Q2 Holdings

QTWO : NYSE : US$13.68
Target: US$17.00

Q2 Holdings provides a cloud-based platform for
customer facing web and mobile banking solutions for
regional and community financial institutions. The
platform enables users to pay bills, check balances,
transfer funds, and deposit checks through a unified
online platform or mobile device. Q2 was founded in
2004 and is headquartered in Austin, TX.

All amounts in US$ unless otherwise noted.


Investment thesis
In our opinion, Q2 Holdings could be one of the quiet winners of the recent IPO
class. The firm sells customer-facing banking applications, competing largely
with legacy software vendors and aging custom code. Q2 signs 5+ year
subscriptions (excellent visibility), is growing revenues ~30%, but won’t likely
break even until sometime in 2017. If Q2 can articulate and demonstrate a
clear and consistent path to profitability, the stock could get re-valued into the
25%+ growth SMID cap cloud cohort, which implies a 7-9x forward revenue
multiple. As is our custom, our price target is more conservative and assumes a
modest deterioration in the EV/revenue multiple, but a 20% appreciation in the
face of 30% revenue growth. We are initiating coverage of QTWO with a BUY.
Investment highlights
 An upgrade cycle is underway. Regional and community financial
institutions (RCFIs) are increasingly becoming viable competitors to the
national mega-banks – this means that they too need online and mobile
banking functions and sleek, next-generation user interfaces. Enter Q2.
 Legacy competition. Being founded in the mid-2000s, Q2 has the
advantage of being constructed on a unified, cloud-based platform with a
mobile-first development mentality. The firm competes either with vendors
like Digital Insight (NCR) and First Data, who are attempting to morph
timeworn applications, or oftentimes in-house, custom-built code.
 Attractive micro-economics. Q2 signs 5+ year initial deals, dollar-based
retention including upsell tops 125%, and the firm crosses into profitability
after 1.8 years of a new customer relationship. This means that in the near
term at least, the faster Q2 adds clients, the more money they will lose.
 What it means for the numbers. From the firm’s roughly $65M run rate,
we expect Q2 to be a ~30% revenue grower for the next several years.
Gross margins should scale from ~40% this year to 60%+ with scale, and
Q2 should become cash flow and EBITDA profitable sometime in 2017.

Akamai Technologies

AKAM : NASDAQ : US$57.86
Target: US$68.oo

Akamai provides content delivery and cloud
infrastructure services for accelerating and improving the
delivery of content and applications over the Internet,
ranging from live and on-demand streaming videos to
conventional web content, to c-commerce tools. The
company is headquartered in Cambridge, Massachusetts


Telecommunications — Telecommunications

Investment recommendation
Akamai hosted its annual investor day on Tuesday, reiterating some of the
common themes that continue to support our long-held BUY-rated thesis.
With overall Internet traffic growth continuing to accelerate and with the
likely traction of newer lines of business like carrier services or the
security business, we believe top-line revenue growth will continue at the
mid- to high-teens range with the potential for continued margin
expansion over time. With two stellar quarters behind us at a very
controversial time for the company and with Q1/14 guidance that far
exceeded expectations, we continue to recommend the shares. With
increasing confidence in the outlook, we increase our target to $68,
representing a 12.0x EBITDA multiple and 26.0x EPS on 2015 estimates.
Investment highlights
Solid momentum likely continues – Although the company avoided talk of
the near-term trends that resulted in the recent increase in Street
estimates, we believe Akamai continues to greatly benefit from being one
of the few sources capable of terminating incremental traffic on
increasingly constrained ISP networks.
Outlook calms fears – With the recently renewed contract with its largest
customer, estimated to be 9% of revenues and growing, we remain
confident 2014 will possess significant tailwinds. However, it remains
unclear when Apple will begin to migrate any traffic to their developing
CDN network. Longer-term guidance was adjusted on Tuesday, but only
Incremental growth drivers on tap – With the investments in the sales
force and ordering systems in 2013that continued into 2014, we expect to
begin to witness returns that could drive revenue growth and EBITDA
margins higher. However, in the near term we would expect some
incremental dilution from the integration of the recent Prolexic aquisition.



NASDAQ : US$68.44 
BUY  Target: US$84.00

COMPANY DESCRIPTION: Benefitfocus sells a cloud-based benefits software platform for large employers and insurance carriers. The firm’s suite of solutions enables customers to more efficiently shop, enroll, manage, and exchange benefits information. Based in Charleston, SC, Benefitfocus was founded in 2000 and went public in September, 2013.
All amounts in US$ unless otherwise noted.
A favorable mix shift towards the faster growing Employer business and an uptick in demand from Carriers around private exchanges could enable BNFT’s revenue growth rate to accelerate by a couple hundred basis points in each of the next 2-3 years. If we are correct, the natural, and eventual compression of the firm’s EV/revenue multiple of 12x 2014E will be both gradual and more than offset by high-20′s organic revenue growth. We continue to expect BNFT’s stock to advance faster than the overall stock market. Reiterate BUY.
 Preliminary Q4/13 results ahead of expectations. BNFT expects to report Q4 total revenue and Adjusted EBITDA loss of $30.3M and ($7.9M), which were respectively $1.8M and $0.4 better than our forecasts. Total revenues increased 36% y-o-y, and within the mix, Employer revenues increased 80% y-o-y and now make up 44% of revenue.
 Color on deal flow. BNFT added 14 new employer customers in the quarter, bringing the firm’s total to 393, up from 286 a year ago – we’d remind investors that the second and third quarters tend to be seasonally stronger as a result of the timing of open enrollment season. The firm saw particular strength with Carriers, adding 3 new accounts in the quarter, as those firms look to setup private exchanges. Q4 was a company record in terms of customer “go-lives.”
 C2014 investment initiatives. Management highlighted three areas of focus: (1) an increase in sales capacity to really put the foot on the gas in the hot Employer market; (2) an incremental $10M investment in their private exchange efforts for Carriers and brokers; and (3) the build out of a third-party channel for implementation services – the firm is already in discussions with multiple potential partners. The result of the initiatives will be a roughly $20M larger EBITDA loss in C2014 than we had previously forecast. As we are undoubtedly in the very early stages of this opportunity, we believe this is a logical strategy. Our C2014 and C2105 revenue estimates increase by $2.5M and $4.0MTechnology

Akamai Technologies BUY Target Price $56

AKAM : NASDAQ : US$47.68
Target: US$56.00

Akamai provides content delivery and cloud infrastructure services for accelerating and improving the delivery of content and applications over the Internet, ranging from live and on-demand streaming videos to conventional web content, to c-commerce tools. The company is headquartered in Cambridge, Massachusetts.
All amounts in US$ unless otherwise noted.

Investment recommendation
We maintain our BUY rating and $56 price target ahead of its seasonally-strong Q4 report that is also expected to be potentially impacted by the “catch up” contract repricing with its largest customer. Despite this well-articulated headwind, we continue to expect another solid quarter report as we believe the potential drag has been well reflected in investor expectations and that organic growth from favorable secular trends will more than offset the negative impact over time.
Investment highlights
 Solid CDN traffic growth expected – With the majority of the software downloads for the initial iOS7 and subsequent updates expected to have occurred in Q4/13, we expect the traffic growth for the Media Delivery Solutions business to be strong in the quarter. Combined with the continued proliferation of over-the-top video traffic growth, we believe the company will deliver another quarter with robust traffic growth of the traditional CDN business.
 Security, e-commerce continue to benefit – As the consumer holiday purchases continue to shift towards mobile and other online venues, we believe the growth in Akamai’s e-commerce business will remain strong as the company facilitates fast and secure online transactions with its massive infrastructure and optimization software. Performance & Security business will also benefit from the continued IT outsourcing trends as enterprises increasingly focus on performance and reliability in their cloud migration.
 Temporary speed bump provides opportunity – Despite investor concerns due to a large contract re-pricing, we believe Akamai remains a unique asset well positioned to benefit from multiple favorable secular trends (mobile, cloud, online video and security). As such, recent volatility creates an opportunity to accumulate its share, in our view

Workday Target $90

WDAY : NYSE : US$73.30
Target: US$90.00

Workday provides enterprise-scale, cloud applications that deliver the core functions for global customers to manage the human capital and financial resources of an organization. Solutions include: HCM, Financial Management, Payroll, Time Tracking, Procurement, Employee Expense Management, etc. Workday was founded by the former founders of PeopleSoft in 2005 and is headquartered in Pleasanton, CA.
All amounts in US$ unless otherwise noted.

Technology — Enterprise Software — Software as a Service
While high valuation momentum stocks have taken a breather this quarter as
many investors locked in good YTD performance, Workday, the company,
continues to execute quite well. The firm is a large deal shop, selling to large
firms in big chunks. Our view is that the pivot point for the business will be
several reference customer successes with financials. If that happens around
summer 2014, Workday is very likely to see a cascading list of customers switch
from Oracle and to some degree SAP and perhaps a few Microsoft customers.
With the stock valued at an eye-watering 17x 2014E revenues, Workday will
need to deliver those kind of epic results for the stock to continue working. At
this point, we expect that to happen and for WDAY shares to continue to
bulldoze doubters and short-sellers.
 The trend continues: another material upside. Workday reported revenues, calculated billings, and FCF loss of $127.9M (+76% y-o-y), $154.0M (+99%) and ($9.7M), which were respectively $10M, $21M, and $23M better than
our estimates. Subscription revenues grew 82% in the quarter, and non- GAAP EPS loss of ($0.12) was $0.05 better than we expected.
 Color from the call. Workday now has more than 550 customers worldwide, with approximately 2/3 currently live on the system. The firm added 10 new Financials customers in the quarter, which was a company record.
 Outlook: mid-point Q4 revenues ~$7M ahead of consensus. Rolling forward WDAY’s subscription revenue upside and improved outlook, we have increased our F2015 and F2016 revenue estimates by $30M and $20M respectively, which implies ~50% revenue growth next year. We continue to expect WDAY to show FCF profitability at some point in 2H/F16.


BNFT : NASDAQ : US$46.26
Target: US$54.00

Benefitfocus sells a cloud-based benefits software platform for large employers and insurance carriers. The firm’s suite of solutions enables customers to more efficiently shop, enroll, manage, and exchange benefits information. Based in Charleston, SC, Benefitfocus was founded in 2000 and went public in September, 2013.

Technology — Enterprise Software — Software as a Service
It was green lights across the board for BNFT in its inaugural quarterly report as a public company. Our opinion on the company is unchanged, and positive, from our initiation report published 24 days ago, in which we asserted that BNFT shares should advance almost as fast as the firm’s gradually accelerating revenue growth. More importantly in our opinion, Benefitfocus has the kind of corporate culture that positions the firm for sustained long-term growth. The last three companies we know who had this characteristic were PeopleSoft, Ultimate Software, and SPS Commerce – all three long-lived successes. While it is premature to put BNFT into that pantheon of quality companies, we strongly believe this quarter represents a good step in that direction. Reiterate BUY.
 A good start: upside revenue and EBITDA. BNFT reported revenues and Adjusted EBITDA loss of $26.3M and ($4.5M), which were respectively $1.0M and $2.8M ahead of our estimates. Total revenues increased 26% in the quarter, driven by continued momentum on the Employer side, which grew 66% y-o-y. BNFT generated operating cash flow of $3.0M in the quarter compared to our expectation for a loss of ($5.7M).
 Customer additions. BNFT added 31 new Employer customers in the quarter, bringing the firm’s total to 379, which is up 41% y-o-y. We anticipate that Q4 will be a record “go-live” quarter for Employers. BNFT’s Carrier sales focus remains on getting broader within its 37 customer base.
 Outlook: Q4 revenues inched up, C2013E losses less than expected. BNFT set mid-point Q4 revenue guidance ~$1M ahead of our estimates, which implies sequentially accelerating growth (to 28%). We have modestly increased forward estimates and expect FCF profitability in C2016.

ServiceNow Buy NOW

NOW : NYSE : US$52.96
Target: US$60.00

ServiceNow is a leading provider of cloud-based services that automate enterprise IT operations — this includes a suite of
applications built on the firm’s proprietary platform that automates workflow and provides integration between related
business processes. ServiceNow was founded in 2004, is headquartered in San Diego, CA and has been public since June 2012

Technology — Enterprise Software — Infrastructure
Investment thesis
ServiceNow, in our opinion, has reached escape velocity in terms of marketplace momentum. What that means for investors is that it is very likely that the company will continue to scale rapidly. If so, this puts the bias in terms of estimate revisions to the upside, which in turn means a slower-than-one might- expect decline in the EV/revenue multiple, and that translates into
continued superior stock price returns. That’s a BUY to us, and that’s what we’re recommending investors do when it comes to NOW.
 Upside revenue and EPS. ServiceNow reported strong Q3/13 results with revenue and non-GAAP EPS of $111.3M (+73% y-o-y) and $0.01, which were respectively $5.8M and $0.03 ahead of our estimates. The firm generated FCF of $3.9M compared to our $1.8M estimate and calculated billings of $127.0M (+56% y-o-y) were $3.7M ahead of our forecast.
 Customer metrics. Average annual revenue per customer was $219k, up 21% y-o-y driven by larger initial deals and user growth within the customer base. NOW added 122 net new customers in Q3 (down sequentially, but the focus has been on larger deals), bringing the firm’s total to 1,900, including 18% of the Global 2,000. Subscription revenue retention was 97% and the firm added three new customers with ACV
 Outlook: Q4 guided nicely ahead of consensus. Mid-point revenue guidance for Q4 was roughly $4M ahead of estimates and management expects roughly breakeven operating margins (in-line with consensus). We have increased our C2014 revenue estimate by $20M to $610M, which would be 45% revenue growth, and are assuming ~3.7% operating margins

Akamai Technologies Update

An old favorite of the Jack A. Bass Managed Accounts :

AKAM : NASDAQ : US$51.87
Target: US$56.00

Akamai provides content delivery and cloud infrastructure services for accelerating and improving the delivery of content and applications over the Internet, ranging from live and on-demand streaming videos to conventional web content, to c-commerce tools. The company is headquartered in Cambridge, Massachusetts

Investment recommendation
Akamai reported yet another exceptionally strong set of quarterly results with revenue growth 200bps ahead of expectations (18.0% vs 16.0% y/y revenue growth) and EBITDA margins of 43.8% versus our expectation for 43.0%.

Fully taxed normalized EPS (adjusted for the $0.03 one-time gain) was $0.47, in line with our estimate and at the high end of the guidance range. Notably, the board approved a share repurchase program ($750mm through 2016) that would enable the company to more than offset dilution from its equity compensation plan, thereby introducing a more formalized process to return cash to shareholders. In spite of near-term headwinds from the expected downward repricing of a large media customer contract, we believe the outlook for Akamai remains strong.
Investment highlights
 Solid results to be offset by large customer reprice – With the very solid 3Q13 results and a more meaningful share repurchase plan announced, Akamai also disclosed that a large-scale customer (we estimate 8%-9% of revenues) that has not been repriced in three years will impact sequential growth trends in either 4Q13 or 1Q14.
 2014 growth should remain strong – Even with the reprice of its largest customer (very different than when eight of the 10 largest media customers repriced in 1Q11), and lapping the effects of two non-recurring projects in 3Q13, we believe 2014 revenue growth will remain in the mid-teens and that margins can expand. We expect media delivery revenue to re-accelerate in 2H14.
Pullback creates entry point – With the stock to open soft this morning, we find the stock more attractive for purchase while retaining our $56 price target.

CalAmp Raising Target Price to $30

CAMP : NASDAQ : US$18.69
Target: US$30.00


CalAmp supplies tightly integrated M2M hardware with its COLT M2M Application Enablement Platform (AEP) cloud to add cellular and GPS connectivity solutions into several M2M verticals including: fleet management, asset/trailer tracking, vehicle finance/recovery/remote start, rail, and smart energy. In its legacy business, CalAmp supplies outdoor  reception/amplification and indoor network products for DBS satellite TV applications
All amounts in US$ unless otherwise noted.

Technology — Communications Technology — Wireless Equipment
Investment recommendation: CalAmp delivered strong results with Q2/F2014 pro forma EPS of $0.19 well above our $0.16 estimate. We believe the Wireless Matrix acquisition combined with the strong pipeline for CalAmp’s higher-margin Wireless DataCom business position CalAmp to grow faster than our 16% M2M hardware market revenue CAGR forecast. In fact, we believe CalAmp’s Wireless DataCom business is well positioned to drive re-accelerating 2H/F2014 and F2015 sales and earnings growth driven by new usage-based auto insurance contracts ramping in 2H/F2014, growing international sales, ramping sales from new deals with Caterpillar starting in Q1/F2015 and Pepco Holdings in 2H/F2014, and anticipated steady growth of higher-margin Wireless Matrix sales. We maintain our BUY rating and increase our price target to $30. CalAmp remains our top small-cap pick.
Investment highlights
 CalAmp’s higher-margin Wireless DataCom division’s Q2/F2014 sales of $47.2M grew an impressive 38% year-over-year including a full quarter of Wireless Matrix sales. Satellite division sales of $11.6M declined slightly sequentially from $12.9M in Q4/F2013, but gross margin of 19.6% was above our 18% estimate driven by a favorable product mix.
 Consistent with our positive investment thesis that several growth drivers would drive improving 2H/F2104 results, CalAmp’s Q3/F2014 guidance for sales of $61M at the mid-point was above our $59.8M estimate and pro-forma EPS guidance of $0.19-0.23 was in line with our $0.21 estimate.
 Given the strong Q2/F2014 results and our belief multiple long-term growth drivers remain intact, we increase our F2014 pro-forma EPS estimate from $0.78 to $0.81, F2015 from $1.02 to $1.04, and introduce our F2016 estimate of $1.20.
Valuation: Our $30 price target is based on shares trading at roughly 25x our F2016 pro forma EPS estimate.

Akamai Technologies

AKAM : NASDAQ : US$50.57
Target: US$56.00

Akamai provides content delivery and cloud infrastructure services for accelerating and improving the delivery of content
and applications over the Internet, ranging from live and ondemand streaming videos to conventional web content, to commerce tools. The company is headquartered in Cambridge, Massachusetts.
All amounts in US$ unless otherwise noted.


Investment highlights
Upon further review of the details of the company’s cost structure, provided after the earnings report in their 10-Q and in conjunction with the latest launch of Apple’s operating software that will consume substantially more capacity to download than prior versions, we are increasingly confident that Akamai will face greater tail-winds in 2H13 than we had previously expected. We are retaining our buy rating and increasing our price target to $56 from $51.
Investment highlights
 Stronger tail-winds expected – We continue to believe the 2013 outlook remains conservative and that the forecast for low 40% EBITDA margins and significantly slowing top-line growth was simply too conservative, as shown with the Q2/13 report.  iOS7 downloads could drive better growth – As the average download size for the latest iOS upgrade could approach nearly 2x that of last year’s download with many more devices deployed, it is possible that this event could drive upside to 2H13 results.
 Cost structure continues to improve –Upon review of the details of the company’s cost structure as provided in the 10-Q, we continue to believe Akamai harbors the opportunity to make continued improvements such that margins will again rebound to the mid-40’s level.
 Marginal earnings and multiple adjustments – With continued improvements to the outlook in 2H13 and beyond, in spite of the investments that have depressed margins in the near term, we are slightly increasing our estimates and our target multiple to 11.5x estimated 2014 EBITDA.


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