Sell-Side Reaction to CNET's 3Q05 Results - Mark Mahaney, Citigroup (CNET)

Citigroup Internet analyst Mark Mahaney sent a note to clients evaluating CNET's (ticker: CNET) Q3 results on October 25th. He has a "Buy" rating on the stock. Extracts:

CNET: We Like The Story, But Want A Better Price

SUMMARY

* CNET report an In-Line & In-Line quarter -- $86.3MM rev and $0.05 EPS (excl. 1X items) vs. Street at $87.0MM and $0.04. December rev guidance was 3% below the Street, but EPS was $0.01 above. Kind of a typical CNET qtr.

* Fundies clearly got stronger -- 26% Y/Y proforma revenue growth was higher than 23% in June and 19% in March, while EBITDA margin leaped 780 bps Y/Y to 17.9%, with 53% incremental margin. And FCF/EBITDA increased to a high of 28%.

* No change to our view on the stock -- we continue to like the secular growth, competitive position, and business model leverage here, but don't view the reward/risk as compelling. Reit Hold and $14PT.

* Reducing 2006 GAAP EPS from $0.41 to $0.39 due to reduced Publishing segment revenue expectations. Key segment to focus on is Interactive (92% of total), and trends getting stronger and outlook improving.

Did CNET’s fundamentals improve? Yes. We focus first and foremost on CNET’s proforma Internet revenue growth and this accelerated from 23% in the June quarter to 26% in the September quarter.

EBITDA margins expanded 780 bps Y/Y to 17.9%, up 110 bps Q/Q. Incremental EBITDA margins reached 52.6% in September, so the CNET model continues to provide evidence for margin expansion going forward.

Were fundamentals better than the Street expected? Yes/No. Revenue of $86.3MM was below Street expectations of $87.0MM, however, EPS of $0.05 beat the Street at $0.04.

Did the company raise guidance relative to the Street? No & Yes. For the December quarter, CNET guided to mid-point revenue of $106MM, below the Street at $109MM. But CNET also guided to mid-point EPS of $0.15, above the Street at $0.14. For the record, CNET did modestly increase its own December guidance – revenue from $102-$108MM to $102-$109.5MM and EPS from $0.13-$0.15 to $0.13-$0.16. Particularly key is that CNET materially increased the revenue guidance for its Interactive/Internet segment – from $93.5$98.0MM to $95MM-$100MM.

Related:

• All Internet Stock Blog articles on CNET.
• The complete list of Internet stocks (and links to articles about them) covered by The Internet Stock Blog.
• A list of full conference call transcripts available on the Seeking Alpha Network.

Full disclosure: the editor of the Internet Stock Blog is short CNET at the time of writing. « Any opinions expressed on the Seeking Alpha sites are those of the individual authors and do not necessarily represent the opinion of SeekingAlpha or its management. »