TRACS 17 Technology, Media, Telecom Primer

Wells Fargo Securities, LLC 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 the report and investors
should consider this report as only a single factor in making their investment
decision.
Please see disclosure appendix for rating definitions, important
disclosures and required analyst certifications.
Thematic
Research
Across
the
Capital
Structure
Vol. 17
TRACS
May 2012
...we used thi s stuff.
Technology,
Media & Telecom
Primer
Some questi ons r emai n unanswer ed...
Some questi ons r emai n unanswer ed...
...but not your TMT questi ons.

Dear Valued Client,

We are pleased to present the seventeenth edition of our Thematic Research Across the Capital
Structure (TRACS) report series, a Technology, Medi a & Telecom (TMT) Pri mer.

In this publication, we provide an uncomplicated description of each subsector of TMT, followed by a
discussion of the interconnected key themes driving the sector. We have also included select case
studies that offer insights from a number of dynamic and innovative companies, including Verizon,
Salesforce.com, Nielsen, CBS, and Comcast. Finally, we provide a roadmap for valuing each sector.

Four technology companies (Apple Inc., Microsoft Corp., International Business Machines, and Google
Inc.) currently account for $1.2 trillion (or 46%) in market cap of the top-ten companies that comprise the
S&P 500. This statistic isnt surprising considering that over the past 15 years, businesses have invested in
technology at 4x the rate of broader capital spending. We have also seen 19% average annual growth in
U.S. consumer spending on technology in the past 15 yearsconsumer electronics spending is widely
expected to top $1 trillion worldwide in 2012. With steady earnings streams and rising cash stores from
seemingly insatiable demand, technology companies have uncharacteristically started to pay dividends.
Tech is looking more and more like a defensive sector.

The anytime, anywhere content demand of smartphone and tablet users continues to change the
landscape for media companies, as consumers expect more bells and whistles for content configuration.
Even the most diversified global media conglomerates are grappling with how to adapt to new advertising
protocols, which must include a game plan for traditional television, online viewing, and product
placements. Dish Network recently began to offer Auto Hop. This feature allows subscribers to avoid
commercials completely (no more fast forwarding!)

One of the key themes we consider in the telecommunications sector is consumer spending shifts from
wireline to wireless. Wireless providers are no longer focused on grabbing market share. The focus now is
on increasing the share of consumers disposable income spent on add-on services. As companies win
subscriber dollars, they must also ensure that they have the spectrum to meet demands.

From whats a Bizumer? to whats the future of advertising? to how is spectrum valued?we have
the answers in this report. We hope you find this latest installment of TRACS to be an important TMT
reference guide and, as always, we welcome your feedback.

Sincerely,

Diane Schumaker-Krieg
Global Head of Research & Economics
Todd M. Wickwire
Co-Head of Equity Research
Sam J. Pearlstein
Co-Head of Equity Research
Senior Analyst
Paul Jeanne, CFA, CPA
Associate Director of Research

Marielle Jan de Beur
Head of Structured
Products Research
Senior Analyst

Lee D. Brading, CFA
Head of Credit Research
High Grade & High Yield
Senior Analyst

John E. Silvia, Ph.D.
Chief Economist

Natalie Cohen
Head of Municipal Research

Lisa F. Hausner
Global Publications Director

I think there is a world market for maybe five computers.
- Thomas Watson (1874-1956), Chairman of IBM, 1943

CONTRIBUTING ANALYSTS

Nicole Black
High Grade Telecom, Media, Technology
MEDIA TELECOM
Eric J. Boyer
Equity Information & Analytic Services
TECHNOLOGY
Edward S. Caso, Jr., CFA
Equity IT/BPO Services
TECHNOLOGY
Bishop Cheen
High Yield Media/Entertainment/Telecom
MEDIA
Jennifer M. Fritzsche
Equity Telecom ServicesWireless/Wireline
TELECOM
Davis Hebert, CFA
High Yield Media/Entertainment/Telecom
TELECOM
Jess L. Lubert, CFA
Equity Communications Hardware
TECHNOLOGY
Gina Martin Adams, CFA, CMT
Equity Strategy
EXECUTIVE SUMMARY

Jason Maynard
Equity Software, Internet
TECHNOLOGY
Matthew R. Nemer
Equity Internet
TECHNOLOGY
Gray Powell, CFA
Equity Internet Infrastructure
TECHNOLOGY
Philip Rueppel
Equity Software
TECHNOLOGY
Marci Ryvicker, CFA, CPA
Equity Broadcasting & Cable
MEDIA
Peter Stabler
Equity Internet
TECHNOLOGY
Timothy Willi
Equity Transaction Processing
TECHNOLOGY
David Wong, CFA, Ph.D.
Equity IT Hardware, Semiconductors
TECHNOLOGY

WELLS FARGO SECURITIES, LLC
TRACS Vol. 17May 2012 INTEGRATED RESEARCH & ECONOMICS

ii
TABLE OF CONTENTS

EXECUTIVE SUMMARY ................................................................................................................................................ 1
One of the strongest themes affecting the economy today is arguably the widespread adoption of technology, media, and telecom
(TMT) products and related services. While investors understandably lump the technology, media, and telecommunications
industries together given clear thematic links, each segment offers unique qualities when it comes to its inclusion in an investment
portfolio.

TECHNOLOGY
Technology Overview.................................................................................................................................................. 7
Key Themes .......................................................................................................................................................................8
The ongoing buildout and use of the Internet creates growth for technology companies, new things to do with the Internet are
constantly emerging (e.g. social networking), and new ways to use or get to the Internet are evolving (mobility, cloud computing).
IT Hardware................................................................................................................................................................. 13
The Basics of IT Hardware.............................................................................................................................................. 13
IT hardware refers to computers, servers, and enterprise storage systems. IT hardware companies design and manufacture
computers and computer-related systems.
Key Themes ..................................................................................................................................................................... 13
Key themes include mobility (think notebooks, tablets, and smartphones), infrastructure buildout, and emerging markets.
Valuation/Investment Considerations ........................................................................................................................... 14
We think that investors correctly put greater value on businesses that have a repeating (annuity-like) nature that provides stability
and visibility.
Software.........................................................................................................................................................................17
Software Defined..............................................................................................................................................................17
Computer software or just software, is a collection of computer programs and related data that provide the instructions for telling
a computer what to do and how to do it. Software is a set of programs, procedures, algorithms, and its documentation concerned
with the operation of a data processing system.
Key Themes ......................................................................................................................................................................17
Key themes include the ongoing shift to cloud computing, proliferation of mobile devices, ongoing social networking adoption,
Bizumers driving the consumerization of IT, growing business adoption of engagement apps, the widespread growth in data, and
increasing use of IT by CMOs.
Valuation/Investment Considerations ........................................................................................................................... 19
The majority of sales revenue for SaaS companies is usually deferred, while marketing and sales costs are realized up-front,
leading to lower initial net income/EPS levels with economies in later periods. As a consequence, SaaS companies are more
frequently valued on a revenue and cash flow multiple basis.
CASE STUDYSalesforce.com, inc. .........................................................................................................................20
A leading pioneer in the cloud-based customer collaboration and relationship management market.
Semiconductors.......................................................................................................................................................... 23
What is a Semiconductor? .............................................................................................................................................. 23
A semiconductor is a type of electronic material that is halfway between a conduct of electricity and an insulator against electricity.
Semiconductor companies are involved in designing circuits to be implemented in semiconductors and/or processing material
(semiconductor wafers) to make electric circuits.
Key Themes .....................................................................................................................................................................23
Semiconductors are the enablers for many major technology trends and are still a high-growth business. Moores Law: The ability
to make semiconductor devices smaller and cheaper has driven the worldwide chip industry.
Valuation/Investment Considerations ...........................................................................................................................26
Semiconductor companies are susceptible to global economic issues. There is an ongoing trend toward making dividend payments
by chip companies.
Technology, Media & Telecom Primer INTEGRATED RESEARCH & ECONOMICS

iii
Internet .........................................................................................................................................................................29
The Internet in a Nutshell...............................................................................................................................................29
The Internet is a global collection of computer networks linked through wireless and wireline technologies. Computer networks
communicate to each other through a suite of Internet protocols (namely TCP/IP) that allows the computers to exchange data
through a host of applications.
Key Themes .....................................................................................................................................................................29
Key themes include broadband, processing power, and near-free storage; the rise of the social OS, the post-PC era, race for data
supremacy, and the digitization of the local commerce supply chain.
EV-to-EBITDA multiple valuation has historically been the tool of choice for Internet companies.
CASE STUDYVelti plc................................................................................................................................................. 34
A leading global provider of mobile marketing and advertising technology and solutions that enable brands, advertising agencies,
mobile operators, and media to implement highly targeted, interactive, and measurable campaigns by communicating with and
engaging consumers via their mobile devices.
Internet Infrastructure............................................................................................................................................. 37
Internet Infrastructure 101 ............................................................................................................................................. 37
Internet infrastructure is the collection of networks, both big and small, that connect together in many different ways to form the
single entity that we know as the internet. Companies can run their internet infrastructure as do-it-yourself solutions, by leasing
wholesale data center space from REITs, leasing network-neutral space from providers, or completely outsourcing all
infrastructure needs to managed hosting providers.
Key Themes .....................................................................................................................................................................38
Data center and managed hosting/cloud business models reduce enterprise IT infrastructure costs; Strong internet traffic growth
drives data center demand; and migration to third-party environments creates attractive growth opportunity.
Within the internet infrastructure space, we believe investors view the data center sector like the tower sector within the
telecommunication services space. Investors have starting looking at data centers in terms of total returns and giving the sector
credit for higher terminal multiples.
CASE STUDYEquinix, Inc.........................................................................................................................................40
A leading global provider of network-neutral data center and interconnection services, offering colocation, traffic exchange, and
outsourced IT infrastructure solutions for global enterprises, content companies, systems integrators, and network service.
Communications Hardware.................................................................................................................................... 43
What is Wireline Equipment and Data Networking?.....................................................................................................43
Communications hardware is a wide range of technologies (the wireline equipment and data networking industry) that enable
users to send and receive voice, video, and data communications over a physical connection.
Key Themes .....................................................................................................................................................................44
The transition from TDM to IP-based communications, the need to manage explosive network traffic growth, the shift to the cloud,
the transition from voice to video, and communications, and the desire to be mobile.
Wireline equipment and data networking stocks have historically been valued based on P/E multiples. During periods of economic
expansion and end-market growth multiples are often applied to earnings for the out year, with shares typically trading at a
premium to the S&P 500.
Transaction Processing ............................................................................................................................................ 47
Transaction Processing Defined..................................................................................................................................... 47
Transaction processing is the facilitation of electronic payments, such as credit and debit card transactions. There are three
essential roles transaction processing companies play: a network, a merchant acquirer, and an issuer processor.
Key Themes ..................................................................................................................................................................... 47
Mobility is reshaping the purchasing and payment experience, greater reliance upon emerging markets for organic growth,
increasing government intervention.
Efficient capital deployment across various geographies and use of EV/EBITDA methodology.

iv
Information & Analytic Services ............................................................................................................................ 55
What is Information & Analytic Services?...................................................................................................................... 55
At its core, information & analytic services is the provision of information in various forms, such as data feeds, databases,
reports, and analytical tools that are often embedded within its customers everyday business processes and decision making;
acquisitions are a major part of the model; the data explosion supports new players.
Key Themes ..................................................................................................................................................................... 56
The value of information continues to increase and information & analytic service providers have a head start in riding the big
data and analytics wave.
Investors typically value the group using EV/EBITDA and to a lesser extent price-to-earnings (P/E) multiples. we believe the space
should grow in the high single digits as organizations look to external providers to harness the flood of data to create information
and insight to help them navigate the constantly evolving business landscape.
CASE STUDYNielsen Holding N.V. ........................................................................................................................60
A global information and measurement services company that provides clients with an in-depth understanding of customers and
their behavior.
Information Technology/BPO Services................................................................................................................63
What is IT/BPO Services?...............................................................................................................................................63
Information technology (IT) and business process outsourcing (BPO) service providers support the efforts of major enterprises and
government agencies globally in managing their existing operations, as well as helping them take advantage of new technologies,
such as that offered by the emerging technologies of mobile, social, big data and the Cloud, to both improve efficiency and increase
revenue.
Key Themes .....................................................................................................................................................................63
Key themes include sustaining market opportunities, big data and analytics, continental Europe finally embracing outsourcing,
commoditization and verticalization, emerging business models and the cloud, politics and visa availability, and government
servicesfacing sustained funding challenges.
IT/BPO services has historically been viewed as a growth market and therefore valuation has been driven by expectation of
forward top-line organic growth rates. Operating margin has generally been stable during periods of growth, so has been more of
a factor in assigning relative valuation among the various providers.
CASE STUDYGenpact Ltd. ........................................................................................................................................ 67
A leading global provider of business process outsourcing services and information technology services, with a strong focus on the
finance and accounting, supply chain management, and infrastructure services segments.

MEDIA
Media.............................................................................................................................................................................70
MediaThe Big Picture .................................................................................................................................................. 70
Broadly speaking, media companies engage in the creation, aggregation, and distribution of content and then leverage this content
to sell advertising based on audience metrics and generate subscription revenue.
Key Themes .....................................................................................................................................................................70
Transition to digital and mobile world; evolution favors good content creators; future of advertising, and focused on shareholder
returns.
CASE STUDIESComcast Corporation CBS Corporation
Comcast Corporation is the largest U.S. cable company serving 50 million primary service units (PSUs) as of March 31, 2012. ........... 74
CBS Corporation, a diversified, international media company that has operations in virtually every field of media and entertainment. ..... 75
For equity, price to free cash flow has become the most popular determinant of relative value among media stocks. For fixed
income, yield, ratings and relative value, total return, and structure are considered.


v

TELECOMMUNICATIONS
Telecom.........................................................................................................................................................................89
Telecom ServicesA Macro Definition ..........................................................................................................................89
Telecom Services in its simplest form may be defined as a service enabling communications for both consumers and businesses.
Key Themes .....................................................................................................................................................................89
Key themes include wireline model is redefined, spectrum = life blood of wireless network; wireless drivers evolving; consolidation;
regulatory environment remains heavy; and competitive landscape varies depending on silo.
CASE STUDYVerizon Communications
The largest regional Bell operating company (RBOC), serving customers in 29 states. ................................................................. 91

Valuation/Investment Considerations ......................................................................................................................... 103
We typically value Telecom companies on an EV-to-EBITDA basis where companies are spending to expand the network and on
price-to-earnings (P/E) multiples for stable businesses. The moderate barriers to entry and stable cash flow make telecom
companies defensive businesses and lead to above-average dividend yields over time.

APPENDIX
TMT Analyst Roster ...................................................................................................................................................... 105
Coverage Universe
By Analyst ............................................................................................................................................................... 106
By Company............................................................................................................................................................ 109

Glossary of Terms ..........................................................................................................................................................113

Index...............................................................................................................................................................................119

Required Disclosures .................................................................................................................................................... 120


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1

EXECUTIVE SUMMARY
Gina Martin Adams, CFA, CMT
Equity Strategist
[email protected]
212/214-8043

One of the strongest themes affecting the economy today is arguably the widespread
adoption of technology, media, and telecom (TMT) products and related services.
The drive for more efficient operations and a more effective labor force saw U.S. businesses
investing in technology at 4x the rate of broader capital spending over the past 15 years. U.S.
companies now dedicate nearly half of their overall capital spending budgets to technology
investment. Meanwhile, seemingly insatiable demand for technology, and the entertainment and
connectivity it provides, has resulted in 19% average annual growth in U.S. consumer spending on
tech over the past 15 years. The result is a giant sector on the leading edge of the U.S. economy. S&P
500 TMT companies now house a quarter of index profits and the largest company in the world by
market capitalization.

Tech Share of Spending and Investment
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Jul-95 Jul-97 Jul-99 Jul-01 Jul-03 Jul-05 Jul-07 Jul-09 Jul-11
10%
15%
20%
25%
30%
35%
40%
45%
50%
Tech Spending Share of Total PCE
(left axis)
Tech Investment Share of Business
Fixed Investment (right axis)
Source: FactSet, Wells Fargo Securities, LLC

Source: FactSet and Wells Fargo Securities, LLC

2
TMT Leaps to The For efr ont of Spendi ng Pr i or i ti es

Spending on tech products continues to outpace spending on other categories of both
business investment and personal consumption, as businesses seek out productivity and efficiency
gains via tech purchases and consumers forego spending on other categories to get the latest and
greatest tech gear. Real information processing equipment and software investment jumped 8%
over the last two years, while personal consumption of technology products has jumped 12% over
that time, more than 6x the pace of total consumption growth. We suspect that businesses and
consumers alike will only continue to expand upon these spending habits as the economic recovery
continues to progress in the year ahead. Also, as the economic recovery continues and workers are
slowly added to the labor force, companies and consumers alike should become increasingly
comfortable in spending profits on technology equipment, and telecom & media services.
Meanwhile, ad spending should follow on the heels of broad corporate profit growth, benefiting
media companies that offer businesses the opportunity to reach a broad audience of potential
buyers.

The TMT story is not one of just the last few years of economic recovery, but extends more broadly
over many years, even decades. As providers continue to find ways to leverage social desires for
connectivity, mobility, and efficiency, technology is increasingly integrated into economies.
The result is an ongoing expansion of TMTs share of private-sector budgets and, despite the
challenge of rapidly shifting industry dynamics, decreasing volatility of TMT sector earnings.
Fifteen years ago, technology spending was a mere 1% of consumption and 20% of business
investment. Today, nearly 5% of consumer spending and half of business investment is dedicated to
technology equipment and software. Including media and telecom services, consumer spending on
TMT in total has grown 50% faster than total consumer spending over the last fifteen years.

The increasing integration of TMT has likely helped to aid a reduction in relative
earnings volatility in the space that may be underappreciated by many investors. Indeed, all
three segments of TMT offer earnings volatility below that of the broader S&P 500 index. At peak
levels around the middle of the last decade, volatility of technology sector earnings was 30% higher
than that of the S&P 500 index, volatility of media earnings exceeded index volatility by more than
60%, and telecommunications services earnings volatility was 6% higher than index volatility. Now,
tech, media, and telecom earnings volatility is 2%, 6%, and 12%, respectively, below that of the
broader S&P 500.

S&P 500 Technology Earnings Volatility
-50%
-30%
-10%
10%
30%
50%
1999 2001 2003 2005 2007 2009 2011
Rolling 3Y Std. Dev. Of Earnings
Growth Rel to S&P 500
S&P 500 Media Earnings Volatility
-50%
-30%
-10%
10%
30%
50%
70%
90%
1999 2001 2003 2005 2007 2009 2011
S&P 500 Telecom Earnings Volatility
-50%
-30%
-10%
10%
30%
1999 2001 2003 2005 2007 2009 2011

Source for all charts: FactSet and Wells Fargo Securities, LLC

Retur n Of Capi tal Appeals To Todays I nvestor Demands

Reduced earnings volatility and increased economic integration results in an
increasingly defensive skew to the entire TMT sector, in our view. Thus, technology,
media and telecom securities offer investors more than the opportunity to leverage the major trends
toward mobility, efficiency, and connectivity. The sector is also increasingly shareholder-friendly. In
our view, the ability of companies to pay out to a yield-starved investor base may be one of the
largest drivers of demand for securities over the next several years. As shareholder demand for
return of capital accelerates, TMT companies seem not only able, but increasingly willing to comply.

3
Through consolidation and expanding market share, a class of TMT giants has emerged over recent
years, and these titans are offering investors the much-desired return of capital through dividends
and share buybacks. Indeed, the TMT sector has returned $290 billion in capital to shareholders
over the past two yearsnearly one-third of S&P 500 ex-financials dividend and share buybacks.

Tech companies start to offer dividendspayout increased 23% in 2011. Steady
earnings, high cash, and cheap debt funding have allowed the technology sector to pursue
typical, as well as atypical, capital deployment strategies in recent years. As is fairly traditional
for the sector, share buybacks accelerated 71% over the past two years. However, technology
companies have also started to pursue deployment of capital in the form of dividendsa
strategy formerly anathema to the sector. The sector paid $23.4 billion in dividends in 2011, a
23% increase over 2010, and 40% more than in 2009. Techs payout ratio has doubled over the
past ten years, while the broader S&P 500 payout ratio remains at a level lower than at anytime
in history. The dividend yield for technology, while still very low, has nonetheless doubled since
the middle of the last decade, while the dividend yield for the broader index has remained
generally flat at about 2%.

Media companies remain primarily focused on share buybacks. From recession-
depressed levels in 2009, buybacks surged more than 200% in 2010 and nearly doubled again
last year to exceed the level recorded at the peak of the cycle in 2007. Buybacks were equivalent
to about 8% of sector market cap in 2011. While dividends continue to largely take a backseat to
buybacks, there is a long-term trend of rising yield in media. From the low reached in 2002 of
just 0.4%, dividend yield for the media industry is now 1.6%.

Telecommunication services companies, meanwhile, have the highest payout ratio
and highest dividend yield in the index. Just ten years ago, telecommunications services
companies in the S&P 500 paid out less than 50% of their earnings in the form of dividends.
Today, more than 90% of telecom sector earnings are returned to shareholders. The dividend
yield is more than double that of the S&P 500 index, at 5.5%. Buybacks are small, but
nonetheless increasing. Buybacks were less than 1% of sector market cap in 2011, but nearly
double the level of buybacks in 2010.

TMT Return of Capital ($B)
Common Dividends + Share Repurchases
0
50
100
150
200
250
2007 2008 2009 2010 2011
62%
27%


4
Conclusi on

As with all opportunities, the group is not without risksTMT companies face a rapidly evolving
marketplace, where pricing strategies remain under pressure and competition fierce, and
infrastructure to support the rapid proliferation of very sophisticated, data-intensive products
remains a daunting challenge for much of the industry. On the pages that follow, we aim to detail
the immense opportunities evident in TMT, as well as the challenges that inevitably accompany
such opportunities.

TMT Portfolio Considerations
While investors understandably lump the technology, media, and telecommunications industries
together given clear thematic links, each segment offers unique qualities when it comes to its
inclusion in an investment portfolio. Indeed, over one-year, five-year, and ten-year horizons, the
relative performance of technology, media, and telecom stocks varies vastly, and correlation of
relative returns is nearly zero. From a top-down perspective, we suggest investors should consider
the stage of the business cycle and sensitivity to the market to take advantage of performance
differentials. As for intersector security selection, we suggest that factors such as geographic
exposure and business model are important to consider for tech, while margins and pricing
strategies remain key for telecom. Return of capital is a key consideration across groups in TMT.

1Y Relative Performance Correlation 5Y Relative Performance Correlation 10Y Relative Performance Correlation
Tech Media Telecom Tech Media Telecom Tech Media Telecom
Tech -0.07 -0.09 Tech 0.01 0.02 Tech 0.11 0.03
Media -0.20 Media 0.01 Media 0.05
Telecom Telecom Telecom
Source: FactSet, Wells Fargo Securities, LLC Source: FactSet, Wells Fargo Securities, LLC Source: FactSet, Wells Fargo Securities, LLC


Top-Down Por tfoli o Consi der ati ons

Stage Of Busi ness Cycle

The three segments of TMT have differing sensitivities to stages of the business cycle, due largely to
the link between economic and earnings patterns.

Technology Relative Price History
0.1x
0.2x
0.3x
0.4x
0.5x
0.6x
0.7x
1995 1997 1999 2001 2003 2005 2007 2009 2011

Media Relative Price History
0.10x
0.14x
0.18x
0.22x
0.26x
0.30x
1995 1997 1999 2001 2003 2005 2007 2009 2011

Telecom Relative Price History
0.05x
0.10x
0.15x
0.20x
0.25x
1995 1997 1999 2001 2003 2005 2007 2009 2011



5
(1) Technology is early-cycle performer. While the tech sector has become more services
oriented in recent years, industry groups such as semiconductors and communications
equipment continue to trade very closely with the global inventory and production cycle.
Technology sector relative performance troughed in late 2008, three months before the
broader market trough in 2009. Technology surpassed pre-recession relative performance
peaks before the economy was even out of recession in early 2009.

(2) Media is a midcycle performer. The media industry, highly levered to both consumer
services spending as well as business investment spending, tends to trade best in the middle
of the business cycle, when economic stability is fairly well established. In contrast to the
early outperformance of technology sector stocks, the media industry did not form a relative
performance bottom until 2009, and even then did not manage to surpass its pre-recession
relative performance peak until well into this economic expansion.

(3) Telecom is late-cycle performer. While the business cycle position of both technology
and media seems to be quite clear, the telecom services industry appears to have shifted
character in recent years. Through the 1990s, telecom services traded in close correlation to
the media segment. However, with acceleration in dividend payout, high dividend yield, and
lowered earnings volatility, telecom has become a late-cycle outperformer. Note, telecom
relative performance peaked just after the market bottomed in 2009.

Sensi ti vi ty To Equi ty Market (Beta)

Macroeconomic risks and extraordinary monetary policy result in high inter-market correlations
the so-called risk-on, risk-off trade. Thus, general sensitivity to moves in the equity market has
become a key consideration for portfolio construction.

S&P 500 Technology 1Y Beta
0.5
0.9
1.3
1.7
2.1
2.5
1999 2002 2005 2008 2011
S&P 500 Media 1Y Beta
0.5
0.9
1.3
1.7
1999 2001 2003 2005 2007 2009 2011
S&P 500 Telecom 1Y Beta
0.5
0.9
1.3
1999 2001 2003 2005 2007 2009 2011


Media is high-beta. It may surprise investors to hear that of the three segments within TMT,
the media industry trades with the highest sensitivity to the broader market. Simply, when
stocks broadly rise, media stocks will likely benefit, but when stocks fall, media stocks will feel
the brunt of declines. Indeed, media beta is 1.1x.

Tech is market-beta. Meanwhile, technology sector beta peaked about a decade ago, and has
trended lower ever since, ending 2011 at just 0.97. Multiple factors likely explain this defensive
shift, including steady earnings growth and rising cash stores in the sector.

Telecom is low-beta. Telecom stocks have very low sensitivity to the broader market, indeed,
one of the lowest among sectors in the S&P 500. Telecom sector beta is just 0.64x. Low-beta
segments of the market such as telecom tend to perform particularly well during periods of high
market volatility.


6
I nter sector Por tfoli o Consi der ati ons
In addition to the top-down considerations mentioned above, there are a number of industry-
specific factors to consider in building a portfolio of TMT companies.

Technology Consi derati ons
Geographic and currency exposure. Most U.S. technology companies have substantial
global exposure. Related to this, sales of many, but not all, U.S. technology companies can thus
be affected by variations in currency exchange rates and global economic growth trends.
Companies with large foreign currency exposure often have currency hedging strategies in
place, so currency changes may have a larger effect on revenue than on earnings.

Use of Cash. As a means of returning cash to shareholders, U.S. technology companies are
active share re-purchasers, and many technology companies have implemented dividend
payments for the first time in recent years.

A choice of different business models for many of the major growth themes. The
technology subsegments we discuss in this report have widely varying business models, but
benefit from many of the same major technology trends, such as the growth of the Internet. For
example, software and services typically have recurring revenue streams, which in principle
result in stability and good visibility, while hardware and component companies have
businesses associated with the sale of capital and consumer goods, which arguably have a large
amount of upward leverage in an economic upturn.

Media Considerations

Return of Capital. Appealing to the yield-starved investor, the large media players are in a
mode of returning capital to shareholders in the form of large-scale share repurchase
authorizations and dividends. Payouts are occasionally even more than generated free cash flow
since most have room on their balance sheet to accommodate such actions.

Top-Line Growth. Since media is heavily dependent upon advertising, and advertising is
closely correlated to GDP growth, many investors monitor top-line growth of various media
entities, especially in weak macroeconomic times, as a barometer of industry health.

Margin Expansion. Thanks to the explosion of media content across various screens
(e.g., televisions, smartphones, tablets), most media companies are monetizing their content
into new channels, and this is driving margin expansion. Another contributor to this
phenomenon is subscription video-on-demand providers, like Netflix, and the increase in
retransmission consent deals, which is helping to deliver high-margin, incremental profits to
the media group.

Telecom Considerations

Balance Sheet and Financing Needs. The wireless industry is especially capital intensive,
and carriers must show that they are able to get a good return on investment.

Regulatory Environment and Competitive Landscape. Telecom is a highly regulated
industry, which mandates investors keep an eye on pending regulatory changes. Meanwhile,
telecom (especially wireless) is an extremely competitive industry. Pricing and margin are
critical issues for telecom.

Free-Cash-Flow Potential/Sustainability. With the highest dividend yield and highest
dividend payout ratio among sectors in the index, dividends are a large part of the telecom
story. Commitment to dividends has elevated telecom as a defensive sector.


7

TECHNOLOGY
Overview
Technology, Media &
Telecom Team

Technology makes it possible for businesses and consumers to send, receive, and process
information electronically. This involves the following:

Creating the means to represent, store, process, and transmit information electronically
(semiconductors and electronics components, computer hardware, communications hardware).
Creating the means or controlling the electronic systems and organizing the information
(software operating systems).
Inventing ways that people and businesses can use information (software applications and, at a
higher level, Internet applications and websites).

The Face of Technology (Appli cati ons)
Internet companies0ffering services or goods through the Internet.
Software companiesdeveloping the programming that makes it possible to use computer
and communications hardware.
Transaction processing companiesenabling payments and movement of money.
Information services companiesdeveloping ways to handle and make sense of information.

The Thi ngs That Make Technology Possi ble

Internet infrastructure companiesproviding access to computer hardware (data
centers) to run Internet applications on.
IT Services companieshelping set up computer and communications hardware.
Communications hardware companiesdeveloping and making the hardware that helps
send information from place to place.
Computer hardware companiesdeveloping and making computers and other hardware
devices such as storage systems that are necessary for handling and processing information.
Semiconductor (and other component) companiesdeveloping the pieces of
electronics that are at the heart of electronics systems like computers and communications
hardware.

8
Key Themes

Listed below are themes that we discuss in the next several segments. Some threads that run
through the various segments include:

The ongoing buildout and use of the Internet creates growth for technology companies.
New things to do with the Internet are constantly emerging (e.g. social networking).
New ways to use or get to the Internet are evolving (mobility, cloud computing).

I T Hardware
Mobility: notebooks, tablets, and smartphones
The Internet, computer infrastructure, and cloud computing
Emerging markets

Software
Ongoing shift to cloud computing
Proliferation of mobile devices
Ongoing social networking adoption
Bizumers (business consumers of technology) are driving the consumerization of IT
Growth in engagement applications
CMOs investing in IT

Semi conductors
Semiconductors provide the essential IP that underpins virtually all modern technology.
After many decades of growth, we believe that semiconductors are still a high-growth industry.
Moores Lawthe ability to make semiconductor devices smaller and cheaper has driven the
worldwide chip industry.

I nter net
Broadband, processing power, and near-free storage
Rise of the social OS
The race for data supremacy
Digitization of the local commerce supply chain

I nternet I nfrastructure
Data center and managed hosting/cloud business models reduce enterprise IT infrastructure
costs.
Strong Internet traffic growth drives data center demand.
Migration to third-party environments creates attractive growth opportunity.


9
Communi cati ons Hardware
The transition from TDM to IP-based communications
The need to manage fast-growing network traffic
The shift to the cloud
The desire to mobile and bring your own device
The transition from voice to video communications
Ability to make semiconductor devices smaller and cheaper has driven the worldwide chip
industry.

Transacti on Processi ng
Maturing industry in the United States, international and emerging markets figuring more
prominently into the growth outlook.
Technology, particularly mobile, would be critical in driving more acceptance at a faster rate.
Technology enables the formation of new competitive threats.
Potential for payments industry to be part of marketing and analytics.

I nformati on & Analyti c Servi ces
Information & analytic services stocks are starting to garner more attention.
Data analytics is simply the science of drawing conclusions through the examination of data.
Companies likely will be created, combined, and partnerships forged as a result of the growth of
data.
Growth expected in the high single digits with pockets much faster.

I T Servi ces
Growth drivers include macroeconomic headwinds that are causing large companies to
redouble efforts to reduce costs and improve productivity, emerging markets, tightening
regulation requiring significant systems changes, and new technologies.
Big data and analytics
Continental Europe is finally embracing outsourcing
Commoditization and verticalization
Emerging business models and the cloud
Politics and visa availability
Government servicesfacing sustained funding challenges

10
Valuation/Investment Considerations

The various more-established segments of IT have organic revenue growth potential ranging from
midsingle digit percent per year to low-double-digit or even teens percent per year. Many of the larger
technology companies have active acquisition strategies that add some additional, inorganic growth.

Many IT companies are focused on raising profitability and margin, driving EPS growth that is
higher than revenue growth. Successful acquisition strategies can also add to EPS growth.
EPS growth potential for many technology segments is of the order of high-single-digit to mid-
teens percent per year.
As can be seen from Exhibit 1, the S&P 500 technology segment has, in the past, typically run in
the 10-20x P/E range, spiking above this in the bubble period of the late 1990s and early
2000s.
Many of the IT segments have matured to the point where the larger companies are solidly
profitable. A P/E in the 10-20x range translates to price/sales in the 2-3x range.
Price/book of typically 3-4x demonstrate how investors view technology business as adding
value (deserving a value that is several times book).

Exhibit 1. Valuation Data
S&P 500 12.6x 10.7% 1.2x
Information Technology 12.6x 13.1% 1.0x
Communications Equipment 13.7x 10.9% 1.3x
Computers & Peripherals 11.4x 19.8% 0.6x
Electronic Equip & Instruments 11.0x -0.9% -12.4x
Internet Software & Services 13.9x 18.5% 0.7x
Office Electronics 6.8x 6.3% 1.1x
Semiconductors & Equipment 12.7x 5.0% 2.6x
Software 12.0x 10.1% 1.2x
IT Services 11.6x 5.3% 2.2x
Technology NTM P/E and EPS Growth
PEG
Ratio
NTM P/E
Ratio
NTM EPS
Growth Est.

P/E off next 12 month estimates for S&P500technology segment
0x
5x
10x
15x
20x
25x
30x
35x
40x
45x
50x
Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10

Source: IBES, FactSet, Wells Fargo Securities, LLC estimates Source: IBES, FactSet, Wells Fargo Securities, LLC

Price/Sales for S&P 500 Technology Segment
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
Jan-95 Jan-99 Jan-03 Jan-07 Jan-11

Price/Book for S&P 500 Technology Segment
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
Jan-95 Jan-99 Jan-03 Jan-07 Jan-11
Long Term Avg.
= 3.58

Source: Ned Davis Research, FactSet, Wells Fargo Securities, LLC Source: Ned Davis Research, FactSet, Wells Fargo Securities, LLC
Price/Book for S&P 500 Technology Segment
P/E off NTM Estimates for S&P 500 Technology Segment
Price/Sales for S&P 500 Technology Segment

11
Fixed Income Valuation

(1) Yield. A philosophical difference between equity and fixed-income securities is that bonds
offer current income as opposed to future capital gains. The principal measure of that return
is a bonds yield, which is inverse to price. In a traditional yield curve environment, longer-
dated bonds should yield more than shorter-dated maturities. Various measures of yield
include: current yield, yield to call, yield to maturity, and yield to worst.

(2) Ratings and Relative Value. Bond investors tend to rely on ratings agency ratings as a
reflection of general creditworthiness. At a basic level, the valuation of various bonds should
fall in line with ratings and leverage levels to compensate for corporate risk (e.g., triple-B
credits should be cheaper than single-A, C-rated credits cheaper than double-B). In high
grade, investors use spread to Treasury as the standard measure of risk, while high-yield
bond buyers focus more on absolute yield.

(3) Total Return. Total return is an important measure among fixed-income investors
especially high-yield investorsbecause it incorporates price change, coupon and yield over a
fixed period (usually one year). As a result, total return of any given bond is often an
appropriate risk-adjusted surrogate for equity return.

(4) Structure. Another factor governing bond investors appetite for particular bonds can come
to down to where it may fall within the capital structure. For example, a senior secured bond
tends to trade much more richly than a junior subordinated piece of debt since the holder of
that paper does not take on as much risk. Pricing may vary depending not only on seniority
but also on leverage covenants, holding company versus operating company origination,
guarantee language, change of control provisions, and coupon step requirements.

12



13

TECHNOLOGY
IT Hardware
[email protected]
212/214-5007

The Basics of IT Hardware

IT hardware refers to computers, servers, and enterprise storage systems. IT hardware companies
design and manufacture computers and computer-related systems. These include personal
computers, servers (large computers that personal computers connect to), and enterprise storage
systems that can be used to store data. Many IT hardware companies focus on the design of systems
and outsource the manufacturing of systems to contract manufacturers. The larger IT hardware
companies often get involved in software development as well to help differentiate their systems.

Key Themes

MobilityNotebooks, Tablets, Smartphones

The theme of mobility has had a profound effect on increasing the addressable market for
computing hardware.

We believe that over the last decade notebooks increased the addressable market in the
consumer space by 2-4x, making consumer computers a personal item with the addressable
market being every individual in a household, in contrast to consumer desktops, which were
often purchased on a one-per-household basis. In addition, in the corporate market, notebooks
have increased the addressable base from one computer per worker to more than one computer
per worker (some workers require both desktops and laptops).

Gartner estimates that 210 million notebooks shipped worldwide in 2011, up from
28 million shipped ten years earlier, in 2001.
According to Gartner, Hewlett Packard is the market leader in the notebook space, with a
17% unit share in the March 2012 quarter, followed by Asian companies Acer (15% share)
and Lenovo (13% share). Dell is currently in fourth place with an 11% share.

Smartphones have created a market for an additional, highly portable computing device, in
addition to computers.

Gartner estimates that in 2011 about 470 million smartphones shipped worldwide, with
smartphones accounting for more than 25% of the close to 1.8 billion total wireless handset
market. Worldwide smartphone shipments increased about 4x from 2007 to 2011, with
about 116 million smartphones shipped in 2007.
According to IDC, Samsung was the market leader in smartphones in the March 2012
quarter, with a market share of about 29% (42 million units); Apple was second, with a
market share of 24% (35 million units). Nokia was a distant third with a market share of 8%.

We believe that tablets have created a third market for computing in the consumer space.
Although tablets might overlap somewhat with smartphones and netbooks, we think that
tablets have primarily created their own demand and contribute to incremental sales of
computing devices.

Gartner estimates that in 2011 about 60 million tablets shipped (up from essentially zero
prior to mid 2010), of which about 40 million were Apple iPads.

14
Infrastructure BuildoutThe I nternet, Cloud Computi ng, and Computer Servers

Some 20+ years ago, computers and computer communications were the province of businesses
and academia. Over the past 20 years, the widespread availability of computing resources and the
growth of the Internet have brought computing to the consumer and, as a result, a large number of
computer-based activities such as, email and online shopping. This has required substantial
buildout of computer infrastructure worldwide. Cloud computing is also contributing to buildout
demand. One basic building block of computer infrastructure is the computer server.

Gartner estimates that the computer server market was about $44 billion in 2011.

Of this $44 billion, about $35 billion or approximately 80% of revenue comes from x86
servers (servers based on the Intel x86 microprocessor architecture).
Gartners numbers imply that in 2011, HP was the market leader with 32% server revenue
share, IBM second with 25% revenue share, and Dell third with 18% revenue share. HP, IBM,
and Dell together command about three-quarters of the total worldwide server market.

The x86 server market has solid secular growth potential, we believe, driven by the ongoing
worldwide buildout of the Internet. However, the market for other types of servers (for example
Unix servers and mainframe servers) has been slowly declining over the last few years, and we
think that this decline is likely to continue.

Emerging Markets

Emerging markets are important drivers of IT hardware growth. For example, Gartner estimates
the following from 2007-2011:

Personal computer (PC - desktop+notebook) computer shipments into the emerging markets
(Asia Pacific, Eastern Europe, Latin America, Middle East & Africa) rose from about 127 million
in 2007 to 203 million by 2011, a growth rate (CAGR) of about 10% per year.

Emerging market notebook growth is particularly impressive, with notebook shipments
rising from about 36 million in 2007 to about 110 million by 2011, a growth rate (CAGR) of
about 25% per year.
Emerging markets still only accounted for about 57% of total worldwide PC shipments in
2011, up from 48% in 2007. We think there is ample opportunity for continuing growth of
PCs in emerging markets.


The Continuing Evolution of IT Hardware Companies. One striking characteristic about
companies that are commonly included in the IT hardware group is how many of them are constantly
evolving. A particularly striking example of this is IBM, which at various times in the past was one of
the worlds biggest manufacturers of semiconductors (though it consumed the bulk of the
semiconductors it made), the worlds biggest PC company (IBM spun off its PC division to Lenovo),
and a major manufacturer of printers (IBM spun off its printing division as Lexmark). In the March
2012 quarter, about 60% of IBMs revenue was, in fact, from IT services, about 23% from software,
just 15% from hardware, and 2% from financing. HP and Dell have, in recent years, made fairly
substantial acquisitions in IT services (HP bought EDS and Dell bought Perot systems). HP has also
recently looked into divesting its PC division, though after evaluating its options decided against doing
this. Apple entered the wireless handset business just five years ago in 2007 but is now the worlds
market-share leader in smartphones, with 57% of its March quarter revenue related to the Apple
iPhone. Companies moving into new businesses with different margin and growth characteristics can
have an important impact on relative valuation between the various IT hardware stocks.

15
Servi ces and ConsumablesAnnui ty-Li ke Busi nesses

In general, we think that investors correctly put greater value on businesses that have a repeating
(annuity-like) nature that provides stability and visibility. IT services businesses are often based on
long-term contracts that play out over many years. We believe that the investment community
generally has a very high opinion of the strength of IBMs services business. HPs printer
consumables business has, for many years, been viewed as a valuable part of HP, though in recent
years HPs other struggles have overshadowed this. In the March 2012 quarter, Apple reported
more than $2 billion in revenue from its music-related products and services, which have grown out
of its iPod franchise.


16



17

TECHNOLOGY
Software
Jason Maynard
[email protected]
415/947-5472
Philip Rueppel
[email protected]
617/603-4260

Software Defined

Computer software or just software, is a collection of computer programs and related data that
provide the instructions for telling a computer what to do and how to do it. Software refers to one or
more computer programs and data held in the storage of the computer for some purpose. In other
words, software is a set of programs, procedures, algorithms and its documentation concerned with
the operation of a data processing system. The global software market is comprised of companies
that are involved in architecting and providing proprietary computer programs, suites of related
applications, and data management tools used to facilitate enterprise computing and typically
offered through sale, licensing, or increasingly as a service (SaaS) in which software is accessed
remotely over the Internet and billed on a subscription basis.

Leading subcategories within the software market address virtually all business functional areas
and include enterprise resource management (ERM), supply chain management (SCM), customer
relationship management (CRM), business intelligence (BI), enterprise content management
(ECM), IT service management, human capital management (HCM), data management, and
enterprise application integration (EAI), and systems security and management. The software
market generally does not include custom or internally developed programs, training fees, or open-
source software applications. Among the leading global software companies are Microsoft, Oracle,
SAP, IBM, Symantec, HP, EMC, CA Technologies, Adobe, VMware, NetSuite, and Fujitsu. The
worldwide software market is estimated to represent $330 billion a year and is expected to increase
to $400 billion by 2015.

Key Themes

We believe the software industry is undergoing a dramatic technological and cultural shift around
social, mobility, and consumerization that is ushering in a new era for business software. Among
the themes that we see as central to this transformation are: (1) shift to cloud computing,
(2) proliferation of mobile devices, (3) ongoing social adoption, (4) the consumerization of
traditional IT via bizumers, (5) growing business adoption of engagement apps, (6) the widespread
growth in data, and (7) increasing use of IT by chief marketing officers (CMOs).

(1) Ongoing shift to cloud computing. We believe that 2012 will mark the period where
cloud solutions become the first option for deployment. Over the last few years, we believe the
value proposition, security model, and cost have been proven. This is important because it
marks the end of the evangelical phase of the transformation and the entrance into mass
adoption.

(2) Proliferation of mobile devices. The rapid and ongoing adoption of mobile computing is
accelerating in 2012. We expect mobile devices (smartphones and tablets) to eclipse PC unit
sales as more form factors, price points, and platforms reach maturity.

(3) Ongoing social networking adoption. The widespread use of social media is forcing
companies to change not just their marketing approach but also the means by which they
engage on the web with their customers. The phenomenon of social media usage, sharing, and
user-generated content is radically altering both local commerce and advertising.

18
(4) Bizumers are driving the consumerization of IT. We believe the rise of business
consumers of technology (what we call bizumers), are the driving catalyst in the ongoing
consumerization of IT. Consumer technology is amazing, but when people get to work they
find outdated, difficult-to-use, unintuitive, and desktop-centric offerings. However, there is
major change coming to the workplace, as the principles behind consumer technology are
beginning to infiltrate corporate IT.

Exhibit 1. Ten Bizumer Principles of Consumerization

Source: Wells Fargo Securities, LLC

(5) Growth in engagement apps. Engagement is the new killer app in business software, in
our view. These systems represent a new layer in the application topology, moving beyond
analytical and transactional systems. We define engagement apps as applications, processes,
and analytical tools that enable companies to actively interact and empower interactions with
customers, with and between employees, and with external partners across the value chain.

Exhibit 2. The Rise of Engagement Apps
Internal
Productivity
Internal
Productivity
Social
CRM
Social
CRM
ValueChain
Collaboration
ValueChain
Collaboration
Transactional
Applications
Transactional
Applications
Analytical
Applications
Analytical
Applications
Engagement
Applications
Engagement
Applications


19
(6) The five Vs of data. IT professionals are focused on the changes happening in the data
market. We think that the more appropriate way to look at the changes in data is through the
lens of what we call the five Vs of data: (1) variety (unstructured, nonrelational), (2) velocity
(in memory computing and flash), (3) volume (machine-generated and social), (4) visualization
(new UX and formats for users), (5) value (improvement in predictive analytics).

Exhibit 3. The 5 Vs of Data


(7) CMOs investing in IT. The influence of marketing and CMOs on enterprise IT spending is
growing. Due to growth in online advertising, social technologies, mobility, and the
digitization of local commerce, marketers are taking greater responsibility for all aspects of
consumer engagement via information technology.


On a cash flow and PE basis, large-cap ($10 billion+ market cap) software companies are averaging
around 29x/14x multiples, respectively, while SaaS models are trading north of 50x on both
metrics. On an EV-to-revenue basis, large-cap software stocks are at 5.0x versus an average of 5.2x
for those at less than $10 billion and 8.5x for leading SaaS companies. The premium for SaaS versus
traditional license revenue-based operating models, which include most of the large-cap software
companies (Oracle, SAP, Microsoft) is driven by their higher growth potential, (averaging 31% yr/yr
for SaaS versus 18% for traditional large cap) and is also reflective of accounting treatments for
SaaS. Traditional license-based models generally recognize both costs and revenue in the same
period with earnings maintaining a linear relationship to revenue and, as a result, trade primarily
on a P/E basis. The majority of sales revenue for SaaS companies is usually deferred, while
marketing and sales costs are realized up-front, leading to lower initial net income and EPS levels
with economies in later periods. As a consequence, SaaS companies are more frequently valued on a
revenue and cash flow multiple basis.


20
Exhibit 4. Public Comparable Companies

Revenue EPS CashFlow
2012 2013 2012 2013 2012 2013
Enterprise&BusinessTechnology 5/21/12
Mkt.Cap
($MM)
Price/
Sales EV/Sales
RevGrw.
Est
Price/
Sales EV/Sales
RevGrw.
Est
Price/
Earnings
EPS
Growth
Price/
Earnings
EPS
Growth EV/CFO EV/CFO
ARBA AribaInc. $37.09 $3,715 7.0x 6.6x 19.8% 6.1x 5.7x 14.3% 37.7x 22% 32.2x 17% 38.3x 28.1x
ATHN AthenahealthInc. $73.88 $2,648 6.2x 5.9x 32.3% 4.8x 4.6x 27.6% 75.1x 12% 54.6x 38% 42.6x 29.3x
BV BazaarvoiceInc. $15.16 $862 6.6x 6.5x 27.5% 5.2x 5.1x 26.5% NM (2%) NM (51%) 44.5x 453.3x
CARB CarboniteInc. $8.06 $205 2.4x 1.6x 39.0% 1.8x 1.2x 33.7% NM (5%) NM (38%) 10.7x 4.6x
CNQR ConcurTechnologiesInc. $57.23 $3,134 7.1x 6.6x 26.2% 5.7x 5.3x 24.6% 58.3x 16% 46.9x 24% 33.9x 26.3x
CRM Salesforce.cominc. $146.01 $21,325 9.4x 8.9x 36.8% 7.2x 6.8x 31.5% 107.8x 11% 90.3x 19% 34.1x 28.4x
CSOD CornerstoneOnDemandInc. $19.99 $994 8.7x 8.0x 55.6% 6.3x 5.7x 39.8% NM (17%) NM (72%) 112.6x 30.6x
CTCT ConstantContactInc. $21.40 $651 2.6x 2.0x 17.8% 2.2x 1.7x 16.3% 24.4x 23% 19.1x 28% 10.2x 8.7x
CTSH CognizantTechnologySolutionsCo $60.98 $18,568 2.5x 2.2x 21.0% 2.1x 1.8x 17.9% 18.0x 19% 15.4x 17% 13.9x 12.0x
CTXS CitrixSystemsInc. $77.04 $14,344 5.6x 5.3x 15.8% 5.0x 4.7x 12.8% 27.8x 12% 24.1x 15% 15.7x 14.1x
DWREUS DemandwareInc $27.92 $783 10.7x 9.2x 29.8% 7.9x 6.8x 35.6% NM 831% NM (86%) 77.5x 234.8x
ET ExactTargetInc. $23.22 $1,530 5.6x 5.0x 31.0% 4.6x 4.1x 21.2% NM (84%) NM (43%) 210.7x 68.0x
IL IntraLinksHoldingsInc. $4.45 $244 1.2x 1.3x (6.0%) 1.2x 1.2x 4.9% 74.2x (86%) 31.8x 133% 11.9x 8.3x
INFA InformaticaCorp. $42.55 $4,606 5.1x 4.5x 14.6% 4.5x 3.9x 14.4% 26.4x 13% 22.6x 17% 18.5x 15.4x
JIVE JiveSoftwareInc. $16.65 $1,023 9.0x 8.7x 46.9% 6.7x 6.5x 33.9% NM (70%) NM (57%) NM 55.0x
KNXA KenexaCorp. $28.90 $790 2.2x 2.0x 27.2% 1.9x 1.8x 15.1% 27.5x 25% 22.8x 21% 11.7x 9.8x
LPSN LivePersonInc. $16.23 $893 5.5x 4.8x 21.7% 4.6x 4.0x 21.0% 39.2x 15% 32.9x 19% 23.7x 20.5x
MDSO MedidataSolutionsInc. $27.81 $702 3.3x 2.7x 16.6% 2.9x 2.4x 13.3% 24.9x (26%) 19.4x 28% NM NM
MKTGUS ResponsysInc. $10.33 $495 3.0x 2.4x 21.6% 2.5x 2.0x 18.7% 47.0x 5% 33.5x 40% 15.8x 11.3x
MSFT MicrosoftCorp. $29.54 $250,440 3.4x 2.6x 6.7% 3.1x 2.3x 9.5% 10.8x 2% 9.7x 12% 6.3x 5.6x
N NetSuiteInc. $43.09 $3,186 10.7x 10.2x 25.7% 8.7x 8.2x 23.9% 208.9x 35% 157.2x 33% 56.9x 45.7x
NTAP NetAppInc. $33.47 $12,149 1.8x 1.2x 11.6% 1.6x 1.1x 10.1% 12.3x 15% 10.9x 13% 6.1x 5.0x
ORCL OracleCorp. $26.24 $133,037 3.6x 3.1x 3.1% 3.4x 3.0x 5.3% 10.9x 9% 10.1x 7% 8.5x 7.7x
RP RealPageInc. $18.47 $1,356 4.2x 4.1x 25.9% 3.5x 3.4x 20.6% 38.8x 32% 29.5x 32% 21.0x 16.3x
SAPETR SAPAG $46.82 $55,757 3.5x 3.5x 11.2% 3.2x 3.2x 10.2% 15.5x 6% 14.1x 10% 14.8x 13.4x
SCOR ComScoreInc. $18.35 $648 2.3x 2.2x 19.7% 2.0x 1.9x 16.3% 15.2x 24% 12.8x 19% 11.3x 8.0x
SNCR SynchronossTechnologiesInc. $19.72 $770 2.7x 2.3x 24.4% 2.3x 1.9x 19.3% 17.9x 13% 15.1x 18% 11.1x 8.2x
SPSC SPSCommerceInc. $27.30 $333 4.7x 4.2x 22.5% 4.0x 3.6x 17.6% 65.6x 60% 47.6x 38% 28.7x 25.3x
SQI SciQuestInc. $14.55 $324 5.1x 4.2x 18.1% 4.2x 3.5x 21.0% 53.0x (5%) 35.3x 50% 13.1x 10.8x
TIBX TIBCOSoftwareInc. $29.04 $4,962 4.7x 4.5x 13.9% 4.2x 4.0x 12.1% 24.6x 17% 21.5x 15% 20.4x 18.1x
TNGO TangoeInc. $21.07 $783 5.5x 5.3x 36.8% 4.6x 4.5x 18.1% 50.6x 60% 37.7x 34% 41.7x 28.2x
TRAK DealerTrackHoldingsInc. $28.93 $1,228 3.2x 3.0x 7.6% 2.9x 2.6x 13.0% 26.9x 5% 22.5x 19% 15.7x 12.9x
ULTI UltimateSoftwareGroupInc. $75.17 $2,002 6.0x 5.9x 23.2% 5.0x 4.8x 21.3% 74.1x 56% 53.0x 40% 40.4x 31.7x
VMW VMwareInc. $100.59 $43,677 9.5x 8.5x 22.1% 7.9x 7.1x 19.9% 37.0x 25% 32.1x 15% 16.1x 13.8x
VOCS VocusInc. $15.08 $311 1.9x 1.7x 45.7% 1.5x 1.4x 20.7% 38.6x (52%) 23.3x 66% 14.5x 10.7x
Average 5.0x 4.6x 23.2% 4.1x 3.8x 19.5% 44.4x 29.0% 33.7x 14.0% 24.5x 12.2x
S&P500 12.8x 9.8% 12.0x 6.6%

Note: All data for SAP are in Euros
Source: Wells Fargo Securities, LLC and FactSet

CASE STUDYSalesforce.com, inc. (CRM)

Company Description: Salesforce.com inc. is a worldwide provider of customer and
collaboration relationship management solutions. The company provides hosted collaboration and
relationship management solutions for a monthly subscription fee. The company also provides
enterprise cloud computing applications on its Force.com platform. The company was founded in
1999, and has its headquarters in San Francisco, California.

Marc Benioff, founder, chief executive officer and chairman of Salesforce.com responding to
questions about the Salesforces growth potential during companys February 23 earnings call
stated the following.

This is the heyday of the cloud. This is the renaissance. We are in the great time. This is the time to create all
this amazing new technology. Weve changed all the devices weve used. Were all changing how we use
computers Were doing it!

Founded in 1999, and headquartered in San Francisco, California, Salesforce.com is a leading
pioneer in the cloud-based customer collaboration and relationship management market. The
company has built a client roster of world-class customers that includes Burberry, Toyota,
Electronic Arts, and most recently, Hewlett Packard. In our view, Salesforce is arguably the best-
positioned software vendor in the cloud market, and we believe that over the next few years it will
become a much larger company, with much higher profits as it drives social enterprise cloud
adoption.

21

Over the last few years, Salesforce has expanded its sales though both organic growth and
complementary acquisitions to its product suite, highlights of which include the following:

Sales CloudSalesforce automation represents the core of Salesforces platform, and provides
cloud-based customer automation and sales data management for recording, tracking, and
sharing information about sales opportunities, sales leads, sales forecasts, the sales process,
and closed business.

Data.comDesigned as a core contact marketing tool built around Dun & Bradstreets
database of company information and Jigsaws contact information, Data.com has been
expanded to integrate with all of the popular social networks such as Twitter, and LinkedIn.

ChatterSalesforces Chatter enables customers to improve employee collaboration by
establishing cloud-based private employee social networks. The tool features real-time
collaboration, user-initiated groups, and other social features. As discussed earlier, we believe
that the ongoing consumerization macrotrend will drive both increased demand for these types
of social engagement applications within the enterprise as a means to improve efficiency and
collaboration.

Radi an6Acquired in March 2011 and re-launched as the Radian6 Social Marketing Cloud,
this suite of tools enables companies to monitor, manage, analyze, and interact with their
online brand presence and customer base. The product suite includes integration with leading
social media platforms such as YouTube, Twitter, and LinkedIn and contains a number of
applications from monitoring trends to communicating across social platforms. In our view,
Radian6 remains a logical extension of the companys overall strategy and will prove a powerful
tool to help manage a social conversation for enterprise customers that is strategically vital,
rapidly evolving, and potentially lucrative.

RyppleIn our view, the addition of Rypple, an HCM tool that was acquired in December
2011, provides several benefits to Salesforce, including extension into adjacent markets with
large markets of accessible users; synergies within the companys existing social enterprise
platform product suite; and improved competitive footing relative to Oracle, SAP and as
ownership of core HCM becomes a key element for long-term market leadership.

The growth of the companys product suite has been accompanied by an expanded vision, and we
believe the company is now executing against a much bigger revenue opportunity through the social
enterprise vision and its positioning as the de facto system of record for all things customer. In
our opinion, there are three important elements that represent significant forward growth
opportunities:

(1) The accelerating penetration within the enterprise market as social features transform
customer and employee expectations driving demand for new engagement apps like Rypple,
Radian6, and Chatter;

(2) The emerging role of Salesforce as the de facto system of record for all things customer and the
opportunity to grow the Service Cloud and pull through sales products; and

(3) The blue sky opportunities available in underpenetrated adjacent markets (PaaS, Europe, data,
etc.) that, in our opinion, represent huge growth potential.

We believe that Salesforce has clearly been on a roll in recent months, announcing 100 seven-figure
transactions in its most recent quarter, and nine eight-figure deals. We view these announcements
as confirmation that large enterprises are increasingly looking to Salesforce as a strategic partner.
The company has also indicated that its current Q1 FY2012 is off to a strong start thanks to the
signing of the companys first-ever nine-figure deal.

22

From a competitive standpoint, Salesforce is not alone in the CRM market, and we respect that
incumbent competitors like Oracle (via Fusion CRM, and the RightNow and Taleo acquisitions),
Microsoft (Microsoft Dynamics), and SAP (via SuccessFactors) remain highly competitive in the
marketplace. However, in our opinion, what differentiates Salesforce from these competitors is the
strong beachhead it has established within social, mobile, and in-the-cloud delivery. We believe that
the momentum is on the side of Salesforce, and that the recent spate of acquisitions by competitors
demonstrates both the value of the end markets and the need by some of several other players in the
enterprise software market to catch up.

23

TECHNOLOGY
Semiconductors
[email protected]
212/214-5007

What is a Semiconductor?

A semiconductor is a type of electronic material that is halfway between something
that conducts electricity (e.g., a metal) and something that insulates against
electricity (e.g., plastic). A semiconductor material can be altered to vary how much electricity it
will conduct, which makes it possible to make various electronic devices within a semiconductor,
and connect these devices together to make various electric circuits. These electric circuits can do a
variety of things, including thinking (logic circuits) and remembering information (memory chips).
Tiny devices can be in a semiconductor, which makes it possible to create very complicated circuits
in a small amount of space. A microprocessor that powers a personal computer might have billions
of devices (transistors) on a chip the size of a thumbnail.

Semiconductor companies are involved in designing circuits to be implemented in semiconductors
and/or processing material (semiconductor wafers) to make electric circuits. The worldwide
semiconductor market is roughly $300 billion a year.

Semiconductors provide the essential intellectual property (IP) that underpins
virtually all modern technology. Semiconductors are typically at the heart of all electronic
devices. According to Gartner, consumption of semiconductors by end markets is approximately:

41% by the computing markets (compute and storage);
Some chip companies with large exposure to the computing markets include Intel, AMD,
Micron, and Nvidia.
19% by the wireless communications market;
Some chip companies with large exposure to the wireless communications market include
Qualcomm and Broadcom.
17% by the consumer electronics market;
8% by the automotive market;
6% by the wired communications market (primarily telecommunications infrastructure);
9% by the Industrial, medical and other markets.
Some chip companies with broad exposure to most of the chip end markets include analog
companies such as Texas Instruments, Analog Devices, Maxim, and Linear Technology.
Xilinx and Altera are two companies that have broad exposure to the communications
infrastructure, industrial, and automotive markets.

Key Themes

In our view, semiconductors are the linchpins of many major technology trends,
including the following:
Cloud computing and the ongoing buildout of the Internetpowerful processor chips,
advanced memory chips with large capacity, communications chips;

24
Mobile computingsmartphones, tablets and notebooks: low-power processor chips,
wireless communications chips, memory chips that can permanently store information (NAND
flash) even when the power is off.

After many decades of growth, we beli eve that semi conductors are sti ll a hi gh-
gr owth i ndustr y.

Exhibit 1 shows that worldwide semiconductor sales have grown from less than $1 billion per month
prior to 1980 to more than $20 billion per month currently ($300 billion worth of semiconductors
shipped in 2011). We believe that many investors view semiconductors as a maturing market, in
which the growth rate is slowing. The data in the graph imply a semiconductor sales growth rate
(CAGR) of 15% per year from 1990-2000 but only 4% per year from 2000-10, which shows a clear
slowdown. However, the unit growth rate of semiconductors (growth of individual semiconductor
chips) follows a completely different pattern. Integrated circuit units (integrated circuits are the
main type of semiconductor, making up more than 90% of the dollar value of semiconductors) have
been growing at 10% per year since 1984 through 2012, with no obvious sign of slowing. Our
analysis suggests that the sales growth from 1990-2000 was greater than the unit growth primarily
because of a mix shift. During that time computers were a significant driver of chip demand growth,
and computers contain a number of chips with high average selling prices (ASPs), such as
microprocessors. This broadened the mix of semiconductors in the 1990s. One important driver of
chip growth from 2000-10 was wireless handsets, which have a less rich mix of chips than
computers. Over the next several years, we think that some of the big growth drivers for the
semiconductor industry include the computer server market (buildout of the Internet and cloud
computing) and smartphones, which both have a relatively rich mix of high-ASP chips. Our
assumption is that the long-term trend for semiconductor sales growth is likely to roughly match
integrated circuit unit growth. We have estimated growth of 10-12% per year for the semiconductor
industry over the next several years.

Two major chip companies that we think benefit in particular from strong secular growth
trends are Qualcomm (the smartphone and tablet markets) and Intel (the notebook market, the
computer infrastructure marketcloud computing and the Internet).

Exhibit 1. Total Worldwide Semiconductor Sales
(Three-Month Rolling Average, In $000s)
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
18,000,000
20,000,000
22,000,000
24,000,000
26,000,000
28,000,000
30,000,000
32,000,000
D
e
c
-
7
7
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7
8
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7
9
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-
1
2
Worldwide Chip Sales Our Projections (11% growth in 2012)

Source: Semiconductor Industry Association and Wells Fargo Securities, LLC estimates

25
Moores Law: The abi li ty to make semi conductor devi ces smaller and cheaper has
dri ven the worldwide chi p i ndustry.

Moores Law, based in part on thoughts expressed in a technical paper published in 1965 by
Intel Co-Founder Gordon Moore, has over time become a term used to describe the fact that the
chip industry continually keeps finding a way to make semiconductor devices and circuits
smaller and smaller. This results in increased capability of semiconductor chips for a given cost.
Exhibit 2 illustrates the effect of Moores Law on memory chips. A little more than 20 years ago,
a typical computer had of about 1 megabyte of DRAM memory (the ability to retain about a
million pieces of information to work on at any given time.) Today a typical computer might
come with 4 gigabytes of memory (the ability to work directly on 4 billion pieces of
information)4,000x the amount of memory.

Exhibit 2. Memory Pricing (DRAM Price Per Megabit)
$0.0001
$0.0010
$0.0100
$0.1000
$1.0000
$10.0000
D
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P
r
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e
/
M
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Price/Mb 35%/Year Price Decline 29%/Year Price Decline

Source: Semiconductor Industry Association and Wells Fargo Securities, LLC

Moores Law has had an impact on the semiconductor industry, the worldwide economy, and
modern life, in many ways:

There are a number of highly sophisticated electronics devices, such as computers that are now
affordable to consumers rather than being equipment used solely by businesses.
There are whole classes of devices, such as wireless handsets that can be made small enough
(and cheap enough) to be useful.
Semiconductor content and functionality has found its way into many new places such as
automobiles.

Intel is a chip company that we think benefits from its leadership position in chip manufacturing
technology and its ability to drive Moores Law forward.

26

The i ndustry i s less cycli cal than i t was.

Exhibit 3 shows year-over-year growth for worldwide semiconductor integrated circuit (IC) sales
and units. Although unit growth does show a fair amount of variation, it is in the sales graph that a
clear seven-year cyclical pattern can be seen from 1995-99. The two semiconductor cycles that can
be seen in this period were driven by pricing expansion (sales growth higher than unit growth)
during cyclical upturns (1986-89, 1992-95).

We think the data show that in the past 12 years, since 2000, there has not been any obvious
semiconductor-specific cycle in which pricing expansion drove an upturn for an extended period.
For the most part, the graph of year-over-year sales growth has tracked closely with the graph of
year-over-year unit growth. The big downdrafts seen in 2001 and again in 2008/2009 were related
to global economic downturns. As might be expected, the semiconductor industry is still affected by
global economic cycles.

Exhibit 3. The Semiconductor Cycle
(60%)
(40%)
(20%)
0%
20%
40%
60%
80%
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G
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o
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h

Yr/Yr Chg IC Sales Yr/Yr Chg IC Units

Source: Semiconductor Industry Association and Wells Fargo Securities, LLC

We can think of two factors that may have contributed to the disappearance of the semiconductor
cycle:

(1) There has been a trend toward many major companies being fabless and outsourcing chip
manufacturing to specialized chip foundries. This separates the organizations that carry high
capital risk (the chip foundries) from the companies selling the chips (the fabless chip
companies), reducing the effect of factory utilization considerations on pricing.
(2) Of the chip companies that still do their own manufacturing, we believe that there has been a
shift in priorities throughout the chip industry to a focus on profitability and effective capital
management over the past decade. This is in contrast to the widespread focus on growth and
market share that characterized the pre-2000 period.


27
Di vi dends and di vi dend yi elds have been ri si ng for many chi p compani es.

Exhibit 4 shows the dividend history for Intel, the worlds largest chip company. Intel has steadily
increased its dividend payment over the past 20 years. More significantly, over the last several
years, dividend yield has increased and currently runs in the 3-4% range.

Intel, in fact, is one of the few chip companies that has a long history of paying dividends. It is only
in the last few years that many of the larger and midsized chip companies have begun paying
dividends at all. However, there is an ongoing trend toward making dividend payments by chip
companies. Currently, of the large and midsized chip companies in our coverage universe, three-
quarters pay dividends and a third have a dividend yield of close to 3%.

Exhibit 4. Intel Corp.s Quarterly Dividend History

$-
$0.02
$0.04
$0.06
$0.08
$0.10
$0.12
$0.14
$0.16
$0.18
$0.20
$0.22
1
2
/
1
/
1
9
9
2
9
/
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/
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Q
u
a
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l
y

D
i
v
i
d
e
n
d
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
A
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d

D
i
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d

Y
i
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l
d
Quarterly Dividend Dividend Yield

Source: Intel Corp. and Wells Fargo Securities, LLC


28


29

TECHNOLOGY
Internet
Jason Maynard
[email protected]
415/947-5472

Matthew R. Nemer
matt.nemer @wellsfargo.com
415/396-3938
Peter Stabler
peter.stabler @wellsfargo.com
415/396-4478

The Internet in a Nutshell

The Internet is a global collection of computer networks linked through wireless and wireline
technologies. Corporations, public and private institutions, academic institutions, and the
government all communicate using computer networks. Computer networks communicate to each
other through a suite of Internet protocols (namely TCP/IP) that allows the computers to exchange
data through a host of applications, including e-mail, hypertext, video, and voice over IP. While
there are numerous types of Internet-based companies, we are primarily focused on firms in the
subcategories of e-commerce, online advertising, search, and social media.

Key Themes

Internet accessibility has transformed how people fundamentally communicate, collaborate,
consume content, and conduct commerce. That force for connectivity slowly extended beyond the
constraints of university terminals over the initial Arpanet, through the hard line cables of desktop
PCs, into todays mobile infrastructure and ubiquitous wireless connectivity.

We believe that we are moving toward a world in which people use multiple devices, in multiple
locations, maintain large and diversified content libraries, use their smartphone to find and buy
things both online and in physical stores, and inherently share their experiences. We think
consumer technology will realign around the needs of the consumer, rather than the individual
capacities of different devices and applications.

The shift to a user-centric model holds significant opportunities and real dangers for vendors that
dont adapt. We foresee this megatrend evolving over the next five years as mobile broadband
becomes prevalent, the use of HTML 5 goes mainstream, and social disrupts more distribution
channels. In this user-centric world, vendor competition and differentiation likely will increasingly
be based on ease of access to data and content, potential for user personalization and discovery, and
ability to seamlessly integrate within the context of each user. Below we highlight what we believe
are the five leading Internet and technology mega-trends affecting our coverage universe:

(1) Broadband, Processing Power, and Near-Free Storage. Consumer behavior,
convenience, and preferences now drive media consumption, with the digital home as the hub
for media consumption and management, and the cloud gaining prominence for storage. For
companies we see expanding content production, discovery, distribution, and transactional
opportunities. Yet with these opportunities come increasing challenges. Barriers to entry are
dropping and tech-empowered consumers are emerging as worthy competitors in the realm
of publishing and commerce influencers. On the marketing front, tech advances now yield a
tantalizing menu of options as the Internet has evolved from a text- or image-based billboard
to a multimedia platform capable of competing with traditional analog media in terms of
scale, engagement, and efficacy.


30
Exhibit 1. U.S. Unique Viewers of Online Video Content
140
145
150
155
160
165
170
175
180
185
J
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(
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Source: Comscore Mymetrix

We believe Web-based video advertising will be the fastest-growing sub-segment of online
advertising as growth of consumer video consumption is driven by improving data speeds,
proliferation of professionally produced content, and embrace of the medium by advertisers
looking for both a complement and replacement for linear television advertising.

(2) Rise of the Social OS. Over the next five years, we think the direction of consumer
technology will largely be shaped by the actions of the large platform vendors, including
Apple, Amazon, Google, and Microsoft, as well as some of the rising ecosystems like Twitter
and other well known social networks. If 2011 was the year of scaled emergence for social
platforms, 2012 may be the year that the social OS heralds the shift from machine-centric to
people-centric computing. The Social OS is a metaphorical operating system about all the
things that matter to an individual, whereas the traditional OS was designed for a specific
machine and the applications tied to that device. The social OS is highly personalized, lives in
the cloud, operates across any number of devices, especially mobile, and encompasses user
content, communication, context, and commerce. We believe sharing and ubiquitous access
will prove to be the driving forces behind social-based disruptions to marketing,
communication and retail.

From a vendor standpoint, we see the world changing rather quickly where the locus of value
in consumer technology is shifting to that data. These data can be the social or interest graph,
search intentions, content, commerce, and communication. We believe that over the next five
years, the data generated from these activities will become a lynchpin for growth. We believe
the platform that creates the most consumer value will capture the most data. The platforms
that house that data will, in effect, likely have control of the users digital identity for certain
application services. With visibility into identity, the platform vendor can market and
monetize the user in various forms.


31
(3) The Post-PC Era. As hardware innovation advances and prices decline, we believe mobile
device form factors will proliferate in number and variety in the coming year. Notebooks will
likely become lighter, tablets smaller, and phones more versatile. All of them will likely
become cheaper, lighter, and more powerful. For marketers, we believe 2012 will be a year of
rapid adoption, as experimental budgets give way to committed efforts and the meaningful
incorporation of mobile into product and service design. Beyond simple advertising, we
expect mobile to play an increasing role in customer relationship management (CRM), as
well. For retail, while we expect mobile commerce growth to continue, we will see perhaps
greater effect on retail by device and mobile Web ubiquity at the store level, where hidden
positives are being overlooked by investors. Mobile could actually be a saving grace for
physical shopping. It is true that barcode scanning apps bring increased price transparency to
physical stores and turn some stores into showrooms for Amazon. We believe, however, that
this could be offset by the benefits derived from other emerging mobile technologies. These
include (1) mobile devices for store associates that provide real-time inventory data and
product information, as well as advanced CRM data, and mobile checkout, (2) self-checkout
apps so that customers can scan and pay without waiting in line, and (3) mobile shopping
walls that bring retail billboards to airports and other busy public spaces with minimal capital
investment and labor expense.

Though we remain somewhat skeptical of the branding power of current mobile display
advertising units, growing tablet penetration offers what we believe will be the most sought-
after platform for marketers seeking to display rich mobile media (including video) in a
branded content environment. With their skew toward content consumption (rather than
messaging and communication), we believe tablets will gain increasing levels of investment
and traction among marketers seeking to diversify their mobile marketing portfolios. Video
and other rich media expressions, in particular, should gain rapidly as publishers optimize
their offering for tablet presentation. Moreover, we believe that over time, advertisers will
begin to understand the value in unique mobile advertising opportunities by including such
click to action features as click to call, or click for coupon, etc. while consumers are
actually in the vicinity, and more apt to respond to relevant advertisements.

(4) The Race For Data Supremacy. We believe industry moves in 2012 will underscore
competitive advantages associated with practical application of data, where leverage of social
graphs and linkage of behavioral data across platform should continue to drive
personalization and evolution of consumer experiences. Googles groundbreaking linkage of
G+ and search is clearly a bold step in this direction. Across online marketing, application of
data is affecting a wide range of behaviors. We view programmatic buying, linkage of first-
party customer data, and improving media mix modeling as data-driven industry drivers
poised to accelerate in 2012.

For retail, emerging technologies are generating customer data that makes the shopping
experience more exciting, efficient, personalized, and relevant. We believe the most
sophisticated retailers will use location-based apps and geofencing to know when a consumer
is approaching the store, what that consumer bought the last time he or she was in the store,
and what he or she was looking for online but did not buy. With this data retailers should be
able to create custom offerings while engaged consumers are shopping in stores. Even more
interesting but nascent is the technology that can locate where a consumer is within a store.
Companies are creating detailed shopping mall, theme park, and airport maps that work with
an installed app to provide very accurate location-based information overlaid on store or mall
maps. Retailers are tracking the Wi-Fi signal on consumers smartphones and then using data
including traffic, window display conversion, visit frequency, and time spent, among other
metrics.


32
We believe that the popularity of many social networks has created a new destination for
display advertising for several reasons: vast user scale, deep engagement metrics, the
unrivaled power of peer endorsement, and data. No other advertising platform can come
close to competing with the amount of first-party data that is made directly available to these
networks by its hundreds of millions of users. Although the current display advertising
offerings are fairly limited in their ability to offer splashy, page-dominant creative executions,
the ability of marketers to pay on a performance basis and target highly discrete user groups
has changed the competitive equation.

(5) Digitization Of Local Commerce Supply Chain. Rapid advancements in smartphones,
location-based services, directories, social networks, and daily deals have ushered in a digital
world of local commerce. Connectivity is putting the Internet in places it has never been
before and transforming the local commerce information and transaction supply chain.
Product discovery, reviews, peer referrals, discounting, and location sourcing are moving
online as national online activities are expanding into local markets. Mobile price comparison
applications such as those offered by Amazon and eBay are forcing traditional retailers to
compete online or go out of business. Online local commerce is reducing transaction friction
and increasing velocity.

We believe the extension of multimedia capabilities to local will gain attention and greater
traction as advertisers seeking to augment local search and basic display inventory will
increasingly seek richer expressions of local advertisers content. We believe the strength of
online video advertising on a national level will translate into growing demand for local video
advertising options, whether through IP targeting of national properties or the growing
syndication of professionally produced content on local online properties. We believe local
television advertising dollars will likely be the next significant target of both national and
local online content providers. On the audio side, Pandora is seeking to disrupt the traditional
broadcast radio advertising equation by offering new levels of targeting to a format that
offered little in the way of advertiser product innovation over the past 30 years.

It is true that Internet technologies have spawned entirely new business models, creating some of
the worlds most successful companies over the past decade. But tech-fueled advancement is now
blurring once clean lines that separated digital from analog. Legacy, pre-Internet businesses are
competing more directly with Internet pure plays than ever before. Disruption, admittedly an
overused noun in the space, is now taking on different forms as technology themes have shown the
potential to alter the competitive landscape of traditional sectors at different rates.

Online And Mobile Advertising Forecast, 2011-15

We expect online advertising industry growth to moderate in 2012. We expect U.S. paid
search growth to moderate to low double digits against approximately 25% 2011 comparables, with
paid click growth continuing to be modestly offset by lower CPC as mobile search queries increase
share. Globally, our paid search estimate stands at 18%, down from an estimated 23% in 2011. For
display, we expect U.S. spending to growth 12%, with rapidly expanding video (up 25%) offsetting
slower growth behind traditional banners (up 8%) and rich media (up 8%), where we expect
complexity of execution and pricing to continue to act as impediments to more rapid growth.

Mobile marketings time has (finally) come. On the mobile front, we believe momentum
witnessed this year will continue as a decade of unfulfilled promise for mobile marketing passes and
smartphone penetration, exploding app usage, and improved data speeds firmly cement mobiles
position as a required element of any full-featured marketing campaign. Our mobile estimate for
the United States stands at 50%, with global growth of 40%.


33
Exhibit 2. U.S. and Global Online Advertising Forecast, 2011-15E
Global Online/Mobile Advertising ($B) 2011-2015E
2008 2009 2010 2011A 2012E 2013E 2014E 2015E CAGR
U.S. Internet and Mobile Advertising
Paid Search 10.5 10.7 11.7 14.8 16.5 18.9 21.1 23.4 12.2%
% Growth 19.8% 1.4% 9.0% 26.6% 12.0% 14.0% 12.0% 11.0%
Online Video 0.7 1.0 1.4 1.8 2.3 3.1 4.0 5.0 28.7%
% Growth 126.5% 38.6% 38.1% 28.8% 25.0% 35.0% 30.0% 25.0%
Other Internet 12.2 10.9 12.3 13.6 14.6 16.1 17.8 19.5 9.5%
% Growth 0.9% -10.2% 12.7% 10.0% 7.6% 10.2% 10.5% 9.6%
Mobile 0.2 0.3 0.6 1.6 2.4 3.5 4.9 6.3 41.1%
% Growth 61.9% 52.9% 146.5% 149.0% 50.0% 45.0% 40.0% 30.0%
Total U.S Internet and Mobile 23.6 22.9 26.0 31.7 35.8 41.5 47.7 54.2 14.3%
% Growth 10.9% -3.0% 13.6% 21.9% 12.8% 15.9% 15.1% 13.6%
% Share of Global 42.7% 40.2% 38.9% 38.2% 36.3% 35.9% 35.3% 35.3%
Rest of the World 31.8 34.1 40.9 51.4 62.8 74.0 87.5 99.5 17.9%
% Growth 30.8% 7.5% 19.9% 25.7% 22.0% 17.9% 18.2% 13.7%
% Share of Global 57.3% 59.8% 61.1% 61.8% 63.7% 64.1% 64.7% 64.7%
Global Internet Advertising
Paid Search 24.8 26.8 30.6 37.7 44.5 51.2 58.8 66.5 15.2%
% Growth 28.1% 8.1% 14.4% 23.0% 18.0% 15.0% 15.0% 13.0%
Online Video 1.5 2.3 3.5 5.0 6.5 8.5 11.0 13.8 28.7%
% Growth 91.4% 49.3% 53.8% 45.0% 30.0% 30.0% 30.0% 25.0%
All Other Internet 27.9 26.4 30.3 36.3 41.8 48.1 55.3 60.8 13.7%
% Growth 12.2% -5.3% 14.6% 20.0% 15.0% 15.0% 15.0% 10.0%
Mobile 1.2 1.6 2.6 4.1 5.7 7.7 10.1 12.6 32.4%
% Growth 105.5% 32.6% 61.2% 60.0% 40.0% 35.0% 30.0% 25.0%
Total Global Internet and Mobile 55.4 57.1 67.0 83.2 98.5 115.4 135.2 153.6 16.6%
% Growth 21.5% 3.0% 17.4% 24.2% 18.5% 17.2% 17.1% 13.6%

Source: MagnaGlobal, Wells Fargo Securities, LLC estimates


For Internet companies, investors have historically focused EV/EBITDA (excludes equity stock
comps and one-time items) multiples as a valuation tool of choice. Currently, small and midcap
internet companies are trading at 8x 2012 consensus EV/EBITDA and 7x 2013 consensus
EV/EBITDA, both multiples in-line with peer historical average. However, large-cap
Internet companies (EBAY, AMZN, GOOG, PCLN) are currently trading at 16x consensus 2012
EV/EBITDA, mainly driven by investors' elevated expectations of the sectors growth prospects.


34

CASE STUDYVelti plc (VELT)

Company Description: Velti is a leading global provider of mobile marketing and advertising
technology and solutions that enable brands, advertising agencies, mobile operators and media to
implement highly targeted, interactive and measurable campaigns by communicating with and
engaging consumers via their mobile devices.

We believe the mobile channel is just scratching the surface of its potential
Alex Moukas, CEO, March 12, 2012

Mobile marketings moment has arrived. Neither the consumption of graphical content nor the
concept of marketing on mobile devices is new. Yet we agree with CEO Moukas that the mobile
advertising and mobile landscape stands poised to be the fastest-growing segment across the
marketing ecosystem over the next five years. Fueled by substantial advancements in data delivery
speeds, device functionality and application development, the mobile devicein an increasing array of
form factorsis becoming a central design and operating feature across a wide array of industries.

Mobile is transforming a wide array of businesses. Online content producers like AOL and
Yahoo! are adopting mobile first development initiatives in preparation for the day when mobile
devices overtake deskbound PCs as users first-look device. Traditional media publishers like the
Wall Street Journal and The New York Times have aggressively embraced mobile channel
distribution at the demand of their customer bases. Even established brick-and-mortar industries
like film exhibitors are embracing mobile in their quest to improve their customer experience.
Elsewhere, wireless carriers and banks are discovering the efficiencies of conducting customer
relationship management information exchanges via text messages rather than call centers.

Velti provides an end-to-end solution. It is against the backdrop of this dynamic ecosystem that
Velti operates as one of the worlds leading end-to-end mobile advertising and marketing service
software providers. We believe Velti rises above a crowded competitive marketplace due to the range
of capabilities the company offers. For a growing number of marketers, participation in mobile
advertising has become a necessity as the influence of smartphone and connected tablets has radically
altered the media consumption experience. Veltis suite of products help marketers and their agencies
design and implement a wide range of mobile advertising and marketing programs.

Founded in Greece in 2000, Veltis ambition from the outset was to build a global platform. Today,
Europe accounts for the majority of revenue, but the United States and U.K. are the largest country
contributors. The companys footprint now extends to every major continent. Among the companys
more recent acquisitions is CASEE, Chinas largest mobile advertising exchange. Veltis products
address the full lifecycle of a robust mobile marketing campaign, including the following:

Mobile application and website development
Operating system and mobile email optimization
Media planning/buying platform
Ad-serving to mobile apps and mobile web
Campaign management platform
Post-click tracking/optimization
Opt-in database management/messaging
Data & analytics

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A SaaS revenue model with pay-for-performance elements. Veltis products are sold
primarily on a SaaS model. Experienced mobile marketers can use Veltis tools to develop, deploy
and track their own campaigns. But for many of Veltis customers, pay-for-performance models
provide an additional revenue stream. Under this model, Veltis customers engage the company to
deliver agreed-upon performance metrics such as software downloads, car dealership visitors, or
database opt-ins, where Velti uses its access to mobile media inventory, deep data, and optimization
tools to efficiently deliver specific advertiser results.

From a sales perspective, Velti currently sources roughly 40% of sales through indirect channels.
Prime among indirect sources are the worlds largest advertising agency holding companies. We
expect agency channels to increase share of revenues as Velti strikes platform sales agreements,
allowing agencies to leverage suite of Velti tools across installed client base, reducing outsourcing
and creating an additional revenue line.

We see parallels with early days of web marketing. When we assess the mobile marketing
landscape, we see many parallels with the early days of Internet-connected PCs and web browsers,
when marketers rushed headlong into a world with an entirely new communication platform.
Mobile phones may not be new, but the rising primacy of mobile-connected devices offered in an
expanding array of form factors has forever changed (again) the dynamics of the marketing
industry. With a full suite of services and emerging global reach, we view Velti as well positioned to
profit from the maturation of the mobile marketing ecosystem.


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37

TECHNOLOGY
Internet Infrastructure
Gray Powell, CFA
[email protected]
212/214-8048

Internet Infrastructure 101

Internet infrastructure is the collection of networks, both big and small, that connect together in
many different ways to form the single entity that we know as the Internet. There are a number of
ways that companies can run their Internet infrastructure, from do-it-yourself solutions (either
putting servers in a closet or building their own data centers), to leasing wholesale data center space
from REITs, leasing network-neutral space from providers, such as Equinix, to completely
outsourcing all infrastructure needs to managed hosting providers, such as Rackspace. The key
elements in the Internet infrastructure space follow.

In-Sourcing: Google, Yahoo, and Amazon. In many cases large corporations choose to own
their data center space for large server deployments. The decision faced by companies that in-
source is whether it is more cost efficient to lever the balance sheet and build their facilities or
outsource to a wholesale REIT and make contractual rent payments. Roughly speaking, 80-85% of
worldwide server deployments are in company-owned data centers currently.

Wholesale REITs: Digital Realty Trust, DuPont Fabros, CoreSites, i/o Data Centers,
Vantage Data Centers, etc. Wholesale data centers represent the most basic layer of outsourcing
IT equipment. These companies are not involved in the day-to-day operations of running a data
center. Instead they lease space and power at wholesale rates for large deployments an average of
2 megawatts, which equate to 500 cabinets or 12,500 net sellable sqare feet. Wholesale facilities
appeal to larger enterprise server deployments with less focus on connectivity mainly because it
allows the enterprise to take its data center investment off balance sheet and lever the lower cost
structure of the wholesale data center provider. Sometimes wholesale providers sell space to other
data center companies. For example, Digital Realty Trust leases space to Savvis and Equinix.

Carrier-Owned: AT&T, Verizon, Level 3 Communications, Qwest, Cincinnati Bell, and
Cogent. Those facilities have limited transport options as the carrier operator is the only transport
provider available.

Network-Neutral Data Centers: Equinix, Switch & Data Facilities, Telecity Group PLC,
and Global Switch. These companies primarily provide colocation and interconnect services. As a
secondary (i.e., less than 5% of revenue) source, they provide managed IT services. What
differentiates the network-neutral model is the fact that its customers have a number of choices for
transport from third-party providers located within the facility. In addition, customers are typically
attracted to the facility because there are a number of customers with whom they can exchange
traffic and therefore create additional savings on transport costs. Typical customers deployments
are smaller in scalenormally 60 kilowatts, 15 cabinets, or 375 net sellable square feet. Deal sizes
generally range from 20-200 KW.

Managed Service Providers: Amazon AWS, Rackspace, SoftLayer, IBM, CenturyLink/
Savvis, Verizon Business/Terremark, and Fujitsu. Managed service providers provide
complete outsourcing solutions for IT infrastructure needs. The customer literally never needs to
see the inside of a data center and is literally renting space or computing power on servers owned by
the managed hosting provider to run web-based applications. Managed service providers focus on a
broader service offeringsuch as security, monitoring, back-up, storage, network and load
balancing, and various IT-related functions. This provides the operator with greater flexibility to
increase same-customer revenue by up-selling additional services.


38
Exhibit 1 outlines the primary players and capabilities within the sector.

Exhibit 1. Internet InfrastructureHosting Competition
IT Shared Dedicated Managed Cloud
Company Outsourcing Colocation Hosting Hosting Hosting Hosting SaaS
Amazon X
AT&T X X X X X
CenturyLink / SAVVIS Inc X X X X
CSC X X X X
Equinix X
Google X X
IBM X X X
InterNAP Network Services X X X X X
InterXion X
Joyent X
Layered Tech X X X X
Media Temple X X X
NaviSite X X X X
OpSource X X
QualityTech X X
Rackspace X X X X
ServerPath X X X
SoftLayer / The Planet X X X X
SunGard X X
Verizon / Terremark X X X X X

Source: Company reports and Wells Fargo Securities, LLC estimates

Key Themes

Data Center And Managed Hosting/Cloud Business Models Reduce Enterprise IT
Infrastructure Costs. We believe that data center and managed hosting companies exhibit defensive
characteristics because they allow their customers to reduce IT infrastructure costs versus do-it-
yourself (DIY) solutions. In short, colocation providers enable customers to gain access to cheaper
power and floor space while managed hosting/cloud providers enable companies to meaningfully
reduce upfront capital expenditures on server infrastructure and reduce IT maintenance costs.

On the colocation side, both wholesale and retail providers are able to purchase power at wholesale
rates from utilities as 25-35% discounts to the retail rates that individuals or normal businesses
typically pay. In addition, data center companies allow business to arbitrage higher-cost office space
with lower-cost warehouse space. Specifically, the cost per square foot to store a group of servers in a
data center in New Jersey is likely much cheaper than the cost of office space in Manhattan.
Furthermore, network-neutral providers such Equinix, InterXion, and Telex offer customers multiple
telecom network options to transport bandwidth. As an example, some Equinix facilities have 200
networks to chose from. This essentially creates a marketplace that attracts customers that require low
latency to facilities. In addition, customers have the ability to bid network providers against each other
in neutral facilities, which can result in cost savings on bandwidth in excess of 25%.

Moving up the stack, managed hosting and cloud services offers additional potential cost savings.
One of the primary advantages of outsourcing to a managed hosting or cloud provider is the ability
to save on the often large upfront cost of purchasing servers for an often unknown or difficult-to-
predict level of customer demand and turn that capital expense into a scalable rental expense that
more closely matches actual demand and usage. On the pure infrastructure side, cloud
environments such as Amazon's AWS service can save customers in excess of 65% versus the cost of
colocation depending on the type of workload. Managed hosting providers such as Rackspace
differentiate by offering customer support in addition to outsourced IT infrastructure. In addition
to save a customer on the cost of purchasing and running their server infrastructure, Rackspace
essentially allows customers to outsource the bulk of their IT department. As a result, companies
outsourcing with managed hosting providers like Rackspace generally save between 35-50% of their
total cost of purchasing and running their own infrastructure. The combination of services is
particularly attractive during times of economic volatility because companies are able to avoid large
upfront capital expenditures, more closely match server capacity to customer demand, and reduce
head count costs while retaining quality of service.

39
Strong Internet traffic growth drives data center demand. Growth in Internet traffic is
expected to remain very strong during the next four years. According to Ciscos Visual Networking
index, total worldwide IP traffic should grow at a 30% CAGR from 2011-15, driven by fixed Internet,
managed IP, and mobile traffic growth. Growth in North America should also remain robust, at a
22% CAGR. This should result in a need for improved IT infrastructure capacity and network
bandwidth, which in turn drives growth in outsourcing to data centers.

Exhibit 2. Cisco Global IP Traffic Growth Estimates: 2009-2014

Petabytes (PB) Per Month CAGR
2009 2010 2011 2012 2013 2014 2015 2011 - 2015E
Internet 10,942 14,955 20,650 27,434 35,879 46,290 59,354 30%
Managed IP 3,652 4,989 6,839 9,014 11,352 13,189 14,848 21%
Mobile Data 91 237 546 1,163 2,198 3,806 6,254 84%
Total 14,685 20,181 28,035 37,611 49,429 63,285 80,456 30%
Yr/Yr Growth 37% 39% 34% 31% 28% 27%

Source: Cisco Visual Networking Index, 2011

Migration to third-party environments creates attractive growth opportunity. We
believe that a shift from on premise IT infrastructure in company-owned data centers to third-party
data center facilities and managed hosting/cloud environments will drive strong growth in the
Internet infrastructure space over the next five years.

On the colocation sideroughly 80-85% of server deployments are in company-controlled
facilities, while only 15-20% are in third-party facilities. Based on discussions with industry
contacts, we believe this should move to around 40% over the next five years. This would
basically drive a mid- to high-teens average growth rate for the colocation space. This is roughly
in line with average growth rates that we are observing for data center companies currently.
Specifically, companies exhibit a same-store-sales growth rate in the low double digits. For
example, we estimate a same-store-sales growth rate for Equinix EQIX at closer to 15%toward
the high end of peerswhile Digital Realty (DLR) is closer to 8%. However, data center
expansion initiatives move the growth rate for EQIX up to almost 19% and Street estimates
show DLR growing 13% in 2012, which is in line with our longer-term industry forecasts.

In terms of managed hosting and cloud providerswe estimate that only 2% of
workloads are preformed in managed hosting/cloud environments currently. While a large
portion of workloads will likely remain on company-owned and controlled infrastructure, we
could easily see the market for managed hosting and cloud account for 10% of server
deployments in 510 years, which would support a 20% average annual revenue growth rate for
the sector longer term. While numbers from various industry research firms differ on the
absolute size of each marketgenerally speaking the managed hosting market exhibits 15-20%
annual revenue growth. Additionally, companies like AMZN and RAX are exhibiting cloud
computing revenue growth in excess of 80%.


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Within the Internet infrastructure space, we believe investors view the data center sector like the
tower sector within the telecommunication services space, while investors view managed hosting
and cloud companies as more closely correlated to software-as-a-service providers. Historically,
both sectors have exhibited relatively high capital intensity with capex in excess of 50% of revenue.
However, in steady states, we believe the return profiles are very attractive, which merits above-
average valuations.

We believe the long-term ROIC profile of the data center space is attractive. We estimate that true
recurring capex for a data center is in the high-single to low-double-digit range depending on the
assumptions for the useful life of the asset. This translates into a roughly 20% pretax/12% fully
taxed ROIC for a data center. Given that data centers can be structured as REITS and companies
are becoming more focused on generating positive FCF (e.g., Equinix), investors have starting
looking at data centers in terms of total returns and giving the sector credit for higher terminal
multiples. As a result, data center pure plays are now trading at 10-12x 2012 estimated EV/EBITDA
versus a range of 8-10x since mid-2009. We continue to view valuations as attractive because data
centers REITs trade at 15-16x EBITDA and towers trade at about 18x 2012E EBITDA.

We admit stocks with managed hosting and cloud exposure exhibit relative high multiples. For
example, RAX currently trades at roughly 18.0x 2012E/about 13.5x 2013E EBITDA. However, with
strong secular growth, higher ROICs, and M&A over the last 18 months (i.e., Verizon/Terremark
and Centurylink/Savvis), we believe an investment case can easily be made to support premium
valuations. Specifically, we think that managed hosting and cloud pure plays should exhibit in
excess of 20% revenue growth for the next 35 years as more companies outsource their IT
infrastructure. While managed hosting exhibits an ROIC in the 20% range currently with recurring
capex likely in the low- to mid-teenscloud computing theoretically exhibits an ROIC of 50+% with
recurring in midsingle digits. Thus, as more workloads move to cloud environments capital
intensity should improve and returns should scale. Longer term, the business model looks more
similar to software as a service companies, which trade at 2530+x 2012E EBITDA. As a result, we
think stocks with managed hosting/cloud exposure will continue to merit premium valuations.

CASE STUDYEquinix, Inc.

Company Description: Equinix is a leading global provider of network-neutral data center and
interconnection services, offering colocation, traffic exchange and outsourced IT infrastructure
solutions for global enterprises, content companies, systems integrators and network service.
Equinix (IBX) centers serve as critical, core hubs for IP networks and Internet operations
worldwide. With IBX centers located in 38 strategic markets across the Americas, EMEA and Asia-
Pacific, Equinix enables customers to operate their mission-critical infrastructure on a global basis.

As the Internet continues to scale, the global data center market remains as dynamic as ever. Trends such as
mobility, cloud computing, data management, and social media are at the heart of this shift. There are more
people interacting with data than ever before, and the world's effective capacity to exchange information
through telecommunications network is predicted to reach approximately 670 exabytes annually in 2013.

Steven Smith, CEO, April 25, 2012

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Derivative play on Internet traffic growth. Clearly growth in Internet and IP traffic remains
very strong, driven by online HD video adoption, cloud computing, new devices such as the iPad,
growth in mobile entertainment, the introduction of wireless 4G networks capable of 10 Mbps
downloads, and a host of other factors. In fact, Streaming Media surveyed over 800 CDN customers
and the insights on traffic expectations were impressive. Companies spending in excess of
$500,000 per year expect traffic to increase 127% in 2012 from 2011 while smaller companies
expect traffic to increase between 50-75%. We believe that EQIX is a safe derivative play on this
trend as growth of Internet traffic creates demand for servers and telecom infrastructure, which
ultimately resides in data centers such as those owned by EQIX. Furthermore, we think EQIX
stands to disproportionately benefit from this trend relative to other data center providers as their
business focus is differentiated by offering network density and proximity to major markets which
attracts customers focused on latency-sensitive deployments.

Neutral arms dealer to cloud infrastructure providers. We view EQIX as a relatively safe
derivative play on the trend to the outsourcing of IT infrastructure to third-party cloud
environments. While EQIX does not run its own cloud platform, the company provides highly
connected physical infrastructure to support cloud deployments. As an example, companies like
Amazon, Rackspace, Softlayer, and Carpathia all have some server deployments in EQIX facilities.
While IT services and cloud providers only represent 24% of EQIX revenue, it is one of EQIXs
fastest growing verticals. In addition, given that many enterprises want to have hybrid hosting
environments with both dedicated infrastructure and cloud, we think the cloud ecosystem could
help EQIX realize improved growth in its enterprise segment (about 10% of revenue), where growth
has historically lagged.

Network density creates strong demand from customers with latency-sensitive
applications. In comparison to normal data centers with only 1-5 network options, EQIX facilities
offer connectivity to 100200 telecom networks and offers access to 90% of the worlds Internet
traffic routes. This makes EQIX facilities extremely attractive for customers deploying latency-
sensitive applications. As a result, EQIX has a very dense financial vertical with trading platforms
like Direct Edge, ISE, and Chi X. In addition, EQIX has many content and digital media customers,
such as Netflix, Zynga, and Hulu. All of these companies rely on EQIX due to their telecom density
and proximity to major markets, which helps drive higher performance on trading, video, gaming,
mobile, and other latency-sensitive applications.

Portfolio depth and retail focus creates high barrier to entry. With 90+ data centers in 38
markets, 4 continents, and 11 countries, EQIX has the broadest portfolio of any colocation provider.
This, combined with its retail focus and network density, creates a very high barrier to entry for
EQIXs business model. While many investors often express concern on wholesale capacity and
pricing, we believe that EQIX is insulated from competition related to this segment. No other
colocation provider can help customers deploy globally as EQIX can with using agreements for
partner facilities internationally. Additionally, EQIXs economics of smaller retail deployments in
multiple locations would be very difficult for a wholesale player to replicate. EQIXs typical
customer has 15 cabinets in 4 markets, or on average 4 cabinets per location. This compares to the
typical wholesale provider customer, which has roughly 250 cabinets, all in one location. In
addition, EQIX provides services such as help with the installation of customer gear, 24/7 remote
monitoring, and customer support. Other wholesale providers purely provide access to raw space
and power. From a business model perspective, we simply do not believe that the retail economics
of EQIXs business model would support a wholesale provider. This is because a wholesale provider
such as Digital Realty or DuPont Fabros would need to increase headcount by a factor of 35x in
order to support smaller retail deployments in multiple locations like EQIX does. If wholesale
providers attempted this strategy, they would not be able to maintain the 60% EBITDA margin they
currently enjoy while offering service at a about 30% discount to EQIX. As a result, we think EQIXs
business model exhibits fairly high barriers to entry.

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43

TECHNOLOGY
Communications Hardware
Jess L. Lubert, CFA
[email protected]
212/214-5013

What is Wireline Equipment And Data Networking?

The wireline equipment and data networking industry encompasses a wide range of technologies
that enable users to send and receive voice, video, and data communications over a physical
connection. Users leverage wireline and data networking products every time they place a phone
call, send an email, or go to a website. While there are many different product categories in the
wireline equipment and data networking space, some of the more significant verticals include:

Ethernet Switching (roughly $21 billion): These products are used to support data
communications within an independent location, such as a corporate office in a building.
Typically users PCs are connected to an Ethernet switch, which then forwards information back
and forth between the users within that physical location.

IP Routing (roughly $15 billion): These products are used to send information between
independent locations, such as buildings. Routers are essentially the post office of the network,
with data carried in IP packets (analogous to envelopes), which are forwarded to their
destination based on their IP address (analogous to a mailing address).

Optical (roughly $14 billion): These products encode voice, video and data
communications onto wavelengths of light, which are then sent over optical fiber from one
location to another. Optical products provide the physical medium used to connect distant
locations at very high speeds. Optical products are analogous to the highway system with each
wavelength of light similar to a lane on the highway that connects one destination to another.

Voice infrastructure (roughly $30 billion): These products enable users to pick up a
phone, establish a connection, and make a call. Enterprise companies typically leverage on-
premise voice infrastructure (known as PBXs) to cost effectively provide local and long distance
voice connectivity. Meanwhile, residential users typically connect directly to a carriers
switching infrastructure.

Video conferencing technology (roughly $4 billion): These products include desktop,
conference room, and high-end Telepresence endpoints, which can facilitate real-time, high-
quality video communication across a network. The video conferencing market also includes
network infrastructure (known as MCUs) products, which enable large enterprise customers to
connect, manage and secure various video endpoints.

Wireless LAN (roughly $5 billion): These products enable users to connect to enterprise and
carrier networks without a physical connection. These products are seeing strong demand as
users become more mobile and increasingly adopt smart phone and tablet-based form factors.

44
Exhibit 1. Data Networking Diagram
Internet
Thelayer 3switchreceives
communication
betweenthecaller
andthecalled
party. Softwareon
theproduct
performscall
routing, caller ID,
andensuresquality
of service.
communication
betweenthecaller
andthecalled
party. Softwareon
performscall
routing, caller ID,
andensuresquality
Headquarters
Branch
Wide Area Network (WAN)
IP Phones Workstations
Telepresence
Database
Blade Servers
IP PBX
Web Server Farm
L2/L3 Ethernet Switch
Access Edge Router
Access Edge Router
SAN/FCOE Switch
Access Edge Router
Application
Delivery
Controller
Access Edge Router
Firewall
L2 Ethernet Switch
Datacenter
Internet
communication
betweenthecaller
andthecalled
party. Softwareon
theproduct
performscall
routing, caller ID,
andensuresquality
of service.
communication
betweenthecaller
andthecalled
party. Softwareon
performscall
routing, caller ID,
andensuresquality
Headquarters
Branch
Telepresence
Database
Blade Servers
IP PBX
Web Server Farm
Access Edge Router
Access Edge Router
SAN/FCOE Switch
Access Edge Router
Application
Delivery
Controller
Access Edge Router
Firewall
L2 Ethernet Switch
Datacenter
Internet
communication
betweenthecaller
andthecalled
party. Softwareon
theproduct
performscall
routing, caller ID,
andensuresquality
of service.
communication
betweenthecaller
andthecalled
party. Softwareon
performscall
routing, caller ID,
andensuresquality
Headquarters
Branch
Telepresence
Database
Blade Servers
IP PBX
Web Server Farm
Access Edge Router
Access Edge Router
SAN/FCOE Switch
Access Edge Router
Application
Delivery
Controller
Access Edge Router
Firewall
L2 Ethernet Switch
Datacenter


Key Themes

There are a number of significant trends taking place within the wireline equipment and data
networking markets. Some of the more important trends include the following:

The transition from TDM to IP-based communications. Historically, networks were
designed to carry voice traffic over dedicated TDM circuits, which provide guaranteed bandwidth
between a caller and called party, regardless of whether either party was speaking. Unused
bandwidth on a circuit could not be allocated to another party. While this was an efficient means for
carrying predictable low-bandwidth voice traffic, it was highly inefficient for carrying bandwidth-
intensive and often unpredictable data traffic. Data communications leverages the IP protocol,
which segments information into variable length IP packets. Each individual packet is sent on a
best-efforts basis. IP equipment does not reserve bandwidth for any individual call or
communication stream, but rather utilizes all available bandwidth on any given link, which provides
superior network utilization as compared to circuit-switched alternatives, as all free capacity is
available for use. Considering data now represent the vast majority of traffic on todays networks
and the increased efficiency associated with IP versus circuit-switched technologies, there is an
ongoing shift of spending away from legacy circuit-switched technologies toward next-generation IP
technologies. Many of our covered companies such as Cisco, Acme Packet, and Juniper are key
beneficiaries of the transition from TDM to IP-based communications.

The need to manage explosive network traffic growth. According to Ciscos Visual
Networking index, network traffic is expected to grow at a compound annual growth rate of 32%
over the next five years. This is placing tremendous strain on todays service provider networks. In
order to better manage this explosive growth, carriers are implementing new network architectures
at both the network edge and core. Some of the wireline equipment and data networking
technologies that are likely to benefit from this carrier trend include edge and core routers, carrier
Ethernet switches, and optical transport platforms. Explosive traffic growth is also taking place
within the enterprise, particularly within data center environments. In order to manage growth,
enterprise IT teams are deploying Ethernet fabrics, application delivery controllers, and WAN
optimization solutions. We believe Cisco, F5, Ciena, Juniper, and Riverbed are likely to benefit most
from explosive traffic growth.

45
Exhibit 2. Ciscos Visual Networking IndexIP Traffic, 2010-15 (published June 2011)
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
2010 2011 2012 2013 2014 2015
P
B

p
e
r

M
o
n
t
h
Fixed Internet Managed IP Mobile Data

Note: Ciscos VNI: Global Mobile Data Traffic Forecast Update (published February 2012) suggests this
category will deliver 78% CAGR over the 2011-16 time period.
Source: Cisco Systems, Inc. and Wells Fargo Securities, LLC

The shift to the cloud. We believe the emergence of cloud computing is an important trend with
material implications for wireline equipment and data networking vendors. We define cloud
computing as the ability to enable any authorized person access to a pool of IT resources at any time
from any location. Currently most companies maintain their own private clouds (resources owned
and managed by the company). But we expect companies to increasingly outsource some (hybrid
cloud) if not all (public cloud) of their IT resources to third-party providers over time given the
substantial savings that can be achieved. We believe the wireline equipment and data networking
sector is likely to benefit from the buildout of infrastructure to support public, private, and hybrid
clouds. We believe Cisco, F5, Ciena, Juniper, and Riverbed are likely to benefit most from the
adoption of cloud computing.

The transition from voice to video communications. We believe video is becoming an
increasingly important communication tool within the enterprise workplace. Originally we believe
video was largely used as a technology that could help companies reduce cost via corporate travel.
However, we believe companies are increasingly recognizing the significant productivity gains and
opportunity cost benefits that can be realized through video collaboration. Significant
improvements in product quality and ease of use have also strengthened enterprise interest in video
adoption. Finally, with many consumers leveraging free-to-use technologies such as Apple Facetime
and Skype, we think society is becoming increasingly comfortable with video communications,
which may further accelerate enterprise video adoption. We believe Polycom maintains the most
direct exposure to enterprise video adoption, although Cisco is also a strong competitor in this
market.

The desire to be mobile and bring your own device. Given the proliferation of smartphones
and tablet devices, the work force is becoming increasingly mobile and maintains a growing desire
to disconnect from the wired network. This is driving strong demand for 802.11x solutions that
extend the corporate network to authorized users via a wireless signal. While these products often
complement wired Ethernet networks, we believe wireless LAN technologies offer a cheaper and
more-efficient way to scale enterprise bandwidth requirements and subsequently may reduce
demand for campus Ethernet deployments. We believe Aruba maintains the most direct exposure to
wireless LAN adoption, although Cisco and Juniper also compete in this market.

46

Wireline equipment and data networking stocks have historically been valued based on PE
multiples, which are most heavily influenced by growth and margins. High-growth networking
vendors often trade at 20-25x estimates, while slower-growth peers may see single-digit multiples.
Price-to-sales valuation techniques continue to be used for early stage start ups and companies that
maintain limited profitability. We note that during periods of economic expansion and end market
growth that multiples are often applied to earnings for the out year, with shares typically trading at
a premium to the S&P 500. Conversely during periods of economic contraction and slower industry
growth that timelines collapse and valuation multiples may be applied to current-year earnings,
with multiples approaching those applied to the S&P 500.

Exhibit 3. Data Networking Sector Forward P/E Multiple Versus S&P 500 Index
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
S
e
p
-
0
7
D
e
c
-
0
7
M
a
r
-
0
8
J
u
n
-
0
8
S
e
p
-
0
8
D
e
c
-
0
8
M
a
r
-
0
9
J
u
n
-
0
9
S
e
p
-
0
9
D
e
c
-
0
9
M
a
r
-
1
0
J
u
n
-
1
0
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
S
e
p
-
1
1
D
e
c
-
1
1
M
a
r
-
1
2
S&P 500
Data Networking

Source: FactSet, Wells Fargo Securities, LLC, estimates


47

TECHNOLOGY
Transaction Processing
Timothy Willli
[email protected]
314/955-4404

Transaction Processing Defined
Transaction processing is the facilitation of electronic payments, such as credit and
debit card transactions. For these transactions, there are three essential roles companies in our
universe play: (1) a network (e.g., Visa and Mastercard) provides the technological infrastructure for
issuers and merchants (or entities acting on their behalf) to complete a transaction; (2) a merchant
acquirer (processore.g., Vantiv, Global Payments Heartland Payment Systems, and Total System
Services) acts on behalf of a merchant to complete a transaction by communicating with the issuer
(or an entity acting on its behalf) over a network; and (3) an issuer processor (e.g., Total System
Services and Vantiv) acts on behalf of the issuer to complete a transaction by communicating with
the merchant acquirer (processor) over a network.

Transaction processing companies typically generate revenue based on dollar- or transaction
volume processed. Given less developed economies and technology infrastructures in emerging
markets, cash and checks still represent a significant percentage of transactions. In our view, this
should result in strong credit and debit dollar and transaction volume growth over at least the next
several years, presenting opportunities for companies in our universe with a presence in Asia
Pacific, Latin America, the Middle East, and Africa.

Key Themes
We believe that payments and transaction processing are at one of the most critical
points in the 12 years that we have covered the industry as a variety of factors are coming
together that will not only affect that fundamentals of established players but also the
lens through which investors view the industry. Ultimately, we believe that the industry remains
an attractive investment vehicle though we would argue that there is likely to be more noise associated
with the industry for 2 reasons; (1) The story of the industry is increasingly being driven by international
expansion and the various geo-political backdrops are going to affect the industry and share prices.
(2) A wave of innovation is sweeping through the industry and will likely continue for the next several
years. Nevertheless, we believe the financial characteristics and growth of the global transaction
processing industry will still generate attractive returns over a long-term time frame.

Technology, particularly mobility is reshaping the purchasing and payment experience
like at no other time. There are a variety of dynamics taking place with mobile and the mobile
Internet that will change the way that a consumer shops and pays for goods and services. There tends
to be some initial reaction that the evolution of technology is going to create a whole new set of
competitive forces in the payments industry to challenge the incumbents. While this is a logical
reaction, we are increasingly believers that what mobile is going to do is create a variety of new players
and product offerings that will surround the actual payment for goods and services both before and
after a transaction to the benefit of the consumer and the merchant. Specifically, we point to the
expected growth of mobile marketing where consumers could receive highly targeted
advertisements/coupons/rebates to drive their purchasing decision or the tools that are being
developed that help them search and locate goods and services. All of these are what we would
describe as influencing the purchase decision. On the flip side, merchants will be provided with an
ever increasing array of tools to leverage the data inherent in the transactional histories of consumers
to better understand how to engage a customer but also better understand the performance of their
own businesses. Many of the entrenched players such as the payment networks, banks and processors
are in a role to provide these types of services while the digital marketing and analytical companies
also have an opportunity to insert themselves into the purchasing/payment experience. In the
emerging markets we believe that mobile technology can drive the adoption curve of payment
acceptance by accelerating the places where consumers can utilize electronic payments.

48
Growth remains attractive, though the U.S. market is maturing, placing greater
reliance on emerging markets for organic growth. In our opinion, we have crossed into a
new phase where drivers of growth will be more driven by the international markets while the US
becomes a more mature market. After a 15-20 year run of electronic payments aggressively taking
share away from paper-based payments the US payments industry is set to grow at a more
moderate rate. As seen in figures #1 -2 the growth rate of payments is expected to remain around
7% credit being in the low-to-mid single digits due to a cyclical rebound while debit is expected to
slow to the low double-digits. Overall, we believe that credit is likely to be a low single-digit grower
and debit/pre-paid will be able to drive a low double-digit growth rate for the next several years in
the United States. However, as a result of the inevitable slowdown in U.S. growth rates, the players
in the payments food chain are increasingly going to turn to international markets to drive
transaction growth. While the opportunity is clearly obvious when looking at the statistics in
various regions of the world such as Latin America or Asia, there are still investments that need to
be made and in many cases partnerships that have to be formed, which may limit the trajectory of
what seems to be a very obvious opportunity for transaction and volume growth. That being said,
we are 7-8 years into the international learning curve and believe that in the next 2-3 years we will
see companies make notable strides developing a profit stream that is increasingly driven by
international growth.

Exhibit 1. Worldwide Payment Volume Mix, 2010 and 2015E

2010 - $7.831 Trillion
MEA
2%
U.S. Debit
18%
U.S. Credit
24%
Latin America
6%
Europe
26%
Asia Pacific
18%
Canada
6%
2015E - $13.189 Trillion
MEA
3%
U.S. Debit
17%
U.S. Credit
19%
Latin America
7%
Europe
27%
Asia Pacific
22%
Canada
5%

Note: General purpose cards, excluding China Union Pay
Source: Company reports, The Nilson Report, and Wells Fargo Securities, LLC estimates

Exhibit 2. Payment Volume CAGR by Geographic Region, 2005-2010 and 2010-2015E
3%
15%
7%
17%
10%
17%
24%
11%
14%
11%
6%
10%
7%
16%
7%
19%
17%
12%
13%
11%
0%
5%
10%
15%
20%
25%
30%
U.S. Credit U.S. Debit U.S. Asia Pacific Canada MEA Latin America Europe International Worldwide
'05-'10 CAGR '10-'15 CAGR (Est)

Note: General purpose cards, excluding China Union Pay
Source: Company reports, The Nilson Report, and Wells Fargo Securities, LLC estimates


49
Government intervention has been inserted into the discussion. With the implementation
of the Durbin amendment, it is our opinion that the payments industry in certain respects will be
more closely watched by government and regulatory bodies, which will likely try to make their
presence known on topics such as pricing structure and market power. Outside of the United States
there is also a fair amount of government presence whether that be disputes over cross-border fees in
the EU, regulating interchange (as is the case in Australia and parts of Europe) or governments trying
to control more of the payment infrastructure such as in China with China Union Pay (CUP) and other
governments that are trying to take a bit more active role in domestic payment networks. Ultimately
we believe the payment networks and those in the food chain can survive though the legacy economics
that are inherent in the US model are likely to be challenged as governments will be more inclined to
try and take some control in concert with advancements in technology that will enable a larger set of
potential competitors to play in emerging markets as those markets evolve.


Capital deployment will continue to increasingly factor into the valuation creation
equation. Historically, the payments industry has been one that has been characterized by margin
expansion, no balance sheet leverage, and copious amounts of free cash flow. However, as the
industry has matured and organic growth rates have moderated, the allocation of capital is figuring
more into the equation as opposed to during the prior phases of the industry life cycle when strong
EPS growth alone was the major driver of shareholder value creation. We look for investors to be
more discerning among the names in our universe and try to understand who is allocating capital
efficiently among various geographies, (i.e., taking capital out of the maturing United States and
investing in emerging markets), partnerships and acquisitions. We also look for companies to
continue to be diligent about share buyback, and we look for dividend payout ratios to move higher.
We point to names in our universe like JKHY, TSS, WU, and V as companies that are very actively
returning capital to their shareholders.

Exhibit 3. Dividend Growth and Payout Ratios

Year Average Median Average Median
2005 27% 22%
2006 27% 21%
2007 15% 20% 23% 21%
2008 17% 11% 26% 21%
2009 0% 0% 23% 13%
2010 33% 0% 26% 15%
2011 37% 8% 26% 17%
Year-Over-Year Growh Payout Ratio

Source: FactSet, company reports, and Wells Fargo Securities, LLC estimates

We look at a variety of valuation yardsticks with the transaction processing
companies. Historically, P/E ratios and the P/E ratio relative to the market were the primary
tools (and most likely still are), but we increasingly sense that investors are using EV-to-EBITDA
ratios (to account for more leverage on balance sheets while a variety of definitions of EPS cloud
that equation). We also look at the PEG ratio.


50
Exhibit 4. Transaction and Business Services Valuation: NTM PE
0
5
10
15
20
25
30
35
40
45
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
NTM PE - Average NTM PE - Median 5-Year Average

Note: Companies include all companies under coverage excluding MGI and VNTV plus CKFR, CEFT, EFD,
FDC, GDOT, ACIW, DST, FISV, ORCC, SDS, HEW, CEN, and NSP
Source: FactSet Research Systems and Wells Fargo Securities, LLC

Exhibit 5. Transaction and Business Services Valuation: Relative P/E Ratio
0.0
0.5
1.0
1.5
2.0
2.5
Relative NTM PE (S&P 500) - Average Relative NTM PE (S&P 500) - Median Historical Average



51
Exhibit 6. Transaction and Business Services Valuation: PEG Ratio
0.0
0.5
1.0
1.5
2.0
2.5
PEG - Average PEG - Median 5-Year Average


Exhibit 7. Transaction and Business Services Valuation: EV/NTM EBITDA
0
3
6
9
12
15
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
EV/NTM EBITDA - Average EV/NTM EBITDA - Median 5-Year Average

Source: FactSet Research Systems and Wells Fargo Securities, LLC.


52
Flow Charts for Payment Transacti ons

Exhibit 8. PIN Debit Transaction Flow
8 Authorization and Settlement Information 7 Authorization and Settlement Information
Network
3 Message 4 Message
Acquiring Processor Issuer Processor
9 Authorization and Settlement Information 2 Message 5 Message 6 Authorization and Settlement Information
POS Terminal Issuing Bank
10 Completed Transaction 1 PIN
Card

Source: FRB Kansas City and Wells Fargo Securities, LLC

Exhibit 9. Signature Debit and Credit Transaction Flow

8 Authorization Information 7 Authorization Information
Network
3 Message 4 Message
Acquiring Processor Issuer Processor
9 Authorization Information 2 Message 5 Message 6 Authorization Information
POS Terminal
10 Completed Transaction 10A Signature 1 Card Swipe
Card
Issuing Bank


Exhibit 10. Settlement for Signature Debit and Credit Transaction: 1 of 2
1 Transaction Info 1 Transaction Info
Processor 2 Net Debit And Credit Processor
Information
Network's Bank
5 ACH 5 ACH
4A Debit Fed 4B Debit Fed
Account For 3 ACH Account For
ACH Credits File ACH Debits
Originated Originated
ACH Operator
Network



53
Exhibit 11. Settlement for Signature Debit and Credit Transaction: 2 of 2
Processor
1 Net Debit And Credit Information
Merchant Processor Clearing Bank Cardholder
5A Post Credit 3A Debit Fed 3A Credit Fed 5B Post Debit
Account For 2 ACH Account For
Member FI ACH Credits File ACH Credits Member FI
4 ACH ACH Operator 4 ACH



54


55

TECHNOLOGY
Information &
Analytic Services
Eric J. Boyer
[email protected]
443/263-6559

What is Information & Analytic Services?

At its core, information & analytic services is the provision of information in
various forms, such as data feeds, databases, reports, and analytical tools that are
often embedded within its customers everyday business processes and decision
making. Information & analytic services stocks are classified together in terms of their
business/financial model but they do not largely compete against each other as the current public
companies serve different end-markets that span most industries. The group is often covered by
investors that focus on business services, technology, or the industry that the company services. We
believe investors are starting to become more aware of the group in part due to the groups
performance, attractive characteristics, and the increasing focus on data and analytics. We believe
Nielsens initial public offering at the beginning of 2011 and its recent secondary has helped to raise
the profile of the space. We also expect McGraw Hills pending separation of its education business
from its financial information business to help as well.

Exhibit 1. Primary Industries Served
Company Ticker Primary Industries Served
CoreLogic CLGX Real estate, financial services, government
CoStar CSGP Commercial real estate
Dun & Bradstreet DNB Financial services, diversified
Equifax EFX Financial services, mortgage
FactSet FDS Capital markets
Gartner IT Information technology departments across all industries
HIS HIS Oil & gas, government defense and security, chemicals, transportation, manufacturing, tech media & telecom
McGraw Hill MHP Capital and commodities markets, education
MSCI MSCI Capital markets
Nielsen NLSN Consumer packaged goods, media/advertising
Solera Holdings SLH Auto insurance and repair
Thomson Reuters TRI Financial services, legal, tax and accounting, intellectual property, science and media markets
Verisk Analytics VRSK P&C insurance, health, mortgage
Source: Company reports and Wells Fargo Securities, LLC

Information & Analytic Services Provider Framework. Information & analytic services
providers have their legacies rooted in traditional publishing and/or news services (Thomson
Reuters, McGraw Hill, Wolters Kluwer, Reed Elsvier), information research (Gartner, Forrester)
and more data-intensive focused providers such as our current coverage (Equifax, IHS, Nielsen,
Solera, and Verisk Analytics). The more data focused Information & Analytic Services providers
often provide products/services using data in which they source from publicly available and/or
proprietary channels. Value-added services are then applied, which can range from simply
organizing the data into different formats to combining data sources, running advanced analytics,
and adding domain knowledge to produce more valuable outputs such as insight, forecasts, and
predictive analysis. The more-common revenue streams that are used to monetize the information
include subscription-based models, software, consulting & advisory services, and alliances.

56
Legacy Rooted In Contributory Models. The more data-intensive information & analytic
services providers have their legacies rooted in serving industries that benefit from a contributory
model where participants in a particular end market provide the data in order to gain better insight
into the industry as a whole. Companies such as IHS (oil & gas), Equifax (consumer credit), Nielsen
(consumer-packaged goods [CPG] retail measurement), Verisk Analytics (P&C insurance), and
Solera (auto insurance) all benefit in part from this type of model. For example, Verisk Analytics
provides information and insight to help the P&C insurance industry measure risk. Individual
insurance providers can measure and price risk much more effectively when armed with how the
entire market is performing compared to just its current customer base.

Exhibit 2. Information Services Provider Framework

Alliances
Revenue streams
Value add
Analytics
Domain
Knowledge
Information
Insight Predictive
Analysis
Subscriptions
Software
Cloud
Consulting
Services
Forecasts
Data
Input
Output
Process
Info
Related
Data
Alliances Alliances
Revenue streams
Value add
Analytics
Domain
Knowledge
Information
Insight Predictive
Analysis
Subscriptions
Software
Cloud
Consulting
Services
Forecasts
Data
Input
Output
Process
Info
Related
Data
Alliances


Key Themes

The value of information continues to increase. The key underlying secular theme that we
believe the group will benefit from is the increasing value of "information" as a competitive
differentiator for businesses as the annual amount of data produced grows exponentially and the
role of analytics increases. Business ecosystems are becoming more complex and competitive. At
the same time, rapid advances in technology have caused a flood of data that managements are
drowning under. IDC estimates that in 2011 the amount of information created and replicated will
surpass 1.8 trillion gigabytes. Technology has enabled data to be produced in a constant stream
from increasing sources such as social interactions, mobile devices, facilities, equipment, R&D,
simulations, and physical infrastructure. In aggregate, IDC defines the aforementioned concept as
Big Data, which when analyzed correctly can provide useful strategic and operational insights into
areas such as user behavior, customer experience, capacity consumption, pricing, fraudulent
activity, and security risks. We believe companies will look to information & analytics services
providers to help them make better decisions through the use of information.


57
Head start in riding the big data and analytics wave. The information & analytic services
providers have been working with and using analytics on large data sets to produce more valuable
information to help with decision making long before the terms big data and analytics reached
hyped status. As such, we believe the group is uniquely positioned to take advantage of these secular
themes to spur development of new information and analytical-based products and services. A
common way information services providers utilize analytics is to provide tools for customers to
drill down into the service providers proprietary data, which can combine information from
multiple databases through complex indexing and join techniques. Increasingly, predictive analytics
are being built to leverage the service providers unique data assets as well as more client specific
data to help predict what will happen. Predictive analytics are being used and offered by Equifax to
help clients acquire new and manage existing customers based on consumer credit information.
Verisk Analytics offers predictive analytics to help customers better price risk and lower costs by
utilizing historical P&C/medical insurance claims, weather, property, and other information.
Equifax, Solera Holding, and VRSK Analytics all use predictive analytics to help detect fraud.
Consumer packaged goods companies are using Nielsens predictive analytics to help with areas
such as growth and demand strategy, pricing, market segmentation, and sales modeling.

Acquisitions are a major part of the model. As mentioned earlier, many of the information &
analytic services providers were formed based on a contributory data model for a specific industry.
Acquisitions and partnerships have been used very successfully and are likely to continue to be used
by information services providers to broaden their reach into new capabilities, geographies,
platforms, and industries. It is often the combination of data assets, domain knowledge, and
analytics within the cross-section of business processes or industries that can come about through
acquisitions and partnerships that provide the most insight and value for customers.

Companies likely will be created, combined, and partnerships forged as a result of the
growth of data. Information & analytic services providers are rapidly expanding their analytics
capabilities to address existing markets and to enter new markets. We expect new players in the space
to emerge that are information providers and or help organizations and governments to improve
specific business processes and make strategic decisions by using analytics. Over time, we believe the
boundary lines between pure-play information services, IT/BPO services, software, and industry-
specific service providers could become blurred as they all compete for customers analytics wallet
share. However, those companies that control proprietary information should command higher
valuations than those that simply provide tools or are focused on company-specific projects, all else
being equal. The value derived from analytics is very much dependent on the input data. As such,
those that control the information could be attractive acquisition targets to other non information &
analytic service providers. We point to last years acquisition of government information services
provider Input by the software company Deltek. However, we believe alliances/partnerships between
the larger information & analytic services providers, software, and or consulting providers are more
viable than large-scale M&A transactions across business types.

Exhibit 3. Data Analytics Being Pursued From Multiple Provider Angles

IT/BPO
Services
Data &
Information
Services
Software
Industry
Process
Specific
Analytics
IT/BPO
Services
Data &
Information
Services
Software
Industry
Process
Specific
Analytics


58

Expect Growth in the High Single Digits With Pockets Much Faster. The information &
analytics services space is not homogeneous so it is hard to forecast an absolute growth rate for the
space as a whole. However, we believe investors can get a sense of the growth potential by looking at
what enterprises are spending on the tools and services to be able to gain better insight from their
own data themselves. We have looked at various forecasts for business intelligence and business
analytics software and services spending. Using those forecasts as a point of reference and looking
at the near-term growth potential of the public information services providers we believe the space
should grow in the high single digits as organizations look to external providers to harness the flood
of data to create information and insight to help them navigate the constantly evolving business
landscape. However, there should be pockets of much faster growth due to vertical specific or
process-oriented dynamics.

Information & Analytic Services: Quality Defensive Growth for Uncertain Times. We
view the information & analytic services space as attractive for investors especially during the
continued market uncertainty due to its longer-term growth profile and somewhat defensive nature.
The characteristics of the model often include the following:

Strong, if not dominant, positioning within end markets. Information services
providers serve a variety of industries with critical information and analytics that are often
embedded within its customers everyday business processes and decision-making. In many
cases the publicly traded information services companies have very strong, if not dominant,
positioning within their largest end-markets.
High degree of revenue visibility due to recurring and or subscription-based
revenue. Information & analytic services companies can have a high percentage of recurring
revenue. Contracts are often subscription-based, which are typically prepaid, or long-term
agreements. Revenue tends to be sticky with renewal rates in the 90% range due to the
information and analytics being embedded within the customers everyday processes and
decision-making.
Resilient organic growth, which remained positive during the downturn and even
better positioned currently. Organic growth for our coverage group during the downturn
remained positive except for Equifax, which is highly levered to consumer credit and where
revenue is more transactional.
High incremental margin due to operating leverage of a build once/resell many
times business model. An information & analytic services business model has inherent
operating leverage leading to high incremental margin. Ideally, a vendor produces information
once and resells it as many times as possible with little to no incremental cost. Companies
continuously add value to existing products and are therefore able to increase pricing, which
often far exceeds the incremental investment.
Free cash flow is a major positive for the group. The inherent leverage of an information
services company allows for strong cash flow generation especially for companies with high
levels of subscription-based revenue as cash is collected up front and minimal incremental
working capital is needed to support revenue growth. The group fared very well during the
downturn in terms of free cash flow generation. Cash flow generation has been mostly used to
fuel acquisitive growth and share buyback, Equifax and Solera Holdings pay dividends, and
Nielsen is paying down debt. We expect acquisitions to be the main use of cash for the
foreseeable future as most companies cite record pipelines for acquisition targets.

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Valuation is never cheap due to the quality financial characteristics of the group.
Investors typically value the group using EV/EBITDA and to a lesser extent price-to-earnings (P/E)
multiples. The groups historical average five-year FY2 EV/EBITDA multiple is approximately 10.0x
with a range of approximately 6.0-13.0x. The groups historical average five-year FY2 P/E multiple
is approximately 18.0x with a range of approximately 11.0x-25.0x.

Exhibit 4. Information Services EV/EBITDA Historical Valuation

Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
6
7
8
9
10
11
12
13
14
Information Services Avg. 5 Yr EV/EBITDA- FY2
Average Line EV/EBITDA FY2

Source: FactSet Research Systems

Exhibit 5. Information Services P/E Historical Valuation

Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
10
12
14
16
18
20
22
24
26
Information Services Avg. 5 Yr P/E - FY2
Price to Earnings FY2 Average Line

Source: FactSet Research Systems

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CASE STUDYNielsen Holdings N.V. (NLSN)

Company Description: Nielsen is a global information and measurement services company that
provides clients with an in-depth understanding of customers and their behavior. Specifically,
Nielsen provides media and marketing information, analytics, and industry expertise about what
customers watch (TV, online, mobile) and what customers buy to help clients strengthen market
positions, identify growth opportunities, and enhance marketing and advertising return on
investment. The company has a presence in approximately 100 countries, is incorporated in the
Netherlands, and is headquartered in New York, New York.

We expect to continue to grow fast within analytics as we root the insights into the basic information
services that we provide.

David Calhoun, CEO, Nielsen, May 7, 2012

CEO David Calhoun has helped to successfully lead the transition of Nielsen from a mostly U.S.-
centric marketing information company to a global information and analytic services powerhouse.
Nielsen, now in approximately 100 countries, provides clients with an in-depth understanding of
customers and their behavior. Specifically, Nielsen provides media and marketing information,
analytics, and industry expertise about what customers buy and what customers watch to help
strengthen market positions, identify growth opportunities, and enhance marketing and advertising
return on investment. Nielsen enjoys very strong market share within its two main end markets
which should continue as CEO Calhoun believes that competitive barriers over the past six years
have actually increased due to the fragmentation of content distribution and the role of big data.

Nielsen Exemplifies the Attractive Investment Characteristics Within High-Quality
Information Services Companies as it enjoys (1) high degree of revenue visibility due to
recurring and/or subscription-based revenue (~70% of revenue committed entering a year);
(2) high incremental margin due to operating leverage of a build once/resell many times business
model; (3) dominant market positioning as a result of unique data assets, scale, and contributory
data relationships; (4) attractive free cash flow characteristics inherent in a subscription-based
model; and (5) attractive top-line growth opportunities for information and analytics.

Consumer Packaged Goods Industry Relies on Nielsen to Lead the Way Into
Developing Markets. Nielsens Buy segment provides retail market share data, which is the
means by which large consumer packaged goods (CPG) companies monitor business to determine if
they are winning or losing in the market. As CPG companies increasingly pursue growth
opportunities in developing countries with faster-growing middle class populations, Nielsen is often
called on before its clients move into a country in order to provide important market information
and analysis. Nielsen has been investing and growing rapidly over the past five years within
developing markets as it has doubled the size of that business to over $1.0 billion in annual revenue.
Management expects its developing markets to continue its strong growth in the teens range.

Positioning to Benefit from the Fragmentation of Content Distribution. Nielsen is the
dominant provider of market share data for TV as its ratings are the measure of value, or the
currency, for the TV industry. The company has been investing heavily for a number of years to
extend that market leadership to address the media/advertising industries challenges around
monetization and return on investment in a world of content distribution fragmentation and the
increasing share of advertising dollars being spent on the Internet. Two of Nielsens relatively new
solutions to address the above include:

Cross-Platform Audience Measurementprovides audience measurement information
for content that is viewed across platforms such as TV, online, and mobile.
Online Campaign Ratings (OCR)provides audience measurement information to help
determine the effectiveness of a branded advertising campaign online.

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Nielsen will Continue to Use Analytics and Big Data Expertise to Develop New
Products. Nielsen is continually trying to extrapolate additional insights and create new products
from utilizing analytics and combining its information with additional external data sources.
Analytics are prevalent within both its Buy and Watch segments. Within its Buy segment, the
companys new Answers platform enables customers to analyze consumer purchasing information
in real time. Within its Watch segment, both of the above mentioned audience measurement tools
are examples. Nielsen believes it holds a big advantage over potential entrants into its end markets
as its analytics are rooted in the basic information services that it provides, which have been tested
over the years, and are the standards for how consumption is measured in the media/advertising
and CPG worlds.

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63

TECHNOLOGY
IT/BPO Services
[email protected]
443/263-6524

What is IT/BPO Services?

Information technology (IT) and business process outsourcing (BPO) service
providers support the efforts of major enterprises and government agencies globally in managing
their existing operations (lights on work), as well as helping them take advantage of new
technologies, such as that offered by the emerging technologies of mobile, social, big data, and the
cloud, to both improve efficiency and increase revenue.

Maintenance, or lights on work includes the running of corporate infrastructures
(i.e., networks and data centers), maintaining of enterprise software, and the running of discrete
back office operations, which is often referred to as BPO. This represents the vast majority of client
outsourcing spend with the focus being on lowering cost, improving efficiency, and in some cases
improving end-client satisfaction. Over the last decade, the (primarily) India-centric service
providers have successfully leveraged their labor cost advantage and process culture helping them
drive dramatic organic growth.

Development, or discretionary spend, focuses on addressing new business opportunities that
both existing and emerging technologies can provide. This can account for 10-20% of the
outsourcing market potential. The initial phase is an analysis of the business situation (consulting).
If a decision to move forward is made, software is then developed (or in many cases packaged
software is modified). After testing, the new software-based application is combined with existing
systems (systems integration) and put into production. At that point, the software and process can
be run internally, or outsourced to the service provider.

The business models remain very sensitive to the addition of billable employees (i.e., linear
growth), although efforts are accelerating to provide more leverage (i.e., non-linear growth) through
models such as software-as-a-service, a version of cloud. We believe it will take several years before
non-linear offerings become a meaningful part of the revenue mix. Our comments below focus on
the Global 1,000, as that is where the vast majority of IT/BPO spending occurs.

The maintenance-oriented work is often multiperiod and contractual in nature so provides
the service provider with an annuity-like revenue stream. Revenue may be based on number of
people (full-time equivalents [FTEs]), transaction volumes or units monitored. Client funding
comes from the operating budget so has lower variability.
The development work tends to be shorter-term projects, although strong client
relationships often lead to a series of engagements, giving the feel of a long-term revenue
stream. Client funding comes from more investment accounts and often is more discretionary
and therefore at times uneven in availability. Projects can be fixed-price or time-and-materials
based. The latter model is FTE * utilization * rate.

Key Themes

Primary Market Growth Drivers. There are four overarching needs of major enterprises that
should sustain the market opportunity for IT/BPO service providers.

(1) Macro Economic Headwinds. The Global 1000 (G1000BusinessWeeks list of the
world's top companies by market value) are facing increasing growth headwinds, forcing
them to redouble efforts to reduce costs and improve productivity. A noteworthy example of

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this is the dramatic challenges facing the pharmaceutical industry, as a disproportionate
number of drugs are losing their patent protection. This provides significant opportunity for
IT/BPO service providers to offer services, especially through the leveraging of global delivery
centers (a.k.a. offshore), such as by Cognizant Technology Solutions (CTSH).
(2) Emerging Markets Opportunity. The United States, Europe, and Japan are viewed as
limited (at best) economic growth markets in the coming decade, with significant growth
opportunities for the G1000 shifting to emerging markets such as Brazil, China, eastern
Europe, India and parts of Africa. The often globally capable service providers can help the
G1000 with market entry, as well as setting up and running, systems for operating in those
new geographies. We see global provider Accenture (ACN), among others, benefiting from
this trend.
(3) Regulatory Reform Burden. Based on existing technology and market trends, we see
significant systems changes that will be required to address ever-tightening regulation,
especially for financial service providers and those in the healthcare industry. This is a global
issue. Examples include the still to-be-codified Dodd-Frank financial reform in the United
States and the ICD9-10 data set conversion in the healthcare sector. We see ACN and CTSH
among the best positioned to capture sustained work in this area.
(4) Threat/Opportunity of New Technologies. For nearly a decade after the dot-com bust,
the G1000 focused on optimizing existing technology investments. With the maturity of the
Internet (i.e., broadband capabilities), rapidly expanding capabilities of wireless technologies
(think the iPhone, iPad, etc.), arrival of social media, the rising demands of digitally
empowered consumers and employees, and the steadily expanding adoption of cloud-based
services, the G1000 have little choice but to embrace technology change or run the risk of
losing market share. This will force large enterprises to spend more discretionary dollars,
often using lights on savings to fund the needed investments. Uncertainty is always
advantageous for the discretionary-focused business/IT consultant and software developer.
We see Sapients (SAPE) unique approach that marries business consulting, marketing
strategy/execution, and technology integration as the best positioned to help the G1000
navigate the emerging omnichannel-based business world.

Big Data and Analytics. We find this to be the most interesting area of new growth as new
approaches and technologies allow for the massive amount of user information being collected daily
to be massaged into usable business intelligence. While there are no public pure plays within the
services universe, it is an area that can provide incremental growth to the more forward-thinking
IT/BPO organizations. We believe it will be a critical component of successful deployment of
digital consumer solutions. BPO providers ExlService (EXLS) and Genpact (G) now derive nearly
20% of revenue from working with clients to leverage their massive data flow, and this opportunity
is fast growing for them.

Continental Europe Finally Embracing Outsourcing. While the United Kingdom has long
embraced using service providers for both project work and outsourcing, the continent has focused
usage to just project work to limit legal and cultural restraints. With the intense economic
challenges of the last few years in Europe, we are increasingly hearing of the leveraging of
outsourcing, both to nearby eastern Europe, and now also to remote locations (off-shoring). While
India remains the dominant location for IT-focused work, BPO work often goes to locales that can
offer common language capabilities, such as former colonies. We see this as a new leg of growth, but
one that will come in fits and starts.

Commoditization and Verticalization. We believe that the low-hanging fruit of labor
arbitrage-driven movement of work offshore is now well picked among the large global clients. We
are increasingly hearing of intensifying price pressure for standard software application and
infrastructure outsourcing opportunities. We believe that infrastructure outsourcing, once
dominated by IBM, EDS (now part of HP), and Computer Sciences (CSC), is now heavily
commoditized, with further pressure expected as the monitoring work is being shipped overseas to
be handled by lower-cost personnel. Clients now assume providers have low-cost global centers and

65
are demanding more solutions. This requires more investment in front-end IT and business
consulting capabilities and strong understanding of the clients business and their challenges. This
also requires a more proactive approach to winning new business with more client-touching
resources, not just RFP responders. We believe this favors ACN, with its strong partner model and
historical vertical approach, and CTSH which, in our opinion, is the farthest along among the
offshore-centric providers to embrace the vertical approach. We believe that Infosys (INFY) has
been too slow to embrace the market change, and we believe it will see market share loss until it
surrenders its industry-high operating margin.

Emerging Business Models and the Cloud. In our view, the cloud (i.e., in an ideal world
buying services by the drink) is an unstoppable trend. It is also a trend that should take years to
play out for the large G1000 buyer given issues around security, privacy, performance, and existing
technological investment. While cloud gets a lot of press, in our view, it currently is only fully
deployable for small and some midsized organizations that have either limited (or no) back office
infrastructure, or are willing to accept a standardized (i.e., limited) capability to capture the volume
savings of the external cloud provider. This is rarely the case for the G1000, who so far have focused
cloud-like solutions in the areas of data center and applications consolidation, i.e., the return to the
central computer center and shared service centers. Financial institutions, historically large
spenders on technology, have been challenged with privacy and security issues, limiting most
efforts to within the firewall.

Politics and Visa Availability. In the United States as well as Europe, sustained high
unemployment has increased the level of job protectionism. While we would argue that there is an
insufficient pool of qualified technology-enabled professionals in the United States in large part
because of decades of failed (or lacking) industrial policy, this has not stopped the politicians from
pressing for visa restraint. While legislation has so far failed to meaningfully materialize, the Obama
Administrations pressure on visa approvals has notably increased challenges for onsite operations
in the last year. This should increase costs to the U.S. client as well as put pressure on operating
margins for all the offshore-centric providers. This is primarily an issue for the IT-focused
providers, as most of the BPO work is done offshore.

Government ServicesFacing Sustained Funding Challenges. The U.S. federal
government is one of the largest users of technology-based services. Given the inability to hire,
sufficiently pay, and retain staff with the needed skills to run the technology backbone of the
government, especially the Department of Defense, service providers have been heavily leaned on.
Given the budget day of reckoning (in our view) now being felt with the upcoming sequestration
that would further cut into already tightening budgets, we see limited, if any, growth for
government-focused service providers for the foreseeable future. Unfortunately, given the RFP-
driven procurement culture of the federal government this makes it hard to bring new solutions to
agency clients that actually save costs and improve efficiency, therefore much of the savings has
so far come from tightened pricing and reduced activity levels. This has led to a growing number of
earnings misses.


IT/BPO services have historically been viewed as a growth market and therefore valuation has been
driven by expectation of forward top-line organic growth rates. Operating margin has generally
been stable during periods of growth, so has been more of a factor in assigning relative valuation
among the various providers. Valuations tend to rise during periods of improving (or expected to
improve) growth.

While the consultants generally have less contracted revenue, they also have limited capital
requirements, so free cash flow tends to be strong. The BPO providers tend to have primarily
longer-term contracted work so visibility is high, but so are their capital needs. The government
service providers have historically strong visibility and high utilization, which yields strong
predictable cash despite lower margins than those afforded commercial providers. This has often
led to financial leverage being added to the government service provider.

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Industry consolidation is also a regular event as it is often needed for client entry, expansion into
new geographies, or accelerated broadening of service offerings. This means that income statements
can sometimes include meaningful amounts of noncash intangible amortization. This in turn leads
to the use of enterprise value-to-EBITDA.

Exhibit 1. Government Services: Long-Term P/E

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
5 5
10 10
15 15
20 20
25 25
30 30
35 35
Government Index: BAH, CACI, DCP, DRCO, ICFI, MANT, NCIT, SAI, SRX AND SXE
Average: 15.22x

Source: FactSet

Exhibit 2. Government Services: Long-Term EV/EBITDA
'03 '04 '05 '07 '08 '09 '11 '12
4 4
6 6
8 8
10 10
12 12
14 14
16 16
Government Index: BAH, CACI, DCP, DRCO, ICFI, MANT, NCIT, SAI, SRX AND SXE
Average: 8.44x

Source: FactSet

Exhibit 3. Offshore-Centric Services: Long-Term P/E
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11
5 5
10 10
15 15
20 20
25 25
30 30
35 35
40 40
45 45
50 50
Offshore IT Index: CTSH, IGTE, INFY, SYNT, WIT
Offshore BPO Index: EXLS, G, WNS

Source: FactSet


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Exhibit 4. Offshore-centric services: Long-term EV/EBITDA
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11
0 0
5 5
10 10
15 15
20 20
25 25
30 30
Offshore IT Index: CTSH, IGTE, INFY, SYNT, WIT
Offshore BPO Index: EXLS, G, WNS

Source: FactSet

CASE STUDYGenpact Ltd. (G)

Company Description: Genpact is a leading global provider of business process outsourcing
(BPO) services and Information Technology (IT) services, with a strong focus on the finance and
accounting, supply chain management, and infrastructure services segments. BPO represents about
75% of revenue, ITO about 25%.

CEO Interview: Tiger Tyagarajan, CEO of Genpact Ltd.

How important is the need for vertical (end market) knowledge in the capture and execution of
BPO work? Has this capability grown in importance for your outsourcing clients? Has it
expanded the market opportunity? Has it led to increased differentiation among BPO providers?

It is important to build horizontal capabilities, for example, G&A processes such as finance and
accounting (F&A) and procurement, however, vertical industry focus is also important as we drive
deeper relationships with clients.

Vertical and domain expertise continues to be a core element of our growth strategy which drives
differentiation and deeper relationships. We will continue to invest and build targeted vertical
industry and horizontal domain expertise. We have identified key growth industry verticals such as
CPG, retail, pharma, healthcare, manufacturing, capital markets, insurance, banking and financial
services. Each of these verticals will be run by an experienced business leader who will own it from
front end sales all the way through to service delivery. A lot of the work we continue to do is
industry-specific, for example, core banking and insurance operations, spare parts and warranty
management for manufacturing companies and patient-level data analysis for life sciences
companies, among many others.

Clients value insights and experience in their specific industries and their competitive environment,
an intimate knowledge of their business models, and deep domain expertise in the context of their
industries, for example, in finance and accounting, reengineering, analytics or risk management.
We also leverage this unique combination of vertical and deep horizontal process knowledge.
Depending on the specific G&A process and industry, 6090% can be common and gives us cutting-
edge expertise, which itself is a huge advantage. It enables best practices to be leveraged across
industries, such as applying practices in collections from BFS to manufacturing and CPG, since
many companies tend to get confined to operating models, mindsets and benchmarks from within
their own industry.

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Having our teams vertically focused has expanded relationships. As an example, our three-year
contract extension earlier this year with global CPG leader, Kimberly-Clark, for comprehensive
finance and accounting services, and high-end analytics. We will continue to help Kimberly-Clark
increase the efficiency and effectiveness of its F&A operations. Based on our CPG industry
experience, Genpact will also be partnering with Kimberly-Clark to develop a comprehensive
analytics solution for trade promotions, a key element of sales and marketing efforts for CPG
companies.

Do you see commoditization, and therefore pricing pressure, for traditional finance & accounting
(F&A) arrangements?

F&A is a broad category from transactional offerings for processes such as accounts payable to very
high-end services for processes such as general ledger, tax accounting, financial planning and
analysis and closing the books for companies. While you may have commoditization of transactional
efficiency what differentiates us is the ability to take an end-to-end view and drive business
outcomes as well as higher value add services. For example even in transactional processes like A/P
if you look at the end-to-end view of the entire Source-to-Pay process you can drive significant value
by reducing total overall spendthis cannot be commoditized. No we do not see pricing pressure in
F&A.

Do you see an increased acceptance of outsourcing in continental Europe? Is the opportunity there
still constrained by issues around data privacy and job security rules?

Europe as a geography continues to perform well for us. This is due to more acceptance from the
market but also for us due to the strategic decision to invest in the front-end business development
and relationship management teams back in 2009. Also, we do not have much exposure to the BFSI
sector in Europe, where the concern for the data privacy is probably the highest. Although within
BFSI, concerns are limited when a service provider has European delivery. We do not see data
privacy being a major challenge for non-BFSI sectors.

Job security has always been a big issue in Europe. However some countries particularly in western
Europe are beginning to lead the way towards change.

Do you see cloud-based solutions meaningfully changing (threatening) the BPO model for the
larger enterprise clients? If so, how long before this impact has a notable impact on demand? Or,
is cloud a new tool that can be used to drive incremental growth for Genpact? What are the
opportunities and challenges of platform-based offerings for Genpact and how big an
opportunity could they represent over time?

The fundamental premise of the cloud and offerings business process as a service are that processes
are reasonably standardized. As we all know processes across divisions, countries and companies
are far from standardized.

As cloud becomes more pervasive, it becomes a focal point that drives the standardization agenda.
However, it will still require major change management, managing exceptions, redesigning
processes, all of which are services and solutions that Genpact is well known for.

69

What we are finding is cloud-based offerings to be more easily adopted by:

Emerging market enterprises that are growing rapidlytherefore do not worry about legacy
systems and are willing to go toward standardized processes from the beginning.
Large global companies that have made the decision to enter new markets (products and
geographies) by setting up an entire division with many processes being designed straight on
the cloud.
Point solutions that have cloud-based standalone offerings like T&E, and Talent Management.
In all these cases Genpact becomes a service provider of services wrapped around the cloud with the
process expertise, business domain knowledge and the ability to build insights from data being used
from a common cloud platform.

How large is the opportunity for analytics/big data? Can it be used to drive downstream work?
Or, is it just a high-growth, stand-alone opportunity?

Technology advances and proliferation, including social media and cloud computing, have enabled
clients to easily collect, store and access large volumes of data about their customers, end users,
operations, competitors and suppliers. This explosion in so-called big data has produced greater
demand for insights. Smart Decision Services combines insights drawn from the data with our in-
depth understanding of business processes and outcomes in areas such as sales and marketing
effectiveness, risk management and reporting, and supply chain effectiveness. The intelligence we
provide is exactly what clients are looking for today, as they face an environment where they must
drive top-line growth and profitability without adding costs. Sharply defined Smart Decision
Services engagements in analytics, reengineering and risk management that deliver fast payback
and specific outcomes for our clients being a gateway to enter into a new relationship. These often
lead to more activity and dialogue on other long-term annuity engagements.

At the same time in the longer term, annuity engagements where we run different processes for
clients highlights our ability to build insights from the data we are processing. This allows for higher
value being delivered for the client and deepens the relationship.

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71

Media
Nicole Black
[email protected]
704/715-7382

[email protected]
212/214-5010
Bishop Cheen
[email protected]
704/383-0473

MediaThe Big Picture

Broadly speaking, media companies engage in the creation, aggregation, and distribution of content
and then leverage this content to sell advertising based on audience metrics (e.g., readership,
viewership) and generate subscription revenue. Thanks to technological innovation, the nature of
content and its delivery mechanisms are rapidly evolving. Most recently, the transition to a digital
and mobile world has made traditional forms of contentincluding newspapers, magazines, books,
television programming, and filmed entertainmentavailable to anyone, anytime, anywhere.

Key Themes

It feels to us that the world of media is at a critical inflection point in its evolution: the
explosion of smartphone devices and tablets has made connectivity increasingly mobile; the
advancing penetration of streaming media in and out of the home is creating unprecedented
demand for good content; the traditional advertising-dependent protocols are being challenged at
every turn; and even the most diversified global media conglomerates are grappling with how to
adapt to new operating ecosystems.

Though there are many angles one could take when evaluating the media industry for investment
purposes, we decided to delve into the following themes:

Transition to digital and mobile world;
Evolution favors good content creators;
Future of advertising; and
Focused on shareholder returns.

For this report, we are trying to keep our analysis high level, fundamental, and relevant to rapidly
evolving/shifting consumer, social, technological, competitive, and economic paradigms. Media
investors are often at risk of focusing on single events, which may overshadow the macro, and in
turn lead to myopic, short-term views and, sometimes, inappropriate weightings. We tend to take
the long view, but we remain cognizant of the myriad challenges affecting media markets daily. We
hope this report will put into perspective our insights into the media sector:

Winners and Losers. Overall, we do not see media/telecom as a zero-sum game, because no
single medium has ever obsoleted another. Video did not kill radio; TV did not put movie
theaters out of business; cable/satellite did not pull the plug on broadcast TV; newspapers are
still published daily; and even the paging business is still around (check your doctors belt).
Granted, technology and consumer behavior has put pressure on mature media valuations as
operators scramble to adapt in order to stay competitive and relevant. Still, lucrative paydays
are being generated by out-of-favor subsectors, while devotees of perceived high-growth new
media have also demonstrated a capacity for irrational exuberance leading to speculation and
perhaps unsustainable valuations. True, it is probably the natural order of progress and
investment where there is always another new, new thing about to emerge.
Infrastructure Challenges. Infrastructure is one of the biggest challenges facing
media/telecom, in our view, especially when it comes to reallocating crucial spectrum in order
to meet escalating supply/demand imbalances. As demand has shifted from voice to data and
video, so too has demand for spectrum. Smartphones use 24x the spectrum capacity as
traditional cellphones, and tablets take up as much as 140x

(according to FCC Chairman Julius

72
Genachowskis prepared remarks, CTIA Wireless conference, March 2011). And, it is not just a
big block of broadcast TV spectrum at risk for being reallocatedvia so-called voluntary
incentive auctions in order to accommodate growing wireless telecom carrier demandbut
within wireless there are growing imbalances currently between incumbent and over-stretched
3G smartphone networks and new underutilized 4G networks.
Goliath Versus Goliath. We root for upstarts even when our wallets are vested with
incumbentsits the American way. Still, size does indeed matter in media. Only eight entities
control the majority of broadcast and broadband content:CBS Corp., Comcast/NBCUniversal,
Discovery/QVC/Liberty Media, Disney/ABC/ESPN, News Corp./Fox, Scripps Networks, Time
Warner Inc., and Viacom. Using a wider, convergent mouth of the funnel to include new media,
our list would expand to include tech/content titans Apple, Google, and Facebook. These new-
order Goliaths could put incumbent media and broadband operators (large and small) at an
inherent disadvantage, we think. should these powerful entities force a change in the economics
and competitive landscape of content and distribution. This is because incumbent economic
models have been built around ad-supported and subscription-based bundles.
Valuations. Leading metrics for incumbent mediahouseholds, ratings, share, subscribers,
time spent viewing/listening, ARPU, circulation, cost per thousand, etc.are well more than a
half century old. Investors, advertisers, and operators have had to scramble in just the past
decade to learn a whole new lexicon of meaningful measurements: unique visitors, page views,
search, megabits, etc.that do not readily connect to valuations. That, in turn, implies that
some entrenched models supporting common perceptions of value may be outmoded.
Investors, however, are likely to want to translate all measurements, new and old, into their
own comfort screen of cash flow, multiples, yields and returns. Its a learning curve, we think,
that never ends.
Transition to Digital and Mobile World. It is safe to say that we are becoming multiscreen
consumers of content. Not only do most homes have television sets, but with the proliferation of
smartphones and tablets, many people have ample opportunity to stream video in this increasingly
mobile world. It certainly helps that user-generated content has exploded online and digital
competitors (e.g., NetFlix, YouTube) are now investing in content to compete with traditional media
producers. Consider the following statistics:
According to a July 2011 In-Stat survey, nearly two-thirds of smartphone owners have watched
video on their device, while nearly 86% of tablet owners have done so. Tablet viewers watch
more video and are willing to pay a higher price for that video compared to smartphone
viewers.
Video streaming is the largest component of data traffic on mobile networks, at an average of
50% of total. Volume due to video content is 69% of total mobile data traffic, based on a
February 2012 Bytemobile, Mobile Analytics report.
A recent Viacom study (Viacom website, Tapping Into Tabletomics study, April 17, 2012) of
more than 2,500 people ages 8-54 revealed that tablets have risen to second-screen
prominence for full-length television (FLTV)-show viewing, taking up as much as 15% of total
FLTV viewing. Most media activities on the tablet, such as playing games and watching TV
shows, peak with the 18-24 demographic.
About 60 hours of video is now uploaded to Google Inc.s YouTube video website every minute,
compared with approximately 48 hours in May 2011, according to Reuters (January 23, 2012).
Requiring New Strategies to Monetize Programming Investments. Undoubtedly one
of the biggest challenges currently facing the media industry is how to get paid for quality-
produced content in nontraditional distribution channels. The average consumer, particularly
of the younger demographic, is quite accustomed to getting content free online. For example,
YouTube hit the four billion streaming online videos per day mark in January, but, according to
the company, only three billion videos per week are monetized.

73
According to research firm SNL Kagan (Economics of Mobile Programming, 2012 Edition),
free video iPad apps from major content owners, including Disney, Viacom, and Time Warner
are doing great; however, paid video apps are not doing as well. The route the industry seems
to be taking to solve this problem is an authentication model whereby content is made available
online to consumers who can prove that they subscribe to a multiservice operator (MSO), be it
cable, satellite or telecom provider. The most popular application is TV Everywhere, which is
the official name of the Comcast and Time Warner Cable authentication programs (the two-
largest domestic cable operators with roughly 30% of total broadband subscribers).
Online Viewership has Created an Any Time, Anywhere Consumer Mindset. Not
only is the media industry attempting to crack the code on how to monetize its content
digitally, but to complicate matters, consumer demands and expectations on that front are only
increasing. The now-mobile-heavy users of media want even more bells and whistles, be it
personalization (do you have an app for that?) or configuration across devices (you are cloud-
based, right?). It has led to a growing list of audience demands to meet what we consider to be
the any time, anywhere mindset of the new media consumeryet another challenge facing the
current media programmers.

Evolution Favors Good Content Creators. However, we believe that the ongoing evolution to
a mobile world does indeed favor those media players that produce high-quality, highly desirable
content. Recently, we have seen substantial proof that programmers have become more protective
of their content. For example:

News Corp. instituted an eight-day window for new Fox television programs for
unauthenticated viewers in August 2011.
Time Warner doubled its 28-day rental window with Netflix and Redbox to 56 days in January
2012.
HBO is no longer selling DVDs at a discount to Netflix.
Disney, which had initially questioned the merits of TV Everywhere, signed a ten-year carriage
agreement with Comcast in January 2012. This extensive agreement spans sports, news, and
entertainment content, live and on-demand, to Comcast Xfinity subscribers via television,
computers, tablets, and handheld devices.

Authentication is Real. With the ten-year programming agreement between Disney and
Comcast that was announced in early January, combined with the success of HBO Go,
Showtime Anytime, and Time Warners TV Everywhere app, we see evidence that the
authentication model is not only real but is actually gaining momentum, which does several
things:

Underscores the partnership between content and distribution;
Provides visibility for both sides (content AND distribution); and
Satisfies consumer needs/wants without compromising monetization.

On April 30, The New York Post reported that Hulu, which attracted 31 million unique users in
March with its free-for-all model, is taking steps to move toward an authentication model and
that Fox (owned by News Corp.) is expected to begin talks soon with Comcast on a TV
Everywhere authentication deal.


74

CASE STUDYComcast Corporation (CMCSA)

Company Description: Comcast is the largest U.S. cable company serving 50 million primary
service units (PSUs) as of March 31, 2012, comprised of 22 million video subscribers, 18.5 million
high-speed Internet subscribers, and 9.5 million phone subscribers. On January 29, 2011, Comcast
created and acquired a 51% stake in a joint venture with NBC Universal (GE owns the remaining
49%). The joint venture combined a majority of legacy Comcasts cable networks, regional sports
networks (RSNs), certain digital properties (i.e., Fandango and Daily Candy) and NBCUs cable
networks (Bravo!, CNBC, MSNBC), the NBC broadcast network, the Telemundo (Spanish-language)
broadcast network, 26 owned-and-operated television stations (10 NBC, 15 Telemundo and
1 independent Spanish-language station that has been contributed to a trust), various studios
(e.g., Universal Pictures), various online sites (iVillage and 32% of Hulu.com) and theme parks
(Universal Parks & Resorts and Universal Studios).

Recent comments from Neil Smit, CEO and president, Comcast Cable illustrate how the
authentication model is gaining momentum:

So, we are big believers in TV Everywhere and from a definitional perspective, its having great quality
content for the customer anytime and anywhere. So they should be able to view it across multiple platforms,
multiple devices, in and out of home.

Weve done a number of landmark deals. We finished one with Disney the end of the year, Turner, Viacom,
CBS. So we have a lot of TV Everywhere content and itsI think we've got a great authentication platform.
We've really focused on making authentication easy, and authentication is ensuring the subscriber has the
rights to the content they're viewing.

Our belief is that we want to offer the broadest selection of content to our customers, the best TV shows and
movies across multiple platforms. Right now, we have 35,000 choices on VOD, 225,000 choices online, 8,000
choices on the iPad app. So weve got a lot of choices out there.

I think were leading the industry in this space, and we're big believers that we want to give the consumers
or our customers access to the content wherever and whenever they want.

Must-Have Content Will be Monetized. When Viacom conducted its April 2012 study of
tablet users who stream video, it found that comedy and music were the genres that were most
viewed on tablets. Reality programming is still the most heavily viewed on the traditional
television screen, followed by drama, science fiction, and sports. The good news for the content
creators is that among tablet owners who subscribe to a cable company that offers a streaming
app, about half report downloading it, and those MSO app users spend 20% more time on their
tablet than non-MSO app users. Through the success of the authentication model, it appears
empirically that must-have content will likely be monetized.

Subscription Video-on-Demand, Retransmission Dollars Offer Upside. In addition
to the traditional distribution arrangements between content creators and cable/satellite MSOs,
the media companies have an opportunity to monetize their content through incremental
subscription video-on-demand (SVOD) and retransmission-consent arrangements, as outlined
in recent comments by CBS Corp. CEO Les Moonves. We have noticed a recent lift in the
financial performance of those companies that are beginning to benefit from such non-
advertising sources of revenue (e.g., CBS, Viacom) and expect the trajectory to only continue.

75

CASE STUDYCBS Corporation (CBS)

Company Description: CBS Corporation is a diversified, international media company that has
operations in virtually every field of media and entertainment, including network broadcast
television (CBS and CW), television production and distribution (CBS Television Studios, CBS
Television Distribution), cable television (Showtime, CBS Sports), publishing (Simon & Schuster),
local TV and radio broadcasting (CBS Television Stations, CBS Radio) and outdoor advertisings
(CBS Outdoor).

Recent Comments from Les Moonves, CEO, CBS Corp.

one of the most powerful developments in our business model is the growth of steady and recurring non-
advertising revenue, which is increasingly paying off. Syndication, retrans, and online streaming are having
a huge impact on our numbers and are not directly tied to the economy. All told, 39% of our total revenue in
the first quarter came from non-advertising sources. Many of these revenue sources did not even exist just a
few short years ago. As we continue to transform our business model, you'll see that number rise even
higher.

None of this would be possible without premium content. Across the company, we have industry-leading
programming in every business in which we compete and it is getting more valuable by the day.

We have been transforming this company into a content-driven higher-growth business for several years
now, and the good news is that all the strategic actions we have taken to do this are coming together as
evidenced by todays [Q1 2012] numbers.

Newly established growth drivers like retrans, online video distribution and international expansion have
created steady recurring revenue streams that fall right to our bottom line. And, we have negotiated long-
term profitable deals for our [10-year] programming. Events like the NFL, the NCAA Basketball
Tournament, SEC Football, the PGA Tour, the Grammys and the Academy of Country Music Awards all of
which will benefit us for at least a decade under their new contracts.

76
Exhibit 1. SVOD Deals in Place
Amazon Hulu / Hulu Plus Netflix
CBS Corp
CBS Network
non-exclusive licensing
agreement, timeframe and
monetary value unkown
2-year deal through 2013
for select TV shows,
monetary terms not
disclosed
The CW
5-year deal through 2016,
worth an estimated $1
billion
Comcast
NBCUniversal
licensing agreement for
select movies, monetary
value unknown
licensing agreement for TV
shows, monetary value
unknown
multi-year deal worth an
estimated $300
million/year
Discovery
worth $150 million
Disney
ABC, Disney Networks
for ABC, ABC Family and
Disney Channel
programming
multi-year deal for ABC,
ABC Family, ABC Daytime
and SOAPNet programming
for ABC, ABC Family and
Disney Channel
programming
News Corp.
FOX
licensing agreement for
movies, TV shows,
monetary value unknown
licensing agreement for TV
shows, monetary value
unknown
multi-year deal for movies,
TV shows, financial terms
not disclosed
Time Warner Inc.
The CW
worth an estimated $1
billion
Viacom
Paramount
worth est. $150
million/year
Viacom
2-year deal for select TV
content, worth an
estimated $40-$50 million

Source: Company reports, Reuters, SNL Kagan, Wall Street Journal, and Wells Fargo Securities, LLC

Exhibit 2. Growth Profile of Broadcast Network Retransmission Revenue

Source: SNL Kagan and Wells Fargo Securities, LLC

77
Future of Advertising. This year is poised to be a seminal year in the advertising landscape of
the media industry. According to MagnaGlobal projections (May 1, 2012), total digital/online will
overtake broadcast television as the largest ad category in terms of spending size. The two finished
2011 neck and neck, with broadcast TV accounting for 18.8% of total advertising spend and
digital/online 18.4%. Magna projects that digital advertising will leapfrog broadcast TV in 2012, to
20.2% and 19.8% shares, respectively. The specific component of digital advertising that is growing
the fastest is mobile-Internet advertising. It jumped 149% in 2011, to roughly $1.6 billion,
representing roughly 5% of total Internet advertising and 1% of total U.S. advertising. This year,
MagnaGlobal predicts another 53% jump, to $2.4 billion.

Encouraged by the rise of smartphone and tablet usage and the availability of scalable platforms,
mainstream advertisers are now fully embracing all mobile formats (display, search, video, in-app).
Vincent Letang, EVP, Head of Global Forecasting, MagnaGlobal

Historical Perspective. Generally, advertising growth has followed the same trend as gross
domestic product (GDP) growth, as shown in Exhibit 3. In fact, from the 1990s-2006, ad dollars
grew on average at a rate of GDP plus 2-3%. However, there was a clear divergence from
2007-09, when ad growth was significantly weaker than GDP. There was a bit of a snapback in
2010, thanks to strong growth in cable television and digital/online media spending, and
convergence in 2011 as total advertising and GDP both grew 1.7% in yearly comparisons.

Exhibit 3. Ad Spending Versus Real GDP and CPI, Yr/Yr Growth
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
Ad Spend CPI Real GDP

Source: MagnaGlobal, U.S. Department of Commerce, U.S. Department of Labor, and Wells Fargo Securities, LLC


78
After a disastrous 2009, when total advertising fell 16.2%, the state of the U.S. ad market has
rebounded somewhat, with $172.3 billion spent across all media in 2011 (see Exhibit 4 for
further detail). The clear driver of growth in 2011 was the digital/online category, which
delivered a robust 21.9% increase. MagnaGlobal expects 2012 growth to be 2.4%, including
political and Olympic advertising, and 0.9% without those two categories, driven again by
digital/online (up 12.2%). The agency cites a tepid economic recovery and a still-fragile
economic outlook in discussing its 2012 projection of declaration. The suggestions of 1.5% 2013
growth and 2.5% 2014 growth (excluding political and Olympic) are more optimistic. Granted,
the recessionary spiral down and the climb back heretofore has been in a low inflationary
environment, making it even tougher, we think, for rate-driven ad media to find traction.

Exhibit 4. Total Advertising Expenditures, 2009-2014E ($s in millions)
Actual % Actual % Actual % Projection % Projection % Projection %
2009 Change 2010 Change 2011 Change 2012 Change 2013 Change 2014 Change
Broadcast Television ex-Pol./Ol. $29,449.7 -9.9% $30,825.8 4.7% $31,810.6 3.2% $31,877.8 0.2% $31,892.5 0.0% $32,101.0 0.7%
Network Broadcast TV (English) 12,888.8 -5.3% 12,989.0 0.8% 13,468.1 3.7% 13,465.5 0.0% 13,264.2 -1.5% 13,112.8 -1.1%
Network Broadcast TV (Spanish) 1,009.9 -4.4% 1,093.4 8.3% 1,171.7 7.2% 1,215.3 3.7% 1,276.6 5.0% 1,386.0 8.6%
National Syndication 1,774.5 -8.3% 1,867.6 5.2% 1,938.6 3.8% 1,943.5 0.3% 1,961.8 0.9% 1,990.8 1.5%
Local Broadcast TV 13,776.5 -14.4% 14,875.8 8.0% 15,232.2 2.4% 15,253.4 0.1% 15,389.8 0.9% 15,611.4 1.4%
Cable Television ex-Pol./Ol. 21,471.8 -4.0% 24,168.4 12.6% 26,168.0 8.3% 27,138.8 3.7% 28,623.8 5.5% 30,305.3 5.9%
National Cable TV 18,093.5 -2.4% 20,369.0 12.6% 22,000.1 8.0% 22,841.6 3.8% 24,161.0 5.8% 25,647.5 6.2%
Local Cable TV 3,378.3 -11.6% 3,799.4 12.5% 4,167.8 9.7% 4,297.2 3.1% 4,462.8 3.9% 4,657.8 4.4%
Network Broadcast TV - Olympics 0.0 0.0% 605.0 0.0% 0.0 0.0% 633.0 0.0% 0.0 0.0% 1.0 0.0%
Local TV - Political 440.6 0.0% 2,234.0 0.0% 556.0 0.0% 2,479.7 0.0% 631.5 0.0% 2,693.1 0.0%
Radio 14,641.6 -19.5% 15,347.5 4.8% 15,269.7 -0.5% 15,146.5 -0.8% 15,145.9 0.0% 15,231.4 0.6%
Network and Satellite Radio 1,120.0 -9.8% 1,166.5 4.2% 1,209.7 3.7% 1,212.0 0.2% 1,222.1 0.8% 1,238.8 1.4%
Local Broadcast Radio 13,521.7 -20.2% 14,181.0 4.9% 14,060.0 -0.9% 13,934.4 -0.9% 13,923.9 -0.1% 13,992.6 0.5%
Digital/Online 23,132.8 -2.6% 26,041.0 12.6% 31,735.0 21.9% 35,600.8 12.2% 39,476.9 10.9% 43,745.2 10.8%
National Digital/Online Media 5,986.2 -5.3% 7,462.8 24.7% 9,316.4 24.8% 10,514.6 12.9% 11,810.4 12.3% 13,245.2 12.1%
Local Digital/Online Media 3,455.9 -9.9% 3,871.8 12.0% 4,294.5 10.9% 4,638.1 8.0% 5,014.8 8.1% 5,421.7 8.1%
Direct Online Media 13,690.6 0.7% 14,706.5 7.4% 18,124.1 23.2% 20,448.2 12.8% 22,651.7 10.8% 25,078.3 10.7%
Lead Generation 1,451.0 -14.1% 1,323.0 -8.8% 1,522.0 15.0% 1,594.5 4.8% 1,675.7 5.1% 1,754.9 4.7%
Internet Yellow Pages 1,541.6 11.8% 1,722.5 11.7% 1,834.1 6.5% 1,896.1 3.4% 1,919.2 1.2% 1,924.2 0.3%
Paid Search 10,698.0 1.7% 11,661.0 9.0% 14,768.0 26.6% 16,957.6 14.8% 19,056.8 12.4% 21,399.3 12.3%
Newspapers 24,821.2 -28.6% 22,795.2 -8.2% 20,691.8 -9.2% 19,442.8 -6.0% 18,352.7 -5.6% 17,358.4 -5.4%
National Newspapers 918.1 -22.2% 930.2 1.3% 849.5 -8.7% 788.2 -7.2% 726.2 -7.9% 663.9 -8.6%
Local Newspapers 23,903.1 -28.8% 21,865.1 -8.5% 19,842.3 -9.3% 18,654.7 -6.0% 17,626.5 -5.5% 16,694.5 -5.3%
Magazines 13,797.7 -23.7% 13,813.3 0.1% 13,765.9 -0.3% 13,237.7 -3.8% 12,598.1 -4.8% 11,981.3 -4.9%
Directories 8,955.6 -20.0% 6,852.2 -23.5% 5,464.7 -20.2% 4,197.7 -23.2% 3,369.1 -19.7% 2,801.7 -16.8%
Direct Mail 19,853.2 -15.4% 20,599.1 3.8% 20,410.3 -0.9% 19,912.9 -2.4% 19,382.1 -2.7% 18,655.8 -3.7%
Outdoor 5,900.7 -15.6% 6,142.8 4.1% 6,388.4 4.0% 6,646.7 4.0% 6,958.5 4.7% 7,311.3 5.1%
Total - Excluding Political 162,024.4 -15.4% 166,585.2 2.8% 171,704.2 3.1% 173,201.7 0.9% 175,799.7 1.5% 180,146.1 2.5%
and Olympics
Total - Including Political 162,465.0 -16.2% 169,424.2 4.3% 172,260.3 1.7% 176,314.4 2.4% 176,431.2 0.1% 182,840.2 3.6%
and Olympics

Source: MagnaGlobal and Wells Fargo Securities, LLC

Pie is Growing But Slices Are Changing. The good news for advertising-dependent media
players is that overall advertising spending continues to grow, but the mix of media channels is
clearly changing. Exhibit 5 shows just how drastic the differences in growth profiles are for
various ad categories. Anchoring the growth end of the spectrum is digital/online, with an
estimated 12.2% growth this year, and that channel is currently supported by outdoor (up 4.0%)
and cable TV (up 3.7%). The biggest decline this year, just like in 2011, is expected from
directories (down 23.2%).

Exhibit 5. Growth by Media Channel, 2011 Actual and 2012 Estimated
2011 Growth by Media Channel 2012 Estimated Growth by Media Channel
21.9%
8.3%
4.0% 4.0%
3.1%
2.4%
-0.3% -0.5% -0.9%
-9.2%
-20.2%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
D
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4.0% 3.7%
0.9%
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-0.8%
-2.4%
-3.8%
-6.0%
-23.2%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
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5.0%
10.0%
15.0%
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Source for both charts: MagnaGlobal and Wells Fargo Securities, LLC

79
Another way to analyze the trend is to look at percentage of total ad spend, or market share.
Exhibit 6 demonstrates the projected transition of the digital/online category to leading market
share this year. One other observation is that the big (e.g., digital/online, broadcast TV,
cable/satellite TV) keep getting bigger clearly at the expense of the old media categories
(e.g., newspapers, radio, magazines, directories).

Exhibit 6. Ad Spending by Media Channel, 2011 Actual and 2012 Estimated
2011 Ad Spending by Media Channel 2012E Ad Spending by Media Channel
Digital/Online
18.4%
Cable TV
15.2%
Direct Mail
11.8%
Radio
8.9%
Magazines
8.0%
Outdoor
3.7%
Broadcast TV
18.8%
Newspapers
12.0%
Directories
3.2%
Broadcast TV
19.8%
Direct Mail
11.3%
Radio
8.6%
Magazines
7.5%
Outdoor
3.8%
Digital/Online
20.2%
Newspapers
11.0%
Directories
2.4%
Cable TV
15.4%


The current growth dynamic and shift to new media channels for advertising is only expected
to become more exaggerated over time. Exhibit 7 reflects MagnaGlobals historical and
projected share by media channel. This graphical representation demonstrates how the trend is
even more pronounced three and four years out.

Exhibit 7. Ad Spending by Media Channel, 2006-2016E
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Broadcast TV Cable TV Radio Digital/Online Newspapers
Magazines Directories Direct Mail Outdoor



80
Focused on Shareholder Returns. In our opinion, the media sector did a very good job
repairing balance sheets and reducing leverage during the economic downturn of 2009 and 2010.
By and large, most media companies focused on debt reduction, generally at the expense of
shareholder returns. In 2011 and in 2012, though, we have seen the pendulum swing the other way
such that most media companies have actively re-engaged in returning capital to shareholders. The
methods of choice at present are stock buybacks and increasing dividends (though that may be
challenged in 2013 depending on what happens with tax policy post-elections).

Below-Target Leverage Metrics Create Debt Capacity. Thanks to the solid state of most
media balance sheets, the group is generally below stated leverage targets, as shown in
Exhibit 8. The industry tends to focus on gross leverage rather than net leverage; regardless, all
of the companies we surveyed are currently underlevered versus their goals. We also note,
however, that smaller-cap, high-yield debt-issuing media companies tend to lag their large-cap
brethren in deleveraging their balance sheets. Accordingly, that subset is currently above target
but is, in general, closing in on their leverage ratio goals.

Exhibit 8. Current Versus Target Leverage
LTM Target Gross Available Debt
Company Leverage Leverage or Net? Capacity ($ in MM)
CBS Corp. 1.8x 2.5x gross 2,538
Discovery 2.1x 3.0x gross 1,873
Disney 1.5x 2.0x gross 5,210
News Corp. 2.3x 2.5x gross 1,668
Time Warner Inc. 2.4x 2.5x net 478
Viacom 1.8x 2.0x gross 741
Average 2.0x 2.4x 2,085


On average, our media peer group has about a half turn of available leverage under self-
imposed leverage targets. Using 2012 EBITDA estimates, we think that translates into an
average $2.1 billion in available debt capacity that could be routed to shareholder returns.
Specifically, Disney has the most capacity, at $5.2 billion; and Time Warner Inc. has the lowest
capacity, at $478 million.

Share Repurchase Activity Increasing. There is no question that media has accelerated its
pace of stock buyback over the past 12-18 months, and we fully expect that trend to continue
over the balance of 2012 and into 2013. As Exhibit 9 demonstrates, the average annual
repurchase amount quadrupled to $888 million in 2010, from $220 million in 2009, and really
jumped in 2011, to $2.4 billion. We expect another 24% jump in 2012, to an average of
$2.9 billionand based on available leverage, an even bigger jump next year, to $4.5 billion.


81
Exhibit 9. Media Share Repurchases, 2009-2013E
220
888
2,358
2,917
4,475
0
2,000
4,000
6,000
8,000
10,000
2009 2010 2011 2012E 2013E
CBS Corp. Discovery Time Warner Inc. Viacom
Disney News Corp. Average


Dividends Also on the Way Up. As with stock buyback, media dividend payouts have also
been escalating over the past two years and are predicted to continue their upward trend. After
a flat 2010, our media group ramped up dividends by 26% in 2011, to an average $479 million,
and we look for another 22% increase in 2012, to $585 million. In 2013, we expect a
deceleration to 12% growth, but that still means an incremental $415 million of total aggregate
dividends, according to our model. As of May 21, 2012, the group was paying an average
dividend yield of 1.7%, which is below the yield of the S&P 500, at 2.2%.


82
Exhibit 10. Media Dividends, 2009-2013E
368
379
479
585
654
0
200
400
600
800
1,000
1,200
1,400
2009 2010 2011 2012E 2013E
Discovery CBS Corp. Viacom News Corp.
Time Warner Inc. Disney Average


Exhibit 11. Media Dividend Yields, as of May 21, 2012
Current
Dividend Yield
CBS Corp. $31.11 1.2%
Discovery $49.17 N/A
Disney $43.95 1.4%
News Corp. $19.30 0.9%
Time Warner Inc. $34.44 2.8%
Viacom $46.37 2.2%
Average 1.7%
Stock Price
(as of 5/21/12)

Source: Bloomberg and Wells Fargo Securities, LLC


83

We discuss valuation of media securities in the context of both equity and fixed income below.

Equi ty Valuati on

Price-to-Free Cash Flow (P/FCF) Multiple. Price to free cash flow has become the most
popular determinant of relative value among media stocks with increasing importance due to
both a decline in capital intensity and burdensome debt levels. Investors are most interested in
those companies that not only have low P/FCF multiples (or equivalent high free cash flow
yields) but that are poised to return that free cash flow to equity holders in the form of
dividends or share buybacks.
Over the past six months P/FCF multiples have moved back up toward the historical average of
roughly 15x (it is currently at 13.6x as shown in Exhibit 12), but the groups P/FCF multiples are
still well below pre-recessionary levels in the low 20s. One important thing to note is that the
diversified group has a reasonably steady flow of cash generation, even in recessionary periods,
so the substantial drop in P/FCF multiples in late 2008 through 2009 were due mostly to the
plunge in stock prices, while FCF held up relatively well.

Exhibit 12. Large-Cap Diversified Media Historical Trends: Price To FCF
2.0x
5.0x
8.0x
11.0x
14.0x
17.0x
20.0x
23.0x
26.0x
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
P
r
i
c
e
/
F
C
F
Recessionary
period
VIAB spin-off
from CBS
Current
13.6x


Enterprise Value-to-EBITDA (EV/EBITDA) Multiple. Enterprise value to EBITDA is the
metric used most by investors who cover a variety of sectors, as this metric tends to compare
companies regardless of discretionary management decisions, such as capital structure and
intensity Historically, media companies traded at EV-to-EBITDA multiples ranging from
roughly 6-15x (excluding during recessionary periods), but we have seen this gap narrow to
6-9x in recent years due to lower top-line growth as well as lower debt levels.

84
Exhibit 13. Large-Cap Diversified Media Historical Trends: EV/Forward EBITDA

3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
9.0x
10.0x
11.0x
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
E
V
/
E
B
I
T
D
A
VIAB spin-off
from CBS
Recessionary
period
Current
7.0x


Price-to-Earnings (P/E) Multiple. The P/E multiple is one of the tools used to value media
stocks, although it is not as widely used as price to-free cash flow or enterprise value to EBITDA
given the lack of consistent historical data (many companies showed significant losses for a
number of years prior to the recession). The biggest focus from an investment standpoint is
how a media companys P/E multiple trades relative to the P/E multiple of the broader market,
which we define as the S&P 500. Prior to the Great Recession of 2008/2009, the large-cap
media stocks traded at a premium to the S&P 500 (roughly 45% from 2002-07). This slowed
from the substantial premiums experienced in the 1990s, as growth rates decelerated to levels
more inline with the broader market. Today, however, the large-cap media stocks are trading
roughly even with the S&P 500, as shown in Exhibit 14.

85
Exhibit 14. Large-Cap Diversified Media NTM P/E Relative To The S&P 500
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
4.0x
Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10
15-Year Average = 1.71x

Source: IBES, FactSet, and Wells Fargo Securities, LLC

Discounted Cash Flow (DCF) Model. The discounted cash flow model is extremely
sensitive to long term growth rates, which have continued to fall over time. The reason for
this decline is the simple fact that the growth in GDP has declined, and as we explained
earlier, out of the entire TMT sector, media companies tend to be the most cyclical and
therefore the most highly correlated with the year-over-year growth in GDP.

86
Exhibit 15. Real And Nominal GDP Growth
(6.0%)
(4.0%)
(2.0%)
0.0%
2.0%
4.0%
6.0%
8.0%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013E
Y
r
/
Y
r

G
D
P

G
r
o
w
t
h
Nominal GDP Real GDP

Source: BEA and Wells Fargo Securities, LLC estimates
Another important determinant in the DCF model is the discount rate, which is sensitive to
both a companys capital structure (which tends to determine the nominal marginal cost of
debt) and its beta relative to the market. While long-term growth rates have declined post the
recession, so have the discount rates (likely due to the more flexible balance sheets), which has
left valuations pretty much unchanged from a DCF valuation perspective.
Sum-of-the-Parts Analysis. A sum-of-the-parts analysis can be very useful to understand
the value that each segment provides within a large, diversified media company. In this
situation, a fair-market-value multiple is applied to the forward-looking cash flow of each
subsegment within a conglomerate. The separate segment values are then summed and a
conglomerate discount ranging anywhere from 10-20% is then applied. The sum-of-the-parts
analysis is most useful when a company management is considering a saleeither of the
company in its entirety or of a specific segment. Sum-of-the-parts valuations tend to rise when
public multiples riseand fall when public multiples fall. Investors use the sum-of-the parts
valuations more as a check on the floor of a stock rather than as a major determinant in their
investment decision.
Fi xed I ncome Valuati on

Yield. A philosophical difference between equity and fixed income securities is that bonds offer
current income as opposed to future capital gains. The principal measure of that return is a
bonds yield, which is inverse to price. In a traditional yield-curve environment, longer-dated
bonds should yield more than shorter-dated maturities. Various measures of yield include:
current yield, yield to call, yield to maturity, and yield to worst.

Ratings and Relative Value. Bond investors tend to rely on ratings agency ratings as a
reflection of general creditworthiness. At a basic level, the valuation of various bonds should fall
inline with ratings and leverage levels to compensate for corporate risk (e.g., triple-B credits
should be cheaper than single-A, C-rated credits cheaper than double-B). In high grade,
investors use spread to Treasury as the standard measure of risk, while high-yield bond buyers
focus more on dollar price.

87
Total Return. Total return is an important measure among fixed income investorsespecially
high yield investorsbecause it incorporates price change, coupon, and yield over a fixed period
(usually one year). As a result, total return of any given bond is often an appropriate risk-
adjusted surrogate for equity return.

Structure. Another factor governing bond investors appetite for particular bonds can come
down to where it may fall within the capital structure. For example, senior secured bonds tend
to trade much more richly than a junior subordinated piece of debt since the holder of that
paper does not take on as much risk. Pricing may vary depending not only on seniority but also
on: leverage covenants, holdco versus opco origination, guarantee language, change of control
provisions, and coupon step requirements.

88



89

TELECOM
[email protected]
312/920-354

Nicole Black
[email protected]
704/715-7382
Davis Hebert
[email protected]
704/715-0594

Telecom ServicesA Macro Definition

Telecom Services in its simplest form may be defined as a service enabling communications for both
consumers and businesses. The way in which this communication happens continues to be
redefined. The telecom services segment has continued to move with technology evolution. Today,
telecom companies offer a variety of servicesvoice, data, video and other strategic services.

Key Themes

Communications, whether voice, text messaging, or social networking, remain as important as ever
for the American consumer and business. Hence, the percentage of household expenditures on
telecom services (defined as wireline, Internet, or wireless) grew to more than 2.1% by 2009 from
1.7% in 1994. However, the scope of that spending has shifted dramatically over the past ten years.
The percentage of monthly household telecom spending on wireless has ballooned to nearly 44% in
2009 from 22% in 2000, and we expect this number to move higher as consumers adopt more data-
intensive smartphones and wireless companies migrate toward price-tiering that takes more of the
telecom wallet share. Spending on Internet/broadband has remained relatively constant, at
19-20% since 2006; therefore, growth in the wireless sector has grown primarily at the expense of
wireline, where spending has fallen to 36% as of 2009 from 67% share in 2000.

Wireline: There are many ways to slice and dice the wireline industry. Incumbent local
exchange carriers (ILECs) were born out of the 1984 AT&T breakup that separated AT&Ts
long-distance business from its local exchange carriers. Consolidation has been rampant since
the 1996 Telecom Act that deregulated long distance and local voice service, as well as data
services, and many ILECs now own sizable footprints with long-haul capacity. Competitive
carriers (traditionally known as competitive local exchange carriers, or CLECs) come in many
different flavors and sizes, but in general, they provide high-bandwidth capacity and
communications services to enterprises, government entities, educational institutions, and on a
wholesale basis, other carriers. Cable, meanwhile, could also be considered part of the wireline
ecosystem, as it offers voice in tandem with video and broadband services to consumers and
businesses.

Wireless: The wireless communications industry is a $165 billion industry (based on CTIA
data). It currently features four national carriers (AT&T [T], Verizon [VZ], Sprint Nextel, and
T-Mobile USA) that cover in excess of 87.5% of the U.S. population and a number of regional
carriers (including MetroPCS, Leap Wireless and US Cellular, among others) and small
providers in one specific region (i.e., Cincinnati Bell and Cellular South).

In sum, we believe there are six key themes that are transforming the way investors value the
telecom sector:

(1) Wireline Model is Redefined
(2) Spectrum = Life Blood of Wireless Network
(3) Wireless Drivers Evolving
(4) Consolidation (Size And Scale Dominates)
(5) Regulatory Environment Remains Heavy
(6) Competitive Landscape Varies Depending on Silo

90
(1) Wi reli ne Model i s Redefi nedWhile the old wireline business, especially on the
enterprise side, was driven by access lines and long-distance revenue, we have begun to see the
model transition to IP services and strategic services. As Exhibit 1 llustrates, while wholesale
and enterprise revenue is declining at a slower rate than in the past few years, it is still in the
red. Strategic services, however, while only a small portion of carriers revenue (note: strategic
services represented 9% of Ts and 18% of VZs wireline revenue in 2011), is continuing to show
accelerating rates of growth. We expect this trend to continue in a more meaningful way in
H2 2012 and into 2013even with clear macro issues still weighing on the economy. Verizon,
perhaps, more than any other carrier has been ahead of this trend. (See our Verizon
Communications case study on page 91.)

While strategic services typically make for longer sales cycles than legacy enterprise-type
revenue, these services can help improve the efficiency of businesses and typically provide a
stickier type of revenue stream for the carriers themselves. Carriers have made large bets on
this segment through M&A. This was most clearly seen with Verizons purchase of Terremark
(April, 2011) and CenturyLinks purchase of Savvis (July, 2011). We believe carriers are
correctly recognizing the fact that the dynamics of the old enterprise revenue drivers have
clearly changed. While strategic services (which includes such segments as managed hosting,
cloud, storage, IP) is still somewhat in its infancy, those carriers which only, or primarily,
service this niche are well positioned to realize robust growtheven in a weaker macro
environment.

Exhibit 1. Strategic Services Revenue Versus Wholesale and Enterprise
(AT&T and Verizon Growth Rates)

10.0%
10.4%
17.0%
-5.8%
-3.5%
-2.2%
-8.0%
-3.0%
2.0%
7.0%
12.0%
17.0%
22.0%
2009 2010 2011
S
e
q
u
e
n
t
i
a
l

G
r
o
w
t
h

%

Source: Company reports and estimates

91

CASE STUDYVerizon Communications (VZ)

Company Description: Verizon Communications currently stands as the largest regional Bell
operating company (RBOC), serving customers in 29 states. In addition, the companys wireless
subsidiary, Verizon Wireless (VZ Wireless), of which VZ owns 55%, is the second-largest wireless
operator in the U.S. The creation of VZ Wireless, in April 2000, provided VZ with a partner in
Vodafone (VOD), the largest wireless operator in the world.

Interview between Jennifer Fritzsche and Fran Shammo, CFO, May 11, 2012

On the consumer side, VZ made a significant investment in FiOS. This has been a clear winner for
the company with significant market share gains in a short amount of time. Given the broadband
speeds you have the ability to offer versus your peers, can you actually be more of a disruptor in
the OTT (over-the-top) model? Is this part of your strategy versus cable?

Through our strategic investments in FiOS, and our success in scaling this business, we certainly
have the technology platform, content, and delivery expertise to participate and benefit from the
over-the-top video opportunity. In fact, opportunities like this are very much a part of our
strategic vision to be well positioned in high-growth parts of the market and to find new sources of
profitable growth within our core competencies.

Video streaming is one example of an incremental revenue opportunitybut its certainly not the
only one. Youll hear more about this later this year, but through our newly formed joint venture
with RedBox, well be introducing some new and innovative entertainment offerings that we think
will have broad appeal to customers.

The increasing popularity of wireless tablets, game consoles, and smart TVs is driving more and
more demand for higher broadband speeds in the home. As you point out, with our FiOS platform,
which already has been recognized as the nations fastest Internet service, we are in a unique
position to provide even higher speeds to customers, which we think will further differentiate our
service and allow us to continue to monetize our investment. Again, youll be hearing more about
these new offers in the coming months.

As you know, its not one size fits all with customers. However, we feel pretty good about our
overall competitive position. Within our telecom footprint, we think our FiOS platform offers
distinct advantages in enabling over-the-top alternatives. More broadly, our RedBox joint venture
and our 4G LTE wireless network will open up new avenues of growth as it relates to video
entertainment above and beyond the traditional markets that we serve.

How do you believe enterprise revenue has changed over the past few years?

We have seen sources of our enterprise revenue shift away from legacy transportTDM voice and
data services like Frame and ATMand move toward IP and application services.

In the process, we have attempted to align ourselves around the higher growth opportunities in
areas like managed hosting, data center, security, cloud computing and mobility. We are also
streamlining and simplifying our business so that we have a solid core of services that create
sustainable, profitable growth.

What do you see as the key demand drivers of enterprise customers today?

I would say that the key demands of large enterprise customers today include the need for global
communication capabilities, increased mobility, faster delivery of applications, reduced IT
complexity, and probably overarching all of these, would be data security. And of course, achieving
all this with a reduced capital spend and a path to lower operating expense as well.

Enterprise customers are obviously embracing mobility and are looking for ways to leverage cloud
computing to drive productivity gains and increase operating efficiency.

92

This was a key driver behind our decision to form Verizon Enterprise Solutions. We felt the time
was right to align our enterprise business around the key strategic platforms of M2M and mobility,
cloud and IT solutions and advanced communications delivered over our global IP, Ethernet and
3G and 4G LTE networks. In addition, data security is an integral part of all our services and has
become another key differentiator for Verizon. A lot of people may not know this, but we are the
#1 rated managed security services provider in the world.

How has the concept of cloud computing affected your strategy?

The cloud computing opportunity is significant. We view the cloud as the next logical step in our
enterprise evolution as well as a large revenue stream for us over time in a very large and growing
market.

Our strategic vision in this area has always been to provide a complete stack of next generation
services to enterprise customers, with security throughout all of the layers. As we looked at how to
best position ourselves to capture these growth opportunities, it became clear to us that a purely
organic build would not get us into this rapidly evolving market fast enough.

We had already been working cooperatively with Terremark on joint commercial activities, and we
concluded that an acquisition would bring us much of what we needed and accelerate our path to
leadership in cloud services.

Fast forward a year to today, we view the cloud as the key platform to develop all of our enterprise
and government solutions in areas like mobility, machine-to-machine, IT and advanced
communications.

VZ has seemed to change ahead of this trend. What do you believe are your key advantages versus
your competitors?

I would say that our key advantage is that we have already assembled the assets needed for success,
including a world-class global network and services organization with a leadership position in cloud
and IT security and rapidly developing professional service capabilities.

Were one of a few technology companies that can leverage the key platforms of mobility, machine-
to-machine, cloud and IT, advanced communications, security and global networks to bring
together networks, applications, information, and environments to help our enterprise customers
meet the challenges shaping business today.

(2) Spectrum = Li fe Blood of Wi reless NetworkSpectrum is the lifeblood of wireless and a
primary driver of value and constraints on the companies in the wireless industry. Spectrum is
valuable because it is scarce and because there are limits on how much capacity can be
delivered over the limited amount that is available. This contrasts with nearly infinite capacity
in fiber-based wireline networks, but the benefit of wireless, despite the constraints and cost, is
that it can provide a mobile experience and ubiquitous coverage that wireline cannot.
Following, we explore the important characteristics of spectrum and the real-world impact it is
having in the marketplace.

Drivers of Spectrum ValueThere are four primary drivers of spectrum value, the most
important of which is the frequency level and propagation characteristics of spectrum. The
general rule of thumb is that lower frequency spectrum is better because it has better
propagation characteristics, which means that a comparable signal on a lower frequency can
travel further and penetrate buildings better than the same signal at a higher frequency. The
better propagation is helpful to a wireless carrier because it can build a network with fewer sites
and better in-building penetration allows for better indoor service for wireless subscribers. The
superior propagation characteristic of lower-frequency spectrum is a matter of physics, but the
value to wireless carriers is evident in the higher auction prices that carriers have always paid
for lower-spectrum frequency. The average price paid, for example, in the 700MHz auction in
2008 was $1.28 per MHz/POP versus $0.58 for the 2100MHz AWS spectrum in 2006.

93
The second-most important driver of spectrum value is location. Providing wireless service in
dense cities, like New York and Chicago, is a challenge and carriers will often pay several times
more for the same spectrum in a city versus a less densely populated location.

The third driver of spectrum value is channel size. A 10x10 channel, for example, is more
valuable than a 5x5 channel. There are a few reasons that this is the case, but one of the major
reasons is that networks are more efficient with larger channels, so a 10x10 channel can deliver
more than double the capacity of a 5x5 channel.

The last important feature of spectrum is inclusion in global standards. Global standards bodies
set spectrum standards. Wireless equipment for global standard spectrum is cheaper than non-
tandard spectrum because of economies of scale for the wireless equipment provider.

Exhibit 2. Carriers Spectrum Holdings
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
VZ T S T-Mo PCS USM LEAP CLWR
700 MHz 850 MHz SMR PCS AWS BRS EBS

Source: FCC and company reports

Carrier Spectrum HoldingsEach of the four major facilities-based wireless
carriers in the United States is in a different spectrum position. Verizon is in the best
position because it has substantial holdings of low-frequency 700MHz and 850MHz spectrum
and is buying higher-frequency spectrum from a cable consortium to supplement its holdings in
metro areas. AT&T is also in a good position with 700MHz and 850MHz holdings, but T is
generally considered to need more spectrum to support its growing subscriber base in urban
areas. We expect AT&T to pursue additional spectrum as it comes available or purchase
spectrum from one of the surplus holders, like Dish Networks or Clearwire. Sprint has limited
low-frequency spectrum, but is the majority owner of the largest surplus holder of spectrum in
the United States, Clearwire.

Sprint has substantial capacity in metro areas, but its lack of low frequency spectrum inhibits
its ability to provide true nationwide coverage. The government is working to free up additional
low-frequency spectrum that is currently used by television broadcasters, but this spectrum is
not likely to be available for use until the latter part of the decade. Sprint is in a bind, but it is
likely to continue to pursue a network strategy that is narrower than T and VZ until it can get
lower-frequency spectrum that would allow it to provide wider coverage. Sprint should have
exceptional capacity in metro areas due to its relationship with Clearwire, but its unclear at this
point if that will be a competitive advantage or if Clearwires substantial holdings of 2500MHz
spectrum is more than needed.

T-Mobile is in a similar position to Sprint in that it has all high-frequency spectrum. T-Mobiles
long-term spectrum strategy is unclear given that its sale to AT&T was only recently blocked by
the U.S. government, but we expect further details this year. T-Mobile is likely to pursue a
narrow network focus similar to Sprint with a longer-term eye towards acquiring low-frequency
spectrum in future spectrum auctions.

94
One byproduct of the spectrum shortage in the United States is strong demand for tower
services. Carriers that cannot acquire sufficient spectrum can satisfy their customers capacity
needs by adding more cell sites, either through distributed antenna systems (DAS) or with
traditional cell towers. This growing demand has and continues to drive strong growth in
demand for the DAS and tower services of American Tower, Crown Castle, and SBA
Corporation.

Exhibit 3. Frequencies Ranges for 700 MHz Spectrum
700 MHz Band Plan
800 MHz
Upper
D
5 MHz paired downlink - designated for public
safety
C
11 MHz paired downlink - Verizon LTE (open access
rules)
775 MHz
D
5 MHz paired uplink - designated for public safety
750 MHz
C
11 MHz paired uplink - Verizon LTE (open access
rules)
Lower C 6 MHz paired downlink
B 6 MHz paired downlink
A 6 MHz paired downlink
725 MHz
E
6 MHz un-paired - Qualcomm/T has Boston, LA, NY,
Philly, SF (70MM covered pops; $550MM); Dish the
rest
D 6 MHz un-paired - Qualcomm/T MediaFLO
C 6 MHz paired uplink - T has mix of B&C
B
6 MHz paired uplink - VZ, Cox, USM and other have
mix of A,B,C. VZ has LA and Miami of B; Leap just
got Chicago A from VZ.
700 MHz A 6 MHz paired uplink - PCS has Boston ($310MM)

Source: Company reports and FCC

(3) Wi reless Dri vers Evolvi ngUp until recently, the main metric or driver of the wireless
model was sub growth. While churn and ARPU clearly mattered, how quickly a carrier was able
to add gross adds was key to the model, given the scale benefits it offered. However, as
illustrated in Exhibit 4, wireless penetration at more than 100% in the United States. In the
most recent CTIA survey, there were 331 million wireless subs. That would imply penetration of
107%. As a result of this high penetration, we believe sub growth becomes a less-meaningful
metric. While customers may jump from one service provider to another, the fact is most
individuals that want wireless service already have it.

As a result, the wireless business model has shifted away from a focus on grabbing share in a
growing market to growing share of subscriber spend from other potential uses of disposable
income. The carriers are using the appeal of the smartphone, and smartphone subsidies to
encourage customers to subscribe to higher-ARPU plans and add-on services (namely wireless
data).

However, even the ARPU metric may get a bit blurred. This summer, Verizon is expected to roll
out out a family data plan offering. While we do not yet know the details, we believe that one
bucket of data will be offered. A family of users will be able to use it on any device
(e.g., phone, tablet) that has the ability to use wireless data on the network. We make this point,
because if VZ moves on this, it is likely that others will follow. If the industry is transitioning to
this type of pricing arrangement, we believe the lines get all the more blurred for the
traditional wireless metrics such as subs, churn and ARPU. As we look out 3-5 years, we
believe the model will likely need to be driven off an assumed blended service revenue growth
metric as the traditional metrics (such as subs, ARPU, and churn) will become much more
undefined on a per-subscriber basis.


95
Exhibit 4. Estimated Subscriber Penetration
2
0
%
2
5
%
3
2
%
3
9
%
4
5
%
4
9
%
5
6
%
6
5
%
7
3
%
8
1
%
8
8
%
9
2
%
1
0
0
%
1
0
8
%
6
%
9
%1
3
%1
6
%
0%
20%
40%
60%
80%
100%
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
*
2
0
1
0
*
2
0
1
1
P
e
n
e
t
r
a
t
i
o
n

%

Source: CTIA Annual Survey

Exhibit 5. Average Revenue per User (AT&T, Verizon, Sprint Postpaid Subscribers)
$56.86
$57.70
$58.20
$58.75
$59.05
$58.11
$59.85
$55.00
$55.50
$56.00
$56.50
$57.00
$57.50
$58.00
$58.50
$59.00
$59.50
$60.00
$60.50
2010 1Q11 2Q11 3Q11 4Q11 2011 2012E
A
R
P
U


96
(4) Consolidation (Size and Scale dominates)We expect 2012 to be a significant year for M&A in
both the wireline and wireless sectors. Exhibits 6 and 7 offer a list of recent M&A activity in three
different segments: CLEC/fiber (wireline), data centers, and wireless. As can be seen in Exhibit
7, there was much activity in the CLEC /fiber area in 2011. We expect this trend to continue over
the next few years. There still exists many private regional fiber players who we believe would be
willing sellers at the right price. In late 2010, we saw many transactions occur driven by financial
sponsors/private equity players that were looking for an exit strategy. AboveNets move to sell to
Zayo (announced March 19, 2012) offers another example of such a move.

In the managed hosting/data center space, we believe VZ could look to build around the
Terremark assets that it acquired in 2011. At a recent conference, VZs CFO indicated that the
company would look to purchase more data centers in the international market place (which
complement the Terremark assets) as well as look to other areas in the international arena that
offer greater cloud and security capabilities. We also believe that we could see other players
(including AT&T and CenturyLink [CTL]) add to their capabilities in this area, possibly through
a purchase of an outside player. While CTL has Savvis, we would not be surprised to see it look
to further grow this segment as it attempts to diversify away from its RLEC roots. Other names
to watch in both this segment and the regional fiber space include: Windstream, Level 3
Communications and TW Telecom.

Finally in terms of wireless, 2011 was an unusually quiet year for M&A. While there certainly
was the big (and very much unexpected) announcement in March, 2011 of the T/T-Mobile
merger, the industry seemed to go into a lull following this as players were planning their next
move based on the outcome (and possible divestitures from) that merger. While the regulatory
headwinds were too strong for AT&T to get the deal done, we still believe DC would approve
mergers of smaller industry players (note: we define smaller players as any carrier smaller
than T and VZ).

All eyes should focus on the Germans! What T-Mobiles parent company, Deutsche
Telekom (DT), does here is going to be very significant in determining how the U.S. wireless
landscape will look a year from now. Whether they stay or go will have an impact on the
industry overall. If they stay, T-Mobile will need spectrum if it is to have a real LTE strategy. We
would not be surprised if T-Mobile were to look for a possible spectrum partner. T-Mobile could
also look to a joint venture/spectrum sharing partnership (DT has shown a willingness to do
this in other countries). If it chooses to go down this path, Sprint could be a serious candidate
for a potential partnership. Wholesale revenue opportunities are a large part of Sprints
Network Vision model and it clearly has shown an affinity for T-Mobile prior to AT&Ts bid.
Separately, we expect to see consolidation among some of the smaller industry players. We have
seen (and lived through) this movie before.

Although the list of public regional wireless carriers has significantly shrunk in recent years,
names to watch include: NTELOS, US Cellular, Leap Wireless, and MetroPCS. As some of these
carriers look to add additional spectrum, we believe the key decision will be based on the
financial case around adding this spectrum given the competitive nature of this space and
limited free cash flow now being generated. How these carriers answer this question may be the
key driver in the next leg of M&A we see in the industry.


97
M&A Multiples

Exhibit 6. ILEC M&A Multiples
Notable M&A

Announce
Date Acquir er Target
Pur chas e
Pri ce ($mm)
LTM EBITDA
($mm)
Syner gies
($mm)
Synergi es ( %
of EBITDA)
Acc ess Li nes
(000s)
EBITDA (Pre-
Syg's ) Mul t.
EBITDA (Post -
Sy g's ) Mul t.
Pri c e per
Line
Feb-12 Consolidated Communications SureWest Communications $538.2 $83.5 25.0 29.9% 146 6.4x 5.0x $3,694
Apr-10 CenturyLink
Qwest
1
$22,400.0 $4,415.0 575.0 13.0% 10,266 5.1x 4.5x $2,182
Nov-09 Windstream Corp. Iowa Telecom $1,128.0 $130.0 35.0 26.9% 256 8.7x 6.8x $4,413
Sep-09 Windstream Corp. Lexcom $141.0 $24.0 5.0 20.8% 23 5.9x 4.9x $6,130
May-09 Windstream Corp. D&E Communications $330.0 $64.0 25.0 39.1% 116 5.2x 3.7x $2,845
May-09 Frontier Communications VerizonProperties $8,580.0 $1,819.0 500.0 27.5% 4,011 4.7x 3.7x $2,139
Aug-08 Otelco Country Road Properties $101.3 $12.7 2.8 22.1% 29 8.0x 6.6x $3,494
Oct-08 CenturyTel EMBARQ $11,600.0 $2,604.2 375.0 14.4% 3,890 4.5x 3.9x $2,982
J an- 07 FairpointCommunications VerizonProperties $2,715.0 $429.9 67.5 15.7% 1,350 6.3x 5.5x $2,011
May-07 Windstream CT Communications $585.0 $57.0 30.0 52.6% 186 10.3x 6.7x $3,154
J un- 07 Quadrangle Hargray Communications $407.0 $41.4 5.8 14.0% NA 9.8x 8.6x NA
J ul-07 Consolidated Communications North PittsburghSystems $375.1 $49.3 7.5 15.2% 128 7.6x 6.6x $2,930
Dec- 06 CenturyTel Madison River lines $830.0 $99.0 17.0 17.2% 229 8.4x 7.2x $3,628
Sep-06 Frontier Communications Commonwealth Tel. $1,158.0 $171.0 30.0 17.5% 320 6.8x 5.8x $3,619
Dec- 05 ALLTEL Valor Telecom $2,218.0 $274.4 52.0 19.0% 518 8.1x 6.8x $4,278
Average 7.1x 5.8x $3,370
Maxi mum 10.3x 8.6x $6,130
Mi nimum 4.5x 3.7x $2,011
1 V l f Q t t ti f t

1Value of Qwest at time of merger announcement
Source: Bloomberg, SNL Kagan, and Wells Fargo Securities, LLC

Exhibit 7. CLEC, Fiber, Data Center M&A Multiples
Notable M&A

Announce
Date
Ac quir er Target Ass ets
Pur chase
Pr i ce ( $mm)
LTM EBITDA
($mm)
Synergi es
($mm)
Sy ner gi es (%
of EBITDA)
EBITDA ( Pre-
Sy g's ) Mul t.
EBITDA (Post -
Syg's ) Mul t.
Mar-12 Zayo Group AboveNet CLE C/Fiber $2,204.4 $223.6 NA NA 9.9x NA
Oct-11 Zayo Group 360Networks CLE C/Fiber $345.0 $26.2 15.8 60.3% 13.2x 8.2x
Sep-11 Gores Group Alpheus Comm. CLE C/Fiber NA NA NA NA NA NA
Aug-11 WindstreamCorp. PAETEC CLE C/Fiber/Data Ctrs $2,252.1 $373.0 100.0 26.8% 6.0x 4.8x
Apr-11 Level 3 Communications Global Crossing CLE C/Longhaul Nwk $3,112.3 $400.0 300.0 75.0% 7.8x 4.4x
Apr-11 CenturyLink Savvis, Inc. Data Centers/Nwk $3,162.2 $290 (11E) 70.0 24.1% 10.9x 8.8x
Mar-11 EarthLink STS Telecom CLE C $22.1 NA NA NA NA NA
J an-11 Verizon Communications Terremark Data Centers $1,915.2 $102.0 0.0 NA 18.8x 18.8x
J an-11 Time Warner Cable NaviSite Hosting/Data Centers $284.4 $30.8 NA NA 9.2x NA
Dec-10 EarthLink One Communications Fiber Network $370.0 $76.3 20.0 26.2% 4.8x 3.8x
Dec-10 Lightower Fiber Networks Open Access Inc. Fiber Network NA NA NA NA NA NA
Dec-10 Sidera Networks (f/k/a RCN) Long Island Fiber Exch. Fiber Network NA NA NA NA NA NA
Nov-10 Sidera Networks (f/k/a RCN) Cross ConnectSolutions Data Centers NA NA NA NA NA NA
Nov-10 WindstreamCorp. Hosted Solutions Data Centers $310.0 $25.7 0.0 0.0% 12.1x 12.1x
Oct-10 EarthLink ITC^Deltacom Fiber Network $516.0 $89.3 20.0 22.4% 5.8x 4.7x
Sep-10 Lightower Fiber Networks Lexent Metro Connect Fiber Network NA NA NA NA NA NA
Sep-10 PAE TEC Corp. Cavalier Telephone Fiber Network/CLEC $460.0 $90.9 30.0 33.0% 5.1x 3.8x
Aug-10 Ridgemont Equity Partners Unite Private Networks Fiber Network NA NA NA NA NA NA
Aug-10 Court S quare Capital Fibertech Fiber Network $500.0 NA NA NA NA NA
Aug-10 WindstreamCorp. KDL/Norlight Fiber Network/CLEC $782.0 $92.8 25.0 26.9% 8.4x 6.6x
J ul-10 NTELOS Holding Corp. FiberNet (fromOneComm)Fiber Network $170.0 $25.0 8.0 32.0% 6.8x 5.2x
J un-10 Zayo Group American Fiber Systems Fiber Network $114.5 NA NA NA NA NA
May-10 Lightower Fiber Networks Veroxity Fiber Network NA NA NA NA NA NA
May-10 Cincinnati Bell, Inc. CyrusOne Data Centers $550.0 $42.0 0.0 0.0% 13.1x 13.1x
Mar-10 Zayo Group AGL Networks Fiber Network $73.7 $7.8 0.0 0.0% 9.5x 9.5x
Nov-09 WindstreamCorp. NuVox CLE C $643.0 $115.0 30.0 26.1% 5.6x 4.4x
Av er age 27.1% 9.1x 7.7x
Max imum 75.0% 18.8x 18.8x
Mi ni mum 0.0% 4.8x 3.8x
Source: Bloomberg, company reports, and Wells Fargo Securities, LLC estimates

(5) Regulatory Envi ronment Remai ns HeavyThe U.S. telecommunications industry is a
regulated industry. The Federal Communications Commission (FCC) exists solely to regulate
the telecommunications industry. As a result, the government plays a bigger role in the
telecommunications industry than it does in most industries and each administration brings a
different regulatory philosophy and creates its own regulatory environment. The current
administrations philosophy is supportive of competition over consolidation and is focused on
driving increased wireless and wireline broadband availability.

98
Mergers and AcquisitionsThe telecommunications regulatory legacy of the Obama
administration and FCC Chairman Genachowski is most likely going to be the blocking of the
AT&T acquisition of T-Mobile. The blockage of this transaction in many ways symbolizes two
distinct views of the US wireless industry. One view is that rising costs and limited spectrum
make significant scale necessary to compete in the U.S. wireless industry, so the industry needs
to consolidate to strengthen the remaining players. The second view, which is currently
espoused by this administration, is that the benefit of scale gives large players (i.e., AT&T and
Verizon) an unfair advantage, so consolidation should occur among all the other players to
create a strong No. 3 and 4 player to promote competition. As a result of this view, the current
regulatory environment in the U.S. wireless industry is generally supportive of commercial
activity that does not further strengthen the competitive position of the large players. We see
this in the current effort by the administration to review the commercial agreements between
the SpectrumCo companies and Verizon. The announcement coincided with the announced
purchase of SpectrumCos spectrum by Verizon.

BroadbandOne of the signature efforts of the current FCC is the National Broadband Plan.
The National Broadband Plan detailed a number of goals that the administration would target
to expand the availability of broadband in the United States. Ironically, the actual funds that
would support broadband deployment were allocated as part of the stimulus programs prior to
the completion of the Plan. The two primary areas of focus were supporting wireless broadband
growth by targeting an additional 500MHz of spectrum to be made available and by re-focusing
the Universal Service Fund (USF) on broadband availability instead of its traditional focus on
voice. The administration has had success in moving both of these efforts forward, but each effort
is a challenge. In terms of increasing available spectrum, the FCC has taken a number of steps to
convert MSS spectrum into usable spectrum for terrestrial wireless networks and has started what
will be a lengthy process of bringing broadcaster and government spectrum to market. In terms of
moving the USF reform process forward, the FCC filed a Notice of Proposed Rulemaking earlier
this year to start the process of reforming and re-focusing the fund on broadband.

(6) Competiti ve Landscape Vari es Dependi ng on Si lo

Wireless

PostpayThe wireless industry is extremely competitive with an average of 6 competitors
in each major U.S. city. The number of competitors actually is higher when including the
numerous prepay MVNO operators in the market. On the postpay side, we believe pricing is
very much in repair. This is an extremely positive development, in our view. Specifically,
carriers have moved more toward tiered pricing, taken steps to mitigate the amount of
upgrades, and limited the amount of data customers can access.

Carriers have taken these steps to help relieve some of the pressures they face from rising
handset subsidy pressuresnamely from the iPhone. As can be seen in Exhibit 8, margin
has faced challenges in recent years for most wireless postpay carriers. Handset subsidies
have been increasing as smartphone adoption has grown. The iPhone, which costs the
carrier an additional $200 on average in subsidy expense, has been a major driver of this
trend, particularly in 2011 with Verizon and Sprint both getting the device. Such margin
declines are emblematic of the pressure subsidies are putting on industry today. While we
expect handset subsidies to continue to pressure margins in 2012, we believe that there are
longer-term trends developing that could help the carriers diversify away from Apple in
some ways. A key part of this will be the second act of the current operating system
platforms. Nokia/Window phones and RIMMs move to the Blackberry 10 platform will be
a critical part of this trend.


99
Exhibit 8. EBITDA Margin as a Percentage of Service Revenue (AT&T, Verizon, Sprint)
36.5%
35.5%
35.0%
32.9%
32.5%
39.8%
40.9% 40.7%
38.9%
40.4%
46.0%
45.5%
46.9%
45.0%
45.8%
23.8%
20.0%
17.5%
14.9%
11.2%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
2008 2009 2010 *2011 *2012
E
B
I
T
D
A

M
a
r
g
i
n

%
Total Average
T
VZ
S

Pr epayOn the prepay wireless side, pricing remains quite fierce as this slice of this pie
is still very much in growth mode. Prepaid subscriber growth has greatly exceeded growth
in the postpaid subscriber base over the last several years. Specifically, in 2009 and 2010,
the number of prepaid subscribers grew 36.9% and 13.2%, respectively, versus 2.8% and
2.6% growth in the number of postpaid subscribers (see Exhibit 9). Driving this trend are a
number of factorsgreater credit challenges by many in the U.S. population, an allure of a
contract-free agreement with carriers, a more attractive handset portfolio (with many
affordable Android smartphones), popularity of true unlimited plans. We expect to see the
continuation of more postpay subs choosing prepay services in 2012.


100
Exhibit 9. Prepaid Versus Postpaid (Year on Year Annual Growth Trends)
36.9%
13.2%
13.9%
7.9%
2.8%
2.6%
2.9%
2.2%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
2009 2010 2011E 2012E
Y
/
Y

G
r
o
w
t
h

%
Prepaid Subs
Postpaid Subs


Wireline

To comment on the competitive state of the wireline industryone needs to consider its many
different silos. The three most significant silos are (1) consumer wireline, (2) SMB, and
(3) enterprise.

Consumer Wi reli neOn the consumer side, offerings focus on the triple-play package.
This includes three services: voice, broadband and video. Of these three components, voice
has become the most de-emphasized and commoditized part of the bundle with broadband
and video becoming the major part of the focus. As can be seen in Exhibit 10, access lines
have continued to be on a steady decline, while broadband growth has been robust. VZ and
AT&T have deployed different strategies here. In 2007, Verizon chose what was a seemingly
controversial strategy known as FiOS. This essentially dragged fiber to the consumer home.
It allowed for the carrier to offer much higher data speeds than its competitors. Today, VZ
covers roughly 13.5 million homes with FiOS. AT&Ts strategy (marketed under the name
Uverse) is different than that of Verizons FiOS strategy in that it brings fiber to the curb
(versus the house). As of Q1 2012, T had 30 million homes passed with Uverse. While this
was a less capital-intensive initiative than FiOS, it is disadvantaged in terms of broadband
speeds versus VZ. Although the two companies (VZ and AT&T) do not compete in markets,
we believe VZs strategy has been more effective versus cable competitors than AT&Ts at
this point. Exhibits 11-13 illustrate the change in market share between cable and telco in
recent quarters in the telephony, video, and HSD categories. Cable has gained share versus
telco in the HSD and telephony area but lost share in the video category.


101
Exhibit 10. Consumer Access Lines Versus Broadband & TV Subscribers (AT&T and Verizon)
21.2
13.4
15.1
16.9
18.9
16.7
15.7
14.6
0.0
5.0
10.0
15.0
20.0
25.0
2009 2010 2011E 2012E
A
v
e
r
a
g
e

S
u
b
s
c
r
i
b
e
r
s

(
i
n

M
i
l
l
i
o
n
s
)
Access Lines Avg
Broadband & TV Avg


Exhibit 11. Video Market Share

Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2'11 Q3'11 Q4'11 Q1'12
Cable 61.6% 61.0% 60.3% 59.8% 59.3% 58.9% 58.3% 57.8% 57.5%
CMCSA 23.4% 23.2% 22.9% 22.8% 22.6% 22.5% 22.3% 22.2% 22.1%
CVC 3.4% 3.4% 3.3% 3.3% 3.3% 3.3% 3.3% 3.2% 3.2%
TWC 12.8% 12.7% 12.5% 12.4% 12.3% 12.2% 12.1% 12.0% 11.8%
DBS 32.9% 33.0% 33.2% 33.3% 33.4% 33.4% 33.6% 33.7% 33.7%
DISH 14.3% 14.3% 14.3% 14.1% 14.1% 14.0% 13.9% 13.9% 13.9%
DTV 18.6% 18.7% 18.9% 19.2% 19.3% 19.4% 19.7% 19.8% 19.8%
Telco 5.5% 6.0% 6.4% 6.9% 7.3% 7.7% 8.1% 8.5% 8.9%



102
Exhibit 12. HSD Market Share

Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2'11 Q3'11 Q4'11 Q1'12
Cable 55.3% 55.4% 55.5% 55.6% 55.7% 55.8% 56.1% 56.5% 56.9%
CMCSA 21.1% 21.1% 21.2% 21.3% 21.5% 21.5% 21.6% 21.8% 21.9%
CVC 3.7% 3.7% 3.7% 3.6% 3.6% 3.6% 3.6% 3.6% 3.5%
TWC 12.3% 12.3% 12.3% 12.3% 12.3% 12.3% 12.3% 12.4% 12.4%
Telco 44.7% 44.6% 44.5% 44.4% 44.3% 44.2% 43.9% 43.5% 43.1%
CTL 6.7% 6.7% 6.7% 6.6% 6.7% 6.7% 6.7% 6.7% 6.6%
WIN 1.5% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6%
Frontier 0.8% 0.8% 2.2% 2.2% 2.1% 2.1% 2.1% 2.1% 2.1%


Exhibit 13. Telephony Market Share

Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2'11 Q3'11 Q4'11 Q1'12
Cable 27.9% 29.0% 30.0% 31.3% 32.3% 33.2% 34.0% 35.0% 36.1%
CMCSA 9.7% 10.2% 10.7% 11.2% 11.7% 12.1% 12.5% 12.9% 13.3%
CVC 2.7% 2.8% 2.9% 3.0% 3.0% 3.1% 3.2% 3.3% 3.4%
TWC 5.3% 5.5% 5.6% 5.8% 6.0% 6.2% 6.3% 6.5% 6.8%
Telco 72.1% 71.0% 70.0% 68.7% 67.7% 66.8% 66.0% 65.0% 63.9%
T 29.2% 28.7% 28.2% 28.0% 27.5% 27.1% 26.5% 26.1% 25.6%
VZ 19.5% 19.4% 16.4% 16.4% 16.2% 16.2% 16.2% 16.3% 16.3%
CTL 11.5% 11.3% 11.2% 11.1% 11.0% 10.9% 10.6% 10.6% 10.6%
WIN 2.2% 2.5% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6%
Frontier 1.5% 1.5% 4.3% 4.5% 4.4% 4.3% 4.3% 4.3% 4.2%


SMBThe small, medium business segment is an increasingly competitive one. While the
Bells still own 80% of the market, other players (namely cable) are aggressively targeting
this segment. The cable companies seem to be taking share from the competitive local
exchange carriers (CLECs). The CLEC sector has continued to face many changes of late.
Under the old CLEC definition, these carriers would provide service to the building and
then rely on the incumbent operator to provide the last mile of support. However, the
recession and the concerted push by the cable sector caused this business model to become
more distressed. As a result, many carriers seemed to turn more toward building their own
fiber-based backbones, which has led to greater M&A activity in the space. We expect this to
continue over the near term.

Enterpri seAt the Fortune 100 level, we believe the competitive landscape has become
much more rational. At the very high end of the enterprise pyramid, we believe it is
essentially a two-horse race between AT&T and Verizon. The bad news here is that the
macroenvironent continues to weigh heavily. While we have seen some improvement in
enterprise trends, the growth significantly lags what we believe would be a more
normalized growth rate in a better economy. As is to be expected, drivers of the model are
very much dependent upon employment and the overall business-spending environment.
Telecom spending tends to lag in the business cycle. So put simply, we need to see more of a
recovery to see growth in the high-single digits. The good news, however, is that both AT&T
and VZ have aligned costs in such a way that once revenue growth does return in a more
meaningful way, large contribution margins should be realized.

103

Equi ty Valuati on

Telecommunications is an industry characterized by capital intensity, moderate barriers to entry,
and stable cash flows from recurring subscriber revenue streams. Our approach to valuing telecom
companies reflects the attributes of the industry. The high level of capital expenditure necessary to
compete in the telecommunications industry leads us to value companies on an EV-to-EBITDA
basis for companies that are expanding the network footprint and on price-to-earnings (P/E)
multiples for stable businesses that have capital expenditures primarily to maintain the network.
The moderate barriers to entry and stable cash flow make telecom companies defensive businesses
and lead to above-average dividend yields over time. Dividend yield is another way that we
determine a companys valuation.

Valuation Multiples. We typically value Telecom companies on an EV-to-EBITDA basis
where companies are spending to expand the network and on price-to-earnings (P/E) multiples
for stable businesses. The EV/EBITDA multiple essentially looks at the value of the company
(equity and debt) as a multiple of the operating cash flow of a company before capital
expenditures, tax expense, and interest. EV/EBITDA allows us to look at a companys progress
independent of the cost of the network buildout or financing costs, which is why this is the
preferred metric for companies in the early stages of growth. EV/EBITDA is a helpful metric to
measure a growing company's progress, but it is incomplete, because it excludes real costs like
capex, interest, and taxes. The P/E multiple is the multiple we use for mature companies,
because the multiple looks at the value of the company's equity versus the profit the company
generates when all costs are considered. The factors that influence our views on the proper
multiple for a growth or mature company are growth rates, competitive advantages,
competition, management and other intangible factors that will influence the performance of a
business over time.

Dividend Yield. The telecommunications industry is considered a defensive industry because
of the stable cash flows the companies generate from subscriber revenue streams. As a result,
telecom companies have over time generally paid dividends. Telecom companies that are in the
early stages of growth have typically not paid a dividend, but mature companies typically target
dividend yields of 5-10%. We evaluate a companys dividend yield based on the total yield, the
sustainability of the yield, and the growth prospects for the business that could lead to an
increasing dividend over time.

Fi xed I ncome Valuati on

Yield. A philosophical difference between equity and fixed income securities is that bonds offer
current income as opposed to future capital gains. The principal measure of that return is a
bonds yield, which is inverse to price. In a traditional yield-curve environment, longer-dated
bonds should yield more than shorter-dated maturities. Various measures of yield include:
current yield, yield to call, yield to maturity, and yield to worst.
Ratings and Relative Value. Bond investors tend to rely on ratings agency ratings as a
reflection of general creditworthiness. At a basic level, the valuation of various bonds should fall
inline with ratings and leverage levels to compensate for corporate risk (e.g., triple-B credits
should be cheaper than single-A, C-rated credits cheaper than double-B). In high grade,
investors use spread to Treasury as the standard measure of risk, while high-yield bond buyers
focus more on dollar price.
Total Return. Total return is an important measure among fixed income investorsespecially
high yield investorsbecause it incorporates price change, coupon, and yield over a fixed period
(usually one year). As a result, total return of any given bond is often an appropriate risk-
adjusted surrogate for equity return.

104
Structure. Another factor governing bond investors appetite for particular bonds can come
down to where it may fall within the capital structure. For example, senior secured bonds tend
to trade much more richly than a junior subordinated piece of debt since the holder of that
paper does not take on as much risk. Pricing may vary depending not only on seniority but also
on: leverage covenants, holdco versus opco origination, guarantee language, change of control
provisions, and coupon step requirements.


105

TMT ANALYST ROSTER

MEDI A & TELECOMMUNI CATI ONS
EQUITY
Advertising
Peter Stabler, Sr. Analyst (415) 396-4478
Ignatius Njoku, Associate (415) 396-4064

Broadcasting & Cable
Marci Ryvicker, CFA, CPA, Sr. Analyst (212) 214-5010
Stephan Bisson, Associate (212) 214-8033
Eric Katz, Associate (212) 214-5011
Daniel Bellehsen, Associate (212) 214-8044

Telecommunication ServicesWireless/Wireline
Jennifer M. Fritzsche, Sr. Analyst (312) 920-3548
Andrew Spinola, Associate (212) 214-5012
Brian Davis, Associate (212) 214-8036

CORPORATE CREDIT
High GradeTelecom, Media, Technology
Nicole Black, Sr. Analyst (704) 715-7382
Erin K. Avery, CIMA, Sr. Analyst (704) 715-0590

High YieldMedia/Entertainment/Telecom
Bishop Cheen, Sr. Analyst (704) 383-0473
Davis Hebert, Sr. Analyst (704) 715-0594

TECHNOLOGY & SERVI CES
EQUITY
Communication Technology
Jess Lubert, CFA, Sr. Analyst (212) 214-5013
Michael Kerlan, Associate (212) 214-8052
Gray Powell, CFA, Sr. Analyst (212) 214-8048

Information & Business Services
Eric J. Boyer, Sr. Analyst (443) 263-6559

Information Technology (IT) Services
Edward S. Caso, Jr., CFA, Sr. Analyst (443) 263-6524
Richard Eskelsen, CFA, Associate (410) 625-6381
Tyler Scott, Associate (443) 263-6540

Semiconductors
David Wong, CFA, PhD, Sr. Analyst (212) 214-5007
Amit Chanda, Associate (314) 955-3326
Parker Paulin, Associate (212) 214-5066

Software
Philip Rueppel, Sr. Analyst (617) 603-4260
Priya Parasuraman, Associate (617) 603-4269
Samson Lee, Associate (617) 603-4266

Technology
Jason Maynard, Sr. Analyst (415) 947-5472
Karen Russillo, Associate (415) 396-3505

Transaction Processing
Timothy Willi, Sr. Analyst (314) 955-4404
Robert Hammel, Associate (314) 955-4638
Daniel Moisio, Associate (314) 955-0646

CORPORATE CREDIT
High GradeTelecom, Media, Technology
Nicole Black, Sr. Analyst (704) 715-7382
Erin K. Avery, CIMA, Sr. Analyst (704) 715-0590


106

COVERAGE UNIVERSEBY ANALYST

Nicole Black
MEDIA TELECOMMUNICATIONS
ADBE
Adobe Systems Inc.
(covered by Erin K. Avery, CIMA)
BRITEL BT Group PLC
CBS CBS Corporation
CEI Cox Enterprises
CMCSA Comcast Corporation
COXENT Cox Communications, Inc.
CSCO Cisco Systems, Inc.
CTL CenturyLink Inc.
CTL Embarq Corporation
DELL Dell Inc.
DIS The Walt Disney Company
DISCA Discovery Communications, Inc.
DT Deutsche Telekom AG
DTV The DIRECTV Group, Inc.
EBAY
eBay, Inc.
FISV Fiserv, Inc.
FRTEL France Telecom
HPQ Hewlett-Packard Co.
IBM
International Business Machines
Corporation
MSFT Microsoft Corp.
NWS News Corporation
ORCL Oracle Corporation
QUS Qwest Corporation
RCICN Rogers Communications Inc.
T AT&T Inc.
T AT&T Mobility, Inc.
T Bellsouth Corporation
TELEFO Telefonica, S.A.
TITIM Telecom Italia S.p.A.
TWC Time Warner Cable Inc.
TWX Time Warner Inc.
VIA Viacom Inc.
VOD Vodafone Group Public Limited Company
VZ GTE Corporation
VZ GTE Southwest Incorporated
VZ Verizon California Inc.
VZ Verizon Communications
VZ Verizon Delaware Inc.
VZ Verizon Florida Inc.
VZ Verizon Maryland Inc.
VZ Verizon New England Inc.
Nicole Black - continued
MEDIA TELECOMMUNICATIONS
VZ Verizon New Jersey Inc.
VZ Verizon New York Inc.
VZ Verizon Pennsylvania Inc.
VZ Verizon Virginia Inc.
VZW Verizon Wireless Inc.
WU
Western Union Co.
XRX Xerox Corporation
Eric J. Boyer
TECHNOLOGY
VRSK Verisk Analytics, Inc.
UIS Unisys Corporation
TTEC TeleTech Holdings, Inc.
SYKE Sykes Enterprises, Inc.
SLH Solera Holdings Inc.
NLSN Nielsen Holdings N.V.
IRM Iron Mountain Incorporated
IHS IHS Inc.
GIB CGI Group, Inc.
EFX Equifax Inc.
CVG Convergys Corporation
TECHNOLOGY
WNS WNS Holdings Ltd.
WIT Wipro Ltd.
SYNT Syntel, Inc.
SAPE Sapient Corporation
SAI SAIC, Inc.
NCIT NCI, Inc.
MANT ManTech International Corporation
INFY Infosys Ltd.
IGTE iGATE Corporation
ICFI ICF International, Inc.
G Genpact Ltd.
EXLS ExlService Holdings, Inc.
CTSH Cognizant Technology Solutions Corp.
CSC Computer Sciences Corporation
CACI CACI International Inc.
BAH Booz Allen Hamilton Holding Corporation
ACN Accenture plc


107

TELECOMMUNICATIONS
WIN Windstream Corporation
VZ Verizon Communications
USM United States Cellular Corporation
TWTC TW Telecom, Inc.
T AT&T, Inc.
SBAC SBA Communications Corp.
S Sprint-Nextel Corp.
RIMM Research In Motion Limited
PCS MetroPCS Communications Inc.
NTLS NTELOS Holdings Corp.
NOK Nokia Corporation
NIHD NII Holdings, Inc.
MMI Motorola Mobility
LVLT Level 3 Communications, Inc.
LEAP Leap Wireless International Inc.
FTR Frontier Communications Corp.
CTL CenturyLink Inc.
CLWR Clearwire Corp.
CCOI Cogent Communications Group, Inc.
CCI Crown Castle International Corp.
CBEY Cbeyond, Inc.
CBB Cincinnati Bell, Inc.
AMT American Tower REIT, Inc.
ABVT AboveNet, Inc.
Jess Lubert, CFA
TECHNOLOGY
TLAB Tellabs Inc.
RVBD Riverbed Technology, Inc.
PLCM Polycom, Inc.
JNPR Juniper Networks, Inc.
FFIV F5 Networks, Inc.
CSCO Cisco Systems Inc.
CIEN Ciena Corp.
BRCD Brocade Communication Systems Inc.
APKT Acme Packet, Inc.

Jason Maynard
TECHNOLOGY
VMW VMware, Inc.
TIBX TIBCO Software Inc.
SAP SAP AG
P Pandora Media, Inc.
ORCL Oracle Corporation
N NetSuite Inc.
MSFT Microsoft Corp.
JIVE Jive Software, Inc.
GRPN Groupon, Inc.
GOOG Google Inc.
CRM Salesforce.com, inc.
Matthew R. Nemer
TECHNOLOGY
EBAY eBay, Inc.
AMZN Amazon.com Inc.
Gray Powell, CFA
TECHNOLOGY
AKAM Akamai Technologies, Inc.
DOX Amdocs Limited
EQIX Equinix, Inc.
INAP InterNap Network Services Corp.
INXN InterXion Holding N.V.
NSR NeuStar Inc.
NUAN Nuance Communications, Inc.
RAX Rackspace Hosting, Inc.
SNCR Synchronoss Technologies, Inc.
Philip Rueppel
TECHNOLOGY
WBSN Websense, Inc.
VOCS Vocus Inc.
SYMC Symantec Corp.
SREV ServiceSource International, Inc.
RHT Red Hat, Inc.
PROJ Deltek, Inc.
INTU Intuit Inc.
FTNT Fortinet, Inc.
FIRE Sourcefire, Inc.
CTXS Citrix Systems, Inc.
CHKP Check Point Software Technologies Ltd.
CA CA Technologies, Inc.
BMC BMC Software, Inc.
BLKB Blackbaud, Inc.
AZPN Aspen Technology, Inc.
ADBE Adobe Systems Inc.


108

MEDIA
VIAB Viacom Inc.
TWX Time Warner, Inc.
TWC Time Warner Cable Inc.
TVL LIN TV Corporation
SGA Saga Communications, Inc.
SBGI Sinclair Broadcast Group, Inc.
NWSA News Corporation
LAMR Lamar Advertising Company
GTN Gray Television, Inc.
ETM Entercom Communications Corp.
DTV The DIRECTV Group, Inc.
DISH DISH Network Corporation
DIS The Walt Disney Company
CVC Cablevision Systems Corp.
CMCSA Comcast Corporation
CCO Clear Channel Outdoor Holdings, Inc.
CBS CBS Corporation
BLC Belo Corp.
Peter Stabler
TECHNOLOGY
YHOO Yahoo! Inc.
WPPGY WPP Plc
WBMD WebMD Health Corp.
VELT Velti plc
VCLK ValueClick, Inc.
TRIP TripAdvisor
OMC Omnicom Group Inc.
MDCA MDC Partners Inc.
IPG Interpublic Group of Cos., Inc.
IACI IAC/InterActiveCorp.
DMD Demand Media, Inc.
AOL AOL Inc.

Timothy Willi
TECHNOLOGY
WXS Wright Express Corp.
WU Western Union Co.
VNTV Vantiv, Inc.
V Visa, Inc.
TSS Total System Services, Inc.
TRAK DealerTrack Holdings, Inc.
SSNC SS&C Technologies, Inc.
PAYX Paychex, Inc.
NTSP NetSpend Holdings Inc.
MGI MoneyGram International, Inc.
MA MasterCard Inc.
JKHY Jack Henry & Associates, Inc.
HPY Heartland Payment Systems, Inc.
GPN Global Payments Inc.
GCA Global Cash Access Holdings, Inc.
FLT FleetCor Technologies, Inc.
FIS Fidelity National Information Services, Inc.
EEFT Euronet Worldwide, Inc.
ADS Alliance Data Systems Corp.
ADP Automatic Data Processing
TECHNOLOGY
XLNX Xilinx Inc.
TXN Texas Instruments Inc.
QCOM QUALCOMM Inc.
NVDA Nvidia Corporation
MXIM Maxim Integrated Products Inc.
MU Micron Technology, Inc.
MSCC Microsemi Corp.
LLTC Linear Technology Corp.
INTC Intel Corp.
BRCM Broadcom Corp.
AMD Advanced Micro Devices Inc.
ALTR Altera Corp.
ADI Analog Devices, Inc.


109

COVERAGE UNIVERSEBY COMPANY

Ticker Company Name Analyst
ABVT AboveNet, Inc. Jennifer M. Fritzsche
ACN Accenture plc Edward S. Caso, Jr., CFA
APKT Acme Packet, Inc. Jess Lubert, CFA
ADBE Adobe Systems Inc. Philip Rueppel
ADBE Adobe Systems Inc. Erin K. Avery, CIMA
AMD Advanced Micro Devices Inc. David Wong, CFA, Ph.D.
AKAM Akamai Technologies, Inc. Gray Powell, CFA
ADS Alliance Data Systems Corp. Timothy Willi
ALTR Altera Corp. David Wong, CFA, Ph.D.
DOX Amdocs Limited Gray Powell, CFA
AMT American Tower REIT, Inc. Jennifer M. Fritzsche
ADI Analog Devices, Inc. David Wong, CFA, Ph.D.
AOL AOL Inc. Peter Stabler
AZPN Aspen Technology, Inc. Philip Rueppel
T AT&T Mobility, Inc. Nicole Black
T AT&T, Inc. Nicole Black
T AT&T, Inc. Jennifer M. Fritzsche
ADP Automatic Data Processing Timothy Willi
T Bellsouth Corporation Nicole Black
BLC Belo Corp. Marci Ryvicker, CFA, CPA
BLKB Blackbaud, Inc. Philip Rueppel
BMC BMC Software, Inc. Philip Rueppel
BAH Booz Allen Hamilton Holding Corporation Edward S. Caso, Jr., CFA
BRCM Broadcom Corp. David Wong, CFA, Ph.D.
BRCD Brocade Communication Systems Inc. Jess Lubert, CFA
BRITEL BT Group PLC Nicole Black
CA CA Technologies, Inc. Philip Rueppel
CVC Cablevision Systems Corp. Marci Ryvicker, CFA, CPA
CACI CACI International Inc. Edward S. Caso, Jr., CFA
CBEY Cbeyond, Inc. Jennifer M. Fritzsche
CBS CBS Corporation Marci Ryvicker, CFA, CPA
CBS CBS Corporation Nicole Black
CTL CenturyLink Inc. Jennifer M. Fritzsche
CTL CenturyLink Inc. Nicole Black
GIB CGI Group, Inc. Eric J. Boyer
CHKP Check Point Software Technologies Ltd. Philip Rueppel
CIEN Ciena Corp. Jess Lubert, CFA
CBB Cincinnati Bell, Inc. Jennifer M. Fritzsche
CSCO Cisco Systems, Inc. Jess Lubert, CFA
CSCO Cisco Systems, Inc. Nicole Black
CTXS Citrix Systems, Inc. Philip Rueppel
CCO Clear Channel Outdoor Holdings, Inc. Marci Ryvicker, CFA, CPA
CLWR Clearwire Corp. Jennifer M. Fritzsche
CCOI Cogent Communications Group, Inc. Jennifer M. Fritzsche
CTSH Cognizant Technology Solutions Corp. Edward S. Caso, Jr., CFA
CMCSA Comcast Corporation Marci Ryvicker, CFA, CPA
CMCSA Comcast Corporation Nicole Black
CSC Computer Sciences Corporation Edward S. Caso, Jr., CFA
CVG Convergys Corporation Eric J. Boyer
COXENT Cox Communications, Inc. Nicole Black
CEI Cox Enterprises Nicole Black
CCI Crown Castle International Corp. Jennifer M. Fritzsche
TRAK DealerTrack Holdings, Inc. Timothy Willi
DELL Dell Inc. Nicole Black
PROJ Deltek, Inc. Philip Rueppel
DMD Demand Media, Inc. Peter Stabler

110

DT Deutsche Telekom AG Nicole Black
DISCA Discovery Communications, Inc. Nicole Black
DISH DISH Network Corporation Marci Ryvicker, CFA, CPA
EBAY eBay, Inc. Erin K. Avery, CIMA
CTL Embarq Corporation Nicole Black
ETM Entercom Communications Corp. Marci Ryvicker, CFA, CPA
EFX Equifax Inc. Eric J. Boyer
EQIX Equinix Inc. Gray Powell, CFA
EEFT Euronet Worldwide, Inc. Timothy Willi
EXLS ExlService Holdings, Inc. Edward S. Caso, Jr., CFA
FFIV F5 Networks, Inc. Jess Lubert, CFA
FIS Fidelity National Information Services, Inc. Timothy Willi
FISV Fiserv, Inc. Nicole Black
FLT FleetCor Technologies, Inc. Timothy Willi
FTNT Fortinet, Inc. Philip Rueppel
FRTEL France Telecom Nicole Black
FTR Frontier Communications Corp. Jennifer M. Fritzsche
G Genpact Ltd. Edward S. Caso, Jr., CFA
GCA Global Cash Access Holdings, Inc. Timothy Willi
GPN Global Payments Inc. Timothy Willi
GOOG Google Inc. Jason Maynard
GTN Gray Television, Inc. Marci Ryvicker, CFA, CPA
GRPN Groupon, Inc. Jason Maynard
VZ GTE Corporation Nicole Black
VZ GTE Southwest Incorporated Nicole Black
HPY Heartland Payment Systems, Inc. Timothy Willi
HPQ Hewlett-Packard Co. Nicole Black
IACI IAC/InterActiveCorp. Peter Stabler
ICFI ICF International, Inc. Edward S. Caso, Jr., CFA
IGTE iGATE Corporation Edward S. Caso, Jr., CFA
IHS IHS Inc. Eric J. Boyer
INFY Infosys Ltd. Edward S. Caso, Jr., CFA
INTC Intel Corp. David Wong, CFA, Ph.D.
INAP InterNap Network Services Corp. Gray Powell, CFA
IBM International Business Machines Corporation Nicole Black
IPG Interpublic Group of Cos., Inc. Peter Stabler
INXN InterXion Holding N.V. Gray Powell, CFA
INTU Intuit Inc. Philip Rueppel
IRM Iron Mountain Incorporated Eric J. Boyer
JKHY Jack Henry & Associates, Inc. Timothy Willi
JIVE Jive Software, Inc. Jason Maynard
JNPR Juniper Networks, Inc. Jess Lubert, CFA
LAMR Lamar Advertising Company Marci Ryvicker, CFA, CPA
LEAP Leap Wireless International Inc. Jennifer M. Fritzsche
LVLT Level 3 Communications, Inc. Jennifer M. Fritzsche
TVL LIN TV Corporation Marci Ryvicker, CFA, CPA
LLTC Linear Technology Corp. David Wong, CFA, Ph.D.
MANT ManTech International Corporation Edward S. Caso, Jr., CFA
MA MasterCard Inc. Timothy Willi
MXIM Maxim Integrated Products Inc. David Wong, CFA, Ph.D.
MDCA MDC Partners Inc. Peter Stabler
PCS MetroPCS Communications Inc. Jennifer M. Fritzsche
MU Micron Technology, Inc. David Wong, CFA, Ph.D.
MSCC Microsemi Corp. David Wong, CFA, Ph.D.
MSFT Microsoft Corp. Jason Maynard
MSFT Microsoft Corp. Nicole Black
MGI MoneyGram International, Inc. Timothy Willi
MMI Motorola Mobility Jennifer M. Fritzsche
NCIT NCI, Inc. Edward S. Caso, Jr., CFA
NTSP NetSpend Holdings Inc. Timothy Willi
N NetSuite Inc. Jason Maynard
NSR NeuStar Inc. Gray Powell, CFA

111

NWS News Corporation Nicole Black
NWSA News Corporation Marci Ryvicker, CFA, CPA
NLSN Nielsen Holdings N.V. Eric J. Boyer
NIHD NII Holdings, Inc. Jennifer M. Fritzsche
NOK Nokia Corporation Jennifer M. Fritzsche
NTLS NTELOS Holdings Corp. Jennifer M. Fritzsche
NUAN Nuance Communications, Inc. Gray Powell, CFA
NVDA Nvidia Corporation David Wong, CFA, Ph.D.
OMC Omnicom Group Inc. Peter Stabler
ORCL Oracle Corporation Jason Maynard
ORCL Oracle Corporation Nicole Black
P Pandora Media, Inc. Jason Maynard
PAYX Paychex, Inc. Timothy Willi
PLCM Polycom, Inc. Jess Lubert, CFA
QCOM QUALCOMM Inc. David Wong, CFA, Ph.D.
QUS Qwest Corporation Nicole Black
RAX Rackspace Hosting, Inc. Gray Powell, CFA
RHT Red Hat, Inc. Philip Rueppel
RIMM Research In Motion Limited Jennifer M. Fritzsche
RVBD Riverbed Technology, Inc. Jess Lubert, CFA
RCICN Rogers Communications Inc. Nicole Black
SGA Saga Communications, Inc. Marci Ryvicker, CFA, CPA
SAI SAIC, Inc. Edward S. Caso, Jr., CFA
CRM Salesforce.com, inc. Jason Maynard
SAP SAP AG Jason Maynard
SAPE Sapient Corporation Edward S. Caso, Jr., CFA
SBAC SBA Communications Corp. Jennifer M. Fritzsche
SREV ServiceSource International, Inc. Philip Rueppel
SBGI Sinclair Broadcast Group, Inc. Marci Ryvicker, CFA, CPA
SLH Solera Holdings Inc. Eric J. Boyer
FIRE Sourcefire, Inc. Philip Rueppel
S Sprint-Nextel Corp. Jennifer M. Fritzsche
SSNC SS&C Technologies, Inc. Timothy Willi
SYKE Sykes Enterprises, Inc. Eric J. Boyer
SYMC Symantec Corp. Philip Rueppel
SNCR Synchronoss Technologies, Inc. Gray Powell, CFA
SYNT Syntel, Inc. Edward S. Caso, Jr., CFA
TITIM Telecom Italia S.p.A. Nicole Black
TELEFO Telefonica, S.A. Nicole Black
TTEC TeleTech Holdings, Inc. Eric J. Boyer
TLAB Tellabs Inc. Jess Lubert, CFA
TXN Texas Instruments Inc. David Wong, CFA, Ph.D.
DTV The DIRECTV Group, Inc. Marci Ryvicker, CFA, CPA
DTV The DIRECTV Group, Inc. Nicole Black
DIS The Walt Disney Company Marci Ryvicker, CFA, CPA
DIS The Walt Disney Company Nicole Black
TIBX TIBCO Software Inc. Jason Maynard
TWC Time Warner Cable Inc. Marci Ryvicker, CFA, CPA
TWC Time Warner Cable Inc. Nicole Black
TWX Time Warner, Inc. Nicole Black
TWX Time Warner, Inc. Marci Ryvicker, CFA, CPA
TSS Total System Services, Inc. Timothy Willi
TRIP TripAdvisor Peter Stabler
TWTC TW Telecom, Inc. Jennifer M. Fritzsche
UIS Unisys Corporation Eric J. Boyer
USM United States Cellular Corporation Jennifer M. Fritzsche
VCLK ValueClick, Inc. Peter Stabler
VNTV Vantiv, Inc. Timothy Willi
VELT Velti plc Peter Stabler
VRSK Verisk Analytics, Inc. Eric J. Boyer
VZ Verizon California Inc. Nicole Black
VZ Verizon Communications Jennifer M. Fritzsche

112

VZ Verizon Communications Nicole Black
VZ Verizon Delaware Inc. Nicole Black
VZ Verizon Florida Inc. Nicole Black
VZ Verizon Maryland Inc. Nicole Black
VZ Verizon New England Inc. Nicole Black
VZ Verizon New Jersey Inc. Nicole Black
VZ Verizon New York Inc. Nicole Black
VZ Verizon Pennsylvania Inc. Nicole Black
VZ Verizon Virginia Inc. Nicole Black
VZW Verizon Wireless Inc. Nicole Black
VIA Viacom Inc. Nicole Black
VIAB Viacom Inc. Marci Ryvicker, CFA, CPA
V Visa, Inc. Timothy Willi
VMW VMware, Inc. Jason Maynard
VOCS Vocus Inc. Philip Rueppel
VOD Vodafone Group Public Limited Company Nicole Black
WBMD WebMD Health Corp. Peter Stabler
WBSN Websense, Inc. Philip Rueppel
WU Western Union Co. Timothy Willi
WU Western Union Co. Erin K. Avery, CIMA
WIN Windstream Corporation Jennifer M. Fritzsche
WIT Wipro Ltd. Edward S. Caso, Jr., CFA
WNS WNS Holdings Ltd. Edward S. Caso, Jr., CFA
WPPGY WPP Plc Peter Stabler
WXS Wright Express Corp. Timothy Willi
XRX Xerox Corporation Nicole Black
XLNX Xilinx Inc. David Wong, CFA, Ph.D.
YHOO Yahoo! Inc. Peter Stabler

113

GLOSSARY OF TERMS
This glossary is comprehensive of terms related to the three sectors discussed in this report; not all terms appear in the report.
3G/4G
Standards used to describe various stages of wireless network evolution as
defined by the International Telecommunication Union. 3G is an acronym for
third generation and requires peak data rates of at least 200 kilobits per second.
4G stands for fourth generation and is becoming the standard here in the U.S.
with the rapid adoption of major wireless carriers.
Media Chapter
Access Line
A customer telecommunications connection. An access line can be a phone line
or a data connection.
Telecommunication
Chapter
App
The shortened version of the term application and refers to any number of
computer applications designed for a particular purpose. We credit Apple for the
success of this term, as it offers over 500,000 apps for its suite of hardware
products (e.g., iPhone, iPad, iPod Touch).
Media Chapter
Application Delivery
Controller (ADC)
These products typically sit in front of enterprise and web applications where
they manage client requests based on availability, policy, and priority settings.
These products also provide security, caching, and other features that improve
enterprise and web application performance.
Technology
Chapter
ARPU Average Revenue Per User.
Telecommunication
Chapter
Authentication
In the context of this report refers to the process of confirming the identity of
cable/satellite subscribers and then authorizing those users to view certain
content online. It is basically a gatekeeper system that makes sure viewers are
paying customers, generally by confirming identity with a username or account
number and a corresponding password.
Media Chapter
Channel
A spectrum channel is the frequency set aside to be used. In a 5x5 configuration,
there is a 5MHz up channel and a 5MHz down channel.
Telecommunication
Chapter
Chip A piece of semiconductor containing a circuit.
Technology
Chapter
Chip foundry
Typically a semiconductor manufacturer that makes chips for fabless companies.
TSMC (Taiwan Semiconductor Manufacturing Corporation) is the worlds largest
chip foundry.
Technology
Chapter
Circuit
Refers to a dedicated connection between two links on a network, Bandwidth in
a circuit is guaranteed and unused capacity cannot be used by other parties.
Technology
Chapter
Closed-Loop
Network
In a closed-loop network, one entity typically acts as the network, issuer,
merchant acquirer and issuer processor. American Express and Discover are
closed-loop networks.
Technology
Chapter
Cloud
The access to computing time or process capability remotely and purchased on
an as needed basis.
Technology
Chapter

114

Cloud Computing
At the moment, users of a computer such as a desktop or a notebook computer
have substantial computing power in their own personal desktop or notebook.
The concept of cloud computing is that it might be possible to centralize the
computing power in a cloud. Individuals could access a public cloud or
corporate workers an enterprise cloud using much simpler and cheaper
devices. Both software and computing capability might reside within the
cloud.
Technology Chapter
Competitive Local
Exchange Carrier
(CLEC)
These are mid-size wireline carriers focused primarily on the enterprise
market.
Telecommunication
Chapter
CTIA The US wireless association.
Telecommunication
Chapter
Distributed Antenna
System (DAS)
An method of deploying a wireless network where distributed nodes are
connected back via fiber to the electronics. This is an alternative to the
traditional cell tower model and is frequently used in densely populated
metros.
Telecommunication
Chapter
Dynamic Random
Access Memory
(DRAM)
A type of memory that is most commonly used as the main memory in a
computer. DRAM is volatile memory, which means that it forgets what it is
supposed to remember when the power is switched off, as opposed to non-
volatile memory (flash memory is one type of non-volatile memory), which
remembers its information even with the power off.
Technology Chapter
EMV
EMV comes from the initials Europay, MasterCard, and Visa and is a set of
standards that covers the processing of payment transactions that involve
credit or debit cards with a microprocessor chip and a specialized terminal at
the point-of-sale. Payment transactions utilizing EMV technology are
generally considered more secure than those which utilize magnetic stripe
technology.
Technology Chapter
Ethernet
Ethernet is a networking protocol most commonly used to connect terminals
(PCs, printers, and IP phones) within a local area network.
Technology Chapter
Fab
A factory (fabrication facility) for processing semiconductor wafers to create
semiconductor chips.
Technology Chapter
Fabless
A company that does not have its own fab, but rather, outsources its chip
production to another company (a foundry).
Technology Chapter
Firewall Technology security devices and software that protect systems from hackers. Technology Chapter
Full Time
Equivalents
A calculation of staff availability on a normalized basis. Technology Chapter
HSD High speed data connection.
Telecommunication
Chapter
Incentive Auctions
Authorized by Congress as part of the Middle Class Tax Relief and Job
Creation Act of 2012, are designed to reallocate spectrum from TV
broadcasters to commercial mobile wireless providers. Proceeds from the
incentive auctions will be divided between those that voluntarily relinquished
spectrum (i.e., broadcasters), the U.S. Treasury and to complement the build-
out of a nationwide public safety network. The process is generally expected to
take three to ten years.
Media Chapter
Incumbent Local
Exchange Carrier
(ILEC)
These are essential the legacy telcos, like AT&T, Verizon and CenturyLink.
Telecommunication
Chapter

115

Independent Sales
Organizations (ISOs)
ISOs act as a proxy sales force for merchant acquirers, providing access to
small and mid-sized merchants not easily reached by a direct sales force. The
universe of ISOs is expansive and ranges from small operations with only a
handful of sales people to enterprises with large sales forces, robust technology
and customer service capabilities.
Technology Chapter
Interchange
Interchange represents the economic value a merchant transfers to issuers to
compensate them for the risk and cost of participating in and developing
electronic payment systems. Interchange rates typically are set by the
networks and represent a percentage of the transaction dollar value.
Technology Chapter
Internet Protocol
(IP)
IP is a networking protocol that is most commonly used to transmit data
communications across network boundaries that are typically found in
between physical locations such as buildings.
Technology Chapter
IP Internet protocol.
Telecommunication
Chapter
Issuer Processor
An issuer processor is responsible for authorizing, clearing, settling and
posting data for debit, credit and ATM transactions on behalf of its financial
institution clients who issue the cards. A select number of primarily large
issuers handle processing capabilities in-house.
Technology Chapter
Linear And Non-
Linear Growth
Linear growth refers to the fact that revenue for service providers generally
grows in line with the growth in billable staffing levels. Non-linear growth is
the leveraging of solutions that drive revenue at a faster pace the headcount
adds.
Technology Chapter
Local Area Network
(LAN)
Typically refers to a group of PCs, printers and IP phones that are connected
and able to share resources in a limited area such as in a home or office.
Technology Chapter
Merchant Acquirer
(Processor)
From a technical perspective, a merchant acquirer is a financial institution
that is licensed by a card association and is contractually obligated to make
payments to merchants in settlement of payment card transactions. However,
the term is often synonymous with any number of third-party organizations
who provide a range of services to merchants. The services include: (1) signing
and underwriting merchants; (2) processing transactions (authorization,
capture, clearance and settlement); and (3) customer service. Third-party
providers include merchant processors and ISOs, among others.
Technology Chapter
MHz/POP Megahertz of spectrum per individual covered by the spectrum.
Telecommunication
Chapter
Microprocessor
A chip that is used as the thinking part of a computer. It is sometimes call a
CPU or the central processor unit.
Technology Chapter
Mobile Satellite
Service Spectrum
(MSS Spectrum)
MSS Spectrum is a spectrum band in the low 2.0GHz area that was originally
designated for use by hybrid satellite/wireless networks. Currently, the FCC is
working to reclassify the spectrum as wireless-only spectrum.
Telecommunication
Chapter
Mobile Virtual
Network Operator
(MVNO)
An MVNO is a service provider that does not own a network but leases
capacity from a network provider.
Telecommunication
Chapter
Multi-Point Control
Unit (MCU)
MCUs are network devices that enable enterprise customers to connect, secure
and manage multiple video conferencing endpoints.
Technology Chapter
Multi-System
Operator (MSO)
Used to describe companies that own and operate two or more cable systems.
Since the Federal Communications Commission considers a facility serving a
single community or distinct governmental entity a system, it is not hard to
be deemed an MSO.
Media Chapter

116

NAND Flash
NAND is a type of flash memory (non-volatile) that is used in non-volatile
memory applications in which the chip must retain its information even when
the power is switched off. NAND memory is typically used in consumer
applications such as storage for digital cameras, music storage for iPods,
removable storage for computers and some of the permanent storage in
smartphones.
Technology Chapter
National Broadband
Plan
FCC plan that is a blueprint for the governments initiative to broaden the
availability of Broadband in the US.
Telecommunication
Chapter
Near Field
Communication
(NFC)
NFC is a wireless technology that allows for the exchange of data between two
devices that are in close proximity (usually less than 4 centimeters). In a
payments setting, NFC technology has been embedded in plastic cards to
enable transactions using a specialized terminal at the point-of-sale. Recently,
handset manufacturers began embedding NFC technology in smartphones.
Technology Chapter
Open-Loop Network
A network with four unique participants that include: (1) the network; (2) the
issuer; (3) the merchant acquirer; and (4) the issuer processor. The most
recognized open-loop networks are Visa, MasterCard and PIN debit networks.
Technology Chapter
Packaged Software
Software created by independent software vendors (think Microsoft) that is
sold on a license fee basis.
Technology Chapter
Paired Spectrum Spectrum that is broken into downlink and uplink channels.
Telecommunication
Chapter
Payment Card
Industry Data
Security Standard
(PCI DSS)
The PCI DSS are a set of requirements designed to ensure all merchants or
organizations that accept, transmit or store cardholder information maintain a
secure environment.
Technology Chapter
Private Branch
Exchange (PBX)
PBX systems are used by enterprise organizations to manage voice
connectivity. These devices save companies money by managing internal calls
internally and avoiding local access fees. IP versions of these devices can also
reduce long distance calling fees by sending long distance calls over the
internet and placing them from local carrier as a local call.
Technology Chapter
Professional Visas
Permits for foreigners to work in the United States. The two primary visas are
H1b (multiyear) and L1s (short term).
Technology Chapter
Retransmission
Refers to the fees paid by cable and satellite video providers for the rights to
carry network television content, which was previously offered for free in an
ad-supported business model.
Media Chapter
Request For
Proposal (RFP)
A formal process to request service providers to bid on work. This is the
primary method of new business generation for work with the U.S. federal
government.
Technology Chapter
Rural Local
Exchange Carriers
(RLEC)
The rural telcos like Frontier Communications and Windstream Corp.
Telecommunication
Chapter
Servers
Servers are large computers owned by corporations or internet service
providers. x86 servers are servers that used processors from Intel or AMD
(x86 processors) and these are the most common type of server in use today
and it is the x86 segment of the server market that has been demonstrating
solid secular growth. Corporations also use some servers based on the Unix
operating system (Unix servers), though the Unix server market has been
trending flat to down for several years. Mainframe computers are another type
of server, often used in legacy applications. Mainframe computers have been
used for decades and this too is a market that we expect will continue to
decline in the future.
Technology Chapter

117

Smartphones
A class of mobile phone built on a mobile computing platform. Smartphones
tend to have more advanced computing ability and connectivity than other
phones. The Apple iPhone is an example of a smartphone, that runs on
proprietary Apple software (the operating system). RIMs blackberry phone
runs on RIMs proprietary operating system. Many other smartphones,
including phones made by Samsung and Motorola are designed to run on
Googles Android operating system. The computing capability in most
smartphones today is provided by chips based on circuit designs from the
company ARM (ARM-based processors, designed and sold by other chip
companies like Qualcomm, Texas Instruments and Broadcom).
Technology and
Media Chapters
Software-as-a-
Service
This is an application of the Cloud model, where software capabilities are
acquired on an as needed basis. The approach minimizes the need for up front
license fees, integration costs and upgrades hassle. Salesforce.com is the
primary example.
Technology Chapter
Spectrum
Refers to the radio portion of the electromagnetic spectrum used for wireless
communications. Since spectrum spans a certain, limited frequency range,
there is a finite amount available for wireless use. Spectrum is divided into
bands, which are then further sub-divided into blocks, and it is these blocks
that are licensed to individual wireless carrier operators.
Media Chapter
Streaming
When a user watches or listens to content from a continuous Internet feed
without downloading it first. In other words, content is sent in compressed
form over the Internet and displayed in real time.
Media Chapter
Subscription Video
on Demand (SVOD)
Allows subscribers unlimited access to certain programming for recurring fees.
Popular providers include Amazon Prime, Hulu Plus and Netflix.
Media Chapter
Tablet
A tablet is bigger than a smartphone but smaller and lighter than a notebook.
Apple, with its iPad product, currently controls the majority of the tablet
market, though there are several other tablet vendors, including Samsung,
Asustek, Acer and Toshiba who are addressing the tablet market with products
running the Android operating systems.
Technology, Media
Chapters

Tiering
Wireless price plans that are broken into tiers based on the amount of data
usage allowed.
Telecommunication
Chapter
Time Division
Multiplexing (TDM)
TDM is a legacy circuit switched technology that makes fixed levels of
bandwidth available through a series of fixed time slots. Unlike packet based
transmissions, unused bandwidth cannot be allocated from one time slot to
another.
Technology Chapter
TV Everywhere
An initiative initially introduced by Comcast and Time Warner Inc. in June
2009. It is an authentication system that allows subscribers to access certain
premium content online. Additional participants now include AT&T,
Cablevision, Cox Communications, DIRECTV, Dish Network, Time Warner
Cable and Verizon.
Media Chapter
Universal Service
Fund (USF)
An FCC fund that takes funds from carriers and distributes them to other
carriers to subsidize uneconomic services, particularly in rural geographies.
Telecommunication
Chapter
Unpaired Spectrum
Spectrum that uses the same frequency for both the downlink and uplink
channels.
Telecommunication
Chapter
Utilization
This is the key factor in determining short-term revenue and margins for
consulting firms. Utilization is what percentage of available consulting hours
are being used for billable work.
Technology Chapter
Wide Area Network
(WAN)
Typically refers to a network connecting users across a broad geographic area
and physical locations. For example a wide area network would be used to
connect a corporate user in New York to a corporate user in California.
Technology Chapter


118


119

INDEX

Cloud Computing................................................................................................... 8, 14, 17, 20, 23, 24,39, 40, 45, 69, 91, 92
Competitive Local Exchange Carrier (CLEC).............................................................................................................. 89, 102
CTIA................................................................................................................................................................... 72, 89, 94, 95
Distributed Antenna System (DAS) .................................................................................................................................... 94
Dynamic Random Access Memory (DRAM)....................................................................................................................... 25
Ethernet ....................................................................................................................................................................43-45, 92
Fabless.................................................................................................................................................................................. 26
Firewall ................................................................................................................................................................................ 65
Full Time Equivalents (FTE) ............................................................................................................................................... 63
HSD.............................................................................................................................................................................102, 102
Incentive Auctions ............................................................................................................................................................... 72
Incumbent Local Exchange Carrier (ILEC) ........................................................................................................................ 89
Internet Protocol.................................................................................................................................................................. 29
Issuer Processor................................................................................................................................................................... 47
Linear And Non-Linear growth........................................................................................................................................... 63
Local Area Network (LAN) ............................................................................................................................................ 43, 45
Merchant Acquirer (Processor) ........................................................................................................................................... 47
MHz/POP............................................................................................................................................................................. 93
Microprocessor .........................................................................................................................................................14, 23, 24
Mobile Satellite Service spectrum (MSS Spectrum) ........................................................................................................... 99
Mobile Virtual Network Operator (MVNO) ........................................................................................................................ 99
Multi-Point Control Unit (MCU)......................................................................................................................................... 43
Multi-System Operator (MSO)............................................................................................................................................ 74
NAND Flash......................................................................................................................................................................... 24
National Broadband Plan .................................................................................................................................................... 98
Private Branch Exchange (PBX).......................................................................................................................................... 43
Retransmission...........................................................................................................................................................6, 74, 76
Request For Proposal (RFP)................................................................................................................................................ 65
Rural Local Exchange Carriers (RLEC)............................................................................................................................... 96
Semiconductor............................................................................................................................................... 4, 7-9, 14, 23-26
Servers........................................................................................................................................................... 13, 14, 37, 38, 40
Smartphone ................................................................................ 6, 8, 13, 14, 17, 24, 29, 31, 32, 34, 45, 71, 72, 77, 89, 94, 99
Software-as-a-Service (SaaS) ................................................................................................................................... 17, 19, 35
Spectrum...................................................................................................................................... 71, 72, 78, 89, 92-94, 97-99
Streaming.............................................................................................................................................................40, 71-75, 91
Subscription Video on Demand (SVOD)....................................................................................................................6, 74, 76
Tablet ............................................................................................................. 6, 8, 13, 17, 24, 31, 34, 43, 45, 71-74, 77, 91, 95
Tiering.................................................................................................................................................................................. 89
TV Everywhere................................................................................................................................................................73, 74
Universal Service Fund (USF) ............................................................................................................................................. 98
Utilization ................................................................................................................................................................ 26, 63, 65
Wide Area Network (WAN)................................................................................................................................................. 44

120

Required DisclosuresEquity

Additional Information Available Upon Request

I certify that:
1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or
issuers discussed; and
2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed
by me in this research report.

Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions.
Wells Fargo Securities, LLCs research analysts receive compensation that is based upon and impacted by the overall profitability
and revenue of the firm, which includes, but is not limited to investment banking revenue.

STOCK RATING
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market over the next 12 months. BUY
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the market over the next 12 months. HOLD
3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over
the next 12 months. SELL
SECTOR RATING
O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months.
M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12
months.
U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.
VOLATILITY RATING
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As of: March 2012
48% of companies covered by Wells Fargo Securities, LLC
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Equity Research are rated Market Perform.
services for 32% of its Equity Research Market Perform-rated
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121

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This report is for your information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments
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SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE


122
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Additional Information Available Upon Request

Company Recommendation Definitions
Buy: The security is trading cheap to its peer group and/or the market and has significant total return potential.
Outperform: On a relative basis, the security is expected to outperform its peer group and/or the market.
Market Perform: The security is expected to perform in line with its peer group and/or the market.
Underperform: On a relative basis, the security is expected to underperform its peer group and/or the market.
Sell: The security is trading rich to its peer group and/or the market and has the potential to significantly underperform based on
fundamental reasons.

Sector Recommendation Definitions
Overweight We expect the sector to outperform the relevant broader market benchmark.
Market Weight We expect the sector to perform in line with the relevant broader market benchmark.
Underweight We expect the sector to underperform the relevant broader market benchmark.
This report was prepared by Wells Fargo Securities, LLC.

About Wells Fargo Securities, LLC
Wells Fargo Securities, LLC is a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission and a member of
the New York Stock Exchange, the Financial Industry Regulatory Authority and the Securities Investor Protection Corp.
Important Information for Non-U.S. Recipients
EEA
The securities and related financial instruments described herein may not be eligible for sale in all jurisdictions or to certain
categories of investors. For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited
(WFSIL). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Services Authority. For the
purposes of Section 21 of the UK Financial Services and Markets Act 2000 (the Act), the content of this report has been approved
by WFSIL a regulated person under the Act. WFSIL does not deal with retail clients as defined in the Markets in Financial
Instruments Directive 2007. The FSA rules made under the Financial Services and Markets Act 2000 for the protection of retail
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of the credit ratings stated on the respective rating agencies websites.


123
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research analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views
expressed by the research analyst(s) in this research report.

Ratings History Chart
No rating information available.

Distribution of Ratings
As of 5/22/12
0.3% of issuers and securities covered by Wells Fargo Securities,
LLC Fixed Income Research are rated Buy.
services for 0% of its Fixed Income Buy-rated issuers.
28.8% of issuers and securities covered by Wells Fargo
Securities, LLC Fixed Income Research are rated Outperform.
services for 25% of its Fixed Income Outperform-rated issuers.
53.9% of issuers and securities covered by Wells Fargo
Securities, LLC Fixed Income Research are rated Market
Perform.
services for 23% of its Fixed Income Market Perform-rated
issuers.
17.1% of issuers and securities covered by Wells Fargo Securities,
LLC Fixed Income Research are rated Underperform.
services for 26.7% of its Fixed Income Underperform-rated
issuers.

This report, IDs, and passwords are available at www.wellsfargo.com/research
This report is for your information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or
instruments named or described in this report. Interested parties are advised to contact the entity with which they
deal, or the entity that provided this report to them, if they desire further information. The information in this report
has been obtained or derived from sources believed by Wells Fargo Securities, LLC, to be reliable, but Wells Fargo
Securities, LLC does not represent that this information is accurate or complete. Any opinions or estimates contained
in this report represent the judgment of Wells Fargo Securities, LLC, at this time, and are subject to change without
notice. For the purposes of the U.K. Financial Services Authority's rules, this report constitutes impartial investment
research. Each of Wells Fargo Securities, LLC, and Wells Fargo Securities International Limited is a separate legal
entity and distinct from affiliated banks. Copyright 2012 Wells Fargo Securities, LLC.

SECURITIES: NOT FDIC-INSURED * NOT BANK-GUARANTEED * MAY LOSE VALUE

Source for cover images: iStockphoto.com/Tsekhmister
www.wellsfargoresearch.com
Copyright 2012 Wells Fargo Securities, LLC

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