Investing in Tech: Understanding Innogration Jim Pearce The Wealth Summit May 2014

What is “Innogration”? “Innograton” = Innovation + Integration Innovation is using internal resources to develop new products Integration is acquiring outside resources and combining them with innovation to create a market leading product Example: Apple iPhone

How is Innograton Measured? Boeckl Innograton Quotient (“BiQ”) –Dividends - necessary to attract and retain current investor capital, plus stabilize market cap to access debt markets inexpensively –Cash Flow From Operations – must be growing to provide fuel to pay dividend while innovating and integrating –Strategy – must be built around convergence on end point technologies (e.g., cloud, etc.)

How is the BiQ Scored? Dividends – scale of 0 – 3 based on yield compared to treasury curve Cash Flow – scale of 0 – 3 based on most recent period compared to average of prior two periods. Strategy – scale of 0 – 4 based on degree of focus on convergence Total score of 0 – 10

How is the BiQ used to Invest? Converted to Smart Tech Rating (“STR) based on forward 12-month estimated earnings versus average for peer group. Example: ABC has a BiQ of 5 and FFT of.5 (20/10), so STR is 10 (5 x 2). Conversely, DEF has a BiQ of and FFT of 2 (20/40), so STR is 2.5 (5 x.5).

Case Study: Microsoft (MSFT) BiQ = 4.5 ( ) Forward Earnings –MSFT = –Sector = 23.3 –23.3/14.81 = 1.57 STR = (4.5 x 1.57)

Case Study: Amazon (AMZN) BiQ = 5.2 ( ) Forward Earnings –MSFT = –Sector = 24.8 –24.8/166.6 =.149 STR = 0.78 (5.2 x.149)

Long Wave Theory Economy travels through long waves (40 – 60 yrs) based on new core technology. We are mid-way through current wave, microprocessor is core technology. Invention is key to first half of wave, but innogration is key to second half. Spreads into all other industries during second half of wave.

Prior Long Wave: Autos Internal combustion engine was a core technology of prior long wave. As a result auto industry revolutionized travel, hurt railroad industry. First half of wave included construction of the National Highway System, which in turn created huge demand for utilities during second half of wave as suburbs were built out.

Current Long Wave: Cloud Microprocessor spawned the Internet (“Information Superhighway”), with PCs and smartphones as vehicles. Just as McDonalds and Holiday Inn recognized opportunity and bought up best land during prior wave… Early adaptors in current wave are staking out space in the Cloud, Big Data, Mobility and Social.

New Utilities: Social Primary advertising-based revenue model, subject to popular trends with low barrier to entry. Must have a compelling value proposition to retain loyal customer base. We like LinkedIn (LNKD), because employers will pay for better candidates and people are motivated by job opps.

New Utilities: Cloud Requires massive storage and transmission capabilities, high barrier to entry. Speed, Security and Storage capacity are paramount. We like a lot of companies in this space, including Western Digital (WDC) up 50% since last year but still only 11x FFE.

New Utilities: Mobility Requires the greatest amount of innogration just to keep up, most fluid. Battle lines are being drawn in Asia, especially China and India due to huge populations and limited infrastructure. We like Qualcomm (QCOM), potential for Asian market too big to ignore (room for both Apple and Samsung to grow).

New Utilities: Big Data Perhaps the greatest upside potential of all, least likely to become commoditized in near term. Also good for cloud companies, indirectly supports Mobility and Social. We like NICE Systems (NICE), cybercrime and national security are huge growth markets.

Summary BiQ determines likelihood that a company will become an eventual category winner. STR identifies those stocks that possess desirable combination of high BiQ and low STR. Companies with STR 50% greater than average are buys, those less than 50% of average are either sells or takeovers.