Datawatch's CEO Hosts Acquisition of Panopticon Software AB Conference (Transcript)

| About: Datawatch Corporation (DWCH)

Datawatch Corporation (NASDAQ:DWCH)

Acquisition of Panopticon Software AB Conference Call

June 17, 2013 1:00 pm ET

Executives

Dan Incropera – Corporate Controller and Vice President

Michael A. Morrison – President and Chief Executive Officer

Willem De Geer –Chief Executive Officer, Panopticon

Ben Plummer – Chief Marketing Officer and Senior Vice President, Strategic Alliances

James Eliason – Chief Financial Officer

Analysts

Nathan Schneiderman – ROTH Capital Partners

Noel Atkinson – Loewen, Ondaatje, McCutcheon Ltd.

Operator

Greetings and welcome to the Datawatch, Panopticon Investor 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. Okay, Mr. Incropera, you may begin.

Daniel Incropera

Good afternoon everyone. Thank you for joining us today to discuss this morning’s announcement regarding Datawatch Corporation’s Agreement to Acquire Panopticon Software AB. I am Dan Incropera, Vice President and Corporate Controller at Datawatch. Joining me today are Michael Morrison, our President and CEO; Jim Eliason, our Chief Financial Officer; Ben Plummer, our Chief Marketing Officer.

We’re also very pleased to have Willem De Geer, CEO of Panopticon on line with us. Both Jim and Willem are joining us from the UK. Management will discuss the announcement made today and then open the call up for questions regarding the acquisition.

Before we begin the call, we would like to caution investors regarding any forward-looking statements. All statements on this call other than statements of historical facts are deemed to be forward-looking statements. As that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, including those described in the Company’s filings with the SEC. It could cause actual results to differ materially from those reflected in the forward-looking statements. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results or occurrences. Datawatch disclaims any obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise. You may obtain copies of the Company’s filings with the SEC at www.sec.gov.

Now, I will turn the call over to Michael Morrison.

Michael A. Morrison

Thanks Dan. Good afternoon everyone. We are certainly pleased you could take the time to join us today on fairly short notice to discuss the acquisition of Panopticon. One quick note before we start, as you know we’re currently in our quiet period leading up to our planned announcement of our fiscal Q3 2013 results in late July. As such, we’ll refrain from any comment on the current quarters’ performance and look to focus our remarks and your questions on today’s news instead. With that, I’ll begin.

Let me start by saying, how thrilled I am to be talking to you today about this strategically important acquisition. It’s a critical step along the path that we have traveled since 2011, when we began the transformation of Datawatch by focusing all of our resources on what we saw as a major market opportunity that is leveraging our unique and proven information optimization platform to harness the wide-variety of information across an enterprise, regardless of source or format to address the analytics needs of the business.

With today’s announcement of the acquisition of Panopticon, the leading real-time Visual Discovery vendor, we are significantly extending the value we can provide to our customers and partners in building on all the work we’ve done these past two years to make our information optimization platform the recognized solution for adding variety to Big Data, business intelligence, and other analytic solutions, particularly those dealing with large, high velocity, and rapidly changing data such as machine data and data from complex event processing engines and message buses.

As noted in the press release, Panopticon is a privately held company headquartered in Stockholm, Sweden with sales offices in London and New York City. The company was founded in 2002 by Willem de Geer and Ludvig Karlsson Sandman, who today are CEO and Chief Architect respectively of the company. I’m pleased to report that both will be joining Datawatch in Executive capacities.

Over the years Panopticon has applied its knowledge and expertise in the area of visualizations to create an unrivaled and highly respected real-time Visual Discovery Solution that has been successfully deployed in some of the world’s largest companies. Their unique ability to handle high velocity data has made it the go to technology for risk and training applications in financial services, network monitoring applications and telecommunications and grid utilization applications in energy.

Coupling Panopticon’s real-time Visual Discovery technology with Datawatch’s semi-structured and unstructured data transformation technology is a transformative event in the business analytics market. With this combination Datawatch now becomes the only vendor in the analytics market that can access and transform any variety of data and deliver this data in real-time to a rich Visual Discovery experience.

In addition to technology Panopticon adds 75 customers to Datawatch’s existing customer base, including marquee name such as Bank of America, Citigroup, Credit Suisse, Amgen, Novartis, Vodafone and Shell. Panopticon also brings 30 customer ready solution assets and several dozen partnerships to Datawatch, including key OEM relationships with SAP and Thomson Reuters and important alliance relationships with QlikTech, Accenture, and Deloitte. We’ve been very clear this past year that we are targeting our investment to delivering more solutions and building out our partner ecosystem in order to best seize the sizable opportunity available to us in the analytics market, and the acquisition of Panopticon helps us accelerate our efforts in both of these areas.

Let me turn now to the financial details of the acquisition. In terms of the stock purchase agreement, which was unanimously approved by the boards of directors of both companies this past Friday, calls for Datawatch to acquire all the outstanding shares of Panopticon in an all-stock transaction that based upon the closing price of Datawatch common stock as of Friday June 14, is valued at approximately $31.4 million. The transaction is expected to be completed during our fiscal fourth quarter, which ends on September 30. Excluding certain one-time costs associated with the transaction, Datawatch expect the acquisition to be accretive in our next fiscal year at FY 2014. Because we require shareholder approval to issue the stock needed to purchase Panopticon, we will hold a Special Shareholder’s meeting in August, we plan to have a proxy statement filed for the meeting in the very near future.

Following completion of the transaction the current owners of Panopticon, which includes a number of Swedish and European institutional investors as well as the current management, will own approximately 23.6% of the total outstanding shares of Datawatch. And for your reference, we anticipate that our total outstanding share count will be approximately 8.5 million following the Special Shareholder meeting. We anticipate that the majority of Panopticon’s 25 employees and contractors will join Datawatch on closing including Willem who as I mentioned serves as CEO and the day-to-day manager of the company’s operation.

And this is a good time to introduce you to Willem and have him say a few words about Panopticon and the combination with Datawatch. Willem?

Willem De Geer

Thanks, Michael. I’m very pleased today to join [us all] when we announced this combination. For those people who are not familiar with Panopticon, I’d like to just give you a brief background. So, what we do is visualization, we are visualization company focused on the true real-time market. And the way we differentiate from the rest of the market is that our technology allows us to work directly against the data sources and the databases.

We can work with CEP engines, we can work with message buses, we can work with historic data bases and by doing that we allow companies to use their real-time data in the [content] [ph] applications that is coming down in two ways. Either we use our technology to invent in often either proprietary system or existing BI environment. So imagine that you have as an example, click that dashboard and you would like to get real-time in their, you can use Panopticon to be able to incorporate and federate the real-time data. Or if you don’t have the BI requirements of reporting et cetera you can use as standalone, very often in capital market firms where for example in trading and risk et cetera.

So our clients use that insight to make smart decisions. And the important part in our world compared to the BI space is that it really does matter when you make a decision. So, in a real-time environment it’s really important you need to understand the data, make the insights but the action here actually what’s most important.

As you will know obviously the market has changed towards our direction and all the larger vendors are pushing their database offerings more and more into real-time and I think as one of our premier partners, SAP's CTO Vishal Sikka [put it] [ph]. We’re starting to see the end of the batch era. And I also think the last couple of weeks, recent corporate activity around the CEP sector, I think that CEP real-time database is now becoming a business requirement and also as a consequence part of all larger companies roadmap.

This really helps most of these companies are our partners. But about a year ago we started getting requests from large corporations, especially in the capital market space that they wanted a holistic view of all their data, especially around the risk space that has obviously been highlighted throughout the financial crisis where you need to look at all the data changing and it’s impossible to run a large organization with batch when you look at risk.

Initially, I assume that they wanted a combination of static data and real-time data, but the more we looked that’s actually use cases. What they really wanted was to look at all data. So we started looking at the segments, which is called unstructured and semi-structured data, it’s called [‘dark data’] and we took upon ourselves to look at all the vendors in the space.

I wasn’t as familiar with the space as most of people on this call, but it’s obviously called a variety part of the Big Data. And if you look at all the vendors in the space, the messaging from the different companies is very, very similar. But if you skip the marketing link up, as far looking at the underlying technology, there’s a big difference what they actually provide. There’s a difference between those who provide search and there’s a difference between the ones who cannot structure, down structure part. For us that’s an obstacle and it’s again clear that the kind of technology that Datawatch had is a kind of enabling technology to actually get the holistic view of all the data.

My experience as you hear is predominately from a financial services industry and the first solution we’re going to take to market, both in financial services and across the whole enterprise space is managing risk. So the deal oriented from my perspective that I saw a clear depth in the market and a business problem. And I think my personal view is that I think combining these two very, very robust technologies and the fact that we have 40,000 clients and the phenomenal partner base with the leading IT companies in the world, I think this makes it very, very exciting.

From a deal perspective, the Panopticon Board and our investors concluded that not only did Datawatch have a transformational technology it made our frontend so much more valuable to them, clients, by being very impressed with the stellar leadership team that Michael has put in place. They have a very similar entrepreneurial spirit and culture that we have and luckily enough, in my opinion, I think, we got probably the most undervalued stock in the whole sector.

So with that we’re delighted to do an all-stock deal and we see the potential of phenomenal value creation. And some of the industry veterans and I had the pleasure of working with, and who have supported me from day one to where I am today. I think they made a very valid point on Friday when we decided to do this. They were more excited than ever and they made a comment, we are going from good to great.

So speaking on behalf of Panopticon team, the Board et cetera, the shareholders, we’re very, very excited to becoming part of the Datawatch team once this transaction is completed.

With that, I’ll turn the floor back to Michael.

Michael A. Morrison

Thanks Willem and I can assure the entire Datawatch team shares your enthusiasm. I think it’d also be helpful to have you hear from Ben Plummer, who has been front and centers as we identified this opportunity and determine how Panopticon and Datawatch would most effectively integrate their offering.

In addition, Ben has been talking to a number of industry analysts and we’ll share with you their reaction to the news of this combination as well as their insight as to the market benefit for our customers, prospects, and partners. Ben?

Ben Plummer

Thanks, Michael. I’m really thrilled that we could reach this agreement because I do see this as the game changer for the business. The acquisition not only takes Datawatch to new level as a provider of information optimization software, by giving our customers’ a high velocity visual data discovery environment where they can evaluate virtual to any source of data regardless of its structure, but it also resets the bar to the entire analytics industry.

The promise of Big Data solutions revolves around the ability to evaluate information regardless of its size, latency or structure and with this acquisition Datawatch is uniquely positioned to help our customers fulfill this vision.

As we’ve reached out to the analyst community about this acquisition, we have consistently heard the same feedback, this is a great combination. Data variety meets high velocity visual data discovery. They pointed to the ability for Datawatch to close the gap that exists in traditional visualization software by providing the ability to work with information in real-time in a visual discovery paradigm not just the dashboard to take action against any source of information regardless of its structure.

The analyst community believes that the combination of Datawatch and Panopticon will augment every analytical application with an expanded set of capabilities that provides the ability to change the way businesses with time returns on their investments.

Finally I wanted to comment briefly on the impact of this acquisition in terms of our partnering strategy. As we’ve engaged with partners over the last several months, they’ve all been able to grow their businesses by adding the Datawatch solution to their portfolio.

As we’ve begun to reach out to these partners with the combined value proposition of Datawatch and Panopticon, they believe they can actually create a new area of their business focused on the ability to deliver actionable analytics, not just dashboards. They view this combination as an extension to their traditional business intelligence practices and are anxious for Datawatch to deliver on our combined product roadmap.

In addition to these types of partnerships, we believe that this will also accelerate our strategic relationships with organizations like SAP, IBM and many of the other larger Big Data vendors. The reason for this is that we are now able to go beyond just delivering the data variety into these Big Data initiatives. We’re also able to do this at a high velocity manner with actionable, visual discovery capabilities.

I’ve said at the beginning of this, at this conversation, this is a game changer and not just for Datawatch, but for our customers, our partners and the analytics market as a whole. I cannot be more excited about this acquisition and I look forward to bringing this combination to market.

With that, I’ll turn it back over to you, Michael.

Michael A. Morrison

Thanks, Ben. And Manny, we’re now ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Nathan Schneiderman of ROTH Capital. Please go ahead.

Nathan Schneiderman – ROTH Capital Partners

Hey, thanks very much for taking my questions and congratulations on the acquisition. It’s nice to see an aggressive move here.

Michael A. Morrison

Thanks, Nate.

Nathan Schneiderman – ROTH Capital Partners

A few question areas for you. I was just curious if, you shared that deal value, but I was just curious with the base of 75 customers. What’s the annual revenue run rate that you expect to fold in here?

Michael A. Morrison

So, last year, Panopticon is a calendar year company. In FY ’12, Panopticon did a little over $5 million under Swedish GAAP in revenue, a little over $7 million in bookings and that was up over 100% from the year before.

Nathan Schneiderman – ROTH Capital Partners

Great. And I was just curious, is the 100% plus bookings growth, was there a similar pace of growth the prior year or was this an unusual step function up, if it was an unusual step function up, was there any particular driver of that that you would highlight?

Michael A. Morrison

Willem, do you have the specifics of that question? Do you know the answer to that?

Willem De Geer

I don't have exact number. We saw an increased growth in the 2011, I think it was about 30%, if I’m not incorrect. The driver for 2012 and I think we’re seeing that right now is that the underlying database market is changing. So, now post the financial crisis, financial institution, especially I think everybody, they have two choices. Either they get a real-time database environment or they need significant buffers to handle risk and the buffers by definition are always expensive and with most likely, they’re also going to be wrong. So that was the driver in the market and that’s the trend we’re seeing right now.

Nathan Schneiderman – ROTH Capital Partners

And I have a question for you on just the relationship with QlikTech and I understand they ODM your solution, but I wasn’t sure you knew or could you share with us about how many Qlik’s customers use it in conjunction with your solution? And, also on the competitive front, do you consider yourself a competitor to Tableau or is that the vendor you’d highlight or are there others you’d highlight or you feel your relationship is more competitive than cooperative?

Michael A. Morrison

So Willem, I’ll jump in here and take the end of this question. Then I’ll turn it back to you to kind of answer the first part of it. In terms of competition, when you start to parse this market down, I mean, I believe that this particular transaction will certainly bring Datawatch more in line with what you might see from a Tableau, in terms of applications and capabilities. So I would certainly see us on their radar, probably more frequently than you would have in the past. I would probably also say with the real-time nature of technology and our ability to work with various datasets in a high velocity manner. We’ll probably see ourselves running into companies like Splunk more frequently with some of the machine data initiatives and [law] [ph] file initiatives. So we have underway.

My particular position on Qliktech and I’ll let Willem jump in terms of how many folks they see deployed in both [inaudible], I mean, both companies are very strong partners with Qliktech. Both technologies are available through their channels and we’ve seen deployments of both technology sets, maybe not the same accounts, but certainly alongside of QlikTech. I would anticipate that partnership continuing to be strong, both because of the real-time capabilities and because of our ability to add data variety to QlikTech applications. So Willem, anything you want to add to that?

Willem De Geer

I think Qlik and we share a lot of the same clients, which is of course natural, but the QlikTech product is used for very different things than Panopticon. So I don’t see any competitiveness whatsoever.

Nathan Schneiderman – ROTH Capital Partners

Got it. A final question area for you. Michael, when you look at your large base of customers and the idea of potentially cross-selling this solution into your customer base, what percent of your customer base do you feel has the needs for this kind of real-time analytics? So what’s the enlarged opportunity set here? What percent of the customer base do you think are reasonable potential customers for this solution? Thanks so much.

Michael A. Morrison

Thanks. And this is one of the more exciting aspects of this combination. I think a large percentage of our customers could realize value from the Panopticon solution. The Panopticon solution is visual discovery in real-time. The percentage of customers that would see a need to use it in a real-time is probably less than 50%, but the percentage that could just use that better visualization is well over 50% and that’s, Panopticon has been very wise about how they went to market in the early days. They play to their strengths, which was real-time.

There is a lot of used cases in financial services. But their applicability crosses all verticals and that’s one of the things that you’ll see on day one and that we will be pushing on day one is the visual discovery capabilities of the Panopticon throughout our base in just throughout our entire messaging and our work in the solution areas and also with partners is going to be a big part of our go-to-market.

Nathan Schneiderman – ROTH Capital Partners

Got it. Very helpful. Thanks a lot, Michael and congrats. Goodbye. Thanks.

Operator

(Operator Instructions) The next question is from Noel Atkinson of LOM. Please go ahead.

Noel Atkinson – Loewen, Ondaatje, McCutcheon Ltd.

Hi, folks. Congratulations on what seems like a very exciting combination. I was wondering if you can talk a little about the Panopticon pricing model. Is it a subscription based model?

Michael A. Morrison

Panopticon, it goes to market both in perpetual license model with maintenance as well as in certain cases a subscription model. That’s where I mentioned earlier that last year that they did $5 million plus in revenue and $7 million plus in bookings. That delta was largely the result of their SaaS model. So, we expect to continue to that within Datawatch.

Noel Atkinson – Loewen, Ondaatje, McCutcheon Ltd.

Okay. So you expected maybe this might be a good driver for Datawatch being able to sort of promote its own subscription based pricing model?

Willem De Geer

Yes.

Noel Atkinson – Loewen, Ondaatje, McCutcheon Ltd.

Okay, great. Can you talk about, what the total number of customers is, is it 75 total customers or just new customers delivered to Datawatch?

Michael A. Morrison

75 total customers.

Noel Atkinson – Loewen, Ondaatje, McCutcheon Ltd.

Okay. And can you talk about the number of seats that are installed or active?

Michael A. Morrison

I don’t know the answer to that. Willem, do you have a rough guesstimate there.

Willem De Geer

We estimate about 60,000 people to 65,000 people in the capital market space. Then we have some applications that go very, very broad that we’re not counting in that.

Noel Atkinson – Loewen, Ondaatje, McCutcheon Ltd.

Okay. So 60,000 active users to 65,000 active users and you’re doing about $5 million of revenue?

Willem De Geer

Yeah, but as you can see or obviously we also do OEM agreements. If you take, for example, Live View, which is StreamBase, or now it’s actually TIBCO that’s the front end, there is us. If you take [inaudible] Partner, that’s all us. If you take Imagine, that’s all us. So I wouldn’t make the calculation where you take revenue per seat because a big part of our business model is that we have the ability to embed into other peoples’ applications. So the way you do that math isn’t really representative of the way we go-to-market.

Noel Atkinson – Loewen, Ondaatje, McCutcheon Ltd.

Okay. And also the pricing, if I look at where Tableau is trading right now, I think we’re trading at 17 times 2013 revenues and 13 times next year revenues. So the pricing looks like a pretty decent deal for all involved something like six times 2012. Can you give us some sense of how the first quarter went for Panopticon, was it that you were continuing on that rapid growth trajectory?

Michael A. Morrison

No, we’re not, as you know, we don’t give guidance as a company and is part of this transaction, when I said about either our current quarter or the current quarter of Panopticon or if it’s just completed quarter if you will.

Noel Atkinson – Loewen, Ondaatje, McCutcheon Ltd.

Okay. So then on the different type, if you’re talking about it being accretive in fiscal 2014, can you give us some sense of what sort of revenue run rate you need to be able get to achieve that accretion?

Michael A. Morrison

Again, in that we don’t provide guidance. The short answer is no, but just point you to the fact that here is a company that it’s $5 million in revenue again under Swedish GAAP, grew 100%. You understand the broader market that Panopticon plays in. We expect to be able to have a lot of value to what they brought into the market in terms of our go-to-market organization, our positioning, the combination of the variety that we bring to velocity and we expect that also play out and make this a positive outcome.

Noel Atkinson – Loewen, Ondaatje, McCutcheon Ltd.

Okay. Just on a technical note, Panopticon, does it have a 64-Bit-Engine?

Willem De Geer

I’m sorry. Could you repeat that again please?

Noel Atkinson – Loewen, Ondaatje, McCutcheon Ltd.

Does it have a 64-Bit-Engine, [because it could] operate on 64-Bit or just 32-Bit?

Willem De Geer

Correct me if I jump off the train tracks here, but I’m pretty sure it runs under 64-Bit-Engine today.

Ben Plummer

Yes.

Noel Atkinson – Loewen, Ondaatje, McCutcheon Ltd.

Okay, that’s great. And then finally, in terms of your very, very focused niche like what Gartner puts you guys in at Panopticon, would you folks consider you to be the largest of your kind in terms of revenue or seats?

James Eliason

No, I don’t know, you said focused niche. So I know Gartner has written about Panopticon. I know they just gave them an award recently for In-Memory Computing. I’ll go back to something that I alluded to a little bit earlier. Panopticon, growing out of Sweden and trying to make a play for itself in the market, focused where the best opportunities were, which was financial services to really exploit their real-time capability, their solution, and I would encourage anybody who is interested to go to their website, download the free copy and then do the same with the Tableau and compare, their solution, the visual discovery capabilities are very, very impressive. There is a lot of opportunity to build out the franchise that Panopticon has created with a little bit more capital behind that we would provide to Panopticon.

Noel Atkinson – Loewen, Ondaatje, McCutcheon Ltd.

Okay, great. Well, thank you for taking my questions.

Operator

Thank you. It appears we have no further questions in queue at this time. I’d like to turn the floor back over to management for any additional remarks.

Michael A. Morrison

Thanks, Manny and thanks again for joining us. We all look forward to speaking with you again in late July, which is when we will release our Q3 results. So thanks a lot everybody.

Willem De Geer

Thank you.

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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