Share Price - $8.00
Market Cap - $140 million
Enterprise Value - $131 million
2016 Revenue - $54.5 million
2017E Revenue - $66.9 million (23% growth)
2018E Revenue - $82.5 million (23% growth)
EV/2016 Revenue - 2.4x
EV/2017E Revenue - 1.9x
EV/2018E Revenue - 1.6x
Attunity Ltd. (NASDAQ:ATTU) provides software to enterprises used to replicate and integrate heterogeneous data sources into a single data lake, which provides the basis for creating data warehouses used for Big Data analysis. The company has been in existence for 20 years, first providing software used to integrate mainframe data and then adding more data sources as they became available in the market. Current data sources include Oracle (Oracle), Microsoft (NASDAQ:MSFT), SAP (NYSE:SAP), Amazon Redshift (NASDAQ:AMZN), Teradata (NYSE:TDC), Hadoop, and modern streaming data sources. The company has OEM relationships with Microsoft and Amazon where the companies embed Attunity's solution into their own when data replication is called for.
Attunity's revenue grew quickly in the 2014-2015 time frame, with 43% growth in 2014 and 36% growth in 2015. This growth was driven by the need to gather data from various corporate sources and assemble it into data warehouses for analysis. Attunity has a simple but powerful solution that enables a much faster time to analysis for its customers. Attunity is admittedly a smaller player in the market facing bigger competition in Informatica (NASDAQ:INFA) and IBM (NYSE:IBM), but its solution is robust and has proven successful for its customer base. In 2014 and 2015, Attunity mostly sold into smaller opportunities of $1 million or less with six to nine month sales cycles. By 2016, Attunity's success and increasing name recognition began to attract larger deals with longer sales cycles and different sales team requirements. The company found that some of its sales force was not up to the task and revenue only grew 11% as some large deals slipped during the year.
Attunity management acknowledged the problem and swapped out 15 of its weaker sales hands and replaced them with more experienced enterprise software sales people. Our work suggests that the company's problem in 2016 was indeed company-specific as the market for its type of software remained robust. Management is convinced that the worst of its sales issues are behind it and this was borne out by a beat and raise December quarter. The company notched sales of $15.6 million versus expectations of $14.3 million. Guidance for 2017 was set at $62-65 million, above consensus of $60 million.
We believe that after the company's tough 2016, management is guiding more conservatively for 2017 than it did last year. The market seems to be supportive of growth rates seen in 2014 and 2015, yet neither the management team nor the analysts want to get ahead of themselves at this point. Given the very high gross margins in this business (90%), there is a ton of operating leverage once revenue gets moving. Management guided to 5-8% operating margins in 2017 but these could go much higher, especially in 2018, if revenue ramps ahead of plan.
We value ATTU on an enterprise value to revenue basis based on 2018 numbers. Based on our current 2018 revenue forecast, ATTU trades at 1.6x revenue. We believe it should trade at a substantially higher multiple of 3x. The closest public comp, Talend SA (NASDAQ:TLND) trades at 4x 2018 numbers and operates in essentially the same market. At 3x, ATTU would be worth $14.72, or 84% higher than its current trading price.
In terms of an endgame, Attunity could grow organically for an extended period in this large market, but it could also present an interesting acquisition target for a larger strategic or financial player. The CEO, Shimon Alon, is the largest shareholder with 8% of the stock, so he has a considerable financial interest in the company's future. Interestingly Microsoft, as an OEM partner, has right of first refusal for any acquisition proposed by another party. This demonstrates the importance of ATTU to Microsoft and presumably to its other OEM partner.
Attunity is a bit of a relic in its perpetual license revenue model. While most software companies today are in the Software-as-a-Service (SAAS) model, Attunity's customer base demands ownership of its software products, so it sells to them in a perpetual fashion. This business model is a two-edged sword as revenue above/below forecast drops to the bottom line and causes large EPS beats/misses. The main risk for Attunity is that some deals slip out of a quarter causing a revenue and earnings shortfall.
Disclosure: I am/we are long ATTU.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.