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Datawatch Corporation (NASDAQ:DWCH)

F4Q09 Earnings Call

November 19, 2009 2:00 pm ET

Executives

Dan Incropera - Controller

Ken Bero - President and CEO

John Kitchen - SVP and Chief Marketing Officer

Murray Fish - CFO and VP of Finance

Operator

Welcome to the Datawatch Corporation fourth quarter and fiscal year 2009 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Dan Incropera, Controller for Datawatch Corporation. Thank you, Mr. Incropera, you may begin.

Dan Incropera

Good afternoon, everyone. Thank you joining us today for the Datawatch Corporation fourth quarter and fiscal year 2009 earnings conference call. I am Dan Incropera, Vice President and Controller at Datawatch. Joining me today are Ken Bero, our President and CEO; John Kitchen, Senior Vice President and Chief Marketing Office and Murray Fish, our Chief Financial Officer and Vice President of Finance.

You can obtain a copy of our earnings release which was distributed earlier today by e-mailing us at investor@datawatch.com. This release will also be posted on our website at www.datawatch.com.

Let me first outline for you this afternoon’s agenda. I will present our Safe Harbor statement followed by Ken who will provide some general comments on the business. Murray will then present a summary of our fourth quarter and fiscal year 2009 financial results. Following our prepared comments we will open up the call for a question and answer session.

Before we begin, I would 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 including, without limitation, statements concerning expected expense savings, market trends, product introductions, acquisitions and general market conditions, may constitute forward looking statements. Any such statements are based on our current expectations but are subject to a number of risks and uncertainties that may 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, 2008 and its quarterly reports on form 10-Q for the quarters ended December 31, 2008, March 31, 2009 and June 30, 2009 and other publically available documents filed with the SEC. Any forward-looking statements should be considered in light of those factors.

I will now turn the call over to Ken for a discussion of business results.

Ken Bero

Thanks, Dan. Good afternoon, everyone. I will share, as Dan mentioned, some opening comments about our Q4 and full year performance. Following my remarks, Murray Fish, our CFO will provide more detailed information about our financials. John Kitchen, our Chief Marketing Officer is in attendance for the call and following Murray’s remarks we will open the meeting for questions.

Let me take a couple of minutes and talk about our results for the quarter and full year. I will address revenues first and follow with a discussion of the company’s net income results.

As reported this morning revenues for the fourth quarter were slightly below $4.6 million. Q4 revenues were approximately 14% below the same quarter of fiscal year 2008. For the entire year fiscal 2009 revenues finished at $19.6 million approximately 15% below fiscal 2008 revenues of $23 million. Historically Q4 is our most difficult period as we typically experience a slowing of desktop purchases mainly due to lower levels of activity during the summer vacation period.

In addition to seasonality, the worldwide recession continued to impact our business. Discretionary spending continues to be tight and actual expenditures continue to receive scrutiny and review. The business saw a slight decline in Monarch sales versus Q3 in both the US and our European markets. Business conditions also impacted our service revenues as several customers delayed upgrade activity for enterprise products.

We continue to be relatively happy with our enterprise business. Enterprise license sales for Q4 showed an increase over Q3 results. During the quarter we achieved upgrade sales of the web based version of our service management product, VQSM, which was introduced this spring. We continue to procure orders for our BI solutions both in the US and internationally.

We were also very pleased with the introduction and acceptance of our newest product offering, Datawatch Dash Board. For the quarter we closed six deals; two each for the US, the U.K. and Australia. One of the opportunities was a significant installation for a government agency here in the US. The interest and excitement for this product is high.

For the year, the economy had a significant impact on our overall business. Discretionary spending decreases and reductions in IT budgets significantly impacted our desktop services and maintenance revenues during fiscal year 2009. Full year U.K. results, our second largest market, were affected by the weaker British Pound versus the US Dollar as compared to sales in fiscal year 2008. The weaker British Pound versus the US Dollar accounted for approximately $1.5 million or almost 45% of our year-over-year declines in revenue.

Despite the economy, enterprise license sales were a very bright spot for the business. They increased approximately 12% versus a year ago. Q4 income from operations was solidly in the black exceeding last year’s Q4 results on less revenue. We have continued to proactively manage and control expenses. Excluding the effects of the second quarter non-cash write downs for goodwill and trademark impairment charge, Datawatch generated $1.142 million from operations. Income from operations for fiscal year 2009 doubled versus fiscal year 2008 on less revenue in a very difficult economy.

During the quarter and for the full year we continued to build our cash position and we have no debt on the balance sheet. We have continued to upgrade and invest in our product offerings. During the spring we launched a new web version of our service management product. During the year we also announced upgrade capabilities for our archive solution BDS. During Q4 we introduced Datawatch Dash Board, an exciting new product which provides our customers with new VI visualization and monitoring capabilities.

Recently we have also announced exciting new capabilities for our flagship product, Monarch. With the latest version of Monarch, V10.5, users can now create and export Microsoft Office Excel spreadsheets that include a copy of the original source data. V10.5 reduces what everyone refers to as “spreadsheet hell” providing simple compliance and auditing capabilities and thus eliminating spreadsheet uncertainties.

Our solution offerings have never been stronger. The organization is solid and the sales team has proved its effectiveness at positioning how we can solve significant problems for our customers. We believe that our solutions position us well for growth as the economy turns around.

Murray will now provide you with some additional information regarding our financials.

Murray Fish

Thank you Ken. Good afternoon. For those of you who may have not seen our results released earlier today, our total revenues for the fourth quarter of fiscal year 2009 were $4.6 million as compared to $5.3 million for the fourth quarter of fiscal year 2008. Revenues decreased $756,000 or 14% quarter-over-quarter.

For the fourth quarter of fiscal year 2009 revenues from licenses and subscriptions were $2.5 million as compared to $2.8 million for the fourth quarter fiscal year 2008. As a percentage of revenue software license and subscription sales accounted for 55% of revenue for the fourth quarter of fiscal 2009 and 53% of revenue for the fourth quarter of fiscal 2008.

For the fourth quarter of fiscal year 2009 revenues from maintenance and services were $2.0 million as compared to $2.5 million for the fourth quarter of fiscal 2008. As a percentage of revenue, maintenance and services accounted for 45% of revenues for the fourth quarter fiscal 2009 and 47% of revenue for the fourth quarter of fiscal year 2008.

Business intelligence solutions, content management solutions and service management solutions product revenues were 70%, 17% and 13% of total revenues for the fourth quarter of fiscal 2009 as compared to 69%, 17% and 14% for the fourth quarter of fiscal year 2008. Domestic revenues and international revenue were 76% and 24% of total revenues for the fourth quarter of fiscal year 2009 as compared to 74% and 26% for the fourth quarter of fiscal year 2008.

Gross margins for software licenses and subscriptions were 76% for the fourth quarter of fiscal 2009 as compared to 81% for the fourth quarter of fiscal year 2008. Gross margins for maintenance and services were 68% for the fourth quarter of fiscal year 2009 and 62% for the fourth quarter of fiscal year 2008. Overall, total gross margin were 72% for the fourth quarter of fiscal year 2009 and 2008.

Sales and marketing expenses decreased by $411,000 or 23% in the fourth quarter of fiscal year 2009 over the fourth quarter of fiscal year 2008. Sales and marketing expenses as a percentage of revenues were 31% for the fourth quarter fiscal year 2009 as compared to 34% for the fourth quarter of fiscal year 2008. This decrease is primarily attributable to lower headcount and related costs such as commission and travel.

Engineering and product development expenses decreased by $23,000 or 3% for the fourth quarter of fiscal year 2009 over the fourth quarter of fiscal year 2008. Engineering and product development expenses as a percentage of revenues were 14% for the fourth quarter fiscal 2009 as compared to 13% for the fourth quarter fiscal year 2008. The decrease in engineering and product development expenses was primarily due to lower use of outside consultants as to new product releases.

General and administrative expenses decreased by $131,000 or 12% in the fourth quarter of fiscal year 2009 over the fourth quarter of fiscal year 2008. General and administrative expenses as a percentage of revenue were 22% for the fourth quarter fiscal 2009 as compared to 21% for the fourth quarter of fiscal year 2008. This decrease is primarily attributable to lower professional service fees.

There were no additional non-cash impairment charges for the fourth quarter ended September 30, 2009. Other income and expense decreased by $50,000 in the fourth quarter of fiscal year 2009 versus the fourth quarter of fiscal year 2008.

The provision for income tax expense increased by $28,000 in the fourth quarter of fiscal year 2009 over the fourth quarter of fiscal year 2008 due to increases in foreign taxes.

Net income for the fourth quarter of fiscal year 2009 was $253,000 or $0.04 per diluted share as compared to net income of $296,000 or $0.05 per diluted share for the fourth quarter of fiscal year 2008.

For the year-to-date results our total revenues for fiscal year 2009 were $19.6 million as compared to $23 million for fiscal year 2008. Revenue decreased by $3.4 million or 15% due to the worldwide recession and the impact of the British Pound and currency exchange rates. Our fiscal year 2009 revenues from licenses and subscriptions were $10.9 million as compared to $12.4 million for fiscal year 2008. As a percentage of revenue, software license and subscription sales accounted for 56% of revenue for fiscal year 2009 and 54% of revenue for fiscal year 2008.

Fiscal year 2009 revenues from maintenance and services were $8.7 million as compared to $10.6 million for fiscal year 2008. As a percentage of revenue maintenance and services accounted for 44% of revenue for fiscal year 2009 and 46% of revenues for fiscal 2008. Business intelligence solutions, content management solutions and service management solutions product revenues were 71%, 17% and 12% of total revenues for fiscal year 2009 as compared to 67%, 16% and 17% for fiscal year 2008.

Domestic revenues and international revenue were 77% and 23% of total revenues for fiscal year 2009 as compared to 70% and 30% for fiscal year 2008. Gross margins from software licenses and subscriptions were 79% for fiscal year 2009 as compared to 82% for fiscal year 2008. Gross margins from maintenance and services were 64% for fiscal year 2009 and 60% in fiscal year 2008. Overall total gross margins were 73% for fiscal year 2009 and 72% in fiscal year 2008.

Sales and marketing expenses decreased by $1.7 million or 21% in fiscal year 2009 over fiscal year 2008. Sales and marketing expenses as a percentage of revenues were 33% in fiscal year 2009 as compared to 35% for fiscal year 2008. This decrease was primarily attributable to lower headcount and related costs and lower consulting costs.

Engineering and product development expenses decreased by $533,000 or 18% in fiscal year 2009 over fiscal year 2008. Engineering and product development expenses as a percentage of revenues were 12% for fiscal year 2009 as compared to 13% in fiscal year 2008. The decrease in engineering and product development expenses is primarily due to capitalized development costs for new product releases.

General and administrative expenses decreased by $651,000 or 13% in fiscal year 2009 over fiscal year 2008. General and administrative expenses as a percentage of revenues were 22% for fiscal year 2009 as compared to 21% for fiscal year 2008. This decrease is primarily attributable to lower professional and consulting fees.

The company recorded a non-cash impairment charge for the quarter ended March 31, 2009 of approximately $6.4 million related to the full impairment of its goodwill and indefinite lived trademark. Other income expense decreased by $178,000 or 48% in fiscal year 2009 over fiscal year 2008. This decrease was primarily attributable to lower interest rates and other income.

The provision benefit for income tax expense decreased by $314,000 in fiscal year 2009 over fiscal year 2008 primarily due to the reversal of tax provisions related to the goodwill which was written off as a result of full impairment in the second quarter of fiscal year 2009. The net loss for the fiscal year 2009 including the non-cash impairment charge was $4.940 million or $0.83 per diluted share as compared to net income of $717,000 or $0.12 per diluted share for fiscal year 2008.

Excluding the non-cash goodwill impairment charge and the trademark impairment charge net of tax, non-GAAP net income would have been $1.142 million or $0.19 per diluted share for fiscal year 2009. As of September 30, 2009 the company had $5.649 million in net cash and cash equivalents, an increase of $764,000 or 16% as compared to September 30, 2008.

Ken?

Ken Bero

Thanks Murray. Let me now open the call for any questions.

Question-and-Answer Session

Operator

At this time there are no questions. I would like to turn the call back over to management for any closing comments.

Ken Bero

Let me just kind of summarize that in an economy that continues to be difficult we are pleased with our Q4 and full year fiscal year 2009 performance. We continue to show that our solutions provide meaningful value to the market and our customers. While the recession may be bottoming out business remains difficult. We therefore continue to be proactive regarding expense management. While remaining confident regarding the cost side of the business, we continue to invest in our products, providing functionality and ease of installation and use required by our customers. We are optimistic and have confidence we will effectively weather this economic period and be in a strong position to take advantage of the expected future opportunities. Thank you for your continued interest in Datawatch.

Operator

Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you very much for your participation. Have a wonderful afternoon.

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