Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Datawatch Corporation (NASDAQ:DWCH)

F3Q10 (Qtr End 06/30/10) Earnings Call Transcript

August 10, 2010 2:00 pm ET

Executives

Dan Incropera – VP and Corporate Controller

Ken Bero – President and CEO

Murray Fish – CFO and VP, Finance

John Kitchen – SVP and Chief Marketing Officer

Analysts

Dan Zeff – Zeff Capital

Jim Lieberman – Wells Fargo

Operator

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

Dan Incropera

Good afternoon everyone. Thank you for joining us today for the Datawatch Corporation third quarter of 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 and update on the business. Murray will then present a summary of our third quarter and year-to-date 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 subscriptions 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 quarters ended December 31, 2009, and March 31, 2010 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 will share some opening comments about her Q3 performance and following my remarks, Murray Fish our CFO will provide more detailed information regarding our financials for the quarter. John kitchen our chief marketing officer is also in attendance for the call and following Murray's remarks we will open up the meeting for questions.

As reported this morning revenues for the third quarter were approximately 4.6 million. Q3 revenues were slightly lower than Q3 revenues one year ago and slightly ahead of our fiscal year ’10 Q2 revenues.

For the quarter Datawatch generated net income of 221,000 as compared to net income of 275,000 a year ago. We were pleased with the Q3 operating results.

It is noted in the press release this morning the quarter’s positive outcome resulted from stabilized quarter-on-quarter revenues as well as continued expense management. We had a solid enterprise quarter while results were good in the US we also had significant contributions from our European operations.

Few significant orders were from existing customers for our document management product BDS, one order was the result of a substantial increase in user licenses due to acquisitions with the other coming from a large customer in the financial sector who will be doing a major BDS version upgrade and conversion to new hardware over the next year.

We continue to see positive results from both our Monarch Data Pump solution as well as sales growth from our dashboard products. Monarch revenues for the quarter were slightly below results from Q2 the difference between the two quarters being lower sales in the UK and Europe.

US Monarch training revenues continue to increase for Q2. We also had a strong maintenance quarter, we believe this indicates our customers remain committed to our product offerings and are receiving strong value from their solutions.

Expenses for the quarter were substantially reduced as compared to Q2. During the second quarter, the business had a retroactive state unemployment tax increase related to fiscal year ’09 headcount reduction as well as legal fees incurred to end our relationship with Avanquest UK Ltd. Our second quarter coincides with the beginning of the calendar year quarterly payroll tax levies and payroll benefit accruals are at the highest levels of our fiscal year. These expenses were not incurred or were lower for Q3.

During the quarter we saw expected cost savings due to the termination of our arrangement with Avanquest for the management of our UK, European, Middle East and Africa Monarch sales and operations.

Going forward we will continue to have increased flexibility managing the EMEA operations and sales staff providing us with the ability to more effectively address market conditions and opportunities as they are identified.

While operating income for the quarter was strong the final net income results was negatively impacted by currency losses resulting from translation of Euro based assets into functional currency of our UK subsidiary.

These assets consisted primarily of receivables in cash. Datawatch continues to have a solid cash position, the business had approximately 6.1 million at the end of this quarter.

While the ending Q3 cash balance was lower than the ending Q2 amount of 6.3 million, our Q3 receivables balance increased by 500,000 versus Q2 based on the increased revenue.

Murray Fish will now provide some additional information regarding our financials.

Murray Fish

Good afternoon. Thank you, Ken. Good afternoon. For those of you who may not have seen our results released earlier today our total revenues for the third quarter of fiscal year 2010 were 4.6 million as compared to 4.8 million for the third quarter of fiscal year 2009. Revenue decreased 172, 000 or 4% quarter-over-quarter.

For the third-quarter of fiscal year 2010, revenues from licenses and subscriptions were 2.5 million as compared to 2.6 million for the third quarter of fiscal year 2009. As a percentage of revenue software and license and subscription sales accounted for 54% of revenue for the third quarter of fiscal year 2010 and 55% of revenue for the third quarter of fiscal year 2009.

For the third quarter of fiscal year 2010, revenues from maintenance and services were 2.1 million as compared to 2.2 million for the third quarter of fiscal year 2009. As a percentage of revenue maintenance and services accounted for 46% of revenues for the third quarter of fiscal year 2010 and 45% of revenues for the third quarter of fiscal year 2009.

Business Intelligence Solutions, Content Management Solutions and Services Management Solutions product revenues were 70%, 21%, and 9% of total revenues for the third quarter of fiscal year 2010 as compared to 72%, 17% and 11% for the third quarter of fiscal year 2009.

Domestic revenues and international revenues were 75% and 25% of total revenues for the third quarter of fiscal year 2010 and 78% and 22% for the third quarter of fiscal year 2009.

Gross margin for software licenses and subscriptions were 76% for the third quarter of fiscal year 2010 as compared to 78% for the third quarter of fiscal year 2009. Gross margins for maintenance and services were 66% for the third quarter of fiscal year 2010 and 64% for the third quarter of fiscal year 2009.

Overall, total gross margins were 71% for the third quarter of fiscal year2010 as compared to 72% for the third quarter of fiscal year 2009.

Sales and marketing expenses decreased by hundred 141,000 or 9% in the third quarter of fiscal year 2010 over third quarter of fiscal year 2009. Sales and marketing expense as a percentage of revenues was 30% for third quarter the third quarter of fiscal year 2010 as compared to 32% for the third quarter of fiscal year 2009. This decrease was primarily attributable to lower headcount and related costs such as commissions and travel and lower consulting costs.

Engineering and product development expenses increased by 144,000 or 30% in the third quarter of fiscal year 2010 over third quarter of fiscal year 2009. Engineering and product development expenses as a percentage of revenues were 14% for the third quarter of fiscal year 2010 as compared to 10% for third quarter of fiscal year 2009. The increase in engineering and product development expenses was primarily due to external consulting costs.

General and administrative expenses decreased by 103, 000 or 10% in the third quarter of fiscal year 2010 over the third-quarter of fiscal year 2009. General and administrative expenses as a percentage of revenues were 21% for the third-quarter of fiscal year 2010 as compared to 23% for the third quarter of fiscal year 2009. This decrease is primarily achievable to lower headcount related costs and lower professional service fees.

Other income expense was an expense of 58,000 in third quarter of fiscal year 2010 as compared to expense of 52,000 for the third quarter of fiscal year 2009 primarily due to the translation of euro-based assets into the functional currency of our UK subsidiaries the British pound in the third quarter of fiscal year 2010.

The provision for income tax expense was 7,000 in the third quarter of fiscal year 2010 as compared to an income tax expense of 4,000 for the third quarter of fiscal year 2009 which represents provisions for uncertain tax positions relative to foreign taxes.

The net income for the third quarter of fiscal year 2010 was 222,000 or $0.04 per diluted share as compared to net income of 275,000 or $0.05 per diluted share for the third quarter of fiscal year 2009. For the year-to-date results our total revenues for the first nine months of fiscal year 2010 were 13.4 million as compared to 15.1 million for the first nine months of fiscal year 2009. Revenue decreased 1.7 million or 11%.

For the first nine months of fiscal year 2010 revenues from licenses and subscriptions were 7.2 million as compared to 8.4 million for the first nine months of fiscal year 2009. As a percentage of revenue, software license and subscription sales accounted for 54% of revenue for the first nine months of fiscal year 2010 and 56% of revenue for the first nine months of fiscal year 2009.

The first nine months of fiscal year 2010 revenues for maintenance and services were 6.2 million as compared to 6.6 million for the first nine months of fiscal year 2009. As a percentage of revenue, maintenance and services accounted for 46% of revenues for the first nine months of fiscal 2010 and 44% of revenues for the first nine months of fiscal year 2009.

Business intelligence solutions, content management solutions and service management solution product revenues were 70%, 19% and 11% of total revenues for the first nine months of fiscal year 2010 as compared to 72%, 16% and 12% for the first nine months of fiscal year 2009.

Domestic revenues and international revenues were 75% and 25% of total revenues for the first nine months of fiscal year 2010 as compared to 77% and 23% for the first nine months of fiscal year 2009. Gross margins for software licenses and subscriptions were 75% for the first nine months of fiscal year 2010 as compared to 81% for the first nine months of fiscal year 2009. Gross margins for maintenance and services were 64% for the first nine months of fiscal 2010 and 63% for the first nine months of fiscal year 2009.

Overall, total gross margins were 70% for the first nine months of fiscal year 2010 as compared to 73% for the first nine months of fiscal year 2009.

Sales and marketing expenses decreased to 520,000 or 10% in the first nine months of fiscal year 2010 over the first nine months. Sales and marketing expenses as a percentage of revenues were 34% for the first nine months of fiscal year 2010 as compared to 33% for the first nine months of fiscal year 2009. This decrease is primarily attributable to lower headcount and related costs such as commissions and travel and lower consulting cost.

Engineering and product development expenses increased by 264,000 or 15% for the first nine months of the fiscal year 2010 over the first nine months of fiscal year 2009. Engineering and product development expenses as a percentage of revenues were 15% for the first nine months of fiscal year 2010 as compared to 12% of the first nine months of fiscal year 2009. The increase in engineering and product development expenses is currently due to higher external consulting costs.

General and administrative expenses decreased by 481,000 or 15% in the first nine months of fiscal year 2010 over the first nine months of fiscal year 2009. General and administrative expenses as a percentage of revenues were 21% for the first nine months of fiscal year 2010 compared to 22% for the first nine months of fiscal year 2009. This decrease is primarily attributable to lower headcount related costs and lower professional services.

The company recorded a non-cash impairment charge in the quarter ended March 31st, 2009, of approximately 6.4 million related to the full impairment of its goodwill and indefinite (inaudible).

Other income expense was expense of 59,000 in the first nine months of fiscal year 2010 as compared to income of 112,000 for the first nine months of fiscal year 2009. Both primarily due to foreign currency exchange fluctuations during the periods. The provision benefit for income tax expense was 22,000 in the first nine months of fiscal year 2010 primarily represents a provision for uncertain tax positions relative to foreign taxes.

The company had a tax benefit of 236,000 for the first nine months of fiscal year 2009 due to the reversal of tax provisions related to goodwill which was written off as a result of the impairment in 2009. The net loss for the first nine months of fiscal year 2010 was 75,000 a negative $0.01 per diluted share as compared to a net loss of 5,194,000 a negative $0.88 per diluted share for the first nine months of fiscal year 2009. As of June 30th 2010 the company had 6,072,000 net cash and cash equivalents an increase of 423,000 or 7% compared to September 30th 2009.

Ken?

Ken Bero

Thanks Murray, let me now open the call up for any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question comes from the line of Dan Zeff with Zeff Capital. Please proceed with your question.

Dan Zeff – Zeff Capital

Hello can you guys talk about seasonality and the strength in the quarter versus whether business is actually strengthening on a more basic level on longer-term and is this a trend that we can expect to continue in terms of profitability.

Ken Bero

Well, I think for the question of seasonality this is probably a pretty good comparison – this quarter is a pretty good comparison to Q2, in that, you've got full – you know the full quarter had things like vacations and holidays and that sort of stuff so I think that two were as I said I think in the press release we just saw a stabilization of revenue so it’s quarter-on-quarter that's not something that we've had over the last 15 months.

To your second question here, I am not going to speak to the future but I think that again we are seeing some recent indications as far as the economy goes it is not like it's not still difficult there's an awful lot of hard looking that customers are doing at any buying that they're doing but as long as you've got a good ROI and a good justification product is being sold and we are doing that and we continue to really scrutinize the expense structure and manage to it accordingly.

Dan Zeff – Zeff Capital

Thank you. Can you also discuss strategic alternatives and dividends and buybacks and things like that given that your stock is trading at almost zero enterprise value or at least under 10 million? Does that make sense to you? Have you explored these alternatives and will you?

Murray Fish

It's been the company's position and it's been discussed with the Board that the company should maintain its cash balances and you know we are looking for always acquisitions of technology and other things to build the business.

Dan Zeff – Zeff Capital

Thank you.

Operator

Thank you. Our next question comes from the line of Jim Lieberman with Wells Fargo. Please proceed with your question.

Jim Lieberman – Wells Fargo

Yes, perhaps you have touched on this area I've always been impressed by the quality of the products you have and the value added productivity gain that the companies get by using your software relative to other solutions that are out there. What do you think will do – what will take to get the kind of traction that you would like to see so that you're going get more acceptance of your products in the marketplace? It just seems like you have such a great value proposition that is not being quite being recognized by the rest of corporate America. So, I am wondering if you could address that.

Ken Bero

I think that’s a great comment and we do offer great value to customers and I think that one of our – and we have lots of discussions about this – I think one of our opportunities and challenges is to get the message in front of as many customers we can both existing and brand new. Our technology and the way we go about doing particularly business intelligence is not the way that kind of knocks your dad’s automobile kind of approach to business intelligence.

We extract information from reports which make this less expensive, easier to install than the traditional database solutions and so what we do is, we spend a lot of time teaching or getting that message in front of customers and educating them about how we're different and why we're different and how it's a benefit to them. So we've spent a lot of time this year doing things like webinars and seminars again both through existing as well as new customers and have found that that's a pretty valuable way of getting the message out to customers so I think for us it's much more of that line of attack to get our products more in the mainstream use.

John Kitchen

Jim this is John Kitchen.

Jim Lieberman – Wells Fargo

Yes sir.

John Kitchen

Other things that we are doing is, you know, we know that doing the same old same old doesn't work, so we also in fact through our channel partners are trying to do a different programs and we also are taking a vertical approach, we now have a healthcare product manager on staff who's responsible for investigating to help us and try to steer us in specific vertical so there are different steps that were taking in order to answer that very question that – you know, are sort of changing up how we view things and do the things and

Jim Lieberman – Wells Fargo

I mean, it does seem like your products I would say do have wonderful application in the whole healthcare industry. Do you see that there are opportunities out there that really could have explosive growth potential for you?

John Kitchen

You know, I would hesitate to say explosive but I do think there are some obviously some great opportunities that we are finding in healthcare. I mean, we have over a thousand healthcare organizations in the US alone that use Datawatch technology somewhere in the organization. And so what we've been doing is doing lately a much better job of identifying exactly how people are using them and then taking that market to – that message to market.

So for example, over the past couple of months we've actually picked a few specific healthcare information platforms such as (inaudible) that we are doing programs in the hospital that use that platform to them specifics of how our technology pack could enhance their business intelligence analysis and also meeting the demands of reporting demands the government is putting in like meaningful use and things like that that we think there is an opportunity to help their institutions meet the ongoing and ever changing demands of federal regulations and reporting requirements. So we do think, yes, there is an opportunity there and we are pursuing that turn.

Jim Lieberman – Wells Fargo

That sounds very exciting and good luck on your products.

Ken Bero

Thank you.

Jim Lieberman – Wells Fargo

Thanks.

Operator

Thank you. (Operator Instructions) gentlemen, it appears there no further questions at this time.

Ken Bero

All right, let me summarize. Q3 results showed a significant improvement over the previous two quarters while Monarch sales were down slightly as compared to Q2. We had a solid enterprise and maintenance renewal quarter.

Revenues stabilized quarter-on-quarter and as I said the economy remains challenging, purchases continue to be tightly monitored measured for ROI and reviewed.

We also continue to be proactive regarding our expense management and investing in our products which provide excellent value functionality as well as ease of installation and the usage required by our customers.

We remain confident that were in a strong position to take advantage of expected future opportunities.

Thank you for your continued interest in Datawatch.

Operator

Thank you. And ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Datawatch Corporation F3Q10 (Qtr End 06/30/10) Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts