Attunity: A Big Quarter For Big Data

| About: Attunity Ltd (ATTU)
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2012 is off to a red hot start for Big Data vendors. Last week, Splunk (NASDAQ:SPLK) exploded on to the scene, driven by its compelling value proposition and application ecosystem. In the January quarter, Wall Street's newest darling nearly doubled its revenue to $43.2 million. These results, among other things, gave investors justification to reward SPLK with a $3 billion valuation.

Pipeline Data has been high on Big Data for over a year and SPLK's meteoric rise only fuels our enthusiasm. Its valuation presents some risk, but Splunk's positioning certainly warrants close monitoring

Among smaller caps, Attunity (NASDAQ:ATTU) is showing impressive growth. We have highlighted Attunity on SeekingAlpha in recent months (see "Software Earnings: Attunity Reports 100% Growth; Broadvision Looms" and "These Stocks Are Poised To Triple In 2012"). Its latest news further validates our bullish view.

On Monday, Attunity reported 106% revenue growth for its March quarter. It was Attunity's sixth straight quarter of strong growth, showing investors that Big Data is taking off. Attunity's Real-Time Data Integration drove revenue of $6.1 million versus $3.0 million in the year-ago period. License revenue grew even faster, jumping 125% to $3.6 million in the quarter. These statements can be verified via the earnings conference call replay.

Attunity's September acquisition of RepliWeb has proven to be a quick and synergistic success. During the March quarter, RepliWeb contributed 50%+ organic license growth, only slightly overshadowed by the 60% organic growth delivered by its parent. This can be verified via the company's earnings call replay. Instructions can be found at the bottom of the earnings release.

The quarter was highlighted by seven large deals in the Financial Services vertical and many more in very competitive bake-offs. Many of these institutions chose Attunity for its expertise in enabling data availability and removing Big Data bottlenecks. Some of Attunity's latest capabilities allow customers to easily move data between on-premise and cloud-based applications.

These strengths have attracted big-name Big Data partnerships with the likes of Hortonworks (Big Data vendor, spun-off from Yahoo), Hewlett-Packard (NYSE:HPQ), IBM, Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL), and SAP (NYSE:SAP). In fact Attunity's technology is in an integral piece of Micosoft's latest version of SQL Server.

Of equal importance, Attunity's CEO has a reputation for execution and unlocking value for public shareholders. He oversaw the growth of Precise Software from $1 million to over 20 million in quarterly revenue before accepting a $600 million buyout offer from Veritas (which merged into Symantec one year later).

Attunity is currently a third of the way to matching Precise's size at acquisition, so it still has plenty of growth ahead. Our discussion with management confirmed that the company is targeting 30% in annual organic growth, which could lead to another M&A exit. These facts can also be confirmed via the company's presentations to investors.

A simple modeling exercise uncovers Attunity's potential path. In the model below, you can see that the company has an attractive cost structure, highlighted by high gross margins. Company guidance indicates that the company will keep its R&D and G&A resources fixed, while Sales & Marketing expenses will grow at close to the same rate as revenue. Given this operating leverage, even 25% revenue growth will result in exceptional EPS growth.

If the company continues with its expansion, non-GAAP net income could approach $10 million in 2014. In our opinion, this would justify a valuation of nearly $9 per share, even if we apply a conservative PEG ratio of less than 1.

Of course, the company has to execute against this model for the stock to achieve its lofty potential. As such, there are risks, many of which are outlined in the company's annual report, filed with the SEC. Some of these risks include the following:

  • The multi-billion dollar valuation afforded to Splunk shows that there is great potential for reward. However, it also means that there are many well capitalized competitors in the marketplace.
  • Attunity need to maintain its relationships with IBM, Microsoft, and others. In 2011, two of its OEM partners accounted for 13.4 % and 10.7%. of revenue, respectively.
  • The market is moving fast, so Attunity needs to remain ahead of the curve. As a result, its development efforts need to continue bearing fruit. Any missteps could be detrimental to the business.

In this regard, we are relying on management to replicate its past successes. In our earlier articles, we alluded to the company's potential, but with our modeling exercise we can now present quantification of why we believe shares of Attunity are poised to triple.

ATTU (All numbers in U.S. $000) 2010 2011 2012 2013 2014 2015
Software License 4,645 8,140 15,000 20,000 26,000 33,300
Maintenance and services 5,430 7,029 12,000 13,800 16,320 19,683
Total revenues 10,075 15,169 27,000 33,800 42,320 52,983
Growth 51% 78% 25% 25% 25%
Cost of revenues 1,951 1,453 2,970 3,360 4,044 4,936
Gross Profit 8,124 13,716 24,030 30,440 38,276 48,047
Research and development costs, net 2,482 4,960 8,000 8,000 8,500 9,000
Selling and marketing expenses 3,831 5,851 10,000 11,830 13,754 16,425
General and administrative expenses 1,854 2,835 3,200 3,300 3,400 3,500
Total operating expenses 10,118 15,099 21,200 23,130 25,654 28,925
Operating income (loss) (43) 70 2,830 7,310 12,622 19,123
Non-GAAP Operating Income 4,782 9,262 14,574 21,075
Financial expenses, net 1388 1284 1,250 1,000 500 0
GAAP net income before taxes (1431) (1214) 1,580 6,310 12,122 19,123
Non-GAAP net income before taxes 3,532 8,262 14,074 21,075
Income taxes (benefit) 74 (399) 632 2,524 4,849 7,649
Net income/(loss) (1505) (815) 948 3,786 7,273 11,474
Non-GAAP Net Income 2,900 5,738 9,225 13,426
Forward P/E 40 35 32 30 25
Valuation (Per Share) $ 11.04 $ 18.68 $ 26.76 $ 35.64 $ 40.00

Disclosure: I am long ATTU.