Paramount Global (PARA) 2003 Q1 法說會逐字稿

Good afternoon.

My name is Tina and I will be your conference facilitator today.

At this time I would like to welcome everyone to the CNET network first quarter financial 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 then the number one on your telephone keypad.

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

I would now like to introduce Robert Borchert, vice president of Investor Relations.

Sir, you may begin.

Thank you, Tina.

And good afternoon.

On the call with me today are Shelby Bonnie, our chairman and chief executive officer, and Doug Woodrum, our chief financial officer.

Before we begin our formal comments, I'd like to remind you that 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 parted of our financial news release today are subject to risks and uncertainties that could cause actual or predicted results to differ materially.

These risks are outlined in our first quarter news announcement, as well as in the company's Securities and Exchange Commission filings, 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 second quarter ending June 30th.

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

I we decide to update our financial guidance we will disseminate the information either by news release or other similar communications methods that meet regulation fair disclosure guidelines.

Last but not least, our corporate Investor Relations site, IR.CNET.com, you can find a reconciliation of non-GAAP financial measures that we used in our news release or on this call to GAAP financials.

Now we turn the call over to Shelby.

Thank you, Robert.

We came in to 2003 saying this would be a foundation year.

Our objective was to lay a framework for both profitability and growth going forward.

First and foremost we need to make sure our business was stabilized and sized correctly.

In that context, we were very pleased with our first quarter results.

For the first time in a couple of years we saw modest revenue growth comparing 2003 to 2002 in the first quarter, a very encouraging fact in itself and above our guidance range.

We also saw significant improvement from a bottom line perspective.

Overall operating loss before depreciation and amortization was $7.4 million, which includes a $5.4 million charge related to realignment costs.

These improvements were largely driven by significant cost reductions from the first quarter of 2002 to the first quarter of 2003.

We also saw minimal cash use during the quarter.

Cash at the end of the quarter was $142.6 million, an overall decrease of $2.5 million from the December quarter.

We continue to see strength on the product and user front, and had some new launches and innovations in the quarter, a couple of which I'll spend some time highlighting later.

On the macro side there is improving sentiment with respect to Internet advertising with the signs being positive for greater shift in marketing dollars, a key to our long-term success.

At the same time, the technology market remains challenging from the perspective of general business health and specifically level of marketing spends, which creates short-term growth challenges.

But as we said, this would be a foundation year and to that end we were generally pleased with what we saw in the first quarter and what we see for the remainder of this year.

So with that let me turn it over to Doug.

Thank you, Shelby.

I would like to provide a review of our results for the first quarter.

OurQ1 revenue came in at $56.6 million, which was 2%higher than last year, and above the high-end of our guidance range.

Our 100 largest customers represented about 67% of total U.S. revenue in Q1,which is consistent with last quarter's results.

Gateway represented approximately 16% of revenue in the quarter, up from 10% in Q4, driven by an increase in custom publishing revenues, and custom publishing is a program introduced a year ago to assist our customers with their tech focus, direct-mail marketing efforts.

As part of these programs we source all of the printing and distribution costs, as well as provide technology content.

While these programs offer lower margins, they have provided a means to broaden and strengthen customer relationships.

In the case of Gateway, all the majority of our relationship from a revenue perspective is connected with custom publishing and resultant lower margins, we believe our higher margin business has benefited from expanding our marketing solutions.

Our Q1 cash operating expenses totaled $64 million, including the$5.4 million of severance in radio termination costs.

And our Q1 operating loss before depreciation and amortization came in at $7.4 million, again including the $5.4 million of severance in radio termination costs, and this was the mid-point of our overall guidance range.

Our net loss of $15.8 million, or 11 cents per-share in the quarter, compared favorably to our Q1 guidance of between 11 and 14 cents per-share.

And from a balance sheet perspective our cash at the end of Q1equaled $142.6 million, a decline of $2.5 million from year-end 2002.

Our day sales outstanding equaled 69 as of March 31st, a decrease compared to 74 as of December 31st.

And the improvement resulted in a $12.6 million reduction in receivables and contributed to the generation of $8.9 million of positive working capital during the quarter.

Our Q1 capital expenditures came in at $2.5 million, a quarterly amount that is on-plan with our full-year guidance range of $12 million, however, our capital expenditures in Q2 will be higher, in the rage of $3.5 to $4 million as a result of completing the remaining components of our unified publishing platform.

We continue to expect that full year 2003 capital expenditures will be no higher than $12 million.

Additionally from a cash perspective in Q2, we anticipate receiving an $8 million federal tax refund representing a recovery of taxes paid in prior periods.

Our total debt remains at approximately $118 million, and turning to guidance for the second quarter of 2003, we anticipate total revenues of between $56.5to $58.5 million, and an operating loss before depreciation and amortization of between $2 and $5 million, including potential realignment expenses of between $2 and 4 million, of which a significant element may relate to real estate lease terminations in the event we conclude settlement negotiations.

And while the exact amount of these activities isn't determinable yet, we feel this range should adequately cover these potential costs.

Our full year 2003 guidance remains unchanged.

With total revenue of between $235 and $245 million and operating income before depreciation and amortization of break even to $5 million, including our Q1 and Q2 realignment cost of between $7.4 to $9.4 million.

And a detailed spreadsheet of our financial outlook is attached to our announcement for your review.

I also want to call to your attention to the statistical highlights information included with today's announcement.

Last quarter we asked for input about what information would be useful for investors, while at the same time respecting the competitive of information we provide, and our goal to produce information that accurately portrays our underlying business fundamentals.

This review has led to the following changes.

As a result of more customers designing marketing solutions that combine online media and commerce programs, the lines are green between these two revenue streams.

In effect, we are no longer able to accurately separate online media from commerce revenue.

Beginning this quarter, and for prior quarters, we've combined online media revenue and commerce revenue.

This customer marketing approach has also resulted in us being unable to produce an average revenue per lead because of the difficulty of measuring the commerce-only portion of combined online media and commerce programs.

Regarding our information on sales leads, in order to more accurately portray all of our lead generation programs developed across our entire customer set, we have expanded total leads and leads per day to include our search programs and our ITY paper services.

This change is being made in Q1 and for future periods.

And absent the inclusion of search and ITY paper leads, our historical leads programs increased 8% in Q1, 2003, compared to Q1, 2002.

And lastly, we added the statistic title subscription, licensing and fee-based revenue in an effort to provide a better view of our revenue diversification efforts across all businesses.

And finally, in summary, we continue to focus on the following goals, which is to drive toward sustainable and growing operating profitability, to generate free cash flow by year-end, and to leverage our IT infrastructure to drive product innovations and deliver operating efficiencies.

And with that I'd like to turn the call back to Shelby.

Thanks, Doug.

I thought I would organize my comments into two general buckets, one, a discussion of what we are seeing from a broad environment perspective, and second, a discussion what we're seeing on our individual business units.

With respect to the broad environment, we see long-term positive signs and continued short-term challenges.

On the long-term side broad sentiment towards Internet advertising continues to improve.

As most of you know I'm the Chairman of the Interactive Advertising Bureau , or the IAB, which is the industry consortium focused on advertising and improving the advertising environment with the medium.

The IAB's efforts, like CNET's efforts, are to rebuild demand within the medium with higher real permanent spending levels.

There have been two primary-focus areas.

One is driving demand, which is do more things to support overall advocacy and awareness of the medium, and second is simplification, how do we take friction out of the process and make this an easier to participate in and a more economic medium, especially for agencies.

On the drive-demand side, we're clearly seeing greater acceptance of the search area, and I think that has been one of the places you've seen enormous amount of growth within the past year and a half.

The good news is we're also seeing branding reach broader acceptance levels as marketers are beginning to understand that you have to do more in creating influence of their brands and of their products earlier in the buying cycle.

So I think that is good and I think that's a real positive for the medium, and I think you're seeing some examples of that.

The IAB has done a number of cross-media research studies.

One of them that's actually notable is McDonald's, they looked at the chicken flat bread product, and one of the interesting things that came out of it is Bill Lamar ,who is the SVP of U.S. marketing at McDonald's, was quoted as saying that he saw a shift away from a mostly TV marketing strategy toward more digital media, saying that the company is already doing the most of any companies to reach customers on the web and believe it's becoming a more component and necessity of marketing I think that is a good example of broad-based consumer company and what they're seeing kind of the adoption they're seeing as they participate in the media.

And I think with respect to our own business, we're seeing that among our bellwethers, the bellwether accounts you're seeing real shifts in medium mix as they shift marketing dollars away from areas like print and TV, more toward the Internet.

I think that is really positive and I think from the long-term perspective, you know, we're very encouraged by that.

The second area has been simplification, and clearly it is an industry we have done a lot to try to build standards and simplify processes at the industry level, but I also think there is some good things to actually highlight about the simplification process within CNET.

We have finished work to finish the rollout on our combined new ad system and on our management system which we rolled out or completed rollout of in the beginning of the first quarter, and one of the really good benefits is that we have actually taken the discrepancies between our impression counts and third-party and advertiser impression counts down to very minimal levels.

And what has come out of that is better client relationships and also lower friction in the process.

So you spend less time trying to sync-up one person's count with another person's count.

And one of the clear benefits for us has been not only have we improved customer satisfaction, we've also as we have lowered friction been able to lower on DSO.

So as Doug mentioned, we've brought our DSOs down five days within the quarter, which clearly unlocked a lot of cash, and I think is a good sign of what we're being able to achieve in terms of taking friction out of the process.

So overall when you looking kind of from a long long-term perspective I think the signs are good.

I think we're addressing the right issues and seeing the right signs from an overall business perspective.

The second thing is probably worth focusing on which is kind of more shorter-term in nature really is the technology market, and I think to understand the technology market it's worth actually thinking about two different components within the technology market.

One is enterprise, which is people selling technology products into the business market, and the second is personal where people are actually selling products for either individual use or small business use.

On the enterprise side it remains a difficult environment, and there's two primary factors.

One is there is a lot of deferral of capital spending and that has clearly been impacted large amounts in technology industry, as CFOs and COOs have pushed off capital spending in an effort to conserve cash.

But the second is also the second factor that is also impacted is really downward pressure resulting from greater price value scrutiny.

You see a certain amount of commoditization that's occurred in the stack, and that has created a greater kind of overall price pressure and clearly is having an impact on the enterprise category.

And because of that you see very little in comparative brand spending, and what brand spending you're seeing is much more defensive in nature rather than offensive in nature so people are spending to maintain their overall customer bases, and there are some exceptions.

I think you'd look at Microsoft, you'd look at IBM and Intel as examples of companies that are offensively spending money and spending money within a downturn.

I'd say overall it's hard to nod and I think we continue to be disappointed with overall levels of spending.

At the same time I think there is interesting things that you can see and as a real bifurcation that is occurring within our different types of customers.

In one bucket is where you consider the bellwether accounts, the people that are continuing to spend money, are the kind of a better known technology companies, and we're seeing an ability not only to build stronger relationships and to get closer to those customers, but we're also seeing actual larger dollar spends from that group.

Interestingly, the second bucket, which is what I would call the second-tier accounts, we're also seeing growth.

We're just seeing it in a different bucket, and you know albeit a smaller bucket, which is really the ROI-driven programs like Webcast, like Whitepapers, like research.

It's allowed us to maintain spend levels and maintain relationships in what otherwise has been a down market in a place where people have kind of, you know, dramatically decreased their level of spend.

So I think it has had real strategic benefit, it's laid an important foundation for us to grow those relationships as the business improves over time.

The second bucket is the personal area.

And we continue to see strong demand within what you think of as kind of the core technology accounts.

So desk tops, notebooks, hand-helds, kind of the peripheral categories, and there has been strong demand for marketers.

We haven't seen a lot of growth, though, and I think that is as much a factor of actually user growth and whether people are actually going out and buying more of those products, and I think the industry stats are pretty clear on that.

The place we are seeing a real user growth is in the areas like consumer electronics and wireless, and, you know, we tell you know you've heard a lot over the last 10 years where different people talked about convergence and the convergence of technology, consumer electronics and technology moving into the living room, into the kitchen, we're actually beginning to see, you know, I think the nice, a nice ability for the stars to lineup for a lot of that to begin to happen.

So we're seeing a lot more activity both in terms of the products that are being created but also importantly in terms of user interest and one example of that is Gateway released a $3000 plasma screen TV that they released in December, and they released it as a $3000 price-point, and they couldn't keep it in stock, and they had almost a two-month backlog on it.

I think it really speaks to some of the important things that are happening within that category.

It also creates some real opportunities for us because marketers have not spent according to where you're seeing user activity and user demand.

So you know, as we look at it, and especially look at the second half of the year, that is a real area to focus not only editorially, not only product-wise for us, but also in terms of our ability to actually introduce and get people more involved from an overall marketing standpoint within those categories.

So those are, you know when you kind of think of the broad stuff going on, those are two important areas to look at.

What is happening in terms of long-term adoption of the medium, and secondly, what is happening within the technology market and how does it relate to us?

Let me spend a little time actually highlighting each of our individual business units and some I'll spend more time and some I'll spend less.

Enterprise, which encompasses CNN News.com, Tech Republic and Builder.com is really focused on the business and on people that are buying technology and using technology for business purposes.

I think it's a really good example and I want to actually spend a bit of time because I think it tells a lot about how we have reacted to the last year and what we have done as a company.

Despite everything that is going on in the market and the pressure that I just covered a minute ago in terms of what you have seen in the enterprise category, the enterprise area is a place where we have continued to innovate and invest over the past two years.

We have invested against our core products with a clear eye on leadership and future growth.

And I think you have seen that both in terms of investment against core editorial products, and also investment in terms of new products and innovation.

Being a core editorial product, editorial is a really key underpinning and quality of editorial and quality of journalism it's one of the things that really underpins our brands, and I think CNN News.com is a really good example of our commitment toward high quality editorial and editorial excellence.

Last month, the month of March, News.com was awarded 10 separate prizes or awards from different both online and offline journalism organizations, and I think it really speaks to the quality of that product and our commitment to high quality editorial throughout our organization.

The second thing I want to highlight is actually we launched ZD Net in the beginning of the first quarter and there is a couple of things that were interesting and kind of new things that we introduced as part of that re-launch.

One of them was a product called IT Priorities, and with IT Priorities, we actually took what has been the classic publishing model, which is really a broadcast model, and we flipped it on its head, so we flipped it and really made is much more of a pull model and made it more reflective of what users want, and what users are interested in.

So as part of IT priorities, we look at what business-decision makers in the technology category are looking at now, what they're looking at for 12 months on and what they're looking for 24 months out, and then we are able to make sure editorial matches up with what people want, and provide appropriate levels of depth and information as part of that.

And it has allowed us to do a much better job of tuning our product and getting much closer to the customer.

And I think that is great.

And it's really provided extraordinary relevancy toward the user base, and so I think it's been a great win from a product standpoint, but it'a also had a real benefit, which is it's a lot of supplied insight to marketers on what is on the mind of buyers, what are they thinking about and over what time frame are they thinking about it.

And that has been a big win and that has changed the whole scope of what our dialogue is now with enterprise clients, and it's allowed us to create a broader model and a broader story.

So I think that's been a really positive innovation and introduction for us.

As part of that and as part of the ZD Net launch we also introduced a series of integrated marketing programs, and we called them power centers.

And within the commerce base we have done a lot of integrated marketing programs like the Dell aisles, like the Gateway aisles, like the HP aisles.

What this does it brings that same type of model to the enterprise and it's allowed marketers like Microsoft, IBM and (inaudible) base to put content that is relevant from each of the vendors and match it up deep within our site with what is relevant to users at that point.

And I think it is a very powerful model in the use of marketing as a deep, rich, relevancy vehicle for users, and so I think we have been there.

That has been a real positive thing and we have seen a really nice embrace of that within the enterprise model.

Two other business units that I think are worth just touching on, both commerce and download, which have really been stalwarts for us over time, they're clearly important parts of our business, and I would just say overall they continue to perform on plan.

We've been very encouraged by what we saw in the first quarter.

We're encouraged with what we see looking out for the rest of the year.

So I'd say overall, you know, we feel very good on both commerce and download.

Gamespot has also been a real bright spot.

I think they have shown extraordinary industry leadership in terms of their ability to really make a difference and be relevant to what is, we would all agree a vibrant category for both users and marketers.

At the same time they're seeing real traction from both in advertising sales and also from a paying subscription model.

So I think that has been also really encouraging.

International, when you think about international it's worth actually breaking into two buckets because the two buckets are different.

One is Asia, and Asia you know continues to perform on-plan.

We saw a seasonally, you know, weak quarter actually more seasonally weak than what you would normally see in the U.S. due to Chinese New Year, but it was expected and I think we remain encouraged by what we see in Asia.

I think one just question mark that we have to put out there is what is the potential impact of SARS can be on that business.

I think it's too early to know, but I think it is an appropriate question mark.

Europe, we've made some small acquisitions in the U.K.

We made an acquisition of Silicone.com in the fall in a small events company in the first quarter, and we saw a nice quarter.

And I think we're really seeing benefit of gaining critical mass in the U.K. and I think we have a good team that is really I think, you know, hitting on all cylinders there.

Consistent with what we said in the fourth quarter, France and Germany both remain challenging markets.

It's not it has nothing to do with the execution.

I think the teams have done a good job of innovating and moving those businesses forward.

Both of those economies are just economies where we have seen a fair amount of challenge and so they continue to be places where we're putting effort and making sure that we're being very diligent about it advancing those business models.

Then the final business unit that I want to touch is really Channel and you know I think what you would say on Channel is we continue to sign up those licenses which Doug covered in (inaudible) and it's really going according to plan, and so we're seeing, you know, I think kind of a steady increase and steady growth there, you know, according to what we expected.

So in conclusion, as I said at the beginning of the call, in the context of a foundation year this was a very positive step and I think a very good quarter.

We continue to aggressively manage our business.

We remain focused on positioning ourselves for growth and profitability.

We saw some modest growth in the first quarter and I think that was a real positive, one that is very encouraging for us and gives us good confidence that, you know, I think where we have started to get the business heading in the right direction.

We remain positioned for delivery of operating income before depreciation and amortization between zero and $5 million for2003, which includes $7 to $9 million of realignment charges which occur in the first half of the year, and we have continued to invest against our business and to continue to innovate focused on delivering value to our customers and delivering value to our shareholders.

And with that I would like to go ahead and open it up for questions.

At this time I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q and A roster.

Your first question comes from Goldman Sachs.

Actually it's Eric Handler (ph) in for Anthony.

No do Just a quick question, with your top 100 advertisers, the bellwethers, you know, looking like they're coming back in the market, how is that affecting pricing of the advertising and also can you make a little distinction between the growth, rate of growth and pay per search compared to the rate of growth just traditional regular advertising?))

Okay.

I'd say an overall affect on pricing, we've actually done in the last six months the sales team has actually done a really good job of changing the way we package both our commerce inventory and our enterprise inventory.

I think they have done a really nice job of how do they create different tiers and some sense of, you know, restricted supply in different markets.

And I think that has been a really positive impact.

It's allowed us, in fact, to maintain price levels over time and so we have been, I think, very pleased with what we have seen in our ability to, you know, maintain price and also, you know, as we look forward to hopefully grow price.

With respect to kind of the search category, as a content provider, search is going to be a much less meaningful part of our business.

We do, you know, we clearly have a relationship with lots of different search providers and it's something we look for all sorts of opportunities on adding incremental revenue, but I think at the same time what we recognize is the real benefit out of content environments is the fact that you have the ability to create demand, create awareness and to get people involved in the consideration process, and, you know, we're very encouraged in what we're seeing in terms of kind of broader adoption of that theme with marketers and our ability to, you know, in some ways look at searches, you know, the Yellow Pages, and in these environments as a way to really influence overall kind of buying decisions much earlier in the process where you have a chance to do it with greater efficacy.

Thank you.

Your next question comes Smith Barney.

Hi, it's actually Bill Morrison (ph).

I was wondering if you could kind of comment a little bit on going back to your discussion about the split kind of between consumer- and enterprise-driven ad revs, and if you can maybe give us a sense of what percentage roughly of your advertising revenues are coming from the consumer segment versus the enterprise segment, and maybe, you know, what kind of different growth rates you're seeing in those two segments?

You know, I'm not going to give exact percentages, but I would say they're both significant.

You know, one is not orders of magnitude larger than the other so think of them as pretty, not exactly even but they're both, you know, close to the same size.

And I would say that what we have seen is we have seen a lot more pressure over time on the enterprise side.

I mean, that is really over the last two years where we have seen, you know, real pressure and as I mention in my talking points, there is a lot of things going on in the enterprise category right now and it's been, you know, businesses have been much more tighter with the dollar than consumers have.

And so we have seen a lot more over the last two years that is where we have seen a lot more contraction in general.

I would say what is good is we have made some real advances from a product side in terms of how do we address business audiences.

I think the IT priorities product is one that we're really excited about and it's really changing the tenor of the discussions we're having with enterprise accounts.

So there is a lot of positive stuff and, you know, we view that as a real big opportunity as that market begins to strengthen and come back over time.

The other thing that is just worth pointing out is, you know, CE remains a big opportunity for us and really within the, within the consumer space.

You know, we have done a really good job, you know, not only being able to get what you think of as kind of transactional lead-related dollars within the traditional tax base, but also manufacture dollars.

I think we probably better than any one have really focused on how you get manufacture and transaction dollars, and what I think is really exciting is, you know, we look and we have enormous amounts of activity within what you'd think of was the broad-based consumer electronics space, but we have orders of magnitude less spending by participating within that space.

And they to date have been much more reliant on what they think of as traditional offline spending.

So in a funny way online when somebody comes to a buying guide to buy a product in second quarter, they're there to buy a product and most of the consumer electronics players are still geared to a market only in the fourth quarter and that is when I market and I market to support foot traffic, and so, you know, we have had big traction in just getting CCE manufactures to look at year-long contracts and acknowledging the fact that people are buying all year-round.

And so we're very encouraged both in terms of our ability to get CE manufactures and retailers to spend more dollars.

We're also really encouraged just as a way that content topics for us, these are going to be, these convergence products more complicated and it's reaching a group of people that in many ways is less attuned to how to set things up and what to look at, and that is a great opportunity for content providers like ourselves.

Thanks a lot.

Your next question comes from the line of Sherry Linwith Thomas Weisel Partners.

Hi, great quarter.

Congratulations.

I just had a couple of questions.

The first one, I was wondering if you could help us break out your adding commerce revenue just between traditional advertising, the lead business and search and white paper?

And the second question has to do with given the state of technology market we're just curious whether you had ever considered taking advantage of your high quality demographics to approach a wider or broader set of advertisers?

And the last question is just about taxes, whether we notice that you're not paying taxes this quarter and if you anticipate paying them in the future.

Okay, on question one which is the break-out of adding commerces, I think Doug mentioned, you know, we have combined those two in terms of the way we're reporting going forward, and one of the big reasons is we have a bunch of our big partners who spend media dollars an spend lead dollars and they, some want to skew pricing so it over weights media and some want to overweight leads, and I think it creates less elevancy, less accuracy in terms of the way it reports.

So the numbers over time began to get kind of grayer and grayer, and I think we thing it is not as accurate for us to try to differentiate between the two.

So we actually combined them and I think in some ways, you know, it provides more accurate information and more insight into what we're doing.

In terms of looking at state of the tech market and what we're doing in terms of what you think of as non-tech advertisers, we have certainly reached out in different places and you know you have seen us, you know, get some auto advertisers and, you know, some different places where you think of as more traditional high-end audience marketers.

And so we have had some success there.

But at the same time, I would argue one of the reasons we have been able to charge, you know, and maintain high rates during the past three or four years is really the fact that we create these very unique environments that involve kind of, you know, the right audience in the buying process as they get information about, you know, products and topical information and so it ends up from a dollar standpoint being a greater value to people that kind of have direct products they sell into that.

So we're going to probably not do as well as what you think as the non-traditional more consumer base.

I think they're going to be unwilling to pay our prices in a lot of areas, though we've certainly in places like Gamespot, and other things looked to do more there.

I'll let Doug go into that.

Yes, and on the taxes, we're not currently a taxpayer.

We do have NOLs I think at year-end of 2002 around the $80 million level, so our future tax payments are just oriented around some state and local taxes.

But not federal income taxes for the next couple of years.

And just to reiterate, that the refund that we're receiving in Q2 dates back to when we were paying taxes in 1999, we're carrying back our losses to recapture those taxes paid.

Great, thanks.

Your next question comes from Fanay Fariq (ph) with Q Investments (ph).

Hi, thank you.

Just a few quick questions.

I missed, what the revenue from Gateway?

And the other questions were, where are all the cost-cutting coming from?

Is it from SG&A sales marketing or the cause line, and in terms of the accruals, what is the accrual remaining to be paid out and if you can talk in this same level how much severance/lease payments went out in cash, in the form of cash, in the first quarter?

And then if you can talk about the restricted cash and the zip(inaudible) guarantee that you have.))

Sure.

Do you want to -- I mean, the Gateway was just to reiterate, it was 16% of our total revenue in the first quarter.

And, you know, it's predominantly, it was an increase from 10% compared to the fourth quarter primarily driven by our custom publishing programs that we have with them.

As far as our cost --.

I'll do the cost.

You know, I think we've taken a very methodical approach over the last two years we have really gone in in certain areas, we have cut businesses like radio that was cut in the first quarter, in certain places we have been able to consolidate platforms.

I think we have taken a very methodical approach.

And our tack has really been how do we take cost out of the system in a way that doesn't detract from our ability to, you know, maintain overall revenue capacity, and I think that has been one of the big positives.

I think you can see that as an example, News.com, you know, winning 10 awards during the month of March.

I think we have been able to maintain, but you can see that come out of all places and I think we have looked at what we can do in terms of lowering technology costs, SG&A costs, product costs, you know, what we have been able to do on the real estate side.

I think we have been very aggressive every place we can.

I would say as well as the realignment cost that we had in Q1, the $5.4 million, those individual, the costs are actually within a different cost component of cost of revenue, sales and marketing and G&A.

That is where those are being embedded.

As far as the accruals go, we don't have any unusual accruals related to our severance in our radio termination costs.

We have pretty well paid those out during the first quarter.

You mean the charge you took you already paid that $5.4 million out?

Yes.

Okay.

And then as far as restricted cash, yeah, it remains what it has been over the last year or two which is primarily related to a lease deposit that we have on our New York facility and, you know, we hope to perhaps unlock that facility as we go forward but it should be kind of a steady-state amount.

Okay.

Thank you.

Your next question comes from the line of David Marsh (ph) with Friedman, Billings, Ramsey.

Hi, guys.

Just to follow up on the previous caller's question.

Could you just give us a little bit more, a little bit more specific breakdown of exactly how the $5.4 million hit the various expense lines during the quarter and from that then give us some sense of what a good run rate for G&A expenses would be for the remainder of the year?

And then moving beyond that, it looks like the Gamespot has been really very successful having just launched it a couple of quarters ago.

Give us a sense of what the subscriber base did quarter on quarter and kind of what your general expectations are for that business during the course of this yea?.

Okay.

On the breakdown of the $5.4 as mentioned it is within cost revenue sales and marking G&A to $5.4 million.

Don't have exact numbers in front of me, but those will be in our 10-Q when we file it, and it's basically an even amount in those three categories, so as far as if you look as mentioned our total Q1 expenses were $64 million in Q1 and that included the $5.4 of the severance and the real estate costs.

So our expenses were less than that excluding those two items.

On the Gamespot question I think you're right in saying that Games.dot. has done a really good job and we're very encouraged by what we see.

I think I can appropriately say on a relatively basis it is one of the smaller units that we have and, you know, I think they have got, they have done enormously, you know, well in the last year.

I think we have seen nice growth, overall subscriber base side.

I think we have seen nice growth from an advertisers side.

I think this is going to be a very telling quarter because in this quarter we start to come up on where we see in terms of annual renewals so, you know, this product launch toward the end of the second quarter we're still going to start to see, you know, in terms of how we do with taking yearly subscribers an turning them over for another year.

And so I think we'll be able to tell you a lot more at the end of the second quarter, but we're encouraged.

We think it is a nice business and I think it will continue to grow and be an even better business.

And are you still doing generally a 1999 annual subscription?

We actually took the price up in August of last year to $24.95.

So it is $24.95 on an annual and $4.95 on a monthly and I encourage everybody on the call if you don't have a subscription to get a subscription.

Every little bit helps.

Thanks, guys.

Your next question comes from Justin Leu (ph) with Zazo Associates (ph).

Hi.

A question on the work (inaudible) are these DSO sustainable for the future or do you expect them to revert to prior quarter numbers?

I'll try and repeat your question because you were breaking up a bit.

I think you're asking our DSOs, which were 69 days at March 31, is that a sustainable level?

Yes.

I would say generally we think, yes.

Okay.

And with respect to the potential realignment cost next quarter, does that relate to the restricted cash, the lease where the restricted cash is being reserved for?

No, I think I think as Doug mentioned, you know, we have really I think are making an effort to really try to clean up overall, you know, kind of real estate leases , and one of the bad news is that acquisitions over time in consolidation of space we have ended up with excess leases in place and we're making a real concerted effort to get all of those things resolved, and so, you know, I think it's early because we're still in kind of early negotiations and I don't think we're in a position where we can say, you know, we'll definitely be able to get them revolved or not but I would say Doug and his team are making a real concerted effort around that.

That can be a very significant portion.

Okay.

And last question, with respect to the revenue mix between Internet and publishing revenue, is this kind of the level that, the mix that we should expect over the course of the year?

I mean obviously publishing being increasing as a percentage?

I think it's probably flat to, you know, publishing over time.

I think flat to potentially down a little bit as an overall percentage.

You know, a lot depends on kind of, you know, what we do as Doug mentioned in his talking points, it's a lot of the print side doesn't have the same margin characteristics that we see on the online side.

So as you move dollars around it certainly doesn't have the same impact on (inaudible), and so you can look at publishing or even you can look at the Gateway relationship, you know, the actual operating income or, that is driven by those is significantly less than what you would see in terms of the percentage of revenue.

So, you know, I think we think it's probably steady to down a little bit over the next three quarters.))

Great.

Thank you.

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

At this time, there are no further questions.

Well, good.

Thank you.

You know, I think we're, you know, pleased with the quarter and we look forward to speaking to you 90 days from now so thank you.

This concludes today's conference.

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