I think Hennessey Advisors is a great investment because its undervalued next to

the competition and has been growing its Assets under management from 743
million from 2011 to expected 7 billion in 2016

I like Hennessy Advisors because 1) Hennessy Focus Fund, which stood

approximately $2.3B AUM as of the end of Q3. This increase is the product of the
fund's outperformance of its benchmark over every single time span from 3
months to 15 years. Over the past fifteen years, the fund has produced returns
at 12.2% CAGR compared to 6.14% for its category (mid-cap growth) and
5.75% for the S&P 500. These returns have earned Hennessy Focus Fund a spot
in the top 1% of all funds in its category for this period, and a "five star" rating
from Morningstar. 2) HNNA has acquired more than fifteen competing funds over
its history, and including As a result, the Westport Fund and the Westport Select Cap

Fund will be reorganized into the Hennessy Cornerstone Mid Cap 30 Fund (HIMDX)
which will add 460 million dollars in assets. The market has not priced in this
acquisition and this company is not covered by many analysts. 3) Hennessy currently
has margins that is 15.9% in 2011 to 19.8% in 2013 to 25.5% in 2015. Total
operating expenses have been decreasing YOY of around 2% since 2011. Returns

to scale this inflection point in overhead costs as revenue increases indicates that
HNNA is tapping into the returns to scale inherent in the asset management
industry.

Right now its around $36. HNNA is trading at a TTM P/E of 13.4. This is a heavy

discount to the average of 20x earnings for its peer group (small publiclytraded asset managers).
Due to HNNA's small size and lack of coverage, its price does not yet reflect
its outstanding Q3 earnings (.71) figures, now trading at only 11.61x Q3
earnings. With considerable market appreciation so far in Q4 and the
impending acquisition of Westport Funds, HNNA projects to have a monster
fourth quarter. Conservatively assuming 3% benefit to average daily AUM
from market appreciation and the successful transition of two-thirds of
Westport's AUM as of May 2 to HNNA control, earnings could see a $0.13
bump before accounting for the effect of net inflows. Under these

assumptions and not even incorporating potential organic AUM growth,

HNNA is now trading at 10x forward earnings.
Even if the firm were to trade at 13.4x earnings (its current TTM P/E), it
would be worth $47.70 per share using projected Q4 earnings. At its August
6 closing price of $35.31, this would mean HNNA is trading at around a 2025% discount.
Downside risks include
Volatility in and disruption of the capital markets and changes in the economy may significantly affect our
revenues. And Investor behavior is influenced by short-term investment performance
of mutual funds. We derive a substantial portion of our revenues from a limited
number of the Hennessy Funds.

Summary
1.

Make an actionable recommendation buy or sell and get to the point in the
beginning with a quick summary sentence (I think Company X is a great
investment because its undervalued next to the competition and has been
diversifying its operations and getting into higher-margin businesses.)

2.

List 3 key reasons why you like or dont like the company, followed by how
these reasons are different from the consensus. It is essential to understand
what the mainstream thinks in equity research and then think differently from
others if you cant do that, why would big-name investors ever pay attention to
you?

3.

Summarize what you think the stock should be valued at (Right now its at
$20, but I could see it rising to $30 within the next year) and explain how you
reached this conclusion. You might talk about comparables, DCF analysis, or
other methodologies, many of which you would probably also use in bankin

16 Hennessy Funds

receives investment advisory fees monthly based on a percentage of the respective Hennessy Funds average daily
net assets

day announced that it has completed the acquisition of assets related to the management
of The Westport Funds. As a result, the Westport Fund and the Westport Select Cap Fund
will be reorganized into the Hennessy Cornerstone Mid Cap 30 Fund (HIMDX).

Hennessy Advisors trades cheaply relative to comparable publicly-traded

asset management firms despite explosive AUM growth over the past five
years.
Hennessy Cornerstone Mid Cap 30 Fund, with shareholders of the Westport Fund and the Westport Select Cap Fund
becoming Institutional Class shareholders of the Hennessy Cornerstone Mid Cap 30 Fund
We derive our operating revenue from investment advisory fees and shareholder service fees paid to us by the
Hennessy Funds. These fees are calculated as a percentage of the average daily net assets in each of the Hennessy
Funds. The percentage amount of the investment advisory fees vary from fund to fund, but the percentage amount of
the shareholder service fees is consistent across all funds. The dollar amount of the fees we receive fluctuate with
changes in the average net asset value of each of the Hennessy Funds, which is affected by each funds investment
performance, purchases and redemptions of shares, general market conditions and the success of our marketing,
sales, and public relations efforts.
U.S. equity markets posted relatively strong gains in the nine-month period ended June 30, 2016, but
continued to exhibit volatility. Evidence of lower but continued economic growth and a strong labor market
provided encouragement for investors. In addition, the Federal Reserve maintained short-term interest rates steady
after its quarter point increase in December amid indications of slower growth abroad.
U.S. bond yields fell over the nine-month period ended June 30, 2016, especially over the last two quarters, as
the probability of a second rate increase in the first half of 2016 evaporated. Bond investors successfully ignored the
moderately higher inflation and wage growth reported over the period and benefited from a flight to safety in June
caused by the unexpected decision from British voters to approve Britains exit from the European Union.
The Japanese equity market pulled back over the nine-month period ended June 30, 2016. A sluggish
economy, combined with a decline in the inflation rate, a significant appreciation of the yen and a slowdown in
corporate profits growth, dampened investor sentiment over the period.
Volatility in and disruption of the capital markets and changes in the economy may significantly affect our
revenues.
The securities markets are inherently volatile and may be affected by factors beyond our control, including
global economic conditions, industry trends, interest and inflation rate fluctuations, and other factors that are
difficult to predict. Because our assets under management are largely concentrated in equity products, our results are
particularly susceptible to downturns in the equity markets or a decline in the amount of assets invested in the equity

markets. We derive all of our operating revenues from investment advisory fees and shareholder service fees paid to
us by Hennessy Funds. These fees are calculated as a percentage of the average daily net asset value of the Hennessy
Fund
Investor behavior is influenced by short-term investment performance of
mutual funds.
We derive a substantial portion of our revenues from a limited number of the Hennessy Funds. Investors in the
Hennessy Funds can redeem their investments at any time and for any reason, including poor investment
performance. A decline in our assets under management adversely affects our revenues.
As of September 30, 2015, our total assets under management were concentrated in the following three
Hennessy Funds: the Hennessy Focus Fund (32% of total assets under management), the Hennessy Gas Utility Fund
(26% of total assets under management), and the Hennessy Cornerstone Mid Cap 30 Fund (16% of total assets under
management).
A primary component of our growth strategy is to selectively pursue strategic
purchases of assets related to management of additional mutual funds. Our scalable
business model allows us the potential to increase our profit margins when assets under
management grow because we do not necessarily need to add personnel proportional to the
additional assets under management. W

We seek to provide positive annualized returns to investors in the Hennessy Funds on average over a market cycle
and to generate net inflows into the Hennessy Funds. During the nine-months ended June 30, 2016, we maintained
strong and consistent marketing and sales efforts. We regularly target over 100,000 financial advisors through our
marketing and sales program, and currently serve approximately 18,000 advisors who utilize the Hennessy Funds
for their clients. Approximately one in five of those advisors owns two or more of the Hennessy Funds. We continue
to expand our team of sales professionals to serve our advisor community and to assist us with providing services to
our over 350,000 mutual fund accounts across the country. In addition, we have a rigorous public relations effort
with the Hennessy brand name appearing on TV, radio, print or online media on average once every two daysAs of
June 30, 2016, 8 of the 16 Hennessy Investor Class Funds posted positive annualized returns for the 1-year, 3-year,
5-year, 10-year and since inception periods. Total assets under management as of June 30, 2016, were $6.34 billion,
an increase of 4.4%, or $268 million, from $6.07 billion as of June 30, 2015 (the end of the prior comparable
period). The increase in total assets is attributable to aggregate net inflows into the Hennessy Funds of $416 million,
and was partly offset by aggregate market depreciation of $148 million.

Strong Q3 earnings report showed considerable EPS growth and highlighted

reasons for optimism going forward.
The acquisition of Westport Funds along with overall market appreciation will
drive substantial increase in AUM.

Market has yet to reflect how cheap the stock is considering the impending
earnings growth attributable to this bump in AUM.
8,333

Fcf 6/30/2016

Hennessy Advisors, Inc. (NASDAQ: HNNA) is an asset management firm

located in Novato, California that manages a family of open-end mutual
funds. As of June 30, 2016, HNNA's assets under management (AUM) stood
at $6.3B. The vast majority of Hennessy's revenue is generated via "advisory
fees," ranging from 40 to 90 basis points, collected on these assets under
management. Over the past 5 years, HNNA has experienced exceptional
growth in AUM, both organically and though shrewd acquisitions. The
corresponding increase in earnings has propelled the stock up over 1000%
since 2011. Despite this rapid growth, the firm still trades at a meaningful
discount to its peers with a TTM P/E of 13.25.

Possibly due to its market cap of under $200M and the sheer speed of its
earnings' ascent, the market has yet to truly reflect the upside potential for
this company with high top line growth and low variable costs.
AUM growth has been the result of a number of factors, the most important
of which is the strong performance of the Hennessy Focus Fund, which stood
approximately $2.3B AUM as of the end of Q3. This increase is the product
of the fund's outperformance of its benchmark over every single time span
from 3 months to 15 years. Over the past fifteen years, the fund has
produced returns at 12.2% CAGR compared to 6.14% for its category (midcap growth) and 5.75% for the S&P 500. These returns have earned
Hennessy Focus Fund a spot in the top 1% of all funds in its category for this
period, and a "five star" rating from Morningstar.
Also contributing to HNNA's explosive growth has been the strategic use of
acquisitions to add to its assets under management. HNNA has acquired
more than fifteen competing funds over its history, most notable of which
was Virginia-based FBR Funds in 2012. This acquisition is responsible for
HNNA's second largest fund, Hennessy Gas Utility Fund, with $1.42B AUM as
of the end of Q3.

Strong Earnings & Potential for Immediate Growth

On August 3, HNNA reported diluted normalized EPS of $0.76, up from $0.64
in Q2. This strong figure combined with several details put forth in the 10-Q
suggest that Hennessy may be extremely undervalued at this juncture:

Net inflows were $97M for Hennessy Focus Fund and $19M for its third
largest fund, Hennessy Cornerstone Mid Cap 30 Fund, despite mediocre short
term performance for the former and very weak short term performance for the
latter. This brings net inflows in the last three quarters to $355M for Focus Fund
and $155M for Mid Cap 30 Fund. The continued growth of AUM for these Funds
during a period of rough performance is a testament to the marketing
capabilities of HNNA. All this suggests that HNNA's recent AUM growth is more
than just investors chasing returns, and is in fact sustainable in the long run.

Net outflows for Hennessy Gas Utility Fund decelerated to $29M in Q3.
Recent volatility in the energy sector has led to outflows of $270M from this fund
in the past nine months. The relatively low outflows in Q3 suggest that the
bleeding has stopped and that outflows from the Gas Utility Fund will no longer
hamper the firm's efforts to grow total AUM.

Operating expenses excluding depreciation, amortization, and sub-advisory

fees totaled $4.55M for Q3, down from $4.6M in Q2. This figure is 35% of
revenue, as opposed to 36% of a smaller revenue figure for Q3 2015. This
inflection point in overhead costs as revenue increases indicates that HNNA is
tapping into the returns to scale inherent in the asset management industry.

This earnings figure does not yet reflect HNNA's latest M&A move. On May
2,HNNA)+Announces+Acquisition+of+The+Westport+Funds/11572652.html"
rel="nofollow">HNNA announced plans to acquire Westport, CT based advisor
Westport Funds, LLC for $11.2M in cash. At the time of the announcement,
Westport managed approximately $640M in assets, which added to HNNA's
present AUM would take the firm over the $7B mark in assets under
management. The deal, set to complete in Q4, will considerably boost

Hennessy's total advisory fees for an extremely attractive price. On top of this,
the acquired assets should fit smoothly into HNNA's existing operating structure
without incurring many additional costs. As part of the deal, Westport Funds
investors will be transitioned into the Hennessy Cornerstone Midcap 30 Fund,
which has one of the highest net advisory fees of any Hennessy fund (74 basis
points). The Mid Cap 30 Fund's fees are still smaller than those currently charged
by Westport. This along with the similarity of investing styles between Westport
and HNNA managers are reasons for optimism that HNNA can successfully
transition these assets.

Q3's strong earnings came despite lower stock market prices during the
period. Market appreciation is heavily margin-accretive for asset managers, as it
raises advisory fees without incurring any additional costs for the firm. As of
closing 8/6/2016, the S&P is up 5.89% compared to its average level during
HNNA's Q3. This will further boost Q4 earnings.

HNNA is Heavily Undervalued

As of closing 8/6/2016, HNNA is trading at a TTM P/E of 13.4. This is a heavy
discount to the average of 20x earnings for its peer group (small publiclytraded asset managers). HNNA is also cheaper on an EV/EBITDA basis (8.5x
vs. 9.2x for peers). This comes despite extremely high growth in recent
years, its higher than average net margins, and its management's
demonstrated commitment in increasing shareholder value via acquisitions
such as Westport Advisors and its $20M 2015 self-tender offer which heavily
decreased the firm's shares outstanding. One potential culprit for HNNA's
smaller multiple is the fact that it deals exclusively in open-end mutual
funds, which are battling aggregate outflows in recent years. However, such
broad trends have not hampered HNNA's growth. Instead, they have created
an enormous opportunity: a stock with excellent earnings growth trading at
an extremely attractive multiple.
Due to HNNA's small size and lack of coverage, its price does not yet reflect
its outstanding Q3 earnings figures, now trading at only 11.61x Q3 earnings.

With considerable market appreciation so far in Q4 and the impending

annexation of the Westport Funds, HNNA projects to have a monster fourth
quarter. Conservatively assuming 3% benefit to average daily AUM from
market appreciation and the successful transition of two-thirds of Westport's
AUM as of May 2 to HNNA control, earnings could see a $0.13 bump before
accounting for the effect of net inflows. Under these assumptions and not
even incorporating potential organic AUM growth, HNNA is now trading at
10x forward earnings.
Even if the firm were to trade at 13.4x earnings (its current TTM P/E), it
would be worth $47.70 per share using projected Q4 earnings. Based upon
its historical valuation relative to peers and the market, balance sheet, and
growth prospects, we believe a more realistic valuation for HNNA is 14.5x
projected Q4 diluted EPS. This yields a target price of $51.62. At its August 6
closing price of $35.31, this would mean HNNA is trading at around a 30%
discount.
Not only does HNNA have 30% upside, but also it should see strong
appreciation in the next three months as the market realizes how cheaply
the stock is trading considering the inevitable bump in earnings it will soon
receive. It is unlikely that the opportunity to buy HNNA at current levels will
be around as Q4 earnings get close.
Disclosure: I am/we are long HNNA.
I wrote this article myself, and it expresses my own opinions. I am not
receiving compensation for it (other than from Seeking Alpha). I have no
business relationship with any company whose stock is mentioned in this

ACACIA

Pitch: Mylan [MYL] In this sample stock pitch outline, well make a LONG (Buy)
recommendation for Mylan [MYL] based on the results of our market and valuation
analysis. Well explain the reasons for this recommendation, the additional
information we would need to create a comprehensive pitch, and then conclude
with a stock pitch outline that you can immediately apply to Mylan, or any other
company youre pitching. NOTES AND DISCLAIMERS: First, please do not construe
this as investment advice. We are NOT recommending that you invest in any of
the companies covered here. This is a tutorial about how to research and pitch
companies that you think are interesting, and how to use what weve learned so far
to support your arguments. Also, keep in mind that the tips covered here move you
in the right direction, but are NOT sufficient for an entire case study or stock pitch.
Stock Pitch LONG Recommendation for Mylan [MYL] Recommendation I
recommend longing Mylan [MYL], a generics pharmaceuticals company, which
currently trades at $100-110 per share, because it is undervalued by 10-20%, the
market has incorrectly underestimated earnings, and there is significantly more
upside to its recently announced Agila acquisition than the market has given it
credit for. Additionally, even if growth in its generics segment declines at fasterthan-expected rates, there is still at least 10% potential upside in the stock.
Catalysts to increase its share price in the next 6-12 months include the close of its
recently announced $1.6 billion Agila acquisition (expected in Q4), the companys
first earnings announcement postacquisition, and the launch of Xeloda, an oral
cancer drug, in the middle of the year. Key investment risks include the Agila
acquisition failing to close, integration being more challenging than expected
(resulting in lower revenue growth and/or margins), and the companys new product
launches for the year, such as Xeloda, generating lower-than-expected revenue. We
could mitigate those risks via protective put options or covered calls, or by longing
the stock of peer companies that have invested more heavily in other geographies
or in competitive products. http://www.mergersandinquisitions.com
http://breakingintowallstreet.com 0 M 2 M 4 M 6 M 8 M 10 M 12 M 14 M $0.00 $5.00
$10.00 $15.00 $20.00 $25.00 $30.00 $35.00 Shares Traded (in Millions) Share Price
Mylan - Price-Volume Graph (Past Year) Volume Share Price Company Background
Mylan is a global pharmaceuticals company that operates in 2 segments: generics
and specialty pharmaceuticals (primarily EpiPen). Total revenue in FY 2012 was $6.8
billion, with EBITDA of $1.7 billion (24% margin), and the company has grown
revenue at 10-12% for the past 2 years, mostly through acquisitions of generics and
specialty businesses from other companies. Its generics segment accounted for
88% of total revenue and 85% of operating income in FY 2012, but its percentage of
total revenue has declined slightly from over 90% 3 years ago. Mylan currently
trades at trailing multiples of 2.3x EV / Revenue and 9.3x EV / EBITDA. Forward

multiples in our base case revenue and margin assumptions are 2.1x EV /
Revenue and 9.0x EV / EBITDA in FY 2013, excluding the impact of the Agila
acquisition (which is set to close in Q4 of FY 2013). Investment Thesis Currently, the
market views Mylan as a fairly standard generics pharmaceuticals company in the
middle of the range of its peer companies in the industry. As a result, it also trades
at valuation multiple squarely in the middle of that range, and its multiples are close
to those of Actavis, its closest peer (excluding the impact of acquisitions). However,
the stock is priced imperfectly for the following reasons: 1. There is significantly
more upside to the Agila acquisition than the market has priced in as
demonstrated by channel checks we performed in emerging markets such as Brazil,
which comprises 27% of Agilas revenue. Factoring in higher-than-projected growth
rates, our analysis implies a valuation of at least $31.00 $32.00 per share vs.
Mylans current price of $28.60. 2. There is significantly less downside in the decline
of its specialty segment than the market has attributed to it. Even with more
conservative estimates, the specific decline rate of this segment only accounts for
approximately $0.75 $1.00 of Mylans implied per share value. In most reasonable
scenarios, a faster-than-expected decline rate would push down Mylans valuation
by at most $0.50 per share. http://www.mergersandinquisitions.com
http://breakingintowallstreet.com 3. While some have expressed concern over
growth in its core generics segment, even with lower assumed growth rates over
the next 5 years, there is still potential upside of at least 10% over the next 12
months; furthermore, the launch of key new products such as Xeloda in the middle
of this year reduces the risk of lower-than-expected revenue growth. Each of these
reasons ties in directly to the companys valuation and will make a substantial
impact (in the case of reasons #1 and #3 above), or will make far less of an impact
than what the market currently expects, even in a downside scenario (for reason
#2). Even if some of these reasons turn out to be incorrect, any one of the factors
above represents a significant difference from the current market view of the stock
and could result in substantial upside. If all of the factors above turn out to be
incorrect, then Mylan is valued appropriately at its current stock price and an
investment would represent minimal downside risk, even if theres no room for
share price appreciation. Catalysts Catalysts in the next 6-12 months include: The
close of the recently announced $1.6 billion Agila acquisition (expected in Q4 FY
2013); The companys first earnings announcement post-acquisition; and The
Xeloda launch in the middle of the year. Catalysts #1 and #2 are interrelated and
are the most significant in terms of valuation. Specifically, the acquisition of Agila
may result in $450+ million in additional revenue in FY 2014 and over $120 million
in EBITDA, with revenue growing to over $900 million and EBITDA growing to $300+
million in FY 2017. This makes a difference of over $7.00 per share in the base case

assumptions in our DCF analysis (discount rate of 6.7%, terminal FCF growth rate of
1.0%, and generics revenue growth at 7% initially, falling to 4% by FY 2017):
WITHOUT Agila, Mylans implied share price is in the $20.00 - $30.00 range: Mylan,
Inc. - Net Present Value Sensitivity - Terminal Growth Rates Discount Rate $ 24.35
5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 2.5% $ 72.63 $ 57.89 $ 47.36 $
39.46 $ 33.32 $ 28.40 $ 24.37 $ 21.02 $ 18.18 2.0% 59.26 48.52 40.47 34.20 29.18
25.08 21.66 18.76 16.25 1.5% 49.70 41.49 35.10 29.99 25.80 22.31 19.36 16.81
14.56 1.0% 42.54 36.02 30.81 26.54 22.98 19.97 17.39 15.09 13.09 0.5% 36.97
31.65 27.30 23.67 20.60 17.96 15.64 13.59 11.79 0.0% 32.51 28.07 24.37 21.24
18.55 16.19 14.11 12.27 10.63 Terminal Growth Rate
http://www.mergersandinquisitions.com http://breakingintowallstreet.com Its implied
share price is exactly $25.12 without the acquisition, but it jumps to $32.00+ per
share with the acquisition included in future years (the highlighted area below
shows more of a downside case; 30-40%+ revenue growth is likely based on our
channel checks): As shown in the table, even if Agilas revenue declines at fasterthan-expected rates (the bottom several rows), there is still upside and a $28.00+
per share price is plausible with the Agila contribution. Consensus estimates
currently peg Agilas revenue growth at 25% in FY 2014, falling to 10% by FY 2017,
but we have assumed a premium to these numbers because of the following
factors: Via channel checks, we spoke with several healthcare professionals in
emerging markets and they all agreed that Agilas market position in Brazil (which
currently represents 27% of its revenue) is highly desirable and very difficult to
replicate given government regulations there and the requirement to manufacture
locally. Effectively, it has close to a monopoly in this fastgrowing market and will
maintain that for the next several years. Furthermore, several customers in Brazil
mentioned that they expect demand for injectables will be higher than expected
and that the growth rate in Brazil will be even higher than overall injectables growth
in emerging markets as a whole. As a result, we believe that 35%+ growth initially
followed by a slower-than-expected decline is reasonable, which in turn will boost
Mylans share price once the market gains knowledge of this and prices it in
appropriately. The second catalyst, the companys first earnings announcement
post-acquisition, is significant because this event may make the market realize the
pricing imperfection in Mylans stock once the company provides higher-thanexpected guidance for FY 2014 as a result of the acquisition. It is possible that the
acquisition may not close, or may not be approved by government authorities, or
may not work as well as expected, but we address these risks below in the section
on Investment Risks. Finally, catalyst #3, the launch of the Xeloda brand, is
significant because it is a $700+ million brand with the potential to boost Mylans
total over revenue over the next 5 years by anywhere between 2% and 5%

depending on the revenue contribution each year. Mylan, Inc. - Net Present Value
Sensitivity - Initial Agila Revenue Growth vs. Decline in Revenue Growth Rates in
Subsequent Years Initial Agila Revenue Growth $ 32.33 15.0% 20.0% 25.0% 30.0%
35.0% 40.0% 45.0% 50.0% 55.0% (1.0%) $ 28.80 $ 29.71 $ 30.79 $ 32.04 $ 33.51 $
35.20 $ 37.16 $ 39.39 $ 41.95 (1.8%) 28.56 29.43 30.45 31.65 33.05 34.68 36.55
38.70 41.16 (2.5%) 28.34 29.16 30.13 31.28 32.61 34.17 35.96 38.03 40.39 (3.3%)
28.12 28.90 29.83 30.92 32.19 33.68 35.40 37.38 39.65 (4.0%) 27.91 28.65 29.53
30.57 31.79 33.21 34.85 36.75 38.93 (4.8%) 27.71 28.42 29.25 30.24 31.40 32.76
34.33 36.15 38.24 Agila - Annual Decline in Revenue Growth Rate
http://www.mergersandinquisitions.com http://breakingintowallstreet.com This
sensitivity table shows the impact of Mylans generics segment revenue growth and
its overall operating margin over the next 5 years on its implied share price: While
this table does not directly show the impact of cumulative revenue and revenue
growth over 5 years, you can see the impact of even a 1% change in initial revenue
growth in FY 2013: approximately 1% in extra revenue growth translates into
around $1.25 in extra per share value. With Xeloda and other new products, we
believe at least 6-7% revenue growth, falling by 0.5%-1.0% per year, is reasonable,
which would imply valuations of at least $29.00 - $30.00 per share, and potentially
over $32.00 per share. All of the above represent catalysts that could boost Mylans
share price to our targeted range of $32.00 - $34.00 per share in the next 12
months; if they all come true and work as expected, the price may be near the
upper end of that range, and if one or more is false, there is still potential upside in
the stock but it would be reduced to the lower end of that range, or slightly below it.
Valuation We have valued Mylan using public comps, precedent transactions, and
the DCF analysis. To select comparable public companies and precedent
transactions, we have used the following criteria: [You would explain the criteria
here in a real stock pitch we are skipping it here in the interest of time and
wanting to focus more on the DCF analysis.] Here are the implied valuation ranges
from these methodologies: [You would display the ranges from this analysis in a real
stock pitch and explain what the valuation ranges tell you about the company
might it be undervalued? Overvalued? Valued appropriately?] The discounted cash
flow analysis uses the following base case assumptions: Initial Generics
Segment revenue growth of 7.0%, declining by 0.75% per year (based on Mylans
product pipeline, expected launch dates, and consensus estimates, which we have
seen no reason to deviate from) Mylan, Inc. - Net Present Value Sensitivity Generics Revenue Growth vs. Operating Margin (Excl. Acquisition) Initial Generics
Revenue Growth (Annual change of (0.8%)) $ 32.33 3.0% 4.0% 5.0% 6.0% 7.0%
8.0% 9.0% 10.0% 11.0% 17.5% $ 29.24 $ 30.49 $ 31.78 $ 33.13 $ 34.52 $ 35.96 $
37.46 $ 39.01 $ 40.62 17.0% 28.31 29.52 30.78 32.08 33.43 34.82 36.27 37.78

39.33 16.5% 27.38 28.55 29.77 31.03 32.33 33.68 35.09 36.54 38.05 16.0% 26.46
27.59 28.76 29.98 31.24 32.55 33.90 35.31 36.76 15.5% 25.53 26.62 27.75 28.93
30.14 31.41 32.71 34.07 35.47 15.0% 24.60 25.65 26.74 27.88 29.05 30.27 31.53
32.83 34.19 Mylan, Inc. Standalone Operating Margin
http://www.mergersandinquisitions.com http://breakingintowallstreet.com Initial
Specialty Segment revenue growth of 10.0%, which then reverses into a 20.0%
annual decline each year starting in the second year most analysts project this
segment to grow for 2 years before declining, but we are being extra conservative
with the base assumptions here Operating Margin of 16.5% and Tax Rate of
35.0%, in-line with historical levels $1.6 billion in debt raised for the Agila
acquisition in FY 2013, with a $125 million cash earnout in FY 2014; Agilas revenue
grows from $454 million in FY 2014 to $908 million in FY 2017, with Operating
Income rising from $121 million to $283 million these numbers exceed consensus
estimates due to our channel checks and additional research 6.7% discount rate
(based on public comps and WACC), 1.0% terminal FCF growth rate, and standard
discount periods Heres the DCF down to the NOPAT line so that you can see the
revenue and operating income contributions from different segments and the Agila
acquisition: Here are the most relevant sensitivity tables based on key variables in
this analysis, such as the discount rate, terminal growth rate, and revenue growth
and margins: Mylan, Inc.- Free Cash Flow Projections Historical Projected Fiscal Year
Ends December 31, 2010 2011 2012 2013 2014 2015 2016 2017 Generics & Other
Revenue: $ 5,028 $ 5,583 $ 5,996 $ 6,416 $ 6,817 $ 7,192 $ 7,533 $ 7,835 Generics
Revenue Growth Rate: N/A 11.0% 7.4% 7.0% 6.3% 5.5% 4.8% 4.0% Specialty
(EpiPen) Revenue: 423 547 800 880 704 563 451 360 Specialty Revenue Growth
Rate: N/A 29.3% 46.3% 10.0% (20.0%) (20.0%) (20.0%) (20.0%) Total Revenue: $
5,451 $ 6,130 $ 6,796 $ 7,296 $ 7,521 $ 7,755 $ 7,984 $ 8,195 Overall Revenue
Growth Rate: N/A 12.4% 10.9% 7.4% 3.1% 3.1% 3.0% 2.6% Operating Income: 722
1,005 1,109 1,204 1,241 1,280 1,317 1,352 Operating Margin: 13.2% 16.4% 16.3%
16.5% 16.5% 16.5% 16.5% 16.5% Less: Taxes, Excluding Effect of Interest: (421)
(434) (448) (461) (473) Net Operating Profit After Tax (NOPAT): 782 807 832 856
879 Contribution from Agila: Revenue: 70 129 193 255 344 454 586 739 908
Revenue Growth Rate: 84.3% 49.6% 32.1% 35.0% 32.0% 29.0% 26.0% 23.0%
Operating Income: 32 49 66 91 121 169 223 283 Operating Margin: 24.7% 25.4%
25.9% 26.3% 26.6% 28.8% 30.2% 31.2% NOPAT: 68 91 126 168 212 Tax Rate:
25.0% 25.0% 25.0% 25.0% 25.0% Combined Company Revenue: 7,296 7,975 8,341
8,722 9,103 Combined Company Operating Income: 1,204 1,362 1,448 1,541 1,635
Combined Company NOPAT: 782 897 958 1,024 1,091
http://www.mergersandinquisitions.com http://breakingintowallstreet.com Key
Takeaways: The analysis is highly sensitive to both of these assumptions however,

these terminal growth rates are also quite conservative and even in the case of
0.5% growth, the company would only be valued at slightly less than its current
stock price. The bigger question is the discount rate is 6.5% or 7.0% more
appropriate? Our estimated rate is right in the middle of the range. This one will
require some additional research. Heres another table for the initial revenue growth
in Mylans generics segment (with the revenue growth rate falling by 0.75% each
year, i.e. the second year would be 6.3%), along with the companys overall
operating margin: Key Takeaways: If you look at the highlighted area, youll see that
even in downside scenarios, the valuation implies, at worst, approximately a 15%
discount to Mylans current share price, and each 0.5% in margin contributes about
$1.00 per share, with each additional 1.0% of revenue growth adding $1.25. The
more optimistic scenarios and implied values over $35.00 per share are less likely,
but from this table it certainly seems like the potential upside exceeds the potential
downside. We have already shown the analysis of Agilas initial revenue growth and
decline rate in the Catalyst section and given estimates for the impact of the
Specialty segment decline rate; the key takeaways are that the Specialty decline
rate is almost irrelevant, and that additional upside from Agila contributes
substantially to implied valuation, at around $1.25+ per share for each 5% of initial
Year 1 revenue growth. Based on our research and channel checks, we believe there
is a high likelihood that actual revenue growth will meet or exceed these numbers
due to Agilas favorable geographical split and strong competitive advantage in
emerging markets. Mylan, Inc. - Net Present Value Sensitivity - Terminal Growth
Rates Discount Rate $ 31.41 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0%
2.5% $ 89.51 $ 71.77 $ 59.10 $ 49.60 $ 42.21 $ 36.30 $ 31.47 $ 27.44 $ 24.03
2.0% 73.40 60.48 50.80 43.26 37.24 32.31 28.20 24.72 21.74 1.5% 61.90 52.02
44.34 38.19 33.16 28.97 25.43 22.39 19.76 1.0% 53.27 45.43 39.17 34.04 29.77
26.16 23.06 20.37 18.03 0.5% 46.56 40.17 34.94 30.58 26.90 23.74 21.00 18.61
16.47 0.0% 41.19 35.86 31.41 27.66 24.44 21.64 19.20 17.04 15.08 Terminal
Growth Rate Mylan, Inc. - Net Present Value Sensitivity - Generics Revenue Growth
vs. Operating Margin (Excl. Acquisition) Initial Generics Revenue Growth (Annual
change of (0.8%)) $ 32.33 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0%
17.5% $ 29.24 $ 30.49 $ 31.78 $ 33.13 $ 34.52 $ 35.96 $ 37.46 $ 39.01 $ 40.62
17.0% 28.31 29.52 30.78 32.08 33.43 34.82 36.27 37.78 39.33 16.5% 27.38 28.55
29.77 31.03 32.33 33.68 35.09 36.54 38.05 16.0% 26.46 27.59 28.76 29.98 31.24
32.55 33.90 35.31 36.76 15.5% 25.53 26.62 27.75 28.93 30.14 31.41 32.71 34.07
35.47 15.0% 24.60 25.65 26.74 27.88 29.05 30.27 31.53 32.83 34.19 Mylan, Inc.
Standalone Operating Margin http://www.mergersandinquisitions.com
http://breakingintowallstreet.com Investment Risks The top risk factors include: 1)
The Agila acquisition failing to close; 2) Integration being more challenging than

expected (resulting in lower revenue growth and/or margins); and 3) The companys
new product launches for the coming year, such as Xeloda, generating lowerthanexpected revenue. Well address each of those risk factors in turn and explain how
to mitigate them: Agila Acquisition Fails to Close If the Agila acquisition does not
close or is held up by regulatory approval or by other factors, the company might be
worth closer to the $25.00 $30.00 per share range (see the tables in the Catalysts
section above). While that is not dramatically different from its current price of
$28.60, there is a chance that the market may overreact and send the stock price
down, or that the stock price could fall as the company guides to lower revenue and
EPS in FY 2014 as a result of the delay. To hedge against this risk, we could buy
protective put options on Mylans stock at a strike price of $27.17 (or something
close to that) to limit our losses to 5%; this is not an investment with massive
upside, so we dont see a reason to accept greater than 5% losses if the potential
gain is only 10-15%. Integration is More Challenging than Expected / Emerging
Markets Grow More Slowly As shown in the tables above, this investment thesis is
heavily dependent on growth in emerging markets exceeding estimates and the
Agila acquisition making a substantial contribution to revenue and operating income
from FY 2014 through FY 2017. If that does not happen, the companys implied per
share value would be closer to $25.00 $30.00 per share in the case where initial
revenue growth from Agila is between 15% and 30% and the annual revenue growth
decline rate is 3.0% 5.0% rather than the 3.0% weve assumed in the base case.
That doesnt represent a massive potential loss, but we could hedge against this
outcome by longing a competitor with less exposure to emerging markets (e.g.
Actavis), or even a much larger pharmaceuticals company with a more diversified
pipeline, such as Pfizer or Merck. New Product Launches (Xeloda) Generating Lowerthan-Expected Revenue As shown above, the analysis here is dependent on solid
revenue growth in Mylans generics segment going into FY 2013 and beyond if the
initial revenue growth is in the 3.0% 6.0% range rather than the
http://www.mergersandinquisitions.com http://breakingintowallstreet.com 7.0% in
our base case, and the operating margin falls from 16.5% to closer to 15.0%, the
companys implied value per share falls to the $23.00 $27.00 range. This is a
sizable discount to the companys current $28.60 share price, so we could hedge
against this risk via protective put options (purchased at $26.00 $27.00 strike
prices), or by longing the stock of a competitor that is focused on other segments of
the pharmaceuticals market, or one that offers products in the same segment (oral
cancer drugs) but with more competitive pricing or other benefits. This would
require additional research on the market and peer companies to execute properly.
The Worst Case Scenario Another risk is that we could be wrong about everything
outlined above, from the revenue growth rates and margins to the acquisition, new

product launches, and more. A true worst case scenario might result in an implied
share price of between $15.00 and $20.00 if you assume dramatically lower
revenue growth, lower margins, a significantly higher discount rate, and a terminal
FCF growth rate of less than 1.0%. Assets minus Liabilities on Mylans Balance Sheet
is currently $3.4 billion, which equates to a stock price of $8.60. If you subtract out
Intangible Assets and Goodwill, however, the picture is not as favorable since
Tangible Assets minus Liabilities is actually a negative number as is often the case
for pharmaceutical firms with IP-heavy portfolios. So there is not much Balance
Sheet protection, but we could protect against these extreme downside scenarios
via protective put options, longing the stock of peer companies such as Actavis, or
investing in another company in the sector with a different geographical and/or
product focus. Additionally, there is another way to hedge against this extreme
downside with Mylan: since it has acquired so many companies in recent years, it
could sell off any divisions that have not already been fully integrated, or even ones
that have been more fully integrated (and accept a discount to market value for
them). We would need to conduct additional research and do more valuation work
on what these divisions might be worth, but the company has spent nearly $1 billion
on these deals in the past several years on the surface, that is also a low per-share
value, but potentially they could be sold for significantly more than that $1 billion
depending on how market values have changed over time. Return to Top.
http://www.mergersandinquisitions.com http://breakingintowallstreet.com What
Next? Now that youve completed this case study and read through this stock pitch
above, whats next? What can you do to master these concepts and get more
practice with all of this? Heres what we recommend: 1. Flesh Out the Missing Pieces
Here For example, do your own channel checks and your own industry research
and see if you can confirm / deny some of these assumptions, or at least make your
own arguments for or against what weve laid out above. 2. Practice with Your Own
Company Use what youve learned here to generate your own investment ideas
and stock pitches, in any industry youre interested in. The same structure always
applies, but the model inputs, research, and valuation will be different. And if youre
looking for a more structured approach: 1. Job Search Digest Webinars Were
actually covering this very case study and including more on the technical parts in a
case study on Tuesday next week (June 25th). If you sign up for the Job Search
Digest newsletter, youll receive an announcement about this webinar and
instructions on how to join. 2. Numis Stock Pitch and Case Study Service I linked
to this at the end of the previous articles, but hes your best source for personalized
assistance with your stock pitches and hedge fund case studies and hes worked
with dozens of clients over the years and helped them land offers in equity
research, hedge funds, and more. You can visit his LinkedIn page here or email him

at numi.advisory@gmail.com. 3. BIWS Financial Modeling Courses This is a

relatively recent addition, but we now include bonus case studies if youve signed
up for the Fundamentals or Advanced courses (or any combination thereof). If
youre already a member, click here to access them. These case studies cover
valuation, merger models, LBO models, and more, and several of them also teach
you how to make investment recommendations in PE and HF interviews. Return to
Top.
ECHO

Summary
Echo's founders should be heavily scrutinized and have a pattern of cashing
out early and disappointing investors by promoting "disruptive" technologies.
The company's transportation logistics roll-up story has not demonstrated
any operating leverage. Its recent deal to buy Command Transport added
substantial leverage and business risk to investors.
Stripping out the contribution from recent acquisitions illustrates that Echo's
organic revenue growth has been declining for multiple quarters and is now
negative.
Echo appears to have breached a covenant of its ABL; the company is
becoming more dependent on short-term financing, which could jeopardize
its ability to implement its growth strategy.
Normalizing Echo's financials for accounting distortions and placing an 8-9x
multiple on 2017 EBITDA gets us to 50-60% downside. Upside of 11% to
analysts' average target a terrible risk/reward.
Report Entitled "Echo Global: Logistical Nightmare"
Spruce Point Capital Management is pleased to announce it has released the
contents of a unique short idea involving Echo Global Logistics, Inc.
(Nasdaq:ECHO), a billion-dollar company in the transportation logistics

sector where we see $11.00-13.00 per share, or approximately 50-60%

downside. We have a "Strong Sell" opinion detailed extensively in our
presentation, which is accessible on our website. We also encourage all of
our readers to follow us on Twitter @Sprucepointcap for exclusive research
updates. Please review our Disclaimer at the bottom of this email.
Update on Recent Spruce Point Campaigns
We are pleased to update our readers on the tangible outcomes resulting
from our recent campaigns. In April, we initiated Sabre
Corp. (NASDAQ:SABR) with a "Strong Sell" and argued that aggressive
accounting was masking fundamental pressures and cash flow
overstatement. On August 2nd, Sabreissued its Q2'16 earnings and revised
its cash flow guidance downward. The company also made the bizarre
statement that it could not provide forward guidance on a GAAP basis
without unreasonable effort! Last month, we warned our readers
about AECOM (NYSE:ACM) and detailed our concerns about its earnings
quality and cash flow. We also argued that the company's AECOM Capital
sales should not be considered as "core" earnings. Just this week,
AECOM revised its earnings guidance lower and said annual earnings would
come at the low end of its $3.00-3.40 range due to the company's inability
to monetize its capital stake. The mere fact that the majority of AECOM's
annual earnings was predicated on liquidating an equity capital position
should be concerning to its investors.
Echo Checks All of Our Boxes For the Perfect Short
Insiders with a history of value destruction, limited alignment with
shareholders, a commoditized business with decaying fundamentals and
diminishing transparency, inflated Non-GAAP results, problematic
accounting, overvaluation, and a consensus "buy" on Wall Street... Echo has
everything we like as the perfect short! It was IPO'ed in 2009 and promoted
as a company with a "proprietary" technology capable of disrupting the
transportation logistics market. Echo's founders, the same people behind

Groupon (NASDAQ:GRPN), have used an identical playbook to promote

Echo. The founders have a repeated history of value destruction and a knack
for cashing out early before losses mount. Echo is nothing more than a
transportation broker matching demand with supply and taking a small cut
of the deal. The company is a subscale player and has not demonstrated any
operating leverage from its roll-up strategy. Free cash flow after acquisitions
(including numerous contingent payments) is negative since its IPO.

Echo has churned through five chief technology officers and has quietly
suspended all discussion of its Enhanced Transportation Management, "ETM,"
platform, which was once the cornerstone of its IPO pitch and plastered all
over its IPO prospectus.

Now called "Optimizer," the company's website portal is sadly not even
optimized for the world's top browser, Chrome! Echo is further challenged by
dozens of young start-ups backed by the founders of Amazon, eBay, and
others, and all set to disrupt fringe players like Echo with Uber-like realtime, location-based technologies.

According to a Frost & Sullivan Study (Uber for Trucks: Executive

Analysis, May 2016)

It believes that the Uber model for trucking is poised to revolutionize freight
mobility.

Mobile-based freight brokerage generates ~$100 million in revenues. By

2025, the mobile freight market is expected to grow at a compound annual
growth rate of 74.65% and generate $26.4 billion in revenue for the entire
market. It is estimated that by 2025, 16% of 3PL will be enabled through mobile
platforms.

"Mobile-based freight brokers are strategizing to grow their network by

offering as much value as possible for free to customers on their apps. In
addition to strengthening their freight brokering capabilities, mobile-based
freight brokers are bundling transportation management solutions together to
attract customers."

According to an Oliver Wyman recent study: (Uber Trucking is on its

Way, 2016)
"Many of the new trucking apps are being developed by non-traditional
technology companies with brokerage authority, and these are looking to
increase their appeal by undercutting the middleman fees charged by
traditional freight brokers, while offering more comprehensive solutions.
Thus much like the taxi industry, which is now fighting back against ride
sharing with its own streamlined apps (such as Hailo and Arro), traditional
truck freight brokers will need to embrace "uberization" as well - or risk
being displaced entirely."
As a slap in the face to Echo, New Enterprise Associates, the company's first
venture backer, is now backing Transfix, a new "disruptive" online
marketplace for truckload capacity offering free apps to customers. Echo's

only attempt at a mobile app in 2011 appears to have failed and is no longer
available on theApple store or Google Play.
Rising Interest in Uber For Trucking

(Source: Google Trends)

Background on Echo's Founders
Echo was co-founded by Eric Lefkofsky and partner Brad Keywell. Their track
record should be carefully vetted by investors:

The duo bought children's apparel company Brandon Apparel Group. It later
faltered, Lefkofsky explained in his blog entitled "When You Don't Know What to
Say" (September 2012): "Along with our sales growth came lots of debt which
eventually crippled the company when fashion trends changed in the late 90's"
(Note: Echo recently took on $230 million of debt, and we believe its industry is
changing.)

The pair later founded Starbelly.com, an online promotional merchandise

seller in 1999. In early 2000, Starbelly sold itself to publicly traded Ha-Lo
Industries for $240 million, much of which went Lefkofsky. Commenting on the

deal, Keywell said, "This move positions us just where we want to be long term,
which is to dominate this entire industry."

Shortly thereafter, Ha-Lo declared bankruptcy. Shareholders and others

blamed the Starbelly deal, and a series of lawsuits ensued. According to legal
filings, Lefkofsky made the following statement to Ha-Lo colleagues even as the
business was deteriorating: "Lets get funky. Lets announce everything. Lets be
WILDLY positive in our forecasts, if we get wacked on the ride down - who gives
a sh*t. Is it going to worse than today? is our market cap going to fall to 200N,
100M who the f**k cares."

Lefkosky and Keywell later emerged as founders of three new "technology"

companies, the most notable and promoted among which was Groupon.
Groupon's struggles have been well publicized; its stock is down 80% since
IPO'ing at $20/share in 2011
According to Lefkofsky, "Groupon is going to be wildly profitable." Need we
say any more? To his credit, Lefkofsky has held most of his equity in the
company (along with Keywell), and even assumed an interim role as CEO,
before being replaced.
Lefkofsky and Keywell founded Echo in 2005 with the strategy of using
"proprietary" technology to gain share in the large and fragmented
transportation logistics industry, with $1.3 trillion of annual spend according
to data cited in its prospectus

According to the S-1, Lefkofsky and Keywell owned 18.9% and 12.4%, of
Echo respectively. As of the company's last proxy statement and SC 13G/A,
Lefkfofsky owns just 3.3%, while Keywell owns a token 2%.

Lefkofsky quietly resigned from the Board in December 12, as stated in an8K filing. Shortly thereafter, Echo noted a material weakness.

Another insight into Lefkosfky can be seen on his blog, "The Valley or the
Peak" (August 2012):

"We have for many years promoted the concept of fast failure as a means to
building innovative business models. The concept is simple. Often you have
to iterate your way into a business model that actually works to the extent
it's disruptive, so every early iteration is in fact destined to be a failure. As a
result, you might as well fail fast."
Echo vs. Groupon: Same People, Same Playbook, Same End Result...?

Masking Organic Growth Deterioration With The Acquisition of

Command Transportation
Under pressure to grow revenues to $3 billion by 2018, and facing
fundamental pressures in its industry such as excess transportation capacity
and declining rates, Echo announced its largest deal to acquire Command
Transportation, founded by Paul Loeb in June 2015. The company paid a rich
11.2x EV/EBITDA to acquire a truckload brokerage business (a lowermargin, "spot"-oriented business adding a higher risk profile to
shareholders).

The company leveraged itself over 3x Net Debt/EBITDA and diluted

shareholders to complete the deal.

Echo is an "asset-light" business, which means increased leverage on its

business can be destructive for shareholders when things go bad. It has
promoted Command's technology platform as "industry-leading," but in
reality we don't believe it's anything unique. To illustrate, Loeb
founded American Backhaulers, which was sold to industry behemoth C.H.
Robinson (NASDAQ:CHRW) in 1999. Loeb's partner, Jeff Silver, went to study
supply chain logistics at MIT, found a competitor - Coyote Logistics - and
just sold it to UPS, while CHRW sued Loeb claiming he misappropriated the
technology. In all likelihood, CHRW and UPS both have some form of
Command and Echo's secret technology sauce. But don't take our word for
it, insiders tend to know best.

"Completely Outdated Technology Platform Found Matching

Outdated New CIO"

IT Management team is out of touch with reality.

Clueless senior IT leadership team and outdated CIO must catch up with
modern IT world.

Leadership is not about being in charge. Leadership is about taking care of

those in your charge.

Lack of direction and keep changing priorities.

CIO mindset is consultants are going to fix all problems.

His actions and words don't match.

(Source: Glassdoor: July 19, 2015)

"Avoid at All Costs"
"More general issues, they try to call themselves a technology company but
they are severely lacking. software is not strong, releases seem to be to fix
problems and never actually create anything. Terrible base pay, long road to
commissions, a laughable 401k plan."
(Source: Glassdoor: April 19, 2015)
"IT Department Downhill Spiral"
"IT Management consists of people that are baked in and comfortable at
their job. They don't care about the engineers or about their careers. There
is no formal training given or encouraged - you have to be proactive to learn
on your own. With the new CIO, the mentality is that you are replaceable by
consultants unless you are in management or enterprise architect.
Consultants are brought in for quick wins instead of helping to staff a team.

Some teams consist of one or two engineers doing the work for four people
while other teams have six people doing the work of two. Favoritism is
rampant like consultant being brought on full time and promoted to director
or senior engineer promoted to enterprise architect. Decision on what
technology to use keeps changing. Management cannot support or stick to
one decision which in turn wastes company money and time."
(Source: Glassdoor: July 14, 2015)
Based on our research, Command Transportation has had meaningful
employee departures since the deal closed, and Command's founder recently
returned $750,000 in cash to Echo, citing "employee retention criteria"
without further specifics in the recent 10-Q.

Reading between the lines, we interpret this as a decidedly negative. After

adjusting Echo's recent reported sales figures for recent M&A deals, we find
its organic revenue growth has been declining for each of the past few
quarters, and is now negative.

Our results are corroborated by declining Google search interest.

(Source: Google Trends)

Outrageous Synergy Assumptions and Diverging GAAP/Non-GAAP
Performance Suggest Echo Will Dramatically Miss Growth
Expectations
Echo guided the market to expect $200-300 million of revenue synergies by
2017 from adding Command and cross selling services. The revenue synergy
targets are 50-70% of the $407 million enterprise value paid for Command!
Moreover, we analyzed all of the recent headlines making M&A deals in the
sector and cannot find any transaction even close to promising this level of
synergy.

To make matters even more questionable, in Q2'15 (one year after closing
the deal) Echo added $3 million of mysterious cost savings synergies, but
offered no specifics on the conference call. The company's Non-GAAP
financial performance is diverging at an alarming rate from its GAAP
financials, suggesting financial strain and future problems.

Echo's results continue to generally disappoint. In Q2'16, it reported

quarterly Non-GAAP EPS of $0.27 and missed expectations of $0.32, coming

in -16% below expectations (1). Echo called out $3.1 million of Command
integration costs, or $0.06 cents per share, to conveniently "beat"
expectations by $0.01 (2). At times, Echo's Command integration costs don't
appear to have not even reconciled among public statements (3).
We believe investors should be highly cautioned about the
company's earnings quality given escalating integration costs, and
now mysterious and unexplained cost synergies announced in Q2'16.

(1) Sources: Echo Press Release and Echo Misses 2Q Profit Forecasts.
(2) CFO Sauers, Q2'16 Conference Call.
(3) Echo says total costs in 2015 were $2.3 million, but adding Q2 cost of
$0.2 million (on the conference call), $1.5 million in Q3 (press release), and
$0.8 million in Q4 (press release), we get $2.5 million.
(4) Midpoint of guidance range. (see above chart)
Not surprisingly, the company is out touting it is already on the hunt for
more acquisitions without even making due on its Command promises, but
to us this just appears to be a Hail Mary that it can paper over its problems

with more deals. To underscore our point, we observe that Echo's audit fees
have risen >40% p.a. in the past three years, and are materially higher on a
revenue and per employee basis than that of any of its industry peers.

Echo has acknowledged material weaknesses in its financial controls in the

past. In 2012, the company admitted it had been defrauded in its acquisition
of Shipper Direct, resulting in the quiet resignation of founder Lefkofksy in
December 2012. A coincidence or not: Echo had received money back from
Shipper's founders, just as it recently received money back from Command.
Echo Appears to Be Out of Compliance With Its Credit Agreement
As part of its Command deal, the company entered into a $200 million assetbased lending (ABL) agreement to provide itself working capital. In recent
years, Echo has become much more dependent on short-term financing, a
worrisome sign given its poor cash management policies. For example, we
observe that Echo earns no interest income on its cash balances!

In our opinion, Echo is not currently in compliance with its ABL covenants. In
March 2016, the company announced an agreement to expand its
headquarter lease to 225k sq. ft. By our analysis, this makes little economic,
as each of its 1,300 employees will have 170 sq. ft. (almost an entire office
per person). The terms of Echo's ABL agreement limit additional
indebtedness to $12.5 million, but by reviewing the footnotes of the
company's operating leases, it is clear it has assumed ~$42 million of
leases.

(Source: 10-K and Q1'16 10-Q)

Not surprisingly, Echo dropped the language in its recent 10-Q that appeared
in previous financial filings stating that it was in compliance with ABL

agreement. A covenant breach would limit the company's ability to

implement its acquisition growth strategy.
Broken Alignment Among Insiders and Current Shareholders
Insiders have rapidly exited Echo's shares since its IPO.

Management keeps gearing more of its pay toward cash, not stock.

How can management be incentivized and new technology talent attracted

when no stock options are granted?

Various Accounting and Financial Presentation Distortions

In our opinion, Echo's financial statements cannot be taken at face value,
due to a plethora of questionable accounting assumptions and changes of
financial presentation and disclosure that distort the true condition of its
business.

For example, we observe that the company stopped disclosing enterprise

customers, which was a critical selling point of its IPO to demonstrate
revenue and cash flow stability.

Echo even stopped disclosing shipping volumes, a critical metric to evaluate

its business.

From an accounting perspective, investors should recall that Groupon was

forced to restate its revenues from gross to net revenues pre-IPO after
questioning by the SEC. Around this time, Echo quietly changed its
presentation of "gross profit" to "net revenue." Upon reviewing Echo's Terms
of Service and recent accounting guidance, it also appears that the
company's gross revenue accounting is problematic given it appears to act
as an agent (broker) and shifts financial responsibilities to carriers to
perform the client service. Another clear area of concern is Echo's intangible
amortization policies. We observe that the company has stretched its
assumption for amortizing customer relationships every single year, and now
has the most aggressive assumption in the industry!

Echo Trades At an Unjustified Premium; Normalizing Results Gets Us

50-60% Downside:
Wall Street sell-side analysts have a nearly unanimous "Buy"
recommendation on Echo and see an average upside to $29.65 (11%+). In
our view, this is a terrible risk/reward proposition for owning the company's
shares. By normalizing Echo's accounting methods, and giving the company
no credit for its preposterous synergies, we believe its true EPS and EBITDA
are approx. 35% lower than 2017 Street estimates.

(1) Most analysts just take management's word that $250 million of revenue
synergies can be achieved. We give Echo zero credit, given a year has
passed with nothing to show.
(2) In Q2'16, management came up with unspecified $3 million of cost
synergies; we give them zero credit for this.
(3) Adjusted to reverse the Q3'15 reallocation of intangibles to goodwill.
(4) Normalizes amortization to 8 years in line with industry peers versus
Echo's 14.8 years.
(5) Normalizes bad debt expense closer to industry average of 1.6% of
receivables.

(6)-(8) Multiple non-standard add-backs relative to peers that we don't give

credit for. We also don't believe eliminating recurring M&A costs for a roll-up
strategy is justified.
Echo trades at a rich 11.5x inflated 2017E EBITDA multiple. It competes
against well-established, larger players that are more deserving of a
premium multiple, in our view. In the table below, we list the valuations for
C.H. Robinson, XPO Logistics (NYSEMKT:XPO), Expeditors International
(NASDAQ:EXPD), Landstar (NASDAQ:LSTR), Forward Air (NASDAQ:FWRD),
Hub Group (NASDAQ:HUBG), Roadrunner Transportation (NYSE:RRTS) and
Universal Logistics (NASDAQ:ULH). The company's most relevant peers are
asset-light operators CHRW, HUBG and EXPD.

Echo's rich multiple appears predicated on its above-average revenue

growth. To hit this enormous target, it will have to extract full synergies from
its Command acquisition and acquire further companies. We are skeptical
Echo can hit the Command revenue synergy goals (to date we don't believe
they've demonstrated any synergies). Furthermore, given that we believe
Echo has breached a covenant of its ABL, we hold Echo may have trouble
accessing its liquidity for further deals.

By applying a discounted industry multiple of 8x-9x to our normalized

EBITDA, we derive a price target of $11.00-13.00 per share (approx. 5060% downside).

Disclaimer
This research expresses our investment opinions, which we have based upon
interpretation of certain facts and observations, all of which are based upon
publicly available information, and all of which are set out in our complete
research presentation report on our website. Any investment involves
substantial risks, including complete loss of capital. Any forecasts or
estimates are for illustrative purpose only and should not be taken as
limitations of the maximum possible loss or gain. Any information contained
herein may include forward looking statements, expectations, pro forma
analyses, estimates, and projections. You should assume these types of
statements, expectations, pro forma analyses, estimates, and projections
may turn out to be incorrect for reasons beyond Spruce Point Capital
Management LLC's control. This is not investment or accounting advice nor
should it be construed as such. Use of Spruce Point Capital Management
LLC's research is at your own risk. Any historical performance achieved from
any idea or opinion from Spruce Point Capital Management should not be
considered an indicator of future performance. Please visit Sumzero.com for
full details of their investment opinion ranking methodology. You should do
your own research and due diligence before making any investment decision
with respect to any of the securities covered herein.
You should assume that as of the publication date of any presentation,
report or letter, Spruce Point Capital Management LLC (possibly along with or
through our members, partners, affiliates, employees, and/or consultants)
along with our subscribers and clients has a short position in all stocks
(and/or are long puts/short call options of the stock) covered herein,
including without limitation Echo Global Logistics, Inc. ("Echo"), and
therefore stand to realize significant gains in the event that the price of its
stock declines. Following publication of any presentation, report or letter, we
intend to continue transacting in the securities covered therein, and we may
be long, short, or neutral at any time hereafter regardless of our initial
recommendation.

This is not an offer to sell or a solicitation of an offer to buy any security, nor
shall any security be offered or sold to any person, in any jurisdiction in
which such offer would be unlawful under the securities laws of such
jurisdiction. Spruce Point Capital Management LLC is not registered as an
investment advisor, broker/dealer, or accounting firm.
To the best of our ability and belief, as of the date hereof, all information
contained herein is accurate and reliable and does not omit to state material
facts necessary to make the statements herein not misleading, and all
information has been obtained from public sources we believe to be accurate
and reliable, and who are not insiders or connected persons of the stock
covered herein or who may otherwise owe any fiduciary duty or duty of
confidentiality to the issuer, or to any other person or entity that was
breached by the transmission of information to Spruce Point Capital
Management LLC. However, Spruce Point Capital Management LLC
recognizes that there may be non-public information in the possession of
Echo Global Logistics, Inc. or other insiders of Echo Global Logistics, Inc.
that has not been publicly disclosed by Echo Global Logistics. Therefore,
such information contained herein is presented "as is," without warranty of
any kind - whether express or implied. Spruce Point Capital Management LLC
makes no other representations, express or implied, as to the accuracy,
timeliness, or completeness of any such information or with regard to the
results to be obtained from its use. All rights reserved. This document may
not be reproduced or disseminated in whole or in part without the prior
written consent of Spruce Point Capital Management LLC.
Disclosure: I am/we are short ECHO, ACM.
Summary
Share price is up triple since IPO with more room to run and targeting large,
growing markets.

Acacia is an ideal investment for those looking to capitalize on trends in

increased data usage, the cloud economy, and the internet of things.
Seasonality traditionally in the fourth quarter may provide an ideal entry
point for dip buyers.
Acacia Communications (Pending:ACIA) priced its IPO in May at $23 per
share, at the high end of expectations as investors clamored to get a piece
of this high growth optical networking story. Shares have been rampaging,
up to that almost magical $100 mark, due to blowout Q2 results.

Acacia now trades at a PE of 63x, forward PE 32x, PEG of .92, and 6x

price/sales, with its market cap growing to almost $2 billion. An initial glance
at these numbers in light of recent results reveals that shares may still be
undervalued, even after the recent price bump. Let's take a further look.
Notable institutional holders include Matrix Partners with 12 million shares,
almost 1/3rd of outstanding. They are followed by Commonwealth Capital
Partners with 6 million shares, as well as a general partner of the company
(Stan Reiss) with 12 million shares and a director (Peter Chung) with 2.89

million shares. The float remaining is around 2 million with around half of
that short. An initial glance at these numbers in light of recent results
reveals that shares may still be undervalued, even after the recent price
bump.
Background
The company's mission is to "deliver high-speed optical interconnects that
transform, cloud, content and communication networks", utilizing its silicon
based solutions. Traditional technologies are challenging in terms of
scalability, efficiency, and performance, while Acacia's solutions reduce
complexity. Acacia claims its products enable "industry-leading speed,
density, and power efficiency."
The company defines its major target markets as long/haul, metro, and
inter-data center, which are growing at a compound annual growth rate 9%,
13%, and 58% respectively, according to the company.

Acacia seems to be at the crossroads of several positive trends, from

increased data use (a la Netflix, YouTube, social media), the advent of the
cloud economy, objects we use every day being hooked up to a network
(internet of things), etc. A lot of articles have been showing up this year on
faux IoT plays, ways to capitalize on the Pokemon Go craze, but Acacia
seems to be the real deal.
Acacia hopes to help Web 2.0 content providers and traditional service
providers to build out their fiber networks at a reduced cost, as demand for
bandwidth continues to increase for factors mentioned earlier. Management
describes the market opportunity as "large and growing", as the increase of
bandwidth demand pushes customers to focus their investments on speeds
of 100G and more.

In terms of competition, it looks like the company has a decent moat with its
intellectual property, as well as the time it takes for other companies to bring
similar products to the market, not to mention that Acacia has the best DSP
on the market.
Quarterly Results
Revenue increased 101% year over year to $116.2 million, with non GAAP
net income of $17.6 million and earnings per share of $.77 respectively.
Their gross margin was 47% of revenue with income from operations of
$32.6 million. The company predicts for the third quarter revenue of $120 to
$128 million with earnings per share of $.64 to $.76. Cash and cash
equivalents were $159 million with no debt, with $31 million of cash
generated during the customer, definitely the sign of a healthy business.

Geographically Acacia's management saw strong demand from all regions,

with the strongest coming from China. As their clients are in the early stages
of a multi-year buildout cycle of 100G, 200G, and 400G technology, they
foresee steady demand for years to come.
Interestingly enough, management has seen large increases in volumes and
number of products purchased from the company from their original eight
clients, so they believe they will see similar demand from the other 17+
companies they currently count as customers. Revenue from customers
outside the original eight grew 120% year over year and 117% sequentially,
compared to 96% year over year growth for the original eight customers and
25% sequential growth.
While margins clocked in around 47% this quarter, management believes
they can get that number up to 48-50%.
An Opportunity to Add to Or Initiate Position?
After management predicted similar revenue growth for the second half of
the year, company president and CEO Raj Shanmugaraj opaquely referred to
a "history of seasonality" in the fourth quarter, which I suspect many on the
Street might miss.

Promising Revenue Growth but

Revenue momentum and quarterly growth are rather impressive, but
investors would do well to note the Q4 dip in 2014 from $47 million to $41
million, as well as lesser growth in Q4 2015 compared to other quarters. It's
possible investors might overreact to a similar situation in 2016, which could
provide an ideal entry point for those looking to initiate a position on the dip.
Other Conference Call Nuggets
When asked further about growth in their target markets, management
stated that growth in its three target markets growing from $11 billion in
2015 to $20 billion in 2019, with their particular addressable market in the
$4 billion to $5 billion range.
The company has a reasonable headcount ending the quarter at 233
employees, while they were a bit vague about the target tax rate, noting it
would be in the 10% to 15% range.

When asked about the controversial situation with ZTE in China,

management commented that ZTE is consistently one of the top 5
equipment providers in the world and "we're happy to have them as a big
customer". In Q1 revenue derived from the ZTE relationship was 46% of
revenue, while it dropped to 31% of revenue in Q2 as other companies
upped their purchase of Acacia's products. The company foresees a strong
backlog of orders from ZTE for the rest of the year. For those who don't
remember or aren't aware of the situation, ZTE earlier in the year was
placed on the US Department of Commerce "entity list", which prohibits US
companies from selling to them due to violations of national security or
foreign policy interests. ZTE was accused of selling communications systems
to Iran. Thankfully, ZTE has made great strides to address concerns of the
US Department of Commerce by granting them a reprieve that should last
until August 30th, giving ZTE time to convince them to not go through with
or continue the ban. If the ban is allowed to continue, it would be a huge
blow to the company and its operations. ZTE is currently the 4th largest
seller of smartphones in the US.
Conclusion
Even closing in on a $100 share price and a $2 billion market cap, Acacia
provides an attractive opportunity for investors looking to capitalize on the
trends in increased data usage and infrastructure buildout. The target
markets the company is focused on are full of opportunity and growing for
years to come, its clients are in the middle of making large investments in
upgrading their technology.
Personally, I think the share price looks quite elevated up here, but with
plenty of room to grow further. For investors who are more risk averse, a
better option might be to wait to see how the company delivers in Q4, taking
advantage of seasonality if and when it occurs. Or, a small pilot position
could be established while looking to add on dips.

Risks include a drop in demand (or lumpy quarters), competition from other
companies in the arena, a continued ban on major client ZTE, and other
unforeseeable events that could motivate clients to put off their purchases
until a later time.
Disclosure: I/we have no positions in any stocks mentioned, but may
initiate a long position in ACIA over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not
receiving compensation for it (other than from Seeking Alpha). I have no
business relationship with any company whose stock is mentioned in this
article.

Valuation
Market Capitalization (Mil)

ACIA

Industry

S&P 500

3,810.32

5,553.55

40,076.08

P/E Excl Extra (TTM)

146.70

19.96

23.53

Price to Sales (TTM)

11.39

2.69

1.92

Price to Book (MRQ)

17.15

NMF

NMF

Price to Tangible Book Value (MRQ)

17.22

6.41

7.52

148.70

12.82

11.64

78.97

15.55

18.81

Dividend Rate Indicated Annual

NMF

2.46

2.16

Price

ACIA

Price to Cash Flow /Share (TTM)

Price to Free Cash Flow / Share (TTM)

Recent Price
YTD Percent Change

4 Week Percent Change

13 Week Percent Change

Industry

S&P 500

106.41

NMF

NMF

NMF

18.58

8.71

11.23

2.42

0.54

178.12

12.80

4.00

26 Week Percent Change

NMF

16.53

9.30

52 Week Percent Change

NMF

20.47

13.91

4 Week vs. S&P500

14.17

NMF

NMF

13 Week vs S&P500

173.97

NMF

NMF

26 Week vs S&P500

NMF

NMF

NMF

52 Week vs S&P500

NMF

NMF

NMF

Beta

NMF

NMF

NMF

Profitability

ACIA

EPS Percent Change (MRQ) 1Yr Prior

Industry

S&P 500

1,938.25

12.67

1.75

EPS Percent Change TTM over TTM

772.89

20.50

-7.93

EPS Percent Change (YOY)

339.66

11.99

-9.91

NMF

NMF

NMF

100.86

4.68

0.66

Revenue Percent Change TTM over TTM

73.50

1.79

-1.39

Revenue Percent Change (YOY)

63.47

3.03

-2.38

1,586,005.00

NMF

NMF

Gross Margin (TTM)

43.64

56.85

42.70

Operating Margin (TTM)

19.75

18.62

14.73

NMF

NMF

NMF

Tax Rate (TTM)

-2.74

19.61

25.67

Return on Average Assets (TTM)

33.42

9.09

3.53

Return on Average Equity (TTM)

19.24

14.74

12.17

EPS Growth Rate 5 Yr

Revenue Percent Change (MRQ) 1Yr Prior

Revenues / Employee (TTM)

Profit Margin (TTM)

Ratios

ACIA

Industry

S&P 500

Cash / Share (MRQ)

4.46

NMF

NMF

Quick Ratio (MRQ)

3.25

2.61

1.05

Current Ratio (MRQ)

3.56

2.78

1.41

Long Term Debt to Equity (MRQ)

0.00

48.40

85.22

Total Debt to Equity (MRQ)

0.00

48.40

85.22

Interest Coverage (TTM)

NMF

11.05

7.14

Receivables Turnover (TTM)

5.69

6.37

6.26

Inventory Turnover (TTM)

9.85

6.31

6.34

Asset Turnover (TTM)

1.76

0.55

0.33

Recent price
52 Week High
52 Week Low

106.41
128.73
27.05

5 Day Percent Change

4 Week Percent Change
13 Week Percent Change
26 Week Percent Change
52 Week Percent Change

-5.08
11.23
178.12
NMF
NMF

4 Week vs. S&P500

13 Week vs. S&P500
26 Week vs. S&P500
52 Week vs. S&P500

14.17
173.97
NMF
NMF

ITEM 1A. Risk Factors.

An investment in our common stock involves a high degree of risk. Investors in our common stock should
carefully consider the risks and uncertainties described below, together with all of the other information included in
this Quarterly Report on Form 10-Q and in our other public filings, before deciding to invest in our common stock.
Our business, financial condition, operating results, cash flow and prospects could be materially and adversely
affected by any of these risks or uncertainties, as well as other risks not currently known to us or that we currently
consider immaterial. If any of such risks and uncertainties actually occurs, our business, financial condition or
operating results could differ materially from the plans, projections and other forward-looking statements included
in the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this Quarterly Report on Form 10-Q and in our other public filings. The trading price of our common
stock could decline due to any of these risks, and, as a result, investors in our common stock may lose all or part of
their investment.
Risks Related to Our Business and Industry
We have a history of operating losses, and we may not maintain or increase our profitability.
Although we were profitable in 2014, 2015 and the six months ended June 30, 2016, we incurred operating
losses in 2009 through 2013. We may not be able to sustain or increase profitability on a quarterly or annual basis. If
we are unable to maintain profitability, the market value of our stock may decline, and investors in our common
stock could lose all or a part of their investment.

Our limited operating history makes it difficult to evaluate our current business and future prospects and may
increase the risk associated with investments by investors in our common stock.
We were founded in 2009 and shipped our first products in 2011. Our limited operating history, combined
with the rapidly evolving and competitive nature and consolidation of our industry, suppliers, manufacturers and
customers, makes it difficult to evaluate our current business and future prospects. We have encountered and may
continue to encounter risks and difficulties frequently experienced by rapidly growing companies in constantly
evolving industries, including unpredictable and volatile revenues and increased expenses as we continue to grow
our business. If we do not manage these risks and overcome these difficulties successfully, our business, financial
condition, results of operations and prospects could be adversely affected, and the market price of our common stock
could decline. Further, we have limited historic financial data, and we operate in a rapidly evolving market. As such,
any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer
operating history or operated in a more predictable market.
Since we began commercial shipments of our products, our revenue, gross profit and results of operations
have varied and are likely to continue to vary from quarter to quarter due to a number of factors, many of which are
not within our control. It is difficult for us to accurately forecast our future revenue and gross profit and plan
expenses accordingly and, therefore, it is difficult for us to predict our future results of operations.
28

We depend on a limited number of customers for a significant percentage of our revenue and the loss or
temporary loss of a major customer for any reason, including as a result of U.S. Department of Commerce
restrictions currently applied to our largest customer, could harm our financial condition.
We have historically generated most of our revenue from a limited number of customers. In 2013, 2014, 2015
and the six months ended June 30, 2015 and 2016, our five largest customers in each period (which differed by
period) collectively accounted for 79.5%, 77.7%, 72.6%, 79.2% and 79.8% of our revenue, respectively. In 2013,
2014, 2015 and the six months ended June 30, 2015 and 2016, ADVA Optical Networking North America, Inc.
accounted for 13.6%, 23.4%, 22.2%, 28.8% and 23.6% of our revenue, respectively, and ZTE Kangxun Telecom Co.
Ltd., or ZTE, accounted for 32.1%, 35.4%, 27.6%, 29.0% and 37.9% of our revenue, respectively. In addition,
during 2015 and the six months ended June 30, 2015 and 2016, Coriant, Inc. accounted for 13.1%, 12.0% and 10.7%
of our revenue, respectively, and during 2013, Alcatel-Lucent accounted for 19.2% of our revenue. As a
consequence of the concentrated nature of our customer base, our quarterly revenue and results of operations may
fluctuate from quarter to quarter and are difficult to estimate, and any cancellation of orders or any acceleration or
delay in anticipated product purchases or the acceptance of shipped products by our larger customers or any
government-mandated inability to sell to any of our larger customers could materially affect our revenue and results
of operations in any quarterly period.
For example, on March 8, 2016, the U.S. Department of Commerce published a final rule in the Federal
Register that amended the Export Administration Regulations by adding ZTE, its parent company and two other
affiliated entities to the Entity List, for actions contrary to the national security and foreign policy interests of the
United States. This rule imposed new export licensing requirements on exports, reexports, and in-country transfers
of all U.S.-regulated products, software and technology to the designated ZTE entities, which had the practical effect
of preventing us from making any sales to ZTE. On March 24, 2016, the U.S. Department of Commerce issued a
temporary general license suspending the enhanced export licensing requirements for ZTE and one of its designated
affiliates through June 30, 2016, thereby enabling us to resume sales to ZTE. On June 28, 2016, the U.S. Department
of Commerce extended the temporary general license through August 30, 2016. There can be no guarantee that the
U.S. Department of Commerce will extend this temporary general license beyond the August 30, 2016 expiration
date or permit any sales to the designated ZTE entities after this temporary general license expires. This or future
regulatory activity may materially interfere with our ability to make sales to ZTE or other customers. The loss or
temporary loss of ZTE as a result of this or future regulatory activity could materially harm our business, financial
condition, results of operations and prospects.

We may be unable to sustain or increase our revenue from our larger customers or offset the discontinuation
of concentrated purchases by our larger customers with purchases by new or existing customers. We expect that such
concentrated purchases will continue to contribute materially to our revenue for the foreseeable future and that our
results of operations may fluctuate materially as a result of such larger customers buying patterns. For example, in
the fourth quarter of 2014, our revenue was adversely affected by a delay in anticipated purchases by two customers.
In addition, we have seen and may in the future see consolidation of our customer base which could result in loss of
customers or reduced purchases. The loss or temporary loss of such customers, or a significant delay or reduction in
their purchases, could materially harm our business, financial condition, results of operations and prospects.
Our revenue growth is substantially dependent on our successful development and release of new products.
The markets for our products are characterized by changes and improvements in existing technologies and the
introduction of new technology approaches. The future of our business will depend in large part upon the continuing
relevance of our technological capabilities, our ability to interpret customer and market requirements in advance of
product deliveries and our ability to introduce in a timely manner new products that address our customers
requirements for more cost-effective bandwidth solutions. The development of new products is a complex process,
and we may experience delays and failures in completing the development and introduction of new products. Our
successful product development depends on a number of factors, including the following:

the accurate prediction of market requirements, changes in technology and evolving standards;

the availability of qualified product designers and technologies needed to solve difficult design challenges in a cos

our ability to design products that meet customers cost, size, acceptance and specification criteria and performanc

our ability to manufacture new products with acceptable quality and manufacturing yields in a sufficient quantity

our ability to offer new products at competitive prices;

our dependence on suppliers to deliver in a timely manner materials that are critical components of our products;

our dependence on third-party manufacturers to successfully manufacture our products;

29

the identification of and entry into new markets for our products;

the acceptance of our customers products by the market and the lifecycle of such products; and

our ability to deliver products in a timely manner within our customers product planning and deployment cycle.

A new product development effort may last two years or longer, and requires significant investments in
engineering hours, third-party development costs, prototypes and sample materials, as well as sales and marketing
expenses, which will not be recouped if the product launch is unsuccessful. We may not be able to design and
introduce new products in a timely or cost-efficient manner, and our new products may be more costly to develop,
fail to meet the requirements of the market or our customers, or may be adopted by customers slower than we
expect. In that case, we may not reach our expected level of production orders and may lose market share, which
could adversely affect our ability to sustain our revenue growth or maintain our current revenue levels.
We depend on third parties for a significant portion of the fabrication, assembly and testing of our products.
A significant portion of the fabrication, assembly and testing of our products is done by third party contract
manufacturers and foundries. As a result, we face competition for manufacturing capacity in the open market. We
rely on foundries to manufacture wafers and on third-party manufacturers to assemble, test and manufacture
substantially all of our coherent DSP ASICs, silicon PICs and modules. Accordingly, we cannot directly control our
product delivery schedules and quality assurance. This lack of control could result in product shortages or quality
assurance problems. These issues could delay shipments of our products, increase our assembly or testing costs or

lead to costly epidemic failure claims. In addition, the consolidation of contract manufacturers and foundries, as well
as the increasing capital intensity and complexity associated with fabrication in smaller process geometries, has
limited the number of available contract manufacturers and foundries and increased our dependence on a smaller
number of contract manufacturers and foundries. The small number of contract manufacturers or foundries could
also increase the costs of components or manufacturing and adversely affect our results of operations, including our
gross margins. In addition, to the extent we engage additional contract manufacturers or foundries, introduce new
products with new manufacturers or foundries and/or move existing internal or external production lines to new
manufacturers or foundries, we could experience supply disruptions during the transition process.
Because we rely on contract manufacturers and foundries, we face several significant risks in addition to
those discussed above, including:

a lack of guaranteed supply of manufactured wafers and other raw and finished components and potential higher w

the limited availability of, or potential delays in obtaining access to, key process technologies;

the location of contract manufacturers and foundries in regions that are subject to earthquakes, typhoons, tsunamis

competition with our contract manufacturers or foundries other customers when contract manufacturers or found

The manufacture of our products is a complex and technologically demanding process that utilizes many state
of the art manufacturing processes and specialized components. Our foundries have from time to time experienced
lower than anticipated manufacturing yields for our wafers or photonic integrated circuit, or PIC, modules. This
often occurs during the production or assembly of new products or the installation and start-up of new process
technologies and can occur even in mature processes due to break downs in mechanical systems, clean room
controls, equipment failures, calibration errors and the handling of the material from station to station as well as
damage resulting from the shipment and handling of the products to various points of processing.
We depend on a limited number of suppliers, some of which are sole sources, and our business could be disrupted
if they are unable to meet our needs.
We depend on a limited number of suppliers of the key materials, including silicon wafers, substrate materials
and components, equipment used to manufacture and test our products, and key design tools used in the design,
testing and manufacturing of our products. Some of these suppliers are sole sources. With some of these suppliers,
we do not have long-term agreements and instead purchase materials and equipment through a purchase order
process. As a result, these suppliers may stop supplying us materials and equipment, limit the allocation of supply
and equipment to us due to increased industry demand or significantly increase their prices at any time with little or
no advance notice. Our reliance on sole source suppliers or a limited number of suppliers could result in delivery
problems, reduced control over product pricing and quality, and our inability to identify and qualify another supplier
in a timely manner. Some of our suppliers may experience financial difficulties that could prevent them from
supplying us materials, or
30

equipment used in the design and manufacture of our products. In addition, our suppliers, including our sole source
suppliers, may experience manufacturing delays or shut downs due to circumstances beyond their control such as
labor issues, political unrest or natural disasters. Our suppliers, including our sole source suppliers, could also
determine to discontinue the manufacture of materials, equipment and tools that may be difficult for us to obtain
from alternative sources. In addition, the suppliers of design tools that we rely on may not maintain or advance the
capabilities of their tools in a manner sufficient to meet the technological requirements for us to design advanced
products or provide such tools to us at reasonable prices. Further, the industry in which our suppliers operate is
subject to a trend of consolidation. To the extent these trends continue, we may become dependent on even fewer
suppliers to meet our material and equipment needs.

Any supply deficiencies or industry allocation shortages relating to the quantities of materials, equipment or
tools we use to design and manufacture our products could materially and adversely affect our ability to fulfill
customer orders and our results of operations. Lead times for the purchase of certain materials, equipment and tools
from suppliers have increased and in some instances have exceeded the lead times provided to us by our customers.
In some cases, these lead time increases have limited our ability to respond to or meet customer demand. We have in
the past and may in the future, experience delays or reductions in supply shipments, which could reduce our revenue
and profitability. If key components or materials are unavailable, our costs would increase and our revenue would
decline.
Although we are developing relationships with additional suppliers, doing so is a time-consuming process,
and we may not be able to enter into necessary arrangements with these additional suppliers in time to avoid supply
constraints in sole sourced components.
Our revenue growth rate in recent periods may not be indicative of our future growth or performance.
Our revenue growth rate in recent periods may not be indicative of our future growth or performance. We
experienced revenue growth rates of 88.3%, 63.5% and 91.0% in 2014, 2015 and the six months ended June 30,
2016, respectively, in each case compared to the corresponding periods in the immediately preceding year. We may
not achieve similar revenue growth rates in future periods. Our revenue for any prior quarterly or annual period
should not be relied upon as any indication of our future revenue or revenue growth. If we are unable to maintain
consistent revenue or revenue growth, our business, financial condition, results of operations and prospects could be
materially adversely affected.
We may not be able to maintain or improve our gross margins.
We may not be able to maintain or improve our gross margins. Factors such as slow introductions of new
products, our failure to effectively reduce the cost of existing products, our failure to maintain or improve our
product mix or pricing, changes in customer demand, annual, semi-annual or quarterly price reductions and pricing
discounts required under the terms of our customer contracts, pricing pressure resulting from increased competition,
the availability of superior or lower-cost technologies, market consolidation or the potential for future
macroeconomic or market volatility to reduce sales volumes have the potential to adversely impact our gross
margins. Our gross margins could also be adversely affected by unfavorable production yields or variances,
increases in costs of components and materials, the timing changes in our inventory, warranty costs and related
returns, changes in foreign currency exchange rates, our inability to reduce manufacturing costs in response to any
decrease in revenue, possible exposure to inventory valuation reserves and failure to obtain the future benefits of
current tax planning strategies. Our competitors have a history of reducing their prices to increase or avoid losing
market share, and if and as we continue to gain market share we may have to reduce our prices to continue to
effectively compete. If we are unable to maintain or improve our gross margins, our financial results will be
adversely affected.
Product quality problems, defects, errors or vulnerabilities in our products could harm our reputation and
adversely affect our business, financial condition, results of operations and prospects.
We produce complex products that incorporate advanced technologies. Despite our testing prior to their
release, our products may contain undetected defects or errors, especially when first introduced or when new
versions are released. Product defects or errors could affect the performance of our products and could delay the
development or release of new products or new versions of products. Allegations of unsatisfactory performance
could cause us to lose revenue or market share, increase our service costs, cause us to incur substantial costs in
redesigning the products, cause us to lose significant customers, subject us to liability for damages or divert our
resources from other tasks, any one of which could materially adversely affect our business, financial condition,
results of operations and prospects.
From time to time, we have had to replace certain components of products that we had shipped and provide
remediation in response to the discovery of defects or bugs, including failures in software protocols or defective
component batches resulting in reliability issues, in such products, and we may be required to do so in the future. We
may also be required to provide full

31

replacements or refunds for such defective products. Such remediation could have a material effect on our business,
financial condition, results of operations and prospects.
We generate a significant portion of our revenue from international sales and therefore are subject to additional
risks associated with our international operations.
Since January 1, 2013, we have shipped our products to customers located in 18 foreign countries. In 2013,
2014 and 2015 and the six months ended June 30, 2015 and 2016, we derived 85.1%, 79.2%, 82.3%, 82.9% and
80.1%, respectively, of our revenue from sales to customers with delivery locations outside the United States. A
significant portion of our international sales are made to customers with delivery locations in China. In 2013, 2014
and 2015 and the six months ended June 30, 2015 and 2016, we derived 32.1%, 36.5%, 36.0%, 33.3% and 43.5%,
respectively, of our revenue from sales to customers with delivery locations in China. We also work with
manufacturing facilities outside of the United States. In the future, we intend to further expand our international
operations to locate additional functions related to the development, manufacturing and sale of our products outside
of the United States. Our current and anticipated future international operations are subject to inherent risks, and our
future results could be adversely affected by a variety of factors, many of which are beyond our control, including:

U.S. or foreign governmental action, such as export control or import restrictions, that could prevent or significan
foreign jurisdictions;

greater difficulty in enforcing contracts and accounts receivable obligations and longer collection periods;

difficulties in managing and staffing international offices, and the increased travel, infrastructure and legal compli

the impact of general economic and political conditions in economies outside the United States, including the unc
the European Union;

tariff and trade barriers, changes in custom and duties requirements or compliance interpretations and other regula
foreign markets;

heightened risk of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales a
financial statements;

certification requirements;

greater difficulty documenting and testing our internal controls;

reduced protection for intellectual property rights in some countries;

potentially adverse tax consequences;

the effects of changes in currency exchange rates;

changes in service provider and government spending patterns;

social, political and economic instability;

higher incidence of corruption or unethical business practices that could expose us to liability or damage our repu

natural disasters, health epidemics and acts of war or terrorism.

International customers may also require that we comply with additional testing or customization of our
products to conform to local standards, which could materially increase the costs to sell our products in those
markets.

As we continue to operate on an international basis, our success will depend, in large part, on our ability to
anticipate and effectively manage these and other risks associated with our international operations. Our failure to
manage any of these risks could harm our international operations and reduce our international sales.
We are subject to government regulation, including import, export, economic sanctions, and anti-corruption laws
and regulations that may limit our sales opportunities, expose us to liability and increase our costs.
Our products are subject to export controls, including the U.S. Department of Commerces Export
Administration Regulations and economic and trade sanctions regulations administered by the U.S. Treasury
Departments Office of Foreign Assets Controls, and similar laws and regulations that apply in other jurisdictions in
which we distribute or sell our products. Export control and economic
32

sanctions laws and regulations include restrictions and prohibitions on the sale or supply of certain products and on
our transfer of parts, components, and related technical information and know-how to certain countries, regions,
governments, persons and entities. For example, on March 8, 2016, the U.S. Department of Commerce published a
final rule in the Federal Register that amended the Export Administration Regulations by adding ZTE and three of
its affiliates to the Entity List, for actions contrary to the national security and foreign policy interests of the
United States. This rule imposed new export licensing requirements on exports, reexports, and in-country transfers
of all U.S.-regulated products, software and technology to the designated ZTE entities, which had the practical effect
of preventing us from making any sales to ZTE. On March 24, 2016, the U.S. Department of Commerce issued a
temporary general license suspending the enhanced export licensing requirements for ZTE and one of its designated
affiliates through June 30, 2016, thereby enabling us to resume sales to ZTE. On June 28, 2016, the U.S. Department
of Commerce extended the temporary general license through August 30, 2016. There can be no guarantee that the
U.S. Department of Commerce will extend this temporary general license beyond the August 30, 2016 expiration
date or permit any sales to the designated ZTE entities after this temporary general license expires. This or future
regulatory activity may materially interfere with our ability to make sales to ZTE or other customers. The loss or
temporary loss of ZTE as a result of this or future regulatory activity could materially harm our business, financial
condition, results of operations and prospects. In addition, our association with ZTE could subject us to actual or
perceived reputational harm among current or prospective investors in our common stock, suppliers or customers,
customers of our customers, other parties doing business with us, or the general public. Any such reputational harm
could result in the loss of investors in our common stock, suppliers or customers, which could harm our business,
financial condition, results of operations or prospects.
In addition, various countries regulate the importation of certain products, through import permitting and
licensing requirements, and have enacted laws that could limit our ability to distribute our products. The exportation,
re-exportation, transfers within foreign countries and importation of our products, including by our partners, must
comply with these laws and regulations, with any violations subject to reputational harm, government investigations,
penalties, and/or a denial or curtailment of our ability to export our products. Complying with export control and
sanctions laws for a particular sale may be time consuming, may increase our costs and may result in the delay or
loss of sales opportunities. Although we take precautions to prevent our products from being provided in violation of
such laws and regulations, if we are found to be in violation of U.S. sanctions or export control laws, we and the
individuals working for us could incur substantial fines and penalties. Changes in export, sanctions or import laws or
regulations may delay the introduction and sale of our products in international markets, require us to spend
resources to seek necessary government authorizations or to develop different versions of our products, or, in some
cases, such as with ZTE, prevent the export or import of our products to certain countries, regions, governments,
persons or entities altogether, which could adversely affect our business, financial condition and operating results.
We are also subject to various domestic and international anti-corruption laws, such as the U.S. Foreign
Corrupt Practices Act and the U.K. Bribery Act, as well as other similar anti-bribery and anti-kickback laws and
regulations. These laws and regulations generally prohibit companies and their intermediaries from offering or
making improper payments to non-U.S. officials for the purpose of obtaining, retaining or directing business. Our

exposure for violating these laws and regulations increases as our international presence expands and as we increase
sales and operations in foreign jurisdictions.
If we fail to attract, retain and motivate key personnel, or if we fail to retain and motivate our founders, our
business could suffer.
Our business depends on the services of highly qualified employees in a variety of disciplines, including
optical systems and networking, digital signal processing, large-scale ASIC design and verification, silicon photonic
integration, system software development, hardware design and high-speed electronics design. Our success depends
on the skills, experience and performance of these employees, our founders and other members of our senior
management team, as well as our ability to attract and retain other highly qualified management and technical
personnel. There is intense competition for qualified personnel in our industry and a limited number of qualified
personnel with expertise in the areas that are relevant to our business, and as a result we may not be able to attract
and retain the personnel necessary for the expansion and success of our business. All of our co-founders are
currently employees of our company. The loss of services of any of our founders or of any other officers or key
personnel, or our inability to continue to attract qualified personnel, could have a material adverse effect on our
business.
The failure to increase sales to our existing customers as anticipated could adversely affect our future revenue
growth and adversely affect our business.
We believe that our future success will depend, in part, on our ability to expand sales to our existing
customers for use in a customers existing or new product offerings. Our efforts to increase product sales to existing
customers may generate less revenue than anticipated or take longer than anticipated. If we are unable to increase
sales to our existing customers as anticipated, our business, financial condition, results of operations and prospects
could be adversely affected.
33

If we do not effectively expand and train our direct sales force, we may be unable to add new customers or
increase sales to our existing customers, and our business will be adversely affected.
We depend on our direct sales force to increase sales with existing customers and to obtain new customers.
As such, we have invested and will continue to invest in our sales organization. In recent periods, we have been
adding personnel and other resources to our sales function as we focus on growing our business, entering new
markets and increasing our market share, and we expect to incur additional expenses in expanding our sales
personnel in order to achieve revenue growth. There is significant competition for sales personnel with the skills and
technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in large part, on
our success in recruiting, training, retaining and integrating sufficient numbers of sales personnel to support our
growth, particularly in international markets. New hires require significant training and may take significant time
before they achieve full productivity. Our planned hires may not become productive as quickly as we expect, and we
may be unable to hire, retain or integrate into our corporate culture sufficient numbers of qualified individuals in the
markets where we do business or plan to do business. If we are unable to hire, integrate and train a sufficient number
of effective sales personnel, or the sales personnel we hire are not successful in increasing sales to our existing
customer base or obtaining new customers, our business, financial condition, results of operations and prospects will
be adversely affected.
Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we
could lose the innovation, creativity and teamwork fostered by our culture, and our business may be harmed.
We believe that a critical contributor to our success has been our corporate culture, which we believe fosters
innovation, teamwork, passion for customers and focus on execution, as well as facilitating critical knowledge
transfer and knowledge sharing. As we grow and change, we may find it difficult to maintain these important aspects

of our corporate culture, which could limit our ability to innovate and operate effectively. Any failure to preserve our
culture could also negatively affect our ability to retain and recruit personnel, continue to perform at current levels
or execute on our business strategy.
Quality control problems in manufacturing could result in delays in product shipments to customers or in quality
problems with our products which could adversely affect our business.
We may experience quality control problems in our manufacturing operations or the manufacturing
operations of our contract manufacturers. If we are unable to identify and correct certain quality issues in our
products prior to the products being shipped to customers, failure of our deployed products could cause failures in
our customers products, which could require us to issue a product recall or trigger epidemic failure claims pursuant
to our customer contracts, which may require us to indemnify or pay liquidated damages to affected customers,
repair or replace damaged products, or discontinue or significantly delay shipments. As a result, we could incur
additional costs that would adversely affect our gross margins. In addition, even if a problem is identified and
corrected at the manufacturing stage, product shipments to our customers could be delayed, which would negatively
affect our revenue, competitive position and reputation.
We may not be able to manufacture our products in volumes or at times sufficient to meet customer demands,
which could result in delayed or lost revenue and harm to our reputation.
Given the high level of sophisticated functionality embedded in our products, our manufacturing processes
are complex and often involve more than one manufacturer. This complexity may result in lower manufacturing
yields and may make it more difficult for our current and future contract manufacturers to scale to higher production
volumes. If we are unable to manufacture our products in volumes or at times sufficient to meet demand, our
customers could postpone or cancel orders or seek alternative suppliers for these products, which would harm our
reputation and adversely affect our results of operations.
Customer requirements for new products are increasingly challenging, which could lead to significant
executional risk in designing such products. We may incur significant expenses long before we can recognize
revenue from new products, if at all, due to the costs and length of research, development and manufacturing
process cycles.
Network equipment manufacturers seek increased performance optical interconnect products, at lower prices
and in smaller and lower-power designs. These requirements can be technically challenging, and are sometimes
customer-specific, which can require numerous design iterations. Because of the complexity of design requirements,
including stringent customer-imposed acceptance criteria, executing on our product development goals is difficult
and sometimes unpredictable. These difficulties could result in product sampling delays and/or missing targets on
key specifications and customer requirements and acceptance criteria. Our failure to meet our customers
requirements could result in our customers seeking alternative suppliers, which would adversely affect our
reputation and results of operations.
34

Additionally, we and our competitors often incur significant research and development and sales and
marketing costs for products that, at the earliest, will be purchased by our customers long after much of the cost is
incurred and, in some cases, may never be purchased due to changes in industry or customer requirements in the
interim.
Our sales cycles can be long and unpredictable, and our sales efforts require considerable effort and expense. As
a result, our sales and revenue are difficult to predict and may vary substantially from period to period, which
may cause our results of operations to fluctuate significantly.

The timing of our sales and revenue recognition is difficult to predict because of the length and
unpredictability of our products sales cycles. A sales cycle is the period between initial contact with a prospective
network equipment manufacturer customer and any sale of our products. Customer orders are complex and difficult
to complete because prospective customers generally consider a number of factors over an extended period of time
before committing to purchase the products we sell. Customers often view the purchase of our products as a
significant and strategic decision and require considerable time to evaluate, test and qualify our products prior to
making a purchase decision and placing an order. The length of time that customers devote to their evaluation,
contract negotiation and budgeting processes varies significantly. Our products sales cycles can be lengthy in
certain cases. During the sales cycle, we expend significant time and money on sales and marketing activities and
make investments in evaluation equipment, all of which lower our operating margins, particularly if no sale occurs
or if the sale is delayed as a result of extended qualification processes or delays from our customers customers.
Even if a customer decides to purchase our products, there are many factors affecting the timing of our recognition
of revenue, which makes our revenue difficult to forecast. For example, there may be unexpected delays in a
customers internal procurement processes.
Even after a customer makes a purchase, there may be circumstances or terms relating to the purchase that
delay our ability to recognize revenue from that purchase. For example, the sale of our products may be subject to
acceptance testing or may be placed into a remote stocking location. In addition, the significance and timing of our
product enhancements, and the introduction of new products by our competitors, may also affect customers
purchases. For all of these reasons, it is difficult to predict whether a sale will be completed, the particular period in
which a sale will be completed or the period in which revenue from a sale will be recognized. If our sales cycles
lengthen, our revenue could be lower than expected, which would have an adverse effect on our business, financial
condition, results of operations and prospects.
If we fail to accurately predict market requirements or market demand for our products, our business,
competitive position and operating results will suffer.
We operate in a dynamic industry and use significant resources to develop new products for existing and new
markets. After we have developed a product, there is no guarantee that our customers will integrate our product into
their equipment or devices and, ultimately, bring the equipment and devices incorporating our product to market. In
addition, there is no guarantee that cloud, network and communications service providers will ultimately choose to
purchase network equipment that incorporates our products. In these situations, we may never produce or deliver
significant quantities of our products, even after incurring substantial development expenses. From the time a
customer elects to integrate our interconnect technology into their product, it typically takes up to 24 months for
high-volume production of that product to commence. After volume production begins, we cannot be assured that
the equipment or devices incorporating our product will gain market acceptance by network operators.
If we fail to accurately predict and interpret market requirements or market demand for our new products, our
business and growth prospects will be harmed. If high-speed networks are deployed to a lesser extent or more
slowly than we currently anticipate, we may not realize anticipated benefits from our investments in research and
development. As a result, our business, competitive position, market share and operating results will be harmed.
As demand for our products in one market grows, demand in another market may decrease. For example, if
we sell our products directly to content providers in addition to network equipment manufacturers, our sales to
network equipment manufacturers may decrease due to reduced demand from their customers or due to
dissatisfaction by network equipment manufacturers with this change in our business model. Any reduction in
demand in one market that is not offset by an increase in demand in another market could adversely affect our
market share or results of operations.
Most of our long-term customer contracts do not commit customers to specified purchase commitments, and our
customers may decrease, cancel or delay their purchases at any time with little or no advance notice to us.
Most of our customers purchase our products pursuant to individual purchase orders or contracts that do not
contain purchase commitments. Although some of our customers have committed to purchase a specified share of
their required volume for a particular product from us, monitoring and enforcing these commitments can be difficult.

Some customers provide us with their expected forecasts for our products several months in advance, but customers
may decrease, cancel or delay purchase orders already in place,
35

and the impact of any such actions may be intensified given our dependence on a small number of large customers.
If any of our major customers decrease, stop or delay purchasing our products for any reason, our business and
results of operations would be harmed. For example, several of our customers have historically elected to defer
purchases scheduled for the fourth quarter into the first quarter of the following year, resulting in a decrease in our
anticipated revenue during the fourth quarter. Cancellation or delays of such orders may cause us to fail to achieve
our short-term and long-term financial and operating goals and result in excess and obsolete inventory.
The markets in which we operate are highly competitive.
The market for high-speed interconnect is highly competitive. We are aware of a number of companies that
have developed or are developing coherent DSP ASICs, non-coherent PICs and 100 Gbps and 400 Gbps modules,
among other technologies, that compete directly with some or all of our current and proposed product offerings.
Competitors may be able to more quickly and effectively:

develop or respond to new technologies or technical standards;

react to changing customer requirements and expectations;

devote needed resources to the development, production, promotion and sale of products;

attain high manufacturing yields on new product designs;

establish and take advantage of operations in lower-cost regions; and

deliver competitive products at lower prices, with lower gross margins or at lower costs than our products.

In order to expand market acceptance of our products, we must differentiate our products from those of our
competition. We cannot provide assurance that we will be successful in making this differentiation or increasing
acceptance of our products as we have limited resources dedicated to marketing of our products. In addition,
established companies in related industries or newly funded companies targeting markets we serve, such as
semiconductor manufacturers and data communications providers, may also have significantly more resources than
we do and may in the future develop and offer competing products. All of these risks may be increased if the market
were to further consolidate through mergers or other business combinations between our competitors or if more
capital is invested in the market to create additional competitors.
We may not be able to compete successfully with our competitors and aggressive competition in the market
may result in lower prices for our products and/or decreased gross margins. New technology and investments from
existing competitors and competitive threats from newly funded companies may erode our technology and product
advantages and slow our overall growth and profitability. Any such development could have a material adverse
effect on our business, financial condition and results of operations.
Our results of operations may suffer if we do not effectively manage our inventory, and we may continue to incur
inventory-related charges.
We need to manage our inventory of component parts and finished goods effectively to meet changing
customer requirements. Accurately forecasting customers product needs is difficult. Our product demand forecasts
are based on multiple assumptions, each of which may introduce error into our estimates. In the event we
overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to
sell. As a result, we could hold excess or obsolete inventory, which would reduce our profit margins and adversely
affect our financial results. Conversely, if we underestimate customer demand or if insufficient manufacturing

capacity is available, we could forego revenue opportunities, lose market share and damage our customer
relationships. Also, due to our industrys use of management techniques to reduce inventory levels and the period of
time inventory is held, any disruption in the supply chain could lead to more immediate shortages in product or
component supply. Additionally, any enterprise system failures, including in connection with implementing new
systems or upgrading existing systems that help us manage our financial, purchasing, inventory, sales, invoicing and
product return functions, could harm our ability to fulfill orders and interrupt other billing and logistical processes.
Some of our products and supplies have in the past, and may in the future, become obsolete or be deemed
excess while in inventory due to rapidly changing customer specifications, changes to product structure, components
or bills of material as a result of engineering changes, or a decrease in customer demand. We also have exposure to
contractual liabilities to our contract manufacturers for inventories purchased by them on our behalf, based on our
forecasted requirements, which may become excess or obsolete. Our inventory balances also represent an
investment of cash. To the extent our inventory turns are slower than we anticipate based on historical practice, our
cash conversion cycle extends and more of our cash remains invested in working capital. If we are not able to
manage our inventory effectively, we may need to write down the value of some of our existing inventory or write
off non-saleable or
36

obsolete inventory. We have from time to time incurred significant inventory-related charges. Any such charges we
incur in future periods could materially and adversely affect our results of operations.
Increasingly, our customers require that we ship our finished products to a central location, which is not
controlled by us. If that facility is damaged, or if our relationship with that facility deteriorates, we may suffer losses
or be forced to find an alternate facility. In addition, revenue is only recognized once our customers take delivery of
the products from this location, rather than when we ship them, which could have an adverse effect on our results of
operations. We often lack insight into when customers will take delivery of our products, making it difficult to
forecast our revenue.
The industry in which we operate is subject to significant cyclicality.
Industries focused on semiconductor and optical network technologies can be highly cyclical and
characterized by constant and rapid technological change and price erosion, evolving technical standards, increasing
effects of competition, frequent new product introductions and technology displacement, short product life cycles
both for semiconductors and optical technologies and for many of the end products in which they are used. In
addition, the markets in which we compete are tied to the aggregate capital expenditures of telecommunications and
network and content service providers as they build out and upgrade their network infrastructure. This spending can
also be highly cyclical, resulting in wide fluctuations in product supply and demand, as spending increases and
decreases due to the importance and focus of local initiatives, such as the ongoing telecommunications build out and
upgrade in China, government funding and other factors. From time to time, these factors, together with changes in
general economic conditions, have caused significant industry upturns and downturns that have had a direct impact
on the financial stability of our customers, their customers and our suppliers. Periods of industry downturns have
been characterized by diminished demand for products, unanticipated declines in telecommunications and
communications system capital expenditures, industry consolidation, excess capacity compared to demand, high
inventory levels and periods of inventory adjustment, under-utilization of manufacturing capacity, changes in
revenue mix and erosion of average selling prices, any of which could result in an adverse effect on our business,
financial condition and results of operations. We expect our business to continue to be subject to cyclical downturns
even when overall economic conditions are relatively stable. To the extent we cannot offset recessionary periods or
periods of reduced growth that may occur in the industry or in our target markets in particular through increased
market share or otherwise, our business can be adversely affected, revenue may decline and our financial condition
and results of operations may be harmed. In addition, in any future economic downturn or periods of inflationary
increase we may be unable to reduce our costs quickly enough to maintain profitability levels.

Our business is subject to currency fluctuations that have adversely affected our results of operations in recent
quarters and may continue to do so in the future.
Our financial results have and in the future could continue to be adversely affected by foreign currency
fluctuations. Historically, a significant portion of our expenses, predominately related to outsourced development
services, were denominated in Euros while substantially all of our revenue is denominated in U.S. dollars.
Fluctuations in the exchange rates between these currencies and other currencies in which we collect revenue and/or
pay expenses have and could have a material effect on our future operating results. For example, in 2014, we agreed
with one of our suppliers to pay for supplies in U.S. dollars instead of Euros, based on a predetermined exchange
rate, which resulted in a significant increase in the cost of those supplies when the Euro to U.S. dollar exchange rate
fell substantially below the predetermined rate. Currency rate fluctuations may also affect the ability of our
customers to purchase our products in the event that such fluctuations result in a significant increase to the purchase
price of our products under the customers local currency.
Although we do not currently engage in currency hedging transactions, we may choose to do so in the future
in an effort to reduce our exposure to U.S. dollar to Euro or other currency fluctuations. In connection with any
currency hedging transaction in the future, we may be required to convert currencies to meet our obligations. These
transactions may not operate to fully hedge our exposure to currency fluctuations, and under certain circumstances,
these transactions could have an adverse effect on our financial condition.
If our customers do not qualify our manufacturing lines or the manufacturing lines of our subcontractors for
volume shipments, our operating results could suffer.
Our manufacturing lines have passed our qualification standards, as well as our technical standards. However,
our customers may also require that our manufacturing lines pass their specific qualification standards and that we,
and any subcontractors that we may use, be registered under international quality standards. In addition, many of our
customers require that we maintain our ISO certification. In the event we are unable to maintain process controls
required to maintain ISO certification, or in the event we fail to pass the ISO certification audit for any reason, we
could lose our ISO certification. In addition, we may encounter quality control issues in the future as a result of
relocating our manufacturing lines or ramping new products to full volume production. We may be unable to obtain
customer qualification of our or our subcontractors manufacturing lines or we may experience delays in obtaining
37

customer qualification of our or our subcontractors manufacturing lines. Such delays or failure to obtain
qualifications would harm our operating results and customer relationships. If we introduce new contract
manufacturers and move any production lines from existing internal or external facilities, the new production lines
will likely need to be re-qualified with our customers. Any delay in the qualification of our or our subcontractors
manufacturing lines may adversely affect our operations and financial results. Any delay in the qualification or
requalification of our or our subcontractors manufacturing lines may delay the manufacturing of our products or
require us to divert resources away from other areas of our business, which could adversely affect our operations and
financial results.
Acquisitions that we may pursue in the future, whether or not consummated, could result in operating and
financial difficulties.
We may in the future acquire businesses or assets in an effort to increase our growth, enhance our ability to
compete, complement our product offerings, enter new and adjacent markets, obtain access to additional technical
resources, enhance our intellectual property rights or pursue other competitive opportunities. If we seek acquisitions,
we may not be able to identify suitable acquisition candidates at prices we consider appropriate. We are in an
industry that is actively consolidating and, as a result, there is no guarantee that we will successfully and
satisfactorily bid against third parties, including competitors, when we identify a target we seek to acquire.

We cannot readily predict the timing or size of our future acquisitions, or the success of any future
acquisitions. Failure to successfully execute on any future acquisition plans could have a material adverse effect on
our business, prospects, financial condition and results of operations.
To the extent that we consummate acquisitions, we may face financial risks as a result, including increased
costs associated with merged or acquired operations, increased indebtedness, economic dilution to gross and
operating profit and earnings per share, or unanticipated costs and liabilities, including the impairment of assets and
expenses associated with restructuring costs and reserves, and unforeseen accounting charges. We would also face
operational risks, such as difficulties in integrating the operations, retention of key personnel and our ability to
maintain and support products of the acquired businesses, disrupting their or our ongoing business, increasing the
complexity of our business, failing to successfully further develop the combined, acquired or remaining technology,
and impairing management resources and managements relationships with employees and customers as a result of
changes in their ownership and management. Further, the evaluation and negotiation of potential acquisitions, as
well as the integration of an acquired business, may divert management time and other resources.
We may need additional equity, debt or other financing in the future, which we may not be able to obtain on
acceptable terms, or at all, and any additional financing may result in restrictions on our operations or
substantial dilution to our stockholders.
We may need to raise funds in the future, for example, to develop new technologies, expand our business or
acquire complementary businesses. We may try to raise additional funds through public or private financings,
strategic relationships or other arrangements. Our ability to obtain debt or equity funding will depend on a number
of factors, including market conditions, interest rates, our operating performance and investor interest. Additional
funding may not be available to us on acceptable terms or at all. If adequate funding is not available, we may be
required to reduce expenditures, including curtailing our growth strategies and reducing our product development
efforts, or forgo acquisition opportunities. If we succeed in raising additional funds through the issuance of equity or
convertible securities, then the issuance could result in substantial dilution to existing stockholders. If we raise
additional funds through the issuance of debt securities or preferred stock, these new securities would have rights,
preferences and privileges senior to those of the holders of our common stock. In addition, any preferred equity
issuance or debt financing that we may obtain in the future could have restrictive covenants relating to our capital
raising activities and other financial and operational matters, which may make it more difficult for us to obtain
additional capital and to pursue business opportunities, including potential acquisitions.
If our estimates or judgments relating to our critical accounting policies are based on assumptions that change
or prove to be incorrect, our results of operations could fall below expectations of securities analysts and
investors, resulting in a decline in the market price of our stock.
The preparation of financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes.
We base our estimates on historical experience and on various other assumptions that we believe to be reasonable
under the circumstances, as described in Managements Discussion and Analysis of Financial Condition and
Results of Operations, the results of which form the basis for making judgments about the carrying values of assets,
liabilities, equity, revenue and expenses that are not readily apparent from other sources. Significant assumptions
and estimates used in preparing our consolidated financial statements include those related to revenue recognition,
stock-based compensation, contract manufacturing liabilities and income taxes. If our assumptions change or if
actual circumstances differ from those in our assumptions, our results of operations may be adversely affected and
may fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our
stock.
38

We may face product liability claims, which could be expensive and time consuming and result in substantial
damages to us and increases in our insurance rates.

Despite quality assurance measures, defects may occur in our products. The occurrence of any defects in our
products could give rise to product liability or epidemic failure claims, which could divert managements attention
from our core business, be expensive to defend, result in the loss of key customer contracts and result in sizable
damage awards against us and, depending on the nature or scope of any network outage caused by a defect in or
epidemic failure related to our products, could also harm our reputation. Our current insurance coverage may not be
sufficient to cover these claims. Moreover, in the future, we may not be able to obtain insurance in amount or scope
sufficient to provide us with adequate coverage against potential liabilities. Any product liability claims brought
against us, with or without merit, could increase our product liability insurance rates or prevent us from securing
continuing coverage, could harm our reputation in the industry and reduce product sales. We would need to pay any
product losses in excess of our insurance coverage out of cash reserves, harming our financial condition and
adversely affecting our operating results.
Our business and operating results may be adversely affected by natural disasters, health epidemics or other
catastrophic events beyond our control.
Our internal manufacturing headquarters and new product introduction labs, design facilities, assembly and
test facilities, and supply chain, and those of our contract manufacturers, are subject to risks associated with natural
disasters, such as earthquakes, fires, tsunami, typhoons, volcanic activity, floods and health epidemics as well as
other events beyond our control such as power loss, telecommunications failures and uncertainties arising out of
terrorist attacks in the United States and armed conflicts or terrorist attacks overseas. The majority of our
semiconductor products are currently fabricated and assembled in Canada, Japan, Singapore, Taiwan, China and
Thailand. The majority of the internal and outsourced assembly and test facilities we utilize or plan to utilize are
located in California, New Hampshire, Canada, Germany, Japan, Thailand, China and other non-U.S. jurisdictions,
and some of our internal design, assembly and test facilities are located in Massachusetts, California and New
Jersey, regions with severe weather activity and, in the case of California, above average seismic activity. In
addition, our research and development personnel are concentrated primarily in our headquarters in Maynard,
Massachusetts and in our research center in Hazlet, New Jersey. Any catastrophic loss or significant damage to any
of these facilities or facilities we use in the future would likely disrupt our operations, delay production, and
adversely affect our product development schedules, shipments and revenue. In addition, any such catastrophic loss
or significant damage could result in significant expense to repair or replace the facility and could significantly
curtail our research and development efforts in a particular product area or primary market, which could have a
material adverse effect on our operations and operating results.
Breaches of our cybersecurity systems could degrade our ability to conduct our business operations and deliver
products to our customers, compromise the integrity of the software embedded in our products, result in
significant data losses and the theft of our intellectual property, damage our reputation, expose us to liability to
third parties and require us to incur significant additional costs to maintain the security of our networks and
data.
We increasingly depend upon our information technology, or IT, systems to conduct virtually all of our
business operations, ranging from our internal operations and product development and manufacturing activities to
our marketing and sales efforts and communications with our customers and business partners. Computer
programmers may attempt to penetrate our network security, or that of our website, and misappropriate our
proprietary information, embed malicious code in our products or cause interruptions of our service. Because the
techniques used by such computer programmers to access or sabotage networks change frequently and may not be
recognized until launched against a target, we may be unable to anticipate these techniques. In addition,
sophisticated hardware and operating system software and applications that we produce or procure from third parties
may contain defects in design or manufacture, including bugs and other problems that could unexpectedly
interfere with the operation of the system. We have also outsourced a number of our business functions to third-party
contractors, including our manufacturers and logistics providers, and our business operations also depend, in part, on
the success of our contractors own cybersecurity measures. Additionally, we depend upon our employees and
contractors to appropriately handle confidential data and deploy our IT resources in safe and secure fashion that does
not expose our network systems to security breaches and the loss of data. Accordingly, if our cybersecurity systems
and those of our contractors fail to protect against unauthorized access, sophisticated cyberattacks and the
mishandling of data by our employees and contractors, our ability to conduct our business effectively could be
damaged in a number of ways, including:

sensitive data regarding our employees, business, including intellectual property and other proprietary data, could

our electronic communications systems, including email and other methods, could be disrupted, and our ability to
39

our ability to process customer orders and deliver products could be degraded or disrupted, resulting in delays in r

defects and security vulnerabilities could be introduced into the software embedded in or used in the development
products.

Should any of the above events occur, we could be subject to significant claims for liability from our
customers and regulatory actions from governmental agencies. In addition, our ability to protect our intellectual
property rights could be compromised and our reputation and competitive position could be significantly harmed.
Additionally, we could incur significant costs in order to upgrade our cybersecurity systems and remediate damages.
Consequently, our financial performance and results of operations could be adversely affected.
We may not be able to successfully manage the growth of our business if we are unable to improve our internal
systems, processes and controls.
Our business is growing rapidly and we anticipate that it will continue to do so in the future. In order to
effectively manage our operations and growth, we need to continue to improve our internal systems, processes and
controls. We may not be able to successfully implement improvements to these systems, processes and controls in an
efficient or timely manner. In addition, our systems and processes may not prevent or detect all errors, omissions or
fraud. We may experience difficulties in managing improvements to our systems or processes and controls, which
could impair our ability to provide products to our customers in a timely manner, causing us to lose customers, limit
us to smaller deployments of our products or increase our technical support costs.
We are subject to environmental, health and safety laws and regulations, which could subject us to liabilities,
increase our costs or restrict our business or operations in the future.
Our manufacturing operations and our products are subject to a variety of environmental, health and safety
laws and regulations in each of the jurisdictions in which we operate or sell our products. These laws and regulations
govern, among other things, the handling and disposal of hazardous substances and wastes, employee health and
safety and the use of hazardous materials in, and the recycling of, our products. Failure to comply with present and
future environmental, health or safety requirements, or the identification of contamination, could cause us to incur
substantial costs, monetary fines, civil or criminal penalties and curtailment of operations. In addition, these laws
and regulations have increasingly become more stringent over time. The identification of presently unidentified
environmental conditions, more vigorous enforcement of current environmental, health and safety requirements by
regulatory agencies, the enactment of more stringent laws and regulations or other unanticipated events could
restrict our ability to use or expand our facilities, require us to incur additional expenses or require us to modify our
manufacturing processes or the contents of our products, which could have a material adverse effect on our business,
financial condition and results of operations.
Changes in industry standards and regulations could make our products obsolete, which would cause our net
revenues and results of operations to suffer.
We design our products to conform to regulations established by governments and to standards set by
industry standards bodies worldwide. Various industry organizations are currently considering whether and to what
extent to create standards applicable to our current products or those under development. Because certain of our
products are designed to conform to current specific industry standards, if competing or new standards emerge that
are preferred by our customers, we may have to make significant expenditures to develop new products. If our
customers adopt new or competing industry standards with which our products are not compatible, or industry

groups adopt standards or governments issue regulations with which our products are not compatible, our existing
products would become less desirable to our customers and our net revenues and results of operations would suffer.
We recently implemented a corporate restructuring that is more closely aligned with the international nature of
our business activities, and if we do not achieve the anticipated financial, operational and effective tax rate
efficiencies as a result of our new corporate structure, our financial condition and results of operations could be
adversely affected.
We recently implemented a reorganization of our corporate structure and intercompany relationships to more
closely align our corporate structure with the international nature of our business activities. This corporate
restructuring may allow us to reduce our overall effective tax rate through changes in our use of intellectual
property, international procurement and manufacturing and sales operations. This corporate restructuring may also
allow us to achieve financial, operational and effective tax rate efficiencies. Our efforts in connection with this
corporate restructuring have required and will continue to require us to incur expenses for which we may not realize
related benefits. If the structure is not accepted by the applicable taxing authorities upon audit or if there are adverse
changes in domestic or international tax laws, including changes in any proposed legislation to reform U.S. taxation
of international business activities, the structure may be negatively affected. In addition, if we do not operate our
business in a manner that is
40

consistent with this corporate restructuring or any applicable tax provisions, we may fail to achieve the financial,
operational and effective tax rate efficiencies that we anticipate and our results of operations may be negatively
affected.
The implementation of our corporate restructuring increases the likelihood that unfavorable tax law changes,
unfavorable government review of our tax returns, changes in our geographic earnings mix or imposition of
withholding taxes on repatriated earnings could have an adverse effect on our effective tax rate and our
operating results.
We have expanded and will likely continue to expand our operations into multiple non-U.S. jurisdictions in
connection with our recent corporate restructuring, including those having lower tax rates than those we are subject
to in the United States. As a result, our effective tax rate will be influenced by the amounts of income and expense
attributed to each such jurisdiction. If such amounts were to change so as to increase the amounts of our net income
subject to taxation in higher tax jurisdictions, or if we were to commence operations in jurisdictions assessing
relatively higher tax rates, our effective tax rate could be adversely affected. The continued availability of lower tax
rates in non-U.S. jurisdictions, if any, will be dependent on how we conduct our business operation on a going
forward basis across all tax jurisdictions. As a result of our corporate restructuring, we will be subject to periodic
audits or other reviews by tax authorities in the jurisdictions in which we conduct our activities in the future and
there is a risk that tax authorities could challenge our assertion that we have conducted or will conduct our business
operations appropriately in order to benefit from these lower tax rate jurisdictions. In addition, tax proposals are
being considered by the U.S. Congress and the legislative bodies in some of the foreign jurisdictions in which we
operate which could affect our corporate restructuring, our tax rate, the carrying value of deferred tax assets or our
other tax liabilities. We cannot predict the form or timing of potential legislative changes, but any newly enacted tax
law could have a material adverse impact on our tax provision, net income and cash flows. This could result in
additional tax liabilities or other adjustments to our historical results. In addition, we may determine in the future
that it is advisable to repatriate earnings from non-U.S. subsidiaries under circumstances that could result in a
significant amount of U.S. tax at the higher U.S. corporate tax rate. In addition, the repatriation of foreign earnings
could give rise to the imposition of potentially significant withholding taxes by the jurisdictions in which such
amounts were earned and substantial tax liabilities in the United States. In addition, we may not receive the benefit
of any offsetting foreign tax credits, which also could adversely affect our effective tax rate.
Although we believe our tax estimates, which include the impact of anticipated tax rate benefits with the
implementation of our corporate restructuring, are and will be reasonable, the ultimate tax outcome may materially

differ from the tax amounts recorded in our consolidated financial statements and may materially affect our income
tax provision, net income or cash flows in the period or periods for which such determination is made.
The final determination of our income tax liability may be materially different from our income tax provision.
The final determination of our income tax liability, which includes the impact of our corporate restructuring,
may be materially different from our income tax provision. We are subject to income taxes in the United States and,
as a result of our corporate restructuring, have become subject to income taxes in international jurisdictions.
Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of
our business, there are some transactions where the ultimate tax determination is uncertain. Additionally, our
calculations of income taxes are based on our interpretations of applicable tax laws in the jurisdictions in which we
file or will file as a result of the proposed corporate restructuring. Although we believe our tax estimates, which
include the impact of anticipated tax rate benefits in connection with our corporate restructuring, are and will be
appropriate, there is no assurance that the final determination of our income tax liability will not be materially
different than what is reflected in our income tax provisions and accruals.
We are also subject to periodic examination of our income tax returns by the Internal Revenue Service in the
United States and will be subject to periodic examination of our income tax returns by taxing authorities in other tax
jurisdictions. We assess and will continue to assess on a regular basis the likelihood of adverse outcomes resulting
from these examinations to determine the adequacy of our provision for income taxes. The outcomes from these
examinations may have an adverse effect on our operating results and financial condition.
Furthermore, our provision for income tax could increase as we further expand our international operations,
adopt new products or undertake intercompany transactions in light of acquisitions, changing tax laws, expiring
rulings and our current and anticipated business and operational requirements.
Our ability to utilize certain net operating loss carryforwards and tax credit carryforwards may be limited under
Sections 382 and 383 of the Internal Revenue Code.
As of December 31, 2015, we had net operating loss carryforward amounts, or NOLs, of approximately
$12.2 million and $12.8 million for U.S. federal and state income tax purposes, respectively, and tax credit
carryforward amounts of approximately $2.5 million and $4.5 million for U.S. federal and state income tax
purposes, respectively. The federal and state tax credit
41

carryforwards will expire at various dates beginning in 2016 through 2033 and $0.2 million of such carryforwards
will expire between 2016 and 2018 if not used. The federal and state net operating loss carryforwards will expire at
various dates beginning in 2029 through 2033. Utilization of these net operating loss and tax credit carryforward
amounts could be greatly restricted and subject to a substantial annual limitation if the ownership change limitations
under Sections 382 and 383 of the Internal Revenue Code and similar state provisions are triggered by changes in
the ownership of our capital stock. Such an annual limitation would result in the expiration of the net operating loss
and tax credit carryforward amounts before utilization. Our existing NOLs may be subject to limitations arising from
previous ownership changes, including in connection with our IPO and any future follow-on public offerings. Future
changes in our stock ownership, some of which are outside of our control, could result in an ownership change that
we may pursue. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other
unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax
liabilities. Additionally, state NOLs generated in one state cannot be used to offset income generated in another state.
For these reasons, we may be limited in our ability to fully utilize the tax benefit from the use of our NOLs, even if
our profitably would otherwise allow for it.
We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we
could be obligated to pay additional taxes in various jurisdictions.

As a multinational organization, we may be subject to taxation in several jurisdictions around the world with
increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these
jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased
tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material
adverse effect on our liquidity and operating results. In addition, the authorities in these jurisdictions could review
our tax returns and impose additional tax, interest and penalties, and the authorities could claim that various
withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us
or our subsidiaries, any of which could have a material impact on us and the results of our operations.
Risks Related to Our Intellectual Property
Our products may infringe the intellectual property rights of others, which could result in expensive litigation or
require us to obtain a license to use the technology from third parties, or we may be prohibited from selling
certain products in the future.
Companies in the industry in which we operate frequently are sued or receive informal claims of patent
infringement or infringement of other intellectual property rights. We have, from time to time, received such claims
from companies, including from competitors and customers, some of whom have substantially more resources and
have been developing relevant technologies for much longer than us.
Third parties may in the future assert claims against us concerning our existing products or with respect to future
products under development, or with respect to products that we may acquire through acquisitions. We have entered
into and may in the future enter into indemnification obligations in favor of our customers that could be triggered upon
an allegation or finding that we are infringing other parties proprietary rights. If we do infringe a third partys rights
and are unable to provide a sufficient work around, we may need to negotiate with holders of those rights in order to
obtain a license to those rights or otherwise settle any infringement claim. A party that makes a claim of infringement
against us may obtain an injunction preventing us from shipping products containing the allegedly infringing
technology. We have from time to time received notices from third parties alleging infringement of their intellectual
property and in one case have entered into a license agreement with a third party with respect to such intellectual
property. Any license agreements that we wish to enter into the future with respect to intellectual property rights may
not be available to us on commercially reasonable terms, or at all. Generally, a license, if granted, would include
payments of up-front fees, ongoing royalties or both. These payments or other terms, including any that restrict our
ability to utilize the licensed technology in specified markets or geographic locations, could have a significant adverse
effect on our operating results. In addition, in the event we are granted such a license, it is possible the license would be
non-exclusive and other parties, including competitors, may be able to utilize such technology. Our larger competitors
may be able to obtain licenses or cross-license their technology on better terms than we can, which could put us at a
competitive disadvantage. In addition, our larger competitors may be able to buy such technology and preclude us from
licensing or using such technology.
We may not in all cases be able to resolve allegations of infringement through licensing arrangements,
settlement, alternative designs or otherwise. We may take legal action to determine the validity and scope of the thirdparty rights or to defend against any allegations of infringement. Holders of intellectual property rights could become
more aggressive in alleging infringement of their intellectual property rights and we may be the subject of such claims
asserted by a third party. For example, as described further in Item 1 of Part II Legal Proceedings, on January 22,
2016, ViaSat, Inc. filed a suit against us alleging, among other things, breach of contract, breach of the implied
covenant of good faith and fair dealing and misappropriation of trade secrets. In the course of pursuing any of these
means or defending against any lawsuits filed against us, we could incur significant costs and diversion of our
resources and our managements attention. Due to the competitive nature of our industry, it is unlikely that we could
increase our prices to cover such costs.
42

In addition, such claims could result in significant penalties or injunctions that could prevent us from selling some of
our products in certain markets or result in settlements or judgments that require payment of significant royalties or
damages.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our
products, services and brand.
Our future success will depend, in large part, upon our intellectual property rights, including patents,
copyrights, design rights, trade secrets, trademarks and know-how. We maintain a program of identifying technology
appropriate for patent and trade secret protection. Our practice is to require employees and consultants to execute
non-disclosure and proprietary rights agreements upon commencement of employment or consulting arrangements.
These agreements acknowledge our exclusive ownership of all intellectual property developed by the individuals
during their work for us and require that all proprietary information disclosed will remain confidential. Such
agreements may not be enforceable in full or in part in all jurisdictions and any breach could have a negative effect
on our business and our remedy for such breach may be limited.
Despite our efforts, these measures can only provide limited protection. Unauthorized third parties may try to
copy or reverse engineer portions of our products, may breach our cybersecurity defenses or may otherwise obtain
and use our intellectual property. Patents owned by us may be invalidated, circumvented or challenged. Any of our
pending or future patent applications, whether or not being currently challenged, may not be issued with the scope of
the claims we seek, if at all. Legal standards relating to the validity, enforceability and scope of protection of
intellectual property rights in other countries are uncertain and may afford little or no effective protection for our
proprietary rights. Consequently, we may be unable to prevent our intellectual property rights from being exploited
abroad. Policing the unauthorized use of our proprietary rights is expensive, difficult and, in some cases, impossible.
Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of management resources, either of which could harm our business. Accordingly,
despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our
intellectual property. If we cannot protect our proprietary technology against unauthorized copying or use, we may
not remain competitive.
Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater
resources to developing and protecting their technology or intellectual property rights than we do. In addition, our
attempts to protect our proprietary technology and intellectual property rights may be further limited as our
employees may be recruited by our current or future competitors and may take with them significant knowledge of
our proprietary information. Consequently, others may develop services and methodologies that are similar or
superior to our services and methodologies or may design around our intellectual property.
We may be subject to intellectual property litigation that could divert our resources.
In recent years, there has been significant litigation involving patents and other intellectual property rights in
our industry. To the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual
property infringement claims. The risk of patent litigation has been amplified by the increase in the number of a type
of patent holder, which we refer to as a non-practicing entity, whose sole business is to assert such claims. We could
incur substantial costs in prosecuting or defending any intellectual property litigation. If we sue to enforce our rights
or are sued by a third party that claims that our products infringe its rights, the litigation could be expensive and
could divert our management resources.
Confidentiality arrangements with employees and others may not adequately prevent disclosure of trade secrets
and other proprietary information.
We have devoted substantial resources to the development of our technology, business operations and
business plans. In order to protect our trade secrets and proprietary information, we rely in significant part on
confidentiality arrangements with our employees, licensees, independent contractors, advisers, channel partners,
resellers and customers. These arrangements may not be effective to prevent disclosure of confidential information,
including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of

confidential information. In addition, if others independently discover trade secrets and proprietary information, we
would not be able to assert trade secret rights against such parties. Effective trade secret protection may not be
available in every country in which our services are available or where we have employees or independent
contractors. The loss of trade secret protection could make it easier for third parties to compete with our products by
copying functionality. In addition, any changes in, or unexpected interpretations of, the trade secret and employment
laws in any country in which we operate may compromise our ability to enforce our trade secret and intellectual
property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our
proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive
business position.
43

We may be subject to damages resulting from claims that our employees or contractors have wrongfully used or
disclosed alleged trade secrets of their former employees or other parties.
We could in the future be subject to claims that employees or contractors, or we, have inadvertently or
otherwise used or disclosed trade secrets or other proprietary information of our competitors or other parties.
Litigation may be necessary to defend against these claims. If we fail in defending against such claims, a court could
order us to pay substantial damages and prohibit us from using technologies or features that are essential to our
products, if such technologies or features are found to incorporate or be derived from the trade secrets or other
proprietary information of these parties. In addition, we may lose valuable intellectual property rights or personnel.
A loss of key personnel or their work product could hamper or prevent our ability to develop, market and support
potential products or enhancements, which could severely harm our business. Even if we are successful in defending
against these claims, such litigation could result in substantial costs and be a distraction to management.
We license technology from third parties, and our inability to maintain those licenses could harm our business.
We incorporate technology, including software, that we license from third parties into our products. We
cannot be certain that our licensors are not infringing the intellectual property rights of third parties or that our
licensors have sufficient rights to the licensed intellectual property in all jurisdictions in which we may sell our
products. Some of our agreements with our licensors may be terminated for convenience by them. If we are unable
to continue to license any of this technology because of intellectual property infringement claims brought by third
parties against our licensors or against us, or if we are unable to continue our license agreements or enter into new
licenses on commercially reasonable terms, our ability to develop and sell products containing that technology
would be severely limited, and our business could be harmed. Additionally, if we are unable to license necessary
technology from third parties, we may be forced to acquire or develop alternative technology of lower quality or
performance standards. This would limit and delay our ability to offer new or competitive products and increase our
costs of production. As a result, our margins, market share and operating results could be significantly harmed.
The use of open source software in our offerings may expose us to additional risks and harm our intellectual
property.
Open source software is typically freely accessible, usable and modifiable. Certain open source software
licenses require a user who intends to distribute the open source software as a component of the users software to
disclose publicly part or all of the source code to the users software. In addition, certain open source software
licenses require the user of such software to make any derivative works of the open source code available to others
on unfavorable terms or at no cost. This can subject previously proprietary software to open source license terms.
We monitor and control our use of open source software in an effort to avoid unanticipated conditions or
restrictions on our ability to successfully commercialize our products and believe that our compliance with the
obligations under the various applicable licenses has mitigated the risks that we have triggered any such conditions
or restrictions. However, such use may have inadvertently occurred in the development and offering of our products.
Additionally, if a third-party software provider has incorporated certain types of open source software into software

that we have licensed from such third party, we could be subject to the obligations and requirements of the
applicable open source software licenses. This could harm our intellectual property position and have a material
adverse effect on our business, results of operations and financial condition.
The terms of many open source software licenses have not been interpreted by U.S. or foreign courts, and
there is a risk that those licenses could be construed in a manner that imposes unanticipated conditions or restrictions
on our ability to successfully commercialize our products. For example, certain open source software licenses may
be interpreted to require that we offer our products that use the open source software for no cost; that we make
available the source code for modifications or derivative works we create based upon, incorporating or using the
open source software (or that we grant third parties the right to decompile, disassemble, reverse engineer, or
otherwise derive such source code); that we license such modifications or derivative works under the terms of the
particular open source license; or that otherwise impose limitations, restrictions or conditions on our ability to use,
license, host, or distribute our products in a manner that limits our ability to successfully commercialize our
products.
We could, therefore, be subject to claims alleging that we have not complied with the restrictions or
limitations of the applicable open source software license terms or that our use of open source software infringes the
intellectual property rights of a third party. In that event, we could incur significant legal expenses, be subject to
significant damages, be enjoined from further sale and distribution of our products that use the open source software,
be required to pay a license fee, be forced to reengineer our products, or be required to comply with the foregoing
conditions of the open source software licenses (including the release of the source code to our proprietary
software), any of which could adversely affect our business. Even if these claims do not result in litigation or are
resolved in our favor or without significant cash settlements, the time and resources necessary to resolve them could
harm our business, results of operations, financial condition and reputation.
44

Additionally, the use of open source software can lead to greater risks than the use of third-party commercial
software, as open source software does not come with warranties or other contractual protections regarding
indemnification, infringement claims or the quality of the code.
Risks Related to the Ownership of Our Common Stock
Our stock price may be volatile and investors in our common stock may be unable to sell their shares at or above
the price they purchased them.
The trading prices of the securities of technology companies, including technology companies in the industry
in which we operate, have been highly volatile. Some of the factors that may cause the market price of our common
stock to fluctuate include:

price and volume fluctuations in the overall stock market from time to time;

volatility in the market price and trading volume of comparable companies;

actual or anticipated changes in our earnings or fluctuations in our operating results or in the expectations of secur

announcements of technological innovations, new products, strategic alliances, or significant agreements by us or

announcements by our customers regarding significant increases or decreases in capital expenditures;

departure of key personnel;

litigation involving us or that may be perceived as having an impact on our business;

changes in general economic, industry and market conditions and trends, including the economic slowdown in Ch
Kingdom in favor of exiting from the European Union;

investors general perception of us;

sales of large blocks of our stock; and

announcements regarding further industry consolidation.

In the past, following periods of volatility in the market price of a companys securities, securities class
action litigation has often been brought against that company. Because of the potential volatility of our stock price,
we may become the target of securities litigation in the future. Securities litigation could result in substantial costs
and divert managements attention and resources from our business.
Our quarterly operating results or other operating metrics may fluctuate significantly, which could cause the
trading price of our common stock to decline.
Our quarterly operating results and other operating metrics have fluctuated in the past and may continue to
fluctuate from quarter to quarter. We expect that this trend will continue as a result of a number of factors, many of
which are outside of our control and may be difficult to predict, including:

the level of demand for our products and our ability to maintain and increase our customer base;

the timing and success of new product introductions by us or our competitors or any other change in the competiti

the mix of products sold in a quarter;

export control laws or regulations that could impede ability to sell our products to ZTE or any of its affiliates or o

pricing pressure as a result of competition or otherwise or price discounts negotiated by our customers;

delays or disruptions in our supply or manufacturing chain;

our ability to reduce manufacturing costs;

errors in our forecasting of the demand for our products, which could lead to lower revenue or increased costs;
45

seasonal buying patterns of some of our customers;

introduction of new products, with initial sales at relatively small volumes with resulting higher product costs;

increases in and timing of sales and marketing, research and development and other operating expenses that we m

insolvency, credit, or other difficulties faced by our customers, affecting their ability to purchase or pay for our pr

insolvency, credit, or other difficulties confronting our suppliers and contract manufacturers leading to disruptions

levels of product returns and contractual price protection rights;

adverse litigation judgments, settlements or other litigation-related costs;

product recalls, regulatory proceedings or other adverse publicity about our products;

fluctuations in foreign exchange rates;

costs related to the acquisition of businesses, talent, technologies or intellectual property, including potentially sig

general economic conditions in either domestic or international markets.

Any one of the factors above or the cumulative effect of some of the factors above may result in significant
fluctuations in our operating results.

The variability and unpredictability of our quarterly operating results or other operating metrics could result
in our failure to meet our expectations or those of any analysts that cover us or investors in our common stock with
respect to revenue or other operating results for a particular period. If we fail to meet or exceed such expectations for
these or any other reasons, the market price of our common stock could fall substantially, and we could face costly
lawsuits, including securities class action suits.
Because we do not expect to pay any dividends on our common stock for the foreseeable future, returns to
investors in our common stock will be limited to any increase in the value of our common stock.
We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable
future. Instead, we plan to retain any earnings to maintain and expand our existing operations. Accordingly,
investors in our common stock must rely on sales of their common stock after price appreciation, which may never
occur, as the only way to realize any return on their investment.
The concentration of our capital stock ownership with insiders will likely limit certain common stock investors
ability to influence corporate matters including the ability to influence the outcome of director elections and
other matters requiring stockholder approval.
As of August 5, 2016, our directors and executive officers and their affiliates beneficially owned, in the
aggregate, more than 64% of our outstanding common stock. As a result, these stockholders, acting together, could
have significant influence over the outcome of matters submitted to our stockholders for approval, including the
election of directors and any merger, consolidation or sale of all or substantially all of our assets, and over the
management and affairs of our company. This concentration of ownership may also have the effect of delaying or
preventing a change in control of our company and might affect the market price of our common stock.
A significant portion of our total outstanding shares may be sold into the public market in the near future, which
could cause the market price of our common stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any
time. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could
reduce the market price of our common stock.
As of August 5, 2016, we had outstanding 35,807,893 shares of common stock. Of these shares, the
5,175,000 shares sold in our IPO are freely tradable, and the balance will be available for sale in the public market
beginning on November 8, 2016 following the expiration of lock-up agreements entered into in connection with our
IPO. The representatives of the underwriters in our IPO may release these stockholders from their lock-up
agreements at any time and without notice, which would allow for earlier sales of shares in the public market.
46

As of August 5, 2016, an aggregate of 1,969,340 shares of our common stock was reserved for future
issuance under our stock option plans, and 700,000 shares of our common stock were reserved for future issuance
under our ESPP. Shares registered under our registration statements on Form S-8 are available for sale in the public
market subject to vesting arrangements and exercise of options, the lock-up agreements described above and the
restrictionsof Securities Act Rule 144.
As of August 5, 2016, an aggregate of 245,000 shares of our common stock were reserved for future issuance
upon the exercise of outstanding warrants. These shares will be able to be sold in the public market beginning on
November 8, 2016 following the expiration of lock-up agreements.
Additionally, the holders of an aggregate of 24,177,495 shares of our common stock as of August 5, 2016
have rights, subject to some conditions, to require us to file one or more registration statements covering their shares
or to include their shares in registration statements that we may file for ourselves or other stockholders. If we were

to register these shares for resale, they could be freely sold in the public market. If these additional shares are sold,
or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.
Anti-takeover provisions in our restated certificate of incorporation and our amended and restated bylaws, as
well as provisions of Delaware law, might discourage, delay or prevent a change in control of our company or
changes in our management and, therefore, depress the trading price of our common stock.
Our restated certificate of incorporation and amended and restated bylaws and Delaware law contain
provisions that may discourage, delay or prevent a merger, acquisition or other change in control that stockholders
may consider favorable, including transactions in which an investor in our common stock might otherwise receive a
premium for their shares of our common stock. These provisions may also prevent or delay attempts by our
stockholders to replace or remove our management. Our corporate governance documents include provisions:

establishing a classified board of directors with staggered three-year terms so that not all members of our board ar

providing that directors may be removed by stockholders only for cause and only with a vote of the holders of at l

limiting the ability of our stockholders to call and bring business before special meetings and to take action by wr

requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders an

authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights

limiting the liability of, and providing indemnification to, our directors and officers.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the
Delaware General Corporation Law, which limits the ability of stockholders holding more than 15% of our
outstanding voting stock from engaging in certain business combinations with us. Any provision of our amended
and restated certificate of incorporation or amended and restated by-laws or Delaware law that has the effect of
delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for
their shares of our common stock, and could also affect the price that some investors in our common stock are
willing to pay for our common stock.
The existence of the foregoing provisions and anti-takeover measures could limit the price that investors in
our common stock might be willing to pay in the future for shares of our common stock. They could also deter
potential acquirers of our company, thereby reducing the likelihood that an investor in our common stock could
receive a premium for their common stock in an acquisition.
Our restated certificate provides that the Court of Chancery of the State of Delaware will be the exclusive forum
for substantially all disputes between us and our stockholders, which could limit our stockholders ability to
obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our restated certificate provides that the Court of Chancery of the State of Delaware is the exclusive forum
for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any
action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of
incorporation or our bylaws; or any action asserting a
47

claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a
stockholders ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors,
officers or other employees, which may discourage such lawsuits against us and our directors, officers and other
employees. Alternatively, if a court were to find the choice of forum provision contained in our certificate of
incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with
resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

We are currently an emerging growth company, and the reduced disclosure requirements applicable to
emerging growth companies may make our common stock less attractive to investors.
We are currently an emerging growth company, as defined in the Jumpstart Our Business Startups Act of
2012, or the JOBS Act. For so long as we remain an emerging growth company, we are permitted, and intend, to rely
on exemptions from certain disclosure requirements that are applicable to other public companies that are not
emerging growth companies. These exemptions include reduced disclosure obligations regarding executive
compensation and exemptions from the requirements of holding a non-binding advisory vote on executive
compensation and stockholder approval of any golden parachute payments not previously approved, not being
required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or
the Sarbanes-Oxley Act, and not being required to comply with any requirement that may be adopted by the Public
Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditors
report providing additional information about the audit and the financial statements.
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended
transition period for complying with new or revised accounting standards. This allows an emerging growth company
to delay the adoption of certain accounting standards until those standards would otherwise apply to private
companies. We have elected not to avail ourselves of this exemption from new or revised accounting standards and,
therefore, we will be subject to new or revised accounting standards at the same time that they become applicable to
other public companies that are not emerging growth companies. Accordingly, we will incur additional costs in
connection with complying with the accounting standards applicable to public companies and may incur further
costs when the accounting standards are revised and updated.
Our management team has limited experience managing a public company.
Most members of our management team have limited experience managing a publicly traded company,
interacting with public company investors and complying with the increasingly complex laws pertaining to public
companies. Our management team may not successfully or efficiently manage our transition to being a public
company subject to significant regulatory oversight and reporting obligations under the federal securities laws and
the scrutiny of securities analysts and investors. These new obligations and constituents will require significant
attention from our management team and could divert their attention away from the day-to-day management of our
business, which could adversely affect our business, financial condition and operating results.
We will incur increased costs and demands upon management as a result of complying with the laws and
regulations affecting public companies, particularly after we are no longer an emerging growth company,
which could adversely affect our business, operating results and financial condition.
As a public company, and particularly after we cease to be an emerging growth company, we will continue
to incur significant legal, accounting and other expenses. We are subject to the reporting requirements of the
Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the
rules and regulations of the NASDAQ Global Select Market, or NASDAQ. These requirements have increased and
will continue to increase our legal, accounting and financial compliance costs and have made and will continue to
make some activities more time consuming and costly. For example, we expect these rules and regulations to make
it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required
to accept reduced policy limits and coverage or incur substantially higher costs to maintain the same or similar
coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board
of directors, particularly to serve on our audit committee and compensation committee, and qualified executive
officers.
The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control
over financial reporting annually and the effectiveness of our disclosure controls and procedures quarterly. In
particular, beginning in 2018, Section 404 of the Sarbanes-Oxley Act, or Section 404, will require us to perform
system and process evaluation and testing of our internal control over financial reporting to allow management to
report on, and our independent registered public accounting firm potentially to attest to, the effectiveness of our
internal control over financial reporting.

We are currently evaluating our internal controls, identifying and remediating deficiencies in those internal
controls and documenting the results of our evaluation, testing and remediation. As an emerging growth company,
we avail ourselves of the exemption from the requirement that our independent registered public accounting firm
attest to the effectiveness of our internal
48

control over financial reporting under Section 404. However, we may no longer avail ourselves of this exemption
when we cease to be an emerging growth company. When our independent registered public accounting firm is
required to undertake an assessment of our internal control over financial reporting, the cost of our compliance with
Section 404 will correspondingly increase. Our compliance with applicable provisions of Section 404 will require
that we incur substantial accounting expense and expend significant management time on compliance-related issues
as we implement additional corporate governance practices and comply with reporting requirements. Moreover, if
we are not able to comply with the requirements of Section 404 applicable to us in a timely manner, or if we or our
independent registered public accounting firm identifies deficiencies in our internal control over financial reporting
that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to
sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and
management resources.
Furthermore, investor perceptions of our company may suffer if deficiencies are found, and this could cause a
decline in the market price of our stock. Irrespective of compliance with Section 404, any failure of our internal
control over financial reporting could have a material adverse effect on our stated operating results and harm our
reputation. If we are unable to implement these requirements effectively or efficiently, it could harm our operations,
financial reporting, or financial results and could result in an adverse opinion on our internal controls from our
independent registered public accounting firm.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure
are creating uncertainty for public companies, increasing legal and financial compliance costs and making some
activities more time consuming. These laws, regulations, and standards are subject to varying interpretations, in
many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new
guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding
compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We
intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in
increased general and administrative expense and a diversion of managements time and attention from revenuegenerating activities to compliance activities. If our efforts to comply with new laws, regulations and standards
differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal
proceedings against us and our business may be harmed.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Set forth below is information regarding shares of capital stock issued by us since April 15, 2016 that were
not registered under the Securities Act. Also included is the consideration received by us for such shares and
information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under
which exemption from registration was claimed.
Under our 2009 Stock Plan, 63,814 shares of common stock have been issued pursuant to the exercise of
stock options. The common stock issuable upon the exercise of such options were issued under our 2009 Stock Plan
in reliance on the exemption provided by Rule 701 promulgated under the Securities Act. Each of the recipients of
securities in these transactions had adequate access, through employment, business or other relationships, to
information about us.
On May 18, 2016, we closed our IPO, in which we issued and sold 4,570,184 shares of common stock and
certain selling stockholders sold an additional 604,816 shares, inclusive of the underwriters option to purchase

additional shares that was exercised in full. The price per share to the public was $23.00. We received aggregate
proceeds of approximately $97.8 million from the IPO, net of underwriters discounts and commissions, before
deduction of offering expenses. We received no proceeds from the sale of shares by the selling stockholders. The
selling stockholders received an aggregate of $12.9 million from the sale of their shares, net of underwriters
discounts and commissions. All of the shares issued and sold in the IPO were registered under the Securities Act
pursuant to a Registration Statement on Form S-1 (File No. 333-208680), which was declared effective by the SEC
on May 12, 2016. Goldman Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Deutsche Bank
Securities, Inc. acted as managing underwriters and representatives of the underwriters. The offering commenced on
May 12, 2016 and did not terminate until the sale of all of the shares offered.
The net offering proceeds to us, after deducting underwriting discounts of $7.4 million and offering expenses
payable by us totaling $3.8 million, were approximately $93.9 million. No offering expenses were paid directly or
indirectly to any of our directors or officers (or their associates) or persons owning 10.0% or more of any class of
our equity securities or to any other affiliates.

1.

Make an actionable recommendation buy or sell and get to the point in the
beginning with a quick summary sentence (I think Company X is a great
investment because its undervalued next to the competition and has been
diversifying its operations and getting into higher-margin businesses.)

2.

List 3 key reasons why you like or dont like the company, followed by how
these reasons are different from the consensus. It is essential to understand
what the mainstream thinks in equity research and then think differently from
others if you cant do that, why would big-name investors ever pay attention to
you?

3.

Summarize what you think the stock should be valued at (Right now its at
$20, but I could see it rising to $30 within the next year) and explain how you
reached this conclusion. You might talk about comparables, DCF analysis, or
other methodologies, many of which you would probably also use in banking.

4. When it comes to the specific stock question, have at least 2 choices. You should know the
stocks P/E ratio (historically high or low), Sales, Net Income, Operating Margin, products,
risks to their business, areas where they are growing, what are their strengthsbrand name,
international exposure, and things that they have done recently. You can try to pick a stock
and then steer the interview back to the general economy. So touch on its P/E ratio and
comment on whether it was cheap or expensive, then say areas they were growing, some of
their strengths, and how events in the general economy would affect it going forward.

5. Facts & Figures you NEED to know

You should have an idea of the current levels for all of the below, as well as what their price
movements looked like over the last 6-9 months and , if possible, the market sentiment
behind the movesall of which becomes very easy if you actively follow the markets-. You
should also note their support and resistance levels and events that could force them out of
their ranges.
6. The S&P 500, The Dow Jones, Oil, Gold, 2 yr UST, 5 yr UST, 10yr UST, 30yr UST, Fed
Funds Rate, O/N Libor, 3-month Libor, 6 month Libor, USD,GBP,JPY,EUR,AUD.
7.

For example, I was once having a coffee with a buyside guy and he mentioned that one of
his favourite ways was to have a call with the company's competition, who they see as their
competition (and if your focus company really features) and then try to get the view on the
company you're really looking at.

8. Or boost his ego and ask for his best call and why he made it etc.
Exactly what CFA said. Start with the top-down approach of the economy, fed, ceo of the firm your
recommending, the firms value proposition, financials, competitors, price, technical analysis - the
whole 9 yards. You will be good, and practice in front of teachers or your family friends.
1. Financial Data (Data from income statements, balance sheets, cash flow)
2. Recent Headline News (Anything that puts the stock in the spotlight)
3. Absolute Valuations (DCF, etc.)
4. Comparable Valuation (Compare your company to other companies in the industry through the
ratios mentioned earlier.
5. Catalysts (This is something that will happen that will give positive attention to your stock and
boost its price. Ex. A bio-pharmaceutical company announces its final phase of testing for its
groundbreaking drug is a success.)
6. Management and Infrastructure (Insider buying/selling, do they have a good track record, any
lawsuits, any plans to improve the company, etc.)
7. Future Crisises (Does the company have a lot of debt that they cannot pay, they lose funding from
an outside firm, quarterly earnings report is expected to be sour, a competitor has just announced a
major breakthrough, etc.)

Alliance Data Systems

Bank that owns a software company
1) How long will it take before I cover my own stocks?
2) Will I be allowed to cover peripheral stocks in the sector that I join within a year?
However equity research headhunters suggest these may be insufficient. Jonathan Evans,
chairman of Sammons Associates says equity research candidates may want to ask a few
supplementary questions. For those of you thinking of attending an equity research
interview soon, he recommends:
3) Whos the head of the team? Whats their background?
4) What type of research is required? Is it fundamental, top down etc?
5) What length do you expect research reports to be? And how frequently are they
produced?
6) Whats your sales force like? How many generalist and specialist sales people do you
have? [Specialist salespeople are considered preferable.]
7) Are you P&L or ranking driven? [P&L is best for the firm (and your bonus), but ranking is
best for your career and will make it easier to transfer elsewhere.]
8) Are you driven by internal rankings or client rankings? [Internal ranking is good for pay.
External ranking helps the firm get corporate business and will increase your fungibility.]
9) To what extent will I be expected to attend road shows? [Ideally you probably do not want
to attend many, as they will involve travelling and staying in corporate hotels. However, this
may not apply if you are a recent joiner and want to see the world.]

The operations of the companys card services business, which contributes the
lions share of earnings, is at two bank subsidiaries. These two entities are limited
by regulatory and capital requirements, which limits the parent companys use of
the cash generated by them.

Dividend Discount model

Gordon Growth is steady state dividends
Good for stable companies with stable leverage The firm is in stable growth;
based upon size and the area that it serves. Its rates are also regulated. It is unlikely
that the regulators will allow profits to grow at extraordinary rates. The firm is in a
stable business and regulation is likely to restrict expansion into new businesses.
The firm is in stable leverage. The firm pays out dividends that are roughly equal
to FCFE. Average Annual FCFE between 1996 and 2000 = $551

Disadvantage

the fact that it does not factor in buybacks and its fundamental assumption of income only
from dividends. Capital gains are not taken into account

Price=Dividend (1 + growth rate in perpetuity)/(cost of equity-growth rate in

perpetuity)

Two stage and three stage growth models and also H model

Free Cash flow model

Sum of parts method

Take into account different parts and product mix of company and take multiples
and growth rates to arrive at valuation

1.
2.

"An IPO market that has dried up completely."

"S&P earnings hitting a bottom and turning higher. (Dollar
drop/rising oil stimulant)"

3.

"A mass exodus from retail investors (dumb money) as they dump
their funds."

4.

"Our 'friends' at our investment banks tell us to sell stocks."

5.

"Zero market speculation in penny/micro-cap, Bio's/speculative

stocks."

6.

"Households at multi-decade lows in terms of stock ownership."

7.

"Retail investor bullishness under 24%."

8.

"A stretched bond market as investors seek the 'safe haven' status
of bonds."

9.

"Longer-term put/call ratios at extremes (investors seeking

downside protection)."

10. "Warren Buffett buying stocks hand over fist after highest cash
balance ever last year."
11.

"Widespread blogger bearishness (dumb money)."

12. "Speculative 'high beta' stocks massively underperforming 'safe'

low betas."
13.

"Leading indicator semiconductors turning around first."

14. "Retail investors (Mom, Pop, Joe 6 Pack, Uber driver, etc.)
becoming experts on and actively touting 'Death Crosses' and 'Head
and Shoulder' patterns."
15.

"The media promoting financial negativity."

As we move forward, the media will start to say things like The 7 or 8 or 9year bull
market is long in the tooth. What the media is missing is that we saw a MASSIVE
MASSIVE global financial market reset from 2014 to early 2016. It was probably the
biggest under the surface bear market in history. Going through 800 or so mostly
small cap charts in late 2015, Id say that of the them were down 80%+ from
their 2014 highs. During this nearly 2year bear, we saw incredible breadth

destruction. Institutions piled into the top 1020 largest market cap stocks and
completely liquidated the other 7,000 or so stocks in the U.S.. On top of that, we
had one of the biggest oil collapses in history. We had Black Monday and then we
had major collapses in January and February of this year. On top of that, we had
what could be the biggest commodity bear market in history. And lets not forget
that we witnessed what could turn out to be a record number of bankruptcies over
this time frame. 20142016 was not part of the 2009 Bull Market folks. Many global
markets were destroyed. Emerging Markets were stuck in a 5year waterfall decline.
20142016 killed anyone with a Buy and Hold strategy (outside of FANG) as the
market was a crazy Pump and Dumpmess. Nothing stuck for more than a few
days. Speculation in penny stocks and microcaps completely dried up. You had to
get in and out of positions FAST!
Heres a chart of the Global 100 which might be the single best representation of all
world markets. Globally, the bear started in June, 2014 and ended on the double
bottom in February, 2016. Also note the reverse head and shoulders over the past
year.

Interview Questions

Why not enter after undergraduate?

A better answer would be to say something like you were interested in another field
like law or accounting initially, but you realized pretty early on within a few months
of starting on the job that you actually wanted to do banking. And since then,
youve been taking specific actions to get there.
How I got interested? Learning in 2012 about the recession in 2008 and also about
facebook stock that IPOd

ACACIA