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What the SolarWinds IPO Says About the Channel

The software provider enters the public market for the second time to disappointing results.

Initial public offerings this week have had a rough go as the stock market continues its bounce back from last week’s dismal numbers. IT management software provider SolarWinds, which announced its IPO this week, seems to fall right in line with the trend. The company first announced plans to offer 42 million shares at $17-$19 per share. It slashed expected proceeds from the IPO almost in half this week, scaling back its offer to 25 million shares at $15 per share. And during afternoon trading Friday, the stock was down 1.3 percent, near $14.80. What hints can the IPO give us about the market conditions for the IT channel in general?

Déjà Vu 

Being publicly traded isn’t a new thing for SolarWinds, which investors Silver Lake Partners and Thoma Bravo took private in 2015 after a $4.5 million leveraged buyout. At the time, SolarWinds had a good product and go-to-market strategy, but it was struggling to gain enough market share to make it a viable competitor to rivals such as ConnectWise, Kaseya and Autotask, now part of Datto. With the influx of private capital and the freedom to pivot quickly because of a lack of public scrutiny, SolarWinds has become a greater market force in the last three years, increasing recurring revenue to 81 percent of its total revenue in the period ending June 30.

“Our discipline on cost management plus our powerful financial profile driven by the strong recurring revenue foundation has allowed us to grow the business at a high level of visibility, growth, profitability and cash flow,” says SolarWinds chief revenue officer David Gardiner. “The time we took under the private-equity structure and the way we were able to advance our business because of our relationship with our users has allowed us to progress our business with tremendous speed to list on the NYSE for the second time.”

“If we analyze private equity, their thesis is to capture undervalued firms and pursue transformations, add-ons and even holding an asset and re-offer public shares when the market sentiment is more favorable,” says James Hwang, chief operating officer IT services company NexusTek.

James Hwang

So why is the time ripe for SolarWinds to once again enter the public market? There’s a lot of wheeling and dealing in the channel M&A sphere these days, so the provider might be aiming to use the funds from the IPO to execute its own acquisition strategy in order to widen its reach and bring new tech and talent in-house. There’s also a lot of money pouring into this space as outsiders begin to come around to the value of the indirect sales channel, and it’s a good time to take advantage of a positive market.

Regardless of market conditions and financing trends, there’s little doubt that the ability for SolarWinds to IPO is directly related to its growth since the take-private.

“We’ve been able to advance our business quickly for two primary reasons — our highly successful go-to-market model of selling from the inside with high-velocity, B2C marketing, and the unique financial position we have created due to the strength of our maintenance and revenue base,” says Gardiner.

Off to a Disappointing Start

But there are big signs that the IPO SolarWinds envisioned isn’t all it was cracked up to be. Prior plans to raise $756 million have been revised, and it’s now aiming for $388 million, less than half of its initial filing. While all of the financial frenzy in the RMM/PSA sector means more private equity and higher-profile market presence, it also means the space is more competitive than ever before. Hwang says what once were lofty valuations may now be more appropriately pegged.

“[The lowered initial offering] could signal that investors, including institutional backers, do not agree with the forced valuation of SolarWinds,” he posits, “or that institutional investors believe that SolarWinds is not quite transformed as a business unit to warrant such valuation in the marketplace.”

For its part, SolarWinds admits that the current financial climate is difficult, but told Channel Futures it’s not unfamiliar territory for the company. It’s worthy of note that SolarWinds went public the first time in 2009 during a big recession and in a market that still bore fresh scars from risky investments that failed epically.

“Regardless of the environment, we remain nimble and focused. Most importantly, we know how to execute,” said Gardiner. “Markets are unpredictable, but we’ve done this before and are confident in the strength of our business model, our strong maintenance and revenue base and the commitment to the technology professional as core strengths.

David Gardiner

Hwang says NexusTek is a big user of SolarWinds and that the IPO has little impact on its vendor relationship, which is the reaction we should expect from the company’s partners. It has a loyal and growing user base, as evidenced by its growing market share among the Channel Futures MSP 501. Nearly one in five MSP 501 companies (19 percent) on the 2017 rankings reported using a SolarWinds product. That number grew to 21 percent on the 2018 list.

“Going public is not a destination for us. This is just another milestone in our long journey to establish SolarWinds among the best software companies,” says Gardiner. “We will continue to do what we do best — arming technology pros with the software they need to meet the management challenges of today’s IT environments.”

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