Wednesday, October 27, 2010

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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Tuesday, October 26, 2010

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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Thursday, October 21, 2010

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.

Tuesday, October 19, 2010

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.

Monday, October 18, 2010

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.

Wednesday, October 13, 2010

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.

Sunday, October 10, 2010

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.

Monday, October 4, 2010

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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