SolarWinds (NYSE: SWI $17-19) will be returning to the public markets this week after being taken private by private equity firms Silver Lake and Thoma Bravo in February of 2016 in a $4.5B deal. In the middle of the range, the company would have a market capitalization of $5.4B. Post-IPO these PE companies will still own about 83% of the company – making it a “controlled business”. As expected from a PE-controlled business, SWI will carry $2B on the balance sheet post-IPO.
It’s not clear that the PE ownership period resulted in a better company or investment opportunity. Revenues are higher but at the expense of margins and high-interest costs from $2B of debt.
Consider this: For the nine months ended September 2015 equity investors enjoyed operating income of $88M. For the same period in 2018 investors got $79M in operating income but with $114M in interest expenses!
As we highlight below the market is a little more open then it was and SWI will be generating substantial cash flow which can be used to pay down debt and or repurchase shares.
SWI makes network and systems management tools. They first came public in 2009 and gained an investment following thanks to their diverse product set, good growth, and very high-profit margins. Unlike the large network management software providers like Computer Associates ($CA), SolarWinds sells lots of “point products” that are designed to solve a problem quickly and directly. Instead of selling large “enterprise deals” the company targets individual engineers and department managers who have the need and budget to buy individual tools. Today the company sells over 50 different products.
A key and differentiated part of the story is that a large component of company revenues are from maintenance contracts. For example for the September quarter maintenance revenues were just over $101M out of the $212M total. These revenues are basically recurring and by selling a large number of smaller products the SolarWinds revenue production is fairly predictable – not the typical large deal-driven business. The business remains profitable with operating margins at 11%.
