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.
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.
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.