SolarWinds Management Discusses Q2 2012 Results - Earnings Call Transcript

SolarWinds (SWI)

Q2 2012 Earnings Call

July 25, 2012 9:00 am ET

Executives

David Hafner

Kevin B. Thompson - Chief Executive Officer, President, Chief Operating Officer, Treasurer and Director

Michael J. Berry - Chief Financial Officer and Executive Vice President

Analysts

Daniel H. Ives - FBR Capital Markets & Co., Research Division

Keith Weiss - Morgan Stanley, Research Division

John S. DiFucci - JP Morgan Chase & Co, Research Division

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Stewart Materne - Evercore Partners Inc., Research Division

Scott Zeller - Needham & Company, LLC, Research Division

Presentation

Operator

Good day, everyone, and welcome to the SolarWinds' Second Quarter 2012 Earnings Call. [Operator Instructions] At this time, I would like to turn the call over to Mr. Dave Hafner, Director of IR. Please go ahead.

David Hafner

Thank you, Dana. Good morning, everyone, and welcome to SolarWinds' Second Quarter 2012 Earnings Call. With me today are Kevin Thompson, our President and CEO; and Mike Berry, our Executive Vice President and CFO. Following prepared remarks from Kevin and Mike, we'll have a brief question-and-answer session. Please note that this call is being simultaneously webcast on our Investor Relations website at ir.solarwinds.com.

The press release with our results for the second quarter was issued earlier today and is also posted on our Investor Relations website. Please remember that certain statements made during this call, including those concerning our business outlook, product roadmap, growth plans and opportunities of the company and our products, and our ability to capitalize on our opportunities, are forward-looking statements. These statements are subject to a number of risks, uncertainties and assumptions described in our SEC filings, including our Form 10-Q for the second quarter of 2012, which we anticipate filing with the SEC on or before August 9, 2012. Should any of the risks or uncertainties materialize or should any of our assumptions prove to be incorrect, actual company results could differ materially and adversely from those anticipated in these forward-looking statements. These statements are also based on currently available information, and we undertake no duty to update this information, except as required by law. Cautionary statements regarding these forward-looking statements are further described in today's press release.

In addition, some of the numbers during this call will be presented on a non-GAAP basis. Our use and calculation of these non-GAAP financial measures are explained in today's press release, and a full reconciliation between each non-GAAP measure and its corresponding GAAP measure is provided in the tables accompanying the press release. Each non-GAAP item in our forward-looking financial outlook that we will provide today has not been reconciled to the comparable GAAP outlook item because we cannot reasonably or reliably estimate future adjustments such as stock-based compensation expense, which is dependent on our stock price at the time.

I'll now turn the call over to Kevin.

Kevin B. Thompson

Thanks, Dave. Good morning to everyone joining us on the call today. I am pleased to report that we had a very strong second quarter. I believe that the results we will be sharing with you today demonstrate the strength of our execution of the unique SolarWinds go-to-market model against the backdrop of ongoing macroeconomic noise that increased in volume as we moved through the quarter.

Our model uniquely allows us to enter into conversations with thousands of IT professionals each quarter at the point when they have a performance management problem that they must solve and are actively looking for a solution to the problem. We believe that this creates a much different conversation with the potential buyer than the traditional enterprise software sales engagement process, and that, coupled with easy-to-use, powerful products and a pricing model, which is among the most affordable in the industry, gives us a higher likelihood of success than our competitors in periods of macroeconomic uncertainty and tight IT budgets.

Turning to our results for the second quarter of 2012. Total revenue increased to $64 million, reflecting growth of 40% over the second quarter of 2011. This is the fifth consecutive quarter of acceleration in growth of total revenue. License revenue for the second quarter of 2012 was $29.5 million, an increase of 40% over the second quarter of 2011 and represents the sixth straight quarter of accelerating license revenue growth.

Maintenance revenue also continued its long string of strong growth quarters, increasing by 40%, to $34.5 million. We were able to deliver these growth rates in our reported revenue in the second quarter despite battling the foreign currency headwinds encountered by all U.S. companies with European operation. Assuming the same currency exchange rates from the second quarter of 2011, license revenue growth would have been 2 percentage points higher than reported, while maintenance revenue and total revenue would have each been 3% higher.

As we look at our new license sales results for the second quarter for both our U.S. federal and commercial businesses, we saw a strong, balanced and consistent growth during the quarter. U.S. federal and new license sales grew by 29% year-over-year in the second quarter, and had one of its most linear sales booking quarters. This growth was driven primarily by the success we have had and increasing our federal run rate business through expanded awareness across the civilian agencies in the U.S. federal government, as well as the Department of Defense. We're enthusiastic about the size of the opportunity for the use of SolarWinds products by the U.S. federal government, and believe with continued focus, that this part of our business can be a positive contributor to our future growth.

Our commercial new license sales, which grew 37% year-over-year in the second quarter, were strong across all major geographic region. And just like U.S. federal, our commercial business had one of its most linear new license sales quarters. I would like to provide some additional perspective on our second quarter 2012 commercial new license sales growth by drilling into these results from a geographic perspective. Despite the host of ongoing macroeconomic issues in Europe and the foreign currency headwinds felt by most companies doing business in the region, EMEA was actually our highest growth geographic region during the second quarter, with new license sales increasing by over 50% compared to the second quarter of 2011.

We believe we were beginning to see the impact of the investments we have made in our product and web expansion strategy in EMEA for the 2 largest economies in the region, Germany and the U.K., leading our second quarter growth. New license sales in Germany grew at a rate of over 200% in the quarter, while the U.K. delivered very healthy growth in excess of 40%. We believe our ability to grow at this rate amidst the current instability in Europe highlights the power of our unique go-to-market strategy and the appeal of our value proposition of powerful and affordable products.

North America, our largest commercial region, continued a run of impressive growth quarters, delivering 37% year-over-year growth in new license sales in the second quarter. An important contributor to this strong growth was from our systems and application management and virtualization management product lines. Several quarters ago, we expanded the number of inside sales teams in North America that focused on specific product areas, such as systems and application management and virtualization management. These new inside sales teams have delivered solid booking results since they were put in place, which is one of the major drivers of the growth we saw in the quarter.

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