Jaguar 4Q 2018 Outlook and Premium Ideas

Jaguar 4Q 2018 Outlook and Premium Ideas
Thank you for your interest in Jaguar 4Q 2018 Outlook and Premium Ideas. The file is
divided into 5 sections as following:
➢ 3Q 2018 Recap and Performance

➢ 4Q 2018 Macro Outlook and Sentiment
➢ Jaguar Premium Ideas with full analysis
➢ Key Debates and Catalysts
➢ Large Institutional Option Positions
Another good quarter in the books! 3Q Top Picks returned +7.6% absolute gain and
beat the S&P by +44 bps. Q3 Key Debates performed even better with +12% absolute
return and +479 bps of alpha generation. Cumulatively, since inception in Jan 2017
Jaguar Quarterly Premium ideas have generated 2391 bps alpha, 2x the S&P return!
We are back with only one primary goal in mind – To provide you noise-free in-depth
research, filtered exclusively with goal of helping you make better investment decisions
and be informed of risks and opportunities. Going into Q4 we have confluence of good
macro environment, strong equity market seasonality, and mid-term elections that may
flip the power in Congress. It is to be determined what kind of, if any, market volatility
will proceed when hot and cold fronts collide. We believe, on balance, the setup
remains in favor of bulls. As with every research, we don’t cut corners. We thrive where
others fail by always seeking answers in every stage of an investment opportunity or
cyclical turn. We are aggressive stock pickers with differentiated research. We hope
you’ll find the information useful. Feel free to reach out to any of us for questions.
Fahad Khalid Tom Joy

Chief Investment Officer Chief Executive Officer
Email: fkhalid@jaguaranalytics.com Email: tjoy@jaguaranalytics.com
Jay Kunstman Avo Menakian

Research Analyst Research Analyst
Email: jkunstman@jaguaranalytics.com Email: avo@jaguaranalytics.com
Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 1

Table of Contents
3Q 2018 Performance Scorecard .……………………………………… 3

➢ Where We Went Wrong ………………………………………………….. 5
➢ Where We Went Right ……………………………………………………. 7
4Q 2018 Macro Outlook and Sentiment ……………………………. 9
Jaguar Premium Ideas (Bullish, Bearish)

➢ Expedia (EXPE) ………………………..….…………….…………………..…………... 15
➢ Benefitfocus (BNFT) ……..…………..………………..….………………………….. 21
➢ Inspire Medical Systems (INSP) ….….……………………….…….……………. 25
➢ Smartsheet (SMAR) ……..………………………………………..……….………….. 31
➢ Cognex (CGNX) …………………...………………………………………….………..… 38
➢ Level 3 Technologies (LLL) ……………………………………….……………….... 45
➢ Green Dot (GDOT) ….……….…………………….…………….…………………..… 53
➢ Kratos Defense & Security (KTOS) ………....………………….…….…………. 60
➢ SendGrid (SEND) ……….…..……………………………………………….……..…… 69
➢ Axon Enterprises (AAXN) ………………………………………………..….…….… 77
➢ Merit Medical Systems (MMSI) ……..……………………….…….……..…….. 84
Key Debates and Catalysts (Bullish, Bearish)

➢ Yellow Pages on Steroids ………..……….………………………………..…..…… 92
➢ For Adventurers. By Adventurers. .………………………..………………….... 94
➢ Sleep Well in These Scenarios ..…..………………………..….………….....…. 97
➢ Awaiting FAA Certification for Longitude …………….…………….…….…. 99
➢ Digital Spatial Profiler …………………….....…………….………….………….…. 102
➢ Revenue Cycle Management ……………..……….…..…………………………. 105
➢ Hyper Converged Infrastructure …………………………….……….............. 107
Large Institutional Option Positions ………………………………… 111

3Q 2018 Performance Scorecard
Performance of Top Picks and Key Debates from 3Q18 Outlook from June 29 to September 28.
Finished higher by +7.64% and +11.99%, respectively. Beat the benchmark S&P by +44 bps and
+479 bps, respectively.

All Jaguar Quarterly Outlooks Issued Since
Inception
Click HERE for Unlock version of 3Q 2018 Outlook and Premium Ideas
(absolute return +7.64%, beat S&P by +44 bps)
Click HERE for unlock version of 2Q 2018 Outlook and Premium Ideas
(absolute return -5.73%, missed S&P by -451 bps)

Where We Went Wrong – 5 Places
Over last 10 years of managing money and running client services and nearly 20 years of actively
trading, one thing I believe deep down in my heart is the power of pure honesty and integrity.
This is the money game. Yours and mine hard-earned dollars are at stake here. When something
is wrong, pretending that it is not, can destroy portfolios and lives and send the clock backward.
When we are wrong, there is no point in sugar coating. Acknowledging a blunder is the first step
in avoiding mistakes in the future.
In Q3 equity markets generally kept the momentum to upside, making higher-highs and higher-
lows in defined channel with minor up to 3% pull back at times. Trading environment was easier
than past two quarters of 2018. However, there were few spots where we went wrong about
our Top Picks driven by sudden surprise change in fundamental story.
Dropbox (DBX) – Our bullish view was driven by continued strong capex environment in cloud
and associated offerings which is leading to higher spending on side sectors such as enterprise
cloud storage and sharing. But in early July within a few weeks after Q3 Outlook was issued,
news came out that Facebook as parts of major effort to fix its privacy policy has decided to
cancel contract with Dropbox. Unfortunately, the bull case was immediately fractured materially
after loss of this major customer. We talked about this multiple time in chat and webinars and
suggested that our views have changed on the stock. DBX finished down -17.2% in Q3. We no
longer see bull case here and would not be buyer at this time. We need to see clear evidence of
growth rate accelerating and competitive dynamic improving before we come back to DBX.
Instructure (INST) – A temporary reset of expectations but now with lower conviction. The
weakness in stock throughout the quarter surprised us. Quarter was good. Our expectations of
strong results based on channel checks panned out as expected with +31% revenue growth and
+38% subscription growth and +60 bps of margin improvement. However, guidance was soft
and mostly in line with expectations. The “negative thing” that stood out for some analysts was
only +23.7% growth in deferred revenues, its slowest pace as a public company which would
suggest forward revenue growth would decelerate to +27% YoY vs. +31 prior quarter. One long
term positive side, management increased capex to add new features for Canvas and Bridge but
those features will not come out until mid-2019. INST finished down -16.8% in Q3. Essentially,
soft guidance and higher capex with no benefit to derive from it until mid-2019 has created a
vacuum with lack of catalysts in short term. We still like it and would remain buyer of this down
here but with lower conviction and believe it will be a while before stock regains momentum.
Cedar Fair (FUN) – Perhaps our biggest negative surprise in Q3. Our bull case was based on
improving park attendance, outstanding early season performance of Knott's Berry Farm,
improving season pass sales led by excitement about new roller coasters, strong channel checks
and lastly potential for M&A. Instead the quarter was surprisingly bad with miss across all
metrics and guidance was lowered twice during the quarter 6 weeks apart. The part that
surprised us was similar weakness was not seen in SIX or DIS parks. Appeared isolated problem
associated with FUN. FUN finished down -17.3% in Q3. I believe the bull case is over here. Two

back to back guidance cuts within 6 weeks left a mark that will take a long time to repair. We are
not buyers of FUN here and would advise exiting the position.
Tesla (TSLA) – This was covered under Key Debates. The bull case is simply based on product
cycle that we believe has several quarters of accelerating revenue growth. But it goes without
saying where company struggles is operationally. Tesla is a unique circumstance such that it is a
rare case in which everyone on Main Street loves the product and everyone on Wall Street hates
the CEO. Musk’s arrogance doesn’t help his shareholder base either. Blowing off analysts on
earnings call by hanging up on them, trashing shorts on Twitter, smoking pot and broadcasting
about it, and pre-maturely making statements about buyout and then getting in trouble with the
SEC. So much stuff happened in Q3 with Elon Musk. However, as far as the product is concerned
Model 3 is selling well and everyone loves it and bunch of new versions are coming out in 2019.
Stock closed lower -22.8% in Q3 and 70% of that sell off came on last day of the quarter with
news that SEC has sued Elon Musk. We remain buyers of Tesla here and recommend getting long
on this weakness with news out over the weekend that Musk has settled with SEC and will
remain the CEO of company.
Vishay Intertechnology (VSH) – This was also covered in Key Debates. A contrarian bullish view
at a time when generally speaking we have been consistently maintaining bearish view on semi
sector. Huge jump in book to bill ratio led by favorable end market pricing due to supply
shortages had us believed that stock has more runaway ahead. For half the quarter it worked
perfectly with stock up +12% at one point. But by mid-August all those gains reversed plus some
when multiple analysts cut memory chip sales estimates based on falling NAND and DRAM
prices. Good start but not a pretty ending for VSH. Stock finished down -12.3% in Q3 and we
believe it’s time to move on. No reason to stay in the trade with cyclical and pricing pressures on
semis rising each week.

Where We Went Right – 10 Places
This is where I get to brag about fabulous performance in several spots. Really proud of Jaguar
research team identifying opportunities in a volatile headline-risk driven market.
Royal Caribbean (RCL) – Up +25.4% in Q3 vs. S&P up +7.2%. Excellent work by Avo! This is 2nd
time in two years Avo has called a bottom perfectly in cruise ship stocks. First time was in
summer 2016 when RCL had pulled back from $100 to $70. See that note HERE. Second time for
as 3Q18 Top Pick after stock had retraced from $135 to $105. Throughout during Q3 we saw
steady positive news flow around strengthening pricing in the Caribbean and improving yields.
Additionally, all three casino operators (RCL, NCLH, CCL) raised guidance although CCL suffered a
setback towards the end of quarter after revealing some margin pressure led by higher oil
prices. We believe all 3 cruise ship stocks have more to run and we would remain buyers of them
here giving improving net yields. We also believe market is underestimating the potential if
travel restrictions are eased between China and South Korea.
Stitch Fix (SFIX) – Up +59.5% in Q3 vs. S&P up +7.2%. Excellent work by Fahad! Our best
performer in Q3 that at one point was up +85% on the quarter before pulling back towards the
end after a stupid analyst downgrade on competitive concerns from Amazon about entering
subscription apparel business. Please note SFIX never reported earnings in Q3. The timing of
release worked out as such they skipped the entire 3-month period. Last release was in early
June. Additionally, SFIX outperformed partly because FartFetch (FTCH) IPO that came to market
at significantly higher valuation and worse growth than SFIX. Now another subscription apparel
IPO called Revolve (RVRV) is coming soon in October. We actually believe RVRV could be
another successful IPO. More on this later. We believe subscription apparel business with
personalization has created a new medium between online and brick-and-mortar shopping
experiences that still remains in infancy with not many pure plays. We remain buyers of SFIX
even after this strong performance. With 92% correlation of Retail Sales to Consumer Confidence
which is at 18-year high, we are expecting strong performance during holiday shopping season.
Rapid7 (RPD) – Up +30.8% in Q3 vs. S&P up +7.2%. Excellent work by Jay! Another fantastic
cyber security play with shift to subscription model. The bull case was based upon sharply rising
vulnerability assessment by +27% YoY allowing company to capture market share. Additionally,
in prior quarter company shifted all their products to subscription pricing, a precursor to
valuation multiple expansion. This shift also resulted in remarkable growth rate in Annualized
Recurring Revenues by +38% YoY which sequentially accelerated to +44% in most recently
reported quarter driven by new customer growth, upsells and cross-sells. For full year 2018
management raised guidance to +40% ARR Growth. We believe if it wasn’t for $175M secondary
share offering after strong earnings which was later upsized to $200M, stock would’ve gone to
mid $40’s given strong technical momentum. We still like the name and remain buyers of stock.

Gluakos (GKOS) – Up +59.7% in Q3 vs. S&P up +7.2%. Excellent work by Fahad! Our highest
performer during the quarter. This was a unique pick, a leading medtech for treating Glaucoma
disease in which the street had turned too cautious while nobody was paying attention that
competitors were having issues with getting approval from the FDA. That was our entire bull
case and it was presented as is in Chicago TradersExpo Conference. On September 13th GKOS
spiked sharply higher by +63% after competitor (Novartis) withdrew Alcon CyPass Micro-stent
from the market. Separately, another competitor Ivantis FDA application has been delayed by 9
months and they are still waiting for approval. The trade is over. The catalyst is over. So we don’t
see a good reason to stay in it at this time. However, worth pointing out that if both competitors
are off the market, nothing is stopping GKOS from keep marching higher.
Medpace (MEDP) – Up +39.3% in Q3 vs. S&P up +7.2%. Excellent work by Fahad! Bookings in
Excess of Billings. That was the bull case and it players out beautifully when earnings came out
and stock shot up +35% in single session. MEDP was also a nice extension of bull case in IQVIA
(IQV) which was presented in prior quarterly outlook. Healthcare spending is strong and
gradually recovering from 2015/2016 slump. MEDP particularly stood out revenue backlog
conversion is driven by Oncology which is of high interest right now by pharma and it represents
27% of MEDP sales and it further improved by +500 bps sequentially. The CRO is positioned to
ride strong spending cycle and it will likely continue for some time to come. We believe easy
money has been made. Further upside will likely continue but it will depend on Book-to-Bill Ratio.
We suggest taking profits and stepping aside but we may come back to it in the future if we see
further improvement fundamentally.
Other ideas from Q3 Outlook that worked out great –
➢ Tabula Rasa (TRHC) – Finished higher by +27.2%. Changes in Part D of Medicare has
been a boon company and it remains in center of spending created by government to
curb use Opioid. Okay to hold if you have room with hard stop at $76.
➢ Becton Dickinson (BDX) - Finished up +8.9% in Q3. We would take profits in this. We
love the Medtech space particularly but better other spots to park money.
➢ SS+C Technologies (SSN) - Finished up +9.5% in Q3. We would take profits in this as
well. The bull case remains strong regarding margin improvement but the risk of
execution missteps by management has increased after doing 3 major acquisitions this
year and now all of them are being integrated simultaneously.
➢ Verint Systems (VRNT) – Finished up +13% in Q3. Believe stock has more to run given
strong end markets for IT Services business which was evident in last earnings report
when stock sharply gapped higher. Okay to hold if you have room.
➢ Aerojet Rocketdyne (AJRD) – Finished up +15.3% in Q3. Hold this one. Hypersonic
missiles are just getting started and I expect defense budgets to materially go higher in
coming quarters. JP Morgan also out with big bullish view on hypersonic recently.

4Q 2018 Macro Outlook and Sentiment
In 3Q 2018 Outlook, we started macro discussion as following:
1. Monetary Tightening → Faster Monetary Tightening

2. Disinflation → Inflation
3. Uncertainty → Even More Uncertainty (Headline Risks)
4. Seasonality → Starts Q3 strong, gets weaker over time, sentiment worst in September
Here is how we see them today:
1. Monetary Tightening → Faster Monetary Tightening

2. Disinflation → Inflation
3. Uncertainty → Election Risk
4. Seasonality → Early on some spillover from September but usually Q4 starts strong and
stays strong all the way to end of year.
Let’s hit all these points briefly one at a time:
Monetary Tightening – In webinar on Wednesday, September 26, I made the case that FOMC is
setting up the stage to get more hawkish than it has been in the past. Well, we got only minor
hawkish changes in Fed statements than I was expecting. Still the bias remains to upside for
interest rates to move higher. The FOMC hiked rates by 25bps to a range of 2.0-2.25%, as
expected. The Committee signaled little change in the path of policy, showing four hikes this
year, three hikes next year and one in 2020. The new 2021 dot showed no change in the fed
funds rate relative to 2020, but the long-run dot did shift up to 3.0%. At the post-meeting press
conference, Fed Chair Powell sounded upbeat on the medium-term growth prospect, noting
that growth is “running at a healthy clip” and the “unemployment rate is low while “inflation is
low and stable.” Here is a great picture to show where Fed Chairman Powell stands currently on
the spectrum – as you can see slightly hawkish!
The takeaway from current monetary tightening environment is simply this: Expect TLT to have
a major breakdown at some point and expect 10-year bond yield to sharply move higher well
above +3.1%. If and when that happens, I expect Staples, Utilities and REITs to sell off.
That takes me to an important topic that is in everyone mind currently: Flattening yield curve.
Flattening Yield Curve - The US yield curve is defined as interest rates on 10-year bond minus
the interest rate on 2-year bond. And that spread is flattening. Many investors are concerned
that a flattening yield curve is an early warning sign of economic weakness and that the curve is
at risk to invert. Yield curve inversions have preceded the last seven recessions and nine out of
the last 12 recessions. The last yield curve inversion that did not precede a recession was in the
mid 1960’s.
Shaded areas in chart above are recessions. Should you be worried? Perhaps a little. But we are
not entirely there yet. So, the question becomes how much time do we have? I am not sounding
alarms here and it’s certainly not going to be the end of world if the spread turns negative. So,
lets give you some context. By the way, bookmark this site to track yield curve HERE.
Little Economic Lesson - Why does yield curve flatten? An inversion occurs when the yield on
longer-term bonds is lower than the yield on shorter-term bonds. A buyer gets paid less to tie up
capital for longer periods of time. A Fed tightening cycle should flatten the yield curve. When
the Fed is tightening, the federal funds rate (which is the rate banks charge each other for
overnight loans), is raised. This lifts the end of the yield curve which is represented commonly by
yield on 2-year bond. This acts to narrow the spread between 10 and 2. Moreover, the lack of
significant inflation that holders of 10-year bond expect to receive as compensation for inflation
risk is gone. In summary, when you have short-term interest rates going up because the Fed is
tightening but long-term interest rates are not going up by as much because of lack of inflation,
the spread tightens and that suggests upcoming economic contraction.
How Does it Affect S&P? - Sometimes the S&P peaks within two to three months after 10 minus
2 spread turns negative. Sometimes it takes up to 2 years for S&P to peak. Looking at last 10
observations back to 1956, the S&P topped out within approximately three months of the
inversion six times (1956, 1959, 1965, 1973, 1980, and 2000). The S&P took 11 to 22 months to
peak after the other four inversions (1967, 1978, 1989, and 2005).

The S&P tends to peak 7.3 months (average) or 2.6 months (median) after a yield curve
inversion. The range of S&P peaks is from 1.6 months (1973) to 21.6 months (2005) after the
inversion – a wide range.
So, if yield curve inverts what happened to idea of that euphoric phase of bull market called
“impulsive move” that we talked about in prior quarterly outlook?
Good question! This is why it gets tricky in last phase of bull market. First of keep in mind that
the equity market is on borrowed time after the yield curve inverts. However, after an initial
post-inversion dip, the S&P can rally meaningfully prior to a bigger US recession related
drawdown. History shows the initial post-inversion drawdown is -5.2% on average. The
drawdowns typically last two months. After the initial drawdown, the S&P can have a
meaningful last gasp rally. This is the rally that can be described as final euphoric or impulsive
move. This rally has averaged +16.7% and 6.7 months. Range of rally is wide from +2.0% (1965)
to +28.5% (1989) and timeframe is also wide from 0.9 to 16.5 months. The 1967, 1978, 1989,
and 2005 inversions saw last gasp rallies in excess of +20% on the S&P.
With all that said, let’s look at 10 minus 2 yield spread picture below again. Unlike the one
shown above which is 50-year chart, the one below is 1-year chart.
At start of 2018 the spread was around 0.55%. Now it’s at 0.23%. Ignore the spike in February
which was caused by money flocking for safety in bonds during market crash. Over the course of
year, the spread had declined by 32 bps. That’s equates to 3.5 bps point decline per month. At
this rate, the spread will go negative in about 6.5 months which means by March 2019. But it
could also happen much earlier, perhaps in 4Q18 because there have been periods when spread
has fallen much faster (such as from May to July spread lost -28 bps).
I really hope I am not losing you here with all this talk about yield curve, or that you are finding
it quite boring. I am trying to establish a realistic timeline when the yield curve will go below and
when the S&P will top in current cycle. If this exercise is hinting us anything it is that you should
expect yield curve to go negative in perhaps 3 to 6 months. Then immediately expect small quick
correction of up to -10% in the market lasting 1 to 2 months. Then a V-shape giant recovery and
beginning of euphoric phase that rips the market higher like a rocket rising by +16% in about 7
months. And that’s the market top that will coincide with sharp deceleration in economic data.

No, I don’t have a crystal ball. But having a plan (even a bad one) is better than having no plan at
all. All this discussion takes me to next topic, hopefully a fun topic this time.
What sectors perform the best when yield curve inverts? – Short answer is everything in
healthcare and now hopefully it will make sense to many readers why in Q4 Top Ideas and Key
Debates I am focusing so much on healthcare related names particularly Medtech (one of my
favorite sectors).
➢ Healthcare has had the best performance on the most consistent basis. The 6, 12 and 18
month post-inversion returns were 4.01%, 7.48%, and 10.74%, respectively, versus
average annual returns of 9.45%. Reason is obvious. Whenever we don’t regulatory risk
overhang (like the one created by thought of single payer system as proposed by Hillary
Clinton in 2015), healthcare always proves to be the best defensive sector with growth
that one could find, beating out even Staples, Utilities, REITs and other all of which have
some form of cyclical weight and much lower growth rate. Put it simply, you are much
better off parking money in Pfizer or Merck market and macro data is peaking than
Procter and Gamble or Kimberly Clark.
➢ Caveat here is Energy and Financials at times outperformed healthcare, but their results
lacked Healthcare’s consistency as shown in chart below.
➢ Consumer Discretionary consistently fared the worst in the period following an inversion
and was the only sector to produce negative average and median 6, 12, and 18 month
returns. Technology and Industrials are also bad performing sectors post yield inversion
given these sectors tend to see margins peak quickly and they’re highly cyclical.
Seasonality and Presidential Cycle – Expect ridiculously strong seasonality in favor of bulls
because the Presidential Cycle is on your side. That’s the message here and we recently covered
this view in chat rooms and webinars. So just reiterating here:

Presidential Cycle Year 2 – Rolling 3-month seasonality during mid-term election year tends to
flip from negative to positive in Aug-Oct. Since 1928, S&P has been up on average +6.37% during
Q4 with Index finishing up 86% of the time. It’s worth noting when it’s not mid-term election
year, Q4 seasonality is still strong up +2.64% average with Index finishing up 74.4% of the time.
This is why we have to look at 2018 seasonality in terms of Presidential Cycle.
Presidential Cycle Year 3 - Since 1928, 1Q of Year 3 has been up 82% of the time with an
average return of +5.41% and is the strongest 3-month period of Year 3. However, Presidential
Year 3 tends to have well-above average 3-month returns through August. This means that after
a summer lull, the Presidential Cycle can be quite strong from 4Q in the Mid-term year through
August in Year 3. This is the sweet spot of the Presidential Cycle.

Jaguar Premium Ideas
At Jaguar, everything we do starts from bottom-up detail research and analysis. Many of you
that are on website each day understand our process and ways of thinking. We like to think
outside of the box. For each stock, we first take the prevailing widely-held fundamental view on
Wall Street and we tear that apart into pieces. Then we compare those street opinions to what
managements are telling us in their earnings reports and what industry and channel checks are
showing us. Once we have the collective wisdom from all corners, only then we form our own
opinion. This is the core of our process of doing fundamental research.
It is hard work and smart work. It requires inclination, the desire to get hands dirty with details
that actually matter. It requires plenty of reading and understanding to form a strong opinion.
As a result, quite often you will find us at opposite side of conventional Wall Street thinking, or
technicals on the chart. It’s not our job to agree or disagree with the street. Our job is to simply
highlight risks and find opportunities where we can make money for our clients. If that goes
against conventional wisdom, so be it.
In this section you will find Jag Premium Ideas. In each idea we have tried to attach the narrative
to a particular catalyst in sight.

Expedia Group (EXPE)
Buy Expedia (EXPE) January 135/150 Call Spread for $4.30 or less.
As the world’s largest online travel agency (OTA), Expedia Group offers leisure and business
travel products and services such as airline bookings, car rentals, cruise packages and hotel or
alternative lodging reservations. The company is mostly known for the namesake website it
operates along with many other well-recognized brands across global markets that reach a
massive customer base garnering a very high market share. As of mid-2018, Expedia had
agreements with over 200,000 lodging operators and 500 airlines in 200 countries. Expedia
reports its fiscal operations under four segments – all its OTA sites are under one banner:
Core OTA
HomeAway
Egencia
Trivago
Revenue Breakdown
In 2Q18, Expedia derived its worldwide revenue as from the following grouped segments:
69% from lodging

10% from advertising and media (Trivago contributes to this grouping)
8% from air travel, mostly airfare
13% from other sources, including travel insurance
Geographically, in FY2017 55% of revenues were generated in the United States and 45% from
the rest of the world with no other country contributing more than 10%. This has remained
constant since 2015.
Core OTA
This is Expedia’s bread-and-butter segment where the majority of the 675 million monthly
visitors end up: where all the well-known and recognized brands live and through which hotels
rooms are booked, airline tickets, rail passes and cruises bought, and cars rented. In 2Q2018,
Core segment reported gross bookings of $21 billion, an 11% year-over-year increase, with
revenues higher by 12% to $2.25 billion. EBITDA was up 16% to $561 million and the company
repurchased $409 million worth of its own stock.

Exiting last quarter, Expedia’s global lodging portfolio held more than 750,000 properties
(including 195,000 in HomeAway segment). 60,000 new properties were added, a sequential
increase from 1Q2018’s 50,000 new additions. Airfare revenue rose 10% from increased ticket
sales and also higher revenue per ticket. Travel insurance and car rental revenue was 16%
higher. Management commented on acceleration of room-nights-booked within their core
targeted markets which resulted from improved marketing efficiencies.
Egencia
Providing comprehensive online and in-person services to businesses worldwide, Egencia

segment offers management tools for corporate travel with 24/7 support, customizable
programming, consulting, meeting and event planning assistance and expense tracking
automation. Egencia counts over 1.8 million active business travelers and has grown revenue
from $365 million in 2013 to $521 million in 2017 by expanding its presence in more than 65
countries. Revenue is derived from transactional and account management fees.
Trivago
The search platform increased its available alternative accommodation supply to over 800,000
units, bringing overall accommodations to more than 2.5 million. Revenues continue to
underperform, posting a 15% year-over-year decline from $319 million to $280 million, posting a
$24 million loss.
HomeAway
Competing directly with Airbnb, HomeAway is Expedia’s vacation rental segment. Since its
acquisition in December 2015, the business model has been subjected to a transformation from
subscription-based model to transactional. In its new format, travelers pay a fee when renting a
property, and the rental owners or managers pay a commission for the listing.
Presently Expedia offers this service in about 40 countries, generating $9 billion in bookings. Its
various platforms count over 1.5 million bookable units. At the end of 2Q2018, HomeAway
accounted for 195,000 of Expedia’s 750,000 lodging unit count. A large market potential lies
ahead – in 2017 the segment recorded $906 million in revenue within an estimated $100 billion,
worldwide addressable market.
Last quarter saw property-nights bookings, room-nights and revenue each post 33% year-over-
year increases – EBITDA margin posted a sharp 900bps margin expansion to 26%. Management
said their marketing efficiency has continued paying off and plans are for further international
and urban market expansion, as well as increased property listings soon after the business
model transition is completed.
Cloud Migration
Expedia is in the midst of transitioning its data centers into the cloud to cut operation costs and
improve overall efficiency.

Currently the company runs three data centers to handle everyday traffic and logistics with their
associated operational costs such as staffing, electricity, property rental and taxes. These
expenses aren’t reported separately in their filings; however, as a point of reference Booking
Holdings (BKNG) spent approximately $24 million in 2017. Based on this, Expedia could see $16
million or more in property rental savings per year with the closure of two locations and when
factoring in circumstantial cost reductions including IT staffing and equipment divestitures
(cloud structure does not require as many components), annualized savings could reach $150
million by 2020, and according to SunTrust analyst’s calculations, it could contribute around
$195-$325 million to EBITDA and free cash flow for 2020.
According to management, a ‘large

portion’ of their lodging stock has
been migrated to the cloud already
and more will be moved by the end of
2018 – the bulk of this work should be
complete by the end of 2019, as was
originally forecast. As the project gets
nearer to completion, CapEx is
expected to continue declining,
reflecting as lower spending as a
percentage of revenue, which should
be around 7.5% through 2019.
Advantages of Cloud over Datacenter -
Migrating over to the cloud will
positively impact Expedia across many
of its operational segments and management forecasts topline growth to be pushed higher by
3%-5% in 2020.
In terms of innovation, App Creation is now faster as automation tools and cloud-based
services have helped reduce inception-to-deployment time from 2 weeks to just 1 day –
this has boosted productivity immensely and has also enabled faster availability of new
services for users. Analytics data has shown that faster service results in lower
abandonment rates, and higher conversions for sales.
Machine learning algorithms will help Expedia gain a competitive edge through more
efficient traffic acquisition from better and more relevant keyword bidding which
ultimately can sustain the company’s growth. Users will benefit from better targeted
and personalized travel choice presentations which in turn can contribute to better
retention and conversion rates.
Analytics are greatly improved, by a factor of 360. Time required to crunch and interpret
a week’s worth of data is reduced from 3 hours to just 30 seconds – a very important
factor in addressing changes that need to be implemented to keep up with rapidly
changing market demand profile.

Chat Bots are increasingly prevalent on websites offering low-cost, 24/7 support in
multiple languages. These bots also get ‘smarter’ with increased usage, blurring the line
between machine and human interaction with more relevant recommendations based
on input received by the user. Expedia has made voice-assisted communication available
through Amazon’s (AMZN) Alexa and will most likely offer similar services through
Google (GOOG) products in the future.
US Airline Bookings
As reported by the Airlines Reporting Corporation (ARC), US bookings improved exiting 1Q and
in 2Q. In July, it reported ticket growth from 1.9% in 1Q2018 to 6.2% halfway through 2Q2018.
The positive trend continued through the summer and for the week ending September 9th, ARC
reported an 18.7% increase following a 3.7% rise in the previous week (end of August). Ticket
volumes also improved for the same timeframe, going from a 1% decline to a 9.7% increase and
this was on domestic price increase of 11.8%. Pricing for the month of August was higher by 6%.
Corporate travel agencies reported domestic airline pricing had risen by 6.1% in August.
Looking towards the last quarter of this year, ARC data points to a healthy US travel
environment for both leisure and business purposes.
RevPAR Data
As of September 12th, US 3rd quarter-to-date RevPAR has increased 2.2%. Luxury

accommodations outperformed, posting a 3% increase whereas for the last three years the
segment had seen soft numbers relative to other price tiers. Echoing airline bookings results,
corporate travel showed strength resulting in weekday RevPAR better than weekend numbers.
US lodging development continues to grow and has now posted 68 consecutive months of
increases – 47 of those were double-digit. There are 188,000 rooms currently under
construction with another 607,000 that are due to be started in 3Q2019 showing healthy market
demand. Overall inventory of US hotel rooms stands at 5.27 million units.
Global travel continues to grow as is the shift to e-Commerce in practically all businesses.
Expedia continues to be at the forefront of innovation and visibility, growth through acquisitions
and expansion into new segments such as vacation home rentals with Home Away. Moderation
of expenses, cloud migration for better and faster service round out the reasons why profits
continue to build at Expedia and at the same time ‘shopping experience’ and conversion rates
are helping improve their customer retention rate.
Global travel continues to grow as is the shift to e-Commerce in practically all businesses.
Expedia continues to be at the forefront of innovation and visibility, growth through acquisitions
and expansion into new segments such as vacation home rentals with Home Away. Moderation
of expenses, cloud migration for better and faster service round out the reasons why profits
continue to build at Expedia and at the same time ‘shopping experience’ and conversion rates
are helping improve their customer retention rate.

Benefitfocus (BNFT)
Buy Benefitfocus (BNFT) February 45 Calls for $2.60 or less.
A provider of cloud-based benefits management platform, Benefitfocus (BNFT) offers access to

all products through BenefitsPlace. Introduced to the market back in March of 2018, it is a
combination of their now-retired Certified Carrier Program and Benefitstore segments. This new
platform brings together brokers, employers, carriers and suppliers in one place that in turn
presents the end-user, defined as ‘lives’, a whole slew of personal benefits products. According
to management, this new and unified platform will provide all industry stakeholders with a
centralized and accessible location to “come together and embrace the consumer”.
The company estimates there is a $27B total addressable market which presents a huge
opportunity ahead - in 2016 $3.3 trillion was spent on healthcare in the US alone. Benefitfocus
counts many well-known and large-cap insurance carriers among its customer and partner base
along with numerous blue-chip employers and multinationals as end-users. Of these, just one
accounted for approximately 12% of total revenues and no other single company surpassed the
10% level (2017 figures).
BenefitsPlace
While Benefitstore was a broker-based business that competed with brokers operating within
client-companies for commission, BenefitsPlace was designed as a software distribution model.
The switchover to the new platform will provide Benefitfocus revenue directly from product
providers while the brokers still get their commissions, without competition.
Not being constrained by a broker-of-record model, the new platform is expected to open up
the voluntary benefit experience to Benefitfocus’ 20 million-plus installed base, compared to
just 5% that were participants in the Benefitstore product formerly. Management anticipation is
for Average Revenue per User (ARPU) to increase as advisors continue to drive higher product
adoption and the company in turn earns a recurring fee & transaction revenue. At the same
time, brokers should end up with higher commissions giving them the added incentive to deal
with Benefitfocus.
Initially, exposure was geared to voluntary benefits, representing around $6B of premiums.
Ultimately, management believes there is the potential to collect commission revenue on the
full $48B of premiums that are currently transacted through the platform. In the past employees
had to opt-in to gain access to products and as a result very few did, relative to customer base
size. Starting in 2019, everyone will have automatic access, exposing the platform to over 20
million people nationwide.

In 2Q2018, the positive impact of BenefitsPlace was already apparent – ‘lives added’ grew at a
double-digit pace faster than logos (what the company calls the businesses that are their
clients), which itself saw 23% new employer additions during the quarter and is up 28% year-to-
date. RBC Capital commented that when BenefitsPlace distribution was added to other revenue
sources, they saw a “very attractive growth algorithm”. The analyst highlighted the following
statement: “How many software companies do you know are growing new units almost 40%
with ARPU expansion that are trading on <4X CY19E EV/Sales?”
In late June, Piper Jaffray analyst estimated that for every $2.2M in incremental BenefitsPlace
revenue, 100bps would be added to FY2019 growth. Since Benefitfocus will now get a
percentage off the premium sold on this platform, it should in turn benefit appreciably from this
business model transition – during all of 2017, $6.5B in premiums were purchased by customers
on which Benefitfocus did not collect any fees.
Highlights from 2Q Conference Call
New revenue stream is also expected from University of Texas Systems as it will launch in 2019
and bring 100,000 lives into the system from its 14 learning institutions. Sales force has been
ramped up through 2018 and is already contributing to bookings growth; this is expected to
continue throughout 2019. Strong bookings thus far in 2018 are pointing to material revenue
acceleration and margin improvement over the next 18 months according to RBC Capital. With
more large logos being brought aboard (10,000+ employees), ARPU trends continue to see
improvement.
49 new logos added in 2Q2018, a 23% year-over-year improvement

12 of 49 new logos have employee base of 10,000 or more
Lives increasing at double-digit pace
Software gross margins improved from 65% to 67% year-over-year
Request for Proposal activity was reported as ‘very good’ by a consultant (this was in
early September)

Channel Partners
Benefitfocus works with partners and brokers that collectively bring human resources to
BenefitsPlace through their software solutions platform. Two of its largest partners are:
Mercer Marketplace which brings in approximately 1.5 million lives, granting them
access to pension plan benefits and retirement planning administration as well as any
other employee benefits that each business chooses to offer. The platform’s flexibility
affords extensive customization.
SAP who is a reseller of Benefitfocus Marketplace, enabling enrollment for medical,
dental, vision care and many other healthcare related benefit packages, as well as
insurance and investment products.
Analyst Day
The company will host its first ever Analyst Day in 4Q2018 – the exact date has not yet been
released. It is expected that management will outline future expansion and growth plans after
having the new platform live for over 6 months.
Market Share and Opportunity
In the US there are around 2,200

companies each employing 10,000 or
more workers, 16,000 that count
between 1,000-10,000 employees and
roughly 85,000 that have between
100–1000 employees. The remaining
estimated 5.7 million businesses are
those with fewer than 100 on the
payroll. With 96% of 100+ size
employers offering health insurance,
this presents a very large $22 billion
market opportunity for Benefitfocus:
as of mid-2018, they counted just 997
large employers among the ~18,600 in the US – these are the firms with 1,000 or more people in
their workforce. As such, their market share is presenting ample potential for growth.

Inspire Medical Systems (INSP)
Buy INSP Common Stock for $42.10 or less.
Inspire Medical Systems has the potential to disrupt the Obstructive Sleep Apnea (OSA) market
over the next several years with its non-intrusive Upper Airway Stimulator (UAS) procedure. The
technology is backed by FIVE YEARS of solid clinical data with management currently working for
label expansion into pediatric patients with Down syndrome.
The company was spun-off from Medtronic (MDT) in 2007 and had its IPO in May of 2018.
Medtronic remains a stakeholder and also supplies Inspire with system components.
Troubled Sleep
Sleep apnea is a common and potentially serious sleep disorder affecting and estimated 100
million people worldwide. The condition is categorized into two types: Central Sleep Apnea and
the more common Obstructive Sleep Apnea (OSA). In some instances patients have a
combination of both.
OSA is caused by the relaxation of the airway muscles which then block the airway itself, leading
to breathing interruption during sleep precipitating a reduction in blood oxygen concentration
which triggers a startle response that wakes the afflicted person, temporarily restoring normal
breathing. This occurs throughout the sleeping period, reducing its restorative quality which
eventually affects a patient’s overall health and quality of life. The condition is diagnosed by
home sleep tests measured by four levels of severity, as determined by the Apnea-Hypopnea
Index (AHI):
Treatment Options
For mild cases of OSA, lifestyle changes such as weight loss, smoking cessation and limiting
alcohol consumption are typically encouraged – many studies have shown positive correlation
with OSA reduction to weight loss as overweight people have extra tissue in the back of their
throat which can fall down over the airway and block the flow of air into the lungs during sleep.
Unfortunately most people are unwilling or unable to commit to a more active lifestyle and
caloric reduction.

For patients with mild-to-moderate OSA, oral appliances are often prescribed, plastic devices
that can be heat-formed to fit the wearer’s anatomy and prevent the airway from collapsing –
these look like mouthguards worn in sports (Align Technology (ALGN) had started testing such
devices in 2015 but eventually dropped research).
The most common therapy for moderate-to-severe OSA is Continuous Positive Airway Pressure
(CPAP), basically a mask that is worn on the face or nose that delivers pressurized air while the
person is asleep.
Patient compliance rates vary from 35% to 65% with most users stating discomfort and
inconvenience as the main reason for sporadic usage or discontinuation. Since effectiveness is
dependent on continued utilization, removal of the mask limits its beneficial therapeutic effect.
Surgical Procedures
For those that are either intolerant or unresponsive to CPAP, there are invasive surgical options.
Uvulopalatopharyngoplasty (UPPP), surgical removal of upper airway tissue, including

the uvula, tonsils, adenoids and parts of the tongue, in an effort to streamline and
widen the airway’s shape, often accompanied by a soft palate support implant. This is
usually combined with specialized, multi-stage procedures as UPPP by itself has a poor
rate of success. Patient recovery time is 3-4 weeks and subject to complications such as
narrowing of airway due to scarring.
Maxillomandibular Advancement (MMA) is even more invasive. The procedure involves

breaking and moving the patient’s mandible (lower jawbone) forward by 10mm (0.40
inches), at the same time the tongue is also pulled forward which enlarges and modifies
the airway’s structure. Recovery is very long, up to six months and success rate varies
from 5% to 85%.
Other treatments include nasal surgery, palatal implants, nasal devices and electrical
stimulation of muscles and/or nerves, all with varying degrees of effectiveness.
Inspire Upper Airway Stimulation (UAS)
Inspire’s system consists of four components – 3 implantable parts and 1 hand-held remote.
Neurostimulator, or Implantable Pulse Generator (IPG), the ‘brains’ of the system

housing the battery and electronics inside a titanium case about the size of three

quarters. It is placed just below the clavicle. The battery lasts 11 years and newer
versions are planned that will last even longer.
Stimulation Lead, which is connected to the IPG, routed to the neck and wrapped
around the hypoglossal nerve which controls the tongue. This is the ‘business end’,
delivering a mild electrical impulse to the nerve which then moves the tongue forward
to open the airway.
Pressure Sensing Lead, also connected to the IPG on one end with the other extremity
placed between two ribs to sense respiratory signals
Remote Control, used to activate the system when the wearer is going to sleep. Battery
life can be verified and certain parameters altered as well when needed.
Procedure
Implanting all three subcutaneous components is done on an outpatient basis and takes about
two hours under general anesthesia. Recovery time from the operation which requires three
small incisions is less than a week, typically 3-4 days. Full activation of the device is done after
30 days to allow for proper internal healing.
Presently, the entire system costs about $20,000 and doctors are paid $600 to $1,000 for the
two hour surgery – the actual amount depends on the region and/or clinic. Admittedly, this is
not the most lucrative procedure and this is due to the existing code for billing purposes.
Potentially this could be re-evaluated and Inspire believes it is around 30% undervalued.
There is a second code as well, that of the sensing lead, however this currently falls under
Category III classification which does not carry any payment. The American Medical Association
(AMA) has reviewed an application to change to Category I which, if successful, would add $500
to the average procedure payment – this however could take some time and not have any
results until early 2020.
Needless to say, the higher payments would offer more incentive for surgeons to perform this
relatively simple procedure which may become even less complex as the next generation of
devices might be without electrode leads.

STAR Study
A multi-center trial that included a 12-month study to show the efficacy followed by a controlled
withdrawal comparison at 13 months, the complete STAR study spanned 22 sites globally and
included 126 patients over three years. It has now been extended to five years with 500 patients
and targeting data from 2,500 patients for its ADHERE database, basically just about everyone
who has an implant.
Results from the STAR trial showed that both primary endpoints were met. At 12 months from
initial treatment, patients saw a 69% reduction in median AHI. Median Oxygen Desaturation
Index (ODI) was 71% lower, going from 25.4 events per hour to just 7.4 events per hour.
Secondary endpoints were also met with quality of life showing significant improvement. The
withdrawal study demonstrated a significant difference in patients that continued for a 13th
month of therapy versus patients whose treatment was stopped. Inspire continues to gather
long-term data to further support efficacy and tolerance in an effort to facilitate reimbursement
approvals from healthcare insurers.
Medical Coverage
To date, only Aetna (AET) provides coverage for Inspire system. The insurer decided to extend
coverage on July 9th, nearly 18 months earlier than expected. It will take a few months to start
seeing patient numbers as there wasn’t a vetting process in place. Aetna does have 22 million
covered lives from which OAS numbers could be substantial as prior to their coverage, Inspire
had less than 8 million commercial lives under coverage.
Other insurers that are currently considering coverage are Blue Cross Blue Shields and United
Health (UNH).

Blue Cross has hired independent technology assessment group Evidence Street to evaluate the
UAS system, a report was expected last summer however this was delayed and a deeper, more
thorough review initiated.
United on the other hand has decided not to grant coverage at this time despite having paid out
for approximately 100 cases. However it appears they had not included the latest and more
current research earlier this year when they made that determination and the case is set to be
looked again this fall.
Market Opportunity
There is a huge market opportunity ahead for Inspire. As calculated from non-compliant CPAP
patient numbers, the total addressable market in the US alone is 500,000 annual patients that
would qualify for UAS. With the average unit selling price at $20,000, that translates to $10
billion in yearly sales. Stifel estimates that in 2022 some 4,800 systems will be sold in the US,
just a tiny percentage of the total opportunity.
In June, Inspire received approval to treat moderate-to-severe OSA cases in Japan with a
planned launch in 2H2019, potentially bringing 9 million candidates whose AHI levels qualify
them for Inspire’s UAS system. This would bring International sales up sharply from today’s
estimates – Stifel’s 2020 assumptions of $7.8 million International revenue take into
consideration just 400 unit sales.
Currently Inspire has a contract with two Kaiser Permanente hospitals in California and is
negotiating for a national agreement – there are Kaiser hospitals in eight states plus Washington
DC which would pave the way to more practitioners around the country. There is also the
possibility that the American Academy of Sleep Medicine (AASM) would include Inspire in their
guidelines, this might be announced their SLEEP conference in early June 2019.
Inspire continues to add field clinical representatives, regional and territorial managers as well
as regional centers to better access potential physicians that are in the field.
Without any current competition, exceedingly high customer-satisfaction levels, very positive
medical practitioner commentary and desire to use UAS product, possible upcoming
reimbursement support from more insurers, Inspire Medical has the ‘first maker’ advantage to

gain a sizable market share before any other device is introduced to the market – the closest
one by ImThera Medical (LIVN) is at least 2 years away.

Smartsheet (SMAR)
Buy SMAR Common Stock for $31.26 or less.
Smartsheet is a leading cloud-based work execution platform that allows users to handle ad hoc
or unstructured projects that have traditionally been managed using emails, whiteboards,
documents, folders and spreadsheets. Its simple and familiar spreadsheet-based user interface
along with a straightforward licensing model designed for viral adoption allows it to spread
organically within organizations and become an integral part of business process workflows. It is
simple yet highly effective business with high customer retention rate. Smartsheet competes
against various collaboration software vendors (including Atlassian, Asana, Planview and
Workfront). The company has 92,000+ core customers, with 3.9 million users (free & paid).
Among Smartsheet’s customer base: 92 of the Fortune 100 and two thirds of the Fortune 500.
Gross margin is solid at 81%. Common pushback against the stock is valuation, currently trading
at enterprise value / forward revenue ratio of 12.5x.
The IPO came to market at $15 in early May, opened at $18+ first day of trading, and within few
weeks it was pushing against $30. We have been highly impressed by last two earnings reports.
Some key points to note:
➢ Q2 Billings accelerated to +52% YoY, materially above +45% street estimate driven by
number of large deals and enterprise renewals.
➢ Q2 marked an acceleration in the number of customers spending $50,000 (annualized

contract value or ACV was up +146% YoY sequentially accelerating from +139% prior
quarter) or more indicative of broadening user base of customers, including addition of
26 of Fortune 500 companies.
➢ The number of strategic sales reps have already doubled since late 2017 and
management sees that tripling in near future. There is 75% correlation between sales
reps and number of new customer signings.
➢ A major new bundled solutions package called “Accelerators” is being tested on specific
use-case basis currently and expected to roll out to all customers by year end 2018
(major catalyst, more on this later).
➢ Raised FY2018 full year Billings growth guidance to +49% YoY, well above street
estimate of +43% YoY with bulk of growth weighted towards Q4.
➢ In Q2 subscription gross margin expanded by +210 bps to 88% largely for the fact it
takes lesser cost to upsell and cross-sell customers to number of services offered.
Dollar-based net expansion rate was 131% in Q2, up +500 bps sequentialy vs prior
quarter. It is worth noting SMAR’s Dollar-based net retention rate has steadily increased
from 116% to 131% in past 7 quarters – solid healthy business trend.

➢ The unit economics of business model remain extremely strong, calculated as LTV/CAC
of greater than 5x subscription with gross margins to rise gradually to 87% and dollar
retention of above 130%.
Addressable Market Size / Organizing the World of Unstructured Workload – The unstructured
work automation market is quite large and while there are several companies building products
to help streamline the process, Smartsheet is the only that has a flexible platform to address
thousands of personal use cases while increasing productivity. The part we like the most about
Smartsheet is it’s simplicity and wide acceptance. Put it simply, lots of growing happy
customers. Over 650,000 paid users today, but compare that to 200 million paid commercial
Office users and 865 million knowledge workers globally. Using its straight forward pricing for
standard and enterprise, a mere 10% market penetration in the future gets to $3+ billion in
annualized recurring. Another way of looking at it, company currently has 92,000 paying
subscribers of all sizes, and more than 3.6 million users on its website generating total ROI of
480% in a $20 billion addressable market size.
That is less than 1% market penetration of high growth, untapped market for this leading
platform. That’s the key message here - Sustainability of growth and efficiency of revenue
model. Research firm Forrester recently did extended 3-year study of Smartsheet’s customers
and found out +480% ROI, a 6-month payback period and 15% productivity improvement.
Morgan Stanley did due diligence around large SMAR customers and numerous conversations
noted upon signing, SMAR product simply became an everyday tool for getting work done.
Business process automation is not new. We have seen number or SaaS come to market in
recent years attacking certain part of running a business with automation that improves
productivity and reduces capital intensity. In general, all ideas around business automation are
trying to reduce the need of IT intervention. Smartsheet is squarely positioned to benefit from
this secular trend.
How Defensible is the Competitive Moat? – Since we are talking about a disrupter trying to
remove inefficiences in organizational workflow, can the disrupter be disrupted by others? We
note Smartsheet has already exploited over 2,000 documented use cases of Smartsheet
software, ranging from functions within project management to sales enablement, finance /
investor relations, marketing campaign management and human resources. Management noted
its last earnings call that both Microsoft and Google are also customers of Smartsheet. Morgan
Stanley points out:
“Smartsheet has developed a rich ecosystem of integration partnerships with notable

software vendors, which offer complementary products and help to extend the functionality of
Smartsheet across a variety of enterprise workflows. We think this creates a high-degree of
"co-opetition" in the space. These include notable vendors such as Microsoft and Google, both
of which are also customers of Smartsheet, which we think speaks to the relative ease of use
and breadth of the company's platform.”

This is key point here that makes Smartsheet highly defensible. You have companies like
Microsoft, Google, Salesforce, ServiceNow and others that are using Smartsheet software to not
only use themselves but also to bundle up with their cloud offering to sell to large base of
customers.
Happy Customers - In several checks done by Morgan Stanley, JP Morgan and RBC Capital, we
have noted similar findings with highly satisfactory customer base, many of them referring
Smartsheet as “Excel on Steroids” in terms of increasing productivity. Customers also indicated
very strong reporting capabilities, which allowed them to take their day-to-day work and create
automated, summary level, real-time reports for upper management. Many customers also
cited Smartsheet's viral and often rapid adoption among users across multiple departments.
Once upper management realized the spread of the product, this generally lead to an enterprise
agreement with Smartsheet.
Examples of Documented Use Cases – It is all about creating a business process that reduces
ineffciency, reduces time, increases execution and therefore overall increases productivity. To
do that, over the years company has successfully introduced over 2,000 documented use cases.
Snapshot below shows some examples of those business functions:

Accelerators – In June 2018, company introduced three new “Accelerators” which provide pre
templated processes and workflow around three initial use cases – IT PMO, Professional
Services and M&A. Accelerators lower the friction of the upsell process within an organization
and allow customers to achieve faster time to value. They are priced separately from users and
so provide an incremental revenue stream for the company. On September 19, RBC Capital met
with top management and concluded: “We expect the company to announce new Accelerators
in coming months (for example around sales and finance organizational processes) and
ultimately see Accelerators as a potential way for the company to empower customers and
partners to build on the platform and accelerate adoption and growth of the company’s
ecosystem.”
In earnings conference call on September 4, the CEO gave several examples of how launch of
Accelerators in June 2018 has been gaining momentum (we believe this is also key reason why
billings growth rate has accelerated in past 3 quarters and has more room to grow). From the
CEO:
“A biomedical equipment manufacturer, Beckman Coulter deployed our professional services

accelerator in less than three weeks to improve their customer on boarding and equipment
deployment process. With our Accelerator, Beckman Coulter quickly gained visibility and real-
time status updates to workloads that were previously managed using a less efficient
combination of email and spreadsheets.”
Stan Zlotsky of Morgan Stanley asked several questions in earnings call about how these
Accelerators will give company new leg higher in growth rate and their pricing, here is how the
CEO responded:
“Although it's still early days for our accelerator products, interest from both current and
prospective customers is encouraging. Given this early signal we plan to roll out additional
Accelerators in the coming quarters. Accelerators are package solutions, so they have a --
typically they're sold with a combination of reoccurring software revenue for the actual
solution itself. And then a services package that's usually for some customization and then on-
boarding services. So the idea is that this becomes something that customers can get started
with really quickly, it doesn't require a heavy consulting engagement to get going. We are
actually seeing demand across almost every kind of vertical and horizontal use case for higher
value solutions. We chose the first three really based on where we saw the most customer
demand. And our plan is to announce additional Accelerators over the balance of the year.
And our next wave of Accelerators we're going to focus on a specific vertical around sales
processes. And then pricing, it varies by the type of solution, but all of them are priced in the
five figures.”
Hiring of Strategic Reps Aligns with Launch of Accelerators - That last comment above about
pricing in “five figures” tell me that deal sizes will continue to go higher with launch of these
Accelerators in June 2018 and at least 3 more coming out by end of year. This also explains why
company has started hiring “strategic reps” on top of inside sales team. They started FY2018
with 9 strategic reps, double that number to 20 at end of June and now adding many more in
the US. Strategic reps have materially higher quotas ($1 million vs. $350k-$500k for inside sales).
Commissions are paid to strategic reps on net customer additions (not renewals). Therefore, to

meet $1 million quotas, I expect in coming months these strategic reps will be pushing these
Accelerator launches hard to sell to new as well as existing subscription customer base of
92,000.
Other Items – Here are few other key growth focused items we have observed in past few
weeks that I believe are not fully baked into consensus view:
➢ On September 19 in analyst meeting management also revealed plans to open an office
in the UK by October 1st and immediately plans to have 15 strategic reps by year end.
This is first move to carry out international expansion plans.
➢ In Q4 company will roll out many core functionality improvements including multi-user
approvals, simplification of the UI, integration with Oracle’s Netsuite and more
messaging integration beyond just one app that is currently offered Slack.
➢ On September 5 in earnings call management stated that they 3.6 million active users.
But in analyst day on September 19 they raised that to 4.2 million, suggestive of
continued improving trends.
➢ On September 19 management revealed that they have hired a new pricing expert who
was working for Microsoft previously. Suggested a simplification of pricing might be
coming soon as the first step to align price and value across the product as it evolves
after launch of Accelerators. This may serve as another catalyst in Q4.

Cognex (CGNX)
Buy CGNX February 55 Calls for $5.00 or less.
“These violent delights have violent ends.” – Shakespeare quoted in HBO popular show
Westworld.
One of the most important and challenging question I ask myself every day when doing research
is where we are in the cycle. Once I have determined reasonable answer to that question, next
is finding out which sectors to benefit the most. In modern history, however, I am constantly
reminded that technology is blurring the lines between durable goods cycles. Particularly the
industrial automation is going through the strongest technological change than others. In 20th
century, it was relatively easy to chart out boom and bust of cyclical turns driven by durable
goods order growth. However, in 21st century, technology is structurally driving efficiencies that
raise the threshold for capital equipment purchases, flattening the historical cycle for
industrials.
Think of telecom for example. “Data age” with incredible speed to communicate messages to
mass audience is practically throwing telecoms under the bus, with new entrants that are far
cheaper to build and superior to existing communication platforms. Social media vs. telecom. 10
years ago, you wouldn’t have thought that. This is what I mean by technology blurring the lines
between durable goods cycles. We are currently in late cycle of bull market based on interest
rate and employment status. Historically, at this stage, capex growth for industrial automation is
at peak level that eventually turns into peak margins, excessive inventory, and factory
overcapacity, thus resulting in beginning of a downturn. However, Data Age and Internet of
Things are prolonging the cycle. Across all facets of industrial challenges, a technological
solution (based on hardware and software) is being innovated to quickly address the problem.
This can be easily seen in changing capex make up which is seeing larger and larger allocation to
software. Are we witnessing the end of metal bending age? In fact, I wonder sometimes
whether industrial capital equipment would eventually become a mere pipe for software
content?
Okay, enough of that boring hogwash / psycho-analysis of industrial capex dollars. But as you
read the rest of analysis in Cognex, ask yourself whether it is industrial cyclical stock or tech?
Background - Cognex is $10 billion US-based world’s leading supplier of machine vision systems.
In plain English: the company makes computers that can see and read things, such as barcodes.
Its products are used in dozens of industries and hundreds of applications such as reading
unique ID codes on engine parts and semi wafers, guiding robots to manipulate car body panels,
ensuring safety seals on pharmaceutical packaging, verifying the fill level in beverage containers,
guiding tiny electronic components onto printed circuit boards, etc. As you can imagine, sales
growth is driven by durable goods cycle but as you read below you will realize all major growth
drivers are driven by technology.

On July 31, after 6 months of downtrend, stock reversed sharply with power candle on very high
volume after posting surprisingly very strong quarter. Highlights:
➢ Q2 EPS $0.36 vs $0.32 estimate, beat
➢ Q2 Revenues $211M vs $205M estimate, beat
➢ Q2 Revenues up +19% YoY with broad strength across all verticals
➢ Q2 Revenues up +25% QoQ, significant sequential acceleration
➢ Q3 Revenues Guidance raised to $225M vs $222M estimate, beat
The only negative was margin

pressure in Q2 which was down -
381 bps and management guided
further pressure in Q3 totaling -700
bps within two quarters, but then
suggested a rebound in Q4. Margins
are temporarily taking a hit due to
tough YoY comparison (summer
2017 abnormally too good), and
some inventory adjustment that
should be complete by end of Q3.
As a result, management expects
Free Cash Flow to bounce back
strong in Q4 with margin. Going into earnings several analysts were muted, not expecting much.
But since earnings positive surprise 3 analysts have upgraded and raised estimates. The most
interesting comment comes from JP Morgan on July 31 (note JP Morgan still maintains Sell
rating on stock):
“We may also be underestimating the long-term growth associated with both the Vision
Systems and ID markets. For instance, Cognex believes warehouse and logistics (ID
applications) could be a new growth opportunity, so a contract win with a major eCommerce
company (e.g., Amazon, Alibaba, etc.) could introduce upside to estimates.”
Cognex Growth Could Materially Accelerate with Amazon 3,000 Cashierless Stores
With above comment from JP Morgan in mind, please note on September 13 Amazon
announced highly ambitious plan to open 3,000 cashierless stores by 2021. See HERE. As a
reminder, a year ago Amazon announced “Amazon Go” concept which is entirely based on most
advanced use of machine learning and sensing technology to create cashierless stores. See 2-
minute YouTube video HERE. Cognex is the dominant supplier of machine and vision systems
and will play an important role in Amazon Go concept which is entirely based on use of highly
sophisticated sensors to spot and record each transaction based on customer activity in
cashierless store (please see link for YouTube video above). In this regard, on July 31 in earnings
conference call, the CEO stated:
“We see the fastest growth rates among our smaller, newer markets, such as consumer
products and food, which are increasingly adding Cognex vision and ID to improve product
quality and increase productivity. We are able to satisfy these needs both by increasing the
ease of use and integration of our products, as well as by adding sales noise to reach an ever
broader set of machine vision customers.”
Amazon has gotten warehouse efficiency down to a science, and vision and imaging
technologies share in the credit. The SICK Inspector P30 2D camera, used for positioning in
merchandise retrieval, delivers 15% extra picking cycles per hour at fulfillment centers where
boxes are moving in lightning speed. In 2017 online supermarket Ocado that ships over 1.5
million products per day with over 50,000 unique skews installed Cognex DataMan readers and
immediately saw faster pick times and higher throughput so customer orders are delivered
always on time.
Significant Recent Product Launches Gaining Traction
DataMan 470 Launch (April 2018) - Cognex introduced the DataMan 470 series, the fastest and
most powerful fixed-mount reader in the company’s line of industrial barcode readers. DataMan
470 sets a new industry standard for accurate, simultaneous reading of challenging 1-D and 2-D
codes and multiple mixed symbologies even when they are closely spaced on high-speed
production lines and conveyor systems.
VisionPro ViDi Software Launch (June 2018) - Cognex announced the worldwide availability of
VisionPro ViDi, the first deep learning-based image analysis software designed specifically for
factory automation. VisionPro ViDi enables sophisticated manufacturers to leverage artificial
intelligence together with the company’s industry-leading vision tools and broaden the scope of
applications addressable by machine vision.
VisionPro is immediately a hit. This novel

approach, which tolerates deviation and
unpredictable defects, beats even the
best quality inspectors and is ideal for
defect detection, texture and material
classification, assembly verification and
deformed part location, and character
reading including distorted print. In
earnings call on July 31, the CEO
commented:
“We are pleased to report that we have

just received our first $1 million purchase
order for our deep learning vision

software, and we are working on its application at many other leading manufacturers. We are
seeing broad-based demand for code verifiers. Grading and verification is becoming
increasingly important as manufacturers seek to implement a consistent quality of ID codes
across their widely distributed supply chains.”
Logistics Expansion
Logistics business is currently only 10% of CGNX total revenues but it is the fastest growing
business with +50% YoY growth rate. Logistics is series of barcode readers working
simultaneously throughout fulfillment or distribution center to help companies cut cost and
improve efficiencies. Logistics is a $500M US market where CGNX has ~15% market share. The
global market excluding the US could be ~$2.3B which implies a $300-$400M revenue
opportunity if CGNX expands internationally, according to Morgan Stanley. We are also entering
into strongest seasonal period for logistics business when much of automation is deployed
before ramp-up around Thanksgiving and Christmas.
A particular question was asked in earnings call whether logistics business has any customers
are that are experiencing slowdown that would warrant the analyst to take down growth rate
below +50% YoY. Here is how CEO responded:
“I would say what we hear from our customers, tends to be very positive, particularly in the
U.S. and in Europe, we see them increasing their spending plans. Our business is more focused
in that market on e-commerce fulfillment. That's the bit of the market that's growing fastest.
It's the market where we think there is the most innovation. And we have a whole range of
customers from very big companies to much smaller companies in that market. So, we remain
very positive. We don't see anything in the end user market which gives us cause to think
anything else is going to happen in the near-term.”
The opportunity for Logistics business is big and underappreciated. Morgan Stanley believes
CGNX has the potential to grow its entire revenue base by up to 50% if its US share of logistics
can be duplicated worldwide in what they believe is still a lightly penetrated machine vision
application. Expanding into other shipping applications would be additional upside. As e-
commerce fulfillment centers continue to increase adoption, I expect to see FDX and UPS
distribution centers to become strong adopters of Cognex logistics. The higher accuracy and
ability to "fill in the gaps" of a distorted or damaged bar code should continue to drive

penetration of machine vision to eliminate bottlenecks of bad scans requiring human
intervention.
Is Cognex an Apple Proxy?
A particular reason why the stock acted so weak during first half of 2018 was due to the
downshift in growth at Cognex from consumer electronics, particularly AAPL, had been part of
the narrative before 2017 finished. Cognex is not a content supplier to Apple at the device level,
but on capital equipment in the vision system particularly OLED which is known to be a higher
mix display technology for Cognex as the machine vision to assemble it is more robust and
narrows the competitive landscape to the top tier of suppliers given application specs.
Put it simply, Cognex Vision System

sales is benefiting from secular shift
from LCD to OLED display. Less than
15% iPhones sold in 2017 had OLED,
increased to 32% during 1H18 and
expecting to be 50% mix shift in
2H18.
Morgan Stanley’s China Tech

Hardware team breaks down 2H18
assumption as 50% 6.1" LCD iPhone,
37% 6.5" OLED iPhone, and 13%
5.8" OLED iPhone. Based on the current projections for 1H18, this implies 83 OLED iPhones in
2018 and 118 Other. The mix algorithm for AAPL and the rest of the industry on OLED
production shift should be a material tailwind with new iterations of iPhone announced by
Apple on September 12.
How LCD to OLED Shift Can Create Huge Revenues for Cognex - I want to be clear, this bull case
around Cognex with Apple used as proxy is not based on rising iPhone unit shipments. Please
note Cognex is NOT a component supplier to Apple. The bull case is based on shift from LCD to
OLED which increases demand for Cognex Vision Systems. In 2017, Apple sold 206M iPhones
(39M OLED display and 167M LCD display). Cognex revenues from Apple was $84M from OLED
and $76M from LCD, resulting in “implied” Cognex content per phone of $2.16/OLED and
$0.46/LCD. Now if we assume conservatively for 2018 total iPhone shipments will be down -3%
YoY to 200M but we change the revenue shift to 83M OLED and 118M LCD, using the “implied”
Cognex content per phone, this would equate to +44% growth in Cognex revenues from Apple
vs. street estimate of +5% growth. So, is there is a big disconnect between reality and street
expectations? The next two quarterly report will tell us the story. But if this calculation is even
half right, then forward street estimates are too low. See calculation below.

L3 Technologies (LLL)
Buy LLL January 220 Calls for $5.60 or less.
We continue to press the bull case in defense sector. Understandably, in 2018 the overall sector
performance has been choppy largely due to sentiment shift from lower geopolitical concerns in
the Pacific Ocean resulting in valuation multiple contraction, overcoming the important fact that
industry’s organic growth is the strongest in past 5 years led by rising defense budgets. The net
result in my view is valuations have contracted to extraordinary attractive levels, making
defense sector perfect GARP story (“Growth at Reasonable Price”) in current market.
Ignore the relative underperformance of defense sector in 2018 so far and consider these
points:
➢ The DoD weapons budget is up +40% in 3 years, but spending outlays are up just +10%
creating significant pent up demand and highlighting acceleration in revenues through
year 2020.
➢ Massive omnibus defense spending bill was announced by Trump in March this year,
however according to DefenseOne, the DoD is rushing to obligate money appropriated
by Congress by September 30 or it will be returned to the Treasury Dept. Nearly $200
billion must be allocated to defense projects.
➢ After 4 years of defense budget expansion, the market is too quick to dismiss prospects
of further growth: the last 2 upcycles lasted 12 and 14 years.
➢ Valuation multiples in 2018 have retreated 5 turns and contraction accelerated with
recent North Korea. We are now just one turn away from matching the last contraction
cycle that occurred in 2002/03, which was followed by 5 years of outperformance in
defense sector. Think about this for a moment.
➢ The world super power is shifting with China expected to have both the largest military
and economy in mere 7 years by 2025. The US hasn’t faced another super power since
disintegration of Soviet Union in 1992. This only means one thing: defense spending will
continue to rise.
➢ All defense spending (whether

its Air Force, Navy, Army or
Marine) is highly correlated to
weapons budget (which is why I
own RTN). The pentagon budget
shows Weapons Budget Outlays
to increase from +3% in 2017 to
+7% in 2018 and accelerating
again to +9% in 2019 which
would be the highest rate of
growth in 16 years.

➢ Defense spending as a percentage of Federal Revenues is at only 14%. The only other
time it was as low as this was in 2000 just before 9/11 before defense spending shot up
to 30% of Federal Revenues.
➢ Among all peers, LLL is expected to surpass all others in terms of highest annual organic
growth rate based on higher spending on systems, surveillance and intelligence.
LLL is $16.5 billion prime contractor in Intelligence, Surveillance and Reconnaissance (ISR)
systems, aircraft sustainment, simulation and training, night vision and image intensification
equipment and security and detection systems. The Company provides a broad range of
communication and electronic systems and products used on military and commercial
platforms. The company has four main divisions:
Strong Foundation Now in Place - LLL has been going through transformative change internally
for better part of last 2 years including shake up in top management a year ago which initiated

restructuring and realignment of businesses that is finally now starting to show superior returns.
In December 2017 at the Investor Day, the CEO Chris Kubasik laid out his vision of making LLL a
“nontraditional 6th defense prime” by 2022. The plan included investing heavily in R&D in 2018
in order to generate top line revenue growth of at least 5% and margin expansion to at least
12%. Top line organic growth would be further complemented by aggressive M&A strategy with
up to $1 billion cash deployment each year for next 3 years. Moreover, strategy involved
shedding of underperforming assets particularly in Communication segment which has lagged
for multiple years.
The strategy was bold and looked like a tall order to achieve. But by middle of 2018 we started
to see fruits of this restructuring, which compelled me to make this as Top Pick in Q4 Outlook.
On July 26, company posted a fabulous quarter! Q2 Sales grew by +8% (+7% organic) YoY which
was comfortably above +5% street and management threshold and was sharp sequential
acceleration from just +1% YoY in Q1. Of the four lines of businesses, Sensors posted
phenomenal record growth of +22% YoY, followed by Aerospace up +9% YoY and Electronics up
+6% YoY. Communication continues to be problem child and only one to lag internal growth
target, up just +1% YoY. Management followed through its plans for heavy investment in R&D
which short term hurt margins by -200 bps as well as the plan to divest out of underperforming
asset called Vertex (along with two smaller divisions) that were collectively sold for $540 million.
Vertex was always margin dilutive. Good bold discipline decision by management. And the last
point about improving margins, here is CEO comment:
“And the more you grow, the more volume we have. And higher your margins get to resolve a
lot of your fixed costs. So we've got a pretty sophisticated model we'd look at. We're highly
confident in the 12% margin in '19, and we plan to grow organically and inorganically. And
that's only going to make it easier and a lot more fun.”
As a result, company raised FY2018 revenue guidance by $150M. The part I found most
interesting about guidance was raise was Sensors which posted +22% YoY growth and yet
guidance raise seems very conservative and likely to provide further upside going forward in my
view.

Sensor Growth Is Not Fully Appreciated
Sensor division was the fastest growth segment at

+22% YoY. The highlight was on May 16 company
received three-year $390 million next-generation
night vision goggle award for 13,000 units; 10,000 for
the Army and 3,000 for the Marines. Each of these
goggles are $39,000. The key here is consistent with
customers' desire to move rapidly, the Army and L3
is in alpha contracting process to negotiate and
complete the deal in about 60 days. Therefore,
shipments under this contract didn’t begin late July
(after Q2 was already over). Sensor segment growth
of +22% in Q2 wasn’t driven by this huge order. Q3
will likely show bigger benefits, hence why just +2.8% guidance raise in July vs. April seems too
conservative. A source for another upside in next earnings report. Also note this order pushed
book-to-bill ratio to 1.09x.
More importantly, the CEO in conference call pointed out:
“This 10,000 unit initial order positions us to compete for the Army's planned purchase of
100,000 night vision goggles in the years ahead. This is a case in point of bringing the
disruptive and innovative technology fast to market at an affordable price.”
That comment reveals that total addressable market size of just that one order could be 10x
large and up $3.9 billion which is twice the total annual revenue run rate of Sensor Systems
division. If Army comes back to increase purchase, I expect stock to fly on that.
Communication Systems Underperformance is Likely Over
It is always about finding areas of disconnect. It’s

clear that of all 4 business segments, no analyst likes
Communication Segment which is a drag. But this
too could surprise to upside. One reason for this
segment’s underperformance is Broadband volume
and the other reason is operational challenges at
newly opened facility called Traveling Wave Tube
(TWT). Here are things I believe consensus is missing
from estimates:
➢ Major ongoing development work in Free

Space Optics and electronic warfare that is
in planning phases right now and will move
to production work in quarters ahead.
➢ Company won several initial awards in

targeted areas such as classified space,

Maritime C4ISR, and electronic warfare that open opportunities for much larger
awards.
➢ Way back in October 2017 the US Air National Guard awarded large contract. L3 to
provide 46 Hawkeye III Lite VSAT satellite communications terminals and on-site
training. These will start shipping finally beginning in 4Q18.
➢ TWT was essentially two businesses that were consolidated over very long period of one
and half years. This work was finally completed in April so now we should see margin
improvement beginning from Q3. as the CEO suggested:
“We completed the consolidation in April and I said that we're not yet experiencing
what we would consider to be normal manufacturing yields and productivity on those
traveling wave tubes. We're going to get there beginning in the second half of this
year, and we started to see some improvement in June.”
Just some trade school: Building TWT is highly complex manufacturing process. It entails a lot of
calibration and tuning activity, and those skill sets have to rebuild with new employees and
training those employees which was the case here and its now complete effective April. Now
margin benefits should start to appear. A TWT is an electron device used for radio-frequency
amplification at microwave frequencies (above 500 MHz) and is the primary means of signal
amplification utilized in communication satellites. If you listen to XM satellite radio, pay for
gasoline with a credit card, watch DIRECTV (R) satellite television programming, make long-
distance telephone calls, or watch TV broadcasts from other parts of the world (e.g., live sports
events or news), it’s made possible by L3 TWT products.
Morgan Stanley points out that given history of issues at Communication Segment they are
leaving their margin estimate for 2H18 at 10% even though company guided 12%. But MS does
recognize that even a small uplift to 11% would be sufficient enough to help lift overall LLL
margins.
Bookings in Excess of Billings
For several quarters company previously was struggling to maintain book-to-bill ratio above 1x.
But in Q1 this year it jumped to 1.09x and Q2 increased further to 1.1x. This suggests improving
fundamental strength. In Q2, fully funded orders were up huge +32% (significantly above
organic growth of +7%) led by strength in Aerospace Systems, which converted several long-
term pursuits to orders in the quarter. As these orders or bookings materialize, I expect billings
or revenues to move higher. Coupled that with aggressive restructuring effort to improve
margins, you have very strong case of rising FCF yield well above 5.9% currently.
M&A Driven by Strong Free Cash Flow Conversion
Since 2015 company has been consistently producing cash flow conversion rate at 125% or
higher. Even if we conservatively assume this would will pull back to 115% going forward, it
would still be the highest FCF conversion than all defense peer. This creates a significant pivot
underway at L-3 to accelerate growth through M&A. We don't believe the company is going
back to the roll-up strategy of the late 1990s, but they are definitely putting acquisitions ahead
of share repurchase---a change from
the 2010-2016 approach. The picture
to the right above shows how after
several years of silence, number of
M&A deals picked up in 2015 and have
been maintaining steady pace around 3
or 4 year each. With FCF conversion
rate constantly above 125%, we believe
there is potential for number of deal
making to increase similar to 2000 to
2006 period.
Jon Raviv of Citigroup asked on July 26 in earnings call asked about bolt-on acquisition after
recent history shows highly attractive multiples. Here is how the CEO responded:
“We said previously we'd easily do up to $1 billion a year in M&A and still keep our investment
ratings – investment credit ratings. So, there's no walking back from there and there's really
no limitation on the size. I'd said before I'd rather do two at $500 million, but if they're not out
there we'll continue to do the $69 million ones, the $200 million ones, and whatever's
available. So, we've got a great process, a good pipeline, and like I said, I think we'll announce
another one probably within a month maybe in the $100 million range and we've got a couple
others we're looking at.”
This is as clear as it gets. The CEO in his own words, so I expect to see more M&A news on
consistent basis to keep thick bids under the stock and investors and analysts excited. Here are
recent acquisitions:
➢ Sep 24 – Acquired ASV Global for undisclosed amount. Maker of unmanned surface
vessel (USV) to be integrated with anti-submarine warfare (ASW) solutions.
➢ July 11 – Acquired Azimuth Security and Linchpin Labs for $200M. Maker of strategic
fields of computer network operations and vulnerability research for intelligence
partners and other government, defense and security agencies around the world.
Acquisition immediately adds $65M to LLL total revenues per year.
➢ July 2 – Acquired Applied Defense Solutions for $50M. Provider of space systems
mission planning, space exploration and satellite operations to intelligence community,
DoD and NASA. Acquisition immediately adds $15M to LLL total revenues per year.
➢ February 28 – Acquired minority stake in Peak Nano Optics for undisclosed amount.
Company to provide optical solutions for LLL surveillance systems.
Defense Sector Remains Very Much Under-Owned
To wrap up our discussion, on August 6 BAML did extensive survey of “long only” funds and
came back with contrarian bull signal to buy all of them.

Large cap active exposure to Aerospace
& Defense stocks is at an all-time low.
Investors have eschewed the lagging
sector in favor of consumer and
commodity-oriented sectors (managers’
relative weight in Energy and Materials
today is the highest in more than a
year). In particular, RTN and LLL carry
underweights relative to the market.
Fund managers have less exposure to
BA, LMT, and UTX than they have had in
the ownership data history extending
back to 2008. However, any positive
catalyst for Defense stocks (the mid-
term election, geopolitical friction) could drive a significant rotation into these less preferred
names. We have seen this movie before: around the 2016 election, Health Care dropped to its
lowest relative exposure in our history, but, following the Trump inauguration in January,
outperformed the S&P 500 by more than 7 percentage points over the next 6 months.
So, will mid-term elections in November become the trigger for hyper rally in defense stocks?

Green Dot (GDOT)
Buy GDOT December 90 Calls for $5.40 debit and Sell November 100 Calls for $1.50 credit.
Practically everyone needs a bank account and a debit card to function in today’s society. But
getting a traditional branch bank account is time-consuming, fee-laden, inconvenient and out of
sync with the habits of digital natives. Over the past 20 years, a Banking-as-a-Service (BaaS)
platform has evolved and now democratizes the bank account by making it digital, easy, fast,
inexpensive and broadly accessible for everyone.
Headquartered in Pasadena, California, Green Dot is a leading prepaid financial services

company providing money management solutions. It is a provider of prepaid cards, debit cards,
checking accounts, secured credit cards, payroll debit cards, consumer cash processing services,
wage disbursements and tax refund processing services.
As a products and platform model, the company is able to generate revenue through the
issuance of their own internally designed and branded products that they distribute to the mass
market, specifically retailers, and through their platform, which allows qualified outside partners
to use their bank, technology and program management capabilities to design and brand their
own products that they then distribute to their own customers. “One platform serving all your
account and payment needs.”

As I will show when discussing the company’s earnings results from last quarter, it operates in
two main segments: Account Services and Processing and Settlement. Per a June Investor
Presentation, here is a breakdown of how each generates revenue for the company:
Total Addressable Market (TAM)
SunTrust Robinson analyst Andrew Jeffrey, following a non-deal roadshow a while back,
believed that this topic remains difficult to quantify, but are increasingly convinced that
GreenDot's TAM has expanded meaningfully beyond its traditional unbanked and underbanked
community. This shift manifests in traction in aforementioned platform offerings,
complemented by the emergence of mainstream mobile payments technologies, which I will be
discussing later in this report. SunTrust anticipates that investors will increasingly appreciate
GreenDot's market opportunity over the next few years as it rolls out new products and
platform solutions while driving improving yield. “GreenDot is in the enviable position, in our
view, of owning a bank and having developed technology which can streamline mobile
payments solutions. This creates an opportunity for a positive long-term organic revenue
growth inflection, in our opinion.”

Following the JPMorgan Global Technology, Media, and Communications Conference, analyst
Tien-tsin Huan would comment that Green Dot Founder and CEO Steve Streit no longer views
the prepaid industry as a distinct market, but rather a part of the broader banking industry. Mr.
Streit believes GDOT’s products and services appeal to a broad swath of consumers, evidenced
by the fact that direct deposit accounts for roughly 80% of card load and account holders are
increasingly using bill pay, check writing and digital features. With the introduction of digital
products and reward cards, Green Dot believes its TAM has nearly doubled to 110M users. Retail
remains its largest customer acquisition channel, but all channels are performing well,
particularly online/digital, where customer lifetime value metrics are highest.
In addition, over the past 3 months, Craig Hallum analyst Brad Berning has been extremely
bullish on the name, raising his price target to $95 from $80 saying Green Dot’s story is still not
well understood/followed and argued that it could be a $140 stock in two years. The same
analyst would issue another note reiterating his Buy Rating and calling the stock one of his
favorite ideas, telling investors to take advantage of the momentum as it is still early days in
this evolving story.
Q2 Earnings Recap
On August 8th, Green Dot would report its second quarter earnings and ultimately see its stock
rise 3.4%.
-EPS of $0.74 vs $0.63 estimate – Beat
-Revenue of $258.3M vs $250.9M estimate – Beat
-FY EPS Guidance of $3.03 - $3.08 vs $3.01 estimate – Beat
-Total Operating Revenue increased 16% Y/Y
-Account Services segment increased 17%
-Processing & Settlement segment increased 12%
Mark Shifke, Green Dot’s Chief Financial Officer, would comment, “The strong momentum in
the Account Services Segment, including strong results from both the Products and Platform
parts of our business, and the Processing and Settlement Segment, inclusive of our various
Cash Processing and Tax Refund Processing product lines, combined once again to deliver truly
outstanding organic results for the quarter. Clearly, we are very pleased with both our results
and the underlying strategies and initiatives driving them. This strong performance enables us
to once again raise both top and bottom line full year guidance for 2018.”
In the company’s Account Services segment, Total Active Accounts jumped for the sixth
consecutive quarter growing by 14% Y/Y to 5.9M active accounts or an additional 700,000 more
active accounts, of which approximately 500,000 were new direct deposit accounts. This growth
was 100% organic.
CEO Steven Streit would add, “In addition to having more active customers year-over-year,
those active customers use their accounts more than ever and generated more revenue than
ever with deposit volume, purchase volume and ATM usage all increasing double digits year-
over-year. The continuing long-term portfolio mix shift towards higher lifetime value accounts
helped push the gross dollar volume, or GDV, flowing through our various products to more
than $9.4 billion, representing organic year-over-year GDV growth of 25%.”

Finally, in regard to Green Dot’s Processing and Settlement segment, the 12% increase that I
mentioned above was driven by increasing transaction counts in all of their product lines,
including cash transfers, tax refunds and SimplyPaid corporate disbursements, which all grew
year-over-year transactional volume by double digits.
A day after earnings, SunTrust Robinson analyst Andrew Jeffrey would raise his price target on
Green Dot to $100 and kept his Buy rating, saying the company is "altering the US consumer
banking tech landscape". The analyst adds that Green Dot is monetizing the ecosystem with
"disruptive" banking solutions such as the payroll system for Uber, further noting that he is
turning even more bullish on its growing total addressable market and widening customer
appeal.
In addition, Loop Capital analyst Joseph Vafi would also raise his price target on Green Dot to
$100 after its Q2 earnings beat and raised FY18 revenue guidance, saying the company's
business momentum remains positive with margin recovery and operating leverage gains. The
analyst points to "strong trends" in direct deposit adoption helping to reduce churn while
increasing usage among the newer customers, as well as noting the company's balanced growth
coming from the gains of in-store card programs. Vafi keeps his Buy rating on Green Dot, citing
its expanding total addressable market potential and tailwinds coming from the strong macro
backdrop.
Partnerships
Perhaps SunTrust Robinson said it best, “We assert that GreenDot is building a differentiated
mobile payments technology platform on top of which partners can build unique solutions.
The best examples of these are Apple's in-process ApplePay integration and Uber's payroll
solution.”
While these are just two specific companies, Green Dot has positioned itself with other major
players:

Let’s now go through some of these relationships and if they are bearing fruit for the company:
Apple Pay – In early-November 2017, the company announced on its earnings call that it was
powering the newly announced Apple Pay Cash P2P payment service.
One month later, Jefferies analyst Ramsey El-Assal was out with a note following management
meetings. The analyst noted that Green Dot was now officially processing Apple Pay
transactions funded by accrued P2P balances. Management reiterated that Green Dot makes
the federal funds overnight rate on the balance of the funds on Apple Pay Cash Cards and also
takes 160 bps of signature debit interchange on spend transactions. Jefferies believes the AAPL
deal illustrates GDOT's expanding addressable market and continues to see the company's
banking-as-a-service (BaaS) offering as representing a growing opportunity for the company.
Notably, the company described how the cost of building the software stack required for the
launch of a new platform client diminishes with every new implementation. Currently, GODT is
quite selective when it comes to new BaaS partnerships, with massive scale a prerequisite. As
more platform deals are implemented, we believe other, smaller, potentially more plentiful
opportunities could be brought on at a lower cost.
Fast forward to the company’s last earnings call when management commented that Apple Pay
Cash continues to grow very nicely and it is already serving millions of customers across the U.S.
less than 8 months since its launch.
One comment that caught my attention on the earnings call was when William Blair analyst
Robert Napoli asked about account growth and how it is very strong and accelerating. He
wanted to know what is driving it? Ultimately, CEO Steven Streit would respond and make this
comment that could prove to be a near-term catalyst: “Apple is not in those numbers.”
SunTrust Robinson, in a September 10th note, said that given Apple’s massive ecosystem, the
potential for this product is tremendous. However, the challenge, in our view, is that Apple Pay
hasn’t gained material traction, let alone ubiquity, among U.S. consumers. That said, we
anticipate that Apple will begin offering incentives for behavior change. By offering loyalty, or
discounts, Apple could drive payment volume toward its P2P network. Given Apple Pay’s
growing merchant acceptance, such a tactic could represent a tipping point for POS use. The
first step toward achieving critical mass might be the introduction of a physical card, which
underpins Square Cash. “We submit Apple Pay Cash in an embedded call option, the value of
which is not currently reflected in GDOT.”
Intuit – Also first announced back in November 2017, the Intuit Turbo card program has
delivered wonderful results since its Q1 launch and has continued to do very well for them in Q2
as a result of the tax refund volume that occurred in April and because a large number of
customers have made additional deposits to their cards beyond the initial tax refund
disbursement and are seemingly using the debit card as an ongoing bank account beyond tax
season.
Uber – Back in 2016, Uber launched Instant Pay, an easy-to-use option that drivers can use to
get paid instantaneously. Uber partnered with GoBank to make this possible. Per pymnts.com,
Uber said, since the launch, more than 80,000 drivers have signed up for Instant Pay with the
Uber Debit Card from GoBank, which is a mobile bank account offered from Green Dot.

Fast forward to the Q2 call where management said that their Uber GoBank rewards account
continues to grow very nicely, with new drivers increasing adoption of the account and existing
account holders using it more often.
Also, from SunTrust Robinson, consider that Uber does not pay a penny for this solution.
Instead, Green Dot bears the up-front cost and generates a long-tail of recurring, direct
deposit-funded interchange revenue while pleasing Uber and its employees.
Wal-Mart – Besides fully rolling out their product lineup into checkout lanes at 4600 U.S. Wal-
Mart locations as well in Wal-Mart Money Center locations late last year, management said on
the Q2 call that they’re also proud to announce that Green Dot launched the new placement of
the Walmart MoneyCard at the check lanes in 600 incremental Walmart stores.
Stash – For those that do not know, Stash is a New York-based digital investment platform. On
April 12th, 2018, it announced it would roll out a set of mobile-first banking services aimed at
those left behind by traditional banks and it would be partnering with Green Dot. Management
highlighted that development continues on their new bank account products and partnership
with Stash, which will be released later this year.
MoneyPak
As part of the company’s Six-Step Plan,

one of the initiatives is to launch a new
and compelling use case for the new
MoneyPak and to increase the number
of retail stores selling it.
According to management, MoneyPak

continues to gain traction with sales
nearly doubling year-over-year and an
additional nearly 8,000 retail locations
now selling the products in the quarter
up to nearly 78,000 retailers now selling
MoneyPak. To put that number into
perspective, at the beginning of last year,
Green Dot only had around 30,000
retailers selling MoneyPak. The rapid
expansion of retail distribution for MoneyPak speaks to Green Dot's brand power at many of
America's best retailers. That new use case is now in pilot and showing good traction.
CEO Steven Streit said, “MoneyPak, as it is right now, is selling very, very, very well. And we
think that the new use case will open up MoneyPak to a broader selection of customers.”
However, the company did say they are delaying the official launch in order to make certain
product improvements based on learnings from the pilot. “So check the box in step #2 as it
relates to distribution and unit sales of MoneyPak with a half check so for on the new use case.”

Upcoming Events
While nothing has been confirmed on the company’s IR page, Green Dot historically reports Q3
earnings in the first part of November.

Kratos Defense & Security (KTOS)
Buy KTOS February 15 Calls for $1.55 or less.
Kratos Defense & Security is a leading supplier of unmanned systems, satellite communications
and training systems, microwave devices and other electronics and services for primarily U.S.
and international defense markets.
Kratos is organized into divisions (Shown Below) that specialize in addressing national security
and technology challenges of critical importance. Each division offers a variety of advanced
solutions, including both products and services, that assure government and commercial
customers achieve their mission goals on time and on budget.
Jaguar clients are familiar with this name, as we’ve covered it many times in the chat room over
the last year and a half. If one were to search for this symbol on the website, they will get nearly
5 pages of specific commentary.
The first time we ever discussed the name came on March 9th, 2017 following specific insider
buying. If one is interested, you can click on the following link: https://goo.gl/zuTXzg

So why does the Q4 Outlook contain this company as one of our Top Ideas? Well, as I will go on
to show over the next several pages, besides a positive overall view of the industry, this
upcoming quarter is filled to the brink with potential catalysts.
Defense Overview
Jaguar clients may remember from the chat room on September 11th when the following
comment was made:
“Defense sector remains one of the strongest secular bullish fundamental stories at most
depressed prices as I scan the universe of sectors.”
In addition, just go back and re-read the bull case in L3 Technologies (LLL) where you’ll find
comments like this:
The DoD weapons budget is up +40% in 3 years, but spending outlays are up just +10%
creating significant pent up demand and highlighting acceleration in revenues through
year 2020.
Valuation multiples in 2018 have retreated 5 turns and contraction accelerated with
recent North Korea headlines. We are now just one turn away from matching the last
contraction cycle that occurred in 2002/03, which was followed by 5 years of
outperformance in defense sector.
The Pentagon budget shows Weapons Budget Outlays to increase from +3% in 2017 to
+7% in 2018 and accelerating again to +9% in 2019 which would be the highest rate of
growth in 16 years.
Finally, in a UBS initiation note from August, analyst Myles Walton would say, “We don't believe
that defense stocks have peaked given what we see as mid-SD growth over the next 3-5 years.
Importantly, we do expect differentiation in growth rates to become more apparent vs. the last 5
years when the defense budgets dynamics were stagnant and investors were focused on cost
reduction and capital return.”
“The single largest contributor to relative performance of defense stocks is the US defense
spending outlook, as shown in Figure 14. There have been periods of time where the correlation
breaks down, such as during the M&A wave of the early 1990s or during the tech boom of the
late 1990s, but in general, the stocks tend to follow the budget. Our positive view on defense
spending for the next several years therefore drives our constructive view on the space.”

These Are the Catalysts You’re Looking For!
Flight of the Valkyrie – Earlier this year, the U.S. Air Force announced it would test a new
concept drone designed to act like a sidekick to combat planes with human pilots. Kratos has
been the one developing the XQ-58A “Valkyrie” which, under the Air Force’s “loyal wingman”
concept, a drone wingman could act in concert with its crewed partner to shoot down enemy
fighters, run interference for the crewed airplane as it carries out an attack, or suppress and
destroy enemy air defenses before the crewed plane enters range.
Management would highlight on its last earnings call that each of their tactical drone programs
are on schedule and on budget.
Seaport Global, in a September 12th note, highlighted that the Valkyrie flight test is slated for
late Fall, and the orders to follow in FY19 remain the primary catalyst for the stock.
Furthermore, indications are that flight test timing is on track, static flight testing has progressed
well, and the aircraft are ready for a full capability demonstration. Potential orders are to follow
in 2019 for around 20-25 units/ $3MM-$4MM shipset.
Canaccord Genuity, similarly, said the company remains on track with its Valkyrie development
program, having recently completed wind tunnel and stress testing. The first flight is likely in
Q4/18, and if it goes well, an initial contract for 25 units in H1/19 is possible. Each aircraft would
represent $3M in revenues to KTOS. Near term, the Valkyrie represents the tactical program
with the most upside, and due to the internal investment to own the IP, this is the highest
profile tactical program for KTOS. This program currently has very strong support from the Air
Force Research Laboratory, or AFRL, which is not fully appreciated by investors.

Gremlins (Please Feed After Midnight) – In late-April, the U.S. Defense Advanced Research
Projects Agency (DARPA) selected defense contractor Dynetics and its team of industry partners
for the Phase III demonstration award of its Gremlins program.
The program has been designed to strengthen the US Air Force’s ability to carry out aerial
launch and recovery of a number of low-cost, reusable unmanned aerial systems (UAS). The
program focuses on successfully launching groups of drones from large, fighter or small fixed-
wing aircraft.
Dynetics announced it would assemble a team of industry partners who would deliver necessary
technologies and capabilities to successfully develop and demonstrate the Gremlins system, one
of them being Kratos, where its Unmanned Aerial Systems will lead the fabrication, assembly,
integration and test of each Gremlins air vehicle.
On its last earnings call, Kratos CEO Eric DeMarco would say:
“The Gremlins program with our prime partner, Dynetics, continues on track, with
demonstration of this system currently planned for 2019. As Kratos is not the prime on the
Gremlins program, we are limited to the information that we can provide, though we fully
expect the Gremlins UAS, once successfully demonstrated to enter initial limited production
and to also ultimately be one of Kratos' largest and most important programs and platforms.”
Seaport Global would comment that while the Valkyrie drone remains the near-term focus, the
Gremlins program continues to progress. A Gremlins flight test is anticipated by mid-2019 with
potential orders to follow for 100-200 units at $700K-$1MM per shipset.
Meanwhile, Canaccord Genuity would highlight that the Gremlins program is the next most
important tactical program, with initial flight tests by H1/19. While timing is a risk, the armed
wingman and swarming concepts are likely an integral part of long-term DoD planning, and
KTOS is very well positioned in these efforts as budget levels likely increase. The fact that KTOS
is coming at these markets from a lower-cost target drone market, means that the company

will continue to enjoy a cost advantage over larger defense firms, which also specifically plays
to the growing affordability focus of the DoD.
More in the Pipeline – While Valkyrie and Gremlins remain the main catalysts for Kratos, don’t
overlook the following programs:
SSAT Program – On July 9th, Kratos announced the delivery of the first production BQM-
177A Subsonic Aerial Target (SSAT) Drone System for the U.S. Navy. These production
deliveries were part of the previously announced Low Rate Initial Production (LRIP) Year
One contracts worth approximately $37 million.
Steve Fendley, Unmanned Systems Division
President of Kratos, said, “We are honored to
announce the delivery of the first production
BQM-177A, arguably the highest
performance unmanned aerial drone system
in the world today, to our outstanding
partner and customer the United States Navy. The SSAT program is one of the most important
in all of Kratos, and it is expected to be one of the largest programs in our Company and a key
element of our forecasted growth as we achieve full rate production quantities.”
Project F – Back on January 8th, the company announced a very secretive new jet-
powered unmanned air system developed by its Unmanned Systems Division that would
enter production under a $23 million contract awarded by an unidentified customer.
In an update on the Q2 earnings call, management stated they are now in a position to discuss
an additional tactical UAS program that Kratos is under contract on, which we referred to as
Program F. “Where we recently had a very successful series of test flights, with our current
expectation for Kratos to receive an initial production order in 2019.”

Autonomous Impact Protection Vehicle (AIPV) – On June 21st, Kratos received
confirmation that its Autonomous Impact Protection Vehicle (AIPV), also known as the
Autonomous Truck Mounted Attenuator (ATMA), has officially been approved for
autonomous operation on public roadways in the first of many planned states in
the USA for roadway line painting operations. This would be followed by a July 18th
announcement that it entered into a strategic teaming agreement with Colas Ltd., a
leading international contractor specializing in the design, construction, and
maintenance of roadways, tunnels, and bridges, and Royal Truck & Equipment, a leading
truck equipment up-fitter to support nationwide deployment of the Autonomous
Impact Protection Vehicle (AIPV) in the United Kingdom.
Mid-Term Elections – Do They Even Matter?
When doing research for a potential trade idea, we’re always looking for unusual, out-of-the-
box thinking that doesn’t appear to be in any analyst model. On September 12th, Seaport Global
analyst Josh Sullivan produced an excellent, value-added note on Kratos. Over the two pages of
in-depth coverage, there was one small paragraph that got my attention. The analyst would say:
“Senator Inhofe (R-OK) who just took control of the Senate Armed Service Committee has been
a strong supporter of KTOS (OK manufacturing facility), and even Congressman Adam Smith
(D-WA), who would take over the House Armed Service Committee if the Democrats take
control of the House, is supportive of technology capability vs. volume-based posturing built
on legacy technology.”
To add a bit more color to this, Senator Jim Inhofe of Oklahoma now serves as the Chairman of
the Senate Armed Services Committee. As Chairman, he plays a key role in ensuring that our
military has the best equipment, training and resources necessary to meet our nation’s diverse
security challenges. Meanwhile, Congressman Adam Smith of Washington serves as Ranking
Member of the House Armed Services Committee, where he is committed to providing our
military personnel with the best equipment available to carry out their current and future
missions.
The point I am trying to make is that regardless of the outcome of the upcoming elections, there
will be a politician in charge who is a strong advocate for the military and the equipment it
deploys.

Healthy Batch of Contracts
In the past 5 months, Kratos has announced $380M in new contract awards, with $220M being
in Q2 alone. Looking at the past month, the company continues to win contracts/awards and I
do not see this letting up in the upcoming quarter. Here are a few of those wins:
September 4th – Announced that its Advanced Naval Weapon System Business Unit, a
part of the Kratos Defense & Rocket Support Services Division, was awarded a single
award contract in the amount of $67.47M to provide engineering and technical support
services to the Naval Warfare Center, Dahlgren Division Electromagnetic and Sensor
Systems Department through their Radar Systems Division. The award is a five year
contract that includes a base year and four one year options.
September 6th – Announced that it has been awarded an $11M contract by Kacific
Broadband Satellites, to design and build ground stations for Kacific's new Ka-band High
Throughput Satellite, or HTS, network. The Kacific-1 HTS satellite, launching in 2019, will
deliver broadband services to Pacific Rim and South East Asia. Kratos will help address
Kacific's HTS gateway infrastructure needs by designing and building a state-of-art Ka-
band multi-site gateway solution for Kacific-1.
September 24th – Announced that it has received a $4.2M contract award for the
production of approximately 50 specialized systems in support of a command, control,
communications, computing, combat, intelligence, surveillance and reconnaissance, or
C5ISR, program for a national security related customer.
Insider Buying
Last, but certainly not least, Kratos did see some Insider Buying in early-August. Recall that on
the first page, our very first write-up for this stock was due to insider buying when shares were
trading just above $7/share. Here were the specific insider purchases from August:
Filing Date Insider Name Insider Title Price Total Value

8/8/2018 Bandel Carano Director, 10% $12.70 $126,957
Owner
8/8/2018 Eric DeMarco President, CEO $12.69 $126,900
Option Flow
This past week, on September 25th, there were Buyers of 2,500+ January 15 Calls for $1.20 -
$1.25 on the offer, approximately a $312,000 bullish bet that lifted implied volatility by +10.6%.
Then, back on January 1st, 2018, the following Bull Risk Reversal was placed that remains in open
interest:
-2,000 January 10 Puts Sold to Open for $1.47 Credit

-2,000 January 12.5 Calls Bought to Open for $1.92 Debit

Upcoming Events
Historically, the company reports its Q3 earnings in early-November. Besides that, the company
will be presenting at a handful of different conferences:

SendGrid (SEND)
Buy SEND Common Stock for $36.80 or less.
Founded in 2009, SendGrid developed an industry-disrupting, cloud-based email service to solve

the challenges of reliably delivering emails on behalf of growing companies. Today, SendGrid is a
leading digital communication platform, enabling businesses to engage with their customers via
email reliably, effectively and at scale. The company’s cloud-based platform allows for
frictionless adoption and immediate value creation for businesses, providing their developers
and marketers with the tools to seamlessly and effectively reach their customers using email.
SendGrid is responsible for sending billions of emails for some of the best and brightest
companies in the world and since their inception they have processed more than one trillion
emails.
To generate revenue, SendGrid sells an Email API service and Marketing Campaigns tool that are
used primarily by small and mid-sized organizations. The company delivers these solutions
through a subscription-based, SaaS model, whereby customers pay a monthly fee determined
by the total number of emails sent each month (email API service) and the total number of
marketing contacts stored on its platform (Marketing Campaigns service).
Stifel analyst Tom Roderick, in his initiation note, said it best:
“To paraphrase the great Mark Twain, reports of email’s death have been greatly exaggerated.
We have been hearing of the impending doom of email for well over a decade, and yet, it
remains an increasingly common and core component of modern communication. This is
especially the case in consumer-oriented interactions − both in the US and on a global footprint –
where the richness of image-supported HTML text remains a favored mode of interaction
between retailers, brands and consumers. In an increasingly digital world, consumers regularly
choose to engage with businesses through online and mobile channels, rather than traditional
communication methods like speaking directly with a salesperson, talking via telephone, or
waiting for responses to inquiries in the mail. While mobile and social are certainly rapidly
emerging areas of growth in customer engagement, email maintains a steady foothold with
consumers and still offers a relatively higher average return on investment for organizations.”
[See Snapshot Below]
Industry Opportunity
SendGrid estimates that it is attacking an $11B opportunity based on a bottom-up TAM. This is
based off NAICS Association estimates that there are ~11 million companies with 5+ employees
globally, assumes that 53% of these companies are online (based on SBA data), which is
multiplied by the company’s 2016 average revenue per customer of $1,931 to reach the ~$11
billion TAM. Piper Jaffray believes that there is likely upside to this number over time as the
company’s average revenue per email increases driven by pricing power and higher value-add
services such as marketing campaigns.
SendGrid currently enjoys a leadership position within the transactional email market with ~31%
share based on the percentage of top 1,000 websites using its technology. Piper Jaffray believes
that the primary competitive differentiators are higher deliverability rates (at 94% vs the
industry average at 80% for wanted email), long-standing domain expertise in the market, a
robust analytics toolset, 99.995% uptime, and superior customer support. No customer
represents more than 2% of revenues while the Top 10 customers represent less than 10% of
revenues, the Top 20 customers represent less than 20% of revenues, and the top 50 represent
~25%, with the remaining ~58,000 customers making up the other ~75%

Two Segments…Two Value Propositions
Email API – This segment composes most of SendGrid’s total revenue at approximately 80%. As
briefly mentioned on the first page of this report, Email API helps companies send out
automated emails to their customers. These can be related to password resets, shipping
notifications, account creation, identity confirmation, and order confirmations.
These types of transactional messages play a very important role in customer satisfaction and
ultimately retention. To improve deliverability, the company assists customers in building and
maintaining their IP reputation and monitoring email protocols at leading email providers like
Gmail and Outlook. SendGrid also provides engagement statistics like email open rates and
video tutorials to assist customers in building successful email operations.
Email API pricing is determined by the volume of emails sent each month. Pricing starts at $9.95
per month for organizations sending 40,000 emails or less each month and scales from there.
For those organizations sending multiple millions of emails each month, the company offers
custom pricing. Here is a breakdown of all of its pricing plans:
On the company’s last earnings call, management would say that its total customer count grew
to more than 74,000, an increase of 35% Y/Y. In addition, it processed 140.2 billion emails, an
increase of 29% Y/Y with an average of more than 1.5 billion emails per day. Finally, its Core
Email API revenue increased 32% Y/Y.

One “hot” topic on the conference call surrounded GDPR. Management indicated that it
attracted a lot of attention, but the fact is they saw no discernible change in email sending
patterns or volumes since the GDPR implementation date had passed. “Our volume deliveries
since the May 25 GDPR effectiveness date had been in line with our expectations across all
customers and all geographies.”
In fact, the day before GDPR became effective, SendGrid had their second largest sending day
ever at just over 2 billion emails. From May 22 to the 25, they processed 7.9 billion emails in
total, which was their largest ever four-day surge. “And the great news is we didn't miss a beat
on delivery because we've scaled our infrastructure to accommodate precisely those types of
loads on our system on a routine basis.”
In addition, one possible catalyst to keep an eye out for in the next couple of months surrounds
the upcoming holiday season, specifically Black Friday and Cyber Monday. Management
reminded everyone that on Cyber Monday in Q4 of last year, they processed more than 2.1
billion emails, their strongest single day ever and they always gear up in advance for days like
Cyber Monday and Black Friday, because they historically are among their top sending days
each year.
Finally, on the conference call, CEO Sameer Dholakia would mention that last quarter, they
talked about the introduction of a feature enhancement that aids their customers in email
delivery and troubleshooting, primarily an enhancement for our email API customers. “We’ve
started to gain meaningful traction from this feature enhancement, which we call EASE.” EASE
helps the company differentiate their Email API products and makes customers’ jobs easier.
Marketing Campaigns – In late 2015, SendGrid launched its Marketing Campaign service, which
allows marketers to create and manage contact lists, build and utilize email templates, and
execute email campaigns. While this only represents 18% of revenue, the segment remains in
hyper-growth mode, and carries a ~4x higher price point than its transactional emails. Piper
Jaffray believes that the most natural adjacent customers include those who are currently using
the platform for transactional emails that are looking to create personalized messages with high
deliverability rates.

In Q2, Marketing Campaigns revenue increased 97% Y/Y and management would go on to say
that this is their most significant market expansion opportunity. Within Marketing Campaigns,
they are seeing a healthy mix of growth from both new customers where they had their
strongest quarter-over-quarter growth since the product's launch and within their install base
with about 11% of their email API customers now also using Marketing Campaigns.
CEO Sameer Dholakia would comment, “We continue to make good progress cross-selling
Marketing Campaign into our traditional email API-base. In fact, one of our largest email API
customers since 2014 that provides users with a social app to connect communities in the
second quarter adopted SendGrid's marketing campaign solution, signing a six-figure ARR
deal. They loved the simplicity of our user interface and knew that it would be easy for their
marketers to learn and adopt it.”
A Look at Cross-Selling and Expansion
Cross-Sell – Based on the last comment on the previous page from the CEO, it’s only fitting that I
transition into the company’s potential Cross-Sell opportunity. Let me first leave you with this
quote from management:
“As we expand our market opportunity, we remain focused on both adding and cross-selling
new capabilities to our large and ever-growing installed base. Many of our customers now
leverage multiple SendGrid products. Today just under 17% of our Email API customers by
count also utilize either Marketing Campaigns, Expert Services or both. That number has
increased steadily, growing from just 10% at the end of 2016, accelerating well above our
revenue growth rates.”
Following meetings with CFO Yancey Spruill and vice President Investor Relations David Bank,
Stifel issued a note where they raised their price target to $40 from $32 saying that SendGrid
sunset its legacy Email Newsletter product last year in favor of a more comprehensive Marketing
Campaigns tool. While a quarter or so of the company's recent triple-digit revenue growth rate
can be attributed to migrations from the Newsletter, the majority of growth (roughly 3/4, we
think) has come in the form of upsells into the core Email API base, Greenfield subscribers, and
competitive wins. We believe SendGrid remains in the early stages of its Email Marketing upsell
strategy, and see potential for that motion to fuel long-term growth in the segment.
International – On December 11th, 2017, Stifel would write in an initiation note that despite
having very little international infrastructure or product localization, SendGrid has derived just
over one-third of its total revenue from customers located outside of the United States in each
of the last three years. As the company’s website, marketing software, and support services
begin to more effectively support languages other than English, Stifel believes SendGrid will
open the door to opportunities around the world. SendGrid also intends to add more physical
infrastructure in international markets to improve product delivery and comply with regulatory
requirements. The company’s recently opened London office** is its first international buildout
of sales and marketing capacity.

** From an October 10th, 2016 Press Release:
“With a rapidly growing base of nearly 10,000 paying customers across Europe, SendGrid, the
leading delivery platform for customer communication that drives engagement and growth,
today announced that it has opened an office in London. The office, located at Albert House 256-
260 Old Street, London EC1V 9DD, enables SendGrid to better serve existing customers in the
region and provides a platform for future international growth and expansion.”
Fast forward to September 12th, 2018, and Stifel would highlight that beyond the U.S., they
point out that international markets have turned into a fantastic opportunity as well, accounting
for some 40%+ of revenue, up from 36% of revenue at the end of FY16. While still
predominantly aimed at English-speaking geographies, the self-service purchasing nature of the
model puts no formal barriers on the distribution capacity of the service. Notably, management
emphasized that the overwhelming majority of new customer additions are “green field”
customers, or customers that didn’t previously have any sort of formal outbound email delivery
capability.
Acquisition Material?
As we’ve always stated, we don’t buy the stock or the options solely based on takeover
speculation. But, after laying out the fundamental case for SendGrid, I believe its appropriate to
share the commentary from Piper Jaffray analyst Alex Zukin regarding M&A:
“We believe that SendGrid is a strategic asset given its market leadership position as well as
deep integration with its customers’ products. We believe logical acquirers could potentially
be Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG), as well as Adobe Systems (ADBE).
We believe MSFT could use SendGrid as another valuable adjunct to premium Azure services
and would market it as an alternative to Amazon’s SES product. Additionally, MSFT could
leverage SendGrid’s nascent marketing product as a core SMB marketing platform. Also given
the data scale that SEND operates there are likely significant AI and ML opportunities that
could be unlocked by a hyperscale cloud vendor.” (See Snapshot Below)

Upcoming Events
-The company’s Q3 earnings, while not set yet, should happen in late-October.
-SendGrid CEO and CFO will be meeting with Morgan Stanley on November 15th in New York

Axon Enterprise (AAXN)
Buy AAXN January 70 Calls for $6.40 debit and Sell November 80 Calls for $1.75 credit.
Formerly known as Taser International, Axon is a leading vendor of software and hardware
solutions utilized by law enforcement and other security related personnel. Axon protects lives
with a network of connected public safety technologies. It was in 1993 when Axon first
transformed law enforcement with its TASER weapon (Overview Discussed Below) as an
alternative to traditional, lethal weapons. Axon continues to protect life in new ways with a
growing suite of connected devices and apps, from TASER smart weapons to body cameras,
digital evidence management tools, records management systems, in-car video solutions,
artificial intelligence automation, training and mobile apps.
TASER Weapon – As mentioned above, this was the company’s flagship product, which the
company began developing in the early 1990s. The TASER product is a conducted electrical
weapon that delivers a pulse of electricity via two electrodes designed to incapacitate its target
based on the company’s proprietary Neuro Muscular Incapacitation technology.
Axon sells and markets its TASER products to two primary markets: 1) Law Enforcement,
Military, and Private Security Personnel and 2) Consumers for Personal Safety Protection. The
vast majority of the company’s TASER sales are non-consumer based and come in two primary
models. The first is the company’s X26P, a single shot device with the smallest form factor. The
second is the X2, a dual shot device that also includes dual lasers and a warnings arc.

Body Cameras – The company develops and markets three primary camera devices designed to
capture high definition video: Axon Body 2, Axon Flex 2, and Axon Fleet. Each device is
integrated with the company’s Evidence.com platform to manage video evidence. Axon also
manufactures and sells a Signal Sidearm device that wirelessly alerts all nearby Axon cameras to
begin recording when an officer removes a firearm from a holster.
According to the Department of Justice, 2008 domestic data showed sworn officer counts using
Axon hardware to be 732k, a 21% increase from 603k in 1992. There are other sources that
suggest a sworn officer count of 765k as of 2012. Data USA, a multi-entity consortium that
includes Deloitte, estimates 683k domestic patrol officers in 2014 and expects this population to
increase 7% to 718k in 2024.
Adoption rates for Axon’s weapon and camera hardware are high and increasing, which
Needham believes is a positive precursor to adoption of the company’s Evidence.com and RMS
platforms (More on this Later) to manage the data generated by these devices. The Bureau of
justice Statistics estimates nearly 80% of all domestic police departments had authorized the
use of conducted electrical weapons as of 2013, an increase from 60% in 2007 and 7% in 2000.

The Move to Subscription
Axon has shown to be a market leader in weapons and body camera and has attained mass
adoption domestically. However, the company has begun leveraging its historical market leading
position of non-lethal weapons to expand deeper into subscription-based solutions that collects
and manages data related to incident investigations. On the Q2 conference call, CEO Patrick
Smith would say:
“One of the big accomplishments in the quarter was our follow-on offering, which we consider a
re-IPO. The offering was highly beneficial on a couple of key fronts. First it provided us with
significant resources to be able to accelerate our shift across the entire business towards
subscription. And we've begun executing on the internal functions now to support that, so we
can move the TASER business even more aggressively to subscription.”
In his initiation note, Needham analyst Scott Berg would say, “Axon is in the middle stages of a
move to a subscription-based revenue model that we believe will yield significant
improvements to revenue visibility over time. We prefer subscription revenue in general to
traditional perpetual license or product revenue because the subscription model delivers more
predictable near- term revenue and cash flows while also being more profitable over the long
term. Axon expects to generate ~45% more revenues over 20 years from a customer versus
individual product sales with little incremental cost. Subscription revenue has increased from
16% of total revenue in 1Q16 to 38% of total revenue as of 4Q17 and represent roughly 40% of
recent TASER sales. Also, we believe public sector customers are shifting their purchasing
preference towards subscription models to make spending more predictable. Over the longer
term, we believe the company can generate at least 80% of its revenue from subscription
sales.”
As Axon moves toward subscription, there are two specific initiatives the company has
announced:

Axon Evidence.com – This is the company’s robust, cloud-based platform designed to manage
the workflows and video capture in the field. Users can upload content from almost any Axon
device, search for historical evidence, and manage videos including marking or tagging as
required to document evidence.
Imperial Capital analyst Saliq Jamil Khan would ask management if they are having more
successful conversations in the field, in the station, or in the courtroom. CEO Patrick Smith
would respond by saying, “That is a great question, I would say, definitely the conversations
are getting easier and easier over time. When we first launched cameras – I think there was a
ton of skepticism that, wait a minute, you're a weapon company, you're going to do cameras?
And cloud software, well, A, what is that and then B, how do we know that you're the people
to develop it? I think having delivered on a number of successive transformational product
experiences, we've gained a ton of creditability with our customers, many of them tell us that
Evidence.com is the most reliable and enjoyable software that they use on a day-to-day
basis.”
Another catalyst for the company’s Evidence.com platform dates back to May 4th when Axon
announced it was acquiring VIEVU, a public safety camera and cloud-based evidence
management system provider, which is built on the Microsoft Azure Government cloud, the
first enterprise cloud to directly support the FBI’s Criminal Justice Information Services Division.
With this acquisition, Axon gained service customers immediately such as the New York City
Police Department, the Miami-Dade Police Department, the Phoenix Police Department, the
Oakland Police Department, and the Aurora, CO Police Department.
In a note following this transaction, JPMorgan analyst Mark Strouse said that he believes the
deal strengthens AAXN’s lead in the narrow context of body-cams/digital evidence
management, and should allow the company to better compete with international competitors

(e.g., UK-based Reveal) as well as larger law enforcement technology competitors (e.g.,
Panasonic, Motorola Solutions).
Meanwhile, Ladenburg Thalmann analyst Glenn Mattson had similar comments saying that long-
term, AAXN will look to upsell the major city customers Vievu currently has on the multitude of
new products and services that AAXN is introducing. The company can now boast 73 major
cities as customers and moving forward we find it difficult for other vendors to compete, given
the size of the remaining market. If AAXN can successfully convert these customers they may
have reached a critical mass that even large potential newer entrants like Motorola will have
trouble competing.
Axon Records – This is the second initiative from Axon in which an early version of the product
is in the field testing with customers. A significant component to the company’s growth strategy,
this new platform has been developed to replace much of the manual paperwork and
workflow that continues to exist within many law enforcement departments. Needham
expects Axon Records will be a natural extension of the company’s Evidence.com platform as it
will incorporate collected evidence with the other required and pertinent information of an
incident including names, location, contact info, etc.
JPMorgan, in a post-earnings note, would remark that AAXN expects to have two more trials
underway by year-end, with general availability expected in mid-2019.
On the conference call, Axon’s CEO mentioned that they are not at a stage where they can show
results publicly. However, they do have the International Association of Chiefs of Police
conference coming up in early October. That's typically a place where – if you're interested in
seeing customer reactions, it's a great place to go watch the show, get a feel for the
competitive landscape and I believe, Andrea, that we'll be hosting an event for investors in
Orlando at ITP this year as well.

International Expansion
In the second quarter, Axon reported that international revenue came in at ~$20M, down
slightly Q/Q but up 50% Y/Y. The international business can be lumpy, but the company stated
that the 1H revenue strength was broad-based. CEO Patrick Smith believes that over the next
couple of years, there’s a lot of opportunity for international to actually take up a greater
percentage of revenue.
CEO would add, “We're still establishing our presence in the international markets, and there
are some early beachhead accounts that we're trying to win or that we've won. And there are
some pricing that's not really indicative of what this business is going to look like long-term.”
JPMorgan believes that continued international growth could provide another re-rating higher
for the stock in time.

Merit Medical Systems (MMSI)
Buy MMSI January 60 Calls for $5.30 or less.
Merit Medical is a leading manufacturer and marketer of disposable medical devices used in
interventional, diagnostic and therapeutic procedures, particularly in cardiology, radiology,
oncology, critical care and endoscopy. Since being founded in 1987, the company’s product
portfolio has grown to provide a diverse range of high-quality, innovative products that
improves the lives of people across the globe. Per the company’s website, here are its main
divisions:
It was on July 23rd when Merit reported its second quarter results which beat on both the top
and bottom line and saw its share price rise by 2.3%. A more detailed breakdown will be shown
below. Beyond that, the three biggest takeaways and near-term catalysts for the company
surround its recent agreements/new products, its international opportunity, and a competitor
shortage.
-EPS of $0.43 vs $0.40 estimate – Beat

-Revenue of $224.8M vs $214.63M estimate – Beat
-Worldwide Revenue increased 20.5% Y/Y
-Margins increased 140bps Q/Q and 60bps Y/Y (first sequential improvement in margins since
Q416)
-Cardiovascular segment increased 20.4%
-Endoscopy segment increased 22.3%
-Raises FY EPS Guidance to $1.60 - $1.70 vs $1.65 estimate
-Raises FY Revenue Guidance to $870M - $880M vs $849.8M estimate
CEO Fred Lampropoulos would comment, “The company grew substantially in the second
quarter, driven primarily by demand for our legacy products, a full quarter of selling products
acquired from BD, and continued growth in our international markets,” said Fred P.
Lampropoulos, Merit’s Chairman and Chief Executive Officer. “We see additional growth
opportunities for the balance of 2018, due primarily to recently-awarded tenders, anticipated
releases of new products, commencement of production of the Laurane Medical product line in
our Irish facility, our acquisition of product distribution agreements for the DirectACCESS Medical
FirstChoice™ Ultra High Pressure PTA Balloon Catheter, and the execution of a product
distribution agreement for the QXMédical Q50® PLUS Stent Graft Balloon Catheter.”
Distribution Agreements/New Products
NinePoint Medical – On May 2nd, Merit Medical entered into a worldwide distribution
agreement with NinePoint Medical (known for its Optical Coherence Tomography platform),
whose mission is to provide physicians with an OCT imaging solution to enable accurate
diagnosis and more effective therapy for all patients.
Today, commercial OCT systems are used regularly as an imaging standard in ophthalmology,
cardiology, dermatology, and general research. NinePoint’s Advanced OCT technology, licensed
from the Wellman Center for Photomedicine at Massachusetts General Hospital, initially focuses
on esophageal and general imaging of tissue microstructure.
In addition, NinePoint’s NvisionVLE® Imaging System, with Real-time Targeting™, uses an optical
signal acquisition and processing method to create high-resolution cross-sectional images and
mark tissues—letting you evaluate 100% of the tissue in a 6cm scan in real-time. 3mm deep. At
a resolution of 7 microns. All to provide a more thorough evaluation – potentially leading to
improved biopsy targeting for diagnosis by histopathology, and more complete information to
determine the best treatment for patients.
On the Q2 conference call, Merit Medical would provide an update regarding this agreement:
“You're all familiar, of course, with the NinePoint agreement. And we're already starting to
see the benefits of NinePoint Medical and that OCT technology along with our sales force. And
you'll see for the quarter and for the year that our revenues now have made a very, very nice
move in terms of the growth in the business. And we expect to continue to see this. They are
playing off each other very, very, very well. And we've closed some recent accounts at Mass

General, at the VA in Houston and other accounts where we're getting the benefit of this
technology along with Merit's existing products.”
DirectACCESS – Is the developer of the FirstChoice UHP PTA™ catheters. The line of FirstChoice™
products are PURPOSE BUILT to specifically address the unique clinical requirements of dialysis
access related lesions.
As of May 23rd, 2018 the FirstChoice UHP PTA™ catheters are owned by Merit Medical of South
Jordan, UT and sold through the Peripheral Intervention Division.
This was certainly a purchase from Merit that went under the radar as I could not find a specific
press release with official transaction details. However, on the Q2 call, Merit’s CEO would briefly
comment saying, “And these assets or these products which are approved and in the
marketplace for the high-pressure PTA balloons that are used specifically when you're doing
work with fistulas where you have blockages and you need to open up the areas around the
anastomosis. It's a business of about $2.5 million or $3 million. They really had a very, very
small sales force, a couple of people and working through distributors. And that will now go
into our entire peripheral sales force along with a number of other complementary products
that go along with it. So, we're excited about that.”
Q50 PLUS Stent Graft Balloon – On July 9th, Merit was named the exclusive global distributor of
the Q50 PLUS Balloon, which is widely used in abdominal and thoracic endovascular aneurysm
repair (EVAR) procedures to repair abdominal aortic aneurysms (AAA) and thoracic aortic
aneurysms (TAA). It is also suitable for temporary occlusion of large vessels. The Q50® PLUS
features a broad balloon diameter range of 10 mm to 50 mm and is compatible with 12 French
introducer sheaths, the lowest available profile compared to competitor’s stent graft balloons.

“This addition of the Q50® PLUS Stent Graft Balloon Catheter to our offering allows Merit
Medical to fully support vascular surgeons during all phases of their procedures. We anticipate
no interruption for existing customers as we take on global distribution of the Q50® PLUS, and
in fact, Merit’s existing infrastructure will be an asset for seamless.”
Terumo Tailwind
Potentially, one of the biggest catalysts Merit Medical stands to benefit from is a recent
competitor product shortage. Merit Medical would say this:
“Recently, a competitor experienced substantial global shortages due to internal issues, which
has resulted in increased demand for our Merit Laureate® Hydrophilic Guide Wires, our offering
of microcatheters, including the Merit Maestro®, SwiftNINJA® and the recently introduced Merit
Pursue™ Microcatheter, our Impress® Diagnostic Catheters and our vascular sheaths, including
the recently introduced Prelude IDeal™ and PreludeEASE™ product offerings.”
The competitor being discussed was the large Japanese firm, Terumo, who in July, sent a letter
to customers stating they cannot produce certain products that amount to a total of ~$500M in
annual revenue for them.
This shortage has gotten the attention of plenty of analysts:
According to Piper Jaffray, other med tech companies can produce one or two of these
products, whereas MMSI can meet 100% of them (though it cannot produce $500M worth of
product at the moment).
According to Needham, “MMSI is seeing increased sales of its sheath introducers, guidewires,
microcatheters, compression devices, and catheters as a result. MMSI estimates that the
market for these products is around $500M and that it currently has around $50M of this.

Management noted that the benefit from this started in the last two weeks of 2Q18, has
increased every day, and that they expect to retain the business even after Terumo's shortages
are addressed. It's unclear how long the shortages will last, but MMSI noted that Terumo's latest
guidance is for it to be resolved some time in August.
SunTrust Robinson said they expect the company to benefit from hospitals looking to diversify
away from single sourcing of products after a recent supply-shortage related shipment halt from
Terumo.
Finally, when reading over the Q2 earnings transcript, one comment from Merit’s CEO that
caught my attention relates to Terumo’s history of shortages.
“Now, what they said originally is they'd be back in July, that's changed to August. But as
these things generally go, they have a tendency and I'm talking about Merit's own experience.
They have a tendency to take longer than you think they do. But, listen, if it's stopped next
week or a month, the opportunity has still presented itself. Merit will continue to benefit from
this for years.”
International Opportunity
In a July 2nd note, following management meetings, Piper Jaffray analyst Matt O’Brien would say,
“In terms of geographic expansion, the emerging markets business (just under $200M) is
growing nearly 20% annually and there is plenty of room available to continue delivering
similar growth rates. Overall, we believe MMSI is one of the best mid-cap growth stories in
med tech and it represents our favorite mid cap name, so we encourage investors to start or
build positions.”
This leads me to some specific management commentary from the second quarter where they
said they recently participated in a tender offer in the Middle East. “Last year that tender was
about $1.5 million of business. This year, we received rights or at least opportunity for $6.75
million. Now, that's a significant opportunity. And in these tenders, being present, having your
products in place is really significant for the long-term. Again, these are the legacy products, so
you might get a little bit lower gross margins. But we think that it's better to do that and have to

establish the business for other products like, for instance, the HeRO, other things that are high
margin, but having a presence there is important.”
Upcoming Events
October 2nd – Cantor Fitzgerald Global Healthcare Conference

October 24th – Q3 Earnings (not officially confirmed)

Key Debates and Catalysts
Critical underpinnings of our market views are subject to vigorous debate in the marketplace.
We looked for debates that are likely to matter to investors, that are likely to be settled (or
significantly advanced) in the future. Some of these are particularly relevant for Q4, most would
likely take longer and play out throughout in 2018 and beyond.
The key here is taking an alternative yet high-probability view of certain sectors and stocks
which will matter the most in the future. As such, at minimum, being able to provide you with
view on risks and opportunities.

Yellow Pages On Steroids
Buy Yelp Inc (YELP) January 50/65 Call Spread for $3.60 or less.
If you’ve been a Jaguar client for a long time, you may have noticed that we’re always hunting
for companies that are producing “sequential acceleration.” Back in Feb and May when YELP
reported earnings, stock sold off. But after August earnings, stock ripped higher by +26% on 2nd
highest volume in over 3 years and instantly went from 52-week low to 52-week high. Quite a
change in character. What happened? In short, management beautifully shifted the narrative
from worrying about ARPU decline to optimizing advertising revenue growth. Investors liked
that. August release highlighted three things:
➢ Paying Advertising Revenues came in better than expected at $214M vs $212M

estimate, up +21% YoY and sequentially accelerated from +20% growth in prior quarter.
➢ Paying Advertising Accounts also came in better than expected at 194K vs 184K
estimate, up +19% YoY and sequentially accelerated from +14% growth in prior quarter.
➢ EBITDA Growth came in better than estimate increasing by +20% YoY to $47M, also
sequentially accelerating from +15% growth in prior quarter.
In all three metrics, growth rate hit the best

level we have seen in nearly two years. But it
came at a cost. Average Revenue Per User
(ARPU) declined by -5% from $417 to $397.
Management explained to JP Morgan analyst
in earnings call why ARPU is not a concern:
“An advertiser may only come in for a

partial term of the quarter or even a partial
term of the month. And that trial purchase
activity is going to blend down the observed
revenue per account. But when you look at
the spend commitments that the advertisers
are coming in with and you look at the
monthly spending of preexisting advertisers,
those numbers are exactly consistent and
growing.”
Indeed, as pic shows to the right, local advertising accounts are accelerating because
management is optimizing overall revenue growth at this point to gain as much local traction
with small businesses (SMBs) as possible. So, the question is how are they gaining traction with
local advertisers and whether this momentum is sustainable?
Request A Quote (RAQ) Feature – Exactly one year ago, late September 2017 Yelp announced
that it’s no longer just a place to go find the best burger in town. It has transformed the
platformed and now helps millions of users find the best local service providers to tackle
plumbing catastrophes, move to new homes, connect with the most trustworthy mechanic in
their neighborhood, and beyond (sort of like Angie Homeservices (ANGI) which is another name
we continue to like very much). Yelp launched Request a
Quote (RAQ) which allows users to request up to 10 estimates
with a single click and over the course of last 4 quarters of
studying millions of interactions between its users and
businesses, Yelp was able to build new and refine ways to
connect users to your plumber, mover, contractor, gardener,
etc. more efficiently. In a blog post Yelp announced:
“Today, we’re excited to share that these improvements are

netting big results! Yelpers send an average of 40,000 quote
requests per day. We’re also proud to say that businesses are
loving RAQ — today, more than 80% of all requests are
responded to within 24 hours, and we are adding new
features including Photos, Real Time Chat, Machine Learning
and Service Editor.”
These features have become a huge hit with users and they are
bringing local advertisers on the platform at accelerating
speed. It’s is value-added service to be able to quickly connect
with a service provider, chat immediately right on your phone
app, and decide on how to proceed. Hence the term “Yellow
Pages on Steroids.”
On September 21, large buyer of 2,500 January 55/65 call spread paid $2.45. Approx $612,500
bullish bet that remains in open interest. That prompted me to dig deeper and here is what we
found out:
Proprietary Survey Points to Further Acceleration – On September 14, RBC Capital did large
survey of 2,450 small businesses and found out only 30% of US SMBs advertise online, which
shows market penetration remains low and thus major opportunity for advertising platforms
like Yelp. Yelp ranked #4 most popular channel for SMBs. Future spend intentions on Yelp
platform skew positive, both in absolute terms and relative to competitors (suggestive of market
share gains). Lastly overwhelming 95% respondents described Yelp as “Very Helpful” or
“Somewhat Helpful” which is better than both Facebook and Google. The survey essentially
reveals that RAQ has given big major new vertical to Yelp and it is already achieving strong
momentum. RBC Capital estimates it could generate up to $200M in incremental revenues by
2020 (from 0% to 10% of total sales) and could take company’s EBITDA higher by +15% above
consensus.
Lastly, Yelp long term weekly chart is coming out of long basing formation. As it attempts to
breakout through $50, we believe it goes to $70 over time. See HERE.

For Adventurers. By Adventurers.
Buy Malibu Boats (MBUU) February 55 Calls for $5.50 or less.
Buy Johnson Outdoors (JOUT) Common Stock for $93.00 or less (no options in this).
As a naturally inquisitive and curious person, I am always trying to connect dots and expand
upon research to include new ideas. Back on June 5th in chat room I did some channel checks
and pointed out:
“Pontoon market has been exceptionally strong over the last seven years, growing retail unit
sales at an +11% compound annual rate since 2010, outpacing the industry +6% growth rate.”
Then on September 2nd Jay wrote a bullish piece in Weekend Research on Brunswick (BC), see
HERE. BC has large boat business and Jay pointed out:
“July new boat units increased +11.2% Y/Y (vs. +2.9%), with +11% growth in main powerboats,
and an +0.8% increase in US boat registrations. In addition, small aluminum boats, typically a
leading cycle indicator, picked up after a slow start to the year, increasing +13.2% in July and
+4.5% YTD.”
A week later, on September 6th Malibu

Boats (MBUU) posted absolutely
blowout quarter with huge +76% YoY
jump in sales, +8.5% YoY increase in net
sales per unit to $81,182 and huge
increase in gross margins rising
comfortably management target to
$24.2%. Total unit volume grew +70%
YoY to 1,7058 boats. MBUU posted
$0.76 EPS vs $0.59 estimate on
revenues of $138.7M vs $122.6M
estimate. MBUU benefited not only
from strong organic sales but also from
acquisition of Pursuit Boats. Excluding all acquisitions, organic growth was still very strong up
+12.4% YoY. And just like last time, company introduced FY2019 guidance that appears
conservative. Guidance is based on revenue growth of only “high single digits” and more
importantly it does not consider expected accretion from Pursuit acquisition. Management said
they will update guidance before year end 2018 when Pursuit acquisition in closed which I
believe could serve as another catalyst. I say this because in conference call the CEO pointed out
$0.35 EPS addition per year from Pursuit, which equates to 10% of current estimate. Pursuit is
premium brand, sells about 500 boats per year with average price of $225,000 and carries
EBITDA margins of low teens. There is room for those margins to go higher from better
efficiencies just like management proved that after Cobalt acquisition in July 2017. In earnings
conference call management stated that Cobalt boat sales continue to exceed internal
expectations, yet again built conservatism around this in guidance. Cobalt is also taking market
share. Also stated retail demand remains robust driven by strong consumer confidence (which
has 92% correlation with retail sales and CC hit 18 year high of 138 level in September).
So, you have several drives of continued stock outperformance in MBUU including: Strong
organic sales from high consumer confidence, Pursuit closure and subsequent margin
improvement and lastly several new product launches coming up including Malibu 22 LSV, Axis
A22, Axis T23, and Cobalt A36 which management specifically called out in earnings call as “very
popular” without giving specific data.
Channel Checks Remain Strong - All this extremely positive commentary led me to do further
checks on boat sales. On September 20, Wells Fargo provided channel checks and they look very
good:
“Small aluminum boats, typically a lead cycle indicator, remain solid +7.2%/+4.9%
August/YTD. Ski/wake +14.8%/+9.7% August/YTD despite difficult comps. PWC is accelerating.
Canada retail +11% July YTD (led by Ontario). For 2018 we continue to expect unit retail +4-5%,
total retail dollars +9-10%. 3Q18 comps very easy because 3Q17 was up only +1.5% YoY.”
That discussion brings me to Johnson Outdoor (JOUT). Once again, by measure of simple
observations and connecting the dots. Back in March 2015 I went to top of one of beautiful ski
mountain outside of Denver, Colorado to attend a gorgeous wedding. Stayed 3 nights at a ski
resort owned by Vail Resorts (MTN) which by the way has also been a great stock for many
years. Hanging out at a bar one night with some distant family members, spent an hour talking
about fishing and watercraft. First time I heard about trolling boat and water anchor brands
such as Minn Kota, Cannon, Ocean Kayak, etc.
The next day I was on

my computer to find
out who is the
leading producer of
all this fun outdoor
adventure stuff.
Turns out it’s JOUT.
Didn’t do much with
stock back then. But
now as I saw all these strong earnings reports from MBUU and BC and boating channel checks
and high consumer confidence, decided to take a look. Check out in picture to upper right about
flat sales from 2013-16 and then sudden big jump to $490M in 2017 (up +13% YoY) and now
expected to do $548M in 2018 (up +12% YoY). Similarly, gross margins sharply expanded last

year and expected to continue the rest of 2018. JOUT has only one analyst coverage, basically
nobody follows this $948 million maker of recreational products.
➢ Company posted $2.37 EPS last quarter sharply beating $2.05 estimate. Looking at
history they have materially beat street estimate in each of last 6 quarters.
➢ Revenues were $170M vs. $165M estimate and management called out
“unprecedented growth in our flagship Fishing brands throughout the year.” Several
new products have been introduced in past 18 months that have collected powered
growth higher from flat to +17.3% YoY including Minn Kota, Humminbird® and Cannon®
brands across all key channels. Camping sales outpaced prior year by 14.7%, driven
largely by growth in Jetboil and Eureka! brands in key consumer channels
➢ Net Operating Profit grew by +29% YoY last quarter and gross margins expanded once
again to highest level in company’s history at 46.5%.
2017 was a build year for JOUT. 2018 so far has not seen as many new production introductions
as we saw in 2017. Management talked about new fishing boats and motors to be launching by
year end. But aside from it most other stuff are accessories. This creates a risk as much of
growth momentum from here will depend continued strong industry boating and fishing
channel checks as highlighted by Wells Fargo commentary above.

Sleep Well in These Scenarios
Buy Tempur Sealy (TPX) January 55/65 Call Spread for $2.70 or less.
Here I will lay out two major scenarios / catalysts that could significantly move the stock higher.
I originally thought about making TPX a Top Pick but timing of these catalysts is uncertain. While
I am recommending January calls, it is quite possible that after a while the trade will have to be
rolled out to March to buy more time.
Scenario #1: Mattress Firm Could File Bankruptcy Soon – Way back in August 2016, a South
African company called Steinhoff acquired US-based retailer Mattress Firm (“Firm”) for $3.6
billion. Really bad deal. Steinhoff paid huge +115% premium above prior day’s closing price of
Firm stock price. Within a few months later, the existing distribution agreement between Firm
and TPX went sour. Steinhoff thought that they could negotiate changes to deal in place
between Firm and TPX to their advantage, such as getting significantly higher margins, but
turned out mattress maker TPX wasn’t going to play ball. In rather an angry letter the CEO of
TPX Scott Thompson first threatened and then terminated contract with Firm in 2017. Firm had
historically carried Sealy mattresses, and Tempur-Pedic, which acquired Sealy in 2013, has sold
mattresses through the retailer for more than 10 years. So, this was a massive blow to Firm. TPX
accounted for 80% of total Firm’s sales. It gets worse. The parent company Steinhoff invested
serious amounts of cash to buy up many small competitors arounds the country including
Sleepy’s, boosting their store count to more than 3,500 or about 20% market share in hopes to
get commanding pricing power. Only to find out that their largest supplier TPX has cancelled
agreement. What a bummer! South Africans weren’t so smart after all.
Naturally, what started immediately after cancelling contract with TPX was mounting losses for
Firm. To be fair, it hasn’t been pretty for TPX either for past 4 quarters to lose biggest
distribution arm in America. It has hurt sales but TPX is far better run company and it has other
ways to sell its mattresses. From August 6-8 TPX stock jumped +21% after Reuters ran an article
suggesting Steinhoff was considering throwing Firm under into bankruptcy. See HERE. On
August 15, NY Post ran a story that private equity funds Advent (owner of Serta Simmons) and
THL Partners are said to be separately mulling bids for Firm and may include a pre-packaged
bankruptcy deal. See HERE. This is after Firm stated its running out of cash after booking $150
million operating loss during 1H18. The logic behind TPX stock rally since these articles started
surfacing is that it would lead to stoppage of highly promotional pricing behavior by Firm as well
as a reduction in up to 25% of unprofitable Firm stores.
The scenario here is Firm gets acquired by private equity for peanuts on the dollar, then it gets
thrown into pre-packaged bankruptcy, all of Firm’s silly promotional activities stop immediately,
up to 800 of underperforming Firm stores are closed, then TPX signs a new contract to restart
selling through Firm under new leadership. Just the idea of all this is enough to send TPX stock
surging higher sharply most likely to $65 to $70 per share driven by both forward earnings and
multiple contraction. This may sound crazy but BAML believes that this could add up to $0.76
EPS to current FY2019 estimate of $3.90. Then add assumptions around pick up in TPX sales with
new contract plus margin improvement. And then apply 15x multiple and you have case for $90
or even $100 stock. Almost double of where TPX is trading currently.

Scenario #2: Anti-Dumping Petition Clears Path for Higher Sales – BAML research points out, on
September 18, the American Mattress Manufacturers including Tempur Sealy, Serta Simmons,
Leggett & Platt and others filed an anti-dumping petition against Chinese foam and innerspring
bed manufacturers which alleges unfair trade practices that caused material injury and threat to
the US mattress industry. The petitioners allege dumping margins that range from 267% to
1,777% and are seeking antidumping duties. The investigation is expected to last 9-13 months
and a preliminary determination imposing antidumping deposits within ~6 months. Given the
current trade climate in the US with duties imposed on imported washers and dryers as well as
on steel and aluminum among many other industries all in 2018, and precedent from a
successful similar case filed against Chinese innerspring producers in 2009, it is highly likely that
the petition will go through. The research suggests between 2015 and 2017, imports of cheap
beds from China have increased 218%. This has been particularly detrimental on lower price
beds (below $1,000) sold by US manufacturers which are down 8% in YTD 2018. TPX sells a lot of
lower priced Sealy beds.
I have no doubt that some action will be taken against China. But I’m unsure of timing. The Dept
to Commerce in late-July already determined how China has hurt US manufacturers, see HERE.
So the investigation may already be over or soon to be over, which tells me duties could be
imposed in next 3 to 6 months.
Price Hike Coming Soon – On July 18, TPX sent a letter to all dealers that it would be hiking
selling prices effective October 15 as following:
“We are announcing a $200 increase in the suggested retail prices for all sizes of Tempur-Pedic
Adapt and ProAdapt mattresses, effective Oct. 15. In addition, mattress wholesale prices for
Tempur-Pedic Adapt and ProAdapt mattresses will increase by $90 on all sizes. Under the new
prices, a queen Adapt mattress has a suggested retail price of $2,199, with a retail markup of
54%. A queen ProAdapt mattress has a suggested retail price of $2,999, with a 55% retail
markup.”

Awaiting FAA Certification for Longitude
Buy Textron (TXT) March 75 Calls for $2.95 or less.
On July 18th TXT posted Q2 earnings which was very good but stock price action was flattish. So,
I did some digging considering we know this company very well from 3Q17 when it was made
Top Pick. Q2 EPS was exceptionally strong coming in at $0.87 vs $0.70 estimate with Revenues
beating sharply at $3.73B vs $3.52B estimate. FY2018 EPS guidance was also raised to $3.25 vs
$3.17 estimate. Margins were strong in 4 out of 5 business segments. So, what’s the problem?
Why flat price action?
Turned out book-to-bill ratio (B-B) in Aviation segment came down sharply to 1.0x in Q2 from
1.4x in Q1. That’s not good. Specially when we are seeing steady acceleration in business jet
demands. Something doesn’t make sense. What happened here? So, I pulled the earnings
transcript and here is a comment from the CEO that caught attention:
“On the new product front, the Citation Longitude, our new super midsize aircraft continues in
the FAA certification process. Based on the FAA’s new certification requirements, the number
of ground and flight test conditions to be met by the Longitude program has nearly doubled
the amount completed on past certification programs. This process is taking longer than
initially planned, as our engineering team works alongside the FAA through the enhancement
certification process for the first time.”
Ah, so that’s what pulled B-B ratio down. Quick history: During entire time from 2012-16 period
Aviation segment struggled to sustain B-B ratio above 1.0x because of soft business jet demand.
Then is it improved in 2017 and hit point of 1.4x in 1Q18, it was disappointing to see it come
back down to 1.0x in 2Q18. But now it makes sense based on this comment about FAA ongoing
inspection of new jet Citation Longitude. TXT was expecting to final certification in summer. But
it was delayed. Question was asked in conference call when they will get it, to which the CEO
answered:
“I think it’s within the next couple of months. The guys are working really hard at this. The
good news here is there is no issue, it’s not that there is a conflict between us and the FAA
over anything technical or programmatic or the aircraft itself it’s just – this new process
involves the creation of thousands of pages of documentation, which we just haven’t done in

the past and it’s a result of the implementation of this new process and it’s just an enormous
amount of work that we haven’t had on previous certifications that was a bit unplanned.”
Frustration it is taking this long. And

therefore, stock had sort of flattish price
in July despite what was clearly a blowout
quarter. The Longitude has range of
greater than 3,500 nautical miles and a
maximum operating speed of greater than
0.84 mach. The aircraft has a full fuel
payload of greater than 1,600 pounds. The
aircraft is quiet and has a total direct
operating cost of less than $2,000 per
hour. Cessna views the main competitors
of the Longitude as the Bombardier’s
Challenger 350, General Dynamic’s Gulfstream G280, and Embraer’s Legacy 600. There are 6,000
holes required to be drilled for each wing in Longitude. It is just one of many reasons why it has
taken longer than normal to get FAA certification. It is the best in class beautiful business jet
priced at “just” $29 million.
Given that in July earnings call management didn’t provide specific timing of when they will get
certification, analyst community has practically left any upside out of their Q3 estimates.
However, on September 28, BAML visited Textron Aviation facility in Wichita, Wisconsin and
observed Longitude production lines, which would suggest the work has already begun. If true, I
expect Q3 earnings report to show jump in Book-to-Bill ratio and stock to gap higher on those
results. Indeed, here is a quote from the CEO in July earnings call: “We will have all deliveries in
sort of late Q3 into Q4 or even if for some reason this thing doesn’t get across the goal line,
then they would all deliver in Q4. I feel good.”
Many Other Reasons to be Bullish on Textron –
➢ In the past six months, management has seen improvement in demand. Business jets,
for some products, are starting to build a backlog and are no longer a spot market. Each
quarter, the company is getting better pricing.
➢ YTD, the average daily utilization rate for Cessna aircraft is up 3.5%. Additionally, there
are fewer competitive aircraft for sale in the used market. For Citations less than 10
years old, only 3.5% are for sale.
➢ Textron is in the process of delivering first order of 100 Sky Courier jets to FedEx (19-32
seat passenger). Management sees this rising to 600 in the future.
➢ Management has increased its sales force from 12 people to 120 people along with
higher infrastructure spending in Vietnam, Singapore, Malaysia and China to increase
factory production in anticipation of higher international order growth.
➢ Aviation margin improved to 8.2% and beat consensus of 7.5% and management
believes they can get to 9.5% through process automation such as using Kuka drill to
holes in wings instead of labor which cut time from 12 hours to 1.5 hours and cost from
$1.3M to $300,000.
➢ Aftermarket business is expected to accelerate to +7% vs <5% driven by vertical

integration including bigger use of Aircraft on Ground (AOG) service which has been
positively received by the industry.
➢ The US Air Force intends to buy 300 aircraft. The Request for Proposal (RFP) is expected
to be released in December 2018. Proposals will likely to be due in March 2019 with a
decision in 3Q19.
Digital Spatial Profiler
Buy Nanostring Technologies (NSTG) April 17.5 Calls for $3.10 or less.
NSTG is small $530 million market cap life sciences company that makes clinical instruments
that profile hundreds of genes and proteins simultaneously from a single tissue sample. NSTG
has launched instrument platforms, expanded its assay menu, and entered into companion
diagnostics agreements with financial compensation that is arguably unprecedented in the
industry. It’s “nCounter” device uses novel molecular barcoding technology and is selling well for
several years. Quite an innovative company with at least 7 products currently in the market.
The focus of bringing attention to stock this time is the excitement is building around the most
recently launched product called Digital Spatial Profiler (DSP) in which I believe analyst
placement estimates are likely conservative. The early access instrument placements for limited
customers will start late in 2018 followed by a full commercial launch in early 2019. At that point
I expect revenue growth to take off.
➢ DSP is already oversubscribed by 55 mega customers around the world from both
biopharma and academic institutions. For example: Merck, Novartis, Genetech, Yale
School of Medicine, Vanderbilt Ingram Cancer Center, University of Texas Anderson
Cancer Center, MIT and Netherlands Cancer Institute.
➢ DSP will sell for $295,000 per machine. It looks like a common laser printer in office. It
profiles in depth complex matrix of tumor and immune cells in a tissue in ways that was
never done before, providing insights highly useful in cases of oncology and
combination therapies such as chemotherapy. 7-step process that takes 30 seconds as
shown in picture above. Management gave 58-minute long presentation in March 2018
showing hundreds of use cases for analyzing tissues, immediately after which we they
started collecting pre-orders from customers. See presentation HERE.
➢ In preparation of major launch, on September 5th company launched priority site

program for early adopters to gather early feedback on the hands-on user experience
with DSP.
➢ Company has been maintaining revenue growth rate between +10% and +13% for past
several years all driven by nCounter success, expected to reach $105M for FY2018. I
believe this growth rate will shoot higher to +65% in FY2019 led by DSP commercial
launch and beginning of strong placement cycle. Math explained below.
A few comments from the CEO in August 8 earnings call that get attention regarding DSP:
“Demand for the beta instruments is strong, and we look forward to finalizing and announcing
the early access sites in the months ahead. This program is expanded at an impressive pace
and to date we've completed 55 projects and initiated 18 new projects in the second quarter
alone. Overall, we have been successful in generating substantial customer interest in digital
spatial profiling, well ahead of our scheduled full commercial launch.”
The Science and Differentiating Factors for DSP - The outpouring of strong demand for DSP
from biopharma and academic is because it shows not only how protein and RNA expression
varies on average across the tissue, but how they can be localized to different parts of issue. For
example, use cases where DSP is showing high interest is oncology, in which a tumor can be
diagnosed by using single slide for observing 16 different markers in DSP in fraction of time vs.
traditionally immunochemistry device would use 4 slides for same number of markers and in
much longer amount of time. Additionally, DSP will provide critical information not only about
many immune cells are there, but how far they've made it in penetrating into the tumor. And
that's something you can only get through spatial profiling using DSP. Similarly, when diagnosing
a neurological disorder, DSP allows medical practitioners to see wiring of specific neurons and
their adjacency to specific immune cells. This gives incredible amount of insights not available by
any device on market currently.
What is DSP Revenue Opportunity? – A very

interesting comment from the CEO on August 8 in
earnings call that hints on this:
“Early in the year, at our national sales meeting,

we asked our existing reps how many of our
current nCounter customers had already
expressed interest in DSP. And at that time,
which was late January, already 20% of our
nCounter customers were expressing interest.
Since that time, when we go to major meetings
like AACR and ASCO, approximately 50% or half
of our booth leads and booth traffic are DSP-
focused.”
That is perhaps the most important comment from the CEO, which had me look into “nCounter”
sales history as shown in picture to the right. Note as of June 2018, nCounter installed base had
increased to 670, up +23% YoY. Now, let’s do fun math.
➢ If I assume management will sell DSP into 50% of nCounter installed customer base
within first year of commercial launch, that is 670 x 0.50 x $295,000 = $98.8 million in
incremental annual revenues.
➢ If I assume management will sell DSP into 20% of nCounter installed customer base
within first year of commercial launch, that is 670 x 0.20 x $295,000 = $39.5 million in
incremental annual revenues.
The realistic answer likely lies somewhere between 20% and 50%, so let’s take middle ground
35%. That equates to 670 x 0.35 x $295,000 = $69M in incremental annual sales from DSP. Note
street revenue estimate currently for FY2018 is $105M and expected to rise to $120M. So, since
commercial launch will happen in early 2019, let’s take FY2018 revenue estimate of $105M and
add $69M sales from DSP. That’s $174M in FY2019, represents +65% YoY growth rate and it’s
substantially above $120M street estimate.
Stock has historically traded 5x Sales. Based on calculation above, $174M sales times 5 and
divided by 29.5M shares outstanding, equates to $29.50/share price target. Stock currently at
$17.83. This represents 65% upside in next 12 months.
And this price target could be highlight conservative because: 1) we are not factoring in
minimum mid-teens percentage growth in nCounter installed base next year, 2) DSP sales could
reach 50% of nCounter installed base, 3) valuation could be much higher than 5x sales given
most medtech peers are trading at 8x or higher, and 4) we didn’t even talk about Clinical
Sequencing which is next major growth vertical that comes into play in year 2020 with massive
commercial launch expected into 5,000 hospitals nationwide.
Revenue Cycle Management
Buy R1 RCM (RCM) Common Stock at $10.20 or less.
Came across RCM when I saw the following comment from Baird analyst after company
presented in Baird Annual Healthcare Conference on September 7:
“CEO Joe Flanagan and CFO Chris Ricaurte expect another end-to-end revenue cycle win for
1H19 implementation. Additionally, management emphasized that the company’s 2020
guidance doesn’t reflect a mature margin profile for the business. We expect both factors
could drive upside to our/Street estimates over time.”
Until then, never heard of the

company. But then in following
weeks the more I read, the more I
liked the story. RCM is a provider of
revenue cycle management (RCM)
and physician advisory services (PAS)
to healthcare providers. If you own a
hospital or any busy healthcare
facility, RCM segment will help you
by simply taking over entire
responsibility of revenue cycle, so
you can concentrate on quality of care. RCM will bring the best technology to your facility and
perform customer billings, scheduling patients, processing claims, reimbursements, analytics,
staffing, everything! Similarly, if you are a physician and run your own practice, the PAS segment
will take over entire responsibility of revenue cycle. It’s like giving over control of all
administrative functions.
This is quite a remarkable growth

story. The company is able to grow
revenues at rapid speed by constantly
signing large deals with healthcare
facilities nationwide and in Baird
Healthcare Conference on September
7 management gave multiple
indications that demand environment
remains robust as phenomena of
outsourcing hospital RCM is still fairly
new to many and it’s accelerating with plenty of market penetration still ahead. Management
showed strong confidence in 2020 EBITDA revenue and EBITDA projections which is expected to
increase by +43% and +352% over the course of next two years, respectively. A hockey stick
guidance, yet management appears highly confident on this. So, how will they get there? By
making more and more deals, such as this one from June 25: Master 10-year professional
services agreement signed with Ascension Health that will pay RCM: (i) base fees based on a
specified percentage of cash collections and (ii) incentive payments equal to a specified
percentage of cash collections.
Transformative Acquisition – On
February 26, RCM acquired
Intermedix for $460 million cash. A
major acquisition half of its own size.
The acquisition extends RCM
leadership significantly into acute care
physician category. Intermedix offers
highly scaled platform with net
patient revenues under management
of $4.2 billion, 20 million annual
patient encounters, 15,000 providers
served, 700 customers, and significant investment in data analytics and automation providing
full suite of RCM services. As the picture shows on right, Intermedix adds meaningful capabilities
to serve non-acute markets and as a result boosts combined company presence into many
vertical. Before Intermedix, total addressable market size was $60B, now it’s $100B. Before
Intermedix, projected CAGR through 2020 was +12% and now it’s +25%. By pooling talents and
technology with Intermedix, management highlighted recently that is has improved healthcare
provider economics with +5% net increase in Revenues, -20% reduction in Accounts Receivable
and -30% reduction in cost to collect. These efficiencies are even better by year 3 of contract
signing with a customer.
Management shared several success stories in last earnings call highlighting the progression of
efficiencies they create when a hospital outsources revenue functions to RCM. For example,
with Ascension in Phase 1 they started with 400 vendors plugged into all different locations
through out Ascension Hospital System. With help of RCM, Ascension cut that down to 65
vendors after 12 months. Now RCM believes they can cut it down to 20 vendors in short period.
Several Reasons to Believe Guidance is Conservative - The company's next expected customer
deployment is Phase 3 of Ascension, expected to be completed by the end of 2018.
Management also noted that AMG onboarding could begin in 4Q18, and RCM is ahead of
schedule in the integration of the Intermedix product portfolio. Lastly, despite significant
outperformance in 2Q, and likely sequential growth throughout 2H18, the company did not
adjust its 2018 full-year guidance. Perhaps more notably, RCM did not raise its 2020 guidance to
reflect the AMITA contract.
Management wouldn’t call out any specific in earnings call but suggested multiple times that
they are holding many one-on-one meetings with $3+ billion providers. This could potentially
serve as major catalyst for stock.
Hyper Converged Infrastructure
Buy Nutanix (NTNX) January 45/60 Call Spread for $3.60 or less.
We are refreshing the bull case in this emerging hyper-growth hyper-convergence leader amid
30% pull back in stock from 52-week high led by what we believe is noise, presenting a
compelling buying opportunity. We also believe NTNX could threaten VMW/DELL/HPQ
dominance in hyper convergence business by consistent market share gains that are already
showing up in each quarterly earnings report. A good analogy here would be how ANET
disrupted and stole market share in switching/routing business from CSCO/JNPR for many
quarters. Moreover, NTNX verticals are big and deep with significant growth still to capture.
There is plenty of ground to cover. Lastly, at $8 billion market cap trading at 4.5x FY2019 Sales
expected to grow by +32% YoY, we believe this is becoming very attractive GARP candidate
(“Growth at Reasonable Price”) that may easily become an M&A target as it disrupts major core
markets of large IT service providers. Let’s dive into a few important points, some adding
thoughts to our previously bull case that can be found HERE, as well as some new thoughts.
Market Share Gains – While

backward looking but on
September 25th IDC posted Q2
market share for converged
infrastructure solutions
providers. System wide revenues
for all providers combined was
up +19% sequentially QoQ vs.
1Q18 to $1.45 billion and up
+78% YoY which was consistent
+78% YoY growth in prior quarter
but sharply better than +56%,
+63%, +68% in 2Q17, 3Q17,
4Q17, respectively. Based on this data, Wells Fargo made following observation:
“Nutanix Share Gains vs. VMware vSAN + Ready Nodes: As we increasingly focus on Nutanix’s
competitive positioning against VMware, we would highlight our analysis of IDC’s data leaves
us to estimate Nutanix’s (including 3rd party OEMs) 2Q18 market share at 34.2%, up to 32.3%
in the year-ago quarter (vs. 32.7% in 1Q18). This compares to VSAN + Ready Nodes at a 34.1%
market share across all hardware vendors, down from 37% in the prior quarter.”
Deal Count Materially Improving - During last quarter NTNX added 1,000 new customers
bringing total number to 10,610. In last 12 months company has added nearly as many
customers as they had at time of IPO two years ago. Now 710 of Global 2000 companies are
their customers. Last quarter also brought better momentum with 46 deals worth more than $1
million signed, 9 of which were more than $13 million. NTNX closed 201 deals more than $1
million in FY2018, +39% higher than 144 in FY2017. Lastly, NTNX now has 26 customers with a
lifetime spend of more than $10 million, up from 11 in FY2017. And they continue to see depth
across vertical markets with customers like colocation provider Cyxtera; motorsports raceway
management company, International Speedway Corporation; telecom provider, NETCOM BB;
and law firm, Akin Gump Strauss Hauer & Feld.
Hardware Business (9% of Billings) is Going Away - In light of this, one way may ask the
question why did NTNX lower 1Q19 revenue guidance on August 30th ($303M vs $309M
estimate) when they are gaining market share, hurting the stock? Good question and this is
where Jaguar research and due diligence comes in. It’s important to point out Nutanix’s is
mostly software-only business (91% of total billings growing at +66% YoY). NTNX is currently in
the process completely exiting hardware business (9% of total billings) and entire revenue guide
down vs expectations was due to faster decline in pass-through hardware. This is how the CEO
explained in earnings call on August 30th and we believe those comments from the CEO should
put any concerns that street has about guidance to rest:
“During our Q1 earnings call, just nine months ago, we committed to a bold plan to eliminate
majority of our pass-through hardware revenue. Today, I'm extremely pleased to say that we
have eliminated our hardware pass-through revenue exactly according to this plan. In Q4, we
targeted to eliminate $95 million of pass-through hardware revenue, and we eliminated
exactly $95 million. Our billings guidance assumes pass-through hardware to be 5% to 6% of
total billings versus our previous estimate of 7%. This one to two percentage point reduction
negatively impacts total billings and revenue by $4 million to $8 million. The offset to the
slightly reduced billings and revenue expectation is that we now expect higher gross margins
led by software, which will continue to run significantly ahead of our prior expectations.”
Move to Subscription Model - The company made the first step of its business transformation
by shifting from appliance to software sales, and has quickly done away with the majority of
passthrough hardware. It is now on its way to changing how on-premise software is sold, from
hardware lifecycle-based licenses to 1/3/5 year term licenses, and well as shifting to new
recurring revenue with cloud offerings (e.g. Xi). As revenue mix shifts to a subscription model,
we expect Nutanix to get valued at a higher multiple, similar to the expansion seen by other
software companies that have made the transition. This view particularly makes the valuation at
4.5x FY2019 Sales attractive because we have seen previously stealth multiple expansion to as
high as 8x in other companies that have shifted business model to subscription billing. Here is
how the CEO explained the transition will take place in coming months and quarters and I
believe this consistency it will create will lead to valuation multiple expansion in stock price:
“We will begin a phased-in approach for software licensing connection with the new Nutanix
NX sale that will transition the business to a term-based subscription licensing model. Over the
last few quarters, we've also been focused on selling more term-based subscription software
associated with our current offerings. In other words, deals without any associated hardware.
Our recent introduction of Beam, Frame and soon, Xi, as well as other future offerings allow us
to begin selling cloud-based subscription software. In association with these changes,
beginning Q1 fiscal 2019, we will disclose our software and entitlement details in a manner
that is consistent with many other software companies.”
I love the CEO of Nutanix, Dheeraj Pandey, and I don’t think I’ve had so much fun reading last
quarter earnings transcript particularly the Q&A session between analysts and the CEO.
Could Nutanix’s Xi Disrupt Amazon’s AWS Cloud? – Obviously that’s a long shot and it’s not in
anyone’s model but just for fun discussion, back on April 27 Bloomberg reported the following
story:
Again, this may seem like a long shot but one thing I know for certainty that over the course of
my life time of observing how fast technology can go from idea to mass adoption, never
underestimate the motive and drive of potential disrupters.
Nutanix Xi cloud is launching by the end of 2018 and in next 12 months you will see this take off.
Management has given several presentations in recent months building a momentum for this.
What differentiates Xi from others is very simple yet highly effective drag-and-drop experience
between on-prem and off-prem. In management’s own words, they really want to blur the lines
between the two. Their whole focus is to build tools that seamlessly allow customers to move
content and processes with one operating system, one click and simple application centric
management functions. The objective of Xi is to make all the clouds used by any business
effectively invisible by bringing them under one management environment, which is effectively
an abstraction layer. This makes Xi Cloud offering far different than anything else in the market
currently. Management has several times given example of Apple iCloud. You sign up for iCloud.
You go into your iPhone setting and turn on iCloud Phone Library. Done! Simple and single
operating system with full stock of controls all done by simple click. Now imagine if you can
manage all your business processes on cloud by simple clicks on single OS like that. That’s how
Nutanix wants to differentiate Xi from others.
Large Institutional Option Positions
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Jaguar 4Q 2018 Outlook and Premium Ideas

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Jaguar 4Q 2018 Outlook and Premium Ideas

➢ 3Q 2018 Recap and Performance

Fahad Khalid Tom Joy

Jay Kunstman Avo Menakian

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 1

3Q 2018 Performance Scorecard .……………………………………… 3

4Q 2018 Macro Outlook and Sentiment ……………………………. 9

Jaguar Premium Ideas (Bullish, Bearish)

Key Debates and Catalysts (Bullish, Bearish)

Large Institutional Option Positions ………………………………… 111

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 2

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 3

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 4

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 5

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 6

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 7

Other ideas from Q3 Outlook that worked out great –

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 8

1. Monetary Tightening → Faster Monetary Tightening

Here is how we see them today:

1. Monetary Tightening → Faster Monetary Tightening

Let’s hit all these points briefly one at a time:

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 10

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 11

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 12

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 13

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 14

69% from lodging

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 15

Providing comprehensive online and in-person services to businesses worldwide, Egencia

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 16

According to management, a ‘large

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 17

As of September 12th, US 3rd quarter-to-date RevPAR has increased 2.2%. Luxury

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 19

A provider of cloud-based benefits management platform, Benefitfocus (BNFT) offers access to

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 21

Highlights from 2Q Conference Call

49 new logos added in 2Q2018, a 23% year-over-year improvement

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 22

Market Share and Opportunity

In the US there are around 2,200

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 23

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 25

Uvulopalatopharyngoplasty (UPPP), surgical removal of upper airway tissue, including

Maxillomandibular Advancement (MMA) is even more invasive. The procedure involves

Neurostimulator, or Implantable Pulse Generator (IPG), the ‘brains’ of the system

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 26

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 27

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 28

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 29

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 30

➢ Q2 marked an acceleration in the number of customers spending $50,000 (annualized

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 31

“Smartsheet has developed a rich ecosystem of integration partnerships with notable

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 33

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 34

“A biomedical equipment manufacturer, Beckman Coulter deployed our professional services

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 35

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 36

Jaguar 4Q 2018 Outlook and Premium Ideas – September 30, 2018 38

The only negative was margin

Significant Recent Product Launches Gaining Traction

VisionPro is immediately a hit. This novel