Paramount Global (PARA) 2003 Q3 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the CNET third quarter financial results 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 1 on your telephone keypad.

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

Thank you.

I will now turn the conference over to Cammeron Finnigan, Director of Investor Relations.

You may begin your conference.

Thank you.

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 forward-looking statements including 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 our third quarter news announcement as well as in the company's Securities and Exchange Commission filings including its 10-K for the year 2002 and its 10-Q for the quarter ended June 30, 2003 which can been obtained from the SECs 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 fourth quarter ending December 31st.

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.

If we decide to update our financial guidance, we will disseminate the information either by news release or other similar communication methods that meets regulation FD guidelines.

Last but not least you can find a reconciliation of the non-GAAP financial measures that we use in our news release and on this call to GAAP Financials on the last page of today's news announcement as well at our Investor Relations Web site, IR.CNET.com.

Hosting today's call are Shelby Bonnie, CNET's Chairman and Chief Executive Officer and Doug Woodrum our Chief Financial Officer.

Now let me turn the call over to Shelby.

Thanks, Cammeron, and thank you for joining us.

This was another solid quarter for CNET Networks.

At the beginning of the year I spoke about this year being a foundation year and this quarter was another positive step in delivering on that.

Though the technology sector remains challenged, our business continues to improve.

We saw our third consecutive quarter of year-over-year revenue growth with revenues increasing 3% in the third quarter of this year versus the third quarter of last year.

If you look at the components of revenue, we continue to see growth in the core Internet businesses.

Revenue was up 10% from the third quarter of 2002, which compared to up 6% second quarter versus second quarter.

At print, at the same time, decreased $2.5 million or 18% in the third quarter versus last year primarily due to reduced custom publishing revenue.

Operating income before depreciation, amortization was $1 million and our net loss was a loss of 4 cents per share, which was ahead of our guidance of a 6 cent to 7 cent loss for the quarter.

As we said last quarter, we remain excited about the opportunities ahead.

The long-term trends are positive for content publishers in general.

We have a leadership position in three categories, personal technology, business technology and games and entertainment.

Our products continue to be recognized for editorial leadership and we enter a period where we will accelerate our focus on product improvements.

Over the past year we have seen stabilization in our business from a financial standpoint and early signs of growth, which is quite encouraging.

We completed the final work on all the systems integration for ZDNet, mySimon and TechRepublic.

This was a significant event.

It provides us the opportunity to increase the rate of innovation, and to increase leverage into our model.

We are very well positioned now to scale our business profitably.

And we are showing that in our financial results.

With that, let me turn it over to Doug to cover the financial highlights and after that I will provide more insight into the operating results and outlook.

Thanks, Shelby.

As Shelby mentioned, the third quarter results illustrate the company's continued ability to grow revenues while effectively managing costs and take advantage of leveraged economics.

Third quarter revenues of $57.7 million were up 3% over last year.

This is in line with our revenue guidance of between 57 and $59 million for the quarter.

Looking at our primary components of revenue, Internet and publishing.

During the third quarter, Internet revenues of $46.1 million increased 10% compared to last year, which compares favorably to a 6% growth rate generated in Q2.

And as Shelby mentioned, publishing revenues of $11.6 million were down $2.5 million primarily due to lower custom publishing revenue.

Consistent with our expectations, the trend of higher Internet revenues and lower publishing revenues may continue.

Moving down the P&L and turning to operating expenses and income, cash expenses of $56.7 million were down $3 million, or 5% from the year ago quarter, which represents solid execution during the quarter and productivity improvements.

And a combination of higher revenues and lower costs during the third quarter resulted in operating income before depreciation and amortization of $1 million.

A turnaround of $4.5 million compared to last year's operating loss of $3.5 million before depreciation, amortization and asset impairment.

We continue to place a high priority and focus on delivering a significant amount of operating income growth from every dollar of revenue growth.

Our net loss for the third quarter equaled $5.8 million, or 4 cents per share, which was 2 cents better than our guidance of between a 6 cent and 7 cent loss per share.

During the third quarter, our 100 largest customers represented approximately 58% of total revenue.

And our largest customer, Gateway, represented approximately 6% of revenue in the quarter, down from 10% of revenue in Q2.

This reduction comes mostly from lower custom publishing revenues.

Turning to the balance sheet, our cash position at the end of the third quarter equaled $137.6 million, which was a decrease of $11 million during the quarter and the majority of the decrease, or approximately $8 million, is the result of completing lease buyouts on two of our abandoned real estate facilities which were accrued in prior quarters.

We believe our remaining accrual of approximately $4.5 million is sufficient to cover our remaining obligations.

In addition we paid out approximately $2 million of severance costs in July that were accrued in Q2.

Our day sales outstanding equaled 64 as of September 30th an improvement compared to 67 as of June 30th and 69 a year ago.

Capital expenditures in the third quarter came in at $1.6 million and now total $7.8 million year-to-date through September.

Capital expenditures in Q3 were approximately $1 million less than anticipated because some equipment ordered in September wasn't received until October.

As a result, capital expenditures in the fourth quarter will be in the range of 2.5 to $3.5 million which will bring full year 2003 capital expenditures below our original guidance of $12 million.

Our total debt remains at approximately $118 million of which $114 million is our 5% convertible debt due March, 2006.

Turning to guidance.

For the fourth quarter of 2003 we anticipate revenues of between 68 and $71 million.

Operating income before depreciation and amortization between 10.5 million and $12 million resulting in a profit margin of 14 to 16%.

Our initial 2004 guidance, realizing that we are early in the budgeting process is based on continued growth from Internet revenues with the possibility of flat to slightly lower revenues from publishing.

The guidance also reflects an increase in profits and an increase in profit margins and represents that approximately 60 to 65 cents of profit can be generated from each $1 of revenue increase.

With that, the full year 2004 guidance is as follows: With total revenues of between 265 and $275 million and operating income before depreciation and amortization of between 27 and $30 million.

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

Thanks, Doug.

As I mentioned at the beginning, this was another solid quarter for us.

Let me spend a moment on CNET Networks overall.

As a company we continue to strengthen our position of leadership in the interactive content media.

We have over 65 million unique users per month, we have significant scale from both a user and platform perspective.

Our focus is really on three primary content categories, personal technology, business technology and games and entertainment.

Editorial is a key differentiator and a competitive tool for us and is an area where we are recognized as a leader.

As a content publisher our core competency is the ability to create, manage and monetize interactive content.

We also have products like print, data, research and events to compliment and garner leverage from our core position in the interactive space.

We manage diverse brands against diverse audiences.

We like the interactive content medium and believe we are good at it.

Let me provide a little color on the financial results.

As both Doug and I mentioned we saw 3% growth in overall revenues versus the third quarter of last year in this quarter and 10% growth in Internet revenues versus the same quarter last year.

With respect to the overall revenue environment, the long-term trends in Internet advertising remain positive.

We have seen a bifurcation in the market between impression-based and performance-based advertising.

The good news is that both are working.

On the impression side, there continues to be great industry research to support the overall efficacy of the medium.

As a company, we have also introduced new ad types for marketers in this quarter.

You saw the redesign of CNET news.com and saw new ad types like Archways and [PRESTICIALS] that have really resonated well with the marketers around that category.

We also launched a series of Gamespot launch units that have also been very well received by game publishers.

On the performance side we have integrated our own leads products, commerce leagues, white paper and software downloads and Webcast sign ups and have integrated third party search key words as well.

We've been able to use Search.com in our meta search capabilities to optimize our offerings in combination with outside offerings.

Overall, looking at the ad market, it is still mixed with respect to our clients, specifically.

There are some categories that are encouraging yet we still see a lack of growth in enterprise and PC categories.

Costs continue to be an area of focus and we've shown an ability to translate revenue wins into bottom line wins.

As Doug mentioned our operating income before depreciation and amortization was approximately $1 million which was a nice improvement from last year and also showed continued improvement over 2003 with second quarter being better than first quarter and now third quarter better than second quarter.

Let me provide some highlights with respect to kind of specific categories.

As I mentioned, we have three major categories on which we focus: personal technology, business technology and games and entertainment.

We have a number of different products and businesses that address these categories.

Personal technology is the most significant of the categories we address.

It is anchored by CNET.com.

The service is focused on helping people make decisions and we add value by using category expertise and edit to make those decisions easier and better for users.

This category had expanded over time as it has moved from traditional tech products like personal computers and software to encompass digital cameras, MP3 players, and now TVs and stereos.

As that transition has happened we continued to expand our editorial coverage.

We've extended it from a product perspective, from a category perspective and also with the direction of covering more life-style implications for these products.

Our product coverage by the end of this year will be on over 12,000 products.

This is a mix of lab-based product reviews, first takes and product highlights.

We've also leveraged our catalog expertise from our data business to produce better, more accurate product information against products within our catalog.

Our team in Switzerland and Moscow have provided a very effective platform on which we can use a foundation for everything we do in technology and consumer electronics.

At the beginning of October we launched CNET Digital Living which is a notable new product for us.

It is focused on the life-style aspects of technology and consumer electronics.

How do those products integrate together?

What are the benefits?

How does it work in real life?

Why should I want this?

Is it cool?

It is a real example of us leveraging editorial expertise with new technologies to create a user experience that could only be created by CNET.

It takes the whole CE category, which we've talked a lot about and makes it more meaningful and accessible to a broader audience.

It launched with a highly respected C manufacturer, Sony as its principal sponsor.

So far the responses we've heard from both users and marketers has been very encouraging.

The launch of the new commerce platform has given has a lot of tools and features that make for a better user experience and a more optimized revenue model.

A lot of new enhancements came with the launch of the new system.

Better scalable tools for producing editorial, improved harvesting and feed management and an ability to aggressively scale our merchant services and strong features in the price comparison area.

We believe that our platform allows us to be best of breed in price comparison.

Price is a piece of the puzzle but a small part of the puzzle.

Our strategic focus has really been on the value add part of the buying process where we can differentiate through category expertise and lab-based non-biased reviews.

Editorial is also critical to create an appropriate environment that will attract manufacturers spending in addition to retail spending.

One of the other benefits we receive from the new platform is our ability to scale horizontally into more categories other than technology and consumer electronic through the mySimon brand.

This can be an interesting growth opportunity for us over time.

As we said last quarter, we will support these efforts on both CNET.com and mySimon within an increased level of marketing in the third quarter and fourth quarter of this year which encompasses the guidance that has provided by Doug.

A couple of other areas worth noting in personal technology, Download.com continues to roll out editorial and should be at 2,000 reviews by year end of downloadable software products and the download paper download program is on schedule to cover at least 50% of categories by the end of the year.

As Doug mentioned, the weakness in print is mostly attributable to declines in custom publishing.

The computer shopper team has done an admirable job of maintaining share in what has been a weak print market over the last year.

With respect to business technology, business technology has been anchored by CNET News.com, ZDNet and TechRepublic.

These services focus on providing information to help people at work and for work.

We've seen over the last nine months continual improvement against these products.

You saw a redesign of News.com, you've also seen enhancements to ZDNet and other services.

We've also seen some real strength from a user perspective with respect to our introduction of white papers and Web cast over the last year and I think we're seeing real traction in those areas.

One of the interesting parts about business technology is that we're beginning to touch a broader business audience than the traditional IS IT professional.

We have followed technology into the organization and are looking for more ways to build upon that foundation.

If you actually look at some of the demo information that we get back for the Web casts that we provided, we've seen as many as 1 in 5 of our viewers are from in CXO positions within an organization.

Which really speaks again to not only the quality of professional that we are getting in an organization, but also to the fact that we are touching business leaders other than just technology professionals.

The third category is games and entertainment which is really anchored by GameSpot.

We're recognized as a leader in this area.

We have over 11.5 million unique users per month that go to GameSpot, GameFacts and GameRankings and that's really been because of the high quality products that those teams have produced.

Strong editorial, good coverage and good functionality for our users.

We have also seen real strength and momentum from a sales perspective in the last year.

This is a great example of a growth area for us.

Overall, the game industry revenue in 2002 was $10.3 billion which compared to Hollywood box office of $9.4 billion.

There is no question that online provides a user experience that cannot be replicated anywhere else.

The ability to include screen shots, movies, forums and other forms of interactivity.

This has also given us an avenue into non-endemic advertisers because of both the attractiveness of the demo and difficulty of reaching them in other mediums.

GameTracks is a service, a business intelligence product that was launched also in the games group and has continued to provide traction with marketers and real intelligence into what our users are doing and how they're making decisions around products.

I 'd say overall this category is an area where we will continue to invest as a company.

I've really laid out the three categories as one way to look at our business.

Another way to look at our business is the distinction between domestic and international.

I thought I might just spend a moment on international.

Over the last year we have strengthened product offerings across both Europe and Asia, particularly in the United Kingdom, China and Korea.

We saw good growth in the third quarter organically and also from newer businesses in both Korea and Japan.

The international market with respect to interactive content space is years behind where we are in the U.S.

So we think as we look forward, a lot of the things we're doing in the U.S. will have real applicability from a product standpoint and from a revenue standpoint outside of the U.S and we will be able to build upon the strength that we've seen here.

Let me spend some time looking at outlook.

As Doug mentioned, we're providing guidance of between 68 to $71 million in revenue in the fourth quarter and between 10.5 and $12 million in operating income before depreciation and amortization in the fourth quarter.

This clearly reflects the fourth quarter being a stronger quarter for us from a seasonality standpoint but I think also speaks to our ability to translate growth and revenues onto improvements and income at the bottom line.

As we look forward into 2004, as Doug mentioned, it's still early.

We are midstream in the budgeting process and therefore guidance is still reflective of an early snapshot.

We are guiding to 265 to $275 million in revenues in 2004 and operating income before depreciation and amortization of 27 to $30 million.

Both of these reflect an assumption that you will not see significant change in the current outlook for either the economy or for the technology sector, as you compare 2004 to 2003 which we think is the prudent assumption at this time.

At the beginning of 2003, we described that 2003 would be a foundation year for us.

And in 2004 we will very much be focusing on how do we grow both revenues and profitability and especially how do we translate growth in revenues to disproportionate increases and growth in cash flow.

I would point out that two of the areas that I talked about on the call, the consumer electronic space and the games categories, are categories that you wouldn't say are traditional ways that you might view, as kind of technology products.

I believe that this really speaks to our ability to follow users and focus on areas where we can utilize our skills around editorial and our Web publishing skills to be a real leader.

I think both of those are examples of that.

We will also look for ways over time to deploy capital to further accelerate growth in an opportunistic basis.

We have done a great deal of hard work over the past two years to make our organization and systems efficient and scalable.

I do believe this means we are structured to translate revenue growth into higher levels of profit and expanding margins.

In conclusion, overall, this was another good quarter for us.

We see continued strength on the Internet advertising side and ability to drop revenue improvements to the bottom line.

We have completed our infrastructure integration, are now in a position to put a greater percentage of resources against driving growth and increasing momentum.

Finally, we will continue to focus on our strengths to grow our business and produce higher rates of profitability.

That wraps up the formal comments.

We'd like to turn it over to the operator so that we can open it up for questions.

Thank you.

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&A roster.

Your first question comes from Anthony Noto with Goldman Sachs.

Actually, it's Eric Handler in for Anthony.

Two quick questions.

First, in the past couple of quarters, especially last quarter we've seen Hewlett Packard, Dell and Gateway all who have advertised with you guys in the past, expand or launch their new consumer electronics initiative.

Are these guys continuing to advertise you for their consumer electronics businesses going forward?

And then secondly with, you know, granted the scene at Digital Living is a new product, did you plan on making this like one company specific as you're doing with Sony or what are the plans to evolve it so you can add a greater number of consumer electronic advertisers?

Well, I think the first thing I'd say about the whole consumer electronics space, it is a space that is different, it has different characteristics than the traditional PC space.

So how you cover it needs to change, it's less of a feeds and speeds and more of how you do think about life-style, and different uses and how those products kind of integrate into your life.

That's when you look at the new content types that we launched this quarter with the launch of CNET Digital Living.

I think that really speaks to our commitment and investment against the CE category on top of what we are doing with respect to reviews of TV products and other things within that overall category.

I think we're very much positioning ourselves to continue to take share and get greater shares of budget as people really begin to shift.

I mean, a lot of the CE dollars have been spent in other mediums and have been spent in support of traditional retail sales so the Best Buys and the Circuit Cities of the world.

And so part of it is an education on how they should think differently about distribution channels and how they influence buyers.

I'd say, especially with the launch of CNET Digital Living we're starting to really make some strides in our ability to sell in not only traditional CE players but what you are seeing is in the investment on some of the PC players that are moving into the market.

But have you seen, clarification, the traditional advertisers that you have dealt with the HPs the Dells and the Gateways?

Why didn't you see them?

I mean it's specific to people like HP and Dell.

I mean, you see announcements?

Yes.

You haven't seen a lot of product out yet so I think we're still early from their perspective.

Clearly with the relationship like Gateway we've been able to expand into plasmas and other things and that's been an important area for us.

So I think we have good relationships with all those players and will continue to be able to, as they move their businesses, we hope we will be able to continue to support them as I believe they understand how to market in the media.

Thank you.

Thank you.

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

Good afternoon.

Question on the '04 guidance.

Obviously it is early and lot of ad budgets are being set in November.

But just to be clear, it sounds like you're assuming the same fairly sluggish tech environment that we've seen this year, as you think about your plans for next year, is that what you said, did I hear that right?

The same back drop.

Are you assuming the back drop that we're in now which presumably is a little bit better than the first half of the year?

Yes, I think at this point it's prudent not to change that perspective.

You know, I think we would rather go in and assume that we're going to have continued kind of levels.

I think the two big swing areas are really going to be what happens in the enterprise category and what happens in the PC category.

I think you would argue on the PC category that that category is at a more mature stage.

So a lot has to do with how we think about those categories.

I think the good news is as Doug and I both mentioned, I think we've done a lot to really build in leverage economics in a way that we have an ability to capture, if revenues end up being better than, you know, we hope, I think we have an ability to disproportionately capture dollars as profit out of that.

Especially given the last two and a half years.

I think the prudent and correct thing to do is to not have us spend a lot of time trying to make assumptions of how we call economies and sectors.

Right, I think that is prudent.

One other question.

You mentioned there is a bifurcation obviously in the ad business with performance-based versus impression-based.

Maybe you could just talk about, you said they are both growing but I'm curious, is one growing faster than the other?

I guess the performance-based being the leads-based business, how is that fairing?

Well, it's interesting.

The performance-based is actually an area that whether it is leads or other things, was an early participant in.

It's gotten a lot more sophisticated and we've gotten a lot more sophisticated where we take, you know, we've built an engine where we take our own commerce leads, all the different offerings that we can do on a performance basis, integrate in an outside provider so as most of you know, we work with lots of different providers within the key word space.

So we have an ability really to smartly optimize and our pages, as we really think about optimizing kind of a revenue per page basis.

You know, it's interesting because that's the space that's clearly gotten a lot of attention and I think the commitment you've seen Yahoo make to it and the growth you've seen out of Yahoo, I mean, out of Google, it's clearly been an area of importance.

I think at the same time we are seeing really good traction within the broader industry, in how people think about the opportunity to brand and create a persistent presence on more of an impression-based side.

So, you know, I think as you look from a macro point, you'd say probably say the performance stuff in the last year has probably been growing faster but actually I think when you look at size of ultimate dollars and the opportunity is looking out five years from now, I think that there's going to be a lot more opportunity on the branding side than what you see right now in the business.

Great, thanks.

Thank you.

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

Again we'll pause for just a moment to compile the Q&A roster.

Your next question comes from Lannie Baker with Smith Barney.

It is Bill Morrison for Lannie.

I kind of jumped in the middle of the call so I might have missed this but could you talk a little about what percent of your revenues were represented by your top 100 advertisers?

I think you provided that number in the past.

Second question, just curious, when we look at ComScore or Net Ratings it looks to us like you guys really dominate the tech space.

I am just curious how you guys think about the market turns around who you're competing with for your customer's ad dollars?

Thanks.

Do you want to go with question one?

Yes, the revenue that we generated from our top 100 customers was 58% in the third quarter.

When you look from a competitive I think the right way is actually to think about three really distinct categories.

We have what you think of as kind of the personal tech area, which I think you should take a broader definition of how you use the word technology in that.

That's grown to include things like consumer electronics and lots of other products and I think that over time will only continue to expand.

We have business technology, which is really more focused on providing information into the enterprise and then the games and entertainment area which really is focused primarily on the video game and PC game side.

I think a lot of where we're actually seeing the most competition is actually offline versus online.

I think we've done a really good job of creating leadership positions in each of those.

I think we provide, you know, produce really good products.

You take as an example, television, who else can you think about that is positioned anywhere to review and be an authority on televisions.

As you look right now and you say over the next 10 years there aren't going to be, 10 years from now, every one is going to have a form of flat panel TVs.

So we're going to turn over all the TVs in the U.S and people are probably going to spend more in the next 10 years on TVs than they spent in the prior 10 years.

So that could be a really good category for us.

We have leadership, I think we see, when we look at them is mostly how we get competition from offline, whether it's from in our case, mostly the magazine industry.

How we continue to move dollars from offline to online.

I think it is some of them it's going to take time.

We look at consumer electronic space, the users moved a long time ago.

You know, the way people get information about digital cameras and MP3 players and all those things, they moved a long time ago.

The manufacturer dollars still have not moved really of any size.

So we look at those.

It kind of brings back memory wise to some of the things we were saying about the PC industry 4 or 5 years ago.

We have seen the movie.

Thankfully we've also seen what the end of the movie begins to look like.

We like the position, we like the competitive position and think that over time the interactive content space will only get better in comparison to offline.

Great, that is really helpful.

One quick follow-up on the first question.

Do you see, the trend has kind of been the percent of top 100 advertisers has kind of been coming the last few quarters.

Do you see that trend kind of continuing over the next couple of quarters or do you think it stabilizes around, you know, in the kind of the mid-50s range?

Yes.

I would say, it's been relatively stable.

Actually, I think we talked about this a call or two ago.

I think we're actually better if it continues to, you know, if we continue to bring in a greater breadth of marketer.

So a lot of the stuff we are doing, in terms of different programs that we're providing are geared on how do we create more scalable frictionless ad products, so an example would be the paper download products as an opportunity for us to bring in more marketers against a product like Download.com.

I think there's a lot of benefit to having a broader set of marketers, and I think one of unfortunately the things that happened is the economy got worse during the last two years was really we saw a narrowing of participants and competitors and competition is good.

It's good for media, because people in the more competitive the environment is, the more need to spend against it.

We are encouraged actually to see that number go down over time.

Though at the same time I think we continue to be very proud of the strong relationships we have with the significant players in the industry.

Thanks a lot.

At this time, there are no further questions.

Are there any closing remarks?

Good.

Well, we want to thank everyone we know.

A lot of other calls and conflicts on this date and for that we apologize and probably some baseball game conflicts as well.

Thank you for your time.

We look forward to talking to you the next quarter.

Thank you for joining today's conference call.

You may now disconnect