7/27/2015

Market Ignores Datawatch’s Q3 Hidden Value Creation, Why?


Market price for DWCH was likely spooked after Q3 earnings release by slow sequential growth for a “growth stock”. Yet, Q3 significant company improvements and trends ignored. July 22 Datawatch reported Q3 revenue of 7.8M, slow 4% top line sequential growth, 16% decrease versus Q3 prior year expected. Software license revenue of 4.3M up 5% sequentially, maintenance revenue of $3.7 million up sequentially at 3% and flat compared to prior year. Gross margins came in at 90% for Q3 2015 compared to 86% for the prior year quarter.
The top line improvements were far below personal expectations and barely exceeded Wall Street’s aggregate public estimates. I was looking for 15% to 20% top line improvement. But a closer look and deeper analysis uncovers important value creation the market ignores.

Several reasons may explain the market’s negative reaction to Q3. The shareholder base is growth oriented with a shorter investment horizon. An impatient growth oriented institution mindlessly dumped shares after the Q3 earnings announcement. Based on the market’s reaction, zero investment thought on Q3 key wins, trends and operational improvements. Further, the general market has become volatile, risk adverse, short term oriented and less forgiving to tiny growth technology companies.

These Q3 thoughts are focused on ignored positives creating a stronger foundation for future growth and an immediate improved valuation.

Summary of Q3 POSITIVES:

OEM partner revenue near record growth; Data Discovery Platform completed for market (details below); Deal trend for quality and size significantly improved: New OEM wins yet to be fully monetized; Magnitude of future potential with Dell underestimated; Dell to resell Monarch with Statistica

OEM revenue contributed 12% of total license revenue.  An increase from prior Q3 fiscal year at 7% and up significantly from the first half results of FY 2015 at mid single digit percentage. Quarter 3 OEM revenue reported on 07/22/15 was more than the sequential Q1 and Q2 combined. The OEM partner target is 30% of total license contribution, strong progress achieved toward this important goal.

Trend in deal size and quality improved. Average deal size Q1 and Q2 were in the mid 30k range compared to Q3 56k. Quarter 3 there were ten six figure deals, seven six-figure license deals. The Q3 six figure deals equal to the total number for Q1 and Q2 of FY 2015 combined. Deal size and quality driven by people buying the complete vision and unique solution.  Expect further leverage with new product positioning, introduction of Monarch 13 Complete and Classic was available for purchase on last day of Q3.

Examples of quality Q3 deals based on uniqueness of their technology solutions. Big four public accounting (KPMG??) firm added an additional two thousand Monarch seats for auditors to acquire and prepare multi-structured data during the audit process. A classic Iot (internet of things) application was Chesapeake Energy. Selected Datawatch for an IOT application to visualize and analyze in real-time sensor data coming from wellheads, drilling and production equipment on more than 60 wells. ASG Software Solutions, a new OEM, employ Datawatch’s data preparation to analyze documents archived in enterprise content management systems. Further, automate the data acquisition, preparation and govern processes. Then data ingested directly into Datawatch Designer visualization. ASG is an example of a customer that leveraged the value of the entire Managed Analytics platform buying into the new product positioning.

The magnitude of additional potential deals with Dell has yet to be realized. Additionally, Dell will resell Monarch coupled with their OEM visualization with Statistica.

We are working very closely with Dell to make the most of this relationship for the long-term. In fact, we already closed a high profile, internal visualization deal with Dell last quarter for rolling inventory forecasting in its hardware business across 4,000 discrete parts in 40 Dell sites. We are optimistic about the potential here is that they are – even though the Dell Software business, that was a $2 billion plus business within a nearly $60 billion organization. We were able to go from competing for an opportunity with several of the largest and most well-known players in visualization and data discovery and ultimately winning that to integrating the products and getting in on a price list and getting into the field’s hands in less than six months which is nearly unheard of with a normal software company with a company that $2 billion of software revenue, it’s quite impressive. So, the opportunity I believe is quite large. We are we’ve got a big focus ourselves on making the best of this. We’ve got a growing pipeline as I mentioned, it’s into the channel late in the quarter. They closed a deal with a Fortune-50 CPG company before the end of the quarter. We’ve done an internal deal with them, a competitive deal. So, we are – we’ve got – we know that there is a good opportunity here if we go and execute properly. We are in active conversations with Dell, because there will be more need for advanced analytics or predictive….” Source Q3 conference call

New OEM Q3 wins;

Lipper in Switzerland (subsidiary of Reuters), ASG, Fincad, Flextrade, Stragey group in Malaysia

Lipper operates as subsidiary within Thomson Reuters leveraging Datawatch’s visualization to showcase the value of over 10 years of Lipper Mutual Fund data, plans to promote this solution to its more than 1000 clients. Lipper sold its first deal to UBS in Q3.

Valuation:

Trading at 1 times EV to sales it’s now in value territory. A deeply depressed stock price with a Gartner and industry awarded product suite. Cash burn continues to decline and likely to be cash flow positive in 3 to 4 quarters if sequential growth continues. Datawatch is balancing the goal to attain breakeven results with the need to improve products, create market awareness, hire talent  to reach an inflection point in this high growth competitive data analytic market.

Cash balance at June 30, 2015 was $36.3 million with no long term debt. Cash per share is 3.17 versus closing per share price of $5.71. “Over 80% of our AR balances as of the end of Q3 FY 2015 were in the current category, more than 20 percentage points better than Q1 of FY 2015. Furthermore, less than 10% of our receivables are over 60 days past due.” CFO Q3 call.

Additional color on , “Managed Analytics Platform for Self-Service Data Preparation and Visual Data Discovery”. Note the last day of Q3 “Monarch Complete” was offered, the platform vision is market ready.

 

Platform,  http://www.datawatch.com/platform/ is self service (no outside involvement) highly differentiated software.


Any Data(Dark, Real Time, Multi Structured, directly open 3rd sources such as sales force, oracle, informix,my sql,Splunk, Amazon redshift, others.


Prep  Data by enriching, create new fields(meta data), remove data, correct errors, export directly to 3rd party visualization software Tableau, Qlik, or Datawatch Designer.



Mask sensitive data for distribution and analysis.


DISCOVER with in memory visualization, real time in motion visualization



Long DWCH

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