Accounting May Mask the Appeal of Disrupters




. . . the Trade Desk’s focus on the U.S., its lack of dependency on foreign supply chains and its leadership in marketing software make the company less susceptible to trade tariffs.

Additionally, as a software company, the Trade Desk isn’t dependent on blue- collar workers that have experienced the largest increase in wages. Even though the company may hire additional sales and marketing employees to manage new clients, its revenues are driven primarily by the value that its software delivers, so labor costs are less significant than for manufacturers or other “old economy” companies. Furthermore, the Trade Desk’s focus on the U.S., its lack of dependency on foreign supply chains and its leadership in marketing software make the company less susceptible to trade tariffs. Medical Devices Spark Secular Growth Glaukos Corp. and Nevro Corp. are disrupting health care with innovative medical devices. In doing so, they illustrate the value of intangible assets. Additionally, the companies’ products are highly profitable, a reflection of compelling intellectual property, so we believe the companies are unlikely to struggle as wages increase. Both companies, furthermore, are not dependent on foreign supply chains. • Glaukos provides iStent Inject for use with micro-invasive eye surgery to relieve intraocular pressure caused by glaucoma. A competitors’ product was previously pulled from the market, leaving only one other significant competitor. However, iStent’s clinical data are more robust than the data of the competing product. For the third quarter of 2019, Glaukos’ net sales increased 33% year over year and the company generated a gross margin of 87% compared to 86% for the same quarter in 2018. Its reported margin could potentially be higher if the $17.3 million that the company spent on research and development for creating intangible assets was amortized rather than fully expensed. • Nevro provides spinal cord stimulation technology for managing chronic pain. It recently received FDA approval for its newest product, the Senza Omnia Spinal Cord Stimulation System. Based on clinical data, the newer technology may be more effective at managing pain because it provides a greater range of electrical frequencies for customizing treatments.We believe the company’s deep bench of patents and superior technology, can potentially protect it from new competitors. Like Glaukos, it has a substantial commitment to developing intangible assets, having spent $42 million on research and development during the first nine months of 2019, up 20% year over year. Going Forward We continue to believe that companies with significant intangible assets are timely investment opportunities that may be less susceptible to rising wages and trade disruption. Among these types of companies, we believe only businesses that are leaders in developing innovative products will succeed while other companies will inevitably lose market share and flounder. At Weatherbie Capital, we will continue to use our research-driven investment strategy to search for the potential winners of change on behalf of our clients.



Matt Weatherbie, CFA Chief Executive Officer Co-Chief Investment Officer

H. George Dai, Ph.D. Senior Managing Director Co-Chief Investment Officer

Joshua D. Bennett, CFA Senior Managing Director Director of Research

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