TMT Model Portfolio Update: Escaping the Death Watch

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SEE LAST PAGE OF THIS REPORT Paul Sagawa / Artur Pylak


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February 23, 2015

TMT Model Portfolio Update: Escaping the Death Watch

We assessed the valuations of 187 US traded large cap TMT stocks, separating their EV into near-term and long-term components and graphing them on these axes. In the framework, the names fall into quadrants that have interesting implications for trading. This quarter, we are looking more closely at the “Death Watch” – i.e. stocks with below average 5-yr cash flow growth expectations and where the implicit 5th year terminal value represents less than 75% of the total EV. Amongst these 47 names are a motley crew of old IT suppliers and fallen internet stars who’s best days are likely behind them, but also several post-peak cyclicals, industry vertical suppliers, and a few surprises. We see particular opportunity in MSFT, QCOM, STX and WDC, where we feel management has navigated past obvious dangers and where their positions for the future are poorly appreciated. We also note that AAPL has fallen from the skepticism quadrant into the death watch – its recent cash flow performance has been so strong, that analysts and investors no longer project significant growth, perhaps also discounting its overseas cash assets as well. We are sympathetic to this perspective, although we are keeping AAPL in our Large Cap Model portfolio, which outperformed its benchmark in the quarter by 40bp, up 950bp. We are swapping STX for WDC, and PAY for AMZN. Our Small Cap Model Portfolio underperformed dramatically, up just 110bp, on very poor performance from OPWR, MRIN, RKUS and WWWW. We are removing JDSU, WWWW and MRIN, along with CNVR, which was acquired. We are adding HUBS, RENT, QLYS and SMCI in their place.

  • MSFT stands out amongst 16 traditional IT suppliers. The largest part of the Death Watch are suppliers to enterprise data centers, a clear market endorsement of a public cloud future. We see MSFT as clearly different from the others, a list that includes erstwhile stalwarts ORCL, CSCO, EMC and HPQ. A strong, early commitment to the cloud gives MSFT important assets, like its Azure IaaS platform and its Office 365 SaaS franchise, that suggest a bright future, even as older products fade.
  • The narrative on QCOM is overly pessimistic. Long time Skepticism quadrant member QCOM dropped onto the Death Watch, after worries about the future of its IPR royalties spurred significant downward revisions. Investors’ long term concerns are particularly acute, with only 5 companies in our overall large cap universe showing lower terminal values. Given the recent resolution of an anti-trust investigation by Chinese regulators and with new self-designed processors due, we see upside to expectations and possible multiple expansion.
  • Opportunity in disk drives. Along with QCOM, STX and WDC are amongst 7 component suppliers on the Death Watch. With just 3 remaining global disk drive manufacturers, clear signs of discipline, and a bullish future for cloud storage, we believe both are significantly undervalued. Strong performers in 2014, we expect a pattern of beats and revisions to continue in 2015.
  • Why is AAPL here? AAPL has fallen into the Death Watch, as its estimates and share price have not kept pace with its cash flows. Investors, apparently, have difficulty in projecting significant growth off of the greatest FCF quarters ever posted by any company and may be heavily discounting its overseas cash. While it is easy to argue that AAPL is undervalued, it is also easy to see the potential for future stagnation against the most difficult compares in history. We are holding on to AAPL in our model portfolio for at least one more quarter, but fear that hum-drum iPhone announcements for the fall could easily reverse the current momentum.
  • Not much to look at amongst other consumer plays. The Death Watch also contains a dog’s breakfast of one-time Internet stars. EBAY, at least, has the look of acquisition bait after its spin out of PayPal is complete – we see the e-commerce assets of the parent as much more attractive than its competitively outflanked payments subsidiary. YHOO becomes much less interesting without its BABA stake, and could become irrelevant if it were to divest its Yahoo Japan position, as has been rumored.
  • Idiosyncratic opportunities in industry vertical plays. SMB financial SW leader INTU has potential as it executes its shift to a SaaS model. Thinly covered and fast growing investor services software provider BR is also intriguing. Other stocks in the category are tied to investment cycles in their specific target industries, several of them – AMAT, PTC, SNPS, CGNX, CDNS and TER – tied to semiconductor manufacturing that is trending toward trough spending,
  • The Large Cap Model Portfolio returns to strong performance. Our Large Cap Portfolio was up 950bp since our last update on Oct 30, 40bp above the tech components of the S&P500. Performance had been weak in the 6 months from April, after outperformance in the two prior years. NFLX, DATA, ARM and AAPL were particularly strong performers, with the negative reaction to the most recent QCOM and MSFT quarters partially offsetting them. We are removing STX in favor of its competitor WDC, based on their recent records of execution. We are also returning AMZN to the portfolio, given expectations of improving near term margins, replacing PAY. As noted, we are retaining AAPL with expectations of further appreciation, but with a note of caution given the very difficult compares that will begin in September.
  • The Small Cap Model Portfolio performed poorly. Our Small Cap Portfolio was up just 110bp from October, vs. a 610bp rise in the S&P 600 and a 1050bp increase in its tech components. Performance was scuttled by sharp declines in OPWR, WWWW, MRIN, and RKUS, overshadowing strong appreciation by PFPT and SYNA. We must replace CNVR, which was acquired by ADS during the period, as well as WWWW and MRIN, which are being removed for their disappointing performance, and JDSU, which has grown above our $3B cap guideline and doesn’t fit well to our thematic heatmap. In their place, we are adding HUBS, RENT, QLYS, and SMCI.

The SSR TMT Heatmap

I’m Not Dead, Yet!

TMT stocks cannot be trusted to regress to the mean – expensive stocks often get more expensive, while cheap stocks get cheaper, and, occasionally, die. As such, valuation is a dangerous tool for tech investors, but ignoring it entirely can be dangerous as well. We use a framework that breaks valuation into two axes – one showing the 5-yr free cash flow growth estimated by consensus, and the other measuring the percentage of the enterprise value represented by the present value of the 5th year terminal value, once the value of those 5-yrs of forecast cash flows have been subtracted. In the framework, our universe of 187 large cap TMT stocks fall into quadrants, each with clear implications for investment.

This quarter, we are diving deeply into the quadrant defined by below average expectations for 5-yr cash flow growth and below average implied terminal values. We have nicknamed this sector the “Death Watch” and it contains stocks where investors are suggesting that there is little growth to be had in either near or long terms. While we concur with the market in the large majority of names, those with the potential to surprise and rerate are unusual opportunities where the risk is greatly outweighed by the possible reward. It is no accident that 4 of the 15 stocks in our Large Cap Model Portfolio are found in this group.

The 48 Death Watch companies comprise several distinct categories. There are 15 enterprise IT companies, most of them hoary traditional data center suppliers. Here, we see MSFT, with its vibrant cloud businesses already offsetting its declining products, as an enormous bargain. Amongst the 6 components companies, we like the two disk drive makers – STX and WDC – and wireless technology leader QCOM. Disk drives are on the cusp of growth, as the opportunity from enormous cloud data centers begins to overwhelm the obvious decline in PC-related demand, and consolidation has yielded a far more disciplined industry than the wildly cyclical free-fall-all of old. The Chinese anti-monopoly investigation that had weighed heavily on QCOM shares was recently resolved with penalties and terms that were far less onerous than had been feared. We believe that value of the company’s IPR will prove more robust than assumed, and that its growing domination of mobile device silicon will continue, a prognosis that greatly belies its current Death Watch status.

The 8 consumer-oriented names are mostly fallen internet stars, but AAPL sticks out like a sore thumb. A long-time resident of the “skepticism” sector, the company’s recent quarters have been so momentous, that analysts and investors are no longer comfortable forecasting much cash flow growth at all, in either short-term or long-term. We see another 6 months of positive surprises ahead, and while we do not expect multiple expansion, we do expect some further appreciation before the reality of AAPL’s historically difficult December compare becomes the dominant trading concern. Of the others on the consumer list, only EBAY, which could be an M&A candidate, is interesting.

2 of the 6 vertical software companies in the Death Watch are attractive. SMB financials software vendor INTU may be worth a flyer as it transitions to a SaaS subscription model. Thinly covered SaaS Investor Relations solution provider BR has done nothing but deliver double digit growth and upside surprises – its valuation is an anomaly. The 3 industry vertical systems vendors and 4 semi cap equipment names are post-peak cyclical plays. Finally, the few remaining stocks outside of these categories offer little to recommend them.

Exh 1: SSR’s TMT Quadrant Valuation Framework

Pay Me Now or Pay Me Later

Historically, valuation metrics have had very poor correlation to stock performance in the TMT sector. Disobeying the laws of investment physics that apply to most every other part of the economy, TMT companies do not necessarily regress to the mean. Oft times, expensive stocks stay expensive, growing into their multiples and rewarding the intrepid investors that bought despite their having “no earnings” and “bubble valuations”. Similarly, cheap tech stocks too often go on to get even cheaper, sometimes on their way to existential crises.

Nonetheless, we believe that valuation tools can be put in service to the thematic investing approaches that have been the most successful in TMT. To that end, we created a framework for sorting stocks based on the short term and long term expectations of the market. For each of a universe of 187 large cap TMT stocks, we calculated the 5-year CAGR of free cash flows expected by consensus estimates – where 5 year consensus forecasts were not available, we estimated the missing years based on the trajectory of the data at hand. We then calculated the 5th year terminal value that was implied by the current share price by subtracting the net present value of those forecasted cash flows from enterprise value (essentially, market cap + current liabilities – cash & investments), discounting cash holdings to reflect future tax liabilities and capital inefficiency. The remainder, expressed in present day dollars, and taken as a percentage of the enterprise value, represents the portion of the current valuation related to long-term franchise value. We then plotted the companies on axes representing the near-term FCF CAGR and the terminal value percentage of total EV. The size of the bubble is the current percentage cash flow margins. The collected plot is not particularly linear, with the various companies spreading out from a mean of roughly 12% 5-year FCF CAGR and 75% of value represented in the fifth year terminal value. When we introduced this framework in July, using a smaller universe, the mean was 11% and 65% respectively (Exhibit 1). With this note, we are adjusting our quadrant boundaries to reflect the current distribution, but we will note the cases where the previous definitions would have placed the stocks in a different quadrant.

Exh 2: SSR Quadrant Framework – Universe of 187 TMT companies

Exh 3: SSR’s TMT Valuation Framework CHART – “The Dream Stocks”

Dream a Little Dream of Me

We then examined the companies inhabiting each of the four quadrants of the graph. The upper right hand section – companies carrying expectations of better than 12% projected annual cash flow growth and with implicit terminal values that were more than 75% of their EV – contains the “Dream Stocks”. These 52 companies are richly valued, even in comparison to their strong projected near term growth. “Dream Stocks” get the benefit of the doubt, and can weather near term setbacks as long as the market remains convinced of the long-run narrative of domination. For these stocks, sales growth is far more important than margins to investors and sloppy quarters are quickly forgiven in the face of new product introductions and confident forward statements. Most of them will probably grow into their valuations – at least eventually (Exhibit 3-4).

Amongst the group are such luminaries as Amazon, Facebook, and, alongside well regarded cloud/internet names like LinkedIn, WorkDay, and TripAdviser, and fast growing up-and-comers like Twitter, Splunk and Tableau. However, there is also a cadre of payments players – led by Visa, and followed by VeriFone, Wex, FleetCor and Total System Services. While we expect dramatic changes to the payments industry over the next decade, it is not clear that these specific players are best positioned to capture the value that will be created.

We also note a collection of, what we believe are, sub-scale enterprise cloud infrastructure players – Equinix, Rackspace and Akamai – and two carriers – AT&T and Charter – who will be targeted by the FCC’s planned broadband regulation. Their high terminal values may be reflective of an unjustified belief in the enduring value of their substantial fixed assets. We are skeptical that those assets likely retain their value in a We future world dominated by massive public cloud operators on the enterprise side and marked by government restrictions and rising wireless competition on the consumer end.

Exh 4: SSR’s TMT Valuation Framework TABLE – “The Dream Stocks”

Exh 4: SSR’s TMT Valuation Framework TABLE – “The Dream Stocks” CONT

Call Me a Skeptic, But

Stocks with expectations for strong near term growth but low implicit terminal values are in a difficult position. These “Skepticism Stocks” may deliver upside sales growth, fat margins and EPS beats, but until investors stop expecting the sky to fall at some point down the line, results will be raked over for signs of encroaching weakness and any negative news flow will be amplified, even as positive news flow is ignored. Sitting in this category are 31 companies, most of them former market darlings that have had a bit of a fall from grace (Exhibits 56). To the far right of the quadrant, with expected cash flow growth more than double the universe average but carrying paltry implicit terminal values, are companies like Google, Pandora, 3D Systems and Yelp. These companies, still delivering strong growth and once investor darlings have fallen from the Dream quadrant on fears that their current competitive strength will lack long term staying power. This group will have to break through investor cynicism about their prospects and rerate to really move higher, as strong earnings are already built into expectations. Here, we see Google as most likely to succeed, based on its extraordinary, but poorly appreciated, dominance in the core technologies of cloud data processing.

Most of the rest of the companies are clustered between 12 and 24% expected annual cash flow growth, including a roster of fallen investor favorites – VMWare, Accenture and Priceline – and a few cyclical semiconductor vendors –Microchip, Maxim, Linear and Altera All of these stocks have something to prove to investors, and may not be accorded multiples commensurate with their current results without offering serious evidence that the future will be very different than what investors fear.

Exh 5: SSR’s TMT Valuation Framework CHART – “Skepticism Stocks”

Exh 6: SSR’s TMT Valuation Framework TABLE – “Skepticism Stocks”

Hope Springs Eternal

Then there are the stocks where the consensus expects weak near term results, but where the implicit terminal value is nonetheless high. These 54 “Comeback Stocks” are being given a pass for their short-term shortcomings based on the faith of investors that their business assets will prove more valuable long term than they will be over the next five years. Notable within this group are 6 major telecom carriers, 6 major cable and satellite media distributors and 6 TV focused media companies, perhaps reflective of denial amongst investors in the sector that the internet names, largely resident in the Dream Stocks category, are coming after their bread and butter. Also notable are 8 old line IT companies, led by IBM, ADP and Xerox, the 4 biggest electronics distributors, and the 2 biggest suppliers of connectors and other non-semiconductor electronic parts. We are sympathetic to the connector guys – Amphenol and TE Connectivity – who have an important role to play in the ongoing build out of cloud data centers. Finally, there are 4 payments names in the Comeback category, including 2, FIS and ADS, that we prefer to any of their competitors in the Dream quadrant (Exhibit 7-8).

There is real risk in the Comeback Stocks. In particular, we see nothing in the activities, assets or character of the old-line technology names to lead us to believe that they will mount the recovery implicit in their relatively rich terminal values. Given the valuation, the risks are often asymmetrically negative. This is the place to go hunting shorts. Still, sometimes, the story is good enough to buy – we include FIS in our model portfolio based on faith in the future of mobile payments.

Exh 7: SSR’s TMT Valuation Framework CHART – “Comeback Kids”

Exh 8: SSR’s TMT Valuation Framework TABLE – “Comeback Kids”

Exh 9: SSR’s TMT Valuation Framework CHART – “Death Watch”

Do Not Ask For Whom the Bell Tolls

This quarter we are taking a deeper look at the “Death Watch” quadrant – stocks where the analyst consensus projects less than 12% annual cash flow growth over the next 5 years and where the 5th year terminal value, implied once the present value of those 5-yr cash flows has been subtracted, is less than 75% of the total value (Exhibit 9-10).

Just over half of the 47 stock Death Watch are enterprise IT companies – 16 traditional horizontal suppliers and 9 providers of industry vertical solutions. Another 7 make components, while 4 supply semiconductor manufacturing equipment and software. Finally, there are 8 consumer-oriented companies, and 4 that do not fall into any of the above categories. The scatter of the stocks within the quadrant is wide. Cognex sits just below the boundaries on both axes, essentially an average stock within the entire universe. Analysts project declining free cash flows for both AOL and Microsoft over the next 5 years, putting both companies at the far left of the plot, while investors see less than 45% of the value for storage systems competitors EMC and NetApp as coming from beyond 2019, a bleak perspective that has them at the bottom of the graph.

While “Death Watch” is an obviously overdramatic term, analysts and investors are expressing little confidence that these companies can deliver performance that deserves appreciation, in either the short or long term. However, in this pessimism, there is also opportunity. Death Watch companies that surprise to the upside can break investor presumptions, drawing upward revisions and spurring multiple expansion. We see several such opportunities.

Exh 10: SSR’s TMT Valuation Framework TABLE – “Death Watch”

The 16 traditional IT players in the quadrant are largely a roster of yesterday’s heroes, companies like Cisco, HP, Oracle, EMC and Juniper struggling for relevance in a cloud era of generic hardware and open source software. We see Microsoft as a clear exception. While the Windows franchise faces serious threats, prescient investments in modern data center expertise and infrastructure are paying off. The transition to the subscription-based Office 365 is maintaining Microsoft’s dominance of productivity applications, while Azure is emerging as one of only 3 competitive scale players vying for the massive opportunity in providing basic data center functionality as a public cloud service. We believe the market, numbed by years of sluggishness in the previous decade, is seriously underestimating the company’s ability to leverage this cloud strength with its enviable enterprise IT positioning to expand these businesses and to build new ones. This pessimism is evident in Microsoft’s position far to the left and toward the bottom of our Death Watch plot, supporting our contention that the potential rewards far outweigh the risks.

We are similarly enthusiastic about Qualcomm, one of 7 components suppliers in the group. This quarter, the wireless IPR and chipset leader slipped out of the Skepticism quadrant and onto the Death Watch, as concerns over Chinese royalties, until recently under examination by government anti-monopoly regulators, pushed analysts to reduce their estimates. Just two weeks ago, Qualcomm stock jumped 5% on news that the company had negotiated a settlement with the Chinese government that was far less harsh than many had feared. We believe that this agreement will have far more positive ramifications for performance than is implied by the reaction thus far – enabling more timely and honest royalty collections, and validating the most important tenets of Qualcomm’s licensing strategy. Moreover, we believe that the transition to 64-bit architecture has been a temporary hiccup for the QCT business – the company’s flagship Snapdragon chipsets are using ARM’s Cortex processor design rather than the company’s ARM-based proprietary Krait implementation. With the next generation, we expect a return to the Krait architecture, and with it, a return to the performance and time-to-market advantages that Qualcomm had previously enjoyed. If we are right, Qualcomm could deliver significant upside surprises that, in turn, could spur a rerating of the stock.

Among component names appearing in the “Death Watch” quadrant is Intel, which sits near the border of Skepticism. Despite its successes in the data center, the company remains exposed to the old PC paradigm Intel has been unsuccessful gaining any traction in the mobile space and has been absorbing monumental losses in that business of -$4.2B in 2014 and -$3.2B in 2013, which would have been enough to sink just about any other semi player. Though it has been making heavy bets on the Internet of Things, much of the space is still heavily hyped. Qualcomm is simply a better play for the mobile and connected world.

Amongst the other components companies, we also favor the two competing disk drive manufacturers, Seagate and Western Digital. Global disk drive unit volumes have suffered in recent years with the rapid decline of the consumer PC market, but a tempering of the PC trajectory and the explosive growth of cloud storage has the industry at the brink of growth. Meanwhile, Western Digital’s 2012 acquisition of Hitachi’s storage business completed a market consolidation that saw the number of competitors shrink from 9 in 2005 to just 3 today. The result is a far more disciplined industry, led by Western Digital and Seagate, each with more than 40% share – 3rd place Toshiba has just over 15%. In this new context, we believe industry pricing and investment will be less aggressive, allowing sales growth and more consistent profitability incongruous with the industry’s violently cyclical past. We have long held Seagate in our model portfolio, but Western Digital has been the better performer, taking share and delivering fatter margins. While we expect both to prosper, we are swapping out Seagate in favor of its rival.

What’s a Nice Company like Apple Doing in a Place like This?

Perhaps the most shocking member of the Death Watch is Apple, which dropped in from the Skepticism quadrant this period. Having just seen the company turn in the greatest cash flow quarter of any company, in any industry, in all of history, analysts and investors are essentially casting doubt that even a company as extraordinary as Apple could grow very much from this position. It may also be that investors are unwilling to give management full credit for its $178B in cash and investments, given potential tax liabilities foreign currency exposure and inefficient returns. Nonetheless, pundits continue to struggle with the pedestrian multiples borne by the world’s most valuable company.

We have sympathy with the doubters. The downside of having turned in the greatest quarterly report in the history of quarterly reports is that in a year’s time it will have turned into history’s most difficult YoY compare. It is very likely that the extraordinary iPhone growth in December was fueled in part by early upgrades by a reasonable proportion of Apple’s installed base – the company reported that nearly 15% of its users had upgraded to the iPhone 6/6+, typically that number is around 10%. These are users that won’t be upgrading on their normal cycle next year. Moreover, the iPhone 6 is a hard act to follow. There is no other attribute that was even close to larger displays on Apple users’ wish lists. The Apple Watch may get a rush of early adopters but the high price points will limit unit volumes and stretch replacement cycles.

Still, those early adopter sales will juice revenues and cash flows for the rest of the fiscal year, as will the next wave of iPhone 6 upgrades. We expect significant upside to Apple earnings vs. consensus over the next two quarters, at least, likely enough to take its shares at least a bit higher before the reality of that tough compare intervenes. Perhaps too, hype over those fantastic rumors of an Apple electric mini-van will help to keep investors from fixating on that not too distant cliff. In any case, we are rolling the dice and keeping Apple in our Large Cap Model Portfolio for at least one more quarter.

Move Along, Nothing to See Here

The remaining 7 consumer-oriented companies on the Death Watch are mainly past-their-prime internet names like Groupon, King Media, Expedia, and IAC. Of these, Ebay holds some interest, solely because we see the e-commerce operations as valuable to potential acquirers such as Google and Alibaba. We are not optimistic for the future of the PayPal business that is being spun out. Yahoo could be an effective trading vehicle for Alibaba, and could draw further attention post spin-off for its valuable stake in Yahoo Japan. However, the core business of Yahoo remains in crisis, without scale or momentum.

Amongst the vertical software players, Intuit is intriguing as it navigates its transition to a subscription SaaS service. Friday’s 6% pop on strong subscription growth could be signs of a breakout for a stock that is toward the upper ends of the Death Watch boundaries. Broadridge Financial Solutions is a $6B cap company that has been under the radar, covered by just 7 brokers who have not bothered to change their ratings on the stock for more than a year despite a steady record of upside surprises by the company. Broadridge, which provides cloud-based services to financial firms, such as distributing proxy materials, managing proxy voting, and registering financial transactions, would seem an excellent bet to continue its record of beating expectations.

We have little to add on the four semi cap solutions companies in the Death Watch – their residency is a function of their cyclicality. Similarly, the two industry vertical solutions suppliers are dependent on the investment cycles of their target industries – Motorola Solutions on public safety agencies and Arris on cable operators. Finally, there are two companies that don’t fall into the broader categories – Flextronics and Dolby. We see nothing in these companies to recommend consideration.

Exh 11: SSR Large Cap TMT Model Portfolio – Before Reconstitution

The Large Cap Model Portfolio

Our large cap model portfolio performed roughly in-line with its benchmark metric since October 30, 2014, rising 950bp against an 910bp appreciation in the tech components of the S&P 500. Our performance was particularly strong through earnings season, with strong reactions to the results of DATA, TWTR, NFLX, ARM, FIS and TMUS offsetting the muted response to QCOM, GOOG, and MSFT (Exhibit 11-12).

We have decided to swap in WDC for its industry rival STX. While we believe industry conditions will allow both to prosper, WDC has been the better performer on both sales and profitability, a trend that we have no reason to believe will not continue. We are also returning AMZN to the portfolio, believing that the company will show a few more quarters of earnings. CEO Bezos may not care very much about the needs of his investors, but the share price is critical for employee retention. To accommodate AMZN, we are removing PAY, which has been relatively disappointing in the midst of what should be a spending cycle in POS equipment.

Exh 12: SSR Large Cap TMT Model Portfolio – Reconstituted

The Small Cap Model Portfolio

Our Small Cap Model Portfolio performed very poorly since the last update, rising just 110bp against 610bp of appreciation in the S&P600 and a 10.5% rise in its tech components. OPWR, and MRIN each declined by more than 15%, while WWWW and RKUS dropped by over 10% in the period, overwhelming double digit appreciation by SYNA, PFPT, GRUB and OLED. We are removing MRIN, WWWW, for their poor performance, JDSU, which has grown above our $3B cap guideline and does not fit well to our preferred themes, and CNVR, which has been acquired. In their place, we are adding HUBS, RENT, QLYS and SMCI (Exhibit 13-14).

HubSpot offers a cloud-based service that manages in-bound on-line marketing for enterprises. Sales have been growing at better than 50% and we believe that its core business is well positioned against a nascent opportunity with considerable potential. Rentrak provides audience measurement for media customers bridging traditional channelized TV to on-line streaming. The company’s cross-platform approach dovetails with the trends in entertainment, allowing it to take considerable revenue market share from industry leader Nielsen. Qualys is an IT security company offering cloud-based tools to identify and manage enterprise threats. The company is profitable, growing at better than 25% YoY and has steadily appreciated since its IPO in 2012. Super Micro Computer provides very low cost, bare-bones blade servers for cloud data centers. While the biggest operators design their own servers and have them built to spec, most would be competitors do not have sufficient expertise or scale, giving SMCI an attractive target market, at least for the next few years. The company is profitable and growing at better than 40% YoY, yet trades for just 1 times sales.
Exh 13: SSR Small Cap TMT Model Portfolio – Before Reconstitution

Exh 14: SSR Small Cap TMT Model Portfolio – Reconstituted

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