SolarWinds Corporation

Thank you, Cindy. Good morning, everyone, and welcome to SolarWinds First Quarter 2012 Earnings Call.

With me today are Kevin Thompson, our President and CEO; and Mike Berry, our Executive Vice President and CFO.

Following prepared remarks from Kevin and Mike, we'll have a brief question-and-answer session. Please note that this call is being simultaneously webcast on our Investor Relations website at ir.solarwinds.com.

The press release with our results for the first quarter was issued earlier today and is also posted on our Investor Relations website. Please remember that certain statements made during this call, including those concerning our business outlook, product roadmap, growth plans and opportunities of the company and our products, and our ability to capitalize on our opportunities, are forward-looking statements.

These statements are subject to a number of risks, uncertainties and assumptions described in our SEC filings, including our Form 10-Q first quarter 2012 which we anticipate filing with the SEC on or before May 10, 2012. Should any of the risks or uncertainties materialize or should any of our assumptions prove to be incorrect, actual company results could differ materially and adversely from those anticipated in these forward-looking statements.

These statements are also based on currently available information, and we undertake no duty to update this information, except as required by law.

Cautionary statements regarding these forward-looking statements are further described in today's press release. In addition, some of the numbers during this call will be presented on a non-GAAP basis.

Our use and calculation of these non-GAAP financial measures are explained in today's press release, and a full reconciliation between each non-GAAP measure and its corresponding GAAP measure is provided in the tables accompanying the press release. Each non-GAAP item in our forward-looking financial outlook that we will provide today has not been reconciled to the comparable GAAP outlook item because we cannot, reasonably or reliably, estimate future adjustments such as stock-based compensation expense, which is dependent on our stock price at the time.

I'll now turn the call over to Kevin.

Thanks, Dave. Good morning to everyone on the call and thank you for joining us.

We're off to a strong start to 2012, creating momentum that we will work hard to build on during the remainder of the year.

I'm pleased to say that we significantly accelerated our license revenue growth in the first quarter to 35%, maintained high customer retention rates and continued to deliver best in class profitability with greater than 50% non-GAAP operating margins for the 8th consecutive quarter.

We feel that our market and product expansion strategy has delivered positive results as the awareness of SolarWinds has a provider of solutions for a wide range of IT management problems continues to grow. We are quickly changing the perception of SolarWinds in the minds of IT professionals from a provider of Network Management products to a company that provides purpose built solutions that are designed to solve most of their IT management challenges, whether those challenges are related to networks, servers, applications, storage or virtualization.

This is evidenced by the broad-based strength in Q1 throughout our entire business, including all core products and all geographic regions. While we still have work to do in building awareness of the breadth of IT management problems that our products solve for IT pros, we believe we are off to a strong start.

For the first quarter of 2012, total revenue reached a record $59.7 million, a 39% increase over the first quarter of 2011. License revenue in the first quarter reached a record $27.5 million, representing not only strong year-over-year growth of 35%, but also our 5th consecutive quarter of accelerating license revenue growth.

Maintenance revenue was also a record at $32.2 million in the first quarter of 2012, growing 43% year-over-year. We continue to believe that we have built one of the most powerful operating models in software, a model that has been able to consistently deliver high growth and support significant investments in our business to create the ability to deliver strong future growth while delivering robust operating margins.

This model has resulted in revenue growth, that has been among the best in class over the last 3 years, while at the same time, delivering non-GAAP operating margins that has consistently been one of the highest in enterprise software.

Our financial model once again showed great leverage as we posted a record non-GAAP operating income of $31.6 million in the first quarter, translating into a non-GAAP operating margin of 53%. In addition, we generated free cash flows of $30.9 million in the quarter, reflecting 41% growth over the first quarter of 2011.

We believe the conventional wisdom that so many young companies appear to embrace which says that, you have to trade profitability for growth, is inherently flawed and that it is possible to deliver strong growth while generating best-in-class operating margins. We are committed to building our business based on this belief.

The momentum we believe we have created was especially pronounced within our commercial business where our year-over-year growth in the new license sales was 45% in the first quarter, our fastest pace of commercial growth in over 2 years. Our commercial growth was driven by a combination of strong geographic and product performance.

Our North American commercial business, which is our largest and most mature region, had a very solid quarter, growing new license sales at a year-over-year rate of over 40%. This was the fifth quarter of accelerating growth in North America and our fastest pace of growth since the first quarter of 2010.

Our North American sales team continue to do an excellent job of driving new license sales through solid execution against demand from new and existing customers. Our focus on the cross sell and upsell opportunity inside our install base began to pay meaningful dividends in the first quarter, resulting in strong North American commercial Network Management growth.

Newer products, such as SolarWinds Virtualization Manager, DameWare NT Utilities and DameWare Mini Remote Control, also all performed well in the quarter, contributing to our robust North American growth.

We continued a string of strong growth quarters in EMEA, with our strongest growth quarter in the last 3 years. Our EMEA team grew new license sales by greater than 60% in the first quarter.

The strength in EMEA new license sales in the first quarter was driven by broad-based demand for all of our core products. And in addition, we also had a solid quarter of European sales of our DameWare products.

Our first quarter growth was spread across the region, reflecting contributions from many different countries in EMEA, with the largest contribution coming from the U.K., Germany and the Middle East. Our Latin America team also put up impressive growth numbers in the first quarter, delivering year-over-year new license sales growth of 50%.

This growth was driven by strength across most of Latin America with Brazil, Argentina and Colombia leading the way. While the biggest percentage regional growth stories in the first quarter were North America, EMEA and Latin America, our Asia Pacific business continue to deliver solid results, with new license sales growth of almost 30% against a very tough growth comparison to the first quarter of 2011.

We believe we are uniquely positioned in the APAC region from a go-to-market and product perspective and feel that an opportunity exists for this to be high-growth market for us for a long time to come. And importantly, we began to see an increase in demand in deal activity in Japan during the quarter, which has been driven by our early awareness building efforts.

We are encouraged by the initial response and remain focused on Japan being a meaningful contributor to our long-term growth in the region. And while our total U.S.

federal new license sales declined by a little over 30%, as compared to the first quarter of 2011, when you exclude the impact of one large project-based transaction which we closed in the first quarter of 2011, our run rate U.S. federal business also had a strong quarter, driven by solid year-over-year core product transaction volume growth of over 30%.

Needless to say, we feel very positive about the consistency of the strength in our business across geographies in the first quarter 2012, as it reflects the priority we have placed on building total demand and on developing a leadership team in each of our geographies, capable of executing successfully against this demand.

Turning to review of our first quarter 2012 performance from a product category point of view, our commercial Network Management business was very strong during the first quarter, growing 35% year-over-year. We believe that this growth rate reflects both a very significant growth opportunity that remains in network management as we further penetrate the global market, as well as our continued ability to quickly take market share from our old and tired competitors, who have go-to-market models that rely on hardware refresh cycles and big enterprise deals.

Through our unique go-to-market strategy, and our extensive easy to use and affordable Network Management product portfolio, we believe we have built a Network Management business that has not been tied to external factors like hardware refresh cycles. And which provides us with the ability to capture the global market opportunity in companies big and small in a way that none of our competitors currently can.

As a result, our commercial Network Management business has continued to charge ahead in what we believe is the pace of growth that has meaningfully outstripped our competitors. We intend to be, and believe we are rapidly becoming, the dominant player in Network Management in the global marketplace.

We also believe we are rapidly creating a meaningful presence for SolarWinds in the systems and application management area of IT management and that our results support this belief. Our systems and application management product portfolio, which now includes SolarWinds Server & Application Monitor, SolarWinds Synthetic End-User Monitor, DameWare NT Utilities, DameWare Mini Remote Control and SolarWinds Patch Manager, gives us the ability to solve a significant percentage of the day-to-day issues faced by system administrators with powerful, yet easy-to-use products that are also among the most affordable available.

Our efforts to build presence in this market over the last 12 months translated into strong growth and momentum in 2011 that carried into the first quarter of 2012. With new license sales of our entire portfolio product versus admin, growing by over 200% on a year-over-year basis.

Momentum is also continuing to build for SolarWinds Virtualization Manager as an increasing number of business-critical workloads are virtualized both On-Premise and in the cloud. In addition, with an increase in the amount of unstructured data, that is being captured, stored and then ultimately accessed referred to these days as big data, we are seeing a strong connection between storage management and virtualization management, which has resulted in a meaningful increase in the attach rates for SolarWinds Virtualization Manager through sales of SolarWinds Storage Manager.

As a result of these trends and the increase in awareness of our ability to solve these emerging problems, sales for SolarWinds Virtualization Manager increased by more than 150% on a year-over-year basis. By quickly and significantly increasing the number of IT management problems we can solve, with products that are focused on the IT Pro, our powerful but also very affordable, and are easy to implement and use, we have been able to step in front of an increasing number of purchasing cycles.

Our web and inside sales based go-to-market model has then enabled us to accelerate the ability to take advantage of these opportunities. We believe that our relevance, and more importantly, the recognition of our relevance among IT pros is growing rapidly beyond our network management roots, to the broader IT management market.

This rapidly broadening relevance is reflected in our results of our first quarter. These results highlight the synergistic benefits we believed we would be able to create with our market expansion strategy.

It is no longer only the case for our awareness in Network Management helps us to drive sales of our system storage, login event or virtualization management products. Driven by the user-centric characteristics of all our products in our efforts to build awareness of the problems that these products solve, we are now actually seeing that our awareness in virtualization, systems storage and login event management has helped to drive sales in all of our other markets, including Network Management.

For example, we're not only seeing improved cross sell attach rates of core products like SolarWinds Storage Manager and Virtualization Manager, SolarWinds Network Performance Monitor sales, but also the reverse. Improved attach rates for SolarWinds Network Performance Monitor, the sales of products like SolarWinds Virtualization Manager.

Improved search, better incentives for member engagement including some very cool game application features, an increase in the amount of content on a broader range of IT topics. With regard to our efforts to localize our products for key International markets, we remain on track to meet the goals we laid out of our business at the beginning of the year.

To the Japanese market in particular, we plan to release localized versions of SolarWinds Network Performance Monitor before the end of the third quarter and SolarWinds Netflow Traffic Analyzer before the end of the fourth quarter this year, and additional network and systems management products will follow in 2013.

We have also made significant progress around our efforts to build a localized web presence for Japan, Germany and Brazil, and are on track with our website localization plan. Now that we have finished the first milestone of our redesign of solarwinds.com, we expect to accelerate the rate at which localized content is added to these sites.

In addition, we believe that we have significantly improved the user experience for customers and prospects on dameware.com, which will allow us to drive increased traffic to this site as well as higher conversion rates.

Turning to some of our significant product advances. In early March, we released DameWare NT Utilities and DameWare Mini Remote Control version 8, the first new version since our acquisition of DameWare in December 2011.

The main new features in this release were chat, some screenshot features which many DameWare customers have been requesting. The response to this new release has been very positive.

The acquisition of DameWare has not only given us access to the over 500,000 IT professionals who have purchased DameWare products in the past, it also has given us a very strong product set and has consistently been rated as #1 in its class by system administrators ahead of competing products from LogMeIn, Teameur and Citrix. In mid-April, we acquired technology from Rove IT and subsequently launched SolarWinds Mobile Admin based on that technology.

SolarWinds Mobile Admin is a very robust product, that allows IT pros to monitor and manage over 40 different platforms and applications, including the SolarWinds products suite from their iOS, Android or BlackBerry mobile devices. With the addition of SolarWinds mobile admin, we continue to respond to our users' needs.

They've been asking us for a mobile-based IT administration product that has all the product characteristics they have come to expect from us, including affordability, scalability and ease of use. As a result, we believe there's a lot of potential to attach SolarWinds Mobile Admin to sales of our core products and the sales of SolarWinds Mobile Admin to our existing install base.

Pricing for SolarWinds Mobile Admin is very affordable, starting at $695 per user.

Last week, we released Version 5.0 of SolarWinds Virtualization Manager. This release adds the Microsoft Hyper-V support to SolarWinds Virtualization Manager, which we believe is an important step in increasing its market opportunity.

We are seeing a meaningful number of requests from IT pros to support Hyper-V. We think demand for Hyper-V support will continue to accelerate as an increasing number of customers deploy mixed hypervisor environments based on the criticality of the workload or applications they're deploying.

In addition, we believe that the release of Hyper-V 3.0 will further accelerate this trend, based on the early reaction it is getting from IT pros.

Powerful, easy to evaluate, easy to implement and use, and affordably priced. We believe that this release gives us the ability to solve the great majority of the problems told by the high priced and complicated solutions provided by other vendors like Infoblox, Bluechat Networks and several others at a fraction of the cost.

And without requiring the replacement of existing DHCP and DNS infrastructure. And in true SolarWinds fashion, we expect the SolarWinds IP Address Manager will add meaningful new functionality with each future release, allowing us to close the gap in functionality with competing products quickly while maintaining our significant pricing advantage.

And with that, I'll now turn the call over to Mike for a more detailed review of our financial results and an update to our outlook for the remainder of 2012.

Great. Thank you very much, Kevin.

A very good morning to everyone. Similar to our previous earnings calls, this morning I will go through the details of the first quarter 2012 financial results, as well as our key metrics and our outlook for the second quarter and full year of 2012.

But before going into those details of the quarterly results, I'd like to make some high-level comments on the financial performance for the first quarter of 2012. As Kevin mentioned in his prepared comments, the first quarter was a very good start to the year and that has certainly reflected in the financial results.

For the first quarter of 2012, we exceeded the high end of the quarterly outlook for all of the revenue and non-GAAP profitability measures we provided on the February 2012 earnings call. Continuing the trend that we saw during each quarter of 2011, the results in the first quarter of 2012 for license, maintenance and total revenue, all saw an acceleration in our year-over-year growth rates.

Our license revenue growth was once again driven by strong transaction volume growth in commercial and U.S. federal.

Maintenance renewal rates for our core products remain consistent with our historical levels, which helped drive our growth and maintenance revenue of 43%. Non-GAAP operating margins exceeded 50% for the 8th straight quarter.

Cash flow from operations and free cash flow were higher than expected, and both grew on a year-over-year basis by greater than 40%. And based mainly on the strong results in the first quarter of 2012, we are increasing our revenue and profit outlook for the full year 2012.

Okay, with that said, let's get started with a more detailed review of the quarterly results for the first quarter of 2012.

Total revenue was $59.7 million or 39% year-over-year growth rate, which is an increase from the 34% year-over-year growth in total revenue we experienced in the fourth quarter of 2011. License revenue finished at $27.5 million or a year-over-year growth rate of 35%.

This is the 5th straight quarter of accelerating year-over-year license growth -- license revenue growth, excuse me. Maintenance revenue continued a string of strong quarters and finished at $32.2 million, which represented a 43% year-over-year increase.

Our non-GAAP operating expenses in the first quarter of 2012 were $25.6 million, an increase of $1.6 million or 7% on a sequential basis versus the fourth quarter of 2011. This sequential increase of $1.6 million in non-GAAP operating expenses reflects our continued investments in multiple areas designed to drive growth.

These include our marketing initiatives for the new and redesigned websites and community platform, the focus on R&D to develop and enhance our product portfolio and adding new sales management and headcount largely in line with our expected new license sales growth. For the first time in company history, our non-GAAP operating income amount exceeded $30 million and finished at $31.6 million in the first quarter of 2012, resulting in a non-GAAP operating margin of 52.9%.

As we discussed throughout 2011, our financial model continued to exhibit strong leverage, with ability to drive incremental profitability through either higher than expected revenue or a better return on investment from our incremental expenses. For the first quarter 2012, our non-GAAP operating margin outperformance was driven mainly by the fact that our total revenue was approximately $3 million above the high end of our outlook, which in turn drove the majority of the nearly $3.9 million in incremental non-GAAP operating income as measured against the high-end of our outlook.

Non-GAAP net income was $22.8 million and non-GAAP diluted earnings per share was $0.30 for the first quarter of 2012.

For the first quarter 2012, our international revenue was approximately 25% of total revenue. Let's move from the income statement our new license sales results for the first quarter.

Total new license sales increased on a year-over-year basis by 36%, with commercial new license sales growing by 45%. The commercial new license sales growth of 45% was comprised of North American commercial growth of 42% and international commercial growth of 51%.

As we expected and highlighted on the February 2012 Earnings Call, U.S. federal new license sales were consistent with our expectations and below the first quarter of 2011 by 32%, which was due in large part to the large project-based deal that was booked in the first quarter of 2011.

U.S. federal new license sales were approximately 6% of the total company new license sales in the first quarter of 2012.

Okay, let's move on to our key business metrics which continue to illustrate our goals of driving license revenue growth through increased volume versus higher average transaction size. In the first quarter of 2012, transactions that contained a core product increased year-over-year by 37%, an acceleration over the same measure for the fourth quarter of 2011 of 33%.

The core product year-over-year growth was consistent across most regions as commercial grew by 37% and U.S. federal grew by 32%.

We define core transactions as transactions that include a core product of either of our Network Management products and modules, application management, storage management, virtualization management products or our login event management products.

For the first quarter of 2012, the total trailing 12-month average transaction size, excluding Kiwi and DameWare, finished at approximately $8,600, an increase of 1% over the same measure ending the first quarter of 2011.

Now, let's move on to the balance sheet. Including our short-term investments of approximately $32 million, we ended the first quarter with total cash, cash equivalents and investments of $171.2 million versus $152.4 million as of December 31, 2011.

The quarter-over-quarter increase in total cash of approximately $19 million is primarily driven by approximately $28 million generated from cash flow from operations, partially offset by cash used in investing activities, primarily the acquisition of EminentWare. As we have discussed in previous calls, a large percentage of our cash balance is held in U.S.

dollars, as approximately 15% of the total cash balances held in the foreign currencies of our international subsidiaries. Accounts receivable finished at $27.8 million as of March 31, 2012 and our DSOs, calculated on a trailing quarterly revenue, finished at 42.5 days, which is our lowest DSOs in the last 3 years.

Our worldwide collection teams continue to due a great job in managing our receivables and collecting cash on a very timely basis. Our total deferred revenues saw a very nice sequential increase of nearly $6 million from December 31, 2011 to finish at $83.0 million.

This is a 38% year-over-year growth versus the March 31, 2011 balance of $60 million. Our quarterly cash flow from operations finished at $28.3 million, an increase of approximately 50% on a year-over-year basis.

Free cash flow was $30.9 million for a year-over-year increase of 41%. These amounts were better than our outlook, mainly due to higher than expected cash collections.

On a trailing 12-month basis, we have generated approximately $124 million in free cash flow, or approximately 58% of total revenue for the same period. We define free cash flow as GAAP cash flow from operations less purchases of fixed assets, plus excess tax benefits from stock-based compensation.

As we discussed on multiple occasions preceding this call, we continue to expect to pay approximately $15 million in U.S. federal taxes during 2012.

And related to that expectation, we did make U.S. tax payments totaling approximately $3.5 million in the first quarter of 2012.

Cash used in investing activities was $17.6 million, which included cash used for the EminentWare acquisition and the Hyper9 earn-out payment. Cash provided by financing activities totaled $5.2 million, which includes $3.3 million received from the exercise of stock options, and $3.3 million from the excess tax benefit of option exercises.

Okay, let's move on to the outlook for the remainder of 2012. In addition to the company's outperformance in the first quarter of 2012, there are 2 other main items that will impact our outlook for the remainder of the year.

As Kevin mentioned earlier, we completed the acquisition of Rove in early 2012. We expect the addition of Rove to add approximately $500,000 in total revenue over the remaining 3 quarters of 2012, and to be slightly dilutive to non-GAAP operating income margins and non-GAAP EPS for the remainder of 2012.

As with previous acquisitions, the majority of the incremental spending will be in R&D and marketing, as we are typically able to integrate the acquired products into our existing sales motion and absorb the administrative functions without significant incremental expenses. Additionally, based mainly on the strong performance in the first quarter of 2012, we are increasing our outlook for DameWare for the remainder of 2012, which also raises our full year outlook from what we provided to you on the February 2012 earnings call.

we expect total revenue to be in the range of $59.0 million to $60.2 million, representing growth over the second quarter of 2011 of between 29% and 31%. This revenue range is expected to comprise license revenue in the range of $26 million to $27 million, or 23% to 28% year-over-year growth, and maintenance revenue in the range of $33.0 million to $33.2 million, representing year-over-year growth of 33% to 34%.

We currently expect non-GAAP operating margins to be approximately 50%, which includes the expected dilutive impact from the Rove acquisition. Non-GAAP EPS is currently projected to be between $0.26 and $0.27 per share, given the non-GAAP effective tax rate of 30%, and fully diluted weighted average shares outstanding for the second quarter of 2012 of 76.5 million.

total revenue for 2012 to be in the range of $250 million to $260 million, which reflects anticipated growth of 26% to 31% over 2011 total revenue of $198.4 million. We now expect our full year non-GAAP operating margins to be between 50% and 51%.

We expect non-GAAP EPS to be in the range of $1.14 to $1.19 per share. This reflects an assumed 29.5% full-year non-GAAP effective tax rate and fully diluted weighted average shares outstanding for the year of $77.2 million.

As I'm sure you noticed, we increased our non-GAAP operating income margin expectations to between 50% and 51%. This is a result of the first quarter margin coming in at approximately 53% and our current expectations of approximately 50% margins for the remaining quarters in 2012.

Network Management, which includes log in event management, is expected to grow by 21% to 26%; storage and virtualization is expected to grow by 30% to 35%; and system and application performance management, which includes our last 3 acquisitions of Rove, EminentWare and DameWare is expected to grow by approximately 100%.

That concludes my prepared remarks. Thank you very much for your time.

I'll now turn the call back over to Kevin.

Thanks, Mike. As evident by our first quarter results that we have shared during this call, we believe that the aggressive business and product expansion strategy that we embarked on at the outset of 2011, including creating standalone products from many of our Network Management modules and rapidly expanding the number of problems of that we solve for IT pros, has really begun to take hold and has allowed us to enter a new phase of growth.

While we still have much work to do to reach our stated goal of being one of the best companies in the world, by using the web to reach our potential buyers, we are very pleased with the progress that our marketing team has made in expanding and improving our web presence over the last 15 months. We believe that we continue to differentiate ourselves from all of our competitors in this approach to the IT marketplace and are making consistent progress toward our goals.

As we look forward to the rest of 2012, our strategic focus will be on continuing to deepen our product offerings and our relationships with IT pros, in the areas of systems and application management and virtualization management. This will include adding additional products and additional features to the products that we already have.

We expect to accomplish this through a combination of organic product development and additional acquisitions of smaller companies with products that have a modern technology architecture that we can quickly slide into our sales and marketing engine. We also remain focused on continuing the expansions of our international business which we are accomplishing through the localization of our web presence, starting with solarwinds.com, and our core products, starting with our flagship network management offerings, SolarWinds Network Performance Monitor, and SolarWinds Netflow Traffic Analyzer.

In all of our market areas, our approach is consistent. We focus exclusively on the IT pros who would use our products everyday to manage and solve the issues that arise in their IT infrastructure.

We understand their challenges, and how they want to address these challenges. These may seem like simple concepts.

But reality is that most IT pros have come to expect and accept a much different experience. Being forced to work with typical enterprise software vendors, these products are difficult to evaluate, buy, use and maintain, and really don't address the realities of day-to-day IT management.

We believe that IT pros deserve to work with a software company that is laser focused on making IT pros' jobs easier, not more complex. We believe that we can change their expectations of enterprise software, beginning with how they research, find and evaluate solutions, to changing the experience of purchasing, implementing and ultimately, using those solutions to get their job done each day.

IT pros deserve to be delighted by the solutions they use, and by the relationship with the software company who provided the solutions. At SolarWinds, we call this unexpected simplicity.

And it is the concept that drives why and how we do all that we do. With that, we will open up the call for questions.

I was wondering if you could talk a little bit about the attraction of some of the recent acquisitions. I know you talked about DameWare but in more particular, I was just interested in from the acquisitions where you acquired user-bases.

I was interested in your initial views there on revenue conversion rates and so what you're seeing in terms of these new I guess acquired user bases coming to your website.

Yes. Well, what I was saying that the initial feedback we're getting both from the users of the companies we've acquired which is with DameWare, EminentWare, Rove, some of those are very new for us, is that, these IT pros behave in much the same way as the network engineers and IT journalists we've been dealing with for the last 5 years.

That we can build a relationship with them and it is about building a relationship, creating trust and making sure that they began to, not only have a relationship with the company we bought, but begin to see value in the relationship with SolarWinds. And that we can enhance the experience they've had with the products and with the company that they've had a relationship with in the past.

So we feel good about what we've gotten done. We're definitely learning about how to communicate with big user bases that we acquire, learning how to share information with them in a way that it begins to create that trust and create that trust quickly, so that ultimately, we can convert them to buying a lot of the other products that we sell.

I think we've also done a, do a very nice job of understanding their needs, quickly bringing new products to market from the products that we acquired that add feature and functions that may have been asking for, for a long time. And really hoping to show them how much different it's going to be, and much better it's going to be to have those products be a part of the SolarWinds family.

So we continue to be excited about it, and it continues to be of focus for us. We'll keep looking for good products to buy with large user bases.

We do believe we can create value from that, and early indications are that we are.

Okay. And secondly for me, if I could.

I just have a question on Virtualization Management business now that you do have support for the Windows platform. Any initial commentary on sort of the download activity there so what you're seeing on the Windows side?

Yes. It's pretty early, we just released the Hyper-V version of SolarWinds' Virtualization Manager we released a free tool that had Hyper-V support a couple of weeks prior to that, the activity has been strong.

The interest level's been really high. We definitely hear from our customer base, which is midmarket, apartment level enterprise, small businesses that they are using Hyper-V.

And we understand that VMware has the dominant market share, especially the data center and had a significant application workload, but there's a lot of Hyper-V being deployed out there in either a less critical workload, or by smaller companies that have an enterprise relationship with Microsoft where they get Hyper-V for effectively free. And so the ability to the manage both VMware environments, as well as Microsoft environments, we think is important, particularly in the midmarket.

And so we're excited about what this product can do for us. So things are looking good to start, but it's early.

Kevin, it's hard to find something in this quarter to sort of tick on. And are just trying to dig deeper.

I guess, obviously your strategy applying this unique model, is working across both products and geos. So Kevin [indiscernible] that's coming along.

I mean, the results, the numbers are pretty impressive for international but it's my understanding that you're not [indiscernible]. So maybe you can just sort of bring us up to speed on where you are with localization of a web presence.

And I guess Germany [indiscernible] they've talked about in the past. Can you get us sort of a -- just to tell us were you are and when you plan to be fully [indiscernible].

I guess you're up and running there, but sort of a fully booked in those regions.

Yes. So it's a good question, John.

So I'd say on the -- as it relates to our international results, maybe first. I think what we're seeing is the kind of the results of a lot of work we've done to build awareness and build brand, around not only our new products, but also just continuing to expand the knowledge of what we're doing in the Network Management side, to our brand outside North America even in Network Management, is still not as strong as it is inside of North America, there's a very large growth opportunity in Network Management outside North America.

I think we've done a good job of increasing web presence, increasing search traffic and that is a real key. And we've expanded our web presence in lots of different ways.

One, by adding content. Two, by starting to add a lot of local language pages around our products.

We've had a German site for longer than we've had any other localized sites. So that's site's a little more extensive, is probably a good way to put it.

Then our Japanese site, or our Portuguese site. And so I think we are driving higher levels of demand there.

So you heard my comments on Europe, U.K., Germany, we're kind of 2 of the leaders in growth in the first quarter. And that's being driven a lot by this local web presence and local brand building that we've been doing.

So we are on track with where we're expected be. You'll see that start to accelerate as we move through the rest of this year, because there were certain things we could not do on a localization site from a web point of view, until we got solarwinds.com redesigned, up and launched.

So if you haven't been to solarwinds.com recently, go take a look. We're pretty excited about it.

We think it's really a significant change in terms of the look and feel, navigation, usability, search. We're now going to start to localize more quickly.

So, feel good about where we are. We're going to get the things done, we need to get done this year, which will have benefits in 2013 and beyond.

Okay. So I guess, Mike said that international is up like 51%.

But just so I understand, you expect, and I understand you got some acquisitions in there, too. But do you expect to gain more traction as you move forward through the year there?

Yes. I mean, we're seeing a lot of really good indications in our International business.

One, the further thing really is, we have are really strong international management team that's now been in place for a good period of time. And we have a lot of confidence in what we're doing and how they're doing as they've really created a level of consistency over the last 12 months, and how we go to market in Europe and in Asia, with how we grow the -- go to market in North America.

So that's been something we've been focusing on, and something we're pretty excited about. We also have done a lot of as I indicated, a lot of awareness building in those locations of our new products.

We've done a better job of getting our international sales team comfortable with selling those new products because it's always easier to sell what you know. It's harder to sell things that are new, but our international team is picking up those new products a lot more quickly.

It's an attraction around new products like virtualization management and storage management is growing -- outside the U.S., we're selling more and more of it, which is part of what's driving 60% plus growth in Europe, and driving almost 30% growth in Asia off a very difficult compared to in prior year when we were going at 70% plus. So I feel good about what we're getting from both a product point of view and team point of view.

I think we can continue to grow very quickly and can, even in certain markets in Europe and Asia accelerate the growth that was really strong in Q1.

So, I'd like to follow up perhaps with Mike. Mike, you talked about new sales.

It sounds like you're according to plan towards new sales headcount higher. Can you just give us a little more information on that?

About what [indiscernible] subjective about. If you can give us a number, great.

But are you continuing to hire [indiscernible] domestic at this point or any information on that would be helpful.

Sure. So you're breaking up a little bit there, John, so I'm going to guess what you were asking about what my comment about adding sales in line with estimated or projected new license sales.

So we continue to add sales folks in all of our regions, in the U.S., in Europe and in Asia Pacific as well. Now we have a pretty good dashboard in terms of where we think we need to hire and Paul and his team.

So in my comment there was really to make sure everybody understood while sales and marketing -- that increase, a good bit of that increase was in marketing this quarter, while sales did increase headcount as a percentage of license, it was actually in line. So we continue to do a very nice job of managing the total sales headcount.

As you know, we don't give that number, but we do expect through 2012, to be able to add that in line with our projected new license sales.

Kevin, are you -- now at a broader products suite, obviously the success you're having U.S. probably in international as well, are you starting to see the conversation change in terms of going further up the stack, looking for SolarWinds do more for a customer?

I mean, just maybe talk to help conversations have changed over the last 3, 6 months versus where we were a year ago now given the success you're having in the enterprise?

Yes. So, what I'd say is look, most of the conversations we have , Daniel, are the same conversations we've been having for the last 3 to 4 years, because our go-to-market approach really drives conversations being the same, which is you've got a problem, we've got a product that you've come and found and solves that very specific problem that's got your hair on fire at the moment.

And we want to make sure you buy that product. Now, I think we're doing a good job of pointing out other products that we have, that we think are related to that problem, and attaching those products.

So whether it's products like SolarWinds Mobile Admin, which we've just added to the portfolio that we believe all of customers ought to buy and own, because why wouldn't you be able, want to be able to actually solve some of the problems that come up each day from your mobile device, plus you can do for $699. I think we're doing a better job of attaching product like that to a sale.

But we're not trying to drive conversations around, "Hey, buy everything we have today." Yes, we got a bunch of customers now who own a large number of our products.

And we have a number of customers who are buying more products per invoice. But because our model has taken a very true "you got a problem, you find us when you're looking for that solution to that problem."

That initial sale does not change that much. Now, follow on sales are starting to change.

The ability to go back and cross-sell and upsell and we're doing a better job of marketing and selling around and that's changing, which is increasing the number of our products over time that the customer buys and uses which is really part of the strategy. But I don't want that initial conversation to change very much.

I want to be, you've got a problem, we'll solve it right now, $5,000, send me the PO, we'll sell you $50,000 or $60,000 of additional products over the next 12, 15 to 18 months. Because the reality is, I don't think anyone's taking that opportunity away from us.

Our competitors don't have a response right now. And so we don't have to rush to own an account, we can just add technology in to those accounts as they have more problems, which is part of just changing that relationship and that expectation that IT pros have of "Look, all I want to do right now is solve the problem you've got.

I know you'll come back because I know you're going to be delighted with the product that we gave you." And so that's how we'll make sure we grow inside those accounts.

So that's what we're trying to drive.

I would like to drill down on what the acquisitions might have added to license revenue in the current quarter. If you could give us any kind of just general or specific numbers on that?

Yes. We generally don't break out revenue by product line.

What I'll tell you to kind of give you a little bit color is that all of our core products did better than we expected coming in to the quarter. So the outperformance is driven by a combination of better than expected performance of our historical products, and better than expected performance of some our acquired products, particularly DameWare had a nice quarter.

But really because of the things we did to really change their web presence, things we did to improve that product to really apply our go-to-market model, our sales model, our marketing model to their user base, both free and pay. So, really all of our products did better than we thought they would do.

So this is really driven by a cross of historical product, new product, both built and acquired, all performing better than we expected. So I think that's why -- the kind of best color we can provide on.

And the great thing is that's a global statement also. It's not just in North America.

That's North America, Europe, Asia, LatAm.

Great. And maybe asking a little differently.

Before you had thought that DameWare and EminentWare when combined, contribute $5 million to 2012 revenue. You said you now expect it to be more, I wonder if you might be able to comment on that.

So, Steven, it's Mike. As we talked about, we did bump the DameWare number for the full year, so we do expect it to do a little bit better than $5 million.

As Kevin said, certainly they both had strong quarters in the first quarter, so we're not going to redo that number for you, but we will tell you that we do expect to do better and that's one of the reasons why we bumped the full year number.

And just lastly, you did a large government deal in the first quarter a year ago. Any color on the size of that?

No. We don't break that out.

We did say it was significant in that in the first quarter, over $500,000 in license revenue is all we disclosed.

If you remember the comment I made which is that if you pull that deal out, we had 30% growth in core product transaction volumes in Federal in the first quarter of 2012. So, we feel real good about what we got done on the run rate side as you know, we've been focused very hard on increasing the volume of transactions and the consistency and predictability of our federal business.

We feel good about what we've gotten done and that we are making progress towards that goal.

Two quick questions for me. If you look at the balance between transactions which were terrific in the quarter and ASPs, do you feel like the breadth of the products now are such that ASPs are going to remain relatively stable and transaction book is going to be primary driver for revenue, or do you see ASP's moving to higher over time?

I think we are focused on driving transaction volume growth. And we think that's going to be the largest contributor to revenue growth as we look forward.

I think ASPs may come up slightly, but pretty much consistent with what we've seen, which is in the low single digits in the last couple of quarters. Some of the things we're doing around products like SolarWinds Mobile Admin, which is only $695, it doesn't move the average transaction that much.

It will hopefully have a little bit of a positive impact in size, but our focus is on volume. We've got a broad product portfolio, we appeal to a much larger population of IT pros than we appealed to a year ago.

And so we think we should be doing more and more core product transaction volumes each quarter as we move forward.

And just one quick follow-up. I missed this earlier in the call, but did you give the acquisition contribution in the quarter?

That's it for me.

Yes. We didn't give the specific acquisition contribution, what we said was that all of our products, both core products that we've had for a while, as well as new products we've added and we both built and acquired, performed better than our expectations in Q1.

So it really was, broad outperformance across our entire portfolio, compared to our expectations that drove a very strong Q1.

I guess first, Mike, just on the second quarter license guide. Normally, I think for you, you'd see some seasonality, 1Q to 2Q.

I assume the guide is just sort of taking into account perhaps in the outperformance on the first quarter because I don't think there's any sort of big deals in the second quarter from last year that would sort of skew the normal seasonality.

I would agree with that statement Kirk. It's really taken into the outperformance of Q1.

Keep in mind though, Q2 typically for us, a little bit of a more difficult quarter in the past, plus it's not a big fed quarter, so we're just being a little bit prudent as we go into Q2.

Okay. That's what I figured.

And then just secondly, obviously, really strong growth on the network management side. ASPs seem to remain at about the same level.

I guess, Kevin, when you talk about new customers, I guess when you're seeing growth is it net new customers? Or are you seeing nice expansion from existing customers in sort of more of a land and expand?

I guess is that skewed one way or the other?

Yes. So, our growth still is driven in large majority by the addition of new customers to our internal customer base.

So that's driving the larger percentage of our growth and a larger percentage of our license sales. With that being said, we are doing a better job of cross-selling and upselling into that install base.

We've come up weaning I think our sales and marketing teams have come up with a number of creative and interesting ways to get our existing customers interested in the new products that we have, that we brought to market, and new ways to capture their attention when they happen to have a problem that this new products solve, and they may not be aware that these products solve those problems. So we have to make sure we capture their attention at the moment they're looking for solutions to those problems, we're doing a better and better job of that.

And so that is becoming a meaningful piece of our business each quarter. But is still mainly being driven by adding new customers into the fold.

I wanted to ask about what we've heard regarding the cross-selling team that you've talked about Analyst Day, I can't remember the headcount that you said was going to be dedicated to that effort, but can you talk about the, any specifics around revenue contribution from that team and the impact it had on the quarter? And was, and actually was this the first full quarter of that effort?

Yes. So we didn't talk about specifically how many headcount we're adding -- we said -- it's not a lot, so it's a pretty small number of folks and it's less than 10% of our sales team.

So in terms of contribution, that team is very quickly getting up to a similar level of productivity that the rest of our reps have, which means they're contributing close to the same level as our reps that are getting traditional downloads and are responding to the inbound demand from both new and existing customers. Keep in mind, our existing customer for years have been coming to download the product, when -- new product when they've got a problem.

And we've reached out and touched them. We just got a lot more proactive about how we message to them, about when we message to them and about what we message to them, to try to be able to raise their hand and say, "Hey, I want to talk about that."

So what I'll tell you is that those reps are very quickly approaching the level of productivity of the rest of our team. And there's nothing we see that says we can't get them there.

And if we can get them to productivity that -- at the same level that's obviously that's a big win for us. And right now, we believe that we can, based on what we're seeing.

And just to follow-up. Is this the first full quarter of that team's efforts in your numbers?

It was the first full quarter. We started to put that team together in the fourth quarter.

They were in place. A good part of the fourth quarter, really starting at 0 in terms of both pipeline and the activities we were having them do.

And so Q1 was the first full quarter, we're still refining what they do everyday. We've got a very creative sales management team that finds new ways, literally on a daily basis, to reach out and speak with customers.

Our marketing team is trying a number of new approaches that we're testing and measuring and then tweaking based on what we're seeing. So I think we'll continue to get better at it but they had a good Q1.

Cindy, we have time for one more question.

Was there any large transactions that you benefited from in Q1? Or was this mainly run rate transaction business?

Rob, it's Mike. We did not have any transactions greater than $500,000 in license revenue, it was just a very good solid run rate quarter.

Great. And given you had, I guess on a year-over-year basis there was a large deal, some large deals.

As I think about Q2 and the sequential guidance, why is it falling less than we seen seasonally over the last couple of years in terms of total revenue? And I guess in terms of license revenue, outside of 2010, where I think there was a tougher compare, it falls below what you've seen seasonally.

So why the reason for conservatism with regard to the June quarter?

So I think if you look at the guidance we gave for the full year, Rob, we've raised our guidance for the full year, which effectively means we've even raised our own expectations a little bit for Q2 through Q4 of this year. As Mike indicated, one, we had a very strong first quarter.

The second quarter has been a good quarter for us, but has not been our strongest growth quarter historically. And there's really no great reason for that, but it's just historically been the case, I think we're trying to make sure we take a prudent view of the second quarter that we put ourselves in a position to be able to achieve our outlook.

And hopefully, we'll continue to deliver strong growth that meets people's expectations and exceeds those expectations. And it's still strong growth numbers.

So I think those are the things we'll are looking at as we put together the guidance for the rest of the year and in particular Q2.

Okay, Cindy. Thanks very much for helping us out.

Thank for everyone for joining us today. That concludes our first quarter earnings call.