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CNET Networks, Inc. (NASDAQ:CNET)

Q2 2006 Earnings Conference Call

July 24, 2006 5:00 pm ET


Shelby W. Bonnie - Chairman of the Board, Chief Executive Officer

George Mazzotta - Chief Financial Officer

Neil M. Ashe - Senior Vice President, Strategy and Development

Gloria Lee - Investor Relations


Lloyd - Thomas Weisel Partners

Imran Khan - JPMorgan Chase & Co.

Aaron Kessler - Piper Jaffray & Co.

Mark Mahaney - Citigroup

Jennifer Connelly - Goldman Sachs

Hagit Reindel - Jefferies & Co.

Mark May - Needham & Co.

Kit Spring - Stifel Nicolaus

Scott Kessler - Standard & Poor's

William Morrison - JMP Securities



Good afternoon. My name is Katie and I will be your conference operator today. At this time, I would like to welcome everyone to the CNET Network second quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. Ms. Lee, you may begin your conference.

Gloria Lee

Thank you and good afternoon. Before we begin our formal comments, I would like to remind you that in the financial news announcement released today, and also on this call, CNET Networks is providing specific forward-looking statements including guidance related to our expectations of future financial performance. Any forward-looking statements made as part of our news today are subject to risk and uncertainties that could cause actual or predicted results to differ materially. These risks are outlined in the safe harbor statement of our second quarter news announcement, as well as in the company’s Securities and Exchange Commission filings, including its 10-K for the year 2005 under the section entitled risk factors, which can be obtained from the SEC’s website or directly from our investor relations website.

All information discussed on this call is as of July 24, 2006 and CNET Networks undertakes no duty to update this information.

Hosting today’s call are Shelby Bonnie, CNET Networks’ Chairman and Chief Executive Officer, and George Mazzotta, our Chief Financial Officer. Neil Ashe, Executive Vice President, will also be available during the question-and-answer session.

Now, let me turn the call over to Shelby.


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Shelby W. Bonnie

Thanks, Gloria, and thanks everyone for joining us. We are pleased with our performance during the quarter, as well as the trends we see in our business. We continue to see the long-term opportunities strengthen and grow. It is clear that there will be sizable shifts in both advertising and users to the interactive media.

To increase exposure to those shifts, we have pursued a strategy of building interactive brands for people in the things they are passionate about. We currently have a number of category-leading brands, like CNET, ZDNet, and GameSpot, with a number of newer brands like,, and Chowhound.

We have also shown an ability and a desire to add additional categories and brands to our portfolio. In this call, I will take you through some of the new areas that we have been working on during the past six months.

Consistent with the press release of July 24, 2006, today we will be making a limited release of results, announcing our revenues for the second quarter and our cash position as of June 3, 2006.

Total revenues were $92 million in the second quarter, up 14% from the second quarter of 2005. Given the sale of Computer Shopper magazine, all year-over-year comparisons exclude that business.

Our cash balance was approximately $143.3 million as of June 30, 2006.

With that, let me turn it over to George to cover our financial highlights in more detail, and after that, I will provide more insight into the operating results and outlook.

George Mazzotta

Thank you, Shelby. Before I comment on our financial performance for the quarter, I would like to spend a few minutes to share with you an update on our stock option investigation.

As we have previously announced, on May 16th, the Center for Financial Research and Analysis issued an analysis of stock option exercise price at 100 companies. The report identified us, along with a number of other companies, as having granted stock options between 1998 and 2001 with exercise prices that matched or were close to a 40-day low in the stock price.

In response to this report, we appointed a special committee of independent directors to conduct an internal investigation of past option grants.

On July 10, we announced the special committee’s preliminary conclusion that the company should have recorded non-cash charges for stock-based compensation expense for certain past option grants in prior financial reporting periods.

We believe that this stock-compensation expense will be material under GAAP and will require us to restate financial statements for 2003, 2004, and 2005. The committee’s review is ongoing and it is possible that other periods could be affected as well.

The effect of the restatement will likely be to reduce the amount of our previously reported operating income and net income, or increase the size of our previously reported operating loss or net loss as determined in accordance with GAAP.

We do not expect that the anticipated restatement will have any impact on our previously recorded revenues or cash positions. Similarly, we do not expect the restatement to affect our previously reported non-GAAP operating income before depreciation, amortization, impairment and stock compensation expense, which is the corresponding non-GAAP financial measure that we normally disclose in our financial releases and communications with investors.

The special committee is continuing its review and has not completed its work or reached final conclusions. The special committee and management, along with our outside advisors, are working diligently to conduct a thorough and accurate review as expeditiously as possible.

However, we will not be in a position to file our quarterly report on Form 10-Q or to provide operating expense, operating income, net income, or earnings per share on a historical basis, or as part of our business outlook pending the completion of the special committee’s review.

Because we cannot provide these measures on a GAAP basis, we are not able to disclose, discuss or provide guidance for corresponding non-GAAP metrics. As a result, we will be limiting our remarks today to revenue and cash position and will not be able to provide any further financial information.

Additionally, we are very limited in what we can discuss about the investigation. I understand that you may have questions about this matter and as the process moves forward, we will provide you with additional information when we can. In the meantime, we do not expect to be able to respond on this call to any questions about the investigation. We appreciate your patience as we work through this process.

Now let me comment on our performance for the second quarter. We are pleased to report continued revenue growth during the second quarter and remain very confident in the long-term fundamentals of our business. We generated $92 million of total revenue in the second quarter, which was 14% above last year. Total revenue was driven primarily by growth in our interactive businesses offset by a year-over-year decline in international publishing revenue.

As we mentioned last quarter, our results exclude revenues related to Computer Shopper magazine, which we sold in the first quarter of 2006, and consequently has been treated as a discontinued operation in our financial results for 2005 and 2006.

Supporting our total revenue growth is a stable and expanding advertiser base. Across the entire network, our largest customers represented 55% of total revenue, which is similar to previous quarters. We continue to experience a very high renewal rate from our top advertisers. In fact, all of our top 100 advertisers in the first quarter renewed with us in the second quarter.

Marketing services revenue grew year over year 14% to $79.4 million. Our marketing services revenue was driven by growth across all interactive businesses, with significant growth in display media. Our licensing fees and user revenues grew by 15% to $12.6 million.

During the second quarter, our cash position increased to $143.3 million from $138.5 million at the end of the first quarter. We invested $11 million in capital expenditures in the second quarter to support strategic infrastructure builds of additional beta centers. We also invested $5.4 million in acquisitions during the second quarter. Our day of sales outstanding at the end of the second quarter was 67, which was equal to last year, but a three-day reduction from first quarter 2006.

Now I would like to provide you with CNET Networks’ guidance for the third quarter and full year 2006.

We expect total revenues for the third quarter to be within the range of $93 million to $96 million, which represents 14% to 17% growth, excluding Computer Shopper magazine from 2005 third quarter results.

For the full-year 2006, we maintain our previous guidance and expect total revenues to be within the range of $386 million to $403 million, which represents 15% to 20% growth excluding Computer Shopper magazine from full-year 2005 results.

We also expect to maintain our capital expenditure plan, and invest an aggregate of between $35 million and $38 million in 2006.

In summary, we are very pleased with our second quarter results. We are confident in the fundamentals of our business and the growth opportunities ahead of us.

I would now like to turn the call back over to Shelby.

Shelby W. Bonnie

Thanks, George. As I said at the beginning of the call, we are confident in the outlook for the interactive advertising space. I have spent a good deal of time on the road during the past quarter, visiting both advertisers and agencies. Here are some of the things I am consistently hearing from those parties.

Unlike what meetings were like a couple of years ago, there is now widespread acceptance of the dramatic change that is underway with respect to media consumption and thus, advertising. Marketers consistently talk about increasing user control over media as seen by increasing use of both the Internet and DVRs. Marketers understand that the old ways of doing business and the old metrics will no longer apply, and they will need to reinvent marketing.

It is taken as a given that significant amounts of dollars will move to the interactive space. At the same time, marketers want to protect their brand value and understand that where and how their marketing messages show up in the interactive world is much more important. They worry about the wild west nature of parts of the media and believe there is a lack of premium inventory where they can comfortably place their brands. Marketers ask for quality brands and audiences in environments that complement their brands.

Themes like this are what give us confidence that there is a great deal of opportunity for media companies like ourselves to build brands for people in the things they are passionate about.

Before I get into the individual business units, I thought I might spend some time on some of the broader themes affecting our business.

As we mentioned in our first quarter call, this is a transition year both in the technology and gaming categories, and this is clearly having an impact on our revenue growth rates for 2006. Having said that, we are happy with what we are seeing in terms of the long-term fundamentals of our business and our ability to add new properties and increase the attractiveness of our overall network.

A bigger focus of ours remains bringing in a broader set of advertisers. We see traction and the number has become more significant with every quarter. In the second quarter, we expanded our advertiser base and introduced new advertisers to our network. Every quarter that goes by we get further along in the effort, and remain confident that this will be a strong area of growth for us going forward.

Additionally, as we get customers, we keep customers, building a healthy, long-term growth platform.

The overall dynamics and health of our business remain healthy, as evidenced by trends in both audience and advertiser relationships. We ended the quarter reaching close to 116 million monthly unique users turning approximately 93 million pages per day, an increase of 1% for users and a decrease of 5% for pages. If you exclude Webshots, we saw a 12% increase in pages.

We are comfortable with the overall user and traffic trends within the network.

CNET Networks brands received awards and accolades during the second quarter, including several prestigious Webby and Maggie awards.

The company won four "Maggie Awards" for its outstanding editorial content as part of the 55th Annual Western Publishers Association award event. In the consumer category, CNET won Best Publication Website; won Best Regularly Featured Web Column; and and CNET tied for Best Web Article.

In addition, CNET Networks won three People's Voice Awards as part of the Tenth Annual Webby Awards, the leading international honor for Web sites. won in the Guides, Ratings and Reviews category; CNET won in the IT Hardware/Software category; and GameSpot won in the Games-related category.

We see very strong metrics around our ability to satisfy the needs of our customers. Our advertiser renewal rates remain stronger than ever, with all of our top 100 advertisers from the first quarter renewing with us in the second quarter.

In my visits with agencies and advertisers, I hear very strong feedback on the quality of product and service that we are providing to our clients.

Now let me take a moment to go through some of the key initiatives in each of our categories.

Our CNET brand of properties continues to scale. With CNET News and Downloads together under one interface, it is a more seamless and integrated user experience.

Today, CNET TV officially launched in beta. We launched it quietly over the last couple of weeks and it received enthusiastic response. CNET TV provides users a single destination where they can access all of CNET’s video content franchises, including insider secrets, weekend projects, and first-looks from the lab. We package and promote the content with a distinctly CNET voice. The site also reaches out to new audiences through its distribution partnerships with Cox Communication, Tivo, and TVN Entertainment.

Additionally, the continued focus of extending our relationship with our users beyond purchase decisions, we launched a new collection of tips that amasses thousands of tips for users in a searchable database. This, combined with a database of FAQ’s and owner’s manuals, creates a solid resource for anyone in the TEC or CE space.

Let me now turn to the games and entertainment category. GameSpot once again had a great showing at E3 in May. Users watched nearly 18 million on-demand video streams. Page views to the GameSpot site increased by nearly 32% compared to page views during the 2005 E3 conference. GameSpot's exclusive online coverage of the Sony PlayStation 3 press conference and its live streaming of Nintendo's Wii press conference contributed to its unprecedented E3 success.

During the quarter, GameSpot launched in beta its user video upload capability. User video upload on GameSpot represents a valuable and highly relevant use of digital video. On the sites’ message boards, users can upload video game segments to demonstrate the point they are making and to answer questions, or just to provide general commentary on things they think are funny.

The beta version is open only to GameSpot paying subscribers, which is approximately $70,000 members, and has had some strong traction to date. We expect to roll this out to all GameSpot users soon, as well as to MP3 and users.

We see very solid momentum at with both users and advertisers. During the second quarter, we celebrated the one-year milestone and are pleased with how far the site has come in only one year.

Pages are up 44% from the same quarter a year ago. User activity is strong on the site, with over 2200 user reviews posted per day and over 138,000 episodes now in the database. We have over 2.8 million user ratings on the site, and over 600,000 registered users.

At Webshots, we have made some early progress on the products side. In the next month, we plan to launch a redesigned version of the site in beta. This fresh, streamlined look in navigation will reflect innovative new back-end photo retrieval functionality that allows for more robust community engagement.

In addition, Webshots will feature landing pages for each of 10 channels based on demonstrated areas of user interest, including entertainment, family, good times, home and garden, news, outdoors, pets, rides, sports and travel. Ultimately, the new funcationality will make it easier than ever for Webshots’ vibrant community of 20 million monthly users to interact with each other around shared interests and passions.

In addition to the redesign, earlier in Q2 we launched other features, including, a service that provides free unlimited photo uploading and hosting. AllYouCanUpload is designed for people seeking a quick, easy, one-click solution for hosting images. Users interested in a more robust experience, including archiving photos for future use, have the option of registering for a free account.

Webshots’ powerful technology infrastructure allows users to upload up to 10 images at a time with no limits on size of photos, and automatically generates codes to display images that can be pasted into popular social networking, blog, and/or auction sites.

During the quarter, we made tremendous progress in our efforts to add new brands and new categories to the networks. Our recent expansion in the lifestyle category is a key example.

First, as we mentioned last quarter, we added a few key assets in the food category, a category that we believe is underserved in the marketplace and fits well with our strategy to create brands that serve the needs of the most passionate users.

We acquired earlier this year, and earlier this month, we re-launched the property with an entirely new look and feel. We worked closely with the vibrant Chowhound community to create the functionality improvement they were looking for and new features that would appeal to them. The relaunch has been a success in that initial response from these discerning food fans has been very enthusiastic. I encourage you to take a look if you haven’t.

As we successfully did with the acquisitions in the past, like TV Tome, which we re-launched as, we have shown an ability to evolve and transform property, leveraging our expertise and platforms. Among other things, this new site features personalization, specifically the ability to track favorite users and posts.

We look at our food products as part of an overall lifestyle category. During the second quarter, we made our next move into the lifestyle category with the acquisition of Urban Baby. This is an extension of the strategy we have pursued of buying smaller sites and transforming them into something more meaningful from both a product and monetization standpoint.

Urban Baby operates a popular website and newsletter in a variety of U.S. cities, an insider’s guide for expecting and new moms with active lifestyles.

It provides daily and weekly e-mail newsletters, site message boards, and reviews for a population of passionate users. The site covers topics such as baby gear, doctors, child care, events, marriage, etc.

The site appealed to us because it aligns directly with our goal to provide brands for people in things they are passionate about, representative of the kinds of highly-engaged, influential users that we design our brands for.

Among new moms, Urban Baby is becoming a well-known and influential brand. Just last week, the New York Magazine featured Urban Baby as a seven-page cover story, focusing on how the site gives new moms a powerful outlet for sharing their experiences.

Additionally, there was a long segment on the Today show just last Friday talking about the site and what an amazing community it represents. Importantly, it broadened the demographic profile of our audience, bringing a larger female audience into the network.

We believe, as we did with the food category, that this market is underserved online and that we have a great potential to drive marketer expansion and growth within the category long-term.

Not only do we continue to find highly attractive acquisition opportunities that are off the radar here in the U.S., but we are pursuing the same strategy internationally as well. While internationally, our focus historically has been more on the IT professional market, we have increasingly stepped up our effort to bring more consumer-focused brands to key markets.

In July, we acquired xcar in China. With growing disposable income, China is becoming one of the fastest-growing auto markets in the world. Additionally, for most consumers in China, an automobile purchase will be their first ever, meaning there is much more opportunity for independent content players to help support their buying decision.

Xcar, which is based in Beijing, is one of the top-three properties related to the auto industry in China. Xcar is dedicated to news, reviews and information regarding the auto market in China. The site is a mix of both original and user-generated content, as well as a rich database of car and related product information.

As we said before, we launched GameSpot U.K. last quarter, leveraging the GameSpot U.S. site with content catered to the U.K. market. The property has been very well-received. It is already one of the leading game sites in the United Kingdom. The site offers gamers the benefit of localized content while enabling U.K. gaming and consumer advertisers’ reach into this valuable, geographically targeted audience.

We also launched in France as an extension of the CNET brand, and so far it has been very well-received. We expect to launch more of our U.S. brands in key markets over time this year.

We are pleased with our overall performance during the quarter in terms of our ability to expand our existing brands as well as add new brands and new categories to the network. As a management team, our focus remains on our business and continuing to make it stronger. In a time when advertisers are not only shifting budgets but also struggling with how to put their dollars to work, we provide an attractive opportunity.

Through a focus on our users and what they want, we have built some of the most important content brands in the interactive space -- brands that are grounded in our ability to innovate and meet the needs of our users without the legacy of other businesses or distribution platforms.

Also, we have been an innovator on advertising and at the same time provide a high level of service and results that translates into incredibly high renewal rates.

Finally, as a network, we find ways to add new growth areas economically to both diversify our customer base and build additional shareholder value.

CNET Networks has held a long-term focus on the content category and built exposure towards the opportunity that we see continuing to grow. We have consistently proven that we can turn revenue growth into profits while at the same time innovate and launch new products and grow user and customer base.

The long-term trends for this business are attractive, and CNET Networks is well-positioned to generate sustainable top-line growth, expand margins, and generate significant free cash flow in the coming years.

That wraps up our formal comments. We would like to turn it over to the operator so that we can open it up for questions.

Question-and-Answer Session


(Operator Instructions)

Your first question comes from Gordon Hodge with Thomas Weisel Partners.

Lloyd - Thomas Weisel Partners

Hi, guys, it’s Lloyd in for Gordon. Just wondering if you can comment a little bit about some of the recent data points out of the enterprise tech space, and how weakness at companies such as Dell might square with planned marketing spending at Microsoft surrounding the Vista launch, and if you have any change in your sense of the timing of when Microsoft Vista related revenue might show up in your revenues.

Shelby W. Bonnie

As we talked about during the first quarter, we were overall seeing weakness in both the PC platform and the gaming platform, both of those. I think it is two important transition years. We did, when you look at the context from our first quarter call announcement to what you saw in terms of the results of a lot of bell-weather accounts, not only the PC category but the game category, I think in that context we would say we are really proud of what we did from a performance standpoint in this quarter.

I would say that again, 2006 is a transition year. These are not things that really speak to the long-term viability or health of either of those categories, but it really is a case that we are looking at a transition year. I think we are doing a relatively good job of managing through it.

I think we are pleased with our overall performance in that context.


Your next question comes from Imran Khan with JP Morgan Chase.

Imran Khan - JPMorgan Chase & Co.

Good afternoon. Three questions. First, I think you said that page views, if I ex out Webshots, was up 12%. If my memory is correct, I think it was 18% last quarter. I was trying to better understand, how should we think about page views in the longer term?

Secondly, you talked about the unique users growth of 1% from the second quarter of 2005. I was wondering if I could get that number ex-ing out Webshots. Those are the two major questions.

Third, a housekeeping question, can you give us the working capital changes this quarter? Thank you.

Shelby W. Bonnie

The first question, when you look at page views over the last three years and you look at trends overall, as we said starting three years ago, it has been an area of focus as we have built up inventory in anticipation of what we were seeing overall within the industry. I think at the time, when you look at some extraordinary numbers going two and three years ago, we said at the time we thought that those numbers, we would go through fits and starts of kind of higher numbers and lower numbers. I think the good thing overall is that we feel very comfortable with where we are with respect to an overall inventory level and our ability to monetize what we have.

We did a really good job of building into a trend and a need. Going back a couple of years ago, we said we thought it was more economic to do then. I think we feel very pleased in terms of what we are seeing with respect to overall trends in our business.

I think we have plenty of inventory. We feel very good about what we are doing with respect to our ability to serve our users. We are feeling good about directionally where the business is going.

Secondly, when you speak about page views longer-term, I think one of the things that everyone just needs to keep on the radar screen is the page view metric is going to become less and less meaningful as time goes on, as we do more video and as our sites get more interactive and dynamic, we are going to have to start looking at other metrics in terms of how you think about interaction.

For instance, right now, you have seen a real focus on our part in terms of how we leaned into video over the last six months, so I think that is something that all of us are just going to have to be aware that is one of the things that you are going to see overall.

With respect to unique users excluding Webshots, we are actually not providing that number because it is not available in terms of how we [de-dupe] it within our network. I would say overall if you look at what we are seeing in the network, we are very pleased from both a user standpoint and a page view standpoint. I also think the stuff we have seen around the Webshots product, I think we are really excited about what the redesign can mean.

The opportunity on Webshots really has been a monetization opportunity and I think the team has done a really good job of both making a product that can be very engaging for users but also provides a real foundational product in allowing us to do a better job of monetizing. I think the trends overall in that area have been good. George.

George Mazzotta

On the third part of your question, unfortunately we are unable to disclose the changes in working capital for the quarter, or to disclose any further financial information other than what we have announced on the call and presented in the financial highlights page.


Your next question comes from Safa Rashtchy with Piper Jaffray.

Aaron Kessler - Piper Jaffray & Co.

Hi, it’s Aaron Kessler for Safa. A couple of questions, following up on Imran’s question about the page views, can you disclose or give us a general sense for the CNET core growth in page views, first in maybe the GameSpot platform?

Also, are you seeing any impact at all from the new Yahoo! consumer technology review site? Thank you.

Shelby W. Bonnie

We do not break out pages among different sites, but I would say that overall, we have been really pleased with the way the CNET property has done. We have gone through a period of bringing together,, and Download. I think the team has done an extraordinary job. I think the CNET TV product that launched in Beta today is a really good one.

I would say overall we are not seeing a lot of impact right now from competition across the board. I think we are feeling very good overall where that product is going directionally. I think the product continues to get better. We continue to see really good engagement in traction with users and, at the same time, marketers remain very pleased with respect to overall experience and quality of that environment.


Your next question comes from Mark Mahaney with Citi Bank.

Mark Mahaney - Citigroup

Thank you. A couple of questions. First, acquisitions I assume did not contribute anything materially in the quarter? If you could just confirm that.

Secondly, in terms of the product side, how do you think about allowing Webshots to expand a little bit in allowing the uploading of videos? Not just photos, but videos? How do you think about that market opportunity?

Third, just a little bit more color on the international media side. It looked like, I think it is an apples-to-apples basis, but it looked like there was particularly a material slowdown in the year-over-year growth rate. I think in the script you mentioned something about international print efforts may have really slowed down. Could you just provide a little bit -- is there a way to look at international media stripping out the publishing assets and talk about what the growth rate was like for the international online assets? Thanks a lot.

Neil M. Ashe

You are correct that acquisitions did not play a real part in the second quarter, from a financial perspective.

Secondly, on the Webshots product side, we do view Webshots as one of the premier media sharing platforms on the web now, and we would look to satisfy the needs of the over 20 million users who want to share all kinds of media as they are changing. We do not have any specific announcements on video, but it is obviously something that we pay close attention to.

As Shelby mentioned, you will see the redesign of that site in the next little bit and it is highly conducive to building communities around users interests and different forms of media. So that should be pretty exciting.

On the international media side, as we mentioned in the script, we did have some weakness in print in China, which is our sole remaining print area. We are pleased with the transition that we are making to a broader online platform that is and will grow faster in the future. Although the growth rate was not great internationally this quarter, we are pleased with the strategic direction there and making real progress for the future.


Your next question comes from Anthony Noto with Goldman Sachs.

Jennifer Connelly - Goldman Sachs

Hi, this is Jen Connelly in for Anthony. I have two questions. One is how should we think about the cost to drive growth in the most recent quarter versus prior quarters? Is there any reason that we should expect that the expected ramp in margins in the back-half of the year would not materialize?

Then, my second question would be if you could just discuss the advertiser base of both Urban Baby and Chowhound, what they currently are and how you see that going forward.

George Mazzotta

I can take the first question. This is George, and this may be helpful for all those people that are asking similar questions about our margin expansion or our operating expenses and investments.

Our investigation is ongoing. We will not be able to discuss these types of financial metrics until we complete the investigation and finalize our restatement and file. So unfortunately, we cannot talk about -- I cannot address specifically the answers to your question.

Neil M. Ashe

So then I will take the question about the existing advertiser base and the opportunity for Chow and for Urban Baby. Both right now are nascent in their revenue contribution, so they are not going to be material contributors until we build them out and start to grow them in 2007 and beyond.

However, the types of accounts that are interested and have identified interest in the properties are those which you would expect, which are the highest quality general consumer advertisers focused on the female demographic generally in the 25-40 year old age group.

So the initial reaction has been great. There are obviously endemic advertisers that have an interest in the food category as well as in the parenting category, and we expect to have strong growth there in 2007 and beyond.

Shelby W. Bonnie

I would just underscore, as I mentioned in my comments, I spent a bunch of time on the road talking to both advertisers and agencies. Of course, Urban Baby at the time was not public but what we are doing around the food category was. I would say we are seeing a really good response. I think people are very interested in that area.

I think there are also, as I mentioned earlier, people are really looking at how do I find quality brand and environments where I can, as a marketer, put money to work in a way that really makes sense for me, kind of an environment that is conducive to my brand.

What is interesting is that people see us continuing to expand and do more things. I think we get a lot of positive feedback from agencies and advertisers, because they are all stuck with -- there is a limited set of good places to spend money right now. I think they all know “I gotta spend more money”, but at the same time, where do they put that money?

What is interesting is even walking around [inaudible], I spent time in New York and I get just unbelievable responses from a lot of people at the agencies who were chowhound users and were really excited to see what we have done with it.


Your next question comes from Youssef Squali with Jefferies & Co.

Hagit Reindel - Jefferies & Co.

Thank you. This is Hagit Reindel for Youssef. First question on the non-endemic advertisers, could you just update us about how many actually renewed from Q1 to Q2, and how many were added? Maybe you can name a few, like you did last quarter.

Second question, on and video in general, as you are becoming more involved in that space, are you considering any entry into digital downloads, or considering any partnerships in that area? Thank you.

Shelby W. Bonnie

On the non-endemic side, we continue to see really good traction, as I said. It continues to get more significant every quarter. I would say we have been very pleased with the response that we are getting from marketers.

As we go in and talk to people, I think our brand name in terms of what we are doing from a network standpoint continues to increase. We continue to bring in new marketers. We continue to show an ability to keep the marketers that we get.

I think one of the numbers that we were really proud of this quarter is that all of our advertisers from the first quarter in the top 100 renewed with us during the second quarter. I think it really speaks to, and I think you saw it with the aQuantive award we got and other things. We have done a really good job of providing a high level of service and real results and value to our marketing partners. I think we are finding that same thing holds true for what we are doing in the non-endemic.

I will let Neil speak to the

Neil M. Ashe

As it relates to, we are very pleased with the growth of the property so far, and both the URL and the position it sits in as a brand that is built for people who are passionate about television is we recognize is very strong.

We right now are focused on continuing to develop that and to develop the size of the community and the audience and the traffic. We think it is an outstanding environment to deliver video, and it is proving that in terms of the promotional video that we currently run on the site for high-quality network television shows. We expect that to continue in the future.


Your next question comes from Mark May with Needham & Co.

Mark May - Needham & Co.

Hi, thanks for taking my questions. I have three of them, if possible. Since page views are increasingly not a good proxy for revenues, and clearly this quarter that was the case with page views being down 6% sequentially, including Webshots, and marketing revenue I think up 12% or so, what were the key drivers of marketing services revenue growth in the quarter? Was it sell-through rate? Was it an increase in CPN’s or other rates? Was it the introduction of new monetization engines, etc.?

Second question, more to do with the third quarter revenue guidance. If my numbers are right, in two of the last three years, marketing revenues had declined sequentially into the third quarter. The one year that it was up, it was up only 1%. I am just curious why you are guiding up 3% or so. What gives you the confidence? I guess not the confidence, but is it the marketing segment that is driving that, or is it some new revenue in the licensing area? Thank you.

Shelby W. Bonnie

To the first thing, one of the things we said for a while as we build page views in advance of the opportunity that we -- I think that has been a good thing, is we have not been gated by overall page view levels. There is not, in a good way and a bad way, a direct elastic relationship between what you see in page views and revenues.

What you saw during the second quarter was you saw us doing a better job of selling in what we would contextually say was a difficult market in two of our big categories, the personal computer category and in the gaming category. I think we did a good job of selling through it, and I think we continue to add new brands and new types of advertisers. So what we have been able to do is take inventory we have and do a better job of selling it and monetizing and bring in additional advertisers.

When we think about rates, I think as we said on prior calls, I think we have to be careful not over-leaning on rates. We have taken a view of that we have premium inventory and premium pricing for a while, and we think there should be a direct relationship between them and the value provided to customers and what you do for an overall rate standpoint.

With respect to third quarter, I would just say that we saw, as I think we have said before, we saw some weakness in the first half of the year and from what we are seeing right now, the guidance we are providing is our best estimate of where we see that market going.

I think it is really coming across the board, kind of continued the step improvement in our business. We feel generally good about where things are.


Your next question comes from Kit Spring with Stifel Nicolaus.

Kit Spring - Stifel Nicolaus

Good afternoon. You mentioned that your traffic is a little bit better without Webshots. Is Webshots disproportionately lower as far as the percentage of revenues relative to the traffic? Can you give us a little color on that?

Also, could you give us a similar statistic about the percentage of revenues that GameSpot accounts for, since that seems to be where a lot of the growth is coming? That would give us a lot of confidence, if you could quantify that for us.

Third, can you talk about an appetite for a buyback at current levels? Thank you.

Neil M. Ashe

I will take the monetization. We do not break it out by individual brand, our revenues by individual brand. I will remind you that when we acquired Webshots we pointed out that the RPN for that property was materially different than the RPN for the rest of the network. I believe that prior to the acquisition of Webshots, the RPN was around $15, and post the acquisition of Webshots, it was in the $8 or $9 range, so that gives you an order of magnitude.

Beyond that, we do not break out the revenue by brands. Although I will say that while the GameSpot and our other entertainment properties are fast-growing brands, we do see growth across the board in our brands. As Shelby mentioned, we build premium brands and premium inventory for people and the things they are passionate about, and that resonates across the board with advertising agencies.

George, do you want to take the…

George Mazzotta

Yes, a brief answer to the question about buyback is that we are not going to, at this time, speculate about a share buyback.


Your next question comes from Scott Kessler with Standard & Poor's.

Scott Kessler - Standard & Poor's

Thanks very much. First, I just wanted to say that I think that you guys have handled, at least communications with the investment community and the public at large related to the issues involving alleged options backing, in a very forthright fashion, so I just wanted to thank you for that.

Along those lines, I wanted to know if you could at all speak to the materiality of the [inaudible] related to the backdating related issue.

The second question I have is have you guys given any thought, and I think I might have asked about this previously, have you given any thought to ways that you can attract more users to your network of properties? Because I think what people are maybe speaking to, to some degree, is that there has been flatness with respect to things like the page views and the unique users. I am wondering, to what degree is that important for you to try to jumpstart those? Obviously the reference made to the fact that you are going to be focusing more perhaps on video streams is relevant, but I am wondering if you are thinking about doing anything to kind of increase some of those metrics. Thank you.

George Mazzotta

This is George. I will take the first question, which is the cost of the investigation and restatement. The special committee investigation is ongoing. We are not complete. At this time, it is difficult for us to determine the extent of the cost of the investigation, but we believe that it will be significant.

Neil M. Ashe

I will take the second question, Scott, as relates to continue to grow the network. Yes, we are desirous of continuing to grow the network, but it is good context to note that we remain the 11th largest Internet network in the world.

As we have said, we build brands for people and the things we are passionate about, and as such, we do not attract all users but rather focus on what we like to call the most passionate, or the top-third of the interest level who are influential and generally guide the directions of the rest of public. We continue to be pleased with where we are from a growth perspective and you will see the new properties start to contribute over time as well, so we are happy with the platform and its growth.

Shelby W. Bonnie

I think we have time for one more question.


Your last question comes from Bill Morrison with JMP Securities.

William Morrison - JMP Securities

George, I was wondering, I think I heard you say that you had $11 million in cap-ex in the quarter. I just wanted to confirm that. I believe that your guidance from last call was somewhere in the $35 million to $36 million range for the year in cap-ex. I was just wondering if you could update us on that, if that is still is a good number to use in our models.

Shelby, I was wondering if you could, last quarter you commented a little bit more about relative weakness, or relative to your expectations, some weakness not only on the brand side but in the leads business in the computer category. I was wondering if you could update us if you are still seeing that weakness in the leads business and if you could talk about some of the -- when you talk about a transitional year, does that relate to leads as well as just CPM-based media that you are selling? Thank you.

George Mazzotta

I will take the first question, which is yes, we can confirm that $11 million was our capital expenditures for the quarter, and that for the year our guidance is the capital expenditure planned between $35 million and $38 million. We believe that our expenditure in the second quarter is very consistent with our strategic plan and guidance for the year.

Shelby W. Bonnie

I would say just to the leads point, it is all advertising to us. We are really looking at in terms of what we get from marketers and our ability to provide it in a variety of different forms. It really is in the end all dollars they are paying to drive customers.

I think one of the things you see is if the product does not exist, you cannot drive customers to them. So the fact that you are in a transitional year of course is going to have an impact within that area.

In the same regard, I think one of the things we saw as why we stopped breaking out leads as a specific number is that we see a mix of how we deal with our customers. We see people in terms of providing it either under CPM with underlying economics or other things, and it all kind of is just advertising. It is just another form you are basically paying to your customers.

I would say overall, we continue to feel really good about our ability to manage through what is a different year in terms of what we see with respect to two big customer groups. I think we did a good job of foreseeing that in the first quarter, and at the same time really managing to it and ending up at the higher end of the range we provided for the second quarter.

I would say overall, I think in the big scheme of things, pretty good execution.

With that, we would like to thank everyone and we look forward to updating you next quarter. Take care.


This concludes today’s CNET Networks second quarter financial results conference call. You may now disconnect.


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