Solarwinds: MSP Market Ripe for Investment, Fast Growth

Written by Jessica Davis 1
July 28, 2015

Solarwinds will buy back shares of common stock following a sell off after Q2 earnings disappointed analysts. But even thought quarterly licensing revenues didn't meet expectations, MSP revenues showed strong growth. Here are the details.

SolarWinds (SWI) this week announced plans for a share buy back of up to $200 million of the company’s common stock. The move follows a drop in share prices after the company’s Q2 earnings, announced July 16, failed to meet analyst expectations.

In spite of the angst over the overall company performance, Solarwinds’ managed services business inked a strong quarter. Here are the details about the Solarwinds N-able business performance in Q2, plus the news about what went wrong in other parts of the company that caused the disappointing quarter. But first, let’s look at the MSP piece.

Solarwinds N-able business performance

Solarwinds’ Q2 revenue included a 26 increase in recurring revenue to 80.5 million on a reported basis and a 34 percent increase to $85.3 million on a constant currency basis. The company said the growth reflected a sequential improvement in customer retention rates and a strong growth in new subscription sales of MSP and cloud products.

CEO Kevin Thompson told analysts during the quarterly earnings call earlier this month that N-central 10.0, which was released during Q2, won “very positive feedback” from customers and prospects. Plus, “We’ve seen our average transaction size for N-central rise by approximately 10 percent in just a few months since the release of N-central 10.0,” CEO Kevin Thompson said during the earnings call, as transcribed by SeekingAlpha.

MSP business outlook

Thompson further forecast a strong outlook for the MSP business.

“We believe the MSP market will continue to grow rapidly as more and more small businesses that are light IT approach to their IT infrastructure turn to the MSP to manage most if not all of their internal and external IPSS,” he said.

“We believe that opportunity exists to create a very large and fast-growing business in the MSP market and plan to increase our focus in investment in this area of our business.”

Thompson also said that Solarwinds’ revenue model continues to shift more towards recurring revenue (made up of subscription and maintenance revenue). This segment has grown to 66 percent of total revenue for the first half of 2015, compared to 63 percent in 2014.

The bad news

So with all that good news, what was the market so upset about? That would be the license revenue. Solarwinds’ reported license revenue increased by 3 percent to $38.6 percent on a reported basis and by 5 percent to $39.6 million on a constant currency basis.

Total revenue (licensing and recurring) grew to $119.1 million for Q2, reflecting year-over-year growth of 17 percent on a reported basis and $125 million or up 23 percent on a constant currency basis.

Licensing business hurt by marketing system weakness

Analysts wanted to know why licensing revenue was weak for Q2, and Thompson blamed the weakness on issues with the company’s demand capture system. Solarwinds relies on online marketing to generate sales leads for its licensing business, and had tried some new channels that didn’t yield the quality of leads the company had come to expect, Thompson explained to analyst in the earnings call.

To fix the issues around its marketing and sales, Solarwinds announced it has hired Jason Marshall, former VP of e-Commerce and digital marketing at the consumer retailer Cost Plus World Market. Marshall will lead Solarwinds marketing efforts going forward as the company’s SVP of Marketing and CMO.

Solarwinds gets new CMO, Marketing SVP

“Jason brings a wealth of experience at building and running a large and rapidly-growing e-commerce sites where the website was the business, as well as a depth of knowledge in modern digital marketing which I believe will allow us to make more rapid progress toward our goals and address successfully the demand capture issues we encountered during the second quarter,” Thompson said.

Solarwinds will also reorganize its product management and product marketing team, Thompson said, looking to create greater focus, attention and investment on areas of the company’s product portfolio that have large opportunities for high growth.