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SolarWinds Announces Fourth Quarter and Full Year 2011 Results

(February 07, 2012)

AUSTIN, TX -- (Marketwire) -- 02/07/12 -- SolarWinds® (NYSE: SWI), a leading provider of powerful and affordable IT management software, today reported results for its fourth quarter and full year ended December 31, 2011.

  • Record total revenue for the fourth quarter of $55.6 million, representing 34% year-over-year growth.

  • Record total revenue for the full year of 2011 of $198.4 million, representing 30% year-over-year growth.

  • Fourth quarter GAAP operating income of $22.3 million and non-GAAP operating income of $29.3 million, or a non-GAAP operating margin for the fourth quarter of 53%.

  • Fourth quarter GAAP diluted earnings per share of $0.22 and non-GAAP diluted earnings per share of $0.29.

  • Fourth quarter free cash flow of $36.6 million, representing 28% year-over-year growth.

Financial Results

SolarWinds reported record total revenue for the fourth quarter of 2011 of $55.6 million, a 34% increase over total revenue for the fourth quarter of 2010. License revenue of $25.3 million for the fourth quarter of 2011 represented a 27% increase over license revenue for the fourth quarter of 2010. During the fourth quarter of 2011, the assets acquired from DameWare Development contributed license revenue of approximately $200,000, which was consistent with SolarWinds' previously announced expectations. Maintenance revenue was a record $30.3 million for the fourth quarter of 2011, representing a 41% increase over maintenance revenue for the fourth quarter of 2010.

On a GAAP basis, diluted earnings per share were $0.22 for the fourth quarter of 2011 compared to $0.21 for the fourth quarter of 2010. Non-GAAP diluted earnings per share were $0.29 for the fourth quarter of 2011 compared to $0.24 for the fourth quarter of 2010.


Net cash provided by operating activities was $36.4 million for the fourth quarter of 2011 compared to $20.0 million for the fourth quarter of 2010, representing a year-over-year increase of 82%. Free cash flow was $36.6 million for the fourth quarter of 2011 compared to $28.6 million for the fourth quarter of 2010, representing a year-over-year increase of 28%. Cash, cash equivalents, and investments at the end of the fourth quarter of 2011 were $152.4 million, a decrease of $13.4 million from the end of the third quarter of 2011. During the fourth quarter of 2011, SolarWinds paid approximately $51.0 million in cash to acquire DNSstuff.com and DameWare Development.

The financial results included in this press release are preliminary and pending final review by the company and its external auditors. Financial results will not be final until SolarWinds files its annual report on Form 10-K for the period. Information about SolarWinds' use of these non-GAAP financial measures is provided below under "Non-GAAP Financial Measures."

Recent Business Highlights

"The SolarWinds team had a very strong performance in the fourth quarter, driving solid results across the board and a great finish to an important year for our company," said Kevin Thompson, SolarWinds' President and Chief Executive Officer.

"In 2011, we successfully executed against an aggressive plan to extend our unique brand of powerful, affordable, and easy to use IT management software far beyond our traditional network management roots. We entered into the systems and application management space with the release of two new products -- SolarWinds Application Performance Monitor and Synthetic End-User Monitor -- and entered the virtualization management and log & event management markets through two complementary acquisitions," continued Thompson. "In the process, we estimate that we more than doubled our total addressable market opportunity, by dramatically increasing the range of IT management problems our products can solve and our relevancy to IT professionals in any size of business. In 2012, we plan to continue disrupting the IT management space, by reshaping expectations around how enterprise software is built, purchased, and used, in order to drive another year of success at SolarWinds."

SolarWinds' business highlights during the fourth quarter of 2011 include:

  • SolarWinds completed the acquisition of DameWare Development, deepening SolarWinds' capabilities in the system and application management markets with powerful, yet affordable and easy-to-use tools for SysAdmins to remotely manage the computers on their networks.
  • The company also expanded its international sights, entering the Japanese market through key partnerships with leading Japanese companies, including Marubeni Information Systems, Mitsuiwa Corporation, and Daikin, in order to promote and sell its unique IT management portfolio to Japanese customers.
  • SolarWinds received honors in Redmond Magazine's 2011 Readers Choice Awards, including Best Virtualization Management and Optimization Product (VM Monitor) and ISV Winner and Grand Slam Winner for Best Network Performance Management Product (SolarWinds Network Performance Monitor). In addition, Windows IT Pro Magazine awarded SolarWinds Network Performance Monitor (NPM) with the 2011 Editors' Best and Community Choice gold medal in the Network Management Product Category.
  • SolarWinds released new versions of several products including SolarWinds Network Configuration Manager (NCM), User Device Tracker (UDT), NPM, Storage Manager, and Virtualization Manager.
  • SolarWinds introduced Storage Response Time Monitor, a free tool for monitoring total storage response time in VMWare vSphere deployments and identifying storage IO problems caused by server virtualization.
  • SolarWinds also introduced Real-Time Bandwidth Monitor, a free tool for monitoring bandwidth usage of many interfaces concurrently.

"In 2011, we successfully demonstrated that periods of significant investment in new products and acquisitions can coincide with periods of strong growth and strong profitability and cash flow generation," added Mike Berry, SolarWinds' Chief Financial Officer. "By leveraging our unique financial model and maintaining a sharp focus on ROI, we expect to continue to deliver this combination of solid revenue growth, profit, and cash flow as we move into 2012."

Financial Outlook

As of February 7, 2012, SolarWinds is providing its financial outlook for its first quarter and full year of 2012. The financial information below represents forward-looking non-GAAP financial information, including an estimate of non-GAAP operating income as a percentage of revenue, and non-GAAP diluted earnings per share, for the first quarter of 2012 and for the full year 2012. These non-GAAP financial measures exclude, among other items mentioned below, stock-based compensation expense and related employer-paid payroll taxes. SolarWinds cannot reasonably estimate the expected stock-based compensation expense and related employer-paid payroll taxes for these future periods as the amounts depend upon such factors as the future price of SolarWinds' stock for purposes of computation. In addition, costs related to non-recurring items and acquisitions are not something that SolarWinds can estimate because they are a function of what non-recurring items and acquisitions, if any, occur and the kind of costs incurred in connection with any such non-recurring items or acquisitions.

Financial Outlook for the First Quarter of 2012

SolarWinds management currently expects to achieve the following results for the first quarter of 2012:

  • Total revenue in the range of $55.5-$56.7 million, or 29% to 32% growth over the first quarter of 2011.

  • Non-GAAP operating income representing approximately 49% of revenue, including the dilutive impact of recent acquisitions.

  • Non-GAAP diluted earnings per share of $0.24-$0.25.

  • Weighted average shares outstanding of approximately 76.0 million.

Financial Outlook for Full Year 2012

SolarWinds management currently expects to achieve the following results for the full year 2012:

  • Total revenue in the range of $245.0-$255.0 million, or 24% to 29% year-over-year growth.

  • Non-GAAP operating income representing approximately 50% of revenue.

  • Non-GAAP diluted earnings per share of $1.10-$1.15.

  • Weighted average shares outstanding of approximately 77.5 million.

Conference Call and Webcast

In conjunction with this announcement, SolarWinds will host a conference call today to discuss its financial results and other business at 8:00am CST (9:00am EST/6:00am PST). A live webcast of the event, including any supplemental information, will be available on the SolarWinds Investor Relations website at http://ir.solarwinds.com. A live dial-in will be available domestically at 800-967-7135 and internationally at +1-719-457-2642. To access the live call, please dial in 5-10 minutes before the scheduled start time. A replay of the webcast will be available on a temporary basis shortly after the event on the SolarWinds Investor Relations website.

Forward-Looking Statements

This press release contains "forward-looking" statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including SolarWinds' financial outlook and its plan to continue disrupting the IT management space by reshaping expectations around how enterprise software is built, purchased, and used. These forward-looking statements are based on management's beliefs and assumptions and on information currently available to management. Forward-looking statements include all statements that are not historical facts and may be identified by terms such as "plans," "expects," or similar expressions and the negatives of those terms. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the following: (a) the possibility that general economic conditions or uncertainty cause information technology spending to be reduced or purchasing decisions to be delayed; (b) the presence or absence of occasional large customer orders, including in particular those placed by the U.S. federal government; (c) the inability to increase sales to existing customers and to attract new customers; (d) SolarWinds' failure to integrate acquired businesses and any future acquisitions successfully; (e) the timing and success of new product introductions by SolarWinds or its competitors; (f) changes in SolarWinds' pricing policies or those of its competitors; (g) potential foreign exchange gains and losses related to expenses and sales denominated in currencies other than the functional currency of an associated entity; and (h) such other risks and uncertainties described more fully in documents filed with or furnished to the Securities and Exchange Commission, including the Form 10-K that SolarWinds anticipates filing on or before February 29, 2012. All information provided in this release is as of the date hereof and SolarWinds undertakes no duty to update this information except as required by law.

Non-GAAP Financial Measures

In addition to disclosing financial measures prepared in accordance with GAAP, this press release and the accompanying tables contain certain non-GAAP financial measures. The tables below set forth a reconciliation of each of these non-GAAP measures to a GAAP financial measure that we consider to be most comparable. SolarWinds believes that each of these non-GAAP financial measures provides meaningful supplemental information regarding its performance by excluding certain items that may not be indicative of its core business operations. SolarWinds' management and Board of Directors use certain of these non-GAAP measures to assess operational performance and to determine employee incentive compensation. Accordingly, these measures may provide helpful insight to investors on the motivation and decision-making of management in operating the business. SolarWinds considers free cash flow also to be a liquidity measure that provides important information regarding the cash generated by the business after the purchase of property and equipment that can then be used for, among other things, strategic acquisitions and investments in the business, stock repurchases and funding ongoing operations.

SolarWinds also believes that these non-GAAP financial measures are used by investors and security analysts to (a) compare and evaluate its performance from period to period and (b) compare its performance to those of its competitors. These non-GAAP measures exclude certain items that can vary substantially from company to company depending upon their financing and accounting methods, the book value of their assets, their capital structures and the method by which their assets were acquired.

There are limitations associated with the use of these non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP, do not reflect a comprehensive system of accounting and may not be completely comparable to similarly-titled measures of other companies due to potential differences in the exact method of calculation between companies. Certain items that are excluded from these non-GAAP financial measures can have a material impact on operating and net income. In addition, free cash flow does not represent the total increase or decrease in the cash balance for the period.

As a result, these non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for the most comparable GAAP measures. SolarWinds' management and Board of Directors compensate for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reviewing the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measure. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to their most comparable GAAP financial measures that are set forth in the tables below.

About SolarWinds

SolarWinds (NYSE: SWI) provides powerful and affordable IT management software to customers worldwide -- from Fortune 500 enterprises to small businesses. We work to put our users first and remove the obstacles that have become "status quo" in traditional enterprise software. SolarWinds products are downloadable, easy to use and maintain, and provide the power, scale, and flexibility needed to address users' management priorities. Our online user community, thwack, is a gathering-place where tens of thousands of IT pros solve problems, share technology, and participate in product development for all of SolarWinds' products. Learn more today at http://www.solarwinds.com.

SolarWinds and the SolarWinds logo are exclusive trademarks of SolarWinds, are registered with the U.S. patent and trademark office, and may be registered or pending registration in other countries. All other SolarWinds trademarks, service marks, and logos, including without limitation, Application Performance Monitor, Synthetic End-User Monitor, VM Monitor, SolarWinds Network Performance Monitor, Network Configuration Manager, User Device Tracker, Storage Manager, Virtualization Manager, Storage Response Time Monitor, and Real-Time Bandwidth Monitor, may be common law marks or registered or pending registration in the United States or in other countries. All other trademarks or registered trademarks mentioned herein are used for identification purposes only and may be trademarks or registered trademarks of their respective companies.

© Copyright 2012 SolarWinds, Inc.

SolarWinds, Inc. Condensed Consolidated Balance Sheets (In thousands, except share and per share information) (Unaudited) December 31, December 31, 2011 2010 ------------- ------------- Assets Current assets: Cash and cash equivalents $ 122,707 $ 142,003 Short-term investments 29,688 - Accounts receivable, net of allowances of $192 and $201 as of December 31, 2011 and December 31, 2010, respectively 26,965 20,255 Income tax receivable 110 10,350 Deferred taxes 668 261 Other current assets 2,770 3,210 ------------- ------------- Total current assets 182,908 176,079 Property and equipment, net 7,341 6,702 Deferred taxes 3,334 4,099 Goodwill 110,746 40,424 Intangible assets and other, net 58,079 20,173 ------------- ------------- Total assets $ 362,408 $ 247,477 ============= ============= Liabilities and stockholders' equity Current liabilities: Accounts payable $ 2,213 $ 2,150 Accrued liabilities 9,442 8,588 Accrued earnout 3,513 4,000 Income taxes payable 779 555 Current portion of deferred revenue 73,774 52,583 ------------- ------------- Total current liabilities 89,721 67,876 Long-term liabilities: Deferred revenue, net of current portion 3,373 3,175 Non-current deferred taxes 289 - Other long-term liabilities 4,078 817 ------------- ------------- Total liabilities 97,461 71,868 Commitments and contingencies Stockholders' equity: Common stock, $0.001 par value: 123,000,000 shares authorized and 73,367,367 and 71,658,808 shares issued and outstanding as of December 31, 2011 and December 31, 2010, respectively 73 72 Additional paid-in capital 194,379 165,972 Accumulated other comprehensive loss (2,769) (1,256) Accumulated earnings 73,264 10,821 ------------- ------------- Total stockholders' equity 264,947 175,609 ------------- ------------- Total liabilities and stockholders' equity $ 362,408 $ 247,477 ============= =============



SolarWinds, Inc. Condensed Consolidated Statements of Income (In thousands, except per share information) (Unaudited) Three Months Ended Twelve Months Ended December 31, December 31, -------------------- -------------------- 2011 2010 2011 2010 --------- --------- --------- --------- Revenue: License $ 25,283 $ 19,868 $ 92,254 $ 75,603 Maintenance and other 30,326 21,538 106,104 76,790 --------- --------- --------- --------- Total revenue 55,609 41,406 198,358 152,393 Cost of license revenue 1,186 636 4,097 1,943 Cost of maintenance and other revenue 2,212 1,638 7,892 5,987 --------- --------- --------- --------- Gross profit 52,211 39,132 186,369 144,463 Operating expenses: Sales and marketing 15,152 11,322 53,850 43,252 Research and development 5,692 4,226 21,332 15,731 General and administrative 8,093 5,370 28,076 23,476 Accrued earnout loss (gain) 936 - (664) - --------- --------- --------- --------- Total operating expenses 29,873 20,918 102,594 82,459 --------- --------- --------- --------- Operating income 22,338 18,214 83,775 62,004 Other income (expense): Interest income 94 42 308 177 Interest expense - - (1,146) Other income 699 78 720 115 --------- --------- --------- --------- Total other income (expense) 793 120 1,028 (854) --------- --------- --------- --------- Income before income taxes 23,131 18,334 84,803 61,150 Income tax expense 6,837 3,020 22,360 16,404 --------- --------- --------- --------- Net income $ 16,294 $ 15,314 $ 62,443 $ 44,746 ========= ========= ========= ========= Net income per share: Basic earnings per share $ 0.22 $ 0.22 $ 0.86 $ 0.65 ========= ========= ========= ========= Diluted earnings per share $ 0.22 $ 0.21 $ 0.84 $ 0.61 ========= ========= ========= ========= Weighted shares used to compute net income per share: Shares used in computation of basic earnings per share 73,215 70,503 72,812 68,664 ========= ========= ========= ========= Shares used in computation of diluted earnings per share 74,885 73,041 74,413 72,862 ========= ========= ========= =========



SolarWinds, Inc. Reconciliation of GAAP to Non-GAAP Financial Measures (In thousands, except per share amounts and percentages) (Unaudited) Three Months Twelve Months Ended Ended December 31, December 31, ----------------- ----------------- 2011 2010 2011 2010 -------- -------- -------- -------- Revenue $ 55,609 $ 41,406 $198,358 $152,393 GAAP cost of revenue $ 3,398 $ 2,274 $ 11,989 $ 7,930 Amortization of intangible assets (1) (1,011) (464) (3,651) (1,730) Stock-based compensation expense and related employer-paid payroll taxes (2) (48) (35) (192) (169) -------- -------- -------- -------- Non-GAAP cost of revenue $ 2,339 $ 1,775 $ 8,146 $ 6,031 ======== ======== ======== ======== GAAP gross profit $ 52,211 $ 39,132 $186,369 $144,463 Amortization of intangible assets (1) 1,011 464 3,651 1,730 Stock-based compensation expense and related employer-paid payroll taxes (2) 48 35 192 169 -------- -------- -------- -------- Non-GAAP gross profit $ 53,270 $ 39,631 $190,212 $146,362 ======== ======== ======== ======== GAAP gross profit as a % of revenue 93.9% 94.5% 94.0% 94.8% Amortization of intangible assets as a % of revenue (1) 1.8% 1.1% 1.8% 1.1% Stock-based compensation expense and related employer-paid payroll taxes as a % of revenue (2) 0.1% 0.1% 0.1% 0.1% -------- -------- -------- -------- Non-GAAP gross profit as a % of revenue 95.8% 95.7% 95.9% 96.0% ======== ======== ======== ======== GAAP sales and marketing expense $ 15,152 $ 11,322 $ 53,850 $ 43,252 Stock-based compensation expense and related employer-paid payroll taxes (2) (817) (568) (3,363) (2,788) -------- -------- -------- -------- Non-GAAP sales and marketing expense $ 14,335 $ 10,754 $ 50,487 $ 40,464 ======== ======== ======== ======== GAAP research and development expense $ 5,692 $ 4,226 $ 21,332 $ 15,731 Stock-based compensation expense and related employer-paid payroll taxes (2) (398) (393) (1,673) (1,638) -------- -------- -------- -------- Non-GAAP research and development expense $ 5,294 $ 3,833 $ 19,659 $ 14,093 ======== ======== ======== ======== GAAP general and administrative expense $ 8,093 $ 5,370 $ 28,076 $ 23,476 Amortization of intangible assets (1) (1,487) (388) (3,519) (1,440) Stock-based compensation expense and related employer-paid payroll taxes (2) (1,379) (1,273) (5,746) (7,452) Public offering costs (3) - - - (170) Lawsuit settlement costs and related legal fees, net of reimbursements (3) - - - 217 Severance costs related to retirement of former Executive Chairman (3) - - - (208) Acquisition related adjustments (4) (860) (91) (2,002) (501) -------- -------- -------- -------- Non-GAAP general and administrative expense $ 4,367 $ 3,618 $ 16,809 $ 13,922 ======== ======== ======== ======== GAAP accrued earnout loss (gain) $ 936 $ - $ (664)$ - Acquisition related adjustments (4) (936) - 664 - -------- -------- -------- -------- Non-GAAP accrued earnout loss (gain) $ - $ - $ - $ - ======== ======== ======== ======== GAAP operating expense $ 29,873 $ 20,918 $102,594 $ 82,459 Amortization of intangible assets (1) (1,487) (388) (3,519) (1,440) Stock-based compensation expense and related employer-paid payroll taxes (2) (2,594) (2,234) (10,782) (11,878) Public offering costs (3) - - - (170) Lawsuit settlement costs and related legal fees, net of reimbursements (3) - - - 217 Severance costs related to retirement of former Executive Chairman (3) - - - (208) Acquisition related adjustments (4) (1,797) (91) (1,339) (501) -------- -------- -------- -------- Non-GAAP operating expense $ 23,995 $ 18,205 $ 86,954 $ 68,479 ======== ======== ======== ======== GAAP operating income $ 22,338 $ 18,214 $ 83,775 $ 62,004 Amortization of intangible assets (1) 2,498 852 7,170 3,170 Stock-based compensation expense and related employer-paid payroll taxes (2) 2,642 2,269 10,974 12,047 Public offering costs (3) - - - 170 Lawsuit settlement costs and related legal fees, net of reimbursements (3) - - - (217) Severance costs related to retirement of former Executive Chairman (3) - - - 208 Acquisition related adjustments (4) 1,797 91 1,339 501 -------- -------- -------- -------- Non-GAAP operating income $ 29,275 $ 21,426 $103,258 $ 77,883 ======== ======== ======== ======== GAAP operating margin 40.2% 44.0% 42.2% 40.7% Amortization of intangible assets as a % of revenue (1) 4.5% 2.1% 3.6% 2.1% Stock-based compensation expense and related employer-paid payroll taxes as a % of revenue (2) 4.8% 5.5% 5.5% 7.9% Public offering costs as a % of revenue (3) 0.0% 0.0% 0.0% 0.1% Lawsuit settlement costs and related legal fees, net of reimbursements, as a % of revenue (3) 0.0% 0.0% 0.0% -0.1% Severance costs related to retirement of former Executive Chairman as a % of revenue (3) 0.0% 0.0% 0.0% 0.1% Acquisition related adjustments as a % of revenue (4) 3.2% 0.2% 0.7% 0.3% -------- -------- -------- -------- Non-GAAP operating margin 52.6% 51.7% 52.1% 51.1% ======== ======== ======== ======== GAAP other income (expense), net $ 793 $ 120 $ 1,028 $ (854) Debt issuance costs write-off (3) - - - 334 Acquisition related adjustments (4) 34 95 239 257 -------- -------- -------- -------- Non-GAAP other income (expense), net $ 827 $ 215 $ 1,267 $ (263) ======== ======== ======== ======== GAAP income tax expense $ 6,837 $ 3,020 $ 22,360 $ 16,404 Income tax effect on non-GAAP exclusions (3) 1,445 907 4,970 4,494 -------- -------- -------- -------- Non-GAAP income tax expense $ 8,282 $ 3,927 $ 27,330 $ 20,898 ======== ======== ======== ======== GAAP net income $ 16,294 $ 15,314 $ 62,443 $ 44,746 Amortization of intangible assets (1) 2,498 852 7,170 3,170 Stock-based compensation expense and related employer-paid payroll taxes (2) 2,642 2,269 10,974 12,047 Debt issuance costs write-off (3) - - - 334 Public offering costs (3) - - - 170 Lawsuit settlement costs and related legal fees, net of reimbursements (3) - - - (217) Severance costs related to retirement of former Executive Chairman (3) - - - 208 Acquisition related adjustments (4) 1,831 186 1,578 758 Tax benefits associated with above adjustments (3) (1,445) (907) (4,970) (4,494) -------- -------- -------- -------- Non-GAAP net income $ 21,820 $ 17,714 $ 77,195 $ 56,722 ======== ======== ======== ======== Non-GAAP diluted earnings per share (5) $ 0.29 $ 0.24 $ 1.04 $ 0.78 ======== ======== ======== ======== Weighted average shares used in computing diluted earnings per share 74,885 73,041 74,413 72,862 ======== ======== ======== ======== GAAP net income as a % of revenue 29.3% 37.0% 31.5% 29.4% Amortization of intangible assets as a % of revenue (1) 4.5% 2.1% 3.6% 2.1% Stock-based compensation expense and related employer-paid payroll taxes as a % of revenue (2) 4.8% 5.5% 5.5% 7.9% Debt issuance costs write-off as a % of revenue (3) 0.0% 0.0% 0.0% 0.2% Public offering costs as a % of revenue (3) 0.0% 0.0% 0.0% 0.1% Lawsuit settlement costs and related legal fees, net of reimbursements, as a % of revenue (3) 0.0% 0.0% 0.0% -0.1% Severance costs related to retirement of former Executive Chairman as a % of revenue (3) 0.0% 0.0% 0.0% 0.1% Acquisition related adjustments as a % of revenue (4) 3.3% 0.4% 0.8% 0.5% Tax benefits associated with above adjustments as a % of revenue (3) -2.6% -2.2% -2.5% -2.9% -------- -------- -------- -------- Non-GAAP net income as a % of revenue 39.2% 42.8% 38.9% 37.2% ======== ======== ======== ======== (1) Amortization of Intangible Assets. We provide non-GAAP information which excludes expenses for the amortization of intangible assets which primarily relate to purchased intangible assets associated with our acquisitions. Because of varying fair value amounts of intangible assets, subjective impairment assumptions and the variety of useful lives, which affect the recognition of amortization expense, we believe that the exclusion of amortization expense allows for more accurate comparisons of our operating results to our peer companies. The amortization of purchased intangible assets associated with our acquisitions results in our recording expenses in our GAAP financial statements that were already expensed by the acquired company before the acquisition and for which we have not expended cash. Accordingly, we analyze the performance of our operations in each period without regard to such expenses. (2) Stock-Based Compensation Expense and Related Employer-Paid Payroll Taxes. We provide non-GAAP information which excludes expenses for stock- based compensation and related employer-paid payroll taxes. We believe the exclusion of these items allows for financial results that are more indicative of our continuing operations. We believe that the exclusion of stock-based compensation expense provides for a better comparison of our operating results to prior periods and to our peer companies as the calculations of stock-based compensation vary from period to period and company to company due to different valuation methodologies, subjective assumptions and the variety of award types. Employer-paid payroll taxes on stock- based compensation is dependent on our stock price and the timing of the taxable events related to the equity awards, over which our management has little control, and does not correlate to the core operation of our business. Because of these unique characteristics of stock-based compensation and the related employer-paid payroll taxes, management excludes these expenses when analyzing the organization's business performance. (3) Other Items. We exclude certain other unplanned items which we believe are not indicative of our continuing operations and which amounts and timing are difficult to estimate in advance, including the following, when applicable: (i) write-off of debt issuance costs; (ii) public offering costs; (iii) lawsuit settlement costs and related legal fees, net of related reimbursements from insurance proceeds; (iv) severance costs related to retirement of certain executive officers; and (v) the income tax effect on our financial statements of excluding items related to our non-GAAP financial measures. Although these events are reflected in our GAAP financials, these transactions which are not indicative of our continuing operations may limit the comparability of our ongoing operations with prior and future periods. We also believe providing financial information with and without the income tax effect of excluding items related to our non-GAAP financial measures provide our management and users of the financial statements with better clarity regarding the on-going performance and future liquidity of our business. Because of these factors, we assess our operating performance both with these amounts included and excluded, and by providing this information, we believe the users of our financial statements are better able to understand the financial results of what we consider our continuing operations. (4) Acquisition Related Adjustments. We exclude certain expense items resulting from acquisitions including the following, when applicable: (i) amortization of purchased intangible assets associated with our acquisitions (see Note 1 for further discussion); (ii) legal, accounting and advisory fees to the extent associated with acquisitions; (iii) changes in fair value of contingent consideration; (iv) costs related to integrating the acquired businesses; and (v) restructuring costs, including adjustments related to changes in estimates, related to acquisitions. We consider these adjustments, to some extent, to be unpredictable and dependent on a significant number of factors that are outside of our control. Furthermore, acquisitions result in non-continuing operating expenses, which would not otherwise have been incurred by us in the normal course of our organic business operations, with respect to each acquisition. We believe that providing non-GAAP information for acquisition related expense items in addition to the corresponding GAAP information allows the users of our financial statements to better review and understand the historic and current results of our continuing operations, and also facilitates comparisons to our historical results and results of less acquisitive peer companies, both with and without such adjustments. (5) Non-GAAP Diluted Earnings Per Share Item. We provide non-GAAP diluted earnings per share. The non-GAAP diluted earnings per share amount was calculated based on our non-GAAP net income and the weighted-average number of shares outstanding during the reporting period. The non-GAAP diluted earnings per share included additional dilution from potential issuance of common stock, except when such issuances would be anti- dilutive.



SolarWinds, Inc. Reconciliation of Free Cash Flow to GAAP Cash Flows From Operating Activities (In thousands) (Unaudited) Three Months Ended Twelve Months Ended December 31, December 31, -------------------- -------------------- 2011 2010 2011 2010 --------- --------- --------- --------- Reconciliation of free cash flow to GAAP cash flows from operating activities: GAAP cash flows from operating activities $ 36,445 $ 19,994 $ 111,418 $ 66,043 Excess tax benefit from stock-based compensation 1,227 9,381 6,359 26,748 Purchases of property and equipment (1,102) (773) (2,945) (2,740) --------- --------- --------- --------- Free cash flow (1) $ 36,570 $ 28,602 $ 114,832 $ 90,051 ========= ========= ========= ========= (1) Free Cash Flow: We define free cash flow as cash flows from operating activities plus the excess tax benefit from stock-based compensation and less the purchase of property and equipment. We believe free cash flow is an important liquidity measure that reflects the cash generated by the business after the purchase of property and equipment that can then be used for, among other things, strategic acquisitions and investments in the business, stock repurchases and funding ongoing operations.



SolarWinds, Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Three Months Ended Twelve Months Ended December 31, December 31, -------------------- -------------------- 2011 2010 2011 2010 --------- --------- --------- --------- Cash flows from operating activities Net income $ 16,294 $ 15,314 $ 62,443 $ 44,746 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,234 1,602 9,957 5,498 Provision for doubtful accounts 11 60 97 194 Stock-based compensation expense 2,606 1,926 10,690 10,880 Accrued earnout loss (gain) 936 - (664) - Deferred taxes 2,087 (2,629) 2,123 (2,220) Excess tax benefit from stock-based compensation (1,227) (9,381) (6,359) (26,748) Other non-cash expenses (benefits) 263 (209) 622 470 Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations: Accounts receivable 1,224 3,766 (7,038) (5,078) Income taxes receivable (8) - (33) 31 Prepaid income taxes - - - 4,675 Prepaid and other current assets (578) (769) (189) (1,199) Accounts payable (282) 235 56 (1,127) Accrued liabilities 1,235 2,487 747 3,958 Accrued interest payable - - - (539) Income taxes payable 5,637 5,447 19,886 17,160 Deferred revenue and other liabilities 5,013 2,145 19,080 15,342 --------- --------- --------- --------- Net cash provided by operating activities 36,445 19,994 111,418 66,043 Cash flows from investing activities Purchases of short-term, long- term investments (3,950) - (34,129) - Maturities of investments 4,000 - 4,000 - Purchases of property and equipment (1,102) (773) (2,945) (2,740) Purchases of intangible assets and other (191) (144) (745) (795) Acquisition of businesses, net of cash acquired (51,000) - (109,483) (28,039) Earnout payments for acquisitions - - (3,743) - --------- --------- --------- --------- Net cash used in investing activities (52,243) (917) (147,045) (31,574) Cash flows from financing activities Repurchase of common stock (35) - (342) (24,987) Exercise of stock options 3,148 6,261 11,919 21,032 Excess tax benefit from stock- based compensation 1,227 9,381 6,359 26,748 Repayment of long-term debt - - - (44,097) Repayments of capital lease obligations - - - (9) --------- --------- --------- --------- Net cash provided by (used in) financing activities 4,340 15,642 17,936 (21,313) Effect of exchange rate changes on cash and cash equivalents (1,658) (553) (1,605) (941) --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents (13,116) 34,166 (19,296) 12,215 Cash and cash equivalents Beginning of period 135,823 107,837 142,003 129,788 --------- --------- --------- --------- End of period $ 122,707 $ 142,003 $ 122,707 $ 142,003 ========= ========= ========= ========= Supplemental disclosure of cash flow information Cash paid for interest $ - $ - $ - $ 1,280 ========= ========= ========= ========= Cash paid (received) for income taxes $ (97) $ 175 $ 1,013 $ (3,282) ========= ========= ========= ========= Noncash investing and financing transactions Accrued earnout $ - $ - $ 3,938 $ 3,743 ========= ========= ========= ========= Stock issued for acquisition $ - $ - $ - $ 9,221 ========= ========= ========= =========

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CONTACTS:

Investors:
Dave Hafner
Phone: 512.682.9867
ir@solarwinds.com

Media:
Tiffany Nels
Phone: 512.682.9545
pr@solarwinds.com


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