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Datawatch Corporation (NASDAQ:DWCH)

F3Q 2011 Earnings Call

April 28, 2011 4:30 PM ET

Executives

Dan Incropera – Controller

Michael Morrison – President and CEO

Murray Fish – CFO, VP - Finance, Treasurer and Secretary

Operator

Greetings and welcome to the Datawatch Corporation’s second quarter fiscal 2011 earnings 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, Dan Incropera, Controller for Datawatch Corp. Sir, you may begin.

Dan Incropera

Good afternoon, everyone. Thank you for joining us today for the Datawatch Corporation second quarter of fiscal year 2011 earnings conference call. I am Dan Incropera, Vice President and Controller of Datawatch. Joining me today is Michael Morrison, our President and CEO; and Murray Fish, our Chief Financial Officer and Vice President of Finance.

You can obtain a copy of our earnings release which was distributed at 4:00 PM Eastern Time today by emailing us at investor@datawatch.com. This release is also available on our website at www.datawatch.com.

Let me first outline to you this afternoon’s agenda. Following a reading of our Safe Harbor statement, Michael will provide some general comments and an update on the business. Murray will then present a discussion of our second quarter fiscal year 2011 financial results. Following our prepared remarks, we will open up the call for question-and-answer session.

Before we begin, I’d like to review 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, its quarterly report on Form 10-Q for the quarter ended December 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 Michael for a discussion of business results.

Michael Morrison

Thanks, Dan, and thank you all for joining us this afternoon. First off, I want to say that I am thrilled to be here and part of company that has the potential to be in my opinion a real game changer in our market. During my time in the software industry, I’ve had the privilege of working with great teams with people with terrific software products that delivered tremendous value to businesses. And to have that privilege again to work with an outstanding team of people and a unique product is exciting. Before I go further, I just want to pause to recognize that the higher senior management team here at Datawatch has steered this company through some very difficult economic times while continuing to maintain profitability and a positive cash flow.

I am going to turn the call over to Murray shortly, but first I’ll share some brief comments about our Q2 performance. Murray will then provide more detailed information on our financial performance, and I’ll come back and give you some insights on recent accomplishments and my vision for the company moving forward.

As for Q2, total revenues were $4.45 million, down 3% from total revenues a year ago. License revenues were $2.55 million, a 2% decline from the comparable quarter a year ago. Unfortunately this past quarter continued to trend of declining revenue for Datawatch, which we are firmly committed to reverse as we move forward. The total loss for the quarter was $511,000 or $0.09 per diluted share compared to a net loss of $97,000 or $0.02 per diluted share from a year ago.

The quarter included a restructuring charge of $641,000 or $0.11 per diluted share. Excluding the effects of the restructuring charge, non-GAAP net income would have been a $130,000 or $0.02 per diluted share. We ended the quarter with $7.75 million in cash and investments, up 10% from $7.05 million at the end of our last fiscal year.

I’ll now turn it over to Murray to give you more details on our financial results.

Murray Fish

Thank you, Michael. Good afternoon. For those of you who may not have seen our results released earlier today, our total revenues for the second quarter of 2011 was $4.45 million as compared to $4.57 from the second quarter fiscal year 2010. Revenue decreased by $117,000 or 3% quarter-over-quarter.

For the second quarter of fiscal year 2011, revenues from licenses were $2.55 million as compared to $2.59 million for the second quarter of fiscal year 2010. As a percentage of revenue, software license revenue accounted for 57% of revenue for both the second quarter of fiscal year 2011 and 2010. For the second quarter of fiscal year 2011, revenues from maintenance and services were $1.9 million as compared to $2.0 million for the second quarter of fiscal year 2010. As a percentage of revenue, maintenance and services accounted for 43% of revenues for both the second quarter of fiscal year 2011 and 2010.

Report analytics, report management and archived solutions and business service management solutions product revenues were 75%, 17% and 8% of total revenues for the second quarter of fiscal year 2011 as compared to 70%, 18% and 12% for the second quarter of fiscal year 2010.

Domestic revenues and international revenues were 78% and 22% of total revenues for the second quarter of fiscal year 2011 and were 76% and 24% of total revenues for the second quarter of fiscal year 2010. Gross margins for software licenses were 77% for the second quarter of fiscal year 2011 as compared to 75% for the second quarter of fiscal year of 2010.

Gross margins from maintenance and services were 68% for the second quarter of fiscal year 2011 and 62% for the second quarter of fiscal year 2010. Overall, total gross margins were 73% for the second quarter of fiscal year 2011 as compared to 69% for the second quarter of fiscal year 2010.

Sales and marketing expenses decreased by $109,000 or 7% in the second quarter of fiscal year 2011 as compared to the second quarter of fiscal year 2010. Sales and marketing expenses as a percentage of revenues were 33% for the second quarter of fiscal year 2011 as compared to 35% for the second quarter of fiscal year 2010. This decrease is primarily attributable to lower headcount and related costs such as commissions and travel, lower amortization costs, consulting costs and software expense.

Engineering and product development expenses decreased by $62,000 or 9% in the second quarter of fiscal year 2011 as compared with second quarter of fiscal year 2010. Engineering and product development expenses as a percentage of revenues were 15% for the second quarter of fiscal year 2011 as compare to 16% for the second quarter of fiscal year 2010. The decrease in engineering and product development expenses was primarily attributable to lower headcount and external consulting costs.

General and administrative expenses increased by $668,000 or 69% in the second quarter of fiscal year 2011 over the second quarter of fiscal year 2010. General and administrative expenses as a percentage of revenues were 37% for the second quarter of fiscal year 2011 as compared to 21% for the second quarter of fiscal year 2010. The increase is primarily attributable to severance costs in the quarter of $641,000 related to a restructuring to align sales and marketing operations with the company’s new business strategy and lower professional service fees.

Other income expense was an interim of $34,000 in the second quarter of fiscal year 2011 as compared to the interim of $1,000 for the second quarter of fiscal year 2010 due to gains in the foreign currency transaction. Provision for income tax expense for the second quarter of fiscal year 2011 was an expense of $41,000 as compared to an expense of $6,000 in the second quarter of fiscal year 2010. The increase in the provision for income tax is due to the exploration of state net operating losses along with the provision – uncertain tax position relative to foreign taxes. The net loss for the second quarter of fiscal year 2011 was $511,000 or negative $0.09 per diluted share as compared to a net loss of $97,000 or negative $0.02 per diluted share for the second quarter of fiscal year 2010.

Excluding the effects of the restructuring charge, the company’s non-GAAP net income for the three months ended March 31, 2011 would have been $130,000 or $0.02 per diluted share. For the year-to-date results, our total revenues for the first six months of fiscal year 2011 were $8.63 million as compared to $8.81 million for the first six months of fiscal year 2010. Revenue decreased by $171,000 or 2% year-over-year.

For the first six months of fiscal year 2011, revenues from licenses were $4.66 million as compared to $4.76 million for the first six months of fiscal year 2010. As a percentage of revenue, software license revenue accounted for 54% of revenue for both the first six months of fiscal year 2011 and 2010.

Revenues from maintenance and services were $4.1 million for both the first six months of fiscal year 2011 and 2010. As a percentage of revenue, maintenance and services accounted for 46% of revenues for both the first six months of fiscal year 2011 and 2010. Report analytics, report management and archived solutions and business service management solutions product revenues were 73%, 18% and 9% of total revenues for the first six months of fiscal year 2011 as compared to 70%, 18% and 12% for the first six months of fiscal year 2010.

Domestic revenues and international revenues were 76% and 24% of total revenues for the first six months of fiscal year 2011 as compared to 75% and 25% for the first six months of fiscal year 2010. Gross margins for software licenses were 76% for the first six months of fiscal year 2011 as compared to 74% for the first six months of fiscal year 2010. Gross margins from maintenance and services were 68% for the first six months of fiscal year 2011 and 63% for the first six months of fiscal year 2010. Overall, total gross margins were 72% for the first six months of fiscal year 2011 as compared to 69% for the first six months of fiscal year 2010.

Sales and marketing expenses decreased by $429,000 or 14% in the first six months of fiscal year 2011 over the first six months of fiscal year 2010. Sales and marketing expenses as a percentage of revenues were 31% for the first six months of fiscal year 2011 as compared to 36% for the first six months of fiscal year 2010. This decrease is primarily attributable to lower headcount and related costs such as commissions and travel, lower consulting costs and lower amortization costs.

Engineering and product development expenses decreased by $136,000 or 10% in the first six months of fiscal year 2011 over the first six months of fiscal year 2010. Engineering and product development expenses as a percentage of revenues were 15% for the first six months of fiscal year 2011 as compared to 16% for the first six months of fiscal year 2010. The decrease in engineering and product development expense is primarily due to lower headcount and related costs, and lower external consulting costs.

General and administrative expenses increased by $709,000 or 39% in the first six months of fiscal year 2011 as compared [ph] to the first six months of fiscal year 2010. General and administrative expenses as a percentage of revenues were 29% for the first six months of fiscal year 2011 and 21% for the first six months of fiscal year 2010. This increase is primarily attributable to severance costs related to a restructuring to align sales and marketing efforts with the company’s new business strategy and lower professional service fees.

Other income expense was income of $56,000 in the first six months of fiscal year 2011 as compared to expenses of $1,000 for the first six months of fiscal year 2010 due to foreign currency transactions. Provision for income tax expense was $52,000 in the first six months of fiscal year 2011 and $14,000 in the first six months of fiscal year 2010. The increase in provision for income taxes is due to the exploration of state net operating losses along with the provision for uncertain tax positions relative to foreign taxes. The net loss for the first six months of fiscal year 2011 was negative $282,000 or negative $0.05 per diluted share as compared to a net loss of $297,000 or negative $0.05 per diluted share for the first six months of fiscal year 2010.

Excluding the effects of the restructuring charge, the company’s non-GAAP net income for the first six months ended March 31, 2011 would have been $359,000 or $0.06 per diluted share. Michael.

Michael Morrison

Thanks, Murray. I am going to highlight a few accomplishments from this past quarter and then give you some insights as to what we have done today and what we plan to do in the future to position Datawatch to take full advantage of the opportunities that we see in front of us. In Q2, we announced the latest releases of Monarch Enterprise Server and Monarch Report Management in archive solutions. These solutions are integral components of our Monarch Report Analytics platform and provide us with a true end-to-end offering for the market that enables organization to leverage the investments that they’ve already made in existing report, existing reporting processes.

Now we can empower organizations to extract the data from static, inflexible and incomplete reports as well as semi-structured business documents. Transform that data into dynamic information, validate, automate the delivery of that information throughout the enterprise by the web, and manage the archiving and delivering of that information through a complaint high volume enterprise report repository.

In addition to this significant step forward with our products in Q2, we added to our already extensive customer base. We have reported wins of leaders in the financial services industry such as RBS, Citizens Financial Group, Bank of America and Flagstar Bank and the healthcare industry with HCA Healthcare and Extend Healthcare and then adding the telecommunications industry with Telstra. These worldwide wins point toward the breadth and flexibility of the Datawatch solutions and the value that we do provide to industry leading companies.

The solid mix of business from new customers and existing customer bodes well for us as we prepare to grow our business. While we are clearly in the early stages of a transition, I look forward and I see Datawatch ploys to become a great software company. Our flagship software, the Monarch platform is truly in a class by itself. It transforms the way our customers manage their businesses. Datawatch today sits at the components of two important trends that are involving in the industry. One of those trends is the increasing influence of the business user in technology buying decisions.

We sell our Monarch platform predominantly to business user because that’s where we typically deliver the majority of our value. The other trend is the accelerating requirement for fast time to value. Our Monarch platform leverages an organization’s existing investments and reports and reporting processes. And as a result, we will always implement faster than alternative solutions and provide a more immediate return on investment.

Historically Datawatch has been viewed by some as a business intelligence vendor. While I believe we are an integral part of an overall business intelligence strategy, I don’t see us competing directly with BI vendors, rather I see us building a significant gap in the traditional database centric approach to developing BI applications. By using Datawatch to develop report analytics systems from existing reports as part of an overall strategy, customers can more effectively analyze information that’s already validated and available today and identify gaps in this information around their BI projects.

This means quicker time to value and reduced overall costs for BI deployments. In this context I see Datawatch as a very attractive partner for this traditional BI vendors, and their customers to where report analytics to the current database oriented approaches with all BI vendors pursuant to deploy their applications. To take advantage of the opportunity we see before us, we took some significant steps over the past two months and have others planned in the near future that I’d like to share with you now.

First of all we’ve been fortunate to be able to attract a number of very talented experienced individuals from within our market segment in the sales and pre-sales operation and a combination with a proven skills already on board here at Datawatch, I feel we’re on a solid path to having a first class team in place to capture the opportunity. We have also responded and focused our corporate messaging and positioning to highlight our differentiated Monarch platform and our unique approach to the market.

I shared this messaging and positioning and briefings with leading industry analysts such as Gartner, Ventana Research, Aberdeen Research, the 451 Group and Flora Research. The feedback from these industry experts has been overwhelmingly positive and it’s also helped to shape the finer aspects of our message. In fact in just the past week, Ventana Research and the 451 Group have published research notes on Datawatch and both of these well respected industry analysts favorably view our strategy and our potential in this market.

We have aligned our sales operations around our enterprise agenda, and we have begun ramping our lead generation activities focusing on the overall value of our enterprise Monarch platform for reporting analytics. The quantity and quality of our lead flow has already improving as a result of these initiatives. Our go-to-market model is well defined, it’s in place and it’s prepared to deliver results.

Looking forward, we’re pursuing several initiatives that are essential to our long-term success. First, we’re continuing to sharpen our messaging and our positioning the market and we are continuing to deliver this message to customers, prospects, industry analysts, financial analysts, and other stakeholders. By clearly articulating our unique value to market we will improve awareness in Datawatch and best position ourselves for growth.

Second, we are working to aggressively expand our partner ecosystem in order to service customer demand, provide needed domain expertise and expand geographic reach. We’ve already signed on several new reselling and implementation partners here in this U.S. and we are in active discussions with several more here, in Europe, and in Australia.

We are exploring distributorships in certain geographies where we do not have a direct presence. And we are in the early stages of discussions with a couple of potential OEMs. The vibrant expansive partner ecosystem is critical to support our growth in the market. Finally, we’re working to take maximum advantage of one of Datawatch’s most valuable assets, our passionate global customer base.

Our customers are our best advocates in the source of extraordinary use cases and success stories. We are renewing our outreach to these customers and collaborating with them to further our new business opportunities. Case studies, success stories and joint promotional events are all very powerful tools in securing new business, and we are pursuing all of these admins [ph] to raise our visibility with our customers and in the market. We are also engaging our customers with our focused message centered on the value of the entire Monarch platform which is surfacing add-on opportunities in our install base.

We still have a lot of work to do in order to better engage with our customers but we have taken the important first steps on this path.

In closing, I have confidence that we’re taking the necessary actions to position Datawatch to aggressive attack the rapidly emerging need for an easy access to meaningful report data. We have a unique technology solutions with our Monarch platform and are competitive position is solid. Our customers are loyal and supportive and our employees are committed to the task in hand, growing the business profitably.

As we execute on the transition of the business, we will face some challenges that market dynamic that could impact quarterly results such as lumpiness due to large deals and seasonality, but my confidence is higher that we can get Datawatch on a solid growth trajectory and enhance shareholder value.

With that I will turn the call back to Alexis for any questions.

Question-and-Answer Session

Operator

Thank you sir. We would now be conducting a question and answer session. (Operator Instructions) One moment please while we poll for questions (Operator Instructions) Gentlemen, there seem to be no questions at this time. Do you have any closing remarks?

Michael Morrison

Well thank you Alexis, I hope it didn’t put people to sleep, but I appreciate you investing the time to hear our story and I look forward to updating you next quarter.

Operator

Excuse me, sir.

Michael Morrison

We’re all done here.

Dan Incropera

Did you hear that, Alexis?

Operator

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for you participation.

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