April 22, 2010, 9:44 am

DVOX - Dynavox

DVOX - Dynavox

DVOX - Dynavox plans on offering 9.375 million shares at a range of $15-$17. Assuming over-allotments, the deal size will be 10.8 million shares. Piper Jaffray and Jefferies are leading the deal, William Blair and Wells Fargo are co-managing. Post-ipo DVOX will have 31 million shares outstanding for a market cap of $496 million on a pricing of $16. 1/3 of the proceeds will go to debt repayment, the remainder will go to insiders.

Vestar will own 35% of DVOX post-ipo and will control voting interests via a separate share class.

From the prospectus:

'We develop and market industry-leading software, devices and content to assist people in overcoming their speech, language or learning disabilities. Our proprietary software is the result of decades of research and development and our trademark- and copyright-protected symbol sets are more widely used than any other in our industry.'

DVOX is a leader in two areas for assistive technologies: speech generating technologies and special education software.

DVOX is the largest provider of speech generating technology. Users communicate through synthesized or digitized recorded speech. Users are those who are unable to speak, such as adults with amyotrophic lateral sclerosis, or ALS, often referred to as Lou Gehrig's disease, strokes or traumatic brain injuries and children with cerebral palsy, autism or other disorders. Devices can be controlled/used via touch or even via tongue, head or eye movements. 82% of revenues are derived from DVOX's speech generating products.

Special Education software - 18% of revenues. Used by children with cognitive challenges, such as those caused by autism, Down syndrome or brain injury; physical challenges, such as those caused by cerebral palsy or other neuromuscular disorders; as well as by children with learning disabilities, such as severe dyslexia. DVOX's proprietary symbol sets are the most widely used for creating symbol-based activities and materials in the industry. Funding generally comes from federal sources.

I like this statement in the S-1: 'We believe that our speech generating technologies can transform the lives of those who have significant speech, language, physical or learning challenges by enabling their communication.'

Two most recent products are the EyeMax eye-tracking accessory and the highly portable Xpress speech generating device.

Speech generating products are sold via a direct sales force focused on speech language pathologists. Special education software is sold via internet and direct mail.

Products are sold in the US, Canada and Great Britain.


Speech Generating - 20 million adults and children in the US suffer from conditions that may lead to speech impairment. DVOX believes the annual new market for speech products is $1.8 billion in their geographic market. DVOX does believe this potential end market is currently under penetrated. Growth driver include a growing awareness among speech pathologists and the underserved population. DVOX believes speech generating products are only now achieving mass awareness. A big reason for this are technological advances making the products far more accurate and user friendly.

***I have a feeling that speech generating products are only now beginning to reach 'tipping point' stage. With the aging US population coupled with technological advances in the products themselves, this is a fantastic growth spot over the next 10+ years...and DVOX is far and away the market leader. Assuming the financials look at least okay, this is a very unique, interesting and strong ipo.

Special Education Software - In the US 6 million students are deemed to require special education with a market opportunity of $1 billion+ annually. DVOX believes higher education standards coupled with increased special education funding are the growth drivers for their Special Ed software.

Risks - A large chunk of DVOX's revenues are derived from the public school system as well as Medicaid and Medicare. With budget shortfalls, each of the preceding is finding itself in 'cutback' mode. This could stall growth somewhat, particularly in DVOX's special education segment. I doubt very much that funding cutbacks are going to effect the speech generating segment however as there are few voice communication alternatives out there currently for those without speech.

Competition: From the S-1: 'Within our particular areas of speech generating technology and interactive software for students with special educational needs, we believe we are the largest player and have no dominant competitors.' Rarely do you see in a prospectus a statement this strong when describing the competition.


$30 million in net debt post-ipo. Expect DVOX to pay this down via cash flows going forward. Debt not enough to impede operations.

Fiscal year ends 6/30 annually. FY '10 ends 6/30/10.

Revenues have increased annually for at least five years in a row. DVOX has been profitable since at least FY '05.

Seasonality - Revenues are stronger in the back half of the fiscal year, with the 4th quarter(6/30) being the strongest. In FY '09 33% of revenues were derived in the 4th quarter of the fiscal year.

FY '09(ended 6/30/09) - Revenues of $91 million, a 12% increase over FY '08. Gross margins were strong at 73%. Operating expense ratio of 52%, operating margins of 21%. Solid margins here. Plugging in debt servicing and full taxes, net margins were 11 1/2%. EPS of $0.34.

FY '10 - Strong start to the fiscal year for DVOX through the first 2 quarters of the fiscal year. Keep in mind that DVOX's strongest quarters are to come and DVOX should post a strong number in the 6/30/10 quarter.

***Revenues should grow a strong 37% to $125 million. As I noted above, DVOX's speech generating products appear to be hitting critical mass as revenues in that spot are accelerating strongly here in FY '10.

Gross margins are improving as are operating expense ration, although the latter only slightly. Gross margins should be 75%. Operating expense ratio of 51%, putting operating margins at a quite healty 24%.

Debt servicing should eat up 9% of revenue, well below my 20% threshold. Again, I would expect this debt to be erased altogether sometime in FY '11.

Net after tax/debt margins of 15%. Earnings per share of $0.63. On a pricing of $16, DVOX would trade 25 X's FY '10 earnings.

FY '11 - Really is just a guess here until we see the 6/30 quarter, which will set the tone for FY '11. Let us take a guess though. I do not expect another 30%+ quarter as some of that strength is due to easy recession year comparisons in FY '09. Note though that even in a tough economic climate, DVOX grew FY '09 revenues 11%. I would peg FY '11 growth around 20%, a conservative number. Gross margins have gone about as far as they can I think at 75%. Operating margins should improve slightly as should net margins. On 16 1/2% net margins and 20% revenues growth, DVOX would earn $0.80 per share. On a pricing of $16, DVOX would trade 20 X's FY '11 earnings.

Conclusion - Market leader in what should be a nice growth area over the next decade. Strong recommend in range here, I like this ipo quite a bit. DVOX looks poised to have a great future, very reasonable market cap in range when we take into account the potential here going forward. This one has the potential and the look of a long term winner