Editor's Note: A reference to Insider Selling in this stock has been removed by the author.
In trying to outperform the market, one has to figure out what information is not priced in. This can be obtained in two ways. First, short-term information may not be reflected like upcoming quarterly results, buy-out, or other yet-to-be announced news. Trading on this non-public news often borders on insider-trading, which is not only illegal, but is now being enforced by the SEC. A second way to achieve outperformance is through longer-term market and competitive analysis. This requires familiarity with the technology, market and competition, to develop a strategic vision of who the winners and losers will be. Due to the stock market's shorter time horizon, this may create a buying opportunity when a particular stock's long-term value becomes overly discounted.
This long-term approach, however, carries less certainty for two reasons. First, the variables affecting a company's intrinsic value can change over time, especially in the dynamic technology sector. Secondly, an investor is never able to obtain 100% of all available information. Most information related to long-term price movements is either unobtainable or uncontrollable at present. Still, we can obtain an information edge over other investors that increase the probability of a successful investment outcome.
In assessing any long-term investment candidate, the key variables are market, technology/competitive advantage, team, financials/business model, risks, and valuation. The ensuing analysis evaluates Attunity (ATTU) on these parameters, with a concluding summary on its long-term investment outperformance potential.
Technology/Competitive Advantage
Founded in 1998, Attunity's roots are in data connectivity. The company provides an interface to connect and transport all types of enterprise data across heterogeneous platforms and networks. Initially, Attunity provided data connection interfaces or adapters for batch files that worked with mainframes, UNIX, Windows and other platforms. Attunity then moved beyond batch files to real-time transport of all types of data as well as files. 2011 was a landmark year in this progression via 1) the acquisition of RepliWeb enabling the transfer of massive data files in real-time, and 2) the Replicate product launch for the real-time transport of various data and content between enterprises and data repositories. Between Replicate's real-time data and content transport, RepliWeb's real-time file replication and transfers, and Attunity' pre-2011 real-time product suites, Attunity became a technological leader in the fast-growing Big Data transport niche.
The key term for data analytics is real time. A study below by Nucleus Research showed that half the value of tactical data is lost within an hour, and the half-life of operational data is about eight hours. Only strategic data is less time-sensitive with a half-life of two days. Until recently, it did not matter, as we did not have the tools to transport and analyze such massive amounts of data in real time. But today, for the first time, we actually can analyze mega-data in real time.
Since 2011, Attunity has continued its rapid evolution into an end-to-end data transport solution with the CloudBeam SaaS solution for companies like Amazon (AMZN) Web Services, the Hayes acquisition to provide data and file transport solutions to the SAP (SAP) ecosystem, and the recent launch of Maestro, which provides a layer of data management and monitoring for more complex file and data transfers.
Attunity is currently integrating Apache Hadoop into its end-to-end data transport solutions. Hadoop, with its YARN operating system, is open-source software for storage/filing that processes in parallel thousands of data streams. Privately-held Hortonworks ($55M in estimates 2013 revenues) and Cloudera ($73M, as well as a recent $0.9B capital raise) are leading a surge of large corporate initiatives to incorporate Hadoop into their data storage infrastructure. Attunity is proactively preparing to get on the Hadoop express train. But Hadoop is a double-edged sword for Attunity (see Risk section below).
Attunity's technological advantages include fully-automated, in-memory processing, leading to much faster data transport than peers in a simple fashion. In a few clicks, the customer can define the data source and transfer that data to a targeted location. A second technological advantage is Attunity's competency of transferring data across a large number of enterprise software platforms, operating systems, and networks. Networks, files, data and content are increasingly varied and complex - adaptive connectivity across all these platforms is quite an accomplishment that only some larger peers can match. Moreover, Attunity has now eliminated its major technological disadvantage via its Maestro solution for end-to-end management of more complex transfers. Maestro was just launched this quarter, and was positively received by customers.
Attunity's independence is a major advantage versus market leader Oracle/Golden Gate (ORCL) that competes with its customers. As a by-product, Attunity has attained key partnerships with Big Data industry leaders such as EMC/Greenplum (EMC), Teradata (TDC), IBM (IBM), and Microsoft (MSFT), among others.
Market
The Big Data software opportunity is substantial and rapidly expanding. From the viewpoint of value created by Big Data software, Nucleus Research estimates that $106B would be shared with the end client. According to Wikibon, Big Data vendor revenues jumped 58% in 2013 to $18.6B consisting of software ($4.1B), services ($7.4B), and hardware ($7.1B). Please refer to this article from 2013 for more information on the Cloud Computing and Big Data market, including Attunity and other vendors.
The bulk of the Big Data software market is analytics; data transport is a smaller portion. Still, management estimates that the potential market for data replication alone is $1B. Moreover, many competitors are vying for a piece of Big Data Analytics such as Splunk (SPLK), Datawatch (DWCH), and Qlik Technologies (QLIK), among others. Big Data Transport has fewer competitors, the primary being Oracle/Golden Gate, Informatica/WisdomForce (INFA), IBM/DataMirror/Aspera, as well as Attunity. Open-source and freeware solutions also exist, which are less expensive than solutions from Attunity and above-mentioned peers. But these pure open-source/freeware solutions may not currently meet the needs of more demanding large enterprises. Thus, Attunity is competitively well-positioned in a fast-growing substantial market.
Team
Attunity's workforce of 136 people is led by Chairman and CEO Shimon Alon. Before joining Attunity, Mr. Alon helped build (including a three-year stint as President) and sell Precise Software Solutions to Veritas Software/Symantec (SYMC) for about $600M in 2003. Since Mr. Alon became CEO of Attunity in 2008, he has led the strategic acquisitions, product introductions, and international sales force expansion that has increased Attunity's value.
Historically, Attunity was led by its top-notch R&D team in Israel of 58 people, which was further strengthened by the RepliWeb acquisition in 2011. A prior weakness for Attunity was its understaffed sales team, which had led to several missed customer opportunities. Recent hires catapulted sales and marketing to 54 people at the end of 2013 versus 33 one year earlier. Attunity now has global sales coverage, compared to its previous US-centric model. US sales accounted for 70% of total 2013 revenues, while the international market potential is equal if not greater than that of the US. The fruit borne by these new hires should be seen in the coming quarters.
Attunity's competitors have the advantage of more people and resources. Nevertheless, Attunity has replaced market leader Oracle/Golden Gate at 15 accounts thus far, without losing one existing account to Oracle/Golden Gate or any other competitor. Attunity's bigger challenge is to get in front of more customers. Often competing products, while inferior to those of Attunity, are good enough for customers to not look elsewhere, especially with the comfort of a large brand name like Oracle or IBM. As Attunity's visibility and credibility increase in the marketplace, more customer doors can be opened.
Financials/Business Model
Attunity's revenues rebounded from $9M in 2009 to $25M in 2013 driven by the emergence of the real-time data transport business. Revenues actually slipped 1% in 2013, due to a weak first half 2013. Some of the issues included a slowing in the file replication (RepliWeb) and older batch-file data connector business, a temporary loss of license-sharing revenues from IBM, and long sales cycles that create lumpy licensing revenues on a quarterly basis.
Revenues exhibited year-over-year increases since Q3 2013, and are projected to rise 39% to $35M in 2014, or 27% organically (excluding the Hayes acquisition effect). 2015 ongoing revenue growth is expected to pick-up to around 34% with a preliminary target of $47M. This renewed sales growth is primarily driven by data replication (Replicate) which appears mostly as license revenues. Replicate revenues are expected to rise from $6M in 2013 to $13M this year, and should be over $20M next year. A second driver is the geographic sales expansion that is especially bearing fruit in Europe. A third factor is the Maestro data management overlay which will be first introduced for the file replication suite over the next two quarters, and then for Replicate incorporating Hadoop in Q4 2014. Maestro should reverse last year's decline in non-data replication revenues, especially boosting the file replication and transfer business (RepliWeb).
The December 2013 Hayes acquisition should contribute $4M in 2014 revenues, but is expected to nearly double in 2015 via higher cross-selling of Maestro and Replicate products.
The main risk to revenues is in Q2 and possibly Q3 of this year. 2014 revenues are back end-loaded, with management guiding for sequential increases each quarter from Q1's $7M. Maestro will not really kick in until Q3. Replicate continues to do extremely well but was only 25% of 2013 revenues and will be about 37% of 2014 revenues. Management was recently sanguine about Europe sales, however, which could keep Attunity revenues on track.
Below is my own estimate of Attunity's revenues by product group, as well as the company's breakdown between licensing and maintenance. This will show a clearer picture of the growth dynamic of Replicate, and the transition away from the maturing data connector business.
Revenues | 2013 | 2014e | 2015e |
Replicate | $6M | $13M | $22M |
RepliWeb | $8M | $9M | $11M |
Data Connectors | $11M | $9M | $7M |
Hayes | NA | $4M | $7M |
Total | $25M | $35M | $47M |
License | $13M | $21M | $30M |
Maintenance | $12M | $14M | $17M |
The bigger picture is that time is on our side. By 2015, 1) fast-growing Replicate will account for nearly half of revenues; 2) Maestro will be in full roll-out, accelerating Replicate's already surging sales, and stabilizing the Repliweb/data connector business; and 3) Hayes should expand substantially.
In technology, if you stand still, you die. The agile Attunity team is very aware of this fact. Attunity pragmatically has transformed its legacy batch-file data connector business into a thriving real-time data transport business. Attunity is now adding an end-to-end data management overlay (Maestro), creating an even more compelling data solution for customers.
$, millions (GAAP) | 2010 | 2011 | 2012 | 2013 | 2014e | 2015e |
Revenues | 10.1 | 15.2 | 25.5 | 25.2 | 35.0 | 47.0 |
Gross Profit | 8.1 | 13.7 | 23.1 | 23.1 | 32.2 | 43.5 |
% of revs. | 80.6% | 90.4% | 90.8% | 91.5% | 92.0% | 92.6% |
Optg. Profit | -0.0 | 0.1 | 2.5 | -0.1 | 1.7 | 5.2 |
% of Revs | -0.3% | 0.5% | 9.9% | -0.2% | 4.9% | 11.1% |
Net Income | -1.5 | -0.8 | 1.5 | -0.6 | 1.4 | 5.1 |
EPS | -$0.02 | -$0.09 | $0.12 | -$0.05 | $0.10 | $0.34 |
Historically, Attunity had low operating margins, mainly due to low revenue levels barely covering fixed costs. Attunity has a scalable business model with licensing and maintenance revenue generating consistent gross margins of over 90%. Once sales ramp from current levels, much of the incremental revenues should fall to the bottom line. Incremental marketing and R&D expense may rise slightly to support this growth. But the major staff expansions are behind us; so Attunity is now ready to reap the benefits of past human resource investments.
Furthermore, Attunity's ASPs are rising. Replicate's ASPs have been rising to $250k-$300k and sometimes higher, about 10x more than file replication ASPs. The upcoming Maestro solution will garner an above-company average price tag of $100k-to-$600k to existing clients, depending on the number of nodes. Finally, the profitable CloudBeam SaaS (software-as-a-service) subscription offering to Amazon Web Services is gaining momentum, albeit from a low base. In September 2013, CloudBeam had 15 customers at $20k annual subscription per client ($300k), which has since doubled, and should reach 100 by then end of 2014 ($2M).
A more lucrative product mix combined with swiftly rising incremental revenues falling to the bottom line, should lead to a substantial improvement in Attunity's currently low operating margins. A greater margin improvement, however, should be felt in 2015. For 2014, management is guiding for non-GAAP operating margins of roughly 11% versus 9% last year. On a GAAP basis, operating margins should reach 5% in 2014 and 11% in 2015, and should continue to improve towards 15%, which is at the low-end of the historical 15%-to-20% range of peers like Informatica and Teradata.
Risks
Long Sales Cycle/Breaking Oracle, IBM and Informatica's Customer Stranglehold
Despite Attunity's product advantages, some customers prefer the comfort of a large organization. Even if potential customers then agree to meet with Attunity, the sales process is long, especially for its higher ASP products like Replicate and possibly Maestro. Attunity must continue to differentiate and make their value proposition that much more compelling. Still, Attunity has a blue-chip list of corporate partners including competitors IBM and Oracle that are selling and increasing awareness of Attunity's solutions.
Leap of Faith that Sales and Profits Will Really Take Off
Historically, Attunity has not been very profitable. Aside from 2002, Attunity never achieved GAAP operating margins over 10%. We were encouraged by the revenue and profit ramp in 2011-2012. But the 2013 relapse after an especially strong 2012 was a disappointment for investors. Management is now guiding for sequential revenue and profit growth after a seasonally weak Q1 2014.
The Big Data and storage vendors have exhibited weak results lately ranging from Teradata to NetApp (NTAP). Part of this weakness may be caused by open-source alternatives like Hadoop (see below for more color). Attunity is not immune to this sector weakness.
Management must execute to overcome some warranted investor skepticism.
Open-Source: A Disruptive Trend
Attunity, Teradata and several other Big Data software vendors have been negatively impacted by open-source Hadoop taking away ETL (extract, transform and load) batch workloads and performing large scale analytics more cheaply. According to Teradata, confusion about Hadoop's capabilities had led to customer indecision as they evaluate/try to incorporate Hadoop. The release of Hadoop 2.0 last year with YARN (a.k.a. MapReduce version 2.0) is a particular thorn in the side of Big Data software vendors as it replaces previous batch processing with speedier analytics that approach real time (although still slower than other open-source software like Storm - see below). Until Attunity adapts its product line to Hadoop and its robust YARN operating system, some potential sales will be lost or delayed. While some potential customers without complex real-time processing needs may decide to forego Attunity's offering due to Hadoop, most potential customers using Hadoop would view an Attunity-with-Hadoop-capabilities product as complementary.
Open-source software is a risk and an opportunity for all Big Data companies. In the ever-changing technology scene, Twitter (TWTR) has now contributed its Storm code to the open-source community. Storm is real-time data monitoring and analytics, as opposed to Hadoop which may take consumer data from the last three months, and process it quickly but not in real time. Attunity will have to meet the challenge to adapt its systems to Hadoop, Storm, and future open-source codes. The short history of some open-source codes makes them a bit buggy. Still, one of Attunity's core competencies is to run its technology in complex heterogeneous environments, and Attunity already runs on certain open-source software. So it should be doable.
The Big Data analytics companies may be at greater risk. In addition to Teradata, fast-growing companies like Splunk potentially can be disrupted by Hadoop, Storm, and startups like Elasticsearch and Loggly that may offer a better price/value tradeoff to customers. We are not necessarily negative on Splunk; in fact, we were early investors in Splunk. I am just making the point that technology is dynamic; assigning a huge valuation to any tech stock (e.g. 14x revenues for Splunk, albeit down from 30x three months ago) based on currently ramping revenues that may not be sustainable may lead to suboptimal returns down the road.
Dilution
The November 2013 capital raise, and to a lesser degree, stock options, have pushed Attunity's share count to almost 14.8M today, about 3M more than 2013. The return on these proceeds must be high in order to avoid diluting returns from the increased share count.
Valuation and Price Target
Below is an expanded quoted peer group that includes Informatica, Teradata, Datawatch, Qlik Technologies, Splunk, Progress Software (PRGS), and Actuate (BIRT). On a revenue value/growth tradeoff adjusted for profitability, Attunity is the most attractive stock in its peer group, followed by Informatica.
Some caveats: 1) EV/Revenues-to-Revenue Growth was used instead of the PE/Growth ratio. Most of these stocks' profit bases are too small and volatile to use for PEG ratios, plus top-line growth is more highly-valued as a proxy to best capture this hyper-growth segment. 2) Neither Attunity nor its below-mentioned peers have leveraged balance sheets that would penalize their valuation ranking. In fact, they all have strong net cash positions. 3) Stocks like Datawatch, Attunity and Actuate have small market caps, and may warrant a small discount for their lower liquidity. 4) Final adjusted valuation ranking reflected several factors including organic revenue growth, trending sales growth, non-recurring EBITDA charges, actual differences in the valuation and profitability results, etc. before making the final ranking (but most of these factors ended up offsetting one another).
Peer Analysis - Valuation-to-Growth Ranking
Big Data SW Peers | Ticker/ | EV | Revs | EV/ Revs | EV/ | Revs | Revs 2014e | EV/Revs |
Datawatch | DWCH | 77 | 33 | 2.3x | Neg. CF | +25% | +22% | 0.10x |
Qlik Tech. | QLIK | 1,683 | 485 | 3.5x | 292.9x | +19% | +17% | 0.19x |
Informatica | INFA | 3,309 | 977 | 3.4x | 18.9x | +18% | +12% | 0.23x |
Splunk | SPLK | 4,323 | 303 | 14.3x | Neg. CF | +52% | +34% | 0.33x |
Teradata | TDC | 9,203 | 5,752 | 2.1x | 13.9x | +4% | +4% | 0.53x |
Progress | PRGS | 858 | 325 | 2.6x | 9.3x | +2% | 0% | 2.60x |
Actuate | BIRT | 129 | 124 | 1.0x | 17.8x | -11% | -25% | Neg. Growth |
Median | - | 1,683 | 325 | 2.6x | 18.9x | +18% | +12% | 0.33x |
Attunity | ATTU | 111 | 28 | 4.0x | 47.1x | +15% | +39% | 0.15x |
Peer Analysis - Profitability
Big Data SW Peers | EBITDA Margin LTM | EBITDA Margin 2014e | EBITDA Margin ~2yr avg |
Progress | 28.3% | 35.9% | 32.1% |
Teradata | 23.7% | 26.8% | 25.3% |
Informatica | 17.9% | 26.6% | 22.3% |
Actuate | 5.9% | 7.1% | 6.5% |
Qlik Tech. | 1.2% | 7.8% | 4.5% |
Splunk | -23.3% | 2.1% | -10.6% |
Datawatch | -30.9% | 2.6% | -14.1% |
Median | 5.9% | 7.8% | 6.5% |
Attunity | 8.5% | 13.1% | 10.8% |
Peer Analysis - Profitability-Adjusted Valuation Ranking
Big Data SW Peers | Value-to-Growth Ranking 2/3 wgt | Profitability | Combined Score | Final Ranking |
Attunity | 2 | 4 | 2.67 | 1 |
Informatica | 4 | 3 | 3.00 | 2 |
Datawatch | 1 | 8 | 3.33 | 3 |
Qlik Tech. | 3 | 6 | 4.00 | 4 |
Teradata | 6 | 2 | 4.67 | 5 |
Progress | 7 | 1 | 5.00 | 6 |
Splunk | 5 | 7 | 5.67 | 7 |
Actuate | 8 | 5 | 7.00 | 8 |
Attunity and most of its peer group stocks have corrected sharply over the last three months, as higher-priced growth stocks went out of favor. The group as a whole is more fairly valued today given a double-digit growth rate, and EV/Revenues of 2.6x. Thus, Attunity being the most attractive stock among its peers is at least a good sign.
In setting a price target, we can take 2015 EPS of $0.34 (GAAP) or $0.48 (non-GAAP) x 35, or 2015 revenues of $47M x 5. This produces a price target today of $12 to $17, versus $8.99 currently. A 5x revenue multiple and 35x earnings multiple are reasonable given expected 35% top-line growth, an exponential rise in profits, and the near-zero interest rate environment. These assumed multiples are well below the levels that some high-flying stocks were trading at a few months ago.
That said, I would like to de-emphasize the use of price targets. Usually if a company executes, its stock price will exceed previously set target levels (and Street analysts simply raise their price targets). Conversely, if management does not execute, the stock will be punished. At the end of the day, you are buying a business. If the business is producing strong results and is positioned to continue doing so, then as long as the business is reasonably valued in line with those results/expectations, you should continue owning that stock or business.
Summary
Attunity meets the investment checklist for Technology/Competitive Advantages, Market, Team, Financials/Business Model, and Valuation. The countervailing risks are substantial, as is the case with most technology companies. Attunity is a high-return/high-risk investment.
Attunity is really a 2015 story. This 2015 upside potential is not reflected in the current stock price. The greatest risk to owning Attunity is in the next quarter or two. Just keep in mind that the market is forward looking, and will start factoring in this upside before 2015.
Disclosure: I am long ATTU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
