Altair (ALTR) buys Datawatch (DWCH) and IntriCon (IIN) Reports
Quick note: Summaries of Goosehead Insurance (GSHD) and Everbridge (EVBG) Q3 earnings reports are coming later today.
Altair Engineering (ALTR): Yesterday Altair announced it would acquire Datawatch (DWCH), a company we’re somewhat familiar with as we held it in the Cabot Small-Cap Confidential portfolio for a short time. Altair management justifies the $176 million acquisition—the largest in its history—by pointing to the depth of technology that it gets in the acquisition. Datawatch has three disparate solutions: Angoss is a prediction tool, Monarch and Swarm are data prep tools, and Panopticon is a visualization tool.
These technologies have applications across Altair’s customer base because of the similarities they share with simulation, especially in areas like IoT utilization in manufacturing. Management believes the underlying technologies are converging, and that by rolling Datawatch tools into the Hyperworks Units model it can offer both customer bases something new, exciting and valuable. There is an opportunity to sell Datawatch technologies into marketing departments among Altair’s 6,000 customers. There’s also an opportunity to sell Altair’s solutions into Datawatch’s userbase.
That said, Altair’s customer base is mostly involved in manufacturing. Datawatch has a large presence in financial services. There isn’t a lot of overlap. On the one hand, if management is right and there are direct applications leading to cross-sell opportunities the potential is significant. Especially since Datawatch didn’t really need to be a stand-alone public company—it has three disparate technologies and limited resources. While they are powerful, selling and scaling the business has been a persistent challenge. Altair could help fix that.
On the other hand, breaking into new markets represents execution risk and new competition. Software for financial markets and marketing is beyond the scope of Altair’s current manufacturing focus.
In the near term, Altair says the deal could reduce the acquired revenue stream (Datawatch was expected to deliver $55.6 million in revenue in 2019, up almost 20% over 2018). That’s because of the conversion of subscriptions to the Hyperworks model. Datawatch is also expected to be around break-even on an adjusted EBITDA basis. There will be some cost synergies. Bottom line: management is striking a very conservative tone with respect to financial impact.
The market had a visceral reaction to the deal and sent Altair’s stock sharply lower yesterday. Shares closed near session lows indicating the Street sees significant execution risk and questions the validity of the deal’s logic. I’ll admit that when I first read the press release, I was a little perplexed by the marriage of these two companies.
I can, however, see the potential upon further examining the respective companies’ product lines. For example, one of the areas Datawatch’s Panopticon visualization software is used is in high frequency trading. It gives trade desks the ability to react quickly to market moving events. As manufacturing becomes more digitized (through use of sensors) it’s easy to see how real-time visualization software can be used for sophisticated operations. It’s all about pulling in data, cleaning and filtering it then streaming it to users in an easy-to-consume format so they can make better decisions based on what’s happening now, and likely to happen in the future.
For now, however, the market has voted. And we need to respect the reaction. Altair moves to Hold after yesterday’s drop. It’s doing a little better today. Management will report on Thursday and we’ll get more info on the deal then, along with an update on the rest of the business. The pressure is on. HOLD.
IntriCon (IIN) reported last night and revenue growth of 20.2% to $30.1 million missed by a fraction ($40,000) while EPS of $0.22 beat by $0.02. Gross margins were up 0.8% to 31.6%. Over the last nine months, revenue is up 24.5% and EPS has improved to $0.56 from $0.23. IntriCon also completed a secondary offering in Q3 at 55 (well above the current share price) in which it raised $63 million. Full-year guidance was issued with the low-end of the range starting at current consensus estimates. Look for revenue of $115.7 million to $116.7 million in 2018.
In the Medical segment, which drives 64% of revenue, sales were up 25.1%, mostly due to sales of continuous glucose monitoring (CGM) systems to Medtronic (MDT).
Sales in the Hearing Health business, which accounts for 29% of revenue, were up 10%, driven by value-based indirect-to-end-consumer channel (up 63%), a modest decline in the direct-to-end-consumer channel, a.k.a. Hearing Health Express (HHE), (down 16%), and expected declines in the conventional hearing aid sales channel (down 9%).
Sales in the Professional Audio Communications segment (6.6% of total revenue) were up 24%.
The biggest news is IntriCon’s ongoing expansion in the Medical segment. Limited production began in its new manufacturing facility. And two more molding presses were added in the quarter, bringing the total up to 13. Management expects this business to keep ramping up throughout the remainder of the year and into 2019.
Management was asked if it’s seeing any potential threat from the rise of connected insulin pens, which have been rumored to potentially take some market share from insulin pumps (which IntriCon makes for Medtronic). The answer was they’re not really competing products due to different use cases (I’m not sure I buy that argument). Another question revolved around another Medtronic value-added-supplier (VAS) that said some unfavorable inventory changes were impacting their business. IntriCon said there hasn’t been any change in the way it’s working with Medtronic and all is good.
We’ve been waiting to hear about progress establishing a viable over-the-counter (OTC) hearing aid business. Management said it has been tweaking its advertising investments at Hearing Help Express (HHE), its DTC website. Sales were down in the quarter but the trend has been improving over the last two months and the HHE business is on pace to deliver a record quarter in Q4. The weakness was due to some experimental marketing (since changed) in May, June and July (the business recognizes revenue 60 days after a product ships), but September and October were much improved. This is a new business model so some experimentation and volatility is expected. IntriCon expects to ramp up advertising as it figures things out across mail order, print media and telesales channels.
Management met with the FDA in Q3 and showed off its Sentibo Smart Brain self-fitting software, which is designed to improve the quality of first-time fittings. That should drive lower prices, better customer satisfaction and, with a little luck, open access in the OTC hearing aid category. Based on FDA feedback IntriCon is moving to pursue 510K approval for a wireless OTC self-fitting hearing aid to be marketed after the FDA finalizes regulations for this category. Based on conversations with Senators Chuck Grassley (R-IA) and Elizabeth Warren (D-MA), and the FDA’s approval of Bose’s OTC self-fitting hearing aid, management believes OTC hearing aid regulation could be a late-2019 event, well ahead of the August 2020 deadline.
Management was asked if Bose needs an FDA certified facility and 510K approval to make and sell its devices, and IntriCon management said yes. It was asked if Bose could be a potential indirect-to-end-consumer customer, and management said yes. IntriCon currently sells private label devices for other customers and it could do the same for Bose, should the opportunity arise
The bottom line here was a mixed quarter and no major changes to the long-term outlook. IntriCon is a small company working on big things, which may or may not pan out. Questions will remain about how long growth through Medtronic will last and if and when the OTC hearing aid opportunity will pay dividends.
For now, the growth story remains intact, even though shares traded down sharply this morning. That’s just the nature of holding a relatively speculative micro-cap stock. Treat it as such and expect it to act accordingly (meaning erratically). Shares have been clawing their way back from session lows hit right after the open. I’ll be watching them closely all week. For now, keep Holding. I’ll update you again on Friday. HOLD.
As I mentioned earlier, earnings summaries for both Goosehead Insurance and Everbridge are on their way to you this afternoon in a separate Special Bulletin.
And tomorrow you’ll receive updates on tonight’s earnings reports, which include Rapid7 (RPD) and Q2 Holdings (QTWO).