CNET Networks Q3 2007 Earnings Call Transcript

| About: ChinaNet Online (CNET)


Q3 2007 Earnings Call

October 25, 2007 5:00 pm ET


Cameron McLaughlin - IR

Neil Ashe – CEO

George Mazzotta – CFO


Mark Mahaney - Citi Investments

Brian Fitzgerald - Banc of AmericaSecurities

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.


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

Cameron McLaughlin

Thank you and good afternoon. Before we get started I wouldlike to remind you that this call is being webcast. The webcast can be accessedon the CNET Network’s Investor Relations website at Areplay will also be available shortly after the conclusion of this call.

I’d also like to remind you that in the financial newsannouncement released today and also on this call, CNET Networks is providingspecific forward-looking statements including guidance related to our expectationsof future financial performance. Any forward-looking statements made as part ofour news today are subject to risks and uncertainties that could cause actualor predicted results to differ materially.

These risks are outlined in our third quarter newsannouncement as well as in the company’s Securities and Exchange Commissionfilings, including its 10-K for the year 2006 which can be obtained from theSEC’s website or directly from our investor relations website.

All information discussed on this call is as of today, October 25th, 2007 and CNET Networksundertakes no duty to update this information.

Last but not least, you can find a reconciliation of thenon-GAAP financial measures that we use in our news release and on this call toGAAP financials on the last pages of today’s news announcement.

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

Following their prepared remarks, we will host a briefquestion-and-answer session. To facilitate the question-and-answer session, wewill be muting the line following each question and will take follow-upquestions if time allows.

Now let me turn the call over to Neil.

Neil Ashe

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

Financially, we’re realizing value from businesses that donot fit with our long-term plans and we are positioning ourselves to create valuefor shareholders with our balance sheet. Operationally, we have a winning teamwho knows what success is and is committed to achieving it. We are makingimportant internal changes that ensure we reach our goals.

What does all this mean? It means that we’re creating a newCNET Networks, a bold company that is entrepreneurial and aggressive. We arenot the site of the day; we are the media company of the future.

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

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

(2) Last week we announced a $250 million credit facilitythat provides us with the financial flexibility to create value for ourshareholders.

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

Before I share more results, I will provide highlights ofour third quarter results. The number of people coming to our propertiescontinues to grow. We ended the third quarter with 141 million monthly uniqueusers consuming over 91 million pages per day. As we discussed with you lastquarter, we have migrated some of our reporting platforms to our international markets to assist with theintegration and growth of our developing properties.

Accordingly, our traffic statistics now include the fulleffect of our new and developing properties in places such as Chinaand Europe. This has resulted in an increase ofapproximately 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 WebShotsfor both 2007 and 2006, total revenue increased 11% during the quarter. Operatingincome before depreciation, amortization, stock compensation and stock optioninvestigation-related expenses was $18 million, for a profit margin of 18%.

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

(1) Realizethe potential and opportunity of our existing brands.

(2) Identifynew opportunities for growth.

(3) Continuallystrive to do what we do, better.

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

First, we are pleased to welcome Stephen Colvin to CNETNetworks as the head of our Entertainment and Lifestyle business, responsiblefor such important properties as GameSpot,, CHOW, UrbanBaby, MP3 andFilmSpot. Stephen is a dynamic leader and brand builder with significant mediaexperience. We are very excited to be working with Stephen to grow our Entertainmentand Lifestyle properties.

Second, on the sales side, we believe that the developmentand re-architecture of our go-to-market approach is a necessary component ofour growth. Having the right team in place is key to this success. After fourmonths on the job as special advisor to the CEO, Jack Haire made great progressevolving how we go to market, and as part of these changes, he’s taking on thenewly formed position of Chief Client Officer. In this role, Jack will haveresponsibility for raising our industry visibility, for developing new salesstrategies for new categories and new accounts, and ensuring a consistentworld-class customer sales experience.

Our efforts are already being noticed. According to therecently released Jack Myers Survey on online sales organization performance,CNET, GameSpot and sales efforts were ranked either first or second intheir respective categories.

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

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

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

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

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

User and usage trends on BNET have been impressive andmarketers love the property. Advertisers in the third and fourth quarterinclude FedEx, MasterCard, AT&T, Adobe and Dell, among others. We are andwill continue to constantly innovate the BNET product. During the quarter, weintroduced BNET Video, a dedicated broadband channel that features originalcontent, as well as syndicated videos from other content producers. BNET isturning heads in the industry. In September, Folio awarded BNET Gold Folios forBest B2B Website and Best B2B Website Design.

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

We have built a meaningfully-sized media business withleading 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 advertiserslike L’Oreal, Estee Lauder, Chanel, Unilever, Johnson & Johnson, Nike andProcter & Gamble to our Chinese business. We will continue our investmentin this market.

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

Our third area of focus is to realize the potential of ourexisting brands. CNET Networks brands are best in class. We continue to add newfeatures and functionality across our properties that address the needs of ourusers and improve our ability to monetize them. CNET is the category leader intechnology with the broadest and most comprehensive media experience, online oroff.

During the quarter, CNET TV 2.0 launched in beta withinnovative features that help our users find and engage with more of our greatcontent. Since that launch, streams are up over 25% per user. CNET TV 2.0 alsoinnovates for marketers. We’ve created new vendor video channels piloted byPanasonic and Microsoft. These channels allow marketers to introduce their deepcontent to our users.

Turning to GameSpot, as many of you know, the third quarterwas significant in terms of new video game launches, and once again, we led theindustry with exceptional coverage. In the spirit of new platforms and newgames, GameSpot created new, innovative launch centers for the most importantgames like Halo 3, Madden, Bioshock, and the Legend of Zelda: PhantomHourglass.

These launch centers quickly became the hubs of activity forthose who love games, providing users with everything they could want to knowabout the games, including up to the minute coverage, as well as unique promotionalopportunities for sponsors, including Best Buy. In terms of pages, videostreams and users, Halo 3 drew an influx of traffic on GameSpot, making theweek of September 23rd the second biggest of the year with over 1 million videostreams in just the first two days following the release. is fast becoming the comprehensive destination forall things television, whether it was red carpet coverage at the Emmy’s, thefall preview guide, or plots for upcoming season premieres, had itcovered.

Before I turn the call over to George to bring you up to dateon our financial picture, let me say again why the third quarter was such anexciting one for CNET Networks. We are exiting this quarter with a bettermanagement team, a better mix of assets and more financial flexibility to growthe 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 saleof WebShots. The sale of WebShots to American Greetings for $45.2 million incash will close today. We expect that the sale of WebShots will be treated foraccounting purposes as a discontinued operation. This means that we will reportthe net operating results of WebShots as a separate line on our incomestatement labeled discontinued operations in the fourth quarter.

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

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

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

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

As we discussed on previous conference calls, we exited ourevents business in Chinaand the UK, ourmedia operations in Korea,and our EDventure business in the USduring the fourth quarter of 2006. Combined, these businesses contributed about$2.3 million of revenue during the third quarter of 2006. Excluding theseclosed businesses from our third quarter 2006 results, total revenue during thethird quarter of 2007 would have grown by 9%. Excluding WebShots and closed businesses, total revenue would haveincreased by 11%.

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

Licensing fee and user revenue during the third quarterdeclined 3% year over year to $12.3 million, due largely to declines inWebShots 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 renewalrate 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 inthe third quarter of this year.

Google Search revenue represented 10% of total revenue forthe quarter.

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

International revenue increased 15% to $22.7 million duringthe third quarter. International growth was driven by strength in recentlyacquitted interactive businesses in China,Germany and Franceand favorable foreign exchange rates. Excluding closed businesses and adjustedfor foreign exchange, international revenue would have grown 18% from lastyear.

Total cash operating expenses during the third quarter,which exclude goodwill impairments, depreciation, amortization, stockcompensation expense and costs associated with our stock option investigationand related matters were $81.8 million. This reflects an increase of 9% from $74.8million 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 operatingexpenses 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 toinvestments in growing domestic businesses as well as additional hires in ournetwork sales organizations for CNET business and entertainment as reflected inthe 17% year-over-year increase in sales and marketing expense during thequarter. Expenses associated with our stock option investigation were $406,000and represent fees paid to legal counsel.

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

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

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

The combined impact of the impairment and sale of WebShotsreduces our estimate of full year profitability to levels that create anegligible Consequently, our third quarter tax expense represents primarily cashtaxes 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 aloss of $16.6 million or a loss of $0.11 per share on a diluted basis, comparedto a 2006 net loss of $2.3 million or a loss of $0.02 diluted EPS. Our thirdquarter 2007 reported net income is negatively impacted by a $19 millionnon-cash goodwill impairment charge; $4.7 million of stock compensation expense;and $406,000 in stock option investigation fees, positively offset by $590,000of realized gains on investments.

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

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

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

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

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

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

Total revenue, which excludes WebShots, is expected to bewithin 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 bebetween 8% and 13% for the fourth quarter. Operating income beforedepreciation, amortization and stock compensation expense is expected to bebetween $34 million and $38 million for the fourth quarter. We estimate thatstock compensation expense will be approximately $6 million during the fourthquarter.

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

Excluding approximately $0.04 per share of stockcompensation expense and $1.16 per share of tax benefit related to ourvaluation allowance release, fourth quarter 2007 earnings per share is expectedto be between $0.07 and $0.10. On a reported basis, fourth quarter EPS will bebetween $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 rangeof $400 million to $406 million, which represents an 8% to 10% growth over thelast 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 $80million. We estimate that full year of stock compensation expense will beapproximately $20 million.

Excluding about $0.13 per share of stock compensationexpense and $1.16 per share of tax benefit related to our valuation allowancerelease in the fourth quarter, full year 2007 earnings per share is expected tobe a loss of between $0.15 and $0.13. On a reported basis, full year EPS willbe between $1.14 and $1.16 per share.

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

Nearly half of our year-to-date capital expenditures havesupported our international operations and represent investments in newlyacquired businesses, the expansion of existing infrastructure and newfacilities for key markets such as Chinaand the UK. Thebalance of our year-to-date capital investments have supported domesticbusiness expansion.

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

Neil Ashe

Thanks, George. We exit the third quarter with real progresson the transformation of our company. We are excited to be building a new CNETNetworks, a bold company that is entrepreneurial and aggressive. By realizingthe potential of our existing brands, identifying new opportunities for growthand continuously doing what we do better, we are building a vibrant andvaluable company that seizes the long-term opportunity and creates value forusers, employees, marketers and shareholders.

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

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



Your first question comes from Mark Mahaney - CitiInvestments.

Mark Mahaney - CitiInvestments

That organic revenue growth that you mentioned for thequarter excluding WebShots, can you just give the comparable growth rate, whatthat 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 trendsthat you’re seeing for your premium ad inventory, do they seem relativelystable or are you seeing any pricing pressure? Thank you very much.

Neil Ashe

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

As relates to the comparable, excluding exited businessesgrowth rates, George?

George Mazzotta

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


Your next question comes from Brian Fitzgerald - Banc ofAmerica Securities.

Brian Fitzgerald - Bancof America Securities

You mentioned that you’re seeing good traction in games onthe quarter. Microsoft just gave goodnumbers, specifically mentioning strong demand for Vistaand Premium. Can you talk to how things are shaping up for Q4 in terms ofadvertising around PC software? Are you seeing the games continue to be stronggoing into Q4?

Neil Ashe

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


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

Megan Barker forAnthony 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 CNETproperties as a package deal? Just anycolor there? Secondly as you look to develop new sites, what verticals are youcurrently not in that you think could be interesting? Thank you.

Neil Ashe

First, the update on the sales initiative. As I mentioned inmy remarks, Jack Haire has been a tremendous influence on the organization sofar and he’s taken on the newly created role of Chief Client Officer withresponsibility for really three key items, which are (1) raising our industryvisibility (2) identifying strategies for new categories and new accounts, and (3)to ensure a world-class sales experience for our customers across our entirecompany.

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

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

In terms of additional verticals, we’ve always said that ourevaluation of areas where we want to be where we’re not is based on threepretty key functions. One is, is there a sizeable audience that we believe thatwe 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, andthat’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 andwhat 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 aroundbusiness media right now, and we are excited and confident about being acompetitor in the marketplace.


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 EBITDAfor the year on WebShots? Your CapEx was down quite a bit in 4Q. What do youexpect for the year for CapEx, what’s a run rate for the year on CapEx? Thankyou.

George Mazzotta

I’ll take those questions, Kit. WebShots, we’ll disclose that it has a EBITDAmargin about equal that of the total company. As far as our CapEx investmentgoes, our CapEx is, as you know, not a linear investment. Our CapEx is a planto fund expansion in the business, and we think our guidance of about $30 millionfor the year is appropriate and consistent with our capital investmentstrategy.

We think that what we experienced in the first three monthsof this year will continue through the fourth quarter, which is that probablyabout 50% of our capital investment is devoted to our international expansionprograms. The other remaining 50% is devoted to domestic business expansion andinfrastructure investments.


Your next question comes from Sandeep Aggarwal - Oppenheimer.

Sandeep Aggarwal - Oppenheimer

A question on your full year guidance. In Q3, your revenueand EBITDA margin came right in the middle of your previous guidance, andlooking at your full year number for the guidance, it seems like the EBITDAmargin guidance is going down. I thinkthat you just mentioned that WebShots was in line with the overall company’smargin. 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 canreplicate similar type of success? Thank you.

Neil Ashe

I’ll start with the international operations and the successwe’re seeing in China.As I’ve said, Chinais a key market for us. The UKis also a key market for us. On a smaller scale, we’ve seen strong growth inboth France andin Australia.Obviously, many of our leading brands have global footprints and we are excitedto capitalize on strength. Frankly, the larger the market, the more interestingit is for us. So the English language markets and Chinaare 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 weprovided for Q4 is appropriate and we’ll operate well within the marginguidance that we provided. It’s the step up in operating expenses from Q3 to Q4is probably what you’re noticing, which is not a reflection or indication ofwhat’s happened with WebShots.

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


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

Gordon Hodge - ThomasWeisel Partners

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

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

Neil Ashe

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

The second is about how we intend to use our balance sheetto increase value for our shareholders. Number one, in the context of buildingvalue, our strong preference is to grow. So to the extent that we can findproperties 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, verysuccessful 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 sharerepurchase at this point, obviously, we have the financial flexibility to dothat if we decide to in the future.

With the M&A market the way it is, in many cases, ourproperties in the collective look very inexpensive in relation to what we seeas acquisition targets. So we consider ourselves in the market for acquisitiontargets and we evaluate our properties the same way. While there are nospecific plans, it is something that we would consider.


Your next question comes from Lev Polinsky – JP Morgan.

Lev Polinsky – JP Morgan

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

Secondly, it seems like the bigger growth opportunity atthis point exists internationally than in the US.But at the same time, monetization outside the USseems 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 youthink monetization for a user outside the UScan 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 areyour 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, excludingWebShots and excluding the transition to the platforms outside the US, users inthe third quarter were up a little bit over 10% and page views were basicallyflat.

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

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


Your next question comes from Hagit Reindel - Jefferies.

Hagit Reindel - Jefferies

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

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

Neil Ashe

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

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

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


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 planon leveraging your balance sheet to deliver benefits for shareholders. What Iwanted to know is, Neil, I think you referenced an interest in growth. So arewe looking at more international acquisitions like you’ve been doing? I thinksomeone previously asked about a new category. You’ve emphasized yourcontinuing dedication to the USmarket. Maybe a little bit of detail as to exactly what you plan on doing withwhat just recently now is $250 million in a credit facility and $45 millionplus from the sale of WebShots. That would be appreciated.

Neil Ashe

Obviously, there is a premium on financial flexibility atany time, and we’ve long held that our balance sheet is a strategic resourceand we’re beginning to demonstrate that. Our absolute goal and focus is onmaking our company more valuable. Our bias is on growing. So we will look tocontinue to make acquisitions and you can expect us to make small acquisitionsin the fourth quarter consistent with what we have done in the past that won’tconsume anywhere near all of those proceeds.

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

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


Your next question comes from Gordon Hodge - Thomas WeiselPartners.

Gordon Hodge - ThomasWeisel Partners

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

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

George Mazzotta

We appreciate your dedication to the fire alarm or whatsounds like a fire alarm in your building. First you’re correct; there will beno 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 secondyear of a two-year deal so that comes up later this year, and we’ll provide youwith additional information as it becomes available.


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

Mark May - Needham& Co.

Thanks. There is no fire here, but I am talking whiledriving 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 havethe announcement of the sale of WebShots today. You’ve sold or shuttered a fewother businesses in the last 12 months. Do you have plans for further suchactions of other assets that you have? Is this part of a bigger picturestrategy? How do we tie these assetsales 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 focusedon those areas that present us with the highest potential opportunity in thefuture. We want to concentrate our management, our operation and our financialresources on those opportunities which we believe can deliver the highestgrowth.

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


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

Neil Ashe

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

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