Datawatch Corporation's (DWCH) CEO Michael Morrison on Q2 2016 Results - Earnings Call Transcript

| About: Datawatch Corporation (DWCH)

Start Time: 08:30

End Time: 09:04

Datawatch Corporation (NASDAQ:DWCH)

Q2 2016 Earnings Conference Call

April 21, 2016, 08:30 AM ET

Executives

Michael Morrison - President and CEO

Jim Eliason - CFO

Sanjay Mistry - Vice President, Controller

Analysts

DJ Hynes - Canaccord Genuity

Ilya Grozovsky - National Securities

Operator

Greetings, and welcome to the Datawatch Corporation Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

I will now like to turn the conference over to your host, Sanjay Mistry, Vice President, Controller for Datawatch Corporation. Thank you. You may begin.

Sanjay Mistry

Thank you, Melissa. Good morning, everyone, and thank you for joining us today to discuss Datawatch’s Q2 '16 financial results.

With me on the call this morning are Datawatch’s Chief Executive Officer, Michael Morrison; and Chief Financial Officer, Jim Eliason.

Our press release containing our Q2 '16 results was issued yesterday afternoon at 4 PM and is posted on our Web site. You can also request a copy by emailing us at investor@datawatch.com.

This call is being broadcast live via webcast and following the call, an audio replay will be available in Investor Relations section of our Web site, www.datawatch.com. Following the prepared remarks, we will open the call for questions. The operator will provide instructions at that time.

Before we begin, I’d like to remind you that any statements we make today 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 accurate as of today, April 21, 2016 and are subject to a number of risks and uncertainties that could cause the actual results to differ materially from current expectations. We undertake no obligation to update any forward-looking statements.

For more information, I refer you to the descriptions of these risk factors found in our earnings release along with the company’s Annual Report on Form 10-K for the year ended September 30, 2015 and in Form 10-Q for the quarter ended December 31, 2015, as well as other publicly available documents filed with the SEC. Any forward-looking statement should be considered in light of those factors.

I would also like to remind you that to supplement our financial results prepared in accordance with generally accepted accounting principles, we will from time to time discuss certain non-GAAP financial measures that we believe are helpful in understanding our financial performance and future results.

A reconciliation of our GAAP and non-GAAP financial results is contained in the press release issued yesterday and is also available in our filings with the SEC. Our non-GAAP financial measures are not meant to be considered in isolation nor as a substitute for comparable GAAP measures and should be considered in conjunction with our consolidated financial statements prepared in accordance with GAAP.

With that, it is my pleasure to turn the call over to Jim.

Jim Eliason

Thanks, Sanjay. Good morning, everyone, and welcome to our Q2 FY '16 earnings call. As you can see from our press release last evening, although our reported revenues are essentially flat versus the prior year quarter, the traction in the business is trending very positively when you factor in the impact of our Q3 license subscription model back in mid FY '15.

As you may recall, beginning in Q3 2015, Datawatch changed its pricing policy for Monarch transacting all small volume orders on a subscription-only basis rather than a perpetual license model. The total value over the life of the subscription is recorded as bookings but only a portion of the annual subscription fee earned in the quarter sold is recognized as revenue in that quarter.

The balance is recorded as deferred revenue on our balance sheet and recognized as revenue over the life of the subscription. This has a somewhat negative impact in the current quarter’s recorded revenue but appears to build up our deferred revenue down which becomes predictable revenue in future periods.

I would also like to point out that our subscription offerings include maintenance in the price, so increased subscriptions may have been somewhat negative impact on our maintenance revenue moving forward.

With that, let me briefly share some of the financial results from the just completed quarter.

Q2 total revenue was 7.4 million, essentially flat with the prior year quarter. License revenue for Q2 FY '16 was 3.6 million versus 3.9 million in Q2 of the previous year. Maintenance revenue for the just completed quarter was 3.5 million, up some 200,000 from the prior year quarter. Services revenue of approximately $300,000 was up slightly from Q2 FY '15 when it was $255,000.

As I mentioned in my opening comments, we continue to see very good traction with our license subscription model with more than $800,000 of growth bookings in the quarter, up almost 20% sequentially and over 500% year-over-year. Driving this predictable revenue growth of our business is the traction we are experiencing in our recently launched Monarch Complete data preparation offerings with 178 net new land customers during Q2 '16 and over 350 customers and more than 1,000 users since the initial launch of this product back in Q4 FY '15. We’re pleased to share that during this past quarter, we started to see some of the initial expand deals materialize from the land deals of prior quarters. We are very encouraged by the results we’ve seen so far.

Our non-GAAP loss for the second fiscal quarter of 2016 was 1.6 million versus 3.3 million in Q2 of FY '15 demonstrating solid expense control. Our non-GAAP expenses came in at 9.2 million, down significantly from Q2 FY '15 when they were 10.7 million. For the fourth consecutive quarter, we purposely maintained our expense base in the mid $9 million range and we will continue to do so while also shipping investments across the organization as opportunities warrant and our business model continues to evolve throughout the year.

On the balance sheet, our cash position remains strong as we ended the quarter with approximately 31.5 million of cash on hand. Accounts receivables are at an all-time level in terms of quality with roughly 88% of our outstanding receivables in the current aging category. DSOs are 63 days for the most recent quarter versus 69 days in Q2 FY '15.

Deferred revenues grew by more than 25% or up some 1.8 million from the prior year quarter. License deferred revenues are driving this impressive growth increasing more than 20% sequentially and nearly 300% year-over-year.

For the fourth consecutive quarter, subscription bookings have grown significantly both sequentially and year-over-year basis. In addition, during this past quarter, we recognized over $500,000 of deferred license revenue from previous quarters. The total license subscription bookings over the past four quarters is now more than 2.5 million and continues to track and scale positively.

At this time, I would like to share some operating metrics from the just completed quarter.

There were seven six-figure license deals in the second fiscal quarter this year, which is more than double the number of such deals in the prior year quarter, we had only three. Also the aggregate dollar value of the six-figure deals in Q2 FY '16 is approximately 55% higher than the deals in Q2 FY '15. The average deal size in Q2 FY '16 was approximately $45,000 as compared to approximately 30,000 in both Q1 FY '16 and Q2 FY '15.

Our headcount at the end of Q2 FY '16 was 147 people, down slightly from Q1 FY '16 and a decrease from the prior year second quarter when it was 157 people. Included in the Q2 headcount numbers are 21 quota carrying sales people, of which nine are inside sales reps and 12 are outside sales reps. Lastly, our total shares outstanding as of March 31, 2016 were 11,753,000 and weighted average shares outstanding were 11,669,000.

In closing, we are encouraged by the continued momentum we are seeing from our switch to a subscription-based license model as well as the launch and continued innovation of our Monarch Complete data preparation product offerings in this exciting and emerging market. We continue to be highly focused on further implementing targeted initiatives to build sustainable revenue growth as well as prudent expense management, both in order to achieve a cash breakeven business model.

With that, I would now like to turn the call over to our President and CEO, Michael Morrison.

Michael Morrison

Thanks, Jim. Good morning, everyone, and thanks for joining us to review our second quarter fiscal 2016 results. We’re pleased to report that this past fiscal quarter we continued to make meaningful progress toward establishing ourselves as a leading vendor in self-service data preparation, a technology category that Gartner Group refers to as the next big market disruption.

I want to provide further details on our early success in this rapidly developing space in three specific areas; sales, market and product. On the sales front, we added 178 new name customers for our Monarch self-service data preparation offering during the quarter for a total of over 300 in the first half of our fiscal 2016 alone. This is more customers than many of the other self-service data preparation vendors have accumulated in their entire history.

These new self-service data prep customers range from major Fortune 500 companies such as Wells Fargo, Bank of America and Exxon Mobile to small and medium-sized businesses such as [indiscernible] and Children’s Hospital of Alabama. These new name self-service data prep customers expand the globe with recognized brands such as Geico and Capital One in North America, Bank of Australia and Kroll Singapore in Asia-Pac and AstraZeneca and Iberiabank in Europe. We also saw the expected early momentum expanding prior land deals with organizations such as the U.S. Marine Corps, KPMG and Arrow Electronics.

Finally, we signed up several resellers in the Tableau, IBM and Qlik partner ecosystem to accelerate our broad-based distribution approach to the market. Our Monarch offering for self-service data preparation has only been in the market for three quarters and the rapid pace of adoption in these early days is a testament to the innovation pack inside of this solution as well as the unparalleled differentiation around our capacity to transform nearly any format and source of data, including multi-structured and unstructured data format.

With regard to the market for self-service data preparation, we believe it is developing rapidly and attracting the attention of analysts, partners, tradecrafts and vendors alike. I’d almost say that the interest in this emerging area of the analytics space is at a fever pitch. At the recent Gartner Business Intelligence & Analytics Summit in Texas, the session on self-service data preparation was one of the most highly attended of all of their breakout sessions.

Further, Gartner advised us after the conference that the Datawatch presentation was the fourth highest attended of all the vendor breakout sessions far surpassed any attendance for many presentations by analytic vendors that are multiple times our size. In addition, funding continues to pour into the data preparation space and it is not secret that all the major analytic spenders and mega vendors are scurrying to develop data preparation strategies and offerings.

During the quarter, we jointly announced with IBM that IBM had selected our Monarch self-service data preparation offering to resell with IBM Watson Analytics and IBM Cognos Analytics. This is a critically important development we believe as IBM has been quite explicit about its investment in its Watson franchise as a key avenue for their growth. IBM is ranked as the third largest analytic vendor worldwide and this new relationship has already opened up opportunities for Datawatch to solve a variety of data challenges for IBM customers.

I view IBM’s decision to resell Datawatch’s solution first and foremost as a strong validation of the self-service data preparation market in general. Analytics, Cognos and vendors realize that they must address the data preparation challenges for their users in order to accelerate broad adoption of their own self-service analytic offerings. IBM’s decision to resell Datawatch is also obviously an important validation of Datawatch as a trusted partner and our Monarch technology has the premier self-service data preparation solution in the market. There are other alternatives available and we are extremely pleased that IBM has placed its faith in our highly differentiated product offering to complement its award-winning Watson Analytics cognitive solution.

Speaking of our products, we continue our rapid pace of innovation releasing another quarterly update on the last day of our second fiscal quarter. As I mentioned earlier, our Monarch self-service data preparation solution has only been in the market for nine months. But don’t be fooled by what appears to be very young technology. We here at Datawatch like to say that we invented self-service data preparation. Nearly 20 years ago, our Monarch product was introduced to solve one of the most vexing data challenges at the time unlocking mainframe principle data so that it could be used for analytic tasks. Over the years, as the types and formats of DART data increased, Monarch continued to meet the hardest data challenges in our core mission, never waiver, to enable ordinary business users to achieve extraordinary results with any data.

With the arrival of new self-service analytics tools designed for these business users, the need for a complementary self-service data preparation solution is a critical must-have. Datawatch has more experience than anyone in meeting customer needs in this rapidly evolving market. We have taken our years of experience and our years of innovation around data preparation and brought them to bear on our new product offering. This is why we were able to innovate and bring the product to market at a speed and quality level that would otherwise appear to be implausible. It’s our unmatched experience, our extensive customer base, our customer interactions and our agile development approach that gives us the sizable technology advantage in this fast-moving self-service data preparation space.

Turning briefly to our real-time visualization business, last quarter we further focused our visualization resources on specific areas where we have the most success. Visual analytics and visual anomaly detection opportunities, primarily in capital markets and for Internet of Things used cases. We had good early success with this approach. During the quarter, two major global investment firms; HSBC and Standard Chartered became the most recent tier 1 banks to adopt Datawatch to satisfy their real-time visualization needs. Euronext, a leading pan-European marketplace also signed up to use Datawatch’s visualization technology for portfolio analytics. And NetOTC with its solution designed for reduced risk and help financial institutions implement regulations for OTC derivatives agreed to embed Datawatch visualizations in its technology platform.

While it is clear that the pace of commoditization in the broader market for visualization solutions is picking up, the segment in the visualization market where we have been successful is seeing no signs of commoditizing. In these situations we typically compete against the build-it-yourself alternative. In the rare instances where we compete against a commercial vendor for real-time visualization, we do not lose. We will remain focused on the real-time segment of the visualization market and we will leverage our visualization successes with the largest global investment banks to promote new opportunities for our self-service data preparation solutions in these firms.

Looking forward to the second half of our fiscal year, we are laser-focused on the self-service data preparation market with the goal of establishing Monarch as the de facto standard data preparation solution for self-service analytic tools. We are embracing all of the leading self-service analytics vendors and working tirelessly to enable their field organizations and their partner ecosystems to broadly position Datawatch for near and longer term growth in this exciting market.

With that, Melissa, let’s open the line for questions.

Question-and-Answer Session

Operator

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Richard Davis with Canaccord. Please proceed with your question.

DJ Hynes

Hi. Thanks, guys. It’s DJ on the line for Richard. So I wanted to ask about what you’re seeing with the transition subscription with Monarch. Our understanding was this was kind of happening at the very low end of the market and now we kind of are attributing more revenue performance to the transition. So are you guys aggressively kind of moving up to larger deals on a subscription basis or how are you thinking about kind of evolving that go-to-market strategy? And I guess what are the implications on kind of maintenance retention and that sort of stuff?

Jim Eliason

Yes, so DJ it’s Jim. We can say – so we tried out if you remember a year ago just the Monarch Classic [indiscernible]. But when we went to market with our new data prep product in July of last year, we do sell it both ways. If someone buys more than 10 copies as you would expect with the land kind of deal, those deals are typically under 10c. So primarily most of those deals are subscription. So yes, we are pushing it. But again, we’ll sell it both ways in certain instances. And then to our point on the maintenance, I don’t know if it’s going to have a material impact. I got to believe that if it continues to grow like it, it will. And what’s really happening, as you know, it’s just shifting what would be a maintenance revenue stream up into the license subscription.

DJ Hynes

Okay. And then maybe if you can give any color on what’s going on with sales leadership. I mean you guys posted an 8-K out that said that Jon is leaving the firm. Any color on what’s behind that, what’s the plan going forward, any implications on kind of structural changes to the sales force? That sort of stuff would be helpful.

Michael Morrison

DJ, this is Michael. We mutually agree with Jon a short while back that it was time to move on. Today, I’m – this is a bit back to the future. I am running the worldwide sales organization. That’s not the long-term answer but it is very much like we operated prior to Jon’s arrival here as we were building the business where we’re organized geographically, we got North America, EMEA and Asia-Pac operation. They all roll into me right now. I see very little as to any disruption this quarter and next quarter. In fact as you would imagine with the CEO one level down, a more intense focus on deals in the here and now. But ultimately we will build in some sales infrastructure. My message today would be that there is little if any disruption for the immediate term.

DJ Hynes

Got it. And then one last one if I could. Just the IBM partnership, I think you guys had been on their sales list and working with IBM for some time, I guess. This is an expansion on the data prep side to work with Watson. Just let me understand what exactly is different about your firm’s kind of go-to-market partnership now with what was announced in Q2 versus kind of what we had before and what that means maybe for productivity out of that channel?

Michael Morrison

The heritage relationship with IBM, which we’ve built around their content management business, it was our Report Mining Server product in their content management business. It came into being two or three years ago. It continues to move along. In fact, one of the deals we did this quarter was with Citigroup in Singapore through IBM as part of that relationship. It was one of our six-figure deals. So that continues to move along. This new relationship and it’s not an extension of the exciting relationship, it is in fact a new relationship, is very different. It really centers around their Watson Analytics and Cognos Analytics business and it is data prep for those business analytic users. So the relationship as you know which was announced a couple of months ago, it in the formative stages literally it’s still not in their price bucket; will be there next month. But there’s a lot of work that’s been going on in the last 60 days in preparing for this that we’ve enabled almost 1,600 of their presales team in this broader group that got access to a special landing page [ph] on our sites to get valuation licenses and e-learning. We were out at their offices a couple of weeks ago enabling 300 of their sales reps. Even though we’re not on the price list yet, we’ve closed the deal just coming out of the announcement, long-time IBM Cognos customer who had a vexing problem for years and years around getting multi-structured data at actually one of their more famous, if you will, reference sites who signed up and bought our Monarch technology. As we get into the market, there’s a lot of work to do around the enablement process and getting word out worldwide. IBM has been great through the entire process and very aggressive in nurturing the relationship, which gets back to one of the points I made in my prepared comments, which is first and foremost this is a validation of the data prep market. IBM itself has a very good data prep solution. It’s different from ours. So clearly IBM looked at that, knows where their data prep solution plays, understands where we complement that. They also as you would imagine looked at the broader data preparation market and all the alternatives out there and selected us. So the true points [ph] are to come but all of the early signs are very positive. The amount of energy throughout our sales organization and theirs is quite high and there’s active cycles as we speak. Like I said, there’s already been a deal done on our paper but there’s a lot of active cycles underway even in the anticipation of this getting formalized within IBM proper.

DJ Hynes

Yes, great. That’s helpful and it sounds promising. I’ll pass the line. Thank you for your time.

Michael Morrison

Thanks.

Operator

Thank you. Our next question comes from the line of Ilya Grozovsky with National Securities. Please proceed with your question.

Ilya Grozovsky

Thanks, guys. So I have two questions. One was if you could sort of – you’ve obviously given a lot of color here on what’s going on at IBM. If you could bring us up to speed and update us on the other partnerships you guys have which a lot of them seem very promising? And then I’ll take the second part after that.

Michael Morrison

Ilya, it’s Mike Morrison. The other one that we talked about to a degree recently is around Dell, and just to bring others up to speed. So a year or so ago, Dell signed an agreement to OEM our visualization technology with their advanced analytics solution called Statistica. As part of their offering also when they sell Statistica going forward, our visualization is part of that, there’s [indiscernible] business. There was business this past quarter. There’s a good pipeline there. The interesting tag along to that is in the last four or five months, Dell had seen a need to complement their Statistica offering not just with visualization but also with data preparation capability. So we are in the process of white labeling our data preparation solution for Statistica so that they can have a bundled offering where they’ll be able to do data preparation to their advanced analytic offering and then visualize it through our solution. It’s exciting for the Dell relationship specifically but I think it’s more important for us on a broader level, which is this is where the market is going. Whether you’re a self-service analytic player like a Tableau or Qlik or a Watson or even Excel, you see the need to incorporate data preparation capabilities into the offering. And some players are trying to build out more capabilities themselves. We are trying to get into the market aggressively as the de facto standard to support all of those – whether you’re an analytic offering or an advanced analytic offering like Statistica or [indiscernible] or SPSS or SAS. The other happening with Dell, which is potentially more exciting in the longer term as you might know, Dell has recently made a big bet on the Internet of Things. It’s one of their large go-to-market initiative. We were recently announced especially part of their Internet of Things IoT program. We are integrated with their gateway. We’re being exhibited and presented around the globe as that visual solution for IoT applications and as I’ve mentioned before, so we’ve taken our visualization solution and really focus it on where we do well and that is capital markets where there are lot of real time and time series and complex visualization scenarios, also the Internet of Things which the hallmarks of that are screening sensor data and being able to visualize that and make decisions in real time. So the Dell IoT initiative is one that holds promise. I can’t predict where it will turn out and it’s early days for Dell itself and early days for our relationship, but it very much plays into our focus for our visualization solution and we’re excited about the momentum that we’ve built literally just in the last two, two and a half months with Dell around IoT.

Ilya Grozovsky

Okay, great. And can you just give a sense from a percentage of revenues all of these different partnerships that you guys have been working on for the past few years here, what percentage of the revenues does all of that kind of amount to?

Jim Eliason

So this past quarter, license revenues it’s 10% to 11% right now this past quarter. It’s still in that 10% to 12% range.

Ilya Grozovsky

Okay, 10 to 12, great. And then just from a housekeeping perspective, sales and marketing has been trending down pretty consistently for the past, I don’t know, six or eight quarters. This continues to go down or are you guys kind of at the bottom of what you can cut in sales and marketing and does it flatten out from here?

Jim Eliason

Like we said before, the overall goal is to get to cash breakeven, right, and you do that one of two ways; revenue growth and expense management. So like most software companies do, we are looking at the forecast every quarter going into the next quarter, looking at capacity and trying to balance that with the pipeline that we see. So there’s excess capacity still in the expense, but again I’ll maintain that we’re going to keep our expenses overall in the $9 million to $9.5 million range on a non-GAAP basis, which is what we’ve done in the last four quarters. And where we spend it is a dialogue we have throughout quarters and the year in terms of whether to sales and marketing or development.

Ilya Grozovsky

And do you guys think you get to the breakeven in the third or fourth quarter of this fiscal full year?

Michael Morrison

Ilya, we’ve talked during the course of the year, Jim and I, as we’ve been out at some of these investor conferences that the goal has always been to be at breakeven by the end of the year. That generally is still the target line. As you’re probably aware we’ve had this investor action in the last quarter or so, which has picked up. It put more expense in the business in the short term that was unanticipated, so that may play a role in it but we’re still on that pathway without the unusual expenses to get to around that number by the end of this fiscal year.

Ilya Grozovsky

Okay, great. Thanks, guys.

Michael Morrison

Thank you.

Operator

Thank you. Thank you, ladies and gentlemen. At this time, we’ve come to the end of our time for questions. I’d like to turn the floor back to Mr. Morrison for any final remarks.

Michael Morrison

Thanks, Melissa, and thanks again for joining us this morning. As always, if anybody on the line has follow-on questions, feel free to reach out. For those of you who are interested, we are participating in a panel discussion at the Cowen & Company TMT Conference in New York on June 1. So if you’re planning to come, would love to get together with you there. So thank you all for your time.

Operator

Thank you. This concludes today’s teleconference. Thank you for your participation. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!