oort among 'private companies to watch' via goldman sachs

June 25, 2014

Internet of Things – Volume 1

Making S-E-N-S-E of the

next mega-trend

Equity Research

Framing the IoT opportunity for CommTech and Semiconductors

The Internet of Things takes shape as the next mega-trend

The Internet of Things (IoT) is emerging as a third, and likely bigger, wave

in the development of the Internet, following the rise of the fixed Internet in

the 1990s and the mobile Internet in the 2000s. While the fixed Internet

connected 1 billion users via PCs, and the mobile Internet connected 2

billion users via smartphones (on its way to 6 billion), the IoT is expected to

connect 28 billion “things” to the Internet by 2020. We are launching a

series of reports in which we examine the implications of the IoT wave

across multiple sectors within the Tech industry and beyond, with this first

installment focused on the CommTech and Semiconductor sectors.

Making S-E-N-S-E of the IoT

Given the incredible breadth and depth of technologies, applications, and

verticals related to the IoT, understandably there is some confusion on how

to define it and what makes it different than the “regular” Internet. We

address that question with the S-E-N-S-E framework, which captures what

we view as the key attributes of the IoT: Sensing, Efficient, Networked,

Specialized, Everywhere. The key verticals of adoption include Wearables,

Cars, Homes, Cities, and Industrials; we cover the first four in this report.

CommTech: (1) Wi-Fi, (2) Cellular, (3) “Fog” computing

We see three important implications for CommTech: (1) Wi-Fi becomes the

dominant access technology, with IoT adding 50% to the Wi-Fi market by

2020; (2) New cellular connections could expand the baseband market by

over 15%; and (3) Network intelligence shifts to the edge, as fog computing

supplants the cloud in crunching data closer to the devices in the network’s

edge. We see Cisco, Garmin, Gemalto, Qualcomm, Ruckus, Silver

Spring, and Wistron NeWeb as best positioned in our coverage.

Semiconductors: (1) Sensors, (2) Connectivity, (3) ARM/MCU

We expect the rise of the IoT to drive the most incremental growth in the

following segments of semis and components: (1) Sensors, (2) Connectivity,

including Wi-Fi, Bluetooth, ZigBee, and a number of other standards we detail

in this report, and (3) ARM-based processors and microcontrollers (MCU),

which we expect to have an edge over x86 given lower power. We see ARM,

Atmel, Broadcom, Freescale, InvenSense, Maxim, Microchip, Murata,

Samsung, and TE Connectivity as best positioned in our coverage.

Simona Jankowski, CFA (415) 249-7437 [email protected] Goldman, Sachs & Co.

James Covello (212) 902-1918 [email protected] Goldman, Sachs & Co.

Heather Bellini, CFA (212) 357-7710 [email protected] Goldman, Sachs & Co.

Michael Bang +82(2)3788-1655 [email protected] Goldman Sachs (Asia) L.L.C., Seoul Branch

Ikuo Matsuhashi, CMA +81(3)6437-9860 [email protected] Goldman Sachs Japan Co., Ltd.

Bill Shope, CFA (212) 902-6834 [email protected] Goldman, Sachs & Co.

Daiki Takayama +81(3)6437-9870 [email protected] Goldman Sachs Japan Co., Ltd.

Mark Delaney, CFA (212) 357-0535 [email protected] Goldman, Sachs & Co.

Donald Lu, Ph.D +86(10)6627-3123 [email protected] Beijing Gao Hua Securities Company Limited

Robert Yen +886(2)2730-4196 [email protected] Goldman Sachs (Asia) L.L.C., Taipei Branch

Gabriela Borges (212) 357-2692 [email protected] Goldman, Sachs & Co.

Alexander Duval +44(20)7552-2995 [email protected] Goldman Sachs International

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investment decision. For Reg AC certification and otherimportant disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed bynon-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Global Investment Research

June 25, 2014 Global: Technology

Goldman Sachs Global Investment Research 2

North America Asia

Simona Jankowski, CFA Daiki Takayama

[email protected] [email protected]

(415) 249-7437 +81(3)6437-9870

Goldman, Sachs & Co. Goldman Sachs Japan Co., Ltd.

James Covello Michael Bang

(212) 902-1918 [email protected]

[email protected] +82(2)3788-1655

Goldman, Sachs & Co. Goldman Sachs (Asia) L.L.C., Seoul Branch

Heather Bellini, CFA Ikuo Matsuhashi, CMA


(212) 357-7710 +81(3)6437-9860

Goldman, Sachs & Co. Goldman Sachs Japan Co., Ltd.

Bill Shope, CFA Donald Lu, Ph.D


(212) 902-6834 +86(10)6627-3123

Goldman, Sachs & Co. Beijing Gao Hua Securities Company Limited

Mark Delaney, CFA Robert Yen


(212) 357-0535 +886(2)2730-4196

Goldman, Sachs & Co. Goldman Sachs (Asia) L.L.C., Taipei Branch

Kent Schofield

[email protected]

(415) 249-7489

Goldman, Sachs & Co.

Europe

Gabriela Borges Alexander Duval


(212) 357-2692 +44(20)7552-2995

Goldman, Sachs & Co. Goldman Sachs International

Doug Clark, CFA

[email protected]

(415) 249-7453

Goldman, Sachs & Co.

Balaji Krishnamurthy, CFA

[email protected]

(212) 934-6451

Goldman Sachs India SPL



Contents

Portfolio manager summary 4

The Internet of Things takes shape as the next mega-trend 6

Making S-E-N-S-E of the Internet of Things 6

The IoT value proposition 8

Why now? Enablers of IoT 9

Barriers to adoption 10

The IoT stack: Vertical vs. horizontal solutions 11

Key verticals of adoption 13

Connected Wearable Devices 13

Connected Cars 15

Connected Homes 17

Connected Cities 18

Network infrastructure for the IoT 20

Sizing the incremental networking opportunity 21

IoT communication standards 22

Semiconductors for the IoT 26

Sizing the semiconductor content opportunity 27

Cores, architectures and power efficiency 28

Company profiles: Infrastructure enablers for the IoT 31

Aerohive (HIVE, Buy): Benefiting from the next generation of connected students 32

Amphenol (APH, Neutral): Broad connector exposure with increasing sensor business 32

Apple (AAPL, Buy): Extending the iOS ecosystem to IoT 32

ARM (ARM.L, Buy): Significant potential to capitalize upon the IoT based on ARM’s low power designs 34

Aruba Networks (ARUN, Neutral): Capitalizing on IoT through Wi-Fi connectivity and the BYOD trend 35

BlackBerry (BBRY, Neutral): Leveraging QNX and BlackBerry’s secure network infrastructure for IoT 35

Broadcom (BRCM, Neutral): Well positioned with connectivity and broadband portfolio plus developer support 36

Cisco Systems (CSCO, Buy): IoT thought leader benefiting through Wi-Fi and “fog” computing 37

Delta (2308.TW, Buy): Big Data trends driven by IoT could benefit Delta 38

Garmin (GRMN, Neutral): Expanding portfolio of wearables and growing content in connected cars 38

Gemalto (GTO.AS, Buy): Digital security expertise to monetize IoT in the Machine-to-Machine segment 39

Google (GOOGL, Neutral): Gathering more data, offering more services 40

InvenSense (INVN, Buy): Early design wins on wearables although still small part of total sales 41

Marvell (MRVL, Neutral): Baseband and connectivity products should allow Marvell to benefit 41

Mediatek (2454.TW, Neutral): Tapping into the IoT market 42

Microcontrollers, microprocessors, and analog: Content gains in auto, industrial and infrastructure 43

Murata Mfg. (6981.T, Buy): Positioned to benefit most from IoT in the technology upstream supply chain in Japan 43

Netgear (NTGR, Sell): The gateway in the home to the IoT 44

Nokia (NOK1V.HE, Not Rated): Leveraged to the Automotive vertical with the HERE mapping platform 45

Qualcomm (QCOM, CL-Buy): Extending cellular and connectivity leadership from smartphones into the IoT 46

Quanta (2382.TW, Neutral): Rising data flows create growth opportunity in cloud computing 47

Ruckus Wireless (RKUS, Buy): Pure-play Wi-Fi vendor in the sweet spot of IoT 47

Samsung Electronics (005930.KS, Buy): Widest hardware reach in IoT 48

Silver Spring Networks (SSNI, Buy): Connected city pure play – smart meters, street lighting, and beyond 49

TE Connectivity (TEL, Buy): Auto and industrial connector exposure with increasing focus on sensors 50

Wistron NeWeb (6285.TW, Neutral): Expert in wireless solution embracing IoT trends 51

Emerging Technology Research: Private Companies to Watch 53

Disclosure Appendix 54



Portfolio manager summary

We expect the Internet of Things (IoT) to be a mega-trend, following the major shifts to

mobility and cloud computing that shaped the last decade in technology. By its very nature,

IoT’s implications will reach far beyond the Tech sector into many other industries, creating

new winners and losers based on companies’ abilities to adapt to a world where things are

connected. With this report – our first in a series – we attempt to take an overly broad topic

and help investors narrow their focus to the verticals and technologies that matter most.

We have the following key takeaways.

1. IoT will rearrange the tech landscape, again – IoT has key attributes that distinguish

it from the “regular” Internet, as captured by our S-E-N-S-E framework: Sensing,

Efficient, Networked, Specialized, Everywhere. These attributes may tilt the direction of

technology development and adoption, with significant implications for Tech

companies – much like the transition from the fixed to the mobile Internet shifted the

center of gravity from Intel to Qualcomm or from Dell to Apple.

2. Five verticals get the most focus – While IoT will be found virtually everywhere, we

focus on five verticals that are early in the adoption curve and offer a large market

opportunity and the possibility for significant profits: Connected Wearable Devices,

Connected Cars, Connected Homes, Connected Cities, and the Industrial Internet.

3. CommTech impact: Wi-Fi, Cellular, “Fog” computing – IoT will require primarily

wireless communications; thus, we expect Wi-Fi to be the key communications

standard for IoT, much like DSL/Ethernet was for the fixed Internet and 3G/4G for the

mobile internet. Secondarily, cellular connections will grow for hard to reach or mobile

objects (e.g., cars). In terms of infrastructure, we expect more network intelligence to

reside in the edge, giving rise to “fog” computing architectures, as most data will be

too noisy or latency-sensitive or expensive to be carried all the way back to the cloud.

4. Semiconductor impact: Sensors, Connectivity, and ARM/MCU – Sensors have

outgrown other semiconductor units by five percentage points over the last two years,

and we expect that trend to continue as they proliferate. Connectivity will also grow

above-average, driven by Wi-Fi, Bluetooth, ZigBee, NFC, and other IoT standards. More

devices will use ARM-based processors and microcontrollers given their lower price

points and power requirements relative to the x86 microarchitecture.

Exhibit 1: The IoT heat map: Where to focus

Source: Goldman Sachs Global Investment Research.

Wearables Home City Auto Industrial

Timing Scale

Market size ($) More Significant

Profitability

Semiconductor content

Less Significant

Networking content



Exhibit 2: The CommTech IoT Matrix Company focus by technology and vertical

Source: Company data, Goldman Sachs Global Investment Research.

Exhibit 3: The Semis and components IoT Matrix Company focus by technology and vertical


WiFiFog

ComputingConnected

DevicesSecurity Wearables Auto

Connected Home

Connected Cities

Industrial Internet

Aerohive

Aruba

BlackBerry

Cisco

Garmin

Gemalto

Netgear

Nokia

Ruckus

Silver Spring

Wistron NeWeb

Product focus Vertical focus

ConnectivityMCUs/

ProcessorSensors Wearables Automotive

Connected Home

Connected Cities

Industrialinternet

Amphenol

ARM Holdings

Atmel

AMD

Broadcom

Freescale

Intel

InvenSense

Marvell

Maxim

Mediatek

Microchip

Murata

Nvidia

NXPI

ON Semiconductor

Qualcomm

Renesas

STMicroelectronics

TE Connectivity

Texas Instruments

Product exposure Vertical exposure



The Internet of Things takes shape as the next mega-trend

The Internet of Things (IoT) is starting to take shape as the next mega-trend, following the

major shifts to mobility and cloud computing that shaped the last decade in technology.

While those two mega-trends had profound and industry-changing implications for the

technology industry, the implications of the IoT will likely prove even more far-reaching, as

by its very nature it is a trend that will reach beyond tech to touch every industry, from

healthcare to retail to oil and gas exploration.

What is IoT? The Internet of Things connects devices such as every day consumer

objects and industrial equipment onto the network, enabling information gathering

and management of these devices via software in order to increase efficiency,

enable new services, or achieve other health, safety, or environmental benefits.

The term was first proposed by Kevin Ashton, a British technologist, in 1999, when

he was Executive Director at MIT’s Auto-ID Center, an RFID research consortium.

Exhibit 4: IoT emerging as the next mega-trend

Internet subscribers over time

Note: y-axis is on a logarithmic scale

Source: IDC, Ericsson, Goldman Sachs Global Investment Research.

Making S-E-N-S-E of the Internet of Things

Given the incredible breadth and depth of technologies, applications, and verticals related

to the IOT, understandably there is some confusion around exactly how to define it and

what makes it different than the “regular” Internet. We attempt to answer that question in

Exhibit 5 below using the S-E-N-S-E framework, which captures what we view as the key

attributes of the IoT: Sensing, Efficient, Networked, Specialized, Everywhere. In the

sections below, we discuss how these attributes translate to changes in the underlying

enabling network infrastructure and drive incremental semiconductor demand, and where

they create the most opportunities for vendors in the infrastructure supply chain.

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June 25, 2014

Goldman Sachs Global Investment Research

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Exhibit 6: Search activity for “Internet of Things” has

shot up according to Google Trends

Exhibit 7: Major IoT milestones point to an inflection

Notable IoT announcements

Source: Google Trends.

Source: Company data.

The IoT value proposition

From a business perspective, the value proposition of IoT can be summarized in two

categories that we list below, along with illustrative examples.

Revenue generation – Companies are focused on the IoT as a driver of

incremental revenue streams based on new products and services. For example,

since the beginning of the year AT&T has introduced a Connected Car service in

partnership with a number of automobile manufacturers, including Audi, GM,

Telstra, and Volvo, which offer high-speed 3G or 4G connections for a monthly

subscription fee of $10. By the end of 2014, 30 of GM’s 2015 vehicle models will

have LTE support, enabling vehicles to act as a Wi-Fi hotspot with connectivity for

up to 7 devices, as well access to OnStar for remote vehicle access, diagnostics,

and emergency service.

Productivity and cost savings – Businesses are also embracing the IoT to

improve productivity and save costs, such as capex, labor, and energy. For

example, Verizon is saving more than 55mn kWH annually across 24 data centers

by deploying hundreds of sensors and control points throughout the data center,

connected wirelessly. This results in a reduction of 66mn pounds of greenhouse

gases per year.

As shown in Exhibit 8, a recent survey by Infonetics point to both revenues and costs as

being the top drivers of IoT adoption by enterprises.

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Cisco NCSEnables a fabric (mesh) network

that is better suited for IoT

Qualcomm Low-power Wi-Fi platformConnect major home appliances

to the network

GE Industrial InternetProduct porfolio includes industrial equipment,

Internet-linked sensors and software to monitor performance and analyze big streams of data

Intel QuarkSoCs that are smaller and lower power

than Atom to support IoT

Nest Protect (Acquired by Google)Thermostats and smoke detectors that can be managed through smartphone

Apple iBeaconLow power, Bluetooth device that can send push

notifications to devices in close proximity

Apple HomeKitHomeKit provides a common communication protocol for home related devices to work seamlessly with iOS.

Apple HealthKitAllows apps to gather information and control devices

from a centralized point.

AT&T Mobile Share Value updateAT&T now allows Mobile Share Value plan subscribers

to add select cars to their plans for $10/month.



Exhibit 8: Top drivers of M2M and IoT adoption Infonetics Survey: M2M Service Adoption Drivers, % of respondents rating the factor “very

important” or “critical” (Sample size: 163)

Source: Infonetics, January 2014.

From a personal and societal standpoint, there are several other important drivers of IoT

adoption.

Health and wellness – Consumers are embracing wearable devices, such as

fitness bands, to keep track of and improve their health. Some fitness bands are

even being subsidized by insurance companies, who can offer more attractive

rates to employees who wear them.

Environment – There is a rising number of IoT applications that result in energy

savings. For example, smart meters, connected street lighting, and smart

thermostats such as the Nest all result in lower power usage.

Safety – IoT devices also enhance safety, such as connected smoke alarms,

surveillance video cameras, smart rail sensors, and oil rig temperature sensors.

Why now? Enablers of IoT

A number of significant technology changes have come together to enable the rise of the

IoT. These include the following.

Low-cost sensors – According to the SIA, the average cost of a sensor now costs

$0.60 vs. $1.30 10 years ago. As detailed below on page 28, sensors vary widely in

price, but in general they are now cheap enough and small enough to justify new

business cases.

Smartphones – Ubiquitous smartphones are now becoming the personal gateway

to the IoT, serving as a remote control or hub for the connected home, connected

car, or for the health and fitness devices consumers are increasingly starting to

wear.

Cheap bandwidth – The cost of bandwidth has also declined precipitously, by a

factor of nearly 40X over the past 10 years.

Cheap processing – Similarly, processing costs have declined by nearly 60X over

the past 10 years, enabling more devices to be not just connected, but smart

enough to know what to do with all the new data they are generating or receiving.

0% 20% 40% 60% 80%

Business Agility

Improve quality of ourproduct/services

Improve customer satisfaction

Generate new revenue

Improve workflow

Lower cost

Improve employee satisfaction

Dri

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Ubiquitous wireless coverage – With Wi-Fi coverage now ubiquitous, wireless

connectivity is available for free or at a very low cost, given Wi-Fi utilizes

unlicensed spectrum and thus does not require monthly access fees to a carrier.

Big data – As the IoT will by definition generate voluminous amounts of

unstructured data, the availability of big data analytics is a key enabler.

IPv6 – Most networking equipment now supports IPv6, the newest version of the

Internet Protocol (IP) standard that is intended to replace IPv4. IPv4 supports 32-bit

addresses, which translates to about 4.3 billion addresses – a number that has

become largely exhausted by all the connected devices globally. In contrast, IPv6

can support 128-bit addresses, translating to approximately 3.4 x 1038 addresses –

an almost limitless number that can amply handle all conceivable IoT devices.

Exhibit 9: Cost of compute is a fraction of its 1990’s level

Exhibit 10: …so is cost of bandwidth

Source: John Hagel, Deloitte, 5/14, Mary Meeker, KPCB.


Source: John Hagel, Deloitte, 5/14, Mary Meeker, KPCB.


Barriers to adoption

Our industry research points to four key hurdles that may influence the pace of IoT

adoption.

Security concerns – Security concerns escalate to a whole new level with the IoT,

given the potential for privacy violations or safety issues as a result of the ability to

remotely manipulate physical assets. For example, in a highly publicized case in 2013,

the FTC took legal action against TRENDnet, the maker of IP video cameras that were

sold to consumers to monitor “babies at home, patients in the hospitals, offices and

banks, and more.” In a major security breach, hackers realized that they could access

the live streams of any camera over the Internet, bypassing the login requirement,

which resulted in over 700 cameras’ live video feeds being streamed over the Internet,

including footage of babies, young children, and people engaging in daily life activities

in their homes. This is just one early example of the vulnerabilities associated with the

IoT. Security breaches could be far ranging, such as remote shut-off of industrial

equipment, theft or sabotage of power delivery, etc.

Regulation or compliance – Another key concern is compliance with regulations, as

many IoT implementations are being mandated by the government, such as the eCall

connected car requirement in Europe, the rail safety act in the US, or smart grid

mandates around the world.

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Standards – Standardization is critical for IoT adoption, as businesses are hesitant to

invest in connecting assets that may become “stranded” if the communications

standards change. For example, smart meters are very expensive to deploy, as they

number in the tens of millions and have a useful life in the field of over 10 years, and it

would be prohibitive to have to replace them before their useful life is over.

Ease of use – Some of the early success stories in IoT have benefited from their ease

of use, such as the Nest thermostat (acquired by Google). Conversely, complex IoT

solutions are taking longer to deploy, such as eHealth initiatives.

Exhibit 11: Top barriers to M2M and IoT adoption Infonetics Survey: M2M Service Adoption Barriers, % of respondents rating the factor “very

important” or “critical” (Sample size: 163)

Source: Infonetics, January 2014.

The IoT stack: Vertical vs. horizontal solutions

At a high level, the IoT stack is not too dissimilar to that in the fixed or mobile Internet, and

can be visualized as enabling networking infrastructure at the bottom, connected devices in

the middle, and applications and services on top (Exhibit 12). Outside the level of maturity,

the main difference is that the IoT is significantly more fragmented, with multiple

specialized solutions by vertical, such as wearable devices, homes, cars, cities,

transportation or industrial applications. In this report, our focus is on the hardware layers

of the stack, including networking and semiconductors; the applications and services will

be addressed in a subsequent report.

More vertically integrated than the traditional Internet – In any technology market, we

typically see both vertically integrated (e.g., Apple) and horizontal (e.g., Android)

approaches. For example, Apple’s vertical integration spans across the semiconductors,

hardware, operating system, platform, applications and services; by contrast, those

elements exist in a largely disaggregated fashion in the Android ecosystem. Vertically

integrated solutions typically ramp faster in the early days of a new market, as it takes

longer for effective horizontal solutions to develop given the need for standardization and

other coordination. We expect that dynamic to be even more pronounced in the IoT, given

the inherent specialization by vertical (e.g., very different solutions are required for a

fitness band vs. a connected car vs. an oil rig). Thus, we expect to see a proliferation of

successful vertically integrated business models, such as PG&E’s smart grid deployment,

where the hardware and services are provided by the same vendors, rather than by third

0% 20% 40% 60%

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Regulation or compliance issues

Complexity of solutions

Cost of M2M services

Cost of M2M devices

Lack of information about availableservices and solutions

Lack of information about thebenefits of M2M services

Bar

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s

June 25, 2014

Goldman Sachs Global Investment Research

parties. Ove

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Exhibit 12: The IoT value stack: infrastru


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Key verticals of adoption

By definition, the Internet of Things has enormous breadth that can be difficult to get one’s

arms around. In our view, it can be broken up into five key verticals of adoption: Connected

Wearable Devices, Connected Cars, Connected Homes, Connected Cities, and the Industrial

Internet. We dig deeper into the first four in this section, while the Industrial Internet is

addressed in a companion report.

Exhibit 13: The IoT landscape


Connected Wearable Devices

In this section, we define the major categories in the wearables segment and assess its size

and growth potential in the coming years. Broadly, the wearables segment can be

classified into the following categories.

(1) Fitness Bands, primarily fitness trackers typically in a wrist band form factor,

including Fitbit Force, Jawbone Up, Nike+ Fuelband, and Garmin Vivofit, among

others. These devices can track the distance walked, calories burned, set goals,

Wearables

Connected Cars

Connected Homes

Connected Cities

Industrial Internet

Transportation

Oil & Gas

Healthcare



and compete with friends on social networks. These are targeted towards casual

users trying to maintain an active lifestyle.

(2) Smart watches, comprising smart devices having a watch-like form factor, such as

Samsung Galaxy Gear, Sony SmartWatch, Pebble Steel, among others, which can

be paired with and used as an extension to smartphones to read e-mails, texts,

receive calendar alerts, take calls, and get contextual information without taking

the phone out of pocket. Additionally, these can also serve as fitness trackers.

Smart watches target users trying to get and act on information in a more efficient

way, especially in situations where operating the phone may be infeasible, such as

during bus journeys, or while playing a sport.

(3) Smart glasses, comprising light-weight glasses that can be worn on a regular

basis, such as Google Glass. These glasses provide context-specific information,

turn-by-turn directions, or any general information such as alerts and texts. They

also enable the user to capture photos and record videos on the move. Smart

glasses offer an “always-on” experience for users who want to be connected at all

times to receive context-specific information.

(4) Action cameras, or compact, light-weight Point-of-view (PoV) camcorders, such as

GoPro Hero 3+ and Garmin VIRB Elite, can be attached to helmets or cars to record

extreme outdoor activities such as sky-diving, dirt-biking, etc. Action cameras can

also upload videos real-time and provide GPS data. They currently target

experience sports activities, while daily use and casual video recording represent

expansion opportunities.

Exhibit 14: Snapshot of wearables in the IoT market


Operating Systems (OS) market remains highly fragmented for now: Most smart wearable

devices use proprietary OS, based on the Real-Time Operating System (RTOS), designed

Category Use Cases Key Vendors FeaturesCommunication

ProtocolsOperating Systems

Fitness Bands

• Monitor fitness by tracking distance run, calorie burn, heartbeat, sleeping patterns and so on (primarily as a fitness assistant ) • Share fitness statistics and compete with others on social networks

• Convey mobile alerts

• Basis B1• Fitbit• Garmin Vivofit• Jawbone UP24• Jaybird Reign• Larklife• Misfit Shine• Nike+ Fuelband

• Activity tracker worn as a band• Needs to be paired with IP enabled devices, eg. Smartphone• Links fitness statistics to social networking apps• Displays notifications and alerts

• ANT+• Bluetooth

No specific OS running on the device itself. However, there is support for linking to IP enabled devices running Android, iOS etc.

Smart Watches

• Remotely control smartphones (lock/unlock, play/stop music etc.) as well as use it as a handsfree to attend calls

• Get turn-by-turn directions through GPS navigation as well as context specific information like restaurants, hotels etc.

• Use it as a fitness assistant and track activity levels and sleeping pattern

• LG G Watch• Moto 360• Pebble Smartwatch• Qualcomm Toq• Samsung Gear 2• Sony Smartwatch

• Pair with IP enabled devices• Install third-party applications to boost features and functions• Touchscreen• In-built Camera• Voice control• Vibration based alerts• Parental controls (track children)• Control smartphones remotely

• Bluetooth/Bluetooth Low Energy (BLE)

• Android Wear• Micrium (MicroC/OS-II)• Pebble OS• Qualcomm OS• Tizen (Linux)

Smart Glasses

• Visually enrich ones view with relevant information, such as translating road signs, turn-by-turn directions, user reviews, etc.

• Capture photos and videos and stream on a real-time basis

• Enhance vision as well as improve gaming experience

• Google Glass• Innovega’s iOptik• Kopin Corp’s Golden-I

• Light-weight, head mounted display (HMD)• Does not need smartphone to function• Touchpad to slide through screens• Communicate using natural language based voice commands•Third-party apps can be used via Android app-store

• WiFi• Bluetooth/BLE

• Android• Gi-OS

Action Cameras

• Record high-definition videos in extreme outdoor situations (such as climbing a mountain, racing etc.) by attaching to helmets, cars, bikes etc.

• Capture details such as altitude, geographical location, speed and upload on a real-time basis

• GoPro Hero• Garmin VIRB elite• Ghost Drift S• Ion Air Pro 3• Looxcie• Pivothead• Sony Action Cam 2

• Light-weight, compact• Real-time video streaming and sharing• GPS• Accelerometer• Barometric altimeter

• ANT+• NFC• WiFi



for embedded devices. For instance, Pebble smart watches run on Pebble OS while

Qualcomm Toq runs on Qualcomm OS. Consequently, the underlying OS market in the

wearables segment remains fragmented. Google launched a modified version of Android

for smart devices, Android Wear, with Moto 360 and LG G Watch as the first devices to

utilize this. Given the large base of third-party application developers and Google’s support,

Android Wear is likely to gain considerable traction in this space. Samsung uses the Linux-

based open source Tizen OS for its Gear 2 and Gear 2 Neo smart watches, with potential as

an emerging competitor to Android. In addition, upcoming introductions from Apple and

Microsoft are likely to leverage their own OSs.

Exhibit 15: Wearables to reach about $20bn by 2017, growing at over 60% CAGR IDC segments wearables as Complex Accessories, Smart Accessories, and Smart Wearables,

largely overlapping Fitness Bands, Smart Watches, and Smart Glasses, respectively

Source: IDC, Goldman Sachs Global Investment Research.

IDC forecasts the overall wearables segment to increase from over $2.5bn in 2013 to nearly

$20bn in 2017, representing a CAGR of over 60%. Smart Watches and Smart Glasses

(broadly categorized as Smart Accessories and Smart Wearables by IDC) are likely to grow

the most, at a CAGR of close to 100% and 200%, respectively. As a result, IDC estimates

Smart Watches to grow to over 35% of the wearables market by 2017, up from 15% in 2013

(Exhibit 15).

Connected Cars

Connected car refers to any vehicle that is connected to the internet typically using a

cellular technology (3G/4G), and may also feature 802.11 connections for communication

with other vehicles and infrastructure (such as traffic lights). The trend towards connected

cars is well under way; 802.11p has already been standardized for vehicle communications

and Qualcomm has already designed an LTE chipset specifically for the auto industry

(602A). Connected Cars penetration is being driven by applications in the following

categories.

(1) Safety, by providing features such as active cruise control, lane and vehicle proximity

assistance, and traffic assistance. Also, these cars can contact emergency services and

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2013A 2014E 2015E 2016E 2017E

Rev

enu

e ($

mn

)

Complex Accessories Smart Accessories Smart Wearables Action cameras



send vital information such as speed and location automatically in case of an accident,

thereby improving response time. Road and driver safety is one of the prime reasons

for introducing connectivity in cars, stimulated by various regulatory mandates in

different countries.

(2) Vehicle Diagnostics, through which the vehicle can be monitored on a real-time basis,

potential issues can be detected and fixed, thereby providing an efficient overall

driving experience.

(3) Infotainment and Navigation, which provide entertainment features such as video

streaming, access to social media, and internet radio along with GPS-based navigation

and location services.

(4) Fleet Management, which provides features such as real-time vehicle tracking, driver

profiling, and fuel management. This can help organizations manage their fleet more

effectively and improve productivity, thereby reducing overall costs.

According to GSMA, safety related services will be supported by over 41mn vehicles,

vehicle diagnostics by close to 15mn vehicles, in-car infotainment by over 32mn, and

navigation related services by over 28mn vehicles globally by 2018, compared to a global

auto market of about 80mn in 2013.

Regulatory mandates expected to improve car connectivity

Countries have begun to implement regulatory mandates for car manufacturers aimed at

improving road safety for vehicles and pedestrians. eCall (in Europe) and ERA-GLONASS (in

Russia) focus on providing connectivity to cars for faster response in case of emergencies,

while SIMRAV (in Brazil) focuses on tracking stolen vehicles. Other countries like China and

India are also likely to follow suit and have similar mandates. We expect more traction in V2V

(Vehicle-to-Vehicle) communication technology through which cars could prevent collisions

and V2I (Vehicle-to-Infrastructure) communication technology through which cars can

communicate with the traffic signals and suggest adequate speeds to avoid red-lights. Other

mandates include UBI (Usage Based Insurance) which can be used to provide differential

insurance based on the total distance driven, average speed, and car type.

Exhibit 16: Global penetration to reach 60% by 2020 (at 77% CAGR 2013-2020E)

Source: Gartner (March 2014), Company data, Goldman Sachs Global Investment Research.

-

20

40

60

80

100

120

2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E

No

. of

cars

(m

n u

nit

s)

Connected Cars Non-connected Cars



The total automobile market is expected to increase from over 80mn units in 2013 to 100

mn units by 2020, a 3% CAGR. While we expect the penetration of connected cars to

increase gradually in the near future from 2% in 2014 to less than 20% in 2017, we expect it

to increase at a much higher rate from 2017 to 2020 and reach close to 60% globally by the

end of 2020, with support from developing countries (including Brazil, China, and India

among others).

Connected Homes

The Connected Home segment focuses on connecting household appliances to the network,

with resulting advantages including improved security, remote management of devices,

and energy management. The following key categories compose the Connected Home.

(1) Security Cameras such as DropCam Pro, Foscam, and Netgear VueZone can be

connected to the Internet. Depending on the product, variants may have night vision

capabilities, stream live feed, and may also be controlled remotely through

smartphones, enabling round the clock surveillance. Some devices also include motion

detection capability that triggers alerts to the home owner in case of unexpected

movements. This could be one of the earliest opportunities in the Connected Home

segment, with the revenue from worldwide home surveillance expected (Source: IDC)

to grow from over $5.5bn in 2013 to $7bn in 2016 at a CAGR of 8%.

(2) Smart Thermostats by Ecobee, Honeywell, and Nest (acquired by Google) can learn

from usage patterns and adjust temperature settings automatically.

(3) Smart Appliances include ovens, refrigerators, washing machines, etc., which can be

monitored as well as operated remotely. Key vendors include Bosch, GE, LG and

Samsung.

(4) HVAC Systems ensure adequate airflow and temperature throughout the house, and

prevent sections from over-heating/cooling. EcoNet, Keen Vents, and others

manufacture smart vents and Honeywell’s Total Connect Comfort Services is one

example of a control solution.

(5) Smart Locks, such as those offered by Goji, KwikSet, and Lockitron, offer keyless entry,

time-based access to select individuals, and remote access via eKeys. Benefits include

convenience and increased security.

(6) Smart Lighting introduces remote control access and typically leverages LED upgrades

to improve energy efficiency. Key vendors include GE, Leedarson, Philips, and

Samsung, as well as a number of start-ups (Exhibit 39).

(7) Entertainment Systems, or home theater and whole house audio systems from Bose

Soundtouch, NuVo, and Sonos, can be integrated with other home systems such as

lighting, climate control, etc. and be controlled via smartphones or tablets to get a

richer entertainment experience.

We believe this segment could be a meaningful revenue opportunity in the near term.

Samsung expects the global Smart Home Device market to reach $15bn in 2015, nearly

doubling over 2013 levels of $7.8bn. Samsung expects the bulk of this opportunity to be

driven by the US, UK, Australia, and China. More recently, Google acquired Smart

Thermostat maker Nest for $3.2bn (January 2014) and Apple launched HomeKit software at

WWDC 2014 (June 2014).



Exhibit 17: Connected Home landscape


Exhibit 18: Worldwide smart thermostat revenues

expected to increase 16X by 2020 Worldwide smart thermostat market revenues

Exhibit 19: North America and Europe home automation

systems revenues expected to increase 6X by 2017 North America and Europe home automation systems

Source: Navigant Research.

Source: Berg Insight.

Connected Cities

The initial foray into connected cities was catalyzed by over $3bn in stimulus funding and

support for smart grid technology adoption as part of the United States’ 2009 American


Protocols

Security Cameras

• Ensure safety by recording activities around a home• Monitor a child or an elderly person in another room to see if they require any attention• Ensure safety of your vacation home throughout the year by keeping a remote watch

• DropCam Pro• Foscam• Honeywell• Logitech Alert 750n• Netgear VueZone• Samsung SNH-1011

• High Quality video and audio• Two-way talk; Night Vision• Live-streaming remotely• Motion detector - mobile and email alerts• Cloud recording via encrypted channels• Customizable recording and alert schedules

• Ethernet• WiFi

Smart Thermostats

• Prevent a home from overheating or overcooling• Remotely adjust the temperature to appropriate levels• Set the appropriate temperature automatically based on previous manual adjustments

• Aros• Ecobee• Honeywell• Nest (Google)

• Smartphone/Tablet based control• Personalized insights on energy savings via reports• Setup alerts and reminders• Setup vacation schedule• Remote programming via web portal

• WiFi• ZigBee

Smart Appliances• Save time on tasks and remotely control various appliances

• Bosch• GE Brillion • LG• Samsung• Whirlpool

• Monitor progress remotely• Set timers and Start/Stop remotely• Control temperature settings remotely• Job completion alerts

• Bluetooth• Insteon• ZigBee

HVAC Systems

• Adjust room temperature and airflow automatically based on lifestyle• Prevent overheating or overcooling sections of the house and save energy

• EcoNet Controls Z-Vent• Honeywell's Total Connect Comfort Services• Keen Vents

• Monitor and control HVAC over internet• Access multiple locations from one place (if connected)• Receive e-mail alerts• Open/close/redirect vents for most efficient energy usage

• WiFi• ZigBee• Z-Wave

Smart Locks

• Answer doorbells and grant access even when not present in the house• Receive alerts based on any suspicious activity around the doors/gates• Record the entry/exit details for security purposes

• August• Baldwin Locks• Goji• Kwikset Kevo• Lockitron• OkiDokeys• Skybell• Yale Locks

• Keyless entry• eKeys - Individual keys for all family members • Time based access control• Answer doorbells from anywhere using smartphones• IR & Motion sensors - sends alerts in case of movement• 24x7 customer support - in case of smartphone theft• Logging entry/exit details

• Bluetooth• WiFi

Smart Lighting• Automatically dim or switch off the lights when it is empty in order to save energy

• GE lighting• GreenWave Reality• Leedarson Lighting• LIFX• Philips Hue

• LED based lighting - energy saver• Control via smartphone/tablet• Mood lighting• Assess daylight levels and control brightness automatically

• Insteon• WiFi

Entertainment Systems

• Play music in any of the rooms• Setup a separate home-theater to watch movies in a theater like environment

• Bose Soundtouch• HTD• NuVo• Sonos• Samsung Shape M7

• Whole House Audio/Video• Wireless mesh network (separate from home's WiFi)• Can integrated in existing home systems• Control via smartphone/tablet

• WiFi

0

200

400

600

800

1000

1200

1400

1600

2013 2020E0

5

10

15

20

25

30

35

Re

ven

ue

($m

n)

mn

un

its

Revenue ($mn) Installed Base (mn)

$2 bn

$13 bn

0

10

20

30

40

50

60

$0

$2

$4

$6

$8

$10

$12

$14

2012 2017E

Ins

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ase

(m

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Revenue Installed base



Recovery and Restoration Act. The United States has emerged as a leading adopter of

smart meter technology, approaching 50% penetration of 150mn total endpoints. The

total addressable market for smart meter upgrades is about 1.5bn home and business

endpoints globally. Navigant Research estimates smart meter penetration was about 20%

in 2013 (an installed base of slightly over 300mn), expected to reach nearly 1.1bn in 2022,

implying a 15% CAGR. Much of the smart meter penetration is being driven by government

initiatives, for example in Europe (where there is a target for 80% of households to have

smart meters by 2020) and Latin America. Smart meters enhance traditional gas, electric,

and water meters by adding two-way communications, or networking capabilities. As a

result, utilities and consumers are able to collect and analyze energy consumption data,

resulting in cost savings (less truck rolls, meter reading, etc.), improved grid efficiency and

reliability, and lower energy usage.

Exhibit 20: Navigant Research expects the smart meter

installed base to grow to over 830mn by 2020 Smart meter shipments by region, units 000s

Exhibit 21: Smart meters represent a 1.5bn global

endpoint opportunity Approximate estimate of smart meter opportunity by

geography, in million

Source: Navigant Research, 2014.


By extension, smart meters and the grid network architecture lay the foundation for further

connectivity throughout cities, including smart street lighting, parking meters, traffic

lights, electric vehicle charging, and others. Silver Spring estimates the TAM for smart

public street lights is about 300mn endpoints. Similar to smart meters, street lighting

offers improved efficiency and better network control/visibility. In conjunction with lighting

connectivity, LED light replacements materially improve energy efficiency. According to

The Climate Group, LED lamps combined with smart controls can reduce CO2 emissions by

50-70%. In addition to the benefits of energy savings, smart street lighting can also

improve public safety. In a similar vein, networked or smart traffic lights offer traffic

reduction benefits and better safety. The Institute of Transportation Engineers estimates

there are more than 300k traffic signals in the United States. Another example is

connected parking meters. While estimates range widely, the Intelligent Transportation

Society of America (2011) estimates there are approximately 20-40mn permit or metered

parking spaces in the US, representing less than 10% of all parking spaces (or roughly

500mn), and the Commercial Investment Real Estate (2004) estimates about 5mn actual

parking meters. As with all connected city applications, outage or technology malfunctions

can be detected more quickly. We detail other potential connected city use cases in Exhibit

22 below.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Sm

art

Me

ters

(0

00

s)

Middle East Latin America Asia Pac Europe North America

US 150

UK25

Japan70

Brazil62

India270

Australia/New Zealand

10

Rest of Europe260

Middle East60

Rest of LatAm60

China300

Rest of APAC240



Smart meters are deployed by utilities, which are generally large, regulated institutions;

thus, technology decisions and deployments take place slowly, typically over several years.

By contrast, street lights, traffic lights, or parking meters procurement is far more

fragmented, with the decision made by cities or municipalities. As a result, deployments

can be far more rapid compared to smart meters. Even though these deployments are in

early stages, we believe the ramp could be more rapid and less lumpy than smart meters.

As an illustrative example, we note that within a year after introducing its solution in mid-

2013, Silver Spring has already begun connecting street lights and traffic controls in cities

such as Copenhagen, Dublin, Miami, Oslo and Paris, and Dongguan and Foshan in China.

Exhibit 22: Snapshot of Connected City space in the IoT market


Network infrastructure for the IoT

The unique attributes of the IoT, as presented above in our S-E-N-S-E framework, imply

three important inflections in network infrastructure.

1. Wi-Fi becomes pervasive: “access for the IoT” – We expect the majority of IoT

devices will access the network wirelessly, given wireless access is more pervasive,

cheaper, and easier to deploy than wireline. Further, we expect Wi-Fi to be the

dominant wireless access technology for IoT, given that unlike cellular, it uses

unlicensed spectrum and thus does not require monthly access fees. This is also

consistent with the results of a survey of by VDC Research, where about 70% of

respondents expect the IoT to use Wi-Fi (Exhibit 25). Put another way, just like wired

access (copper and fiber) laid the foundation for the fixed Internet and cellular access

(3G and 4G) enabled the mobile Internet, we expect Wi-Fi to be the enabler of the

Internet of Things. To put these markets in context, the size of wired access market was

$7.0bn in 2013, while the cellular basestation market was $43.0bn, implying significant

headroom for the Wi-Fi access point market, which was $7.8bn.


Protocols

Smart Grid

• Save time and cost associated with meter reading, by doing it remotely instead of visiting the premises• Provide notification of any failures or outages instantaneously, thereby enabling more timely corrective response• Protect meters from being tampered with

• Echelon• Elster• Itron• Sensus• Silver Spring Networks• Toshiba

• Remote monitoring of electricity and gas usage• Outage alerts• Real-time load control• Remote disconnect switch• More accurate pricing to reflect peak/off-peak usage

• Power Line Communication (PLC)• WiFi• ZigBee• Cellular

Smart Street Lighting

• Reduce energy consumption by switching to LED street lighting • Detect failrue and expedite replacements• Improve the safety of pedestrians by illuminating the crossings with appropriate color to indicate whether it is safe to cross or not

• Echelon• Philips GreenLine• Sensus• Silver Spring Networks• Tvilight

• LED based lighting• Automatic dimming • Energy savings in the long run• Faster failure detection• Color coded pedestrian crossing

• PLC• Cellular• WiFi• Cellular

Smart Mobility

• Reduce congestion by providing real-time information about available parking spots to the drivers• Control the frequency of traffic signal changes depending on traffic and pedestrians, and thereby easing traffic flow

• Cisco• Deteq• IBM• Libellium• Schneider Electric• Streetline

• Detection of free parking spots• Vehicle and pedestrian detection• Pollution, icy roads detection• Crack monitoring - bridges, tunnels• Automated tolling systems• Real-time traveler information

• Bluetooth• WiFi• Cellular

Smart Buildings

• Integrate different systems such as HVAC, lighting, elevator, access controls, and fire alarms for more efficient response in case of an emergency as well as lead to savings in daily energy requirements• Monitor equipment performance in real time, identify past trends and potential points of failure for optimization of operations

• BuildingIQ• Cisco EnergyWise• Echelon• Hitachi• IBM• Mitsubishi Electric• Schneider Electric

• Control HVAC, lighting systems, elevator systems, access management and the safety of the entire building• Demand Response • Reduced energy consumption

• BACnet• KNX• LonWorks• Modbus

Smart Water

• Monitor water quality to ensure quality for general consumption• Monitor industrial discharge into rivers/seas to avoid contamination beyond acceptable limits• Detect and manage floods more effectively to reduce life/property damage

• Geosyntec• ioBridge• Libelium • Schneider Electric

• Monitor water quality (pH, temperature, ammonia content etc.) on a real-time basis• Detect water leakages in pipes• Integrated water cycle management• Detect floods

• Cellular• ZigBee



2. Cellular baseband market could expand by over 15% – We view the IoT as an

incremental growth opportunity for the cellular baseband market, which is otherwise

maturing given already high handset penetration globally. The cellular baseband

market in 2013 was $17.3bn (+13% yoy) based on handset market shipments of over

1.8bn (handsets drive the majority of baseband units, though tablets and other devices

certainly contribute). Ultimately, we believe the IoT could add about 2 percentage

points to cellular baseband market growth through 2020, assuming cellular attach rates

for IoT devices of about 5%, which implies 250-300mn IoT cellular baseband shipments

in 2020. The automobile vertical is likely to be the biggest driver of IoT cellular

baseband demand within that timeframe, as cars are mobile and thus will need cellular

connections as opposed to Wi-Fi. As discussed above, the annual volume of cars

shipped is around 80mn, most of which could be connected by 2020. In addition, tough

to reach locations such as smart meters or street lighting in rural areas could also be

connected via cellular connections if fixed line Internet and Wi-Fi are not available.

3. The network edge gains intelligence: “fog computing” – The traffic patterns of the

IoT will be different than those of the traditional Internet, driving more of the network’s

intelligence to the edge. The differences stem from the fact that IoT devices will be an

order of magnitude greater in number than PCs and smartphones, but the bandwidth

usage per device can be orders of magnitude lesser (think of the data rate of a parking

meter compared to streaming an HD video to a smartphone). This implies there will be

a lot more signaling traffic relative to data traffic, as well as a greater need for

subscriber management. In addition, a greater percentage of the data generated may

be noise (e.g., an IP surveillance camera or a smoke detector in the absence of any

events), with only occasional needs for action to be taken (e.g., sound an alarm if there

is an event). Therefore, more of the intelligence will need to shift to the “edge” of the

network (i.e. servers, routers, or gateways that are near the end devices), for two

reasons: (a) so that decisions can be made with low latency (e.g., apply the brakes to a

train if there is an issue with the tracks), and (b) so that bandwidth is not wasted by

hauling a lot of useless data or background noise to the cloud. This architecture is

sometimes referred to as “fog computing,” a term coined by Cisco, a reference to the

fact that some of the data will be collected and be processed near the devices, just like

fog is near the ground, rather than in a far-away “cloud” data center.

Sizing the incremental networking opportunity

We estimate that the IoT offers the largest incremental networking opportunity for

(1) connectivity chips, (2) Wi-Fi access points, and (3) cellular basebands. Based on

IDC’s IoT forecast of 28bn devices by 2020, we estimate that IoT devices could drive an

incremental $4.6bn of annual connectivity chip revenue (Wi-Fi, Bluetooth, etc.) by 2020,

compared to 2013 market size of $7.1bn. In other words, the IoT could add more about 65%

to the market size by 2020, implying a 7% CAGR from 2013-2020, based on our assumption

that 85% of connected IoT devices will have some type of connectivity, such as Wi-Fi or

Bluetooth. Similarly, we estimate that the IoT could expand the cellular baseband market

by about 16% relative to its size of $17.3bn in 2013, based on an assumption that 5% of IoT

devices will have a cellular connection at an ASP of $10 per baseband.

From a network infrastructure standpoint, we believe Wi-Fi access points are most

leveraged to the IoT due to high attach of Wi-Fi and low cost of deployment, leading to a

50% incremental market opportunity or a 6% CAGR through 2020. Conversely, we do not

expect the impact to Optical or Routing markets to be as material, with an incremental

contribution of 8-9% by 2020 or a 1% CAGR, reflecting the lower bandwidth usage of IoT

devices relative to the wired and mobile Internet.



Exhibit 23: We estimate the IoT adds the most growth to the Wi-Fi market, with limited

impact to Optical and Routing markets Incremental revenue opportunity by segment in 2020, compared to market size in 2013 ($mn)

Source: Gartner, Dell Oro, IDC, Cisco VNI, Infonetics, Goldman Sachs Global Investment Research.

IoT communication standards

There are a host of communications mediums that will be employed in the broad IoT

landscape (Exhibit 26). As described above, we expect Wi-Fi to be the cornerstone wireless

technology for IoT. As part of its VNI forecast, Cisco forecasts 61% of all global internet

traffic will be Wi-Fi based. Similarly, survey results from VDC Research imply Wi-Fi will be

used in a majority of IoT devices.

Exhibit 24: Global Internet Traffic, Wired and Wireless

Exabytes per Month

Exhibit 25: Wireless Technologies in M2M/IoT projects

Survey respondents on type of wireless technology

Source: Cisco VNI 2014 : The Zettabyte Era.

Source: VDC Research.

Below we address some of the key attributes as well as benefits and limitations of the

primary IoT communication technologies.

65% growth52% growth

16% growth

9% growth8% growth

-

5,000

10,000

15,000

20,000

25,000

Connectivitychips (Wi-Fi,

Bluetooth, etc)

Wi-Fi APs Cellularbaseband chips

Optical (Metro) Routers (ServiceProvider Edge)

Mar

ket r

eve

nues

($

mn

)

2013 Market Size IoT opportunity (2020)

55%

61%41%

24%

4%

15%

0

60

120

2013 2014 2015 2016 2017 2018

Exa

byt

es

per

Mo

nth

Fixed / Wi-Fi Fixed / Wired Mobile Data 0% 10% 20% 30% 40% 50% 60% 70%

OtherANT

AM or FM radio315/433 MHz

InfraredProprietary wireless

900 MHzUnlicensed 2.4GHz band

Cellular 2GWi-Fi DirectCellular 4G

NFCBluetooth Classic

ZigbeeCellular (3G)

Bluetooth LE/SmartCellular (any)

Bluetooth (any)Wi-Fi



Exhibit 26: IoT Wireless Technologies characteristics Not a complete list

Source: Gartner, Goldman Sachs Global Investment Research.

Cellular – Provides always-on connectivity to the macro network. Similar to mobile

phones, cellular data can transmit over 2G, 3G, or 4G networks. Benefits include broad

coverage leveraging existing base station infrastructure as well as mobility (e.g., cars).

Potential drawbacks include power consumption, fees associated with data transfer

over licensed spectrum owned by carriers, and potential gaps in coverage. Cellular

chipsets range from the mid-$20 range for high-end LTE to the mid-single digits for

legacy connections (like 2G and 3G).

Wi-Fi – Offers low power consumption and low cost relative to cellular. Unlike cellular,

Wi-Fi operates in unlicensed spectrum, resulting also in lower data transmission costs.

Range is limited by proximity to a wireless router or relays and the quality of

connection can be diminished by network congestion. Wi-Fi chips are typically priced

in the mid- to low-single-digit dollar range. There are several different Wi-Fi standards

and IoT applications, such as the following.

o Wi-Fi Direct enables two or more devices to connect directly in the absence of

a traditional Wi-Fi hotspot.

o With the recent availability of the 802.11ac Wi-Fi standard, Wi-Fi operates in

the 5GHz band with wider channels (note 11n could also operate in 5GHz but

in smaller channels), thus enabling more capacity. Theoretical throughput of

11ac can exceed 1 Gbps.

o Also known as Low-Power Wi-Fi, 802.11ah operates in the sub 1GHz band.

Qualcomm views 802.11ah as central to IoT, given support for extended range

Wi-Fi and efficient power profile. 11ah extends Wi-Fi beyond 2.4 and 5GHz,

enabling coverage in challenging environments such as in building,

basements, etc. It also supports low cost sensors without a power amplifier,

and minimum data rates result in short-term data bursts. 11ah draft 2.0 is

expected to be standardized in mid-2014, though final standards may not

arrive until early 2016.

o 802.11p is an approved standard for vehicle to vehicle communications. It

uses dedicated short range communications (DSRC) for applications such as

toll collection, interaction between cars, and safety and roadside

communications.

Bluetooth – Bluetooth provides a short distance wireless connection with low power

consumption, even compared to Wi-Fi. Bluetooth Low Energy (also known as

Bluetooth Smart or BLE) further reduces the power consumption profile of traditional

Bluetooth. For example, Bluetooth devices can sustain battery life for weeks or months,

while Wi-Fi can be hours or days. Data transfer rates are somewhat limited at about

1Mbps (though theoretical throughput is up to 24Mbps), though the range extends up

to about 100 meters (300+ feet). Similar to Wi-Fi, Bluetooth can be used for machine to

machine connections and device pairing. Bluetooth 4.1 was introduced in December

Wireless Communications Technology

Key Applications Range Max Throughput Power Consumption

Cellular (2G, 3G, LTE) Always connected, high data rates, mobility 30km 1Gbps High

NFC Mobile marketing, mobile payments, wearables 10cm 20Kbps Low

Wi-Fi Automotive, connected home, consumer electronics, mobile marketing, appliances, wearables 100-300m 300Mbps High*

Bluetooth Mobile marketing, mobile payments, connected home, personal productivity 10-100m 1Mbps Low

ZigBee Connected home, consumer electronics, appliances, industrial 10-100m 20Kbps-250Kbps Low

Z-Wave Connected home, appliances Variable (+/-100m) 40Kbps Low* Low power Wi-Fi option



2013, which enables devices to communicate with each other before feeding that data

back to a host, and interoperates with LTE.

ZigBee – Standardized by the IEEE, ZigBee is a low power communication protocol

that operates in the industrial, scientific, and medical (ISM) radio bands (900MHz or

2.4GHz). As a result, data transmission rates can vary from 20Kbps to 250Kbps. ZigBee

is often deployed in a mesh network format (such as with smart meters), whereby

endpoints can interconnect and create a reliable network with extended range. ZigBee

enables devices to join a network very quickly.

Z-Wave – Z-Wave is a wireless protocol designed for home automation. It uses low-

power RF radio for household devices such as lighting, entertainment systems, and

appliances. It is a low-latency communication method with data rates up to 100Kbps

and operates in sub-gigahertz frequencies.

In reality, many IoT endpoints will employ multiple communications technologies based on

cost, improved flexibility, and interoperability. A primary example is Google’s Nest, which

incorporates both Wi-Fi and ZigBee. In addition, Silver Spring Networks’ smart meters

support cellular, ZigBee, RF mesh, and Wi-Fi capabilities. A key advantage of Wi-Fi and

Bluetooth is that they are already embedded in essentially all smartphones.

Higher-level standards under way – The IEEE has already standardized dozens of use-

cases and applications for IoT protocols. In addition to the basic communications standards

discussed above (layer 2 in the OSI stack), which handle the underlying communications,

there is a need for standardization at higher layers of the stack. While the ecosystem

remains fragmented, we highlight two key organizations that have emerged to drive

operating system standardization and coordination efforts across industries: the AllSeen

Alliance, whose focus is more broadly directed at the consumer side of the IoT, and the

Industrial Internet Consortium, which addresses industrial applications.

AllSeen Alliance – The AllSeen Alliance was established in December 2013 and

comprises about 40 organizations, including many of the major consumer brands such

as Haier, LG, Panasonic, and Sharp (Exhibit 27). The alliance is working on the

emerging AllJoyn operating system for IoT, an open-source framework started by

Qualcomm which has been contributed to the AllSeen Alliance and is in the process of

being standardized under the Linux Foundation. AllJoyn is an application-level

protocol (layer 7 in the OSI stack) that enables security, discovery, and interoperability.

Currently, the core framework includes device information and configuration,

onboarding, notifications (enable devices to broadcast and receive basic

communications), control panel (enable a device to control another product via a

graphical interface), and audio. The idea is that any two devices that support AllJoyn

can communicate to each other, without regard for which manufacturer made them or

which communications technology they use. To use an analogy, AllJoyn is to the IoT

what HTTP (Hypertext Transfer Protocol) is to the Internet. Other open-sourced

operating systems designed for the IoT including Contiki, LiteOS, RIOT, Sapphire,

Nimbits, Thingspeak, OpenAlerts, IoT Toolkit, The Thing System, and Nitrogen.



Exhibit 27: Members of the AllSeen Alliance

Source: Allseenalliance.org

Industrial Internet Consortium – The IIC was started in March 2014 by five founding

members - AT&T, Cisco, GE, Intel and IBM. IIC has nearly 50 members that include

many industrial companies (Exhibit 28). The IIC is focused on IoT use cases, reference

architecture framework, and testbed prioritization. While it is not a standard-setting

body, it has established relationships with standards organizations to influence the

standard-making process as an enabler of IoT.

Exhibit 28: Members of the Industrial Internet Consortium

Source: IIConsortium.org

Premier

Haier 2lemetry Fon Musaic

LG Electronics AT&T Digital Life GOWEX Muzzley

Panasonic Affinegy Harman Patavina Technologies

Qualcomm Audio Partnership HTC Sears Brand Management Corp

Sharp Beechword Software iControl Networks Sprotuling

Silicon Image Beijing Winner Micro Electronics Imagination Technologies The Sprosty Network

Technicolor Canary Kii Tuxera

TP-Link CA Engineering Letv Two Buls

Cisco LIFX Vestel Group

D-Link Lite-on Weaved

doubleTwist Moxtreme Wilocity

Community

Accenture Intel-GE Care Innovations SevOne, Inc.

AT&T* MachineShop, Inc. SpaceCurve

Bayshore Networks, Inc. MDSL Symantec

BlackBerry Micron Technology Synapse Wireless

Bosch MITRE Corporation System Insights

Cisco Systems Inc.* Mobily TE Connectivity

Cubicon Corporation Open Group The Charles Stark Draper Laboratory

Dan Hussain Moxa Inc. ThingWorx

Datawatch Parker Hannifin Toshiba

Eclipse Foundation People Power Toyota Motor Sales

Elecsys Corporation Pitney Bowes Tyco

ENT Foundation PrismTech V2COM

General Electric* PTC Inc Vanderbilt University

Grid Connect Inc. Purfresh Inc. Water & Process Group (WPG)

Huawei Technologies Co., Ltd. Real-Time Innovations Wyconn

IBM* RhoData Corporation Xcaliber Technologies, LLC

Intel* LAAS-CNRS

* Founding Member

Members



Semiconductors for the IoT

IoT presents a secular growth opportunity within microcontrollers, analog and

sensors; although we see the opportunity as a driver of incremental growth, rather

than an inflection point. We believe the internet-of-things describes a trend toward higher

semi content that has already been taking place for some time. We believe this is illustrated

by the higher growth rates in microcontrollers and sensors in recent years, especially in the

context of overall semi industry growth slowing.

Microcontrollers: Microcontroller units grew at an 8% CAGR between 1998 and 2005,

but at an 11% CAGR between 2006 and 2013 (Exhibit 29). This compares to IC units ex.

memory growing at a 7% and 3% CAGR respectively over these time frames (We

choose 2006 as an inflection point because this is when growth rates vs. IC units begin

to noticeably diverge).

Exhibit 29: Microcontroller growth has significantly outpaced the semiconductor market Market size and unit CAGR

Source: SIA, Goldman Sachs Global Investment Research.

Sensors: Sensors grew at a 6% CAGR from 2004 to 2008, compared to IC units ex.

memory also growing at 6% (Exhibits 30 and 31). However, from 2011 to 2013, sensors

grew at a 5% CAGR vs. IC units ex. memory being flat (we choose 2011 as an inflection

point due to reclassification in the SIA data in 2010, although historical data suggests

sensor growth rates may have inflected higher as early as 2009).

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Exhibit 30: Sensors grew in-line with the overall semi

market from 2004-2008… Indexed IC units and sensor units to January 2004

Exhibit 31: ..but sensor growth has outstripped semis

from 2011-2013 (5% CAGR vs. semis at 0%) Indexed IC units and sensor units to January 2011



Sizing the semiconductor content opportunity

Higher ASPs and higher performance; or lower ASPs and higher volumes. Upgrading

an IoT device or system to include real-time data monitoring and analytics requires

additional microcontroller and sensor content. For microcontrollers specifically, we believe

the incremental opportunity lies in either (1) upselling a customer to microcontrollers with

higher processing power (e.g., from 8-bit to 32-bit) or (2) developing lower-cost and lower-

power chips that can be sold in meaningfully higher volumes. Examples include the

following.

In the industrial market, the trend toward “distributed” controllers vs. one centralized

controller. Controllers are installed at more stages in a production process to allow for

more precise monitoring, analysis and correction. Although each distributed controller

is sold at a lower ASP than a centralized controller, the volume opportunity is more

significant.

In automotive, applications include advanced driver assist, safety features, and

infotainment. We estimate that semi content gains in automotive have averaged 6%

per year over the past 10 years.

In the wearables and smartphone markets, devices increasingly include sensor hubs.

Sensor hubs are microcontrollers which offload power and processing requirements

from a core processor and hence offer longer battery life (we believe in the order of

10%-20%) and greater power efficiency at a small incremental cost.

We summarize ASPs across processors and sensors in Exhibits 32 and 33, and provide a

snapshot of key semi content in Internet-of-Things device teardowns in Exhibit 34.

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Sensors: 6% CAGR 2004 - 2008

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IC units: 0% CAGR 2011 - 2013

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Exhibit 32: Processor ASPs vary by performance

Estimated range of sensor ASPs

Exhibit 33: Sensor ASPs vary by application

Estimated range of sensor ASPs



Exhibit 34: Teardowns of existing IoT devices reveal substantial semiconductor content

Chips across IoT devices

Source: iFixit, Company data, Goldman Sachs Global Investment Research.

Cores, architectures and power efficiency

Key architectures for IoT:

X86: Intel launched Quark, its new product family specifically for IoT applications, in

September 2013 and it is currently shipping 32nm SoCs at about $10 per chip. Quark is

designed for low power applications, with Intel claiming Quark chips are one-fifth the size

and one-tenth the power of its existing low-power Atom line of products. Intel plans to

increase investment in IoT applications by 20% this year and now reports a new “Internet

of Things” business segment quarterly. In 2013, this segment comprised $1.8 bn in

revenue (3% of sales) vs. $1.6 bn in 2012, including contributions from software. AMD is

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Semi content Nike Fuelband FitBit One Nest Smart Meter Gear Watch Google GlassMPU/APU

Integrated SoCMCU

MCU (2)ASIC

BluetoothWiFi moduleZigbee SoCPower SoC

Protection circuit moduleBattery management

AmplifierUSB controllerAudio codec

AccelorometerGyroscope

Activity sensorAltimeterCamera

Heat sensorHumidity sensorProximity sensorSmoke sensor

Retail price $99 $100 $129 $50 - 200 $199 $1,500

Processing

Connectivity

Analog

Sensors



pursuing similar IoT opportunities with its Eagle Steppe product family. A key part of the

company’s strategy is diversifying beyond its traditional PC and server market with new

embedded applications.

ARM: ARM Holdings targets IoT applications with its Cortex M series of microcontrollers,

which have been introduced at progressively lower price points and power envelopes

(Exhibit 35). Microcontrollers represent the highest share of royalty revenues for ARM in its

Embedded Systems segment, and are one of ARM’s highest unit opportunities in our view.

ARM has Cortex M partnerships with over 40 microcontroller companies.

MIPS: Imagination acquired MIPS in 1Q13 and, in the following weeks, articulated a goal of

25% share of the CPU IP market (compared to 6% in 2012, based on data from The Linley

Group). Since that time, the company has announced partnerships with Qualcomm,

Broadcom, and others to create an open-source foundation promoting the MIPS

architecture for improved portability from “datacenter to device,” In addition, Imagination

is working with Java to improve the performance of Java-based applications on its

proprietary 32-bit and 64-bit graphics cores.

Exhibit 35: ARM continues to develop smaller, lower power MCUs ARM MCUs over time


We believe that ARM-based microprocessors and microcontrollers will have a distinct

advantage over x-86 chips in the IoT market for the following reasons.

1. Power efficiency: Our view continues to be that x-86 chips are best positioned in

applications that require high performance, and that ARM chips are best

positioned in applications that require low power. Although apples-to-apples

benchmarking statistics comparing Intel’s Quark to ARM’s Cortex M products have

yet to become available, we expect ARM will continue to hold a power efficiency

advantage in embedded applications over the medium term.

2. Existing customer relationships and channel breadth: Although Intel and AMD

have strong relationships through the PC supply chain, we believe ARM’s

microcontroller partners have considerably more breadth in the handset,

consumer, auto, and industrial markets.

3. Adjacency to analog content: We believe companies with broad portfolios of

microcontroller and analog content are best positioned to benefit from IoT, as

0

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these companies can sell customers a complete analog-processing solution. These

types of integrated solutions likely lower costs and improve time to market. All of

the microcontroller companies in our universe have supporting analog portfolios,

whereas customers sourcing processors from Intel/AMD must source their analog

content separately.

We refer readers to the ARM company profile on page 34 for more detail.



Company profiles: Infrastructure enablers for the IoT



Aerohive (HIVE, Buy): Benefiting from the next generation of

connected students

Company profile

Aerohive is a provider of cloud-based enterprise wireless local area networking (WLAN)

solutions. Aerohive’s “controller-less” approach manages the WLAN network through its

Cloud Services Platform, which can sit in Aerohive’s data centers, private clouds, or partner

clouds. Aerohive sells WLAN access points (AP), campus/branch routers and switches,

cloud services, and software to enterprises. The majority of Aerohive’s revenue comes

from education (40-50% of revenue), retail, and healthcare.

Exposure to IoT

IoT for the next generation of connected students – Three out of five schools in the US

do not have needed Wi-Fi connections, according to the Federal Communications

Commission (FCC). As the next generation of connected students incorporates its mobile

devices into classrooms, Wi-Fi for the education vertical, especially K-12, becomes a

spotlight, evidenced by the FCC’s recent proposal to allocate $2bn in E-rate funds for Wi-Fi

in schools through 2015 and 2016. We believe that Aerohive, with its heavy exposure to the

education vertical, is in a strong position to benefit from this initiative. Longer term, as

students adopt wearables and shoppers, patients, educators, and employees expect a more

connected experience, we expect Aerohive will be a key enabler.

Amphenol (APH, Neutral): Broad connector exposure with

increasing sensor business

Company profile

Amphenol is a diversified supplier of connectors and related components including

antennas, cable, and sensors. The company has a history of using tuck-in M&A to add new

capabilities and maintain balanced end-market exposure, and this has translated into

above average organic growth. Amphenol is the second largest supplier in the roughly $50

bn connector market based on revenue. Its key end markets are mobile devices, A&D,

datacom, industrial, auto, and mobile networks.

Exposure to IoT

We believe that Amphenol will benefit from increasing connector content in industrial and

auto applications, which we view as a continuation of the long-term trend in the market. In

addition, we believe that Amphenol’s recent acquisition of GE’s Advanced Sensor business

will help the company to benefit from increased measurement requirements for IoT

applications. We estimate that sensors are a low to mid-single digit percent of total sales

for Amphenol. Finally, Amphenol’s antenna business could pick-up for IoT connectivity,

and we believe this is more likely to occur in larger form factor devices given that its sales

are currently tied primarily to tablets and ultrabooks for WiFi (rather than for handsets).

Apple (AAPL, Buy): Extending the iOS ecosystem to IoT

Company profile

Apple is a leading provider of smartphones, tablets, and PCs with proprietary operating

systems across mobile devices (iOS) and general purpose computers (Mac OS). The

company sells its products directly through their more than 400 retail stores as well as

through carrier partners and third-party retailers. Apple’s platforms attract a robust user

Covered by Kent Schofield, US Smid-cap CommTech analyst

Covered by Mark Delaney, US IT Supply Chain and Semi analyst

Covered by Bill Shope, US IT Hardware analyst



base with nearly 800 million iTunes accounts and a Mac installed base of 80 million.

iPhones represent the largest revenue generator for Apple with 150.3 million units in

FY2013 totaling $91.3 billion in sales (53% of total company revenue). iPads generated 19%

of FY2013 revenue as the company sold 32.0 million units. The Mac segment accounted for

$21.5 billion of revenue in FY13, which equates to 13% of the company total. Apple also

has a robust services stream with the iTunes/Software/Services segment generating $16.0

billion of revenue in FY13 (9% of total). Platform enhancements continue to be critical for

Apple as they increase stickiness and create a virtuous cycle by which user growth attracts

content and developers which attracts further user growth.

Exposure to IoT

Hardware focus primarily through wearables and iBeacon ecosystem – To date, Apple

does not manufacture any IoT-centric hardware, though they do provide an interface to

communicate with iOS devices through iBeacon. iBeacon is a Bluetooth-enabled

technology that enables location-based awareness. As far as hardware is concerned, we

continue to believe that the company will launch an iWatch in the coming months and

wouldn’t rule out Apple expanding into further wearables categories over time.

Extending the iOS platform into the IoT – The biggest opportunity for Apple within the

IoT exists in extending the iOS platform beyond traditional mobile use cases (smartphones

and tablets) into the IoT. As the near-term potential for substantial hardware differentiation

in Apple’s traditional markets is narrowing, iOS platform differentiation is becoming

increasingly critical. Apple’s innovation focus is likely to skew more towards software-

related enhancements than in the past as the company attempts to both increase platform

stickiness and attract new users. Pushing outward into the IoT is a logical extension of that

strategy as the more aspects of a user’s day-to-day life Apple touches, the more likely that

user is to remain within the Apple ecosystem.

Primary monetization through incremental iOS device volume – Monetization through

additional iOS device volume (namely iPhones and iPads) greatly outweighs the impact of

incremental revenue and profit from IoT-related sensors. As discussed in our May 29, 2014,

note Apple: The “Next Big Thing” isn’t Hardware, a 1% revenue share in the smartphone

market yields 7x the EPS contribution of a 1% share in the watch market. Additionally, in

building out an IoT platform, the opportunity remains for Apple to begin selling more

robust services into its installed base.

HealthKit and HomeKit illustrate development of “sub-platforms” – Within the IoT, the

landscape is likely to split into multiple “sub-platforms” given the vertical-specific needs of

different categories of devices. Apple’s recent announcement at WWDC 2014 of the launch

of HealthKit and HomeKit address this specific need, providing APIs for third-party

developers to link into. While historically IoT device data lived in app silos on iOS, these

sub-platforms will provide a central hub for multiple devices to co-exist and share data.

One home-related example of how this could play out in practice would be a user telling

Siri to “get ready for bed”, which triggers the garage doors to close, the doors to lock, and

the lights to shut off. Within health, there are both consumer-oriented use cases and health

provider benefits. A benefit to consumers would be Nike’s Nike+ app pulling together

sensor data from multiple apps into one place to measure progress towards fitness goals.

With respect to data for medical professionals, the Mayo Clinic app was used as an

example to illustrate how a user's blood pressure reading can be compared with “normal”

levels and automatically notify a care provider if the metric falls outside of normal metrics.



ARM (ARM.L, Buy): Significant potential to capitalize upon the IoT

based on ARM’s low power designs

Company profile

ARM is a leader in processor architecture design for chip manufacturers, which it

monetizes via its royalty model. While ARM has a dominant market position in the handset

and tablet verticals, we expect a rapid acceleration in royalties from non-mobile, including

areas such as Networking, Enterprise and Embedded Systems, to drive almost 50% of

group incremental revenue growth out to 2018. ARM’s licensing and royalty model is

extremely scalable (95% incremental EBIT margins for royalties) and we see the licensing

base as a key platform for continued market share dominance in mobile and share gains in

non-mobile. We estimate a path towards 65% underlying operating margins by 2018, with

a five-year EPS CAGR of more than 20%.

Exposure to IoT

Power efficiency advantages support IoT market share – We see ARM’s IP architecture

as a key enabler for the Internet of Things, with the Cortex M (Cortex-MO, M1, MO+, M3,

M4) series of MPU designs positioning ARM well, in our view, to capitalize upon this

opportunity. We analyze ARM’s IoT exposure in the context of four separate components of

the IoT ecosystem, all of which sit within ARM’s Embedded Systems segment: (1)

Microcontrollers, which conduct local processing and constitute a tool for information

discovery, (these form the greater part of Embedded Systems revenues for ARM); (2)

Embedded connectivity devices (i.e., Bluetooth and Wi-Fi chips), which allow for machine-

to-machine communication; (3) Connectivity hubs, which perform a routing function in the

transmission of information between machines; and (4) Wearable devices, which allow for

wider ubiquitous computing.

We view the power efficiency advantages of ARM’s Cortex-M designs as supportive of

ARM’s market share across designs relating to these four areas, and we see ARM’s blended

share in such areas rising from roughly 30% in 2015 to more than 50% by 2020, driving

30% unit growth in these areas for ARM in 2015-2020 (five-year CAGR).

Large opportunity for Microcontrollers – Microcontrollers, which represent the highest

share of royalty revenues for ARM in its Embedded Systems segment, are one of ARM’s

highest unit opportunities in our view, given licensing momentum and end-market

potential. Historically, MCU producers’ architectures have been based on proprietary

designs; however, over the last few years producers in possession of more than 50% of the

MCU market have announced that they have licensed ARM’s architecture for MCU

production as opposed to internally developed designs. ARM has now signed more than

198 Cortex-M licenses with 40 companies, making the Cortex M0 ARM's fastest licensing

processor design.

Growth of Embedded Systems – We estimate that Embedded Systems were 29% of

ARM’s royalty units in 2013, which in light of rapid market share gains and end-application

growth will increase to 52% in 2018. We forecast ARM’s architecture will feature in 45% of

total MCUs in 2018 (vs. 17% estimated share in 2012). We assume such scope for share

gains despite our assumption that market leader Renesas Electronics is unlikely to utilize

ARM’s technology for the majority of its MCUs (although we noted its recent

announcement of an ARM-based high-performance processing MPU of 300 MHz and

higher).

While the large-scale proliferation of MCUs will have a deflationary impact on ARM’s

average royalty rate (ARR) based on mix, given that they represent low-value chips (vs

ARM’s other end-devices), the MCU unit opportunity remains significant, and we expect

this to translate into a 36% royalty revenue CAGR for ARM in Embedded chips (2013-2018),

driving 19% of group incremental royalty revenues over the period.

Covered by Alexander Duval, European Tech Hardware analyst



Aruba Networks (ARUN, Neutral): Capitalizing on IoT through Wi-Fi

connectivity and the BYOD trend

Company profile

Aruba is the largest stand-alone enterprise WLAN vendor (with the number-two market

share position, 11% in 2013), offering access points, controllers, and WLAN enhancement

products such as intrusion protection, network management, and layer 4-7 services. Aruba

primarily focuses on being a “best of breed” provider of WLAN products to large

enterprises, but entered the middle market and “distributed enterprise” in 2011 with its

Aruba Instant offering.

Exposure to IoT

Capitalize a more connected generation of workers – As the bring your own device

(“BYOD”) trend, ”), which we expect to include more than the typical computing devices

seen today, is becoming increasingly important, Aruba is in a key position to capture such

demand as the largest standalone Wi-Fi equipment vendor. With the wave of personal

devices, wearable technology, and connected “things” increasing, enterprises continue to

implement and upgrade Wi-Fi technology (including the ongoing transition to802.11ac

standard) to keep up with speed requirements and demand for connectivity. We have

already seen the early effect of this trend as Aruba’s ClearPass (managed software for

BYOD) has been growing double digits and Aruba Instant (controller-less WLAN) bookings

have been growing more than 100% yoy. In addition, Aruba acquired indoor location

company Meridian in May 2013, which could help position the company in retail,

industrials, and public spaces (e.g., stadiums).

BlackBerry (BBRY, Neutral): Leveraging QNX and BlackBerry’s

secure network infrastructure for IoT

Company profile

BlackBerry designs and sells smartphones for consumers and enterprises, with an

increasing focus on providing and expanding set of related enterprise services. BlackBerry

historically differentiated its offerings through their best in class security as a result of the

end-to-end encryption of its architecture. However, its share of the smartphone market has

fallen to under 1% compared to a peak of almost 20% in 2009, as it missed the transition to

touchscreen smartphones and lost share to Apple and Android-based devices. The

company is undergoing a significant strategic and operational restructuring under CEO

John Chen, who joined in November 2013. As part of that shift, BlackBerry is increasing its

focus and investment in its QNX business, which provides an operating system for

automotive and other IoT applications. In addition, BlackBerry is looking for ways to

leverage its network operating centers (NOC) for new services such as BlackBerry

Messenger (BBM), secure enterprise mobility management (EMM), and mobile payments.

Exposure to IoT

QNX secure operating system – In 2010, BlackBerry purchased QNX Software Systems.

QNX is a micro-kernel operating system (OS), which the company used as a foundation for

its revamped BB10 OS. QNX was originally founded in 1982 and has become the

embedded operating system for a host of industries. QNX has experienced particular

success in the auto industry for infotainment systems, where it has been used in over 200

models of cars by about 40 OEMs, including Acura, Audi, BMW, Chrysler, General Motors,

Land Rover, Porsche, and others. More recently, Apple announced CarPlay, which is

essentially iOS for the car and utilizes QNX. Competitive operating systems for autos

include those from Microsoft and Google. Though BlackBerry has not quantified the

revenue contribution of QNX (suggesting it is currently fairly minimal), its leadership in


Covered by Simona Jankowski, US CommTech analyst



gaining a multitude of automotive design wins suggests that revenues will ramp

significantly over the next few years as the new car models ramp. In addition, the company

believes it can leverage QNX in a broader set of machine-to-machine applications, such as

medical, manufacturing, and consumer verticals, and plans to launch its QNX Cloud

platform in December. We expect that in addition to licensing QNX, BlackBerry can

monetize it through upselling its own as well as third party applications and services (e.g.

safety features, tire pressure, infotainment, etc.).

Project Ion – In May 2014, BlackBerry announced Project Ion, a platform to securely

manage data from millions of endpoints, representing a cloud back-end for sensor data

and analytics. The software will leverage QNX, and Blackberry will open-source parts of

QNX to allow other devices to connect to the QNX cloud. BlackBerry is a member of the

Industrial Internet Consortium (IIC; members include Intel, GE, Cisco, AT&T, and IBM) and a

founding member of the Application Developer Alliance (ADA), an “association that

focuses on advancing application development while helping to solver current challenges

such as security and privacy.” Project Ion is currently in beta, with expected formal launch

by early 2015. Given BlackBerry’s expertise in end-to-end security, its global network of

NOCs, its robust QNX OS, and its direct connectivity to the networks of hundreds of

carriers, we believe the company is uniquely positioned to participate in the IoT.

Broadcom (BRCM, Neutral): Well positioned with connectivity and

broadband portfolio plus developer support

Company profile

Broadcom is a leading provider of semiconductors for wireless and wired communication,

including mobile devices, broadband, and communications infrastructure. Pro forma for its

planned exit from cellular basebands, we estimate that about 35% of revenue is from

connectivity, 35% from infrastructure, and 30% from broadband.

Broadcom has strong market share in several key product categories including connectivity

chips such as Wi-Fi (60-65% share in combo chips), switching (we believe 60-70% merchant

share), and cable broadband (we believe about 45-55% share).

Exposure to IoT

Connected wearables and devices – We believe that Broadcom, as a leader in combo

chips and technologies such as 802.11ac Wi-Fi and Bluetooth, will benefit from growth in

wearables. Some of Broadcom’s connectivity chips for the wearables market have

processing capabilities included, which helps to reduce power. In addition, Broadcom has

introduced related chips for new applications such as wireless charging to complement its

connectivity solutions.

Broadcom is also working to support the ecosystem, and it offers a software development

kit and technical support for the wearables and embedded markets. Broadcom noted in

December 2013 that as part of its WICED (Wireless Internet Connectivity for Embedded

Devices) initiative that it was engaged with about 400 companies (including 14 fitness

companies, 8 home appliance companies, and 7 thermostat companies).

While Broadcom will not directly participate in the cellular baseband market and this will

likely limit its ability to sell connectivity in some devices (as some chips could be integrated

or bundled), Broadcom does plan to partner with baseband providers such as Spreadtrum

to help maintain some of its connectivity sales in lower-cost devices.

Connected home – We believe Broadcom has a broad set of offerings for applications

such residential gateways, set top boxes, and modems and these include Wi-Fi, high

efficiency encoding (which saves on bandwidth), and home networking (such as MoCa).




We believe Broadcom’s breadth of technology, ability to integrate multiple features on a

chip, and strong share in set top boxes and modems position it well for growth in the

connected home.

Cisco Systems (CSCO, Buy): IoT thought leader benefiting through

Wi-Fi and “fog” computing

Company profile

Cisco is a leading global provider of networking technology, including systems, software

and services, with $48.6 billion in revenues in FY13 (FYE July). The company has been a

long-standing leader in the $20 billion switching industry, with about 65% market share,

and switching products drove 30% of total company revenues in FY13. Its second biggest

segment, routing, drove 17% of total revenues, as Cisco has about 40% share in the $10

billion service provider routing market and 75% share in the near $4 billion enterprise

routing market. In addition to its core switching and routing revenues, Cisco has a leading

position in a number of other categories, including service provider video, which includes

set-top boxes, video infrastructure and software ($4.9bn in FY13 sales), collaboration

($4.0bn in FY13 sales), Wi-Fi ($2.2bn), servers ($2.0 bn), and security ($1.3bn). Cisco’s

services business, which was $10.6bn last year, accounted for the remaining 22% of FY13

revenues.

Exposure to IoT

IoT thought leader – Cisco was early to the IoT trend, having started investing in enabling

technology more than three years ago and becoming one of the leading voices on the

importance of the trend. Cisco estimates that the IoT will result in $14 trillion of value

created across all industries over the next 10 years, which it defines as the combination of

increased revenues and lower costs. Moreover, Cisco expects the IoT market to be 5-10X

the size of the Internet. As a result of its early bullish view on this trend, Cisco has invested

$1bn in IoT over the past three years and plans to spend another $1bn in the next three

years. The company now has 800 products that have been enabled for the IoT, for example

by ruggedization for tough environments. In addition, Cisco is building out an internal

consulting and services organization that targets industry verticals to help them enable

their business for the IoT. Cisco is prioritizing the industrial vertical rather than consumer

markets, as that is where the most value is likely to be created and therefore there is the

most significant potential profit opportunity. In particular, Cisco is focusing on

transportation (e.g., rail), smart and connected cities (e.g., automating parking meters,

traffic flows, garbage collections), oil and gas (e.g., oil fields are generating 0.75TB of data

per week), and smart grid (e.g., utilities process 0.5TB per day).

Architecting the network for “fog” computing – Cisco coined the term “fog” computing,

a complement to cloud computing, to reflect the fact that IoT requires distributed

intelligence and analytics in addition to hosting those capabilities in the cloud. This is

because much of the data generated by IoT devices merely needs to be monitored for

events, rather than processed in its entirety. For example, a video camera capturing

footage in an empty home only needs to alert the homeowner when there is an event, such

as an intruder. It is not bandwidth efficient to carry all that video traffic 3,000 miles away to

a cloud data center if the processing of the data can be done locally. There could be an

additional latency reason for processing the data in the edge rather than the cloud –

especially when the response to an event has to be instantaneous, such as slamming on

the brakes of a train in response to an obstacle on the tracks. Cisco addresses the fog

computing paradigm with its IOx application framework, which marries its networking

operating system, iOS, with Linux, in order to enable developers to develop applications on

networked devices in the edge. In addition, in 2013 Cisco introduced its NCS product




(Network Convergence System), which is a converged optical and packet transport

platform optimized for the IoT. By comparison to traditional optical and routing equipment

that forms the foundation of the Internet, the NCS reduces costs by combining the optical

and packet transport functions into one platform. In addition, it includes CPU blades with

virtualized software for network function virtualization (NFV), such as IP mobile core,

security, session border control, or WLAN control, enabling distributed intelligence.

Wi-Fi leadership in the IoT – We also expect Cisco to benefit from the significant growth

in Wi-Fi, a $2.2bn business in FY13 (Jul) in which Cisco leads the market with about 25%

share in the latest quarter (down from 30-35% in 2012-2013). As discussed above, we

expect IoT to drive a more than 50% increase in the Wi-Fi market by 2020, as we expect

more than 80% of IoT devices to be Wi-Fi-enabled.

Delta (2308.TW, Buy): Big Data trends driven by IoT could benefit

Delta

Company profile

Delta is a global leader in power and thermal management solutions. Its business

categories can largely be broken into three areas. (1) Power Electronics: Delta offers

diversified power supplies, thermal management, and electronic component/systems for

portable device, cloud computing equipment, home appliance, etc. (2) Energy

Management: includes telecom power systems, UPS, drives, EV charging, and industrial

automation products. (3) Smart Green Life: expansive range of environment-friendly

consumer electronics products such as display and visualization, LED lighting, healthcare,

and IP networking product. Delta has gradually transformed itself from a component

supplier into a solution/system provider with rising business focus and exposure in “Big

Data” and automation areas.

Exposure to IoT

The IoT opportunity reinforces our positive view on Delta’s secular growth driven by “Big

Data” given the increasing data traffic generated in a more connected environment. Delta

specializes in providing power management solutions to data center, telecom, and

networking equipment, where power efficiency and thermal management are of growing

importance as cloud equipment processes larger and larger volumes of data. In addition to

power products, Delta also supplies networking equipment such as switch, smart grid,

broadband access, and we expect this to benefit from the growth in data traffic as well.

Delta’s Big Data business accounts for around 46% of 2014E sales and we expect growth of

17%/13% in 2015/2016, with segment contribution growing from 41% in 2013 to roughly

50% in 2016.

Garmin (GRMN, Neutral): Expanding portfolio of wearables and

growing content in connected cars

Company profile

Garmin is a vertically integrated consumer electronics manufacturer that specialized in GPS

technology. Nearly 50% of 2013 revenues came from Auto/Mobile (which is comprised

largely of Personal Navigation Devices or PNDs), though this business has been declining

rapidly due to smartphone cannibalization. Garmin’s other segments include

Fitness/Outdoor, Aviation, and Marine.

Covered by Robert Yen, Taiwan CommTech/Hardware analyst




Exposure to IoT

Leader in Fitness and Outdoor devices – Garmin is a leader in Fitness and Outdoor

electronics devices, such as watches, bands, and trackers, addressing a wide range of

verticals such as running, swimming, golf, cycling, dog training, hunting, mountaineering,

hiking, and others. The Outdoor/Fitness segment has grown at a 13% CAGR over the past

four years to reach $767mn in revenues in 2013, and we are modeling 16% growth to

$888mn in 2014, representing 33% of our estimated 2014 total revenues for the company.

The segment has very high margins, with gross margins at 63% and operating margins at

36% in 2013; we estimate that it will drive 50% of 2014E operating profits for the company.

Garmin most recently expanded into the fitness band category with the vivofit (priced at

$129 and aimed at consumers) and vivoki (aimed at corporate wellness), featuring wireless

sync via USB ANT or Bluetooth. In conjunction, Garmin operates the Garmin Connect

website, which allows users to upload and track the fitness information gathered from their

devices. Another new IoT product category for the company is the VIRB action camera,

which has Bluetooth, Wi-Fi, ANT+, and GPS connectivity, and is targeting a market

segment popularized by GoPro. We expect Garmin to continue to innovate in this market

and expand into adjacency, which makes it well positioned to benefit from strong growth

in the Connected Wearables segment of the IoT.

Auto Infotainment – Garmin is also exposed to the auto infotainment industry. Its K2

infotainment solution provides 3D navigation, location services, media content, and

diagnostic information on a multi-touch console screen. It also has voice control and can

be integrated with smartphones. Garmin’s OEM auto customers include BMW, Chrysler,

Honda, and Suzuki, among others (only Suzuki has factory installed Garmin’s full

infotainment solution). In addition, in 2013 Garmin announced that its navigation will be

integrated into the infotainment system of future Mercedes-Benz models. We believe

Garmin can leverage its navigation and GPS expertise to expand its content in automotive

infotainment systems over time, benefiting from the increased connectedness of cars.

Gemalto (GTO.AS, Buy): Digital security expertise to monetize IoT

in the Machine-to-Machine segment

Company profile

Gemalto is a leading provider of digital security software and platforms. While it has

traditionally focused on supplying smartcards for the telco and banking verticals, it has

progressively diversified its product offering to incorporate areas such as governmental

electronic documents and, through its acquisition of Cinterion, is present in the machine-

to-machine module and SIM (“MIM”) space. As Gemalto evolves its offering across such

verticals to incorporate a more significant platform offering, we see it achieving a double-

digit group revenues CAGR out to 2017 (the duration of its long-term plan), with operating

leverage allowing for an EPS CAGR of more than 20%.

Exposure to IoT

M2M module and SIM growth – Gemalto’s position within the M2M module and SIM

(“MIM”) market, alongside its strength in remote management platforms, will in our view

allow the segment to deliver 10% annual revenue growth for Gematlo over the course of

the company’s long-term plan (out to 2017), accounting for approximately 10% of

incremental growth over the period.

While Gemalto competes with Sierra Wireless and Telit in the US$1bn connected module

market, the former is positioned more on the consumer side while the latter is more

enterprise-focused. Gemalto’s leverage to IoT is especially associated with M2M in the

Automotive OEM segment, where the company is expected to see a growth inflection, and




newer areas including eHealth/mHealth as well as certain industrial and regulatory driven

segments such as toll collection remote monitoring.

The ASPs for M2M SIMs and M2M modules are a multiple of those seen on its SIM cards

used in handsets. This is because devices such as smartphones are typically in the hands

of users who can adjust settings/troubleshoot if there is a disturbance in the connection,

whereas machines that are deployed in the field in a M2M context are likely to be less

accessible, and hence must be more robust so as to facilitate remote management.

Moreover, security software is more robust vs. that found on telco SIMs, given data in a

machine to machine context may be industrially sensitive.

Competitive differentiation in M2M – Gemalto’s competitive differentiation in M2M

revolves around 1) its high security proposition, 2) the platforms it offers for managing

device subscriptions remotely (e.g., to ensure optimization of connectivity charges for the

end user) and 3) its open nature: it is based on Java and is agnostic as to whether devices

in the field are wired or wireless. Gemalto’s approach also involves driving intelligence into

the edge of the network that can manage a plethora of sensors, and is connected back to

the enterprise. Finally, Gemalto’s platforms allow for modules to be managed remotely in

whichever country they are operating in and regardless of the telco network. We expect

Gemalto’s leading Trusted Services Manager platforms to be increasingly applicable to

M2M remote management – e.g., to manage delivery of electronic car keys and/or for data

collection related to vehicle insurance.

Google (GOOGL, Neutral): Gathering more data, offering more

services

Company profile

Google is the largest online advertising company, with over $55bn in advertising revenues

in CY13 (+16% yoy, 91% of total revenues), driven primarily through the company’s

dominant search engine. According to comScore, Google handled over 67% of US web

search queries and 54% of worldwide queries. Google also develops the Android operating

system which held 78% share (759mn) of mobile devices shipped in 2013, up from 66%

share in 2012 (452mn), according to Gartner. Google has grown its topline +20% yoy for the

past three years, has a strong focus on innovative R&D (14% of revenues in CY13), while

still generating non-GAAP operating margins in the mid-30% range.

Exposure to IoT

For Google, we believe its role in IoT will be focused around developing an open software

platform that can be installed on any hardware device, similar to Android’s evolution on

smartphones. Further, though we expect Google to foster an ecosystem of third-party

developers for IoT, similar to that of Android, we note that to date we have not seen much

from Google in the development of this ecosystem.

A broad array of IoT initiatives – Many view Google’s IoT initiatives as being primarily

focused on home/security and automation to date as a result of the company’s $3bn

acquisition of Nest earlier this year. This deal pushed the company into the thermostat

market, and the company’s recent acquisition of connected camera-maker Dropcam further

solidified Google’s IoT positioning in the home security/automation vertical. That having

been said, we also expect Google to be a leader in emerging areas such as smart watches

and transportation in the future. Google’s development of self-driving cars, where a user

could summon a smart car from a mobile device is one area where the company is a

pioneer alongside Google Glass. We also expect the company to be a player in the area of

smart watches that leverage the Android operating system that ultimately will enable them

to offer vertical specific applications in the area of health and fitness to name a few. Lastly,

Covered by Heather Bellini, US Software & Select Internet analyst



we see Google Now as a horizontal application that can be leveraged to help manage and

connect all of these devices to each other. For example, in the realm of driverless cars, after

summoning the car using a mobile device, the car would be able to know where one was

heading based on information inputted into the user’s calendar and could take the fastest

route depending on traffic by leveraging information accessed via its Maps applications.

IoT is in line with Google’s broader R&D strategy – In the past, Google has clearly stated

its R&D philosophy of only developing new products that pass the “toothbrush test” – the

product must be used as least twice a day. In this respect, we see Google’s IoT strategy

firmly passing the toothbrush test given that products like thermostats and glasses have

daily consumer use. More importantly, Google’s success to date has been based on its

ability to aggregate information and target its users with relevant advertising. Success in

IoT will clearly be a significant driver of information aggregation and increased targeted

advertising.

Multiple monetization opportunities with IoT – We see Google primarily generating IoT-

related revenue from advertising, but also see the potential for revenue streams from OS

licensing (like Android) and rev share agreements (like Google Play). Success in IoT has the

potential to significantly enhance Google level of targeted advertising, thereby increasing

its CPC. While we see Google’s IoT platform as driver of revenue (through licensing and

revenue share with third parties), we see platform success to be more critical to IoT’s

advertising revenue stream, as the popularity of the platform will drive both information

gathering and targeted advertising.

InvenSense (INVN, Buy): Early design wins on wearables although

still small part of total sales

Company profile

InvenSense is the leading MEMS-based motion sensor provider for mobile devices. The

company’s patented manufacturing process and position on the Android reference design

has resulted in strong market share on Android devices (as well as gross margins that are

well above peers). While motion sensors contribute the majority of its revenue, InvenSense

has expanded its portfolio into optical image stabilizers and microphones.

Exposure to IoT

Connected devices – While about 80% of InvenSense’s revenue came from the

smartphone and tablet markets in FY14, we believe the company is designed into the

Google Glass and Galaxy Gear watch. Given the small form factor of InvenSense’s sensors

as well as the company’s efforts to penetrate new customers and applications, we believe it

will continue to grow its business in the wearables market over time.

Marvell (MRVL, Neutral): Baseband and connectivity products

should allow Marvell to benefit

Company profile

Marvell is a fabless semiconductor company with solutions primarily for the storage,

mobile device, and networking markets. In FY14 (ending February 1, 2014), Marvell derived

49% of sales from its Storage segment, 25% from Mobile and Wireless, and 20% from

Networking. Marvell has a broad portfolio of processing, cellular baseband, connectivity

and networking chips and often integrates multiple technologies onto a single chip. Marvell

has very strong share in the storage market (we believe about 60-70% share of HDD and

SSD merchant controllers) and a smaller share position in the baseband, connectivity, and

networking end markets.





Exposure to IoT

Connected homes and devices – Marvell is a leading connectivity and SoC provider for

game consoles (such as the Xbox), the Google Chromecast (provides connectivity,

processing, and power management), and home routers and access points. Marvell’s

technology portfolio includes Wi-Fi, Bluetooth, ZigBee, and NFC, and the company has

historically had 5-10% share of the connectivity market. We believe Marvell’s higher share

in home devices and routers will enable it to benefit from opportunities in the connected

home.

In addition to connectivity, Marvell has been investing in the 4G cellular baseband business,

and we believe it is well positioned to capture more than 10% share of the China 4G LTE

cellular baseband opportunity in 2014 (compared to low-single-digit global 3G baseband

market share). To the extent that connected devices use both cellular and connectivity

standards, this should be an opportunity for Marvell given its broad product portfolio.

Mediatek (2454.TW, Neutral): Tapping into the IoT market

Company profile

Mediatek is a leading fabless semiconductor company, providing integrated chipset

solutions for feature phone, smartphone, tablets, Wi-Fi, HDTV, DVD and Blu-ray.

Smartphone SOC (System-On-Chip) contributed 50% of total revenue in 2013 and we

forecast Mediatek to ship 350mn smartphone SOCs in 2014, or 52% share of the Chinese

smartphone SOC market.

Exposure to IoT

Mediatek started to tap into the IoT market and launched a series of new products and a

platform for connected home and wearable devices as follows.

Connected homes – On June 3, 2014, Mediatek announced two SOCs, MT7688 and

MT7681, targeting the smart home segment. MT7688 integrates MIPS CPU and memory,

supports 802.11n Wi-Fi connectivity and is the industry’s lowest power consumption Linux-

based SOC for smart home appliances. MT7681 is the smallest (5 x 5 mm in packaging)

802.11n SOC available for smart home applications, suitable for simple home appliance

such as smart lighting, door locks, and plugs. PMU, PA, and RF are integrated in the SOC.

Both SOCs are in mass production and customers’ products are expected to hit the market

in 2H2014.

Connected wearables – On June 3, 2014, Mediatek launched a platform, LinkIt, together

with an Aster SOC for the wearable and IoT markets. The Aster chip is in a package size of

5.4 x 6.2mm with an integrated ARM7 processor, Bluetooth, PMU, and memory. LinkIt

integrates the Aster SOC and is a developer platform supported by reference designs and

with software modules, which gives the developers flexibility to develop their own devices

and applications for different verticals. Notably, the platform features Mediatek’s own

proprietary OS (MRE, Mediatek Run-time Environment), which was used in Mediatek’s

Smart-Feature phones.

We believe Mediatek is in a favorable position to embrace the opportunity in the IoT market

by leveraging its leadership in cross-platform products (mobile phones, connectivity, TV,

and DVD) with its proved power-efficient and highly integrated solutions. Its solid and

diversified customer base in China could be the potential developers for devices in IoT

segment as well. We think that, by launching the LinkIt platform, Mediatek aims to cultivate

its own ecosystem of device makers, application developers, and service providers apart

from Android.

Covered by Donald Lu, Ph.D., China Technology and Telecom analyst



Microcontrollers, microprocessors, and analog: Content gains in

auto, industrial and infrastructure

Analog and microcontrollers

Within our US coverage, Texas Instruments, Atmel, Freescale, Microchip, Maxim, NXP Semiconductors, and ON Semiconductor have exposure to secular growth in

MCUs and analog driven by IoT. These companies are broadline providers of analog and

microcontroller chips. As the IoT opportunity evolves, we believe the degree of incremental

growth/profitability that companies realize will be based on: (1) breadth vs. depth, and

whether companies decide to offer a wide range of MCU/analog products or focus on

specific applications; (2) end market exposure, with industrial/auto product cycles typically

being much longer and more profitable than consumer/mobile product cycles; and (3)

strategic uses of cash, with companies increasingly using M&A to improve their traction in

IoT. Recent examples of IoT-centric M&A include Linear Technologies and Dust Networks

(2011, $24 mn), Microchip and ISSC technologies (2014, $317 mn), Atmel and IDT Smart

Metering (2013, $10 mn) and Atmel and Ozmo Wi-Fi (2012, $64 mn). Outside the US,

Renesas, as the largest MCU vendor in the world, is likely to take an important role to

expand IoT devices in various areas, supplying not just to Japanese system vendors but

also to global players particularly in Auto industry and power system industry including

T&D and grid (meters). Since its positioning is very high in Auto already, Renesas may face

challenges to keep its share where it is today so as not to offset the additional growth

opportunity.

Microprocessors

Intel and AMD have been pursuing opportunities in the IoT space with embedded

microprocessors. Intel quantifies its exposure at about 3% today (including software), and

we estimate that AMD’s exposure is similar. Nvidia is targeting automotive applications

with its Tegra applications processor; we estimate its exposure is about 5% today.

Exhibit 36: Several of our companies have exposure to

secular growth in microcontrollers MCU exposure by company

Exhibit 37: MCU market share is fragmented

MCU market share, 2013


Source: Gartner, Goldman Sachs Global Investment Research.

Murata Mfg. (6981.T, Buy): Positioned to benefit most from IoT in

the technology upstream supply chain in Japan

Company profile

Murata Manufacturing is one of the world’s leading passive components manufacturers.

The company has at least a 40% share of the world market for MLCCs and at least a 50%

share in SAW filters. Not only has it grown sales of individual products such as MLCCs and

Exposure Company MCUs as a % of sales

High

Microchip ~65%

Atmel ~65%

Freescale 40% - 45%

Renesas 30% - 35%

Infineon 20% - 25%

NXP ~20%

STMicro 10% - 15%

Texas Instruments 5% - 10%

Low

Renesas, 24%

Freescale, 10%

STMicro, 8%

Microchip, 8%Infineon, 7%

Texas Instruments, 7%

NXP, 7%

Atmel, 6%

Other, 23%

Covered by James Covello and Gabriela Borges, US Semiconductor analysts, and Ikuo Matsuhashi, Japan Semiconductor analyst

Covered by Daiki Takayama, Japan Hardware analyst



SAW filters, but also rapidly increased sales of communications modules in the last few

years. The number and value of Murata products used in mobile devices such as

smartphones and tablets have been rising. The weaker yen has helped in part to make

Murata’s products competitive against Asian rivals, and combined with its cutting-edge

technologies it is starting to see an increase in its market share. In sales terms, the top

three applications for Murata’s products in FY3/14 were communications (mainly

smartphones) at 51%, PCs (including tablets) and peripherals at 18%, and automobiles at

14%. We expect continued high growth, and our FY3/15 estimates are for revenue of

¥931bn, and operating profits of ¥150bn, up 19% yoy.

Exposure to IoT

Multiple IoT levers – Murata stands to benefit the most from IoT in the upstream part of

Japan’s technology supply chain, in our view. We highlight three reasons: (1) Murata has a

broad range of core technologies such as wireless communications devices, sensors,

passive components, and electrical storage devices; (2) it has a competitive edge in

hardware, including creating products with ultra-small footprints at much lower costs in

large volumes; and (3) it is seeking to add value by providing solutions to transmit required

data efficiently, not merely to send and receive data.

Near and long term adoption drivers – Murata envisages business fields expanding from

wearables, automobiles, and homes (smart homes and energy management) to structures

(buildings and roads) and agricultural crops in the next 5-10 years. For example, the

company is currently in the process of jointly developing with customers a system for

continuously obtaining only key data based on the concept of energy harvesting, which

involves “harvesting” small amounts of energy from external sources and converting it to

electricity, in the areas of roads and agricultural crops. At the same time, we focus on the

expansion of the wearables market in terms of its immediate impact on company earnings

due to scope for greater adoption of Murata products (we estimate Murata’s dollar content

will be US$1-2 per item).

Netgear (NTGR, Sell): The gateway in the home to the IoT

Company profile

Netgear is a provider of networking equipment to consumers, service providers, and small

businesses. The company has a 20% market share in the retail/SOHO Wi-Fi router market

and is considered to be the most premium brand in that segment. The company’s Retail

business unit represents roughly 33% of sales and sells Wi-Fi routers, extenders, and home

video monitoring equipment. The Commercial business unit represents roughly 23% of

sales and sells switches, Wi-Fi equipment, firewalls, and storage to small businesses

through its channel partners. The Service Provider business unit sells cable, DSL, and LTE

home gateways to service providers and represents 44% of sales.

Exposure to IoT

Wi-Fi routers offer gateway to IoT – Netgear’s strong position within the home as the

connection between devices and the internet will allow it to be an enabler of IoT. Smart

appliances, home security, and sensors will need to be connected to the internet through a

home router and Netgear’s products will be the gateway to the internet for these products.

While Wi-Fi routers are already the gateway to the internet inside of homes, the

proliferation of IoT will increase the performance requirements of Wi-Fi routers and

increase the importance of Wi-Fi in the home given that we believe Wi-Fi will be used by

most connected devices. Given Netgear is typically associated with high-performance

routers, IoT could be a modest driver of sales for the company.




IoT for the home and small business – Netgear’s product portfolio includes other

products that play a direct or indirect role in facilitating the IoT at homes and small

businesses, such as mobile broadband gateways, Wi-Fi range extenders, connected

entertainment devices, home video monitoring, wireless IP cameras, and touch panels. We

believe the largest of these products today from a revenue standpoint are the Wi-Fi range

extenders, which extend the reach of the Wi-Fi signal created by the broadband router or

gateway in the home. In addition, Netgear’s acquisition of VueZone gave it a credible entry

in the fragmented home video monitoring (“nanny cam”) market. Netgear’s connected

entertainment devices include streaming players, gaming and home theater adapters, and

wireless display adapters, which all enable users to access entertainment from a multitude

of devices at home.

Home security and automation – Leveraging Netgear’s service provider partners, the

company hopes to bring broadband to more homes, and build out its presence in home

security and automation. Through the Sierra Wireless AirCard acquisition, Netgear brought

more of the technology in-house to produce wireless broadband gateways, which provide

Wi-Fi in homes and small businesses via carriers’ cellular networks. Netgear has won deals

with Bell Mobility in Canada and Sprint in the US for commercial deployments, but we do

not expect this to be a meaningful driver until 2015 or beyond. Additionally, Netgear

provides home video monitoring products that can be offered as a service from a carrier or

cable provider. One of Netgear’s more recent product launches is a home touch panel. This

device enables customers to control security systems, lights, thermostats, etc. as the

central hub of the connected home.

Nokia (NOK1V.HE, Not Rated): Leveraged to the Automotive

vertical with the HERE mapping platform

Company profile

Following the announced disposal of Nokia’s handsets business to Microsoft, the majority

of the group’s revenue base comes from its Networks business, which occupies the

number-three position globally in the wireless infrastructure market, behind peers Ericsson

and Huawei. Alongside this, however, Nokia’s mapping IP business, HERE, represents

about 8% of ex-handsets revenues. The company’s strategic review announced at the time

of 1Q14 results stated that this asset will remain part of Nokia’s business.

Exposure to IoT

HERE mapping and automotive – Nokia’s exposure to IoT stems predominantly from its

ownership of the HERE mapping platform, and the latter’s strength within the Automotive

vertical. Nokia and Google are the only major players in the automotive mapping market,

and HERE is considered to have the best map production engine and the most accurate

maps (as its data probes for feedback into the mapping database are the highest quality).

HERE has captured roughly 80% of the total automotive mapping market.

Nokia sees great potential for in-dash mapping which has a penetration of close to 25% in

Western markets and is expected to rise significantly over the next five years. Nokia sees

its future growth in this area not only as a function of addressable end units growing (as a

function of rising penetration of in-dash) but also of scope to increase ASPs by moving up

the value stack to provide more content and services, rather than just maps. Nokia has

already invested $100mn in the development of connected car technology.




Qualcomm (QCOM, CL-Buy): Extending cellular and connectivity

leadership from smartphones into the IoT

Company profile

Qualcomm is the leading smartphone cellular chipset and application processor provider,

with an estimated market share in the high 60%s of CDMA/WCDMA/LTE devices. Its

customers include essentially all major handset and tablet companies, and many of the

emerging handset vendors as well. Over the past three years, Qualcomm has led the LTE

cellular baseband market, sustaining over 90% share in that segment. The company also

has a leading presence in the Wi-Fi market as a result of its 2011 acquisition of Atheros.

Beyond handsets and tablets, Qualcomm’s end markets include Wi-Fi access points,

automobiles, small cells, and healthcare, to name a few. Over two thirds of company

revenues come from the sale of chipsets. Qualcomm’s licensing business accounts for the

remaining one third of revenues; however, this segment accounts for over two thirds of

operating profit given its high margins. Owning most of the IP behind CDMA/WCDMA and

much of LTE, Qualcomm gets a royalty from every device that uses its technology. We

forecast 9% revenue and 13% EPS CAGR from FY13 to FY16 as a result of Qualcomm’s

market leadership and leverage to continued smartphone growth and LTE expansion.

Exposure to IoT

Qualcomm stands to benefit from the proliferation of IoT from both a chipset and licensing

standpoint, as it can leverage its leadership position in wireless connectivity (3G/4G, Wi-Fi,

Bluetooth, GPS, etc.) in a wide range of new applications from wearables to smart homes

to automobiles.

Connected cars – Qualcomm is emerging as the leader in cellular chips for automobiles;

for example, BMW will have LTE connections in 100% of its cars starting with the 2014

model year, and all of its LTE chips will be Qualcomm’s. In addition to BMW, Qualcomm is

working with Audi and GM, among others. While some car manufacturers (e.g., Tesla) use

3G connections, demand is rapidly shifting to 4G/LTE, given the expected 10-year-plus

lifecycle of a car. Given the long design cycle of 3-4 years, we believe that Qualcomm is

well positioned to lead the auto 4G chipset space, as it translates its 90%-plus market share

in LTE for handsets over the past two years to a similar market share in cars. Beyond LTE

use for diagnostics and safety, Qualcomm’s content opportunity in cars extends to the full

system-on-chip (SoC) for infotainment, including the baseband, application processor, Wi-

Fi, and Bluetooth. Longer term, active driver assistance systems (ADAS) present a new

adjacency that will drive incremental content.

Connected homes – Qualcomm is leveraging its strong presence in home networking

through its Atheros acquisition for its expansion into home automation. In November 2013,

Qualcomm announced the IPQ (Internet Processor Qualcomm), which aims to convert the

home router to a smart router – similar to the feature phone to smartphone transition. IPQ

SoCs are integrated CPU/GPU chips specifically designed for home network functions such

as home gateways, routers, and media servers. Essentially, the IPQ is a low-power, high-

performance processor to handle the growing number of devices in a home. More broadly,

Qualcomm can pair processors and connectivity together with smart appliances, connected

TVs, or other devices. In addition, Qualcomm is also actively pursuing new connectivity

technologies and standards, such as 802.11ah and MU-MIMO (multi-user multiple-input

multiple-output) Wi-Fi.

Connected wearables – Qualcomm is also targeting the connected wearables space, such

as smart glasses, watches, trackers, body sensors, and wearable cameras, with its

application processors and Wi-Fi chips.

Small cells – By leveraging its leadership in connectivity and 3G/4G, Qualcomm is also

targeting the small cell opportunity. Small cells enhance both coverage and network




capacity by distributing the burden of cellular connection away from macro cells.

Qualcomm has launched a number of SoCs (FSM90xx, FSM99xx) designed specifically for

small cells by bringing LTE and Wi-Fi together with the Qualcomm IPQ. We expect small

and Wi-Fi cells to proliferate as the key network infrastructure enabler of IoT.

Smart grid – Qualcomm has formed partnerships with Itron, Landis+Gyr (part of Toshiba),

Honeywell, and GE in the smart meter market and is currently discussing connecting smart

meters through cellular networks with utilities in the UK and Japan.

Quanta (2382.TW, Neutral): Rising data flows create growth

opportunity in cloud computing

Company profile

Quanta designs and manufactures diverse IT products including PC, tablet, server,

consumer electronics mainly on an ODM basis serving global top-tier IT vendors such as

Apple, HP, Dell, ASUS, Acer, etc. Quanta is currently the largest NB ODM in terms of

shipment with global market share at around 24% in 2013. Quanta’s server/storage/switch

business has become its most significant sales/profit growth drivers when it has

transformed its server business from ODM project to direct account sales (shipment made

directly to end user instead of branded server vendors). Quanta has also been engaged in

development of wearable device and we expect to see more meaningful sales contribution

from 2014 on several project wins.

Exposure to IoT

We expect the emerging IoT trend would increase the demand for server and storage as

more and more data collected by connected devices needed to be stored and analyzed on

the cloud. Currently the cloud infrastructure is mostly provided by service/content

providers (such as ISPs like Google, Amazon, Baidu) or private cloud built by enterprise.

We see growth opportunity for Quanta’s cloud business, as it has increased its direct

engagement with global top ISPs and also enterprise customers, supplying customized

server systems to international ISPs or even comprehensive data center solutions

according to customer’s demand. Quanta’s server-related business accounts for around

10% sales and 28% profit in 2014E and we expect sales and profit contribution to reach

13%/37% in 2016E.

Ruckus Wireless (RKUS, Buy): Pure-play Wi-Fi vendor in the sweet

spot of IoT

Company profile

Ruckus is a provider of Wi-Fi access points (AP) and controllers to both service provider

and enterprise customers. Roughly two thirds of its revenues are derived from enterprises,

and the other one third from service providers. Ruckus is a leader in the service provider

Wi-Fi market with roughly 20-25% market share (Cisco is the other leader with a similar

level of share). Within the enterprise vertical, Ruckus has about 5% share, which makes it

third behind Cisco and Aruba Networks. Within Enterprise, Ruckus primarily addresses the

hospitality, K-12 education, retail, and warehousing verticals. From a technology

perspective, Ruckus differentiates with its adaptive antenna technology to reduce

interference, improve throughput, and lower total cost of ownership. The company, which

went public in late 2012, grew revenues at a three-year CAGR of 52% to reach $263mn in

2013, and we are forecasting a 2013-2016 revenue CAGR of 27% to $539mn in 2016.





Exposure to IoT

Enterprise and service provider exposure – We view Ruckus as the networking

equipment vendor most leveraged to IoT, given its pure play exposure to Wi-Fi, which we

view as the dominant IoT access technology. As we discuss above, we estimate that Wi-Fi

attach of IoT devices could drive an incremental 50% growth in the Wi-Fi access point

market by 2020, representing a 6% CAGR. Ruckus’ strong technology differentiation

positions it well for future adoption, which is further supported by key customer references,

such as Time Warner Cable, Boingo, Google, KDDI, Telefonica, Orange, AT&T, and others.

New products expand addressable market – Ruckus has recently launched a number of

new technologies that further differentiate its product offering and expand its addressable

market. Most importantly, the virtual Smart Cell Gateway (vSCG) virtualizes Ruckus’

carrier-grade and highly scalable controller technology, and thus enables the company to

sell it as licensed or subscription software that runs on standard x86 servers in service

providers’ data centers. In addition, earlier this year Ruckus launched SPoT, a location-

based service targeting retail customers, and SAMs, a hosted public cloud Wi-Fi service,

both of which are subscription based.

Samsung Electronics (005930.KS, Buy): Widest hardware reach in

IoT

Company profile

Samsung Electronics (Samsung) is the largest memory semiconductor, AM OLED panel,

smartphone, and flat panel TV manufacturer globally and also has strong positioning in

logic semiconductors, TFT-LCD panels, and home appliances. The company has enjoyed

robust earnings growth over the past few years as it has taken advantage of the growth of

smart devices. Samsung’s EPS has grown by a CAGR of 49% from FY11 to FY13. Although

smartphone unit growth is expected to slow, we see new opportunities for Samsung in the

upcoming years. New trends such as IoT and wearable tech combined with the ability to

commercialize new technologies such as flexible AM OLED display and V-NAND before

competitors should help to continue to differentiate Samsung’s products. We believe that

this should help to play an important role in our forecast revenue and EPS CAGRs of 6.2%

and 7.4% from FY13 to FY16, respectively.

Exposure to IoT

As the largest maker of mobile smart devices (smartphones and tablets) Samsung is well

positioned for the growth of IoT. However, unlike other smart device makers, Samsung has

added advantages in that (1) it dominates high traffic hardware real estate in the home as

the largest TV maker in the world and a leading appliance maker and (2) it has software

capability that can address platform and security opportunities. We outline several

opportunities for Samsung below.

Smart device market share leader – Samsung is the largest maker of smart devices

(smartphones and tablets) with 362mn devices shipped in 2013 for an estimated market

share of 30%. With unmatched scale, design times, in-house component development &

sourcing, and distribution, we expect Samsung to maintain its leadership in smart mobile

devices. We expect this to be especially true as Samsung introduces plastic-based AM

OLED displays in late FY14 which could open the door for new smartphone/tablet form

factors (bended and bendable) and more sophisticated wearable smart devices.

Ownership of hardware in the home – Samsung is the largest TV maker in the world

(22% market share in 2013) as well as a leading white goods maker. This is especially

relevant in IoT because these are devices that are among the most used in the household

and are always connected to a power source. Therefore, these types of devices have

Covered by Michael Bang, Korea Tech analyst



potential to act has a gateway to the house or hub for the connected home but also make

Samsung more relevant with consumer mindshare.

Platform and security a unique advantage – With leading market shares in mobile smart

devices and key high traffic devices in the home, Samsung is well positioned to create a

hardware platform of Samsung devices. While Samsung has indicated that it plans on

creating an open platform where all makers are welcome, it goes without saying that

communication and integration between Samsung devices could be more efficient than

between devices created by other makers. Of note, this does not mean that Samsung is

abandoning Android. We interpret Samsung’s development of an independent platform as

the fact that Android may have not well equipped for connected homes at the time

Samsung started connect home/IoT development. In addition, Samsung introduced the

KNOX container security for smartphones in 2013. KNOX could also be used on Samsung’s

IoT platform.

Revenue opportunity needs development – At this point, we believe that Samsung’s

positioning within IoT will help Samsung to sustain and/or increase market share within its

specific device verticals. Subscription revenue opportunities have yet to be developed for

KNOX or other IoT type services. Successful commercialization of subscription services

could result in upside risk to our estimates. Nevertheless in our view, we believe that these

opportunities are secondary as Samsung is more interested in increasing its hardware

footprint in the home and mind share among consumers.

Silver Spring Networks (SSNI, Buy): Connected city pure play –

smart meters, street lighting, and beyond

Company profile

Silver Spring Networks is a provider of smart grid networking solutions designed for utility

power grid management. The company produces standards-based, Internet Protocol (IP)

communication modules that are installed into meters (manufactured by other companies

like GE and Landis+Gyr), which connect wirelessly via radio frequencies. Silver Spring has

networked nearly 19mn endpoints and has a backlog of about $1bn. In addition to the sale

of communication modules, Silver Spring offers professional services such as network

planning, installation, and maintenance (about 11% of total revenues) and managed

services, where Silver Spring will collect, manage, and analyze a network of endpoints on

behalf of its customers (about 10% of revenues). At the end of 2013, Silver Spring had 35

total customers. BG&E and ComEd represented 27% and 11% of 2013 billings, respectively.

Exposure to IoT

Smart grid communication modules – Silver Spring is a market share leader in smart

grid, having won over 50% of the end points awarded in the US in 2013, bringing its

cumulative market share to about 33%. In addition to the 19mn networked endpoints,

Silver Spring has a backlog of about 9mn endpoints or $1bn. Furthermore, it estimates an

additional 26mn endpoints in its pipeline of pilots and partial deployments. We believe

Silver Spring’s connectivity technology (which spans 900MHz, 2.4GHz, cellular, ZigBee, and

Wi-Fi) combined with its full platform approach (managed services and applications such

as Distribution Automation and Demand Side Management) position it well within a very

large smart meter addressable market of approximately 1.5bn homes and business

endpoints (implying penetration is still only about 15%).

Expanding into street lighting – In mid-2013, Silver Spring leveraged its smart meter

communication technology to enter the smart street light vertical. It estimates the market is

about 300mn endpoint global opportunity. Silver Spring already has achieved a number of




reference customer wins, including Copenhagen, Dublin, Miami, Oslo and Paris, and

Dongguan and Foshan in China.

TE Connectivity (TEL, Buy): Auto and industrial connector exposure

with increasing focus on sensors

Company profile

TE Connectivity is a leading provider of connectors and components with a focus on the

automotive (about 40% of sales), industrial (20-25% of sales), and networks (20-25% of

sales) end markets. TE’s revenue comes primarily from connectors but its product offerings

also include sensors, relays, antennas, and subsea communication.

TE is the largest connector company globally based on sales, and it has nearly 20% share

of the approximately $50 bn global connector market. TE’s share in other end markets is

smaller. For example, its organic sensor business (tied to auto and industrial) drives about

$200 mn of revenue in a $40 bn addressable market. However, TE’s proposed acquisition of

Measurement Specialties (which TE expects to add well over $500 mn of sales in year one

if the deal closes) would significantly expand TE’s exposure to the sensor market.

Exposure to IoT

Connected cars, cites, and industrial equipment – We expect TE to benefit from growth

in connected cars, cities, and industrial equipment. While we view the IoT as a continuation

of the long-term trend of increased auto and industrial connector content per unit, we

believe the addition of new electronic features and connectivity will drive more power and

data connections. Given TE’s high exposure to industrial and auto, we believe that TE will

be a primary beneficiary.

Expanding presence in sensors – Additionally, TE’s sensor business would increase to a

mid-single-digit percentage of total revenue pro forma for the proposed Measurement

Specialties acquisition, and this would give TE a broad portfolio of pressure, position, force,

temperature and humidity sensors. Measurement specialties is exposed to the trucking

(39% of sales), industrial (39% of sales), medical (10% of sales), consumer (6%), and A&D

(5%) markets. Its end applications include areas that could benefit from IoT such as traffic

pattern sensing, healthcare monitoring, and exercise equipment.

Toshiba (6502.T, Neutral): Top supplier of smart meters

Company profile

Toshiba is an integrated electronics maker, particularly well known for its leading position

in NAND flash memory, Nuclear systems, and Power meters. For NAND, together with its

partner SanDisk, it is the top share player in the market. For Nuclear, with the acquisition of

Westinghouse in 2006, and for Power meters, with the acquisition of Landis+Gyr in 2011,

Toshiba has become a global leading player for both with 30% market share.

Exposure to IoT

We expect Toshiba (L+G) to remain the top supplier of smart meters and believe it could

benefit from any incremental acceleration in the shift to smart meters from legacy meters.

Leveraging the L+G channel, Toshiba also targets selling its T&D systems, which are back-

end systems, to grid companies, which contributes to building out smart grid networks.

The CO2 reduction targets set in the US market should drive the development of smart

grids, which in turn could trigger the actual usage of smart meters that are already installed

and provide further opportunity.


Covered by Ikuo Matsuhashi, Japan Integrated Electricals/Semiconductors analyst



Wistron NeWeb (6285.TW, Neutral): Expert in wireless solution

embracing IoT trends

Company profile

Wistron NeWeb (WNC) designs and manufactures wireless connectivity products on

ODM/JDM/OEM bases with a wide range of end-applications, including home devices,

mobile, automotive, and enterprise applications. WNC is also a global leading supplier of

satellite communication systems such as LNB (low-noise block) for satellite TV, satellite

radio, and HD Radio receiver systems. WNC has recently shifted more of its resources to

focus on home and automotive applications to catch up the connectivity trend in smart

homes and motor vehicles by leveraging its core strength in RF technology.

Exposure to IoT

IoT wireless modules – We expect WNC to benefit from the rising IoT trends, as wireless

connectivity is an essential ingredient for IoT, enabling ubiquitous wireless communication

between external data/service and end devices. WNC is experienced in supplying wireless

modules with different connectivity technologies covering Bluetooth, Wi-Fi, Cellular,

ZigBee/Z-Wave according to the different requirements of the “things.”

Home and Automotive – Its current IoT exposure mainly lies in two categories: (1) Home

products include Wi-Fi/Cellular products (IAD, small cell), wireless modules (Wi-Fi,

Bluetooth, Cellular), and connected smart devices (Energy management, automation, and

security etc.) that enable consumers to establish a well-connected environment in the

home and (2) Automotive products mainly include Telematics boxes, Bluetooth + Wi-Fi

modules, and Cellular M2M modules inside the vehicle that enable passengers to connect

their own devices to the car and connect the car to parties such as other vehicles or

external data services from third-party service providers.

For 2014E, we do not expect WNC’s IoT exposure to be significant, as it still has a large

portion of sales coming from its legacy Satellite product (TV and Radio). We estimate the

IoT-related revenues to be approximately 12% from Smart Home (excluding commodity

wireless product such as routers and Wi-Fi-Bluetooth modules) and approximately 6% from

Automotive. We expect that Home/Automotive connectivity sales could rise to 20%/17% in

2016E on the rising trend of IoT, as WNC has penetrated into several key customers in

Smart Home device vendors and top-tier car module makers.




Exhibit 38: Summary of ratings, price targets, and price target methodology


Company TickerPrice

6/25/2014Rating

12-month Price target

Methodology Risks

Aerohive Networks, Inc. HIVE $8.99 Buy $13.00 EV/S Risks include competition, vertical exposure, and large venture ownership.

Advanced Micro Devices, Inc. AMD $3.96 Sell $2.50 EV/EBITDA, M&A Key risks relate to PC and gaming units, market share, margins, and M&A.

Amphenol Corp. APH $96.13 Neutral $92.00 Normalized P/E Orders, M&A integration, and margins.

Apple Inc. AAPL $90.36 Buy $103.00 P/E Downside risks include delayed product cycles, supply chain difficulties, product price erosion, and a slower pace of product innovation.

ARM Holdings plc ARM.L £8.86 Buy £14.00 DCF Increased competition, slowing innnovation, and market share limits.

Aruba Networks, Inc. ARUN $17.36 Neutral $24.00 P/E Key risks include market growth and gross margin expectations.

Atmel Corporation ATML $9.23 Neutral $8.50 Normalized P/E Market share, margin trajectory, cyclical dynamics.

BlackBerry Limited BBRY $9.98 Neutral $10.00 Sum of the parts Upside risks include M&A or a turnaround. Downside risks are deteriorating smartphone market share and declining service revenues.

Broadcom Corporation BRCM $37.16 Neutral $37.00 Normalized P/E Market share, execution on baseband divestiture.

Cisco Systems, Inc. CSCO $24.72 Buy $29.00 P/E Primary risks include a deteriorating macro environment, heightened competition, commoditization trends in technology, and execution.

Delta Electronics 2308.TW NTD 205.00 Buy NTD 208.00 P/B Global economic slowdown, rising raw material prices.

Freescale Semiconductor Ltd. FSL $23.38 Buy $27.00 Normalized P/E Market share, cyclical dynamics.

Garmin Ltd. GRMN $59.95 Neutral $60.00 P/E Upside risks include share gains and diversification. Downside risks include PND declines and Fitness competition.

Gemalto GTO.AS € 76.15 Buy € 123.00 EV/EBITDA, M&A Key risks include slower-than-expected rollout of LTE/4G, mobile payments and/or EMV technology.

Google Inc. GOOGL $585.93 Neutral $600.00 DCF, EV/EBITDA, and P/E

Material acceleration in search volumes, better-than-expected display and mobile growth, faster than expected cost growth, and increasing competition.

InvenSense, Inc. INVN $21.99 Buy $20.00 Normalized P/E, M&A

Market share, pricing pressure.

Intel Corp. INTC $30.88 Sell $18.00 Normalized P/E PC market trends, change in strategy, lower capex.

Marvell Technology Group Ltd. MRVL $14.49 Neutral $17.00 Normalized P/E Market share, pricing pressure, capital allocation.

Maxim Integrated Products MXIM $33.97 Buy $41.00 Normalized P/E Market share, cyclical dynamics.

Mediatek 2454.TW NTD 505.00 Neutral NTD 441.00 P/B Faster or slower-than-expected LTE transition in China, competition.

Microchip Technology Inc. MCHP $48.84 Neutral $49.00 Normalized P/E Market share, cyclical dynamics.

Mitsubishi Electric 6503.T ¥1,274 Sell ¥1,170 P/B Yen decline, high smartphone investment.

Murata Mfg. 6981.T ¥9,390 Buy ¥10,700 EV/GCI vs CROCI/WACC

Risks of slowing growth on smartphone maturation or forex fluctuations.

Netgear, Inc. NTGR $34.15 Sell $31.00 P/E Upside risks include capital allocation, better AirCard ramp, and SP customer wins.

Nokia NOK1V.HE € 5.66 Not Rated

NXP Semiconductors N.V. NXPI $64.58 Neutral $51.00 Normalized P/E Market share, cyclical dynamics.

ON Semiconductor Corp. ONNN $9.07 Neutral $9.50 Normalized P/E Trajectory of margins, execution on M&A, SSG growth and profitability.

QUALCOMM, Inc. QCOM $78.05 Buy $95.00 P/E Unfavorable license negotiations, lower than expected ASPs, macroeconomic weakness, and increasing competition.

Quanta Computer 2382.TW NTD 84.30 Neutral NTD 77.00 P/B Market share shift; non-NB business; FX gains/losses.

Renesas Electronics 6723.T ¥800 Sell ¥590 P/E Smaller-than-expected contraction in sales from product withdrawals, penetration of broad-based price hikes for products such as MCUs, further yen depreciation.

Ruckus Wireless, Inc. RKUS $11.42 Buy $18.00 EV/S, M&A Competition, execution, and lumpiness of deployments.

Samsung Electronics 005930.KS � 1,320,000 Buy � 1,600,000 EV/GCI vs CROCI/WACC

Weaker smartphoine units/margins & memory prices, slow new business growth, unfavorable litigation rulings, and sudden currency movements.

Silver Spring Networks, Inc. SSNI $13.40 Buy $22.00 EV/S, M&A Downside risks include competition, lumpiness, lack of new customers, regulatory and legal developments.

STMicroelectronics STM.PA € 6.77 Neutral € 7.40 EV/EBITDA Adverse cyclical dynamics, market share loss, capex intensity, and currency.

TE Connectivity Ltd. TEL $61.04 Buy $66.00 Normalized P/E Revenue, margins, and capital allocation.

Texas Instruments Inc. TXN $48.04 Neutral $42.00 Normalized P/E Market share, cyclical dynamics.

Toshiba 6502.T ¥471 Neutral ¥460 P/B Larger-than-expected increases/decreases in NAND price and forex fluctuations.

Wistron NeWeb Corp. 6285.TW NTD 71.00 Neutral NTD 70.00 P/B Penetration rate of in-car and home connectivity; market share shift.



Emerging Technology Research: Private Companies to Watch

Exhibit 39: List of private IoT focused companies (not a complete list)

Source: Company data, TechCrunch, Cisco, Goldman Sachs Global Investment Research.

Company DescriptionWearablesAmiigo Activity tracker band, compatible with iOS and AndroidBasis Health tracker and wrist bandEvado Filip Locator and phone designed for children, with GPS, Wi-Fi, and GSMFitbark Dog activity monitorFitbit Health and activity trackerGibi Technologies Dog tracker, virtual fences, real time updates and GPS location servicesJawbone Fitness bands and wireless speakers and headsetsPebble Smartwatchremee Lucid dreaming sleep maskThimble Bioelectronics Portable pain management technologyWahoo Fitness Wearable monitors, bike computers, and sports bandsWithings Activity trackers, blood pressure monitors, smart scales

Connected CarsDashlabs Bluetooth pairing between car and smartphone; vehicle diagnosticsMojio Cellular and GPS module that connects to car's diagnostic portOpenXC Hardware module and open source API platform for automobiles

Connected HomesAlarm.com Cloud-managed, home automation and security platformAyla Networks Communication modules, software, and services for home controls, HVAC, and appliancesBelkin WeMo home automation, Echo water and power solutions, and Linksys home networkingBitponics Wi-Fi sensors for hydroponic garden managementCanary Home security in a module, with video, sensors, and connectivityEcobee Wi-Fi thermostatElectric Imp Wi-Fi and processor module that connects to a variety of home devicesGood Night Lamp Home lighting solution, without the need for Wi-Fi or home internet connectionHomeMonitor Wi-Fi video cameraiGrill Bluetooth enabled grill thermometeriSmartAlarm Connected video cameras, contact sensors, and motion sensorsKoubachi Wi-Fi planet sensor, plant analytics and diagnosticsKwikset Connected locks, use smartphones as key or grant remote accessLapka Sensors to detect radiation, humidity, nitrates in food, or electromagnetic fieldsLIFX Wi-Fi enabled, multi-color LED light bulbsLively Custom activity sensors attached to keys, medication boxes, refrigerators, etcLockitron Connected locks, use smartphones as key or grant remote accessNetatmo Remote home thermostat and indoor weather beaconNinjablocks Temperature and humidity sensors, motion sensors, window/door sensorsOort Bluetooth hub and software to control sensor systems (beacons, power strips, thermometers, Rediator Labs Wi-Fi controlled home radiator coverRevolv Wi-Fi hub to control other connected devicesSmartThings Smartphone app to control and monitor connected home devicesTado Smart thermostatUbi Wi-Fi enabled, voice operated computer that plugs into an outletWovyn Wireless sensors for home automation

AdhereTech Wireless medication bottlesBigBelly Solar Modules for city-wide trash and recycling collection dataBit Stew Systems Advanced metering management systemC3 Energy Smart grid analytics softwareEnlighted Sensor and analytics platform for commercial environments, targets energy cost savingsEuclid Wi-Fi, location based customer analytics for retailersNomi Location based services and connectivity designed for retailers, restaurants, hospitality, and morePlacemeter Video surveillance analytics, provide insight into real-time traffic and movementTelcare Cellular enabled blood glucose meterTrilliant Smart meter communication modules and analytics

PlatformsAxeda Cloud-based service for managing connected devices and machinesEVRYTHNG Platform to discover and track internet connected devicesJasper Purpose-built IoT IT platform for Cars, Devices, and EnterprisesMesh Systems M2M communication software and wireless sensor networkPhunware Consumer web portal for location based experiences (shopping, traveling, museums, etc) via Wi-Fi, GPS, BluetoothZonoff Software to enable home automation, energy management, and safety monitoring

Connected Cities / Industrial / Medical



Disclosure Appendix

Reg AC

We, Simona Jankowski, CFA, James Covello, Heather Bellini, CFA, Michael Bang, Ikuo Matsuhashi, CMA, Bill Shope, CFA, Daiki Takayama, Mark

Delaney, CFA, Donald Lu, Ph.D, Robert Yen, Gabriela Borges, Alexander Duval, Kent Schofield, Doug Clark, CFA and Balaji Krishnamurthy, CFA,

hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or

their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or

views expressed in this report.

Investment Profile

The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and

market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites

of several methodologies to determine the stocks percentile ranking within the region's coverage universe.

The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:

Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate

of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend

yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.

Quantum

Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for

in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.

GS SUSTAIN

GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list

includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and

superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate

performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the

environmental, social and governance issues facing their industry).

Disclosures

Coverage group(s) of stocks by primary analyst(s)

Simona Jankowski, CFA: America-Communications Technology. James Covello: America-Semi Device, America-Semiconductor Capital Equipment.

Heather Bellini, CFA: America-Software. Michael Bang: Asia Pacific Media, Korea Technology. Ikuo Matsuhashi, CMA: Japan-Integrated

Elec./Semicon, Japan-Telecom & IT Services. Bill Shope, CFA: America-IT Hardware/Systems. Daiki Takayama: Japan-Electronic Components. Mark

Delaney, CFA: America-IT Supply Chain: Components, America-IT Supply Chain: Distributors, America-IT Supply Chain: EMS, America-Semi Device.

Donald Lu, Ph.D: China Technology, China Telecoms. Robert Yen: Asia Pacific Technology. Gabriela Borges: America-Semi Device. Alexander Duval:

Europe-Communications Technology, Europe-Semiconductor & Tech Hardware. Kent Schofield: America-Communications Technology.

America-Communications Technology: ADTRAN, Inc., Aerohive Networks, Inc, Aruba Networks, Inc., BlackBerry Limited, Broadsoft, Inc., Brocade

Communications Systems, Calix, Inc., Ciena Corp, Cisco Systems, Inc., Corning Inc., Cyan, Inc., F5 Networks, Inc., Finisar Corp., Garmin Ltd.,

Gigamon Inc., Infinera Corp., Infoblox Inc., JDS Uniphase Corp, Juniper Networks, Inc., Motorola Solutions Inc., Netgear, Inc., Polycom, Inc.,

QUALCOMM, Inc., Riverbed Technology, Inc., Ruckus Wireless, Inc., Silver Spring Networks, Inc..

America-IT Hardware/Systems: Apple Inc., CDW Corporation, EMC Corporation, Emulex Corp., Fusion-io, Inc., Hewlett-Packard Co., Ingram Micro Inc.,

International Business Machines, Lexmark International Group, NetApp, Inc., Nimble Storage, Inc., QLogic Corp., SYNNEX Corp., Seagate

Technology, Tech Data Corporation, Western Digital Corp., Xerox Corp..

America-IT Supply Chain: Components: Amphenol Corp., CommScope Holding Company, Inc, Sensata Technologies Holding N.V., TE Connectivity

Ltd..

America-IT Supply Chain: Distributors: Arrow Electronics Inc., Avnet, Inc..

America-IT Supply Chain: EMS: Flextronics International Ltd., Jabil Circuit, Inc., Plexus Corp., Sanmina Corp..

America-Semi Device: Advanced Micro Devices, Inc., Altera Corp., Analog Devices, Inc., Atmel Corporation, Avago Technologies Ltd, Broadcom

Corporation, Freescale Semiconductor Ltd., Hittite Microwave Corp., Intel Corp., International Rectifier Corp., InvenSense, Inc., Linear Technology

Corp., Marvell Technology Group Ltd., Maxim Integrated Products, Microchip Technology Inc., Micron Technology Inc., Microsemi Corp., NXP

Semiconductors N.V., Nvidia Corp., ON Semiconductor Corp., SanDisk Corporation, Texas Instruments Inc., XILINX Corp..

America-Semiconductor Capital Equipment: Advanced Energy Industries, Inc., Applied Materials, Inc., KLA-Tencor, Lam Research Corp., MKS

Instruments, Inc., SunEdison Semiconductor Limited, Teradyne, Inc..

America-Software: Adobe Systems Inc., Akamai Technologies, Inc., Autodesk Inc., Citrix Systems Inc., Facebook, Inc., Google Inc., Jive Software, Inc.,

Microsoft Corp., Oracle Corp., Red Hat, Inc., Rovi Corp., Sabre Corporation, Splunk, Inc., Tivo Inc., VMware, Inc., Workday, Inc., salesforce.com, Inc..

Asia Pacific Media: Astro Malaysia Holdings Berhad, Autohome Inc, Baidu.com, Inc., CJ E&M Corporation, Changyou.com, Ctrip.com International,

Daum Communications, Dish TV India, Info Edge India Ltd, Jumei International Holding Limited, Just Dial Ltd, Makemytrip Ltd, NAVER Corporation,

NCSOFT, New Oriental Education & Technology Group Inc. (ADR), Nord Anglia Education, Inc., Qihoo 360 Technology Co. Ltd., Qunar.com, SINA

Corporation, Sohu.com, SouFun Holdings Limited, Sun TV Network, TAL Education Group, Tarena International, Inc., Television Broadcasts, Tencent

Holdings, Vipshop Holdings Limited, Weibo Corporation, Xueda Education Group, Youku Tudou Inc., Zee Entertainment Enterprises.

Asia Pacific Technology: AAC Technologies, ASUSTeK Computer, Acer, Advanced Semiconductor Engineering, Inc, BizLink Holding, Career

Technology, Chipbond Technology Corp., Compal Electronics, Coolpad Group Ltd, Delta Electronics, Flexium Interconnect, HTC Corp., King Yuan

Electronics Co. Ltd, Kinsus Interconnect Technology, Largan Precision, Lenovo Group, Lite-On Technology, Merry Electronics, Quanta Computer,

Siliconware Precision Industries Co. Ltd., Synnex Technology International, Unimicron Technology, Wistron, Wistron NeWeb Corp., Zhen Ding

Technology Holding.



China Technology: Accelink Technologies, Anhui USTC iFLYTEK, Beijing Ultrapower Software, Comba Telecom Systems, Fiberhome Telecom Tech,

GoerTek Inc., Hangzhou Hikvision Digital Technology Co., Ltd., Hermes Microvision, Inc., Hunan Talkweb Information System, Mediatek, Nationz

Technologies, NavInfo Co, Parade Technologies Ltd, Shenzhen Tat Fook Technology, Sunny Optical Technology Group Co Ltd, Sunsea

Telecommunications, TSMC, TSMC (ADR), United Microelectronics (ADR), United Microelectronics Corp., ZTE Corporation (A), ZTE Corporation (H),

Zhejiang Crystal-Optech Co., Zhejiang Dahua Technology Co., Ltd..

China Telecoms: China Communication Services, China Mobile (HK), China Mobile (HK) (ADR), China Telecom, China Telecom (ADR), China Unicom,

China Unicom (ADS), China United Network Communications.

Europe-Communications Technology: Alcatel-Lucent, Alcatel-Lucent (ADS), Ericsson, Ericsson (ADR), Gemalto, Nokia, Nokia (ADR), Spirent

Communications Plc, Technicolor.

Europe-Semiconductor & Tech Hardware: ARM Holdings plc, ASML Holding NV, Infineon, Ingenico SA, Pace, STMicroelectronics, STMicroelectronics

(ADR).

Japan-Electronic Components: Alps Electric, Hirose Electric, Ibiden, Japan Aviation Electronics Industry, Kyocera, Mabuchi Motor, Minebea, Mitsumi

Electric, Murata Mfg., NGK Insulators, NGK Spark Plug, Nichicon, Nidec, Nippon Chemi-Con, Nitto Denko, Shinko Electric Industries, TDK, Taiyo

Yuden.

Japan-Integrated Elec./Semicon: Fujikura, Fujitsu, Furukawa Electric, Hitachi, Mitsubishi Electric, NEC, Oki Electric Industry, Renesas Electronics,

Rohm, Sumitomo Electric Industries, Toshiba, Yamaha.

Japan-Telecom & IT Services: Itochu Techno Solutions, KDDI, NS Solutions, NTT Data, NTT DoCoMo, Nippon Telegraph & Telephone, Nomura

Research Institute, Otsuka, Softbank.

Korea Technology: Advanced Process Systems, LG Display, LG Electronics, LG Innotek Co., SFA Engineering, SK Hynix Inc., Samsung Electro-

Mechanics, Samsung Electronics, Samsung SDI Co., Samsung Techwin, Seoul Semiconductor.

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