SolarWinds' (SWI) CEO Kevin Thompson on Q2 2014 Results - Earnings Call Transcript

| About: SolarWinds, Inc. (SWI)

SolarWinds (NYSE:SWI)

Q2 2014 Earnings Call

July 24, 2014 5:00 pm ET


David Hafner -

Kevin B. Thompson - Chief Executive Officer, President and Director

Jason Ream - Chief Financial Officer and Executive Vice President of Finance


Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Gregg S. Moskowitz - Cowen and Company, LLC, Research Division

Keith Weiss - Morgan Stanley, Research Division

Greg McDowell - JMP Securities LLC, Research Division

Stewart Materne - Evercore Partners Inc., Research Division

James Moore - FBR Capital Markets & Co., Research Division

Tim Klasell - Northland Capital Markets, Research Division


Good afternoon. Welcome to SolarWinds' Second Quarter 2014 Earnings Call. This call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Mr. Dave Hafner, Director of IR. Please go ahead, sir.

David Hafner

Thank you, Janine. Good afternoon, everyone. Welcome to SolarWinds' second quarter 2014 earnings call. With me today are Kevin Thompson, our President and CEO; and Jason Ream, our Executive Vice President and CFO.

Following prepared remarks from Kevin and Jason, we'll have a brief question and answer session. Please note that this call is being simultaneously webcast on our investor relations website at

Please remember that certain statements made during this call, including those concerning our financial outlook, our growth opportunities and expectations, our market opportunities and our product roadmap and strategy are forward-looking statements. These statements are subject to a number of risks, uncertainties and assumptions described in our SEC filings, including our Form 10-K for the fiscal year ended December 31, 2013, which was filed on February 14, 2014.

Should any of these risks or uncertainties materialize or should any of our assumptions prove to be incorrect, actual company results could differ materially and adversely from those anticipated in these forward-looking statements. These statements are also based on currently available information, and we undertake no duty to update this information except as required by law. Cautionary statements regarding these forward-looking statements are further described in today's press release.

In addition, some of the numbers during this call will be presented on a non-GAAP basis. Our use and calculation of these non-GAAP financial measures are explained in today's press release, and a full reconciliation between each non-GAAP measure and its corresponding GAAP measure is provided in the tables accompanying the press release. Each non-GAAP item in our forward-looking financial outlook that we will provide today has not been reconciled to the comparable GAAP outlook item because we cannot reasonably or reliably estimate future adjustments such as stock-based compensation expense, which is dependent on our stock price at the time.

I now will turn the call over to Kevin.

Kevin B. Thompson

Thanks, Dave. I'm pleased to report that we have followed a very strong start to 2014 in the first quarter with what we believe are impressive results for the second quarter.

Total revenue for the second quarter of 2014 grew 31%, reaching $101.5 million. This represents our first quarter with total revenue in excess of $100 million, which is an important step towards our goal of $1 billion in annual revenue and beyond.

In addition to strong total revenue growth in the first quarter, we also delivered sequential acceleration in year-over-year license revenue growth, reaching 21% for the second quarter. We believe our second quarter license revenue growth, coupled with 38% year-over-year growth and recurring revenue, demonstrate the unique growth characteristics of our recurring revenue and license-based model.

We believe we are creating a foundation of an increasing number of recurring revenue offerings with potential for strong growth, comprised of our MSP offering, the cloud management offering from Pingdom and our unique maintenance model that, when combined with our perpetual license-based core network management and systems management products, which we believe are capable of delivering solid growth in license revenue, can deliver a differentiated level of long-term growth and profitability.

As we have stated on many occasions, we see a large growth opportunity in our core network management and systems management businesses. Based on this belief, we increased our investment in these areas of our business beginning in the third quarter of 2013 to drive a higher level of growth. This increased investment has allowed us to meaningfully increase the number of network management and systems management problems that our products were able to solve for IT Pros.

We believe that the improved results we are seeing in the commercial market sales performance of our core network management and systems management products are the initial results of this sustained investment.

In fact, in the second quarter of 2014, our commercial core network management business delivered its strongest quarter of core product new license sales growth in 6 quarters, reaching 12% year-over-year growth, which is a solid progress toward our stated objective of 20%. In addition, our commercial systems management business continued to grow at a high rate delivering year-over-year core product new license sales growth of 49% in the second quarter. Jason will discuss these results in more detail in his remarks.

We remain focused on driving accelerated growth in our core network management and systems management products sales. And as a result, our investment in these 2 areas of our business is expected to remain at a high level.

You've heard us speak about our planned product releases more frequently over the last 12 months than what you have heard historically. One thing that is very important to understand when we speak about our product release plans that is very different from other software companies is that we do not sell based on new releases or even features and functions. However, releases of new products and the meaningful expansion or improvement of existing products are important in our go-to-market model.

The primary reason product releases are important in the Solar's go-to-market model is that they expand the number of problems that we're able to solve for IT Pros. The expansion in the number of problems that our products address allows us to speak to a new set of issues and challenges faced by IT Pros on our website and in our other web-based content. When we do this right, we're able to effectively capture search traffic related to these problems that already exist on the Web. It is not about creating demand in the SolarWinds' model, it is about capturing demand that already exists.

Our increased investment in R&D over the last 4 quarters has been for the primary purpose of expanding the number of problems that we solve for IT Pros across all of our net man and sys man core products to allow us to capture a higher percentage of existing level of demand.

In addition, we believe our commitment to frequent and viable product releases is one of the key reasons our customer retention rate have historically been among the highest in the industry.

We are just now beginning to see the impact of our increased product investment in our planned schedule of product releases. We believe that, over the next 3 quarters, we have the strongest schedule of product releases that we have ever had as a company. I will provide some additional details related to the more strategic releases that we plan to launch over the next several months and quarters, which meaningfully expand the problems that we could address for IT Pros.

It is our view that as IT evolve and converges to serving applications, context is critical. It is not only about managing IT infrastructures such as servers, networking, virtualization, storage and databases, it's about how IT infrastructure works together in the context of application performance and end-user experience that is critical.

To that end, there are 2 key initiatives we are working on to serve the current need of IT Pros.

First is the product that we call Application-Aware Network Performance Management, which we will bring to market as part of the launch of SolarWind's NPM 11.0 in the last week of July. We believe that this is the next natural evolution of our network management product line that our IT Pro customers and prospects have been telling us they need from us to allow them to solve a set of problems they are facing today that have become more prevalent and more critical to the performance of their businesses.

Application-Aware NPM answers the question: is it a network or application issue and how do I map network performance to application performance and end-user experience? You're probably wondering why this has become a major point of pain for IT Pros, and why does it matter in the context of capturing additional demand. What we are hearing from our IT Pro community is that the challenge that they face is that their companies are becoming more reliant on applications to drive business-critical processes. At the same time, the application delivery chain is becoming more and more complex to support. As applications become more networked, as virtualization drive IT infrastructure convergence in abstraction, end-users become more mobile.

In order for all -- for IT Pros to deliver the high level of infrastructure and application performance that the business demands, IT Pros must be able to quickly answer the age-old question: when there's an issue with application performance, is it the network or is it the application?

Application-Aware NPM use a deep packet inspection and analysis technology to identify mission-critical applications traversing networks and gives network teams on the front lines a single solution for visibility into both network performance and its impact on application performance and end-user experience.

Remaining true to the promise of the SolarWinds brand, we believe, based on the feedback from our customers, that we have architected this product in a manner that allows it to solve a very complex set of problems for the IT Pro with basically a point-and-click experience.

We believe we are providing IT Pros with an easy-to-use product at price points that we believe any IT Pro in any size of organization should be able to afford, which will short-circuit the blame game and determine the root cause of issues faster.

App-Aware NPM will be priced based on the number of network and server sensors that a company needs to monitor its application environment and will be used in conjunction with SolarWinds' NPM. We believe this will be the most impactful and market-expanding network management product release in SolarWinds in the last 4 years. This release opens up the opportunity for us to provide a solution to IT Pros for a set of have-to-solve problems that we believe exist in companies of all sizes today which are critical to business performance and the success of the IT Pros we serve.

Prior to the release of App-Aware NPM, these IT Pros have been unable to consider a solution to SolarWinds to address these issues. In addition, we believe that App-Aware NPM will create a large up-sell opportunity inside our current NPM customer base that we estimate totals $100 million at June 30, 2014, and will grow each quarter as we add new NPM customers.

Second, we're also improving our ability to address IT convergence in the context of an application with what we call our App Stack troubleshooting initiative, which answers the question IT Pros are struggling with, which is why is my application running slow and how do I fix it?

The application delivery chain, or the App Stack as we call it, is comprised of the application and all the back-end IT infrastructure that supports it, including of all the software and extended infrastructure that the application require for performance.

So once IT has identified that it's an application performance issue, the question that must be answered is: where is the problem that is causing this performance issue? And then, more specifically, why is the application running slow and how does the systems team fix it? For example, a given application where you run across multiple virtual servers and each server will have its own dynamically configured constraint or memory, CPU storage, throw databases, virtual digital networks and cloud into the mix, it is a very complex troubleshooting scenario for an IT Pro.

Solving this problem requires an integrated and unified view of the full application stack for troubleshooting. So in addition to providing insight into how the network impacts application performance with Application-Aware NPM, SolarWinds is working on an innovative approach, which we expect to deliver later this year that will help IT Pros more easily connect the dots between all of the components of the full application stack.

We will provide our users the ability to double click as they're determining it's an application issue and digitally drill down into which layer of the application stack is having a problem. Is it the app, server, storage, virtualization or database?

We believe that this approach can help many IT Pros solve application performance problems that they're facing today. We'll make our products relevant in a number of situations where IT Pros have not considered SolarWinds in the past as we simply did not solve the problem for which they were actively looking for a solution.

We also believe that this capability has become a part of our competitive advantage when an IT Pro has applications that are deployed in the cloud or in a hybrid architecture as, over time, we plan to provide visibility in the performance from the application back to the end-user without regard to what application or the end-user is locating.

It is important to note that we are not planning to sell a product called SolarWinds App Stack, rather, it is a combination of several of our current products including, NPM, SAM and Virtualization Manager. Also, in typical SolarWinds fashion, we will continue to provide IT Pros of the ability to only buy the product or a combination of products they need to address the specific performance issue that they're struggling to solve.

In addition to these 2 major initiatives, a number of our other core products have meaningful releases scheduled over the next several quarters, including SolarWinds NPM, SolarWinds Database Performance Analyzer and SolarWinds Application Monitor. We're excited about the possibilities that our increased investment in product development is creating for us as we meaningfully expand the number of performance challenges we address for IT Pros. The next step to ensuring that the increase in the number of problems we solve for IT Pros result in growth is to get compelling content, discussing these problems and challenges on our website and in the other locations on the web that IT Pros frequent.

All these content must be optimized for search so that we're able to capture new web traffic. This work is in process and we expect it will result in a stream of new content that will hit the web over the next several quarters.

On June 18, 2014, we announced the acquisition of Pingdom, a leading provider of website monitoring and performance management solutions, which are all offered as a service from the cloud. The acquisition of Pingdom allows us to begin to solve performance management problems in the cloud and from the cloud for IT Pros in addition to our historical ability to solve performance management challenges inside the firewall with on-premise solution.

Pingdom's product offerings include uptime-monitoring, which synthetically test the website and supporting infrastructure performance once per minute to once per hour based on user preferences -- preference from over 70 locations globally.

Web performance monitoring, which is real user monitoring, generally referred to as RUM, and tracks real-time website response time and page views by browser, by geo and by platform, meaning desktop or mobile device; and transaction monitoring, which is synthetic monitoring of the performance of an interaction step on a website. A great example of this is the checkout process in any commerce site.

All of Pingdom's offerings are provided on a subscription basis with pricing that ranges from $9 per month to $450 per month based on the level of offering the customer need and the number of websites and web applications that need to be monitored.

We believe that a large and rapidly growing market opportunity exist to manage the performance and uptime of websites and web applications. In a world where users expectations are that the website, mobile apps and SaaS application will perform within 3 seconds or less, slow has become the new down.

Pingdom's offerings provide IT Pros charged with managing performance of these websites and web applications to meet the demands of the business and the end-user.

There are an estimated 182 million active websites today and a countless number of web applications, and these numbers are growing quickly.

WPM is applicable to all organizations that need to provide a consistent level of uptime and response time to users at their websites and their web applications.

Pingdom currently has more than 500,000 users of their technology, over 23,000 of which are using one of the paid versions of Pingdom's offering.

The Pingdom go-to-market model sits very well with SolarWinds. Pingdom is entirely a web-based marketing model with almost all of their business historically done through e-commerce with no human intervention. In addition, Pingdom recently added a small sales team which sells only from the inside and mainly focuses on incremental opportunities within their installed base operating in a similar fashion to the installed base sales team at SolarWinds.

We are very excited to have the Pingdom team become part of SolarWinds. The team is very strong and has done an outstanding job of creating a very well respected and recognized brand in web performance management. The team at Pingdom, led by their CEO and founder, Sam Nurmi, has deep knowledge and experience in web-based product architecture and service delivery model, which we believe is a great addition to the deep knowledge in performance management of the SolarWinds team.

Sam will remain in his role as the leader of the Pingdom team reporting directly to me with a charge to continue to build a great company dedicated to making the web faster and more reliable by creating easy-to-use tools and services for websites and web application owners in organizations of all sizes all over the world.

In addition to another strong quarter of financial results and the acquisition of Pingdom, I'm very pleased with the progress we have made on several initiatives, which are aimed to support future growth in our business.

First, we've expanded the depth and breadth of our leadership team over the last several quarters, and these new leaders have been able to pick up the unique characteristics of the SolarWinds model while bringing their expertise and skill to bear to improve the way certain areas of our business operate.

Second, last week, we announced that Paul Cormier, President of product and technology at Red Hat, has joined our Board of Directors. We are excited about having Paul become part of our team. Paul brings many years of experience in infrastructure software, as well as systems management to our board. Paul also has great insight given his role at Red Hat. And Red Hat has an influential role in what's happening in IT infrastructure into the current and future architecture of IT infrastructure, including the cloud.

I will now turn it over to Jason to discuss the financial results for the second quarter in more detail. He will also provide our outlook for the back half of 2014, which will include some additional details regarding Pingdom and its impact on our outlook.

Jason Ream

Thank you, Kevin, and good afternoon to everyone on the call. As Kevin has already said, we are pleased with the performance that our team delivered in Q2. License revenue in the quarter grew by 21% compared to last year with a better growth rate this year in our core network and systems management product than we saw last Q2.

Our recurring revenue, which includes maintenance and subscription, grew to almost $64 million, an increase of 38% from last Q2 and now represents 63% of total revenue.

And total revenue for the quarter, which was $101.5 million, was above $100 million for the first time in SolarWinds's history, representing 31% growth over last year.

I'll head off 1 question that I'm sure you have and point out that we acquired Pingdom on June 17 of this year, 13 days before the end of Q2. Because Pingdom is entirely subscription-based and because we are required by GAAP to write down most of the acquired deferred revenue during the first year after the acquisition, we only recognized approximately $100,000 in revenue from Pingdom during the quarter.

We are changing our script format a bit this quarter. You probably noted that Kevin focused on our strategic priorities and progress instead of giving you a more detailed view of how various parts of the business performed. This time, I will give you some of that detail, as well as a ton of the numbers that I'm sure you're looking forward to, including all the business that we have committed -- all the business metrics that we have committed to report each quarter.

I'll start off with a view of how our marketing demand generation engine performed during Q2. Our marketing team is now organized largely by product line, allowing us to better align with the market and drive demand in the context of solving the specific problems that technology professionals are wrestling with today.

On the systems front, we have implemented marketing automation for a number of key products and are beginning to drive intelligent nurture campaigns that cater to specific products and personas in a way that is resonating with potential customers.

We have more work left to do to fully leverage our marketing automation systems, as well as other systems that we use to assist our demand gen efforts, but we are encouraged by the early results coming from our investments in this area.

We will also continue to advance and refine our analytics in terms of knowing what quality of demand we are capturing, making sure that marketing and sales are aligned in terms of what to expect in the funnel and making ROI-based decisions on where to spend marketing dollars to drive the most value to the business.

We saw our marketing efforts transform into strong growth and new business sales of our licensed and subscription products both year-over-year and sequentially versus Q1.

On a year-over-year basis, new business sales grew by 25% and total new business sales was the second-highest dollar amount we have ever recorded behind only Q4 of last year.

Our renewal rates for maintenance remained strong. Renewals of subscriptions continue to outperform our expectations and our renewal bookings in total grew by over 40% from Q2 of last year.

Turning to our geographies. New business sales into the North American commercial market not only grew significantly from Q1 to Q2 but also meaningfully accelerated their year-over-year new business sales growth rate to 28% compared to Q2 of last year. We are excited about how the North American sales team is building momentum at about the consistency that we believe they can now drive with the strength in leadership, organizational structure and training initiatives that we had put in place over the last year.

EMEA was our fastest-growing region on a year-over-year basis at 39% growth in new business sales, with broad-based strength coming from both our core network and systems management products, as well as from our MSP business.

APAC, which has become a more meaningful contributor to our overall results, continued this trend of healthy growth both sequentially and year-over-year, where new business sales this Q2 were up 26% compared to the same quarter last year.

Worldwide, our new business sales to commercial market customers were up 29% compared to Q2 of 2013 and up 6% from Q1 of this year, the strongest sequential growth that we've seen in the second quarter during the last 3 years.

In U.S. federal, new business sales were down 15% year-over-year because of a large deal in Q2 of 2013 and no large deals in Q2 of this year. Excluding that large deal in 2013, new business sales were strong with year-over-year growth of 20%. In total, set turned in strong sequential growth and license sales that were consistent with our expectations. We believe that we are well positioned for a strong Q3 to finish the federal fiscal year.

On a recognized revenue basis, North America represented approximately 72% of total revenue in Q2 with international accounting for the remaining 28%. This level of contribution from international is consistent with Q1 of this year and up by a little over a point from Q2 of 2013. The percentage of revenue coming from outside of North America has trended upwards, but strong sales growth in North America like we had this Q2 obviously slows that progress. Of course, I have to say that we're always happy for North America to put up a strong fight for their share of our revenue mix.

Turning to our product view of performance. New business sales of our core network management products in the commercial market grew by 12% year-over-year, the strongest growth rate for those products in the last 6 quarters. Our network management product and marketing teams have built momentum around the portfolio of network management products that we have to market and sell and on the connections that they are making with network-oriented IT Pros.

The improved momentum that we have seen in sales of our core network management products and the exciting new product releases that are scheduled for later this year, which Kevin discussed in his comments, give us confidence in the growth rates that we expect from these core products, which still account for more revenue than any other set of products at SolarWinds.

New business sales of our core systems management products in the commercial market grew by 49% year-over-year with strong contributions from a number of products across the systems management portfolio.

Among our core network and systems management products, Server & Application Monitor and Virtualization Manager were 2 of the 3 largest contributors along with SolarWinds NPM to overall growth in new business sales on a dollar basis from Q2 of last year, highlighting how meaningful systems management has become to SolarWinds' overall offering.

Server & Application Monitor has really begun to gain momentum in the market, being viewed as not only an affordable and easy-to-use product, but also one that solves a wide range of real-world problems for IT Pros that are responsible for managing servers and the applications that sit on them better than most other products available.

Virtualization Manager, which has always been a good product, is finding traction in the market as virtualization complexity grows within organizations of all sizes and IT Pros look for solutions to identify and remediate performance bottlenecks.

We believe that SolarWinds Database Performance Analyzer will be one of the key drivers of our core systems management portfolio in the future, serving traditional IT organizations, as well as DevOps organizations that are primarily focused on the application layer.

This business, which when we bought it, was farther from our typical go-to-market model than we would've liked, has continued to evolve towards our model based on the power and ease-of-use of the product itself, as well as based on our efforts to inject our go-to-market approach into this business. In Q2, we really saw the transactional potential of the product, with the majority of our new license sales coming from our download-driven, high velocity sales model.

Now I would like to take you through some of the transaction metrics that we provide you each quarter.

The average size for core commercial license transactions during Q2 was approximately $8,200, an increase from $7,700 last quarter and $7,600 in Q2 of last year.

We are very comfortable with an average transaction size of this level, indicating that we are attaching an appropriate number of products to each sale but also not slowing transaction velocity by artificially expanding deals.

We had core commercial license transaction volume growth of 17% compared to Q2 of last year, a sequential improvement from our transaction volume growth rate last quarter.

Sales by our installed base team into existing customers increased year-over-year by 138%. North America continued to drive the majority of the installed base sales effort, but we are beginning to see more consistent contribution from our teams in EMEA and APAC, with APAC, whose team was started just a year ago, more than doubling its sales from Q1 to Q2.

And finally, our MSP business continues to show that managed service providers have a growing need for powerful easy-to-use products that allow them to manage the technology infrastructure of their SMB customers. The switch we made to offer a remote monitoring and management product on a subscription basis has really resonated with the market. And this quarter, we saw sequential growth of 18% in new business sales of these products, reaching a record high for the quarter.

We have also seen that renewals of subscriptions for our MSP products have been higher than we expected last year when we entered this market, reflecting the trust that our customers have in our products and the success that they've had in using those products to deliver IT management services to their customers.

Turning to recognized revenue from our product areas. Total revenue from network management product in Q2 was $60 million, up from $58 million last quarter and $54 million in Q2 of last year. Total revenue from systems management product in Q2 was $32 million, up from $30 million last quarter and $22 million in Q2 of last year.

Our MSP business generated $9 million in total revenue this quarter, up 17% from last quarter. And lastly, revenue from our cloud product, which currently includes just Pingdom and is entirely comprised of subscription revenue, was approximately $100,000 in Q2.

Moving below the top line. Our total non-GAAP expenses for Q2 were $58.8 million, an increase of $3.6 million from last quarter. Our spending this quarter was focused on supporting the accelerated product development efforts that we began last fall and on continuing to drive demand growth through investment in marketing. In addition, we ramped our investment in our support organization during the quarter in an effort to further improve the relationships that we have with our IT Pro customers, which we believe to be critical in widening the gap between SolarWinds and our competition in the minds of both existing and potential IT Pro customers.

On a year-over-year basis, total non-GAAP expenses grew by $23.4 million or 66%. The 2 largest increases on a dollar basis in our year-over-year comparison are related to the acquisitions of our MSP business in Q2 of last year and our database business in Q4 of last year. Excluding expenses specifically related to these 2 new areas of our business, our total expenses grew year-over-year by $15 million or 46%.

Our overall spend for the quarter was very close to what we had targeted for the quarter, and we now believe we have reached the level of investment where we are appropriately balancing risk, spending visibility and aggressively chasing our market opportunity. I will go into more detail when I provide our outlook for the remainder of the year, but we expect that going forward, our perpetual license IT management software business will be a source of operating margin leverage.

Turning to our GAAP expenses. I want to note that in Q2, we took a charge of $6.8 million related to the abandonment of the lease on our former headquarters building in Austin. As we've mentioned before, we ran out of space in that building and were unable to secure additional space in close proximity and so, therefore, leased new space, which we moved into in April of this year to provide sufficient room for our planned future growth.

Unfortunately, we have not been able to sublet our former headquarters facility, in part due to the short duration of 22 months left on our lease and in part due to the current surplus of available Class A commercial office space in the Austin market.

As such, the lease abandonment charge we have taken represents the majority of the remaining outstanding lease obligation at the old headquarters building.

However, as the charge was for the majority of the remaining obligation, we do not expect to have any meaningful charges like this going forward and we believe that the market conditions that led to that charge also resulted in us receiving a favorable rate at our new facility.

On the balance sheet, we ended the quarter with $207 million in cash, cash equivalents and investments with 65% of the total held in the U.S. In Q2, we generated record operating cash flow of $51 million as a result of strong collections with DSOs at 37 days, one of the lowest levels we have seen in years and as a result of the revenue growth we have experienced.

Based on these results and on our cash position at the end of Q2, we feel very comfortable with our current access to capital. And in August, we expect to repay the $40 million that is outstanding on our revolving credit facility. The facility remains outstanding through October of 2018 and our access to the $125 million of available credit under the base facility, as well as to the additional $75 million available under the accordion feature remains unchanged.

There are a few significant items on the balance sheet and cash flow statement during Q2 that I'd like to highlight and explain.

First, $3.8 million or the remaining portion of the landlord funded capital expenditures related to the build-out of our new headquarters building in Austin is reflected on our cash flow statement in Q2. Like we discussed last quarter, there's no actual cash flow associated with that portion of capital expense, as the improvements were actually paid for again by the landlord.

Second, you'll see a larger than normal increase in accrued current liability, most of which is related to the lease abandonment charge that I discussed earlier.

Third, we have a large cash outflow in our investing activity. We are not disclosing specific details of the churns of the acquisition of Pingdom, but this cash outflow is obviously associated with the Pingdom deal.

And lastly, we repurchased approximately 70,000 shares during Q2 for approximately $2.7 million under the stock buyback plan that we announced last year. There are approximately $12 million still available under that buyback program, which is scheduled to conclude on July 31, 1 week from now.

Turning to our outlook for the second half of 2014. We are raising our total revenue outlook for the second half of 2014 to a range of $223.1 million to $229.1 million, an increase from last quarter's implied outlook for the second half of the year of $4.5 million at the midpoint of the ranges. Again, I want to reiterate that's for the second half of 2014.

Built into our assumptions for the second half of the year is the contribution of subscription revenue from Pingdom of approximately $2 million to $2.5 million. On a stand-alone basis, Pingdom did approximately $5 million in subscription revenue in 2013 and has been growing quickly. However, as you probably remember hearing from us before, in acquisitions, we do not carryover deferred revenue directly but instead are able to recognize a small amount of revenue to cover the cost supporting existing customers.

In this case, because Pingdom's cost structure was relatively lightweight, we started with a very small amount of deferred revenue. But we expect to grow our revenue quickly as we add customers and renew existing customers, particularly those that are on monthly subscriptions.

Obviously, as we rebuild the revenue stream from Pingdom, we expect more of the $2 million to $2.5 million in subscription revenue during the back half of this year to fall in Q3 rather than in -- I'm sorry, to fall in Q4 rather than in Q3.

The remaining $2 million to $2.5 million increase in our second half outlook is related to increased confidence that we have in our business based on the progress that we believe that we have made in both stabilizing and predicting the level of demand that we regenerate, based on the confidence in the team that we have strengthened over the last year, based on our excitement about the product enhancements we plan to release during the second half of this year and based on our belief that we are addressing a large relatively untapped market opportunity.

I will now go into more detail about how our outlook for the back half of 2014 translates into the outlook for Q3.

For the third quarter, we expect total revenue to be in the range of $109 million to $111.5 million, representing 24% to 27% growth over the third quarter of last year.

As a reminder, in Q3, we typically see a jump in license revenue as a result of meaningfully -- of a meaningfully higher level of new license sales to the U.S. federal government, as it is the government's fiscal year-end.

We do not expect our fed business to represent a larger portion of Q3 sales than it typically has in the past, but we do expect it to contribute positively to our year-over-year growth in the third quarter. We expect our recurring revenue to continue to grow both year-over-year and sequentially but the jump in new business sales in Q3 versus Q2 will not be seen fully in our recurring revenue line during the quarter but rather play out over the course of the year.

We expect to generate non-GAAP operating margins in the range of 41% to 42% in the third quarter, above the range of 40% to 41% that we have targeted for the last several quarters.

Implicit in our margin outlook for Q3 is an increase in non-GAAP operating expenses of approximately $4 million to $5 million as compared to Q2 of this year.

We expect a significant portion of our quarter-over-quarter spending increase to be related to Pingdom which, on a stand-alone basis, was running at lower margins in SolarWinds.

Additionally, with the negative impact to Pingdom's revenue base that I just discussed and a ramp in the investment from pre-acquisition levels as we not only shape the market opportunity in web performance management but also build on the Pingdom technology platform, brand and user base as the first foundation pieces of our cloud and DevOps strategy, we expect Pingdom to generate operating losses for the third and fourth quarter and be flatly dilutive to our non-GAAP operating margins.

However, despite the dilutive impact of Pingdom and the other ongoing investments across our business, our margin outlook is increasing from past quarters as we expect to get leverage from the revenue acceleration that is part of our outlook for Q3.

Lastly, we expect a non-GAAP tax rate of approximately 26% and $77 million weighted average shares outstanding to drive non-GAAP earnings per share of $0.42 to $0.44.

For the full year of 2014, our total revenue outlook increases to $420.5 million to $426.5 million reflecting 25% to 27% year-over-year growth and an increase of $8.5 million from our previous outlook at the midpoint of the ranges.

The increase in our expectations is based on the revenue outperformance in Q2; the $2 million to $2.5 million of revenue that we expect from Pingdom in the second half of 2014; the impact on subscription revenue from our MSP business in the second half of 2014 due to bookings outperformance in Q2; and the increased confidence we have in the business based on our demand generation, strengthened team, product roadmap and market opportunity.

As you think about modeling individual lines in the second half of the year, I want you -- I want to remind you that from a trending perspective, license revenue in Q4 is typically flat as compared to Q3 as new license sales into the federal government dropped meaningfully from Q3 to Q4 and are replaced by a ramp-up of new license sales into the commercial market at the end of those customers' fiscal years.

We believe that our recurring revenue will continue to grow sequentially with an emphasis on subscription revenue as our MSP business enters its fifth full quarter focused on subscription and we build up the contribution from Pingdom.

We are increasing our non-GAAP operating margin outlook for the year to approximately 42% based primarily on the margin outperformance in Q2 and despite the dilutive impact of the Pingdom acquisition.

Our spending plan in Q4 are largely a continuation of the initiatives that are currently underway, with meaningful sequential growth coming only in cloud where we're funding not only the growth in Pingdom but laying the groundwork to serve other needs of technology professionals in managing the performance of their cloud assets.

For the year, we expect a non-GAAP tax rate of 25% to 26%, approximately 77 million weighted average shares outstanding and non-GAAP earnings per share of $1.68 to $1.72.

With that, I will turn it back to Kevin.

Kevin B. Thompson

Thanks, Jason. As you can tell by our remarks, we are very pleased with the performance of our business in the second quarter, as well as for the first 6 months of 2014. Our total revenue for the first half of 2014 increased to $197.4 million, which reflects growth of 31% over the first half of 2013 while delivering non-GAAP operating margin of 42.3%.

In addition, we believe we are beginning to see the positive impact of the sustained investments we have made in our business over the last 12 months on the level and consistency of our results, with accelerated growth rate in our commercial network management business, continued robust growth rate in our commercial systems management business and a product pipeline that is deeper than at any other time in our history.

We also believe that we had made good progress at increasing the expertise of our online demand capture marketing team and in implementing marketing systems that we expect will deliver improved results in the future.

As I indicated in my earlier remarks and on our first quarter 2014 earnings call, we are focused on executing an aggressive product strategy aimed at allowing us to rapidly expand the number of problems we solve for IT Pros, while at the same time rapidly improving and extending the products in SolarWinds that our customers are currently using.

In addition, we plan on quickly adding capabilities that allow us to manage the emerging hybrid cloud IT infrastructure more effectively than any other provider of IT management software.

We have made meaningful progress against this strategy in the first 6 months of the year with a number of strong product releases of our core network management and systems management products and a robust organic pipeline over the next several quarters, which will result in several exciting new product releases that I discussed in my initial remarks.

In addition, with the acquisition of Pingdom in June, we believe we now have a strong cloud-based technology platform and a great cloud brand, both of which we plan to leverage to accelerate bringing to market additional offerings, which meet the needs of IT Pros and IT developers have to effectively manage the performance of today's cloud in a mobile application infrastructure.

I think that it is important to understand that we continue to see a large growth opportunity for SolarWinds in managing IT infrastructure that is deployed behind the company's firewall where on-premise performance management solutions are required to meet the demands of IT Pros responsible for this infrastructure.

Not only is this large market opportunity still growing, we feel our competitors are reducing their investment and focus on serving this market while we have increased our investment and focus. It is our goal to meaningfully increase our market share in the on-premise area of the IT management market over the next 18 to 24 months.

We also see a growing opportunity to more effectively serve the SaaS market with our existing product suite. Historically, the SaaS vendors have tried to manage the performance of their customer-facing infrastructure through a combination of internally written script and a collection of point product. As customers demand, on performance of these SaaS-based applications continue to get higher, we are seeing an increasing number of SaaS companies buy our network and systems management product to give themselves the increased visibility into infrastructure performance that they must have.

With the addition of our database performance management product and the WPM offerings from Pingdom, we now, we believe, we address the major performance challenges that IT Pros, who managed SaaS-based infrastructure, face on a daily basis.

Over the next several quarters, we will be focused on discussing the problem these IT Pros face and how our products address them individually and collectively in all of our web-based communication vehicles, which includes all our websites,, and, as well as other sites on the web where IT Pros congregate.

At the same time, however, we see a rapidly growing opportunity to provide a set of performance management capabilities to IT Pros and developers to manage new applications that are being created in the cloud whether public, private or hybrid. We're planning to take high expertise in IT performance management and monitoring combined with the cloud management expertise of the Pingdom team and, over the next year, develop a set of products that addresses the issues of infrastructure and application performance that exist in a cloud-based IT and application infrastructure.

The last topic I will touch on relates to the business and financial model of the SolarWinds. We have always been a business and financial model focused on recurring revenue and the value of customer relationships over a long period of time. In 2006, when I arrived at SolarWinds, we architected a relationship model with our customers predicated on the expectation that we will deliver a regular and frequent stream of technology to our customers for every product that they purchase from us.

We created a product packaging and pricing model based on this customer relationship model that has resulted in much -- in a much higher portion of recurring revenue from each customer than any other perpetual license software models. And our customers have bought into this model as evidenced by our very strong customer retention rate.

Over the last 15 months, you have seen us add subscription-based products from N-able and Pingdom, focused on serving market opportunities where we believe, from a technology perspective, in order to solve the problem that the IT Pro must solve, the solution must be delivered to the service.

As we look forward at the evolving landscape of IT infrastructure and applications, we believe that we will need to provide additional products built into the service, as well as additional solutions sold as a license to address existing and new problems that are occurring behind the firewall.

Our longer term outlook is we believe our future license growth rate will be strong and we continue to be focused on 20% as the minimum growth target. We expect our recurring revenue, which was 63% of total revenue for the first 6 months of 2014, will grow faster than license revenue on a percentage basis. This will occur as a result of the historical design of our business model, recent subscription-based additions to our product portfolio and expected future subscription-based additions to our product portfolios.

We will now open up the call for questions.

Question-and-Answer Session


[Operator Instructions] And we'll take our first question from Steve Ashley with Robert W. Baird.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

To go back to your prepared comments and you talked about commercial core products, license growth of 12%, strongest since 6 quarters. What products are you referring to when you talk about that improving demand for commercial core products?

Kevin B. Thompson

So maybe to clarify, Steve. We talked about commercial core network management products at 12%, and we talked about systems management products growing new license sales at 49%. So 12% on the network management side for core products and 49% for core products in the systems management side. And when I say it, I'd point you back to the analyst day presentation we gave where Jason broke out what's in commercial core network management. That's mainly NPM, it is NTA, it's what we call pollers, which extend NPM. It's NCM. It's IP Address Managers. Those are the major products in network management. The major core products in systems management are SAM, Virtualization Manager, Storage Manager and Database Performance Analyzer. So there are a few other products other than that, but those are the big ones. So 12% on the network management side that was the strongest in 4 quarters. And then 49% on the commercial systems management side, which is also a really, really strong continued growth in that part of our business.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

And is that systems management 49% license growth all organic?

Kevin B. Thompson

So it's SAM, Virtualization Manager, Storage Manager. There are a few other products...

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Is Confio in there?

Kevin B. Thompson

That's one of the products out there. One of the newer products in there is Database Performance Analyzer. It is a part of that growth, but it's not the major portion of that growth.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Yes. And how was the Confio, the database performance management performance vis-à-vis your expectations and how is that going?

Kevin B. Thompson

So Jason talked about the fact, we really feel like we have made the turn and turned that into a license -- into a download-driven business, which it was not when we bought it. It performed well, it performed within our expectations. And I feel like we have got it at the place we can really start to drive meaningful growth. I think it took us the better part of last month, 9 months to really transition it into a download-driven business, but it feels like that's where we are. And now we're going to really try to step on the gas.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

And just my last question, it relates to M&A activity. How active do you see yourself going forward, vis-à-vis how active you've been in the past?

Kevin B. Thompson

Well, I think what you've seen over the last 24 months is the number of deals that we're doing has reduced. And we're really focused on doing strategic transactions that allow us to enter markets or parts of markets where we believe demand exist right now today and we don't have solutions to the problems that IT Pros are facing and they're asking us for those solutions. So long way to say, I think it's -- you're going to see kind of a number of transactions. If we could find good things to buy that you've seen over the last 24 months, which has not been that many, we've done 3 deals in the last 24 months that feels like about the right volume of business. But we continue to be active-looking. There's a lot of cool technologies out there. You could see us do a few more than that in a 12-month period. You can see us do less than that. I mean, we don't have a specific number of acquisitions that we intend to do each year. We're really more focused on filling out the product architecture that we talked about at Analyst Day, which is the ability to manage all things IT regardless of where the IT assets sit and regardless of where the management resource needs to sit. We're building a lot of that technology as you can tell by my remarks. We're also acquiring some of that technology. So we'll continue to look, but I feel like we'll be making more strategic acquisitions like what you've seen over the last 24 months.


And we'll take our next question from Gregg Moskowitz from Cowen and Company.

Gregg S. Moskowitz - Cowen and Company, LLC, Research Division

Jason, at the start of the year, you guided to 12% to 18% license revenue growth, and you're tracking north of that now. And obviously, you raised guidance. And I guess I'm just kind of wondering if you have any updated thoughts on how we should be thinking about license for the full year?

Jason Ream

So, Gregg, we obviously don't guide to the individual lines, but what I tried to convey in the prepared remarks was that you should obviously think about our recurring revenue lines, both maintenance and subscription, continuing to grow on a sequential basis and on a year-over-year basis obviously, but continuing to grow with some maybe a bit more emphasis on the subscription side because of the outperformance of our MSP business relative to some of our earlier expectations as well as based on the inclusion of Pingdom, which is all subscription revenue. The remainder, obviously, comes from license, right? And as we typically see, we expect this year an increase in license revenue from Q2 -- Q2 to Q3 of pretty meaningful increase based on set. And then essentially flat license revenue from Q3 to Q4 as the federal fiscal year ends and the commercial fiscal year kicks in.

Kevin B. Thompson

Yes. And look, Jason, I just want to say, Gregg, is that we're clearly ahead of where we believe we'd be 6 months into the year, which is a good thing. From a new business sales perspective, and that's both license and subscription, are a good bit in front of where our plan, what we've said we'd be at the first 6 months of the year. That's going to translate into outperformance for the full year just from the first 6 months. So I think that and then I think the comments that Jason gave you will give the ability to kind of come up of what you believe those new license growth rates will be.

Gregg S. Moskowitz - Cowen and Company, LLC, Research Division

Perfect. That's helpful. And then, Kevin, wonder if you could elaborate on just where we are now from a marketing and systems automation standpoint? In other words, how far along are you in the implementation of automated processes to hopefully improve lead gen and conversion going forward?

Kevin B. Thompson

Yes. So if we ran a 9-inning baseball game, I'd say we're probably maybe in the bottom of the fourth. So we still got some work to do. We've made good progress and we're playing well so far. And at the moment, maybe a little ahead of where I thought we would be. And so I feel good about what we've got done. We got a lot of work left to do. We've got a good team in place. We've added some really great members to that team that really understand how to use some of the modern technology to communicate more effectively, particularly with customers, but also with prospects that aren't maybe quite ready to download, but they really want to continue the conversation with us. So I feel good about where we are, but we're not even quite half done yet. And the reality is we'll never be done but we're not really quite half done with kind of the initial work we laid out a little over a year ago or right at a year ago now. So feel good about where we are, we're making a lot of good progress but a decent amount of work still to go.


And we'll hear next from Keith Weiss with Morgan Stanley.

Keith Weiss - Morgan Stanley, Research Division

Definitely, it sounds like there's a lot more focus on sort of the applications side of the house and application management. I was hoping if you can talk a little bit about the competitive environment there. There are definitely some competitors that we hear about that are probably focused a little bit more on developers than sort of the IT professionals that you guys talk to. Do you see that as the competitive environment that's going to evolve? Do those 2 sides of the equations start to come together? Or who should we be thinking about as who you guys are going to be going up against out there in the field?

Kevin B. Thompson

Yes. I guess, maybe to answer that question two ways. First, what I'd say is while we are absolutely focused on the systems management opportunity, which includes applications that we see in front of us, driving obviously really high growth right now with 49% growth in new business sales in the second quarter, so we're really focused on the management side. But we also do see an opportunity with both server, virtualization, storage and application management to bring a differentiated set of offerings to the market. We continue to be focused on IT Pros. Will we have some offerings that the new IT developers will find interesting and maybe, in some cases, compelling? We absolutely believe they will. But it's really the connection of what's going on in the infrastructure with the applications that are being created, recognizing that, in the end, those applications that are being created by developers today ultimately are going to be have to be handed to IT or someone who is sitting inside of IT, even if -- maybe they're more of a developer in terms of skill set to manage ongoing performance and make sure the business is operating. So I don't know that some of those newer names you have out there are going to be kind of head-to-head competitors for ours -- of ours for quite some time. I think there's a big opportunity in the SaaS market. There's big opportunity in the WPM market for us today, and we'll begin to add some of the features that we think IT Pros need today to manage applications that are sitting in cloud whether public, private or hybrid. So in the longer view of the world, yes, we may compete with some of the newer names that are out there. But we're going to do it in a very different way because we're going to connect application all the way back to end user, and we really believe we're one of the few companies that are positioned to do that well and maybe only one that actually can go and make it happen. Because the others who are positioned to do it well are old, stodgy with old technology that just -- we don't believe are going to be able to put the pieces together and make those pieces talk to one another or work the way IT Pros need them to work. So kind of a long answer to your question, but that's kind of how we view the opportunity right now.

Keith Weiss - Morgan Stanley, Research Division

Got it. And if I could sneak in one last one, this is maybe more of a philosophical question, if you will. I think software guys are pretty well trained, to think about products-focused companies. And you come up with a new product and you assess whether the product is doing will by how much it sells. You guys definitely have much more of a marketing dent, and there's a lot of focus placed on sort of this new marketing engine that you're putting into -- putting into place here. From an external perspective, as analyst looking at your company, how can we judge externally how well this marketing engine is performing? And how well you guys are doing in terms of implementing these new marketing ideas? Is there any sort of external validation or sort of external metrics that we should be focusing on to see whether this is garnering the type of -- whether you're getting good return on the investment, if you will?

Kevin B. Thompson

It's a good question, Keith. It's definitely not as simple as some of the other models you follow over time because a lot of the things that we look at are going to be metrics that are not visible externally. There's, obviously, a number of things that Jason and I are looking at to make sure that we're seeing positive impacts from the investment. Are we seeing people who download it but didn't buy, come back more quickly, and look at another product or the same product and hopefully buy it. Are we seeing people came to the website and performed an action but didn't download the product? Are we able to nurture the higher percentage of them to come and download one of the products that we sell? Those are all things that we look at that, obviously, you guys can't see. I think from an external point of view, what should happen, if we're doing this well, is you'll see our sales and our customer base continue to grow at very high rates. Now can they grow forever at the 100-plus percent we've seen over the last 4 quarters? It would be great if they will. And I'm known to be unreasonable internally, so I might have an expectation that's humanly possible but not everyone might believe that, so I don't know if that's possible. You actually should see customer base sales continue to grow at very high rates if we're doing that well. You should see that the demand we're creating -- and you can see a few of those metrics when you look at, Trulio [ph], some of the external data on traffic on our website. That data is not accurate, by the way. It never is. But it gives you some view of what's going on. They won't necessarily translate directly into business. That gives you a view, are we capturing more traffic than we were before? Is the content that we're putting out on the web seem to be valuable? You can -- you look IT forum sites where IT Pros congregate and see if there is an increasing level of conversation and noise around some of the ways we're solving problems for IT Pros. I think those are the things that you can go and try and look at. But none of those are going to be perfect. Metrics for you to look at, but they all give you some level of indication of are we being successful. Now what the other way is, is our growth strong when we report each quarter? Are we meeting the metrics that we thought we would? Are we talking positively about the things we're getting done? That's more where you got to wait for us each 90 days.


And we'll take our next question from Greg McDowell from JMP Securities.

Greg McDowell - JMP Securities LLC, Research Division

I have a Pingdom question. I think it's really curious that 23,000 of the 500,000 are paid, that's only about 5% of their customers that are paying. I was wondering if you could talk a little bit about how you think you can that -- get that conversion rate to be higher, and any thoughts on sort of changing the business model of Pingdom to solarize it a little bit into more of a 30-day trial method that you guys use for some of your other products? And to that end, if you could discuss sort of -- is that premium program that Pingdom uses? Is that something that you guys could potentially adopt at SolarWinds for some of your core products? And I'll stop there.

Kevin B. Thompson

Okay. So first what I'd say is that the Pingdom team would tell you this if you talk to them, that it's really not much a conversion rate of the 500,000 to the 23,000 because they'll tell you very frankly they never tried to get their free users to convert to paid users. It just hasn't been one of the things that's been on their priority list. They've really been focused on building what is a really strong, scalable architecture for their technology that allows them to serve companies all over world and to look at performance of websites and applications from all over the world, and that's really been priority one for Sam and his team. So they have not really tried to convert. So what we will do differently and one of the things we're talking about now is how do we begin to communicate with those free users and see if we can get them to begin to convert because they have really done no communication with our users over the last several years as they've been around as a business. So a really large growth opportunity for us just inside the 500,000 free users that they have. And so I think we will make progress against that. We will get some of those users to convert. I'm not planning to make a change in the way their go-to-market model works right now. It's working very well. They're growing very nicely, at good economics for a small company, and they've got a great brand both on the web in general, as well as with a bunch of IT Pros around the world were managing the performance of websites and web applications. So we'll leave that premium model in place. We're just going to try to do it maybe a little bit differently, a little better than they've been able to because they just haven't focused on it. And I think they made the right decision. No reason to focus on any of those future technology right, get the offering right, get a bunch of people who are loving it and loving the brand, which they've done an awesome job of. And now we'll work with them to begin to convert some of that to revenue, which I think we're very good at. As far as applying that premium model to SolarWinds, I don't think we will. And the reason for that is I think our try-and-buy model works. We have a free product model at SolarWinds, but it's free product, as you remember, that solves very specific problems. They are free forever. They're not baby versions of what we sell. They are set, purpose-built products that solve very specific problems that we think we ought to solve for IT Pros for free and that's a little bit different approach than what Pingdom has taken. But different technology really require different approaches. So right now we'll leave their approach as is, but we will begin to try to convert, which will be the first time that's really, really been done. And we think that it actually can be done. It's going to take us a little bit to learn what works, what doesn't work and to make sure that we are doing it in a way that their user base finds it viable and not annoying. And that's what we're working on now.


And we'll take our next question from Matt Williams with Evercore Investment Bank.

Stewart Materne - Evercore Partners Inc., Research Division

It's actually Kirk. Just a quick -- I guess a quick question, Kevin. You guys have had sort of the MSP business now for a year or so, and you sort of mentioned that's with Pingdom. I guess are there any things you're doing from sort of marketing perspective with MSPs that are a little bit different than sort of your traditional businesses? I was just kind of curious if there have been any sort of lessons learned because that business is clearly performing really well. I was just kind of curious of how you see that evolving perhaps over the next 12 to 24 months.

Kevin B. Thompson

Yes, yes. MSP business has definitely done very well. They've outperformed our booking expectations really every quarter for the last 4 quarters, which is great. A really good team. It is a very different business than the Pingdom business just in terms of both the market it serves and how it serves that market. That being said, though, I will tell you I believe there's a lot of opportunity for the Pingdom product to be sold into the MSP market because I think on MSPs, you will have a need to manage web apps and websites for their customers. So I think there's an opportunity there that we will try and begin to exploit in the not-too-distant future. But in terms of lessons learned, I think the lessons we've learned is that when we acquire businesses that have -- that are a little different from ours and that have reasons that they ought to be a little different, even though we operate them in a very similar fashion at very strong economics, what we've learned is not break what works. And we've learned how to both learn from the business that we acquire and to begin to inject the things we do really well into those businesses to begin to help them really perform more effectively. So we'll do that with Pingdom, we'll let it continue to run because it's doing great. As we really make sure we understand it, we'll start to add some of the things that SolarWinds does really well, we've done historically for a long time, to make that business run even a little more effectively. The market model is different for our MSP business. It's a little more kind of direct MSP and direct end-user than the just web-based because it's a smaller number of people you're trying to reach in the world. You're trying to reach the MSPs that exist in the world, which is there are a lot of them. But there are fewer of them than there are companies in the world. So the marketing approach is a little more regional in terms of how we do it because MSPs are organized regionally. They generally don't move outside of geography, so that's really the difference. Pingdom is a global marketing program, all web-driven, everything done in a very global way. Pingdom has got customers all over the world. You can actually go to their website and you can see on their website everywhere that they are seeing websites that go down all over the world because there's actually a live map on that website that will show you the activity there they're identifying. That shows you the global reach that they've created in a very short period of time.


We'll take our next session from Daniel Ives with FBR Capital Markets.

James Moore - FBR Capital Markets & Co., Research Division

This is Jim Moore, in for Dan. Just first question, as you guys drive towards that 20% growth objective, what would you say are some of the more immediate near-term priorities around that?

Kevin B. Thompson

Yes. So within the license side, we continue to be focused on it. We've been at that number for the first 6 months of the year, which is nice. It doesn't mean we're done, and doesn't mean we definitely are at the point that I'm going to tell you every single quarter that's where we're going to be yet. But I think we are doing all the right things. So we are increasing the level of domain we're capturing on the network management side and the systems management side of our business. We are making major investments in product that are going to increase, as I talked about, the number of problems we can solve for IT Pros so I can talk about those problems on the web, capture conversations, search what's going on the web today, drive it to our website, get them to try one of our products. And once they try it, we are pretty good in getting them to buy it. So it's really just doing more of what we've been doing over the last 6 months. And really taking a lot of the work that's just now being completed or just now getting to the stage that we can start to leverage it to drive result and really making sure that we get out of that work and out of the investment we made in product and marketing and even in sales, the level of return that we believe we ought to get. So there's really nothing new at this point that we don't already have underway. It's finishing a few things that are not done yet. It's making sure that the investments we made that are really beginning to be able to be leveraged, turn into what I believe they can. So App-Aware NPM, for example, I want to make sure that we have a great launch the last part of this month and then we carry that launch through the rest of this year. We do a great job of letting our customers, prospects know. We can solve a big set of problems for them, we couldn't solve before. And that as we get them to try that product and we get them to come and learn about that product that hopefully we turn that into business that we close. So it's really just continuing the plan we laid out a year ago. There's not a lot of new things I feel like we need to add to that plan. We just need to continue to execute on it and make progress against it.

David Hafner

Okay, Janine, we have time for one more question.


We'll take our last question from Tim Klasell with Northland Securities.

Tim Klasell - Northland Capital Markets, Research Division

A couple of quick questions. First, the renewal rates on the MSP subscriptions. How have they been trending? And are you getting them closer to your corporate average?

Kevin B. Thompson

So they're trending up, which is good. They've always been good in that business even before we bought them. And so they -- it's been a focus of theirs because they understand the value in a recurring revenue business, as maintaining your customers. It's my belief that they have among the highest retention rates of anybody in the space just based on the number of customers we take every day from other providers and we just don't lose very many. So that's just anecdotal comment that I can't necessarily bag over a lot of data but I think it's 1 that feels right. But it is getting better. It's -- definitely, the focus of ours is the focus of the team in Ottawa, it's a focus of ours as a company. We've always really made customer retention a priority and so we've leveraged some of the best practices we have to give to them because we've been doing this longer than they have. And so I think that focus and the ability to share best practices across the organization is why those rates are growing.

Tim Klasell - Northland Capital Markets, Research Division

Okay, good. And then sort of a high level question, if you will. As you see customers move some of their assets into SaaS and maybe to MSP, do you think that enlarges your market or contracts it? Because in theory, if your customers are now turning those responsibilities over to somebody else as a service, those service providers are probably much more efficient to utilize your solutions much more highly. So do you think it shrinks the market or does it enlarge it?

Kevin B. Thompson

What I would say is that we see the market opportunity expanding really on both sides of the coin right now. So the on-premise market opportunity is growing because there is additional technology being deployed. And not a tremendous amount of technology being moved right now and I actually don't expect to see a tremendous amount of technology being moved in the near term because it's bought -- its paperworks working, and there's not a great economic advantage to move it now. We do see new applications being deployed in a different manner. And you're clearly seeing a lot more dedicated cloud, if you will, as well as private cloud. And I think what people may have believed it would be 12 months ago, I think that is just kind of a -- it's really not much different than what we've been doing today in terms of making sure we can manage that infrastructure. As technology moves to the cloud and as MSP market grows, it's absolutely growing right now. Right now, it's expanding our ability to get at that market. So the market size may not be growing, but there's a really big piece of that small business market that we just weren't getting at in the past because our product were really just slightly more than those company needed in terms of other features and capability. So really looking for kind of a broader set of functions, but they were really shallow. And that's kind of the way we play in the MSP market. And so, our ability to reach that market is better than it's ever been as a result of the move into the MSP space. So in total, what I'd is the addressable market is going to expand as the result of the things we're seeing happening in IT today, coupled with what we've done on the product side to make sure that we can address all those new areas of the market in addition to the areas in the market that exist today. But talking about Application-Aware NPM, there wasn't demand for that 3 years ago. But today, there's big demand for Application-Aware NPM because applications have become more critical, because applications are deployed in a really complex way, so it's opening up new opportunities for us.

Jason Ream

Okay. Thanks to everyone who tuned in today. That concludes our Q2 call.


And again, this does concludes today's SolarWinds' Second Quarter 2014 Earnings Call. We thank you again for your participation. You may now disconnect.

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