Wednesday, March 30, 2011

Healthstream ( Nsadaq - HSTM ) -- Expands Laerdal Medical Partnership

Healthstream (HSTM $7.40) acquired a 50% stake in Laerdal's "Advanced Video System."  The two companies formed an equal partnership in 2010 to develop a simulation based health care education business.  Healthstream paid $3.5 million in cash to Laerdal so the video technology would be added to the partnership.  The video system uses up to four cameras to record students (hospital workers) as they perform various procedures on patient simulators (computerized mannequins).  The partnership originally was established to develop a next generation instruction system that combined Healthstream's courseware with Laerdal's mannequins.  As students perform different actions the results are transmitted over the Internet and evaluated.  The video provides additional feedback, showing the students and instructors exactly where they went right and wrong.  Healthstream and Laerdal are in the early stages of rolling out the new product line.  So the video business is not expected to generate a direct boost to results this year.  The technology's availablity promises to reinforce overall demand as more courses become available in the future.  For now we are maintaining our current estimates.  (Please click on the "Labels" button below to bring up all the reports on file about Healthstream.)

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Friday, March 25, 2011

Acacia Research ( Nasdaq - ACTG ) -- Public Stock Offering

Acacia Research (ACTG $32.00) sold 5.0 million new common shares in a public offering.  The deal was completed in a single day after it was announced.  Acacia received $31.50 a share, less expenses, netting the company approximately $150 million in fresh capital.  An additional 750,000 shares could be sold if the underwriter exercises its over-allotment option.  Acacia historically has earned a superior rate of return on capital.  If it keeps it up income promises to benefit by $.50 a share or more once the capital is deployed, even allowing for the dilution caused by the new shares.  Separately, Q1 results are likely to be robust.  Our fully year earnings estimate likely will be realized despite the extra shares, as well.  We'll issue a more detailed financial outlook after Q1 results are issued and the over-allotment option is settled.

Thursday, March 17, 2011

Ebix ( Nasdaq - EBIX ) -- Follow-up Report

Ebix (EBIX $27.50) reported excellent on target Q4 results.  Revenues improved 12% to $35.1 million.  Adjusted earnings rose 14% to $.32 a share.  All of the improvement was generated internally.  Ebix completed a pair of large acquisitions in 2009 that bolstered comparisons in previous quarters.  Fourth quarter growth was largely organic.  Our income figure excludes non cash stock option expense ($1.85 million).  It also excludes tax loss carryforward benefits ($7.5 million).  Official earnings reported by the company were higher, as a result.  Aided by the acquisitions, full year revenues climbed 35% to $132.2 million.  Earnings jumped 29% to $1.19 a share.  Organic growth for the year equalled 11%.

The ADAM acquisition in February will open up the health insurance market to Ebix's exchange technology.  That transaction was paid for primarily with stock, moderating the immediate earnings leverage.  The new line promises to lift 2011 income by $.10 a share or more, nonetheless.  ADAM is well established in the small business market.  Ebix plans to enhance the technology to improve performance and lower costs, making its exchange more attractive to policy providers and business customers alike.  The technology also should attract additional brokers, reinforcing the momentum.  Longer term, volume could surge once the new national health insurance rules are implemented.

Meantime, Ebix is poised to sustain growth at superior levels.  We estimate 2011 sales will improve 10%-15% internally.  Combined with the ADAM contribution, revenues could reach $175 million.  Earnings likely will expand at a slower pace due to the additional shares issued to purchase ADAM.  Still, an 18% gain to $1.40 a share appears obtainable.  Further acquisitions are possible.  An in-house expansion into the property and casualty insurance exchange market is slated for this year, laying the groundwork for additional leverage in the future.

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Wednesday, March 16, 2011

Zagg ( Nasdaq - ZAGG ) -- Follow-up Report

Zagg (ZAGG $7.00) reported excellent Q4 results, far beyond our expectation.  Sales were fueled by the addition of new distribution channels.  The company added the ATT and Verizon retail networks to its thriving Best Buy relationship.  Zagg also enjoyed a surge in volume on its own website.  Revenues jumped 157% to $29.3 million.  Mobile phones represented 91% of the total.  Tablets accounted for 7%.  The ZaggMate tablet add-on was introduced in Q4, so that segment contributed a small percentage for the entire year.  Non-GAAP earnings surged 550% to $.13 a share.  An inventory write-off cost Zagg $.04 a share in Q4.  The company has to build inventory when new phones are launched.  Some of those units don't sell as well as hoped.  Write-offs probably will be an ongoing issue although Zagg is developing techniques to mitigate the damage in future periods.  An unusually high tax rate clipped income by an additional $.02 a share.  That figure promises to decline in 2011 after Zagg opens an Irish distribution center.  Besides reducing the company's tax liability the fulfillment operation should improve response times with European customers.  International business accounted for 20% of 2011 sales even though a majority of phones are used outside the United States.

The earthquake in Japan might cause growth to moderate.  Key semiconductor factories were put out of commission.  And the nation's electricity supply could be constrained for months as the nuclear power plants in Japan are recertified, or rebuilt.  Zagg's tablet related volume also might be effected by Apple Computer's new iPad cover.  That's not a direct competitor but many consumers might be reluctant to buy a second accessory.  Still, another powerful performance appears likely.  We estimate sales will improve 25%-31% to $95-$100 million to provide earnings of $.55-$.60 a share (+28%-40%).  Expanding smartphone and tablet demand combined with new product introductions are capable of propelling sales to $150-$175 million within 2-3 years.  Income could achieve $.75-$1.00 a share.

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Tuesday, March 8, 2011

Simulations Plus ( Nasdaq - SLP ) -- Preliminary Q2 (Feb.) Results

Simulations Plus (SLP $3.15) reported preliminary Q2 (February) results that were consistent with our expectation.  Total sales rose 14% to $3.35 million.  Pharmaceutical software revenues improved 18% to $2.62 million, representing 78% of the total.  The non core text-to-speech line posted a 1% increase to $728,000.  A series of software product upgrades could reinforce growth over the second half of fiscal 2011 (August).  Income figures were not published but margins likely remained at superior levels, fueled by the company's highly profitable subscription sales model.  New customers accounted for 29% of the pharmaceutical modeling business.  Marketing activity is being maintained at a vigorous level.

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ZAGG ( Nasdaq - ZAGG ) -- Apple Computer Enters the Device Cover Market

Zagg (ZAGG $8.25) is on track to report excellent on target Q4 results.  Our estimates are unchanged (see below).  Last week Apple Computer released its second generation iPad tablet computer, which ordinarily would have created an additional market opportunity for Zagg.  During its formal presentation Apple featured a specialized cover it had developed for the iPad.  That product gained more publicity than most of the other innovations contained in the iPad.  The immediate impact on Zagg is likely to be negligible, since tablet computers still represent a small fraction of the potential market.  Afficionados also may be able to distinguish between Apple's new cover and the ZaggMate.  The longer term question is whether the hoopla will set off a wave of additional products, laying the groundwork for a more competitive market in the future.  If that happens sales growth could moderate despite the industry's ongoing expansion.  Profit margins could come under greater pressure, as well.  It's premature to throw in the towel on these shares.  Zagg is a well managed company that commands the leading position in the device cover market.  American tax laws and its economic climate aren't especially conducive to business start-ups, either.  Established computer accessory manufacturers could move into the business.  But until some genuine evidence of that emerges our advice is to maintain at least a reduced position in these shares.

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Monday, March 7, 2011

Data I/O ( Nasdaq - DAIO ) -- Follow-up Report

Data I/O reported Q4 results that were moderately below our expectation.  The company's order rate declined early in the period.  That coincided with a general slowdown throughout the semiconductor industry.  Business picked up midway in the quarter and has remained vibrant since then.  Data I/O's systems are used to load programs and datafiles onto blank computer chips before they are shipped out for final assembly.  The long term outlook is positive because more products are being computerized, and the volume of information that's being embedded in computer chips keeps growing at exponential rates.  Business is prone periodic downswings, though, due to inventory drawdowns and slowdowns in overall economic activity.  Sales rose 40% in the December quarter to $6.95 million, despite the early sluggishness.  Fully taxed earnings advanced 400% to $.05 a share.  Both year ago figures were depressed by relatively weak economic conditions.  Profit margins in the latest period were affected by a sudden jump in R&D spending.  Data I/O remains the leading producer of semiconductor programming systems by a wide margin.  But it does face considerable low end competition, especially from Chinese manufacturers.  Data I/O accelerated development of several proprietary software upgrades in response to customer demand.  Those initiatives also promise to thwart potential competition.  The use of outside consultants and other nonrecurring expenses probably reduced income by $.01-$.02 a share in the quarter.

The new software features are slated for introduction in the second half of 2011.  In the meantime, sales are likely to exhibit positive year to year comparisons.  But some orders may be deferred until the new technologies are made available.  As a result, we have reduced our 2011 sales estimate by $2 million to $30 million; and our earnings estimate by a nickel to $.30 a share.  Data I/O has stockpiled $18.9 million in cash ($2.10 a share), and the company continues to aggressively pursue complementary acquisitions.  Spending half that amount and generating a 10% rate of return would boost earnings by $.10 a share.  Earnings should get a further boost when the new product lines gain momentum, setting the stage for substantially higher levels of profitability over the next 2-3 years.

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Sunday, March 6, 2011

Acacia Research ( Nasdaq - ACTG ) -- Into the Mainstream

Acacia Research (ACTG $32.00) reported Q4 results that were somewhat below our estimate.  Acacia partners with patent holders to generate royalties on those technologies from infringing corporations, primarily in computer related industries.  The company currently manages more than 180 patent portfolios.  Acacia usually tries to negotiate settlements but it does go to court when deals aren't reached, hiring outside attorneys to try the cases.  Acacia has a fiduciary responsibility to the patent holders it represents.  The company doesn't accept discounted settlements so it can show smooth quarterly earnings comparisons.  Fourth quarter results were slow from a financial reporting perspective because a number of active cases failed to settle.  The volume and total size of the claims Acacia is prosecuting continued to grow, however, and that trend promises to continue.

Acacia signed two "structured agreements" in 2010.  Those deals, rumored to be with Oracle and Microsoft, generated payments of $25 million and $40 million, respectively, which the company split with its various patentholding partners.  The agreements gave those companies the right to use most if not all the patents in Acacia's portfolio for a three year period.  The remainder of Acacia's 2010 revenue was provided mainly by one-off settlements, typically in the $500,000 to $1.0 million range.  The company hopes to sign three more structured agreements in 2011, then four in 2012.  Last week Acacia filed an 8-K with the S.E.C. suggesting it had completed an agreement with Samsung.  Details remain confidential.  But the likelihood of very strong March quarter results appears high.

Growth is likely to be fueled by the electronics industry in 2011.  But Acacia is expanding aggressively into the medical technology area, laying the foundation for greater diversification and faster growth down the line.  The company is starting to reinvest its burgeoning cash flow in its own private patent portfolio, moreover, removing the need to pay a share of its winnings to the original patent holder.  Acacia also formed a hedge fund last year to invest in patents.  Institutional investors are being recruited to invest in what the company hopes will become a new asset class.  Acacia also is beginning to team with large companies, mainly foreign ones to date, to enforce their patent rights.  Many companies own patents that aren't central to their business but could generate royalties.

We estimate fully taxed 2011 earnings will reach $1.20 a share.  Annual growth of 25%-40$% appears sustainable well into the decade.

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Ansys ( Nasdaq - ANSS ) -- Cash Flow Automation

Ansys (ANSS $55.00) reported excellent Q4 results, slightly ahead of our expectation.  Revenues advanced 11% to $166.6 million.  Non-GAAP earnings rose 23% to $.65 a share.  Profitability benefited from the R&D tax credit, which Congress resurrected just before the end of the year.  Ansys hadn't reserved for those credits in the previous three quarters, so it took the amount for the entire year in the December period.  Revenues were aided by foreign currency translation gains, although Ansys usually hedges its exposure by matching expenses with revenues.  So that factor contributed just a modest amount to income.  Margins remained at superior levels, bolstered by a high level of recurring revenue and an unrivaled competitive position.  Orders percolated in Q4 following the release of Ansys's next generation line of engineering simulation software.  That momentum is continuing to build and promises to accelerate growth in upcoming periods.  U.S. customers accounted for 34% of Q4 sales.  That proportion may widen in 2011 in response to the accelerated depreciation feature in the latest tax law.  Our estimates are a little above Ansys's own forecast, mainly due to the expected lift in tax related demand.  (Some of that business might end up being stolen from future periods, like the cash for clunkers and first time homebuyer programs.)  Simulation remains a hotbed of innovation.  Ansys is certain to develop plenty of advances internally.  But the company has plenty of cash ($473 million) to make acquisitions if outside opportunities emerge.

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