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On Jun 11, 2013, Zacks Investment Research downgraded SolarWinds Inc. (SWI - Snapshot Report) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

The downgrade reflects SolarWinds not-so-impressive first quarter 2013 results as well as the dilutive N-able acquisition, which it completed at the end of May this year.

SolarWinds first quarter earnings of 34 cents per share beat the Zacks Consensus Estimate by a couple of cents. However, revenues of $72.9 million not only failed to beat management’s guided range of $74.9–$75.7 million but also lagged the Zacks Consensus Estimate of $75.0 million.

Post first quarter results, SolarWinds announced the N-able acquisition, for which the company agreed to pay $120.0 million in cash. Although the acquisition is expected to contribute $8.0 to $9.0 million in revenues for the remainder of 2013, it will lower earnings by 11 cents per share.

Currently, SolarWinds expect earnings per share in the range of $1.59 to $1.65 for the full year. Moreover, the acquisition will reduce cash balance (estimated $154.0 million at the end of second quarter compared with $274.0 million at the end of first quarter), which is a major concern in the near term.

Year-to-date, SolarWinds share price has declined approximately 24.93%.

The Zacks Consensus Estimate for the second quarter of 2013 has declined 11.4% (4 cents) to 31 cents over the last 60 days.

The Zacks Consensus Estimate for 2013 decreased 38.0% (11 cents) to $1.31 per share over the last 60 days. The Zacks Consensus Estimate for 2014 dropped 7.1% (12 cents) to $1.58 per share over the same period.

Other Stocks to Consider

Not all network management and related software technology providers are performing as poorly as SolarWinds. We recommend Advent Software (ADVS - Snapshot Report), which has a Zacks Rank #1 (Strong Buy). Netapp Inc. (NTAP - Snapshot Report) and EPIQ System (EPIQ - Snapshot Report), both having a Zacks Rank #2 (Buy), are also looking good at present.

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