ZW Data Action Technologies Inc.
Q4 2006 Earnings Call Transcript

Published: 30 Jan 2007

[Cameron 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 news announcement as well as in the company’s Securities and Exchange Commission filings, including its amended 10-K for the year 2005 filed today, 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, January 29, 2007 and CNET Networks undertakes no duty to update this information. Last but not least, you can find a reconciliation of the non-GAAP financial measures that we used in our news release and on this call to GAAP financials on the last page of today’s news announcement, as well as, in the slide presentation that accompanies this call, located at our Investor Relations website, ir.cnetnetworks.com. Hosting today’s call are Neil Ashe, CNET Networks Chief Executive Officer and George Mazzotta, our Chief Financial Officer. Now let me turn the call over to Neil.

[Neil Ashe:]

Thanks, Cameron and thank you all for joining us. It is our pleasure to be able to discuss our fourth quarter results, our progress and our outlook for the future. CNET Networks is a different kind of media company and we continue to demonstrate our ability to build and grow media brands for people and the things that they are passionate about. With multiple brands serving multiple people in multiple areas of passion, CNET Networks has the foundation to thrive in the evolving media landscape. The fourth quarter was one of great activity and many distractions for our company. In that context, we are very pleased with our performance. Highlights of our fourth quarter are as follows

[George Mazzotta:]

Thank you, Neil. My comments today will first focus on our performance for the fourth quarter and full year. I will then provide you with a summary of our financial restatement before concluding with guidance for 2007. We are pleased to report a strong finish to the year with total revenue for the fourth quarter of $118.4 million, which is a 14% increase from $103.7 million last year. Revenue growth was driven by an increase in interactive revenue, offset slightly by a year-over-year decline in our China publishing business. Marketing services revenue increased 14% to $105.7 million, driven primarily by strong growth in display media from our CNET entertainment and international business units. Licensing fee and user revenue grew 12% to $12.7 million during the fourth quarter, driven largely by growth in our channel data licensing business. Supporting our revenue growth is a stable and expanding advertiser base. Across the entire network our top 100 customers represented 57% of total revenue. We also experienced a high renewal rate from our top advertisers as 96% of our top 100 customers in the third quarter continue to do business with us in the fourth quarter. On a segment basis, US media revenue increased 13% to $93.9 million and international revenue increased 18% to $24.5 million during the fourth quarter. International growth was driven by strength in our interactive businesses, offset by year-over-year declines in our publishing and events business. Interactive growth came mostly from key markets such as China and the UK. Monthly unique users on a global basis in the fourth quarter grew 17% year over year to over a 136 million. Our entertainment properties were the largest contributors to this growth. Average daily page views decreased 18% in the fourth quarter to 85 million pages per day; excluding Webshots, however, average daily page views increased 8% for the quarter. Total cash operating expenses, excluding investigation fees of $6.5 million were $85.2 million in the fourth quarter, an increase of 17% from $72.7 million last year. The $12.5 million year-over-year increase, exclusive of investigation fees, was primarily driven by the investment of additional personnel in both our new and existing businesses and expenses related to business closures and severance. Excluding $2.3 million in costs associated with business closures and severance, cash operating expenses were $82.9 million, an increase of 14% from last year. Cash expenses associated with our stock option investigation reflect fees paid to our independent auditor and various outside providers of forensic accounting and legal services. Operating income for the fourth quarter, excluding stock compensation, depreciation, amortization, impairments and investigation fees was $33.1 million, an increase of 7% from $31 million last year. This represents a 28% margin, compared to 30% last year. Excluding costs associated with business closures and severance, operating income would have grown 13% to $35.4 million, which represents a 30% margin. Incremental margin, excluding investigation fees, was 15% during the quarter, which compares to an incremental margin of 64% in the fourth quarter of 2005. Our incremental margin during the quarter was depressed due to continued re-investment in new and developing businesses, specifically our community and lifestyle properties, as well as costs associated with business closures and severance. During the fourth quarter, bondholders of our $125 million convertible notes declined to accept our consent solicitation offer and accelerated their notes. Consequently, we repaid the bonds at par value in accordance with the indenture by using $65 million of cash and drawing $60 million of funds from our one-year credit agreement. Our interest expense during the fourth quarter totaled $3 million of which $2.3 million was a write-off of deferred issuance costs associated with our retired convertible notes, and the remaining amount reflects two months interest payment for the $60 million line of credit at 6.88% that we used in combination with cash to pay off our bondholders. It is important to understand the balance sheet effect of retiring these notes. After paying off our convertible notes, we ended the fourth quarter with available unrestricted cash and investments of $75.6 million compared to a $110 million last year. Our total debt outstanding at the end of the fourth quarter is $78.3 million compared to a $141.8 million in fourth quarter last year. Our cash balances have been reduced by $34.4 million, but our outstanding debt balances have been reduced by almost twice as much, or $63.5 million. During the fourth quarter, we generated $8.6 million of cash from operations and invested $5.9 million in capital expenditures, which resulted in free cash flow of $2.7 million. Net income for the fourth quarter, excluding stock compensation, asset impairments, investment gains and losses, discontinued operations and investigation fees was $19.6 million or $0.13 diluted EPS. This compares to net income for the fourth quarter of 2005 of $23.3 million or $0.15 diluted EPS. The year-over-year decline in net income was due to costs associated with business closures and severance, as well increased interest expense related to the retirement of our bonds during the quarter. Excluding these items, net income would have been $24.2 million, or $0.16 diluted EPS compared to $23.3 million or $0.15 diluted EPS last year. On a reported basis, net income for the fourth quarter was $6.3 million or $0.04 diluted EPS compared to 2005 net income of $20.7 million or $0.13 diluted EPS. Our fourth quarter 2006 results includes stock compensation expense of $5.4 million, investigation fees of $6.5 million, and asset impairment charges of $1.4 million associated with the closure of our Korea operations. Our fourth quarter 2005 results included stock compensation expense of only $946,000 a gain of $1.3 million from the sale of private investments and discontinued operating losses of $2.9 million from Computer Shopper. Now I would like to share with you our full year results. Our strong fourth quarter results contributed to a solid performance for the full year. In a year that we were challenged by continued softness in both the technology and video game industries, we are pleased to report an increase in total revenue of 15% to $387.7 million from $338 million last year. Total revenue growth was driven by significant increases in marketing services revenue from our entertainment and international properties. In 2006, Google search revenue represented nearly 10% of total revenue for the year. Total cash operating expenses, excluding investigation fees of $13.7 million, were $307.2 million, an increase of 13% from $273 million last year. The $34.2 million year-over-year increase exclusive of investigation fees was driven by increased investment of additional personnel for both our new and existing businesses and expenses related to business closures and severance. Excluding $4.4 million in costs associated with business closures and severance, cash operating expenses were $302.8 million, an increase of 11% from last year. Operating income for the year, excluding stock compensation, depreciation, amortization, impairments and investigation fees was $80.5 million, an increase of 24% from $65 million last year. This represents a 21% margin compared to 19% last year. Excluding costs associated with business closures and severance, operating income would have grown 28% to $84.9 million, which represents a 22% margin. Our ability to manage growth and cash operating expenses to levels below revenue growth drove an incremental margin of 38% for the year. Net income for the year, excluding stock compensation, impairments investment gains and losses, discontinued operations and investigation fees was $43.6 million or $0.29 diluted EPS. This compares to net income of $36.8 million or $0.24 diluted EPS from last year. On a reported basis, full year 2006 net income was $7.8 million or $0.05 diluted EPS compared to 2005 net income of $19.6 million or $0.13 diluted EPS. Our 2006 result include stock compensation expense of $19.8 million, investigation fees of $13.7 million, realized gains of $558,000 from the sale of private investments, a discontinued operating loss of $37,000 from Computer Shopper, and asset impairments of $2.8 million from the closure of our Korean business and EDventure. Our 2005 results includes stock compensation of $6.3 million, a loss of a $170,000 from the sale of private investments, a discontinued operating loss of $9.1 million from Computer Shopper and asset impairments of $1.6 million. For the full year we generated $61.8 million of cash from operating activities and invested $32.9 million in capital expenditures, which resulted in $29 million of free cash flow. Now let me take a minute to review the important adjustments reflected in our restated financial reports filed earlier today. In the process of preparing our restated financial statements we have performed a thorough and comprehensive review of our historical filings from 1996 to 2006. As a result, we have reflected in our restated reports minor reclassifications and out-of-period adjustments, in addition to revised stock compensation expense associated with our investigation. Today we filed the following reports with the SEC. Please reference these reports for detailed accounting and reconciliation of all adjustments. We filed an amended 2005 annual report, an amended quarterly report for Q1 2006, and quarterly reports for both Q2 and Q3 of 2006 that were not previously filed. Our total restatement adjustments equaled a $103 million of non-cash charges and affected years 1996 through 2005. Adjustments to reflect revised stock compensation expense equaled a $106 million of non-cash expense. These adjustments were due to timing differences between grant dates and measurement dates. The adjustments corrected the measurement dates of approximately 41 million options out of a total 74 million granted during the ten-year timeframe. The magnitude of these adjustments are the function of three variables

[Neil Ashe:]

Thanks, George. As I discussed last quarter, we are enthusiastic about the prospects of our existing brands and we are focused on realizing their full potential and opportunity. At our CNET-branded properties, we kicked the year off on a high note. CES 2007 was again a real success for us. CNET was the definitive source for everything related to the show. CNET produced over 80 video packages, over 300 product reviews and eight podcasts. CNET interviewed industry luminaries including Bill Gates, Sir Howard Stringer and Robbie Bach, and our CNET editors were interviewed by major media outlets including CNN, NBC Nightly News and CNBC Power Lunch, to name just a few, and our users appreciated it. CNET Reviews traffic was up over 30% as compared to last year’s show and CNET TV did over 1 million video streams. During the fourth quarter, we also updated our look and feel with the goal of make CNET easier to use. As a result, we have greater brand consistency among CNET.com, CNET Reviews; CNET Download and CNET News, and we have simplified the navigation. During the fourth quarter, we maintained our momentum in entertainment as we continued to add new content and features, as well as add new brands. TV.com continues to be a success for us proving our ability to launch new brands with significant reach and advertiser traction. In the fourth quarter, unique users were up over 50% year-over-year at TV.com, continuing to outperform expectations. Meanwhile, Game Spot remains the go-to source for all news and information related to everything gaming. Users flock to our outstanding coverage of the Wii and PS3 launches. In November 2006, Game Spot traffic hit levels above records set at E3, with over 20 million unique visitors consuming news, previews, reviews and videos. MP3.com announced a comprehensive suite of online marketing capabilities for independent music artists as part of its streamlined new site design. Artists can now upload their music and videos to this site and leverage free, easy to use promotional tools to gain exposure before MP3.com’s audience. Since the feature’s launch, thousands of songs have been uploaded and promoted. As you know, Webshots launched a new streamlined look with updated functionality and navigation in August; this was followed in November by the introduction of video hosting capabilities that enable users to combine still and video images with text and publicly shared albums. Since the redesign, Webshots’ users have been increasing on a month-over-month basis. The Webshots redesign has fundamentally changed the ad buying experience. With channels focused on specific categories Webshots has transformed into a media property that advertisers want to associate their brands with. We are focused on selling more of this inventory direct via our own sales force and we continue to see traction with this sales effort. ZDNet also launched a new look and feel field with features that represent the web’s ongoing evolution into a next generation publishing medium that gives equal weight to the voices of editorial experts, users and vendors. Along with news, product reviews and content contributed by users and vendors ZDNet’s redesign spotlights its successful blog network, where as I discussed earlier, more than 30 well-known IT experts and journalists exclusively blog on the latest developments in the business technology space. Internationally, our online efforts in China continue to perform well. We have had great success in China and have demonstrated our ability to build upon our existing brands as well as to add new ones in this market. According to Alexa data, ZOL, a property that we acquired in 2004, emerged as the number one technology portal in China with 30% more traffic than its number two competitor. XCAR, the auto site that we recently acquired, is also performing well. It has seen the rate of membership growth nearly double and is a leading auto community in China. As I said last quarter, we will continue to identify new opportunities for growth. During the fourth quarter, we made strides to realize new opportunities for growth, both with the addition of new brands and via acquisitions. We added the fourth leg of the stool to our entertainment category with the beta launch of FilmSpot, leveraging the TV.com platform and MetaCritic franchise, FilmSpot rounds out our coverage of the entertainment category. FilmSpot aims to combine content and community features in an immersive environment that satisfies the interest of movie fans. The site is focused on becoming an in-depth online movie resource, featuring movie summaries, critical opinion, trailers, news, photos, actor and character guides, celebrity bios, theatrical and DVD release schedules, and box office results. Just as our other entertainment properties do, FilmSpot will provide valuable intelligence and back end data for us to monitor and assess entertainment-related trends. Our newly-added food brands -- CHOW in the United States and Art Culinaire in France -- are performing well and are important steps in our efforts to continue to broaden the profile of the CNET Network’s audience. CHOW, the food destination targeted at young and inspired foodies, is doing over one million unique users per month and we have had great success with advertisers early on. Since launch, our advertisers have included Bertoli, American Express, Best Buy and Visa. In the coming months, CHOW will continue to add more features including more video, expanding its restaurant and recipe databases, and bringing more user-generated content from its influential audience. The integration of the Chowhound community into CHOW has been very successful with traffic tripling since we acquired it. The Chowhounds now have prominent placement on the front door of CHOW. In addition, Art Culinaire set records for traffic in the month of December. We also continue to find good acquisition opportunities in key markets outside the U.S. We have added two properties, GameKult in France and EA3W in China, as part of our efforts to expand our online portfolio of brands worldwide. Today, we announced that we acquired GameKult, a leading video game content site in France. GameKult adds to our GameSpot franchise with French language and market coverage. GameKult serves the passionate game enthusiast and according to Neilson Net Ratings, is consistently ranked among the top gaming sites in France. In China, we acquired EA3W, a leading home consumer electronics buying guide based in Beijing. With an extensive product database, EA3W provides a unique opportunity to expand upon ZOL, adding broader content coverage and the opportunity to extend our audience and advertising relationships in the home consumer electronics category. 2006 was a year of many distractions for our company. In that context, I am pleased with our fourth quarter performance. As we enter 2007, we are excited about the course that we are charting for CNET Networks. Because we have proven that we can build and operate multiple media brands that fuel people’s passions, we are confident that we can meet the changing needs and desires of both our demanding users and the marketers who want to engage with them. We have the foundation to thrive in the evolving media landscape. As a different kind of media company, CNET Networks will be known for generating, funding and promoting emerging media. That wraps up our formal comments and we’d like to turn it over to the operator so we can open it up for your questions.

[Operator:]

(Operator Instructions) Your first question comes from Imran Khan - JP Morgan.

[Imran Khan:]

Hi Neil and George, how are you? Two questions

[Neil Ashe:]

And your second question?

[Imran Khan:]

The second question is surrounding the CPM trend you are seeing. There are a lot of concerns in the marketplace in terms of increasing inventory, how that's impacting the CPM price for banner advertisement and video. If you could comment on that, we would appreciate that.

[Neil Ashe:]

I'll start with the second question first, which is obviously our performance in the fourth quarter demonstrated that we could continue to grow revenue; and in fact, our revenue growth rate exceeded our page view growth rate so we continue to maintain our price and to grow our inventory in the marketplace.

[George Mazzotta:]

To answer your first question we will not provide you with guidance or pro forma estimates about what our growth rates would be ex these divestitures, other than to say what these businesses represent for us in 2006 which we just disclosed, $7.8 million in total revenue for the full year 2006.

[Operator:]

Your next question comes from Youssef Squali - Jefferies and Co.

[Youssef Squali:]

Two questions. In formulating your guidance for '07 how much of that is predicated on a strong uptick from Vista and the gaming platforms being rolled out? Second in terms of page views, we saw your page views consumption down year on year and also sequentially. I was wondering if you could comment on that? What's baked into your guidance? Are you assuming any pickup in usage and pricing? Thanks.

[Neil Ashe:]

So first as relates to our growth in 2007, our expectations for Vista and the game platforms, we have been very consistent in our expectations that we can continue to grow our users and our usage and continue to grow our revenues. While these are important components of our growth rates we have not, as we have said consistently, expected large increases related to Vista. Specifically to the video game cycle, that's a longer term cycle for us as most of our revenue comes from video game publishers who spend more dollars per game with larger installed bases. As to the second question, I'm not sure what you meant by page view consumption, but our rate of page view growth was about 8% in the fourth quarter. We continue to grow. As with all networks, not all page views are created equal. We had strong growth in our entertainment properties, specifically TV.com and GameSpot and in some of our important technology properties, CNET.com CNET Reviews, and CNET TV, so we're confident that our guidance represents our best knowledge right now of both our ability to drive users and usage in 2007, as well as our expectation for performance among large categories that are meaningful for us.

[Youssef Squali:]

Just to clarify. I was really talking about page views per user.

[Neil Ashe:]

As I said, our guidance includes our best estimate right now of our ability to drive users and usage.

[Youssef Squali:]

Thank you.

[Operator:]

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

[Mark Mahaney:]

Great, thank you. Two questions

[George Mazzotta:]

I'll take the first question. We do expect some ongoing expenses related to the investigation; not nearly to the extent that we saw in Q4 or certainly since May of 2006. I think it's conservative to estimate that there will be some ongoing expenses related to the investigation as we tie up loose ends.

[Neil Ashe:]

We'll obviously be careful too to call those out on the income statement so that you can see them. As it relates to page view outlook, our page view outlook varies based on our different brands and different properties. Those which are older and larger we expect less growth. So I think for the CNET-branded properties that's a fair estimation, single-digit growth rate. I'd expect to see greater growth rate among some of our other properties. If you look at our entire network, however, CNET Networks, we will continue to have challenging comparable numbers because of the large number of page views or Webshots and its change in size. So to summarize, I think single-digits probably for the CNET-branded properties, probably higher for some of our other properties, then CNET Networks lower due to challenging comparables at Webshots.

[Operator:]

Your next question comes from Anthony Noto - Goldman Sachs.

[Anthony Noto:]

Thank you. Neil, I was wondering if you could talk about the potential implications of the industry shift of advertisers being willing to allocate a portion of their incremental spending to lower CPM inventory via ad networks, marketplaces that we have heard from both Yahoo! as well as several digital agencies? Then I have a follow-up once you guys have answered that. Thanks.

[Neil Ashe:]

Sure. We have seen this and talked about this trend a lot which is the bifurcation of inventory online. First, I would say that it's not our view that portal inventory is premium inventory. It's rather that portal inventory is more reach inventory and that's, I think proven out in our rates and our monetization per thousand pages. Advertisers have consistently, and I think leading advertisers who we've been working with for the last couple years, have consistently maintained that it is their desire to buy important places in high premium quality inventory like our sites, and then to buy reach as cheaply as they possibly can. So this doesn't surprise us at all that you would see more spending on reach. I don't think that's necessarily comparable nor challenging to our branded environments, however, on the longer term.

[Operator:]

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

[Gordon Hodge:]

Good afternoon and thanks for all the disclosures. We were expecting more blood and gore, I guess, but it was pretty clear. Anyway, a question on the fourth quarter trends. You did beat your guidance on the top line. Did you see a pickup in entertainment? Were you able to monetize the pickup in page view growth in entertainment towards the end of the quarter, and was that the source of upside? Then a second question, George in terms of the businesses that you have divested, the $7.8 million of revenues, would there have been much EBITDA profit associated with that revenue or should we assume those were either losing money or breakeven level businesses? Thanks.

[Neil Ashe:]

First, on the fourth quarter trends, as we said we started to really bear fruit from general consumer advertisers in the fourth quarter, both at the entertainment properties as well as CNET. Now we fully recognize that the fourth quarter is a seasonally strong quarter for consumer advertisers, so for example, it would be challenging for us to repeat that in the first quarter. But it does affirm what we have been saying for awhile which is that our environments, both the entertainment properties as well as CNET and our developing lifestyle properties, are attractive to general consumer advertisers and they are willing to make meaningful investments in them.

[George Mazzotta:]

In terms of the EBITDA contribution of closed businesses for the full year 2006, it was nearly breakeven, within $300,000 of breakeven.

[Operator:]

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

[Mark May:]

Thanks for taking my questions. You mentioned Google as percent of revenue in '06. Did you have any revenue from that relationship in '05 and if so, what was it? Second question, I think in your filings you are now segmenting your business in the U.S. into two segments

[Neil Ashe:]

First question, Google has been our search provider since, I believe September of 2004. So they have been a meaningful revenue contributor to us since then. I believe that in '05 it was about the same percentage of total revenue, around 10%. In terms of breaking out users and usage, U.S. versus international, we don't do that. We look at our properties both globally and then in the individual markets. So it's not really a meaningful statistic for the way that we run the business, so we don't break that out.

[Operator:]

Your next question comes from Jordan Rohan - RBC Capital Markets.

[Jordan Rohan:]

Thanks. The question has to do with a little more clarity on CapEx. For two years in a row you've had around $35 million or $40 million in CapEx which is on the '07 forecast about 8% or 9% of sales. Fairly high, some may say; others may say it's a little bit low given the growth that you’re expecting. Can you talk to us about whether it's hardware or software or what you're spending that on? Are there any office spaces or leases that have been capitalized? And any other main components of that, just on a directional nature? Thank you.

[George Mazzotta:]

I can provide some specifics on that and Neil may also want to comment. We believe that our level of capital expenditures both last year 2006 and what we expect in 2007 is very appropriate and consistent with our long range strategic plan. Both years 2006 and what we expect in 2007 considers some facilities investments; but by and large, this is investment in the infrastructure of our properties, so it's hardware.

[Operator:]

Your next question comes from Safa Rashtchy - Piper Jaffray.

[Neil Ashe:]

I think we scared him off the call. Safa?

[Operator:]

Your next question comes from Kit Spring – Stifel Nicolaus.

[Kit Spring:]

A much better revenue quarter. Can you talk a little bit about the opportunity in video? What kind of CPMs you see in video versus regular and maybe what percentage of your page views is coming from video, where can that go? Secondly, I don't know if you have an opinion on this, but some of the sell ratings we have seen have been predicated on declining traffic in the ComScore data. I'm wondering if you guys have much less poor data. I wonder, what are the differences between your internal data and ComScore’s? Is theirs wrong? What do you think the reason for such a wide disparity is on that?

[Neil Ashe:]

I'll take them in order. First, of course, we see an opportunity in video, and we currently see premium rates for video. We do about 2 million video streams per day versus about 85 million page views per day. As for the difference between our internal data and ComScore, it's a necessary reality that we will always know more data about our users and usage because we track every single one of them and every single page view. So while we have a lot of respect for the work of the external agencies, ComScore and Net Ratings in particular, they just don't have the same level of access to our users that we do. We invest a lot in them, though, because we're confident that they will continue to improve over time, so they're the best that all of us have right now but we will necessarily always have more information than they do because we do have internal server logs.

[Operator:]

You do have a question from Safa Rashtchy - Piper Jaffray.

[Safa Rashtchy:]

Sorry I missed you guys last time, I couldn't get on just in time. A couple of questions. One, if I could actually pick up on the last question about the discrepancy between what you report and what ComScore and Net Ratings report. Are your numbers global? If so, can you give us some rough estimates of what we should expect in there? Then I have a couple of follow-ups.

[Neil Ashe:]

Sure, Safa. All the numbers that we were quoting were global numbers, yes.

[Operator:]

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

[Scott Kessler:]

Thanks a lot. Over the last six to 12 months I think it's pretty evident that a lot of talented people have left the company's management ranks and I'm wondering what's being done to address this? My second question is if you could talk a little bit about the impact of the announcement of the iPhone and how it influenced web traffic to your sites. Thanks.

[Neil Ashe:]

Well first, obviously with the resignations of the CEO, the General Counsel, and our Senior Vice President of Human Resources we have had talent leave our company. What has not changed is that we have over 2,000 people around the world who show up every day inspired to deliver a user experience to the most passionate users on the web, and that hasn't changed. CNET Networks has always been known as a company that can both recruit and develop talent and we don't often have opportunities to hire people in at senior levels. I have to tell you that I'm in inspired by the people that I know want to work at CNET Networks. So we are very confident in our ability to bring in talented folks as well as to develop talented folks in our organization. Second, the iPhone launch when it happens in June may be a traffic driver for us, but I would not call it material. MacWorld has a several day impact on our page views, but that's about it.

[Operator:]

Thank you. Your next question comes from Heath Terry - Credit Suisse.

[Heath Terry:]

Great, thank you. I was wondering if you could talk about the monetization levels on the site? To what extent as you look across the business, do you feel like you're fully exploiting the page views that you've got in terms of number of ads on the page, the type of ads that you're running on the page, and is that something is going to be a primary focus, something that we should expect to see here over time that you are going to increase inventory on the individual pages within the network?

[Neil Ashe:]

Heath, our philosophy is to always start from the user experience, so we start and end any decisions we have there. We've been historically very good at monetization at revenue per thousand pages. What you have seen over the last quarter or two and you'll see in the future is sometimes a disconnect between our monetization and our page view growth as we'll outgrow our monetization capabilities. We're always focused on realizing the maximum potential from our user engagement. However, we are always focused first on the user experience. So you will see changes at a number of our properties regularly, but the balance is always one of how can we first, furiously satisfy our users; and then second, provide the most efficient monetization. So will you see more impressions per page? Maybe in some places and you might see less in others.

[Operator:]

Thank you. Your next question comes from David Joseph - Morgan Stanley.

[David Joseph:]

Hi everyone, thank you. I'm sorry to go back to guidance but just really quickly, you presented a pretty impressive range given some metrics during the quarter not necessarily going in that direction. Renewal rates were down year over year for the second quarter and your page views are still in the single-digits. So I'm wondering, it either implies that you're expecting a pricing improvement in the environment in '07 or that some more recent acquisitions are going to be driving some of that growth. Secondly, as you execute further on your vertical strategy in 2007, can we assume that we are going to be seeing a similar level of acquisitions quarter to quarter?

[Neil Ashe:]

First as it relates to guidance and our expectations, as I said when we walked through it, baked into our expectations for our revenue growth, our expectations for page view and user growth at each of our properties, and I walked through that earlier. No, we don't think that necessarily implies a large increase in page views across the network. Secondly on acquisitions, we believe it is a core competence of ours to launch ourselves into new categories, either through development or through acquisitions. So we will continue to scout for new opportunities to expand the network and we will be opportunistic when we find them. What we have demonstrated over the last several years is that we move aggressively when we find things that fit with us and that we believe that we can execute very well on, but we don't necessarily chase everything that others are looking at. So we're excited to grow the network. We believe that it is a core competence of ours, and we will look to acquisitions in the future.

[Operator:]

Your next question comes from Bill Morrison - JMP Securities.

[Bill Morrison:]

It looks like the incremental margin in '06 came out at around 35%. George, you noted it was around 15% in the fourth quarter. It looks to me like at the midpoint of your guidance, you're expecting another year of around 35% incremental margin, maybe a little bit lower if you were to give yourself credit for some of the EBITDA that went to disposing assets this past year. Just curious if we should think about that as a new normalized incremental margin for the company? Historically in '04 and '05 you obviously had incremental margins much higher. I was wondering if you could just help us understand if 35% is a new normalized level and if not why is it at that range next year? What investments are keeping it there? Secondly, I was wondering if you could help us understand the revenue progression, growth rates through the year, if possible? I think at the midpoint of Q1 you're at 10%, and if we were to assume 10% growth each quarter you get to the midpoint for the year. I'm curious, as you look to the high end of your guidance, where would you expect to see an acceleration -- in which quarter or quarters? Thanks.

[Neil Ashe:]

Thanks, Bill. First, on the incremental margin, we have been saying for the last several quarters that we are focused on expanding margins and that we believe that we have proven the profitability of our business model and we have proven that we can realize the margins of a diversified media company and we have demonstrated the operating leverage in the business. So while we're focused on expanding margins, we are not sure where that ultimately leads us. What we do know is that we can expand margins and we would expect to continue to do that in the future but we're also focused on growing the business, so we've been able to generate profits internally to fund the development of our new brands and properties and we'll continue to do that in the future. We don't goal ourselves specifically around incremental margins. Obviously, it's easier to have a higher incremental margin with a higher revenue growth rate so that may impact it, but we really are focused on expanding the network and growing our properties. The second question as it relates to guidance, the revenue growth rates in fiscal year '07, as you noted we have bracketed 10% to 15% revenue growth. Our best look at the first quarter right now has the midpoint coming in around 10%. That could move around and we would expect to see growth through the rest of the year.

[Operator:]

Your next question comes from Steve Weinstein - Pacific Crest.

[Steve Weinstein:]

Thanks, just a couple questions. What was the effect of foreign currency in the quarter? One more question on guidance. You're guiding to double-digit growth and I'm wondering, what does that really imply for core CNET, red ball type of growth versus all of the new initiatives that you highlighted in your prepared remarks?

[George Mazzotta:]

I'll take the first question, which is the effect of foreign currency on revenue in the fourth quarter, far less than $1 million is the answer.

[Neil Ashe:]

I'll take the second. As it relates to guidance we obviously don't break out individual property levels but we are seeing growth across all of our franchises.

[Operator:]

Thank you. At this time there are no further questions. Are there any closing remarks?

[Neil Ashe:]

First of all thank you all for bearing with us. We're very happy to be back and current with our financials and we appreciate you spending the time to learn more about us. We look forward to talking to you later and next quarter. Thanks.

[Operator:]

Thank you. This concludes today's CNET Networks fourth quarter and full year 2006 earnings conference call.