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SolarWinds (NYSE:SWI)

Q2 2012 Earnings Call

July 25, 2012 9:00 am ET

Executives

David Hafner

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

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

Analysts

Daniel H. Ives - FBR Capital Markets & Co., Research Division

Keith Weiss - Morgan Stanley, Research Division

John S. DiFucci - JP Morgan Chase & Co, Research Division

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

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Stewart Materne - Evercore Partners Inc., Research Division

Scott Zeller - Needham & Company, LLC, Research Division

Operator

Good day, everyone, and welcome to the SolarWinds' Second Quarter 2012 Earnings Call. [Operator Instructions] At this time, I would like to turn the call over to Mr. Dave Hafner, Director of IR. Please go ahead.

David Hafner

Thank you, Dana. Good morning, everyone, and welcome to SolarWinds' Second Quarter 2012 Earnings Call. With me today are Kevin Thompson, our President and CEO; and Mike Berry, our Executive Vice President and CFO. Following prepared remarks from Kevin and Mike, we'll have a brief question-and-answer session. Please note that this call is being simultaneously webcast on our Investor Relations website at ir.solarwinds.com.

The press release with our results for the second quarter was issued earlier today and is also posted on our Investor Relations website. Please remember that certain statements made during this call, including those concerning our business outlook, product roadmap, growth plans and opportunities of the company and our products, and our ability to capitalize on our opportunities, 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-Q for the second quarter of 2012, which we anticipate filing with the SEC on or before August 9, 2012. Should any of the 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'll now turn the call over to Kevin.

Kevin B. Thompson

Thanks, Dave. Good morning to everyone joining us on the call today. I am pleased to report that we had a very strong second quarter. I believe that the results we will be sharing with you today demonstrate the strength of our execution of the unique SolarWinds go-to-market model against the backdrop of ongoing macroeconomic noise that increased in volume as we moved through the quarter.

Our model uniquely allows us to enter into conversations with thousands of IT professionals each quarter at the point when they have a performance management problem that they must solve and are actively looking for a solution to the problem. We believe that this creates a much different conversation with the potential buyer than the traditional enterprise software sales engagement process, and that, coupled with easy-to-use, powerful products and a pricing model, which is among the most affordable in the industry, gives us a higher likelihood of success than our competitors in periods of macroeconomic uncertainty and tight IT budgets.

Turning to our results for the second quarter of 2012. Total revenue increased to $64 million, reflecting growth of 40% over the second quarter of 2011. This is the fifth consecutive quarter of acceleration in growth of total revenue. License revenue for the second quarter of 2012 was $29.5 million, an increase of 40% over the second quarter of 2011 and represents the sixth straight quarter of accelerating license revenue growth.

Maintenance revenue also continued its long string of strong growth quarters, increasing by 40%, to $34.5 million. We were able to deliver these growth rates in our reported revenue in the second quarter despite battling the foreign currency headwinds encountered by all U.S. companies with European operation. Assuming the same currency exchange rates from the second quarter of 2011, license revenue growth would have been 2 percentage points higher than reported, while maintenance revenue and total revenue would have each been 3% higher.

As we look at our new license sales results for the second quarter for both our U.S. federal and commercial businesses, we saw a strong, balanced and consistent growth during the quarter. U.S. federal and new license sales grew by 29% year-over-year in the second quarter, and had one of its most linear sales booking quarters. This growth was driven primarily by the success we have had and increasing our federal run rate business through expanded awareness across the civilian agencies in the U.S. federal government, as well as the Department of Defense. We're enthusiastic about the size of the opportunity for the use of SolarWinds products by the U.S. federal government, and believe with continued focus, that this part of our business can be a positive contributor to our future growth.

Our commercial new license sales, which grew 37% year-over-year in the second quarter, were strong across all major geographic region. And just like U.S. federal, our commercial business had one of its most linear new license sales quarters. I would like to provide some additional perspective on our second quarter 2012 commercial new license sales growth by drilling into these results from a geographic perspective. Despite the host of ongoing macroeconomic issues in Europe and the foreign currency headwinds felt by most companies doing business in the region, EMEA was actually our highest growth geographic region during the second quarter, with new license sales increasing by over 50% compared to the second quarter of 2011.

We believe we were beginning to see the impact of the investments we have made in our product and web expansion strategy in EMEA for the 2 largest economies in the region, Germany and the U.K., leading our second quarter growth. New license sales in Germany grew at a rate of over 200% in the quarter, while the U.K. delivered very healthy growth in excess of 40%. We believe our ability to grow at this rate amidst the current instability in Europe highlights the power of our unique go-to-market strategy and the appeal of our value proposition of powerful and affordable products.

North America, our largest commercial region, continued a run of impressive growth quarters, delivering 37% year-over-year growth in new license sales in the second quarter. An important contributor to this strong growth was from our systems and application management and virtualization management product lines. Several quarters ago, we expanded the number of inside sales teams in North America that focused on specific product areas, such as systems and application management and virtualization management. These new inside sales teams have delivered solid booking results since they were put in place, which is one of the major drivers of the growth we saw in the quarter.

At the same time, our historical North American geography-based inside sales teams have continued to perform very consistently, while being responsible for selling a smaller number products. Based on the success of our product specializations sales strategy in North America, we plan to create additional inside sales teams in EMEA and Asia-Pacific over the second half of 2012, to allow similar levels of product specialization.

We continue to generate profitability that is among the best in all of enterprise software, reflected by our non-GAAP operating margin of 53% in the second quarter. We were able to, once again, generate higher-than-expected non-GAAP operating margins despite the dilutive impact of the EminentWare and Rove IT acquisition, which we close in the first and second quarter of 2012, respectively. We continue to manage the business to a non-GAAP operating margin in the range of 50% to 51%. However, our model has shown a meaningful increase in leverage over the last several quarters, which is then reflected in several consecutive quarters with higher-than-expected operating margins.

We believe our continued ability to generate this combination of high-revenue growth and high-operating margins, traces back to our differentiated business model, a model that is rooted in providing IT professionals with powerful, yet affordable and easy-to-use products that they actually enjoy using because they solve their IT management problems in the way they want those problems to be solved.

Unlike other software companies, we're not reaching those users through an expensive and inefficient sales and marketing model characterized by a bunch of high-priced enterprise sales people, who are selling myriad big-ticket, cumbersome and heavy products to CIOs and VPs of IT, that the IT professionals themselves are not even interested in. Instead, we are engaging in conversations with IT professionals at the very moment they are actively looking for a solution to a problem that is causing them ongoing pain. We do this by being present in the places these IT pros go on the web, when they are out searching for solutions to the problems they are having or when they are researching IT management topics. And because we are a commoditizer of markets, we are not investing development resources based on where we think IT management is going to be 5 or 10 years down the road, instead we are developing software to solve today's problems. These problems are well understood, just not well solved.

Over the past 24 months, we have been focused on expanding our product portfolio on making our existing products even easier to evaluate, implement and use; increasing the number of management problems our existing products address; and increasing the awareness of IT professionals of the breadth of IT management problems we solve. We believe this is translated into improving trends and attach rates in cross-sell across the number of our product areas.

In our network management product lines, the attach rates of network management modules, like user device tracker and IP Address Manager, the sales of SolarWinds Network Performance Monitor, have improved consistently over the last year. We have also seen steady improvement in the attach rates in SolarWinds Log & Event Manager, the sales of SolarWinds Network Performance Monitor since we acquired our log and event management product in early Q3 2011.

In our storage management and virtualization management product lines, during the second quarter, we continue to see improving attach rates of SolarWinds Storage Manager, the SolarWinds Virtualization Manager and vice versa. In both cases, the attach rates of these products to the other have approximately doubled over the last year.

In addition to improving attach rates, we also continue to see a strong contribution from the install base sales team that we put in place in the fourth quarter of last year. In a very short period of time, the install base sales teams has developed a set of processes designed to attack the large and growing opportunity we had within our install base to cross-sell additional products, as well as to sell customers an upgrade to a larger version of the products the customers already own. In Q2, we saw an impressive acceleration in the year-over-year growth rate of upgrade license sales.

Turning to a discussion of our performance by product area. Our systems and application management product portfolio had another strong quarter, with new license sales growth increasing by over 200% during the second quarter of 2012. This followed year-over-year growth of over 200% in the first quarter of 2012 as well. We are continuing to build momentum in systems management through a number of investments aimed at increasing our awareness, among sysadmin, as well as continuing to add new products for sysadmin, like SolarWinds Mobile Admin, which we acquired from Rove IT early in the second quarter.

Over the last 6 months, we have become more convinced that the opportunity for SolarWinds in the systems and application management market is very large. We plan to add additional products through both organic developments and additional acquisitions to increase the number of problems that we solve for sysadmin.

In fact, we would like to announce today the most recent expansion of our systems management product portfolio. On July 24, we acquired an IT helpdesk product, named Web Help Desk, to add to our systems and application management product portfolio. We believe the new SolarWinds Web Help Desk has all of the power and features that IT pros need to manage their companies' IT services. We plan to price SolarWinds Help Desk starting at under $500 per user for a perpetual license, which we believe will put SolarWinds Web Help Desk at among the lowest priced IT helpdesk products available.

I will add some additional comments on the positioning and strategy for this new product in my closing remarks. In addition to expanding our product portfolio in the systems and application management market, we are also accelerating our already considerable awareness building efforts in this market, as we fully focused all aspects of our disruptive model on the systems and application management market. And finally, as a relative newcomer to the systems and application management market, we were happy to see SolarWinds Server & Application Monitor receive some strong recognition during the second quarter by winning Best Microsoft TechEd 2012 in the Systems Management and Operation category from a pool of 297 products and 46 finalists.

Overall, we believe the TechEd win provides a strong proof point of the appeal of the SolarWinds approach to systems and application management. It also supports why we believe that our approach of building easy-to-evaluate, implement and use products, which are focused on the needs of the IT professionals, which has been so successful in network management, will also be very successful in the systems and application management market.

Moving on to our virtualization and storage management product portfolio. SolarWinds' Virtualization Manager had a strong quarter, with second quarter new license sales up over 75% compared to the second quarter of 2011. We believe that the awareness of the need for virtualization management by IT professionals is rapidly increasing and the SolarWinds' Virtualization Manager has a number of advantages over competing products, including ease of evaluation, implementation in use and pricing that is much more affordable than most of the competing products in virtualization management.

Building on these advantages, we added support for Hyper-V, the SolarWinds Virtualization Manager during the second quarter, which we believe extends our lead in virtualization management, making SolarWinds Virtualization Manager, not only one of the most affordable, but also one of the most fully featured virtualization management products in the market. In our opinion, we are well positioned to take advantage of the trend of increasing recognition by IT pros of the need for virtualization management.

Completing the discussion of product performance, our network management product line, which includes Log & Event Manager, also had another solid growth quarter. New license sales grew nearly 20% in the second quarter of 2012 versus the second quarter of 2011, coming off strong year-over-year growth of 25% in the first quarter of 2012. I will provide some additional thoughts in our view of this significant growth opportunity in the network management, as part of my closing remarks.

Overall, we are pleased with the growth across our product portfolio. During the second quarter, we continue to see the synergistic benefits resulting from our efforts over the last 24 months to expand our product portfolio into virtualization management, systems and application management, storage and resource management, and log and event management. As we have increased the number of problems we solve for IT pros, in the awareness by a broadening set of IT pros, for our ability to solve these problems, we are seeing visitors to our various websites, again, to download and try related products that we feature on those sites.

For example, the dameware.com site is now driving a consistent and meaningful number of downloads of SolarWinds Server and Application Monitor and SolarWinds Patch Manager in addition to, of course, driving downloads of DameWare NT Utilities and DameWare Mini Remote Control. Beyond our ongoing efforts to expand our product portfolio, we have also begun to explore a number of new ways we can develop relationships with IT professionals through thought leadership and useful content to help IT pros do their jobs more effectively on a day-to-day basis. Earlier examples of this strategy are thwack.com, our vibrant user community, and DNSstuff.com, a community sysadmin that we acquired last fall.

Last week, we launched a new website called patchzone.org. With PatchZone, in particular, we're looking to become a one-stop shop for sysadmin for all things Patch Manager related, whether that means being a reliable source of information on important upcoming patch releases, issues of outstanding patches, patch-related news and trends or blogs and commentary on relevant subject matter.

While our first foray into this next evolution of the demand generation has begun, with the subject of patch management, we believe there are multiple opportunities to establish websites, sending in a number of IT management topics, enabling us to be present and engaged in an ever-growing number of conversations that are occurring on the web that are related to problems and issues that we can address with our products.

As some of you may recall, we also relaunched solarwinds.com at the end of the first quarter. This relaunch was necessary to enable the transformation of solarwinds.com into an IT management site from the network management site that it was only a few quarters ago. That effort included a new site architecture that allows us to make site changes and add new content much more quickly, than we have been able to in the past. In addition, we have added all new solutions and product pages for many of our products with more new pages to come as we move through the rest of 2012. We are on track with this project and excited about the opportunity it has created for us to make our web presence even more effective.

Lastly before I turn it over to Mike, I'd like to highlight another important second quarter milestone. As some of you may have noticed, we released the Japanese version of SolarWinds Network Performance Monitor, our flagship network management product at the end of May. More recently, we also launched Phase I of our localized Japanese website on July 18, adding a critical ingredient to the recipe of our web-based, go-to-market model. We expect to release the Japanese version of SolarWinds NetFlow Traffic Analyzer by the end of the fourth quarter, followed by the release of SolarWinds Network Performance Monitor and SolarWinds NetFlow Traffic Analyzer in German, fully supported by a fully localized German website by early 2013.

We feel good about the progress we are making in localization and believe this will have a positive impact as we move into 2013. With that, I'll now turn it over to Mike for a detailed financial review.

Michael J. Berry

Great. Thank you very much, Kevin. A very good morning to everybody on the call. Similar to our previous earnings calls, this morning, I will go through the details of the second quarter 2012 financial results and our key metrics, but we'll spend most of my time this morning on our outlook for the third quarter and full year of 2012.

As Kevin mentioned during his prepared comments, the second quarter was another strong quarter for SolarWinds, and the power of our unique business model was once again highlighted in our financial results. For the second quarter of 2012, we exceeded the high end of the quarterly outlook for all of the revenue and non-GAAP profitability measures we provided on the April 2012 earnings call.

For the first time since the first quarter of 2010, license, maintenance and total revenue all saw a year-over-year growth rate of at least 40%. License revenue and total revenue, once again, showed accelerated growth in their year-over-year growth rates. This is the sixth consecutive quarter of accelerating growth for license revenue and the fifth straight quarter for total revenue.

Non-GAAP operating margins exceeded 50% for the ninth straight quarter, and this is the highest non-GAAP operating margin since Q4 '09. Mainly as a result of better-than-expected cash collections, cash flow from operations was higher than expected and grew on a year-over-year basis by 44%. Based primarily on our continued strong results in the second quarter of 2012, and in spite of the continued economic turmoil around the globe and a stronger dollar, we are increasing our revenue and profit outlook for the full year 2012, which I will cover later in my remarks.

Okay. With that said, let's get started with a more detailed review of the quarterly results for the second quarter of 2012. Total revenue was $64 million for a 40% year-over-year growth rate. License revenue finished at $29.5 million, which is also a year-over-year growth rate up 40%. And maintenance revenue finished at $34.6 million and grew 40% year-over-year as well, which completed our trifecta of 40% year-over-year top line growth during the second quarter.

For the second quarter of 2012, our international revenue was approximately 25% of total revenue. Our non-GAAP operating expenses in the second quarter of 2012 were $27.3 million, an increase of approximately $1.7 million, or 7% on a sequential basis, versus the first quarter of 2012. The majority of the $1.7 million in incremental spending was focused in sales and marketing, as we continue to fund the initiatives that we believe will contribute to our expected future growth, such as additional marketing spend to expand the number of sites where we are engaged in conversations with IT pros as well as our ongoing build out of sales teams focused on selling specific products in North America.

Our non-GAAP operating income amount reached a new record high and finished at $34.3 million in the second quarter of 2012, resulting in a non-GAAP operating margin of 53.5%. Our financial model continued to exhibit strong leverage with the ability to drive incremental profitability. Similar to the first quarter 2012, our non-GAAP operating margin and earnings per share outperformance during the second quarter of 2012 was driven mainly by the fact that our total revenue was approximately $3.8 million above the high end of our outlook, which in turn drove the majority of the nearly $4.1 million in incremental non-GAAP operating income, again, as measured against the high end of our outlook. Non-GAAP net income was a record high of $24.8 million and non-GAAP diluted earnings per share was also a record high of $0.33 for the second quarter of 2012.

Okay. Let's move on to our key business metrics. In the second quarter of 2012, core product transaction volumes increased year-over-year by 25%, as commercial core product transactions grew by 26% and U.S. federal was basically flat. We define core product transactions as transactions that include a core product of either our network management products and modules, application management, storage management, virtualization management products or our log and event management products.

For the second quarter of 2012, the total trailing 12-month average transaction size, excluding Kiwi and DameWare, finished at approximately $8,800, an increase of 4% over the same measure ending the second quarter of 2011. The average transaction size also increased over the first quarter of 2012 and was helped by the steady increase in attach rates of modules through SolarWinds' Network Performance Monitor.

Now let's move on to the balance sheet. Including our short- and long-term investments of approximately $52 million, total cash, cash equivalents and investments were approximately $196.2 million at June 30, 2012, versus $171.2 million as of March 31, 2012. The quarter-over-quarter increase in total cash of approximately $25 million was primarily driven by approximately $34 million generated by cash flow from operations, partially offset by cash used in the acquisition of Rove IT early in the second quarter.

A large percentage of our cash balances held in U.S. dollars has only approximately 16% of the total cash balances held in the foreign currencies of our international subsidiaries as of June 30, 2012. Accounts receivable finished at $28.8 million as of June 30, 2012, an increase of $1 million from March 31, 2012.

Our DSOs calculated on quarterly -- on trailing quarterly revenue, finished at just less than 41 days, even lower than the first quarter of 2012, which at that time, was our lowest DSOs in the last 3 years. As I mentioned earlier, our cash collections were better than expected, which contributed to the lower DSOs for the second quarter of 2012. Our total deferred revenue saw a nice sequential increase of nearly $4 million from March 31, 2012, to finish at $86.7 million. This equates to a 38% year-over-year growth versus the June 30, 2011, balance of $62.8 million. Our quarterly cash flow from operations finished at $34.1 million, an increase of approximately 44% on a year-over-year basis. Free cash flow was $35.2 million for a year-over-year increase of 46%.

On a trailing 12-month basis, we have generated approximately $135 million in free cash, flow or approximately 58% of total revenue for the same period. We define free cash flow as GAAP cash flow from operations less purchases of fixed assets, plus excess tax benefits from stock-based compensation.

As we discussed on multiple occasions preceding this call, we continue to expect to pay approximately $15 million in U.S. federal taxes during 2012. We have made total tax payments totaling $7.4 million through the second quarter of 2012. Cash used in investing activities was $32.1 million, which includes moving approximately $21 million from cash to additional investment options, as well as the cash used for the Rove IT acquisition. Cash provided by financing activities totaled $4.3 million, which includes $2.4 million received from the exercise of stock options and $1.9 million from the excess tax benefit of option exercises.

We have several items to discuss related to the rest of 2012, so let's move on to the outlook for the third quarter and full year of 2012. For our commercial business, we currently expect commercial to continue to grow nicely on a year-over-year basis and our outlook for the third quarter assumes commercial new license sales growth in the low- to mid-30% range.

Let's move on to the impact of the U.S. federal business for the third quarter of 2012. As many of you know, the third quarter typically includes a larger portion of our new license sales from the U.S. federal business, as this represents the end of the U.S. government's fiscal year. We expect that to be the case again in the third quarter of 2012. Since we get a lot of questions about the U.S. federal business heading into the third quarter, I want to take a step back and remind everyone how we look at the U.S. federal business in preparing our outlook.

It is important to note that we have not changed our methodology for forecasting the U.S. federal business as we still -- as we are still excluding project-based deals from the outlook. We have assumed that across the multiple, larger opportunities in our current pipeline, that some percentage of the opportunities or some percentage of the opportunity potential license amount will ultimately close during the quarter. So think of this as a portfolio approach to our expectations for the U.S. federal new license sales in the third quarter.

Kevin mentioned earlier that we recently completed the acquisition of an IT helpdesk product called Web Help Desk. This acquisition was completed on July 24, 2012, at a total cash purchase price of $20 million. As with most of our previous acquisitions, we will move quickly to integrate this acquisition into our core business. To that end, we have already changed the pricing and packaging to be consistent with the SolarWinds' business model by simplifying the number of SKUs and reducing the product pricing to better reflect our pricing philosophy.

Similar to several of our previous acquisitions, this is why we view the new license sales as organic growth, because we are not acquiring a large installed customer base, and the majority of the new business will be created by SolarWinds using our go-to-market model. For the second half of 2012, we expect this acquisition to contribute approximately $1 million in total revenue and to be dilutive to non-GAAP operating margins by approximately 1 percentage point. As with previous acquisitions, the majority of the incremental spending will be in R&D, support and marketing as we expect to integrate the acquired products into our existing sales motion and absorb the administrative functions without significant incremental expenses.

And just to hit on foreign exchange for a moment, since we received questions from some of you on it. For Q3 and Q4, our outlook reflects an assumed euro to U.S. dollars exchange rate of $1.20. To provide some additional context, currently about 25% of our revenue is international, with about 2/3 of that 25%, or approximately 17%, coming from EMEA, and the remaining 1/3, or approximately 8%, coming from our Asia-Pacific business.

Given the growth we have experienced internationally over the last couple of years, I'd like to update the rules of thumb around FX that we have talked about in the past. Where our business stands today, we estimate that for every $0.10 movement in the euro to U.S. dollar exchange rate, we would see an $850,000 impact to revenue per quarter. Again, $850,000 impact to revenue per quarter, with approximately 70% of that hitting maintenance revenue and the remaining 30% impacting license. And since we are not over or under weighted from an expense point of view internationally, applying our company 50% margin level to the top line impact enables you to calculate the approximate impact to operating income and EPS.

So with that being said, our current expectations for the third quarter of 2012 are as follows: We expect total revenue to be in the range of $66 million to $68.5 million, representing growth over the third quarter of 2011 of between 22% and 27%. This revenue range is expected to comprise license revenue in the range of $30 million to $32 million and maintenance revenue of approximately $36 million to $36.5 million, which includes the impact of the acquisition of the IT -- of the Web Help Desk product.

We currently expect non-GAAP operating margins to be in the range of 50% to 51%, which includes the expected dilutive impact of the acquisition of the Web Help Desk product. Non-GAAP EPS is currently projected to be between $0.29 and $0.31 per share, given a non-GAAP effective tax rate of 30% and fully diluted weighted average shares outstanding for the third quarter of 2012 of approximately $76.8 million.

Before I move on to the full year outlook, I'd like to mention a few important items related to the third quarter outlook. First, and this was important so I'm going to go slow, when looking at the license revenue growth rate, remember that the commercial business is expected to grow year-over-year in the low- to mid-30% range, but that U.S. federal, which is expected to represent approximately 20% of the new license sales in the quarter versus 8% of the new license sales in the second quarter, is forecast in the outlook to be basically flat on a year-over-year basis.

Let me do that again, commercial business is expected to grow year-over-year in the low- to mid-30% range, but that U.S. federal, which is expected to represent approximately 20% of the new license sales in the quarter, is basically flat in our outlook.

Next, as it relates to maintenance revenue, it is important to remember that the impact from the lower euro to USD exchange rate assumption negatively impacts maintenance revenue more than license revenue. We will lose approximately $650,000 of acquired deferred maintenance revenue starting in the third quarter of 2012 from the purchase accounting of the TriGeo acquisition. While we have successfully renewed maintenance on most of TriGeo's customers, the roll off of this maintenance revenue will have an impact on the growth of maintenance revenue for the remainder of this year.

Also, please note that when you look at the year-over-year comparison for non-GAAP earnings per share that the tax rate in the third quarter of 2011 was 22%, compared to an expected 30% in the third quarter of 2012, which represents the equivalent of about $0.04 per share in earnings per share.

Lastly, our margin outlook for Q3 includes an increase in planned spending in a number of key areas in an effort to drive growth. As Kevin mentioned, this includes additional sales capacity, especially internationally to build sales teams focused on selling some of our newer products, like SolarWinds Storage Manager, SolarWinds Virtualization Manager and SolarWinds Patch Manager, as well as expansion of our cross-selling team, both here and internationally. And additional spending that supports our expansion into Japan, Germany and Brazil, including our ongoing product and web localization efforts.

Okay. Moving on to the full year of 2012. As I mentioned earlier, we are increasing our outlook for the full year of 2012 total revenue, non-GAAP operating margin and non-GAAP EPS. This is due mainly to the strong performance in the second quarter of 2012 and the acquisition of the Web Help Desk product, slightly offset by the expected negative impact of the lower euro to USD exchange rate assumed in our guidance for the rest of 2012. With that aside, for the full year of 2012, we currently expect the following: Total revenue for 2012 to be in the range of $257 million to $263 million, which reflects anticipated growth of approximately 30% to 33% over the 2011 total revenue of $198.4 million, and represents an increase in full-year outlook of $3 million to $7 million from the guidance we provided at the end of the first quarter.

We now expect our full-year non-GAAP operating margins to be between 51% and 52%, which also represents an increase from the outlook we provided on the first quarter call, despite the impact of the Web Help Desk product acquisition. We expect non-GAAP EPS to now be in the range of $1.20 to $1.24 per share, an increase of $0.05 to $0.06 per share from what we provided on the first quarter call. This reflects an assumed 29% full-year non-GAAP effective tax rate and fully diluted weighted average shares outstanding for the year of approximately $76.5 million.

Lastly, I'd like to update our expectations for year-over-year total revenue growth rates for our main product categories, which includes all of our core products, plus DameWare, and excludes the rest of our transactional products. Please keep in mind that these amounts are for the total company and include the U.S. federal business. Since we are projecting the U.S. federal business to increase only slightly in 2012, the product growth in the commercial business would be higher than these amounts.

Our current expectations for the growth rates for our main categories for total revenue in 2012 are as follows: Network management, which includes log and event management, is expected to grow by approximately 21% to 26%, which is consistent with our expectations from the first quarter call; storage and virtualization is expected to grow by approximately 33% to 38%, which reflects an increase from our expectations on the first quarter call; and systems and application management, which includes our last 4 acquisition of the Web Help Desk product, Rove, EminentWare and DameWare, is expected to grow by greater than 130%, which represents a significant increase from the expectations that we had at the end of the first quarter.

This concludes my prepared remarks. Thank you very much. Now I'll turn the call back to Kevin.

Kevin B. Thompson

Thanks, Mike. We believe, as evident by our results in the second quarter of 2012, we are gaining traction across the new areas of the IT management market, which we entered over the last 18 months. We believe that SolarWinds is rapidly becoming known by IT pros as an IT management company, which has a suite of products that are unique in their ability to solve a wide range of performance management challenges for IT pros and organizations of all sizes.

We also believe that we have made solid progress in expanding the promise of the SolarWinds brand of easy-to-evaluate, easy-to-implement and use, yet powerful and affordable products, the systems and application management, virtualization management and storage management markets. We believe that one of the keys to the consistent increase in our new license revenue growth rates over the last 6 quarters has been the success we have had in expanding our model beyond network management to a number of additional IT management markets. We believe that this success has been tied to our commitment to the unique aspects of our model, that we believe give us a significant competitive advantage.

In all of our market areas, our approach is consistent. We focus exclusively on the IT pros who will use our products every day to manage and solve the issues that arise in their IT infrastructure. We understand their challenges and how they want to address these challenges. We believe that we are changing the expectations that IT pros have for the enterprise software experience. Beginning with how IT pros research, fund and evaluate solutions to ultimately have a purchase, implement and use those solutions to get their job done each day.

We believe that IT pros deserve to work with a software company that is laser-focused on making IT pros jobs easier, not more complex. IT pros deserve to be delighted by the solutions they use and by the relationship of the software company who provided the solutions. In SolarWinds, we call this concept unexpected simplicity, it is one of the cornerstones of our business model and is consistent across all of our market areas. As we stated on our first quarter earnings call, our strategic focus in 2012 is on continuing to deepen our product offerings and our relationship with IT pros in the areas of systems, applications and network management.

The July 24 acquisition of Web Help Desk, which provides us with an IT helpdesk solution, specifically designed for IT pros, is a great example of how we expect this strategy to continue to unfold. We believe that our systems and network management customers and prospects will be very interested in purchasing a very affordable, easy-to-use IT helpdesk product, which is focused on their specific needs.

In addition, we believe that our current systems and network management customers, will find the unique integrations that we plan to provide between SolarWinds Web Help Desk and many of our other products to be compelling. And overall, we believe the affordability we have created with our planned pricing, the ease of use and the strong functionality, specifically focused on IT helpdesk only, versus helpdesk for customer service organizations, which we believe is unique in the market, will provide SolarWinds Web Help Desk with a strong and competitive advantage.

To be even a little more specific, we are not planning on competing with customer service helpdesk offerings from companies like BMC and ServiceNow, as these products are expensive, complex and must be sold to the VP of customer support or in some cases, even a higher level business executives. This is not consistent with our model. Our model is based on selling directly to an IT professional, who has some amount of discretionary budget, and the ability to make buying decisions to solve current and ongoing problems that must be solved right now. We believe the SolarWinds' IT helpdesk meets this definition and will work well in the SolarWinds model.

We continue to search for additional product acquisitions in the areas of systems, application and network management. We believe that we have been disciplined in our acquisition approach of searching for additional products to meet our criteria of easy-to-evaluate, easy-to-implement and easy-to-use, yet powerful and scalable products to solve problems which IT pros and organizations of all sizes face on a daily basis. And intend to maintain this discipline in evaluating future acquisitions.

In addition to our acquisition activities, we are actively working on developing several new product offerings in the network and systems management markets that we currently expect the release by early 2013. We believe that over the last several years, we have become one of the leading players in the network management market, with a rapidly growing list of Network Management customers that few in the industry can match. We have driven strong growth in this portion of our business, with network management, new license sales growing at an average rate of 25% over the last 4 quarters, which reflects a much faster growth rate than that of the overall network management market.

However, we believe that there's an opportunity to further accelerate this growth rate. Our network management product portfolio is comprised of a set of robust and mature products, that solve the great majority of the network management challenges faced by IT pros at a price point that is much lower than other competing products. In our opinion, based on discussions with thousands of IT professionals, we have evolved and expanded our network management product portfolio much faster than any of our competitors to deal with new issues in IT infrastructure management. As a result, we believe that there's an opportunity for us to significantly increase our lead into network management.

During the second half of 2012, we are planning to increase our level of activity in the network management market to take advantage of this opportunity. We will now open up the call for a few questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Daniel Ives with FDR Capital Markets.

Daniel H. Ives - FBR Capital Markets & Co., Research Division

Could you just talk about, on the federal side, I mean, what you're hearing from customers relative to going into other fiscal year ends from your customer conversations?

Kevin B. Thompson

Yes. Just what I said Daniel, if you look at our results for the 6 months of the year, we've had very consistent results in the federal government. Buying activity has been consistent. It's been strong. We had 29% year-over-year growth in the second quarter. So at least for the first 6 months of the year, we haven't seen any real indication that this year is different than any other. I think we have our view, at least right now including our outlook, that we're going to be basically flat in the third quarter, it was last year, and then we had a very strong U.S. federal quarter in the third quarter of 2011, so we still expect good results in the third quarter of 2012. Right now, we're not forecasting growth. But our results for the year have indicated that it's been a pretty consistent year, that buyers know what budget they have and they've been able to get that budget spent in a time frame that is consistent with their expectations. So we don't really feel -- the only thing that I would say is that wouldn't change as we move into the third quarter.

Daniel H. Ives - FBR Capital Markets & Co., Research Division

And just lastly, do you find, I mean just given the success that you've been having, that competition is changing in terms of more vendors trying to come downstream to compete with you?

Kevin B. Thompson

We really haven't. And it really goes back to what we've said a number of times, is that the larger vendor that we compete with, have no ability to really come down and compete with us in our go-to-market model. Their products are heavy, they're old, they're hard to implement, they're expensive, they've got large outside sales forces that want to close very large deals, sell them directly to the CIO. We obviously believe that's an outdated and old model of selling, but most of these guys haven't been willing or able to make that change. It is not something you could do in 6 months or a year. It's a fundamental change in the way they go to business. But I just don't believe they're capable of, it goes against their DNA and requires such a different in how you think about a market, how you approach a market, how you find buyers and communicate with buyers that we didn't see no indication over the last 5 years, they've got any ability to do that. There's a number of smaller companies that are trying to adopt the SolarWinds' model, and we actually hope a lot of them will be successful, because it will give us more companies that we can acquire, where we don't have to make as much change. But the challenge there is we've spent 6 years honing this model. We're changing it every 90 days, because one of the things we think we do better than most other companies is we thrive on change. We thrive on adopting our model and making ourselves uncomfortable every day and look for new ways and better ways to do what we do. So we're not going to stand still and let people catch us.

Operator

We'll go next to Keith Weiss with Morgan Stanley.

Keith Weiss - Morgan Stanley, Research Division

You guys have grown license revenues about 40% year-on-year in the first half of the year. And if I look at the guidance, and it looks like you guys expect that growth rate to slow overall to about a 20% in the back half at the midpoint of your guidance range. So my first question was just outside of FX, because, obviously, it's a pressure on a lot of guys, anything in particular for that more conservative outlook into growth in the back half of the year? It really does sound like you have most things operating on all cylinders right now.

Kevin B. Thompson

So look, I think this is going well. We've had a great start to the first 6 months of the year. And it probably goes back to Mike's comments. U.S. federal is a meaningful percentage of our license revenue, about 20% is what we projected in the third quarter. We're not projecting growth there. So that is an area where we're not really projecting any growth in the third quarter. And we've got a similar view in the fourth quarter, because I don't think anyone really knows what's going to happen in the fourth quarter, given we're in an election year. So we've taken a pretty rational view, we believe. Federal growth and that's bringing down kind of an overall growth rate. As Mike indicated, we still think commercial is going to grow in the low- to mid-30% range. So really not changing too much our expectation moving forward with what we've seen in the first 6 months of the year. And most of maybe the difference between 40% and low- to mid-30s is really based on a much stronger U.S. dollar, which means our international revenues are going to translate into a little bit less in dollars. Knowing demand has been strong and our business is operating well, we're going to continue to take a rational view of what we believe our growth can be. Hopefully, we can continue to deliver numbers that are in excess of our expected growth, but we're not going to get out in front of what we see happening in the market right now. And we're still outgrowing almost everyone else we're looking at. And so I think we've got a good strong forecast out there, but one that we believe is rational and that we can meet.

Keith Weiss - Morgan Stanley, Research Division

Got it. And then in terms of the European growth particularly Germany, you saw a really nice -- I mean, 100% new license growth there. I just wanted to check, do you still, guys -- you still haven't rolled out international versions or the German language version of your products for the internationalized website, that's still on the com, right?

Kevin B. Thompson

Yes. The localized version's in German. SolarWinds Network Performance Monitor and SolarWinds NetFlow Traffic Analyzer are going to come late this year and early next year. We have increased our web presence in Germany. We've got more to come, a lot more to come on the web presence in Germany as we move through the back half of this year, so that work has really just started. We're ahead in Japan on where we are in Germany. I think the growth you're seeing reflects a couple of things. So one, I've said this many times, I have not been happy for a long time with our performance in Germany. I believe that ought to be a very large market for us, it ought to be larger than the U.K. It's still not even close to as large as the U.K., even though it's had a really great growth quarter in the second quarter. Also our DameWare acquisition, that product line is doing really well in Germany. So remote helpdesk is something that is really being used pretty aggressively by German IT professionals. So that's really been a nice contributor to that German growth. And the great thing about that is, is it's adding a bunch of sysadmins in Germany to our customer base, and we've got a lot of product now to sell to sysadmins. So hopefully, we can continue to do our job. The German market is going to continue to be a strong driver for growth for us in Europe because we're not even close to as large as we ought to be in Germany today, but we're finally making progress. And we're pleased with what the company has been able to get done, they have been pushing them hard for a long time now and I think we're probably doing a really nice job.

Operator

And we'll go next to John DiFucci with JPMorgan.

John S. DiFucci - JP Morgan Chase & Co, Research Division

First question for Mike. Mike, its seems like your internal operations continue to hum along as at least the same level as historical efficiency. As your expansion into new product areas and new geographic regions gain steam, and it sounds like that's happening, actually, happening more today, have you experienced anything that makes you think you'd have to change that model to suit either different product areas or new geographic regions?

Michael J. Berry

I'd have to say the answer to that would be no. We don't think we need to change it. One of the things that Kevin talked about is we're always looking at every 90 days what the model looks like. A big piece of that, John, is what are the new acquisitions that we've done, what are the new areas. We've talked about our increased investment in Q3 focused on the sales teams internationally. So we look at it every 90 days, nothing that we see makes me think that it's going to change any of those fundamentals of the business going forward.

John S. DiFucci - JP Morgan Chase & Co, Research Division

And that's what I thought you'd say, but I just wanted to hear you say it to me. Just a follow-up for Kevin. Kevin, so far, software results, good software results from other companies have been, simply, they weren't as bad as expected. But you just put up the best license growth that we have seen since the March 2010 quarter, and that was off the March 2009 quarter, which was the easiest comp hopefully you'll ever see. The macro is not a secret out there and in Europe, especially, and I know you just hit on Germany. But just generally in Europe, is it more -- it sounds like a lot of it has to do with this year's current size in Europe and what you think it can be. But is there something else there, too? I mean, do you expect to see as things toughen there -- it's hard to say you're going to be -- you're going to do better than you would otherwise, but are you better positioned? Is SolarWinds better positioned in an environment like that, at least, relative to your competitors?

Kevin B. Thompson

I think it's a couple of things when you look at our European performance. So one, we really built a great team in Europe over the last 2 years. We moved a young guy from the U.S. to Europe about 18 months ago, named Dan Gamwell, to be the VP of Sales in EMEA. And he has really done an outstanding job of building the management team, in building a sales team. He really believes in what we do, and absolutely doesn't believe that you got to change our model in any way to be successful in Europe. And that's one of the challenges you always have when you build a European team, that they want to do it the European way. And our team believes in the SolarWinds way that, that model is going to work globally. So they really did a nice great job of just executing, executing, executing, keeping their head down, not even worrying about the exchange rate, not worrying about the environment, but believing that we -- our product solves problem that have to be solved. That no one in the industry can compete at our combination of ease-of-use, power, scalability and price, and just driving that message home every single day. And just executing better and better against a pretty constant level of demand that, while growing, we haven't really pushed it hard to grow it because we knew we could execute better against the demand we had. So why spend money to grow that demand in Europe until we were executing at a level we are happy with against that demand. We're just now starting to look at it as, okay, we're getting close on the execution side, now let's start to grow demand. So we're not ignoring the macro uncertainly in Europe. However, we believe we're better positioned to be successful than our competitors, that the problem have to be solved and we can solve them less expensively than anyone else. We think we're going to continue to grow in Europe, even if the environment gets a little bit tougher. But we're being cautious, we're looking at it and we're making sure that we're not getting too excited about what we're seeing. But we've just had a nice job of executing and have a really great team.

Operator

And we'll go next to Steve Ashley with Robert W. Baird.

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

Wondering if you could give us any qualitative comment on just the size of the government pipeline this year versus a year ago as you head into the third quarter.

Kevin B. Thompson

Yes. What I'd say is that we've had, and you can see that in our results for the first 6 months of the year, we've had a very consistent, very solid start to the year in U.S. federal. One of the better starts to a year that we've had in a long time, especially when you look at the consistency and linearity of that sales performance. So what I would say is I think our pipeline are where they need to be to get to our third quarter number. That they are of good quality. That our federal sales management team, which we put in place a couple of years ago now, and have done just a really nice job of building a much more consistent business. And they are doing a really nice job of managing those pipelines to support our outlook. That's all I can talk about the size of the pipeline, but I'd say what we've got in place is what we need in place to get to our outlook for Q3 and in the rest of the year.

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

And just maybe a higher level question, as we look at the new businesses that you're now gaining traction and getting success, is there any difference in the way that you'd drive and shepherd people to your website versus how you had to do it for the core networking business?

Kevin B. Thompson

I'd say there isn't really any difference, but I would say is a lot of our -- the methods we're using are evolving. If you go back 4 years ago, obviously, social media wasn't something people were really thinking about as they thought about demand generation. And so there's a lot of those techniques that were deployed across all our product areas including network management. Yes, we are definitely focused on building awareness in these new market areas at even a higher level than we are in network management because the brand is not as well known. But things like patchzone.org, which is kind of the next-evolution for us in demand generation, where we are talking about all the different third-party patches that are coming out, a lot of pretty constant basis to a number of products. It's just a way to engage with IT professionals that we weren't necessarily doing before. It's different than community because we're trying to provide a service that we don't charge for that we think delivers a lot of value to IT professionals because of the unique ability we have, to be aware of a bunch of things we think these guys need to know about. So our engagement model is evolving, but it's across all of the areas, not just the new areas.

Operator

And we'll go next to Rob Owens with Pacific crest.

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

Just wondering if you guys could give anymore metrics around cross-selling right now? Anything with regard to how much of new license growth is coming from existing customers and following orders. I know it's been a newer initiative for you, but any more clarity or color you could provide?

Kevin B. Thompson

Yes. I actually find it hard to believe that anybody would ask for anymore metrics than the ones we've provided, but -- we provided a lot. So let me give you a little color without giving you specific numbers. So the great -- still the great majority of our license revenue is being driven by new customers that we're adding to our customer base. However, we are seeing very nice growth in cross-sell. And I mentioned to Michael, we had really impressive acceleration in Q2 in the sale of larger versions of our product to existing customers, because we're doing a much better job of just communicating with our customers on a very frequent basis about all of the things they can do with a product they already own. Because one of the things we've learned is, maybe someone has been using SolarWinds NPM for a couple of years, but they still don't know all the things that product can do and all the devices they can manage or the way they can manage devices. So we're doing a better job of educating them, that's one of the things our marketing team is doing. And we're going to -- we have a long way to go on that, so we're nowhere closer to being done. But we are making progress at beginning to get at that $6.2 billion market opportunity that exists in our own install base. And that was the number we gave you back at the Analyst Day, it's bigger now. We'll update you at the next Analyst Day, because we've added a bunch of products, so that opportunity is growing because we're growing it faster in a way by selling into it. But we're doing much better. And I feel good about where we are, but I know we've got a long way to go. And I'm pushing hard for us to continue to find new and creative ways to engage with our customers in ways they find valuable, not just ways we find valuable. So stay tuned, we intend to do some pretty interesting things over the back half of the year as we move into next year, begin to communicate in new and different ways. So we've got some stuff planned that we're not ready to talk about yet, but we will start to roll out, hopefully, in the back half of the year.

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

Great. Now I realized you guys do multiple thousands of transactions a quarter, but any sense if there's any change in characteristic of kind of who the average buyer is SMB versus large enterprise? Do you find yourselves pushing up market more given the microenvironments? And were there any large transactions in the quarter?

Kevin B. Thompson

So I'll let Mike talk about transactions. What I would tell you is there's been no change in really that customer base we're selling into. If anything, with some of the products we've added like DameWare and Rove IT, which had very low average sales prices in the hundreds of dollars and not even in the thousands of dollars. We are being more successful than we've ever been with both small and large customers. Yes, we've got a very large product portfolio today. We're closing more transactions today, over $25,000 on the license side, than we ever have. But we're also closing more transactions today than we ever had for $500. So I think our product strategy has been one of continuing to grow the number of customers we have in organizations of all sizes at as fast a pace as we possibly can, while at the same time, having the ability to attach more products to an invoice without causing friction and without slowing the deal cycle down. So it's been a really consistent focus by our entire organization in not letting that dynamic change of selling to all organizations of all sizes, selling to the entire market. We're not changing that, we don't want to change that. You can see that in our average transaction size, which has only grown slightly over the last year.

Michael J. Berry

And Rob, I keep that in mind that, yes, we do, do more,larger deals, but we also do more smaller deals. A lot of that has been driven by the acquisitions. And then direct answer to your question, no, we did not have any transactions with license revenue greater than $500,000 in the quarter.

Kevin B. Thompson

Or even close.

Operator

We'll go next to Aaron Schwartz with Jefferies.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

You talked quite a bit about the improved linearity in the quarter, it seemed to be an area you were pleased with. Could you sort of relate that to the install base sales effort you made? Is that helping linearity or sort of deal cycles a little quicker with that install base sales team?

Kevin B. Thompson

Look, it's always easier to sell to the customer you have versus the new customers, especially if you've made them incredibly happy and delighted them with the products that they bought from you previously, which is one of the things that we try to do. And we don't get that perfect every time, but we did it right more often than not. So I'd say the deal cycle is probably slightly shorter. I think the improved linearity goes to lots of things. Our sales management team, particularly in North America, is a very creative group. And because they've got a larger team here, they can try new things that we then move out to the rest of the organization. But they do a lot of pretty cool stuff to try to drive linearity in the sales teams, and it's worked. It doesn't mean we're going to always be as linear as we were this quarter, and we didn't have perfect linearity. We're not yet to the 1/3, 1/3, 1/3 which I'd love us to get to someday. But we definitely have one of the most linear quarters in both fed and commercial that we've ever seen, which is great. And I'd attribute that to just how my sales management team is managing their teams, how our marketing team is trying to drive, downloads more consistently across the quarter and remove some of the peaks and valleys. We're not going to always get that perfectly right, but we're working pretty hard to do it.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Okay, great. And the second question I had was with the international sort of expansion. I know in some markets, you've been successful using resellers and some distributors here. Seemingly, maybe to grease the wheels before you fully enter with localized products. How do you view sort of conversion rates as you do follow up with localized products and sort of build out the inside sales team, where you already have a presence through maybe some select reseller model?

Kevin B. Thompson

I think it's going to be something we're going to learn. Really, the only place we've done it quite that way is in Japan, where we have -- went and build out a network of partners before we entered the market. We have a couple of Japanese-speaking reps that sit in one of our Asia-Pacific offices, so we do have a couple of inside sales reps that Japanese. But we're really working with the partner to build awareness and build demand, more because of the culture of that market. In almost all of the other markets that we've gone into, we've gone in where we're generating downloads, we put partners in place as fast as we can when we move into a new market. Because one of our goals is to take all the friction out of the buying process. So if the buyer typically buys through a local partner, we don't want to try to convince them to buy direct, because that's not how they do it. And that's going to add a week or 2 or 3 to the process. Instead we want to make sure they can buy through whatever means they want to buy. So that's really the goal on the channel side. Our channel is growing nicely, continuing to generate a growing amount of demand that they're creating, which is great, as well as other really nice job of fulfilling demand that we generate when the customer wants to buy through a local partner.

Operator

And we'll go next to Greg Dunham with Goldman Sachs.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Wanted to follow-up on John's model question, which I know you guys aren't changing, for good reasons. But did want to hit on the R&D component. What are the things that you guys are doing from an R&D perspective to make sure you are as efficient as you have been from a go-forward perspective given all the product increases? And should we think about R&D as a percentage of sales as continuing to be less than 10% long term? And then a follow-up would be -- well, that's my first question.

Kevin B. Thompson

Okay. So let me talk about the R&D process and I'll let Mike talk about R&D as a percentage of revenues. So what I would say is, look, I think we have developed a very unique model for how we build product. Said a lot of great things about a lot of our management team today, but my R&D management team has been quite a leader in innovation in this model over the last 5 years. Literally, every 90 to 120 days, they challenge everything about how they build product. They're trying to get more and more efficient and to make sure that they can support this very large product portfolio we've assembled both by building products and acquiring product, and that they can do that in a way that would continue to release valuable new releases of almost all of our products on an every-6-months basis. Because we know that one of the reasons we have such great customer retention is because we put new technology that helped our customers get their job done easier in their hands on a very frequent basis. So we have a global development model, I don't call it offshoring, because it's not. It's a global development model, where every location I have in the world is an integrated part of how we build product. Every location I have in the world in Chennai, in Brno, in the U.S. is building -- and in part of building the most important -- probably one of the most important products that we have and are literally integrated on a daily basis in terms of how they build technology. And it's that willingness to constantly challenge how we build product and change it, I think, that's made us be able to do what we've done on the product side, add all these products and not have R&D as a percentage of revenue really increase at a really rapid pace. And I'll let Mike talk about kind of how we think as we move forward.

Michael J. Berry

Yes. Greg, so you mentioned 10%. Historically, it's been anywhere between kind of 9.5% up to 10%, but right in that kind of upper 9%. I would expect that to stay relatively consistent with that. Keep in mind that acquisitions will move that a little bit. So due to some transactions that have a higher R&D component, you may see that tip over 10%. But I think long term, as we talked about at Analyst Day last year, we expect it to be right around that 10% number.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Okay, great. And then I guess one quick follow-up on M&A. You've done, I think, 7 acquisitions now in the last couple of years. Do you feel that -- is that the right cadence? Should we expect the same kind of acquisition pace going forward? Is there a digestion period or how should we think about that?

Kevin B. Thompson

I think based on the type of acquisitions we've been doing, which have been very small. In some cases, we literally have kept no employees. In other cases, like the Web Help Desk, we're going to keep less than a handful of employees. If we continue to find companies like that, and that tends to be what we find if we're looking for easy-to-use products that have great architecture, that we can just slipstream into our model, then I think we can do an acquisition a quarter because it really -- not that there's no integration effort, but we've gotten pretty good at. And the team knows how to do it and they're up for the challenge. And so if we can find a great company to buy, that meet our model, I indicated, we're going to continue to be very disciplined in what we look out. And then I think we'll continue to try to find things to buy. As I told our company a couple of weeks ago, our acquisition strategy is we're shopping with an intent to buy. I don't go to the mall to shop, I go to the mall to buy. And if we're out looking for acquisitions, we're not wasting our time looking in windows. But we're going to be very disciplined and we're only going to buy things that meet the model. It's why I think we've been a successful as we have. The products we bought have for -- almost at 100% have really slipped into the model very nicely. And we haven't had to have spend a lot of time retrofitting them. I'd say the one acquisition we've made, it was a little bit harder, it was the first one we did, which was a storage management acquisition. And we learned a lot from that one. Great product. We've worked very hard at it. We like the product now, but it was much, much harder to get that product to sit into our model, and we learned a lot from that. And every acquisition we've done since, the products have really slipped into the model very easily. So if that's what I find, there's no reason we can do one quarter. I mean, I'm fine one a quarter, but there's a lot of technology we can add that we believe we can easily attach through existing sales or sell back into our customer base. And that's really the strategy. Buy things that we can sell into the base or things we can attach on an invoice to a download of MPM or APM or SolarWinds Application Performance Monitor. Those are the kinds of things that I'm looking for.

Operator

And we'll go next to Kirk Materne with Evercore Partners.

Stewart Materne - Evercore Partners Inc., Research Division

I guess just real quickly, Kevin, on APM, as you guys have gotten bigger and that business continues to grow, I guess, are you just fulfilling demand part of the market that was just ignored by the larger vendors or do you guys think you're now at a point where you're taking some share? I would just love to get your sort of view on that.

Kevin B. Thompson

It's a great question. So what I would say, Kirk, is that there's definitely a large part of the market where there, we're literally were doing almost nothing or nothing as it came -- as it's related to looking at performance of applications. Mainly because, as you know, the most of the products that are out are really hard to use or expensive, much larger than most mid-market companies need them to be. The minimum of the companies didn't know how to the application performance is -- how is the performance, is my user being affected in any way, and if they are, give me a clue as to what's going on and then I'll dig into it and figure out what the problem is. That's basically what our products do. Now those products are really good and they're getting much, much better. They're solving in a larger, larger percentage of the problem. So I think, really -- mainly, we are meeting a greenfield need and we think that's a very large one. But we're also getting deployed alongside a lot of the other products from some of the other vendors, because there are things we just do really well and really easily and very cheaply that the other guys don't do very well. And to the extent they do it, it's hard. So it's a lot like network management. We tend to deploy alongside a lot, and so are we reducing the opportunity for other guys in an account? Maybe. But it's not really a displacement conversation we're having.

Operator

And we'll take our final question from Scott Zeller with Needham & Company.

Scott Zeller - Needham & Company, LLC, Research Division

I'm actually going to go back to Rob's question earlier about install base sales team and try again. Could you quantify, I think, since the second full quarter for that team being in place, could you quantify whether they're accelerating in their production or is it continued solid production?

Kevin B. Thompson

Yes, you're right. It's second quarter we've had them in place, just in North America. As part of the success we've seen both with the install base team as well as the teams that are focused on specific products like virtualization, storage and application, which are all from just in North America right now, our intent is that over the last half of the year to roll those teams in Europe and Asia and actually hire some reps and put those teams in place, because the same opportunity exists. So what I would say is we're getting better at driving demand from the install base, that some of that demand is getting fulfilled by that install base team, but also our geography-based teams fulfill from that demand also. So those numbers are growing. We're doing better at it, we still have lots and lots of opportunity. And we're nowhere close to the point that I'm satisfied, but we are making really solid progress.

Scott Zeller - Needham & Company, LLC, Research Division

And quickly on Japan, you'd mentioned in your prepared remarks that you did have some traction there. But could you give us an update again on how material that revenue is at this point? And how much of the localization of Japan is complete at this point?

Kevin B. Thompson

Yes. So we have one product, which is SolarWinds Network Performance Monitor, which is obviously our flagship technology. We are very close on getting SolarWinds NetFlow Traffic Analyzer, which is our highest attaching module to SolarWinds Network Performance Monitor localized. So hopefully that happens by late in the year or late next. And so that really gives us 2 very solid products, really, the 2 products that we built this company on, it's an engineer's tool set, has really launched in that Japanese market with. We've done a nice job of building out a really great partner network because that partner network is expanding, as other partners are coming in and actually practically searching us out now. We've got them going to the website launch. You ought to go and look at solarwinds.com/jp. It's a really nice start and we're going to be adding a lot of pages to that site as we move through the rest of the year. It is very immaterial. We are really, really early in the growth in Japan. It's so small that I wouldn't call it and contributor to growth. And we really don't have an expectation that it will be until we get the next year. But we are doing better. We're driving more downloads. We're getting more engagement. The awareness is building. So we're on track to get accomplished what we wanted to get accomplished this year. And we continue to feel good about the opportunity in that market, but it's going to be -- the opportunity builds over time, it's not going to be all of a sudden one quarter it becomes material. It's going to get, hopefully, larger and larger every quarter. Just like what we've done in Germany. We've been working hard at Germany for at least 3 years now and really in the last 2 quarters, we've seen the traction start to build and the momentum start to accelerate. And hopefully, we'll do it faster in Japan because we've learned some things, but we're pretty patient and we've got very rational expectations built into our outlook. Thank you.

Michael J. Berry

All right. Thanks, everyone for joining us on the call today. That concludes our second quarter earnings call.

Operator

Again, that does conclude today's presentation. We thank you for your participation.

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