By:
Nicholas Arco, AIM Student at Marquette University
Summary
• SolarWinds Corp. (NYSE:SWI) provides information (IT) infrastructure
management software. SWI’s products are designed to help IT professionals
manage and monitor their IT environments whether they are on-premise or in the
cloud.
• Over the last 3 quarters,
SWI has managed to grow subscription revenues substantially.
• Management expects the
company’s leverage ratio to fall to 3.5x by the end of the year.
• A key risk to this
stock, considering its high leverage, is the interest rate environment. Since being
pitched, rates have remained favorable.
Key
points:
Part of the investment
thesis for SolarWinds was its ability to drive recurring revenues
higher. A high recurring revenue number is somewhat comforting to investors as it
provides significant visibility into a company’s top line. In the case of SWI, it
is derived, in part, by subscription revenues, which over the last three
quarters, have seen significant accelerations. At the end of 3Q19, subscriptions
comprised 34.6% of total revenues, versus 31.7% in the year ago quarter.
Additionally, for this part of the thesis to play out, recurring revenues had
to grow into the mid 80% range. SWI is well on its way, growing this number by almost
2% in the last 11 months.
After returning to the
public markets from a two-year stint as a private company, SolarWinds,
expectedly, carries a high debt burden. Key to this stock’s investment thesis
was its ability to deliver on the promise of paying down debt. So far, SWI has
been able to do just this, decreasing its leverage ratio from 5x in 2018 to
4.2x as of June 2019. At the end of the most recent fiscal quarter, the leverage
ratio sat at 3.9x and SWI expects the number to be close to 3.5x at the end of
2019.
Much of SWI’s debt is attached
to a LIBOR-based floating rate. If interest rates were to rise, the company could
be subject to much higher annual payments—particularly burdensome to a company with
high leverage. However, since December 2018, LIBOR rates have come down
significantly and should remain depressed for at least the time being.
What
has the stock done lately?
Over the last three quarters,
the stock
has returned 11.47%, but in the last nine quarters, this number drops
to 1.91%. Ove the last 6 months, SWI has returned 7% versus the Russell 2000’s
7.84%. While only lagging its benchmark by 84 bps, SWI seems to have trouble substantially
breaking through $20 and has been trading sideways over the last month (between
$18.40 and $19.60).
Past
Year Performance:
SWI has increased 37.7% over the last year
versus 19.03% for the S&P 500 and 6.76% for the Russell 2000. Again, while
this seems impressive, the stock looks to have stagnated; so, going forward, it
is possible that returns will be minimal until it has a breakout. However, on
the other hand, investors should take comfort in the fact that the short-term
downside seems to be limited due the tight range that it has been trading in.
Source:
FactSet
My
Takeaway
The investment thesis for
SolarWinds seems to be playing out quite nicely as management delivers on its
promises. The substantial growth in subscriptions has driven recurring revenues
higher even quicker than expected and leverage continues to fall at phenomenal
rates. However, a plausible fear is that this type of deliverance may have come
to be expected by investors. While performance has been strong (even when
compared to consensus numbers), the stock has continued to trade sideways. For
now, it remains a hold.
Source:
FactSet
