Wednesday, May 11, 2011

Zagg ( Nasdaq - ZAGG ) -- Better than Expected Q1 Results

Zagg (ZAGG $10.00) reported excellent Q1 results, above our expectation.  Sales boomed 207% to $27.0 million, nearly matching the December period showing.  Volume normally moderates following Christmas.  Earnings advanced 225% to $.13 a share.  The superior performance was fueled by the ZaggMate, an innovative accessory for the Apple iPad tablet.  That product protects the device from scratches and cracks the same way Zagg's Invisible Shield does on smart phones.  It also is equipped with a wireless keyboard and an easel to prop up the tablet for easy viewing.  After the quarter ended Zagg signed a deal with accessory giant Logitech to outsource ZaggMate manufacturing in exchange for royalties.  Keyboard layouts vary from country to country and Zagg didn't relish the production and inventory complexities.  The company will continue to sell the ZaggMate (made by Logitech) on its own website.  Internet demand accounted for 24% of total Q1 sales.

Retail distribution continues to expand.  Best Buy remains Zagg's largest Invisible Shield reseller, representing an estimated 40% of total sales.  Target Stores also accounted for more than 10% of volume in the period.  Other chains include ATT, Verizon, Radio Shack, Cricket and Carphone Warehouse (U.K.).  Sprint's 1,600 retail chain was added to mix today.  Over the next two quarters ZaggMate fulfillment will switch over to Logitech.  That will reduce reported revenue since Zagg only will recognize the royalties it receives on each unit sold, not the wholesale amount.  (Website sales will continue to show up in full.)  The outsourcing arrangement will substantially reduce risk, however.  The royalty rate Zagg will receive hasn't been disclosed but a meaningful contribution is likely.

We are raising our 2011 estimates.  Sales appear headed to $105-$115 million.  Earnings could reach $.55-$.65 a share.  Zagg recently opened a manufacturing and distribution center in Ireland.  That could accelerate penetration into Europe, which currently accounts for less than 5% of total sales.  It also could provide a lower income tax rate.  Finances should benefit from the switch to Logitech by alleviating capital spending and working capital requirements.  Competition is deterred by key patents on the Invisible Shield technology.  The ZaggMate line could be more vulnerable to knock-offs, although Logitech should become a low cost producer.  The main long term risk facing the company is the likelihood that over time smart phones will evolve into something different.  That threat may put a limit on Zagg's P/E multiple.

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Tuesday, May 10, 2011

Ebix ( Nasdaq - EBIX ) -- Q1 Results on Target

Ebix (EBIX $20.00) reported excellent on target Q1 results.  Excluding non-recurring acquisition costs, fully taxed earnings rose 43% to $.40 a share.  Revenues climbed 27% to $40.0 million.  The ADAM health insurance benefits acquisition contributed $4.2 million to revenue.  That deal was completed in mid February.  Backing that out, revenues improved at a 13% clip.  Ebix is the leading provider of computer based insurance exchanges that match customers with carriers through a network of brokers.  The system allows buyers to compare offers from multiple insurance companies in a convenient format.  While pricing is more competitive the carriers also benefit, from reduced marketing costs.  The direct computer hook-ups also facilitate compliance, since incorrect information can't be submitted.  Paper based exchanges often go back and forth several times.  Ebix's business is expanding due to the technology's productivity advantages.  Much of the insurance industry remains set its ways, though, so the company still has penetrated only a sliver of the potential market.  Overall insurance sales are lackluster because of the economy.  That's put a lid on same store growth, as well.

The ADAM acquisition moved Ebix into the employee benefits area.  ADAM's medical database offerings rank at the pinnacle of the industry.  But that operation always had trouble capitalizing on its potential due to below average technology management.  Software offerings usually were a generation behind.  Ebix already is improving those systems.  An initial upgrade is slated for introduction in the fall, when most companies open their benefit enrollment season.  Further enhancements promise to reinforce the trend in subsequent years.  Ebix plans to ultimately extend its reach beyond medical insurance into claims processing, to help carriers and hospitals automate the reimbursement process.  Most hospitals and insurance companies currently bolt on a variety of software packages, which can lead to incompatibility and wrong calculations.

We are raising our earnings estimate a nickel to $1.45 a share.  Our revenue estimate is unchanged at $175 million.  Growth could be sustained at superior levels as the employee benefit line gains momentum, more brokers and insurance companies adopt online exchange systems, and the overall insurance industry recovers.  Internal growth of 10%-20% appears sustainable well into the decade.   (Please see "Accounting Notes" for an explanation of our adjustments to reported earnings.  Addbacks include $556,000 for stock options, $1.2 million for acquired intangible amortization, and $1.79 million in one time deal costs.  Our tax rate is 17.0% compared to 9.4% as reported under GAAP rules.  It excludes tax loss carryforward benefits.)

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Friday, May 6, 2011

Ansys ( Nasdaq - ANSS ) -- Q1 Results on Target

Ansys (ANSS $54.00) reported excellent on target Q1 results.  The company is the leading provider of engineering simulation software.  Sales increased 16% to $158.0 million.  Non-GAAP earnings climbed 21% to $.57 a share.  Renewal rates stayed high.  Customers added more seats to existing deals, resulting in a record 17 million dollar contracts during the quarter.  Demand was especially vibrant in the electronics, automobile, and aerospace industries.  Emerging areas included nuclear power safety and bioscience.  Orders increased 20%.  Margins were sustained at unusually high levels.  Our full year estimates are unchanged.

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Thursday, May 5, 2011

Image Sensing Systems ( Nasdaq - ISNS ) -- Follow-up Report

Image Sensing Systems (ISNS $12.00) reported poor Q1 results, consistent with the company's earlier announcement.  Sales rose 14% to $6.14 million.  A loss of $.08 a share was incurred.  Performance in China, which represents a huge opportunity, was far below internal targets.  Image Sensing's radar line produced unusually low sales levels, too.  That unit was acquired in 2009.  A final earn-out was paid in Q1 based on results through December.  Sales might have been accelerated into Q4 to ensure the maximum bonus was paid, leaving the cupboard bare in the March period.  A separate acquisition, Citysync, which makes license plate reading systems, also suffered in Q1 due to high costs.  Image Sensing is working to improve that unit's margins but some lingering effects are possible in upcoming periods.

Financial success hinges on the core machine vision line (Autoscope) over the coming year.  That technology remains the industry standard and a series of upgrades has broadened the potential market.  Image Sensing markets the intelligent intersection management system in the U.S. through Econolite, which packages the line in more comprehensive offerings.  Sales in North America have been affected by the economy during the past two years but Econolite has kept the business moving forward with an effective marketing effort.  Image Sensing declined to say that 15%-20% U.S. growth is a realistic target in 2011, but we can't see significant reasons why it isn't.

Image Sensing's direct sales activities are more of a question mark.  The company has been unable to make inroads in China despite years of trying.  Its two acquisitions are producing lackluster results.  Sales in Europe are okay but nothing to be excited about.  So it will be up to Econolite to save Image Sensing's bacon this year.  A new hybrid intersection product that combines machine vision with radar is rolling out of R&D at long last.  But that system probably won't generate a material impact until 2012.  We are maintaining our 2011 sales estimate at $35 million.  We are reducing our non-GAAP earnings estimate by 15%, though, to $.85 a share, to reflect the unanticipated rise in expenses.  Aggressive investors should exit the stock until either the problems are fixed or the new hybrid line proves it will become a success.  Patient investors can hold on because downside risk is limited by Econolite's involvement.  

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