Datawatch's (DWCH) CEO Michael Morrison on Q3 2016 Results - Earnings Call Transcript

| About: Datawatch Corporation (DWCH)

Datawatch Corporation (NASDAQ:DWCH)

Q3 2016 Earnings Conference Call

July 21, 2016 8:30 AM ET

Executives

Sanjay Mistry - Vice President of Finance & Controller

James Eliason - Chief Financial Officer and Treasurer

Michael Morrison - President and Chief Executive Officer

Analysts

Joe Fadgen - Craig-Hallum Capital Group LLC

Ilya Grozovsky - National Securities Corporation

Operator

Greetings, and welcome to the Datawatch Corporation Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Sanjay Mistry, Vice President of Finance and Controller. Thank you, sir. You may begin.

Sanjay Mistry

Thank you, Donna. Good morning, everyone, and thank you for joining us today to discuss Datawatch’s Q3 2016 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 Q3 2016 results was issued yesterday afternoon at 4 PM and is posted on our website. 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 website, 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, July 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 quarters ended December 30, 2015 and March 31, 2016, as well as other publicly available documents filed with the SEC. Any forward-looking statements 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 Datawatch’s Chief Financial Officer, Jim Eliason.

James Eliason

Thanks, Sanjay. Good morning, everyone, and welcome to our Q3 FY 2016 earnings call. As you can see from our press release last evening, although our reported revenues for the third fiscal quarter of 2016 were down slightly versus the prior year quarter.

Our subscription business continues to trend very positively with over 1 million of subscription license bookings in the quarter. The adoption of our Monarch Complete data preparation software offerings continues to build momentum in the market, with both net new customers as well as within our existing customer base.

With that, let me briefly share some of the financial results from the just completed quarter. Q3 total revenue was $7.4 million, down from the prior year third quarter when total revenues were $7.8 million.

License revenue for Q3 FY 2016 was $3.7 million versus $4.1 million in Q3 of the previous year. Maintenance revenue for the just completed quarter was $3.3 million, essentially flat with the prior year quarter. Services revenue of approximately $370,000, was up slightly from Q3 FY 2015 when it was $350,000.

As I mentioned in my opening comments, we continue to see excellent traction with our license subscription model with over $1 million of growth bookings during the quarter, up almost 40% sequentially, an increase of over 110% year-over-year.

Monarch Complete is the primary driver for this growth with 228 net new LAN customers during Q3 FY 2016 and approximately 600 customers and thousands of users since the initial launch of this product just over 12 months ago.

Our non-GAAP loss for the third fiscal quarter of 2016 was $2.9 million versus $2.1 million in Q3 of FY 2015. Our non-GAAP operating expenses came in at $10.3 million, up slightly from Q3 FY 2015 when they were $9.9 million.

I would like to point out that included in our Q3 2016 non-GAAP expenses is approximately $400,000 of costs related to the contested election of directors at the 2016 Annual Shareholders Meeting in April 2016, as well as another $270,000 of costs related to VP of Sales transition that happened in the quarter. Thus, our normalized non-GAAP expense run rate was roughly $9.4 million as we exited Q3.

We will continue to be mindful of our spending levels moving forward and expect that overall spending will decline to low $9 million range, where they have typically been over the past 12 months.

On the balance sheet, our cash position remains strong, as we ended the quarter with approximately $29 million of cash on hand. Accounts receivables remain in great shape in terms of quality with roughly 83% of our outstanding receivables in the current aging category. DSOs were 59 days for the most recent quarter versus 73 days in Q3 FY 2015.

Deferred revenues were $8.9 million at the end of Q3 FY 2016, a largest balance in the history of the company and grew more than 20% or up some $1.6 million from the prior year quarter. License deferred revenues continue to drive this impressive growth, increasing almost 30% sequentially and nearly a 160% year-over-year.

For the fourth consecutive quarter, subscription bookings have grown significantly both sequentially in our year-over-year basis. In addition, during this past quarter, we’ve recognized over $700,000 of deferred license revenue from previous quarters. The total license subscription bookings over the past four quarters is now more than $3 million and continues to trend upwards.

Finally, during Q3 FY 2016, the company evaluated the realized ability of its deferred tax assets as it does every reporting period. Despite this analysis, we evaluate the profitability of each tax jurisdiction on a historic cumulativebasis, as well as a forward-looking basis.

At the conclusion of our analysis in the just reported quarter, the company decided that it was appropriate to establish a full valuation allowance against our Swedish deferred tax assets and recorded a non-cash expense of $1.8 million. As of the end of Q3 FY 2016, all the company’s deferred tax assets are 100% reserved for.

At this time, I would like to share some operating metrics from the just completed quarter. There were three six-figure license deals in the third fiscal quarter this year. The average deal size in Q3 FY 2016 was approximately $35,000 as compared to approximately $56,000 in Q3 FY 2015.

Our headcount at the end of Q3 FY 2016 was 150 people, up slightly from Q2 FY 2016, and a decrease from the prior year’s third quarter when it was 163 people. Included in the Q3 FY 2016, 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 June 30, 2016 were 11,860,000 and weighted average shares outstanding were 11,815,000.

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

Michael Morrison

Thank you, Jim, and good morning, everyone. Thanks for joining us to review our third quarter fiscal 2016 results. I want to first provide some perspective on Datawatch’s position in the self-service data preparation market.

As I noted last quarter, we like to say that we invented data preparation nearly 20 years ago. With the original release of Monarch, which over the years developed into a comprehensive offering to prepare and manage data from some of the most challenging sources and some of the most challenging formats.

With the emergence of the self-service market in the past couple of years, Datawatch sees the opportunity to reinvent our Monarch solution to address this rapidly emerging segment of the analytics market and to realize our vision, which is to enable organizations of all sizes to prepare, manage, analyze, and visualize any data in any format of any complexity rapidly here in real-time to support faster business insights and better decisions.

Our next generation Monarch self-service data prep offering was introduced just one year ago. And the reception thus far has been impressive. In the first year since the release of this offering, we signed up nearly 600 new customers. Only eight months after we released this new Monarch offering, Dresner Advisory Services, one of the premier advisory firms in the analytic space ranked us in the top three out of 30 data preparation vendors in the Wisdom of the Crowds End User Data Preparation survey.

And also in this first year after release, we were selected by IBM as their self-service data preparation offerings to complement both Watson Analytics and Cognos Analytics, as well as by Dell, as their self-service data preparation offerings to complement Dell’s Statistica. Extraordinary progress, impressive results for a product in its first year after initial release.

This next generation Monarch self-service data preparation offering, which embodies the 20-plus years of innovation of our heritage Monarch product is making ways in a rapidly emerging segment in the broader analytics market.

Datawatch has unique capability to acquire, prepare blended and rich data from multi-structured data formats, such as PDFs, documents, principal log files and Web pages, as well as from streaming real-time data sources, such as tick databases, sensors, Kafka, message buses and complex event processing engines, sets us apart from the competition.

In addition, we routinely received high marks for ease-of-use, intuitiveness, and simplicity. We are in the exciting place and time in the data preparation market and have a clear plan to exploit our technology and our customer advantages to grow revenue in the coming quarters as the market itself evolved.

We believe the competitive moat that our technology provides today and into the future with the release of our next-generation server architectures later this year, will serve us well as the data preparation market continued its rapid development in the next 12 to 24 months.

In our third fiscal quarter, we had a 228 new name customers, our Monarch self-service data preparation offering. These new self-service data preparation customers range from major global 2,000 companies, such as Delta, Honda, Comcast and Kemet to small and medium-sized businesses, such as Mueller Industries, Dana-Farber Cancer Institute and Saint-Gobain.

We also upgraded over 100 heritage Monarch customers to our next-generation offering. Including one of the Big Four public accounting firms, which quickly build the compelling ROI and upgraded thousands of heritage Monarch customers or users, while also extending use of this next-generation solution to thousands of additional users.

Our expense of customer base of heritage Monarch users represents an enormous selling opportunity. We estimate that well over half of these customers are candidates to upgrade to our next-generation offering and simultaneously increase the number of users we are actively and aggressively targeting this market.

Meanwhile, we continue to expand the land deals from previous quarters, including the sales to Magna, Tyco, and City National Bank for expands in this past quarter. The land and expand strategy for our Monarch self-service data preparation solution, it’s clearly working. We are continuing exploring ways of fine tune our processes in order to maximize sale results in the coming quarters and years.

Our go-to-market strategy for self-service data preparation also involved the targeting of partner ecosystems and the leading analytic vendors, such as IBM, Tableau, Qlik and Microsoft. We have a partner first mindset and our agnostic approach of this market, our cost effectiveness and our simplicity and ease-of-use make Datawatch an excellent complement to all of these leading analytic offerings.

In the third quarter, we on-boarded number of new resellers in the Tableau and IBM partner ecosystems, which will undoubtedly help us accelerate the broad-based adoption of Monarch all around the world, including in the Asia-Pac region and as we mentioned in our earnings release yesterday.

It’s clear to me that the self-service data preparation market is rapidly evolving, even though it remain somewhat early days at the moment. And I know it will be a highly covenant faced by large players in the market. Datawatch has the most experience in this exciting segment in the analytics markets. We have a unique understanding of how to leverage our technology and our customer assets across the broad spectrum in the market.

Our technology is an important competitive differentiator for us in the market. During the third fiscal quarter, we continued our rapid pace of innovation with the April release of Monarch for self-service data preparation, which includes extended data governance capabilities, machine learning for fuzzy logic, advanced calculations and support for large data sets.

In the May release of Panopticon for fast data preparation and analysis, which includes improved connectivity with time-series databases and improved fast data analytics for intra-day and historic time-series datasets.

Datawatch prides itself in having more experienced than any other vendor in the market when it comes to acquiring, repairing, and managing data from the widest variety of data sources and formats, including structured multi-structured and real-time streaming. This experience dealing with the most challenging datasets coupled with our agile development approach, allows us not just to maintain, but to expand our technology advantages in this rapidly emerging market.

And later this year, we will introduce the next-generation upgrades of our server platforms with Monarch focused on the social aspects of data sharing in collaboration, as well as a Deploy Anywhere architecture. And Panopticon focused on intelligent preparation and delivery of streaming real-time data and further support for Big Data technologies, such as Kafka, Spark, and Cassandra.

Before I turn the call over to the operator, I want to say a few words about our announce that yesterday that the company is evaluating strategic alternatives. A logic question for our shareholders is why we’re doing this now? I believe, we’re doing it from a position of strength. As I’ve said before, we believe we possess highly differentiated and valuable technology solutions for self-service data preparations and fast data analytics.

These technology sets address a rapidly emerging, a potentially very large and critical market as organizations face the challenges of accessing and analyzing and acting upon their data in whatever form and at whatever speed that’s available. Our customer base is enviable, thousands of organizations of all sizes around the globe. We are recognized as an innovator and market leader with the most experienced extracting value from the most challenging data sets that our customers can handle.

How we manage these assets to create long-term value for our shareholders deserves to be evaluated, and that’s why we’re embarking on the process we outlined in the press release yesterday. At the same time, we’re continuing to execute on our business strategy, which we believe is absolutely the right one. And a 100% of our efforts in energy are dedicated to increasing sales of our data preparation and fast data analytics solutions and extending the innovation lead in this fast-moving market.

That said, we’re mindful that we are operating within the market segment that had seen a marked increase in transactional activity in the recent months. And while we are not responding to any specific expression of interest, we believe it’s important to assess a ranges of strategic alternatives that might create higher value for our shareholders.

As we noted in the press release, we do not plan to issue any updates on this process or comment on any specifics going forward. I didn’t want to share my thoughts about it with you this morning.

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

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. [Operator Instructions]. Our first question is coming from Joe Fadgen of Craig-Hallum. Please proceed with your question.

Joe Fadgen

Hey, guys. On here for Chad today. Thanks for taking the question. First one around the cost cuts that you talked about, and I think you mentioned that were going to try to get the OpEx down to about a $9 million run rate. I guess, the two questions are then, where are those cuts primarily going to come out of? Is that sales and marketing, G&A or R&D?

And then, if you get there, if you get to the $9 million run rate, what’s kind of the revenue level that you need to get to operate cash flow break-even?

James Eliason

Hey, Joe, it’s Jim. First of all to be clear, we’re not cutting price. I think what we’ve always done, we’re going to be very judicious as we go through the quarter. We’ve got a very disciplined forecasting process on the expense side. And, for example, in terms of backfill, as you always have in the quarter, we’ll probably look at those closely. And the way I’d frame it is, if it’s going to impact near-term revenue, we’re going to backfill that as long-term, we may pause it for a couple of months.

So that’s primarily how we’ll look at that as long as well as pairing back a little bit of the marketing program’s spend in the quarter. So I think that answers your question. So the costs are higher than they have been for a multitude of reasons that they went over on the calls in the past quarter. We really want to manage the business to low 9.

To your second question, when we get them back down there, as I’ve always said, it’s somewhere in the $9.5 million range is break-even at that expense level.

Joe Fadgen

Okay. I guess and from our revenue perspective or maybe just license revenue, what was the partner contribution in the quarter? And I guess how steady has that been over the past few quarters?

James Eliason

Again, it’s been a low. It’s been in that high single-digit, low double-digits as a percentage of license revenue. This quarter, in particular, I mean a lot of focuses has been on the IBM relationship, which is just getting started, there’s good traction there, but it’s early days.

Joe Fadgen

Okay. And then last one for me, the large deal pipeline, I guess, where is that today versus maybe a few quarters ago? And if you can just give me an idea of, on a larger deal, how long do those typically take to kind of work through the pipe, either on average or I don’t know, maybe it’s a pretty wide range, but just any color there?

Michael Morrison

Joe, this is Michael. This quarter was a down quarter on the large deal front as you can tell from the stats that Jim shared. Coming into the quarter, the large deal pipeline looked like the large deal pipeline from the previous two years quarters.

The good news – bad news, the deals that didn’t happen, none of them were lost to a competitor. They all slipped for a variety of reasons. A couple of them have already come in. So it was, at least, for us out of the ordinary the level of performance this quarter.

And in terms of the timing of them, some of them do take a long time. We had – I alluded to one of our upgrades to the new self-service offering to this Big Four firm, who has been a longtime customer of ours, very happy customer, thousands of users in that. That process took well over a year. That said, we have a couple of deals that closed in 90, 120 days.

I think on average, I would look at our business very much like I would look at a business on the traditional analytics player like a Tableau, or a Qlik, or an IBM or an SAP that those types of deals usually take 90 to 180 days to form up and close.

Joe Fadgen

Okay. That will be all for me, for now. Thank you.

James Eliason

Okay. Thanks, Joe.

Operator

Thank you. Our next question is coming from Ilya Grozovsky of National Securities. Please proceed with your question.

Ilya Grozovsky

Thanks, guys. Can you elaborate a little bit on the IBM relationship and kind of what types of deals are you seeing forming in that pipeline?

Michael Morrison

So, Ilya, it’s Michael here. So we announced a quarter ago that we entered into this partnership. I mentioned earlier that it moved – it actually moved quite quickly, but it wasn’t until the middle of May that that our products actually got on the internal IBM pricelist where it’s now available for IBM sellers and partners to resell.

So between the middle of May and the end of the quarter, six weeks, we developed what I consider to be a very, very healthy pipeline. And we’re still in the early phases of getting the word out, building awareness, enabling IBM sellers, pre-salespeople, the partners, network, but building what amounts to be a better than seven-figure pipeline in six weeks is quite promising in my view.

The nature of the transaction, I mean, there is a – IBM has got a great product with IBM Watson Analytics, their cognitive solution, which still arguably is the next-generation beyond the current data discovery solutions out there with Tableau and Qlik and the other ones. We’re partnered there as a – as one of their data preparation offering.

So there’s – a bunch of the pipeline is around that. But there’s also pipeline, which doesn’t surprise me, but pipeline around the heritage Cognos traditional BI offering and being able to prepare to prepare difference, multi-structured data sets and other types of data to get it into a Cognos environment, extends the value of organization’ investment in that technology.

So we’ve seen a good amount of both of those types of sales cycle or pipeline builds. And then there is a third category, which is an IBM, there’s is a whole bunch of things. But their businesses – their system integration business, business process outsourcing business, where our Monarch platform is a great enabler to access and transform and prepare data to bring it into an environment to make it much more cost effective. There is some pipeline building around there.

So we’re – look, to its early days. We’re very excited about the opportunity that the engagement on both sides, I think, is excellent. We’ve got a lot of work to do. They’ve got a lot of work to do. There’s a lot of promise, but time will tell how that all plays out.

Ilya Grozovsky

Okay, thanks.

Operator

Thank you. At this time, I would like to turn the floor back over to Mr. Morrison for any additional or closing comments.

Michael Morrison

Thanks, Donna, and thanks again for joining us this morning. As always, if there’s any follow-on questions after the call, please feel free to reach out. We are also scheduled to present at the Canaccord Technology Conference in Boston in early August, August 10 to 11. So if you’re attending, we’d be happy to chat with you at that point.

So with that, thank you, Donna. Thank you everyone for taking the time.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today’s teleconference. You may disconnect your lines at this time and have a wonderful day.

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