Datawatch's CEO Discusses F3Q12 Results - Earnings Call Transcript

| About: Datawatch Corporation (DWCH)

Datawatch Corporation (NASDAQ:DWCH)

F3Q12 Earnings Call

July 26, 2012 4:30 pm ET

Executives

Dan Incropera – Vice President and Controller

Michael A. Morrison – President and Chief Executive Officer

Murray P. Fish – Chief Financial Officer, Vice President-Finance and Treasurer

Analysts

Noah Steinberg – G2 Investment Partners

Operator

Greetings, and welcome to the Datawatch Corporation Third Quarter Fiscal 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. Thank you, sir. You may now begin.

Dan Incropera

Good afternoon, everyone. Thank you for joining us today for the Datawatch Corporation third 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 third 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 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, this quarterly reports on Form 10-Q for the quarters ended December 31, 2011, and March 31, 2012 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 P. 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 third quarter of fiscal year 2012 were $7.17 million as compared to $4.41 million for the third quarter of fiscal year 2011.

Revenue increased $2.76 million, or 62% quarter-over-quarter. For the third quarter of fiscal year 2012, revenues from licenses were $4.7 million as compared to $2.5 million for the third quarter of fiscal year 2011. For the third quarter of fiscal year 2012, revenues from maintenance were $2.11 million as compared to $1.53 million for the third quarter of fiscal year 2011.

For the third quarter of fiscal year 2012, revenues from services were 368,000 as compared to 486,000 for the third quarter of fiscal year 2011. The net income for the third quarter of fiscal year 2012 was 548,000 or $0.08 per diluted share as compared to net income of 213,000 or $0.03 per diluted share for the third quarter of fiscal year 2011.

Net income for the third quarter of fiscal year 2012 was negatively impacted by $170,000 severance expenses related to our continued re-building of the company on a worldwide basis. For the nine months, our total revenues for the nine months ended June 30, 2012, were $19.99 million as compared to $13.05 million for the nine months ended June 30, 2011. Revenue increased $6.94 million or 53% year-over-year.

For the nine months ended June 30, 2012, revenues from licenses were $13.18 million as compared to $7.06 million for the nine months ended June 30, 2011. For the nine months ended June 30, 2012, revenues from Maintenance were $5.68 million as compared to $4.57 million for the nine months ending June 30, 2011.

For the nine months ended June 30, 2012, revenues from Services were $1.13 million as compared to $1.42 million for the nine months ended June 30, 2011. The net income for the nine months ending June 30, 2012 was $1,311,000 or $0.20 per diluted share as compared to a net loss of $69,000 or negative $0.01 per diluted share for the nine months ended June 30, 2011.

Net income for the nine months ended June 30, 2012 was negatively impacted by $183,000 severance expenses. Net income for the nine months ended June 30, 2011 was negatively impacted by Q2 severance cost of $641,000 or $0.11 per diluted share related to the restructuring of sales and marketing operations.

As previously announced, Datawatch acquired the intellectual property for its flagship product Monarch from Math Strategies on March 30, 2012 for a cost of approximately $8.54 million. This amount will be amortized over five years consistent with industry’s practice. The amortization of the Monarch IP resulted in charge of approximately $431,000 in this quarter. The Monarch royalty payment for the quarter ended June 30, 2012 would have been $597,000.

To supplement our financial results presented in accordance with generally accepted accounting principles, 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 an isolation or as a substitute for comparable GAAP measures and should 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 measures include adjustments based in the following items as well as the related income tax effects and the adjustments to the valuation allowance.

Amortization of the purchased software resulting from a material transaction is not likely to occur in the foreseeable future. Stock-based compensation is a 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 and similar actions in fiscal 2012, which were principally related to selected headcount reductions.

We believe it is useful for investors to understand these items on the effect of total operating expenses and net income. Excluding the effects of the non-cash amortization associated with the purchase of the Monarch intellectual property, non-cash stock compensation costs and restructuring severance charges, the Company’s non-GAAP net income for the third fiscal quarter of 2010 was $1,376,000, or $0.20 per diluted share, and the Company’s non-GAAP net income for the first nine months of fiscal 2012 was $2,494,000, or $0.37 per diluted share.

As of June 30, 2010 the company had $7,836,000 in net cash and cash equivalents, a decrease of 548,000 or 7% as compared to September 30, 2011, which is primarily the impact of the use of $3 million cash for the Monarch IP purchase last quarter. Michael?

Michael A. Morrison

Thanks, Murray. Good afternoon everyone and thank you for joining us today. As you can gather from our earnings release emerged in March, our Q3 FY ’12 results were quite strong. Driven by a sound business strategy, focused sales execution and effective marketing. There’s a major transformation happening in IT today with an accelerating shift to cloud computing, and a growing need to leverage big data to deliver greater insight, and that cover new opportunities.

The challenge for a company like Datawatch is to make sure we correctly align our business and our postioning to best take advantage of the opportunities this change provides. Datawatch’s ability to correctly identify and invest in these changes thus far has been a major reason for our recent success and enabled us to grow our overall revenue 62% year-over-year in third quarter and license revenue 96% year-over-year in the third quarter with non-GAAP EPS up an impressive 300%.

We also grow our cash balance of 11% sequentially over the second quarter this year.

What we see today is that, organizations are transforming their businesses by better leveraging big data to gain competitive advantage. This growing interest in big data applications is clearly driving demand for Datawatch’s information optimization solution.

Specifically, the SaaS buyer need to leverage a greater verity of data formats and sources. We are benefiting from the business need to unlock the value the semi-structured and unstructured data, both internal and external, and link the resulting datasets together with structured data for a unified view of the business.

Traditional information infrastructures including business intelligence systems are not well designed to handle the used cases inspired by the flood of data from semi-structured and external data sources. Print streams, system logs, text files, office documents, EDI streams, PDF and machine data are some of the more common sources of unstructured data that businesses find challenging to harness through conventional approaches.

Capturing these varied data formats and combining this valuable information with structured information is Datawatch’s portrait, where we believe we remained an unchallenged leader in the marketplace. Our information optimization solutions embody more than 20 years of continuous innovation in this segment and position us exceptionally well to capture a larger share of a fast growing market during this era of IT transformation.

While still being early days relatively speaking, and the big data potential has not yet caught up to a much of the height, customers clearly see the transformation and analytics to include semi-structured and unstructured data, and want to implement the best technology stack with the right partners as they start on their journey to capitalize on all of their data assets.

We at Datawatch are eager to partner with these customers on this journey. Turing to the four key operating metrics against which we measure our performance, in Q3, our average deal size was $60,000 as compared to 34,000 in Q3 of 2011. We had five six figure deals in Q3 this year compared to two six figure deals in Q3 of FY ’11.

In Q3, we signed six new Enterprise customers compared with seven in Q3 of 2011. New Enterprise customers this past quarter include DHL, Service Master and Flagstar Bank. And lastly, in Q3, we signed four new partners compared to no new partners in Q3 of fiscal 2011. New partners include, ACL Services in Canada, VAS Value Added Services in Germany and Blue Line Planning in United States.

Performance against our key operating metrics continues year-over-year improvement. We’re now principally focused on the expansion of our partner ecosystem since that will enable us to accelerate our revenue growth plans most effectively. To this end, we’ve focused additional investment in recruiting and enabling partners, particularly in Europe and Asia-Pac.

This past quarter, we signed a strategic agreement with VAS Value Added Services as I mentioned, one of QlikTech’s key strategic resellers for the Germany, Switzerland and northside region. VAS clearly sees the value combining Datawatch and QlikTech Solutions to expand its customers’ analytics capabilities and intents to introduce the Datawatch Solutions to its network of over 300 QlikTech resellers in this region. We look forward to working closely with VAS on this initiative, which we plan to replicate in other territories.

This past quarter we also established an office in Singapore to better address the mature and emerging markets in Japan, North Asia and South Asia. As we recently announced, we hired Karl Mouantri, highly regarded business and analytics executive to run the Singapore office with a mandate to aggressively expand our partner network in Asia-Pac and to grow revenue. Karl is a veteran of Hyperion and Endeca two innovative analytics company, all the homework acquired by Oracle. Karl and his team have a proven track record of building successful partner ecosystems in Asia-Pac in driving top line revenue growth.

I fully expect that Karl and his team will recruit onboard five to ten new strategic partners for Datawatch in Asia-Pac by the end of this current fiscal quarter. Let me reinforce this very important point, leveraging channel partner’s expertise and relationship is a central tenant of our current growth strategy, and it’s an important component of our growth plans for FY ’13 as well.

I believe Datawatch has been in enviable position in the market. Our solutions have the unique capability to harvest the vast troves of data locked in a variety of semi-structured data formats from both inside and outside the enterprise so that organizations can extract maximum value from their information assets. We meet the needs of customers of all sizes across the broad spectrum of the industry, including financial services, healthcare, retail, government and audit just to name a few. We operate in one of the hottest areas of IT, where secular growth trends are strong and expected to increase.

On top of this, Datawatch offers the only pure play solution to support the semi-structured and unstructured information needs of big data application. As a result, we remain bullish on the market opportunity, our exceptional solutions and our growth strategy.

Before I open it up for questions, for those of you who have not yet had the opportunity to read our earnings release, Murray will be leaving Datawatch on August 15, after we file our 10-Q. I’d like to personally thank Murray, for his service to Datawatch for these past five years, and particularly his support of the company during these past 18 months as we have executed on a successful business transformation. Murray’s contribution to the recent progress in the company are significant, and I’m indebted to him for his assistance as we work through this transformation at Datawatch.

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

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is from Noah Steinberg with G2 Investment Partners. Please proceed with your question?

Noah Steinberg – G2 Investment Partners

Hi guys, nice job on the growth that continued here.

Michael A. Morrison

Thank you.

Noah Steinberg – G2 Investment Partners

My question – maybe you could talk a little bit about the pipeline that you’re seeing, it sounds like the growth every second to continue, but I just wanted to – maybe give a little qualitatively on the pipeline, what you’re seeing out there in the market – a couple others?

Michael A. Morrison

Pipeline continues its trajectory, so it’s – we’ve had an upward trajectory the last six quarters, it’s not materially increasing or modestly decreasing either, it’s continuing on a trend we all would like it to increase substantially, but it’s in a good place and continuing to go where we need to go.

Noah Steinberg – G2 Investment Partners

Okay. Good to hear, and it was also nice to see that you are able to grow the software revenue, accelerate that growth with the average deal sizes even coming down, were there any abnormally large deals in the quarter? And do you think that deal size, we could see it move up from here?

Michael A. Morrison

No abnormally sized license deals this quarter, and our goal is to continue to increase the average deal size, so we expect it to improve quarter-over-quarter.

Noah Steinberg – G2 Investment Partners

Great. And then maybe just geographically, any color on geographies that were strong, geographies that were less strong?

Michael A. Morrison

Nothing notable there, Noah. Just all the geographies sort of perform in accordance with their historical trends.

Noah Steinberg – G2 Investment Partners

Great. So congratulations on a great quarter.

Michael A. Morrison

Thanks

Operator

(Operator Instructions) Our next question comes from the line of Brendan Austin with [Benito Capital]. Please proceed with your question?

Unidentified Analyst

Hey guys, just curious, the non-GAAP number, $0.20, what kind of tax rate is implied by us?

Murray P. Fish

Right now we have net operating losses to cover net income, so we pay a very nominal tax rate.

Unidentified Analyst

Okay, but that’s what’s implied, there’s no deferred taxes implied in any of that of same (inaudible).

Murray P. Fish

Correct.

Unidentified Analyst

Okay. In terms of you grow, how many quarter of experience you guys have by now?

Michael A. Morrison

At the end of the quarter, we had 15.

Unidentified Analyst

And what do you feel, the capacity of those 15 are at this point?

Michael A. Morrison

Not sure, I understand the question entirely, but…

Unidentified Analyst

Okay, how many of those 15 are fully up and running right now versus sales person you might have hired recently that isn’t quite up to speed.

Murray P. Fish

Less than half of those 15 had been in a territory. It takes 6 to 9 months, where you'd expect somebody to start getting into a good group with their revenue performance. So of the 15, probably seven had been there longer than six, seven, eight nine months. So there’s still a lot of evolving to do with that group, there’s a big opportunity out in front of us that we’re continuing to look for opportunities to add to the quarter carrying sales rep ranks, and we’ll do that in the coming quarters.

Unidentified Analyst

Okay. And so that’s good – and in terms of do you guys, is it like one a quarter or is there a plan in terms of how you want to expand those ranks?

Murray P. Fish

One a quarter in terms of sales reps?

Unidentified Analyst

Yeah, like adding.

Murray P. Fish

Yeah, no. We’re – as we see the opportunity. As I see a big opportunity in front of us. So we are aggressively looking to fill, whether it's a geographic territory like we did with our Singapore operations or a vertical opportunity, we’ve had a lot of success in healthcare recently or some other type of horizontal play, where we’re finding the opportunities, we’re not getting into them without a plan beforehand. But putting the people in place to address the opportunities we see in front of us.

Unidentified Analyst

And do you have a sense of how much of your sales are coming though partners versus how much you guys are really carrying the ball on directly?

Michael A. Morrison

The very large proportion of any major deal is coming through a direct operation currently. And we’re looking to expand the partner channel to handle more of the mid-market, lower end market, and also the vertical applications.

Unidentified Analyst

And just the last thing, I’m a little new to the story, and I wasn’t able to get in touch with you a couple of weeks ago, because of the quite period back. On the Monarch acquisition, only counting for it. So roughly $0.5 million royalty, that’s not – does that affect your revenue line at all or is that just – does that just come right off of cost of sales in terms of this quarter versus what you might have reported two or three quarters ago?

Michael A. Morrison

It comes off our cost of sales line, and effectively as we placed the amortization of the software.

Unidentified Analyst

Okay, but there is no effect on like the revenues were just the revenues. The revenues last year would have been this year, would have been the same revenue regardless of the Monarch acquisition.

Michael A. Morrison

Yeah, it’s correct.

Unidentified Analyst

Okay, great. Thanks a lot. Good job, guys.

Michael A. Morrison

Thanks.

Operator

(Operator Instructions) Mr. Morrison, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing or additional comments.

Michael A. Morrison

Again thank you for being with us today, we truly believe that our solutions are ideally positioned to take advantage of this transformational play in the IT world today, we have a great team executing on a good strategy, we’ve got a lot work to do, but we’re all excited about the opportunity.

If you’d like to speak with us further, please don’t hesitate to reach out and talk with us or talk to – reach us at our investor relations group, and we do sincerely appreciate your interest in Datawatch. So thank you very much.

Operator

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

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