Tuesday, November 30, 2010

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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Saturday, November 13, 2010

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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Friday, November 12, 2010

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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Sunday, November 7, 2010

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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Friday, November 5, 2010

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.