瑞银-美股-互联网服务行业-美国互联网与互动娱乐：转到2018，道路愈发艰难 176页

'GlobalResearch10January2018USInternet&InteractiveEntertainmentEquitiesTurningto"18:LeavingtheEasyRoadBehindAmericasInternetServicesEricJ.SheridanTurningto"18:LeavingtheEasyRoadBehindAnalystAsweturnto2018,wetaketheopportunitytoexamineourforwardoperatingeric.sheridan@ubs.comestimates&rollforwardour12-monthPTs.Broadly,ourestimatechangesreflect:1)+1-212-7139310solidrevenuegrowth(bolsteredbystrongenddemandbackdrop);2)AlexandraKaspersustained/increasedlevelsofinvestmentamonglarge-capcompaniestobroadenAnalystecosystems&amongSMIDcapcompaniestocompete;&3)openquestions(likelytoalexandra.kasper@ubs.comdominateQ4earningsseason)abouthowUScorporatetaxreformimpactscompanies+1-212-7132968onanidiosyncraticlevel.OurlonestockratingchangeistoupgradeDespegarfromBridgetHanNeutraltoBuy($36PT)–recentunderperformancenowbetterreflectsAssociateAnalystcompany/industrydebates.bridget.han@ubs.com+1-212-7133309SolidDemandinQ4–PositiveForContinuedOfflinetoOnlineShiftsin2018BenjaminMillerQ4"17&forward2018channelchecks&ourfundamentalanalysiscontinuetopointtoAssociateAnalystsolidendmarketdemandinQ4"17:1)Digitaladvertisingseculartrendsintactforlargebenjamin-h.miller@ubs.comcaps–weseeespeciallyconstructiveshort-termsetupsforFB&GOOGintoQ4results+1-212-7133629season;2)eCommerce(inlinewithcurrentests);&3)OnlineTravel(wearecountertoLaneCzurainvestorfearsofslowergrowth/lowermarginsin"18).WecontinuetohighlightAssociateAnalystoperatingprofitvolatility(Q4"17/1H"18)asapotentialstockperformanceheadwindlane.czura@ubs.comovertheshort-termasmanycompaniescontinuetosustainhighlevelsofinvestmentin+1-212-7136206keylong-terminitiatives(wearebelowStreetonoperincomeestsformanynames)."18Picks:Growth(GOOG);Value(DESP,ZNGA,IACI/MTCH,EXPE,AABA,QVCA)For"18,weareframingAlphabet(GOOG)asourtoppick–sustainedoperatingperformance(vsfears),sum-of-the-partscalloptionality,cashrepatriation,capitalallocation(s/hreturnsandM&A)allactaspotentialcatalysts.Inaddition,weseeGOOGwellpositionedformanykeythemesahead–mobilecomputing,AI/ML,mediaconsumption&cloudcomputing.Afterayearofsignificantoutperformanceby"theacronymthatshallnotbenamed",weseemoreattractiverisk/rewardskewsinmanyvalue/idionames:DESP(LatAmplayonOTAtrends);ZNGA(mobilegameturnaround),IACI/MTCH(continuedattractiveSOTPstory),EXPE(OTAfearsvsSOTPstory),AABA(taxefficiency&simplifiedassetplay)&QVCA(turnaround,HSNmerger&assetbackedtransaction).PleaserefertoFigures2&3inthereportforourcompletesummaryofforwardestimateandPTchanges.Figure1:TopPick–GOOG;Value(DESP,ZNGA,IACI/MTCH,EXPE,AABA,QVCA)PriceTarget2018Revenue2018EPS%toTickerOldNewUpsideDownsideOldNewOldNewTargetGrowthAlphabet*GOOG$1,165$1,32520%$1,725$870$102,838$102,788$38.50$39.48ValueZyngaZNGA$4.80$5.0029%$7.50$2.90$946$946$0.08$0.08IACIIAC$155$16021%$214$100$3,965$3,965$3.20$3.22MatchGroup*MTCH$35$4025%$62$20$1,594$1,594$1.18$1.17ExpediaEXPE$154$16026%$232$80$11,328$11,274$3.39$3.52Altaba*AABA$77$9220%$125$54n/an/an/an/aQVCGroupQVCA$28$3015%$44$18$10,651$10,651$1.63$1.65UpgradeFromNeutraltoBuyDespegar*DESP$36$3636%$50$24$622$622$0.87$0.87Source:Companyreports,UBSNote:EPSisGAAP;*DenotesmaterialchangetoPTand/orratingwww.ubs.com/investmentresearchThisreporthasbeenpreparedbyUBSSecuritiesLLC.ANALYSTCERTIFICATIONANDREQUIREDDISCLOSURESBEGINONPAGE171.UBSdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision. ContentsEricJ.SheridanAnalysteric.sheridan@ubs.com2018&2019EstimatesRevisions..............................................................4+1-212-7139310AlexandraKasperValuation–Shifting2019MultiplestoGAAPEBITDAandFCFminusSBC...7Analystalexandra.kasper@ubs.comSectorTakeaways–WhereDoWeSitToday?.........................................11+1-212-7132968BridgetHanSelectIndustryData...............................................................................14AssociateAnalystAdvertising&Services................................................................28bridget.han@ubs.com+1-212-7133309Alphabet(GOOG,Buy,$1,325PT)..........................................................29BenjaminMillerAssociateAnalystFacebook(FB,Buy,$215PT)...................................................................34benjamin-h.miller@ubs.com+1-212-7133629IAC/InterActiveCorp(IACI,Buy,$160PT).................................................39LaneCzuraAssociateAnalystMatchGroup(MTCH,Buy,$40PT).........................................................44lane.czura@ubs.com+1-212-7136206Twitter(TWTR,Neutral,$25PT)..............................................................49Snap(SNAP,Sell,$8PT).........................................................................55Netflix(NFLX,Buy,$250PT)...................................................................60eCommerce.................................................................................65Amazon(AMZN,Buy,$1,440PT)............................................................66eBay(EBAY,Buy,$44PT).......................................................................73PayPal(PYPL,Neutral,$83PT)................................................................78Groupon(GRPN,Sell,$4.50PT)..............................................................83QVCGroup(QVCA,Buy,$30PT)............................................................89Yelp(YELP,Sell,$38PT).........................................................................94Travel..........................................................................................99Expedia(EXPE,Buy,$160PT).................................................................100Priceline(PCLN,Buy,$2,150PT)............................................................107TripAdvisor(TRIP,Neutral,$35PT).........................................................112Despegar(DESP,Buy,$36PT)................................................................117Travelport(TVPT,Neutral,$14PT)..........................................................122InteractiveEntertainment.........................................................127ActivisionBlizzard(ATVI,Buy,$76PT)....................................................128ElectronicArts(EA,Buy,$132PT)..........................................................133Zynga(ZNGA,Buy,$5.00PT).................................................................137Appendix..................................................................................142CompTables........................................................................................143IndustryForecasts.................................................................................146USInternet&InteractiveEntertainment10January20182 USInternet&InteractiveEntertainmentQ42017EarningsSeason–KeyIssues&SentimentCompanyTickerReportDateKeyIssues/SentimentExpectingcontinuedstrengthincoreNewsFeedadvertising(ledbyvideoads,directresponse&retailspecificadunitsduringtheholidayseasone.g.,DAs)andInstagram;investor/industryconversationssuggestYoYadrevgrowthintheFacebookFB01/31mid-40srangeex-FX(vs.UBSat42%YoY);investorswillbefocusedonanyclarityaroundthemagnitudeofforwardinvestment(i.e.,securityrelatedinitiatives,videocontentetc),commentary/dataonengagementtrends,ex-F/Xadrevsgrowth,Instagrammonetizationtrends,<growthdrivers(Oculus,Messenger,WhatsApp,connectivity,AI,etc.).DespitecontinuednoisearoundEUregulatoryoverhang(rulingonAndroid&AdSensecaseslikelyin1H"18)andbrandsafetyissuesonYouTube/Display,industrycheckspointtoanotherstrongqtrformobile+desktopsearchwithbetterAlphabetGOOG02/01thanfearedFXneutralgrosswebsiterevsgrowthinthelow20%s(UBSe+21.9%YoY);investorslookingforclarityonthepotentialbusinessimpactofEUrulings,TACtrajectory(incl.,impactfromMozilladeal),investmentpriorities,&usesofcashin2018(OpEx&CapExacrossCloud&OtherBetsbroadly)andseekinganupdateoncoreSearchbusinessmomentum,Cloud&hardwarestrategy,&cadenceofannouncedbuybackprogram.StockwillreacttoMatchGroup&ANGIHomeservicesresults;outsideofMTCH&ANGI,investorsarefocusedonthecontinuedmomentumwithinVimeo(incl.,updateonsubscriptionoffering&contentstrategy)andthemagnitudeofIACIACI01/31*headwindsinPublishing&Apps;thoughtsaroundassetspin-offs,andupdatedcommentaryoncapitalallocationpriorities.ContinuedfocusonPMCtrajectoryforcoreMatchvs.Tinder,impactfromTinderGold&newfeatures(Feed&SuperLikeable)onengagement&monetization;ARPPUtrendsincoreMatch,discussionofbroaderadvertisinglaunchinMatchGroupMTCH01/30*Tinder&planforadditionalTindermonetization;discussionofmedium-termOpExtrajectory(marketingexpenseinparticular)&guidanceforFY2018.Advertising/ServicesFocuswillbeonDAUgrowth(UBSeof~5mmnetaddsfor+15%YoY)andcoloraroundDAUpenetrationofnon-coredemos;investorswillalsolookforanycommentaryontherolloutoftheredesignedapp&engagementtrends,SnapchatSNAP02/06updatesonsaleschannelexpansion&advertiserdemand,pricingtrends,thegeneralcompetitiveenvironment,andcoloraroundthetiming/arcofoperatingleverage.Investorswillfocusonadrevenuetrends&usergrowthtrajectory(UBSe+3mmnetadds)andseekcommentaryonadvertisergrowth,adbudgetallocation,pricingtrendsanduserengagementtrends;investorswillalsolookforTwitterTWTR02/08clarificationonlivevideo/contentstrategy(incl.tractionofautoplayvideoads&newadunitse.g.,videowebsitecard)&expectedinvestmentlevelgoingforwardaswellasforwardmargintrajectory(marketing,cadenceofrevsdropofffromdecommissionedproducts,etc.).10January2018Investorswillbefocusedonsubtrends(bothdomestic&int"l)andinitial2018EBITmarginguidance;discussionaroundstrengthoftheoriginalslate&contentpipeline(incl.localizedcontent),pace&cadenceofcontentspend(cash&NetflixNFLX01/22amortizedbasis),marketingspendtrajectory,andbroadercommentaryonthecompetitivelandscape.ChannelcheckspointtoasolidquarterforNAeCommercerevsincl.,healthyconsumerspendingtrends;investorsarelookingforanycommentaryona)WholeFoodsintegration(incl.updateoncross-sellingopportunities&synergies),b)AmazonAMZN02/01*Q1operatingincomeguide(UBSsat$990m)togaugethemagnitudeofinvestments(PrimeNow,fulfillmentmediacontentetc),c)thecompetitivedynamicsincloudandtheresultingimpactonAWSgrowth,andd)growthopportunitiesbeyondcorecategories&markets.InvestorsarelookingforhighsingledigitUSGMVgrowthex-StubHub(UBSat7.6%YoYgrowth),clarityonFY2018guidance&investment/opextrajectory(todrivetrafficandbrandperception),anupdateontheprogressoftheeBayEBAY01/24*structureddatainitiatives(i.e.,quantificationofconversionbenefits,anyincrementaltrafficand/orusergrowth);thoughtsonStubHubtoplinetrendsweighedagainsttoughcompsandadd"lcoloronbothClassifieds&StubHubmarginprofilesaswellasviewsaroundshareholderreturnswouldbeviewedasapositive.DiscussionofFY2018guidance(incl.pace/depthofgrowthinvestments),adoption&engagementtrendsofGrouponPlus(incl.,marginimpact)andbroadertrendsingrossprofitdollargrowth;anysignsofreturnfromplanned/elevatedGrouponGRPN02/08*advertisingexpensestopromotegrowthinkeymarkets(particularlyNAcustomergrowth);commentaryontheroleofGoodsbusiness(incl.1Pvs.3Pmix)goingforwardandgeneralthoughtsoncompetitioninthelocalcategory.UpdateonHSNintegration&rev/costssynergiestimeline;updateonQ4USgrowthtrends(UBSe+3%YoY)givenQ3outperformanceaswellasdiscussionofplannedinitiativestoreaccelerategrowthinthebusiness(&thoughtsoneCommerceQVCGroupQVCA02/28*FY2018outlook);investorquestionswithrespecttosecular/cyclicaltrendsinthebroaderhomeshoppingsector,competitionfromeCommerceplayersandanyupdateonpace/velocityofshareholderreturnsfor2018inlightofexpectedQ1GCItransactionclosing.Stockwillreacttolocaladvertisinggrowthincl.,netaddsinpayingadvertisingaccounts(UBSe+2.6k)andFY2018outlook;Focuswillbeonforwardstrategicpriorities(incl.,thoughtsoncompetitiveenvironmentinlocal)aswellasYelpYELP02/07*salesforcegrowthandproductivitygains;updateonrevstrajectoryofnational&self-servechannels,andtractionofrequest-a-quotewouldbeapositive;ongoingdebatearoundinvestmentneedsparticularlymarketingspend&potentialimpacttoEBITDAmarginslongerterm.Updateonnetadds,engagementacrosstheplatform,TPVgrowthandtakerates;UpdateonVenmomonetizationprogress("PaywithVenmo");UpdateoncapitalallocationplansfollowingSychronydealcloseinQ3"18(reinvestmentPayPalPYPL01/25*opportunities,shareholderreturnsand/orM&Astrategy);InvestordebatearoundcompetitivelandscapefromApplePay,GooglePay,etc.Focuswillbeonmgmtupdateoflodgingroomnighttrends(incl.HomeAwaybookedvs.stayedpropertynights&Easterimpact).UpdateonHomeAwayplatformintegration&investmentsandresultingEBITDAimpact;commentaryonExpediaEXPE02/08theoperatingperformancegivenQ1outperformance;updateontheprogressofcloudspendannouncedinQ4;thoughtsonshareholderreturns&potentialforM&A.Focuswillbeonmgmtupdateofroomnighttrends(bothcore&HomeAwaycontribution)for2018&beyond;updateonHomeAwayplatformintegration&investmentsandresultingEBITDAimpactfor2018/2019,progressofcloudDespegarDESPn/amigration,competitionfromhoteldirecttraffic&Googleandthoughtsonshareholderreturns&potentialforM&A.Focuswillbeonanybroadermacrocommentary(especiallydemand/competitioninEuropeandSEAsia),updateonroomnightsgrowth/hotelsupplygrowth(especially2018guidevswhereStreetestimatessit)andcompetitionfromPricelinePCLN02/26*Travelhoteldirecttraffic&Google;updateonadvertisingROIs(especiallydynamicofshiftbetweenperformance/brandmarketing)aswellasonstrategy/demandonsharedaccommodation.Focuswillbeonhotelshoppergrowthoutlook,repeatrates,returnvisitsandconversion/monetizationaswellasthetoplineimpactfrombid-downsinadvertiserauctionsin2018;UpdateonresultsofbrandspendtobuildawarenessofTripAdvisorTRIP02/14platform&impactofmargins;updateontheNon-Hotelsegment(investmentfocus,revenueprofile,margintrajectory).Updateonmarketshareandimpactofkeycustomerroll-offsvs.newcustomerwinsandsubsequentimpactonmargintrajectoryin2018;TrendsinthecoreAirbusinessvs.growthinBeyondAir(especiallyeNett)andanypotentialTravelportTVPT02/20technology/infrastructureinvestmentsneededInvestorswillbefocusedoninitial2018guidance,unitperformanceofCoD:WWII&Destiny2,digitalmomentum(fullgamedownloadtrends,DLC,MTX),andcommentaryaroundeSports&Kingadvertising;investorswillalsolookforActivisionBlizzardATVI02/08*recentindicatorsofportfoliostrength(Overwatchusergrowth,Kingmobilebookings,Destinyengagementgrowth,Blizzardincubationefforts)andanyaddedcoloron2018titleslate.FocuswillbeonunitperformanceofBattlefrontII(&plansfordigitalmonetization)andstrategyfortheStarWarsfranchisegoingforward;updateonFY19contentpipelineanddiscussionaroundpace&competitionofkeytitlelaunchesElectronicArtsEA01/30(esp.mobile/UltimateTeamaspectsofthesportsfranchises);commentaryonindustrytailwinds(digital&eSports)&potentialforadd"lcashreturns.InteractiveEmphasiswillbeongrossbookingsgrowth&adj.EBITDAmarginachievedandinitial2018guidance(incl.progresstowardsthemedium-term20%EBITDAmargingoalby2018);commentaryonnewgamedevelopment,healthofcoreEntertainmentZyngaZNGA02/07*franchises,adbusinessmomentum,assetvalues(cash&realestate),andtheimplicationontherelativecontributionfromtitlestrengthvs.marketingspendtothetitles"success.Source:FactSet,CompanyReports;Note:asteriskdenotesestimatedreportingdate3 2018&2019EstimatesRevisionsAsweturnfrom2017to2018,wetaketheopportunitytoexamineouroperatingestimatesforthecompaniesinourcoverageuniversefor2018/2019andadjustour12-monthforwardPTstoreflectvaluationon2017-2019operatingestimates.Broadly,ourestimatechangesreflect:1)solid(butslowing)revenuegrowth(however,withastrongenddemandbackdrop,thosechangesaremostlyminorandbroadlypositive);2)sustained/increasedlevelsofinvestmentamonglarge-capcompaniestobroadenecosystems&amongSMIDcapcompaniestocompetewithbroaderscaledplayers;&3)openquestions(likelytodominateQ4earningsseason)abouthowUScorporatetaxreformimpactscompaniesonanidiolevel.Q4"17&forward2018channelchecks,industryconversations&ourfundamentalanalysiscontinuetopointtosolidendmarketdemandinQ4"17:1)Digitaladvertising(socialmedia,digitalvideo&mobilesearchallsolidlyoutgrowingtheadindustry)–weseeespeciallyconstructiveshort-termsetupsforFB&GOOGintoQ4resultsseason;2)eCommerce(consumerconsumptioninlinewithexpectations);&3)OnlineTravel(investorfearsofnewstructuralnormalofslowergrowth/lowermarginsnotsupportedbyourwork).Wecontinuetohighlightoperatingprofitvolatility(Q4"17/1H"18)asapotentialstockperformanceheadwindovertheshort-termasmanycompaniescontinuetosustainhighlevelsofinvestmentinkeylong-terminitiatives(ourbelowStreetestsformanycompaniesreflectmorepronouncedseasonalmarginpressures–especiallyinQ4"17andQ1"18ests).Figure2:2018Estimates&PriceTargetChanges2018EstimatesSalesGAAPEBITDAGAAPEPSPTChangesRatingOldNewOldNewOldNewOldNewStreetCurrentOldNewAMZN$222,116$222,480$22,433$20,822$8.86$5.74$1,250$1,440$1,301$1,254BuyBuyATVI$7,334$7,334$2,240$2,290$1.31$1.36$75$76$72$67BuyBuyDESP$622$622$102$102$0.87$0.87$36$36$37$26NeutralBuyEA**$5,581$5,581$1,665$1,665$4.13$4.13$132$132$129$112BuyBuyEBAY$10,339$10,329$3,245$3,242$1.59$1.59$40$44$40$38BuyBuyEXPE$11,328$11,274$1,785$1,775$3.39$3.52$154$160$152$127BuyBuyFB$53,026$53,009$27,756$27,749$6.66$6.66$208$215$211$188BuyBuyGOOG$102,838$102,788$40,901$41,105$38.50$39.48$1,165$1,325$1,101$1,103BuyBuyGRPN$2,947$2,894$164$174$0.08$0.10$4.00$4.50$5.33$5.09SellSellIAC$3,965$3,965$737$737$3.20$3.22$155$160$158$132BuyBuyMTCH$1,594$1,594$519$519$1.18$1.17$35$40$34$32BuyBuyNFLX$14,895$14,937$1,736$1,716$2.18$2.20$237$250$217$213BuyBuyPCLN$14,540$14,540$5,167$5,316$78.19$80.71$2,000$2,150$1,998$1,873BuyBuyPYPL$15,635$15,121$3,386$3,165$1.74$1.63$71$83$82$79NeutralNeutralQVCA$10,651$10,651$1,972$1,972$1.63$1.65$28$30$31$26BuyBuySNAP$1,186$1,186($1,044)($1,101)($0.92)$(0.96)$7$8$12$15SellSellTRIP$1,629$1,573$266$207$0.70$0.42$34$35$34$34NeutralNeutralTVPT$2,519$2,514$556$561$0.83$0.89$15$14$16$13NeutralNeutralTWTR$2,525$2,577$578$589$0.19$0.19$21$25$20$24NeutralNeutralYELP$997$951$80$84$0.33$0.38$37$38$46$43SellSellZNGA$946$946$102$106$0.08$0.08$4.80$5.00$4.37$3.89BuyBuySource:FactSet,UBS**Note:EA2018estimatescorrespondtocompany"sfiscal2019numbersUSInternet&InteractiveEntertainment10January20184 Figure3:2019EstimatesChanges2019EstimatesSalesGAAPEBITDAGAAPEPSOldNewOldNewOldNewAMZN$262,952$262,866$28,885$27,004$15.65$12.19ATVI$7,487$7,621$2,383$2,458$1.85$1.92DESP$749$749$131$131$1.15$1.15EA**$5,902$5,902$1,920$1,920$4.78$4.78EBAY$11,026$11,013$3,585$3,581$1.84$1.84EXPE$12,431$12,517$2,080$2,098$4.64$4.91FB$65,436$65,416$34,370$33,340$7.93$7.63GOOG$116,672$117,909$45,950$46,801$43.22$45.04GRPN$3,123$3,034$194$231$0.15$0.20IAC$4,461$4,461$946$946$4.49$4.65MTCH$1,843$1,843$633$633$1.42$1.41NFLX$18,016$18,086$2,867$2,707$3.98$3.67PCLN$16,062$16,319$5,724$6,020$88.18$93.23PYPL$18,464$17,814$3,987$4,119$2.10$2.29QVCA$10,990$10,990$2,046$2,046$1.82$1.82SNAP$1,742$1,742($798)($909)($0.74)$(0.83)TRIP$1,812$1,733$339$270$1.12$0.78TVPT$2,609$2,598$578$582$0.96$1.02TWTR$2,731$2,812$719$741$0.40$0.42YELP$1,203$1,120$130$121$0.71$0.66ZNGA$1,023$1,023$138$149$0.11$0.12Source:FactSet,UBS**Note:EA2019estimatescorrespondtocompany"sfiscal2020numbersAsweexpressedinourrecent10Themesfor2018report,thispastyearsawdramaticlargecapstockoutperformance.Whilethisabsoluteperformancelevelisunlikelytoberepeatedoverthenextyear,weremainpositiveonthegroup(albeitwithmoremutedreturnexpectations).Akeytrendthatlargeplatform/techcompaniesarebeginningtodemonstratethenextwaveofconsumer&enterprisecomputingtrendsthroughaseriesofinvestments,M&A,productlaunchesandincreasedenduseradoptionacrossAI,machinelearning,bigdata,voiceassistants,recommendationengines&cloud,whichweexpecttobeakeydriverofrevgrowth,investments,competition&impactthelong-termstrengthofecosystemsoverthenextdecade.Inthetablebelowwehighlighttherationalebehindourestimatechanges:Figure4:Summary–RationaleBehindEstimatesChangesCompanySub-SectorRationaleAlphabetDigitalAdvertisingWearemodestlyadjustingourforwardrevenuegrowthexpectationsforFY2018&FY2019toreflectcontinuedmomentuminmobilesearch,YouTubeandlessofadeclineindesktopsearchtrends.WemodestlyincreaseourFY2018&FY2019TACestimatesmainlytoreflectGoogle"snewdistributionagreementwithMozilla.OurEBITDAestsreflectelevatedlevelsofsales&marketingcostsreflectinginvestmentsinbrandadvertising(mainlyrelatedtohardware)inQ4"17&beyond.WeexpectFXNSitesrevenuegrowthof~21.9%YoYinQ4"17(and15.2%YoYgrowthinFY2018),reflectingstrongmobilesearchmomentum&YouTubegrowthcoupledwithgreaterstabilityindesktopsearchgrowth.FacebookDigitalAdvertisingWemakenochangestoourforwardadvertisinggrowthestimates,butwedolowerourPayments&OtherrevenuegrowthgivenmoremodestexpectationsaroundOculusheadsetshipments.Fromacostperspective,wemodestlyincreaseourtotaloperatingexpensegrowthexpectations(mainlyreflectingmedia/videocontentinvestments)nowassuming45.6%YoYgrowthinFY18.Source:UBSestimatesUSInternet&InteractiveEntertainment10January20185 Figure5:Summary–RationaleBehindEstimatesChangesCompanySub-SectorRationaleTwitterDigitalAdvertisingWemodestlyincreaseourFY2018&FY2019revenuegrowthestimatesdrivenbycontinuedstrengthinaudienceengagement(helpedbycontinuedproductinvestments,innovatione.g.,"threads"&marketing),pricingstabilization(whilestillprovidinganattractivevaluepropositiontoadvertisers),strengthinvideo(Q4isthefirstfullquarterofthenew"videowebsitecard"adunit)anditspotentialtotapintonewchannelsofdemandviaexpandingprogrammaticbuyingcapabilities.Wearenotmakingchangestoouroperatingexpenseestimates.SnapchatDigitalAdvertisingWeareloweringourGAAPEBITDAandGAAPEPStoreflectcontinuedpressureongrossmarginduetoSnap’suniquecoststructure(whilerealizingsomebenefitfromitsdual-cloudstrategy).Additionally,weexpectheadcountgrowthtobeasignificantopexdriveroverthenextfewyearsasthecompanyscales.Wearenotmakingchangestoourrevgrowthestimates.AmazoneCommerceForFY2018&FY2019,ouroperatingincomeexpectationsmovelowerreflectingourupdatedviewonamoreaggressivepaceofinvestmentsinanumberofareasincl.i.e.,licensed&originalcontent,sales&marketing,India,AWS,Alexa&Echoinvestmentsetc.alongwithincreasedfulfillmentcosts(AmazonFresh,PrimeNowexpansion,Same-Dayexpansion,sortationcentregrowth,etc.).ForQ12018,wenowexpectAmazontoreport$989minOI.GrouponeCommerceWemodestlylowerourforwardrevenuegrowthestimatestoreflectamoreconservativestanceonGroupon"sabilitytogrowitsactivecustomerbaseandbillings,whilede-emphasizingtheGoodsbusiness.WeincreaseourforwardEBITDAgrowthestimatesdrivenbythecontinuedroll-outofGrouponPlus,continuedstreamliningofoperationsanditscostbase,partiallyoffsetbyongoinginvestmentsintomarketinginNA&International.PayPaleCommerceWemodestlylowerourreveststofactorintheimpactofthesaleofUSconsumercreditreceivablesandpartnershipwithSynchrony.Newrevestsincorporatemgmt"sFY18outlookforgrowthof~16.5%YoY,including3.5%neg.impactfromSynchrony.TheprimaryrevenueimpactofthedealisthatPayPalwillnowbeinaprofitshareagreementrelatedtoUSconsumercredit.Thatsaid,thisdealisexpectedtofreeupcapitaltobeallocatedtohigherreturninginvestmentsand/orreturningcashtoshareholders.ChangestoEBITDAreflectlowerrevs,offsetbyreducedloanlossexpenserelatedtoUSconsumercreditbusinesspost-dealcloseinQ3aswellasmgmt"scontinuedeffortstodriveefficienciesandleveragerelatedtootheropex.YelpeCommerceWearemodestlyadjustingourforwardrevenue&EBITDAestimatestoreflectamoreconservativestanceonYelp"sabilitytoincreasepenetrationofpayingadvertisingaccountspartiallyoffsetbyincreasedretentionamongexistingadvertisersandthegrowthofnewrevenuestreamse.g.,Request-A-Quote.Inaddition,weareadjustingour"Transactions"revenueexpectationsdownwards.SinceOctober"17,YelprecognizesanettransactionfeefromitspartnershipwithGrubHub.OurreducedEBITDAestimates(mainlydrivenbylowerforwardrevenuegrowthassumptions)arepartiallyoffsetbyimprovedsales&marketingefficiency.ExpediaOnlineTravelWemodestlyadjustforwardoperatingestsreflectingbookings+11%YoYinFY18and10%inFY19.WeincreaseourFY19HomeAwayrevforecastreflecting27%YoYgrowth(from+19%).Momentumonthetraffic,booking&conversionelementsofthebusinessasaresultofreinvestmentsbackintoareaslikeproduct,technologyandmarketinggiveusconfidencetoincreaseourpriorconservativeestimate.Further,wenowfactorin$500mofseniornotescomingduein2018,resultinginlowerinterestexpenseandhigherEPSinFY18andFY19.PricelineOnlineTravelWemodestlyadjustoperatingestimatesreflectingroomnightgrowthof15%inFY18and13%inFY19andconstantcurrencyADRapprox.flattoup1%YoY.WeexpectFY18bookings+14%YoYandFY19growthof13.5%YoY.WeraiseourGAAPEBITDAestimatesasaresultofslightlyhigherrevenueexpectationsandslightlylowerperformanceadvertisingspendinFY19.TripAdvisorOnlineTravelWereduceourFY18&FY19revenueexpectations(relatedtoclick-based&transactionrevs)asaresultofdownwardlyrevisedhotelshoppergrowthests(hotelshoppergrowthwasflatinOct.).Thatsaid,weexpectcontinuedsolidexecutioninnon-Hotel.OurlowerEBITDAexpectationsprimarilyreflectlowerrevenueassumptionsaswellasslightlyhighertechnology&contentexpense(thoughstillexpectthislineitemtodecreaseasapercentofrevenueinFY18&FY19).TravelportOnlineTravelWemodestlyadjustoperatingestimatesreflectingnetrevenuegrowthof~3-4%YoYinFY18&FY19.Further,wenowexpecteNettgrowthinFY18of24%YoYand11%inFY19.AdjustmentsreflectimpactofFlightCentreroll-off(whichishighermargin),partiallyoffsetbyhighervolumesfromOTAwins(lowermargin).Source:UBSUSInternet&InteractiveEntertainment10January20186 Figure6:Summary–RationaleBehindEstimatesChangesCompanySub-SectorRationaleActivisionInteractiveWemodestlyraiseourFY2019revenueestimatesonthebackofourexpectationformorestableBlizzardEntertainmentKinggrowthtrajectory(incl.Blizzardmobilegames)andslightuptickineSportsrevenues.Additionally,wemodestlydecreaseourFY2018andFY2019opexestimates(bothR&DandS&M)asweseegreateroperatingleveragefromthedigitalbusinessmodel.ZyngaInteractiveWemodestlyraiseoperatingleverageassumptionsforbothR&DandSales&MarketinglinesastheEntertainmentcompanysquarelyfocusesonmanagingresourcesandexpensesgoingforward.WestillseeR&Dlineshowingfasterleverageon%ofsalesbasisthanS&MasZyngacontinuestoinvestinuseracquisitionwhilemoreselectivelyinvestindevelopmentprojects.Source:UBSValuation–Shifting2019MultiplestoGAAPEBITDAandFCFminusSBCAswerollour12-monthpricetargetsforwardtobebasedon2019operatingestimates,wethoughtitwouldbevaluableforinvestorstounderstandourvaluationframework.OurapproachtovaluingInternetcompaniescanbesummarizedbythefollowingphrase:Areyoupayingareasonablemultiplefornear-term(definedasthenext2years)growthratesthatcanbereasonablyassumedandstress-tested?Stretchingmuchfurtherthanthatrequiresaninvestortomakeverylongtailedassumptionsthatnormallyincorrectlymodelbusinessdisruption,individualcompanyandindustryinvestmentcyclesand/ormacroeconomiccycles.Withthisnote,weshiftourpreferredvaluationframeworktoa50/50blendof:1)EV(enterprisevalue)toGAAPEBITDAmultipleappliedtoour2019estimatesand2)EV/(FCFminusstockbasedcompensation)multipleappliedtoour2019estimates.We’dnotewithinthismethodologyweexaminebothabsolutemultiplesandmultiplesasaratiooftheforwardtwoyeargrowthassumptions.Thiscomparestoourpriorframework,whichpreferredablendofEV/Sales,EV/Adj.EBITDAandEV/FCF.Asdiscussedinour10Themesfor2018report,withtheSECincreasinglyscrutinizingtheuseofnon-GAAPmetrics,theindustryandinvestorsarestartingtoshifttowardsGAAPreporting&valuation.WebelievethisshiftalsobeginstoreflectaslowlymaturingindustryandexpectGAAPtobecomethemorepredominantvaluationframeworkinthenearfuture.WeobserveadeepenedvaluationdisconnectonGAAPbasisbetweenlargecapandSMIDcapinternet(vs.onnon-GAAPbasis),furthersolidifyingourpreferencetowardslargecapnameswithinourcoverage.Stockbasedcompensationisoneofthemaincomponentsofnon-GAAPadjustmentsforinternetcompaniesandthefocalpointofdebateonGAAPvs.non-GAAPvaluation.Astheindustrymatures,companiesandinvestorsareincreasinglyviewingSBCasaregularoperatingexpense("costofdoingbusiness"),henceshouldnotbeexcludedfromvaluation.Ininstanceswherecompaniesarenotprofitableand/ordonotgeneratepositiveFCF,weutilizea50/50blendof:1)EV/Salesmultipleappliedtoour2019estimatesand2)amodifiedDCFusinganEV/(FCFminusstockbasedcompensation)multipleappliedtoour2022estimatesdiscountedback3years.WefirstintroducedthismethodologywithourSNAPinitiation.USInternet&InteractiveEntertainment10January20187 FY2017Recap–OutperformanceDrivenbyMultipleExpansionLookingatthevaluationmultiplesofthecompaniesinourcoverageonyear-endestimates(vs.beginningoftheyear),wenotethatEV/Sales,EV/EBITDA,andP/Eallexpandedatahealthyclip,drivingthemajorityofstockperformancein2017.Specifically,webegan2017withourInternetcoveragetradingatapproximately2.9x,10.4xand19.9xStreetexpectationsfor2018sales,EBITDA,andearnings.Byyearend,ourcoverageuniversewasbeingvaluedatmultiplesof4.0x,15.4x,and32.2x2018expectations,representingsignificantmultipleexpansionof39%,47%,and62%acrossEV/Sales,EV/EBITDA,andP/E,respectively.Thisisinsharpcontrasttothelevelsofmultipleexpansionunderourcoverageobservedin2016(1%,2%and1%acrossEV/Sales,EV/EBITDAandP/E)and2014(4%,0%,and8%,respectively).Thatsaid,itiscloserto2015performancewhenmultiplesroseby45%,42%and44%acrossEV/Sales,EV/EBITDAandP/E.Figure7:MultipleExpansionin2017(2018EV/Sales,EV/EBITDA,P/E)EV/Sales(2018E)EV/EBITDA(2018E)P/E(2018E)12/31/201612/31/201712/31/201612/31/201712/31/201612/31/2017EA3.6x5.2x43%10.2x13.7x35%15.9x20.8x31%FB6.3x8.8x40%9.9x15.0x51%17.3x25.8x49%EXPE1.9x2.0x6%9.2x12.0x30%14.1x20.9x49%NFLX4.3x5.8x34%34.6x45.6x32%62.5x80.9x30%QVCA1.4x1.6x8%7.5x8.4x12%15.9x19.6x24%MTCH3.3x6.2x85%9.6x16.7x74%15.5x24.8x60%ATVI3.6x6.4x77%9.4x16.2x73%14.1x24.1x71%EBAY3.0x3.6x20%7.6x10.0x31%13.1x17.2x31%PCLN4.4x5.2x19%11.3x14.1x25%16.6x20.5x23%GOOG3.6x4.8x31%8.8x12.0x36%15.8x24.8x57%TRIP3.3x2.6x-19%12.4x13.7x10%23.3x32.0x37%IAC1.4x2.6x88%7.0x11.2x61%13.9x24.3x75%YELP2.0x2.8x36%9.9x13.3x35%83.2x97.7x17%AMZN1.7x2.4x42%13.4x22.0x64%48.9x136.9x180%GRPN0.5x0.9x80%6.4x10.1x58%15.7x25.1x60%ZNGA1.7x3.0x73%11.0x16.2x48%24.8x28.8x16%TWTR2.9x6.0x102%9.2x17.8x92%19.9x54.1x172%TVPT1.4x1.5x2%5.9x6.1x2%8.5x8.6x2%PYPL2.9x5.4x88%11.4x20.4x78%19.8x32.5x64%Aggregate2.9x4.0x38.5%10.4x15.4x47.3%19.9x32.2x62.1%Source:FactSet,Companyreports,UBS-Note:ForEA,estimatesareforfiscal2019E(yearendingMarch2019);EBITDAandEPSestimatesarebasedonnon-GAAPSimilarto2015,multipleexpansioncameonmodestlypositiveSalesandEBITDArevisionsandanegativeEPSrevisionoverthecourseoftheyear.Specifically,SalesandEBITDAestimatesforourcoverageuniversewererevisedhigher(up9.7%and3.1%,respectively)sinceJanuary1st,vs.netincomerevisedlowerby9.6%,asshowninthefollowingtable.We"dnoteexcludingFB,NFLX,GOOGandAMZN,SalesandEBITDAestimatesforthegroupwererevisedhigherby0.2%and1.6%,respectively.USInternet&InteractiveEntertainment10January20188 Figure8:EstimateChangesDuring2017(2018EStreetSales,EBITDA,EPS)Sales(2018E)EBITDA(2018E)EarningsperShare(2018E)12/31/201612/31/201712/31/201612/31/201712/31/201612/31/2017EA$5,583$5,5950%$1,985$2,1056%$4.78$4.974%FB$46,299$53,45815%$29,276$31,3467%$6.52$6.622%EXPE$11,408$11,3570%$2,387$1,940-19%$7.90$5.40-32%NFLX$13,176$14,97814%$1,658$1,90915%$1.90$2.2820%QVCA$11,244$11,6313%$2,175$2,1780%$1.57$1.48-6%MTCH$1,609$1,542-4%$562$5722%a$1.00$1.1011%ATVI$7,327$7,4201%$2,808$2,9224%$2.46$2.564%EBAY$9,921$10,2553%$3,917$3,725-5%$2.27$2.23-2%PCLN$14,268$14,3811%$5,561$5,328-4%$87.64$83.25-5%GOOG$118,911$131,06310%$49,374$52,3996%$48.06$41.50-14%TRIP$1,871$1,601-14%$493$309-37%$2.00$1.06-47%IAC$3,686$3,8685%$726$89123%$4.31$5.1319%YELP$1,077$952-12%$221$198-11%$0.41$0.37-8%AMZN$203,599$228,41112%$25,940$25,150-3%$15.35$8.02-48%GRPN$3,389$2,911-14%$278$273-2%$0.18$0.192%ZNGA$907$9232%$142$17020%$0.10$0.1339%TWTR$3,091$2,545-18%$984$852-13%$0.76$0.45-41%TVPT$2,654$2,530-5%$644$609-5%$1.61$1.46-9%PYPL$14,687$15,3935%$3,673$4,06811%$2.01$2.2612%Aggregate$474,706$520,8129.7%$132,805$136,9433.1%n/an/a-9.6%Source:FactSet,Companyreports,UBS-Note:ForEA,estimatesareforfiscal2019E(yearendingMarch2019);EBITDAandEPSestimatesarebasedonnon-GAAPThatsaid,asdepictedinthefollowingcharts,weobservedseveraldiscrepanciesbetweenindividualstockreturnsandcorrespondingchangesinStreetestimatesduringtheyear.Inmanycases,webelievethesediscrepanciescanhelpidentifyopportunitiesintheyearahead:2017StockPerformancevs.SalesRevisions:WithrespecttoSales,YELP,TWTR,GRPNandMTCHsawnegativerevisionsto2018salesestimatesduringtheyearwhileachievingpositivereturnsonanabsolutebasis.Further,generallyspeakingthegroupasawholesawstrongstockperformanceonthebackofrelativelyminimalpositiveestimaterevisionsthroughtheyear.Figure9:UBSInternetCoverage–2017StockPerformancevs.Changein2018StreetSalesEstimates120%80%40%0%-40%TRIPTVPTEXPEYELPPCLNQVCAEBAYGOOGEATWTRGRPNZNGAFBNFLXAMZNATVIPYPLMTCHIAC2017StockPerformanceChangein2018ESales(StreetEsts)Source:FactSet,UBSNote:ForEA,estimatechangesareforfiscal2019E(yearendingMarch2019);ExcludesAABA,SNAP,DESPandV2017StockPerformancevs.EBITDARevisions:IntermsofEBITDArevisions,wewitnessedsomeofthesamediscrepanciesassales.Thefollowingchartdisplaysthedisparitybetweenstockperformanceandthechangesin2018StreetEBITDAexpectationsforstocksinourcoverageuniverse.Underthislens,EXPE,YELP,PCLN,EBAY,TWTR,GRPNandAMZNachievedpositiveabsolutestockpricereturnsdespitedownwardEBITDArevisions.USInternet&InteractiveEntertainment10January20189 Figure10:UBSInternetCoverage–2017StockPerformancevs.Changein2018StreetEBITDAEstimates120%80%40%0%-40%-80%TRIPTVPTEXPEYELPPCLNQVCAEBAYGOOGEATWTRGRPNZNGAFBNFLXAMZNATVIPYPLMTCHIAC2017StockPerformanceChangein2018EEBITDA(StreetEsts)Source:FactSet,UBSNote:ForEA,estimatechangesarefor2019E(yearendingMarch2019);ExcludesAABA,SNAP,DESPandV2017StockPerformancevs.EPSRevisions:Similarly,thechartbelowdisplaysthedisparitybetweenstockperformanceandchangesin2018StreetEPSexpectationsforeachcompany.Whileaggregatenetincomeexpectationsweredown9.6%duringtheyear,thiswaslargelyduetoAMZNandGOOG,whichexperienceddownwardrevisionsto2018earningsestimatesof44%and13%,respectively(ex.AMZNandGOOG,aggregatenetincomeexpectationswouldhaverisen0.8%).Figure11:UBSInternetCoverage–2017StockPerformancevs.Changein2018StreetEPSEstimates120%80%40%0%-40%-80%TRIPTVPTEXPEYELPPCLNQVCAEBAYGOOGEATWTRGRPNZNGAFBNFLXAMZNATVIPYPLMTCHIAC2017StockPerformanceChangein2018EEarningsPerShare(StreetEsts)Source:FactSet,UBSNote:ForEA,estimatechangesarebasedonfiscal2019E(yearendingMarch2019);ExcludesAABA,SNAP,DESPandVUSInternet&InteractiveEntertainment10January201810 SectorTakeaways–WhereDoWeSitToday?2018Setup–StockPerformanceSinceLastYearAstoabroadermeasureofInternetstockperformance,wenotethatourUBSInternetIndexoutperformedthemarket(definedastheS&P500)by2,700bpsin2017.Specifically,ourindexof~50Internetcompanieswasup46.4%,whiletheS&P500wasup19.4%duringtheyear.Onasectorlevel:Advertisingcompaniesinourcoverageoutperformedthemarketby2,400bpswithIAC,MTCH&AABAseeingthestrongestperformancein2017.TheeCommercesectoroutperformedthemarketasPYPLandAMZNhadthegreatestincreases(up67%and36.5%,respectively)whileYELPwastheonlydeclinerin2017(down9%).Theonlinetravelsectorsawa1,200bpsincreaseonanabsolutebasis(down740bpsvs.theS&P)overthecourseof2017withTRIPandTVPTbeingthelargestrelativeunderperformers.InteractiveEntertainmentcompanies(ATVI,EAandZNGA)outperformedtheS&P500bythewidestmargin(3,910bps)drivenprimarilybyATVI(up75%in2017onanabsolutebasis).Figure12:UBSInternetCoveragePerformancevs.InternetIndex&SPX(2017)SinceDecember31,2016PriceReturnReltoSPXReltoInternetIndexS&P50019.4%---27.0%UBSInternetIndex46.4%27.0%--Facebook53.4%34.0%6.9%Google35.6%16.2%-10.9%IAC88.7%69.3%42.3%MatchGroup83.1%63.7%36.7%Twitter47.3%27.9%0.9%Snap*-14.1%-33.5%-60.5%Altaba80.6%61.2%34.2%Netflix55.1%35.6%8.6%AdvertisingServicesAverage**43.4%24.0%-3.0%Amazon56.0%36.5%9.5%eBay27.1%7.7%-19.3%Groupon53.6%34.2%7.2%QVCGroup22.2%2.8%-24.2%Yelp10.0%-9.4%-36.4%PayPal86.5%67.1%40.1%eCommerceAverage56.9%37.5%10.5%Expedia5.7%-13.7%-40.7%Despegar*5.7%-13.7%-40.7%Priceline18.5%-0.9%-27.9%TripAdvisor-25.7%-45.1%-72.1%Travelport-7.3%-26.7%-53.7%OnlineTravelAverage***12.0%-7.4%-34.4%ActivisionBlizzard75.4%55.9%28.9%ElectronicArts33.4%14.0%-13.0%Zynga55.6%36.2%9.2%InteractiveEntertainmentAverage58.5%39.1%12.0%Source:FactSet,UBSNote:Averagereturnsthrough12/31/17aremarketcapweighted,*ReturnsinceIPO,**ExcludesSNAP,***ExcludesDESPUSInternet&InteractiveEntertainment10January201811 Overthecourseof2017,theVIXhastrendedbetweenhigh-singledigitsandlow-doubledigitswhichweprimarilyattributetoabullmarketruninglobalequities.We’dnotethattheInternetIndexwasslightlyunderperformingtheS&P500forthefirsttwoweeksof2017,andthensawareversalwithcontinuedoutperformancebyover2700bpsthroughtheendoftheyear.Asweenter2018andtheVIXhassettledintothehigh-singledigitrange,thatgapcontinuestowiden.Figure13:UBSInternetIndexvs.VIX(2015–2017)700504560040500354003025300202001510100500Jan-15Apr-15Jul-15Oct-15Jan-16Apr-16Jul-16Oct-16Jan-17Apr-17Jul-17Oct-17Jan-18UBSInternetIndexVIXSource:FactSet,UBSFromatechnicalperspective,wenotethatthe14-DayRSIforourcoverageexhibitamoderatelevelofskewonbothtailsthoughonaveragearehighercomparedtolastquarter,indicatingthatourcompanieshavegenerallybeenslightlyoverboughtintherecentpastvs.Q3.AmongourBuy-ratedstocks,ZNGA&ATVIaremostoversold,whileAABA,IACI,andMTCHhaveseenthemostpositivemomentum.Figure14:14-DayRSI10080Avg=61.986040200SNAPTVPTZNGAGRPNTRIPATVIYELPQVCAEATWTRPCLNEBAYFBAMZNPYPLGOOGEXPEMTCHIACIAABANote:AsofJanuary5,2018closeSource:FactSet,UBSUSInternet&InteractiveEntertainment10January201812 Generally,wecontinuetobelievethattherisk-rewardforourcoverageuniverse(seebelow)isattractiveatcurrentlevels.Inparticular,wewouldhighlightAABA,EXPE,ZNGA,MTCHandDESPasBuy-ratednameswithatleast20%upsidepotentialtoourpricetargetandatleasta30%greaterskewtoourupsidescenariovs.ourdownsidescenario.Figure15:UBSInternetRisk-RewardMatrix100%DESP80%ZNGA60%MTCHNFLXQVCAIACEXPE40%ATVIGOOGPCLNEBAYAABAPYPL20%EAFBTWTRAMZNTRIP0%TVPTYELP-20%Upside/DownsideSkewGRPN-40%-60%SNAP-80%-50%-40%-30%-20%-10%0%10%20%30%40%%toTargetSource:FactSet,UBSestimates;Note:asofJan13closeUSInternet&InteractiveEntertainment10January201813 SelectIndustryDataWhileweprovideadditional,company-specificdatapointsineachofthecompanysections,herewehighlightaselectionofbroaderindustry-leveldatarelevanttoQ42017results.TheConferenceBoardConsumerConfidenceIndexConsumersentimentreadingsforOctober,NovemberandDecember2017wereallaboveprioryearlevels(updoubledigitsYoYinOctoberandNovember)andalsoabovetheQ3average(125.6inQ4vs.120.3inQ3).Figure16:U.S.ConsumerConfidenceIndex—LongTermFigure17:U.S.ConsumerConfidenceIndex—ShortTermTrendTrend1401401201291301251261221001191201201211181171201161138011211060401002090080Dec-Jan-Feb-Mar-Apr-May-Jun-Jul-Aug-Sep-Oct-Nov-Dec-Dec-01Dec-02Dec-03Dec-04Dec-05Dec-06Dec-07Dec-08Dec-09Dec-10Dec-11Dec-12Dec-13Dec-14Dec-15Dec-16Dec-1716171717171717171717171717Source:TheConferenceBoard,UBSSource:TheConferenceBoard,UBSSearchQueriesForU.S.desktopsearch,comScoreNovemberdatastartedtoshowachangeinshareshifttrendvs.theTTMtrendofMicrosoftbeingthesolesharegainer.GooglegainedmodestdesktopshareinNovemberonY/Ybasis(+19bps)alongwithMicrosoft(+108bps)whileOath&Askcontinuedtoloseshare(-105bps&-21bps,respectively).ForMicrosoft,webelieveoneofthemaindriversofBing"scontinuingmarketsharegainshasbeentherolloutofMicrosoft"sWindows10operatingsystemondesktopPCs,whichfeaturesMicrosoftEdgeandBingasthedefaultbrowserandsearchenginerespectively.Figure18:DesktopSearchQueryMarketShareandYoYQueryGrowthNov-17Oct-17TrailingTwelveMonths%Y/YShareShrY/Y%Y/YShareShrY/Y%Y/YShareShrY/YGoogle8.0%64.0%19bps10.6%63.6%-4bps-3.7%63.4%-33bpsMicrosoft12.9%23.3%108bps16.0%23.4%107bps2.4%23.0%126bpsOath-1.3%11.5%-105bps3.3%11.9%-84bps-8.6%12.3%-73bpsAsk-8.5%1.2%-21bps-4.2%1.2%-18bps-16.2%1.3%-20bpsTotal7.7%100%0bps10.7%100%0bps-3.2%100%0bpsSource:comScore,UBSUSInternet&InteractiveEntertainment10January201814 Figure19:YoYChangeinDesktopSearchQueries(%):Figure20:YoYChangeinDesktopSearchQueries(%):2-YearTrendShortTermTrend20.0%20.0%10.0%15.0%0.0%10.0%-10.0%5.0%-20.0%0.0%-30.0%-5.0%-40.0%-10.0%Nov-15May-16Nov-16May-17Nov-17Oct-17Nov-17GoogleSitesMicrosoftSitesGoogleSitesMicrosoftSitesOathAskNetworkOathAskNetworkSource:comScore,UBSSource:comScore,UBSSMI–AdvertisingSpendingBasedonSMI,coredigitalagencyadspendgrowthdeceleratedto9.7%Y/YinNovvs.+12.4%Y/YinOct,a~280bpsdecelerationonaroughlyflatcomp.WhiletheQ4QTDgrowthrateof+10.9%Y/YrepresentsadecelerationfromthefullQ3growthrateof+11.2%Y/Y,wenotethatDecemberpresentsa~530bpseasierYoYcompandourbroaderindustrycheckscontinuetobeconstructiveforthescaledplatformsinourcoverageYTD(GOOG&FB).Onthatnote,DecembertypicallyrepresentsthebiggestmonthfordigitalinQ4givendigitaladvertisers"focusondirectresponsetotarget&reachshoppersclosertothepointofpurchase.Accordingly,welooktoDecemberforamorecompletepictureofthehealthofQ4USaddemand.Alldigitalsub-categoriesdeceleratedinNovembervs.October,exceptforSocial.Socialcontinueditsstrongmomentum,growing+38.0%Y/Yvs.+32.7%inOct,a~530bpsaccelerationdespitea~450bpstoughercomp.Content&Searchreported+11.6%Y/Ygrowth(vs.+14.0%Y/YinOct,a~240psdecelerationona~640bpstoughercomp)andProgrammaticincreased+3.1%Y/Y(vs.+7.8%Y/YinOct,a~470bpsdecelerationona~460bpseasiercomp).VideocontinuestodeclineinNovember,-5.7%Y/Yvs.-3.2%inOct,a~250bpsdecelerationona630bpseasiercomp.Withindigital,Novembersawstrongsharegainforsocialandmodestsharegainfordirect-solddisplay&searchadvertising(classifiedbySMIas"PurePlay–ContentandPurePlay–Search")whilevideoandprogrammaticbothlostshareonY/Ybasis,largelyconsistentwithTTMtrends.Novembersawanothercontinuedsteadyperformancefromdirect-solddisplay&searchadvertising(+11.6%Y/Yvs.TTMgrowthrateof+9.2%Y/Y).Wenotethatourindustrycheckscontinuetopointtostronggrowthinmobilesearchastheyhaveinthepast(onarelatednote,pleaseseeourAprilnoteDeepDivin":MovetoGAAPforAlphabet;GoogleTACAnalysis).Lastly,wenotethatgiventhedirect-responsenatureofsearchbudgets,searchadspenddisproportionatelyflowstosearchprovidersdirectly(e.g.,Google,Bing,Yahoo,etc.)andtospecializedmarketingagencies,whichmaylayoutsidethescopeofbudgetscapturedbySMI.USInternet&InteractiveEntertainment10January201815 Figure21:AdAgencyAdvertisingSpending,perSMIData,NovemberSummary-DigitalNovember2017October2017QTD4Q17TrailingTwelveMonths%Y/YShare(2)ShrY/Y%Y/YShare(2)ShrY/Y%Y/YShare(2)ShrY/Y%Y/YShare(2)ShrY/YPurePlayContent/Search11.6%36.6%72bps14.0%35.7%94bps12.7%36.2%82bps9.2%35.8%17bpsTotalAdNetwork/AdExchange3.1%27.0%-164bps7.8%27.5%-80bps5.2%27.2%-126bps4.8%28.5%-59bpsPurePlay-Video-5.7%6.2%-100bps-3.2%6.5%-96bps-4.6%6.4%-98bps6.9%7.0%-14bpsPurePlay-Social38.0%13.5%280bps32.7%12.4%204bps35.7%13.0%245bps37.0%11.5%140bpsPurePlay-InternetRadio2.9%2.7%-17bps8.2%2.9%-7bps5.3%2.8%-13bps7.9%2.9%2bpsCoreDigital9.7%89.9%21bps12.4%89.6%112bps10.9%89.7%62bps11.2%89.9%128bpsDigitalTV11.6%6.8%14bps2.9%7.1%-56bps7.4%7.0%-18bps1.2%6.8%-19bpsDigitalPrint-1.0%3.3%-35bps-5.0%3.3%-56bps-2.8%3.3%-44bps5.2%3.3%-10bpsTotalDigital9.4%100%0bps11.0%100%0bps10.1%100%0bps9.8%100%99bps(2)ShareoftotaltelevisionincludingDigitalTV.Source:SMI;UBSeCommercecomScoreeCommercedata–ForOctoberandNovember2017,comScoreindicatesaYoYgrowthof14.8%and16.3%innon-travelUSdesktopeCommercesalesrespectively.ThisgrowthestimatecomparestoanaverageQ3YoYgrowthrateof15.6%.Wewouldnotethatthesegrowthratesarelikelyunderstatedduetotheirlackofmobileinclusion,whichisafastergrowingcomponent.Figure22:comScoreeCommerceNon-Travel—LongTermFigure23:comScoreeCommerceNon-Travel—ShortTermTrend(YoYGrowth%)Trend(YoYGrowth%)40%18%17%16%16%30%15%15%15%14%14%14%12%20%11%10%0%5%-10%-20%Nov-Dec-Jan-Feb-Mar-Apr-May-Jun-Jul-Aug-Sep-Oct-Nov-Nov-07Nov-09Nov-11Nov-13Nov-15Nov-1716161717171717171717171717Source:comScore,UBSSource:comScore,UBSOnlineTravelcomScoreeCommerceTraveldata–ForbothOctoberandNovember2017,comScoreindicatesYoYgrowthof4.8%and6.1%,respectively,inUStravelspend.Thesecomparetothe8.1%YoYaveragegrowthreportedforQ3.WenotethattheonlinetravelspenddataprovidedbycomScoreisdefinedasworldwidebuyingonUSdesktopsites.Mobilecontinuestobecomeanincreasinglyimportantcontributortohotelbookings.USInternet&InteractiveEntertainment10January201816 Figure24:comScoreeCommerceTravel—LongTermFigure25:comScoreeCommerceTravel—ShortTermTrend(YoYGrowth%)Trend(YoYGrowth%)20%13.0%12.8%15%11.0%9.7%10%8.2%7.8%7.4%7.2%5%6.7%6.9%6.1%5.4%0%4.8%-5%-10%-15%Nov-Dec-Jan-Feb-Mar-Apr-May-Jun-Jul-Aug-Sep-Oct-Nov-Nov-07Nov-09Nov-11Nov-13Nov-15Nov-1716161717171717171717171717Source:comScore,UBSSource:comScore,UBSSmithTravel–BasedondataprovidedbySmithTravel,UShoteloccupancyratesthroughthefirst2monthsofQ42017wereup1.6%YoY(basedonmonthlyaveragegrowthrates)versustheprioryearquarter-to-date,whileUSADRswereup2.6%.ForEurope,throughthefirsttwomonthsofQ42017hoteloccupancyratesareestimatedtobeup1.8%YoY,withEuropeanADRs(inUSDterms)estimatedtobeup3.9%onaconstantcurrencybasis.Figure26:USHotelOccupancyRates(YoY)—LongTermFigure27:USHotelOccupancyRates(YoY)—ShortTermTrendTrend10%4.3%8%6%3.2%4%2%0%1.6%1.6%1.3%-2%1.2%1.0%-4%0.6%0.6%0.5%0.6%-6%0.0%-8%-10%-12%-0.5%4Q014Q024Q034Q044Q054Q064Q074Q084Q094Q104Q114Q124Q134Q144Q154Q164Q141Q152Q153Q154Q151Q162Q163Q164Q161Q172Q173Q174Q17QTD4Q17QTDSource:SmithTravel,UBSSource:SmithTravel,UBSUSInternet&InteractiveEntertainment10January201817 Figure28:USADRs—LongTermTrendFigure29:USADRs—ShortTermTrend10%8%4.8%4.6%6%4.4%4.2%4%2%3.3%3.2%3.3%0%2.9%2.8%2.6%2.6%-2%2.4%-4%1.5%-6%-8%-10%-12%4Q014Q024Q034Q044Q054Q064Q074Q084Q094Q104Q114Q124Q134Q144Q154Q164Q141Q152Q153Q154Q151Q162Q163Q164Q161Q172Q173Q174Q17QTD4Q17QTDSource:SmithTravel,UBSSource:SmithTravel,UBSFigure30:EuropeHotelOccupancyRates(YoY)—LongFigure31:EuropeHotelOccupancyRates(YoY)—ShortTermTrendTermTrend6%4.2%5%4%3%2.6%2.3%2%2.1%1.8%1%1.3%1.0%0%0.7%-1%-2%-0.3%Q410Q211Q411Q212Q412Q213Q413Q214Q414Q215Q415Q216Q416Q217Q415Q116Q216Q316Q416Q117Q217Q317Q417Q417QTDQTDSource:SmithTravel,UBS,Note:BeginningofDec"14,dataisconstantcurrencySource:SmithTravel,UBS,Note:BeginningofDec"14,dataisconstantcurrencybasedonachangeinUBSdatasubscriptionbasedonachangeinUBSdatasubscriptionFigure32:EuropeADRs(in$)—LongTermTrendFigure33:EuropeADRs—ShortTermTrend25%4.5%4.3%4.3%20%3.9%15%10%2.4%2.4%2.3%5%2.2%0%1.1%-5%-10%Q410Q211Q411Q212Q412Q213Q413Q214Q414Q215Q415Q216Q416Q217Q415Q116Q216Q316Q416Q117Q217Q317Q417QTDQ417QTDSource:SmithTravel,UBS,Note:BeginningofDec"14,dataisconstantcurrencySource:SmithTravel,UBS,Note:BeginningofDec"14,dataisconstantcurrencybasedonachangeinUBSdatasubscriptionbasedonachangeinUBSdatasubscriptionUSInternet&InteractiveEntertainment10January201818 InteractiveEntertainmentFigure34:KeyLaunchesforATVI,EA&ZNGATitlePlatformPublisherDateCallofDuty:WWIIPS4,XBO,PCActivisionBlizzard11/3/2017WordsWithFriends2iOS,AndroidZynga11/8/2017NeedforSpeedPaybackXBO,PS4,PCElectronicArts11/10/2017StartcraftII(Free-to-play)PC,MacActivisionBlizzard11/14/2017StarWarsBattlefrontIIPS4,XBO,PCElectronicArts11/17/2017TheSims4(ConsoleVersion)PS4,XBOElectronicArts11/17/2017TheSims4Cats&Dogs(ExpansionPack)PC,MacElectronicArts11/172017Destiny2:CurseofOsiris(ExpansionPack)PS4,XBO,PCActivisionBlizzard12/5/2017Hearthstone:Kobolds&Catacombs(ExpansionPack)PC,Windows,iOS,AndroidActivisionBlizzard12/7/2018Battlefield1:TurningTides(DLCpack)PS4,XBO,PCElectronicArts12/11/2017Source:UBSNext-GenVideoGameConsoleAdoptionPlayStation4:BasedonthelatestdisclosurefromSony,morethan73.6mPlayStation4unitshavebeensold-throughtoconsumersglobally(asofDec31,2017)sincelaunchinNovember2013(vs.PS3lifetimeunitsof~80m),inclusiveoftheoriginalPS4,PS4Slim(retailsat$299,releasedSeptember15,2016),andPS4Pro(retailsat$399,releasedonNovember10,2016).PS4softwaresalesalsoremainstrongwithmorethan645.0mcopiessoldatretailanddigitally(asofDec3,2017),foranaverageattachrateof8.76gamespersystem(upfrom8.07inJune2017).Inaddition,SonylaunchedPlayStationVRonOctober13,2016,whichiscompatiblewithallcurrentgenPlayStationconsoles.Accordingtothecompany,PSVRhascumulativelysoldmorethan2munitsand12.2mPSVRtitlesgloballyasofDec3,2017,foranaverageattachrateof6.1gamespersystem.XboxOne:Basedonindustryreports(mostrecentlySuperData),XboxOnehasaninstalledbaseofapproximately26mmasof2016yearend.AccordingtoVGChartz(avideogamesalestrackingservice)thenumberwasjustnorthofthe35mmmarkinJanuary2018.SimilartoSony,Microsoftintroducedtwomid-cycleupgrades–XboxOneS(retailsat$299,releasedOctober7,2016)andXboxOneX(retailsat$499,releasedonNovember7,2017).PressreportedthatXboxOneXsaleswerestrongduringtheholidayseason.NintendoSwitch:NintendolaunchedSwitch,itsnewesthybridconsole,onMarch3,2017.Basedoncompanydisclosure,Nintendosold10mSwitchunitsworldwidethroughtheNov2017,makingitthefastestsellingconsoleincompanyhistory.Thesedatapointswouldpointtoatotalinstalledbaseof~120munitsasof2017yearend,4yearsintotheconsolecycle.Comparatively,lastgenconsoles(ex-Wii)soldthrough~180munitsintotal(roughlyevenspiltbetweenPS3andXbox360)fortheentire8yearcycle(2005-2013).Basedoncompanydisclosure,PS3(launchedNov2006)soldthrough~34munitsasofDec2009whileXbox360(launchedNov2005)soldthrough30m+unitsasofMay2009,whichbringsthetotallastgeninstalledbaseto~60munitsfouryearsintothecycle.Thiswouldindicatethatthecurrentgenconsolecycleistrackingdoublevs.lastgen.AccordingtoNPD,asofNovember2017,totalcumulativeUSvideogamehardwaresaleswerejustshyof$20bn(sinceNovember2013).Weviewthisstrongadoptionasapositivesignforpublishersandavalidationthatvideogameconsoleshavenotbeendisplacedbyothermethodsofgaming.FortheUSInternet&InteractiveEntertainment10January201819 mid-cyclehardwarelaunches,webelievebackwardscompatibilitywillmuteanydisruptionindemandforthepublishers.Additionally,havingdigitalcontent,mobileandsubscriptionrevenuestreamswillhelpmutedisruptionfromtransitionsbetweenconsolecyclesthatoccurredinthepast.Figure35:CumulativeUSVideoGameHardwareSalesSinceNov2013($B)$25$20$15$10$5$0Nov-13Apr-14Sep-14Feb-15Jul-15Dec-15May-16Oct-16Mar-17Aug-17Source:NPD,UBSUSInternet&InteractiveEntertainment10January201820 CurrencyImpactinQ42017andBeyondSincetheendofQ32017,theUSDhasbeenapproximatelyflatonaQoQbasisbutweakened~4%onaYoYbasisversusabasketofdevelopedmarketcurrencies,representingapotentialeasingofthecurrencyheadwindstomanycompaniesinourcoverage.Fromtheselectionofmajorcurrenciesbelow,thelargestQoQchangewasobservedfortheAUDandJPY(weakeragainsttheUSDby~2-3%).ForthelatestUBSviewonforwardglobalFXtrajectories,pleaseseetheDecember2017notepublishedbyourMacroStrategyteam.Figure36:CurrencyChanges(YoYChanges&QoQChanges)YoYChangesQoQChangesYoYChanges201520162017Q117Q217Q317Q417Q417Q118Q218Q318DevelopedMarketsGBP1.531.361.291.241.281.311.331.331.331.331.33Change-7%-11%-5%0%3%2%1%7%7%4%1%EUR1.111.111.131.071.101.181.181.181.181.181.18Change-16%0%2%-1%3%7%0%9%10%7%0%KRW0.000880.000860.000.000870.000880.000880.000900.000900.000900.000900.00090Change-7%-2%2%1%2%0%2%4%4%2%2%AUD0.750.740.770.760.750.790.770.770.770.770.77Change-17%-1%3%1%-1%5%-3%2%1%2%-3%JPY0.0080.0090.010.0090.0090.0090.0090.0090.0090.0090.009Change-13%12%-3%-4%2%0%-2%-3%1%-2%-2%CAD0.780.760.770.760.740.800.790.790.790.790.79Change-13%-4%2%1%-1%7%-1%5%4%6%-1%SGD0.730.720.720.710.720.740.740.740.740.740.74Change-8%0%0%0%2%2%0%4%4%3%0%MixedDevelopedMarketBasketChange-12%-1%0%-1%1%3%0%4%4%3%0%BRICMarketsBRL0.310.290.310.320.310.320.310.310.310.310.31Change-28%-5%9%5%-2%2%-3%1%-3%-1%-3%RUB0.020.020.020.020.020.020.020.020.020.020.02Change-38%-9%14%7%3%-3%1%8%0%-2%1%INR0.020.010.020.010.020.020.020.020.020.020.02Change-5%-5%3%1%4%0%-1%4%3%-1%-1%CNY0.160.150.150.150.150.150.150.150.150.150.15Change-2%-5%-2%-1%0%3%1%3%4%4%1%MixedBRICMarketBasketChange-18%-6%6%3%1%0%-1%4%1%0%-1%Note:DecreaseindicatesdollarstrengtheningSource:FactSet,UBSestimatesUSInternet&InteractiveEntertainment10January201821 TaxReformAnalysisExpectImmediateImpactofTaxReformtoBeNeutralWeexpecttheimmediateimpactoftaxreformtobeneutralformostUSinternetnameswithbenefitsfromlowerUSstatutoryrateoffsettingtheheadwindfromthe15.5%mandatoryone-timetaxonliquidcashheldoffshoreandminimum10%taxonoffshoreearnings.Giventhecomplexityoftaxstructure/taxprovisionandthealreadylowtaxrateprofileofmostinternetcompanies,wedonotexpectthelowerUSstatutoryratetosignificantlyimpactforwardtaxratesforourcoveragegroup.Webelieveinvestorfocusasrelatedtotaxreformwillmostlikelycenteronthepotentialusesforrepatriatedcash(collective~$120bnofoffshorecashaccumulatedbythegroup)andhowthatwillimpacttheindustrycapitalstructuregoingforward.Long-termImpactPositivefromCashRepatriationWebelievethebiggestbenefitforourcoveragegroupwillbecashrepatriationwhichmostlikelywillfundorganicreinvestments(Capex,R&D,etc.),targetedM&A,shareholderreturns,andforcertaincompaniesdebtrepayment.Ouranalysisindicatesthattherepatriationtaxliabilitywillonlyhavedeminimisimpacton"18and"19EPSevenwithouttakingintoconsiderationthepotentialbenefitsfromforeigntaxcreditsandlowerUSstatutoryrate.Taxreformshouldalsobenefittechnologyspendingingeneralasnon-techindustrieshavemorecashtoinvestintomodernizingoperationsforlong-termcompetitiveadvantage.OtherRelevantThemesfromTaxReformBesidesthedropinstatutoryrateanddeemedrepatriation,otherelementsoftaxreformthatcouldpotentiallyimpactthesectorinclude:1)minimumtaxonforeignearnings;2)limitationonNOLutilization(esp.forunprofitableSMIDcapnames);3)acceleratedCapexdeduction;4)limitationoninterestdeductibility;and5)limitationonexecutivecompdeductibility.Figure37:TaxReformCashRepatriationAnalysisGrossOffshore%HeldTotalRepatCashTotalRepatTax2018RepatCash2018Tax2018Repat%EPS2019Repat%EPSCompanyTickerCash*CashOffshore(NetofTax)Liability(15.5%)(NetofTax)RepatLiabilityEPSDilutionImpact***EPSDilutionImpactFacebookFB$38,290$12,89034%$10,892$1,998$871$160$(0.05)-1%$(0.05)-1%AlphabetGOOG$100,100$60,50060%$51,123$9,378$4,090$750$(1.06)-3%$(1.04)-2%IACIAC$1,255$51741%$437$80$35$6$(0.07)-1%$(0.07)-1%MatchGroupMTCH$158$12076%$102$19$8$1$(0.01)0%$(0.01)0%TwitterTWTR$4,260$2185%$184$34$15$3$(0.00)-1%$(0.00)-1%SnapSNAP$2,298$45.962%$39$7$3$1$(0.00)0%$(0.00)0%Advertising/ServicesNetflixNFLX$1,747$44425%$375$69$30$6$(0.01)-1%$(0.01)0%AmazonAMZN$24,300$7,80032%$6,591$1,209$527$97$(0.19)-1%$(0.19)-1%eBayEBAY$11,400$8,70076%$7,352$1,349$588$108$(0.10)-5%$(0.10)-4%GrouponGRPN$639$24138%$203$37$16$3$(0.00)0%$(0.00)0%QVCGroup**QVCA$404$26365%$222$41$18$3$(0.01)0%$(0.01)0%eCommercePayPalPYPL$6,972$5,80083%$4,901$899$392$72$(0.06)-3%$(0.06)-2%ExpediaEXPE$3,800$1,40037%$1,183$217$95$17$(0.11)-2%$(0.11)-2%PricelinePCLN$18,400$15,90086%$13,436$2,465$1,075$197$(3.99)-5%$(3.98)-4%TravelTripAdvisorTRIP$769$58676%$495$91$40$7$(0.05)-5%$(0.05)-4%ActivisionBlizzardATVI$3,700$2,30062%$1,944$357$155$29$(0.04)-1%$(0.04)-1%VideoGameElectronicArtsEA$4,355$2,80064%$2,366$434$189$35$(0.11)-2%$(0.11)-2%Source:Companyreports,governmentwebsites,UBS;Note:*Includescash&cashequivalentsandinsomecases,marketablesecurities&ST/LTinvestments;**QVCGroupincludesbothQVCAandHSNISep2017cashbalances;***EAEPSestimatesareforFY19endingMarch2019;EPSestimatesareGAAPforFB,GOOG,NFLX,QVCA.Companiesexcludedfromtheanalysisinclude:1)AABA(seeseparatecompanionnotepublishedtoday);2)foreigncompaniesundercoverage(BABA,JD,DESP,&TVPT);3)YELP&ZNGA(deminimisuntaxedforeignearnings).USInternet&InteractiveEntertainment10January201822 USInternet&InteractiveEntertainmentFigure38:USDesktopUniqueVisitors(millions)Oct-16Nov-16Dec-164Q16Jan-17Feb-17Mar-171Q17Apr-17May-17Jun-172Q17Jul-17Aug-17Sep-173Q17Oct-17Nov-174Q17QTDGoogle190.3192.2192.4191.7186.4179.3183.9183.2178.5182.0178.6179.7177.4174.3179.1176.9180.4182.2181.3YOY%-6.5%-5.7%-7.6%-6.6%-9.9%-11.3%-8.6%-9.9%-8.8%-6.3%-7.0%-7.4%-8.6%-11.2%-5.9%-8.6%-5.2%-5.2%-5.2%Facebook129.4133.9132.2131.9120.9117.1117.2118.4113.2116.2112.6114.0110.9108.3111.4110.2112.7110.1111.4YOY%-9.6%-7.3%-7.4%-8.1%-16.9%-16.4%-18.8%-17.4%-19.6%-19.1%-20.3%-19.7%-17.3%-19.7%-11.2%-16.2%-12.9%-17.8%-15.4%IACSites89.486.083.286.281.378.784.681.676.176.067.873.363.765.770.666.674.274.074.1YOY%-1.6%-3.3%-6.4%-3.7%-6.6%-9.6%-1.4%-5.9%-2.8%-0.5%-5.8%-3.0%-12.8%-17.4%-18.5%-16.4%-17.1%-14.0%-15.6%Match.com1.81.61.81.72.02.12.22.12.02.11.81.91.91.91.61.81.61.61.6YOY%-9.2%-18.8%-15.0%-14.4%-5.7%14.2%6.2%4.4%4.1%11.1%-17.3%-1.5%-13.2%-10.8%-12.7%-12.2%-13.0%-4.8%-9.1%Snapchat1.0.91.11.01.0.91.21.01.21.31.31.21.01.01.01.01.21.01.1YOY%41.3%60.4%64.7%55.0%33.1%48.8%44.8%42.0%37.5%33.3%3.4%22.2%-19.6%-20.2%9.1%-12.3%25.9%5.1%15.7%Twitter30.433.032.331.932.628.129.930.229.130.230.329.929.630.731.630.630.328.329.3YOY%-13.7%-7.5%-10.9%-10.7%-10.6%-22.9%-20.5%-18.0%-19.8%-17.5%-21.7%-19.7%-24.1%-15.7%-2.0%-14.7%-0.5%-14.3%-7.7%Amazon99.4107.9114.4107.2102.996.4103.9101.0103.7106.1101.9103.9101.6102.6104.1102.7103.9108.7106.3YOY%-6.9%-3.7%-3.6%-4.7%-4.2%-0.5%0.4%-1.5%1.3%2.7%-1.8%0.7%-1.7%-4.6%3.0%-1.2%4.5%0.7%2.5%10January2018eBay51.354.253.953.147.744.649.147.146.547.746.747.044.844.645.645.045.645.745.7YOY%-5.4%-3.5%-3.6%-4.1%-4.8%-7.4%-1.2%-4.4%-3.2%-5.2%-14.7%-8.0%-19.6%-23.2%-13.9%-19.0%-11.0%-15.7%-13.4%Groupon11.614.215.113.613.110.813.712.511.712.612.112.211.610.49.710.610.111.510.8YOY%-22.7%-20.6%-14.4%-19.1%-16.6%-28.5%-12.0%-18.9%-19.3%-14.8%-22.4%-18.9%-28.5%-32.4%-24.5%-28.7%-13.5%-18.8%-16.4%Yelp30.028.429.029.131.129.534.531.733.333.833.733.632.234.030.732.331.731.731.7YOY%-17.0%-13.8%-17.2%-16.0%-11.4%-16.6%-3.2%-10.4%-3.1%-1.3%-2.7%-2.4%-2.6%4.4%3.1%1.5%5.6%11.8%8.6%ExpediaInc.25.224.824.024.727.426.730.028.027.329.530.829.230.627.124.227.324.322.423.3YOY%0.4%4.4%0.0%1.5%17.2%3.2%1.1%6.6%-4.3%-1.5%-7.9%-4.7%-9.8%-18.2%-10.0%-12.8%-3.8%-10.0%-6.9%PricelineInc.13.613.913.913.816.814.917.016.214.715.717.115.815.913.713.014.211.912.812.4YOY%-6.4%3.0%3.8%0.0%9.9%-3.9%2.6%2.8%-6.6%-9.7%-17.6%-11.8%-26.0%-30.4%-10.6%-23.5%-12.7%-7.4%-10.0%TripAdvisor28.425.626.426.832.529.834.432.230.831.832.331.733.031.727.130.626.625.426.0YOY%-18.4%-19.7%-19.5%-19.2%8.3%-3.1%2.3%2.4%-1.2%-6.9%-8.2%-5.6%-6.2%-4.0%-6.9%-5.6%-6.3%-0.9%-3.8%Zynga1.91.81.81.91.61.41.31.41.21.31.21.21.11.21.21.21.31.41.4YOY%-53.2%-51.0%-44.7%-49.9%-49.7%-49.5%-56.0%-51.7%-58.2%-57.5%-56.1%-57.3%-59.0%-56.5%-46.0%-54.3%-33.3%-21.0%-27.4%HSN2.22.93.12.71.91.41.61.61.31.61.41.41.51.31.11.31.52.11.8YOY%-21.8%-11.6%-11.0%-14.4%-16.0%-15.4%-24.4%-18.7%-30.4%-16.1%-39.4%-29.5%-38.2%-38.0%-47.9%-41.2%-29.7%-27.2%-28.3%QVC3.34.64.54.12.82.52.92.72.52.42.62.52.12.42.62.43.04.33.7YOY%-18.5%-8.7%-11.5%-12.5%-14.8%-22.7%-11.2%-16.2%-20.9%-21.1%-21.8%-21.3%-37.9%-30.2%-15.8%-28.4%-9.9%-6.2%-7.8%Source:comScore,UBSestimates.Note:Quarterlyfigurescorrespondtothe3-monthaverageMostsignificantQoQacceleration(USDesktop):SNAP,ZNGA,QVCA,PCLN,GRPNMostsignificantQoQdeceleration(USDesktop):IACI,TRIP,MTCH,FB,GOOG23 USInternet&InteractiveEntertainmentFigure39:WorldwideDesktopUniqueVisitors(millions)Oct-16Nov-16Dec-164Q16Jan-17Feb-17Mar-171Q17Apr-17May-17Jun-172Q17Jul-17Aug-17Sep-173Q17Oct-17Nov-174Q17QTDGoogle1206.51220.01202.61209.71202.61165.11199.51189.11184.81188.61178.81184.11203.41201.81208.11204.41214.61214.71214.7YOY%-2.1%-1.2%-2.4%-1.9%-2.7%-4.8%-4.0%-3.8%-4.3%-4.4%-4.4%-4.4%-2.8%-4.7%-2.3%-3.3%0.7%-0.4%0.1%Facebook759.3773.3765.9766.2765.9723.8726.6738.8705.9704.0687.9699.3719.4717.0705.0713.8719.0713.5716.2YOY%-10.6%-8.7%-6.9%-8.8%-8.5%-8.9%-12.4%-9.9%-14.1%-13.8%-15.5%-14.4%-9.9%-10.9%-8.1%-9.6%-5.3%-7.7%-6.5%IACSites241.4241.6221.2234.7221.2230.6248.9233.6236.0241.7226.6234.8226.7234.5253.7238.3249.4259.4254.4YOY%-21.2%-18.4%-21.3%-20.3%-20.9%-15.0%-8.4%-14.8%-6.6%-2.9%1.7%-2.8%0.1%3.3%9.3%4.3%3.3%7.4%5.3%Match.com2.82.52.62.62.62.83.12.82.83.02.52.82.92.82.32.72.22.22.2YOY%-5.3%-20.7%-21.4%-16.1%-19.0%-0.4%-3.4%-7.9%-7.0%2.8%-29.1%-12.1%-19.1%-16.5%-21.6%-19.0%-21.9%-11.6%-17.1%Snapchat3.03.23.53.23.52.83.63.33.53.33.43.43.53.52.93.33.63.23.4YOY%n/an/an/a50.5%35.1%17.7%12.5%21.2%-0.4%-10.6%-20.8%-11.2%-8.4%-8.3%-11.3%-9.2%17.1%0.6%8.7%Twitter132.1146.1144.4140.9144.4124.6135.5134.8131.2136.9132.6133.5141.6138.4135.6138.5136.6134.4135.5YOY%-13.6%-7.2%-5.7%-8.8%-7.6%-19.7%-17.3%-14.9%-14.9%-14.7%-16.7%-15.4%-12.7%-12.0%1.2%-8.3%3.5%-8.0%-2.6%10January2018Amazon343.6368.3376.1362.7376.1326.9353.0352.0339.9341.8340.8340.9345.8341.8342.5343.4357.1373.7365.4YOY%-10.4%-8.4%-7.9%-8.9%-3.4%-9.2%-7.9%-6.8%-8.3%-5.6%-2.1%-5.4%-1.4%-5.0%2.0%-1.5%3.9%1.5%2.6%eBay204.7209.1201.2205.0201.2176.9191.5189.9179.3183.0175.9179.4180.1174.9173.0176.0171.0173.3172.1YOY%-5.2%-2.7%-5.4%-4.4%-3.8%-10.4%-7.6%-7.2%-9.7%-8.0%-14.3%-10.7%-10.6%-15.9%-13.2%-13.2%-16.5%-17.1%-16.8%Groupon34.937.337.536.637.529.534.333.730.330.828.029.728.226.423.025.924.127.926.0YOY%-32.6%-32.8%-30.0%-31.8%-28.5%-36.5%-25.2%-30.0%-27.0%-26.4%-33.8%-29.1%-36.3%-35.9%-36.8%-36.3%-31.0%-25.3%-28.0%Yelp32.931.331.631.931.632.538.434.236.737.437.137.135.938.135.136.436.035.735.8YOY%-19.9%-15.5%-18.4%-18.0%-19.3%-17.1%-3.9%-13.4%-3.8%-2.3%-3.4%-3.2%-1.6%7.4%8.9%4.7%9.5%14.0%11.7%ExpediaInc.74.174.268.272.268.273.484.175.279.686.191.385.795.689.377.387.474.771.773.2YOY%-2.7%5.7%2.7%1.7%-2.1%-5.5%3.2%-1.4%-0.4%5.1%6.3%3.7%1.5%-4.4%-2.2%-1.7%0.8%-3.4%-1.3%PricelineInc.83.982.475.480.675.478.793.982.780.284.990.985.397.292.780.290.177.775.576.6YOY%-8.5%-5.1%-13.8%-9.1%-25.5%-16.1%-2.5%-14.9%-11.6%-9.9%-10.1%-10.5%-15.3%-14.9%-6.0%-12.6%-7.5%-8.4%-8.0%TripAdvisor115.1109.2101.8108.7101.8114.3128.2114.8118.1121.4121.5120.3128.9126.9109.9121.9110.7111.1110.9YOY%-21.6%-20.3%-24.3%-22.1%-19.6%-4.8%0.2%-8.1%-3.4%-6.1%-6.8%-5.5%-7.7%-2.4%-6.1%-5.5%-3.8%1.8%-1.1%Zynga7.78.08.48.18.46.77.07.46.56.26.16.36.56.46.36.46.66.66.6YOY%-40.1%-30.7%-27.6%-33.1%-25.3%-35.9%-37.0%-32.7%-38.2%-39.7%-41.9%-40.0%-33.8%-31.9%-21.0%-29.4%-14.4%-18.1%-16.3%HSN2.23.03.12.73.11.51.62.11.41.71.51.51.71.41.11.41.62.21.9YOY%-23.1%-13.1%-12.6%-15.8%33.7%-14.5%-25.9%-0.5%-28.2%-15.9%-39.2%-28.4%-35.9%-36.2%-47.7%-39.7%-26.7%-26.0%-26.3%QVC4.86.36.35.86.33.74.44.83.93.83.73.83.43.83.93.74.56.05.3YOY%-19.2%-12.5%-7.3%-12.7%34.8%-18.2%-4.7%4.2%-16.9%-14.2%-25.3%-19.0%-31.0%-25.2%-16.1%-24.3%-6.2%-4.0%-4.9%Source:comScore,UBSestimates.Note:Quarterlyfigurescorrespondtothe3-monthaverageMostsignificantQoQacceleration(WWDesktop):QVCA,SNAP,ZNGA,TWTR,HSNIMostsignificantQoQdeceleration(WWDesktop):EBAY,EXPE,MTCH,IACI,FB24 USInternet&Figure40:USMobileUniqueVisitors(millions)Oct-16Nov-16Dec-164Q16Jan-17Feb-17Mar-171Q17Apr-17May-17Jun-172Q17Jul-17Aug-17Sep-173Q17Oct-17Nov-174Q17QTDGoogle169.5171.2170.5170.4170.1169.8170.5170.1170.8171.712.4118.3175.3176.6177.3175.9178.9180.5179.7YOY%8.6%9.5%9.2%9.1%5.3%5.0%4.9%5.1%4.7%1.1%-92.5%-28.8%5.3%5.3%4.4%5.3%5.6%5.4%5.5%10January2018InteractiveEntertainmentFacebook157.3157.3159.0157.9158.5156.9157.1157.5155.7155.712.4107.9154.3159.0158.1156.7172.8173.8173.3YOY%9.4%8.9%9.8%9.4%5.6%4.2%4.4%4.8%1.9%0.3%-92.1%-30.4%1.3%1.9%0.9%1.6%9.9%10.5%10.2%IACSites101.4103.9107.2104.293.789.695.693.091.984.812.463.072.674.774.073.689.688.288.9YOY%4.9%6.1%6.4%5.8%-9.5%-7.8%-4.5%-7.3%-2.4%-10.9%-86.7%-33.0%-26.6%-28.6%-28.1%-27.6%-11.6%-15.1%-13.4%Match.com3.82.94.23.73.93.03.53.53.94.412.46.94.83.63.44.24.55.65.0YOY%45.4%1.9%107.6%45.7%29.0%10.2%13.0%17.7%53.9%26.6%211.8%107.5%35.6%20.4%-5.3%28.6%16.5%92.4%49.3%Snapchat62.268.373.568.073.680.179.977.980.580.912.457.985.185.585.585.3108.3107.2107.8YOY%66.4%81.4%100.1%82.5%99.5%100.5%81.9%93.4%70.0%64.2%-75.3%18.4%63.5%45.5%43.0%53.9%74.2%57.1%65.2%Twitter74.573.371.072.975.469.866.570.668.973.212.451.583.683.183.683.4126.2121.0123.6YOY%2.6%5.0%10.2%5.8%8.1%2.3%-2.9%2.5%3.8%1.9%-82.4%-25.9%13.1%11.3%11.6%12.2%69.5%64.9%67.2%Amazon129.7130.6138.1132.8134.8129.3132.4132.2129.2130.012.490.5131.7131.0128.2131.4149.7164.6157.2YOY%8.0%6.9%8.9%8.0%7.2%17.2%6.2%9.9%0.4%1.0%-90.3%-29.6%1.8%-2.2%-2.9%-0.2%15.5%26.0%20.8%eBay60.562.061.361.358.352.357.556.157.056.512.442.057.748.748.553.270.476.373.3YOY%10.8%8.1%0.8%6.4%1.4%-6.8%-2.4%-2.6%-7.7%-9.3%-80.7%-33.2%-5.2%-24.4%-27.8%-15.1%16.3%23.0%19.7%Groupon42.340.442.141.638.137.737.537.737.337.412.429.139.136.333.837.748.252.850.5YOY%15.9%-12.7%-5.7%-2.0%-12.2%-12.7%-16.0%-13.7%-18.1%-19.1%-73.3%-37.0%-16.8%-20.1%-22.6%-18.4%14.0%30.9%22.3%Yelp57.154.259.757.059.961.266.462.566.365.612.448.168.065.860.966.967.265.666.4YOY%1.4%5.5%9.5%5.4%2.7%4.7%7.2%4.9%8.0%2.8%-80.4%-23.4%1.1%1.3%2.0%1.2%17.7%21.0%19.3%ExpediaInc.22.821.223.422.527.325.030.227.528.531.012.424.033.327.723.930.537.029.733.4YOY%22.5%24.5%7.5%17.4%-9.5%-2.7%6.1%-2.2%3.5%8.1%-61.4%-18.6%-3.9%-6.9%-4.8%-5.3%62.5%40.2%51.8%PricelineInc.8.88.310.09.010.49.712.310.811.312.612.412.116.016.511.716.219.519.519.5YOY%29.7%40.3%36.2%35.2%13.4%12.4%32.6%19.6%17.2%17.4%5.7%13.1%16.7%41.2%19.8%28.0%121.6%133.9%127.6%TripAdvisor42.437.741.440.547.446.253.348.952.051.612.438.765.164.356.964.742.040.341.2YOY%35.7%35.9%35.8%35.8%29.4%26.0%30.2%28.6%35.2%23.4%-73.6%-8.8%26.3%23.7%26.0%25.0%-0.9%7.0%2.8%Zynga18.618.119.618.819.519.020.819.821.820.912.418.423.022.121.922.624.826.025.4YOY%-4.1%-6.6%7.0%-1.4%-0.4%-3.9%10.8%2.0%12.2%6.8%-33.9%-4.6%29.3%17.6%13.7%23.3%32.7%43.7%38.1%HSN4.25.64.64.83.31.42.42.32.53.112.46.03.31.41.32.43.35.04.2YOY%-16.8%-6.7%-11.6%-11.4%18.2%-32.0%-20.7%-9.7%3.9%34.1%177.2%95.8%-37.4%-59.9%-73.2%-46.4%-21.5%-9.5%-14.7%QVC5.47.66.26.42.92.23.73.03.63.112.46.43.52.94.13.26.010.08.0YOY%42.4%32.1%31.9%34.7%-37.4%-60.7%-28.1%-42.7%-32.6%-63.3%24.8%-19.3%-49.2%-56.4%-30.0%-52.7%11.4%31.0%22.9%Source:comScore,UBSestimates.Note:Quarterlyfigurescorrespondtothe3-monthaverageMostsignificantQoQacceleration(USMobile):PCLN,QVCA,EXPE,TWTR,GRPNMostsignificantQoQdeceleration(USMobile):TRIP,GOOG,FB,SNAP,IACI25 USInternet&InteractiveEntertainmentFigure41:USMultiplatformUniqueVisitors(millions)Oct-16Nov-16Dec-164Q16Jan-17Feb-17Mar-171Q17Apr-17May-17Jun-172Q17Jul-17Aug-17Sep-173Q17Oct-17Nov-174Q17QTDGoogle246.4246.2246.7246.4243.3239.3241.5241.4241.4241.5241.4241.4241.8242.3245.3243.1247.2248.1247.7YOY%0.2%-0.4%-0.7%-0.3%-0.7%-1.8%-0.8%-1.1%0.3%0.0%-0.2%0.0%0.5%0.7%-0.2%0.3%0.3%0.8%0.6%Facebook203.8205.1206.1205.0202.3198.1200.0200.1199.5199.8200.0199.8197.0201.8201.1200.0206.3205.8206.1YOY%-5.8%-5.6%-4.7%-5.4%-1.8%-3.1%-2.8%-2.6%-2.6%-3.5%-3.3%-3.1%-3.5%-0.9%-0.7%-1.7%1.2%0.4%0.8%IACSites175.1171.7172.5173.1162.4157.2164.6161.4156.0150.2138.0148.1126.2128.7132.6129.2147.1144.3145.7YOY%-1.7%-5.1%-6.2%-4.4%-8.6%-7.6%-6.3%-7.5%-7.0%-9.9%-15.5%-10.8%-23.5%-25.2%-23.5%-24.0%-16.0%-16.0%-16.0%Match.com5.84.86.25.66.15.15.75.66.06.66.46.47.05.95.36.16.57.97.2YOY%18.1%-8.6%42.4%15.8%8.5%4.7%8.9%7.5%17.7%17.7%-5.5%8.7%10.4%6.7%-8.0%3.2%10.9%64.5%35.1%Snapchat67.976.883.776.183.191.991.488.891.491.995.392.997.997.898.498.0124.9124.4124.7YOY%70.7%90.2%113.7%91.4%113.4%118.4%98.9%109.8%79.0%76.1%78.7%77.9%76.0%53.0%50.0%58.9%84.0%62.0%72.3%Twitter105.3105.7101.2104.0105.697.895.499.696.0101.0109.5102.2112.3113.1114.8113.4153.4147.8150.6YOY%-6.6%-4.6%-5.2%-5.5%-4.2%-11.2%-11.1%-8.8%-8.9%-7.8%0.2%-5.5%0.9%3.1%5.7%3.2%45.7%39.9%42.8%10January2018Amazon182.2184.1189.0185.1184.0176.7183.0181.3180.7181.9180.0180.9180.8180.6182.5181.3190.8197.7194.3YOY%-4.0%-4.5%-4.9%-4.5%0.6%2.8%1.1%1.5%-0.8%0.2%-1.0%-0.5%-1.5%-3.0%-0.6%-1.7%4.8%7.4%6.1%eBay102.1105.2104.7104.097.189.496.294.292.893.790.192.293.085.885.988.2106.3112.0109.1YOY%4.5%2.9%0.7%2.6%-1.6%-7.1%-4.3%-4.3%-8.5%-8.7%-17.2%-11.6%-13.0%-22.3%-21.4%-18.9%4.0%6.5%5.3%Groupon56.155.958.556.852.150.451.751.450.050.846.048.951.748.344.848.359.965.362.6YOY%4.6%-15.1%-9.1%-7.2%-13.8%-15.8%-15.7%-15.1%-20.2%-19.8%-27.9%-22.7%-20.3%-23.1%-24.6%-22.6%6.7%16.7%11.7%Yelp81.876.782.980.585.685.693.988.491.691.892.692.093.792.685.490.692.290.691.4YOY%-7.4%-5.7%-3.2%-5.5%-1.2%-2.2%3.3%0.0%2.1%0.0%0.5%0.9%-1.2%0.0%0.1%-0.4%12.7%18.1%15.3%ExpediaInc.46.845.346.446.253.951.158.154.454.959.659.858.161.654.447.154.459.250.755.0YOY%4.8%8.6%-1.7%3.7%-3.6%-2.8%0.9%-1.8%-1.2%4.6%-5.5%-0.9%-6.4%-10.3%-7.2%-8.0%26.6%11.9%19.4%PricelineInc.21.521.822.922.026.124.528.326.325.927.529.827.731.230.424.728.832.533.032.8YOY%1.0%10.1%9.5%6.8%4.1%2.4%12.2%6.3%3.7%0.3%-4.7%-0.5%-6.3%1.6%2.5%-1.1%51.3%51.8%51.5%TripAdvisor71.163.767.567.479.576.985.780.781.181.587.983.595.894.282.890.965.762.664.1YOY%9.3%7.7%7.8%8.3%20.8%15.2%18.2%18.1%18.9%10.6%10.6%13.2%13.6%14.7%9.4%12.7%-7.7%-1.7%-4.9%Zynga24.524.025.724.824.723.726.024.827.925.526.426.628.127.927.027.729.130.529.8YOY%-8.3%-9.5%3.9%-4.8%-2.7%-5.1%6.6%-0.5%7.7%-2.8%5.9%3.6%15.6%9.9%6.6%10.7%18.6%26.7%22.6%HSN7.29.68.58.45.43.44.34.34.25.54.74.85.83.02.93.95.37.66.5YOY%-22.8%-15.3%-18.9%-18.8%-11.7%-21.1%-30.2%-21.0%-11.9%19.1%-38.9%-15.7%-36.1%-54.4%-63.7%-50.5%-25.6%-21.0%-23.0%QVC9.814.712.312.36.45.47.86.56.86.16.06.36.05.77.46.49.615.712.6YOY%13.1%19.9%10.6%14.8%-31.5%-49.6%-29.9%-37.1%-40.7%-59.4%-66.5%-57.4%-54.0%-53.2%-32.1%-47.1%-2.5%6.5%2.9%Source:comScore,UBSestimates.Note:Quarterlyfigurescorrespondtothe3-monthaverageMostsignificantQoQacceleration(USMultiplatform):QVCA,PCLN,TWTR,GRPN,EXPEMostsignificantQoQdeceleration(USMultiplatform):TRIP,GOOG,FB,AMZN,IACI26 USInternet&InteractiveEntertainmentFigure42:USDesktopVideoUniqueViewers(millions)Oct-2016Nov-2016Dec-20164Q16Jan-2017Feb-2017Mar-20171Q17Apr-2017May-2017Jun-20172Q17Jul-2017Aug-2017Sep-20173Q17Oct-2017Nov-20174Q17QTDAmazonSites8.811.013.311.010.58.59.29.410.611.111.911.213.110.310.211.210.19.29.7YOY%30.8%15.5%30.1%25.0%35.6%-4.5%7.3%11.9%29.4%27.6%20.7%25.6%30.0%7.9%13.1%17.3%15.5%-16.4%-2.3%BrightRoll113.4117.4109.1113.3n/an/an/an/a115.015.312.547.66.25.94.85.63.02.82.9YOY%-8.4%-13.2%-26.6%-16.6%n/an/an/an/a29.9%-84.3%-87.7%-50.3%-94.1%-93.7%-94.9%-94.2%-97.4%-97.6%-97.5%Facebook73.278.580.077.270.568.669.469.569.070.670.470.068.865.868.167.668.167.367.7YOY%-19.7%-13.4%-9.7%-14.3%-16.4%-15.4%-16.8%-16.2%-10.6%-11.1%-16.2%-12.7%-20.3%-22.1%-9.9%-17.7%-7.0%-14.3%-10.8%GoogleSites207.0197.0191.9198.7184.7183.3163.3177.1153.6156.1147.7152.5146.3151.6157.9151.9163.7166.3165.0YOY%16.0%11.2%2.4%9.7%4.5%-2.6%-13.1%-3.9%-14.8%-17.3%-17.7%-16.6%-12.0%-14.2%-18.3%-15.0%-20.9%-15.6%-18.3%Twitter15.116.215.115.514.814.013.514.112.613.012.512.712.112.414.412.912.913.213.1YOY%-45.4%-45.9%-53.3%n/a-58.6%-63.5%-56.8%-59.8%-55.4%-48.2%-49.5%-51.2%-48.9%-45.1%-27.5%-41.1%-14.3%-18.3%-16.4%Vimeo42.840.038.740.541.441.043.842.141.741.136.239.618.920.222.220.421.318.720.0YOY%-14.4%-29.1%-34.0%-26.4%-12.0%8.2%-14.8%-7.4%-13.4%-12.5%-26.0%-17.4%-54.6%-53.8%-47.6%-52.0%-50.2%-53.4%-51.8%Source:comScore,UBSestimates.Note:Includescontent&ads;Quarterlyfigurescorrespondtothe3-monthaverage10January201827 Advertising&ServicesUSInternet&InteractiveEntertainment10January201828 Alphabet(GOOG,Buy,$1,325PT)EstimatesWearemodestlyadjustingourforwardrevenuegrowthexpectationsforFY2018&FY2019toreflectcontinuedmomentuminmobilesearch,YouTubeandlessofadeclineindesktopsearchtrends.WemodestlyincreaseourFY2018&FY2019TACestimatesmainlytoreflectGoogle"snewdistributionagreementwithMozilla.OurEBITDAestsreflectelevatedlevelsofsales&marketingcostsreflectinginvestmentsinbrandadvertising(mainlyrelatedtohardware)inQ4"17&beyond.WeexpectFXNSitesrevenuegrowthof~21.9%YoYinQ4"17(and15.2%YoYgrowthinFY2018),reflectingstrongmobilesearchmomentum&YouTubegrowthcoupledwithgreaterstabilityindesktopsearchgrowth.Figure43:Oldvs.NewEstimatesQ42017FY2018FY2019OldNew%ChangeOldNew%ChangeOldNew%ChangeCommentsGoogle(Gross)$31,490$31,4900.0%$126,361$127,0470.5%$142,552$144,7361.5%UpwardrevisionreflectsourexpectationsforbetterrevtrendsforSitesandNetworkGoogleSites$21,741$21,7410.0%$88,602$89,0170.5%$98,293$100,1141.9%Continuestoreflectstrongmobilesearchmomentum&YouTubegrowth(bothadvertisingandnon-advertisingrevenuestreams)Networks$4,985$4,9850.0%$18,882$19,1541.4%$19,941$20,3031.8%UpwardrevisionreflectsstrongerprogrammaticandAdMobgrowth;Programmaticcontinuestoriseas%ofmixGoogleOther$4,764$4,7640.0%$18,877$18,8770.0%$24,319$24,3190.0%Nochangetoourestimates;ReflectscontinuedstrengthinGoogleCloudPlatformandstrongHardwaremomentumTAC$6,257$6,3501.5%$25,144$25,8802.9%$28,068$29,0153.4%HigherTACestimatemainlyreflectsnewMozilladistributiondeal(sinceNovember2017)Google(Net)$25,233$25,140-0.4%$101,217$101,1670.0%$114,484$115,7211.1%OtherBets$381$3810.0%$1,621$1,6210.0%$2,188$2,1880.0%AlphabetGrossRevenues$31,871$31,8710.0%$127,982$128,6680.5%$144,741$146,9241.5%AlphabetNetRevenues$25,614$25,521-0.4%$102,838$102,7880.0%$116,672$117,9091.1%GAAPEBITDA$9,853$9,824-0.3%$40,901$41,1050.5%$45,950$46,8011.9%EBITDAestimatesreflectimprovedtoplineassumptionspartiallyoffsetbymodestlyhighersales&marketing(YouTubeTV,hardware)inFY18.ModelSBCuptickinQ1andstepdownfortherestoftheyeargivennewequityrefreshcycleGAAPEPS$9.34$9.481.5%$38.50$39.482.5%$43.22$45.044.2%Maintaineffectivetaxrateassumptionat18.5%basedonlong-termhistoricalaverages;Reflects$1.5bnofbuybackperquarterinQ4"17Source:Companyreports,UBSestimatesValuationWeincreaseourPTfrom$1,165to$1,325basedonourweightedaverageframework(50%EV/GAAPEBITDAand50%EV/(FCF-SBC))appliedtoourrevisedFY2019operatingestimates:EV/GAAPEBITDAmultipleof16.0x(from17.5x)basedonEV/GAAPEBITDAto-Growthof0.85x(from1.03x).EV/(FCF-SBC)multipleof30x(from29x)basedonEV/(FCF-SBC)-to-Growthof0.96x(from2.80x)USInternet&InteractiveEntertainment10January201829 Figure44:GOOGPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$870$1,325$1,725%Upside/Downside-21%20%56%GAAPEBITDA(FY18E)$37,888$41,105$43,407GAAPEBITDA%ofSales38.0%40.0%41.0%GAAPEBITDA(FY19E)$41,445$46,801$51,998GAAPEBITDA%ofSales37.0%39.7%42.0%EV/2019GAAPEBITDA12.0x16.0x20.0xGAAPEBITDACAGR("17-"19)11.7%18.7%25.2%GAAPEBITDAtoGrowth1.02x0.85x0.80xEnterpriseValue$497,339$748,809$1,039,954FCFminusSBC(FY18E)$19,941$24,233$26,468(FCF-SBC)%ofSales20.0%23.6%25.0%FCF(FY19E)$19,042$27,587$30,951(FCF-SBC)%ofSales17.0%23.4%25.0%EV/2019(FCF-SBC)22.0x30.0x36.0x(FCF-SBC)CAGR("17-"19)9.0%31.2%38.9%EV/FCFtoGrowth2.45x0.96x0.92xEnterpriseValue$418,929$827,598$1,114,237WeightingsEnterpriseValue$458,134$788,204$1,077,096CapitalStructureAdjustmentsAdjustedNetDebt-2019E$(169,988)$(169,988)$(169,988)AdjustedSharesOutstanding723723723Source:Companyreports,FactSet,UBSestimatesFigure45:GOOGEarningsPreview–UBSvs.ConsQ42017FY2018FY2019UBSEstConsEst%UBSvsConsUBSEstConsEstUBSEstConsEstGoogleGrossRevenue$31,490$31,4370.2%$127,047$129,660$144,736$150,635GoogleSites$21,741$21,897-0.7%$89,017$92,182$100,114$107,660Networks$4,985$4,9570.6%$19,154$19,018$20,303$19,910GoogleOther$4,764$4,5834.0%$18,877$18,460$24,319$23,065TAC$6,350$6,2701.3%$25,880$25,985$29,015$30,076GoogleNetRevenue$25,140$25,167-0.1%$101,167$103,675$115,721$120,559OtherBets$381$3615.4%$1,621$1,511$2,188$2,041ConsolidatedGrossRevenues$31,871$31,8470.1%$128,668$131,262$146,924$153,404ConsolidatedNetRevenues$25,521$25,544-0.1%$102,788$105,093$117,909$121,974GAAPEBITDA$9,824$9,882-0.6%$41,105$42,380$46,801$49,404GAAPEPS$9.48$9.98-5.0%$39.48$41.46$45.04$48.44Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201830 SummaryModelsFigure46:P&LSummaryAlphabetP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019EGrossRevenue24,75026,01027,77231,87129,27930,25832,22536,906110,403128,668146,924TrafficAcquisitonCost(4,629)(5,091)(5,502)(6,350)(5,862)(6,224)(6,484)(7,310)(21,572)(25,880)(29,015)NetRevenue20,12120,91922,27025,52123,41724,03425,74129,59688,831102,788117,909GrossProfit(GAAP)14,95515,63716,62418,22217,21717,77319,02220,91065,43874,92385,210Research&Development(GAAP)(3,942)(4,172)(4,205)(4,543)(4,730)(4,807)(5,148)(5,179)(16,862)(19,865)(22,493)Sales&Marketing(GAAP)(2,644)(2,897)(3,042)(3,828)(3,044)(3,293)(3,475)(4,513)(12,411)(14,325)(16,196)General&Administrative(GAAP)(1,801)(1,700)(1,595)(1,965)(2,049)(1,863)(1,738)(2,146)(7,061)(7,795)(8,649)OperatingInc(UBS)8,5776,1359,6029,8009,85310,21410,97811,36534,11442,41048,236Stock-BasedComp(2,009)(2,003)(1,820)(1,914)(2,459)(2,403)(2,317)(2,294)(7,746)(9,473)(10,363)OperatingInc(GAAP)6,5684,1327,7827,8867,3947,8118,6619,07126,36832,93837,872Pre-TaxIncome6,8194,3777,9798,2007,7128,1549,0369,47127,37534,37239,765IncomeTaxProvision(1,393)(853)(1,247)(1,517)(1,427)(1,508)(1,672)(1,752)(5,010)(6,359)(7,357)NetInc(GAAP)5,4263,5246,7326,6836,2856,6457,3647,71922,36528,01332,409EPS(GAAP)7.735.019.579.488.909.3810.3610.8331.7939.4845.04DilutedSharesOutstanding702704704705706708711713704709720Adj.EBITDA10,0807,76011,36311,73811,85012,24913,02013,45940,94150,57757,164GAAPEBITDA8,0715,7579,5439,8249,3919,84510,70311,16533,19541,10546,801Capex(2,508)(2,831)(3,538)(3,157)(2,553)(2,768)(2,793)(3,152)(12,034)(11,265)(12,319)FreeCashFlow7,0404,5726,3615,80510,6468,3256,6248,11123,77833,70537,950FCFminusSBC5,0312,5694,5413,8918,1875,9224,3075,81716,03224,23327,587Employees%ofRevenueGrossProfit(GAAP)74.3%74.8%74.6%71.4%73.5%74.0%73.9%70.7%73.7%72.9%72.3%Research&Development(GAAP)-19.6%-19.9%-18.9%-17.8%-20.2%-20.0%-20.0%-17.5%-19.0%-19.3%-19.1%Sales&Marketing(GAAP)-13.1%-13.8%-13.7%-15.0%-13.0%-13.7%-13.5%-15.3%-14.0%-13.9%-13.7%General&Administrative(GAAP)-9.0%-8.1%-7.2%-7.7%-8.8%-7.8%-6.8%-7.3%-7.9%-7.6%-7.3%OperatingInc(UBS)42.6%29.3%43.1%38.4%42.1%42.5%42.6%38.4%38.4%41.3%40.9%Stock-BasedComp-10.0%-9.6%-8.2%-7.5%-10.5%-10.0%-9.0%-7.8%-8.7%-9.2%-8.8%OperatingInc(GAAP)32.6%19.8%34.9%30.9%31.6%32.5%33.6%30.7%29.7%32.0%32.1%Pre-TaxIncome33.9%20.9%35.8%32.1%32.9%33.9%35.1%32.0%30.8%33.4%33.7%IncomeTaxProvision-6.9%-4.1%-5.6%-5.9%-6.1%-6.3%-6.5%-5.9%-5.6%-6.2%-6.2%NetInc(GAAP)27.0%16.8%30.2%26.2%26.8%27.6%28.6%26.1%25.2%27.3%27.5%Adj.EBITDA50.1%37.1%51.0%46.0%50.6%51.0%50.6%45.5%46.1%49.2%48.5%GAAPEBITDA40.1%27.5%42.9%38.5%40.1%41.0%41.6%37.7%37.4%40.0%39.7%Capex-12.5%-13.5%-15.9%-12.4%-10.9%-11.5%-10.8%-10.7%-13.5%-11.0%-10.4%FreeCashFlow35.0%21.9%28.6%22.7%45.5%34.6%25.7%27.4%26.8%32.8%32.2%FCFminusSBC25.0%12.3%20.4%15.2%35.0%24.6%16.7%19.7%18.0%23.6%23.4%Year-on-YearGrowthGrossRevenue22.2%21.0%23.7%22.3%18.3%16.3%16.0%15.8%22.3%16.5%14.2%TrafficAcquisitonCost22.2%28.1%31.6%31.0%26.6%22.3%17.8%15.1%28.5%20.0%12.1%NetRevenue22.2%19.4%21.9%20.3%16.4%14.9%15.6%16.0%20.9%15.7%14.7%GrossProfit(GAAP)18.6%17.0%20.9%18.3%15.1%13.7%14.4%14.8%18.7%14.5%13.7%Research&Development(GAAP)17.1%24.1%16.9%25.4%20.0%15.2%22.4%14.0%20.9%17.8%13.2%Sales&Marketing(GAAP)10.8%20.0%18.6%22.8%15.1%13.7%14.2%17.9%18.4%15.4%13.1%General&Administrative(GAAP)19.0%4.7%-12.6%-2.9%13.8%9.6%8.9%9.2%1.1%10.4%11.0%OperatingInc(UBS)25.5%-17.9%25.9%15.5%14.9%66.5%14.3%16.0%12.1%24.3%13.7%Stock-BasedComp34.5%33.3%-2.2%3.7%22.4%20.0%27.3%19.8%15.6%22.3%9.4%OperatingInc(GAAP)23.0%-30.8%34.9%18.8%12.6%89.0%11.3%15.0%11.2%24.9%15.0%Pre-TaxIncome32.9%-28.5%32.0%19.6%13.1%86.3%13.2%15.5%13.4%25.6%15.7%IncomeTaxProvision51.1%-31.3%26.7%-0.5%2.4%76.8%34.0%15.5%7.2%26.9%15.7%Adj.NetInc(UBS)Adj.EPS(UBS)NetInc(GAAP)29.0%-27.7%33.0%25.3%15.8%88.6%9.4%15.5%14.8%25.3%15.7%EPS(GAAP)28.5%-28.4%32.0%24.5%15.2%87.3%8.3%14.2%14.0%24.2%14.1%Adj.EBITDA22.8%-13.4%23.2%15.4%17.6%57.8%14.6%14.7%12.0%23.5%13.0%GAAPEBITDA20.2%-22.8%29.6%18.0%16.4%71.0%12.2%13.7%11.2%23.8%13.9%Capex3.3%33.3%38.5%2.6%1.8%-2.2%-21.1%-0.1%18.2%-6.4%9.3%FreeCashFlow34.6%-34.7%-15.1%-8.6%51.2%82.1%4.1%39.7%-8.8%41.7%12.6%FCFminusSBC34.7%-53.2%-19.3%-13.6%62.7%130.5%-5.2%49.5%-17.2%51.2%13.8%EmployeesSource:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201831 Figure47:Revenue&KeyMetricsSummaryAlphabetRevenue&KeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019EGrossRevenue24,75026,01027,77231,87129,27930,25832,22536,906110,403128,668146,924Google(Stand-Alone)24,50625,76227,47031,49028,94929,93931,79736,362109,228127,047144,736Advertising(Gross)21,41122,67224,06526,72624,77025,86027,37130,16994,874108,170120,417GoogleSites17,40318,42519,72321,74120,36221,18922,68124,78577,29289,017100,114GoogleNetwork4,0084,2474,3424,9854,4094,6724,6895,38417,58219,15420,303GoogleOtherRevenue3,0953,0903,4054,7644,1784,0794,4276,19314,35418,87724,319OtherBets2442483023813303184285441,1751,6212,188TAC(4,629)(5,091)(5,502)(6,350)(5,862)(6,224)(6,484)(7,310)(21,572)(25,880)(29,015)DistributionTAC(1,805)(2,049)(2,401)(2,761)(2,688)(2,860)(3,107)(3,420)(9,016)(12,076)(14,332)%ofSitesRevenue-10.4%-11.1%-12.2%-12.7%-13.2%-13.5%-13.7%-13.8%-11.7%-13.6%-14.3%NetworkTAC(2,824)(3,042)(3,101)(3,589)(3,174)(3,364)(3,376)(3,890)(12,556)(13,804)(14,683)%ofNetworkRevenue-70.5%-71.6%-71.4%-72.0%-72.0%-72.0%-72.0%-72.3%-71.4%-72.1%-72.3%NetRevenue20,12120,91922,27025,52123,41724,03425,74129,59688,831102,788117,909Google(Stand-Alone)19,87720,67121,96825,14023,08723,71525,31429,05287,656101,167115,721Advertising(Net)16,78217,58118,56320,37618,90819,63620,88722,85973,30282,29091,402GoogleSites15,59816,37617,32218,98017,67418,32819,57421,36568,27676,94185,782GoogleNetwork1,1841,2051,2411,3961,2341,3081,3131,4945,0265,3505,620PaidClicks(YoY)44%52%CPCs(YoY)-19%-23%GAAPOperatingIncomebySegmentGoogle7,5987,8038,7449,1768,5198,7279,26510,51733,32137,02842,008OperatingMargin38.2%37.7%39.8%36.5%36.9%36.8%36.6%36.2%38.0%36.6%36.3%OtherBets(855)(772)(812)(1,100)(900)(800)(800)(1,075)(3,539)(3,575)(3,475)Year-on-YearGrowthGrossRevenue22.2%21.0%23.7%22.3%18.3%16.3%16.0%15.8%22.3%16.5%14.2%Google(Stand-Alone)22.0%20.9%23.4%22.0%18.1%16.2%15.8%15.5%22.1%16.3%13.9%Advertising(Gross)18.8%18.4%21.4%19.3%15.7%14.1%13.7%12.9%19.5%14.0%11.3%GoogleSites21.5%19.6%22.6%21.0%17.0%15.0%15.0%14.0%21.2%15.2%12.5%GoogleNetwork8.6%13.5%16.3%12.5%10.0%10.0%8.0%8.0%12.7%8.9%6.0%GoogleOtherRevenue49.4%42.3%40.0%40.0%35.0%32.0%30.0%30.0%42.4%31.5%28.8%OtherBets47.0%34.1%53.3%45.2%35.4%28.4%41.7%43.0%45.0%38.0%35.0%TACDistributionTAC48.3%51.6%54.0%56.4%48.9%39.6%29.4%23.9%53.0%33.9%18.7%NetworkTAC9.8%16.0%18.2%16.5%12.4%10.6%8.9%8.4%15.2%9.9%6.4%NetRevenue22.2%19.4%21.9%20.3%16.4%14.9%15.6%16.0%20.9%15.7%14.7%Google(Stand-Alone)21.9%19.2%21.6%20.0%16.1%14.7%15.2%15.6%20.6%15.4%14.4%Advertising(Net)17.9%15.9%18.7%16.1%12.7%11.7%12.5%12.2%17.1%12.3%11.1%GoogleSites19.0%16.6%19.2%17.1%13.3%11.9%13.0%12.6%17.9%12.7%11.5%GoogleNetwork5.6%7.6%11.9%3.5%4.3%8.6%5.8%7.0%7.0%6.4%5.1%GAAPOperatingIncomebySegmentGoogle21.1%11.6%29.0%16.4%12.1%11.8%6.0%14.6%19.3%11.1%13.4%OperatingMargin(bpschg)(25)(259)230(112)(133)(95)(320)(30)(42)(141)(30)OtherBets6.6%-10.1%-6.1%1.1%5.3%3.6%-1.5%-2.3%-2.1%1.0%-2.8%Qtr-on-QtrGrowthGrossRevenue-5.0%5.1%6.8%14.8%-8.1%3.3%6.5%14.5%Google(Stand-Alone)-5.0%5.1%6.6%14.6%-8.1%3.4%6.2%14.4%Advertising(Gross)-4.4%5.9%6.1%11.1%-7.3%4.4%5.8%10.2%GoogleSites-3.1%5.9%7.0%10.2%-6.3%4.1%7.0%9.3%GoogleNetwork-9.5%6.0%2.2%14.8%-11.6%6.0%0.4%14.8%GoogleOtherRevenue-9.1%-0.2%10.2%39.9%-12.3%-2.4%8.5%39.9%OtherBets-6.9%1.6%21.8%26.0%-13.2%-3.6%34.4%27.1%TACDistributionTAC2.2%13.5%17.2%15.0%-2.7%6.4%8.6%10.1%NetworkTAC-8.4%7.7%1.9%15.7%-11.6%6.0%0.4%15.2%NetRevenue-5.2%4.0%6.5%14.6%-8.2%2.6%7.1%15.0%Google(Stand-Alone)-5.1%4.0%6.3%14.4%-8.2%2.7%6.7%14.8%Advertising(Net)-4.4%4.8%5.6%9.8%-7.2%3.9%6.4%9.4%GoogleSites-3.7%5.0%5.8%9.6%-6.9%3.7%6.8%9.1%OtherBets-6.9%1.6%21.8%26.0%-13.2%-3.6%34.4%27.1%GAAPOperatingIncomebySegmentGoogle-3.6%2.7%12.1%4.9%-7.2%2.4%6.2%13.5%OperatingMargin(bpschg)60(48)205(330)40(10)(20)(40)OtherBets-21.4%-9.7%5.2%35.5%-18.2%-11.1%0.0%34.4%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201832 USInternet&InteractiveEntertainment10January201833 Facebook(FB,Buy,$215PT)EstimatesNochangestoourforwardadvertisinggrowthestimates–weexpectQ4F/X-neutraladrevenuegrowthof+41.7%YoY(+39.1%YoYintheUS)and+32.6%YoYinFY2018(+31.6%YoYintheUS)drivenbycontinuedmomentumincoreNewsFeedadvertising(primarilyvideo&directresponseunits)andInstagram.WhileourindustryconversationsindicatethatFacebookgainedincrementaladbudgetshareduringtheFY2017holidayseason(leveraginginvestmentsinretailspecificadvertisingformats),ourchecksforFacebook"sWatchtabremainmixed.Also,wecurrentlyfactorinonlyminoramountsofrevenuecontributionfromMessengerorWhatsApp.WelowerourPayments&OtherrevenuegrowthgivenmoremodestexpectationsaroundOculusheadsetshipments.Fromacostperspective,wemodestlyincreaseourtotaloperatingexpensegrowthexpectations(mainlyreflectingmedia/videocontentinvestments)nowassuming45.6%YoYgrowthinFY2018(vs.companyguidanceof45%-60%).Overall,wemodelcontinuedmarginpressuredrivenbyproduct(e.g.,securityrelated)initiativesandcontinuedinvestmentinlowermarginproducts(includingVR,WhatsApp,adtechetc)Figure48:Oldvs.NewEstimatesQ4"17FY2018FY2019OldNew%ChangeOldNew%ChangeOldNew%ChangeCommentsRevenue$12,415$12,4100.0%$53,026$53,0090.0%$65,436$65,4160.0%Advertising$12,231$12,2310.0%$52,242$52,2420.0%$64,522$64,5220.0%Payments&Other$184$179-2.9%$784$768-2.1%$914$894-2.1%ModestrevenuerevisiontoreflectlowerOculusshipmentsexpectationsMAUs2,1392,1390.0%2,2572,2570.0%2,3472,3470.0%ARPU$5.90$5.890.0%$24.13$24.120.0%$28.43$28.420.0%AdvertisingARPU$5.81$5.810.0%$23.77$23.770.0%$28.03$28.030.0%DAUs1,4071,4070.0%1,5721,5720.0%1,6871,6870.0%AssumescontinuedstabilityinengagementhelpedbyvideoeffortsGAAPOperatingIncome$6,687$6,6840.0%$23,079$23,0720.0%$27,610$26,582-3.7%FY18estsreflectGAAPexpensegrowthof+46%YoY(vs.guidanceof+45-60%YoY);GrowthinCapexdrivenby1)securityefforts;2)WatchTabcontentspend;3)LTinitiatives(VR,AI,Connectivity)GAAPEPS$2.04$1.98-3.2%$6.66$6.660.0%$7.93$7.63-3.7%ReflectsGAAPtaxrateof13%inQ4"17and15%inFY2018toreflectmgmtguidanceSource:Companyreports,UBSestimatesValuationWeincreaseourPTfrom$208to$215basedonouradjustedblendedvaluationapproachappliedtoour2019estimates(50%EV/GAAPEBITDAand50%EV/(FCF-SBC)).Weutilizemultiple-to-growthratiostowardsthelowerendofthetypicalrangeforInternetstocksgivenourexpectationfordownwardpressureonFB"sindustry-leadingEBITDAmarginsgoingforward(frommixshiftandinvestments):EV/GAAPEBITDAmultipleof20x(from26x)basedonEV/GAAPEBITDAto-Growthof0.93x(nochange).EV/(FCF-SBC)multipleof34.5x(from30x).USInternet&InteractiveEntertainment10January201834 Figure49:FBPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$126$215$288%Upside/Downside-33%14%53%GAAPEBITDA(FY18E)$25,445$27,749$29,770EBITDAMargin50.0%52.3%54.0%GAAPEBITDA(FY19E)$29,516$33,340$37,444EBITDAMargin48.0%51.0%54.0%EV/2019EBITDA14.0x20.0x24.0xEBITDACAGR("17-"19)14.3%21.5%28.7%EV/EBITDAtoGrowth0.98x0.93x0.83xEnterpriseValue$413,221$666,804$898,662FCF-SBC(FY18E)$10,178$11,951$13,231FCF%ofSales20.0%22.5%24.0%FCF-SBC(FY19E)$10,454$14,103$17,335FCF%ofSales17.0%21.6%25.0%EV/2019FCF20.0x34.5x40.0xFCFCAGR("17-"19)-20.6%-7.8%2.2%EV/FCFtoGrowth-0.97x-4.43x17.94xEnterpriseValue$209,070$486,551$693,412WeightingsEnterpriseValue$311,146$576,678$796,037CapitalStructureAdjustmentsAdjustedNetDebt-2019E$(67,641)$(67,641)$(67,641)AdjustedSharesOutstanding3,0003,0003,000Source:Companyreports,FactSet,UBSestimatesFigure50:FBEarningsPreview–UBSvs.ConsQ42017FY2018FY2019%UBSvsUBSEstConsEstConsUBSEstConsEstUBSEstConsEstRevenue$12,410$12,516-0.9%$53,009$53,498$65,416$67,343Advertising$12,231$12,373-1.1%$52,242$53,210$64,522$67,465Payments$179$1714.5%$768$645$894$623MAUs2,1392,1380.0%2,2572,3322,3472,570ARPU$5.89$5.91-0.3%$24.12$24.49$28.42$27.94AdvertisingARPU$5.81n/an/a$23.77n/a$28.03n/a-0.5%DAUs1,4071,4151,5721,5431,6871,697GAAPOperatingInc$6,684$6,4783.2%$23,072$23,003$26,582$28,730GAAPEPS$1.98$1.923.0%$6.66$6.61$7.63$8.06Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201835 SummaryModelsFigure51:P&LSummaryFacebookP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenue8,0329,32110,32812,41011,05112,52413,50915,92640,09153,00965,416GAAPGrossProfit(UBS)6,8738,0848,88010,9049,31810,67411,37913,67534,74145,04554,660Research&Development(1,834)(1,919)(2,052)(2,048)(2,597)(2,693)(2,837)(2,946)(7,853)(11,073)(14,005)Marketing&Sales(1,057)(1,124)(1,170)(1,489)(1,547)(1,691)(1,824)(2,230)(4,840)(7,291)(9,324)General&Administrative(655)(640)(536)(683)(939)(939)(743)(987)(2,514)(3,609)(4,749)Stock-BasedComp(867)(1,032)(1,010)(1,045)(1,166)(1,187)(816)(911)(3,954)(4,080)(4,215)OperatingInc(GAAP)3,3274,4015,1226,6844,2355,3515,9757,51119,53423,07226,582Pre-TaxIncome3,4084,4885,2366,7334,2885,4086,0347,57519,86523,30526,877IncomeTaxProvision(344)(594)(529)(875)(643)(811)(905)(1,136)(2,342)(3,496)(4,031)NetInc(GAAP)3,0593,8904,7045,8553,6424,5935,1266,43617,50819,79722,833EPS(GAAP)1.041.321.591.981.231.551.722.165.936.667.63GAAPDilutedShares2,9442,9512,9562,9602,9652,9702,9752,9782,9532,9722,991GAAPEBITDA3,9985,1295,8957,5695,2266,4477,2018,87422,59127,74933,340Capex(1,271)(1,444)(1,755)(2,358)(2,431)(2,880)(3,107)(3,663)(6,828)(12,082)(13,599)FreeCashFlow3,7873,9164,3734,5113,8983,7444,3134,07716,58716,03218,318FCFminusSBC2,9202,8843,3633,4672,7322,5573,4973,16612,63411,95114,103%ofRevenueGrossProfit(UBS)85.6%86.7%86.0%87.9%84.3%85.2%84.2%85.9%86.7%85.0%83.6%Research&Development-22.8%-20.6%-19.9%-16.5%-23.5%-21.5%-21.0%-18.5%-19.6%-20.9%-21.4%Marketing&Sales-13.2%-12.1%-11.3%-12.0%-14.0%-13.5%-13.5%-14.0%-12.1%-13.8%-14.3%General&Administrative-8.2%-6.9%-5.2%-5.5%-8.5%-7.5%-5.5%-6.2%-6.3%-6.8%-7.3%Stock-BasedComp-10.8%-11.1%-9.8%-8.4%-10.6%-9.5%-6.0%-5.7%-9.9%-7.7%-6.4%OperatingInc(GAAP)41.4%47.2%49.6%53.9%38.3%42.7%44.2%47.2%48.7%43.5%40.6%Pre-TaxIncome42.4%48.1%50.7%54.3%38.8%43.2%44.7%47.6%49.6%44.0%41.1%IncomeTaxProvision-4.3%-6.4%-5.1%-7.1%-5.8%-6.5%-6.7%-7.1%-5.8%-6.6%-6.2%GAAPEBITDA49.8%55.0%57.1%61.0%47.3%51.5%53.3%55.7%56.3%52.3%51.0%Capex-15.8%-15.5%-17.0%-19.0%-22.0%-23.0%-23.0%-23.0%-17.0%-22.8%-20.8%FreeCashFlow47.1%42.0%42.3%36.4%35.3%29.9%31.9%25.6%41.4%30.2%28.0%FCFminusSBC36.4%30.9%32.6%27.9%24.7%20.4%25.9%19.9%31.5%22.5%21.6%Year-on-YearGrowthRevenue49.2%44.8%47.3%40.9%37.6%34.4%30.8%28.3%45.1%32.2%23.4%GrossProfit(UBS)51.3%46.4%47.4%40.5%35.6%32.0%28.1%25.4%45.7%29.7%21.3%Research&Development36.6%31.2%33.3%31.0%41.6%40.3%38.2%43.9%32.9%41.0%26.5%Marketing&Sales28.0%25.0%26.5%33.2%46.4%50.4%55.9%49.7%28.5%50.6%27.9%General&Administrative79.0%55.3%22.4%32.5%43.4%46.8%38.6%44.7%45.2%43.6%31.6%Stock-BasedComp16.2%26.3%22.6%25.7%34.5%15.1%-19.2%-12.8%22.9%3.2%3.3%OperatingInc(GAAP)65.5%61.0%64.3%46.4%27.3%21.6%16.7%12.4%57.0%18.1%15.2%Pre-TaxIncome65.0%63.0%65.5%48.5%25.8%20.5%15.2%12.5%58.5%17.3%15.3%IncomeTaxProvision4.9%26.1%-1.5%-9.3%87.0%36.6%71.1%29.8%1.8%49.2%15.3%NetInc(GAAP)76.5%70.9%79.5%64.4%19.0%18.1%9.0%9.9%71.5%13.1%15.3%EPS(GAAP)74.2%69.2%76.0%63.2%18.2%17.3%8.3%9.3%69.8%12.3%14.6%GAAPEBITDA56.0%54.5%59.0%46.1%30.7%25.7%22.2%17.2%52.8%22.8%20.2%Capex12.3%45.1%60.3%85.8%91.3%99.5%77.0%55.4%52.0%76.9%12.6%FreeCashFlow61.5%46.7%48.7%23.2%2.9%-4.4%-1.4%-9.6%45.4%-3.3%14.3%FCFminusSBC82.6%55.6%58.9%22.5%-6.4%-11.4%4.0%-8.7%54.2%-5.4%18.0%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201836 Figure52:Revenue&KeyMetricsSummaryFBRevenue&KeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenueAdvertising7,8579,16410,14212,23110,86712,35313,30015,72139,39452,24264,522Payments&Other175157186179183170209205697768894Revenue8,0329,32110,32812,41011,05112,52413,50915,92640,09153,00965,416AdvertisingRevenuebyPlatformDesktop1,1791,1911,2171,5191,2851,2751,2781,5955,106Mobile6,6787,9738,92510,7129,58311,07912,02114,12734,288DAUsbyRegion(mm)US&Canada182183185187189189191193187193199Europe267271274279284287289293279293303Asia427453476503534557576604503604664RestofWorld408419433438461461476482438482521TotalDAUs1,2841,3261,3681,4071,4671,4951,5331,5721,4071,5721,687TotalMAUs1,9362,0062,0722,1392,1782,2072,2332,2572,1392,2572,347AdvertisingARPU4.144.654.975.815.035.635.997.0019.7023.7728.03PaymentsARPU0.090.080.100.080.080.080.090.090.350.350.39Year-on-YearGrowthAdvertising51.1%46.9%48.8%41.7%38.3%34.8%31.1%28.5%46.5%32.6%23.5%Payments&Other-3.3%-20.3%-4.6%-0.7%4.8%8.4%12.4%14.7%-7.5%10.2%16.5%Revenue49.2%44.8%47.3%40.9%37.6%34.4%30.8%28.3%45.1%32.2%23.4%AdvertisingRevenuebyPlatformDesktop25.9%19.3%11.6%10.0%9.0%7.0%5.0%5.0%15.9%6.4%-100.0%Mobile56.6%52.1%55.9%47.8%43.5%39.0%34.7%31.9%52.5%36.5%-100.0%DAUsbyRegion(mm)US&Canada5.2%4.6%3.9%3.8%3.7%3.5%3.5%3.5%3.8%3.5%3.0%Europe7.2%7.5%7.0%6.5%6.3%6.0%5.5%5.0%6.5%5.0%3.5%Asia29.8%30.9%29.3%27.0%25.0%23.0%21.0%20.0%27.0%20.0%10.0%RestofWorld20.0%18.0%14.9%13.0%13.0%10.0%10.0%10.0%13.0%10.0%8.0%TotalDAUs17.8%17.6%16.0%14.8%14.3%12.7%12.0%11.7%14.8%11.7%7.3%TotalMAUs17.0%17.2%15.9%15.0%12.5%10.0%7.8%5.5%15.0%5.5%4.0%AdvertisingARPU29.1%25.4%27.7%22.8%21.6%21.2%20.5%20.6%26.4%20.6%17.9%PaymentsARPU-21.0%-28.6%-16.6%-14.4%-6.0%-3.6%-1.8%7.6%-20.2%0.3%11.2%Qtr-on-QtrGrowthAdvertising-8.9%16.6%10.7%20.6%-11.1%13.7%7.7%18.2%Payments&Other-2.8%-10.3%18.5%-3.9%2.6%-7.2%22.9%-2.0%Revenue-8.8%16.0%10.8%20.2%-11.0%13.3%7.9%17.9%AdvertisingRevenuebyPlatformDesktop-14.6%1.1%2.2%24.8%-15.4%-0.8%0.2%24.8%Mobile-7.9%19.4%11.9%20.0%-10.5%15.6%8.5%17.5%DAUsbyRegion(mm)US&Canada1.1%0.5%1.1%1.0%1.0%0.4%1.1%1.0%Europe1.9%1.5%1.1%1.8%1.7%1.3%0.6%1.4%Asia7.8%6.1%5.1%5.7%6.1%4.4%3.4%4.8%RestofWorld5.2%2.7%3.3%1.3%5.2%0.0%3.3%1.3%TotalDAUs4.7%3.3%3.2%2.9%4.3%1.9%2.5%2.6%TotalMAUs4.1%3.6%3.3%3.2%1.8%1.3%1.2%1.1%AdvertisingARPU-12.5%12.3%7.0%16.8%-13.3%11.9%6.3%16.9%PaymentsARPU-8.9%-10.8%19.1%-11.6%0.1%-8.6%21.3%-3.1%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201837 USInternet&InteractiveEntertainment10January201838 IAC/InterActiveCorp(IACI,Buy,$160PT)EstimatesWemakenomaterialchangestoourforwardoperatingestimatesatthispoint.ValuationWeareincreasingourPTfrom$155to$160basedonoursum-of-partsanalysis(nowbasedonGAAPestimates)appliedtoour2019estimates:MatchGroup–WevalueMatchGroupbasedonour$40PT(from$35).ANGIHomeServices–WevalueIAC"sequitystakeinANGIHomeServicesbasedonitscurrentmarketvalue.Publishing–WevaluePublishingat1.0xsales(unchanged).Salesmultipleatadiscounttodigitaladvertisingpeerstoreflectgreatervolatilityinthebusiness(impactedbyGooglesearchalgorithmchanges)anduncertaintyaroundlong-termfinancialimpactofrevisedGoogleagreementApplications–WevalueApplicationsat3.0xEBITDA(unchanged),whichreflectsadiscounttoYHOO&AOL(pre-acquisition)toreflectgreatervolatilityinthebusiness(impactedbyChromebrowserpolicychanges)anddragfromopt-intransition.Video–WevalueVideoat4.0xSales(unchanged),whichreflectsapremiumtoYHOO&AOL(pre-acquisition)givenhigherlevelsofrecurringrevenueatVimeo&fasterunderlyinggrowth.CorporateCosts–Weausean8.0xmultiple(unchanged).SBC–GivenourbroadershifttoaGAAPvaluationframeworkforourgroup,wenowincorporateSBCinourSOTPvaluation(valuedat8.0x)Figure53:IACITargetSumofthePartsTargetSOTPSummaryValue($mm)ValuationBasisMatchGroup$8,880UBSPTof$40/shEquityOwnershipStakeinANGIHomeService$5,301Publishing$3551.0xEBITDAApplications$3683.0xEBITDAVideo$1,3994.0xSalesCorporateCosts$(576)8.0xEBITDASBC$(1,484)8.0xEBITDANetCash(ex-MTCH;ex-ANGI)$1,417Total(Pre-Tax/LiquidityDiscount)$15,659Tax&LiquidityDiscount10%Total$14,093Adj.SharesOutstanding(2019E)88PriceTarget$160%Upside/DownsidetoTarget20%Source:Companyreports,FactSet,UBSestimatesUSInternet&InteractiveEntertainment10January201839 Figure54:55:IACIEarningsPreview–UBSvs.ConsQ42017FY2018FY2019UBSEstConsEst%UBSvsConsUBSEstConsEstUBSEstConsEstRevenue$894$8920.3%$3,965$3,863$4,461$4,286MatchGroup$366$3611.3%$1,594$1,547$1,843$1,779ANGIHomeservices$218$2180.1%$1,145$1,140$1,351$1,407Publishing$90$91-0.8%$352$334$355$338Applications$137$1370.3%$561$562$564$563Video$83$83-0.2%$313$300$350$333GAAPEBITDA$129$135-4.7%$737$737$946$1,106Adj.EBITDA$192$1920.0%$925$901$1,131$1,104MatchGroup$149$151-1.2%$594$575$714$679ANGIHomeservices$31$2427.3%$272$261$348$354Publishing$9$11-22.0%$29$21$32$24Applications$30$285.5%$121$123$123$123Video$(8)$(9)12.5%$(18)$(17)$(13)$2CorporateCosts$(18)$(17)-5.9%$(72)$(65)$(72)$(66)GAAPEPS$0.42$0.411.3%$3.22$3.51$4.65$4.82Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201840 SummaryModelsFigure56:P&LSummaryIACIP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenue7617678288949299801,0211,0343,2513,9654,461GrossProfit(UBS)6156296636837658118247952,5903,1953,616SellingandMarketing(349)(318)(332)(292)(395)(391)(371)(321)(1,291)(1,477)(1,705)General&Administrative(117)(118)(141)(148)(119)(127)(148)(145)(524)(539)(495)ProductDevelopment(50)(50)(52)(51)(62)(65)(65)(61)(204)(253)(285)Depreciation(20)(18)(17)(18)(18)(17)(19)(18)(73)(72)(75)OIBA821261201741722112212505038541,056Amortization(9)(9)(4)(13)(13)(13)(12)(12)(35)(50)(46)Stock-BasedComp(34)(39)(134)(63)(36)(43)(67)(43)(271)(189)(186)OperatingInc(GAAP)3776(19)98123155142195192614824Pre-TaxIncome561(54)769713011517488516746IncomeTaxProvision2419279(27)(34)(46)(40)(61)296(181)(261)Adj.NetInc(UBS)24624610194123128154233499661Adj.EPS(UBS)0.290.740.551.181.101.431.481.782.775.807.55Adj.DilutedShares8384858585868687848688NetInc(GAAP)26661803655736296309286420EPS(GAAP)0.320.701.790.420.620.820.701.073.623.224.65GAAPDilutedShares8384878888888989858990AdjustedEBITDA1021451381921892282402695769261,131GAAPEBITDA661033129153185173226300737946Capex(11)(31)(15)(16)(13)(38)(17)(17)(72)(85)(92)FreeCashFlow5759125088125340(12)241541737FCFminusSBC3(9)226(70)444247(140)150156211%ofRevenueGrossProfit(UBS)80.9%81.9%80.0%76.4%82.4%82.7%80.7%76.9%79.7%80.6%81.1%SellingandMarketing-45.8%-41.5%-40.1%-32.6%-42.5%-39.8%-36.4%-31.0%-39.7%-37.3%-38.2%General&Administrative-15.3%-15.4%-17.0%-16.5%-12.8%-12.9%-14.5%-14.0%-16.1%-13.6%-11.1%ProductDevelopment-6.6%-6.6%-6.3%-5.8%-6.7%-6.7%-6.4%-5.9%-6.3%-6.4%-6.4%Depreciation-2.6%-2.4%-2.1%-2.0%-1.9%-1.8%-1.8%-1.8%-2.3%-1.8%-1.7%OIBA10.8%16.4%14.5%19.5%18.5%21.5%21.6%24.2%15.5%21.5%23.7%Amortization-1.2%-1.1%-0.5%-1.5%-1.4%-1.3%-1.2%-1.2%-1.1%-1.3%-1.0%Stock-BasedComp-4.5%-5.1%-16.2%-7.1%-3.9%-4.4%-6.6%-4.2%-8.3%-4.8%-4.2%OperatingInc(GAAP)4.9%9.9%-2.2%10.9%13.2%15.8%13.9%18.9%5.9%15.5%18.5%Pre-TaxIncome0.6%8.0%-6.5%8.5%10.4%13.3%11.3%16.8%2.7%13.0%16.7%IncomeTaxProvision3.1%2.5%33.7%-3.0%-3.6%-4.7%-3.9%-5.9%9.1%-4.6%-5.9%Adj.NetInc(UBS)3.1%8.1%5.6%11.3%10.1%12.5%12.5%14.9%7.2%12.6%14.8%NetInc(GAAP)3.4%8.6%21.7%4.1%5.9%7.4%6.1%9.3%9.5%7.2%9.4%AdjustedEBITDA13.4%18.8%16.6%21.5%20.4%23.2%23.5%26.0%17.7%23.3%25.4%GAAPEBITDA8.7%13.4%0.4%14.4%16.5%18.8%16.9%21.8%9.2%18.6%21.2%Capex-1.5%-4.0%-1.8%-1.8%-1.4%-3.9%-1.7%-1.7%-2.2%-2.2%-2.1%FreeCashFlow7.4%7.7%15.1%0.0%9.5%12.8%33.3%-1.2%7.4%13.6%16.5%FCFminusSBC0.4%-1.2%27.3%-7.9%0.5%4.5%24.2%-13.5%4.6%3.9%4.7%Year-on-YearGrowthRevenue-7.1%2.9%8.4%10.3%22.1%27.7%23.3%15.6%3.5%22.0%12.5%GrossProfit(UBS)-1.7%9.2%13.1%14.0%24.4%28.9%24.4%16.4%8.5%23.4%13.2%SellingandMarketing-8.4%8.4%14.1%6.5%13.2%22.6%11.9%9.9%4.2%14.5%15.4%General&Administrative1.4%-10.0%27.6%30.9%2.2%7.1%5.2%-1.9%11.5%3.0%-8.2%ProductDevelopment3.5%11.8%22.1%20.9%24.0%29.7%25.2%17.6%14.2%24.1%12.5%Depreciation25.9%4.3%-3.8%-12.8%-11.3%-5.3%7.3%4.0%2.2%-1.7%4.6%OIBA17.1%33.6%-0.6%21.0%109.3%66.8%83.7%43.6%17.1%69.8%23.7%Amortization-33.7%-76.7%-69.4%-8.1%41.2%47.0%184.6%-7.8%-55.5%42.1%-7.8%Stock-BasedComp8.9%40.2%468.3%185.4%6.0%10.8%-50.2%-32.3%158.3%-30.2%-1.8%OperatingInc(GAAP)73.0%n/a-121.7%-13.4%231.6%104.5%n/a99.8%n/a220.3%34.1%Pre-TaxIncome-51.8%n/a-176.7%-39.5%2024.7%113.2%n/a127.6%n/a484.6%44.6%IncomeTaxProvisionn/a-79.9%n/a114.6%-241.6%-334.9%-114.4%127.6%355.9%-161.0%44.6%Adj.NetInc(UBS)-34.1%80.7%-23.5%-11.8%295.3%97.8%177.7%52.8%-5.0%114.4%32.5%Adj.EPS(UBS)-32.0%76.2%-25.7%-14.2%283.2%94.0%172.2%49.8%-6.2%109.6%30.1%NetInc(GAAP)216.5%n/a316.2%-64.3%110.0%10.1%-65.4%163.4%n/a-7.3%46.9%EPS(GAAP)225.4%n/a266.2%-64.7%96.7%17.7%-61.0%158.3%n/a-10.9%44.3%AdjustedEBITDA18.7%29.0%-1.0%16.8%85.8%57.7%74.1%39.9%14.9%60.7%22.2%GAAPEBITDA29.5%-151.8%-97.4%-12.8%132.1%80.1%5578.1%75.5%153.5%145.2%28.4%Capex-30.7%61.0%-46.8%4.4%13.8%24.5%16.3%9.2%-7.1%17.8%7.5%FreeCashFlow607.5%159.9%84.0%-99.9%55.8%111.3%171.3%-9273.7%12.5%124.2%36.2%FCFminusSBC-53.6%-33.3%455.6%-209.0%30.2%-583.7%9.3%98.5%52.1%3.9%35.3%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201841 Figure57:Revenue&KeyMetricsSummaryIACIRevenue&KeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenueMatchGroup2993103433663683834134291,3181,5941,843ANGIHomeServices1511811822182653052942817311,1451,351Publishing7878899087858991335352355Applications159144136137147141135138577561564Video5155788362669095267313350Revenue7617678288949299801,0211,0343,2513,9654,461EBITDAbySegmentMatchGroup86.2109.9119.6149.2116.2144.3153.2180.1465594714ANGIHomeServices10.213.7(2.3)30.558.468.671.973.052.1271.9347.8Publishing1.22.77.18.66.36.67.28.7202932Applications34.940.531.129.530.830.429.729.7136121123Video(14.7)(6.8)(0.8)(7.9)(4.3)(4.0)(4.5)(4.8)(30.2)(17.6)(12.6)Corporate(14.3)(15.5)(17.1)(18.0)(18.0)(18.0)(18.0)(18.0)(64.9)(72.0)(72.0)Year-on-YearGrowthRevenueMatchGroup4.7%2.8%8.5%14.4%23.3%23.8%20.3%17.4%7.8%21.0%15.6%ANGIHomeServices35.2%38.8%36.0%76.4%76.1%68.7%61.6%28.6%46.5%56.5%18.0%Publishing-53.0%-8.4%18.6%11.4%11.6%8.4%0.7%0.9%-17.7%5.1%0.7%Applications-0.6%0.6%-4.6%-13.2%-7.7%-1.8%-0.9%0.4%-4.6%-2.7%0.5%Video-8.2%16.7%30.5%25.0%22.0%20.0%15.0%15.0%16.7%17.4%11.6%Revenue-7.1%2.9%8.4%10.3%22.1%27.7%23.3%15.6%3.5%22.0%12.5%EBITDAbySegmentMatchGroup33.5%9.8%8.0%16.1%34.8%31.3%28.1%20.7%15.1%27.7%20.2%ANGIHomeServices104.0%-8.7%-114.4%142.4%472.6%400.6%n/a138.9%7.3%421.5%27.9%Publishing-89.5%n/an/an/a426.7%143.0%0.7%0.9%n/a46.5%10.0%Applications12.4%39.2%-10.1%-21.4%-11.7%-24.9%-4.4%0.4%2.8%-11.4%1.7%Video-13.2%70.0%-11.1%-1674.6%-70.6%-41.6%462.8%-39.5%41.4%-41.8%-28.1%Corporate38.8%0.6%19.6%13.2%25.9%16.1%5.3%0.0%16.1%10.9%0.0%Qtr-on-QtrGrowthRevenueMatchGroup-6.5%3.6%10.9%6.5%0.7%4.1%7.8%4.0%ANGIHomeServices21.8%19.9%0.6%20.1%21.7%14.8%-3.7%-4.4%Publishing-3.7%0.0%13.7%1.7%-3.5%-2.9%5.7%1.8%Applications0.3%-9.4%-5.3%0.8%6.7%-3.6%-4.5%2.1%Video-23.7%9.1%41.8%5.8%-25.5%7.3%35.9%5.8%Revenue-6.2%0.9%8.0%8.0%3.9%5.5%4.2%1.3%EBITDAbySegmentMatchGroup-32.9%27.5%8.8%24.8%-22.1%24.1%6.2%17.5%ANGIHomeServices-19.0%34.3%-116.8%n/a91.2%17.4%4.9%1.4%Publishingn/a125.0%163.0%20.8%-26.3%3.8%9.0%21.0%Applications-7.2%16.0%-23.2%-5.0%4.2%-1.3%-2.2%-0.2%Video-3040%-54%-88.2%884.1%-45.1%-8.0%13.3%5.8%Corporate-10.1%8.4%10.3%5.3%0.0%0.0%0.0%0.0%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201842 USInternet&InteractiveEntertainment10January201843 MatchGroup(MTCH,Buy,$40PT)EstimatesWemakenomaterialchangestoourforwardoperatingestimatesatthispoint.ValuationWeincreaseourPTfrom$35to$40basedonouradjustedblendedvaluationapproach(50%EV/GAAPEBITDAand50%EV/(FCF-SBC))appliedtoour2019estimates(unchanged).EV/GAAPEBITDAmultipleof20.0xbasedonEV/GAAPEBITDAto-Growthof0.74xEV/(FCF-SBC)multipleof25.0xbasedonEV/(FCF-SBC)-to-Growthof0.75xFigure58:MTCHPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$20$40$62%Upside/Downside-37%27%96%GAAPEBITDA(FY18E)$459$519$564EBITDAMargin30.0%32.6%34.0%GAAPEBITDA(FY19E)$451$633$779EBITDAMargin28.0%34.4%36.0%EV/2019EBITDA15.0x20.0x25.0xEBITDACAGR("17-"19)7.1%26.9%40.7%EV/EBITDAtoGrowth2.11x0.74x0.61xEnterpriseValue$6,766$12,665$19,463FCF-SBC(FY18E)$275$327$365FCF%ofSales18.0%20.5%22.0%FCF-SBC(FY19E)$274$437$562FCF%ofSales17.0%23.7%26.0%EV/2019FCF18.0x25.0x30.0xFCFCAGR("17-"19)5.7%33.5%51.4%EV/FCFtoGrowth3.17x0.75x0.58xEnterpriseValue$4,929$10,929$16,868WeightingsEnterpriseValue$5,848$11,797$18,166CapitalStructureAdjustmentsAdjustedNetDebt-2019E$97$97$97AdjustedSharesOutstanding292292292Source:Companyfilings,FactSet,UBSestimatesUSInternet&InteractiveEntertainment10January201844 Figure59:MTCHQ4EarningsPreview–UBSvs.ConsQ42017FY2018FY2019UBSEstConsEst%UBSvsConsUBSEstConsEstUBSEstConsEstRevenue$366$3630.8%$1,594$1,550$1,843$1,772Dating$366$3630.8%$1,594$1,555$1,843$1,773DatingDirect$349$3490.1%$1,529$1,499$1,757$1,700AveragePMC(k)7,025n/an/a7,661n/a8,705n/aARPPU$0.541n/an/a$0.547n/a$0.553n/aDatingIndirect$16$1417.3%$65$56$86$73GAAPEBITDA$135$139-2.4%$519$520$633$630AdjustedEBITDA$149$151-1.3%$594$578$714$678GAAPEPS$0.34$0.333.2%$1.17$1.00$1.41$1.22AdjustedEPS$0.29$0.31-8.4%$1.06$1.11$1.26$1.32Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201845 SummaryModelsFigure60:P&LSummaryMatchP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenue2993103433663683834134291,3181,5941,843GrossProfit(UBS)2402472722902923013223351,0501,2501,427Sales&Marketing(106)(87)(94)(86)(122)(100)(107)(92)(372)(421)(460)General&Administrative(30)(31)(37)(35)(33)(34)(37)(41)(132)(146)(155)ProductDevelopment(18)(20)(21)(20)(21)(23)(24)(22)(80)(90)(98)Depreciation(8)(8)(8)(8)(7)(8)(8)(8)(31)(31)(33)OperatingInc(UBS)79102111142109136145172434563681Stock-BasedComp(18)(16)(20)(14)(20)(18)(21)(16)(67)(75)(81)Amortization(0)(0)(0)(1)(0)(0)(0)(1)(2)(2)(2)OperatingInc(GAAP)59839112788118124155360486598Pre-TaxIncome345462106619094126256371454IncomeTaxProvision(9)(3)226(11)(6)(9)(9)(13)203(37)(45)Adj.NetInc(UBS)3648568256747998222306366Adj.EPS(UBS)0.120.160.190.290.190.260.270.340.751.061.26Adj.DilutedShares293308295285286287288289295287291NetInc(GAAP)205128895558185113454334408EPS(GAAP)0.070.170.980.340.190.280.300.401.551.171.41GAAPDilutedShares292307293283284285286287294285289Adj.EBITDA86110120149116144153180465594714GAAPEBITDA679110013596126132164393519633Capex(6)(9)(7)(9)(7)(11)(8)(10)(31)(36)(40)FreeCashFlow84547010511711735132313401518FCFminusSBC66395091979914116245327437%ofRevenueGrossProfit(UBS)80.4%79.9%79.1%79.3%79.2%78.6%77.9%78.0%79.7%78.4%77.4%Sales&Marketing-35.5%-28.0%-27.3%-23.5%-33.0%-26.0%-26.0%-21.5%-28.3%-26.4%-24.9%General&Administrative-10.0%-9.9%-10.8%-9.5%-9.0%-9.0%-9.0%-9.5%-10.0%-9.1%-8.4%ProductDevelopment-6.1%-6.5%-6.2%-5.5%-5.6%-6.0%-5.8%-5.1%-6.1%-5.6%-5.3%Depreciation-2.5%-2.5%-2.4%-2.1%-2.0%-2.0%-2.0%-1.8%-2.4%-1.9%-1.8%OperatingInc(UBS)26.3%33.0%32.4%38.7%29.5%35.6%35.1%40.2%32.9%35.3%37.0%Stock-BasedComp-6.0%-5.1%-5.8%-3.8%-5.5%-4.6%-5.1%-3.7%-5.1%-4.7%-4.4%Amortization-0.1%-0.1%-0.1%-0.3%-0.1%-0.1%-0.1%-0.3%-0.2%-0.2%-0.1%OperatingInc(GAAP)19.7%26.8%26.5%34.6%23.9%30.8%30.0%36.2%27.3%30.5%32.5%Pre-TaxIncome11.4%17.6%17.9%28.9%16.6%23.4%22.7%29.4%19.4%23.3%24.6%IncomeTaxProvision-3.1%-0.9%65.9%-2.9%-1.7%-2.3%-2.3%-2.9%15.4%-2.3%-2.5%Adj.NetInc(UBS)12.0%15.6%16.3%22.5%15.1%19.2%19.1%22.7%16.9%19.2%19.9%NetInc(GAAP)6.7%16.6%83.8%26.0%14.9%21.1%20.5%26.4%34.5%20.9%22.2%Adj.EBITDA28.9%35.5%34.8%40.8%31.6%37.6%37.1%41.9%35.3%37.3%38.7%GAAPEBITDA22.4%29.5%29.0%37.0%26.1%33.0%32.0%38.3%29.8%32.6%34.4%Capex-1.9%-2.9%-2.0%-2.5%-1.8%-2.8%-1.9%-2.4%-2.3%-2.3%-2.2%FreeCashFlow28.2%17.5%20.3%28.6%31.9%30.5%8.5%30.7%23.7%25.2%28.1%FCFminusSBC22.2%12.4%14.5%24.8%26.4%25.8%3.5%27.0%18.6%20.5%23.7%Year-on-YearGrowthRevenue4.7%2.8%8.5%14.4%23.3%23.8%20.3%17.4%7.8%21.0%15.6%GrossProfit(UBS)3.6%1.0%6.3%12.7%21.4%21.9%18.4%15.5%6.0%19.1%14.1%Sales&Marketing-5.8%-0.8%2.4%20.6%14.6%15.0%14.6%7.4%2.7%13.0%9.2%General&Administrative-21.6%-22.2%0.3%-12.5%11.4%12.6%-0.1%17.4%-14.1%10.0%6.7%ProductDevelopment8.2%11.8%30.2%12.3%13.2%14.3%12.5%8.8%15.4%12.2%9.0%Depreciation17.0%-2.6%1.4%-12.4%-1.8%-0.6%-0.7%1.7%-0.2%-0.3%4.7%OperatingInc(UBS)35.4%10.9%8.5%18.1%38.3%33.7%30.3%21.7%16.4%29.7%21.1%Stock-BasedComp3.0%23.3%79.0%18.5%12.4%13.7%4.9%14.6%27.3%11.0%8.0%Amortization-95.1%-93.7%-91.8%-66.6%5.4%3.6%1.9%-1.0%0.6%0.6%0.5%OperatingInc(GAAP)101.7%12.6%-0.8%13.9%49.7%42.5%36.0%22.7%17.5%35.0%23.2%Pre-TaxIncome174.5%13.8%-20.1%12.1%79.8%65.2%52.6%19.5%10.4%45.2%22.4%IncomeTaxProvision82.5%-79.5%n/a-48.2%-35.0%219.7%-104.2%19.5%n/a-118.2%22.4%Adj.NetInc(UBS)26.7%3.4%-9.8%5.4%55.9%52.9%40.6%18.7%3.4%37.6%19.8%Adj.EPS(UBS)16.3%-9.8%-17.1%1.3%59.6%64.1%44.1%17.3%-5.2%41.4%18.4%NetInc(GAAP)180.4%50.9%410.0%28.7%173.8%57.0%-70.6%19.5%164.9%-26.5%22.4%EPS(GAAP)157.5%31.8%369.9%24.3%181.3%69.1%-69.9%18.0%143.4%-24.4%20.9%Adj.EBITDA33.5%9.8%8.0%16.1%34.8%31.3%28.1%20.7%15.1%27.7%20.2%GAAPEBITDA52.2%3.5%-4.9%9.8%43.6%38.6%32.9%21.3%9.1%32.0%22.0%Capex-11.2%-36.0%-63.0%-6.6%18.5%20.6%15.8%13.8%-37.1%17.1%11.8%FreeCashFlow23.0%118.9%90.4%88.9%39.3%115.6%-49.4%26.0%68.8%28.4%29.1%FCFminusSBC29.8%219.6%95.4%107.6%46.7%157.0%-71.2%27.7%85.5%33.1%33.9%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201846 Figure61:Revenue&KeyMetricsSummaryMatchRevenueandKeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenueDatingDirectRevenue2882993303493553703964081,2671,5291,757DatingIndirectRevenue1110131614131721516586Revenue2993103433663683834134291,3181,5941,843DirectDatingRevenuebyRegionNorthAmerica177180189202203207215228749853947International110119141148152163181180518675810PMCsbyRegion(000s)NorthAmerica3,4383,5033,6683,8513,9003,9804,1374,3163,6154,0834,477International2,4732,5982,8913,1743,3513,5073,6433,8092,7843,5774,228TotalPMCs5,9116,1016,5597,0257,2517,4877,7798,1256,3997,6618,705ARPPUbyRegionNorthAmerica$0.57$0.57$0.56$0.57$0.58$0.57$0.57$0.58$0.57$0.57$0.58International$0.50$0.50$0.53$0.51$0.50$0.51$0.54$0.51$0.51$0.52$0.52TotalARPPU$0.54$0.54$0.55$0.54$0.54$0.54$0.55$0.55$0.54$0.55$0.55Year-on-YearGrowthDatingDirectRevenue15.6%13.7%20.6%24.3%23.2%23.6%19.9%16.8%18.7%20.7%14.9%DatingIndirectRevenue-3.2%-14.6%-3.5%20.0%25.0%30.0%30.0%28.5%0.3%28.4%30.9%Revenue4.7%2.8%8.5%14.4%23.3%23.8%20.3%17.4%7.8%21.0%15.6%DirectDatingRevenuebyRegionNorthAmerica7.9%5.9%9.5%15.6%14.3%14.8%13.9%13.2%9.8%14.0%11.0%International30.4%28.0%39.4%38.4%37.5%37.0%27.9%21.8%34.4%30.3%19.9%PMCsbyRegion(000s)NorthAmerica6.7%5.8%8.8%14.5%13.4%13.6%12.8%12.1%9.0%13.0%9.6%International32.8%30.6%32.9%36.0%35.5%35.0%26.0%20.0%33.2%28.5%18.2%TotalPMCs16.3%15.1%18.3%23.3%22.7%22.7%18.6%15.7%18.4%19.7%13.6%ARPPUbyRegionNorthAmerica2.2%0.1%0.7%1.0%0.8%1.0%1.0%1.0%1.0%0.9%1.2%International-0.7%-2.0%4.9%1.8%1.5%1.5%1.5%1.5%1.2%1.4%1.5%TotalARPPU0.5%-1.2%2.0%0.8%0.4%0.7%1.1%1.0%0.5%0.8%1.2%Qtr-on-QtrGrowthDatingDirectRevenue2.3%4.1%10.2%5.9%1.5%4.4%6.9%3.2%DatingIndirectRevenue-19.5%-7.8%31.2%23.3%-16.2%-4.2%31.2%21.8%Revenue-6.5%3.6%10.9%6.5%0.7%4.1%7.8%4.0%DirectDatingRevenuebyRegionNorthAmerica1.6%1.8%4.6%6.8%0.5%2.2%3.9%6.2%International3.5%7.7%18.7%4.5%2.8%7.3%10.8%-0.4%PMCsbyRegion(000s)NorthAmerica2.2%1.9%4.7%5.0%1.3%2.0%3.9%4.3%International6.0%5.1%11.3%9.8%5.6%4.7%3.9%4.6%TotalPMCs3.8%3.2%7.5%7.1%3.2%3.3%3.9%4.4%ARPPUbyRegionNorthAmerica1.6%-1.2%-1.1%1.8%1.4%-1.0%-1.1%1.8%International-0.2%1.4%5.5%-4.8%-0.4%1.4%5.5%-4.8%TotalARPPU0.8%-0.3%1.4%-1.2%0.5%0.0%1.8%-1.2%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201847 USInternet&InteractiveEntertainment10January201848 Twitter(TWTR,Neutral,$25PT)EstimatesNochangestoourQ4"17estimates–weexpectadvertisingrevenuestodeclineby4.7%YoY(UBSe$607.5m)inQ4incl.,a$40mYoYheadwindfromTellApartplusanadditional$15mYoYheadwindfromliveevents.WemodestlyincreaseourFY2018&FY2019revenuegrowthestimatesdrivenbycontinuedstrengthinaudienceengagement(helpedbycontinuedproductinvestments,innovatione.g.,"threads"&marketing),pricingstabilization(whilestillprovidinganattractivevaluepropositiontoadvertisers),strengthinvideo(Q4isthefirstfullquarterofthenew"videowebsitecard"adunit)anditspotentialtotapintonewchannelsofdemandviaexpandingprogrammaticbuyingcapabilities.Aspercompanycommentary,weexpecttoseeaheadwindinMAUgrowthinQ4asaresultofiOS11removingsystemlevelintegrationforsocialmediaapps.Wearenotmakinganychangestoouroperatingexpenseestimates.ForQ4"17,weexpect$240minAdj.EBITDAatthehighendofthecompanyguide.Ourlong-termmarginoutlook(+100-200bpsperyear)ismainlydrivenbyreacceleratingrevenuegrowthandlessofafocusoncostcuttinginitiatives.Figure62:Oldvs.NewEstimatesQ42017FY2018FY2019OldNew%ChangeOldNew%ChangeOldNew%ChangeCommentsRevenue$703$7030.0%$2,525$2,5772.1%$2,731$2,8123.0%ComparestoimpliedQ4guidanceof$611mto$686m;Ourestimatesreflect-2%consolidatedrevenuegrowthforQ4and+6.7%YoYgrowthforfullyear2018Advertising$608$6080.0%$2,123$2,1752.4%$2,267$2,3483.6%AdvertisingrevenueestsreflectimprovingO&Orevenuetrajectoryandconstructivemgmtforwardcommentary;Expect$55mofrevsheadwindinQ4(toughcompof$40mfromTellApartdecommissioningand$15mfromliveevents);Assumes13%adrevdeclineinUSand8%adrevgrowthinInternationalinQ4DataLicensing$95$950.0%$402$4020.0%$464$4640.0%Q4growthof20%YoYreflectsstronggrowthmomentuminQ3;ExpectdatalicensingtoincreasinglycontributetogrowthandprofitabilityCoreMAUs3333330.0%3403400.0%3513510.0%UserestsreflectheadwindfromiOSremovingautopollingbutincreasedengagement.Assume~3mmsequentialcoreMAUnetaddsinQ4(1mfromUSand2mfromint"l);Upsideinusergrowthcouldstemfrommarketinginitiatives,timelineinitiatives(i.e.livecontent,algorithmrefinement,ExploreTabetc.),andimprovednotificationAdvertisingARPU$1.82$1.820.0%$6.25$6.412.4%$6.45$6.683.6%GAAPEBITDA$144$1440.0%$578$5892.1%$719$7413.0%Nochangetoopexests;comparestoguidanceof$220-$240mforQ4;ReflectsQ4marginsof34%vs.guidanceof35-36%AdjustedEBITDA$240$2400.0%$882$9002.1%$982$1,0113.0%GAAPEPS$0.02$0.020.0%$0.19$0.193.5%$0.40$0.423.7%Assume10%GAAPtaxrategoingforwardAdjustedEPS$0.12$0.120.0%$0.46$0.462.1%$0.53$0.553.0%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201849 ValuationWeincreaseourPTfrom$21to$25basedonouradjustedblendedvaluationapproach(50%EV/GAAPEBITDAand50%EV/(FCF-SBC))appliedtoour2019estimates(unchanged).EV/GAAPEBITDAmultipleof20.0xbasedonEV/GAAPEBITDAto-Growthof0.50xEV/(FCF-SBC)multipleof35.0xbasedonEV/(FCF-SBC)-to-Growthof0.40xFigure63:TWTRPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$12$25$40%Upside/Downside-50%4%67%GAAPEBITDA(FY18E)$490$589$676EBITDAMargin20.0%22.9%25.0%GAAPEBITDA(FY19E)$506$741$928EBITDAMargin20.0%26.4%30.0%EV/2019EBITDA12.0x20.0x30.0xEBITDACAGR("17-"19)16.0%40.3%57.0%EV/EBITDAtoGrowth0.75x0.50x0.53xEnterpriseValue$6,073$14,822$27,835FCF-SBC(FY18E)$245$318$406FCF%ofSales10.0%12.3%15.0%FCF-SBC(FY19E)$253$467$619FCF%ofSales10.0%16.6%20.0%EV/2019FCF20.0x35.0x45.0xFCFCAGR("17-"19)37.9%87.5%115.7%EV/FCFtoGrowth0.53x0.40x0.39xEnterpriseValue$5,061$16,361$27,835WeightingsEVderivedfromEBITDA50%50%50%EVderivedfromFCF50%50%50%EnterpriseValue$5,567$15,591$27,835CapitalStructureAdjustmentsAdjustedNetDebt-2019E$(3,683)$(3,683)$(3,683)Dividends000Buyback(@CurrentPrice)000AdjustedSharesOutstanding780780780Source:Companyreports,FactSet,UBSestimatesUSInternet&InteractiveEntertainment10January201850 Figure64:TWTREarningsPreview–UBSvs.ConsQ42017FY2018FY2019UBSEstConsEst%UBSvsConsUBSEstConsEstUBSEstConsEstRevenue$703$6862.5%$2,577$2,543$2,812$2,743Advertising$608$5893.1%$2,175$2,155$2,348$2,311DataLicensing$95$96-0.8%$402$400$464$452CoreMAUs3333320.5%340344351353AdvertisingARPU$1.82n/an/a$6.41n/a$6.68n/aGAAPEBITDA$144$1393.4%$589n/a$741n/aAdjustedEBITDA$240$2380.5%$900$865$1,011$965GAAPEPS$0.02$0.029.9%$0.19n/a$0.42n/aAdjustedEPS$0.12$0.14-13.9%$0.46$0.46$0.55$0.52Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201851 SummaryModelsFigure65:P&LSummaryTwitterP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenue5485745907035716156387532,4152,5772,812GrossProfit(UBS)3413763944713614094295061,5821,7051,862Research&Development(76)(80)(79)(93)(73)(77)(73)(90)(327)(313)(328)Marketing&Sales(134)(160)(148)(176)(131)(160)(153)(162)(617)(606)(619)General&Administrative(48)(48)(47)(53)(44)(48)(45)(60)(196)(197)(201)OperatingInc(UBS)8389121149112125158193442589714Stock-BasedComp(117)(113)(101)(95)(79)(82)(71)(78)(427)(310)(270)OperatingInc(GAAP)(40)(38)741273783109(31)255432Pre-TaxIncome(58)(113)(18)184135985(171)162356IncomeTaxProvision(3)(3)(4)(2)(0)(1)(6)(9)(12)(16)(36)Adj.NetInc(UBS)50567890677595117275354424Adj.EPS(UBS)0.070.080.100.120.090.100.120.150.370.460.55Adj.DilutedShares731738745750755759763767741761775NetInc(GAAP)(62)(116)(21)163125377(183)145320EPS(GAAP)(0.09)(0.16)(0.03)0.020.000.020.070.10(0.25)0.190.42GAAPDilutedShares722730737742746751754759733752767Adj.EBITDA1701782072401882052362717949001,011GAAPEBITDA6365105144110122165193376589741Capex(40)(43)(35)(54)(39)(43)(34)(54)(172)(171)(165)FreeCashFlow1641462054422813619668560628737FCF-SBC4733104(51)14954125(10)133318467%ofRevenueGrossProfit(UBS)62.2%65.6%66.8%67.0%63.2%66.6%67.3%67.1%65.5%66.2%66.2%Research&Development-13.8%-13.9%-13.3%-13.3%-12.8%-12.5%-11.5%-12.0%-13.5%-12.2%-11.7%Marketing&Sales-24.4%-27.8%-25.0%-25.0%-23.0%-26.0%-24.0%-21.5%-25.5%-23.5%-22.0%General&Administrative-8.7%-8.4%-8.0%-7.5%-7.8%-7.8%-7.0%-8.0%-8.1%-7.6%-7.1%OperatingInc(UBS)15.2%15.5%20.5%21.2%19.7%20.3%24.8%25.6%18.3%22.8%25.4%Stock-BasedComp-21.3%-19.8%-17.1%-13.6%-13.8%-13.4%-11.1%-10.4%-17.7%-12.0%-9.6%OperatingInc(GAAP)-7.3%-6.7%1.2%5.8%4.6%6.0%12.9%14.5%-1.3%9.9%15.4%Pre-TaxIncome-10.6%-19.7%-3.0%2.6%0.6%2.2%9.3%11.3%-7.1%6.3%12.6%IncomeTaxProvision-0.6%-0.6%-0.6%-0.3%-0.1%-0.2%-0.9%-1.1%-0.5%-0.6%-1.3%Adj.NetInc(UBS)9.1%9.8%13.2%12.9%11.8%12.2%14.9%15.5%11.4%13.7%15.1%NetInc(GAAP)-11.2%-20.3%-3.6%2.3%0.6%2.0%8.3%10.2%-7.6%5.6%11.4%Adj.EBITDA31.0%31.0%35.1%34.1%33.0%33.3%37.0%36.0%32.9%34.9%36.0%GAAPEBITDA11.4%11.3%17.8%20.5%19.2%19.9%25.8%25.6%15.6%22.9%26.4%Capex-7.3%-7.6%-5.9%-7.7%-6.8%-7.1%-5.4%-7.2%-7.1%-6.6%-5.9%FreeCashFlow29.8%25.5%34.8%6.3%39.9%22.2%30.8%9.0%23.2%24.4%26.2%FCFminusSBC8.5%5.7%17.7%-7.2%26.1%8.8%19.7%-1.4%5.5%12.3%16.6%Year-on-YearGrowthRevenue-7.8%-4.7%-4.3%-2.0%4.2%7.1%8.2%7.2%-4.5%6.7%9.1%GrossProfit(UBS)-17.3%-9.2%-4.0%-0.9%5.9%8.7%9.0%7.4%-7.6%7.8%9.2%Research&Development-5.3%-9.1%-12.6%-10.7%-3.9%-3.4%-6.6%-2.9%-9.6%-4.2%4.6%Marketing&Sales-27.9%-14.3%-17.6%-4.2%-1.7%0.1%3.7%-7.8%-16.0%-1.7%2.1%General&Administrative14.2%2.9%6.5%-18.2%-7.6%-0.8%-5.6%14.3%-0.8%0.4%1.9%OperatingInc(UBS)-20.3%-5.3%24.3%21.4%34.9%40.2%31.2%29.4%5.7%33.1%21.3%Stock-BasedComp-22.5%-32.4%-36.3%-31.0%-32.6%-27.5%-29.8%-17.7%-30.6%-27.3%-13.0%OperatingInc(GAAP)-31.9%-55.6%n/an/an/an/a1034.3%168.1%-91.6%n/a69.6%Pre-TaxIncome-24.9%8.1%-81.8%n/an/an/an/a371.4%-61.2%n/a120.1%IncomeTaxProvision57.5%29.2%-45.7%-62.3%-88.8%-60.7%65.9%371.4%-25.3%34.8%120.1%Adj.NetInc(UBS)-24.2%-5.3%26.8%-23.7%34.8%32.7%22.3%28.9%-10.1%28.9%20.0%Adj.EPS(UBS)-27.2%-9.1%22.7%-26.0%30.6%29.0%19.4%26.1%-13.2%25.5%17.8%NetInc(GAAP)-22.8%8.6%-79.5%n/an/an/an/a371.4%-60.0%n/a120.1%EPS(GAAP)-26.1%3.9%-80.4%n/an/an/an/a361.0%-61.7%n/a116.0%Adj.EBITDA-5.8%1.9%14.2%11.4%10.8%15.1%13.9%13.2%5.7%13.3%12.4%GAAPEBITDA111.9%836.8%359.7%-695.1%75.2%89.3%57.4%33.6%976.1%56.7%25.7%Capex-32.6%10.9%-52.2%12.6%-2.9%0.0%-1.1%0.2%-21.4%-0.8%-3.3%FreeCashFlow57.9%-16.6%75.7%-70.1%39.3%-6.8%-4.4%53.1%2.8%12.3%17.3%FCFminusSBC-198.5%324.2%-350.7%-592.5%219.9%64.5%20.1%-79.4%-287.8%139.1%47.0%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201852 Figure66:Revenue&KeyMetricsSummaryTwitterRevenueandKeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenueAdvertising4744895036084815145376432,0732,1752,348DataLicensing7485879590100101111342402464Revenue5485745907035716156387532,4152,5772,812AdvertisingRevenuebyPlatformDesktop00000000000Mobile00000000000CoreMAUsbyRegion(mm)UnitedStates6968697071717273697276International257258261263265267269271260268276TotalCoreMAUs327326330333336338341344329340351AdvertisingARPU1.451.501.521.821.431.521.571.876.306.416.68Year-on-YearGrowthAdvertising-10.7%-8.5%-7.8%-4.7%1.6%5.2%6.8%5.8%-7.8%4.9%7.9%DataLicensing16.8%26.0%22.6%20.0%21.0%18.0%16.0%16.0%21.4%17.6%15.5%Revenue-7.8%-4.7%-4.3%-2.0%4.2%7.1%8.2%7.2%-4.5%6.7%9.1%AdvertisingRevenuebyPlatformDesktop0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Mobile0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%CoreMAUsbyRegion(mm)UnitedStates6.2%2.4%3.0%4.5%2.2%4.4%4.3%4.3%4.0%3.8%5.4%International4.9%4.3%4.4%4.8%3.1%3.5%3.1%3.0%4.6%3.2%2.9%TotalCoreMAUs5.5%4.2%4.1%4.7%2.6%3.7%3.3%3.3%4.6%3.2%3.5%AdvertisingARPU-15.4%-12.2%-11.4%-9.0%-1.0%1.5%3.4%2.4%-11.9%1.7%4.3%Qtr-on-QtrGrowthAdvertising-25.7%3.2%2.8%20.9%-20.8%6.8%4.4%19.7%DataLicensing-6.2%14.1%2.4%9.5%-5.4%11.3%0.6%9.5%Revenue-23.6%4.7%2.7%19.2%-18.7%7.5%3.8%18.1%AdvertisingRevenuebyPlatformDesktop0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Mobile0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%CoreMAUsbyRegion(mm)UnitedStates3.0%-1.4%1.5%1.4%0.7%0.7%1.4%1.4%International2.4%0.4%1.2%0.8%0.8%0.8%0.7%0.7%TotalCoreMAUs2.8%-0.3%1.2%0.9%0.8%0.7%0.9%0.9%AdvertisingARPU-27.8%3.5%1.6%19.8%-21.4%6.1%3.5%18.7%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201853 USInternet&InteractiveEntertainment10January201854 Snap(SNAP,Sell,$8PT)EstimatesWearenotmakinganychangestoourforwardrevenueestimates(UBSe$257minQ4"17&$1,186minFY2018,with+5mDAUnetaddsinQ4)howevertakeamoreconservativestancetowardsforwardexpensegrowth(continuedgrossmarginpressurefromoutsourcingitsITinfrastructureoperationsandheadcountgrowth).Figure67:Oldvs.NewEstimatesQ4"17FY2018FY2019OldNew%ChangeOldNew%ChangeOldNew%ChangeCommentsTotalDAUs1831830.0%1961960.0%2192190.0%Ourestimatesreflect5mnetaddsinQ4"17(US+2m,Europe+1mandRoW+2m)and+21minFY2018NorthAmerica79790.0%84840.0%92920.0%Europe58580.0%61610.0%68680.0%RestofWorld46460.0%51510.0%59590.0%Revenue$257$2570.0%$1,186$1,1860.0%$1,742$1,7420.0%Ourestimatesreflect+96%YoYrevgrowthinFY2017and49%inFY2018reflectingcontinuedpricingNorthAmerica$212$2120.0%$931$9310.0%$1,326$1,3260.0%pressuregivenmixshifttowardsprogrammaticandEurope$31$310.0%$169$1690.0%$279$2790.0%mutedDAUgrowthassumptionsRestofWorld$14$140.0%$85$850.0%$138$1380.0%GAAPEBITDA$(302)$(302)0.0%$(1,044)$(1,101)-5.4%$(798)$(909)-13.9%OurestimatesreflectcontinuedpressureongrossmarginduetoSnap"suniquecoststructure(whilerealizingsomebenefitfromitsdual-cloudstrategy);headcountgrowthisexpectedtobeasignificantopexdriveroverthenextfewyearsasthecompanyscalesAdjustedEBITDA$(165)$(165)0.0%$(573)$(630)-10.0%$(359)$(483)-34.6%OurestimatesreflectcontinuedpressureongrossmarginduetoSnap"suniquecoststructure(whilerealizingsomebenefitfromitsdual-cloudstrategy);headcountgrowthisexpectedtobeasignificantopexdriveroverthenextfewyearsasthecompanyscalesGAAPEPS$(0.26)$(0.26)0.0%$(0.92)$(0.96)-5.0%$(0.74)$(0.83)-12.2%AdjustedEPS$(0.14)$(0.14)0.0%$(0.52)$(0.55)-5.9%$(0.36)$(0.45)-25.2%Source:Companyreports,UBSestimatesValuationWearriveata12-monthforwardpricetargetof$8(from$7)byapplyinga50/50blendof:1)EV/Salesmultipleappliedtoour2019estimatesand2)amodifiedDCFusinganEV/(FCFminusSBC)multipleappliedtoour2022estimatesdiscountedback3years.EV/Salesgoesto5.0x(from8.0x)ona0.10xmultiple-to-growth(nochange).EV/(FCF-SBC)goesto16x(from30x).DiscountRatestaysat18%(unchanged).ThediscountrateisbasedonaCAPM+companyspecificriskpremiumcalculationusing:1)3%riskfreerate(basedonanormalized10-yrrate);2)betaof2.0givenweexpectafairamountofvolatilityaroundSNAPoverthefirstfewyears(andcomparedtoanunlevered2-yrpeerbetaof1.3consideringSnap"scurrentcapitalstructure);3)equityriskpremiumof5%(basedonUBS"internaldatabaseassumptions);and4)companyspecificriskpremiumof5%(basedona)earlystageIPOdiscountgiventherelativeimmaturityofSnapasasocialanddigitaladvertisingplatformcomparedtopeers;b)liquiditydiscount;c)corporategovernancediscount;andd)increaseduncertaintyfrommultiplebeingappliedto2022estimates).USInternet&InteractiveEntertainment10January201855 Figure68:SNAPPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$4$8$16%Upside/Downside-73%-46%7%Sales(FY18E)$1,103$1,186$1,269Bear/BullAdjustment-7%—7%Sales(FY19E)$1,533$1,742$1,951Bear/BullAdjustment-12%—12%EV/2019Sales4.0x5.0x7.5xSalesCAGR("17-"19)38.8%47.9%56.5%EV/SalestoGrowth0.10x0.10x0.13xEnterpriseValue$6,132$8,711$14,634FCFminusSBC(FY22E)$470$921$1,411(FCF-SBC)%ofSales10.0%19.6%30.0%EV/2022(FCF-SBC)12.0x16.0x25.0xDiscountRate21.0%18.0%15.0%DiscountPeriod(Years)333EnterpriseValue(2022)$5,643$14,743$35,272DiscountedEnterpriseValue(2019)$3,186$8,973$23,192WeightingsEnterpriseValue$4,659$8,842$18,913CapitalStructureAdjustmentsAdjustedNetDebt-2019E$(692)$(692)$(692)AdjustedSharesOutstanding1,2021,2021,202Source:Companyreports,FactSet,UBSestimatesFigure69:SNAPEarningsPreview–UBSvs.ConsFY2018FY2019UBSEstConsEst%UBSvsConsUBSEstConsEstUBSEstConsEstTotalDAUs183184-0.5%196202.1219227.7NorthAmerica7979.5-0.6%8486.49295.6Europe5858.9-1.5%6164.86873.1RestofWorld4645.60.9%5150.95959Revenue$257$2560.3%$1,186$1,309$1,742$2,049NorthAmerica$2121977.6%$931952.6$1,3261338.2Europe$3132-4.5%$169198$279376RestofWorld$1419-25.4%$85123$138269GAAPEBITDA$(302)$(361)16.4%$(1,101)$(1,084)$(909)$(922)AdjustedEBITDA$(165)$(187)11.8%$(630)$(688)$(483)$(439)GAAPEPS$(0.26)$(0.33)22.1%$(0.96)$(1.12)$(0.83)$(0.88)AdjustedEPS$(0.14)$(0.15)11.3%$(0.55)$(0.58)$(0.45)$(0.41)Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201856 SummaryModelsFigure70:P&LSummarySnapP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenue1501822082572242673133817961,1861,742GrossProfit(UBS,non-GAAP)632(1)4039814010787266609Research&Development(84)(92)(93)(90)(86)(100)(97)(95)(358)(379)(468)Marketing&Sales(59)(70)(74)(72)(72)(75)(78)(86)(275)(311)(388)General&Administrative(64)(76)(69)(64)(67)(73)(78)(95)(274)(314)(366)OperatingInc(UBS,non-GAAP)(201)(207)(196)(186)(187)(167)(214)(170)(820)(737)(613)Stock-BasedComp(2,013)(242)(226)(137)(139)(128)(118)(85)(2,619)(470)(425)OperatingInc(GAAP)(2,214)(449)(462)(324)(326)(295)(332)(255)(3,448)(1,208)(1,038)Pre-TaxIncome(2,212)(443)(455)(317)(320)(290)(328)(250)(3,427)(1,188)(1,026)IncomeTaxProvision3(0)1299897243228Adj.NetInc(UBS)(192)(196)(168)(165)(166)(147)(193)(151)(750)(657)(544)Adj.EPS(UBS)(0.20)(0.16)(0.14)(0.14)(0.14)(0.12)(0.16)(0.13)(0.65)(0.55)(0.45)Adj.DilutedShares9551,2231,2331,2021,2021,2021,2021,2021,1531,2021,202NetInc(GAAP)(2,209)(443)(443)(309)(311)(282)(319)(243)(3,404)(1,155)(998)EPS(GAAP)(2.31)(0.36)(0.36)(0.26)(0.26)(0.23)(0.27)(0.20)(2.95)(0.96)(0.83)GAAPDilutedShares9551,2231,2331,2021,2021,2021,2021,2021,1531,2021,202Adj.EBITDA(188)(194)(179)(165)(163)(141)(186)(140)(756)(630)(483)GAAPEBITDA(2,201)(436)(444)(302)(302)(269)(305)(225)(3,384)(1,101)(909)Capex(18)(19)(26)(28)(20)(25)(30)(30)(92)(105)(105)FreeCashFlow(173)(229)(220)(222)(206)(177)(126)(229)(844)(739)(637)FCFminusSBC(2,186)(471)(446)(360)(345)(305)(245)(315)(3,463)(1,209)(1,063)%ofRevenueGrossProfit(UBS)4.2%17.5%-0.4%15.5%17.2%30.5%12.6%28.0%11.0%22.5%35.0%Research&Development-55.9%-50.6%-44.7%-35.0%-38.5%-37.5%-31.0%-25.0%-45.0%-32.0%-26.9%Marketing&Sales-39.3%-38.7%-35.4%-28.0%-32.0%-28.0%-25.0%-22.5%-34.5%-26.2%-22.3%General&Administrative-43.1%-41.9%-33.2%-25.0%-30.0%-27.5%-25.0%-25.0%-34.4%-26.5%-21.0%OperatingInc(UBS)-134.1%-113.7%-94.4%-72.5%-83.3%-62.5%-68.4%-44.5%-103.0%-62.2%-35.2%Stock-BasedComp-1345.2%-133.5%-108.5%-53.5%-61.9%-47.9%-37.9%-22.3%-328.9%-39.7%-24.4%OperatingInc(GAAP)-1479.3%-247.2%-222.1%-126.0%-145.1%-110.4%-106.2%-66.8%-433.1%-101.9%-59.6%Pre-TaxIncome-1478.0%-243.8%-219.0%-123.5%-142.6%-108.4%-104.7%-65.7%-430.5%-100.2%-58.9%IncomeTaxProvision2.0%-0.1%5.9%3.3%3.9%2.9%2.8%1.8%3.0%2.7%1.6%Adj.NetInc(UBS)-128.2%-107.6%-80.8%-64.2%-73.8%-55.0%-61.6%-39.7%-94.2%-55.4%-31.2%NetInc(GAAP)-1476.0%-243.9%-213.1%-120.1%-138.7%-105.5%-101.9%-63.9%-427.5%-97.5%-57.3%Adj.EBITDA-125.8%-106.8%-86.0%-64.0%-72.6%-52.9%-59.5%-36.8%-94.9%-53.2%-27.7%GAAPEBITDA-1471.0%-240.2%-213.7%-117.5%-134.4%-100.8%-97.3%-59.1%-425.0%-92.8%-52.2%Capex-12.0%-10.7%-12.5%-11.0%-8.9%-9.4%-9.6%-7.9%-11.5%-8.9%-6.0%FreeCashFlow-115.6%-126.0%-105.8%-86.5%-91.9%-66.3%-40.3%-60.2%-106.0%-62.3%-36.6%FCFminusSBC-1460.8%-259.5%-214.3%-139.9%-153.8%-114.2%-78.1%-82.5%-434.9%-102.0%-61.0%Year-on-YearGrowthRevenue285.7%153.0%62.2%55.1%50.0%47.0%50.5%48.3%96.9%48.9%46.9%GrossProfit(UBS)n/an/a-233.0%220.2%512.0%156.4%n/a167.8%n/a205.3%128.7%Research&Development229.0%175.5%119.7%48.8%3.2%9.0%4.4%5.9%121.9%5.7%23.6%Marketing&Sales321.1%192.7%120.1%46.8%22.2%6.3%6.4%19.2%128.1%13.1%24.9%General&Administrative192.5%146.2%68.8%-2.5%4.4%-3.5%13.3%48.3%71.5%14.8%16.5%OperatingInc(UBS)104.2%85.9%69.2%14.3%-6.9%-19.2%8.9%-9.0%67.9%-10.0%-16.8%Stock-BasedComp36250.2%5012.7%1411.3%1914.8%-93.1%-47.3%-47.5%-38.1%8076.0%-82.0%-9.5%OperatingInc(GAAP)2032.3%287.6%252.6%90.7%-85.3%-34.3%-28.0%-21.3%562.6%-65.0%-14.0%Pre-TaxIncome2017.5%282.0%247.4%86.4%-85.5%-34.6%-28.1%-21.1%557.0%-65.4%-13.6%IncomeTaxProvisionn/a-742.4%79.0%2785.2%186.7%n/a-28.1%-21.1%234.3%35.5%-13.6%Adj.NetInc(UBS)100.2%82.0%60.3%4.2%-13.7%-24.9%14.7%-8.2%60.8%-12.5%-17.1%Adj.EPS(UBS)75.1%20.0%8.2%-27.6%-31.4%-23.6%17.7%-8.2%15.4%-16.0%-17.1%NetInc(GAAP)2012.2%282.3%256.7%81.7%-85.9%-36.4%-28.1%-21.1%561.4%-66.1%-13.6%EPS(GAAP)75.1%20.0%8.2%-27.6%-31.4%-23.6%17.7%-8.2%15.4%-16.0%-17.1%Adj.EBITDA101.9%84.5%64.7%8.1%-13.4%-27.2%4.0%-14.8%64.5%-16.5%-23.3%GAAPEBITDA2128.7%297.3%259.7%89.8%-86.3%-38.3%-31.5%-25.4%588.8%-67.5%-17.4%Capex44.5%17.9%50.9%38.7%11.2%29.1%15.6%6.1%37.8%14.7%0.0%FreeCashFlow64.8%52.1%-6.0%18.1%19.3%-22.7%-42.7%3.3%24.6%-12.5%-13.8%FCFminusSBC1877.8%203.6%78.9%84.5%-84.2%-35.3%-45.1%-12.5%388.0%-65.1%-12.1%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201857 Figure71:Revenue&KeyMetricsSummarySnapRevenueandKeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenue1501822082572242673133817961,1861,742CoreDAUsbyRegion(mm)NorthAmerica7175777981838587768492Europe5557575859606163576168RoW4042444648505254435159TotalDAUs166174178183188193198204175196219ARPUNorthAmerica$1.81$1.97$2.17$2.69$2.26$2.46$2.82$3.49$8.68$11.09$14.41Europe$0.24$0.39$0.48$0.53$0.42$0.68$0.82$0.85$1.65$2.78$4.10RoW$0.19$0.29$0.30$0.30$0.34$0.44$0.45$0.44$1.09$1.67$2.33TotalARPU$0.90$1.04$1.17$1.40$1.19$1.38$1.58$1.87$4.54$6.06$7.95Year-on-YearGrowthRevenue285.7%153.0%62.2%55.1%50.0%47.0%50.5%48.3%96.9%48.9%46.9%CoreDAUsbyRegion(mm)NorthAmerica255.2%128.5%46.1%45.2%42.6%38.3%43.5%43.2%81.4%42.1%42.3%Europe383.5%245.2%132.7%111.9%87.7%84.2%81.9%73.8%163.9%80.6%64.8%RoWn/an/an/a135.9%116.0%78.6%77.3%70.2%480.4%81.8%61.9%TotalDAUs36.1%21.7%16.3%15.1%13.3%10.9%11.2%11.5%21.5%11.7%11.9%ARPUNorthAmerica170%86%23%25%25%25%30%30%49%28%30%Europe243%179%100%90%75%75%70%60%116%69%47%RoW1800%2800%650%100%80%50%50%45%383%53%40%TotalARPU183.5%108.0%39.4%34.8%32.4%32.5%35.3%33.0%62.0%33.3%31.3%Qtr-on-QtrGrowthRevenue-9.7%21.4%14.5%23.6%-12.7%19.0%17.2%21.8%CoreDAUsbyRegion(mm)NorthAmerica85.9%81.3%80.4%82.6%81.6%76.5%76.6%79.8%Europe-9.3%68.4%23.1%12.8%-19.7%65.3%21.6%7.7%RoW29.9%60.3%8.4%4.5%19.0%32.5%7.6%0.4%TotalDAUs4.4%4.8%2.3%2.8%2.7%2.7%2.6%3.0%ARPUNorthAmerica-16%9%10%24%-16%9%15%24%Europe-14%63%23%11%-21%63%20%4%RoW27%53%3%0%14%27%3%-3%TotalARPU-13.5%15.8%11.9%20.2%-15.0%15.9%14.2%18.2%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201858 USInternet&InteractiveEntertainment10January201859 Netflix(NFLX,Buy,$250PT)EstimatesWeputforwardournewNetflixoperatingestimatesbelow:Figure72:NFLXQ42017EarningsPreviewQ42017FY2018FY2019UBSEstConsEst%UBSvsConsGuidanceUBSEstConsEstUBSEstConsEstTotalRevenues$3,274$3,281-0.2%$3,274$14,937$14,988$18,086$17,999DomesticStreaming$1,616$1,618-0.1%$1,616$7,102$7,270$8,005$8,161IntlStreaming$1,553$1,5321.4%$1,553$7,464$7,435$9,784$9,617DomesticDVD$105$1050.5%$105$372$364$296$288TotalStreamingSubscribers115,576114,9720.5%115,550135,994136,313156,903157,364DomesticStreaming54,03553,9990.1%54,02058,09958,20362,06262,202IntlStreaming61,54161,620-0.1%61,53077,89578,74194,84195,606ContributionProfit$734$7310.3%n/a$3,904$3,917$5,242$4,929DomesticStreaming$558$571-2.4%$556$2,838$2,853$3,351$3,367IntlStreaming$116$10016.8%$115$868$888$1,734$1,749DomesticDVD$60$574.4%n/a$198$195$157$152GAAPEBIT$239$243-1.6%$238$1,621$1,660$2,592$2,714Adj.EBITDA$305$311-2.2%n/a$1,932$1,926$2,957$2,995GAAPEPS$0.42$0.420.8%$0.41$2.20$2.30$3.67$3.83FCF$(905)$(735)-23.1%($504)-($1,004)$(3,088)$(2,288)$(1,720)$(1,583)Source:Companyreports,UBSestimatesValuationWeincreaseourpricetargetto$250(from$237prior)basedonourmultiple-basedGAAPvaluationframework(fromDCFframeworkpreviously).Weapply50%weightingtoEV/GAAPEBITDAmultiple(onFY2019estimates)and50%weightingtomodifiedDCF(basedonFY2022(FCF–SBC)).Formoredetailsonourvaluationapproach,pleaserefertothefrontsectionofthisreport.EV/GAAPEBITDAof50x(or0.69xmultiple-to-growth)EV/(FCF-SBC)of50xDiscountRateof15%.ThediscountrateisbasedonaCAPM+companyspecificriskpremiumcalculationusing:1)3%riskfreerate(basedonanormalized10-yrrate);2)betaof1.38(source:Bloomberg);3)equityriskpremiumof5%(basedonUBS"internaldatabaseassumptions);and4)companyspecificriskpremiumof5%givenincreaseduncertaintyfrommultiplebeingappliedto2022estimates.USInternet&InteractiveEntertainment10January201860 Figure73:NFLXPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$120$250$385%Upside/Downside-43%19%83%GAAPEBITDA(FY18E)$1,490$1,716$1,882GAAPEBITDAMargin10.5%11.5%12.0%GAAPEBITDA(FY19E)$2,163$2,707$3,086GAAPEBITDAMargin13.0%15.0%15.8%EV/2019GAAPEBITDA38.0x50.0x60.0xEBITDACAGR("17-"19)54.6%72.9%84.6%EV/GAAPEBITDAtoGrowth0.70x0.69x0.71xEnterpriseValue$82,197$135,354$185,171FCF-SBC(FY22E)$2,496$3,245$3,883(FCF-SBC)%ofSales9.0%11.7%14.0%EV/2022(FCF-SBC)30.0x50.0x65.0xDiscountRate18.0%15.0%12.0%DiscountPeriod333EnterpriseValue(2022)$74,886$162,261$252,393EnterpriseValue$45,578$106,689$179,648WeightingsEVderivedfromSales0%0%0%EVderivedfromGAAPEBITDA50%50%50%EVderivedfromFCFminsSBC50%50%50%EnterpriseValue$63,887$121,022$182,410CapitalStructureAdjustmentsAdjustedNetDebt-2019E$8,855$8,855$8,855Dividends$-$-$-Buyback(@CurrentPrice)$-$-$-AdjustedSharesOutstanding452452452Source:Companyreports,FactSet,UBSestimatesUSInternet&InteractiveEntertainment10January201861 SummaryModelsFigure74:P&LSummaryNetflixP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenue2,6372,7852,9853,2743,4093,5753,8114,14411,68114,93718,086Amort.ofStreamingContentAssets(1,306)(1,551)(1,627)(1,785)(1,705)(1,877)(2,002)(2,259)(6,269)(7,842)(9,237)Amort.ofDVDContentAssets(19)(17)(13)(15)(15)(15)(15)(15)(63)(60)(52)OtherCOGS(333)(335)(352)(393)(404)(405)(423)(471)(1,413)(1,702)(1,927)GrossProfit(GAAP)9808839921,0811,2851,2781,3711,3993,9355,3336,870Marketing(271)(274)(312)(347)(332)(327)(368)(402)(1,205)(1,429)(1,628)Technology&Development(257)(267)(255)(275)(314)(322)(305)(323)(1,054)(1,263)(1,488)General&Administrative(194)(214)(216)(219)(239)(261)(259)(261)(843)(1,020)(1,162)ContributionProfit(GAAP)7086096797349539511,0039972,7303,9045,242OperatingInc(UBS)3021722532854564214924671,0121,8372,842Stock-BasedComp(45)(44)(45)(45)(55)(53)(54)(54)(179)(216)(250)OperatingInc(GAAP)2571282092394013684394138331,6212,592Pre-TaxIncome224141161703222803443045241,2502,095IncomeTaxProvision(46)521320(68)(59)(72)(64)40(263)(440)NetInc(GAAP)178661301902552212722405639881,655EPS(GAAP)0.400.150.290.420.570.490.600.531.262.203.67GAAPDilutedShares445446447448448449449450447449451Adj.EBITDA3171902733054784455174931,0851,9322,957GAAPEBITDA2721462282594233914634399051,7162,707Capex(53)(65)(34)(49)(43)(45)(48)(52)(201)(187)(181)FreeCashFlow(423)(608)(465)(905)(574)(828)(721)(965)(2,400)(3,088)(1,720)FCFminusSBC(467)(652)(510)(950)(628)(882)(775)(1,018)(2,580)(3,304)(1,970)%ofRevenueAmort.ofStreamingContentAssets-49.5%-55.7%-54.5%-54.5%-50.0%-52.5%-52.5%-54.5%-53.7%-52.5%-51.1%Amort.ofDVDContentAssets-0.7%-0.6%-0.4%-0.5%-0.4%-0.4%-0.4%-0.4%-0.5%-0.4%-0.3%OtherCOGS-12.6%-12.0%-11.8%-12.0%-11.9%-11.3%-11.1%-11.4%-12.1%-11.4%-10.7%GrossProfit37.2%31.7%33.2%33.0%37.7%35.8%36.0%33.8%33.7%35.7%38.0%Marketing-10.3%-9.8%-10.5%-10.6%-9.7%-9.2%-9.7%-9.7%-10.3%-9.6%-9.0%Technology&Development-9.8%-9.6%-8.6%-8.4%-9.2%-9.0%-8.0%-7.8%-9.0%-8.5%-8.2%General&Administrative-7.4%-7.7%-7.2%-6.7%-7.0%-7.3%-6.8%-6.3%-7.2%-6.8%-6.4%ContributionProfit(GAAP)26.9%21.9%22.8%22.4%28.0%26.6%26.3%24.1%23.4%26.1%29.0%OperatingInc(UBS)11.4%6.2%8.5%8.7%13.4%11.8%12.9%11.3%8.7%12.3%15.7%Stock-BasedComp-1.7%-1.6%-1.5%-1.4%-1.6%-1.5%-1.4%-1.3%-1.5%-1.4%-1.4%OperatingInc(GAAP)9.7%4.6%7.0%7.3%11.8%10.3%11.5%10.0%7.1%10.9%14.3%Pre-TaxIncome8.5%0.5%3.9%5.2%9.5%7.8%9.0%7.3%4.5%8.4%11.6%IncomeTaxProvision-1.7%1.9%0.4%0.6%-2.0%-1.6%-1.9%-1.5%0.3%-1.8%-2.4%Adj.EBITDA12.0%6.8%9.1%9.3%14.0%12.4%13.6%11.9%9.3%12.9%16.4%GAAPEBITDA10.3%5.3%7.6%7.9%12.4%10.9%12.2%10.6%7.8%11.5%15.0%Capex-2.0%-2.3%-1.1%-1.5%-1.3%-1.3%-1.3%-1.3%-1.7%-1.3%-1.0%FreeCashFlow-16.0%-21.8%-15.6%-27.6%-16.8%-23.2%-18.9%-23.3%-20.5%-20.7%-9.5%FCFminusSBC-17.7%-23.4%-17.1%-29.0%-18.4%-24.7%-20.3%-24.6%-22.1%-22.1%-10.9%Year-on-YearGrowthRevenue34.7%32.3%30.3%32.2%29.3%28.3%27.7%26.6%32.3%27.9%21.1%Amort.ofStreamingContentAssets23.4%31.9%33.0%34.2%30.6%21.0%23.0%26.5%30.9%25.1%17.8%Amort.ofDVDContentAssets-9.0%-17.5%-31.2%-21.9%-19.3%-9.2%13.1%0.0%-19.7%-5.3%-13.3%OtherCOGS14.5%20.6%21.7%29.1%21.4%20.8%20.0%19.6%21.6%20.4%13.2%GrossProfit(GAAP)66.5%39.7%31.0%31.3%31.1%44.7%38.2%29.5%40.5%35.5%28.8%Marketing30.4%27.0%10.8%21.8%22.2%19.3%17.9%15.9%21.6%18.6%13.9%Technology&Development26.3%28.8%18.1%22.1%22.0%20.5%19.4%17.5%23.7%19.8%17.8%General&Administrative52.7%54.6%40.7%38.0%22.8%22.0%20.2%19.0%45.9%20.9%14.0%ContributionProfit(GAAP)86.3%46.3%42.9%36.3%34.6%56.2%47.6%35.9%50.9%43.0%34.3%OperatingInc(UBS)228.5%50.1%69.5%44.1%51.1%145.3%94.3%63.9%82.8%81.5%54.7%Stock-BasedComp5.8%-0.2%2.9%4.2%22.3%21.1%19.8%18.2%3.2%20.3%16.1%OperatingInc(GAAP)419.6%81.6%96.8%55.3%56.1%188.0%110.3%72.6%119.2%94.7%59.9%Pre-TaxIncome461.2%-72.7%46.9%87.8%44.1%1902.7%195.9%79.4%101.0%138.8%67.6%IncomeTaxProvision272.9%n/an/an/a48.6%-213.7%-641.0%-414.0%n/a-760.2%67.6%NetInc(GAAP)544.3%61.0%151.6%184.4%42.9%236.7%109.7%26.5%201.7%75.3%67.6%EPS(GAAP)566.7%66.7%141.7%180.0%42.5%226.7%106.9%26.2%196.3%74.4%66.9%Adj.EBITDA197.1%48.0%66.3%43.9%50.8%133.5%89.6%61.7%77.5%78.1%53.1%GAAPEBITDA323.3%73.2%89.2%54.1%55.5%167.3%103.3%69.3%107.0%89.5%57.7%Capex523.4%503.2%24.1%-19.5%-18.9%-31.5%40.2%5.5%86.6%-7.0%-3.1%FreeCashFlow62.1%139.4%-8.2%41.6%35.8%36.2%55.2%6.6%44.6%28.6%-44.3%FCFminusSBC54.3%118.8%-7.3%39.3%34.5%35.1%52.1%7.2%40.7%28.1%-40.4%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201862 Figure75:Revenue&KeyMetricsSummaryNetflixRevenue&KeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenueDomesticStreaming1,4701,5051,5471,6161,7181,7501,7931,8406,1397,1028,005InternationalStreaming1,0461,1651,3271,5531,5901,7291,9272,2185,0927,4649,784DomesticDVD120115110105100959086450372296TotalRevenues2,6372,7852,9853,2743,4093,5753,8114,14411,68114,93718,086SubscirbersbySegment(000s)DomesticStreamingSubs50,85451,92152,77254,03555,13655,88956,72958,09954,03558,09962,062Paid49,37550,32351,34552,05853,23454,08755,00756,07752,05856,07760,015Promotional1,4791,5981,4271,9771,9021,8021,7222,0221,9772,0222,047InternationalStreamingSubs47,89452,03156,47661,54165,25868,46172,91677,89561,54177,89594,841Paid44,98848,71352,67857,03360,95064,30368,30872,83757,03372,83789,273Promotional2,9063,3183,7984,5084,3084,1584,6085,0584,5085,0585,568DomesticDVDSubs3,9443,7583,5693,3993,2423,0722,9052,7453,3992,7452,131Paid3,8673,6923,5203,3553,2033,0382,8762,7213,3552,7212,127Promotional776649443934292444244TotalStreamingSubs98,748103,952109,248115,576120,394124,350129,645135,994115,576135,994156,903MonthlyARPUperPaidSub($)DomesticStreamingARPU9.9110.0710.0710.1510.4210.8810.8710.969.2710.2410.95InternationalStreamingARPU8.108.098.298.739.448.989.209.697.808.649.58DomesticDVDARPU10.2510.1610.1210.1910.1910.1910.1910.1910.2510.1710.19ContentSpendStreamingContentCashSpend1,9822,1502,3502,8922,6432,9093,1033,5019,37412,15512,932StreamingContentAmortization1,3061,5511,6271,7851,7051,8772,0022,2596,2697,8429,237CashSpendtoAmortizationRatio1.5x1.4x1.4x1.6x1.6x1.6x1.6x1.6x1.5x1.6x1.4xYear-on-YearGrowthDomesticStreaming26.6%24.6%18.6%15.1%16.9%16.3%15.9%13.9%20.9%15.7%12.7%InternationalStreaming60.5%53.7%55.5%63.9%52.0%48.4%45.2%42.8%58.6%46.6%31.1%DomesticDVD-16.8%-17.3%-16.7%-16.9%-16.8%-16.9%-18.0%-18.6%-16.9%-17.5%-20.2%TotalRevenues34.7%32.3%30.3%32.2%29.3%28.3%27.7%26.6%32.3%27.9%21.1%SubscirbersbySegment(000s)DomesticStreamingSubs8.3%10.2%11.1%9.3%8.4%7.6%7.5%7.5%9.3%7.5%6.8%InternationalStreamingSubs38.7%44.3%43.9%38.7%36.3%31.6%29.1%26.6%38.7%26.6%21.8%DomesticDVDSubs-16.8%-17.3%-16.7%-16.9%-16.8%-16.9%-18.0%-18.6%-16.9%-17.5%-20.2%TotalStreamingSubs21.2%25.0%25.9%23.2%21.9%19.6%18.7%17.7%23.2%17.7%15.4%ARPUDomesticStreamingARPU16.0%14.6%7.9%5.1%8.0%8.0%8.0%6.0%10.4%6.9%5.0%InternationalStreamingARPU10.7%8.1%8.4%16.5%11.0%11.0%11.0%11.0%10.8%10.9%5.0%DomesticDVDARPU-0.6%-0.6%-0.4%-0.6%0.2%0.7%0.0%0.0%-0.8%0.2%0.0%ContentSpendStreamingContentCashSpend40.5%38.4%22.9%44.3%33.3%35.3%32.0%21.1%36.2%29.7%6.4%StreamingContentAmortization23.4%31.9%33.0%34.2%30.6%21.0%23.0%26.5%30.9%25.1%17.8%Qtr-on-QtrGrowthDomesticStreaming4.7%2.4%2.8%4.4%6.3%1.9%2.4%2.6%InternationalStreaming10.4%11.4%13.9%17.0%2.4%8.7%11.5%15.1%DomesticDVD-4.8%-4.7%-3.9%-4.7%-4.6%-4.8%-5.2%-5.4%TotalRevenuesSubscirbersbySegment(000s)DomesticStreamingSubs2.9%2.1%1.6%2.4%2.0%1.4%1.5%2.4%InternationalStreamingSubs8.0%8.6%8.5%9.0%6.0%4.9%6.5%6.8%DomesticDVDSubs-4.8%-4.7%-3.9%-4.7%-4.6%-4.8%-5.2%-5.4%TotalStreamingSubs5.3%5.3%5.1%5.8%4.2%3.3%4.3%4.9%ARPUDomesticStreamingARPU1.6%-0.1%0.8%2.7%4.4%-0.1%0.8%0.8%InternationalStreamingARPU-0.1%2.4%5.3%8.1%-4.8%2.4%5.3%8.1%DomesticDVDARPU-0.8%-0.4%0.7%0.0%0.0%0.0%0.0%0.0%ContentSpendStreamingContentCashSpend-1.1%8.4%9.3%23.1%-8.6%10.1%6.7%12.8%StreamingContentAmortization-1.9%18.8%4.9%9.7%-4.5%10.1%6.7%12.8%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201863 USInternet&InteractiveEntertainment10January201864 eCommerceUSInternet&InteractiveEntertainment10January201865 Amazon(AMZN,Buy,$1,440PT)EstimatesWearenotmakinganymaterialchangestoourrevenuegrowthoutlookatthispoint.OurQ4"17revenueestimateis$59.2bn,atthehigherendofthecompanyguideof$56bn-$60.5bn(incl.a1,000bpsimpacttoourYoYgrowthratefromWholeFoods).ForFY2018,weexpect+26%YoYrevenuegrowth(+18%YoYinFY2019).ForAWS,weestimate40%YoYrevenuegrowthinQ4"17.ForFY2018&FY2019,ouroperatingincomeexpectationsmovelowerreflectingourupdatedviewonamoreaggressivepaceofinvestmentsinanumberofareasincl.i.e.,licensed&originalcontent,sales&marketing,India,AWS,Alexa&Echoinvestmentsetc.alongwithincreasedfulfillmentcosts(AmazonFresh,PrimeNowexpansion,Same-Dayexpansion,sortationcentergrowth,etc.).ForQ12018,wenowexpectAmazontoreport$989minOI.Anycommentarybymanagementtohelpinvestorsbetterunderstandthecompany"sinvestmentphilosophyovertheshort-to-mediumtermwouldbeapositiveforthename.Figure76:Oldvs.NewEstimatesQ42017FY2018FY2019OldNew%ChangeOldNew%ChangeOldNew%ChangeCommentsTotalRevenue$59,209$59,2090.0%$222,116$222,4800.2%$262,952$262,8660.0%NomaterialchangestoourrevenuegrowthOnlineStores$34,867$34,8670.0%$123,163$123,1630.0%$140,246$139,581-0.5%PhysicalStores$4,338$4,3380.0%$15,996$16,3602.3%$16,796$17,3753.4%RetailThird-PartySellerServices$10,252$10,2520.0%$40,581$40,5810.0%$51,111$51,1110.0%RetailSubscriptionServices$3,195$3,1950.0%$12,949$12,9490.0%$16,781$16,7810.0%Other(NewDef)$1,607$1,6070.0%$6,586$6,5860.0%$9,357$9,3570.0%AWS$4,950$4,9500.0%$22,841$22,8410.0%$28,661$28,6610.0%NorthAmerica$35,825$35,8250.0%$131,151$132,0210.7%n/a$154,415n/aInternational$18,434$18,4340.0%$68,124$67,618-0.7%n/a$79,790n/aGrossMargin35.0%35.2%20bps37.7%37.8%17bps38.4%38.6%22bpsOperatingInc(GAAP)$1,280$1,3999.2%$5,811$4,199-27.7%$9,312$7,525-19.2%Q4guidancecallsforarangeof$300-1,650m(undisclosedimpactfromWholeFoods);wetakeamoreconservativestanceonexpensegrowthinFY2018&FY2019(i.e.,licensed&originalcontent,sales&marketing,India,AWS,Alexa&Echoinvestments,advertisingetc.)alongwithincreasedfulfillmentcosts(AmazonFresh&grocerybuild-out,PrimeNowexpansion,Same-Dayexpansion,sortationcentergrowth,etc.)GAAPEPS$1.65$1.8813.9%$8.86$5.74-35.2%$15.65$12.19-22.1%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201866 ValuationWeareincreasingourPTfrom$1,250to$1,440basedonapplyingmultiplevaluationframeworkstoourupdated2019estimates.Thethreevaluationapproachesincludeouradjustedmultiplesapproach(50%EV/GAAPEBITDAand50%EV/(FCF-SBC)),alongwithtwoSOTPframeworks(bybusinesslineandbyreportablesegment).Weprovidefurtherdetailoneachapproachbelow:Figure77:AmazonBlendedValuationApproachBlendedValuationValuationStandardMultiplesApproach(totalco.EV/GP,EV/EBITDA,EV/FCF)$1,440SOTPValuation:Method1$1,471SOTPValuation:Method2$1,416PriceTargetBasedonAverageof3ValuationApproaches$1,440Source:Companyreports,UBSestimatesPriceTargetAnalysisEV/EBITDAmultiplebasedonEV/GAAPEBITDAtoGrowthof0.91x.EV/FCFmultiplebasedonEV/FCFtoGrowthof0.36x.Figure78:AMZNPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$710$1,440$2,040%Upside/Downside-42%17%66%GAAPEBITDA(FY18E)$18,688$20,822$24,295EBITDAMargin8.8%9.4%10.5%GAAPEBITDA(FY19E)$21,226$27,004$31,741EBITDAMargin8.5%10.3%11.5%EV/2019EBITDA20.0x30.00x35.0xEBITDACAGR("17-"19)17.9%33.0%44.2%EV/EBITDAtoGrowth1.11x0.91x0.79xEnterpriseValue$424,529$810,117$1,110,938FCF-SBC(FY18E)$5,340$6,388$8,098FCF%ofSales2.5%2.9%3.5%FCF-SBC(FY19E)$6,243$8,868$11,730FCF%ofSales2.5%3.4%4.3%EV/2019FCF35.0x65.0x75.0xFCFCAGR("17-"19)134.6%179.6%221.6%EV/FCFtoGrowth0.26x0.36x0.34xEnterpriseValue$218,508$576,399$879,780WeightingsEVderivedfromGrossProfit0%0%0%EVderivedfromEBITDA50%50%50%EVderivedfromFCF50%50%50%EnterpriseValue$321,518$693,258$995,359AdjustedNetDebt-2019E$(36,934.37)$(36,934.37)$(36,934.37)Dividends$-$-$-Buyback(@CurrentPrice)$-$-$-AdjustedSharesOutstanding507507507Source:Companyreports,FactSet,UBSestimatesUSInternet&InteractiveEntertainment10January201867 SOTPValuationMethod1(BusinessLineValuation)WithinthisvaluationapproachweapplyarangeofEV/SalesmultiplestoAmazon"sThisapproachallowsforseparatevariousbusinesslines,whichwedefinesas1P,3P,AWS,andOther.Thisapproachmultiplestobeappliedtoeachallowsforseparatemultiplestobeappliedtoeachbusiness,importantgiventheirbusiness(1P,3P,AWS,&Other),varyingaccounting(i.e.,1Paccountedforgrossvs.3Paccountedfornet)andimportantgiventheirvaryingmargin(e.g.,100%grossmarginsforAWSvs.lowdoubledigitgrossmarginsforaccounting&marginprofilesthe1Pbusiness).Figure79:SOTPValuationMethod1(bybusinessline)SOTPValuation:Method12017E2018E2019E1PRevenues$113,453$139,523$156,956EV/2019Sales1.55xSalesCAGR("17-"19)17.6%EV/SalestoGrowth0.09xEnterpriseValue$243,2823PRevenues$31,609$40,581$51,111EV/2019Sales3.50xSalesCAGR("17-"19)27.2%EV/SalestoGrowth0.13xEnterpriseValue$178,888RetailSubscriptions$9,740$12,949$16,781EV/2019Sales4.00xSalesCAGR("17-"19)31.3%EV/SalestoGrowth0.13xEnterpriseValue$67,123AWSRevenues$17,295$22,841$28,661EV/2019Sales6.0xSalesCAGR("17-"19)28.7%EV/SalestoGrowth0.21xEnterpriseValue$171,969OtherRevenues$4,525$6,586$9,357EV/2019Sales5.00xSalesCAGR("17-"19)43.8%EV/SalestoGrowth0.11xEnterpriseValue$46,785TotalEnterpriseValue$708,047NetDebt/(Cash)$(36,934)MarketCap(mm)$744,982DilutedSharesOutstanding507Valuation$1,471Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201868 SOTPValuationMethod2(ReportableSegmentValuation)WithinthisvaluationapproachweapplyacombinationofEV/SalesandEV/CSOIThisapproachallowsforseparatemultiplestoAmazon"svariousreportablesegments,whichthecompanydefinesasmultiplestobeappliedtoeachNorthAmerica,International,andAWS.Thisapproachallowsforseparatereportablesegment(NA,multiplestobeappliedtoeachreportablesegment,importantgiventheirvaryingInternational,&AWS),importantstagesofinvestment(e.g.,InternationalbusinessreportedresultscontinuetobegiventheirvaryingstagesofimpactedbyinvestmentsinIndiaandChina).investmentFigure80:SOTPValuationMethod2(byreportablesegment)SOTPValuation:Method22017E2018E2019ENorthAmericaCSOI$4,997$5,909$7,109EV/2019CSOI20.0xCSOICAGR("17-"19)19.3%EV/CSOItoGrowth1.04xEnterpriseValue$142,183InternationalRevenue$54,694$67,618$79,790EV/2019Sales3.75xSalesCAGR("17-"19)20.8%EV/SalestoGrowth0.18xEnterpriseValue$299,211AWSCSOI$4,676$5,946$8,542EV/2019CSOI28.00xCSOICAGR("17-"19)35.2%EV/CSOItoGrowth0.80xEnterpriseValue$239,165TotalEnterpriseValue$680,559NetDebt/(Cash)$(36,934)MarketCap(mm)$717,493DilutedSharesOutstanding507Valuation$1,416Source:Companyreports,UBSestimatesFigure81:AMZNEarningsPreview–UBSvs.ConsQ42017FY2018FY2019UBSEstConsEst%UBSvsConsUBSEstConsEstUBSEstConsEstTotalRevenue$59,209$59,747-0.9%$222,480$228,335$262,866$276,136OnlineStores$34,867$35,331-1.3%$123,163$125,937$139,581$145,029PhysicalStores$4,338$4,366-0.6%$16,360$16,725$17,375$17,083RetailThird-PartySellerServices$10,252$10,2160.4%$40,581$41,259$51,111$52,789RetailSubscriptionServices$3,195$3,1082.8%$12,949$12,997$16,781$17,076Other(NewDef)$1,607$1,5761.9%$6,586$6,206$9,357$8,853AWS$4,950$4,964-0.3%$22,841$23,575$28,661$30,761NorthAmerica$35,825$36,165-0.9%$132,021$135,873$154,415$162,299International$18,434$17,8103.5%$67,618$66,185$79,790$79,380GrossMargin35.2%35.3%-6bps37.8%37.6%38.6%38.6%OperatingInc(GAAP)$1,399$1,508-7.3%$4,199$6,580$7,525$10,919GAAPEPS$1.88$1.851.6%$5.74$7.97$12.19$13.74Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201869 SummaryModelsFigure82:P&LSummaryAmazonP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ENetRevenue35,71437,95543,74459,20947,82849,97454,83669,841176,622222,480262,866GrossProfit(UBS)13,27414,50416,19520,84018,37419,64720,90525,28064,81384,206101,483FulfillmentExpenses(4,534)(4,897)(6,190)(7,922)(6,433)(6,684)(7,806)(9,828)(23,543)(30,751)(36,067)MarketingExpenses(1,826)(2,096)(2,344)(3,434)(2,631)(2,749)(3,016)(4,190)(9,700)(12,586)(14,601)Tech&ContentExpenses(4,372)(4,916)(5,349)(5,921)(6,218)(6,523)(6,855)(7,333)(20,558)(26,928)(31,983)G&AExpenses(709)(755)(848)(829)(949)(994)(1,063)(978)(3,141)(3,984)(4,584)OperatingInc(UBS)1,8411,8521,4772,7522,1582,7112,1822,9727,92210,02214,324Stock-BasedComp(792)(1,158)(1,085)(1,280)(1,123)(1,542)(1,383)(1,574)(4,315)(5,621)(6,618)Otheropinc(expense),net(44)(66)(45)(74)(46)(40)(64)(52)(229)(202)(182)OperatingInc(GAAP)1,0056283471,3999891,1307351,3453,3794,1997,525Pre-TaxIncome9536663161,0297209485719942,9643,2336,699IncomeTaxProvision(229)(467)(58)(96)(76)(101)(81)(105)(850)(363)(541)Adj.NetInc(UBS)1,4531,1191,3412,2311,7652,3621,8772,4486,1438,45212,676Adj.EPS(UBS)2.972.272.714.503.554.743.764.8912.4616.9525.14DilutedSharesOutstanding490492494496497498499501493499504NetInc(GAAP)7241972569326438444888872,1092,8626,150EPS(GAAP)1.480.400.521.881.291.700.981.774.285.7412.19AdjustedEBITDA4,2764,4854,3896,6526,2216,6906,2017,53419,80226,64633,803GAAPEBITDA3,4403,2613,2595,2995,0535,1094,7545,90715,25920,82227,004Capex(1,861)(2,501)(2,659)(2,960)(2,272)(2,374)(3,224)(3,352)(9,981.4)(11,221.6)(12,598.9)FreeCashFlow(3,451)1,3281,19211,281(2,039)5,4013,46612,12910,35018,95724,739FCFminusSBC(5,112)(1,105)(1,209)8,560(4,701)2,1832958,6111,1346,3888,868%ofRevenueGrossProfit(UBS)37.2%38.2%37.0%35.2%38.4%39.3%38.1%36.2%36.7%37.8%38.6%FulfillmentExpenses-12.7%-12.9%-14.2%-13.4%-13.4%-13.4%-14.2%-14.1%-13.3%-13.8%-13.7%MarketingExpenses-5.1%-5.5%-5.4%-5.8%-5.5%-5.5%-5.5%-6.0%-5.5%-5.7%-5.6%Tech&ContentExpenses-12.2%-13.0%-12.2%-10.0%-13.0%-13.1%-12.5%-10.5%-11.6%-12.1%-12.2%G&AExpenses-2.0%-2.0%-1.9%-1.4%-2.0%-2.0%-1.9%-1.4%-1.8%-1.8%-1.7%OperatingInc(UBS)5.2%4.9%3.4%4.6%4.5%5.4%4.0%4.3%4.5%4.5%5.4%Stock-BasedComp-2.2%-3.1%-2.5%-2.2%-2.3%-3.1%-2.5%-2.3%-2.4%-2.5%-2.5%Otheropinc(expense),net-0.1%-0.2%-0.1%-0.1%-0.1%-0.1%-0.1%-0.1%-0.1%-0.1%-0.1%OperatingInc(GAAP)2.8%1.7%0.8%2.4%2.1%2.3%1.3%1.9%1.9%1.9%2.9%Pre-TaxIncome2.7%1.8%0.7%1.7%1.5%1.9%1.0%1.4%1.7%1.5%2.5%IncomeTaxProvision-0.6%-1.2%-0.1%-0.2%-0.2%-0.2%-0.1%-0.2%-0.5%-0.2%-0.2%Adj.NetInc(UBS)4.1%2.9%3.1%3.8%3.7%4.7%3.4%3.5%3.5%3.8%4.8%NetInc(GAAP)2.0%0.5%0.6%1.6%1.3%1.7%0.9%1.3%1.2%1.3%2.3%AdjustedEBITDA12.0%11.8%10.0%11.2%13.0%13.4%11.3%10.8%11.2%12.0%12.9%GAAPEBITDA9.6%8.6%7.5%8.9%10.6%10.2%8.7%8.5%8.6%9.4%10.3%Capex-5.2%-6.6%-6.1%-5.0%-4.8%-4.8%-5.9%-4.8%-5.7%-5.0%-4.8%FreeCashFlow-9.7%3.5%2.7%19.1%-4.3%10.8%6.3%17.4%5.9%8.5%9.4%FCFminusSBC-14.3%-2.9%-2.8%14.5%-9.8%4.4%0.5%12.3%0.6%2.9%3.4%Year-on-YearGrowthNetRevenue22.6%24.8%33.7%35.4%33.9%31.7%25.4%18.0%29.9%26.0%18.2%GrossProfit(UBS)29.4%29.2%41.4%41.0%38.4%35.5%29.1%21.3%35.8%29.9%20.5%FulfillmentExpenses27.0%32.6%48.4%43.3%41.9%36.5%26.1%24.1%38.8%30.6%17.3%MarketingExpenses32.3%43.0%41.8%42.4%44.1%31.1%28.7%22.0%40.4%29.7%16.0%Tech&ContentExpenses36.2%42.0%44.5%46.1%42.2%32.7%28.1%23.9%42.5%31.0%18.8%G&AExpenses60.4%51.9%53.1%32.8%33.9%31.7%25.4%18.0%48.4%26.9%15.1%OperatingInc(UBS)10.9%-12.1%6.8%26.5%17.2%46.4%47.7%8.0%8.1%26.5%42.9%Stock-BasedComp45.6%50.8%39.8%44.3%41.8%33.1%27.4%23.0%45.0%30.3%17.7%Otheropinc(expense),net-2.2%20.0%40.6%116.6%4.4%-39.8%42.6%-28.7%37.7%-11.5%-10.2%OperatingInc(GAAP)-6.2%-51.1%-39.7%11.5%-1.6%79.9%111.8%-3.8%-19.3%24.3%79.2%Pre-TaxIncome-9.8%-43.5%-35.6%-11.7%-24.4%42.3%80.8%-3.4%-23.8%9.1%107.2%IncomeTaxProvision-51.8%52.1%-74.7%-76.9%-66.9%-78.3%39.6%10.0%-40.4%-57.2%49.0%Adj.NetInc(UBS)55.9%-28.0%46.1%50.0%21.4%111.2%40.0%9.8%25.6%37.6%50.0%Adj.EPS(UBS)53.2%-29.3%43.5%47.1%19.8%108.6%38.5%8.6%23.3%36.0%48.3%NetInc(GAAP)41.1%-77.0%1.6%24.4%-11.2%328.6%90.7%-4.8%-11.1%35.7%114.9%EPS(GAAP)38.7%-77.6%-0.3%22.0%-12.4%323.4%88.7%-5.8%-12.7%34.1%112.5%AdjustedEBITDA22.6%11.7%26.6%48.7%45.5%49.2%41.3%13.3%28.2%34.6%26.9%GAAPEBITDA18.7%2.1%22.6%49.2%46.9%56.7%45.9%11.5%24.0%36.5%29.7%Capex57.8%46.2%44.4%47.7%22.1%-5.1%21.2%13.2%48.2%12.4%12.3%FreeCashFlow3.4%-24.3%-57.7%30.5%-40.9%306.7%190.8%7.5%4.8%83.2%30.5%FCFminusSBC8.5%582.1%-214.1%27.5%-8.0%-297.6%-124.4%0.6%-60.9%463.2%38.8%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201870 Figure83:Revenue&KeyMetricsSummaryAmazonRevenue&KeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ENetRevenueOnlineStores22,82623,75426,39234,86726,47827,19830,08739,399107,839123,163139,581PhysicalStoresn/an/a1,2764,3383,9053,9833,7004,7725,61416,36017,375RetailThird-PartySellerServices6,4386,9917,92810,2528,5309,08810,14812,81531,60940,58151,111RetailSubscriptionServices1,9392,1652,4413,1952,7152,9233,2224,0909,74012,94916,781Other8509451,1231,6071,2581,3701,6282,3294,5256,5869,357AWS3,6614,1004,5844,9504,9425,4126,0516,43617,29522,84128,661NetRevenue35,71437,95543,74459,20947,82849,97454,83669,841176,622222,480262,866ProductSales23,73424,74528,76836,09727,49128,14931,09640,790113,344127,526144,527ServicesSales11,98013,21014,97623,11220,33721,82523,74129,05163,27894,954118,339NorthAmerica20,99222,37025,44635,82528,45129,86132,05541,654104,633132,021154,415International11,06111,48513,71418,43414,43514,70116,73121,75254,69467,61879,790Year-on-YearGrowthOnlineStores14.6%16.6%22.2%18.0%16.0%14.5%14.0%13.0%17.9%14.2%13.3%PhysicalStoresn/an/an/an/an/an/a190.0%10.0%n/a191.4%6.2%RetailThird-PartySellerServices34.1%37.5%40.3%37.5%32.5%30.0%28.0%25.0%24.3%23.6%18.0%RetailSubscriptionServices49.2%51.3%59.3%50.0%40.0%35.0%32.0%28.0%0.0%0.0%0.0%Other56.0%51.0%58.4%50.0%48.0%45.0%45.0%45.0%0.0%0.0%0.0%AWS42.7%42.1%41.9%40.0%35.0%32.0%32.0%30.0%41.5%32.1%25.5%NetRevenue22.6%24.8%33.7%35.4%33.9%31.7%25.4%18.0%29.9%26.0%18.2%ProductSales15.3%17.2%28.8%17.9%15.8%13.8%8.1%13.0%19.7%12.5%13.3%ServicesSales40.2%42.2%44.3%76.3%69.8%65.2%58.5%25.7%53.1%50.1%24.6%NorthAmerica23.5%26.6%34.8%36.5%35.5%33.5%26.0%16.3%31.1%26.2%17.0%International15.6%16.7%29.3%32.0%30.5%28.0%22.0%18.0%24.3%23.6%18.0%Qtr-on-QtrGrowthOnlineStores-22.7%4.1%11.1%32.1%-24.1%2.7%10.6%31.0%PhysicalStoresn/an/an/a240.0%-10.0%2.0%-7.1%29.0%RetailThird-PartySellerServices-13.7%8.6%13.4%29.3%-16.8%6.5%11.7%26.3%RetailSubscriptionServices-9.0%11.7%12.7%30.9%-15.0%7.7%10.2%26.9%Other-20.6%11.2%18.8%43.1%-21.7%8.9%18.8%43.1%AWS3.5%12.0%11.8%8.0%-0.2%9.5%11.8%6.4%NetRevenue-18.4%6.3%15.3%35.4%-19.2%4.5%9.7%27.4%ProductSales-22.5%4.3%16.3%25.5%-23.8%2.4%10.5%31.2%ServicesSales-8.6%10.3%13.4%54.3%-12.0%7.3%8.8%22.4%NorthAmerica-20.0%6.6%13.8%40.8%-20.6%5.0%7.3%29.9%International-20.8%3.8%19.4%34.4%-21.7%1.8%13.8%30.0%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201871 USInternet&InteractiveEntertainment10January201872 eBay(EBAY,Buy,$44PT)EstimatesWemakenomaterialchangestoourforwardoperatingestimatesatthispoint.ValuationWeincreaseourPTfrom$40to$44basedonouradjustedblendedvaluationapproach(50%EV/GAAPEBITDAand50%EV/(FCF-SBC))appliedtoour2019estimates(unchanged).EV/GAAPEBITDAmultipleof10xbasedonEV/GAAPEBITDAto-Growthof1.03xEV/(FCF-SBC)multipleof19xbasedonEV/(FCF-SBC)-to-Growthof1.74xFigure84:EBAYPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$30$44$56%Upside/Downside-20%17%49%GAAPEBITDA(FY18E)$2,905$3,242$3,457EBITDAMargin29.0%31.4%32.5%GAAPEBITDA(FY19E)$3,034$3,581$3,932EBITDAMargin29.0%32.5%34.0%EV/2019EBITDA8.50x10.00x12.00xEBITDACAGR("17-"19)1.0%9.7%15.0%EV/EBITDAtoGrowth8.58x1.03x0.80xEnterpriseValue$25,790$35,806$47,181FCF-SBC(FY18E)$1,803$2,073$2,287FCF%ofSales18.0%20.1%21.5%FCF-SBC(FY19E)$1,883$2,244$2,544FCF%ofSales18.0%20.4%22.0%EV/2019FCF13.00x19.00x22.00xFCFCAGR("17-"19)1.6%10.9%18.1%EV/FCFtoGrowth7.93x1.74x1.21xEnterpriseValue$24,482$42,627$55,969WeightingsEVderivedfromEBITDA50%50%50%EVderivedfromFCF50%50%50%EnterpriseValue$25,136$39,216$51,575CapitalStructureAdjustmentsAdjustedNetDebt-2019E$(5,573)$(5,573)$(5,573)AdjustedSharesOutstanding1,0291,0291,029Source:Companyreports,FactSet,UBSestimatesUSInternet&InteractiveEntertainment10January201873 Figure85:EBAYEarningsPreview–UBSvs.ConsQ42017FY2018FY2019UBSEstConsEst%UBSvsConsUBSEstConsEstUBSEstConsEstTotalRevenue$2,612$2,6100.1%$10,329$10,257$11,013$10,929NetTransactions$2,046$2,042n/a$8,105$8,026$8,659$8,610MS&O$566$567n/a$2,223$2,272$2,354$2,463GMV$23,896$24,104n/a$94,503$93,913$101,263$99,641GAAPEBITDA$869$8443.0%$3,242$3,230$3,581$3,545AdjustedEBITDA$1,005$9782.7%$3,781$3,723$4,144$3,988GAAPEPS$0.42$0.44-4.1%$1.59$1.71$1.84$1.90AdjustedEPS$0.58$0.59-1.2%$2.17$2.23$2.47$2.49Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201874 SummaryModelsFigure86:P&LSummaryeBayP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ENetRevenue2,2172,3282,4092,6122,4162,5172,6002,7969,56610,32911,013GrossProfit(UBS)1,7201,7881,8732,0311,8661,9262,0192,1747,4127,9848,514Marketing(541)(609)(608)(632)(586)(667)(663)(657)(2,390)(2,573)(2,683)ProductDevelopment(242)(263)(271)(269)(261)(282)(290)(285)(1,045)(1,118)(1,170)G&A(212)(223)(214)(235)(227)(237)(227)(247)(884)(939)(980)Provisionfortrans/loanloss(62)(63)(68)(62)(65)(65)(71)(64)(255)(265)(274)Other2510291081212OperatingInc(UBS)6656357138337296837699202,8463,1013,420Stock-BasedComp(101)(137)(118)(136)(109)(148)(126)(143)(492)(527)(551)Other(18)(20)(17)(21)(13)(18)(9)(6)(76)(46)(26)OperatingInc(GAAP)5464785786766065176347702,2782,5282,842Pre-TaxIncome5584606976385664785967332,3532,3722,718IncomeTaxProvision477(433)(174)(191)(170)(143)(179)(220)(321)(712)(815)Adj.NetInc(UBS)5384935146155324975656832,1602,2772,547Adj.EPS(UBS)0.490.450.480.580.510.470.540.662.002.172.47DilutedSharesOutstanding1,1021,0911,0781,0581,0541,0491,0451,0411,0821,0471,032NetInc(GAAP)1,035275234473963344175132,0321,6611,902EPS(GAAP)0.940.020.490.420.380.320.400.491.881.591.84GAAPSharesOutstanding1,1021,0911,0781,0581,0541,0491,0451,0411,0821,0471,032AdjustedEBITDA8127888701,0058898489391,1053,475.13,780.54,144.1GAAPEBITDA7096467518697786928119612,9753,2423,581Capex(135)(182)(157)(183)(169)(176)(182)(196)(656.8)(723.0)(743.4)FreeCashFlow4475177206314247627146992,315.22,599.32,794.6FCFminusSBC3463806024953146155885561,8232,0732,244%ofRevenueGrossProfit(UBS)77.6%76.8%77.8%77.8%77.2%76.5%77.7%77.8%77.5%77.3%77.3%Marketing-24.4%-26.2%-25.2%-24.2%-24.3%-26.5%-25.5%-23.5%-25.0%-24.9%-24.4%ProductDevelopment-10.9%-11.3%-11.2%-10.3%-10.8%-11.2%-11.1%-10.2%-10.9%-10.8%-10.6%G&A-9.6%-9.6%-8.9%-9.0%-9.4%-9.4%-8.7%-8.9%-9.2%-9.1%-8.9%Provisionfortrans/loanloss-2.8%-2.7%-2.8%-2.4%-2.7%-2.6%-2.7%-2.3%-2.7%-2.6%-2.5%Other0.1%0.2%0.0%0.0%0.1%0.3%0.0%0.0%0.1%0.1%0.1%OperatingInc(UBS)30.0%27.3%29.6%31.9%30.2%27.1%29.6%32.9%29.7%30.0%31.0%Stock-BasedComp-4.6%-5.9%-4.9%-5.2%-4.5%-5.9%-4.9%-5.1%-5.1%-5.1%-5.0%Other-0.8%-0.9%-0.7%-0.8%-0.6%-0.7%-0.3%-0.2%-0.8%-0.5%-0.2%OperatingInc(GAAP)24.6%20.5%24.0%25.9%25.1%20.5%24.4%27.6%23.8%24.5%25.8%Pre-TaxIncome25.2%19.8%28.9%24.4%23.4%19.0%22.9%26.2%24.6%23.0%24.7%IncomeTaxProvision21.5%-18.6%-7.2%-7.3%-7.0%-5.7%-6.9%-7.9%-3.4%-6.9%-7.4%Adj.NetInc(UBS)24.3%21.2%21.3%23.5%22.0%19.7%21.7%24.4%22.6%22.0%23.1%NetInc(GAAP)46.7%1.2%21.7%17.1%16.4%13.3%16.0%18.4%21.2%16.1%17.3%AdjustedEBITDA36.6%33.8%36.1%38.5%36.8%33.7%36.1%39.5%36.3%36.6%37.6%GAAPEBITDA32.0%27.7%31.2%33.3%32.2%27.5%31.2%34.4%31.1%31.4%32.5%Capex-6.1%-7.8%-6.5%-7.0%-7.0%-7.0%-7.0%-7.0%-6.9%-7.0%-6.8%FreeCashFlow20.2%22.2%29.9%24.2%17.5%30.3%27.5%25.0%24.2%25.2%25.4%FCFminusSBC15.6%16.3%25.0%19.0%13.0%24.4%22.6%19.9%19.1%20.1%20.4%Year-on-YearGrowthNetRevenue3.7%4.4%8.7%9.1%9.0%8.1%7.9%7.0%6.5%8.0%6.6%GrossProfit(UBS)2.9%2.1%8.0%8.5%8.5%7.7%7.8%7.0%5.5%7.7%6.6%Marketing4.6%2.2%5.6%8.2%8.3%9.5%9.1%3.9%5.2%7.6%4.3%ProductDevelopment16.3%4.8%9.3%8.0%8.0%7.2%7.0%6.0%9.3%7.0%4.7%G&A17.8%20.5%11.5%9.9%7.2%6.4%6.1%5.3%14.7%6.2%4.3%Provisionfortrans/loanloss19.2%-1.6%21.4%5.3%4.1%4.0%4.0%3.3%10.4%3.8%3.3%OperatingInc(UBS)-6.9%-2.2%7.5%9.0%9.6%7.5%7.9%10.5%2.0%9.0%10.3%Stock-BasedComp14.8%21.2%12.4%23.8%8.1%7.7%7.2%5.3%18.3%7.0%4.6%OperatingInc(GAAP)-11.1%-10.0%6.6%5.9%11.0%8.2%9.7%14.0%-2.0%11.0%12.4%Pre-TaxIncome-5.6%-12.0%30.8%-68.2%1.4%3.8%-14.5%15.0%-35.6%0.8%14.6%IncomeTaxProvision-537.6%403.5%51.3%-104.9%-135.6%-66.9%2.7%15.0%-108.8%121.4%14.6%Adj.NetInc(UBS)-2.2%-0.6%1.0%2.3%-1.1%0.8%9.9%11.1%0.2%5.4%11.9%Adj.EPS(UBS)3.9%4.7%6.7%8.1%3.4%4.8%13.4%13.0%5.9%9.0%13.5%NetInc(GAAP)114.7%-93.8%25.1%-92.5%-61.7%1138.1%-20.3%15.0%-72.1%-18.3%14.6%Adj.EPS(UBS)128.0%-93.5%32.2%-92.1%-60.0%1187.5%-17.8%16.9%-70.5%-15.5%16.3%AdjustedEBITDA-6.6%-2.1%6.1%9.0%9.5%7.6%7.9%9.9%1.7%8.8%9.6%GAAPEBITDA-9.2%-7.4%5.2%6.7%9.7%7.1%8.0%10.6%-1.1%9.0%10.4%Capex-14.6%23.8%-15.1%34.4%25.3%-3.2%15.9%7.0%4.9%10.1%2.8%FreeCashFlow-7.5%-16.2%16.7%30.4%-5.2%47.4%-0.8%10.8%5.2%12.3%7.5%FCFminusSBC-12.4%-24.6%17.6%32.3%-9.1%61.8%-2.4%12.3%2.1%13.7%8.2%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201875 Figure87:Revenue&KeyMetricsSummaryeBayRevenueSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ENetRevenueMarketplaces2,2172,3282,4092,6122,4162,5172,6002,7969,56610,32911,013NetTransRev1,7291,8171,8792,0461,8931,9792,0372,1977,4718,1058,659MktgSvcs&Other4885115305665235385635992,0952,2232,354NetRevenue2,2172,3282,4092,6122,4162,5172,6002,7969,56610,32911,013MarketplacesGMV(ex-vehicles)20,89721,40121,68023,89622,51023,03123,29725,66587,87494,503101,263TakeRate8.3%8.5%8.7%8.6%8.4%8.6%8.7%8.6%8.5%8.6%8.6%GlobalActiveAccounts(millions)165.0167.0168.0170.4172.6175.2177.8180.4170.4180.4195.3GMVMarketplaces19,98020,39220,51822,61421,52821,90121,99524,24283,50489,66795,986StubHub9171,0091,1621,2829811,1301,3011,4234,3704,8365,277US8,8368,8078,7799,7609,4819,5129,42010,41436,18238,82741,010International12,06112,59412,90114,13613,02913,52013,87715,25151,69255,67660,253Year-on-YearGrowthMarketplaces3.7%4.4%8.7%9.1%9.0%8.1%7.9%7.0%6.5%8.0%6.6%NetTransRev3.1%4.1%7.7%9.1%9.5%8.9%8.4%7.4%6.1%8.5%6.8%MktgSvcs&Other6.1%5.6%12.3%9.1%7.2%5.3%6.3%5.8%8.3%6.1%5.9%NetRevenue3.7%4.4%8.7%9.1%9.0%8.1%7.9%7.0%6.5%8.0%6.6%MarketplacesGMV(ex-vehicles)2.2%2.6%8.1%7.3%7.7%7.6%7.5%7.4%5.1%7.5%7.2%GlobalActiveAccounts(millions)1.9%1.8%5.0%5.2%4.6%4.9%5.8%5.9%5.2%5.9%8.2%GMVMarketplaces2.0%3.0%8.5%7.5%7.8%7.4%7.2%7.2%5.3%7.4%7.0%StubHub5.5%-4.8%1.8%3.5%7.0%12.0%12.0%11.0%1.4%10.7%9.1%US3.6%3.2%4.8%6.8%7.3%8.0%7.3%6.7%4.6%7.3%5.6%International1.1%2.3%10.6%7.6%8.0%7.3%7.6%7.9%5.4%7.7%8.2%Qtr-on-QtrGrowthMarketplaces-7.4%5.0%3.5%8.4%-7.5%4.2%3.3%7.5%NetTransRev-7.8%5.1%3.4%8.9%-7.5%4.6%2.9%7.9%MktgSvcs&Other-6.0%4.7%3.7%6.8%-7.6%2.9%4.7%6.3%NetRevenue-7.4%5.0%3.5%8.4%-7.5%4.2%3.3%7.5%MarketplacesGMV(ex-vehicles)-6.2%2.4%1.3%10.2%-5.8%2.3%1.2%10.2%GlobalActiveAccounts(millions)1.9%1.2%0.6%1.4%1.3%1.5%1.5%1.5%GMVMarketplaces-5.0%2.1%0.6%10.2%-4.8%1.7%0.4%10.2%StubHub-26.0%10.0%15.2%10.4%-23.5%15.2%15.2%9.4%US-3.3%-0.3%-0.3%11.2%-2.9%0.3%-1.0%10.6%International-8.2%4.4%2.4%9.6%-7.8%3.8%2.6%9.9%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201876 USInternet&InteractiveEntertainment10January201877 PayPal(PYPL,Neutral,$83PT)EstimatesWemodestlylowerourrevenueestimatestofactorinthesaleoftheUSconsumercreditportfolioandpartnershipwithSynchrony.Ournewrevenueestimatesincorporatemanagement"sFY18outlookforrevenuegrowthof~16.5%YoY,whichincludes3.5%negativeimpactfromSynchronydeal.TheprimaryrevenueimpactofthedealisthatPayPalwillnowbeinaprofitshareagreementrelatedtotheUSconsumercreditportfolio.Thatsaid,thisdealisexpectedtofreeupcapitaltobeallocatedtohigherreturninginvestmentsand/orreturningcashtoshareholders.ChangestoEBITDAreflectlowerrevs,offsetbyreducedloanlossexpenserelatedtoUSconsumercreditbusinesspost-dealcloseinQ3aswellasmgmt"scontinuedeffortstodriveefficienciesandleveragerelatedtootheropex.Figure88:Oldvs.NewEstimatesQ42017FY2018FY2019OldNew%ChangeOldNew%ChangeOldNew%ChangeCommentsTPV$129,234$129,2340.0%$565,204$562,662-0.4%$699,047$690,379-1.2%Reflecting~25%growthYoYinFY2018,whichcomparestomanagements2018outlookofmid-to-high20%growthYoY;webelievetheexpandedstrategicpartnershipagreementswithVisa,MasterCard&Discover(amongothers)aswellasVenmoadoptionwillpositivelyimpactTPVgrowthlongerterm,byexpandingPYPL"sdigital&POSacceptance;Downwardadjustmentreflectsslightlylowernetnewregisteredaccountsin2019outofconservatism(weexpect29mnetnewactiveregisteredaccountsin2018and2019)Payments-Revenue$3,632$3,6320.0%$15,635$15,121-3.3%$18,464$17,814-3.5%Reflectsmanagement"s2018outlookforrevenuegrowthof~16.5%YoY,whichincludes3.5%negativeimpactfrompartnership/announceddealwithSynchronyTransactionRevenues$3,208$3,2080.0%$13,781$13,687-0.7%$16,326$16,5491.4%DrivenbyslightlylowerTPVoffsetbyVenmomonetizationbeginningtoeasesometransactiontakeratepressureYoY(P2Pgrowth,mixshifttolargermerchants,Braintreegrowth,TIO)OtherValueAddedServices$425$4250.0%$1,854$1,434-22.6%$2,138$1,264-40.9%Reflectspartnership/dealwithSynchronyrelatedtoUSconsumercreditportfolio;Underthisdeal,SynchronyfundsthecapitaltooriginatetheloansrelatedtoUSconsumercreditandsharesintheprofitswithPayPalGAAPEBITDA$750$1,03437.9%$3,386$3,165-6.5%$3,987$4,1193.3%Reflectslowerrevenue;Operatingleverageexpectedin2018&2019(adj.forone-timeitems)drivenbymanagement"scontinuedeffortstodriveefficienciesandleveragerelatedtootheroperatingexpensesAdj.EBITDA$930$9360.7%$4,146$3,979-4.0%$4,795$4,9332.9%GAAPEPS$0.37$0.5651.0%$1.74$1.63-6.5%$2.10$2.299.0%~$5.3bnremainingonrepurchaseauthorizations(wemodel~$300mofsharebuybacksperquarter)Adj.EPS$0.52$0.520.8%$2.31$2.23-3.4%$2.69$2.887.1%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201878 ValuationWeincreaseourPTfrom$71to$83aswerollforwardourvaluationframeworktobebasedonourweightedaverageframework(50%EV/GAAPEBITDAand50%EV/(FCF-SBC))appliedtoourrevisedFY2019operatingestimates:EV/GAAPEBITDAof18.0x(0.93xtoGrowth)EV/(FCF-SBC)of24.0x(0.19xtoGrowth)Figure89:PYPLPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$55$83$124%Upside/Downside-30%5%58%GAAPEBITDA(FY18E)$2,758$3,165$3,538EBITDAMargin19.0%20.9%22.5%GAAPEBITDA(FY19E)$3,014$4,119$4,721EBITDAMargin18.0%23.1%25.0%EV/2019EBITDA13.0x18.00x23.0xEBITDACAGR("17-"19)2.0%19.3%27.7%EV/EBITDAtoGrowth6.45x0.93x0.83xEnterpriseValue$39,183$74,140$108,573FCF-SBC(FY18E)$2,903$3,735$4,403FCF%ofSales20.0%24.7%28.0%FCF-SBC(FY19E)$3,349$3,902$5,287FCF%ofSales20.0%21.9%28.0%EV/2019FCF18.0x24.0x30.0xFCFCAGR("17-"19)107.7%124.2%161.0%EV/FCFtoGrowth0.17x0.19x0.19xEnterpriseValue$60,281$93,636$158,612WeightingsEVderivedfromGAAPEBITDA50%50%50%EVderivedfromFCF-SBC50%50%50%EnterpriseValue$49,732$83,888$133,593CapitalStructureAdjustmentsAdjustedNetDebt-2019E$(16,972)$(16,972)$(16,972)AdjustedSharesOutstanding1,2121,2121,212Source:Companyreports,FactSet,UBSestimatesFigure90:PYPLQ42017EarningsPreviewQ42017FY2018FY2019UBSEstConsEst%UBSvsConsUBSEstConsEstUBSEstConsEstTPV$129,234$128,4180.6%$562,662$564,752$690,379$698,014Payments-Revenue$3,632$3,6290.1%$15,121$15,394$17,814$18,030TransactionRevenues$3,208$3,1860.7%$13,687$13,660$16,549$16,221OtherValueAddedServices$425$445-4.5%$1,434$1,696$1,264$1,707GAAPEBITDA$1,034$73740.3%$3,165$3,306$4,119$3,747Adj.EBITDA$936949.7-1.4%$3,979$4,073$4,933$4,796GAAPEPS$0.56$0.4524.7%$1.63$1.70$2.29$2.17Adj.EPS$0.52$0.520.0%$2.23$2.26$2.88$2.76Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201879 SummaryModelsFigure91:P&LSummaryPayPalP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ENetRevenue2,9753,1363,2393,6323,5893,7153,6794,13812,98215,12117,814Transactionexpense(987)(1,064)(1,102)(1,293)(1,279)(1,355)(1,401)(1,649)(4,446)(5,683)(7,042)Transactionandloanlosses(300)(308)(363)(296)(280)(291)(331)(366)(1,267)(1,269)(1,569)Customersupportandoperations(287)(301)(308)(316)(292)(310)(313)(319)(1,212)(1,234)(1,302)Salesandmarketing(210)(251)(242)(254)(230)(273)(251)(263)(957)(1,017)(1,108)Productdevelopment(169)(173)(176)(184)(179)(179)(182)(189)(702)(728)(795)Generalandadministrative(223)(231)(239)(353)(334)(337)(305)(253)(1,046)(1,228)(1,080)Depreciationandamortization(181)(198)(191)(215)(204)(220)(204)(231)(785)(858)(966)OperatingInc(UBS)6436596467518137827108832,6993,1884,011Stock-BasedComp(147)(180)(195)(205)(199)(211)(206)(194)(727)(809)(813)OperatingInc(GAAP)4314304238165935404876752,1002,2943,138Pre-TaxIncome4384474518416155655147302,1772,4243,389IncomeTaxProvision(54)(36)(71)(151)(111)(102)(93)(131)(312)(436)(610)Adj.NetInc(UBS)5345545606376856616057692,2852,7213,495Adj.EPS(UBS)0.440.460.460.520.560.540.500.631.872.232.88DilutedSharesOutstanding1,2161,2151,2231,2241,2221,2211,2191,2181,2191,2201,214NetInc(GAAP)3844113806905054634225981,8651,9882,779EPS(GAAP)0.320.340.310.560.410.380.350.491.531.632.29AdjustedEBITDA8018358119369989848981,1003,383.33,979.24,932.9GAAPEBITDA6146316171,0348007636949092,8963,1654,119Capex(148)(174)(165)(182)(215)(223)(221)(248)(668.3)(907.3)(1,068.8)FreeCashFlow603747841(688)(606)(139)4,5857041,503.64,544.44,714.3FCFminusSBC456567646(893)(805)(350)4,3805107763,7353,902%ofRevenueTransactionexpense-33.2%-33.9%-34.0%-35.6%-35.6%-36.5%-38.1%-39.8%-34.2%-37.6%-39.5%Transactionandloanlosses-10.1%-9.8%-11.2%-8.1%-7.8%-7.8%-9.0%-8.8%-9.8%-8.4%-8.8%Customersupportandoperations-9.6%-9.6%-9.5%-8.7%-8.1%-8.3%-8.5%-7.7%-9.3%-8.2%-7.3%Salesandmarketing-7.1%-8.0%-7.5%-7.0%-6.4%-7.4%-6.8%-6.3%-7.4%-6.7%-6.2%Productdevelopment-5.7%-5.5%-5.4%-5.1%-5.0%-4.8%-4.9%-4.6%-5.4%-4.8%-4.5%Generalandadministrative-7.5%-7.4%-7.4%-9.7%-9.3%-9.1%-8.3%-6.1%-8.1%-8.1%-6.1%Depreciationandamortization-6.1%-6.3%-5.9%-5.9%-5.7%-5.9%-5.5%-5.6%-6.0%-5.7%-5.4%OperatingInc(UBS)21.6%21.0%19.9%20.7%22.7%21.0%19.3%21.3%20.8%21.1%22.5%Stock-BasedComp-4.9%-5.7%-6.0%-5.7%-5.5%-5.7%-5.6%-4.7%-5.6%-5.4%-4.6%OperatingInc(GAAP)14.5%13.7%13.1%22.5%16.5%14.5%13.2%16.3%16.2%15.2%17.6%Pre-TaxIncome14.7%14.3%13.9%23.2%17.1%15.2%14.0%17.6%16.8%16.0%19.0%IncomeTaxProvision-1.8%-1.1%-2.2%-4.2%-3.1%-2.7%-2.5%-3.2%-2.4%-2.9%-3.4%Adj.NetInc(UBS)17.9%17.7%17.3%17.5%19.1%17.8%16.4%18.6%17.6%18.0%19.6%NetInc(GAAP)12.9%13.1%11.7%19.0%14.1%12.5%11.5%14.5%14.4%13.1%15.6%AdjustedEBITDA26.9%26.6%25.0%25.8%27.8%26.5%24.4%26.6%26.1%26.3%27.7%GAAPEBITDA20.6%20.1%19.0%28.5%22.3%20.5%18.9%22.0%22.3%20.9%23.1%Capex-5.0%-5.5%-5.1%-5.0%-6.0%-6.0%-6.0%-6.0%-5.1%-6.0%-6.0%FreeCashFlow20.3%23.8%26.0%-18.9%-16.9%-3.7%124.6%17.0%11.6%30.1%26.5%FCFminusSBC15.3%18.1%19.9%-24.6%-22.4%-9.4%119.1%12.3%6.0%24.7%21.9%Year-on-YearGrowthNetRevenue16.9%18.3%21.4%21.8%20.6%18.5%13.6%13.9%19.7%16.5%17.8%Transactionexpense31.3%31.4%32.8%35.5%29.5%27.3%27.1%27.6%32.9%27.8%23.9%Transactionandloanlosses17.6%20.8%33.9%-3.6%-6.6%-5.4%-8.7%23.7%16.4%0.2%23.6%Customersupportandoperations3.2%1.7%1.3%3.9%1.9%3.0%1.6%0.8%2.5%1.8%5.5%Salesandmarketing-3.2%10.1%14.2%11.5%9.5%8.9%3.7%3.4%8.2%6.2%9.0%Productdevelopment4.3%-0.6%-2.8%3.5%5.8%3.4%3.1%2.7%1.0%3.7%9.2%Generalandadministrative9.3%1.3%3.9%49.5%49.6%45.8%27.4%-28.3%16.5%17.4%-12.1%Depreciationandamortization4.0%13.1%4.9%15.0%12.7%11.0%6.8%7.2%9.4%9.3%12.6%OperatingInc(UBS)19.7%24.8%31.8%21.3%26.5%18.6%9.9%17.7%24.1%18.1%25.8%Stock-BasedComp54.7%59.3%78.9%61.7%35.2%17.0%5.5%-5.4%63.8%11.2%0.4%OperatingInc(GAAP)5.9%15.9%21.6%77.4%37.5%25.5%15.1%-17.3%32.4%9.2%36.8%Pre-TaxIncome3.8%17.6%25.3%79.4%40.5%26.3%14.0%-13.3%33.5%11.3%39.8%IncomeTaxProvision-17.8%-18.0%-19.7%-18.0%-18.0%-18.0%-18.0%-18.0%-18.5%-18.0%-18.0%Adj.NetInc(UBS)18.1%27.1%31.8%24.3%28.4%19.4%8.0%20.9%25.2%19.1%28.4%Adj.EPS(UBS)19.0%27.1%30.8%23.5%27.7%18.8%8.3%21.5%25.0%19.1%29.1%NetInc(GAAP)5.2%27.2%17.6%76.9%31.4%12.7%11.0%-13.3%33.1%6.6%39.8%EPS(GAAP)6.0%27.2%16.8%75.8%30.7%12.2%11.3%-12.8%32.9%6.5%40.5%AdjustedEBITDA18.5%25.0%26.5%21.0%24.6%17.8%10.8%17.5%22.6%17.6%24.0%GAAPEBITDA5.7%15.4%15.8%59.4%30.2%20.9%12.5%-12.1%25.4%9.3%30.1%Capexn/an/an/an/an/an/an/an/a-0.1%35.8%17.8%FreeCashFlown/an/an/an/an/an/an/an/a-39.6%202.2%3.7%FCFminusSBC-10.5%48.4%26.9%-238.7%-276.4%-161.7%578.0%-157.1%-62.0%381.2%4.5%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201880 Figure92:Revenue&KeyMetricsSummaryPayPalRevenue&KeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ENetRevenuePayments2,9753,1363,2393,6323,5893,7153,6794,13812,98215,12117,814TransactionRevenues2,5992,7492,8333,2083,1533,2573,4153,86211,38913,68716,549OtherValueAddedServices3763874064254364582642761,5941,4341,264NetRevenue2,9753,1363,2393,6323,5893,7153,6794,13812,98215,12117,814PaymentsPayPalTPV99,327106,444114,045129,234126,136132,874142,035161,617449,050562,662690,379TakeRate3.0%2.9%2.8%2.8%2.8%2.8%2.6%2.6%2.9%2.7%2.6%Activeaccounts(mm)203.0210.0218.0226.6232.1238.8246.4256.0227256285Year-on-YearGrowthPayments16.9%18.3%21.4%21.8%20.6%18.5%13.6%13.9%19.7%16.5%17.8%TransactionRevenues16.1%18.3%22.4%22.7%21.3%18.5%20.5%20.4%20.0%20.2%20.9%OtherValueAddedServices22.9%18.3%15.0%16.0%16.0%18.3%-35.0%-35.0%17.9%-10.0%-11.8%NetRevenue16.9%18.3%21.4%21.8%20.6%18.5%13.6%13.9%19.7%16.5%17.8%PaymentsPayPalTPV22.5%23.5%30.5%30.1%27.0%24.8%24.5%25.1%26.8%25.3%22.7%Activeaccounts(mm)10.3%11.7%13.5%15.0%14.3%13.7%13.0%13.0%15.0%13.0%11.5%Qtr-on-QtrGrowthPayments-0.2%5.4%3.3%12.1%-1.2%3.5%-1.0%12.5%TransactionRevenues-0.6%5.8%3.1%13.2%-1.7%3.3%4.8%13.1%OtherValueAddedServices2.7%2.9%4.9%4.6%2.7%5.0%-42.4%4.6%NetRevenue-0.2%5.4%3.3%12.1%-1.2%3.5%-1.0%12.5%PaymentsPayPalTPV0.0%7.2%7.1%13.3%-2.4%5.3%6.9%13.8%Activeaccounts(mm)3.0%3.4%3.8%3.9%2.4%2.9%3.2%3.9%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201881 USInternet&InteractiveEntertainment10January201882 Groupon(GRPN,Sell,$4.50PT)EstimatesWemodestlylowerourforwardrevenuegrowthestimatestoreflectamoreconservativestanceonGroupon"sabilitytogrowitsactivecustomerbaseandbillings,whilede-emphasizingtheGoodsbusiness.Onthatnote,managementhasstatedafocusongrossprofitgrowthevenattheexpenseofnear-termbillings/revenueheadwinds.Ontheotherhand,weincreaseourforwardEBITDAgrowthestimatesdrivenbythecontinuedroll-outofGrouponPlus(100%takerateproduct,henceaccretivetomargins),continuedstreamliningofoperationsanditscostbase,partiallyoffsetbyongoinginvestmentsintomarketinginNA&International.ForQ4"17,managementnotedthatitwillremainopportunisticwithregardstomarketingspend.Figure93:Oldvs.NewEstimatesQ42017FY2018FY2019OldNew%ChgOldNew%ChgOldNew%ChgCommentsNetRevenue$859$858-0.1%$2,947$2,894-1.8%$3,123$3,034-2.8%ComparestoQ4guidanceofrevenueof$850m;Mgmtreiteratedtheirintentiontodrivegrossprofitdollargrowthevenattheexpenseofneartermrevenue/billingheadwindsNorthAmerica$575$5750.0%$1,978$1,928-2.5%$2,107$2,021-4.1%Reflects+1%YoYinFY18;expectde-emphasizinglowermargingoodsbusinesstocreaterevenueheadwindbutprovidelifttogrossmarginsInternational$284$283-0.3%$969$966-0.2%$1,015$1,013-0.2%Reflects+6%YoYgrowthinFY18;expectstabilizingtrendsinintloverthecomingquarters,especiallyfollowingoutperformanceinQ3GrossBillings$1,625$1,622-0.2%$6,028$5,908-2.0%$6,476$6,303-2.7%NorthAmerica$1,113$1,1130.0%$4,223$4,110-2.7%$4,586$4,421-3.6%International$512$509-0.6%$1,806$1,798-0.4%$1,890$1,882-0.4%GrossProfit(GAAP)$373$373-0.2%$1,435$1,406-2.1%$1,568$1,527-2.6%GAAPEBITDA$85$916.3%$164$1745.8%$194$23118.9%Reflectingcontinuedinvestmentsinproductandmarketing(launchedintegratedofflinecampaignin3citiesforGroupon+),mostlyoffsetbyotherSG&Asavings&thecontinuedroll-outofGrouponPlus(accretivetomargins)AdjustedEBITDA$85$916.3%$261$2693.0%$280$31311.8%GAAPEPS$0.10$0.119.7%$0.08$0.1014.2%$0.15$0.2030.9%Wemodel$15minsharerepurchasesperquarterthrough2018AdjustedEPS$0.10$0.119.7%$0.21$0.224.2%$0.26$0.3015.7%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201883 ValuationWeincreaseourPriceTargetto$4.50(from$4)basedonouradjustedvaluationapproach(50%EV/GAAPEBITDAand50%modifiedDCFbasedonFY2022FCF-SBC)appliedtonewestimates.Formoredetailsonourvaluationapproach,plsrefertothefrontsectionofthisreport.EV/GAAPEBITDAof10.0x(or0.30xEV/GAAPEBITDA-to-Growth)EV/FCF-SBCof14.5xDiscountRateof18%.ThediscountrateisbasedonaCAPM+companyspecificriskpremiumcalculationusing:1)3%riskfreerate(basedonanormalized10-yrrate);2)betaof2.0(source:Bloomberg)givenweexpectafairamountofvolatilityaroundGRPNcomparedtoothereCommerce&digitaladvertisingpeers;3)equityriskpremiumof5%(basedonUBS"internaldatabaseassumptions);and4)companyspecificriskpremiumof5%givenincreaseduncertaintyfrommultiplebeingappliedto2022estimates.Figure94:GRPNPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$2.30$4.50$6.65%Upside/Downside-56%-14%27%GAAPEBITDA(FY18E)$83$174$271EBITDAMargin3.0%6.0%9.0%GAAPEBITDA(FY19E)$141$231$325EBITDAMargin5.0%7.6%10.0%EV/2019EBITDA7.0x10.0x12.0xEBITDACAGR("17-"19)4.1%33.1%57.9%EV/EBITDAtoGrowth1.71x0.30x0.21xEnterpriseValue$987$2,306$3,895FCFminusSBC(FY22E)$173$250$276(FCF-SBC)%ofSales5.0%7.2%8.0%EV/2022(FCF-SBC)10.0x14.5x17.0xDiscountRate21.0%18.0%15.0%DiscountPeriod(Years)333EnterpriseValue(2022)$1,725$3,625$4,693DiscountedEnterpriseValue(2019)$974$2,206$3,086WeightingsEnterpriseValue$981$2,256$3,491CapitalStructureAdjustmentsAdjustedNetDebt-2019E$(367)$(367)$(367)AdjustedSharesOutstanding580580580Source:Companyreports,FactSet,UBSestimatesUSInternet&InteractiveEntertainment10January201884 Figure95:GRPNQ42017EarningsPreviewQ42017FY2018FY2019%UBSvsUBSEstConsEstConsUBSEstConsEstUBSEstConsEstNetRevenue$858$8550.3%$2,894$2,911$3,034$3,008NorthAmerica$575$5651.8%$1,928$1,968$2,021$2,047International$283$290-2.6%$966$943$1,013$961GrossBillings$1,622$1,6200.1%$5,908$5,961$6,303$6,317NorthAmerica$1,113$1,1011.1%$4,110$4,193$4,421$4,429International$509$516-1.4%$1,798$1,768$1,882$1,888GrossProfit(GAAP)$373$379-1.7%$1,406$1,410$1,527$1,501GAAPEBITDA$64$65-0.8%$174$181$231$212AdjustedEBITDA$91$93-2.8%$269$278$313$306GAAPEPS$0.07$0.0543.4%$0.10$0.06$0.20$0.11AdjustedEPS$0.11$0.0925.9%$0.22$0.19$0.30n/aSource:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201885 SummaryModelsFigure96:P&LSummaryGrouponP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ENetRevenue673.6662.6634.5857.8664.9675.5659.6894.22,828.52,894.33,033.8GrossProfit(GAAP)309.5328.1309.4372.5316.2347.0335.2407.11,319.51,405.51,526.9Marketingexpense(86.3)(100.7)(101.5)(111.8)(85.1)(103.0)(103.9)(122.1)(400.2)(414.1)(420.8)SG&Aexpense(232.0)(230.2)(214.8)(223.5)(233.9)(239.4)(228.0)(236.1)(900.6)(937.4)(973.0)OperatingInc(UBS)10.718.611.457.816.125.821.769.698.5133.1214.1Stock-BasedComp(19.7)(21.4)(18.2)(20.5)(18.9)(21.2)(18.3)(20.7)(79.8)(79.2)(80.9)Acquisition-related(benefit)exp(0.0)(0.0)17.10.00.00.00.00.017.10.00.0OperatingInc(GAAP)(11.7)(7.4)(1.2)37.3(2.8)4.63.448.917.054.0133.2Pre-TaxIncome(16.3)(1.5)6.342.03.610.18.954.630.677.2161.3IncomeTaxProvision(4.6)(3.9)(2.5)(2.0)(1.1)(3.0)(2.7)(16.4)(13.0)(23.2)(48.4)Adj.NetInc(UBS)5.212.06.860.522.626.521.154.484.4124.6171.5Adj.EPS(UBS)0.010.020.010.110.040.050.040.100.150.220.30DilutedSharesOutstanding562.2559.8566.7558.5559.7561.0562.2563.3561.8561.5573.2NetInc(GAAP)(24.4)(9.3)0.140.02.67.16.238.28.154.0112.9EPS(GAAP)(0.04)(0.02)0.000.070.000.010.010.070.010.100.20AdjustedEBITDA44.853.346.690.761.459.252.296.0235269313GAAPEBITDA17.021.128.064.135.333.731.373.7130174231Capex(14.1)(15.4)(14.3)(19.3)(14.9)(15.2)(14.8)(20.1)(63.0)(65.0)(68.2)FreeCashFlow(150.3)(36.1)9.6252.6(107.8)21.048.9158.475.8120.5222.7FCFminusSBC(170.0)(57.5)(9.6)232.1(126.7)(0.3)30.6137.7(5.0)41.4141.9%ofRevenueGrossProfit(UBS)45.9%49.5%48.8%43.4%47.5%51.4%50.8%45.5%46.6%48.6%50.3%Marketingexpense-12.8%-15.2%-16.0%-13.0%-12.8%-15.2%-15.8%-13.7%-14.1%-14.3%-13.9%SG&Aexpense-34.4%-34.7%-33.9%-26.1%-35.2%-35.4%-34.6%-26.4%-31.8%-32.4%-32.1%OperatingInc(UBS)1.6%2.8%1.8%6.7%2.4%3.8%3.3%7.8%3.5%4.6%7.1%Stock-BasedComp-2.9%-3.2%-2.9%-2.4%-2.8%-3.1%-2.8%-2.3%-2.8%-2.7%-2.7%Acquisition-related(benefit)exp0.0%0.0%2.7%0.0%0.0%0.0%0.0%0.0%0.6%0.0%0.0%OperatingInc(GAAP)-1.7%-1.1%-0.2%4.3%-0.4%0.7%0.5%5.5%0.6%1.9%4.4%Pre-TaxIncome-2.4%-0.2%1.0%4.9%0.5%1.5%1.3%6.1%1.1%2.7%5.3%IncomeTaxProvision-0.7%-0.6%-0.4%-0.2%-0.2%-0.4%-0.4%-1.8%-0.5%-0.8%-1.6%Adj.NetInc(UBS)0.8%1.8%1.1%7.1%3.4%3.9%3.2%6.1%3.0%4.3%5.7%NetInc(GAAP)-3.6%-1.4%0.0%4.7%0.4%1.0%0.9%4.3%0.3%1.9%3.7%AdjustedEBITDA6.6%8.0%7.3%10.6%9.2%8.8%7.9%10.7%8.3%9.3%10.3%GAAPEBITDA2.5%3.2%4.4%7.5%5.3%5.0%4.7%8.2%4.6%6.0%7.6%Capex-2.1%-2.3%-2.2%-2.2%-2.2%-2.2%-2.2%-2.2%-2.2%-2.2%-2.2%FreeCashFlow-22.3%-5.4%1.5%29.5%-16.2%3.1%7.4%17.7%2.7%4.2%7.3%FCFminusSBC-25.2%-8.7%-1.5%27.1%-19.0%0.0%4.6%15.4%-0.2%1.4%4.7%Year-on-YearGrowthNetRevenue-3.6%-8.4%-7.6%-5.2%-1.3%1.9%4.0%4.3%-6.1%2.3%4.8%GrossProfit(UBS)-3.3%4.0%5.5%5.9%2.2%5.8%8.3%9.3%3.0%6.5%8.6%Marketingexpense-0.8%12.9%19.7%22.8%-1.5%2.3%2.4%9.3%13.7%3.5%1.6%SG&Aexpense-11.8%-11.0%-8.3%-6.1%0.8%4.0%6.1%5.6%-9.4%4.1%3.8%OperatingInc(UBS)n/a1014.6%n/a27.1%50.1%38.7%90.6%20.4%122.6%35.2%60.8%Stock-BasedComp-28.0%-37.5%-28.4%-9.1%-3.9%-0.7%0.5%1.0%-27.1%-0.8%2.2%Other-99.7%-100.4%728.9%0.0%0.0%0.0%0.0%0.0%n/an/an/aOperatingInc(GAAP)-74.0%-81.4%-95.1%292.3%-76.0%n/an/a31.1%n/a218.2%146.8%Pre-TaxIncome-61.5%-97.0%n/an/an/an/a40.0%29.8%n/a152.4%109.0%IncomeTaxProvision354.6%-273.5%49.8%-134.6%-76.1%-22.2%5.1%718.7%-344.5%78.1%109.0%Adj.NetInc(UBS)n/an/an/a18.3%336.5%122.0%211.9%-10.1%192.0%47.7%37.7%Adj.EPS(UBS)n/an/an/a20.8%338.4%121.5%214.4%-10.8%199.6%47.7%34.9%NetInc(GAAP)-50.0%-83.0%-100.2%-195.7%-110.5%-175.6%10418.2%-4.6%-104.6%565.9%109.0%EPS(GAAP)-48.2%-82.5%n/an/an/an/a10502.1%-5.4%n/a566.2%104.7%AdjustedEBITDA40.8%49.8%42.9%13.1%37.1%11.2%12.0%5.9%30.6%14.2%16.6%GAAPEBITDA-212.4%-302.5%666.8%45.2%107.9%59.7%11.7%14.9%484.0%33.6%32.5%Capex-29.1%-6.8%12.4%0.1%6.1%-1.3%4.0%4.3%-7.8%3.2%4.8%FreeCashFlow59.3%-46.6%-118.3%-8.3%-28.3%-158.1%409.2%-37.3%24.5%97.9%193.7%FCFminusSBC36.6%-44.7%-87.8%-8.2%-25.5%-99.6%-419.6%-40.7%-90.7%-176.6%-2937.3%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201886 Figure97:Revenue&KeyMetricsSummaryGrouponRevenue&KeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ENetRevenueNorthAmericarevenues4734524145754544534265951,9141,9282,0213Pandotherrevenue2232342172422282502382729159891,101Directrevenue251218198333226203188323999939920InternationalRevenues2002112202832112222342999149661,0133Pandotherrevenue7982869281869298339356373Directrevenue121129135190131137142201575610640Consolidatedrevenues6746636348586656766608942,8282,8943,0343Pandotherrevenue3023163023343093363303701,2541,3451,473Directrevenue3723473325243563393305241,5741,5491,561ConsolidatedGrossBillings1,3581,3641,3411,6221,3541,4101,4181,7265,6865,9086,303NAGrossBillings9659749291,1139451,0009791,1883,9814,1104,421IntlGrossBillings3933904135094094104395391,7051,7981,882Consol.Billings/AACust.2828283327282833333335NABillings/AACust3131293428302935343536Int"lBillings/AACust2324253024242631303132Consol.ActiveCustomers484849505051515249.951.853.2NAActiveCustomers323233333334343433.034.435.4IntlActiveCustomers171617171717171716.917.417.8Year-on-YearGrowthNorthAmericarevenues-5.5%-12.6%-14.3%-11.6%-4.2%0.3%2.8%3.6%-11.0%0.7%4.8%3Pandotherrevenue3.6%12.5%8.7%3.2%2.4%7.0%10.0%12.6%6.8%8.1%11.3%Directrevenue-12.3%-29.5%-30.4%-20.0%-10.0%-7.0%-5.0%-3.0%-22.8%-6.0%-2.0%InternationalRevenues1.3%1.9%8.4%11.3%5.5%5.6%6.1%5.7%6.1%5.7%4.8%3Pandotherrevenue-16.6%-5.5%1.6%14.0%2.5%4.9%7.0%6.0%-2.2%5.2%4.5%Directrevenue17.8%7.2%13.1%10.0%7.5%6.0%5.5%5.5%11.6%6.0%5.0%Consolidatedrevenues-3.6%-8.4%-7.6%-5.2%-1.3%1.9%4.0%4.3%-6.1%2.3%4.8%3Pandotherrevenue-2.6%7.2%6.6%6.0%2.4%6.5%9.1%10.8%4.2%7.3%9.5%Directrevenue-4.3%-19.2%-17.6%-11.2%-4.3%-2.2%-0.7%0.1%-13.0%-1.6%0.8%ConsolidatedGrossBillings-0.9%-1.8%1.4%1.0%-0.3%3.3%5.7%6.4%0.0%3.9%6.7%NAGrossBillings2.9%0.8%0.9%0.1%-2.0%2.6%5.4%6.7%1.1%3.3%7.6%IntlGrossBillings-9.1%-7.9%2.6%3.2%4.1%5.2%6.5%5.8%-2.7%5.4%4.7%Consol.Billings/AACust.-4.0%-9.4%-5.7%-4.4%-4.3%-1.5%0.6%2.0%-14.7%-11.4%-1.1%NABillings/AACust-13.3%-13.0%-10.7%-8.0%-7.5%-3.0%0.0%2.0%3.3%3.1%-3.3%Int"lBillings/AACust9.4%-4.6%4.5%3.0%3.0%2.0%2.0%2.0%3.0%2.0%2.0%Consol.ActiveCustomers9.3%7.6%7.4%4.1%4.3%5.4%4.7%3.9%4.1%3.9%2.7%NAActiveCustomers17.5%14.3%11.7%6.1%5.7%5.8%4.9%4.2%7.2%7.5%9.3%IntlActiveCustomers-3.5%-3.5%0.0%0.3%1.8%4.6%4.2%3.3%0.3%3.3%2.3%Qtr-on-QtrGrowthNorthAmericarevenues-27.3%-4.5%-8.3%38.8%-21.1%-0.1%-6.0%39.8%3Pandotherrevenue-4.9%5.1%-7.4%11.6%-5.7%9.8%-4.8%14.2%Directrevenue-39.8%-13.0%-9.4%68.7%-32.3%-10.1%-7.4%72.3%InternationalRevenues-21.2%5.2%4.5%28.4%-25.2%5.2%5.0%27.9%3Pandotherrevenue-2.7%3.8%4.7%7.7%-12.5%6.2%6.8%6.8%Directrevenue-29.9%6.1%4.4%41.5%-31.4%4.6%3.9%41.5%Consolidatedrevenues-25.6%-1.6%-4.2%35.2%-22.5%1.6%-2.4%35.6%3Pandotherrevenue-4.4%4.7%-4.2%10.5%-7.6%8.9%-1.9%12.2%Directrevenue-36.9%-6.8%-4.3%57.7%-32.0%-4.7%-2.9%59.0%ConsolidatedGrossBillings-15.4%0.5%-1.7%20.9%-16.5%4.1%0.6%21.7%NAGrossBillings-13.3%1.0%-4.7%19.9%-15.1%5.8%-2.1%21.3%IntlGrossBillings-20.3%-0.9%5.9%23.3%-19.5%0.2%7.1%22.6%Consol.Billings/AACust.-17.7%0.0%-2.5%19.0%-17.6%3.0%-0.4%20.7%NABillings/AACust-16.7%-0.2%-6.0%17.8%-16.3%4.6%-3.1%20.2%Int"lBillings/AACust-20.5%0.3%6.2%21.7%-20.5%-0.7%6.2%21.7%Consol.ActiveCustomers0.8%0.0%1.7%1.5%1.1%1.0%1.0%0.8%NAActiveCustomers1.6%0.9%1.9%1.5%1.2%1.0%1.0%0.9%IntlActiveCustomers-0.6%-1.8%1.2%1.5%0.9%0.9%0.9%0.6%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201887 USInternet&InteractiveEntertainment10January201888 QVCGroup(QVCA,Buy,$30PT)EstimatesWemakenomaterialchangestoourforwardoperatingestimatesatthispoint.WhileourcurrentmodeldoesnotyetincludepostHSNacquisitionestimates,weprovideanupdatedQVC/HSNpro-formaanalysisinacompanionnote.ValuationWeincreaseourPTfrom$28to$30basedonouradjustedblendedvaluationapproach(50%EV/GAAPEBITDA&50%EV/FCF-SBCappliedtoour2019estimates.EV/GAAPEBITDAmultipleof9.0xbasedonEV/GAAPEBITDAto-Growthof2.22xEV/(FCF-SBC)multipleof12.50xbasedonEV/(FCF-SBC)-to-Growthof28.59x.Figure98:QVCAPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$18$30$44%Upside/Downside-23%29%89%GAAPEBITDA(FY18E)$1,879$1,972$2,173EBITDAMargin18.0%18.5%20.0%GAAPEBITDA(FY19E)$1,794$2,046$2,286EBITDAMargin17.0%18.6%20.0%EV/2019EBITDA7.0x9.00x10.0xEBITDACAGR("17-"19)-2.6%4.1%10.0%EV/EBITDAtoGrowth-2.70x2.22x1.00xEnterpriseValue$12,555$18,417$22,859FCF-SBC(FY18E)$992$1,117$1,249FCF%ofSales9.5%10.5%11.5%FCF-SBC(FY19E)$950$1,109$1,372FCF%ofSales9.0%10.1%12.0%EV/2019FCF10.0x12.5x15.0xFCFCAGR("17-"19)-7.1%0.4%11.7%EV/FCFtoGrowth-1.42x28.59x1.28xEnterpriseValue$9,495$13,863$20,573WeightingsEnterpriseValue$11,025$16,140$21,716CapitalStructureAdjustmentsAdjustedNetDebt-2019E$3,817.7$3,817.7$3,817.7AdjustedSharesOutstanding409409409Source:Companyreports,FactSet,UBSestimatesUSInternet&InteractiveEntertainment10January201889 Figure99:QVCAEarningsPreview–UBSvs.ConsQ42017FY2018FY2019UBSEstConsEst%UBSvsConsUBSEstConsEstUBSEstConsEstNetRevenue$3,227$3,248-0.7%$10,651$10,656$10,990$11,705QVCUS$2,007$1,9950.6%$6,330$6,253$6,521$6,420QVCInt"l$736$768-4.2%$2,653$2,738$2,730$2,838zulily$483$492-1.8%$1,667$1,666$1,739$1,737GAAPEBITDA$589$659-10.6%$1,972$2,312$2,046$2,432AdjustedEBITDA$608$654-7.0%$2,047$2,180$2,128$2,217GAAPEPS$0.51$0.493.3%$1.65$1.47$1.82$1.61AdjustedEPS$0.65$0.633.0%$2.02$1.90$2.20$1.84Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201890 SummaryModelsFigure100:P&LSummaryQVCAP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ENetRevenue2,3232,3462,3753,2272,4152,4452,4533,33810,27110,65110,990GrossProfit(UBS)8188528211,0918498868491,1293,5823,7133,829OperatingExpenses(148)(148)(156)(200)(152)(158)(167)(204)(652)(681)(695)SG&AExpenses(225)(216)(249)(283)(231)(216)(249)(290)(973)(986)(1,006)Depreciation&Amortization(207)(205)(180)(174)(163)(161)(133)(128)(766)(584)(577)OperatingInc(UBS)2382832364333033523005071,1901,4621,551Stock-BasedComp(12)(18)(18)(19)(14)(20)(20)(21)(67)(74)(82)OperatingInc(GAAP)2262652184152893322804861,1241,3881,469Pre-TaxIncome1621891623552292712234298681,1521,223IncomeTaxProvision(59)(69)(31)(124)(80)(95)(78)(150)(283)(403)(428)Adj.NetInc(UBS)91111119220136166132267541701743Adj.EPS(UBS)0.200.240.260.510.310.390.310.641.201.651.82DilutedSharesOutstanding455455452435434430423416449426408NetInc(GAAP)91111119220136166132267541701743EPS(GAAP)0.200.240.260.510.310.390.310.641.201.651.82AdjustedEBITDA4454884166084665124336351,956.72,046.62,128.5GAAPEBITDA4334703985894524934146141,8901,9722,046Capex(29)(44)(51)(47)(28)(44)(51)(46)(171.1)(169.5)(169.4)FreeCashFlow4161711903892682672204361,166.01,191.71,191.1FCFminusSBC4041531723702542472014151,0991,1171,109%ofRevenueGrossProfit(UBS)35.2%36.3%34.6%33.8%35.1%36.2%34.6%33.8%34.9%34.9%34.8%OperatingExpenses-6.4%-6.3%-6.6%-6.2%-6.3%-6.5%-6.8%-6.1%-6.3%-6.4%-6.3%SG&AExpenses-9.7%-9.2%-10.5%-8.8%-9.6%-8.8%-10.1%-8.7%-9.5%-9.3%-9.1%Depreciation&Amortization-8.9%-8.7%-7.6%-5.4%-6.7%-6.6%-5.4%-3.8%-7.5%-5.5%-5.3%OperatingInc(UBS)10.2%12.1%9.9%13.4%12.6%14.4%12.2%15.2%11.6%13.7%14.1%Stock-BasedComp-0.5%-0.8%-0.8%-0.6%-0.6%-0.8%-0.8%-0.6%-0.6%-0.7%-0.7%OperatingInc(GAAP)9.7%11.3%9.2%12.9%12.0%13.6%11.4%14.6%10.9%13.0%13.4%Pre-TaxIncome7.0%8.1%6.8%11.0%9.5%11.1%9.1%12.8%8.5%10.8%11.1%IncomeTaxProvision-2.5%-2.9%-1.3%-3.9%-3.3%-3.9%-3.2%-4.5%-2.8%-3.8%-3.9%Adj.NetInc(UBS)3.9%4.7%5.0%6.8%5.6%6.8%5.4%8.0%5.3%6.6%6.8%NetInc(GAAP)3.9%4.7%5.0%6.8%5.6%6.8%5.4%8.0%5.3%6.6%6.8%AdjustedEBITDA19.2%20.8%17.5%18.8%19.3%21.0%17.7%19.0%19.1%19.2%19.4%GAAPEBITDA18.6%20.0%16.8%18.3%18.7%20.1%16.9%18.4%18.4%18.5%18.6%Capex-1.2%-1.9%-2.1%-1.5%-1.2%-1.8%-2.1%-1.4%-1.7%-1.6%-1.5%FreeCashFlow17.9%7.3%8.0%12.1%11.1%10.9%9.0%13.1%11.4%11.2%10.8%FCFminusSBC17.4%6.5%7.2%11.5%10.5%10.1%8.2%12.4%10.7%10.5%10.1%Year-on-YearGrowthNetRevenue-1.9%-3.2%3.1%3.3%3.9%4.2%3.3%3.5%0.5%3.7%3.2%GrossProfit(UBS)-1.9%-3.8%2.8%2.8%3.8%4.0%3.4%3.5%0.1%3.7%3.1%OperatingExpenses-3.3%-5.7%2.6%4.8%2.5%7.0%7.0%1.9%-0.1%4.4%2.1%SG&AExpenses-8.5%-10.7%3.3%9.3%2.8%-0.2%0.0%2.4%-1.5%1.3%2.0%Depreciation&Amortization-1.0%-4.2%-17.8%-16.2%-21.4%-21.5%-26.1%-26.8%-9.8%-23.8%-1.2%OperatingInc(UBS)5.3%3.7%26.2%7.5%27.3%24.3%27.2%17.1%9.3%22.9%6.1%Stock-BasedComp-33.3%-5.3%-10.0%3.3%13.7%11.0%10.2%12.3%-11.2%11.7%10.4%OperatingInc(GAAP)9.7%4.3%30.5%8.0%28.1%25.2%28.7%17.3%11.1%23.5%5.9%Pre-TaxIncome4.5%-12.9%58.8%6.4%41.2%43.4%37.8%20.7%7.5%32.6%6.1%IncomeTaxProvision3.5%-12.7%-3.1%-3.5%35.7%37.5%152.0%20.7%-4.6%42.3%6.1%Adj.NetInc(UBS)-4.5%-12.6%23.0%3.7%4.0%9.1%-6.0%8.0%1.1%4.3%4.9%Adj.EPS(UBS)3.0%-6.8%30.0%11.4%8.9%15.4%0.5%13.0%8.3%10.0%9.0%NetInc(GAAP)1.1%-12.6%95.1%12.9%49.1%49.7%11.0%21.2%14.4%29.5%6.0%EPS(GAAP)9.1%-6.8%106.3%21.2%56.2%58.3%18.6%26.8%22.3%36.6%10.5%AdjustedEBITDA2.3%0.2%2.5%-0.5%4.6%5.0%4.2%4.5%0.9%4.6%4.0%GAAPEBITDA4.3%0.4%3.1%-0.5%4.4%4.8%3.9%4.3%1.6%4.3%3.8%Capex-32.6%-34.3%6.3%-1.8%-2.3%0.1%-0.3%-1.8%-16.9%-1.0%-0.1%FreeCashFlow111.2%-49.4%-5.0%17.2%-35.6%56.4%16.0%12.1%9.3%2.2%-0.1%FCFminusSBC125.7%-52.0%-4.4%18.0%-37.1%61.7%16.6%12.1%10.8%1.6%-0.8%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201891 Figure101:Revenue&KeyMetricsSummaryQVCARevenue&KeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ENetRevenueQVC1,9651,9792,0102,7432,0382,0562,0642,8268,6978,9839,251QVCUS1,3701,3671,3742,0071,4251,4291,4092,0686,1186,3306,521QVCInernational5956126367366136276557582,5792,6532,730zulily3593673674833773893895121,5761,6671,739NetRevenue2,3232,3462,3753,2272,4152,4452,4533,33810,27110,65110,990Year-on-YearGrowthQVC-2.4%-4.1%3.2%3.2%3.7%3.9%2.7%3.0%0.2%3.3%3.0%QVCUS-2.6%-4.3%2.7%3.1%4.0%4.5%2.5%3.0%0.0%3.5%3.0%QVCInernational-1.8%-3.6%2.0%3.5%3.0%2.5%3.0%3.0%0.7%2.9%2.9%zulily1.1%0.3%2.2%3.5%5.0%6.0%6.0%6.0%1.9%5.8%4.3%NetRevenue-1.9%-3.2%3.1%3.3%3.9%4.2%3.3%3.5%0.5%3.7%3.2%Qtr-on-QtrGrowthQVC-26.1%0.7%1.6%36.5%-25.7%0.9%0.4%36.9%QVCUS-29.6%-0.2%0.5%46.1%-29.0%0.3%-1.4%46.8%QVCInernational-16.3%2.9%3.9%15.7%-16.7%2.4%4.4%15.7%zulily-23.1%2.2%0.0%31.7%-22.0%3.2%0.0%31.7%NetRevenue-25.7%1.0%1.2%35.9%-25.2%1.3%0.3%36.1%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201892 USInternet&InteractiveEntertainment10January201893 Yelp(YELP,Sell,$38PT)EstimatesWearemodestlyadjustingourforwardrevenue&EBITDAestimatestoreflectamoreconservativestanceonYelp"sabilitytoincreasepenetrationofpayingadvertisingaccountspartiallyoffsetbyincreasedretentionamongexistingadvertisersandthegrowthofnewrevenuestreamse.g.,Request-A-Quote.Inaddition,weareadjustingour"Transactions"revenueexpectationsdownwards.SinceOctober"17,YelprecognizesanettransactionfeefromitspartnershipwithGrubHub.OurreducedEBITDAestimates(mainlydrivenbylowerforwardrevenuegrowthassumptions)arepartiallyoffsetbyimprovedsales&marketingefficiency.Figure102:Oldvs.NewEstimatesQ42017FY2018FY2019OldNew%ChangeOldNew%ChangeOldNew%ChangeCommentsNetRevenue$216$215-0.8%$997$951-4.6%$1,203$1,120-6.9%ManagementguidedQ4toarangeof$211-$216mm;wereviseouradvertising&transactionrevenueestimatesdownwardsAdvertising$210$207-1.2%$957$920-3.8%$1,138$1,081-5.0%Wenowexpect21%YoYgrowthinQ4drivenbycontinuedgrowthinallthreechannels(local,nationalandself-serve);FY18revenuereviseddownwardsaswetakeamoreconservativestanceonYelp"sabilitytoincreasepenetrationofpayingadvertisingaccountspartiallyoffsetbyhigheradrevenueretentionTransactions$2.5$2.76.7%$26$16-38.2%$50$24-53.3%Adjustingourforwardestimatesdownwards;reflectsthesaleofEat24andpartnershipwithGrubHubinQ4;Managementdisclosedthatrevperorderwilldecline(butprofitperorderwillbehigher)asrevenuewillberecognizedonlybyfeesearnedfortransactionsoriginatedonYelpOtherservices$3.7$4.420.0%$14$155.9%$15$165.9%ReflectscontinuedgrowthfromYelpReservations,NowaitandTurnstyleGAAPEBITDA$18$18-0.8%$80$844.9%$130$121-6.8%ComparestoQ4guidanceof$39-$42mm;Ourrevisedestsreflectlowerrevenueestimatesoffsetbyimprovedsales&marketingefficiencyAdjustedEBITDA$43$42-0.8%$194$192-0.9%$262$244-6.9%GAAPEPS$(0.01)$0.01185.8%$0.33$0.3815.3%$0.71$0.66-6.2%Mgmt.commentedsharerepurchasesshouldcontinuewith$192mmavailableundercurrentauthorization(wemodel$10mofrepurchasesperquartergoingforward)AdjustedEPS$0.28$0.28-19.4%$1.28$1.290.5%$1.78$1.67-6.2%Source:Companyreports,UBSestimatesValuationWeincreaseourPriceTargetto$38(from$37)basedonouradjustedvaluationapproach(50%EV/GAAPEBITDAand50%modifiedDCFbasedonFY2022FCF-SBC)appliedtonewestimates.Formoredetailsonourvaluationapproach,plsrefertothefrontsectionofthisreport.EV/GAAPEBITDAof11.0x(or0.24xEV/GAAPEBITDA-to-Growth)EV/FCF-SBCof22.0xDiscountRateof15%.ThediscountrateisbasedonaCAPM+companyspecificriskpremiumcalculationusing:1)3%riskfreerate(basedonanormalized10-yrrate);2)betaof1.4(source:Bloomberg)givenweexpectafairamountofvolatilityaroundYELPcomparedtoothereCommerce&digitaladvertisingpeers;3)equityriskpremiumof5%(basedonUBS"internaldatabaseassumptions);and4)companyspecificriskpremiumof5%givenincreaseduncertaintyfrommultiplebeingappliedto2022estimates.USInternet&InteractiveEntertainment10January201894 Figure103:YELPPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$26$38$55%Upside/Downside-40%-12%28%GAAPEBITDA(FY18E)$63.9$83.8$98.9EBITDAMargin7.0%8.8%10.0%GAAPEBITDA(FY19E)$73.7$120.7$154.4EBITDAMargin7.0%10.8%13.0%EV/2019EBITDA8.0x11.0x14.0xEBITDACAGR("17-"19)13.4%45.1%64.2%EV/EBITDAtoGrowth0.59x0.24x0.22xEnterpriseValue$589.7$1,327.4$2,161.4FCFminusSBC(FY22E)$134$177$214(FCF-SBC)%ofSales10.0%13.2%16.0%EV/2022(FCF-SBC)15.0x22.0x30.0xDiscountRate18.0%15.0%12.0%DiscountPeriod(Years)333EnterpriseValue(2022)$2,008$3,895$6,427DiscountedEnterpriseValue(2019)$1,222$2,561$4,575WeightingsEVderivedfromGAAPEBITDA50%50%50%EVderivedfromFCF50%50%50%EnterpriseValue$906.1$1,944.3$3,368.0CapitalStructureAdjustmentsAdjustedNetDebt-2019E$(1,316.8)$(1,316.8)$(1,316.8)AdjustedSharesOutstanding868686Source:Companyreports,FactSet,UBSestimatesFigure104:YELPEarningsPreview–UBSvs.ConsQ42017FY2018FY2019%UBSvsUBSEstConsEstConsUBSEstConsEstUBSEstConsEstNetRevenue$215$215-0.20%$951$952$1,120$1,109Advertising$207$208-0.15%$920$917$1,081$1,061Transaction$3$3-1.63%$16$18$24$25Otherservices$4$4-0.32%$15$23$16$29GAAPEBITDA$18$174.35%$84$86$121$120AdjustedEBITDA$42$422.11%$192$198$244$250GAAPEPS$0.07$0.0538.55%$0.38$0.39$0.66$0.64AdjustedEPS$0.28$0.273.35%$1.29$1.31$1.67$1.59Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201895 SummaryModelsFigure105:P&LSummaryYelpP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenue197.3208.9222.4214.5218.8229.7244.9258.0843.1951.31,120.3GrossProfit(ex-SBC)181.4191.8204.1198.3201.4211.3225.2239.0775.5876.91,034.3MarketingExpenses(102.4)(98.0)(105.7)(100.8)(111.6)(108.0)(115.1)(116.1)(407.0)(450.7)(525.5)ProductDevelopment(28.7)(30.8)(33.9)(31.4)(31.7)(34.5)(36.7)(34.8)(124.8)(137.7)(156.7)G&AExpenses(21.0)(20.1)(21.7)(23.6)(22.6)(21.8)(23.8)(28.4)(86.4)(96.6)(108.1)DepreciationandAmort.(10.2)(10.7)(10.7)(10.7)(9.8)(10.3)(11.0)(11.6)(42.2)(42.8)(44.8)OperatingInc(UBS)19.132.232.231.725.636.738.648.1115.2149.0199.2Stock-BasedComp(24.3)(25.4)(25.3)(24.9)(25.5)(26.1)(27.9)(28.5)(99.9)(108.0)(123.3)OperatingInc(GAAP)(5.4)6.86.86.90.110.610.719.615.141.075.9Pre-TaxIncome(4.7)7.78.27.81.111.711.820.719.045.380.3IncomeTaxProvision(0.1)(0.1)(0.2)(2.3)(0.3)(3.5)(3.5)(6.2)(2.8)(13.6)(24.1)Adj.NetInc(UBS)16.321.625.423.018.826.527.834.386.3107.3141.5Adj.EPS(UBS)0.200.250.290.280.230.320.330.411.031.291.67GAAPNetInc(4.8)7.67.95.40.88.28.314.516.231.756.2GAAPEPS(0.06)0.090.090.070.010.100.100.170.190.380.66DilutedSharesOutstanding8085878282838384848385AdjustedEBITDA29.342.942.842.535.547.049.659.7157.4191.8244.0GAAPEBITDA4.717.517.517.610.020.921.731.257.383.8120.7Capex(2.5)(1.6)(3.8)(6.4)(6.6)(4.6)(3.7)(5.2)(14.3)(20.0)(22.4)FreeCashFlow38.833.547.818.744.737.653.427.8138.8163.5207.9FCFminusSBC14.48.122.5(6.2)19.211.525.5(0.7)38.955.684.6%ofRevenueGrossProfit(ex-SBC)91.9%91.8%91.8%92.4%92.1%92.0%92.0%92.6%92.0%92.2%92.3%MarketingExpenses-51.9%-46.9%-47.5%-47.0%-51.0%-47.0%-47.0%-45.0%-48.3%-47.4%-46.9%ProductDevelopment-14.5%-14.8%-15.2%-14.7%-14.5%-15.0%-15.0%-13.5%-14.8%-14.5%-14.0%G&AExpenses-10.7%-9.6%-9.7%-11.0%-10.4%-9.5%-9.7%-11.0%-10.2%-10.2%-9.6%DepreciationandAmort.-5.1%-5.1%-4.8%-5.0%-4.5%-4.5%-4.5%-4.5%-5.0%-4.5%-4.0%OperatingInc(UBS)9.7%15.4%14.5%14.8%11.7%16.0%15.8%18.6%13.7%15.7%17.8%Stock-BasedComp-12.3%-12.1%-11.4%-11.6%-11.7%-11.4%-11.4%-11.0%-11.8%-11.3%-11.0%OperatingInc(GAAP)-2.8%3.3%3.1%3.2%0.1%4.6%4.4%7.6%1.8%4.3%6.8%Pre-TaxIncome-2.4%3.7%3.7%3.6%0.5%5.1%4.8%8.0%2.2%4.8%7.2%IncomeTaxProvision0.0%-0.1%-0.1%-1.1%-0.2%-1.5%-1.4%-2.4%-0.3%-1.4%-2.1%Adj.NetInc(UBS)8.2%10.4%11.4%10.7%8.6%11.5%11.3%13.3%10.2%11.3%12.6%GAAPNetInc-2.4%3.6%3.6%2.5%0.4%3.6%3.4%5.6%1.9%3.3%5.0%AdjustedEBITDA14.8%20.5%19.2%19.8%16.2%20.5%20.3%23.1%18.7%20.2%21.8%GAAPEBITDA2.4%8.4%7.9%8.2%4.6%9.1%8.9%12.1%6.8%8.8%10.8%Capex-1.2%-0.8%-1.7%-3.0%-3.0%-2.0%-1.5%-2.0%-1.7%-2.1%-2.0%FreeCashFlow19.7%16.0%21.5%8.7%20.5%16.4%21.8%10.8%16.5%17.2%18.6%FCFminusSBC7.3%3.9%10.1%-2.9%8.8%5.0%10.4%-0.3%4.6%5.8%7.6%Year-on-YearGrowthNetRevenue24.4%20.4%19.4%10.1%10.9%10.0%10.1%20.3%18.2%12.8%17.8%GrossProfit(ex-SBC)26.0%20.8%18.4%10.1%11.0%10.2%10.3%20.5%18.4%13.1%18.0%MarketingExpenses14.7%11.9%14.8%16.1%8.9%10.2%8.8%15.1%14.4%10.8%16.6%ProductDevelopment18.5%24.9%25.0%19.7%10.7%11.7%8.5%10.8%22.1%10.4%13.7%G&AExpenses20.7%9.0%10.8%8.7%7.6%8.8%9.7%20.3%12.0%11.9%11.9%DepreciationandAmort.24.0%24.5%16.3%13.7%-3.0%-3.0%3.4%8.2%19.4%1.5%4.7%OperatingInc(UBS)295.3%65.0%31.1%-11.5%34.2%13.8%20.0%51.6%36.0%29.3%33.7%Stock-BasedComp27.3%22.4%12.2%4.1%4.8%2.8%10.3%14.5%15.8%8.1%14.2%OperatingInc(GAAP)-61.9%n/a247.3%-19.3%n/a54.8%56.8%185.4%n/a172.1%84.9%Pre-TaxIncome-66.4%n/a257.6%-16.0%n/a51.3%44.2%165.7%n/a138.8%77.3%IncomeTaxProvision-95.3%-109.3%6.9%133.4%407.9%2865.4%1425.2%165.7%98.6%393.6%77.3%Adj.NetInc(UBS)172.9%72.9%38.0%2.1%15.4%22.5%9.3%49.0%45.3%24.3%31.8%Adj.EPS(UBS)159.4%61.5%30.9%4.9%11.7%25.4%14.7%46.2%24.9%27.7%29.2%GAAPNetInc-69.1%1590.4%283.9%-34.1%n/a7.6%3.9%165.7%n/a95.6%77.3%GAAPEPS-70.6%1479.3%264.1%-32.3%n/a10.1%9.1%160.6%n/a96.6%73.6%AdjustedEBITDA124.7%52.6%27.1%-6.2%21.3%9.6%15.9%40.6%31.1%21.8%27.2%GAAPEBITDA-177.4%137.3%57.1%-2.0%112.1%19.6%24.2%77.4%88.6%46.4%43.9%Capex-67.9%-66.1%-28.9%23.9%167.6%182.4%-3.7%-19.8%-37.7%39.5%12.1%FreeCashFlow138.9%87.6%59.9%-53.2%15.4%12.3%11.7%48.5%33.6%17.8%27.1%FCFminusSBC-602.4%-380.3%206.0%-138.3%33.1%42.1%13.4%-88.7%120.5%42.8%52.2%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201896 Figure106:Revenue&KeyMetricsSummaryYelpRevenue&KeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ENetRevenueAdvertising177.0186.6199.6207.5214.7222.2234.9248.6770.7920.41,081.0Brandadvertising0.00.00.00.00.00.00.00.00.00.00.0Transactions18.118.418.52.71.83.75.64.857.715.823.5Otherservices2.23.84.34.42.23.94.44.614.715.115.9NetRevenue197.3208.9222.4214.5218.8229.7244.9258.0843.1951.31,120.3PPAs139,000148,000155,000157,559161,378167,833173,707179,787157559179787197479SalesperPPA1,2731,2611,2881,3171,3311,3241,3521,383141614481450Year-on-YearGrowthAdvertising28.2%22.8%22.0%21.3%21.3%19.1%17.7%19.8%23.4%19.4%17.4%Brandadvertising0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Transactions24.8%18.7%16.4%-84.0%-90.0%-80.0%-70.0%80.0%-7.8%-72.6%48.7%Otherservices-63.3%-36.7%-36.8%-38.2%0.0%2.0%3.0%5.0%-43.3%2.9%5.0%NetRevenue24.4%20.4%19.4%10.1%10.9%10.0%10.1%20.3%18.2%12.8%17.8%PPAs16.8%18.4%17.4%16.7%16.1%13.4%12.1%14.1%16.7%14.1%9.8%SalesperPPA9.7%3.8%3.9%3.9%4.5%5.0%5.0%5.0%5.2%4.9%4.7%Qtr-on-QtrGrowthAdvertising3.4%5.4%7.0%3.9%3.5%3.5%5.7%5.8%Brandadvertising0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Transactions9.0%1.7%0.5%-85.6%-31.9%103.3%50.8%-13.9%Otherservices-69.0%72.7%13.2%2.0%-49.8%76.2%14.3%4.0%NetRevenue1.3%5.8%6.5%-3.5%2.0%5.0%6.6%5.4%PPAs3.0%6.5%4.7%1.7%2.4%4.0%3.5%3.5%SalesperPPA0.5%-1.0%2.1%2.3%1.1%-0.5%2.1%2.3%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January201897 USInternet&InteractiveEntertainment10January201898 TravelUSInternet&InteractiveEntertainment10January201899 Expedia(EXPE,Buy,$160PT)EstimatesWearemodestlyadjustingourforwardoperatingestimatesreflectingbookings+11%YoYinFY18and10%inFY19.WeincreaseourFY19HomeAwayrevenueforecastreflecting27%YoYgrowth(from+19%).Momentumonthetraffic,booking&conversionelementsofthebusinessasaresultofreinvestmentsbackintoareaslikeproduct,technologyandmarketinggiveusconfidencetoincreaseourpriorconservativeestimates.Further,wenowfactorin$500mofseniornotescomingduein2018,resultinginlowerinterestexpenseandhigherEPSinFY18andFY19.Figure107:Oldvs.NewEstimatesQ42017FY2018FY2019OldNew%ChgOldNew%ChgOldNew%ChgCommentsGrossBookings$18,964$18,9640.0%$97,448$96,951-0.5%$107,106$106,948-0.1%Reflectsbookingsup11%YoYinFY18and10%inFY19Revenue$2,340$2,3400.0%$11,328$11,274-0.5%$12,431$12,5170.7%CoreOTA$1,853$1,8530.0%$8,633$8,587-0.5%$9,311$9,296-0.2%Egencia$124$1240.0%$556$549-1.4%$603$600-0.5%trivago$210$2100.0%$1,215$1,2150.0%$1,376$1,3760.0%HomeAway$226$2260.0%$1,343$1,3430.0%$1,599$1,7036.5%IncreaseFY19HomeAwayrevenuereflecting27%YoYgrowth(from+19%);Momentumonthetraffic,booking&conversionelementsofthebusinessasaresultofreinvestmentsmadebackintothebusinessinareaslikeproduct,technologyandmarketinggiveusconfidencetoincreaseourpriorconservativeestimateCorporate&Eliminations$(74)$(74)0.0%$(419)$(419)0.0%$(457)$(457)0.0%GAAPEBITDA$405$4050.0%$1,785$1,775-0.5%$2,080$2,0980.8%ReflectsmodestadjustmentstorevenueAdj.EBITDA$448$4480.0%$1,971$1,961-0.5%$2,281$2,3000.8%GAAPEPS$0.66$0.694.8%$3.39$3.523.8%$4.64$4.915.8%Primarilyreflectslowerinterestexpenseas$500mofnotescomeduein2018Adj.EPS$1.16$1.213.5%$5.45$5.623.1%$6.70$7.035.0%Source:Companyreports,UBSestimatesValuationWeareraisingourPTto$160(from$154)basedonSOTPanalysisbelowaswerollforwardourvaluationtobebasedonour2019operatingestimates.WeprovidecontextfortheSOTPinourblendedvaluationapproachappliedtoour2019estimates:EV/GAAPEBITDAof14.5x(0.93xtoGrowth)EV/(FCF-SBC)of25x(0.76xtoGrowth)USInternet&InteractiveEntertainment10January2018100 Figure108:EXPEPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$80$160$232%Upside/Downside-37%26%83%GAAPEBITDA(FY18E)$1,586$1,775$2,032EBITDAMargin14.5%15.7%17.5%GAAPEBITDA(FY19E)$1,724$2,098$2,431EBITDAMargin14.5%16.8%18.5%EV/2019EBITDA11.0x14.5x17.5xEBITDACAGR("17-"19)4.8%15.6%24.5%EV/EBITDAtoGrowth2.28x0.93x0.71xEnterpriseValue$18,967$30,416$42,551FCF-SBC(FY18E)$766$855$1,103FCF%ofSales7.0%7.6%9.5%FCF-SBC(FY19E)$832$1,143$1,314FCF%ofSales7.0%9.1%10.0%EV/2019FCF17.0x25.0x30.0xFCFCAGR("17-"19)13.5%33.0%42.6%EV/FCFtoGrowth1.26x0.76x0.70xEnterpriseValue$14,151$28,573$39,429WeightingsEVderivedfromGAAPEBITDA50%50%50%EVderivedfromFCF-SBC50%50%50%EnterpriseValue$16,559$29,495$40,990CapitalStructureAdjustmentsAdjustedNetDebt-2019E$3,606$3,606$3,606AdjustedSharesOutstanding161161161Source:Companyreports,FactSet,UBSestimatesUSInternet&InteractiveEntertainment10January2018101 USInternet&Figure109:SOTPAnalysisRevenueEBITDAValuation10January2018InteractiveEntertainment2017E2018E2019E"17-192017E2018E2019E"17-19MultipleMultipletoImpliedValueCommentsCAGRCAGRGrowthCoreOTA$7,876$8,587$9,2969%$2,074$2,188$2,4138%11.0xEBITDA1.40x$26,541BrandExpedia,Hotels.com,Orbitz,Hotwire,Venere,CarRentals.com,ExpediaAffiliateNetwork(EAN),AirAsiaJV,Travelocity,andWotif;WeassignahighermultipletoCoreOTAgivenpotentialfor(longerterm)synergies(andupside)associatedwithOrbitz,Wotif,andTravelocity.Egencia$508$549$6009%$97$105$1159%10.0xEBITDA1.15x$1,148AcquiredVIATravel(2012)andOrbitzforBusiness(2015);ManagementindicatedpotentialfutureM&AtoscalethecorporatetravelbusinessHomeAway$940$1,343$1,70335%$229$333$44339%18.0xEBITDA0.46x$7,974Momentumonthetraffic,booking&conversionelementsofthebusinessgiveusincreasedconfidenceingrowthprospects;Investmentstogrow(lessfocusonmargin)warrantahighermultipleforincreasedpotentialforsustainedgrowthandsolid#2positioninthesub-sectorOtherAssets$498Includesvaluationofstakesinnon-whollyownedprivateinvestmentsEliminations&$(405)$(419)$(457)6%$(657)$(671)$(697)3%10.0xEBITDAn/m$(6,974)EliminationofintersegmentrevenuesprimarilyrelatedUnallocatedOverheadtoadvertising&mediaservicesprovidedbytrivagoto(Corporate)theCoreOTAsegmentStockBased$(147)$(160)$(173)9%10.0xEBITDAn/m$(1,735)CompensationExpediaNetCash(Debt)$(3,606)Net(debt)reflectsourYE2018estimate;includesmerchant-relatedliabilitiesforconservatismTotalShares%OwnershipSharePriceMarketValueTrivago35060%$7.50$1,568Expediaholdsapproximately60%oftotaloutstandingshares(~65%ofthevotingpower)ofTrivago,atravelmetasearchoperator,whichwentpublicinDec"16.SharedOwned%OwnershipUBSPTImpliedValueDespegar9.614%$36.00$345Expediaholds9.59msharesor~14%oftotaloutstandingsharesofDespegar,aleadingOTAinLatinAmerica,whichwentpublicinOct"17.Total$25,759Est.SharesOutstanding(2019E)161ImpliedMarketValue(pershare)$160Source:Companyreports,UBSestimates102 Figure110:EXPEQ42017EarningsPreviewQ42017FY2018FY2019UBSEstConsEst%UBSvsConsUBSEstConsEstUBSEstConsEstGrossBookings$18,964$19,761-4.0%$96,951$99,887$106,948$110,865Revenue$2,340$2,355-0.6%$11,274$11,371$12,517$12,667CoreOTA$1,853$1,873-1.1%$8,587$8,740$9,296$9,574Egencia$124$131-5.1%$549$584$600$647trivago$210$2100.3%$1,215$1,263$1,376$1,438HomeAway$226$2212.5%$1,343$1,217$1,703$1,538Corporate&Eliminations$(74)$(80)7.8%$(419)$(422)$(457)$(480)GAAPEBITDA$405$429-5.8%$1,775$1,835$2,098$2,309Adj.EBITDA$448434.43.2%$1,961$1,927$2,300$2,276GAAPEPS$0.69$0.591.4%$3.52$3.03$4.91$4.33Adj.EPS$1.21$1.163.9%$5.62$5.39$7.03$6.51Source:Companyreports,Factset,UBSestimatesUSInternet&InteractiveEntertainment10January2018103 SummaryModelsFigure111:P&LSummaryExpediaP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ESales2,1892,5862,9662,3402,4912,8953,3222,56610,08111,27412,517GrossProfit(UBS)1,7702,1502,5101,9382,0272,4212,8282,1378,3679,41310,515SalesandMarketing(1,259)(1,433)(1,451)(1,143)(1,500)(1,658)(1,654)(1,261)(5,287)(6,074)(6,802)TechnologyandContent(309)(328)(336)(329)(324)(351)(368)(342)(1,303)(1,385)(1,415)Generalandadministrative(138)(157)(161)(171)(142)(169)(170)(171)(625)(652)(728)OperatingInc(UBS)64232562295612426363631,1521,3021,570Stock-BasedComp(47)(50)(6)(44)(41)(43)(41)(35)(147)(160)(173)Amortizationofint.assets(67)(66)(71)(69)(63)(62)(65)(62)(273)(252)(224)OperatingInc(GAAP)(73)103482182(68)1335322676938651,143Pre-TaxIncome(131)57415142(109)965012354837231,027IncomeTaxProvision47(3)(66)(33)25(22)(113)(53)(55)(162)(231)Adj.NetInc(UBS)714139919281584792557399001,133Adj.EPS(UBS)0.050.892.511.210.050.992.991.594.675.627.03DilutedSharesOutstanding156159159159160160160160158160161NetInc(GAAP)(86)57352109(83)76388178432559784EPS(GAAP)(0.57)0.362.230.69(0.53)0.482.441.122.773.524.91GAAPDilutedSharesOutstandin151157158158158159159159156159160AdjustedEBITDA208.2392.5709.3448.3221.9404.0802.8531.91,758.31,960.62,300.1GAAPEBITDA135.4320.1708.9404.7156.5357.4763.9497.11,569.11,774.92,097.7Capex(166.9)(190.0)(168.7)(187.2)(199.3)(231.6)(265.8)(205.3)(712.8)(901.9)(876.2)FreeCashFlow1,506.6502.2(612.3)(603.2)1,708.4712.7(928.1)(478.6)793.21,014.41,316.4FCFminusSBC1,459.4452.1(618.6)(646.9)1,667.1670.0(968.7)(513.5)646.0854.91,142.9%ofRevenueGrossProfit(UBS)80.9%83.1%84.6%82.8%81.4%83.6%85.1%83.3%83.0%83.5%84.0%SalesandMarketing-57.5%-55.4%-48.9%-48.9%-60.2%-57.3%-49.8%-49.2%-52.4%-53.9%-54.3%TechnologyandContent-14.1%-12.7%-11.3%-14.1%-13.0%-12.1%-11.1%-13.3%-12.9%-12.3%-11.3%Generalandadministrative-6.3%-6.1%-5.4%-7.3%-5.7%-5.9%-5.1%-6.7%-6.2%-5.8%-5.8%OperatingInc(UBS)2.9%9.0%18.9%12.6%2.4%8.4%19.2%14.2%11.4%11.6%12.5%Stock-BasedComp-2.2%-1.9%-0.2%-1.9%-1.7%-1.5%-1.2%-1.4%-1.5%-1.4%-1.4%Amortizationofint.assets-3.0%-2.6%-2.4%-3.0%-2.5%-2.2%-2.0%-2.4%-2.7%-2.2%-1.8%OperatingInc(GAAP)-3.3%4.0%16.2%7.8%-2.7%4.6%16.0%10.4%6.9%7.7%9.1%Pre-TaxIncome-6.0%2.2%14.0%6.1%-4.4%3.3%15.1%9.1%4.8%6.4%8.2%IncomeTaxProvision2.1%-0.1%-2.2%-1.4%1.0%-0.7%-3.4%-2.1%-0.5%-1.4%-1.8%Adj.NetInc(UBS)0.3%5.4%13.4%8.2%0.3%5.5%14.4%9.9%7.3%8.0%9.0%NetInc(GAAP)-3.9%2.2%11.9%4.7%-3.3%2.6%11.7%7.0%4.3%5.0%6.3%AdjustedEBITDA9.5%15.2%23.9%19.2%8.9%14.0%24.2%20.7%17.4%17.4%18.4%GAAPEBITDA6.2%12.4%23.9%17.3%6.3%12.3%23.0%19.4%15.6%15.7%16.8%Capex-7.6%-7.3%-5.7%-8.0%-8.0%-8.0%-8.0%-8.0%-7.1%-8.0%-7.0%FreeCashFlow68.8%19.4%-20.6%-25.8%68.6%24.6%-27.9%-18.7%7.9%9.0%10.5%FCFminusSBC66.7%17.5%-20.9%-27.6%66.9%23.1%-29.2%-20.0%6.4%7.6%9.1%Year-on-YearGrowthNetRevenue15.0%17.8%14.9%11.8%13.8%11.9%12.0%9.6%14.9%11.8%11.0%GrossProfit(UBS)17.7%19.9%15.8%12.4%14.5%12.6%12.7%10.3%16.4%12.5%11.7%SalesandMarketing22.0%26.9%21.0%19.2%19.1%15.7%14.0%10.3%22.4%14.9%12.0%TechnologyandContent10.0%13.4%15.9%5.7%5.0%7.0%9.4%3.8%11.2%6.3%2.1%Generalandadministrative7.2%4.5%16.1%11.1%3.2%8.3%5.5%0.3%9.7%4.3%11.6%OperatingInc(UBS)2.9%3.7%4.1%-1.9%-5.0%4.2%13.3%23.4%2.4%13.0%20.5%Stock-BasedComp-3.5%-50.1%-86.7%-2.5%-12.5%-14.7%546.4%-20.1%-39.0%8.3%8.7%Amortizationofint.assets-25.9%-21.3%-7.9%-31.2%-5.7%-5.9%-8.7%-10.9%-22.4%-7.8%-10.9%OperatingInc(GAAP)-25.1%300.5%24.8%23.4%-7.3%29.6%10.5%46.9%50.2%24.8%32.2%Pre-TaxIncome-20.9%-564.8%22.3%23.7%-17.3%70.0%20.6%64.7%74.7%49.7%41.9%IncomeTaxProvision-18.5%-116.5%9.0%8.3%-46.6%619.9%70.6%61.1%260.0%194.2%42.7%Adj.NetInc(UBS)-46.4%9.9%6.6%5.0%8.1%12.1%20.0%32.8%5.3%21.7%25.9%Adj.EPS(UBS)-46.6%7.3%4.1%2.8%5.6%11.1%19.2%32.0%3.4%20.4%25.1%NetInc(GAAP)-20.7%79.1%26.1%37.4%-3.2%33.8%10.2%63.5%53.3%29.4%40.3%EPS(GAAP)-20.4%75.1%23.3%34.8%-8.0%32.5%9.4%62.5%50.9%27.1%39.4%AdjustedEBITDA17.9%18.6%6.4%1.5%6.6%2.9%13.2%18.7%8.8%11.5%17.3%GAAPEBITDA38.2%41.7%20.8%6.4%15.6%11.7%7.8%22.8%21.6%13.1%18.2%Capex-0.4%-10.5%-9.8%2.7%19.4%21.9%57.5%9.6%-4.9%26.5%-2.9%FreeCashFlow59.4%25.2%65.7%273.2%13.4%41.9%51.6%-20.7%-2.7%27.9%29.8%FCFminusSBC62.9%50.3%48.5%213.3%14.2%48.2%56.6%-20.6%12.6%32.3%33.7%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018104 Figure112:Revenue&KeyMetricsSummaryExpediaRevenue&KeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ENetRevenueCoreOTA1,7002,0092,3141,8531,8942,1922,4992,0027,8768,5879,296Egencia123135126124124149139137508549600trivago2863283382103003283552311,1621,2151,376HomeAway1852243052262773344542779401,3431,703CorporateandEliminations(104)(110)(117)(74)(105)(108)(124)(81)(405)(419)(457)NetRevenue2,1892,5862,9662,3402,4912,8953,3222,56610,08111,27412,517GrossBookingsCoreOTABookings19,11018,95418,45615,70220,81720,87720,15117,13272,22278,97685,491EgenciaBookings1,8041,7611,7281,5341,7521,8651,8471,6656,8277,1307,792HomeAwayBookings2,6972,1232,0131,7283,4522,7172,5162,1608,56110,84513,665TotalGrossBookings23,61122,83822,19718,96426,02125,46024,51420,95687,61096,951106,948HotelRoomNights64.079.993.574.072.391.9107.585.8311.4357.6402.1Year-on-YearGrowthCoreOTA10.4%13.8%11.1%9.3%11.4%9.1%8.0%8.0%11.2%9.0%8.3%Egencia11.8%8.0%12.5%7.1%1.1%10.5%10.0%9.9%9.8%8.0%9.3%trivago62.5%63.2%22.5%15.0%5.0%0.0%5.0%10.0%39.0%4.5%13.2%HomeAway30.3%30.2%45.2%36.4%49.9%49.0%48.9%22.5%36.3%42.8%26.8%GrossBookings14.1%12.4%11.0%9.0%10.2%11.5%10.4%10.5%11.7%10.7%10.3%CoreOTABookings10.9%10.3%8.5%7.2%8.9%10.1%9.2%9.1%9.3%9.4%8.2%EgenciaBookings8.9%4.9%9.4%5.5%-2.9%5.9%6.9%8.5%7.2%4.4%9.3%HotelRoomNights12.0%21.0%16.0%14.0%13.0%15.0%15.0%16.0%16.0%14.8%12.5%Qtr-on-QtrGrowthCoreOTA0.3%18.2%15.2%-19.9%2.2%15.7%14.0%-19.9%Egencia24.1%-2.4%-1.9%-11.2%14.2%6.5%-1.0%-9.9%trivago56.3%14.7%3.0%-37.7%42.7%9.2%8.2%-34.8%HomeAway11.4%21.1%36.2%-25.8%22.5%20.3%36.0%-38.9%GrossBookings35.7%-3.3%-2.8%-14.6%37.2%-2.2%-3.7%-14.5%CoreOTABookings30.4%-0.8%-2.6%-14.9%32.6%0.3%-3.5%-15.0%EgenciaBookings24.1%-2.4%-1.9%-11.2%14.2%6.5%-1.0%-9.9%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018105 USInternet&InteractiveEntertainment10January2018106 Priceline(PCLN,Buy,$2,150PT)EstimatesWemodestlyadjustoperatingestimatesreflectingroomnightgrowthof15%inFY18and13%inFY19andconstantcurrencyADRapprox.flattoup1%YoY.WeexpectFY18bookingsgrowthof14%YoYandFY19growthof13.5%YoY.WeraiseourGAAPEBITDAestimatesasaresultofslightlyhigherrevenueexpectationsandslightlylowerperformanceadvertisingspendinFY19.Figure113:Oldvs.NewEstimatesQ42017FY2018FY2019OldNew%ChgOldNew%ChgOldNew%ChgCommentsGrossBookings$17,421$17,4210.0%$92,151$92,1510.0%$102,913$104,6201.7%CorrespondstoFY18bookingsgrowthof14%YoYandFY19growthof13.5%YoY;ourestsreflectroomnightgrowthof15%inFY18and13%inFY19andconstantcurrencyADRapprox.flattoup1%YoYRevenue$2,728$2,7280.0%$14,540$14,5400.0%$16,062$16,3191.6%Correspondstogrowthof15%YoYinFY18and12%inFY19;WetakeupourrevenueestsslightlyasaresultofslightlyhigherbookingsGrossProfit$2,658$2,6580.0%$14,242$14,2420.0%$15,750$16,0021.6%Correspondstogrowthof16%YoYforFY18and12%YoYinFY19;reflectsgrossmarginsapprox.flatYoYin2018GAAPEBITDA$928$9340.7%$5,167$5,3162.9%$5,724$6,0205.2%ReflectsslightadvertisingdeleverageinFY18inadditiontonon-adopexdeleveragefortheyear;thatsaid,weexpectbest-in-classconversionadvantagestopersistonpaidsearchandmetasearchplatforms;AdjustmentstoFY19primarilyrelatestohighergrossprofitandslightlylowerperformanceadvertisingspendAdj.EBITDA$928$9340.7%$5,167$5,3162.9%$5,724$6,0205.2%GAAPEPS$13.26$13.370.8%$78.19$80.713.2%$88.18$93.235.7%Weforecast~$390minsharerepurchasesinQ4and~$810mofrepurchasesinFY18Adj.EPS$14.05$14.160.8%$81.38$83.903.1%$91.31$96.335.5%Source:Companyreports,UBSestimatesNote:PCLNstoppedexcludingSBCfromAdj.EBITDAin2016ValuationWeincreaseourPTfrom$2,000to$2,150aswerollforwardourvaluationframeworkbasedonouradjustedblendedvaluationapproach(50%EV/GAAPEBITDAand50%EV/(FCF-SBC))appliedtoour2019estimates:EV/GAAPEBITDAmultipleof14.0xbasedonEV/GAAPEBITDAto-Growthof1.09xEV/(FCF-SBC)multipleof19.0xbasedonEV/(FCF-SBC)-to-Growthof1.74xUSInternet&InteractiveEntertainment10January2018107 Figure114:PCLNPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$1,440$2,150$2,850%Upside/Downside-23%15%53%GAAPEBITDA(FY18E)$4,886$5,316$5,520EBITDAMargin35.0%36.6%36.5%GAAPEBITDA(FY19E)$5,216$6,020$6,487EBITDAMargin34.0%36.9%37.5%EV/2019EBITDA10.0x14.0x18.0xEBITDACAGR("17-"19)5.0%12.8%17.1%EV/EBITDAtoGrowth2.00x1.09x1.05xEnterpriseValue$52,155$84,278$116,762FCF-SBC(FY18E)$3,908$4,275$4,612FCF%ofSales28.0%29.4%30.5%FCF-SBC(FY19E)$4,142$4,918$5,449FCF%ofSales27.0%30.1%31.5%EV/2019FCF13.0x19.0x24.0xFCFCAGR("17-"19)1.8%10.9%16.8%EV/FCFtoGrowth7.20x1.74x1.43xEnterpriseValue$53,843$93,448$130,774WeightingsEVderivedfromGAAPEBITDA50%50%50%EVderivedfromFCF-SBC50%50%50%EnterpriseValue$52,999$88,863$123,768CapitalStructureAdjustmentsAdjustedNetDebt-2019E$(18,568)$(18,568)$(18,568)AdjustedSharesOutstanding505050Source:Companyreports,FactSet,UBSestimatesFigure115:PCLNQ42017EarningsPreviewQ42017FY2018FY2019UBSEstConsEst%UBSvsConsUBSEstConsEstUBSEstConsEstGrossBookings$17,421$17,3200.6%$92,151$92,496$104,620$104,825Revenue$2,728$2,7030.9%$14,540$14,390$16,319$16,297GrossProfit$2,658$2,6400.7%$14,242$14,075$16,002$15,942GAAPEBITDA$934$9231.2%$5,316$5,282$6,020$6,003Adj.EBITDA$934995.9-6.2%$5,316$5,541$6,020$6,287GAAPEPS$13.37$13.360.1%$80.71$80.30$93.23$91.83Adj.EPS$14.16$14.080.6%$83.90$82.85$96.33$94.20Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018108 SummaryModelsFigure116:P&LSummaryPCLNP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ENetRevenue2,4193,0254,4342,7282,8733,5285,0193,12012,60614,54016,319GrossProfit(UBS)2,3342,9524,3752,6582,7823,4524,9623,04612,31814,24216,002PerformanceAdvertising(981)(1,148)(1,224)(864)(1,141)(1,329)(1,389)(975)(4,216)(4,834)(5,411)BrandAdvertising(73)(121)(113)(66)(106)(162)(156)(82)(373)(507)(569)SalesandMarketing(114)(132)(166)(146)(139)(162)(198)(174)(557)(673)(749)Personnel(exSBC)(292)(319)(417)(367)(381)(414)(471)(420)(1,395)(1,687)(1,896)Generalandadministrative(136)(142)(143)(140)(167)(173)(162)(160)(560)(661)(743)InformationTechnology(40)(45)(48)(45)(50)(55)(54)(52)(178)(211)(238)Depreciation(40)(45)(51)(49)(54)(58)(63)(59)(185)(235)(276)Stock-BasedComp(59)(67)(66)(95)(76)(87)(80)(109)(288)(353)(377)OperatingInc(UBS)5999342,1478856681,0112,3871,0154,5665,0815,744Amortizationofintangibles(43)(41)(45)(47)(46)(45)(44)(43)(176)(177)(162)OperatingInc(GAAP)5568932,1028396229672,3439724,3904,9045,582Pre-TaxIncome5288632,0677975869312,3119474,2554,7765,523IncomeTaxProvision(72)(143)(346)(136)(80)(154)(387)(161)(697)(783)(904)Adj.NetInc(UBS)4947581,7607005338201,9658333,7134,1514,773Adj.EPS(UBS)9.8815.1435.2214.1610.7616.5539.6616.9074.4383.9096.33DilutedSharesOutstanding5050504950505049504950NetInc(GAAP)4567201,7206625067771,9247863,5583,9934,619EPS(GAAP)9.1114.3934.4313.3710.2315.6938.8315.9471.3380.7193.23AdjustedEBITDA634.8974.12,187.7934.5722.21,069.52,449.81,074.24,7315,3166,020GAAPEBITDA639.9979.12,197.7934.5722.21,069.52,449.81,074.24,7515,3166,020Capex(70.6)(76.7)(76.4)(79.7)(83.5)(93.2)(91.6)(94.4)(303.4)(362.7)(391.5)FreeCashFlow310.11,144.51,810.21,019.1388.31,033.81,927.51,277.84,2844,6275,295FCFminusSBC251.11,077.61,743.7923.7312.1946.81,847.41,168.53,9964,2754,918%ofRevenueGrossProfit(UBS)96.5%97.6%98.7%97.4%96.8%97.8%98.9%97.6%97.7%97.9%98.1%PerformanceAdvertising-40.5%-37.9%-27.6%-31.7%-39.7%-37.7%-27.7%-31.2%-33.4%-33.2%-33.2%BrandAdvertising-3.0%-4.0%-2.5%-2.4%-3.7%-4.6%-3.1%-2.6%-3.0%-3.5%-3.5%SalesandMarketing-4.7%-4.4%-3.7%-5.4%-4.8%-4.6%-4.0%-5.6%-4.4%-4.6%-4.6%Personnel(exSBC)-12.1%-10.5%-9.4%-13.4%-13.3%-11.7%-9.4%-13.5%-11.1%-11.6%-11.6%Generalandadministrative-5.6%-4.7%-3.2%-5.1%-5.8%-4.9%-3.2%-5.1%-4.4%-4.5%-4.6%InformationTechnology-1.7%-1.5%-1.1%-1.7%-1.7%-1.6%-1.1%-1.7%-1.4%-1.5%-1.5%Depreciation-1.7%-1.5%-1.1%-1.8%-1.9%-1.6%-1.3%-1.9%-1.5%-1.6%-1.7%Stock-BasedComp-2.4%-2.2%-1.5%-3.5%-2.7%-2.5%-1.6%-3.5%-2.3%-2.4%-2.3%OperatingInc(UBS)24.8%30.9%48.4%32.5%23.2%28.7%47.6%32.5%36.2%34.9%35.2%Amortizationofintangibles-1.8%-1.4%-1.0%-1.7%-1.6%-1.3%-0.9%-1.4%-1.4%-1.2%-1.0%OperatingInc(GAAP)23.0%29.5%47.4%30.8%21.7%27.4%46.7%31.2%34.8%33.7%34.2%Pre-TaxIncome21.8%28.5%46.6%29.2%20.4%26.4%46.0%30.3%33.8%32.8%33.8%IncomeTaxProvision-3.0%-4.7%-7.8%-5.0%-2.8%-4.4%-7.7%-5.2%-5.5%-5.4%-5.5%Adj.NetInc(UBS)20.4%25.1%39.7%25.7%18.5%23.2%39.2%26.7%29.5%28.5%29.2%NetInc(GAAP)18.8%23.8%38.8%24.3%17.6%22.0%38.3%25.2%28.2%27.5%28.3%AdjustedEBITDA26.2%32.2%49.3%34.3%25.1%30.3%48.8%34.4%37.5%36.6%36.9%GAAPEBITDA26.4%32.4%49.6%34.3%25.1%30.3%48.8%34.4%37.7%36.6%36.9%Capex-2.9%-2.5%-1.7%-2.9%-2.9%-2.6%-1.8%-3.0%-2.4%-2.5%-2.4%FreeCashFlow12.8%37.8%40.8%37.4%13.5%29.3%38.4%41.0%34.0%31.8%32.4%FCFminusSBC10.4%35.6%39.3%33.9%10.9%26.8%36.8%37.4%31.7%29.4%30.1%Year-on-YearGrowthNetRevenue12.6%18.3%20.1%16.1%18.7%16.7%13.2%14.4%17.3%15.3%12.2%GrossProfit(UBS)15.6%21.5%21.9%16.7%19.2%17.0%13.4%14.6%19.4%15.6%12.4%PerformanceAdvertising25.8%24.6%17.7%17.0%16.3%15.8%13.5%12.9%21.2%14.6%11.9%BrandAdvertising4.5%7.9%55.0%63.1%44.8%33.9%38.6%23.8%26.3%35.6%12.4%SalesandMarketing23.5%24.8%32.6%29.9%22.0%23.2%19.9%18.8%28.1%20.8%11.2%Personnel(exSBC)20.5%14.8%42.1%27.8%30.5%29.9%13.0%14.6%26.7%21.0%12.4%Generalandadministrative19.9%25.7%24.6%20.7%23.1%21.9%13.4%14.6%22.7%18.2%12.4%InformationTechnology21.8%25.2%31.6%20.7%25.4%23.2%13.4%14.6%24.9%18.9%12.4%Depreciation32.6%29.0%37.6%28.6%34.7%29.9%24.5%21.1%31.9%27.1%17.4%Stock-BasedComp-10.7%21.7%22.8%28.0%29.3%30.1%20.6%14.6%15.2%22.6%6.9%OperatingInc(UBS)1.1%20.5%18.2%6.4%11.4%8.2%11.2%14.6%13.7%11.3%13.1%Amortizationofintangibles1.5%-4.4%8.0%11.7%6.0%8.5%-3.5%-8.1%4.1%0.4%-8.1%OperatingInc(GAAP)1.1%22.0%152.2%6.1%11.8%8.2%11.5%15.9%51.1%11.7%13.8%Pre-TaxIncome14.6%24.6%159.2%4.5%11.2%7.9%11.8%18.8%56.8%12.2%15.6%IncomeTaxProvision-16.4%27.7%18.8%52.7%11.2%7.9%11.8%18.8%20.5%12.3%15.5%Adj.NetInc(UBS)7.2%20.2%18.6%-1.5%7.8%8.2%11.6%18.9%13.0%11.8%15.0%Adj.EPS(UBS)7.4%20.2%18.6%-0.4%8.9%9.3%12.6%19.4%13.4%12.7%14.8%NetInc(GAAP)21.7%24.0%240.0%-1.8%11.2%7.9%11.8%18.8%66.7%12.2%15.7%EPS(GAAP)21.9%24.0%240.0%-0.7%12.3%9.0%12.8%19.2%67.2%13.2%15.5%AdjustedEBITDA4.0%20.0%18.4%7.6%13.8%9.8%12.0%15.0%14.3%12.4%13.2%GAAPEBITDA2.7%20.9%141.0%7.4%12.9%9.2%11.5%15.0%47.8%11.9%13.2%Capex32.5%26.9%40.5%53.9%18.3%21.5%19.9%18.4%38.0%19.5%7.9%FreeCashFlow6.5%26.4%24.5%-3.4%25.2%-9.7%6.5%25.4%15.6%8.0%14.4%FCFminusSBC11.6%26.7%24.6%-5.8%24.3%-12.1%5.9%26.5%15.7%7.0%15.1%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018109 Figure117:Revenue&KeyMetricsSummaryPCLNRevenue&KeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ENetRevenueAgencyRevenues1,7852,3323,5242,0232,1622,7654,0262,3419,66411,29412,817MerchantRevenues4424986844924805407405412,1162,3012,467OtherRevenues1921942262132302232532398259461,035NetRevenue2,4193,0254,4342,7282,8733,5285,0193,12012,60614,54016,319GrossBookings20,68620,79721,76217,42123,84623,91224,66919,72380,66692,151104,620AgencyBookings18,14017,94718,59414,87420,91120,63521,07816,84069,55579,46490,219AgencyTakeRate9.8%13.0%19.0%13.6%10.3%13.4%19.1%13.9%13.9%14.2%14.2%MerchantBookings2,5462,8503,1682,5472,9353,2773,5912,88411,11112,68714,401MerchantTakeRate17.4%17.5%21.6%19.3%16.4%16.5%20.6%18.8%19.0%18.1%17.1%HotelRoomNights173.9170.2177.5147.9203.5197.4202.4168.6669.5771.8874.2Year-on-YearGrowthAgencyRevenues19.0%25.9%21.8%16.5%21.1%18.6%14.3%15.7%21.1%16.9%13.5%MerchantRevenues-6.0%-3.8%10.3%11.8%8.6%8.4%8.1%10.0%3.3%8.7%7.2%OtherRevenues7.9%4.9%27.1%24.0%20.0%15.0%12.0%12.0%15.8%14.6%9.5%NetRevenue12.6%18.3%20.1%16.1%18.7%16.7%13.2%14.4%17.3%15.3%12.2%GrossBookings24.2%16.4%17.9%15.3%15.3%15.0%13.4%13.2%18.5%14.2%13.5%AgencyBookings24.8%16.8%18.0%14.6%15.3%15.0%13.4%13.2%18.6%14.2%13.5%MerchantBookings20.2%14.3%17.2%19.4%15.3%15.0%13.4%13.2%17.6%14.2%13.5%HotelRoomNights27.4%21.0%18.6%14.0%17.0%16.0%14.0%14.0%20.3%15.3%13.3%Qtr-on-QtrGrowthAgencyRevenues2.8%30.6%51.1%-42.6%6.9%27.9%45.6%-41.9%MerchantRevenues0.5%12.7%37.4%-28.2%-2.3%12.4%37.0%-26.9%OtherRevenues11.7%1.0%16.5%-5.7%8.1%-3.2%13.4%-5.7%NetRevenue3.0%25.0%46.6%-38.5%5.3%22.8%42.3%-37.8%GrossBookings36.9%0.5%4.6%-19.9%36.9%0.3%3.2%-20.0%AgencyBookings39.8%-1.1%3.6%-20.0%40.6%-1.3%2.1%-20.1%MerchantBookings19.3%11.9%11.2%-19.6%15.2%11.6%9.6%-19.7%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018110 USInternet&InteractiveEntertainment10January2018111 TripAdvisor(TRIP,Neutral,$35PT)EstimatesWereduceourFY18&FY19revenueexpectations(relatedtoclick-based&transactionrevenue)asaresultofdownwardlyrevisedhotelshoppergrowthestimates(hotelshoppergrowthwasflatinOctober).Thatsaid,weexpectcontinuedsolidexecutioninnon-Hotel.OurlowerEBITDAexpectationsprimarilyreflectlowerrevenueassumptionsaswellasslightlyhighertechnology&contentexpense(thoughstillexpectthislineitemtodecreaseasapercentofrevenueinFY18&FY19).Figure118:Oldvs.NewEstimatesQ42017FY2018FY2019OldNew%ChgOldNew%ChgOldNew%ChgCommentsRevenue$316$306-3.3%$1,629$1,573-3.4%$1,812$1,733-4.3%RevisionsforFY17&FY18aresultofdownwardlyrevisedclickbasedrevenuefromlowerhotelshoppergrowthestimates(hotelshoppergrowthwasflatinOctober);Thatsaid,weexpectcontinuedsolidexecutioninnon-HotelHotel$238$228-4.4%$1,202$1,146-4.7%$1,316$1,237-6.0%Click-based&transaction$140$130-7.4%$754$697-7.4%$836$758-9.4%Downwardrevisionsreflectlowerhotelshoppergrowthasresultofcontinuedrelativeoutperformanceofmobileshoppergrowthandunder-performanceofdeskptopshoppergrowth(hotelshoppergrowthwasflatinOctober)Display-basedadvertising&subscription$69$690.0%$295$2950.0%$319$3190.0%Reflectslow-to-midsingledigitgrowthinFY18Otherhotelrevenue$29$290.0%$153$1530.0%$160$1600.0%FY18expectedtogrowmid-singledigitsNon-Hotel$78$780.0%$427$4270.0%$496$4960.0%Expect18%YoYgrowthinFY18onthebackofinitiativestoincreasebookablesupplywithinAttractions,Restaurants&VacationRentals,bettermobilefunctionalityanddrivingengagement&conversionGAAPEBITDA$43$34-19.6%$266$207-22.3%$339$270-20.3%Ournewestsprimarilyreflectlowerrevenuegrowthandslightlyhighertechnology&contentexpense(thoughstillexpectthislineitemtodecreaseasapercentofrevenueinFY18&FY19)Adj.EBITDA$64$55-12.9%$356$299-16.1%$437$368-15.9%GAAPEPS$0.06$0.03-56.9%$0.70$0.42-39.3%$1.12$0.78-30.1%PrimarilyreflectsEBITDAassumptionsAdj.EPS$0.20$0.16-18.8%$1.23$0.96-21.6%$1.57$1.26-19.9%Source:Companyreports,UBSestimatesValuationWeincreaseourPTfrom$34to$35aswerolloverourvaluationframeworkbasedonouradjustedblendedvaluationapproach(50%EV/GAAPEBITDAand50%EV/(FCF-SBC))appliedtoour2019estimates:EV/GAAPEBITDAmultipleof14.0xbasedonEV/GAAPEBITDAto-Growthof1.69xEV/(FCF-SBC)multipleof20.0xbasedonEV/(FCF-SBC)-to-Growthof0.88xUSInternet&InteractiveEntertainment10January2018112 Figure119:TRIPPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$18$35$51%Upside/Downside-48%2%48%GAAPEBITDA(FY18E)$174$207$245EBITDAMargin11.5%13.1%15.0%GAAPEBITDA(FY19E)$163$270$331EBITDAMargin10.0%15.6%18.0%EV/2019EBITDA10.00x14.00x18.00xEBITDACAGR("17-"19)-15.9%8.3%19.8%EV/EBITDAtoGrowth-0.63x1.69x0.91xEnterpriseValue$1,629$3,782$5,952FCF-SBC(FY18E)$121$142$180FCF%ofSales8.0%9.1%11.0%FCF-SBC(FY19E)$114$199$257FCF%ofSales7.0%11.5%14.0%EV/2019FCF13.00x20.00x25.00xFCFCAGR("17-"19)-7.1%22.7%39.5%EV/FCFtoGrowth-1.83x0.88x0.63xEnterpriseValue$1,482$3,979$6,429WeightingsEVderivedfromGAAPEBITDA50%50%50%EVderivedfromFCF-SBC50%50%50%EnterpriseValue$1,556$3,881$6,190CapitalStructureAdjustmentsAdjustedNetDebt-2019E$(1,078)$(1,078)$(1,078)AdjustedSharesOutstanding143143143Source:Companyreports,FactSet,UBSestimatesFigure120:TRIPQ42017EarningsPreviewQ42017FY2018FY2019UBSEstConsEst%UBSvsConsUBSEstConsEstUBSEstConsEstRevenue$306$309-1.1%$1,573$1,600$1,733$1,734Hotel$228$232-1.6%$1,146$1,164$1,237$1,205Click-based&transaction$130$131-1.0%$697$744$758$743Display-basedadvertising&$69$70-1.8%$295$291$319$300subscriptionOtherhotelrevenue$29$31-6.5%$153$153$160$162Non-Hotel$78$780.6%$427$437$496$522GAAPEBITDA$34$2822.0%$207$232$270$260Adj.EBITDA$5552.405.6%$299$309$368$354GAAPEPS$0.03$(0.00)n/a$0.42$0.42$0.78$0.64Adj.EPS$0.16$0.158.0%$0.96$1.07$1.26$1.27Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018113 SummaryModelsFigure121:P&LSummaryTripAdvisorP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ESales3724244393063624304573231,5411,5731,733GrossProfit(UBS)3554044192903454094353051,4681,4951,644SalesandMarketing(202)(223)(242)(165)(217)(241)(258)(176)(832)(893)(956)TechnologyandContent(52)(51)(49)(46)(51)(52)(50)(47)(198)(199)(211)Generalandadministrative(28)(29)(33)(24)(25)(26)(30)(23)(114)(104)(110)Depreciation(19)(19)(19)(17)(19)(19)(20)(18)(74)(76)(84)OperatingInc(UBS)5482763833717742250223284Stock-BasedComp(19)(28)(26)(21)(23)(24)(24)(21)(94)(92)(98)Amortizationofintangibles(8)(8)(8)(8)(7)(7)(7)(6)(32)(27)(22)OperatingInc(GAAP)27464293404714124104165Pre-TaxIncome2544386(1)36431011387151IncomeTaxProvision(12)(17)(13)(2)0(12)(14)(3)(44)(28)(39)Adj.NetInc(UBS)3553502318444824161135180Adj.EPS(UBS)0.240.380.360.160.130.320.340.171.140.961.26Adj.SharesOutstanding145141139139140140141141141140142NetInc(GAAP)1327254(1)242976959112EPS(GAAP)0.090.190.180.03(0.01)0.170.210.050.490.420.78GAAPSharesOutstanding145141139139140140141141141140142AdjustedEBITDA73101955551919760324299368GAAPEBITDA5473693429667339230207270Capex(18)(17)(15)(13)(17)(16)(14)(13)(63)(60)(62)FreeCashFlow116204(150)56116232(172)59226235297FCFminusSBC97176(176)3593208(196)37132142199%ofRevenueGrossProfit(UBS)95.4%95.3%95.4%94.8%95.2%95.0%95.2%94.6%95.28%95.0%94.9%SalesandMarketing-54.3%-52.6%-55.1%-54.0%-60.0%-56.0%-56.5%-54.5%-54.0%-56.8%-55.1%TechnologyandContent-14.0%-12.0%-11.2%-15.0%-14.0%-12.0%-11.0%-14.5%-12.8%-12.7%-12.2%Generalandadministrative-7.5%-6.8%-7.5%-7.8%-7.0%-6.0%-6.5%-7.0%-7.4%-6.6%-6.3%Depreciation-5.1%-4.5%-4.3%-5.7%-5.1%-4.5%-4.3%-5.7%OperatingInc(UBS)14.5%19.3%17.3%12.4%9.1%16.6%16.9%12.9%16.2%14.2%16.4%Stock-BasedComp-5.1%-6.6%-5.9%-6.8%-6.3%-5.6%-5.2%-6.6%-6.1%-5.9%-5.6%Amortizationofintangibles-2.2%-1.9%-1.8%-2.5%-2.0%-1.6%-1.4%-1.9%-2.1%-1.7%-1.3%OperatingInc(GAAP)7.3%10.8%9.6%3.0%0.7%9.3%10.3%4.4%8.1%6.6%9.5%Pre-TaxIncome6.7%10.4%8.7%1.9%-0.4%8.4%9.4%3.1%7.3%5.6%8.7%IncomeTaxProvision-3.2%-4.0%-3.0%-0.7%0.1%-2.7%-3.0%-1.0%-2.9%-1.8%-2.3%Adj.NetInc(UBS)9.4%12.5%11.4%7.4%5.0%10.3%10.6%7.5%10.4%8.6%10.4%NetInc(GAAP)3.5%6.4%5.7%1.2%-0.3%5.7%6.4%2.1%4.5%3.8%6.4%AdjustedEBITDA19.6%23.8%21.6%18.1%14.2%21.0%21.2%18.6%21.0%19.0%21.2%GAAPEBITDA14.5%17.2%15.7%11.2%7.9%15.4%16.0%12.0%15.0%13.1%15.6%Capex-4.8%-4.0%-3.4%-4.3%-4.6%-3.8%-3.2%-4.1%-4.1%-3.8%-3.6%FreeCashFlow31.2%48.1%-34.2%18.3%31.9%53.9%-37.6%18.1%14.7%14.9%17.1%FCFminusSBC26.1%41.5%-40.1%11.5%25.6%48.3%-42.8%11.5%8.6%9.1%11.5%Year-on-YearGrowthSales5.7%8.4%4.3%-3.2%-2.6%1.5%4.1%5.5%4.1%2.1%10.2%GrossProfit(UBS)5.7%8.9%4.2%-3.3%-2.8%1.3%3.8%5.3%4.2%1.8%10.0%SalesandMarketing21.0%13.2%18.0%-1.1%7.7%8.1%6.7%6.5%13.1%7.3%7.0%TechnologyandContent0.0%-1.9%-3.9%-4.4%-2.4%1.3%2.6%2.0%-2.5%0.8%5.8%Generalandadministrative-12.5%7.4%3.1%-12.2%-9.4%-10.9%-10.0%-4.7%-3.6%-9.0%6.0%Depreciation18.8%11.8%5.6%-3.2%-2.6%1.5%4.1%5.5%7.9%2.1%10.1%OperatingInc(UBS)-21.7%5.1%-20.8%-5.3%-39.1%-13.1%1.4%9.8%-11.7%-10.8%27.5%Stock-BasedComp0.0%21.7%18.2%-4.9%20.5%-13.2%-9.3%1.6%9.2%-2.0%6.1%Amortizationofintangibles14.3%0.0%0.0%-3.8%-8.8%-13.5%-17.9%-19.0%2.2%-14.7%-19.0%OperatingInc(GAAP)-37.2%-2.1%-36.4%-7.2%-90.0%-13.0%11.7%52.2%-25.1%-16.5%58.6%Pre-TaxIncome-35.9%0.0%-39.7%47.0%-105.5%-18.3%12.8%70.9%-24.7%-22.5%72.6%IncomeTaxProvision33.3%70.0%62.5%-27.5%-103.7%-32.3%5.5%47.8%47.3%-36.6%40.3%Adj.NetInc(UBS)-28.6%-7.0%-35.9%-2.1%-47.8%-16.3%-3.3%7.5%-22.5%-15.8%32.9%Adj.EPS(UBS)-26.7%-3.1%-32.2%2.8%-45.7%-15.8%-4.5%5.9%-19.1%-15.4%30.9%NetInc(GAAP)-56.7%-20.6%-54.5%270.5%-107.2%-9.5%16.6%84.4%-42.7%-13.4%87.9%EPS(GAAP)-56.1%-17.2%-51.9%288.9%-107.5%-8.9%15.2%81.7%-40.4%-13.1%85.1%AdjustedEBITDA-14.1%6.3%-16.7%-4.6%-29.6%-10.4%2.0%8.5%-7.9%-7.9%23.1%GAAPEBITDA-18.2%1.4%-25.0%-4.5%-47.2%-9.3%6.2%12.7%-13.4%-10.2%30.6%Capex5.9%-10.5%-28.6%-8.5%-7.6%-4.8%-3.5%-0.5%-11.5%-4.4%2.9%FreeCashFlow6.4%-6.8%38.9%78.0%-0.3%13.8%14.6%4.3%-10.5%3.7%26.5%FCFminusSBC7.8%-10.2%35.4%270.1%-4.3%18.1%11.1%6.0%-20.6%7.8%39.6%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018114 Figure122:Revenue&KeyMetricsSummaryTripAdvisorRevenue&KeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ENetRevenueHotel3143263122282923133082331,1801,1461,237TripAdvisor-brandedclick-based&transaction211214195130184196186131750697758TripAdvisor-brandeddisplaybasedadvertising&subscription6574766968777972284295319Otherhotelrevenue3838412940404330146153160Non-Hotel5898127787111814990361427496NetRevenue3724244393063624304573231,5411,5731,733Year-on-YearGrowthHotel3.6%3.2%-2.5%-9.6%-7.1%-4.0%-1.1%2.3%-0.9%-2.9%7.9%TripAdvisor-brandedclick-based&transaction11.6%6.5%-5.3%-15.8%-12.7%-8.4%-4.4%0.8%0.0%-7.0%8.6%TripAdvisor-brandeddisplaybasedadvertising&subscription-4.4%2.8%4.1%0.0%4.0%4.0%4.0%4.0%0.7%4.0%8.0%Otherhotelrevenue-17.4%-11.6%0.0%0.0%5.0%5.0%5.0%5.0%-8.2%5.0%4.5%Non-Hotel18.4%30.7%25.7%22.0%22.0%20.0%17.0%15.0%24.9%18.2%16.2%NetRevenue5.7%8.4%4.3%-3.2%-2.6%1.5%4.1%5.5%4.1%2.1%10.2%Qtr-on-QtrGrowthHotel24.6%3.8%-4.3%-27.0%28.1%7.3%-1.4%-24.5%TripAdvisor-brandedclick-based&transaction37.0%1.4%-8.9%-33.5%42.0%6.4%-4.9%-29.9%TripAdvisor-brandeddisplaybasedadvertising&subscription-5.8%13.8%2.7%-9.2%-2.0%13.8%2.7%-9.2%Otherhotelrevenue31.0%0.0%7.9%-29.3%37.6%0.0%7.9%-29.3%Non-Hotel-9.4%69.0%29.6%-38.5%-9.4%66.2%26.4%-39.6%NetRevenue17.7%14.0%3.5%-30.3%18.5%18.8%6.2%-29.4%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018115 USInternet&InteractiveEntertainment10January2018116 Despegar(DESP,Buy,$36PT)EstimatesWhilewemakenochangestoourforwardoperatingestimates,weareupgradingDESPtoBuyfromNeutral(pleaseseeourcompanionDESPnotetitled"UpgradingaTriptoLatAm").Oneofthekeydebatessurroundingthestockhasbeenthepotentialfordecliningtakerates(specificallytheconsumerfee)chargedbythecompany.We"dnoteweforecastnetrevenuemargincomingdownfrom11.9%in2017to11.4%in2022.Forourdetailedthoughtsonthis,pleaseseeourrecentlypublishedinitiationreport(Link)andinteractivetakeratemodel(Link).ValuationOur$36PT(unchanged)isbasedonaweightedaveragemultiplesapproachappliedtoour"19operatingestimates.Specifically,weapply:EV/GAAPEBITDAof12.5x(0.45xtoGrowth).Thiscomparestotheaveragehistoricaltradingrangesof8.9x-18.6xEV/GAAPEBITDAand0.41x-1.05xEV/GAAPEBITDA-to-Growthforonlinetravelcomps(EXPE,PCLN,TRIP&CTRP).EV/FCF-SBCof17.5x(0.38xtoGrowth).Thiscomparestotheaveragehistoricaltradingrangesof10.0x-28.3xEV/(FCF-SBC)foronlinetravelcompsand0.11x-2.20xEV/FCF-SBC-to-Growthforonlinetravelcomps.Overthepastfewmonths,onlinetravelhasbeenahighlydebatedsectorresultinginabroadselloffacrossthegroup.Thiscomesasinvestorshavecalledintoquestionstructuralgrowthratesandwhetherwearefacinga"newnormal"asglobalOTAsdealwithunderperformingbrandsandcompetitionfromsupplierstryingtodrivedirecttrafficthroughloyalty/rewardsprogramsandmarketing.Overthissametime,wehaveseenDESPstockcomeunderpressureanditsvaluationdiscountexpandrelativetoonlinetravelpeers.USInternet&InteractiveEntertainment10January2018117 Figure123:DESPPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$24$36$50%Upside/Downside-15%28%77%GAAPEBITDA(FY18E)$90$102$116EBITDAMargin15.0%16.4%18.0%GAAPEBITDA(FY19E)$98$131$152EBITDAMargin14.0%17.5%19.0%EV/2019EBITDA10.0x12.5x15.0xEBITDACAGR("17-"19)10.1%27.6%37.6%EV/EBITDAtoGrowth0.99x0.45x0.40xEnterpriseValue$976$1,638$2,285FCF-SBC(FY18E)$96$111$129FCF%ofSales16.0%17.9%20.0%FCF-SBC(FY19E)$105$136$168FCF%ofSales15.0%18.2%21.0%EV/2019FCF13.0x17.5x22.0xFCFCAGR("17-"19)27.4%45.5%61.7%EV/FCFtoGrowth0.47x0.38x0.36xEnterpriseValue$1,359$2,388$3,705WeightingsEVderivedfromGAAPEBITDA50%50%50%EVderivedfromFCF-SBC50%50%50%EnterpriseValue$1,167$2,013$2,995CapitalStructureAdjustmentsAdjustedNetDebt-2019E$(461)$(461)$(461)AdjustedSharesOutstanding696969Source:Companyreports,FactSet,UBSestimatesFigure124:DESPQ42017EarningsPreviewQ42017FY2018FY2019UBSEstConsEst%UBSvsConsUBSEstConsEstUBSEstConsEstGrossBookings$1,165$1,192-2.3%$5,315$5,267$6,433$6,167Transactions2,290n/an/a10,815n/a12,964n/aRevenue$137$1360.4%$622$617$749$733GrossProfit$100$963.7%$448$443$539$524GAAPEBITDA$19$20-3.6%$102$101$131$123Adj.EBITDA$20$201.9%$106$105$136$136GAAPEPS$0.15$0.151.3%$0.87$0.80$1.15$1.04Adj.EPS$0.16$0.1416.5%$0.92$0.79$1.20$1.01Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018118 SummaryModelsFigure125:P&LSummaryDespegarP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenue125123131137144145164170517622749GrossProfit(UBS)948894100106104116123376448539Sellingandmarketing(36)(43)(41)(46)(44)(48)(51)(56)(166)(199)(237)Generalandadministrative(19)(19)(15)(21)(21)(22)(21)(22)(73)(86)(101)Technologyandcontent(15)(18)(19)(18)(19)(19)(20)(19)(70)(77)(89)OperatingInc(UBS)2510191723152527293542Amortizationofintangibles(2)(2)(2)(2)(2)(2)(3)(3)(8)(10)(12)OperatingInc(GAAP)2491816221424266786112Pre-TaxIncome1871514201221245478103IncomeTaxProvision(2)(4)(4)(3)(5)(3)(5)(6)(14)(18)(24)DilutedSharesOutstanding5959596969696969616969NetInc(GAAP)15311111691719416079EPS(GAAP)0.260.060.190.150.230.130.240.270.660.871.15EPS(Non-GAAP)0.280.070.200.160.240.150.250.280.710.921.20AdjustedEBITDA28.113.223.020.326.918.829.031.684.5106.3135.9GAAPEBITDA26.912.222.119.325.917.827.930.580.5102.1131.0Capex(3)(1)(2)(2)(2)(2)(2)(3)(8)(9)(11)FreeCashFlow165831265373969115141%ofRevenueGrossProfit(UBS)75.1%71.6%71.2%73.0%73.6%71.6%70.6%72.6%72.7%72.1%71.9%Sellingandmarketing-28.4%-35.1%-31.3%-33.5%-30.5%-33.4%-30.9%-33.0%-32.1%-32.0%-31.6%Generalandadministrative-15.1%-15.1%-11.7%-15.0%-14.5%-15.3%-12.9%-13.0%-14.2%-13.9%-13.5%Technologyandcontent-12.3%-14.3%-14.4%-13.0%-13.0%-13.2%-12.4%-11.1%-13.5%-12.4%-11.9%OperatingInc(UBS)20.2%7.9%14.6%12.2%16.3%10.4%15.1%16.1%5.6%5.6%5.5%Amortizationofintangibles-1.2%-1.7%-1.9%-1.6%-1.6%-1.7%-1.7%-1.6%-1.6%-1.6%-1.7%OperatingInc(GAAP)19.2%7.1%13.9%11.5%15.6%9.7%14.4%15.5%12.9%13.9%14.9%Pre-TaxIncome14.3%5.8%11.7%10.0%14.3%8.4%13.1%14.2%10.5%12.6%13.8%IncomeTaxProvision-2.0%-3.1%-3.2%-2.3%-3.3%-1.9%-3.0%-3.3%-2.6%-2.9%-3.2%NetIncome(GAAP)12.3%2.8%8.5%7.7%11.0%6.4%10.1%10.9%7.8%9.7%10.6%AdjustedEBITDA22.5%10.7%17.5%14.8%18.7%13.0%17.6%18.7%16.4%17.1%18.1%GAAPEBITDA21.5%9.9%16.8%14.1%18.0%12.3%17.0%18.0%15.6%16.4%17.5%Capex-2.4%-0.9%-1.7%-1.5%-1.5%-1.5%-1.5%-1.5%-1.6%-1.5%-1.5%FreeCashFlow13.1%3.8%6.5%22.4%17.9%3.4%22.3%23.0%13.3%18.6%18.9%Year-on-YearGrowthRevenue31.4%25.0%23.9%23.1%14.9%17.2%24.8%23.8%25.7%20.3%20.5%GrossProfit(UBS)52.3%35.9%17.1%28.2%12.6%17.2%23.8%23.2%32.1%19.3%20.2%Sellingandmarketing24.4%48.6%31.0%41.6%23.2%11.6%23.3%22.0%36.5%19.9%19.1%Generalandadministrative24.3%33.4%12.8%-6.5%10.4%18.9%38.1%7.3%13.4%17.5%17.4%Technologyandcontent-1.0%10.7%20.3%11.0%21.2%8.3%7.6%5.7%10.3%10.3%15.8%OperatingInc(UBS)974.2%61.0%-0.4%110.3%-7.4%54.0%28.7%63.8%44.0%19.8%19.0%Amortizationofintangibles-12.2%6.3%19.1%2.9%49.9%18.9%12.4%26.5%4.7%24.7%21.0%OperatingInc(GAAP)946.4%46.8%-5.2%108.9%-7.0%58.8%29.6%67.2%90.5%29.1%29.5%Pre-TaxIncome835.6%206.2%-16.4%141.9%14.6%67.6%39.3%76.4%91.1%44.3%32.0%IncomeTaxProvision-6.0%74.8%3.0%90.7%89.5%-26.9%17.7%76.4%29.3%31.9%32.0%NetInc(GAAP)-2194.4%1803.4%-21.9%162.9%2.5%173.3%47.3%76.4%127.7%48.4%32.0%AdjustedEBITDA425.7%42.5%0.9%81.5%-4.1%43.0%25.7%55.9%74.0%25.8%27.8%GAAPEBITDA408.4%33.0%-3.1%79.4%-3.6%45.6%26.4%58.3%67.6%26.9%28.3%Capex200.0%28.2%31.8%n/an/an/an/an/a90.3%10.9%20.5%FreeCashFlow-133.5%-1043.0%-156.7%n/an/an/an/an/an/a68.6%22.4%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018119 Figure126:Revenue&KeyMetricsSummaryDespegarRevenue&KeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenue125123131137144145164170517622749Air566159247274311Packages,Hotels&Other696373270348438GrossBookings1,0191,0611,1161,1651,1681,2581,4021,4874,3615,3156,433Transactions2,1292,2102,2982,2902,4272,6082,8732,9088,92710,81512,964AirTransactions1,2461,3251,3285,2496,0026,936Pkg.,Hotels,OtherTransactions8838859703,6784,8136,028AverageSellingPricePerOrder479480486509481483488511489491496NetRevenueMargin12.3%11.6%11.8%11.8%12.3%11.5%11.7%11.4%11.9%11.7%11.7%AirRev/Order454644474645Pkg.,Hotels,OtherRev/Order787175737273Year-on-YearGrowthRevenue31.4%25.0%23.9%23.1%14.9%17.2%24.8%23.8%25.7%20.3%20.5%Air34.1%20.4%7.1%20.1%10.8%13.7%Packages,Hotels&Other29.3%29.8%41.6%31.3%29.1%25.9%GrossBookings54.1%40.5%32.1%16.7%14.6%18.6%25.6%27.6%33.8%21.9%21.0%Transactions30.4%29.6%24.9%12.5%14.0%18.0%25.0%27.0%23.8%21.2%19.9%AirTransactions34.3%31.3%22.0%23.5%14.4%15.6%Pkg.,Hotels,OtherTransactions25.4%26.9%29.3%24.1%30.9%25.3%AverageSellingPricePerOrder18.1%8.4%5.7%8.1%0.6%1.0%NetRevenueMargin(bps)-212-144-78623-14-8-35-76-15-5AirRev/Order-0.1%-8.3%-12.1%-1.9%-3.1%-1.6%Pkg.,Hotels,OtherRev/Order3.2%2.2%9.5%6.3%-1.4%0.5%Qtr-on-QtrGrowthRevenue12.4%-1.2%6.5%4.1%4.9%0.8%13.4%3.3%Airn/a9.3%-4.0%Packages,Hotels&Othern/a-9.7%16.5%GrossBookings2.1%4.1%5.2%4.4%0.2%7.8%11.4%6.1%Transactions4.6%3.8%4.0%-0.4%6.0%7.4%10.2%1.2%AirTransactions1.7%6.3%0.3%Pkg.,Hotels,OtherTransactions9.1%0.2%9.6%AverageSellingPricePerOrder-2.4%0.3%1.2%4.8%-5.4%0.3%1.2%4.8%NetRevenueMargin(bps)113-6314-355-8020-30AirRev/Ordern/a2.8%-4.2%Pkg.,Hotels,OtherRev/Ordern/a-9.9%6.4%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018120 USInternet&InteractiveEntertainment10January2018121 Travelport(TVPT,Neutral,$14PT)EstimatesWemodestlyadjustoperatingestimatesreflectingnetrevenuegrowthof~3-4%YoYinFY18&FY19.Further,wenowexpecteNettgrowthinFY18of24%YoYand11%inFY19.AdjustmentsreflectimpactofFlightCentreroll-off(whichishighermargin),partiallyoffsetbyhighervolumesfromOTAwins(lowermargin).Figure127:Oldvs.NewEstimatesQ42017FY2018FY2019OldNew%ChangeOldNew%ChangeOldNew%ChangeCommentsTotalRevenue$564$5640.0%$2,519$2,514-0.2%$2,609$2,598-0.4%Reflectsnetrevenuegrowthof~3-4%YoYinFY18&FY19;IncludesimpactofFlightCentrerolloff,partiallyoffsetbyhighervolumesfromOTAwinsAir$383$3830.0%$1,754$1,738-0.9%$1,819$1,779-2.2%BeyondAir$159$1590.0%$673$6841.6%$698$7274.1%WenowexpecteNettgrowthinFY18of24%YoYand11%inFY19TechnologyServices$22$220.0%$92$920.0%$92$920.0%AdjEBITDA$130$128-1.0%$618$599-3.0%$641$620-3.2%ReflectscontinuedrolloffofFlightCenter(whichishighermargin)andOTAwins(highervolume/lowermargin)aswellascontinuedinvestmentsinareassuchasmobileplatform,paymentproducts,APIdevelopmentGAAPEBITDA$102$1074.2%$556$5611.0%$578$5820.6%ReflectschangestoAdj.EBITDA,offsetbyslightlylowernon-corecorporatecostsAdjEPS$0.23$0.22-3.5%$1.46$1.34-7.8%$1.51$1.41-7.0%GAAPEPS$0.02$0.05164.3%$0.83$0.897.6%$0.96$1.026.2%Source:Companyreports,UBSestimatesValuationWelowerourPTfrom$15to$14basedonouradjustedblendedvaluationapproach(50%EV/GAAPEBITDAand50%EV/(FCF-SBC))appliedtoour2019estimates:EV/GAAPEBITDAmultipleof7.0x(unchanged)whichequatestoEV/GAAPEBITDAto-Growthof2.90xEV/(FCF-SBC)multipleof13.0xbasedonEV/(FCF-SBC)-to-Growthof0.72xUSInternet&InteractiveEntertainment10January2018122 Figure128:TVPTPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$5$14$21%Upside/Downside-61%8%62%GAAPEBITDA(FY18E)$512$561$595EBITDAMargin21.0%22.3%23.0%GAAPEBITDA(FY19E)$524$582$621EBITDAMargin21.0%22.4%23.0%EV/2019EBITDA6.00x7.00x8.00xEBITDACAGR("17-"19)-2.8%2.4%5.9%EV/EBITDAtoGrowth-2.13x2.90x1.37xEnterpriseValue$3,142$4,071$4,971FCF-SBC(FY18E)$158$195$220FCF%ofSales6.5%7.8%8.5%FCF-SBC(FY19E)$162$236$270FCF%ofSales6.5%9.1%10.0%EV/2019FCF10.5x13.00x15.00xFCFCAGR("17-"19)-2.2%18.0%26.2%EV/FCFtoGrowth-4.74x0.72x0.57xEnterpriseValue$1,702$3,069$4,052WeightingsEVderivedfromGAAPEBITDA50%50%50%EVderivedfromFCF50%50%50%EnterpriseValue$2,422$3,570$4,512CapitalStructureAdjustmentsAdjustedNetDebt-2019E$1,779$1,779$1,779AdjustedSharesOutstanding128128128Source:Companyreports,FactSet,UBSestimatesFigure129:TVPTQ42017EarningsPreviewQ42017FY2018FY2019UBSEstConsEst%UBSvsConsUBSEstConsEstUBSEstConsEstTotalRevenue$564$567-0.5%$2,514$2,526$2,598$2,526Air$383383-0.1%$1,738$1,741$1,779$1,802BeyondAir$159160-0.7%$684$700$727$780TechnologyServices$2224-7.2%$92$99$92$103AdjEBITDA$128134-4.5%$599$613$620$643GAAPEBITDA$107117-9.0%$561522$582583AdjEPS$0.22$0.23-1.3%$1.34$1.45$1.41$1.60GAAPEPS$0.05$0.04n/a$0.89$0.90$1.02$1.15Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018123 SummaryModelsFigure130:P&LSummaryTVPTP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ENetRevenue6516126115646566306355932,4382,5142,598GrossProfit(UBS)3593413243123573473433271,3371,3741,415CoreSG&Acosts(107)(114)(106)(97)(106)(116)(111)(101)(424)(434)(447)TechnologyCosts(84)(80)(81)(87)(85)(83)(83)(90)(333)(341)(347)OperatingInc(UBS)107857669105858774337351372non-CoreSG&A(6)(1)(5)(21)(7)(2)(6)(23)(33)(38)(39)AmortizationofIntangiblers(10)(10)(10)(10)(10)(10)(10)(10)(41)(39)(36)EBITDA(GAAP)171146131107160146143112OperatingInc(GAAP)9974613788737241270274297Pre-TaxIncome694227960454414147163190IncomeTaxProvision(13)(8)(23)(2)(18)(14)(13)(4)(45)(49)(56)NetInc(GAAP)56345742323110102114134EPS(GAAP)0.450.280.040.050.330.250.240.080.820.891.02Adj.NetInc(UBS)6450232953394239166173184Adj.EPS(UBS)0.510.400.180.220.410.300.320.300.820.891.02DilutedSharesOutstanding126126126127128129130130126129131AdjustedEBITDA168.6147.0136.4128.2166.2147.8149.1135.7580.2598.8620.4GAAPEBITDA170.6146.2130.9106.8159.6146.0143.4112.3554.5561.3581.5Capex(23.6)(23.2)(32.4)(28.2)(36.1)(34.6)(31.8)(29.6)(107.4)(132.1)(116.9)FreeCashFlow71.460.463.48.858.852.4136.2(20.5)203.9227.0262.8FCFminusSBC63.652.554.7(1.3)50.944.2128.6(28.5)169.5195.1236.1%ofRevenueGrossProfit(UBS)55.2%55.8%53.0%55.4%54.5%55.1%53.9%55.2%54.8%54.7%54.5%CoreSG&Acosts-16.4%-18.6%-17.4%-17.2%-16.2%-18.5%-17.4%-17.0%-17.4%-17.3%-17.2%TechnologyCosts-12.9%-13.1%-13.3%-15.5%-12.9%-13.1%-13.1%-15.3%-13.6%-13.6%-13.4%OperatingInc(UBS)16.5%13.9%12.5%12.2%16.0%13.4%13.8%12.5%13.8%14.0%14.3%non-CoreSG&A-0.9%-0.1%-0.9%-3.8%-1.0%-0.3%-0.9%-3.9%-1.4%-1.5%-1.5%AmortizationofIntangiblers-1.6%-1.7%-1.7%-1.8%-1.5%-1.6%-1.5%-1.6%-1.7%-1.6%-1.4%OperatingInc(GAAP)15.2%12.1%9.9%6.6%13.4%11.6%11.3%7.0%11.1%10.9%11.4%Pre-TaxIncome10.5%6.9%4.5%1.5%9.1%7.2%7.0%2.4%6.0%6.5%7.3%IncomeTaxProvision-2.0%-1.3%-3.7%-0.3%-2.7%-2.1%-2.1%-0.7%-1.8%-1.9%-2.2%NetInc(GAAP)8.6%5.6%0.8%1.2%6.4%5.0%4.9%1.6%4.2%4.5%5.2%Adj.NetInc(UBS)9.9%8.2%3.7%5.1%8.1%6.2%6.6%6.6%6.8%6.9%7.1%AdjustedEBITDA25.9%24.0%22.3%22.7%25.3%23.5%23.5%22.9%23.8%23.8%23.9%GAAPEBITDA26.2%23.9%21.4%18.9%24.3%23.2%22.6%18.9%22.7%22.3%22.4%Capex-3.6%-3.8%-5.3%-5.0%-5.5%-5.5%-5.0%-5.0%-4.4%-5.3%-4.5%FreeCashFlow11.0%9.9%10.4%1.6%9.0%8.3%21.4%-3.5%8.4%9.0%10.1%FCFminusSBC9.8%8.6%9.0%-0.2%7.8%7.0%20.2%-4.8%7.0%7.8%9.1%Year-on-YearGrowthNetRevenue6.8%1.0%3.4%3.4%0.8%2.9%4.0%5.1%3.7%3.1%3.3%GrossProfit(UBS)4.5%3.1%-4.2%2.1%-0.5%1.6%5.9%4.7%1.4%2.8%3.0%CoreSG&Acosts-2.3%5.6%-3.1%6.5%-0.1%2.1%4.0%4.1%1.5%2.5%3.0%TechnologyCosts4.2%-4.3%4.1%3.4%0.8%2.9%2.5%3.7%1.8%2.5%1.8%OperatingInc(UBS)11.2%2.5%-13.0%-6.7%-2.3%-0.2%14.5%7.9%-1.0%4.1%6.1%non-CoreSG&A2.4%-97.3%-59.9%-49.7%18.4%113.9%4.0%9.2%-64.2%12.6%3.7%AmortizationofIntangiblers-6.7%-26.1%-14.1%-0.5%-2.4%-1.9%-4.2%-7.8%-4.2%-7.8%-7.8%OperatingInc(GAAP)23.8%95.6%-2.4%78.3%-11.0%-1.3%18.5%11.5%34.8%1.4%8.4%Pre-TaxIncome174.7%-520.2%-13.4%-636.1%-12.7%7.0%63.0%60.8%227.4%11.4%16.3%IncomeTaxProvision63.4%76.1%124.4%-76.9%41.2%74.2%-41.0%141.2%50.6%9.4%14.4%NetInc(GAAP)225.1%-338.2%-78.1%-176.1%-24.9%-8.2%564.4%40.7%576.9%12.3%17.2%EPS(GAAP)233.6%-332.2%-77.1%-217.3%-26.7%-11.8%524.8%37.5%503.6%8.6%15.3%Adj.NetInc(UBS)26.3%45.8%-44.7%1.1%-17.7%-21.9%85.5%37.0%227.4%11.4%16.3%Adj.EPS(UBS)24.6%43.8%-45.5%-1.3%-19.3%-23.7%80.8%33.9%5.4%2.2%4.7%AdjustedEBITDA9.4%5.7%-9.3%-1.8%-1.4%0.5%9.3%5.8%1.1%3.2%3.6%GAAPEBITDA14.7%35.7%-4.2%21.3%-6.4%-0.1%9.5%5.1%15.2%1.2%3.6%Capex4.8%3.4%28.7%-24.5%52.8%49.2%-1.8%5.1%-0.1%23.0%-11.5%FreeCashFlow1839.0%11.2%-26.1%-81.6%-17.7%-13.1%114.9%-332.8%6.5%11.3%15.8%FCFminusSBCn/a10.6%-32.0%-103.4%-20.0%-15.8%135.2%2150.8%6.1%15.1%21.0%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018124 Figure131:Revenue&KeyMetricsSummaryTVPTRevenueandKeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenueAirRevenue4744244173834764354303971,6981,7381,779BeyondAirRevenue148160169159156173182173635684727TechnologyServices29282522232323231049292Revenue6516126115646566306355932,4382,5142,598RevenuebyRegionInternational4664284363994734474584231,7281,8011,875UnitedStates156156150143160160154147606621630TotalTravelPlatformRevenue6225845865426336076125702,3342,4222,506Passengers(mm)bysegmentsInternational5752524956535350209212216UnitedStates3635333037353430135135135TotalSegments9386857993888781344348352RevPasInternational$8.20$8.30$8.38$8.15$8.40$8.51$8.64$8.39$8.26$8.49$8.68UnitedStates$4.29$4.48$4.50$4.77$4.38$4.56$4.59$4.86$4.50$4.59$4.66TotalRevPas$6.67$6.76$6.86$6.86$6.82$6.93$7.07$7.07$6.79$6.97$7.13Year-on-YearGrowthAirRevenue7%-1%2%2%0%3%3%4%3%2%2%BeyondAirRevenue9%8%11%10%6%8%8%9%10%8%6%TechnologyServices-6%-11%-20%-20%-20%-20%-5%3%-14%-12%0%Revenue11%-3%-7%-7%-14%-10%6%15%4%3%3%RevenuebyRegionInternational1%0%0%3%3%3%3%3%6%4%4%UnitedStates1%0%0%3%3%3%3%3%1%3%1%TotalTravelPlatformRevenue7%2%5%5%2%4%4%5%5%4%3%Passengers(mm)bysegmentsInternational4%-1%4%3%-1%2%2%3%3%1%2%UnitedStates2%0%-2%1%1%1%1%1%0%0%0%TotalSegments4%0%2%2%0%1%1%2%2%1%1%RevPasBeyondAirRevenue9%8%11%10%6%8%8%9%10%8%6%TechnologyServices-6%-11%-20%-20%-20%-20%-5%3%-14%-12%0%TotalRevPas4%2%3%3%2%3%3%3%3%3%2%Qtr-on-QtrGrowthAirRevenue27%-11%-1%-8%24%-9%-1%-8%BeyondAirRevenue2%8%5%-6%-2%10%6%-5%TechnologyServices4%-1%-13%-10%4%-1%3%-3%Revenue19%-6%0%-8%16%-4%1%-7%RevenuebyRegionInternational23%-8%2%-9%19%-5%2%-8%UnitedStates12%0%-4%-5%12%0%-4%-5%TotalTravelPlatformRevenue20%-6%0%-8%17%-4%1%-7%Passengers(mm)bysegmentsInternational19%-9%1%-6%15%-7%1%-5%UnitedStates22%-4%-4%-10%22%-4%-4%-10%TotalSegments20%-7%-1%-8%18%-6%-1%-7%RevPasBeyondAirRevenue3%1%1%-3%3%1%1%-3%TechnologyServices-8%4%1%6%-8%4%1%6%TotalRevPas0%1%2%0%-1%2%2%0%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018125 USInternet&InteractiveEntertainment10January2018126 InteractiveEntertainmentUSInternet&InteractiveEntertainment10January2018127 ActivisionBlizzard(ATVI,Buy,$76PT)EstimatesWemodestlyraiseourFY2019revenueestimatesonthebackofourexpectationformorestableKinggrowthtrajectory(incl.Blizzardmobilegames)andslightuptickineSportsrevenues.Additionally,wemodestlydecreaseourFY2018andFY2019opexestimates(bothR&DandS&M)asweseegreateroperatingleveragefromthedigitalbusinessmodel.Figure132:Oldvs.NewEstimatesQ42017FY2018FY2019OldNew%ChangeOldNew%ChgOldNew%ChgCommentsAdjRevenue$2,384$2,3840.0%$7,334$7,3340.0%$7,487$7,6211.8%UpwardrevisiontoFY2019revenuesreflectsourexpectationfor(aspreviouslyamorestablegrowthtrajectoryofKing(incl.BlizzardmobileGAAPRevenue$1,744$1,7440.0%$6,948$6,9480.0%$7,197$7,3031.5%AdjEBITDA$970$9700.0%$2,732$2,7781.7%$2,828$2,9233.4%ReflectsimprovedtoplineassumptionsandmodestlylowerR&D(aspreviouslyandSales&MarketingexpensesinFY2018andFY2019asweAdjOpInc$939$9390.0%$2,597$2,6431.8%$2,704$2,7993.5%ReflectschangesinEBITDAestimates(aspreviouslyGAAPOpInc$181$1810.0%$1,675$1,7283.1%$2,199$2,2733.3%FCF$1,367$1,3670.0%$2,522$2,5511.2%$2,764$2,7931.0%ReflectschangesinEBITDAestimatesAdjEPS$0.85$0.850.0%$2.40$2.483.2%$2.50$2.625.1%ReflectschangesinEBITDAestimates(aspreviouslyGAAPEPS$0.12$0.120.0%$1.31$1.363.5%$1.85$1.923.6%Source:Companyreports,UBSestimatesValuationWeincreaseourPTto$76(from$75)basedon19.0xFCFmultiple(from21.6xonFY2018estimatesprior)appliedtoourrevisedFY2019FCFestimatefor2.04xmultiple-to-growth(vs.1.73xonFY2018estimatesprior).Thedecreaseinmultiplereflectstimevalueofmoneyaswerollforwardourvaluationframeworkto2019E.USInternet&InteractiveEntertainment10January2018128 Figure133:ATVIPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$49$76$105%Upside/Downside-26%15%58%Sales(FY18E)$7,114$7,334$7,555Bear/BullAdjustment-3%—3%Sales(FY19E)$7,163$7,621$8,078Bear/BullAdjustment-6%—6%SalesCAGR("17-"19)1.9%5.1%8.2%EBITDA(FY18E)$2,419$2,778$2,946EBITDAMargin34%38%39%EBITDA(FY19E)$2,507$2,923$3,231EBITDAMargin35%38%40%EBITDACAGR("17-"19)-0.2%7.8%13.3%FCF(FY18E)$2,277$2,551$2,795FCF%ofSales32%35%37%FCF(FY19E)$2,292$2,793$3,150FCF%ofSales32%37%39%EV/2019FCF14.0x19.0x24.0xFCFCAGR("17-"19)-1.0%9.3%16.1%EV/FCFtoGrowth-14.73x2.04x1.49xEnterpriseValue$32,092$53,068$75,609WeightingsEVderivedfromFCF100%100%100%EnterpriseValue$32,092$53,068$75,609CapitalStructureAdjustmentsAdjustedNetDebt-2019E$(5,928)$(5,928)$(5,893)DividendperShare$0.30$0.30$0.35Buyback(@CurrentPrice)---AdjustedSharesOutstanding774774774Source:Companyreports,FactSet,UBSestimatesFigure134:ATVIQ42017EarningsPreviewQ42017FY2018FY2019UBSEstConsEst%UBSvsConsGuidanceUBSEstConsEstUBSEstConsEstAdjRevenue$2,384$2,482-3.9%$2,335$7,334$7,420$7,621$8,022(previouslydefined)GAAPRevenue$1,744$1,833-4.9%$1,700$6,948$7,308$7,303$7,806AdjEBITDA(previously$970$998-2.8%n/a$2,778$2,922$2,778$3,146defined)AdjOpInc(previously$939$946-0.7%n/a$2,643$2,738$2,799$3,097defined)GAAPOpInc$181$254-28.8%$153$1,728$1,661$2,273$3,043FCF$1,367$929n/mn/a$2,551$2,077$2,793$2,327AdjEPS(previously$0.85$0.90-5.3%$0.82$2.48$2.56$2.62$2.91defined)GAAPEPS$0.12$0.20-41.7%$0.10$1.36$1.60$1.92$2.00Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018129 SummaryModelsFigure135:P&LSummaryATVIP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenue(GAAP)1,7261,6311,6181,7441,6321,6811,5492,0866,7196,9487,303DeferredRevenue(530)(213)284640(282)(77)306441181387318Revenue(Non-GAAP)1,1961,4181,9022,3841,3501,6031,8552,5266,9007,3347,621GrossProfit(UBS)8601,0821,3091,6699891,2921,2801,7684,9205,3295,552ProductDevelopment(213)(238)(258)(265)(229)(257)(269)(291)(974)(1,046)(1,067)Sales&Marketing(165)(226)(266)(346)(196)(249)(260)(360)(1,003)(1,064)(1,086)G&A(131)(147)(160)(119)(138)(156)(156)(126)(557)(577)(600)OperatingInc(UBS)3514716259394266315959922,3872,6432,799Stock-BasedComp(33)(39)(47)(57)(46)(48)(50)(49)(176)(193)(199)OperatingInc(GAAP)4933392571815344132465351,2701,7282,273Pre-TaxIncome4532932201404933732054941,1061,5652,109IncomeTaxProvision(27)(50)(32)(50)(178)(134)(30)(178)(159)(519)(627)Adj.NetInc(UBS)2363324586562964544277321,6821,9092,030Adj.EPS(UBS)0.310.430.600.850.390.590.550.952.202.482.62Adj.DilutedShares761764766769769770771771765770773GAAPNetInc426243188903162391753169471,0451,482GAAPEPS0.560.320.250.120.410.310.230.411.241.361.92GAAPDilutedShares761764766769769770771771765770773AdjustedEBITDA3855036589704586626291,0292,5162,7782,923GAAPEBITDA7175654773966625464086742,1552,2902,458Capex(21)(31)(34)(24)(24)(38)(55)(29)(110)(146)(131)FreeCashFlow3902343451,3671,113896(122)6642,3362,5512,793FCFminusSBC3571952981,3101,067849(172)6152,1602,3592,594%Non-GAAPRevenueGrossProfit(UBS)71.9%76.3%68.8%70.0%73.3%80.6%69.0%70.0%71.3%72.7%72.9%ProductDevelopment-17.8%-16.8%-13.6%-11.1%-17.0%-16.0%-14.5%-11.5%-14.1%-14.3%-14.0%Sales&Marketing-13.8%-15.9%-14.0%-14.5%-14.5%-15.5%-14.0%-14.3%-14.5%-14.5%-14.3%G&A-10.9%-10.4%-8.4%-5.0%-10.3%-9.8%-8.4%-5.0%-8.1%-7.9%-7.9%OperatingInc(UBS)29.4%33.2%32.9%39.4%31.5%39.3%32.1%39.3%34.6%36.0%36.7%Stock-BasedComp-2.8%-2.8%-2.5%-2.4%-3.4%-3.0%-2.7%-1.9%-2.6%-2.6%-2.6%OperatingInc(GAAP)41.2%23.9%13.5%7.6%39.6%25.8%13.2%21.2%18.4%23.6%29.8%Pre-TaxIncome37.9%20.7%11.6%5.9%36.5%23.2%11.0%19.5%16.0%21.3%27.7%IncomeTaxProvision-2.3%-3.5%-1.7%-2.1%-13.2%-8.4%-1.6%-7.0%-2.3%-7.1%-8.2%Adj.NetInc(UBS)19.7%23.4%24.1%27.5%21.9%28.3%23.0%29.0%24.4%26.0%26.6%AdjustedEBITDA32.2%35.5%34.6%40.7%33.9%41.3%33.9%40.7%36.5%37.9%38.4%Capex-1.8%-2.2%-1.8%-1.0%-1.8%-2.3%-3.0%-1.1%-1.6%-2.0%-1.7%FreeCashFlow32.6%16.5%18.1%57.4%82.5%55.9%-6.6%26.3%33.9%34.8%36.7%Year-on-YearGrowthRevenue(GAAP)18.6%3.9%3.2%-13.4%-5.4%3.1%-4.3%19.6%1.7%3.4%5.1%DeferredRevenue-3.1%-646.2%358.1%46.2%-46.7%-63.7%7.7%-31.2%n/a113.0%-17.8%Revenue(Non-GAAP)31.7%-11.9%16.7%-2.8%12.9%13.1%-2.5%6.0%4.6%6.3%3.9%GrossProfit(UBS)32.1%-10.6%8.6%3.4%15.0%19.4%-2.2%6.0%5.1%8.3%4.2%ProductDevelopment29.1%0.8%8.4%-2.7%7.7%7.8%4.3%9.8%6.9%7.4%2.1%Sales&Marketing24.9%-5.8%3.5%15.6%18.7%10.0%-2.4%4.1%8.0%6.1%2.1%G&A28.0%0.7%18.5%-3.9%5.9%6.4%-2.5%6.0%9.8%3.6%3.9%OperatingInc(UBS)39.5%-19.9%8.7%2.2%21.1%33.9%-4.8%5.6%2.3%10.7%5.9%Stock-BasedComp-24.8%-4.9%42.4%42.9%38.3%22.2%7.1%-14.2%11.5%9.4%3.0%OperatingInc(GAAP)6.9%46.1%-12.6%-57.4%8.3%22.0%-4.4%195.7%-10.1%36.1%31.5%Pre-TaxIncome10.8%75.4%-4.8%-53.3%8.9%27.2%-6.9%252.7%-0.1%41.5%34.8%IncomeTaxProvision-41.3%212.5%0.0%9.6%557.6%168.3%-6.9%252.7%13.9%225.8%20.8%Adj.NetInc(UBS)36.4%-17.8%15.4%-5.7%25.5%36.8%-6.8%11.6%0.7%13.5%6.3%Adj.EPS(UBS)35.0%-18.7%14.2%-7.0%24.2%35.7%-7.4%11.2%-0.4%12.7%5.9%NetInc(GAAP)18.3%62.0%-5.1%-64.6%-25.9%-1.8%-6.9%252.7%-1.5%10.4%41.8%EPS(GAAP)16.5%59.7%-6.3%-65.1%-26.7%-2.6%-7.5%251.3%-2.9%9.6%41.3%AdjustedEBITDA39.0%-18.7%8.4%1.8%18.9%31.6%-4.3%6.1%2.4%10.4%5.2%GAAPEBITDA26.2%21.2%-11.2%-40.9%-7.7%-3.3%-14.5%69.9%-3.9%6.2%7.3%Capex-22.2%-29.5%21.4%-34.0%16.0%21.2%61.4%18.4%-18.8%32.0%-10.3%FreeCashFlow25.8%-49.0%-19.4%66.4%185.4%283.1%-135.3%-51.4%15.7%9.2%9.5%FCFminusSBC34.2%-53.3%-24.6%67.6%199.0%335.3%-157.8%-53.1%16.1%9.2%10.0%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018130 Figure136:Revenue&KeyMetricsSummaryATVIRevenue&KeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenue(Non-GAAP)PCandOnline4194934694454575374974721,8261,9632,002Consoles2403657941,1942714166751,2652,5932,6272,726Mobile&Other4715005505465565905945892,0672,3292,457Distribution666089200666089200415415436Revenue(Non-GAAP)1,1961,4181,9022,3841,3501,6031,8552,5266,9007,3347,621Year-on-YearGrowthPCandOther39.2%-21.7%-32.1%-30.0%9.0%9.0%6.0%6.0%-19.1%7.5%2.0%Consoles-26.8%-17.0%90.4%10.0%13.0%14.0%-15.0%6.0%14.2%1.3%3.7%Mobile&Other103.0%3.3%20.9%2.0%18.0%18.0%8.0%8.0%21.1%12.7%5.5%Distribution40.4%9.1%32.8%2.0%0.0%0.0%0.0%0.0%13.7%0.0%5.0%Revenue(Non-GAAP)31.7%-11.9%16.7%-2.8%12.9%13.1%-2.5%6.0%4.6%6.3%3.9%Qtr-on-QtrGrowthPCandOther-34.1%17.7%-4.9%-5.1%2.6%17.7%-7.5%-5.1%Consoles-77.9%52.1%117.5%50.3%-77.3%53.4%62.2%87.5%Mobile&Other-12.0%6.2%10.0%-0.8%1.8%6.2%0.7%-0.8%Distribution-66.3%-9.1%48.3%124.6%-67.0%-9.1%48.3%124.6%Revenue(Non-GAAP)-51.2%18.6%34.1%25.4%-43.4%18.8%15.7%36.2%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018131 USInternet&InteractiveEntertainment10January2018132 ElectronicArts(EA,Buy,$132PT)EstimatesWemakenochangestoouroperatingestimatesatthistime.ValuationOur$132PT(nochange)isbasedona19.2xEV/FCFmultiple(nochange)appliedtoourFY19FCFestimate.Figure137:EAPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$78$132$175%Upside/Downside-29%21%60%Sales(FY18E)$4,995$5,203$5,412Bear/BullAdjustment-4%—4%Sales(FY19E)$5,246$5,581$5,916Bear/BullAdjustment-6%—6%SalesCAGR("17-"19)3.0%6.3%9.4%EBITDA(FY18E)$1,673$1,852$2,056EBITDAMargin34%36%38%EBITDA(FY19E)$1,889$2,093$2,307EBITDAMargin36%38%39%EBITDACAGR("17-"19)5.8%11.4%16.9%FCF(FY18E)$1,349$1,530$1,623FCF%ofSales27%29%30%FCF(FY19E)$1,364$1,825$2,011FCF%ofSales26%33%34%EV/2019FCF13.5x19.2x24.0xFCFCAGR("17-"19)-7.0%7.6%12.9%EV/FCFtoGrowthn/m2.54x1.86xEnterpriseValue$18,413$35,045$48,271WeightingsEVderivedfromFCF100%100%100%EnterpriseValue$18,413$35,045$48,271CapitalStructureAdjustmentsAdjustedNetDebt-FY19E$(5,454)$(5,454)$(5,454)DividendperShare$-$-$-Buyback(@CurrentPrice)000Adj.Shares-FY19E308308308Source:Companyreports,FactSet,UBSestimatesFigure138:EAFQ32018EarningsPreviewFQ3FY2018FY2018FY2019UBSEstConsEst%UBSvsConsGuidanceUBSEstConsEstUBSEstConsEstNon-GAAPRevenue$2,045$2,0201.2%$2,000$5,203$5,165$5,581$5,595(NetSales)GAAPRevenue$1,180$1,1244.9%$1,135$5,089$5,099$5,404$5,548AdjEBITDA(implied)$919$9071.3%n/a$1,852$1,810$2,093$2,105Non-GAAPOpInc$888$8771.3%$855$1,731$1,679$1,970$1,969(implied)GAAPOpInc$(43)$(59)26.9%($76)$1,371$1,362$1,542$1,628FreeCashFlow$898$8327.9%n/a$1,530$1,448$1,825$1,667AdjEPS(implied)$2.21$2.22-0.2%$2.15$4.34$4.24$4.92$4.97GAAPEPS$(0.18)$(0.20)11.0%($0.21)$3.72$3.63$4.13$4.11Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018133 SummaryModelsFigure139:P&LSummaryEAP&LSummary(USDmillions)Jun17Sep17Dec17EMar18EJun18ESep18EDec18EMar19EFY18EFY19EFY20ERevenue(GAAP)1,4499591,1801,5021,5541,0121,2431,5945,0895,4045,791DeferredRevenue(674)220865(297)(716)242970(319)114177112Revenue(Non-GAAP)7751,1792,0451,2058381,2542,2131,2755,2035,5815,902GrossProfit(UBS)6227911,5229816798511,6641,0473,9164,2414,515MarketingandSales(114)(151)(256)(120)(119)(157)(266)(121)(641)(663)(687)GeneralandAdministrative(93)(102)(102)(101)(98)(105)(105)(104)(398)(413)(422)ResearchandDevelopment(297)(295)(276)(277)(313)(308)(288)(287)(1,145)(1,195)(1,242)OperatingInc(UBS)1182438884821492801,0065351,7311,9702,165Stock-BasedComp(48)(62)(65)(65)(51)(64)(67)(67)(240)(250)(258)OperatingInc(GAAP)743(41)(43)712814(27)(32)7871,3711,5421,794Pre-TaxIncome749(38)(46)709809(32)(37)7831,3751,5231,780IncomeTaxProvision(105)16(9)(121)(121)14(7)(141)(219)(256)(317)Adj.NetInc(UBS)981946913741122157814141,3571,5221,677Adj.EPS(UBS)0.310.622.211.190.360.692.531.354.344.925.47Adj.DilutedShares313312313314311310309308313309307NetInc(GAAP)644(22)(55)589687(18)(44)6421,1561,2671,463EPS(GAAP)2.06(0.07)(0.18)1.882.21(0.06)(0.14)2.093.724.134.78GAAPDilutedShares313309309314311306305308311307306AdjustedEBITDA148.0273.0918.8512.1178.9311.61,036.7566.21,851.92,093.42,290.8GAAPEBITDA773.0(11.0)(12.6)742.5843.94.2(1.1)817.81,491.91,664.81,920.5Capex(33.0)(30.0)(27.1)(30.0)(42.7)(27.8)(28.6)(31.9)(120.2)(131.0)(140.6)FreeCashFlow143.022.0897.9467.2257.1(0.4)1,047.0521.71,530.21,825.31,887.5FCFminusSBC95.0(40.0)832.9402.0206.5(64.9)979.5454.51,289.91,575.51,629.4%Non-GAAPRevenueGrossProfit(UBS)80.3%67.1%74.4%81.4%81.0%67.8%75.2%82.1%75.3%76.0%76.5%MarketingandSales-14.7%-12.8%-12.5%-10.0%-14.2%-12.6%-12.0%-9.5%-12.3%-11.9%-11.6%GeneralandAdministrative-12.0%-8.7%-5.0%-8.4%-11.8%-8.4%-4.8%-8.2%-7.7%-7.4%-7.1%ResearchandDevelopment-38.3%-25.0%-13.5%-23.0%-37.3%-24.5%-13.0%-22.5%-22.0%-21.4%-21.0%OperatingInc(UBS)15.2%20.6%43.4%40.0%17.7%22.4%45.4%42.0%33.3%35.3%36.7%Stock-BasedComp-6.2%-5.3%-3.2%-5.4%-6.0%-5.1%-3.0%-5.3%-4.6%-4.5%-4.4%OperatingInc(GAAP)95.9%-3.5%-2.1%59.1%97.1%-2.1%-1.4%61.7%26.3%27.6%30.4%Pre-TaxIncome96.6%-3.2%-2.2%58.9%96.5%-2.5%-1.7%61.4%26.4%27.3%30.2%IncomeTaxProvision-13.5%1.4%-0.4%-10.0%-14.5%1.1%-0.3%-11.1%-4.2%-4.6%-5.4%Adj.NetInc(UBS)12.6%16.5%33.8%31.0%13.4%17.1%35.3%32.5%26.1%27.3%28.4%AdjustedEBITDA19.1%23.2%44.9%42.5%21.3%24.8%46.8%44.4%35.6%37.5%38.8%Capex-4.3%-2.5%-1.3%-2.5%-5.1%-2.2%-1.3%-2.5%-2.3%-2.3%-2.4%FreeCashFlow18.5%1.9%43.9%38.8%30.7%0.0%47.3%40.9%29.4%32.7%32.0%Year-on-YearGrowthRevenue(GAAP)14.0%6.8%2.7%-1.6%7.3%5.5%5.4%6.2%5.0%6.2%7.2%DeferredRevenue14.4%10.0%-6.1%-31.7%6.2%10.2%12.1%7.4%17.6%55.3%-36.9%Revenue(Non-GAAP)13.6%7.4%-1.2%10.3%8.2%6.4%8.2%5.8%5.3%7.3%5.8%GrossProfit(UBS)20.3%11.4%-3.2%10.1%9.2%7.6%9.3%6.8%6.1%8.3%6.5%MarketingandSales-5.8%11.9%10.2%-21.8%4.5%4.3%3.9%0.6%-0.1%3.5%3.6%GeneralandAdministrative-2.1%3.0%5.4%6.5%5.9%3.3%2.8%2.7%3.2%3.6%2.2%ResearchandDevelopment11.2%11.7%7.0%-9.7%5.3%4.2%4.2%3.5%4.5%4.4%3.9%OperatingInc(UBS)247.1%14.6%-9.8%43.8%25.9%15.4%13.2%11.1%10.5%13.8%9.9%Stock-BasedComp0.0%29.2%35.4%25.5%5.3%4.0%3.9%3.0%22.6%4.0%3.4%OperatingInc(GAAP)32.7%-16.3%978.6%-0.7%9.5%-34.4%-25.7%10.5%12.0%12.4%16.4%Pre-TaxIncome35.7%-26.9%663.0%-0.9%8.0%-16.5%-19.0%10.3%13.6%10.8%16.9%IncomeTaxProvision-6.3%14.3%-283.1%-19.6%15.7%-14.5%-23.1%16.8%-10.0%16.9%23.9%Adj.NetInc(UBS)345.3%17.7%-11.0%41.6%14.4%10.6%13.0%10.9%10.5%12.2%10.2%Adj.EPS(UBS)345.3%18.5%-10.9%40.9%15.3%11.5%14.4%13.0%10.6%13.5%11.0%NetInc(GAAP)46.4%-42.1%5393.7%4.0%6.7%-18.0%-19.7%9.0%19.5%9.6%15.5%EPS(GAAP)47.3%-43.6%5295.0%3.5%7.5%-17.1%-18.7%11.1%18.3%11.0%16.0%AdjustedEBITDA134.9%11.9%-9.4%39.9%20.9%14.1%12.8%10.6%9.8%13.0%9.4%GAAPEBITDA31.2%-35.3%-150.4%-0.7%9.2%-138.6%-90.9%10.2%10.9%11.6%15.4%Capex-17.5%3.4%8.5%3.6%29.5%-7.3%5.4%6.2%-2.3%9.1%7.3%FreeCashFlown/a-76.3%-17.6%23.6%79.8%-101.8%16.6%11.6%9.1%19.3%3.4%FCFminusSBC-146.1%-188.9%-20.1%23.3%117.4%62.2%17.6%13.0%6.9%22.1%3.4%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018134 Figure140:Revenue&KeyMetricsSummaryEARevenue&KeyMetricsSummary(USDmillions)Jun17Sep17Dec17EMar18EJun18ESep18EDec18EMar19EFY18EFY19EFY20ERevenue(Non-GAAP)Consoles4448531,5377824788981,6658153,6153,8554,051XboxOne,Playstation44268131,5207574698781,6578023,5163,8064,026Xbox360,Playstation3184017259209121005025OtherConsole00000000000Mobile151155191188175180221218685794905PC179166301227184171310234873899913Other1516815179303234Revenue(Non-GAAP)7751,1792,0451,2058381,2542,2131,2755,2035,5815,902Year-on-YearGrowthConsoles18.1%6.9%-1.4%12.6%7.6%5.3%8.3%4.2%5.5%6.6%5.1%XboxOne,Playstation427.2%17.8%2.0%14.0%10.0%8.0%9.0%6.0%10.6%8.2%5.8%Xbox360,Playstation3-56.1%-62.6%-75.0%-15.0%-50.0%-50.0%-50.0%-50.0%-59.3%-50.0%-50.0%OtherConsole0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Mobile7.1%12.3%9.0%8.0%16.0%16.0%16.0%16.0%9.0%16.0%14.0%PC20.1%11.4%-5.0%5.0%3.0%3.0%3.0%3.0%5.0%3.0%1.5%Other-93.3%-61.5%-20.0%5.0%5.0%5.0%5.0%5.0%-45.7%5.0%5.0%Revenue(Non-GAAP)13.6%7.4%-1.2%10.3%8.2%6.4%8.2%5.8%5.3%7.3%5.8%Qtr-on-QtrGrowthConsoles-36.0%92.1%80.2%-49.1%-38.9%88.0%85.4%-51.1%XboxOne,Playstation4-35.8%90.8%86.9%-50.2%-38.1%87.4%88.7%-51.6%Xbox360,Playstation3-37.9%122.2%-57.5%45.0%-63.5%122.2%-57.5%45.0%OtherConsole0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Mobile-13.2%2.6%23.1%-1.5%-6.8%2.6%23.1%-1.5%PC-17.1%-7.3%81.4%-24.7%-18.7%-7.3%81.4%-24.7%Other-87.5%400.0%220.0%-47.5%-87.5%400.0%220.0%-47.5%Revenue(Non-GAAP)-29.0%52.1%73.4%-41.1%-30.4%49.6%76.5%-42.4%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018135 USInternet&InteractiveEntertainment10January2018136 Zynga(ZNGA,Buy,$5.00PT)EstimatesWemodestlyraiseoperatingleverageassumptionsforbothR&DandSales&Marketinglinesasthecompanysquarelyfocusesonmanagingresourcesandexpensesgoingforward.WestillseeR&Dlineshowingfasterleverageon%ofsalesbasisthanS&MasZyngacontinuestoinvestinuseracquisitionwhilemoreselectivelyinvestindevelopmentprojects.Figure141:Oldvs.NewEstimatesQ42017FY2018FY2019OldNew%ChangeOldNew%ChangeOldNew%ChangeCommentsBookings$216$2160.0%$946$9460.0%$1,023$1,0230.0%WemakenochangestoourtoplineestimatesGAAPRevenue$221$2210.0%$937$9370.0%$1,023$1,0230.0%WemakenochangestoourtoplineestimatesAdjEBITDA$36$35-3.0%$173$1761.8%$203$2124.9%UpwardrevisioninFY18andFY19reflects(previouslyreported)improvedoperatingleverageassumptionsonbothR&DandS&MlinesAdjEBITDA$41$40-2.7%$165$1681.9%$203$2124.9%(newmethodology)FreeCashFlow$46$45-1.8%$164$1671.5%$190$1974.1%ReflectschangesinEBITDAestimatesGAAPEPS$0.02$0.02-5.5%$0.08$0.083.6%$0.11$0.128.6%ReflectschangesinEBITDAestimatesSource:Companyreports,UBSestimatesValuationWeincreaseourPTto$5.00(from$4.80)basedon17.5xFCFmultiple(from21.0xonFY2018estimatesprior)appliedtoourrevisedFY2019FCFestimatefor0.49xmultiple-to-growth(vs.0.26xonFY2018estimatesprior).Thedecreaseinmultiplereflectstimevalueofmoneyaswerollforwardourvaluationframeworkto2019E.USInternet&InteractiveEntertainment10January2018137 Figure142:ZNGAPriceTargetAnalysisSCENARIOANALYSISDOWNSIDEBASEUPSIDEValuation$2.90$5.00$7.50%Upside/Downside-25%30%94%Bookings(FY18E)$898$946$993Bear/BullAdjustment-5%—5%Bookings(FY19E)$941$1,023$1,105Bear/BullAdjustment-8%—8%SalesCAGR("17-"19)5.5%9.9%14.3%EBITDA(FY18E)$135$176$218EBITDAMargin15.0%18.6%22.0%EBITDA(FY19E)$122$212$276EBITDAMargin13.0%20.8%25.0%EBITDACAGR("17-"19)-2.4%28.6%46.6%FCF(FY18E)$126$167$199FCF%ofSales14.0%17.6%20.0%FCF(FY19E)$132$197$254FCF%ofSales14.0%19.3%23.0%EV/2019FCF12.0x17.5x22.5xFCFCAGR("17-"19)11.1%36.0%54.2%EV/FCFtoGrowth1.08x0.49x0.41xEnterpriseValue$1,581$3,456$5,716WeightingsEVderivedfromFCF100%100%100%EnterpriseValue$1,581$3,456$5,716CapitalStructureAdjustmentsAdjustedNetDebt-2019E$(1,034)$(1,034)$(1,034)Dividends$-$-$-Buyback(@CurrentPrice)$-$-$-AdjustedSharesOutstanding905905905Source:Companyreports,FactSet,UBSestimatesFigure143:ZNGAQ42017EarningsPreviewQ42017FY2018FY2019UBSEstConsEst%UBSvsConsGuidanceUBSEstConsEstUBSEstConsEstBookings$216$2131.2%$210$946$920$1,023$992GAAPRevenue$221$2190.9%$215$937$940$1,023$1,054AdjEBITDA$35$329.3%$30$176$170$212$218(previouslyreported)AdjEBITDA$40n/an/a$35$168n/a$212n/a(newmethodology)FCF$45$451.0%n;/a$167$149$197$182GAAPEPS$0.02$0.021.3%$0.01$0.08$0.09$0.12$0.10Source:FactSet,Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018138 SummaryModelsFigure144:P&LSummaryZNGAP&LSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenue(GAAP)1942092252212142342442468499371,023DeferredRevenue13(0)(11)(5)(2)(2)66(3)80Bookings(Non-GAAP)2072092132162122322502528469461,023GrossProfit(UBS)130145159155144163173173589652712ResearchandDevelopment(58)(55)(51)(51)(47)(54)(60)(59)(214)(220)(226)Sales&Marketing(45)(49)(52)(50)(48)(54)(60)(58)(196)(219)(237)G&A(19)(20)(20)(20)(17)(18)(17)(17)(79)(69)(60)OperatingInc(UBS)2627273030374345110155192Stock-BasedComp(18)(16)(16)(15)(14)(15)(17)(16)(64)(63)(63)OperatingInc(GAAP)(9)62019182220223682126Pre-TaxIncome(7)82323202522254792138IncomeTaxProvision(3)(3)(5)(5)(4)(5)(4)(5)(15)(18)(28)Adj.NetInc(UBS)00000000000Adj.EPS(UBS)0.000.000.000.000.000.000.000.000.000.000.00Adj.DilutedShares00000000000NetInc(GAAP)(9)51818162018203273110EPS(GAAP)(0.01)0.010.020.020.020.020.020.020.040.080.12GAAPDilutedShares876888894900900899899898889899902AdjustedEBITDA3030333536424850129176212GAAPEBITDA(0)1328252428252866106149Capex(2)(2)(3)(4)(3)(2)(3)(5)(11.2)(12.3)(13.5)FreeCashFlow(7)363245(18)474988107167197FCFminusSBC(25)201730(31)32327142104134%ofBookingsGrossProfit(UBS)62.7%69.5%74.5%71.6%67.7%70.3%69.4%68.6%69.6%69.0%69.6%ResearchandDevelopment-27.8%-26.3%-23.8%-23.5%-22.2%-23.2%-23.9%-23.4%-25.3%-23.2%-22.1%Sales&Marketing-21.6%-23.6%-24.4%-23.0%-22.7%-23.2%-23.9%-23.0%-23.2%-23.2%-23.2%G&A-9.1%-9.5%-9.5%-9.2%-8.1%-7.6%-6.8%-6.8%-9.3%-7.3%-5.9%OperatingInc(UBS)12.6%12.7%12.5%13.9%14.3%15.8%17.3%17.9%12.9%16.4%18.8%Stock-BasedComp-8.5%-7.8%-7.3%-7.0%-6.4%-6.7%-6.9%-6.6%-7.6%-6.6%-6.2%OperatingInc(GAAP)-4.3%2.7%9.3%8.9%8.4%9.7%7.8%8.8%4.2%8.6%12.4%Pre-TaxIncome-3.2%4.0%10.6%10.6%9.5%10.7%8.8%9.8%5.6%9.7%13.5%IncomeTaxProvision-1.4%-1.6%-2.1%-2.1%-1.9%-2.1%-1.8%-2.0%-1.8%-1.9%-2.7%Adj.NetInc(UBS)0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%AdjustedEBITDA14.3%14.3%15.7%16.4%16.8%18.1%19.4%20.0%15.2%18.6%20.8%Capex-1.1%-0.9%-1.3%-2.0%-1.2%-0.9%-1.2%-1.9%-1.3%-1.3%-1.3%FreeCashFlow-3.4%17.2%15.2%21.1%-8.3%20.4%19.8%34.8%12.6%17.6%19.3%Year-on-YearGrowthRevenue(GAAP)4.1%15.1%23.1%15.9%10.2%11.6%8.6%11.3%14.5%10.4%9.1%DeferredRevenuen/a-99.3%-177.7%-144.7%-113.0%3343.7%n/an/a-122.9%n/a-100.0%Bookings(Non-GAAP)14.2%19.8%8.5%7.2%2.5%10.8%17.0%16.6%12.1%11.8%8.2%GrossProfit(UBS)-0.2%14.7%31.7%20.0%10.6%11.9%8.9%11.6%16.3%10.7%9.1%ResearchandDevelopment-6.4%-9.1%-16.7%-18.2%-18.2%-2.2%17.5%16.2%-12.6%2.5%2.8%Sales&Marketing1.1%28.7%7.9%9.6%7.5%8.6%14.8%16.3%11.1%11.9%7.9%G&A-3.3%-8.7%10.1%-1.5%-9.7%-11.8%-15.5%-13.4%-1.2%-12.7%-13.2%OperatingInc(UBS)249.3%223.8%82.2%66.8%15.8%38.3%62.2%50.1%126.4%42.0%23.7%Stock-BasedComp-40.8%-39.7%-36.3%-43.3%-22.7%-5.0%10.2%9.9%-40.1%-2.7%0.9%OperatingInc(GAAP)-66.6%n/an/an/an/a293.1%-2.1%15.0%n/a127.9%54.5%Pre-TaxIncome-72.6%n/an/an/an/a194.4%-2.8%8.2%n/a94.1%50.1%IncomeTaxProvision15.6%556.5%-263.3%40.8%41.2%49.2%-3.2%8.2%344.3%19.9%50.1%Adj.NetInc(UBS)0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Adj.EPS(UBS)0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%GAAPNetInc-64.3%n/an/an/an/a289.2%-2.7%8.2%n/a129.6%50.1%GAAPEPS-64.5%n/an/an/an/a284.4%-3.3%8.5%n/a127.2%49.5%AdjustedEBITDA172.0%158.4%87.3%64.0%19.9%40.3%44.8%42.0%107.4%37.2%20.5%GAAPEBITDA-99.4%209.5%-177.0%-201.8%-24159.2%116.5%-7.8%10.5%-190.9%60.2%41.5%Capex-13.9%43.5%2.4%15.9%10.2%11.6%8.6%11.3%8.2%10.5%9.5%FreeCashFlow17.5%171.4%76.2%89.0%153.0%31.6%52.6%92.7%114.8%56.0%18.6%FCFminusSBC-31.0%-244.7%-374.0%-1354.2%27.5%61.7%92.0%133.5%-173.5%145.0%29.2%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018139 Figure145:Revenue&KeyMetricsSummaryZNGARevenue&KeyMetricsSummary(USDmillions)Q1"17Q2"17Q3"17Q4"17EQ1"18EQ2"18EQ3"18EQ4"18E2017E2018E2019ERevenueOnlineGame153164175169171184190188661734798Advertising4145495243495457188203224TotalRevenue(GAAP)1942092252212142342442468499371,023DeferredRevenue13(0)(11)(5)(2)(2)66(3)80Bookings(Non-GAAP)2072092132162122322502528469461,023DAUs(millions)2121212121222222212223DailyABPU($)0.1070.1090.1130.1130.1100.1180.1240.1260.1110.1200.123QuarterlyAdRev/DAU($)1.942.172.352.522.002.272.472.658.979.399.86Year-on-YearGrowthOnlineGame12.0%20.6%30.5%20.4%11.6%12.6%8.4%11.6%20.8%11.0%8.8%Advertising-17.8%-0.9%2.4%3.5%5.1%8.2%9.2%10.3%-3.3%8.3%10.3%TotalRevenue(GAAP)4.1%15.1%23.1%15.9%10.2%11.6%8.6%11.3%14.5%10.4%9.1%DeferredRevenuen/a-99.3%-177.7%-144.7%-113.0%3343.7%n/an/a-122.9%n/a-100.0%Bookings(Non-GAAP)14.2%19.8%8.5%7.2%2.5%10.8%17.0%16.6%12.1%11.8%8.2%DAUs(millions)10.5%16.7%16.7%15.0%2.0%3.0%4.0%5.0%14.7%3.5%5.0%DailyABPU($)3.9%1.9%-2.6%-5.5%3.0%8.0%10.0%11.0%-0.8%8.1%3.0%QuarterlyAdRev/DAU($)-25.7%-15.1%-12.2%-10.0%3.0%5.0%5.0%5.0%-15.6%4.7%5.0%Qtr-on-QtrGrowthOnlineGame9.5%6.7%7.0%-3.7%1.5%7.6%3.1%-0.8%Advertising-19.0%11.5%8.5%5.7%-17.8%14.8%9.5%6.7%TotalRevenue(GAAP)2.0%7.7%7.3%-1.7%-3.0%9.0%4.4%0.8%DeferredRevenue18.9%-100.4%n/a-55.8%-65.5%7.6%n/a-0.8%Bookings(Non-GAAP)2.9%0.9%2.1%1.2%-1.6%9.1%7.8%0.8%DAUs(millions)16.7%0.0%0.0%-1.4%3.5%1.0%1.0%-0.5%DailyABPU($)-10.8%1.9%3.7%0.4%-2.8%6.8%5.6%1.3%QuarterlyAdRev/DAU($)-30.6%11.5%8.5%7.2%-20.6%13.6%8.5%7.2%Source:Companyreports,UBSestimatesUSInternet&InteractiveEntertainment10January2018140 USInternet&InteractiveEntertainment10January2018141 AppendixUSInternet&InteractiveEntertainment10January2018142 USInternet&InteractiveEntertainmentCompTablesUBSInternet&InteractiveEntertainmentSummaryCompanyTickerRatingCurrentTarget%toTargetUpsideDownsideProsandConsFacebookFBBuy$188$21514%$288$126Pros:Highlypersonal/socialinnature;Potentialtodisrupttangentialbusinesses(search,businesslistings,etc.);ArrayofLTgrowthdriversCons:Lackofusers"intenttoconsume;Privacyconcerns;PotentialmarginheadwindsoverneartomediumtermAlphabetGOOGBuy$1,103$1,32520%$1,725$870Pros:Digitaladvertisingleader(mobile/desktop);Strongpositioninmobile(OS,hardware)andenterprise(GCP,apps);Historyofinnovation/disruptionCons:Pressuresonmarginsduetolong-tailedinvestments;RegulatoryconcernsIACIACBuy$132$16021%$214$100Pros:Strongmomentumingrowthproperties;Diversecollectionofadvertising-driven,local,andsocialbusinesses;ContinuedshareholderreturnsCons:Delayedinvestmentinmobile(mayposemonetizationchallenges);Dependenceondesktopengagement;SearchbusinessvolatilityMatchGroupMTCHBuy$32$4025%$62$20Pros:Strategicstrengths:scale,breath,profitability,demographics&accesstocapital;PotentialforTindermonetization&B/SleverageCons:Shifttomobile,mixshiftbetweenbrands,int"linvestmentsanduncertaincompetitiveenvironmentraiseconcernsaroundsustainabilityofprofitgrowthTwitterTWTRNeutral$24$253%$40$12Pros:Mobile-first;Personal/socialinnature;Uniquecharacteristics(real-time,public)Cons:Slowusergrowth;Challengedmgmt.adexecution;Heightenedcompetitionindigitaladvertising;InvestmentneededtoscaleinternationalAltabaAABABuy$77$9220%$125$54Pros:StakesinYahooJapanandAlibaba;Prospectsforcashreturns;PotentialtaxefficientoutcomesnotpricedinbythemarketAdvertising/ServicesCons:Inabilityformanagementtotaxefficientlymonetizenon-coreassetsSnapSNAPSell$15$8-45%$16$4Pros:Highlyengagedmillennialuserbasewithsignificantmonetizationrunwayahead;UniquecoststructureallowsforoutsideleverageLT10January2018Cons:Coredemohighlypenetrated&usergrowthslowedinQ3/Q4"16;Intensifiedcompetitivelanscape;UnprofitableinneartermNetflixNFLXBuy$213$25018%$385$120Pros:Continuedsubscribermomentuminint"lmarket;Stablechurnratedespitepriceincrease;PricingincreaseimprovingmarginsCons:Risingcontentspendputtingpressureonmargins;Leverageonbalancesheet;Abilitytoprocureint"lcontentthatwoulddriveint"lsubscribermomentumAmazonAMZNBuy$1,254$1,44015%$2,040$710Pros:Users"intenttoconsume;Suiteofseamlesslyconnectedapps;Historyofinnovationanddisruption(AWS,Kindle,Prime,Echo)Cons:Ongoinginvestmentinfulfillment,mediacontent,hardware,India&AWS;Questionsonmobilecomputing(devices/platform)eBayEBAYBuy$38$4417%$56$30Pros:Users"intenttoconsume;Personalizationeffortsandstructureddatainitiatives;TrackrecordofstrategicacquisitionsCons:Ongoingrecoveryfromtrafficheadwinds(securitybreach,Googlealgochange);Upcominginvestmentyear;StillemerginglocalpresenceGrouponGRPNSell$5.09$4.50-12%$6.65$2.30Pros:Globalscaleofusersandmerchantrelationships;DiversifyingbusinesswithPayments,Rewards,Getaways,etc.Cons:Businessmixtransitionandmanagementchange;PotentialformarginpressureduetocompetitionandinvestmentinuseracquisitionQVCGroupQVCABuy$26$3015%$44$18Pros:Impressiveglobalscaleandmarginlevels;Potentialupsidefromzulilysynergies;Shareholderreturns(buyback,M&A,etc.)Cons:Challengingmacro(especiallyintheUS);MorenascentInternationalbusinessescurrentlyadragonoverallmarginseCommerceYelpYELPSell$43$38-12%$55$26Pros:Scaleofuserreviewsandlocalmerchantrelationships;Effectivemobileimplementation;Highlysocial/personalinnatureCons:Potentialcompetitiveentrybylargerplayers;Unstablesalesforceproductivity;LackofInternationalpresencePayPalPYPLNeutral$79$835%$124$55Pros:Globalleaderinonlinepayments;No.ofupcomingcatalystsincl.Venmomonetization/merchantadoptionCons:Visa,Mastercard,&Discoveragreementspressuringmargins;Competitiveentrybylargerplayersincl.Apple&Google;HighrelativevaluationExpediaEXPEBuy$127$16026%$232$80Pros:Users"intenttoconsume;Trackrecordofinnovation;Technologyupgradelargelycomplete;SolidseculargrowthCons:Increasingcompetitivepressures;Hotelindustryconsolidation&pushfordirectbooking;LimitedEuropeanexposureDespegarDESPBuy$26$3636%$50$24Pros:PositiveLATAMGDPtrends;IncreasingonlinepenetrationofLATAMtravel;ImprovementsinconsumeraccesstocreditinregionCons:Potentialforincreasingcompetitivepressures;Globalmacrorisk;LATAMairlineindustryconsolidation;PotentialforpressureoncustomerfeesPricelinePCLNBuy$1,873$2,15015%$2,850$1,440Pros:Users"intenttoconsume;Exposuretoonlineinternationaltraveltrends;KayakacquisitionprovidesdiversificationCons:Increasingcompetitivepressures;Globalmacrorisk;Hotelindustryconsolidation&pushfordirectbooking;OpenTableImpairmentTravelTripAdvisorTRIPNeutral$34$351%$51$18Pros:Impressivebaseofuserreviews;Effectivemobileimplementation;Highlysocial/personalinnatureCons:NeartermInstantBookingdilution&margincompression;LTbalancebetweenbooking&infofunctionality;CompetitionfromlargecapplayersTravelportTVPTNeutral$13$147%$21$5Pros:Globallywell-diversifiedGDSplatform;Leaderinhotelattachments;Shareholderreturns(buybacks)oncecompanyreachesleveragetargetsCons:NeartermtechinvestmentsandeNettgrowthcompressmargins;SecularthreatofcontinueddisintermediationActivisionBlizzardATVIBuy$67$7614%$105$49Pros:Demonstratedabilitytodeliverinnovativetitles;Multiplepathstomonetization;Recapitalizationviabuybackand/orleverageCons:Emergenceofmobileandsocialgames;Long-termtentpolefranchisescouldfacepossibilityofdeclineElectronicArtsEABuy$112$13218%$175$78Pros:Strongmobilepresence;Proprietarydigitaldistributionplatform;ManagementcostdisciplineCons:RelianceoncostlylicensesforIP;BroadportfoliopressuresmarginsInteractiveZyngaZNGABuy$3.89$5.0029%$7.50$2.90Pros:Leveredtothethemeofsocial&mobile;ProprietaryIPfromNaturalMotionacquisition;DevelopingfranchiseapproachEntertainmentCons:Historicallylowvisibilityinforwardtitleslate;Risingmarketingcosts;UnprovennewfranchisesSource:FactSet,Companyreports,UBSestimates143 USInternet&UBSInternet&InteractiveEntertainmentValuationsTTMEV/SalesGAAPEV/EBITDAEV/FCFGAAPPrice/EarningsCompanyTickerRatingTargetTotalReturn2017E2018E2019E2017E2018E2019E2017E2018E2019E2017E2018E2019EFacebookFBBuy$21551.1%12.9x9.8x7.9x22.9x18.6x15.5x31.2x32.2x28.2x31.7x28.2x24.6x10January2018InteractiveEntertainmentAlphabetGOOGBuy$1,32533.5%7.7x6.6x5.8x20.5x16.5x14.5x28.6x20.2x17.9x34.7x27.9x24.5xIACIACBuy$16089.0%3.6x2.9x2.6x38.5x15.7x12.2x47.9x21.4x15.7x36.5x41.0x28.4xMatchGroupMTCHBuy$4074.7%8.0x6.6x5.7x26.8x20.3x16.6x33.7x26.2x20.3x20.7x27.3x22.6xTwitterTWTRNeutral$2539.6%6.4x6.0x5.5x41.0x26.1x20.8x27.5x24.5x20.9xn/m125.5x58.1xAltabaAABABuy$9280.9%n/an/an/an/an/an/an/an/an/an/an/an/aSnapSNAPSell$8-40.2%19.8x13.3x9.0xn/mn/mn/mn/mn/mn/mn/mn/mn/mNetflixNFLXBuy$25063.6%8.5x6.6x5.5xn/m57.8x36.7x-41.3x-32.1x-57.7x168.5x96.6x57.9xAdvertisingServicesAverage9.5x7.4x6.0x29.9x25.8x19.4x21.3x15.4x7.6x58.4x57.8x36.0xAmazonAMZNBuy$1,44057.6%3.5x2.8x2.4x40.6x29.8x23.0x113.8x51.6x40.0x293.2x218.6x102.9xeBayEBAYBuy$4424.6%4.0x3.7x3.5x12.9x11.8x10.7x16.5x14.7x13.7x20.1x23.8x20.4xGrouponGRPNSell$4.5044.6%1.0x1.0x0.9x21.8x16.3x12.3x37.5x23.6x12.8x352.5x52.9x25.8xQVCGroupQVCABuy$3034.4%1.7x1.7x1.6x9.3x8.9x8.6x15.1x14.8x14.8x21.7x15.9x14.4xYelpYELPSell$387.2%3.8x3.4x2.9x56.3x38.5x26.7x23.3x19.7x15.5x223.3x113.5x65.4xPayPalPYPLNeutral$8393.2%7.0x6.0x5.1x31.3x28.7x22.0x60.3x20.0x19.2x51.9x48.7x34.7xeCommerceAverage3.5x3.1x2.7x28.7x22.3x17.2x44.4x24.1x19.3x160.4x78.9x43.9xExpediaEXPEBuy$1609.1%2.5x2.2x2.0x16.0x14.1x12.0x31.7x24.8x19.1x45.9x36.1x25.9xDespegarDESPBuy$36-16.6%3.1x2.5x2.1x19.7x15.5x12.1x23.1x13.7x11.2x40.0x30.5x23.1xPricelinePCLNBuy$2,15022.0%6.8x5.9x5.2x18.0x16.1x14.2x20.0x18.5x16.1x26.3x23.2x20.1xTripAdvisorTRIPNeutral$35-32.8%2.8x2.7x2.5x18.7x20.8x15.9x19.0x18.3x14.5x70.8x81.4x44.0xTravelportTVPTNeutral$14-8.0%0.7x0.7x0.6x3.0x2.9x2.8x8.1x7.3x6.3x16.0x14.7x12.7xOnlineTravelAverage3.2x2.8x2.5x15.1x13.9x11.4x20.4x16.5x13.4x39.8x37.2x25.2xActivisionBlizzardATVIBuy$7674.9%7.4x6.9x6.7x23.5x22.2x20.6x21.7x19.9x18.2x54.0x49.3x34.9xElectronicArtsEABuy$13242.4%6.1x5.7x5.4x21.2x19.0x16.5x20.7x17.3x16.8x30.2x27.2x23.5xZyngaZNGABuy$5.0049.6%3.3x2.9x2.7x42.3x26.4x18.7x26.1x16.7x14.1x108.3x47.7x31.9xInteractiveEntertainmentAverage5.6x5.2x4.9x29.0x22.5x18.6x22.8x18.0x16.3x64.2x41.4x30.1x144Source:FactSet,Companyreports,UBSestimates USInternet&InteractiveEntertainmentUBSInternet&InteractiveEntertainmentEstimatesRevenues($M)GAAPEBITDA($M)GAAPEPS($)FCF($M)Valuation($B)UBSCAGRUBSCAGRMarginUBSConsensusUBSCAGRCompanyTickerRatingMktCapEntVal2017E2018E2019E"17-"192017E2018E2019E"17-"192017E2018E2018E2019E2018E2019E2017E2018E2019E"17-"19FacebookFBBuy$555.3$517.0$40,091$53,009$65,41627.7%$22,591$27,749$33,34021.5%56%52%$6.66$7.63$6.63$8.15$16,587$16,032$18,3185.1%AlphabetGOOGBuy$775.9$679.7$88,831$102,788$117,90915.2%$33,195$41,105$46,80118.7%37%40%$39.48$45.04$41.48$48.70$23,778$33,705$37,95026.3%IACIACBuy$11.2$11.6$3,251$3,965$4,46117.1%$300$737$94677.4%9%19%$3.22$4.65$3.28$4.77$241$541$73774.8%MatchGroupMTCHBuy$9.4$10.5$1,318$1,594$1,84318.3%$393$519$63326.9%30%33%$1.17$1.41$1.00$1.22$313$401$51828.7%TwitterTWTRNeutral$18.1$15.4$2,415$2,577$2,8127.9%$376$589$74140.3%16%23%$0.19$0.42$(0.08)$0.09$560$628$73714.8%AltabaAABABuy$64.9$60.5n/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/aAdvertising/ServicesSnapSNAPSell$18.1$15.8$796$1,186$1,74247.9%($3,384)($1,101)($909)n/m-425%-93%$(0.96)$(0.83)$(1.10)$(0.85)($844)($739)($637)n/aNetflixNFLXBuy$95.19$99.2$11,681$14,937$18,08624.4%$905$1,716$2,70772.9%8%11%$2.20$3.67$2.29$3.85($2,400)($3,088)($1,720)-15.4%10January2018AmazonAMZNBuy$619.6$620.0$176,622$222,480$262,86622.0%$15,259$20,822$27,00433.0%9%9%$5.74$12.19$8.09$14.09$5,449$12,009$15,48568.6%eBayEBAYBuy$40.6$38.3$9,566$10,329$11,0137.3%$2,975$3,242$3,5819.7%31%31%$1.59$1.84$1.70$1.94$2,315$2,599$2,7959.9%GrouponGRPNSell$2.9$2.8$2,828$2,894$3,0343.6%$130$174$23133.1%5%6%$0.10$0.20$0.06$0.11$76$121$22371.4%QVCGroupQVCABuy$11.8$17.6$10,271$10,651$10,9903.4%$1,890$1,972$2,0464.1%18%19%$1.65$1.82$1.52$1.35$1,166$1,192$1,1911.1%eCommerceYelpYELPSell$3.8$3.2$843$951$1,12015.3%$57$84$12145.1%7%9%$0.38$0.66$0.38$0.61$139$164$20822.4%PayPalPYPLNeutral$97.1$90.7$12,982$15,121$17,81417.1%$2,896$3,165$4,11919.3%22%21%$1.63$2.29$1.70$2.17$1,504$4,544$4,71477.1%ExpediaEXPEBuy$20.2$25.1$10,081$11,274$12,51711.4%$1,569$1,775$2,09815.6%16%16%$3.52$4.91$3.04$4.45$793$1,014$1,31628.8%DespegarDESPBuy$1.8$1.6$517$622$74920.4%$80$102$13127.6%16%16%$0.87$1.15$0.81$1.04$69$115$14143.6%PricelinePCLNBuy$94.2$85.5$12,606$14,540$16,31913.8%$4,751$5,316$6,02012.6%38%37%$80.71$93.23$80.68$92.33$4,284$4,627$5,29511.2%TravelTripAdvisorTRIPNeutral$4.8$4.3$1,541$1,573$1,7336.1%$230$207$2708.3%15%13%$0.42$0.78$0.42$0.63$226$235$29714.5%TravelportTVPTNeutral$1.6$1.6$2,438$2,514$2,5983.2%$554$561$5822.4%23%22%$0.89$1.02$0.90$1.15$204$227$26313.5%ActivisionBlizzardATVIBuy$51.4$50.7$6,900$7,334$7,6215.1%$2,155$2,290$2,4586.8%31%31%$1.36$1.92$1.59$2.00$2,336$2,551$2,7939.3%ElectronicArtsEABuy$35.0$31.7$5,203$5,581$5,9026.5%$1,492$1,665$1,92013.5%29%30%$4.13$4.78$4.25$5.15$1,530$1,825$1,88811.1%InteractiveZyngaZNGABuy$3.5$2.8$846$946$1,0239.9%$66$106$14950.6%8%11%$0.08$0.12$0.07$0.11$107$167$19736.0%EntertainmentSource:FactSet,Companyreports,UBSestimates;Forvideogamenames,revenuesarenon-GAAP145 IndustryForecastseCommerceFigure146:UBSUSeCommerceIndustryForecast(2014–2021E)UBSeCommerceModel(USDMillions)2014201520162017E2018E2019E2020E2021EUSRetailSales(Total)*$3,080,491$3,188,690$3,310,576$3,423,324$3,545,479$3,671,993$3,803,021$3,938,725YoYGrowth4.3%3.5%3.8%3.4%3.6%3.6%3.6%3.6%USeCommerceRetailSales$298,595$342,263$390,987$450,266$520,074$599,799$688,354$786,404YoYGrowth14.3%14.6%14.2%15.2%15.5%15.3%14.8%14.2%eCommerceShareofRetailSales9.7%10.7%11.8%13.2%14.7%16.3%18.1%20.0%YoYGrowth(bps)85bps104bps108bps134bps152bps167bps177bps187bpsSource:USCensusBureau,NRF,UBSestimates.Note:RetailsalesarelessMotorVehicle&PartsDealers,GasolineStations,FoodService&DrinkingPlacesFigure147:UBSUSMobileeCommerceIndustryForecast(2014–2021E)MobileCommerce2014201520162017E2018E2019E2020E2021ETablet36,18041,87047,25052,92058,21262,86966,01269,313YoYGrowth36.9%15.7%12.8%12.0%10.0%8.0%5.0%5.0%Smartphone20,62037,72067,250100,875146,269197,463261,638340,130YoYGrowth39.3%82.9%78.3%50.0%45.0%35.0%32.5%30.0%OtherMobileDevice1,2801,3501,4501,5361,6031,6661,7231,773YoYGrowth20.8%5.5%7.4%5.9%4.4%3.9%3.4%2.9%TotalUSMobileCommerce$58,080$80,940$115,950$155,331$206,084$261,998$329,373$411,216YoYGrowth37.3%39.4%43.3%34.0%32.7%27.1%25.7%24.8%MobileCommerceShareofeCommerceRetailSales19.5%23.6%29.7%34.5%39.6%43.7%47.8%52.3%YoYGrowth(bps)326bps420bps601bps484bps513bps406bps417bps444bpsMobileCommerceShareofRetailSales1.9%2.5%3.5%4.5%5.8%7.1%8.7%10.4%YoYGrowth(bps)45bps65bps96bps104bps128bps132bps153bps178bpsSource:USCensusBureau,NRF,UBSestimates.Note:RetailsalesarelessMotorVehicle&PartsDealers,GasolineStations,FoodService&DrinkingPlacesUSInternet&InteractiveEntertainment10January2018146 OnlineTravelFigure148:UBSUSOnlineTravelModel(2012E–2020E)(USDmillions)USTravelMarket2012E2013E2014E2015E2016E2017E2018E2019E2020EAirlineOnline$66,767$72,108$74,968$76,918$80,299$85,297$89,390$93,256$97,274YoYGrowth5.1%8.0%4.0%2.6%4.4%6.2%4.8%4.3%4.3%Onlinepenetration(leisure&unmangedcorp./total)52.3%54.0%54.3%55.3%56.1%57.3%58.3%59.0%59.8%Airlinetotalmarket$127,773$133,617$138,152$138,981$143,150$148,876$153,342$157,943$162,681YoYGrowth3.1%4.6%3.4%0.6%3.0%4.0%3.0%3.0%3.0%HotelandLodgingOnline$37,433$42,250$47,465$52,535$58,540$64,173$69,149$74,604$80,067YoYGrowth13.7%12.9%12.3%10.7%11.4%9.6%7.8%7.9%7.3%Onlinepenetration(leisure&unmangedcorp./total)32.4%34.6%35.7%36.4%37.4%38.1%39.1%40.4%41.6%HotelandLodgingtotalmarket$115,470$122,002$133,103$144,406$156,608$168,300$176,715$184,756$192,331YoYGrowth7.5%5.7%9.1%8.5%8.4%7.5%5.0%4.6%4.1%SharedAccommodationOnline$5,600$7,929$9,835$12,337$15,955$20,824$26,594$32,576$37,985YoYGrowth19.1%41.6%24.0%25.4%29.3%30.5%27.7%22.5%16.6%Onlinepenetration24.6%28.6%32.6%36.6%41.1%45.6%50.1%54.6%59.1%SharedAccommodationtotalmarket$22,800$27,761$30,204$33,744$38,856$45,705$53,123$59,705$64,314YoYGrowth5.1%21.8%8.8%11.7%15.2%17.6%16.2%12.4%7.7%CarRentalOnline$7,905$8,750$9,063$9,562$10,263$10,743$11,305$11,894$12,513YoYGrowth11.5%10.7%3.6%5.5%7.3%4.7%5.2%5.2%5.2%Onlinepenetration(leisure&unmangedcorp./total)47.2%49.3%49.2%50.8%53.0%53.5%54.0%54.5%55.0%CarRentaltotalmarket$16,746$17,741$18,431$18,837$19,365$20,081$20,934$21,824$22,752YoYGrowth4.0%5.9%3.9%2.2%2.8%3.7%4.3%4.3%4.3%CruiseOnline$2,396$2,808$3,090$2,736$2,955$3,317$3,610$3,924$4,258YoYGrowth25.6%17.2%10.0%-11.5%8.0%12.2%8.9%8.7%8.5%Onlinepenetration(leisure&unmangedcorp./total)15.9%18.6%20.0%17.0%17.0%18.0%18.7%19.5%20.2%Cruisetotalmarket$15,040$15,058$15,476$16,095$17,383$18,426$19,255$20,122$21,027YoYGrowth4.4%0.1%2.8%4.0%8.0%6.0%4.5%4.5%4.5%RailOnline$1,098$1,158$1,216$1,271$1,340$1,408$1,476$1,546$1,619YoYGrowth10.0%5.5%5.0%4.5%5.4%5.1%4.8%4.8%4.7%Onlinepenetration(leisure&unmangedcorp./total)55.8%56.3%56.6%59.1%59.9%60.9%61.6%62.4%63.1%Railtotalmarket$1,968$2,056$2,148$2,149$2,237$2,313$2,394$2,478$2,564YoYGrowth6.3%4.5%4.5%0.0%4.1%3.4%3.5%3.5%3.5%PackagingOnline*$800$840$880$925$972$1,050$1,093$1,136$1,180YoYGrowth2.7%5.0%4.8%5.1%5.1%8.0%4.1%4.0%3.9%Onlinepenetration(leisure&unmangedcorp./total)6.9%7.1%7.3%7.5%7.7%8.2%8.5%8.7%9.0%Packagingtotalmarket$11,544$11,800$12,100$12,340$12,552$12,735$12,862$12,991$13,121YoYGrowth1.0%2.2%2.5%2.0%1.7%1.5%1.0%1.0%1.0%InternationalSuppliers$4,386$6,096$5,883$7,882$9,467$10,015$10,416$10,832$11,266YoYGrowth-1.9%39.0%-3.5%34.0%20.1%5.8%4.0%4.0%4.0%TotalUSOnlineTravel$126,384$141,939$152,400$164,166$179,792$196,828$213,031$229,769$246,162YoYGrowth8.6%12.3%7.4%7.7%9.5%9.5%8.2%7.9%7.1%USOnlinePenetration40.0%42.2%42.9%43.8%45.0%46.2%47.4%48.8%50.2%YoYGrowth(bps)140bps220bps64bps97bps115bps116bps129bps138bps141bpsTotalUSTravelMarket$315,727$336,131$355,497$374,434$399,618$426,451$449,041$470,650$490,055YoYGrowth4.8%6.5%5.8%5.3%6.7%6.7%5.3%4.8%4.1%LessUSManagedCorporateTravelMarket$95,918$102,117$108,000$112,000$116,000$119,000$122,570$126,247$130,035%ofTotalUSTravelMarket30.4%30.4%30.4%29.9%29.0%27.9%27.3%26.8%26.5%YoYGrowthn/a6.5%5.8%3.7%3.6%2.6%3.0%3.0%3.0%AdjustedTotalUSTravel(leisure&unmanagedcorp)$219,809$234,014$247,497$262,434$283,618$307,451$326,471$344,403$360,020YoYGrowthn/a6.5%5.8%6.0%8.1%8.4%6.2%5.5%4.5%AdjustedUSOnlinePenetration(leisure&unmanagedcorp)57.5%60.7%61.6%62.6%63.4%64.0%65.3%66.7%68.4%YoYGrowth(bps)n/a316bps92bps98bps84bps63bps123bps146bps166bpsSource:PhoCusWright,UBSestimates.Note:*Onlinetravelagencypackaging/dynamicpackagingnotincludedinpackagingtotalsbecausethesebookingsareaccountedforinsegmentbookingsfigures.USInternet&InteractiveEntertainment10January2018147 Figure149:UBSGlobalOnlineTravelModel(2012E–2020E)(USDmillions)GlobalTravelMarket(ex-ROW)2012E2013E2014E2015E2016E2017E2018E2019E2020EUSOnline$126,384$141,939$152,400$164,166$179,792$196,828$213,031$229,769$246,162YoYGrowth8.6%12.3%7.4%7.7%9.5%9.5%8.2%7.9%7.1%Onlinepenetration(leisure&unmangedcorp./total)40.0%42.2%42.9%43.8%45.0%46.2%47.4%48.8%50.2%UStotalmarket$315,727$336,131$355,497$374,434$399,618$426,451$449,041$470,650$490,055YoYGrowth4.8%6.5%5.8%5.3%6.7%6.7%5.3%4.8%4.1%EuropeOnline$120,890$134,061$147,553$138,778$147,237$156,670$166,985$177,831$189,231YoYGrowth0.5%10.9%10.1%-5.9%6.1%6.4%6.6%6.5%6.4%Onlinepenetration(leisure&unmangedcorp./total)39.0%41.0%44.2%47.3%48.8%50.3%51.8%53.3%54.8%Europetotalmarket$310,039$326,773$333,545$293,174$301,490$311,245$322,138$333,413$345,082YoYGrowth-2.4%5.4%2.1%-12.1%2.8%3.0%3.5%3.5%3.5%FXRate$1.29$1.33$1.33$1.11$1.10$1.10AsiaPacOnline$77,393$82,214$95,567$115,034$137,961$161,612$182,860$205,782$230,377YoYGrowth15.8%6.2%16.2%20.4%19.9%17.1%13.1%12.5%12.0%Onlinepenetration(leisure&unmangedcorp./total)23.7%24.5%27.3%30.5%34.0%37.0%39.0%41.0%43.0%AsiaPactotalmarket$325,914$335,555$350,393$377,131$405,738$436,760$468,842$501,875$535,730YoYGrowth6.6%3.0%4.4%7.6%7.6%7.6%7.3%7.0%6.7%LatAmOnline$14,100$15,891$18,500$21,200$24,400$28,150$32,234$36,663$41,447YoYGrowth25.9%12.7%16.4%14.6%15.1%15.4%14.5%13.7%13.0%Onlinepenetration(leisure&unmangedcorp./total)18.2%19.9%21.5%23.0%24.8%26.8%28.8%30.8%32.8%LatAmtotalmarket$77,679$79,936$86,200$92,100$98,500$105,148$112,034$119,147$126,473YoYGrowth5.8%2.9%7.8%6.8%6.9%6.7%6.5%6.3%6.1%TotalGlobalOnlineTravel$338,768$374,105$414,019$439,179$489,390$543,259$595,111$650,045$707,218YoYGrowth7.6%10.4%10.7%6.1%11.4%11.0%9.5%9.2%8.8%GlobalOnlinePenetration32.9%34.7%36.8%38.6%40.6%42.5%44.0%45.6%47.2%YoYGrowth(bps)138bps178bps209bps185bps197bps185bps156bps160bps162bpsTotalGlobalTravelMarket$1,029,358$1,078,395$1,125,635$1,136,838$1,205,347$1,279,603$1,352,056$1,425,085$1,497,340YoYGrowth3.1%4.8%4.4%1.0%6.0%6.2%5.7%5.4%5.1%Source:PhoCusWright,FactSet,UBSestimates.DoesnotincludeROW(US,AsiaPac,Europe,LatAmonly)Figure150:GlobalTravelMarketOTAShare(2012E–2020E)(USDmillions)OTAShare2012E2013E2014E2015E2016E2017E2018E2019E2020EUSOTA$43,042$48,681$52,477$57,715$63,036$68,803$74,065$79,323$84,358YoYGrowth6.7%13.1%7.8%10.0%9.2%9.2%7.6%7.1%6.3%shareoftotalUSmarket13.6%14.5%14.8%15.4%15.8%16.1%16.5%16.9%17.2%shareofUSonline34.1%34.3%34.4%35.2%35.1%35.0%34.8%34.5%34.3%EuropeOTA$45,949$53,201$61,585$59,703$64,411$68,830$73,655$78,733$84,077YoYGrowth3.4%15.8%15.8%-3.1%7.9%6.9%7.0%6.9%6.8%shareoftotalEuropemarket14.8%16.3%18.5%20.4%21.4%22.1%22.9%23.6%24.4%shareofEuropeonline38.0%39.7%41.7%43.0%43.7%43.9%44.1%44.3%44.4%FXRate$1.29$1.33$1.33$1.11$1.10$1.10AsiaPacOTA$26,190$30,359$37,738$47,714$56,405$65,085$74,554$84,826$95,905YoYGrowth21.6%15.9%24.3%26.4%18.2%15.4%14.5%13.8%13.1%shareoftotalAsiaPacmarket8.0%9.0%10.8%12.7%13.9%14.9%15.9%16.9%17.9%shareofAsiaPaconline33.8%36.9%39.5%41.5%40.9%40.3%40.8%41.2%41.6%LatAmOTA$6,000$6,500$7,400$8,500$9,700$11,932$14,394$17,095$20,043YoYGrowth66.9%8.3%13.8%14.9%14.1%23.0%20.6%18.8%17.2%shareoftotalLatAmmarket7.7%8.1%8.6%9.2%9.8%11.3%12.8%14.3%15.8%shareofLatAmonline42.6%40.9%40.0%40.1%39.8%42.4%44.7%46.6%48.4%TotalGlobalOTA$121,181$138,741$159,201$173,631$193,552$214,650$236,667$259,977$284,383YoYGrowth10.2%14.5%14.7%9.1%11.5%10.9%10.3%9.8%9.4%OTA%ofTotalGlobalTravelMarket11.8%12.9%14.1%15.3%16.1%16.8%17.5%18.2%19.0%YoYGrowth(bps)76bps109bps128bps113bps78bps72bps73bps74bps75bpsOTA%ofGlobalOnlineTravel35.8%37.1%38.5%39.5%39.5%39.5%39.8%40.0%40.2%YoYGrowth(bps)84bps131bps137bps108bps1bps-4bps26bps23bps22bpsTotalGlobalTravelMarket$1,029,358$1,078,395$1,125,635$1,136,838$1,205,347$1,279,603$1,352,056$1,425,085$1,497,340YoYGrowth3.1%4.8%4.4%1.0%6.0%6.2%5.7%5.4%5.1%Source:PhoCusWright,FactSet,UBSestimatesNote:DoesnotincludeROW(US,AsiaPac,Europe,LatAmonly)USInternet&InteractiveEntertainment10January2018148 Figure151:US,European,AsiaPacandGlobalHotelMarkets(2012E–2020E)(USDmillions)USHotelMarket-Online(BrandDirectvs.OTA)2012E2013E2014E2015E2016E2017E2018E2019E2020EHotelandLodgingtotalmarket$115,470$122,002$133,103$144,406$156,608$168,300$176,715$184,756$192,331YoYGrowth7.5%5.7%9.1%8.5%8.4%7.5%5.0%4.6%4.1%HotelandLodgingOnline$37,433$42,250$47,465$52,535$58,540$64,173$69,149$74,604$80,067YoYGrowth13.7%12.9%12.3%10.7%11.4%9.6%7.8%7.9%7.3%Onlinepenetration32.4%34.6%35.7%36.4%37.4%38.1%39.1%40.4%41.6%OTAHotelandLodging$17,155$20,550$23,665$26,485$29,512$32,320$34,791$37,499$40,205YoYGrowth14.1%19.8%15.2%11.9%11.4%9.5%7.6%7.8%7.2%OTAShareofOnlineHotel&LodgingMarket45.8%48.6%49.9%50.4%50.4%50.4%50.3%50.3%50.2%OTAShareofTotalHotel&LodgingMarket14.9%16.8%17.8%18.3%18.8%19.2%19.7%20.3%20.9%Hotel&LodgingBrandDirectOnline$20,278$21,700$23,800$26,050$29,028$31,853$34,357$37,105$39,862YoYGrowth13.4%7.0%9.7%9.5%11.4%9.7%7.9%8.0%7.4%BrandDirectShareofOnlineHotel&LodgingMarket54.2%51.4%50.1%49.6%49.6%49.6%49.7%49.7%49.8%BrandDirectShareofTotalHotel&LodgingMarket17.6%17.8%17.9%18.0%18.5%18.9%19.4%20.1%20.7%Check0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%TravelAgencies/TMCsShareofTotalHotel&LodgingMarket11%10%10%10%10%10%9%9%8%CentralRes/PropertyDirectShareofTotalHotel&LodgingMark57%56%54%54%53%53%52%51%50%EuropeanHotelMarket-Online(BrandDirectvs.OTA)2012E2013E2014E2015E2016E2017E2018E2019E2020EHotelandLodgingtotalmarket$102,356$111,386$114,009$99,804$102,398$105,195$108,351$111,601$114,949YoYGrowth-6.9%8.8%2.4%-12.5%2.6%2.7%3.0%3.0%3.0%HotelandLodgingOnline$29,227$33,936$37,099$34,633$37,750$41,034$44,481$48,084$51,834YoYGrowth4.2%16.1%9.3%-6.6%9.0%8.7%8.4%8.1%7.8%Onlinepenetration28.6%30.5%32.5%34.7%36.9%39.0%41.1%43.1%45.1%OTAHotelandLodging$21,117$24,250$26,510$24,459$26,509$28,651$30,880$33,189$35,570YoYGrowth6.9%14.8%9.3%-7.7%8.4%8.1%7.8%7.5%7.2%OTAShareofOnlineHotel&LodgingMarket72.3%71.5%71.5%70.6%70.2%69.8%69.4%69.0%68.6%Hotel&LodgingBrandDirectOnline$8,110$9,686$10,589$10,174$11,241$12,383$13,601$14,895$16,264YoYGrowth-2.2%19.4%9.3%-3.9%10.5%10.2%9.8%9.5%9.2%BrandDirectShareofOnlineHotel&LodgingMarket27.7%28.5%28.5%29.4%29.8%30.2%30.6%31.0%31.4%AsiaPacHotelMarket-Online(BrandDirectvs.OTA)2012E2013E2014E2015E2016E2017E2018E2019E2020EHotelandLodgingtotalmarket$108,808$108,133$109,985$118,280$126,585$135,512$144,900$154,756$165,090YoYGrowth6.8%-0.6%1.7%7.5%7.0%7.1%6.9%6.8%6.7%HotelandLodgingOnline$22,449$24,423$28,732$34,449$40,650$47,845$56,171$65,776$76,826YoYGrowth14.8%8.8%17.6%19.9%18.0%17.7%17.4%17.1%16.8%Onlinepenetration20.6%22.6%26.1%29.1%32.1%35.3%38.8%42.5%46.5%OTAHotelandLodging$14,777$16,698$19,848$24,032$28,195$32,995$38,511$44,833$52,058YoYGrowth16.5%13.0%18.9%21.1%17.3%17.0%16.7%16.4%16.1%OTAShareofOnlineHotel&LodgingMarket65.8%68.4%69.1%69.8%69.4%69.0%68.6%68.2%67.8%Hotel&LodgingBrandDirectOnline$7,673$7,725$8,884$10,417$12,455$14,851$17,660$20,943$24,768YoYGrowth11.6%0.7%15.0%17.3%19.6%19.2%18.9%18.6%18.3%BrandDirectShareofOnlineHotel&LodgingMarket34.2%31.6%30.9%30.2%30.6%31.0%31.4%31.8%32.2%GlobalHotelMarket(ex-ROW)(USDbillions)2012E2013E2014E2015E2016E2017E2018E2019E2020EUSHotelBookings$115,470$122,002$133,103$144,406$156,608$168,300$176,715$184,756$192,331YoYGrowth7.5%5.7%9.1%8.5%8.4%7.5%5.0%4.6%4.1%EuropeHotelBookings$102,356$111,386$114,009$99,804$102,398$105,195$108,351$111,601$114,949YoYGrowth-6.9%8.8%2.4%-12.5%2.6%2.7%3.0%3.0%3.0%FXRate$1.29$1.33$1.33$1.11$1.10$1.10LatAmHotelBookings$39,940$41,100$43,772$46,617$49,647$52,874$56,311$59,971$63,869YoYGrowth5.8%2.9%6.5%6.5%6.5%6.5%6.5%6.5%6.5%AsiaPacHotelBookings$108,808$108,133$109,985$118,280$126,585$135,512$144,900$154,756$165,090YoYGrowth6.8%-0.6%1.7%7.5%7.0%7.1%6.9%6.8%6.7%TotalGlobalHotelBookings$366,573$382,621$400,869$409,107$435,238$461,881$486,276$511,084$536,239YoYGrowth2.7%4.4%4.8%2.1%6.4%6.1%5.3%5.1%4.9%Source:PhoCusWright,FactSet,UBSestimatesNote:DoesnotincludeROW(US,AsiaPac,Europe,LatAmonly)USInternet&InteractiveEntertainment10January2018149 Figure152:US&EuropeanVacationRentalsMarketModel(2012E–2020E)(USDmillions)2012E2013E2014E2015E2016E2017E2018E2019E2020EUSSharedAccommodationIndustryModelTotalNumberofSharedAccomodationStays(inm)18.722.424.428.334.142.152.162.872.7YoYGrowth0.2%20.0%8.6%16.0%20.5%23.7%23.5%20.7%15.7%AverageLengthofStay(days)5.85.75.65.55.45.35.15.04.9YoYGrowth-1.7%-1.5%-1.8%-1.8%-2.0%-2.0%-2.0%-2.0%-2.0%TotalRoomNights(inm)107127136154182221268317359YoYGrowth-1.5%18.2%6.7%14.0%18.1%21.3%21.1%18.3%13.4%ADR(AverageDailyRate)$212$219$223$218$213$207$198$188$179YoYGrowth6.7%3.0%2.0%-2.0%-2.5%-3.0%-4.0%-5.0%-5.0%AverageSpendperTrip$1,220$1,238$1,240$1,194$1,141$1,085$1,021$950$885YoYGrowth4.8%1.5%0.2%-3.7%-4.5%-4.9%-5.9%-6.9%-6.9%USSharedAccomodationMarket(offline&online,inm)$22,800$27,760.78$30,204$33,744$38,856$45,705$53,123$59,705$64,314YoYGrowth5.1%21.8%8.8%11.7%15.2%17.6%16.2%12.4%7.7%SharedAccomodationOnlinePenetration24.6%28.6%32.6%36.6%41.1%45.6%50.1%54.6%59.1%USOnlineSharedAccomodationMarket(inm)$5,600$7,929$9,835$12,337$15,955$20,824$26,594$32,576$37,985YoYGrowth19.1%41.6%24.0%25.4%29.3%30.5%27.7%22.5%16.6%EuropeSharedAccommodationIndustryModelTotalNumberofSharedAccomodationStays(inm)40.743.847.752.959.667.075.785.596.7YoYGrowth5.0%7.5%9.0%11.0%12.5%12.5%13.0%13.0%13.0%AverageLengthofStay(days)7.06.96.86.76.56.46.26.15.9YoYGrowth0.0%-1.0%-1.8%-2.0%-2.0%-2.3%-2.3%-2.5%-2.5%TotalRoomNights(inm)285303325353389428473521574YoYGrowth5.0%6.4%7.1%8.8%10.3%10.0%10.5%10.2%10.2%ADR(AverageDailyRate,in$)$94$98$99$85$86$88$90$91$93YoYGrowth-9.5%4.3%1.6%-14.8%1.5%2.0%2.0%2.0%2.0%ADR(AverageDailyRate,in€)€73.01€73.74€74.85€76.34€77.87€79.43€81.02€82.64€84.29YoYGrowth-1.9%1.0%1.5%2.0%2.0%2.0%2.0%2.0%2.0%AverageSpendperTrip$657$679$677$566$563$561$559$556$553YoYGrowth-9.5%3.3%-0.2%-16.5%-0.5%-0.3%-0.3%-0.5%-0.6%EuropeanSharedAccomodationMarket(offline&online,i$26,750$29,695$32,304$29,936$33,503$37,580$42,340$47,581$53,471YoYGrowth-4.9%11.0%8.8%-7.3%11.9%12.2%12.7%12.4%12.4%FXRate$1.29$1.33$1.33$1.11$1.10$1.10$1.10$1.10$1.10SharedAccomodationOnlinePenetration24.0%26.0%29.5%33.0%36.5%40.0%43.5%47.0%50.5%EuropeanOnlineSharedAccomodationMarket(inm)$6,420$7,721$9,530$9,879$12,229$15,032$18,418$22,363$27,003YoYGrowth-0.8%20.3%23.4%3.7%23.8%22.9%22.5%21.4%20.7%Source:PhoCusWright,FactSet,UBSestimatesUSInternet&InteractiveEntertainment10January2018150 DigitalAdvertisingFigure153:UBSU.S.OnlineAdvertisingModel($mm)20132014201520162017E2018E2019E2020E2021EDesktop35,69736,99838,87435,78433,10830,91628,99627,73727,023YoYGrowth7.5%3.6%5.1%-7.9%-7.5%-6.6%-6.2%-4.3%-2.6%%ofOnlineAdvertising83.4%75.3%65.3%49.4%38.4%31.2%26.0%22.6%20.1%%ofTotalAdvertising19.7%19.7%20.4%17.7%15.9%14.1%13.0%11.9%11.4%Search18,36518,95520,48117,84015,87814,29013,00412,35412,106YoYGrowth8.6%3.2%8.1%-12.9%-11.0%-10.0%-9.0%-5.0%-2.0%%ofDesktop51.4%51.2%52.7%49.9%48.0%46.2%44.8%44.5%44.8%%ofOnlineAdvertising42.9%38.6%34.4%24.6%18.4%14.4%11.7%10.0%9.0%Display12,82113,48713,88113,59313,09712,74112,37912,05811,858YoYGrowth6.8%5.2%2.9%-2.1%-3.6%-2.7%-2.8%-2.6%-1.7%%ofDesktop35.9%36.5%35.7%38.0%39.6%41.2%42.7%43.5%43.9%%ofOnlineAdvertising30.0%27.4%23.3%18.8%15.2%12.9%11.1%9.8%8.8%DigitalVideo2,7843,2544,2364,8905,5266,0786,3826,5426,673YoYGrowth19.5%16.9%30.2%15.4%13.0%10.0%5.0%2.5%2.0%%ofDesktopDisplay21.7%24.1%30.5%36.0%42.2%47.7%51.6%54.3%56.3%%ofDesktop7.8%8.8%10.9%13.7%16.7%19.7%22.0%23.6%24.7%%ofOnlineAdvertising6.5%6.6%7.1%6.8%6.4%6.1%5.7%5.3%5.0%BannerAds(NewDef)10,03710,2339,6458,7037,5716,6635,9965,5175,186YoYGrowth3.7%2.0%-5.8%-9.8%-13.0%-12.0%-10.0%-8.0%-6.0%%ofDesktopDisplay78.3%75.9%69.5%64.0%57.8%52.3%48.4%45.7%43.7%%ofDesktop28.1%27.7%24.8%24.3%22.9%21.6%20.7%19.9%19.2%%ofOnlineAdvertising23.5%20.8%16.2%12.0%8.8%6.7%5.4%4.5%3.9%Other(NewDef)4,5114,5564,5134,3514,1343,8863,6143,3253,059YoYGrowth5.5%1.0%-1.0%-3.6%-5.0%-6.0%-7.0%-8.0%-8.0%%ofDesktop12.6%12.3%11.6%12.2%12.5%12.6%12.5%12.0%11.3%%ofOnlineAdvertising10.5%9.3%7.6%6.0%4.8%3.9%3.2%2.7%2.3%Mobile7,08412,14320,67736,62353,19568,17582,58695,229107,265YoYGrowth110.2%71.4%70.3%77.1%45.3%28.2%21.1%15.3%12.6%%ofOnlineAdvertising16.6%24.7%34.7%50.6%61.6%68.8%74.0%77.4%79.9%%ofTotalAdvertising3.9%6.5%10.9%18.1%25.5%31.1%36.9%40.8%45.4%Search3,6205,6688,89117,21324,95931,94738,33644,47049,807YoYGrowth109.1%56.6%56.9%93.6%45.0%28.0%20.0%16.0%12.0%%ofMobile51.1%46.7%43.0%47.0%46.9%46.9%46.4%46.7%46.4%%ofOnlineAdvertising8.5%11.5%14.9%23.8%28.9%32.2%34.4%36.2%37.1%Display3,1716,10210,95917,94526,33233,94241,69047,94354,418YoYGrowth122.2%92.4%79.6%63.8%46.7%28.9%22.8%15.0%13.5%%ofMobile44.8%50.3%53.0%49.0%49.5%49.8%50.5%50.3%50.7%%ofOnlineAdvertising7.4%12.4%18.4%24.8%30.5%34.3%37.4%39.0%40.5%DigitalVideo4799741,9574,0296,8499,58812,46414,33415,767YoYGrowth154.7%103.1%101.0%105.8%70.0%40.0%30.0%15.0%10.0%%ofMobileDisplay15.1%16.0%17.9%22.4%26.0%28.2%29.9%29.9%29.0%%ofMobile6.8%8.0%9.5%11.0%12.9%14.1%15.1%15.1%14.7%BannerAds2,6925,1289,00113,91719,48324,35429,22533,60938,650YoYGrowth117.2%90.5%75.5%54.6%40.0%25.0%20.0%15.0%15.0%%ofMobileDisplay84.9%84.0%82.1%77.6%74.0%71.8%70.1%70.1%71.0%%ofMobile38.0%42.2%43.5%38.0%36.6%35.7%35.4%35.3%36.0%Other2933748271,4651,9042,2852,5602,8153,041YoYGrowth38.5%27.6%121.4%77.1%30.0%20.0%12.0%10.0%8.0%%ofMobile4.1%3.1%4.0%4.0%3.6%3.4%3.1%3.0%2.8%%ofOnlineAdvertising0.7%0.8%1.4%2.0%2.2%2.3%2.3%2.3%2.3%TotalOnline42,78149,14159,55172,40786,30399,091111,582122,965134,289YoYGrowth17.0%14.9%21.2%21.6%19.2%14.8%12.6%10.2%9.2%%ofTotalAdvertising23.6%26.2%31.3%35.8%41.4%45.1%49.8%52.7%56.8%TotalU.S.Advertising181,637187,731190,194202,299208,360219,563223,901233,540236,216YoYGrowth1.6%3.4%1.3%6.4%3.0%5.4%2.0%4.3%1.1%Source:IAB,eMarketer,UBSestimatesUSInternet&InteractiveEntertainment10January2018151 Figure154:U.S.DigitalAdvertising–DesktopSearchvs.MobileSearch($mm)20132014201520162017E2018E2019E2020E2021ESearch21,98524,62329,37235,05340,83646,23751,34056,82461,913YoYGrowth17.9%12.0%19.3%19.3%16.5%13.2%11.0%10.7%9.0%%ofOnlineAdvertising51.4%50.1%49.3%48.4%47.3%46.7%46.0%46.2%46.1%Desktop18,36518,95520,48117,84015,87814,29013,00412,35412,106YoYGrowth8.6%3.2%8.1%-12.9%-11.0%-10.0%-9.0%-5.0%-2.0%%ofSearch83.5%77.0%69.7%50.9%38.9%30.9%25.3%21.7%19.6%%ofOnlineAdvertising42.9%38.6%34.4%24.6%18.4%14.4%11.7%10.0%9.0%Mobile3,6205,6688,89117,21324,95931,94738,33644,47049,807YoYGrowth109.1%56.6%56.9%93.6%45.0%28.0%20.0%16.0%12.0%%ofSearch16.5%23.0%30.3%49.1%61.1%69.1%74.7%78.3%80.4%%ofOnlineAdvertising8.5%11.5%14.9%23.8%28.9%32.2%34.4%36.2%37.1%Source:IAB,eMarketerandUBSestimatesFigure155:U.S.DigitalAdvertising–DesktopDisplayvs.MobileDisplay($mm)20132014201520162017E2018E2019E2020E2021EDisplay15,99219,58924,83931,53839,42946,68354,06860,00166,276YoYGrowth19.0%22.5%26.8%27.0%25.0%18.4%15.8%11.0%10.5%%ofOnlineAdvertising37.4%39.9%41.7%43.6%45.7%47.1%48.5%48.8%49.4%Desktop12,82113,48713,88113,59313,09712,74112,37912,05811,858YoYGrowth6.8%5.2%2.9%-2.1%-3.6%-2.7%-2.8%-2.6%-1.7%%ofDisplay80.2%68.8%55.9%43.1%33.2%27.3%22.9%20.1%17.9%%ofOnlineAdvertising30.0%27.4%23.3%18.8%15.2%12.9%11.1%9.8%8.8%Mobile3,1716,10210,95917,94526,33233,94241,69047,94354,418YoYGrowth122.2%92.4%79.6%63.8%46.7%28.9%22.8%15.0%13.5%%ofDisplay19.8%31.2%44.1%56.9%66.8%72.7%77.1%79.9%82.1%%ofOnlineAdvertising7.4%12.4%18.4%24.8%30.5%34.3%37.4%39.0%40.5%Source:IAB,eMarketerandUBSestimatesUSInternet&InteractiveEntertainment10January2018152 GlobalResearch10January2018AlphabetInc.EquitiesAdjustingForwardEstimates&PTAmericasInternetServices12-monthratingBuyAdj.Ests&PTs–SolidToplineGrowth,MarginVolatilityRising,TaxQsLoomAsweturnto2018,wetaketheopportunitytoexamineourforwardoperating12mpricetargetUS$1,325.00estimates&rollforwardour12-monthPTs.Broadly,ourestimatechangesreflect:1)Prior:US$1,165.00solidrevenuegrowth(bolsteredbystrongenddemandbackdrop);2)PriceUS$1,102.61sustained/increasedlevelsofinvestmentamonglarge-capcompaniestobroadenecosystems&amongSMIDcapcompaniestocompete;&3)openquestions(likelytoRIC:GOOG.OBBG:GOOGUSdominateQ4earningsseason)abouthowUScorporatetaxreformimpactscompaniesTradingdataandkeymetricsonanidiolevel.52-wkrangeUS$1,106.94-795.70AdjustingOperatingEstimatestoReflectContinuedMomentumMarketcap.US$776bnWearemodestlyadjustingourforwardrevenuegrowthexpectationsforFY2018&Shareso/s704m(COM)FY2019toreflectcontinuedmomentuminmobilesearch,YouTubeandlessofaFreefloat79%declineindesktopsearchtrends.WemodestlyincreaseourFY2018&FY2019TACAvg.dailyvolume("000)1,340estimatesmainlytoreflectGoogle"snewdistributionagreementwithMozilla.OurAvg.dailyvalue(m)US$1,378.8EBITDAestsreflectelevatedlevelsofsales&marketingcostsforinvestmentsinbrandCommons/hequity(12/17E)US$164bnadvertising(mainlyrelatedtohardware)inQ4"17&beyond.WeexpectFXNSitesP/BV(12/17E)4.7xrevenuegrowthof~21.9%YoYinQ4"17(and15.2%YoYgrowthinFY2018),Netdebt/EBITDA(12/17E)NMreflectingstrongmobilesearchmomentum&YouTubegrowthcoupledwithgreaterEPS(UBS,diluted)(US$)stabilityindesktopsearchgrowth.12/17EQ4,FY18&FY19EstimatesFromTo%chCons.Q17.737.7307.73Q4’17estsaregrossrevsof$31.9bn(unchanged),GAAPEBITDAof$9.8bn(fromQ25.015.0105.01$9.9bn),&GAAPEPSof$9.48(from$9.34).FY18estsaregrossrevsof$128.7bnQ39.579.5709.57(from$127.9bn),GAAPEBITDAof$41.1bn(from$40.9bn),&GAAPEPSof$39.48Q4E9.349.4829.98(from$38.50).FY19estsaregrossrevsof$146.9bn(from$144.7bn),GAAPEBITDAof12/17E31.6431.79032.31$46.8bn(from$46.0bn),&GAAPEPSof$45.04(from$43.22).12/18E38.5039.48341.5212/19E43.2245.04448.56Valuation:RaisePTto$1,325(from$1,165);MaintainBuyRatingOurPTfrom$1,165to$1,325isbasedonourweightedaverageframework(50%EricJ.SheridanAnalystEV/GAAPEBITDAand50%EV/(FCF-SBC))appliedtoourrevisedFY2019operatingeric.sheridan@ubs.comestimates.WeuseaEV/GAAPEBITDAmultipleof16x(from17.5x)basedonEV/GAAP+1-212-7139310EBITDA-to-Growthof0.85x(from1.03x)andEV/(FCF-SBC)multipleof30x(from29x)AlexandraKasperbasedonEV/(FCF-SBC)-to-Growthof0.96x(from2.80x).Analystalexandra.kasper@ubs.com+1-212-7132968BridgetHanAssociateAnalystbridget.han@ubs.com+1-212-7133309Highlights(US$m)12/1412/1512/1612/17E12/18E12/19E12/20E12/21ERevenues52,50960,64673,47988,831102,788117,909132,782147,813EBIT(UBS)16,87419,36023,71626,36832,93837,87242,30847,042Netearnings(UBS)14,51415,82619,47822,36528,01332,40936,45740,813EPS(UBS,diluted)(US$)21.1222.8427.8831.7939.4845.0449.9255.04DPS(US$)0.000.000.000.000.000.000.000.00Net(debt)/cash59,15867,84682,398100,385132,504169,988213,014261,641Profitability/valuation12/1412/1512/1612/17E12/18E12/19E12/20E12/21EEBITmargin%32.131.932.329.732.032.131.931.8ROIC(EBIT)%42.939.843.543.851.356.258.461.0EV/EBITDA(core)x15.214.314.620.516.514.513.111.8P/E(UBS,diluted)x26.626.426.734.727.924.522.120.0EquityFCF(UBS)yield%3.03.95.03.14.34.95.66.4Netdividendyield%0.00.00.00.00.00.00.00.0Source:Companyaccounts,ThomsonReuters,UBSestimates.Metricsmarkedas(UBS)havehadanalystadjustmentsapplied.Valuations:basedonanaveragesharepricethatyear,(E):basedonasharepriceofUS$1,102.61on10Jan201816:41ESTUSInternet&InteractiveEntertainment10January2018153 UpsidetoDownsideGOOG.OPriceUS$1102.612.7to12,0001,8001,6001725.00Upside:+56%1,4001,2001325.00Base:+20%1,000870.00Downside:-21%80060010Jan+12mo.400201620172018ValuedriversGoogleSitesGoogleOtherRevenueOtherBetsGAAPEBITDA(2018E)GrowthNetworkGrowthGrowthMarginGrowth$1,725upside24.0%15.0%50.0%10.0%41.0%$1,325base21.0%13.0%35.0%0.0%40.0%$870downside19.0%7.0%42.0%-5.0%38.0%Source:UBSWeseerisktothecurrentsharepriceasskewed(2.7:1)totheupsideUpside(US$1,725)Ourupsidescenarioof$1,725isbasedonAlphabetbeingabletogenerate2017&2018revenues3-5%higherthanourcurrentforecastonthebackof:1)betterthanexpectedimprovementinmobileadpricingvs.desktop;2)fasterthanexpectedgrowthinYouTube,Cloud,andGooglePlay;and3)betterthanexpectedrevenuerampinOtherBetsbusinesses.Webelievegrossmarginsandoperatingmarginswouldexpandundersuchascenario,leadingtohigherfreecashflow.InvestorswouldalsobewillingtoawardahighervaluationtoOtherBetsinthisscenario.Base(US$1,325):Our$1,325PTisbasedonourweightedavg.framework(50%EV/GAAPEBITDAand50%EV/(FCF-SBC)).Downside(US$870)Ourdownsidescenarioof$870isprimarilybasedon:1)aslowingoverallglobaladvertisingenvironment,drivinglowersearchvolumesinparticular;2)weakerthanexpectedpricingtrendsinmobile;and3)greaterthanexpectedmarginandFCFpressurefrommixshiftawayfromsearchadvertisingrevenueintheGooglesegmentandinvestmentsinAI/machinelearning,cloudcomputing&OtherBets.Inourdownsidescenario,AlphabetwouldproduceslowerrevenueandEBITDACAGRsfrom2017-19.InvestorswouldalsovalueOtherBetsasaperpetualloss-makerinthisscenario.USInternet&InteractiveEntertainment10January2018154 GlobalResearch10January2018Amazon.comEquitiesAdjustingForwardEstimates&PTAmericasInternetServices12-monthratingBuyAdj.Ests&PTs–SolidToplineGrowth,MarginVolatilityRising,TaxQsLoomAsweturnto2018,wetaketheopportunitytoexamineourforwardoperating12mpricetargetUS$1,440.00estimates&rollforwardour12-monthPTs.Broadly,ourestimatechangesreflect:1)Prior:US$1,250.00solidrevenuegrowth(bolsteredbystrongenddemandbackdrop);2)PriceUS$1,254.33sustained/increasedlevelsofinvestmentamonglarge-capcompaniestobroadenecosystems&amongSMIDcapcompaniestocompete;&3)openquestions(likelytoRIC:AMZN.OBBG:AMZNUSdominateQ4earningsseason)abouthowUScorporatetaxreformimpactscompaniesTradingdataandkeymetricsonanidiolevel.52-wkrangeUS$1,254.33-799.02AdjustingEstimatestoReflectIncreasedInvestmentSpendinFY18&FY19Marketcap.US$620bnShareso/s494m(COM)ForFY18&FY19,welowerouroperatingincomeexpectationstoreflectourupdatedviewonamoreaggressivepaceofinvestmentsinanumberofareasincl.,licensed&Freefloat80%originalcontent,sales&marketing,India,AWS,Alexa&EchoalongwithincreasedAvg.dailyvolume("000)3,489fulfillmentcosts(AmazonFresh,PrimeNowexpansion,Same-Dayexpansion,sortationAvg.dailyvalue(m)US$3,931.9centergrowth).ForQ12018,wenowexpectAmazontoreport$989minoperatingCommons/hequity(12/17E)US$33.4bnincome.Wearenotmakinganychangestoourforwardrevenueestimates.P/BV(12/17E)18.1xNetdebt/EBITDA(12/17E)NMQ4,FY18&FY19EstimatesEPS(UBS,diluted)(US$)Q4’17estsarerevsof$59.2bn(unchanged),GAAPOperatingIncomeof$1.4bn(from12/17E$1.3bn),&GAAPEPSof$1.88(from$1.65).FY18estsarerevsof$222.5bn(fromFromTo%chCons.$222.1bn),GAAPOperatingIncomeof$4.2bn(from$5.8bn),&GAAPEPSof$5.74Q11.481.4801.48(from$8.87).FY19estsarerevsof$262.9bn(unchanged),GAAPOperatingIncomeofQ20.400.4000.40$7.5bn(from$9.3bn),&GAAPEPSof$12.19(from$15.66).Q30.520.5200.52Valuation:RaisePTto$1,440(from$1,250);MaintainBuyRatingQ4E1.651.88141.8512/17E4.054.2864.32Our$1,440PTisbasedonaweightedavg.approach(EV/EBITDA&EV/(FCF-SBC))&12/18E8.875.74-358.05twoSOTPframeworks(bybusinessline&byreportablesegment).Fortheweightedavg12/19E15.6612.19-2213.84approach,weuseaEV/EBITDAmultipleof30.0x(0.91xtoGrowth)andaEV/(FCF-SBC)multipleof65.0x(0.36xtoGrowth).ThepriorvaluationapproachusedwasaweightedEricJ.SheridanAnalystavgapproach(EV/GP,EV/EBITDA,EV/FCF)&thesametwoSOTPframeworks.Fortheeric.sheridan@ubs.comweightedavgapproach,weusedaEV/GPof6.0x(0.19xtoGrowth),EV/EBITDAof+1-212-713931025.5x(0.73xtoGrowth),andEV/FCFof40.0x(0.78xtoGrowth).AlexandraKasperAnalystalexandra.kasper@ubs.com+1-212-7132968BenjaminMillerAssociateAnalystbenjamin-h.miller@ubs.com+1-212-7133629Highlights(US$m)12/1412/1512/1612/17E12/18E12/19E12/20E12/21ERevenues88,988107,007135,987176,622222,480262,866307,895358,452EBIT(UBS)1,8084,5247,3277,92210,02214,32418,96324,408Netearnings(UBS)(241)5962,3712,1092,8626,1509,74714,001EPS(UBS,diluted)(US$)(0.52)1.264.904.285.7412.1919.1027.09DPS(US$)0.000.000.000.000.000.000.000.00Net(debt)/cash9,15111,57318,2879,44021,44936,93457,43984,687Profitability/valuation12/1412/1512/1612/17E12/18E12/19E12/20E12/21EEBITmargin%2.04.25.44.54.55.46.26.8ROIC(EBIT)%173.8266.0>50063.541.557.472.388.4EV/EBITDA(core)x22.219.920.731.323.318.414.912.2P/E(UBS,diluted)xNMNMNMNMNMNM65.746.3EquityFCF(UBS)yield%1.33.22.91.73.14.05.16.6Netdividendyield%0.00.00.00.00.00.00.00.0Source:Companyaccounts,ThomsonReuters,UBSestimates.Metricsmarkedas(UBS)havehadanalystadjustmentsapplied.Valuations:basedonanaveragesharepricethatyear,(E):basedonasharepriceofUS$1,254.33on10Jan201816:43ESTUSInternet&InteractiveEntertainment10January2018155 UpsidetoDownsideAMZN.OPriceUS$1254.331.4to12,2002,0001,8002040.00Upside:+63%1,6001,4001440.00Base:+15%1,2001,000800710.00Downside:-43%60040010Jan+12mo.200201620172018ValuedriversNASalesInt"lSalesGrowthAWSSalesGAAPEBITDA(2018E)GrowthGrowthMargin$2,040upside30.2%27.6%37.1%10.5%$1,440base26.2%23.6%32.1%9.4%$710downside22.2%19.6%27.1%8.8%Source:UBSWeseerisktothecurrentsharepriceasskewed(1.4:1)totheupsideUpside(US$2,040):OurupsidescenarioforAmazonisprimarilybasedonAmazonbeatingourrevenueestimates.Suchupsidecouldbedrivenby:1)betterthanexpectedsalesstemmingfromPrimesubscribergrowth;2)successinnewgeographiesandnewproductverticalswithinitseCommercecompetency;3)betterthanexpectedoverallretailsales;and/or4)littletonolong-termheadwindsstemmingfromhardware/software/servicesalesfromcompetitorssuchasAppleandGoogle.Insuchanupsidescenario,wewouldexpectAmazontohaveupsidetobothEBITDAmarginsandFCFconversionifitproducedsuchupsideinourrevenueestimates.Anexpansionofrevenuegrowthratesandoverallprofitmarginswouldgiveusgreatercomfortwiththeupsidecase.Base(US$1,440):OurPTisbasedonourweightedavgapproach(50%EV/GAAPEBITDAand50%EV/(FCF-SBC)))&SOTP.Downside(US$710):OurdownsidescenarioforAmazonisprimarilybasedonAmazon"sresultscominginwithlowersalesgrowthdueto:1)slowsalesinitsMediasegmentsbecauseofthephysical-to-digitaltransition;2)failuretoexpandintoadditionalverticals;3)slowinggrowthormarginpressureswithinitsAWSdivisionasothercompanies(Google,Microsoft)trytogainshareincloudcomputing;and/or4)macroeconomicheadwindsresultinginslowerglobalretailsales;5)ProlongedinvestmentcyclewithoutvisibilityintowhencompanywillrealizeROI.Insuchadownsidescenario,wehaveAmazonmissingourEBITDAmarginandFCFconversionestimatesduetonegativeoperatingleverageandthelikelyneedtomaintainhighneedsofinvesting&marketingspendaroundallofitsproductstomaintaingrowth.USInternet&InteractiveEntertainment10January2018156 GlobalResearch10January2018eBayEquitiesIncreasingOurPTto$44(from$40)AmericasInternetServices12-monthratingBuyAdj.Ests&PTs–SolidToplineGrowth,MarginVolatilityRising,TaxQsLoomAsweturnto2018,wetaketheopportunitytoexamineourforwardoperating12mpricetargetUS$44.00estimates&rollforwardour12-monthPTs.Broadly,ourestimatechangesreflect:1)Prior:US$40.00solidrevenuegrowth(bolsteredbystrongenddemandbackdrop);2)PriceUS$37.70sustained/increasedlevelsofinvestmentamonglarge-capcompaniestobroadenecosystems&amongSMIDcapcompaniestocompete;&3)openquestions(likelytoRIC:EBAY.OBBG:EBAYUSdominateQ4earningsseason)abouthowUScorporatetaxreformimpactscompaniesTradingdataandkeymetricsonanidiolevel.52-wkrangeUS$39.80-29.99EstimateChanges:Maintainingestimatesfor2018/2019Marketcap.US$40.6bnShareso/s1,078m(COM)Wearenotmakinganychangestoourforwardoperatingestimatesatthispoint.Freefloat90%Valuation:RaisePTto$44(from$40);MaintainBuyRatingAvg.dailyvolume("000)9,257Our$44PTisbasedonourweightedavg.approach(EV/GAAPEBITDA&EV/(FCF-SBC)Avg.dailyvalue(m)US$343.0appliedtoour2019ests.WeuseaEV/GAAPEBITDAmultipleof11xbasedonCommons/hequity(12/17E)US$6.43bnEV/GAAPEBITDAto-Growthof1.13xandaEV/(FCF-SBC)multipleof19xbasedonP/BV(12/17E)6.1xEV/(FCF-SBC)-to-Growthof1.74x.ThepriorvaluationapproachusedwasaweightedNetdebt/EBITDA(12/17E)NMaverageframeworkofEV/Sales,EV/EBITDA,EV/FCF.Inthepriorvaluationmethod,weEPS(UBS,diluted)(US$)usedaEV/Salesmultipleof3.3xbasedonEV/Sales-to-growthof0.44x,aEV/EBITDA12/17Emultipleof10xbasedonEV/EBITDA-to-growthof1.90x,andaEV/FCFmultipleofUBSCons.16.0xbasedonEV/FCF-to-growthof1.84x.Q10.490.49Q20.450.45Q30.480.48Q4E0.580.5912/17E2.002.0112/18E2.172.2312/19E2.472.49EricJ.SheridanAnalysteric.sheridan@ubs.com+1-212-7139310AlexandraKasperAnalystalexandra.kasper@ubs.com+1-212-7132968BenjaminMillerAssociateAnalystbenjamin-h.miller@ubs.com+1-212-7133629Highlights(US$m)12/1412/1512/1612/17E12/18E12/19E12/20E12/21ERevenues8,7908,5928,9799,56610,32911,01311,64512,315EBIT(UBS)2,9652,8812,7902,8463,1013,4203,7294,065Netearnings(UBS)2,3862,2322,1562,1602,2772,5472,7863,075EPS(UBS,diluted)(US$)1.891.831.882.002.172.472.692.93DPS(US$)0.000.000.000.000.000.000.000.00Net(debt)/cash7,8356,1317,1496,1646,7196,9698,87812,084Profitability/valuation12/1412/1512/1612/17E12/18E12/19E12/20E12/21EEBITmargin%33.733.531.129.730.031.032.033.0ROIC(EBIT)%36.8298.9145.5155.5>500209.8130.6123.0EV/EBITDA(core)x17.113.87.111.010.19.28.57.9P/E(UBS,diluted)x28.324.114.418.917.315.314.012.9EquityFCF(UBS)yield%3.84.17.05.76.46.97.48.1Netdividendyield%0.00.00.00.00.00.00.00.0Source:Companyaccounts,ThomsonReuters,UBSestimates.Metricsmarkedas(UBS)havehadanalystadjustmentsapplied.Valuations:basedonanaveragesharepricethatyear,(E):basedonasharepriceofUS$37.70on10Jan201816:41ESTUSInternet&InteractiveEntertainment10January2018157 UpsidetoDownsideEBAY.OPriceUS$37.702.4to170.065.060.055.056.00Upside:+49%50.045.040.044.00Base:+17%35.030.030.00Downside:-20%25.010Jan+12mo.20.0201620172018ValuedriversMarketplaceStubHubRevClassifiedsRevOtherRevAdj.EBITDA(2018E)RevGrowthGrowthGrowthGrowthMargin$56upside11%12%15%6%38.0%$44base9%8%10%4%36.3%$30downside7%4%4%-3%35.0%Source:UBSeUpside(US$56):OurupsidescenarioforeBayis$56,primarilybasedoneBaybeatingourrevenueestimates.Suchupsidecouldbedrivenby:1)areturntostrongusergrowthasstructureddatainitiativestakehold;2)betterthanexpectedgainsineCommercepenetrationintheUSandothercoremarkets(UK,Germany,Australia);and3)potentialmonetizationofassetsresidingonthebalancesheet(MercadoLibre,StubHub,etc.).Insuchascenario,wewouldexpecteBaytohaveupsidetobothEBITDAmarginsandFCFconversionifitproducedsuchupsideinourrevenueestimates.Base(US$44):Our$44PTisbasedonourweightedaverageframework(50%EV/GAAPEBITDAand50%EV/(FCF-SBC))).Downside(US$30):OurdownsidescenarioforeBayis$30,primarilybasedoneBay’sresultscominginwithlowersalesgrowthdueto:1)acontinuedweaknessinnewusergrowth;and2)generalweaknessinglobalconsumerretail.Insuchadownsidescenario,wehaveeBaymissingourEBITDAmarginandFCFconversionestimatesduetonegativeoperatingleverageandthelikelyneedtomaintainhighneedsofmarketingspendaroundallofitsproductstomaintaingrowth.USInternet&InteractiveEntertainment10January2018158 GlobalResearch10January2018PayPalHoldingsIncEquitiesAdj.Ests.andPTtoReflectSynchronyDealAmericasInternetServices12-monthratingNeutralAdj.Ests&PTs–SolidToplineGrowth,MarginVolatilityRising,TaxQsLoomAsweturnto2018,wetaketheopportunitytoexamineourforwardoperating12mpricetargetUS$83.00estimates&rollforwardour12-monthPTs.Broadly,ourestimatechangesreflect:1)Prior:US$71.00solidrevenuegrowth(bolsteredbystrongenddemandbackdrop);2)PriceUS$79.37sustained/increasedlevelsofinvestmentamonglarge-capcompaniestobroadenecosystems&amongSMIDcapcompaniestocompete;&3)openquestions(likelytoRIC:PYPL.OBBG:PYPLUSdominateQ4earningsseason)abouthowUScorporatetaxreformimpactscompaniesTradingdataandkeymetricsonanidiolevel.52-wkrangeUS$79.37-39.31AdjustingOperatingEstimatestoReflectSynchronyDealMarketcap.US$96.4bnShareso/s1,215m(COM)WemodestlylowerourrevenueestimatestofactorinthesaleoftheUSconsumercreditportfolioandpartnershipwithSynchrony.OurnewrevenueestimatesFreefloat100%incorporatemanagement"sFY18outlookforrevenuegrowthof~16.5%YoY,whichAvg.dailyvolume("000)9,396includes3.5%negativeimpactfromSynchronydeal.TheprimaryrevenueimpactofAvg.dailyvalue(m)US$688.2thedealisthatPayPalwillnowbeinaprofitshareagreementrelatedtotheUSCommons/hequity(12/17E)US$16.3bnconsumercreditportfolio.Thatsaid,thisdealisexpectedtofreeupcapitaltobeP/BV(12/17E)5.8xallocatedtohigherreturninginvestmentsand/orreturningcashtoshareholders.Netdebt/EBITDA(12/17E)NMChangestoEBITDAreflectlowerrevs,offsetbyreducedloanlossexpenserelatedtoUSEPS(UBS,diluted)(US$)consumercreditbusinesspost-dealcloseinQ3aswellasmgmt"scontinuedeffortsto12/17Edriveefficienciesandleveragerelatedtootheropex.FromTo%chCons.Q10.440.4400.44Q4,FY18&FY19EstimatesQ20.460.4600.46Q4"17estsarerevsof$3.6b(unchanged),GAAPEBITDAof$1.03b(from$750m),Q30.460.4600.46GAAPEPSof$0.56(from$0.50)&Adj.EPSof$0.52(unchanged).FY18estsarerevsQ4E0.520.52NM0.52of$15.12b(from$15.64b),GAAPEBITDAof$3.17b(from$3.39b),GAAPEPSof12/17E1.871.87NM1.87$1.63(from$1.74)&Adj.EPSof$2.23(from$2.31).FY19estsarerevsof$17.81b12/18E2.312.23-32.26(from$18.46b),GAAPEBITDAof$4.12b(from$3.99b),GAAPEPSof$2.29(from12/19E2.692.8872.76$2.10)&Adj.EPSof$2.88(from$2.69).EricJ.SheridanValuation:NeutralRates,$83PT(from$71)Analysteric.sheridan@ubs.com$83PT(from$71)isbasedon50/50weightedaverageframeworkof18xEV/GAAP+1-212-7139310EBITDA(0.93xtogrowth)and24xEV/FCF-SBC(0.19xtogrowth)appliedtoourrevisedBenjaminMillerFY2019operatingestimates.AssociateAnalystbenjamin-h.miller@ubs.com+1-212-7133629Highlights(US$m)12/1412/1512/1612/17E12/18E12/19E12/20E12/21ERevenues8,0129,24110,84212,98215,12117,81421,03424,414EBIT(UBS)1,6171,9522,1742,6993,1884,0114,9525,856Netearnings(UBS)1,3151,5681,8252,2852,7213,4954,3205,129EPS(UBS,diluted)(US$)1.071.281.501.872.232.883.574.26DPS(US$)0.000.000.000.000.000.000.000.00Net(debt)/cash2,2303,4114,9753,43011,36414,75519,21924,622Profitability/valuation12/1412/1512/1612/17E12/18E12/19E12/20E12/21EEBITmargin%20.221.120.120.821.122.523.524.0ROIC(EBIT)%-27.926.828.638.966.974.278.8EV/EBITDA(core)x--14.526.522.618.214.912.8P/E(UBS,diluted)x-27.825.542.435.627.622.218.6EquityFCF(UBS)yield%--5.31.64.74.96.07.2Netdividendyield%-0.00.00.00.00.00.00.0Source:Companyaccounts,ThomsonReuters,UBSestimates.Metricsmarkedas(UBS)havehadanalystadjustmentsapplied.Valuations:basedonanaveragesharepricethatyear,(E):basedonasharepriceofUS$79.37on10Jan201816:42ESTUSInternet&InteractiveEntertainment10January2018159 UpsidetoDownsidePYPL.OPriceUS$79.371.8to1140120124.00Upside:+56%1008083.00Base:+5%6055.00Downside:-31%4010Jan+12mo.20201620172018ValuedriversActiveAccountsAvgPmtsperAvgPaymentTakeRateGAAPEBITDA(2019E)GrowthAcctGrowthSizeGrowthMargin$124upside14.1%11.2%0.4%2.62%25.0%$83base11.5%10.4%-0.3%2.58%23.1%$55downside8.9%9.6%-0.9%2.54%18.0%Source:UBSUpside(US$124):OurupsidescenarioforPayPalof$124isprimarilybasedon1)continuedstronguser/activeregisteredaccountsgrowthintheUSandInternationalcreatingupsidetoourTPVestimates;2)continuedpenetrationgainsonline&offlineforPayPalpaymentssolutions(includingcredit&P2Pproducts);3)fasterthanexpectedadoption/shifttodigitalcurrencies;&4)moresignificantadoption/monetizationofPaywithVenmo.Insuchanupsidescenario,wewouldexpectPayPaltohaveupsidetobothEBITDAmarginsandFCFconversionifitproducedsuchupsideinourrevenueestimates.Continuedstrengthinnewusergrowthandtransactionvolumetrendswouldgiveusgreatercomfortintheupsidescenario.Base(US$83):$83PTisbasedonourweightedaverageframework(EV/Sales,EV/EBITDA,EV/FCF).Downside(US$55):OurdownsidescenarioforPayPalis$55,primarilybasedon1)aslowingofrecentstrengthinusergrowthaswellaspaymentsperaccounts;2)generalweaknessinglobalconsumerspending(includingonline);3)anyincreasesincompetitivenesswithtraditional,largetech/internetcompanies(i.e.,ApplePay,AndroidPay,Alipay,etc.)andsmallerprivatecompanies(e.g.Square,Stripe,etc.)expandingtheirproductofferings(e.g.,furtherpenetrationintothecoredesktop&mobileeCommercemarkets);4)potentialregulatory&litigationrisk.Insuchadownsidescenario,wehavePayPalmissingourEBITDAandFCFconversionestimatesduetonegativeoperatingleverageandthelikelyneedsofcontinuedelevatedlevelsofmarketingspendtomaintaingrowth.USInternet&InteractiveEntertainment10January2018160 GlobalResearch10January2018GrouponEquitiesAdjustingForwardEstimates&PTAmericasInternetServices12-monthratingSellAdj.Ests&PTs–SolidToplineGrowth,MarginVolatilityRising,TaxQsLoomAsweturnto2018,wetaketheopportunitytoexamineourforwardoperating12mpricetargetUS$4.50estimates&rollforwardour12-monthPTs.Broadly,ourestimatechangesreflect:1)Prior:US$4.00solidrevenuegrowth(bolsteredbystrongenddemandbackdrop);2)PriceUS$5.09sustained/increasedlevelsofinvestmentamonglarge-capcompaniestobroadenecosystems&amongSMIDcapcompaniestocompete;&3)openquestions(likelytoRIC:GRPN.OBBG:GRPNUSdominateQ4earningsseason)abouthowUScorporatetaxreformimpactscompaniesTradingdataandkeymetricsonanidiolevel.52-wkrangeUS$5.86-3.01Mixofincreasingandloweringestimatesfor2018/2019Marketcap.US$2.88bnShareso/s567m(COM)WemodestlylowerourforwardrevenuegrowthestimatestoreflectamoreconservativestanceonGroupon"sabilitytogrowitsactivecustomerbaseandbillings,Freefloat55%whilede-emphasizingtheGoodsbusiness.Onthatnote,managementhasstatedaAvg.dailyvolume("000)8,288focusongrossprofitgrowthevenattheexpenseofnear-termbillings/revenueAvg.dailyvalue(m)US$43.7headwinds.Ontheotherhand,weincreaseourforwardEBITDAgrowthestimatesCommons/hequity(12/17E)US$0.24bndrivenbythecontinuedroll-outofGrouponPlus(100%takerateproduct,henceP/BV(12/17E)12.0xaccretivetomargins),continuedstreamliningofoperationsanditscostbase,partiallyNetdebt/EBITDA(12/17E)NMoffsetbyongoinginvestmentsintomarketinginNA&International.EPS(UBS,diluted)(US$)Q4,FY18&FY19Estimates12/17EFromTo%chCons.Q4"17estsarerevsof$858mm(from$859mm),GAAPEBITDAof$91mm(fromQ10.010.0100.01$85m),&GAAPEPSof$0.11(from$0.10).FY18estsarerevsof$2.9b(unchanged),Q20.020.0200.02GAAPEBITDAof$174mm(from$164mm),&GAAPEPSof$0.10(from$0.08).FY19Q30.010.0100.01estsarerevsof$3.0b(from$3.1b),GAAPEBITDAof$231mm(from$194mm),&Q4E0.100.11100.09GAAPEPSof$0.20(from$0.15).12/17E0.140.1570.1312/18E0.210.2240.19Valuation:RaisePTto$4.50(from$4.00);MaintainSellRating12/19E0.260.30160.22Our$4.50PTisbasedonouradjustedvaluationapproach(50%EV/GAAPEBITDA&50%modifiedDCFbasedonFY2022FCF-SBC).Weusea10.0xEV/GAAPEBITDAEricJ.SheridanAnalystmultiple,a14.5xEV/FCF-SBCmultiple,andadiscountrateof18%.Thediscountrateiseric.sheridan@ubs.combasedonaCAPM+companyspecificriskpremium.+1-212-7139310AlexandraKasperAnalystalexandra.kasper@ubs.com+1-212-7132968BenjaminMillerAssociateAnalystbenjamin-h.miller@ubs.com+1-212-7133629Highlights(US$m)12/1412/1512/1612/17E12/18E12/19E12/20E12/21ERevenues3,0423,0223,0142,8282,8943,0343,1653,304EBIT(UBS)31(4)(100)1754133175204Netearnings(UBS)911032984125171193209EPS(UBS,diluted)(US$)0.140.160.050.150.220.300.330.34DPS(US$)0.000.000.000.000.000.000.000.00Net(debt)/cash1,0178628638619031,1091,3681,657Profitability/valuation12/1412/1512/1612/17E12/18E12/19E12/20E12/21EEBITmargin%1.0-0.1-3.30.61.94.45.56.2ROIC(EBIT)%(7.9)1.120.3(2.8)(9.6)(27.2)(35.6)(38.2)EV/EBITDA(core)x24.722.242.611.39.17.56.76.1P/E(UBS,diluted)x55.234.181.133.922.917.015.614.8EquityFCF(UBS)yield%7.114.71.04.77.915.018.921.0Netdividendyield%0.00.00.00.00.00.00.00.0Source:Companyaccounts,ThomsonReuters,UBSestimates.Metricsmarkedas(UBS)havehadanalystadjustmentsapplied.Valuations:basedonanaveragesharepricethatyear,(E):basedonasharepriceofUS$5.09on10Jan201816:45ESTUSInternet&InteractiveEntertainment10January2018161 UpsidetoDownsideGRPN.OPriceUS$5.091to1.89.008.007.006.006.65Upside:+31%5.004.50Base:-12%4.003.0010Jan2.30Downside:-55%2.00201620172018+12mo.ValuedriversActiveCustomer3PBilling/Customer3PTakeRateDirectRevsAdj.EBITDA(2018E)GrowthgrowthGrowthMargin$6.65upside4.9%3.2%31.4%2.4%9.0%$4.50base3.9%2.0%30.9%-1.62%6.0%$2.30downside2.9%0.8%30.4%-5.6%3.0%Source:UBSWeseerisktothecurrentsharepriceasskewed(1:1.8)tothedownsideUpside(US$6.65):OurupsidescenarioforGrouponis$6.65,primarilybasedonGrouponbeatingourrevenueestimates.Suchupsidecouldbedrivenby:1)betterthanexpectedcustomeracquisitionresultingfrommarketinginvestments;2)stabilizationoftheinternationalbusinessfollowingrestructuring;and/or3)diminishedheadwindsfromcompetitionassmallerplayersexit.Insuchanupsidescenario,wewouldexpectGroupontohaveupsidetobothEBITDAmarginsandFCFconversionifitproducedsuchupsidetoourrevenueestimates.Itisalsoimportanttowatchthemixof3Pversus1Pgiventhedifferentmarginprofileandmultiplesascribedtothebusinesses.Additionalgrowthin3Prevenues,alongwithanysignsthatthe1Pbusinesshascarvedoutanicheininventorydisposal,wouldgiveusmorecomfortintheupsidescenario.Base(US$4.50):$4.50PTisbasedonourweightedaverageapproach(50%EV/GAAPEBITDA&50%modifiedDCFbasedonFY2022FCF-SBC).Downside(US$2.30):OurdownsidescenarioforGrouponis$2.30,primarilybasedonGroupon’sresultscominginwithlowersalesgrowthdueto:1)continuedstruggleswithintheinternationalbusiness;2)failureofmarketinginvestmentstoresultindesiredcustomeracquisitionlevels;3)increasedcompetitionfromlargertechnologycompanies(e.g.,Amazon,Google,eBay);and/or4)macroeconomicheadwindsresultinginlowerglobalretailsales.Insuchadownsidescenario,wehaveGrouponmissingourEBITDAmarginandFCFconversionestimatesduetonegativeoperatingleverage.Thatsaid,Grouponcouldmeetorbeatourrevenueestimatesinalowerqualitymannerwitheitheranincreasedmixof1PbusinessorbysignificantlyreducingG&Aexpenses.Continuedtakeratepressuresand/oralackofstabilizationintheinternationalbusinesswouldgiveusmorecomfortinthedownsidescenario.USInternet&InteractiveEntertainment10January2018162 GlobalResearch10January2018TwitterEquitiesAdjustingForwardEstimates&PTAmericasInternetServices12-monthratingNeutralAdj.Ests&PTs–SolidToplineGrowth,MarginVolatilityRising,TaxQsLoomAsweturnto2018,wetaketheopportunitytoexamineourforwardoperating12mpricetargetUS$25.00estimates&rollforwardour12-monthPTs.Broadly,ourestimatechangesreflect:1)Prior:US$21.00solidrevenuegrowth(bolsteredbystrongenddemandbackdrop);2)PriceUS$24.25sustained/increasedlevelsofinvestmentamonglarge-capcompaniestobroadenecosystems&amongSMIDcapcompaniestocompete;&3)openquestions(likelytoRIC:TWTR.NBBG:TWTRUSdominateQ4earningsseason)abouthowUScorporatetaxreformimpactscompaniesTradingdataandkeymetricsonanidiolevel.52-wkrangeUS$25.20-14.29RaisingFY18&FY19EstimatesonContinuedMomentumMarketcap.US$18.1bnShareso/s745m(COM)WemodestlyincreaseourFY2018&FY2019revenuegrowthestimatesdrivenbycontinuedstrengthinaudienceengagement(helpedbycontinuedproductinvestments,Freefloat85%innovatione.g.,"threads"&marketing),pricingstabilization(whilestillprovidinganAvg.dailyvolume("000)4,118attractivevaluepropositiontoadvertisers),strengthinvideoanditspotentialtotapintoAvg.dailyvalue(m)US$87.9newchannelsofdemandviaexpandingprogrammaticbuyingcapabilities.AsperCommons/hequity(12/17E)US$4.91bncompanycommentary,weexpecttoseeaheadwindinMAUgrowthinQ4asaresultP/BV(12/17E)3.7xofiOS11removingsystemlevelintegrationforsocialmediaapps.WearenotmakingNetdebt/EBITDA(12/17E)NManychangestoouroperatingexpenseestimates.ForQ4"17,weexpect$240minAdj.EPS(UBS,diluted)(US$)EBITDAatthehighendofthecompanyguide.12/17EQ4,FY18&FY19EstimatesFromTo%chCons.Q10.070.0700.11Q4"17estsarerevsof$703mm(unchanged),GAAPEBITDAof$144mm(unchanged),Q20.080.0800.08&GAAPEPSof$0.12(unchanged).FY18estsarerevsof$2.6b(from$2.5b),GAAPQ30.100.1000.10EBITDAof$589mm(from$578mm),&GAAPEPSof$0.19(unchanged).FY19estsareQ4E0.120.1200.14revsof$2.8b(from$2.7b),GAAPEBITDAof$741mm(from$719mm),&GAAPEPSof12/17E0.370.3700.40$0.42(from$0.40).12/18E0.460.46NM0.4512/19E0.530.5530.53Valuation:RaisePTto$25(from$21);MaintainNeutralratingOurPTfrom$21to$25isbasedonouradjustedblendedvaluationapproach(50%EricJ.SheridanAnalystEV/GAAPEBITDA&50%EV/(FCF-SBC))appliedtoour2019ests.Weusea20xeric.sheridan@ubs.comEV/GAAPEBITDAmultiple&a35xEV/(FCF-SBC)multiple.+1-212-7139310AlexandraKasperAnalystalexandra.kasper@ubs.com+1-212-7132968BridgetHanAssociateAnalystbridget.han@ubs.com+1-212-7133309Highlights(US$m)12/1412/1512/1612/17E12/18E12/19E12/20E12/21ERevenues1,4032,2182,5302,4152,5772,8123,0853,374EBIT(UBS)1293004194425897148601,025Netearnings(UBS)101277305275354424490616EPS(UBS,diluted)(US$)0.150.400.430.370.460.550.620.77DPS(US$)0.000.000.000.000.000.000.000.00Net(debt)/cash3,6223,4953,7754,2914,8204,5125,2235,129Profitability/valuation12/1412/1512/1612/17E12/18E12/19E12/20E12/21EEBITmargin%9.213.516.618.322.825.427.930.4ROIC(EBIT)%35.968.349.261.2114.790.476.968.3EV/EBITDA(core)x92.337.511.619.417.115.213.512.0P/E(UBS,diluted)xNM89.041.265.552.244.338.931.4EquityFCF(UBS)yield%(0.4)0.14.43.13.54.14.65.5Netdividendyield%0.00.00.00.00.00.00.00.0Source:Companyaccounts,ThomsonReuters,UBSestimates.Metricsmarkedas(UBS)havehadanalystadjustmentsapplied.Valuations:basedonanaveragesharepricethatyear,(E):basedonasharepriceofUS$24.25on10Jan201816:42ESTUSInternet&InteractiveEntertainment10January2018163 UpsidetoDownsideTWTR.NPriceUS$24.251.3to160.055.050.045.040.040.00Upside:+65%35.030.025.025.00Base:+3%20.015.012.00Downside:-51%10Jan10.0201620172018+12mo.Valuedrivers2017EUSMAUUSARPU2017EInt"lInt"lARPUAdj.EBITDA(2018E)Growth(mm)GrowthMAUGrowthGrowthMargin(mm)$40upside4mm2.1%12mm8.1%25.0%$25base3mm-3.9%8mm4.1%22.9%$12downside2mm-0.9%4mm0.1%20.0%Source:UBSWeseerisktothecurrentsharepriceasevenlyskewed(1.3:1)Upside(US$40):OurupsidecasescenarioforTwitteris$40andisbasedprimarilyonTwitterbeatingourrevenueestimatesby5-10%in2018and2019.Suchupsidecouldbedrivenby:1)productandusabilityimprovementsthatsimplifytheproductfornewusersormarketinginitiativesthatbettereducatethemassmarketonusesoftheTwitterplatform(therebyacceleratingMAUgrowth);2)anabilitytoclosetheinternationalmonetizationgapfasterthanweexpect;3)greaterthanexpectedcontributionsfrompresentlynascentrevenuesources(MoPub,BuyNowbutton,Periscopemonetization);4)fasterthanexpectedmarginimprovementonthebackofgreaterthanexpectedoperatingleverage.Withsuchrevenueupside,weexpectadditionalEBITDAleveragein2018and2019.Base(US$25):WederiveourPTof$25basedonaweightedaveragemultipleframeworkof50%EV/GAAPEBITDA&50%EV/(FCF-SBC).Downside(US$12):OurdownsidecasescenarioforTwitteris$12andisbasedprimarilyonTwittermissingourrevenueestimatesby5-10%in2018and2019.Suchdownsidecouldbedrivenby:1)slowerthanexpectedadoptionofadvertisingproductsbyadvertisers;2)fasterchurninMAUsduetoaninabilitytoestablishapersistentusecase;3)greaterthanexpectedcostsassociatedwithincreasingheadcount,acquiringnewusers,and/orbuildingoutaninternationalinfrastructure.Insuchascenario,weforecastTwitterwouldmissourEBITDAmarginandFCFconversionestimatesduetonegativeoperatingleverageandthelikelyneedtomaintainhighlevelsofR&Dtocontinuetofindaproductthatallowsforamplemonetization.USInternet&InteractiveEntertainment10January2018164 GlobalResearch10January2018MatchGroupIncEquitiesIncreasingPriceTargetto$40(from$35)AmericasInternetServices12-monthratingBuyAdj.Ests&PTs–SolidToplineGrowth,MarginVolatilityRising,TaxQsLoomAsweturnto2018,wetaketheopportunitytoexamineourforwardoperating12mpricetargetUS$40.00estimates&rollforwardour12-monthPTs.Broadly,ourestimatechangesreflect:1)Prior:US$35.00solidrevenuegrowth(bolsteredbystrongenddemandbackdrop);2)PriceUS$31.94sustained/increasedlevelsofinvestmentamonglarge-capcompaniestobroadenecosystems&amongSMIDcapcompaniestocompete;&3)openquestions(likelytoRIC:MTCH.OBBG:MTCHUSdominateQ4earningsseason)abouthowUScorporatetaxreformimpactscompaniesTradingdataandkeymetricsonanidiolevel.52-wkrangeUS$32.38-15.70MaintainingOperatingEstimatesfor2018/2019Marketcap.US$9.43bnShareso/s295m(COM)Wearenotmakinganychangestoourforwardoperatingestimatesatthispoint.Freefloat98%Valuation:RaisePTto$40(from$35);MaintainBuyRatingAvg.dailyvolume("000)1,622OurPTfrom$35to$40isbasedonouradjustedblendedvaluationapproach(50%Avg.dailyvalue(m)US$46.5EV/GAAPEBITDAand50%EV/(FCF-SBC))appliedtoour2019estimates(unchanged).Commons/hequity(12/17E)US$0.61bnWeuseaEV/GAAPEBITDAmultipleof20.0xbasedonEV/GAAPEBITDAto-GrowthofP/BV(12/17E)13.5x0.74xandaEV/(FCF-SBC)multipleof25.0xbasedonEV/(FCF-SBC)-to-Growthof0.75x.Netdebt/EBITDA(12/17E)2.2xThepriorvaluationapproachusedwasaweightedaverageframeworkofEV/Sales,EPS(UBS,diluted)(US$)EV/EBITDA,&EV/FCF.Inthepriorvaluationmethod,weusedanEV/Salesmultipleof12/17E4.0xfor0.3xmultiple-to-growth,EV/EBITDAmultipleof18.0xfor0.8xmultiple-to-FromTo%chCons.growth,andEV/FCFmultipleof32.0xfor0.67xmultiple-to-growth.Q10.120.1200.12Q20.160.1600.16Q30.190.1900.19Q4E0.290.29NM0.3212/17E0.750.75NM0.8012/18E1.071.06-11.0912/19E1.271.26-11.32EricJ.SheridanAnalysteric.sheridan@ubs.com+1-212-7139310AlexandraKasperAnalystalexandra.kasper@ubs.com+1-212-7132968BenjaminMillerAssociateAnalystbenjamin-h.miller@ubs.com+1-212-7133629Highlights(US$m)12/1412/1512/1612/17E12/18E12/19E12/20E12/21ERevenues8881,0201,2231,3181,5941,8432,0942,350EBIT(UBS)248253373434563681797908Netearnings(UBS)156156215222306366420469EPS(UBS,diluted)(US$)0.930.840.790.751.061.261.431.57DPS(US$)0.000.000.000.000.000.000.000.00Net(debt)/cash(63)(1,077)(923)(1,017)(615)(97)4901,141Profitability/valuation12/1412/1512/1612/17E12/18E12/19E12/20E12/21EEBITmargin%27.924.830.532.935.337.038.138.7ROIC(EBIT)%31.024.027.932.342.551.861.972.0EV/EBITDA(core)x-16.111.822.517.614.612.611.1P/E(UBS,diluted)x-16.718.442.530.025.422.420.3EquityFCF(UBS)yield%-5.34.83.34.35.56.26.9Netdividendyield%-0.00.00.00.00.00.00.0Source:Companyaccounts,ThomsonReuters,UBSestimates.Metricsmarkedas(UBS)havehadanalystadjustmentsapplied.Valuations:basedonanaveragesharepricethatyear,(E):basedonasharepriceofUS$31.94on10Jan201816:41ESTUSInternet&InteractiveEntertainment10January2018165 UpsidetoDownsideMTCH.OPriceUS$31.942.5to170.060.062.00Upside:+94%50.040.040.00Base:+25%30.020.020.00Downside:-37%10.010Jan+12mo.0.0201620172018ValuedriversCorePMCCoreARPPUTinderPMCsTinderAdj.EBITDA(2018E)GrowthGrowth(avg)RevenuesMargin$62upside3.8%8.6%3,711k492mm34.0%$40base1.8%7.6%3,568k464mm32.6%$20downside-0.2%6.6%3,425k437mm30.0%Source:UBSWeseerisktothecurrentsharepriceasskewed(2.5:1)totheupsideUpside(US$62):CorePMCgrowthandARPPUbetterthanexpectedonreboundincoreMatch,PlentyofFishpenetrationrateimprovementsandinternationalupside.Revenueoutperformanceresultsingreaterincrementaloperatingleverage.Tinderachievesfasterthanexpectedadmonetizationrampin2019.MatchGroupmaintainsbalancesheetleverageata3.0xlong-termtargetnetdebtratio,usingdebtproceedstofundcashreturnstoshareholders.Base(US$40):MatchGroupseesimprovementincorePMCandrevenuegrowthoneasingheadwindsfromthetransitiontomobile.Tindercontributesmorethan$500mmofrevenuein2018,andEBITDAmarginsimproveto~36%.Managementallowsbalancesheettonaturallyde-leverasfreecashflowisgenerated.MarketvaluesMTCHprimarilyonEV/EBITDA.Downside(US$20):CorePMCgrowthandARPPUarelessthanexpectedoncontinuedmobileheadwinds,includingincreasedcompetition.Tinderusergrowthandmonetizationdeceleratessharplyfrominitialramp.IncreasedmarketingandR&Disrequiredtodriveuseracquisitiononpaidbrandsandattractuserstofreemiumbrandsontopofnegativeoperatingleveragefromweakertop-lineperformance.Valuationbecomesfurtherdepressed.USInternet&InteractiveEntertainment10January2018166 GlobalResearch10January2018SnapIncEquitiesAdjustingForwardEstimates&PTAmericasInternetServices12-monthratingSellAdj.Ests&PTs–SolidToplineGrowth,MarginVolatilityRising,TaxQsLoomAsweturnto2018,wetaketheopportunitytoexamineourforwardoperating12mpricetargetUS$8.00estimates&rollforwardour12-monthPTs.Broadly,ourestimatechangesreflect:1)Prior:US$7.00solidrevenuegrowth(bolsteredbystrongenddemandbackdrop);2)PriceUS$14.65sustained/increasedlevelsofinvestmentamonglarge-capcompaniestobroadenecosystems&amongSMIDcapcompaniestocompete;&3)openquestions(likelytoRIC:SNAP.NBBG:SNAPUSdominateQ4earningsseason)abouthowUScorporatetaxreformimpactscompaniesTradingdataandkeymetricsonanidiolevel.52-wkrangeUS$27.09-0.00LoweringEstimatestoReflectHigherExpenseGrowthOutlookMarketcap.US$18.1bnShareso/s1,233m(COM)Wearenotmakinganychangestoourforwardrevenueestimates.WeareloweringourGAAPEBITDAandGAAPEPStoreflectcontinuedpressureonmarginduetoSnap’sFreefloat10%uniquecoststructure(whilerealizingsomebenefitfromitsdual-cloudstrategy)&Avg.dailyvolume("000)4,625headcountgrowth.Avg.dailyvalue(m)US$67.0Commons/hequity(12/17E)US$3.00bnQ4,FY18&FY19EstimatesP/BV(12/17E)5.6xQ4"17estsarerevsof$257mm(unchanged),GAAPEBITDAof($302mm)(unchanged),Netdebt/EBITDA(12/17E)0.6x&GAAPEPSof($0.26)(unchanged).FY18estsarerevsof$1.2b(unchanged),GAAPEPS(UBS,diluted)(US$)EBITDAof($1,101mm)(from($1,044mm)),&GAAPEPSof($0.96)(from($0.92)).12/17EFY19estsarerevsof$1.7b(unchanged),GAAPEBITDAof($909mm)(from($798mm)),FromTo%chCons.&GAAPEPSof($0.83)(from$0.74)).Q1(2.31)(2.31)NM(0.20)Valuation:RaisePTto$8(from$7);MaintainSellRatingQ2(0.36)(0.36)NM(0.16)Q3(0.36)(0.36)NM(0.14)Ourpricetargetof$8(from$7)isbasedona50/50blendof:1)EV/SalesmultipleQ4E(0.26)(0.26)NM(0.15)appliedtoour2019estimatesand2)amodifiedDCFusinganEV/(FCFminusSBC)12/17E(2.95)(2.95)NM(0.64)multipleappliedtoour2022estimatesdiscountedback3years.WeuseanEV/Sales12/18E(0.92)(0.96)NM(0.56)multipleof5.0x(from8.0x)ona0.10xmultiple-to-growth(unchanged),anEV/(FCF-12/19E(0.74)(0.83)NM(0.35)SBC)multipleof16x(from30x),andadiscountrateof18%(unchanged).Nochangeinpriorvaluationmethod.EricJ.SheridanAnalysteric.sheridan@ubs.com+1-212-7139310AlexandraKasperAnalystalexandra.kasper@ubs.com+1-212-7132968BridgetHanAssociateAnalystbridget.han@ubs.com+1-212-7133309Highlights(US$m)-12/1512/1612/17E12/18E12/19E12/20E12/21ERevenues-594047961,1861,7422,4933,429EBIT(UBS)-(382)(520)(3,448)(1,208)(1,038)(509)263Netearnings(UBS)-(373)(515)(3,404)(1,155)(998)(492)270EPS(UBS,diluted)(US$)-(0.51)(0.62)(2.95)(0.96)(0.83)(0.39)0.20DPS(US$)-0.000.000.000.000.000.000.00Net(debt)/cash-6419872,0741,332692374575Profitability/valuation-12/1512/1612/17E12/18E12/19E12/20E12/21EEBITmargin%-<-500-128.7-433.1-101.9-59.6-20.47.7ROIC(EBIT)%--(158.9)(472.6)(125.5)(100.4)(46.0)21.7EV/EBITDA(core)x----4.8-14.8-17.9-44.141.1P/E(UBS,diluted)x---(5.0)(15.2)(17.6)(37.4)74.0EquityFCF(UBS)yield%---(4.7)(4.1)(3.5)(1.8)1.1Netdividendyield%---0.00.00.00.00.0Source:Companyaccounts,ThomsonReuters,UBSestimates.Metricsmarkedas(UBS)havehadanalystadjustmentsapplied.Valuations:basedonanaveragesharepricethatyear,(E):basedonasharepriceofUS$14.65on10Jan201816:43ESTUSInternet&InteractiveEntertainment10January2018167 UpsidetoDownsideSNAP.NPriceUS$14.651to822.020.018.016.014.016.00Upside:+9%12.010.08.08.00Base:-45%6.04.04.00Downside:-73%2.010Jan+12mo.0.0201620172018ValuedriversNADAUNetNARevperEuropeDAUEuropeRevperAdj.Gross(2018E)Adds(mm)DAUGrowthNetAdds(mm)DAUGrowthMargin$16upside16mm33.2%5mm69.2%24.5%$8base8mm27.7%4mm68.7%22.5%$4downside4mm22.2%3mm68.2%20.5%Source:UBSUpside(US$16):OurupsidescenarioforSnapis$16,primarilybasedonthecompanydrivingfasterthanexpectedrevenuegrowthvs.expectations.Suchupsidecouldbedrivenby:1)betterthanexpectedDAUgrowth&engagement(especiallyinNorthAmericaandEurope);2)fasterthanexpectedadvertiseradoptionandincreaseinadvertisingspending(incl.acceptanceofnewadvertisingformats);3)strongerthanexpectedadpricingtrends;and4)betterthanexpectedhardware(Spectacles)sales.Webelievegrossmargins,Adj.EBITDAmarginsandfreecashflowwouldexpandifupsidewasledbyincreasedadmonetizationperusergivenSnap"suniquecoststructureBase(US$8)WederiveourPTof$8basedonaweightedaveragemultipleframeworkofa)EV/Salesmultipleappliedtoour2019operatingestimatesand2)EV/FCF(minusSBC)appliedtoour2022estimatesdiscountedback.Downside(US$4):OurdownsidescenarioforSnapis$4,primarilybasedonthecompany"sresultscominginwithlowersalesgrowthdueto:1)slowingordecliningusergrowthandengagementduetoemergingcompetition;2)slowerthanexpectedadvertiseradoptionandadvertisingspendingonSnap;3)lackofacceptanceofnewadvertisingproductsandservices;and4)lowerthanexpectedrevenuegrowthfromSnap"shardwareinitiatives.Insuchadownsidescenario,wehaveSnapmissingourGross&Adj.EBITDAmarginandFCFconversionestimatesduetonegativeoperatingleverage.USInternet&InteractiveEntertainment10January2018168 AlphabetInc.InvestmentcaseGrowthinmobilesearchandYouTubewillsustainthemomentuminAlphabet"scoreGoogleoperations.Withafocusonbalancingcostsvs.revenueopportunitiesunderCFORuthPorat,webelieveAlphabetwillcontinuetoclimbawallofworrythathaspersistedoverthelastfewquarters.Longerterm,achievingabalancebetweeninnovation(e.g.,"OtherBets")andshareholderexpectationswillbekeytotheinvestmentstory.WebelieveinvestorswillbesatisfiedifAlphabetcanmaintaina)consistencyincoreoperatingmargins(coreflat-to-expandingvs.Enterpriseinvestments);b)mid-tohigh-teensrevenuegrowth;and/orc)aconsistentshareholderreturnpolicyoverthelongterm.Amazon.comInvestmentcaseAsAmazoncontinuestoinvestinitsmultiplegrowthopportunities,webelievethecompanycandelivera~20%revenueCAGRoverthemediumtermalongwithmoderatemarginexpansion.Weexpectinvestments,toplinegrowth&thebenefitsofscaletocreateahealthybalanceoverthelongterm(despiteQ-to-Qvolatility).Additionally,theimpliedvaluationoftheeCommercebusinessappearsattractivewhenAMZNsharesareviewedex-AWS.eBayInvestmentcaseWebelieveeBayhasthepotentialtodemonstraterevenueupsidevs.investorexpectationsfromitsstructureddatainitiativesandlargeaddressablemarketopportunity.Further,whencombiningareasonablevaluationwithpotentialforshareholderreturns,webelieveeBayrepresentsanattractivevalueproposition.However,wenotealimitedexpectationformarginexpansiongivencontinuedinvestmentsinbothmarketing(givenpendinginternationalrolloutofbrandadcampaignin2H"17)andplatformimprovements(e.g.,structureddata,mobile,site,userexperience).PayPalHoldingsIncInvestmentcaseWeseealongrunwayforPayPal"sindustry-leadingassets(largeglobalactiveuserbase,trustedbrand,PayPalCreditofferings,Paydiantwhite-labelmobilepayments,etc.)togrowintoamorecompleteopencommerceplatformoverthecomingyrs.However,theincreasingpressurefromcompetitionandindustryshifttowardsmobilefirstpresentchallengesforPayPaltomaintainitsgloballeaderposition.GrouponInvestmentcaseWhileGrouponhasformulatedafocusedturnaroundstrategy(centeredonvoucher-lessexperience,localofferings,anddrivingpurchasefrequency)andexecutedonsomeofitscoreinitiatives(incl.streamliningitsint"loperationsandcustomeracquisition),webelievethereisstillalongroadaheadinstrengtheningthecompany"spositioninginthelocaladand/orlocaleCommercemarket.Meanwhile,largerInternetcompanies,predominantlyGOOG&FB,areincreasingtheireffortstocapturelocalad$whileAMZN"ssame-daydeliveryservice(incl.PrimeNowandanincreasingPrimemembershiproster)willalsoimpactGroupon"slocalmarketplaceefforts.TwitterInvestmentcaseAtcurrentlevel,weseeTwitterasamorebalancedrisk/reward:a)upsidecouldcomefromcontinueduserengagementtrends&abetterthanexpectedmargintrendline;vsb)continuedopenquestionsaboutbothshort/longtermrevenuetrends(especiallyagainstindustrybenchmarks)&amoredemandingGAAPdrivenvaluationcase.USInternet&InteractiveEntertainment10January2018169 MatchGroupIncInvestmentcaseWebelieveMatchpossessesstrongstrategicfootingamidstabackdropofseculargrowth.WhiletheshifttomobileandmixshiftswithinMatch"sportfoliopresentheadwinds,webelieveconsensusisoverlydiscountingtheserisksandfailstoaccountforpotentialupsidefromTinder&B/SleverageLT.SnapIncInvestmentcaseWebelieveSnapwillcontinuetostruggleonmultiplefrontsinthecoming12months-aredesignedappcouldbringopportunitybutalsoplatformdisruption&tryingtoscaleitsadbusinessasusergrowthistepidwhilecompetingagainstGOOG,FB&AMZNislikelygoingtoproveverydifficult.WenolongerbelieveSNAPwarrantsasetofvaluationmetricsmuchdifferentthanitspeersasitsgrowthprospectsdecelerateincomingquarters.ValuationMethodandRiskStatementThepotentialrisksintheInteractiveEntertainmentsectormayinclude,butarenotlimitedto:aslowdowninconsumerspending;changestotheretailchannel;operationaldifficulties;competition;consumerfatigueinparticulargamegenres;releasedateslips;theimpactoflegalandlicensingissues;softwarepiracy;andforeignexchangeandcurrencyrates.RisksinonlineadvertisingandeCommerceincludeapotentialinabilityfortheindustrytogrowduetoweaknessinconsumerdiscretionaryspendingaswellasalackofexecution.Risksthatcouldpotentiallyimpactonlinetravelsectorsharesincludeglobalmacroheadwinds,FXfluctuations,unpredictabledisruptioninthetravelindustry,unpredictableinterruptionofinformationtechnology&communicationssystems,increasedcompetitionfromlargesearchenginesorotherinternationalOTAs,searchenginealgorithmchanges,andanyincreasedemphasisbysuppliers(hotels,airlines)toluremoretrafficdirectlytotheirownwebsites.OurInternetvaluationsarebasedonacombinationofEV/GAAPEBITDAandEV(/FCF-SBC),andinsomecases,sum-of-the-partsmethodologies.USInternet&InteractiveEntertainment10January2018170 RequiredDisclosuresThisreporthasbeenpreparedbyUBSSecuritiesLLC,anaffiliateofUBSAG.UBSAG,itssubsidiaries,branchesandaffiliatesarereferredtohereinasUBS.ForinformationonthewaysinwhichUBSmanagesconflictsandmaintainsindependenceofitsresearchproduct;historicalperformanceinformation;andcertainadditionaldisclosuresconcerningUBSresearchrecommendations,pleasevisitwww.ubs.com/disclosures.Thefigurescontainedinperformancechartsrefertothepast;pastperformanceisnotareliableindicatoroffutureresults.Additionalinformationwillbemadeavailableuponrequest.UBSSecuritiesCo.LimitedislicensedtoconductsecuritiesinvestmentconsultancybusinessesbytheChinaSecuritiesRegulatoryCommission.UBSactsormayactasprincipalinthedebtsecurities(orinrelatedderivatives)thatmaybethesubjectofthisreport.Thisrecommendationwasfinalizedon:11January201805:03AMGMT.UBShasdesignatedcertainResearchdepartmentmembersasDerivativesResearchAnalystswherethosedepartmentmemberspublishresearchprincipallyontheanalysisofthepriceormarketforaderivative,andprovideinformationreasonablysufficientuponwhichtobaseadecisiontoenterintoaderivativestransaction.WhereDerivativesResearchAnalystsco-authorresearchreportswithEquityResearchAnalystsorEconomists,theDerivativesResearchAnalystisresponsibleforthederivativesinvestmentviews,forecasts,and/orrecommendations.AnalystCertification:Eachresearchanalystprimarilyresponsibleforthecontentofthisresearchreport,inwholeorinpart,certifiesthatwithrespecttoeachsecurityorissuerthattheanalystcoveredinthisreport:(1)alloftheviewsexpressedaccuratelyreflecthisorherpersonalviewsaboutthosesecuritiesorissuersandwerepreparedinanindependentmanner,includingwithrespecttoUBS,and(2)nopartofhisorhercompensationwas,is,orwillbe,directlyorindirectly,relatedtothespecificrecommendationsorviewsexpressedbythatresearchanalystintheresearchreport.UBSInvestmentResearch:GlobalEquityRatingDefinitions12-MonthRatingDefinitionCoverage1IBServices2BuyFSRis>6%abovetheMRA.46%27%NeutralFSRisbetween-6%and6%oftheMRA.39%24%SellFSRis>6%belowtheMRA.16%13%Short-TermRatingDefinitionCoverage3IBServices4StockpriceexpectedtorisewithinthreemonthsfromthetimeBuy<1%<1%theratingwasassignedbecauseofaspecificcatalystorevent.StockpriceexpectedtofallwithinthreemonthsfromthetimeSell<1%<1%theratingwasassignedbecauseofaspecificcatalystorevent.Source:UBS.Ratingallocationsareasof31December2017.1:Percentageofcompaniesundercoveragegloballywithinthe12-monthratingcategory.2:Percentageofcompanieswithinthe12-monthratingcategoryforwhichinvestmentbanking(IB)serviceswereprovidedwithinthepast12months.3:PercentageofcompaniesundercoveragegloballywithintheShort-Termratingcategory.4:PercentageofcompanieswithintheShort-Termratingcategoryforwhichinvestmentbanking(IB)serviceswereprovidedwithinthepast12months.KEYDEFINITIONS:ForecastStockReturn(FSR)isdefinedasexpectedpercentagepriceappreciationplusgrossdividendyieldoverthenext12months.MarketReturnAssumption(MRA)isdefinedastheone-yearlocalmarketinterestrateplus5%(aproxyfor,andnotaforecastof,theequityriskpremium).UnderReview(UR)StocksmaybeflaggedasURbytheanalyst,indicatingthatthestock"spricetargetand/orratingaresubjecttopossiblechangeinthenearterm,usuallyinresponsetoaneventthatmayaffecttheinvestmentcaseorvaluation.Short-TermRatingsreflecttheexpectednear-term(uptothreemonths)performanceofthestockanddonotreflectanychangeinthefundamentalvieworinvestmentcase.EquityPriceTargetshaveaninvestmenthorizonof12months.EXCEPTIONSANDSPECIALCASES:UKandEuropeanInvestmentFundratingsanddefinitionsare:Buy:Positiveonfactorssuchasstructure,management,performancerecord,discount;Neutral:Neutralonfactorssuchasstructure,management,performancerecord,discount;Sell:Negativeonfactorssuchasstructure,management,performancerecord,discount.CoreBandingExceptions(CBE):Exceptionstothestandard+/-6%bandsmaybegrantedbytheInvestmentReviewCommittee(IRC).FactorsconsideredbytheIRCincludethestock"svolatilityandthecreditspreadoftherespectivecompany"sdebt.Asaresult,stocksdeemedtobeveryhighorlowriskmaybesubjecttohigherorlowerbandsastheyrelatetotherating.Whensuchexceptionsapply,theywillbeidentifiedintheCompanyDisclosurestableintherelevantresearchpiece.USInternet&InteractiveEntertainment10January2018171 Researchanalystscontributingtothisreportwhoareemployedbyanynon-USaffiliateofUBSSecuritiesLLCarenotregistered/qualifiedasresearchanalystswithFINRA.SuchanalystsmaynotbeassociatedpersonsofUBSSecuritiesLLCandthereforearenotsubjecttotheFINRArestrictionsoncommunicationswithasubjectcompany,publicappearances,andtradingsecuritiesheldbyaresearchanalystaccount.Thenameofeachaffiliateandanalystemployedbythataffiliatecontributingtothisreport,ifany,follows.UBSSecuritiesLLC:EricJ.Sheridan;AlexandraKasper;BridgetHan;BenjaminMiller;LaneCzura.CompanyDisclosuresCompanyNameReuters12-monthratingShort-termratingPricePricedateActivisionBlizzard16ATVI.OBuyN/AUS$66.8310Jan2018AlphabetInc.6b,6c,7,16,22GOOG.OBuyN/AUS$1,102.6110Jan2018AltabaInc13,16AABA.OBuyN/AUS$76.5110Jan2018Amazon.com16,22AMZN.OBuyN/AUS$1,254.3310Jan2018Despegar.com4,6a,16DESP.NNeutralN/AUS$26.4910Jan2018eBay6b,7,16EBAY.OBuyN/AUS$37.7010Jan2018ElectronicArts4,6b,7,16EA.OBuyN/AUS$112.2510Jan2018Expedia2,4,16EXPE.OBuyN/AUS$127.1810Jan2018Facebook16,22FB.OBuyN/AUS$187.8410Jan2018Groupon16GRPN.OSellN/AUS$5.0910Jan2018IACInterActive16IAC.OBuyN/AUS$132.1010Jan2018MatchGroupInc16MTCH.OBuyN/AUS$31.9410Jan2018NetflixInc16NFLX.OBuyN/AUS$212.5210Jan2018PayPalHoldingsInc16PYPL.ONeutralN/AUS$79.3710Jan2018QVCGroup16,26aQVCA.OBuyN/AUS$26.1510Jan2018SnapInc2,4,6a,16SNAP.NSellN/AUS$14.6510Jan2018ThePricelineGroupInc.16PCLN.OBuyN/AUS$1,872.9110Jan2018TravelportWorldwideLtd4,5,6a,7,16TVPT.NNeutralN/AUS$13.0510Jan2018TripAdvisor16TRIP.ONeutralN/AUS$34.4910Jan2018Twitter16,26bTWTR.NNeutralN/AUS$24.2510Jan2018Yelp16YELP.KSellN/AUS$43.2910Jan2018Zynga16ZNGA.OBuyN/AUS$3.8910Jan2018Source:UBS.Allpricesasoflocalmarketclose.Ratingsinthistablearethemostcurrentpublishedratingspriortothisreport.Theymaybemorerecentthanthestockpricingdate2.UBSAG,itsaffiliatesorsubsidiarieshasactedasmanager/co-managerintheunderwritingorplacementofsecuritiesofthiscompany/entityoroneofitsaffiliateswithinthepast12months.4.Withinthepast12months,UBSAG,itsaffiliatesorsubsidiarieshasreceivedcompensationforinvestmentbankingservicesfromthiscompany/entityoroneofitsaffiliates.5.UBSAG,itsaffiliatesorsubsidiariesexpecttoreceiveorintendtoseekcompensationforinvestmentbankingservicesfromthiscompany/entitywithinthenextthreemonths.6a.Thiscompany/entityis,orwithinthepast12monthshasbeen,aclientofUBSSecuritiesLLC,andinvestmentbankingservicesarebeing,orhavebeen,provided.6b.Thiscompany/entityis,orwithinthepast12monthshasbeen,aclientofUBSSecuritiesLLC,andnon-investmentbankingsecurities-relatedservicesarebeing,orhavebeen,provided.6c.Thiscompany/entityis,orwithinthepast12monthshasbeen,aclientofUBSSecuritiesLLC,andnon-securitiesservicesarebeing,orhavebeen,provided.7.Withinthepast12months,UBSSecuritiesLLCand/oritsaffiliateshavereceivedcompensationforproductsandservicesotherthaninvestmentbankingservicesfromthiscompany/entity.13.UBSAG,itsaffiliatesorsubsidiariesbeneficiallyowned1%ormoreofaclassofthiscompany`scommonequitysecuritiesasoflastmonth`send(orthepriormonth`sendifthisreportisdatedlessthan10daysafterthemostrecentmonth`send).USInternet&InteractiveEntertainment10January2018172 16.UBSSecuritiesLLCmakesamarketinthesecuritiesand/orADRsofthiscompany.22.UBSAG,itsaffiliatesorsubsidiariesheldothersignificantfinancialinterestsinthiscompany/entityasoflastmonth`send(orthepriormonth`sendifthisreportisdatedlessthan10workingdaysafterthemostrecentmonth`send).26a.AU.S.-basedglobalequitystrategist,amemberofhisteam,oroneoftheirhouseholdmembershasalongcommonstockpositionintheLibertyInteractiveCorpQVCGroup.26b.AU.S.-basedglobalequitystrategist,amemberofhisteam,oroneoftheirhouseholdmembershasalongcommonstockpositioninTwitterInc.Unlessotherwiseindicated,pleaserefertotheValuationandRisksectionswithinthebodyofthisreport.Foracompletesetofdisclosurestatementsassociatedwiththecompaniesdiscussedinthisreport,includinginformationonvaluationandrisk,pleasecontactUBSSecuritiesLLC,1285AvenueofAmericas,NewYork,NY10019,USA,Attention:InvestmentResearch.USInternet&InteractiveEntertainment10January2018173 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oreticalmodel-basedvaluationsandmaybebasedoncertainassumptions.DifferentassumptionsbyUBSoranyothersourcemayyieldsubstantiallydifferentresults.Norepresentationorwarranty,eitherexpressedorimplied,isprovidedinrelationtotheaccuracy,completenessorreliabilityoftheinformationcontainedinanymaterialstowhichthisdocumentrelates(the"Information"),exceptwithrespecttoInformationconcerningUBS.TheInformationisnotintendedtobeacompletestatementorsummaryofthesecurities,marketsordevelopmentsreferredtointhedocument.UBSdoesnotundertaketoupdateorkeepcurrenttheInformation.Anyopinionsexpressedinthisdocumentmaychangewithoutnoticeandmaydifferorbecontrarytoopinionsexpressedbyotherbusinessareasorgroups,personnelorotherrepresentativeofUBS.AnystatementscontainedinthisreportattributedtoathirdpartyrepresentUBS"sinterpretationofthedata,informationand/oropinionsprovidedbythatthirdpartyeitherpubliclyorthroughasubscriptionservice,andsuchuseandinterpretationhavenotbeenreviewedbythethirdparty.InnocircumstancesmaythisdocumentoranyoftheInformation(includinganyforecast,value,indexorothercalculatedamount("Values"))beusedforanyofthefollowingpurposes:(i)valuationoraccountingpurposes;(ii)todeterminetheamountsdueorpayable,thepriceorthevalueofanyfinancialinstrumentorfinancialcontract;or(iii)tomeasuretheperformanceofanyfinancialinstrumentincluding,withoutlimitation,forthepurposeoftrackingthereturnorperformanceofanyValueorofdefiningtheassetallocationofportfolioorofcomputingperformancefees.ByreceivingthisdocumentandtheInformationyouwillbedeemedtorepresentandwarranttoUBSthatyouwillnotusethisdocumentoranyoftheInformationforanyoftheabovepurposesorotherwiserelyuponthisdocumentoranyoftheInformation.UBShaspoliciesandprocedures,whichinclude,withoutlimitation,independencepoliciesandpermanentinformationbarriers,thatareintended,anduponwhichUBSrelies,tomanagepotentialconflictsofinterestandcontroltheflowofinformationwithindivisionsofUBSandamongitssubsidiaries,branchesandaffiliates.ForfurtherinformationonthewaysinwhichUBSmanagesconflictsandmaintainsindependenceofitsresearchproducts,historicalperformanceinformationandcertainadditionaldisclosuresconcerningUBSresearchrecommendations,pleasevisitwww.ubs.com/disclosures.Researchwillinitiate,updateandceasecoveragesolelyatthediscretionofUBSResearchManagement,whichwillalsohavesolediscretiononthetimingandfrequencyofanypublishedresearchproduct.Theanalysiscontainedinthisdocumentisbasedonnumerousassumptions.Allmaterialinformationinrelationtopublishedresearchreports,suchasvaluationmethodology,riskstatements,underlyingassumptions(includingsensitivityanalysisofthoseassumptions),ratingshistoryetc.asrequiredbytheMarketAbuseRegulation,canbefoundonUBSNeo.Differentassumptionscouldresultinmateriallydifferentresults.Theanalyst(s)responsibleforthepreparationofthisdocumentmayinteractwithtradingdeskpersonnel,salespersonnelandotherpartiesforthepurposeofgathering,applyingandinterpretingmarketinformation.UBSreliesoninformationbarrierstocontroltheflowofinformationcontainedinoneormoreareaswithinUBSintootherareas,units,groupsoraffiliatesofUBS.Thecompensationoftheanalystwhopreparedthisdocumentisdeterminedexclusivelybyresearchmanagementandseniormanagement(notincludinginvestmentbanking).Analystcompensationisnotbasedoninvestmentbankingrevenues;however,compensationmayrelatetotherevenuesofUBSand/oritsdivisionsasawhole,ofwhichinvestmentbanking,salesandtradingareapart,andUBS"ssubsidiaries,branchesandaffiliatesasawhole.ForfinancialinstrumentsadmittedtotradingonanEUregulatedmarket:UBSAG,itsaffiliatesorsubsidiaries(excludingUBSSecuritiesLLC)actsasamarketmakerorliquidityprovider(inaccordancewiththeinterpretationofthesetermsintheUK)inthefinancialinstrumentsoftheissuersavethatwheretheactivityofliquidityprovideriscarriedoutinaccordancewiththedefinitiongiventoitbythelawsandregulationsofanyotherEUjurisdictions,suchinformationisseparatelydisclosedinthisdocument.Forfinancialinstrumentsadmittedtotradingonanon-EUregulatedmarket:UBSmayactasamarketmakersavethatwherethisactivityiscarriedoutintheUSinaccordancewiththedefinitiongiventoitbytherelevantlawsandregulations,suchactivitywillbespecificallydisclosedinthisdocument.UBSmayhaveissuedawarrantthevalueofwhichisbasedononeormoreofthefinancialinstrumentsreferredtointhedocument.UBSanditsaffiliatesandemployeesmayhavelongorshortpositions,tradeasprincipalandbuyandsellininstrumentsorderivativesidentifiedherein;suchtransactionsorpositionsmaybeinconsistentwiththeopinionsexpressedinthisdocument.USInternet&InteractiveEntertainment10January2018174 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