Solarwinds
Inc. reported 4Q13 and FY13 February 5th and held a corresponding
conference call market close. In 4Q13 the company delivered the strongest revenue
growth of the year up 32% yoy to $97.1MM besting UASBIG and street estimates of
$91.0MM and $90.7MM respectively. 4Q13 Non-GAAP EPS came in at $0.41 compared
to $0.36 last year matching our estimate of $0.41. Non-GAAP Operating margin
was 45% materially ahead of guidance by almost 500 bps. Turning to FY13 Results
total revenue was $335.4MM up 25% yoy compared to our estimate of $329.3MM.
Non-GAAP EPS was $1.63 vs. $1.36 last year again matching our estimate of
$1.63. Non-GAAP Operating margin was 51%. Total recurring revenue, comprised of
subscription and maintenance revenue increased to $57.6MM now representing over
59.3% of total revenue.
The
lone analyst who screamed ‘double down’. First 4Q remarks and then FY13.
Solarwinds had one of the best quarters they have had in the past year with
double digit yoy growth in all three revenue categories. Driven by increased
levels in product sales from core network management products along with record
sales in North America and EMEA. Revenue from Federal business was up 10% but
down sequentially as anticipated shared improvement from 3Q13. With license
revenue growth back above 20%- another target yet ahead of management
expectation this was a significant quarter. Confidence among average
transaction size from management reaffirm their continuing climb to ~$8,700, a
range that hasn’t been reached since 2Q12.
We applaud
Solarwinds prudent ability to fund initiatives that are important to its long
term goals. $5MM was invested split relatively even between product development
and marketing and sales. Headcount since 1Q13 was up 20% to 1300 employees
globally. Indeed these investments are accelerating revenue growth and have put
the company in a position to scale more effectively.
Looking
forward to 2014 and beyond we see our original investment thesis largely intact
and a sizeable opportunity in the companies remarks. Revenue growth is fueling
performance and reinvestment in the company is driving acceleration into new
markets. The demand for network management tools is large, growing consistently
and mildly untapped. In addition we are thrilled to see management focus on new
developments in product security driven by several high profile data loss
incidents in the past year equate us to feel safe the company is nimble, aware
of the pressing need and responding to again a largely untapped market.
Initial
guidance was offered for 1Q14 and FY14. 1Q14 revenue was forecasted in range of
$92.0- $94.0 up 27.5% yoy at the midpoint and Non-GAAP EPS of $0.34-$0.36. For
FY 14 revenue is expected in the range of $408.0-$420.0MM and Non-GAAP EPS of
$1.55-1.65.
Despite
a challenging year viewed by the investment community Solarwinds combination of
growth, cash flow and profitability are metrics that can only be matched by a
few technology companies. Revenue growth has led metric outperformance- not
underinvestment. Alongside absorbing 2 of the largest acquisitions in the
company’s history while exceeding Non-GAAP operating margin for not only 4Q13
but year end is to put bluntly- impressive. Historically the stock has sold for
42.4x earnings.
Our Price target of 46.10 represents a 25.4x multiple to our
FY14 EPS of $1.83. Indeed a significant discount vs. historically and in our
view quite unwarranted as not limited to management execution, inherent operating
leverage, revenue growth, and the acquisitory nature of the company. Multiples
should recover in conjunction to its peer group at the minimum if not exceeding
them. We maintain our “buy” rating on this name.
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