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The Growth Factor
Needham Funds' Commentary by John Barr
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Volume 21 - January 10, 2016
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John Barr
Portfolio Manager
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Chris Retzler
Portfolio Manager
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Preview of the 18th Annual Needham Growth Conference
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The Needham Funds team will attend the 18th Annual Needham1 Growth Conference on January 12-14 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 2016.
Management teams of more than 350 public and private companies will present at the conference. A number of our small and mid-cap 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. Many of the presenting companies will webcast their presentations.
We highlight three of our holdings as of December 31, 2015 that are presenting at this year's Conference: Akamai Technologies, Inc. (AKAM), KVH Industries, Inc. (KVHI) and PDF Solutions, Inc. (PDFS).
We also highlight three exciting private companies: Accela, Booker Software, and iCIMS.
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Akamai Technologies, Inc. - Tom Barth, IR; Tuesday, January 12 at 8:00 AM ET
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 Akamai Technologies of Cambridge, MA, is the global leader in Content Delivery Network (CDN) services, which make the Internet fast, reliable and secure. The company's cloud-based web performance, mobile performance, cloud security and media delivery solutions enable businesses to deliver video over the Internet, operate e-commerce sites and protect websites and enterprise applications from cyber attack. Akamai has over 200,000 servers in networks around the world, which it uses as its cloud.
Akamai's traditional business is delivering Internet content for media companies such as ESPN and software downloads for the likes of Apple and Microsoft. The media delivery business has many customers and should benefit as more and more video is delivered across the Internet. Akamai has a dominant share of this market.
Akamai also has a cloud-based cyber Distributed Denial of Service (DDoS) security offering, which mitigates denial of service attacks by bad guys. The attackers attempt to flood a website with traffic, which likely renders the site unresponsive. If a company is using Akamai's Kona Site Defender, the attackers may take down one server, but Akamai just switches the traffic to another of its 200,000 edge servers. The cloud security opportunity is still in its early growth stages.
Tom Barth, Investor Relations, will open the conference with his presentation on Tuesday, January 12 at 8:00am.
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KVH Industries, Inc. - Martin Kits van Heyningen, CEO, and Peter Rendall, CFO;
Tuesday, January 12, 12:50 PM ET
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 In our view, KVH Industries is like the combined Netflix, Inc. (NFLX) and Comcast Corporation (CMCSA) of the commercial maritime industry. They supply satellite communications equipment, voice and data services and entertainment, news and training content to ships at sea through their IP-Mobilecast technology. KVH is just beginning to monetize a three-year investment in IP-Mobilecast.
KVH also manufactures fiber-optic gyroscopes (FOG), which are used
for commercial and militaryapplications, including guidance, optical and weapon stabilization and precision positioning. They were used on the CROWS (Common Remote Operated Weapon System), which allowed a gunning turret to be operated from inside a Humvee in the Gulf War. FOGs are also being designed into drones and self-driving cars. The Economist wrote an article about the technology behind self-driving cars, including the role of gyroscopes. FOG revenue has been depressed along with U.S. Department of Defense spending over the last few years. We believe this business has great potential and is ignored by investors.
KVH's digital compass and FOG-based TACNAV (Tactical Navigation) systems are used to provide locationinformation when a vehicle is without GPS. The Saudi Arabian National Guard placed a $36 million order in 2012 and has recently begun to order again. We believe TACNAV's opportunities are also ignored.
KVH has a market cap of $135 million and is trading at enterprise value to 2015 revenues of just 0.9x and 7x EBITDA. We believe this valuation does not reflect any of KVH's opportunities. Management's presentation on Tuesday, January 12 at 12:50pm will be webcast.
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PDF Solutions, Inc. - Dr. John Kibarian, CEO, and Greg Walker, CFO; Tuesday, January 12 at 5:30 PM ET
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 PDF Solutions, Inc. supplies software and services to help semiconductor manufacturers develop new manufacturing lines and manage production yields for established lines. We look at PDF's business in three segments:
1) As Samsung, AMD, Apple, Qualcomm and others begin to manufacture on the Samsung and Global Foundries 14 nanometer processes, PDF's Gainshare royalty revenue could grow 40% in 2016, from $38 million to $55 million of revenue and contribute near 100% flow-through margin.
2) PDF's Exensio Big Data platform analyzes and reports on data generated across the semiconductor manufacturing environment. Big data analytics SaaS could grow 100%, from single-digit-millions to double-digit millions and comprise 20% of revenue by 4Q 2016. 3) PDF's new electrical design for inspection initiative could generate royalties in 2017, with a longer-term opportunity to double royalty revenue. At the 14 nanometer manufacturing process, visual, light-based inspection is near impossible for finding manufacturing errors. PDF's approach inserts five to ten billion tiny on-chip instruments in empty spaces on a semiconductor wafer. A PDF tester will charge these instruments and read the electrical response. The Exsensio Big Data platform can then be used to identify the failing on-chip instruments and manufacturing problems. PDF has only briefly spoken about design for inspection on its quarterly earnings conference calls. We look forward to any commentary on this initiative. PDF Solutions has a market cap of $290 million and $126 million in cash. It is valued at just 4x 2016 estimated EBITDA. Dr. John Kibarian, CEO, Co-Founder and Board Member will present and be joined by Greg Walker, CFO. The presentation will be Tuesday, January 12 at 5:30pm.
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Accela, Inc. - Maury Blackman, CEO; Tuesday, January 12, 10:20 AM ET
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 Accela, Inc. of San Ramon, CA, provides a cloud-based platform that increases citizen engagement, improves efficiency and delivers transparency to help government better serve its citizens to strengthen communities. The Accela Civic Platform serves over 2,000 communities worldwide, including over half of America's largest cities.
Accela has over 30 years of experience in government software. They continue to add capabilities by internal development and acquisition. In the last two years, they've acquired 9 civic tech companies. Solutions include environmental health, asset management, land management, right-of-way management, licensing and case management, and others.
In February 2015, ABRY Partners, J. P. Morgan Private Equity Limited and Karlani Capital invested $143.5 million in Accela, bringing funding in 2014 and 2015 to $200 million.
CEO Maury Blackman has a mission to harness technology to increase civic engagement. He has finished ten Ironman triathlons, including several world championships in Hawaii. Early on, he served as a Field Artillery Officer in the United States Army.
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Booker Software, Inc. - Josh McCarter, CEO, and Bill Smith, CFO; Tuesday, January 12 at 9:40 AM ET
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Josh McCarter co-founded Booker Software in New York in 2010 and has been CEO since inception. The Booker Platform helps small, service businesses attract, book, sell, manage and retain customers. Typical customers are beauty salons, day spas, hair salons, HVAC services, lawn services, nail salons, pet services, plumbing services, and spin studios.
The product combines many functions that are very difficult for a small business to manage separately. Booker provides on-line booking, integration with social media such as Facebook, on-line and in-store payments (likely a result of their investment from First Data Corp. [FDC]), tracking sales and payment data and customer-relationship management software. Booker's offering complements email service from the likes of Constant Contact (CTCT).
Booker's basic offering is $85 per month. The standard offering includes a suite of loyalty, rewards and membership tools and costs $135 per month.
Booker raised $35 million in a Series C round in March 2015. They've raised a total of $77 million. Booker investors include Bain Capital Ventures, First Data, Grotech Ventures, Jubilee Investments, Jump Capital, Medina Capital, Revolution LLC, Signal Peak Ventures, TDF Ventures and Vital Venture Capital.
Josh McCarter, CEO, will be joined by Bill Smith, CFO and will present on Tuesday, January 12 at 9:40am.
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iCIMS, Inc. - Michael Wilczak, SVP Corporate Development, and Jared Zawada, Corporate Development Executive; Wednesday, January 13 at 3:10 PM ET
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iCIMS of Matawan, NJ is a leading provider of Software-as-a-Service talent acquisition solutions. iCIMS enables organizations to manage their entire talent acquisition lifecycle from sourcing, to recruiting, to onboarding. The company has a vision of emphasizing ease of use and customer service, rather than unnecessary features.
iCIMS solutions include: 
- iCIMS Connect - provides an easy way to engage candidates before they are even ready to apply
- iCIMS Recruit - manages the workflow and processes in recruiting to make for a positive candidate experience
- iCIMS Onboard - improves the process of converting candidates into employees
I've had the opportunity to follow iCIMS' progress for the last several years. The company was founded by CEO Colin Day in 1999 and has consistently grown and gained market share since its founding. Prior to raising its first capital in 2012, iCIMS was self-funded, highly profitable and grew organically at a 43% CAGR from 2003 to 2012. iCIMS has over 3,000 customers.
Since 2012, the company has raised a total of $92.6 million, including a $56.7 million round in October 2015. Susquehanna Growth Equity is a major investor. iCIMS has 97% recurring revenue and remains profitable.
Michael Wilczak, SVP Corporate Development, and Jared Zawada, Corporate Development Executive will present on Wednesday, January 13 at 3:10pm.
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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 December 31, 2015: AKAM: 3.57%; CTCT: 0.68%; KVHI: 4.84%; PDFS: 3.12%.
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.
All three of the Needham Funds have substantial exposure to small and micro capitalized companies. Funds holding smaller capitalized companies are subject to greater price fluctuation than those of larger companies. Also, all three of the Needham Funds are permitted to engage in short sales, options, futures, and leveraged trading strategies. The Funds' 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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