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IT management software provider SolarWinds (SWI - Snapshot Report) recently announced that it has entered into a definitive agreement to acquire N-able Technologies for $120.0 million in cash. The acquisition is expected to be complete by the end of May, 2013.

Privately-held N-able develops and provides cloud-based remote monitoring and management (“RMM”) and service automation software for Managed Service Providers (“MSPs”). Ottawa, Canada based N-able serves more than 91,000 small businesses and sells its products through 2,600 MSPs.

The N-able acquisition will expand SolarWinds’ product portfolio, which will help it to address the IT management problems faced by small enterprises. These enterprises normally employ less than 100 people and follow a simple IT structure. Hence, they require applications that only solve important problems related to the performance of their businesses.

N-able’s cloud-based products address these issues in a cost efficient manner. SolarWinds estimates N-able’s worldwide market opportunity to be approximately $4.0 billion in addition to its existing $65.0 billion market opportunity. Apart from expanding its product portfolio, the acquisition will increase SolarWinds’ competitive edge in the RMM market.

Moreover, as the demand for cloud based IT management services increases from large and mainstream organizations, SolarWinds expects to use the talent and knowledge of the N-able team to efficiently handle their needs over the long term.

N-able Outlook for 2013

N-able is expected to contribute revenues of approximately $8.0 to $9.0 million for the remainder of 2013. This will increase revenues by 3.0%. Currently, SolarWinds forecasts revenues of $326.5–$334.0 million for 2013 (21.4% to 24.2% year-over-year growth).

SolarWinds expects 80.0% of N-able revenues to be subscription revenues, while the remainder will come from maintenance of N-able's historical perpetual license sales. SolarWinds plans to discontinue perpetual license sales post the completion of the acquisition.

SolarWinds expects N-able to post operating loss of $12.0 million. The N-able acquisition is expected to negatively impact earnings by 11 cents. Currently, SolarWinds expect earnings per share in the range of $1.59 to $1.65 per share.

Conclusion

Although the acquisition will lower earnings growth in the near term, we believe that N-able is a significant addition to the company’s product portfolio. SolarWinds’ decision to offer only subscription-based products will boost recurring revenues going forward.  

However, declining cash balance (estimated $154.0 million at the end of second quarter compared with $274.0 million at the end of first quarter) is a major concern in the near term. Additionally, increased investments in products and expansion initiatives will likely impact margins in the near term.

Moreover, volatile macroeconomic environment and competition from bellwethers such as International Business Machines (IBM - Analyst Report), Hewlett Packard (HPQ - Analyst Report) and BMC Software are the major headwinds going forward.

Currently, SolarWinds has a Zacks Rank #3 (Hold).

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