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SolarWinds Inc (SWI) vs. Splunk Inc (SPLK): A Tale of Two Data Management Companies

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Data surrounds us, but we only perceive a small fraction of it.

Companies like SolarWinds Inc (NYSE:SWI) and Splunk Inc (NASDAQ:SPLK) empower customers to gain dominion over complex digital networks and turn data from numerous disparate sources into actionable business insight. Think banks aggregating financial activities from numerous sources (ATM, wire transfer, online banking, credit card transactions) to detect fraud or identifying anomalies across network devices in order to quickly guard against malicious attacks that could endanger customers’ accounts or personal information.

Low-cost model

SolarWinds Inc (NYSE:SWI)SolarWinds Inc (NYSE:SWI) provides network and server monitoring software with a unique business model that incurs the lowest costs in the industry. By hiring developers and product managers in Brno, Czech Republic and Chennai, India instead of Austin, Texas, the company limits Research & Development (R&D) costs to 10% of revenue, while still releasing meaningful new products twice a year.

Further, SolarWinds Inc (NYSE:SWI) sells from the inside: it does not have sales reps in the field, wining and dining prospects’ CIOs. Instead, it spends sales and marketing dollars (only 27% of revenue!) driving prospects to its website, where they can freely download full-feature trials. Thereafter, the inside sales team quickly up-sells prospects to the full product, with 70% of deals closing in less than 20 days.

SolarWinds Inc (NYSE:SWI) calculates its total addressable market is an astonishing $65 billion. At a market cap of just under $3 billion and less than $300 million in annual revenue, this represents huge room to grow. A subset of this $65 billion comes from attaching additional products to current customers, to the tune of $11 billion if the company can cross-sell all its products to every current customer, admittedly a tall order.

Balancing revenue growth and profitability

Splunk Inc (NASDAQ:SPLK) develops software to help companies capture, search, and make business decisions based on large amounts of disparate machine data. The company spends 20% of revenue on R&D and over 60% on sales and marketing; these higher costs help explain why Splunk has lost money each quarter since going public.

With a market cap of $4.8 billion, Splunk Inc (NASDAQ:SPLK) is valued at more than 22 times Trailing Twelve Month (TTM_ revenue. SolarWinds Inc (NYSE:SWI) has a smaller market cap at just under $3 billion, yet it has TTM revenue of $280 million (a 10x multiple). Further, SolarWinds is profitable, earning $81 million over the past year (a P/E ratio of 34), while Splunk has lost $36 million over the same period, though it expects to show an operating profit by the end of this fiscal year.

One challenge both companies face is how to accelerate revenue growth. SolarWinds Inc (NYSE:SWI) just splashed the cash on a company you’ve never heard of, buying N-able Technologies for $124 million, or about 5 times N-able’s 2012 revenue. SolarWinds hopes the acquisition will allow it to expand its reach by targeting Managed Service Providers (MSPs), companies that provide IT services to many small businesses. The short-term problem is that N-able is not profitable, so combining N-able’s operating results into SolarWinds’ will result in slightly higher revenue but lower earnings per share.

Both companies have solid products that are rated highly both by customers and industry analysts. For instance, Gartner honored Splunk Inc (NASDAQ:SPLK) as a market leader in its Security Information and Event Management (SIEM) Magic Quadrant. While SolarWinds landed in the “Challengers” category, indicating a lower ability to execute and a less convincing vision, it had the honor of being selected Forbes‘ 2012 Best Small Company in America. Not to be outdone, Splunk Inc (NASDAQ:SPLK) was named the fourth most innovative company in the world by Fast Company. Clearly, both companies are doing something right.

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