SolarWinds Announces Third Quarter 2013 Results

Marketwired

AUSTIN, TX--(Marketwired - Oct 29, 2013) - SolarWinds® (NYSE: SWI), a leading provider of powerful and affordable IT management software, today reported results for its third quarter ended September 30, 2013.

  • Total revenue for the third quarter of $87.9 million, representing 23% year-over-year growth.
  • Combined maintenance and subscription revenue for the third quarter of $53.5 million, representing 42% year-over-year growth in recurring revenue.
  • GAAP diluted earnings per share of $0.30 and non-GAAP diluted earnings per share of $0.41 for the third quarter.
  • GAAP operating income of $31.9 million, or a GAAP operating margin of 36%, and non-GAAP operating income of $43.9 million, or a non-GAAP operating margin of 50% for the third quarter.

Financial Results
SolarWinds reported total revenue for the third quarter of 2013 of $87.9 million, a 23% increase over total revenue for the third quarter of 2012. Total recurring revenue, comprised of subscription revenue of $3.2 million and record maintenance revenue of $50.3 million, reached $53.5 million, increasing by 42% over the third quarter of 2012 and now represents over 60% of total revenue. License revenue increased to $34.4 million for the third quarter of 2013, driven by commercial market new license sales growth of 5% partially offset by a 22% decline in U.S. Federal new license sales. 

On a GAAP basis, diluted earnings per share were $0.30 for the third quarter of 2013 compared to $0.29 for the third quarter of 2012. Non-GAAP diluted earnings per share were $0.41 for the third quarter of 2013 compared to $0.37 for the third quarter of 2012.

Net cash provided by operating activities was $42.0 million for the third quarter of 2013 compared to $34.9 million for the third quarter of 2012, representing a year-over-year increase of 20%. Free cash flow was $42.3 million for the third quarter of 2013 compared to $37.1 million for the third quarter of 2012, representing a year-over-year increase of 14%. Cash, cash equivalents, and investments at the end of the third quarter of 2013 were $222.9 million, an increase of $26.7 million from the end of the second quarter of 2013.

The financial results included in this press release are preliminary and pending final review by the company and its external auditors. Financial results will not be final until SolarWinds files its quarterly report on Form 10-Q for the period. Information about SolarWinds' use of these non-GAAP financial measures is provided below under "Non-GAAP Financial Measures."

Recent Business Highlights

"Our third quarter results serve to highlight some of the improvements we made in our business," said Kevin Thompson, SolarWinds' President and Chief Executive Officer. "The focus we placed on capitalizing on our opportunity within network management drove the highest individual and collective commercial market growth of SolarWinds Network Performance Monitor, Netflow Traffic Analyzer, and Network Configuration Monitor in six quarters. Within our systems management product portfolio, both our flagship Server and Application Monitor and Virtualization Manager saw solid year-over-year commercial market growth, reflecting the efforts we made to increase our relevance to sysadmins and penetrate the significant opportunity we believe exists for SolarWinds in systems management," continued Thompson.

"In addition, the efforts we have made to expand the depth of our EMEA sales leadership team resulted in stronger results than we had expected for the third quarter growing over 12% sequentially. Our global commercial market business performed well, showing growth acceleration across many product areas. The one main area of disappointment in the quarter was our U.S. Federal sales results. Despite a strong start to the quarter, we believe the recent government shutdown prevented a number of deals from closing this quarter, which negatively impacted our overall third quarter results. We are focused on continuing the momentum that we have built in our commercial business and believe that our U.S. Federal business will get back on track now that the U.S. Federal government is back at work. We also are planning to continue to broaden the scope of IT management problems we can address and the number of IT Pros to whom we are relevant," added Thompson.

Recent SolarWinds business highlights include:

  • The company recently completed the acquisition of privately held Confio® Software, the makers of the award-winning Confio Ignite® database performance management software. SolarWinds acquired Confio, which is headquartered in Boulder, CO, for $103 million in cash. Given the importance of databases to the levels of service that IT organizations are expected to deliver, SolarWinds believes that a significant opportunity exists to deliver an expanded IT infrastructure management portfolio integrated with robust, heterogeneous database performance management.

  • SolarWinds concluded a search for a key member of the leadership team, and selected John F. Rizzo as SolarWinds' new Executive Vice President, Chief Marketing and Customer Officer, effective November 4, 2013. Mr. Rizzo, formerly CMO of Jive Software, will report to Kevin Thompson, president and CEO, and will help drive the evolution of SolarWinds' marketing strategy, as well as the company's new, focused customer experience initiative. 

  • During the third quarter, SolarWinds released several new versions of their core products including the latest release of Server & Application Monitor (SAM), which extends the product's capabilities to database monitoring. The latest version of SAM provides sysadmins, DBA's and SQL developers with instant visibility into Microsoft SQL Server performance through AppInsight for SQL. SAM also features a new baseline threshold calculator for identifying abnormal server and application performance and an extensive dashboard for tracking IT asset inventory. In addition, Virtualization Manager now integrates with SAM, providing comprehensive monitoring and visibility for the entire virtualized application stack -- applications, virtual machines (VMs), hosts, clusters and datastores. The company also began aggressive investment to accelerate product development. The investments are designed to allow the company to more rapidly enhance its product offerings based on the needs of IT Pros with a number of new product releases and advances. 

  • SolarWinds products and overall corporate performance were recognized, once again, by its users and the industry. Most recently, the company was named one of Network World's "Ten Most Powerful Companies in Network Management." Forbes featured SolarWinds on its "Best Small Companies in America" and "Fastest Growing Tech Companies" lists. And, SolarWinds Server and Application Monitor was named 2013 Market Leader for APM Software by IT Brand Pulse based on its survey of IT Professionals conducted in September 2013. In addition, N-able™ by SolarWinds was named a 2013 Tech Innovator by CRN. The win marks the second consecutive year N-able has won the top spot in the managed services category.

  • SolarWinds also announced changes in its financial leadership with two internal promotions during the quarter. Jason Ream was named Executive Vice President and Chief Financial Officer and Bart Kalsu was named Executive Vice President and Chief Accounting Officer.

  • SolarWinds initiated a $50 million share repurchase program, reflecting the management team and board of directors' confidence in the long-term strategy of the company.

"Looking ahead, we continue to be excited about the significant opportunity that we see in IT management. To target that opportunity, we increased the level of product development, marketing and sales investment in our business as we moved through the third quarter. We believe those investments drove an improvement in growth in our business, especially for our network management products, during the quarter," said Jason Ream, SolarWinds' Executive Vice President and Chief Financial Officer. "Moving into the fourth quarter, we have continued to invest in our business at an accelerated pace in an effort to capitalize on our market opportunity and build upon the early momentum we believe we have created," added Ream.

Financial Outlook
As of October 29, 2013, SolarWinds is providing its financial outlook for its fourth quarter and full year of 2013. The financial information below represents forward-looking non-GAAP financial information, including an estimate of non-GAAP operating income as a percentage of revenue, and non-GAAP diluted earnings per share, for the fourth quarter of 2013 and for the full year 2013. These non-GAAP financial measures exclude, among other items mentioned below, stock-based compensation expense and related employer-paid payroll taxes. SolarWinds cannot reasonably estimate the expected stock-based compensation expense and related employer-paid payroll taxes for these future periods as the amounts depend upon such factors as the future price of SolarWinds' stock for purposes of computation. In addition, costs related to non-recurring items and acquisitions are not costs that SolarWinds can estimate because they are a function of what non-recurring items and acquisitions, if any, occur and the kind of costs incurred in connection with any such non-recurring items or acquisitions.

Financial Outlook for the Fourth Quarter of 2013
SolarWinds' management currently expects to achieve the following results for the fourth quarter of 2013, which includes the impact of the Confio acquisition completed on October 7, 2013:

  • Total revenue in the range of $90.3 to $92.2 million, or 23% to 25% growth over the fourth quarter of 2012.
  • Non-GAAP operating income representing 40% to 41% of revenue.
  • Non-GAAP diluted earnings per share of $0.33 to $0.34.
  • Weighted average outstanding diluted shares of approximately 77.1 million.

Financial Outlook for Full Year 2013
SolarWinds' management currently expects to achieve the following results for the full year 2013, which includes the impact of the Confio acquisition completed on October 7, 2013:

  • Total 2013 revenue in the range of $329.3 to $331.2 million, or 22% to 23% year-over-year growth.
  • Non-GAAP operating income for the full year representing approximately 50% of revenue.
  • Non-GAAP diluted earnings per share of $1.56 to $1.57.
  • Weighted average outstanding diluted shares of approximately 76.7 million.

Conference Call and Webcast
In conjunction with this announcement, SolarWinds will host a conference call today to discuss its financial results and other business at 4:00pm CT (5:00pm ET/2:00pm PT). A live webcast of the event, including any supplemental information, will be available on the SolarWinds Investor Relations website at http://ir.solarwinds.com. A live dial-in will be available domestically at 800-723-6498 and internationally at +1-785-830-7989. To access the live call, please dial in 5-10 minutes before the scheduled start time. A replay of the webcast will be available on a temporary basis shortly after the event on the SolarWinds Investor Relations website.

Forward-Looking Statements
This press release contains "forward-looking" statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding SolarWinds' financial outlook for the fourth quarter and full year 2013, our belief that our U.S. Federal business will get back on track, our ability to continue the momentum we believe we are building in our commercial business, our ability to continue to broaden the scope of IT management problems we can address and the number of IT Pros to whom we are relevant, the existing opportunity to deliver an expanded IT infrastructure management portfolio integrated with a robust, heterogeneous database performance management and our plans for investments in our business. These forward-looking statements are based on management's beliefs and assumptions and on information currently available to management. Forward-looking statements include all statements that are not historical facts and may be identified by terms such as "believe," "will," "expect," or similar expressions and the negatives of those terms. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the following: (a) the inability to generate significant volumes of sales leads from Internet search engines, marketing campaigns and traffic to our websites; (b) the possibility that general economic conditions or uncertainty cause information technology spending to be reduced or purchasing decisions to be delayed; (c) the inability to expand our sales operations effectively; (d) the presence or absence of occasional large customer orders, including in particular those placed by the U.S. federal government; (e) the inability to increase sales to existing customers and to attract new customers; (f) SolarWinds' ability to successfully identify, complete, and integrate acquisitions; (g) the timing and success of new product introductions and product upgrades by SolarWinds or its competitors; (h) potential foreign exchange gains and losses related to expenses and sales denominated in currencies other than the functional currency of an associated entity; and (i) such other risks and uncertainties described more fully in documents filed with or furnished to the Securities and Exchange Commission, including the risk factors discussed in our Annual Report on Form 10-K for the period ended December 31, 2012 and the Form 10-Q that SolarWinds anticipates filing on or before November 12, 2013. All information provided in this release is as of the date hereof and SolarWinds undertakes no duty to update this information except as required by law.

Non-GAAP Financial Measures
In addition to disclosing financial measures prepared in accordance with GAAP, this press release and the accompanying tables contain certain non-GAAP financial measures. The tables below set forth a reconciliation of each of these non-GAAP measures to a GAAP financial measure that we consider to be most comparable. SolarWinds believes that each of these non-GAAP financial measures provides meaningful supplemental information regarding its performance by excluding certain items that may not be indicative of its core business operations. SolarWinds' management and Board of Directors use certain of these non-GAAP measures to assess operational performance, allocate resources, prepare annual budgets, and determine employee incentive compensation. Accordingly, these measures may provide helpful insight to investors into the motivation and decision-making of management in operating the business. SolarWinds considers free cash flow also to be a liquidity measure that provides important information regarding the cash generated by the business after the purchase of property and equipment that can then be used for, among other things, strategic acquisitions and investments in the business, stock repurchases and funding ongoing operations.

SolarWinds also believes that these non-GAAP financial measures are used by investors and security analysts to (a) compare and evaluate its performance from period to period and (b) compare its performance to those of its competitors. These non-GAAP measures exclude certain items that can vary substantially from company to company depending upon their financing and accounting methods, the book value of their assets, their capital structures and the method by which their assets were acquired.

There are limitations associated with the use of these non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP, do not reflect a comprehensive system of accounting and may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies. Certain items that are excluded from these non-GAAP financial measures can have a material impact on operating and net income. In addition, free cash flow does not represent the total increase or decrease in the cash balance for the period.

As a result, these non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for, the most comparable GAAP measures. SolarWinds' management and Board of Directors compensate for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reviewing the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measure. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to their most comparable GAAP financial measures that are set forth in the tables below.

About SolarWinds
SolarWinds (NYSE: SWI) provides powerful and affordable IT management software to customers worldwide from Fortune 500 enterprises to small businesses. In all of our market areas, our approach is consistent. We focus exclusively on IT Pros and strive to eliminate the complexity that they have been forced to accept from traditional enterprise software vendors. SolarWinds delivers on this commitment with unexpected simplicity through products that are easy to find, buy, use and maintain while providing the power to address any IT management problem on any scale. Our solutions are rooted in our deep connection to our user base, which interacts in our thwack® online community to solve problems, share technology and best practices, and directly participate in our product development process. Learn more today at http://www.solarwinds.com.

SolarWinds, SolarWinds& Design, thwack, Confio and Confio Ignite are registered trademarks of SolarWinds and Confio. All other SolarWinds, N-able and Confio marks are the exclusive property of SolarWinds, N-able or Confio, may be pending registration with the U.S. Patent and Trademark Office, and may be registered or pending registration in other countries. All other company and product names mentioned are used only for identification purposes and may be trademarks or registered trademarks of their respective companies.

Copyright © 2013 SolarWinds Worldwide, LLC. All rights reserved.

 
SolarWinds, Inc.
 
Condensed Consolidated Balance Sheets
(In thousands, except share and per share information)
(Unaudited)
 
           
    September 30, 2013   December 31, 2012  
Assets              
Current assets:              
  Cash and cash equivalents   $ 182,831   $ 179,702  
  Short-term investments     23,276     49,276  
  Accounts receivable, net of allowances of $345 and $271 as of September 30, 2013 and December 31, 2012, respectively     45,544     32,506  
  Income tax receivable     745     142  
  Deferred taxes     2,030     1,712  
  Prepaid and other current assets     4,434     3,322  
    Total current assets     258,860     266,660  
Property and equipment, net     8,644     8,342  
Long-term investments     16,819     12,823  
Deferred taxes     3,031     338  
Goodwill     253,605     158,601  
Intangible assets and other, net     94,099     70,631  
    Total assets   $ 635,058   $ 517,395  
Liabilities and stockholders' equity              
Current liabilities:              
  Accounts payable   $ 5,868   $ 4,050  
  Accrued liabilities and other     13,337     14,226  
  Accrued earnout     --     121  
  Income taxes payable     3,334     4,037  
  Current portion of deferred revenue     120,637     97,672  
    Total current liabilities     143,176     120,106  
Long-term liabilities:              
  Deferred revenue, net of current portion     6,685     5,084  
  Non-current deferred taxes     2,729     483  
  Other long-term liabilities     14,255     8,908  
    Total liabilities     166,845     134,581  
Stockholders' equity:              
  Common stock, $0.001 par value: 123,000,000 shares authorized and 75,244,873 and 74,633,412 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively     75     75  
  Additional paid-in capital     243,882     229,277  
  Accumulated other comprehensive income (loss)     1,030     (1,145 )
  Accumulated earnings     223,226     154,607  
    Total stockholders' equity     468,213     382,814  
    Total liabilities and stockholders' equity   $ 635,058   $ 517,395  
                   
                   
 
SolarWinds, Inc.
 
Condensed Consolidated Statements of Income
(In thousands, except per share information)
(Unaudited)
 
         
    Three months ended September 30,   Nine months ended September 30,
    2013     2012   2013     2012
Revenue:                            
  License   $ 34,358     $ 34,008   $ 96,300     $ 90,919
  Maintenance and other     50,283       37,715     137,841       104,515
  Subscription     3,222       --     4,151       --
    Total revenue     87,863       71,723     238,292       195,434
  Cost of license revenue     2,646       2,080     8,263       5,820
  Cost of maintenance and other revenue     2,942       2,511     8,578       7,314
  Cost of subscription revenue     1,511       --     2,046       --
Gross profit     80,764       67,132     219,405       182,300
Operating expenses:                            
  Sales and marketing     25,962       19,146     66,538       53,289
  Research and development     9,558       7,214     25,622       20,814
  General and administrative     13,383       9,288     34,758       26,107
    Total operating expenses     48,903       35,648     126,918       100,210
Operating income     31,861       31,484     92,487       82,090
Other income (expense):                            
  Interest income     91       112     324       307
  Other income (expense), net     (6 )     90     (497 )     41
    Total other income (expense)     85       202     (173 )     348
Income before income taxes     31,946       31,686     92,314       82,438
  Income tax expense     9,123       9,200     23,695       23,394
Net income   $ 22,823     $ 22,486   $ 68,619     $ 59,044
Net income per share:                            
  Basic earnings per share   $ 0.30     $ 0.30   $ 0.91     $ 0.80
  Diluted earnings per share   $ 0.30     $ 0.29   $ 0.90     $ 0.78
Weighted-average shares used to compute net income per share:                            
  Shares used in computation of basic earnings per share     75,371       74,344     75,202       74,038
  Shares used in computation of diluted earnings per share     76,466       76,303     76,580       75,871
                               
                               
 
SolarWinds, Inc.
 
Reconciliation of GAAP to Non-GAAP Financial Measures
(In thousands, except per share amounts and percentages)
(Unaudited)
 
             
    Three months ended September 30,     Nine months ended September 30,  
    2013     2012     2013     2012  
GAAP cost of revenue   $ 7,099     $ 4,591     $ 18,887     $ 13,134  
  Amortization of intangible assets (1)     (2,633 )     (1,766 )     (7,768 )     (5,151 )
  Stock-based compensation expense and related employer-paid payroll taxes (2)     (189 )     (86 )     (502 )     (249 )
  Restructuring charges (4)     (17 )     --       (27 )     --  
Non-GAAP cost of revenue   $ 4,260     $ 2,739     $ 10,590     $ 7,734  
                                 
GAAP gross profit   $ 80,764     $ 67,132     $ 219,405     $ 182,300  
  Amortization of intangible assets (1)     2,633       1,766       7,768       5,151  
  Stock-based compensation expense and related employer-paid payroll taxes (2)     189       86       502       249  
  Restructuring charges (4)     17       --       27       --  
Non-GAAP gross profit   $ 83,603     $ 68,984     $ 227,702     $ 187,700  
                                 
GAAP sales and marketing expense   $ 25,962     $ 19,146     $ 66,538     $ 53,289  
  Stock-based compensation expense and related employer-paid payroll taxes (2)     (1,945 )     (1,209 )     (6,385 )     (3,723 )
  Restructuring charges (4)     (190 )     --       (223 )     --  
Non-GAAP sales and marketing expense   $ 23,827     $ 17,937     $ 59,930     $ 49,566  
                                 
GAAP research and development expense   $ 9,558     $ 7,214     $ 25,622     $ 20,814  
  Stock-based compensation expense and related employer-paid payroll taxes (2)     (1,071 )     (784 )     (3,407 )     (2,295 )
  Restructuring charges (4)     (91 )     --       (99 )     --  
Non-GAAP research and development expense   $ 8,396     $ 6,430     $ 22,116     $ 18,519  
                                 
GAAP general and administrative expense   $ 13,383     $ 9,288     $ 34,758     $ 26,107  
  Amortization of intangible assets (1)     (2,482 )     (1,857 )     (6,320 )     (5,515 )
  Stock-based compensation expense and related employer-paid payroll taxes (2)     (2,470 )     (1,900 )     (7,584 )     (5,564 )
  Acquisition related adjustments (3)     (402 )     (498 )     (1,006 )     (831 )
  Restructuring charges (4)     (529 )     --       (961 )     --  
Non-GAAP general and administrative expense   $ 7,500     $ 5,033     $ 18,887     $ 14,197  
                                 
GAAP operating expenses   $ 48,903     $ 35,648     $ 126,918     $ 100,210  
  Amortization of intangible assets (1)     (2,482 )     (1,857 )     (6,320 )     (5,515 )
  Stock-based compensation expense and related employer-paid payroll taxes (2)     (5,486 )     (3,893 )     (17,376 )     (11,582 )
  Acquisition related adjustments (3)     (402 )     (498 )     (1,006 )     (831 )
  Restructuring charges (4)     (810 )     --       (1,283 )     --  
Non-GAAP operating expenses   $ 39,723     $ 29,400     $ 100,933     $ 82,282  
                                 
GAAP operating income   $ 31,861     $ 31,484     $ 92,487     $ 82,090  
  Amortization of intangible assets (1)     5,115       3,623       14,088       10,666  
  Stock-based compensation expense and related employer-paid payroll taxes (2)     5,675       3,979       17,878       11,831  
  Acquisition related adjustments (3)     402       498       1,006       831  
  Restructuring charges (4)     827       --       1,310       --  
Non-GAAP operating income   $ 43,880     $ 39,584     $ 126,769     $ 105,418  
                                 
GAAP other income (expense)   $ 85     $ 202     $ (173 )   $ 348  
  Acquisition related adjustments (3)     --       31       4       53  
Non-GAAP other income (expense)   $ 85     $ 233     $ (169 )   $ 401  
                                 
GAAP income tax expense   $ 9,123     $ 9,200     $ 23,695     $ 23,394  
  Income tax effect on non-GAAP exclusions (5)     3,183       2,240       9,308       6,456  
Non-GAAP income tax expense   $ 12,306     $ 11,440     $ 33,003     $ 29,850  
                                 
GAAP net income   $ 22,823     $ 22,486     $ 68,619     $ 59,044  
  Amortization of intangible assets (1)     5,115       3,623       14,088       10,666  
  Stock-based compensation expense and related employer-paid payroll taxes (2)     5,675       3,979       17,878       11,831  
  Acquisition related adjustments (3)     402       529       1,010       884  
  Restructuring charges (4)     827       --       1,310       --  
  Tax benefits associated with above adjustments (5)     (3,183 )     (2,240 )     (9,308 )     (6,456 )
Non-GAAP net income   $ 31,659     $ 28,377     $ 93,597     $ 75,969  
                                 
Non-GAAP diluted earnings per share (6)   $ 0.41     $ 0.37     $ 1.22     $ 1.00  
Weighted-average shares used in computing diluted earnings per share     76,466       76,303       76,580       75,871  
                                 
Percentage of Revenue:                                
                                 
GAAP gross profit     91.9 %     93.6 %     92.1 %     93.3 %
  Non-GAAP adjustments (1)(2)(4)     3.2       2.6       3.5       2.8  
Non-GAAP gross profit     95.2 %     96.2 %     95.6 %     96.0 %
                                 
GAAP operating margin     36.3 %     43.9 %     38.8 %     42.0 %
  Non-GAAP adjustments (1)(2)(3)(4)     13.7       11.3       14.4       11.9  
Non-GAAP operating margin     49.9 %     55.2 %     53.2 %     53.9 %
                                 
GAAP net income     26.0 %     31.4 %     28.8 %     30.2 %
  Non-GAAP adjustments (1)(2)(3)(4)(5)     10.1       8.2       10.5       8.7  
Non-GAAP net income     36.0 %     39.6 %     39.3 %     38.9 %
                                 
(1) Amortization of Intangible Assets. We provide non-GAAP information which excludes expenses for the amortization of intangible assets which primarily relate to purchased intangible assets associated with our acquisitions. We believe that eliminating this expense from our non-GAAP measures is useful to investors, because the amortization of intangible assets can be inconsistent in amount and frequency and is significantly impacted by the timing and magnitude of our acquisition transactions, which also vary in frequency from period to period. Accordingly, we analyze the performance of our operations in each period without regard to such expenses.
   
(2) Stock-Based Compensation Expense and Related Employer-Paid Payroll Taxes. We provide non-GAAP information which excludes expenses for stock-based compensation and related employer-paid payroll taxes. We believe the exclusion of these items allows for financial results that are more indicative of our continuing operations. We believe that the exclusion of stock-based compensation expense provides for a better comparison of our operating results to prior periods and to our peer companies as the calculations of stock-based compensation vary from period to period and company to company due to different valuation methodologies, subjective assumptions and the variety of award types. Employer-paid payroll taxes on stock-based compensation is dependent on our stock price and the timing of the taxable events related to the equity awards, over which our management has little control, and does not correlate to the core operation of our business. Because of these unique characteristics of stock-based compensation and the related employer-paid payroll taxes, management excludes these expenses when analyzing the organization's business performance.
   
(3) Acquisition Related Adjustments. We exclude certain expense items resulting from acquisitions including the following, when applicable: (i) amortization of purchased intangible assets associated with our acquisitions (see Note 1 for further discussion); (ii) legal, accounting and advisory fees to the extent associated with acquisitions; (iii) changes in fair value of contingent consideration; (iv) costs related to integrating the acquired businesses; and (v) restructuring costs, including adjustments related to changes in estimates, related to acquisitions. We consider these adjustments, to some extent, to be unpredictable and dependent on a significant number of factors that are outside of our control. Furthermore, acquisitions result in non-continuing operating expenses, which would not otherwise have been incurred by us in the normal course of our organic business operations, with respect to each acquisition. We believe that providing non-GAAP information for acquisition related expense items in addition to the corresponding GAAP information allows the users of our financial statements to better review and understand the historic and current results of our continuing operations, and also facilitates comparisons to our historical results and results of less acquisitive peer companies, both with and without such adjustments.
   
(4) Restructuring Charges. We provide non-GAAP information that excludes restructuring charges such as severance, relocation and benefits and the estimated costs of exiting and terminating facility lease commitments, including accelerated depreciation on leasehold improvements and fixed assets, as they relate to our corporate restructuring and exit activities. These restructuring charges are inconsistent in amount and are significantly impacted by the timing and nature of these events. Therefore, although we may incur these types of expenses in the future, we believe that eliminating these charges for purposes of calculating the non-GAAP financial measures facilitates a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
   
(5) Income Tax Effect of Non-GAAP Exclusions. We believe providing financial information with and without the income tax effect of excluding items related to our non-GAAP financial measures provide our management and users of the financial statements with better clarity regarding the ongoing performance and future liquidity of our business.
   
(6) Non-GAAP Diluted Earnings Per Share Item. We provide non-GAAP diluted earnings per share. The non-GAAP diluted earnings per share amount was calculated based on our non-GAAP net income and the shares used in the computation of GAAP diluted earnings per share.
   
   
 
SolarWinds, Inc.
 
Reconciliation of Free Cash Flow to GAAP Cash Flows From Operating Activities
(In thousands)
(Unaudited)
 
             
    Three months ended September 30,     Nine months ended September 30,  
    2013     2012     2013     2012  
Reconciliation of free cash flow to GAAP cash flows from operating activities:                                
GAAP cash flows from operating activities   $ 42,004     $ 34,881     $ 113,603     $ 96,249  
Excess tax benefit from stock-based compensation     1,500       3,737       7,746       8,921  
Purchases of property and equipment     (1,217 )     (1,521 )     (2,963 )     (3,081 )
Free cash flow (1)   $ 42,287     $ 37,097     $ 118,386     $ 102,089  
                                 
(1) Free Cash Flow. We define free cash flow as cash flows from operating activities plus the excess tax benefit from stock-based compensation and less the purchases of property and equipment. We believe free cash flow is an important liquidity measure that reflects the cash generated by the business after the purchase of property and equipment that can then be used for, among other things, strategic acquisitions and investments in the business, stock repurchases and funding ongoing operations.
   
   
 
SolarWinds, Inc.
 
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
             
    Three months ended September 30,     Nine months ended September 30,  
    2013     2012     2013     2012  
Cash flows from operating activities                                
  Net income   $ 22,823     $ 22,486     $ 68,619     $ 59,044  
  Adjustments to reconcile net income to net cash provided by operating activities:                                
    Depreciation and amortization     6,851       4,535       17,727       13,166  
    Provision for doubtful accounts     134       131       261       138  
    Stock-based compensation expense     5,601       3,832       17,143       11,368  
    Deferred taxes     (1,519 )     570       (4,393 )     (1,085 )
    Excess tax benefit from stock-based compensation     (1,500 )     (3,737 )     (7,746 )     (8,921 )
    Discount (premium) on investments     6       (111 )     (607 )     (1,178 )
    Other non-cash expenses     84       244       822       908  
  Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:                                
    Accounts receivable     (9,605 )     (10,294 )     (9,706 )     (12,344 )
    Income taxes receivable     169       (14 )     133       22  
    Prepaid and other assets     (641 )     (618 )     (236 )     (1,201 )
    Accounts payable     1,654       1,349       968       1,616  
    Accrued liabilities     1,453       1,932       (3,596 )     2,389  
    Income taxes payable     4,916       4,843       11,989       13,102  
    Deferred revenue and other liabilities     11,578       9,733       22,225       19,225  
      Net cash provided by operating activities     42,004       34,881       113,603       96,249  
Cash flows from investing activities                                
  Purchases of investments     --       (7,050 )     (17,288 )     (48,067 )
  Maturities of investments     7,179       7,750       38,674       26,750  
  Purchases of property and equipment     (1,217 )     (1,521 )     (2,963 )     (3,081 )
  Purchases of intangible assets and other long-term investments     (8,078 )     (166 )     (8,249 )     (1,068 )
  Acquisition of businesses, net of cash acquired     --       (27,439 )     (120,868 )     (48,323 )
  Other investing activities     579       --       579       --  
      Net cash used in investing activities     (1,537 )     (28,426 )     (110,115 )     (73,789 )
Cash flows from financing activities                                
  Repurchase of common stock     (13,852 )     (138 )     (18,351 )     (1,472 )
  Exercise of stock options     2,734       2,979       8,124       8,662  
  Excess tax benefit from stock-based compensation     1,500       3,737       7,746       8,921  
  Earnout payments for acquisitions     --       (951 )     --       (4,154 )
      Net cash provided by (used in) financing activities     (9,618 )     5,627       (2,481 )     11,957  
Effect of exchange rate changes on cash and cash equivalents     3,088       970       2,122       (64 )
  Net increase in cash and cash equivalents     33,937       13,052       3,129       34,353  
Cash and cash equivalents                                
  Beginning of period     148,894       144,008       179,702       122,707  
  End of period   $ 182,831     $ 157,060     $ 182,831     $ 157,060  
Supplemental disclosure of cash flow information                                
  Cash paid for income taxes   $ 5,514     $ 3,724     $ 15,737     $ 11,122  
Non-cash financing transactions                                
  Accrued earnout   $ --     $ 596     $ --     $ 1,547  
                                   
Contact:
CONTACTS:

Investors:

Dave Hafner
Phone: 512.682.9867
ir@solarwinds.com

Media:

Tiffany Nels
Phone: 512.682.9545
pr@solarwinds.com
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