Sunday, May 27, 2012

Ansys ( Nasdaq - ANSS ) -- Otlook Remains Intact

Ansys (ANSS $61.00) appears on track to produce excellent on target Q2 results.  First quarter performance was impacted modestly by a shift towards annual licenses from perpetual sales.  Annual licenses involve less upfront revenue but generate higher payments over time.  Most of the change came from small and medium sized customers that decided to conserve cash in the face the worldwide economic slowdown.  Sales to large enterprise customers was unaffected.  Even with the modest short term drag created by the change organic sales growth is likely to remain in the 12%-15% range this year.  Margins are likely to stay at elevated levels, as well. 

International business continues to be solid despite the news background.  The United Kingdom is the only European country that is seriously readjusting its economy at this point, downsizing government involvement.  That change promises to establish a firmer footing over the long haul.  Short term, though, the austerity measures have had a moderately negative effect on Ansys.  If that process spreads to the rest of Europe further temporary pressures could arise.  Nonetheless, the impact on the company is likely to be modest, since 70%-75% of sales are recurring and demand for engineering productivity tools is likely to keep rising.  Acquisitions could pick up some of the slack, moreover.  Ansys is the industry leader by a wide margin but there are attractive niche participants who could round out the company's product line or expand its customer base.

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Thursday, May 24, 2012

Cyanotech ( Nasdaq - CYAN ) -- New Capacity in Production

Cyanotech (CYAN $7.65) appears on track to produce excellent on target Q1 (June) results.  The company still hasn't reported its March period figures.  Those probably were down sequentially due to seasonal factors.  Less sunlight translates into less output.  But volume almost certainly has jumped in the current period.  Cyanotech's capacity expansion began production in April.  Sunshine has abundant and strong the past two months, as well.  Demand for astaxanthin remains vibrant, moreover.  The transition from lower margin bulk sales to consumer products is reinforcing the uptrend in margins, helping income advance faster than sales.  Our estimates are unchanged. 

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Tuesday, May 22, 2012

Acacia Research ( Nasdaq - ACTG ) -- Still the Game Changer

Acacia Research appears on track to produce excellent on target Q2 results.  The company is the leading provider of patent monetization services.  Acacia got its start working with small inventors who didn't have the resources to enforce their rights against large corporations.  Acacia provided the legal talent and the financial muscle to reach the finish line.  In exchange, it earned 50% of the winnings.  (That's just an average.  Every deal is unique.)  Over the years Acacia began to win on a regular basis in its core field, the technology and communications industries.  Those companies are under tremendous competitive pressure and don't have time to run patent searches when they develop new products.  So they inevitably break the law.  In the old days they'd just stare down a university professor who held a patent they were violating.  Once Acacia arrived on the scene there wasn't any more getting out the back Jack.  Those companies were on the hook and Acacia made them pay.

In 2010 and 2011 Acacia signed three "structured agreements" with Oracle, Microsoft, and Samsung.  Those were big money deals that gave the companies three years of free access to all of Acacia's patents, including the ones it had partners for.  The company began using that money to purchase patent portfolios for its own account.  It raised capital in the stock market, some of which was spent on patent acquisitions, as well.  Last year patent valuations skyrocketed in the wake of several high profile deals.  Those were billion dollar transactions that, while they didn't have anything to do with the company directly, increased the value of its patent portfolio.  It also got the Fortune 500 thinking.  Patents became a new asset class.  Those multinationals had tons of patents, some of which were non core.  So a market began to develop.

In 2012 patent asset values have stabilized.  The volume of settlements and transactions had declined during the run-up because the sellers were afraid they'd sell low and the buyers were afraid they'd buy high.  Now that values are better established volume has begun to pick up again.  Acacia took a low key approach itself during the surge.  It hasn't signed a "structured transaction" in more than a year.  That situation probably is coming to an end. 

Some very large deals are likely to be signed this year.  It takes two to tango so it's impossible to predict how much money Acacia will earn in 2012.  We think it definitely will be higher than Wall Steet's consensus estimate.  Our figures assume that the biggest targets, like Apple Computer, will continue to hope against hope they can rope a dope the legal system or figure some other escape route.  So the massive payouts may not emerge for another year or two.  But a strong performance is likely, nonetheless.

The long term outlook remains bright.  Patent rights probably will become more of a standardized market where a lot of the negotiations take place behind a computer screen.  That will reduce transaction costs.  Acacia already has brought down legal expenses over the past few years by negotiating more out of court settlements.  The industry itself is likely to keep growing, moreover, because the largest patent holders also are the biggest infringers.  If the transaction costs are narrowed, there won't be any reason not to figure out exactly who owes what to who.  Acacia will make the market.  And it will trade for its own account.  These shares have a lot of upside potential.

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Wednesday, May 16, 2012

Napco Security Technologies ( Nasdaq - NSSC ) -- Economic Headwinds

Napco Security Technologies (NSSC $2.85) reported lower than expected Q3 (March) results.  Sales declined 3% to $17.2 million.  Earnings were unchanged year to year at $.03 a share.  Home security demand remained muted despite the introduction of several high tech products due to continued weakness in discretionary consumer spending.  That segment did post a 5% gain but a stronger performance was anticipated as a result of the new product launches.  Locking system sales to the commercial market remained slow and declined by approximately 20%.  Napco has developed a series of new locks aimed at the refurbishment segment, which promises to give that segment a lift in upcoming periods.  Up to now the company has relied almost completely on new construction.  That area has started to show improvement, which could yield further leverage in upcoming quarters.

The new computer based home security products are gaining popularity.  Additional features and upgrades are in the pipeline.  The technology is likely to dominate the industry over the long haul.  For now, though, most sales are being made to new installations.  Upgrade sales to existing customers have been relatively modest.  And even in the new user market sales have been less dynamic than they might have been under better economic conditions.  Still, volume is likely to expand.  And margins promise to widen on any increase in activity.

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Friday, May 11, 2012

Boingo Wireless ( Nasdaq - WIFI ) -- Solid Q1 Results

Boingo Wireless (WIFI $10.00) reported excellent on target Q1 results.  Earnings rose 40% to $.07 a share.  Sales advanced 15% to $24.2 million.  The company's legacy consumer business continued to slide as more locations provide free WiFi service.  On the plus side, Boingo is the leading provider of those WiFi systems.  Some of those sites still charge users for access, dividing the revenues with Boingo in some cases.  More often the company is paid to install and manage the networks.  Tablet and smart phone traffic is continuing to rise faster than cell phone networks can keep up.  A rising percentage of that activity is being offloaded onto Wifi hubs like those the company provides.  Penetration of international markets promises to leverage performance in upcoming periods.  Formal relationships with the cell phone networks could accelerate growth further.  Our estimates are unchanged.  Contracts with one or more major carrier could propel results substantially higher.  Trials are likely to begin later in 2012. 

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Tuesday, May 8, 2012

Ansys ( Nasdaq - ANSS ) -- Customer Purse Strings Grow Tighter

Ansys (ANSS $60.00) reported excellent on target Q1 results.  Sales improved 17% to $185.3 million.  Earnings advanced 16% to $.66 a share.  Ansys is the leading provider of engineering simulation software used in a wide range of industries.  The company sells its products either as a perpetual license, which requires a large upfront payment and smaller annual maintenance fees which provide customers with all the latest enhancements; or as an annual license.  That format provides for a less expensive upfront fee but higher renewal rates.  In the March quarter a higher than normal percentage of customers adopted the year to year approach.  The total number of licenses sold was on track in the period.  But revenue was less than it would have been otherwise.  The main factor was tighter customer budgets.  That pressure may cause further shifts to annual licenses.  It also could impact overall unit volume in upcoming periods.  Most customers find the technology essential and are unlikely to eliminate purchases altogether.  But they may cut their own engineering staffs if the economy weakens materially, which might cause some scaling back in the number of software packages they need.

Our 2012 estimates are unchanged.  The economic slowdown makes it less likely those figures will be revised higher, though.  And if things don't pick up growth probably will remain subdued in 2013, as well.  Barring a total collapse Ansys remains well positioned to sustain a high level of financial performance.  It also could improve its already dominant competitive position.  Free cash is running $50-$100 million per quarter, more often towards the high end of the range.  That financial muscle could support further R&D and marketing improvements, plus potential acquisitions of complementary technologies.

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Sunday, May 6, 2012

Ellie Mae ( Amex - ELLI ) -- Leverage Kicks In

Ellie Mae (ELLI $15.25) reported excellent better than expected Q1 results.  Earnings swung to a profit of $.14 a share (fully taxed) on a 97% sales increase ($20.9 million).  Pretax margins exploded to 23%.  Unit volume benefited from an expansion in overall mortgage activity combined with further market share expansion.  Average revenue per mortgage also expanded as more ancillary services were implemented.  Ellie Mae plans to hire aggressively over the next few quarters to enhance product development and marketing.  Those costs probably will cause margins to narrow somewhat in the short term.  U.S. mortgage activity is predicted to decline in upcoming quarters, which should create a drag on revenue growth despite further market share gains and average order size. 

Macro-economic headwinds may persist in 2013.  Approximately 60% of the mortgages produced in 2012 are likely to be refinancings.  If rates stop declining that segment may see less activity.  Origination volume could pick up the slack if the economy improves.  Government programs could yield additional leverage.  We estimate the overall U.S. mortgage market will decline next year, assuming further rate reductions don't occur.  Ellie Mae is likely to keep gaining market share, though.  Average order size is likely to keep rising, as well.  Altogether we think revenues could improve 25% next year to provide a 50% earnings gain.  The long term outlook remains positive.  If housing and mortgage activity return to normal levels revenues could keep widening at superior rates.  Fixed costs promise to increase far less rapidly than sales, moreover, creating the opportunity for even more rapid earnings growth.

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