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Preview of the
15th Annual Needham Growth Conference
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Needham Funds is pleased to present you with the fifth installment of our regular commentary...
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| Preview of the Needham Growth Conference | |
In The Growth Factor Vol. 4, we discussed our view that investors can identify, research and invest in stocks that beat the market. We also reviewed Peter Lynch's books on investing, One Up on Wall Street and Beat the Street.
As part of our fundamental research on growth equities, Chris Retzler and I and the rest of the Needham Funds portfolio management team will attend the 15th Annual Needham Growth Conference** January 15-17 in New York. We attend a number of investor and industry conferences throughout the year, and the Needham Growth Conference provides a great start to the year as we gain a sense for how companies are viewing 2013. The CEOs and CFOs of approximately 360 companies will present at the conference. We will meet with about 75 companies over the three days. A number of our small and mid cap holdings will be present.
As we invest in growth companies, we will be looking for discussions of new products and new market plans for 2013. We will also be listening for overall economic commentary, which we expect to be muted. We are interested in expense control plans should GDP go negative and company specific growth plans be delayed.
We'd like to highlight a few of our portfolio companies that will be presenting.
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Financial Services & Technology
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Financial Engines Inc.* (FNGN, $29.15), based in Sunnyvale, CA, was founded by Nobel Laureate Dr. William Sharpe in 1996. Dr. Sharpe originated the Capital Asset Pricing Model (CAPM), used to illustrate the relationship of investment risk and return in pricing of securities. He also developed the Sharpe Ratio for measuring risk-weighted returns for investment portfolios.
Dr. Sharpe saw that technology could provide the same risk management tools to individuals as used by institutional investors. Financial Engines serves as an independent investment advisor that uses technology to allocate assets in retirement plans.
Financial Engines' ultimate customers are investors in company-sponsored retirement plans - the company offers its advisory services for employees of Fortune 500 companies including Alcoa, Altria, Comcast, Delta Airlines, Dell, Ford, IBM, Raytheon, Travelers Companies and Texas Instruments. Furthermore, Financial Engines provides fiduciary protection for the employers.
We are attracted to Financial Engines' scalable and proprietary investment technology platform, their high growth rate and recurring revenue. The recurring revenue comes from an investment management fee based on assets under management. As U.S. companies shift from a defined pension plan system to a defined contribution plan, such as an IRA or 401(k), Financial Engines has the opportunity to grow assets under management.
We will be listening for commentary on Financial Engines Income+ initiative to manage retirement accounts for retired or terminated employees. Income+ was introduced in 2011.
The presentation by Jeff Maggioncalda, CEO, and Ray Sims, CFO will be webcast on Wednesday, January 16 at 9:20 am.
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| Semiconductors |
Entropic Communications* (ENTR, $5.60), based in San Diego, CA, is a fabless semiconductor supplier of integrated circuits used in the home for networking. Most homes are wired with coaxial cable for their cable television, broadband and phone service. The MoCAŠ (multi-media over coax) protocol is used for televisions, digital video recorders and home gateways to communicate with each other. MoCAŠ provides more reliable transmission than WiFi in a home setting. WiFi has limitations due to walls and other obstacles. Entropic is the leading supplier of MoCAŠ integrated circuits.
In 2012, Entropic purchased the set-top box System-on-Chip (SoC) business from Trident Microsystems. Broadcom (BRCM) is the leading supplier in this market. Entropic's plan over the next 18 months is to integrate its MoCAŠ technology onto SoC. Entropic is the primary alternative to Broadcom.
At the conference, we will be looking for a discussion of Entropic's SoC business and new products involving MoCAŠ 2.0. We will also look for commentary on international SoC opportunities, which Trident had not been able to pursue due its financial condition. Increasing numbers of high definition cable subscribers and multi-room digital video recorders are good for Entropic. Over the long term, we believe many home devices beyond televisions will be MoCAŠ enabled.
The presentation by Patrick Henry, CEO, will be webcast on Tuesday, January 15 at 4:10 pm.
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ViaSat, Inc.* (VSAT, $37.62), headquartered in Carlsbad, CA, has two main lines of business. In 2012, the company launched its satellite ViaSat1 to provide Exede, a satellite-based broadband service throughout North America. ViaSat1 has as much bandwidth as all other commercial satellites combined. Exede is ViaSat's first consumer product. Progress with their sales and marketing program is most important to the company and the stock.
ViaSat also supplies electronics products to the defense industry. Defense suppliers suffered in 2012 as the Department of Defense went into a "pre-sequester" shut-down. We believe that defense spending remains subdued due to Federal budget constraints and the wind-down of engagement in Iraq and Afghanistan. Nonetheless, ViaSat's role in supplying electronics for satellite communications and surveillance should be a long-term growth area. We will listen for commentary on defense spending.
Mark Dankberg, ViaSat's Chairman and CEO, will present January 17 at 8:00 am.
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| Semiconductor Manufacturing Services & Equipmen | |
Portland, Oregon's Electro Scientific Industries, Inc.* (ESIO, $10.07) supplies laser-based manufacturing equipment used for micromachining and inspection for the electronics industry. According to ESI's 10K filings for the last four years, Apple (AAPL) has been the company's largest customer. In Growth Factor Volume 3, we highlighted ESI's important role in Apple's supply chain. In the fiscal year ending March 2012, Apple was responsible for $74 million, or 29%, of ESI's revenue.
We will be listening for ESI's commentary on the mobile device market and its micromachining products. The presentation by Nick Konidaris, President & CEO, will be webcast at 4:10 pm ET on Wednesday, January 16.
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| Electronics Manufacturing Services | |
Jabil Circuit Inc.* (JBL, $19.92), based in St. Petersburg, FL, supplies turnkey manufacturing services such as circuit board assemblies, subsystems and systems for the electronics industry.
Jabil's Material Tech Group, which includes Jabil Greenpoint, produces enclosures for a number of smartphone and tablet makers. This group has been adding capacity and improving its yields. For the past year, Apple has been a 10% customer. We will be interested in any commentary on the Material Tech Group.
Jabil's enterprise and infrastructure segment and its high velocity systems results were below expectations in the November quarter. These groups assemble printed circuit boards, subsystems and complete systems such as printers and set-top boxes. These are lower margin businesses than the Material Tech Group. Research In Motion Ltd. (RIM) represents possible upside as they have recently consolidated manufacturing, with Jabil a beneficiary. The new BlackBerry, which is based on the BlackBerry 10 operating system, will be available in the next few weeks and is important to RIM's future. We believe market expectations for Jabil's RIM business are low. It will be interesting to hear any comments about the RIM business. The presentation by Jabil's CFO, Forbes Alexander, will be webcast on Tuesday, January 15 at 12:45pm.
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| Software as a Service | |
E2open, Inc.* (EOPN, $18.45), headquartered in Foster City, CA, provides Software-as-a-Service supply chain management solutions to tier 1 brands and their manufacturing and trading partners. E2open went public in July 2012. The company's customers include manufacturers and their supply chain partners, such as IBM, Panasonic, Dell, NetApp, Seagate, Diebold, Cisco, Embraer and Huawei. E2open's products are used to manage and track orders through procurement, manufacturing, shipping, warehousing and shipment-to-distribution.
E2open is still in investment mode and is estimated to have -4% operating margins in the fiscal year ending February 2014. We will be interested in commentary on the company's profitability target.
We will also be interested in commentary about the new Japan reseller NS Solutions Corp. and its recently announced customers, including Land O'Lakes. We will also be listening for comments on E2Open's new products, including demand-side applications and social supply chain initiative.
Mark Woodward, CEO and Peter Maloney, CFO will present on January 16 at 9:20 am.
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| Enterprise IT Equipment | |
Emulex Corp.* (ELX, $7.19) based in Costa Mesa, CA, creates products that connect storage servers and networks. It sells through leading original equipment manufacturers including Dell, IBM and EMC. Emulex has been a leader in products that use the legacy fiber channel protocol and has a leading 10GbE (gigabit Ethernet) product, which is the protocol of the future. We are interested to learn how the fiber channel market is faring and the adoption rate for the new GbE technology. Jim McCluney, CEO, Jeff Benck, President & COO and Mike Rockenbach, CFO, will present January 15 at 2:50 pm.
Super Micro Computer, Inc.* (SMCI $9.98) designs and manufactures high-performance servers and storage. The company was founded in 1993 by CEO Charles Liang and first raised outside capital in its 2007 initial public offering. It has been profitable every year and has grown to 1,300 employees and $1 billion in sales.
In 2012, the company's gross margins fell to 13.0% from 17.1% in December 2011. There were three issues. Super Micro reached a supply agreement with Seagate for hard-disk drives after the Thailand flood. While Super Micro locked in supply, drive prices fell in 2012. Super Micro also built a manufacturing facility in Taiwan and introduced new products based on Intel's new Xeon processors, formerly called Romley. The Taiwan facility was not used at capacity and the Romley servers, while they provide a significant improvement in data center virtualization capabilities, were slow to be adopted in 2012 due to the economy and a slow, new technology adoption cycle. The return from these initiatives should come in 2013.
In the past, Super Micro's stock has outperformed during periods of margin expansion. Street estimates see gross margins expanding to 16.5% in 2013. We will be listening for signs of capacity use in Taiwan and adoption of the Xeon processor in data centers. Howard Hideshima, CFO, will present January 17 at 8:00 am.
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**The Needham Growth Conference is sponsored by Needham and Company, LLC, member of FINRA, SIPC. Needham and Company, LLC is an affiliate of Needham Asset Management, LLC.
*The Needham Funds' aggregate ownership as a percentage of net assets in the stated securities as of 12/31/12: FNGN 1.85%; ENTR 4.16%; VSAT 2.70%; PDFS 4.31%; ESIO 2.36%; JBL 2.04%; EOPN 0.31%; SDBT 1.25%; ELX 3.65%; SMCI 3.27%.
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 www.needhamfunds.com 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.
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