One of the most significant results of the recent recession is the heightened focus on how we spend our money, especially with the recovery continuing to be so sluggish. If you’re like most consumers, you’re more aware of how much money you’re spending and what you’re spending it on. Businesses are no different.
Consider this: U.S. productivity growth doubled from 2008 to 2009 and then doubled again in 2010. Stocks that help businesses cut costs and operate more efficiently are in a sweet spot right now, and SolarWinds (NYSE:SWI) is one of my favorite.
Don’t be fooled by the name. This is not a solar or even alternative energy company. (The two brothers who founded SWI were big fans of outer space lore.) It’s actually an enterprise software company. Enterprise is a bit of a fancy word for an organization — a huge corporation, a small business, a nonprofit, a government agency and so on. SWI sells its products to 93,000 organizations of all shapes and sizes all over the world, including 425 of the Fortune 500 companies.
SolarWinds is a real recession and post-recession success story. It continued to grow through the worst of times, and it was just the second tech company to go public after the recession — successfully completing its IPO in the second quarter of 2009.
I look for SWI to continue growing solidly. It has very good products but charges lower prices than many of its competitors, so the company provides strong value in this value-oriented world. It has a big, loyal and growing customer base. The company itself keeps costs low thanks to its marketing approach, and management has an excellent track record of smart acquisitions that fuel growth. In fact, some of its more recent products put SolarWinds in good position to benefit from the powerful trend toward cloud computing.
Through the years, SolarWinds has built a suite of powerful software that allows IT professionals to manage key elements of their infrastructure — networks, applications, storage and physical and virtual servers. The company touts its products as the easiest of their kind to use, and in many cases customers simply download the software off the Internet just like you and I would add a program to our PC.
SolarWinds has new products that I think position it very well for continued growth. Among the most important are Virtualization Manager and a related product called Storage Manager. Virtualization is a game-changing trend in IT. It is the path to the cloud because it allows for shared resources, which increases efficiency and saves money.
SolarWinds revenues come from two sources: sales of new software licenses, and maintenance agreements with existing customers. Maintenance revenues are derived from customers upgrading and enhancing their software products, as well as Swiss training, consulting and product development services. Maintenance revenues are an excellent source of recurring business and have been increasing as the customer base grows. They doubled from 2008 to 2010, accounting for two-thirds of overall revenue growth, and are now more than 50% of revenues.
As the growth of maintenance revenues shows, SolarWinds markets very efficiently. The costs of acquiring new customers are very low for SolarWinds, as it develops its leads primarily from its website and existing customer base. As a result, it needs only maintain a low-cost in-house sales force that focuses on a high volume of standardized transactions.
Take a quick look at the company’s growth, and you can’t help but be impressed. Revenues grew 147% from 2007 through 2010 — all the more impressive because that includes a historic recession — and earnings more than tripled from 20 cents per share to 64 cents. The strong results continued through the first six months of 2011. Aided by the Hyper9 acquisition, revenues increased 27% to $88.8 million. Maintenance revenues grew 33%, and software license revenues gained 20%. The Hyper9 acquisition enhanced profitability as well as sales, with operating income increasing 41.4% to $36.2 million. For the full year, the company is guiding for revenues of $191.5 million to $196 million and non-GAAP earnings of 86 to 90 cents per share
SolarWinds has been an impressive grower in the most difficult of times, and there is plenty of room for more growth as the company expands its product offerings, increasingly monetizes its existing customer base and continues to win new customers. And because of its appeal to midsize companies that don’t want to shell out the big bucks for high-end software, SolarWinds also could be an attractive acquisition target for some of the bigger players looking to strengthen sales to that market.