Paramount Global (PARA) 2004 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the CNET first quarter financial results conference call. [Operator Instructions]

I would now like to turn the conference over to Miss Cammeron Finnegan, Director of Investor Relations.

Miss Finnegan you may begin your conference.

Thank you and good afternoon.

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 first quarter news announcement, as well in the company's Securities and Exchange Commission filings, including its 10K for the year 2003, which can be obtained from the SEC's website or directly from our investor relations department.

After this conference call, CNET Networks does not expect to provide further guidance until the release of our financial results for the second quarter ending June 30th, 2004.

Our company 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 communications methods that meet 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 as at our investor relations website, ir.cnet.com.

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

Now let me turn the call over to Shelby.

Thanks Cammeron, and thanks everyone for joining us.

Our first quarter results demonstrate a business that continues to gain strength.

We saw growth across the board in all our key metrics.

Revenues were up, profit margins were higher, and our unique users grew.

The fourth quarter has traditionally been a seasonally weak quarter so the strength we saw in this quarter provides a better indication of sustained improvement.

We are on track with more products, stronger brands, larger audiences with more revenue streams.

We are taking advantage of our leadership position and actively broadening our current products, audiences, and customer segments.

If we look at the top-line performance in the quarter, we saw total revenues of $63.4 million, which which was up 12% from the first quarter of 2003.

We continue to see growth in our core interactive business.

Revenue was up 32% from the first quarter of 2003.

Strength in interactive revenue was a result of a solid execution and growth in both marketing services and licensing fee and user revenue.

This was our 5th quarter in a row of accelerating revenue growth in interactive.

The significant growth in interactive revenues continues to illustrate our ability to capture more advertising dollars and proves the value of our content environments.

Print revenue was down from the year ago quarter as a result of lower custom publishing revenues and overall industry trends; however, we did see better than expected performance from some of our international publications.

Our model is set up to effectively scale and grow profitably.

Our top-line growth and minimal operating expense growth drove better than expected profit trends.

Operating income before depreciation and amortization was $2.4 million; net income was $2.9 million, or 2 cents per share, and net income in the first quarter was impacted by some one-time gains and charges that increase earnings per share by a net 4 cents.

Absent these factors, our net loss per share would have been a 2 cent loss.

The overall outlook for interactive content remains extremely attractive.

We have begun to see dollars move into the space, and we believe this area will sustain attractive, long-term growth rates over the next ten years.

Our focus is on providing leadership in interactive content to maximize our ability to capture these dollars.

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

Thank you, Shelby.

The first quarter results demonstrate continued growth, as mentioned, from our core interactive business; specifically, we saw revenue growth of 32% from interactive, and in addition, overall profit exceeded our expectations, accompanied by strong user trends during the quarter.

And as we look forward to the rest of 2004, we believe that CNET remains well-positioned to take advantage of the improving on-line advertising market from our existing content offerings, as well as new offerings such as Download.com music and MP3.com, both scheduled to launch during Q2.

And before I get into the financial highlights, let me review two changes that we've made to the financial attachments in today's press release.

First, we renamed our core revenue stream to Interactive revenue on our income statement.

And this change matches our goal to build the premiere global interactive content company as described in our 2003 annual report.

Interactive revenues are comprised of marketing services, and the licensing fees and user revenues.

The second change is we consolidated Channel Services financial results into the U.S.financial reporting segment, and this coincides with transitioning Channel Services personnel in Switzerland into the U.S.

As a result our financial segments are now U.S. and International which has not changed.

And now let's look at some of the top-line trends during the quarter.

First quarter revenues of $63.4 million, as mentioned, were up 12% over last year.

This is $1.4 million above the high-end of our guidance range, which was between 60 and $62 million, and these results include the contribution from EDventures PC Forum held in March.

But it's important to note that without the addition of PC Forum, both total revenues and operating income before depreciation and amortization exceeded our guidance.

Looking at our primary components of revenue -- interactive and publishing -- during the first quarter, the interactive revenues of $55.5 million increased to $13.5 million compared to last year.

And within interactive, the marketing services grew at a 34% clip during the quarter while licensing fees and user revenue increased 22%, largely due to the inclusion of PC Forum.

The increase in marketing services reflects growth from all of our content areas, personal technology, games and entertainment, and business technology both domestically and internationally, and also reflects growth from paid search.

Our publishing revenues of $7.9 million were down year-over-year, in-line with our expectations for the quarter due to lower custom publishing revenues of approximately $7 million.

And as we stated last quarter, we expect custom publishing revenue to continue to decline, and this trend is factored into our publishing revenue guidance for 2004.

Moving down the P&L to operating expenses and net income, cash operating expenses of $61 million were down $3 million, or 5%, from the year ago quarter, which represents another quarter of efficiencies and continued productivity improvements.

And the combination of higher revenues and continued cost improvement during the first quarter resulted in operating income before depreciation and amortization of $2.4 million which is above our guidance range -- which was break even to $1 million -- and above last year's operating loss before depreciation and amortization of $7.4 million.

And as stated earlier, both revenue and operating income before depreciation and amortization exceeded our Q1 guidance without contributions from the EDventure acquisition.

Net income for the first quarter equalled $2.9 million, or 2 cents per share, compared to a loss of $15.8 million , or an 11 cent per share loss in the year ago quarter.

And as Shelby described, impacting net income this quarter are two events that were not anticipated at the time of our January investor call: the first is a noncash depreciation charge of $3.5 million, partially offset by a noncash foreign exchange gain of $1.7 million, recorded in other income.

Both of these items are associated with revalued channel -- revaluing Channel Services real estate in Switzerland in conjunction with transitioning the majority of those jobs into the U.S. which will occur during Q2.

The second item is $8 million in gains from the sale of privately held investments.

And absent the impact of both the noncash depreciatation and foreign exchange charges and the gain on sale of investments, we would have reported a loss of 2 cents per share for the quarter, which is better than our guidance of a loss per share of 4 to 5 cents.

Turning to some nonfinancial metrics and user statistics, our unique users increased 27% year-over-year.

Paid leads are up 16% year-over-year and average daily page views were up 39%.

During the first quarter, our largest -- our 100 largest customers -- represented 58% of total revenue, which is similar to previous quarters.

And we continue to experience a high renewal rate from our top customers; 89% of our top-100 Q4 advertisers renewed with us in Q1.

In the first quarter, our largest customer was Google, which accounted for approximately 12% of total revenues, largely representing paid search as well as advertising for products such as Google's toolbar.

And as you may recall, Google was added as our primary paid search provider during Q4, which has resulted in consolidating a portion of our paid search activities.

Turning to the balance sheet, our cash position as of March 31st, equalled $149 million, which is an increase of $13 million compared to December 31st.

Day sales outstanding equalled 66 at the end of March, down from 67 at the end of December, and down from 69 the year ago.

Our capital expenditures in the first quarter came in at $3.3 million, was in line with our guidance of 3 to $3.5 million.

We continue to anticipate that our 2004 capital expenditures will be in the range of 12 to $13 million.

We expect that capital expenditures will be slightly higher in the first half compared to the second half, which is similar to last year.

And we anticipate Q2 capital expenditures to be in the range of 3.5 to $4 million and, as mentioned, to decline on a quarterly basis beginning in Q3.

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

Turning to guidance, today we are introducing guidance for the second quarter of 2004 as follows: total revenues of between 65.5 and $67.5 million.

This translates into interactive revenue of between 57 and $58.5 million, which is reflecting an increase over Q2 2003 of between 22 and 25%, and publishing revenues of between 8.5 and $9 million, reflecting the decline compared to Q2 last year due to a $3.5 million decline from custom publishing.

Operating income before depreciation and amortization of between 3.5 and $4.5 million for the second quarter.

And our full year, total revenue guidance of $270 to $280 million is being increased to total revenues of between 275 and $285 million.

And this translates into interactive revenue of between $237 and $245 million, reflecting an increase of between 20 and 24%.

And publishing revenues of between 38 to $40 million, reflecting a projected $12 to $13 million decline from custom publishing.

Excluding the effect of custom publishing, the remaining publishing activities are expected to increase slightly.

Our full year operating income before depreciation and amortization guidance of 28 to $31 million is being increased to between $30 million and $32 million, and is reflecting our continued focus on generating an incremental profit margin of at least 50% coming from our 2004 revenue growth.

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

Thanks, Doug.

Our focus is building the leading interactive content company in the world.

As most of you know, we see a great deal of long-term opportunity in interactive content.

As dollars continue to shift towards the on-line medium, interactive content publishers are going to be well-positioned to capture a great deal of those dollars.

As we said last quarter, we believe that the majority of dollars that have migrated at this point are being spent against fulfilling existing demand.

But the bulk of dollars spent in the off-line world are spent in creating demand for a category, a brand, or a product.

These branding dollars are just beginning to move in a more significant way, and you will see continued acceleration as the medium sees more acceptance with marketing professionals and also as it becomes a better branding platform through video and [inaudible].

We don't expect to see the shift overnight; it will be a five to ten year secular trend, which is just beginning.

And it is a trend where interactive content destinations like ours have the ability to disproportionately capture dollars.

The interactive category is a category where CNET has clearly established as a leadership position.

We have over 76.5 million unique users per month; these are users that are attracted to our high-value, high-engagement content environments.

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

As you think about content -- you think about how we define it -- it's helpful for us actually to spend a moment on how we do view and talk about interactive content.

We really view interactive content in three basic buckets.

One bucket is content we produce; so think reviews, news, analysis, features, video and audio vignettes, video programming.

The second is professional content we distribute; so distributing software, distributing video, distributing professional music, distributing other outside content providers.

And the third bucket is distributing independent contents; so user opinions, forums, free music, shareware, game maps, and other things that are produced by users or by independent parties.

We have a commitment as we think about content to producing the highest quality content, and you see this in a numerous awards that we win throughout any given year.

And I think Q1 results truly illustrate the leadership position and our ability to effectively execute with strong growth across the board.

One of the themes you hear a lot about right now, in terms of kind of talk in the industry, is this whole theme of consolidation.

I thought I might spend a moment giving you some thoughts on how we think and view consolidation.

When we think about consolidation, we really think revenue consolidation; so your ability to consolidate dollars.

And there's really two ways you can do it.

One way is you can build internally and thus take share from other participants.

Or two is you can buy share through things like acquisitions.

And over time, what you've seen us do, and what you will see us continue to do, is to do both; to build in certain areas, and at the same time to buy.

As attractive as the opportunity is in interactive content, there are not a lot of high quality companies that do it well, have reached critical mass, or in fact, have survived.

As a result, you will see us do more opportunities like MP3.com, which we consider a hybrid of building and buying.

We bought a vanguard brand; we're launching it against existing infrastructure, which means that the incremental dollars we are spending are going to the user experience.

And it allows us to expand our advertiser and user base to generate new, incremental accretive dollars.

If we can find more opportunities like this, we will pursue them.

Our strategy is we're going to aggressively focus on growth.

We said that at the beginning of year, and that is probably the most important theme we will focus on this year.

And I think the first quarter results signified some success in that.

We are going to look for opportunities to grow into new categories, like you see us doing in music this quarter.

We are going to look at categories that continue to broaden our base of marketers and leverage what we do well.

And finally, we are going to remain focused on consolidating cost and putting the maximum amount of dollars to work on the user experience.

Let me spend a minute actually talking about, and giving some color, on what's happening within our three main categories: personal technology, games and entertainment, and business technology.

On the personal technology front, we continue to see nice traction on the products side, really, revolving around CNET.com.

As we talked about last quarter, we continue to expand our editorial coverage.

We have added new content offerings like Digital Living, and the just-launched technology makeover feature.

And coming this year, you'll see us being much more aggressive in video, which we think can be an important differentiator for us.

One thing is we've seen our audience -- the way that our audience uses become much more used from broadband access.

And that means it makes video a much more attractive content vehicle for us.

In this quarter, we're launching a product which we call First Look from the Labs.

First Look From the Labs are 60-second vignettes, where our editors actually take products; so they take an iPod or they take a Sony Vaio laptop, and they actually talk about and show users via video the design features of that product, how it uses, how it works, the interface issues, and it provides a way for us to communicate things that would otherwise be difficult to communicate in text.

And we think this will be a really significant and important expansion of how we view and deliver value to our users.

You should also look to see us be more aggressive using partnerships to get this unique and powerful content in front of a more diverse set of users.

Also in personal technology, we continue to see nice strengths with Download.com.

It remains a very strong performer, helping facilitate over 75 million downloads per month, and our pay-per-download model continues to perform nicely.

You also see us expanding into additional content categories.

In the second quarter, Download.com will be launching a games category and a music category.

The games category is being done in partnership with GameSpot, and will be launching a music category at music.download.com.

This site will leverage the large audience of Download.com to provide a platform for independent artists to distribute their music for free.

We have begun building a catalog of artist submitted songs, and have been encouraged by the response we have seen.

We have also seen a great deal of opportunity and strength in our second category, which is games and entertainment.

On the product side, we continue to be a leader, and we're gearing up at this moment for the [E-3] coverage, which is a major gaming event that takes place in May.

We also made acquisition in the quarter of Wireless Gaming Review, or WGR.

WGR provides a best-of-breed service for wireless users and their gaming content needs.

We will also, as I mentioned, be launching the MP3.com site in the next couple of weeks and are encouraged by the opportunity around this product.

MP3.com will provide an immersive environment for people who care about music.

It will be unique, and it will be significantly different from the site that is being run by Vivendi.

So interestingly, in our approach in music, we're doing it in two ways.

We're approaching one, music.download.com, which really focuses on free music, and then secondly, we will relaunch MP3.com, focused around the overall needs of people who care about music.

As we mentioned last quarter, we have beefed up our sales organization within games and entertainment to provide greater coverage against the largely untapped consumer advertisers, and though it's still early, I think we're beginning to see some nice wins.

The third and final category is business technology.

In the business technology area we continue to deepen our commitment to editorial of the highest quality.

You see that with the continued awards being won by CNETNews.com, and you also see it with the addition of EDventure, which brings Esther Dyson, one of the most influential and insightful minds following the internet and technology categories, onto to our team.

We've also continued to innovate in behalf of our marketing partners.

In the first quarter, we launched the enterprise launch units, which provide a way for marketers to get very broad reach against a quality IT and business decision maker audience in a very short time frame. [Verasign] came in as our first marketer to embrace this package.

Finally, let me spend a minute on international.

As we said in the last quarter, we continued to strengthen our product offerings across Europe and Asia over the past year, particularly in the United Kingdom, China, and Korea.

And I think we've seen nice, organic growth, which you see in the numbers during this last quarter.

Let me spend a moment on outlook.

Doug provided overall guidance for both the second quarter and for the full year; let me provide a little color on that guidance.

As Doug mentioned, we are increasing our guidance numbers on both the revenue and operating income before depreciation and amortization for the full year.

Revenues were increased to a range of 275 to $285 million, which gives you overall revenue growth of between 12% and 16%, which includes declines projected, declines in print.

This brings full year interactive growing between 20% and 24%, and this range really speaks to the growing momentum in our business.

We are very focused on the long-term prize of capturing branding dollars through high-value content environments.

We are at the front end of a five to ten year secular trend, and our goal is to maintain attractive growth rates over an extended period as we capture those dollars.

As we continue to focus on expanding our long-term profit margins, we are targeting a greater than 50% annual incremental margin, and our guidance remains consistent with this objective.

In setting this target we take into account two different things: our desire to invest against our core business, to lay a growth foundation for 2005 and beyond; and the importance, for both shareholders and employees, of remaining disciplined about realizing increased profit margins.

So in conclusion, this was a strong quarter across the board.

We saw strong growth in our most important metrics: revenues, profit margin, and users.

We remain very excited about the opportunities that lay ahead within the interactive content space.

We will be aggressive as we focus on growing revenues and maintaining momentum with our sites and our financial model, and at the same time we will strike a prudent balance between generating margin improvements and reinvesting in our business.

So that wraps up our formal comments, and with that, we'd like to turn it back to the operator so we can 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 Lanny Baker with Smith Barney.

Thanks a lot.

I had a couple of questions. (Audio difficulties) First, I was wondering if you could -- in both the quarter and in your revised guidance, put your finger on what is the one or, you know, -- what's the primary factor that's different or better today than 90 days ago when you gave guidance.

What has changed, and sort of what is the one thing that's really provided [inaudible], if you can boil it down to that.

And then secondly, I was wondering -- I think you said, Doug, that the contribution from Google was about 12% of the revenue in the quarter.

I don't remember whether you were saying that was the interactive or the total.

Either way, can you give us a sense of what similar relationships that you might have had with Overture last year, was as a percentage of the business.

In other words, help us understand, you know, how quickly that segment is growing on a year-over-year basis.

And the last question I guess is can you talk about -- sort of pull the Google/external need business out and give a snapshot of the the year-to- year growth and the sort of the core marketing services business if you look at it that way.

That would be really helpful.

Great.

I will start with the first question and let -- I'll let Doug do the second and third question.

On the first question, I'd say if we were to say one thing, we've seen across-the-board growth in our different areas, and I know that's probably not what you want to hear.

But I think what we are seeing is on overall improvement in health of all of our different businesses.

I think the environment's gotten better.

I think we've also made, over time, real investments against kind of core products and the core proposition for marketers.

And we see that really beginning to pay off; we saw it in the second half of last year, and we see it within the first quarter results and the guidance that we continue to provide.

I think we also, in general, see a lot of health around what we think about as kind of the [CPM] advertising market and we see more demand in that category.

I'd say the one place that, you know -- and it's fairly obvious from the numbers -- but I think the one place we've seen a real decline has been the print business that is really rotated around the custom publishing side.

So let me turn it over to Doug for the second question.

Okay.

And just let us know if you don't hear us clearly or not, Lanny.

You were breaking up a bit, but if you don't hear us, let us know.

On the Google relationship, you know, paid search, as we talked about last quarter, has always been an important component of our revenue stream and of the company.

And as a company, and particularly a content company such as CNET, you know, we continue to benefit from the continued improvement in overall paid search economics.

And the search economics, you know, continue to improve as a result of our access to high-valued audiences like we have.

Also, as mentioned last quarter, you know, we consolidated our paid search opportunities into a primary provider, which is now Google.

So what was the source of -- so if you compare and contrast, kind of the pre-Google relationship, when our primary relationship before that a year ago with Overture, you know, we have consolidated today more activities around paid search with Google as a primary provide than we had done a year ago.

So there's more of a -- more of that revenue stream which was spread across more multiple providers is now more singularly -- not singularly, but more singularly flowing through with the relationship that we have with Google.

And we're also seeing, as mentioned, we're benefiting from volume.

The audience that we have are valuable, and they come to us and use this activity of search and navigation more so today than they have in the past, so we benefit from that as well.

Also, not to look over the contribution that we received in Q1 from Google, is advertising.

And their relationship that we have, they've also purchased advertising on our site for various products that they have and like to seek customers for.

Okay.

That's helpful.

Can you then try to depict the growth of your -- compare the growth trend of your -- kind of what's called your CPM advertising business -- to the growth rate of the interactive business overall?

I would say our overall growth, as Shelby described, has been a good foundation quarter for us across all of our content areas as well as through paid search.

So there's not a great deal of deviation from our overall growth rates that we have communicated today in our interactive area, in really in needing to call out paid search as an inordinantly higher rate than the others.

They've all been nice contributors across, you know, our marketing services revenue streams, you know, laid across our content areas, both in the U.S. and non-U.S.

So it's really, I think the take away that we've had, good growth from this relationship with Google, you know, we've consolidated activities around it so it's bigger by almost the way we've designed and structured it.

But stepping away, it's been one component of many contributing to the growth that occurred during the first quarter.

Okay.

Great.

Thank you.

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

Good afternoon.

Just had a question about your guidance.

It looked to me like your marketing services grew about 35% year-over-year --assuming I did the math right -- in the first quarter.

And if you were to carry that kind of momentum into the second quarter, I think you would be at a much higher revenue level if you just -- if you just assumed the fees and listings, et cetera are flat, and then use your publishing numbers.

So I'm just curious, are you seeing a deceleration or are you just taking a cautious stance?

Was there a one-time contribution or a mix issue or something in the first quarter that we should be aware of?

Thanks.

You know, I think the outlook that we have today is a continuation of growth.

As Shelby articulated, you know, we're focused on sustaining a growth rate, you know, 20% or more on the interactive side, and that's really kind of factored into our outlook today.

I don't know that we've overly characterized it one way or the other, in terms of how our activities may end up in the outer months of May and June, but we feel good about our growth and, you know, as it relates to Q1 as well.

I would say that the thing we're focused on is how do we get a sustainable, attractive, long-term growth.

We're playing for the long-term prize here.

I think it's a message you've heard us say consistently over the last four years.

We've made a lot of investments in platform and other things;

Focus on the long-term capturing of dollars and margin.

And, you know, I think we're very encouraged by what we saw in the first quarter.

I think at the same time, if you look on a comparison basis, the first quarter was a weaker quarter last year, and I think we saw some, you know, good signs this year.

So it was probably an easier comparison, but I think we're very, you know, right now, I mean, we're encouraged.

I think, you know, the guidance we provided, which is a 20 to 24% growth rate on the interactive side, is a really attractive one.

And we're very pleased with what we are seeing overall in the business.

No, that's great.

I just wanted to see if there was a change in environment or tone or anything like that.

It sounds like momentum is continuing to be what you'd like.

Your next question comes from Mary Meeker with Morgan Stanley.

Thanks.

I have a very high level question, Shelby, and Brian has a question as well.

One of the things that we have seen in recent days is we've seen the Major League Baseball deal with Microsoft; we've seen Reuters indicate that they are going to start charging for some of their content on the web.

Could you talk about that as a potential trend and what it means for the industry and what it means for CNET specifically?

And then Brian -- if you could answer that, that would great, and then Brian will come back.

Yeah, I would say that the bigger trend is the growing importance of content.

And, you know, for a long time, you know, we've been a big believer and a big supporter of content and the importance of content.

I think one of the things that we really value in content is the uniqueness of it and the fact that you can own the intellectual property in it.

And when you think about those three levels of content that we laid out, and those are the kind of content that we produce, the kinds of content that professionals produce and the content independents produce, and the last two that we distribute.

Over time as more people are using the web and you're seeing richer things on the web, so people to really be able to distribute music and distribute video and other things.

Content and the ownership around it has become increasingly important.

And so, you know, I think the thing that encourages us in that trend is, yes, content is a higher fixed cost over time and you've got to actually produce it, but I think the nice part is you do have the ability to create something that's unique, that is valuable, and ultimately, I think creates a way for you to maintain attractive margins over time.

And to, in effect, get more scale with the user base?

That's right.

I mean, I think the nice thing we have right now -- I mean, we have 76 million uniques per month, so we're in a position where the categories we're in, we have clear leadership position in.

I think we have the highest quality content, which, by the way we own, and we have an ability really to leverage existing critical mass, existing infrastructure; we need to continue to grow and to create additional expansions of, you know, different categories, like we're doing with music.

And as you kind of look out -- if we back to the original vision of CNET, there was the TV side, the radio side, the web side, and we could almost be doing a little bit of back to the future if we look at where you'll be five years from now.

No, I think that -- I mean that, that's right.

It's funny, because we in the last two years have added two additional studios in our building, and it is a back to the future, in terms of, you know, we had studios, we've added more studios.

We, you know-- one of the blessings was we understand how to produce video very inexpensively, and we've been able to take advantage of the infrastructure and expertise we have to create a high-value video products and audio products and other things, that we can distribute online.

Okay.

Thanks.

Just real quick on your application download business.

This is something that you guys talked about a little bit more last year.

Can you give us some perspective on growth and further monetization of it going forward?

Yeah, I mean, as I mentioned in my -- kind in the formal comments, I think we continue to see the paper downloads, sort of the the performance download model working against Download.com.

And we've been pretty encouraged by what we're seeing.

We're also being aggressive about expanding into other categories.

So you see Download having a very dominant position in the software space.

This quarter we're adding games, and this quarter we're adding music.

And we see that ability to not only have that revenue model working, but an ability, also, to scale it against other categories.

Okay.

Thanks.

Thanks.

Your next question comes from Safa Rashtchy with Piper Jaffray.

Good afternoon, Shelby, Doug.

Good quarter.

A couple of questions.

First, Doug, can you tell us how much of the increase in guidance comes from the acquisitions and how much of it is just organic growth that you're seeing.

And I'll follow up with a general question for Shelby.

Sure.

Safa, the contributions from the acquisitions-to-date are fairly modest on a go-forward basis.

You know, we did benefit from PC Forum in March, and we called that out as we overperformed on revenues and operating income before depreciation without PC Forum in Q1.

But from our wireless gaming and from EDventures for the balance of the year, are at this moment in time, modest contributors, but important foundation pieces to games and entertainment and business technology, and against those audiences, we look outward to 2005.

Okay.

Thanks.

And Shelby, on the growth strategy that you outlined, obviously, the acquisitions you have had and what your hinting to suggests that you would add more and more -- let's call it broadly, content -- that is in line with the trends that we see in the previous question alluded to.

But my question has to do with monetization of what already have.

You already have pretty impressive content in the three categories described -- in the personal entertainment and business -- but your monetization is it still below what could be generated from this level of traffic and content.

Maybe I should phrase that as a question.

Where do you think you are in the level of monetization that you can have from the existing content and user base, and how fast can you increase it, and how long will it take you to get to the optimum level?

I would say we still have a lot of legs on the three categories we have right now.

As you look over time, we think we're still very early in branding dollars -- real branding dollars -- coming to the internet.

And so you take, you know, categories like consumer electronics, or you take categories like the games area or the enterprise area or other things.

We've built, we think, a really good foundation from a user-base standpoint, and we think we have a lot more legs left in our ability to continue to monetize against those.

And I don't think there's anything from a focus standpoint, in terms what we're doing, that really takes away from that.

At the same time, I think, you know, using again MP3.com as an example, we have the ability to leverage the infrastructure, to leverage the user base; we think to make very accretive contributions to our overall business.

And, you know, we're going to find the right mix.

I mean, you know, the guidance you see right now -- the guidance you see right now really reflects, you know, primarily core growth in what is the three categories.

So I think, you know, as we look at additional things, we're looking at how can we be smart on expanding the categories we have and really provide incremental value, both on the revenue side and also on the EBITDA side, going forward.

All right.

Thank you.

Your next question comes from William Drewry with Credit Suisse First Boston.

Hi.

Cost related question, Shelby.

I guess it's sort of in the similar vein of these last couple of questions.

But, just wondering, I think you spoke about incremental margins going forward of 50%.

I'm just wondering why it's not higher, you know, traditional, media ad-driven model, you know, you see more like a 70 to 80% incremental margin.

So maybe you could attack it from the cost side as you go forward, what are you going to need to spend more money on specifically?

Is it more sales people?

Are you going to have to spend specifically on content that you have planned?

I guess I'm trying to get at, if you get $30 million of incremental extra revenue above planned in the second half, why wouldn't most of that just drop to the bottom line at this point?

I think, as we've talked about when we look at the overall, you know, business economics, you do see, I mean you have a choice.

The marginal dollar of revenue that we add is pretty minimal in our ability -- in our ability to require additional cost and additional infrastructure.

So we have a lot of scale left in our business.

At the same time, we really like what we're seeing in the overall interactive content category and we're playing, again, for a ten year game.

We know the math for the law of compounding.

We look at, based on what we can do in terms of reinvestment of dollars against our business,the ability, for instance to launch, you know, music at MP3.com or launch music at Download.com, gives us an ability, we think, to lay a foundation so that we can maintain long-term high growth rates over the next ten years.

So it's really a function of what we're seeing in terms of our ability to reinvest in our own business, what we think those returns can look like as we play to, you know, fourth quarter of this year, we played it to 2005.

Just one follow up, if I can.

Who should we compare you to now going forward, because, you know, related to my last question, when you look at some of these media companies in their internet oriented operations, whether it's a "New York Times" or a Disney or a Viacom, in different parts of their business, just the online part, they're able to draw already, you know, 30% plus kind of margins.

And maybe that's because they're drawing off of content that's already existed.

You know, who is it fair to compare you to?

Is it a Yahoo, is it the media companies, or is it somebody else?

I think the best analogy for who we are is the cable portfolio that Viacom has.

So kind of MTV networks, BET, you know, Showtime, other services they have within their overall content -- cable content portfolio.

What they do, they do really well.

They've been able, over time, to maintain very high growth rates over an extended period of time, and to be able to generate a lot of cash.

And I think if you were to look at our business and say where are we, we're very early in the cycle of the creation of that, and so, you know, we're looking at how do we expand our portfolio of brands against multiple audiences so that over time we can take a greater and greater share and be able to maintain very high levels of both revenues and also increasing profit margins.

Okay.

Thank you very much.

Your next question comes from Steve Weinstein with Pacific Crest.

Hi.

Thanks.

Actually, my question was already asked, but I didn't quite understand the answer so I'll ask it a little differently.

You know, the interactive revenue line grew over 30% in the first quarter and, you know, from talking to other companies and advertisers, it sounds as though online advertising, if anything, is growing faster in the second quarter.

And you're talking about, you know, basically 10 points of deceleration.

There seems to be some sort of disconnect in that.

Like, I don't understand why I should expect 30 to 35% growth in the core business here unless there's been, sort of, a shift in the type of advertising people are buying or you have some client mixes.

Can you give us a little more color as to why things would slow?

Yeah.

I'd say that to start of the response is to keep in mind in the Q1 where we haven't -- we had 32% growth rate in interactive.

Last year at this time we still had revenues actually on a decline.

So we had -- we actually, you know, having that comparison work in our favor, but even absent that though, we're very excited about and of our 20 to 24% longer term growth rate this year and beyond, and I don't think we're -- we don't see anything of indication that online advertising is getting weaker.

We see it being strong.

We're participating.

We're launching new activities that will position us for continued growth going forward.

But we did have the year of --last year, actually, the internet advertising was still on a bit of a decline and we had that comparison this year, which made the numbers look -- which, you know, the growth rate was higher.

But we're, you know, we're happy with very high growth rates of 20% plus, and don't see anything that is falling away.

I would say that we also see opportunities that were not yet tapped into going forward, and then the outward quarters and years in the participation of customer sets in the consumer area with MP3.com and other areas within games and entertainment that aren't yet being applied to our results.

So I think we're not seeing anything unusual in Q2 to answer your question directly, and we're focused on keeping that growth rate in the 20%-plus range.

I think if you look at how we break out from a seasonal standpoint, I think what we're guiding to is pretty consistent with the overall numbers.

I just want to underscore, again, we're playing for the long-term opportunity.

We see this as a ten year trend.

We want to build content leadership and content categories where we think we, you know, via having strong brands, strong relationships, strong intellectual property, that we will be able to maintain very high value, high growth over time.

And, you know, that is our objective and that's what, you know, as a management team we spend our time thinking about and focusing on.

Your next question comes from Anthony Noto with Goldman Sachs.

Thank you very much, Doug and Shelby.

As we sort of progress through the quarter and spoke to advertisers and media buyers, we had heard a couple of themes that were consistent.

And one of the themes, when we spoke to technology advertisers, was that their first dollar was not being spent on CNET -- while they were clearly spending dollars on CNET, it just wasn't their first dollar.

And when we look at the results in the growth rates, they're somewhat below what we're seeing for the overall industry.

And given that CNET is, you know, in many consumer's minds seen as a destination for the different areas within technology that you laid out, I was wondering, what would you attribute that to?

Is it a pricing differential versus your competitors?

Is it a structural difference with your ability to deliver effective advertising?

And if you could just elaborate on that a little bit.

Secondly, Shelby, you had mentioned acquisitions.

I was wondering if you could elaborate a little on the MP3 acquisition in regards to its financials before you acquired it; whether it was profitable or not, and how you will transition that business to be profitable in a return above your cost to capital.

And then last, are there areas within your network that are high usage areas that are currently not being monetized at all, because there's no monetization engine before that you could now potentially monetize via search?

Thanks.

First of all, I think I would differ on the premise and the assumptions of your first question.

I think if you look at the relationships we have, kind of core relationships within the technology space, within the gaming space and other things, we do have a very good relationships with our marketers.

They've been relationships we've had for 8 years; you've seen very little churn in them.

I think you see that in terms of what percentage of people are renewing quarter to quarter to quarter, I mean, you know 89%, 96%.

I think it's very hard to look at and question the position we have with our set of marketers.

I do think, you know, as you look at marketing messages, and I know you had, you know, raised with me at one point this whole question of, you know, how do people think about spending their dollars.

We do incredibly well as a content destination around topics, getting dollars that are more in the consideration area.

There are going to be places that people spend awareness dollars.

We're going to have higher prices, you know, those aren't -- you know, those aren't necessarily -- we're not going to be necessarily the first place they look, but when you look where people have extended relationships over long periods of time, I think you would be very hard pressed to find anyone that kind of, you know, has had sustained relationships and quality relationships in the way we have.

And that is because we places where people form opinions, where users form opinions, and therefore, as you think about investing in making it into consideration set, you know, it's clearly going to be one of the important places you invest.

So I, you know, I think our numbers speak for themselves.

I feel very comfortable with the relationships we have overall.

On the MP3.com site, as you probably remember, Vivendi was running it.

Vivendi was losing a lot of money and Vivendi made a decision that they wanted to get out of that business.

And we bought, essentially,the domain name, the hardware, all of the resident trademarks as part of that for an undisclosed, minimal amount of money.

Your next question comes from Stephen Ralston with Glenn Capital Management.

First of all, nice progress in your business.

You talked about how we're very early in the process of advertisers moving to branding, especially in the technology area.

Can you talk about what it will take, whether it's under your control or not, to see the migration occur as you expect it to occur and what are some of the obstacles that you think need to be removed?

I know you've talked about this before.

And then secondly, one of the areas that you've invested in over the past 18 months is the consumer electronics area.

Can you go into a little bit more depth on your progress there, progress with advertisers there, and what you plan to do going forward.

Thanks.

Great.

I think on the -- on the dollars moving, you know, as we've said before, we think a lot of the dollars that have moved to date really have been dollars have been more focused on a kind of direct response side or, you know, we kind of internally refer to as fulfilling demand.

So someone knows they want to get a particular thing, the search model and other things work very well for that.

The lion's share of dollars that happen in the offline world are really about people investing and creating demand for a category, demand for a product, or demand for a brand.

And those dollars are going to come as people that run the branding buckets and marketers get more come comfortable in their ability to make the internet a larger part of their overall branding mix.

That's going to come from, you know, there's some infrastructure stuff we have to do, like better pre-planning and post reporting tools, region frequency tools, integration [inaudible]; there's a whole bunch of stuff around that.

A lot of it's going to come from education.

I think we've made great strides as an industry in terms of being able to address those.

I think that's why, you know, what we're not saying is it's not happening.

It's just we're very early on in it happening.

I think that is what is really encouraging.

Because branding, we think, is going to to have a better home in content destinations where people are forming opinions and people are hanging out and doing things and thinking.

And, therefore, their minds are open to being able to be influenced.

So as an example, if you look at CNET.com, 80% of the people that come to CNET.com have not made a brand decision yet.

So as a marketer, how do you think about your ability to spend dollars to influence that ultimate brand decision in how products get made.

So I think, you know, some of it is just time; some of it is things we do as we see more rich media, as we see more video and other things.

And I think we, you know, internally we're spending time on how do we educate our sales organization to have better tools to sell towards those buckets.

And I think as an industry and I think specifically at CNET, I think we're all making greet strides on that.

I think we've made really good progress.

I think, you know, we talked about the progress on the last call.

I think Digital Living, as an example, was a really good introduction of a new product type that allowed an environment where branding dollars had an easier time residing.

And you saw Sony come in as the initial advertiser; you saw a lot of interest from people who wanted to participate in version two, and you saw Sony coming back in and taking that program again.

You see us also right now doing a big new feature where we're doing a technology makeover.

You can imagine those type of things, again, very good environments for branding dollars.

And so I think we're seeing, you know, the right movement among marketers;

I think we're doing the right things from a product standpoint, and we're pretty encouraged what we're seeing overall within that area.

Again, I would like to remind everyone, in order to ask a question, press star, one on your telephone keypad.

Your next question comes from Peter Carlin with Alson Capital.

Any chance you guys could provide the revenue distribution the same way you had in previous quarters;

U.S. online, media and commerce, U.S. print international, media commerce, and channel services?

No.

We made the transition, if you were on the call last quarter, where we transitioned to our new construct of revenue streams.

At that time, we did give both the old construct and the new construct so we could provide you with all quarters in '03, so you'll have that data set if you need it.

But we're not providing both constructs now.

We're just providing our new format going forward.

What was the growth rate for U.S. online this quarter versus international?

We don't -- again, we don't -- we don't deviate from, you know, the revenue structure that we have today, which are marketing services and licensing fees, users, and publishing.

Can you just give U.S. versus international growth rates, total?

Yeah.

We have segment information that combines all of our U.S. revenues, both interactive and print, as well as international.

The interactive and print, those are attached to our earnings release today.

Okay.

Thanks.

You're welcome.

At this time, there are no further questions.

You may proceed with the conference or any closing remarks.

Well, good.

If there aren't any other questions, we want to thank everyone for participating, and we look forward to talking to you next quarter.

That concludes today's CNET first quarter financial results conference call.

You may now disconnect.