Portfolio Manager's Commentary
April 30, 2009

Kent Croft
Russell Croft

Generating Ideas
We are value oriented with a contrarian bent. Through extensive research, we generate investment ideas from a variety of sources - both internal and external. We are classic stock pickers who look at stocks from the bottom-up.

A patient investment strategy is our hallmark. We look for gaps between a company's business value and its current stock price, then carefully evaluate its strengths and risks, investing in those whose stock prices don't fully reflect their true value. We typically hold these stocks for at least 3-5 years.
Our multi-cap approach allows us to opportunistically take advantage of market rotations. During these market cycles, we apply our proven investment process to companies of all sizes and sectors, identifying what we believe are undervalued small-, mid- and large-capitalization stocks.

Broadband Internet
As value-oriented investors, we look to buy stocks 80-cents-on-the-dollar and are constantly searching for advantageous entry points. The recent volatility in the markets created opportunities to add to our existing holdings. We believe there are several attractive investment opportunities relating to the build-out of broadband internet infrastructure.

Over the last seven years, the volume of internet traffic has been increasing at annual rates of 70% to 100% in the U.S. and Europe. Despite the boom in internet traffic, however, infrastructure build-out failed to keep up with the increasing demand as firms were reluctant to make capital investments in the wake of the dot-com bust. Internet backbone capacity has actually declined since the start of the decade as a result of consolidation throughout the sector.

This is a theme that we've followed for years. We feel that recent developments merit a return to our discussion and analysis of this growth platform. Last year (2008) provided a tougher operating environment for every part of the economy and as a result growth rates declined across the board and companies saw valuations compress. This was the case for nearly all of the companies exposed to the broadband sector despite continued overall growth in subscribers and network traffic. We feel that the overall economic environment has created near-term dislocations in an area that has become under-appreciated and thus provides long term opportunities.
An increasing demand for video over the Internet during the next decade should drive a four to six-fold average annual increase in network traffic. One hour of video requires the same backbone data capacity as a year's worth of emails; the bandwidth required to distribute a Hi-Def quality video is 2,700 times that needed to view a static website. The continued convergence of television and internet through websites and applications such as YouTube, Hulu.com, and ITunes will also push broadband capacity to its limits. In December, 2008 U.S. Internet users watched a record 14.3 billion online videos, 41 percent more than the year ago period with nearly 150 million people (78% of total U.S. Internet audience) consuming some type of video over the internet. The build out of wide area municipal and corporate Wi-Fi networks and Voice over Internet Protocol (VoIP) will also contribute to Internet traffic growth. Despite the economic conditions in 2008, the top 20 broadband internet providers still increased their subscriber base by 8.5%. Furthermore, the $7.2 billion allocated to broadband network expansion in President Obama's American Recovery and Reinvestment Act will help increase penetration rates and overall bandwidth demand. In addition to increased demand, industry consolidation following the dot-com bust has contributed to lower spare backbone capacity.  Backbone bottlenecks will lead to declining access speeds and an overall slowdown in service for Internet users, leading to significant consumer dissatisfaction.  Backbone providers may have to start to upgrade existing fiber links to handle more traffic and new fiber may have to be installed in some cases.  We believe the following companies will benefit from these trends:

Cisco Systems Inc. (CSCO): Cisco designs, manufactures, and sells Internet Protocol-based networking and other products relating to the communications and information technology industry worldwide. They are exposed to all aspects of the broadband growth theme as the list of products they provide consists of routers, switching systems, network cards, wireless routers, cable access, VoIP services, optical networking products, and security solutions to name a few. They are constantly pushing the envelope of internet enablement and optimization products and coming up with creative solutions that allow businesses to improve the productivity and efficiency through advanced workstations and videoconferencing options. CEO John Chambers expects that by 2012 online videoconferencing traffic alone will reach five times the amount of internet data in 2000. Cisco is well positioned to take advantage of any increased utilization of broadband internet, whether by companies, governments, or individuals.

Amdocs (DOX): Amdocs is a leading provider of business and operating systems and services to telecommunications providers worldwide. The company has created advanced methods of customer billing that make companies' operations run more efficiently. Their products also provide increased levels of customer satisfaction which has become increasingly important as competition has increased in the industry. The combination of increased internet traffic and the advent of the "triple play" in which companies offer a package of internet, television, and telephone services has driven growth in the market for Amdocs' products. Telecommunications companies began putting more emphasis on growing the average revenue per user (ARPU) and to do this they needed to provide more than a single service. As companies such as Comcast, Verizon, Sprint, and AT&T expanded to provide the "triple play" of services, they needed a more sophisticated system that could converge customer billing in an efficient manner. More internet traffic augmented the incentives for these large providers to enhance efficiency and customer satisfaction in order to take full advantage of the growing market. Amdocs was able to see this trend before it fully materialized and with their latest offerings, Amdocs 6 and 7, they expanded their suite of products away from their wireless telephone billing base to add cable and internet services. The combination of being a first-mover into the converged billing services arena and providing excellent product performance has made Amdocs the industry leader. Despite a tough economic backdrop over the past year, Amdocs has continued to add new contracts and build upon those with existing customers. In September, 2008 they expanded their deal with Comcast to provide business and operational support and also added prepay provider MetroPCS to their client list. They have also maintained international momentum, most recently picking up a contract with China Telecom, one of the largest providers in the world, to provide billing and service support. As demand for bandwidth continues to grow and more companies make services such as video and voice over the internet available to more people, demand will increase for Amdocs' converged billing services and drive growth into the future.

VeriSign (VRSN): VeriSign is the dominant provider of intelligent network infrastructure services that enable people and businesses to find, connect, secure, and transact across the internet and other converged networks. They are the exclusive operator of the Internet's master database for .com and .net domain names which is essentially a monopoly with significant barriers to entry. VeriSign is leveraged to the growth in internet traffic that may increase by more than 100% annually over the next decade. As the internet sees more traffic, there is more demand for domain registry names for which VeriSign is the exclusive operator. The company is in the process of restructuring to focus on its three core businesses- domain naming services (DNS), SSL certificates, and Identity and Authentication Services (IAS). Once the divestiture process is complete, VeriSign should be one of the few premier, billion dollar software companies with double digit earnings growth and above-average margins. The company recently announced a deal to sell its Communications Services Group, the largest of the five planned for divestiture, for $230 million. The sale came despite a tough market and removes an overhang as to how soon the divestiture would take place to allow for margin expansion in the near term. Due to the sale of their non-core assets, VeriSign has improved upon its strong balance sheet and their net cash position gives them significant financial flexibility over cash-strapped peers.