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SolarWinds Flies 19% On 50% EPS Rise

IT software maker SolarWinds (SWI) on Wednesday reported second-quarter profit and revenue that beat views and stepped up its acquisition spree.

SolarWinds shares shot up 19.4% to 49.54, hitting a new high. The stock is up 77% this year.

Q2 earnings surged 50% to 33 cents a share. Revenue rose 40% to $64 million, the fifth straight quarter of acceleration. Analysts expected EPS of 27 cents on sales of $60 million..

SolarWinds also announced a $20 million buy for Web Help Desk, its seventh takeover since early 2011. It told analysts on the earnings call that it will keep making acquisitions to expand its IT management products.

Operating margin rose to 53.5% from 50.8% a year earlier. SolarWinds' strategy of using social media to market to IT engineers that download software at its website makes it easier to bolt on acquisitions, says Steve Ashley, analyst at Robert W. Baird.

"When companies grow through acquisitions, rewards are often tempered, because acquisitions can be dilutive to margins," he said. " With SolarWinds you have accelerating revenue growth and expanding margins.

SolarWinds' main product is "Orion" communications network software that sells on average for $8,500 per license. Via takeovers, SolarWinds has added products that help IT departments manage business applications, computer servers, and data storage systems.

It bought DameWare, whose software lets system administrators remotely manage computers on their networks, for $40 million in December. Other recent deals include DNSstuff.com and EminentWare.

SolarWinds feels comfortable with "an acquisition a quarter," CEO Kevin Thompson said on the call. He says SolarWinds has brought on few employees via its acquisitions, making integration easier and reducing costs.

In an interview with IBD, he said SolarWinds usually lowers the price of acquired products. The strategy has been undercutting IT giants such as IBM (IBM), CA (CA) and BMC Software (BMC).

"Every deal we've done is at or ahead of plan. They're growing faster as part of us than they were before we bought them," Thompson said. "That's the magic of what we do. We (buy) something and put it into a pretty unique go-to-market model.

For the full year, SolarWinds upped its EPS outlook to $1.20 to $1.24. Analysts expected $1.21.

SolarWinds upped its 2012 revenue guidance to about $260 million vs. views for $257.8 million.

Q2 revenue rose 7% from Q1. SolarWinds sees sequential growth of 5% in Q3 and 3% in Q4.

Federal agencies are among SolarWinds' top customers. While government IT spending usually picks up in the September quarter, the government's Q4, it usually falls in the December period.

SolarWinds told analysts it expects flat federal software license sales in Q3 vs. a year earlier.

SolarWinds' broadened product and geographic reach — one-fourth of Q2 revenue was overseas — is easing its reliance on the federal business, says Thompson.

"We're set up to grow for the long-term," he said. "Our commercial business is growing in the mid-30s. It's going to offset the decline in fed. That's where the acquisitions are kicking in and the new products we've built are kicking in.

Despite Europe's troubles, SolarWinds says Q2 licensing revenue rose 200% in Germany and 40% in the U.K. Analysts expect Japan to help boost 2013 growth.

"SolarWinds continues to give a healthy outlook when there's a scarcity of growth stories," said Daniel Ives, analyst at FBR Capital Markets.