Feb 4, 2014 - We initiate coverage of SolarWinds with a BUY recommendation. .... appeasing customer service and support, through the online Thwack Community. .... base of over 150,000 including such customers as Nike, Toyota, BMW, and Samsung, while ...... SWI offers free tools like desktop, laptop, server-based or ...
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SolarWinds. Inc.
Feb. 4, 2014
SolarWinds is an IT management software company based in Austin, TX serving over 150,000 customers worldwide.
Sector: Technology Industry: Infrastructure Software
Ticker: SWI (NYSE) Current Price (as of 2/3/2014): $39.11
Recommendation: BUY Price Target: 41.76 (6.78% increase)
Investment Summary We initiate coverage of SolarWinds with a BUY recommendation. Our target price is $41.76, representing a 6.78% upside from the current price of $39.11.
Valuation Summary Target Price DCF Market comparable Before premium After premium
SolarWinds is a software company featuring unique “Walmart-like” business model. With prudent business strategies of acquisition and global expansion, and the “Thwack, Stack, and Rack” sales approach, $41.76 the company has experienced healthy growth of above 20% per year since its IPO in 2009, achieving remarkable margins along the way. The company has sound financials and positive cash flow for future growth opportunities. Although the infrastructure software market has become increasingly crowded, $13.94-45.04 SolarWinds has positioned itself in a unique favorable position, with brand advantages over the smaller players while the price advantage over the larger plays in the market. Global expansion and the entrance into the new high growth market of cloud and data management might add to the future growth of the company. $34.46-$50.71 Overall, we project that the company will remain competitive in the market. We derive our target price of $41.76 from the discounted cash flow (DCF) valuation based on a 13.11% required return, a 20% growth rate for the next five years, and a 5% long-term growth rate thereafter.
Market Profile 52 Week Price Range
31.94 61.52
Average Daily Volume (3m)
1,111,252
Beta Dividend Yield Shares Outstanding
1.21 N/A 75.15 M
Market Capitalization
3.03 B
Institutional Holding
84.90%
Insider Holdings
13.46%
Float
86.00%
Book Value per Share (mrq) Debt to Total Capital Return on Equity (ttm)
We also apply market multiple approach based on a group of companies in the infrastructure software industry. Although SolarWinds appears to be overvalued against industry peers, we note that SolarWinds has been consistently trading at a premium relative to most peers in the past. The premium for SolarWinds might reflect fundamentals rather than overvaluation. The valuation we obtain from the multiples approach ranges from 13.93 to 45.04, which may represent the lower end of pricing considering historical patterns. Applying historical premiums on peer groups, we obtain a target price range of $34.46-$50.71.
$6.22 N/A 22.19%
Source: Yahoo finance
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SolarWinds. Inc.
Figure 1. SolarWinds growth 2009-2013
Feb. 4, 2014
Business Description SolarWinds is a provider of affordable IT management and network software to IT professionals. SolarWinds is based in Austin, TX, currently employing 1,203 employees in 13 sales and development offices in U.S., Canada, Czech Republic, Australia, India, Ireland, and Singapore, and serving over 150,000 customers worldwide, including all size of business, governments, and more than 450 of the Fortune 500 companies. (see Appendix 6 for sample customers) SWI was founded in 1999 and went public in 2009 (See Appendix 7 for major company events). Through acquisition and internal research and development, SWI has expanded its product offering from the single product of network performance software to a family of 29 products that address a broad range of IT management problems, ranging from log viewer that sells as low as $79 to patch manager with a price range of $3,495-131,995 (see Appendix 8 for SolarWinds products). Since its IPO year of 2009, SolarWinds has grown its revenue to 268 million in 2012 at an annual compound growth rate of 24%. Business Strategy and Prospect A tech company with a “Walmart-like” business model
Source: Company presentation Figure 2. Glassdoor.com Employee Review
Although in the technology sector, SolarWinds bears more resemblance to Walmart, the company its founder had worked for before founding SolarWinds. In product pricing, SolarWinds stresses affordability, relying on volume to derive revenue growth. The products of SolarWinds offer similar or even better functionality, but sell for a fraction of their competitors’ prices. To maintain reasonable margin, SolarWinds is prudent in cost control and has several proven strategies. To start with, SolarWinds caters to the existing demand of IT professionals, and focuses on the “necessities” in the IT management world. This eliminates any cost other IT companies might have to bear to create demand for their “luxury” products. Regarding marketing and sales strategies, SolarWinds mainly relies on a low-cost web-based strategy. The sale usually starts with a potential customer visiting the SolarWinds website due to word of mouth, downloading a free-trial product, and then getting a follow-up call from a SolarWinds sales representative. The price advantage and functionality of SolarWinds products insures the success of this sales model. In addition, SolarWinds employs a transactionbased model, therefore minimizing costs related to relationship building. Finally, human capital is a key input in the IT industry. SolarWinds has R&D offices in Czech Republic and India, taking advantage of the lowercost talent there. The Czech Republic office first started in 2008 and employs over 200 staff as of 2013. In the U.S., it does not appear that SolarWinds devotes as much resources on human capital development and retention as most other IT companies. This may be reflected in SolarWinds’ below-average employee ratings at glassdoor.com (see Appendix 9 for details). For example, SolarWinds has a 52% CEO approval rate, while Spiceworks, another Austin-based IT management solution provider who is known to have followed the “Google” model, boasts an 100% CEO approval rate. Overall, SolarWinds stands out as an IT company with a unique Walmart-like business model of low-price, high-volume, and stringent cost control. A buyer of outside innovation
Source: glassdoor.com
SolarWinds has been relying on acquisition to expand its product line and geographic reach, and to get into new growth areas in the industry. Since 2007, the company has made 15 major acquisitions (See Appendix 10 for details). These acquisitions have increased the company’s product line as well as further diversify their product portfolio profile. Total network and solution management is a niche market SolarWinds must dominate and work to continually solidify its position as the major player in the market. In 2013, SolarWinds acquired N-able and Confio. With the N-able acquisition, SolarWinds started their MSP business, for which the company has estimated a 100% growth over the next year. Confio helps SolarWinds expand into database performance management. This acquisition is also expected to fuel future growth for SolarWinds given the rise of big data. To summarize, SolarWinds has been a buyer of outside innovation, and we expect SolarWinds to continue this growth strategy in the future.
A “Thwack, Stack, and Rack” seller Another key component of SolarWinds’s growth strategy is their sales approach of thwack, stack, and rack. First, SolarWinds has developed a significant platform offering industry appeasing customer service and support, through the online Thwack Community. This online community of users and forums provides service, support, and networking to both current and potential customers. Reaching one new customer opens the door and that is all SolarWinds desires. The quality of the product offered combined with services such as Thwack, builds a positive relationship and product appeal. SolarWinds will then start the stack process by translating the existing customer into repeat business by up-selling and cross-selling. SolarWinds has identified 150,000 total customers, while only less than 60,000 of them are users of SolarWinds core-products that generate the most revenue and profit for SolarWinds. Selling core products to the 90,000 non-core customers can provides great potential to the company’s future revenue growth. Finally, Rack is about maintaining the existing customers. Earning customer loyalty is the final step in the ideal model SolarWinds has adapted. However, many of SolarWinds’ customers are price sensitive. The ability to establish a relationship and maintain the customer for life will ensure the success of the company, but it remains a challenge for SolarWinds.
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SolarWinds. Inc.
Feb. 4, 2014
A multinational company with continued commitment to global growth SolarWinds is a global company with sales and R&D offices in Canada, Czech Republic, Australia, India, Ireland, and Singapore. They also have signed distributors for many foreign markets (e.g., Westcon for Brazil and Comstor for Africa), and localized their products and website in the German and Japanese languages. For the trailing past 12 months, foreign markets account for 26% of total revenue, which is below the industry average of 52% according to Gartner 2013 estimates. In addition, the international expansion has brought about a competitive advantage in the area of R&D, as it allows for twenty-four hour, around-the-clock, development of products and version updates. We expect SolarWinds to continue its global expansion in search for new growth. SWOT Analysis Strengths: SolarWinds has a unique and prudent business strategy for sales and cost control. Although not a household name, it is recognized among IT professionals. On-line search suggests that its products have generated mostly positive reviews from customers. Weaknesses: Customer loyalty could be low because SolarWinds mostly sell to price-sensitive customers. Furthermore, SolarWinds does not seem to have a strong inside innovative culture as other tech companies. We are also concerned about the company’s lower employee ratings at Glassdoor.com. Opportunities: SolarWinds has the potential to increase revenue by upselling and cross-selling to existing customers. Recent acquisitions and commitment to continued global growth may add more growth opportunities. Threat: SolarWinds is operating in a highly competitive environment. While SolarWinds differentiates itself from their big competitors by affordability, many smaller competitors are offering even lower prices with similar functionality.
Industry Overview and Competitive Positioning Infra industry market share
SolarWinds is competing in the infrastructure software industry, with both giant leaders and numerous small players. According to Bloomberg, the infrastructure software is a $192 billion industry globally based on the 2012 data, which is about 51% of total software spending. The top three companies in this industry are Microsoft, IBM, and Oracle, and they account for almost half of the total market share. Recent IDC research suggests that software spending as a whole is expected to grow by 6.1% to $384 billion in 2014, mainly driven by spending in areas such as the cloud, mobile and analytics. Geographically, software spending will have highest growth in the America region at 6.6%, followed by Asia Pacific at 6.4%, and EMAE at 5.4%, Low Barriers to Entry and Network Effects
Source: Bloomberg Software market growth
Infrastructure Software industry has low to no barriers to entry as innovation cycles selfcorrect market power and technology become commoditized. Strong growth of cloud computing has lowered the costs upfront for research and development, and new entrants can either buy or rent servers. Therefore, capital requirement has become less significant for new entrants. However, start-ups entering software market often experience a variety of difficulties, especially network effects, also called demand-side economies of scale. Besides point solutions for enterprise, customers seek those trusted vendors that have large customer base and data pool. Enterprise customers prefer interacting with software providers, other buyers, and users. Therefore, despite the low barriers to entry, major software vendors remain competitive due to networking advantages. 3rd Platform drives growth
Source: IDC 3rd Platform—The growth point
Managed service providers (MSPs) are facing challenges as information access and usage increase due to the convergence of cloud services, big data and analytics, software-as-aservice (Saas), social networking, and mobile computing, called 3rd platform. The IDC forecasts that in 2014, 3 rd platform technology will take up 89% of IT spending growth, and grow by 15% compared to previous years. SWI traces the technology trend with expected 2014 CAGR of 100%+ in MSP with growth in System & App Management and network management at 30-40% and 10+%, respectively, according to SolarWinds recent growth forecasts. Cloud Adoption changes business model The rapid adoption of cloud computing will lower customer switching costs, and further reduce consumer loyalty. As enterprise customers move away from the traditional license model, vendors will increasingly rely on subscription revenue. According to the IDC, worldwide subscription has the highest CAGR of 16% while worldwide license and maintenance are much lower at 4.0% and 4.8%.
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SolarWinds. Inc.
Feb. 4, 2014
Patent wars remain a feature of the industry Patent litigation lawsuits are expensive to both parties involved, as well as to customers. As legal costs increase, patent cost will increase, driving up the cost of products. Even though intellectual property right is to improve patent quality, encourage innovation, and reduce settlements and litigations, a research published by Princeton Press shows that software patents with unclear boundaries are more likely to be litigated: 4 times comparing to chemical patents, and 13 times comparing to other methods of doing business. Thus, wasteful litigations may stifle innovation. Patent trolls are nothing new to software industry. Companies seek profit from litigations by sending out their complaints to another party. In most cases, the defendants choose to settle to avoid further legal costs. Aiming to discourage patent abuses, Innovation Act of 2013 was passed by U.S. House of Representative in December 2013 and now moves to the Senate. The potential new changes in government regulations may change the landscape of the industry, although large companies strongly oppose the bill. Overall, the nature of technology industry is rapid advancement of new technologies and services. To survive, grow market share, and maintain competitive advantages, companies must be on the forefront of research and development, evolving with new advancements and satisfying consumer demands. Constantly pushing the boundaries of innovation and creativity is required for success in the industry, as consumers demand efficient, reliable, and exciting products.
Major Competitors and Competitive Positioning Four Principal Competitors Drive IT Management Software Market: CA, IBM. HPQ, and BMC The portfolios of four tech vendors (CA, IBM, HPQ, and BMC) cover the entire IT management software market. According to Forrester, with cash available and market presence, these vendors diversify their portfolios through strategic acquisitions of innovations and specialists (See Appendix 12 for details). These vendors also have the advantage of brand recognition, enjoying the perks from the demand-side economies of scale. However, these companies usually charge a high premium on their products. The bundling of functionalities and expensive sal es approaches further drive up the costs for customers. Therefore, catering to different customer need, these companies post little, if any, threat to SolarWinds. Numerous small vendors provide similar products SolarWinds faces intense competition from numerous smaller vendors who provide similar products. In the network management software market, for example, Wikipedia lists a total of 57 network monitoring systems in its Comparison of Network Monitoring Systems (See Appendix 13 competing products), ranging from free systems to expensive commercial ones. Below is a list of sample companies providing similar products (See Appendix 12 for details): •
ManageEngine offers similar products of fault management and performance management to SolarWinds at fairly similar price, starting at about $2000. While SWI only provides server solutions running on Windows, ManageEngine is more diversified with both Windows and Linux/Unit. In addition, the company also has notable customers such as The New York Times, DHL, L’Oreal, and multiple universities.
•
Ipswitch is yet another privately held company offering similar product line tailored to network management software and solutions. Their flagship product is WhatsUpGold, a product in direct competition with SolarWinds’ Network Performance Monitor, but slightly cheaper. Founded in 1991, Ipswitch touts a customer base of over 150,000 including such customers as Nike, Toyota, BMW, and Samsung, while reaching customers in over 100 countries. Ipswitch offers a free 30 day trial download of WhatsUpGold, allowing users to test the product and reach potential customers that may not purchase without first seeing the product benefits. The company’s business model is also similar to SolarWinds, focuseing on offering a high quality product at a cost-effective price to consumers.
•
NetScout, headquartered in Westford, MA, specializes in holistic network management solutions including hardware. NetScout’s flagship product nGeniusONE has the unique feature of performing application and network management functionalities simultaneously. Th e company is one of the fastest growing companies in the global network management software and appliance market and the market share leader according to IDC. NetScout has been in the market for over two decades, serves over 20,000 enterprise customers around the globe, and currently runs six R&D centers globally.
•
Spiceworks is a company headquartered in Austin, TX., also providing network management solutions. However, Spiceworks has followed a “Google” business model that would allow the software to remain free by featuring advertisements from companies offering small-tomedium business technology products and services directly within the application and community. Spiceworks has also established an open and welcome company culture that is similar to Google.
•
In the global market there are also many local companies offering similar products. For example, Statseeker is a privately held company headquartered in Brisbane, Australia, which is also a location for one of the SolarWinds offices. Statseeker offers management and performance maintenance products designed to monitor network infrastructure with an aggressive pricing strategy.
Comparing with these smaller competitors, SolarWinds has established itself as the leader of the pack. First, it has longer operating history and better customer recognition among IT professionals. Even though some competing products offer lower prices, the learning curve might prevent customers from switching as long as SolarWinds products continue to be viewed as trustworthy and reliable. Second, as a larger
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SolarWinds. Inc.
Feb. 4, 2014
company in this group, SolarWinds has a wider customer base, and therefore more potential of growth from upselling and cross-selling. Finally, SolarWinds has a proven strategy of prudent cost control. While most of SolarWinds’ competitors are private companies whose financials are not in public domain, we find that SolarWinds’ margins have been consistently higher than its public competitors including NetScout. The positive profit and cash flow can facilitate future growth of SolarWinds as they incorporate new technology to improve upon their existing products, and further enter high growth business in the industry. The status as a publicly traded company is also a plus compared to its private competitors because it can boost SolarWinds’ access to the capital market in case they need additional funding. To Summarize, we consider SolarWinds’ competitive position favorable as a middle player in the market. Porter’s Five Forces Competitive Rivalry: HIGH SolarWinds competes in an industry where stringent competition for customers exists. Products and services for network solutions abound, and customer loyalty is at a minimum, as buyers are seeking to maximize IT budget power. Supplier Power: LOW-MEDIUM With a high dependence on successful R&D, SolarWinds relies on relatively small amounts of inputs to create its products. However, the creation and functionality of the company and products relies heavily upon in-house technology, power, and electricity. Therefore, SolarWinds sources the following from suppliers: utility companies for power, data center infrastructure, generators, uninterruptible power supplies, servers, switches, etc. For the most part, supplier power is low, as SolarWinds can switch suppliers. However, to deliver the R&D needed to develop new products, SolarWinds is dependent upon the newest technology to service and develop products. In this case, SolarWinds negotiating power is nominal, having to pay the premiums required for the newest and fastest technology. Buyer Power: MEDIUM-HIGH While maintaining a fairly consistent type of customer, SolarWinds has a very diverse customer base, ranging from Fortune 500 companies to the U.S. Military to universities and colleges worldwide. SolarWinds sales model is laser focused, selling to IT users and administrators within corporations, not targeting the corporation itself. Therefore, customer price sensitivity is relatively high, as IT departments are usually operating on strict budgets wherein expenditures are often divided between capital and subscription based expenses, allotting specific budgets for each. As a result, customer loyalty is low as customer switching costs are low and incentive driven. Threats of Substitutes: MEDIUM-HIGH Substitutes exist and the propensity for customers to switch is a reality with which SolarWinds must contend. Many of the products and services SolarWinds offers seek to provide solutions and tools to equipment and technology with which various alternative providers exist. While SolarWinds has competitors within its specific business, they are also competing with the companies whose products they are servicing, as certain network products come with product support and monitoring. However, the customer seeks to benefit from SolarWinds product offerings, in their ability to streamline the entire network management process. Threat of New Entrants: HIGH The business software and services industry is a highly competitive industry, attractive for start-up companies and new entrants. Essentially anyone with a computer has the ability to develop a product or service designed to manage networks and technology, resulting in a low barrier of entry to the market. This is evident in SolarWinds recent acquisitions, as the company has acquired fifteen different companies in the past five years, with various goals including: increasing product line, acquiring a talented workforce, buying out successful competitors, and growing market share, to name a few. Technology has brought about of wave of new innovation in various industries, and managing these technologies both currently in existence and those that have yet to be introduced provide numerous opportunities to both SolarWinds and new entrants to the market.
Valuation Current Risk-free Rate* Beta** Historical Market Return*** Long-term Growth Rate Required Return [RFR + β*(Rmarket - RFR)] NPV FCFE 2014 NPV FCFE 2015 NPV FCFE 2016 NPV FCFE 2017 NPV FCFE 2018 NPV Terminal Shares Outstanding Intrins ic Value Closing Price 02/03/14
2.61% 1.21 11.29% 5.00% 13.11% $ 131.82 $ 144.78 $ 156.85 $ 169.41 $ 182.52 $ 2,362.26 $ 3,147.63 75.371 $ 41.76 $ 39.11
DCF Valuation The DCF valuation resulted in an intrinsic value of $41.76, which represents a 6.78% premium to the current price of $39.11 (closing price as of 02/03/14). The free cash flow to equity (FCFE) estimates for 2014 to 2018 were discounted at a required rate of 13.11%, derived from a risk-free rate of 2.61%, a beta of 1.21, and a market return of 11.29%. The terminal value is based on a long-term growth rate of 5% (Appendix 3). The risk free rate represents the 10-year U.S. bond yield as of 02/03/14. We calculated the beta using the weekly closing prices of SolarWinds’ stock and the S&P 500 index for the past 2 years. The raw beta of 1.32 was adjusted with the following formula [2/3*raw beta + 1/3*1.0] to account for the assumption that a stock’s beta approaches market average as time passes.
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SolarWinds. Inc.
Feb. 4, 2014
The sensitivity analysis shows that SolarWinds is currently undervalued for most scenarios. At the assumed long-term growth rate of 5%, the stock would be undervalued for required return rates of 13.61% and less. If the required rate of return is held constant at 13.11%, the security would be overvalued at long-term growth rates below 4.5%. Long-term growth rate
Required rate of return
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
6.00%
6.50%
7.00%
10.61%
$
47.83
$
50.59
$
53.78
$ 57.48
$
61.85
$ 67.06
$ 73.42
$ 81.31
$ 91.39
11.11%
$
44.64
$
47.02
$
49.74
$ 52.87
$
56.50
$ 60.79
$ 65.92
$ 72.15
$ 79.91
11.61%
$
41.83
$
43.90
$
46.24
$ 48.90
$
51.98
$ 55.55
$ 59.76
$ 64.80
$ 70.92
12.11%
$
39.33
$
41.14
$
43.17
$ 45.47
$
48.09
$ 51.11
$ 54.62
$ 58.75
$ 63.70
12.61%
$
37.10
$
38.69
$
40.46
$ 42.46
$
44.72
$ 47.29
$ 50.25
$ 53.70
$ 57.77
13.11%
$
35.08
$
36.49
$
38.06
$ 39.80
$
41.76
$ 43.98
$ 46.51
$ 49.42
$ 52.81
13.61%
$
33.27
$
34.52
$
35.90
$ 37.44
$
39.15
$ 41.08
$ 43.26
$ 45.74
$ 48.60
14.11%
$
31.61
$
32.73
$
33.97
$ 35.33
$
36.84
$ 38.52
$ 40.41
$ 42.55
$ 45.00
14.61%
$
30.11
$
31.11
$
32.21
$ 33.43
$
34.76
$ 36.24
$ 37.90
$ 39.76
$ 41.86
15.11%
$
28.73
$
29.63
$
30.62
$ 31.71
$
32.90
$ 34.21
$ 35.67
$ 37.29
$ 39.12
15.61%
$
27.46
$
28.28
$
29.17
$ 30.14
$
31.21
$ 32.38
$ 33.67
$ 35.10
$ 36.70
Market Comparable Valuation Figure: Competitors
Preliminary Valuation – True Competitors Our first task is to find company peers in the industry that are truly comparable to SolarWinds in terms of valuation. Most of the companies directly competing with SolarWinds are privately held. We therefore start with public companies in the infrastructure software industry as listed by Bloomberg. (Please see figure) Among these companies, we exclude companies with negative earnings because SolarWinds is a company with positive earnings and high margins. Further, based on business lines and market capitalization standard, we boil the list down to the three closest peers: NTCT, CTXS, and CA. However, we note that CTXS and CA are much larger than SolarWinds with lower historical growth. Valuation Benchmarks Source: Yahoo!, Team Estimates
Figure: SWI and Potential Competitors (NTCT, CTXS, and CA)
All three companies are also less profitable than SolarWinds (See financial analysis for more detailed comparison). We use the three trailing benchmarks of P/E, P/B, and P/S to conduct our market comparable valuation (Please see Appendix 4). P/E ratio reflects earnings power, the main focus in our analysis given SolarWinds’ superior ability in generating profits. We also examine the valuation based on the other two commonly adopted ratios of P/B and P/S. P/B ratio has the benefit of providing a more stable valuation than volatile EPS. We recognize that P/B does not account for the value of intangible assets such as human capital, which can be the main driving forces of software companies. P/S ratio can also be a suitable alternative for evaluating internet stocks because sales revenue is not easily manipulated as book value or EPS. However, the drawback is that it values based solely on a company’s ability to generate revenue, ignoring the variations in companies’ ability to translate revenue into earnings. Multiples Analysis
Soucre: Yahoo!, Team Estimates
Based on the median of the three peers, we obtain a target price of $14.95 based on the P/S ratio, $25.28 based on the M/B ratio, and $32.96 based on the P/E. Although SolarWinds appears to be overvalued against industry peers, we note that SolarWinds has been consistently trading at a premium relative to most peers in the past. The premium for SolarWinds might reflect fundamentals rather than overvaluation. Historical Premium Analysis based on P/E We expand the peer list and conduct analysis of historical premium based on P/E. The valuation we obtain from the multiples approach ranges from 13.93 to 45.04, which may represent the lower end
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SolarWinds. Inc.
Feb. 4, 2014
of pricing considering historical patterns. Applying historical premiums on peer groups, we obtain a target price range of $34.46-$50.71 (See Appendix 4). Based on the historical multiples analysis, we apply the average premium to our preliminary valuation based on P/E, and obtained a target price of $42.88 per share, which is 9.63% higher than its current price, and closed to the consensus forecasts. For details, please see Appendix.
Financial Analysis Growth
Soucre: SEC Filings, Q42013 Forecast, Team Estimates
Soucre: SEC Filings, Team Estimates
SolarWinds has overall experienced tremendous growth since going public in 2009. However, quarterly year-over-year (yoy) growth has been quite volatile. SolarWinds achieved impressive yoy growth of 42.6% in 2010Q1, but then experienced a steady decline to a temporary low of 25.2% in 2011Q1. The growth rate managed to climb back up to almost 40% in 2012Q2 before sliding downwards again. Regarding 2013Q4, we notice that Q4 has not historically been a growth month for SolarWinds, often reporting flat sales over the previous quarter of Q3. Considering the slowdown in government business due to the government shutdown in October 2013, we expect 2013Q4 to be the first quarter with a yoy growth rate below 20%. For 2013, the annual growth rate will thus be 21%, which marks a significant decrease from the previous year’s 35.6%. The market for network application software, SolarWinds’ flagship products, has become increasingly crowded in recent years. SolarWinds has also made many acquisitions, which could explain some of the volatility in the quarterly revenue growth. Solarwinds closed two deals over $100 million each in 2013 and announced that it is open for further expansion through acquisition in the near future. Even with hefty price tags, the acquisitions are not a guarantee for an increase in revenue proportional to the acquisition price. However, the acquired assets in high growth sector such as N-Able and Confio may help SolarWinds boost growth in the long run. In addition, SolarWinds is currently expanding into new markets around the world and this will also help break the current downward trend. Considering all these recent developments, we project an annual growth of 20% for the next five years of 2014-2018. In May 2013, Gartner, Inc. reported that the IT operations and management software market grew 4.8% in 2012. We believe that 5% represents an appropriate rate for long-term growth after 2018 because gaining new customers and increasing average transaction sizes will become more and more difficult in a market that has seemingly open doors to new entrants.
Profitability Soucre: SEC Filings, Team Estimates
Soucre: SEC Filings, Team Estimates
SolarWinds’ quarterly operating and profit margins have been volatile and recently demonstrate a downward pattern. However, compared to the industry peers, these margins still appear to be superior. The volatility in the margins is attributable to acquisitions that caused the operating expenses to jump in the quarter of acquisition without having the same effect on revenue. Especially, the 2013 acquisitions of N-able and Confio have increased the number of total employees by about 25%. Our estimates for 2013Q4 are 31.0% for operating margin and 22.54% for profit margin to account for the recent trend and the October acquisition of Confio. The annual profit margins show a downward trend as well but are expected to become stable at around 27% over the next five years with a slight upward trend due to economy of scale. Because more acquisitions are very likely to occur over the next five years, the margins will not improve significantly as a result of integrating the acquired firms into the existing structure. However, we believe that at some point SolarWinds will be large enough to absorb future acquisitions without a significant negative impact on margins. ROA has recently seen a downward trend. 4 Year Average Superior Margins of Solarwinds This is largely due to the company’s CA NTCT CTXS acquisition strategy. The acquired companies added a large amount of 1.46 10.08 Market Cap $ (B) 14.37 goodwill and intangible assets to Operating Margin + 11.18% + 21.95% + 24.56% SolarwWinds’ balance sheet without bringing the proportional increase in net Profit Margin + 10.13% + 17.70% + 15.01% income. As SolarWinds further integrate these companies into the SolarWinds business model, we expect these acquired assets to have higher return in the future.
Soucre: SEC Filings, Team Estimates
Solarwinds’ ROE has also been declining recently. The DuPont analysis reveals that the higher ROE of 33.13% in 2009 was mainly due to higher leverage. Since 2010, the asset turnover and the equity
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SolarWinds. Inc.
Feb. 4, 2014
multiplier have decreased slightly each year (except for the equity multiplier in 2013 due to the new $40 million credit). The decrease in 2011 was partially absorbed by the better profit margin. However, the years of 2012 and 2013 saw a decrease in both the profit margin and the asset turnover, bringing ROE down further. We expect ROE to become stable over the next few years at around 17.5%. The slight increases in the profit margin will be offset by the reduced equity multipliers.
Balance Sheet & Financing In terms of liquidity, the current ratio has been high during the period of 2009-2012 and is projected to decrease considerably to 1.56 for 2013 because of the most recent acquisitions that used about $180 million in cash. We expect SolarWinds to keep acquiring companies for about $120 million each year over the next five years instead of amounting more than $1.2 billion in cash by 2018. Another important aspect is the amount of deferred revenue that heavily affects the current liabilities balance. The percentage is projected to be around 85% for the next five years, making up the vast majority of current liabilities. The deferred revenue balance may indicate a large liability, but the low percentage of COGS reveals that actual burden is much lower. 2009 2.42
2010 2.59
2011 2.04
2012 2.22
2013* 1.56
2014E 1.42
2015E 1.34
2016E 1.36
2017E 1.44
2018E 1.56
50.92%
29.04%
26.89%
26.01%
31.79%
30.66%
29.88%
29.22%
28.68%
28.25%
103.75%
40.93%
36.79%
35.16%
46.61%
44.22%
42.62%
41.28%
40.22%
39.37%
Current Ratio Debt Ratio Debt-Equity Ratio
Capitalization Ratio 23.41% 0.00% 0.00% 0.00% 7.61% 6.35% 5.30% 4.41% 3.67% 3.05% Operating CF to 78.10% 97.30% 124.18% 119.43% 98.43% 82.78% 83.31% 83.15% 82.89% 82.56% Current Liabilities Operating CF to 53.27% 91.89% 114.32% 106.59% 70.56% 61.97% 64.88% 66.94% 68.65% 70.04% Total Liabilities The debt ratio increased in 2013 due to the $40 million credit and is expected to decrease slightly each year until 2018 . Again, the deferred revenue makes this ratio appear much higher. If the debt ratio would only include accounts that have to be paid back, the ratio would be under 10%. The same applies to the debt-equity ratio and only the capitalization ratio truly reflects SolarWinds’ low leverage. The operating cash flow to current liabilities (or total liabilities) is healthy as well. Overall, we expect SolarWinds to continue to have strong balance sheet and remain solvent in the future. Cash Flow Net operating cash flow has been steadily increasing in line with higher net income. The trend is expected to continue except for 2014 because the positive effect of changes in working capital and other assets and liabilities will be smaller than in 2013.
Soucre: SEC Filings, Team Estimates
Net investing cash flow has seen major increase from 2010 to 2011 and then again from 2012 to 2013 mainly because of larger acquisitions. 2013 is projected to have a net investing outflow of $214 million that consisted of the N-able and Confio purchases ($223 million together), about $3 million capital expenditure, and sale of approximately $12 million in investments. For 20142018, the expectation of $120 million acquisition plus $12.5 million in capital expenditure per year will contribute substantially to investing cash flow. Besides these two items, we project an increased amount going into the purchase of investments and other investing opportunities that will open up.
Financing cash inflow in 2009 from the IPO of $104 million was partially offset by long-term debt retirement, resulting in a low cash inflow from financing activities. Solarwinds then paid off its remaining $44 million long-term debt in 2010. Proceeds from stock option exercise brought in between $8 and $20 million per year from 2010 to 2013. The high financing cash inflow in 2013 is caused by the new $40 million credit. SolarWinds has the option to extend this credit up to $125 million. The company also announced a $50 million share repurchase progr am in 2013. We believe that the program will cancel out the effect of stock options exercise until 2018, thereby exerting minimal impact on the net financing cash flow unless the firm increases its long-term debt.
Corporate Governance Management CEO – Kevin Thompson Kevin Thompson took the lead role of CEO in March of 2010; prior to that, he served as CFO and Treasurer from 2006 to 2010, COO from 2007 to 2010, and became President in 2009. Mr. Thompson has an extensive background in senior management of various software companies including serving as CFO of Surgient, Inc., SVP and CFO for SAS Institute, and EVP and CFO of Red Hat. He seems to exercise the company’s sales approach and model through the driving focus of internal customer development and product quality. Appendix 14 shows t he experience of all executives. The company’s compensation policy is such that the management team is motivated to build competitive advantage and sustain profitability through commitment to the adopted sales model, R&D, and an innovative and progressive company culture. Board of directors
8|Page
SolarWinds. Inc.
Feb. 4, 2014
SolarWinds board is comprised of executives and professionals between the age group of 45-61. According to the company proxy statement, SolarWinds is currently without a Chairman of the Board and that in the absence of this position, Steven M. Cakebread, the co mpany’s Lead Independent Director, acts as chairperson for meetings and independent sessions of the board. SolarWinds is not actively searching to fill this role, as the company is currently satisfied with operation of the Board of Directors. Appendix 15 shows the experience and compensation of all directors. Compensation Executive director compensation is based upon recommendations from Compensia, a third-party compensation consultant, hired to review various factors within the industry as compared to SolarWinds peer group. The culmination of Compensia’s results determined that SolarWinds should have a total compensation package consistent with the 75th percentile of the peer group identified. Therefore, current compensation rewards directors position specific retainers, stock options, restricted stock units, and the potential for annual increase in retainer value. The compensation plan that has been adopted ensures a competitive compensation within the peer group, and is structured to effectively reward board members for their experience, time, and professional knowledge being contributed. Proper equity incentive ensures the int erest alignment of directors and shareholders, and has propelled SolarWinds to consistent strong results. Board composition SolarWinds board is divided into three classes. Elected board members serve a three-year, class specific term, in which the various class elections are staggered such that only one director class is up for election per annual meeting. The main reason for classified structure is to protect the company from unwanted takeovers and proxy contest. SolarWinds board consists of seven directors, of which six satisfy the NYSE listing standards and SEC rules pertaining to director independence. The Board of Directors is established to facilitate management of the company through the presence of Board Committees. These committees include an Audit Committee, a Compensation Committee, and a Nominating and Governance Committee, all consisting entirely of d irectors and comply with the NYSE and SEC rules and regulations. These committees are in place to effectively and efficiently fulfill board responsibilities for oversight and management. Insider and institutional trading Considering the past six months insider trading has been marginal, as both buy and sell transactions have taken place. However, looking further back into February of 2013, a significant amount of shares (293,200) were purchased while the stock price ranged from $55 -56 dollars per share, signaling considerable insider confidence in SolarWinds. While sale transactions have also been executed, it is not uncommon to see insiders exercise their options for diversification purposes.
Investment Risks Security Breach or Service Outage SolarWinds product line is inherent with risk, as the applications and tools offered are utilized to manage company specific networks and applications that include confidential and proprietary information. Any lapse in service or breach of security to any subscription customer has the ability to cause widespread damage to current and future business. As SolarWinds relies on word-of-mouth marketing to promote and sell its products and services, the same can have the alternate negative externality if one user has a bad experience with a product. The business software and services industry is one that requires scrutinizing security, wherein competitors vie for reputation and brand awareness through quality, secure products and services. Successful and Productive Research and Development To maintain business and compete in the business software and services industry, SolarWinds must be committed to R&D, both in the short and long term. The ability of a company to grow in this industry largely depends on the success of the R&D function of the business. The technology industry and more specifically SolarWinds target customer, the IT user, is wired to seek out and utilize the most cutting edge technology and products. Therefore, SolarWinds ability to deliver this type of cutting edge product is critical to the company’s future success. While new products must be developed, existing products must be upgraded and revised to meet industry demands, maintain competitive advantage, and stimulate public reputation. SolarWinds is committed to quality R&D and has the ability to work around the clock through international expansion to deliver innovative products and services. Ability to Sell To effective grow the company; SolarWinds is dependent upon effective execution of the current sales model. This means cross-selling products to existing customers and further penetrating the sales to current customers of the company. The company reports over 150,00 0 customers, of which only 60,000 are using the core product. Product pricing places the average core product costing $8,000-10,000, while the average tool and application costs only $2,000-3,000. These factors provide significant opportunity for SolarWinds to grow with business from within, developing existing customer sales to grow revenue. New customer sales are also vital to success and the sales model. The goal of the company is to land and expand. Land a customer, selling one product in high demand to that specific customer. Further down the road , expand the existing products sold to the customer. This approach can be highly effective, however depends on a number of factors such as the availability of sales leads, skill of sales staff, and customer awareness. Timing of Large Transactions
9|Page
SolarWinds. Inc.
Feb. 4, 2014
The United States government is a large customer of SolarWinds and the timing of the orders placed, can greatly impact the sales and earnings of the company. SolarWinds is currently providing products to a number of government customers including: the United States Air Force, Army, NASA, NSA, Department of Homeland Security, and Department of Energy, to name a few. The timing of these orders are unpredictable to the company, therefore they have the ability to largely effect reporting of numbers.
10 | P a g e
SolarWinds. Inc.
Feb. 4, 2014
Appendix Table of contents 1. 2.
3.
4.
5.
6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.
Summary of valuation Financial statement forecasts a. Quarterly financial statement forecast 2013Q4 b. Annual financial statement forecasts 2013-2017 c. PP&E forecast Free Cash Flow Valuation a. Discounted CF approach b. Sensitivity analysis Market-based Valuation a. Peer selection process b. List of peers c. Relative valuation development Financial analysis a. Key financial ratios b. Income statement (common size) c. Balance sheet (common size) SolarWinds customers Company major event timeline Product list Glassdoor.com employee ratings Major acquisitions Industry trend analysis Major Competitors Competing products Management Board of directors Institutional ownership and insider ownership Technical analysis Event analysis chart SolarWinds supply chain Web traffic and Google Trend Analysis
11 | P a g e
Appendix 1. Valuation summary
Target Price DCF
$41.76
Market comparable Before premium
$13.94-45.04
After premium
$34.46-$50.71
Feb. 4, 2014
Appendix 2. Financial Statement Forecasts a. 2013Q4 income statement forecast (in thousand $)
2009
2010
2011
2012
2013
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4E
License
12.54
14.60
17.64
17.60
17.62
17.26
20.85
19.87
20.38
21.07
25.52
25.28
27.46
29.45
34.01
33.07
30.73
31.13
34.36
31.60
Maintenance and other
11.53
12.44
14.71
15.38
16.70
18.24
20.30
21.54
22.60
24.75
28.43
30.33
32.21
34.59
37.72
40.47
42.19
45.37
50.28
50.00
1.02
3.22
5.64
77.52
87.86
87.24
Revenue :
Subscription Total revenue
24.08
27.04
32.35
32.98
34.33
35.51
41.15
41.41
42.98
45.82
53.95
55.61
59.67
64.04
71.72
73.53
72.91
Cost of license revenue
0.15
0.15
0.15
0.04
0.36
0.46
0.49
0.64
0.77
0.81
1.34
1.19
1.88
1.86
2.08
2.38
2.76
2.86
2.65
2.91
Cost of maintenance and other revenue
0.98
1.04
1.11
1.24
1.34
1.46
1.55
1.64
1.72
1.76
2.20
2.21
2.39
2.41
2.51
2.88
2.87
2.77
2.94
3.13
0.54
1.51
2.81 78.39
Cost of subscription revenue Gross profit
22.95
25.85
31.09
31.70
32.63
33.59
39.12
39.13
40.49
43.26
50.41
52.21
55.40
59.77
67.13
68.26
67.28
71.36
80.76
Operating expenses: Sales and marketing
6.70
7.23
7.77
8.86
10.25
10.69
10.99
11.32
11.73
12.78
14.19
15.15
16.56
17.58
19.15
19.76
20.30
20.28
25.96
27.26
Research and development
2.43
2.76
2.99
3.03
3.63
3.82
4.05
4.23
5.04
5.03
5.57
5.69
6.67
6.93
7.21
7.96
7.85
8.22
9.56
10.04
General and administrative
3.87
4.11
5.15
12.91
5.32
6.93
5.86
5.37
6.67
6.32
8.45
8.37
9.29
9.47
9.82
11.55
13.38
14.05
Accrued earnout (gain)loss Total operating expenses Operating income
7.00
8.09
-1.60
0.94
-0.50
12.99
14.09
15.90
24.80
19.20
21.44
20.91
20.92
23.44
24.13
25.16
29.87
31.68
32.88
35.65
36.68
37.97
40.05
48.90
51.35
9.96
11.76
15.19
6.90
13.43
12.15
18.21
18.21
17.06
19.13
25.25
22.34
23.72
26.89
31.48
31.58
29.31
31.31
31.86
27.04
0.04
0.04
0.06
0.07
0.09
0.09
0.09
0.11
0.11
0.12
0.12
0.11
0.09
0.09 -0.01
Other income (expense): Interest income
0.08
0.05
0.09
0.04
0.03
0.07
Interest expense
-1.45
-1.54
-0.67
-0.59
-0.78
-0.36
Other income (expense), net
0.00
-0.01
-0.08
0.18
0.05
0.16
-0.17
0.08
-0.31
-0.21
0.54
0.70
-0.02
-0.03
0.09
0.38
-0.15
-0.34
-0.01
Total other income (expense)
-1.37
-1.50
-0.66
-0.37
-0.70
-0.13
-0.14
0.12
-0.25
-0.14
0.63
0.79
0.07
0.07
0.20
0.50
-0.03
-0.23
0.09
0.09
Income before income taxes
8.59
10.26
14.53
6.53
12.73
12.02
18.07
18.33
16.81
18.99
25.88
23.13
23.79
26.96
31.69
32.08
29.28
31.08
31.95
27.12
Income tax expense (benefit)
2.60
3.44
4.37
-0.02
3.79
3.68
5.91
3.02
5.10
5.44
4.99
6.84
6.66
7.54
9.20
9.78
6.29
8.29
9.12
7.46
Net income
5.99
6.82
10.16
6.55
8.94
8.34
12.16
15.31
11.71
13.55
20.89
16.29
17.13
19.43
22.49
22.30
23.00
22.80
22.82
19.67
EPS
0.21
0.15
0.16
0.10
0.13
0.12
0.18
0.22
0.16
0.19
0.29
0.22
0.23
0.26
0.30
0.30
0.31
0.30
0.30
0.26
Diluted EPS
0.18
0.13
0.14
0.09
0.12
0.11
0.17
0.21
0.16
0.18
0.28
0.22
0.23
0.26
0.29
0.29
0.30
0.30
0.30
0.26
Basic Shares Outstanding
28.18
44.91
65.05
65.66
67.27
68.20
68.67
70.50
72.37
72.72
72.95
73.22
73.74
74.03
74.34
74.55
74.99
75.25
75.37
75.37
Diluted Shares Outstanding
33.52
50.95
71.79
71.94
72.85
73.29
72.51
73.04
74.00
74.35
74.46
74.89
75.44
75.85
76.30
76.47
76.67
76.59
76.47
77.10
Feb. 4, 2014
Appendix 2. Financial Statement Forecasts (Cont.) b.
Annual financial statement forecast (in millions $)
2012 forecasts are based on actual financial statement of 2012 Q1-Q3 and student forecast of 2012Q4.
Income Statement
Revenue : License Maintenance and other Subscription Total revenue Cost of license revenue Cost of maintenance and other revenue Cost of subscription revenue Gross profit Operating expenses: Sales and marketing Research and development General and administrative Accrued earnout (gain)loss Total operating expenses Operating income Other income (expense): Interest income Interest expense Other income (expense), net Total other income (expense) Income before income taxes Income tax expense (benefit) Net income EPS Diluted EPS Basic Shares Outstanding Diluted Shares Outstanding
2009
2010
2011
2012
2013*
2014E
2015E
2016E
2017E
2018E
62.38 54.07
75.60 76.79
92.25 106.10
123.98 144.98
116.45 0.49 4.37
152.39 1.94 5.99
198.36 4.10 7.89
268.96 8.20 10.20
111.59
144.46
186.37
250.56
127.81 187.84 9.88 325.53 11.18 11.71 4.85 297.79
152.35 226.57 11.72 390.63 15.89 13.53 5.76 355.45
178.13 276.57 14.06 468.76 22.02 15.27 6.91 424.57
208.13 337.51 16.88 562.51 25.72 18.63 8.29 509.86
243.01 411.76 20.25 675.02 30.04 22.73 9.95 612.30
283.51 502.21 24.30 810.02 35.04 27.72 11.94 735.31
30.55 11.20 26.04
43.25 15.73 23.48
109.38 43.95 58.60
128.91 52.74 70.31
154.69 63.28 84.38
185.63 75.94 101.25
222.76 91.13 121.50
82.46 62.00
73.05 28.77 35.58 -0.50 136.89 113.67
93.80 35.66 48.81
67.79 43.80
53.85 21.33 28.08 -0.66 102.59 83.78
178.27 119.53
211.92 143.53
251.96 172.61
302.35 207.51
362.82 249.48
435.39 299.93
0.27 -4.25 0.09 -3.90 39.91 10.40 29.51 0.58 0.52 51.04 56.82
0.18 -1.15 0.12 -0.85 61.15 16.40 44.75 0.65 0.61 68.66 72.86
0.31
0.43
0.42
0.72 1.03 84.80 22.36 62.44 0.86 0.84 72.81 74.41
0.42 0.85 114.52 33.18 81.34 1.10 1.07 74.17 76.04
-0.50 -0.09 119.44 31.15 88.28 1.18 1.15 74.81 76.70
0.42 -0.56 -0.50 -0.65 142.89 38.94 103.95 1.38 1.35 75.37 77.10
0.42 -0.56 -0.50 -0.65 171.96 46.43 125.53 1.67 1.63 75.37 77.10
0.42 -0.56 -0.50 -0.65 206.87 55.34 151.53 2.01 1.97 75.37 77.10
0.42 -0.56 -0.50 -0.65 248.83 65.94 182.89 2.43 2.37 75.37 77.10
0.42 -0.56 -0.50 -0.65 299.28 77.81 221.47 2.94 2.87 75.37 77.10
Feb. 4, 2014
Appendix 2. Financial Statement Forecasts (Cont.) Common Size Income Statement 2009
2010
2011
2012
2013*
2014E
2015E
2016E
2017E
2018E
License
53.57%
49.61%
46.51%
46.10%
39.26%
39.00%
38.00%
37.00%
36.00%
35.00%
Maintenance and other
46.43%
50.39%
53.49%
53.90%
57.70%
58.00%
59.00%
60.00%
61.00%
62.00%
3.03%
3.00%
3.00%
3.00%
3.00%
3.00%
Revenue :
Subscription Total revenue Cost of license revenue Cost of maintenance and other revenue
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
0.42%
1.27%
2.07%
3.05%
3.43%
4.07%
4.70%
4.57%
4.45%
4.33%
3.75%
3.93%
3.98%
3.79%
3.60%
3.46%
3.26%
3.31%
3.37%
3.42%
1.49%
1.47%
1.47%
1.47%
1.47%
1.47%
Cost of subscription revenue Gross profit
95.83%
94.80%
93.96%
93.16%
91.48%
90.99%
90.57%
90.64%
90.71%
90.78%
Operating expenses: Sales and marketing
26.23%
28.38%
27.15%
27.16%
28.81%
28.00%
27.50%
27.50%
27.50%
27.50%
Research and development
9.62%
10.32%
10.75%
10.70%
10.95%
11.25%
11.25%
11.25%
11.25%
11.25%
General and administrative
22.36%
15.40%
14.15%
13.23%
14.99%
15.00%
15.00%
15.00%
15.00%
15.00%
-0.33%
-0.19%
Accrued earnout (gain)loss Total operating expenses
58.21%
54.11%
51.72%
50.90%
54.76%
54.25%
53.75%
53.75%
53.75%
53.75%
Operating income
37.61%
40.69%
42.23%
42.26%
36.72%
36.74%
36.82%
36.89%
36.96%
37.03%
Interest income
0.23%
0.12%
0.16%
0.16%
0.13%
0.11%
0.09%
0.07%
0.06%
0.05%
Interest expense
-3.65%
-0.75%
-0.14%
-0.12%
-0.10%
-0.08%
-0.07%
Other income (expense):
Other income (expense), net
0.08%
0.08%
0.36%
0.16%
-0.15%
-0.13%
-0.11%
-0.09%
-0.07%
-0.06%
Total other income (expense)
-3.35%
-0.56%
0.52%
0.32%
-0.03%
-0.17%
-0.14%
-0.12%
-0.10%
-0.08%
Income before income taxes
34.27%
40.13%
42.75%
42.58%
36.69%
36.58%
36.68%
36.78%
36.86%
36.95%
Income tax expense (benefit)
8.93%
10.76%
11.27%
12.33%
9.57%
9.97%
9.90%
9.84%
9.77%
9.61%
25.34%
29.36%
31.48%
30.24%
27.12%
26.61%
26.78%
26.94%
27.09%
27.34%
Net income
SolarWinds. Inc.
Feb. 4, 2014
Appendix 2. Financial Statement Forecasts (Cont.) Balance Sheet 2009
2010
2011
2012
2013*
2014E
2015E
2016E
2017E
2018E
129.79
142.00
122.71
179.70
180.04
195.17
223.55
276.46
359.49
479.35
29.69
49.28
32.98
35.75
40.95
50.65
65.86
87.82
38.45
46.43
56.04
67.64
81.91
Assets Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net of allowances
15.79
20.26
26.97
32.51
32.65
Income tax receivable
0.11
10.35
0.11
0.14
0.75
Deferred taxes
0.25
0.26
0.67
1.71
2.03
2.03
2.03
2.03
2.03
2.03
Prepaid and other current assets
6.79
3.21
2.77
3.32
4.43
4.84
5.81
6.98
8.37
10.04
152.73
176.08
182.91
266.66
252.88
276.24
318.77
392.16
503.39
661.15
Property and equipment, net
6.41
6.70
7.34
8.34
11.64
24.14
36.64
49.14
61.64
74.14
Debt issuance costs, net
0.40 12.82
16.82
16.82
16.82
16.82
16.82
16.82
Total current assets
Long-term investments Deferred taxes
2.08
4.10
3.33
0.34
3.03
3.03
3.03
3.03
3.03
3.03
15.44
40.42
110.75
158.60
333.61
427.61
521.61
615.61
709.61
803.61
4.42
20.17
58.08
70.63
94.10
102.58
123.10
147.72
177.26
212.71
181.47
247.48
362.41
517.40
712.08
850.42
1,019.97
1,224.47
1,471.75
1,771.47
Accounts payable
3.29
2.15
2.21
4.05
6.25
7.94
10.05
12.05
14.47
17.36
Accrued liabilities
4.94
8.59
9.44
14.23
16.28
19.53
23.44
28.13
33.75
40.50
Accrued interest payable
0.54 4.00
3.51
0.12
Goodwill Intangible assets and other, net Total assets L iabilities and sto c kho lde rs’ equ it y Current liabilities:
Dividend payable Accrued earnout Income taxes payable Current portion of deferred revenue
0.28
0.56
0.78
4.04
3.33
3.33
3.33
3.33
3.33
3.33
37.10
52.58
73.77
97.67
136.42
164.42
200.54
244.52
298.09
363.29
Current portion of capital lease obligation
16 | P a g e
SolarWinds. Inc.
Current portion of long-term debt Total current liabilities
Feb. 4, 2014
16.87 63.03
67.88
89.72
120.11
162.29
195.22
237.35
288.04
349.64
424.49
1.54
3.18
3.37
5.08
7.11
8.57
10.45
12.74
15.53
18.93
0.29
0.48
2.73
2.73
2.73
2.73
2.73
2.73
4.08
8.91
14.26
14.26
14.26
14.26
14.26
14.26
40.00
40.00
40.00
40.00
40.00
40.00
Long-term liabilities: Deferred revenue, net of current portion Non-current deferred taxes Other long-term liabilities Long-term debt, net of current portion Total liabilities
0.61
0.82
27.23 92.40
71.87
97.46
134.58
226.38
260.77
304.79
357.76
422.15
500.40
0.067
0.072
0.073
0.075
0.075
0.075
0.075
0.075
0.075
0.075
123.08
165.97
194.38
229.28
243.88
243.88
243.88
243.88
243.88
243.88
-0.16
-1.26
-2.77
-1.15
-1.15
-1.15
-1.15
-1.15
-1.15
-1.15
Stockholders’ equity: Common stock, $0.001 par value Additional paid-in capital Accumulated other comprehensive income (loss) Accumulated earnings (deficit) Total stockholders’ equity Total liabilities and stockholders’ equity
-33.93
10.82
73.26
154.61
242.89
346.84
472.37
623.90
806.79
1028.26
89.07
175.61
264.95
382.81
485.70
589.65
715.18
866.71
1,049.60
1,271.07
181.47
247.48
362.41
517.40
712.08
850.42
1,019.97
1,224.47
1,471.75
1,771.47
17 | P a g e
SolarWinds. Inc.
Feb. 4, 2014
Appendix 2. Financial Statement Forecasts (Cont.) Common Size Balance Sheet 2009
2010
2011
2012
2013*
2014E
2015E
2016E
2017E
2018E
71.52%
57.38%
33.86%
34.73%
25.28%
22.95%
21.92%
22.58%
24.43%
27.06%
8.19%
9.52%
4.63%
4.20%
4.02%
4.14%
4.47%
4.96%
4.52%
4.55%
4.58%
4.60%
4.62%
Assets Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net of allowances
8.70%
8.18%
7.44%
6.28%
4.59%
Income tax receivable
0.06%
4.18%
0.03%
0.03%
0.10%
Deferred taxes
0.14%
0.11%
0.18%
0.33%
0.29%
0.24%
0.20%
0.17%
0.14%
0.11%
Prepaid and other current assets
3.74%
1.30%
0.76%
0.64%
0.62%
0.57%
0.57%
0.57%
0.57%
0.57%
84.16%
71.15%
50.47%
51.54%
35.51%
32.48%
31.25%
32.03%
34.20%
37.32%
Property and equipment, net
3.53%
2.71%
2.03%
1.61%
1.64%
2.84%
3.59%
4.01%
4.19%
4.19%
Debt issuance costs, net
0.22% 2.48%
2.36%
1.98%
1.65%
1.37%
1.14%
0.95%
Total current assets
Long-term investments Deferred taxes
1.15%
1.66%
0.92%
0.07%
0.43%
0.36%
0.30%
0.25%
0.21%
0.17%
Goodwill
8.51%
16.33%
30.56%
30.65%
46.85%
50.28%
51.14%
50.28%
48.21%
45.36%
Intangible assets and other, net
2.43%
8.15%
16.03%
13.65%
13.21%
12.06%
12.07%
12.06%
12.04%
12.01%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Accounts payable
1.81%
0.87%
0.61%
0.78%
0.88%
0.93%
0.98%
0.98%
0.98%
0.98%
Accrued liabilities
2.72%
3.47%
2.61%
2.75%
2.29%
2.30%
2.30%
2.30%
2.29%
2.29%
Accrued interest payable
0.30% 1.62%
0.97%
0.02%
Total assets L iabilities and sto c kho lde rs’ equ it y Current liabilities:
Dividend payable Accrued earnout Income taxes payable Current portion of deferred revenue
0.16%
0.22%
0.21%
0.78%
0.47%
0.39%
0.33%
0.27%
0.23%
0.19%
20.45%
21.25%
20.36%
18.88%
19.16%
19.33%
19.66%
19.97%
20.25%
20.51%
Current portion of capital lease obligation
18 | P a g e
SolarWinds. Inc.
Current portion of long-term debt Total current liabilities
Feb. 4, 2014
9.30% 34.73%
27.43%
0.85%
1.28%
24.76%
23.21%
22.79%
22.96%
23.27%
23.52%
23.76%
23.96%
Long-term liabilities: Deferred revenue, net of current portion Non-current deferred taxes Other long-term liabilities Long-term debt, net of current portion Total liabilities
0.33%
0.33%
0.93%
0.98%
1.00%
1.01%
1.02%
1.04%
1.06%
1.07%
0.08%
0.09%
0.38%
0.32%
0.27%
0.22%
0.19%
0.15%
1.13%
1.72%
2.00%
1.68%
1.40%
1.16%
0.97%
0.80%
5.62%
4.70%
3.92%
3.27%
2.72%
2.26%
15.00% 50.92%
29.04%
26.89%
26.01%
31.79%
30.66%
29.88%
29.22%
28.68%
28.25%
0.04%
0.03%
0.02%
0.01%
0.01%
0.01%
0.01%
0.01%
0.01%
0.00%
67.83%
67.07%
53.64%
44.31%
34.25%
28.68%
23.91%
19.92%
16.57%
13.77%
-0.09%
-0.51%
-0.76%
-0.22%
-0.16%
-0.13%
-0.11%
-0.09%
-0.08%
-0.06%
Stockholders’ equity: Common stock, $0.001 par value Additional paid-in capital Accumulated other comprehensive income (loss) Accumulated earnings (deficit) Total stockholders’ equity Total liabilities and stockholders’ equity
-18.69%
4.37%
20.22%
29.88%
34.11%
40.78%
46.31%
50.95%
54.82%
58.05%
49.08%
70.96%
73.11%
73.99%
68.21%
69.34%
70.12%
70.78%
71.32%
71.75%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
19 | P a g e
SolarWinds. Inc.
Feb. 4, 2014
Appendix 2. Financial Statement Forecasts (Cont.) Statement of Cash Flow 2009
2010
2011
2012
2013*
2014E
2015E
2016E
2017E
2018E
29.51
44.75
62.44
81.34
88.28
103.95
125.53
151.53
182.89
221.47
Operating Activities Net Income / Starting Line Depreciation, Depletion & Amortization
2.17
5.50
9.96
18.36
24.58
29.46
37.14
45.77
55.54
66.69
Deferred Taxes & Investment Tax Credit
-0.28
-2.22
2.12
-0.99
-3.01
0.00
0.00
0.00
0.00
0.00
Deferred Taxes
-0.28
-2.22
2.12
-0.99
0.00
0.00
0.00
0.00
0.00
0.00
2.35
-15.20
4.39
4.29
2.19
0.00
0.00
0.00
0.00
0.00
Other Funds Funds from Operations
33.74
32.82
78.91
103.01
112.05
133.41
162.67
197.30
238.43
288.16
Changes in Working Capital
15.48
33.22
32.51
40.44
47.69
28.19
35.07
42.20
51.39
62.31
Receivables
-1.49
-5.05
-7.07
-5.72
-0.75
-5.79
-7.98
-9.62
-11.60
-14.27
Accounts Payable
1.79
-1.13
0.06
1.81
2.20
1.68
2.11
2.01
2.41
2.89
Income Taxes Payable
9.08
17.16
19.89
18.57
-0.70
0.00
0.00
0.00
0.00
0.00
Other Accruals
0.11
3.42
0.75
4.47
1.93
3.26
3.91
4.69
5.63
6.75
Other Assets/Liabilities
5.99
18.82
18.89
21.32
45.01
29.04
37.03
45.12
54.96
66.93
49.23
66.04
111.42
143.45
159.74
161.60
197.73
239.49
289.83
350.46
Net Operating Cash Flow Investing Activities Capital Expenditures
-3.13
-3.54
-3.69
-5.09
-3.30
-12.50
-12.50
-12.50
-12.50
-12.50
Net Assets from Acquisitions & Goodwill
-0.05
-28.04
-109.48
-66.03
-223.00
-120.00
-120.00
-120.00
-120.00
-120.00
Intangible Assets
0.00
0.00
0.00
0.00
-23.47
-8.48
-20.52
-24.62
-29.54
-35.45
Purchase/Sale of Investments
0.00
0.00
-30.13
-32.00
12.30
-2.77
-5.20
-9.69
-15.21
-21.96
Other Funds Net Investing Cash Flow
0.00
0.00
-3.74
0.00
0.00
-11.20
-31.65
-44.39
-59.09
-76.14
-3.18
-31.57
-147.05
-103.12
-214.00
-146.47
-169.35
-186.58
-206.80
-230.60
-20.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
113.14
-3.96
11.58
9.15
14.61
0.00
0.00
0.00
0.00
0.00
-57.01
-44.11
0.00
0.00
40.00
0.00
0.00
0.00
0.00
0.00
6.99
26.75
6.36
6.33
0.00
0.00
0.00
0.00
0.00
0.00
Financing Activities Cash Dividends Paid Change in Capital Stock Issuance/Reduction of Debt, Net Other Funds
20 | P a g e
SolarWinds. Inc.
Net Financing Cash Flow
Feb. 4, 2014
43.12
-21.31
17.94
15.48
54.61
0.00
0.00
0.00
0.00
0.00
Exchange Rate Effect
0.05
-0.94
-1.61
1.18
0.00
0.00
0.00
0.00
0.00
0.00
Net Change in Cash
89.22
12.22
-19.30
57.00
0.34
15.13
28.38
52.91
83.03
119.86
21 | P a g e
Feb. 4, 2014
Appendix 3. Discounted Cash Flow Valuation a.
Discounted cash flow approach
in millions of $
2014E
2015E
2016E
2017E
2018E
Net Operating Cash Flow
161.60
197.73
239.49
289.83
350.46
0.41
0.41
0.41
0.41
0.41
-12.5
-12.5
-12.5
-12.5
-12.5
149.51
185.64
227.41
277.74
338.38
-0.41
-0.41
-0.41
-0.41
-0.41
0.00
0.00
0.00
0.00
0.00
149.10
185.23
226.99
277.33
337.96
Add: Interest Expense x (1-Tax Rate) Less: Capital Expenditure FCFF Less: Interest Expense Add: Net Borowing FCFE Current Risk-free Rate* Beta** Historical Market Return*** Long-term Growth Rate
2.61% 1.21 11.29% 5.00%
Required Return
13.11%
[RFR + β*(Rmarket - RFR)] NPV FCFE 2014 NPV FCFE 2015 NPV FCFE 2016 NPV FCFE 2017 NPV FCFE 2018 NPV Terminal
$ 131.82 $ 144.78 $ 156.85 $ 169.41 $ 182.52 $ 2,362.26
Shares Outstanding
$ 3,147.63 75.371
Intrinsic Value
$
Closing Price 02/03/14
$
41.76 39.11
*10 yr US Bond yield as of 02/03/14 (www.treasury.gov) **2 year time period compared to S&P 500 based on weekly closing prices, raw 1.32, adjusted = .67*raw + 0.33*1.0 ***S&P 500, arithmetic average 1964-2013, http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
Terminal
4374.07
SolarWinds. Inc.
Feb. 4, 2014
Appendix 3. Discounted Cash Flow Valuation (Cont.) Sensitivity analysis Currently undervalued Currently overvalued
3.00%
Required rate of return
a.
10.61% 11.11% 11.61% 12.11% 12.61% 13.11% 13.61% 14.11% 14.61% 15.11% 15.61%
3.50%
Price
$
Long-term growth rate 4.50% 5.00%
4.00%
39.11
5.50%
6.00%
6.50%
7.00%
$ $ $ $
47.83 44.64 41.83 39.33
$ $ $ $
50.59 47.02 43.90 41.14
$ $ $ $
53.78 49.74 46.24 43.17
$ $ $ $
57.48 52.87 48.90 45.47
$ $ $ $
61.85 56.50 51.98 48.09
$ $ $ $
67.06 60.79 55.55 51.11
$ $ $ $
73.42 65.92 59.76 54.62
$ $ $ $
81.31 72.15 64.80 58.75
$ $ $ $
91.39 79.91 70.92 63.70
$
37.10
$
38.69
$
40.46
$
42.46
$
44.72
$
47.29
$
50.25
$
53.70
$
57.77
$
35.08
$
36.49
$
38.06
$
39.80
$
41.76
$
43.98
$
46.51
$
49.42
$
52.81
$
33.27
$
34.52
$
35.90
$
37.44
$
39.15
$
41.08
$
43.26
$
45.74
$
48.60
$
31.61
$
32.73
$
33.97
$
35.33
$
36.84
$
38.52
$
40.41
$
42.55
$
45.00
$
30.11
$
31.11
$
32.21
$
33.43
$
34.76
$
36.24
$
37.90
$
39.76
$
41.86
$
28.73
$
29.63
$
30.62
$
31.71
$
32.90
$
34.21
$
35.67
$
37.29
$
39.12
$
27.46
$
28.28
$
29.17
$
30.14
$
31.21
$
32.38
$
33.67
$
35.10
$
36.70
23 | P a g e
Feb. 4, 2014
Appendix 4: Market Based Valuation a. Valuation based on three closest peers Ticker
Company
NTCT
NetScout, Inc.
CTXS CA
Market Cap
TTM P/B 3.87
TTM P/S
1.48
TTM P/E 32.12
Citrix Systems, Inc
10.98
35.48
3.24
3.83
CA Technologies, Inc.
14.57
14.11
2.56
3.18
27.24
3.22
3.62
33.60
6.39
9.61
23.36%
98.34%
165.47%
Mean from peers
27.24
3.22
3.62
EPS
1.21
Mean SWI
SolarWinds, Inc.
Forecasted
Premium
2.99
Book Value per share
3.85
7.84
Sales per share Target price
4.13 $
32.96
$
25.28
$
14.95
SolarWinds. Inc.
b.
Feb. 4, 2014
Expanded peer group based on P/E TTM Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
11.51
12.43
12.21
12.5
12.75
13.07
13.87
13.73
14.41
14.1
14.66
14.24
185%
157%
126%
148%
130%
140%
128%
142%
153%
183%
250%
281%
13.52
14.35
13.94
13.57
12.45
12.79
13.23
12.21
13.16
13.35
13.35
12.29
143%
123%
98%
128%
135%
145%
139%
172%
177%
199%
284%
342%
11.73
11.96
11.57
12.29
12.38
12.64
14.1
13.68
13.56
11.59
12.2
11.94
180%
167%
139%
152%
137%
148%
124%
143%
169%
244%
321%
355%
VMW
37.22
38.21
39.17
39.78
39.06
46.91
45.55
36.36
41.46
44.5
45.48
42.92
-12%
-16%
-29%
-22%
-25%
-33%
-31%
-9%
-12%
-10%
13%
27%
EMC
17.92
18.85
18.96
18.94
20.21
20.71
20.97
19.1
20.2
19.09
19.26
18.8
83%
70%
46%
63%
45%
51%
51%
74%
80%
109%
166%
189%
NTAP
26.01
25.01
25.26
24.03
29.39
29.19
28.79
27.91
27.42
25.42
25.08
24.46
26%
28%
9%
29%
0%
7%
10%
19%
33%
57%
105%
122%
NTCT
31.11
26.14
30.56
29.79
25.62
25.72
28.11
25.15
25.41
23.78
24.52
28.1
22%
-10%
4%
14%
22%
12%
32%
43%
68%
109%
93%
34.52
34.74
34.44
41.13
42.58
43.67
36.97
34.72
34.8
38.62
39.1
IBM CA CSCO
5% CTXS
29.13 13%
-7%
-20%
-10%
-29%
-26%
-28%
-10%
5%
15%
33%
39%
SWI
32.82
31.99
27.65
30.95
29.29
31.37
31.61
33.2
36.42
39.85
51.32
54.3
Price range 13.93
169%
37.40 16.36
174%
44.78 14.19
190%
41.13 45.04
-13%
39.02 21.68
86%
61%
40.25 31.47
37%
43.13 37.64
35%
50.71 35.25
-2%
34.46
21.965
Median P/E from peers Assigned Premium
61%
Forecasted EPS
1.21
Target price from P/E
Premium
$
42.88
25 | P a g e
Feb.4,2014
Appendix 5.Financial analysis
Revenue & Growth - Revenue - Net Income-
QTR Revenue & YOY Growth
Revenue Growth
Net Income Growth
1000
V').
- QTR Revenue -
500/o
100
500/o
900
45%
90
45%
800
400/o
80
400/o
700
35% 0::: ro
70
35%
60
ro 300/o 0:: 25% .c. ....
.... Q)
V').
....
0
c.n
c.n
600
300/o
.c. ....
.Q
25%
.E
...0
.Q 50
500
.E
40
400
200/o
c
30
c
300
15%
-ro::!
200
100/o
0
.-I
...
200/o 0 15% (!) 100/o 5% 0%
.-I .-I .-I .-I N .-I .-I
u ... to
(l)
0
2
Q. c: (l)
-,
V">
Q)
u to...
(l)
0
2
N
N .-I
Q. c: (l)
-,
V">
N .-I
("()
u ... to
(l)
0
2
("()
("()
("()
.-I
.-I
Q. c: (l)
-,
V">
u
(l)
0
SolarWinds. Inc.
Feb. 4, 2014
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
24.075
27.042
32.35
32.979
34.325
35.508
41.154
41.406
42.978
45.823
53.948
55.609
59.671
64.04
71.723
73.53
72.91
77.519
87.863
87.23710027
Operating income
9.955
11.757
15.186
6.903
13.429
12.151
18.21
18.214
17.057
19.127
25.253
22.338
23.718
26.888
31.484
31.58
29.312
31.314
31.861
27.03920614
Net income
5.988
6.818
10.155
6.548
8.937
8.336
12.159
15.314
11.71
13.551
20.888
16.294
17.131
19.427
22.486
22.299
22.999
22.797
22.823
19.66504945
Operating Margin
41.35%
43.48%
46.94%
20.93%
39.12%
34.22%
44.25%
43.99%
39.69%
41.74%
46.81%
40.17%
39.75%
41.99%
43.90%
42.95%
40.20%
40.40%
36.26%
31.00%
Profit Margin
24.87%
25.21%
31.39%
19.86%
26.04%
23.48%
29.55%
36.98%
27.25%
29.57%
38.72%
29.30%
28.71%
30.34%
31.35%
30.33%
31.54%
29.41%
25.98%
22.54%
Total revenue
27 | P a g e
SolarWinds. Inc.
Feb. 4, 2014
Total revenue
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
116.45
152.39
198.36
268.96
325.53
390.63
468.76
562.51
675.02
810.02
Operating income
43.80
62.00
83.78
113.67
119.53
143.53
172.61
207.51
249.48
299.93
Net income
29.51
44.75
62.44
81.34
88.28
103.95
125.53
151.53
182.89
221.47
Operating Margin
37.61%
40.69%
42.23%
42.26%
36.72%
36.74%
36.82%
36.89%
36.96%
37.03%
Profit Margin
25.34%
29.36%
31.48%
30.24%
27.12%
26.61%
26.78%
26.94%
27.09%
27.34%
28 | P a g e
SolarWinds. Inc.
Net Profit Margin
Feb. 4, 2014
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
25.34%
29.36%
31.48%
30.24%
27.12%
26.61%
26.78%
26.94%
27.09%
27.34%
Total Asset Turnover
0.64 x
0.62 x
0.55 x
0.52 x
0.46 x
0.46 x
0.46 x
0.46 x
0.46 x
0.46 x
Equity Multiplier
2.04 x
1.41 x
1.37 x
1.35 x
1.47 x
1.44 x
1.43 x
1.41 x
1.40 x
1.39 x
33.13%
25.48%
23.57%
21.25%
18.18%
17.63%
17.55%
17.48%
17.42%
17.42%
29.51
44.75
62.44
81.34
88.28
103.95
125.53
151.53
182.89
221.47
181.47
247.48
362.41
517.40
712.08
850.42
1019.97
1224.47
1471.75
1771.47
16.26%
18.08%
17.23%
15.72%
12.40%
12.22%
12.31%
12.38%
12.43%
12.50%
ROE Net Income Total Assets ROA
29 | P a g e
SolarWinds. Inc.
Feb. 4, 2014
Source: FactSet * Fiscal Year Ends in March 4 Year Average Superior Margins of Solarwinds CA Market Cap $ (B) Operating Margin Profit Margin
14.37 + 11.18% + 10.13%
Current Ratio
NTCT
CTXS
1.46
10.08
+ 21.95% + 17.70%
2009 2.42
+ 24.56% + 15.01%
2010 2.59
2011 2.04
2012 2.22
2013 1.56
Current Ratio w/o Acquisit. Debt Ratio Debt-Equity Ratio
2014 1.42
2015 1.34
2016 1.36
2017 1.44
2018 1.56
2.03
2.35
2.61
2.81
2.97
50.92%
29.04%
26.89%
26.01%
31.79%
30.66%
29.88%
29.22%
28.68%
28.25%
103.75%
40.93%
36.79%
35.16%
46.61%
44.22%
42.62%
41.28%
40.22%
39.37%
Capitalization Ratio
23.41%
0.00%
0.00%
0.00%
7.61%
6.35%
5.30%
4.41%
3.67%
3.05%
Operating CF to Current Liab.
78.10%
97.30%
124.18%
119.43%
98.43%
82.78%
83.31%
83.15%
82.89%
82.56%
Operating CF to Total Liab.
53.27%
91.89%
114.32%
106.59%
70.56%
61.97%
64.88%
66.94%
68.65%
70.04%
30 | P a g e
SolarWinds. Inc.
Feb. 4, 2014
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Net Income
29.51
44.75
62.44
81.34
88.28
103.95
125.53
151.53
182.89
221.47
Fund from Operation
33.74
32.82
78.91
103.01
112.05
133.41
162.67
197.30
238.43
288.16
Net Operating CF
49.23
66.04
111.42
143.45
159.74
161.60
197.73
239.49
289.83
350.46
Net Investing CF
-3.18
-31.57
-147.05
-103.12
-214.00
-146.47
-169.35
-186.58
-206.80
-230.60
Net Financing CF
43.12
-21.31
17.94
15.48
54.61
0.00
0.00
0.00
0.00
0.00
0.05
-0.94
-1.61
1.18
--
--
--
--
--
--
89.22
12.22
-19.30
57.00
0.34
15.13
28.38
52.91
83.03
119.86
Exchange Rate Effect Net Change in Cash
31 | P a g e
Appendix 6: SolarWinds customers SWI delivers its products and services to more than 150,000 customers worldwide in more than 180 countries, including all size of business, governments and more than 450 of the Fortune 500 companies. SWI typical customers are network professionals, systems administrators, storage administrators or virtual administrators who are sophisticated users of software and related technologies. The following presents a sample of SolarWinds customers.
Source: Company website
SolarWinds. Inc.
Feb. 4, 2014
Appendix 7. Company major events
1999
•
Founded in Tulsa, Oklahoma by Dave and Don Yonce to create and sell network-management tools
2006
•
Relocated to Austin, Texas
2007
• • •
Raised private funding Acquired several companies including Neon Software and ipMonitor Corp Opened an European sales office in Ireland
2008
• •
Established an operation in Brno, CZECH REPUBLIC Announced its professional certification program, the SolarWinds Certified Professional Program (SCP) for network management
2009
• • • •
Acquired kiwi enterprise, a New Zeeland based software maker (1/8/2009) Completed IPO of $112.5 million (5/20/2009) Acquired development personnel in Chennai, India (2010/1) Bought tek-Tools , a company based in Dallas for 42 million with cash and stock, expanding SWI’s services into storage management (2010/1/27) Established Asia-Pacific Headquarter in Brisbane, Australia Signed distributer in Singapore (Westcon Group ASEAN) and the African Region (Comstor) Acquired Hyper9 (a company based in Austin) for 23 million and introduced SolarWinds Virtualization Manager (2011/1) Competed TriGeo (a company based in Idaho) acquisition for 35 million and introduced SolarWinds Log & Event Manager (2011/7/13) Bought DNSstuff.com for 11 million, adding DNS management tools that help IT professionals fix email and connectivity problems.(2011/10) Acquired certain assets of DameWare for 40 million. DameWare sells software tools that allow remote management. (2011/12/15) Acquired EminentWare, a company based in Houston, TX that sells patch management software (2012/1) Entered distribution relationship with Westcon Group to better serve the Brazilian market. (2012/3/1) Acquired Rove Mobile , a mobile managing company (2012/4) Acquired WebHelpDesk for 20 million and launched Solarwinds Web help desk (2012/7) Launched Japanese website (2012/8) Acquired Athena Security, a company based in Los Angeles, CA, and launched Firewall Security Manger (2012/8) Acquired Rhino Software and launched Serv-U, a file transfer management software (2012/12/18) Introduced a new set of localized assets for the German market, and launched German-language website (2012/Q4)
2010
2011
• • • • • •
2012
• • • • • • • •
2013
• • • • •
Acquired N-able , a company based in Ontario, Canada serving 2600 MSPs, for $120 million. The acquisition is believed help Solarwinds enhance remote monitoring and management (RMM) offerings and add MSP service automation (2013/5/28) Authorized Share Repurchase Program for up to $50 million of the company's common stock. (2013/7/29) Announced commitment to new headquarter--The new 13-year lease is for approximately 230,000 square feet in buildings with options to expand. (2013/7) Acquires Confio Software, headquartered in Boulder, CO, for $103 million in cash, and added database performance solutions to product line (2013/10/7) Established strategic partnership with AppNeta, the technology company based in Boston that provides Full Stack Application Performance Management (APM) solutions (/2013/11/5)
Source: Company website, company 10-k, Wikipedia
33 | P a g e
SolarWinds. Inc. Appendix 8: SolarWinds Product Family
Feb. 4, 2014
a. Categories and functions of products
Source: Company analyst day presentation SolarWinds product classification Core Products “core products offers of enterprise-class IT management products that are used by IT professionals and teams in companies of all sizes to configure, monitor and report on network equipment, physical and virtual servers, applications and storage devices to determine the overall health and performance of the IT infrastructure and to automate the processes of change, compliance and inventory. These prod ucts provide advanced IT management functionality and are capable of scaling from simple to complex environments. Our current core products provide enterprise-class functionality across network management, systems and application management, storage resource management, virtualization management and log and event management”(SWI, 10-k). Transactional Products These products are desktop-based, laptop-based or server-based applications designed to solve complicated tasks for individual IT professionals, and it include individual tools and toolsets, which offer many powerful tools into a single package, in addition to entry-level IT infrastructure monitoring functionality as well. Transaction products include Standard Toolset, Engineer’s Toolset, Kiwi Syslog Server, Kiwi CatTools, and Kiwi Logviewer products, ipMonitor, LANsuurveyor, DameWare SysAdmin Utilities and DameWare Mini Remote Control, and various subscription-based tools available at DNSstuff.com.by providing these products and that give the opportunity to have more loyalty from the IT professional to purchase SWI products.(SWI,10-k) Free Tools SWI offers free tools like desktop, laptop, server-based or internet-based applications designed for use by individual IT professionals, and focused on a single network or infrastructure management task or technology. Potentially, free tools are used to drive awareness of SWI brand and paid products within the broader IT management community and to build customers’ loyalty for the brand and our end-user community. (SWI, 10-k)
34 | P a g e
SolarWinds. Inc.
Feb. 4, 2014
Source: SolarWinds 2013 Analyst day
Future products
Source: SolarWinds 2013 Analyst day
35 | P a g e
SolarWinds. Inc.
b.
Feb. 4, 2014
Major products and price list (as of 1/23/2014) Description
Price range_low
Price range_high
Pricing levels
Pricing note
Popularity by Thwack Discussion count
current version
1
Network Performance Monitor
2675
25775
5
total
19022
10.6
2
Server & Application Monitor
2995
31495
6
total
3471
6.0
3
Network Configuration Manager
2695
30995
7
total
2861
7.2
4
NetFlow Traffic Analyzer
1795
14995
5
total
1737
4.0
5
Engineer's Toolset
1390
1390
1
total
1269
10.9
6
ipMonitor
1995
1995
1
total
1020
10.8
7
Patch Manager
3495
131995
11
total
645
2.0
8
Kiwi CatTools
750
949
2
total
574
9
IP Address Manager
1995
14995
4
total
513
4.0
10
VOIP & Network Quality Manager
1495
11995
4
total
500
4.1
11
Kiwi Syslog
295
395
2
total
444
9.4
12
Log & Event Manager
4495
99995
10
total
441
5.7
13
Storage Manager
2995
99990
9
total
336
5.3
14
Enterprise Operations Console
4995
4995
1
total
258
1.5
15
Virtualization Manager
2995
52995
7
total
248
6.0
16
Web Help Desk
695
555
8
per user
227
17
User Device Tracker
1795
16995
6
total
203
3.0
36 | P a g e
SolarWinds. Inc.
Feb. 4, 2014
18
Web Performance Monitor
1995
28995
7
total
153
19
DameWare MRC
170
259
6
total
67
20
Serv-U FTP Server & MFT Server
495
2995
6
total
66
21
DameWare DRS
270
349
6
total
57
22
Failover Engine
495
17495
6
total
54
23
Firewall Security Manager
1995
75000
15
total
35
24
Network Topology Mapper
1495
1495
1
total
24
25
Mobile Admin
670
2995
3
total
20
26
Kiwi log viewer
79
109
2
total
2.0
All the pricing includes one-year maintenance Source: http://www.solarwinds.com/products/pricing/; product release notes
37 | P a g e
Appendix 9. Glassdoor.com employee ratings SolarWinds
Spiceworks
SolarWinds. Inc.
Feb. 4, 2014
Appendix 10. Major Acquisitions
2009
•
Acquired kiwi enterprise, a New Zeeland based software maker (1/8/2009).
•
Completed IPO of $112.5 million (5/20/2009)
•
2010
Tek-Tools- The Dallas-based company develops storage resources-management software. Tek-Tools developed the Profiler Suite, which allows IT professionals to see track the performance of a company’s storage infrastructure. SolarWind paid $42 million for the company in January 2010 – making Tek-Tools its second largest acquisition. The deal also expanded SWI’s services into storage management.
•
2011
Hyper9 – The Austin–based virtualization management-software developer was acquired by SWI in January 2011 for $23 million. The technology provides optimization, capacity planning, configuration and reporting for virtual servers. After the acquisition, SWI launched its own virtualization management software, called SolarWinds Application Performance Monitor.
•
TriGeo Network Security Inc.- SWI bought Post Falls, Idaho-based TriGeo for $35 million in July 2011. The buyer based its SolarWinds Log& Event Manager product off of TriGeo’s technology, which provides log and event management services to IT manager technology collects data from devices, allowing users to detect security threats and generate compliance reports.
•
DNSstuff.com – DNSstuff.com provides online troubleshooting told that help IT professionals fix email and connectivity problems. SWI bought the company in October 2012 for $11million.
•
DameWare – Solar Winds paid $40 million to buy DameWare in December 2012. The company sells software tools to companies that allow IT professionals to remotely manage computers. The deal allowed SWI to deepen its capabilities in the system-management market.
. 2012
•
EminentWare – SWI bought this patch management company in January 2012 for an undisclosed amount. EminentWare, headquartered in Houston, develops patching technology that can fix problem with Windows, Adobe, Apple, Google, Mozilla, Oracle and other computer programs. The service also decreases security risks. The company was integrated into SWI’s patch management services and is now called SolarWinds Patch Manager.
•
Rove- Rove, headquartered in Ottawa, Canada, was picked up by SWI for an undisclosed amount in April 2012. The target develops mobile IT software, which allows IT professionals to manage tasks from their iPhone, iPad, Android smartphones and tablets, BlackBerry smartphone and other mobile devices. The technology allowed SWI to release SolarWinds mobile Admin Software v.7, its own mobile-management product.
•
WebHelpDesk- SWI paid $20 million for WebHelpDesk, hadquartered in Fremont, Calif., in July 2012. The target develops online help desk software for IT professionals. SWI said at the time that the deal would expand the number of IT management problems that it solved. For more, see ”SolarWinds Buys Help Desk, Continues Growth Through Acquisitions.”
•
Athena Security – Athena, a company that develops firewall-management tools, was acquired by SWI in August 2012 for an undisclosed amount. The acquisition allowed SWI to develop 39 | P a g e
SolarWinds. Inc.
Feb. 4, 2014
SolarWinds Firewall Security Manager, a product that provides firewall management.
•
Rhino Software – SWI’s December 2012 purchase of file transfer software developer, Rhino Software, allowed the company to expand its services with two transfer offerings, SolarWinds FTP Voyager and SolarWinds Serv-U Managed File Transfer Server.
2013
•
Acquired N-able Technologies in May 2013 , a company based in Ontario, Canada serving 2600 MSPs, for $120 million. The acquisition is believed help Solarwinds enhance remote monitoring and management (RMM) offerings and add MSP service automation.
•
Acquires Confio Software in October 2013, headquartered in Boulder, CO, for $103 million in cash, and added database performance solutions to product line.
40 | P a g e
SolarWinds. Inc.
Feb. 4, 2014
Appendix 11. Industry trend analysis
41 | P a g e
Appendix 12: Major Competitors •
CA Technologies (NASDAQ: CA) – a most significant competitor amongst peer group. CA focuses on reducing the complexity of technology and delivering consistent performance through the application of software products and solutions. The company’s customer base consists of large enterprises that have intricate technologies and rely heavily upon there reliability. CA relies on a direct sales force to drive revenue. Sales focus on developing customers through the application and success of a certain product or solution and cross selling other products and services offered by CA.
•
International Business Machines Corporation (NYSE: IBM) – IBM leads top position in supporting and driving transformation compared to other tech vendors, holding market share of $190.24B. Its portfolio is organized and adjusted appropriately to engage with new IT management solution trend. With full changes, IBM might lose its market share as smaller vendors take advantage o f those customers who demand traditional IT solutions in short term.
•
Hewlett-Packard Company (NYSE: HPQ) – HP is growing without much focus on disruptive technology in software management solutions as its peers. Additionally, lacking vision and weak market strategy cause HP to deal with acquiring failures. Even though HP is in recovering stage of acquisitions, its portfolio is still considered rich with current strength of application performan ce management solution.
•
BMC Software goes private – BMC starts focusing on innovation and specialists approach rather than concentrating on acquisitions. Its first action after going private is successful introducing Business Services Management (BSM) to the market, adding another solution to its portfolio. By understanding of market forces and obtaining innovative technology key, privatization helps BMC gain competitive advantage over public companies.
Sample small vendors with similar solutions portfolio •
ManageEngine, Inc.: The company offers similar products: fault management and performance management to SolarWinds at fairly closed price, starting at about $2000. While SWI only provided server solutions running on Windows, Manage Engine is more diversified with both Windows and Linux/Unit. In addition, the company also has notable customers such as The New York Times, DHL, L’Oreal, and multiple universities, etc.
•
Ipswitch, Inc: A privately held company offers a similar product line tailored to network management software and solutions. The flagship product for Ipswitch is “WhatsUpGold” a product in direct competition with SolarWinds product “Network Performance Monitor”, wherein they provide unified network management solutions. Founded in 1991, Ipswitch touts a customer base of over 150,000 including such customers as Nike, Toyota, BMW, and Samsung, while reaching customers in over 100 countries. Ipswitch offers a free 30 day trial download of WhatsUpGold, allowing users to test the product and reach potential customers that may not purchase without first seeing the products benefits. The company’s business model focuses on offering a high quality product at a cost-effective price to consumers.
•
Statseeker, Inc. – a privately held company headquartered in Brisbane, Australia, offering management and performance maintenance products designed to monitor network infrastructure. The company focuses on the simplistic operation of their product, used to manage complex technological environments, while offering an aggressive pricing strategy. Statseeker has taken the “less is more” ap proach, reducing the data volume while increasing the value of data through specific statistical methods.
Feb. 4, 2014
Appendix 13: Competing products Appendix 13a. Comparison of network monitoring software by Wikipedia
Name
AccelOps
AggreGat e Network Manager
Lates Late t Logica Distribu Acces st Trend Auto Trigg Data IP SLA l Trendi Agentl SN Plugi ted Invent Platfor s relea Predicti Discov Syslog ers / WebApp Storage License Maps IPv6 relea Reports Groupi ng ess MP ns Monitori ory m Contr se on ery Alerts Method se ng ng ol versi date on Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Support Yes ed
Support Yes ed
Yes
Yes
Yes
Yes Full Control
Yes
Yes
Unkno PostgreS Commer wn QL cial
Yes
Yes
Unkno wn
MySQL, MS SQL, Limited PostgreS free, Java QL, Commer Oracle, cial Firebird, HSQLDB
Yes
Yes
Unkno wn
Flat file, Artistic Berkeley License DB
No
Yes
Yes
Yes
Yes Full Control
Yes
Yes
Yes
Unkno wn
Yes
Yes
Unkno Commer MySQL wn cial
Yes
Yes
Yes
Unkno Commer MySQL wn cial
Yes
Yes
Yes
Plugin
Yes
Yes
2013- 0.8.8 08 b
Commer Plugin cial
Yes
Yes
20135.4.3 09
Apach e ACL
Yes
20135.4 08
Argus
Yes
Yes
Yes
Yes
No
No
Yes
Yes
Yes
Yes
Viewing, Acknowled ging, Reporting
CA Spectrum
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
No
Yes
Yes
Yes
Yes Full Control
Yes
Yes
Cacti
Yes
Yes
Yes
Yes
Via plugin
Yes
Yes
Yes
Yes
Yes Full Control
Yes
Yes
PHP
RRDtool, MySQL
Centina Systems NetOmnia
Yes
Yes
Yes
Yes
Via plugin
Yes
Yes
Yes
Yes
Yes Full Control
Yes
Yes
Java
MySQL
No
No
No
No
Push Support Yes model; ed multica
Yes
Yes
Yes
Yes
No
C
RRDtool
Avaya VPFM
collectd
Viewing
Perl
GPL
GPLv2
No
20133.7 02
SolarWinds. Inc.
Name
Feb. 4, 2014
Lates Late Logica Distribu Acces t Trend Auto Trigg Data st Plugi ted Invent Platfor s IP SLA l Trendi Agentl SN relea ers / WebApp IPv6 relea Storage License Maps Predicti Discov Syslog m ns Reports Groupi ng ess MP Monitori ory Contr se se ery Method on Alerts ng ol versi ng date on st possibl e
Dhyan Network managem ent System
Yes
Yes
Yes
Unknow n
Yes
Support Yes ed
support Yes ed
GroundW ork Inc.
Yes
Yes
Yes
Yes
Yes
ExtraHop
Yes
Yes
Yes
Yes
Yes
Yes
FreeNATS
Yes
Yes
No
No
Yes
No
Via gmond check in
Ganglia
HP Network Node Manager (NNMi)
No
Yes
IBM Tivoli Possible
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
Yes
No
No
Via plugin
Yes
No
Via plugi n
No
Yes
Yes Full Control
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Via Yes integrat Yes ion
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes Full Control
With ECM
Yes
In PHP Full Control Code
No
No
No
Yes
Yes
Viewing
Yes
Yes
Java
MySQL, Commer Oracle, cial Derby
Yes
Yes
Yes
Perl
Limited PostgreS free, QL, Commer RDTool cial
Yes
Yes
No
20137.0 10
Unkno Proprieta Commer wn ry cial
Yes
Yes
Yes
20133.10 12
MySQL
GPL
No
Yes
Unkno wn
Unkno C, PHP RRDtool wn
BSD
Yes
No
Unkno 20133.5.7 wn 02
Yes
Yes
Yes
Yes
Yes
Yes
PHP
Unkno wn
PostgreS Commer QL, cial Oracle Database
Unkno MySQL, Commer
44 | P a g e
SolarWinds. Inc.
Name
Network Manager
Icinga
InterMapp er
IPHost Network Monitor
Feb. 4, 2014
Lates Late Logica Distribu Acces t st Trend Auto Trigg Data IP SLA l Trendi Agentl SN Plugi ted Invent Platfor s relea Predicti Discov Syslog ers / WebApp Storage License Maps IPv6 relea Reports Groupi ng ess MP ns Monitori ory m Contr se se on ery Alerts Method ng ng ol versi date on via configura tion
Via plugin
Yes
Yes
wn
Yes
Yes
Yes
Yes
Yes
Yes
No
No
Via Via Support Via plugi plugin ed plugin n
Yes
No
No
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes Full Control
Yes
Via plugin
C[1]
Oracle Database , DB2 MySQL, PostgreS QL, Oracle Database
cial
GPL
Yes
Viewing
Yes
Yes
Limited Windo free, ws, Linux & PostgreS Commer cial MacOS QL
Yes
Viewing, Acknowled ging, Reporting
Yes
No
Unkno FirebirdS Commer wn QL cial
Yes
Yes
Yes
20131.9.0 05
Yes
Yes
Yes
2014- v5.7. 01 1
No
No
Unkno wn
Yes
Yes
No
Yes
No
Yes
Yes
Yes
Yes Full Control
Yes
Via plugin
Yes
Yes
Unkno FirebirdS Commer wn QL cial
Yes
Yes
Unkno wn
Unkno Commer Unknown wn cial
Yes
Yes
Yes
Unkno Yes wn
Yes
isyVmon
Yes
Yes
Yes
No
Via plugin
Kaseya Network Monitor
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes Full Control
LiveActio n
Yes
Yes
Yes
No
Yes
Yes
Yes
No
Yes
Yes
Viewing, Reporting
Yes
Yes
Monitorix
No
No
Yes
Yes
No
No
Yes
No
Yes
Yes
Viewing
Yes
Unkno wn
Limited RRDtool, free, Via PHP MySQL Commer plugin cial
Perl
RRDtool
GPL
20133.0.0 02
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Name
Feb. 4, 2014
Lates Late Logica Distribu Acces t Trend Auto Trigg Data st Plugi ted Invent Platfor s IP SLA l Trendi Agentl SN relea ers / WebApp IPv6 relea Storage License Maps Predicti Discov Syslog m ns Reports Groupi ng ess MP Monitori ory Contr se se ery Method on Alerts ng ol versi ng date on
Munin
No
No
Yes
Yes
Nagios
Via plugin
Yes
Yes
No
Yes
Yes
No
Possible NetCrunc via h configura tion
No
No
Yes
No
Via Via Support Via plugi plugin plugin ed n
Yes
Yes
Yes
Yes
Yes Partial
Viewing
Via Unkno nodes wn
Perl
Unkno Unkno wn wn
RRDtool
GPL
Flat file, Via C, PHP plugin SQL
GPL
Yes
Yes
2013- 2.0.1 03 2
Yes
Yes[2]
Marc 3.5.0[ h 3] 2013
Yes
Yes
Yes
Yes
Yes
Yes
Viewing, Acknowled ging
No
Yes
Unkno wn
Commer cial
Yes
Yes
No
Viewing, Acknowled ging, Reporting
Yes
Yes
Unkno Commer Unknown wn cial
Yes
Yes
Unkno wn
Yes
Yes
Unkno wn
Proprieta Commer ry cial Database
Yes
Yes
Yes
MySQL, MS SQL, Oracle, PostgreS QL, SQLite
Yes
Yes
No
Yes
Yes
Yes
NetQoS Performan ce Center
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Network Instrumen ts Observer Infrastruct ure
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes Full Control
NetXMS
No
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes Full Control
Yes
No
NeuralStar
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes Full Control
Yes
Yes
C++
SQL
GPL
Unkno Commer MS SQL cial wn
20137.3 12
20131.2.9 09
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SolarWinds. Inc.
Name
CA Nimsoft Monitor
Observiu m
Feb. 4, 2014
Lates Late Logica Distribu Acces t Trend Auto Trigg Data st ted Invent Platfor Plugi IP SLA l Trendi Agentl SN s relea ers / WebApp Storage License Maps IPv6 relea Predicti Discov Syslog m ns Monitori ory Contr se Reports Groupi ng ess MP se ery Method on Alerts ng ol versi ng date on
Yes
Yes
Yes
No
Yes
No
Yes
No
Yes
Yes
Support Yes ed
No
Yes
Yes
Yes
Yes
Yes
Yes
Viewing, Acknowled ging, Reporting
Yes Full Control
OpenKBM
Yes
Yes
Yes
Yes
Yes
Support Yes ed
OpenNMS
Yes
Yes
Yes
Unknow n
Yes
Support Yes ed
Yes
Yes
Opmantek NMIS
Yes
Yes
Yes
Yes
Yes
Support Yes ed
Yes
Full Yes Contro l
Yes
Yes
Yes
Yes
Yes Full Control
Yes
No
Yes
Yes
Unkno wn
SQLServ er, Commer Oracle, cial MySQL
Yes
Yes
Yes
Limited RRDtool, free, PHP MySQL Commer cial
Yes
Yes
Yes
Proprieta ry with Commer cial JDBC support
Yes
Yes
Yes
Yes
Yes
Yes
2013- 1.12. 09 1
MongoD GPL, B, Commer RRDtool cial
Yes
Yes
Yes
2013- 8.4.2 05 G
Unkno wn
Yes
Yes
Yes
Yes
JRobin, Java PostgreS GPLv3 QL
Yes
Yes
Yes
Perl
Viewing, Acknowled ging, Reporting
Yes
No
Unkno Commer Unknown wn cial
Yes
Yes
Unkno wn
No
Unkno wn
Yes
Yes
Yes
Yes
Yes
Yes
OPNET's AppRespo nse Xpert
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Opsview
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes Full Control
Yes
op5 Monitor
Yes
Yes
Yes
Yes
Yes
Support Yes ed
Yes
Yes
Yes
Yes
Yes
SQL
Via Flat file, C, PHP SQL plugin
Commer cial Limited free, Commer
Rollin g N/A relea se
20136.1.1 05
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Name
Feb. 4, 2014
Lates Late Logica Distribu Acces t st Trend Auto Trigg Data IP SLA l Trendi Agentl SN Plugi ted Invent Platfor s relea Predicti Discov Syslog ers / WebApp Storage License Maps IPv6 relea Reports Groupi ng ess MP ns Monitori ory m Contr se se on ery Alerts Method ng ng ol versi date on cial
OSI NetExpert
PacketTra p
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Java, C++
Oracle
Commer cial
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Viewing, Reporting
Yes
Yes
Unkno wn
SQL
Commer cial
Yes
Yes
Yes
MySQL, GPLv2; Perl, PostgreS (Enterpri PHP, Yes QL, se edition C++ Oracle available)
Yes
Yes
20145.0 01
Pandora FMS
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes Full Control
Yes
Yes
PathSoluti ons
Yes
Yes
No
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Performan ce CoPilot
No
Yes
Yes
No
No
No
No
No
Yes
Yes
No
Yes
No
Unkno Flat file wn
PRTG Network Monitor
Yes
Yes
Yes
Yes
Yes
Scrutinize r
Yes
Yes
Yes
No
No
ScienceLo gic
Yes
Yes
Yes
Yes
Yes
Support Yes ed
Yes
Yes
Commer cial
Yes
Yes
No
2013V4.3 02-01
GPL, LGPL
No
No
Yes
20133.7.1 03
Yes
Freeware and Unkno Proprieta Yes Commer wn ry cial
Yes
Yes
Yes
Yes
Yes
Commer cial
Yes
Yes
Yes
C
SQLite
Yes
Yes Full Control
Viewing, Acknowled ging, Reporting
Yes
Yes
Limited free, Unkno MySQL Commer wn cial
Yes
Yes
Python MySQL
Yes
Yes
Yes
Yes
Support Yes ed
Yes
Yes
Yes Full Control
Yes
201310.0 04
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SolarWinds. Inc.
Name
Feb. 4, 2014
Lates Late Logica Distribu Acces t Trend Auto Trigg Data st Plugi ted Invent Platfor s IP SLA l Trendi Agentl SN relea ers / WebApp IPv6 relea Storage License Maps Predicti Discov Syslog m ns Reports Groupi ng ess MP Monitori ory Contr se se ery Method on Alerts ng ol versi ng date on
ServersCh eck
Yes
Yes
Yes
No
Yes
Support Yes ed
Yes
Yes
Yes Full Control
Yes
No
Unkno Flat file, Commer wn ODBC cial
Yes
Yes
Unkno wn
SevOne
Yes
Yes
Yes
Yes
Yes
Support Yes ed
No
Yes
Yes Full Control
Yes
Yes
C, PHP MySQL
Commer cial
Yes
Yes
Yes
20135.3.0 09
AGPL
Yes
Yes
Yes
20131.4 05
Commer cial
Yes
Yes
Yes
proprietar Sqlite y software Yes
Yes
No
Yes
Yes
No
Shinken
Solarwind s
Via Via plugi plugin n
Yes
Yes
Viewing, Acknowled ging, Reporting
Yes
Yes
Full Control
Via plugin
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
Partial Yes
No
Yes
Yes Full Control
Yes
Yes
Yes
No
Yes
Yes
Yes
Flat file, MySQL, Oracle, Via Python Graphite, plugin Sqlite, MongoD B Yes
Unkno wn
Yes
Yes
Micros oft Windo ws only
No
No
Unkno RRDTool wn
Unkno Oracle, Commer cial wn SQL,
Yes
Yes
Unkno wn
Commer cial
Yes
Yes
Yes
2013- 16.2. 12 1
GPL
No
Apach e ACL
No
2012- 4.3.1 08 0
Spicework s
No
Yes
Yes
No
Yes
Support Yes ed
TclMon
Yes
Yes
Yes
No
Yes
Support Yes ed
Verax NMS
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes Full Control
Yes
No
WhatsUp Gold
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes Full Control
Yes
Yes
Xymon/Ho bbit
Yes
Yes
Yes
No
No
No
Via Plug
No
Yes
Yes
Viewing, Acknowled
Yes
No
Viewing
SQL
SQL
Flat file, C, Shell RRDTool , MySQL
BSD
20136.2 01
Unkno 20132.4.0 wn 09
49 | P a g e
SolarWinds. Inc.
Name
Feb. 4, 2014
Lates Late Logica Distribu Acces t st Trend Auto Trigg Data IP SLA l Trendi Agentl SN Plugi ted Invent Platfor s relea Predicti Discov Syslog ers / WebApp Storage License Maps IPv6 relea Reports Groupi ng ess MP ns Monitori ory m Contr se se on ery Alerts Method ng ng ol versi date on in
ging
via plugin
Zabbix
Yes
Yes
Yes
No
Yes
Support Yes ed
Yes
Yes
Yes Full Control
Yes
Yes
Oracle, MySQL, PostgreS C, PHP QL, IBM DB2, SQLite
Zenoss
Yes
Yes
Yes
Yes
Yes
Support Yes ed
Yes
Yes
Yes Full Control
Yes
Yes
ZODB, Python MySQL, RRDtool
Yes
Yes
Yes
Yes
Support Yes ed
Yes
Yes
Yes Full Control
Yes
Yes
Zyrion Traverse
Yes
Java
SQL
GPL
Yes
Yes
Yes
20132.2.1 12
GPL
Yes
Yes
Yes
20134.2.4 07
Commer cial
Yes
Yes
Yes
20135.6 08
Source: Wikipedia (http://en.wikipedia.org/wiki/Comparison_of_network_monitoring_systems)
50 | P a g e
Feb. 4, 2014
Appendix 14. Company leadership Name Kevin B. Thompson
Age 48
Title
Experience
President and Chief Executive Officer
• President and Chief Executive Officer since March 2010 . • Chief Financial Officer and Treasurer since July 2006. • Chief Operating Officer in July 2007. •SWI’s President in Jan 2009. •was Chief Financial Officer of Surgient, Inc., a software company, from Nov 2005 till March 2006. • Senior Vice President and Chief Financial Officer at SAS Institute, a business intelligence software company, from Sept 2004 till Nov 2005. •Executive Vice President and Chief Financial Officer of Red Hat, Inc. from 2000 to Aug 2004. • holds a B.B.A. from the University of Oklahoma . • in April 2009 as Vice President, Business Development and Investor Relations. leading the integration of DameWar. • was an Executive Director for J.P. Morgan from2006to 2009. • From July 1999 to July 2006, he held various roles in investment banking at UBS, Piper Jaffray and Credit Suisse First Boston. •He holds an A.B. in Mathematics from Amherst College • Senior Vice President, Engineering since January 2009. • General Manager of Asia-Pacific Operations since October 2010. • Vice President, Product Development from August 2006 until January 2009. • was Vice President, Engineering at RealVue Simulation Technologies, Inc., • provider of custom simulation software to the commercial, industrial and manufacturing sectors, from September 2004 until May 2006. • was Vice President, Engineering at ForwardVue Technologies Inc., a software and service for 3 years. • holds a degree as a technician in mechanical engineering and has fundamentals of engineering certification from the National Council of Examiners for Engineering . • SWI’s Chief Accountant , Finance in August 2007. • Senior Vice President, Finance since 2011. • worked for JPMorgan Chase Bank as Vice President,
Jason Ream
---
Executive Vice President and Chief Financial Officer
Doug G. Hibberd
48
Executive Vice President, Strategic Operations
J. Barton Kalsu
45
Executive Vice President and Chief Accounting
compensation The total $6,152,955 And Total Annual Compensation $843,750
Board relationships 22 Relationship. This person is connected to 22 board members in 3 different organizations across 7 different industries.
There is no Annual Compensation data available
No Relationship. This person is connected to 0 board members in 0 different organizations across 1 different industries.
Total $2,558,883 And the Total annual Compensation$436,985
No Relationship. This person is connected to 0 board members in 0 different organizations across 2 different industries.
Total $956,920 And Total Annual Compensation$346,750
No Relationship. This person is connected to 0 board
SolarWinds. Inc.
Feb. 4, 2014
Officer
David Owens
---
Vice President, Finance and Operations, EMEA
John Rizzo
56
Executive Vice President, Chief Marketing Officer and Chief Customer Officer
Suaad Sait
46
Executive Vice President, Products and Markets
Bryan A. Sims
45
Senior Vice President, General Counsel and Secretary
Commercial Banking, from June 2005 until August 2007. • From April 2002 until June 2005, Mr. Kalsu worked for Red Hat, Inc. as Senior Director of Finance. • holds a B.S. in Accounting from Oklahoma State University. •Vice President, Finance and Operations, EMEA since April 2007. •Prior to joining SolarWinds, Mr. Owens worked for Red Hat, Inc., an enterprise software company, for over seven years, where he served initially as Director of Global Logistics and Production and then as Senior Director of Finance- EMEA. • was Chief Marketing Officer of Jive Software from 2011 to 2013. •Prior to Jive, he was President and CEO of Zeebo, a 3G videogame and wireless digital content delivery company and was President and CEO of Informative. • he was the CMO at the world’s first fabless chip company. • He was the first product marketer at Intel for Flash memory and for the first Macintosh at Apple Computer. • holds a bachelor’s degree in Electrical Engineering from Stanford University. • was Chief Marketing Officer at Rackspace, the open cloud company from 2011 to 2013. • Prior to Rackspace, he was founder and Chief Executive Officer of ReachForce. • was vice president and general manger of products and marketing at Pervasive Software, Inc. • was Chief Marketing Officer for Liaison Technology, as founding vice president of marketing at Ventix Systems Inc. (acquired by Motive), • head of Internet product marketing for Dazel Corp. (acquired by HP). •heldsd a Masters of Science from The William E. Simon Graduate School of Business at the University of Rochester and a B.S. in Electrical & Computer Engineering from the State University of New York at Buffalo. •SWI’s Vice President, General Counsel and Secretary since Mar 2007. • From July 2005 until March 2007,he was Of Counsel at Squire Sanders and Dempsey. • was Vice President at Red Hat, Inc From Sept 2000 till Aug 2005. •holds a B.A. in English with a minor in Finance from Howard University and a J.D. from The Ohio State University College of Law.
members in 0 different organizations across 1 different industries
There is no compensation available
8 Relationship. This person is connected to 8 board members in 1 different organizations across 5 different industries s
There is no Annual Compensation data available.
16 Relationship. This person is connected to 16 board members in 2 different organizations across 5 different industries.
There is no Annual Compensation data available.
No Relationship. This person is connected to 0 board members in 0 different organizations across 2 different industries. 52 | P a g e
SolarWinds. Inc.
Paul Strelzick
Feb. 4, 2014
49
Executive Vice President, Worldwide Sales
•SWI’s Senior Vice President, Worldwide Sales since Jan 2009. •SWI’sVice President, Worldwide Sales from Jan 2008 till Jan 2009. •Vice President, North American Sales from July
Total Annual Compensation: $542.5K
2007 until January 2008.
•was Vice President, Sales for various technology companies, including Uplogix, Inc.,
•a provider of remote network management solutions, from March 2006 until April 2007. •MessageOne, Inc., a provider of managed services for email archiving, magnt and business continuity, from Sept 2004 until Feb 2006, •Permeo Technologies, Inc., a network security software company, from Oct2003 until June 2004 and NetIQ Corporation, a provider of systems and security management solutions, from July 1999 to October 2003. •He holds a B.A. in History from the State University of New York ( Albany ).
53 | P a g e
SolarWinds. Inc.
Feb. 4, 2014
Appendix 15. Board Directors Board Members - Solarwinds Inc (SWI) Name
Age
Primary Company
Type of Board Member
Compensation
Board Relationships
There is no Annual Compensation data available
37 Relationships.
-J. Benjamin H. Nye
47
VMTurbo, Inc.
This person is connected to 9 Board Members in 9 different organizations across 9 different industries. -Steven M. Cakebread
61
There is no Annual Compensation data available
D-Wave Systems Inc.
56 Relationships. This person is connected to 9 Board Members in 9 different organizations across 16 different industries.
-Ellen F. Siminoff
45
Shmoop University, Inc.
39 Relationships. There is no Annual Compensation data available
This person is connected to 6 Board Members in 6 different organizations across 15 different industries
There is no Annual Compensation data available.
35 Relationships.
-Roger J. Sippl
58
Support.com, Inc.
This person is connected to 35 board members in 9 different organizations across 12 different industries.
54 | P a g e
SolarWinds. Inc.
Feb. 4, 2014
-Lloyd W aterhouse
61
There is no Annual Compensation data available.
McGraw-Hill Education, Inc.
5 Relationships. This person is connected to 1 Board Members in 1 different organizations across 7 different industries.
-Kevin B. Thompson
48
SolarW inds, Inc.
The total $6,152,955
22 Relationship.
And Total Annual Compensation $843,750
The data is from the following link( Bloomberg Businessweek-solarwinds Inc.) and from the company. http://investing.businessweek.com/research/stocks/people/people.asp?ticker=SWI
55 | P a g e
SolarWinds. Inc.
Feb. 4, 2014
Appendix 16. Event analysis timeline
Source: Yahoo and student research
56 | P a g e
Feb. 4, 2014
Appendix 17. Supply chain analysis
Source: Bloomberg
SolarWinds. Inc.
Feb. 4, 2014
Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society of Austin, CFA Society of Dallas Fort Worth, CFA Society of Houston, CFA Society of Louisiana, CFA Society of San Antonio, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.
CFA Institute Research Challenge
58 | P a g e
