CNET Networks Q3 2007 Earnings Call Transcript

CNET Networks (CNET)

Q3 2007 Earnings Call

October 25, 2007 5:00 pm ET

Executives

Cameron McLaughlin - IR

Neil Ashe – CEO

George Mazzotta – CFO

Analysts

Mark Mahaney - Citi Investments

Brian Fitzgerald - Banc of America Securities

Megan Barker for Anthony Noto - Goldman Sachs

Kit Spring - Stifel Nicolaus

Sandeep Aggarwal - Oppenheimer

Gordon Hodge - Thomas Weisel Partners

Hagit Reindel - Jefferies

Lev Polinsky – JP Morgan

Scott Kessler - Standard & Poor’s

Mark May - Needham & Co.

Presentation

Operator

Welcome to the CNET Networks third quarter financial results conference call. (Operator Instructions) I would now like to turn the conference over to Ms. McLaughlin. Thank you, you may begin your conference.

Cameron McLaughlin

Thank you and good afternoon. Before we get started I would like to remind you that this call is being webcast. The webcast can be accessed on the CNET Network’s Investor Relations website at ir.CNETNetworks.com. A replay will also be available shortly after the conclusion of this call.

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 third 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, October 25th, 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 use in our news release and on this call to GAAP financials on the last pages of today’s news announcement.

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 host a brief question-and-answer session. To facilitate the question-and-answer session, we will be muting the line following each question and will take follow-up questions if time allows.

Now let me turn the call over to Neil.

Neil Ashe

Thanks, Cameron and thank you all for joining us. After a year on the job, I can confidently say that we’re building a company that can succeed in 2008, 2009 and beyond. Strategically, we’re focused on providing people with brands that make a difference and that help marketers win. We are premium online.

Financially, we’re realizing value from businesses that do not fit with our long-term plans and we are positioning ourselves to create value for shareholders with our balance sheet. Operationally, we have a winning team who knows what success is and is committed to achieving it. We are making important internal changes that ensure we reach our goals.

What does all this mean? It means that we’re creating a new CNET Networks, a bold company that is entrepreneurial and aggressive. We are not the site of the day; we are the media company of the future.

I’m excited to tell you about three significant events during the quarter that underscore our commitment to success:

(1) We have filled out our executive leadership ranks with the addition of Stephen Colvin as Executive Vice President overseeing our Entertainment and Lifestyle brands. Stephen comes to us from Dennis Publishing, where he launched and built Maxim, Blender and The Week.

(2) Last week we announced a $250 million credit facility that provides us with the financial flexibility to create value for our shareholders.

(3) We evaluated our brand portfolio and made the decision to focus on the assets with the largest opportunities for us. Accordingly, we have made the decision to sell WebShots to American Greetings for approximately $45 million.

Before I share more results, I will provide highlights of our third quarter results. The number of people coming to our properties continues to grow. We ended the third quarter with 141 million monthly unique users consuming over 91 million pages per day. As we discussed with you last quarter, we have migrated some of our U.S. data reporting platforms to our international markets to assist with the integration and growth of our developing properties.

Accordingly, our traffic statistics now include the full effect of our new and developing properties in places such as China and Europe. This has resulted in an increase of approximately 50 million page views per day.

Total revenues for the quarter were $99.5 million, up 7% from the year-ago quarter. Excluding all exited business, including WebShots for both 2007 and 2006, total revenue increased 11% during the quarter. Operating income before depreciation, amortization, stock compensation and stock option investigation-related expenses was $18 million, for a profit margin of 18%.

As I have discussed with you in the past, we are organized around the following three initiatives and key areas of focus as part of our long-term growth strategy:

(1) Realize the potential and opportunity of our existing brands.

(2) Identify new opportunities for growth.

(3) Continually strive to do what we do, better.

Let me start there with what we are doing better. One of the most important aspects of realizing our full growth potential is having the right people. While we are developing talent throughout the organization, we are also bringing in new leadership with fresh perspective. I’m excited to tell you about two key executive announcements.

First, we are pleased to welcome Stephen Colvin to CNET Networks as the head of our Entertainment and Lifestyle business, responsible for such important properties as GameSpot, TV.com, CHOW, UrbanBaby, MP3 and FilmSpot. Stephen is a dynamic leader and brand builder with significant media experience. We are very excited to be working with Stephen to grow our Entertainment and Lifestyle properties.

Second, on the sales side, we believe that the development and re-architecture of our go-to-market approach is a necessary component of our growth. Having the right team in place is key to this success. After four months on the job as special advisor to the CEO, Jack Haire made great progress evolving how we go to market, and as part of these changes, he’s taking on the newly formed position of Chief Client Officer. In this role, Jack will have responsibility for raising our industry visibility, for developing new sales strategies for new categories and new accounts, and ensuring a consistent world-class customer sales experience.

Our efforts are already being noticed. According to the recently released Jack Myers Survey on online sales organization performance, CNET, GameSpot and TV.com sales efforts were ranked either first or second in their respective categories.

During the quarter, we re-evaluated our asset mix, and we are focused on those areas that represent the most significant potential for us in which we can be leaders. As a result, today we are announcing the sale of WebShots to American Greetings for approximately $45 million. George will walk through the financial impact of the transaction later in the call. The transaction is effective immediately.

Exiting WebShots allows us to refocus management time and attention on higher growth opportunities. As a company with multiple properties, it is important for us to continue to launch, buy and build additional properties. It is also important for us to be willing to sell some of those properties. We will not shy away from either one of these.

We’ve long said that our balance sheet is an untapped strategic resource to create value. Last week, we announced that we have secured a $250 million credit facility. Completing this deal in a challenging credit market with leading banks demonstrates the quality of our financial profile. Together with the proceeds from our WebShots sale, we have the financial resources available to create value for our shareholders.

Turning now to new opportunities for growth, we are focused on the categories and assets that offer us the most long-term potential. Let’s talk about a couple of them.

Our core competency is building and growing high-quality media brands. BNET, launched this year, is another example. BNET is business from the inside; arming business managers with the tools they need to do their jobs better. The site and its content address a large, unmet opportunity in business media and we are exploiting it.

User and usage trends on BNET have been impressive and marketers love the property. Advertisers in the third and fourth quarter include FedEx, MasterCard, AT&T, Adobe and Dell, among others. We are and will continue to constantly innovate the BNET product. During the quarter, we introduced BNET Video, a dedicated broadband channel that features original content, as well as syndicated videos from other content producers. BNET is turning heads in the industry. In September, Folio awarded BNET Gold Folios for Best B2B Website and Best B2B Website Design.

Next is China. Through internal development, acquisition and superior execution, we have built a valuable business in China and it will continue to be an area of focus for us. We have successfully added and grown new brands and entered new categories in a market where there is a premium on execution.

We have built a meaningfully-sized media business with leading technology in all our properties that are growing and gaining scale. ZOL, a site we acquired in late 2004 is the leader in the technology category. Xcar, which we purchased in 2006, is the number one site in the auto category.

We also continue to find acquisition opportunities in China. This quarter, we entered the lifestyle category with the acquisition of OnlyLady, a leading Shanghai-based site for women’s fashion. The site adds advertisers like L’Oreal, Estee Lauder, Chanel, Unilever, Johnson & Johnson, Nike and Procter & Gamble to our Chinese business. We will continue our investment in this market.

Finally, we’re focused on introducing our leading brands and high quality content to more and more people, both on our properties and off. As well as introducing our influential audiences to high quality content produced by others, you will see us build on this import-export strategy in the coming months.

Our third area of focus is to realize the potential of our existing brands. CNET Networks brands are best in class. We continue to add new features and functionality across our properties that address the needs of our users and improve our ability to monetize them. CNET is the category leader in technology with the broadest and most comprehensive media experience, online or off.

During the quarter, CNET TV 2.0 launched in beta with innovative features that help our users find and engage with more of our great content. Since that launch, streams are up over 25% per user. CNET TV 2.0 also innovates for marketers. We’ve created new vendor video channels piloted by Panasonic and Microsoft. These channels allow marketers to introduce their deep content to our users.

Turning to GameSpot, as many of you know, the third quarter was significant in terms of new video game launches, and once again, we led the industry with exceptional coverage. In the spirit of new platforms and new games, GameSpot created new, innovative launch centers for the most important games like Halo 3, Madden, Bioshock, and the Legend of Zelda: Phantom Hourglass.

These launch centers quickly became the hubs of activity for those who love games, providing users with everything they could want to know about the games, including up to the minute coverage, as well as unique promotional opportunities for sponsors, including Best Buy. In terms of pages, video streams and users, Halo 3 drew an influx of traffic on GameSpot, making the week of September 23rd the second biggest of the year with over 1 million video streams in just the first two days following the release.

TV.com is fast becoming the comprehensive destination for all things television, whether it was red carpet coverage at the Emmy’s, the fall preview guide, or plots for upcoming season premieres, TV.com had it covered.

Before I turn the call over to George to bring you up to date on our financial picture, let me say again why the third quarter was such an exciting one for CNET Networks. We are exiting this quarter with a better management team, a better mix of assets and more financial flexibility to grow the company and to create shareholder value.

With that, let me turn it over to George.

George Mazzotta

Thank you, Neil. Before I review our third quarter results, I’d like to provide you with some insight into how we will account for the sale of WebShots. The sale of WebShots to American Greetings for $45.2 million in cash will close today. We expect that the sale of WebShots will be treated for accounting purposes as a discontinued operation. This means that we will report the net operating results of WebShots as a separate line on our income statement labeled discontinued operations in the fourth quarter.

This also means the operating results of this business will be removed from continuing operations within our historical financial statements for all comparable periods beginning with the fourth quarter of 2007 financial reports. Additionally, shortly after we close the sale of WebShots, we will file a pro forma financial statement which reflects the effect of this disposition for historical periods including interim periods in 2007 and the full year 2006, 2005 and 2004 as required by SEC guidelines.

As part of our annual impairment review during the third quarter, we determined that a portion of the carrying value of WebShots should be impaired. As a result, our third quarter financial reports reflect a $19 million non-cash asset impairment charge on our income statement as an operating expense, and an equal amount is reflected as a reduction in goodwill on our balance sheet.

This impairment had a significant effect on our reported net income and income tax expense for the third quarter, which I’ll explain in a moment. We expect that the accounting for the sale of WebShots in the fourth quarter may result in a gain or loss, which will be reflected in discontinued operations.

Now let me review with you our financial results for the third quarter. Total revenue for the third quarter was $99.5 million, an increase of 7% from $93.3 million last year. Revenue growth during the quarter was driven largely by strong performance from our international, entertainment, and business properties, partially offset by a year-over-year decline in WebShots revenue.

As we discussed on previous conference calls, 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. Combined, these businesses contributed about $2.3 million of revenue during the third quarter of 2006. Excluding these closed businesses from our third quarter 2006 results, total revenue during the third quarter of 2007 would have grown by 9%. Excluding WebShots and closed businesses, total revenue would have increased by 11%.

Marketing services revenue grew 7% year over year to $87.2 million driven mostly by strong performance from our international, entertainment and business properties, offset by a year-over-year decline in display media revenue at WebShots. Excluding closed businesses, marketing services revenue would have grown 10% from last year.

Licensing fee and user revenue during the third quarter declined 3% year over year to $12.3 million, due largely to declines in WebShots subscription and print revenue. Excluding closed businesses, licensing revenue would have increased 3%.

Supporting our revenue growth is a stable advertiser base. Across the entire network, our top 100 U.S. customers represented 53% of total revenue. We also experienced a high renewal rate from our top advertisers as 95% of our top 100 U.S. customers that did business with us in the second quarter renewed with us in the third quarter of this year.

Google Search revenue represented 10% of total revenue for the quarter.

On a segment basis, U.S. media revenue increased 4% to $76.8 million in the third quarter. The decline in WebShots’ media revenue contributed to lower growth in total U.S. media revenue. Excluding closed businesses, U.S. media revenue would have grown 5%. Excluding WebShots and closed businesses, U.S. media revenue would have increased 7%.

International revenue increased 15% to $22.7 million during the third quarter. International growth was driven by strength in recently acquitted interactive businesses in China, Germany and France and favorable foreign exchange rates. Excluding closed businesses and adjusted for foreign exchange, international revenue would have grown 18% from last year.

Total cash operating expenses during the third quarter, which exclude goodwill impairments, depreciation, amortization, stock compensation expense and costs associated with our stock option investigation and related matters were $81.8 million. This reflects an increase of 9% from $74.8 million last year and is nearly equal for the second quarter of this year. Almost half of the $7 million year-over-year increase in cash operating expenses can be attributed to investments in our international business; expense mostly associated with newly acquired properties in China, Germany and France.

The balance of the year-over-year increase was related to investments in growing domestic businesses as well as additional hires in our network sales organizations for CNET business and entertainment as reflected in the 17% year-over-year increase in sales and marketing expense during the quarter. Expenses associated with our stock option investigation were $406,000 and represent fees paid to legal counsel.

Operating income for the third quarter, excluding stock compensation expense, depreciation, amortization, asset impairment and costs related to our stock option investigation, was $17.7 million, an $800,000 decrease from $18.5 million last year. This resulted in an operating income margin of 18% compared to 20% last year.

Net income for the third quarter excluding stock compensation expense, investment gains, asset impairments, and costs related to our stock option investigation was $6.9 million or $0.04 on a diluted EPS basis. This compares to net income excluding stock compensation expense, investment gains, asset impairments and costs related to our stock option investigation for the third quarter of 2006 of $9.9 million, or $0.06 diluted EPS.

Our third quarter net income reflects a $1.4 million income tax expense compared to our prior guidance, which estimated a $4 million tax benefit. Previously, our expected third quarter tax benefit was estimated by applying an effective tax rate to year-to-date operating losses through the third quarter. This effective tax rate was based on a projection of full year profitability that did not contemplate the impairment or sale of WebShots.

The combined impact of the impairment and sale of WebShots reduces our estimate of full year profitability to levels that create a negligible U.S. tax. Consequently, our third quarter tax expense represents primarily cash taxes paid for foreign tax liability, mostly related to our businesses in China, which are profitable.

On a reported basis, net income for the third quarter was a loss of $16.6 million or a loss of $0.11 per share on a diluted basis, compared to a 2006 net loss of $2.3 million or a loss of $0.02 diluted EPS. Our third quarter 2007 reported net income is negatively impacted by a $19 million non-cash goodwill impairment charge; $4.7 million of stock compensation expense; and $406,000 in stock option investigation fees, positively offset by $590,000 of realized gains on investments.

Our third quarter 2006 net income includes $5 million in stock compensation expense, $1.4 million in goodwill impairment related to EDventure, and $58,000 in realized gains on investments.

Turning to our balance sheet, our total unrestricted cash and marketable securities balance at the end of the third quarter was $71.4 million, about $14 million less then than the second quarter. The decrease in cash was almost entirely driven by cash payments for acquisitions during the quarter, which included TechTracker, OnlyLady, and SportsGamer.

Cash provided by operations during the third quarter was $12.1 million, a $3 million increase from last year. Capital expenditures during the quarter were $4.1 million. Excluding $406,000 in fees related to our stock option investigation, free cash flow was $8.5 million during the third quarter compared to $5.5 million last year.

Earlier this month, we established a syndicated credit facility that allows us to borrow up to $250 million. This facility closed in October and consists of a $190 million revolving line of credit and a $60 million term loan. All borrowings under the credit facility will mature in October 2011. For the remainder of 2007, the funded debt will carry an interest rate of approximately 8.2%.

Total debt at the end of the third quarter was $66.1 million, which represents a $9.6 million net reduction from the end of the second quarter. Our debt balance was reduced during the third quarter by retiring $10 million of seller notes related to previous acquisitions with cash. At the end of the third quarter, total debt consisted largely of a $60 million credit line that was replaced in October with the new credit facility.

Now let me provide you with our financial guidance for the fourth quarter and full year. It is important to understand that our guidance for the fourth quarter and full year 2007 now reflects the treatment of WebShots as discontinued operations. Therefore, operating results for WebShots will be removed from our 2007 expected performance and comparison to 2006 results.

Total revenue, which excludes WebShots, is expected to be within the range of $119 million to $125 million, representing a 5% to 10% growth rate for the fourth quarter. Excluding the effect of exited businesses, total revenue growth would be between 8% and 13% for the fourth quarter. Operating income before depreciation, amortization and stock compensation expense is expected to be between $34 million and $38 million for the fourth quarter. We estimate that stock compensation expense will be approximately $6 million during the fourth quarter.

As we have discussed on previous conference calls, we expect to release in the fourth quarter of this year our valuation allowance recorded against deferred tax assets, which will generate a substantial tax benefit for the fourth quarter and full year. Currently, our valuation of deferred tax assets and our projections of future profitability suggest about a $178 million benefit. It is important to note that while we will record an effective book tax rate on our future period income statements, we fully expect to enjoy a very low cash tax rate for several years, given our significant level of deferred tax assets.

Excluding approximately $0.04 per share of stock compensation expense and $1.16 per share of tax benefit related to our valuation allowance release, fourth quarter 2007 earnings per share is expected to be between $0.07 and $0.10. On a reported basis, fourth quarter EPS will be between $1.27 and $1.30 per share.

For the full year 2007, we now expect the following:

Total revenue, which excludes WebShots, will be in the range of $400 million to $406 million, which represents an 8% to 10% growth over the last year. Excluding exited businesses, 2007 revenue growth would be between 11% and 13% growth.

We expect full year operating income before depreciation, amortization and stock compensation expense to be between $76 million and $80 million. We estimate that full year of stock compensation expense will be approximately $20 million.

Excluding about $0.13 per share of stock compensation expense and $1.16 per share of tax benefit related to our valuation allowance release in the fourth quarter, full year 2007 earnings per share is expected to be a loss of between $0.15 and $0.13. On a reported basis, full year EPS will be between $1.14 and $1.16 per share.

For the full year, we now expect that our total capital expenditures will be approximately $30 million. As presented on our second quarter conference call, our projected capital investments for the year have been reduced due to phasing of U.S. facilities and network infrastructure projects to future periods.

Nearly half of our year-to-date capital expenditures have supported our international operations and represent investments in newly acquired businesses, the expansion of existing infrastructure and new facilities for key markets such as China and the UK. The balance of our year-to-date capital investments have supported domestic business expansion.

That completes our financial update and I’d now like to turn the call back over to Neil.

Neil Ashe

Thanks, George. We exit the third quarter with real progress on the transformation of our company. We are excited to be building a new CNET Networks, a bold company that is entrepreneurial and aggressive. By realizing the potential of our existing brands, identifying new opportunities for growth and continuously doing what we do better, we are building a vibrant and valuable company that seizes the long-term opportunity and creates value for users, employees, marketers and shareholders.

CNET Networks builds and grows engaging media brands that captivate passionate people. With leading online destinations serving over 140 million people worldwide, CNET Networks is the media company of the future.

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

Your first question comes from Mark Mahaney - Citi Investments.

Mark Mahaney - Citi Investments

That organic revenue growth that you mentioned for the quarter excluding WebShots, can you just give the comparable growth rate, what that would have been like in the June quarter or in the first half of the year, just so we can see what the trend was?

Then if you could just talk generally about pricing trends that you’re seeing for your premium ad inventory, do they seem relatively stable or are you seeing any pricing pressure? Thank you very much.

Neil Ashe

I’ll take the pricing question and let George handle the comparable revenue growth rates. On the pricing trends, we are seeing consistency in our pricing. In some of our premium areas we’ve had the opportunity to actually increase prices, so I guess the direct answer is no, we have not seen downward pressure on our pricing in the fourth quarter.

As relates to the comparable, excluding exited businesses growth rates, George?

George Mazzotta

Mark, for the first six months of 2007, without WebShots, our growth rate would have been in the mid-teens.

Operator

Your next question comes from Brian Fitzgerald - Banc of America Securities.

Brian Fitzgerald - Banc of America Securities

You mentioned that you’re seeing good traction in games on the quarter. Microsoft just gave good numbers, specifically mentioning strong demand for Vista and Premium. Can you talk to how things are shaping up for Q4 in terms of advertising around PC software? Are you seeing the games continue to be strong going into Q4?

Neil Ashe

Our guidance for Q4 obviously incorporates the best information that we’ve got right now. Yes, we continue to see games performance to be strong in the fourth quarter with new launches. We’re seeing strength in the consumer electronic categories. I’d say beyond that, we’re seeing trends consistent with what we’ve seen in the PC space so far. We’re seeing pretty good trends in the business media section of our business as well.

Operator

Your next question comes from Megan Barker for Anthony Noto - Goldman Sachs.

Megan Barker for Anthony Noto - Goldman Sachs

Hi, it’s Megan Barker on for Anthony. A couple of questions. First, can you give us an update on the salesforce initiative to sell CNET properties as a package deal? Just any color there? Secondly as you look to develop new sites, what verticals are you currently not in that you think could be interesting? Thank you.

Neil Ashe

First, the update on the sales initiative. As I mentioned in my remarks, Jack Haire has been a tremendous influence on the organization so far and he’s taken on the newly created role of Chief Client Officer with responsibility for really three key items, which are (1) raising our industry visibility (2) identifying strategies for new categories and new accounts, and (3) to ensure a world-class sales experience for our customers across our entire company.

We’ve made a lot of progress on that front. We expect that to deliver benefits, as I said, in 2008, 2009 and beyond. You can expect to see us probably add additional folks over time in those areas as well.

We are seeing stronger trends both in what would be considered out of category advertisers for us as well as those companies that are operating or are marketing on multiple of our properties. It’s still in its nascent stage though, so we’ll be talking about that more in the future, but so far we’ve seen good progress.

In terms of additional verticals, we’ve always said that our evaluation of areas where we want to be where we’re not is based on three pretty key functions. One is, is there a sizeable audience that we believe that we can build in that marketplace? The second, is there marketer interest? Third, do we think we can do it better?

We want to be leaders in the businesses that we are in, and that’s why we’ve chosen to focus on the properties that we are focusing on today. The most exciting of which, as I mentioned, is BNET. We are very bullish on business media and what we think we can do in business media. BNET is business from the inside, which is something that no one else is doing, and there is a lot of heat around business media right now, and we are excited and confident about being a competitor in the marketplace.

Operator

Your next question comes from Kit Spring - Stifel Nicolaus.

Kit Spring - Stifel Nicolaus

Can you give us what the multiple is on both revenues and EBITDA for the year on WebShots? Your CapEx was down quite a bit in 4Q. What do you expect for the year for CapEx, what’s a run rate for the year on CapEx? Thank you.

George Mazzotta

I’ll take those questions, Kit. WebShots, we’ll disclose that it has a EBITDA margin about equal that of the total company. As far as our CapEx investment goes, our CapEx is, as you know, not a linear investment. Our CapEx is a plan to fund expansion in the business, and we think our guidance of about $30 million for the year is appropriate and consistent with our capital investment strategy.

We think that what we experienced in the first three months of this year will continue through the fourth quarter, which is that probably about 50% of our capital investment is devoted to our international expansion programs. The other remaining 50% is devoted to domestic business expansion and infrastructure investments.

Operator

Your next question comes from Sandeep Aggarwal - Oppenheimer.

Sandeep Aggarwal - Oppenheimer

A question on your full year guidance. In Q3, your revenue and EBITDA margin came right in the middle of your previous guidance, and looking at your full year number for the guidance, it seems like the EBITDA margin guidance is going down. I think that you just mentioned that WebShots was in line with the overall company’s margin. So I wanted to know what’s going on there?

Secondly, the kind of success you’re seeing in China, can you name any other countries which are attractive or where you can replicate similar type of success? Thank you.

Neil Ashe

I’ll start with the international operations and the success we’re seeing in China. As I’ve said, China is a key market for us. The UK is also a key market for us. On a smaller scale, we’ve seen strong growth in both France and in Australia. Obviously, many of our leading brands have global footprints and we are excited to capitalize on strength. Frankly, the larger the market, the more interesting it is for us. So the English language markets and China are the leaders for us.

George, do you want to take the guidance question?

George Mazzotta

I can take that. We believe that the guidance that we provided for Q4 is appropriate and we’ll operate well within the margin guidance that we provided. It’s the step up in operating expenses from Q3 to Q4 is probably what you’re noticing, which is not a reflection or indication of what’s happened with WebShots.

But it’s our continued investment program in the international business, probably two-thirds of that increase in operating expenses from Q3 to Q4 that is implied within our guidance is operating expenses that we’ll invest in international. The balance of it is investment here in the United States.

Operator

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

Gordon Hodge - Thomas Weisel Partners

Intel was out, I think a couple weeks ago, talking about increasing the commitments of their ad budget to online pretty significantly over the next year or two and then also I think putting a push behind their Intel Inside co-op money, encouraging that to go online as well. I’m wondering if you can give us any feel for whether you will benefit from that, based on conversations you have had with them and their partners.

Neil, you talked about creating value in using your balance sheet. I’m wondering if you mean by that that you would consider buying back stock or are you more inclined to make acquisitions? If so, are you interested in boosting traffic, gaining more content, you know, other areas that maybe you can just give us a sense of what your interests would be from an M&A standpoint. That would be great. Thanks.

Neil Ashe

First on Intel, there has been some press about the contemplated changes in the Intel Inside Program (IIP) and the effect that that will have online. It won’t surprise anyone to know that we’ve been closely engaged with Intel through this entire process, their evaluation of what they wanted the IIP program to look like as well as its direction. It’s a little early to call exactly what the impact of that will be, but it will be more online advertising by both Intel and the Intel Inside Program dollars. So we will work diligently over the coming months to capture our fair share of that.

The second is about how we intend to use our balance sheet to increase value for our shareholders. Number one, in the context of building value, our strong preference is to grow. So to the extent that we can find properties that fit our criteria that either add to what we already have, ideally, which we will continue to do a fair amount of. We’ve been very, very successful with plug-in acquisitions to grow initiatives that we already have, that could get us into a new property or expand in geographies like China.

While we don’t have any specific plans to do a share repurchase at this point, obviously, we have the financial flexibility to do that if we decide to in the future.

With the M&A market the way it is, in many cases, our properties in the collective look very inexpensive in relation to what we see as acquisition targets. So we consider ourselves in the market for acquisition targets and we evaluate our properties the same way. While there are no specific plans, it is something that we would consider.

Operator

Your next question comes from Lev Polinsky – JP Morgan.

Lev Polinsky – JP Morgan

First of all, I was wondering, in the past you’ve released some user data ex WebShots, some with. I don’t know if you’d be able to give some usage trends for your sites, excluding the impact of WebShots, just to get an idea of it for historical.

Secondly, it seems like the bigger growth opportunity at this point exists internationally than in the US. But at the same time, monetization outside the US seems like it’s not as high as it is maybe in the UK; but beyond that it’s not.

Looking at ’08 and beyond in a long-term way, where do you think monetization for a user outside the US can be compared to where it is for a user in the US? Do you think it reaches parity eventually, or is it a 50% discount? What are your thoughts on that? Thank you.

Neil Ashe

Thanks for the questions. First on our user and usage data, excluding WebShots, on a pure kind of apples-to-apples basis, excluding WebShots and excluding the transition to the platforms outside the US, users in the third quarter were up a little bit over 10% and page views were basically flat.

So the second question, our biggest growth opportunities. You’re accurate, international monetization is not currently equivalent to US monetization. The way we look at international markets is first, the advertising spend per capita and then secondly, the share of online advertising per capita. You identify appropriately that the UK is the only market outside the US where both of those ratios, are higher than in the US. I believe 50% of marketing dollars are spent in the US. So we are still focused -- I should be crystal clear about this -- we are still focused on growing in the United States and still see a large growth opportunity in the US.

In terms of monetization, the ability to monetize a user in different markets will scale based on frankly, the amount of advertising that’s in that market. So we don’t have any illusions that the value of a Chinese user is going to be anywhere near the value of a US user in the immediate future, based on the fact that the total advertising pie there is much smaller. So it depends how long you extend your time horizon to decide what you think that total revenue opportunity is, but those are the variables which we use to determine what the revenue opportunity is.

Operator

Your next question comes from Hagit Reindel - Jefferies.

Hagit Reindel - Jefferies

First on guidance, could you just help us understand your new guidance versus the old and maybe how much of Q4 guidance in the past was coming from WebShots? Should we think of a quarterly run rate of about $3 million, the same as it was this quarter, is that kind of how you saw it?

Second, on the international margin, it went down again sequentially this quarter. Was that due to the three acquisitions that you made that you mentioned or was just the margin lower for some reason? Could you just give more color on that? Thanks.

Neil Ashe

First I’ll speak to the revenue guidance for the fourth quarter. Net of all the exited businesses, and to clarify, that’s WebShots this year and then earlier this year, we exited several other businesses like Korea, our events businesses outside the US and EDventure, the growth rate is about 8% to 13%.

We will release, as we finish the accounting process, we’ll release the specific WebShots numbers throughout the income statement. But you can assume that it’s probably on the growth rate, and we won’t project what the fourth quarter of WebShots will actually end up being.

The second is why are international margins down sequentially? The fourth quarter is obviously the largest revenue quarter in most of the markets in which we compete. We’ve been scaling up to realize that revenue. That revenue is mildly depressed by some investments in places like China and as you point out, some of the acquisitions which aren’t yet at the margin of the rest of the business. There’s no outlier effect going on in international from Q3 to Q4.

Operator

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

Scott Kessler - Standard & Poor’s

I wanted to explore a little bit further about how you plan on leveraging your balance sheet to deliver benefits for shareholders. What I wanted to know is, Neil, I think you referenced an interest in growth. So are we looking at more international acquisitions like you’ve been doing? I think someone previously asked about a new category. You’ve emphasized your continuing dedication to the US market. Maybe a little bit of detail as to exactly what you plan on doing with what just recently now is $250 million in a credit facility and $45 million plus from the sale of WebShots. That would be appreciated.

Neil Ashe

Obviously, there is a premium on financial flexibility at any time, and we’ve long held that our balance sheet is a strategic resource and we’re beginning to demonstrate that. Our absolute goal and focus is on making our company more valuable. Our bias is on growing. So we will look to continue to make acquisitions and you can expect us to make small acquisitions in the fourth quarter consistent with what we have done in the past that won’t consume anywhere near all of those proceeds.

But now we have the flexibility to be a player in many of the transactions that could come down the pipe. We will focus those on, as I said, the areas that present the largest growth opportunity and we will continue to be as disciplined as we have been in the past on our expectations for return and for contribution to our business.

So this really is the realization, this credit facility is the realization of what was financial flexibility that we already had. Now it’s on demand to use when and as we and our board of directors see as appropriate.

Operator

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

Gordon Hodge - Thomas Weisel Partners

I don’t know what the basis was on WebShots from a tax standpoint, I assume that cash, you get to keep most of it?

If you could just update us on the status of the search deal that you have with Google which I believe expires at the end of the year and how those negotiations might be going? Thanks.

George Mazzotta

We appreciate your dedication to the fire alarm or what sounds like a fire alarm in your building. First you’re correct; there will be no tax impact on our sale of WebShots, so that is direct cash on cash to us.

The second, on the Google search deal, we’re in the second year of a two-year deal so that comes up later this year, and we’ll provide you with additional information as it becomes available.

Operator

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

Mark May - Needham & Co.

Thanks. There is no fire here, but I am talking while driving a rental car.

Neil Ashe

That could be dangerous for everybody.

Mark May - Needham & Co.

I’m sorry if you’ve touched on this already, but you have the announcement of the sale of WebShots today. You’ve sold or shuttered a few other businesses in the last 12 months. Do you have plans for further such actions of other assets that you have? Is this part of a bigger picture strategy? How do we tie these asset sales or closures into what your strategy is for the business?

Neil Ashe

Yes, this is part of a strategy, and that strategy is to be focused on those areas that present us with the highest potential opportunity in the future. We want to concentrate our management, our operation and our financial resources on those opportunities which we believe can deliver the highest growth.

Our core competence is building leading media brands, and we expect to be leaders in the markets in which we compete. So yes, we will continue this process going forward. There aren’t any immediate plans, but that’s the filter by which we evaluate each of the properties that we own.

Operator

There are no further questions at this time. Do you have any closing remarks?

Neil Ashe

Thank you all for spending some time with us today. As I said, this is an exciting quarter for us, as we believe that we’ve made significant progress in the transformation of our company. We’re excited for the new CNET Networks that’s aggressive, bold and entrepreneurial. Thank you for spending some time with us.

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