RBC Capital Markets, LLC Mitch Steves (Analyst) Jeriel Ong (Senior Associate) (415) 633-8535 (415) 633-8559 [email protected] [email protected] Jae Cho (Associate) Amit Daryanani, CFA (415) 633-8624 (Analyst) [email protected] (415) 633-8659 [email protected] August 15, 2016 Internet of Things (IoT)... Big Brother Is Here $1.4 Trillion Market The Takeaway: We are publishing our 2016 Internet of Things (IoT) report, which provides a deep dive into a new and growing concept. IoT is a network of physical devices, vehicles, buildings, and other embedded electronics that allow for material improvements in visibility/tracking/efficiency/safety due to the gathering of robust amounts of data. Overall, we take a look at each segment and provide EQUITY RESEARCH our high-level thoughts on (1) the first markets to adopt IoT technology, and (2) the verticals where we think IoT will be deployed first. Net net: we believe the growing concept will primarily benefit companies with robust software platforms and component/end-points that become increasingly complex on smaller form factors (miniaturization). Key winners (large cap): 1) Cisco (Jasper) – while a small portion of revenue, Jasper was acquired for $1.4B (we think ~10x sales) and is a cloud-based IoT software service platform. 2) INTC – generates more than $2.5B of revenues from IoT segment, which we think will sustain "double-digit" growth going forward. INTC benefits from leveraging its IP and providing a host of IoT-centric solutions, ranging from entry level to high performance. Key winners (SMID cap): Impinj – end-to-end solution provider (end-points RFID chips, connectivity, and software). Notably, ~66% of revenue comes from end-points, ~33% from connectivity (readers), and 1% is software. Synopsys – while ARM (acquired by Softbank) was the leading player in semiconductor IP, Synopsys is second with ~15% of revenue tied to IP (benefiting from complex chip design, miniaturization). Connector/sensor players (APH, TEL, & ST): should all benefit from IoT as demand for sensors (to sense physical phenomena like temperature, pressure, humidity, etc.) and connectors (to transmit the data) will both inflect higher, especially across verticals like automotive & industrial. Top-5 trends 1. Software platform & design: We think the software platform is the most-attractive segment within the broad topic of IoT, as cloud-based software platforms allow companies to obtain real-time visibility and monitoring. For the design side, we think companies that provide software to create increasingly complex chips (miniaturization) will also benefit from IoT growth. Specifically, while it will be difficult to predict the percentage of chips that are being designed for IoT solutions, we think the designers will benefit from increased R&D spend on chip design. 2. Components/end-points: Beyond the IoT platform players, we note that component companies (end-point suppliers) should also see robust growth. From an end-market perspective, we are most bullish on end-points that address automotive, consumer, industrial, and energy while we take a cautious stance on general trackers for health and fitness. Specifically, we think smaller components (chips and sensors) will be the primary beneficiaries from the rapid growth of IoT products. 3. Security & tracking: Once information becomes free flowing, companies and consumers will want to keep their information secure and track devices as well. This becomes a broad topic as it includes personal information, secure tracking of objects, and IoT products used to manage access. 4. Data analytics: Once data is being transmitted securely, analytics would represent the next logical step of the IoT story. Information can be used to (1) help predict product failure, (2) track detailed customer patterns, and (3) anticipate human behavior. 5. Long-term data center and networking pressure: Assuming the proliferation of IoT devices occurs, we think data centers will need to be updated as more information is transferred at rapid rates (long- term effect). Specifically, we think this would benefit companies exposed to data center services, switches, and even line cards as well. Priced as of prior trading day's market close, EST (unless otherwise noted). Disseminated: Aug 15, 2016 01:10ET; Produced: Aug 15, 2016 01:10ET All values in USD unless otherwise noted. For Required Conflicts Disclosures, see Page 84. Internet of Things (IoT)... Big Brother Is Here Table of contents Industry overview ................................................................................................................ 3 What is IoT? ................................................................................................................................ 3 Key drivers of IoT ........................................................................................................................ 6 Five key questions ................................................................................................................ 8 RBC Capital Markets industry perspective ............................................................................ 9 Networking and component companies affected by IoT..................................................... 11 Cisco Systems (Outperform, $35 price target) ......................................................................... 11 Intel (Sector Perform, $36 price target) ................................................................................... 14 Impinj (Outperform, $25 price target) ..................................................................................... 15 Synopsys (Outperform, $64 price target) ................................................................................. 21 Connector companies (APH, TEL, and ST) ................................................................................ 23 Market overview ................................................................................................................ 25 Increase in connected devices ................................................................................................. 25 Total addressable market (TAM) .............................................................................................. 33 Examining the major use cases ........................................................................................... 46 Industrial IoT ............................................................................................................................ 46 Connected home ...................................................................................................................... 51 Connected car .......................................................................................................................... 56 Health and fitness .................................................................................................................... 59 Platform-based IoT ............................................................................................................. 62 Component-based IoT ........................................................................................................ 69 Software enablers .............................................................................................................. 71 Private IoT Companies ........................................................................................................ 75 Ayla Networks .......................................................................................................................... 75 Teezle ....................................................................................................................................... 75 Relayr ....................................................................................................................................... 75 Electric Imp ............................................................................................................................... 76 Machineshop ............................................................................................................................ 76 Axiros ........................................................................................................................................ 76 Exosite ...................................................................................................................................... 77 Enlighted .................................................................................................................................. 78 M&A activity ...................................................................................................................... 79 Risks and barriers to adoption ............................................................................................ 82 Companies mentioned ....................................................................................................... 83 All statements in this report attributable to Gartner represent RBC’s interpretation of data, research opinion, or viewpoints published as part of a syndicated subscription service by Gartner, Inc., and have not been reviewed by Gartner. Each Gartner publication speaks as of its original publication date (and not as of the date of this report). The opinions expressed in Gartner publications are not representations of fact, and are subject to change without notice. August 15, 2016 2 Internet of Things (IoT)... Big Brother Is Here Industry