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Attunity Gets Back On Track To Triple

Attunity Gets Back On Track To Triple

Last Thursday, Attunity (ATTU) delivered it Q2 earnings report. After hitting a roadblock in Q1, this quarterly report validated the thesis we set forth in our initiation report on SeekingAlpha.

Specifically, the company hit its targets by generating $6.1 million in revenue and $0.02 of basic EPS. It was a solid rebound quarter, with license revenue doubling over Q1’s levels. Guidance for the remainder of the year calls for $27-30 million in revenue. If achieved, second-half revenue growth will be between 25.4% and 48.5%.

On the conference call, I asked management about their expected expense levels going forward. They confirmed that operating expenses should remain flat at current levels. This will provide tremendous operating leverage going forward, especially since its gross margins are over 90%. In other words, they expect most every dollar of incremental revenue to drop to the operating income line. We model something more conservative below, but the implications for EPS and EPS growth are still impressive, as we will soon discuss.

After the call, I conducted a one-on-one with ATTU’s executive management team to review the events that led to its Q1 stumble. The purpose was to determine exactly what happened with the benefit of hindsight. More importantly, I sought to ascertain what happened in Q2 to alleviate the issues (and whether those measures are likely to have a lasting impact).

The issues boiled down to two main themes:

1.     ATTU’s marketing strategy failed to close the loop between lead-generation and sales

2.     Short-term timing issues in its partner channel resulted in an unexpected dip in recognizable revenue.

Issue #1 Marketing & Sales

ATTU’s head of marketing was a believer in utilizing the Internet for marketing and lead generation. Indeed, we could witness the company’s strong web presence, but had little visibility into the efficacy of those efforts. As it turns out, ATTU’s marketing efforts lacked a process for qualifying leads and handing them off to the sales force. As a result, interested prospects fell into a black hole and represented numerous missed opportunities.

Exacerbating matters, with a broken lead-gen pipeline, ATTU management was unable to accurately assess the capabilities of its sales people. In that regard, better sales training was needed, but was left unchecked until it was apparent that Q1 hadn’t materialized as the company had hoped.

Solution: ATTU’s head of marketing was replaced by a new hire with an MIT education. His expertise lies in lead-generation and ensuring better hand-off between marketing and sales. Simultaneously, the company instituted a new sales training program, designed to improve the productivity of its newer and incoming sales hires.

In anticipation of strong revenue growth, ATTU hired several quota carriers during Q4 and Q1. The majority were already familiar with the company’s offerings. They simply required tactical expertise as it pertained to responding to specific scenarios that might arise in the sales process (for example, helping a potential customer to understand the differences between its on-premise and cloud-based offerings and integration to different software platforms).

According to CEO Shimon Alon, the adjustments in sales and marketing contributed to the 100% sequential increase in license revenue that ATTU reported in Q2. More importantly, he views their renewed execution and having generated enough momentum that it will contribute to above-market annualized growth in the back half of 2013 (as outlined in the guidance section above).

Issue #2 ATTU’s Partner Channel

ATTU has attracted long-standing OEM relationships with some of the world’s largest IT vendors, including Microsoft (MSFT), Hewlett Packard (HPQ), and even Oracle (ORCL) whose Golden Gate acquisition makes it a competitor to Attunity. ATTU also boasts an enviable list of go-to-market partners including Amazon (AMZN), EMC/Greenplum (EMC), and Teradata (TDC).

During Q1, Attunity’s pipeline with EMC deteriorated sharply and suddenly, due to changes within its Greenplum/Pivotal unit. These changes led to a $105 million investment from GE into Pivotal, which was spun-out from EMC and VMware. Alon assured us that the financing and other restructuring efforts were completed during the quarter, leading to a stronger relationship between Attunity and the EMC businesses.

A similar issue reared its head with one of ATTU’s largest OEMs. During the quarter, the company was in the process of renegotiating the terms of its relationship. The new terms have since been memorialized and promise to bring more recurring maintenance revenue to ATTU.

Though resolved during Q2, neither of these augmented relationships had a material impact on Q2 results. They are however expected to have an immediate impact in the current quarter, contributing to the aforementioned above-market growth implied in management’s full-year guidance.

So, What’s Next?

With its Q1 issues seemingly in the rear-view mirror, Attunity is poised to continue riding the Big Data wave, as it did in 2012. According to Gartner Group is arguably the strongest independent real-time data capture and replication vendor in the space. At present, its key competitors are Oracle and Informatica (INFA).

The former is actually an Attunity partner (as we have already noted), due to functional advantages that ATTU has developed since ORCL’s acquisition of Golden Gate. As for INFA, Attunity has been laser-focused on its niche, while INFA has been struggling with spotty execution and intensifying competition from the likes of IBM. The net result has seen ATTU establish itself as a best-of-breed alternative within INFA’s installed base, offering robust functionality and a more end-to-end solution for customers.

According to Mr. Alon, these factors have enabled ATTU to build the strongest pipeline of business it has seen in some time.  This gave management the confidence to guide investors to $27-30 million in revenue for 2013 with baseline expectations for 20% growth going forward.

Outlook & Valuation

In our original assessment of ATTU and the Big Data market, we cited market forecast figures that peg Big Data growth in the 30% range. Mr. Alon has repeated stated that he expects ATTU to gain market share in the space, but has only been willing to put his stamp on 20% long-term growth for the company. The obvious takeaway is that he is baking-in a prudent dose of conservatism, designed to avoid a repeat of Q1’s misstep.

That being said, the following outlook and valuation analysis assumes the conservative 20% growth rate.

ATTU   (All data in U.S. $000) 2010 2011 2012 2013E 2014E 2015E 2016E
Software License 4,645 8,140 14,437 16,000 19,360 23,426 28,345
Maintenance and services 5,430 7,029 11,042 11,000 13,100 15,662 18,781
Total revenues 10,075 15,169 25,479 27,000 32,460 39,088 47,126
Growth 51% 78% 6% 20% 20% 21%
Cost of revenues 1,951 1,453 2,356 2,430 2,921 3,518 4,241
Gross Profit 8,124 13,716 23,123 24,570 29,539 35,570 42,885
R&D 2,482 4,960 7,748 8,000 8,250 8,500 8,500
Selling and marketing 3,831 5,851 9,833 11,000 13,000 15,275 17,948
General and administrative 1,854 2,835 3,024 3,200 3,400 3,500 3,500
Total operating expenses 10,118 15,099 20,605 22,200 24,650 27,275 29,948
Operating income (loss) -43 70 2,518 2,370 4,889 8,295 12,936
Financial expenses, net 1388 1284 1,241 200 100 0 0
Pre-tax net income -1431 -1214 1,277 2,170 4,789 8,295 12,936
Income taxes (benefit) * 74 -399 -209 217 479 829 1,294
Net income/(loss) -1505 -815 1,486 1,953 4,310 7,465 11,643
Shares 7,993 8,662 10,716 12,000 12,400 12,750 12,750
EPS  $  (0.19)  $  (0.09)  $   0.14  $   0.16  $   0.35  $   0.59  $    0.91
114% 68% 56%
PEG Ratio 0.40 0.60 0.65 0.75
Forward P/E 45 41 36 29
Valuation (Per Share)  $ 15.79  $ 24.05  $ 29.95  $   35.92
*   Estimates assume a 10% tax rate (ATTU possesses $40 million in tax-loss benefits)

Looking at our outlook, ATTU’s 2013 guidance will require the company to generate $16.3 – 19.3 million in Q3/4 revenue. This compares very favorably to the second half of 2012 when the company produced $13.0 million in revenue. At the lower end of its guidance range, investor might expect Q3 to come in at $7.5 million and Q4 to come in at $9.0 million. This would represent year over year growth of 26% and 27%, respectively. Annualized license revenue growth can be expected to be more in the range of 40%.

This has significant implications for Attunity’s profitability. Like most software companies, ATTU possesses a high margins and a similarly high-leverage operating model. The following chart depicts our ATTU’s revenue/EPS forecast assuming a 30% growth rate (in line with expectations for Big Data market growth):

ATTU   (All data in U.S. $000) 2010 2011 2012 2013E 2014E 2015E 2016E
Software License 4,645 8,140 14,437 16,000 21,440 28,730 38,498
Maintenance and services 5,430 7,029 11,042 11,000 13,100 16,078 20,216
Total revenues 10,075 15,169 25,479 27,000 34,540 44,808 58,714
Growth 51% 78% 6% 28% 30% 31%
Cost of revenues 1,951 1,453 2,356 2,430 3,109 4,033 5,284
Gross Profit 8,124 13,716 23,123 24,570 31,431 40,775 53,430
R&D 2,482 4,960 7,748 8,000 8,447 8,949 9,504
Selling and marketing 3,831 5,851 9,833 10,927 12,758 15,034 17,833
General and administrative 1,854 2,835 3,024 3,200 3,379 3,580 3,802
Total operating expenses 10,118 15,099 20,605 22,127 24,584 27,562 31,139
Operating income (loss) -43 70 2,518 2,443 6,848 13,213 22,290
Financial expenses, net 1388 1284 1,241 200 100 0 0
Pre-tax net income -1431 -1214 1,277 2,243 6,748 13,213 22,290
Income taxes (benefit) * 74 -399 -209 224 675 1,321 2,229
Net income/(loss) -1505 -815 1,486 2,019 6,073 11,892 20,061
Shares 7,993 8,662 10,716 12,000 12,360 12,731 13,113
EPS  $  (0.19)  $  (0.09)  $   0.14  $   0.17  $   0.49  $   0.93  $    1.53
192% 90% 64%
PEG Ratio 0.20 0.35 0.50 0.55
Forward P/E 38 32 25 23
Valuation (Per Share)  $ 18.88  $ 29.46  $ 34.66  $   48.78
*   Estimates assume a 10% tax rate (ATTU possesses $40 million in tax-loss benefits)

Both models are available here for download. The second tab allows you to plug in any growth rate and PEG ratio you prefer to see the impact on ATTU’s valuation.

Looking at our conservative-scenario, while the top-line only expands at a 20% rate, the earnings leverage leads to EPS growth of 114% in 2014 and 68% in 2015. Even assuming a conservative PEG ratio of 0.4 (to account for execution risk), we derive a 2013 year-end target of $15.79. If Attunity can continue to execute against its 20% revenue-growth target next year, the lowered execution risk should enable the PEG-ratio and PE to expand. We believe that would result in a 2014 year-end valuation of $20.05, potentially progressing to $30 by the end of 2015.

In our 30%-growth model, you can see that ATTU can justify a valuation of $18.88 per share, with the potential for a $30 valuation to come next year (one year earlier than in our 20% growth scenario).

Of course, this optimistic view should be tempered due to the execution risks that are inherent in any business (as ATTU demonstrated in Q1). If the company’s recent rebound proves short-lived, we would expect its valuation to return to its recent lows in the $5 range. That being said, investors should also realize that our figures do not represent the top end of ATTU’s potential. Nor do they reflect the possibility that the company is acquired by a larger Big Data player.

Indeed, we view acquisition as a distinct possibility, due to the company’s status as the preeminent pure play in the rapidly-growing Big Data space. Further, Mr. Alon has a history of selling companies, most recently Precise Software. From what we could gather, Precise’s valuation rose 30x under his leadership. The company was acquired by Veritas (now owned by EMC) in a stock-transaction valued at $537 million. We believe that a similar valuation for Attunity can potentially be achieved…and would equate to $48.68 per share.

We believe that finding an acquirer for Attunity (at a significant premium to today’s valuation, of course) would be Mr. Alon’s coup de grâce prior to retirement. Accordingly, we maintain our optimistic view. The team at PoisedToTriple Research will likely wait for Q3 results to raise our rating to GOLD Mine, but continue to believe that shares of ATTU are poised to triple.

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One comment

  1. Interesting — I just noticed that DWCH is set to produce $8.5 million in revenue and $0.02 of EPS in Q4. I think ATTU will beat that, yet its shares trade at half of DWCH’s valuation. One more reason to believe ATTU could double by year-end…

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