The Growth Factor

Needham Funds' Commentary

by John Barr

In This Issue
The iPhone and iPad Mini
Jabil Circuit, Inc.
TTM Technologies, Inc.
PDF Solutions, Inc.
Multi-Fineline Electronix, Inc.
Electro Scientific Industries
iPhone 5 Disassembled

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John Barr
Chris Retzler   



September 27, 2012


Needham Funds is pleased to present you with the third installment of our regular commentary...
The iPhone and iPad Mini

Apple, Inc. (AAPL, $665.18, +64.9% YTD) introduced the iPhone 5 on September 12, 2012 and is anticipated to introduce an iPad Mini later in the fall. One of our investment themes for the last few years has been that the iPhone and iPad will "change the world." Needham Aggressive Growth Fund (NEAGX) has had a successful long-term investment in Apple.  However, Apple has investment implications throughout our three mutual fund portfolios. 

Apple - Introducing iPhone 5
Apple - Introducing iPhone 5

The Needham Growth Fund, Needham Aggressive Growth Fund and Needham Small Cap Fund have invested in a number of companies that we believe will benefit from Apple's product innovation. While Apple does not disclose information about its suppliers, we'd like to highlight a few companies, held in our funds as of June 30, 2012, which we believe are in the Apple manufacturing supply chain.  

Jabil Circuit, Inc. 

Jabil Circuit, Inc. (JBL, $18.90, -2.4% YTD) produces the enclosures for a number of smartphone and tablet makers and for the past year, Apple has been a 10% customer for Jabil.


In 2007, Jabil purchased Taiwan Green Point Enterprises Co. Ltd. In June 2010, Plastics News published an overview of Jabil's Green Point operations. The company does high-end plastic molding in Taiwan and China. As of June 2010, Jabil Green Point had 775 injection presses and 23,000 employees. The company had invested in automation including Fanuc robots and was changing from basic plastic molding to materials and structural processing with ceramics, metals and plastics.


Plastics News described an interesting ceramic capability. Jabil Green Point had "the largest capacity for non-conductive vacuum metallization, or giving plastic handsets a metalized look." Another area of innovation was ceramic injection molding where Jabil mixed proprietary blends of ceramic powder with plastic, and ended up with a lightweight enclosure that looks like a ceramic, but is shatter proof. We believe that the smartphone market remains a focus for Jabil and that it will continue to innovate in enclosures.


Jabil is based in St. Petersburg, FL. The company was founded in 1966 and Bill Morean, Chairman of the Board, is a former long-time CEO and the founder's son, and owns 5.7% of the stock. We like to see a Board and management team which brings a long-term perspective to a company's strategy. CEO Tim Main gave an update on Jim Cramer's "Mad Money" on June 26.

TTM Technologies, Inc. 

TTM Technologies, Inc.  (TTMI, $9.55, -12.9% YTD) manufactures printed-circuit boards (PCBs), which consist of laminated material with product-specific electrical circuitry etched from copper. TTM is the largest domestic circuit board maker and in 2010 acquired Meadville Holdings of Taiwan, one of the leading PCB manufacturers in China.


Apple has been a top five customer of TTM since the Meadville acquisition. For most of the last two years, TTM has had one customer representing over 10% of revenues, which we believe was Apple. In 2Q12, TTM's five largest customers were  Apple, Cisco, Ericsson, Huawei and IBM (in no specific order).


Of the company's $120 million of planned capital expenditures for 2012, $100 million is planned for the Asia Pacific area for advanced high-density interconnect and rigid PCB manufacturing. We believe these investments are designed to serve the likes of Apple.


In their July 31, 2012 earnings release, CEO Kent Adler said, "As we enter the second half of the year, we are beginning to receive orders in our Asia Pacific segment for new handheld products. This improving advanced HDI demand in the second half of 2012 is beginning to materialize as anticipated and should improve our results."


TTM is based in Santa Ana, CA, with operations around the world. Kent Adler has been CEO since 1999.

PDF Solutions, Inc. 
PDF Solutions, Inc. (PDFS, $13.43, +92.7% YTD) provides software and services which are used to help semiconductor companies achieve volume production with higher yield. PDF's top three customers, accounting for 58% of revenue in 2011, were Samsung, Global Foundries and IBM (IBM), all three of which work together on the
Common Technology Platform to develop next generation semiconductor manufacturing technology.


Samsung manufactures the iPhone 4's A5 microprocessor and the iPhone 5's A6 microprocessor for Apple in Austin. Despite the recent court ruling that Samsung violated Apple's mobile phone software patents, we believe that their manufacturing relationship is important to both companies. 


We believe PDF has also benefitted from Global Foundries' success with Qualcomm, which makes baseband processors for Apple. In April, Qualcomm discussed a shortage of 28 nanometer capacity  which we believe it needed to meet Apple's projected iPhone 5 demand. PDF helped Global Foundries be in a position to be a supplier to Qualcomm. 28nm refers to the width of the circuitry on the chip. The smaller the width of the circuitry, the smaller the chip and the less power it will use. Designers want to minimize the power consumption in order to extend the battery life of a smartphone. 28nm represents a width of about 280 atoms. It is amazing technology.


IBM does much of the technology development for Samsung and Global Foundries as members of the Common Technology Platform. This video previews the Common Platform Forum 2012, which was held on March 14, in San Jose, CA.


PDF receives "design-to-silicon yield solutions" revenue for the upfront work in getting a semiconductor manufacturing process to work. Once manufacturing has started, PDF receives "gainshare performance incentives," which are similar to a royalty, on every wafer produced.


In the quarter ending March 2012, PDF's gainshare performance incentives increased to $7.3 million from $3-4 million per quarter in 2011. In June 2012, gainshare incentives continued the trend with $8.7 million of revenue. While gainshare revenue can be inconsistent quarter-to-quarter, it appears the company's gainshare revenue will continue at this higher level. The benefits of 28nm manufacturing should last for several years and should have a material effect starting in 2013.


PDF is based in San Jose, CA. CEO and board member John Kibarian founded the company in 1992 and owns 8.8% of the shares. Co-founder and board member Kimon Michaels owns 5.6%.

Multi-Fineline Electronix, Inc. 
Multi-Fineline Electronix, Inc. (MFLX, $22.23, +8.2% YTD) makes flexible printed circuit boards and inserts components onto those circuit boards. Most of the circuit board industry, including TTM, makes rectangular, rigid or semi-rigid printed circuit boards. M-Flex makes small, flexible boards which are used in phones and tablets.
MFLX's flexible circuit board used in tablets and smartphones

In the quarter ending June 2012, one customer, which we believe to be Apple, represented 73% of revenue. Two customers, which we believe to be Research In Motion (RIM) and Motorola (now owned by Google), totaled 17%. 71% of revenue was from smartphones and 26% from tablets. Similar to TTM and other suppliers, M-Flex reduced revenue expectations for the September quarter based on a later than expected ramp for products, which we believe to be Apple's new devices. These products could contribute to the December 2012 quarter and the 2013 year.


Additionally, M-Flex continues to focus on strategic growth by expanding into other consumer devices including music players, laptops, ultrabooks, eBook readers, mobile internet devices and portable game consoles.


Multi-Fineline Electronix is headquartered in Irvine, CA, with manufacturing in Anaheim and China.

Electro Scientific Industries

Electro Scientific Industries (ESIO, $12.39, -12.8% YTD) supplies laser-based manufacturing solutions for the electronics industry. Specifically, ESI's interconnect and micro-fabrication groups' recent success is believed to be attributed to demand from Apple, one of ESI's largest customers.


ESI's 5300 and 5900 micromachining models are used to drill tiny holes called vias in printed circuit boards. Vias are used to connect the circuitry on one layer to the circuitry on layers above or below. ESI's machines can also be used to write below the surface of a metal plate to create an indelible marking for identification purposes. 


According to ESI's 10K filings for the last four years, Apple has been the company's largest customer.  In the fiscal year ending March 2012, Apple was responsible for $74 million, or 29%, of ESI's revenue.  Over the last four years, Apple has purchased $213 million of what we believe to be micromachining tools from ESI.   ESI had total revenue of $816 million for the four years.


In March 2012, ESI announced the esiFIT Module for Advanced Fabrication which allows for inspection in real-time right before the laser cutting. This inspection allows for very accurate placement of a circuit board and therefore very accurate placement of the drilled holes or markings. We believe ESI will continue to benefit from the growth in demand for micromachining solutions by smartphone, tablet and other consumer electronics companies.


ESI was founded in 1944 and has headquarters in Portland, OR.

The iPhone 5 Disassembled
iPhone Disassembled

An iPhone 5 disassembled: how our portfolio companies fit inside


Photo Source:

We believe that the iPhone 5 and iPad Mini will also provide opportunities for a number of our other investments. The iPhone 5 will support the 4G LTE network from Verizon, ATT and Sprint. LTE has been tested at 3-5x as fast as 3G networks. This speed should enhance and encourage mobile data and video use, which could benefit Akamai (AKAM, $37.92 -1.3% YTD) with its content delivery network and Brightcove (BCOV, $11.93, +8.3% YTD) with its enterprise video hosting and management service. Mobile video viewing should drive the need for investment in the carriers' networks including optical components from Finisar (FNSR, $14.84, -35.0 YTD), which enable high speed data communications.


In this edition of the Needham Funds' Growth Factor, we have highlighted a few of our investments that could benefit from successful iPhone 5 and iPad Mini launches.   We believe that Apple represents substantial revenue for the highlighted companies. These companies are in Apple's manufacturing supply chain and should benefit as Apple volumes increase. As of June 30, 2012, these companies represented approximately 10% of the invested capital of the three Needham Funds. 

The information presented in this commentary is not intended as personalized investment advice and does not constitute a recommendation to buy or sell a particular security or other investments.
This message is not an offer of the Needham Growth Fund, the Needham Aggressive Growth Fund or the Needham Small Cap Growth Fund. Shares are sold only through the currently effective prospectus. Please read the prospectus and consider the investment objectives, risks, and charges and expenses of the Fund carefully before you invest. The prospectus contains this and other information about the Fund.


Investment returns and principal value will fluctuate, and when redeemed, shares may be worth more or less than their original cost. Shares held 60 days or less are subject to a short-term redemption fee of 2%. Past performance does not guarantee future results and current performance may be higher or lower than these results.  Current month-end performance and a copy of the prospectus is available at or by contacting the Fund's transfer agent, U.S. Bancorp Fund Services, LLC at 1-800-625-7071.


Funds holding smaller capitalized companies are subject to greater price fluctuation than those of larger companies. Also, the Fund's use of short sales, options, futures strategies and leverage may result in significant capital loss. Total return figures include reinvestment of all dividends and capital gains. Needham & Company, LLC, member FINRA/ SIPC, is the distributor of The Needham Funds, Inc.