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Michael Whyte
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I believe that the intrinsic value of companies can be determined through fundamental analysis.
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  • Undervalued Datawatch: The Time to Rediscover It Is Now
    I posted this on my mjmaherGroup website April 29th. I have decided to start posting to seeking alpha, so here goes. 

     The Business 

    Datawatch brings in revenue from three areas,  Business Intelligence Service (71%), Content Management Solutions (20%), and Services Management Solutions(10%).

    Datawatch’s BIS includes Monarch Professional which is a report mining software, that provides data access and analysis tools. Monarch Context compares data in an excel spreadsheet to corresponding information within the embedded source report. Monarch Data Pump automatically creates and delivers customized data across an organization. Monarch BI Enterprise Server transforms existing reports into web-enabled data, it also provides enterprise report management, online data analysis, Excel integration and has unmatched pricing. Monarch  Report Mining Server provides web-based report mining and analysis. Datawatch Dashboards retrieves information from an existing databases and creates a dashboard of  charts and other valuable data.

    The Content Management Products include Datawatch BDS a document management server that provides management for images, reports, customer correspondence, statements and other information. Its complete end-to-end service exists outside the user’s firewall. On March 22nd a new upgrade was released adding translation for global reach and certification for Red Hat LINUX.

    Service Management Solutions provided by Datawatch include customized Monarch model building, product training, and business consulting.

    Revenue

    Revenues for the past 12 months were $17.6 million. Looking at the twelve-month trailing data for total revenue, it has shown a decline for the last 10 quarters. The previous CEO stated that this was mostly due to bad conditions in the economy and a lack of enterprise spending.

    There was a slight increase of 2% year over year in their Business Intelligence Solutions after declines of 16% and 6% in the 2nd and 3rd quarter. BIS makes up 71% of total revenue. The Monarch product line saw gains for the first time in 18 months in Q2 these gains have been stable since with some gains coming from new users and others coming from upgrades.

    The was an increase of 4% year over year in their Content Management Solutions after seeing a decline of 12% last quarter. Excluding great sales in Q3, revenue from Content Management is still the highest it has been for the last 8 quarters, it makes up 20% of total revenue. Datawatch BDS (which just had an update 3/22/11) is a product to watch.

    Datawatch’s Service Management Solutions makes up 7% of revenue, but I expect that to decrease. It has seen steady declines in year over year revenue for the last four quarters, down 26%. They pride themselves on making a product so easy to use that there is not much support or IT needed to use it. Therefore it makes sense that the service portion of their revenue stream will start to decrease.

    Domestic sales are down 3% compared to Q1 in 2010. International sales are up 3% compared to Q1 2010. They are down 1% since terminating their overseas sales consulting contract, bringing the overseas sales in-house. International sales are something to watch. If they increase or stay flat than this was a wise decision to drop the outside consulting firm. The opposite it true if international sales drop. It is too soon to tell if this decision has made any impact on sales. Although sales were down in Q3, there was better performance from the Euro and Australian markets last quarter.

    Sales, Marketing, and R&D 

    Sales and Marketing remains at 41% of gross profits down 12% from Q1 2010. They have been focusing a lot on getting the product’s capabilities known to the firms that would use it. Through the use of webinars they have been brining in new users and also by showing existing customers different features, they have shown some add-on products. In September they hired Tom Callahan to help with their sales to the healthcare industry. Tom is a veteran of healthcare IT and client services. They hope with him on the team he can show the industry how Datawatch helps prevent inefficiencies and it doesn’t require additional support from a healthcare firm’s IT staff. 

    Because of the National healthcare reform hi-tech act, a shift towards reimbursement models based on quality and outcomes, and the overall cost savings of efficiency, Datawatch hopes to grow its healthcare market. It is already being used by over 1,000 healthcare firms and is. 15% of Monarch sales come from this industry.  If the firm does not adopt the electronic medical record system before 2015, financial incentives will no longer be available and they will incur penalties. There will be a 1% reduction in Medicare fees per year until 2017 when it increases to 3%.

    Research and Product Development makes up 21% of gross profits compared to 24%  in Q1 2010. There has been a decline in product development by 10.5% since Q3 2010 mostly due to eliminating the external consulting costs. However, the 10% savings in R&D does not show up in the P/E because it is still eating up close to the same percentage of gross profits due to the decrease in gross profits. If the newer upgrades are successful and Datawatch cuts back on R&D by 50% than the P/E would change from its current level around 37 to 15.

    New CEO

    The new CEO Michael Morrison has a background at IBM in financial management; he held a similar position at Cognos, which was acquired by IBM in 2008. He was the CEO of Applix Inc. a business analytics software company. Applix was acquired by Cognos for almost six times its annual revenue.

    The announcement of Morrison came on February 14, 2011. Since the announcement Datawatch’s Stock has increased from 3.60 to 5.36 with today's close at $5.59.

    Bookings saw an increase of 6% in Q1 after 8 Qs of declines. This could be the signal that Morrison will turn the company into a profitable one. I am waiting one for one more earnings call before I give it a valuation. 

    Tags: DWCH, BI
    Jul 01 9:11 AM | Link | Comment!
  • Undervalued Digimarc: The Time to Rediscover It Is Now

    I posted this on my mjmaherGroup website June 3rd. I have decided to start posting to seeking alpha, so here goes. The stock has since risen 25% since my post but I think there is still upside, as you will read.

    Digimarc Corporation (NASDAQ:DMRC) is based in Oregon and provides digital watermarking and content identification for all forms of media. Digimarc has an extensive portfolio of over 600 patents and 400 patents pending. The patents cover techniques for monitoring, authenticating, and managing audio, video, digital images, and other documents. The company makes its intellectual property portfolio accessible to licensees and partners .In October 2010, Digimarc partnered with Intellectual Ventures Management to expand the company’s patent licensing program. Other business partners include Adobe, AlpVision, Nielsen, and major motion picture and publishing companies. Digimarc welcomes partnerships and collaborates with partners to expand watermarking application and ecosystems.

    There has been a lot of buzz around digital watermarking and their ability to optimize a users media experience while enhancing security. In April Yahoo! acquired IntoNow. IntoNow recognizes television programs by matching the fingerprints of the audio stream with the television program or commercial. Rumor has it, Yahoo! paid quite a premium for the startup. Recently DIRECTV and other cable providers have been giving consumers access to movies that are still in the theater. Digital watermarking is a key element to the security of the copywrited material.

    Publishers, advertisers, and marketers can use Digimarc’s digital watermarking to embed data into their media. The Digimarc Discover Platform uses intuitive computing to read otherwise unseen watermarks in media and enhance a user’s experience.  Digimarc Discover is still in beta but has seen traction with over 800 trial users.  The trial ends June 1 and channel checks propose many revenue baring contracts for Digimarc Discover in the second half of this year.

    Digimarc repurchased more than 550,000 shares in Q1 spending $15.7 million. The company maintains steady cash flow with $3.8million in net cash provided by operations. Q1 revenue came in at $9 million which is 11% lower than the same period a year ago. However in that period Digimarc realized a $4.5 million onetime contract with Arbitron. Removing that contract from the equation, Digimarc has seen year over year revenue growth of 21%, 10%, 89% and 60% for the last four quarters. Bookings have been up 19%, 18%, 77%, and 62% in the past 4Qs, this suggests a $58 million revenue next year. This should yield $1.56 in EPS vs. the current EPS of $.12.

    I believe that Digimarc is under valued at $28.03. Current net tangible assets are $29 million. Revenues are estimated at $58 million. Given that most of its license revenue is  recurring in nature, a 3x multiple would be justified. This would peg the enterprise value  at $175 million giving it a market cap of $204 million or $29.75 per share. This valuation does not factor in any new revenue from Digimarc Discover which could easily become 25% of its total revenue after ten months of aggressive marketing. This would equate to a share price of $36.

    This new technology is not without risk. With many competitors trying to capture the growing market, there has been some litigation between several companies including Walker Digital, Digimarc, Shazam, Apple, Nielsen, Disney, The Weather Channel, and Verance.

    Things to watch in the coming quarters are the number of paid contracts using Digimarc Discover, and of course any and all litigations.

    Tags: DMRC, Technology
    Jun 30 7:46 PM | Link | Comment!
  • Undervalued 8x8: The Time to Rediscover It Is Now
    I posted this on my mjmaherGroup website June 22nd. I have decided to start posting to seeking alpha, so here goes. The stock has since risen 23.7% since my post but I think there is still upside, as you will read. 

    8×8 (NASDAQ:EGHT) provides communication, hosting, and cloud-based services to businesses. Founded under the name Integrated Information Technology in 1987, it  developed multimedia semiconductors and software. In 1996 the company changed its name to 8×8 and in 1997 it went public. It wasn’t until 2002 that 8×8 began offering its voice-over IP (VoIP) phone service direct to customers. 8×8 has since expanded its products and services to include VoIP, mobile VoIP, internet faxing, video conferencing, virtual meetings, hosting, and other cloud related services.

    8×8 has 25,000 business customers and the number is growing at a rate of 20% per year. The average number of services each customer is using is 8, which is a 7% increase from last year.  Twelve-month trailing revenue is $70.1 million up 10.6% from last year and now accelerating.

    I believe that 8×8 is undervalued even at today’s 52 week high of $3.95. Due to it price and scalability, VoIP is becoming attractive to businesses, especially small to medium-sized businesses. According to FCC data, currently only 6% of businesses are utilizing VoIP. 8×8′s addressable market is expanding rapidly.

    8×8 faces competition from startups as well as industry leaders. To compete, the company looks to grow organically and inorganically. With the acquisitions of Central Host, Inc in May 2010 and Zerigo,Inc just last week, 8×8 is broadening its offerings to businesses by including hosting as well as a wide range of cloud computing capabilities.  The demand for VoIP is outpacing supply, and with its ability to provide businesses a low cost IT infrastructure, 8×8 is well positioned to close this gap .

    8×8′s fourth quarter revenue growth increased 14.6% to $18.1 mil and GAAP diluted EPS were $.03 vs. $.02, in the same period last year. Looking ahead to the next twelve months, strong revenue growth should yield $.07 in EPS.

    Net cash provided by operations was $1.6 mil compared to $1 mil last Q4. 8×8 continues to increase the extent to which its net income generates cash. The cash flow from operations to net income ratio is 1.32 compared to .64 the same period last year. The company plans on reinvesting some of this cash flow over the next year. 8×8 will add to its 254 employees to both assist in revenue growth and staff the new channel sales organization.

    Current net tangible assets are $9.1 million. Revenues are slated to come in at $77M for FY2012. Given the recurring nature of its business, a 3x multiple would be justified. This would peg enterprise value at $231 million giving it a market cap of $240 million or $3.90 per share.

    So why am I recommending a buy at $3.95? That can be answered with its new growth potentials. Last quarter 8×8 brought in two new seasoned executives. Don Trimble a former Cisco exec and Kim Niederman also a former Cisco exec but more recently Mr. Niederman was Senior Vice President of NComputing, Inc. Together they were brought in to spearhead a new range of cloud-based services. With the acquisition of Central Host and Zerigo 8×8 introduced Cloud-based VoIP, Cloud Contact Centers, Virtual Managed Hosting, Cloud Server, and Cloud Video Conferencing Virtual Room. The additions will all be delivered as a SAAS model. This will allow the company to leverage its existing customers and infrastructure to sell a lot more services.

    Currently the average monthly subscription paid is $209. By offering customers scalable cloud-based office solutions to replace their existing more expensive solutions, 8×8 will likely drive that average $209 subscription to over $300. This would peg enterprise value at $335.6 million giving it a market cap of $344 million or $5.50 per share.

    Jun 30 7:35 PM | Link | Comment!
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