Datawatch: 'Twenty Feet From Stardom'

Mar.21.14 | About: Datawatch Corporation (DWCH)


Orchestrated a successful turnaround strategy with the acquisition of Panopticon.

Technology leader in dig data visualization in some vertical markets like finance.

Tableau Software is the category killer in its niche.

Although not overvalued, will have a tough time overtaking market leader Tableau Software.

"What we lack is visibility in the market." - Michael Morrison, CEO Datawatch

If you go by equity appreciation, then the turnaround strategy at Datawatch (NASDAQ:DWCH) has been a phenomenal success. The stock shot up from $12.40 to $38.70 in about six months beginning in May of 2013, but has come down to the $30 range in the last quarter. Much of this price propulsion can be attributed to two primary catalysts - the froth in the "big data" analytic sector which still exists today, and the acquisition of Panopticon back in June. At the time of the acquisition, Panopticon was the leading real-time Visual Discovery vendor, a direct competitor with Tableau Software (NYSE:DATA).

Some Background

Datawatch was founded in 1985, and can boast a client base that includes 99 of the Fortune 100, and 495 of the S&P 500 companies. The company's "heritage" or "legacy" technology is best described by Alex Woodie of Datanami:

Prior to its acquisition of Panopticon, Datawatch's strength lay in the area of processing semi-structured and unstructured data. Its flagship Monarch offering gave customers the capability to ingest all types of data and documents--including reports in plain text or PDF formats--create a model based on the metadata contained in those reports, and yield more structured data as output.

That technology was suitable for 20th century analytics, but real-time visualization is becoming a business norm with the advent of on-the-fly data mining. Tableau Software, Splunk (NASDAQ:SPLK) and Qlik Technologies (NASDAQ:QLIK) have been market leaders the past few years. Enter Panopticon.

Panopticon: The Tail That Wags The Dog

Although the purchase of Panopticon could be considered a tuck-in acquisition (an all-stock transaction of approximately $31.4 million), it was a critical step in the transformation of Datawatch which began in 2011 when CEO Michael Morrison took over the helm. According to the company, this marriage created the only vendor in the analytics market that can access and transform any variety of data, and deliver data in real-time. It was no coincidence the stock heated up like a microwave oven after the merger was made public.

In addition to technology, Panopticon added 75 customers to Datawatch's existing customer base, including Bank of America (NYSE:BAC), Citigroup (NYSE:C), Credit Suisse , Amgen (NASDAQ:AMGN), Novartis (NYSE:NVS), Vodafone (NASDAQ:VOD), and Shell (NYSE:RDS.A). OEM relationships with SAP and Thompson Reuters also ensued. Based on the new clients that were folded into the Datawatch family, you can see the company is highly levered to some vertical markets like the financials. Alliances with Qlik, Accenture (NYSE:ACN), and Deloitte also came with the package.

Although Qlik can be seen as a competitor in some instances, both companies share a lot of the same customers. The Qlik product is used for very different purposes than what the Panopticon technology is utilized for. The same can be said for Splunk. Fast-forward five months to November of 2013, and Datawatch announced an alliance with Splunk. Like Qlik, Splunk offers some of the same services Datawatch does, especially in data mining. However, it's a separate set of circumstances for Tableau Software.

As expressed by the CEO at during the acquisition announcement:

I believe that this particular transaction will certainly bring Datawatch more in line with what you might see from a Tableau, in terms of applications and capabilities. So I would certainly see us on their radar, probably more frequently than you would have in the past.

Battle lines are being drawn in data visualization. Although Datawatch purportedly has the lead in technology, Tableau is a much larger rival with new iterations of its software scheduled to be released in the Q2 2014, and early 2015.

The "Land and Expand" Strategy

In the 2013 Q4 Conference Call, Chief Marketing Officer Ben Plummer discussed the company's "land and expand" strategy. Datawatch is attacking the market by focusing on its legacy customer base with a big emphasis on specialties they excel in. Most notably real-time data analytics. A big push into the Asia-Pacific region is also on the docket. There isn't as much competition in this geographic sector with Tableau, Qlik Tech, or Tibco's Spotfire (NASDAQ:TIBX). However, Europe and the United States are still extremely important markets.

A recent partnership with IBM (NYSE:IBM), may help Datawatch in the ever expanding data mining and analytic market globally. As explained by CEO Morrison:

We entered into an agreement with IBM, where IBM will resell our Datawatch solutions for report mining in analytics against documents stored in IBM Enterprise Content Management systems. While we have had an informal relationship with IBM for years, this is the first time that IBM has agreed to put our solution on their price list and resell it.

Although the big data visualization market is a drop in the bucket to a behemoth like IBM, it's a big deal for a smaller company like Datawatch. Additional boots on the ground with the pedigree of the Big Blue sales force can only be beneficial to the bottom line.

In the 2014 Q1 Conference Call, it was stated that customers initially landed include, HSBC (NYSE:HSBC), Standard Chartered Bank (STAN.L), and Memorial Healthcare. Customers where the company expanded more significantly on initial purchases of its visual data discovery solution included Citigroup, Invesco (NYSE:IVZ), and Deutsche Bank (NYSE:DB). The alliance with IBM was well underway in Q1, but no specifics as to which accounts they participated in.

As a side note, this tack is not to be confused with Tableau's "land and expand" strategy. I don't know if there is a bit of copycatting going on here, but the implementation for both companies is quite different. Tableau Software's approach is to offer its product for free as a teaser, hook the individual customer with the plug-and-play attributes, then go after the department when word of mouth steamrolls the purchasing process.

Playing Catch-Up With Tableau Software

In the "big data" technology and services market, IDC projects a 27% compound annual growth rate to $32.4 billion through 2017. This is about six times the growth rate of the overall information and communications technology market. With Datawatch and Tableau Software the two primary pure-plays in data visualization, there is probably room for both companies. Nevertheless, even with the acquisition of Panopticon, Datawatch was late to the party although they've got a rock solid position in certain vertical markets like financials.

Here are some paraphrased statements by CEO Morrison in the most recent earnings presentation:

  • I would characterize what we've done in Q4 and Q1 as priming the pump.
  • We've got a lot of work to do to get on the radar screen.
  • The offering we have in visual data discovery is very much like Tableau.

Although the Datawatch visualization product may be very much like Tableau's, Tableau Software was founded over ten years ago at Stanford University, so they've got a big head start.

In 2010, Tableau's revenues were approximately $34 million. That's more than what Datawatch sold three years later in 2013 ($30.3 million in fiscal 2013, a 16% increase over the $26 million in sales for 2012). Last year, Tableau's revenues were $232.5 million, growth of 82% over 2012. Some of the Datawatch sales were derived from the data mining part of the business, so it's not an apples to apples comparison. Taking that into consideration, it makes the task of catching Tableau more daunting. Datawatch has a huge gap to overcome.

The Bottom Line

The documentary film Twenty Feet From Stardom focuses on the backup singers of some of the most prolific rock and roll songs back in the 60's and 70's. Although mega talented, the movie's subjects just never made it to the big time. I believe this may be the same fate for Datawatch. It will be successful, but as a niche player in data visualization with strengths in some vertical markets. With the advent of Twitter (NYSE:TWTR) and other forms of social media, word of mouth spreads very quickly on an international basis where business, politics and pop culture are concerned. Tableau has too big of a jump on the smaller company.

In closing, for a turnaround technology company, the stock is not grossly overvalued like its rival Tableau Software. According to the most recent statistics on Yahoo Finance, it has a market cap of $256.44 million (it should be noted the company issued a stock offering after the market cap figure was released, but it's in the ballpark). Price/Sales for the trailing twelve months is 7.94. Price/Book for the most recent quarter is 5.28. Although the turnaround strategy has been a success to this point, it doesn't guarantee it will continue to gain traction. My opinion is that the entire big data analytic sector is overvalued, and if there is sector rotation, or a market correction, this stock will fall like its peers.

This concludes a three part series on big data mining and analytic pure plays. Previous postings focusing on Splunk and Tableau Software were utilized for statistics in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.