Datawatch CEO Discusses F1Q11(Qtr End 12/31/2010) Results - Earnings Call Transcript

| About: Datawatch Corporation (DWCH)

Datawatch Corp. (NASDAQ:DWCH)

F1Q11 (Qtr End 12/31/2010) Earnings Call

February 3, 2011 2:00 pm ET


Dan Incropera - VP and Controller

Ken Bero - President and CEO

John Kitchen - SVP and CMO

Murray Fish - VP of Finance and CFO


Dan Zeff - Zeff Capital


Greetings and welcome to the Datawatch first quarter 2011 conference call. (Operator Instructions)

It is now my pleasure to introduce your host, Mr. Dan Incropera, Corporate Controller of Datawatch.

Dan Incropera

Good afternoon, everyone. Thank you for joining us today for the Datawatch Corporation first quarter of fiscal year 2011 earnings conference call. I am Dan Incropera, Vice President and Controller of 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 This release is also available on our website at

Let me outline for you this afternoon's agenda. I will first review 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 first quarter of fiscal year 2011 financial results. Following our prepared remarks, we will open up the call for question-and-answer session.

The following is our Safe Harbor statement. While we do not share projections of our future performance, we do 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, 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 comments about our Q1 fiscal year '11 performance. And following my remarks, Murray Fish, our CFO, will provide a more detailed information regarding our financials for the quarter. John Kitchen, our Chief Marketing Officer is in attendance for the call. Following Murray's remarks, we will open the meeting for questions.

The Q1 quarterly results were positive. As reported this morning, Datawatch was profitable for the quarter with net income being reported at $229,000. We've continued to effectively manage company expenses.

Revenues for the quarter were approximately $4.2 million, slightly below Q1 revenues of a year ago. Monarch revenues remained relatively stable in comparison to the last three quarters. We did have better than expected performance from both the European and the Australian operations.

While the enterprise revenues did not reflect it, this side of the business showed some encouraging signs. During the quarter, Datawatch began to reposition our messaging and our flagship enterprise solution, Monarch Enterprise Server, to more effectively address a core business problem. The fact that while all businesses rely heavily on reports for information and decision making, reports are difficult to use because the information they contain is static.

Users of reports face the issue of IT dependency for custom or new reports or performing manual processes to access the data they need. Datawatch uniquely resolves this problem through our ability to unlock the static report information without being dependant on IT and transform that data into formats and applications that can effectively be used for decision-making purposes. We call this process report activation. And best of all, our enterprise solution is able to utilize existing report infrastructure in reporting processes.

As part of our corporate messaging, Monarch Enterprise Server has been repositioned to provide a total end-to-end web-based report activation solution. It's able to store, index and manage the existing report information from internal and external sources that allow users independent of IT to securely extract and transform the required report information into desired formats that can used be for analytic purposes. Users can output the data into a variety of applications, including Excel, as well as visually view the information through Datawatch Dashboards.

We closed the significant Monarch Enterprise Server opportunity during the quarter in Australia. There were several components of the sale that we noted. First, the sale validated our repositioning message. In addition, the average sales price of the solution was higher than most of our enterprise product sales. And finally, the solution generated a substantial level of services and consulting work.

The customer within the retail space was encountering difficulty in getting timely information for their decision-making needs. Their former processes was taking three to as many as seven days to manually compile weekly and monthly closing reconciliations in order to have information that could be used for decision-making purposes.

To resolve their problems, the company did an exhaustive search of special vendors and solutions. Solutions involving traditional BI database solutions were too costly and burdensome from an ongoing IT infrastructure support perspective. Monarch Enterprise Server was a cost-effective solution providing them with new information in required formats and on a timely basis. And finally, the system was not going to overburden their IT processes and personnel.

With Monarch Enterprise Server, they have automated their former manual processes. This enables them to compile information from multiple stores and be able to reconcile required decision-making data immediately upon closing. They now have information including sales, profitability, gross margins and inventory when needed, allowing them to make better decisions regarding their overall business operations.

We continue to believe that the state of our organization and our solutions position us well for growth moving forward.

Murray Fish 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 total revenues for the first quarter of fiscal year 2011 were $4,180,000 as compared to $4,234,000 for the first quarter fiscal year 2010. Revenue decreased by $54,000 or 1% quarter-over-quarter.

For the first quarter of fiscal year 2011, revenues from licenses and subscriptions were $2.1 million as compared to $2.2 million for the first quarter of fiscal year 2010. As a percentage of revenue, software and license and subscription sales accounted for 50% of revenue for the first quarter of fiscal year 2011 and 51% of revenue for the first quarter of fiscal year 2010.

For the first quarter of fiscal year 2011, revenues from maintenance and services were $2.1 million as compared to $2.0 million for the first quarter of fiscal year 2010. As a percentage of revenue, maintenance and services accounted for 50% of revenues for the first quarter of fiscal year 2011 and 49% of revenues for the first quarter fiscal year 2010.

Business intelligence solutions, content management solutions and service management solutions product revenues were 71%, 20% and 9% of total revenues for the first quarter of fiscal year 2011 as compared to 69%, 19% and 12% for the first quarter of fiscal year 2010.

Domestic revenues and international revenues were 74% and 26% of total revenues for the first quarter of fiscal year 2011 as compare to 75% and 25% for the first quarter of fiscal year 2010.

Gross margins for software, licenses and subscriptions were 74% for both the first quarter of fiscal year 2011 and 2010. Gross margins from maintenance and services were 67% for the first quarter of fiscal year 2011 and 63% for the first quarter of fiscal year 2010. Overall, total gross margins were 71% for the first quarter of fiscal year 2011 and 69% for the first quarter of fiscal year 2010.

Sales and marketing expenses decreased by $320,000 or 21% in the first quarter of fiscal year 2011 as compared to the first quarter of fiscal year 2010. Sales and marketing expenses as a percentage of revenues were 29% for the first quarter of fiscal year 2011 and 37% for the first quarter of fiscal year 2010. This decrease is primarily attributable to lower headcount and related costs such as commissions, travel and professional service costs.

Engineering and product development expenses decreased by $73,000 in the first quarter of fiscal year 2011 as compared to the fiscal quarter of fiscal year 2010. Engineering and product development expenses as a percentage of revenues were 15% for the first quarter of fiscal year 2011 and 17% for the first quarter of fiscal year 2010. This decrease is primarily attributable to lower headcount and related costs, but partially offset by higher external consulting costs.

General and administrative expenses increased by $41,000 or 5% for the first quarter of fiscal year 2011 as compared to the first quarter of fiscal year 2010. General and administrative expenses as a percentage of revenues were 21% for the first quarter of fiscal year 2011 and 20% for the first quarter of fiscal year 2010. The increase in general and administrative expenses is primarily attributable to higher professional services and consulting fees.

Other income expense decreased by $25,000 in the first quarter of fiscal year 2011 over the first quarter of fiscal year 2010. This increase is primarily attributable to foreign currency gains.

Provision for income tax expense increased by $2,000 in the first quarter of fiscal year 2011 over the first quarter of fiscal year 2010. The net income for the first quarter of fiscal year 2011 was $229,000 or $0.04 per diluted share as compared to a net loss of $199,000 or negative $0.03 per diluted share for the first quarter of fiscal year 2010.

As of December 31, 2010, the company had $7,481,000 in net cash and cash equivalents, an increase of $428,000 or 6% as compared to September 30, 2010.

Ken Bero

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

Question-and-Answer Session


(Operator Instructions) Our first question is coming from the line of Dan Zeff of Zeff Capital.

Dan Zeff - Zeff Capital

What indication are you getting that your repositioning and front product lines are going to result in growing revenues? Is that a backlog? Can you tell us anything about what your salespeople were saying, and do you expect revenues to grow?

Ken Bero

I think the repositioning that's going on is really a more accurate reflection of what we actually do. I think in the past, we have erroneously tried to position ourselves as a BI player and oftentimes we had some but statements around it. By focusing on the issue of reporting, which is a very pervasive problem within organizations, we are really hitting on key issues that the businesses face.

And I think as you saw in the example that I cited with the account in Australia, we're right on the money in terms of giving them a product that was a high return on investment and really hit the market in terms of what they are looking for and what there needs were relative to the requirements they had to get more timely information.

We are seeing feedback from customers that this new positioning and repositioning resonates very well. It does address issues. and particularly at executive levels, they really do get the fact that the issue of reports and the ability to get information from reports and the relative high cost and investment that companies have to make in IT in order to accommodate customers' quest for information, all kind of bodes well for the repositioning of the solution and the repositioning of the message as well.

Dan Zeff - Zeff Capital

Is the repositioning (inaudible) because it's not a new technology, or is it actually a new solution that you've created to report quicker?

Ken Bero

It's not a new technology. It really is repackaging the product and putting it in a state that really now is a complete end-to-end solution. We have added components to the base product that were not previously a part of the solution. I'll let John comment a little bit about the actual base product and what's in it from a future perspective.

John Kitchen

One thing I want to add to that is that I think one of the big problems we had in the past is that customers have had a hard time figuring out exactly what we did and where we fit in the stack. A great example of that was last year one of our salespeople went to a potential customer, and the guy said, "Wait a minute. You're going to try to sell me some BI stuff I just spent $10 million on the implementation. You must be crazy."

And then when our salesperson said, "No. Really what we're going to do is we're going to help you with reporting and make it more useful," they said, "Now, I understand what you do." But I think a lot of work we've done with the repositioning is make the benefits for our technology. And what we do uniquely is make it much clear to the customers and end users. We spend an awful lot of time talking to analysts, talking to potential customers to really get that benefit statement out there in a much more understandable fashion. We think we really nail that piece of it.

As far as the base Monarch Enterprise Server product we've come up with, we've also made some changes in that in addition to the powerful report indexing, storage, and then people can through the web browser pull out the pieces of it, look at this data for example on Excel. We've added some other capabilities to it. We now have a Dashboards component to it as well as the ability to put the whole PDF storage as well.

So we've really expanded the capabilities of that flagship Monarch Enterprise Server product, again to talk to people about how we can help their whole reporting issue.

In terms of a lot of organizations out there, their issue is not an application or an information or BI issue. It's reporting issue and being able to take more use out of those reports that are coming out. And by focusing on that, we're getting a lot more positive response. People understand what we do a lot better.

Dan Zeff - Zeff Capital

Can you discuss the current headcount and cost structure? I know we had a good run rate now from this past quarter. What should we assume there?

Murray Fish

We feel that we have the appropriate infrastructure to handle the operations and have upper hand for 2011.

Dan Zeff - Zeff Capital

So breakeven levels would be around where they are now for a while, is that fair to say? Are you having a bunch of more salespeople or anything or if you make what you made this quarter in revenues, you'll be positive?

Murray Fish

Well, I think the answer is we've managed the expenses to revenue base, and we believe that we have an opportunity to grow the revenues. And we will add expenses commensurate with the increased potential that we see from a revenue increase.

Dan Zeff - Zeff Capital

What revenue increase?

Murray Fish

I think most of the expansion, if it's going to be anywhere, is really in the sales and marketing area, really used to drive and accelerate the sales piece of the business.

Dan Zeff - Zeff Capital

So you're going to try to achieve more growth and you might have to add people?

Murray Fish


Dan Zeff - Zeff Capital

Is there any capital expense this year or anything like that?

Ken Bero

Well, we have always have capital expenditures, but nothing out of the ordinary than what we've done in the last three years.

Dan Zeff - Zeff Capital

Do you expect cash to continue to grow?

Murray Fish

Well, we expect to be profitable. So we would expect to see a positive influence on cash.

Dan Zeff - Zeff Capital

And the reason you guys are hearing me is since you have made some corporate changes to Board and stuff, and that's a very positive sign. And my last question is do you have a three to five-year plan in writing or at the Board level or are you working on something like that, and what is it?

Ken Bero

Well, I think it would be the tough in that to really provide information about forward-looking kinds of things. But we have plans in place and goals that we seek to achieve, and they have been discussed at the Board level, but not appropriate to really be talking about them on this phone call.

Dan Zeff - Zeff Capital

Well, I would encourage you to come up with a publicly-stated three to five-year plan as many companies have.


(Operator Instructions) Gentlemen, there seem to be no further questions at this time.

Ken Bero

I'll summarize then we were encouraged with our Q1 results and overall profitability. The ongoing repositioning of our corporate message and flagship product Monarch Enterprise Server is an important company milestone. We are 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.


Thank you. That concludes today's teleconference. You may disconnect your lines at this time. Thank you for you participation.

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