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Market analysis

The Internet subsector reported a strong Q2 2015 with impressive growth of 22% year over year and 5.0% quarter over quarter. The top two companies in our representative sector group for quarter-over-quarter growth were Yelp (+12.7%) and LinkedIn (+11.7%). Year over year, Yelp reported striking 52.3% growth. eBay was the only company that reported a sequential decline (-1.6%). In contrast, four of the seven Internet companies experienced a year-over-year decline in net income, with the exception of Amazon, Google and eBay that showed profit improvements. Similarly, quarter over quarter net income increased for four of the seven excepting LinkedIn, Yahoo Inc and Yelp.

With rapidly expanding access and declining prices, the ability to monitor and control the home as a holistic platform of devices and appliances has emerged. The number of smart connected homes is expected to grow from between 100 to 200 million homes today to between 500 to 700 million homes by 2020.1 Cable companies, Internet companies, alarm companies and mobile phone operating system providers are actively creating platforms and ecosystems in an attempt to break into the “IoT gateway to the home” market. One important example is the I0T device-specific operating system, Brillo, launched by Google in Q2 2015. The most successful home gateway provider will develop a system that seamlessly integrates with nearly any vendor's IoT application and is relatively painless to the homeowner.1

Amazon’s sales increased 20% from the year prior quarter in Q2 2015, but sequentially they were relatively flat with an increase of 2%. Amazon Web Services (AWS) led the year over year improvement, posting an 81% increase in revenue from the prior-year period. The primary driver for AWS was increased customer usage. Changes in foreign currency exchange rates negatively impacted net sales by US$(1.4)bn. North American sales increased 26% in Q2 2015 compared to the same quarter last year. Sales growth was primarily driven by increased unit sales, including sales by marketplace sellers. International sales increased 3% in Q2 2015.

Google’s CEO, Larry Page, recently announced plans for a new operating structure where Google will become a subsidiary of a new company called Alphabet. Alphabet will oversee Google’s initiatives in technology, life sciences, investment capital and research. Its other subsidiaries will include Calico, Google Ventures, Google Capital, Google X and Nest Labs. Google will now focus only on Internet-related services, such as online advertising technologies, search, cloud computing and software. Google, along with the other subsidiaries, will report financials under the new Alphabet structure.  In Q2 2015 Google reported revenue of US$17.7bn, an 11% year-over-year growth in revenue. The key contributors were the core search business, particularly mobile, YouTube and Programmatic Advertising. GAAP operating income grew 13% year over year. 

Yahoo! announced it will spinoff its 15% stake in Alibaba Group into a new entity called Aabaco Holdings Inc. The goal of the spinoff is to allow Yahoo! to minimize taxes while unlocking shareholder value from its stake in Alibaba. After the spinoff, the new equity will be distributed to current shareholders, who will pay taxes only when they sell their respective holdings.  However, on September 2 the IRS notified Yahoo! it would not grant the requested ruling confirming tax-free treatment of the Alibaba shares. The issue remains unresolved but Yahoo! in an SEC filing the same day, noted that the IRS had not stated the spinoff was taxable, suggesting uncertainty remains on this issue. In other news, Yahoo! and Microsoft amended their ‘search’ partnership to add flexibility and to further enhance the search experience. Yahoo! will now control how search results are presented on both desktop computers and mobile devices, while Microsoft will be responsible for selling ads on its Bing search site. Yahoo!’s key growth areas—mobile, video, native advertising and social—grew to nearly US$400mn in revenue in Q2 2015, delivering 60% growth year over year, and their display business grew 15% year over year, the most substantial revenue growth since 2010. Mobile revenue represented 22% of total traffic-driven revenue in Q2 2015, a 7% increase over Q2 2014., Aug 2015