IoT – A Large and Explosive Market Opportunity Quarterly Commentary – October 2016 IoT – A Pervasive Technology Trend This quarter, we take a look at one of the most broad reaching technology trends in the $14.4 Trillion in Value Creaon market today—IoT or Internet of Things. Given that most any “thing” of importance can be connected to the Internet, we expect IoT technologies to become pervasive in our business and personal lives. One measure of the importance of this market comes from Cisco, who esHmates that $14.4 trillion in annual value will be created via the deployment of IoT technologies by the year 2022. IoT refers to the interrelated network of physical objects that feature unique idenHfiers (IP addresses) for Internet connecHvity, and the communicaon that occurs between these objects and other Internet-enabled devices and systems in order to transfer data without requiring human interacHon. Examples of “things” that can exist in the IoT realm include trucks/cars, shipping containers, home appliances, water measurement systems, vending machines, pet collars, and a wide array of other connected devices. Some of the largest market segments that IoT technologies will be applied include: transportaon & logisHcs, connected cars, fitness/wellness, connected homes, locaon/navigaon, connected buildings, manufacturing & inventory management and health care services. IoT Ecosystem Source: Cisco, 2015 The market for IoT technology soluHons itself is made up of an interconnected ecosystem of players including: manufacturers of chipsets and sensors that reside in the connected devices; IoT Gateway providers; service providers that provide network connecvity, security, and locaon; and back end systems providers that transform unstructured data being transmiXed into useful business and consumer soluHons. Source: Eclipse.org, 2015 2 Quarterly Newsletter IoT Market Size With a market so pervasive and large, it is not surprising to see market growth and size esHmates vary widely. Market evangelists such as Cisco and Ericsson expect 50 billion connected devices in 2020. Cisco pegs connected device growth at a 23% CAGR from 14 billion devices in 2014. Leading industry analyst firms such as Gartner and IDC expect a moderately smaller but sHll robust market at 32 billion and 28 billion connected devices by 2020, respecHvely, with IDC expecHng a CAGR of 17% from 11 billion units in 2014. Source: IoT Analy<cs 3 Quarterly Newsletter IoT Market Size From a revenue standpoint as well, the IoT market is expected to be large as IoT permeates our business and personal lives. IDC expects the market to increase at a 21% CAGR from $2.3 trillion in 2014 to $7.0 trillion in 2020. Visiongain has the market increasing at a 13% CAGR from $800 billion to $1.6 trillion. Given that IoT will be so pervasive, we believe differences lie in how the market is measured. Regardless, all market pundits point to a very large and growing opportunity in IoT. Source: IoT Analy<cs 4 Quarterly Newsletter IoT Market Drivers & Challenges Market Drivers Market Challenges 1. Cheaper Sensors – According to a recent study by Goldman Sachs, 1. Industry Standards – Industry standards and communicaon sensor prices have dropped to an average of $0.60 from $1.30 over protocols are yet to be standardized in the IoT industry. As the IoT the past 10 years. industry creates firmer standards, we expect to see incremental 2. Low-power Semiconductor Design – Power sipping chip designs are growth. Without cooperaon, the growth of IoT will be slowed. very criHcal to IoT devices in terms of hardware design. As Moore’s 2. IoT Ecosystem – There is a great opportunity for startups to create law comes to an end, chip designers may have to design around this and enable plaorms and services for IoT that bridge the gap hurdle or could eventually even force the search for a replacement between the sensors collecHng data and the servers in the cloud material for silicon such as Graphene. crunching the big data aggregated from the millions of connected devices. UlHmately, cooperaon between sensor, devices, networks, 3. Inexpensive and Ubiquitous Wireless Coverage – We expect the adopHon of IoT to greatly benefit from declining networks costs and and backend systems will be key for the IoT industry to grow. ubiquitous wireless coverage. Over the past decade the cost of 3. Security and Privacy – Data privacy of connected personal devices wireless data has dramacally dropped. The ITU expects that by 2019 and potenHal data misuse could become a major hindrance to IoT 57% of the global populaon will be connected to the Internet, up development. Therefore, IoT companies need to conHnue to make from 40% currently. investments and acquisiHons in the security space to help ease data security concerns and drive faster adopHon of IoT devices across 4. Produc8vity and Cost Savings – Businesses are embracing IoT to various sectors. HighlighHng this was the recent Internet aack that improve producHvity and efficiency, while also saving on costs such as caused outages and network congesHon launched with the help of capex and labor. hacked IoT devices such as CCTV video cameras and digital video 5. Big Data & Analy8cs – IoT is expected to generate vast amounts of recorders. unstructured data, which historically was difficult to comb through 4. Lack of Privacy – IoT providers gather a wealth of informaon about and use efficiently. However, the evoluHon of data and analyHcs plaorms that allow companies to quickly digest, view, and take those who use it. Smart phones can already be tracked, but smart devices point to a future where governments supplement census acHon on the data is leading to new use cases for IoT. informaon with the output of smart devices, and manufacturers can 6. IPv6 – IPv4 supports ~4.3 billion addresses, which is insufficient for effecHvely and accurately harvest informaon about your habits. the 50 billion connected devices with unique idenHfiers (IP addresses) UlHmately, we can expect IoT to produce dozens of legal precedents expected by 2020. IPv6 in comparison is expected to support a and class acHon suits as countries debate just what rights to privacy limitless number of IP addresses, paving the way for the billions of the users of smart devices retain and which they forfeit. devices expected. 5 Quarterly Newsletter IoT Financing and M&A IoT Financing and M&A Emerging growth IoT companies have garnered a tremendous amount of new investment over the past five years, especially those working on industrial IoT applicaons, which saw 83% funding growth in 2015. Health & Wellness, Business Intelligence, Green Tech, Networking and Healthcare were the top 5 sectors by deal volume. The largest upHck in deal count in 2015 went to “RoboHcs”, a subindustry that includes drones and warehouse automaon systems. According to CB Insights, there were 70 deals with $846 million of financing in q1 2016. The $846 million was up YoY and QoQ and represented the second highest quarter of IoT financing to date. M&A acHvity also remains robust, highlighted by the large pure-play IoT acquisiHon: Jasper Wireless by Cisco for $1.4 billion, at a valuaon of 7.5x EV/Revenue. There has also been mulHple large deals in the semiconductor market with IoT being a central case for those deals such as SotBank’s $32 billion acquisiHon of ARM. Other recent notable deals include Nokia’s $190 million acquisiHon of Withings in the wellness market, Brocade’s $1.5 billion acquisiHon of Ruckus Wireless for enterprise networking, and Verizon’s recent $2.4 billion acquisiHon of Fleetmacs in the telemacs space that builds upon its recent acquisiHons of Telogis and Hughes Telemacs. THA’s Take on Funding and M&A Ac8vity in IoT The IoT market is becoming pervasive in our lives and thus we expect very solid funding and M&A acHvity in the sector. Given the size of the market, we expect tech giants to be the most acquisiHve, including Cisco, IBM, Verizon, Nokia, Microsot, Google, Amazon and many others. We also expect to see robust funding trends to conHnue. While we are excited in specific verHcal markets such as Supply Chain & LogisHcs, Connected Home/Car/ Building, and Health & Wellness, we are most excited by horizontal and value-add connecHvity plaorms, highlighted by the recent acquisiHon of Jasper Wireless by Cisco Systems. 6 Quarterly Newsletter Merger & AcquisiHon TransacHons Date Acquirer Target Target Description EV ($M) EV/Rev Announced 10/4/16 Continental AG Zonar Systems Provides fleet management systems and SaaS for the pupil transportation, commercial and vocational trucking NA NA sectors. 10/4/16 BSM Technologies Mobi Provides GPS-based fleet management and route optimization SaaS, and related SCM, logistics and analytics $8.0 NA SaaS for businesses. 10/3/16 Silicon Labs Micrium Provides embedded, IoT real-time operating systems primarily for the aerospace, industrial and medical device NA NA industries. 9/28/16 SAP PLAT.ONE Provides cloud-based and on-premise IoT and M2M provisioning software for businesses. Software enables the NA NA creation, deployment and management of IoT applications, devices and smart city infrastructure. 9/12/16 Verizon Sensity Systems Provides sensing systems that are embedded with LED lighting structures to enable the physical monitoring and NA NA security of various locations. Also provides related management SaaS. 9/7/16 Fleetmatics Inosat Consultoria Provides GPS-based fleet management SaaS for the construction, insurance, oil and gas, transport, waste NA NA Informatica collection, emergency services sectors in Portugal, Spain and South America. 8/16/16 BullGuard Limited Dojo-Labs Provides mobile IoT security devices and related management software to enable consumers to monitor the NA NA security of connected devices within their homes. 8/4/16 Sierra Wireless GenX Mobile Manufactures and sells in-vehicle wireless communications and tracking systems for transportation and fleet- $6.0 NA management companies in North America and Europe.