Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA

1. EQUITY PRODUCT MANAGEMENT
July 14, 2005 North America
Product Management Group
Telecom/Media Overview Telecom/Media Overview
Industry Overview Alvin P. Kressler III
1.212.526.3375
Telecom & Media Research Monitor akressle@lehman.com
Sector View:
New: 0-Not Rated
Old: 0-Not Rated
Investment conclusion
! Highlighted: GOOG, YHOO, PLCM, FFIV, NWSA, DIS, CVC, SBSA, GCI
**PLEASE REFER TO FULL COMPANY NOTE(S) on http://www.lehmanlive.com **
Lehman Telecom & Media Research from North America
Google Inc. (GOOG, $298.86, 1-Overweight, Sector Neutral) Raising Numbers, Raising Target – Douglas Anmuth
We are raising our estimates for Google for 2Q05, and 2006 and beyond. We expect GOOG to post strong 2Q05 numbers on
the heels of continued secular growth in search, int'l expansion, and further gains in monetization. Our estimates for net
revenue move from $844M (+6.2% Q/Q) to $861M (+8.3% Q/Q), for EBITDA from $541M (-1.2% Q/Q, 64.1% margin) to
$566M (+3.3% Q/Q, 65.7% margin), and for PF EPS from $1.22 to $1.28. While we expect 2Q05 to be a strong quarter, our
higher price target and incrementally more positive outlook on the company are based on GOOG's fundamental earnings
power over the L-T. We are raising our EBITDA margins for 2Q05 and the outer years as we believe GOOG simply cannot
spend money fast enough given the extremely high incremental margins associated with the core search business, and the
company's technological focus and lean approach to new projects provide distinct advantages in terms of costs and efficiency.
Equity Derivatives Strategy: GOOG Buy-Write – Ryan Renicker
We are seeing signs that option market participants are pricing in a relatively high degree of uncertainty for Google (GOOG)
shares heading into Q2 earnings (July 21), as measured by Google implied volatility levels. Specifically, Google 2-month
implied volatilities are currently trading relatively high 1) on an absolute basis 2) versus realized and 3) versus the Nasdaq 100.
From a fundamental perspective, GOOG is likely to post strong 2Q numbers on the heels of continued secular growth in
search, international expansion and further gains in monetization, according to Lehman Internet & Media analyst Douglas
Anmuth. We believe investors should consider implementing a August 320 “buy-write” strategy on GOOG shares heading into
GOOG’s July 21 earnings release. This short-term strategy allows investors to maintain a bullish stance on GOOG shares into
earnings, while partially protecting against a downside move in the stock. The buy-write makes money as long as GOOG
trades above $289.46 as of the August 20th expiration date and outperforms a long-only position in GOOG shares if GOOG
trades at or below $329.40 at expiration. If GOOG trades at $329.40 on expiry, both the buy-write strategy and the long-only
position would result in call-away or holding-period return of about 10.25%.
Yahoo! Inc (YHOO, $36.73, 1-Overweight, Sector Neutral) Branded & Int'l the Likely 2Q Highlights – Douglas Anmuth
We believe YHOO's branded advertising and international businesses could provide modest upside potential to our current 2Q
estimates, which call for revs of $889M (+46% Y/Y), EBITDA of $358M (+53% Y/Y), and EPS of $0.13. Based on our tracking,
we believe YHOO's branded business experienced increased spending from the automotive, wireless, and consumer verticals,
Lehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors
should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report.
Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or
companies covered in this report, at no cost to them, where such research is available. Customers can access this
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Investors should consider this report as only a single factor in making their investment decisions.
PLEASE SEE ANALYST(S) CERTIFICATION(S) ON PAGE 3 AND IMPORTANT DISCLOSURES
BEGINNING ON PAGE 4
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2. EQUITY RESEARCH
while also benefiting from increased inventory sell-through as YHOO devoted less of its prime real estate to its own products
and services. In terms of international, we believe further roll out of its algorithmic tech, sponsored search, and contextual-
based advertising continues to fuel strong rev growth and Y/Y margin expansion. While modest upside potential to our 2Q
estimates and a slight increase to full year guidance are not likely to have a material near-term impact on the stock, we
continue to believe in the L-T potential of YHOO shares. We reiterate our 1-Overweight rating.
Polycom Inc (PLCM, $16.40, 1-Overweight, Sector Neutral) Expect Solid Jun-Q; Main 1OW – Jiong Shao
We expect PLCM to deliver a solid Jun-Q w/ rev ahead of our mdpt of guid est of $138.9M(+1%QoQ) v mgmt guid flat to +2%
& EPS est of $0.18, driven by improved US ent & govt/public, w/ momo in vid & VoIP handset biz & increased traction in int'l
biz. We main 1OW & $20 tgt. PLCM reports on Jun 20 @ 5 PM EDT. Dial-in: 800.205.6183. GM & OM likely to be stable at
62.9% &15.7%, respective, w/ higher op ex fr ramp in R&D & SG&A to expand international sales, execute strat partnerships &
further infrastructure investments. Bel Sept-Q guidance at least inline w/ current street est +3.6% to $145M, helped by cont
traction fr MCU prods through MSFT partnership, strgth in vid sales fr VSX line & shipments of IP conference phones through
NT OEM partnership. Key areas to focus during call: update on various partners, increased competition w/ new private plays in
space; outlook for IP vid adoption & VoIP handset traction, backlog & def rev figs; updates on share repurchases.
F5 Networks (FFIV, $47.47, 2-Equal weight, Sector Neutral) Expect Solid Jun-Q; Main 2EW/$60 Trgt – Jiong Shao
Following our latest checks, we expect F5 to deliver Jun-Q results at least at high end of rev/eps guid of $70-72M/$0.33-0.34 v
our/St $72M/$0.34 est. Checks indicate strong momo cont. for app acceleration & for F5 in particular. We main constructive
2EW. Call on 7/20/05 @ 4:30 ET; dial-in: 888.942.8131. Bel Jun-Q rev up QoQ in all geos ex Japan(due F'Q1 seasonality),
led by US w/ grwth in APAC & EMEA; Bel B:B potential>1 & increased def rev. Bel security/Firepass & Buf Jump strong, as
Buf Jump 55-60% of rev v 50% LQ, w/ TrafficShield inline w/ lowered expectations. Bel GM flattish v LQ at 76.8% v 76-77%
guid & OM up to 26.8% v 25.8% LQ w/ opex of $36M v $35-36.5M guid; Bel mgmt may tweak lt op margin trgt slightly up fr
current 25-30% goal. W/ respect to guid, bel F5 may potentially provide Sep-Q guid ahead of St. rev/EPS est of $75.9/$0.36,
w/ high end at least toward our $77.2M/$0.37 est. Bel DSOs to remain in mid 40s v 46 LQ, w/ inv up to $2-3M v $2M LQ at
least $20M in cash fr ops.
News Corporation (NWSA, $16.68, 1-Overweight, Sector Neutral) F4Q05 and F2006 Outlook – Vijay Jayant
We remain comfortable with our rev and OI growth ests for News Corp's F4Q05 of 6.7% and 34.9%, respectively. In addition,
we look for another strong year of growth in F2006 with operating income rising 18%. News Corp remains our top pick among
the major media companies as it has the best long-term growth prospects and the most attractive valuation. Our rev, OI, and
EPS ests for F4Q05 are $5.84B (+6.7%), $909M (+34.9%), and $0.18 (+23.7%), respectively. Sky Italia, Newspapers, and
Cable Networks are the key drivers in the quarter. Filmed Entertainment is faced with tough Y-Y comps and could see double
digit OI declines in the quarter. Television remains soft with flattish OI growth likely. We estimate share repurchases of roughly
$1.5B in F2006 (employing ~60% of FCF), following the $530M spent in F4Q05. NWS/A trades at 8.4x EV/EBITDA and 13.9x
P/FCF based on C2005E. We believe the spread between the NWS and NWS/A shares may widen in the coming months.
Walt Disney Co (DIS, $25.71, 2-Equal weight, Sector Neutral) F3Q05 Outlook: Waiting On Catalysts – Vijay Jayant
We are modestly lowering our F3Q05 operating income estimates by $27M to $1.4B due to lower expectations at Studio
Entertainment and Consumer Products. However, our EPS remains at $0.39 and the growth outlook for the quarter and C2005
still remain ahead of all other major media companies except for News Corp. Valuation is becoming more attractive, but the
biggest question that remains is the sustainability and strength of Disney's recovery following F2005, especially in light of a
slowing economy. Reducing operating income to $1.40B (+27.5%) from prior $1.43B est. EPS remains at $0.39 (in line with
consensus). All segments are positioned for double digit operating income growth except for Theme Parks, which will be
impacted by Hong Kong pre-opening expenses. Advertising concerns, slowing DVD sales, and a cooling US economy in 2006
are weighing on the shares. However, several potential catalysts are looming on the horizon. DIS trades at 9.7x EV/EBITDA
and 15.8x P/FCF based on C2005E.
Cablevision Systems (CVC, $31.95, 2-Equal weight, Sector Neutral) AMC Litigation Minor Negative – Vijay Jayant
TWX's recent court victory in its litigation with CVC over the format change at AMC is a minor negative for CVC. We do not
believe AMC's carriage at Time Warner Cable is at risk, but rather that TWX will use this victory as leverage when negotiating
AMC affiliate fees. Most likely outcome (reduction in affiliate fee) reduces CVC value/share by less than $0.33; worst case,
lose/lose scenario (AMC is dropped by TWC) reduces CVC value by $1.96/share. A New York court has ruled that AMC's shift
from a classic movie format to carriage of more recent movies breached its contract with Time Warner Cable. CVC plans to
appeal the ruling. Current contract expires in '08. We continue to expect a modest bump in the Dolans' cash offer for the CVC
telecom assets and that the Rainbow stub will trade at a discount to management estimated NAV of $12.50. TWX mgmt has
made it clear it does not plan to bid for the CVC telecom assets at this time.
Spanish Broadcasting Sys (SBSA, $9.87, 1-Overweight, Sector Neutral) Expansion Into Television – William Meyers
We were surprised by the timing and strategic direction of SBSA's announced purchase of an independent television station in
the Miami DMA for $37.5 million. We are maintaining our estimates pending further analysis of the likely earnings/FCF dilution
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3. EQUITY RESEARCH
associated with the initiative. Given previous delays in closing its long-awaited Los Angeles radio station sale to Styles Media,
coupled with management's focus on debt repayment, we would have expected SBSA to complete the $120M sale prior to
announcing any acquisitions. We were surprised by SBSA's TV initiative given: 1) its lack of senior management experience in
the business and 2) the highly competitive dynamics of the local TV station business. Management is currently reluctant to
review plans for programming strategies, investments and station projections, but will likely address these issues during its
2Q05 earnings call. The acquisition is expected to close in mid-4Q05.
Gannett (GCI, $72.95, 2-Equal weight, Sector Negative) Lowering Street-low Ests Further – Craig Huber
Gannett's 2Q EPS was $1.37 vs. our estimate of $1.38 and $1.30 in prior year. Lowering our 2005 near Street-low and 2006
Street-low EPS estimates to $4.97 and $5.30 from $5.05 and $5.40, respectively. Trimming our price target to $68 from $72
due to lowered 2006 EBITDA estimates. Maintaining 2-Equal weight rating and 3-Negative newspaper sector rating. Total 2Q
rev. of $1.937 bil was up 3.4% vs. our $1.932 bil(E). Pro forma newspaper 2Q ad rev. up 3.1% incl. a weak June, up only 0.8%.
2Q retail ad rev. up 2.6%, national down 0.3%, and classified up 4.9%. 2Q help wanted ad rev. up 7.8% and showing signs of
slowing at up only 3.7% in June (up 8.5% YTD). 2Q auto weak at down 5.0%. 2Q real estate ad revenue up 6.5%. USA Today
ad rev. down 1.4% in 2Q and down 7.6% in June. Ad revenue has been very volatile in recent months which does not indicate
strong ad front. 3Q05 TV pacings running down 17-19% vs. our prior estimate of down 12.5% (hurts EPS by additional $0.03
vs. our prior estimate). 2Q TV margins at 10-yr lows.
Happening Today
Telecom & Media C2Q05 Earnings Expectations
Lehman Brothers Expectations Consensus Estimates
Above / Above / Next Q
Earnings Current Q (Below) Current Q (Below) Cons. Next Q
Company Report Date Time Call-in Number Revenues EBITDA EPS Cons. Rev. Cons Cons. EPS Cons Rev. Cons EPS
TRB 14-Jul-05 9:00 AM 877.847.0401 $1,437.8 $380.5 $0.56 $1,467.6 (29.82) $0.58 (0.02) $1,407.5 $0.50
MNI 14-Jul-05 12:00 PM 877.278.1205 $301.7 $90.4 $0.92 $305.2 (3.48) $0.93 (0.01) $298.0 $0.86
KRI 14-Jul-05 2:00 PM 800.616.1938 $761.4 $170.7 $0.99 $769.4 (8.03) $0.99 0.01 $741.5 $0.91
Source: Lehman Brothers and First Call
Economics:
CPI (June), Lehman est. is 0.3% m-o-m.
Core CPI (June), Lehman est. is 0.2% m-o-m.
Retail Sales (June), Lehman est. is 0.7% m-o-m.
Non-auto Retail Sales (June), Lehman est. is 0.7% m-o-m.
TSY 10-year TIPS Auction
Initial Jobless Claims (9-Jul), Lehman est. is 315k.
Continuing Claims (2-Jul), Lehman est. is 2.525m.
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securities referred to in this publication and; 2) no part of my compensation was , is or will be directly or indirectly related to the specific
recommendations or views expressed in this report.
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4. EQUITY RESEARCH
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Related Stocks: Ticker Price (07/13) Rating
Google Inc. GOOG 298.86 1-Overweight
Yahoo! Inc YHOO 36.23 1-Overweight
F5 Networks FFIV 47.47 2-Equal weight
Polycom Inc PLCM 16.40 1-Overweight
Walt Disney Co DIS 25.71 2-Equal weight
News Corporation NWSA 16.68 1-Overweight
Cablevision Systems CVC 31.95 2-Equal weight
Spanish Broadcasting Sys SBSA 9.87 1-Overweight
Gannett Inc. GCI 72.95 2-Equal weight
Tribune Co. TRB 35.40 3-Underweight
McClatchy Company MNI 67.78 3-Underweight
Knight Ridder KRI 62.41 3-Underweight
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Stock Ratings From February 2001 to August 5, 2002 (sector view did not exist):
This is a guide to expected total return (price performance plus dividend) relative to the total return of the stocks’ local market (i.e. the market
where the stock primarily trades) over the next 12 months.
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2-Buy - expected to outperform the market by 5-15 percentage points.
3-Market Perform - expected to perform in line with the market, plus or minus 5 percentage points.
4-Market Underperform - expected to underperform the market by 5-15 percentage points.
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5. EQUITY RESEARCH
5-Sell - expected to underperform the market by 15 or more percentage points.
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