Simulations Plus ( Nasdaq - SLP ) -- Revenues Set to Accelerate

Simulations Plus (SLP $4.10) appears on track to produce reasonably good Q3 (May) results.  Year to year comparisons remain skewed due to the sale of a non core subsidiary, and the lack of any new collaboration contracts in the current year.  Software license sales have been rising at a 10%-15%, though, fueled primarily by high renewal rates and greater penetration of existing accounts.  Our full year estimates are unchanged.

Two new collaboration deals recently were signed.  Those projects will be paid for by drug companies that want specific features developed.  Simulations Plus performs the work and retains title to the software improvements, enhancing the functionality of existing product line.  A similar albeit less lucrative arrangement with the F.D.A. is nearing completion in the toxicology area.  Simulations Plus hopes to commercialize that technology next year in the food safety market.  The company also is likely to expand its consulting operation.  An in-house demonstration project proved the company could use its technology and produce several viable drug candidates on a lark.  Existing customers are likely to begin hiring Simulations Plus's personnel to apply that expertise on their own problems.

Acquisitions remain a possibility.  Simulations Plus traditionally has applied unrealistic criteria to prospective tyransactions, however, so it remains unknown if the right fit will be found.  Quarterly cash dividends of $.05 a share are being paid in the meantime.  The company itself might become an acquisition target before long.  The C.E.O. controls approximately 40% of the shares.

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Cyanotech ( Nasdaq - CYAN ) -- Victory at Sea

Cyanotech (CYAN $6.65) reported Q4 (March) results that were somewhat below our expectation.  Earnings rose 67% to $.05 a share.  Sales climbed 15% to $5.99 million.  Income was reduced by $.14 a share due to abnormally high production costs associated with the Spirulina line.  That segment represented 35% of total sales for the entire year.  Cyanotech recorded that entire expense in the fourth quarter.  New equipment and procedures have been implemented to return costs to normal.  That effort is expected to be completed over the next few quarters.  We estimate the impact will continue at approximately $.01 a share per quarter.  The high potential astaxanthin line performed as predicted.  In fact, production exceeded the company's forecast for the entire year.  The Q4 sales comparison was skewed a bit by $700,000 of obsolete inventory sales in the year ago period.

Marketing efforts are accelerating.  Most of the company's astaxanthin sales growth has been generated by adding new customers, primarily small natural product stores.  Social media and other business development programs now are being geared up to boost same store volume at those outlets.  Larger chains are being targeted, as well.  In the year just ended bulk sales represented 65% of total revenue; retail, 35%.  The shift to greater retail business promises to lift sales and margins in the current fiscal year.

Volume also should benefit from capacity expansion.  Cyanotech boosted its growing area by 33% last year.  That additional capacity now is ramping up.  Consumer demand for astaxanthin continues to exceed demand, so Cyanotech should have little trouble finding outlets for its higher level of production.

We are raising our fiscal 2013 (March) earnings estimate by a nickel to $.60 a share (fully taxed).  Our sales estimate is unchanged at $30 million (+22%).  Above average growth could be sustained well into the future.  In 2-3 years earnings could attain $1.00 a share.  Applying a P/E multiple of 15x suggests a target price of $15 a share, potential appreciation of 125%.

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Ellie Mae ( Amex - ELLI ) -- Market Share Gains Continue

Ellie Mae (ELLI $15.50) appears on track to produce excellent on target Q2 results.  Total mortgage volume in the United States has exceeded industry predictions so far in the June quarter.  And Ellie Mae is continuing to expand its share of the market.  Revenue per loan is expanding, as well.  Customers are adopting the company's "success based pricing" model in lieu of perpetual software licenses, laying the groundwork for recurring revenue gains in the future.  Margins jumped in the March period as fixed costs were leveraged by a big pick up in volume.  Further expansion is achievable over the long haul.  The company is spending heavily in Q2 and Q3 to expand its computer infrastructure, though.  It also is boosting sales and marketing efforts.  So further margin improvement is unlikely before the end of the year.  Still, a strong showing appears to be in the cards.  Our full year estimates are unchanged due to the weakening macroeconomic outlook.  Ellie Mae may have the horsepower to overcome those obstacles, however.  So a stronger performance is possible.

Above average growth is likely to be sustained in 2013.  Industry mortgage volume is predicted to decline as refinancings fall as a percentage of total activity.  Home purchases might not accelerate as much as some experts forecast, either.  Despite that, Ellie Mae could show gains of 25%-50% next year by expanding its market share, boosting revenue per transaction, and by adding new features via acquisition.  The company actively is pursuing companies with mobile, marketing, and risk management abilities.  A public offering is likely to be pursued before long to finance those deals and to support the overall expansion of the business.  That could dilute earnings somewhat in the short run.  But it should make Ellie Mae much more difficult to overcome by competitors.  In 2-3 years Ellie Mae could hold 75% of the non-major mortgage market.  (The 20 largest banks hold about 50% of the entire market, which is off limits to Ellie Mae.)  That's about twice the company's current market share.  If the housing market recovers within that time period these shares could trade at substantially higher levels than they are now.

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Napco Security Solutions ( Nasdaq - NSSC ) -- Solid Finish to the Year Likely

Napco security Solutions (NSSC $3.00) appears on track to produce solid Q4 (June) results.  The company is a leading provider of home and commercial security systems.  It sells its products to a wide range of local installation companies, including the majors.  Growth has been stymied by the economic downturn.  But Napco has been investing heavily in product development, updating its systems with more intelligent computerized controls, Internet connectivity, and wireless communication.  At this point Napco is promoting that next generation technology to its existing distribution network.  Volume is picking up but it remains a small part of the overall business. 

Most of the national cable and phone companies are exploring home security as an additional option for its triple play customer base.  Those efforts remain in the trial phase.  But substantial growth could result if those distribution channels develop.  Our estimates remain muted for the moment due to the economy and the uncertainty associated with the next generation line.  Once that technology builds momentum substantial stock price gains could develop.  In 2-3 years income could reach $1.00 a share.  Applying a P/E multiple of 15x suggests a target price of $15 a share, potential appreciation of 400% from the current quote.

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