CNET Networks Q1 2007 Earnings Call Transcript

Apr.26.07 | About: ChinaNet Online (CNET)
Wall Street Horizon Logo
Click to enlarge


Q1 2007 Earnings Call

April 26, 2007 5:00 pm ET


Cameron McLaughlin - IR

Neil Ashe - CEO

George Mazzotta - CFO


Anthony Noto - Goldman Sachs

Peggy Frango - Jefferies and Co.

Gordon Hodge - Thomas Weisel and Partners

Imran Khan - JP Morgan

Kit Spring - Stifel Nicolaus

Mark Mahaney - City Investment Research

Heath Terry - Credit Suisse

Bill Morrison - JMP Securities

Gordon Hodge - Thomas Weisel Partners

Ursulla Moran - Bear Stearns



Good afternoon. My name is Keshena and I will be your conference operator today. At this time, I would like to welcome everyone to the CNET Networks First 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) I would now like to turn the call over to Ms. Cameron McLaughlin, Director of Investor Relations. Ma’am, please go ahead.

Cameron McLaughlin

Thank you, and good afternoon. Before we get started, I would like to remind you that this conference is being webcast. The webcast of first quarter live presentation can be accessed on the CNET Networks, Investor Relations website at I’d also 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 first quarter news announcement, as well as, in the company’s Securities and Exchange Commission filings, including its 10-K for the year 2006, 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, April 26, 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, are located at our Investor Relations website.

Hosting today’s call are Neil Ashe, CNET Networks’ Chief Executive Officer and George Mazzotta, our Chief Financial Officer. Following their prepared remarks, we will have a brief question-and-session session. To facilitate the Q&A session we will be muting the lines following each question.

Now let me turn the call over to Neil.


Wall Street Horizon Logo

Do you get frustrated during earnings season?

Have you had trades go south because of bad earnings dates?

We know what it's like. We’ve been there. We’re Wall Street Horizon and we work with some of the largest firms on Wall Street.

Founded by former Fidelity Investments executives, we understand the power of trading on good information and the pain and suffering of trading otherwise. We obsess about earnings and economic events calendars so you don’t have to. Accurate. On time. Guaranteed.

Let us help.

Get Smart

Get Wall Street Horizon.

View our Free 30-day trial for investment professionals

To sponsor a Seeking Alpha transcript click here.

Click to enlarge

Neil Ashe

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

Highlights of our first quarter are as follows; total revenues were $92.1 million, up 10% from the year ago quarter. We saw user growth and solid financial performance from our CNET Entertainment and International business units. Our growth was offset by revenue weakness at Webshots and some developing softness in the technology category. We will cover this in more detail shortly.

Operating income before depreciation, amortization, stock compensation and stock option investigation related expenses was $11.8 million for a profit margin of 15%. We have made progress on the construction of new team. I am pleased that so many talented individuals would like to join CNET Networks.

We have filled the head away chart and general counsel roles, and they will be joining us in the coming weeks. We will provide more details at that time.

Also, we announced that we have added two new members to our Board of Directors, Susanne Lyons who is the Chief Marketing Officer, of Visa USA and Mark Rosenthal who is the CEO of Interpublic Media and the COO MTV Networks. We are confident that their expertise in brand building, advertising and media will help us continue to grow CNET Networks and our brand.

2007 will be a year of transition for CNET Networks. We have made, are making and will continue to make all that is necessary to execute on the opportunity that we see in front of CNET Networks. Let me turn it over to George to bring you up to date on our financial picture, and after that I will provide more insight into our initiative and our outlook.

George Mazzotta

Thank you, Neil. Total revenues for the first quarter was $92.1 million, an increase of 10% from $83.17 million last year. Revenue growth was driven primarily by strength in marketing services revenue. As we discussed in our call last quarter, we exited our events business in China and the UK, our media operations in Korea and our EDventure business in the US during the fourth quarter of 2006. Excluding this closed businesses from our 2006 results, total revenue during the first quarter would have grown by 15%.

Marketing services revenue grew 13% year-over-year to $80.4 million driven mostly by strength in our CNET Entertainment and international properties offset by weakness in our Webshots property. Excluding closed businesses, marketing services revenue would have grown 15% from last year.

Licensing fee and user revenue during the first quarter declined by 6% year-over-year to $11.7 million due largely for the closure of our EDventure business which recognized a significant portion of its revenue in the first quarter of 2006 from the PC Forum event. Excluding closed businesses licensing revenue would have grown 13% from last year.

Supporting our revenue growth is a stable and expanding advertiser base across the entire network our top 100 US customers represented 57% of total revenue. We also experienced a high renewal rate from our top advertisers as 96% of our top 100 US customers that did business with us in the fourth quarter renewed with us in the first quarter of this year.

Google search revenue represented nearly 12% of total revenue for the quarter. On a segment basis, the US Media revenue increased 10% to 74.2 million. Excluding closed businesses, the US Media revenue would have grown 13%. International revenue increased 12% to 17.9 million during the first quarter. International growth was driven by strength and recently acquired businesses in key markets such as China and France, and growth in existing interactive businesses in markets such as Australia and the UK.

Excluding closed businesses and foreign exchange effect, international revenue would have grown 17% from last year. Monthly unique users on a global basis in the first quarter grew 23% to nearly a 143 million users. We experienced unique user growth across the entire network with very strong growth from our entertainment and business property. Average daily page views decreased 18% in the first quarter to 81 million pages per day. The decline in page views was driven by Webshots. Excluding Webshots, average daily page views increased to 1% for the quarter.

We are focused on audience development and creating more engaging experiences for our users. With the addition of more video, audio and other emerging media formats to our properties, we expect to see page views grow at a slower rate.

Total cash operating expenses, excluding investigations fees of 4.4 million or 80.3 million in the first quarter, an increase of 9% from 73.7 million last year. The 6.7 million year-over-year increase in cash operating expenses was driven by investments of additional personnel in newer growth businesses including our lifestyle and international properties in addition to increased investments in our network infrastructure.

Cash expenses associated with our stock option investigation represents fees paid to our independent auditor, forensic accounting and legal council.

During the quarter we also benefited from about a million dollars of expense savings as a result of executive headcount vacancy and property tax refunds that we do not expect to continue in future quarters. Excluding these expense savings, cash operating expenses were $81.3 million, an increase of about 10% from last year.

Operating income excluding stock compensation, depreciation, amortization and investigation fees for the first quarter was $11.8 million, an increase of 18% from $10 million last year. This represents a 13% margin compared to 12% margin last year.

Net income for the first quarter, excluding stock compensation investment gains and losses and investing fees was $474,000 or breakeven on a diluted EPS basis. This compares to net income for the first quarter of 2006 of $3 million or $0.02 per diluted EPS.

The year-over-year decline in net income during the first quarter of 2007 was due to increased investments in new businesses and network infrastructure, in addition to incremental depreciation charges associated with our capital investment program over the past few years.

On a reported basis, net income for the first quarter was a loss of $9.1 million or $0.06 per diluted share compared to a 2006 net loss of $1.3 million or $0.01 per diluted EPS. The year-over-year decline in reported net income was mostly driven by stock option investigation fees of $4.4 million, as well as, incremental depreciation charges of $2.7 million.

Our first quarter 2007 reported net income also includes $5.2 million of stock compensation expense. Our first quarter 2006 net income includes $4.8 million in stock compensation expense and $500,000 of the gain from private investments.

Turing to our balance sheet, our total unrestricted cash from balance at the end of the first quarter was $72.7 million, approximately $3 million less than the prior quarter. This reduction in cash was driven by $14.1 million of acquisition payments and $7.2 million of capital expenditures offset by stock option exercise proceeds.

Total debt at the end of the first quarter was $77 million. Our debt balance consists of a $60 million credit facility due October of 2007 and $17 million of accelerated notes related to acquisition of which $10 million is due in Q3 of 2007.

Cash from operations during the quarter was $11 million, a decrease of $18.2 million from last year. The declining cash flow from operations was driven by a change in working capital. Our day sales outstanding at the end of the first quarter were 74, a two day increase compared to last year, and a six day increase compared to the prior quarter.

Net capital expenditures were $7.2 million for the quarter compared to $8.7 million last year. During the quarter we invested $9.5 million in growth capital expenditures of which $2.3 million related to lease hold improvements in the UK was reimbursed.

Free cash flow for the quarter was $3.8 million, excluding $4.4 million of fees associated with our stock option investigation. Free cash flow would have been $8.2 million which compares to $20.5 million from the first quarter of 2006.

Before I comment on our second quarter guidance, I would like to spend a few minutes to update you on our tax planning efforts regarding the release of our deferred tax assets, as well as, the tender offer that we filed during the quarter associated with our stock option investigation.

First, taxes. As we discussed last quarter, we expect to release evaluation allowance of deferred tax assets in the fourth quarter of 2007. The timing of this release is a matter of judgment, and is based on our historical profitability and management’s expectation of future performance.

Our deferred tax assets are mostly comprised of net operating losses. In order to determine how we may utilize our deferred tax assets to offset taxable income in future period, we outlined the plan last quarter to assess the value of our deferred tax assets, substantiate their expected tax benefit and determine the timing of the valuation allowance released through the P&L. We have completed this work in partnership with our independent auditor and have accepted the value of our differed tax assets to be approximately $307 million.

We expect to release about 221 million of the related valuation allowance in the fourth quarter of 2007. Of this amount, approximately a 190 million would be a benefit to income tax expense, and 31 million will reduce goodwill. The remaining portion of the valuation allowance will remain on the balance sheet until it can be used to offset future income streams from related investment gains and/or foreign income.

Following the release of the valuation allowance, we expect to report a book tax rate beginning in the first quarter of 2008 in the mid 40% range. However, it is important to understand that due to the value and availability of our differed tax assets we will continue to enjoy a very low effective cash tax rate for many years.

During the quarter, we successfully concluded our stock option investigation and became current with our SEC filings. As a result of our investigation, some of our employees are holding improperly priced options referred to as discounted options. And these are options are subject to adverse tax consequences under section 49A of the IRS regulation which imposes a 20% excise tax on gains from discounted option. Residents of California are subject to an additional excise tax of 20%.

Management and the board decided that it was important to take measures to resolve any adverse tax consequences that our employees may experience as a result of holding or exercising improperly priced option. First, the company elected to participate in programs offered by the Federal government and the State of California which enables CNET Networks to pay the excise tax owed by employees who have exercised improperly priced options in 2006, the cost of which was about $400,000, and is included in our first quarter's fees for stock option investigation.

Second, to avoid the future adverse tax consequences as a result of holding this kind of options, we launched a tender offer in March that closed in early April. Under the terms of the offer, employees were given the opportunity to increase the exercised price of their option to the appropriate price as determined by our investigation. In exchange for agreeing to re-price their options, CNET Network will make a cash payment to employees of approximately $2.1 million in the early 2008. The timing of this payment is prescribed by Section 409A.

It is important to note that no current or former members of CNET Networks, Board of Directors or Executive Management team were eligible to participate in these programs, and then all current board members, in fact some 16 executives have voluntarily re-priced their option. Additionally, our current directors have reimbursed the company for any names realized by the exercise of improperly priced options.

Now I'd like to provide with our Q2 and full-year guidance for 2007. This guidance does not consider any ongoing expenses, related to our stock option investigation. For the second quarter of 2007 we expect the following.

Total revenues is expected to be within the range of $97 to a $102 million representing a 5% to 10% growth from the second quarter last year. Operating income before depreciation, amortization and stock compensation expense is expected to be between $13 million and $17 million for the second quarter. We estimate that stock compensation expense will be approximately $5.5 million during the quarter.

Excluding stock compensation expense of approximately $0.04 per share, and our second quarter EPS is expected to be within the range of $0.01 to $0.04. On a reported basis second quarter earnings per share is expected to be within the range of a $0.03 loss to break even.

For the full year 2007, we maintain our expectation as follows. Total revenue will be in the range of $425 to $445 million, which represents a 10% to 15% growth over the last year.

We expect full year operating income before depreciation, amortization and stock compensation expense to be between $90 and $105 million. We estimate that full year stock compensation expense will be approximately $23 million. Excluding approximately $0.15 per share of stock compensation expense and a $1.23 per share of tax expense benefit related to the $190 million evaluation allowance release in the fourth quarter.

Full year 2007 earnings per share is expected to be between $0.29 and $0.39 EPS. On a reported basis, full year EPS will be between a $1.37 and $1.47 per share.

Finally, we expect capital expenditures to be between $35 and $40 million in 2007. I would now like to turn the call back over to Neil.

Neil Ashe

Thanks George. As I said last time we spoke, 2007 will be a year of great activity for CNET Networks. We remain focused on realizing the potential and opportunity of our existing brands, and doing what we do better and on identifying and capitalizing our new opportunities. We will continue to expand our footprint.

We are uniquely positioned to play an important role in the evolving media landscape. Since our inception, we have been innovators in content models and user experiences, and we have more people visiting our sites than ever before.

During the first quarter, we attracted nearly a 144 million monthly unique users, up 23% from the first quarter of 2006. This places us among the top ten largest Internet companies in the world. We create engaging user experiences and are focused on staying at the cutting edge for our users and marketers while leveraging innovative technologies in emerging media to cost selling improve our properties.

We continue to generate, fund and promote emerging media to deliver on the user promise of our brand. The ZDNet blog network continues to grow and we are constantly exploring new ways to include independent content producers on our properties.

We have scaled the amount of video and audio and we have streamlined the usability of several sites including CNET and Webshots by reducing the number of pages that a user needs to click while either reading a review or uploading photos.

During the quarter, CNET Network’s users turned over 81 million page views per day. Our users are engaged and active on our site. We served nearly a 1000 pages per second and later this month the GameSpot will service one billionth video stream. In the hour that we spent together today our properties would have generated over 3.5 million page views.

We have also repeatedly demonstrated our ability to build brands that activate influential audiences and to do so at scale. In March, according to ComScore, reached more men globally than, and is the largest technology information site.

GameSpot is the second largest game information site and the largest focused solely on games. Although it is less than two years old, is the fourth largest television site in the world, ahead of all of the network television sites. And in just seven months since its official launch CHOW is now approaching the audience size of food category [forward]. Simply put, we attract high quality audiences to branded media properties and activate them to influence those around them.

On the topic of influence we recently completed some groundbreaking research that will provides some new insights and to who influences are, and the role that these individuals play in shaping opinions and consideration and point your attractiveness of our audience and our brand.

We partnered with an independent third party research firm that has been focused on this topic for several consumer package goods and beverage marketers to develop our approach.

We conducted the research across seven of our leading brands including CNET., GameSpot, the ZDNET and TechRepublic. We surveyed over 12,000 people and conducted numerous in person interviews. Importantly, we also included a comparison group of four of the users for the topic areas that our leading brands serve.

We found that influence is driven largely by the personal benefit to the (influence. Notably, the satisfaction of helping others. These then forces activated based up on their trust in the quality and uniqueness of the information. Our brand skewed higher in key areas and activation versus the product control group.

Not surprisingly, our users have larger influence networks. Finally we found that our users influence a wide range of topics. We have been sharing this insights with the marketing community and we will continue forward with an innovated research as we help chart had a successfully market in the changing media landscape.

I'd now like to update you on the three initiatives that I outlined when I first spoke to you as CEO on last call. To realize the potential of the brands that we currently have, to deal we do better and try to identifying and capitalize our new opportunities for growth.

CNET Networks will remain focused on realizing the potential and opportunity of our existing brands.

In the last four years we've grown from almost exclusively technology brands to leading brands in business, Personal Technology, Games, Music, Television, Food and Parenting.

These brands provide us with a foundation for continued leadership in growth. We are enthusiastic about the prospects of our existing brands and during the quarter we made good progress. Some key highlights are as follows.

We maintained our momentum in entertainment as we continue to add new content and features. The audience continues to scale, now nearly 19 million monthly unique users. The show spaces are becoming the de facto online home for some of the largest shows on television including Rock, (inaudible) and Prison Break.

During the quarter, we announced that was the launch partner of the CBS Interactive Audience Network. Arrangements like this one provided symbiotic ways to improve our user experience to grow the audiences of featured shows, and ultimately create more value for us and for our media partners.

GameSpot continue to be the premiere destination for gamers by offering access to content and information about the most anticipated games and exclusive coverage of the industry's biggest events. GameSpot was selected as the exclusive North American partner for the multi-phased Lord of the Rings Online Beta, distributing more than 100,000 beta keys to gamers looking for exclusive sneak peaks and game-related content directly from the developer.

GameSpot also provided extensive coverage of the Game Developers Conference in March, including exclusive coverage of the (inaudible) and the GDC Awards, plus coverage of hundreds of games, news and preview articles. In addition video coverage that served nearly 1 million streams during the conference.

At our CNET branded properties we began the year with words and recognition from our advertisers and our peers. Avenue A/Razorfish recognized CNET as "Publisher of the Year" in the Technology Category. The distinction is given to publishers who have the best combination of audience, service, performance and creativity and is part of Avenue A/Razorfish's 2007 Digital Outlook Report. Also CNET TV received two wins and two finalist awards in the Television News category by the Aegis Video & Film Production Awards, the industry's premier competition for pure recognition of outstanding video productions and non-network TV commercials.

Our business properties continue to scale and to perform well. The combined reach of our business properties is growing and is significant. Currently ZDNET and TechRepublic reach over 25% of all IT business technology decision makers on a monthly basis.

With our $500 million of enterprise technology marketing still spent in IT print alone, we are confident in the opportunity of these brands. Internationally, we continue to have success with the introduction of our leading US brands in international markets, and with the acquired brand in key markets.

Thus far we have launched GameSpot in the UK, Australia, Japan and China, and CNET in Australia, France and the UK. We are experiencing positive trends. For example GameSpot Australia grew unique users 20% during the quarter.

In addition, the site continued to attract strong advertiser interest from videogame advertisers and from new customers including 20th Century Fox and Paramount during the quarter.

In China ZOL and PCHome maintain their position as leading technology portals, and XCar remains one of the largest auto sites. While still a small portion of revenue for us, traffic growth has been strong and we are optimistic about the future prospects of our properties in China. We have had success in China due to our market position, our outstanding local team, and strong execution.

The second initiative I outlined last fall was to focus on continuously improving all aspects of business and how we execute. We will make the changes necessary to achieve this.

First, we have taken steps in recent months to discontinue or sell businesses that we feel are either not contributing to our strategic ambition or aren't meeting our financial expectations.

Second, we will make the organizational changes necessary to return our growth to level consistent with our expectations.

To that end we are making substantive changes to our sales organization, including changes in people, structure and processes. While making changes like these are not about the short-term challenges, including impact on current performance. These changes will allow us to realize the opportunity of our brands. We take seriously our status as an industry leader, and we will start to realize the power of our network in ways that we have not historically.

Our business continues to have revenue concentration with some large technology advertisers. We can both improve our execution against those accounts, as well as accelerate the growth and penetration with new advertisers. We have had success on this today, and will work to accelerate and multiply those successes. We will also seek to re-distribute our internal resources towards areas of highest long-term growth potential.

To that end, we will be focusing less on Webshots as a primer property. This will entail lowering our revenue expectations and the resources and senior management time that we have devoted the property. Although it has not met our financial expectations, Webshots remains a leading photo sharing site and is an important part of the network.

While we are scaling back our investment in the property, it is profitable and serves our strategic needs. A smaller, reconstituted team will be focused on realizing the opportunity of this brand. Third, we'll be focused on identifying new opportunities for growth and on realizing these opportunities.

In the first quarter, we launched BNET. There is a large unmet opportunity in business media. Currently business media is largely focused on business sports, who is winning, who is losing, who got a new contract, who got caught cheating. This approach is business from the outside.

BNET is focused on business from the inside. We are arming business managers with the tools to do their job better. BNET delivers practical insight and straight forward tools for the challenges managers face everyday, and has the largest non-IT business resources directory on the internet.

We are excited about the opportunity for BNET. It can be a meaningful contributor to our future growth. User and usage trends have been impressive. Live now for less than two months, the site reaches close to 1 million unique users per month and is scaling.

We have supported the launch with the successful cost promotion program across our network. BNET gives marketers a high quality outlet to reach influential business professionals who are passionate about keeping informed, building knowledge and sharing insides to master their lives at work and further their carriers. Marketer interest has been strong; launch sponsors include Sprint, RIM, Dell, Adobe, and Dow Chemical.

Over the last few years we have entered numerous new categories, demonstrated an ability to build new properties, to buy new properties as well to combine building and buying to create new properties. Our successes include, CHOW, MP3, ZOL, PCHome and XCar among others. We will continue to use all avenues available to us to expand our footprint.

CNET Networks is well positioned to take advantage of the positive trends in online advertising. In order to take full advantage, we need to invest in our business, and we will continue to add new properties.

CNET Network is a different kind of media company. We are unique in our ability to build brand for people and the things that they are passionate about, and to do so in ways that attract and activate people with large influenced networks on a wide range of topics. Our audience continues to grow, is attractive to a whole host of advertisers, and we continue to have high advertiser renewal rates. We are focused on improving our business, and we are making the changes necessary to realize these improvements.

While 2007 is a transition year for us, we are strategically well positioned to thrive in the evolving media landscape.

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

Question-and-Answer Session


Thank you. (Operator Instructions) We’ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Anthony Noto with Goldman Sachs

Anthony Noto - Goldman Sachs

Thank you very much. Neil a couple of questions. I was wondering if you could comment on your organic revenue growth for the overall company, and then within the context of that, what's the revenue growth at, and Thank you.

Neil Ashe

So, we don’t break out individual properties, so we can’t break out the CNET revenue growth, total revenue growth as we pointed out would have been 15% year-over-year excluding the closed businesses in that first quarter.


Your next question comes from the line of Youssef Squali with Jefferies and Co.

Peggy Frango - Jefferies and Company

Thanks. This is Peggy Frango for Youssef. Could you talk a little bit about demand for lower priced inventory items? Are you seeing more of that as we heard something off with this quarter, and also could you talk a little bit about how you monetized non-premium inventory and whether you have participated in an ad exchange?

And just one other question: You haven't announced any acquisition this quarter. Could you just talk whether that was a function of the quality that you are looking at evaluations or anything else? Thank you.

George Mazzotta

Okay. So we will pick through them in the order that you ask them. So first for demand for low CPM inventory. The overall predominance of our inventory is high quality inventory. So we don't -- when -- when others are selling kind of pure rented inventory we have less of that than would be considered in other areas. So we don't have the same trends around things like email inventory and others.

We monetize almost all of our own inventory. So we do participate on a limited basis with ad networks for rented inventory and for Webshots. But we strongly believe that we are best at selling our own network, that our properties are incredibly valuable, and that they generally provide more value to an ad network than ad networks provide to us. While we continue to test how to most effectively optimize that monetization currently that's almost exclusively done with us with some minor exceptions.

The third question on acquisitions in this quarter, we completed the acquisition of GameKult in France which we had talked about on the last conference call.

We have no shortage of backlog of acquisitions that we are seeing, and we are focused on finding those which can either improve the operations in any one of our properties or markets or launch us into new areas. As I said in my prepared comments we feel like we have proven the ability to both build properties, as well as buy properties, as well as do a combination of building and buying to enter new categories, and we continue to focus on expanding our footprint.


Your next question comes from the line of Gordon Hodge with Thomas Weisel and Partners.

Gordon Hodge - Thomas Weisel and Partners

Just a few questions Neil. Let's see one; if you look at the Q2 guidance, and you have got expenses up, it looks like sort of 14%, 15% year-over-year, and then revenue up 5% to 10%. I am just curious what sort of things or initiatives do you have in mind for Q2 that would cause expenses to outrun revenue growth?

And then on the -- you observe in the press release at page – these are down 18%, up 1% excluding Webshots, but users are up a bunch and I think the ComScore data would suggest the time spent with your properties is also up significantly. How do you reconcile the different direction of page users going versus time spent and can you confirm the time spent with your properties is actually up nicely? Thanks

Neil Ashe

Okay, thanks Gordon. I'll take the second question first, which is we have that strong growth in users, and as we mentioned, as we continue to increase our usage of video or audio and other technologies, it will [stand] to reason that we will continue to increase our time spent. That’s not correctly a metric that we managed to hear, so we spent the last on that, but I'll give you some anecdotal evidence which is CNET TV did about 1.1 million users per month, and they, I think turn on average about six videos per time there. So you can see how that time spent will change pretty dramatically. We are focused in all of our properties on all forms of emerging media whether that's video, text, photos or audio, and we are focused on creating that experience which seriously satisfies our user promise. And that will lead to the engagement that we’ve described.

As that effects second quarter guidance the revenue expectations in the second quarter are related to as I mentioned in the prepared remarks, some softness against specific technology accounts as well as our decision to scale back on Webshots.

And this is I believe a one quarter phenomenon and not a permanent phenomenon, and we are making the changes that I outlined to position ourselves for long-term future growth in revenue on all of our properties.

George Mazzotta

And Gordon with respect to our suggested expense growth for Q2, this is a function of strategic investments that we have made in new and growing properties. If you look at our expense growth sequentially, you will notice that the mid-point of our guidance suggest that we would be actually be below levels of Q4 2006.

Note that we examine regularly and with great interest the reinvestment rates in each of our businesses and in our corporate infrastructure. And we have the opportunity as Neil pointed out in his comments to both invest more aggressively in new and growing properties and to scale back in other areas.


Your next question comes from the line of Imran Khan with JP Morgan.

Imran Khan - JP Morgan

Yes, hi, thank you very much for taking my questions. Two questions, first, maybe high level. You have rolled out your sites in the international market, can you give us some color like how quickly you think you can get some traction in terms of growing traffic or revenue monetization whether you need to built a sales force desk separately. How are you trying to monetize the traffic there?

And secondly I think you talked about strong technology advertisers, I believe that’s Intel. What gives you the confidence on the revenue number if some of the technology advertisers start cutting their spending, thank you?

Neil Ashe

Okay, so I'll hit those in the order that you ask them Imran. So first on international; so we have media operations in Europe and the U.K., France and Germany and in the largest markets in Asia including China, Japan etcetera.

So as we roll out our U.S. branded properties we roll against a largely against an existing sales force. And while we may need to make additions to that, we're generally already [resident] in the markets. So we've seen strong growth in the market where you would expect us to, which are the U.K., China obviously and to a lesser extent France as we've introduced these properties in those markets.

So the second question on weakness in technology advertisers and our confidence in our projections for the remainder of the year, we see our path to our existing guidance for the rest of the year.

As I said in my prepared remarks, I believe that we can execute it better against specific accounts as well as continue to grow with some of our other properties and grow our revenues against those.

So while the second quarter is not the kind of growth rate that we would like, we believe that we can through the changes that we've identified start to realize our expectations for the back half of this year, but more importantly for 2008 and beyond.

We remain focused on building our properties which are some of the most important media brands in the world, and we believe that we can monetize to a whole host of advertisers where we need to scale our exposure and we are making organizational changes and we are doing what's necessary to realize that overtime.

The trends for online advertising come to us, and the future of media is consistent with our strategy with the expectation of a branded user experience, and we are putting ourselves in a position to realize that that revenue in that value creation opportunity overtime.


Your next question comes from the line of Kit Spring with Stifel Nicolaus.

Kit Spring - Stifel Nicolaus

Isn’t that really your page view slowdown that might be impacting the slowdown in sales rather than the sales process? And what are doing to improve that page view, and what are you assuming for page views for the second half?

Neil Ashe

The short answer to your question is no. It’s not the page whose slowdown is effecting our growth and sales. We've been very consistent about this for the last three years in terms of our expectation about user growth and the relationship between monetization and realization of page views and/or other revenue generating opportunities like video etcetera.

We have a non-linear relationship between our growth and users and usage and our revenue, so the output of that is RPM. So as you've seen our RPM has gone up or revenue per thousand pages. And so are, we are focused as I've said earlier on growing our users over the course of the rest of this year. In this quarter they were up 23%, and we expect them to continue to grow in the back half of the year.


(Operator Instruction). Your next question comes from the line of Mark Mahaney with City Investment Research.

Mark Mahaney - City Investment Research

Thanks. I wanted to ask couple of questions please. First, George, do you have any way of guessing what the option investigation costs are going forward? Can you [put] them in range or do you think the numbers in absolute terms will increase or decrease?

Secondly house keeping question, marketing services, you gave that that growth rate was like excluding close businesses 15% in the March quarter, what was that growth in the December quarter? Can you tell whether its accelerating or decelerating?

And then the last question has to do with that 23% unique user growth, is that organic number, are there international properties that have been added that have accelerated accruals or is there cleaner organic number to get at or is that it? Thank you very much.

George Mazzotta

I'll take the first question which was around our investigation fees. A terrific amount of effort was expended in the first quarter of this year to file our SEC reports, and to results the 409A issue related to the investigation. We will not speculate or provide an estimate for what it will cost to resolve the residual issues related to this matter.

Neil Ashe

I'll take the unique user growth question first. That’s a pretty clean number; the 23% is a pretty clean number. We added GameKult in France which is only about 2 million monthly unique users, 1 million to 2 million monthly unique users, so that’s not a big impact. So that is a clean almost exclusively organic growth number.

In terms of the marketing services growth as we said first quarter excluding closed businesses was 15%, that's pretty consistent with where it's been for or where it was for the fourth quarter.


Your next question comes from the line of Heath Terry with Credit Suisse.

Heath Terry - Credit Suisse

Just wondering, to go back to the discussion of IT advertising spending and the weakness that you are seeing there, can you give us an idea of what percentage, what portion of your revenues is actually represented by IT spending? And then if there are other segments of advertising that you are either seeing strength or weakness and could you talk about that?

And then as we look at the outsized growth in RPM relative to the growth in page views. Can you talk to us about how that's manifesting itself, whether it’s a function of pricing within specific categories or if it’s more of a shift?

Neil Ashe

Okay. So I'll deal with those questions in order also. So first on the IT spending; we don’t break our categories as a percentage of growth. Although, as I pointed out in my prepared remarks we do still have large IT customers obviously.

But they are largely centered around or our challenge in the second quarter is largely centered around those who sell PCs and the PC market. We'll not call that a broad based statement about the IT spending universe.

Other segments where we are seeing strength and weakness, we are making progress in the auto category, games are starting to tick up. I think everyone expects 2008 to be a big year for games. And we continue to see growth among all of our properties in our penetration of general consumer advertisers. That is as you know still a smaller portion of our revenue growth side, but we still see some growth there.

Our influence on research has really been a great tool for the marketing industry to understand what it means to create brand of properties that activate influencers and who those influencers are, and it allows us to really have a fruitful discussion with them about the power of our brands as an advertising medium for them.

On the RPM growth, this is driven both by price as well as by sell through. So it’s pretty healthy across the board in those regards.


Your next question comes from the line of Bill Morrison with JMP Securities.

Bill Morrison - JMP Securities

Hi. Thanks. I think you said Google was 12% of your revenue in the quarter, and if memory serves me correct it’s consistently better on 10% the last several quarters. Can you just confirm whether or not that's correct, and if so kind of what was driving the strength as a percentage of revenues there? And also can you remind us when that deal comes up for renegotiation? Thanks.

Neil Ashe

So yes, Google usually bounces around 10% of our revenue, and was 12% in the first quarter. We had a pretty good quarter on general optimization. So we are constantly evaluating our optimization mix and how we can change the mix of revenue to realize the most revenue.

We found some ways to increase our revenue with an optimization in the first quarter with our Google relationship that we don’t expect to continue in the second quarter and we’ll find other ways.

Our deal with Google, we are in the second of a two year deal, so it’s up for renegotiation this year for commencement next year and beyond.


(Operator Instructions). Your next question is a follow up question from the line of Gordon Hodge with Thomas Weisel and Partners

Gordon Hodge - Thomas Weisel Partners

Yeah, thanks. Just a question George on stock compensation expense, not the investigation expense but the actual compensation expense. Is it embedded in there anything related to variable option accounting where you have options that or you win the money or whatever, that would inflate that number, in other words I guess the question is, is that a -- if we look from here over the next five years we would be looking at $23 million or so of stock option expense, or is there some things in there that might over time sort of diminish?

George Mazzotta

No, Gordon, albeit the current guidance that we have provided $23 million of approximate estimate for a stock compensation expense for all of 2007, you know, we believe in that guidance that reflects what we expect to expense, and there has not been that counter validity stock option investigation, relating to the compensation expense that would make that a volatile period in coming years.


Your next question comes from the line of Ursulla Morgan with Bear Stearns

Ursulla Moran - Bear Stearns

Hi, it’s actually Ursulla Morgan at Bear Stearns. Forgive the housekeeping fresh whatever question, but did I hear correctly that for 2007 overall the adjusted guidance meaning taking away all of these unusual things, and the deferred taxes and stock comps and whatever else, that your guidance was a $0.29 to $0.39 range, I am not sure I got that correctly in my notes? And then could you comment on whether that is an apples-to-apples comparison to consensus because I see that the consensus for ‘07 looks to be 17 and for ‘08 25, and I just not at all comfortable that I am comparing like. Thanks.

Neil Ashe

Sure, I can I can speak to at least part of that question, I believe is, let me just re-read my comments, what we said was that excluding about $0.15 per share of stock compensation expense and a $1.23 per share of the tax expense benefit, and this relates to the valuation allowance relief of our differed tax asset which is about $190 million, we estimate.

Our 2007 full year EPS spend would be about $0.29 to $0.39 based on the revenue and EBITDA ranges that we have provided, but on a reported basis, with all these things considered the full year EPS would be between a $1.37 and $1.47 per share.


Ladies and gentleman, we have reached the end of the allotted time for questions and answers. I would now like to turn the call back over to our presenters.

Neil Ashe

Thank you all for spending time with us. Thank you for your interest in CNET Networks, and we look forward to talking to you again next quarter. Thank you.


This concludes today's CNET Network first quarter financial results conference call. You may now disconnect.


Wall Street Horizon Logo

Do you get frustrated during earnings season?

Have you had trades go south because of bad earnings dates?

We know what it's like. We’ve been there. We’re Wall Street Horizon and we work with some of the largest firms on Wall Street.

Founded by former Fidelity Investments executives, we understand the power of trading on good information and the pain and suffering of trading otherwise. We obsess about earnings and economic events calendars so you don’t have to. Accurate. On time. Guaranteed.

Let us help.

Get Smart

Get Wall Street Horizon.

View our Free 30-day trial for investment professionals

To sponsor a Seeking Alpha transcript click here.

Click to enlarge

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!