Image Sensing Systems ( Nasdaq - ISNS ) -- Gets the Green Light

Image Sensing Systems (ISNS $14.00) reported excellent Q4 results, somewhat above our expectation.  Tighter government budgets at the state and local level prevented an even stronger performance.  Non-GAAP earnings advanced 35% to $.35 a share.  That figure would have $.03 a share higher, except Image Sensing had to pay a higher than expected earn out bonus to the former owners of CitySync, which was acquired during 2010.  Sales of CicySync's license plate reading system were stronger than predicted.  Earnings also were reduced by relatively high input costs at CitiSync.  Image Sensing inherited several supplier contracts, which will expire soon.  The company believes it can reduce those expenses by shifting to its regular suppliers.  Earnings benefited from a lower than expected tax rate, caused largely by the renewal of the R&D tax credit by Congress.  The amount for the full year was recognized in the period.  Earnings for the twelve months finished at $1.04 a share.  Sales finished at $31.7 million.

Earnings promise to advance sharply in 2011.  Sales are likely to reach $40 million, fueled by a full year's contribution from CiySync.  The license plate reading technology is proving to be Image Sensing's fastest growing category, as well.  Traffic management is likely to expand less rapidly, due to the budget deficits that are cropping up around the nation.  But underlying demand remains robust.  Congestion is building as the economy improves.  And computerized intersection management is cheaper alternative to new road construction.  A major new line that combines machine vision with radar is slated for introduction.  That line promises to propel Image Sensing's price performance advantage far beyond its competition, laying the groundwork for significant market share expansion over the next several years.

We estimate 2011 earnings will advance 30% to $1.35 a share.  Sustained above average gains are possible well into the decade as the license plate recognition line achieves wider adoption, and the hybrid product rolls out.  International potential remains huge, particularly in emerging markets.  Image Sensing already has sales offices in place in the Far East.

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Healthstream ( Nasdaq - HSTM ) -- Organic Growth Accelerates

Healthstream (HSTM $7.50) reported excellent on target Q4 results.  Non-GAAP earnings advanced 50% to $.06 a share.  Revenues increased 17% to $17.6 million.  The subscriber base expanded 14% to 2.25 million healthcare professionals.  The backlog of new subscribers who haven't been implemented yet rose more quickly (+125%) to 225,000.  Pricing remained solid.  The renewal rate was nearly 100%.  New educational materials are in the pipeline, which promise to increase average revenue per subscriber.  The company's research business regained momentum, as well, fueled by beefed up marketing efforts.  For the entire year income advanced 28% to $.23 a share.  Revenues improved 15% to $65.8 million.

New products will reinforce growth in 2011.  Organic gains in the core acute hospital market promise to be amplified by Healthstream's high potential Sim Ventures partnership with Laerdal Medical (Norway).   That product line will enable employees to acquire techniques and certifications using computerized mannequins, that relay what's happening over the Internet to an instructor or interactive computer program.  Healthstream is rolling out two additional products, which could yield further impetus.  Initial contributions are likely to be modest but substantial contributions could develop over the next several years.

We estimate 2011 income will climb 22% to $.28 a share.  Sales could reach $77-$80 million, depending on the new products' contribution.  Those lines probably won't generate significant income in 2011, due to start up costs.  But leverage could become sizable down the road.  (Please click on the "Labels" button to bring up previous reports about the company.)

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Simulations Plus ( Nasdaq - SLP ) -- Follow-up Report

Simulations Plus (SLP $3.25) appears on track to produce excellent on target Q2 (February) results.  The key pharmaceutical modeling software line is benefiting from an aggressive marketing campaign.  Price hikes implemented last spring will enhance comparisons, too.  And existing customers are expanding use of the technology to save money and accelerate product development, by narrowing down promising drug candidates with computers instead of animal testing.  The Words Plus speech to text product line appears to be holding its own, moreover, helped by recent new product introductions.  That line accounts for about 25% of total sales and contributes little in the way of income. 

Closer ties with the FDA could leverage future results.  Simulations Plus has expanded its presence in the drug review process by working directly with the agency to save time and money by implementing the software.  It also sells the programs at a 90% discount to the government.  The company recently formed a second relationship with the FDA to computerize the analysis of potential food dangers and toxicology issues.  Simulations Plus hopes to create a master database from the results of that work, and introduce a series of commercial products for those applications later in calendar 2011.  The potential market could exceed the drug business, which itself remains in an early stage of development.

The company is starting to invent its own magic molecules, too.  Relying entirely on its software, Simulations Plus is screening millions of candidates to address specific diseases and conditions.  Candidate drugs are tested, modified, and retested in a series of iterations to weed out the obvious losers and focus on compounds that could work, at least in theory.  The company isn't bringing any unusual drug development expertise to the process; just computer and mathematical know how.  Early stage blind testing already has produced molecules that are similar to some top selling drugs.  Interest among large pharmaceutical companies is growing.

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Ebix ( Nasdaq - EBIX ) -- Completes Acquisition

Ebix formally acquired ADAM, a leading provider of employee benefits and health care software.  The deal was an all stock transaction, consisting of 3.65 million shares.  ADAM will be consolidated in Ebix's results for eleven months during 2011.  Last year the company generated approximately $28 million in revenues.  The transaction is expected to add $.10-$.15 a share to Ebix's income right off the bat.  Much greater contributions are possible in the future.  ADAM always had problems converting its database and marketing prowess into a profitable growing business, primarily because it lacked programming expertise.  That's Ebix's strength.  Performance also could surge once the new national health insurance regulations take effect.  ADAM serves the small business market, which could be dramatically impacted by the rule changes.  Its software also could be modified to address the health insurance exchange market that is slated to develop under the law.  Meantime, Ebix's core insurance exchange business continues to perform effectively.  Our estimates are unchanged. 

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Amerigon ( Nasdaq - ARGN ) -- Lower than Expected Q4 Margins

Amerigon (ARGN $12.50) reported Q4 sales that were consistent with our estimate.  Margins contracted, however, leading to a lower than expected earnings report.  A nonrecurring non cash tax adjustment enhanced the headline number.  Sales advanced 34% to $28.9 million.  Fully taxed earnings increased 14% to $.08 a share.  Manufacturing margins decreased as a result of higher tellurium costs.  That's the key ingredient in Amerigon's air conditioned car seats.  Research expenses also jumped after the company bought out its 15% development partner.  Amerigon now owns any future applications outright but will be responsible for 100% of the expenses, too.  The company also created a reserve to pay legal costs that are expected to be incurred in 2011 in a patent dispute.  For the entire year income finished at $.39 a share (+457%).  That number does not include non cash stock option expense but is taxed at a full 37% rate.  Sales were up 85% at $112.4 million.

We are reducing our 2011 earnings estimate by a dime to $.45 a share.  Manufacturing margins may stay under pressure as rare earth commodity prices remain at elevated levels, bolstered by demand and political factors in China.  Amerigon isn't likely to experience shortages, since most of its production facilities reside within the communist state.  Unit volume on existing auto platforms is likely to widen in 2011 as people replace their aging vehicles with new ones.  Amerigon focuses on high end cars, which continued to sell pretty well last year.  It's unclear how big a lift the company will enjoy from a rebound in the mid- and low-price segment.  Take rates remain lofty but might not expand if car buyers adopt a price conscious approach towards optional equipment.

Non-auto applications remain in development.  Those projects have power hitting potential but still are in the low minors, to use a baseball analogy.  Development has taken longer than originally hoped.  It remains to be seen whether those efforts can overcome the engineering hurdles involved.  Meantime, a line of heated and cooled beds (king and queen sized) is providing an element of diversification but is unlikely to contribute more than 1%-2% of total revenue in 2011.  Our advice is to close out positions and reinvest the proceeds in a Special Situation with better defined near term prospects.

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