The Applied Finance Group, Ltd.

January 21, 2011

“Smart” Tech, Smart Ideas

The 2011 CES

The Applied Finance Group, Ltd.

105 W. Adams, Suite 2105
Chicago, IL 60603
(312) 362-9903
support@afgltd.com
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“Smart” Tech, Smart Ideas: The 2011 CES

“Smart” Tech, Smart Ideas: The 2011 CES
The International Consumer Electronics Show (CES) held every year in Las Vegas is currently
Andrew McFadden
the largest consumer technology tradeshow in the world. This year’s show featured 2,700 Research Analyst
exhibitors, and it is estimated that over 140,000 industry professionals were in attendance. (559) 892-0409
Such craze underscores the importance of understanding the future of technology and
consumer electronics through this venue, which we believe provides very valuable information amcfadden@afgltd.com
for investing in the technology segment. And just for the record, the hype surrounding this show
almost does not do it justice: the innovation on display at many of the exhibits was simply
remarkable. It’s almost as if you have taken a time machine into the future 3 years to see what Kevin Khoong
the mainstream consumer electronics world will look like. This year, the innovations at CES
ranged from “smart” phones to “smart” cars, the majority of which encompassed the idea of Research Analyst
connecting with “the cloud.” And while many of these new technologies will probably need a fair (559) 892-0408
amount of fine-tuning before they are sold in mass amounts to consumers, we got a pretty good
idea about where consumer electronics and technology markets are heading. CEA President
kkhoong@afgltd.com
Gary Shapiro said the Consumer Electronics industry is expected to grow 3% in 2011 to $186
billion – its highest mark ever – on the fast-growing success of tablets, smartphones, e-readers,
and other connected devices. It is our goal with this report to give you a better understanding of
these underlying trends, as well as a list of companies which we believe have interesting
opportunities to capitalize in these areas.

It’s all about the Tablets!

As extensively reported, the biggest wave of new products at CES centered around the tablet
device. While north of 100 tablet introductions had been expected, the actual number came in
around 80 – still very impressive considering this product category is in its infancy with only one
such successful launch thus far (iPad). However, with 17 million tablets sold worldwide in less
than 9 months in 2010, and millions of consumers aching to get their hands on one,
manufacturers everywhere have quickly realized that capturing even a small piece of this
burgeoning market would be worth the risk and investment. The exhibits at CES were proof of
that. Asus, Acer, LG, Samsung, Research in Motion, Motorola, Lenovo, and others all
introduced their tablet devices during the show, with the majority running on the Android
platform (a fair amount of the others ran on Windows 7). Part of the reason why the tablet is
gaining so much traction is that devices of this screen size have gone relatively missing to date,
with smartphones dominating the 3-5 inch size, PCs dominating the 15-25 inch size, and TV
dominating the 25-60 inch size. Thus, devices of 5-15 inches have been relatively non-existent
until recently (at least in a mass market sense), and it appears consumers are voting for tablets
over netbooks. Tablets provide a screen big enough to surf the net and watch quality videos (as
opposed to watching them on a minute 4 inch smartphone screen) but without the added
hardware weight that comes with a PC.

And as we learned from experts of the CEA, if you can dominate a screen size, you have the
potential to sell tens of millions of units per year (as Apple’s iPad has already shown). In fact,
tablet sales are already expected to double in 2011, based on conservative projections. And by
2014, tablets are expected to account for 32% of all computer shipments. It appears to be a
consensus expectation that tablet devices are here to stay, unlike many other devices
introduced at CES in past years (i.e. DigiScents’ iSmell). However, we must point out that CEA
chief economist Shawn DuBravac predicted that growth estimates for tablets in the coming year
or two are overstated and show little regard for supply chain dynamics. He believes that tablet
sales will follow more of an S-shaped adoption curve, like all consumer electronic products have
done in the past (current market projections dictate more of a linear production curve for
tablets). But while this may make for some rocky movements in tablet sales predictions, the
long-term projections are intact, and it would be silly to not try to gain exposure to this market at
such an early point in the game. We will talk further about potential investment ideas towards
the end of the report.

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“Smart” Tech, Smart Ideas: The 2011 CES

Wait a second… what about Smartphones?
While tablets were the hottest product at CES because of their “new-ness,” that does not take away from the fact that there
were also an abundance of new smartphones introduced by many industry stalwarts (LG, HTC, Samsung, Motorola, etc).
But the most exciting news surrounding these devices was not only the hardware (i.e. the Motorola Atrix smartphone sports
an Nvidia dual-core microchip – more processing power than the laptop you owned four years ago), but also revolves
around their ability to access 4G networks as well as the further development of Applications. Verizon, for example,
introduced several new smartphones that will run on its LTE-based 4G network, which runs at speeds up to 10 times faster
than 3G. In addition, these phones enjoy a new Skype app, which allows for video conferencing. Other creative apps were
also introduced at the show, including ones that can read your blood pressure when your phone is connected to a device
that fits around your arm. Another app we saw would turn your smartphone into a remote control for your television. The
primary trend underlying all of this app development is the personalization of consumer electronics. Manufacturers and
software developers are striving to make the smartphone experience more useful to each and every consumer. This can
happen as the smartphone learns to serve more of your needs and learn “who you are” as a consumer so that it can be a
real-life guide that adds value to many aspects of your life. The last major development connected with smartphones
illustrated at the show is the type of sensors integrated into each device which allow for different functions: capacitative and
resistive touchscreens, microphones, cameras, accelerometers, gyroscopes, compasses, pressure sensors, etc. We
believe this will be an area of significant innovation and adoption going forward as the smartphone has become the most
popular consumer electronics device in the world today. CEA experts agree, noting that smartphones have reached 39%
penetration in the U.S. in just a few short years, but still have plenty of growth opportunities as standard feature cell phones
have a penetration rate of 91%. The CEA expects smartphone units to grow at an annual rate of roughly 12% through
2014.

Into the 3rd Dimension

Also in abundance at CES were 3DTV’s, a technology which is producing an awe-inspiring experience. Toshiba even
introduced a 3DTV that did not require glasses. For 2011, CEA experts expect 1.9 million 3DTVs to be sold, up 67% from
2010. However, 3DTV is not even close to mass adoption, as the content available is limited. In fact, based on a market
survey conducted by CEA, 37% of shoppers said they are unsure if they would ever purchase a 3DTV, 19% said they
would never purchase one, and only 25% said they would purchase a 3DTV in the next 3 years. The limited 3D content
does not justify purchasing the TV let alone the inconvenience of wearing expensive 3D glasses. Therefore, while we are in
awe of the 3D experience, and expect to see 3D gain more popularity over the coming years, a mass-adoption of the
product appears to be quite a few years away, hinging on the availability of content. One thing that could speed that
process is the adoption of 3D gaming, which essentially redefines the gaming experience.

The Smart era of TV

Another type of TV in abundance at CES, which already offers a fair amount of content and therefore seems poised to grab
hold of the consumer market in the nearer future, was the “connected” TV, meaning TV connected to the internet. Unit
sales increased over 150% in 2010, to 3.2 million – a reassuring sign. In all actuality, “connected” devices – not just TVs –
were the most prominent theme throughout the whole show, an exciting development that we think will materialize rapidly
in the decade to come. Imagine this: A world where every device is connected to the internet; whether it’s a washing
machine, refrigerator, camera, phone, TV, radio, clock, car, air conditioning, home security system, etc. Now imagine the
possibilities. All of these devices will be able to seamlessly transfer data to the cloud (since they are all “connected”), which
will allow you to do things like manage your energy consumption, transfer photos to Facebook or to a printer directly from
your camera, download a song that you hear on your car radio directly to your playlist in the cloud, or view ingredients on
your smart grocery cart needed to make a recipe a friend just recommended. The key word here is “connected.” The TV
will more than likely play a pivotal role in this circle of connected devices, while the smartphone will likely be the central
device, as it is the most convenient to carry around. Connected TV unit shipments are expected to grow at an annual rate
of approximately 47% through 2014, according to CEA experts, following an S-shaped adoption curve.

All of these connected devices will require faster, stronger, and larger networks, much more software innovation, and a
way to integrate them on a platform that allows for easy communication with the cloud. And the exciting thing is, the more
we use these connected devices, the more in tune they will become with our lifestyles, and will therefore be able to make
recommendations to make our lives easier and our experiences more enjoyable.

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“Smart” Tech, Smart Ideas: The 2011 CES

Companies at the forefront of the “Smart” trends
Now we’ve given you a respectable view from the clouds (no pun intended) of all that is going on in the consumer
electronics world, we would like to identify companies that impressed at CES and/or are well-positioned to benefit from
these trends. Please see the list below:

The List of “Smart” Companies

as of 1/20/2011 close

Mkt. Cap Sales Growth % Sales Growth EBITDA % (5 EBITDA %

Ticker Company Name (mil) (5 yr median) % (LFY) yr median) (LFY) MQ AFG Recommendation

Semiconductor Companies
MRVL MARVELL TECHNOLOGY GROUP LTD. $ 13,810 29.4 -4.8 5.9 12.7 1 Strong Buy
BRCM BROADCOM CORPORATION $ 23,763 11.3 -3.6 6.8 4.5 1 Buy
TXN TEXAS INSTRUMENTS INCORPORATED $ 40,109 -2.9 -16.6 21.5 21.1 1 Strong Buy
STM STMICROELECTRONICS NV $ 10,429 1.4 -13.5 3.7 -12.2 0.5 Strong Buy
SNDK SANDISK CORPORATION $ 12,077 19.6 6.4 12.9 12.9 1 Buy
CY CYPRESS SEMICONDUCTOR CORPORA $ 3,391 -6.5 -12.8 -6.0 -20.1 0 Neutral
QCOM QUALCOMM INCORPORATED $ 84,050 17.9 5.5 32.0 29.9 1 Sell
ATML ATMEL CORPORATION $ 6,382 -1.9 -22.3 2.1 -1.8 0 Neutral

Networking Companies
ALU ALCATEL-LUCENT SA $ 7,300 1.7 -15.3 -0.3 -2.1 0.5 Strong Buy
CSCO CISCO SYSTEMS INCORPORATED $ 116,113 13.2 10.9 23.9 22.9 1 Neutral

Processor Companies
NVDA NVIDIA CORPORATION $ 13,020 18.2 -2.9 14.9 -3.0 1 Neutral
ARMH ARM HOLDINGS PLC $ 11,335 6.4 -13.0 15.4 15.4 1 Neutral

OS Companies
GOOG GOOGLE INC. $ 201,676 56.5 7.0 33.9 34.2 1 Neutral
MSFT MICROSOFT CORPORATION $ 243,760 11.3 6.1 39.0 39.0 1 Neutral

Hardware Companies
MMI MOTOROLA MOBILITY HOLDINGS INC $ 10,673 -35.4 -35.4 -9.6 -8.6 0.5 Neutral
GLW CORNING INC $ 30,650 13.0 -9.3 17.4 11.8 1 Strong Buy

The trends discussed in this report are fast developing, and companies mentioned could see their competitive positioning
change quickly. We are avid observers of the “connected-ness” and hope you embrace the new technologies and the
great potential they bring like we do. We hope you keep a close eye on the stocks listed, looking for the best fit for your
portfolio.

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Semiconductor Companies
MRVL – Although Marvell is not among the most chased companies at CES, we believe there is
something to be said about the “unsexy” components made by Marvell which allow these ramping
devices to run smoothly. What we like most about Marvell is that its chips allow for connectivity of
devices and communication between devices – a trend that should begin to catch storm as more
applications are developed.

BRCM – Broadcom received a lot of attention at CES, as its chips can be found in various
smartphones, tablets, and other “connected” devices. Broadcom’s products continue to do especially
well in the Bluetooth and WiFi product arenas. Connectivity is the biggest trend in consumer
electronics devices, and will benefit companies like Broadcom for years to come.

TXN - Microsoft stated it has been working with TXN on an ARM-based processor (OMAP) for its
next generation operating system (along with NVDA and QCOM). With TXN providing
semiconductors for smartphones and tablets, basestations for wireless networks, as well as several
other “connected” electronics devices (including automotives), the company is well positioned to
capitalize on the developing trends.

STM – STM produces semiconductors for several products and applications including 3DTV,
“Connected” TV, and home connectivity. With areas of focus like these, the company has exposure
to several key areas that we saw growing in popularity at CES.

SNDK – Sandisk is an obvious beneficiary of the growing popularity of smartphones and tablets, as
its flash-based storage products are in major demand. As consumers look for more convenient ways
to take their digital lives with them, flash storage will become more and more necessary to support
light-weight devices capable of storing a fair amount of data.

CY – Cypress makes touch controllers that go inside of mobile devices, primarily smartphones.
Cypress has a lot of opportunity for growth, and should benefit as Motorola Mobility begins
diversifying its touch controller suppliers. As the market for touch screen devices expands, Cypress
should be able to benefit.

QCOM –The Company showcased several new tablets and smartphones powered by its
Snapdragon family of processors. The expanding Snapdragon portfolio includes dual-CPU chips
with high-performance processing and full HD graphic capabilities for the next generation of tablets
and devices, as well as the only LTE and HSPA+ multi-mode chipsets.

ATML – Atmel is the dominate leader in terms of touch controllers within tablets, and can be found in
Motorola Mobility’s yet to be released Xoom. It was also mentioned that Atmel could be found in just
about every tablet running Nvidia’s Tegra processor, another great sign.

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Networking Companies
ALU - As the only infrastructure provider to be providing all three elements of Verizon Wireless' 4G
LTE Mobile Broadband network – LTE Radio Access Network (RAN)/Enhanced Packet Core (EPC)/IP
Multi-Media Subsystem (IMS), plus the mobile backhaul solution – ALU appears committed to laying
the groundwork to provide the “connected” customer experience. ALU, like Cisco, will benefit from the
huge demand for networking due to the mass amounts of “connected” devices and their high quality of
content.

CSCO - At CES, Cisco unveiled its solution for service providers, which seamlessly pulls together free
and paid programming, video on demand, and videoconferencing, all in a single unit, which plugs right
into your set-top box. However, this is a product that we believe still needs some fine-tuning, though it
could still end up having a very significant market presence. The more important idea to note is that
Cisco is still the dominant vendor in 6 of the 16 main networking technologies. And if one thing is for
sure, with all of these “connected” devices being introduced and becoming mainstream, an incredibly
powerful network is needed to support it all. Cisco, in its leadership position, is capable of providing
the powerful network and poised to benefit.

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Computer Processor Companies

NVDA – We were most enamored at Nvidia’s exhibit at the conference. The company is a pioneer in
graphics, and has also begun making chips used as the central processor for Android smartphones
and tablets, which is very exciting (Google chose Tegra – an NVDA processor – as the lead vendor for
its Honeycomb OS update for tablets). Also, the company is developing an ARM-based CPU which
will eventually go into laptops and other devices. Lastly, the company is developing 3D graphics
solutions for gaming, photography, and video. For all the trends we mentioned, NVDA has the potential
to make a big splash and transform the entire company. Due to this potential, NVDA shares have
appreciated nearly 50% YTD and currently do not possess loads of upside. However, we believe the
latest consensus estimates could have underestimated the company’s growth potential, and urge you
to keep a very close eye on NVDA.

ARMH - Microsoft announcement that it would develop Windows Operating Systems compatible with
chips designed by ARM was obviously bigger for ARM than it was for Microsoft, attesting to the
success the company has achieved in the smartphone and tablet space. Chips designed by ARM are
likely to continue to transform the market in the years to come.

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Operating System Companies

GOOG – It seemed like just about every device that was introduced at CES used the Android operating
system. This was enough to attest to the rapid success Android has already achieved, and with the
lack of a serious competitor so far, Android will likely remain the primary OS of choice for all mobile
device manufacturers other than Apple, RIMM, and HP. As the smartphone, tablet, and connected TV
product segments continue to grow, Google will be one of the primary beneficiaries reaping advertising
revenues, assuming it will keep Android free.

MSFT – Microsoft CEO Steve Balmer made a big splash at his keynote, showing how the new motion-
sensing Kinect device, which attaches to the Xbox 360, is a lot of fun. The Kinect has racked up $1
billion in sales in just two months (8 million units vs. the company predicted 5 million units). Also,
Balmer interacted with one of the newer Windows smartphones and touted the rapid adoption of
Windows 7 on PCs. He also announced that Microsoft plans to design a Windows operating system
compatible with chips designed by ARM – the dominant producer of chips for smartphones and tablets.
All were great announcements/displays for the company, but the elephant in the room was Microsoft’s
unnoticeable presence in the ever-popular tablet devices. Google’s Android stole the show, and with
Apple’s iPad already leading by a large distance in the space, Microsoft’s lacking presence might be an
ominous sign for the company’s PC business.

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Hardware Companies
MMI – Motorola Mobility made the biggest splash of the hardware manufacturers, introducing 2
sleek and powerful new smartphones (Atrix and the Droid Bionic) and an iPad-rivaling tablet
(Xoom). The Xoom won CNET’s best in show and is based on Android’s tablet-focused
Honeycomb OS. The Atrix smartphone is equipped with a dual-core processor, touted as “the
world’s most powerful smartphone.” Motorola has developed a close relationship with Android,
and has witnessed a resurgence within its mobile business because of it. We continue to expect
Motorola Mobility to remain at the forefront on the mobile device world, backed by its rejuvenated
innovation and marketing.

GLW – Corning’s Gorilla Glass is being found in all types of new devices, primarily smartphones
and tablets, but also Microsoft’s new “Surface” table. The glass is thin and durable, exactly the
prescription needed for these oft-used but extremely mobile devices. Gorilla Glass is already
used in 20% of the phone market and is used for both the iPhone and iPad. Because of its
impressive uses so far, Gorilla Glass or variations of it will likely be found in all sorts of devices in
the years ahead, which bodes well for the company’s growth prospects.

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Disclaimer

The Applied Finance Group, Ltd. certifies that the views expressed in this report accurately reflect the firm’s
models. The information in this report is based on material we believe to be accurate and reliable, however, the
accuracy and completeness of the material and conclusions derived from said material in this report are not
guaranteed. The information in this report is not intended to be used as the primary basis of investment
decisions, and The Applied Finance Group, Ltd. makes no recommendation as to the suitability of such
investments for any person. Any opinions and projections expressed herein reflect our judgment at this date
and are subject to change without notice. Due to individual investor requirements, this report should not be
construed as advice meant to meet the investment needs of any investor. This report is not an offer to buy or
sell, or a solicitation of an offer to buy or sell any of the security mentioned in this report.

The Applied Finance Group, Ltd, its owners, employees and/or customers may have positions in the security
that is discussed in this report.

All historic fundamental data and analyst estimates (excluding the United States and Canada) are provided by
Worldscope and IBES, which are used by permission of Thomson Reuters. ©2011 Thomson Reuters. All
Rights Reserved. Use, duplication, or sale of this service, or data contained herein, except as described in The
Applied Finance Group™, Ltd.'s Subscription Agreement, is strictly prohibited.

Analyst earnings and analyst earnings related data for the United States and Canada are provided by Zacks
Investment Research, Inc.

The information contained in this report is the property of The Applied Finance Group, Ltd. ©2011.

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