Datawatch's CEO Discusses F1Q12 Results - Earnings Call Transcript

Jan.26.12 | About: Datawatch Corporation (DWCH)

Datawatch Corporation (NASDAQ:DWCH)

F1Q12 Earnings Conference Call

January 26, 2012 4:30 PM EST


Dan Incropera – VP and Controller

Michael Morrison – President and CEO

Murray Fish – CFO and VP, Finance


Matthew Dodson – Edmunds White Partners

Frank Sparacino – First Analysis


Greetings and welcome to the Datawatch Corporation First Quarter 2012 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. Thank you. You may now begin.

Dan Incropera

Thank you. Good afternoon, everyone. Thank you for joining us today for the Datawatch Corporation first quarter fiscal year 2012 earnings conference call. I am Dan Incropera, Vice President and Controller at 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 o’clock PM Eastern Time today by emailing us at This release is also available on our website at

Let me first outline to you this afternoon’s agenda. Following a reading of our Safe Harbor statement, Michael will provide some initial comments on our quarter, followed by Murray who will present a discussion of our first quarter fiscal year 2012 financial results. Michael will then provide an update on our business initiatives and operating 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 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 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’d 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, 2011, 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 some opening remarks on our first quarter.

Michael Morrison

Thanks Dan, and welcome to everyone joining us on today’s call. I’d like to say a few words at the outset about Q1 performance. Our Q1 results established a strong start to fiscal 2012, a reflect and acceleration of the year-over-year growth that we first saw last quarter.

Total revenue for Q1 was $6.27 million, up 50% from total revenue in the same quarter a year-ago. License revenue was $4.21 million, up 99% year-over-year, and incidentally more than the total revenue from the first quarter of fiscal 2011. Net income for the quarter was $603,000 or $0.09 per diluted share, which was a nice increase compared to net income of $229,000 or $0.04 per diluted share from a year-ago. And we’re growing our cash balances; at the end of the quarter we had $9.65 million in cash and investments, up 15% from $8.38 million at the end of fiscal year 2011, representing more than $1.50 per diluted share.

With the Super Bowl right around the corner, I can’t help lapse [ph] into a bit of a football reference here. While these Q1 results are certainly gratifying, we at Datawatch are not ready to do any kind of Aaron Rodgers Championship Belt to answer Rob Gronkowski [inaudible] and spike in the end zone. Q1 was a hard fought first down on 32 in our own territory. There is still long field ahead and a lot of work to do before we are in any kind of position to celebrate. With that, said, and I know speak for each and every Datawatch employee, but I’d say that we are committed as a team to put in the effort required to keep driving Datawatch’s top line growth and shareholder value as we continue to execute on our strategy.

I’ll now turn the call over to Murray Fish, our Chief Financial Officer, 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 first quarter of fiscal year 2012 was $6.27 million as compared to $4.18 million for the first quarter of fiscal year 2011. Revenue increased by $2.09 million or 50% quarter-over-quarter. For the first quarter of fiscal year 2012, revenues from licenses were $4.21 million as compared to $2.11 million for the first quarter of fiscal year 2011. As a percentage of revenue, software license revenue accounted for 67% of revenue after the first quarter of fiscal year 2012 as compared to 51% for the first quarter of fiscal year 2011.

For the first quarter of fiscal year 2012, revenues from maintenance were $1.72 million as compared to $1.54 million for the first quarter of fiscal year 2011. As a percentage of revenue, maintenance accounted for 27% of revenues for the first quarter of 2012 as compared to 37% of revenues for the first quarter of fiscal year 2011. For the first quarter fiscal year 2012, revenues from services were $0.35 million as compared to $0.53 million for the first quarter of fiscal year 2011. As a percentage of revenue, services accounted for 6% of revenues for the first quarter of fiscal year 2012 as compared to 13% of revenues for the first quarter of fiscal year 2011.

Gross margins for software licenses were 86% for the first quarter of fiscal year 2012 as compared to 74% for the first quarter of fiscal year 2011. Gross margins for maintenance and services was 68% for the first quarter of fiscal year 2012 and 67% for the first quarter of fiscal year 2011. Overall, total gross margins were 80% for the first quarter of fiscal year 2012 as compared to 71% for the first quarter of fiscal year 2011.

Sales and marketing expenses increased by $1.57 million or 128% in the first quarter of fiscal year 2012 as compared to the first quarter of fiscal year 2011. Sales and marketing expenses as a percentage of revenues were 45% for the first quarter of fiscal year 2012 as compared to 29% for the first quarter of fiscal year 2011. This increase is primarily attributable to higher headcount and related cost such as commissions, benefits and travel, increases in marketing programs, lead generation, and consulting costs.

Engineering and product development expenses decreased by $7,000 or 1% in the first quarter of fiscal year 2012 as compared to the first quarter of fiscal year 2011. Engineering and product development expenses as a percentage of revenues were 10% for the first quarter of fiscal year 2012 as compared to 15% for the first quarter of fiscal year 2011. General and administrative expenses increased by $90,000 or 10% in the first quarter of fiscal year 2012 over the first quarter of fiscal year 2011.

General and administrative expenses as a percentage of revenues were 15% for the first quarter of fiscal year 2012 as compared to 21% for the first quarter of fiscal year 2011. This increase is primarily attributable to higher employee related cost and professional fees.

Net income for the first quarter of fiscal year 2012 was $603,000 or $0.09 per diluted share as compared to net income of $229,000 or $0.04 per diluted share for the first quarter of fiscal year 2011.

As of December 31st, 2011 the company had $9,650,000 in net cash and cash equivalents, an increase of $1,267,000 or 15% compared to the September 30th, 2011. Michael?

Michael Morrison

Thanks Murray. To give you a more perspective on our Q1 results, I want to first talk about two specific wins that are important markers to our business, I will then update you on our performance against the key operating metrics I shared with you last quarter, and finally I will share with you our focus area this quarter as we move into the next phase of our company’s transition.

The first win is a strategic partnering agreement that we announced recently with Logica plc in Europe. Logica is a $6 billion technology services company that employees 41,000 people globally. Logica provides business consulting, systems integration and outsourcing to clients around the world, including many of Europe’s largest businesses.

The agreement between Datawatch and Logica relates to Logica’s enterprise content management in the cloud offering, which provides companies with an Internet-based delivery model to dynamically access and share all types of business documents and reports, both within and beyond the four walls of an organization.

Logica and Datawatch are extending this Logica cloud offerings with Datawatch Report Money Server, providing Logica clients with the ability to perform sophisticated analytics and reporting of the business documents being archived and managed by Logica in the cloud. This agreement includes the first end-user client commitment to the combined offering, 500 users for a five-year term. Our Monarch Report Analytics Platform is ideally suited to a cloud delivery model and I expect we’ll see more opportunities similar to this Logica alliance in the coming quarters.

The second one I want to talk about is with Navy Federal Credit Union, the largest retail credit union in the world by both membership and assets. Navy Federal Credit Union has been a longtime Datawatch customer with more than 400 Monarch users deployed throughout its operations.

An important element of our new business plan is to secure stronger customer relationships with deeper engagements in order to be the best business partner possible. As part of this effort, we’ve sponsored local Datawatch user group meetings where customers can meet one another, share their experiences and learn about the latest Datawatch offerings and best practices.

Navy Federal Credit Union hosted the Inagural Mid-Atlantic User Group at Vienna, Virginia headquarters in October. The local meeting attracted more than 30 attendees from 12 separate Datawatch customers, including several employees from the host Navy Federal Credit Union. It was an extremely successful event where user shared some of their more strategic applications in Datawatch technology and learned the latest tips and techniques from Datawatch experts.

After that meeting and principally as a result of the interest generated during this local user group event, Navy Federal Credit Union identified demand for an additional 330 users and subsequently made the purchase in early December.

By focusing increased attention on our customer base and engaging our customers in more value-added interactions like these local user groups in our upcoming Worldwide User Conference in May, we will not only be a better partner, but we will also accelerate new business opportunities within our customer base which as you will recall is some 40,000 strong around the world.

I highlight these two wins, because they illustrate three important elements of our business plan going forward. First, it’s obvious from the size and scope of these transactions that report analytics is becoming more strategic within major organizations. Second, these wins demonstrate our commitment to continue to actively engage with and expand our presence in our expansive customer base. And third, it demonstrates our ability to look to the future and uncover new opportunities like the cloud-based initiative with Logica to further accelerate the use of report analytics by organizations of every size.

Now I’d like to turn to the four operating metrics that I introduced on our last call. As a reminder, these are average deal size, six-figure deals, new enterprise customers, and new partners. Let me give you an initial report from our first quarter results. In Q1, average deal size was $87,000 as compared to $30,000 for Q1 of 2011. We had five six-figure deals in Q1 this year compared to no six-figure deals in Q1 of FY 2011. In Q1, we signed seven new enterprise customers compared to three in Q1 of 2011. New enterprise customers include ADP, Smurfit Kappa and Old Florida National Bank. And lastly in Q1 this year, we signed six new partners compared to no new partners in Q1 of fiscal 2011. New partners include Analytics8 in the US, COMSOFT in Germany, and Cogito Solutions [ph] in Hong Kong.

You can see from these initial results, we’re executing well in the business plan and growth strategy that we put in place last year. As we move forward each quarter, we focus on specific priorities within the strategy that will carry us to the next phase of our business transformation. We have three key priorities this current quarter. First, we will fill out the remaining high profile roles in our sales and marketing organizations. Second, we plan to aggressively expand our footprint within our customer base through targeted initiatives to up sell and increase the adoption of Monarch Report Analytics throughout these customer organizations. And third, we’re dedicated to further expanding our partner ecosystems with several new key partner alliances this quarter.

I am confident that our success in executing earnings priorities will put us in a very good position to deliver on our growth goals in the second half of the year. With regard to these goals, I know many of you would like us to start sharing guidance as to revenue and profitability, we heard as much when we presented at the Needham Growth Conference in New York two weeks ago. In response, I’ll tell you that we are closely evaluating the right time to begin sharing this information. The continued progression of our business transition will be critical consideration in the timing of this decision. That said we fully intend to begin a more active dialog with the investment community to foster better awareness of Datawatch, our unique report analytics solution, and the sizeable opportunity we see in the market.

In closing, I’m very pleased with our Q1 performance and the acceleration of the revenue growth we first saw late last year. We have great products to offer unbeatable ROI. We have passionate customers, we have a talented and energized employee base, and we are the leader in the exciting new area of report analytics. We are poised for further success and we intend to work hard to achieve the success.

With that, I will turn it over to Shea.

Question-and-Answer Session


Thank you. We’ll now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from Matthew Dodson from Edmunds White Partners.

Matthew Dodson – Edmunds White Partners

Can you talk just a little bit about the sequential growth that you had? Looking back over your results over the last couple of years, you’ve tended not to grow sequentially from September which is your fiscal year to the December quarter. I guess is there anything unusual this year then? What’s the normal seasonality coming out of the first quarter?

Michael Morrison

Matthew, so my sense is that looking historically at sequential growth is not going to be a good barometer going forward. We – in the past year we’ve had a major transition turnover in our go-to-market operations, in their sales operations, and marketing. I don’t think any of the historical reference points are going to be useful as we look forward. So I think by the results this past quarter are a representation of getting some people in territory. They’re still relatively new in the territory and starting to execute on this strategy. But I wouldn’t put any – put any faith in looking at the backward sequential growth numbers and trying to apply them going forward. We just don’t have any point of reference.


Thank you. (Operator Instructions). We do have a follow-up coming from Matthew Dodson.

Matthew Dodson – Edmunds White Partners

Can you also talk then or maybe help us understand the pipeline? Did you flush most of the pipeline in the quarter? Is the opportunity still robust? Another year in the midst of a kind of a transition in the geographies, but can you speak a little bit about that? And then can you also speak to kind of SG&A expenses and how we should look about them growing sequentially?

Michael Morrison

Sure. With regard to pipeline, we – when I came onboard about 11 months ago, we embarked on a fairly aggressive campaign to drive new programs and lead generation activities to develop the pipeline. That continues today. I think today our pipelines are better than they’ve ever been, and a quarter-ago I would have said the same thing. So we continue to develop our pipelines in this – in a macro sense. It’s fairly immature, but I would not in any sense characterize in those as being flushed. So we’re doing – we’re spending a fair amount of investments dollars on generating new interest, new needs that continues today. And you will see that in the SG&A line, it’s your – you want to talk to the SG&A line Murray or?

Murray Fish

SG&A line, the increases were primarily in additional headcount sales people and marketing expenses to drive revenue growth.


Thank you. Our next question comes from Frank Sparacino from First Analysis.

Frank Sparacino – First Analysis

Hi guys. Michael, I was just wondering if you could comment on the two deals, Logica and then the ECM deal from a sales cycle competitive standpoint, anything noteworthy to point out in terms of who they were evaluating and how quickly those deals came to fruition?

Michael Morrison

So on the Logica transition – transaction, that sales cycle in the grand scheme of things was actually quite brief. It was probably a 60-day sales cycle and there wasn’t any competition for it, which is – when we get into our report analytics offering and – in this particular case, the sales cycle had to deal with an existing content management system or report archive system where Logica was looking for a solution to be able to extract some value out of the reports and business documents that restored in that system. There was just not much in the way of competition out there. So it was just us, it was a – as I said a fairly quick sales cycle being 60 days. And I – as I mentioned in the prepared comment, I’ve got a lot of – I think there is a lot of potential in that relationship as we move forward.

With regard to Navy Federal Credit Union, as I noted, they’re an existing customer, so really there was no competition there either, it was just expanding into other areas of their business. And the nice part about that transaction was our taking the time and putting the energy into teaching to the customer about the other applications of our technology and where they can apply to their business and get value. And our guide that was working at that particular territory did a great job, cultivating those relationships, getting in front of them, sharing with them the possibilities, and that was again a fairly quick sales cycle. After that it was probably a 60-day sales cycle. Out of the norm, but.


Thank you. (Operator Instructions). There is a follow-up question coming from Matthew Dodson.

Matthew Dodson – Edmunds White Partners

I’m sorry, but relative to the question on SG&A, your SG&A was $2.8 million basically this quarter, and I’m sure some of that was commission dates, because you had those big deals. But how should we think about kind of SG&A dollars going sequentially? Can you give us any kind of insight?

Michael Morrison

So Matthew, it’s Michael Morrison here. We are closed to having filled out the complement of our sales and marketing personnel for the year. So there will be some incremental people costs in the coming quarters, but relatively speaking not a significant amount. We are going to continue on the marketing side to spend in order to increase our visibility on the marketplace to generate lead. I would not expect the same kind of significant ramp ups that we’ve seen in the last year-over-year numbers. Obviously the commission, you know with the commissions that’s always going to be driven by for the revenue side of the –

Matthew Dodson – Edmunds White Partners

So I mean is it – I mean do the sales go to kind of $3 million and top out depending upon where sales go, or can you give us any kind of insight, or is there – or you’re just not talking about that yet?

Michael Morrison

We’re not talking about it, but just at a general level there is – I have mentioned this before, I see, we see a very large opportunity for Datawatch in this report analytics space, and we are not going to short change ourselves by attempting on the investment dollars, we’re going to be very disciplined about it. But where we see the opportunities we’re going to take further advantage of them.

Matthew Dodson – Edmunds White Partners

Got it. And then the other question I have for you relative to the license, I mean the incremental margin you had on the license was phenomenal, right? I mean, basically your software sales were doubled and your cost of license only went up by what $300,000 or something like that? So help me understand. I mean is that the kind of leverage that’s in model if you were able to drive software sales even higher, is it that kind of incremental dollar that flows through?

Michael Morrison

It partly depends on the mix of the product that’s being sold. There is some product that hasn’t higher cost of sales and other. So it’s going to be partly driven by the elements of our platform that are being sold from quarter-to-quarter.

Matthew Dodson – Edmunds White Partners

Okay. And then on the engineering and product development, do you need to increase that much or do you feel pretty good about the products right now, or can that dollar amount stay relatively stable?

Michael Morrison

I’ve noted it in the past that our – product is the least of our worries with our – it’s never good enough, right? You always want to improve. But we’re quite comfortable with the products and there is a lot of innovation that we can continue to deliver with the current investments that we have gotten products. So that’s what we intend to do. We don’t – so we don’t see any need to materially increase that in the future, although we are targeting our investment to the opportunities that we see out in the marketplace.


Thank you. At this time, we have no further questions.

Michael Morrison

Thanks Shea. Thank you all for your interest in Datawatch. If you are not yet aware, we recently announced that we’ve revised our Worldwide User Conference which will be the first one since 2008, will take place at the M Resort in Las Vegas, May 6th through 8th, and it will be great to see you all there. So thank you for listening and we’ll talk to you after Q2.


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

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