Solarwinds Inc. 2Q14 Earnings: Record Beat, Outlook Raised, Reiterate BUY

Solarwinds Inc. reported 2Q14 earnings Thursday market close and held a corresponding conference call at 5pm EST. Revenues came in $101.5MM up 31% yoy besting our $96.6MM estimate. Non GAAP EPS was up $0.41 vs our $0.38 estimate up 11% yoy. All eyes on license revenue which came in at $37.6MM up 21% yoy due to strength in core and systems management products. It should be noted that this was the first time in company history where total revenue exceeded $100MM, a fine feather in the cap of an underdog.

On a year-over-year basis, new business sales grew by 25%. Did we not have faith incremental investment in the back half of last year would pay off? While the NA installed base contributed to sales to existing customers up 138%, more consistent momentum is gaining with EMEA and APAC, whose teams were started just a year ago. Over the next 3 quarters, management believes they have the “strongest schedule of product releases we’ve ever had as a company,” words taken with strides as the stock was up ~7% in after hours peaking ~12% today.

Solarwinds has expanded the depth and breadth of their leadership team over the last several quarters akin to their international build out. Also, last week, they announced that Paul Cormier, President of product and technology at Red Hat has joined the Board of Directors. On June 18, 2014, 13 days before the end of 2Q they acquired Pingdom, a leading provider of website monitoring and performance management solutions, which are all offered as a service from the cloud.

Enough positives. Total non-GAAP expenses grew by $23.4 million or 66%. Also, the company took a charge of $6.8 million related to the abandonment of their former headquarters in Austin. Solarwinds leased new space, which they moved into this past April to provide sufficient room for planned future growth.

Solarwinds generated record operating cash flow of $51 million as a result of strong collections. In August, they expect to repay $40M outstanding on their revolving credit facility. Lastly, approximately 70,000 shares were repurchased during Q2 for ~$2.7M under the stock buyback plan announced last year. There is approximately $12M still available under that buyback program, which is scheduled to conclude on July 31, 1 week from now. What is downside?

Outlook for FY Non-GAAP operating margin increased 100 bps to 42% based primarily on the margin outperformance in Q2 despite the dilutive impact of the Pingdom acquisition. Revenue outlook for the second half was raised $4.5M or $8.5M for FY14. On a stand-alone basis, Pingdom is approximately $2-2.5M of the sum. The rest due to increased confidence in the business based on demand generation, strengthened team, product roadmap and market opportunity.

After our double down in late June our average share price increased to $35.59. Currently up around ~20% we see another 20% of appreciation down the road. Over the last 3 years the stock has sold for 29x current year earnings. We are maintaining our $52.00 PT representing a 31x multiple to our FY14 EPS of $1.71. Indeed a slight premium warranted due to consistency of results, robust growth rates, and product pipeline coupled with profitability.