Investment Pitches

Pitch Summary:
Gates Industrial Corp. PLC (GTES) – Small Cap Gates manufactures highly engineered power transmission and fluid power solutions. The company is most well-known for its belts, which enable and control motion and are used in a broad range of applications. Blackstone took Gates public in early 2018 and remains the largest shareholder with a 27% ownership interest. Blackstone's ownership stake is an overhang on the stock as they will inevitably sell their remaining stake. Destocking and a more challenging end market have also weighed on results. These transitory pressures have provided us with an opportunity to own a high-quality, well-run industrial company with solid through-cycle growth prospects and re-rating potential. The company is a leader in its large and fragmented markets with a well-recognized brand known for quality and technological innovation. These markets are largely replacement driven, which helps to reduce cyclicality, and management is targeting a handful of growth opportunities including chain-to-belt conversions, personal mobility, and automotive aftermarket, to name a few, that should drive revenue growth at 2 times underlying industrial production growth. There is also a margin opportunity as management executes on internal initiatives to reduce costs and improve productivity. Finally, with Gates stock trading at around 12 times 2024 P/E, we believe there is an opportunity for Gates to re-rate more in-line with other high-quality industrial peers given its attractive EPS growth outlook and strong return profile.

BSD Analysis:
FMI presents a compelling value opportunity in Gates Industrial, a high-quality industrial manufacturer trading at attractive valuations due to temporary headwinds. The manager highlights Gates' leadership position in fragmented power transmission markets with strong brand recognition and technological innovation capabilities. The investment thesis centers on the company's replacement-driven revenue base that reduces cyclicality, combined with multiple growth vectors including chain-to-belt conversions and automotive aftermarket expansion that should drive revenue growth at 2x industrial production rates. Management's cost reduction initiatives and productivity improvements provide additional margin expansion opportunities. At 12x 2024 P/E, the valuation appears disconnected from the company's quality profile and growth prospects, suggesting meaningful re-rating potential as temporary pressures from Blackstone's overhang and destocking cycles resolve.

Pitch Summary:
This quarter we are highlighting Exxon Mobile (XOM) as a relative yield example in the Energy sector. XOM is a leading integrated oil and natural gas company. It has upstream assets that develop and produce oil and natural gas, along with downstream refining and chemical manufacturing assets. We believe it has attractive low-cost acreage in the Permian basin and has a sizeable growth opportunity in Guyana. Further, we think XOM has a sustainable competitive advantage due to size and scale, and its ability to integrate refining and chemical assets provides a low-cost advantage versus competitors. Our thesis on XOM is that it will grow production volumes of oil and gas moderately over the next few years, while limiting excessive capital investment that plagued the industry from 2014-2020. Production growth will come from its 2023 acquisition of Pioneer Natural Resources, which is the largest producer in the Permian basin. XOM plans to double its Permian output by 2027, to 2 million barrels per day. Capital spending will be limited to $20-25 billion per year through 2027, which should allow for significant amounts of cash to be returned to shareholders including a $35 billion share repurchase program and continued dividend increases. Higher oil prices would provide a tailwind to our thesis but are not necessary. We think XOM can grow earnings and cash flow if oil prices remain above $60 per barrel. The fund purchased XOM in March 2024 at $111. At the time of purchase, XOM had a dividend yield of 3.3% and a relative dividend yield of 2.4x the S&P 500, which was above its 20-year average of 1.75x. The company has an AA-rated balance sheet by Standard & Poor's and is a Dividend Aristocrat that has raised its annual dividend 41 years in a row. XOM is one of only two Energy companies on the Dividend Aristocrat list, which requires dividend increases for 25 consecutive years.

BSD Analysis:
Madison's thesis on Exxon Mobil centers on disciplined capital allocation and production growth through strategic acquisitions rather than excessive drilling. The 2023 Pioneer Natural Resources acquisition positions XOM to double Permian output to 2 million barrels per day by 2027, leveraging low-cost acreage in America's most prolific shale basin. Management's commitment to capping capital expenditure at $20-25 billion annually represents a marked departure from the industry's historical capital intensity, enabling substantial cash returns through a $35 billion share repurchase program and continued dividend growth. The company's integrated model provides competitive advantages through refining and chemical operations that benefit from lower input costs. XOM's AA credit rating and 41-year dividend growth streak underscore financial strength, while the 3.3% dividend yield at 2.4x the S&P 500 multiple suggests attractive relative value. The investment case remains viable even at modest oil prices above $60 per barrel, reducing commodity price dependency.

Pitch Summary:
We also made our way to Safari and Outdoor, a destination shopping experience for hunting and outdoor enthusiasts. Safari and Outdoor is part of Outdoor Investment Holdings (OIH), a private company. Desert Lion is invested in the business via Astoria, a listed investment holding company. We were welcomed by Marco van Niekerk (no relation), CEO of OIH, and Jan van Niekerk (again, no relation), director of Astoria. Marco has retail flowing through his veins. Since he became a shareholder and joined OIH as CEO in 2015, the business has shown phenomenal growth. There were some retail experts in the group who quizzed him on detailed metrics, and they were impressed by the answers, to say the least. As an added extra, Marco is an entertainer of note, and we had a great time touring the shop with him. With OIH as Astoria's single biggest investment, Astoria has benefitted proportionally. NAV has compounded at about 30% per annum, in USD, since 2020 when current management of Astoria took over the investment management of the portfolio. Yet the company is trading at a 50% discount to NAV. We are happy to buy growing businesses at half price, thank you.

BSD Analysis:
Desert Lion Capital presents a compelling value opportunity in Astoria, which provides exposure to the high-growth Outdoor Investment Holdings (OIH) retail business. The investment thesis is built around CEO Marco van Niekerk's exceptional retail expertise and track record of phenomenal growth since joining OIH in 2015. Retail industry experts were impressed by van Niekerk's detailed operational metrics, validating the quality of the underlying business execution. The fund highlights Astoria's impressive NAV compounding of approximately 30% annually in USD terms since current management took over in 2020. Despite this strong fundamental performance, Astoria trades at a significant 50% discount to net asset value, creating an attractive entry point for a growing business. The discount represents a classic value opportunity where market pricing fails to reflect underlying business quality and growth. With OIH as Astoria's largest investment, the holding company benefits proportionally from the retail operation's success. This combination of proven management, strong growth metrics, and substantial valuation discount creates an asymmetric risk-reward profile for patient investors.

Pitch Summary:
I've written extensively about Karooooo in previous letters. Karooooo is a day 1 investment for the Fund, and we are holding it as a long-term compounder. Zak Calisto is the CEO and 62% shareholder. Our audience was pleasantly surprised by Zak's rationality and honesty. Replying to a question on how AI changes the environment for Karooooo and to what extent the company is adopting AI, Zak's response was that "AI is just a buzzword that companies use to hype up their share price. In reality, it infers accelerating evolving technology, and within that context, Karooooo has been employing AI since inception." I find answers like that refreshing. Karooooo's earnings are currently understated, and we expect growth to ramp up from present levels.

BSD Analysis:
Desert Lion Capital maintains strong conviction in Karooooo as a core long-term holding since the fund's inception. The investment thesis is anchored by CEO Zak Calisto's substantial 62% ownership stake, ensuring exceptional management-shareholder alignment. The fund manager was impressed by Calisto's rational and honest communication style, particularly his pragmatic view on AI adoption rather than using it as a marketing buzzword. Calisto's assertion that Karooooo has been employing AI technology since inception demonstrates the company's authentic technological capabilities rather than following trends. The fund believes current earnings significantly understate the company's true potential, suggesting meaningful operating leverage as the business scales. Management expects growth acceleration from current levels, indicating confidence in the company's trajectory and market positioning. This combination of strong insider ownership, authentic technology leadership, and understated earnings creates an attractive long-term compounding opportunity in the fleet management and vehicle tracking space.

Pitch Summary:
Johnny Copelyn is the CEO and a major shareholder in Hosken Consolidated Investments (HCI), an active investment holding company with a superior track record of compounding. The bulk of the company's current earnings are generated by investments in tourism and hospitality, gaming, public transport services, media, coal mining, and properties. What interests us most, though, is the exposure to the extensive exploration acreage in the Orange Basin, which is emerging as the world's next hydrocarbon giant. Significant discoveries of oil have already been confirmed and HCI is part of a consortium, led by Total, that is commercializing these discoveries. We believe the earnings from these operations will effectively triple HCI's current earnings in about 5 years.

BSD Analysis:
Desert Lion Capital presents a compelling bull case for HCI based on its diversified earnings base and transformational oil exposure. The fund manager highlights HCI's proven track record of compounding returns through its active investment approach across multiple sectors including tourism, gaming, transport, media, coal, and properties. The key investment thesis centers on HCI's participation in the Orange Basin oil discoveries, where the company is part of a Total-led consortium commercializing significant hydrocarbon finds. Management projects these oil operations could triple current earnings within five years, representing a substantial catalyst for value creation. The fund appreciates CEO Johnny Copelyn's dual role as both management and major shareholder, ensuring strong alignment of interests. This combination of stable diversified cash flows and transformational oil upside creates an asymmetric risk-reward profile. The Orange Basin is positioned as an emerging global hydrocarbon giant, suggesting HCI's exposure could deliver outsized returns as these discoveries are developed and brought into production.

Pitch Summary:
Shift, a Japanese technology company specializing in software testing, pulled back after a solid fourth quarter. The company saw quarterly revenue growth slow in the first quarter, and margins compressed over the period due to a supply/demand gap resulting from lost opportunities on upstream projects. The outsourced software testing market is vast, with an estimated 98% of the workload handled in-house today, even though companies like Shift can deliver this service materially cheaper and more efficiently. The company has a strong track record of hiring, training, and retaining talented engineers. We expect they will continue to deliver strong organic revenue growth for the foreseeable future.

BSD Analysis:
Polen Capital maintains a bullish long-term view on Shift despite near-term operational challenges, focusing on the massive market opportunity in outsourced software testing. The company operates in a highly underpenetrated market where 98% of testing work remains in-house, creating substantial runway for market share expansion as companies recognize the cost and efficiency benefits of outsourcing. Shift's competitive advantage lies in its ability to deliver testing services materially cheaper and more efficiently than in-house alternatives, providing clear value proposition to clients. The company's strong track record in talent acquisition, training, and retention is critical in a skilled labor-intensive business, ensuring quality service delivery and scalability. Current margin compression appears cyclical, driven by supply/demand imbalances and lost upstream project opportunities rather than structural issues. Polen's confidence in continued strong organic revenue growth reflects the secular trend toward software testing outsourcing and Shift's market-leading position in Japan. The combination of vast market opportunity, proven execution capabilities, and temporary valuation compression creates an attractive entry point for a high-quality growth company.

Pitch Summary:
Like Globant, Endava is an IT services company, albeit UK-based, focused on payments, financial services, and TMT verticals. Unfortunately, financials and TMT have been among the weakest segments as companies cautiously pull back on investments, negatively impacting Endava's results over the past several quarters. Further, management issued 2024 guidance that came in well below expectations, further underscoring investor concerns around the timing of a reacceleration in growth. The over 40% earnings price decline is likely a result of investors extrapolating the worst-case scenario; however, we remain more positive on the long term and trust Endava's ability to play a critical role in facilitating digital transformation across various industries and end markets. The stock is now trading below 20x next year's earnings for a high-quality business, and recent acquisitions set the business up for continued future success.

BSD Analysis:
Polen Capital demonstrates contrarian conviction in Endava, viewing the significant price decline as an overreaction to cyclical headwinds rather than structural deterioration. The company's specialization in payments, financial services, and TMT verticals positions it well for long-term digital transformation trends, despite current sector weakness. Management's conservative 2024 guidance, while disappointing to markets, likely reflects prudent planning during uncertain economic conditions and sets up potential for positive surprises as conditions normalize. The 40% stock decline has created an attractive valuation opportunity, with shares trading below 20x forward earnings for a high-quality technology services provider. Polen's emphasis on recent acquisitions suggests confidence in management's ability to expand capabilities and market reach during the downturn. The company's critical role in digital transformation across multiple industries provides defensive characteristics and long-term growth visibility. Trading at such compressed multiples for a business with proven execution capabilities and secular growth drivers presents compelling risk-adjusted returns for patient investors willing to look through the current cycle.

Pitch Summary:
Globant, a cloud-native IT services company specializing in digital technology, was one of the top detractors in the quarter. While Globant has been a strong contributor on a one-year and six-month basis, the stock reacted negatively to what we view as prudently cautious guidance from management in their fourth quarter 2023 earnings reports. Secular tailwinds support Globant as companies are compelled to spend on digital transformation and increasingly integrate AI effectively. We have maintained our confidence in the company's capability to deliver mid- to high-double-digit top-line growth for many years. Despite broad IT services headwinds, we have been very impressed with Globant's significantly above-industry growth.

BSD Analysis:
Despite recent underperformance, Polen Capital maintains strong conviction in Globant's long-term prospects, viewing the current weakness as a temporary setback rather than a fundamental deterioration. The company's cloud-native positioning and digital transformation expertise align perfectly with secular technology trends, particularly the accelerating adoption of AI solutions across enterprises. Management's conservative guidance approach, while pressuring near-term sentiment, demonstrates prudent capital allocation and sets up potential for positive surprises. Globant's ability to deliver significantly above-industry growth rates, even during broader IT services headwinds, highlights the company's competitive differentiation and market positioning. The sustained mid-to-high double-digit revenue growth capability reflects strong demand for specialized digital transformation services and the company's ability to capture market share. Polen's maintained confidence suggests the current valuation presents an attractive entry point for a high-quality growth company. The combination of secular tailwinds, proven execution, and conservative management creates a compelling risk-reward profile for patient investors.

Pitch Summary:
Core & Main is an industrial distributor specializing in waterworks and fire protection, providing an extensive range of over 200,000 products in the water infrastructure market. The company's fundamental business performance has been better than expected, and it continues to execute its disciplined M&A strategy very well. We view Core & Main as a high-quality business with numerous competitive advantages and reinvestment opportunities, supported by structural tailwinds given the need to repair and replace aging municipal water infrastructure.

BSD Analysis:
Polen Capital presents a compelling infrastructure play through Core & Main, capitalizing on the critical need for water infrastructure modernization across the United States. The company's extensive product portfolio of over 200,000 items creates significant barriers to entry and customer stickiness in a mission-critical market. Management's disciplined M&A approach enables market share expansion while maintaining quality standards, reflecting the fragmented nature of the distribution landscape. The structural tailwinds from aging municipal infrastructure create a multi-decade growth opportunity, supported by government spending initiatives and regulatory requirements. Core & Main's specialized focus on waterworks and fire protection provides defensive characteristics, as these are non-discretionary expenditures for municipalities and contractors. The combination of better-than-expected operational performance and successful acquisition integration demonstrates management's execution capabilities. Polen's emphasis on competitive advantages and reinvestment opportunities suggests confidence in the company's ability to compound returns through both organic growth and strategic acquisitions.

Pitch Summary:
CTS Eventim, the European leader in ticketing and live entertainment event management, reported another set of strong quarterly results with profits ahead of expectations again. Revenues rose to 65% above pre-COVID levels, and net income was over double. Blockbuster tours from artists such as Taylor Swift and Coldplay have driven ticket sales. Despite the robust results, company management continues to maintain a conservative forward guidance, with U.S. expansion plans remaining challenged, given high competitive barriers and possible regulation. We believe the company can compound earnings close to 15% per annum given its dominant market position, secular trends of ticketing moving online, and increased consumer spending on experiences.

BSD Analysis:
Polen Capital maintains a strong bullish stance on CTS Eventim, highlighting the company's exceptional recovery and growth trajectory post-COVID. The 65% revenue increase above pre-pandemic levels and doubled net income demonstrate the resilience and growth potential of the live entertainment sector. Management's conservative guidance approach provides downside protection while creating potential for positive surprises, as evidenced by consistently beating expectations. The secular shift toward online ticketing and increased consumer preference for experiential spending creates sustainable tailwinds for the business model. Polen's 15% annual earnings growth projection reflects confidence in the company's dominant European market position and pricing power. While U.S. expansion faces regulatory and competitive challenges, the core European business appears well-positioned to capitalize on the experience economy trend. The combination of market leadership, secular growth drivers, and conservative management creates an attractive risk-adjusted return profile.

Pitch Summary:
Topicus.com is the European version of Constellation Software, a vertical market, mission-critical software provider. The company announced quarterly and full-year results that beat consensus estimates. Annual revenues grew 27%, free cash flow grew 36%, and net income increased 10% versus 2023. We think a highly talented management team leads the company, operates in an attractive and fragmented industry, and should continue to see attractive earnings growth over the coming years.

BSD Analysis:
Polen Capital presents a compelling bull case for Topicus.com, positioning it as the European counterpart to the successful Constellation Software model. The company demonstrated exceptional operational performance with 27% revenue growth and 36% free cash flow expansion, significantly outpacing net income growth of 10%, indicating improving cash conversion efficiency. The vertical market software approach provides mission-critical solutions with high switching costs and recurring revenue characteristics. Management's proven track record and the fragmented nature of their target markets create substantial runway for continued acquisitions and organic growth. The company's ability to consistently beat consensus estimates suggests conservative guidance and potential for continued positive surprises. Polen's confidence in sustained attractive earnings growth reflects the defensive nature of mission-critical software and the compounding benefits of the acquisition strategy. This pitch exemplifies Polen's focus on high-quality businesses with competitive moats and reinvestment opportunities.

Pitch Summary:
We modestly trimmed our position in MercadoLibre (MELI) during the quarter. The business has been performing well since our purchase in mid-2021, with the company's earnings per share increasing more than 10x in 2.5 years. We believe MELI's competitive advantages are significant and growing, but our analysis indicates that its 2024 revenue growth profile and profit margin progress could normalize from elevated levels seen recently. Market share gains should continue but could be at a lower rate than last year when some of MELI's competitors were dealing with significant issues. Margin gains have been substantial, perhaps exceeding management expectations. We would not be surprised to see new investment initiatives, which are wise for long-term positioning, set margin progress back in 2024. With all these points in mind, we felt a trim was warranted. We continue to believe MELI is an excellent business and could increase our weighting in the future.

BSD Analysis:
Polen Capital remains fundamentally bullish on MercadoLibre despite trimming the position due to valuation and normalization concerns. The company's exceptional performance since mid-2021, with earnings per share increasing more than 10x in 2.5 years, demonstrates the power of MELI's business model and execution. Polen acknowledges that MELI's competitive advantages are significant and growing, reflecting the company's dominant position in Latin American e-commerce and fintech. The trim appears to be a prudent portfolio management decision as growth rates and margins normalize from elevated levels. The expectation that market share gains will continue, albeit at a slower pace, suggests MELI's competitive position remains strong. Management's potential new investment initiatives, while potentially pressuring near-term margins, are viewed positively for long-term positioning. Polen's willingness to increase the weighting in the future indicates continued conviction in the long-term investment thesis. The company's integrated e-commerce and payments ecosystem in Latin America provides multiple growth vectors and defensive characteristics in a large, underpenetrated market.

Pitch Summary:
Finally, HDFC Bank has seen slower deposit growth recently and is working through post-merger integration with its former parent, HDFC Limited. We view these as near-term business issues and continue to view HDFC's management team as industry-leading. As such, we believe HDFC remains well-positioned as one of the dominant banks in the attractively growing Indian economy.

BSD Analysis:
Polen Capital maintains a bullish stance on HDFC Bank despite near-term integration challenges, emphasizing the long-term opportunity in India's growing economy. The slower deposit growth and post-merger integration issues with HDFC Limited are viewed as temporary operational challenges rather than structural problems. Polen's confidence in HDFC's industry-leading management team suggests strong execution capability to navigate the integration successfully. As one of India's dominant private sector banks, HDFC is well-positioned to benefit from the country's economic growth, rising income levels, and increasing financial inclusion. The merger with HDFC Limited creates a larger, more diversified financial services platform with enhanced scale and market presence. India's attractive demographic profile, growing middle class, and underpenetrated banking market provide a favorable long-term backdrop for HDFC's growth. The bank's strong brand, extensive distribution network, and superior asset quality position it to gain market share as the Indian banking sector evolves. Polen's conviction reflects confidence in HDFC's ability to emerge from the integration period as an even stronger competitor in the Indian financial services market.

Pitch Summary:
Temenos experienced weakness last quarter following the publication of a "short report" that accused the company's management of utilizing aggressive accounting practices. We do not take such allegations lightly and have discussed them at length with Temenos' management team. Furthermore, the company's management extensively addressed and refuted the allegations at a recent investor day. We continue to be comfortable with Temenos' accounting practices and view them as appropriate for an enterprise software company.

BSD Analysis:
Polen Capital maintains confidence in Temenos despite the short seller attack, viewing the accounting allegations as unfounded after thorough due diligence. The firm's extensive discussions with management and the company's detailed refutation at the investor day provide comfort regarding the integrity of financial reporting. Polen views Temenos' accounting practices as appropriate for an enterprise software company, suggesting the short report may have mischaracterized standard industry practices. The weakness following the short report likely created a temporary valuation disconnect for a fundamentally sound business. Temenos operates in the attractive banking software market, providing mission-critical core banking systems that have high switching costs and generate recurring revenue. The company's software solutions are essential for financial institutions' daily operations, creating a defensive revenue base. As a leading provider of banking technology, Temenos benefits from digital transformation trends in the financial services industry. Polen's continued conviction suggests they view the current situation as a temporary setback rather than a fundamental challenge to the investment thesis.

Pitch Summary:
Teleperformance's stock price has been under pressure this year due to a combination of factors. The first is a weaker macroeconomic backdrop that has led to a short-term reduction in customer spend. We have seen this dynamic across the IT services industry and do not believe it is specific to Teleperformance. Secondly, the company's 2023 acquisition of Marjorel may be slower to integrate than initially expected. We believe the company's competitive advantages are unchanged, and we view the weaker operating performance as a function of the economic backdrop. The stock's current forward 12-month P/E multiple of 6x reflects negative sentiment toward the industry. In the long run, our research indicates that the company can grow its earnings at a healthy double-digit rate.

BSD Analysis:
Despite near-term headwinds, Polen Capital maintains a bullish long-term view on Teleperformance based on attractive valuation and intact competitive advantages. The current 6x forward P/E multiple reflects excessive pessimism and creates a compelling entry point for a quality business. The reduction in customer spending appears cyclical rather than structural, affecting the broader IT services industry rather than being company-specific. While the Marjorel acquisition integration is proceeding slower than expected, this represents a temporary execution issue rather than a fundamental problem with the business model. Teleperformance's global scale, operational expertise, and diversified client base provide competitive moats in the customer experience management industry. The company benefits from the ongoing trend toward outsourcing of customer service functions, particularly as businesses seek cost efficiencies. Polen's research suggests the company can achieve healthy double-digit earnings growth over the long term as economic conditions normalize and integration synergies materialize. The current weakness presents an opportunity to own a market-leading business at a discounted valuation.

Pitch Summary:
Aon was another contributor to relative performance during the quarter. The company ended its FY2023 with high-single-digit organic revenue growth and low-double-digit profit growth, which aligns with our long-term expectations. Management is guiding for mid-single-digit or better organic revenue growth for FY2024, with expectations for expanding operating margins. Additionally, Aon's acquisition of NFP brings the company into the middle-market insurance brokerage space for the first time, where we think its brand and scale should be advantageous.

BSD Analysis:
Polen Capital views Aon favorably based on the company's consistent execution and strategic positioning in the insurance brokerage industry. The high-single-digit organic revenue growth and low-double-digit profit growth in FY2023 demonstrate Aon's ability to expand margins while growing organically. Management's guidance for mid-single-digit revenue growth with expanding margins suggests continued operational leverage in the business model. The NFP acquisition represents a strategic expansion into the middle-market segment, where Aon's established brand and global scale should provide competitive advantages. This acquisition diversifies Aon's client base and creates cross-selling opportunities across different market segments. As a leading insurance broker, Aon benefits from increasing insurance penetration globally and rising premiums, which drive commission growth. The company's risk management and human capital consulting services provide additional revenue streams and deepen client relationships. Polen's confidence reflects Aon's ability to generate consistent cash flows and expand market share through both organic growth and strategic acquisitions.

Pitch Summary:
After delivering a robust fourth quarter, SAP's stock price again rose significantly in 1Q 2024 due to solid 4Q 2023 earnings and full-year 2024 guidance that management revised modestly higher. Importantly, SAP's transition to the cloud, a core part of our investment thesis, continues at a healthy pace, and the company is seeing compelling cloud revenue growth and expanding cloud gross margins. Management is guiding cloud sales growth through 2025 in the mid-20% range, which we view as reasonable and attractive. We also view SAP as one of the more resilient software business models, as it is an essential part of its customers' day-to-day operations and cannot easily be turned off or scaled back.

BSD Analysis:
Polen Capital's bullish thesis on SAP centers on the company's successful cloud transformation, which is driving compelling revenue growth and margin expansion. The cloud transition represents a fundamental shift in SAP's business model toward higher-margin, recurring revenue streams. Management's guidance for mid-20% cloud sales growth through 2025 demonstrates strong execution and market demand for SAP's cloud offerings. The company's mission-critical ERP software creates significant customer switching costs, making SAP's revenue base highly resilient even during economic downturns. This defensive characteristic, combined with the growth potential from cloud migration, creates an attractive risk-adjusted return profile. SAP's dominant position in enterprise software and the essential nature of its products provide pricing power and visibility into future cash flows. The revised higher guidance for 2024 reflects management's confidence in the business trajectory and validates Polen's investment thesis around the cloud transformation story.

Pitch Summary:
ICON was the Portfolio's largest contributor to relative performance during the quarter. The company's 4Q 2023 earnings were broadly in line, and management's guidance for the FY2024 (fiscal year) was generally better than expected, forecasting revenue growth in the mid-single-digit range and earnings growth in the mid-teens range.

BSD Analysis:
Polen Capital maintains a bullish stance on ICON following solid Q4 2023 results that met expectations and improved FY2024 guidance. Management's forecast of mid-single-digit revenue growth and mid-teens earnings growth demonstrates the company's ability to expand margins while growing the top line. The better-than-expected guidance suggests ICON is well-positioned to benefit from continued pharmaceutical R&D spending and clinical trial demand. As a leading contract research organization, ICON benefits from the outsourcing trend in drug development, providing essential services that are difficult to replace. The company's global scale and expertise in clinical trials management position it to capture market share in the growing life sciences tools sector. Polen's confidence in ICON reflects the company's competitive advantages in a resilient, growth-oriented industry. The strong relative performance contribution validates the investment thesis around ICON's earnings growth potential.

Pitch Summary:
We also initiated a position in Intapp, Inc. Founded in 2000, Intapp provides cloud-based software for regulated professional services industries such as legal, accounting, consulting, private capital markets, and investment banking. Intapp's software helps manage and automate many of the administrative workflows unique to these industries, such as clearing conflicts for new engagements, onboarding new clients, recording billable hours, and establishing regulatory walls between divisions. Its DealCloud suite also functions as a deal lifecycle management and customer relationship management system that has become the industry standard in private equity and investment banking. Intapp serves more than 2,400 customers, including 96 of the top 100 American law firms, 15 of the top 20 accounting firms, and 1,600 leading financial services firms. Intapp competes in a large and growing addressable market, spanning 28,000 firms that collectively spend roughly $15 billion annually on software in Intapp's categories. The company has grown its annual recurring revenue by more than 20% annually for the past five years as customers have seen good returns on their Intapp investment. For example, Intapp products have helped professional services firms reduce new client onboarding and conflict clearance processing times by more than 50%, saved millions of dollars in billable hours leakage, and significantly expanded new deal origination volumes for financial services firms. This success has led to low churn rates, increased market share capture, and expanding footprints in existing accounts. Intapp has several competitive advantages that should drive continued market share capture over time, including a proprietary graph data model that is better equipped for professional services needs than traditional databases, good brand recognition with decades of experience serving the largest firms in its industries, and AI capabilities that continuously improve product effectiveness. We see a long runway for growth through a combination of new customer wins and existing customer expansion. Management believes its largest 200 customers alone represent a $1.3 billion wallet opportunity, and that Intapp can continue to generate mid-teens expansion rates in existing accounts by cross-selling product modules, growing its user penetration, and capturing better pricing. While Intapp is profitable today and has expanded its free-cash-flow margins over the last two years, we see an opportunity for margins to inflect further to 20% or more as the company benefits from operating leverage and a higher cloud revenue mix. The combination of good organic growth and free-cash-flow margin expansion should bode well for the stock long term.

BSD Analysis:
Baron Discovery Fund initiated a position in Intapp based on the company's dominant position in professional services software and significant growth runway. Intapp serves over 2,400 customers including 96 of the top 100 US law firms, with its DealCloud platform becoming the industry standard in private equity and investment banking. The company operates in a large $15 billion addressable market with 28,000 potential firms, having demonstrated consistent 20%+ annual recurring revenue growth over five years. Baron highlights Intapp's competitive advantages including proprietary graph data technology, strong brand recognition, and AI capabilities that drive customer value through reduced processing times and improved operational efficiency. The fund sees substantial expansion opportunities with existing customers representing a $1.3 billion wallet opportunity and mid-teens expansion rates achievable through cross-selling and pricing optimization. Baron expects margin expansion to 20%+ driven by operating leverage and higher cloud revenue mix, creating a compelling long-term growth story.

Pitch Summary:
We made a new investment in Masimo Corporation, a provider of high-end vital sign monitoring equipment and software. This is a special situation investment, as it is in the process of unwinding an unpopular consumer products acquisition, which we believe will unlock the value of the core health care business (more on that below). Masimo is a market leader in monitoring pulse rates, oxygen levels and perfusion, blood hemoglobin content and other key signs on a continuous basis. Studies have shown that Masimo's higher-quality monitoring can save lives (and money) via higher accuracy and better warning capabilities. The base health care business produces revenues of about $1.3 billion (2024 company guidance), of which about 15% consists of non-recurring sensor hardware sales (what Masimo calls sockets) that are the razor in the business model analogy. The remaining 85% of revenues come from disposable sensors that are the blades in the business model analogy. They produce recurring (and growing) revenue. Masimo can grow its health care revenues by introducing new products (including monitor networking and warning software), gaining new U.S. and international customers, and getting customers to buy more parameters (additional vital signs) for the existing sockets they have installed. Currently, the company averages about $8 per socket in sensor revenues, but that has the potential to go to $100 per socket over time. While we don't believe we will see a 12-fold increase in revenues, we do believe that revenues could double over the next seven years. At the same time margins should expand due to gross margin improvements with the completion of a new Malaysian manufacturing facility and operating leverage because its sales force is largely built out and it has a comfortable research and development budget. So, overall base business cash flow could double as well in six to seven years. This is all overshadowed by Masimo's $1 billion acquisition of Sound United in early 2022. Sound United designs and manufacturers high-end stereo equipment under brands like Marantz and Denon. Masimo is launching a smartwatch designed for higher-end vital sign monitoring (for health and consumer markets) than products like Apple and Android's watches and bought the company for its sales and distribution assets. But the acquisition added debt and the market viewed it as a distraction, far afield from its health care roots. Shares dropped nearly 70% by October 2023. We got involved after an activist started to push for the separation of the businesses. At the end of the first quarter, Masimo announced that it was exploring modalities to split the consumer and health care businesses, including a spin-off or JV structure. We think this is a great idea that will unlock value in the currently under-appreciated health care business. In addition, Masimo is likely to retain a good portion the potential proceeds of a lawsuit against Apple alleging patent infringement related to vital signs on the Apple watch. While this could be worth hundreds of millions or more in ultimate value, we view it as just additional value optionality on the investment. All in, we believe we can double our investment from current valuation levels from Masimo's cash flow growth and higher trading multiple that we believe will be justified for the cleaner health care structure that the company should achieve this year.

BSD Analysis:
Baron Discovery Fund initiated a position in Masimo as a special situation investment focused on unlocking value through business separation. The fund views Masimo as a market leader in vital sign monitoring with a compelling razor-and-blade business model, where hardware installations drive recurring sensor revenue. With $1.3 billion in healthcare revenues and significant growth potential from new products, customer expansion, and increased parameter adoption per socket, Baron believes revenues could double over seven years. The investment thesis centers on the anticipated separation of Masimo's core healthcare business from the unpopular Sound United consumer acquisition, which has weighed on valuation. Baron expects margin expansion from operational leverage and a new Malaysian facility, potentially doubling cash flows. The fund sees additional upside from potential Apple patent litigation proceeds and believes the cleaner healthcare structure will command a higher trading multiple, targeting a double from current levels.