The story is quickly unfolding. A software solution created by merging two data analytic thought leaders, Datawatch (NASDAQ:DWCH) and Panopticon. Last quarter by smartly using stock as currency Datawatch purchased data visualization software developer Panopticon. 2013 Panopticon received the first ever Gartner cool vendor award focused on in-memory computing. The result is creation of the only beginning to end self service BI driven by visual data discovery. Tableau (NYSE:DATA), QlikTech (NASDAQ:QLIK), Spotfire (NASDAQ:TIBX) or Microstategy (NASDAQ:MSTR) cannot offer such important thorough functionality without a complete architecture overhaul.
Datawatch's self service data analytic solution is offering true data democracy regardless of the data's source. Data silos locked in unstructured, semi structured or structured formats can be opened when needed by the non technical end user. HTML,PDF, text reports, log files, XPS reports, spreadsheets, databases ,data streams and other file types can be used for more analysis or join to existing data systems. Zero outside involvement is needed for the functional expert to access as needed arcane data sources to innovate or discover new knowledge. Datawatch offers true beginning to end self service functionality along with fast in memory / real time visual data discovery. These are just a few of the many competitive advantages. Hence, Q1 2014 results will report these unmatched advantages.
How did a tiny company achieve these results? Datawatch's transformation started two years ago. See my earlier DWCH articles for more details on the transformation. After the transformation started Datawatch employees and leaders brought and continue to bring a unique capacity. Their vision and abilities are the byproduct of productive result oriented years working as experts and leaders with BI industry giants, IBM, Cognos, Applix and others. The talent acquisition for this tiny company is remarkable and continues to grow stronger. In addition , December 4th Datawatch announced former BI executives from IBM, Spotfire will run an underserved region, France. The new entity is headquartered in France. Moreover, this talent acquisition is further testimonial to the size and immediate market potential for Datawatch's new technology.
Why am I posting another article on DWCH? Each new post was motivated as the position of the company materially changed. If interested, you can read my prior articles for more details on the people, history and more recent evolution at Datwatch.
Select details on Q4 Performance:
Organic growth drove the recent Q4 YOY revenue change, 47% increase for total revenue and 60% for licenses. The Panopticon acquisition did not the drive the 47% growth. New Datawatch Desktop released quietly after Q4 integrates visualization from Panopticon (see 1 , 2). CEO Morrison commented on the conference call , "Q4 included one month of revenue contribution from the Panopticon acquisition we closed on August 28." Furthermore, Panopticon reported 2012 annual revenue of 5 million. That prorates to 416K for one month assuming zero growth. Datawatch's Q4 revenue increased by 2.8M. Total Q4 revenue of 8.8M increased by 2.8M or 47%. During Q4 new deals and partnerships supports organic growth being the Q4 driver.
This large Q4 deal links to their report mining legacy solution. "One of the World largest retailers will now process hundreds of semi-structured daily reports generated by legacy systems across nearly 400 stores in Canada, literally tens of thousands of pages of reports every single day."Xerox Canada became a strategic alliance partner. Xerox Canada and Datawatch had a large joint win. Now they're working with Xerox to leverage this win to bring their joint solution to other major retailers in Canada".
IBM partnership announced Q4 links to their historical report mining strength. It took two years of negotiating with IBM before they reached an agreement, "where IBM will resell our Datawatch solutions for report mining in analytics against documents stored in IBM Enterprise Content Management systems." "This means that IBM sales reps and IBM business partners will be paid for reselling Datawatch software" commented CEO Morrison.
Thomson Reuters an important relationship carried over by Panopticon "did not change materially, if at all". More evidence the Q4 growth being principally organic. Other opportunities are likely with Reuters. Thomson Reuters will now introduce Datawatch visualization solutions to Thomson Reuters customers worldwide.
An important opportunity is Datawatch's ability to embed visualization technology into other applications. "Nasdaq selected Datawatch for embedded visualizations in two of its technology platforms, including the world's leading surveillance and compliance solution". "Importantly Datawatch was the only vendor that met NASDAQ's key requirement as the only visualization solution seamlessly embedding and integrating with a real-time cross venue surveillance solution that processes literally billions of messages per day." The main take away is validation of Datawatch's technology against any major competitor regardless of size. Based on Q4 comments this could be the beginning of an expanding relationship with NASDAQ. Datawatch now has dedicated resources for OEM sales.
Another opportunity for growth is blueprints or solution strategies. "Blueprints" started at the beginning of fiscal year 2013. Progress accelerated during Q4. Data connectivity accelerators offer opportunity. This enables Datawatch's "real time next generation analytics capabilities for products from IBM, SAP, Splunk, Google, salesforce.com and other leading technology providers". This important niche is delivering results.
Targeted solutions accelerated using real-time visualization from Panopticon. Many opportunities exist that are suited for Datawatch's unique blend of variety, velocity and visualization. These include "retail, consumer packaged goods, telco and healthcare". Partners will publish these blueprints in this first quarter 2014. Capital markets and financial services are areas where both Datawatch and especially Panopticon have demonstrated strength and blue chip customer references. Partnerships are important for near term and long- term growth. Strong increases in the quality and quantity of partner led solutions during Q4 will become a future growth driver.
Summary points on why Q4 47% revenue increase will be beaten for several quarters:
Q4 47% increase was organic growth; Q1 2014 first full quarter with Panopticon; Q1 new integrated products; Datwatch will market to existing global customer list of 496 of the Fortune 500; major software upgrades introduced with must have business reasons to upgrade; fast growing prestigious partnerships now selling Datawatch and creating industry specific solution; Q1 OEM sales with dedicated resources; new focus on underserved markets in Asia, France; new business analytic sales/marketing/support team handpicked from IBM,Cognos, Business Objects, Ipierian, Applix and Oracle; Data visualization is ultra fast growing industry in big data; strong pricing power the result of under pricing with no associated maintenance for all prior transformation years; No real competition or few alternative solutions for Datawatch complete offerings; Industry targeted solutions, growing revenue contribution from partners, compelling use cases; Management understands the current industry dynamics and the urgency needed to execute their message rapidly and flawlessly; This urgency will begin to hit Q1 2014, Q1 2014 financial results reported February 2014.
Does this sound like cheer leading my investment, it's not. My opinions formed from real world 15 years working, developing and managing business intelligence projects for several Fortune 500 companies. Yes I've used Tableau along with Qlikview and MicroStrategy. Qlikview and Tableau are good products with different strengths. Unfortunately they are far from complete in offering self service BI or as Tableau likes to say data democracy. I can say with certainty as a customer of Tableau, Qlikview, MicroStrategy and other BI related products what Datawatch is offering is a must have analytic tool. I agree with CEO Morrison Q4 comment. Datawatch has a "unique first class solution offering. That can compete with any other vendor in the space, now offering real-time against nearly any variety of data that is present in the organization. No competitor today can ever expect to win against us on these agendas without a complete architecture overhaul."
DWCH founded in 1985. This quarter DWCH has many of the positive valuation attributes of a fast growing IPO. So we need to consider these factors when looking at this more challenging valuation.
The market capitalization is 289.90M, enterprise value 283.90M, TTM revenue 30.30M, EV/Revenue 7.26. Consistent positive free cash flow, 10.31M total cash balance or 1.43 per share along with fast double digit growing revenue, improving gross margins all support their strong financial position. Intrinsic value calculation using historical financial results makes current valuation looked stretched. That's an unreasonable approach given Q1 2014 will be the first full quarter with the synergies and new integrated products from Panopticon. During the post acquisition conference call CEO of Panopticon made two valuation comments. One was DWCH stock was undervalued versus their industry peers. Second was they were now going from good to great. These comments are coming from a company that was awarded Gartner's 2013 cool vendor award for their in memory functionality. Furthermore their software is used at 12 of the 15 largest financial institutions in the world. Their data visualization tools are now in use by 95 major capital market firms around the world. Now with the Datawatch combination their potential market and improved functionality has exponentially increased.
Using today's financial results relative valuation trades at a deep discount. Starting this quarter the most direct competitor is DATA (Tableau). Tableau trades near 20 times sales or 4 billion. That puts DWCH current 289M value at a large discount trading at 7 times sales before the benefit of Panopticon. The impact of fast compounding revenue and larger deal sizes from the new integrated Panopticon technology will become more transparent Q1.
A realistic intrinsic valuation forces us to ignore historical financial results. Q1 2014 will be the first full quarter with Panopticon, related new products and its marketing to the large Datawatch customer base. New products introduced to the existing 496 of the fortune 500 Datawatch customers. So after the most recent 47% top line organic growth the coming quarters should surpass 47%. Couple this with pent-up demand from old Monarch users looking to upgrade to the faster improved Modeler formally called Monarch. Deals will increase in size and number because of the improved offerings. Couple this with growing partnerships creating and marketing solutions, recurring revenues from annual license fees, OEM deals, new real-time data applications with little or no competition. The size of the visual data discovery market continues compounding fast. 'IDC expects the Big Data technology and services market to grow at a 27% compound annual growth rate through 2017 to reach $32.4 billion.' Datawatch now sells to a faster growing segment of big data, data discovery with visualization. Moreover, large barriers to entry along with few competitors support valuation increases in the short and long term.
100M in sales or greater is a reasonable forecast in less than two years. DWCH market value is likely double in that time reaching a 500M market cap by using a reasonable price to sales of 5 or less. Ranges of possible valuations are wide. Existing assets have a high terminal value. Terminal value of assets such as software intellectual property, customers in more than 40k organizations worldwide including 99 of the Fortune 100, prestigious partnerships, human resource talent, market share traction in ignored international territories, recurring revenues, ability to raise prices, fast growing industry. These factors along with others make DWCH a great acquisition target for IBM as an example. A Datawatch acquisition is immediately accretive by leveraging IBM's existing administration and R&D departments. Furthermore it makes a logical addition to their Cognos financial suite.
As a potential investor the following are worth noting, aggressive insider buying over the past 2 years with no sales, tiny float, investing opportunity day one with a proven solution now expanded with new technology to the fast growing big data or any data for visual discovery. 42.75% held by insiders with only 29.20% institutions. Lastly, unlike Tableau there is no dilution risk with expiration of lockup periods as in all IPO's looking to cash out.
Disclosure: I am long DWCH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.