Datawatch Corp. F2Q09 (Qtr End 03/31/09) Earnings Call Transcript

May. 5.09 | About: Datawatch Corporation (DWCH)

Datawatch Corp. (NASDAQ:DWCH)

F2Q09 (Qtr End 03/31/09) Earnings Call

May 5, 2009 2:00 pm ET

Executives

Dan Incropera - Controller

Ken Bero - President and CEO

John Kitchen - SVP and Chief Marketing Officer

Murray Fish - CFO and VP of Finance

Analysts

Jim Lieberman - Wells Fargo

Operator

Greetings, and welcome to the Datawatch Corporation second quarter 2009 Earnings Call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Dan Incropera, Controller for Datawatch Corporation. Thank you, sir, you may begin.

Dan Incropera

Thank you. Good afternoon, everyone. Thank you joining us today for the Datawatch Corporation second quarter of fiscal year 2009 earnings conference call. I'm Dan Incropera, Vice President and Controller at Datawatch.

Joining me today is Ken Bero, our President and CEO; John Kitchen, Senior Vice President and Chief Marketing Officer; and Murray Fish, our Chief Financial Officer and Vice President of Finance. You can obtain a copy of our earnings release which was distributed earlier today by e-mailing us at investor@datawatch.com. This release will also be posted on our website at www.datawatch.com.

Let me first outline for you this afternoon’s agenda. Following this introduction, Ken will provide some general comments on the business. Murray will then present a summary of our second quarter of fiscal year 2009 financial results, which will be followed by some closing remarks from Ken. Following our prepared comments, we will open up the call for questions and answers.

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 including without limitation, statements concerning expected expense savings, market trends, product introductions, acquisitions and general market conditions, they constitute forward looking statements. Any such statements are based on our current expectations that are subject to a number of risks and uncertainties that may 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, 2008 and other publically available documents filed with the SEC. Any forward-looking statements should be considered in light of those factors.

I will now turn the call over to Ken, for a discussion of business results.

Ken Bero

Thanks, Dan, and good afternoon, everyone. I’ll share some opening comments about our Q2 performance and following my remarks Murray Fish, our CFO will provide more detailed information regarding our financials for the quarter. Following Murray’s remarks, we’ll open the meeting up for some questions.

Let me take a couple of minutes and talk about our results for the quarter, I’ll first address the second quarter revenues, which will be followed by a discussion of the company’s net income for the quarter and the impact of the non-cash impairment charges of approximately $6.4 million.

Revenues for the quarter were 5.1 million, as mentioned in this morning’s press release these results were lower than Q2 a year ago and slightly lower than Q1 of this year. The recession’s impact on a worldwide basis accelerated during the period January through March 2009 as compared to the November through December Q1 period. These conditions resulted in company cutbacks for discretionary spending, as well as decreased funding for new projects.

Companies were also much more diligent regarding software usage audits resulting in the recycling of software among existing employees. Comparisons to last year revenues and expenses for the same period are also affected by the fact that the pound sterling’s value as compared to U.S. dollar has declined significantly. The UK is our second largest market.

Overall, we felt that our business held relatively steady despite these conditions, while our revenues for the quarter were impacted, we continue to show our ability to provide very clear and direct customer value with our solutions. During the quarter, we closed several large deals in excess of $100,000, with the largest deal being in excess $250,000.

Net income for the quarter showed a loss of 5.85 million for the quarter, the quarter’s loss resulted primarily from a non-cash impairment charge of approximately 6.1 million net of related tax credits. The impairment charge was comprised of goodwill and indefinite lived trademark resulting from acquisitions which occurred in fiscal years 2003 through 2006.

As we previously reported, the uncertain global economic conditions combined without stock price volatility have caused us to continue to perform interim tests regarding our goodwill and indefinite lived intangible assets in accordance with FAS No. 142. Results for the interim period January through March 2009 showed that the company’s book value exceeded its estimated fair value.

And further analysis show that goodwill and an indefinite lived trademark were fully impaired. While we believe that company’s valuations, particularly for technology companies have been impacted by the worldwide economic and overall market conditions and are not an accurate reflection of our operating fundamentals, we were required by accounting rules to write-down the value of these impaired assets.

When you exclude the effects of the non-cash goodwill and trademark impairment charge, the company’s net income for the quarter ending March 31 would have been 228,000 as compared to 83,000 during the same quarter a year ago. Operationally, we earned more money in Q2 of this year than during the same period a year ago on lower revenues and under economic conditions that were much more difficult.

We continued to improve our cash position and have no debt on the books. On April 2, we had a reduction in workforce to lower our overall expense structure. Overall, we felt positive about our results, our business and our direction.

Our solutions provide concrete measurable value to our customers. Our products help drive operational efficiencies and save our clients money in a marketplace, where this requirement is paramount. We continue to believe that our solutions position us well during this difficult economy and for continued growth as the economy turns around.

Murray Fish will now give you some additional information regarding our financials. Murray?

Murray Fish

Thank you, Ken. Good afternoon. For those of you, who may not have seen our results released earlier today, our total revenues for the second quarter fiscal year 2009 were 5.1 million as compared to 5.9 million for the second quarter of fiscal year 2008. Revenue decreased 781,000 or 13% quarter-over-quarter.

For the second quarter of fiscal year 2009, revenues from licenses and subscriptions were $3 million as compared to $3.2 million for the second quarter of fiscal year 2008. As a percentage of revenue, software license and subscription sales accounted for 58% of revenue for the second quarter of fiscal year 2009 and 54% of revenue for the second quarter of fiscal year 2008.

For the second quarter of fiscal year 2009, revenues from maintenances and services were 2.1 million as compared to 2.7 million for the second quarter of fiscal year 2008. As a percentage of revenue, maintenances and services accounted for 42% of revenues for the second quarter of fiscal year 2009 and 46% of revenues for the second quarter of fiscal year 2008.

Business intelligence solutions, content management solutions and service management solution product revenues were 73%, 15% and 12% of total revenues for the second quarter of fiscal year 2009 as compared to 67%, 15% and 18% for the second quarter of fiscal year 2008.

Domestic revenues and international revenues were 76% and 24% of total revenues for the second quarter of fiscal year 2009 as compared to 69% and 31% for the second quarter of fiscal year 2008.

Gross margins for software licenses and subscription were 82% for the second quarter of fiscal year 2009 as compared to 83% for the second quarter of fiscal year 2008. Gross margins for maintenance and services were 61% for the second quarter of fiscal year 2009 and 57% for the second quarter of fiscal year 2008.

Overall, total gross margins were 73% for the second quarter of fiscal year 2009 as compared to 71% for the second quarter of fiscal year 2008.

Sales and marketing expenses decreased by 114,000 or 6% in the second quarter of fiscal year 2009 over the second quarter of fiscal year 2008. Sales and marketing expenses as a percentage of revenues were 36% for the second quarter of fiscal year 2009 as compared to 34% for the second quarter of fiscal year 2008. This decrease was primarily attributable to lower headcount and related cost such as commissions and travel.

Engineering and product development expenses decreased by 251,000 or 30% in the second quarter of fiscal year 2009 over the second quarter of fiscal year 2008. Engineering and product development expenses as a percentage of revenues were 11% for the second quarter of fiscal year 2009 as compared to 14% for the second quarter of fiscal year 2008. The decrease in engineering and product development expenses is primarily due to capitalized development cost of new product releases.

General and administrative expenses decreased by 254,000 or 20% for the second quarter of fiscal year 2009 over the second quarter of fiscal year 2008. General and administrative expenses as a percentage of revenues were 20% for the second quarter of fiscal year 2009 as compared to 22% for the second quarter of fiscal year 2008. This decrease is primarily attributable to low professional service fees.

In light of uncertainties surrounding the global economy and the volatility in the company’s stock price, the company has continued to perform interim tests of impairment for its goodwill and indefinite lived intangible assets in accordance with Statement of Financial Accounting Standards FAS No. 142.

As a result of the current stock price, lowering the company’s market capitalization, valuation analysis for goodwill and indefinite lived assets for the interim period March 31, 2009 indicated that the company’s book value exceeded its estimated fair value.

Further analysis and appraisal by an independent third party indicated that goodwill and an indefinite lived trademark were fully impaired. Therefore, the company recorded a non-cash impairment charge for the quarter ended March 31, 2009 of approximately $6,401,000.

Other income expense decreased by 56,000 in the second quarter of fiscal year 2009 over the second quarter of fiscal year 2008. The provision benefit through income tax expense decreased by 319,000 in the second quarter of fiscal year 2009 over the second quarter of fiscal year 2008, due to the reversal of tax provisions related to the goodwill which was written off as a result of the impairment.

The net loss for the second quarter of fiscal year 2009, including the goodwill and impairment charge was 5,854,000 or negative $0.99 per diluted share as compared to net income of 83,000 or $0.01 per diluted share for the second quarter of fiscal year 2008. Excluding the non-cash, goodwill and impairment charge, net income would have been 228,000 or $0.04 per diluted share for the second quarter of fiscal year 2009.

For the year-to-date results, total revenues for the first six months of fiscal year 2009 were 10.3 million as compared to 11.9 million for the first six months of fiscal year 2008. Revenue decreased by 1.6 million or 14%. For the first six months of fiscal year 2009, revenues from licenses and subscriptions were 5.8 million as compared to 6.5 million for the first six months of fiscal year 2008.

As a percentage of revenue, software license and subscription sales accounted for 56% of revenue for the first six months of fiscal year 2009 and 54% of revenue for the first six months of fiscal year 2008. For the first six months of fiscal year 2009, revenue from maintenance and services were 4.5 million as compared to 5.5 million for the first six months of fiscal year 2008, as a percentage of revenue maintenance and services accounted for 44% of revenues for the first six months of fiscal year 2009 and 46% of revenues for the first six months of fiscal year 2008.

Business intelligence solutions, content management solutions and service management solution product revenues were 72%, 16% and 12% of total revenues for the first six months of fiscal year 2009, as compared to 67%, 15% and 18% for the first six months of fiscal year 2008.

Domestic revenues and international revenue were 77% and 23% of total revenues for the first six months of fiscal year 2009 as compared to 69% and 31% for the first six months of fiscal year 2008.

Gross margins for software licenses and subscriptions were 82% for the first six months of fiscal year 2009 as compared to 83% for the first six months of fiscal year 2008. Gross margins for maintenance and services were 62% for the first six months of fiscal year 2009 and 58% for the first six months of fiscal year 2008. Overall, total gross margins were 73% for the first six months of fiscal year 2009 as compared to 71% for the first six months of fiscal year 2008.

Sales and marketing expenses decreased by 674,000 or 16% in the first six months of fiscal year 2009 over the first six months of fiscal year 2008. Sales and marketing expenses as a percentage of revenues were 34% for the first six months of fiscal year 2009 as compared to 35% for the first six months of fiscal year 2008. This decrease is primarily attributable to lower headcount and related cost and lower consulting cost.

Engineering and product development expenses decreased by 288,000 or 18% in the first six months of fiscal year 2009 over the first six months of fiscal year 2008. Engineering and product development expenses as a percentage of revenues were 13% for both the first six months of fiscal year 2009 and 2008. A decrease in engineering and product development expenses is primarily due to capitalized development costs of new product releases.

General and administrative expenses decreased by 294,000 or 12% in the first six months of fiscal year 2009 over the first six months of fiscal year 2008. General and administrative expenses as a percentage of revenues were 21% for both the first six months of fiscal year 2009 and 2008. This decrease is primarily attributable to lower professional service fees.

As previously mentioned, the company recorded a non-cash impairment charge in the quarter ended March 31, 2009 of approximately 6.4 million related to the full impairment of its goodwill and indefinite lived trademark. Other income expense increased by 18,000 or 12% in the first six months of fiscal year 2009 over the first six months of fiscal year 2008.

The provision benefit for income expense decreased by 324,000 in the first six months of fiscal year 2009 over the first six months of fiscal year 2008 due to the reversal of tax provisions related to the goodwill, which was written-off as a result of the impairment.

The net loss for the first six months of fiscal year 2009, including the non-cash impairment charge was 5,469,000 or negative $0.92 per diluted share as compared to net income of 330,000 or $0.06 per diluted share for the first six months of fiscal year 2008. Excluding the non-cash goodwill and impairment charge, net income would have been 614,000 or $0.10 per diluted share for the first six months of fiscal year 2009. Ken?

Ken Bero

Thanks, Murray. Let me open up the call for any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Jim Lieberman with Wells Fargo

Jim Lieberman - Wells Fargo

These were actually very strong numbers considering the environment that you're working in. I appreciated your comments on news release that you actually thought you are offering a strong value proportion right now and I wonder if you could comment more about that, because I think everyone is looking for that moment where things could really begin to accelerate and bring the company to the next level?

Ken Bero

But I think where we're really seeing traction is in the BI environment and our solutions are offering companies the ability to really monitor and manage their overall business operations and make them more efficient and our value proportion is that we install very easily, it's very easy to use, we can have you up and running in days and weeks and we leverage your existing infrastructure, we're not complicated like the traditional database oriented BI solutions and that has just started to play very well in many accounts not only a large Fortune 1000, but in the S&P market as well. So that’s a place where we’ve really made some inroads.

Jim Lieberman - Wells Fargo

So in fact the economic conditions are really starting to play into your hand more perhaps?

Ken Bero

Well, in some business, yes. And with the caveat that as you look at the overall environment, it's still pretty difficult to go out and sell and even if you have someone that is looking for it, the amount of the time that’s being spend reviewing deals and the number of step that you have to go through. They were elongating the sales cycle, but yes, our value proportion really plays well in front of our management.

John Kitchen

Hey, Jim, this is John Kitchen. I’d add to what Ken has to say in that, there is sort of two countervailing trends going on right now. One is that companies are not spending a lot of money on new systems that they’re going to make do with their existing systems they have in place for a couple of years longer at least. However, the other great drive here is, companies need to have more operational efficiency.

And so if you take those two trends right there, our technology really plays well into that and that we can leverage those existing systems to help people achieve that operational efficiency at a lower cost and a faster time to market, so we think, all things considered moving forward, that we've a pretty strong story to tell to the marketplace.

Jim Lieberman - Wells Fargo

And by your recent news release, you’re beginning to see that taking shape little bit and more traction taking shape there?

Ken Bero

Yes.

Jim Lieberman - Wells Fargo

So, that’s a very good sign. Thank you very much, gentlemen.

Ken Bero

Sure.

Operator

(Operator Instructions). We have a follow-up question from the line of Jim Lieberman with Wells Fargo.

Jim Lieberman - Wells Fargo

Hi, thank you. I guess there weren’t people rushing to ask, I have some other pertinent questions. Are you starting to see some seasonality or just because the economic conditions have sort of swept the environment scene a little bit. It's hard to see any seasonality, you’re just looking at product development and rollout?

Ken Bero

Yes, I think it really is more the latter than the former. I think at this point it’s almost impossible to do anything other than kind of look at the current environment and take the best assessment that you can and really just stay on top of accounts and scrub the pipelines and really continue to go back with the sales people and talk about the deals that we’re working on and make sure that we’ve got all our eyes dotted and tees crossed and that our value propositions are clean and we understand the sales cycle.

And seasonality, I think is kind of a little bit out the window. It really is just making more calls, getting in front of as many customers they should possibly can, again going with well-armed messages in terms of who we are, what we do, how we can help and really focus on those kinds of aspects more than anything else.

Jim Lieberman - Wells Fargo

It does sound like you’re approaching the marketplace right with the right product and I know we'd just be [grateful for all] to see even greater traction again to next levels. Thanks very much for your efforts.

Ken Bero

Sure. Okay, thank you.

Operator

(Operator Instructions). Seeing as there are no further questions, I’d like to turn the call back to management for any concluding remarks.

Ken Bero

Okay. I’ll add a couple of summary remarks. In an economy that is difficult Datawatch continues to perform solidly in the black. We believe that the asset impairment charge reflects unique market conditions which have driven stock price volatility requiring us to meet certain accounting rule standards.

As I stated in my remarks, we’re pleased with our Q2 performance. We continue to be proactive regarding expense management, as well as investments in products and infrastructure. We have confidence that we will effectively weather this stormy period and be in a strong position to take advantage of the expected future opportunities. Thank you for your continued interest in Datawatch.

Operator

Ladies and gentlemen, this concludes today’s teleconference. Thank you for your participation.

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