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SolarWinds Inc.(SWI - Snapshot Report) is looking to enhance its technical capability by gaining access to new technologies through acquisitions. The company recently acquired a privately-held company Confio Software, the maker of Ignite database performance management software for $103 million in cash. This software helps in enhancing the efficiency of the data base management process.

We believe that Confio would be a meaningful addition to SolarWinds product portfolio, as both the companies provide software solutions. Confio has a rich portfolio of products, which are being used by 40% of the Fortune 50 companies. Confio’s performance over the past few years has earned it a place in the Deloitte Technology Fast 500 list. Moreover, recently ColoradoBiz named it the 2013 Top Company in the software category.

SolarWinds is focusing on smaller companies as far as acquisitions are concerned. In May 2013, the company acquired N-able Technologies for $120.0 million in cash.

There was a definite purpose behind this acquisition as privately-held N-able develops and provides cloud-based remote monitoring and management (RMM) and service automation software for Managed Service Providers (MSPs).

N-able enhances SolarWinds’ product portfolio, which will help it to address 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.

Although these acquisitions are expected to weigh down earnings growth in the near term, we believe that these privately-held companies will enhance the technical capability of SolarWinds in the long run. Its decision to offer only subscription-based products will boost recurring revenues going forward.  

On the other hand, increased investments in products and expansion initiatives will likely impact margins in the near term. Moreover, a volatile macroeconomic environment and competition from bellwethers such as International Business Machines Corp. (IBM - Analyst Report), Hewlett Packard Company (HPQ - Analyst Report) and CA Technologies (CA - Analyst Report) are the major headwinds, going forward.

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

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