SOURCE: SolarWinds

SolarWinds

February 09, 2011 16:14 ET

SolarWinds Announces Fourth Quarter and Full Year 2010 Results

AUSTIN, TX--(Marketwire - February 9, 2011) - SolarWinds® (NYSE: SWI), a leading provider of powerful and affordable IT management software, today reported results for its fourth quarter and fiscal year ended December 31, 2010.

    -- Record quarterly total revenue for the fourth quarter of 2010 of
       $41.4 million, representing 26% year-over-year growth.
    -- Record total revenue for the full year of 2010 of $152.4 million,
       representing 31% year-over-year growth.
    -- GAAP operating income for the fourth quarter of 2010 of $18.2
       million and non-GAAP operating income of $21.4 million, or 52%
       of revenue.
    -- GAAP diluted earnings per share for the fourth quarter of 2010 of
       $0.21 and non-GAAP diluted earnings per share of $0.24 (including
       a benefit of approximately $0.04 due to the extension of the R&D
       tax credit).
    -- Free cash flow for the fourth quarter of 2010 of $28.6 million,
       representing 52% year-over-year growth.

Financial Results

SolarWinds reported record total revenue for the fourth quarter of 2010 of $41.4 million, a 26% increase over total revenue in the fourth quarter of 2009. License revenue was $19.9 million in the fourth quarter of 2010, representing a 13% increase over license revenue in the fourth quarter of 2009. Maintenance revenue was a record $21.5 million in the fourth quarter of 2010, representing a 40% increase over maintenance revenue in the fourth quarter of 2009.

On a GAAP basis, diluted earnings per share were $0.21 in the fourth quarter of 2010, compared to $0.09 in the fourth quarter of 2009. Non-GAAP diluted earnings per share were $0.24 in the fourth quarter of 2010 compared to $0.19 in the fourth quarter of 2009. The reinstatement of the R&D tax credit during the quarter provided a benefit of approximately $0.04 to non-GAAP diluted earnings per share in the fourth quarter of 2010.

Net cash provided by operating activities was $20.0 million in the fourth quarter of 2010 compared to $13.2 million for the fourth quarter of 2009, representing a year-over-year increase of 51%. Free cash flow, which is equal to net cash provided by operating activities, plus excess tax benefit from stock-based compensation less purchases of property and equipment, was $28.6 million in the fourth quarter of 2010 compared to $18.8 million for the fourth quarter of 2009, representing a year-over-year increase of 52%. For full year 2010, free cash flow was $90.1 million compared to $55.2 million for 2009, representing a year-over-year increase of 63%.

Cash and cash equivalents at the end of the fourth quarter of 2010 were $142.0 million, an increase of $34.2 million from the end of the third quarter of 2010.

Information about SolarWinds' use of non-GAAP financial information is provided under "Non-GAAP Financial Measures" below.

Recent Business Highlights

"We are very pleased with our performance in the fourth quarter. We generated record total revenue driven by strong execution by our team," said Kevin Thompson, SolarWinds' President and Chief Executive Officer.

"2010 was a very important year for SolarWinds, marking the beginning of our transformation from a singular focus on network management to a more expansive portfolio of powerful, easy to use, and affordable products that address the key areas of IT infrastructure management," continued Thompson. "The acquisition of Tek-Tools earlier in the year was an important first step in this strategic move. The success that we have had in reaching Storage Admins and addressing their problems in much the same way as we have for Network Engineers and IT Generalists leads us to believe we can continue to expand the scope of management challenges we solve for an even broader audience of IT professionals. Already this year, we're sustaining this momentum with the launch of SolarWinds Application Performance Monitor and the acquisition of Hyper9 for virtualization management. Looking ahead, we expect to continue to expand the markets in which we sell while executing on the vast opportunities we have in network, application, storage, and virtualization management."

Other business highlights during the fourth quarter of 2010 include:

    -- SolarWinds released the latest version of Orion Network Performance
       Monitor (NPM) with specific support for data center networks,
       including support for Cisco UCS, fibre channel switches, improved
       visibility into virtual infrastructure and the ability to view Orion
       NPM from mobile devices such as iPhone, Blackberry and Android.
    -- SolarWinds released new versions of Storage Profiler, Orion IP SLA
       Monitor (IP SLA), Orion IP Address Manager (IPAM), and Kiwi Syslog
       and CatTools.
    -- SolarWinds received four honors in Redmond Magazine's 2010 Readers
       Choice Awards, including Best Performance Management Product and
       Best Virtualization Management and Optimization Product.  In
       addition, Windows IT Pro Magazine named SolarWinds the "2010
       Editors' Best" gold medal winner in the Best Network Management
       Product Category.
    -- SolarWinds introduced Permissions Analyzer for Active Directory, a
       free tool for system administrators to track user and group
       permissions.
    -- SolarWinds established its Asia-Pacific headquarters in Brisbane,
       Australia for sales and customer support to the Australasia and
       greater Asia-Pacific region.

"We had solid financial results in the fourth quarter as our non-GAAP operating margin, free cash flow and non-GAAP diluted earnings per share were all above our expectations," added Mike Berry, SolarWinds' Chief Financial Officer. "Heading into 2011, SolarWinds is well positioned to capitalize on growth opportunities in both existing and new markets. While targeting these growth opportunities, we intend to continue to leverage our powerful business model to deliver strong margins and cash flow."

Financial Outlook

As of February 9, 2011, SolarWinds is providing its financial outlook for its first quarter and full year of 2011. The financial information below represents forward-looking non-GAAP financial information, including an estimate of non-GAAP operating income, and non-GAAP diluted earnings per share, for the first quarter of 2011 and for the full year 2011. 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 something 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 First Quarter of 2011

SolarWinds management currently expects to achieve the following results for the first quarter of 2011:

    -- Total revenue in the range of $41.5-$42.7 million.
    -- Non-GAAP operating income representing 46%-48% of revenue, which
       includes 2%-3% of impact related to the acquisition of Hyper9.
    -- Non-GAAP diluted earnings per share of $0.18-$0.19, which includes
       approximately $0.01 of impact related to the acquisition of Hyper9.
    -- Weighted average shares outstanding of approximately 74.0 million.

Financial Outlook for Full Year 2011

SolarWinds management currently expects to achieve the following results for the full year 2011:

    -- Total revenue in the range of $184.4-$190.5 million.
    -- Non-GAAP operating income representing approximately 48%-49% of
       revenue, which includes 1%-2% of impact related to the acquisition
       of Hyper9.
    -- Non-GAAP diluted earnings per share of $0.82-$0.88, which includes
       approximately $0.02 of impact related to the acquisition of Hyper9.
    -- Weighted average shares outstanding of approximately 76.0 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 888-339-3503 and internationally at +1-719-325-2418. 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 SolarWinds' financial outlook, its belief in its ability to rapidly expand the scope of the management challenges it solves for an even broader audience of IT professionals, its expectations to expand its market opportunities and capitalize on these new opportunities as well as existing opportunities, and its intention to leverage its business model to deliver best-in-class margins and cash flow. 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 "continues," "expects," "believes," "intends" 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 possibility that general economic conditions or uncertainty cause information technology spending to be reduced or purchasing decisions to be delayed; (b) the presence or absence of occasional large customer orders, including in particular those placed by the U.S. federal government; (c) the inability to increase sales to existing customers and to attract new customers; (d) SolarWinds' failure to integrate acquired businesses and any future acquisitions successfully; (e) the timing and success of new product introductions by SolarWinds or its competitors; (f) changes in SolarWinds' pricing policies or those of its competitors; (g) potential foreign exchange gains and losses related to expenses and sales denominated in currencies other than the functional currency of an associated entity; and (h) such other risks and uncertainties described more fully in documents filed with or furnished to the Securities and Exchange Commission, including the Form 10-K that SolarWinds anticipates filing on or before March 16, 2011. 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 the following non-GAAP financial measures: non-GAAP operating income, non-GAAP net income, non-GAAP diluted earnings per share, revenue on a constant currency basis, non-GAAP weighted average shares outstanding and free cash flow. Each of non-GAAP operating income, non-GAAP net income and non-GAAP diluted earnings per share exclude the impact of amortization of intangible assets, stock-based compensation expense and related employer-paid payroll taxes, lawsuit settlement costs and related legal fees, expenses related to potential and completed follow-on offerings of common stock, certain acquisition-related costs and severance costs related to retirement of our former Executive Chairman from the comparable GAAP measure. Non-GAAP net income and non-GAAP diluted earnings per share also exclude the write-off of debt issuance costs, any change in fair value of contingent consideration potentially payable in our acquisitions and the related tax benefits of the excluded items from the comparable GAAP measures. Non-GAAP diluted earnings per share is equal to non-GAAP net income divided by non-GAAP weighted average shares outstanding, which adjusts GAAP weighted average shares outstanding for the first and second quarters of 2009 to assume that the conversion of our preferred stock in May 2009 occurred at the beginning of the applicable period. SolarWinds defines free cash flow as cash flows from operating activities plus excess tax benefit from stock-based compensation less purchases of property and equipment. This press release contains a reconciliation of each of these non-GAAP measures to its most comparable GAAP financial measure.

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 these non-GAAP measures to assess operational performance as well as to determine employee incentive compensation. Accordingly, these measures may provide helpful insight to investors on 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 to management, investors and security analysts 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. These items are typically interest expense, income tax expense, depreciation and amortization and stock-based compensation expense and related employer-paid payroll taxes.

SolarWinds understands that, although these non-GAAP financial measures are frequently used by investors and securities analysts in their evaluations of companies, 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, such as the amortization of intangible assets, stock-based compensation expense and related employer-paid payroll taxes and acquisition-related costs, can have a material impact on net earnings. 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, operating income, net income, cash flows from operating activities, revenue or other measures of performance prepared in accordance with GAAP. 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 included elsewhere in this press release.

About SolarWinds

SolarWinds (NYSE: SWI) provides powerful and affordable IT management software to customers worldwide -- from Fortune 500 enterprises to small businesses. We work to put our users first and remove the obstacles that have become "status quo" in traditional enterprise software. SolarWinds products are downloadable, easy to use and maintain, and provide the power, scale, and flexibility needed to address users' management priorities. Our online user community, thwack, is a gathering-place where tens of thousands of IT pros solve problems, share technology, and participate in product development for all of SolarWinds' products. Learn more today at http://www.solarwinds.com.

SolarWinds, SolarWinds.com and Orion are registered trademarks of SolarWinds. All other company and product names mentioned are used only for identification purposes and may be trademarks or registered trademarks of their respective companies.

                             SolarWinds, Inc.
                        Consolidated Balance Sheets
          (In thousands, except share and per share information)
                                (Unaudited)

                                                  December 31, December 31,
                                                      2010         2009
                                                  -----------  -----------
Assets
Current assets:
  Cash and cash equivalents                       $   142,003  $   129,788
  Accounts receivable, net of allowances of $201
   and $149 as of December 31, 2010 and 2009,
   respectively                                        20,255       15,786
  Income tax receivable                                10,350          109
  Deferred taxes                                          261          252
  Prepaid income taxes                                      -        4,675
  Other current assets                                  3,210        2,116
                                                  -----------  -----------
Total current assets                                  176,079      152,726
Property and equipment, net                             6,702        6,406
Debt issuance costs, net                                    -          399
Deferred taxes                                          4,099        2,078
Goodwill                                               40,424       15,444
Intangible assets and other, net                       20,173        4,417
                                                  -----------  -----------
Total assets                                      $   247,477  $   181,470
                                                  ===========  ===========

Liabilities and stockholders' equity
Current liabilities:
  Accounts payable                                $     2,150  $     3,293
  Accrued liabilities                                   8,588        4,937
  Accrued interest payable                                  -          539
  Accrued earnout                                       4,000            -
  Income taxes payable                                    555          284
  Current portion of deferred revenue                  52,583       37,103
  Current portion of long-term debt                         -       16,871
                                                  -----------  -----------
Total current liabilities                              67,876       63,027
Long-term liabilities:
  Deferred revenue, net of current portion              3,175        1,544
  Other long-term liabilities                             817          607
  Long-term debt, net of current portion                    -       27,226
                                                  -----------  -----------
Total long-term liabilities                             3,992       29,377
                                                  -----------  -----------
Total liabilities                                      71,868       92,404
Commitments and contingencies
Stockholders' equity:
  Common stock, $0.001 par value: 123,000,000
   shares authorized and 71,658,808 and
   66,502,098 shares issued as of December 31,
   2010 and 2009, respectively                             72           67
  Additional paid-in capital                          165,972      123,083
  Accumulated other comprehensive loss                 (1,256)        (159)
  Retained earnings (deficit)                          10,821      (33,925)
                                                  -----------  -----------
Total stockholders' equity                            175,609       89,066
                                                  -----------  -----------
Total liabilities and stockholders' equity        $   247,477  $   181,470
                                                  ===========  ===========





                             SolarWinds, Inc.
                    Consolidated Statements of Income
               (In thousands, except per share information)
                                (Unaudited)

                                    Three Months Ended      Year Ended
                                       December 31,        December 31,
                                    ------------------  ------------------
                                      2010      2009      2010      2009
                                    --------- --------  --------  --------

Revenue:
     License                        $  19,868 $ 17,601  $ 75,603  $ 62,378
     Maintenance and other             21,538   15,378    76,790    54,068
                                    --------- --------  --------  --------
          Total revenue                41,406   32,979   152,393   116,446
   Cost of  license revenue               636       36     1,943       494
   Cost of maintenance and other
    revenue                             1,638    1,239     5,987     4,366
                                    --------- --------  --------  --------
Gross profit                           39,132   31,704   144,463   111,586
Operating expenses:
     Sales and marketing               11,322    8,858    43,252    30,548
     Research and development           4,226    3,032    15,731    11,199
     General and administrative         5,370   12,911    23,476    26,038
                                    --------- --------  --------  --------
          Total operating expenses     20,918   24,801    82,459    67,785
                                    --------- --------  --------  --------
Operating income                       18,214    6,903    62,004    43,801
Other income (expense):
     Interest income                       42       42       177       267
     Interest expense                       -     (594)   (1,146)   (4,253)
     Other income                          78      178       115        90
                                    --------- --------  --------  --------
          Total other income
           (expense)                      120     (374)     (854)   (3,896)
                                    --------- --------  --------  --------
Income before income taxes             18,334    6,529    61,150    39,905
     Income tax expense (benefit)       3,020      (19)   16,404    10,396
                                    --------- --------  --------  --------
Net income                          $  15,314 $  6,548  $ 44,746  $ 29,509
                                    ========= ========  ========  ========
Net income per share:
     Basic earnings per share       $    0.22 $   0.10  $   0.65  $   0.58
                                    ========= ========  ========  ========
     Diluted earnings per share     $    0.21 $   0.09  $   0.61  $   0.52
                                    ========= ========  ========  ========
Weighted shares used to compute net
 income per share:
     Shares used in computation of
      basic earnings per share         70,503   65,661    68,664    51,042
                                    ========= ========  ========  ========
     Shares used in computation of
      diluted earnings per share       73,041   71,935    72,862    56,824
                                    ========= ========  ========  ========



                             SolarWinds, Inc.
          Reconciliation of GAAP to Non-GAAP Financial Measures
                              (In thousands)
                                (Unaudited)



                     Three Months Ended           Three Months Ended
                      December 31, 2010          December 31, 2009
                 --------------------------- -----------------------------
                         Adjust-                      Adjust-
                  GAAP    ments     Non-GAAP   GAAP    ments       Non-GAAP
                 ------- ------      ------- -------  -------      -------
Total revenue    $41,406 $    -      $41,406 $32,979  $     -      $32,979
Gross profit      39,132    499       39,631  31,704       57       31,761
  Operating
   expenses       20,918 (2,713)      18,205  24,801  (10,755)      14,046
                 ------- ------      ------- -------  -------      -------
Operating income  18,214  3,212 (a)   21,426   6,903   10,812 (a)   17,715
  Total other
   expense
   (income)          120     95 (b)      215    (374)       -         (374)
                 ------- ------      ------- -------  -------      -------
Income before
 income taxes     18,334  3,307       21,641   6,529   10,812       17,341
   Income tax
    expense
    (benefit)      3,020    907 (c)    3,927     (19)   3,741 (c)    3,722
                 ------- ------      ------- -------  -------      -------
Net income       $15,314 $2,400      $17,714 $ 6,548  $ 7,071      $13,619
                 ======= ======      ======= =======  =======      =======

(a) Reflects the reversal of amortization of intangible assets, stock-based
    compensation expense and related employer-paid payroll taxes and other
    excluded expenses as follows:

  Amortization of intangible assets:
                                                        Three Months Ended
                                                           December 31,
                                                        -------------------
                                                          2010      2009
                                                        --------- ---------
   Cost of license revenue                              $     464 $      30
   Sales and marketing                                          -         -
   Research and development                                     -         -
   General and administrative                                 388        81

  Stock-based compensation expense
   and related employer-paid payroll taxes:

                                                        Three Months Ended
                                                           December 31,
                                                        -------------------
                                                          2010      2009
                                                        --------- ---------
   Cost of maintenance revenue                          $      35 $      27
   Sales and marketing                                        568       575
   Research and development                                   393       356
   General and administrative                               1,273     1,483

  Other excluded expenses:

                                                        Three Months Ended
                                                           December 31,
                                                        -------------------
                                                          2010      2009
                                                        --------- ---------
   Lawsuit settlement costs and related legal fees      $       - $   7,480
   Public offering costs (d)                                    -       720
   Acquisition related costs                                   91        60




(b) Represents the change in fair value of the contingent consideration
    potentially payable under the asset purchase agreement with
    Tek-Tools, Inc.

(c) Reflects the removal of the tax benefits associated with amortization
    of intangible assets, stock-based compensation expense and related
    employer-paid payroll taxes and other excluded expenses.

(d) Represents expenses related to a public offering completed in the
    fourth quarter of 2009.


                             SolarWinds, Inc.
          Reconciliation of GAAP to Non-GAAP Financial Measures
                              (In thousands)
                                (Unaudited)



                         Year Ended                 Year Ended
                      December 31, 2010          December 31, 2009
            ------------------------------  ------------------------------
                      Adjust-                         Adjust-
              GAAP     ments      Non-GAAP    GAAP     ments      Non-GAAP
            --------  -------     --------  --------  -------     --------
Total
 revenue    $152,393  $     -     $152,393  $116,446  $     -     $116,446
Gross profit 144,463    1,899      146,362   111,586      562      112,148
  Operating
   expenses   82,459  (13,980)      68,479    67,785  (17,667)      50,118
            --------  -------     --------  --------  -------     --------
Operating
 income       62,004   15,879 (a)   77,883    43,801   18,229 (a)   62,030
  Total
   other
   expense      (854)     591 (b)     (263)   (3,896)     428 (b)   (3,468)
            --------  -------     --------  --------  -------     --------
Income before
 income taxes 61,150   16,470       77,620    39,905   18,657       58,562
   Income tax
    expense   16,404    4,494 (c)   20,898    10,396    5,434 (c)   15,830
            --------  -------     --------  --------  -------     --------
Net income  $ 44,746  $11,976     $ 56,722  $ 29,509  $13,223     $ 42,732
            ========  =======     ========  ========  =======     ========

(a) Reflects the reversal of amortization of intangible assets, stock-based
    compensation expense and related employer-paid payroll taxes and other
    excluded expenses as follows:       Recalculated


  Amortization of intangible assets:
                                                            Year Ended
                                                           December 31,
                                                        -------------------
                                                          2010      2009
                                                        --------  ---------
   Cost of license revenue                              $  1,730  $     480
   Sales and marketing                                         -          -
   Research and development                                    -          -
   General and administrative                              1,440        209

  Stock-based compensation expense
   and related employer-paid payroll taxes:

                                                            Year Ended
                                                           December 31,
                                                        -------------------
                                                          2010      2009
                                                        --------  ---------
   Cost of maintenance revenue                          $    169  $      82
   Sales and marketing                                     2,788      2,056
   Research and development                                1,638      1,189
   General and administrative                              7,452      4,882

  Other excluded expenses:

                                                            Year Ended
                                                           December 31,
                                                        -------------------
                                                          2010      2009
                                                        --------  ---------
   Lawsuit settlement costs and related legal fees      $   (217) $   8,551
   Public offering costs (d)                                 170        720
   Acquisition related costs                                 501         60
   Severance costs related to retirement of former
    Executive Chairman                                       208          -

(b) Represents a decrease of $334 and $428 in the amortization of debt
    issuance costs due to the repayment of all or a portion of the
    long-term debt during the year ended December 31, 2010 and 2009,
    respectively. The remaining expenses of $257 for the year ended
    December 31, 2010 represent a change in fair value of the contingent
    consideration potentially payable under the asset purchase agreement
    with Tek-Tools, Inc.

(c) Reflects the removal of the tax benefits associated with amortization
    of intangible assets, stock-based compensation expense and related
    employer-paid payroll taxes and other excluded expenses.

(d) Represents expenses of $19 and $720 for the year ended December 31,
    2010 and 2009, respectively, related to a public offering completed in
    the fourth quarter of 2009. The remaining third-party expenses of $151
    for the year ended December 31, 2010 related to  a potential public
    offering that was cancelled during the second quarter of 2010.




                             SolarWinds, Inc.
     Reconciliation of Diluted Earnings Per Share to Non-GAAP Diluted
                           Earnings Per Share
               (In thousands, except per share information)
                                (Unaudited)


                                    Three Months Ended      Year Ended
                                        December 31,        December 31,
                                    ------------------  ------------------
                                      2010      2009      2010      2009
                                    --------  --------  --------  --------
Numerator:
Reconciliation between GAAP and
 non-GAAP net income:
   Net income                       $ 15,314  $  6,548  $ 44,746  $ 29,509
   Reversal of intangible assets
    amortization                         852       111     3,170       689
   Reversal of stock-based
    compensation expense and
    related employer-paid payroll
    taxes                              2,269     2,441    12,047     8,209
   Reversal of debt issuance costs
    write-off                              -         -       334       428
   Reversal of public offering
    costs                                  -       720       170       720
   Reversal of lawsuit settlement
    costs and related legal fees           -     7,480      (217)    8,551
   Reversal of acquisition related
    costs                                186        60       758        60
   Reversal of severance costs
    related to retirement of former
    Executive Chairman                     -         -       208         -
   Reversal of tax benefits
    associated with above
    adjustments                         (907)   (3,741)   (4,494)   (5,434)
                                    --------  --------  --------  --------
   Non-GAAP net income              $ 17,714  $ 13,619  $ 56,722  $ 42,732
                                    ========  ========  ========  ========

Denominator:
Reconciliation between GAAP and
 non-GAAP weighted average shares
 used in computing diluted earnings
 per share:
   Weighted average number of
    shares used in computing
    diluted earnings per share        73,041    71,935    72,862    56,824
   Pro forma adjustments to reflect
    assumed weighted average effect
    of conversion of preferred
    stock (a)                              -         -         -    10,356
                                    --------  --------  --------  --------
   Non-GAAP weighted average shares
    used in computing non-GAAP
    diluted earnings per share (b)    73,041    71,935    72,862    67,180
                                    ========  ========  ========  ========

   Diluted earnings per share       $   0.21  $   0.09  $   0.61  $   0.52
                                    ========  ========  ========  ========

   Non-GAAP diluted earnings per
    share                           $   0.24  $   0.19  $   0.78  $   0.64
                                    ========  ========  ========  ========

   (a) Represents common shares from the conversion of convertible
   preferred shares as if the shares were converted as of the beginning of
   the indicated period.

   (b) If the company assumed the common shares issued in its initial
   public offering in May 2009 were issued as of the beginning of the
   comparable period, or January 1, 2009, then the weighted average shares
   used in computing non-GAAP diluted earnings per share and the non-GAAP
   diluted earnings per share would have been 70,924 shares and $0.60 per
   share, respectively, for the year ended December 31, 2009.





                             SolarWinds, Inc.
         Reconciliation of GAAP Revenue to Non-GAAP Revenue on a
                         Constant Currency Basis
                              (In thousands)
                                (Unaudited)


Revenue on a constant currency basis is calculated using the average
foreign exchange rates in the monthly periods during a previous quarter or
year and applying these rates to foreign-denominated revenue in the
corresponding monthly periods in the fourth quarter of 2010 or in the year
ended 2010.  The difference between revenue calculated based on these
foreign exchange rates and revenue calculated in accordance with GAAP is
listed as foreign exchange impact in the table below.


                         Fourth Quarter   Fourth Quarter   Year Ended 2010
                           2010 Revenue    2010 Revenue        Revenue
                          Using Foreign   Using Foreign     Using Foreign
                         Exchange Rates   Exchange Rates   Exchange Rates
                             in Third       in Fourth       in Year Ended
                         Quarter of 2010  Quarter of 2009        2009
                         ---------------  ---------------  ----------------

License revenue          $        19,868  $        19,868  $         75,603
Foreign exchange impact
 on license revenue                 (246)             521             1,080
                         ---------------  ---------------  ----------------
License revenue on a
 constant currency basis $        19,622  $        20,389  $         76,683
                         ===============  ===============  ================


Maintenance and other
 revenue                 $        21,538  $        21,538  $         76,790
Foreign exchange impact
 on maintenance and
 other revenue                      (230)             394               927
                         ---------------  ---------------  ----------------
Maintenance and other
 revenue on a constant
 currency basis          $        21,308  $        21,932  $         77,717
                         ===============  ===============  ================

Total revenue            $        41,406  $        41,406  $        152,393
Foreign exchange impact
 on total revenue                   (476)             915             2,007
                         ---------------  ---------------  ----------------
Total revenue on a
 constant currency basis $        40,930  $        42,321  $        154,400
                         ===============  ===============  ================





                           SolarWinds, Inc.
      Reconciliation of GAAP Cash Flows From Operating Activities to
                            Free Cash Flow
                            (In thousands)
                             (Unaudited)

                                    Three Months Ended      Year Ended
                                        December 30,        December 30,
                                    ------------------  ------------------
                                      2010      2009      2010      2009
                                    --------  --------  --------  --------

Reconciliation between GAAP cash
 flows from operating activities
 and free cash flow:
   GAAP cash flows from operating
    activities                      $ 19,994  $ 13,204  $ 66,043  $ 49,225
   Excess tax benefit from
    stock-based compensation           9,381     6,522    26,748     8,734
   Purchases of property and
    equipment                           (773)     (923)   (2,740)   (2,729)
                                    --------  --------  --------  --------
   Free cash flow                   $ 28,602  $ 18,803  $ 90,051  $ 55,230
                                    ========  ========  ========  ========





                             SolarWinds, Inc.
                  Consolidated Statements of Cash Flows
                              (In thousands)
                                (Unaudited)

                                    Three Months Ended      Year Ended
                                       December 31,        December 31,
                                    ------------------  ------------------
                                      2010      2009      2010      2009
                                    --------  --------  --------  --------

Cash flows from operating
 activities
  Net income                        $ 15,314  $  6,548  $ 44,746  $ 29,509

  Adjustments to reconcile net
   income to net cash provided by
   operating activities:
    Depreciation and amortization      1,602       539     5,498     2,166
    Provision for doubtful accounts       60        43       194       175
    Stock-based compensation
     expense                           1,926     2,263    10,880     7,891
    Expenses paid by stockholder           -     2,100         -     2,100
    Deferred taxes                    (2,629)     (100)   (2,220)     (281)
    Excess tax benefit from
     stock-based compensation         (9,381)   (6,522)  (26,748)   (8,734)
    Other non-cash expenses             (209)       19       470       915
  Changes in operating assets and
   liabilities, net of assets
   acquired and liabilities
   assumed in business
   combinations:
    Accounts receivable                3,766     5,125    (5,078)   (2,099)
    Income taxes receivable                -        (6)       31       613
    Prepaid income taxes                   -    (4,675)    4,675    (4,675)
    Prepaid and other current
     assets                             (769)      (30)   (1,199)     (673)
    Accounts payable                     235     1,091    (1,127)    1,791
    Accrued liabilities                2,487      (291)    3,958     1,581
    Accrued interest payable               -       (35)     (539)   (1,472)
    Income taxes payable               5,447     5,087    17,160     9,078
    Deferred revenue and other
     liabilities                       2,145     2,048    15,342    11,340
                                    --------  --------  --------  --------
Net cash provided by operating
 activities                           19,994    13,204    66,043    49,225

Cash flows from investing
 activities
  Purchases of property and
   equipment                            (773)     (923)   (2,740)   (2,729)
  Purchases of intangible assets
   and other                            (144)      (96)     (795)     (401)
  Acquisition of businesses                -         -   (28,039)      (46)
                                    --------  --------  --------  --------
Net cash used in investing
 activities                             (917)   (1,019)  (31,574)   (3,176)

Cash flows from financing
 activities
  Repurchase of common stock               -         -   (24,987)        -
  Net cash proceeds from initial
   public offering                         -         -         -   104,625
  Exercise of stock options            6,261     5,833    21,032     8,518
  Excess tax benefit from
   stock-based compensation            9,381     6,522    26,748     8,734
  Repayment of long-term debt              -         -   (44,097)  (56,986)
  Repayments of capital lease
   obligations                             -        (7)       (9)      (26)
  Payments for offering costs              -      (249)        -    (1,745)
  Earnout dividend paid                    -   (20,000)        -   (20,000)
                                    --------  --------  --------  --------
Net cash provided by (used in)
 financing activities                 15,642    (7,901)  (21,313)   43,120
Effect of exchange rate changes on
 cash and cash equivalents              (553)     (301)     (941)       53
                                    --------  --------  --------  --------
  Net increase in cash and cash
   equivalents                        34,166     3,983    12,215    89,222
Cash and cash equivalents
  Beginning of period                107,837   125,805   129,788    40,566
                                    --------  --------  --------  --------
  End of period                     $142,003  $129,788  $142,003  $129,788
                                    ========  ========  ========  ========

Supplemental disclosure of cash
 flow information
  Cash paid for interest            $      -  $    574  $  1,280  $  4,976
                                    ========  ========  ========  ========
  Cash paid (received) for income
   taxes                            $    175  $   (238) $ (3,282) $  5,665
                                    ========  ========  ========  ========
Noncash investing and financing
 transactions
  Accrued earnout                   $    257  $      -  $  4,000  $      -
                                    ========  ========  ========  ========
  Stock issued for acquisition      $      -  $      -  $  9,221  $      -
                                    ========  ========  ========  ========
  Conversion of preferred stock to
   common stock                     $      -  $      -  $      -  $     27
                                    ========  ========  ========  ========


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