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(Editors Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

Last Thursday, Attunity (NASDAQ:ATTU) delivered its Q2 earnings report. After hitting a roadblock in Q1, this quarterly report validated the thesis we set forth in our initiation report on SeekingAlpha.

Specifically, the company hit its targets, generating $6.1 million in revenue and $0.02 of basic EPS. It was a solid quarter all around, with license revenue doubling over Q1's levels. Guidance for the remainder of the year calls for $27-30 million in revenue. This implies that revenue growth will accelerate to between 25.4% and 48.5% in the second half.

On the earnings conference call, I asked management about their expected expense levels going forward. They reaffirmed that operating expenses should remain flat at current levels. Since its gross margins are over 90%, the majority of Attunity's incremental revenue will drop to the bottom line. We model something more conservative below, but the implications for EPS and EPS growth should have a measurable impact on the company's valuation.

After the call, I was granted a one-on-one meeting with ATTU's executive management team for an exclusive review of the events that led to its Q1 stumble. The purpose was to determine exactly what happened with the benefit of hindsight. Further, I sought to ascertain what alleviated the issues in Q2 (and whether those measures are likely to have a lasting impact).

The issues that negatively impacted Q1 boiled down to two main themes:

  1. ATTU's marketing strategy failed to close the loop between lead-generation and sales
  2. Short-term timing issues in its partner channel resulted in an unexpected dip in recognizable revenue.

Issue #1: Marketing & Sales

Attunity's head of marketing was a believer in utilizing the Internet for marketing and lead generation. However, the company had little visibility into the efficacy of those efforts. As it turns out, its marketing strategy lacked an effective process for qualifying leads and handing them off to the sales force. As a result, even interested prospects fell into a black hole. Numerous opportunities went unfulfilled.

Exacerbating matters, its broken lead-gen pipeline left management without a viable sales-assessment process. It was later determined that improved sales training was needed, but that revelation went undiscovered until it was apparent that its Q1 results were in jeopardy.

Solution: ATTU's head of marketing was replaced by Lawrence Schultz, a veteran with specific expertise in lead-generation. Schultz holds a Master in Business Administration from Harvard Business School, as well as a Master of Science and a Bachelor of Science from Massachusetts Institute of Technology. During his most recent tenure at Tokutek, the company's customer base doubled in size. Simultaneously, the company instituted a new sales training program, designed to improve the productivity of its newer and incoming sales hires.

Equally relevant moves were made in the sales organization. In anticipation of strong revenue growth, ATTU hired several quota carriers during Q4 2012 and Q1 2013. The majority were already familiar with the company's offerings, but required tactical expertise as it pertained to responding to specific sales scenarios. For example, training was required to help enable potential customer to understand the differences between its on-premise and cloud-based offerings, as well as the integration challenges into disparate software platforms. This training occurred during Q2 and figures to pay dividends going forward.

According to CEO Shimon Alon, the adjustments in sales and marketing contributed to the 100% sequential increase in license revenue that ATTU reported in Q2. More importantly, he views their renewed execution and having generated enough momentum that it will contribute to above-market annualized growth in the back half of 2013 (as outlined in our guidance commentary above).

Issue #2: ATTU's Partner Channel

ATTU has attracted long-standing OEM relationships with some of the world's largest IT vendors, including Microsoft (NASDAQ:MSFT), Hewlett-Packard (NYSE:HPQ), and even Oracle (ORCL), whose Golden Gate acquisition makes it a competitor to Attunity. ATTU also boasts an enviable list of go-to-market partners including Amazon (NASDAQ:AMZN), EMC/Greenplum (NYSE:EMC), and Teradata (NYSE:TDC).

During Q1, Attunity's pipeline with EMC deteriorated sharply and suddenly due to changes within EMC's Greenplum/Pivotal unit. Those changes led to a positive event -- a $105 million investment from GE into Pivotal, which was spun out from EMC and VMware. That financing and other restructuring efforts were completed during the quarter. Mr. Alon stated that this has resulted in a stronger relationship between Attunity and EMC/Greenplum/Pivotal.

During Q1, a similar issue reared its head with one of ATTU's largest OEMs. During the quarter, the company was in the process of renegotiating the terms of its relationship. The new terms have since been memorialized and promise to bring more recurring maintenance revenue to ATTU.

Even though each of these issues was resolved during Q2, none of Attunity's augmented relationships had a material impact on Q2 results. They are, however, expected to have an immediate impact in the current quarter, contributing to the aforementioned above-market growth implied in management's full-year guidance. Going forward, its new relationship with Infor may contribute meaningfully enough to boost Q4 results.

So, What's Next?

With its Q1 issues in the rear-view mirror, Attunity is poised to continue riding the Big Data wave, as it did in 2012. According to Gartner Group, it is arguably the strongest independent real-time data capture and replication vendor in the space. At present, its key competitors are Oracle and Informatica (NASDAQ:INFA).

The former is actually an Attunity partner (as we have already noted), due to functional advantages that ATTU has developed since ORCL's acquisition of Golden Gate. As for INFA, Attunity has been laser-focused on its niche, while INFA has been struggling with spotty execution and intensifying competition from the likes of IBM. The net result has seen ATTU establish itself as a best-of-breed alternative within INFA's installed base, offering robust functionality and a more end-to-end solution for customers.

According to Mr. Alon, these factors have enabled ATTU to build the strongest pipeline of business it has seen in some time. This gave management the confidence to guide investors to $27-30 million in revenue for 2013 with baseline expectations for 20% growth going forward.

Outlook and Valuation

In our original assessment of ATTU and the Big Data market, we cited market forecast figures that peg Big Data growth in the 30% range. Mr. Alon has repeated stated that he expects ATTU to gain market share in the space, but has only been willing to put his stamp on 20% long-term growth for the company. The obvious takeaway is that he is baking-in a prudent dose of conservatism, designed to avoid a repeat of Q1's misstep.

Looking at our outlook, ATTU's 2013 guidance will require the company to generate $16.3-19.3 million in Q3/4 revenue. This compares very favorably to the second half of 2012 when the company produced $13.0 million in revenue. At the lower end of its guidance range, investors might expect Q3 to come in at $7.5 million and Q4 to come in at $9.0 million. This would represent year over year growth of 26% and 27%, respectively. Annualized license revenue growth can be expected to be more in the range of 40%.

This has significant implications for Attunity's profitability. Like most software companies, ATTU possesses a high margins and a similarly high-leverage operating model. The following chart depicts our latest ATTU forecast scenarios, assuming 20% and 30% growth, respectively:

Figure 1. ATTU Model - 20% Growth Scenario

ATTU (All data in U.S. $000)

2010

2011

2012

2013E

2014E

2015E

Software License

4,645

8,140

14,437

16,000

19,360

23,426

Maintenance and services

5,430

7,029

11,042

11,000

13,100

15,662

Total revenues

10,075

15,169

25,479

27,000

32,460

39,088

Growth

51%

78%

6%

20%

20%

Cost of revenues

1,951

1,453

2,356

2,430

2,921

3,518

Gross Profit

8,124

13,716

23,123

24,570

29,539

35,570

R&D

2,482

4,960

7,748

8,000

8,250

8,500

Selling and marketing

3,831

5,851

9,833

11,000

13,000

15,275

General and administrative

1,854

2,835

3,024

3,200

3,400

3,500

Total operating expenses

10,118

15,099

20,605

22,200

24,650

27,275

Operating income (loss)

-43

70

2,518

2,370

4,889

8,295

Financial expenses, net

1388

1284

1,241

200

100

0

Pre-tax net income

-1431

-1214

1,277

2,170

4,789

8,295

Income taxes (benefit)

74

-399

-209

868

1,915

3,318

Net income/(loss)

-1505

-815

1,486

1,302

2,873

4,977

Shares

7,993

8,662

10,716

12,000

12,400

12,750

EPS

$ (0.19)

$ (0.09)

$ 0.14

$ 0.11

$ 0.23

$ 0.39

114%

68%

PEG Ratio

0.4

0.7

0.9

Forward P/E

45

48

39

Valuation (Per Share)

$ 10.52

$ 18.71

$ 21.47

Source: PoisedToTriple.com

You'll notice, while the top-line only expands at a 20% rate, the earnings leverage leads to EPS growth of 114% in 2014 and 68% in 2015. Even assuming a conservative PEG ratio of 0.4 (to account for execution risk), we derive a 2013 year-end target of $10.52, up 50% from current levels. If Attunity can continue to execute against its 20% revenue-growth target next year, the lowered execution risk should enable the PEG ratio and P/E to expand. We believe that would result in a 2014 year-end valuation of $18.71, progressing to $21.47 by year-end 2015.

While management is hesitant to set higher expectations, we modeled a scenario reflecting 30% growth (the Big Data market growth rate) and less spending (in line with management's comments that expenses shouldn't expand much from current levels). However, we also tempered our valuation metrics to compensate for the increased risk in this scenario:

Figure 2. ATTU Model - 30% Growth Scenario

ATTU (All data in U.S. $000)

2010

2011

2012

2013E

2014E

2015E

Software License

4,645

8,140

14,437

16,000

21,600

29,160

Maintenance and services

5,430

7,029

11,042

11,000

13,100

16,110

Total revenues

10,075

15,169

25,479

27,000

34,700

45,270

Growth

51%

78%

6%

29%

30%

Cost of revenues

1,951

1,453

2,356

2,430

3,123

4,074

Gross Profit

8,124

13,716

23,123

24,570

31,577

41,196

R&D

2,482

4,960

7,748

8,000

8,000

8,000

Selling and marketing

3,831

5,851

9,833

10,927

13,500

16,000

General and administrative

1,854

2,835

3,024

3,200

3,400

3,500

Total operating expenses

10,118

15,099

20,605

22,127

24,900

27,500

Operating income (loss)

-43

70

2,518

2,443

6,677

13,696

Financial expenses, net

1388

1284

1,241

200

100

0

Pre-tax net income

-1431

-1214

1,277

2,243

6,577

13,696

Income taxes (benefit)

74

-399

-209

897

2,631

5,478

Net income/(loss)

-1505

-815

1,486

1,346

3,946

8,217

Shares

7,993

8,662

10,716

12,000

12,250

12,500

EPS

$ (0.19)

$ (0.09)

$ 0.14

$ 0.11

$ 0.32

$ 0.66

187%

104%

PEG Ratio

0.2

0.3

0.5

Forward P/E

37

31

27

Valuation (Per Share)

$ 12.06

$ 20.52

$ 26.81

Source: PoisedToTriple.com

Under this scenario, the stock could double by year-end. Of course, this optimistic view should be tempered due to the execution risks that are inherent in any business (as ATTU demonstrated in Q1). If the company's recent rebound proves short-lived, we would expect its valuation to return to its recent lows in the $5 range. That being said, investors should also realize that our figures do not represent the top end of ATTU's potential. Nor do they reflect the possibility that the company is acquired by a larger Big Data player.

Indeed, we view acquisition as a distinct possibility, due to the company's status as the preeminent pure play in the rapidly-growing Big Data space. Further, Mr. Alon has a history of selling companies, most notably Precise Software, which was acquired by Veritas for over $600 million in 2003 (8x its 2002 sales). This represented a 30-bagger relative to Precise's valuation when Mr. Alon first took the reins.

Selling Attunity would figure to be Mr. Alon's coup de grâce prior to retirement. Considering the company's earnings leverage and tier-1 partnerships, we wouldn't be surprised to see the company sell for 6x revenues. Accordingly, we maintain our original thesis and believe that shares of ATTU remain poised to triple.

Source: Attunity Remains On Track To Triple