The Growth Factor

Needham Funds' Commentary by John Barr 

jbarr@needhamco.com, +1 212-371-8300

                                                                                                         Vol. 16 - July 22, 2014 
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Needham Funds Team
John Barr
Portfolio Manager
Chris Retzler
Portfolio Manager
Jim Giangrasso
CFO
The WOW Factor - In Memory of Dr. Joep Lange; 4 People and 2 Companies 

In our travels throughout the United States, we visit many public companies that are investment candidates for the Needham Funds.  We also visit many interesting people and places that inform our thoughts on leadership, technology and investing.   

 

While the recent loss of hundreds of lives in the Middle East and Ukraine is tragic and disturbing, unfortunately it is nothing new.  The 1980s and 1990s were full of war and violence in eastern Europe, Africa, Asia and the Middle East.  2001 brought terrorism to the United States and later to Europe.  Despite these tragedies, economies and companies grew.  Employees and managers go to work every day to create valuable products and services for their customers and value for their shareholders.  Social enterprises go to work every day to improve lives. We believe monetary policy remains extraordinarily accommodative.  The U.S. economy is improved from a weather-induced terrible first quarter.  We do believe European economies and therefore some United States' companies will face slower growth due to Russian sanctions.   Our job is to create wealth over the long-term by investing in great growth companies.  We continue to see opportunity in our universe of growth equities.  

 

In this edition of The Growth Factor, we intended to highlight four people and two portfolio companies, each of whom left us with the sense of "WOW."  We've added a fifth person whom we've never met or seen speak, but leaves us with a sense of "WOW" and sadness for the loss of his future contributions to mankind.

 

Dr. Joep Lange, a pioneer in AIDS research and in making HIV treatments available to the developing world, was on Malaysia Airlines Flight 17, which was brought down by a missile on July 17.  Dr. Lang and 297 others, including approximately 100 people on their way to the 20th International AIDS Conference in Melbourne, Australia, were killed. 

Jean Ayissi/Agence France-Presse - Getty Images

 

Dr. Lange had been involved with HIV research and treatment since 1983.  He led efforts to make HIV treatments available in the developing world. His scientific accomplishments led him to be one of the first to support early treatment.  He has held numerous leadership positions in scientific and humanitarian organizations. In 2001, he founded PharmAccess Foundation to provide access to healthcare in Africa.  Most recently, he was head of the Department of Global Health at the Academic Medical Center at the University of Amsterdam.  He dedicated his life to making a difference.  

 

1) Mike Sheehan - from Marketing Impresario to The Boston Globe 

I recently had the pleasure of meeting Mike Sheehan, CEO of the Boston Globe, at their Dorchester offices. In October 2013, John Henry bought The Globe from the Times Co. for $70 million and appointed Mr. Sheehan as CEO in January 2014. Mr. Henry also owns the Boston Red Sox, England's Liverpool Football Club and The Roush Fenway NASCAR racing team. Mr. Henry's John W. Henry & Company was one of the longest established managed futures advisors. They stopped managing clients' capital in 2012.

 

The Globe is an amazing franchise.  In addition to the paper, they have www.boston.com, www.bostonglobe.com and www.betaboston.com. BetaBoston does a great job of covering the vibrant Boston venture capital, tech and start-up scene. They have the staff to do great reporting and tell great stories about the happenings in the Boston area.

 

Mike was CEO of Hill Holliday for 10 years to the day. Hill Holliday is Boston-headquartered and the 13th largest ad agency in the United States. Mike's client and advertising background brings a perspective on how to monetize the Globe's content.

 

Mike is involved with Ditto Labs, Inc. and ChoiceStream, which both do very interesting work in digital advertising technology. He is an inspiring leader who understands the digital world and seems the ideal person to lead the Boston Globe through its continued leadership in the Boston community.

 

2) Mark Volman - from The Turtles to Professor to Entrepreneur

A few weeks ago I had the pleasure of attending the Happy Together Tour 2014 in Englewood, NJ. The Tour is organized by Mark Volman and Howard Kaylan, who were founders of The Turtles in 1965. They were also members of Frank Zappa and the Mothers of Invention. The Tour brought together 1960s and early-1970s artists, including Gary Lewis (never realized he is Jerry Lewis' son) of the Playboys, Chuck Negron of Three Dog Night, Mark Farner of Grand Funk Railroad, and Mitch Ryder of the Detroit Wheels.  

 

Volman and Kaylan are an interesting pair. They are comedians, entrepreneurs, and Volman is an academic. They have been organizing The Happy Together Tour for thirty years. The tour starts in early June and crosses the country, by bus, with about 50 performances, and concludes in late August. 

 

At age 44, Volman enrolled at Loyola Marymount University in Los Angeles, and graduated as Valedictorian. In addition to The Happy Together Tour and performing, he is on the Entertainment and Music Business faculty at Belmont University in Nashville. Belmont has a great music and music business program and is also known for its basketball team, which is a perennial candidate for a first round upset win in the NCAA basketball tournament.  

 

Volman and Kaylan are involved with musical intellectual property rights. They have sued Sirius XM (SIRI) in state courts for not paying royalties on pre-1972 songs. These songs do not have federal copyright protection, but California and other states do have ownership rights.   While Volman and Kaylan were first, record labels have followed with suits of their own.  If you get a chance, go see the Happy Together Tour.   

 

3) Dr. Robert Houck, Executive Director, Friends of the Children NY, Harlem, NY - Friend to the Most At-Risk Children 

Friends of the Children is an early intervention program that selects the most at-risk kindergarten children and pairs them with a full-time youth advocate, called a Friend.  The Friend is an adult role model who fosters social and emotional development. Most mentoring programs provide part-time volunteers that are part of a child's life for a period of time. Friends of the Children is different. The Friend is engaged with the child every week from kindergarten thru high school graduation.

 

Dr. Robert Houck moved from North Carolina to New York City to assume leadership of FOTC New York in 2007. He's a licensed psychologist and has devoted the last sixteen years to management of child-serving agencies. He's an amazing advocate for the children and leader for the program. I had the pleasure of meeting him through the Harvard Business School Club of New York Community Partners program.

 

Friends of the Children's mission is "to change the destiny of New York City's most vulnerable children, one child at a time....Friends of the Children New York is an early intervention program that breaks the cycle of generational poverty for children most at-risk...We screen and select children in kindergarten who demonstrate the greatest risk of school failure, juvenile delinquency, and early parenting."  

 

In 2012, Friends of the Children NY was named one of the Social Impact 100 top performing nonprofits.


Friends of the Children serves 150 Achievers (children) in Harlem and in the South Bronx. Bob's vision is to serve 1,000 children in all five New York City boroughs. He has devoted his life to changing the lives of children.

 

4) Rose George: Author of Deep Sea and Foreign Going; and  

5) KVH Industries, Inc: IP- MobileCast

Rose George is an author and writer. She has written on refugees, consumption and waste, and two books on shipping. She brings a human touch to subjects below the headlines which we rarely learn about. 

 

Ms. George traveled on the Maersk Kendal on a five-week voyage from southern England to Singapore. In Deep Sea and Foreign Going: Inside Shipping, the Invisible Industry that Brings You 90% of Everything (Portobello Books, 2013), she tells the story of the massive container ship and its crew. Shipping is critical to world trade and yet we take it for granted and know little about the human cost to bring goods from producing to consuming countries. These crews are responsible for the massive capital investment in their ship and for safe passage of their cargo.  It is a hard, lonely job.

 

Deep Sea and Foreign Going gives a perspective to understand our investment in KVH Industries, Inc. (KVHI). KVH supplies ship-board satellite terminals to enable communications for the maritime industry. It is also a leading supplier of voice and data service to ships at sea. We were very intrigued a year ago when KVH bought Headland Media, which produces news summaries and other information and entertainment for commercial maritime crews. Headlands also ships DVDs around the world to ports to be picked up by ships in transit. Imagine the Netflix of old, shipping DVDs to customers.

 

KVH's vision for the acquisition was to be the Netflix of the future for the maritime industry. The KVH Media Group produces news summaries from the Philippines and other countries that are the homes of crew, multicasts movies and provides live video programming to the ships. KVH's IP-MobileCast content delivery service broadcast the finals of the World Cup on July 13.   

 

At $14/share, KVH Industries trades at an enterprise value to revenues of 1.1x. It is still valued as an equipment supplier. With success, we believe KVH is worthy of a premium multiple. As of June 30, 2014, KVHI was a holding of the Needham Growth Fund, the Needham Aggressive Growth Fund and the Needham Small Cap Growth Fund.  

 

6) Electronics for Imaging, Inc: The Next Generation of Printing, Brought to You from the Woods of Northern New Hampshire

Electronics For Imaging, Inc. (EFII) has been a long-term holding of the Needham Growth Fund and Needham Aggressive Growth Fund. I recently visited their Meredith, New Hampshire, facility, which is headquarters to the EFI VUTEk digital inkjet printing group.

 

An EFI VUTEk HS 100 Pro printer

EFI's strategy is to lead the transformation from analog to digital color commercial printing. EFI's printers and ink bring low cost, personalization to a previously analog world that required long runs and set-up times. These are big printers. They can weigh up to six tons and produce prints used to wrap a bus.

 

Digital printing benefits significantly from technology advances in computing and material science. These printers can print on surfaces including paper, boards, signs, textiles, ceramics, vinyl and wood. They use LED lights for curing, rather than ultraviolet and solvents, making for an environmentally friendly process. The continuing reduction of LED costs makes this application affordable. 

Bus wrap from an EFI printer

 

The VUTek HS100 Pro sprays 480 million drops of ink per second, with 24,000 print nozzles and prints 60 square feet per minute. The placement of each drop is individually controlled to a spacing of 5 microns. EFI/ Vutek's long-time Chief Technology Officer, Joe Lahut has postulated Lahut's Law that print quality and speed per dollar doubles every 24 months.  

 

The size and color of the images is amazing. These capabilities give marketing professionals a new tool. Print is alive and well.

Summary
We are lucky to be able to travel and meet with WOW factor people and to support their social enterprises, and invest in their companies.  It is uplifting to see the results in improved lives, valuable products and services, and increased shareholder value.

Whether it's Mike Sheehan greeting a group of schoolchildren visiting the Boston Globe, The Happy Together Tour putting smiles on people's faces, Friends of the Children transforming a troubled child to an Achiever, Rose George chronicling contemporary life at sea, KVH Industries providing communications/shipboard enterprise applications and entertainment to make life at sea easier, or the R&D team at EFI/Vutek applying technology to create new commercial digital printers, great things are happening every day.

With the loss of Dr. Lange, we are reminded of the importance of every day. Leaders leave behind movements as legacies. We suspect that others in the AIDS community will work to carry Dr. Lange's work to new heights.

*The Needham Funds aggregate ownership as a percentage of net assets in the stated securities as of 6/30/14:  KVHI: 3.26%; EFII: 2.40% 

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 are 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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