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Datawatch Corporation (NASDAQ:DWCH)

F2Q2013 Earnings Conference Call

April 26, 2013 16:30 pm ET

Executives

Dan Incropera - VP & Corporate Controller

Michael Morrison - President and CEO

Jim Eliason - Chief Financial Officer

Ben Plummer - CMO & SVP of Business Development

Analysts

Operator

Greetings, and welcome to the Datawatch Corporation’s Second 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 formal presentation. (Operator Instructions). As a reminder this conference is being recorded.

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

Dan Incropera

Thank you and good afternoon, everyone. Thank you for joining us today for the Datawatch Corporation second 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, Jim Eliason, our Chief Financial Officer and Vice President of Finance and Ben Plummer, our Chief Marketing Officer and Senior VP 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 to you this afternoon’s agenda. I’ll present our Safe Harbor Statement; Jim who will provide a summary of our second quarter financial results. Michael will then provide an update on our business initiatives and our current view of the market. Followed by then we will share with you the opportunities we see in enterprise content management analytics. 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 quarterly report on Form 10-Q for the quarter ended December 31, 2012. And other publicly available documents filed with the SEC. Any forward-looking statements should be considered in light of those factors.

I would also like to remind you that to supplement our financial results, in accordance with Generally Accepted Accounting Principles, we will from time to time 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 considered in conjunction with our consolidated financial statements, prepared in accordance with GAAP.

Our non-GAAP financial measures include adjustments based on the following two items, number one, amortization of purchased software. We have excluded the effect of amortization of the Monarch Software and related intellectual property that we acquired from Math Strategies on March 30, 2012 from our non-GAAP operating expenses and net income measures. Amortization of this purchased software resulted from a material transaction that is not likely to occur in the foreseeable future. Investors should note, the use of the purchased software would contribute to future period revenues. Amortization of the purchased software will recur in future periods.

Number two, share based compensation expenses. We have excluded the effect of share based compensation expenses from our non-GAAP operating expenses and net income measures. Although share based compensation is a key incentive offer to our employees, we continue to evaluate our business performance excluding share based compensation expenses. Share based comp expenses will recur in future period.

With that I would turn the call over to Michael.

Michael Morrison

Thanks Dan. Good afternoon and thank you for joining us today.

I would first like to take this opportunity to introduce Jim Eliason, our new Chief Financial Officer. Jim has an impressive background with public and private software companies most recently at Covidien an enterprise software company that provides cloud based sales enabled analytics application. Through his experience, Jim’s corporate finance, sales operations, mergers and acquisitions, investor relations, human resources and IT.

Jim rounds out a strong executive team at Datawatch and we are looking forward to his contributions to our growth initiatives and our strategic planning. Jim wasn’t here for our Q2 quarter, he will kick off of our call today by reviewing our financial results for this period. Then I’ll come back and speak to our current view of the market, finally Ben will cover in some detail a key of our marketing focus before we open up for any questions. Jim?

James Eliason

Michael, thank you very much. Let me first start by saying I’m very excited to be joining the company as well as a very seasoned management team. I’m looking forward to working closely with the Datawatch team to continue to capitalize on a tremendous opportunity in the expanding market space.

At this point in time, I would like to discuss the company’s results for the quarter ended March 31, 2013. Datawatch total revenue for second quarter of fiscal year 2013 was $6.83 million as compared to $6.55 million for the second quarter of fiscal year 2012. Revenues from the sale of software licenses in the second quarter of fiscal 2013 were $4.3 million as compared to $4.27 million in the second quarter of 2012.

As a percentage of revenue, software licenses in Q2 2013 accounted for 63% of revenue as compared to 65% of revenue in Q2 2012. Revenue from maintenance and services in the second quarter of 2013 were $2.53 million as compared to $2.27 million in the second quarter of 2012. As a percentage of revenue maintenance and services accounted for 37% of revenues in Q2 of 2013 as compared to 35% of revenue from Q2 2012.

Gross margin for Software Licenses were 88% in the second quarter of 2013 as compared to 85% in the second quarter of 2012, gross margins for maintenance and services was 78% in Q2 of fiscal 2013 as compared to 70% in Q2 of 2012. Overall gross margins were 84% in the second quarter of 2013 as compared to 79% in Q2 of 2012.

Net loss for the second quarter of fiscal year 2013 was $626,000 or $0.10 per diluted share as compared to net income of $160,000 or $0.02 per diluted share for the second quarter of fiscal 2012. In spite of net loss Datawatch generated positive cash flow during Q2 2013 and our cash position at March 31, 2013 is $9.68 million, an increase of almost $1 million or 11% from September 30, 2012.

Excluding the effects of the above mentioned non-GAAP financial measures ,the company’s non-GAAP net income to the three month ended March 31, 2013 was $390,000 or $0.06 per diluted share as compared to $354,000 or $0.05 per diluted share for the three month ended March 31, 2012. At this time, I will turn the call back to Michael.

Michael Morrison

Thanks Jim.

Let me make three points about what we saw on our business this past quarter. First, the new messaging and positioning that we introduced in Q1 is gaining traction, we briefed more than 30 industry analysts during Q2 and hear from this three things that are information optimization strategies very much in line with the market and technology trends, being discussed by the most intellectual analysts.

Our customers and prospectors are also embracing our new messaging which is directly leading to increased pipeline. In fact our pipeline at the beginning of Q3 is 50% higher than it was at the beginning of Q2 and the nature of the opportunities in this pipeline is much better aligned with our strategic positioning.

Second our enterprise yield flow and opportunities those we increased, especially in the area of enterprise content management or ECM analytics will be close to three significant six figure transactions in Q2 and tripled our ECM related pipelines. The ECM transformation has become a larger part of our enterprise business, we expect at this category our information optimization solutions will contribute more to our top-line performance, Ben will share more details, on our and apply it in ECM analytics in a few minutes

Third our partner activity really accelerated during the quarter. Now we signed 18 new partners but we ended up twice that number to our partner pipelines and several of the alliance opportunities in the partner pipeline of a strategic nature, they can provide (alternates) into substantial new business area. These partners already began to deliver revenue in the second quarter, in the world wide partner pipeline in terms of the potential business being generated through this channel is now into the seven figures for the first time ever. So we are very pleased with our results in this area.

Turning to the key operating methods that we began sharing with you last year last year, in Q2 2013 our average deal size was $86,000 as compared to $70,000 in Q2 of 2012. The average deal size has been positively impacted by our more strategic messaging and positioning. We had five six figured deals in Q2 this year compared to four six figure deals in Q2 of FY 2012.

In Q2, we signed nine new enterprise customers compared to 10 in the Q2 of 2012, new enterprise customers this past quarter include Vodafone, Allied Irish Bank, Health Management System and DHL.

And lastly in Q2 this year as I mentioned, we signed 18 new partners compared to six new partners in Q2 of fiscal 2012. New partners include (inaudible), Panorama MarkLogic, KeraSoft and (DIN1).

Let me take a step back to provide a bit broader perspective. We are the market leaders in the fast developing area of the analytics space that we call information optimization. We are focusing our investments and solutions and partners to directly pursue this opportunity.

We already have some key successes with wins in all major geographies around the world. Though there remains an element of evangelism around this market, and the market will take some time to truly grow to the size of we and industry analysts believe it will and provide the material opportunity for Datawatch to realize significant future growth.

We still have a lot of work to do, but we know what we need do, our ability to execute is steadily improving for managing our business to be successful over the long-term. Our activities today this fiscal year a part of a carefully horned model and a strategic plan that continues the transformation of Datawatch as we drive toward our growth objective and our goals to become a much more meaningful player in the broader analytic space.

Let me now turn the call over to Ben Plummer, our Chief Marketing Officer to share with you some more details of the opportunities we see in the area of enterprise content management analytics.

Ben Plummer

Thanks Michael.

As Michael mentioned, we have seen a significant increase in our enterprise content management analytics opportunities over the past quarter. We believe that this increase can be directly attributed to a change that we are seeing in the overall analytics market. This company is beginning to evaluate technology like Hadoop to determine how they might utilize big data solutions in the organizations. They are coming to realize that they need to broaden the view of what data and I actually put that in “mean” realizing the data doesn’t always come neatly packaged in data warehouses, data marts and other forms of relational databases. But in fact the largest and fastest growing sources of information in most businesses come in the form of PDF, documents and nevertheless structured data source.

We are also coming to realize that they already have a big data system collecting the story in this type of information in the organization perhaps you could call this the original big data systems and that’s their enterprise content or ECM systems. And they are looking to leverage this data today to improve their operations and get better performance out of the organization. Now, this isn’t just a phenomenon that we are seeing with our customer base many of the 30 industry analysts that Michael mentioned that we spoke to over the last quarter are validating the strength.

In conversations with these analysts, they are describing the use of these ECM systems of analytic data store department, the emergence of what’s being called logical data warehouses. In other words, companies are utilizing information in place instead of going through a time consuming and often costly staging process and ECM systems are rich source of information they may (inaudible) to the start.

Of course, almost every content management system provides the ability to perform surge against the documents that are stored and then retrieved documents that you want to see. But that doesn’t really provide any analytical value against the actual data stored within those documents been able to actually harvest the information inside these documents for analysis what these analysts are calling content transformation that the key to really gaining analytic insight.

This ability to go beyond simple search to actually take action against the data is exactly what the Datawatch information optimization platform is designed to deliver. The recent successes with these large customers delivering these capability and with the validation that this received from the industry analysts gives us reason to be very excited about our position in this market.

To ensure we maximize the opportunity we believe we have, we plan to focus our attention on ensuring the Datawatch is seen a thought leader as this market develops. With our unique ability to transform virtually any semi-structured or unstructured form of content into valuable analytical information from virtually every source including enterprise content management systems like EMC’s Documentum or IBM’s (CMOS) or big data solutions like Hadoop and MarkLogic or even traditional systems in relational database, we are in enviable position and what certain to be exciting market.

But most importantly this capability will continue to allow us to deliver solutions for our customers to give them the whole story about applications like reconciliation, health claims management, machine data analytics and a host of others.

So to summarize, we believe that this new way of thinking about what data is and the role of the ECM system can play in delivering this data represents the major shift in the analytics market and as Michael said earlier it positions Datawatch at the center of fast growing market segment that offers us a platform for growth as we look to the future.

With that I will turn it back to Michael.

Michael Morrison

Thanks Ben. Manny we are ready for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen we will be conducting a question-and-answer session. (Operator Instructions)

Thank you. The first question comes from (inaudible). Please go ahead.

Unidentified Analyst

Hi, guys. I was wondering if you can talk a little bit about the DocuAnalyzer opportunity first though of the six links, could you give us a sense of the – sort of the total numbers of seats that you might have won there?

Michael Morrison

No, I didn’t hear the second part of the question that you said that after the first part what was that?

Unidentified Analyst

The total number of seats that you may have won from the six links?

Michael Morrison

Ones that we mentioned were 3 wins. I mean the total seat were in the range of 2000 to 2500 and more broadly speaking they were opportunities in – as Ben mentioned the ECM analytics base where we – our solutions being used to access the content and the document stored in content management system and pull it out for analytics and more broad based business performance management out of those systems.

Unidentified Analyst

Okay. And then in terms of – it seems like fairly low hanging fruit or an opportunity for you folks to replace that ASG product in the market. Do you have some sense of the total number of seats out there that are using that ASG product today?

Michael Morrison

We did not. But there is – just to take it back of (inaudible) there is a very large opportunity in enterprise content management analytics generally speaking. Just a couple of weeks ago, I was over in France with a very large Documentum customer who is looking that they got 1500 seats of Documentum looking to get better analytics and business value out of what is Terabytes of information that they have stored over the years in their system, (inaudible) data warehouse, their operational systems some that are off the shelf, some that are home grown had been pumping reports into this content store with a better part of 20 years and its just in the last 6 to 9 months that by the way they were current customer they just signed up short while ago.

In the past three to six months they have realized there is a tremendous amount of value trapped inside of all that content that they stored over the years and we are helping them transform that into something useful.

Unidentified Analyst

Okay, great. on the gross margin front, it looks like you guys have been able to maintain this higher overall gross margin. You are seeing some good improvements in the maintenance and service gross margin. Do you guys believe that you will be able to maintain those levels over the near future?

Michael Morrison

Yes, in fact that we should be able to improve on those. We saw a marked change about a year ago when we acquired the Core Technology. But we still have – we still have capacity in our professional services organization to drive more revenue there. So our expectation is that our gross margins in that area will improve over the next four quarters.

Unidentified Analyst

Okay. And then my last question for now is, on the last conference – quarterly conference call Michael you were pretty optimistic about the re-acceleration of year-over-year revenue growth and I guess you achieved that this year. And so it sounds like the pipeline is much larger and things are starting to hit on cylinders, do you have some sense that you are going to start seeing some sequential revenue growth happening pretty quickly again?

Michael Morrison

Yeah, we saw modest sequential growth none of us at Datawatch are pleased with the results that we saw this quarter. We are – we mentioned in the last quarter we went through a – we are in the process or in the end of a process going through a fairly significant transformation which I think we delivered a fairly job coming out of that. We are in a much better position to grow the company moving forward. So while we all would have liked better results this past quarter there still is an element that we talked about I think since I have got here but the company of our size and going through what we are going through, it tends to be lumpy and closing deals on one side or the other of the end of the quarter makes it significant different.

So I would expect us to have greater growth numbers in the second half of the year clearly from the first.

Unidentified Analyst

Okay, great. Thank you.

Operator: (Operator Instructions). The next question is from (George Morango) of First Capital. Please go ahead.

Unidentified Analyst

Hi, thanks Michael for taking my call. I have got a real quick question, your recent purchase of the – what you call Math – I kind of like the name but –

Michael Morrison

Math Strategies.

Unidentified Analyst

Yeah, Math Strategies. Did you also – in terms of an individual who is there, does he retained or working for Datawatch so on some basis?

Michael Morrison

So he would be a regional developer, the owner of Math Strategies and it was a small organization down in Greensborough and then four other people. He is no longer with us the four others are. And actually that group grown. So the core of the intellectual talent if you will, it is still with us.

Unidentified Analyst

That’s the one. Okay. Thank you very much.

Operator: (Operator Instructions). And we have no further questions in queue at this time. Let’s turn the call back over to management for any additional remarks.

Michael Morrison

Thanks again for joining us everybody. We look forward to speaking with you next quarter. We will also be in New York at the Cowen MTN conference at the end of May. So if you got an interest in getting together before next quarter, we are happy to chat with you then. So take care and thank you for your time.

Operator: Thank you. Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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