Saturday, July 30, 2011

Healthstream ( Nasdaq - HSTM) -- Separating from the Pack

Healthstream (HSTM $13.50) reported excellent on target Q2 results.  Earnings advanced 50% to $.09 a share.  Our figures exclude non cash stock option expense and amortization of acquired intangibles.  (See "Accounting Notes" for a complete explanation.)  Margins were reduced by the cost associated with the company's annual user conference.  Healthstream also is adding personnel at a healthy pace to support future growth.  On the other hand margins are starting to benefit from lower per-unit royalties paid to outside content providers.  Healthstream provides the leading computer based learning platform for the health care industry.  Hospital workers take courses over the Internet to keep their skills sharp, learn about new products and procedures, and earn certifications.  Healthstream also is developing a new simulation platform that promises to expand the potential market dramatically over the next several years.  That effort is being done in combination with Laerdal Medical, the leading provider of medical mannequins.  

Revenues climbed 26% to $21.1 million.  The learning division posted a 29% gain.  The smaller research unit, which conducts surveys and other market research programs, posted a 22% advance.  The renewal rate exceeded 100%.  That means renewing hospitals added more personnel to the contracts.  Some customers also signed up for additional courses.  The total number of subscribers rose 63,000 to 2.49 million.  Depending on how the calculation is made, Healthstream ended the period with 42%-45% of the market.  Competition consists mainly of large training and workforce management software providers who address a wide range of industries.  Those companies are performing well but are likely to keep losing market share to Healthstream in the health care segment, primarily because that's only area Healthstream focuses on.

The long term outlook remains bright.  Spending on training by hospitals could keep expanding as the payback improves further.  Content quality continues to improve, fueled by ongoing improvements to the Internet, declining computer costs, and better software features.  The addition of simulation could yield further leverage.  And more third party content providers are likely to adopt Healthstream's platform as a distribution vehicle.  Penetration into related markets like rehab hospitals, surgery centers, and home nursing companies offers additional potential.  Growth could be sustained at a high level well into the decade.  Meantime, we are raising our 2011 earnings estimate by a nickel to $.35 a share.  Next year $.45 a share represents a realistic target.

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Thursday, July 28, 2011

3D Systems (Nasdaq — DDD) Reports On-Target Q2 Results

3D Systems (Nasdaq: DDD $22.25) reported good Q2 earnings. A day after direct competitor Stratasys unveiled earnings that fell below expectations, 3D Systems reported record revenues of $55.1m, a 57% increase from $35.1m in Q2 a year ago. Sales of the company’s DDM printers tripled from the same period last year, accounting for $5.5m in new revenue.

Twenty-seven new distributors were added to the company’s global distribution network – the company now has 167 channel partners total. 3D System’s method of finding its own distributors worked out much better than Stratasys’ pairing with HP. The company expects strong demand for its products in Q3. Sales of custom parts are also expected to grow, as is revenue from healthcare solutions.

Service and maintenance (including custom parts) revenue rose $12.0m compared to the same period last year; printing materials revenue increased by $2.4m. Gross profit margin swelled 30 basis points to 45.7% for the quarter compared to 2010, with gross margin from printing materials zooming 530 bips to 67%. Printers’ gross margin expanded 220 basis points for the quarter, but sequentially decreased 360 basis points. Custom parts services gross margin increased 1,290 bips over the comparable quarter, but also fell sequentially 690 points based on a seasonal revenue shortfall.

3D Systems ended the first six months of 2010 with $79.0m of available cash and cash equivalents. Net income of $13.4m for Q2 included $0.4m in restructuring costs that are expected to save the company money in the future. Legal expenses rose to $2.2m in the quarter, an 83% increase from $1.2m the year before; the increases were primarily due to litigation in a lawsuit filed by customers unhappy with warranty cancellations stemming from third-party printing materials use. Non-cash expenses related to depreciation, amortization and share-based compensation totaled $3.4m in Q2 2011, compared to $2.4m in 2010. Rapid revenue growth on printers compared favorably to last year but compressed earning power. Gross margins are expected to rebound back to target in coming quarters.

The company reported earnings per share of $0.26, but these include a $0.12 per share benefit from the company releasing a portion of its valuation allowance on deferred tax assets. Subtracting the benefit and applying a 35% tax rate, we calculated earnings per share of $0.12 (check here for our complete accounting notes). Share earnings are on track to reach $0.50 for 2011.

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Wednesday, July 27, 2011

Stratasys (Nasdaq — SSYS) -- HP Partnership Yields Lackluster Result

Stratasys (Nasdaq: SSYS $29.70) reported underwhelming second-quarter results. An agreement with Hewlett-Packard to distribute Stratasys’s lower-end 3D printers has not produced, with 18% fewer printers sold this year compared to last. The HP deal didn’t open the distribution channels Stratasys believed it would – a proposed Q1 launch in the U.S. was postponed due to turmoil at HP. The companies are working together to correct this, as their agreement was renewed through September 2012, but it will take some time to recover.

Stratasys will accelerate its independent channel development. The HP agreement currently serves only five countries in Europe – HP plans to expand its European markets later this year, but that remains to be seen. The company reaffirmed its commitment to HP, but Stratasys is intent on increasing distribution by other means.

The stock price fell eight points from 37.97 after this morning’s earnings report. Stratasys’ direct competitor, 3D Systems, also fell, though not as far. 3D Systems reports its earnings tomorrow – if that company's sales are also below expectation it could mean that 3D printing isn’t expanding as rapidly as some believed it would. There are other factors at play, and we’ll have to wait until 3D Systems reports to get a clearer picture.   

Friday, July 22, 2011

Data I/O ( Nasdaq - DAIO ) -- Skeptical Audiance Creates Cheap Entry Price

Data I/O (DAIO $5.70) reported unexceptional Q2 results.  Earnings dipped 29% to $.05 a share.  Sales advanced 4% to $6.85 million.  Sales declined sequentially although orders improved to $7.3 million.  Backlog climbed $500,000 from the end of the March quarter to $1.6 million.  A series of high potential software products is slated for introduction in August.  That rollout probably will continue into 2012.  The new software features could leverage sales of Data I/O's semiconductor programming hardware products.  Stand alone sales of the software to the installed base promise to amplify performance.  Data I/O remains tight lipped about the product features and pricing.  That's caused most investors that currently hold the stock to take a cautious view.  New investors haven't gravitated to the story yet, either.  Downside risk is limited, since Data I/O is the leader in its field and the industry promises to remain vibrant over the long haul as computer chips become more complex.  The company's systems load specific applications onto standard computer chips.  For instance, Ford Motor may load a particular set of instructions and data files onto a Texas Instrument chip to control the brakes on a Fusion.

The new software could cover a lot of ground.  Loading data onto chips continues to be a fairly high end operation.  But the real growth will come from ancillary features like process control and tracking to thwart piracy and other forms of intellectual property theft.  That business promises to make a lot of money right off the bat.  It also could boost Data I/O's hardware penetration.  Competitive offerings will be able to perform the data loading but the value added software probably will be available only on Data I/O machines.

We are raising our 2012 earnings estimate by 25% to $.50 a share.  A stronger performance is possible if direct software sales take off, or the software leverages demand for the company's hardware.  Data I/O intimates the new products could expand its potential market by 1,000% over the next five years.  If that's even remotely true these shares could produce exceptional appreciation from current levels.

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Acacia Research (Nasdaq — ACTG) -- Can This Stock Get to $100 ?

Acacia Research (Nasdaq: ACTG $42.85) reported strong Q2 results. Revenues rose 165% to $39.7m from $15.0m in Q2 2010. Revenues are on pace to finish up 60% at $210m, compared with $131.8m the year before. Fully taxed earnings rose to $0.08 per share from $(0.04) in 2010. Earnings per share fell from $0.39 in Q1, but those earnings were boosted by a $45.0m agreement with Samsung; no such agreements were reached in Q2. The company is optimistic that two large deals will be completed in the second half of this year. Revenues could far exceed our estimate if these agreements come to fruition.

Second-quarter revenues were down 36% from Q1 ($61.1m), but Acacia’s revenues fluctuate from quarter to quarter so this isn’t cause for concern. Gross margins are also down as legal expenses and inventor royalties sucked up 54% of revenue in Q2. The company spent $13.0m on legal fees, a 275% increase from the year before; royalties jumped 200% to $8.6m from $2.9m in 2010. These rises stem from Acacia growing as a whole, and should even out over the remainder of 2011.

The company made 29 licensing agreements in the second quarter, and acquired nine new patent portfolios. Acacia now controls more than 180 patent portfolios. This is fewer agreements and portfolios than in the past, but deals are now being made with larger corporations that generate more revenue per agreement. Corporations are beginning to see patents as a strategic asset, as selling/licensing them can offset research and development and other payments.

Companies have three options when it comes to patents: they can create their own litigation business to handle patents, turn their patents over to a company such as Acacia, or sell them outright. Corporations are increasingly unwilling to create their own patent litigation teams, not only because of the substantial costs involved, but because Acacia and companies like it specialize in patent management and have a history of success. Selling outright works for some patents, but patent licensing through Acacia or a similar firm is emerging as the most lucrative option.

Acacia is also exploring the possibility of exclusive licensing. Rather than license a patent to many companies for a small sum each, Acacia could license it to only one corporation for a much greater amount. For example, let’s say Acacia acquires “Patent X”. The patent is in high demand, and in the past Acacia would try to license Patent X to 100 companies for $1m each ($100m total). Now, however, as patents become more valuable, one company could spend $200m for the exclusive use of Patent X in order to lock out its competitors. In this case, the strategic value of the patent exceeds the licensing value. Of course, only a select few patents fall into this category, but Acacia has the resources and experience to identify them.

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Thursday, July 14, 2011

Simulations Plus ( Nasdaq - SLP ) -- Margins Keep Expanding

Simulations Plus (SLP $3.10) reported excellent on target Q3 (May) results.  Overall sales improved a modest 10% to $3.44 million.  But the high potential pharmaceutical software line gained 14%.  The non core text to speech unit was flat year to year.  Pretax margins continued to widen, fueled by the company's recurring revenue model and the addition of new customers (47 to date).  The tax rate also declined due to the availability of greater R&D tax credits.  The combination of higher margins and lower taxes helped income rise 75% to $.07 a share in the period.  For the entire year we are raising our earnings estimate by 11% to $.20 a share, due to those factors.  In fiscal 2012 (August) a 25% hike in income to $.25 a share appears like a realistic target.  Cash flow remains positive.  Those reserves could fund an acquisition or stock repurchase, either of which could provide further impetus. 

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Thursday, July 7, 2011

Convio ( Nasdaq - CNVO ) -- Expands to London

Convio (CNVO $11.20) acquired privately owned Baigent Digital for $2.9 million in cash.  Baigant is based in a suburb of London, England and is a leading U.K. provider of digital fundraising services for nonprofit organizations.  The new operation approximately broke even in 2010 on $2.0 million in revenue.  Convio plans to beef up Baigant's product line with its core fundraising, email marketing, and event management systems, which could provide an immediate lift.  Marketing efforts will be accelerated, as well, to take advantage of the lack of direct online competition.  Longer term, Convio also plans to integrate its high potential customer relationship systems.  Our 2011 earnings estimate is unchanged.  Future performance is likely to be enhanced by the expansion of Convio's potential market.

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Sunday, July 3, 2011

Ansys ( Nasdaq - ANSS ) -- Significant Acquisition

Ansys (ANSS $55.00) agreed to acquire privately owned Apache Design Solutions for $310 million in cash.  Apache is a leading provider of engineering simulation software that helps designers reduce power consumption in electronic devices.  That market is expanding rapidly as greater functionality is built into mobile phones and other electronic devices.  Apache generated $44 million in sales last year, charging customers on a subscription basis.  That recurring revenue model tends to understate earnings compared to one-time license sales, but it creates greater long term reliability.  Ansys won't reveal Apache's profit margins until the transaction is officially completed in Q3.  The company did say the deal will be earnings neutral in the short run, and then boost income in future years as volume expands.  The relatively high purchase price (6.4x times revenue) reflects Apache's strong competitive position within a fast growing segment of the electronic design automation industry.  Cross marketing opportunities promise to reinforce expansion in upcoming periods.  Our 2011 earnings estimate is unchanged at $2.35 a share. 

Friday, July 1, 2011

Convio (Nasdaq – CNVO)

Convio (Nasdaq: CNVO $10.60) is a leading provider of solutions for nonprofit organizations (NPOs). The company helps organizations more effectively raise funds and form relationships with donors, activists, volunteers and other constituents. Convio does the bulk of its work online, and can adapt an organization’s offline materials onto computers. Customers raised $1.3 billion in 2010 using Convio’s products, and 4 billion e-mails were delivered to over 140 million people. Nonprofit organizations used the company’s technology to fuel over 32.5 million advocacy actions to state and federal elected officials and other targets of cause-related campaigns.

The company’s products include the Convio Online Marketing platform (COM) and Common Ground, a constituent relationship management application. Convio Online Marketing helps an organization get the most out of advertising its advocacy on the internet by targeting constituents through e-mail and social media. Common Ground organizes NPO data from both online and offline sources so the info can be consolidated in a central location for NPO workers to easily access.

Revenue grew to $69.7m in 2010, up from $21.5m in 2006, but only increased 10% from 2009 ($63.1m). We estimate revenues will rise again to $78m in 2011 and continue to $90m in 2012. Most of the company’s revenue comes from sales; they also receive a percentage of funds raised for special events like charity runs or rides organized using Convio software. StrategicOne, LLC was acquired in January as Convio attempts to further penetrate the large- and enterprise-size NPOs. StrategicOne specializes in data management, which has helped Convio to optimize Common Ground.

The slow increase in revenues can be attributed to (you guessed it) the slow economy. Not-for-profits account for about 2% of the U.S. GDP, which is noteworthy but certainly not substantial – if Americans had less disposable income to spend charitable donations would likely fall off.

Revenues appear smaller due to the company’s accounting technique. Customers buy software and services from Convio on 1-4 year contracts depending on the service. Customers can opt to cancel the contract after a certain amount of time, so revenue from new contracts is initially only reported so far as the contract is guaranteed. Contract fulfillment isn’t a problem, as more than 90% of existing customers are retained with new plans.

The company’s stock price is high in relation to earnings per share at $10.60. Share earnings were $.25 in 2010 and project to $.30 in 2011 and $.40 the next year. Convio reported a 9.8% pretax margin in 2010, and that also should continue to rise to 20% over the next 3-5 years. It’s too early to suggest the company now, but we’ll keep a close eye on it and it could become a good earner in the future.

Convio has a strong business model and no true competitor. Blackbaud also assists NPOs; that company has higher revenue and a larger built-in-base, but its services are more traditional (hard mail, phone calls). Blackbaud is altering its business for the internet, but Convio has the upper hand as far as the Web goes.

The future looks promising for Convio. Revenues are rising, and could jump once the economy recovers. The company is also gaining respect among larger companies, so an acquisition is a possibility. Convio is located in Austin, TX.

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