Monday, March 24, 2014

Rocket Fuel's Fall From Grace May Be Temporary

"I expect programmatic to slow down in the same way people stopped trading on exchanges and went back to handing pieces of paper back and forth for selling stocks. The Pandora’s box is open..." - Rocket Fuel CFO Peter Barwick in an interview on AdExchager

Wall Street can be a fickle place. Two short months ago programmatic advertising company Rocket Fuel (FUEL) hit an all time intraday high of $72. This was on the heels of an IPO of $29/share in late September of last year. On the same day shares hit their apex, the company announced a five million share stock offering ahead of its March 19th lockup expiration. Traders didn't like the news, and the price has spiraled downward to roughly $46, a decrease of $36% in sixty days. Although it's hemorrhaging cash, Rocket Fuel is still growing close to 80% on a revenue basis, and may present long term investors a decent entry point at the current valuation.

Programmatic Advertising - A Secular Growth Story

Artificial Intelligence. Big Data. Machine Learning. Distributed Systems. Combine these ingredients, and you get a high octane recipe for an advertising platform know as programmatic (which includes real time bidding). Rather than focusing on data analysis by humans, it's a business practice that autonomously adapts and learns while solving multiple problems. In lay terms, it's where and when to feed that advertisement. John Henry versus the steam shovel - you know who won that battle.

Consider this:

eMarketer projects Real Time Bidding digital display ad spending in the US will account for 29.0% of total US digital display ad spending by 2017, or $9.03 billion. In 2013, it accounted for 19.0%, or $3.37 billion.

(Chart Source: eMarketer)

That eMarket extrapolation may prove to be conservative. It also doesn't take into consideration international sales, so the potential for profits increases. Although Rocket Fuel is primarily a domestic company, it's entrenched in Europe with regional offices in the United Kingdom, France, Germany and the Netherlands. It's also making a push into Japan. The company is one of the kingpins and a pioneer of programmatic advertising. It should benefit from the secular growth story of a market in its infancy.

Explosive Growth Since Launching

Most notable in the latest 10-K, released February 28th, is the 126% compound annual sales growth from 2011-1013. In the last earnings report, Rocket Fuel guided for full year 2014 of revenues between $420-$435 million. If we split the difference, that would give us approximate sales growth of 80% for this year. Yes, revenue growth is slowing, but still advancing at a compelling clip.

Drilling down with some specifics:

Rocket Fuel statistics201120122013
Revenues in millions: $44.7$106.6$240.6
Net Loss in millions: $(4.3)$(10.3)$(20.9)
Active Customers: 266536 1,224
R&D in millions: $1.5$4.9$17.7

We're in a new paradigm shift where technology is concerned, and many young companies are coming public before profitability. That's certainly the case for Rocket Fuel, and may continue for the foreseeable future. If you want to invest in some of the exiting new tech pure-plays, you may have to forego earnings to get hyper-growth. Taking that into consideration with your risk/reward tolerance, the losses may be overlooked for awhile.

To accentuate the positive on Rocket Fuel, look no further than its impressive client base which doubled last year to 1,224. This includes 70 of the Advertising Age top 100 advertisers and over 50 of the Fortune 100. It has significant mindshare in an industry in its early innings. Take a look at some of the heavyweights Rocket Fuel services, a who's who in corporate culture:

(Chart Source: Rocket Fuel)

What bothered me most about the financial filings was the R&D expenditures. With only eleven patents, and $17.7 million being poured back into R&D, the company should be doing more to widen the moat, if indeed it does have one. Criteo (CRTO), Tremor Video (TRMR), and YuMe (YUME) are other digital advertising companies that have recently gone public, and will attempt to take market share from Rocket Fuel.

The Move Into Mobile

As smartphones, tablets, laptops, desktops and televisions become interconnected with the advent of technological advances such as seamless video streaming, advertisers want to reach as many devices as possible in one fell swoop. Rocket Fuel got ahead of the curve by launching a next generation mobile advertising suite in February. The suite integrates with 27 mobile ecosystem partners which includes Flurry, Factual, BlueKai, MoPub (TWTR), and Celtra. According to the company:

Mobile Real Time Bidding suppliers connect with Rocket Fuel's proprietary bid infrastructure to provide the broadest mobile reach across tablets and smartphones on all operating systems, and utilize all possible anonymous identification protocols, including cookies, device IDs, and statistical matching.

I believe one formidable opponent going forward is Millennial Media (MM), a small cap company with a mobile advertising exchange. Millennial Media is moving into programmatic with a recent acquisition of JumpTap. Although the two companies compete in the programmatic arena, they are entering the multi-channel universe from two different directions. Millennial Media is going from mobile to desktop, and Rocket Fuel is going from desktop to mobile.

Full disclosure, I own shares of both Millennial Media and Rocket Fuel. Why own shares of both companies? I really don't know which organization will prevail, and because both are relatively inexpensive on a Price/Sales metric, I've got two horses in the race, at least for the next few quarters. However, Millennial Media is a turnaround play, and potential investors should be aware of this. For more information on Millennial Media, my recent article can give you the low down.

Some Rocket Fuel Valuations

Rocket Fuel is currently unprofitable because it's increasing headcount, and acquiring data centers to increase product improvement. As demonstrated earlier, sales are increasing at an impressive clip with mobile comprising 19% of revenues for Q4 2013. As supplied by Yahoo Finance and the annual report:

  • Total Debt - $26.8 million as of December 31st
  • Cash and cash equivalents - As of December 31, 2013 were $113.9 million. Rocket Fuel received net proceeds from its IPO of $103.3 million during 2013. Subsequently in February 2014, Rocket Fuel received net proceeds from its follow-on offering of $116.5 million.
  • Price/Sales (trailing twelve months) - 6.86
  • Market Cap - $1.59 billion
  • Price/Book (most recent quarter) - 10.8

At roughly 5X 2014 sales, and a significant total addressable market, I took a flier on Rocket Fuel at $46. Eighty percent revenue growth is an opportunity that doesn't come up too often. You're never sure if you've reached the bottom of a sell-off in an equity, but if Rocket Fuel can continue to execute, it should be able to outpace the overall market in the next year.

Thursday, March 20, 2014

Datawatch: Twenty Feet From Stardom

"What we lack is visibility in the market." - Michael Morrison, CEO Datawatch

If you go by equity appreciation, then the turnaround strategy at Datawatch (DWCH) has been a phenomenal success. The stock shot up from $12.40 to $38.70 in about six months beginning in May of 2013, but has come down to the $30 range in the last quarter. Much of this price propulsion can be attributed to two primary catalysts - the froth in the "big data" analytic sector which still exists today, and the acquisition of Panopticon back in June. At the time of the acquisition, Panopticon was the leading real-time Visual Discovery vendor, a direct competitor with Tableau Software (DATA).

Some Background

Datawatch was founded in 1985, and can boast a client base that includes 99 of the Fortune 100, and 495 of the S&P 500 companies. The company's "heritage" or "legacy" technology is best described by Alex Woodie of Datanami:

Prior to its acquisition of Panopticon, Datawatch's strength lay in the area of processing semi-structured and unstructured data. Its flagship Monarch offering gave customers the capability to ingest all types of data and documents--including reports in plain text or PDF formats--create a model based on the metadata contained in those reports, and yield more structured data as output.

That technology was suitable for 20th century analytics, but real-time visualization is becoming a business norm with the advent of on-the-fly data mining. Tableau Software, Splunk (SPLK) and Qlik Technologies (QLIK) have been market leaders the past few years. Enter Panopticon.

Panopticon: The Tail That Wags The Dog

Although the purchase of Panopticon could be considered a tuck-in acquisition (an all-stock transaction of approximately $31.4 million), it was a critical step in the transformation of Datawatch which began in 2011 when CEO Michael Morrison took over the helm. According to the company, this marriage created the only vendor in the analytics market that can access and transform any variety of data, and deliver data in real-time. It was no coincidence the stock heated up like a microwave oven after the merger was made public.

In addition to technology, Panopticon added 75 customers to Datawatch’s existing customer base, including Bank of America (BAC), Citigroup (C), Credit Suisse (CS), Amgen (AMGN), Novartis (NVS), Vodafone (VOD), and Shell (RDS-A). OEM relationships with SAP (SAP) and Thompson Reuters also ensued. Based on the new clients that were folded into the Datawatch family, you can see the company is highly levered to some vertical markets like the financials. Alliances with Qlik, Accenture (ACN), and Deloitte also came with the package.

Although Qlik can be seen as a competitor in some instances, both companies share a lot of the same customers. The Qlik product is used for very different purposes than what the Panopticon technology is utilized for. The same can be said for Splunk. Fast-forward five months to November of 2013, and Datawatch announced an alliance with Splunk. Like Qlik, Splunk offers some of the same services Datawatch does, especially in data mining. However, it's a separate set of circumstances for Tableau Software.

As expressed by the CEO at during the acquisition announcement:

I believe that this particular transaction will certainly bring Datawatch more in line with what you might see from a Tableau, in terms of applications and capabilities. So I would certainly see us on their radar, probably more frequently than you would have in the past.

Battle lines are being drawn in data visualization. Although Datawatch purportedly has the lead in technology, Tableau is a much larger rival with new iterations of its software scheduled to be released in the Q2 2014, and early 2015.

The "Land and Expand" Strategy

In the 2013 Q4 Conference Call, Chief Marketing Officer Ben Plummer discussed the company's "land and expand" strategy. Datawatch is attacking the market by focusing on its legacy customer base with a big emphasis on specialties they excel in. Most notably real-time data analytics. A big push into the Asia-Pacific region is also on the docket. There isn't as much competition in this geographic sector with Tableau, Qlik Tech, or Tibco's Spotfire (TIBX). However, Europe and the United States are still extremely important markets.

A recent partnership with IBM (IBM), may help Datawatch in the ever expanding data mining and analytic market globally. As explained by CEO Morrison:

We entered into an agreement with IBM, where IBM will resell our Datawatch solutions for report mining in analytics against documents stored in IBM Enterprise Content Management systems. While we have had an informal relationship with IBM for years, this is the first time that IBM has agreed to put our solution on their price list and resell it.

Although the big data visualization market is a drop in the bucket to a behemoth like IBM, it's a big deal for a smaller company like Datawatch. Additional boots on the ground with the pedigree of the Big Blue sales force can only be beneficial to the bottom line.

In the 2014 Q1 Conference Call, it was stated that customers initially landed include, HSBC (HSBC), Standard Chartered Bank (STAN.L), and Memorial Healthcare. Customers where the company expanded more significantly on initial purchases of its visual data discovery solution included Citigroup, Invesco (IVZ), and Deutsche Bank (DB). The alliance with IBM was well underway in Q1, but no specifics as to which accounts they participated in.

As a side note, this tack is not to be confused with Tableau's "land and expand" strategy. I don't know if there is a bit of copycatting going on here, but the implementation for both companies is quite different. Tableau Software's approach is to offer its product for free as a teaser, hook the individual customer with the plug-and-play attributes, then go after the department when word of mouth steamrolls the purchasing process.

Playing Catch-Up With Tableau Software

In the "big data" technology and services market, IDC projects a 27% compound annual growth rate to $32.4 billion through 2017. This is about six times the growth rate of the overall information and communications technology market. With Datawatch and Tableau Software the two primary pure-plays in data visualization, there is probably room for both companies. Nevertheless, even with the acquisition of Panopticon, Datawatch was late to the party although they've got a rock solid position in certain vertical markets like financials.

Here are some paraphrased statements by CEO Morrison in the most recent earnings presentation:

  • I would characterize what we've done in Q4 and Q1 as primimg the pump.
  • We've got a lot of work to do to get on the radar screen.
  • The offering we have in visual data discovery is very much like Tableau.

Although the Datawatch visualization product may be very much like Tableau's, Tableau Software was founded over ten years ago at Stanford University, so they've got a big head start.

In 2010, Tableau's revenues were approximately $34 million. That's more than what Datawatch sold three years later in 2013 ($30.3 million in fiscal 2013, a 16% increase over the $26 million in sales for 2012). Last year, Tableau's revenues were $232.5 million, growth of 82% over 2012. Some of the Datawatch sales were derived from the data mining part of the business, so it's not an apples to apples comparison. Taking that into consideration, it makes the task of catching Tableau more daunting. Datawatch has a huge gap to overcome.

The Bottom Line

The documentary film Twenty Feet From Stardom focuses on the backup singers on some of the most prolific rock and roll songs back in the 60's and 70's. Although mega talented, the movie's subjects just never made it to the big time. I believe this may be the same fate for Datawatch. It will be successful, but as a niche player in data visualization with strengths in some vertical markets. With the advent of Twitter (TWTR) and other forms of social media, word of mouth spreads very quickly on an international basis where business, politics and pop culture are concerned. Tableau has too big of a jump on the smaller company.

In closing, for turnaround technology company, the stock is not grossly overvalued like its rival Tableau Software. According to the most recent statistics on Yahoo Finance, it has a market cap of $256.44 million (it should be noted the company issued a stock offering after the market cap figure was released, but it's in the ballpark). Price/Sales for the trailing twelve months is 7.94. Price/Book for the most recent quarter is 5.28. Although the turnaround strategy has been a success to this point, it doesn't guarantee it will continue to gain traction. My opinion is that the entire big data analytic sector is overvalued, and if there is sector rotation, or a market correction, this stock will fall like its peers.


This concludes a three part series on big data mining and analytic pure plays. Previous postings focusing on Splunk and Tableau Software were utilized for statistics in this article.

Saturday, March 15, 2014

Tableau Software: When You're Hot, You're Hot

"Big Data" visualization pure-play Tableau Software's (DATA) "land and expand" business model has paid of in spades. It's a grassroots level strategy that often nets individual customers via free trials, then spreads across an organization's departments, divisions and geographies via word-of-mouth. According to the most recent conference call, the overall average initial order size has consistently been under $10,000. That same document reported Tableau closing 179 transactions greater than $100,000 for the quarter.

It was a blowout quarter in a blowout year for the Seattle based company. Wall Street has taken notice, and propelled the shares to over $90 after coming public at $31 just nine months prior. Shares reached $100 in recent a market upswing, but have sold off 10% in the past few weeks. However, it still remains one of Wall Street's glamour stocks.

With 2014 revenues guidance at $320-$325 million, and a lofty market cap just north of five billion dollars, my contention is that the equity is way over its skis for long term investors. Ninety dollars a share is just not sustainable. Nevertheless, the market can stay irrational longer than you can stay solvent, or so the old chestnut goes, so short sellers beware. I believe there are some catalysts for short term traders that may push shares even higher because the data analytic sub-sector is in vogue at this juncture.

Catalyst #1: Gartner Positions Tableau as a Leader in Business Intelligence

For the second year running, Gartner selected Tableau as a leader in its Magic Quadrant for business intelligence and data analytic platforms.

(Chart Source: Gartner)

If you examine the chart closely, you can see Tableau outpacing competitors such as Microsoft (MSFT), Qlik Technologies (QLIK), Tibco Software (TIBX), Oracle (ORCL), and IBM (IBM). According to Gartner, "It is very likely that 2014 will be a critical year in which the task of making 'hard types of analysis easy' for an expanded set of users will continue to dominate Business Intelligence market requirements.". Tableau's easy-to-use, plug and play software makes it a hit for end-users as the company invents and commercializes cutting edge advances in analytics. You can see one reason why Wall Street put shares prices at a premium. Traders and investors both like technology leaders, and Tableau certainly fits the bill.

Catalyst #2: The Partnership with Splunk

Earlier this month, Tableau and Splunk (SPLK) announced a strategic technology alliance. Although both companies reside in the data intelligence sub-sector, they're more or less complimentary technologies. Splunk leads the market in enabling organizations to collect, index and make searchable unstructured data. Tableau Software's products allow you to visualize that data in the form of charts and graphs.

To give an example, it's almost like the 2002 movie Minority Report, where police officers can predict murders before they happen. Big banks of computers crunch numbers that will predict the probability of a murder - where and when it's going to happen. That's the analytic side of the equation, where Splunk fits in. The holograms the police use to massage and interpret the data is a function of what Tableau does. Like a souped up Excel spreadsheet.

Tableau's mission is to help people see and understand data. Coupled with Splunk's large pool of the flotsam and jetsam of the machine age, additional sales should be generated for both companies. More than 7,000 enterprises in 90 countries use Splunk software to deepen business and customer understanding. Combine that with the 17,000 client base of Tableau, and you've got a potent mixture. However, both equities have come a long way in a short period of time. Like Tableau, Splunk has more than doubled in value this past year.

Catalyst #3: The Blowout Quarter

The numbers were outstanding:

  • Tableau posted a record fourth quarter delivering total revenue of $81.5 million. Wall Street consensus had been modeling for $67.1 million. This represented a 95% increase over the prior year Q4.
  • For the full year, it posted total revenues of $232.5 million, growth of 82% over 2012.
  • The company achieved a compound annual growth rate of 89% over the past three years.
  • International sales were 22% of total revenues. CEO Christian Chabot believes that the international business operations are what the domestic side of the business was like three or four years ago. There is plenty of room for overseas expansion.

As CFO Tom Walker stated during the conference call: "In any given year, we generate the majority of our sales from customers previously acquired.". The land and expand strategy again. Google (GOOG), PepsiCo (PEP), Capital One (COF), Delta Airlines (DAL), Deutsche Telekom, Ford (F), and Bristol-Myers Squibb (BMY) are just some of the companies under the Tableau umbrella. Compound this with the partnership with Splunk, and you've got a real growth story on your hands.

Going Forward

According to management, two things in regards to prospective enterprise clients happened last year that helped contribute to the dramatic increase in sales. One was the success of the IPO which introduced Tableau to a larger base of customers. The second is the release of Tableau 8.1 in November. This provided users with more advanced analytic capabilities by integrating with the open source statistics program R. Tableau is scheduled to release version 8.2 in the second quarter, and Tableau version 9 in the first half of 2015. These releases could also be catalysts for increased sales.

Here's where it gets dicey. Although quarter-to-quarter can be lumpy (Q1 is notoriously know for being light), the company has projected annual revenue growth of approximately 40% at the high end for 2014. That's a far cry from the 82% in 2013. Granted, the company can't grow at almost 90% forever, and this 40% projection could be a low ball figure, but that's a significant drop. As far as earnings go, there are none for 2014. The company is expecting non-GAAP operating losses of between $15 and $20 million for next year. This is because the company is investing heavily in R&D, and increasing headcount. In addition, management expects gross margins to decrease because of the additional expenditures.

Conclusion

This is a pricey stock. Yahoo Finance valuation statistics show:

  • Price/Sales (trailing twelve months) of 23.34.
  • Price/Book (most recent quarter) of 22.18.
  • Total Cash Per Share (most recent quarter) is $4.15.
  • Enterprise Value/Revenue (trailing twelve months) is 22.70.
  • Short % of Float (as of March 11th, 2014) is 3.7%, as reported by The Wall Street Journal.

It should be noted that the short float decreased by almost 10% right after the earnings release because a short squeeze ensued. This stock is in play, but you're paying top dollar for it.

If you like to trade based on momentum, this could be a stock for you. It sits in the intersection of two red hot sectors, big data analytic pure plays and recent IPO's. That said, if you're like me and prefer growth at a reasonable price, better buying opportunities may be on the horizon. For instance, the company will be issuing additional shares of stock, which may put pressure on the inflated price. Macro headwinds are always in the picture, too.


Sections of this article were aided by Tableau Software's recently released 10-K (.pdf file). It is the second in a series of "big data" mining and analytic pure plays posts. The first one featuring Splunk can be found here.