india internet has finally arrived

Sandeep Aggarwal ● (415) 489-2518 ● [email protected] Caris & Company Stan Velikov, CFA ● (415) 489-2510 ● [email protected] 44 Montgomery Street Suite 1500 San Francisco, CA 94104

FINRA SIPC For full disclosure, please see end of report 1

T e c h n o l o g y : I n t e r n e t & S o f t w a r e

Industry Update Thursday, September 16, 2010 Indian Internet Has Finally Arrived! Summary India is the least penetrated Internet economy among the large nations but has finally hit the inflection point, in our view. The last decade of the Internet ramp-up has been painfully slow in India (vs. US/China) constrained by poor IT infrastructure, low broadband penetration, low PC shipments, lack of home-grown innovations, lack of local content/reasons, and VC money chasing more mature non-Internet companies with equally compelling growth prospects. However, in our view, the next 10-years will bring massive growth in the Internet sector in India supported by highly favorable demographics, growing Internet/broadband penetration, launch of one of the world’s best 3G networks, growing middle class/income levels, noticeable pick-up in tech/gadget and mobile culture, and surge in home-grown Internet start-ups. In our view, India's Internet market is 10 years behind US's and 6 years behind China's in terms of several key factors namely – overall Internet adoption, broadband penetration, Internet adverting, E-Commerce, quality content, and sophistication & functionality of websites. However, until 2015, we expect CAGR of 15% for Internet users, 20% for Internet advertising, 25% for E-Commerce and OTAs. There are four public Internet companies in India i.e. SIFY, REDF and MMYT listed on NASDAQ and Info Edge listed in Hong Kong & India. We are initiating on MMYT with a Buy and $46 PT. Key Points • Inflection point. In our view, India Internet has finally hit the inflection point.

With 81mm Internet users base, increasing time spent online, upcoming best 3G mobile network, younger demographic, growing wealth, and surge in Internet start-ups, India is saliently creating a solid ‘Net economy & ecosystem.

• Internet users and penetration. In our view, India has taken much more time to reach 7% Internet penetration than the US, China, and many emerging markets. We believe that by 2015, India will have achieved 15%-18% penetration i.e. 180mm to 200mm Internet users.

• Internet advertising. The global ad industry is $700bn and Internet is $50bn of that. The Indian ad industry is $5bn and Internet ad is a miniscule $200mm. We expect Internet advertising to grow at 30% for the next several years.

• E-Commerce. E-Commerce adoption is fairly low in India. In our view, E-Commerce is trying to grow in India at the same time as the organized retail revolution – E-Commerce is only $1.4bn vs. $350bn retail sector in India.

• Online Travel. The most exciting segment of India's Internet sector is online travel which accounts for $4bn vs. $20bn total travel industry.

• Mobile Internet. Supported by good wireless infrastructure, economical voice/ data plans, availability of cheap handsets, and lower PC installed base, India's mobile market is in many ways more advanced than many mature markets.

• Noteworthy private Internet Co's. While there are many Internet companies with massive growth, the following are some of the noteworthy private ones in India – Yatra, Cleartrip, Via, Indiamart, Shaadi, Interactive Avenues, Komli, Quikr, Sulekha, JustDial, and BharatMatrimony. The established Internet Co's with traditional media roots are – Times, HT Media, NDTV, Network18.

Company Ticker Price Rating Amazon AMZN $145.45 3/Average Digital River DRIV $30.35 1/Buy eBay EBAY $24.19 1/Buy Expedia EXPE $26.66 3/Average Google GOOG $480.64 3/Average GSI Commerce GSIC $23.34 1/Buy MakeMyTrip MMYT $38.39 1/Buy Microsoft MSFT $25.12 1/Buy Priceline.com PCLN $332.06 1/Buy comScore SCOR $19.40 1/Buy TechTarget TTGT $5.11 1/Buy ValueClick VCLK $12.26 3/Average Yahoo! YHOO $14.27 1/Buy

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Table of Contents:

# Section Page

1 Economic and Demographic Overview .......................... 3-5

2 Overview of the Internet Sector in India ......................... 5-9

3 Overview of Internet Advertising in India ...................... 10-11

4 Overview of E-Commerce in India ................................. 11-12

5 Overview of Online Travel in India ................................ 12-13

6 Overview of Mobile Internet in India ............................. 13-15

7 Growth Segments in Indian Internet ............................... 15

8 Overview of Indian Public Internet Companies .............. 16-17

9 IPO/M&A Outlook for the Internet Sector in India ........ 17-18

10 Worldwide and US Internet Overview............................ 19-25

11 Valuation Framework ..................................................... 26

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Section 1: Economic and Demographic Overview Indian economy has been on a massive growth trajectory for the past one decade infused by young demographics, rising capital investments in key sectors (including infrastructure), increasing wealth, robust job market, high savings rates, government-led liberalization of the economy, high-tech revolution, and increasing foreign investments. India was the center of global economic activities until 1600 AD India accounted for anywhere from 35% to 25% of world GDP between 1 AD and 1600 AD but since then its share of the global economy kept going down and reached under 3% by the 1980s.

Source: Angus Maddison, The World Economy: Historical Statistics

Share of World GDP Over Time

0%

5%

10%

15%

20%

25%

30%

35%

USA Europe China India

Today, India is re-emerging very fast and is firmly positioned among the 5 largest world economies India and China are the emerging-world powers with growth rates well above developed countries'. Nowadays India accounts for about 5% of world GDP and is expected to reach 10% by 2020. The country is currently the fifth largest world economy (by 2009 GDP at PPP) after only the EU, the US, China, and Japan and has the 10th best GDP real growth rate in the world. India is also the second most populous country in the world and one of the youngest among the major world economies (the median age of its population is 25.9 years). Although the country ranks fourth in terms of total Internet users, Internet penetration in India (at 7%) is the lowest among the emerging economies and has a great potential for growth.

Source: CIA World Factbook; Caris & Company

2009 GDP at Purchasing Power Parity ($bn)

$14.1

$8.7

$4.2$3.6

$2.8$2.1

USA China Japan India Germany UK

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GDP Trends in India Indian GDP and GDP growth over the last six years look very compelling.

Source: IMF; Caris & Company

Indian GDP (at PPP) and GDP Growth

$2.36$2.67

$3.01$3.30

$3.53$3.8613.4%

12.5%

9.6%

6.9%

9.5%

2005 2006 2007 2008 2009 2010

GDP ($ trillion) GDP Growth (Y/Y)

Comparing India with the US and China on Key Economic and Other Relevant Measures Below we compare India with the US and China on key economic factors and several sectors relevant to this report i.e. total advertising and Internet advertising, total retail and E-Commerce, and total travel and online travel.

United States China India

Population (mm) 307 1,339 1,157Median Age 36.8 35.2 25.9

GDP - PPP ($ trillion) 14.14 8.75 3.57GDP Growth -2.6% 9.1% 7.4%GDP per Capita ($) 46,000 6,600 3,100

Internet Users (mm) 239 420 81Internet Penetration 77% 32% 7%Internet Users Growth 152% 1767% 1520%

Advertising ($ billion) - CY10E 266.6 45.0 5.7Advertising LT Growth Outlook 2%-3% 8%-10% 10%-12%Online Advert ising ($ billion) - CY10E 25.9 3.6 0.2Online Advert ising LT Growth Outlook 13%-15% 24%-27% 32%-35%Online Advert ising Penetration 10% 8% 4%

Retail ($ billion) - CY10E 3,600.0 1,000.0 350.0Retail LT Growth Outlook 2%-3% 10%-12% 12%-14%E-Commerce ($ billion) - CY10E 156.3 24.0 1.4E-Commerce LT Growth Outlook 10%-12% 20%-24% 50%-55%E-Commerce Penetration 4.3% 2.4% 0.4%

Travel* ($ billion) - CY10E 255.0 65.0 42.0Travel LT Growth Outlook 2%-3% 6%-8% 8%-10%Online Travel* ($ billion) - CY10E 106.3 8.5 5.5Online Travel LT Growth Outlook 10%-12% 24%-26% 35%-40%Online Travel Penetration 42% 13% 13%* Travel includes leisure and unmanaged corporate travel only

Source: CIA World Fac tbook; Internet World Stats; Caris & Company

Comparison of the Largest Countries in the World

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Rising Middle Class in India Today, India experiences profound demographic/socio-economic changes as well and its middle class (defined as Seekers and Strivers by McKinsey & Company) is expected to increase from 50mm in 2005 to 225mm in 2015 and 585mm by 2025.

* Income Brackets in Thousand Indian Rupees per Annum (2000)

Source: McKinsey Global Institute

Share of Indian Population (% of Households) by Income Bracket*

93

80

54

35

22

6

18

41

43

36

4

19

32

1 2

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1985 1995 2005 2015 2025

Deprived (<90) Aspirers (90- 200) Seekers (200- 500) Strivers (500- 1,000) Globals (>1,000)

2

9

1 21

Section 2: Overview of the Internet Sector in India In our view, Internet has only scratched the surface in India so far. However, that has been the case for the past decade during which Internet adoption in the country has been painfully slow. India has not only one of the lowest Internet penetration levels among the major world economies but also a very small Internet economy when it comes to the overall economic impact and new job creation. More specifically, Internet advertising and E-Commerce remain very small industries. However, India's Internet has given boost to online travel as well as B2B businesses and both of these segments have seen astronomical growth. Indian Internet Population & Penetration India has the 4th largest Internet population in the world after China, the US, and Japan. However, India is the slowest among the large nations in terms of Internet adoption. As of June 2010, Internet penetration in the country has only reached 7% – way below any major developed or emerging economy in the world. The country accounts for 17% of the worldwide population and for only 4% of Internet users. Still, Internet has been growing very fast in India (1,520% between 2000 and 2010) and we expect penetration to accelerate even further with the current infrastructure improvements and growth in wealth and education levels in the country.

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# Country Population% of WW

PopulationInternet Users

% of WW Internet

2000-'10 Growth

Internet Penetration

1 China 1,330,141,295 19% 420,000,000 21% 1,767% 32%2 United States 310,232,863 5% 239,232,863 12% 152% 77%3 Japan 126,804,433 2% 99,143,700 5% 111% 78%4 India 1,173,108,018 17% 81,000,000 4% 1,520% 7%5 Brazil 201,103,330 3% 75,943,600 4% 1,419% 38%6 Germany 82,282,988 1% 65,123,800 3% 171% 79%7 Russia 139,390,205 2% 59,700,000 3% 1,826% 43%8 United Kingdom 62,348,447 1% 51,442,100 3% 234% 83%9 France 64,768,389 1% 44,625,300 2% 425% 69%

10 Nigeria 152,217,341 2% 43,982,200 2% 21,891% 29%WW Total 6,845,609,960 53% 1,966,514,816 60% 445% 29%

Source: Internet World Stats (Jun '10)

Number of Internet Users - Top 10 Countries

Broadband Penetration in India At 5.1Mbps USA is ranked 28th in the world for bandwidth speed (Korea at 21.4Mbps, Japan at 15.8Mbps, Sweden at 12.8Mbps, and the Netherlands at 11Mbps lead the pack) while India continues to struggle with 256kbps and highly limited broadband penetration at 9mm subscribers (out of 81mm Internet users in India). We do not see PC-based broadband becoming more ubiquitous in India any time soon, however, India is in the middle of implementing one of the most advanced 3G mobile networks in the world and we believe with that mobile Internet will get a much needed impetus as an industry. Worldwide Internet Population and Penetration Internet adoption has been increasing not only in India but throughout the world. Over the past 10 years, the number of Internet users worldwide has grown 445% and there is still plenty of room for growth – Internet penetration as of June 2010 has just reached 29% on a global basis.

WW Regions Population% of Total Population

Internet Users

% of Total Internet

2000-'10 Growth


Africa 1,013,779,050 15% 110,931,700 6% 2,357% 11%Asia 3,834,792,852 56% 825,094,396 42% 622% 22%Europe 813,319,511 12% 475,069,448 24% 352% 58%Middle East 212,336,924 3% 63,240,946 3% 1,825% 30%North America 344,124,450 5% 266,224,500 14% 146% 77%Latin America/Caribbean 592,556,972 9% 204,689,836 10% 1,033% 35%Oceania/Australia 34,700,201 1% 21,263,990 1% 179% 61%WW Total 6,845,609,960 100% 1,966,514,816 100% 445% 29%


Number of Worldwide Internet Users

Indian Internet Landscape Given the size of the country and its global economic impact, India remains in an arguably nascent state of Internet evolution. Google, Yahoo!, MSN, AOL, and Facebook are among the most visited websites in India. The other popular public and mostly private Internet companies in the country are presented in the exhibit below roughly classified in eight major categories.

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Online Ad/ ClassifiedsOnline Marketing

Services E-Commerce Online TravelE-Commerce

Services MobileSocial Media &

GamingContent & Digital

Media

US Popular Public Companies

Google, Yahoo!, MSN, AOL, Monster,

ValueClick, 24/7Media (WPP), Google, Yahoo!

Amazon, eBay, Rediff (REDF), Apple

Expedia, Priceline DigitalRiver Google, Apple Google, MSN, Sify (SIFY), Rediff (REDF)

Google, Yahoo!, MSN, AOL

India Popular Public Companies

InfoEdge, Sify (SIFY), Rediff (REDF) N/A N/A

Makemytrip (MMYT) N/A N/A N/A

Sify (SIFY), Rediff (REDF)

Popular US/Indian Private Companies

Quikr, Shaadi, Sulekha, Bharatmatrimony, Jus tdial, Ideacts

Komli, Interactive Avenues

Fashonandyou, Flipcart, Indiamart,

Future Bazar

Yatra, Cleartrip, Via, Travelguru

mCheck, Paymate One97, Nazara, inmobi, IMImobile,

July System, Kirusa

Facebook, Orkut, Linkedin, Twitter, Hi5, Chakpak, Minglebox,

Games2win

Seventymm, Canvera

Market Size 250mm 30mm 1.4bn 5.5bn $50mm $500mm $25mm $350mm

Long-Term Growth Rate 32%-35% 35.0% 50%-55% 35%-40% 40.0% 40.0% 40.0% 40.0%

Entrepreneurial Opportunities

High High High High High High High High

M&A Activity High High Moderate High Moderate High Low Moderate

Source: Caris & Company

India Internet Market Overview

Trends for Active Internet Users in India The Internet user base in India has been growing over the past 10 years but still remains materially limited in reach.

Source: Internet and Mobile Associat ion of India; Caris & Company

Claimed and Active Internet Users in India (MM)

24

811

21

2932

36

4246

52

59

1216

32

4246

50

57

63

71

2000 2001 2003 2004 2006 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09

Active Internet Users C laimed Inte rnet Users

Time Spent on the Internet in India Rising…Finally In addition to growth of the overall Internet user base, the time spend on the Internet has gone up, especially quite dramatically in the last two years.

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Internet Usage - Average Hours per Week

5.64.8

6.2

8.2

6.9

9.3

15.7

2001 2003 2004 2006 2007 2008 2009

Top Internet Activities in India Below we present the top activities that bring people in India online.


Top Online Activities (% of Respondents): 2008 vs. 2009

20

13 13

21 21

4137

46

32

49

76

91

12 14 16 18

24

33 33

4045

65

80

87

OnlineBank ing

VoIP Calls& Chat

OnlineNews

Book RailTickets

FinancialInfo

OnlineGaming

OnlineJobsites

Text Chat Mus ic/Video

EducationInfo

GeneralSearch

E-Mail

2008 2009

Internet & Software


Below we present the top search activities on the Internet in India.

Source: eMarketer; JuxtConsult; Caris & Company

Most Popular Online Activities in India (% of Respondents)

84%

71%

68%

67%

62%

55%

53%

52%

49%

49%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Online Travel Search

Job Search

Product Search

Instant Messaging/Chatting

Check General News

Dating/Friendship

Check Cricket Content/Scores

Check Sports Other Than Cricket

Marriage Search

English Information Search Engine

Why India’s Internet Adoption has been Slower than Other Large Countries? While US-based portals and search companies have traditionally seen a large user base out of India, the pure-play India Internet has not seen the kind of growth observed in the US, China, Western Europe, Japan, etc. In our view, the major Internet growth drivers and impediments in India include the following:

# Growth Drivers # Growth Impediments

1 Availability of Internet access points 1 Limited reach of the Internet

2 Increasing broadband penetration 2 Poor Internet infrastructure

3 PC shipment and installed base 3 Low bandw idth

4 Rise in w hite collar jobs w ith PC and Internet at w ork 4 Low adoption

5 Internet-capable mobile phones/best 3G Netw ork 5 Small PC installed base

6 Affordable voice and data plans 6 Lack of local content

7 Rising income levels 7 E-Commerce adoption limited

8 New s, Email, Search, Social and E-Commerce 8 Low credit Card penetration

9 Younger Demographics 9 Product development and management lack global standards

10 Emergence of home-grow n companies 10 Traditional businesses are in early stage of evolution as w ell


Major Internet Growth Drivers and Impediments

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Section 3: Overview of Internet Advertising in India India Internet Advertising Market Forecast The Indian Internet advertising market is still relatively small in absolute terms – about $154mm in 2009, by our estimates – but it shows extraordinary growth rates. We are estimating CAGR of 32.9% between 2009 and 2012 for Internet advertising which compares to 14.5% CAGR for total Indian advertising over the same period. Total Internet ad spend is expected to grow to $360mm by 2012, up from $65mm in 2007 and $210mm in 2010. Currently, Internet advertising is about 3.0% - 3.5% of total advertising and we expect its share to grow to 5% by 2012.

$MM 2007 2008 2009E 2010E 2011E 2012E '09-'12 CAGR

Total India Advertising $4,663 $4,962 $4,798 $5,738 $6,484 $7,198 14.5%Y/Y Change 32.1% 6.4% -3.3% 19.6% 13.0% 11.0%

India Internet Advertising $65 $114 $154 $210 $275 $360 32.9%Y/Y Change 85% 75% 34.5% 36.8% 31.0% 30.9%

India Internet as a % of Total 1.4% 2.3% 3.2% 3.7% 4.2% 5.0%Y/Y Inc rease in Penetrat ion 40 bps 90 bps 90 bps 46 bps 58 bps 76 bps

Source: PricewaterhouseCoopers; eMarketer; Caris & Company estimates; Excludes Online Classifieds

India Internet Advertising Revenue ($MM)

Looking at Various Formats of Internet Advertising in India State of Search Advertising in India. Similar to most other countries, search in India is dominated by Google and the other leading search engines such as Yahoo! and Bing. There are two notable home-grown search services that are worth mentioning and those are guruji.com and justdial.com. We believe that Google, Yahoo! and Bing together generate search revenue close to $125mm from India. State of Display Advertising in India. In addition to the leading US portals i.e. MSN, Yahoo!, AOL, etc., the display ad business has dozens of strong home-grown companies especially many with traditional media roots i.e. The Times Group, Hindustan Times, Network18, Rediff, and Sify. State of Other Online Ad Formats in India. Besides search and display, lead generation is another online ad format that has potential in India but marketing sophistication is still not very high. Email marketing and video advertising remain small categories in India but, with retail and brand revolution, will grow in the coming years. State of Online Classifieds in India. In our view, online classifieds is perhaps the biggest category for online advertising in India with jobs, real estate, auto, and matrimony having multiple companies with sizeable revenue and growth. As per our estimates, online classifieds is a $200mm category in India. State of Online Marketing Services in India. We include online ad networks, interactive ad agencies, search engine marketing agencies (SEMs), and search engine optimization agencies (SEOs) as part of online marketing services in India. Because Internet advertising remains a small category in India, online marketing services, which is a derivative of the Internet ad spend, remains very small as well. Advertising by Media in India Unlike in most of the mature markets, advertising is a growth industry in India. While this data are relatively old, below we highlight India’s adverting industry by format.

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Spending Y/Y Change % Share

Print $2,242.4 16% 47.4%TV $1,898.7 17% 40.2%Outdoor $323.9 11% 6.8%Radio $151.1 38% 3.2%Internet $82.8 45% 1.8%Cinema $29.4 24% 0.6%

Total $4,728.3 17% 100.0%

Source: eMarketer; Pitch-Madison; Caris & Company

2008 Advertising Spend in India ($bn)

Section 4: Overview of E-Commerce in India India E-Commerce Market Forecast The Indian retail market is the 5th largest in the world at approximately $350bn with less than 10% in the organized retail sector (retail chains/corporate play vs. mom-and-pop shops). What is more important, though, is that unlike in the US, the Indian retail sector is growing at an estimated growth rate of 10% Y/Y until 2018. Consultancy McKinsey expects the Indian retail market to grow 4x by 2025. In India, the retail E-Commerce market is currently a tiny fraction of the total retail market – about 0.5% – and is expected to reach $1.4bn in 2010. By our estimates, its share will more than double by 2012 due to much faster growth compared to overall retail. We expect E-Commerce in India to grow almost 3x to 4x faster than the overall retail market (58.5% CAGR vs. 15.4% CAGR between 2009 and 2012). We estimate retail E-Commerce to reach $5bn by 2012 (up from $500mm in 2008 and $1.4bn in 2010). We think by 2013, E-Commerce in India will achieve 1% penetration.

Sales in $MM 2008 2009 2010E 2011E 2012E 2013E '09-'12 CAGR

Total Retail $260,000 $300,000 $350,000 $404,250 $460,845 $520,755 15.4% Y/Y Change 15.6% 15.4% 16.7% 15.5% 14.0% 13.0%

Total Retail E-Commerce $500 $850 $1,400 $2,212 $3,384 $5,009 58.5% Y/Y Change 81.8% 70.0% 64.7% 58.0% 53.0% 48.0%

E-Commerce as % of Retail 0.2% 0.3% 0.4% 0.5% 0.7% 1.0% Y/Y Increase in Penetration 0.07% 0.09% 0.12% 0.15% 0.19% 0.23%* Excludes sales of travel products and services

Source: Caris & Company estimates

India Retail and E-Commerce Sales ($MM)

Shift in Spending Behavior in India is a Catalyst for E-Commerce Growth Younger demographics, higher education levels, global cultural awareness, and increasing affordability are brining shifts in the spending behavior of consumers in India. We believe that these shifts may serve as a catalyst for the E-Commerce growth, which has lagged behind on the adoption curve. Below we present a chart that shows where the average Indian consumer is allocating his or her share of wallet.

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Source: McKinsey Global Institute

Share of Average Household Consumption in India

56

4234

25

5

6

5

5

14

12

12

10

2

3

3

3

4

8

9

11

11

1719

20

12

3

6

35

69

4 7 9 13

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 2005 2015 2025

Health care

Education & recreation

Communication

Transportation

Personal products & services

Household products

Housing & utilities

Apparel

Food, beverages, tobacco

Section 5: Overview of Online Travel in India India Online Travel Market Forecast Tourism demand in India is growing not only from domestic sources – more Indians taking vacation – but also from international sources – foreign tourists visiting the country. The Indian Ministry of Tourism has set a goal of reaching 10mm foreign tourist arrivals (FTAs) in 2010 (compared to 5.1mm in 2009) and 675mm domestic tourists. This target seems somewhat ambitious today (FTAs have reached just 3.5mm by August 2010) but the efforts the Indian government puts in promoting the country as a tourist destination (i.e. its Incredible India media campaign, etc.) should pay off in the near future (most likely once macro economic uncertainties ease around the world). India is among the fastest growing travel and tourism markets in the world. Travel and tourism is a $40bn industry in India (includes managed corporate travel; $20bn for leisure and unmanaged corporate travel) and online is expected to reach $5.5bn in gross bookings by the end of 2010. While online travel has low penetration, relative to India’s E-Commerce market, it is the biggest category online. We estimate the online travel market will grow at a CAGR of 27.8% between 2009 and 2012 and reach $8.9bn by 2012. Online travel is expected to grow almost twice as fast as the overall Indian travel market during that period.

2008 2009 2010E 2011E 2012E '09-'12 CAGR

Indian Total Travel $35,200 $36,000 $42,000 $48,426 $55,254 15.4% Y/Y Change -- 2.3% 16.7% 15.3% 14.1%

Indian Online Travel $3,100 $4,250 $5,500 $7,040 $8,870 27.8% Y/Y Change 82% 37.1% 29.4% 28.0% 26.0%

Online Travel as % of Total 8.8% 11.8% 13.1% 14.5% 16.1% Y/Y Increase in Penetration -- 3.00% 1.29% 1.44% 1.52%

Source: WTTC; Caris & Company estimates

Indian Total and Online Travel Sales ($MM)

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Travel is Among the Top Products Indians Search For Online One interesting trend in India is that travel products are the most popular type of products which Internet users research and purchase online. This is very encouraging for the Indian online travel industry and bodes well for all OTAs – domestic and multi-national.

Source: eMarketer; Google; Caris & Company

Types of Products Researched and Purchased Online

66%

40%

26%

0% 10% 20% 30% 40% 50% 60% 70%

Travel Products

Entertainment Products

Technology Products

Section 6: Overview of Mobile Internet in India Indian Mobile Internet India has more than half a billion mobile subscribers today (2nd large mobile subs in the world) and very soon it is set to launch the world’s most advanced 3G network that many experts claim to be as fast as WiMAX. In our view, mobile Internet in India is way ahead of mobile Internet in the US and Western Europe because of several factors – 1) the telecom sector picked-up in India later than in Western countries but that allowed India to benefit from best practices, 2) the PC is less affordable and Internet connections are not that pervasive so mobile has become a gadget of choice to access the Internet, 3) mobile plans for voice and data are highly affordable.

CAGR2008 2009 2010 2011 2012 2013 2014 '09 - '12

Total Populat ion 1,140.6 1,156.9 1,173.1 1,189.2 1,205.1 1,220.8 1,236.3 1.4%Y/Y Growth -- 1.4% 1.4% 1.4% 1.3% 1.3% 1.3%

Mobile Phone Subs 346.9 525.2 604.1 666.0 723.1 787.4 853.0 11.2%Y/Y Growth -- 51.4% 15.0% 10.2% 8.6% 8.9% 8.3%Penetration 30.4% 45.4% 51.5% 56.0% 60.0% 64.5% 69.0%

Mobile Internet Users 2.0 5.0 12.1 30.0 65.1 114.2 162.1 135.3%Y/Y Growth -- 150.0% 142.0% 147.9% 117.0% 75.4% 41.9%Penetration 0.2% 0.4% 1.0% 2.5% 5.4% 9.4% 13.1%

Source: eMarketer; US Census Bureau; Caris & Company

Mobile Phone and Mobile Internet Users in India: 2008 - 2014 (MM)

India Is the 3rd Largest Nation for Mobile Internet Given this favorable environment, it is not surprising that India is one of the countries with the highest mobile Internet traffic in the world. According to eMarketer, the country accounted for 11% of total mobile Internet traffic in February 2009 – surpassed only by the US and the UK which together accounted for half of all the traffic.

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Source: eMarketer; Bango; Caris & Company

Top 10 Countries Ranked by Mobile Internet Traffic, Feb. 2009

US 29.3%

UK 20.3%

India 11.1%

Indonesia 5.5%

South Afr ica 5.4%

Egypt 1.7%

Malaysia 1.4%

Spain 1.4%

Portugal 1.2%

Sweden 1.1%

Other 21.6%

0% 5% 10% 15% 20% 25% 30% 35%

India has the Highest Mobile Users Growth Among BRIC Nations Mobile Internet usage is also expected to grow materially over the next 4-5 years as the country upgrades its network and smart-phones become more affordable (due to increasing wealth and competitive pricing pressure). According to eMarketer, the number of mobile Internet users in India is expected to grow at the astonishing 111% CAGR between 2009 and 2012. This is about 4x faster than the other BRIC countries.

CAGR2009 2010 2011 2012 2013 2014 '09 - '12

Brazil 19.1 31.6 46.2 58.6 71.3 82.8 31.2%Russ ia 15.7 23.6 29.8 42.1 50.9 60.1 29.2%India 5.0 12.1 30.0 65.1 114.2 162.1 111.3%China 233.0 372.8 526.4 686.9 831.9 956.7 30.7%

Source: eMarketer; Caris & Company

Mobile Internet Users in BRIC: 2009 - 2014 (MM)

India is the 2nd Largest BRIC Country for Mobile Ad Spend At the same time, growth of mobile advertising spend in the country is expected to be less robust, compared to the other BRIC countries, but still at a remarkable 60% CAGR between 2009 and 2012.

CAGR2009 2010 2011 2012 '09 - '12

Brazil 6.1 11.8 23.8 40.9 88.6%Russ ia 4.8 6.4 12.1 22.4 67.1%India 20.8 35.4 56.5 85.4 60.1%China 101.0 223.2 448.7 699.9 90.7%


Mobile Ad Spend in BRIC: 2009 - 2012 ($MM)

Internet & Software


Mobile Internet Advertising Trends in India and China Mobile Internet advertising is also a small market today – about $21mm in 2009 – but is also expected to show tremendous growth over the next couple of years. Per eMarketer, mobile ad spend will see CAGR of around 60% between 2009 and 2012.


Mobile Ad Spend - India vs. China: 2009 - 2012 ($MM)

$20.8 $35.4$56.5

$85.4$101.0

$223.2

$448.7

$699.9

2009 2010 2011 2012

India China

Section 7: Growth Segments in Indian Internet In our view, Internet as an industry remains in an early stage of evolution compared to how it ramped up in the US and China. That also means that almost any category in India presents a long-term growth opportunity. While India's Internet overall will outperform the rest of the big nations, below we present the 10 specific Internet segments where we expect to see the most remarkable growth over the next several years. We also show some of the key players in each segment.

# Category Popular Companies

1 Online Travel MakeMyTrip, Yatra, Cleartrip, Via, Travelguru, redBus

2 E-Commerce Flipkart.com, Fashionyou.com, Rediff .com, Future Bazaar, Naaptol, Infibeam

3 Matrimony and Dating Shaadi.com, BharatMatrimony.com, Jeevansathi.com

4 Internet Advertising/Search Justdial, Guruji, Web18, Rediff.com, Sify, Time, PubMatic, Ideacts

5 Mobile Content and VAS Kirusa, Cellcast, InMobi, Comviva, One97 Communications, IMImobile.com, July Systems

6 Digital Agency/ Ad Networks Interactive Avenues/Ad Magnate, Komli, RS LiveMedia

7 Online Classifieds Naukri, Sulekha, MotorExchange, Carwale, 99acres.com, magicbricks.com, Quikr.com, Makaan.com, Indiamart.com

8 Online/Mobile Payment mCheck, PayMate

9 Online Education TutorVista, TopChalks

10 Content/Social/Gaming Minglebox.com, Nazara, Chakpak, Games2win


Top 10 Growth Segments in India's Internet Sector

Internet & Software


Section 8: Overview of Indian Public Internet Companies India is a small market when it comes to publicly traded Internet companies. Against roughly 50 public Internet companies in the US and close to 25-30 in China, there are four notable public Internet companies in India – MakeMyTrip, Info Edge (ticker: 532777-BOM), Rediff.com (ticker: REDF), and Sify (ticker: SIFY). Below we present some key metrics on these companies.

MakeMyTrip Info Edge Rediff Sify

Ticker MMYT 532777-BOM REDF SIFYYear Established 2000 1995 1996 1998FY10 Revenue ($MM) $40.3 $57.4 $18.8 $156.9Total Employees 800 1,550 330 3,000Monthly Uniques ('000) 2,159 4,662 9,917 2,443

Source: Company reports ; comScore; Caris & Company

Public Internet Companies

MakeMyTrip MakeMyTrip (NASDAQ: MMYT) is the largest online travel company in India, based on gross bookings, and offers a wide range of travel and travel-related services and products to residents of India and non-resident Indians and others traveling to India from the United States, Canada, the United Arab Emirates, and other countries. It provides business and leisure travelers with stand-alone and packaged travel products and services that include air tickets, hotels, packages, rail tickets, bus tickets, car hire, and ancillary travel services such as facilitating access to travel insurance, visa processing, etc. Through its websites focused on its four core markets (i.e. India, US, Canada, and UAE), call centers, 19 travel stores in major Indian cities, and a network of 2,000 agents the company provides travelers with the tools and information they need to efficiently research, plan, book, and purchase travel services and products in India and overseas. MakeMyTrip started operations in 2000 and spent its first five years focused on the non-resident Indian market in the US (selling primarily air tickets for India-bound travel). The company started its Indian business in September 2005 with the launch of its Indian website – www.makemytrip.com. Info Edge Info Edge (India) Limited (532777-BOM) is India’s premier online classifieds company in recruitment, matrimony, real estate, education, and related services. Its Recruitment business includes online recruitment classifieds (www.naukri.com, India’s top job-search website, and www.naukrigulf.com, a website focused at the Middle East job market) and offline executive search (www.quadranglesearch.com). Other websites in this business include professional networking site (www.brijj.com) and a new hiring website (www.firstnaukri.com). Info Edge's Matrimony business comprises of online matrimony classifieds (www.jeevansathi.com) and 14 offline Jeevansathi Match Points. Its Real Estate business includes online real estate classifieds (www.99acres.com) and a real estate brokerage business (www.allcheckdeals.com). Its Education business comprises of online education classifieds (www.shiksha.com). Info Edge was incorporated on May 1, 1995 and is headquartered in Noida, Uttar Pradesh, India. The company maintains a network of 49 offices located in 32 cities throughout India and employs about 1,550 people. Rediff.com Rediff.com (NASDAQ: REDF) is one of the premier worldwide web portals providing news, information, communication, entertainment, and shopping services. Its website is one of the most visited in India (among the Top 5 based on unique visitors data by comScore). The company provides a platform for Indians across the world to connect with each other online. Rediff.com also offers the Indian American community one of the oldest and largest Indian weekly newspapers, India Abroad. The company was founded in 1996 and is headquartered in Mumbai, India with offices in New Delhi, Bangalore, Chennai, Hyderabad, and New York, USA. Rediff.com employed 329 people at the end of June 2010. Sify Technologies Limited Sify Technologies Limited (NASDAQ: SIFY) provides Internet, network, and E-Commerce services mostly in India. It was one of the first private companies to offer Internet access in India when the sector was opened to private operators. The company offers corporate network/data services as well as application services, such as website design, development, content management, search engine optimization, hosting, domain name management, secure socket layer certificate for websites, and server space in

Internet & Software


required operating system and database. Further, it offers Internet access services, including high-speed/broadband access to homes over cable, public Internet access from its network of e-ports, and VoIP and dial-up access to homes. The company has set up a chain of franchised internet cafes – a network of over 3,300 cyber-cafes. Sify was incorporated in December 1995 and began commercial operations in April 1998. It is headquartered in Chennai, India. Section 9: IPO/M&A Outlook for the Internet Sector in India So far, Internet has not been among the top sectors for M&A deals and IPOs in India. However, this may change in the coming years. India Internet IPO Outlook As far as IPO is concerned, we believe that Indian Internet companies with compelling fundamentals and sizeable revenue and balance sheets have an opportunity to tap into a global investors base that is looking for growth and thematic stories with a possible listing on NASDAQ (similar to IPO and listing of Makemytrip on NASDAQ in Aug 2010). In 2005, the US Internet sector had created $350bn in market capitalization while China was at under $5bn and India stood at under $500mm. By the end of 2009, the US Internet sector market capitalization reached $450bn, China was at $100bn and India remained under $5bn. As per our estimates, there are roughly 50-60 public Internet companies in the US, 20-25 in China, and fewer than 5 in India. However, in the next 3-5 years, we think India's Internet sector will finally create bigger economic activities/impact and draw global attention. India Internet M&A Outlook We believe that global Internet companies will get more active in India-focused Internet M&A in the next 2-3 years as they search for hyper-growth regions across the world and India starts looking more attractive on absolute numbers basis. eBay and Monster.com have made Internet acquisition in India to expand their geographical presences but other large Internet companies have focused on organic growth to expand in India so far. However, we believe that the US-based Internet companies will get more aggressive in India's Internet market. For M&A perspective, we find the entire market to be attractive but in our view the following 5 categories are very attractive i.e. online travel, interactive ad agencies, Internet ad networks, mobile Internet, and online music and content. Overview of Private Internet Companies The majority of private Internet companies in India are concentrated in several segments – travel, portals, Internet advertising, content (both Internet and mobile consumption), E-Commerce, social networking, classifieds, matrimony/dating, and education. Some of the most popular names include Yatra, Cleartrip, Travelguru, Shaadi.com, Interactive Avenues, Komli, Quikr, Sulekha, JustDial, and BharatMatrimony.com. Top 50 Hot Internet Companies Below we have compiled a list of the Top 50 private Internet companies in India.

Internet & Software


# Company Description # Company Descr iption

1 9.9 Media Traditional and online media 26 mChek Mobile payment platform2 BharatMatrimony.com Matrimonial services 27 Minglebox.com Social network ing s ite3 Canvera Online/offline digital photography 28 MotorExchange B2B marketplace for used vehicles4 Cellcast Interact ive mobile content 29 Naaptol Comparison-based social shopping portal5 Chakpak Media Online movie portal 30 Nazara Technologies Brand-led mobile entertainment content6 ClearTrip Online travel portal 31 ngpay Mobile commerce service platform7 ClickIndia.com Online class if ieds 32 OLX Free online classifieds8 Desi Hits South Asian digital media entertainment hub 33 One97 Mobile content and VAS9 DimDim Web conferencing solutions 34 PayMate Wireless payments

10 FashionandYou.com Private (invitation only) shopping club 35 PubMatic Ad monetization and management solutions11 Flipkart.com Online shopping site 36 Quikr Online classifieds12 Future Bazaar Online shopping site 37 redBus Online bus ticketing13 Games2win Online gaming 38 RS LiveMedia Digital display network14 GETIT Mult i-media information services 39 Saffronart Modern art website15 Gingersoft Media SMS based targeted advertising platform 40 Seventymm Online movie and entertainment services16 Guruji Search engine 41 Shaadi.com Matrimonial services17 IMImobile Mobile VAS 42 SMS GupShup Social SMS service 18 Infibeam.com Online shopping site 43 Sulekha Class if ieds & yellow pages19 InMobi Mobile ad network 44 TopChalks Digital education services20 Interactive Avenues Digital marketing agency 45 Travelguru Online travel agency21 July Systems Mobile media company 46 TutorVista Educational portal22 JustDial Local search engine 47 ValueFirst Enterprise mobility and mobile marketing23 Kirusa Advanced mobile solut ions 48 Vdopia Internet video ad network24 Komli Online ad network platform 49 Via Travel services25 mCarbon Mobile content and service management 50 Yatra Online travel agency

Source: Company website; Caris & Company

Private Indian Internet Companies

Top Internet-focused VCs in India Most Internet-focused VCs in India either funded Silicon Valley-style early stage companies in the late 1990s in the midst of the “.com” bubble or invest today on opportunistic basis. However, the majority of VCs operating in India tend to invest in non-Internet companies or start-ups that have already achieved some traction with self funding or seed money. In our view, VCs in India tend to stay away from early stage start-ups as they can find growth companies with rewarding exit options in categories that are saturated in mature markets. Below we present a list of 12 notable venture capital firms that invest in the Indian Internet sector. In our view, Sequoia, Helion, and SAIF are the most Internet-focused VCs in India with series of noteworthy investments and successful exits.

# Name

1 Sequoia Capital

2 Helion Venture Partners

3 SAIF Partners

4 Kliener Perkins /Sherpalo

5 Draper Fisher Jurvetson

6 NEA

7 Matrix Partners

8 Canaan Partners

9 Nexus Venture Partners

10 Reliance Technology Ventures Ltd

11 Indo-US Ventures

12 Sierra Ventures


Notable India-Focused VCs

Internet & Software


Section 10: Worldwide and US Internet Overview Global Internet Population and Penetration by Region There are close to 7 billion people living on the Earth today and roughly 2 billion of them are Internet users. Over the past 10 years, the number of Internet users has grown 445% and there is still plenty of room for growth – Internet penetration as of June 2010 has just reached 29% on a global basis. In the US, Internet users are close to 240 million for a penetration rate of 77% – one of the highest across the world.

WW Regions Population% of Total Population Internet Users

% of Total Internet

2000-'10 Growth


Africa 1,013,779,050 15% 110,931,700 6% 2,357% 11%Asia 3,834,792,852 56% 825,094,396 42% 622% 22%Europe 813,319,511 12% 475,069,448 24% 352% 58%Middle East 212,336,924 3% 63,240,946 3% 1,825% 30%North America 344,124,450 5% 266,224,500 14% 146% 77%Latin America/Caribbean 592,556,972 9% 204,689,836 10% 1,033% 35%Oceania/Australia 34,700,201 1% 21,263,990 1% 179% 61%WW Total 6,845,609,960 100% 1,966,514,816 100% 445% 29%


Number of Worldwide Internet Users

Overview of the Internet Landscape

Internet AdvertisingOnline Marketing Services E-Commerce Online Travel

E-Commerce Services

Social Media & Gaming

Content & Digital Media

Popular US Public Companies

Google,Microsoft, Yahoo!, AOL, Ask

Marchex, ValueClick, Websense

Amazon, BlueNile, eBay, Overstock.com, Shutterf ly, TigerDirect, Alibaba

Expedia, Priceline, Orbitz, Travelzoo

Digital River, GSI Commerce, PSFw eb

N/A Netflix, RealNetw orks, TechTarget, The Knot, TheStreet.com, WebMD

Popular US Private Companies

Motelyfools, Bankrate, Netshelter, Glam, Plentyoff ish

AdBrite, AudienceScience, Casale Media, Collective, Didit, Eff icient Frontier, ExactTarget, JumpTap, Specif ic Media

Become, Etsy, New egg, Nextag, Zazzle, Zillow

Kayak, Travelocity Bazaarvoice, Pow erReview s, Retrevo, Shopw iki, Wise

Facebook, LinkedIn, Tw itter, Yelp, Zynga, Playfish, Rock You, Mindjolt Games, SlashKey, Country Life

Edmunds, Fool.com, Hulu, Joost, LoveFilm, Metacafe, Oanda, Pandora

Global Market Size $46bn $3-$5bn $518bn $275bn $8-$10bn $2-$3bn $4-$5bn

Global LT Growth Rate 15% 14%-16% 15% 13% 18%-20% 40%-50% 15%-17%

Entrepreneurial Opportunities

High High Moderate Moderate Low High High

M&A Activity High High Moderate Moderate Moderate High Moderate


Internet Landscape

Worldwide Online Advertising Forecast We expect worldwide online advertising to reach $46.5bn in 2010, up 15.0% from 2009. We estimate worldwide online advertising will reach $62bn by 2012, a CAGR of 15.4% from 2009 to 2012, and will become 8.7% of total worldwide advertising in 2012, up from 6.3% in 2009.

Internet & Software


$MM 2007 2008 2009E 2010E 2011E 2012E '09-'12 CAGR

Total Worldwide Advertising $639,700 $659,103 $637,543 $655,937 $684,683 $715,493 3.9% Y/Y Change 5.8% 3.0% -3.3% 2.9% 4.4% 4.5%

WW Internet Advertising $35,663 $40,218 $40,354 $46,459 $53,593 $61,978 15.4%Grow th Rate 27% 13% 0.3% 15.1% 15.4% 15.6%

WW Internet as % of Total 5.6% 6.1% 6.3% 7.1% 7.8% 8.7% Y/Y Increase in Penetration 94 bps 53 bps 23 bps 75 bps 74 bps 83 bps

Source: Universal McCann; IAB & PricewaterhouseCoopers; Caris & Company estimates

Worldwide Internet Advertising Revenue ($MM)

Worldwide Online Advertising by Format We believe that Search will remain the largest online ad category and its market share will go up worldwide from 51% of total online advertising in 2009 to 53% in 2012. We estimate Display advertising to account for 32% of total online advertising in 2012 (down 300bps from 2009) and Classifieds to decline to 7% of total online advertising in 2012 (down 200bps from 2009). We also believe that search will grow faster than the overall market but we expect rich media and video advertising to grow even faster than search.

Ad Revenue ($MM) 2006 2007 2008 2009E 2010E 2011E 2012ETotal $28,000 $35,663 $40,218 $40,354 $46,459 $53,593 $61,978Search $11,867 $15,923 $19,188 $20,712 $23,779 $27,801 $32,872Classif ieds $3,817 $4,405 $4,457 $3,536 $3,775 $4,131 $4,619Referrals/Lead Gen $1,740 $2,063 $2,354 $2,273 $2,607 $2,950 $3,359Email $449 $569 $637 $696 $754 $902 $1,008Display Related Ads $10,128 $12,704 $13,817 $13,964 $15,544 $17,808 $20,121

Banners Ads $7,439 $8,646 $9,469 $9,618 $10,756 $12,030 $13,179Rich Media/Video ads $1,738 $2,843 $3,183 $3,464 $4,044 $4,953 $6,023Sponsorships $951 $1,214 $1,165 $883 $745 $825 $919

Ad Revenue (Y/Y Growth) 2006 2007 2008 2009E 2010E 2011E 2011ETotal 33.3% 27.4% 12.8% 0.3% 15.1% 15.4% 15.6%Search 34% 34% 21% 8% 15% 17% 18%Classif ieds 40% 15% 1% -21% 7% 9% 12%Referrals/Lead Gen 73% 19% 14% -3% 15% 13% 14%Email 43% 27% 12% 9% 8% 20% 12%Display Related Ads 25% 25% 9% 1% 11% 15% 13%

Banners Ads 33% 16% 10% 2% 12% 12% 10%Rich Media/Video ads 25% 64% 12% 9% 17% 22% 22%Sponsorships -1% 28% -4% -24% -16% 11% 11%

Ad Revenue (% of Total) 2006 2007 2008 2009E 2010E 2011E 2012ETotal 100% 100% 100% 100% 100% 100% 100%Search 42% 45% 48% 51% 51% 52% 53%Classif ieds 14% 12% 11% 9% 8% 8% 7%Referrals/Lead Gen 6% 6% 6% 6% 6% 6% 5%Email 2% 2% 2% 2% 2% 2% 2%Display Related Ads 36% 36% 34% 35% 33% 33% 32%

Banners Ads 27% 24% 24% 24% 23% 22% 21%Rich Media/Video ads 6% 8% 8% 9% 9% 9% 10%Sponsorships 3% 3% 3% 2% 2% 2% 1%


Worldwide Internet Advertising by Category/Format

Internet & Software


U.S. Online Advertising Forecast We expect U.S. online advertising to reach $25.9bn in 2010, up 14.4% from 2009. We estimate U.S. online advertising will reach $33.4bn by 2012, a CAGR of 13.8% from 2009 to 2012, and will become 11.8% of total U.S. advertising in 2012, up from 8.7% in 2009.

$MM 2007 2008 2009E 2010E 2011E 2012E '09-'12 CAGR

Total U.S. Advertising $279,600 $280,998 $261,328 $266,555 $273,885 $282,102 2.6%Y/Y Change -0.7% 0.5% -7.0% 2.0% 2.75% 3.00%

U.S. Internet Advertising $21,206 $23,448 $22,661 $25,935 $29,375 $33,401 13.8%Y/Y Change 26% 11% -3.4% 14.4% 13.3% 13.7%

U.S. Internet as a % of Total 7.6% 8.3% 8.7% 9.7% 10.7% 11.8%Y/Y Increase in Penetration 159 bps 76 bps 33 bps 106 bps 100 bps 111 bps


U.S. Internet Advertising Revenue ($MM)

U.S. Online Advertising by Format We believe that Search will remain the largest online ad category and its market share will go up in the U.S. from 47% of total online advertising in 2009 to 51% in 2012. We estimate Display advertising to account for 33% of total online advertising in 2012 (down 200bps from 2009) and Classifieds to decline to 8% of total online advertising in 2012 (down 200bps from 2009). We also believe that search will grow faster than the overall U.S. market but we expect rich media and video advertising to grow even faster than search.

Ad Revenue ($MM) 2006 2007 2008 2009 2010E 2011E 2012ETotal $16,879 $21,206 $23,448 $22,661 $25,935 $29,375 $33,401Search $6,752 $8,694 $10,552 $11,290 $12,645 $14,542 $16,868Classif ieds $3,038 $3,393 $3,283 $2,298 $2,390 $2,557 $2,762Referrals/Lead Gen $1,350 $1,484 $1,641 $1,477 $1,581 $1,739 $1,930Email $338 $424 $469 $519 $549 $624 $679Display Related Ads $5,401 $7,210 $7,738 $7,904 $8,771 $9,913 $11,162

Banners Ads $3,713 $4,453 $4,924 $4,973 $5,471 $6,072 $6,649Rich Media/Video ads $1,182 $2,121 $2,345 $2,579 $2,966 $3,500 $4,165Sponsorships $506 $636 $469 $352 $334 $341 $348

Ad Revenue (Y/Y Growth) 2006 2007 2008 2009E 2010E 2011E 2012ETotal 34.6% 25.6% 10.6% -3.4% 14.4% 13.3% 13.7%Search 31% 29% 21% 7% 12% 15% 16%Classif ieds 42% 12% -3% -30% 4% 7% 8%Referrals/Lead Gen 79% 10% 11% -10% 7% 10% 11%Email 47% 26% 11% 11% 6% 14% 9%Display Related Ads 27% 33% 7% 2% 11% 13% 13%

Banners Ads 51% 20% 11% 1% 10% 11% 10%Rich Media/Video ads 13% 79% 11% 10% 15% 18% 19%Sponsorships -19% 26% -26% -25% -5% 2% 2%




U.S. Internet Advertising by Category/Format

Internet & Software


U.S. Online Advertising Historical Trends Internet advertising spend in the US has been growing consistently between 2002 and 2008 and only in 2009 saw a decline due to the economic recession which started in 2008.


US Internet Ad Revenue History ($MM)

$8,087$7,134

$6,009$7,267

$10,095

$12,542

$16,879

$21,206

$23,448$22,66175%

-12%-16%

21%

39%

24%

35%26%

11%

-3%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Online Ad Revenue ($MM) Y/Y Change

54% CAGR from 1995 to 200916% CAGR from 2005 to 2009

Non-U.S. Online Advertising Forecast We believe that non-U.S. online advertising will continue to grow faster than the overall U.S. online ad growth but we also think the U.S. will remain the largest online ad market in the world for the foreseeable future. We expect non-U.S. online advertising to reach $20.5bn in 2010, up 16.0% from 2009. We estimate non-U.S. online advertising will reach $28.6bn by 2012, a CAGR of 17.3% from 2009 to 2012.

$MM 2007 2008 2009E 2010E 2011E 2012E '09-'12 CAGR

Total Non-U.S. Advertising $360,100 $378,105 $376,214 $389,382 $410,798 $433,392 4.8% Y/Y Change 11.5% 5.0% -0.5% 3.5% 5.5% 5.5%

Non-U.S. Internet Advertising $14,457 $16,770 $17,693 $20,524 $24,218 $28,577 17.3% Y/Y Change 30.0% 16.0% 5.5% 16.0% 18.0% 18.0%

Non-U.S. Internet as a % of Total 4.0% 4.4% 4.7% 5.3% 5.9% 6.6% Y/Y Increase in Penetration 57 bps 42 bps 27 bps 57 bps 62 bps 70 bps

Source: Universal McCann; IAB & PricewaterhouseCoopers; Caris & Company es timates

Non-U.S. Internet Advertising Revenue ($MM)

Non-U.S. Online Advertising by Format We believe that Search will remain the largest online ad category internationally as well and its market share will go up from 53% of total online advertising in 2009 to 56% in 2012. We estimate Display advertising to account for 31% of total non-U.S. online advertising in 2012 (down 300bps from 2009) and Classifieds to stay flat at 7% of total non-U.S. online advertising in 2012.

Internet & Software


Ad Revenue ($MM) 2006 2007 2008 2009E 2010E 2011E 2012ETotal $11,121 $14,457 $16,770 $17,693 $20,524 $24,218 $28,577Search $5,116 $7,229 $8,637 $9,421 $11,134 $13,259 $16,003Classif ieds $778 $1,012 $1,174 $1,238 $1,385 $1,574 $1,858Referrals/Lead Gen $389 $578 $713 $796 $1,026 $1,211 $1,429Email $111 $145 $168 $177 $205 $279 $329Display Related Ads $4,726 $5,494 $6,079 $6,060 $6,773 $7,895 $8,959

Banners Ads $3,726 $4,193 $4,545 $4,644 $5,285 $5,958 $6,530Rich Media/Video ads $556 $723 $839 $885 $1,077 $1,453 $1,858Sponsorships $445 $578 $696 $531 $410 $484 $572

Ad Revenue (Y/Y Growth) 2006 2007 2008 2009E 2010E 2011E 2012ETotal 31.5% 30.0% 16.0% 5.5% 16.0% 18.0% 18.0%Search 37% 41% 19% 9% 18% 19% 21%Classif ieds 31% 30% 16% 5% 12% 14% 18%Referrals/Lead Gen 53% 49% 23% 12% 29% 18% 18%Email 31% 30% 16% 5% 16% 36% 18%Display Related Ads 24% 16% 11% 0% 12% 17% 13%

Banners Ads 19% 13% 8% 2% 14% 13% 10%Rich Media/Video ads 64% 30% 16% 5% 22% 35% 28%Sponsorships 31% 30% 20% -24% -23% 18% 18%




Non-U.S. Internet Advertising by Category/Format

Worldwide E-Commerce Forecast After hitting a bottom in 4Q08 – 1Q09 and stabilizing in 2Q09, E-Commerce trends have improved in 2H-09, in our view. We expect worldwide E-Commerce to reach $517.5bn in 2010, up 13% from 2009. We are also forecasting worldwide E-Commerce sales to reach $697.8bn in 2012, up from $457.5bn in 2009 (a CAGR of 15.1%).

Sales in $MM 2007 2008 2009E 2010E 2011E 2012E '09-'12 CAGR

North America $146,768 $152,490 $153,906 $167,936 $188,088 $211,599 11.2%US $136,768 $142,100 $143,420 $156,328 $175,087 $196,973 11.2%Canada $10,000 $10,390 $10,486 $11,608 $13,001 $14,626 11.7%

Western Europe $121,600 $145,920 $150,298 $159,315 $176,840 $194,524 9.0%

Asia $74,075 $94,563 $104,182 $119,043 $138,939 $161,896 15.8%Japan $43,700 $53,533 $56,744 $61,284 $67,412 $74,154 9.3%S Korea $10,900 $14,170 $15,445 $17,144 $19,716 $22,476 13.3%Australia $13,600 $17,000 $18,530 $20,939 $24,080 $27,451 14.0%China $3,800 $6,840 $9,337 $13,771 $19,280 $26,414 41.4%India $275 $500 $850 $1,400 $2,212 $3,384 58.5%Rest of Asia $1,800 $2,520 $3,276 $4,505 $6,239 $8,017 34.8%

ROW $28,000 $37,800 $49,140 $71,253 $97,973 $129,814 38.2%

Worldwide $370,443 $430,772 $457,526 $517,547 $601,840 $697,833 15.1%Y/Y Grow th 24.8% 16.3% 6.2% 13.1% 16.3% 15.9%

Source: US Department of Commerce, eMarketer, Caris & Company estimates

Worldwide E-Commerce Forecast

Internet & Software


U.S. E-Commerce Forecast We expect E-Commerce in the US to reach $156.3 in 2010, up 9% from 2009. We are also forecasting US E-Commerce sales to reach $197.0bn in 2012, up from $143.4bn in 2009 (a CAGR of 11.2%).

Sales in $MM 2007 2008 2009A 2010E 2011E 2012E '09-'12 CAGR

Total U.S. Retail $4,007,581 $3,951,865 $3,671,881 $3,780,855 $3,932,089 $4,099,203 3.7% Y/Y Change 3.1% -1.4% -7.1% 3.0% 4.0% 4.3%

Total U.S. Retail E-Commerce $136,768 $142,100 $143,420 $156,328 $175,087 $196,973 11.2% Y/Y Change 20.0% 3.9% 0.9% 9.0% 12.0% 12.5%

E-Commerce as % of Retail 3.4% 3.6% 3.9% 4.1% 4.5% 4.8% Y/Y Increase in Penetration 0.48% 0.18% 0.31% 0.23% 0.32% 0.35%

Source: U.S. Department of Commerce; Caris & Company est imates; Does not include travel, financ ial services, or event t icket sales.E-Commerce sales are goods and services where an order is placed by the buyer or price and terms of sale are negotiated over anInternet, extranet, EDI network, e-mail, or other online system. Payment may or may not be made online.

U.S. Retail and E-Commerce Sales

U.S. Online Travel We expect U.S. online travel to reach $106.3bn in 2010, up 11.5% from 2009. We estimate U.S. online travel will reach $134.5bn by 2012, a CAGR of 12.2% from 2009 to 2012.

2008 2009 2010E 2011E 2012E '09-'12 CAGR

B2C E-Commerce $237.4 $238.7 $262.6 $294.1 $331.5 11.6% Y/Y Change 5.2% 0.6% 10.0% 12.0% 12.7%

Retail E-Commerce* $142.1 $143.4 $156.3 $175.1 $197.0 11.2% Y/Y Change 4.9% 2.5% 8.5% 12.0% 12.0%

Online Travel** $95.3 $95.3 $106.3 $119.0 $134.5 12.2% Y/Y Change 6.2% 0.0% 11.5% 12.0% 13.0% As % of B2C E-Commerce Sales 40% 40% 40% 40% 41%* Excludes sales of travel, f inancial services and event tickets** Includes online leisure and unmanaged business travel sales

Source: U.S. Department of Commerce; eMarketer; Caris & Company estimates

U.S. B2C E-Commerce Sales by Segment ($bn)

Internet & Software


Key Internet Growth Drivers \ Major Internet M&A Themes for 2010 Below we highlight 15 different Internet M&A themes along with the likely top acquirers for each of the 15 themes.

# Internet M&A Themes Possible Acquirer Categories Examples of Possible Acquirers1 Social media/gaming Large Internet or Traditional Media GOOG, YHOO, ABC, Viacom, AOL, CBS2 Ad networks Tradit ional Advertising, Top 4 Internet, Large Ad Networks IPG, WPP, Omnicom, MSFT, YHOO, VCLK3 Digital media download E-Commerce or Traditional Media AMZN, ABC, Viacom, AAPL4 Web analyt ics & opt imization Top 4 Internet, Ad Networks MSFT, AOL, VCLK, Advert ising.com5 Internat ional Top 20 US Internet Companies GOOG, TTGT6 Vertical content play Large Portals, Small-to-mid Size Vert ically Focused YHOO, AOL, KNOT, WBMD, TTGT7 Vertical E-Commerce play Top E-Commerce AMZN, EBAY8 Ad targeting Top 4 Internet, Large Social Networks, Traditional Media IPG, WPP, Omnicom, GOOG, MSFT, YHOO, VCLK9 Apps and widgets Top 4 Internet, Handset Manufacturers GOOG, AOL, YHOO, MSFT, NOK, MOT, Samsung10 Online off ice productivity tools Top 4 Internet, Large Tech Companies GOOG, MSFT, AMZN, CSCO, IBM, HPQ11 Other Cloud computing models Top 4 Internet, Large Tech Companies GOOG, MSFT, AMZN, CSCO, IBM, HPQ12 Mobile Internet Top 4 Internet, IT Hardware, Handset OEMs GOOG, AOL, YHOO, MSFT, AAPL, HPQ, DELL, NOK13 E-Commerce infrastructure Large E-Commerce AMZN, EBAY14 Email market ing Industry Consolidation Exac tTarget, VCLK15 Digital market intelligence Audience Measurement, Online Market Research SCOR, Nielsen


M&A Themes in 2010

Display Growth Drivers1. Wide reach, more time spent

2. Adoption of banner advertising by CPG and other big advertisers

3. Video advertising - attractive to broader advertisers; high CPM

4. Behavioral targeting - higher conversion and CPM

5. Contextual ads - better targeting technologies, CPC pricing

Display Growth Drivers1. Wide reach, more time spent

2. Adoption of banner advertising by CPG and other big advertisers

3. Video advertising - attractive to broader advertisers; high CPM

4. Behavioral targeting - higher conversion and CPM

5. Contextual ads - better targeting technologies, CPC pricing

Mobile Internet Growth Drivers1. 3x more mobile users than PC users

2. 24/7 access and often primary way to go online

3. Location and time-sensitive usage on the rise

4. Software, content, and mobile applications creating new opportunities for start-ups

5. Form-factors and data plans getting better

6. Google generated approximately $1 per PC in the worldwide installed base in 2002 and $21 in 2009

Mobile Internet Growth Drivers1. 3x more mobile users than PC users

2. 24/7 access and often primary way to go online

3. Location and time-sensitive usage on the rise

4. Software, content, and mobile applications creating new opportunities for start-ups

5. Form-factors and data plans getting better

6. Google generated approximately $1 per PC in the worldwide installed base in 2002 and $21 in 2009

Search Growth Drivers1. ROI for search is one of the most

compelling among formats

2. Search providers are the leading innovators in the advertising industry

3. Search converts high upfront fixed marketing cost into low variable cost

4. Low cost of development, higher targetability, better measurement, no intrusiveness, higher campaign control

5. Scope of search is expanding beyond direct marketers to brand advertisers

6. Search is highly under-penetrated internationally

7. Only 10% of total ad dollars flow to online formats

Search Growth Drivers1. ROI for search is one of the most

compelling among formats

2. Search providers are the leading innovators in the advertising industry

3. Search converts high upfront fixed marketing cost into low variable cost

4. Low cost of development, higher targetability, better measurement, no intrusiveness, higher campaign control

5. Scope of search is expanding beyond direct marketers to brand advertisers

6. Search is highly under-penetrated internationally

7. Only 10% of total ad dollars flow to online formats

Social Media Growth Drivers1. Top 3 social media websites account

for 15% of total pages viewed in the US vs. only 3% in 2005

2. Influx of huge new ad inventory and pressure on CPM and sell-thru for premium content providers

3. Emergence of hundreds of new publishers

4. Fully engaged and targeted audiences for advertisers

5. Ad networks are the big beneficiaries

Social Media Growth Drivers1. Top 3 social media websites account

for 15% of total pages viewed in the US vs. only 3% in 2005

2. Influx of huge new ad inventory and pressure on CPM and sell-thru for premium content providers

3. Emergence of hundreds of new publishers

4. Fully engaged and targeted audiences for advertisers

5. Ad networks are the big beneficiaries

International Growth Drivers1. Under-penetration of the ‘Net

2. Broadband penetration increasing

3. Media time spent on the Internet increasing

4. In many countries the only source of entertainment that is easily accessible

5. E-Commerce growth

6. 65mm SMBs; 45mm in the US

International Growth Drivers1. Under-penetration of the ‘Net

2. Broadband penetration increasing

3. Media time spent on the Internet increasing

4. In many countries the only source of entertainment that is easily accessible

5. E-Commerce growth

6. 65mm SMBs; 45mm in the US

Internet & Software


Section 11: Valuation Framework We usually value the Internet stocks we cover by using EV/EBITDA and/or P/E methods but we also consider free cash flow yield. For EV/EBITDA we look for EV/EBITDA/Growth of 0.5x to 0.7x with an average of 0.6x. For P/E we look for PEG of 0.8x to 1.0x with an average of 0.9x. We tend to apply higher multiples to the companies with not only the top fundamentals in our sector but also for having relatively higher international exposure and for being takeout targets. Our multiple ranges may vary based on macro economic outlook, historical valuation trends, market trends, earnings revisions, competitive landscape, and market sentiments. Below we present the current multiples and our target multiples for the stocks we cover.

LT 2010 LT 2010Ticker 2009 2010E 2011E Growth GAAP PEG 2009 2010E 2011E 2009 2010E 2011E Growth EV/EBITDA/G 2010E 2011E

AMZN 71.3x 53.1x 38.9x 37% 1.4x 50.6x 39.1x 30.5x 30.4x 22.8x 18.4x 27% 0.8x 2.5% 7.1%DRIV 23.0x 93.3x 35.1x 5% 18.7x 17.9x 36.9x 21.5x 7.4x 13.4x 9.3x 7% 1.9x -1.0% 6.0%EBAY 13.2x 19.0x 15.9x 14% 1.4x 15.3x 14.7x 12.9x 8.8x 8.4x 7.3x 12% 0.7x 5.2% 7.4%EXPE 26.0x 17.9x 14.7x 17% 1.1x 19.4x 15.8x 13.3x 8.7x 7.8x 6.8x 12% 0.7x 8.3% 11.7%GOOG 23.5x 19.6x 17.2x 19% 1.0x 20.7x 17.5x 15.3x 11.2x 9.6x 8.4x 17% 0.6x 5.6% 6.6%GSIC (108.9x) (471.3x) 55.8x 65% (7.3x) 74.7x 47.2x 27.6x 11.4x 10.7x 9.2x 22% 0.5x 2.6% 5.7%MMYT (148.1x) 420.0x 117.2x 90% 4.7x (438.2x) 366.4x 112.7x 698.5x 221.9x 91.6x 80% 2.8x 2.0% 2.5%MSFT 13.8x 11.3x 9.5x 12% 0.9x 13.5x 11.3x 9.5x 8.0x 6.7x 5.9x 10% 0.7x 11.4% 12.2%PCLN 33.6x 34.2x 26.9x 26% 1.3x 39.0x 26.5x 22.1x 28.3x 18.9x 15.4x 26% 0.7x 3.6% 4.6%SCOR 151.3x 93.2x 46.0x 21% 4.4x 27.8x 21.5x 14.6x 17.2x 13.6x 9.8x 20% 0.7x 5.4% 5.8%TTGT (41.8x) (161.0x) 94.7x 18% (8.9x) 29.3x 21.1x 17.1x 10.6x 7.8x 6.4x 18% 0.4x 3.2% 2.3%VCLK 15.6x 17.1x 18.3x 0% n/m 13.5x 15.1x 13.6x 7.0x 6.8x 6.1x 10% 0.7x 8.7% 9.4%YHOO 33.8x 19.8x 19.0x 14% 1.4x 22.8x 17.5x 15.7x 7.5x 7.0x 6.6x 9% 0.8x 4.3% 4.2%Average 8.2x 12.8x 39.2x 26% 1.7x (7.2x) 50.0x 25.1x 65.8x 27.3x 15.5x 20.8% 0.9x 4.8% 6.6%Avg. w/o GSIC, MMYT & TTGT 40.5x 37.9x 24.1x 17% 3.5x 24.0x 21.6x 16.9x 13.5x 11.5x 9.4x 15.0% 0.8x 5.4% 7.5%


FCF YieldEV/EBITDA

Current Valuation Multiples - Based on Our Estimates

PF P/EGAAP P/E

P/E/G Valuation 2011E Long-Term PEG Target P/EStock EPS Growth Multiple Multiple TargetAMZN $3.74 37% N/A N/A N/ADRIV $1.41 5% N/A N/A N/AEBAY $1.88 14% N/A N/A N/AEXPE $1.81 17% N/A N/A N/AGOOG $31.38 19% 0.9 17.0x $533GSIC $0.42 65% N/A N/A N/AMMYT $0.33 90% N/A N/A N/AMSFT $2.65 12% 1.1 13.0x $34PCLN $15.06 26% 0.9 23.0x $346SCOR $0.42 21% N/A N/A N/ATTGT $0.30 18% N/A N/A N/AVCLK $0.67 0% N/A N/A N/AYHOO $0.91 14% N/A N/A N/AAverage: 21% 1.0x 17.7x

EV/EBITDA/G Valuation 2011E Long-Term EV/EBITDA/G Target EV/EBITDAStock EBITDA Growth Multiple Multiple TargetAMZN $7.27 27% 0.6 17.0x $139DRIV $2.29 7% 1.6 11.5x $36EBAY $2.80 12% 0.8 9.5x $32EXPE $3.78 12% 0.5 6.5x $24GOOG $46.19 17% 0.7 11.5x $637GSIC $2.57 22% 0.5 12.0x $33MMYT $0.87 80% 0.6 50.0x $44MSFT $3.69 10% N/A N/A N/APCLN $20.29 26% 0.6 16.0x $350SCOR $1.67 20% 0.7 13.0x $25TTGT $0.55 18% 0.6 11.0x $8VCLK $1.55 10% 0.6 5.5x $12YHOO $1.28 9% 1.1 9.5x $20Average: 16% 0.8x 11.2x

P/FCF/G Valuation 2011E Long-Term P/FCF/Growth Target P/FCFStock FCF Growth Multiple Multiple TargetAMZN $10.26 15% N/A N/A N/ADRIV $1.83 2% N/A N/A N/AEBAY $1.80 8% N/A N/A N/AEXPE $3.12 20% N/A N/A N/AGOOG $31.81 31% N/A N/A N/AGSIC $1.33 11% N/A N/A N/AMMYT $0.96 90% N/A N/A N/AMSFT $3.06 12% 1.0 11.5x $35PCLN $15.38 11% N/A N/A N/ASCOR $1.13 6% N/A N/A N/ATTGT $0.12 10% N/A N/A N/AVCLK $1.16 -3% N/A N/A N/AYHOO $0.60 3% N/A N/A N/AAverage: 11% 1.0x 11.5x

Source: Caris & Company estimates; MMYT EBITDA per share is '12 est

Target Valuation Multiples

Internet & Software


Valuation and Risks Valuation

AMZN: Our rating for AMZN is 3/Average with $140 PT. We reach our $140 PT by applying a multiple of 17.0x to our 2011E EBITDA per share of $7.27 and adding $14.87 in net cash per share and $0.44 in NOLs per share (rounding up). This implies EV/EBITDA to Growth of 0.6x based on our LT EBITDA growth rate of 27%. Because of continuing concerns about margins and Cap-Ex, we are using a lower multiple vs. the overall LT growth for Amazon.

DRIV: Our rating for DRIV is 1/Buy with $36 PT. We reach our $36 PT by assigning a multiple of 11.5x to our 2011E EBITDA per share of $2.29, adjusting for 2010E year-end net cash of $9.15 per share.

EBAY: Our rating for EBAY is 1/Buy with $32 PT. We derive our $32 PT by applying a multiple of 9.5x to our 2011E EBITDA of $3.74bn (EBITDA per share of $2.80), adjusting for 2010E year-end net debt of $5.38bn, or $4.04 per share, and $1.00 for eBay’s stake in Skype. This implies EV/EBITDA to Growth of 0.8x based on our LT EBITDA growth rate of 12%.

EXPE: Our rating for EXPE is 3/Average with $24 PT. We arrive at our $24 PT by using an EV/EBITDA multiple on our 2011 estimates. We assign 6.5x to our pro-forma 2011E EBITDA of $1.10bn (EBITDA per share of $3.78), adjusted for 2010E year-end net debt of $0.35 per share (EV/EBITDA/Growth of 0.5x).

GOOG: Our rating for GOOG is 3/Average with $550 PT. We arrive at our $550 PT by using a combination of EV/EBITDA and P/E multiples on our ’11 estimates. We assign a multiple of 11.5x to our 2011E EBITDA of $15.00bn (EBITDA per share of $46.19) to reach $637, adjusting for 2010E year-end net cash of $34.26bn or $106.12 per share. This implies EV/EBITDA to Growth of 0.7x based on our LT EBITDA growth rate of 17%. We assign a multiple of 17.0x to our 2011E PF EPS of $31.38 to reach a $533 price. This implies a PEG of 0.9x based on our LT PF EPS growth rate of 19%.

GSIC: Our rating for GSIC is 1/Buy with $33 PT. We derive our $33 PT by applying a multiple of 12.0x to our 2011E EBITDA of $180.3mm (EBITDA per share of $2.57), adjusted for 2010E year-end net debt of $55.1mm (or $0.85 per share) and $1.60/share in NOLs (rounding down). This implies EV/EBITDA/Growth 0.5x.

MMYT: We are rating MMYT a Buy and assigning a $46 price target. Our $46 price target is a combination of EV/EBITDA and Price to Gross Bookings. We assign 50x to our pro-forma 2012E EBITDA per share of $0.87 to reach $44, adjusting for 2011E year-end net cash of $0.81/share (EV/EBITDA/Growth of 0.6x). In terms of Price to Gross Bookings, we are assigning 0.95x multiple to our 2012 Gross Bookings estimates of $1.69bn to reach $47. We assign our highest EV/EBITDA multiple to MMYT because its LT EBITDA growth is 80%, highest for any name we cover, and our 50x multiple implies 0.6x EV/EBITDA to Growth. Also, we are using 2012 estimates (vs. 2011 for the rest of our names) since, in our view, MMYT is in an early stage of margin improvement/evolution and using 2011 estimates may not capture the true earnings potential of the company.

MSFT: Our rating for MSFT is 1/Buy with $35 PT. We arrive at our $35 PT by using P/E and P/FCF multiples on our CY11 estimates. We assign a P/E multiple of 13.0x to our CY2011 GAAP EPS of $2.65 to reach $35 (rounding up). This implies a PEG of 1.1x based on our LT GAAP EPS growth rate of 12%. We assign a P/FCF multiple of 11.5x to our CY2011 FCF/share of $3.06 to reach $35. This implies P/FCF to Growth of 0.9x based on our LT FCF growth rate of 12%.

PCLN: Our rating for PCLN is 1/Buy with $348 PT. We reach our $348 PT by using a combination of EV/EBITDA and P/E multiples on our 2011 estimates. We assign 16x to our 2011E EBITDA per share of $20.29 to reach $350, adjusted for 2010E year-end net cash per share of $20.09 and $5.41 in NOLs (EV/EBITDA/Growth of 0.5x). We assign 23x to our 2011 PF EPS of $15.06 (PEG of 0.8x) to reach $346. We are assigning higher multiples now because of our improving outlook for online travel trends.

SCOR: Our rating for SCOR is 1/Buy with $25 PT. We derive $25 by applying a multiple of 13.0x to our 2011E EBITDA of $53.4mm (EBITDA per share of $1.67), adjusting for 2010E year-end net cash of $94.0mm, or $2.96 a share (EV/EBITDA/Growth 0.7x) and $0.36/share in NOLs.

TTGT: Our rating for TTGT is 1/Buy with $8 PT. We reach our $8 PT by assigning a multiple of 11.0x to our 2011E EBITDA per share of $0.55, adjusting for $1.81 per share in net cash and $0.02 in off-balance sheet assets (rounding up). This implies EV/EBITDA to Growth of 0.6x based on our LT EBITDA growth rate of 18%.

VCLK: Our rating for VCLK is 3/Average with $12 PT. We arrive at our $12 PT by applying a multiple of 5.5x to our 2011E EBITDA of $129.1mm (EBITDA per share of $1.55), adjusting for 2010E year-end net cash of $268.2mm or $3.24 per share (rounding up). This implies EV/EBITDA to Growth of 0.55x based on our LT EBITDA growth rate of 10%.

YHOO: Our rating for YHOO is 1/Buy with $20 PT. We reach our $20 PT by assigning 9.5x to our 2011E EBITDA of $1.79bn (EBITDA per share of $1.28), adjusting for $3.19 per share in 2010E year-end net cash and $4.50 in off-balance sheet assets (Yahoo! Japan and Alibaba post illiquidity discount and tax and NOLs).

Internet & Software


Risks

AMZN: 1) Competition with pure-play/multi-channel retailers; 2) Economic weakness/depressed retail environment; 3) Low prices, free shipping and product mix affecting margins; 4) Material FX exposure; 5) Seasonality of the business; 6) Inventory risk; 7) Evolving regulation of E-Commerce; 8) Macro concerns, especially in Europe.

DRIV: 1) Diverse competition; 2) Cloud computing; 3) Revenue growth dependent on the success of partners’ products; 4) Business model for revenue and costs not fully stable after Symantec loss; 5) Exposed to macro-economic slowdown; 6) Consolidation of software vendors; 7) Macro concerns, especially in Europe.

EBAY: 1) Rapidly growing competition; 2) Economic weakness/depressed retail environment; 3) Marketplaces still under transformation; 4) Transitioning business model with long overdue sizeable investments and initiatives; 5) Legal lawsuits – counterfeit and patents; 6) Motors pressurizing GMV; 7) FX headwinds; 8) Macro uncertainties, especially in Europe.

EXPE: 1) Material macro-economic headwinds; 2) Strong competition; 3) Occupancy tax issue remaining an overhang; 4) Voting control; 5) External events disrupting the travel industry; 6) Competition for ad revenue; 7) Changes in search engine algorithms; 8) Macro concerns, especially in Europe and Asia.

GOOG: 1) Google’s competition is getting more intense; 2) Google is still a one-trick pony with nearly 93% of revenue coming from search; 3) Execution risk with recent acquisitions; 4) Google is vulnerable to threats from computing platforms, browsing technologies, and ad blocking technologies; 5) Cap-Ex spending continues to be very high; 6) Rising cost of revenue; 7) Privacy issues and click fraud continue to be a nagging problem; 8) More experienced search marketers are diverting part of search ad dollars to search engine optimization; 9) Macro concerns, especially in Europe.

GSIC: 1) Multi-dimensional competition; 2) High seasonality of the business; 3) Revenue concentration; 4) Investment mode inhibits margin expansion; 5) New acquisitions integration risk; 6) Revenue growth highly dependent on new customer acquisitions; 7) Exposed to macro-economic slowdown; 8) Limited disclosure of business metrics; 9) Macro concerns, especially in Europe.

MMYT: 1) Limited history of margins and operations; 2) Competition from homegrown and multinational OTAs; 3) Stronger supplier direct competition in India; 4) Socio-political uncertainties; 5) Possible fee cuts in air ticketing business; 6) Internet and broadband penetration lagging rest of emerging markets; 7) Other emerging-market risks; 8) Key man risk.

MSFT: 1) Competition; 2) Slowing PC market growth; 3) Disappointing ramp-up of the online business so far; 4) Piracy; 5) Investment mode; 6) Cloud Computing/SaaS; 7) Virtualization; 8) Exposed to macro-economic headwinds; 9) Macro uncertainties, especially in Europe.

PCLN: 1) Material macro-economic headwinds; 2) Strong competition; 3) Occupancy tax issue remaining an overhang; 4) External events disrupting the travel industry; 5) Convertible senior notes can bring substantial dilution; 6) Limited number of online media assets; 7) Changes in search engine algorithms; 8) Macro concerns, especially in Europe and Asia.

SCOR: 1) Diverse and strong competition; 2) Ongoing concern with the accuracy of data/measurements; 3) Revenue concentration; 4) Lack of cross-platform measurements; 5) Newest technologies making Web measurement challenging and less relevant; 6) Evolving industry standards; 7) Exposure to macro-economic slowdown; 8) Potential downward pressure on the stock from insiders’ selling; 9) Macro concerns, especially in Europe (but relatively small exposure).

TTGT: 1) Competition with both online and offline companies; 2) International presence still limited; 3) Move to performance-based marketing by some software vendors; 4) Moderate growth in worldwide IT spending; 5) Lower margins in Events; 6) Limited business disclosures; 7) Macro concerns, especially in Europe.

VCLK: 1) Increasing competition, especially from the big four; 2) High dependence on search engines for monetization; 3) Slowing growth of innovations; 4) Exposure to economic headwinds; 5) Material deceleration in comparison shopping segment; 6) Emergence of vertically focused ad networks; 7) Macro concerns, especially in Europe.

YHOO: 1) Increasing competitive pressure from Google and others; 2) Current growth materially lower than overall Internet ad growth; 3) Limited traction internationally; 4) Mass talent attrition; 5) Execution risk with recent acquisitions; 6) Future business strategy not fully firmed up; 7) Macro concerns, especially in Europe.

Internet & Software


Ratings Distribution Chart:

Number of % of No. Provided % ProvidedRatings Ratings IB Services IB Services

102 61.45% 0 0.00%


61 36.75% 2 3.28%


3 1.81% 0 0.00%

Sell

Total Securit ies Rated166

Buy

Hold/Neutral

First Call ratings are adapted to the above chart as follows: 1 & 2 = Buy, 3 = Hold/Neutral, 4 & 5 = Sell

Ticker Rating Price Cap ($Bil) Date AnalystAMZN Average $145.45 $65.14 9/15/2010 Sandeep AggarwalDRIV Buy $30.35 $1.20 9/15/2010 Sandeep AggarwalEBAY Buy $24.19 $31.74 9/15/2010 Sandeep AggarwalEXPE Average $26.66 $6.90 9/15/2010 Sandeep Aggarwal

GOOG Average $480.64 $118.46 9/15/2010 Sandeep AggarwalVLO Average $17.34 $9.82 9/15/2010 Sandeep AggarwalGSIC Buy $23.34 $1.55 9/15/2010 Sandeep AggarwalMSFT Buy $25.12 $217.33 9/15/2010 Sandeep AggarwalPCLN Buy $332.06 $16.07 9/15/2010 Sandeep AggarwalSCOR Buy $19.40 $0.60 9/15/2010 Sandeep AggarwalTTGT Buy $5.11 $0.22 9/15/2010 Sandeep AggarwalVCLK Average $12.26 $1.00 9/15/2010 Sandeep AggarwalYHOO Buy $14.27 $19.24 9/15/2010 Sandeep Aggarwal

Companies mentioned in this report:

*Note: Caris & Company utilizes the First Call rating system when assigning ratings in equity research reports. The following is a list of each numerical rating and its respective definition.

1 Buy 2 Above Average 3 Average 4 Below Average 5 Sell

Unless otherwise noted, stock prices reflected herein are the closing price through the business day immediately preceding the date of this report.

Internet & Software


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AVERAGE - $27.00

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BUY - $37.00

Microsoft Corp. (MSFT-US) High:37.50 14-Sep-2007 to 15-Sep-2010 (Daily) Low: 14.87 USD Last: 25.11

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Internet & Software


Analyst Certification The analyst responsible for the content of this publication, Sandeep Aggarwal, hereby certifies that the views expressed in this publication regarding the company or companies and their securities accurately represent that analyst’s personal views, and that no direct or indirect compensation is to be received by the analyst for any specific recommendation or views contained in this note. Other Important Disclosures The research analyst and/or research associate responsible for this report has received or will receive compensation based on various factors, including quality of research, investor client feedback, and the Firm's overall revenues, but not based on investment banking revenues. This information is not intended to be used as the primary basis for investment decisions. The information contained herein shall not be construed as an offer, or the solicitation of an offer to buy or sell any securities, products, or services. Because of individual client risk and return requirements and client investment constraints, this material should not be construed as advice designed to meet the particular needs of any investor. CRIS accepts no liability whatsoever for loss or damage of any sort arising out of use of all or part of this publication. This material is based on data obtained from sources considered to be reliable. Caris & Company (CRIS) makes every effort to use reliable, comprehensive information, however, we make no representation that it is accurate or complete and it should not be relied upon as such. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. Any opinions expressed herein are subject to change and CRIS disclaims any obligation to advise you of any such change. The securities described herein may not be eligible for sale in all jurisdictions, or to any particular investors. Options, derivative products, and futures involve risk, and are not suitable for all investors. CRIS, its affiliates, their respective directors, officers, employees, or members of their families may have long or short positions in, and buy or sell, the equities or issues referred to herein, or options thereon. Neither the author of this report nor a member of his or her household maintains a position in the securities mentioned in this report. The firm has not provided any investment banking services for the companies mentioned in this report. Additional information on recommended securities is available upon request. Neither this report, nor any portion thereof may be reprinted, sold, or redistributed without the express written consent of Caris & Company, Inc. Copyright Caris & Company 2010


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ConsumerMedia & Entertainment

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EnergyOil & Gas, Refiners

Ann Kohler 917 464 [email protected]

HealthcareSpecialty Pharmaceuticals

James Molloy 617 728 [email protected]

Specialty Pharma & BioPharmaMario Corso 617 728 [email protected]

Devices & DiagnosticsPaul K. Choi 917 464 [email protected]

Healthcare IT Leo Carpio 917 464 [email protected]

Healthcare Services

Ann Hynes 617 728 [email protected]

TechnologySemiconductors

Craig A. Ellis 415 489 [email protected]

Semiconductor Capital EquipmentBen Pang 415 489 [email protected]

Enterprise SoftwareCurtis Shauger, CFA 415 489 [email protected]

HardwareRobert Cihra 917 464 [email protected]

Internet & SoftwareSandeep Aggarwal 415 489 [email protected]

NEW YORK

500 Fifth AvenueSuite 1640 New York, NY 10110(866) 99-CARIS Toll Free (917) 464-1600(917) 464-1520 Fax [email protected]

SAN FRANCISCO

44 Montgomery Suite 1500San Francisco, CA 94104 (415) [email protected]

DEL MAR

853 Camino Del MarSuite 100 Del Mar, CA 92014(877) 99-CARIS Toll Free (858) 704-0300 (858) 704-0320 Fax [email protected]

BOST ON

50 Milk Street21st Floor Boston, MA 02109(617) 728-0700(617) 728-0715 Fax

[email protected]

C O M P A N Y D I R E C T O R Y

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