4/09/2012

Significant Improvements Could Be Foretelling a Higher Price

updated progress report

Datawatch: DWCH

I'm a value investor in the tradition of Graham and Dodd. Most often but not always I start with the balance sheet recognizing that tangible assets are conservatively recorded according to GAAP at their historical cost. For me this is a sound starting point for valuation before moving on to the I/S and cash flow to assist with the forecasting part of my fair value determination.

My current strong Datawatch conviction does not reconcile using this approach. Most would say its overvalued, moved up way too fast so just wait for a big pull back. That was the original consensus when at $5 per share (Overlooked Opportunity for this Untapped Business Intelligence Niche 10/30/11
http://www.gurufocus.com/news/149577/overlooked-oportunity-for-this-untapped-business-intelligence-niche-) after the move from $3 with my first article on 01/09/11(DWCH (Datawatch): Potential Overlooked Catalyst http://www.gurufocus.com/news/119167/dwch-datawatch-potential-overlooked-catalyst). DWCH last traded at $13.25 on 4/6/12.

My renewed conviction is based on progress over the last 4 quarters. Value has been quickly created that has yet to be realized/recorded on the financial statements. I see this valuation mistake as an opportunity to continue holding my position and adding more on any price weakness.

So just how is Datawatch creating value not yet seen on the financial statements over the past 3 to 12 months. Warren Buffet places a heavy emphasis on understanding management and its ability to foretell the future results of a company. Most investors find this task too difficult or simply lazy to investigate management's track record or fit for a company. Datawatch has been fortunate to acquire many additioinal talented proven leaders over the past few quarters.

Examples of unrecorded value created over the last 3 to 12 months.

Some Major categories of unrecorded value created over the last 3 to 12 months that I consider significant would be: New proven leadership talent to execute the company's transformation... CEO, vice chairman,95% of sales/marketing organization turned over with known commodities, gross  margin improvements, 50% YOY quarterly revenue growth, purchase significantly undervalued intellectual property, multiple partnerships/technology alliances, industry recognition/praise and the proven team to leverage these internal and favorable market trends.

Additional details on the recent overlooked value creation.

95% of the sales and marketing organization were turned over. They have a new "go to market model "driven by known proven sales professional. CEO Morrisson brought them on board and were all part of the success at Applix, Cognos or IBM. It usually takes 9 months to start realizing the full impact of a new sales employee, hence we have yet to see a fraction of the full benefit from these changes even with the 50% YOY quarterly profitable revenue increase. The addition of known sales commodities to a tiny software company like Datawatch is a benefit that has yet to be fully realized on the financial statements.

Maintenance costs were not emphasized in the past. Datawatch will be passing along maintenance cost to customers. This is common practice by all other software BI and related vendors.  From my analysis Datawatch's software was and is being horribly underpriced based on the functionality, problems/questions solved, ROI provided and similar industry solutions sold. This will improve as management made the commitment to quickly increase the average size of deals. 40,000 plus customers with almost all of the Fortune 100 is a tremendous advantage to leverage for the new sales organization and leadership. Couple this with recent major upgrades of their report analytic software and top line growth potential feels certain.

A new focus on partnerships that was virtually ignored in the past has clearly been a successful new commitment. Some examples of partnership agreements over the past 6 months were Arcogent, Jacobus, Technolab, Laserfiche, Dimensions Analysis, Quantalytic, Lifeboat and many others will help drive future free cash flow. Technology alliance with a blue chip BI provider Qlik Tech.

On 03/01/12 Monarch's (Report Analytics Engine) intellectual property was purchased for 8.541 million. This eliminates annual royalty payments which totaled approximately $1.5 million in fiscal year 2011. Gross margins will improve for this immediate accretive cash basis deal . But far more importantly this allows the freedom to accelerate future enhancements , and integrate their report analytics platform with major BI solution providers. The exercised option for 8.541 million is a brilliant win for Datawatch. The fair market value of the intellectual property is many multiple times greater than the price agreed upon in the 2004 contract.

Important points that will accelerate this transformation play.

Today there is very little or no competition. Tremendous technological innovation
developed over 20 years focused on everyday real world user requirements. The functionality of their solutions provided coupled with recent intellectual property ownership will attract alliances with BI, ETL, ERP , and other solution providers.CEO Michael Morrison, Vice Chairman Dave Mahoney and multiple new sales additions were part of Applix. During that time Michael Morrison was the COO, Dave Mahoney CEO along with multiple sales leaders recently hired at Datawatch. At Applix they increased the market capitalization over the course of three years by 15 times. Applix was taken over by Cognos and then months latter Cognos was taken over by IBM for 4.9 billion in cash. So now Datawatch has
the right people coupled with products and market trends to move higher.


DWCH:
Market Capitalization = 82 million
Enterprise value = 73 million
Gross Profit = 13 million

Cash = 9.65 million with not debt

2 comments:

Teresa said...

Thanks for this update on DWCH. Your insights are appreciated. Hope you're feeling well today.

ShadowStock said...

All is well, hope you and all are having a productive fun day.
John