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Datawatch Corporation (NASDAQ:DWCH)

Q2 2010 Earnings Call

May 6, 2010 2:00 pm ET

Executives

Dan Incropera – VP & Controller

Ken Bero – President & CEO

Murray Fish – CFO & VP Finance

John Kitchen – SVP & CMO

Analysts

Larry Brooks – Unspecified Company

Operator

Greetings and welcome to the Datawatch Corporation second quarter 2010 conference call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Dan Incropera, Controller for Datawatch Corporation.

Dan Incropera

Good afternoon everyone. Thank you for joining us today for the Datawatch Corporation second quarter fiscal year 2010 earnings conference call. I am Dan Incropera, Vice President, and Controller at Datawatch. Joining me today is Ken Bero, our President and CEO, John Kitchen, Senior Vice President and Chief Marketing Officer and Murray Fish, Chief Financial Officer and Vice President of Finance.

You can obtain a copy of our earnings release, which was distributed earlier today by emailing us at investor@datawatch.com. This release is also available 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 second quarter fiscal year 2010 financial results. Following our prepared remarks 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 need to remind you that any statements we make that do not describe historical facts, may constitute forward-looking statements, and are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Any such statements are based on our current expectations, but are subject to a number of risks and uncertainties that could 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, 2009, its Quarterly Report on Form 10-Q for the quarter ended December 31, 2009, and other publicly 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 and good afternoon everyone. I’m going to share some opening comments about our Q2 performance and following my remarks as Dan mentioned Murray Fish, our CFO will provide more detailed information regarding financials for the quarter. John Kitchen, our Chief Marketing Officer is in attendance for the call and following Murray’s remarks we’ll open the meeting for some questions.

As reported this morning revenues for the second quarter were slightly below $4.6 million. Q2 revenues were lower than Q2 revenues one year ago, however they showed a significant increase versus Q1 of this year.

For the quarter Datawatch experienced a net loss of $97,000 as compared to a loss of $5.9 million one year ago. We were pleased with the Q2 revenue numbers and the upward trend versus our Q1 results. Its clear that the business climate and IT spends are improving. Monarch revenue showed a quarter to quarter increase for the first time in over 18 months.

Several key factors were encouraging. As mentioned in the press release this morning, we saw several large orders for new copies of Monarch software. We had strong upgrade sales, these are customers moving from older versions of Monarch to our current version 10.5, and finally we saw an increase in the training backlogs.

This is a piece of the business that is very susceptible to discretionary spending. We saw these positive trends both here in the US as well as the UK and Europe. And in addition we were very pleased with Microsoft’s introduction of their V7 operating system has been well received by the market.

Along with improved Monarch sales we had a solid quarter regarding enterprise business. We closed some large deals, sold our ETL tool, Monarch data pump to some new customers. And we continued to have a high level of interest in our dashboard products. During the quarter we had our first sale of the dashboard product on the continent of Europe.

While the Q2 versus Q1 increase in revenues was encouraging our Q2 expenses increased as well. The increased costs resulted in a loss for the quarter which was disappointing. Some of the cost increases were driven by royalties, commissions on higher revenues, and increased marketing expenditures.

During the quarter we ended our arrangement with Avanquest UK Ltd., who’s managed the distribution of our Monarch products throughout the UK, Europe, the Middle East, and Africa over the last decade.

This was a strategic move which we believe will give us more effective control of our international Monarch sales. Since the business incurred one-time non-recurring legal fees to complete the termination of this agreement. And finally we also incurred unexpected expenses due to a substantial rate increase related to unemployment taxes for headcount reductions which occurred last year.

As mentioned in the press release the maximum payroll levels against which the taxes were levied were met during the quarter. We continue to proactively manage and adjust the business’ expenses to return to profitability.

Datawatch continues to have a solid cash position, currently we have approximately $6.3 million which is an increase of almost 8% from the same quarter last year. There continues to be no debt on the balance sheet.

Murray is going to now provide some additional information regarding the finances.

Murray Fish

Thank you Ken, good afternoon. For those of you who have not seen our results released earlier today, total revenues for the second quarter of fiscal year 2010 were $4.6 million as compared to $5.1 million for the second quarter of fiscal year 2009. Revenue decreased $521,000 or 10% quarter over quarter.

For the second quarter of fiscal year 2010 revenues from licenses and subscriptions were $2.6 million as compared to $3.0 million for the second quarter of fiscal year 2009. As a percentage of revenue software license and subscription sales accounted for 57% of revenue for the second quarter of fiscal year 2010 and 58% of revenue for the second quarter of fiscal year 2009.

For the second quarter of fiscal year 2010 revenues from maintenance and services were $2.0 million as compared to $2.1 million for the second quarter of fiscal year 2009. As a percentage of revenue maintenance and services accounted for 43% of revenues for the second quarter of fiscal year 2010, and 42% of revenues for the second quarter of fiscal year 2009.

Business intelligence solutions, content management solutions, and service management solution product revenues were 70%, 18%, and 12% of total revenues for the second quarter of fiscal year 2010 as compared to 73%, 15%, and 12% for the second quarter of fiscal year 2009.

Domestic revenues and international revenue were 76% and 24% of total revenues for the second quarter of fiscal year 2010 and 2009. Gross margins for software licenses and subscriptions were 75% for the second quarter of fiscal year 2010 as compared to 82% for the second quarter of fiscal year 2009.

Gross margins for maintenance and services were 62% for the second quarter of fiscal year 2010 and 61% for the second quarter of fiscal year 2009. Overall total gross margins were 69% for the second quarter of fiscal year 2010 as compared to 73% for the second quarter of fiscal year 2009.

Sales and marketing expenses decreased by $266,000 or 14% in the second quarter of fiscal year 2010 over the second quarter of fiscal year 2009. Sales and marketing expenses as a percentage of revenues were 35% for the second quarter of fiscal year 2010 as compared to 36% for the second quarter of fiscal year 2009.

This decrease is primarily attributable to lower headcount and related costs such as commissions and travel. Engineering and product development expenses increased by $125,000 or 21% in the second quarter of fiscal year 2010 over the second quarter of fiscal year 2009.

Engineering and product development expenses as a percentage of revenues were 16% of the second quarter of fiscal year 2010 as compared to 12% for the second quarter of fiscal year 2009. The increase in engineering and product development expenses is primarily due to higher external consulting costs.

General and administrative expenses decreased by $48,000 or 5% in the second quarter of fiscal year 2010 over the second quarter of fiscal year 2009. General and administrative expenses as a percentage of revenues were 21% for the second quarter of fiscal year 2010 as compared to 20% for the second quarter of fiscal year 2009.

This decrease is primarily attributable to lower professional service fees. There were no non-cash impairment charges for the quarter ended March 31, 2010 as compared to the $6.401 million non-cash impairment charge for the goodwill and indefinite lived intangible assets during the quarter ended March 31, 2009.

Other income expense was income of $1,000 in the first six months of fiscal year 2010 as compared to $7,000 for the first six months of fiscal year 2009. Other income, the provision benefits for income tax was $6,000 in the second quarter of fiscal year 2010 which represents a provision for uncertain tax positions relative to foreign taxes.

The company had an income tax benefit of $284,000 in the second quarter of fiscal year 2009 primarily due to a reversal of tax provisions related to the goodwill which was written off as a result of the impairment during the quarter ended March 31, 2009.

The net loss for the second quarter of fiscal year 2009 was $97,000 or $0.02 per diluted share as compared to a net loss of $5.854 million or $0.99 per diluted share for the second quarter of fiscal year 2009.

So the year to date results, our total revenues for the first six months of fiscal year 2010 were $8.8 million as compared to $10.3 million for the six months of fiscal year 2009. Revenue decreased by $1.5 million or 15%.

For the first six months of fiscal year 2010 revenues from license and subscriptions were $4.8 million as compared to $5.8 million for the first six months of fiscal year 2009. As a percentage of revenue, software license and subscription sales accounted for 54% of revenue for the first six months of fiscal year 2010 and 57% of revenue for the six months of fiscal year 2009.

For the first six months of fiscal year 2010 revenues from maintenance and services were $4.0 million as compared to $4.5 million for the first six months of fiscal year 2009. As a percentage of revenue maintenance and services accounted for 46% of revenues for the first six months of fiscal year 2010 and 44% of revenues for the first six months of fiscal year 2009.

Business intelligent solutions, content management solutions, and service management solution product revenues were 70%, 18%, and 12% of total revenues for the first six months of fiscal year 2010 as compared to 72%, 16%, and 12% for the first six months of fiscal year 2009.

Domestic revenues and international revenue was 75% and 25% of total revenues for the first six months of fiscal year 2010, as compared to 77% and 23% for the first six months of fiscal year 2009. Gross margins for software licenses and subscriptions was 74% for the first six months of fiscal year 2010 as compared to 82% for the first six months of fiscal year 2009.

Gross margins for maintenance and services was 63% for the first six months of fiscal year 2010 and 62% for the first six months of fiscal year 2009. Overall total gross margins were 69% for the first six months of fiscal year 2010 as compared to 73% for the first six months of fiscal year 2009.

Sales and marketing expenses decreased by $380,000 or 11% in the first six months of fiscal year 2010 over the first six months of fiscal year 2009. Sales and marketing expenses as a percentage of revenues were 36% for the first six months of fiscal year 2010 as compared to 34% for the first six months of fiscal year 2009.

This decrease is primarily attributable to lower headcount and related costs such as commissions and travel and lower consulting costs. Engineering and product development expenses increased by $121,000 or 9% for the first six months of fiscal year 2010 over the first six months of fiscal year 2009.

Engineering and product development expenses as a percentage of revenues were 16% for the first six months of fiscal year 2010 as compared to 13% for the first six months of fiscal year 2009. The increase in engineering and product development expenses is primarily due to higher external consulting costs.

General and administrative expenses decreased by $379,000 or 17% in the first six months of fiscal year 2010 over the first six months fiscal year 2009. General and administrative expenses as a percentage of revenues were 21% for both the first six months of fiscal year 2010 and 2009.

This decrease is primarily attributable to lower professional services fees. As previously mentioned the company recorded a non-cash impairment charge in the quarter ended March 31, 2009 of approximately $6.4 million related to the full impairment of its goodwill and an indefinite lived [trademark].

Other income expense was expense of $1,000 in the first six months of fiscal year 2010 as compared to income of $163,000 for the first six months of fiscal year 2009. Other income for the first six months of fiscal year 2009 included significant foreign currency gain due to favorable foreign exchange rates in British pound denominated transactions during that period.

The provision benefit for income tax expense was $14,000 for the first six months of fiscal year 2010 which primarily results a provision for uncertain tax positions related relative to foreign taxes. The company had a tax benefit of $240,000 for the first six months of fiscal year 2009 due to the reversal of tax provisions related to the goodwill which was written off as a result of the impairment in 2009.

The net loss for the first six months of fiscal year 2010 was $2967,000 or negative $0.05 per diluted share as compared to a net loss of $5.469 million or negative $0.92 per diluted share for the first six months of fiscal year 2009.

Ken Bero

That’s Murray, I’d like to now open it up for any questions that anybody has.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Larry Brooks – Unspecified Company

Larry Brooks – Unspecified Company

I had a question in reference to some of the one-time fees that came up, the management fee, legal expenses, unemployment stuff, what would be the total in something like that.

Murray Fish

In all, around $200,000.

Larry Brooks – Unspecified Company

And what about your pipeline itself, how does that look for the future, how does it compare with what we’ve seen in the past.

Ken Bero

I think with, it actually looks good and I’m going to have John jump in here because one of the things that we’ve been asked a couple of times over the last couple of calls is, are there any new accounts that are coming on board and this quarter we actually did see about a half a dozen new account sales that occurred for our ETL tool data pump.

And John’s been working and he’s been running and implementing a webinar series and it involves covering the Monarch products as well as data pump as well as dashboard so I’ll ask him to just take a minute because its been pretty successful and we’re pretty pleased with the responses that we’ve been getting and the addition to the pipeline.

John Kitchen

Its been great actually over the past four or five months we have found that a webcast on the individual products has been very helpful not only with our existing customers introducing them to other products that we have and up selling them and cross selling them but in terms of new customers when you’re able to reach out to new customers or email or call out and invite them to come see a webcast of a live demo, we found that’s been very helpful in terms of shortening the sales process and getting new people in the pipeline.

So as Ken pointed out, we’ve been doing webcasts on our not only for our Monarch desktop product, we do a monthly introduction or Monarch webcast but we also have a variety of webcasts on the data pump, various ways you can use it as well as the dashboard product.

And we also have just started a whole series of healthcare webcasts on various aspects of how Datawatch technology can help in the ever-changing healthcare business right now. So, we’re very encouraged by this new initiative in terms of the webcasts and response has been very good from people coming and listening to them because as you know that in this day and age, no one buys based on one contact.

If you can have a series of contacts then you can not only tell them about your product, but educate them about the issues, you have a much better chance to do some business and that’s exactly what we’re seeing right now.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Ken Bero

In summary let me just say the loss for Q2 was a disappointment however the quarter’s results did show some positive signs. The Monarch quarter on quarter sales increase as well as the solid performance of our enterprise business was very encouraging.

We continue to be proactive regarding expense management and we continue to invest in our products and providing required functionality as well as ease of installation and use that’s required by our customers. We remain confident that we’re in a strong position to take advantage of expected future opportunities.

Thank you for your continued interest in Datawatch.

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Source: Datawatch Corporation F2Q10 (Qtr End 03/31/10) Earnings Call Transcript
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