4/28/2012

Q2 .. Transformation Continues at Datawatch


The Datawatch transformation continues with another great quarter. Q2 reported 04/27/12 was outstanding. Since they are at the beginning  of their transformation full financial benefits are not going to immediately be realized for the following reasons. New sale's team hires, purchased intellectual property, integrating new development team, one time severance charges, new messaging of  product  fit, one time marketing costs for cancellation and change of convention strategy.

But having said all that, many if not all aspects of the Q2 accomplishments were spectacular! Total Q2 Revenue was up 47% and license revenue up 67% over second quarter of 2011. This on top of a Q1 revenue increase of 50%. The real value creation was in the continued momentum with new partnerships and "blue chip" large enterprise customer wins that were also outstanding during Q1.

Specific comments made during the Q2 conference call should give all long term stakeholders optimism for the future. During Q2 they gained 10 new Enterprise customers compared to seven in Q2 of 2011. New Enterprise customers include American Express. Lowe’s and Northern Federal Credit Union. Q2, there  average deal size was $70,000 as compared to $24,000 in Q2 of 2011. They had four six-figured deals in Q2 this year compared to no six-figure deals in Q2 of FY’11. The pipeline at the end of the quarter, or at the beginning of this quarter was the highest it’s been since CEO Morrison has been with the company over  past year. CEO stated "they have been hiring beyond their current plan, opportunistically as we – and a lot of it is people coming to us, they’re starting to get a buzz around what we’re doing. You might have seen the Splunk IPO last week, and they play in a small part of the space that we’re in – got a lot of visibility on our space. So, people are starting to take notice, and we’re taking advantage of that, we’re being disciplined about it. So, there’s no specific number, but I think there’s a big opportunity that when the right people come along we’re going to take advantage of that." They see several important OEM and reselling relationships on the short-term horizon and expect even more to emerge as they move into FY’13.

CEO Morrison spoke about the secondary area of growth opportunity ,the cloud. The European based Logica win realized  last quarter is a cloud deploying their  Monarch Report Mining Server Solution. "Just last week, Logica began rolling this offering out to additional customers." In the coming months Datawatch promised to be updating on new initiatives with other potential partners and customers that take advantage of their ease of use in the cloud.

Another area of growth that has become an additional focus are industry specific solutions. Last week's announced 835 Industry Link Report Analytics for use in Health care will be beneficial and could potentially be purchased by some of their  1,200 healthcare organizations that  rely on the Monarch Report Analytics platform.

They are "actively working on other opportunities to develop repeatable solutions that address common industry-specific or application specific, semi-structured and machine data reporting challenges. These industry solutions allow us to efficiently bring real-world use cases into the market more quickly with demonstrable out-of-the-box value."

The pieces continue to quickly come together for all Datawatch stakeholders.

"the engine for machine data" - I always thought of Datawatch as the undisputed world leader of the  engine for Machine data.  It is.. Then after the spectacular or in my opinion ridiculous IPO market valuation for Splunk I decided to  take a look. It surprised me Splunk's message is simple and repeated often... engine for machine data. Its repeated again and again on their company website. Turning machine data into actionable data, machine data solutions, machine data collection contains a definitive record of the activity, splunk + machine data = operational success. Okay i  will be nice. Splunk may fit well with ecommerce companies monitoring traffic issues, in theory advertising optimization, downtime monitoring, or general system awareness. But the bulk of the potential for company improvements is not in real time log files or online activity monitoring but in the +90% of other company machine generated data.Sorry, Datawatch is the king of this space. Splunk does not come close to the useful impact from machine generated data that Datawatch has accomplished during their dominance over the past 20 years. And Datawatch although profitable with spectacular growth does not deserve to trade at 5 fold the current price based on the price to sales valuation of Splunk. Splunk trades at 25 times unprofitable sales.
Splunk may have an obscene valuation at 3.25 billion with only 120 million in very unprofitable sales. But Datawatch is the engine for Machine data with over 20,000 companies as customers and 500,000 license users. Just because Datawatch is profitable with a market value of only 86 million that doesn't change their clear worldwide leadership in exploiting Machine data. Splunk, Inc. was founded in 2005. Datawatch has been developing and improving solution to leverage machine data for about 20 years with out of the box software.  497 of the Fortune 500 are customers of Datawatch. Splunk has a market value of 3.25 billion with only half of the Fortune 100. Datawatch market value is 86 million. Splunk trades at a market value 40 times Datawatch. Splunk projects potential profitability in 2014. Datawatch continues to be profitable with improving margins, sales growth and a conservative approach to building a word class  organization  while maintaining profitability.
Good luck to Splunk as the choice for real time IT related activity monitoring but Datawatch is the clear choice for companies looking to discover new knowledge with the +90% of the other machine generated data. The cost of a machine generated data solution from Datawatch is far less on the initial setup and ongoing future costs but additionally enhanced as the pool of expertise exists in the 500k licenses sold throughout the world that can be instantly acquired at a staff level financial analysis salary. Yes Datawatch sells instant ROI. Hiring costly Splunk consultants and developing specific solution and worse yet giving control back to the costly IT departments is unwise and detrimental to a company's progress.
The market is  more than big enough for Datawatch and Splunk. Their areas of expertise and methods of adding company value is different. Good luck to both companies!
Long time and current holder of DWCH (Datawatch)

BTW, my definition of machine data is any business data activity generated by the company..Hence over 90% of the "machine data" is generated/captured in sources other that IT related activity reports/log files.

2 comments:

Anonymous said...

Great post. After reading a transcript of the conference call, I did feel optimism! I think I read in the Q & A after the call that last week's Splunk IPO got a lot of visibility, whch actually brought attention to Datawatch, attention they plan to take advantage of. Michael Morrison is doing a great job.
Teresa

ShadowStock said...

Hi Teresa

Datawatch should announce positive news along the way towards next quarter's results but since they purchased the intellectual property for Monarch product development is now for the first time 100% their responsibility. Long term that is a huge positive but short term it may be a distraction and a struggle. Now there will be far more bumps in the road towards what I believe over the next one or two years a higher price.