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    12 06 10-10 02 14 am 12 06 10-10 02 14 am Document Transcript

    • ab Global Equity Research Americas Internet Services UBS Investment Research 12-month rating Buy Key Call: Google Inc. Unchanged 12m price target US$720.00 Unchanged Reiterate Buy; Positive Trends Continue… Price US$573.00 Solid CPC Growth; Proprietary Checks Show Image Ads Still Prevalent RIC: GOOG.O BBG: GOOG US Search Engine Marketer, Efficient Frontier, recently noted strong CPC increases in 6 December 2010 November: Finance (+10% Y/Y); Retail (+6%); Automotive (+24%) and Travel (+37%). Also, per our proprietary processes, Product Listing Ads remain prevalent Trading data – across our database of 100K+ commercial keywords, 10% had a product image 52-wk range US$626.77-436.07 advertisement (see charts 1& 2 inside). Overall coverage trends (i.e. a query with Market cap. US$138bn any sponsored advertisement) remained positive with commercial queries at 97%+. Shares o/s 240m (COM) Free float 50% Drill Down on Product Listing Ads by Vertical Avg. daily volume (000) 3,149 Drilling down a bit on specific verticals: categories with the highest penetration of Avg. daily value (m) US$1,775.2 Product Listing Ads were: Home & Garden (~21%); Clothing & Shoes (~17%); Animals (~12%); Food & Restaurants (~11%); and Sports & Recreation (~10%). Balance sheet data 12/10E Penetration across these top 5 categories alone was 17% (weighted average), with Shareholders equity US$45.7bn these 5 categories accounting for roughly 36% of the 100,000+ database keywords. P/BV (UBS) 4.0x Our thoughts on NY real estate purchase and impending eBookstore Net Cash (debt) US$14.8bn The Wall Street Journal reported that Google has tentatively agreed to purchase Forecast returns 111 8th Ave (New York) for $1.9B. The asset is one of the primary internet Forecast price appreciation +25.7% gateways in NY and resides directly on top of the 8th Ave fiber line, thereby reducing latency to a minimum. In addition, Google is set to launch its e-book store Forecast dividend yield 0.0% (per WSJ), Google Editions. The company is likely to differentiate Google Forecast stock return +25.7% Editions by offering open format books that can be read across multiple devices. Market return assumption 5.5% Forecast excess return +20.2% Valuation: Our $720 PT is based on our DCF (12% WACC, 3.5% LTGR) Our PT implies 18x ’11E EPS (ex $104/shr in cash + mkt securities). EPS (UBS, US$) 12/10E 12/09 UBS Cons. Actual Q1 6.76 6.76 5.16 Q2 6.45 6.45 5.36 Q3 7.64 7.64 5.89 Highlights (US$k) 12/08 12/09 12/10E 12/11E 12/12E Q4E 8.09 7.99 6.79 Revenues 15,856,598 17,481,147 21,832,318 25,786,287 29,506,397 12/10E 28.90 28.78 EBIT (UBS) 7,941,935 9,476,240 11,731,736 13,714,252 15,982,046 12/11E 33.67 33.31 Net Income (UBS) 6,283,673 7,416,493 9,335,113 10,880,154 12,717,342 EPS (UBS, US$) 19.79 23.02 28.90 33.67 39.35 Performance (US$) Net DPS (UBS, US$) 0.00 0.00 0.00 0.00 0.00 800 Stock Price (US$) Rel. S & P 500 160 700 140 Profitability & Valuation 5-yr hist av. 12/09 12/10E 12/11E 12/12E 600 120 500 100 EBIT margin % - 54.2 53.7 53.2 54.2 400 80 ROIC (EBIT) % - 42.0 41.8 45.2 53.4 300 60 200 40 EV/EBITDA (core) x - 8.9 9.9 8.2 7.1 100 20 PE (UBS) x - 19.1 19.8 17.0 14.6 0 0 10/07 01/08 04/08 07/08 10/08 01/09 04/09 07/09 10/09 01/10 04/10 07/10 10/10 Net dividend yield % - 0.0 0.0 0.0 0.0 Price Target (US$) (LHS) Stock Price (US$) (LHS) Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill-related charges and other adjustments for Rel. S & P 500 (RHS) abnormal and economic items at the analysts judgement. Source: UBS Valuations: based on an average share price that year, (E): based on a share price of US$573.00 on 03 Dec 2010 19:38 EST www.ubs.com/investmentresearch Brian Pitz Brian Fitzgerald Kaizad Gotla, CFA Analyst Analyst Associate Analyst brian.pitz@ubs.com brian.fitzgerald@ubs.com kaizad.gotla@ubs.com +1-212-713 9310 +1-212-713 2851 +1-212-713 2603 This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 14. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
    • Key Call: Google Inc. 6 December 2010Update: Product Listing Ads Remain Prevalent We recently ran searches on a basket of 100,000+ commercial keywords onGoogle and found ~10% of all search result pages yielded a product imageadvertisement (a ‘Google Product Listing Ad’) in the sponsored listings (seechart 1). The program is currently in Beta, with the program expanding to moremerchants and users over time.Our checks suggest these product ads have significantly higher (+40-50%) betterclick-through rates than conventional text sponsored listings. These ads aremonetized on a CPA or Cost-Per-Action basis, though we see the potential forblended monetization techniques (CPA, CPM, CPC, etc). We believe ProductImage Ads create a more engaging user experience by including richer productinformation (product image, price, and merchant name), while also making iteasy for merchants to promote their broader catalogs / product lines on Google.Product Listing Ads -- What They DoProduct Listing Ads are search ads that include richer product information -including product image, price, and merchant name - without requiringadditional keywords or ad text. Whenever a user enters a search query relevantto an item in a Google Merchant Center account, Google may automaticallyshow the most relevant products along with the associated image, price andproduct name.Product Listing Ads are charged on a cost-per-action (CPA) basis, which meansthat the advertiser only pays when a user clicks on the ad and completes apurchase (i.e. coverts). As these ads monetize further down consumer purchasefunnel, CPA rates are higher than typical CPC rates.Chart 1: Example of Google Product AdsSource: Google UBS 2
    • Key Call: Google Inc. 6 December 2010We drilled down a bit on specific verticals: categories with the highestpenetration of Product Listing Ads were: Home & Garden (~21%); Clothing& Shoes (~17%); Animals (~12%); Food & Restaurants (~11%); andSports & Recreation (~10%). Penetration across these top 5 categories alonewas 17% (weighted average), with these 5 categories accounting for roughly36% of the 100,000+ keywords in the database.Chart 2: Penetration of Google Product Listing Ads by Key Verticals Number of Keywords w/ a % of Keywords w/ Category Keywords Product Image Ad Product Image Ad 1 Home_&_Garden 16,781 3,587 21% 2 Clothing_&_S hoes 8,389 1,390 17% 3 Animals 898 105 12% 4 Food_&_Restaurants 4,595 519 11% 5 Sports_&_Recreation 5,618 586 10% 6 Computers_&_Electronics 9,543 749 8% 7 Health_&_Wellness 9,833 641 7% 8 Arts_&_Entertainment 7,538 473 6% 9 Beauty_&_Personal_Care 6,182 346 6% 10 Society_&_Culture 3,936 197 5% 11 Science,_Social_Sciences_&_Humanities 3,645 168 5% 12 Vehicles 4,287 193 5% 13 Business 4,889 218 4% 14 Travel_&_Lodging 7,402 229 3% 15 Families_&_Relationships 3,132 65 2% 16 Education_&_Instruction 3,332 55 2% Top 5 Sum 36,281 6,187 Top 5 Weighted Average 17% Total Sum 100,000 9,521 Total Weighted Average 10%Source: UBS Internet Research UBS 3
    • Key Call: Google Inc. 6 December 2010Google eCommerce Coverage Still Trending at 97%+Through Q4Our proprietary system of checking Google coverage indicates coverage acrossour very broad basket of keywords (which also includes the top daily words outof Google Trends) has been trending as expected through Q4. Note, when werun a basket of 24,000+ eCommerce oriented keywords, coverage is -- asexpected – greater than 97%. For commercially viable queries/keywords, thecoverage has run begun to run ‘deeper’ as there are more than the traditional 10sponsored links on the right column as hybrid ads continue to be deployed (casein point – search for “Xbox 360”).Chart 3: Coverage on Google US (www.google.com) Across 24,000+ Commercially Oriented Keywords Total Keywords With an Ad / Total Keyword US Coverage (24K keywords) Checked 100.00% 95.00% Coverage 90.00% 85.00% 80.00% 75.00% 1/2 10 2/4 0 2/1 10 3/4 0 3/1 10 4/1 0 4/1 /10 4/2 10 5/1 0 5/2 10 6/1 0 6/2 10 7/8 0 7/2 /10 8/5 0 8/1 /10 9/2 0 9/1 /10 9/3 10 1 0 /1 0 10 5/09 11 /09 11 /09 12 /09 12 /09 1/7 9 10 /10 11 /10 11 1/10 /10 /0 1 /1 8 /1 8 /1 9 /1 7 /1 4 /1 2 /1 9 /1 / / / 5/ 3/ 0/ 6/ /29 /12 /26 /10 /24 0 /14 /28 /25 /1 /1 10Source: UBS Internet Research UBS 4
    • 9/2 9/2 9/2 9/2 6/1 20% 25% 30% 35% 40% 45% 50% 55% 50% 55% 60% 65% 70% 75% 80% 85% 5/0 35% 40% 45% 50% 55% 60% 65% 35% 40% 45% 50% 55% 60% 65% 70% 20% 25% 30% 35% 40% 45% 50% 55% 5/0 5/0 5/0 2/0 8 8 8 8 8 11 11 11 11 /8/ /8/ /8/ /8/ 8/7 08 08 08 08 /08 12 12 12 12 Checked Checked Checked Checked Checked /22 /22 /22 /22 10 /08 /08 /08 /08 /2/ Ad / Total Keyword Ad / Total Keyword Ad / Total Keyword Ad / Total Keyword Ad / Total Keyword 08 Total Keywords With an Total Keywords With an Total Keywords With an Total Keywords With an Total Keywords With an 2/4 2/4 2/4 2/4 11 /09 /09 /09 /09 /27 /08 Source: UBS Internet Research 3/2 3/2 3/2 3/2 0/0 0/0 0/0 0/0 9 9 9 9 1/2 2/0 5/3 5/3 5/3 5/3 9 /09 /09 /09 /09 3/1 6/1 6/1 6/1 6/1 9/0 6/0 6/0 6/0 6/0 9 9 9 9 9 Key Call: Google Inc. 6 December 2010 7/3 5/1 7/3 7/3 7/3 4/0 0/0 0/0 9 0/0 0/0 9 9 9 9 9/1 9/1 9/1 9/1 7/9 2/0 2/0 2/0 2/0 /09 9 9 9 9 10 10 10 10 /26 /26 /26 /26 9/3 /09 /09 /09 /09 /09 12 12 12 12 10 /9/ /9/ /9/ /9/ /29 09 09 09 09 /09 US Coverage Coverage Coverage Coverage Coverage 1/2 Brazil Coverage 1/2 1/2 Japan Coverage 1/2 Coverage 2/1 12 Germany Coverage Portugal Coverage 2/1 2/1 0 0 0 2/1 0 /24 /09 3/7 3/7 3/7 3/7 /10 /10 /10 /10 2/1 8/1 4/2 4/2 4/2 4/2 0 0/1 0/1 0/1 0 0 0 0/1 0 4/1 5/1 6/3 6/3 /10 6/3 6/3 0 /10 /10 /10 6/1 7/1 7/1 7/1 7/1 0/1 7/1 7/1 0 0 0 7/1 0 7/1 0 8/3 8/3 8/3 8/5 0/1 8/3 /10 0/1 0 0/1 0/1 0 10 0 0 10 /13 10 10 9/3 /13 /10 /13 /13 0/1 /10 /10 /10 0 11 11 11 /26 /26 /26 11 11 /10 /26 /25 /10 /10 /10 /10 9/2 9/2 9/2 9/2 7/1 5 35% 40% 45% 50% 55% 60% 65% 70% 75% 35% 40% 45% 50% 55% 60% 65% 35% 40% 45% 50% 55% 60% 65% 70% 20% 25% 30% 35% 40% 45% 50% 55% 50% 55% 60% 65% 70% 75% 80% 85% 5/0 5/0 5/0 8/0 8 8 8 10 /08 8 11 11 11 /26 /8/ /8/ /8/ 11 /08 0 8 08 08 /26 9/2 2/0 12 12 12 8 Checked Checked Checked Checked Checked /22 /22 /22 12 /08 /08 /27 /08 /08 /0 Ad / Total Keyword Ad / Total Keyword Ad / Total Keyword Ad / Total Keyword 11 Ad / Total Keyword 1/2 8 /27 Total Keywords With an Total Keywords With an Total Keywords With an Total Keywords With an Total Keywords With an 2/4 2/4 2/4 7/0 /08 /09 /09 /09 2/2 9 3/2 7/0 3/2 3/2 0/0 0/0 0/0 3/3 9 2/1 9 9 9 0/0 /09 5/3 4/3 9 5/3 5/3 0/0 /09 /09 /09 5/3 9 4/8 6/1 6/1 6/1 1/0 /09 6/0 6/0 6/0 9 9 9 9 7/1 /09 7/3 7/3 7/3 6/1 0/0 0/0 0/0 8/1 3/0 9 9 9 /09 9 9/1 9/1 9/1 9/1 2/0 2/0 2/0 /0 9 9 9 10 9 /2/ 8/1 8/0 10 /26 10 10 0 9 Chart 4: Google coverage on various Google sites across a basket of broad keyword (English) /26 /26 11 9 /09 /09 /09 /2/ 0 10 12 12 12 12 9 /23 /9/ /9/ /9/ /3/ /09 09 09 09 09 Servers 1/3 Coverage UK Coverage 1/2 Spain Coverage 1/2 /10 Russia Coverage 1/2 12 China Coverage move to HK Coverage France Coverage Coverage 2/1 2/1 2/1 /28 0 0 0 2/3 Coverage /10 /09 Coverage 3/7 3/7 3/7 3/6 /10 /10 /10 /10 4/6 3/4 4/2 4/2 4/2 /10 /10 0/1 0/1 0 0 0/1 0 5/7 /10 6/3 6/3 6/3 6/7 5/9 "2-clicks" /10 /10 /10 /10 /10 implemented 7/1 7/1 7/1 7/8 7/1 /10 0 7/1 0 7/1 0 8/8 7/1 4/1 8/3 8/3 8/3 /10 0 0/1 0 0/1 0 0/1 0 9/8 /1 10 10 10 10 0 9/1 /13 /13 /13 /9/ 8/1 /10 /10 /10 1 0 11 11 0 /26 11 11 /9/ 10 /26 /26 11 /10 /10 /10 /23 /10UBS 5
    • Key Call: Google Inc. 6 December 2010Google Close to Launching E-Book OfferingAccording to the Wall Street Journal, Google is set to launch its e-book store,Google Editions in the near term. The company is likely to differentiate GoogleEditions by offering open format books that can be read across multiple devices.In addition, users can purchase books directly from Google or from other onlinebook retailers in a “digital locker” of sorts. We believe Google is in a goodposition to drive e-book sales given that it may be able to integrate GoogleEditions into its natural and paid search listings when a user searches for acertain keyword or topic. It is unclear what the revenue split may likely bebetween Google and its retail partners.Thoughts on the NY Real Estate PurchaseThe Wall Street Journal reported that Google has tentatively agreed to purchase111 8th Ave (New York) from owner Taconic Investment Partners. The propertyis one of the largest buildings in New York at nearly 3MM sq ft with a diverseroster of Internet and telecom tenants (MCI, Sprint, Level 3, Verizon). The assetis one of the primary internet gateways in New York and resides directly on topof the 8th Avenue fiber line, thereby reducing latency to a minimum.The property currently serves as the NY headquarters for Google and we expectthe company will use it for a combination of personnel and infrastructureexpansion. Given Googles large and growing share in the online display market,we believe the company is looking to grow ties with the Madison Avenue adagencies. In addition, New York provides a large pool of engineering talent forGoogle.Citing people familiar with the matter, the WSJ reports the building at 111Eighth Avenue produces an initial yield of ~5% when valued at $1.9B.Our Thoughts on GrouponLast week we saw media reports (Wall Street Journal) suggested that GOOGwas in final negotiations to acquire group-buying site Groupon, thoughout mostof the week, with news coming late Friday that talks were off.The deal was said to be worth $5.3B, with an additional $700MM inperformance based earnouts. The $6B valuation implied a reasonable 3xPrice/Sales multiple, based on reports suggesting Groupon’s run-rate revenueof $2B (with the valuation coming in at 10x Price/Sales on other reportspointing to an annual revenue figure of $600MM, potentially excluding pass-through revenue).Either way -- we appreciate Groupons strategic value, allowing a potentialacquirer to at once strengthen its local advertising, social networking, andeCommerce ambitions. Groupon allows retailers to acquire valuable ‘foottraffic’ instead of ‘web traffic’; a strong value proposition for local. We notestrong demand for Groupon’s services in the near-term as it plans numerousstrategic expansions. UBS 6
    • Key Call: Google Inc. 6 December 2010Groupon’s financials sound impressive, as the company takes a 50% revenueshare. Our main concern is sustainability moving forward, especially given theintense competition. We would also cite some Groupon merchants who questionits ability to generate repeat business. We believe AMZN’s $175MM stake inLivingSocial would ease anti-trust concerns. UBS 7
    • Key Call: Google Inc. 6 December 2010 Table 7: Internet and Interactive Entertainment Comp Sheet Estimates ($MMs, except EPS) 1 2 Ticker Rating Market Cap Revenue EBITDA EPS FCF 10E Margin UBS Estimate Consensus UBS Estimate Consensus UBS Estimate Consensus Gross Operating Company 12/3/2010 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E Interactive Entertainment Activision ATVI Buy $14,641 $4,879 $5,210 $4,546 $4,709 $1,586 $1,871 $1,485 $1,588 $0.80 $0.91 $0.76 $0.82 $2,187 $1,388 63.5% 29.0% Electronic Arts ERTS Buy 4,961 3,885 4,067 3,804 4,003 445 578 464 598 0.75 1.01 0.64 0.84 557 (6) 56.5 8.6 GameStop GME NR 3,201 -- -- 9,505 9,839 -- -- 847 881 -- -- 2.67 2.91 401 430 -- -- TakeTwo TTWO Neutral 965 1,098 1,221 1,108 1,151 89 115 88 111 0.64 0.97 0.68 0.90 97 51 37.1 6.7 THQ Inc. THQI Neutral 367 850 925 843 924 11 40 5 40 ($0.12) 0.26 (0.15) 0.30 1 (44) 33.3 (0.3) Advertising & Related Services Google GOOG Buy 183,236 21,832 25,786 21,668 25,533 13,151 15,910 12,974 15,207 28.90 33.67 28.78 33.31 9,915 11,339 86.2 53.7 Yahoo! YHOO Neutral 22,910 4,557 4,504 4,572 4,716 1,646 1,602 1,484 1,543 0.76 0.79 0.86 0.78 702 804 81.4 21.8 IAC / InterActiveCorp IACI Neutral 3,133 1,654 1,775 1,645 1,817 258 283 259 298 0.90 1.40 0.88 1.37 198 176 64.4 11.6 WebMD WBMD NR 2,919 -- -- 532 627 -- -- 171 215 -- -- 0.75 1.20 -- -- -- -- ValueClick VCLK Neutral 1,342 428 467 427 471 125 136 117 133 1.07 0.83 0.69 0.78 129 64 72.7 27.8 AOL AOL Neutral 2,630 2,391 2,104 2,406 2,119 782 489 676 471 2.74 1.40 2.84 1.61 867 347 47.8 21.0 United Online UNTD NR 587 -- -- 915 904 -- -- 200 190 -- -- 1.06 0.97 -- -- -- -- EarthLink ELNK NR 986 -- -- 595 504 -- -- 213 -- -- -- 0.90 0.69 -- -- -- -- comScore SCOR NR 695 -- -- 174 231 -- -- 12 33 -- -- (0.04) 0.27 2 15 -- -- Marchex MCHX NR 263 -- -- 96 112 -- -- 8 16 -- -- 0.05 0.23 -- -- -- -- Quinstreet QNST Buy 934 335 424 418 496 71 93 89 102 0.56 1.00 0.99 1.13 55 87 28 12 eCommerce Amazon.com AMZN Buy 82,607 34,446 46,146 34,134 43,667 2,583 3,498 2,276 3,056 2.55 3.81 2.51 3.47 2,799 4,062 22.5 4.5 eBay EBAY Buy 40,915 9,148 10,004 9,138 10,201 3,279 3,656 3,249 3,607 1.70 1.92 1.69 1.86 2,543 2,868 73.1 30.0 Digital River DRIV NR 1,444 -- -- 362 407 -- -- 67 101 -- -- 0.87 1.37 28 50 -- -- Mercado Libre MELI NR 3,030 -- -- 215 277 -- -- 79 104 -- -- 1.26 1.55 52 68 -- -- GSI Commerce GSIC Buy 1,637 1,361 1,575 1,356 1,562 136 178 135 168 0.52 0.78 (0.27) 0.20 108 113 58.9 2.9 OpenTable Inc OPEN NR 1,683 . -- 97 137 -- -- 32 52 -- -- 0.68 1.05 17 29 -- -- Online Entertainment Netflix NFLX Sell 10,108 2,163 3,084 2,163 2,887 335 399 332 432 2.86 3.56 2.79 3.82 189 306 37.3 7.7 Blockbuster BBI NR 20 -- -- 3,314 2,831 -- -- 29 133 -- -- (0.63) (0.57) -- -- -- -- (1) All figures represent "Operating EPS", defined to excludes SBC and 1x items as per Mgmt, except the following companies which are GAAP: VCLK, AMZN, GSIC, NFLX (2) FCF for non-covered companies are FirstCall means (3) ERTS 2010E = Fiscal year ending 03/2011; 2011E = Fiscal Year ending 03/2012 (4) THQI 2010E = Fiscal year ending 03/2011; 2011E = Fiscal Year ending 03/2012 (5) TTWO 2010E = Fiscal year ending 10/2010; 2011E = Fiscal Year ending 10/2011 Source: FactSet and UBS estimatesUBS 8
    • Table 8: Internet and Interactive Entertainment Comp Sheet Valuations Key Call: Google Inc. 6 December 2010 Firm Firm Value / 10-13E 10-13E 2011E 10-13E 2011E Price Upside to 1 Price YTD Value EBITDA EBITDA Price / Earnings EPS P/E to Price / FCF / share FCF FCF Target Target Company Ticker Rating 12/02/10 Performance ($MMs) 2010E 2011E CAGR 2010E 2011E CAGR Growth 2010E 2011E CAGR Yield (%) Interactive Entertainment Activision ATVI Buy $12.08 $14 20% 9% $11,755 7x 6x 9% 15x 13x 10% 1.3 7x 11x (12%) 9.1% Electronic Arts ERTS Buy $15.08 24 62 -15% 3,412 8 6 18 20 15 24 0.6 - 27 (16) 3.7% GameStop GME NR $21.15 -- -- -4% 3,268 4 4 -- 8 7 -- -- -- -- -- -- TakeTwo TTWO Neutral $11.47 11 -4 14% 835 9 8 -- 17 13 -- -- -- -- -- -- THQ Inc. THQI Neutral $5.40 4.45 -18 7% 344 64 9 -- -- 18 -- -- -- -- -- -- weighted average 3% 8 6 14.6 13 10 0.9 4 11 -10 6.1% mean 2% 18 6 15 13 17 1.0 7 19 -14 6.4% Advertising & Related Services Google GOOG Buy $571.82 720 26 -8% 149,371 11 9 16 20 17 16 1.1 19 16 14 6.1% Yahoo! YHOO Neutral $16.33 16.5 1 -3% 13,629 8 9 3 22 21 12 1.7 32 28 14 3.5% IAC / InterActiveCorp IACI Neutral $29.35 30 1 43% 1,956 8 7 11 33 21 24 0.9 16 16 9 6.4% WebMD WBMD NR $51.10 -- -- 33% 2,647 16 12 -- 69 42 -- -- -- -- -- -- ValueClick VCLK Neutral $16.27 15 -10 61% 1,116 9 8 10 15 20 -- -- 10 21 (8) 4.8% AOL AOL Neutral $24.57 25 3 6% 1,911 2 4 (22) 9 18 -- -- 3 7 (36) 13.6% United Online UNTD NR $6.86 -- -- -5% 774 4 4 -- 6 7 -- -- -- -- -- -- EarthLink ELNK NR $9.11 -- -- 10% 593 3 -- -- 10 13 -- -- -- -- -- -- comScore SCOR NR $22.13 -- -- 26% 666 57 20 -- -- 83 -- -- -- -- -- -- Marchex MCHX NR $7.49 -- -- 47% 231 29 14 -- 141 33 -- -- -- -- -- -- Quinstreet QNST NR $20.61 22 6 37% 899 10 9 20 21 18 34 0.54 17 11 26 9.3% weighted average 23% 15 12 25 20 12 0.9 29 35 11 4.9% mean 34% 16 11 34 26 22 1.0 26 31 3 6.2% eCommerce Amazon.com AMZN Buy $176.53 195 10 31% 76,886 30 22 32 69 46 44 1.0 29 20 41 5.0% eBay EBAY Buy $29.91 31 4 27% 32,716 10 9 11 18 16 10 1.5 16 14 11 7.1% Digital River DRIV NR $36.37 -- -- 35% 1,079 16 11 -- 42 26 -- -- -- -- -- -- Mercado Libre MELI NR $68.67 -- -- 32% 2,980 38 29 -- 54 44 -- -- -- -- -- -- GSI Commerce GSIC Buy $24.46 33 35 -4% 1,729 13 10 24 47 31 -- -- 15 15 16 6.8% Drugstore.com DSCM NR $1.74 -- -- -44% 165 21 11 -- -- 348 -- -- -- -- -- -- OpenTable Inc OPEN NR $73.25 -- -- 188% 1,595 49 31 -- 108 70 0 -- -- -- -- -- weighted average 31% 24 18 54 38 31 1 23 17 30 5.3% mean 41% 23 16 51 68 18 1 20 16 23 6.3% Online Entertainment Netflix NFLX Sell $193.42 110 -43 251% 10,064 30 25 30 69 54 29 1.8 55 34 28 2.9% Blockbuster BBI NR $0.09 -- -- -86% 908 32 7 -- -- -- -- -- -- -- -- -- weighted average 223% 30 24 64 50 27 1.7 50 31 25 2.7% mean 82% 31 16 69 54 29 1.8 55 34 28 2.9% (1) Firm Value equal to Equity Value plus straight and convertible debt, straight and convertible preferred stock, and minority interest less cash and cash equivalents, marketable securities, and equity in unconsolidated affiliates. Valuation metrics of non-covered companies are based on FirstCall mean estimates (3) ERTS 2010E = Fiscal year ending 03/2010; 2011E = Fiscal Year ending 03/2011 Source: FactSet and UBS estimatesUBS 9
    • Key Call: Google Inc. 6 December 2010 UBS 10
    • Key Call: Google Inc. 6 December 2010 UBS 11
    • Google Inc. Income statement (US$k) 12/05 12/06 12/07 12/08 12/09 12/10E % ch 12/11E % ch 12/12E % ch Revenues - - 11,660,107 15,856,598 17,481,147 21,832,318 24.9 25,786,287 18.1 29,506,397 14.4 Operating expenses (ex depn) - - (4,739,403) (6,414,776) (6,480,599) (8,681,582) 34.0 (9,876,187) 13.8 (11,093,275) 12.3 EBITDA (UBS) - - 6,920,704 9,441,822 11,000,548 13,150,736 19.5 15,910,101 21.0 18,413,121 15.7 Depreciation - - (967,658) (1,499,887) (1,524,308) (1,419,000) -6.9 (2,195,848) 54.7 (2,431,076) 10.7 Operating income (EBIT, UBS) - - 5,953,046 7,941,935 9,476,240 11,731,736 23.8 13,714,252 16.9 15,982,046 16.5 Other income & associates - - 0 0 0 0 - 0 - 0 - Net interest - - 589,580 316,382 69,003 341,923 395.5 427,106 24.9 552,593 29.4 Abnormal items (pre-tax) - - 0 0 0 0 - 0 - 0 - Profit before tax - - 6,542,626 8,258,317 9,545,243 12,073,659 26.5 14,141,358 17.1 16,534,639 16.9 Tax - - (1,613,289) (1,974,644) (2,128,750) (2,738,546) 28.6 (3,261,204) 19.1 (3,817,297) 17.1 Profit after tax - - 4,929,337 6,283,673 7,416,493 9,335,113 25.9 10,880,154 16.6 12,717,342 16.9 Abnormal items (post-tax) - - (725,617) (2,000,587) (896,045) (1,007,549) 12.4 (1,096,667) 8.8 (1,159,524) 5.7 Minorities / pref dividends - - 0 0 0 0 - 0 - 0 - Net income (local GAAP) - - 4,203,720 4,283,086 6,520,448 8,327,564 27.7 9,783,487 17.5 11,557,818 18.1 Net Income (UBS) - - 4,929,337 6,283,673 7,416,493 9,335,113 25.9 10,880,154 16.6 12,717,342 16.9 Tax rate (%) - - 25 24 22 23 1.7 23 1.7 23 0.1 Pre-abnormal tax rate (%) - - 25 24 22 23 1.7 23 1.7 23 0.1 Per share (US$) 12/05 12/06 12/07 12/08 12/09 12/10E % ch 12/11E % ch 12/12E % ch EPS (local GAAP) - - 13.29 13.49 20.24 25.78 27.4 30.28 17.4 35.76 18.1 EPS (UBS) - - 15.59 19.79 23.02 28.90 25.6 33.67 16.5 39.35 16.8 Net DPS - - 0.00 0.00 0.00 0.00 - 0.00 - 0.00 - Cash EPS - - 18.97 24.79 28.18 33.73 19.7 40.96 21.4 47.34 15.6 BVPS 22.19 14.94 96.35 118.36 113.60 143.29 26.1 178.65 24.7 218.57 22.3 Balance sheet (US$k) 12/05 12/06 12/07 12/08 12/09 12/10E % ch 12/11E % ch 12/12E % ch Cash and equivalents - - 6,081,593 8,656,672 10,197,588 14,835,210 45.5 26,340,026 77.6 39,932,583 51.6 Other current assets - - 11,207,545 11,521,510 18,969,370 27,811,035 46.6 27,700,036 -0.4 28,360,397 2.4 Total current assets - - 17,289,138 20,178,182 29,166,958 42,646,246 46.2 54,040,063 26.7 68,292,980 26.4 Net tangible fixed assets - - 4,039,261 5,233,843 4,844,610 5,752,032 18.7 5,964,961 3.7 6,027,479 1.0 Net intangible fixed assets - - 2,745,964 5,836,544 5,677,503 7,021,927 23.7 6,851,312 -2.4 6,719,357 -1.9 Investments / other assets 0 0 1,261,443 519,006 807,707 1,266,446 56.8 1,320,701 4.3 1,365,914 3.4 Total assets - - 25,335,806 31,767,575 40,496,778 56,686,650 40.0 68,177,037 20.3 82,405,729 20.9 Trade payables & other ST liabilities - - 2,035,602 2,302,090 2,747,467 9,378,718 241.4 9,436,673 0.6 10,483,177 11.1 Short term debt - - 0 0 0 0 - 0 - 0 - Total current liabilities - - 2,035,602 2,302,090 2,747,467 9,378,718 241.4 9,436,673 0.6 10,483,177 11.1 Long term debt - - 0 0 0 0 - 0 - 0 - Other long term liabilities - - 610,525 1,226,623 1,745,087 1,588,549 -9.0 1,683,831 6.0 1,836,725 9.1 Total liabilities - - 2,646,127 3,528,713 4,492,554 10,967,267 144.1 11,120,504 1.4 12,319,902 10.8 Equity & minority interests - - 22,689,679 28,238,862 36,004,224 45,719,383 27.0 57,056,533 24.8 70,085,828 22.8 Total liabilities & equity - - 25,335,806 31,767,575 40,496,778 56,686,650 40.0 68,177,037 20.3 82,405,729 20.9 Cash flow (US$k) 12/05 12/06 12/07 12/08 12/09 12/10E % ch 12/11E % ch 12/12E % ch Net income - - 4,203,720 4,283,086 6,520,448 8,327,564 27.7 9,783,487 17.5 11,557,818 18.1 Depreciation - - 967,658 1,499,887 1,524,308 1,419,000 -6.9 2,195,848 54.7 2,431,076 10.7 Net change in working capital - - 318,545 232,131 485,987 949,786 95.4 209,981 -77.9 493,824 135.2 Other (operating) - - 285,487 1,837,750 785,455 1,270,370 61.7 1,388,186 9.3 1,471,477 6.0 Net cash from operations - - 5,775,410 7,852,854 9,316,198 11,966,720 28.5 13,577,502 13.5 15,954,196 17.5 Capital expenditure - - (2,402,840) (2,358,461) (809,888) (2,051,959) 153.4 (2,238,162) 9.1 (2,361,638) 5.5 Net (acquisitions) / disposals - - (906,651) (3,319,237) (108,024) (860,000) 696.1 0 - 0 - Other changes in investments - - (372,098) 358,276 (7,101,293) (5,499,000) - 0 - 0 - Cash from investing activities - - (3,681,589) (5,319,422) (8,019,205) (8,410,959) 4.9 (2,238,162) -73.4 (2,361,638) 5.5 Increase/(decrease) in debt - - 0 0 0 0 - 0 - 0 - Share issues / (repurchases) - - 23,861 (71,521) 143,141 (1,081,896) - 165,476 - 0 - Dividends paid - - 0 0 0 0 - 0 - 0 - Other cash from financing - - 379,206 159,088 90,271 5,345 - 0 - 0 - Cash from financing activities - - 403,067 87,567 233,412 (1,076,551) - 165,476 - 0 - Cash flow chge in cash & equivalents - - 2,496,888 2,620,999 1,530,405 2,479,210 - 11,504,816 - 13,592,557 - FX / non cash items - - - (45,920) 10,511 2,158,412 20434.8 0 - 0 - Bal sheet chge in cash & equivalents - - - 2,575,079 1,540,916 4,637,622 - 11,504,816 - 13,592,557 - Core EBITDA - - 6,920,704 9,441,822 11,000,548 13,150,736 19.5 15,910,101 21.0 18,413,121 15.7 Maintenance capital expenditure - - (2,402,840) (2,358,461) (809,888) (2,051,959) 153.4 (2,238,162) 9.1 (2,361,638) 5.5 Maintenance net working capital - - 0 0 0 0 - 0 - 0 - Operating free cash flow, pre-tax - - 4,517,864 7,083,361 10,190,660 11,098,777 8.9 13,671,938 23.2 16,051,483 17.4Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill-related charges and other adjustments for abnormal and economic items at the analysts judgement. Note: For some companies, the data represents an extract of the fullcompany accounts. UBS 12
    • Global Equity ResearchAmericasInternet Services Google Inc.12-month rating Buy12m price target US$720.00 Valuation (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E P/E (local GAAP) - 34.5 21.7 22.2 18.9 16.0 P/E (UBS) - 23.5 19.1 19.8 17.0 14.6 P/CEPS - 18.7 15.6 17.0 14.0 12.1 Net dividend yield (%) - 0.0 0.0 0.0 0.0 0.0Company profile P/BV - 3.9 3.9 4.0 3.2 2.6Google Inc., a technology company, maintains an index of Web sites EV/revenue (core) - 6.5 5.6 5.9 5.0 4.4and other online content for users, advertisers, Google network EV/EBITDA (core) - 10.9 8.9 9.9 8.2 7.1members, and other content providers. Its automated search EV/EBIT (core) - 13.0 10.3 11.1 9.5 8.1technology helps users obtain instant access to relevant information EV/OpFCF (core) - 14.5 9.6 11.7 9.5 8.1from its online index. The company provides targeted advertising and EV/op. invested capital - 5.9 4.3 4.6 4.3 4.3Internet search solutions, as well as intranet solutions via anenterprise search appliance. Enterprise value (US$k) 12/08 12/09 12/10E 12/11E 12/12E Average market cap 110,507,5 105,545,8 137,686,1 137,686,1 137,686,1 + minority interests 0 0 0 0 0 + average net debt (cash) (7,369,133 (7,369,133 (7,369,133 (7,369,133 (7,369,133 + pension obligations and other ) 0 ) 0 ) 0 ) 0 ) 0 - non-core asset value (85,160) (128,977) (485,000) (485,000) (485,000) Core enterprise value 103,053,3 98,047,69 129,832,0 129,832,0 129,832,0 Growth (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12EValue (EV/OpFCF & P/E) Revenue - 36.0 10.2 24.9 18.1 14.4 15.0x 25.0x EBITDA (UBS) - 36.4 16.5 19.5 21.0 15.7 EBIT (UBS) - 33.4 19.3 23.8 16.9 16.5 20.0x 10.0x EPS (UBS) - 26.2 16.8 25.2 16.4 16.6 15.0x Cash EPS - 30.7 13.7 19.7 21.4 15.6 5.0x 10.0x Net DPS - - - - - - 5.0x BVPS - 22.8 -4.0 26.1 24.7 22.3 0.0x 0.0x 12/08 12/09 12/10 12/11E 12/12E Margins (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E EV/OpFCF (LHS) P/E (RHS) EBITDA / revenue - 59.5 62.9 60.2 61.7 62.4 EBIT / revenue - 50.1 54.2 53.7 53.2 54.2 Net profit (UBS) / revenue - 39.6 42.4 42.8 42.2 43.1Profitability 55.00% 55.0% Return on capital (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E 54.00% EBIT ROIC (UBS) - 45.3 42.0 41.8 45.2 53.4 50.0% 53.00% ROIC post tax - 34.5 32.6 32.4 34.8 41.0 52.00% 45.0% Net ROE - 24.7 23.1 22.8 21.2 20.0 51.00% 50.00% 40.0% Coverage ratios (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E 49.00% 35.0% EBIT / net interest - - - - - - 12/08 12/09 12/10(E) 12/11(E) 12/12(E) Dividend cover (UBS EPS) - - - - - - EBIT margin (LHS) ROIC (RHS) Div. payout ratio (%, UBS EPS) - - - - - - Net debt / EBITDA - NM NM NM NM NMROE v Price to book value Efficiency ratios (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E 25.00% 4.0x Revenue / op. invested capital - 0.9 0.8 0.8 0.9 1.0 24.00% 3.5x Revenue / fixed assets - 1.8 1.6 1.9 2.0 2.3 23.00% Revenue / net working capital - 1.7 1.4 1.3 1.4 1.6 22.00% 3.0x 21.00% Investment ratios (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E 2.5x 20.00% OpFCF / EBIT - 0.9 1.1 0.9 1.0 1.0 19.00% 2.0x Capex / revenue (%) - 14.9 4.6 9.4 8.7 8.0 12/08 12/09 12/10(E) 12/11(E) 12/12(E) ROE (LHS) Price to book value (RHS) Capex / depreciation - 1.6 0.5 1.4 1.0 1.0 Capital structure (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12EGrowth (UBS EPS) Net debt / total equity - (30.7) (28.3) (32.4) (46.2) (57.0) Net debt / (net debt + equity) - (44.2) (39.5) (48.0) (85.8) NM 30000000 28.0% Net debt (core) / EV - (7.2) (7.5) (5.7) (5.7) (5.7) 26.0% 25000000 24.0% Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill-related charges and other adjustments for abnormal and economic 22.0% items at the analysts judgement. 20000000 Valuations: based on an average share price that year, (E): based on a share price of US$573.00 on 03 Dec 2010 19:38 EST Market cap(E) may include 20.0% forecast share issues/buybacks. 15000000 18.0% 16.0% 10000000 14.0% 12/08 12/09 12/10(E) 12/11(E) 12/12(E) Brian Pitz Brian Fitzgerald Kaizad Gotla, CFA Revenue (LHS) UBS EPS Growth (RHS) Analyst Analyst Associate Analyst brian.pitz@ubs.com brian.fitzgerald@ubs.com kaizad.gotla@ubs.com +1-212-713 9310 +1-212-713 2851 +1-212-713 2603 UBS 13
    • Key Call: Google Inc. 6 December 2010 Google Inc.Google Inc., a technology company, maintains an index of Web sites and otheronline content for users, advertisers, Google network members, and othercontent providers. Its automated search technology helps users obtain instantaccess to relevant information from its online index. The company providestargeted advertising and Internet search solutions, as well as intranet solutionsvia an enterprise search appliance. Statement of RiskGoogle generates the majority of its revenue from online advertising. Onlineadvertising is a relatively new industry. There is risk that the industry could failto grow for a variety of reasons. Google also faces significant competition foradvertising dollars from Yahoo!, Microsoft, AOL, Baidu, and other regionalsearch companies. In addition, Google has been the subject of regulatoryscrutiny in the US and Europe, which could stifle innovation at the companyover the long term. Analyst CertificationEach research analyst primarily responsible for the content of this researchreport, in whole or in part, certifies that with respect to each security or issuerthat the analyst covered in this report: (1) all of the views expressed accuratelyreflect his or her personal views about those securities or issuers; and (2) no partof his or her compensation was, is, or will be, directly or indirectly, related tothe specific recommendations or views expressed by that research analyst in theresearch report. UBS 14
    • Key Call: Google Inc. 6 December 2010Required DisclosuresThis report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches andaffiliates are referred to herein as UBS.For information on the ways in which UBS manages conflicts and maintains independence of its research product;historical performance information; and certain additional disclosures concerning UBS research recommendations,please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance isnot a reliable indicator of future results. Additional information will be made available upon request.UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China SecuritiesRegulatory Commission.UBS Investment Research: Global Equity Rating Allocations 1 2 UBS 12-Month Rating Rating Category Coverage IB Services Buy Buy 51% 37% Neutral Hold/Neutral 40% 33% Sell Sell 9% 22% 3 4 UBS Short-Term Rating Rating Category Coverage IB Services Buy Buy less than 1% 20% Sell Sell less than 1% 0%1:Percentage of companies under coverage globally within the 12-month rating category.2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided withinthe past 12 months.3:Percentage of companies under coverage globally within the Short-Term rating category.4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were providedwithin the past 12 months.Source: UBS. Rating allocations are as of 30 September 2010.UBS Investment Research: Global Equity Rating Definitions UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition Buy: Stock price expected to rise within three months from the time the rating was assigned Buy because of a specific catalyst or event. Sell: Stock price expected to fall within three months from the time the rating was assigned Sell because of a specific catalyst or event. UBS 15
    • Key Call: Google Inc. 6 December 2010KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not aforecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stocks price target and/or rating aresubject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect anychange in the fundamental view or investment case.Equity Price Targets have an investment horizon of 12 months.EXCEPTIONS AND SPECIAL CASESUK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management,performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell:Negative on factors such as structure, management, performance record, discount.Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment ReviewCommittee (IRC). Factors considered by the IRC include the stocks volatility and the credit spread of the respective companysdebt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating.When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are notregistered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained inthe NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by aresearch analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any,follows.UBS Securities LLC: Brian Pitz; Brian Fitzgerald; Kaizad Gotla, CFA.Company Disclosures Company Name Reuters 12-mo rating Short-term rating Price Price date 6a, 6b, 7, 16 Google Inc. GOOG.O Buy N/A US$573.00 03 Dec 2010Source: UBS. All prices as of local market close.Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricingdate6a. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided.6b. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided.7. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than investment banking services from this company/entity.16. UBS Securities LLC makes a market in the securities and/or ADRs of this company.Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. UBS 16
    • Key Call: Google Inc. 6 December 2010Google Inc. (US$) Price Target (US$) Stock Price (US$) 800 600 400 200 0 01-Oct-05 01-Jan-06 01-Apr-06 01-Jul-06 01-Oct-06 01-Jan-07 01-Apr-07 01-Jul-07 01-Oct-07 01-Jan-08 01-Apr-08 01-Jul-08 01-Oct-08 01-Jan-09 01-Apr-09 01-Jul-09 01-Oct-09 01-Jan-10 01-Apr-10 01-Jul-10 01-Oct-10 Buy 2 Neutral 2 Buy No RatingSource: UBS; as of 03 Dec 2010Note: On August 4, 2007 UBS revised its rating system. (See UBS Investment Research: Global Equity Rating Definitions tablefor details). From September 9, 2006 through August 3, 2007 the UBS ratings and their definitions were: Buy 1 = FSR is > 6%above the MRA, higher degree of predictability; Buy 2 = FSR is > 6% above the MRA, lower degree of predictability; Neutral 1 =FSR is between -6% and 6% of the MRA, higher degree of predictability; Neutral 2 = FSR is between -6% and 6% of the MRA,lower degree of predictability; Reduce 1 = FSR is > 6% below the MRA, higher degree of predictability; Reduce 2 = FSR is > 6%below the MRA, lower degree of predictability. The predictability level indicates an analysts conviction in the FSR. Apredictability level of 1 means that the analysts estimate of FSR is in the middle of a narrower, or smaller, range of possibilities.A predictability level of 2 means that the analysts estimate of FSR is in the middle of a broader, or larger, range of possibilities.From October 13, 2003 through September 8, 2006 the percentage band criteria used in the rating system was 10%. UBS 17
    • Key Call: Google Inc. 6 December 2010Global DisclaimerThis report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. In certain countries, UBS AG isreferred to as UBS SA.This report is for distribution only under such circumstances as may be permitted by applicable law. Nothing in this report constitutes a representation that any investment strategy orrecommendation contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for informationpurposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. 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