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SolarWinds, Inc. (NYSE:SWI)

February 12, 2013 5:00 pm ET

Executives

Michael J. Berry - Chief Financial Officer and Executive Vice President

Analysts

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Good afternoon. Thanks for joining us. And thank you, SolarWinds, Mike Berry and Dave Hafner. Thanks for coming. We appreciate it.

Michael J. Berry

Thanks for having us, Greg.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

I think, probably a lot of people in this room know SolarWinds, but I think just to level set the audience, what does SolarWinds do for your customers? What markets do you serve, and why did they choose you?

Question-and-Answer Session

Michael J. Berry

Sure. So -- and we still get this question a lot, even though we've been around for several years now. We have nothing to do with alternative energy. If you want, grab us afterwards. We'll tell you how the company came up with its name. So we are -- SolarWinds is an IT management software provider, and we manage networks, servers, application for customers of all sizes. We got started in the network business, and we have since expanded more into IT management. And for us at SolarWinds, we go to market very differently than a lot of customers do. And for us, it all starts with the way we go to market. We sell directly to the IT user. For us, it's all about stepping in front of demand when that IT user is out searching for a solution. And for us, the top of the pyramid is our products. We have -- the only way our model works is if we have products that are very easy to download, easy to evaluate, show value right out of the box. As we like to say, we need to have that wall [ph] page. So when that IT generalist downloads the product and the bells -- the lights go up, the bells start whistling, and then all of a sudden he says, "Ah, that's why I want this product." Because that product is going to solve a pain point that, that individual has. That then allows us to -- with our business model, most of our marketing is done through the web-based marketing. We have people that come directly to our website. We certainly do all the other things around SEO and SEM to get them to come look at our products. And then once they have raised their hand and downloaded or said that, "I'm interested in that product," that's where our sales team picks it up. And people say we have telesales, and we just like to set the record straight. We do not believe we have telesales. We have people that sell from the inside. We have direct sales team that are very good sales people. They just -- they just happen to be sitting in Austin; Cork, Ireland; Singapore or Brisbane. Nobody drives around in a Taurus. Nobody takes the CIO to dinner. We are responding to incoming demand, and that's what makes us very different. We sell to the whole market. We sell to dental offices, and we sell to over 450 of the Fortune 500. Because our products are easy to use, but they're very scalable and very powerful.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

And the other question that is kind of the first question I get is, how does the company able to grow 25% plus and run at 54%-or-plus operating margins? What -- how is that possible?

Michael J. Berry

It's great, isn't it? So it's really possible because of our model. So the way -- I talked a little bit about how we go to market. And the way that we construct our company is that -- again, we want to make sure that those products are easy to use yet very powerful. And we do several things within the model to make it very efficient. And we think that we can continue to scale using this model and get much bigger than we are today. So why are we able to do that? As Greg talked about, we have margins -- non-GAAP operating margins slightly over 50%. We have an R&D group that runs at about 10% of R&D, because we really embrace the offshoring of development. We have a lot of folks in Austin that drive our product development and our engineering group. But we have people in Brno, Czech Republic. We have people in Chennai. So we're going to outsource a good bit of that engineering. And then the economics really come to play when you talk about the way we go to -- our marketing model works. Again, we want to be everywhere on the web; that, that person is out looking to solve that; to bring in a solution to solve their issue. And that's how we go to market. We don't do a lot of, call it, "big M" marketing. Yes, we'll go to shows every once in a while. But marketing's job is to take a download for an action that somebody has, run them through the funnel and then hand them to sales so that sales can pick it up when they're ready to buy, and then they go from that. So that infrastructure and that mechanism allows us to run at very high margins. And when we talked to investors here, anywhere else, and when I started 3 years ago, a lot of the questions were, "Can you continue to grow with the inside sales model or selling from the inside?" And we have said, "Absolutely, we do." We have no plans to add, call it, field sales team. We think we continue to grow at a high rate with the margins we have, with the business model in place today.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

And another thing you've done is you've done a number of acquisitions. But they're a little different than I -- what most people think of software M&A. You've done 9 in the last 3 years, namely, product purchases. Can you talk about the profile of the company you're looking to buy and why you guys are different than, say, another enterprise software company that is -- has done an aggressive M&A strategy?

Michael J. Berry

Sure. So as Greg said, we've done about 9 acquisitions in the last 2 to 3 years. When we go look for acquisitions, for us, it is -- we want to -- we would look for companies that have products that we think our customers would buy, that we feel that there's a pain point. When we look at the criteria, we want to make sure that we're in markets that would -- that are large markets; where there's existing spend; very importantly, where the IT user is out searching for solutions and has discretionary budget. So that limits a little bit what we can buy. So -- but we're very different. And to us, it's more of a make -- it's a buy versus build. Because we typically will buy a company, and what we want is we want the product. Yes, there'll be -- sometimes there'll be folks within that, that have the domain knowledge that we want to hire. But we typically don't bring on any sales folks, typically. We'll bring some of the subject matter experts, but we take that product and typically, they'll have multiple SKUs with multiple pricing, and it's a little confusing. We will typically change that. We'll get it down to 1 or 2 SKUs, because it has to run through our sales model. We will almost always reduce the price, sometimes pretty significantly. And then we will run that through our sales and marketing engine. So as Greg talked about, we've got a lot of questions on organic versus inorganic, and we really want to make this point. When we do these acquisitions, any existing pipeline pretty much goes out the window. Because they were being quoted other SKUs, other pricing. So that demand that is created post acquisition is demand that we've created through our marketing engine or our sales team. So we look very differently at acquisitions. That's what we've done in the past. Now the one thing I do want to mention, Greg, is we have talked about the acquisition strategy in '11 and '12 was about going deeper into these 2 markets that we're in: network management and system and application management. We have said, when the time is right, we will look to add another new market, and we have started to now look at that. It doesn't say in '13 that we'll do one of those acquisitions, but we will continue to look at acquisitions in our core markets. But we do think that there are areas that the model can play outside of that, and we'll take a look at that starting in '13.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

On that point, I sometimes get the question, why is there a need to enter a brand new market? As your analysts state, I think you did a bottoms-up analysis that said $65 billion just in the market you're in today. Why even take that lead?

Michael J. Berry

Yes, so great question. And for us, this is need versus want. So we don't think we need to do acquisitions to grow. We're very comfortable that we can grow at very good margins with the business that we have today. But for us, it's all about the model. And we want to be, as Kevin Thompson, our CEO has said, "We want to be a $1 billion software company." We'd rather get there sooner versus later. And if we're able to take our model and expand into new markets where we can take what we do, we think, pretty well in the existing markets in the new markets, then we would do that. But again, it's not because we think there isn't any growth left in the existing market. We think we're still very under-penetrated in our core market. We have a great install base opportunity. We think we have at least $11 billion of cross-sell in that base that we can go after. And there's still a bunch of opportunity internationally. So we feel good about being able to chase that growth. But we do think there are areas where our model will play, that we can expand to add to the site.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

How -- and because of this rollout, you added a number of different products and like, 30% of your business next year is going to be outside the network management. From an organizational standpoint, what have you had to adjust to be able to manage the business and execute it the -- I mean, you've beaten every quarter for the last, I don't know, how many quarters? So what have you been -- what have you had to do in order to facilitate that type of execution?

Michael J. Berry

So one of the great things about SolarWinds is, while it's all about the model, we also spend a bunch of time saying, "Okay, what do we need to change within it and how can we get better?" And we constantly beat it up. The last one-on-one question I got is, what does Kevin spend most of his time doing? This is what his time doing is -- was -- he's taking the model and optimizing it every day. And so to Greg's point, we have had to get a lot better about understanding how do you market outside of network management, because now we do IT management as a whole. So we've had to change the way we market and make sure that we're out on the web, where not only network administrators are but also IT generalists: the guy that run storage, the guy responsible for virtualization, the person that's running the help -- the web -- the Help Desk. So we've had to expand how we go to market in terms of marketing, and then very importantly, we've specialized some of our sales team that has those downloads come in, depending on if it's a network. Is it a configuration? Is it a management? Is it system and app? Is it storage or virt [ph]? Those are going to get routed to the -- to our lead routing rules to those groups that have specialty within that -- within those products. Very importantly, though, if somebody gets, for instance, an IPAM download and that person wants to buy another product, they can absolutely sell them that and they do. So we don't let that process get in the way of the velocity of the business. But we have had to change a good bit of the way we structure, especially sales and marketing.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

How about on the R&D front? Because another thing that's notable is, like, your R&D percentage is pretty low relative to other companies. And I think, typically, when you see software companies acquire companies, they keep the R&D, and it's -- it becomes an added component of their spend. You have -- you've been able to keep it pretty lean. How is that possible? Did you -- I mean, do you foresee that staying at those levels as you go forward?

Michael J. Berry

Yes, so outside of a large acquisition, it may cause a blip or a bump. We certainly think that we can continue to keep R&D right around that 10%. And the way we do that is, more than any group within the company and they're kind of the poster child within SolarWinds, is that the R&D team, the engineering team, really embraces the offshoring of what we do. So if we do an acquisition, for instance, yes, there will be domain knowledge typically within the engineering group and we'll keep them for a period of time. We hope they're great. Maybe they'll move to Austin, and we'll keep them for longer. But we will typically, within several months, offshore that development to either Brno or Chennai. So that we can really bring those costs down. And the interesting thing is that we structured a very good process where the Brno team, it actually manages the group in India. So we're able to really drive a lot of that value while keeping the cost down and building that domain knowledge within those 2 groups. The Brno and Chennai locations are very important to what we do, especially for engineering. And importantly, we now have -- out in those locations, we actually have product managers. We have folks that do things like UX, the user experience. So we're actually moving other jobs offshore to support what we have in engineering.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Yes, that brings up a key point to the models. That maintenance stream is a highly profitable business. And your renewal rates are pretty, I guess, industry-leading. What are you seeing from a renewal perspective on some of these newly acquired products that you've recently purchased and...

Michael J. Berry

So it's early. It's early. So as Greg mentioned, we think our retention rates are quite good. And the -- if I could just take a step back for a second, as all of you know, certainly, you have to answer the phone if somebody has an issue, but the way we view maintenance is it's part and parcel to making sure that the product, that we always have frequent and fulsome releases of our product. People are not going to renew maintenance unless they see value in the product. So most of our core products, most, we try to have at least 2 releases every year that have new functionality and new features. So that the user sees value in their maintenance. And that is a huge piece of our retention rates. Some of our newer products, it's early yet. We're excited about what we've seen. It will take us really through 2013 to see if those renewal rates are at the same level as our core products. But as -- and the important thing for us is to make sure to get those into our R&D process, so that we are having frequent releases. And then once that happens, we think that will drive renewal rates consistent with our core products. We've been a little conservative in our outlook just because those are a little bit lower in terms of price but -- and early returns. But we are encouraged by what we've seen.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Okay. Switching gears a little bit, one of the standout metrics in Q4 was the international growth, 50% growth. Can you help frame where you are in terms of penetrating that international opportunity?

Michael J. Berry

Sure. So international in Q4 was about 27% of the total revenue of the company. And we said before, that split, about 2/3 of that number is in EMEA and 1/3 of that is in Asia Pacific. The vast majority of our business internationally is using our English-based product. So our bigger countries are going to be in Western Europe, the Nordics. And then in Asia Pacific, it's going to be Australia, Malaysia and Singapore. What EMEA did so well this year, though, is that they really expanded outside of that. And you all know the economic malaise and issues in -- especially, in Western Europe. A big driver to the growth internationally has been Africa, Middle East, Eastern Europe, where some of our -- we've had some great distributors, but we've really built our awareness there. So that's helped fuel the growth. And then in Asia Pacific as well, just executing better within those core companies -- countries. We have started to localize our products. And when we say localization, keep in mind, it's really 3 things: it's the website, which is really critical; it's our products; and then it's all the user documentation. IT folks are used to using English-based products. But again, our model is step in front of demand when that user is out searching for a solution. We want to make sure they can search in their local language. So we've started to localize that. So we still feel we're early, very early in our growth internationally. More software companies will have international business that's closer to 40% or 50% of the total. So that certainly what we aspire to. But one of the things is our North American business continues to grow well so it's harder for Asia -- international to catch up. So we still think we're early. For instance, in the Japanese market, we do virtually nothing. It rounds to 0, and it's the second-largest IT spend in the world. A lot of that has to do with awareness, as well as we've just rolled out the Japanese website and the product. We think that'll take a little bit longer, because the Japanese market is a little bit different. But that is a great opportunity for us as well.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Yes, I want to hit on that because -- can you talk about when you kind of launched the Japanese localization, the kind of expectations going forward? Because -- then the follow-up would be you just launched in -- or you're launching in German localization as well. And maybe just address the question of applicability of the model in some of these regions. What are some of the issues you see and how do you navigate through those?

Michael J. Berry

Sure. So let's take that one first, and then we'll talk about Japan and Germany. So we go to market the same everywhere in the world. And when SolarWinds first started to go internationally, people said, "Well, this isn't going to work in Europe," or, "This isn't going to work in Asia." We find that almost in every country, our model does work. Now internationally, we will do a little bit more business through our channel, our distribution channel because, especially, when we enter a market or if it's an area where we don't want to deal with the currency risk or the collections risk, then that's when the partners really are important. And they help drive awareness as well. So it is our opinion that we can take our model and basically, that will work throughout the world. Now let's talk about Japan for a second. Japan is a little bit different in that, as we all know, it's a little bit more relationship-based. The MSPs, the service providers, are a little bit more prevalent in Japan with a lot of these companies that have spun off into these different service providers. And we just don't have the awareness yet. So while we've localized the product, what we've realized is it's more important for us to build awareness first. And then once they know who we are, then we feel like we'll be able to build that business. So we haven't built candidly a lot into 2013, because we think it is -- it's going to take a little while. And we're fine with that. It's just an investment that we're going to make. Germany's a little bit different. It is one of our top countries in EMEA. We do a good bit of business there. But we don't do nearly what we think we should. And a good -- and that's why we've invested in the local website as well as the products. Because we do -- we want to make sure that when that user is out searching for a solution in German, they can come to a website that has all the functionality we do in the U.S. and then it's a German-based product. So that we feel like is going to have a little bit better of a kick to momentum than the Japanese market in the near term.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Switching back, I guess, to the U.S. If you look at the commercial license growth, it was a little bit slower than the overall growth of the company. Is that macro-driven? Is that just a function of tougher comps? How should we think about that?

Michael J. Berry

Okay. Yes, so we've gotten this question a lot. So let's take a step back for a second. So going into Q4, the outlook that we gave and where we came out. The commercial business actually did a little better than we thought. International did better than we thought. The North America business, which is going to be, in a given quarter, somewhere around 2/3 of the business. So it's by far our largest region, if I can use that phrase. It was right about where we thought it was. It is by far the toughest comp of the year, because in -- I'll give to provide on that to say this is what will happen this year. The [indiscernible] guys are talking to my ear. But in the past, typically, from Q1 to Q3, you see a little bit of sequential growth and then you see a big jump in Q3 for license revenue, driven by usually the federal government, the end of their fiscal year. And then we're able to keep that level because that will drop and commercial will pick up. And really, the big driver to that has been North America, as well as some of the international. So it was a very tough comp, but we knew it. But we also -- the results were pretty much right in line with what we expected. And keep in mind how big North America is compared to the business.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Yes. I do want to open up to questions in the room. But I also want to -- we kind of circled around it earlier, the install base opportunity, and kind of the evolution of your team that you put in place there. What are you doing to more aggressively go after that install base opportunity? What are some of the lessons you've learned? Can you talk about putting that new team in place? I think it was about a year ago.

Michael J. Berry

About a year ago, yes. So what Greg's referring to is, so we've always done new license deals with our existing customers, where they'll come back and they'll either buy something, a bigger size, or they'll add on new products. What we realized -- and as our customer base has gotten bigger, going into last year, we realized that, that was about a $6 billion opportunity for us to sell additional products to our existing customer base. And a couple of metrics for you. On average, we have 20 core products. We have about 20 core products. On average, our customer will have about 2.5 of those products. We, of course, don't know why they don't have all 20. But even if they don't get there, we think 2.5 is very low. So we initiated -- so we put together a sales team who's job, full job, is to go after that install base. And what we've learned over 2012 is, keep in mind the way, as I talked earlier, the way our sales team and our marketing group is organized just to drive downloads. When you sell to the install base, they may do a download, but they typically won't. Because now we're going to market back to them and try to get them to take an action that we care about. So we've had to change the way we go to market with that group. We've had to do special and build a special customer marketing team to go back into that. And we also have to understand they're our customers so they have multiple touch points. The maintenance team that reports up to me, they talk to them all day long. So we have a much better communication between maintenance and support and sales as well. And we have a much better view and we'll have a better view going forward of that customer in terms of what do they own, do they have any support cases, what have they renewed, all of those pieces that will make that group much more successful. So lots of learnings. It's still a pretty small group, and we kind of incubate that in the U.S. And as we get -- feel better about that, we'll roll it out internationally.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Okay. I do want to open it up to the group. I mean, I have plenty of questions. But I do want to also allow -- go ahead.

Unknown Analyst

You talked about keeping R&D [indiscernible]. You talked about keeping R&D at around 10% of sales and benefiting from offshoring. What's the cost differential these days between, let's say, Austin and Chennai or the Czech Republic?

Michael J. Berry

So it's going to vary by kind of job, where those folks are. But the way we look at it is, it's probably still a 3-to-1 advantage in Chennai, sometimes 4, depending on the job. And it's at least a 2-to-1 advantage in Brno. And the great part about that is, that because we have such a critical mass in both of those places, that we're able to keep those folks for a good bit because there are those job progressions and there's clear opportunity for them. So from a cost perspective, it's great. But we also get the synergies of having everyone together, which is why we've now put product managers in Brno. We've now put UX designers there. They're there with our team, which also helps us from a cost perspective.

Unknown Analyst

So you talked about building awareness, for example, in Japan and kind of the new markets. Other than website and SEO, how do you do that?

Michael J. Berry

So website and SEO is -- those are our big initiatives. So they're our kind of, call it, I'll call it "big M" marketing in terms of awareness, in terms of -- the partners help us quite a bit. We want to be everywhere on the web that, that IT user goes to. We'll go to shows. We'll do some of the shows, but we won't be the -- we won't have a grand stage there. So we do a little bit of that. But we don't do advertising in magazines. We don't do billboard. We spend our marketing money where that user is, typically, on the web or within third-party sites, where are the bloggers, those kinds of things. Because again, we're marketing directly to that end user, not to the CIO. And we spend most of our money and awareness on that to get them to actually take an action that we care about or engage with us.

Unknown Analyst

[indiscernible]

Michael J. Berry

Yes, we drove from the airport here, and we saw the billboards. And we look and go, "No, not us, not us. We don't do that."

Unknown Analyst

So I kind of get the impression from the call that just in core network management, you guys felt like you had an opportunity to actually kind of even sort of reaccelerate that kind of core product growth. Can you kind of talk about what -- what would specifically be the drivers? What would really enable you to do that? Is it just market expansion? Or is it actually kind of product-driven?

Michael J. Berry

So there's a couple of pieces to that. So keep in mind that we are an incoming demand-based model. And while we try to certainly drive that demand, we're going to react to what comes in the door, from downloads or other actions. So a couple of things, in 2012, we did a whole rework of our website early in the year. And that was very network-centric. And now, with our expansion into system and application, it looks much more like an IT management website. And I think that -- we think, certainly, that took a little bit of focus on network, as we try to build awareness in those other categories as well. So what we've done is we've spent a good bit of time going back, making sure that we have all the content that we need, that when someone comes to our website, they feel like they know where they're going to go to look for our network solutions. Because that is the #1 driver of leads for us, people who come to the website. The other thing is the install base play, that's going to be focused mostly on network, first and foremost, because most of our core customers, the biggest penetration is in network. And our biggest opportunity is someone that will have NPM or NTA, traffic -- the NetFlow product. And there are 6 other products that they should have. So that will -- we feel like, and we've already seen some good progress in that to drive network growth. So that's the piece. And then the other thing is there are some additions that we can make either through acquisition or new products to add more functionality to network. But it's really those 2 -- top 2 drivers.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Any other questions? I do want to hit on a big-picture question. You guys sell a lot of different products across a wide range of IT. And you -- it's all inbound, right? So you're seeing where the inbound demand is coming from. What areas are you seeing the most inbound? What areas are maybe not as -- there's not as much demand? But kind of the big-picture perspective, what do you see as the most?

Michael J. Berry

So as a big picture, what we'd say is we feel good about our incoming demand, really, across all the different areas that we have. We had to caution on network. We've seen a nice pickup in those leads coming in as, especially, we've changed what we've done on the website. And we've made it more, again, focused on network and added all the back links in the content to really drive that traffic. But we -- and we've really seen a nice pickup. IPAM, for instance, has been -- is a -- we're very excited about that product. We've focused a lot more awareness and marketing around that. And then system and application as well, we feel like we just have a huge amount of runway there. And because it's coming off of a pretty low base, as we see that demand coming in, we're excited about what we see there, too.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Is it -- I mean, what is the limit of the stuff that you can do to drive more inbound marketing? One of the questions is, because you changed your website, you limited the amount of network demand. Because you didn't have as much content. Does that mean that there's a limit to the amount of inbound demand that you can take in? Or how do you think about that?

Michael J. Berry

So we don't really think there's a limit to the amount of demand that we can create. We think a lot of it is just our ability to execute around that. So to the point about the content is to make sure that we understand where -- again, we want to be everywhere on the web that our user or prospect is. So we get better everyday about understanding where they are. And depending on where they are and what those sites, once they download, do they convert to a lead or not? So we spent a lot of time on that, understanding when they come into the website, how do you get them through the website, such that it's a good experience. And we now actually have a much bigger group in user experience. We used to focus on the product. We're now focused a lot on user experience on the web because that's our key marketing model. So we're off -- so getting them through the website and very importantly, if they take an action, getting them where they get the information they're looking for. The other thing that we've become a lot a lot better at, too, is understanding the quality of that lead, understanding that if they come to us from a download, the conversion -- the ability to convert might be different than if they click on a display ad somewhere else. Or they come -- so how they come to us also matters. Because to us it's all about quality. And then -- because we don't to give the sales team a bunch of leads that aren't going to convert. So we want to make sure they get the high-quality ones and then we'll nurture the other one.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

But where is there a bigger opportunity, getting more leads or improving those conversion leads?

Michael J. Berry

I think, in the long term, it's getting more leads. In the short term, it's probably better conversion.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Okay. I'll open it up to the group, again, if there are any questions.

One thing that hasn't come up that -- go ahead.

Unknown Analyst

What's your conversion rate of people who sort of engage, log on, download some things and then [indiscernible] and who actually buy and you retain?

Michael J. Berry

So the question was, what's our conversion rate? So our conversion rate -- we don't give out specific conversion rates. But I'll try to answer, at least, give you some view. The conversion rate varies by type of source. So did they come direct organic? Did they come directly to our website? Did they come in through a paid link? We do, do some Google AdWords like everybody else does. Did they come in from a third-party website? We also do email, so we get some leads that get come in there. It also varies greatly by country in terms of -- and by product. So it can be -- the highest conversion, typically, is somebody comes directly to SolarWinds because they know who we are. And then that will scale down to list buys or syndicated, things like that, where we're trying to bring people in. Those we're going to nature, and the conversion rates will be lower but we know that. And then we -- certainly, as we look at the cost, it differs as well. So it's going to vary by source, by country and by product.

Unknown Analyst

So what's the high end and what's the low end [indiscernible] numbers?

Michael J. Berry

So again, we don't give conversion rates. What we tell you is that the best converting leads are the ones that come directly to the website, because they know who we are. The lowest ones are, typically, if you do a list buy or are syndicated, because you don't know who they are.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Okay, we got 35 minutes almost, no federal questions. I'm opening it up to the group. Otherwise, you're going to get a federal question. Here we go. Terry [ph] has got a federal question.

Unknown Analyst

No federal question. Mike, one of the things that you used to talk about was -- there was a lot of discussion about being -- going in next -- right next to some of the systems management products, with either IBM or Computer Associates. In some cases, it was an initial sale into a big account and they'd run it next to it and then ultimately display itself. But I haven't heard you talk about that in awhile. So how much at this point in the product line is greenfield, if you will, as opposed to displacement?

Michael J. Berry

So Terry[ph], in general, the majority of our business, we think, is greenfield. Because of our sales motion, we don't try to go in and kick somebody out, a vendor out, a displacement. Every once in a while, a customer will download. We'll get into a conversation and they'll say, "Hey, I'm looking at you for x, and I want to replace my incumbent vendor." And our response is, "Okay, great." But that's -- so that's a result of the motion. We don't try to drive that. Because our -- again, our motion is get in there, get installed, let them see the product, how well it works and then expand from there. So if we're going to -- if we're -- if there is a vendor displacement, that's great. Do we do them? Yes, we absolutely do, and we hear about them. We try not to talk too much about that, because we don't want people to think that, that's a motion that we try to do. But certainly, we do more bigger deals now than we did before. At Analyst Day, we talked about the size of our deals are going up. But very importantly, it's critical for us to continue to bring people in, call them, at the lower end. Because those are the folks that are going to upgrade. They're going to add products, and they're going to really help us grow in the future. So to the extent that there is a vendor displacement, does it happen? Yes. Is it something we try to drive? No.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Any other questions? We got 30 seconds left. And I'm not going to ask you a federal question.

Michael J. Berry

All right, all right.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Cash flow?

Michael J. Berry

Cash flow. I love cash flow.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Yes, free cash flow. You basically said that you expect kind of free cash flow margins in 2013 to be roughly equivalent to where they are in '12. How much visibility do you have to that? And those are pretty impressive cash flow numbers, given the fact you're paying a little bit more in taxes.

Michael J. Berry

Yes. And so that would be the difference. So in 2012, free cash flow, as a percent of revenue, if I have my numbers correct, was 56%, down slightly from the year before, really driven by the fact that we paid about $15 million in cash taxes. And in 2011, we paid $1 million. So it was a big difference. In 2013, we think that number will be about $20 million to $22 million. So outside of the additional taxes, we don't see anything that really changes in the business to say we shouldn't continue to generate the kind of cash that we do. And a lot of that visibility is driven by maintenance, obviously. And then we'd look at where we are with license to bring it in. Our DSOs are very low. We have a fantastic collections group. So if somebody -- if we sell something, we're pretty darn sure we're going to collect it. And our bad debt write-offs are virtually nothing. So we have good visibility into that. So if we did 56% and then you take the cash hit, somewhere in that mid-50s, we still feel good about.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

And Mike, Dave, thanks so much for doing this.

Michael J. Berry

Greg, thank you.

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Source: SolarWinds, Inc. Presents at Goldman Sachs Technology & Internet Conference 2013, Feb-12-2013 02:00 PM
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