Summary
*)The turnaround for DWCH started quarter 4 2015. Near an average of 18% year over year quarterly revenue growth during the past two years. The accelerating growth was after costly strategic mistakes from 2013 to the end of 2015.
*)Intrinsic value is improving from the increasing percentage of recurring revenue now at 60% expected to grow to +70% next year.
*)The quarter 2 2018 acquisition of Agnoss completes Datawatch’s
data analysis offering. This addition presents Datawatch with cross/up-sell opportunities for larger deals. Datawatch now offers data prep, discovery, visualization and predictive analysis. Data can be at rest or in motion, structured, unstructured or streaming.
*) Non-GAAP revenue surging 42% versus prior year’s quarter (23% for GAAP revenue). License revenue improved 78% to the prior year's quarter. Subscription revenue increased 130% versus prior year quarterly results and 17% sequentially. Deferred revenue is 70% greater from the prior year’s quarter and 4% sequentially. Partner
contribution grew 40% Q3 2018 versus Q3 2017 without Angoss.
*) The global data wrangling market projects a cumulative annual growth rate of 20%. Market value expected to reach 3.97 billion by 2024. Zion Market Research
*) Panopticon contributed two 6 figure deals in Quarter 3 2018. The market is now recognizing the need to analyze/visualize data in motion, streaming. Not just for investment banking but the internet of things.
*) Average deal size and the number of six-figure deals is growing.
*) Automatic executive stock sale program every quarter stopped for this most recent quarter. It may be a stretch but no insider selling could indicate outside interest or other material events that prevented automatic sales.
*) Trades at a valuation discount to competitors.
Why is the near-term double-digit accelerating growth preceded by two years of continuously failed quarters from around March 2014 to end of 2016? Investors watched in horror as DWCH stock destroyed quarter after lousy quarter. During this time DWCH hit $35 on Feb 24, 2014, only to drop in price $3.10 on 01/2016.
Let's briefly review the self-imposed dark years from 2014 to the end of 2016. What went wrong after a successful 53.60 million capital raise on January 2014 selling +2 million shares at $28.50 per share? The secondary was months after the acquisition of Swedish visualization software Panopticon on August 2013. After the Panopticon acquisition and the secondary Datawatch thought they could spend millions on advertising trying to compete against Tableau and other visualization software. This self-imposed mistake caused by marketing's leadership with no hands-on working knowledge of Panopticon. If they understood Panopticon software, the millions in advertising and strategic distraction nightmare would never occur. Further, during this time marketing management ignored their company's legacy strength/moat with data prep Monarch software. The marketing leadership rebranded Monarch and Panopticon. They ignored the tens of thousands of loyal companies using Monarch and the well-established brand recognition for two decades to rename Monarch to Modeler along with Gartner recognized real-time visualization Panopticon to Designer.
"Gartner inquiries also suggest a level of dissatisfaction in the legacy Monarch installed base as Datawatch transitions it to the new integrated platform" this from Gartner write up on Datawatch for the 2015 BI magic quadrant.
At the end of 2015 after wasting millions on an epic failed strategic plan Datawatch is forced to recognize their missteps. So with new marketing leadership, they changed Modeler back to the original name Monarch and refocused on their legacy strength. Additionally, Panopticon marketed as real-time fast visualization focused on the capital markets for now. To management's credit, they recruited back a talented hands-on technical leader from Panopticon, Peter Simpson. Peter Simpson is now the VP of Visualization strategy. I'm convinced Mr. Simpson in short time will have the team to support Panopticon as a must have application for IOT (internet of things) not just capital markets. Further, February 2016 a new CMO/COO Ken Tacelli hired. Mr. Tacelli is driving consistent growth and accelerating sales using specific industry case studies demonstrating real-world value. Tacelli is an important part of this exciting turnaround.
Monarch has improved functionality after a product upgrade slip, specifically V11 at the beginning of 2013. Panopticon is no longer sold as general visualization to compete against Tableau but instead, as the only programming free product that works with data in motion (real-time streaming), that's critical to Wall Street and IOT(internet of things). The market recognizes the unique advantage of the Monarch and Panopticon. Now with predictive analytics from Agnoss, DWCH offer a best in class complete data solution.
A deeper dive into Quarter 3 2018 highlights the improvements that will justify a higher multiple.
Datawatch continues to maximize revenue growth by deliberately running break even and investing efficiently. Non-GAAP quarter 3 2018 net income was 940,000 or .07 per share. The current closed quarter is the first full reporting period with Angoss. But, due to GAAP purchase accounting rules, a significant portion of the Angoss revenue due to contracts in place before the acquisition is not classified as revenue. The expenses associated with these transactions is recognized. At least cash from these transactions is collected and reported. The addition of Angoss predictive analytics completes the set of Datawatch's applications. Therefore, Datawatch offers a comprehensive set of data analytics and data science capabilities. The solution provided for data at rest or in motion in a structured, unstructured, or data streaming formats.
Twelve six-figure deals the highest in the company's history realized during Q3 2018. Six of those deals driven by Monarch/Swarm (data prep), two by Panopticon (real-time analytics/visualization) and four by Angoss (data science/predictive). The average deal size was $50,000 as compared to $39,000 in the prior years quarter. Notable wins were ADP and Black Knight for Monarch, Foxtel with Agnoss predictive analytics and global financial service firm Jefferies purchased Panopticon for real-time visualization.
On a non-GAAP basis, total revenue was $12.9 million (13.50 million total Bookings) versus prior year's period of $9.1 million, a 42% increase. Total GAAP revenue was $11.1 million up 23%. License revenue was $8.7 million versus $4.9 million a 78% increase from the prior year period. On both a GAAP and non-GAAP basis these are record high quarterly revenues for Datawatch. License subscription model continues to become more meaningful within overall results. Subscriptions contributed $2.5 million of the license revenue during the quarter representing 36% of our current quarter's license revenue. This improvement represents about 130% over the prior year's quarter and 17% sequentially. Cash position is strong with a balance of $13.6 million. Deferred revenues were $18.8 million at the end of quarter 3 FY 2018 the highest recorded and 70% from the prior year's third quarter and up 4% on a sequential basis. The partner contribution grew 40% versus the prior year period. Note, Angoss does not use partners but expected will start.
Improved future results are even more compelling given that they have yet to focus on Swarm and push the full potential of Panopticon. The current pipeline and proof of concept requests (Fortune 1000 type) have grown materially. There are now cross-selling, up-sell and complete package deals that offer higher deal size.
Valuation:
Datawatch is a small micro-cap recently growing at ~ 18% year over year the past two years with the revenue and gross profit at this time mainly generated by Monarch. But now with the addition of Agnoss, Swarm and renewed emphasis on Panopticon the growth rates should continue and improve. The company's shorter-term higher market value is from an acquisition. A larger software company that can roll Monarch/Swarm, Panopticon and Agnoss into their existing sales, research and administrative organization can realize a highly accretive acquisition. The other growing attribute is recurring revenue at 60% that will grow to +70% by next year even if no changes made. The company can materially accelerate growth but are focused on breakeven results at this time. Recurring software revenue historically valued at a higher valuation of around six times income. Also, Datawatch offers substantial valuable net operating loss carryforwards.
The recent Non-GAAP revenue makes DWCH a 50 million annual revenue company. This gives Datawatch a conservative valuation ~ (4)(50)= 200 million market cap versus the current 143 million or 40% higher from the current price. Recent acquisition valuations, in February 2015, Hitachi Data Systems acquired open source business intelligence and analytics specialist Pentaho. The acquisition value not disclosed. But, estimated between $500 and $600 million or 7 times Pentaho's annual revenue of 85M. HDS motivation is to gain market access to some of the data wrangling market as the much smaller Datawatch. Spring 2016, Qlik goes private by an equity firm for 3.40B with annual revenue of 3B, ~3.40 times sales. TIBCO goes private for approximately $4.3 billion or ~4 times sales. It's worth noting. Tibco uses Datawatch's panopticon for in-motion real-time analysis.
Relative: note the current higher multiples (P/S) for near competitors
Historical growth. Amounts in millions
Current DWCH Valuation
Market Cap = 145.79M : Enterprise Value= 150.86M
Price/Sales (ttm)= 3.62 : Price/Book (mrq) = 5.22 : Enterprise Value/Revenue = 3.74
Revenue (ttm) = 40.3 : Gross Profit (ttm) = 35.88M
Revenue Per Share (ttm) 3.25 : Gross Profit Per Share = 2.82
Quarterly Revenue Growth (yoy) = 22.50%
Total Cash (mrq) =13.58M Total Cash Per Share (mrq) = 1.07
Total Debt (mrq)= 9.1M : Current Ratio (mrq) = 1.22
Book Value Per Share (mrq) = 2.19
52-Week Change = 6.28% : 52 Week High = 14.20 : 52 Week Low = 7.70
Shares Outstanding = 12.73M : Float = 10M
% Held by Insiders = 15.11% : % Held by Institutions = 39.06%
Short % of Float (Aug 30, 2018) = 0.65%
Risks:
Limited resources that further risk overemphasizing Swarm than stay focused on Monarch with larger deal sizes to include Agnoss and Panopticon.
Need for additional capital if they decide to make the bet its better to put the foot on the gas now and gain greater market share. This could be a mistake especially if they think spending that money on Swarm because it will outsell Monarch for data prep.
Too many resources and time spent promoting Swam rather than focus on Monarch, Panopticon and Agnoss.
Dilution if they see the immediate need to raise the current 13 Million cash balance to grow faster in this fast-growing industry. I understand these growth rates will not last forever.
Opportunities:
Near-term company sale with a motivated shareholder-friendly management and board at near 13% insider ownership. My guess they don't sell out for less than 250 million. Its reasonable and management expects to be a 100 million annual revenue company over the next few years.
See the above summary for additional opportunities.
Long DWCH
Why is the near-term double-digit accelerating growth preceded by two years of continuously failed quarters from around March 2014 to end of 2016? Investors watched in horror as DWCH stock destroyed quarter after lousy quarter. During this time DWCH hit $35 on Feb 24, 2014, only to drop in price $3.10 on 01/2016.
Let's briefly review the self-imposed dark years from 2014 to the end of 2016. What went wrong after a successful 53.60 million capital raise on January 2014 selling +2 million shares at $28.50 per share? The secondary was months after the acquisition of Swedish visualization software Panopticon on August 2013. After the Panopticon acquisition and the secondary Datawatch thought they could spend millions on advertising trying to compete against Tableau and other visualization software. This self-imposed mistake caused by marketing's leadership with no hands-on working knowledge of Panopticon. If they understood Panopticon software, the millions in advertising and strategic distraction nightmare would never occur. Further, during this time marketing management ignored their company's legacy strength/moat with data prep Monarch software. The marketing leadership rebranded Monarch and Panopticon. They ignored the tens of thousands of loyal companies using Monarch and the well-established brand recognition for two decades to rename Monarch to Modeler along with Gartner recognized real-time visualization Panopticon to Designer.
"Gartner inquiries also suggest a level of dissatisfaction in the legacy Monarch installed base as Datawatch transitions it to the new integrated platform" this from Gartner write up on Datawatch for the 2015 BI magic quadrant.
At the end of 2015 after wasting millions on an epic failed strategic plan Datawatch is forced to recognize their missteps. So with new marketing leadership, they changed Modeler back to the original name Monarch and refocused on their legacy strength. Additionally, Panopticon marketed as real-time fast visualization focused on the capital markets for now. To management's credit, they recruited back a talented hands-on technical leader from Panopticon, Peter Simpson. Peter Simpson is now the VP of Visualization strategy. I'm convinced Mr. Simpson in short time will have the team to support Panopticon as a must have application for IOT (internet of things) not just capital markets. Further, February 2016 a new CMO/COO Ken Tacelli hired. Mr. Tacelli is driving consistent growth and accelerating sales using specific industry case studies demonstrating real-world value. Tacelli is an important part of this exciting turnaround.
Monarch has improved functionality after a product upgrade slip, specifically V11 at the beginning of 2013. Panopticon is no longer sold as general visualization to compete against Tableau but instead, as the only programming free product that works with data in motion (real-time streaming), that's critical to Wall Street and IOT(internet of things). The market recognizes the unique advantage of the Monarch and Panopticon. Now with predictive analytics from Agnoss, DWCH offer a best in class complete data solution.
A deeper dive into Quarter 3 2018 highlights the improvements that will justify a higher multiple.
Datawatch continues to maximize revenue growth by deliberately running break even and investing efficiently. Non-GAAP quarter 3 2018 net income was 940,000 or .07 per share. The current closed quarter is the first full reporting period with Angoss. But, due to GAAP purchase accounting rules, a significant portion of the Angoss revenue due to contracts in place before the acquisition is not classified as revenue. The expenses associated with these transactions is recognized. At least cash from these transactions is collected and reported. The addition of Angoss predictive analytics completes the set of Datawatch's applications. Therefore, Datawatch offers a comprehensive set of data analytics and data science capabilities. The solution provided for data at rest or in motion in a structured, unstructured, or data streaming formats.
Twelve six-figure deals the highest in the company's history realized during Q3 2018. Six of those deals driven by Monarch/Swarm (data prep), two by Panopticon (real-time analytics/visualization) and four by Angoss (data science/predictive). The average deal size was $50,000 as compared to $39,000 in the prior years quarter. Notable wins were ADP and Black Knight for Monarch, Foxtel with Agnoss predictive analytics and global financial service firm Jefferies purchased Panopticon for real-time visualization.
On a non-GAAP basis, total revenue was $12.9 million (13.50 million total Bookings) versus prior year's period of $9.1 million, a 42% increase. Total GAAP revenue was $11.1 million up 23%. License revenue was $8.7 million versus $4.9 million a 78% increase from the prior year period. On both a GAAP and non-GAAP basis these are record high quarterly revenues for Datawatch. License subscription model continues to become more meaningful within overall results. Subscriptions contributed $2.5 million of the license revenue during the quarter representing 36% of our current quarter's license revenue. This improvement represents about 130% over the prior year's quarter and 17% sequentially. Cash position is strong with a balance of $13.6 million. Deferred revenues were $18.8 million at the end of quarter 3 FY 2018 the highest recorded and 70% from the prior year's third quarter and up 4% on a sequential basis. The partner contribution grew 40% versus the prior year period. Note, Angoss does not use partners but expected will start.
Improved future results are even more compelling given that they have yet to focus on Swarm and push the full potential of Panopticon. The current pipeline and proof of concept requests (Fortune 1000 type) have grown materially. There are now cross-selling, up-sell and complete package deals that offer higher deal size.
Valuation:
Datawatch is a small micro-cap recently growing at ~ 18% year over year the past two years with the revenue and gross profit at this time mainly generated by Monarch. But now with the addition of Agnoss, Swarm and renewed emphasis on Panopticon the growth rates should continue and improve. The company's shorter-term higher market value is from an acquisition. A larger software company that can roll Monarch/Swarm, Panopticon and Agnoss into their existing sales, research and administrative organization can realize a highly accretive acquisition. The other growing attribute is recurring revenue at 60% that will grow to +70% by next year even if no changes made. The company can materially accelerate growth but are focused on breakeven results at this time. Recurring software revenue historically valued at a higher valuation of around six times income. Also, Datawatch offers substantial valuable net operating loss carryforwards.
The recent Non-GAAP revenue makes DWCH a 50 million annual revenue company. This gives Datawatch a conservative valuation ~ (4)(50)= 200 million market cap versus the current 143 million or 40% higher from the current price. Recent acquisition valuations, in February 2015, Hitachi Data Systems acquired open source business intelligence and analytics specialist Pentaho. The acquisition value not disclosed. But, estimated between $500 and $600 million or 7 times Pentaho's annual revenue of 85M. HDS motivation is to gain market access to some of the data wrangling market as the much smaller Datawatch. Spring 2016, Qlik goes private by an equity firm for 3.40B with annual revenue of 3B, ~3.40 times sales. TIBCO goes private for approximately $4.3 billion or ~4 times sales. It's worth noting. Tibco uses Datawatch's panopticon for in-motion real-time analysis.
Relative: note the current higher multiples (P/S) for near competitors
Historical growth. Amounts in millions
Current DWCH Valuation
Market Cap = 145.79M : Enterprise Value= 150.86M
Price/Sales (ttm)= 3.62 : Price/Book (mrq) = 5.22 : Enterprise Value/Revenue = 3.74
Revenue (ttm) = 40.3 : Gross Profit (ttm) = 35.88M
Revenue Per Share (ttm) 3.25 : Gross Profit Per Share = 2.82
Quarterly Revenue Growth (yoy) = 22.50%
Total Cash (mrq) =13.58M Total Cash Per Share (mrq) = 1.07
Total Debt (mrq)= 9.1M : Current Ratio (mrq) = 1.22
Book Value Per Share (mrq) = 2.19
52-Week Change = 6.28% : 52 Week High = 14.20 : 52 Week Low = 7.70
Shares Outstanding = 12.73M : Float = 10M
% Held by Insiders = 15.11% : % Held by Institutions = 39.06%
Short % of Float (Aug 30, 2018) = 0.65%
Risks:
Limited resources that further risk overemphasizing Swarm than stay focused on Monarch with larger deal sizes to include Agnoss and Panopticon.
Need for additional capital if they decide to make the bet its better to put the foot on the gas now and gain greater market share. This could be a mistake especially if they think spending that money on Swarm because it will outsell Monarch for data prep.
Too many resources and time spent promoting Swam rather than focus on Monarch, Panopticon and Agnoss.
Dilution if they see the immediate need to raise the current 13 Million cash balance to grow faster in this fast-growing industry. I understand these growth rates will not last forever.
Opportunities:
Near-term company sale with a motivated shareholder-friendly management and board at near 13% insider ownership. My guess they don't sell out for less than 250 million. Its reasonable and management expects to be a 100 million annual revenue company over the next few years.
See the above summary for additional opportunities.
Long DWCH
