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Edited Transcript of DWCH earnings conference call or presentation 20-Apr-17 12:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 Datawatch Corp Earnings Call

CHELMSFORD Apr 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Datawatch Corp earnings conference call or presentation Thursday, April 20, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James L. Eliason

Datawatch Corporation - CFO, VP of Finance, Treasurer and Secretary

* Ken Tacelli

Datawatch Corporation - COO

* Michael A. Morrison

Datawatch Corporation - CEO, President and Director

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Conference Call Participants

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* Chad Michael Bennett

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* David E. Hynes

Canaccord Genuity Limited, Research Division - Analyst

* Ilya Grozovsky

National Securities Corporation, Research Division - Senior Equity Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Datawatch Corporation Second Quarter 2017 Earnings Conference Call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to your host, Jim Eliason, Chief Financial Officer. Sir, the floor is yours.

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James L. Eliason, Datawatch Corporation - CFO, VP of Finance, Treasurer and Secretary [2]

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Thank you, Julie. Good morning, everyone, and welcome to the Datawatch Corporation Q2 FY '17 Earnings Call. With me on the call this morning are Datawatch President and Chief Executive Officer, Michael Morrison; and Chief Operating Officer, Ken Tacelli.

As you can see from our press release issued last evening, we had another strong quarter, which makes 3 consecutive quarters with double-digit revenue growth and even higher license growth. In addition to the continued improvement with our top line results, the company was profitable on a non-GAAP EBITDA basis excluding severance costs and generated positive operating cash flow during the quarter for the first time since Q3 FY '13.

The business continues to trend positively, and the metrics across the board were, once again, excellent this past quarter. Michael, Ken and I are very excited to share some of these metrics in more detail on the call today right after I review some conference call details and our safe harbor statement.

As I mentioned, our press release containing our Q2 FY '17 results was issued yesterday afternoon at 4 p.m. and is posted on our website. You can also request a copy by e-mailing us at investor@datawatch.com. This call is being broadcast live via webcast. And following the call, an audio replay of the webcast will be available in the Investor Relations sections of our website at www.datawatch.com.

Following the prepared remarks, we will open the call for questions. The operator will provide instructions at that time.

Before we begin, I'd like to remind you that any statements we make today that do not describe historical facts may constitute forward-looking statements and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any such statements are accurate as of today, April 20, 2017, and are subject to a number of risks and uncertainties that could cause actual results to differ materially from current expectations. We undertake no obligation to update any forward-looking statements.

For more information, I refer you to the descriptions of these risk factors found in our earnings release along with the company's Annual Report on Form 10-K for the year ended September 30, 2016, and the quarterly report on Form 10-Q for the quarter ended December 31, 2016, as well as other publicly available documents filed with the SEC. Any forward-looking statements should be considered in light of those factors.

I would also like to remind you that to supplement our financial results, prepared in accordance with generally accepted accounting principles, we will, from time-to-time, discuss certain non-GAAP financial measures that we believe are helpful in understanding our financial performance and future results.

A reconciliation of our GAAP and non-GAAP financial results is contained in the press release issued yesterday and is also available in our filings with the SEC. Our non-GAAP financial measures are not meant to be considered in isolation nor as a substitute for comparable GAAP measures and should be considered in conjunction with our consolidated financial statements prepared in accordance with GAAP.

At this point in time, let me briefly recap some of the key financial results from the just-completed quarter. Q2 total revenue was $8.8 million, up 18% from the prior year second quarter when total revenue was $7.4 million.

License revenue for Q2 FY '17 was $4.9 million versus $3.6 million in Q2 of the previous year, an increase of $0.34. Sales of our Monarch product line continue to be the primary drivers of this growth with Monarch revenues coming in at $7.6 million in Q2 '17, up 31% versus Q2 of FY '16 when they were $5.8 million. Growth in Monarch license revenue line was even more impressive with Q2 FY '17 at $4.6 million versus $2.8 million in the previous year's Q2, up more than 60% year-over-year.

Maintenance revenue for the just-completed quarter was $3.6 million, up slightly from the prior year's second quarter when maintenance revenue was $3.5 million. This modest growth in our maintenance revenue stream continues despite the fact that we have been transitioning to a license subscription model in a measured way over the past 2 years.

Services revenue of approximately $310,000 was also up slightly from Q2 FY '16 when it was $299,000. We continue to see consistent momentum with our license subscription model with approximately $1.3 million of gross bookings during the second quarter of FY '17, up almost 60% year-over-year, as well as contributing approximately $1 million of license revenue during the quarter, representing over 20% of our current quarter's license revenue for the second consecutive quarter while growing almost 90% over the prior year quarter. Monarch Complete continues to be the primary driver for this growth with 193 net new land customers during Q2 FY '17, versus 171 such lands in Q2 FY '16.

As I indicated at the beginning of the call, for the first time in almost 4 years, the company generated a profit of approximately $200,000 on a non-GAAP EBITDA basis, excluding severance costs of approximately $300,000 versus a $1.7 million loss in Q2 of FY '16. Our non-GAAP operating expenses, once again excluding severance costs, came in at $8.6 million, down significantly from Q2 FY '16 when they were $9.1 million.

As we discussed in our last few earnings calls, rationalizing our cost structure was a key priority for the executive team coming out of year-end 2016, and we are happy to report that we met our stated goal of running the business on a cash breakeven basis 2 full quarters earlier than we had planned. To be clear, we continue to carefully monitor and assess all current investments as well as incremental investments that we may make behind our growing revenue base as we pursue the goal of reaching operating profitability on a sustainable basis.

Moving to the balance sheet. Our cash position remained strong as we generated approximately $1.5 million of cash during the quarter, ending with approximately $27.8 million of cash on hand. Approximately $700,000 of the improvement was a result of a onetime settlement payment included in other income from a stockholder related to such stockholder short swing stock trading profits, and the remaining $800,000 was a combination of operating cash flow and positive working capital swings during the quarter.

Accounts receivables are in great shape in terms of quality with roughly 87% of our outstanding receivables in the current aging category. DSOs were 66 days for the most recent quarter versus 63 days in Q2 FY '16.

Deferred revenues were $10.1 million at the end of Q2 FY '17, growing approximately 16% or up some $1.4 million from the prior year second quarter. License deferred revenues continue to drive this impressive trajectory, increasing almost 75% from the prior year quarter. This is now the seventh consecutive quarter in which subscription bookings have grown significantly on a year-over-year basis.

At this time, I would like to share some operating metrics from the just-completed quarter. There were three 6-figure deals in the second fiscal quarter of this year as compared to 8 in the second quarter of fiscal 2016. I am pleased to report that in this quarter's tally was Datawatch's first-ever 7-figure license deal, a transaction that represents a further expansion of a longtime Monarch Classic customer that had upgraded to Monarch Complete in Q1 FY '17, and then in Q2 FY '17, more broadly embraced the Monarch platform across its organization.

The average deal size in Q2 FY '17 was approximately $36,000 as compared to approximately $43,000 in Q2 FY '16. As we said before, this number tends to move around from quarter-to-quarter depending on the composition of deals, although we still see the annual trend moving higher.

Our total headcount at the end of Q2 FY '17 was 130 people, down from 141 as of the end of Q1 FY '17, and 17 fewer than the prior year's second quarter when there were 147 people. Included in the Q2 FY '17 headcount numbers are 17 quota-carrying salespeople, of whom 9 are outside sales reps and 8 are inside sales reps. Lastly, our total shares outstanding as of March 31, 2017, were 12,025,000 and weighted average shares outstanding were 12,014,000.

In summary, the key business metrics that best define and predict our performance are very positive and are trending in the right direction. This is the third consecutive quarter of double-digit revenue growth and greater than 30% license revenue growth for the company. Full rationalization of the underlying cost structure to better align with our current revenue trajectory has been achieved, and we are well on track to exceed our stated goals for the current fiscal year. We are optimistic about our ability to deliver strong results for the remainder of the year and beyond, but at the same time, we recognize that we still have much work to do to gain our fair share of what we believe is a large and growing data preparation market, which in turn will drive positive results for all of our shareholders.

With that, I would now like to turn the call over to our President and CEO, Michael Morrison.

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Michael A. Morrison, Datawatch Corporation - CEO, President and Director [3]

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Thank you, Jim, and good morning everyone joining us on this call to review our fiscal 2017 second quarter results.

I'm pleased to report solid second quarter results which were consistent with our expectations and also included important progress on several fronts. We continue to capitalize on our extensive customer base, leading to strong growth in our core Monarch data preparation and analytics business. We extended the overall market opportunity for Datawatch with the release of Monarch Swarm, our next-generation cloud offering, and as Jim just noted now, we delivered on our commitment to return to operating profitability 2 quarters earlier than we originally targeted.

Total bookings in the second fiscal quarter topped $10 million, up 23% year-on-year and a historic high for Datawatch. With our controlled transition to a recurring revenue model, total bookings remain a critical metric for the company and one that we closely monitor. Our strong performance over the past 3 quarters, coupled with our positive outlook for the second half of fiscal 2017, place the company firmly on track to achieve our financial targets for the year, including double-digit revenue growth and operating profitability exiting the year.

We continue to execute on our strategic plan in a very disciplined manner. Let me share with you some further details on this plan, which at its core, calls for us to produce consistent, predictable and profitable revenue growth. Our focus on delivering innovative technology that improves business processes and empowers business analysts to quickly and easily access data for analytic insights provides a significant growth opportunity for Datawatch. And the secular shift towards self-service analytics is an added accelerant for this growth.

Our strategy to capitalize on the opportunity includes the following: First, expanding within our current customer base. We count nearly 14,000 organizations as customers, and the growing number of use cases that we have developed demonstrating how we improve customers' efficiency and productivity helps to constantly increase the footprint of our Monarch platform within our customers. Nearly all of our largest transactions this past quarter were to our existing Monarch customers.

Second, increasing our overall customer base. Our land-and-expand business model appeals to net new name customers who can engage with our Monarch self-service data preparation and analytics platform in a very frictionless try-and-buy manner. Of the new lands in Q2, nearly half were to net new name customers for Datawatch.

Third, growing our partner ecosystem. Specifically, we're targeting large system integrators and managed service providers that can help us enter and grow in new markets as a complement to our direct sales efforts. Monarch Swarm is a perfect enabling platform for these partners.

Fourth, extending our value proposition. We continue to invest in innovation and new capabilities for our Monarch platform. As I noted earlier, in Q2, we released the next generation of our flagship platform, Monarch Swarm, which is a cloud-enabled release with enhanced data governance, collaboration, socialization and gamification features. And I'm delighted to tell you that one of the world's leading oil and gas companies became the first customer of Monarch Swarm within days of its release, drawn by this platform's ability to enable collaboration amongst the various users of Monarch and its supply chain operations.

And finally, fifth, embracing our Monarch community. Our customers are our best salespeople, and we regularly promote initiatives to keep them engaged and energized. As one example in recent months, we've conducted free training events in Dallas, New York City and London, attended by some 200 individuals, where we shared some of the innovative ways that Monarch can dramatically improve business outcomes. Helping our customers learn from each other as well as from us makes our technology even more useful and widespread within organizations.

So while I'm happy to report that we're executing well in these key elements of our growth strategy, there's always room for improvement. As we move into the second half of fiscal 2017, we're continuing to fine-tune our marketing message and programs, enhance our sales enablement initiatives and increase the level of engagement with our customers. We are on a mission to continually improve our execution and maximize productivity and results.

Before I turn the call over to Ken, let me share a few perspectives about the market in general based upon my interactions with customers, prospects and partners. For the better part of 2016, it seemed to me that the hype around self-service data preparation and analytics was ahead of organizations' actual appetite for these technologies. We certainly saw a lot of interest, but that didn't always translate to a firm intention to buy.

In the past 2 quarters, I definitely sense a shift in the marketplace. While I continue to believe that self-service data preparation and analytics is in its early days, I perceive the heightened awareness within organizations around the value that can be gained by deploying these next-generation technologies.

Whether in meetings with customers and prospects or industry events like the Gartner BI Summit, we hear fewer questions like what is self-service data preparation and far more questions around how do I maximize the value of a self-service data preparation deployment. While this input is largely anecdotal in nature, it's certainly different than it was even 6 months ago, and I firmly believe that an element of Ken's growing pipeline can be attributed to a maturing understanding of this segment of the analytics market by companies who are more galvanized to act than they have been in the past. While I would not call it an inflection point in the adoption of this technology yet, I believe we are seeing a fundamental change in how customers perceive the benefits of self-service data analytics.

With that, let me turn the call over to Ken Tacelli, our Chief Operating Officer, to provide some color on our go-to-market initiatives.

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Ken Tacelli, Datawatch Corporation - COO [4]

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Thank you, Michael. Good morning, everyone. I'm happy to be joining you this morning to provide some updates on our go-to-market sales and marketing initiatives as well as our partnering program. I will also share some specific results from the just-completed Q2 '17. I'll start with the go-to-market approach and then cover some details from the quarter within each aspect of our strategy.

I'm very pleased to say that our sales productivity continues to grow, which is reflected in our license revenue growth of 34% in the past quarter compared to Q2 of last year. This represents a 76% increase in sales productivity Q2-over-Q2. The continuation of the success we've produced in the prior 2 quarters proves that our deliberate move towards industry-specific territories, targeted selling campaigns and a concerted effort to increase sales and marketing alignment is paying off nicely.

As I told you last quarter, our efforts to align sales territories and focus on targeted industries with corresponding use cases has enabled us to create repeatable and scalable sales campaigns. This focus is demonstrating clear success. Our approach enables us to better understand and respond to specific customer business problems that we can help solve through Monarch platform.

Moreover, we're deploying several newer initiatives that specifically target the opportunity for Monarch that resides in our large customer base. Our Monarch self-service data preparation platform is ideally suited to deliver analytic solutions that address horizontal or vertical use cases. The increased traction with our existing customer base is a direct result of our ability to demonstrate to these customers the tangible ROI that can be realized from our Monarch platform. We remain confident that we can continue this pattern of new growth by applying this approach more broadly within the existing base.

Sales and marketing alignment continues to be a critical component of our go-to-market focus. This produces higher quality, top-of-the-funnel leads, which then enable our sales team to focus their time and energies on pursuing better opportunities.

In applying continuous improvement to the ongoing alignment between sales and marketing, we implemented a measurable marketing operating process in the first quarter of 2017 that has directly impacted our positive sales results. We have increased our marketing qualified leads by 52% quarter-over-quarter sequentially while significantly rationalizing our overall marketing spend.

Our team now benefits from defined quarterly goals that are shared across both sales and marketing teams for better [ monitoring ] and improvement of our performance. We have implemented a disciplined approach to measuring all aspects of our marketing. We have redefined both marketing contribution measurements and the way in which we track the original lead source.

This has allowed us to more accurately predict the success of our activities and proactively adjust our actions based on early indicators. This has already resulted in a significantly higher conversion rate of marketing-generated leads to sales-qualified opportunities.

Our successful land-and-expand strategy remains a key element of our approach. As Jim mentioned, we had 193 new land deals in Q2 2017 as compared to 171 in Q2 2016, which is an increase of 13%. We had 42 expand deals in Q2 2017. And by comparison, we only had 18 such deals in Q2 2016.

On the partnering front, as Michael noted, we've seen an improvement on both a quarter-on-quarter and year-over-year basis, especially with large-volume resellers and managed service providers. Our base of global reseller partner accounts has, in some cases, realized double-digit growth in their Monarch business in Q2 2017.

The Datawatch sales team managing the partner channel has focused the resellers on targeting key use cases in both financial services and health-care industries. These are sectors where Datawatch is a proven and well-established leader, making the customer acquisition of the technology more repeatable.

We have also seen better growth in partner-related subscription deals recently with half of the new customer acquisitions being subscription-based transactions. We believe our continued investment in partners will drive more incremental revenue across all of our Datawatch sales teams.

I know many of you have asked about our traction with several key partners. I'm pleased to say that we've also realized partner growth through technology partners like IBM and the former Dell Statistica in Q2 '17. We're continuing to make good progress in engaging with IBM on larger enterprise solution opportunities, building on our inclusion in a 7-figure IBM deal in Q1 '17.

In Q2 '17, we continue to acquire new logos by leveraging IBM and the IBM partner ecosystem. Additionally, Statistica continues to gain traction bundling Datawatch with its core products for predictive analysis. We are pleased with the results we saw in Q2 '17. On a quarter-over-quarter basis, our software royalties from this program have doubled sequentially over the last 3 quarters.

Lastly, our technology partners that have focused in our target verticals like financial services and health care have continued to introduce new land opportunities to the pipeline. As a result, our total pipeline today is stronger than it was entering the fiscal year. And more importantly, I believe it's better qualified because it reflects the work we've done in aligning our sales and marketing messaging.

In conclusion, I believe that we continue to be well positioned for success this year. We know that we have much work to do, but we are employing a highly focused and disciplined approach that's already demonstrated strong results. The entire sales and marketing organization is highly motivated to build upon our recent success and generate stronger growth ahead.

With that, I'll turn the floor back to Michael.

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Michael A. Morrison, Datawatch Corporation - CEO, President and Director [5]

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Thanks, Ken. Julia, let's open the line for questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from David Hynes with Canaccord.

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David E. Hynes, Canaccord Genuity Limited, Research Division - Analyst [2]

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So maybe wanted to start with Swarm first. Michael, curious, what are the 1 or 2 features, I guess, that most differentiate the new product from the legacy? And then I guess, part 2 of that question would be to talk about how this new release will affect pricing? Curious what does a like-for-like Swarm versus legacy Monarch purchase look like in terms of an ASP uplift?

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Michael A. Morrison, Datawatch Corporation - CEO, President and Director [3]

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Yes. So DJ, on the first point, you think of Swarm as our Monarch in a browser. It's -- consider it evolutionary as opposed to revolutionary. So what it does is, again, it's a cloud application, so we all know that's where the world's going. In the data prep world, most of the battles are being fought on premise today. But we know over time, it's going to migrate to the cloud. So Monarch Swarm brings all the goodness of Monarch on-prem and on the desktop into the cloud.

The key capabilities that we're already seeing resonate with customers and also prospects are the ability to collaborate amongst users. I mean, we've got -- if you look into our customer base, we've got customers with hundreds or sometimes thousands of individual users doing their own thing at the desktop, being able to collaborate and share all the goodness of what an individual does throughout the organization, giving IT the ability to govern all of that -- what historically occurred at an individual basis on a desktop is huge.

So its collaboration and socializing what you've done individually. That's where we're seeing the big play in these early days. On the pricing front, our intent is to bring Swarm into the market purely on a subscription basis. And while in the early days there may be some deviations from that, the goal is to -- it's what you would expect with a cloud application, a SaaS-based type model. So looking into next year and the year beyond, as Swarm takes traction, you need to plan for that revenue coming in largely, almost exclusively on a subscription basis.

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David E. Hynes, Canaccord Genuity Limited, Research Division - Analyst [4]

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But just to be clear, it will be an uplift in pricing compared to the subscription deals that you're signing now?

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Michael A. Morrison, Datawatch Corporation - CEO, President and Director [5]

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Yes, it will not replace the deals and the revenue that we're doing now. It extends what we do now, offers up new use cases, new opportunities. And as we get into those, we'll be doing that largely on a subscription basis.

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Ken Tacelli, Datawatch Corporation - COO [6]

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This is Ken. Just to clarify, on continuing to sell our subscription-based pricing for Monarch Complete. And on top of that, you then get the added functionality of Swarm. So you can either buy Swarm as a complete package or through an existing customer who has purchased subscription license on Monarch Complete. We would then upsell you on the Swarm functionality for an additional subscription charge.

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David E. Hynes, Canaccord Genuity Limited, Research Division - Analyst [7]

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Got it. Okay. Second, maybe this one's for Jim, as it's more kind of numbers-driven. As I look at deferred revenue, right, which was down a bit sequentially, and then considering you guys had record maintenance renewals, it tells me the quarter certainly skewed towards perpetual licensing. So, a, is that correct? And then b, it surprises me a bit given the smaller average deal sizes, which I think you guys typically try to handle on a subscription basis. So can you just talk about kind of the dynamics at play there, whether those are correct assumptions? And what's going on with deferred revenue?

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James L. Eliason, Datawatch Corporation - CFO, VP of Finance, Treasurer and Secretary [8]

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Yes, so deferred revenue, a little bit more color on that. So it's down 100K sequentially so it certainly caught my eye when we closed the books. It's not that. We -- it's actually the seasonality in our maintenance base, and so Q2 is our lowest renewal invoicing quarter of the year, if that make sense to you. So essentially, renewals that are coming up, it's the lowest by -- like almost $1 million. And so quite frankly, the reverse is true. In the first half of FY '17, given the license growth we've seen the last 2 quarters, we've added about $1 million -- $1.5 million of new maintenance contracts.

I fully expect the trend up and to the right to continue next quarter. So that's the reason for the deferred revenue, flatten it sequentially. On your second question, we still sell a fair amount of perpetuals. I mean, if someone's on maintenance, right, they can buy perpetual licenses onesie-twosies, and so the average selling price, what's happening there, DJ, is if we break our invoicing down -- our invoicing year-over-year in terms of number of invoices is up almost 20%, so we're doing a lot more deals. Invoicing over 25K, Q2 last year, it's down about 40%, so we had more 25K-and-over invoicing deals in Q2 FY '16 versus '17. And quite frankly, on the 6-figure deals, it was about 100% more in Q2 '16 versus '17. So it's a mix thing. It bounces around. So that's really what's causing it.

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David E. Hynes, Canaccord Genuity Limited, Research Division - Analyst [9]

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Okay. And then did you give an operating cash flow number in the quarter? I know you guys don't put the cash flow statement in the release.

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James L. Eliason, Datawatch Corporation - CFO, VP of Finance, Treasurer and Secretary [10]

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If you pull out, you'll see in the Q -- if you pull out the payment, which is nonoperating, we generated, in Q2, roughly about $800,000 of operating cash flow in the quarter. And I wanted to add was, some of it's P&L, but a lot of it was the balance sheet. Receivables, as you know, they came way down, so we had a really good collection quarter.

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David E. Hynes, Canaccord Genuity Limited, Research Division - Analyst [11]

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Yes. Got it. And then one last one, if I may, and I'll hop back in. Sales and marketing expense, obviously, a big reset there on spend in the quarter, nice job with the cost controls. I guess, should we think of this level as kind of the new norm that we build from? Or was there an anomaly in the quarter that kind of artificially brought that spend down?

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James L. Eliason, Datawatch Corporation - CFO, VP of Finance, Treasurer and Secretary [12]

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So I'll speak, and Ken can add to it. So again, coming into this year, we had to rationalize our cost structure. So we've definitely taken some -- the marketing side -- marketing programs down. We got there. Moving forward, our intent is to run this thing on a breakeven basis. I will say that the majority of our incremental spend, if not all, will go to sales and marketing because that's where it needs to be when you look at benchmarks and so forth.

So it was done by design, but we're very sensitive to it. We talk about it -- Ken, Michael and I -- all the time, where the next dollar goes, and that's part of when we scrutinize what incremental investments to make. It's primarily, Ken, where do you want to put it? Sales, sales heads internationally, domestic, marketing programs, marketing people. I don't know if you want to add to that, Ken?

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Ken Tacelli, Datawatch Corporation - COO [13]

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I'll just say, so we made a deliberate decision to rationalize the marketing budget. So we looked at everything we'd done in the past 4, 5 quarters. I took it line by line, and we looked at the things that had produced positive results from a sales perspective and things that didn't. So the things that we eliminated from the marketing budget were things that we thought really we could not point to a line of sight of direct results, be it the pipeline generation or conversion to sales opportunities. I feel like we've got it rightsized at this point. And as Jim mentioned, we're going to continue to invest in the sales and marketing side in line with what we expect from a revenue perspective.

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Operator [14]

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Our next question comes from Chad Bennett with Craig-Hallum.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [15]

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Outstanding quarter. So just -- either Michael or maybe Ken, can you just kind of give us an idea. The introduction of Monarch Complete, how that -- if it did, in fact, expanded kind of the use cases for Monarch? And maybe in conjunction with that expanded kind of the data sources you could pull into Monarch. And then with Swarm, are we expanding, again, from a use case or addressable market perspective? Can you kind of take us through how that evolved?

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Michael A. Morrison, Datawatch Corporation - CEO, President and Director [16]

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Yes, Chad, it's Michael. I'll start and then turn it over to Ken. I mean, clearly, Classic to Complete expanded our user community and the use case. I mean, and largely, Complete gave us the ability to get at the more casual business analyst user as opposed to the power user as well as to get at an expanded array of data sources. I mean, we made our mark in the world doing the dirty work, the hardest, most challenging data types and formats. Monarch Complete extended that but also made it very easy to get the easy types of sources.

So we expanded our market in terms of the user community as well as the sources. What Swarm is going to give us is the ability to get into even more use cases with the cloud version of it and collaboration. And also, again, appealing to a broader user community, specifically IT. I mean, there's -- what's happening in data prep today is what happened in self-service analytics 5 years ago with Tableau and Qlik where they made great strides in organizations. A lot of deployment and IT was catching up with them once it came to the forefront.

Same thing is starting to occur in data prep, and Swarm gives IT the ability to manage all of these business users that want to get their hands on data and whether it's moving into an analytic tool like a Tableau or an IBM Watson Analytics or a Qlik or just improve the business process, Swarm gives the IT organization the ability to govern all that, to be the data steward. So not to get in the way of the business analyst, but to, in fact, support them and sort of make sure that everything is going along in the right course there within the organization. So with both of these evolutions of our platform, we open up a broader user community and a broader set of use cases. And Ken, if you want to...

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Ken Tacelli, Datawatch Corporation - COO [17]

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Yes. So I would just add to that. I think we continue to sell based on use cases. That's where we've been very successful. We've identified very specific business problems that we know we can solve and with a repeatable ROI. That's no different whether it's Classic, Complete or Swarm. Some of the functionality that Michael talked about are the folks that would use our technology on the Complete side. It does expand to more the line of business users with multiple data sources.

The way we look at Swarm is Swarm is basically Monarch Plus, right, so it's the next evolution of the Monarch experience. You're going from a desktop experience to the ability to have everything browser based. So now you have the ability to not only have multiple users and more users more readily available to gain access to those datasets and the models that are being used, but you now have the ability to govern it in a more centralized fashion, so you've got the governance and administration at the server level, and it allows for the collaboration and socialization of the end users.

So the use cases remain the same in terms of the problems that we solve, but we do strongly believe that this is going to allow us to become much more line of business and enterprise relevant. So as opposed to solving department-level problems and solutions, we really believe that at this point, we're now going to be able to expand across an enterprise or a line of business and do it in a way in which IT feels comfortable with it.

The other thing is from a use perspective or a use-case perspective, we're starting to see a trend moving from trying to solve problems around specific datasets, and now a lot of our customers are starting to ask around, how do I solve problems specific to my systems, how do I align, as an example, my CRM system with my marketing systems? And -- or my HR systems, which are disparate. How can I pull all these systems together and be able to generate datasets that the business can use. So we really do believe, once again, that this is the evolution of what we've already seen from a data prep perspective.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [18]

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Very good. And can you talk a little bit about the competitive environment? And maybe, again, with the expanded use cases that you guys described very well -- and I'm thinking comparable to maybe an Alteryx kind of is your market opportunity noticeably different than theirs? And is there any reason why we should believe kind of your potential growth rate longer term? Obviously, (inaudible) have to be cognizant of making money and everything, should be noticeably different than maybe an Alteryx or someone else that you might want to cite in the market.

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Michael A. Morrison, Datawatch Corporation - CEO, President and Director [19]

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Yes. So Chad, on the competitive front -- and this is Michael again. When we're selling into our base, we don't run into anybody, and that's not surprising, right. So it's the cross-sell, upsell. And even when we're out selling outside of our base, I think half the time that we're doing that, they're not competitive either. And interestingly, in conversations I've had with CEOs of other players in this space, they all see the same thing. And I'd like to think that that's a positive indicator that this market's quite large and expansive.

When we do compete, the player we see most is Alteryx. And look, we've got a lot of respect for them. Dean Stoecker's done a great job there. Three years ago, they were a company about the size that we are right now, and I think they've done a great job sort of building awareness for the data prep market. I mean, they're a large reason why it's on the radar screen of a lot of organizations today.

When we do get engaged with them out in competitive deals, sometimes they are head-to-head competes, and I'd like to think we do quite well against them. And sometimes they're actually opportunities where we complement what they do. I mean, we do a lot of the same things, but we do some things that they don't. They do some things that we don't. So there's a number of instances or competes, if you will, where we're being looked at to complement an Alteryx implementation. And there's -- in my opinion, I think, there's a lot of opportunity for that as we look forward the next couple years.

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Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [20]

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Okay. And then last one from me, again, maybe for Ken or Michael. I think Ken talked about sales productivity improvement and something like a 75% improvement over the time period he cited. If we -- I mean, growth rate, especially on the license side, has accelerated significantly over the last couple quarters. Again, my words, not yours. If we're on a 25%, 30% license growth trajectory over the next year, 1.5 years, how much productivity headroom do we have left? Where do we get to the point where we -- and do we have to materially add to quota-carrying headcount? And anything around that? Is there a breaking point there? Or do we still have a lot of runway? And then I'll jump off.

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Ken Tacelli, Datawatch Corporation - COO [21]

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Yes -- no, it's a great question. So yes, we had significant -- it was actually 76% and -- which is significant uptick as you can imagine. A lot of that was based on -- like I've talked about in the last couple earnings calls, right, focus and discipline, aligning territories correctly, repeatability of use cases, aligning people to specific verticals versus multiple verticals in a given territory. So a lot of that has contributed.

We've, obviously, established a very disciplined approach to how we look at pipeline conversion deals, et cetera. But you will eventually have diminishing returns on that, and we -- so we look at that pretty closely. We've already started to look at where we might add additional heads. Once we've proven that we understand a particular vertical or use case, and we think that there's growth in a particular territory, as an example, I'll look to add headcount in a very discriminating way. So we're not going to do it too far advanced of revenue.

Where I think there is probably some immediate upside for us is the continued advancement of our relationships with partners in our partner network, so we're going to continue to put some emphasis on that. And I also think that we have potential upside in our EMEA markets for growth. So really, I would say, those are the 3 things: EMEA partners and the continued investment in some of the territories that I think at this point we have rightsized and are producing at a rate at which they haven't done before.

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Operator [22]

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And our next question comes from Ilya Grozovsky from National Securities.

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Ilya Grozovsky, National Securities Corporation, Research Division - Senior Equity Analyst [23]

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Can you just kind of elaborate a little bit on how you guys plan on increasing the amount of customers on the subscription side? I know you'd in the past said that anything below I think 5 units you'd funnel through subscription. Are you moving that number up at all and kind of in order to move more customers to that subscription sale?

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Ken Tacelli, Datawatch Corporation - COO [24]

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Yes. This is Ken. So it's actually 10. So our kind of threshold is 10 or above we'd allow a customer who's classically a perpetual customer continue to buy perpetually. The market 10, we've actually looked at that, and we're tracking that pretty closely in terms of should we move it to 15. Is 10 the right number?

From a growth perspective, on subscription, there's a couple things we're doing. We've seen significant uptick in our subscription volume on the partner side. More than half of our partner-related deals are subscription. So as I mentioned on the previous question as we invest and grow on the partner side, I do expect that to continue to be more of a subscription-based model than a perpetual model. And on the direct side, we have certain incentives with our reps around understanding how to lead with subscription versus perpetual.

Once again, as Michael noted at the beginning of the call, if a customer wants to continue to buy perpetually, then we're going to allow them to continue to that. We do want to start to migrate more and more of our customers to subscription. We think Swarm, by offering that primarily as a subscription model, will start to move our customers toward that mindset. Once again, keeping the customer journey in place, Classic to Complete to Swarm.

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Operator [25]

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And there appears to be no further questions. Michael?

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Michael A. Morrison, Datawatch Corporation - CEO, President and Director [26]

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Julie, thank you. And thanks everybody, for joining us this morning. And as always, if you have any questions post this call, please reach out. Just one point of note. Later this quarter, we are going to be participating in the Cowen TMT Conference in New York City, so if any of you are planning to be there, we'd be very happy to meet with you when we're there. So thank you for your time this morning, and we'll talk to you next quarter.

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Operator [27]

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Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.