Equity Research Global Industrial Infrastructure May 23, 2019 Industry Report Louie DiPalma, CFA +1 312 364 5437 [email protected] The Smart City Observer Please refer to important disclosures on pages 13 and 14. Analyst certification is on page 13. William Blair or an affiliate does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. This report is not intended to provide personal investment advice. The opinions and recommendations here- in do not take into account individual client circumstances, objectives, or needs and are not intended as recommen- dations of particular securities, financial instruments, or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. William Blair Overview “Smart city” technology innovations and regulatory developments are occurring at a rapid pace. In The Smart City Observer, we observe how cities are using sensors to observe (monitor) and automate processes across transportation, security, and payments. We analyze leading smart city technologies related to our coverage of AeroVironment, Cubic, FLIR, and Verra Mobility that in- clude connected car, public transit payments, vehicle payments that use surveillance technologies (for deliveries and safety), facial recognition surveillance, and urban surveillance (safe city). The key(tolling/red-light themes that we cameras/speed highlight are ascameras), follows. congestion and traffic management, drones/robotics • Recent M&A activity in surveillance, transportation tech, and payments has been robust, with vendors positioning themselves to take advantage of a surge in urban RFPs and innovation. • The largest global cities are upgrading public transit payment systems to support tap-and-go transactions. • New York City, Seattle, Los Angeles, and San Francisco are all investigating the implementation of congestion pricing. • Multimodal public transit payment/trip-planning apps are drawing interest from big tech. infrastructure. • Audi’s “time to green” feature provides the first glimpse of connected cars networking with city • While red-light photo enforcement remains political, school zone speed enforcement cameras have a much better public image and are steadily proliferating. • Facial recognition systems are increasingly being used for smartphone payments and airport security, yet privacy concerns and performance issues have hindered widespread urban rollouts. • RuralFirst responders cities are partnering are rapidly with acquiring the FAA fleets and commercial of drones for vendors public to safety trial usingmissions. drones to deliver food, medical supplies, and even human organs. Mergers and Acquisitions Recent transportation surveillance/analytics M&A activity has been robust. Over the past nine months, Cubic, FLIR, Motorola, Bridgestone, and Verra Mobility have completed six deals total- ing over $4 billion in the transportation tech and smart city space. In January, Motorola acquired license plate reader systems and analytics provider VAAS International for $445 million, and signalCubic acquiredsystems. trafficAlso in signal October, systems the Gores provider II SPAC GRIDSMART merged with for Verra$87 million. Mobility, Cubic’s the industry deal came leader just inmonths red-light/speed after its October cameras, $236 in million a $2.4 purchasebillion transaction. of Trafficware, In September, another leading FLIR acquired provider Acyclica,of traffic citieswhich seek provides to reduce traffic congestion, intersection increase data analysis. safety, and We raise believe funding. this recent flurry of transportation surveillance M&A activity reflects momentum behind connected car and smart city initiatives, as 2 Louie DiPalma, CFA +1 312 364 5437 William Blair Exhibit 1 Smart City Transportation/Surveillance M&A Consideration Date Acquirer Target (millions) Revenue Description Masternaut is one of the largest European telematics 5/16/19 Michelin Masternaut providers with 220,000 light utility vehicles under contract TomTom is the largest telematics provider in Europe with a 1/22/19 Bridgestone TomTom Telematics €910 user base of 860,000 vehicles License plate reader recognition systems software and 1/7/19 Motorola Solutions VAAS International $445 $100 analytics provider 1/2/19 Cubic GRIDSMART $87 $47 Video-based traffic signals management systems Platform to optimize monetization of parking lots; ParkJockey 12/3/18 Softbank ParkJockey $1,000 recently acquired Imperial Parking Corp and Citizens Parking 11/2/18 Ford Spin $100 E-scooter network 10/24/18 Cubic Trafficware $236 $55 Leading provider of intersection management technology Verra Mobility is the industry leading provider of vehicle 10/17/18 Gores (PE) Verra Mobility $2,400 $387 tolling solutions for rental car customers, and end-to-end red light camera services for government customers Developer of software for automotive roadway and 9/11/18 FLIR Acyclica $22 intersection data generation and analysis The largest bike sharing network in the U.S.; according to the 7/2/18 Lyft Motivate $251 Lyft prospectus, there were 35 million bike share trips in the U.S. in 2017, and 74% were on Motivate systems Public safety camera (body cameras) and cloud-based 5/4/18 Axon VIEVU $17 evidence management system provider to hundreds of law enforcement agencies Specializes in collection of fees from rental car and 4/6/18 Verra Mobility EPC $63 unregistered vehicles in Europe 3/1/18 Verra Mobility HTA $604 $120 Rental car outsourced tolling for Avis and Enterprise Designs, develops, and manufactures advanced security surveillance solutions, including video analytics, network 2/1/18 Motorola Solutions Avigilon $1,000 $354 video management software and hardware, surveillance cameras, and access control solutions Priority traffic signal control for public transit and emergency Global Traffic vehicles with Opticom priority control system and Canoga 12/6/16 Gilbarco (unit of Fortive) $150 Technologies (GTT) sensor system; installed base of 90,000 intersections in 41 of 50 largest U.S. cities Fleetmatics is one the leading North American providers telematics services that include vehicle location, fuel usage, 8/1/16 Verizon Fleetmatics $2,400 speed and mileage; it has over 37,000 customers and 737,000 subscribers Specialized in the development and supply of complex traffic management systems for the monitoring and control of urban and intra-urban road networks, encompassing integrated 11/27/13 Cubic Serco $70 $67 traffic and incident management, decision support, bus tracking, and passenger information through integrated user interfaces Video image processing software and hardware for traffic 12/28/12 FLIR Traficon $46 analysis Sources: Company reports, William Blair estimates Louie DiPalma, CFA +1 312 364 5437 3 William Blair Public Transit Payment Tech The largest global cities are upgrading public transit systems to support smartphone pay- ments. public transit payment systems of New York City, Boston, Brisbane, and San Francisco to support next-generationOver the paymentpast 18 months, platforms Cubic that has include won $1.9contactless billion inbankcards base value and contracts smartphone to upgrade payments the awarded a €60 million contract to French electronic payment provider Worldline and Conduent to upgradefrom Apple its Pay,fare Googlepayment Wallet, system. and In Samsung March 2019, Pay. In the December Singapore 2018, government the Paris announcedtransport authority that the Singapore public transit network will support contactless bank cards. The March 25 Apple special event showcased how Apple Pay will soon support smart cards for Chicago (Ventra), Portland (Hop Fastpass), and New York City (OMNY). Cubic operates the Ventra and OMNY system, while INIT In- novations in Transportation operates Fastpass. Multimodal public transit payment/trip-planning apps drawing interest from big tech. In collaborating to develop a mobile app that will allow users to plan trips and pay for numerous forms ofSeptember public and 2018, private the transportation Los Angeles transit options authority (including announced rail, bus, thatbike-share, Cubic and and salesforce.com parking) on an are in- tegrated platform. Portland, Columbus, and St. Louis are among numerous other cities developing multimodal transit apps. According to our analysis, Cubic holds contracts to develop and operate transit networks in North America. public transit payment systems (including the mobile app) for 10 of the 13 most trafficked public Exhibit 2 Payment System Vendors for North American Rail Systems With Heaviest Ridership Estimated Annual Base Cities Rail System Payment System Transit Agencies Ridership Vendor Contract Value Duration Metropolitan New York City NYC Subway OMNY 2,699,536,300 Cubic $540 2018-2023 + options Transportation Authority Toronto Toronto Subway Presto Metrolink 302,000,000 Accenture $250 2006-2016 + options Chicago Transit Chicago The "L" Ventra 230,204,200 Cubic $454 2011-2023 Authority Washington Washington, D.C. Washington Metro SmarTrip Metropolitan Area 229,595,700 Cubic Transit Authority Boston The "T" CharlieCard MBTA 167,167,900 Cubic $699 2018-2031 Vancouver SkyTrain TransLink 151,000,000 Cubic $220 2011-2023 + options San Francisco Bay Area Bay Area BART Clipper 129,268,100 Cubic $387 2019-2029 RTD Manhattan,