GS internet roadmap by giladn

The Goldman Sachs Group, Inc.

2007 Goldman Sachs Internet Conference Internet Roadmap 8.0 May 2007 Coverage view: Attractive Anthony Noto Erin McCann Jennifer Watson, CFA Megan Barker

212-357-1849 212-902-4077 212-357-7937 212-902-1879

anthony.noto@gs.com erin.mccann@gs.com jennifer.watson@gs.com megan.barker@gs.com

Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co. Goldman, Sachs & Co.

The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of The Goldman Sachs Group, Inc. in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at http://www.independentresearch.gs.com or can call 1-866-727-7000 to request a copy of this research. For Reg AC certification, see page 90. For other important disclosures, see page 92, go to http://www.gs.com/research/hedge.html, or contact your investment representative. Analysts employed by non-US affiliates are not required to take the NASD/NYSE analyst exam.

Table of contents Section

Page

Background on 5th annual online consumer survey

Overview of survey takeaways

Situation assessment

Determining the gateways to maximize engagement

Owning the gateways to maximize engagement

1. Search

2. Shopping

3. Payments

4. Mobile

Global presence also maximizes engagement

Sustainable competitive advantage

Forecasts

Company views

Disclosures

Goldman Sachs Global Investment Research

Fifth annual consumer online user behavior study •

We conducted our fifth annual online user behavior study to assess key trends related to the amount of time spent online, the growth of various activities online, and the comparison vs. traditional activities, drivers of choice related to online activities, spending patterns, and factors of differentiation. The survey also measured drivers of choice for specific online e-Commerce and new media sites, willingness to pay for online services, and mobile device usage.

•

The sample size for the survey was 2,000-plus online users and was conducted via a third party. The 2,000 participants were chosen from an opinion panel of 1 million households and responses were appropriately weighted to ensure that the total data was representative of the Internet population.

•

The survey also analyzed the behavior of online users based on their Internet connection speed, i.e., dial-up vs. broadband, as well as their age and gender to ensure an appropriate sample and to better understand the future of Internet usage.

•

The survey was conducted from March 12, 2007, through March 26, 2007.

Goldman Sachs Global Investment Research

Situation assessment Fragmentation of online usage continues, BUT time spent online is slowing

• • • •

Consistent with last year, fragmentation of usage across sites continues, highlighting the need to remain focused on maximizing engagement User sophistication continues to increase, driving breadth of usage across more activities that we call “gateways” for consumer engagement Fragmentation is thus evident across not just the breadth of sites but also the breadth of activities as well as across platforms (i.e., mobile) In contrast to 2006, time spent online is not accelerating against the headwind of fragmentation

Factors impacting competition for fragmenting user activity

• • • • •

Declining costs of distribution (search) and content (user-generated) and the option to outsource sales to advertising networks have lowered the barriers to entry and success Growth and sustainability of new companies are unprecedented Large media companies are more pressured than ever to make the transition online New platforms beyond the PC create new usage by extending the dimensions of time and location, with different drivers of success Some activities (careers, dating, etc.) appear better addressed by stand-alone companies or brands, rather than aggregators

Goldman Sachs Global Investment Research

Critical success factors

These strategic themes will continue to define success … 1. Maximize engagement – owning differentiated and complementary gateways is required to drive reach, frequency and duration

• • •

Expand the user base – consumers, publishers, advertisers, buyers and sellers Increase usage areas – applications (email, search, VoIP, IM, blogging, software), services (payments, stores, advertising), information (maps, weather, news), entertainment (sports, user-generated content, WebTV), and commerce Develop a multi-platform strategy – PC, mobile device, and the television

2. Optimize monetization – engagement is necessary but not sufficient

• • • •

Advertising – branded, pay for performance search (click, call, acquisition, lead generation), direct marketing e-Commerce – retail, marketplace, stores, shopping comparison, principle vs. agent Subscriptions – VoIP, email, fantasy sports, dating, careers, games Payments – transactions, communications, B2B, PC, mobile, etc.

3. Expand global footprint – to capture two increasingly critical benefits

• •

Geographic expansion is necessary to capture growth and to leverage learning across markets Incremental benefits to users (consumers, advertisers, sellers, etc.) due to a global footprint

Goldman Sachs Global Investment Research

Strategic implications of trying to maximize engagement and optimize monetization… Maximizing engagement and optimizing monetization across devices require:

An understanding of the gateways (i.e., drivers) of site choice by users

• • • •

An understanding of the factors that drive preferences within each gateway and their growth trends

• • • •

¾ ¾

There are certain activities that drive a user’s decision to go to one site over another We call these activities gateways: email, search, shopping, news, weather, maps, etc. The importance of gateways is increasing The game could be over for email and search but beyond these activities, no site dominates a gateway….and the gateways on mobile devices are different and completely up for grabs

Depending on the gateway, the factors that drive preference are different The growth trajectory of each gateway is as important as its relative rank among gateways Search and Shopping rank as top three gateways and are also growing fast with queries per user up 26% yoy and purchase occasions up 29% yoy Payments is a facilitator to engagement across gateways

The leaders in search and email are clear; the leaders for the other gateways (i.e., activities) that drive site choice on the PC and mobile platforms are unclear Companies that lack gateways or the ability to differentiate the drivers of consumer preferences will need to pursue strategic alternatives

Goldman Sachs Global Investment Research

… lead to two conclusions

1. Achieving a competitive advantage on a global scale requires:

•

Owning an optimal mix of interactive businesses and applications such that success in one area drives success in an adjacent/complementary area (i.e., gateway) resulting in greater scale and superior returns. Owning a gateway can build success in another gateway Leveraging the mix of businesses to help drive network effects or an information edge to drive greater engagement, optimize monetization, and expand globally

•

Being very differentiated in a vertical category that is not a critical gateway

2. Consolidation is inevitable will continue – 2006 was likely just the beginning

• • •

We expect that some companies will successfully pursue a global multi-business strategy, but it will likely be done via partnerships, acquisitions, and/or investments as opposed to a pure organic build strategy Stand-alone companies and brands can survive as independents, but will likely still be pursued most aggressively by larger companies to penetrate consumers and advertisers The value of a business that cannot compete on engagement and monetization will become greater for an acquirer that has a strategic hole in its business mix than the value of the business on a stand-alone basis

Goldman Sachs Global Investment Research

Consolidation and strategic partnerships have only begun There have been numerous acquisitions, joint ventures/investments, and partnerships announced in the last 18 months with the goals often including: ¾ ¾ ¾ ¾ ¾

Gaining traffic in audience and users Obtaining technology/service Leveraging content/media/programming Improving monetization/advertiser relationships/revenue Expanding global footprint

Acquisitions

Joint Ventures/Investments

Partnerships

2007 AOL / Adtech AOL / Third Screen Media eBay / StubHub Google / Adscape Media Google / DoubleClick Microsoft / aQuantive Microsoft / ScreenTonic Microsoft / Tellme Networks RealNetworks / Sony NetServices WPP / 24/7 Real Media Yahoo! / Right Media 2006 Amazon / Shopbop.com FTD / Interflora Google / dMarc Google / YouTube RealNetworks / WiderThan Viacom / Xfire

Google / Clear Channel Google / EchoStar Yahoo! / United Online

Amazon / Wikia Series B Financing eBay JV with PChome Online (Taiwan) eBay JV with TOM Online (China) Yahoo! / 10% of Gmarket (Korea) Yahoo! / 20% of Right Media

Baidu / MSN Baidu / eBay's EachNet eBay / Google eBay / Yahoo! Google / News Corp Google / Sony BMG Google / Warner Music Group Yahoo! / Newspaper consortium

Source: Company data, Goldman Sachs Research. Goldman Sachs Global Investment Research

The most active areas of M&A are likely to continue to enhance engagement/monetization Similar to recent transactions, we anticipate that future activity will also reflect the goals of : ¾ Gaining traffic in audience and users ¾ Obtaining technology/service ¾ Leveraging content/media/programming ¾ Improving monetization/advertiser relationships/revenue ¾ Expanding global footprint

Thus, we expect significant activity in the following industries: ¾ Marketing services companies ¾ Mobile companies ¾ Content providers or publishers ¾ Online media companies (UGC, long-tail companies, virtual web, payments) ¾ e-Commerce companies or shopping-related companies ¾ Non-US companies Goldman Sachs Global Investment Research

Who is well-positioned given the current landscape? ¾ Large-cap companies: Across large-capitalization pure play companies, we believe eBay (Buy/A), Google (Buy/A), and Yahoo! (Neutral/A) are positioned the best against our themes and critical success factors

¾ Small-cap companies: Within small-capitalization companies, several verticals are still being well served by leaders leveraging typical advantages:

• Baidu (Neutral/A) – search productivity cycle • Glu Mobile (Buy/C) – strong distribution relationships with carriers prove low-cost porting technology • GSI Commerce (Buy/A) – limited competition with secular tailwinds • Priceline.com (Neutral/A) – driving engagement, monetization, and global expansion • VistaPrint (Buy/A) – low-cost operator • WebMD (Neutral/A) – unique and exclusive content

¾ Some of the well-positioned companies are not rated Buy due to valuation and/or other considerations

Goldman Sachs Global Investment Research

Sector-level themes Industry growth remains solid but cross currents remain 1. Online advertising – robust growth but in transition • • • • •

Branded online advertising has the potential to grow faster than search by 2008/2009 Shift to lower CPM buys and buying audience not pages drives price deflation Growth in branded ads could also decelerate as companies anniversary the significant increase in ad inventory (impressions) placed on a page Need for new distribution channels and platforms for selling lower-CPM inventory Expect most near term merger and acquisition activity in this space

2. e-Commerce – growth remains strong and margins are expanding • • • •

Strong secular growth continues but with stabilization in investment Deflation in marketing costs from the mix shift to lower-CPM inventory is also a plus Purchase occasions are on the rise again as companies develop differentiated consumer value propositions by category Competition remains but the second derivative is slowing (i.e., the number of sites boasting more than 5 million unique visitors has stopped increasing faster than total unique visitors)

3. Video – determining the right model, best utilities, and optimal monetization 4. Platforms beyond the PC provide opportunities and risks (mobile and TV) 5. Financial restructuring- recapitalizations, leveraged recaps, LBO, etc. Goldman Sachs Global Investment Research

Stocks should continue to perform better in 2007 after underperformance in 2006 Fundamentals remain solid across the sector with improving ROIC and FCF growth ¾ Growth remains solid with average revenue growth of 29% in 2007E ¾ Capex as % of revenue should decline for large-cap companies in 2007 following investments in 2006 that should drive growth ¾ Solid free cash flow growth of 37% in 2007E following a decline in 2006 ¾ Average ROIC of 15% in 2007E versus 13% in 2006 ¾ Significant growth in GAAP EPS following the first year of FAS123R implementation in 2006

Total Revenue growth Capex as % of revenue ROIC GAAP EPS growth FCF per share yoy growth

2005 38.1% 7.4% 12.7% 83.2% $1.16

2006 37.9% 7.8% 13.4% -45.1% $1.09 -6.7%

2007E 29.3% 7.8% 15.0% 34.1% $1.49 37.0%

2008E 20.8% 6.9% 17.9% 29.8% $2.13 43.7%

Large cap Revenue growth Capex as % of revenue ROIC GAAP EPS growth FCF per share yoy growth

2005 48.9% 7.6% 26.7% 120.7% $2.22

2006 35.4% 9.5% 17.8% -42.4% $1.96 -11.8%

2007E 26.6% 8.8% 20.6% 34.4% $3.05 55.3%

2008E 20.8% 8.2% 24.1% 30.0% $4.19 37.5%

Small & mid cap Revenue growth Capex as % of revenue ROIC GAAP EPS growth FCF per share yoy growth

2005 36.3% 7.3% 5.6% 45.7% $0.63

2006 39.0% 7.1% 11.6% -47.8% $0.72 14.0%

2007E 30.5% 7.4% 12.7% 33.9% $0.84 16.1%

2008E 20.7% 6.4% 15.3% 28.9% $1.28 53.0%

Source: Company reports, FactSet, Goldman Sachs Research estimates

Goldman Sachs Global Investment Research

Company ranking and summary (ranked alphabetically by rating) 1.

2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

eBay (Buy): In our view, eBay is in the early stages of driving several quarters of improving trends with conversion rates rebounding and driving converted listings growth faster than total listings as the company innovates to improve the buyer experience. Skype, Advertising and PayPal are also driving substantial growth. Google (Buy): Google’s ability to leverage its comparative advantages to gain an information edge in the “Search Productivity Cycle” could lead to a sustainable competitive advantage and traction in new products could drive a complete “Advertising Productivity Cycle.” GSI Commerce (Buy): Sizeable new partner additions evidence the company's ability to scale its platform and technology to drive improving margins against strong revenue growth that is benefiting from increased demand for outsourced e-Commerce and marketing services. VistaPrint (Buy): Vertically integrated model leverages Internet economics and proprietary technology to deliver customized products in small volumes at large volume prices as a low-cost operator, enhancing the customer experience and driving superior ROIC for shareholders. Amazon (Neutral): Low-cost, low-pricing strategy as well as a strong product cycle is driving solid top-line growth, but margin expansion remains the major swing factor in valuation. Baidu (Neutral): Limited upside offsets Baidu’s solid market opportunity and established leadership in the Chinese search market. EarthLink (Neutral): Fundamentals remain uninspiring. Potentially the best financial restructuring story in the sector, with core EBITDA 2X higher than current estimates. Expedia (Neutral): Expedia appears to be close to the end of a period of transition from unsustainable high revenue margin rates, below-industry marketing costs, and underinvestment in customer service; potential recapitalization or consolidation could drive share appreciation. FTD Group, Inc. (Neutral): As the largest integrated floral company with both domestic and international exposure, FTD stands to benefit both from the secular growth of e-Commerce and from the increased dependence of florists on order gatherers. Valuation limits upside. InterActiveCorp (Neutral): Although IACI is experiencing issues in HSN and Lending, IACI’s consistent execution for most segments in recent quarters and potential recap opportunities could drive investor confidence. An asset swap to Liberty for HSN could lessen the fundamental overhang of that business. Priceline.com (Neutral): Continues to benefit from its product and geographic diversification strategy, which is enabling the company to transition to a full online travel provider from a niche online travel company while driving above average growth. RealNetworks (Neutral): We see limited profitability due to heightened competition in both the digital music and online gaming industries. WebMD (Neutral): Benefits from online advertising growth and healthcare costs shifting to the consumer are offset by valuation. Yahoo! (Neutral): Uncertainty remains regarding the magnitude of financial success of Project Panama and the risk of the mix shift to lower CPM branded advertising. CNET Networks (Sell): CNET’s business will likely grow slower than the overall market due to a deceleration in audience growth as well as limited CPM leverage as advertisers shift to lower CPM inventory. 1-800-FLOWERS.COM (Sell): Long-term profit growth above our 13% forecast does not seem probable assuming 6% long-term revenue growth, which is relatively in-line with the company's recent high-single digit organic growth rate and is not likely to accelerate without greater sales and marketing spend. Goldman Sachs Global Investment Research

Situation Assessment Fragmentation and slowing online usage growth

Growth in time spent online has slowed Our proprietary consumer online behavior study shows that the growth in the average user’s time spent online is largely flat versus 2006 ¾ Relatively flat time spent online versus 2006 partially reflects more targeted online experiences and increased productivity in general ¾ The slowdown in growth highlights the need for sites to maximize engagement, monetization, and loyalty

Average hours spent online per week

23.0

21.6

+16% y/y -3% y/y

21.0

18.6 18

17.7

+15% 21.8 y/y -5% 20.0 y/y 19.8 +1% y/y

19.5 17.6

+5% y/y

19.2

+11% y/y -2% y/y

16.3 +8% y/y

10 Total Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

2004

Broadband 2005 2006

Narrowband 2007 15

Slowing growth in time spent online reflects fewer users spending 40+ hours 他A driver of slowing growth in time spent online by the average Internet user is a decline in those heavy users that spend 40 hours or more every week online (13% of users versus 15% last year)

他 On average, excluding those who spend more than 40 hours online per week, users spent 16.5 hours online in a week, up 3% from 16.0 hours in 2006 Hours

2007

2006

2005

2004

0-4

10%

12%

13%

5-9

11%

14%

15%

10-14

18%

16%

18%

20%

15-19

10%

11%

10%

20-29

28%

25%

26%

22%

30-39

13%

12%

10%

40+

13%

15%

10%

Mean hours

21.0

21.6

18.6

17.7

-2.8%

16.1%

5.1%

16.5

16.0

14.9

3.1%

7.4%

4.2%

Yoy change Mean hours ex-40+ Yoy change

14.3

Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

Time spent online continues to fragment across a variety of activitiesâ&#x20AC;Ś Email, search, playing games, news, and shopping continue to represent the greatest amount of time spent online but increased fragmentation persists % of online time spent on various activities

Email Search Playing games Reading news Shopping Online banking Instant messaging Health-related research Listening to music Educational activities Other

% of Online Time Spent on Activities 2006 2005 2007 25% 29% 29% 14% 14% 19% 10% 10% 11% 9% 8% 10% 6% 7% 6% 5% 5% NA 5% 4% 4% 3% 3% NA 4% 3% 3% 2% 3% 3% 17% 14% 15%

Educational activities 2%

Other 17%

Email 25%

Listening to music 4% Health-related research 3% Instant messaging 5%

Search 14%

Online banking 5% Shopping 6% Reading news 9%

Playing games 10%

Other includes: downloading 3%, watching TV 2%, dating services 1%, blogging 1%, travel arrangements 1%, photo-sharing 2%, real estate research 1%, watching movies 1%, phone calls 1%, watching videos 2%, weather 3%, creating video 1%, writing reviews 1%, and gambling 1%. Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

…in addition to fragmenting across sites ¾ Sites with 15 million-plus monthly visits are losing traffic as the proliferation of new sites emerge ¾ Sites with greater than 15 million monthly unique visitors saw a 7.8% yoy decline ¾ Sites with greater than 5 million and 10 million monthly unique visitors are growing at 1.0% and 4.5%

Yoy growth in uniques per site Uniques per site with > 5mn monthly uniques Uniques per site with > 10mn monthly uniques Uniques per site with > 15mn monthly uniques

Apr-07 1.0% 4.5% -7.8%

Note: The time period is trailing twelve months

Source: Goldman Sachs Research estimates, comScore media metrix. Goldman Sachs Global Investment Research

Slowing growth is due to visits given page views/user continues to grow 他 Year-over-year growth in page views per user has been between 2% and 6% on a trailing twelve month (TTM) basis, while total user growth year-over-year is 3%-5% 他 Thus, visits per user are driving the slowdown in time spent online given continued page view per user and user growth

他 Therefore, companies must own the gateways that drive visits

Trailing 12 months page views/unique user

Trailing twelve months page views/unique user 2.75

2.72

2.70

2.66

2.65

2.70

Jun06

Sep- Dec- Mar06 06 07

2.65

2.62

2.60 2.55

2.71

2.70

2.56 2.51

2.50 Mar05

Jun05

Sep- Dec- Mar05 05 06

Quarter ending Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

TTM PV/UV 19

Also improving sell through and adding advertising inventory/page will reach a limit… ¾ Impressions/page have increased steadily over the past two years, with ~25% yoy growth for the past 3 months as publishers increase the number of ads/page to drive revenue growth ¾ With 3%-5% growth in US online users and ~4% growth in page views/user, the 20%-30% growth in ad dollars has likely benefited from the increased ad inventory per page

Impressions per page view 0.60

Impressions per page view

0.50

0.40

0.30

0.20

0.10 Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

…thus, companies must own gateways that drive visits Source: comScore MediaMetrix, Nielsen//NetRatings Goldman Sachs Global Investment Research

Determining the gateways to maximize engagement

We call the activities that drive site choice “gateways” Question: What activity drives your choice of site? ¾ Email and search remain the top two gateways (drivers) of site choice ¾ Shopping has displaced News as the number-three gateway, though News, Weather, and Maps are gateways for at least 30% of users 0%

10%

Email Search Sho pping News Weather M aps Entertainment Health Instant M essenger Lo cal Info Games Spo rts P ho to s M usic Finance Watching video s TV B lo gging Careers Real Estate M o vie Tickets Dating

20%

30%

40%

50%

60%

70%

>30% > 20% still important

Activities that drive site choice (% of responses)

Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

The gateways (i.e., activities) that drive site choice are increasing in importance 他 The top activities increased the percentage of people that select it as a gateway on average by 500 basis points, or by 5% more users 他 The number of gateways highlighted by 20%-plus of users also increased to 11 from 10 activities, reinforcing the need for companies to offer a breadth of activities to increase engagement 0%

10%

Email Search Shopping News Weather Maps Entertainment Health Instant Messenger Local Info Games Sports Photos Music Finance Watching videos TV Blogging Careers Real Estate Movie Tickets Dating

20%

30%

40%

50%

60%

70%

Activities that drive portal choice (% of responses)

2007 2006

Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

Shopping, Health and Entertainment have increased in importance as gateways of site choice 2007 Rank and penetration

Shopping, Health, and Entertainment saw some of the greatest increases in penetration of users selecting these activities as drivers of site choice in 2007

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Email Search Shopping News W eather Maps Entertainment Health Instant Messenger Games Local Info Sports Music Photos Finance W atching videos TV Blogging Careers Real Estate Other Movie Tickets Dating W riting user reviews Voice Calls Compatibility with device

63.0% 55.0% 44.0% 40.0% 36.0% 33.0% 29.0% 28.0% 27.0% 26.0% 26.0% 18.0% 16.0% 16.0% 12.0% 12.0% 8.0% 8.0% 7.0% 6.0% 6.0% 5.0% 3.0% 3.0% 1.0% 1.0%

2006 Rank and penetration 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Email Search News W eather Maps Instant Messenger Games Local Info Shopping Entertainment Health Sports Music Photos Finance Other TV Careers Real Estate Movie Tickets Blogging Dating Voice Calls

58.0% 50.0% 37.0% 34.0% 28.0% 26.0% 24.0% 24.0% 21.0% 21.0% 16.0% 14.0% 9.0% 9.0% 9.0% 8.0% 6.0% 6.0% 5.0% 5.0% 4.0% 2.0% 1.0%

Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

Gateways also account for above average share of total time spent 他 Five of the top eight gateways (i.e. drivers of web site choice) have significantly more of the time spent on that activity being spent online than the ~20% average share of time spent that the Internet has in general

他 If we consider search the same as looking for general information/research, six of the top eight drivers are included below

Activity Looking for general information/research (search) Reading news Banking/Finance Shopping Playing games Instant messaging Health-related research Weather

Online time as % of total time 69.8% 51.5% 47.6% 41.4% 40.9% 31.7% 31.6% 31.3%

Email by default has nearly 100% of time spent online Source: Goldman Sachs Research estimates, Synovate.

Goldman Sachs Global Investment Research

Offering a breadth of activities is critical as several gateways are not dominated Question: Which sites do you use for the following activities? Choices included Yahoo!, Google, MSN, MySpace, AOL & Other

¾ Outside of Email and Search (the top two drivers of site choice), there is less dominance ¾ Excluding Email and Search, no site garners 55%-plus penetration of a gateway ¾ Users do the same activity on multiple sites – no site is used exclusively for an activity ¾ Users also go to different sites for different activities, indicating that no site has created the best experience across all verticals or gateways Percentage of users that choose a site for a specific activity and/or information Email Search Shopping News MySpace 76% Google 63% Google 49% MSN AOL 74% MSN 59% MSN 48% Yahoo! Yahoo! 73% AOL 59% AOL 48% MySpace MSN 72% Yahoo! 57% Yahoo! 46% AOL Google 64% MySpace 56% MySpace 46% Google Weather AOL MSN Yahoo! Google MySpace

Maps 46% 45% 41% 40% 38%

Google AOL MySpace Yahoo! MSN

40% 39% 39% 39% 38%

Entertainment MySpace 45% AOL 38% MSN 37% Yahoo! 34% Google 33%

52% 46% 45% 45% 44%

Health MSN Yahoo! Google MySpace AOL

35% 31% 31% 30% 29%

Note: When asked specifically on search with a broader set of choices, Ask.com & eBay were ranked 5th & 6th Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

Some sites have increased their breadth of gateways to capitalize on the opportunity 他 MySpace and MSN have achieved the largest increase in breadth of categories

penetrated and moved to the leading position

他 Google has also made significant progress 他 AOL and Yahoo! are relatively stagnant 16 14

Number of activities with 20%+ penetration of users 14

14 12

12 11

9 8

8 6 4 2 0 MySpace

MSN

Yahoo! 2006

AOL

Google

2007

Activities include: email, search, news, IM, games, health, entertainment, blogging, careers, real estate, and TV (see slide 22 for complete list). Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

Some gateways are better served by standalone brands or companies, not portals 他 Users significantly reduced activity in dating and careers at the largest sites included in our survey

他 The implication is that certain activities are best served by differentiated brands that carry a trusted name and reputation for important life decisions

Question: Please indicate which of the following sites you use for the following activities and/or information

30%

24%

23%

25% 20%

19%

20%

10%

Google

MySpace 2006

2007

19%

17%

10%

5% Yahoo!

20%

18%

15%

12% 8%

Dating

25%

25% 20%

16%

15% 10%

30%

Careers

AOL

MSN

Yahoo!

Google

MySpace 2006

AOL

MSN

2007

Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

Owning the gateways to maximize engagement

1. Search remains a critical gateway to maximize engagement

Search remains a fast-growing activity and a leading gateway 他 Robust usage growth continues with the average number of searches per user increasing 26% yoy to 13.1 searches on average per week from 10.4 last year.

他 Growth has been fueled by 21% of search users conducting 21 or more searches per week, up from 17% last year. # of searches per week (PC)

2007

2006

Perform searches online (net)

94%

1-3

26%

27%

4-6

16%

18%

7-9

11%

10%

10-13

14%

15%

14-16

17-20

21 or more (net)

21%

17%

Mean

13.1

10.4

0- I do not perform searches online

Yoy growth

26.0%

Source: Goldman Sachs Research estimates, Synovate.

Goldman Sachs Global Investment Research

Preference criteria for web search are unchanged versus 2006â&#x20AC;Ś Question: Why do you use a specific search engine over another? 0%

10%

15%

20%

25%

30%

35%

40%

41% 40%

Most relevant results 23%

Fastest response

25%

14% 14%

Highest number of responses 7% 8%

Personalization Less clutter

6% 5%

Unbiased algo search results

6% 5%

Review s included in search results

45%

3% 4%

General search Local search

Source: Goldman Sachs Research estimates, Synovate.

Goldman Sachs Global Investment Research

Users are using fewer search engines on averageâ&#x20AC;Ś On average 1.6 different search engines are used for the same search query versus 1.8 engines used on average in 2006 and 2005

How m any search engines do you use w hen conducting a search?

2.2 2.1 2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0

2.1 1.8

1.8

2006

2005

1.6

2007

2004

Source: Goldman Sachs Research estimates, Synovate, Harris Interactive.

Goldman Sachs Global Investment Research

…while Google is widening its lead in web search… ¾ Google’s lead is widening with 73% of online users choosing it for search, up 800 bps from 2005

¾ Yahoo!, AOL, and MSN continue to lose share

Question: Which search engine do you use?

Google Yahoo! MSN Ask.com AOL Other eBay YouTube A9.com

2007 73% 40% 15% 13% 12% 7% 7% 2% 1%

2006 68% 43% 22% 14% 16% 7% 9% 1% NA

2005 65% 47% 23% 16% 19% 8% NA NA NA

07/05 delta 8.0% -7.0% -8.0% -3.0% -7.0% -1.0% NA NA NA

Source: Goldman Sachs Research estimates, Synovate.

Goldman Sachs Global Investment Research

…and maintaining loyalty even despite its growing share ¾ 74% of Google search users use it most often when conducting a search, implying high levels of loyalty ¾ Interestingly, Google’s rate increased from 73% in 2006, despite broader search penetration at 73% vs. 68% ¾ Yahoo!, while the second most widely used search site, has much lower loyalty with only 52% of Yahoo! search users using it the most often when conducting a search. 90% 75%

73%74% 63%

60%

52%

49%

40%

45%

32%

29%

30%

22% 15%

15%

13%

12%

9% 2%

YouTube

A9.com

0% Google

Yahoo!

MSN

Ask.com

AOL

Penetration

Other

eBay

Frequency

Questions: Which websites do you use most often when conducting a search? Please rank frequency of use. Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

Local search rank is relatively in-line with general web search rank While the rank of sites is the same for local search, the magnitude of penetration is much lower at 44% vs. 73%, creating a significant opportunity 80% 73%

Question: What search engines do you use when conducting a general search? Local search?

70% 60% 50% 44%

40% 40% 30%

25%

20%

15%

13% 8%

10%

12% 7%

0% Google

Yahoo!

MSN Search Local

AOL

Ask.com *

* Ask.com local results include responses indicating the use of Citysearch.com Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

And Google’s lead is also widening widening in local in local as well ¾ Google’s penetration of local search users increased 900 bps to 44% in 2007 ¾ Yahoo!, MSN, AOL all experienced declines in penetration ¾ CitySearch and Ask.com gained ground despite being ranked 5th and 6th

Q: Which site do you use most often when conducting a local search?

Google Yahoo! MSN AOL Citysearch Ask.com

2007 44% 25% 8% 7% 5% 3%

2006 35% 27% 11% 13% 3% 2%

07/06 delta 9% -2% -3% -6% 2% 1%

Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

2. Shopping is a gateway to engagement that is growing in importance

Shopping is the #3 gateway with increased frequency and thus drives engagement 他 The number of purchase occasions for shopping has increased 29% to 18 in 2007 versus 14 in 2006 他 The importance of shopping in terms of driving engagement is increasing given the increased number of purchase occasions and the rise in rank to the #3 gateway or driver of site selection Number of purchase occasions per year

20 19 18 17 16 15 14 13 12 11 10

18 +29% yoy

15 14

2005

2006

2007

Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

Strength in the top categories is critical to engaging users via the Shopping gateway Clothing/Apparel, Books, Travel, and Consumer Electronics account for the top activities that drive consumers shopping activity Question: Which three categories do you spend the most on? C lo th e s /A p p a re l B ooks T ra v e l a rra n g e m e n ts C o n s u m e r e le c tro n ic s H o m e & G a rd e n ite m s C o m p u te rs H e a lth & b e a u ty F lo w e rs J e w e lry D o w n lo a d in g M /V /S G ro c e rie s O n lin e g a m e s O n lin e n e w s D a tin g s e rvic e s /p e rs o n a ls L o tte ry/b e ttin g

2007 47% 35% 31% 28% 20% 17% 16% 15% 7% 9% 7% 6% 2% 2% 1%

2006 48% 37% 30% 29% 21% 18% 16% 14% 8% 7% 7% 6% 3% 2% 2%

2005 53% 42% 41% 32% NA 20% NA 30% NA 10% 9% 9% 6% 3% 2%

Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

Today, the primary drivers of site choice across the top 4 categories are the same 他 Item prices, shipping costs/free shipping, ease of use, product selection, and trusted brand name of a site are the top five drivers of site selection when shoppers buy across the top 4 categories 他 Determining the right weighting of each attribute is key

Rank Clothes/ Apparel

Books

Travel

Consumer Electronics

Item prices

Shipping costs/free shipping Shipping costs/free shipping

Shipping costs/free shipping

Ease of use

Product selection

Trusted brand name of site

Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

3. Payments is a facilitator of engagement across gateways

Nearly 50% of Internet shoppers use alternative payment options… Internet shoppers use a variety of different payment methods, with nearly 50% indicating that they have used PayPal, BillMeLater, and/or Google Checkout over the past year.

¾ The top 30% of online spenders are more experienced with alternative payment options, with 50%+ citing usage over the past year versus 35%+ of the bottom 30% spenders

¾ PayPal is poised to benefit the most from greater adoption of alternative payments as there is a significant difference in usage between heavy and light shoppers

Credit card PayPal Debit card BillMeLater Google Checkout Other

Total 74% 45% 37% 7% 6% 7%

Top 30% of shoppers 87% 54% 35% 7% 10% 5%

Bottom 30% of shoppers 58% 35% 35% 6% 1% 10%

Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

…but frequency of use is still low, implying an opportunity to drive growth ¾ Internet shoppers used alternative payment options 24% of the time they made purchases

¾ The top 30% of spenders use alternative options for just 19% of transactions BUT the bottom 30% of spenders use alternative options for 27% of transactions

¾ We think that this reflects low retail availability of alternative payments as heavy spenders who have more total shopping occasions use alternative payments in a lower percentage of transactions, despite high penetration

Credit card PayPal Debit card BillMeLater Google Checkout Other

Total 53% 21% 19% 2% 1% 4%

Top 30% of shoppers 60% 17% 20% 1% 1% 2%

Bottom 30% of shoppers 47% 24% 20% 3% 0% 6%

Total Alternative Payment Use

24%

19%

27%

Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

Convenience is by far the primary driver of payment choice Internet users indicate that convenience is the top driver of payment selection, followed by trust and safety and loyalty points Why do you use your payment method? 0%

20%

40%

60%

80%

100%

Most convenient Trust and safety Loyalty points Privacy Wanted to finance the purchase Promotion offered Other

Source: Goldman Sachs Research estimates, Synovate.

Goldman Sachs Global Investment Research

PayPal ranks the best among alternative payments in the top two drivers of choice ¾ PayPal’s second-highest penetration rate reflects its strong ranking on convenience and trust & safety, implying strong brand recognition and a satisfactory user experience

¾ Google’s success to date has likely been driven by promotions as 84% of users paying through Google Checkout are doing so for the promotion offered Percentage of users that choose a payment option for a specific activity and/or information Most convenient Trust and safety Loyalty points Debit card 79% PayPal 53% Credit card Credit card 72% Credit card 33% Google Checkout PayPal 71% Debit card 29% Other Other 55% Other 25% Debit card BillMeLater 51% Google Checkout 21% BillMeLater Google Checkout 15% BillMeLater 20% PayPal Privacy PayPal Google Checkout Credit card Other Debit card BillMeLater

26% 16% 12% 12% 10% 9%

Wanted to finance the purchase BillMeLater 20% Credit card 15% Other 7% Debit card 3% PayPal 3% Google Checkout 0%

Promotion offered Google Checkout BillMeLater Other PayPal Credit card Debit card

30% 13% 9% 7% 4% 3%

84% 17% 7% 6% 5% 3%

Source: Goldman Sachs Research estimates, Synovate.

Goldman Sachs Global Investment Research

4. Mobile, a new platform to maximize engagement The mobile gateways will differ from the PC gateways

Mobile is a new opportunity to maximize engagement with users 他 Only 7% of Internet users access websites via their mobile device, but many users indicate that they would access websites if the user interface were more similar to that on the PC 他 Yahoo! leads as 50% of those that access websites via mobile device go to Yahoo! and it stands to benefit from more mobile users being interested in accessing it with a better interface. Google is next in line in terms of both usage and interest in usage 60% 50%

Percentage of mobile users that access each site or would access each site if the experience was more similar to a PC. 50% 44%

40%

34% 29%

30%

29% 21% 18%

20%

19%

16% 11%

10%

0% Yahoo

Google

AOL

Note: Universe is the % of mobile users that access websites

MSN Use

eBay

Amazon

Ask.com

Would Use

Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

Mobile usage is still early but the activities beyond calling are increasing,… Q: Do you use your mobile phone for activities other than calling?

¾ 36% of respondents answered yes (up from 30% in 2006) due to increases across all age groups ¾ Photos and email activities saw the largest increases in penetration of the non-text messaging activities Percent of mobile users that use mobile devices for non-calling activities (indexed by age group) Total

I use a mobile device for noncalling activities Activities Text messaging Photos Games Email Downloading music Directions News Search Browse Internet sites Watch video clips Shop List items for sale

Age BPs change vs. 2006 18-29 30-49

50+

36%

600

1.8x

1.1x

0.6x

26% 16% 10% 6% 3% 2% 2% 2% 1% 1% 1% 0%

300 500 0 200 0 -100 0 0 -100 0 0 0

2.0x

1.0x

0.5x

1.8x

1.1x

0.5x

1.9x

1.1x

0.4x

1.5x

1.2x

0.7x

2.0x

1.0x

0.3x

1.5x

1.0x

0.5x

1.5x

0.5x

1.5x

1.0x

0.2x

3.0x

1.0x

0.3x

2.0x

1.0x

0.0x

1.0x

0.0x

2.0x

1.0x

Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

…while the demographic mix bodes well for future growth of mobile devices Q: Do you use your mobile phone for activities other than calling?

¾63% of A18-29 use mobile devices for activities other than calling, up from 60% in 2006 and nearly 2x the average user at 36% Q: If so, which activities do you do?

¾The most highly penetrated (those above 15%-20%) activities include: text messaging, taking/sharing photos, and playing games A18-29

Percent of A18-29 mobile users that use mobile devices for noncalling activities

Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

I use a mobile device for noncalling activities

63%

Activities Text messaging Photos Games Email Downloading music Directions News Search Browse Internet sites Watch video clips Shop List items for sale

51% 28% 19% 9% 6% 3% 3% 3% 3% 2% 1% 1% 50

Mobile gateways will be different than PC gateways Q: What drives your site use via mobile device? 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Mobile Email Instant Messenger Weather Search News Maps Sports Compatible with device Entertainment Games Shopping Local Info TV Photos Voice Calls Music Movie Tickets Other Writing user reviews Real Estate Watching videos Careers Blogging Finance Health Dating

48% 27% 20% 19% 15% 13% 12% 12% 11% 10% 8% 7% 7% 7% 7% 6% 5% 4% 4% 3% 3% 2% 2% 2% 2% 1%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

PC Email Search Shopping News Weather Maps Entertainment Health Instant Messenger Games Local Info Sports Photos Music Watching videos Finance TV Blogging Careers Other Real Estate Movie Tickets Writing user reviews Dating Compatible with device Voice Calls

63% 55% 44% 40% 36% 33% 29% 28% 27% 26% 26% 18% 16% 16% 12% 12% 8% 8% 7% 6% 6% 5% 3% 3% 1% 1%

他 Some activities differ across age groups; however, Email, Instant Messenger and Search are top activities across all age groups 他 Entertainment is the different activity that is an important gateway for A18-29 A18-29 Email Instant Messenger Search Entertainment

53% 31% 22% 20%

A30-49 Email Weather Instant Messenger Search

46% 27% 25% 19%

A50+ Email Instant Messenger Games Search

47% 23% 16% 14%

Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

Mobile search has significant growth ahead… ¾ 44% of mobile device users are conducting queries ¾ Mobile search users are conducting 6.8 searches on average per week, roughly half the number of online searches at 13.1

¾ Only 6% of mobile users conduct 21 searches or more per week vs. 21% on a PC ¾ If mobile search adoption mirrors the evolution of web-based search adoption, mobile searches per user could increase 100% # of searches per week (mobile) 0- I do not perform searches online Perform searches online (net) 1-3 4-6 7-9 10-13 14-16 17-20 21 or more (net) Mean

2007 56% 44% 52% 20% 4% 13% 0% 5% 6% 6.8

# of searches per week (PC) 0- I do not perform searches online Perform searches online (net) 1-3 4-6 7-9 10-13 14-16 17-20 21 or more (net) Mean Yoy growth

2007 6% 94% 26% 16% 11% 14% 5% 7% 21% 13.1 26.0%

2006 6% 94% 27% 18% 10% 15% 6% 6% 17% 10.4

Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

…but the top driver of mobile search choice is different from web search ¾ The most critical driver of choice for search engine usage via a mobile device is its interface as opposed to web-based search which is driven by relevancy

¾ Relevancy and speed are ranked at parity versus a wide gap of 1,800 basis points in webbased search

¾ Reviews included in search results was noted by almost 10% of mobile search users as a driver of choice, more than double the response for web search 0%

10%

15%

20%

25%

Most user-friendly interface on mobile device Most relevant results Fastest response Highest number of responses Personalization Review s included in search results Less clutter Click-to-call capabilities Best integrated maps/directions Unbiased algo search results Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

Global presence also maximizes engagement Provides two increasingly critical benefits

A global footprint provides two increasingly critical benefits 他 Geographic expansion is necessary to capture growth and leverage learning across markets

他 Incremental benefits to users (consumers, advertisers, sellers) due to a global footprint International mix and growth for large cap Internet companies 120% 105% 90%

92%

75% 60% 45% 30%

52%

45%

43% 28%

32% 30%

22%

15% 0% Amazon

eBay

Google

International as % of total revenue

Yahoo!

Yoy growth

*Data as of 2006. Percent of reported revenue for Amazon; percent of GMV for eBay; and percent of gross revenue for Yahoo! and Google. Source: Company reports, Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research

Significant Internet user growth potential remains outside the United States International Internet users are expected to represent 15% of the global population in 2007 vs. 76% of the US population, implying significant growth potential from penetration gains overseas in the future 35.0% US Internet user growth (y/y)

International Internet user growth (y/y)

29.9%

30.0%

25.0%

20.0% 15.0% 15.0%

13.3%

13.0% 11.1% 9.1%

10.0%

7.2% 5.0% 2.1% 0.0% 2005

2006

2007E

2008E

Source: Goldman Sachs Research estimates, IDC. Goldman Sachs Global Investment Research

Building a sustainable competitive advantage

The typical sustainable competitive advantages will be hard to achieve across businesses and geographies ¾ Sustainable competitive advantages within a single business or single geography have been achieved in several different ways: • Become a low-cost operator (i.e., Amazon in books/music/video, VistaPrint) • Develop an information edge (i.e., Google, Yahoo!, Baidu) • Network effects (i.e., AIM, eBay) • Exclusivity (i.e., Apple) ¾ HOWEVER, we believe the challenge now lies in developing a sustainable competitive advantage across businesses and geographies ¾ We think the best way to achieve a sustainable advantage across geographies and businesses is via a mix of complementary adjacent businesses that result in a business system that in and of itself is the advantage

Goldman Sachs Global Investment Research

The Search Productivity Cycle is an example of a business system becoming a sustainable advantage Information edge

Comparative Advantages: • Leading search brand • Leading reach in search

Click-through

• Largest affiliate network • Large advertiser base

Coverage and PPC

• Synergies from integration of algorithmic and monetized search technologies • Personalization

Better ROI, Investment, and Satisfaction Source: Goldman Sachs Research. Goldman Sachs Global Investment Research

We believe this model must be replicated across businesses ¾ Creating a combination of businesses such that the success in one business can drive success for the adjacent/complementary business should result in more engagement with users and better monetization ¾ Examples of adjacent businesses that are complementary and increase network effects that can result in a sustainable competitive advantage include: • paid search / marketplace / payments • marketplace / payments / communications • portal / paid search / marketplace / communications / access / payments Comparative Advantages

Sustainable Competitive Advantage

• • • •

INFORMATION EDGE

•

MORE INNOVATION RESULTS IN BETTER PRODUCTS WHICH RESULTS IN MORE USERS AND USAGE

•

STRONG ROI AND FCF

ENGAGEMENT MONETIZATION TECHNOLOGY BUSINESS MIX

BETTER RELEVANCY & TARGETING HIGHER REVENUE PER UNIT GREATER LEVEL OF INVESTMENT

Source: Goldman Sachs Research. Goldman Sachs Global Investment Research

¾ Small-cap companies: Within small-capitalization companies several verticals are still being well served by leaders leveraging typical advantages:

¾ Some of the well-positioned companies are not rated Buy due to valuation and/or other considerations

Goldman Sachs Global Investment Research

Industry drivers â&#x20AC;&#x201C; Online advertising Growth remains strong but the drivers are in transition

Global online advertising to grow 29% in 2007E, up 35% abroad and 24% in the US We forecast global online advertising to grow 29% in 2007 to $37.7 billion, following a 33% rise in 2006, driven by 35% growth internationally and 24% growth domestically 25,000

50.0% 42.9%

45.0% 39.1%

20,000

40.0%

34.9%

15,000

34.6%

30.0% 23.5%

28.9% 24.3%

10,000

25.0% 20.0%

Yoy growth

$ millions

35.0%

20.6% 15.0% 5,000

10.0% 5.0% 12,318

9,596

15,874

13,345

19,734

18,003

23,808

22,229

0.0% 2005

2006 Domestic

International

2007E Domestic

2008E International

Source: Company data, Global Industry Analysts, Inc., Universal McCann, Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

By 2008, online advertising could account for 7.0% of total advertising ($ millions) Domestic International Global

2005 12,318 9,596 21,914

2006 15,874 13,345 29,220

2007E 19,734 18,003 37,737

2008E 23,808 22,229 46,037

% of total online analysis Domestic International

56.2% 43.8%

54.3% 45.7%

52.3% 47.7%

51.7% 48.3%

% of total advertising analysis Domestic 4.4% International 3.1% Global 3.7%

5.4% 4.2% 4.8%

6.5% 5.5% 6.0%

7.5% 6.6% 7.0%

28.9% 39.1% 33.3%

24.3% 34.9% 29.2%

20.6% 23.5% 22.0%

Yoy growth Domestic International Global

34.6% 42.9% 38.1%

Source: Company data, Global Industry Analysts, Inc., Universal McCann, Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

Share of total media time online is still 3X greater than share of ad dollars online 他 Our study shows that the Internet still accounts for roughly 20% of time spent consuming media 他 We think advertising dollars will continue to close the gap vs. audience size Internet 21%

Percentage of time spent on each activity

Shopping 5%

Reading News (sports, entertainment, or weather) 5% Playing games 11%

Watching movies 15% Watching TV shows 25%

Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

Listening to Music 18% 65

Dissecting the impact of a shift toward the Internet by activity 2007

2006

2005

Online hours as % of total activity hours Online as % of total activity hours % of total activity hours ex-email % of total activity hours ex-email & ex-new activities*

23.9% 19.5% 20.7%

24.9% 16.8% 19.0%

NA NA 20.1%

Activities Email Reading news Playing games Shopping Instant messaging

90.5% 51.5% 40.9% 41.4% 31.7%

88.3% 44.4% 34.6% 32.4% 31.7%

NA 40.5% 59.5% 33.3% NA

New activities include: Blogging, travel, downloading, watching videos (not TV/movies), educational activities, looking for general information, photo sharing, banking/finance, real estate research, health research, weather, creating/uploading video, writing reviews Source: Goldman Sachs Research estimates, Synovate. Goldman Sachs Global Investment Research

Industry Drivers â&#x20AC;&#x201C; e-Commerce Itâ&#x20AC;&#x2122;s getting better

We forecast 20% US and 25% global e-Commerce growth 他 Our 20% yoy 2007 US e-Commerce growth forecast reflects 12% growth in online shoppers and 6% growth in the buying rate (spending per shopper) 他 Returns and margins are on the rise 40%

$900 33%

35%

31%

$700

30%

27% $ billions

25%

24%

$600

25%

$500

20%

16%

$400

15%

$300 $200 $100

20%

189

152

10%

263

226

Year-over-year growth

$800

407

535

671

808 0%

$0 2005

2006

2007E

Worldwide

US Growth

Worldwide Growth

2008E

Source: Goldman Sachs Research estimates, Department of Commerce, PhoCusWright, IDC. Goldman Sachs Global Investment Research

Margins within the e-Commerce industry are improving after contracting in 2006 他 Incremental operating margins are expanding in 2007 after contracting 1,000-plus basis points in 2006 driven by leverage against both sales and marketing spending and research and development spending 18% 16% 14%

15.0% 13.4%

13.7%

500+ bps improvement

12% 9.7%

10% 8% 6% 4% 2% 0% 2006

2007E Operating Margin

2006

2007E

Incremental Operating Margin

Source: Company reports, Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

e-Commerce companies are beginning to absorb higher levels of R&D 他 Companies have invested and continue to invest in better technologies that can convert more traffic to buyers given the lower switching costs enabled by improved search functionality, the democratization of advertising, etc. 他 However, companies are beginning to leverage the spend to drive margin expansion. R&D spending is growing 300 bps slower than revenue growth in 2007 versus 2006 when R&D spending grew 1,000 bps-plus faster than revenue growth

300 275 250 225 200 175 150 125 100 75 50 25 0

17% y/y growth

$202

$172 R&D is growing below industry revenue at 20%

2006

2007E

Importance of Merchandising

Average dollars (millions) spent on R&D

Browsing Shopper

Seeking Shopper

Directed Shopper

Difficulty of Converting to Buyer

Source: Company reports, Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

Industry drivers â&#x20AC;&#x201C; Online travel

Total US online travel is expected to grow 21% in 2007 and 17% in 2008 Total online travel Airline Tickets % Change % of Online Travel % of Total Airline Travel

2005 34,340 32% 53% 36%

2006E 42,684 24% 53% 40%

2007E 50,890 19% 53% 46%

2008E 58,749 15% 52% 51%

Hotel Reservations % Change % of Online Travel % of Total Hotel Travel

18,740 29% 29% 22%

23,500 25% 29% 25%

28,600 22% 30% 28%

33,900 19% 30% 31%

Car Rental Reservations % Change % of Online Travel % of Total Car Travel

4,895 23% 8% 27%

5,770 18% 7% 30%

6,430 11% 7% 32%

7,150 11% 6% 34%

Vacation Packages % Change % of Online Travel % of Total Vacation Travel

505 20% 1% 3%

596 18% 1% 3%

686 15% 1% 3%

768 12% 1% 3%

Cruise % Change % of Online Travel % of Total Cruise Travel

881 19% 1% 7%

1,000 14% 1% 8%

1,150 15% 1% 9%

1,288 12% 1% 9%

Rail % Change % of Online Travel % of Total Rail Travel

445 22% 1% 34%

515 16% 1% 39%

565 10% 1% 41%

610 8% 1% 44%

4,550 8% 7%

5,900 30% 7%

8,200 39% 8%

10,750 31% 9%

64,356 28% 28%

79,965 24% 32%

96,521 21% 36%

113,215 17% 40%

Online Agency - International % Change % of Online Travel Total Online Travel % Change % of Total Travel Source: PhoCusWright. Goldman Sachs Global Investment Research

Company Snapshots Priced as of May 15, 2007

eBay (EBAY, $33.50, Buy) Investment Summary

Financial Measurement

We recommend buying eBay shares with ~25% upside to our year-end price target of $43, which is based on our P/E to normalized growth analysis. 1Q2007 results indicated continued improvement in monetization, via stronger conversion rates and ASPs, evidencing eBay’s success in improving buyer engagement (i.e. conversion) and supporting our view that listings growth is not likely to be a strong indicator of marketplace revenue or GMV growth for several quarters. We believe that converted buyer demand is the most critical success factor for eBay and has the ability to drive accelerating GMV growth. If ASP and conversion continue to improve because the growth in converted demand remains strong while supply (i.e. listings) declines, then the value of selling as measured by ASPs and conversion rates will continue to increase and will likely result in total listings seeing a revitalization in growth. A faster growth rate in total listings could result in multiple expansion as total listings growth could begin to mirror revenue growth more closely and provide increased visibility into eBay’s growth rate intra-quarter. We continue to believe that eBay is in a multi-quarter period of improvements and a continuation of these stabilizing/ accelerating trends across the business should help to build investor confidence in our long-term growth rate of ~16%.

2006 Revenue

$5,970

2007E $7,391

2008E

2007E ROIC

EBITDA (adj., ex SBC)

$2,290

$2,840

$3,520

18%

Op Income (adj., ex SBC)

$1,961

$2,430

$2,870

16%

$1.05

$1.34

$1.62

$1,732

$2,007

$2,622

EPS (adj., ex SBC) FCF

18% 16%

14%

Revenue Growth

31%

24%

18%

Op Income Growth

21%

24%

18%

Operating Margins

33%

EPS Growth

21%

28%

21%

FCF Growth

16%

31%

ROA

11%

14%

ROIC

14%

16%

18%

ROE

14%

17%

18%

10%

16%

Median

EBAY

14%

12%

12% 10%

10%

0% Median

Investment Positives

3 yr EPS Growth

$8,714

EBAY

Investment Risks

•

Accelerating GMV/listing and revenue/listing in 1Q2007

•

Valuation dependent on visibility of growth rate

•

Mix shifting to core with 87% of total listings in 1Q2007 and 86% in 4Q2006

•

Electronic payments should continue to increase with the international rollout of PayPal and investment in increasing the adoption of PayPal off-eBay

Uncertainty regarding the payoff of increased investment in product development and marketing

•

Integration and return on acquisitions including Skype, Verisign payments business, and Shopping.com

•

Natural barriers to entry given the benefits of network effects that deliver superior value to buyers and sellers

•

Solid expected free cash flow generation of ~$2bn billion in 2007

Future Normalized P/E and Growth Analysis Multiple Analysis P/E Relative P/E PEG Ratio Relative PEG FCF FCF Yield

2007E 25.0 0.8 1.2 0.9 $2,007 4%

2008E 20.6 0.8 1.3 0.9 $2,622 6%

Normalized Growth and P/E Valuation Current Price $33.50 2008E EPS $1.62 2008 EPS Multiple in 2007 26 3 yr EPS Growth Beyond 2008 16% Assumed PEG in 2007 1.7 Implied Value $42.96 Return 28%

Scenarios $33.50 $33.50 $1.62 $1.62 32 28 19% 16% 1.7 1.8 $51.76 $46.03 55% 37%

Source: Company reports and Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

Google (GOOG, $458.00, Buy) Investment Summary

Financial Measurement

We advise investors to buy Google shares given ~30% upside to our $620 year-end price target, which implies a 32X 2008E P/E multiple on our $19.50 estimate and a 1.5X PEG on our 20%-plus 2008-2011 EPS growth rate. Recent quarterly results should inspire increased investor confidence in 2007 and beyond, particularly with respect to profitability. 63% yoy gross revenue growth in 1Q2007, driven by 52% yoy growth in paid leads and 7% yoy improvement in pricing, implies that our full-year 2007E 56% revenue growth on 48% paid lead growth and 5% CPC growth could prove conservative and thus, we believe that our estimates and price target have an upward bias. Google’s growth continues to significantly outpace its competitors due to market share gains of queries and the benefits from leveraging the “Search Productivity Cycle” to drive superior monetization. We expect this to continue as the company monetizes additional verticals, formats, and partner sites while maximizing engagement via new ad formats (pay per call/action and branded advertising) and new advertising buying dimensions (day parts, site targeting, etc.).

2006

2007E

2008E

2007E ROIC

$7,296

$11,495

$15,689

EBITDA (adj., ex SBC)

$4,614

$6,968

$9,457

Op Income (adj., ex SBC)

$4,120

$6,116

$8,205

EPS (adj., ex SBC)

$10.79

$15.10

$19.50

40%

FCF

$1,678

$3,057

$4,448

35%

45%

81%

58%

36%

Op Income Growth

74%

48%

34%

25%

Operating Margins

56%

53%

52%

20%

EPS Growth

87%

40%

29%

FCF Growth

82%

45%

15%

ROA

18%

20%

10%

ROIC

38%

41%

44%

ROE

20%

21%

41% 20% 16%

30%

Revenue Growth

15%

10%

10% 5%

5% 0%

0% Median

Investment Positives

3 yr EPS Growth 25%

Revenue

GOOG

Median

GOOG

Investment Risks

•

Industry leader with unprecedented growth, scale, and returns

•

Potential margin risk due to toolbar deals and continued investments

•

Continued leadership is supported by its comparative advantages in brand, reach, affiliate network, advertiser base and technology, which provide an information edge

•

Affiliate network revenue risk due to fewer new partners or losing existing partners

•

Multiple opportunities for growth beyond traditional web search, including local, vertical web and non-web search, desktop search, email/personalization, video and branded advertising

•

Higher capex and limited visibility into spending

•

Integration and development of deals/acquisition, particularly DoubleClick

Future Normalized P/E and Growth Analysis Multiple Analysis P/E Relative P/E PEG Relative PEG FCF FCF Yield

2007E 30.3 1.0 1.3 1.0 $3,057 2%

2008E 23.5 0.9 1.1 0.8 $4,448 3%

Normalized Growth and P/E Valuation Current Price $458.00 2008E EPS $19.50 2008 EPS Multiple in 2007 32 3 yr EPS Growth Beyond 2008 21% Assumed PEG in 2007 1.5 Implied Value $619.68 Return 35%

Scenarios $458.00 $458.00 $19.50 $19.50 36 35 21% 23% 1.7 1.5 $697.65 $674.09 52% 47%

Source: Company reports and Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

GSI Commerce (GSIC, $20.25, Buy) Investment Summary

Financial Measurement

We recommend buying GSI Commerce shares given solid business momentum and ~30% upside to our $27 year-end price target, which is based on our P/E to normalized growth analysis. We believe the company is positioned to benefit from several key themes occurring in the e-Commerce space, including strong secular growth, the increasing demand for eCommerce outsourcing platforms, and the margin pressure on retailers that is creating opportunities for GSI Commerce to develop new revenue streams such as marketing management, merchandising tools, and payments. We see new deals in new vertical categories and significant potential in the international market through the Aspherio acquisition and Iomega partnership, which launched in July and is expected to ramp throughout 2007. The company continues to drive strong top-line growth via new partners across product lines and increased adoption of new and existing marketing services. Given the company’s growing experience in larger deal launches, we believe the business has likely reached a level of scale that will enable it to drive improving profitability while launching additional, increasingly sophisticated partners in several new verticals and new countries.

2006 Revenue EBITDA (adj., ex SBC) Op Income (adj., ex SBC) EPS (adj., ex SBC) FCF

2007E

2008E

$610

$743

$896

$39

$56

$78

$18

$24

$40

$0.39

$0.35

$0.54

$23

$22

$15

Revenue Growth

38%

22%

21%

Op Income Growth

99%

34%

70%

Operating Margins

EPS Growth

104%

-12%

56%

FCF Growth

-8%

-31%

ROA

ROIC

12%

ROE

2007E ROIC 30%

25% 10%

10%

25% 8%

20%

15%

10%

16%

0% Median

Investment Positives

3 yr EPS Growth

12%

GSIC

Median

GSIC

Investment Risks

•

Positioned to achieve “Internet economics”—generating revenue over a fixed asset base to deliver increasing levels of cash flow

•

Ability to successfully manage integration of new deals and execute rollout of new technology and investments

•

Leveraging partners’ brands and customer relationships reduces marketing and advertising costs, which can allow GSIC to achieve profitability at a much lower level of revenue

•

Contract risk from partner viability and renewal risk

•

Increased competition

•

Expanded range of products including interactive and 1-to-1 marketing services, creative services, and content management

•

Increased investment in technology and human capital in order to launch new partner sites could negatively impact margins

•

Brand-agnostic approach is a differentiator

Future Normalized P/E and Growth Analysis Multiple Analysis 2007E P/E 58.7 Relative P/E 1.9 PEG Ratio 1.5 Relative PEG 1.1 FCF $22 FCF Yield 2%

2008E 37.6 1.4 1.5 1.0 $15 1%

Normalized Growth and P/E Valuation Current Price $20.25 2008E EPS $0.54 2008 EPS Multiple in 2007 46 3 yr EPS Growth Beyond 2008 25% Assumed PEG in 2007 1.8 NOL per share $2.10 Implied Value $26.81 Return 32%

Scenarios $20.25 $20.25 $0.54 $0.54 46 41 25% 27% 1.8 1.5 $2.10 $2.10 $26.67 $24.34 32% 20%

Source: Company reports and Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

VistaPrint (VPRT, $37.51, Buy) Investment Summary

Financial Measurement

We advise investors to buy VistaPrint shares given ~25% upside to our year-end price target of $48, which is based on our P/E to normalized growth analysis. While the nearterm investment is likely to bring the gross margin to a level marginally below the 65%67% long-term target, we believe it reflects the right decision as it presents a good balance of growth versus investment given VistaPrint’s early stage of growth. The company continues to provide visibility into the areas of capital investment, which enables investors to better assess the investment versus growth trade-offs. In our view, spending is reinforcing VistaPrint’s ability to drive growth by providing a superior value proposition to the fragmented and underserved small office/home office market and increasingly the consumer market with mass-customized products at high-volume quality and pricing despite low-volume order size. We continue to believe the company will maintain and improve its sustainable competitive advantages to capture this growth given its low-cost operations, its 65%-70% long-term gross margin and 30% contribution margin, reflecting its vertical integration of aggregation, production, and fulfillment.

2006 Revenue EBITDA (adj., ex SBC) Op Income (adj., ex SBC) EPS (adj., ex SBC)

2007E

2008E

$201

$318

$436

$42

$65

$94

$32

$46

$68

$0.71

$0.96

$1.35

($2)

FCF Revenue Growth Op Income Growth

($5)

10%

71%

58%

37%

45%

46%

16%

15%

16%

128%

35%

40%

FCF Growth

-135%

200%

-158%

ROA

16%

17%

19%

ROIC

15%

16%

ROE

26%

28%

20%

16%

10% 15%

8% 10%

6% 4%

5% 2% 0%

0% Median

Investment Positives

3 yr EPS Growth 25%

20% 12%

139%

15%

14%

EPS Growth

Operating Margins

2007E ROIC 16%

VPRT

Median

VPRT

Investment Risks

•

Serves a large, fragmented, and underserved market opportunity

•

Currently holds leadership position in the online printing business, aggregating over 15,000 orders per day from more than 7 million customers in 120 countries

Potentially faces a heightened competitive environment with well-funded peers

•

Vertical integration is driving low-cost operations and strong order economics, resulting in a high return on invested capital economic model

Costs of attracting and maintaining a customer base could increase significantly

•

Favorable tax structure could face changes

•

Geographical separation of operations creates potential execution risk

•

Uncertainty regarding future spending levels

• •

Several additional areas of potential growth, including new products, expanded selection of current products, further international expansion, and the opportunity to expand and develop co-branded partnerships

Future Normalized P/E and Growth Analysis Multiple Analysis P/E Relative P/E PEG Ratio Relative PEG FCF FCF Yield

2007E 39.1 1.3 1.4 1.0 -$7 NA

2008E 27.9 1.0 1.4 0.9 $3 0%

Normalized Growth and P/E Valuation Current Price $37.51 2008E EPS $1.35 2008 EPS Multiple in 2007 35 3 yr EPS Growth Beyond 2008 20% Assumed PEG in 2007 1.8 Implied Value $47.56 Return 27%

Scenarios $37.51 $37.51 $1.35 $1.35 36 33 20% 22% 1.8 1.5 $47.83 $43.89 28% 17%

Please note that estimates are calendarized. Source: Company reports and Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

Amazon (AMZN, $60.58, Neutral) Investment Summary

Financial Measurement

We have a Neutral rating on AMZN with a $55 year-end price target, which is based on our P/E to normalized growth analysis. Post 1Q2007 results, our margin assumptions increased by 90 bps in 2007 versus our prior estimate and by 110 bps in 2008. That said, we have low visibility on whether Amazon will remain committed to a consistent balance of growth and profitability improvement, as seen in 1Q2007, given the company’s inconsistent track record since 2003. Consistent leverage improvement is required to achieve or beat our estimates and thus justify valuation. For us to be more constructive on our rating, we would need to have confidence that Amazon remains committed to balancing growth and profitability with a general trend of high-single digit incremental margins. 1Q2007 is a good start to rebuilding a track record and may ultimately prove to be the inflection point back to a period similar to 2001-2003. Separately, we believe that Amazon’s revenue growth will remain robust given the strong product cycle we laid out and due to the favorable trends in marketing efficiencies across the industry compared to the price inflation in 2005-2006. The real swing factor for valuation, in our view, remains the long-term margins and hence free cash flow generation potential.

2006 Revenue EBITDA (adj., ex SBC)

2007E

2008E

$10,711

$14,000

$17,312

$688

$993

$1,252

Op Income (adj., ex SBC)

$493

$763

$1,002

EPS (adj., ex SBC)

$0.56

$1.44

$1.92

FCF

$485

$626

$784

2007E ROIC

3 yr EPS Growth 25%

35% 29%

30%

16%

25%

26%

31%

24%

Op Income Growth

-13%

55%

31%

Operating Margins

EPS Growth

-8%

156%

33%

FCF Growth

-8%

29%

25%

Revenue Growth

ROA

11%

12%

ROIC

19%

29%

39%

ROE

55%

92%

72%

15% 20% 15% 10%

10% 10% 5%

5% 0%

0% Median

Investment Positives

20%

AMZN

Median

AMZN

Investment Risks

•

Leading market position with a global brand, large customer base, superior technology platform, and superior customer service

•

The cost of the digital media transition

•

Inventory risk of carrying toys and a higher percentage of owned goods

•

Proven successful strategy in BMV via low cost, low pricing strategy

•

Increased competition from other e-Commerce platforms

•

Forecast record FCF of ~$800 million in 2008

•

Early signs of margin improvement and cost leverage

Future Normalized P/E and Growth Analysis Multiple Analysis P/E Relative P/E PEG Relative PEG FCF FCF Yield

2007E 42.1 1.4 1.6 1.1 $626 2%

2008E 31.6 1.2 1.6 1.1 $784 3%

Normalized Growth and P/E Valuation Current Price 2008E EPS 2008 EPS Multiple in 2007 3 yr EPS Growth Beyond 2008 Assumed PEG in 2007 Implied Value Return

$60.58 $1.92 29 20% 1.5 $55.34 -9%

Scenarios $60.58 $60.58 $1.92 $1.92 35 32 20% 22% 1.8 1.5 $67.31 $61.84 11% 2%

Source: Company reports and Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research

Baidu (BIDU, $129.03, Neutral) Investment Summary

Financial Measurement

We continue to have a Neutral rating with a $134 year-end price target for Baidu shares as our positive view of the company's leadership position within the Chinese search market is generally priced into shares at the current level. Our price target is based on our P/E to normalized growth analysis. The company appears to be navigating its transition to a direct sales force in Beijing and its new monetization platform well. Despite the outperformance in 1Q2007, we remain somewhat concerned about the number of customer additions and believe that Baidu may have achieved broad penetration of the "early adopters" of online search advertising in China, and thus customer growth could prove less robust until structural issues dissipate and advertisers become more sophisticated with online formats. That said, healthy growth in revenue per advertiser due to the monetization changes as well as a larger and more sophisticated sales and customer service team should serve to drive revenue growth in the near term. We also remain focused on Baidu’s entrance into Japan given stiff competition in the market and as the move could signal that the Chinese market is not growing as fast as the company had previously anticipated.

2007E

2008E

$102

2006

$200

$349

EBITDA (adj., ex SBC)

$49

$96

$165

Op Income (adj., ex SBC)

$40

$76

$139

EPS (adj., ex SBC)

1.29

2.28

3.84

FCF

$52

$77

$160

Revenue*

2007E ROIC

60%

56%

163%

97%

74%

Op Income Growth

348%

87%

84%

Operating Margins

40%

38%

40%

EPS Growth

315%

76%

68%

FCF Growth

441%

50%

106%

ROA

21%

24%

26%

ROIC

55%

56%

67%

ROE

25%

31%

34%

25% 20% 16%

30%

15%

20% 10%

10% 9% 5%

0% Median

Investment Positives

30%

50% 40%

Revenue Growth

3 yr EPS Growth 35%

BIDU

0% Median

BIDU

Investment Risks

•

Positioned to deliver high long-term EPS growth rate from 2008 to 2011

•

Increased competition that increases the cost of growth

•

Commanding market leadership position as it is cited as the most frequently used search engine in China by 50%+ of Internet users

•

Transition from distributors to direct sales

•

Government regulations

•

Strong secular backdrop with the number of Internet users in China expected to exceed that of the US in 2008 and search budgets of SMEs rising

•

Frictional costs related to new monetization initiatives

•

Comparative advantages to drive Search Productivity Cycle include a leading search brand, distribution network, and advertiser base

•

Higher capital spending

•

Investment in Japan

Future Normalized P/E and Growth Analysis Multiple Analysis P/E Relative P/E PEG Relative PEG FCF FCF Yield

2007E 56.6 1.8 1.3 0.9 $77 2%

2008E 33.6 1.2 1.1 0.8 $160 3%

Normalized Growth and P/E Valuation Current Price $129.03 2008E EPS $3.84 2008 EPS Multiple in 2007 35 3 yr EPS Growth Beyond 2008 30% Assumed PEG in 2007 1.2 Implied Value $133.95 Return 4%

Scenarios $129.03 $129.03 $3.84 $3.84 41 37 30% 32% 1.4 1.2 $158.93 $143.00 23% 11%

Note: All estimates are in USD Source: Company reports and Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

EarthLink (ELNK, $7.82, Neutral) Investment Summary

Financial Measurement

Our Neutral rating is based solely on our fundamental view and the current strategy that yield a year-end price target of $7.50, which is based on our EV/EBITDA analysis. That said, we believe that the current investor base is likely to overlook relatively weak fundamentals and focus on the potential that the company has to cut its significant investments and return FCF back to normalized levels or restructure via an LBO, MBO, or recap. As a result, we believe that downside in the shares is limited, with the potential for a 30%-40% takeout premium, assuming a 6X-7X multiple of normalized EBITDA (i.e., excluding investments). Our current $7.50 value penalizes the company for the losses generated by these investments given that they may generate minimal-to-no return and the underlying core EBITDA and FCF of $190-$200 mn and $160-$180 mn could deteriorate meaningfully by the time the investments pay off or are shuttered. If these investments were shut down, shareholders would give up the high risk, longer-term option value for greater near-term certainty of much higher FCF of around $170 mn, versus the current estimate of ~$5mn, and likely higher share value.

Revenue EBITDA (adj., ex SBC) Op Income (adj., ex SBC) EPS (adj., ex SBC) FCF Revenue Growth Op Income Growth Operating Margins EPS Growth FCF Growth ROA ROIC ROE

2006 $1,301 $136 $101 $0.23 $76

2007E $1,301 $112 $66 ($0.77) $10

2008E $1,331 $128 $75 ($0.01) $38

1% -47% 8% -81% -51% 12% 8% 26%

0% -35% 5% -434% -87% -39% 5% -80%

2% 14% 6% NA 293% 0% 5% 0%

2007E ROIC

3 yr EPS Growth 18%

12%

16% 16% 10%

10% 14% 12%

10% 6% 8% 4% 4%

6% 4%

2% 2% 0% 0%

0% Median

Investment Positives

ELNK

Median

ELNK

Investment Risks

•

Third-largest ISP in the US provides a valuable strategic distribution platform

•

Limited visibility in growth prospects

•

Broadband gross margins sustained at about 40% in 1Q2007

•

Rollout of voice and Wi-Fi initiatives in 2007 could drive subscriber growth and thus revenue growth

EarthLink's ability to continue to expand broadband subscriber base without incurring significantly higher costs

•

Cost-cutting opportunities and potential for improved subscriber profitability are becoming more limited

•

Success, timing, and payoff of new growth initiatives remain uncertain

2007E EV/EBITDA Analysis Sum of the parts Current business 2007E EBITDA Average telco EBITDA multiple Implied ELNK EV Shares outstanding Implied value per share

$94 6.3 $587 125.2 $4.69

New initiatives 2011E EBITDA Present value Average telco multiple Implied ELNK EV Shares outstanding Implied value per share Net cash Per share value Total value per share

$34 $22 7.0 $152 125.2 $1.22 186.0 $1.49 $7.40

Source: Company reports and Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

Expedia (EXPE, $24.18, Neutral) Investment Summary

Financial Measurement

We have a Neutral rating on Expedia and a $22 year-end price target, which is based on our P/E to normalized growth analysis. While 1Q2007 trends were another step in the right direction following solid trends in 4Q2006, we think shares could be relatively range-bound in the near-term given that 2Q2007 faces a difficult yoy comparison for profit growth due to cutbacks in expenses in the year-ago quarter and step-ups in spending this year. The trends in 2006 and thus far in 2007 reinforce our view that Expedia continues to be in a transition process from unsustainable high revenue margin rates, below-industry level marketing costs, and underinvestment in customer service and technology to a period of normalized earnings growth. The possibility for financial structure changes such as going private or a recap are also positive drivers for the shares.

Revenue

2006

2007E

2008E

$2,238

$2,407

$2,577

EBITDA (adj., ex SBC)

$648

$683

EBITA (adj., ex SBC)

$599

$617

$739 $667

EPS (adj., ex SBC)

$1.09

$1.18

$1.40

FCF

$562

$563

$503

2007E ROIC

3 yr EPS Growth 18%

12%

10%

16%

10%

14% 12%

Revenue Growth

EBITA Growth

-5%

EBITA Margins

27%

26%

EPS Growth

-8%

18%

-30%

-11%

ROA

ROIC

ROE

FCF Growth

10% 10% 5%

8% 6%

4% 2% 2% 0%

0% Median

Investment Positives

16%

EXPE

Median

EXPE

Investment Risks

•

The largest market participant in online travel, which is one of the largest categories on the Internet

•

High free cash flow generation given about 75 day-plus float on merchant hotel business

•

Leadership and scale afford Expedia leverage in securing merchant hotel inventory during periods of peak occupancy rates

•

Ability to navigate an increasingly competitive online travel environment

•

Potential net margin pressure as chain deals comprise an increasing percentage of Expedia’s merchant hotel inventory

•

Air revenue per ticket continues to decline year over year

•

Higher customer acquisition costs to make up for loss of MSN traffic

Future Normalized P/E and Growth Analysis Multiple Analysis P/E Relative P/E PEG Ratio Relative PEG FCF FCF Yield

2007E 20.4 0.7 1.6 1.1 $563 7%

2008E 17.3 0.6 1.7 1.2 $503 7%

Normalized Growth and P/E Valuation Current Price $24.18 2008E EPS $1.40 2008 EPS Multiple in 2007 16 3 yr EPS Growth Beyond 2008 10% Assumed PEG in 2007 1.6 Implied Value $22.14 Return -8%

Scenarios $24.18 $24.18 $1.40 $1.40 13 16 10% 12% 1.3 1.3 $18.22 $21.85 -25% -10%

Source: Company reports and Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

FTD Group, Inc. (FTD, $17.59, Neutral) Investment Summary

Financial Measurement

We maintain a Neutral rating on FTD shares with an $18 year-end price target, which is based on our P/E to normalized growth analysis. FTD continues to benefit from operating an integrated business model with significant scale in both the consumer and florist businesses, enabling it to benefit from the secular growth of eCommerce and the increased dependence of florists on order aggregators to drive demand. That said, the industry remains competitive with Teleflora entering the consumer business and 1-800FLOWERS.COM entering the florist to florist network business more aggressively, and thus, we believe that longer-term growth will be increasingly dependent on new growth opportunities, such as international expansion (i.e. Interflora) and new touchpoints with consumers, i.e. the grocery/mass-market initiative. We view these two potential opportunities as the greatest swing factors to driving EPS growth above our long-term 8%-9% forecast, and thus a higher valuation. Notably, the international segment could be 5%-10% accretive to our CY2009 EPS estimates if it reaches consolidated US operating margins by leveraging FTD's knowledge and resources to introduce more product offerings to florists, which could justify higher pricing.

2007E

2008E

$530

2006

$639

$683

EBITDA (adj., ex SBC)

$81

$97

$102

Op Income (adj., ex SBC)

$75

$89

$95

$1.09

$1.28

$1.42

$38

$40

$44

Revenue

EPS (adj., ex SBC) FCF Revenue Growth

20%

21%

Op Income Growth

23%

18%

Operating Margins

14%

EPS Growth

25%

18%

11%

FCF Growth

24%

ROA

ROIC

10%

11%

ROE

13%

14%

13%

3 yr EPS Growth

18% 16%

10%

16% 14% 12% 10%

8% 8%

6% 4%

2% 2% 0%

0% Median

FTD

Median

FTD

Investment Risks •

FTD’s consumer business is leveraged to the secular growth of e-Commerce with 90% of orders coming through the online channel in FY2006

Increasingly competitive environment as competitors such as 1-800FLOWERS.COM and Teleflora recognize the synergies of operating both a consumer and florist segment and invest in these businesses

•

Solid free cash flow characteristics support our view that the company will reduce its leverage, driving an earnings growth rate significantly above that of revenue

FTD has significantly greater leverage than our other covered companies and without debt reduction, our EPS estimates could be at risk

•

Continued integration of Interflora

•

Largest integrated floral company benefiting from synergies across its consumer and florist businesses

•

12%

Investment Positives

•

2007E ROIC

International expansion via Interflora acquisition could drive growth

Future Normalized P/E and Growth Analysis Multiple Analysis 2007E P/E 13.7 Relative P/E 0.4 PEG Ratio 1.5 Relative PEG 1.1 FCF $36 FCF Yield 7%

2008E 12.3 0.5 1.5 1.0 $44 8%

Normalized Growth and P/E Valuation Current Price 2008E EPS 2008 EPS Multiple in 2007 3 yr EPS Growth Beyond 2008 Assumed PEG in 2007 Implied Value Return

$17.59 $1.42 13 8% 1.5 $18.20 3%

Scenarios $17.59 $17.59 $1.42 $1.42 13 16 10% 11% 1.3 1.5 $18.33 $23.33 4% 33%

Please note that estimates are calendarized. Source: Company reports and Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

IAC/InterActiveCorp (IACI, $33.89, Neutral) Investment Summary

Financial Measurement

We have a Neutral rating on IAC/InterActiveCorp shares given ~10% upside to our $37 year-end price target, below the ~30% upside for our Buy-rated stocks. Our price target is based on our P/E to normalized growth and SOP analyses. Year-on-year organic revenue growth in the 7%-9% range for the last few quarters, continued buybacks, and our expectation for 100-200 bps of margin improvement over the next 3 years continues to support our view of about 10% long-term profit growth, which could ultimately go higher driven by complementary acquisitions, by leveraging Ask.com across IAC's various properties or by using another unifying strategy. We believe that the 5% yoy decline in EBITA in 1Q2007 reflects difficult cyclical issues in Lending, distribution cost pressures at HSN that should ease in 2H2007, and shifts in the timing of investment across Ticketing, Personals, and Media & Advertising. Thus, we expect IACI to return to positive EBITA growth in 2H2007. We note that a large share buyback or an asset swap with Liberty could be a positive driver of the shares.

2006 Revenue EBITDA (adj., ex SBC)

$6,488 $924

2007E $6,845 $938

2008E

2007E ROIC

3 yr EPS Growth

$7,366 12%

$1,065

EBITA (adj., ex SBC)

$760

$777

$895

EPS (adj., ex SBC)

$1.64

$1.72

$2.12

FCF

$563

$626

$701

18% 16%

10%

16%

10%

14% 8%

Revenue Growth

15%

EBITA Growth

15%

EBITA margins

12%

11%

12%

EPS Growth

25%

24%

FCF Growth

11%

12%

ROA

16%

ROIC

ROE

25%

12%

8% 4% 4%

6% 4%

2% 2% 0%

0% Median

Investment Positives

10%

10% 6%

IACI

Median

IACI

Investment Risks

•

A leader in the largest, fastest-growing, and most successful interactive sector

•

Integration risk related to acquisitions

•

Solid execution in several businesses including Ask.com, Personals, and Ticketing

•

Execution issues within HSN US given recent management changes

•

The acquisition of Ask could help IAC develop greater integration across properties

•

Monetization initiatives at AskJeeves

•

The potential sale of the struggling HSN International segment will enable IACI to focus on other business segments

•

Less favorable macroeconomic environment for the Lending and Real Estate businesses

Future Normalized P/E and Growth Analysis Multiple Analysis P/E Relative P/E PEG Ratio Relative PEG FCF FCF Yield

2007E 19.7 0.6 1.2 0.9 $626 6%

2008E 15.9 0.6 1.5 1.0 $701 8%

Normalized Growth and P/E Valuation Current Price $33.89 2008E taxed EPS $2.12 2008 EPS Multiple in 2007 17 3 yr EPS Growth Beyond 2008 10% Assumed PEG in 2007 1.7 Implied Value $37.10 Return 9%

Scenarios $33.89 $33.89 $2.12 $2.12 16 19 10% 12% 1.5 1.5 $33.12 $39.50 -2% 17%

Sum-of-the-Parts Analysis Sum of the Parts Analysis - 2007 2007E

EBITDA

Implied

Value

EBITDA

Multiple

value

per share

Retailing

288

8.5x

2,447

$8.26

Services

385

14.7x

5,670

$19.14

Media & advertising

104

15.0x

1,559

$5.26

Membership & subscriptions

254

9.6x

2,424

$8.18

Emerging business/corporate Sub-total Cash total

(92) $938

11.7x

(1,082)

($3.65)

11.7x

11,018

$37.19

319

$1.08

Sub-total

11,337

$38.26

Total

10,203

$34.44

Source: Company reports and Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

Priceline.com (PCLN, $54.61, Neutral) Investment Summary

Financial Measurement

We have a Neutral rating and a $62 year-end price target for Priceline, which is based on our P/E to normalized growth analysis. Priceline remains one of our favorite small cap companies as it leverages its diversification strategy in terms of products (via its retail strategy) and geography (via international expansion) to deliver strong business trends and to consistently fuel above-average growth. Despite the lapping of the Bookings BV acquisition, the international business continues to grow at a solid clip, with 1Q2007 international gross bookings growth of 90% yoy due to the fast-growing European market environment and continued market share gains for Priceline. As expected, Street estimates have come up about 15% since February 12 when the company reported 4Q2006 earnings, but we see room for additional estimate upside given the higher guidance and consistent outperformance as well as multiple expansion as the company continues to display stellar execution. Given the continued international outperformance, we are assessing our longterm growth outlook, which would also impact our valuation.

2006

2007E

2008E

$1,122

$1,268

$1,369

$109

$159

$189

$99

$147

$177

$2.03

$3.10

$3.40

FCF

$99

$106

$134

Revenue Growth

17%

13%

Op Income Growth

64%

48%

21%

Revenue EBITDA (adj., ex SBC) Op Income (adj., ex SBC) EPS (adj., ex SBC)

12%

13%

EPS Growth

49%

52%

10%

FCF Growth

92%

27%

ROA

11%

12%

ROIC

Operating Margins

ROE

Investment Positives

24%

29%

27%

2007E ROIC

3 yr EPS Growth 18%

12%

10%

16%

10%

16%

14%

12%

10% 6% 4%

8% 6%

4% 2% 2% 0%

0% Median

PCLN

Median

PCLN

Investment Risks

•

Established brand name associated with discount travel

•

Generating accelerating gross bookings growth, margin expansion, and solid earnings growth

•

Estimate $106 million of FCF in 2007

•

Effective cost controls while investing in profitable growth opportunities such as the online European hotel market

•

Increased competition from pure-play online travel companies as well as from airlines’ and hotels’ proprietary sites

•

Vulnerable to slowing consumer spending on online travel

•

Potential for less favorable economic terms for Priceline in deals with GDS companies and suppliers

Future Normalized P/E and Growth Analysis Multiple Analysis P/E Relative P/E PEG Ratio Relative PEG FCF FCF Yield

2007E 17.6 0.6 1.4 1.0 $106 5%

2008E 16.1 0.6 1.3 0.9 $134 5%

Normalized Growth and P/E Valuation Current Price 2008E EPS 2008 EPS Multiple in 2007 3 yr EPS Growth Beyond 2008 Assumed PEG in 2007 Implied Value Return

$54.61 $3.40 18 12% 1.5 $62.42 14%

Scenarios $54.61 $54.61 $3.40 $3.40 22 22 12% 14% 1.8 1.5 $75.41 $73.03 38% 34%

Source: Company reports and Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

RealNetworks (RNWK, $8.36, Neutral) Investment Summary

Financial Measurement

We maintain our Neutral rating on RealNetworks shares as they are trading relatively in-line with our year-end price target of $9, which is based on our P/E to normalized growth analysis. Post 1Q2007, we maintained our price target - of $9 despite upside in 1Q2007 results as we remain skeptical regarding the sustainability of growth longer-term. That said, we believe that downside risk is limited, as the company is likely to continue its aggressive share repurchase program at current levels under the new $100mn buyback authorization. At these levels, we believe that the stock is already pricing in our fundamental view that the company operates in a competitive environment.

Revenue EBITDA (adj., ex SBC) Op Income (adj., ex SBC) EPS (adj., ex SBC) FCF Revenue Growth Op Income Growth Operating Margins EPS Growth FCF Growth ROA ROIC ROE

2006 $395 $20 $3 $0.15 $190

2007E $563 $56 $35 $0.25 $119

2008E $641 $76 $48 $0.30 $125

22% NA 1% NA -57% 11% 0% 15%

43% NA 6% NA -37% 3% 3% 5%

14% NA 7% NA 5% 2% 4% 2%

2007E ROIC 10% 9%

16% 14%

12%

6% 10% 5% 8% 4% 3%

• • •

2% 0% Median

•

16% 14%

Investment Positives

3 yr EPS Growth 18%

RNWK

Median

RNWK

Investment Risks

A base of 24.6 million paying subscribers, 2.7mn excluding WiderThan which is up from 2.4 million a year ago Recurring revenue nature of growing subscription business and long-term asset value of paying subscriber base Strong expected growth in Games given organic strength, acquisitions, and partnerships

•

Rate of growth in the in-game advertising opportunity

•

Additional acquisitions that could affect the growth rate

•

Competitive environment in the online and mobile games and music industries that could impact margins

Focus on forming partnerships with media companies and infrastructure owners should help grow subscribers more cost effectively than acquisitions

Future Normalized P/E and Growth Analysis Multiple Analysis P/E Relative P/E PEG Ratio Relative PEG FCF FCF Yield

2007E 33.1 1.1 1.6 1.2 $119 8%

2008E 27.5 1.0 1.9 1.3 $125 9%

Normalized Growth and P/E Valuation Current Price 2008E EPS 2008 EPS Multiple in 2007 3 yr EPS Growth Beyond 2008 Assumed PEG in 2007 Implied Value Return

$8.36 $0.30 30 14% 2.1 $9.01 8%

Scenarios $8.36 $0.30 25 14% 1.8 $7.72 -8%

$8.36 $0.30 29 16% 1.8 $8.82 5%

Source: Company reports and Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

WebMD (WBMD, $48.13, Neutral) Investment Summary

Financial Measurement

We maintain a positive view of WebMD's growth and profitability trends as well as its strategic positioning. Our Neutral rating reflects a share price that is generally in line with our $52 year-end 2007 price target, which is -based on our P/E to normalized growth analysis. We believe that investors will continue to award WebMD a premium valuation given that results continue to evidence that it has the most favorable secular trends in the sector, little competition, strong execution, significant visibility into its revenue streams given fairly long lead times, and a clear leadership position. The company's fast-growing private portal segment continues to contribute an increasing percentage of revenue as WebMD develops this channel through new partnerships, the increased adoption of products and the geographic expansion opportunity that is likely to add another growth lever. Importantly, the company is executing on delivering revenue growth combined with significant margin expansion despite tuck-in acquisitions that are generating losses or are break-even when acquired. We believe that these factors are likely to drive increased confidence in the company's ability to deliver solid top-line growth, with incremental EBITDA margins of at least 30%- 40%.

2006 Revenue EBITDA (adj., ex SBC)

2007E

2008E

$254

$354

$432

$53

$89

$116

2007E ROIC

12%

Op Income (adj., ex SBC)

$36

$68

$98

EPS (adj., ex SBC)

0.67

1.20

1.27

FCF

$24

$75

$97

10%

50%

39%

22%

Op Income Growth

106%

90%

43%

Operating Margins

14%

19%

23%

EPS Growth

81%

77%

FCF Growth

132%

209%

29%

ROA

ROIC

10%

16%

ROE

Revenue Growth

10%

Leading brand and unique content drive more page views than its four largest competitors combined

•

Advertisers are attracted to WebMD’s highly engaged users and trusted brand while the Internet as a branding platform better meets the needs of advertisers

•

Strong relationships drive high retention of private portal and advertising clients

20% 16% 15%

6% 10% 4% 5%

0% Median

Investment Risks

•

23%

10%

Investment Positives

3 yr EPS Growth 25%

•

Growth of private portals

•

New potential competitors such as Google

•

Integration of recent acquisitions

•

Increased costs of international expansion

WBMD

Median

WBMD

Future Normalized P/E and Growth Analysis Multiple Analysis P/E Relative P/E PEG Relative PEG FCF FCF Yield

2007E 40.3 1.3 1.4 1.0 $75 3%

2008E 37.9 1.4 1.6 1.1 $97 3%

Normalized Growth and P/E Valuation Current Price $48.13 2008E EPS $1.27 2008 EPS Multiple in 2007 41 3 yr EPS Growth Beyond 2008 23% Assumed PEG in 2007 1.8 Implied Value $51.95 Return 8%

Scenarios $48.13 $48.13 $1.27 $1.27 46 45 23% 25% 2.0 1.8 $58.70 $57.40 22% 19%

Source: Company reports and Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

Yahoo! (YHOO, $28.81, Neutral) Investment Summary

Financial Measurement

We maintain our Neutral rating on Yahoo! shares with a year-end price target of $34 (based on our EV/EBITDA analysis) as we believe that the shares discount our growth outlook and our favorable view of the company’s strategy to maximize engagement and optimize monetization, its new organizational structure, and its progress on Project Panama, which we believe has long-term benefits. Our price target assumes Yahoo! achieves both our 16% growth outlook from 2008-2011E and our current estimates, which are dependent on Yahoo! driving over a $1 billion gross search revenue benefit in 2007 and 2008 from Panama. 2H2007 results remain critical to Yahoo!’s valuation given that our estimates already assume owned and operated yoy search growth accelerates throughout the year reaching 33% and 41% yoy growth in 3Q2007 and 4Q2007 from 9% and 22% in the first two quarters of the year. Our estimates also assume that branded growth accelerates in the back half of 2007. We believe that Yahoo!’s financial success needs to exceed the high-end of company guidance and heightened investor expectations in order to achieve a favorable return for investors from current levels.

Net Revenue EBITDA (adj., ex SBC) Op Income (adj., ex SBC) EPS (adj., ex SBC) FCF

2006 $4,560 $1,896 $1,594 $0.78 $1,280

2007E $5,272 $2,201 $1,790 $0.91 $1,395

2008E $6,243 $2,646 $2,126 $1.07 $1,767

2007E ROIC

23% 20% 35% 16% -2% 7% 13% 8%

16% 12% 34% 16% 9% 6% 14% 8%

18% 19% 34% 18% 27% 7% 16% 9%

18% 14%

14%

16%

Median

YHOO

12%

10%

10% 8% 8% 6%

0% Median

Investment Positives

16% 14%

12% 10%

Net Revenue Growth Op Income Growth Net Operating Margins EPS Growth FCF Growth ROA ROIC ROE

3 yr EPS Growth

16%

YHOO

Investment Risks

•

Potential upside to estimates if Yahoo! can close the gap between its query growth and search revenue growth through new monetization initiatives to be launched throughout 2007

•

Pricing pressure due to shift to lower-CPM inventory

•

Continued growth in its paying subscriber base that has reached more than 16 million

•

Potential loss of affiliate search relationships given inferior monetization relative to Google

•

Significant global opportunity as only ~35% of revenue is currently outside the US

•

Competition from MSN, AOL and Google

•

High fixed-cost model with significant leverage to an advertising upturn

•

Magnitude of financial success of Project Panama

EV/EBITDA Multiple Analysis Yahoo! 2007E EBITDA Multiple EV Per share value

Yahoo! Japan 2,200.9

EBITDA (yen) $/yen exchange rate

115

35,215.2

EBITDA ($ millions)

1,321.25

$25.14

Multiple EV ($ millions)

Cash & equivalents NOL Total cash & equivalents Per share value

152,130

3,574.3 673.8

33.6% stake Per share value

15 19,818.7 6,659.1 $4.75

4,248.2 $3.03

Yahoo! China Per share value

1,000.00 $0.71

Gmarket

74.00

Per share value

$0.05

Total per share value

$33.69

Source: Company reports and Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

CNET Networks (CNET, $8.72, Sell) Investment Summary

Financial Measurement

We maintain our Sell rating as we think the shares are capped at our $9 year-end price target (based on our P/E to normalized growth analysis) given continued slower marketing services growth than the branded ad industry (13% vs. low-twenties) as well as sub-par long-term profit growth relative to the sector. We expect CNET to continue to underperform the broader online advertising market as web page growth excluding Webshots continues to slow (+1% yoy in 1Q2007 versus +8% yoy in 4Q2006) despite new site launches. We also believe that CNET's highCPM inventory likely has limited pricing leverage given the mix-shift to lower-CPM inventory which is generally 25% of the price but 50% as effective. As a result of these secular headwinds and comments that CNET has seen some weakness in technology advertising, we expect that CNET will need to increase investment to keep up with the pace of innovation in order to drive revenue growth and margin leverage over the long term.

Revenue EBITDA (adj., ex SBC) Op Income (adj., ex SBC) EPS (adj., ex SBC) FCF Revenue Growth Op Income Growth Operating Margins EPS Growth FCF Growth ROA ROIC ROE

2006 $387 $82 $59 $0.36 $29

2007E $430 $97 $65 $0.40 $21

2008E $482 $113 $77 $0.29 $38

15% 23% 15% 18% 46% 2% 10% 3%

11% 10.2% 15% 9% -29% 44% 9% 61%

12% 18.6% 16% -26% 86% 5% 10% 6%

18% 16%

10%

16%

10% 9%

14%

12%

12% 10%

8% 4%

6% 4%

2% 0%

0% Median

Investment Positives

3 yr EPS Growth

2007E ROIC 12%

CNET

Median

CNET

Investment Risks

•

High retention rate of top advertisers at 96% in 1Q2007

•

Leveraged to strong secular growth trends of online advertising

•

Unique offering given focus on user-generated content and editorial content

•

Ability to expand advertiser base without lowering CPMs on more coveted inventory

•

Growth partially dependent on new product launches

•

Sensitivity to technology product cycles and the associated advertising dollars

Future Normalized P/E and Growth Analysis Multiple Analysis P/E Relative P/E PEG Relative PEG FCF FCF Yield

2007E 22.1 0.7 -17.0 -12.2 $21 2%

2008E 29.7 1.1 2.4 1.6 $38 3%

Normalized Growth and P/E Valuation Current Price 2008E EPS 2008 EPS Multiple in 2007 3 yr EPS Growth Beyond 2008 Assumed PEG in 2007 NOL per share Implied Value Return

$8.72 $0.29 26 12% 2.1 $1.40 $9.06 4%

Scenarios $8.72 $0.29 22 12% 1.8 $1.40 $7.96 -9%

$8.72 $0.29 22 14% 1.5 $1.40 $7.75 -11%

Source: Company reports and Goldman Sachs Research estimates. Goldman Sachs Global Investment Research

1-800-FLOWERS.COM (FLWS, $7.80, Sell) Investment Summary

Financial Measurement

We continue to rate shares of 1-800-FLOWERS.COM Sell given less favorable characteristics and valuation versus our other stocks. We have an $8 year-end price target, which is based on our P/E to normalized growth analysis. While 1Q2007’s results were an incremental positive given the upside to our EBITDA estimate, we remain concerned that the company will struggle to drive organic topline growth above the mid-single-digit range for CY2008-2011 (versus 9% organic growth in 1Q2007) without additional acquisitions or incremental spending that would pressure margins over time. Specifically, we continue to believe that 1-800-FLOWERS.COM is likely to generate organic revenue and profit growth in line with our 6% and 13% CY2008-2011E CAGRs. We believe that stronger top-line growth would require greater spending and thus slower profit growth given our continued uncertainty that FLWS has sufficiently invested in the branding and technology that is necessary to support stronger top-line growth.

2006 Revenue

2007E

2008E

$858

$960

$1,041

EBITDA (adj., ex SBC)

$40

$60

$71

Op Income (adj., ex SBC)

$26

$43

$52

$0.21

$0.34

$0.42

EPS (adj., ex SBC)

($7)

FCF

$10

2007E ROIC

12%

18% 16%

10%

16%

10%

14%

$24 8%

Revenue Growth

17%

12%

Op Income Growth

116%

68%

20%

Operating Margins

EPS Growth

81%

64%

23%

FCF Growth

-175%

-238%

149%

ROA

ROIC

ROE

10%

13%

12% 6%

10%

6% 8% 4%

6% 4%

2% 2% 0%

0% Median

Investment Positives

3 yr EPS Growth

FLWS

Median

FLWS

Investment Risks

•

Leading position in online gifting with a well-recognized brand name, large customer base, and proven technology, fulfillment, and customer service capabilities

•

Navigating an uncertain cyclical environment to reignite telephonic revenue growth

•

Multi-channel strategy should drive improving margin longer term

•

Ability to effectively integrate recent non-floral acquisitions

•

Solid top-line growth generated by acquisitions including Fannie May and Cheryl & Co

•

Maintaining a relatively fixed cost base and holding capital spending at current levels while investing in brand as well as BloomNet initiatives

•

Increasingly competitive environment driving higher operating expenditures and lower FCF

Future Normalized P/E and Growth Analysis Multiple Analysis P/E Relative P/E PEG Ratio Relative PEG FCF FCF Yield

2007E 23.1 0.7 1.3 1.0 $10 2%

2008E 18.7 0.7 1.4 1.0 $24 5%

Normalized Growth and P/E Valuation Current Price 2008E EPS 2008 EPS Multiple in 2007 3 yr EPS Growth Beyond 2008 Assumed PEG in 2007 Implied Value Return

$7.80 $0.42 19 13% 1.5 $7.97 2%

Scenarios $7.80 $0.42 17 13% 1.3 $7.00 -10%

$7.80 $0.42 24 16% 1.5 $9.95 28%

Please note that estimates are calendarized. Source: Company reports and Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research

Analyst certification

I, Anthony Noto, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Goldman Sachs Global Investment Research

Disclosures May 21, 2007

Disclosures Coverage group(s) of stocks by primary analyst(s) Compendium report: please see disclosures at http://www.gs.com/research/hedge.html

Company-specific regulatory disclosures Compendium report: please see disclosures at http://www.gs.com/research/hedge.html

Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global coverage universe Rating Distribution

Global

Investment Banking Relationships

Buy

Hold

Sell

Buy

Hold

Sell

28%

59%

13%

41%

34%

31%

As of April 1, 2007, Goldman Sachs Global Investment Research had investment ratings on 2,590 equity securities. Prior to June 26, 2006, Goldman Sachs utilized a relative rating system of Outperform, In-Line and Underperform, which, for the purposes of the above disclosure required by NASD/NYSE rules, equated to Buy, Hold and Sell. As of June 26, 2006, Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure. See 'Ratings, Coverage groups and views and related definitions' below.

Price target and rating history chart(s) Compendium report: please see disclosures at http://www.gs.com/research.hedge.html

Goldman Sachs Global Investment Research

Disclosures

Regulatory disclosures Disclosures required by United States laws and regulations See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-managed public offerings in prior periods; directorships; market making and/or specialist role. The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the Goldman Sachs website at http://www.gs.com/research/hedge.html.

Additional disclosures required under the laws and regulations of jurisdictions other than the United States The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and regulations. Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. Canada: Goldman Sachs Canada Inc. has approved of, and agreed to take responsibility for, this research in Canada if and to the extent it relates to equity securities of Canadian issuers. Analysts may conduct site visits but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request from Goldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (India) Securities Private Limited. Japan: See company-specific disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities Finance Company. Korea: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. Russia: Research reports distributed in the Russian Federation are not advertising as defined in Russian law, but are information and analysis not having product promotion as their main purpose and do not provide appraisal within the meaning of the Russian Law on Appraisal. Singapore: Further information on the covered companies referred to in this research may be obtained from Goldman Sachs (Singapore) Pte. (Company Number: 198602165W). United Kingdom: Persons who would be categorized as private customers in the United Kingdom, as such term is defined in the rules of the Financial Services Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International on request. European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is available at http://www.gs.com/client_services/global_investment_research/europeanpolicy.html

Goldman Sachs Global Investment Research

Disclosures

Ratings, coverage groups and views and related definitions Buy (B), Neutral (N), Sell (S) – Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a stock’s return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the potential return or the likelihood of the realization of the return. Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership. Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst’s investment outlook on the coverage group relative to the group’s historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Not Rated (NR). The investment rating and target price, if any, have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.

Ratings, coverage views and related definitions prior to June 26, 2006 Our rating system requires that analysts rank order the stocks in their coverage groups and assign one of three investment ratings (see definitions below) within a ratings distribution guideline of no more than 25% of the stocks should be rated Outperform and no fewer than 10% rated Underperform. The analyst assigns one of three coverage views (see definitions below), which represents the analyst’s investment outlook on the coverage group relative to the group’s historical fundamentals and valuation. Each coverage group, listing all stocks covered in that group, is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html.

Definitions Outperform (OP). We expect this stock to outperform the median total return for the analyst's coverage universe over the next 12 months. In-Line (IL). We expect this stock to perform in line with the median total return for the analyst's coverage universe over the next 12 months. Underperform (U). We expect this stock to underperform the median total return for the analyst's coverage universe over the next 12 months Coverage views: Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Current Investment List (CIL). We expect stocks on this list to provide an absolute total return of approximately 15%-20% over the next 12 months. We only assign this designation to stocks rated Outperform. We require a 12-month price target for stocks with this designation. Each stock on the CIL will automatically come off the list after 90 days unless renewed by the covering analyst and the relevant Regional Investment Review Committee. Goldman Sachs Global Investment Research

Disclosures

Global product; distributing entities The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and pursuant to certain contractual arrangements, on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs JBWere Pty Ltd (ABN 21 006 797 897) on behalf of Goldman Sachs; in Canada by Goldman Sachs Canada Inc. regarding Canadian equities and by Goldman Sachs & Co. (all other research); in Germany by Goldman Sachs & Co. oHG; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs JBWere (NZ) Limited on behalf of Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union. European Union: Goldman Sachs International, authorised and regulated by the Financial Services Authority, has approved this research in connection with its distribution in the European Union and United Kingdom; Goldman, Sachs & Co. oHG, regulated by the Bundesanstalt fĂźr Finanzdienstleistungsaufsicht, may also be distributing research in Germany

General disclosures in addition to specific disclosures required by certain jurisdictions This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than some industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analystâ&#x20AC;&#x2122;s judgment. Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. We and our affiliates, officers, directors, and employees, excluding equity analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives (including options and warrants) thereof of covered companies referred to in this research. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of the investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Current options disclosure documents are available from Goldman Sachs sales representatives or at http://theocc.com/publications/risks/riskstoc.pdf. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Our research is disseminated primarily electronically, and, in some cases, in printed form. Electronic research is simultaneously available to all clients. Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, One New York Plaza, New York, NY 10004. Copyright 2007 The Goldman Sachs Group, Inc. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc. Goldman Sachs Global Investment Research