DynaVox Post-IPO Notes

Aug.27.10 | About: DynaVox Inc.A (DVOXQ)

By Kris Tuttle

We’ve had DynaVox (DVOX) on our radar screen for some time as makes use of a RealVR technology (speech) to give people with disabilities a way to speak and interact, which fits in with our HealthTech angle.

Today the shares were off over 20% to under $12 after their fiscal Q4 report made investors view the company more like a low-growth hardware company with complicated financials than a high growth technology company.

Before our notes on the quarter we’ll take a look at the fundamentals in general:

Notes on a brief presentation by the CEO and CFO back in June.

The company is in two markets:
Speech generating devices (78% of the business)
Special education software

In 2007 the company added new management, increased R&D investment and expanded the sales organization. Since that time the firm has been no more of a growth trajectory with very attractive margins.

Only 7% of users have a device today. Devices are paid for by Medicare, Medicaid and private insurance. Only 10% of prescribers are currently recommending this technology.

Giving someone suffering with an illness like cererbal palsy the ability to speak is a big deal. The most advanced technology allows users to express themselves using only their eyes to blink and dwell on visual interfaces.

Believes they can grow 15% for the foreseeable future. Can add sales teams, international and increase the number of prescribers.

Online is now 11% of the business up from nothing not along ago. The past was all catalog sales.

Gross margins have improved as the mix has shifted towards higher end devices and more software sales.

Company boosts a high return on invested capital thanks to improved financial management.

Stroke, ALS and brain damage also cause non-verbal disability. There are 6M people in the US today, with 350,000 new cases born or diagnosed every year.

There is some paperwork required for a speech therapist to get reimbursement to work. About 1/3 of the company business falls outside of reimbursement and is sold directly to schools and is partially funded by the Americans with Disabilities act.

DynaVox has a special “symbol set” of 78,000 items that have become mostly a standard. For example, a hot dog in a bun.

Company has made some acquisitions in speech technologies in the past few years. One was core speech technology and symbols and the other was eye-tracking technology. Follows a classic build/buy approach. Sounds like they might do more in technology, also to expand in international markets and more sale staff into educational markets.

Investors are not very fond of a company that makes their own hardware versus being able to leverage more standard devices like an iPad.

Unusual structure includes two classes of stock so that original stockholders can continue to own part of the company as a partnership. The public stock is basically a share in the partnership. This was done to shield the existing holders from taxes.

Recent Quarter

Fourth quarter sales were up 8.7% ,which fell below recent company statements about the company sustaining 15% revenue growth.

Gross margins (75.6% as adjusted) and EBITDA margins (34.6% as adjusted) were both very strong.

Management went out of their way to note that the year ago quarter was a week longer so that their real growth rates were higher. Generally, this type of ploy is seen as a negative, especially when it’s not stressed prior to the quarter.

In general, the extra week reporting just complicates results and makes it harder for investors to appreciate the underlying company dynamics.

The financial outlook given was consistent with the company aspiration to continue to grow revenues at 15%. The company expects revenues of $130.3 to $133.7M for the current fiscal year, which represents a growth range of 14% to 17%. Adjusted pro-forma earnings per share are projected to be 56-62c.

New product launches include a software product called Boardmaker Studio, which aims to make it easy for teachers to generate curriculum and content. Boardmaker Studio also opens the door for online sales of content which would be a new opportunity for the company.

In Q&A the company notes that the last fiscal year may not be the best representation of their seasonal pattern. They expect a more back end loaded year. Investors always hate to hear that.

Went from 158 to 204 sales people recently and feels that they will continue to expand that, subject to economic conditions.

Takes about 6 months for sales people to start paying for themselves. Productivity still increases in year three and four.

There is always a risk that state funding for special needs education may be at risk in a tough economy.

States are taking longer to process Medicaid and Medicare applications. No increase in denials or reductions in payments but the process is slower and sometimes suffers from picayune bureaucrats.

Conclusion

We haven’t done the formal IV work on DVOX yet, but TEV now stands at 215M which is 1.9x revenue and just 7.1x EBITDA. That makes the shares pretty cheap if the company can return to 15% growth and maintain these high margins. The new version of their classroom software is promising, although it won’t move the needle much on near-term business. If successful, it will upgrade the view of the company into a more technology and Internet-savvy firm.

Appears to be an undervalued situation but it may take some time for the dust to settle, and since the current fiscal year will be more back-end loaded it may be prudent to do more research on the end markets and revisit the name in late calendar 2010.

Disclosures: None