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On July 25th, Datawatch (NASDAQ:DWCH) reported its Q3 FY 13 results and the stock has been steadily rising ever since. Datawatch recently touched $23 per share, a new 52-week high. An excellent quarterly report has been the most likely culprit of this run.

Below are my 3 main takeaways from the results and company conference call.

1. Organic growth is accelerating. Datawatch reported revenue of $7.83M in the quarter, up 9% year over year. This was a significant acceleration of the 4% year over year growth the company reported in Q2 FY 13.

Management had been guiding for accelerating revenue in Q3/Q4 of FY 13 for the past two quarters (I, II). It's promising to see improvements unfold consistent with prior management guidance.

Just 3 weeks ago, Datawatch announced a major new release of its product portfolio. This is particularly interesting timing given how soon the Panopticon deal is scheduled to close, and will be a catalyst for the continued acceleration of growth in Datawatch's core business.

2. Panopticon acquisition closing soon and bringing new potential to FY 14.

On June 17th, Datawatch announced an agreement to acquire Panopticon Software "a privately held Swedish company specializing in the delivery of real-time visual data discovery solutions."

Panopticon is an enterprise big data solution that competes with Wall Street favorites such as Tableau (NYSE:DATA) and Splunk (NASDAQ:SPLK).

Combining the software of Datawatch and Panopticon presents an incredible market opportunity described below by Datawatch CEO Michael Morrison.

"Not only does Panopticon bring the Datawatch a leading visual discovery analytic solution but also brings the solution that operates in real-time, which is unique in this space. And it brings Datawatch the capability to access an even wider variety of data sources and format extending Datawatch's already sizable lead in this critical area."

On the call management also guided for the deal to close sometime late in Q4. This means Panopticon's revenue could begin to increase Datawatch's overall growth as soon as next quarter.

Besides being able to offer the same type of visualization tools as Tableau, the new Panopticon/Datawatch will be able to "compete more seriously with Splunk" in Machine Data Analytics.

Panopticon only had 75 customers at the time the acquisition was announced, Datawatch currently has over 40,000. Panopticon reported revenue of a little over $5M in 2012, and Datawatch reported $26M in FY 12. Panopticon's customers are clearly worth much more in terms of revenue on a pound for pound basis. If Datawatch can successfully transition just a fraction of its 40,000 current clients to Panopticon's software, it may have big financial implications.

The closing of this deal, even 2/3 of the way through Q4 FY 13, will positively impact Datawatch's topline growth. With $5M in revenue on 112% growth in 2012, Panopticon could easily generate $8M in 2013. At this run rate, Panopticon will generate about $2.1M in revenue in Q3 CY 2013. In the last month of this quarter that would translate to approximately $750K in additional revenue.

$750K would represent 12.5% of all Datawatch's Q4 FY 12 revenue. The combination of accelerating growth in its core business, and added Panopticon revenue bodes very well for topline growth next quarter.

3. Gross margin continues to expand.

Datawatch's gross profit grew 11.3% year over year in Q3 FY 13. This was higher than the reported 9% revenue growth. Overall, gross margin expanded to 85.3% from 83.6% in the prior year.

Gross margin will be a key metric to watch as the company begins to report its data alongside Panopticon's financial results. If Datawatch can continue to grow its gross margin to levels in the high 80%/low 90% range, like Splunk and Tableau, its valuation should benefit.

Conclusion

Datawatch continues to trade at a very depressed valuation when compared to its closest publicly traded peers; Splunk, Tableau and Qlik (NASDAQ:QLIK).

CompanyCY 2012 P/S Multiple
Qlik Technologies7.2
Splunk*25.9
Tableau30.2
Datawatch5.7

*Data is for FY 13 (ranging from Jan '12-Jan'13).

Even prior to the Panopticon deal closing, Datawatch still looks cheap. Panopticon could add $10-12M to Datawatch's topline in FY14, boosting year over year growth to a minimum of 35%. Once Datawatch begins to consistently report revenue growth closer to the levels of its competition, multiple expansion should follow suit.

2014 will be a transformational year for Datawatch with the integration of Panopticon's solutions. Datawatch's experienced management team has put together this deal at a lightning pace and continues to buy shares in the open market.

Big data solutions geared towards enterprise customers are at their infancy. This is the reason Wall Street has assigned incredibly premium valuations to nearly every stock in the space. If Panopticon/Datawatch can successfully execute on its vision in becoming a leader in the real-time enterprise analytics, its stock price has a long way to go.

At this point, Datawatch has made rapid progress towards this goal and its stock price is beginning to reflect the company's growth potential.

Source: Datawatch Breaking 52-Week Highs With Multiple Catalysts Ahead