How SolarWinds Makes Money

SolarWinds Corp. (SWI) is a provider of information technology (IT) infrastructure management software. The company's broad suite of tools is designed to serve the needs of network engineers, systems engineers, database administrators, storage administrators, DevOps, service desk professionals, and managed service providers (MSPs). The company generates revenue through maintenance services, subscriptions, and perpetual licenses.

SolarWinds, which was founded in 1999 and is headquartered in Texas, operates in a highly competitive industry. Rivals include large network management and IT companies like Cisco Systems Inc. (CSCO), U.K.-based MicroFocus International PLC, CA Technologies, International Business Machines Corp. (IBM), and BMC Software Inc. The company also competes with smaller firms in markets including cloud and application monitoring.

The ability to secure client data is a top priority—and ongoing concern—among suppliers and customers in the IT management industry. In this area, SolarWinds has suffered a major setback. Major news organizations reported in December 2020 that software developed by SolarWinds was recently compromised by hackers, enabling them to infiltrate the sensitive computer systems of the U.S. government and some major corporations.

SolarWinds' Financials

SolarWinds posted a net income of $158.5 million on revenue of $1.0 billion in its 2020 fiscal year (FY), which ended Dec. 31, 2020. Net income rose 750.1% while revenue grew 9.3% compared to the previous year. Net income for the year was largely boosted by a significant income tax benefit compared to an income tax expense in FY 2019.

The company's revenue growth has slowed over the last several years. Revenue grew 11.9% in 2019, a slowdown from 14.4% growth in 2018, and from 55.1% in 2017. However, 2019 marked SolarWinds' first year of profitability in at least five years.

SolarWinds' Business Segments

SolarWinds does not separate its operations into separate business segments. However, it does break down its revenue into two main components: recurring revenue, which consists of subscription revenue and maintenance revenue; and perpetual license revenue. Recurring revenue comprises the majority of the company's total revenue. We look at these separate revenue streams in more detail below.

Subscription Revenue (Recurring)

SolarWinds primarily generates subscription revenue from fees received for subscriptions to its software-as-a-service (SaaS) offerings, and some revenue from its time-based license arrangements. Subscription revenue includes sales of products for cloud infrastructure, application performance management, and IT service management, and other tasks. Subscription revenue grew 23.6% to $396.5 million in FY 2020. It comprises about 39% of the company's total revenue.

Maintenance Revenue (Recurring)

The company generates maintenance revenue from the sale of maintenance services associated with its perpetual license products. Customers pay for these services depending on the products purchased. Maintenance revenue rose 7.1% to $478.3 million in FY 2020. It makes up about 47% of SolarWinds' total revenue.

License Revenue (Non-Recurring)

License revenue is generated from sales of perpetual licenses for the company's on-premise network, systems, storage, and database management products. Customers receive one year of maintenance services when they first purchase a license. License revenue fell 12.6% to $144.5 million in FY 2020. It comprises about 14% of the company's total revenue.

SolarWinds' Recent Developments

SolarWinds was thrust into the spotlight last year after it was reported that the U.S. government and major U.S. corporations were victims of a cyberattack attributed to Russia's foreign intelligence service. The hackers built a back door into software developed by SolarWinds, enabling the hackers to access sensitive data when government agencies and corporations that use the software updated their computer systems. The hack is believed to have taken place undetected over several months. SolarWinds estimates that as many as 18,000 customers could have downloaded the compromised software, but investigators believe the number of victims to be much smaller.

On Feb. 23, 2021, the first U.S. Senate hearing related to the cyberattack took place. Top executives from SolarWinds as well as Microsoft Corp. (MSFT) and cybersecurity firms FireEye Inc. (FEYE) and CrowdStrike Holdings Inc. (CRWD) provided statements defending their conduct in relation to the security breaches. SolarWinds CEO Sudhakar Ramakrishna indicated that his company was still investigating how the hackers were able to compromise the company's systems. He said that his team had narrowed the possibilities down to three but did not provide any details.