I'm a value investor in the tradition of Graham and Dodd. Most often but not always I start with the balance sheet recognizing that tangible assets are conservatively recorded according to GAAP at their historical cost. For me this is a sound starting point for valuation before moving on to the I/S and cash flow to assist with the forecasting part of my fair value determination.
My current strong Datawatch (DWCH, Financial) conviction does not reconcile using this approach. Most would say its overvalued and moved up way too fast, so I should just wait for a big pull back. That was the original consensus when it was at $5 per share after the move from $3 with my first article on Jan. 9, 2011 (DWCH Datawatch: Potential Overlooked Catalyst). DWCH last traded at $13.25 on April 6, 2012.
My renewed conviction is based on progress over the last four quarters. Value has been quickly created that has yet to be realized/recorded on the financial statements. I see this valuation mistake as an opportunity to continue holding my position and add more on any price weakness.
So just how is Datawatch creating value not yet seen on the financial statements over the past 3 to 12 months? Warren Buffett places a heavy emphasis on understanding management and its ability to foretell the future results of a company. Most investors find this task too difficult or are simply lazy to investigate management's track record or fit for a company. Datawatch has been fortunate to acquire many additional talented, proven leaders over the past few quarters.
New proven leadership talent is helping to to execute the company's transformation. The CEO, vice chairman and 95% of the sales/marketing organization turned over with known commodities, gross margin improvements and 50% year-over-year quarterly revenue growth. The company also purchased significantly undervalued intellectual property, multiple partnerships/technology alliances, industry recognition/praise and the proven team to leverage these internal and favorable market trends.
Additional details on the recent overlooked value creation
Ninety-five percent of the sales and marketing organization were turned over. They have a new "go-to market model," driven by known, proven sales professionals. CEO Morrisson brought them on board, and they were all part of the success at Applix, Cognos or IBM. It usually takes nine months to start realizing the full impact of a new sales employee, hence we have yet to see a fraction of the full benefit from these changes even with the 50% year-over-year quarterly profitable revenue increase. The addition of known sales commodities to a tiny software company like Datawatch is a benefit that has yet to be fully realized on the financial statements.
Maintenance costs were not emphasized in the past. Datawatch will be passing along maintenance costs to customers. This is common practice by all other software BI and related vendors.
From my analysis, Datawatch's software was and is being horribly underpriced based on the functionality, problems/questions solved, ROI provided and similar industry solutions sold. This will improve as management made the commitment to quickly increase the average size of deals. More than 40,000 customers with almost all of the Fortune 100 is a tremendous advantage to leverage for the new sales organization and leadership. Couple this with recent major upgrades of their report analytic software, and top-line growth potential feels certain.
A new focus on partnerships that was virtually ignored in the past has clearly been a successful new commitment. Some examples of partnership agreements over the past six months were Arcogent, Jacobus, Technolab, Laserfiche, Dimensions Analysis, Quantalytic, Lifeboat and many others, which will help drive future free cash flow. It also has a technology alliance with a blue chip BI provider Qlik Tech.
On March 1, 2012, Monarch's (Report Analytics Engine) intellectual property was purchased for 8.541 million. This eliminates annual royalty payments which totaled approximately $1.5 million in fiscal year 2011. Gross margins will improve for this immediate accretive cash basis deal. But far more importantly this allows the freedom to accelerate future enhancements and integrate their report analytics platform with major BI solution providers. The exercised option for 8.541 million is a brilliant win for Datawatch. The fair market value of the intellectual property is many multiple times greater than the price agreed upon in the 2004 contract.
Important points that will accelerate this transformation play
Today there is very little or no competition. Tremendous technological innovation developed over 20 years focused on everyday, real-world user requirements. The functionality of their solutions provided coupled with recent intellectual property ownership will attract alliances with BI, ETL, ERP and other solution providers. CEO Michael Morrison, Vice Chairman Dave Mahoney and multiple new sales additions were part of Applix. During that time Michael Morrison was the COO, Dave Mahoney was CEO, along with multiple sales leaders recently hired at Datawatch. At Applix they increased the market capitalization over the course of three years by 15 times. Applix was taken over by Cognos and then months latter Cognos was taken over by IBM for $4.9 billion in cash. So now Datawatch has the right people coupled with products and market trends to move higher.
DWCH:
Market Capitalization = 82 million
Enterprise value = 73 million
Gross Profit = 13 million
Cash = 9.65 million with no debt
http://shadowstock.blogspot.com/
My current strong Datawatch (DWCH, Financial) conviction does not reconcile using this approach. Most would say its overvalued and moved up way too fast, so I should just wait for a big pull back. That was the original consensus when it was at $5 per share after the move from $3 with my first article on Jan. 9, 2011 (DWCH Datawatch: Potential Overlooked Catalyst). DWCH last traded at $13.25 on April 6, 2012.
My renewed conviction is based on progress over the last four quarters. Value has been quickly created that has yet to be realized/recorded on the financial statements. I see this valuation mistake as an opportunity to continue holding my position and add more on any price weakness.
So just how is Datawatch creating value not yet seen on the financial statements over the past 3 to 12 months? Warren Buffett places a heavy emphasis on understanding management and its ability to foretell the future results of a company. Most investors find this task too difficult or are simply lazy to investigate management's track record or fit for a company. Datawatch has been fortunate to acquire many additional talented, proven leaders over the past few quarters.
New proven leadership talent is helping to to execute the company's transformation. The CEO, vice chairman and 95% of the sales/marketing organization turned over with known commodities, gross margin improvements and 50% year-over-year quarterly revenue growth. The company also purchased significantly undervalued intellectual property, multiple partnerships/technology alliances, industry recognition/praise and the proven team to leverage these internal and favorable market trends.
Additional details on the recent overlooked value creation
Ninety-five percent of the sales and marketing organization were turned over. They have a new "go-to market model," driven by known, proven sales professionals. CEO Morrisson brought them on board, and they were all part of the success at Applix, Cognos or IBM. It usually takes nine months to start realizing the full impact of a new sales employee, hence we have yet to see a fraction of the full benefit from these changes even with the 50% year-over-year quarterly profitable revenue increase. The addition of known sales commodities to a tiny software company like Datawatch is a benefit that has yet to be fully realized on the financial statements.
Maintenance costs were not emphasized in the past. Datawatch will be passing along maintenance costs to customers. This is common practice by all other software BI and related vendors.
From my analysis, Datawatch's software was and is being horribly underpriced based on the functionality, problems/questions solved, ROI provided and similar industry solutions sold. This will improve as management made the commitment to quickly increase the average size of deals. More than 40,000 customers with almost all of the Fortune 100 is a tremendous advantage to leverage for the new sales organization and leadership. Couple this with recent major upgrades of their report analytic software, and top-line growth potential feels certain.
A new focus on partnerships that was virtually ignored in the past has clearly been a successful new commitment. Some examples of partnership agreements over the past six months were Arcogent, Jacobus, Technolab, Laserfiche, Dimensions Analysis, Quantalytic, Lifeboat and many others, which will help drive future free cash flow. It also has a technology alliance with a blue chip BI provider Qlik Tech.
On March 1, 2012, Monarch's (Report Analytics Engine) intellectual property was purchased for 8.541 million. This eliminates annual royalty payments which totaled approximately $1.5 million in fiscal year 2011. Gross margins will improve for this immediate accretive cash basis deal. But far more importantly this allows the freedom to accelerate future enhancements and integrate their report analytics platform with major BI solution providers. The exercised option for 8.541 million is a brilliant win for Datawatch. The fair market value of the intellectual property is many multiple times greater than the price agreed upon in the 2004 contract.
Important points that will accelerate this transformation play
Today there is very little or no competition. Tremendous technological innovation developed over 20 years focused on everyday, real-world user requirements. The functionality of their solutions provided coupled with recent intellectual property ownership will attract alliances with BI, ETL, ERP and other solution providers. CEO Michael Morrison, Vice Chairman Dave Mahoney and multiple new sales additions were part of Applix. During that time Michael Morrison was the COO, Dave Mahoney was CEO, along with multiple sales leaders recently hired at Datawatch. At Applix they increased the market capitalization over the course of three years by 15 times. Applix was taken over by Cognos and then months latter Cognos was taken over by IBM for $4.9 billion in cash. So now Datawatch has the right people coupled with products and market trends to move higher.
DWCH:
Market Capitalization = 82 million
Enterprise value = 73 million
Gross Profit = 13 million
Cash = 9.65 million with no debt
http://shadowstock.blogspot.com/
