SolarWinds Buys N-able: Will SWI Investors Remain Patient?

SolarWinds Buys N-able: Will SWI Investors Remain Patient?

When SolarWinds acquired N-able for $120 million, SWI stock fell 14 percent. Investors didn't like the all-cash deal. The bigger challenge: N-able's MSP sales model doesn't work as fast as a traditional cloud sales model. Here's why SolarWinds will need to remain patient.

As SolarWinds buys N-able for $120 million, I'm somewhat surprised to see SolarWinds (SWI) spending so much time talking about a cloud-based small business push. SolarWinds stock was the biggest decliner yesterday (May 22, 2013) -- down nearly 14 percent -- because investors don't like all that cash going to an acquisition that won't boost SolarWinds' earnings this year.

But what's really going on here -- especially for SolarWinds' cloud computing and small/midsize business (SMB) customer acquisition strategy?

Yes, the N-able acquisition has some really good cloud computing components. But this deal is really about SolarWinds understanding how to sell software subscriptions (on premises or in the cloud) to managed services providers (MSPs) -- not traditional small business customers. And that's a very, very difficult market to master. Let me explain why.

Cloud Services: SMB Customers Demand Them

First, let's look at the traditional cloud services market. In many cases, customers buy their cloud services directly. They WANT cloud services. Examples include small business customers tapping into (CRM), (AMZN), (CTCT) and other online services. To be clear: N-able Technologies does NOT play in that traditional cloud market.

Managed Services: SMB Customers Need Education

Now let's look at the managed services software market -- which is N-able's core focus. In the managed services software market:

  • Small businesses -- legal firms, accountants, retail shops, etc. -- don't really purchase or directly use the managed services software, nor do they really ask for it. 
  • Instead, managed services providers (MSPs) use N-able's software to remotely monitor and manage customers' small business networks. The MSPs essentially are IT outsourcing companies.
  • MSPs can either run N-able's software in their own offices/data centers, or in N-able's cloud.

MSP vs. Cloud Sales Cycles

SolarWinds keeps calling N-able a cloud company that serves the SMB market, through MSPs. That's true but it's challenging: I believe the N-able sales process is longer than a traditional cloud software sales process.

  • First, N-able must convince IT consultants to purchase and use its software -- either on premises or in the cloud.
  • The IT consultants (MSPs), in turn, must figure out a way to charge customers a monthly fee to maintain their networks. If the MSPs don't succeed selling their managed services to end customers, then N-able really doesn't succeed as a software supplier to the MSPs. 

N-able and many of its rivals have had considerable success selling to MSPs. But it's not your typical cloud services sale. 

Bottom Line

So let's be sure to keep SolarWinds' $120 million buyout of N-able in proper perspective. This isn't a pure cloud deal. Most small businesses will never understand or fully see the power of N-able's software. MSPs understand that power, but sometimes they have trouble communicating the benefits and the value to small business owners who need IT support.

That's the challenge for SolarWinds going forward: It must remain patient as N-able tries to speed sales cycle with MSPs -- even if the sales cycles aren't quite as fast as traditional cloud engagements with small business customers.

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