Simulations Plus ( Nasdaq - SLP ) --

Simulations Plus (SLP $4.40) reported good on target Q4 (August) results.  Earnings doubled to $.02 a share.  Revenues improved by 15% to $1.64 million, after excluding last year's contribution by a subsidiary that later was sold off.  Margins were lower than expected due to increased hiring.  Research and development expenses also climbed somewhat.  The new scientific and sales personnel are slated to contribute in the upcoming year.  Performance was impacted by the soft overall economy.  Several pharmaceutical companies combined laboratories and pursued other cost saving initiatives, reducing the number of users running Simulation Plus's software.  New customers continued to be added at a brisk pace, though.  Approximately 25% of revenues for the fiscal year were generated by new buyers.

The malaria project continues to turn heads.  Last year Simulations Plus conducted a spec operation with its own personnel to apply its technology towards the discovery of a malaria treatment.  The company identified seven candidate molecules, all of which showed some activity.  Two were particularly potent, although further refinement still is required.  That effort raised interest in the technology among potential customers.  It also created the potential for direct funding by third parties to complete the fine tuning and come up with a finished drug.  Simulations Plus plans to perform a second demonstration project this year.  Another successful effort probably would jump start demand for the company's software products, boost consulting revenue, and possibly set the stage for another third party injection of research funds.

Our baseline fiscal 2013 (August) estimates see growth being sustained at a 15% pace.  A substantially stronger showing could develop if a third party funding deal is signed.  Long term growth could accelerate if the second demonstration project lifts overall demand.

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Napco Security Technologies ( Nasdaq - NSSC ) -- Demand Intact

Napco Security Technologies (NSSC $3.05) reported lower than expected Q1 (September) results.  Earnings were unchanged from the year ago period at a $.01 a share loss.  Sales declined by 6% to $15.2 million.  The entire $1.0 million slide was accounted for by inventory reductions at the company's home security dealers and commercial re-sellers.  Napco's high potential digital products were re-engineered in the period to reflect consumer feedback.  Those didn't sell as well as anticipated but they did expand year to year.  The digital products continue to hold explosive long term potential.  Sales to the cable companies and other "triple play" suppliers still haven't gotten off the ground.  Those companies are wrangling with other issues at present.  They are beginning to list home security products in their overall product catalogs, though.  Once active marketing starts a major acceleration could arise. 

Hurricane Sandy might impact performance in the December quarter.  Volume was poised to rebound.  But the rebuilding effort might cause some security projects to be postponed as other work receives greater attention.  Napco's largest market is the Northeast. 

Due to the headwinds we have reduced out fiscal 2013 (June) sales estimate to $75 million.  We also have lowered our earnings target by a nickel to $.25 a share.  The long term outlook remains bright.  Napco is well positioned to capture a leading role in the digital security industry.

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Ellie Mae (Nasdaq ELLI ) -- Big Growth in a Declining Market

Ellie Mae (ELLI $22.50) reported excellent better than expected Q3 results.  Earnings zoomed ahead by 320% to $.21 a share (fully taxed).  Revenues advanced 87% to $27.5 million.  Ellie Mae is the leading provider of mortgage origination software.  Its technology is used by regional and local banks to produce loans cost effectively.  That segment, along with independent mortgage brokers, who also rely on the technology, represent 50% of the entire market.  The rest is handled by the top 20 banks.  Ellie Mae has deals with Wells Fargo and Citibank to use its software to facilitate their operations.  Revenue per loan from the company's full service customers is about $100.  The big banks will retain most of the revenue on the deals they produce, since they use their own software for a lot of the work.  But $25-$50 a loan appears realistic.  Ellie Mae's system is becoming an industry standard.  The large banks love the idea of having data providers, like income verification and appraisals, using a consistent format.

Regulatory headwinds could impact mortgage activity in 2013.  The mortgage rules have made it more difficult for people with average credit to qualify for mortgages.  Most forecasters predict a decline of 10%-30% in mortgage origninations next year as a result. 

Rising average order size and market share gains are likely to sustain growth at a superior level.  Contributions from the large banks could provide a little kick.  We estimate income will rise 23% to $.80 a share on a 30% increase in sales.  More shares outstanding will offset the likely improvement in margins.  The long term outlook remains bright.  Ellie Mae basically has no competition and it participates in a gigantic market that is in an early stage of recovering.  In 3-5 years earnings could reach $1.50-$2.50 a share.

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