Zagg ( Nasdaq - ZAGG ) -- Completes Major Acquisition

Zagg (ZAGG $12.50) acquired privately held iFrogz for 4 million common shares and $50 million in cash.  iFrogz is a leading producer of mobile phone cases and headphones, with sales of $40.9 million last year.  Zagg estimates the acquired operation will grow 50% in 2011 and provide operating profit margins in the 20% vicinity.  Results will be consolidated for seven months.  Like Zagg's existing business, iFrogz generates a disproportionate amount of sales in the fourth quarter.  That should benefit the impact on reported results.  Wal*Mart is iFrogz's largest customer.  Over time that relationship might help Zagg with its Invisible Shield line and other products.  The cash portion of acquisition price will be financed with floating rate debt, beginning at a 6.75% rate.  Earnings could be enhanced by the transaction, perhaps by $.05-$.10 a share this year.  The financial risk created by the borrowing could limit the stock's P/E expansion, though.  The deal does provide a certain amount of diversification which will reduce Zagg's dependence on the Invisible Shield.  On balance the transaction looks like a good move. 

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Healthstream ( Nasdaq - HSTM ) -- Outlook Positive

Healthstream (HSTM $11.15) is on track to produce excellent on target Q2 results.  The share price fell yesterday in response to a downgrade by a Wall Street research firm.  The fundamentals at the company remain intact.  The change in opinion reflected a concern about the stock's high P/E ratio.  Healthstream is continuing to gain market share in its core learning business.  The company also is starting to broaden its horizon in that segment, diversifying beyond the acute care hospital segment.  The research business is continuing to gain momentum, moreover.  And while the high potential simulation partnership with Laerdal Medical still is in an early stage of development, that effort is on schedule.  Major acceleration is likely over the next several years.  That revenue contribution will be accretive to Healthstream's existing business, moreover, so overall results should benefit.

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Simulations Plus ( Nasdaq - SLP ) -- Outlook Remains Positive

Simulations Plus (SLP $2.75) is on target to report excellent on target Q3 (May) results.  The company said sales were up 10% in the period to $3.44 million.  Pharmaceutical software revenues generated all of the improvement, advancing 14%.  That represented 77% of the total.  The non core Words Plus subsidiary posted flat revenues (23% of the total).  Sales of software licenses expanded at a faster pace.  In the year ago period Simulations Plus was engaged in some collaborative research projects which weren't repeated.  That dampened the overall revenue comparison.  Earnings will be released in July.  A strong showing is likely, fueled by ongoing improvement in profit margins.  Simulations Plus has been adding scientific and marketing personnel but those costs have been overtaken by the climb in recurring software revenues.  Profitability is likely to remain well above average in upcoming periods, although some moderation is possible in the August period because fewer contracts come up for renewal.  Our full year (August) Non-GAAP earnings estimate is unchanged at $.18 a share.

Growth could accelerate in fiscal 2012 (August).  The slow growing Words Plus segment will represent a shrinking portion of the overall business.  And comparisons won't be skewed by non recurring collaboration revenue.  License income will be the central factor.  Economic conditions haven't impacted demand to date.  In fact, several pharmaceutical producers have expanded their use of Simulation Plus's software even though they've reduced R&D spending by 10%-20%.  The software has a proven record of lifting productivity.  The company is beefing up training to teach customers additional tricks.  It's also pursuing an in house effort to design molecules from scratch, as a demonstration project.  Entirely new applications also are emerging.  The F.D.A. is implementing the technology to study toxicology issues in food products.  As the related databases and mathematical models accumulate demand could arise among the food companies themselves.  Unilever already has licensed the core system.  Geographic expansion could reinforce performance.  Simulations Plus already is well established in Europe.  Efforts now are underway to penetrate China, India, Brazil, and other emerging markets.  Acquisitions could yield further leverage although it appears nothing is imminent on that front. 

We estimate non-GAAP earnings will advance 27% next year to $.23 a share.  Revenues could advance 20% to $15 million even if the text to speech line keeps trending sideways.  Cash flow remains positive so unless an acquisition is completed the company's share repurchase program could be re-activated.

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Stratasys (Nasdaq – SSYS) , 3D Systems (NYSE: DDD) — The revolution will be printed

Stratasys, Inc. (SSYS $34.00) and 3D Systems Corporation (DDD $18.50) are leading companies in the emerging direct digital manufacturing (“DDM”) field. Both companies develop, manufacture and sell machines capable of what is being called “3D printing.” But this is not printing in the traditional sense. The machines construct finished 3-dimensional parts using a variety of materials including polymers, ceramics and metals. The technology has existed for decades, but these two companies are trying to push what was once a fringe niche closer to the mainstream.

Both companies have users in numerous sectors, including transportation, healthcare, education and recreation. And while the companies’ machines are able to fabricate end-line products, many companies are using the printers as lower-cost alternatives for prototype manufacture. A user can design a computer generated 3D model using CAD, and the machine will use the digital model to accurately build the design. Here is a demonstration of the Fortus 900mc, one of Stratasys’s leading models.

Ansys ( Nasdaq - ANSS ) -- Slight Reduction in Q2 Outlook

Ansys (ANSS $55.00) appears on track to produce excellent Q2 results.  The company is the leading provider of engineering simulation software encompassing a wide range of industries.  Order rates have accelerated over the past several quarters due to the improving economy and a product line upgrade that improved functionality and ease of use.  Deliveries have remained on track in the June period with the exception of Japan, which is Ansys's second largest geographic market.  Disruptions created by the earthquakes have caused some business to be postponed into Q3 and Q4.  The lost revenue is unlikely to be made up.  In fact, Japanese demand may remain relatively subdued for an extended time as the rebuilding process takes place, and customers decide where to go from here.  The rest of the company's business remains vibrant.  Cash flow continues to accumulate.  Ansys is exploring potential acquisitions.  Those transactions have been difficult to complete due to valuation differences.  We are reducing our 2011 revenue estimate by $10 million to reflect the slowdown in Japan.  We also have lowered our earnings estimate by a nickel.  Next year we estimate sales will advance 15% to $765 million as the Japanese market stabilizes.  Earnings could rise 19% to $2.80 a share.  Margins are likely to remain lofty due to the company's high level of recurring income and exceptional competitive position.

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Healthstream ( Nasdaq - HSTM ) -- Simulation Launch on Schedule

Healthstream (HSTM $12.50) appears on track to produce excellent on target Q2 results.  The company continues to gain market share in the health care education industry.  Healthstream provides an Internet platform that lets hospital workers study instructional material at their convenience, unlike competitive offerings that rely on classwork, books, and compact disks.  The computer format also enables hospitals to develop proprietary courses which they can use internally or make money from by licensing them to outside users.  Healthstream currently serves 40%-45% of the U.S. market.  It doesn't operate overseas.  The company also has a research arm that conducts surveys to help hospitals measure performance and customer satisfaction.  That segment has rebounded following a beefed up marketing effort that was implemented last year.  We continue to estimate full year earnings (excluding stock option expense) will reach $.30 a share (+30%) in 2011 on sales of $80 million (+22%).

Simulation could be the wave of the future in health care education.  Last year Healthstream formed an equally owned joint venture with Laerdal Medical, the industry leader in medical mannequins.  The companies have begun to computerize those models and link them up to the Internet.  Students will get measurable feedback on how well they perform different techniques.  That could improve performance (quantifiable data) and speed up class work (instructors won't have to make every observation).  The companies have developed authoring systems and related support tools which experts now are using to develop specific courses and applications.  The commercial rollout is expected to begin this year.  As the inventory of simulation products expands revenues promise to pyramid higher, bolstering recurring revenue and income growth well into the decade. 

Meantime, the core business promises to keep expanding.  Further market share gains are likely.  The number of hospital workers may rise in future years, as well, fueled by government regulation.  And compliance rules may force workers to take more courses, and get certified more frequently.  We estimate 2012 earnings will reach $.40 a share, bolstered to a modest extent by the high potential simulation line.  (Healthstream will split revenue and earnings 50-50 with Laerdal.)  That venture could open up the international market over the long haul, since Laerdal is well established outside the U.S.  (Please click on the "labels" button below to bring up all the reports on file about the company.)

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Acacia Research ( Nasdaq - ACTG ) -- Deal Flow Accelerating

Acacia Research (ACTG $38.00) appears to be on track to produce excellent Q2 results.  The company is the leading supplier of patent enforcement services.  It primarily teams up with patent holders to generate royalties from organizations that need those technologies.  Acacia also purchases patents for its own account, in which case it retains all the proceeds.  On average the company keeps 40% of the money it collects.  Patent attorneys that the company hires generally get 20%.  The original patent holders receive the remaining 40%.  Every specific deal is unique.  Starting in 2010 Acacia began licensing all of the intellectual property it controls to large companies in exchange for substantial lump sum payments.  Those deals are believed to last for three years, at which point another lump sum payment could be negotiated.  To date the company has signed those kind of "structured" deals with Oracle, Microsoft, and Samsung.  The latter transaction occurred in Q1, propelling income sharply higher.

The company hopes to sign two more large deals in 2011.  If one of those doesn't occur in Q2 income will surely decline on a sequential basis (compared to the March period).  Acacia doesn't offer discount settlements to make a particular set of numbers each quarter, either.  It maximizes each deal's value.  While the company's deal flow is strong and growing, revenues can vary from period to period due to timing.  Still, the outlook is bright for another robust performance in 2011.  We estimate income will rise 29% to $1.10 a share (fully taxed) despite the dilution created by a recent stock offering.  Next year $1.40 a share (+27%) is a realistic target.  The industry is expanding rapidly so a stronger showing is possible.  It usually takes two years for a patent portfolio to start becoming monetized, though.  So the surge in activity that's occurring now probably won't affect the income statement before 2013.  (Click on the "labels" button below to bring up all the reports on file about the company.)

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