Healthstream ( Nasdaq - HSTM ) -- Market Share Keeps Expanding

Healthstream (HSTM $27.00) reported excellent on target Q2 results.  Earnings advanced 12% to $.09 a share despite 18% greater average shares outstanding.  The company sold stock earlier in the year.  Sales climbed 23% to $25.8 million.  The learning segment expanded 34%, accounting for most of the increase.  Healthstream also provides surveys and related research services, which experienced an unanticipated slowdown in the period.  The core learning segment is gaining as hospitals realize that computer based systems improve employee performance, reduced costs, and enhance compliance.  New subscriptions beat the company's target in the period.  Average order size expanded.  And backlog widened, laying the foundation for further gains in the future.  More high level content providers joined Healthstream's distribution system.  The company uses its platform to distribute that know-how to hospital employees. 

The long term outlook remains positive.  Healthstream controls about 50% of the U.S. hospital market.  That share is poised to keep expanding as more content providers are added and marketing efforts are enhanced.  New products are rolling out.  A joint venture with Norway based Laerdal Medical could provide substantial leverage.  Ultimately, Healthsteam is well positioned to help the U.S. medical industry improve productivity through computerized instruction and other automation technologies.  Expansion into related markets like surgery centers could reinforce growth.  International opportunities provide further potential.  The stock is trading at a high price in relation to earnings.  But Healthstream remains a small company with key advantages in an enormous industry.  Further appreciation is possible.

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Acacia Research ( Nasdaq - ACTG ) -- Outlook Becomes Uncertain

Acacia Research (ACTG $35.00) reported Q2 results that were below our expectation.  The company's deal flow continued to accelerate.  It also acquired a substantial inventory of new patents to enforce.  A major settlement with Cisco Systems yielded less money than expected, though.  We had raised our estimates earlier in the year in anticipation of that deal, plus some additional large agreements that are in the pipeline.  In the past Acacia Research licensed virtually all of its patents when it made these so-called structured transactions.  Previous deals were made with Oracle, Microsoft, and Samsung.  This time only a portion of Acacia's portfolio was included, yielding a smaller one time payment.  Even so, earnings came in at $.21 a share on sales of $50.5 million. 

We are maintaining our full year earnings estimate at $1.65 a share (excluding stock option expense).  Margins on Acacia Research's regular business continue to improve as fewer cases are resolved in court, reducing litigation costs.  More revenue is being produced by the company's fully owned patents, as well.  Historically, Acacia Research partnered with small patent holders, dividing the winnings after deducting expenses.  When the company enforces patents that it owns by itself, all the proceeds are retained.  We have reduced our revenue estimate, however, by $25 million to $300 million, to reflect the smaller structured settlement payouts.

The long term outlook remains generally positive.  One reason Acacia Research agreed to its arrangement with Cisco Systems was to establish a business relationship where the two companies would enforce Cisco patents against other corporations.  The details of how that will play out remains to be seen.  But the deal could serve as a template for additional Fortune 500 partnerships. 

Serial infringers like Apple Computer are trying to persuade the U.S. Congress to reduce their liabilities.  The big cell phone maker recently won a surprising court verdict in a case brought by Eastman Kodak, as well.  It remains to be seen if that decision (which also included Nokia) sets a meaningful precedent.  Acacia Research earns a lot of its current income from wireless patents.  If that intellectual property becomes more difficult to enforce income could be affected negatively.

We estimate 2013 income will advance 36% to $2.25 a share.  Above average gains appear achievable well into the decade.  Those figures assume the company's patent inventory has not been impaired by Apple Computer's recent court victory.

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Healthstream ( Nasdaq - HSTM ) -- Supreme Court Ruling Solidifies Outlook

Healthstream (HSTM $26.25) appears on track to report excellent on target Q2 results.  The company has accelerated spending on sales and marketing to amplify future performance.  So margins may narrow a bit.  Healthstream also sold stock earlier in the year, increasing dilution.  Earnings comparisons are likely to be muted as a result.  Momentum is likely to build in subsequent periods as new products start contributing, market share expands further, and Healthstream's complementary research services perk up again.  A recent acquisition isn't likely to boost results materially, although the software obtained promises to reinforce the company's current line up.

The Supreme Court decision to uphold the Affordable Care Act promises to boost demand.  Most of Healthstream's sales currently are generated from hospitals that use the technology to train personnel.  More patient traffic at those facilities promises to reinforce what already is an upward trend in demand.  Our estimates are unchanged.  New products and acquisitions hold the potential for faster growth in future periods.

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Simulations Plus ( Nasdaq - SLP ) -- Higher Costs Hit Earnings

Simulations Plus (SLP $4.00) reported reasonably good Q3 (May) results.  Year to year comparisons were impacted by the sale of a non core subsidiary earlier in the year.  Revenues declined on an as reported basis due to the spin off.  The remaining pharmaceutical simulation software line exhibited a 6% increase to $2.77 million.  License sales rose 15% and represented virtually the entire amount.  In the year earlier period the company also generated some consulting and grant income, which wasn't replicated this year.  Almost all of Simulations Plus's software licenses are sold on an annual basis, creating a predictable recurring revenue stream.  Renewal rates typically are in the 95%-100% range.  The occasions when licenses aren't renewed relate to customer mergers, facility relocations, and employee job changes.  Even then, the deals tend to reemerge elsewhere as new business.  Margins narrowed somewhat in the quarter as a result of higher R&D spending.  Marketing and sales costs advanced, too.  And overhead was spread over a smaller revenue base, due to the subsidiary divestiture.  All the same, pretax margins were 47.8% in the period (excluding non cash stock option expense), far above the industry norm.

Earnings fell 29% to $.05 a share.  Besides the margin contraction, income was affected by a higher tax rate, as well.  The fourth quarter (August) usually is the company's weakest from a seasonal standpoint.  Activity tends to moderate over the summer.  A solid year to year comparison is likely, though.  For the entire year we estimate income will advance 11% to $.20 a share on sales of $10 million.

Next year faster growth appears achievable.  Software gains of 15%-20% are possible as drug companies endeavour to lower research costs.  Collaboration revenue could provide an additional 3%-5%.  And while consulting revenues have gone virtually to zero, meaningful improvement is likely in the aftermath of the company's self funded malaria project.  Simulations Plus took on that project to demonstrate its software's ability to identify promising drug candidates without any physical testing to accompany it.  The technology identified nine prospective molecules, all of which showed activity against malaria.  Pharmaceutical companies could hire out the company's experts to provide similar jump starts on their own projects.

Income could hit $.25 a share (+25%) next year on sales of $12 million (+20%).  A new product will be launched early in the fiscal year, which could yield further leverage.  Acquisitions also could be employed to leverage the company's broad distribution network.  The cash dividend is likely to be maintained at $.05 a share per quarter, delivering a 5% yield.

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Ansys ( Nasdaq - ANSS ) -- Macroeconomic Headwinds

Ansys (ANSS $58.00) appears on track to report excellent on target Q2 results.  The company is the leading provider of engineering simulation software used in a wide range applications.  Sales are geographically diversified.  About 75% of revenues are recurring, as well.  New orders have been expanding at a 10%-15%, with an incremental boost provided by a recent acquisition.  Margins are being sustained at exceptional levels, providing plenty of ammunition for further transactions.  Organic growth may moderate slightly in upcoming periods due to slowing economic growth in the United States and Europe.  Asian demand remains robust, though.  And even in the more mature regions demand remains solid because companies require the expertise to stay competitive.  Above average gains are likely to be maintained in 2013 even if the economic slowdown lingers.  Our estimates are unchanged.

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