DataWalk (WSE:DAT) – Report - Warsaw Stock Exchange

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Investment summary

2Q22 revenues reached PLN 14.0 million (up 32% yoy) and beat our tentative forecast by over PLN 1 million. DataWalk informed that 1H22 financials growth dynamic was impeded by insufficient training and size of teams handling the pre-sale and post-sale services, and concluded that only after these problems have been solved, the 70% target yoy growth dynamic can be reached.

In 1H22 DataWalk’s growth dynamic stood at 29% yoy vs our expectations of 72% for FY22, which, in the light of current problems with pre-sale and post-sale processes, may be a big challenge for the Company this year, we believe, as 2H22 revenues should increase over 100% yoy to achieve this 72% growth. Therefore, we lower our forecast of the Company’s revenues in FY22 by 13% to PLN 46.2 million (up 50% yoy). We assume as well that, after the bottleneck problems are solved, from 2023 onwards, the Company’s revenues will resume a growth dynamic at a c. 70% level.

Since June when we issued our last report, the Company informed about 8 contracts signed, including 5 which are the extensions/ expansions of existing contracts (Ally Financial, PKN Orlen, National Police Headquarters, the US Defense Department, the US Labor Department) and 3 new contracts (Total Energies, US Army Criminal Investigation Division, and Polaris Wireless). Until today, the Company informed about 14 new contracts acquired this year, which implies a 75% increase vs the analogical period of 2021 when it obtained 8 new contracts.

Since June when we issued our last report, the median of EV/Sales multiples for 2022-24 of the Company’s peers has fallen by 6% on average, which coupled with lowering of our revenue forecasts for 2022E-24E by 13-16% leads to a 21% decline of our DataWalk 12M EFV that currently yields PLN 158 per share (previously PLN 201 per share).

As we estimate the current upside for the Company’s share price at below 10%, we downgrade our LT fundamental recommendation to Hold (from Buy). At the same time our ST relative Neutral recommendation stays intact.

Increasing number of revealed contracts

Since June when we issued our last report, the Company informed about 8 contracts acquired, including 5 which are the extensions/ expansions of existing contracts (Ally Financial, PKN Orlen, National Police Headquarters, the US Defense Department, the US Labor Department) and 3 new contracts (Total Energies, US Army Criminal Investigation Division, and Polaris Wireless). Until today, the Company informed about 14 new contracts signed this year, which implies a 75% increase vs the analogical period of 2021 when it acquired 8 new contracts.

Growth of sales funnel value

DataWalk informed that as of September 14 a sales funnel value stood at c. PLN 25.1 million (including c. PLN 14.3 million in the US market and PLN 10.8 million in other markets) which implies a 12% growth of sales funnel value as compared to April. It seems that in spite of the above mentioned bottleneck problems of pre-sale services, a sales funnel value is back on a rising path after a year of flat performance.

2Q22 financial results review

In 1H22 the Company’s revenues reached PLN 18.2 million (up 29% yoy) which implies PLN 14.0 million for 2Q22 (up 32% yoy). On the other hand, 2Q22 operating loss stood at PLN 106.2 million; the result was burdened by a non-cash cost of the incentive program (at PLN 106.2 million). 2Q22 adj EBIT (excluding the impact of the incentive program cost) amounted to 0. Operating costs in 2Q22 (excluding costs of the incentive program) reached PLN 14.0 million (up 110% yoy; up 20% qoq). 2Q22 reported revenues beat our preliminary expectations by PLN 1 million (and c. 10%).

Summary of the 3rd stage of development – the conference key issues

On September 15 the Company held a conference to discuss 1H22 financial results and address other matters. Below we present the key issues:

According to one DataWalk’s client, the Company’s software enables to reach a 93% accuracy in fraud detection as compared to standard 20-30%;

• One client managed to shorten time of investigation to minutes from weeks;
• The Company’s clients conversion from the sales funnel reached c. 80%;
• There is large interest and the Company has no problem with client acquisition – the pre- and post-sale services pose the problem;
• The Company was forced to dismiss 50%/ 70% potential clients form US/ Europe due to a lack of employees qualified in pre- and post-sale support;
• Bottlenecks exerted negative impact on the pace of sales funnel building (pre-sales limitation); these processes had to be slowed;
• Chris Westphal is no longer a member of the team, as he completed his tasks (analytic competence building related to cooperation with US State agencies), but remains a significant shareholder;
• The management lists, among the Company’s weaknesses, immature system engineering processes and late start of works related to the SAAS implementation;
• A rise in the price list by >10% is planned from January next year (vs c. 7% rise in January 2022);
• The management indicated targets of the 4th stage of development: (i) acquisition of >100 clients, (ii) implementation of a partner sales model and of a SAAS model (in 3 years starting from today), and (iii) revenue growth at >70%;
• Full funding of the 4th development stage on the turn of 2023 and 2024 (shares issue).

Financial forecasts

In 1H22 DataWalk’s growth dynamic stood at 29% yoy vs our expectations of 72% for FY22, which, in the light of current problems with pre- and post-sale processes, may be a big challenge for the Company, we believe, as 2H22 revenues should increase over 100% yoy to achieve this 72% growth. Therefore, we lower our FY22 forecast of the Company’s revenues by 13% to PLN 46.2 million (up 50% yoy). We assume as well that, after the bottleneck problems 4 DataWalk are solved, from 2023 onwards, the Company’s revenues will resume a growth dynamic at a c. 70% level.

Valuation and recommendations

We value DataWalk via the peer-relative valuation based on the EV/Sales multiples against the peer group encompassing American software companies with similar business model and growth profile. Since June when we issued our last report, the median of EV/Sales multiples for 2022-24 of the Company’s peers has fallen by 6% on average, which coupled with lowering of our revenue forecasts for 2022E-24E by 13-16% results in a 21% decline of our 12M EFV to PLN 158 per share (from PLN 201 per share).

Due to the fact that we estimate the current upside for the Company’s share price at c. 10%, we downgrade our LT fundamental recommendation to Hold (from Buy). At the same time our ST relative Neutral recommendation stays intact.

Catalysts

1. Dynamic growth of the link-based analysis segment
2. High revenue dynamics expected in the upcoming years
3. Increasing number of contracts signed
4. Increasing demand for software for intelligence purposes
5. Dynamic growth of sales funnel value
6. Growing interest of foreign financial investors
7. Strong USD vs PLN

Risk factors

1. Slower than expected revenue growth rate in the upcoming years
2. Faster cash burning than expected without the following revenue growth
3. Lacking access to funding and loss of liquidity
4. Long sale cycle
5. Early stage of the Company’s development
6. Negative sentiment towards growth companies

This report is prepared for the Warsaw Stock Exchange SA within the framework of the Analytical Coverage Support Program 3.0.

Analyst: Tomasz Rodak, CFA