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Jim,thankyouforinvitingmeback.ThoughIhavebeenapaidupsubscriberfordecades,Iamnowquiteworriedaboutyourfranchise.Yousee,anumberofyearsago,Iheardyouquipthatbondsconstitutereturnfreerisk,butbackthentheystillhadsomeyield.Today,inpartsoftheworld,ratesarezeroorevennegative,whichmakesthetitleGrantsInterestRateObserveraparadox.Howdoyouobserveinterestrateswhentheyhaveceasedtoexist?Youmayhavetorethinkyourbrand.

4

IlastspokeherethreeyearsagoandtalkedaboutwhatIdubbedtheFedsJellyDonutmonetarypolicy.Iobservedthataccommodativepolicyhasdiminishingreturnsthathadlongsincepassedthepointofbeingproductiveandwasnowactuallyslowingtherecovery.Icomparedittoeatinga36thJellyDonut.Bykeepingratestoolow,theFedsoughttocreateastockmarketwealtheffect.Isuggestedthatwhilethiswouldincreaseincomeinequality,thewealtheffectwouldnotlikelytranslatetoenoughadditionalconsumptiontooffsettheevenbiggerdrainfromlostincometosavers.

5

PolicymakersandmainstreameconomistsarestuckinGroupThinkthateasymoneyalwayshelpstheeconomy,despitebasiceconomicprinciplesthatsuggestdiminishingornegativemarginalreturns.

6

Inarecentblogpost,Mr.Bernankewrote:thebestwaytoimprovethereturnsattainablebysaverswastodowhattheFedactuallydid:keeprateslow,sothattheeconomycouldrecoverandmorequicklyreachthepointofproducinghealthierinvestmentreturns.Thisiscircularreasoning:Heisassumingthatwhichheseekstoprove,namelythatultralowratesactuallyhelptheeconomy.But,thatistheopenquestion._____________Source:http://www.brookings.edu/blogs/benbernanke/posts/2015/03/30whyinterestratessolow

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Aquicklookatthehouseholdbalancesheetshowsabout$10trillionheldinshorttermratesensitiveinstrumentslikesavingsaccountsandmoneymarkets.Mosthouseholdliabilitiesarefixedratemortgages,wherepaymentsareunaffectedbyratechanges.Consumercreditis$3trillion,someofwhichisalsofixed.Iestimatehouseholdshaveabout$7trillioninexposuretoshortterminterestrates,soa1%changeinratesaddsabout$70billiontoannualincome._____________Source:http://federalreserve.gov/releases/z1/current/z1r5.pdf

8

SwissRerecentlycalculatedthatfrom20082013,U.S.householdslost$470billionofincomeduetoexcessivelylowinterestrates.Becausesaversperceiveinterestincomeasmorerecurringthanvolatilestockmarketgains,andbecauseinterestincomeisspreadmorebroadlythanequitygains,itsfairtoassumethatamuchgreaterproportionofinterestincomewouldbespent._____________Source:http://media.swissre.com/documents/Financial_Repression_pub_web.pdf

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TheFedexpectedthewealtheffectwoulddrivegrowthto34%.Despitethestockmarketrisingabout50%overthelastthreeyearsandtriplingoverthelastsix,GDPgrowthhasstagnatedataround2%._____________Source:BloombergL.P.http://www.businessinsider.com/fedgdpforecast20129https://research.stlouisfed.org/fred2/series/A191RO1Q156NBEA

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IfpeoplewerespendingthepapergainsfromrisingassetpricesastheFedhoped,thesavingsratewouldhaveplummetedasitdidduringthehousingbubble,whencashoutrefinancingsagainstrisinghomevaluesdrovespending.Instead,thesavingsratehasremainedatorabovetheprehousingbubblelevels,eventhoughhouseholdnetworthhasreachednewhighs.AsSwissReputit,Overall,thereisnoclearevidenceofequityrelatedgainshavingtranslatedintoadditionalconsumptionandthusnorealeconomicgrowth._____________Source:BloombergL.P.https://research.stlouisfed.org/fred2/series/PSAVERT/http://media.swissre.com/documents/Financial_Repression_pub_web.pdf

11

Lowinterestratesmakeworkerssavemore,astheycantanticipateearningsafeincomeonsavings.Theyalsomakeretireesspendless,astheyhavelesscurrentandfutureincomeandneedtostretchsavingsovertheirremaininglives.Bothdynamicscreatelessspendingandaslowerrecovery._____________Source:http://www.bis.org/events/agm2013/sp130623.htm

12

IremainoftheviewthathigherrateswillsurprisebyimprovingtheeconomyonMainStreeteventhoughitisquitepossibletheywouldcreatesometurbulenceonWallStreet,asmostequitiesarenowhighlypricedandaselectgroupareinabubble.

13

WhenIspokethreeyearsago,IwasalsoworriedabouthowJellyDonutpolicywasdrivingcommoditypriceinflation.Therecentfallinmanycommoditieshassurprisedme.Ithasturnedoutthatoverseveralyears,sharplyrisingcommoditypricesandlowinterestratescreatedaboomininvestment,andexcesssupplyineverythingfromironoretooil.Lacklusterdemandhasfailedtokeepupwiththisgrowingsupplyand,ironically,itturnsoutthattheloosemonetarypolicyputinplacebycentralbankerstofightdeflationhasinfactcontributedtoit.

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Thequestioniswhobenefitsfromtheharmtosavers?Ofcourse,itisgovernmentswhoareabletoborrowmorecheaply.

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ItshouldntbesurprisingthatJapanandEurope,whichhaveworsefiscalsituationsthanwedo,haveimplementedevenmoreaggressivemonetarypolicy._____________Source:http://www.imf.org/external/data.htm

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Japanhashadnearzerointerestratesformanyyears.SinceJapanrampedupitsQEinthefallof2012,itscurrencyhasweakenedbyabout50%anditsstockmarkethasralliedover115%.However,GDPhasbarelybudged,asstockmarketgainshaventtranslatedintoeconomicgrowththere,either._____________Source:BloombergL.P.

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InEurope,wecanseeGreecebeingtaughtthat"HonestyisNOTthebestpolicy.LetsplayagameCananyonenameaEuropeancountryexpectedtorunsurplusessufficientforittopayitsdebtoutofitstaxrevenues?TheonlythingthatseparatesGreecefromFrance,Ireland,Italy,PortugalandSpainisthattheGreeksopenlyadmitthattheycantrepaytheirdebts,whiletherestremainsilent.Greek10yeardebtyieldsmorethan10%,whilealltheseothercountrieshavelowerratesthantheU.S.Notoneofthemplanstorepayitsdebtoutoftaxcollections.Greeceslossofaccesstothecapitalmarketsisaheavypricetopayforitscandor.

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TheECBhadmanagedtolowersovereignyieldswithforwardguidance,targetedbanklendingprograms,andthethreatofQE.ItsthereforepuzzlingthattheECBisactuallygoingthroughwithbuyingbillionsofEurosworthofbondsatnegativeyields,whenitcoulddeclarevictorysimplybythreateningtobuythem,ifneeded,toenforceinterestratepolicy.IwonderwhetherECBPresidentMarioDraghispentsomuchpoliticalcapitalfightingtheGermanBundesbankfortheabilitytodoQE,thatnowthathehasemergedvictorious,hewillfollowthroughwhetheritsneededornot.

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Whichbringsustothecuriousexistenceofnegativeyieldingbonds.Logically,interestratesshouldalwaysbepositive.Peopleshouldpreferadollartodaytosomethinglessthanadollarinthefuture.Ifyouhaveadollar,youcanliterallyavoidnegativeratesbystickingitunderthemattress.TempurSealymaybealong.Negativeinterestratesarelikethesquarerootofnegativeone:theyexistintheory,butnooneissupposedtobeabletoseethem.

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Yet$3trillionofsovereigndebtfromsevenEuropeannationsandJapanhasnegativeyields.Germanysextendto7years,andSwitzerlandsto10years._____________Source:http://www.projectsyndicate.org/commentary/negativenominalinterestratesbynourielroubini201502

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TheECBsaysitwillbuybondswithyieldsaslowasitsdepositrate nowatnegative0.2% toimplementQE.So,itseasytoimaginethatsomeshorttermtradersarebuyingnegativeyieldingbondswiththeintentofflippingthemtotheECBatamarkup.

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Ithinkthemoreinterestingquestioniswhydolongterminvestorswhoboughtsovereignbondsfortheincomecontinuetoholdthematnegativeyields?Whynotsellandcaptureallthefutureincomeandthensometoday?Whycontinuetotakedurationrisk,liquidityriskandevencreditriskwithoutanycompensation?Wethinktheanswerliesinthenewregulatoryregimesthatareshapingthebehavioroflargefinancialinstitutionstoday.

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Postcrisis,BaselIIIregulationsforbanksandSolvencyIIregulationsforinsurersweredesignedtoimprovetheirfinancialstability.However,itsnotclearthatthedesignerscontemplatednegativebondyields.Requiringfinancialinstitutionstoholdbondsthatareguaranteedtolosemoneydestroysvalueandaddssignificantandunderappreciatedsystemicrisk.

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Letsstartwithbanking.Attheirmostbasicpurpose,banksexisttotakedepositsfromthosewithmoneythatisntneededtodaytolendtothosewhocanuseitforproductiveendeavors.Depositsusedtobevaluedasastablefundingsource,andbankscompetedhardtogatherthemfromindividualsandbusinesses.Zerointerestratepolicyiscombiningwithnewliquidityrequirementstomakecommercialdepositsunattractive,leadingbankstoabandontheircorepurposeofacceptingdeposits.

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UnderthenewBaselIIIregulations,thereissomethingcalledtheLiquidityCoverageRatio,whichrequiresbankstomaintainlotsofverysafeliquidassetslikegovernmentbondstocoverfundingstress.Thisratioalsocategorizescertaindepositsasnonoperatingandassignsthempunitivehaircuts.Inresponse,banksarehoardingsovereigndebt,whilelookingforloopholesenablingthemtomoreprofitablycarrythesenonoperatingdeposits.Insomecases,theyreshunningthemaltogether.Gonearethedayswhenabankwillgiveyouafreetoasterforopeninganaccount;thesedaystheyaregivingbackthedough.IthasgottensobadthatinFebruary,JPMorganannounceditplannedtoreturn$100billiontocustomers.

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Someeffortstoimproveregulatoryratiosinclude: Askingcustomerstoswitchunwanteddepositsintosecuritiesthebankcanhold

incustody; Askingcustomerstotakeoutloanstobuytreasuries; Askingcustomerstotransactthroughoffbalancesheetderivativessuchas

swaps;and Askingcustomerstoreplacephysicalpositionswithsyntheticlookalikes,

collateralizedwithU.S.treasuries.Noneofthesechangesmakebankssaferorbenefitthecustomers.Theyraisecosts,reduceliquidity,andaddleverageandcounterpartyrisk.

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Lastyear,theECBandotherEuropeancountriesbeganchargingbanksfordeposits.TheDanishandSwissnowcharge75basispoints.Banksarebeginningtopassthenegativeratesontocommercialcustomers.Thereisalimittothis,ofcourse.Atsomepointbankswilldecideitscheapertoholdphysicalcurrencyintheirvaultsthanitistomaintainexcessdepositsatcentralbanks.Correspondingly,customerscandecidetheywouldratherholdcashthanpayfortheprivilegeofdepositingmoney.Wearepayingattentiontoapossibletransitionfrombanksrejectingdepositorstodepositorsrejectingbanks._____________Source:GSGlobalMacroResearch,NegativeInterestRates:HelpfulorHarmful?,February27,2015.

28

SolvencyIIwasestablishedwiththegoalofrewardingfinancialinstitutionsforminimizingrisk.Forinsurancecompanieswithlongtermliabilities,itmakessensetoownlongdatedassets,asmismatcheddurationisarealoperatingrisk.Inanormalenvironment,lifeinsurersarewisetolockinlongtermcashflowssothattheywillhaveincometopaydistantbenefits.

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So,thedesignersofSolvencyIIgavegovernmentbondsthatreducedurationriskalowercapitalchargethancash.Thefirstcolumnisthestandalonemarketriskchargeforcertainassets.Thesecondcolumnconsidersotherfactorsincludingdiversificationanddurationmatching.Governmentdebtactuallyhasanegativecapitalcharge.ItappearsthatSolvencyIIdidnotanticipatenegativebondyields,asholdingdebtwithlockedinnegativeyieldscantpossiblybesaferthansellingandholdingcash.Underthenewrules,sellingthebondstoholdcashwouldcreateacapitalcharge.Thatislikeusingbubblewrapfilledwithacorrosivetohelpprotectapackage._____________Source:https://www.ageas.com/sites/default/files/Regulatory%20Impact%20on%20Banks%20and%20Insurers%20Investments%20%20final.pdf

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Hereisanexample.Imagineaninsurerwhohasasimpleportfoliowith40billioneurosofsovereigndebtand5billioneuroseachofrealestateandequities.Ifthesovereigndebttradestoanegativeyield,itwouldbewisetosellittoholdcash.Sellingthedebtwouldincreaseliquidity,raisetheportfoliosreturn,lowerdurationrisk,reducemarketrisk,andevenreducecreditrisk,asgovernmentdebtcandefault.Butletsseewhathappensiftheinsurerdoesthis._____________Source:https://www.ageas.com/sites/default/files/Regulatory%20Impact%20on%20Banks%20and%20Insurers%20Investments%20%20final.pdf

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UnderSolvencyII,theimpactwouldbeanadditionalcapitalchargeofover1billioneuros.Tocompensate,theinsurercouldsellotherriskierassets inthiscasealmostitsentireequityportfolio oritcouldraisefreshequitybysellingstock.YoucanseehowSolvencyIIpracticallyforcescompaniestoholdsovereigndebt.Wethinkthisisthebestexplanationforthepersistenceofnegativeinterestratesinbondswithduration._____________Source:https://www.ageas.com/sites/default/files/Regulatory%20Impact%20on%20Banks%20and%20Insurers%20Investments%20%20final.pdf

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WehavepassedthepointwhereJellyDonutpolicyismerelyslowingtherecovery.Distortionsarenowaddingrisktothebankingandinsurancemarketsandleadingtopoorincentivesforthelargestplayersinthefinancialsystem.Monetarypolicyandregulationshavecombinedlikeafailedchemistryexperimenttocreateapotentiallydestructiveforcethatshouldnotexistoutsideoffiction.Ithinkthisaddstotheultimateattractionofholdinggoldinsteadofgreen.

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Letstalkaboutacoupleofstocks.

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Arecessioniswhenyouhavetotightenyourbelt;depressioniswhenyouhavenobelttotighten.Whenyou'velostyourtrousers you'reintheairlinebusiness._____________Source:http://www.economist.com/blogs/gulliver/2011/12/businessquotations

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Airlineshavegeneratedtheworstreturnoncapitalofanyindustry.Butifyouvealwaysdreamedofowninganairplane,thereisawaytoownhundredsofthemandgeneratearespectablereturn:Youcangointotheaircraftleasingbusiness._____________Source:IATAEconomicsBriefing10,"ProfitabilityandtheAirTransportValueChain",June2013;IndustryMedianROICwithoutgoodwill,1965 2007,McKinsey&CompanyforIATA.

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Thisishowitworks:Youborrowmoneytobuyplanesfromthemanufacturersandleasethemtotheairlinesatlockedinmonthlypayments,usuallyforaninitialperiodoftentotwelveyears.Youcanalsodosale/leasebackdealswiththeairlinesthemselves.Attheendofthelease,yougettheplanebackandreleaseitorsellit.

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Today,40%oftheglobalairlinefleetisleasedcomparedtolessthan2%in1980.Manyemergingmarketairlineslackgoodaccesstocapitalmarketsandbankfinancing.Leasingallowsthemtofinancefleetgrowth.Otherairlinesleasetoaccessnewerplaneswithouttakingresidualvaluerisk._____________Source:http://www.boeing.com/assets/images/bcc/images/Lessors/Slide2_900.png

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OurlongideaisAerCapHoldingsN.V.,tickerAER.AerCapisthelargestand,inourview,thebestmanagedindependentlessor.Inamarketwithfewbargains,webelievethatthestockischeapandoffersagoodriskrewardopportunity._____________Source:BloombergL.P.,issuerfilings,managementpublicstatements,andGreenlightcalculationsderivedfromissuerfilingsandpublicstatements.GreenlightsadjustmentstofiguresinfilingsandpublicstatementswereinthesolediscretionofGreenlight. AerCapstockpricethroughoutthepresentationistheclosing priceasofApril2,2015.

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SeveralsmallerleasingcompaniesmergedtoformAerCap,whichthenpubliclylistedinNovember2006.Sincethen,itsgrownbookvaluepershare19.6%ayear._____________Source:BloombergL.P.,issuerfilings,managementpublicstatements,andGreenlightcalculationsderivedfromissuerfilingsandpublicstatements.GreenlightsadjustmentstofiguresinfilingsandpublicstatementswereinthesolediscretionofGreenlight.

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CEOGusKellyrunsthebusinessinadisciplined,shareholderfriendlyway.Withintheleasingindustry,AerCapstandsoutforitsrecordofexcellentriskadjustedreturnsandopportunisticgrowth._____________Source:BloombergL.P.,issuerfilings,managementpublicstatements,andGreenlightcalculationsderivedfromissuerfilingsandpublicstatements.GreenlightsadjustmentstofiguresinfilingsandpublicstatementswereinthesolediscretionofGreenlight.

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Herearethenumbers:Leasepaymentsvarydependingontheplane.Widebodiesgeneratehigherupfrontleaseratesbutbearmoreremarketingriskgivenasmallercustomerpool.AerCaptendstofocusonlowerrisknarrowbodies.Maintenancerevenuefundsaircraftoverhaulexpenses.Depreciationisover25yearswitha15%residualorscrapvalue.Pretaxreturnonassetsisalmost7%aftersubtractingleasingcosts,whichincludecreditlossesandcorporateSG&A._____________Source:Greenlightestimates.

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AerCapdebtfinancesabout75%usingbothsecuredandunsecuredmostlyfixedratedebt,whichcurrentlycostsunder4%.AerCapisdomiciledinIreland,sothetaxrateislow.Altogether,AerCapearnsalowteensROEonanewleasingdealexcludinggainsorlosseswhentheleaseends.Thecompanybearscreditrisk,residualvalueriskandtheobvioustailrisk

_____________Source:Greenlightestimates.

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SnakesonaPlane

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AerCapmanagescreditriskbyaggressivelymonitoringcustomercreditworthinessanddiversifyingitscustomerbase.Between2007and2013,whichincludedthefinancialcrisisandsomeidiosyncraticairlinedefaults,AerCapsannualdefaultswereapproximately2.5%.Losseswerelow,averagingonly0.2%,becausearound80%ofthedefaultedplaneswererepossessedandthenreleasedorsold,and20%ofthedefaultedplaneswentbacktotheairlineunderarestructuredlease.Despitethemacroeconomicturbulence,AerCapsaverageportfolioutilizationduringthisperiodhasbeenalmost99%._____________Source:AERfilings,Greenlightcalculationsderivedfromissuerfilings,andGreenlightestimates.

45

Unlikeseveralofitsprivateandpubliclytradedpeers,AerCapdidnothavetotakelargeassetvalueimpairmentsduringandafterthecrisis.Infact,AerCaphasusuallydisposedofplanesatapremiumtotheircarryingvalues._____________Source:BloombergL.P.,issuerfilings,managementpublicstatements,andGreenlightcalculationsderivedfromissuerfilingsandpublicstatements.GreenlightsadjustmentstofiguresinfilingsandpublicstatementswereinthesolediscretionofGreenlight.

46

AerCapfocusesitsportfolioonthemostwidelyusedcurrentgenerationaircraft,especiallynarrowbodies.Whiletheseaircraftprovidelowerupfrontrentalyields,theyhaveheldtheirvaluebetterovertimeandthroughcycles.Managementhasagoodtrackrecordofshowingdiscipline.Thecompanydidnotoverpayfornewaircraftintheleaduptothecrisis,anditroutinelysellsolderaircraft,whicharemoresensitivetocyclicaldownturnsandtechnologicalobsolescence._____________Source:AERfilings,Greenlightcalculationsderivedfromissuerfilings,andGreenlightestimates.

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Oneofthefirstaircraftlessors,ILFCwasacquiredbyAIGin1990andwasthesecondlargestlessorintheindustrybehindGE.Itranintotroubleduringtherecession.AIGwasforcedtotake$5billionofassetimpairmentsbetween2010and2013duetoitsagingfleetwithtoomanywidebodies.Notsurprisingly,AIGconcludedthatILFCwasanoncoreassetandlastyearsoldittoAerCap._____________Source:Representsowned&managedfleet,FlightglobalInsight,andGreenlightcalculations.

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AerCapboughtitatasizeablediscounttoitsalreadywrittendownbookvalue.AerCappaid$3billionincashandissued97.6millionsharestoAIG.Itwasabargain.AerCappaidonly84%ofILFCsappraisedfleetvalueandlessthanhalfitsadjustedbookvalue._____________Source:BloombergL.P.,issuerfilings,managementpublicstatements,andGreenlightcalculationsderivedfromissuerfilingsandpublicstatements.GreenlightsadjustmentstofiguresinfilingsandpublicstatementswereinthesolediscretionofGreenlight.

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TheacquisitionsignificantlyincreasedAerCapssize,addingaround1,000ownedandmanagedplanestoitsfleet.AerCapisnowthelargestindependentlessorintheworld.AlongwithGE,theycontrolover40%oftheleasingmarket._____________Source:Representsowned&managedfleet,FlightglobalInsight,andGreenlightcalculations.

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AerCapalsoobtainedILFCslarge,attractivelypricedorderbookofnextgenerationplanes,whichisnowacouplebilliondollarsinthemoney.AerCapisalsointheprocessofreducingcombinedSG&AandloweringitstaxratebymovingILFCsU.S.assetstoIreland,whereAerCapenjoysa12.5%taxrate._____________Source:AERfilings,managementpublicstatements,andGreenlightcalculations.

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AerCaphasalreadyexceededitsinitialproformaEPSguidance.OncurrentconsensusEPSestimatesfor2015,AerCapsstocktradesatanattractive8.5xearnings.

_____________Source:BloombergL.P.andBloombergconsensusestimatesretrievedApril2015.

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Whilethestockischeapon2015earnings,webelievethereismoretocome.AerCap'sfleetwillgrow15%by2018asittakesdeliveryofnewplanes.AsImentioned,SG&Aandthetaxratewillimprove.Combinedwithbuybacksfundedbytheongoinggenerationofexcesscapital,webelievethatAerCapcangrowitsEPSbyaround10%annuallyoverthenextfewyears._____________Source:Greenlightestimates.

53

Thecompanys7yearunsecuredbondyieldshavedeclinedtounder4%sincethedealwasannounced.TheyshoulddeclinefurtheroncethecompanyregainstheinvestmentgradecreditratingitlostduetotheILFCtransaction.Thoughthestockhasadvanced,theP/Emultiplehasbarelychangeddespitestrongpostdealexecutionandimprovingearnings.Wethinkthattheequitymarketwillfollowthecreditmarketandreratethecompany._____________Source:BloombergL.P.;BloombergconsensusestimatesretrievedApril2015andGreenlightcalculations.

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AerCapsmanagementteamdoesntjusttalkaboutmanagingthebusinessforshareholders.Inadditiontorunningthebusinesswell,AerCaphasbeenanaggressivebuyerofitsownstockatlowprices.During2011and2012,thecompanyrepurchased24%ofitssharesoutstandingatanaverageoflessthan$12ashare.Managementhasgoodincentivetocreateshareholdervalue.IntheILFCdeal,seniormanagementwasawardedalargebatchofrestrictedstockunitsthatvestin2018and2019,twothirdsofwhichdependonperformance.Alltold,inanexpensivemarket,thisappearstobeacheapstock._____________Source:AERQ22014earningscallonAugust12,2014.

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Wethinkathenahealthisashort.LastMay,attheSohnconference,Iexplainedwhywethoughtathenawasaverygoodexampleofthebubblegoingoninasegmentofthemarket.Incaseyoumissedit,Iwillbrieflysummarizethethesisandthenbringeveryoneuptodateonwhatshappenedsincethen.Forfurtherreference,thefullpresentationisonlineatourwebsite.

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athenahealthhandlesthebillingforphysiciansthroughawebbasedplatform.Thecompanyalsoprovideselectronichealthrecordsandotherservices,andchargesapercentageofcollectedbills.Thecompanysbusinessisprimarilyintheoutsideofthehospital,orambulatorymarket._____________Source:athenahealthwebsiteathttp://landing.athenahealth.com/g/improvecare,retrievedMay2014.

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Atthetimeofourpresentation,athenawasbeginningtoentertheinpatientorhospitalmarket,throughanewservicewhichwouldtakeoverahospitalsadmissions,referrals,andotheradministrativefunctions.athenahadjustannounceditsfirsttwoalphacustomersinApril2014,longtimeathenaclientsStewardHealthCareandGriffinHospital.

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Wecalledathenaabubblestockbecauseitsshareshadgoneparabolicevenasitsfundamentalsdeteriorated.AtthetimeofSohn,eventhoughthestockhadrolledover,itstilltradedatmorethan100xforwardearningsthatareadjustedtoignorestockcompensationexpense._____________Source:BloombergL.P.

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Analystscomparedittocloudcompanies,socialmediacompaniesandSaaScompaniesandappliedsimilarlyaggressivevaluations.Butwhatwesawwasacompanythatusedawebsitetopartiallyautomateastillverypaperandlaborintensivebackofficebillingcollectionprocess._____________Source:PiperJaffray&Co.reportdatedOctober21,2013.

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Essentially,weseeitasabusinessprocessoutsourcer,withaverypromotionalCEO._____________Source:Compilationcomprisedofexcerptsfromthefollowing,retrievedApril2014:1) HealthDatapaloozaonJune3,2013(https://www.youtube.com/watch?v=Ka_gTyVRjSE).2) athenahealth6thAnnualInvestorSummitonDecember12,2013(http://investors.athenahealth.com/events.cfm).3) EHRtvinterviewwithAnnandEricFishmanonOctober27,2010(http://www.ehrtv.com/athenahealthjonathanbushnov2010/).4) FOXNewsNetworkonMarch27,2012(http://video.foxbusiness.com/v/1532985902001/athenahealthceoonhealthcarelawcloudcomputing/#sp=showclips).5) CableNewsNetworkonApril20,2011(http://money.cnn.com/video/news/2011/04/18/n_athena_cloud.cnnmoney/).

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https://youtu.be/YEww0VOfbJI

Afewweeksbeforewepresented,MorganStanleyreleasedareportthatincludedaDCF.MorganStanleyusedaseriesofwhatwethoughttobeexceedinglyaggressiveassumptionsthatIreviewedindetaillastyear.Thepunchlinewasthatwhenwereplicatedtheirframeworkwithmorerealisticassumptions,wecameupwithabasecaseDCFvalueof$50pershare._____________Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014andGreenlightcalculatedadjustmentstoMorganStanley&Co.estimates.GreenlightsadjustmentstoMorganStanleysmethods,factors,andcalculationswereinthesolediscretionofGreenlight.

62

WealsopresentedabearcasethathighlightedseverallargeheadwindsthatathenawouldhavetocontendwiththatledtoaDCFvalueofjust$14pershare._____________Source:MorganStanley&Co.estimatesasprovidedtoGreenlightinApril2014andGreenlightcalculatedadjustmentstoMorganStanley&Co.estimates.GreenlightsadjustmentstoMorganStanleysmethods,factors,andcalculationswereinthesolediscretionofGreenlight.

63

Thebullcaseassumedthatathenawouldsuccessfullyexpandtobealeadingplayerintheinpatientmarket.WeobservedthatEpicSystemswouldbeabigobstacletoathenassuccessthere,asitwouldbedifficultforathenatodevelopaproductthatwoulddisplaceEpicsdominantsoftwaresolutionforhospitals._____________Source:TheVeronaPress,August9,2013,http://www.connectverona.com/articles/2013/08/09/epicwowschambergroup.

64

Sowhatshappenedsince?Thestockisprettymuchinthesameplace._____________Source:BloombergL.P.

65

athenahasalonghistoryofdeterioratingearningsestimates.Overthelastyear,estimateshavecontinuedtodecline.ThisistrueforbothGAAPandadjustedearnings.OnaGAAPbasis,EPShasdeclinedoverthelastthreeyearsandthecompanycurrentlyoperatesataloss.

NotethatthegapbetweenGAAPandnonGAAPearningsisnow$1.50pershare.In2010itwas$0.28pershareandhasgrowneveryyearsince.Likemanycompanies,athenahaslearnedthatifWallStreetcountscashcompensationbutnotstockcomp,itmayaswellpayitspeopleinasmuchstockaspossible._____________Source: AdjustedandGAAPEPSestimatesarehistoricalBloombergconsensusestimatesfornotedtimeperiodsasretrievedfromBloomberginMarch2015.

66

Butlookatthisexcerptfromthecashflowstatement.athenawantseveryonetobackoutthestockcompensationbecauseitsanoncashexpense.Yet,itpaysoutcashtaxesaspartofitsstockcompensationscheme.At$28million,thatsmorethanthecompanysentirefreecashflow._____________Source:ATHN2014Form10K

67

athenatellsinvestorstoignorecurrentprofitsbecauseitneedstoinvesttomaximizeitsgrowthopportunity.In2014,R&Dexpenseswereexpectedtogrowandpressureoperatingmargins,butthisdidn'thappen.R&Dexpensesontheincomestatementactuallydeclinedasapercentageofsaleslastyear.Wheredidathenainvest?ItinvestedinCapEx,whichwentfrom6%ofsalesto10%.ItalsogrewtotalR&Dsubstantially.

But,itcapitalizedtheincreasingpart,withcapitalizedsoftwaregoingfrom4.9%to7.2%.Marginsfell,onlyitwasn'tduetohigherinvestmentforgrowth,asthegrowthinvestingwasmostlycapitalizedratherthanexpensed.Andhaditnotcapitalizedalltheseexpenses,marginswouldhavefallenevenfurther._____________Source:athenahealthsfilingsonForm10Kand10Q;andGreenlightcalculationsderivedfromathenahealthsfilings.

68

athenaslippedanaccountingchangeintoitsthirdquarter10Qtoacceleraterevenuerecognition.Whilethereisnodisclosureoftheimpact,inourexperiencethisisthesortofthingcompaniesdowhentheyarestrainingtomeetexpectations.Notably,thatquarter,athenaexceededconsensusrevenueestimatesby0.25%.

69

Socomingbacktothebullcase,heresJonathaninOctoberoflastyearremindingeveryonethatthecompanysgoalistogrow30%ayear._____________Source:http://video.cnbc.com/gallery/?video=3000319485

70

https://youtu.beSRdKgnCOxCU

athenamissedthat30%goalin2014.AccordingtoJonathanBush,despitemissingthistarget,itdidgreatandhuge,andenterprise,whichisabouthalfitsbookings,justfellalittleshort._____________Source:athenahealthwebsiteathttp://investor.athenahealth.com/phoenix.zhtml?c=213592&p=quarterlyearnings,retrievedMarch2015.

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Ingeneral,athenaisfairlytransparentwithitsdisclosure,butitdoesntdiscloseitsbookings,presumablyforcompetitivereasons. However,thecompanyissuespressreleasesfornewclientswithover150physicians,knownastheenterprisegroup.So,wecantabulatethepressreleasestoestimateenterprisebookings.Youmightnotthinkthisqualifiesasdeepresearchbutnoneofthesellsideanalystshavewrittenaboutthisandtheresultsarerevealing.Hereyouseeathenaannounced2,000newproviderwinsin2011.In2012itannounced2,950newproviders.In2013,youcanseeithadtwoenormouswins,whichdrovetheincreaseto7,350._____________Source:Greenlightcalculationsfornewathenacollectorenterprisecustomersbasedonathenahealthpressreleasesat http://newsroom.athenahealth.com/phoenix.zhtml?c=253091&p=iroloverview.

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Sowhathappenedin2014?athenahadatargetof30%growth.Jonathansaystheycameupalittleshort.Thegreenlineisoursenseofwhatalittleshortmightmean.Theysaidthirty,somaybetheyonlygrew25%,whichwouldbeabout9,200newproviders._____________Source:Greenlightcalculationsfornewathenacollectorenterprisecustomersbasedonathenahealthpressreleasesat http://newsroom.athenahealth.com/phoenix.zhtml?c=253091&p=iroloverview.

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So,howdidtheydo?athenaannouncedafewsmallcontractstotalingonly1,246providers._________Source:Greenlightcalculationsfornewathenacollectorenterprisecustomersbasedonathenahealthpressreleasesat http://newsroom.athenahealth.com/phoenix.zhtml?c=253091&p=iroloverview.

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Youcanseethatannouncedenterprisebookingsfell83%._____________Source:Greenlightcalculationsfornewathenacollectorenterprisecustomersbasedonathenahealthpressreleasesat http://newsroom.athenahealth.com/phoenix.zhtml?c=253091&p=iroloverview.

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AttheanalystdayinDecember,thebullishhighlightwasthatbookingsgrowthwouldreturnto30%in2015._____________Source:athenahealthwebsiteathttp://investor.athenahealth.com/phoenix.zhtml?c=213592&p=quarterlyearnings,retrievedMarch2015.

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But,that30%isoffthenowlowerbase.Investorshavebeenledtobelievethat2014wasasmallhiccupandthatathenasbookingsaretrackingtothegreenline.Wethinktherealityisthatbookingsgrowthwillcomeoffasubstantiallylowerbaseandaremoreliketheblueline.athenamightcheer30%enterprisebookingsgrowth,butthatwonteventakeitbacktoits2011level._____________Source:Greenlightcalculationsfornewathenacollectorenterprisecustomersbasedonathenahealthpressreleasesat http://newsroom.athenahealth.com/phoenix.zhtml?c=253091&p=iroloverview.

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Whatdoesthismeanforoverallbookings?Weknowthatenterprisebookingswereslatedtobe50%oftotalbookingsin2014,soifthesebookingsdeclined83%,overallbookingsweredownin2014versus2013.Again,ifathenaresumes30%bookingsgrowthoffthelowerbase,itwontreturnto2013levelsthisyear.Evengrowing30%overlastyearsdepletedbasecouldbeachallengebecauseinthefirstquarterathenaannouncedjustonesmallcontract._____________Source:Greenlightcalculationsfornewathenacollectorenterprisecustomersbasedonathenahealthpressreleasesat http://newsroom.athenahealth.com/phoenix.zhtml?c=253091&p=iroloverview.

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Bookingsarealeadingindicatorofinstallationsandinstallationsarealeadingindicatorofrevenue.So,thedeclineinbookingsprobablydidntaffect2014revenues,butwillprovideaheadwindin2015andprobablyanevenbiggerheadwindin2016.Thestreetexpectsrevenuestodeceleratefromthehistoricalrateofover30%to22%thisyearand21%nextyear.

Managementinsiststhatthelongtermrevenuegrowthrateisstill30%._____________Source:BloombergconsensusestimatesretrievedinMarch2015.

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Andincaseyourecuriousastowherethat30%targetcomesfrom._____________Source:http://blogs.vmware.com/euc/2011/07/fortunebrainstormjaviersolteroonhowtheenterprisecaninnovate.html,retrievedApril2014.

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https://youtu.be/KHRuAUljSS8

LastMay,weidentifiedthesesixcustomersthatwebelievedathenamayloseinthecomingyears.WestPennAlleghenydidthefirstmajordeinstallationthisquarter.Obviously,athenaneedstowinnewbusinessjusttoreplacelostcustomers.Itseemslikelythatathenawillcontinuetoloseenterprisecustomers._____________Source:Greenlightopinionbaseduponpublicstatements,newsarticles,announcementsforopenemploymentpositions,anddiscussionswithindustryparticipants.

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Theenterprisebookinglosshasfolloweddeteriorationinitsbrandimage.athenamisseditsclientsatisfactiontargetsforeveryquarterin2014,aftergenerallybeatingtheminprioryears.InhealthcarevendorreviewerKLASsratings,athenasscoresdroppedforeveryproductandeverysizecustomer,anditsrankingsversusotherproviderseitherdeclinedorstayedflat.ItalsolostthetitleofbestoverallsoftwarevendortoEpic.Itspossiblethatathenasdiminishedreputationhasimpacteditsabilitytowinnewbusiness._____________Source: KLAShttp://www.epic.com/http://hitconsultant.net/2015/02/02/indepth2014bestinklasawardsforsoftwareandprofessionalservices/http://investor.athenahealth.com/phoenix.zhtml?c=213592&p=irolcalendarpast

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AfterSohn,JonathanBushwentonCNBCandexplainedthatwehadmisunderstoodthecompany.WhenaskedexplicitlyaboutEpic,hecalledthemthebestdarndinosaurofourageandsaidthefutureisthecloud.WhenthehostfollowedupnotingthatathenawouldhavetospendbillionstobuildasystemtocompetewithEpic,Jonathansaid,Sothisisthekey.Werenotgoingtodevelopasystemtotakethemon.Wearebuildinganetwork.

_____________Source:http://video.cnbc.com/gallery/?video=3000273642

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Lessthaneightmonthslaterathenaspent$80milliontodotwoacquisitionstoacceleratethebuildingofacompetitivesystem.webOMRisBethIsraelsEHRplatformthatathenawillintegrateintoitsowninpatientoffering.

RazorInsightsisacloudbasedEHRforruralandcommunityhospitalswithunder50beds.EventhoughRazorInsightshas25customers,athenaleftitsrevenueguidancesubstantiallyunchanged._____________Source:Greenlightcalculationsfornewathenacollectorenterprisecustomersbasedonathenahealthpressreleasesathttp://newsroom.athenahealth.com/phoenix.zhtml?c=253091&p=iroloverview.

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HeresJonathanBushdescribingthevalueofacquisitions.Wesuspectthatathenaisdoingjustthat usingtheseacquisitionstoimplicitlylowerguidancewithoutactuallyloweringguidance._____________Source:http://video.mit.edu/watch/areyoureadyforipostrategiesandstepsforhowandwhentotakeyourcompanypublic9327/

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https://youtu.be/oLJZVUPKvJw

AsforEpic,JonathanBushdedicatedawholechapterinhisbooktocriticizingthecompanyforbeingaclosedsystem._____________Source:WhereDoesItHurt?AnEntrepreneursGuideToFixingHealthCare.JonathanBushandStephenBaker,chapter9,page135.

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WhenAppleannouncedHealthKitlastsummer,itskeypartneringivingpatientsaccesstotheirrecordsontheirmobiledeviceturnedouttobeEpic thedinosaurisnowinthecloud.

_____________Source:http://www.modernhealthcare.com/article/20150205/NEWS/302059938

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WhileEpicmovesintothecloud,athenasboardseemssomewhatmoregrounded,andexcludingBush havesold58%oftheirsharesinthelastyear._____________Source:Greenlightcalculationsbasedonregulatoryfilings.

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AttheIraSohnconferencelastyear,weallowedrelativelygenerousassumptionsinthebasecaseDCF,whichvaluedathenaat$50pershare.Backthen,wewerentforecastingabigslowdowninenterprisebookings,massiveincreasesincapitalizedresearchanddevelopmentproppinguptheincomestatement,orEpicenteringthecloud.Here,JonathanBushsuggeststhatitsuptomeandotherinvestorstodecidewhatathenaisworth.Well,atleasthedidntgethispricetargetfromthesameplacehegothisgrowthrate.Asitstandsnow,wethinkathenasbusinessperformanceistrackingclosertoourbearcasevaluationof$14pershare.Wecontinuetoexpecttheathenastockbubbletopop._____________Source:http://www.bloomberg.com/news/videos/b/daa965b8068c48fab49f109565a96743

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https://youtu.be/28cY08pxibw