|
Needham Funds' Commentary by John Barr
|
|
[email protected], +1 212-371-8300
|
|
Vol. 18 - January 11, 2015
|
|
 | John Barr
Portfolio Manager |
|
 | Chris Retzler
Portfolio Manager |
|
 | Jim Giangrasso
CFO |
|
|
|
|
Preview of the 17th Annual Needham Growth Conference
|
 |
The Needham Funds team will attend the 17th Annual Needham1 Growth Conference January 13-15 in New York City. We attend a number of investor and industry conferences throughout the year, and the Needham Growth Conference provides a great kickoff for the year and a sense of how companies are viewing 2015.
Management teams of approximately 300 public and 100 private companies will present at the conference. A number of our small and midcap holdings will present, and we will meet with about 75 companies over the three days. The private companies tend to be within a few years of going public. We like to get to know companies while they are still private in order to make informed decisions about investing in them as newly public companies. Companies in the Needham Funds' portfolios as of December 31, 2014 that presented at last year's conference and went public in 2014 were Amber Road, Inc. (AMBR) and Q2 Holdings, Inc. (QTWO).
We highlight three of our holdings as of December 31, 2014 that are presenting at this year's Conference. IPG Photonics Corporation (IPGP, owned by the Needham Aggressive Growth Fund) and WageWorks, Inc. (WAGE, owned by Needham Growth Fund and Needham Aggressive Growth Fund) are both long-term holdings. Vishay Precision Group, Inc. (VPG) was a new holding for the Needham Aggressive Growth Fund in 2014. All of these companies will webcast their presentations.
We also highlight four exciting private companies, InsideSales.com, Instructure, Kronos, and Plex Systems.
|
IPG Photonics Corporation - Tim Mammen, CFO
Tuesday, January 13 at 3:30 PM ET (webcast)
|
|
IPG Photonics, of Oxford, MA, is The Fiber Laser Company™. They are vertically integrated, manufacture their own laser diodes and use them in laser systems, which they manufacture. Dr. Valentin Gapontsev started what became IPG Photonics in 1990 in Russia after earning a doctorate at the Moscow Institute of Physics & Technology. He later located the company in the United States.
Fiber lasers are replacing CO2 lasers and mechanical systems in cutting and welding applications. IPG's largest market is high power (over 500 watt) laser cutting systems for flat sheets and tubes. Fiber lasers represent just one-third of this market and are rapidly growing. IPG has approximately 70% market share.
The automotive market is adopting fiber lasers for welding applications. Today's systems use resistance spot welders. IPG's new LSS, laser seam stepper, is an important new product, which provides stronger welds and reduced cycle times. Small penetration of the automotive market would have a big impact on IPG.
IPG has a host of other new products, including a 355 millimeter ultra-violet laser for cable marking and high-power lasers for use in 3D printing systems.
IPG has recently launched picosecond and super high-powered pulsed fiber lasers. These lasers are used for stripping paint off the likes of aircraft. The Department of Defense spends $1 billion per year on paint stripping.
In December 2014, the U.S. Navy conducted a successful test of LaWS, the laser weapon system made by Lockheed Martin. The Navy declared the LaWS operational for the defense of the ship. We believe IPG supplied the fiber lasers used in the weapon. The cost of a laser pulse is less than $1 compared with the hundreds of thousands of dollars for a missile. The laser also brings guidance capabilities lacking in a missile.
We believe CFO Tim Mammen's presentation will cover these and other growth opportunities.
|
Vishay Precision Group - Ziv Shoshani, CEO, and Bill Clancy, CFO
Wednesday, January 14, 12:05 PM ET (webcast)
|
|
Vishay Precision Group of Malvern, PA, is a $240 million market cap provider of foil resistors and sensors used for measuring weight, pressure, acceleration and other forces. Their markets include aerospace, automotive, scales, hospital beds, and industrials. These markets are incorporating sensors to provide real-time information from mechanical devices and systems to the world of digital analytics and control. Vishay Precision Group is well positioned to benefit from the industrial Internet of Things.
There has been a lot of activity in the sensor space. Measurement Specialties, Inc. (MEAS) is being acquired by TE Connectivity Limited (TEL), and Sensata Technology Holding NV (ST) is doing quite well. Vishay Precision Group is valued at 0.7x EV/ sales and 7x trailing EBITDA, while others in the sensor industry are valued at 3-4x EV/ revenues. The company is followed by only one sell-side analyst.
Vishay Precision Group was spun out from Vishay Intertechnology in 2010. CEO Ziv Shoshani has been with Vishay since 1995.
|
|
|
WageWorks, Inc. - Joe Jackson, CEO, and Colm Callan, CFO Tuesday, January 13 at 11:20 AM ET (webcast)
|
|
WageWorks, headquartered in San Mateo, CA, offers a cloud-based system for administering tax-advantaged employee benefit programs. These Consumer-Directed Benefit programs include commuter benefits, health and dependent care flexible spending accounts (FSA), health savings accounts (HSA), health reimbursement arrangement (HRA) and COBRA. WageWorks is paid monthly by employers for each employee participating in a specific program. The employees get a WageWorks dashboard where they can manage their benefit programs. The broad trend toward consumer-directed benefits could provide a tailwind to the company for years to come.
We believe WageWorks is well positioned to grow in a number of areas. It was only in 2013 that employees were allowed to carry forward a balance on an FSA account into the next year. Only one-fourth of eligible U.S. employees participate in an FSA. In a 2011 survey, only 30% of companies offered commuter benefits. We believe both of these percentages will grow. The health reimbursement arrangement is an employer funded account, which must be used for health care expenses not covered by insurance. This program is rapidly growing and WageWork's Conexis subsidiary administers these plans.
Beyond benefit plans, WageWorks may also see growth from administering public and private healthcare insurance programs. WageWorks is partnering with not-for-profit health plan provider Kaiser Permanente on its participation in public exchanges. Mid-November through February 2015 is open enrollment time for the exchanges and WageWorks is focused on Kaiser Permanente's continued success.
In addition to growth from public exchanges, WageWorks is working with Towers Watson & Co. (TW) to administer their private insurance exchange for employees. Rather than an employer select an insurance company for all employees, employees would use a private exchange to select their own plan. We believe private exchanges could contribute to WageWorks' revenue in 2016 and beyond.
These growth opportunities could lead to a much larger WageWorks over the years to come, although there is no certainty they will achieve them. WageWorks has a $2 billion market cap and is followed by just four sell-side analysts.
CEO Joe Jackson joined WageWorks in 2007. He has over 30 years of experience in the financial services industry, many of them with First Data Corp. CFO Colm Callan was previously CFO at PayPal's Product & Technology Division.
|
InsideSales.com, Inc. - Kevin Samuelson, CFO
Thursday, January 15, 9:20 AM ET
|
|
InsideSales.com of Provo, UT, created the inside sales acceleration platform. Their mission is to increase the effectiveness of an outbound sales team through automation. They are to sales what marketing automation is to marketing. In many industries, sales teams are moving inside and away from the traveling, external sales force. InsideSales.com does not address inbound customer service or call centers.
InsideSales.com offers a SaaS-based system for all size businesses. It includes a PowerDialer™ with advanced list prioritization, one click dialing, pre-recorded voice messaging, email integration, and inbound call routing.
Most interesting, it includes Neuralytics™, a multi-tiered predictive analytics engine. It processes complex data sets on 150 million customer profiles and over 80 billion customer interactions. InsideSales.com sources this data from the likes of Experian and the credit card companies. Access to this information is near impossible for a small business, and the analytics are difficult for even the largest of enterprises. The resulting NeuralScore™ feeds into the PowerDialer™. NeuralSort™ determines the optimal calling times by considering demographic, geographic and company information.
I relate my own experience with InsideSales.com. I recently downloaded the whitepaper, "15 Time Wasters of Inside Sales and Lead Generation," by co-founder and President, Ken Krogue. Before I had time to go to the printer, I had a call from a New York City area code. InsideSales.com has determined that within the first five minutes of downloading content, a prospect is 10x more likely to answer the phone. BINGO #1. They also recognize that local numbers increase contact rates by 38%, BINGO #2. I thought I might have recognized the incoming number, so I answered their call. I was greeted by a friendly and knowledgeable sales qualification person from InsideSales.com! He'd been on board a month and knew his offering quite well.
 | | Kevin Samuelson, CFO |
Ken Krogue has a fascinating blog, and he wrote a two-part piece on the founding and vision behind the company.
InsideSales.com is a member of the billion dollar club. In April 2014, they raised $100 million from Polaris Partners, Kleiner Perkins Caufield & Byers, Salesforce, Hummer Winblad, U.S. Venture Partners, and other leading firms at nearly a $1 billion valuation. The company has close to 600 employees. They just added Jim Steele, Salesforce.com's Chief Customer Officer. Kevin Samuelson, CFO, will present on Thursday, January 15 at 9:20am. Kevin joined the company in 2014 after experience as part of the leadership teams at Backcountry.com and Infor during their rapid growth phases.
|
|
Instructure, Inc. - Joshua Coates, Co-Founder and CEO, and Steve Kaminsky, CFO
Wednesday, January 14 at 4:30 PM ET
|
 | |
Josh Coates, CEO
|
Instructure of Salt Lake City, UT, was founded in 2008 to improve the efficiency of the learning experience. Their vision is to be the universal platform for learning. They are disrupting a market that has been dominated by a legacy system. Instructure's Canvas cloud-based Learning Management System is used by over 800 colleges, universities, and K-12 school districts with over 9 million users.
Instructure launched Canvas K-12 in February 2012 and Canvas MOOC (massively open online course) in November 2012. The Instructure blog has a great story by Kevin Kimball, Associate Professor of Accounting, BYU Hawaii. He took a sabbatical in 2013 to develop a MOOC accounting course. He enthusiastically described the positive impact of the experience on the blog.
Blackboard is the current market leader and is now owned by Providence Equity partners. The Moodle open-source system is also a competitor.
Josh Coates, CEO, has had a number of entrepreneurial experiences, including founder and CEO of Mozy.com, which was a cloud-based backup storage company purchased by EMC after two years for $76 million. Needham & Company analyst Michael Huang published an interview with Coates on December 2, 2013. Instructure's venture investors are OpenView Investments, Bessemer Venture Partners, EPIC Ventures, and Tomorrow Ventures.
|
|
Kronos, Inc. - Mark Julien, CFO
Wednesday, January 14 at 10:00 AM ET
|
 | |
Aron Ain, CEO
|
Kronos, headquartered in Chelmsford, MA, is a leader in cloud-based workforce management software used for recording time and attendance, scheduling, human resources management, and payroll processes.
They employ real-time data and analytics to provide insight to employers. Kronos was founded in 1977 by Mark Ain. Mark's brother, Aron, became CEO in 2005.
In 2007, Kronos was acquired by private equity firms Hellman & Friedman and JMI Equity for $1.7 billion. It has spent the last seven years introducing new cloud-based solutions, growing through acquisition, and increasing its vertical market offerings. Kronos has grown from over $500 million in revenue prior to the buy-out to over $1 billion today. In February 2014, Blackstone and GIC invested $750 million in Kronos in a transaction valued at $4.5 billion. Kronos' sales are now over $1 billion with over 3,800 employees. The Needham Funds were successful, long-term holders of Kronos when it was a public company in the 2000s.
CFO Mark Julien has years of financial experience with Kronos. Kronos has conducted 55 acquisitions since Julien joined the company and he was instrumental in the buyout negotiations with Hellman & Friedman in 2007.
|
|
Plex Systems - Jason Blessing, CEO
Wednesday, January 14, 2:10 PM ET
|
|
Plex Systems of Troy, MI provides cloud-based Enterprise Resource Planning (ERP) systems for automotive, medical, device, food and beverage, aerospace, defense and machinery manufacturing companies. The product addresses production, inventory, quality, human capital and financial management. The Plex Manufacturing Cloud provides universal connection to every component in a manufacturing supply chain. We
 | |
Jason Blessing, CEO
|
believe Plex Systems is well positioned to help create and benefit from a manufacturing renaissance in North America. Plex Systems' 6,000 users are the world's largest cloud-based manufacturing community. Legacy competitors include Oracle, SAP and QAD.
The company was founded in 1995. Crain's Detroit estimates Plex Systems' revenue at $75 million. They have over 400 customers and over 400 employees. Private equity investors include Apax Partners, Francisco Partners, Accel Partners, and T. Rowe Price.
CEO Jason Blessing was previously with Oracle, Taleo, PeopleSoft, and PricewaterhouseCoopers.
|
|
1The Needham Growth Conference is hosted by Needham & Company, LLC; an affiliate of Needham Asset Management, LLC which is the parent company of Needham Investment Management, LLC.
*The Needham Funds aggregate ownership as a percentage of net assets in the stated securities as of 12/31/14: AMBR: 0.32%; QTWO: 0.25%; IPGP: 0.15%; VPG: 0.40% WAGE: 1.37%.
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. Short sales present the risk that the price of the security sold short will increase in value between the time of the short sale and the time the Fund must purchase the security to return it to the lender. The Fund may not be able to close a short position at a favorable price or time and the loss of value on a short sale is potentially unlimited.
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.
|
|
|
|
|
Copyright � 2014. All Rights Reserved.
|
|
|
|
