I last looked over the Solarwinds financials in the lead up to Tech Field Day 9, and was impressed at their ability to generate cash. They seemed to be a well run business, and were converting cash into acquisitions in order to grow. They were great hosts, and I was impressed with the way they thought about their brand and their marketing.
Unfortunately, looks like the Q1 2013 issues with generating revenues and/or containing costs have continued, and perhaps Solarwinds is struggling to digest the acquisitions it’s made. Why do I say that? Well, this:
coupled with this:
Cost control appears to be an issue. Return on Equity has dropped from 21.25% 2012 to 18.55% in 2013, and looks on track to be about 14% in 2014. Leverage hasn’t really changed, which means this is all about the operations of the business.
Asset turnover hasn’t actually changed all that much in the last few years; it’s been bouncing around 0.50 since 2011, and my forecast is for about 0.52 for 2014. What has changed a lot is operating efficiency: down from 0.3013 in 2012 to a forecast 0.18 for 2014, so almost half. Operating efficiency is Net Operating Profit After Tax (NOPAT) divided by Sales, and is a quick measure of the company’s ability to turn a profit on what they sell. Solarwinds are selling plenty of stuff, but it’s harder work than it used to be.
Overall sales are pretty good, increasing pretty much linearly from previous years, so that’s good growth. What’s less good is the net income growth, which isn’t as high as it once was, and I predict it’ll drop in 2014 compared to 2013, as in negative growth. Only about 10%, unless Solarwinds have a strong Q4, but that’s a lot less than the 30% net income growth (and higher!) the company was doing back in 2012.
I don’t have time to really analyse these numbers, because there’s not a single major cause jumping out at me. Cost of goods sold has doubled (as percentage of sales) since 2010, and there’s some increase in sales and marketing expenses, plus some increase in R&D, but that’s all as a % of sales. It’s not clear if this is cause or effect, since the increase in relative percentage of sales could simply be because the sales that were supposed to come didn’t happen, but the overheads were incurred anyway. That’s like sales folk buying lunch for customers, but forgetting to get them to sign the purchase order. Not that that’s what’s happened here, but I can’t figure it out with just a cursory glance.
I dunno. I hope Solarwinds can reverse this trend before they get into trouble. It’s been a couple of years now, which is plenty of time to notice it and take steps to correct it. The correctional steps should be starting to pay off.
It could just be a temporary part of making some fairly large acquisitions, around $100 million each for N-able and Confio, and $67 million for Pingdom, and they aren’t going to be integrated straight away. Still, I’d expect that Solarwinds would see some jump in sales if the acquisitions were a good fit. Hopefully it’ll kick in soon.
That’s the fun of the tech industry! It doesn’t stay static for long.
Hopefully we’ll see some great Solarwinds virtualisation products at VFD4 that can help them fix this temporary revenue glitch. I look forward to being wowed.