Solarwinds a Bright Spot in IPO Market

In the wake of Visa's IPO last month -- the largest ever in the U.S. -- the pipeline for promising candidates is looking dry as a bone: Since Visa went public on March 19, three companies have withdrawn their planned IPOs from the queue, while just four have filed to go public.

Three of the new entrants are so-called SPACs -- the special purpose acquisition companies with no operating histories, which have been immune from the slowdown in the traditional IPO market.

But the fourth company coming to the markets suggests there may be some interesting start-ups still thinking about going public this year.

That company is Solarwinds, a maker of network-monitoring software in Austin, Texas, that was founded in 1998 and has a steady history of operating and net profit over the past five years.

Solarwinds' pitch is that its software is "easy to use." In the business software market, that means the company is targeting network administrators who don't like to roll up their sleeves too much. There are open-source alternatives like GroundWork out there that can monitor networks for a lot less.

With Solarwinds, you pay more, but you get more. A customer can download its network-monitoring software online; it's installed and configured in a matter of hours, the company says.

At the end of 2007, Solarwinds had 50,000 customers in small and mid-sized businesses, including 350 of the Fortune 500. But it also has more than a million free users who download free tools that Solarwinds offers to administrators, as well as an online community that can foster goodwill and generate leads.

Solarwinds has been growing quickly, although like many start-ups, its costs have been growing even faster. Between 2003 and 2007, revenue more than quadrupled, while operating profit rose only two-and-a-half times. As a result, operating margins have declined from 88% in 2003 to 58% last year.

Even so, a company fueling its growth by hiring new staff and still delivering a 50% profit margin isn't bad. Salesforce.com (whose president sits on Solarwinds' board) had an operating margin last year of 3%.

Last year, Solarwinds' revenue grew 61% to $61.7 million, well above the 37% rate for 2006. Meanwhile, operating profit grew 21% to $30.9 million in 2007, compared to the 11% growth in profit the year before.

Most of the increase in operating costs came from sales and marketing spending, which rose to $12.9 million from $3.5 million a year earlier: New sales staff and sales commissions and online efforts to generate new customer leads. Solarwinds also established a European beachhead by opening up a sales and support center in Cork, Ireland.

Research and development costs more than doubled last year to $5.9 million from $2.3 million, partly as a result of contracts with software developers in Eastern Europe. The company says these costs will remain high this year and next as it opens its own offshore development center, an investment that may not deliver significant benefits until 2009.