ZW Data Action Technologies Inc.
Q4 2005 Earnings Call Transcript

Published: 8 Feb 2006

[Operator:]

Good afternoon. My name is Sheila, and I will be your conference operator today. At this time, I would like to welcome everyone to the CNET Networks Fourth Quarter and Full Year 2005 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you like to ask a question during this time simply press “*�? then the “1�? on your telephone keypad, if you like to withdraw your question press the “#�? key. Thank you. Ms. McLaughlin, you may begin your conference.

[Cammeron McLaughlin:]

Thank you, and good afternoon. Before we begin our formal comments, I would like to remind you that in the financial news announcement released today, and also on this call, CNET Networks is providing specific forward-looking statements, including guidance related to our expectations of future financial performance. Any forward-looking statements made as part of our news today are subject to risks and uncertainties that could cause actual or predicted results to differ materially. These risks are outlined in our fourth quarter and full year 2005 news announcement as well as in company’s Securities and Exchange Commission filings, including its 10-K for the year 2004, 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, February 6, 2006, 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 page of today’s news announcement, as well as in the slide presentation that accompanies this call, located at our Investor Relations website, www.ir.cnetnetworks.com. Hosting today’s call are Shelby Bonnie, CNET Networks Chairman and Chief Executive Officer; and George Mazzotta, our Chief Financial Officer. Neil Ashe, Executive Vice President, will also be available during the question-and-answer session. Now let me turn the call to Shelby.

[Shelby W. Bonnie:]

Thanks Cammeron, and thanks everyone for joining us. Our fourth quarter and full year 2005 results demonstrate our continued ability to deliver consistent, solid financial performance, and at the same time significant growth and expansion in our overall product offering, customer base and audience. 2005 was a good year for CNET Networks. We delivered 26% growth in interactive revenue, posted EBITDA margins of nearly 20% and increased cash flow generation. At the same time, we continued to expand our offerings both domestically and internationally with new products, partnerships and acquisitions. We ended the year with an excellent fourth quarter, demonstrating our ability to continue to drive revenue growth through our combined efforts of extending our relationships with in-category advertisers and gaining more share of budget from consumer advertisers as well. We are pleased with what we have accomplished. We were focused on growth and excellence in 2005, and this was apparent in our products, customer growth, user metrics, and ultimately in our financial performance. In addition to the financial results there were three areas of strength in 2005. First, we significantly grew the size of our audience and their usage of our properties. Second, we continued to expand our content categories and add more brands to the network, further delivering on our strategy of a multi-category, multi-brand media organization. And third, we expanded our in-category and out-of-category advertiser base across the network. Let me quickly review some highlights of the solid financial performance during the fourth quarter. Total revenues were 107.4 million in the fourth quarter, up 20% from the fourth quarter of 2004. Interactive revenue was up 25% from the fourth quarter of 2004 to 100.2 million. Our strong topline growth and minimal operating expense growth drove better than expected profit trends. Operating income before depreciation, amortization and asset impairment was 32.2 million and EBITDA margins increased to nearly 30% during the quarter. Excluding the goodwill impairment and gain on sale of investments, net income was 24.5 million or $0.15 per share. Before I turn the call to George to cover the financial highlights in more detail, let me spend a moment to review the sale of Computer Shopper. As we have stated in the past, our focus is on leadership in the interactive content space. We have and will continue to use various offline media assets to strategically extend our position if its helpful. Computer Shopper serves an important purpose, but as time has gone on it has become less strategic. In that light, we thought the asset would be better suited to realize its growth potential under different ownership. The transaction is effective immediately and the financial terms are not being disclosed. George will go into the financial impact in more detail in a second. We continue to believe that our ten-year presence in the print business in China remains a strategic asset for us, as we accelerate our growth and presence online in that region. We can leverage the advertising relationships and resources to help build out our online presence in this market. The sale of Computer Shopper will not impact our international print operations. So with that, let me turn it over to George to cover the financial highlights in more detail, and after that I will provide some more insight into the outlook and operating results.

[George E. Mazzotta:]

Thank you, Shelby. We are very pleased to report continued growth across all key financial and operating metrics during the fourth quarter. We generated 107.4 million of total revenue in the fourth quarter, which was 20% above last year. Total revenue was driven primarily by strong growth and interactive revenue offset by a year-over-year decline in publishing revenue, supporting our total revenue growth is a stable and expanding advertiser base. Across the entire network, our 100 largest customers represented 55% of total revenue, which is similar to previous quarters. We continue to experience a very high renewal rate from our top advertisers. In fact 100% of our top 100 advertisers in the third quarter renewed with us in the fourth quarter. Our interactive revenue for the fourth quarter was 100.2 million, which was 25% above last year. Our growth in interactive revenue reflects a 28% growth in marketing services revenue, and a 5% increase in licensing fee and user revenue. The growth in marketing services revenue reflects our ability to gain market share and extend our customer base in both existing and new categories. Our marketing services revenue was driven by growth across all businesses, including Games and Entertainment, Personal Technology, Business and Webshots. We continue to experience growth from existing advertising clients as we gain further share of their marketing budgets. While still a small portion of total revenue, we are encouraged by our ability to successfully expand our advertiser base into more consumer-focused categories as we enter 2006. The 5% growth in licensing fee and user revenue was primarily driven by our CNET Channel data licensing business. Underlying our interactive revenue performance during the fourth quarter and throughout all of 2005 was a strong growth in user and usage metrics. Monthly unique users increased 13% year-over-year in the fourth quarter to over 116 million. Average daily page views increased 22% in the fourth quarter to almost 104 million pages per day. Our Games and Entertainment and Webshots properties were the largest contributors to this growth. Publishing revenues of 7.2 million declined year-over-year by 20%. This decrease was expected and consistent with long-term trends of media consumption and ad spending shifting towards interactive media, both in the US and international markets. On a full year basis, total revenue equaled 353 million, which was an increase of 21% from 2004. Interactive revenue increased 26% during the year to 324 million while publishing revenue declined 17% to 28.8 million. We are also pleased with the level of operating leverage achieved in the fourth quarter, particularly given the efforts made across the network to launch new products and features, further improved the user experience and extend our brand to the new categories during the year. Total cash operating expenses of 75.2 million in the fourth quarter increased 9% from last year. This increase was driven primarily by investments in additional personnel for our fastest growing categories such as Games and Entertainment and Webshots. Our ability to effectively manage growth and cash operating expense to a level significantly lower than our growth in revenue, drove very strong margin improvement during the quarter. Our fourth quarter operating income before depreciation, amortization, and asset impairment, up 32.2 million, increased 57% from 20.5 million last year. Margins reached 30% of revenue compared to 23% last year, and as a result, we achieved a 64% incremental margin for the quarter. On a full year basis, 2005 operating income before depreciation, amortization, and asset impairment increased to 68.3 million compared to 35.5 million in 2004. Full year margins increased to 19% of revenue in 2005 compared to 12% in 2004. This represents a full year incremental margin of 53%. This margin expansion translated into strong profitability metrics for both the quarter and full year 2005. Excluding asset impairment and investment gains from both 2005 and 2004 results, our net income in the fourth quarter of this year was 24.5 million or $0.15 diluted EPS, compared to 14.6 million or $0.09 diluted EPS in 2004. This represents nearly 68% growth in net income. On a reported basis, reflecting all asset impairments and investment gains, our fourth quarter net income was 22.9 million or $0.14 diluted EPS, compared to 9.2 million or $0.06 diluted EPS in 2004. During the fourth quarter of 2005 we reported approximately 1.6 million or $0.01 diluted EPS of unusual charges, which consisted of a 2.9 million asset impairment charge resulting from the sale of Computer Shopper magazine and 1.3 million gain on the sale of investments. During the fourth quarter of 2004 we reported approximately 5.4 million or $0.03 diluted EPS of unusual charges, the details of which are presented in our press release financial report. For the full year 2005 excluding all unusual charges from both 2005 and 2004 results, our net income was 39.8 million or $0.26 diluted EPS, compared to 10.6 million or $0.08 diluted EPS in 2004. On a reported basis reflecting all unusual charges our full year net income was 27.7 million or $0.18 diluted EPS compared to 11.7 million or $0.08 diluted EPS in 2004. During the full year 2005 we reported approximately 12 million or $0.08 diluted EPS of unusual charges which were 10.3 million of asset impairment charges related to our Computer Shopper magazine, a $1.6 million asset impairment of our Swiss office building and a $170,000 investment loss which was the net result of impairments and gains on privately held investments. During the full year 2004, we reported a net gain from unusual items of approximately 1.1 million, the details of which are provided to you in our press release financial reports. Turning now to cash flow and the balance sheet. During the fourth quarter, we generated 9.8 million of cash from operating activities, and invested 8.1 million in capital projects, which resulted in producing 1.6 million of free cash flow. Given the seasonality of our revenue and our fourth quarter DSO of 71 days, we saw a significant increase in accounts receivables in the fourth quarter, which impacted the generation of free cash flow. However, we expect a corresponding reduction in accounts receivable in the first quarter, when a large portion of our fourth quarter revenue is collected. This seasonal relationship between receivables and cash flow is consistent with what we experienced last year. For the full year, we generated 45 million in cash from operating activities and invested 25.1 million in capital expenditures, producing approximately 19.9 million of free cash flow. Our ability to effectively convert profits into cash flow also strengthened our balance sheet during the year. Our cash position at the end of 2005 increased by 18.5 million from last year to 112.2 million this year. As Shelby discussed earlier, we announced this afternoon that we have sold Computer Shopper magazine. Let me take a few minutes to discuss how this sale impacts our results from the fourth quarter and our financial reporting this year. The February sale of Computer Shopper magazine required us to conduct a goodwill impairment analysis as of December 31, 2005. As a result, in the fourth quarter a $2.9 million non-cash charge is reflected on our income statement as an operating expense labeled asset impairment, and an equal amount was reflected as a reduction in goodwill on our balance sheet. In the first quarter of 2006 we will complete the accounting for this transaction. It is therefore possible that we will recognize a gain or loss on the sale in our first quarter results, reflected below the operating income line. We also expect that the sale of Computer Shopper magazine will be treated for accounting purposes as a discontinued operation. This means that starting January 1st of 2006 through the transition of this business to its new owner, we will report the net operating results for Computer Shopper magazine as a separate line on our income statement below income before taxes, labeled discontinued operations. This also means that the operating results of this business will be removed from our historical financial statements for all comparable periods. For the full year 2005, the Computer Shopper magazine generated approximately 16 million in revenue and 1.8 million of contribution to operating income before depreciation and amortization. With the sale of Computer Shopper magazine, our publishing revenues are expected to be far less than 5% of our total revenues. Therefore, we will no longer report publishing revenue as a separate line item on our income statement. Now I would like to provide you with CNET Networks guidance for the first quarter and full year 2006. We expect the following results; total revenue to be within the range of 83-87 million which represents 17-22% growth excluding Computer Shopper magazine from 2005 first quarter results. Operating income before depreciation and amortization is estimated to be between $8 million and $11 million for the first quarter. This excludes stock compensation expense that we anticipate being in the range of 5-5.5 million during the first quarter. First quarter earnings per share is expected to be within the range of $0.01 loss to $0.01 gain, and this estimate also exclude approximately $0.03 EPS of stock compensation expense. For the full year 2006 we expect the following

[Shelby W. Bonnie:]

Thanks, George. 2005 was a good year for CNET Networks. It was also a year where the industry experienced good growth and momentum, and I believe that the unique position that CNET Networks fits in within the media landscape has become even more evident throughout 2005. Before getting into the specifics of 2005 and a look forward to 2006, I thought I might provide some thoughts on what we are seeing in the overall media world. Media is going, is seeing an enormous amount of change, due to the advances in consumer technology and thus a new set of consumer expectations, media is experiencing tremendous change as it evolves and moves rapidly towards a more digital and interactive world. This change will affect all media companies including ourselves, and will also dramatically change advertising as we know it. As much as we all talked about 10 years ago, the convergence and digitization of media, it is now actually happening and if anything we’ll probably go faster than we expect. There are two things that are driving it. The first is the empowerment by technology, where resources like the Internet, especially high-speed bandwidth, abundant storage and faster processors are becoming more affordable and mainstream. This has put the consumer in a unique place of control. Second and probably more important is the change in consumer expectations that have come from these advances. A consumer today believes that they can get or learn whatever they – when they want, how they want. It is now just taken as given that I can find anything, it will be timely and relevant and at my fingertips. This is TiVo, these are great websites, this is digital music and iPod. This is online communities, instant messenger and lots of other great examples. And it is especially the case with young people, who have not known a world without these things. Today we define media base on how it is distributed. Newspapers are delivered on newsprint, broadcast TV is delivered over broadcast, radio over radio, cable networks over cable. As we look forward, media will be defined by how a user perceives it. There will be a user expectation that’s irrespective how you were distributed as media in the past. As a new media company, you will have to have video, audio, pictures and text. Every property will have to be on-demand and interactive. Times of big change are times of big opportunity. If you believe that the media landscape will change dramatically, there will be a significant shift in customer usage and advertising spending. In this evolving landscape, interactive content companies like CNET Networks are particularly well positioned to take advantage. We have had to live in a world where users determined our ultimate success. They’ve voted with their mouths everyday as to whether they like what we did and whether our advertising was relevant. There was a certain Darwinian aspect to our business. Brands that have succeeded and survived over time have listened to their users everyday and evolved and improved with that learning. So though the media landscape will continue to evolve and will require constant innovation, the current interactive content companies have succeeded because they put the consumer first, which I believe will be the central success trait of great media companies of the future. We’ve also seen over the last five years enormous transformation at CNET Networks itself. As little as five years ago, the general view of CNET Networks was that of a quote-unquote tech portal. CNET was our marquee brand and most of our revenue came from tech advertising. While our corporate brand is CNET Networks, our business has evolved and is more than just our core CNET brand, from both the customer, user and marketer perspective. Our CNET branded properties now make up less than half of our overall revenues when you look at 2005, proof that growth and expansion is coming from new categories beyond consumer technology. We’ve truly emerged as a multi-category, multi-brand company, a leader in the categories we serve online and a company that has proven that we can enter new categories, attract new audiences and bring in new advertisers beyond our tech roots. We’ve seen the growing importance of brands like GameSpot, Webshots, TechRepublic and new brands emerge like MP3.com, TV.com and BNET. In-category advertisers have been and will always be strong to the targetability and contextual relevance of our site and pay a premium to get in front of this valuable audience. During the past year we’ve done an excellent job of bringing in new advertising dollars in entirely new categories such as financial services, auto, consumer packaged goods and media. General consumer advertisers are increasingly recognizing the value of our audiences, based on their hard-to-reach demographics and psychographic characteristics and high level of engagement with our sites. In 2005, our out-of-category effort was a small portion of revenue, but we believe it can be much larger portion and the growth trends are heading that way for 2006 and beyond. We have proven that we can attract consumer advertisers, as our out-of-category customer roster is getting larger. At the end of 2005 we had 54 of the AdAge top 100 advertisers doing business with CNET Networks. And at the same time we have proven ability to keep these advertisers spending with us, with 96% of the AdAge top 100 advertisers that did business with us in 2004, remaining to be customers in 2005. This is an important stat, because not only we are getting sampling, we are also clearly delivering value and service that are keeping them as customers. Examples of new advertisers that we added during 2005 include such companies as General Motors, Kraft Foods and Visa. This is a tremendous opportunity for us going forward, particularly as more and more advertisers are looking for places to spend their online marketing budgets. When you also look from a transformation standpoint, we’ve also transformed the type of media that we deliver. Our brands have moved aggressively in adding more audio, video, and pictures addressing the changing needs of consumers in this increasingly digitized and interactive landscape. We were an early adopter of video content, given the high percentage of broadband users across our network versus many of our peers. We program to our users, adding richer interactive content to our sites. Video content scaled tremendously on our properties during the year, with video streams up over 60% in 2005. We have also added video product reviews, special features, and downloadable video across all of our CNET properties. Ultimately video represents another opportunity for us, while still a small contributor to revenue, it is an area where we are very excited. As we mentioned last quarter, we have also increased our emphasis on our audio features across the network with the launch of podcasts in many of our brands. We have also added more photos, clearly Webshots is an example of that, but you also can look at sites like CNETNews.com, where we are incorporating more photos into the editorial process and content experience. So it has been an important five year period for us. On one level we have remained true to what we are good at, authentic content brands with advertising as the dominant revenue stream. But we have also added new brands, new users and new advertisers and have improved our strategic position materially. A great example of how we have evolved as a company is the launch of TV.com, a site that demonstrates our ability to build and launch a site in an entirely new category. We knew there was significant user demand for content in the television category, but there were very few sites that met this demand. Early in 2005, we purchased a small site, TVTome and within five months and a modest incremental investment, TV.com was launched. It is a site that provides users with a place to meet with similar interests, discuss favorite shows, find new programs, view video clips and access information on more than 16,000 TV series. The TV.com audience has grown significantly since launch, proving our ability to launch successful properties in a new category. In addition, TV.com is now the only non-television network, non-portal among the top 10 television properties as measured by comScore Media Metrics. TV.com users are active and participate heavily in the community. The site has over 0.5 million registered users and more than 2.2 million individual ratings of shows, episodes, and celebrities. It is a category that works for users and also one that can provide a strong platform for marketers. TV.com has also emerged as an ideal venue for television networks to promote a series or show and video represents a great format to do this. TV.com has entered into significant number of promotional agreements where we receive video clips directly from the networks. In fact, we now have arrangements with most of the major networks, including such networks as ABC, NBC, CBS, Fox and MTV Networks. At the launch of TV.com, advertisers were already lined up to sponsor the site. Launch sponsors included HBO, the Discovery Channel and Vivendi. Also, TV.com represents a great general consumer advertiser opportunity, given the demographic and psychographics of the audience and has had early success in that effort. The site has already attracted advertising dollars from Honda, Wrigley’s and Unilever. Video consumption trends prove that engaged online audiences such as TV.coms are willing to adopt new distribution platforms and are ready to consume programming online. In fact just last week we launched a new feature on TV.com that allows users the ability to access downloadable television shows from a variety of providers including iTunes and Google. I encourage you to go look at Lost as an example of that within the environment. We believe that TV.com is a site that sits in a very unique position as it relates to platform convergence between the television and internet industries. In this shifting media landscape, if we can launch new properties to take advantage of the shifts, we will have an opportunity to build significant value for shareholders. This ability to scale into new categories with authentic brands and original content is something that CNET Networks does uniquely. Let me shift gears and provide some highlights on 2005. Over the past three years significant growth in users and usage has been an important focus for us. There were really two primary reasons. The first was the future advertising shifts that we were seeing we believe would play out overtime and only increase. And second, we thought traffic would be more expensive to create or buy in the future. You’ve seen the results of this focus in our results. We ended 2005 with 116 million monthly unique visitors, turning over a 103 million pages per day, up from 103 million users and 85 million page views per day at the end of 2004. This growth was driven by organic expansion of our audiences and their usage of our sites, as well as continued growth from new properties added in 2004 and 2005, including Webshots and the launch of TV.com. During 2005 we did an excellent job of increasing our region inventory. Going forward we will look to build further engagement with our user base. During the year our CNET branded properties, CNET.com, CNET News.com, and CNET Download.com evolved and expanded their focus into new areas, attracting new users and marketers along the way. One of the key developments was the launch of CarTech, a great extension to the type of content CNET users are looking for and provided us an ability to bring in auto advertising dollars to this property. In addition, CNET emerged as an authority and voice of expertise at the 2006 Consumer Electronics Show in early January. CNET was selected by the Consumer Electronics Association, CEA to produce and judge the Best of CES awards this year. This was a huge success, and further solidifies CNET’s credibility and authority as experts in the consumer electronics category. Through the awards program and our coverage of the show we provided our users with an overview of the hottest products for those who were at the show and even more so for those who were not. CNET experienced a 60% increase in users during CES 2006 as compared to CES 2005. In addition CNET editors were increasingly looked upon by the media as experts at the show. CNET editors appeared in numerous television segments, reaching millions of viewers via outlets such as CNN, CNBC, BBC, CBS Evening News, NBC Weekend Nightly, and several ABC affiliates. Let me now turn to our Games and Entertainment properties. While we have had early success with TV.com, which I spent a fair amount of time on earlier, our other Games and Entertainment properties, including GameSpot and MP3.com, continue to exhibit strong momentum and increased traffic. GameSpot continues to strengthen its position within the games category, a category that’s only getting more important. We have seen strong growth from both the user and usage standpoint throughout 2005. For 2005, we have also added more brands to our Games and Entertainment category, including Metacritic, a property that provides thousands of aggregated reviews and opinions across entertainment genres, including film, books, games and videos. During the year, our business properties including BNET, ZDNet and TechRepublic, exhibited growth and expansion, our business properties made strides to change the way our users use the web at work and for work. During 2005, our B2B sites saw a record increase in end-users, telling us exactly what they wanted in the form of registration for content, personalized alerts, public bookmarking and private saved projects. We have been able to leverage that user investment to deliver more customized content and more targeted marketing. Proof that this is working is that now more than 50% of TechRepublic’s traffic is generated by registered users. In an effort to extend our at-work content and expertise beyond the IT professional, we launched BNET earlier this year. BNET is the comprehensive resource for business leaders, providing thought leadership gathered from corporate and academic resources, such as whitepapers, case studies, webcasts, podcasts, RSS feeds and business blogs. BNET has gained momentum since launch and we will look to expand our business coverage and focus in 2006 and beyond. We are also pleased with the progress and growth we have seen at Webshots this year. The focus in 2005 was on the backend and building the infrastructure to support the growth we were seeing within the community. Our team continues to strengthen the performance and scalability of the platform to support the growth we are seeing. During 2005, the number of photos in the Webshots library grew over 200% to now 325 million individual photos. We will continue to focus on showcasing our media roots at Webshots and use our editorial expertise to bring user generated content front and center. While momentum in 2005 was primarily via ad networks, late in 2005 we began to scale our direct sales organization. With the back end improvements behind Webshots, 2006 and beyond will be focused on the sales opportunities and providing an even better media experience for both users and marketers. Our international presence continued to expand and evolve during 2005, particularly in China. Early in 2005 we added PCHome, a leading personal technology property in Shanghai, to our growing portfolio of properties in China. PCHome, combined with the two sites that we acquired in 2004, ZOL and Fengniao, significantly bolstered our personal technology platform in China and positions us as a leader in the category. With a strong position in Shanghai through PCHome and in Beijing through ZOL and Fengniao, we now have a strong place in two critical markets in China. The Chinese market is poised for continued growth and as a media company of significant size and presence, we are positioned for leadership in China. We also extended our presence in Europe with the launch of CNET.com in the UK and France, signaling moves to bring more consumer content coverage to the international markets that we are in. Now let me shift gears and talk a little bit about 2006. As we enter 2006, we are excited about the prospects for CNET Networks and believe we are quite well positioned. Our key focus areas will be as follows. Number one, increasing user engagement across our properties, over the past three years we’ve done a great job of growing the size of our audience, and going forward we are putting more emphasis on increasing user engagement with our brands. We will do this by continuing our efforts to add more features involving community personalization and video, creating more reasons for users to come back more often and to have a deeper experience. Number two, increasing and expanding our advertiser base across the network, particularly general consumer advertising efforts. We had continued success in 2005, and we believe we’re off to a good start this year. We need to build further awareness of our brands among Madison Avenue and consumer marketers themselves. 2005 has shown that we can attract and keep consumer advertising dollars. It is now our focus to gain more share of these dollars. Number three, you will see us add more brands in new categories this year. The TV.com launch is an excellent example of our ability to build great sites with significant momentum. We know how to build great properties that users and marketers are attracted to and we’ll focus our efforts on extending this expertise into additional categories, categories that broaden the demographic and psychographic profiles of our audience. This category expansion could occur by acquisitions as we have done successfully and prudently in the past, and/or product builds. This effort will help develop the company further as a leader in the interactive content category, help with our efforts to broaden both our user and advertiser base, and ultimately can be very accretive from an overall shareholder return standpoint. Fourth and finally, we are focused on maintaining attractive, sustainable revenue growth in 2006 and for the long term. This growth will come from increased spend from existing advertisers, as well as our efforts to extend our consumer advertiser base and capture more share of their budgets. As we look towards 2006, we like what we see in the marketplace and believe that we are well positioned. CNET Networks has held a long-term focus on the content category, and will continue to build exposure towards the opportunity that we are continuing to see grow. We have proven once again this year that we can turn revenue growth into profits, while at the same time continue to innovate and launch new products and grow our user and customer base. The long-term trends for this business are attractive, and CNET Networks is well positioned to generate sustainable topline growth, continued margin expansion, and significant free cash flow generation in the coming years. That wraps up our formal comments. I would like to turn it over to Sheila, so we can open it up for questions.

[Operator:]

Thank you. At this time I would like to remind everyone in order to ask a question please press “*�? then the number “1�? on your telephone keypad. We ask that you limit questions to one question per caller. We will pause for just a moment to compile the Q&A roster. Thank you. Your first question comes from Safa Rashtchy.

[Safa Rashtchy:]

Good afternoon and thank you for providing granularity and some details on your revenue components. In that regard, could you tell us, if you could clarify, I kind of missed the numbers you gave for the growth you expect in the interactive component of your revenue. And I believe it was sub 20% and how we should look at that given the growth that you had this year and the addition of new properties and from web TV and other areas? I would expect that you might be seeing some acceleration. I am not sure if I quite saw that in the numbers you gave? Thank you.

[George Mazzotta:]

Well, to recap what was said in the prepared remarks, we expect that our remaining publishing business will generate about $11 million of revenue this year. And so our overall revenue estimates would translate this to our expectations for interactive revenues to be up 19 to 22% this year or in the range of $385 million to $395 million.

[Shelby Bonnie:]

I think if you look from a color standpoint, we still think the market is looking very attractive. I think as we said at the end of the second quarter call, as we thought about 2006 back then, we kind of looked at a number overall of kind of a 20% revenue growth rate and the guidance we are providing is consistent with that. I think we still continue to see opportunities early in the year, but I think we remain very encouraged when you look at this relative to what other mediums are seeing and as an example, what we saw in the print side of our business. I think the opportunities remain very attractive for the overall online space and we continue to really focus on how do we make sure that we are building both properties and an organization sales staff relationships so that we can have very long-term sustained attractive growth rates going forward.

[Operator:]

Thank you. Your next question comes from Anthony Noto of Goldman Sachs.

[Jennifer Connelly:]

Hi, this is actually Jennifer Connelly in for Anthony. He apologizes for not being on the call, we had two today so…

[Shelby Bonnie:]

We miss him terribly.

[Jennifer Connelly:]

I’ll let him know. A question on RPMs, we saw that they increased for the first time in several quarters, in the fourth quarter you’re up 6% year-on-year. Would you attribute this primarily to lapping of the Webshots acquisition or are there other issues at play that we should be aware of, primarily do you expect RPM to continue to increase year-on-year going forward?

[Shelby Bonnie:]

I think, as we’ve said, we really don’t think of, we don’t manage to RPM, we really manage kind with the overall focus on how do we continue to grow usage, one. And how do we continue to grow revenue. And really look at RPM as a function of that. I think if you look at the page growth and kind of the inclusion of the Webshots number on a full quarter basis. I think what you saw overall is, we had a quarter where we actually grew revenues slightly faster than we grew pages, and so you saw an increase in RPM. But I would say, overall, as we can continue to grow pages and make acquisitions that we think are intelligent or launch new properties like we did with TV.com, we will do that and that clearly will have an impact on RPM. But we’re really playing this in terms of how do we grow the long-term revenue capacity of our business to the greatest extent possible.

[Jennifer Connelly:]

Okay. And to that, just can you talk further to specific brands that you see as potential extension of CNET’s current offering?

[Shelby Bonnie:]

Well, I think we mentioned on the formal comments, one of the interesting things that happened this quarter is the CNET branded properties made up less than 50% of revenues. And so, I think what you’re seeing is a dramatic transformation in our business as we’ve added brands and new properties. You’ve seen especially growth in the Games and Entertainment area. I would also point out this year, on a lot of these calls we get on and we talk about the business area and how the business area has been a real drag. I think we see, we saw some stronger growth, not kind of on par with the rest of our business, but we saw stronger growth out of the business category. And I think we feel very encouraged as to what those overall properties are doing and kind of, that there is some opportunity in that category. So I think we have ended up with a stable of really attractive authentic brands. We will continue to look to add more of them as we see opportunity to do that.

[Operator:]

Thank you. Your next question comes from Gordon Hodge of Thomas Weisel Partners.

[Gordon Hodge:]

Yeah, good afternoon. You alluded to, I think relying less on ad networks perhaps in 2006 as you focus on direct sales. I was just wondering if you could give us a sense for what percentage of your inventory you sold through ad networks versus direct in 2005, just to get a sense?

[Shelby Bonnie:]

So that was only on Webshots, and if you remember when we made the acquisition, its primary revenue stream really was coming from the ad networks. I think, if you looked at over 2005, I think we probably have seen that we really need a dedicated sales staff. We’ve staffed up that group within 2005. I think we have got, there are some very good signs as they’ve solidified the positioning and story that they tell around it. I think there are some good signs, and so it’s still, you know, it’s still primarily sold by the ad networks. But we think there will be opportunity and more opportunity for us to do some more interesting things, as we go in and redesign the site and make it more attractive from both the user and marketer standpoint.

[Operator:]

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

[Mark Mahaney:]

Great, thank you. There was, there have been several reports about strong demand for premium ad inventory. That’s clearly, CNET would fall into that camp. How have your strategies for handling that, maybe excess demand or strong demand for premium ad inventory changed overtime? Thank you.

[Shelby Bonnie:]

Well, I think that is absolutely the case. I mean, one of the things we have done well and I think we have been known for is, we have very good strong brands and they are brands that are sold as a premium. I think we have been able to build very attractive environment not only for users but marketers, a place that marketers can engage. And so, one of the, I think, primary focus areas is, as you know we continue just to look at how do we grow overall usage and continue to expand it. As I think we’ve talked about on prior calls, we are not at this point leaning right now on price as a real lever, as a way to extract more dollars. I think we are, it’s important to us that marketers come in, that marketers have a good experience. That we can service them in a way that we think really give them, kind of honor and respect and make sure they have good experience, because I think that’s the strategy you want to pursue for the long-term, when you look at our, for instance, renewal rates. I mean our renewal rates of our top 100 was 100%. I mean that’s a very attractive number and I think when you look at the out-of-category, the AdAge 100 numbers and the amount of renewal we had on that. So I think that we have done a very good job of servicing that. We continue to focus on how we build more opportunities around that top third of the pyramid where we can have more access to influencers. And we’ll continue to look for ways to both create more inventory, make existing inventory more attractive, and I think in that it’s the right thing to do as we kind of build this business over the long term.

[Operator:]

Thank you. Your next question comes from Youssef Squali of Jefferies & Company.

[Hagit Reindel:]

Yeah, this is Haqit Reindel for Youssef. I’m wondering if you could talk about international revenues? Growth there seems to decelerate this quarter to about 9% year-over-year, could you talk about what happened there? Thank you.

[Shelby Bonnie:]

Yeah, absolutely. You know, we talked about in the call, the fact that we are really focused on how do we transform our business. So I think you saw a move like the Computer Shopper move, where we look at kind of the strategic aspects of our business. I think, when you look specifically at International, some of those themes are carrying through in our international properties as well where we are focusing on. And I think have the ability to today to focus on how do we make sure we are getting higher quality revenue, which has higher profitability. And so, I think a lot of the things we are doing in terms of kind of re-thinking asset mix and other things, you see us doing international, and I think that was reflected in the fourth quarter numbers as we kind of shuffled some business. And, you know, in fact kind of fired some revenue that we thought was not as profitable, and didn’t have the same growth characteristics as other things.

[Operator:]

Thank you. Your next question comes from Brian Fitzgerald of Morgan Stanley.

[Brian Fitzgerald:]

Hi. First question and then I have one follow-up is, specifically with the Games and Entertainment area. Are you seeing any renewed growth with the release of new platforms, Xbox 360 and the upcoming Playstation3?

[Shelby Bonnie:]

I would say overall, we’re in a transition right now, and so you see as you, you’ve seen the launch of the Xbox 360 and you will see the launch of the Playstation3. We are kind of in a transition of game platforms. I think if you look at most of the major game publishers, I think you will see it reflected in their numbers for both the fourth quarter and what they are seeing for the first quarter. So I don’t think it will be surprise if some of that is reflected overall in our Games properties. But I think we remain very encouraged. I don’t think there is any storm clouds on the future with respect to the health of the overall category. We’re just in one of those kind of transitional periods. And so we remain very excited and encouraged in that area. I think that we will see through this transition. I think the good news is that I think when the transition fully kicks in, I think you are going to see a lot of marketing on behalf of game publishers and as they basically market into a, what then would be a new installed base of a new platform.

[George Mazzotta:]

I think there was a second question.

[Operator:]

Thank you. The next question comes from Kit Spring of Stifel Nicolaus.

[Kit Spring:]

You probably can’t tell me this, but what is your expense growth year-over-year in first quarter in 2006 when you back out the acquisitions; looks like a little bit higher than what I would have expected. And then maybe could you comment, do you still expect Yahoo! to launch a tech and gadgets type vertical and then finally, could you maybe talk a little bit about what you think the supply of inventory will do as far as the industry in 2006? Does your guidance forecast that there will be a lot of supply coming on to the market as major media companies put video content online? Thanks.

[Shelby Bonnie:]

To do your first question, we don’t breakout the number in terms of expense growth without acquisitions. But I think if you look at the overall kind of seasonality characteristics of our business, what you’d recognize is in the second half of last year, we went through a period of investment, as we launched new properties and launched new areas. And then you go into a more seasonally weak first quarter, it’s not as if you can let all those people go or kind of decrease the investment. So I think that, you will see that kind of playing out with respect to overall guidance. But I’d say overall we feel very good about kind of where we are with respect to ability to build the business. On the Yahoo! tech launch, my assumption is, and I think the working assumption is, yes they will launch something. This is probably in my history, Tina, maybe the fourth or fifth thing they have launched. So, you know, I get a little weathered on the issue. I do think as we think about our opportunity in the business, you know, we are very, we do something that’s very different in that we really focus on that top third area of the audience, the people that are most passionate about the topic. And we think that’s done uniquely with an authentic brand, with authentic look and feel, and kind of all that stuff. And so, you know, our view has been that the portals do have an opportunity serving the tech category as they have serving other verticals, including games and other things. But what they are going to focus on is more the mass audience. In fact, we are going to partner with them on that. So when you look at Yahoo!’s tech area and you go in and, you know, you get specs and photos and descriptions and all kind of stuff, that’s coming from us, we are licensing that to them. We do the same thing in the games area. So I do think something will launch. My guess is that it will do a good job, kind of addressing that, kind of lower two-thirds of the market. On the third issue, I think one of the really interesting issues with respect to overall inventory availability and one of the things we’ve talked a lot about is, when you looked, for instance, at the Ford XMOS study that we talked about in the last conference call and the fact that Ford’s moving to a 15% spend level. And then you looked at the amount of that, that they probably could contribute to search, given that only 3% of buyers of the Ford F-150 in that case had actually typed in any keyword. I think one of the ongoing questions is going to be, how the heck does Ford actually spends 15%. And I think there’s going to be challenges to that. I think there are going to be more constrained supply. I think it is going to be an inventory issue for the industry going forward. And it’s part of when you see us, continue to make user engagement, increasing usage, increasing usage with respect to video and audio and other things a really important focus area for us. Because we think those are really kind of quality, high value inventory areas in places that, hopefully we can as we build them out continue to capture more and more of those dollars as they come available.

[Operator:]

Thank you. Your next question comes from Imran Khan of JP Morgan.

[Imran Khan:]

Yes, hi, thank you. Hi Shelby and George. You talked about going beyond the CNET.com website and creating more authentic brands. I was wondering if you can talk about, a little bit about what are you doing to cross pollinate the users from different sites on CNET core websites to other new websites. And secondly if you could talk about, what kind of user response you are getting from the redesigning the site? And third, the last question, on the CapEx side, it seems like the CapEx is growing like, a little higher than what we are expecting. So if you could get, give us some sense what, where you are spending the CapEx, thank you.

[Shelby Bonnie:]

First of all when we talk about CNET branded properties, remember its not just cnet.com, it is also cnetnews.com and cnetdownload.com. So its really that we refer to it internally as CNET and its what we refer to as kind of CNET brand which is internally everyone calls “The Red Ball�?. We look at lots of opportunities with respect to what things we can do on cross promotion. You will see us use ad inventory, you will see us use smart linking, you will see us do lot of things with respect to how we utilize search within our network. I think on one level you can’t force it. So I think it’s important that in the spirit and philosophy of giving users what they want, you can’t kind of put a round hole in square, or a round peg in a square hole. So we need to find things that are relevant and useful. We need to find ways to create what can be very kind of workable and unique brand experience. You will also see us cross-pollinate content. So for instance between the CNET brand and the GameSpot brand, you’ve seen us take games content from GameSpot and put it within the CNET environment and you’ve seen us take personal technology content from the CNET brands and put it within GameSpot. And I think we are finding a really nice way to augment within a common brand, a common look and feel, some really high value areas. With respect to redesign, I’d say overall we’ve been very pleased about it. I mean the, this is a continual refreshing process. I think if you look at some of the games and entertainment sites, I think they have seen real success in traffic growth. I think they have seen more engagement. I think we have built it up in a way that we are providing an opportunity for users to participate in the community better. So I would say overall it’s been successful. And I think we’ve been relatively pleased with it. But it is a dynamic continual process and in a good way, the bar gets raised a little higher every day and it’s important that we continue to innovate and learn and take advantage of that. So let me, you want to talk quickly to…

[George Mazzotta:]

Sure. With respect to your question on our capital investment, we believe that our capital investment for 2006 is inline with our growth plans. We think that strategically it compliments our expectations of growth. We expect to increase our investments in our US media properties to support their growth and amplify the growth that we expect from them, and we also expect a little bit larger investment in our US facilities.

[Operator:]

Thank you. The next question comes from Mark May of Needham & Company.

[Mark May:]

Thanks for taking my questions. Just trying to reconcile some of the comments that you made in the prepared remarks, talking about how a lot of the growth in the business overall has come from the growth in the audience and the use of the properties. But it looks like for the last few quarters that the unique user number has slowed, so the second derivative growth rate. And then the average page views per unique has been relatively flat for I guess the last four quarters. And then Shelby, I think in response to one of the questions earlier you said, you weren’t going to be leaning on price too much. I am trying to reconcile all these things. Has, are there certain parts of the network that are holding down that overall growth rate and either the uniques slowing or the page views per unique, and am I maybe not looking at those sort of aggregate numbers in the right way? And second question has to do with the licensing and user fees. It looks like they were, that line item was down in the fourth quarter both sequentially and year-over-year, I think for the first time since I have tracked it, both sequentially and year-over-year. Just wondering why that is and what should we expect this year? Thanks.

[Shelby Bonnie:]

Okay, so to the first point of question, as you heard kind of in our prepared comments. As we look at 2006, we are shifting more towards a focus on kind of user engagement and less so on just raw user growth. And so I think it is correct in saying that as we’ve looked kind over 2005, we saw, we didn’t see the same kind of aggregate increases in overall unique user growth. That was partly by design. I think what we have focused on is how do we attract the highest quality user base, how do we make sure we are addressing the needs of the most passionate, most engaged kind of top third of the audience, and I think you’ll see that over time. I think we feel from a proposition standpoint to marketers, we have lots of reach today. So we’ll continue to kind of lean on how do we make sure that we increase page views per unique, overall engagement, more use of video, and other things. And one of the other interesting aspects is, page views we see as becoming a less important metric. And so how do we think about a mix of kind of page views and video streams and audio streams then, are we, what you see with respect to RSS feeds and other things. There’s a kind of a much larger ecosystem of ways that you touch users. And so, as you see us also shifting towards more use, other types of mediums, I think, you will see, we hope to see more things coming from that. And I would say overall, we feel very comfortable with respect to the kind of overall inventory levels. I mean, if you look at the last three years, we did a great job of kind of really big growth numbers with respect to both page views and other types of sellable inventory. And the real focus was, we need to kind of build in advance of the opportunity. And so, you’ve seen that, in some respects with respect to people asking about kind of lowering RPMs and other things, we’ve been able to, I think, do a really good job of building high quality inventory, which I think puts us in a really good position for kind of the next two to five years. With respect to licensing fee and user revenue, if you look on a quarter basis for the quarter, it was about 5% growth as compared to the fourth quarter of the previous year. So, part of what I would just point out with respect to that, is we didn’t see a shrink. But what I would point out is, as we’ve put a lot more shoulder behind Webshots and what we can do with respect to the media opportunity at Webshots, we would actually less emphasis on the paid services component of Webshots. And so that hasn’t been a big area of focus. I think, you’ve seen the same, that’s kind of indicative of how we thought about, whether its GameSpot Complete memberships or other things. I think as we’ve seen more opportunity in the ad side, I think we’re actively looking for ways to continue to grow inventory overall.

[Operator:]

Thank you. The next question comes from Scott Kessler of Standard & Poor’s.

[Scott Kessler:]

Hi thanks very much, I have two questions. My first question involves, if you could provide more details around Computer Shopper, particularly if you could provide any details related to what you would have expected from revenues in 2006. I am also wondering when you expect the transaction to close and perhaps why no details about the specific consideration you will receive. The second question I have involve stock compensation expense; your guidance suggest roughly 23 million in 2006. I am wondering what that number was in 2005 and if you see that trend going down in terms of the amount of that expense on over time. Thanks.

[Shelby Bonnie:]

So we didn’t breakout in providing guidance for Computer Shopper magazine for ‘06. What we did do is we provided the number for 2005, so it is about 16 million in revenue, about 1.8 million in EBITDA in ‘05. It’s I think, I would say in the big scheme of things, it’s not a particularly material transaction for us. I think this is one we look at as strategically as to how do we continue to kind of have higher quality properties that really are core to our goal of being kind of leading interactive content company. And so, Computer Shopper was a nice, for a period of time a really nice asset to help get leverage and do more things within the overall interactive stage. But, I think as we’ve said over and over, at the point we didn’t think it was strategic, was the point for us to get rid of it. So I’d say, in a big of scheme of things, not material. It is in fact closed, because that, so it closed on 2/2. So that transaction is done. I will let George speak to the stock compensation question.

[George Mazzotta:]

The guidance that we provide on stock option expense compares to about roughly $20 million of expense this year. But it’s important to understand that the valuation of that stock option expense in 2005 will differ from 2006 in the sense that we will use a different valuation model. The valuation model that we have developed with the partnership of Duff & Phelps is that we’ll utilize the Black-Scholes model, but we will modify it to use a term that’s calculated by a Duff & Phelps model, Binomial Lattice model. This model has not been vetted yet with our auditors, but we expect that it will by the middle of February. So, two different valuation methods, but our guidance for 2006 is inline with our 2005 and previous year’s stock option grants.

[Operator:]

Thank you. The next question comes from Bill Morrison of JMP Securities.

[William Morrison:]

Hi. I was hoping you could talk a little bit more about the CapEx. And, George, you said that it’s inline with how you want to grow the business this year. I guess I’m wondering, it was significantly higher than I was expecting as well, as a percent of revenue at least compared to last year. And just kind of curious if, how should we be thinking of that number in forward years beyond this year? Should we be thinking that it will grow as a percent of revenue or there will be some leverage in that number? And then, I guess, along those same lines, I was hoping you might be able to talk about your goals for growing free cash flow for the company over the next few years? Thanks.

[Shelby Bonnie:]

So, first just from a context standpoint, it’s kind of one of those good news, bad news as we’ve really focused on kind of growing user and usage standpoint, and we also look at ways in terms of how do we create kind of better redundancy and other things, kind of, of services. You go, you tend to go in more kind of a step function notion. And this is a big year as we look at what things we can do with respect to kind of expanding redundancy and other things within our properties, which benefit also from an ability to kind of lower risk, one but also in terms of creating higher better performing properties. So, I think, this is a bit of a kind of a step function year overall and I think, remains kind of very consistent with kind of where we are, kind of a, it is a growth phase of our business.

[George Mazzotta:]

And I just want to, probably repeat what I said previously about our CapEx expenditure through ‘06. We will not provide specific guidance about this but I do want to emphasize that we believe strategically it’s inline with our growth plan. It is single digits as compared to the investment over revenue and probably what you have going on also is the law of small numbers, is that last year the 25 million was on a smaller base of revenue than it will be, our 2006 guidance will be, on 2006 revenue.

[Operator:]

Thank you, our final question comes from Paul Keung of CIBC.

[Paul Keung:]

Good afternoon Shelby, George, and Cammeron. Question about your recent success to I guess diversify revenues and improve asset mix. I think you mentioned that CNET’s profit is less than 50% of total revenues for the first time. Where do you see that mix headed in ‘06 and specifically how big can Games and Entertainment and Business category get in ‘06? And the second question is for Shelby, I guess in the last couple of calls, Shelby you used the Ford example and it sounds like a key challenge for you and for Ford to figure how to spend this, this really dramatic increase in online spend. And I think a number of times you have mentioned that the spending is based on some good work being done on the cross media platform, how to spend it. So my question to you really is as it relates Ford and to yourself, do you think that their strategies and research there can now figure out how to spend that money or is that, or is the challenge there such that your guidance is really right around, where your long-term target is, 20% or so?

[Shelby Bonnie:]

First of all, we don’t, with respect to your first question; we don’t breakout the individual kind of business units. What I would say is that Games and Entertainment, I guess as we’ve said on prior calls, has been our fastest growing of our individual units. I think that we, that scenario where we’re continue to see a lot of attractiveness. I think TV.com can be a very good asset for us. We also think there are some additional things we can do overall within the entertainment category. So, I think it’s a place that encourages. But I think, additionally, BNET can be more important. I would also add, as we said in our prepared remarks that we think that there is significant ability to do new categories. And that if I was to liken this to the cable industry, I would say, kind of 1988 cable industry, you kind of went through the first stage, where you thought a bunch of the kind of mainstay basic cable channels had been launched. But then it turned out, from kind of 88, probably next 10 years there has tended to be a great proliferation of some of what are the most valuable, some really valuable assets and some assets extensions that existed. So our plan is not only to grow the stuff we have, but you should also look at how do we reinvest in our business to make sure that we are both adding new brands. That investment could come through more focus on launches. That investment can also come through focus on acquisitions, and I think we will look for the most efficient ways to use our capital, either income statement or balance sheet, to build what we think is the best returning asset mix going forward. I think when you, kind of, go back to the Ford example; there is a bunch of things. I mean, there is issues that Ford has that are different than issues that we have, and we are still early on, as I think we have talked about. Last year was an important year for us that we put a lot of shoulder behind going out and spending time with marketers that were out of, what had been our sweet spot, are raising our profile, having people better understand our overall mix of brands. I think we did a lot of important work I think as we said it was of small amount of revenue but we think it could be a much larger amount. And so we are in a place still where I don’t, I think we are, personally I think we are still relatively underspent. I think part of that is continuing to make sure from a sales force presence and marketing standpoint that we are doing the right things to make sure that we are on people’s media plans. They know who we are and they really can understand the value because the lesson we have learned is if we get them, we keep them. And I think that’s a really important and I think that’s a testament to our organization, it’s a testament to the value that we provide to our marketers and I think it’s a testament to I just think, overall levels of service. So I think that speaks really well to kind of the opportunity. I think when you look at kind of then Ford, Ford is still in a position right now of, they kind of walked through in terms of how much you can spend on search, how much you can spend kind of in endemic places like Edmond’s or Cars.com or other things. I think there’s a whole bunch of things that need to happen in the industry. They need to meet more people like us and spend more time with us and understand kind of the value of our assets and the value of our audiences. And so I think hopefully both of our efforts, where they need to go and where we are going that I think we hope to be able to collide in a nice place sometime throughout the year in a way that we can become a more meaningful partner.

[Operator:]

Thank you. We have reached the allotted time for questions. Ms. McLaughlin, do you have any closing remarks?

[Cammeron McLaughlin:]

No, I think we are all set.

[Shelby W. Bonnie:]

Good. Well, we’d like to thank people and we look forward to speaking with you next quarter. Take care.

[Operator:]

Thank you. This concludes today’s conference call. You may now disconnect.