Paramount Global (PARA) 2002 Q4 法說會逐字稿

Good afternoon.

My name is [Cherel] and I will be your conference facilitator today.

At this time I would like to welcome everyone to the CNET network fourth quarter conference call.

All Lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star and then the number 1on the telephone key pad.

If you would like to withdraw your question, press the pound key.

I would now like to turn the call over to Robert Borchert, Vice President of Corporate and Investor Communications.

Please go ahead sir.

Thank you, [Cherel], and good afternoon everyone.

In our financial news announcement released today and also on this call, CNET Networks is providing specific guidance related to our expectations of future financial performance.

Any forward-looking statements made as part of our financial news today are subject to risks and uncertainties that could cause actual or predicted results to differ materially.

These risks are outlined in the fourth quarter news announcement as well as in the company's Securities and Exchange Commission filing, which can be obtained from the SEC's web site or directly from our investor relations department.

After this conference call CNET Networks does not expect to provide further guidance until our release of financial results for the first quarter ending March 31.

Our company also adheres to a quiet period that ends after the second month of each quarter, and following the release of that quarter's financial results.

If we do decide to update our financial guidance, we'll disseminate the information either by news release or other similar communication methods that meets regulation fair disclosure guidelnes.

Participating in today's call are Shelby Bonnie, our Chairman and CEO as well as Doug Woodrum, our Chief Financial Officer.

So, now, let me hand the call over to Shelby.

Thank you, Robert.

Despite the challenging environment and challenging year, we ended up 2002 on a high note with a better than expected quarter.

Additionally throughout 2002 we were able to accomplish significant progress towards our business objectives.

We saw positive momentum in the fourth quarter as revenues came in at 67.8 million above our guidance range and at 21% increase over the third quarter.

Operating income before depreciation amortization and a noncash asset writedown was 4.2 million, also above our guidance range.

Importantly, we met our second half of the year goal of operating income before depreciation and amortization being positive.

This year we also had significant success in restructuring our business by adding new revenue streams like user enlisting fees, by decreasing our costs as we benefit from the consolidation of our organization and our investments in infrastructure, and by exiting and combining businesses where necessary.

Also strengthened our balance sheet taking our debt outstanding from 173 million to 114 million as of the end of the year and renegotiating our San Francisco real estate lease.

Overall we saw good momentum.

Not one thing stood out.

Rather we saw broad-based improvements across the board.

Though the outlook for the overall technology sector remains mixed for 2003 we continue to focus on delivering the best products for our users and the best products for our marketers.

At the same time, we have continued to lower the cost structure of our business to operate profitability, given this environment, and we have positioned ourselves with the products and revenue streams that can capture significant revenue upside as the environment improves.

With that let me turn it over to Doug.

Thank you, Shelby.

Similar to last quarter included with today's financial announcement is a data sheet with relevant metrics for both the quarter and the comparable period.

I'm going to focus my comments on the pertinent Q4 financial and business issues.

Looking back on 2002, we outlined several goals.

They were to begin generating operating profits to make progress towards generating free cash flow, introduce new revenue streams from fee-based services.

Create additional operating efficiencies and improve our financial flexibility.

We achieved all of these goals in a very tough environment beginning with generating operating profits in the fourth quarter and for the second half of 2002.

As Shelby mentioned our Q4 revenue came in at $67.8 million, which was at the high end of our guidance range.

These results were driven by improved online advertising, seasonally strong revenue from our commerce activities, growth from our international operations, including the recently completed acquisitions in Korea and Japan, growth from Game Spots and downloads, fee-based revenue streams and continued growth from Channel Services.

In Q4, our largest 100 customers represented about 63% of total revenue, which is consistent with our quarterly results for all of 2002 and Gateway represented approximately 10% of revenue during Q4, down from 14% in Q3.

Our Q4 cash operating expenses totalled $63.6 million and our Q4 operating income before depreciation, amortization and a noncash asset charge equaled $4.2 million which was above the high end of our guidance range.

In looking at our Q4 results, revenues increased $11.5 million or 21% compared to Q3.

And importantly, every dollar of additional revenue produced 67 cents of additional operating income.

This is a good indication of the operating leverage being built into our business model as revenues grow we are positioned to expand our profit margins as a fairly rapid rate.

We also reported net income of $3.5 million or 3 cents per share for the fourth quarter.

These results include a gain of $18.5 million from the repurchase of debt and a $9.1 million asset impairment charge relating to moving to a lower cost and more scalable operating platform in Q4 which resulted in decommissioning certain computer hardware and software components that are no longer needed.

Excluding the gain from the repurchase of debt in the asset impairment charge we would have reported a loss of $5.9 million or 4 cents per share which is better than our guidance which was for a 5 to 7 cent per share loss.

Our day sales outstanding equaled 74 as of December 31, which is an increase compared to 69 as of September 30.

This reflects slightly more difficulty collecting receivables beginning in mid to late December when many advertising agencies begin managing their year-end cash balances.

We expect DSOs will decline in Q1.

As mentioned, we recorded an 18 1/2 million dollar gain in Q4 for the repurchase of debt.

During the fourth quarter, we repurchased $52.4 million of our 5% convertible bonds at an average cost of approximately $632 per bond.

We now have $114 million of convertible bonds outstanding down from the original balance of 173 million.

Our cash position at year end was 145 million, which includes our currently restricted cash of 18 million.

Our cash balance declined approximately $43 million in Q4, mostly due to using $33 million to repurchase a portion of our debt at a discount.

And other larger uses of cash during the quarter where capital expenditures of 4.9 million, working capital of 5 million and acquisitions of 2 million.

Looking at our balance sheet from the perspective of total cash minus total debt, gave us a positive balance of $27.1 million as of December 31.

This is a $9 million increase in net positive cash compared to the September 30 balance.

As already mentioned, our Q4 capital expenditure equaled $4.9 million.

In 2003, we anticipate that capital expenditure will average approximately $3 million per quarter.

Our 2002 capital expenditures were invested against the completion or near-completion of several meaningful technology initiatives such as our sales force automation which was completed in the third quarter, our unified ad delivery platform, which was recently completed in January 2003, and our unified publishing platform which will be completed in early Q2 of this year.

And the benefits of completing these projects has contributed greatly to improving our day-to-day operating efficiencies, improved innovation and coordination with our clients and users, lower capital expenditure needs going forward and reduced operating costs.

Turning to the guidance for the first quarter of 2003, we are anticipating total revenues of between $54 and $56 million and an operating loss before depreciation and amortization of $6 to $9 million.

Included again into our Q1 operating loss guidance is an estimated charge of $4 to $5 million for severance, associated with staff reductions completed in Q1 and the termination cost to end our on-air radio operations effective January 31.

Excluding the Q1 severance and radio termination costs, we estimate an operating loss before depreciation and amortization of $2 to $4 million.

Our full year 2003 guidance calls for total revenue of $235 to $245 million, and operating income before depreciation and amortization of break-even to 5 million.

And included within the operating income before depreciation and amortization estimates are the Q1 costs of 4 to 5 million covering severance and terminating our on-air radio operations.

Excluding those costs, our guidance reflects generating operating income before depreciation and amortization of $5 to $9 million for 2003.

And we have attached a detailed spreadsheet of our financial outlook to our news announcements today for your review and analysis.

With that I'd like to turn the call back over to Shelby.

Thanks, Doug.

Though it is a challenging environment to do business, we are able to accomplish the major initiatives we laid out at the beginning of the year.

The five major initiatives were profitability, market share gains, commerce, paid service initiatives and finally infrastructure.

On the profitability side, we probably made the most headway.

We achieved positive operating income before depreciation, amortization and noncash writedown for the second half of the year.

We lowered costs by $75 million in 2001 -- 2002 versus 2001 on top of lowering costs $50 million in 2001 over 2000.

At the same time we maintained the quality of our editorial product.

Winning a series of major awards in 2002, including three awards from the Online News Association and the Columbia School of Journalism.

Numerous awards from publishers like Forbes and, additionally, having some of the most recognized journalists covering the technology sector.

On the share win side we had some nice wines in the fourth quarter which affected advertising as we added larger relationships with Microsoft and Hewlett Packard.

If you looked at the 20 top technology advertisers in print, they spent approximately 25% less in 2002 than 2001, while at the same time we were essentially flat with those same advertisers.

Interestingly, our overall print operations saw significant increase in 2002 as Computer Shopper magazine picked up share in a declining market and we added incremental custom publishing business from companies like Gateway and Toshiba.

In the fourth area, which was commerce, we saw some nice activity in the fourth quarter around our buying advice and commerce areas.

We launched importantly during the first part of the fourth quarter a new reviews model and new reviews paradigm.

One of the areas worth pointing out is a value watch property, which is a proprietary methodology that introduces scalable value ratings for thousands of products.

This is notable because it is built on the knowledge and expertise we have around categories but allows for scalable editorial coverage., something that provides better coverage to users and business model that works for us.

We additionally added kind of a new design and new features so there's more pictures, more accessories, more information about product Lines and other things.

I think it was a big step forward in terms of the overall product.

Because of that, we saw some nice growth and leads in the fourth quarter which leads being up 25% over the third quarter.

We also importantly on the monitorization side saw an increasing revenue per lead reaching 45 cents in the fourth quarter.

This was our fourth straight quarter of modest increases in our revenues per lead which I think bodes well for the overall momentum in that business.

Finally, we also partnered with Business Week on their technology buying guide, which is distributed in print.

It provided both a good branding opportunity and a good revenue opportunity for us in the quarter.

It's an example of the ways we can work with other media companies in the market.

The next initiative area was premium services, and there are really two parts of this.

One was the user side.

How can we create products where we can get users to pay for them.

And the other is the marketer side.

How can we provide high volume low ticket price opportunities for marketers.

On the users side, we launched during 2002 Game Spot Complete and we're up to 50,000 paying subscribers for that product as of the end of the fourth quarter.

What's also notable is that we actually raised prices on that product in August.

That bodes well overall for what we can do in the user side.

We have seen success with Channel OnLin*e, which is a paid service that has approximately 2,000 seats that are paid.

Finally tech paid products which includes books and CDs and other products for the high end IST Lin*e, which we have also seen good traction on throughout 2002.

On the marketers' side we have really focused on listing revenues.

There's two primary areas, one is download paid listings.

Download.com which focuses on 50,000 software titles from 25,000 publishers.

We launched a product really focused on the publishers' side.

It was a product that is completely automated.

A marketer can come in, put in credit card and actually buy paid listings and subscription services as part of that.

We launched that at the beginning of the fourth quarter and have seen nice success.

It's still early but we are happy with what we have seen.

We're on plan in terms of numbers such subscribers.

We're also seeing a slightly higher scue towards the subscription side than we would have originally expected as part of our business plan.

The second area has really been the white paper business.

This summer we launched essentially a white paper directory for enterprise companies to put information about products and features that they have as part of technology offering.

In the fourth quarter we saw nice upside on that business.

It's really provided two things.

It provides a nice steady revenue base.

It also provides probably most importantly a nice introduction into enterprises accounts and a way for us to continue to build deeper relationships with those accounts which is important for overall enterprises efforts.

In the final area that we focused on throughout the year was infrastructure.

As Doug mentioned we completed major initiatives around that, which was the sales order management system and ad delivery system and we are about 80% through with the unified publishing system.

This really I think, importantly, positions us for the future and gives us a very scalable business to both innovate on and to be ale to drive efficiencies.

On top of those I want to point out three additional highlights.

One was international.

On the Asia side, Asia was profitable in the fourth quarter which I think is actually very positive.

As Doug pointed out we also added Korea and a small effort in Japan.

We continue to expand the model in Asia, and we're very happy with what we've seen.

Europe continues I think to be challenging for all kind of media companies at this point.

Yet we have been gaining traction in the U.K. and we added a small acquisition which was Silicon.com which really kicked in at the beginning of the fourth quarter and we have seen them further scale and traction there and have been happy with those results.

Germany and France remain challenging at this point.

The second area that's worth pointing out is the channel efforts.

I mentioned a little bit about Channel Online Pro, which is the subscription service of ours.

Also we have the licensing business and saw a nice increase in the number of licenses, up to 258 at the end of the year.

This is 50% increase over the same time period of last year.

I think really bodes well and we see nice momentum as we go into 2003.

The final thing that's worth pointing out is to underline a comment that Doug made.

That is that we dropped 67 cents of each incremental revenue dollar in the fourth quarter to the bottom line, which proves our ability to deliver profits against increased revenues.

It's beginning to demonstrate our ability to drive profitable growth and leverage from our business model.

We turn to 2003, and let me talk about some of our areas of focus from a business perspective as we go into 2003.

The first, which is probably not surprising to anyone, is continue our focus on driving profitability and growing profitability throughout this year.

We continue to focus on driving increased profitability in 2003, clearly we are focused on what things we can do on the revenue side to grow revenues.

We have taken a very conservative approach from a guidance standpoint.

The second is we continue to focus on cost leverage.

Though we did see an upside in fourth quarter results, we did announce a restructuring which took place two weeks ago that reduced overall head count by almost 5% as we continue to realize the benefits from consolidation and as we exited our businesses like our terrestrial radio businesses.

The second area that we focus on is growth.

We'll continue to grow and improve the diversity and quality of our revenue streams.

That's a major area of focus for this coming year.

We are also aggressively focused on innovating each of our products to build on the leadership positions we have against competitors and to continue to take share and look for ways to exploit the unique things this company delivers to the market.

The third area of focus is innovation.

Our success and what we have been known for as a company is our ability to innovate.

Our success comes from producing the best products for users.

What we do uniquely as a company is to combine our knowledge about our contents base with technology itself to produce the most dynamic, relevant and innovative media-based marketplace for buyers, users, sellers of technology.

I'm excited about what we have on the plate for this coming year.

As we complete our platform consolidation in the second quarter we will be in a position to provide greatly improved products and continue leadership throughout the year.

It's worth kind of pointing out three areas that are areas of focus within the overall innovation highlights.

One is to increase -- continue to increase the value to users and our ability to engage them.

You have seen that with products like Game Spot Complete, with products like Channel Online Pro.

We continue to find new ways to closen our relationship with users and find ways to leverage that through knowledge about users and to provide better and better products and services for them, both on a free basis and on a paid basis.

And to begin to look at things like loyalty programs and other ways to continue to build on the leverage inherent within our user audience.

The second area of focus is really to continue to build on the momentum within the commerce model.

That's not just what we can do in terms of the great product innovations that happened in the fourth quarter and how we can expand those as we go into 2003.

Additionally, how we can we solve that same thinking both in terms of the overall leads models, but also in terms of what we have been able to do from a product standpoint to our other product areas.

So, how do we think about the leads model relative to a Download.com or relative to some of our enterprises areas around things like white papers.

The final area is how do we continue to focus on products for the overall business audience.

One of the positive surprises that people in the industry have seen is the real shift in media consumption by business professionals.

As they use more and more the Internet as their medium of choice.

One of the most surprising things is the Internet has become the most consumed medium by C level business executives, CEOs, COOs, CFOs, and CIOs.

That's a really positive thing and really positive opportunity for us as this has become a very unique way to reach high quality business professionals at work.

Fortunately, we are blessed with an award winning suite of products including news.com, Tech Republic, [INAUDIBLE].com, and DDnet.

So one of the areas of important focus from an innovation standpoint is how we continue to innovate and integrate these products to create a unique offering for both users and marketers that will truly leverage our strengths and truly leverage the strengths of the media.

The final area of focus is leverage of infrastructure.

We talked in 2002 about the importance of infrastructure.

This year it's about capitalizing on that.

How do we build upon that infrastructure and build upon the investment we made over time?

How do we create a better platform for innovation?

A better platform for growth and a platform for scaleability where we can continue to drop revenue incremental revenue to the bottom Lin*e as profits?

Turning briefly to just outlook for 2003.

Based on general uncertainty in the economy and uncertainty around the technology sector.

Our outlook remains appropriately cautious.

We did see nice strength in the fourth quarter, but we will remain cautious until we have a couple quarters under our belt.

As Doug mentioned we are leaving the revenue guidance that we provided last quarter for 2003 unchanged at 4235 to $245 million.

Additionally, we are keeping the operating income before depreciation and amortization guidance of zero to five unchanged.

You should notice as Doug pointed out, this is actually an increase as we will see an additional severance chargeof $4 to $5 million in the first quarter, which is included in that guidance numbered 0 to 5.

So the natural operating income before depreciation and amortization run rate has improved to $5 to $9 million when you exclude the severance costs.

We remain positive towards our business and towards the opportunities that are ahead of us.

We have restructured our business over the past two years as we have consolidated operations, built in more operating leverage and introduced new revenue streams.

The technology category will improve over time as old platforms reach obsolescence and new technologies are introduced.

This categore remains one of the most important categories in the overall global economy with over $2.1 trillion of technology sales and CNET Networks is positioned with both market leadership, products and monitorization engines to capitalize on this opportunity.

So with that let me go ahead and open it up for questions.

At this time I would like to remind everyone, if you would like to ask a question, press star and the number 1 on your telephone keypad.

Your first question comes from the Lin*e of Anthony Noto.

This is actually Eric Webber for Anthony Noto.

Your guidance implies fairly flat revenue growth in 2003.

Do we assume that you do not expect an online advertising recovery in '03.

Has January given you any early indications of the trends in pricing and spending for the tech online ad market in '03?

I would say overall that we have seen positive trends with the adoption of Internet advertising.

The overall trends in Internet advertising are positive.

If you look at both from a research side and you look from a shift in advertising spending, I think the trends are very positive for Internet advertising at a global level.

Having said that, we remain highly dependent on what you see in the technology category.

Given all thin certainty in the world right now both from an economic and political side, it is appropriate to kind of remain cautious with respect to that.

At this point, we have kind of reconfirmed the guidance we provided last quarter.

We think until we begin to see otherwise we will maintain that.

I don't think there's anything in the first quarter, one month into it that really has us think differently one way or the other about it.

Thank you.

Your next question comes from the Lin*e of Fafa Rasje.

Hi, guys.

Good quarter.

Couple of questions.

First on the capital spending that you have done in '02 and I guess finishing up in Q1, documentation in several areas that you said are streamlining your operations quite and bit and helping you with costs.

Could you quantify that a little bit.

What kind of savings do you expect to get from those improvements and secondly can you give us more color on the relative size of opportunity in the subscription-based area and the Game Spot and Download areas, all the new areas you have recently launched?

How big do you think they can get in '03?

Let me ask the answer to the first question.

I'll let Doug add some color on it as well.

On the capital expenditure side, one of the things I'd say we have been able to do over the last two years, as you've seen, we have been able to dramatically lower costs.

Down $50 million from 2000 and 2001 down $75 million from 2001 to 2002.

And as you probably know we announced a 5% head count reduction which took place two weeks ago.

At the same time we have been able to maintain overall quality of our product and quality of the services and our user base.

I think that really speaks in terms of our ability as we have invested in infrastructure to be able to get greater efficiency and greater scale out of existing operations and that's -- when I think you look at the payoff you look and say gosh, we have been able to take significant costs out over the past two years and we have done it while maintaining overall quality of revenue.

I don't know if Doug can add anything else.

A couple other aspects to think about was evidenced in our Q4 on getting some of the benefits of the investments we have been making over the last year, year and a half.

We have been able to demonstrate good incremental flow-through from revenue growth in 67 cents of each dollar in Q4.

And I think also you exhibited by our guidance for 2003 -- our revenue guidance is remaining unchanged at 235 to 245 and our expense guidance is almost by implied is in good shape for to us grow from on a profitability basis.

So the benefits I think we received some already from putting operating leverage into the company from these several technology initiatives as well as other ways that we brought efficiencies to each of our businesses.

So the investments are now coming kind of from a dollar point of view winding down, which is good from a cash usage point perspective and we should receive the operating benefits from these on a go-forward basis for a while.

What gets me excited is that part of the cost equation, but part is an innovation equation and one of the things that we have had as a company is we have been dealing with the combination of ZD Net and CNET and other acquisitions we have made over time and you have seen us kind of consolidate that.

As part of that we were supporting lots of different platforms.

What this allows us to do, we go to unified systems both on the ad side and publishing side, -- really gives us the ability to be vor focused with our resources to drive innovation and really build what I think are kind of the best world class products around this category and really extend that in other ways against kind of a broader set of products.

I think for all of us is pretty exciting -- provides a real opportunity for us this year to kind of spend less money on what you think of as maintenance and be able to move money that was spent on maintenance to innovation and product enhancements.

On the subscription side, I'll focus on kind of two and then give you a little color of what we see in some other areas.

On the game spot side we are at 50,000 subscribers.

I think it's nice and steady revenue build.

That's clearly a big market and a big audience.

You're looking at a market that's bigger than the movie industry and clearly has enormous traction for anyone who kind of followed the game space.

Enormous traction as a category.

We are pretty optimistic.

We still continue to tweak and get better at how we market it and how we get smart about upsells and everything.

We aren't as far along in that as any of us would like.

It means there remains a significant opportunity in our ability to grow that.

On the download side.

Download.com does 2.4 million downloads per day that we facilitate.

We support 25,000 publishers with 50,000 titles.

I think what we are finding that we are positive about is the ability to do a paid listings model in terms of our ability to sign people up with listing fees and subscription service, and I think we have seen good though still early traction on that; but I think, secondly, how we can think of kind of performance models within that and how the ability to extend that similar to what we have done with the leads models in other parts of our businesses.

When you look at how important Download.com has become to the overall category, I think there's real opportunity.

That's 25,000 publishers and we have become the most important distribution platform for them.

When you begin to kind of connect the dots and say what do you think you can do penetration-wise against that 25,000 publishers, one, and ,two is, what do you think is an appropriate amount of marketing that you can get from them on an automated basis via credit card.

We think there's some really interesting opportunity there.

The third area really is this notion around the overall enterprise area and what things we can do from kind of subscription services and other products.

Tech Republic which focuses on ISIT professionals, -- we have had good success selling products into that category, policies about -- policies and guides for IT professionals, books, CDs and other things.

We are pretty positive about what we can do in terms of the broader area around the enterprise side.

We have also had good success actually in the webcast areas.

We produce products for marketers to be distributed on a webcast-basis to provide more information about the different products.

I would say overall within the category there's pretty good opportunity.

Thanks.

Your next question comes from the Lin*e of Lanny** Baker.

Thanks a lot.

Two questions.

Can -- the gap between the top 20 advertisers being down 25% in print and you all being about flat with them, if those advertisers were flat in print in the next 12 months, how much of that gap do you think is sustainable for CNET?

And I have a second question.

I think the first point is that if you look at the the trade publishing side versus the online side from a usage standpoint, the evidence is overwhelming, which I don't think would surprise anyone, that eye balls have moved from the trade publishing side to the Internet side.

I think it's taken time for marketing departments and other things to get their arms around that and understand how they can best utilize this medium to drive both brand names and sales for their organizations.

So I think the trend is with us in terms of kind of overall importance of this medium to the category.

We're pretty positive on our ability to continue to take share from the overall print space.

As we hope we see the market flatten begin to improve I think we can see some wins on that.

The second thing worth pointing out which I have pointed out in my over view is we actually have seen ourselves some nice opportunity on the print side both with Computer Shopper magazine, what we've done on the custom publishing side and also what we have done with international on the print side.

And we are finding really smart ways to leverage both the user base to drive cheaper ways of acquiring customers and maintaining a subscriber base and, secondly, and probably equally, if not more important, our ability to leverage content and content relationships and actually produce better product by taking advantage of all the contents that's produced throughout our company.

I think that's positive for us and positive opportunity for us.

Your second question?

Second question is can you look back over the last two years today and maybe going forward and talk about the CNET user base.

Has it changed?

Would they come to you to look for -- is product more important, less important?

Is it more business, less business?

More kids?

Are gamers -- can you give us a sense of the -- has it been static or has it changed?

If it's changed, what those changes may mean for your business and the opportunities going forward ?

Sure.

I let me point out a couple of points about overall user base.

One is you have a mix within the overall user base of 55 million unique users and the mix is you have kind of somewhat I think of large volume or quantity sites like a Download.com or a Game Spot on the gaming side, kind of at extremes.

On the flip side, you have had a high quality audience of what you think of business decision-makers, whether they're traditional business decisions makers, C levels and other kind of executive classes or the traditional ISIT audience.

One of the things you've seen us do really over the last two years with things like the launch of Biller.com, and the acquisition of Tech Republic, has really been how do we do a better job of positioning against that kind of high quality audience?

And so I think we have really been able to build a strong base within that.

I would say the other thing that is just worth point out is, as a network, one of the things that has defined us, this notion of influencers or thought leaders.

We have fortunately, because of quality of content and quality of services have really been a service that has appealed to influencers and thought leaders, and we probably have much more significant penetration into that group than what you think of kind of the "masses", but I think as an opportunity to monetize it going forward, that's a real opportunity for us as people begin to get better senses of kind of quality of audience and other things.

And we have uniquely provided a strong contextual environment.

As we look forward and think about the influence of things like reach in frequency, we begin to see the reach in frequency model applied against the Internet.

I think mirroring thought leaders, influencers and high quality audience that we have against kind of powerful contextual environments we think it's going to be a very powerful marketing message for people in the industry.

Your next question comes from the Lin*e of Sherry Lin*.

Hi.

This is Sherry Lin*.

I have -- first one question and then some follow-up questions.

The first question has to do with what you've seen as I guess -- what's been most innovative or effective in online advertising?

We've talked about your performance models and we've seen you as innovators in developing creative IMUs a while ago.

Anything that's been emerging recently or things that you've been working on that has struck you as interesting?

I think there's a couple overall trends that I would point out.

One is when you think of kind of traditional advertising, I think actually really been some very positive things, which is, some has been innovation, but some has been a desire on the industry to adopt larger ad units and create a smaller set of standards.

And there's been a lot of I'd say really good progress with respect to organizations like the Internet advertising bureau in terms of their ability to create positive momentum and positive research.

And that, in general, I think is a positive trend and there's been a lot of thought in terms of how do we simplify the market and how do we continue to take friction out.

That's something you probably as a user don't see as much "innovation" in, but I would say is equally innovating.

I think we have all -- anyone in the industry has been struck by the success of models like Overture and ebay.

It's worth pointing out that I don't think there's anything magical in a "listing business" or in an auction market.

What I think is powerful is the notion they've created very low friction marketing opportunities that have allowed a much more broad set of marketers to participate in a way where they really see positive efficacies.

I think the conclusion we should all draw is not we should all run in to try to do paid search or try to do auctions.

I think the conclusions we draw is how do we really begin to take friction out of the market and lower the cost to participating from a marketing standpoint.

I think that's something we put a lot of focus behind over the last year and continue to focus on.

Lots of it are back office efforts.

Some of the stuff Doug talked about in terms of sales order management systems and ad delivery systems and things like that that make it easier to participate.

Secondly, things like Download paid listings, which is, how can you go in with a credit card as a publisher and upload your file and provide marketing opportunities for it.

That's been an area of focus.

I think the final thing worth pointing out is broadband, which is -- I'm on my 10th year at CNET, I think we all at a different point -- people have said the future is broadband -- let's look forward and broadband if going to solve all woes, and there's been many a business that has suffered because of that assumption.

Ironically, right now you are actually beginning to see real traction in broadband.

We are seeing penetration levels go up, especially among business audiences.

And probably most importantly, we are finding the use of things like webcast and other products is a very effective way to deliver rich information in a contextual environment that makes sense.

And that's been a real win and I think we are very positive about our ability to leverage penetration levels and kind of broadband distribution as a way to unlock more and more advertising dollars going forward.

Thanks.

Two other questions.

First one has to do with restructuring efforts.

Do you see yourself as steady for you right now or do you plan to continue?

Well, you know, looking back and saying $50 million in costs out in 2000 to 2001, 75 from 2001 to 2002%.

And unfortunately 5% reduction two weeks ago for the people affected.

We have continued to focus on how do we get more and more efficiency out of our business.

Having said that, you can't cut your way to a great business.

Part of what we are very much focused on this year is how do we continue to innovate and really take advantage of the leverage and scale that we have built to drive the revenue top Lin*e.

And I think that's in many ways a real opportunity.

I think there is always going to be a time where you kind of reclassify to try to put more efforts behind what you think of is a your gross.

I think that's a natural part of doing business.

Great.

And last question if you can answer it.

Do you plan to continue to repurchase your debt?

We are always I think in all cases look for opportunities and ways to use our cash.

Whether that's purchasing securities or small acquisitions or other things, we continue to look for opportunities on that.

I think we have shown an ability to create some really positive opportunities whether it is the restructuring of the lease that took place in the third quarter or whether it's what we did with respect to repurchasing our debts.

I think we just remain open with no plans at this moment.

Thanks a lot.

Your next question comes from Matthew Mark.

Can you just run through a couple sort of housekeeping things for me.

How much revenue within international came from the two acquisitions for the quarter?

That would be sort of one question.

Second, within the offLin*e segment, with the print and broadcasting, how much came from the Gateway and Toshiba customized print businesses as opposed to everything else to the extent you want to comment on it.

Third, small point, but just the -- revenue has trended up nicely and I know that there's some mixed shift in there.

If you could sort of explain that and how you expect it to trend over time, that would be helpful.

Can you answer the first two.

Yeah, on the international side we got a contribution from the Korean transaction of about a million dollars in the fourth quarter.

And the custom publishing, it -- in the fourth quarter, it represented about -- not breaking it down by client because we don't do that, but it represented about 5 to 6% of our revenues in the fourth quarter.

And then on the lead side, I think importantly one is kind of in a 2001 time frame we really saw bottoming as overall retailers on the people saw pressure on their business.

We have also had aggressive efforts in terms of how do we get more paying listers as part of the model and continue to capitalize on that.

We did push through a rate increase about a year ago that took us up on the -- what you think of as a traditional CNET lead side.

We continue to look for ways to be smarter about how we monetize, for an overall opportunity [INAUDIBLE] -- and I think the -- you know, there are numbers that aren't up 20%, but I think there are nice steady increases and they really indicate that we have hit a bottom and we are really starting to come off that in terms of our ability to grow overall revenue on a lead basis.

Okay.

If I could try two more.

Just -- I heard the comments you made on DSOs.

Is it fair to assume over the course of a year of 2003, let's say, that working capital shouldn't really be a source of cash or a significant use of cash?

Yeah, that's the right way to look at it.

Basically a zero, right?

Uh-huh.

Okay.

Did you have any 10% customers in the quarter?

Yeah.

As mentioned earlier, we did.

We had Gateway with approximately 10% in the fourth quarter.

And they were similarly about 14% in the third quarter.

So it had come down a bit.

Thanks.

Your next question from the Lin*e of Steven Rothman.

Yes.

A couple of questions.

Let me do them one at a time.

Shelby, you talked about the top advertisers and you have been trying to increase the closeness of your relationship and their [INAUDIBLE], can you talk about what they're looking for, both advertisers and agencies that would accelerate their shift from print to what you offer and what kind of -- if you can be specific what kinds of things they are looking for to make those decisions?

Yeah.

I would say the most important thing is they look at -- as they look at the Internet is this notion of integrated marketing programs, which is -- I think they all recognize that there's been an important shift in terms of media consumption.

For a lot of reasons I think people generally come in jaded on what you can do, rightly or wrongly with respect to banners and other things.

So they're really looking at how can we create integrated programs that also take advantage of kind of the contextual environments and really give them an ability to showcase their products, their services information, about what they do.

In and I think you have seen this good windows into those programs that really work.

One would be what we kind of did with relationships on the online side with things like Dell and Gateway and now Hewlett Packard.

Also you have seen on the enterprises side where you have organizations like Microsoft who have made significant investments in terms of building out these kind of integrated programs.

There were also, I would say looking for this notion of share of voice which is -- they recognized that in -- kind of any way you look at it, we represent the largest kind of concentrated high quality technology audience that you can find in a medium and we provide a real efficient way to do it.

How do you make sure you get appropriate kind of share of voice.

And for the good and for the bad, you know, everyone continues to really focus on kind of return on investment.

I think that's a trend in the way every company is spending over the last year, I would say as you guys, the investment community, it's probably something everyone's happy to hear in terms of how people think about companies spending their money.

But they want to understand how do you best measure, how do you best understand the efficacy of marketing dollars and how do you ultimately drive and influence your revenues.

I think the good thing is that's something that the Internet has gotten smarter about.

We always had the promise of being able to deliver that value.

I think unfortunately people want their period of focusing solely on click rates.

And I think you have seen in terms of the intelligence with the way people track, the type of research they are doing, that that's also been important.

The final, if I have one more thing is, it's become important for a lot of our larger clients, this notion of business intelligence, which is how do we really use the information that's generated from our user base to give them insight in terms of what users and customers are thinking about.

This has been something that's been done very effectively with a lot of our PC partners for a long time.

Which is provide information about what products people are looking at, what trends there are.

And kind of, what you think of as data about overall trends in the market.

Fortunately, we are finding the same opportunity to do that in the classic enterprises area, which is, how do people understand research about what buyers of technology are thinking about? worrying about? what issues do they have that are keeping them from being able to make buying decisions and allowing that to ultimately influence them about the way people market and spend.

Great.

That's a helpful answer.

Both of you have talked about the incremental revenue so that for every dollar of incremental revenue that you saw in the fourth quarter, you got about 67 cents.

Is that -- as you increase your revenues -- hopefully you do, is that the kind of incremental profitability that you would expect and talk to us maybe about over what range of increased revenue over maybe what your guidance is for '03.

In other words, would it hold for a first incremental $50 million?

Yeah.

An important focus and we have talked a lot about infrastructure and what we have done on an infrastructure standpoint, and one of the things we have been very focused on is how do we build scalability into our model in a way that we can grow the top Lin*e without having to grow the cost side?

And if you think about what the actual costs are for kind of an incremental dollar revenue when you think on the onLin*e side, you think in two areas.

One is sales commissions, your ability to sell.

Two, is your ability to support the sales process.

Three, is the ability to kind of from a usage standpoint, expand your systems and your overall publishing things, so delivering more pages and servers and stuff like that.

A couple things.

One is you're always going to have sales commissions.

That's not necessarily something you do want to decrease, but on the other hand, we have taken and made important investments in terms of how we bring better efficiency into the overall sales process.

So whether it's a sales merger management system; whether it's unified, ad delivery so we take all friction out and different platforms; whether it's going to a cheaper, lower cost publishing platform so we can scale usage, without ability of having to a add expensive servers and expensive software applications to the business.

We are in a position where we feel very comfortable depending on where the dollars come from, our ability based on that to really be able to scale and look at $50, $75 million without significant increases from a cost side.

So if it's -- on the 450 to $75 million, if you add those up, is it reasonable to say that incremental profitability is like 65, 67 cents in general?

Yeah.

I would say in the 65 to 75 cent range.

That's helpful.

And then last question and I'll turn it over to somebody else, I think I know the answer to this, Doug, can you go through what your cash balance expectations are aside from any potential acquisitions or repurchase of debt?

Sure.

As mentioned, we ended the year like 145 million of cash including our currently restricted cash, about 18 million, and we have guided our capital expenditure program to be about 3 million per quarter this year.

So 12.

And our operating income before depreciation amortization including our Q on severance costs, zero break even to five.

Those are our three primary components of two cash movements, and the third one is, as mentioned I think maybe on a previous call, but if not to reinforce, we're going to have another $8 million refunded when we file our 2002 tax return.

We carry back our losses.

In aggregates, in the working capital movement shouldn't be that significant in 2003.

So in aggregate, looking forward to next December year end, our end of year cash balance should be fairly similar to where we started the year?

Thank you.

Again, I would like to remind everyone.

If you would like to ask a question, press star and then the number 1 on your telephone keypad.

Your next question comes from the Lin*e of David Marsh.

Hi, guys.

Could you talk about what your prospects would be for getting that unrestricted cash moved into -- moved into an unrestricted state.

In other words, the question is really directed towards the possibility of renegotiating that lease that ZDNet is currently using up in New York.

Yeah.

You know obviously our eyes are focused on that as well.

Part of the ability to get that released is becoming a stronger company and to be able to put letters of credit together from a lending institution on a noncollateralized basis.

So that's -- that's the basics of it.

As we improve as a company financially and operationally, that improved our ability to make headway on getting those dollars released over time.

The only thing I would add is clearly it is an area that we are focused on and I think as we have seen before, these are constant negotiations in terms of ways you can approach them.

And it's something we look at.

If we think there's a right use of capital to free that up, it's something we clearly look at.

And did you still have some letters of credit outstanding at the end of the year, and if so, what was that total?

If you look at the overall $18 million of restricted cash which is the total amount, it is the $15 million lease in New York, about $2 million on the second [INAUDIBLE], which I think frees up in 2005.

There's $1 million which is kind of small letters of credit and -- for our workmen's comp insurance.

That's the total that we have in unrestricted cash.

Basically mirrors the restricted.

The letters of credit.

Yes.

One last question.

On the subscription businesses such as the Game Spot business, you seem to be developing some really nice traction there.

Could you talk about what kind of contribution margins that that business has and sort of talk -- kind of run through just the economics and sort of what each incremental user adds to the bottom Lin*e in that business.

Sure.

Let me first touch on Download.

Download is predominantly a very low cost in terms of dollars.

We do -- as people sign up for subscription services, so there's a 2.99 per month package and 1.99 per month package, there is heightened some customer support that you get at kind of those levels.

We have slightly more customer support, which wouldn't surprise you.

The people that are paying money expect to be able to talk to someone on the phone.

But I think we are getting smarter about how we manage that.

We have even been able to manage a certain amount of our customer support and other things out of operations in Moscow.

There is some expense to that.

It's not enormous and I think we have been able to be smart about at least supporting a lot of it in terms of offshore operations.

On the Game Spot side, Game Spot Complete, if you follow it, provides a certain amount of video content.

So for Game Spot Complete users we do have what we think of as higher broadband -- higher hosting costs with respect to overall bandwidth needs for the subscription services.

It's as you'd guess, very high margin dollars and I think we continue to look for ways to be smarter about lowering overall -- lowering overall hosting and bandwidth costs.

I think we have made some really important head room in terms of how we think about -- manage that as we go into this year.

We are doing some smart things.

If you follow one of the services we have done on Game Spot -- new file comes out that people are really excited about and you typically get charged on spikes so what is the top spike you have from an overall use of bandwidth side.

We are having people sign up in advance for those services so we have an ability to kind of meter them out over a period of time.

So, A, people get a better chance of getting access to the download, but two is we are able to manage it in a way that we don't create as high a spikes and, therefore, able to overall lower costs.

I don't think there are big costs associated with that.

The one place you could get bigger costs is our ability to go up and sign marketing relationships.

So if you went to portals and did a share on kind of first-year subscription revenue, that's where you would see a cost of goods that could be material.

Clearly we'll still be profitable on the margin.

Great, thanks.

At this time there are no further questions.

Well, good.

We wish everyone a happy and wonderful 2003, and I think for all of us, we are happy with -- though it wasn't an easy time to do business, I think we got a lot of stuff done on 2003.

I think we had good momentum at the end of 2002, and so we continue to go forward and I think we are pretty optimistic about what the opportunities that lay ahead.

So with that, we will see you next quarter.

Thanks.

This concludes today's CNET networks fourth quarter conference call.

You may now disconnect.