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Datawatch Corporation (NASDAQ:DWCH)

F2Q12 Earnings Call

April 26, 2012, 4:30 p.m. ET

Executives

Dan Incropera – VP and Controller

Murray Fish – CFO and VP, Finance

Michael Morrison – President and CEO

Analysts

Steven Koffler – Con Brio Capital

Noah Steinberg – G2 Investment Partners

Operator

Greetings, and welcome to the Datawatch Corporation Second 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 of Datawatch Corporation. Thank you, Mr. Incropera, you may now begin.

Dan Incropera

Good afternoon, everyone. Thank you for joining us today for the Datawatch Corporation’s second 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 4:00 p.m. 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 for you this afternoon’s agenda. I will present our Safe Harbor statement, followed by Murray who will provide a summary of our second 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 in regards to 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 and 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 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, our quarterly report on 10-Q for the quarter ended December 31, 2011, and other publically 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 Murray for a discussion of our financial results.

Murray Fish

Thank you, Dan. Good afternoon. For those of you who may have not seen our results released earlier today, our total revenues for the second quarter of fiscal year 2012 were 6.55 million as compared to 4.45 million for the second quarter of fiscal year 2011.

Revenue increased 2.09 million, or 47% quarter over quarter. For the second quarter of fiscal year 2012, revenues from licenses were 4.27 million as compared to 2.55 million for the second quarter of fiscal year 2011.

For the second quarter of fiscal year 2012, revenues from Maintenance were 1.86 million as compared to 1.5 million for the second quarter of fiscal year 2011.

In the second quarter of fiscal year 2012, revenues from services were 0.41 million as compared to 0.40 million for the second quarter of fiscal year 2011. The net income for the second quarter fiscal year 2012 was 160,000, or $0.02 per diluted share as compared to a net loss of 511,000 or negative $0.09 per diluted share for the second quarter of fiscal year 2011.

Net income for the second quarter of fiscal year 2012 was negatively impacted by a $126,000 charge related to conversion of our Worldwide User Conference scheduled for next month [inaudible] scheduled around the world, and a currency loss of 123,000 as we were required to repay trade funds to the U.S. from our UK subsidiary to conform to certain restrictions in our financing facility related to the intellectual property purchase on which I’ll provide more details momentarily.

Net income for the second quarter of fiscal year 2011 was negatively impacted by severance costs related to construction of sales and marketing operations of 641,000 or $0.11 per diluted share.

For the six months, our total revenues ending March 31, 2012, were 12.82 million as compared to 8.63 million for the six months ending March 31, 2011. Revenue increased by 4.18 million, or 49% year over year.

For the six months ended March 31, 2012, revenues from licenses were 8.48 million, as compared to 4.66 million for the six months ended March 31, 2011.

For the six months ending March 31, 2012, revenues from Maintenance were 3.58 million as compared to 3.04 million for the six months ending March 31, 2011.

For the six months ending March 31, 2012, revenues from Services were 0.76 million as compared to 0.93 million for the six months ending March 31, 2011.

The net income for the six months ending March 31, 2012 was 763,000, or $0.12 per diluted share as compared to a net loss of 282,000 or negative $0.05 per diluted share for the six months ending March 31, 2011.

Net income for the six months ending March 31, 2012 was negatively impacted by the second quarter 2012 items I just mentioned; 126,000 charge related to the cancelation of the User Conference and the currency loss of 123,000.

Net income for the six months ending March 31, 2011 was negatively impacted by the same Q2 2011 severance costs related to the restructuring of Sales and Marketing operations of 641,000 or $0.11 per diluted share.

As previously announced, Datawatch acquired the intellectual property for its flagship product Monarch from Monarch Strategies on March 30, 2012 for a cost of 8.5 million. This amount will be amortized over five years, consistent with industry practice. The amortization of the Monarch IP resulted in a charge of approximately 9,000 in this quarter but will be approximately 430,000 each exceeding quarter.

The acquisition of Monarch IP was financed with 4 million in subordinated note, including warrants for 185,000 shares of common stock to Massachusetts Capital Resource Company, MCRC, a 1.5 million revolving line of credit with Silicon Valley Bank and 3 million of our cash.

The MCRC note carries an interest rate of 10% and matures in February 2019. Warrants are exercisable at any time prior to the later of the repayment of the full MCRC note or February 28, 2019 at an excellent price of $11.54 per share. The value of the warrants is considered an original issue discount, OID of the debt and is accounted for as OID, which is considered to be a form of interest. The warrants are fair valued under Black Soles and then the fair value of the debt and warrants together allocated to give relative value. In our case, the relative value of the debt was approximately 73% or 2.9 million giving a relative value to the warrants of 1.1 million.

The warrants will be amortized over the life of the notes, or seven years. The interest from the warrant amortization in the quarter was approximately $1,000, but will be approximately 39,000 in each succeeding quarter. The OID will be amortized over the life of the debt, charging interest and crediting the note. At the end of the seven-year amortization, the debt will have created from the original relative value of 2.9 million to the total of 4.0 million.

To supplement our financial reserves presented in accordance with Generally Accepted Accounting Principles, or GAAP, the company will discuss certain non-GAAP financial measures that we believe are helpful in understanding our past financial performance and future results.

Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and shouldn’t be read in conjunction with our consolidated financial statements prepared in accordance with GAAP.

Our management regularly uses our supplemental non-GAAP financial measures internally to understand and manage our business and make operating decisions. Our non-GAAP financial measure include adjustments based on the following items as well as the related income tax affect and the adjustment to the valuation allowance.

Amortization of the purchase software resulting from material transaction that is not likely to occur in the foreseeable future. Stock-based compensation, which is the key incentive offered to our employees; however, we continue to evaluate our business performance, excluding stock-based compensation expenses. And restructuring costs related to the reorganization of our sales and marketing operations in fiscal year 2011.

We believe it’s useful for investors to understand the effects of these items on our total operating expenses and net income.

Excluding the effects of the non-cash amortization associated with the purchase of the Monarch intellectual property, as well as the non-cash stock compensation costs, the company’s non-GAAP net income for fiscal – second fiscal quarter of 2012 was 354,000 or $0.05 per diluted share and the company’s non-GAAP net income for the first six months of fiscal 2012 was 1,105,000, or $0.17 per diluted share.

Excluding the effects of the restructuring charge and non-cash stock compensations, the company’s non-GAAP net income for the three months ended March 31, 2011 would have been 166,000 or $0.03 per diluted share and excluding the effects of the restructuring charge and the non-cash compensation costs, the company’s non-GAAP net income for the six months would have been 424,000 or $0.07 per diluted share.

As of March 31, 2012, the company had 7,058,000 in the bank, net cash and cash flow, a decrease of 1,326,000 or 16% compared to September 30, 2011, reflecting primarily the use of cash for the Monarch IP purchase. Michael?

Michael Morrison

Thanks, Murray, and good afternoon to everyone joining us on today’s call. I’m going to add some color on our Q2 results and then touch on what we’re seeing in the market and the key growth drivers for Datawatch.

Q2 was a significant quarter in two very important respects. First, Q2 performance was a great follow on to our strong Q1 results that we delivered to start fiscal year 2012.

One of our key goals is to generate consistent growth year on year, regardless of any lumpiness that can result from larger deals. And the strength in both our overall revenue growth and our license revenue growth demonstrates good progress for us delivering on this goal.

These 2Q results, which represent sequential growth over Q1 and significantly better performance in Q2 last year, are all the more satisfying when you recall that Q1 includes the largest deal in Datawatch’s history.

Second, Q2 was important because it saw us announce and complete the acquisition of intellectual property underlying the Monarch report analytics platform. Ownership of this critically important asset that provides us with the needed financial, technological and business flexibility to best pursue our high growth strategy.

The Monarch Development Group is already been assimilated into our Datawatch Development Organization and they’re quickly helping us move forward on our main product roadmap priorities including platform integration, scalability and performance. I’m confident that this acquisition will accelerate the development and moment for our entire Monarch Report Analytics platform and overtime, be seen as a pivotal step in our company’s transformation.

Now let me turn my attention to the marketplace. We continue to see an important trend emerging in the business analytics market. Organizations of all sizes are struggling with the explosion of a wide range of diverse and complex data types, formats and sources, including machine data that is captured in log files, system reports and web servers.

As I said in our release today, these rich sources of information are coming from everywhere within our organization and are increasingly coming from outside the four walls of the enterprise. This flood of big data has created valuable, but largely untapped analytic assets that Datawatch enables organizations to access and then to analyze.

As Enterprise has begun to address these issues as part of their overall analytic strategies, they’re looking at the Monarch Report Analytic Solution as a necessary compliment to BI Technology Solutions. That’s a critical aspect to understand about Datawatch’s position in the market. For this reason, we’ve started to partner with leaders in this space, like QuickTech to ensure that our solution are enabled to exchange information more easily. This will permit organizations to develop a complete analytics strategy that encompasses structured and semi-structured sources.

In fact, industry experts like Gartner Group are recommending that enterprises consider strategies to permit business users to relate structured data analysis, that BI output, with a wide variety of less structured content for a more holistic view of the enterprise. These developing market trends hold tremendous promise for Datawatch and we’re committed to aggressively peruse opportunities that arise from the increased awareness of the diverse data market.

Turing to the four key operating metrics against which we measure our performance, in Q2, our average deal size was $70,000 as compared to 24,000 in Q2 of 2011. We had four six-figured deals in Q2 this year compared to no six-figure deals in Q2 of FY’11.

In Q2, we gained 10 new Enterprise customers compared to seven in Q2 of 2011. New Enterprise customers include America Express. Lowe’s and Northern Federal Credit Union.

And lastly, in Q2, we signed six new partners compared to no new partners in Q2 of fiscal 2011. New partners include, Techno Lab, Aragon and (Jacobiz)Consulting.

Performance against our key operating metrics is clearly improved year over year and we will continue to work hard to build upon our performance in order to deliver on our business strategy.

Finally, I’d like to share with you some thoughts on how we plan to sustain and increase our growth trajectory over the rest of the year, into FY’13 and beyond.

I see three primary areas that hold the key to accelerating our revenue growth. The first is partnerships. We’re aggressively pursuing partnerships that expand our geographic reach, our vertical reach and our horizontal reach in the market. We are also pursuing strategic alliances to leverage our differentiated Monarch Report Analytics platform in combination with other [inaudible] vendors offerings. I see several important OEM and reselling relationships on the short-term horizon and we expect more to emerge as we move into FY’13.

The secondary is the cloud. The Logica win that we talked about last quarter is a cloud deployment of our Monarch Report Mining Server Solution. Just last week, Logica began rolling this offering out to additional customers. Our Monarch Report Analytics platform is particularly well suited for cloud deployment and in the coming months I will be updating you on new initiatives with other potential partners and customers that take advantage of our ease of use in the cloud.

And the third growth area is industry solutions. Similar to the 835 Industry Link Report Analytics that we announced earlier this week, we are actively working on other opportunities to develop repeatable solutions that address common industry-specific or application specific, semi-structured and machine data reporting challenges. These industry solutions allow us to efficiently bring real-world use cases into the market more quickly with demonstrable out-of-the-box value to a wide variety of organizations.

There three areas are important for accelerating our long-term growth and we have aligned the entire Datawatch organization to focus our activities in order to exploit these opportunities.

In closing, I’m pleased with our Q2 performance, which represents a nice continuation of the positive revenue momentum we first saw late last fiscal year and also serves as validation of our business strategy.

We still have a lot of work ahead of us, some of which reflects challenges associated with growth and tailoring our product strategy to a quickly evolving environment. Our company transition is still in its early stages and we could very well face both company specific and market-related challenges, some of which may impact our results in any given quarter. Nevertheless, I remain encouraged by our differentiated report analytic solution, the opportunity we see in the market and the progress we’ve made as an organization in the past year.

With that, I will turn it back over to Shae for any questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from Steven Koffler from Con Brio Capital.

Steven Koffler – Con Brio Capital

Hi there, Steven Koffler. Hi, Michael, how are you doing?

Michael Morrison

Good, Steven, how are you?

Steven Koffler – Con Brio Capital

Good, thanks. Just to – and nice job on the quarter by the way. Just going through some line items; expenses, I’ve seen sales in marketing went up well over – close to 200,000 sequentially, and I’m curious, sort of the compensation structure for sales people both covering the main accounts and the channel, and just other fixed costs that went into that. So, basically, as we look forward, you know, how should we be thinking about additional fixed cost with any, and how sales and marketing will ramp up, I guess, primarily with license?

Michael Morrison

So, Steven, some of that is, as Murray mentioned earlier, in the past quarter there was a $130,000…

Murray Fish

126.

Michael Morrison

$126,000 cost as we converted our user conference, our worldwide user conference, it’s a local user conferences – so, that’s not a big cost which we’ll carry forward. I mentioned last quarter that we were near our full complement of resources, all though we did hire some within the quarter, and as – the comp plans are geared to pay into accelerators as sales to people get towards their quota and above. I won’t see – expect anything radically different going forward from what you’ve seen thus far – I mean, if you back out the user conference and the additional people cost. So, there is nothing that’s there that is different, or should be any type of surprise from what you’ve seen the last couple of quarters.

Steven Koffler – Con Brio Capital

All right, I just – let me understand that charge, a 126,000, that was to convert a, I guess, a central US, or worldwide meeting into regional meetings?

Michael Morrison

Yes, we had – we use to have a worldwide user conference, very popular, and we stopped it back in 2008, and I think the first day that I arrived here, the first five customers I talked to all complained that we had stopped the conference and asked when we’re going to put one in place. So, we put one back in place and promoted the heck out of it – we didn’t get the kind of uptake that we expected, that we had committed to the cause of the type of conference that we had four years ago, and in doing it post mortem on it, I think predominately it was the fact that we were starting off again anew and people hadn’t put it into their budgets. So, last quarter we made the decision to pull the plug on it, convert it to regional conferences where we could get closer to our customers, but we already had made a commitment to the venue, and that’s the bulk of that, I think it’s almost exclusively the $126,000 charge. We’ve had five of those – and the regional, the local user conferences are modestly costed out, so we’ve had five of them already, we got six planned for this quarter – it’s absorbing that cost for the large one that we converted.

Steven Koffler – Con Brio Capital

What quarter does that fall in, that charge?

Michael Morrison

Last one, last quarter, the Q2.

Steven Koffler – Con Brio Capital

Okay.

Michael Morrison

It would have been in Q3 had we – our user conference was scheduled for Q3.

Steven Koffler – Con Brio Capital

All right, you’re Q2 is the one you just reported, correct?

Michael Morrison

Correct.

Steven Koffler – Con Brio Capital

That’s where the charge, that $126,000 charge fell, correct?

Michael Morrison

Yes.

Steven Koffler – Con Brio Capital

Michael, it sounds like in a way, you’re – I know you’re not excluding it from non-GAP, but you’re saying this is sort of like a one-time charge because you just sort of changed the direction of – it’s a marketing cost here, not going to occur again, is that the correct understanding?

Michael Morrison

Yes, it’s clearly not a non-GAP charge, but it’s also something that you would not expect to repeat next quarter.

Steven Koffler – Con Brio Capital

Okay, so, actually, with that not repeating, that means that sales and all other things being equal, which they won’t be, but if [inaudible] sales and marketing would go down because of that charge not repeating basically?

Michael Morrison

If you’re – yes, if you’re trying to determine a base line, the 126,000 could be, you know, removed from last quarter as you look at a base line and run your models going forward.

Steven Koffler – Con Brio Capital

Okay, so – I’ll end with this, so, if – without that charge, how should we think about sales in marketing split between, you know, sales where people are getting paid commission and fixed cost, what would that look like?

Michael Morrison

So, fixed cost we’re, as I mentioned last quarter, we’re near our plan head count, though we do see a big opportunity in the market. So, we’re taking advantage of any type – we’re being very opportunistic. When we see good talent, or good talent approaches us, and there’s a lot of opportunities out there, there’s a lot of need – when we see it fit, we act on it, so what we will add opportunistically to the sales and marketing fixed cost line, and on the variable cost that run with revenue, it will, you know, it will be slightly as we get toward the talent of the fiscal year, and on average sales organization is higher up than their commission rates you’ll see it slightly take up, but nothing that’s going to be extraordinary.

Steven Koffler – Con Brio Capital

Okay, again, what’s the split, or some approximation – so, I mean, so that we can sort of track is market – are the fixed cost going up, or by how much? That’s really where I’m going.

Michael Morrison

I don’t have that.

Steven Koffler – Con Brio Capital

Okay.

Operator

Thank you, (Operator instructions). Our next question comes from Noah Steinberg from G2 Investment Partners.

Noah Steinberg – G2 Investment Partners

Hi guys, nice job on the quarter.

Michael Morrison

Thanks.

Noah Steinberg – G2 Investment Partners

A couple of questions, so, how many sales people do you have right now?

Michael Morrison

Fourteen.

Noah Steinberg – G2 Investment Partners

Okay, and could you just give any color on the pipeline, or the familiarity that you saw in the quarter overall, you know, demand, maybe pipeline [inaudible].

Michael Morrison

So, pipeline at the end of the quarter, or at the beginning of this quarter was the highest it’s been since I’ve been here, which has been the case every quarter since I’ve been here. So, it continues to track in the right direction – the pipeline is never enough obviously, but the familiarity of it, or – I think you’re asking within a quarter how it plays out?

Noah Steinberg – G2 Investment Partners

Yes.

Michael Morrison

It has not changed – I mean, we’re much like most software companies, back and loaded, and it hasn’t been any more extended or less extended than historically – that hasn’t changed. I mean, the pipeline, as a very general proposition, continues to grow, the quality of it continues to be roughly the same, you know, it’s slightly better. Our goal is to ratchet up the pipeline at a greater trajectory than we’ve had in the last four or five quarters since I’ve been here, and for the quality of it to improve as well – both of those are happening at rates that I’d like to see a lot higher, but you’d always like to see them a lot higher.

Noah Steinberg – G2 Investment Partners

Okay, and if you had it, you know, your way, how many sales people would you like to have, I don’t know, in the next six months, twelve months – you know, what’s the goal there, and on partners, what’s your goal longer term to, you know, have the split between, you know, direct versus going through a partner or an OEM channel?

Michael Morrison

So, I be – the rep question, there’s a big opportunity in front of us, there’s a very big opportunity, and just looking at it in that regard, again double or triple that head count, you do it tomorrow, but we’ve talked about a high growth strategy where I think we can do it maintaining profitability and whatnot, and we’re still on that path. So, we’re being guarded, but where still looking for – and we’re hiring beyond our current plan, opportunistically as we – and a lot of it is people coming to us, they’re starting to get a buzz around what we’re doing. You might have seen the Splunk IPO last week, and they play in a small part of the space that we’re in – got a lot of visibility on our space. So, people are starting to take notice, and we’re taking advantage of that, we’re being disciplined about it. So, there’s no specific number, but I think there’s a big opportunity that when the right people come along we’re going to take advantage of that. On the partner side, we still have a lot of work to do there, I mentioned earlier in my prepared remarks, Noah, that that’s one of – it’s the biggest growth area for us. We got a lot of work going on there, and a lot of activity, and right now it represents a very small part of our license revenue contribution, that needs to accelerate to a large degree and we’re – you’ll see that happen in the next year or so.

Noah Steinberg – G2 Investment Partners

How – of the sales people you added last year, how productive are they at this point, how would you kind of rate it?

Michael Morrison

As expected – I mean, it’s not, it’s still – I mean, the people that came on board are all very, very good people that have been very successful in their past lives, but it’s difficult dropping into a, you know, a new company, new products, new territory, new customers, and then just to add insult to injury there, we, you know, we started to focus on the right kind of messaging. So, we spent years coaching our customers to thing one way, and we had to reset their way of thinking, so their performance is as I would expect, which is very good, but it’s certainly has not been an easy task – I mean, it’s a lot of hard work to do what they’ve done and I think that they’ve done a very good job of it, and as time goes by the hard work in the early days is really going to pay off for them.

Noah Steinberg – G2 Investment Partners

Great.

Michael Morrison

And for us.

Noah Steinberg – G2 Investment Partners

And last one, if I may, just on the balance sheet, and there was the other long term liabilities jumped – is that, is there debt in that line there?

Murray Fish

That’s the NCS c-note.

Noah Steinberg – G2 Investment Partners

Okay, so, the increment bill jumped from 522,000 to, you know, around 3.4 million – that’s the increase of the note?

Murray Fish

Correct.

Noah Steinberg – G2 Investment Partners

Got it. Great, thank you very much, and congratulations on a good job.

Michael Morrison

Thanks.

Operator

Thank you, (Operator instructions). We do have a follow-up question coming from Steven Koffler from Con Brio Capital.

Steven Koffler – Con Brio Capital

Thank you. Murray, since we have a little time here, the note that you took is a little complicated, it has a number of features to it. I wonder if you could just walk through it again. Specifically, I'm not a debt expert, but the interest rate is pretty high, and I’m just wondering, you know, in totally what were all the features that caused you to use this form of financing versus other things you might have done?

Murray Fish

Sure. The financing was primarily, the 4 million was from [inaudible] Capital Resource Corporation. It was a 10% interest with 185,000 warrants, and it’s a seven year note. The accounting for it was, you know, we look at the relative values of the note and the warrants, and allocated those. And the allocation to the note was the 2.9 million to the long-term liabilities.

Michael Morrison

Steven, it’s Michael here, just to pick up to the second part of your question. From the day I arrived here, I knew we were going to purchase this IP. It didn’t make any sense to continue on the way we were set up. You may be aware that the arrangement was a fixed purchase price, it was contractual agreement in place, fixed purchase price, and it was based on a rolling four quarter royalty basis. So, as we grew this business the purchase price for the IP was growing, and growing fairly significantly. And based on our planned projections, it was then to continue to grow significantly. So, when we made the decision to purchase it, it was very important to get it done quickly. And that necessitate us finding somebody that we knew that could move quickly and knew us that would be willing to move quickly. And that is part of what is behind what you may have perceived as a bit of a high interest rate. But in the grand scheme of things getting it done in the timeframe we needed to get it done, was very important, and very beneficial to us.

Steven Koffler – Con Brio Capital

Okay. Back on the (inaudible) that you purchased. As I remember, I think in 2011, I forget the timeframe but in the announcement or release, it said, I believe, 1.5 million in royalty payments had been paid to the former owner of the asset over one year. Is that correct?

Murray Fish

Approximately, yes.

Steven Koffler – Con Brio Capital

When I saw that, I just sort of went to the exercises, and said “okay, this should represent a tailwind for gross margins”, isn’t that correct?

Murray Fish

Correct.

Steven Koffler – Con Brio Capital

So, I just calculated, EBIT in the quarter that it closed, you should have had some benefit. Did you have some gross margin benefit of the result of not paying the royalty?

Murray Fish

No, because closed on March 30th for the quarter, you know, we had a full royalty due.

Steven Koffler – Con Brio Capital

Sorry, I thought it closed about one month before the end. So you had no benefit? Okay.

Michael Morrison

Yes, we announced it on March 1, and closed on March 30. It means we had one day of benefit. Not that much.

Steven Koffler – Con Brio Capital

Okay. So, can we use that 1.5 million number as a gage to how much help you get from un-gross margin?

Murray Fish

Well, it is a definite savings, and as Michael noted earlier, we had the development team join us, and so there’re some cross-off setting, that’s savings on a cash basis.

Steven Koffler – Con Brio Capital

So what cost would that be? Oh, the development team coming in?

Murray Fish

Yes.

Steven Koffler – Con Brio Capital

Oh, okay. And those people would all be allocated to cost & goods?

Murray Fish

Part of it to engineering cost as well.

Steven Koffler – Con Brio Capital

Okay. Also if I got the calculation right, the license gross margin declined by about 1 ½ percentage point, is that correct, and if so what drove that? I mean sequentially?

Murray Fish

The difference was in the product mixed with the revenue. There were higher royalty variant products in Q2 than there were in the prior quarter.

Steven Koffler – Con Brio Capital

Higher royalty, that mean in royalties that you paid on the license in question.

Murray Fish

Correct.

Steven Koffler – Con Brio Capital

So, if you didn’t have those, would you have shown a gross margin improvement? Did you do that exercise?

Murray Fish

No, I have not done that exercise.

Steven Koffler – Con Brio Capital

Okay. But actually, it demonstrates proof of confidence. I mean, you’re going to get this benefit, that you would have had if you this three months ago?

Murray Fish

Correct.

Steven Koffler – Con Brio Capital

Okay. Great, thank you very much.

Operator

Thank you. At this time we have no further questions. I’d like to turn the call back to our speakers for any closing comment.

Michael Morrison

Thank you, Shae, and thanks all for your interest in Datawatch. We will talk to you after our Q3 results in late July, but if anybody has any questions, or you are interested in learning more about us, don’t hesitate to reach out to me or to Murray and we’ll talk to you in three months.

Operator

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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