Description

Attunity Ltd. (NASDAQ:  ATTU)

Market Capitalization:  $144MM

Enterprise Value: $115MM

Valuation:  1.9x EV / fwd rev

Price Target:  $14-21 (100-185% upside)

Average Daily Trading Volume:  47,744

Type of Investment

Admittedly, this has been somewhat of a frustrating investment over the last couple years.  Dead money while nearly every tech stock has ripped, especially those operating in the big data software space.

The general investment thesis of ATTU has been predicated upon rapidly growing and dynamic end markets (big data), a superior technological offering in the marketplace, larger and more prominent deal wins and a loose commitment from management to grow revenues to over $100MM (from 2017P revenue of $63MM) with an inference of eventually selling the business to a larger competitor.    

From a valuation standpoint, the stock trades at a relative bargain at 1.9x EV / fwd revenue compared to peers in the same sector that trade 4-6x, including a competitor Informatica which was sold to private equity for 4.7x.

While every passing quarter does give investors glimmers of hope, the stock has not moved and the core investment thesis is largely unchanged.  Undoubtedly, it has taken longer than expected for Attunity to realize its true value. 

This could be attributable to a whole host of factors that include 1) IT managers taking time to understand ATTU’s value proposition to their enterprise as they shift their focus from legacy data repositories to the cloud and 2) A longer than anticipated sales cycle (a function of point 1).

Investor frustration was punctuated by an unforeseen 3MM secondary stock offering at $6.75 in December 2017 that diluted existing shareholders by approximately 20% without a clear communication of proceeds. 

With all of this in the rear view, I will attempt to lay out an investment thesis which I think presents a compelling argument to own ATTU shares in 2018.  It is my view that within eighteen months to two years’ time, if the Company continues to grow its top line at a mid-teens rate, it will sell itself to a competitor.  This has been the CEO’s playbook in the past and there are reasons why that now this catalyst is more of a reality in 2018 and beyond than it was in the past. 

Overview

Attunity (ATTU), based in Tel Aviv, Israel and Burlington, MA is a provider of Big Data management software solutions that enable the access, management and sharing of data across a heterogeneous enterprise platform and the cloud.  ATTU’s solutions enable enterprises to create, share, automate and manage business processes with partners, suppliers, customers and electronic marketplaces over the Internet.   

The fundamental backdrop driving rapid growth in the Big Data sector is principally driven from the emergence of social media and the proliferation of mobile devices that have created a surge of data. Corporations want to better manage, centralize and manipulate vast amounts of data from multiple sources, hoping to derive insights from the vast amounts collected data.  This in turn has led to robust IT investment in data analytics in recent years.  The total established addressable market for such products is estimated to be between $9-12BN and is to grow at a 10% CAGR as organizations reassess and retool their needs under a Big Data paradigm. 

ATTU’s solutions squarely address the need for customers wanting to synchronize data from disparate repositories to a central location or to the cloud where it can be better analyzed.  ATTUs greatest value proposition is its ability to move very large volumes of data across private networks and/or the cloud while keeping data synchronized across several data repositories.  Many heritage solutions require human personnel to scrub and structure data, whereas ATTU’s solutions can rapidly and powerfully clean, structure and assimilate data from various sources in a fraction of the amount of time. 

ATTU has established it technology as superior in real-time data integration.  One channel check characterized ATTU’s product relative to the competition as that of drinking water out of a firehose as opposed to a garden hose.  This is an important attribute, especially when IT managers are looking to analyze vast sets of data across multiple platforms (on premise and cloud).

ATTU’s technology is imbedded with its OEM partner solutions from Microsoft, Amazon, Oracle and IBM (estimated to be 15-20% of total license revenues) as well as with go-to-market partners including Microsoft, Teradata, Pivotal and HP.

ATTU also sells its product direct as well as to resellers and systems integrators.  The Company serves more than 2,500 customers in with its various data integration products.  ATTU derives 73% of its sales from North America, 17% from Europe and 10% from ROW.  The Company has as a 90% + customer retention rate.

Since 2008, ATTU has been run by Shimon Alon, who currently owns approximately 6.6% of the Company.  Previously Mr. Alon was the CEO of Precise Software Solutions (PRSE) which he IPOed and then subsequently sold to Veritas Software for $609MM.  In Feb 2016, Mr. Alon entered into a 10b5-1 stock purchase plan to acquire additional shares of ATTU.

Why is ATTU Mispriced?

At one point in 2015, ATTU traded as high as $16.  During 2H 2016, a number of self-inflicted, long-term positive internal changes temporarily impaired ATTU’s share price performance creating an attractive entry point in the stock.  Since, the stock still remains one of the cheapest growth software companies in the market with a valuation of 1.9x EV / forward revenue, versus comparable companies that trade 4-6x revenues. 

ATTU’s revenue grew quickly in the 2014-2015 timeframe with 43% growth in 2014 and 36% growth in 2015.  The growth in revenue was driven by a need for customers gathering data from various corporate sources (databases) and assembling it into a data warehouse (also known as a data lake) where it could then be analyzed and scrubbed into a homogenous pool of data (Big Data) for further analysis. 

During the 2014-2015 time frame, ATTU sold smaller packages to clients in the sub $1MM range, often to departments within an organization and not at the enterprise level.  As customers began to realize and appreciate the power and efficiency of ATTU’s product, the solution began to attract more complex and larger sized transactions ($1 MM+).  Larger sales typically require a longer sales cycle (6 to 9 months) than smaller ones given the enterprise approach toward selling larger solutions. 

Given the positively inflecting trends in ATTU’s end markets, management quickly realized that its current sales force was not adequately handling more complex sales inquiries.  As a result, in 2H of 2016, ATTU replaced fifteen of its sales personnel (approximately 30%) with sales personnel experienced with selling at the enterprise level. 

Newly hired enterprise sales personnel generally take 6-12 months to ramp their sales pipeline.   This abrupt change and upgrade of ATTU’s sales organization led to slippage of larger deals into 2016, causing ATTU to grow revenue by only 13% in 2016, punctuated by a large revenue miss in Q3.  As a result, the stock traded from around $10 to a low of $4.36.  Investors misinterpreted the bottleneck in executing more complex deals as moderation of revenue growth for the Company.

Following a disappointing quarter in Q3 16, ATTU announced a slew of $1MM + deals with customers and reported a better than expected Q4 2016 result (22% y/y revenue growth) as well as accelerated 2017 y/y revenue guidance (growth of 14-20%).  The stock quickly traded up to nearly $9.50.

In 2017, ATTU beat Q1 rev estimates by 5% (rev growth of 18% y/y), missed Q2 revenue estimates by 9% (rev growth down 5% y/y), at beat Q3 revenue estimates by 9% (up 27% y/y, including license growth of 45% y/y).  Given not a clear ramp of revenue growth this year, the stock settled back down to the $6.50-7 range.  For 2017P, revenue growth is expected to be up 13% over last year.

While hardly a barn burner (arguably well discounted within its current valuation), management’s commentary continues to be suggest business momentum with 7 deals larger than $1MM announced in 2017 YTD (versus 4 in 2016) and 30 future deals in the pipeline greater than $1MM, up from 7 in Q3 of 2016.  Management remains confident in momentum and future growth and does admit that it is taking longer than they originally thought, given rapid changes in the big data sector and the length of time involved in the decision making process from IT managers, trying to figure out exactly which solutions they need.

While ATTU products work with most big data technologies and databases, ATTU has been making meaningful inroads with its penetration into the Hadoop (open-source software framework used for distributed storage) and the data lake ecosystem which by some estimates has gone from next to zero in 2014 to approximately $8MM (or ~28% of license revenue) of revenues.  Analysts estimate the Hadoop market will grow from approximately $6BN in 2013 to over $50BN by 2020.   Management has commented that 60% of product wins are Hadoop-oriented and they expect growth in this sub segment to continue.

Considering the momentum of the sales organization along with increased demand for larger deals and a growing pipeline, ATTU still remains a relative bargain at only 1.9x EV / fwd revenue.   As the sales organization continues to gain traction and convert the sales pipeline, incremental revenue into 2018 with 90% gross margins will begin to create meaningful operating leverage and ATTU should begin to generate strong cash flow from current levels.  In order for a multiple rerating, however we need to see consistent and somewhat accelerated growth from current levels.

Mr. Alon has indicated a goal to grow ATTU’s revenue to $100MM (current revenue run rate of $62-$65MM growing at mid- to high double digits y/y) with EBIT margins of 20% (current run rate of 5%-8%) over the next few years. 

Pursuant to a loan agreement in 2007 between Plenus Venture Lending and ATTU, if the Company was sold prior to Dec 31, 2017, Plenus will receive 15% of the aggregate proceeds, even though the Plenus loan has been fully settled.  This is why I think that M&A could now become a distinct option over the near to medium term. 

It is also important to note that Microsoft, as an OEM partner of ATTU, has the right of first refusal for any acquisition proposed by another party.  This mechanism underscores the importance of ATTU’s technology to Microsoft’s platform as well as the overall value of ATTU’s technology in the marketplace.

Shimon is 67 years old, is a family man and spends his time between Israel and the United States.  If and once he is able to continue to drive ATTU revenue growth in 2018 and beyond, I imagine he will be looking to sell the business, even if he doesn’t reach his stated run rate revenue target of $100MM.

Assuming 3x run rate 2019 revenue of $85MM equates to ~$14 a share, approximately 100% higher than current levels.  Given multiples in the space, it is highly likely that ATTU will garner a higher multiple.  Applying the INFA multiple (4.7x) to that same revenue figure equates close to $20 a share of value, or 185% higher than current levels. 

We don’t need to see much for this stock to work, just continued business momentum and deal announcements.   

Competition

While ATTU is a smaller player in the market that does face larger, albeit indirect competition (Informatica and IBM), its solution is powerful and enables an expedited amount of time needed to assimilate data for its customers in a completely automated fashion.  Such tasks can be accomplished in a matter of hours or days with ATTU products, as opposed to months for competitive solutions.   

Valuation and Price Target

Comparable software companies currently trade at 4-6x forward revenue.  The closest publicly traded comparable Talend SA (TLND) currently trades at 5x EV / fwd revs. 

One of ATTU’s larger competitors, Informatica was acquired in August of 2015 by a consortium formed by Permira Advisers, Canada Plan Pension Investment Board, Microsoft and Salesforce Ventures for $4.8BN (4.7x revenue).

Assuming the current trajectory of growth driven by continued large deal wins, ATTU should trade closer to its peer group which presents a very favorable risk / reward for shares at current levels. 

Key Risks

·         Competition:  While ATTU does not appear to have a direct competitor with a similar range of products, potential competition does include software megavendors including Microsoft, Oracle and IBM.  While these companies offer their own data replication and movement products, they tend to primarily focus on their own platforms and are not agnostic like ATTUs products are.  One of ATTU’s key strengths lies in its broad product portfolio, vendor independence and platform neutrality, which appeals to customers with multiple databases within their software environment.  Examining Informatica as a competitor, the companies are fundamentally different as Informatica’s platform is based on the traditional process of loading data into the data warehouse, where the developer has to perform multiple steps on a table by table basis (sometimes in the thousands) to produce the same end product that ATTU’s product does on a purely automated basis.  The difference is that a project that would usually take six months to complete by a programmer can now be done in a couple of days with ATTU’s solution.

·      Partner Relationships:  ATTU obtains a material portion of its revenue from its partners.  There remains a risk that one or more may decide to terminate its relationship with ATTU which may have significant impact on its sales.  Channel checks indicate, however, that ATTU’s product is an important solution and complements its partners’ suite of solutions.  It is also important to note that Microsoft and Amazon have recently renewed their contracts with ATTU.

·      Quarterly Volatility:  ATTU sells perpetual licenses, while most companies offer a Software-as-a-Service (SAAS) product, primarily due to the fact that ATTU’s customer base demands ownership of it is software products.  This may lead to near term share price volatility should orders slip to subsequent quarters due to the lumpiness of the sales process, as evidenced in Q3 2016.

·         Liquidity:  ATTU is an illiquid stock with an average daily trading volume of 53,732 shares.  Approximately 12% of the stock is held by management and insiders.  The recently executed secondary offering has somewhat improved liquidity and research coverage so hopefully this will be a better trader in 2018.

Management

Management has 1.86MM options to purchase stock at $7.99 a share, expiring in June 2021.  Mgmt just hired a new Chief Operating Officer (a new position).

Shimon Alon, Chairman and CEO (67)

Shimon Alon, Chairman of the Board, was appointed Chief Executive Officer on June 1st 2008. Previously Mr Alon was CEO of Precise Software Solutions, a leading provider of application performance management. Following the acquisition of Precise by VERITAS Software Corporation in June 2003, Mr. Alon served as an executive advisor to VERITAS. Prior to Precise Software, Mr. Alon held a number of positions at Scitex and its subsidiaries including President and Chief Executive Officer of Scitex America and Managing Director of Scitex Europe. Mr. Alon holds a degree from the Executive Management Program at the Harvard Business School.

Dror Harel-Elkayam, Chief Financial Officer (49)

Mr. Harel-Elkayam has been Attunity's Vice President of Finance and Secretary since October 2004. Prior to that he served as Director of Finance and Corporate Secretary of Precise from August 1997 until June 2003, and as Finance Manager of Precise from June 2003 until September 2004, following the acquisition of Precise by Veritas. Mr. Harel-Elkayam holds a B.A. degree in economics and accounting from the Hebrew University, Jerusalem. He is also a certificated public accountant in Israel.

Mel Passarelli, EVP, Sales & General Manager of the Americas (59)

In this role, Mr. Passarelli  is responsible for increasing Attunity’s penetration in multiple verticals across the workplace applications market. Mel brings over twenty years of experience in the enterprise software space and in engineering. Prior to joining the company, Mel was vice president of sales for various private and public software companies helping them to achieve rapid growth. He spent over thirteen years helping to build Intergraph Corporation into a Fortune 500 company. Mel holds a BA and MBA from the State University of New York in Buffalo, and a Juris Doctorate from Suffolk University School of Law in Boston.

Erez Zeevi, EVP, Research and Development and Global Technical Operations (51)

Mr. Zeevi is responsible for the research and development of all Attunity software products as well as the worldwide after-sales support and maintenance of those products. With more than 20 years of working in various programming, engineering/development, project and management roles, Erez has deep experience in all aspects and all levels of the R&D and support functions. Erez holds a BSc. in software engineering from the Israel Institute Of Technology.

Itamar Ankorion, EVP, Business Development and Corporate Strategy  (NA)

Mr. Ankorion is the Executive Vice President of Business Development and Corporate Strategy at Attunity. In this role, Itamar is responsible for Attunity’s market and product strategy, as well as Attunity's alliances including Amazon Web Services, Microsoft, Oracle, IBM and SAP. Prior to this role, Itamar served as head of marketing and product management. Mr. Ankorion has more than 15 years of experience in marketing, business development and product management in the enterprise software space. He holds a BA in Computer Science and Business Administration and an MBA from the Tel Aviv University.

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Catalyst

Continued revenue growth.  Beat and raise street street estimates in 2018 and beyond

Cash flow generation

Sale to a larger competitor