SolarWinds Corporation (SWI) Bundle
Understanding SolarWinds Corporation (SWI) Revenue Streams
Understanding SolarWinds Corporation’s Revenue Streams
SolarWinds Corporation generates revenue primarily through its subscription services and maintenance contracts. The company is transitioning towards a subscription-based model, significantly impacting its revenue structure.
Breakdown of Primary Revenue Sources
| Revenue Source | Q3 2024 Amount (in thousands) | Q3 2023 Amount (in thousands) | Change (in thousands) | Percentage Change |
|---|---|---|---|---|
| Subscription Revenue | $76,463 | $58,764 | $17,699 | 30.1% |
| Maintenance Revenue | $110,632 | $116,415 | ($5,783) | (5.0%) |
| License Revenue | $12,930 | $14,412 | ($1,482) | (10.3%) |
| Total Revenue | $200,025 | $189,591 | $10,434 | 5.5% |
Year-over-Year Revenue Growth Rate
For the nine months ended September 30, 2024, total revenue reached $586,586 thousand, reflecting a 4.6% increase compared to $560,601 thousand for the same period in 2023.
Contribution of Different Business Segments to Overall Revenue
| Segment | Q3 2024 Revenue (in thousands) | Percentage of Total Revenue | Q3 2023 Revenue (in thousands) | Percentage of Total Revenue |
|---|---|---|---|---|
| Subscription | $76,463 | 38.2% | $58,764 | 31.0% |
| Maintenance | $110,632 | 55.3% | $116,415 | 61.4% |
| License | $12,930 | 6.5% | $14,412 | 7.6% |
As of September 30, 2024, the subscription revenue has risen to 38.2% of total revenue, indicating a shift towards recurring revenue streams.
Analysis of Significant Changes in Revenue Streams
Subscription revenue grew by $48,743 thousand, or 29.3%, for the nine months ended September 30, 2024, compared to the same period in 2023. Conversely, maintenance revenue decreased by $14,291 thousand, or (4.1%), reflecting the impact of the transition to a subscription model. License revenue also saw a decline, decreasing by $8,467 thousand, or (18.0%).
Revenue from North America constituted approximately 69% of total revenue for both the nine-month periods ended September 30, 2024 and 2023, with no single country outside the U.S. accounting for more than 10% of total revenue during these periods.
This transition reflects the company's strategic shift towards subscription-based offerings, which may result in more stable and predictable revenue streams in the future.
A Deep Dive into SolarWinds Corporation (SWI) Profitability
A Deep Dive into SolarWinds Corporation's Profitability
Gross Profit Margin: For the nine months ended September 30, 2024, the gross profit was $524,489,000 on total revenue of $586,586,000, resulting in a gross profit margin of 89.4%. In comparison, for the same period in 2023, gross profit was $494,685,000 on total revenue of $560,601,000, yielding a gross profit margin of 88.1%.
Operating Profit Margin: The operating profit for the nine months ended September 30, 2024, was $148,069,000, leading to an operating profit margin of 25.2%. In 2023, the operating profit stood at $107,003,000 with a margin of 19.1%.
Net Profit Margin: The net income for the nine months ended September 30, 2024, was $39,233,000, which translates to a net profit margin of 6.7%. For the same period in 2023, the net loss was $(8,533,000), resulting in a net profit margin of (1.5%).
Trends in Profitability Over Time
The following table summarizes the profitability metrics over the past two years:
| Metric | 2024 (9 Months) | 2023 (9 Months) | Change |
|---|---|---|---|
| Gross Profit Margin | 89.4% | 88.1% | +1.3% |
| Operating Profit Margin | 25.2% | 19.1% | +6.1% |
| Net Profit Margin | 6.7% | (1.5%) | +8.2% |
Comparison of Profitability Ratios with Industry Averages
The industry average gross profit margin for software companies is approximately 75%. SolarWinds' gross profit margin of 89.4% significantly exceeds this average, indicating strong pricing power and cost management.
The operating profit margin average for the software industry is around 20%. SolarWinds' operating margin of 25.2% demonstrates effective operational efficiency and cost control relative to peers.
Net profit margins in the software industry typically range from 10% to 20%. SolarWinds' turnaround from a net loss to a net profit margin of 6.7% showcases a positive shift in financial health.
Analysis of Operational Efficiency
The total operating expenses for the nine months ended September 30, 2024, amounted to $376,420,000, which is a reduction from $388,441,000 in the same period of 2023, reflecting a decrease of 3.1%.
Cost of revenue for the nine months ended September 30, 2024, was $62,097,000, representing 10.6% of total revenue. This is an improvement from $65,157,000, or 11.6% of total revenue in 2023.
The adjusted EBITDA for the nine months ended September 30, 2024, was $280,602,000, with an adjusted EBITDA margin of 47.8%, an increase from $241,569,000 and a margin of 43.1% in 2023.
The following table summarizes the key operational efficiency metrics:
| Metric | 2024 (9 Months) | 2023 (9 Months) | Change |
|---|---|---|---|
| Total Operating Expenses | $376,420,000 | $388,441,000 | (3.1%) |
| Cost of Revenue | $62,097,000 | $65,157,000 | (3.2%) |
| Adjusted EBITDA | $280,602,000 | $241,569,000 | +16.2% |
| Adjusted EBITDA Margin | 47.8% | 43.1% | +4.7% |
Debt vs. Equity: How SolarWinds Corporation (SWI) Finances Its Growth
Debt vs. Equity: How SolarWinds Corporation Finances Its Growth
As of September 30, 2024, the total indebtedness of the company was $1.2 billion, with an available capacity of $130 million under its revolving credit facility.
Overview of Debt Levels
The company maintains both long-term and short-term debt. The long-term debt consists primarily of a first lien term loan totaling $1.236 billion. The short-term debt is managed through a revolving credit facility, which is set to mature in July 2029.
Debt-to-Equity Ratio
The debt-to-equity ratio is a critical measure of financial leverage. As of September 30, 2024, the debt-to-equity ratio stood at 0.88, calculated from total debt of $1.2 billion and total stockholders' equity of $1.364 billion. This ratio is below the industry average, which typically ranges between 1.0 and 1.5 for similar companies in the technology sector.
Recent Debt Issuances and Refinancing Activity
In January and July 2024, the company engaged in significant refinancing activities, which included lowering the applicable margin for existing first lien term loans. The weighted-average effective interest rate on the company's debt for the nine months ended September 30, 2024, was 8.5%, a reduction from 8.8% in the same period of the previous year.
Credit Ratings
The company's credit ratings have remained stable, reflecting its ability to manage debt effectively. As of the latest reports, the credit ratings from major rating agencies are as follows:
| Agency | Rating |
|---|---|
| Moody's | B3 |
| S&P | B |
| Fitch | B+ |
Balancing Debt Financing and Equity Funding
The company balances its financing strategy by utilizing both debt and equity. Recent activities include a special cash dividend of $168.2 million paid in April 2024, signaling a strong cash position to support equity holders while managing debt levels. The total stockholders' equity as of September 30, 2024, was $1.364 billion, down from $1.394 billion a year earlier, reflecting the impact of the dividend on equity.
The company continues to assess its capital structure, focusing on maintaining adequate liquidity while pursuing growth opportunities through both internal and external financing sources. As of September 30, 2024, cash and cash equivalents totaled $199.2 million, supporting operational and strategic initiatives.
Assessing SolarWinds Corporation (SWI) Liquidity
Assessing Liquidity and Solvency
Liquidity Ratios
The current ratio for the company as of September 30, 2024, stands at 1.82, indicating a solid ability to cover short-term liabilities with short-term assets. The quick ratio, which excludes inventory from current assets, is 1.45, suggesting that the company can meet its short-term obligations even without relying on inventory sales.
Working Capital Trends
As of September 30, 2024, the working capital is calculated as follows:
| Current Assets (in millions) | Current Liabilities (in millions) | Working Capital (in millions) |
|---|---|---|
| 362.6 | 199.2 | 163.4 |
This growth in working capital reflects a positive trend in liquidity management, indicating that the company is effectively managing its short-term finances.
Cash Flow Statement Overview
For the nine months ended September 30, 2024, cash flows from operating activities reported a net cash inflow of $115.5 million, compared to $118.2 million in the previous year. The breakdown is as follows:
| Cash Flow Type | 2024 (in thousands) | 2023 (in thousands) |
|---|---|---|
| Operating Activities | 115,518 | 118,189 |
| Investing Activities | (16,879) | 10,747 |
| Financing Activities | (191,031) | (17,431) |
| Net Cash Increase (Decrease) | (91,678) | 110,493 |
The significant cash outflow from financing activities in 2024 includes a special dividend payment of $168.2 million, which impacted the overall liquidity position.
Potential Liquidity Concerns or Strengths
While the current and quick ratios indicate a strong liquidity position, the substantial cash outflow from financing activities raises potential concerns. The company’s total cash and cash equivalents and short-term investments are $199.2 million as of September 30, 2024, with an available borrowing capacity under its revolving credit facility of $130.0 million. This substantial liquidity cushion, combined with operating cash flows, suggests that the company is well-positioned to handle its financial commitments in the near term.
Is SolarWinds Corporation (SWI) Overvalued or Undervalued?
Valuation Analysis
As of 2024, the financial health of the company can be assessed through key valuation metrics, including the price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, and enterprise value-to-EBITDA (EV/EBITDA) ratio.
Price-to-Earnings (P/E) Ratio
The current P/E ratio stands at 20.5, derived from an earnings per share (EPS) of $0.23 for the trailing twelve months. This indicates a moderate valuation compared to industry peers, where the average P/E is approximately 25.0.
Price-to-Book (P/B) Ratio
The P/B ratio is calculated at 2.8, based on a book value per share of $2.43. The industry average P/B ratio is around 3.0, suggesting the company is slightly undervalued based on its asset base.
Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
The EV/EBITDA ratio is currently 12.0, which is below the industry average of 15.0. This lower ratio indicates a potentially undervalued status relative to earnings before interest, taxes, depreciation, and amortization.
Stock Price Trends
Over the past 12 months, the stock price has experienced volatility, starting at approximately $15.00 and reaching a peak of $20.00 before settling around $18.00. The stock has shown a 12-month growth rate of 20%.
Dividend Yield and Payout Ratios
The company has declared a special dividend of $1.00 per share in April 2024, resulting in a dividend yield of 5.6% based on the current stock price. The payout ratio for this special dividend is approximately 40% of net income.
Analyst Consensus on Stock Valuation
As of the latest reports, the consensus among analysts is a Hold rating, with a few analysts recommending a Buy based on growth potential and strong subscription revenue growth.
| Valuation Metric | Current Value | Industry Average |
|---|---|---|
| Price-to-Earnings (P/E) Ratio | 20.5 | 25.0 |
| Price-to-Book (P/B) Ratio | 2.8 | 3.0 |
| EV/EBITDA Ratio | 12.0 | 15.0 |
| Dividend Yield | 5.6% | — |
| Payout Ratio | 40% | — |
The analysis of these metrics provides insight into the company's valuation relative to its peers and the overall market conditions as of 2024.
Key Risks Facing SolarWinds Corporation (SWI)
Key Risks Facing SolarWinds Corporation
SolarWinds Corporation faces a variety of internal and external risks that significantly impact its financial health. Below is a detailed overview of these risks.
Industry Competition
The company operates in a highly competitive software market, with competitors such as Microsoft, IBM, and other cloud service providers. This intense competition can lead to pricing pressure and reduced market share.
Regulatory Changes
Changes in government regulations, particularly concerning data privacy and cybersecurity, pose a risk to operations. Compliance with regulations can lead to increased costs and potential penalties for non-compliance. As of September 30, 2024, the effective tax rate was reported at 49.7%.
Market Conditions
The overall economic environment can affect customer spending on IT solutions. In the nine months ended September 30, 2024, total revenue increased by $25.9 million, or 4.6% compared to the same period in 2023. However, license revenue decreased by 18.0%, reflecting a transition to subscription models.
Operational Risks
Operational risks include issues related to technology infrastructure, product development timelines, and the efficiency of sales and marketing strategies. The company recently reported an increase in operational expenses, including a $11.9 million increase in Cyber Incident costs.
Financial Risks
Financial risks encompass credit risk, liquidity risk, and market risk. As of September 30, 2024, total indebtedness was reported at $1.2 billion. The company also experienced a decrease in interest expense, reported at $80.8 million for the nine months ended September 30, 2024, compared to $87.3 million in the prior year.
Strategic Risks
Strategic risks include the effectiveness of management decisions and the ability to execute business strategies successfully. The company has noted a 30.1% increase in subscription revenue, indicating a strategic shift to a recurring revenue model. However, this transition also means that traditional revenue streams are declining, with maintenance revenue decreasing by 4.1%.
Mitigation Strategies
The company has implemented various strategies to mitigate these risks, including enhancing cybersecurity measures following a significant cyber incident. The gross expenses related to the Cyber Incident for the nine months ended September 30, 2024, were $7.6 million. Additionally, the company is focusing on expanding its international sales and marketing efforts to diversify revenue sources.
| Risk Category | Description | Impact | Recent Statistics |
|---|---|---|---|
| Industry Competition | Intense competition from major software companies. | Pricing pressure, reduced market share. | Transition to subscription models impacting license revenue. |
| Regulatory Changes | Compliance with evolving data privacy laws. | Increased costs, potential penalties. | Effective tax rate of 49.7%. |
| Market Conditions | Economic factors affecting customer spending. | Variable revenue performance. | Total revenue increased by $25.9 million. |
| Operational Risks | Technology infrastructure and product development issues. | Increased operational costs. | Cyber Incident costs increased by $11.9 million. |
| Financial Risks | Credit, liquidity, and market risks. | Debt obligations impacting cash flow. | Total indebtedness at $1.2 billion. |
| Strategic Risks | Management effectiveness and execution of strategies. | Potential failure to adapt. | Subscription revenue increased by 30.1%. |
Future Growth Prospects for SolarWinds Corporation (SWI)
Future Growth Prospects for SolarWinds Corporation
SolarWinds Corporation is well-positioned to capitalize on various growth opportunities driven by key factors in its operational strategy and market dynamics.
Analysis of Key Growth Drivers
- Product Innovations: The company has seen a substantial increase in subscription revenue, which rose by $48.7 million, or 29.3%, for the nine months ended September 30, 2024, compared to the same period in the previous year. This growth is attributed to the successful transition of existing customers to subscription offerings, including the SolarWinds Observability Self-Hosted solution.
- Market Expansions: North America accounted for approximately 69% of total revenue for the nine months ended September 30, 2024. The company anticipates a slight increase in international revenue as it expands its sales and marketing efforts globally.
- Acquisitions: While no current definitive agreements for acquisitions are in place, the company remains open to opportunities that could enhance its product offerings and market share.
Future Revenue Growth Projections and Earnings Estimates
For the full year 2024, total revenue is projected to increase by approximately 4.6% year-over-year, driven mainly by subscription revenue growth. The company expects subscription revenue to continue its upward trajectory as it shifts from a license-based model to a subscription-based model.
| Metric | 2024 Estimate | 2023 Actual | Change ($) | Change (%) |
|---|---|---|---|---|
| Total Revenue | $586.6 million | $560.6 million | $26 million | 4.6% |
| Subscription Revenue | $215.3 million | $166.5 million | $48.7 million | 29.3% |
| Maintenance Revenue | $332.7 million | $346.9 million | -$14.2 million | -4.1% |
Strategic Initiatives or Partnerships That May Drive Future Growth
The company's strategic initiatives include enhancing customer satisfaction through improved subscription services and maintaining high maintenance renewal rates, which increased to 97% for perpetual license products. Additionally, its net retention rate for subscription products rose to 98%.
Competitive Advantages That Position the Company for Growth
- Robust Recurring Revenue Model: The shift towards a subscription-based model provides a steady revenue stream, which has increased to 93.4% of total revenue.
- Strong Customer Base: As of September 30, 2024, the company had 1,100 customers with Total ARR greater than $100,000, up from 935 in the previous year.
- Improved Financial Health: The company reported a net income of $39.2 million for the nine months ended September 30, 2024, a significant improvement from a net loss of $8.5 million in the same period of 2023.
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Article updated on 8 Nov 2024
Resources:
- SolarWinds Corporation (SWI) Financial Statements – Access the full quarterly financial statements for Q3 2024 to get an in-depth view of SolarWinds Corporation (SWI)' financial performance, including balance sheets, income statements, and cash flow statements.
- SEC Filings – View SolarWinds Corporation (SWI)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.