DynaVox IPO: Speaking Investors' Language?

| About: DynaVox Inc.A (DVOXQ)

Backed by private equity firm Vestar Capital, DynaVox (DVOX) is the largest provider of speech generating devices for children and adults with physical and cognitive disabilities resulting from conditions such as ALS (Lou Gehrig's disease), strokes, traumatic brain injuries, cerebral palsy and autism. DynaVox plans to raise $150 million by offering 9.4 million shares at a range of $15-$17, which would translate to a market cap of $474 million. Piper Jaffray (NYSE:PJC) and Jeffries (JEF) are set to be the lead underwriters on the deal. DynaVox is one of 8 deals on the IPO calendar for the week of April 22nd.

Doing well by doing good

DynaVox's line of seven speech generation devices accommodate a wide range of physical or cognitive limitations; powered by a proprietary software platform, they allow users to communicate via keyboards, touch screens, joysticks, tongue switches and eye-tracking cameras. Additionally, the systems can integrate email and text messaging, internet access and even household controls such as light switches and televisions. Devices are prescribed by speech therapists and are typically reimbursed by Medicare, Medicaid or schools. Since the current management team took over in 2007, the company has invested heavily in direct sales infrastructure and R&D, seeking to increase product awareness among speech therapists in the US, Western Europe and Australia. The company generated LTM sales and EBITDA of $105 million and $28 million, respectively, though management estimates that only 7% of new candidates for speech generating technologies receive a device each year, which implies an annual market opportunity approaching $1.8 billion.

Leveraging its symbol-based technology, the company also provides software for special education students. This high-margin segment currently represents 23% of sales, but the company intends to drive growth with new Internet sales channels, its online educator community AdaptedLearning.com, and a web-based version slated for launch in 2010.

Key Issues

Though the company is 3-4 times the size of its next-largest competitor, it licenses software and IP from third parties and could face pressure if larger technology firms enter the market. In addition, healthcare reform could pressure Medicare and Medicaid reimbursements, and special education software revenues remain exposed to shaky public budgets. Finally, the company plans to purchase shares from existing owners; as a result, 65% of net deal proceeds will be passed through to PE sponsors and management.


This strong cash generator has expanded its margins despite heavy investments in sales infrastructure and R&D. Perhaps more importantly, its impressive revenue growth (17% CAGR from fiscal 2007-2009) lends credibility to the case for a vastly underpenetrated device market. Although investors may raise questions about revenue visibility and a complicated post-IPO corporate structure, the company's profitable track record, attractive margin profile and differentiated investment thesis could generate considerable interest in the deal.