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Small-Cap Confidential
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Cabot Small-Cap Confidential Weekly Update

It was another good week for small caps, and the S&P 600 Small Cap Index keeps grinding higher. The 1% gain over the past week has the index well above its moving average lines and just slightly behind large caps in terms of year-to-date performance.

It was another good week for small caps, and the S&P 600 Small Cap Index keeps grinding higher. The 1% gain over the past week has the index well above its moving average lines…


…and just slightly behind large caps in terms of year-to-date performance. It’s been hard for small-cap tech stocks to keep up with their large-cap peers, but our asset class is doing great in the health care sector!


It does seem like things are a little extended out there, so I think it’s prudent to be selective on the buy side. I’m not calling a top or anything, just pointing out that you don’t want to be lulled into a sense of euphoria given that the market goes up almost every single day!

Earnings season is sure to provide a few jolts to anybody that is starting to drift off. We kick off the beginning of our earnings season today with a summary of Datawatch’s Q1 fiscal 2018 results (see below). The action will pick up next week, and then into February things will get really crazy!

Here’s a summary of performance by current position over the past week. Can’t complain with these results.



AppFolio (APPF) is back above its 50-day line after the stock gained a modest 2% this week. I wrote last week about what I believe is going on with the stock and how 2017 should represent a breakthrough in terms of profitability (expected EPS of $0.41 versus a loss of $0.12 in 2016). But that the market might be starting to wonder how much gas AppFolio has left in the tank and whether or not it will need to invest in growing its Legal solution and/or add a third vertical to its portfolio (beyond Property Management and Legal). I also said I suspected EPS estimates for 2018 are way too low (currently at $0.54, but $0.80 or more is possible). We don’t have an earnings date yet, but I suspect we’re looking at around February 20. Keeping at Buy. BUY.

Apptio (APTI) is still trending in the right direction with the stock trading well above its 50-day line since the November breakout. The company is introducing a new wave of Technology Business Management (TBM) solutions designed for Enterprise customers (revenues under $20 billion) that are purpose-built for specific buyers, are easy to deploy quickly, and include software and services in a single price (around $100,000). One of these products is IT Financial Management (ITFM), which was launched in July of last year. The idea behind this product strategy is that by getting more customers into the front-end funnel, Apptio expands its potential market and will have more customers to sell additional products to. This is going to be an important topic of discussion on the next conference call, as will updates on how the new Cloud Cost Management solution is selling (released November 2017), and an update on the federal government’s Office of Management and Budget (OMB) mandate that agencies report IT spending using parts of the TBM Taxonomy. You may recall from my report that Apptio helped create the TBM Council, which in turn, created the TBM Taxonomy. And while its affiliation doesn’t guarantee that the U.S. government will go with Apptio whenever there’s a choice, it probably doesn’t hurt. A lot going on here, and expectations are high. Keeping at Buy. BUY.

Earnings: February 5

Asure Software (ASUR) is an unknown Human Capital Management (HCM) software provider that trades at a steep discount to better-known peers, including Ultimate Software (ULTI), Cornerstone OnDemand (CSOD), and Paycom Software (PAYC). To put relative growth in context, these three larger peers are expected to grow revenue by an average of 16% in 2018. Asure should grow at roughly 40% (acquisitions could push that up a little). And what about valuation? Asure trades with a forward P/E of just 21, versus an average forward P/E of 53 for the three aforementioned peers! Yes, risk is higher with Asure, and the management team still has to prove itself before it will earn a similar valuation. But it’s making progress, which is why the stock is trending up. A break above the previous all-time high of 17.27 (13.5% above where we are now) would be a good sign. Keeping at Buy. BUY.

AxoGen (AXGN) has moved sideways for the past two weeks at around the 28 level. Management has already pre-released preliminary Q4 2017 results (revenue up 45% to $16.5 million vs. expectations of $15.7 million), so we’re in waiting mode to get what’s most likely going to be a product update on the official earnings release date (February 28). Keeping at Buy. BUY.

Earnings: February 28

BioTelemetry (BEAT) continues to rally with shares trading higher in all but three days in 2018. I’ve mostly given updates on the company’s new partnerships (Apple and Onduo) lately since those initiatives are relatively new additions to the story. Clearly, something has changed in terms of perception here, and the stock is now just 11% off its all-time high (September 2017). No announced earnings date yet. For 2017, the market is currently expecting revenue growth of 36% (35% in 2018) and flat EPS growth (up 42% in 2018). Out of curiosity, I pulled up the company’s most recent 10-Q filing to see what its effective tax rate was. Management said it expected an effective tax rate of 35% in 2017, excluding the impact of the LifeWatch acquisition. That suggests the company should see a significant benefit from the new 21% tax rate for 2018. And that’s probably contributing to some of the strength in the stock. BUY.

Datawatch (DWCH) reported last night. Before I get to the results, let’s do a quick recap of the company. Datawatch is a tiny “big data” software company that has a devoted user base for its Panopticon and Monarch Complete products. It’s trying to expand its market, transition to a cloud-based subscription model (gradually), and launch enterprise, cloud-based products (i.e., Swarm) that carry bigger price tags. In 2017, revenue was up 19% and EPS improved to a loss of $-0.11 from a loss of $-0.66 in 2016. Sales of Panopticon and Monarch Complete led growth (both up over 20%), as expected, and the company continued its measured approach to growing subscriptions sales (up 45%), with subscriptions representing 20% of license revenue at year-end. A few weeks ago, management said it had hired a strategic advisor to help it review options after receiving interest from potential acquirers. That helped the share price recover from a post-earnings drop in November.

Now, on to Q1 results from fiscal 2018! Note that Q1 is typically Datawatch’s slowest quarter, and revenue ramps up throughout the fiscal year. Revenue was up 16.5% to $9.6 million (beating by $310K) and EPS of $-0.01 beat by a penny. License revenue was up 28%, with subscription license revenue up 20%, and now accounting for 40% of license revenue. Maintenance revenue was up 3%, which is a reflection of the company’s transition to subscription licenses, which carry a far lower maintenance component than legacy on-premise product license sales. Services revenue was up 17%.

Importantly, this was the fifth consecutive quarter of double-digit growth, and EPS, while barely negative, improved by $0.10. There were seven six-figure deals in the quarter, up from five in the same quarter last year, and the average deal size was up $9,000 to $49,000. Deferred revenue is up 20% to a record $12.3 million. Cash on hand is down just $700K to $29.8 million, so risk of a secondary offering is still very low (cash accounts for 22% of Datawatch’s market cap).

Sales from partner channels now contribute 15% (that number is creeping up), and management said growth here is being helped by a new partner portal that gives qualified partners a tool to access training documents and streamlines the process for pricing and quoting potential customers. Its goal is to get partner revenue up to 30% of total by the end of the year. Management also launched a new “hunter” sales team which exclusively goes after new logos and sells only on a subscription basis. This team landed 54 logos in the quarter. The punchline here is that Datawatch appears to be building a healthy pipeline of potential customers.

Management spoke very positively about what it sees as growing demand for data preparation solutions, and my general sense of things is that momentum is growing. Not surprisingly, management wouldn’t comment on any acquisition potential. Remember that it’s entirely possible there isn’t a firm offer on the table and that management is trying to raise Datawatch’s profile in the market by priming the acquisition speculation pump. Not saying they are, just saying we should focus on the business as it is, and if a buyout comes up, then that’s gravy. I’ve had Datawatch at Hold since shares sold off in November. Let’s see if and how this earnings report affects the stock (it should react positively). I anticipate moving back to Buy, but will hold off on that decision for a couple more days. HOLD.

Earnings: DONE

Everbridge (EVBG) is on a roll and has been a leader in our portfolio year-to-date. I like how the stock is trading in a tight range most days, and even more that most of those days, it’s been up! Earnings will be out next Friday, and the market is currently expecting 2017 revenue growth of 35% (to $103.7 million) and EPS loss of $-0.24. Current consensus for 2018 is revenue growth of 26.3% (to $131 million) and EPS loss of $-0.21. I think revenue estimates and EPS look good for 2017, but that there’s some downside risk to 2018 EPS estimates because of the recent convertible offering. I think the stock will ultimately go higher, but with the recent run and the potential for a “EVBG 2018 Guidance Below Expectations” headline, let’s be a little conservative and hold off on any new buying. I’ve had this stock at Buy for a while, so I suspect if you don’t have it yet, you don’t want it! I’m not saying I expect a big selloff after earnings, just saying ride what you own through earnings, and we’ll go from there. I’ll revisit my rating once the final numbers are out. HOLD.

Earnings: February 2

Instructure (INST) is the cloud-based education software company run by the guy who restored an M18 Hellcat Tank Destroyer in his garage. We’re coming up on our first earnings report since we picked the stock. Current consensus calls for 2017 revenue growth of 41% (to $156.4 million) and EPS loss of $-1.20. The market will be particularly interested in progress selling the new Corporate LMS solution, Bridge, an update on the hiring of a Chief Revenue Officer (CRO), as well as trends in non-recurring professional services revenue and revenue from early implementations. The latter two have driven above-consensus results in recent quarters, and without a CRO to put his stamp on forward guidance, there’s a sense that expectations need to be kept low. Filling this position would be a positive, and would probably help the company better communicate its financial targets with the market for 2018. These aren’t reasons to avoid the stock. It’s a good story, and the stock is still in my buy range. BUY.

Earnings: February 12

LogMeIn (LOGM) has gained a little altitude over the past week, with shares rising by 5% and starting to probe their all-time high from October (129.25). The stock’s trading action is a little choppy, but the trend is still up, so we’re hanging on. We’re up around 113%. HOLD HALF.

Earnings: February 15

Materialise (MTLS) was up 4% over the past week, but as you’re learning, the day-to-day swings here don’t tell a very good story since the stock is somewhat thinly traded and can be volatile. I put up the weekly chart last Friday, and have done so again today. As you can see, we’re opening up a little space above the 50-day line. We’re not yet positive on the stock (down around 8%), but I believe this one will ultimately work out. Earnings should be out around February 22. BUY.


Primo Water (PRMW). No Update. Sold two weeks ago for a 47% gain. SOLD.

Q2 Holdings (QTWO) gained 5% this week as the bank software stock looks to be regrouping around its 50-day and 200-day lines. The December retreat wasn’t deep enough to get concerned (we saw one at the end of 2016 too, as well as one in June), and I see this as a relatively safe small-cap software stock given the degree of revenue visibility management has (over 90% of the next 12 months at any given time). BUY.

Earnings: February 14

U.S. Concrete (USCR) is still bouncing around but the general direction is up. It’s another somewhat volatile stock when viewed on a daily basis. The company got another shout out from Cramer yesterday on his Lightning Round; Cramer said he sees the company doing well on state spending for infrastructure. No earnings date yet. BUY.