Datawatch Reports Results in Line With Preannouncement

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On Wednesday, after the markets closed, Datawatch reported fiscal secondquarter results that were at the high end of the range provided by management during its earnings preannouncement on April 10 and above the high end of the range provided for non-GAAP net income. Total revenue of $8 million (17% growth) was slightly above our $7.9 million estimate (16% growth), below the Street’s $8.4 million estimate (23% growth), and at the high end of management’s guidance of $7.8 million-$8.0 million. Non- GAAP loss per share of $0.29 was above our $0.32 estimate and below the Street’s $0.28 estimate.

Despite being at the high end of management’s preannounced guidance, results were well below our initial estimates of $9 million in revenue and non-GAAP net loss per share of $0.23 as well as initial Street consensus of $9 million in revenue and non-GAAP net loss per share of $0.21. Although we remain disappointed with the company’s secondquarter results, we believe that management is taking the appropriate steps to address the recent execution issues and that our initial investment thesis remains intact. We were pleased to hear that management is taking decisive steps to address the execution challenges that drove the underperformance in the quarter and believe that Datawatch is well on its way to getting back on track.

We believe that the company has already closed roughly one-third of the $1.5 million in deals that slipped in the quarter, up nicely from management’s 25% estimate in the preannouncement, and that it should be able to close most (if not all) of the slipped deals by the end of the fiscal year. The company addressed the departure of the head of its global accounts group by promoting one of its most tenured and seasoned sales representatives to fill the position, and we believe that he has taken some major steps toward stabilizing operations.

The newly appointed group head has already added two seasoned sales representatives—one from IBM (IBM $190.22) and the other from EMC (EMC $25.51; Market Perform)—adding significant depth of talent to the organization’s bench. In addition, management is effecting new techniques aimed at improving execution discipline with an emphasis on key opportunities, such as conducting weekly cadence calls around all significant deals in the pipeline and applying heightened rigor to the pipeline examination process.

While we expect it to take some time (possibly another quarter or two) for the global accounts group to fully stabilize following the shake-up, our overall sense is that both the quality and quantity of opportunities in the company’s pipeline are showing incremental improvement, which should help minimize volatility in near-term quarterly results.

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