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CNET Networks (NASDAQ:CNET)

Q4 2006 Earnings Call

January 29, 2007 5:00 pm ET

Executives

Neil Ashe – CEO

George Mazzotta - CFO

Cameron McLaughlin - Investor Relations

Analysts

Imran Khan - JP Morgan

Youssef Squali - Jefferies and Co.

Mark Mahaney - Citigroup

Anthony Noto - Goldman Sachs

Gordon Hodge - Thomas Weisel Partners

Mark May - Needham & Co.

Jordan Rohan - RBC Capital Markets

Safa Rashtchy - Piper Jaffray

Kit Spring - Stifel Nicolaus

Scott Kessler - Standard & Poor's

Heath Terry - Credit Suisse

David Joseph - Morgan Stanley

Bill Morrison - JMP Securities

Steve Weinstein - Pacific Crest

Presentation

At this time I would like to welcome everyone to the CNET Networks fourth quarter and full year 2006 earnings conference call. (Operator Instructions) I would now like to turn the call over to Cameron McLaughlin, Investor Relations. Please go ahead, ma’am.

Cameron McLaughlin

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 risks and uncertainties that could cause actual or predicted results to differ materially. These risks are outlined in our fourth quarter news announcement as well as in the company’s Securities and Exchange Commission filings, including its amended 10-K for the year 2005 filed today, 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 today, January 29, 2007 and CNET Networks undertakes no duty to update this information.

Last but not least, you can find a reconciliation of the non-GAAP financial measures that we used in our news release and on this call to GAAP financials on the last page of today’s news announcement, as well as, in the slide presentation that accompanies this call, located at our Investor Relations website, ir.cnetnetworks.com.

Hosting today’s call are Neil Ashe, CNET Networks Chief Executive Officer and George Mazzotta, our Chief Financial Officer.

Now let me turn the call over to Neil.

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Neil Ashe

Thanks, Cameron and thank you all for joining us. It is our pleasure to be able to discuss our fourth quarter results, our progress and our outlook for the future. CNET Networks is a different kind of media company and we continue to demonstrate our ability to build and grow media brands for people and the things that they are passionate about. With multiple brands serving multiple people in multiple areas of passion, CNET Networks has the foundation to thrive in the evolving media landscape.

The fourth quarter was one of great activity and many distractions for our company. In that context, we are very pleased with our performance. Highlights of our fourth quarter are as follows:

Total revenues were $118.4 million, up 14% from the year-ago quarter and ahead of our expectations. We saw strength in both existing and new business during the quarter, with strong performance from our focus on general consumer advertisers. The fourth quarter is a seasonally strong quarter, especially for general consumer ad dollars, and we saw increases in spending from several notable categories including auto, consumer packaged goods and financial services.

Operating income before depreciation, amortization, stock compensation, asset impairments, and stock option investigation-related expenses was $33.1 million or a profit margin of 28%. Excluding costs associated with severance and business closures, margins were 30%.

With the restatement behind us, we are now firmly focused on the future. Our strategy is sound, and the opportunity in front of us is large. I expect 2007 to be a year of great activity for CNET Networks. We remain focused on realizing the potential and opportunity of our existing brands and on identifying and capitalizing on new opportunities. We will continue to expand our footprint. We will combine our expertise and the power of our market leading brands to bring together the best audiences and the best content available.

CNET Networks will be known for generating, funding and promoting emerging media. For us, emerging media means developing and/or using new and exciting forms of content to delight our audiences. It also means developing new and effective models to create and pay for the content.

In many ways, CNET Networks has been the vanguard of emerging media since the conversion of CNET from a cable network to a website in 1995. Today, emerging media is taking many forms: blogs, podcasts and vodcasts to name a few. Crave is a fantastic example of our ability to generate emerging media. Crave is a gadget blog that we launched in October at CNET. We chose some of our passionate editors and we turned them loose at crave.cnet.com.

The results have been impressive. Averaging 20 posts per day, Crave has close to 2,000 posts so far. Most importantly, users have flocked to Crave. In December, just two months after launch, over 800,000 unique users visited Crave; and during CES, Crave had a record day with over 350,000 page views. At this pace, Crave will be the largest tech-related blog very soon.

Another CNET example is CNET TV. CNET TV produces the highest quality video on technology, consumer electronics and living the digital lifestyle. It is distributed online at CNET and on TV via TiVo and VOD distribution with cable companies like Cox.

The ZDNet blog network is another example of combining one of our market-leading brands with industry-leading voices to the benefit of our users. Launched in late 2004, ZDNet now hosts over 30 industry-recognized writers and commentators who host the conversation on the most important topics in business technology. Some of the bloggers are CNET Networks employees -- and some are not -- but importantly, all are chosen by us.

Again, the results have been impressive. According to internal logs, the ZDNet blog network reached over 2 million business technology decision-makers in November. We are the friend of high quality content producers and these examples demonstrate our desire and ability to incorporate independent content producers into our branded media environment. As we embrace emerging media, we remain true to who we are and what makes our brand special.

We begin with our promise to the user and then we aggressively pursue the best content possible wherever it resides, whoever produces it, to fulfill that user promise. We will never be an aggregator of everything, but we will always deliver everything that our users want and need.

Because we successfully deliver on that user promise across multiple brands, we can uniquely satisfy the desires of both our cutting-edge marketers and independent content producers. For the marketers we provide an organized, consistent and attractive advertising environment that is easy to buy. For the independent content producers who participate in our brands, we provide the most important ingredient of all, which is the ability to put their content in front of large audiences and to fund that content with better and more efficient monetization opportunities.

In 2007 we will expand these success stories and work tirelessly to create new ones at all of our brands. CNET Networks is the home of high quality content and friend to the people who produce it. We will continue to generate, fund and promote the best emerging media, because we believe that when you do it right, you can be big.

CNET Networks exited the fourth quarter as the 12th largest Internet network in the world. According to internal log data we had over 136 million monthly unique users engaging our sites globally, generating nearly 85 million page views per day. Unique users were up 17% and page views were down 18% from the year ago quarter. Excluding Webshots, page views were up 8% during the quarter.

We have proven that we have the reach and the size to matter to marketers. Advertiser renewal rates remain strong. Once we get an advertiser, we keep them, with 96% of our top 100 customers renewing with us during the fourth quarter.

We are also recognized as a leader in the advertising agency community. In December, CNET Networks was awarded an ASPY as the best overall publisher by iMedia. Voted on by advertising agency executives, we were recognized for being the partner that brings the best overall combination of service and solution.

Our efforts to expand our customer base were a success in 2006. During the year, we did business with 59 of the AdAge Top 100 advertisers, up from 54 in 2005; and, we increased our revenue from these advertisers. Examples of key consumer advertisers in the fourth quarter were Honda, American Express, Gillette and MasterCard.

As we enter 2007, we are also focused on continuously improving what we do so that we can be more efficient and simplify our business. We have proven the profitability of our business model and have demonstrated the ability to realize meaningful operating leverage. We have also demonstrated the ability to generate profits internally to fund the development of new brands and properties. It is our goal to continue to improve upon our operation so that we will have more financial resources to create long-term value.

We are also taking steps to simplify our business. Since we last spoke, we have exited some businesses that we believed were either not strategic to our future or would not meet our growth and profit expectations. Specifically, in our international operations we have discontinued our events businesses in China and the UK, and we are in the process of closing our Korean media business.

In the United States, we sold the Release 1.0 newsletter and have decided to no longer produce PC Forum. Formerly held in March, PC Forum is the event that we acquired with Release 1.0 via the EDventure acquisition in 2004. These changes will help us focus our time, attention and resources on the businesses and markets where we have the greatest opportunity for growth and value creation.

With that, let me turn it over to George to bring you up-to-date on our financial picture and after that I will provide more inside into our initiatives and outlook.

George Mazzotta

Thank you, Neil. My comments today will first focus on our performance for the fourth quarter and full year. I will then provide you with a summary of our financial restatement before concluding with guidance for 2007.

We are pleased to report a strong finish to the year with total revenue for the fourth quarter of $118.4 million, which is a 14% increase from $103.7 million last year. Revenue growth was driven by an increase in interactive revenue, offset slightly by a year-over-year decline in our China publishing business.

Marketing services revenue increased 14% to $105.7 million, driven primarily by strong growth in display media from our CNET entertainment and international business units. Licensing fee and user revenue grew 12% to $12.7 million during the fourth quarter, driven largely by growth in our channel data licensing business.

Supporting our revenue growth is a stable and expanding advertiser base. Across the entire network our top 100 customers represented 57% of total revenue. We also experienced a high renewal rate from our top advertisers as 96% of our top 100 customers in the third quarter continue to do business with us in the fourth quarter.

On a segment basis, US media revenue increased 13% to $93.9 million and international revenue increased 18% to $24.5 million during the fourth quarter. International growth was driven by strength in our interactive businesses, offset by year-over-year declines in our publishing and events business. Interactive growth came mostly from key markets such as China and the UK.

Monthly unique users on a global basis in the fourth quarter grew 17% year over year to over a 136 million. Our entertainment properties were the largest contributors to this growth. Average daily page views decreased 18% in the fourth quarter to 85 million pages per day; excluding Webshots, however, average daily page views increased 8% for the quarter.

Total cash operating expenses, excluding investigation fees of $6.5 million were $85.2 million in the fourth quarter, an increase of 17% from $72.7 million last year. The $12.5 million year-over-year increase, exclusive of investigation fees, was primarily driven by the investment of additional personnel in both our new and existing businesses and expenses related to business closures and severance. Excluding $2.3 million in costs associated with business closures and severance, cash operating expenses were $82.9 million, an increase of 14% from last year.

Cash expenses associated with our stock option investigation reflect fees paid to our independent auditor and various outside providers of forensic accounting and legal services.

Operating income for the fourth quarter, excluding stock compensation, depreciation, amortization, impairments and investigation fees was $33.1 million, an increase of 7% from $31 million last year. This represents a 28% margin, compared to 30% last year. Excluding costs associated with business closures and severance, operating income would have grown 13% to $35.4 million, which represents a 30% margin.

Incremental margin, excluding investigation fees, was 15% during the quarter, which compares to an incremental margin of 64% in the fourth quarter of 2005. Our incremental margin during the quarter was depressed due to continued re-investment in new and developing businesses, specifically our community and lifestyle properties, as well as costs associated with business closures and severance.

During the fourth quarter, bondholders of our $125 million convertible notes declined to accept our consent solicitation offer and accelerated their notes. Consequently, we repaid the bonds at par value in accordance with the indenture by using $65 million of cash and drawing $60 million of funds from our one-year credit agreement.

Our interest expense during the fourth quarter totaled $3 million of which $2.3 million was a write-off of deferred issuance costs associated with our retired convertible notes, and the remaining amount reflects two months interest payment for the $60 million line of credit at 6.88% that we used in combination with cash to pay off our bondholders.

It is important to understand the balance sheet effect of retiring these notes. After paying off our convertible notes, we ended the fourth quarter with available unrestricted cash and investments of $75.6 million compared to a $110 million last year. Our total debt outstanding at the end of the fourth quarter is $78.3 million compared to a $141.8 million in fourth quarter last year. Our cash balances have been reduced by $34.4 million, but our outstanding debt balances have been reduced by almost twice as much, or $63.5 million.

During the fourth quarter, we generated $8.6 million of cash from operations and invested $5.9 million in capital expenditures, which resulted in free cash flow of $2.7 million. Net income for the fourth quarter, excluding stock compensation, asset impairments, investment gains and losses, discontinued operations and investigation fees was $19.6 million or $0.13 diluted EPS. This compares to net income for the fourth quarter of 2005 of $23.3 million or $0.15 diluted EPS. The year-over-year decline in net income was due to costs associated with business closures and severance, as well increased interest expense related to the retirement of our bonds during the quarter. Excluding these items, net income would have been $24.2 million, or $0.16 diluted EPS compared to $23.3 million or $0.15 diluted EPS last year.

On a reported basis, net income for the fourth quarter was $6.3 million or $0.04 diluted EPS compared to 2005 net income of $20.7 million or $0.13 diluted EPS. Our fourth quarter 2006 results includes stock compensation expense of $5.4 million, investigation fees of $6.5 million, and asset impairment charges of $1.4 million associated with the closure of our Korea operations. Our fourth quarter 2005 results included stock compensation expense of only $946,000 a gain of $1.3 million from the sale of private investments and discontinued operating losses of $2.9 million from Computer Shopper.

Now I would like to share with you our full year results. Our strong fourth quarter results contributed to a solid performance for the full year. In a year that we were challenged by continued softness in both the technology and video game industries, we are pleased to report an increase in total revenue of 15% to $387.7 million from $338 million last year. Total revenue growth was driven by significant increases in marketing services revenue from our entertainment and international properties. In 2006, Google search revenue represented nearly 10% of total revenue for the year.

Total cash operating expenses, excluding investigation fees of $13.7 million, were $307.2 million, an increase of 13% from $273 million last year. The $34.2 million year-over-year increase exclusive of investigation fees was driven by increased investment of additional personnel for both our new and existing businesses and expenses related to business closures and severance. Excluding $4.4 million in costs associated with business closures and severance, cash operating expenses were $302.8 million, an increase of 11% from last year.

Operating income for the year, excluding stock compensation, depreciation, amortization, impairments and investigation fees was $80.5 million, an increase of 24% from $65 million last year. This represents a 21% margin compared to 19% last year. Excluding costs associated with business closures and severance, operating income would have grown 28% to $84.9 million, which represents a 22% margin. Our ability to manage growth and cash operating expenses to levels below revenue growth drove an incremental margin of 38% for the year.

Net income for the year, excluding stock compensation, impairments investment gains and losses, discontinued operations and investigation fees was $43.6 million or $0.29 diluted EPS. This compares to net income of $36.8 million or $0.24 diluted EPS from last year. On a reported basis, full year 2006 net income was $7.8 million or $0.05 diluted EPS compared to 2005 net income of $19.6 million or $0.13 diluted EPS.

Our 2006 result include stock compensation expense of $19.8 million, investigation fees of $13.7 million, realized gains of $558,000 from the sale of private investments, a discontinued operating loss of $37,000 from Computer Shopper, and asset impairments of $2.8 million from the closure of our Korean business and EDventure. Our 2005 results includes stock compensation of $6.3 million, a loss of a $170,000 from the sale of private investments, a discontinued operating loss of $9.1 million from Computer Shopper and asset impairments of $1.6 million. For the full year we generated $61.8 million of cash from operating activities and invested $32.9 million in capital expenditures, which resulted in $29 million of free cash flow.

Now let me take a minute to review the important adjustments reflected in our restated financial reports filed earlier today. In the process of preparing our restated financial statements we have performed a thorough and comprehensive review of our historical filings from 1996 to 2006. As a result, we have reflected in our restated reports minor reclassifications and out-of-period adjustments, in addition to revised stock compensation expense associated with our investigation. Today we filed the following reports with the SEC. Please reference these reports for detailed accounting and reconciliation of all adjustments. We filed an amended 2005 annual report, an amended quarterly report for Q1 2006, and quarterly reports for both Q2 and Q3 of 2006 that were not previously filed.

Our total restatement adjustments equaled a $103 million of non-cash charges and affected years 1996 through 2005. Adjustments to reflect revised stock compensation expense equaled a $106 million of non-cash expense. These adjustments were due to timing differences between grant dates and measurement dates.

The adjustments corrected the measurement dates of approximately 41 million options out of a total 74 million granted during the ten-year timeframe. The magnitude of these adjustments are the function of three variables: the elapsed time between grant date and measurement date, the volatility of our stock price during this period, and the number of options granted. It is important to know that over 99% of our total adjustments were related to stock options that were granted to prior to July 2003.

We also evaluated our internal controls and processes supporting our stock option granting practices. While process deficiencies existed previously, our current controls were found by our independent auditor to be sufficient. In fact, during the course of our investigation, no significant errors were found past July of 2003.

With respect to mispriced options, all current outside board members entered into agreements to reprice all of their options that were granted at a discount and reimbursed the company for all gains realized by the exercise of mispriced options. The total amount of this reimbursement was almost $16,000.

Our former Chairman and CEO also entered into a similar agreement to reprice all of his options, but because he never exercised any of his grants he did not reimbursed the company for gains.

During our review, we also recognized a new interpretation and treatment of a China transactional tax that amounted to a reclassification of this expense. Tax expense that was previously deducted from revenue is now charged to sales and marketing expense and tax expense that was previously charged to tax expense is now also reflected as sales and marketing expense. The adjustments to revenue and expense for the period of 2001 through 2005 are reclassifications and therefore neutral to net income.

Other adjustments amounted to a total of $1.7 million. These were minor out-of-period adjustments, such as the accrual adjustments for bonuses and commissions, as well as revised impairment values.

Finally, we reconciled our tax valuation allowance and recorded tax adjustments related to all of these revisions which resulted in a cumulative $4.7 million tax benefit. As a result of all these adjustments, the effect for the past three years was to reduce reported net income by $7.5 million, $9.8 million, and $8.1 million in 2003, 2004, and 2005 respectively. The impact of these adjustments to the balance sheet for 2005 is a decrease in shareholder equity of $627,000 where an increase in paid-in capital offset a decrease in retained earnings.

Now before I comment on our first quarter and full year 2007 guidance I’d like to spend a few minutes to share with you two factors that impact our 2007 outlook. First, as discussed earlier, in the fourth quarter of 2006 we decided to exit our events business in China and the UK, our operations in Korea and discontinue PC Forum in the US. The combined revenue of these businesses totaled $7.8 million in 2006. It is important to take into account the revenue contributions of these closed businesses when you make year-over-year revenue growth comparisons.

Second, we believe that our track record of consistent profitability, combined with our expectation of future profits will support the release in Q4 2007 of our valuation allowance of deferred tax assets, which are mostly comprised of net operating losses or NOLs. Therefore, it is now appropriate and important for us to assess the value of our deferred tax assets, substantiate their expected tax benefit and determine the timing of their release to the P&L.

This is a three-step process:

First, we must assess the value of our deferred tax assets, which in addition to NOLs includes an assessment of our tax base intangibles. We have completed this effort and included in our restated financial statements as an adjustment increasing deferred tax assets by almost $73 million. This increase is caused by our assessment that a portion of a $1 billion impairment recorded for ZDNet in 2001 should have been allocated to tax-deductible goodwill.

Second, we must substantiate the tax benefit of our acquired NOLs. A large portion of our NOLs were acquired through CNET Networks acquisition of ZDNet in 2000. Tax law requires that through an IRS 382 study we evaluate change of ownership prior to the acquisition to properly value the tax benefit of these NOLs.

Third, we need to determine the timing of the release of our valuation allowance to the P&L. This timing is a matter of judgment and is based on historical profitability and management’s expectations of future performance. We are currently engaged with our independent auditor to complete the evaluation of our acquired NOLs through the IRS 382 study. Until this work is complete, we cannot estimate the precise tax benefit of our deferred tax assets and therefore the valuation allowance release. For this reason, we have not reflected the release of our valuation allowance in our EPS guidance.

What we can say now is that we believe it is very likely that we will release the valuation allowance recorded against our deferred tax assets in the fourth quarter of 2007 and that regardless of the outcome of our acquired NOL evaluation we will continue to enjoy a very low effective tax rate for several years as we utilize our differed tax assets to offset tax expense.

Now, I would like to provide you with CNET Networks guidance for the full year and first quarter of 2007. For the full year 2007, we expect the following:

Full year revenues to be in the range of $425 million to $445 million, which represents a 10% to 15% growth over last year. We expect full year operating income before depreciation, amortization and stock compensation expense to be between $90 million and $105 million. We estimate that full-year stock compensation expense will be approximately $23 million. Full year 2007 earnings per share will be between $0.27 and $0.37 per share, excluding stock compensation expense. Including compensation expense of approximately $0.15 per share, our earnings per share will be in the range of $0.12 to $0.22 cents for this year. As a reminder, our EPS guidance does not consider the conclusions of our NOL evaluation or the likely release of our valuation allowance. Finally we expect capital investment to be between $35 million and $40 million in 2007.

For the first quarter 2007, we expect the following:

First quarter revenue is expected to be within the range of $90 million to $94 million, representing 8% to 12% growth over last year. Operating income before depreciation, amortization and stock compensation expense is expected to be between $7 million and $11 million for the first quarter. We estimate that stock compensation expense will be approximately $5.5 million. First quarter earnings per share are expected to be within the range of a loss of $0.02 to breakeven. This estimate excludes approximately $0.04 per share of stock compensation expense.

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

Neil Ashe

Thanks, George. As I discussed last quarter, we are enthusiastic about the prospects of our existing brands and we are focused on realizing their full potential and opportunity. At our CNET-branded properties, we kicked the year off on a high note. CES 2007 was again a real success for us. CNET was the definitive source for everything related to the show. CNET produced over 80 video packages, over 300 product reviews and eight podcasts.

CNET interviewed industry luminaries including Bill Gates, Sir Howard Stringer and Robbie Bach, and our CNET editors were interviewed by major media outlets including CNN, NBC Nightly News and CNBC Power Lunch, to name just a few, and our users appreciated it. CNET Reviews traffic was up over 30% as compared to last year’s show and CNET TV did over 1 million video streams.

During the fourth quarter, we also updated our look and feel with the goal of make CNET easier to use. As a result, we have greater brand consistency among CNET.com, CNET Reviews; CNET Download and CNET News, and we have simplified the navigation.

During the fourth quarter, we maintained our momentum in entertainment as we continued to add new content and features, as well as add new brands. TV.com continues to be a success for us proving our ability to launch new brands with significant reach and advertiser traction. In the fourth quarter, unique users were up over 50% year-over-year at TV.com, continuing to outperform expectations.

Meanwhile, Game Spot remains the go-to source for all news and information related to everything gaming. Users flock to our outstanding coverage of the Wii and PS3 launches. In November 2006, Game Spot traffic hit levels above records set at E3, with over 20 million unique visitors consuming news, previews, reviews and videos.

MP3.com announced a comprehensive suite of online marketing capabilities for independent music artists as part of its streamlined new site design. Artists can now upload their music and videos to this site and leverage free, easy to use promotional tools to gain exposure before MP3.com’s audience. Since the feature’s launch, thousands of songs have been uploaded and promoted.

As you know, Webshots launched a new streamlined look with updated functionality and navigation in August; this was followed in November by the introduction of video hosting capabilities that enable users to combine still and video images with text and publicly shared albums. Since the redesign, Webshots’ users have been increasing on a month-over-month basis.

The Webshots redesign has fundamentally changed the ad buying experience. With channels focused on specific categories Webshots has transformed into a media property that advertisers want to associate their brands with. We are focused on selling more of this inventory direct via our own sales force and we continue to see traction with this sales effort.

ZDNet also launched a new look and feel field with features that represent the web’s ongoing evolution into a next generation publishing medium that gives equal weight to the voices of editorial experts, users and vendors. Along with news, product reviews and content contributed by users and vendors ZDNet’s redesign spotlights its successful blog network, where as I discussed earlier, more than 30 well-known IT experts and journalists exclusively blog on the latest developments in the business technology space.

Internationally, our online efforts in China continue to perform well. We have had great success in China and have demonstrated our ability to build upon our existing brands as well as to add new ones in this market. According to Alexa data, ZOL, a property that we acquired in 2004, emerged as the number one technology portal in China with 30% more traffic than its number two competitor. XCAR, the auto site that we recently acquired, is also performing well. It has seen the rate of membership growth nearly double and is a leading auto community in China.

As I said last quarter, we will continue to identify new opportunities for growth. During the fourth quarter, we made strides to realize new opportunities for growth, both with the addition of new brands and via acquisitions.

We added the fourth leg of the stool to our entertainment category with the beta launch of FilmSpot, leveraging the TV.com platform and MetaCritic franchise, FilmSpot rounds out our coverage of the entertainment category. FilmSpot aims to combine content and community features in an immersive environment that satisfies the interest of movie fans. The site is focused on becoming an in-depth online movie resource, featuring movie summaries, critical opinion, trailers, news, photos, actor and character guides, celebrity bios, theatrical and DVD release schedules, and box office results. Just as our other entertainment properties do, FilmSpot will provide valuable intelligence and back end data for us to monitor and assess entertainment-related trends.

Our newly-added food brands -- CHOW in the United States and Art Culinaire in France -- are performing well and are important steps in our efforts to continue to broaden the profile of the CNET Network’s audience. CHOW, the food destination targeted at young and inspired foodies, is doing over one million unique users per month and we have had great success with advertisers early on. Since launch, our advertisers have included Bertoli, American Express, Best Buy and Visa. In the coming months, CHOW will continue to add more features including more video, expanding its restaurant and recipe databases, and bringing more user-generated content from its influential audience.

The integration of the Chowhound community into CHOW has been very successful with traffic tripling since we acquired it. The Chowhounds now have prominent placement on the front door of CHOW. In addition, Art Culinaire set records for traffic in the month of December.

We also continue to find good acquisition opportunities in key markets outside the U.S. We have added two properties, GameKult in France and EA3W in China, as part of our efforts to expand our online portfolio of brands worldwide. Today, we announced that we acquired GameKult, a leading video game content site in France. GameKult adds to our GameSpot franchise with French language and market coverage. GameKult serves the passionate game enthusiast and according to Neilson Net Ratings, is consistently ranked among the top gaming sites in France.

In China, we acquired EA3W, a leading home consumer electronics buying guide based in Beijing. With an extensive product database, EA3W provides a unique opportunity to expand upon ZOL, adding broader content coverage and the opportunity to extend our audience and advertising relationships in the home consumer electronics category.

2006 was a year of many distractions for our company. In that context, I am pleased with our fourth quarter performance. As we enter 2007, we are excited about the course that we are charting for CNET Networks. Because we have proven that we can build and operate multiple media brands that fuel people’s passions, we are confident that we can meet the changing needs and desires of both our demanding users and the marketers who want to engage with them. We have the foundation to thrive in the evolving media landscape. As a different kind of media company, CNET Networks will be known for generating, funding and promoting emerging media.

That wraps up our formal comments and we’d like to turn it over to the operator so we can open it up for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Imran Khan - JP Morgan.

Imran Khan - JP Morgan

Hi Neil and George, how are you? Two questions: George, if you can help us to understand the pro forma and organic growth rates adjusted for divestiture and acquisitions for 2007 and 1Q '07?

Neil Ashe

And your second question?

Imran Khan - JP Morgan

The second question is surrounding the CPM trend you are seeing. There are a lot of concerns in the marketplace in terms of increasing inventory, how that's impacting the CPM price for banner advertisement and video. If you could comment on that, we would appreciate that.

Neil Ashe

I'll start with the second question first, which is obviously our performance in the fourth quarter demonstrated that we could continue to grow revenue; and in fact, our revenue growth rate exceeded our page view growth rate so we continue to maintain our price and to grow our inventory in the marketplace.

George Mazzotta

To answer your first question we will not provide you with guidance or pro forma estimates about what our growth rates would be ex these divestitures, other than to say what these businesses represent for us in 2006 which we just disclosed, $7.8 million in total revenue for the full year 2006.

Operator

Your next question comes from Youssef Squali - Jefferies and Co.

Youssef Squali - Jefferies

Two questions. In formulating your guidance for '07 how much of that is predicated on a strong uptick from Vista and the gaming platforms being rolled out?

Second in terms of page views, we saw your page views consumption down year on year and also sequentially. I was wondering if you could comment on that? What's baked into your guidance? Are you assuming any pickup in usage and pricing? Thanks.

Neil Ashe

So first as relates to our growth in 2007, our expectations for Vista and the game platforms, we have been very consistent in our expectations that we can continue to grow our users and our usage and continue to grow our revenues. While these are important components of our growth rates we have not, as we have said consistently, expected large increases related to Vista. Specifically to the video game cycle, that's a longer term cycle for us as most of our revenue comes from video game publishers who spend more dollars per game with larger installed bases.

As to the second question, I'm not sure what you meant by page view consumption, but our rate of page view growth was about 8% in the fourth quarter. We continue to grow. As with all networks, not all page views are created equal. We had strong growth in our entertainment properties, specifically TV.com and GameSpot and in some of our important technology properties, CNET.com CNET Reviews, and CNET TV, so we're confident that our guidance represents our best knowledge right now of both our ability to drive users and usage in 2007, as well as our expectation for performance among large categories that are meaningful for us.

Youssef Squali - Jefferies

Just to clarify. I was really talking about page views per user.

Neil Ashe

As I said, our guidance includes our best estimate right now of our ability to drive users and usage.

Youssef Squali - Jefferies

Thank you.

Operator

Thank you. Your next question comes from Mark Mahaney with Citigroup.

Mark Mahaney - Citigroup

Great, thank you. Two questions: first, your level of confidence that you won't see additional expenses related to the stock inquiry investigation; or to some extent, there must be some buffer or additional expenses you will need to budget for in G&A for ongoing costs -- any comments on that? To what extent do we know that that cost item is finally eliminated?

Secondly, just if I could ask again on the page view outlook. I know you don't give specific guidance, should we be thinking about CNET as a high single-digit page view grower? Is that a growth rate that you are comfortable with, given monetization improvements, or are there factors that you think can cause you to accelerate that page view growth from here? Thank you.

George Mazzotta

I'll take the first question. We do expect some ongoing expenses related to the investigation; not nearly to the extent that we saw in Q4 or certainly since May of 2006. I think it's conservative to estimate that there will be some ongoing expenses related to the investigation as we tie up loose ends.

Neil Ashe

We'll obviously be careful too to call those out on the income statement so that you can see them.

As it relates to page view outlook, our page view outlook varies based on our different brands and different properties. Those which are older and larger we expect less growth. So I think for the CNET-branded properties that's a fair estimation, single-digit growth rate. I'd expect to see greater growth rate among some of our other properties.

If you look at our entire network, however, CNET Networks, we will continue to have challenging comparable numbers because of the large number of page views or Webshots and its change in size. So to summarize, I think single-digits probably for the CNET-branded properties, probably higher for some of our other properties, then CNET Networks lower due to challenging comparables at Webshots.

Operator

Your next question comes from Anthony Noto - Goldman Sachs.

Anthony Noto - Goldman Sachs

Thank you. Neil, I was wondering if you could talk about the potential implications of the industry shift of advertisers being willing to allocate a portion of their incremental spending to lower CPM inventory via ad networks, marketplaces that we have heard from both Yahoo! as well as several digital agencies? Then I have a follow-up once you guys have answered that. Thanks.

Neil Ashe

Sure. We have seen this and talked about this trend a lot which is the bifurcation of inventory online. First, I would say that it's not our view that portal inventory is premium inventory. It's rather that portal inventory is more reach inventory and that's, I think proven out in our rates and our monetization per thousand pages. Advertisers have consistently, and I think leading advertisers who we've been working with for the last couple years, have consistently maintained that it is their desire to buy important places in high premium quality inventory like our sites, and then to buy reach as cheaply as they possibly can. So this doesn't surprise us at all that you would see more spending on reach. I don't think that's necessarily comparable nor challenging to our branded environments, however, on the longer term.

Operator

Your next question comes from Gordon Hodge - Thomas Weisel Partners.

Gordon Hodge - Thomas Weisel

Good afternoon and thanks for all the disclosures. We were expecting more blood and gore, I guess, but it was pretty clear.

Anyway, a question on the fourth quarter trends. You did beat your guidance on the top line. Did you see a pickup in entertainment? Were you able to monetize the pickup in page view growth in entertainment towards the end of the quarter, and was that the source of upside?

Then a second question, George in terms of the businesses that you have divested, the $7.8 million of revenues, would there have been much EBITDA profit associated with that revenue or should we assume those were either losing money or breakeven level businesses? Thanks.

Neil Ashe

First, on the fourth quarter trends, as we said we started to really bear fruit from general consumer advertisers in the fourth quarter, both at the entertainment properties as well as CNET. Now we fully recognize that the fourth quarter is a seasonally strong quarter for consumer advertisers, so for example, it would be challenging for us to repeat that in the first quarter. But it does affirm what we have been saying for awhile which is that our environments, both the entertainment properties as well as CNET and our developing lifestyle properties, are attractive to general consumer advertisers and they are willing to make meaningful investments in them.

George Mazzotta

In terms of the EBITDA contribution of closed businesses for the full year 2006, it was nearly breakeven, within $300,000 of breakeven.

Operator

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

Mark May - Needham & Co.

Thanks for taking my questions. You mentioned Google as percent of revenue in '06. Did you have any revenue from that relationship in '05 and if so, what was it?

Second question, I think in your filings you are now segmenting your business in the U.S. into two segments: U.S. and international media. However, you only gave metrics on the call for combined worldwide. Wondering if you could provide us with the metrics broken down into the way you segment your business in the filings? So page views and users by U.S. and international. Thanks.

Neil Ashe

First question, Google has been our search provider since, I believe September of 2004. So they have been a meaningful revenue contributor to us since then. I believe that in '05 it was about the same percentage of total revenue, around 10%.

In terms of breaking out users and usage, U.S. versus international, we don't do that. We look at our properties both globally and then in the individual markets. So it's not really a meaningful statistic for the way that we run the business, so we don't break that out.

Operator

Your next question comes from Jordan Rohan - RBC Capital Markets.

Jordan Rohan - RBC Capital Markets

Thanks. The question has to do with a little more clarity on CapEx. For two years in a row you've had around $35 million or $40 million in CapEx which is on the '07 forecast about 8% or 9% of sales. Fairly high, some may say; others may say it's a little bit low given the growth that you’re expecting. Can you talk to us about whether it's hardware or software or what you're spending that on? Are there any office spaces or leases that have been capitalized? And any other main components of that, just on a directional nature? Thank you.

George Mazzotta

I can provide some specifics on that and Neil may also want to comment. We believe that our level of capital expenditures both last year 2006 and what we expect in 2007 is very appropriate and consistent with our long range strategic plan. Both years 2006 and what we expect in 2007 considers some facilities investments; but by and large, this is investment in the infrastructure of our properties, so it's hardware.

Operator

Your next question comes from Safa Rashtchy - Piper Jaffray.

Neil Ashe

I think we scared him off the call. Safa?

Operator

Your next question comes from Kit Spring – Stifel Nicolaus.

Kit Spring - Stifel Nicolaus

A much better revenue quarter. Can you talk a little bit about the opportunity in video? What kind of CPMs you see in video versus regular and maybe what percentage of your page views is coming from video, where can that go?

Secondly, I don't know if you have an opinion on this, but some of the sell ratings we have seen have been predicated on declining traffic in the ComScore data. I'm wondering if you guys have much less poor data. I wonder, what are the differences between your internal data and ComScore’s? Is theirs wrong? What do you think the reason for such a wide disparity is on that?

Neil Ashe

I'll take them in order. First, of course, we see an opportunity in video, and we currently see premium rates for video. We do about 2 million video streams per day versus about 85 million page views per day. As for the difference between our internal data and ComScore, it's a necessary reality that we will always know more data about our users and usage because we track every single one of them and every single page view. So while we have a lot of respect for the work of the external agencies, ComScore and Net Ratings in particular, they just don't have the same level of access to our users that we do. We invest a lot in them, though, because we're confident that they will continue to improve over time, so they're the best that all of us have right now but we will necessarily always have more information than they do because we do have internal server logs.

Operator

You do have a question from Safa Rashtchy - Piper Jaffray.

Safa Rashtchy - Piper Jaffray

Sorry I missed you guys last time, I couldn't get on just in time. A couple of questions. One, if I could actually pick up on the last question about the discrepancy between what you report and what ComScore and Net Ratings report. Are your numbers global? If so, can you give us some rough estimates of what we should expect in there? Then I have a couple of follow-ups.

Neil Ashe

Sure, Safa. All the numbers that we were quoting were global numbers, yes.

Operator

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

Scott Kessler - Standard & Poor's

Thanks a lot. Over the last six to 12 months I think it's pretty evident that a lot of talented people have left the company's management ranks and I'm wondering what's being done to address this?

My second question is if you could talk a little bit about the impact of the announcement of the iPhone and how it influenced web traffic to your sites. Thanks.

Neil Ashe

Well first, obviously with the resignations of the CEO, the General Counsel, and our Senior Vice President of Human Resources we have had talent leave our company. What has not changed is that we have over 2,000 people around the world who show up every day inspired to deliver a user experience to the most passionate users on the web, and that hasn't changed.

CNET Networks has always been known as a company that can both recruit and develop talent and we don't often have opportunities to hire people in at senior levels. I have to tell you that I'm in inspired by the people that I know want to work at CNET Networks. So we are very confident in our ability to bring in talented folks as well as to develop talented folks in our organization.

Second, the iPhone launch when it happens in June may be a traffic driver for us, but I would not call it material. MacWorld has a several day impact on our page views, but that's about it.

Operator

Thank you. Your next question comes from Heath Terry - Credit Suisse.

Heath Terry - Credit Suisse

Great, thank you. I was wondering if you could talk about the monetization levels on the site? To what extent as you look across the business, do you feel like you're fully exploiting the page views that you've got in terms of number of ads on the page, the type of ads that you're running on the page, and is that something is going to be a primary focus, something that we should expect to see here over time that you are going to increase inventory on the individual pages within the network?

Neil Ashe

Heath, our philosophy is to always start from the user experience, so we start and end any decisions we have there. We've been historically very good at monetization at revenue per thousand pages. What you have seen over the last quarter or two and you'll see in the future is sometimes a disconnect between our monetization and our page view growth as we'll outgrow our monetization capabilities.

We're always focused on realizing the maximum potential from our user engagement. However, we are always focused first on the user experience. So you will see changes at a number of our properties regularly, but the balance is always one of how can we first, furiously satisfy our users; and then second, provide the most efficient monetization. So will you see more impressions per page? Maybe in some places and you might see less in others.

Operator

Thank you. Your next question comes from David Joseph - Morgan Stanley.

David Joseph - Morgan Stanley

Hi everyone, thank you. I'm sorry to go back to guidance but just really quickly, you presented a pretty impressive range given some metrics during the quarter not necessarily going in that direction. Renewal rates were down year over year for the second quarter and your page views are still in the single-digits. So I'm wondering, it either implies that you're expecting a pricing improvement in the environment in '07 or that some more recent acquisitions are going to be driving some of that growth.

Secondly, as you execute further on your vertical strategy in 2007, can we assume that we are going to be seeing a similar level of acquisitions quarter to quarter?

Neil Ashe

First as it relates to guidance and our expectations, as I said when we walked through it, baked into our expectations for our revenue growth, our expectations for page view and user growth at each of our properties, and I walked through that earlier. No, we don't think that necessarily implies a large increase in page views across the network.

Secondly on acquisitions, we believe it is a core competence of ours to launch ourselves into new categories, either through development or through acquisitions. So we will continue to scout for new opportunities to expand the network and we will be opportunistic when we find them.

What we have demonstrated over the last several years is that we move aggressively when we find things that fit with us and that we believe that we can execute very well on, but we don't necessarily chase everything that others are looking at. So we're excited to grow the network. We believe that it is a core competence of ours, and we will look to acquisitions in the future.

Operator

Your next question comes from Bill Morrison - JMP Securities.

Bill Morrison - JMP Securities

It looks like the incremental margin in '06 came out at around 35%. George, you noted it was around 15% in the fourth quarter. It looks to me like at the midpoint of your guidance, you're expecting another year of around 35% incremental margin, maybe a little bit lower if you were to give yourself credit for some of the EBITDA that went to disposing assets this past year.

Just curious if we should think about that as a new normalized incremental margin for the company? Historically in '04 and '05 you obviously had incremental margins much higher. I was wondering if you could just help us understand if 35% is a new normalized level and if not why is it at that range next year? What investments are keeping it there?

Secondly, I was wondering if you could help us understand the revenue progression, growth rates through the year, if possible? I think at the midpoint of Q1 you're at 10%, and if we were to assume 10% growth each quarter you get to the midpoint for the year. I'm curious, as you look to the high end of your guidance, where would you expect to see an acceleration -- in which quarter or quarters? Thanks.

Neil Ashe

Thanks, Bill. First, on the incremental margin, we have been saying for the last several quarters that we are focused on expanding margins and that we believe that we have proven the profitability of our business model and we have proven that we can realize the margins of a diversified media company and we have demonstrated the operating leverage in the business.

So while we're focused on expanding margins, we are not sure where that ultimately leads us. What we do know is that we can expand margins and we would expect to continue to do that in the future but we're also focused on growing the business, so we've been able to generate profits internally to fund the development of our new brands and properties and we'll continue to do that in the future.

We don't goal ourselves specifically around incremental margins. Obviously, it's easier to have a higher incremental margin with a higher revenue growth rate so that may impact it, but we really are focused on expanding the network and growing our properties.

The second question as it relates to guidance, the revenue growth rates in fiscal year '07, as you noted we have bracketed 10% to 15% revenue growth. Our best look at the first quarter right now has the midpoint coming in around 10%. That could move around and we would expect to see growth through the rest of the year.

Operator

Your next question comes from Steve Weinstein - Pacific Crest.

Steve Weinstein - Pacific Crest

Thanks, just a couple questions. What was the effect of foreign currency in the quarter? One more question on guidance. You're guiding to double-digit growth and I'm wondering, what does that really imply for core CNET, red ball type of growth versus all of the new initiatives that you highlighted in your prepared remarks?

George Mazzotta

I'll take the first question, which is the effect of foreign currency on revenue in the fourth quarter, far less than $1 million is the answer.

Neil Ashe

I'll take the second. As it relates to guidance we obviously don't break out individual property levels but we are seeing growth across all of our franchises.

Operator

Thank you. At this time there are no further questions. Are there any closing remarks?

Neil Ashe

First of all thank you all for bearing with us. We're very happy to be back and current with our financials and we appreciate you spending the time to learn more about us. We look forward to talking to you later and next quarter. Thanks.

Operator

Thank you. This concludes today's CNET Networks fourth quarter and full year 2006 earnings conference call.

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