Datawatch: Deeper Value For A Lower Price

| About: Datawatch Corporation (DWCH)

Datawatch (NASDAQ:DWCH) is a small business analytic software company that has aggressively transformed over the past ~ 1.5 years. The recent financial results have reported many important improvements. These reported results reveal only a TINY fraction of operational changes. As such, I expect financial results over the next 6 to 18 months to be improving materially. Investors should expect a much higher stock price.

The current depressed price presents a potential significant investment opportunity. TTM material operational improvements have been ignored as DWCH sits at 12.75 off the 52 week high of 20.21. Revenues increased 21.62% for the cumulative past 4 quarters. The 21.62% improvement was achieved with 26.840M in sales (6/12 to current 3/13 quarter) versus 22.069M (6/11 to 3/12). This result was after a prior 26.09% cumulative 4 quarter revenue improvement. The 26.09% improvement was realized with 22.06M (6/11 to 3/12) versus 17.502M (6/10 to 3/11). Revenue data was taken from Edgar online. Management commented that growth rates should move even higher for the remainder of the year.

Enterprise content management or ECM analytics are presenting new opportunities. ECM analytics solutions saw three important six figure transactions during Q2. The ECM related pipelines more than tripled during Q2. These recently announced deals provide some important context to the market's acceptance and significance of their future opportunities.

Recent headlines:

  • March 27th "Fortune 50 Managed Health Care Provider Reduces Costs And Optimizes Business Processes With Datawatch Enterprise Content Management Analytics .. Hundreds of Users to Leverage Datawatch Solutions to Improve Business Performance by Maximizing the Value of Big Data Stored in Enterprise Content Management Systems " ;
  • March 19 "Fortune 500 Financial Institution Selects Datawatch For Enterprise Content Management Analytics .. Second Major Financial Institution Replaces DocuAnalyzer with Datawatch" ;
  • March 4th "BNP Paribas Securities Services Selects Datawatch To Deliver Big Data Analytics From EMC Documentum ..Datawatch Solution to Enable Analytics on Valuable Data Trapped in Millions of Semi-Structured Bank Documents". Other notable enterprise deals during Q2 were Vodafone, Allied Irish Bank, Health Management System and DHL.

"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", management commented. Increased deal size is another key metric. In Q2 2013, the average deal size was $86,000 compared to $70,000 in Q2 of 2012.

18 new partners were signed during the recent Q2. More importantly, the partner pipeline increased over twice that amount, along with several alliances of a strategic nature. Management commented that this can provide substantial new businesses. The world wide partner pipeline being generated is now into seven figures for the first time ever, management added.

Datawatch briefed more than 30 industry analysts during Q2. They "hear from this three things that our information optimization strategies are very much in line with the market and technology trends, being discussed by the most intellectual analysts."

Now wrap all these positives within a strong balance sheet , A+ financial position and without question some of the most positive open market insider purchase activity over the past ~ year.

  • Market Cap: 83.55M Enterprise Value: 74.70M
  • Enterprise Value/Revenue: 2.78
  • Total Cash : 9.68M ; Total Cash Per Share: 1.51
  • Shares Outstanding: 6.43M ; Float: 3.03M
  • % Held by Insiders: 42.57% ; % Held by Institutions: 26.20%

Final Thoughts: My positive outlook is all about the Datawatch people, products, current industry trends and management's incentives aligned directly with shareholders.

As an investor, ask yourself why successful executive leaders, management and staff would leave respected roles at leading secure technology/BI employers to risk it all at a tiny company. These moves over the past year or so demonstrate the underlying potential future value of Datawatch. These new executive recruits have years of knowledge in this analytic space to make an informed decision.

Let's take a brief look at some the recent recruits. Recruitment talent is far more relevant to Datawatch's future value than any other historical financial metric. It started with Vice chairman Dave Mahoney, former CEO of Applix and other technology successes. Mahoney joined the board, then months later now CEO Michael Morrison left IBM/Cognos. Morrison was the former COO of Applix. Note Applix was acquired by Cognos then quickly by IBM, where both Morrison (NYSE:COO) and Mahoney (NYSE:CEO) were executives.

Some other new executive management that have recently joined Datawatch after CEO Morrison include Ben Plummer, Mike Carroll, Jon Pilkington and others, including new CFO (James Eliason) announced over the past few weeks. Eliason has deep industry corporate finance along with mergers and acquisitions experience. Ben Plummer joined Datawatch from "IBM Cognos where he was vice president, data discovery and analytics". Mike Carroll "led one of the highest performing of the five commercial teams within the IBM Business Analytics group", before joining Datawatch. Jon Pilkington, brings 18 years in the business intelligence industry including 13 years at various executive roles with Cognos. Also critical there is an entire new sales and marketing team with proven BI talent closing large deals.

The impact of these human capital changes is jaw dropping. Proven talent recruitment is near impossible for a tiny company that was in a slow yearly decline. I emphasize the recruitment success because it should provide investors additional confidence in DWCH 's technology and future continued growing market potential.

One last comment that directly relates to DWCH is Friday's IPO of Tableau (NYSE:DATA). As a frequent user of Tableau, I can state with certainty that Tableau's usefulness is far less valuable without the only out-of-the- box, ready to go, everyman technology perfected over 20 years of continuous improvement for data mining unstructured or structured content existing in most any file source.… web,xps,pdf,html,mdb,xls,txt,prn, and on and on. This software is from Datawatch.

Tableau creates nice graphs with useful data discovery functionality along with other software application including Datawatch. But let's say that a marketing or operational expert needs to research,discover new knowledge and then present the findings by combining non relational data buried on several websites, external PDF files, invoices , ERP reports or an internal Access databases. You will get nowhere without Datawatch's ability to empower the functional expert ,consultant, staff or executive to quickly mash/relate then create new metrics from all this previously unrelated data. Then if desired, present or discover additional insight with Tableau or Qlikview. Qlikview (NASDAQ:QLIK) has already recognized the power of Datawatch. I expect, but can't know for sure if and when Tableau will announce some partnership or a more strategic alliance with Datawatch.

Disclosure: I am long DWCH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.