Zagg ( Nasdaq - ZAGG ) - Product Line Diversification Takes Root

Zagg (ZAGG $7.75) appears on track to produce better than expected Q4 results.  Demand for the company's core "Invisible Shield" line remains vibrant, fueled by the ongoing boom in smartphone sales.  Zagg's protective covering is available for all of the major offerings.  The new ZaggMate for the Apple iPad (tablet computer) has gained meaningful adoption since its launch in mid Novemeber, too.  That line already has generated $2.0 million in sales so far in Q4.  Further gains are likely in upcoming periods as the new line expands beyond the limited distribution network originally employed.  The "Invisible Shield" line still holds substantial potential itself as smartphones grow from their current 15%-20% share of the entire cell phone market to a projected 35%-50% over the next 2-3 years.  Zagg is poised to broaden its distribution channels for that line, as well, providing additional impetus.  The ZaggMate probably will remain a complementary offering, delivering perhaps 10%-15% of the Invisible Shield's sales volume over the long haul.  That diversification should enhance and stabilize financial performance, though, and it could lay the groundwork for additional product introductions.  We are maintaining our 2010 and 2011 estimates for the time being, but a stronger performance appears achievable.

Data I/O ( Nasdaq - DAIO )

Data I/O (DAIO $5.75) is the leading provider of programming systems used to load data onto semiconductor chips.  The company's automated machines convert blank semiconductors into intelligent devices.  Demand is rising due to the expanding complexity of electronic products, and the proliferation of computer chips into an ever widening array of applications.  Data I/O's systems are employed in a broad spectrum of devices, but are particularly relied upon in high end chips containing large data files and programs.  Demand is fueled by the volume of data that has to go in, along with other factors such as physical chip size, production line rates, and geographical proximity to final assembly plants.  A mitigating factor is Data I/O's own ability to speed up its machines' performance, enabling customers to process more chips per minute.  Competition exists, but much of that resides at the low end of the market.  Several prospective customers rely on in-house solutions, which also limits the company's potential somewhat.  Economic factors play a significant role, although those cyclical ups and downs tend to balance out over the long haul.  Right now Data I/O appears to be in the early stages of a major upturn that could last well into the coming decade.

Financial results experienced a nosedive in 2009 due to the recession.  Performance has rebounded in 2010 to prior levels, and momentum is continuing to build.  For the entire year we estimate sales will finish at $27 million, consistent with the 2008 level, and up 46% from the year before.  Non-GAAP earnings (see "Accounting Notes") could reach $.28-$.30 a share.  Data I/O ended the September quarter with $17.5 million in cash, moreover, representing 60% of total assets.  That figure might expand further in the seasonally strong December period.

Next year sales of $32 million (+18%) appear to be a realistic target.  Margins promise to widen on the higher volume to provide a 25% gain in earnings to $.35 a share.  Booming smartphone growth combined with solid gains in other electronics intensive industries could support a stronger showing.  Data I/O also could put its cash reserves to work via acquisitions or joint ventures, creating the potential for further leverage.  The company has increased its diversification efforts of late, so a material transaction is a realistic possibility.  A variety of targets have been identified, both in Data I/O's core market and in related areas. 

In 2-3 years sales could attain $40-$45 million, exclusive of acquisitions.  Margins may continue to widen, propelling earnings into the $.50-$.60 a share vicinity.  Acquisitions could provide an additional $.10-$.15 a share in earnings (assuming $10 million invested at a 10%-15% rate of return).  Applying a P/E multiple of 18x to the midpoint of the range suggests a target price of $10 a share, potential appreciation of 75% from the current quote.  A higher valuation is possible if Data I/O succeeds on the acquisition front.  The company's industry leading position could make it an attractive takeover target itself. 

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Ansys ( Nasdaq - ANSS )

Ansys (ANSS $50.00) is the leading provider of engineering simulation software products.  The technology is used to design new products faster, cheaper, and better than traditional methods.  The software covers the entire development process from initial concept to final stage testing and validation.  Complex mathematical analyses are performed automatically with simple drop and drag desktop interfaces, allowing engineers to discover right away what will work and what won't.  The software includes interfaces with all of the main Computer Aided Design systems, so the design can go straight to manufacturing when it's ready.  Ansys dominates the market worldwide, having acquired all of its chief competitors over the years.  Just a handful of niche players remain.  Industries served include automotive (14% of sales), aerospace (19%), electronics (18%), industrial equipment (14%), and materials and chemical processing (11%).  Up and coming segments include biomedical and clean technology.

Financial results stalled last year due to the global recession.  Revenues only increased by 8% to $516.9 million.  Non-GAAP earnings rose 1% to $1.78 a share.  (See "Accounting Notes.")  Customer hesitation impacted performance in all geographic markets.  Business is divided pretty evenly at this point among the United States, Europe, and the Far East.  Renewal rates remained sturdy at 95%.  Ansys sells its software both on a  perpetual basis (with annual maintenance contracts equal to 20% of the selling price) and as annual licenses (40%-45% of the perpetual charge).  R&D spending is maintained at 15% of revenues.  Demand remained subdued through the first nine months of 2010, although the rebounding economy contributed to a somewhat faster growth rate than the year before.  For the entire year sales appear headed towards $575 million (+11%).  Income of $2.05 a share (+15%) appears achievable.

A major software upgrade in November has rekindled customer enthusiasm.  Improving economic conditions are providing further impetus.  And many customers are starting to bite the bullet and purchase more "seats" to the company's software to maintain their own competitive positions and expansion strategies.  Beta testing earlier in 2010 indicated a positive reception was in the cards.  Ansys responded to those indications by boosting hiring substantially, particularly in product development, sales and marketing, and customer service and support.  The company's beefed up workforce is reinforcing the emerging upturn in sales, laying the foundation for an acceleration in 2011 results.

We estimate 2011 income will advance 15%-25% to $2.35-$2.55 a share.  Revenues appear set to climb 15%-20% to $660-$690 million.  The split between perpetual and annual license sales will influence the final amount.  A restructuring of the company's two Japanese subsidiaries (one was picked up as part of an acquisition) will benefit margins and help earnings rise a little faster than sales.  Contribution margins on software sales are high, moreover, so pretax margins could benefit if sales achieve the upper end of the range.  Leverage is less dramatic than for most companies, though, since Ansys already produces exceptional profit margins from normal sales activity.  Pretax margins typically exceed 45%.

The long term outlook is bright.  The engineering simulation market is fairly well developed but much of its potential still remains untapped.  Larger customers could expand usage.  And smaller and midsize manufacturers are likely to rely increasingly on Ansys' automation tools.  Within a decade or two, moreover, it might become possible for consumers to customize highly complex products directly from their own computers.  Cash flow is unusually positive.  Cash on hand totalled $496 million at the end of September, up $153 million year to date.  Future per share results could be amplified with acquisitions and stock repurchases.  Assuming moderate growth by the world economy sales could reach $925 million in 2-3 years to provide earnings of $3.40 a share.  Applying a P/E multiple of 30x to those earnings suggests a target price of $100 a share, potential appreciation of 100% from the current quote.

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Female Health ( Nasdaq - FHCO ) - Follow-up Report

Female Health (FHCO $5.75) reported excellent on target Q4 results.  Revenues declined 1% to $7.80 million.  Fully taxed earnings advanced 40% to $.07 a share.  Unit volume expanded by 19%.  Female Health's second generation product line comprised 100% of shipments in the period.  That new design has a 30% lower selling price but generates more absolute profit per unit than its predecessor.  The old design accounted for approximately one third of business in the year earlier quarter.  For the entire fiscal year (September) income finished at $.14 a share on sales of $22.2 million.  Two large contracts that originally were expected to start contributing in Q3 remained delayed.  Other business actually was stronger than expected in the September period, enabling Female Health to hit its performance targets.  Those deals are likely to be signed before long, which should bolster fiscal 2011 results.

Even with those contracts, results probably won't attain our estimates for the coming year.  The company suggested that sales are likely to expand 15%-20% to provide a 10%-15% increase in earnings.  We'd anticipated a stronger sales showing combined with some margin expansion to drive fully taxed earnings into the $.35 a share range.  As it is, $.20 a share now looks like a more realistic target.

Female Health enjoys substantial tax loss carryforwards in the United Kingdom.  Those benefits can be transferred without penalty in the event ownership of the company changes hands.  In America, significant restrictions typically are imposed, making those tax benefits less valuable.  The downside is that the tax situation might limit the kinds of deals which would be viable in the event of a merger.  Even so, share price risk is moderated by the tax benefits.  Female Health remains cash flow positive and its business is poised to keep expanding in future years, fueled by AIDS prevention programs and a lack of direct competition.  Growth has begun to moderate, though, and that trend may continue if funding sources tighten.  A contemplated diversification into the commercial market hasn't gained momentum to date.  Government funding is likely to remain the company's main source of revenues well into the decade.  With the shares trading at a premium valuation (40x trailing twelve month earnings) and growth slowing down, our advice to aggressive investors is to close out positions and reinvest the proceeds in a higher potential issue.  Value investors can realistically maintain their holdings.  Soros Capital Management recently purchased a 5% holding.  Other socially responsible funds may get involved, as well.

Simulations Plus ( Nasdaq SLP ) - Follow-up Report

Simulations Plus (SLP $2.95) reported Q4 (August) results that were consistent with its pre-announcement.  Earnings were flat year to year at $.02 a share.  (See "Accounting Notes.")  Sales improved 20% to $2.2 million.  The high potential pharmaceutical modeling software line generated most of the advance, although the Words Plus segment performed better with the aid of a new product launch.  For the entire fiscal year earnings rose 40% to $.14 a share on a 17% expansion in sales ($10.7 million).  Pretax margins finished at 30.3% despite a breakeven showing by the Words Plus division, which represented 29% of total sales.  Software profitability is especially noteworthy because Simulations Plus only issues one year licenses, which have to be renewed.  Most software companies with above average margins rely on one time perpetual sales to juice up near term results.  Future sales are more predictable with Simulations Plus' strategy.

Margins are likely to expand in fiscal 2011 (August).  Pharmaceutical software sales are poised to keep growing at a 25% rate, and comprise a rising proportion of total sales.  Operating costs probably will widen at a lesser rate.  And the Words Plus unit itself may start to kick in some profits, following a lengthy dry spell.  We estimate income will jump 29%-43% to $.18-$.20 a share on a 21%-26% increase in sales ($13.0-$13.5 million).  Acquisition of a complementary software line could yield additional leverage.  Cash increased $2.16 million last year to $9.63 million, even after stock buybacks equal to $1.03 million.  So the money is available if the opportunity arises.

The long term outlook remains bright.  Only a small portion of the potential market has been penetrated to date.  Software modeling of new drug candidates remains in an early stage of development.  Pharmaceutical manufacturers are gravitating to the technology as a way to prune their R&D pipelines more efficiently so they can shift resources behind drugs with the greatest chance for success.  The software delivers day to day cost savings, as well.  As medical science moves forward software modeling is likely to continue achieving greater adoption.  Growth of 20%-30% appears sustainable well into the decade. 

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Zagg ( Nasdaq - ZAGG ) - Follow-up Report

Zagg (ZAGG $7.25) reported excellent on target Q3 results.  A few weeks earlier the company indicated its performance would be stronger than expected.  That proved to be the case.  Sales advanced 137% to $23.1 million.  Earnings jumped 325% to $.17 a share.  (Please refer to "Accounting Notes.")  Best Buy accounted for 42% of total sales.  In the year ago quarter Best Buy represented 38%.  So volume expanded even faster at Best Buy than through the rest of Zagg's distribution system.  New channel partners (ATT Stores and Staples) provided further momentum.  Growth also was seen at Radio Shack and the Carphone Warehouse in Great Britain.  Sales of the Invisible Shield protective covering for the iPhone remained robust.  Results also benefited from expanding Blackberry and Android sales.  A higher priced covering for Apple's new iPad tablet computer reinforced the uptrend and helped propel margins to an unusually high level.  Q3 sales certainly reflected some pre-Christmas inventory build-up among the company's retail partners.  Sell through accounted for much of the sales acceleration, though.  Inventories may wind down a little as the holiday season concludes in Q4.  So sequential performance may be lower than the Q3 rate.  Fundamental trends remain powerful, however.  We estimate Q4 income will finish in the $.10-$.15 a share range on sales of $18-$23 million.  For all of 2010 earnings appear on track to improve 125%-150% to $.40-$.45 a share.  Sales could rise 70%-80% to $65-$70 million.

Further growth is likely in 2011.  Smart phones currently represent 15%-20% of all mobile phone sales.  That percentage could double over the next 2-3 years.  Tablet computer shipments are surging, as well.  Other consumer products are likely to emerge, creating additional targets for Zagg's protective screen coverings.  Distribution channels are likely to keep expanding, too.  Zagg recently signed up Verizon's retail store network.  A bigger push into foreign markets also is possible.  We estimate 2011 sales will increase 30% to $85 million to provide a 25% improvement in earnings ($.50 a share).  The income figure assumes that margins revert to more customary levels.  A stronger showing is possible on both counts.

An investment in a new technology has caused controversy.  Zagg paid $2.0 million for 55% control of a water proofing technology designed to protect electronic devices.  The technology appears designed for use by manufacturers during the production process, so it won't directly leverage Zagg's brand name recognition with consumers.  And, since the technology still is being fine tuned, questions exist about whether it ever will work or if any manufacturers will license it.  We don't know the answers.  But the size of the investment is relatively modest and the potential payoff is large.  It looks like it's worth a shot, considering the small degree of risk involved.  Substantial growth potential remains in the core business.  That could propel revenues to the $200 million area within another few years, just as the company predicted in 2007.  Note -- The shield business should benefit from Zagg's growing patent portfolio.  The company recently bought out the one claimant who might have had a chance to disrupt the applecart.  Besides preempting potential competition Zagg now might start earning some extra money by enforcing its intellectual property rights.

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Ebix ( Nasdaq - EBIX )

Ebix (EBIX $22.00) is the leading provider of annuity and policy exchange systems for the insurance industry.  The company's on demand software allows brokers and agents to download competing bids, compare them by features and pricing, and automatically prepare the paperwork once a decision is made.  The technology makes it easier to analyze different products from competing underwriters.  In the past agents and clients were required to wade through mounds of paper that didn't lend itself to direct comparison.  The systems also produce 100% correct data for the winning insurance carrier.  The order can't be submitted unless the information is filled out correctly.  Using paper based systems, agents usually have to re-file the material several times.  The computerized exchange format gives annuity and insurance buyers greater selection and transparency, often at a lower cost.  Insurance companies enjoy cost savings, as well, plus they gain the opportunity to address a broader potential market.  Agents and brokers are able to process transactions more rapidly and with fewer errors, reducing their costs; plus customer satisfaction is higher due to the greater selection, transparency, and ease of use.

The automated exchange business accounts for 71% of revenues.  Ebix also sells office management software to insurance brokers (10%), back-end systems for insurance carriers to track policy claims and manage day to day operations (7%), and business process outsourcing ("BPO") services to automate the issuance and tracking of insurance certificates (12%).  Exchange revenues are based on the volume of data that goes through the system, and is recurring in nature.   The BPO work tends to be consistent, as well.  Sales of software products to brokers and insurance companies often lead to exchange and outsourcing business but aren't recurring themselves.  The United States accounts for 75% of sales.  Australia until recently generated most of the rest.  An acquisition in Q3 laid the groundwork for expansion into Brazil, which could become a significant contributor in upcoming periods.

Growth has been explosive.  Organic gains of 15% have been achieved over the past several years.  Acquisitions have provided further impetus.  Ebix recently announced plans to merge with ADAM, a major provider of software in the employee benefits area.  That company has struggled over the years to streamline the software required to run the operation.  Those battles also prevented ADAM from expanding into new areas.  The name of the game at Ebix is high performance software development at a low cost (India).  Once ADAM is in the fold, expected by year end, significant improvement is likely.  ADAM currently generates about $30 million a year in revenues.

Meantime, Ebix is enjoying another great year.  Revenues are poised to climb 33% to $130 million.  Earnings could advance 25% to $1.15 a share despite sharply higher levels of spending on product development and marketing.  (See "Accounting Notes.")  Next year, assuming ADAM is consolidated for the entire year, we estimate revenues will increase 35% to $175 million to support income of $1.40 a share (+22%).  The company is acquiring ADAM in an all stock transaction, so shares outstanding will rise about 10%.  Growth could be maintained at superior levels well into the decade.  Electronic insurance exchanges remain in an early stage of development.  Only 20%-25% of annuity contracts are bid that way in the U.S., while car, home, health, and life insurance remain below 5% penetration.  Foreign expansion promises additional opportunities.  Organic growth has moderated to the 10% range during the last year as a result of the recession.  But higher levels are likely once the insurance market rebounds.  Bolstered by low cost but complementary acquisitions, earnings could reach $2.25 a share within 2-3 years on revenues of $275 million.  Applying a P/E multiple of 20x suggests a target price of $45 a share, potential appreciation of 100% from the current quote.

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Image Sensing Systems ( ISNS - Nasdaq )

Image Sensing Systems (ISNS $12.50) is the leading provider of machine vision systems used in traffic applications.  The company's products are mounted at intersections to optimize traffic flow.  The technology is superior to underground sensors, which cost more to maintain because the entire road has to be torn up when mechanical problems occur.  The systems' ability to "see" and mathematically interpret the situation also speeds up response time.  Image Sensing additionally sells units for use in tunnels (to spot fires), along busy highways (accidents), and in a variety of other applications.  An acquisition last year added a complementary technology that relies on radar detection.  Poor lighting conditions sometimes confuse the machine vision software algorithms.  Radar provides a second tool for confirming where the cars are.  In the June quarter of 2010 Image Sensing purchased a provider of automated license reading systems, as well.  That line already enjoys a growing stand alone customer base, primarily for police and anti-terror applications.  The company hopes to generate further leverage by marketing it together it with its traditional traffic control business, creating more competitive differentiation and higher average selling prices.

Financial results have been under pressure due to the worldwide recession.  State and local governments have scaled back highway projects in the United States because of budgetary shortfalls.  International business has held up better, mainly as a result of new road construction in third world nations.  But the pace of that growth has been constrained, as well.  Overall sales dipped 7% in 2009 to $24.6 million despite a modest contribution from the acquired radar line.  Earnings narrowed 20% to $1.15 a share.  (See "Accounting Notes.")  Same store sales have been relatively flat so far in 2010, a good showing in light of the ongoing budget pressures.  Overall sales are poised to increase 22% to $30 million, bolstered by the two acquisitions.  Higher marketing, product development, and integration costs have prevented income from keeping pace, though.  Those efforts are laying the groundwork for market share gains in the future.  Meantime, though, full year earnings likely will decline again, this time by 22% to $.90 a share.

A major rebound could begin 2011.  Image Sensing has tooled up its direct sales operation in China and other Far East nations over the past three years.  That effort is bearing fruit as the level of highway construction continues to ramp up in those markets.  Sales to Eastern Europe are bouncing back, as well.  And U.S. business could take off if the funding issues are neutralized.  Traffic congestion could intensify if the economy recovers.  Image Sensing's technology provides a cost effective alternative to new construction by making existing roads more efficient.  The company's competitive position has improved dramatically over the past few years, since smaller operators have been unable to match Image Sensing's ongoing investment in marketing and new product development.  The combination of resurgent demand and superior products could lay the foundation for accelerating financial performance over the next several years.

We estimate 2011 income will improve 50% to $1.35 a share on a 33% gain in sales ($40 million).  Growth could be sustained at above average rates in subsequent years as sales to China and other international markets keep expanding, and Image Sensing's share of the North American market widens.  Higher average selling prices, made possible by combining the license plate reading and radar technologies with the core machine vision line, should generate further leverage.  In 2-3 years sales could attain $60 million to deliver earnings of $2.25 a share.  Applying a P/E multiple of 18x suggests a target price of $40 a share, potential appreciation of 220% from the prevailing quote.

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Live Person ( LPSN - Nasdaq ) - Follow-up Report

Live Person (LPSN $9.25) reported excellent on target Q3 results.  Earnings improved 17% to $.07 a share, excluding non cash stock option and intangible amortization expenses.  (Refer to "Accounting Notes.")  Revenues advanced 27% to $28.2 million.  Eighteen large new accounts were added.  Existing relationships were expanded.  And the fledgling mid-market unit built momentum, widening its percentage of total revenue.  We continue to estimate full year earnings will reach $.30 a share on sales of $110 million.

Above average growth is likely to be maintained in 2011.  But it now appears the pace may be less robust than previously thought.  Live Person expanded its sales force earlier in 2010.  The benefits from that investment are starting to materialize.  Competition is becoming more prominent, though.  And that trend may continue in upcoming periods.  We are reducing our 2011 sales estimate to $140 million from $150 million.  That still represents growth of 27% year to year.  Expenses are likely to increase less rapidly than sales, enabling income to outpace the improvement in sales.  Nonetheless, we are reducing our earnings estimate by a nickel to $.40 a share (+33%).

Live Person remains a prospective takeover candidate.  It's unclear how large a premium the company might command from the stock's current level, though.  Downside risk appears limited if an offer fails to emerge, assuming financial performance is consistent with our estimates.  Upside potential could be constrained, too, by an already lofty valuation combined with increasing competition and the possibility of a slowdown in capital spending by corporations next year.  Note - Live Person's President announced yesterday that he plans to leave the company in early 2011.  He might just see the handwriting on the wall, concluding the company is certain to be acquired and that he might as well get a jump on his next career.  Or, maybe he envisions a more difficult environment on the horizon.  Aggressive investors are advised to reduce or eliminate positions, at least for the time being.

Amerigon ( ARGN - Nasdaq ) - Follow-up Report

Amerigon (ARGN $9.75) reported excellent on target Q3 results.  Earnings advanced 120% to $.13 a share, excluding non cash stock option expense.  Sales climbed 65% to $30.5 million.  Unit volume rose 60% to 429,000 vehicle seats.  Total revenues included a modest amount from initial shipments of the company's new bed product line.  North American auto sales increased 26% in the period, indicating that Amerigon continued to expand its share of the overall market.  Fourth quarter results are expected to be similar to the Q3 level.  For the entire year we estimate income will finish around $.45 a share on sales of $110 million.  Overhead costs will increase in upcoming periods.  Amerigon plans to buy out the 15% of its BSST research subsidiary that it already doesn't own.  Once that happens it will have to recognize all of those costs, not just the 85% it's been expensing up 'till now.  As those products hit the market, of course, Amerigon will own 100% of the revenues.  That probably won't happen until 2012, though, so R&D costs will climb approximately $.02 a share next year.  The company also is beefing up sales and marketing efforts in Europe and the Far East.  Those costs will impact performance in the short term, although higher sales could result down the road.  For now we are raising our 2011 earnings estimate by a nickel to $.55 a share.  Sales could attain $135 million, bolstered by the addition of several new models carrying the company's heated and cooled seats.  A stronger showing is possible if the overall car market gains momentum.

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Healthstream ( HSTM - Nasdaq ) - Solid Q3 Results

Healthstream (HSTM $6.00) reported excellent on target Q3 results.  Earnings advanced 50% to $.06 a share, excluding non cash stock option and intangible amortization expense.  (Please refer to out "Accounting Notes" button.)  Sales improved 18% to $16.6 million.  Educational and training products gained 22% and represented 66% of total revenues.  The number of medical workers covered by subscriptions increased by 99,000.  The renewal rate was 100%.  Prices increased by an average of 6% year to year.  Most of that reflected the addition of more content by existing customers.  Healthstream's struggling research business bounced back as expected in the quarter, fueled by beefed up marketing efforts.  That line grew 10% year to year and could post faster gains in upcoming periods.  Project revenues declined, holding back the size of the overall advance.  That segment varies from period to period and is less profitable than the core learning business. 

For the entire year we estimate earnings will finish at $.22 a share, up 22%.  Next year initial contributions from the high potential SimVentures line will emerge.  That should offset the drag exerted this year by the program's development costs, and perhaps generate some incremental profit.  Both the learning and research segments are poised to keep expanding at above average rates.  Overhead expenses are likely to remain steady, enabling earnings to once again grow faster than sales.  We estimate 2011 earnings will attain $.28-.30 a share.  Longer term, explosive gains are achievable if the SimVentures effort realizes its potential.

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Acacia Research ( ACTG - Nasdaq ) Follow-up Report

Acacia Research (ACTG $21.60) reported Q3 results that were above our expectation.  The company signed a structured deal with Microsoft during the period, licensing its entire patent portfolio to the software maker for a three year period.  We thought the proceeds probably would be similar to the $25 million paid by Oracle in Q1.  It appears the amount was greater.  Total revenues nearly quadrupled to $63.9 million to produce fully taxed (35% rate) earnings of $.55 a share. 


Last year Acacia lost $.03 a share in the September period.  The company continued ramping up its patent intake during the quarter.  As that intellectual property is licensed out revenues promise to keep building in upcoming periods.  Acacia indicated it does not expect to sign another structured transaction in the December quarter.  We estimate the company will essentially break even in the period, keeping full year income at $.90-$.95 a share.  That's up from our previous $.75 a share estimate.  Next year $1.15-$1.35 a share remains a realistic target.  Actual profits will be higher since the company still holds enough tax loss carryforwards to shield income through the end of 2011.  (We use fully taxed figures for comparability purposes, figuring successful companies will burn through their tax benefits eventually.)

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Amerigon ( ARGN - Nasdaq ) - Follow-up Report

Amerigon (ARGN $10.25) appears on track to report excellent on target Q3 results.  Almost all of the company's revenue will be generated by the automobile industry.  The new line of heated and cooled beds got off to a good start over the summer but remains in limited distribution.  Most auto related sales continue to be Amerigon's unique air conditioned seats.  The company also is getting a small contribution from its heated and cooled cupholders.  Sales visibility is high because Amerigon's products are engineered into more than 50 vehicle models.  Several include the seats as standard equipment.  The rest generally exhibit stable "take rates" (percentage of customers purchasing them as options).  Financial results in the short term hinge primarily on the number of cars sold.  Margins always are under pressure from the car manufacturers, but that leverage is limited by the absence of direct competition.  Amerigon tries to stay on their good side by driving down its own manufacturing costs and passing along at least some of the savings.  R&D spending continues to be fairly high.  Amerigon is developing several non-auto applications which could contribute over the intermediate term (1-3 years).  The company also is working with the Energy Department and some major corporate partners to development breakthrough technologies which could produce substantial energy savings over the long haul (3-5 years).

We continue to estimate 2010 income will reach $.40 a share.  That figure excludes non cash stock option and intangible amortization expenses.  Next year $.50 a share remains a realistic target.  Above average growth is likely to be sustained in subsequent years.  Amerigon is continuing to sign up additional vehicle platforms for its core seating products.  Total car sales are likely to expand as today's fleet ages.  Growth in foreign markets could accelerate, fueled by a cheaper "ventilated" seating line that uses ambient air from the auto's cabin for cooling.  That technology currently is used by German competitors in cars like Mercedes and BMW.  New products outside the auto industry promise additional leverage.  In 2-3 years income could reach $1.00 a share.  Applying a P/E multiple of 20x suggests a target price of $20 a share. 

A heat recapture technology now in development offers tremendous long term potential.  Applying similar materials and techniques used in the air conditioned seating line, Amerigon is developing technologies that recycle waste heat and turn it back into electricity.  The Energy Department has increased its funding for the research every year for the past four years.  In car engines, Amerigon speculates it might be able to boost MPG performance by 10%-15%.  In air conditioning units, energy consumption might improve by a similar amount.  Huge licensing opportunities could develop if Amerigon reaches the finish line.

Acacia Research ( ACTG - Nasdaq )

Acacia Research (ACTG $20.75) is the leading provider of patent enforcement services.  The company has acquired the rights to approximately 150 patent families.  It uses the legal system to enforce those rights, usually by collecting a paid-up license from an infringing party.  Those proceeds are divided between Acacia and the original patent holder.  In cases where settlements are not reached and the dispute goes to court, the company usually hires outside counsel on a contingency basis.  On average Acacia keeps 40% of any judgements won, with the original patent holder getting 40% and the law firm 20%.  In the past most of Acacia's technology partners were academics and small research organizations that could not afford to take on major corporations in court.  Infringement has become increasingly rampant as new product cycles have grown shorter, motivating manufacturers to engineer advances into new designs without engaging in a detailed patent search.  Acacia can afford to bring those infringers to account, creating a path for small inventors to earn a return on their ingenuity.

Bigger deals now are being signed.  In the first quarter Oracle paid $25 million to Acacia for the right to use all of the patents in its portfolio for the next three years.  In the September period a similar transaction with Microsoft was completed.  The Oracle deal contributed about $.50 a share in fully taxed (35% rate) earnings, before overhead.  The Microsoft arrangement is believed to be in the same ballpark.  Acacia also has signed several contracts with large patent holders, to help them enforce their intellectual property rights.  The third largest semiconductor manufacturer (based in Taiwan), a major Japanese consumer electronics company, and a Fortune 100 defense contractor all have joined forces with Acacia this year.  That inventory promises to expand the company's licensing potential in its ordinary course of business.  It also could prompt more large scale deals to be signed, possibly at higher amounts.  Other large companies are negotiating to be represented by Acacia, as well.  Most are likely to retain title to their key patents.  But a deal with Acacia promises to monetize less critical technology that might never be pursued otherwise.

Fully taxed earnings jumped to $.40 a share in the March quarter, fueled by the Oracle transaction.  No large deals were consummated in the June quarter, which led to a loss of $.04 a share.  Earnings are poised to leap again in the September period on the Microsoft license.  A growing string of small transactions promises to reinforce the momentum, and set the stage for a strong second half performance.  We estimate 2010 income will finish around $.75 a share.

Next year Acacia is hoping to land three more major deals.  Those transactions, combined with a growing volume of individual licenses, could propel earnings into the $1.15-$1.35 a share range.  In 2-3 years Acacia could build up a portfolio of 12 big licensing payors, each on the hook for a three year cycle.  Four would renew every year, laying the foundation for approximately $2.00 a share in recurring annual income.  Longer term, further expansion is possible.  Applying a P/E multiple of 20x suggests a target price of $40 a share, potential appreciation of 90% from the current quote.

Live Person ( LPSN - Nasdaq ) - Follow-up Report

Live Person (LPSN $8.50) appears on track to report excellent on target Q3 results.  The company entered the period with 85%-90% of revenue already lined up.  And bookings have continued to climb, fueled by the core enterprise (large customer) segment.  Investments in the sales force and product development that were made in prior periods have begun to bear fruit.  Spending has begun to level off, allowing margins to widen as revenues keep building.  The emphasis on R&D promises to bolster Live Person's competitive advantage in upcoming quarters.  One area that holds substantial potential is proactive website response.  Software tracks each visitor and estimates what his frame of mind is, to determine if it makes sense to jump in and engage the user with some type of communication.  Up to now Live Person has limited those interruptions to an offer to chat with somebody.  Several additional techniques are being rolled out.  Those promise to make it easier for visitors to do what they want to do.  From the website operator's viewpoint, it should increase the sales closing rate.  We are maintaining our 2010 earnings estimate at $.30 a share (excluding non cash stock option and amortization costs).  Next year $.45 a share remains a realistic target.

Zagg ( ZAGG - Nasdaq ) - Follow-up Report

Zagg (ZAGG $5.15) revealed that third quarter results were stronger than predicted.  Sales jumped 127% to $22 million, fueled by strong attach rates to the Apple iPad and a broadening range of smartphone devices.  New distribution channels contributed further momentum.  The company declined to comment on September quarter earnings.  We are not aware of any reason why margins would have narrowed, however, on the surge in volume.  Assuming they remained level with the June period income probably finished in the range of $.12-$.14 a share.  Performance might dip a little from there in the fourth quarter.  Zagg makes a significant amount of shipments in the third period to fill the pipeline for Christmas.  But reorders tend to be substantial as the season unfolds.

December period income likely will be close to the third quarter level, and perhaps ahead of it.  We are raising our full year earnings estimate to $.35 a share, up 106%, on sales of $65 million (+70%).  In 2011 revenues and earnings could realize $80-$90 million and $.45-$.55 a share, respectively.  Essentially, those previously were our 2-3 year targets.  It's premature to revise the long term picture too much.  Zagg simply may have enjoyed an unusually good quarter.  A significant upward revision is likely, though, if Zagg's financial performance keeps up the fast pace into the coming year.

Zagg ( ZAGG - Nasdaq )

Zagg (ZAGG $5.25) is a leading provider of smartphone accessories.  Its main product is the "Invisible Shield" which protects the screens of iPhones and similar devices from scratches and other types of damage.  The coverings remain clear despite all the tapping and banging that goes on, unlike competing offerings that tend to bubble, slip, or fog up over time.  They generally don't need to be replaced and last as long as the phone does.  Zagg got its start selling the shields on its website, mainly to tech savvy customers.  Two years ago the company began distributing the products through Best Buy, which remains its largest channel partner.  Last year Radio Shack was added.  In 2010 Zagg landed its first chain of cellphone retail stores, signing up ATT.

New products promise to reinforce growth.  A higher priced covering for the iPad was introduced in the second quarter of 2010.  That line appears to be gaining significant momentum.  Zagg also launched a line of customized coverings ("Zaggskins") late last year.  Customers upload a photo or design to the company's website and the unique result is shipped a day later.  Zagg also offers a series of high performance buds (earphones), broadening the overall product line further.  In development is a waterproofing application for mobile devices.

Earnings are poised to accelerate.  Performance stalled during the second half of 2009 as the company spread itself too thin.  A raft of new products were developed in hopes of pyramiding on the Invisible Shield"'s performance.  Attention to the core line diminshed somewhat as a result.  Marketing efforts were refocused after sales fell below potential during last year's Christmas selling season.  Progress became apparent in the June quarter.  Sales leaped 63% to $15.1 million in the period, leading to a 50% improvement in earnings (excluding non cash stock option expense) to $.09 a share.  Earnings stood at $.12 a share for the entire six months; sales $23.8 million.  The second half of the year usually is Zagg's stronger period, due to the Christmas influence.  This year incremental boosts from Radio Shack, the ATT stores, and the iPad could provide additional impetus.  We estimate full year earnings will finish at $.25-$.30 a share, up 47%-76%, on sales of $53-$57 million (+38%-48%).

Growth is likely to be sustained at a fast clip.  Accessories are high margin products for retailers.  More chains could adopt the Zagg line in future periods.  Sales through existing channels should remain vibrant, moreover, as smartphone and tablet volume continues to expand.  In 2-3 years sales could reach $85 million to yield earnings of $.50 a share.  Applying a P/E multiple of 20x suggests a target price of $10 a share, potential appreciation of 90% from the current quote.  A higher valuation is possible if Zagg establishes itself as the obvious category leader, and the category itself proves enduring.  In that case the company would be in a position to leverage its brand name with related products, penetrate more retail accounts, and win greater shelf space.  Expansion into foreign markets (international sales already represent 20% of the total) could supply additional gains.

Simulations Plus ( SLP - Nasdaq )

Simulations Plus (SLP $2.80) is the leading supplier of computer based simulation tools used by the pharmaceutical industry to screen promising drug candidates.  The software estimates pretty accurately how a hypothetical molecule will interact with the human body, reducing the need for animal testing in the pre-clinical stage.  Scientists can zero in on a general concept by testing hundreds of analogs in software to identify promising compounds.  Costs are reduced.  Development time is accelerated.  And the odds for success improve.  Simulations Plus is the market leader in several key areas, particularly how drugs are affected by the gastro-intestinal tract.  Other products compete with niche market specialists.  Volume is expanding as the large drug companies employ more simulation in their research programs.  Those companies are starting to consolidate purchasing with a single vendor, moreover, which is placing the niche suppliers at a disadvantage.  As scientists move from one job to another they usually insist on taking the software they are accustomed to with them.  The number of laboratories using the technology is climbing as a result.  Aggressive marketing is pushing results forward, as well.

A non core product line still represents 30% of sales.  Words Plus type-to-speech handheld computers allow people who can't talk to communicate with a synthetic voice.  The products come in a variety of form factors.  Most are reimbursed by government health insurance payers.  Competition is active, and receivables are difficult to collect from the government.  So it's not an attractive business.  But the operation more or less breaks even, depending how corporate overhead costs are allocated.  Simulations Plus has no plans to discontinue the line at this point.  In fact, sales recently began growing again following some product upgrades.  A spinoff could occur down the line, though.

The pharmaceutical software line promises to grow at a superior rate.  We estimate that segment grew 21% in fiscal 2010 (August), supporting an overall revenue gain of 17% to $10.7 million.  Earnings likely expanded 75% to $.14 a share.  (Please refer to "Accounting Notes.")  For all intents and purposes the entire income figure was produced by the simulation business.  The company stepped up its marketing efforts toward the end of last year.  A lot of that revolved around attending more trade shows, to meet prospective customers face to face.  That effort initially impacted margins, causing fiscal 2009 profitability to dip.  The poor economy didn't help, either.  Margins recovered as sales rebounded.  Simulations Plus also raised prices for the first time in five years,  providing additional impetus. 

That momentum is poised to continue.  We estimate overall sales, led by the pharmaceutical unit, will advance 21%-26% in fiscal 2011 (August) to $13.0-$13.5 million to produce earnings of approximately $.20 a share.  Simulations Plus has been pursuing acquisitions of complementary software products, to no avail so far.  But the company is piling up cash at a steady pace.  It has the ability to strike if the opportunity arises.  Any transaction could boost earnings right away, excluding restructuring or acquired intangible amortization costs. 

In 2-3 years sales could reach $20 million to produce earnings of $.30 a share.  Applying a P/E multiple of 20x suggests a target price of $6.00 a share, potential appreciation of 115% from the current quote.  Acquisitions could yield significant additional leverage.

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Healthstream ( HSTM - Nasdaq )

Healthstream (HSTM $5.25) is the leading provider of Internet based learning systems used by the health care industry.  Hospitals, drug companies, and medical device manufacturers sign deals covering most of their employees so they can take the courses and access a wide range of educational material.  Healthstream currently covers about 40% of the five million workers comprising the U.S. market.  Applications cover a lot of territory, including OSHA training, various certification programs, compliance, and best practices training.  Courseware usually is supplied by independent experts, although Healthstream does produce some mainstream products internally.  The company's Internet based delivery system sets it apart from most of its competition, which still rely on printed materials and CD based instruction.  Demand has been fueled by 3%-4% annual increases in the health care workforce over the past several years.  That dynamic has stalled with the recent recession.  But growth has been sustained in the 15% range by providing new products to existing customers, and by persuading hospitals to switch from older technologies.

Healthstream also provides research services for hospitals.  That line produces patient, physician, employee and community surveys, data analysis, and other measurement tools to keep hospitals abreast of the market, and how their own organizations are performing.  That segment has stumbled of late, registering growth in the 4%-6% vicinity.  Broad-based research companies have been gaining market share at Healthstream's expense.  Investments in sales and marketing are beginning to bear fruit, however, re-establishing momentum.  Growth is poised to pick up speed in upcoming periods.

A joint venture aimed at the simulation market could transform the industry over the next 5-10 years.  Healthstream and Norway based Laerdal Medical recently formed a 50%-50% partnership to develop training dummies that link to the Internet.  Currently, when a student practices resuscitation on a dummy, for example, there isn't any direct feedback or method to evaluate how well the job was done.  The simulation technology now in development will allow those measurements to be taken, making it easier for students to correct mistakes in technique.  Initial applications will be launched early in 2011.  A wide range of products are slated to follow over the next several years.  Those products promise to generate significant incremental revenue directly.  They also could pull in demand for Healthstream's traditional business if customers elect to buy from a single source.

We estimate 2010 sales will advance 13% to $65 million.  Overall growth will be retarded by the research unit, which represents about one-third of revenue.  Earnings appear on track to rise 22% on a fully taxed (40% rate) basis to $.22 a share, excluding amortization of intangibles and non cash stock option costs.  Next year, excluding the simulation partnership, revenue and income gains of 15% and 35% appear achievable, respectively.  That would put revenues at $75 million; earnings at $.30 a share.  Earnings should benefit from a decline in start-up costs associated with the simulation venture, which are expected to cost 2010 results approximately $.02 a share.  As the simulation line picks up momentum overall growth could accelerate as time goes on.  In 2-3 years sales could reach $100 million to produce earnings of $.50 a share.  A stronger showing is possible if simulation is broadly adopted.  Applying a P/E multiple of 20x suggests a target price of $10 a share, potential appreciation of 90% from the current quote.

Amerigon (ARGN - Nasdaq)

Amerigon (ARGN $10.15) is the leading manufacturer of heated and cooled automobile seats.  A number of suppliers offer heated seats.  Amerigon's technology provides a cooling option, as well, for when the weather gets hot.  The technology usually is installed in the two front seats.  Passengers can dial in whatever temperature they want.  Competitive systems made by the Germans cycle ambient air through the seats to provide cooling relief.  Amerigon provides that technology, as well, in its lower end product line.  At the high end the company employs a patented system that generates instant performance, and much colder temperatures.  During the mid 2000s, as the technology gained adoption, car companies generally offered the seats as an option on fairly expensive vehicles.  Take rates -- the percentage of buyers who bought the option -- were and remain unusually high, typically above 70%.  That's led a growing number of models to include the technology as standard equipment.  Amerigon currently supplies approximately 50 platforms.  Additional models are in the pipeline, slated for introduction in 2011 and beyond.  Between 5% and 10% of the U.S. car market now is equipped with Amerigon's seats.  That share is likely to expand as lower cost vehicles are outfitted with the systems.  Total volume could benefit, as well, if the overall car market rebounds from its currently reduced state.  Before the recent recession U.S. new auto sales averaged 16 million units a year.  Today they're in the 11-12 million range.

Expansion into new markets could amplify results.  After at least two years of testing Amerigon recently launched a line of heated and cooled beds, aimed at the upscale end of the market.  The queen size retails for $4,000.  The king goes for another $500.  Each side of the bed has separate temperature controls.  When it's getting too hot, just turn down the temperature.  If it's cold, turn it up.  Everybody who tries it, loves it.  Whether they'll pay the money is another story.  Initial demand has been strong, though.  The roll-out is beginning in Texas.  Geographic expansion is slated to keep going until the entire country is reached.  A retail partner is in place. 

A related move into medical beds could provide additional leverage.  Testing has been underway for a while on specialized chairs for chemotherapy and dialysis patients.  Their body temperatures fluctuate dramatically during treatment.  Temperature controlled chairs could ameliorate the effects better than the current method of piling on and removing blankets.  Bed-ridden patients could be another target.  Amerigon doesn't have a partner for the technology yet, but success in the consumer market might help move things along.

Earnings are advancing rapidly in 2010.  Performance declined last year as the auto market felt the recession's impact.  The combination of market share gains and an overall rebound in car demand has restored profitability to past levels.  Earnings recovered from a year earlier loss to reach $.10 a share in the June quarter.  For the entire six months income reached $.18 a share.  Revenues increased 169% in the quarter to $28.8 million.  For the entire year earnings of $.40 a share represent a realistic target.  Next year we estimate further improvement to $.50 a share.  In 2-3 years earnings could hit $1.00 a share, primarily from the auto business.  A stronger showing could develop if some of the company's new product lines make significant contributions.  Applying a P/E multiple of 20x suggests a target price of $20 a share, potential appreciation of 95% from the current quote.

Female Health (FHCO - Nasdaq)

Female Health (FHCO $5.00) is the only manufacturer of female condoms in the world.  Male condoms account for 98% of the entire market.  Demand for the female variety has accelerated over the past decade in response to a rising HIV/AIDS infection rate among women, especially in developing nations.  International relief organizations represent Female Health's primary customer base.  They distribute the condoms, usually free of charge, to at-risk populations in Asia, Africa, and South America.  In recent years agencies in the United States and Europe have entered the market, as well, serving homeless and other at-risk women.  Over the past two years Female Health re-engineered its product line to bring down unit costs by 25%-30%, while increasing the absolute amount of profit on each unit sold.  Reported sales have levelled off despite continued expansion in unit volume and overall net income.  Compliance has climbed as women have become more familiar with how the condoms work.  In the early going a lot of them went unused.  Acceptance among women has reinforced the aid groups' willingness to distribute the products.  Lower costs resulting from the redesigned line ("FC-2") are bolstering demand, too.  And U.S. Government programs have picked up with the change in administrations, now that there is less political opposition to promoting birth control in general.

Two order delays caused Q3 (June) results to fall below target.  Neither contract was renegotiated and will be fulfilled in upcoming quarters.  But the uncertainty caused the stock to decline fairly sharply, and it remains below past levels.  Deliveries on those orders are believed to have resumed in Q4 (September).  But it's unlikely they jumped above the regular trendline.  As a result, full year earnings probably finished even with those of a year earlier at $.15 a share (fully taxed).  For the fourth quarter alone income likely advanced 60%-100% to $.08-$.10 a share.

In fiscal 2011 (September) financial results are likely to get back onto the long term trendline.  Absent the recent order delays income probably would have finished at $.20-$.25 a share in the current year.  Unit volume gains of 20%-30% combined with expanding margins could propel earnings up by 40%-50% from there into the $.30-$.35 a share range in fiscal 2011.  Above average growth in the foreign aid market could be sustained well into the decade, since there are no viable alternatives to protect women from HIV/AIDS infection.  Female Health is well capitalized and is on the lookout for related products it could sell through its distribution network.  It also is negotiating with several consumer product companies to develop a commercial product.  (In Washington D.C. female condoms are distributed by a local aid group.  Extensive advertising appears on buses that drive around the city, encouraging poor women to get the products for free.  That promotional activity recently encouraged drugstore operator CVS to introduce the line for commercial sale.)

In 2-3 years earnings could reach $.50 a share.  Applying a P/E multiple of 20x to those earnings suggests a target price of $10 a share, potential appreciation of 100% from the current quote.  If the consumer market shows potential Female Health could become a takeover candidate, targeted by the large male condom manufacturers.  A higher valuation could emerge as a result.

Live Person (LPSN - Nasdaq)

Live Person (LPSN - $7.00) is the leading provider of click-to-chat software used by websites to improve communication with online visitors, and boost transaction volume.  The company originated the technology more than a decade ago.  The basic click-to-chat functionality now has become a commodity item.  But Live Person has fine tuned the technology with proprietary diagnostics and rule based systems that allow operators to jump in with a chat feature at the optimum moment, to maximize sales conversions while keeping costs under control.  ("Click-to-chat" enables website visitors to talk with a real person to help them navigate the site.  Conversations can be conducted by typing back and forth, or the two sides can pick up a phone and talk directly.)

The emphasis on analytics is boosting the software's performance.  Website operators increasingly let Live Person embed tracking devices inside their web pages.  Those results are analyzed using a variety of proprietary tools to predict the visitor's frame of mind.  That helps websites strike while the iron is hot, opening up a click-to-chat box when it appears that human intervention might seal the deal.  The software  gives workers a heads up as to what's going on, so they can hit the ground running.  Results vary by type of website (phone service and financial products are Live Person's two largest markets).  On average the company estimates that transaction volume is 20% greater than what it would be without assistance.  Live Person prices its products based on volume, so the financial risk assumed by customers is limited.  The company sells one-year subscriptions to its software, so recurring revenue is high.  The company usually has 85%-90% of each quarter's revenue lined up on the first day of the period.  Revenue visibility is high.  The renewal rate is close to 100%, as well.  In fact, many customers initially deploy the software on a small scale and buy more to cover additional websites as time goes on.

Sales advanced 28% during the six month period ended June to $51.7 million.  Q2 sales rose 29% to $26.4 million.  Excluding non cash stock option and intangible amortization expenses, six-month earnings rose 38% to $.13 a share.  They were $.06 a share in Q2 alone.  Margins narrowed in the June quarter due to a significant expansion of the sales force, plus increased hiring in R&D and administration to lay the groundwork for faster growth beyond.  Rising costs probably will keep a lid on margins during the remainder of 2010.  We estimate full year sales will reach $110 million to produce earnings of $.30 a share.

Next year sales growth could exceed the 2010 pace.  We estimate revenues will advance 35% to $150 million.  Margins promise to rebound since much of the new hiring is behind the company now.  Sales should increase more rapidly than costs.  Earnings could reach $.45 a share, up 50%.

In 2-3 years sales could reach $200-$250 million, to produce earnings of $.65-$.85 a share.    Diversification into related areas is likely, moreover, either as a result of internal product development or acquisitions.  So a stronger performance is possible.  Applying a P/E multiple of 20x to the midpoint of the range suggests a target price of $15 a share, potential appreciation of 115%  from the current quote.  Live Person itself could become an acquisition candidate.  Should a bidding war break out a higher valuation could emerge, since the company faces little direct competition and would be the only game in town.