Despite being a micro-cap, DataWatch has as very seasoned management team that made a lot of strategic progress during the quarter. Partnerships with NASDAQ, Thomson Reuters and IBM were all signed and could be the tip of the iceberg if the company's software sees positive adoption.
After reading the company's results and sitting in on the conference call I narrowed my Q3 review into 3 main takeaways.
1. Either Organic Revenue Growth Is Accelerating Or Panopticon Is Growing Very Fast
To be honest $8.82M of revenue was well above my expectations. It appears as if analysts were underestimating DataWatch as well heading into its Q3 report.
According to Yahoo Finance, analysts were expecting revenue of just $7.53M, indicating DataWatch beat the consensus by 17.1%. This is very important because it either means Panopticon is growing faster than expected, or DataWatch's organic business has been picking up steam. If it's a combination of both because of integrating services, then that could be even better.
Here's what we know:
- This past quarter (ending on Sept. 30th) is seasonally DataWatch's weakest.
- Last year the company reported revenue of just $6.01M in the quarter.
- This year Datawatch reported revenue of $8.82M, representing year over year growth of 47%.
- Year over year revenue growth was 9% in FY13 Q3 (ending June 30th).
- Panopticon generated $5M in 2012 revenue, up 112% year over year.
- The Panopticon acquisition closed on August 28th, and therefore contributed revenue for approximately 1/3 of the quarter.
Now we must extrapolate. Let's assume Panopticon's growth has slowed to an average growth rate of 75% in 2013. This indicates overall 2013 revenue would be $8.75M. With a seasonally weak Q3 (assuming same patterns as DataWatch/Splunk/Tableau revenue) that would translate into $1.5-$2M revenue for Panopticon. Because it was acquired with just 1/3 of the quarter left, I'm generously estimating Panopticon contributed $750K to DataWatch's topline this quarter (if year over year growth is at 75%).
If DataWatch were to maintain the same growth in its organic business (9% year over year), it would have generated about $6.6M in standalone revenue this quarter.
But wait. $6.6M + $750K is $7.35M. That is almost exactly what analysts were expecting for the quarter. Yet DataWatch reported $8.82M, indicating an additional $1.5M was unexpectedly generated either from Panopticon growing much faster than 75%, or DataWatch's organic growth being much higher than 9%.
2. Momentum Heading Into FY14 Q1 Is Strong
The combination of DataWatch and Panopticon's services has the potential to accelerate growth for both products. We already saw this have a major impact in FY13 Q4.
Two interesting numerical data points from DataWatch's press release.
- "There were 10 six-figure deals in the fourth fiscal quarter, as compared to 3 six-figure deals in the fourth fiscal quarter of 2012."
- "The average deal size in the fourth fiscal quarter was $63,000, as compared to $54,000 in the fourth fiscal quarter of 2012."
On the analytical side, management highlighted several new partnerships showing how strong interest is in DataWatch's visualization software (italics were my addition to emphasize important aspects of the press release).
- "Datawatch and Xerox, the world's leading enterprise for business and document management, partnered to close a significant initial transaction with the Canadian division of one of the largest American multinational retail corporations. Datawatch and Xerox will automate and digitize print and document management processes across nearly 400 retail stores throughout Canada, leading to the elimination of 50 million pages of annual print and enabling next generation analytics on the semi-structured document data generated by these 400 stores."
- "Datawatch and Thomson Reuters entered into a global agreement pursuant to which Thomson Reuters will resell Datawatch's technology as a general purpose visual data discovery solution and as a real-time visualization front end for its Elektron Analytics platform for standardizing data analytics and tick data management capabilities across the enterprise. Thomson Reuters will provide its customers with worldwide support and professional services for theDatawatch visual data discovery solution."
- "Datawatch, through its partner iGEN Technology, closed an innovative visual data discovery deal in Southeast Asia with the campaign of a major political candidate to provide near real-time analytics of voter profiles and preferences. The Datawatch visualization solution was installed in the political candidate's "War Room" and enabled next generation analytics on data gathered from a wide variety of sources, including polling agents, party workers and press reports."
Despite being in the very early stages of integrating Panopticon's data visualization products, DataWatch's software appears to be gaining major traction with industry leaders
3. Estimates for Q1 FY14 Are Still Dramatically Understated
As of Sunday December 1st, analysts (according to Yahoo Finance) are expecting just $8.81M in revenue next quarter. Yes that would be $10K less than last quarter.
I'm baffled by this for two reasons.
- FY Q4 is seasonally DataWatch's weakest quarter by a huge margin. Last year revenue grew 13.5% sequentially from Q4 FY12 to Q1 FY13.
- Panopticon only contributed to DataWatch for 1/3 of FY13 Q4. In FY14 Q1 it will contribute revenue for the entire quarter.
I'm left with 2 possible conclusions.
- Analysts are taking their sweet time to update estimates for DataWatch's FY14 Q1 and several upgrades are imminent.
- DataWatch will report another blowout quarter for Q1 FY14.
Personally, I'm expecting DataWatch to deliver revenue closer to $10M-$11M next quarter. If DataWatch's revenue were to follow the same pattern as last year (a 13.5% sequential increase) it would generate $10.1M in revenue this quarter. But that's excluding the bonus of having Panopticon contribute for two additional months. Even if Panopticon is still contributing $750K per month in revenue in FY14 Q1 (using assumptions from above) then it would contribute $1.5M of top-line growth this quarter.
This insinuates DataWatch could surprise on its top-line by another 10-15% when results are reported in February 2014.
Although DataWatch was down ~6% to $32 per share after the company's report, the actual results were very strong. DataWatch's top-line is growing significantly more than expected, which indicates its new product line is gaining traction. After a week or two the market woke up to this fact and has pushed DataWatch to new highs.
As Panopticon gets further integrated into the company's product set, its addressable market will only continue to expand. DataWatch's team has done an incredible job of executing on promised growth for the past 3 quarters, giving additional weight to bullish commentary made on the conference call.
Momentum is strong heading into FY14, and analyst estimates may be vastly underestimating how fast DataWatch's visualization software is gaining traction.