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Datawatch Corporation (NASDAQ:DWCH)

F4Q2010 Earnings Call Transcript

November 18, 2010 2:00 pm ET

Executives

Dan Incropera – VP and Corporate Controller

Ken Bero –President and CEO

Murray Fish – CFO, VP of Finance, Treasurer and Assistant Secretary

John Kitchen – SVP, Chief Marketing Officer and Secretary

Analysts

Larry Brookes – Moloney Securities

Operator

Greetings and welcome to the Datawatch Corporation fourth quarter and fiscal year 2010 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. 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 fourth quarter and 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, our Chief Financial Officer and Vice President of Finance.

You can obtain a copy of our earnings release which was distributed earlier today by e-mailing 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 an update on the business. Murray will then present a summary of our fourth quarter and 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'd 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 that 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 reports on Form 10-Q for the quarters ended December 31, 2009, March 31, 2010 and June 30, 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'll share some opening comments about our Q4 and full year performance and following my remarks, Murray Fish, our CFO, will provide more detailed information regarding our financials for the quarter and for the year. John Kitchen, our CMO, is in attendance for the call and following Murray’s remarks, we will open up the meeting for questions.

As reported this morning, we were pleased with the profitability outcome for the fourth quarter and that we finished 2010 in the black. Our stronger second half results have resulted from continued management of our expenses and the fact that we're beginning to see some stabilization in our Monarch desktop sales, combined with continued interest in our Enterprise Solutions and offerings.

In what typically is our most difficult sales quarter, Monarch revenues remained flat versus Q3. This was good news. We've been particularly happy with the Monarch performance in the U.K. and Europe, particularly over the last several quarters. Our strategic move to take back direct management of the EMEA Monarch desktop business in April has had a positive impact.

For fiscal year '10, revenue finished at $17.7 million, approximately 10% below fiscal year '09 revenues of $19.6 million. The fiscal year '10 decline in revenues can be attributed primarily to lower U.S. Monarch desktop revenues and lower service management revenues, primarily in EMEA.

U.S. desktop sales continued to be negatively impacted by corporate buying decisions, as evidenced by declines in desktop sales through our U.S. corporate resellers and distribution partners. As referenced in the earnings statement this morning, we've continued to effectively manage our expense structure. In addition, the business continues to grow its cash position. Growing revenues continue to be challenging. Companies continue to closely control and assess IT expenditures and procurements, impacting all of our revenue sources.

We continued to invest in our products and offerings in order to take advantage of identified market opportunities. In addition to addressing a broad array of business segments, we're also seeking out opportunities in targeted vertical markets. In fiscal year '10, we bolstered our resources, focused on the company's healthcare practice, deepening our expertise and our ability to penetrate this growing market.

Approximately 15% of our revenues come from the healthcare space and more than 1000 organizations utilize our technology to achieve insight into their quality of care and operating performance measurements.

The healthcare market has several aspects that we think are interesting. It's difficult to source information from current healthcare applications. Our ability to activate information reports will play well in this space. IT resources tend to be limited. Our easy to install, use and maintain solutions will be an advantage.

And finally, with passage of the government HITECH Act which will impose sharp financial penalties for noncompliance with government regulations, this is going to provide some major incentives for healthcare providers to move and implement solutions.

Finally, we were very pleased to have David Mahoney join our Board of Directors. Dave brings a very strong technology background, experienced in growing small, high-tech software companies and has a broad set of industry contacts and relationships. His presence on the Board will have a positive impact on the business. We continue to believe that the state of our organization and our solutions position us well for growth moving forward.

Murray will now provide some additional information regarding our financials.

Murray Fish

Thank you, Ken. Good afternoon. For those of you who may not have seen our results released earlier today, our revenues for the fourth quarter of fiscal year 2010 were $4.3 million, as compared to $4.6 million for the fourth quarter of fiscal year 2009. Revenue decreased $284,000 or 6% quarter-over-quarter.

For the fourth quarter of fiscal year 2010, revenues from licenses and subscriptions were $2.3 million, as compared to $2.5 million for the fourth quarter of fiscal year 2009. As a percentage of revenue, software licenses and subscription sales accounted for 55% of revenue, for both the fourth quarter and fiscal year 2010 and fiscal year 2009.

For the fourth quarter of fiscal year 2010, revenues from maintenance and services were $1.9 million as compared to $2.0 million for the fourth quarter of fiscal year 2009. As a percentage of revenue, maintenance and services accounted for 45% of revenues for both the fourth quarter of fiscal year 2010 and fiscal year 2009.

Business Intelligence Solutions, Content Management Solutions and Service Management Solution, product revenues were 75%, 16% and 9% of total revenues for the fourth quarter of fiscal year 2010, as compared to 70%, 17% and 13% for the fourth quarter of fiscal year 2009.

Domestic revenues and international revenue were 77% and 23% of total revenues for the fourth quarter of fiscal year 2010 and 76% and 24% of total revenues for the fourth quarter of fiscal year 2009.

Gross margins from software licenses and subscriptions were 76% for both the fourth quarter of fiscal year 2010 and fiscal year 2009. Gross margins from maintenance and services were 66% for the fourth quarter of fiscal year 2010 and 68% for the fourth quarter of fiscal year 2009. Overall, total gross margins were 71% for the fourth quarter of fiscal year 2010, as compared to 72% for the fourth quarter of fiscal year 2009.

Sales and marketing expenses decreased by $116,000 or 8% in the fourth quarter of fiscal year 2010, over the fourth quarter of fiscal year 2009. Sales and marketing expenses as a percentage of revenues were 30% for the fourth quarter of fiscal year 2010 and 31% for the fourth quarter of fiscal year 2009. This decrease is primarily attributable to lower headcount and related costs such as commissions, travel and lower consulting costs.

Engineering and product development expenses decreased by $39,000 or 6% in the fourth quarter of fiscal year 2010, over the fourth quarter of fiscal year 2009. Engineering and product development expenses as a percentage of revenues were 14% for both the fourth quarter of fiscal year 2010 and fiscal year 2009. The decrease in engineering and product development expenses was primarily due to lower external consulting costs.

General and administrative expenses decreased by $227,000 or 23% in the fourth quarter of fiscal year 2010, over the fourth quarter of fiscal year 2009. General and administrative expenses as a percentage of revenues were 18% for the fourth quarter of fiscal year 2010, as compared to 22% for the fourth quarter of fiscal year 2009. This decrease is primarily attributable to lower headcount and related costs and lower professional service fees.

Other income was $85,000 in the fourth quarter of fiscal year 2010, as compared to $81,000 for the fourth quarter of fiscal year 2009. Primarily due to currency gains from collections in the translation of foreign based assets into the functional currency, of our U.K. subsidiaries in the fourth quarter of fiscal year 2010.

The provision for income tax expense was $15,000 in the fourth quarter of fiscal year 2010, as compared to income tax expense of $75,000 for the fourth quarter of fiscal year 2009, which represents minimum state taxes and a provision for state income taxes and uncertain tax provisions related to foreign taxes.

Net income for the fourth quarter of fiscal year 2010 was $455,000, or $0.07 per diluted share, as compared to net income of $253,000 or $0.04 per diluted share for the fourth quarter of fiscal year 2009.

For the year-to-date results, our revenues for fiscal year 2010 were $17.7 million, as compared to $19.6 million for fiscal year 2009. Revenue decreased by $1.9 million or 10%.

For fiscal year 2010, revenues from licenses and subscriptions were $9.6 million as compared to $10.9 million for fiscal year 2009. As a percentage of revenue, software license and subscription sales accounted for 54% of revenue for the 12 months of fiscal year 2010 and 56% of revenue for fiscal year 2009.

For the fiscal year 2010, revenues from maintenance and services were $8.1 million as compared to $8.7 million for fiscal year 2009. As a percentage of revenue, maintenance and services accounted for 46% of revenues for fiscal year 2010 and 44% of revenues for fiscal year 2009.

Business intelligence solutions, content management solutions and service management solutions, product revenues were 71%, 19% and 10% of total revenues for the first 12 months of fiscal year 2010 as compared to 71%, 17% and 12% for fiscal year 2009.

Domestic revenues and international revenue was 76% and 24% of total revenues for fiscal year 2010 as compared to 77% and 23% for fiscal year 2009. Gross margins for software licenses and subscriptions were 75% for fiscal year 2010 as compared to 79% for fiscal year 2009. Gross margins from maintenance and services were 64% for both fiscal year 2010 and fiscal year 2009.

Overall, total gross margins were 70% for fiscal year 2010 as compared to 73% for fiscal year 2009. Sales and marketing expenses decreased by $637,000 or 10% in fiscal year 2010 over fiscal year 2009. Sales and marketing expenses as a percentage of revenues were 33%, for both fiscal years 2010 and 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 $225,000 or 9% in fiscal year 2010 over fiscal year 2009. Engineering and product development expenses as a percentage of revenues were 15% for fiscal year 2010 as compared to 12% for 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 $708,000 or 17% in fiscal year 2010 over fiscal year 2009. General and administrative expenses as a percentage of revenues were 20% for fiscal year 2010 as compared to 22% for fiscal year 2009.

This decrease was primarily attributable to lower headcount and lower professional service fees. The company reported non-cash impairment charge in the quarter ended March 31, 2009 of approximately $6.4 million related to the full [ph] payment of its goodwill and an indefinite live trademark.

Other income was $26,000 in fiscal year 2010 as compared to $193,000 for fiscal year 2009, both primarily due to foreign currency exchange gains during the period. The provision benefit for income tax expense was $37,000 in fiscal year 2010, which primarily represents provisions for uncertain tax positions relative to foreign taxes.

The company had a tax benefit of $161,000 for fiscal year 2009, due to the reversal of deferral tax liabilities related to the goodwill which was written off as a result of the impairment in 2009.

Net income for fiscal year 2010 was $380,000 or $0.06 per diluted share as compared to a net loss of $4,940,000 or negative $0.83 per diluted share for fiscal year 2009. As of September 30, 2010, the company had $7,053,000 in net cash and cash equivalents, an increase of $1,404,000 or 25% as compared to September 30, 2009. Ken?

Ken Bero

Thanks, Murray. Let me now open up the call for any questions that you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from the line of Larry Brookes with Moloney Securities. Please go ahead.

Larry Brookes – Moloney Securities

Yeah, hi. I was just wondering – you had talked in the last quarter about the Webinars and the Webcast to increase business and new customers. Has that – how has that gone?

John Kitchen

Hi. Larry, this is John Kitchen, the CMO. It’s actually gone very well. I think that the number of new customers and existing customers that are coming back to get more information and content from Datawatch has absolutely increased. The webcasts that we’ve done, we have a series of modern tips and techniques webcasts that were literally getting between three and 500 people who were attending those and our other webcasts for other products are also were getting some pretty high turnouts. So I think that is actually a good sign as we move forward that people still are continuing to be interested in Datawatch technology including our Monarch technology, all the way up through our enterprise products so that bodes well, I think.

Larry Brookes – Moloney Securities

Of those people, of those quantity, what – I mean, are you seeing a higher percentage convert into actual customers, compared to the past or about the same?

John Kitchen

I think that – I mean, we certainly are getting a decent number that are converting. I think what we are getting is we are getting two kinds of people who are coming to these Webcasts. A, we’re getting people who are already users of Datawatch products and they want to find new uses for the products in their organization, which I think bodes well over the long run to be able to cross-sell them and sell this additional features to them and we are getting a good number of brand-new customers, especially for products such as your Monarch Data Pump product which is extend our use not only for business users but (inaudible) department to a variety of projects. So we are seeing some net new customers that have no exposure to Datawatch in the past.

So, on the whole, I would say that we are seeing an increase in the inquiries and certainly the number of leads that we’re passing off to our sales people has certainly gone up.

Larry Brookes – Moloney Securities

And what about the trend so far in the first quarter? Is it similar to the fourth that you’ve seen or is it too soon to tell?

John Kitchen

Trend in relation to people who are attending our Webcasts or trends in terms of sales?

Larry Brookes – Moloney Securities

Yes. Trend in general in sales and how the first quarter is generally going as a whole?

John Kitchen

Well, I think we had good responses. I would say, we’re not going to be in a position to provide much insight as to where the results are going to head up because we don’t know yet, but I think we are finding more inquiries, some recent Webinars have been more heavily attended.

Murray Fish

All-time highs in some of our Webcasts.

John Kitchen

I was also remarking to Murray today that a lot of the inquiries that come in for the web, a lot of it will flow across my computer, particularly the ones in Europe and Asia and it just seems like the number of inquiries around Monarch and versions and wanting to buy, purchases, has increased – has been increasing over the last couple of months. So, I think we think all of those things as pretty good signs.

Larry Brookes – Moloney Securities

I see. Okay. And then going forward, your G&A of course as you discussed did go down, going forward, is that kind of a stable level that you’re looking for or do you think it’s going to be that type going forward, that amount?

Murray Fish

Yeah. I would say that the – we’ve taken a lot of strength [ph] G&A this year, but we should have stabilized at a level that we’ll go forward at.

Larry Brookes – Moloney Securities

At that level. Okay. All right. Good. Thank you.

Operator

(Operator Instructions) It appears there are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Ken Bero

Okay. In summary, we were pleased with the Q4 results and our overall profitability for the full year 2010 as well as our cash position. Generating revenue growth is our challenge moving forward. We continue to invest in our products in order to take advantage of targeted opportunities. At the same time, we remain proactive regarding expense management. We’re optimistic and have confidence that we are in a strong position to take advantage of the expected future opportunities.

Thank you for your continued interest in Datawatch.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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