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Datawatch Corporation (NASDAQ:DWCH)

F1Q13 Earnings Call

January 22, 2013 04:30 PM ET

Executives

Dan Incropera - VP and IR

Michael Morrison - President and CEO

Ben Plummer - CMO and SVP, Business Development

Analysts

James Litterman - Well Fargo Advisors

Frank Serafino - First Analyst

Operator

Greetings, and welcome to the Datawatch Corporation’s First Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the follow-up presentation. (Operator Instructions). As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Dan Incropera. Thank you, Mr. Incropera, you may begin.

Dan Incropera

Thank you, Jane, and good afternoon, everyone. Thank you for joining us today for the Datawatch Corporation first quarter fiscal year 2013 earnings conference call. I am Dan Incropera, Vice President and Corporate Controller at Datawatch. Joining me today is Michael Morrison, our President and CEO, and Ben Plummer, our Chief Marketing Officer and Senior Vice President of Business Development.

You can obtain a copy of our earnings release, which was distributed at 4:00 p.m. Eastern Time today by emailing us at investor@datawatch.com. This release is also available on our website, www.datawatch.com.

Let me first outline for you this afternoon’s agenda. Following a reading of our Safe Harbor statement, I will provide a summary of our first quarter fiscal year 2013 financial results. Michael will then provide an update on our business initiatives and operating results, followed by Ben, who will share with you our perspective on market dynamics and the opportunities available to Datawatch. Following our prepared remarks, we will open up the call for a question-and-answer session.

Before we begin, I’d like to review our Safe Harbor statement with you. While we do not share projections of our future performance, we do need to remind you that any statements we make that do not describe historical facts may constitute forward-looking statements and are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any such statements are based on our current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from current expectations.

For more information, I refer you to the descriptions of these risk factors found in our earnings release, as well as the company’s Annual Report on Form 10-K for the year ended September 30, 2012, and other publically available documents filed with the SEC. Any forward-looking statements should be considered in light of those factors.

Now for the financial results, Datawatch’s total revenue for the first quarter of fiscal year 2013 was $6.82 million, as compared to $6.27 million for the first quarter of fiscal year 2012.

Revenues from the sale of software licenses in the first quarter of fiscal 2013 were $4.33 million, as compared to $4.21 million in the first quarter of 2012. As a percentage of revenue, software licenses accounted for 64% of revenue, as compared to 67% of revenue in Q1 of 2012.

Revenues for maintenance and services in the first quarter of 2013 were $2.49 million, as compared to $2.06 million in the first quarter of 2012. As a percentage of revenue maintenance and services accounted for 36% of revenues in Q1 of 2013, as compared to 33% of revenues in Q1 2012.

Gross margins for software licenses were 88% in the fourth quarter of 2013, as compared to 86% in the first quarter of 2012. Gross margins for maintenance and services were 79% in Q4 of fiscal 2013, as compared to 68% in Q1 of 2012. Overall gross margins were 85% in the first quarter of 2013, as compared to 80% in Q1 of 2012.

Net loss for the first quarter of fiscal year 2013 was $222,000 or $0.03 per diluted share, as compared to net income of $603,000, or $0.09 per diluted share for the first quarter of fiscal 2012.

As you will hear within our non-GAAP discussions a little later on, the increase in expense is partially due to higher stock compensation costs, Q1 of fiscal year 2013 resulting from the grant of restricted shares to new members of Datawatch’s management team.

Due to the vesting terms of the underlying securities, in accordance with ASC 718, these expenses will continue to be higher as compared to fiscal 2012 levels of the next few years. Despite our net loss, Datawatch generated positive cash flow during Q1 and our cash position at December 31, 2012 is $8.94 million, an increase of over $200,000 or 2% from September 30.

To supplement our financial results, presented in accordance with Generally Accepted Accounting Principles, the company will discuss certain non-GAAP financial measures that we believe are helpful in understanding our past financial performance and future results. Our non-GAAP financial measures are not meant to be considered in isolation, or as a substitute for comparable GAAP measures, and should be read in conjunction with our consolidated financial statements, prepared in accordance with GAAP.

Our management regularly uses our supplemental non-GAAP financial measures internally to understand and manage our business and make operating decisions. Our non-GAAP financial measures include adjustments based on the following two items, as well as the related income tax effects and adjustments to the valuation allowance: number one, amortization of purchased software related to the acquisition of the intellectual property surrounding our flagship product, Monarch, on March 30, 2012 and number two, share-based compensation expense, which is a key incentive offered to our employees, however we continue to evaluate our business performance excluding share-based compensation expenses.

We believe it is useful for investors to understand the effects of these items on our operating expenses and net income. Excluding the effects of the noncash amortization associated with the purchase of the Monarch intellectual property and noncash stock compensation costs, the company’s non-GAAP net income for its first fiscal quarter of 2012 was $786,000 or $0.11 per diluted share, as compared to $751,000 or $0.12 per diluted share for the first quarter of 2012.

At this time, I will turn the call over to Michael for his comments.

Michael Morrison

Thanks, Dan. Good afternoon everyone and thanks for joining us today. As noted in our earnings’ release, this past quarter we executed an important pivot for our business. In our 2012 fiscal yearend earnings call, we highlighted the re-launch of the Datawatch into the market in October.

During Q1, we took that process further and deeper introducing much more strategic messaging around Datawatch and our information optimization solutions. We also upgraded our positioning of the market and we established a completely new brand for Datawatch and our solutions.

Over the course of the quarter, we invested significant time creating an entirely new web presence, new collateral, new sales materials to reflect this most strategic approach to the market, which is directly targeted at capturing the very large opportunity that we see emerging.

And we embarked on an aggressive program to train and enable our worldwide field organization and our global partners to utilize this new messaging and positioning to help us secure new customers and increase the penetration throughout our existing customers.

We were able to reflect this critical transition while continuing to grow our top line revenue, albeit at a lesser rate than recent quarters. With the transition largely complete, we expect year-over-year revenue growth to accelerate, as we benefit from the platform we have now created.

Indeed the new messaging and positioning that we announced in Q1 is already delivering results, as we are now routinely pursuing larger opportunities that are much more strategic to enterprises.

And the individuals we are regularly working with in these enterprises are higher level. For example, in Q1 we closed to a six figure transaction, with a leading mortgage banking company, servicing residential and commercial loans for borrowers, located in all 50 states.

This mortgage banking company is pursuing a corporate strategic initiative to improve the loss mitigation process with a proper mix of staffing resources, processes and technology to handle the volume of troubled borrowers effectively.

One particular challenge facing this company is the need to access, integrate, and analyze data from a variety of semi-structured sources, including its own mainframe system and text-based loan performance analytic reports provided by a third party service provider. This mortgage banking company selected the Datawatch information optimization platform to automate manual and paper-based processes and deliver integrated executive dashboards to become more proactive, support larger volumes of loans while improving response time and create value for investors and borrowers.

Ultimately, this company plans to allow it’s investors to access the Datawatch information optimization platform by the web to review their portfolios of loans and ensure their investments are performing.

Q1 also saw us to make very good strive in partner development. We signed up 13 new partners worldwide, the most we have signed up in any single quarter since my arrival. These partners include several geographic distributors, several reselling and implementation partners and a couple of value added software resellers.

Our partner pipeline is an outline high and we’re ramping up our internal channels and resources to properly enable and support these new business partners, so that we can be best positioned to drive revenue for Datawatch and our business partners. We expect that revenue driven by our partner channel will grow nicely as we progress through fiscal year 2013.

Turning to the key operating metrics which we began sharing with you last year, in Q1 2013 our average deal size was $49,000, as compared to $87,000 in Q1 of 2012. You will recall that in Q1 of 2012, we had one seven-figure license transaction that materially skewed the average deal size to be upside.

We had five six-figure deals in Q1 this year, the same number as in Q1 of FY12. In Q1 we signed ten new enterprise customers compared to seven in Q1 of 2012. New enterprise customers this past quarter include the Southern Company, TJX, FC, Time Warner cable and BNP Paribas in France.

Lastly, in Q1 this year, as I mentioned we signed 13 new partners, compared to six new partners in Q1 of fiscal 2012. New partners include Xerox, Sky Solutions, Analytic (inaudible) and Ufinity, one of Singapore’s fasted growing companies.

The attempted efforts we completed in Q1 put us in a strong position as we look out through the remainder of this fiscal year. Today our sale teams and partners are much more affectively positioning and messaging the new Datawatch. Our outreach to industry analysts and research analysts has led to increase market awareness and visibility and our pipeline of directed partner led opportunities is that the highest level I have seen since I joined the company.

As a result, we have confidence that we are well positioned to reaccelerate our revenue growth as we progress through fiscal 2013. As always, given a size and the nature of some of the large opportunities that are available to us, growth can be uneven in any quarter but we believe that today we have the right people, the right technology and the right strategy, all aimed at the right targets to drive the higher level of growth for the long term. There remains a lot of hard work ahead of us and we must continue to be focused and disciplined as we execute on our business strategy.

By doing so and by leveraging all of the resources of the organization, we believe our team can meet this objective. Let me now turn the call over to Ben Plummer, our Chief Marketing Officer to share with you in more detail, some of the growth initiatives we are pursuing in fiscal 2013.

Ben Plummer

Thanks, Michael. As Michael just indicated, Q1 this quarter where we turned the company in a new and very exciting direction. As part of that pivot, we embarked on several initiatives that are designed to accelerate and deliver larger enterprise opportunities. While we have a number of these activities underway, there is two that I’d like to highlight for you today.

The first is our focus on delivering (inaudible) solutions are what we here at Datawatch like to call blueprints to the market and secondly on our focus on recruitment, enablement of partners in our partner eco system.

So, let me start with the solution blueprints. As we started to engage with more and more of our customers it’s become apparent there are a significant number of applications that offer a repeatable approach to deploy our information optimization solutions. These opportunities are exciting for a couple of reasons; first, because they tend to incorporate the entire Datawatch product portfolio and secondly because they tend to be larger and more strategic to our customers.

So, to help ensure that our customers and sales teams understand and position these solutions more effectively, we started to develop complete programs around the design, development and go-to-market strategy of these solutions. Some of the areas that we’re developing these used case blueprints around include healthcare, where we recently released our clinical analytics white paper and sporting use case and our claims denial analytics, where we’ve run webinar series and delivered a white paper and a complete functional blueprint based on the use of 835 EDI data streams.

Both of these programs have driven significant interest in Datawatch and the value projection that we bring with these solutions. Another area which we’ve recently begun to develop a new case blueprint in, is in the area of analyzing machine data, specifically understanding the usage and configuration of Telco routers.

Now, this is an area where companies like Splunk have made a name for themselves recently and where Datawatch is able to offer more than simple machine data analysis by (inaudible) data map, the machine data and other data sources to fully understand the impact of that information on the overall business.

Now, these are just a few examples of the values that these solution blueprints offer to our customers and to the delivery of this type of solution to our sales organization, but we firmly believe that these solutions offered an accelerant to our growth and currently are involved in developing and delivering several others which we anticipate rolling out over the coming quarters.

Now, I can turn my attention to our partners. As Michael indicated earlier, we had a very busy quarter in terms of partner recruitment, but more importantly we are starting actually see these partners come online with this and to help facilitate the enablement of these partners, we have just launched a brand new partner enablement program which has been rolled out globally and is being deployed to our newly deployed partner portal.

This program and supporting portal are targeted at allowing partners to share in the same content we offer our sale teams and it to allow the partners access to join marketing programs that can used to target their customer base.

We’ve already launched several of these joint marketing programs with some of our new partners who were traditionally focused in the business intelligence and data warehousing space and the response has been very good with one partner actually signing up almost 70 registrants in one day to hear how Datawatch could add variety to their BI applications.

And we believe these value-added partners are key for our growth strategy and if this quarter is any indication of the demand in the markets from partners in the areas that BI big data, enterprise content management and ERP, then this can have a significant impact on our ability to grow and expand our business globally.

In addition to our value added reselling partners, this has also been a very successful quarter in terms of signing strategic relationships. What I’d like to highlight is our strategic relationship with Panorama to add variety to their BI 3.0 solution, which is targeted at delivering analytics, visualization and collaboration to their customers.

Datawatch is playing a key role in this solution by adding the ability to incorporate broader data variety, some from other BI vendors to their traditional BI solution. Additionally, we are engaged in discussions with a number of other paid data and content management players to incorporate Datawatch into the fabric of their solutions.

We firmly believe that our information optimization solution leads directly at the corner of our business intelligence in big data and our ability to develop partnerships in these markets is critical to our overall success.

These are just a couple of examples of where we’re investing in strategic initiatives currently. While in already days with both of these initiatives, there are yielding results and we believe the opportunity they present reflect a change in how they watch position and sales of software. With that, I would like to turn it back to Michael.

Michael Morrison

Thanks Ben and Jane, we are ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from James Litterman from Well Fargo Advisors.

James Litterman - Well Fargo Advisors

Hello, I have been following you all for a long time and I am very impressed with the progress and how you positioned yourself. Are you able to comment a little bit more about brief report analytic as an industry and how you see (inaudible) and how large an opportunity that you see in general terms as a large opportunity what we’re talking about and that as a part B to that, could you describe a little bit more about your licensing revenues, how that plays out, is that on to three to five year type of program?

Ben Plummer

This is Ben Plummer. I will take the first part of this, so reporting analytics what we've actually trade in addition to over the last quarter is a much broader value proposition (inaudible) we’re calling it information optimization. We believe it is extraordinarily significant based on a lot of the changes we've seen in the market over the last several months. Two major changes that have taken place is the advent of big data applications of big data storage mechanisms starting to make the variety of information and the companies want to analyze much, much more relevant in terms of what they want to get out and not simply just structure relational data anymore, it’s semi-structured report in (inaudible) type of data that we’re very good at getting at and the unstructured types of big log files that we’re quite getting at. So we believe our value proposition to big data has changed significantly in the last several months and with the advent of business intelligence applications now looking to explain what they are capable of delivering to the user base both in terms of personally analytic capabilities as well as used big data in their analysis now recently played more uniquely positioned here with very little competition to deliver on a value proposition with these two things on our side.

Michael Morrison

Hey Jim, this is Michael Morrison. The second party of question was around licensing revenue and at three to five year rising. Can you expand upon that a bit and I’d be happy to…

James Litterman - Well Fargo Advisors

So, I feel a larger part of your business comes from the licensing side and how does that play out, do they get renewed, these licensing renewals I assume are they like on a yearly basis or do these companies come back in every three years, do they renew that license? That doesn’t expand because of the broader use of the technology if they were to expand it through more seats within their organization?

Michael Morrison

Okay good. So the vast majority of our licenses today are sold on a perpetual basis with associated maintenance. And what you will see is expansions of existing deployments as well as new name customers buying into that. We have a small percentage in single digits that is sold on a subscription basis and that part of our business will grow as things evolve. We announced in October a cloud offering so it’s just getting into the marketplace. We expect that to continue to grow to pick up some steam. We expect our perpetual license business to continue to grow as well. So, that’s in a nutshell how we like today.

Operator

Thank you. Our next question comes from Frank Serafino from First Analyst.

Frank Serafino - First Analyst

Michael maybe just I was wondering if you could comment on your expectations around license growth, maybe I don’t if you don’t want to specifically for Datawatch. But maybe just in general when you think about the overall industry and what you would expect the business grow over the next couple of years.

Michael Morrison

As you know, while we don’t provide guidance but for a company our size in the market, you could look at the market that we plan, we’re defining ourselves as planning information optimization but in the broader category, would probably be the business analytics space and there is a number of industry analysts out there that have growth targets for that broader market, where a lot of the mega vendors play. In the last year we grew at a multiple of that broader industry average. We expect that we will be able to do that for the foreseeable future. As we mentioned in the prepared comments, we made a major shift in our positioning to get to a much more strategic level in the market. There was a lot of work involved in that and the early results are very promising. So, we believe again while we don’t provide guidance that whatever the associated market is you want to look at as I was playing in, we should be able to grow at a multiple of that.

Frank Serafino - First Analyst

Great, thank you Michael and may be lastly just if you look at sales force capacity, can you just tell me where you are today you know relative to a year ago?

Michael Morrison

So today we have 17 (inaudible) reps on the outside. A year ago it was probably in the 11 or 12 range. While these players have come out over the course the last year and assimilated quite well, there is a lot of productivity that can still be garnered out of the existing group. So, we’re especially in that we’re finally arming them with the tool to go into the battle and in large part last year what we did was and I mentioned this on prior calls, the sales force is almost entirely new, but since I arrived, and there are in addition to being new, they are also well known, the people that have worked in the industry that we've known in the past, they came on board and wound up and send out to our customer base where we got a good product and real passionate customers and look for opportunities and do a great job of uncovering those. We didn’t have and at the time all the tools that are disposal to arm them properly. I think what we just went through this past quarter, is a big part of giving the weapon to go into battle, there is still more to do but I feel quite good about where we sit right now that these talented people that are out there you know fighting in battle and now are getting more weapons from corporate to go to battle with. So I expect that this year and into next year they will become more productive.

Operator

Thank you. Our next question comes from (inaudible).

Unidentified Analyst

I had a question about risks, so what do you find, what concerns you the most, what's the biggest risk to not hitting revenue growth targets in your opinion.

Ben Plummer

So Derek I don’t know if I'd term it a risk but the biggest challenge that we've got is that at times what we do is still very much an evangelical sale that even though we've got 40,000 customers out there the concept of extracting value from print streams and log files and HTML and old text based reports from heritage system, it’s not something that comes naturally to the IT world. So there is a lot of evangelizing that we need to do. And again it’s not a risk, it’s a challenge and that quicker that we can so put face on what we do show instead of abstractly talking to prospects about our ability to take semi-structured content and harvested and turn into something that you can analyze to help your business that we can put solution faces on it, the quicker that we will grow and meet the objectives that we have. So it’s a very large market, I think (inaudible) proven that. They plan a smaller area of the market in terms of analyzing data that’s not in a structured format. We do that and much more. They have done a fantastic job of putting a face on what they do and that’s what we need to really you know strive for and put the right amount of energy into meet the challenge that I just talked about.

Unidentified Analyst

I think that makes a lot of sense and I think when you came in and brought in the new sales force, you sound major in the third, fourth quarter of that change which makes sense. So, did you see that as kind of the sales force being able to evangelize and make that conversion and how this typically will allow you to do that again at a larger scale, what’s your thought process around what we've seen historically?

Ben Plummer

There is a lot of work to do; there is still lot of work to do. But there was clearly a lot of work to do when I arrived here. So, the sales force was in a thrown overboard to go and go swim and they’ve done an outstanding job. But on an individual and sort of a local team basis that will make it all up as they went along. And like I said they’ve done a fantastic job. while we take in the organization and move it forward now in a position where we can start arming them with more tools and we should be and the end result should be, we should be much more productive as we move throughout this FY2013 and then beyond. And we got the right players in place; we’re starting to arm then with lot of really good tools to go into battle with.

Operator

Thank you. At this time we have no further questions. I would turn the call back over to (inaudible) for any closing comments.

Michael Morrison

Again thanks for being with us today. We continue to seek opportunities to share our story with investors as we present at the Needham Growth Conference in New York. Later this quarter we will present at the Piper conference in New York and the Roth Conference in California. And welcome the opportunity to meet with investors at all of these events. And if you like to speak with us further in the meantime, don’t hesitate to talk to or contact our investor relations. And as always we appreciate your interest in Datawatch.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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