Paramount Global (PARA) 2004 Q2 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 Networks second quarter financial results conference call.

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

After the speakers' 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.

Thank you.

Miss McLaughlin, you may begin your conference.

Thank you and good afternoon.

Before we begin our formal comments, I would like to remind you that in the Webshots acquisition announcement and financial news announcement released today, and also on this call, CNET Networks is providing specific forward-looking statements, including guidance related to our expectations of future financial performance.

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

These risks are outlined in our second quarter news announcement, as well as in the Company's Securities and Exchange Commission filings, including its 10-K for the year 2000 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 release of our financial results for the third quarter ending September 30th, 2004.

Our company also adheres to a quiet period that begins after the second month of each quarter and ends following the release 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, can you find reconciliation of a the non-GAAP financial measures that we use in our news release and on this call to GAAP financials on the last page in today's news announcement, as well as at our investor relations website, ir.cnetnetworks.com.

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

Now let me turn the call over to Shelby.

Thank you, Cameron.

Thank you, everyone, for joining us.

We have two items to discuss on this call.

Our second quarter financial results and our pending acquisition of Webshots.

I will start off with the top line overview of the quarter and of the transaction.

Doug will provide further financial highlights and I will return and provide some color on the business at which point we will end with question and answer period.

This was overall another strong quarter.

We saw solid performance from a financial standpoint, and we also saw a great deal of positive trends with respect to more qualitative measures.

Let me quickly run through some of the financial and user metrics during the second quarter.

Total revenues were $68.1 million, up 17% from the second quarter of 2003.

We continue to see growth in our core interactive business, revenues were up 26% from the prior year quarter.

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

The growth in interactive further illustrates our ability to take advantage of the improving online advertising market through existing category leading products, new product launches, and consistently delivering value to our marketing partners.

Print revenue is down from a year ago quarter as a result of lower custom publishing revenues.

Our strong top line growth and minimal operating expense growth drove better than expected profits.

Operating income before depreciation and amortization was 5.5 million, incremental margin was 54%, consistent with our target of greater than 50% for the full year of 2004.

Our net loss was $1.5 million or a loss of 1 cent per share.

Turning to user metrics, unique users were up 17% and page views were up 15% from the year ago quarter.

On a sequential basis, our page views and users were down slightly.

Today we also announced that we entered a definitive agreement to acquire Webshots.

Webshots is a leading site in the digital photography space, providing photo hosting and sharing services for users.

It hosts over 58 million publicly available images and has over 300,000 new photos uploaded every day.

Webshots has approximately 14 million monthly unique users, who come to browse, share, and engage with fellow users in a range of categories.

The site generates over 20 million pages per day.

From a strategy standpoint, we continue to focus on the significant growth opportunities in the digital lifestyles area.

This acquisition fits in nicely with our other leading services, like cnet.com, download.com, GameSpot and mp3.com.

Now Doug will provide some financial highlights for the quarter and the acquisition, and then I will return to provide some commentary.

Doug.

Thank you, Shelby.

The second quarter results demonstrate continued growth of our core interactive business, as mentioned interactive revenue was up 26% during the quarter, which exceeded the high end of our guidance range, and in addition, CNET Networks operating profit exceeded expectations.

Looking forward to the second half of 2004, we believe that CNET Networks is positioned to take advantage of the improving online advertising market, benefiting from the improvement and expansion of our content across all categories and the addition of Webshots.

As announced today, we signed a definitive agreement to acquire Webshots, the largest website in the photography category with 14 million users, and the purchase price was $70 million, of which $60 million will be paid in cash at closing, and $10 million of deferred consideration payable at the end of three years.

Financially, Webshots is expected to be EPS neutral to CNET this year in 2004, and EPS accretive beginning next year in 2005.

We expect the transaction to close during the latter half of Q3.

I'll provide more insight into Webshots' financial results and our expectations later in the discussion.

Turning back to CNET Networks results, looking at some of the top line trends during the quarter, second quarter revenues of $68.1 million were up 17% over last year.

This is above the high end of our guidance range which was between 65.5 and 67.5 million.

Looking at our primary components of revenue, which are interactive and publishing, during the second quarter interactive revenues of $59.2 million increased by $12.4 million or 26% compared to last year, and within interactive, marketing services grew at 30% during the quarter, while licensing fees and user revenues increased 3%.

The increase in marketing services reflects strong growth within the areas of personal technology and games and entertainment.

Publishing revenues of $8.9 million were down year over year, but they were in line with our expectations for the quarter due to the elimination of custom publishing revenue.

Print revenues excluding custom publishing increased year over year, reflecting improved results internationally.

Overall, international generated a small amount of operating income before depreciation and amortization during Q2, compared to an $895,000 loss last year.

International has benefited from improved results from existing operations and partially from two magazines acquired in China during the first half of the year, focused on personal technology and game enthusiasts.

Moving down to the P&L to operating expenses, total cash operating expenses of $62.6 million were up 8% from the year ago quarter, and this excludes last year's nonrecurring realignment cost of 4.3 million.

The increase is primarily from existing operations, to a lesser extent from recently completed acquisitions.

From a profitability's perspective, really driving as a result of higher revenues second quarter operating income before depreciation and amortization as mentioned equalled $5.5 million, which is above our guidance range of 3.5 to 4.5 million and above last year's operating loss before depreciation and amortization of 4.1 million, which did include that 4.3 million of realignment costs.

Absent last year's realignment costs, during Q2, each $1 of revenue increase generated 54 cents of operating profit before depreciation and amortization.

This performance keeps us on track to generate an incremental margin of better than 50% for the full year 2004, keeping in mind this margin could be less than 50% in Q3 or Q4, based on the seasonality of certain costs, such as annual compensation adjustments during Q3 and overall marketing efforts during the second half of the year.

Net loss for the quarter equalled $1.5 million or 1 cent per share.

This compares to a loss of $11.6 million or an 8 cent per share loss in the year ago quarter.

Three items were recorded within nonoperating income and expense during the quarter that I would like to provide more detail.

The first is $3.3 million in net gains from investments, and this reflects the sale of a privately-held investment, namely CALCU partially offset by the writedown of two smaller investments.

The second item which impacted interest expense was $1.4 million related to the writoff of remaining issuance costs and other final costs of the early retirement of our 1999 5% convertible notes.

And lastly within other expense is included the $1.6 million premium paid to retire the 5% convertible notes during Q2.

Absent the impact of these three -- these items, our net loss per share for the quarter remains at 1 cent.

Looking at some nonfinancial metrics and user statistics, unique users increased 17% year over year.

Paid leads were up 17% year over year.

And average daily page views were up 15% year over year.

During the second quarter, our 100 largest customers represented 56% of total revenue, which is similar and consistent with previous quarters.

We continue to experience a very high renewal rate from our top advertisers. 98% of our top 100 Q1 advertisers renewed with us in Q2.

Turning to the balance sheet, our cash position as of June 30th equalled $153.5 million, which is up 4.2 million compared to March 31st.

And after taking into account the $60 million cash payment associated with the acquisition of Webshots, our cash balances will equal approximately $93 million upon closing the transaction.

Our day sales outstanding equalled 65 as of June 30th, which is down from 66 as of March 31st and 67 a year ago.

Capital expenditures in the second quarter came in at $3.6 million, in line with our guidance of 3.5 to 4 million.

We anticipate that Q -- that 2004 capital expenditures will now be in the range of 13 to $14 million, an increase of $1 million compared to our previous guidance of 12 to $13 million, which is connected with Webshots integration.

During Q3, we anticipate expenditures in the range of 4 to $5 million.

During the quarter as mentioned we retired the remaining balance of our 5% convertible notes of $114 million, and issued $125 million of 75 basis point convertible notes..

This refinancing significantly lowered the carrying cost of our debt and importantly extended the maturity date on $125 million of -- $125 million of debt out to April 2009, which improved our flexibility to invest a portion of our cash balances in opportunities such as Webshots.

Overall, as a result of this financing, total debt now equalled $129.4 as of June 30th.

Before turning to guidance, I'd like to review some financial information regarding Webshots.

As mentioned, we're paying $70 million for Webshots, $60 million in cash and $10 million deferred.

We anticipate Webshots as though it were a stand alone company for all of 2004 will generate approximately 12 to $13 million of revenue for the 12 months ending December 31st, 2004, and operating income before depreciation and amortization between 6.75 and $7.25 million based on a contribution margin of approximately 50%.

These anticipated results reflect a purchase price valuation multiple of 10 times 2004 operating income before depreciation and amortization.

We view investments such as Webshots as an ideal example of strategically investing capital and generating an attractive rate of return.

From a growth perspective, we anticipate that Webshots' revenue will increase in the range of 30 to 35% in 2005 compared to 2004.

And now turning to CNET's guidance, today we're introducing guidance for the third quarter of 2004 which does not include a contribution from Webshots due to an uncertain closing date, which is expected in the latter half of Q3.

So for Q3, excluding Webshots, we anticipate the following results: Total revenues of between 68 to $70 million.

This translates into interactive revenue of between 59 million and 60.5 million, reflecting an increase over Q3 2003 between 28 and 31%.

Publishing revenues of 9 to 9.5 million, reflecting a decline compared to Q3 a year ago due to a $2.6 million decline from custom publishing.

And operating income before depreciation and amortization between 5.5 and 6.5 million for the third quarter.

Our total -- our full year total revenue guidance of 275 to $285 million is being increased to total revenues of 285 to $292 million.

This increase reflects strength from existing operations and a Q4 revenue contribution from Webshots of between 3.2 and 3.7 million.

This translates into overall interactive revenues of 249 to $255 million, reflecting an increase of 26 to 29%.

And our publishing revenue guidance is for revenues of between 36 and $37 million for the year, and this reflects a projected decline from custom publishing of 15 million.

Our full year operating income before depreciation and amortization guidance of 30 to 32 million is also being increased to between 33 and $35.5 million, reflecting strength from existing operations and a Q4 contribution from Webshots of between 1.7 and $2 million.

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

Thanks, Doug.

There were several key initiatives and themes coming out of the second quarter.

That resonate across almost all of our business and categories.

These initiatives further solidify our goal to maintain our position as the premiere interactive content company.

We will continue to expand our content coverage and product offerings to further broaden our audience and customer base.

I'd like to spend a few minutes discussing this in more detail and in the context of our business lines and our content categories.

The first theme focused on growth around our existing products, one example of this is a launch of our music properties.

We launched MP3.com in early May of this year.

MP3.com is a destination for digital music information and content.

From songs to digital music services to devices.

The early traffic and user trends have been strong.

Importantly, usage trends are quite positive and early adopters are quite active once they have visited.

Users are downloading an average of 72,000 song samples per day in June and one music service has named MP3.com one of its top five refers within the first two months of it's launch.

The addition of MP3.com has also allowed to us tap into more nonendemic and consumer advertisers.

Key advertisers on MP3.com in the second quarter included McDonalds, Sony, Napster, Apple ITunes, NAVIDIA ,Toyota SION, and Panasonic.

We've also seen some examples of where we've been able to take advertisers, or instance, from the game space and move them into the music space.

A good example of that would be Nintendo.

In May we also launched a music service on Download.com at music.download.com.

It's consistent with our strategy of taking Download.com and moving it from just being a place to download software to a place you can download anything.

That now includes software and that includes games and that includes music.

We've had since launch over 5 million songs that have been downloaded from the service.

We are leveraging the large user base that we see at Download.com and showing ability to shift those those users from what they have been doing to the music section and I'd say initial traffic and user stats are very encouraging.

We've also gotten good positive from the independent artists which is a comment to the value of traffic that we're able to deliver to them.

Another example of expansion is the expansion you will see on cnet.com.

We launched in the second quarter a product called CNET at Work.

Which really focused on the small, medium size business market.

It fits work and life together via personal technology products.

We took what works so well in the digital living launch that happened in the fall of last year for the consumer and we expanded it into the digital office.

I think it's worked very well from a user standpoint and from a marketer's standpoint.

We've also use -- we've seen similar expansion on the international side.

We launched in the second quarter a site called MSN CNET.FR which is a site like cnet.com in France.

In French so if you think about digital living which we launch in the states you now have [INAUDIBLE] in France.

So we have really been able to extend the things that worked well on CNET and done the same thing abroad and I think you will see us doing that in other markets as we go into other areas of personal technology and the results have been very positive.

Finally, on the business technologies side, we continue to show innovation and expansion.

In the last couple of weeks we launched a new product called news.com extra, which aggregates a lot of different news providers around technology, so thing Google news, but think Google news filtered by editors verses just being edited by [INAUDIBLE].

It's still early, but I think it's an interesting product and I encourage people to look at it.

Also worth noting, news.com won a national magazine award for general excellent in on-line which for those of who you follow the magazine or publishing business know it is probably the most prestigious award you can get and one that we're incredibly proud of.

The second theme focuses on growth and content types.

In this case specifically, our push against broadband and rich media features.

We've added more innovative, rich media features on products like cnet.com in the second quarter.

So an example of that would be first looks from the lab.

Where we're producing one minute video vignettes featuring personal technology products where an editor sits in the labs holding the product and talking about it, talking about how it feels, what they think it means for users.

We launched it early in the second quarter and already have over 200 videos featured on the site and we continue to add over 30 a week, and we're really excited about both the response we're receiving from marketers and probably more importantly the response we're hearing from users.

GameSpot has also continued to expand its broadband features and video content.

We had an extremely strong presence at E3 this year and used the event to REALLYshowcase what we were doing from a video perspective.

During E3, GameSpot was doing over 1 million video streams per day.

The good news is for all of this, that the advertising demand for broadband marketing environments has been strong since, you know, you have seen them introduce the market and I think we will only continue to accelerate as we in the industry achieve more critical mass and provide a better flat form for marketers.

The third theme is really growth by introducing new types of functionality into our services and I would say a great example of this from the second quarter is the introduction of social networking functionality, think [INAUDIBLE] into the GameSpot and GameSpot community, a which that can be really meaningful around a topic of passion and a topic where there already is a sizeable community.

In the first month of beta, we had over 250,000 users registered to track games.

In addition, the GameSpot community users are posting more than 200,000 messages per day.

So we're really excited about what we're seeing there.

You know, it clearly provides an additional element of data and a better sense of what users are doing and what users are interested in and also for those of you who followed our gaming space know that it employs a lot more data for game tracks and a way to add value and information to the marketing community.

Finally, the fourth theme really is about growth in our user base through key distribution relationships.

We have two significant relationships that we've announced this quarter and you will see launching.

We have long been a believer that our content is in fact its own best advertisement.

And both of these arrangements demonstrate that.

The first arrangement is Premiere Retail Network or PRN.

PRN provides video to nearly 5,000 stores with potential audience of over 110 million shoppers per week.

These videos are displayed on television sets within stores, including Wal-Mart, Sears, Circuit City, Best Buy and Sam's club.

We are providing to PRN CNET video featuring our editors which PRN then displays in the stores twice hourly.

This is putting our video content, our brands, our editors in front of millions of users in an off line environment.

The second relationship is a relationship we announced earlier in week with the New York Times.

We will be providing product review content and shopping functionality for both the New York Times and Boston.com, newyorktimes.com and Boston.com will provide CNET content to complement the New York Times' technology coverage and be featured as part of the New York Times' redesign.

Further, it exposes CNET content, CNET brand to a larger, very high quality audience.

I think it will be a real way for us to get our brand our editors and what we do so well in front of in another audience.

Also GameSpot continues to license and distribute it's content to a number of partners, including AOL,MSN, EB Games, AT&T Wireless and Sprint.

Shifting gears as we mentioned at the beginning of the year, we talked about growth.

And we said it would come both from organic growth and organic execution and also from acquisitions.

The acquisition of Webshots is a great example of fueling growth through an acquisition.

We believe that the addition of a premiere digital photography website is an ideal addition to our growing portfolio of interactive content brands and properties.

With over 14 million monthly unique users turning over 20 million page views per day, we are adding a large and loyal active user base.

And we're adding it to our existing portfolio of digital lifestyles properties and I think one of the best things is when you look at the audience, the significant majority of the audience is unduplicated.

For those of you who really aren't familiar with Webshots, this is not a post and print site like Photo Snap or Shutter [INAUDIBLE], Webshots is a viral community where users post, share and browse photos.

Webshots is clearly one of the premiere user generated content properties and a leader in the space looking at a combination of audience, traffic and time spent on its site.

For nearly a decade, Webshot has been amassing a library of photo content that is today by far the largest content of user driven photos with over 58 million publicly available images.

There also is an extensive library of professional photos.

Webshots has created a unique community feature that lets people browse and share personal photos of hobbies such as travel, sports, recreation, birthdays, and other life events.

This provides a very rich, media platform and that media platform is generated by users.

We also have the ability to leverage our own content, the original content produced by CNET, such as digital camera views, help, how to's and shopping services in areas of Webshots where we believe it be additive.

In the right places, we believe the addition of original content can provide real differentiation and benefit.

This acquisition fits in nicely with the focus on digital lifestyle, represented by our market leading properties like cnet.com, download.com, GameSpot and MP3.com.

Webshots further allows us to tap into a broader advertising base, by adding new advertising opportunities for us.

Webshots is primarily an on-line revenue advertising model and we will look to leverage our existing resource and sales structure to further monetize the Webshot's ad inventory.

This provides significant reach against a passionate audience for our consumer electronic and technology advertisers as well as a broad spectrum of nonendemic advertisers.

This is a very attractive acquisition for us.

It provides a large, highly engaged audience with little duplication that fits into our lifestyle theme.

It provides a great ability for us to introduce that audience, the unduplicated portion to our existing properties.

It adds significant reach in inventory for our marketing partners and finally the transaction was done at an extremely fair price.

We believe that we are entering the second half of 2004 in a great position.

We have further enhanced our overall product offerings and leadership position in the interactive content category.

We remain convinced that we are still at the early stages of a 10-year shift in branding dollars towards the Internet and we continue to focus on positioning ourselves to benefit from that shift.

We are excited about the addition of Webshots to our personal technology category, and will continue to look at ways to put our capital at work to take advantage of opportunities to do what is right for the business and our shareholders for the long-term.

With that, I would like to turn the call back to the operator for questions and answers.

At this time, I would like to remind everyone, if you would like to ask a question, 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.

A couple of questions.

The -- it looks like after 26% growth in the marketing services, you're looking locking looking for a little bit faster growth, closer to 30% in the third quarter.

Can you put your finger on what is causing that acceleration that you're expecting?

Beyond that, kind of tied to it I guess in some ways, you've got 17% year to year growth in users and 15 in page views, are you feeling at all sort of usage constrained, are you concerned that -- your inventory -- you've got your marketing services revenue faster than your users and faster than your page views.

I guess Webshots will answer some of that, but in sort of your main areas are you feeling any kind of constraint on supply and then my last question is, can you talk about the Webshots profitability?

It looks like in the pro forma numbers that you're providing this year, fourth quarter, it's a little bit over 50%.

Did you think it will continue to run at that rate or will it be over that rate next year?

Yeah, I would say as we -- as you addressed your first question on the revenue growth rate of interactive in main Q3 within our guidance, yeah, I think we're seeing, you know, a good marketplace from our advertising set, you know, reflecting that kind of they're all coming back with this -- you know, getting more comfortable and in establishing the type of people they're trying to reach and market to in a bigger way, and we've had some, you know, initial albeit early on nonendemic advertisers with us in Q3 or Q2 that shall be outlined and we would expect more of that.

So we kind of view is it as, you know, the industry is healthy, it's growing, and we're beginning to expand our customer base and beginning to participate a little bit with nonendemics as a support as well.

I would say to the second question, I mean, one of the things you see and I think one of the things that we've demonstrated really is that we have done a good job overall monetizing our inventory and monetizing our users.

I think when you compare to other people in the industry, one of the things that content providers have been able to do is really create core relationships with high value users, and we'll continue to focus on growth and as I think you see good, you know, examples of that in things like the New York Times relationship and the PRN relationship in terms of finding more ways to get, you know, that I think is one of the great products out there, CNET com and products like it in front of more people so.

We're going to continue to focus on -- you know, how do we grow our user base, at the same time do we think there is are better opportunities and with can do a better job at monetizing what is one of the best users bases out there.

Regarding profitability on Webshots, yeah, they've -- as shown by the guidance that we provided on our expectation for their full year 2004 results as though they were a stand alone company, they do have very attractive margins.

That said, this is a growth vehicle for us and we're going to invest appropriately to sustain their growth as what they do as well as leveraging with CNET, so we would expect, you know, the margins to remain high, don't know that they're going to expand, but we're not going to starve the asset because it as an expectation of 30% growth next year, we want to take advantage of that opportunity.

Thanks a lot.

Thanks, Lanny.

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

Good afternoon.

A couple of questions.

One, last quarter you told us what percentage of your revenue came from search and I -- primarily Google.

I was wondering if you could break that out as a percentage also.

And then for this quarter -- and then also, on Webshots, can you give us a better sense of their revenue stream?

It looks like they have some subscription revenue, maybe some -- I don't know if they have licensing revenue or not and some advertising revenue presumably that is I gather undersold.

I'm just curious.

Can you give us a sense for the -- you know, the sellout, the size of their sales force and what you might add to the picture there?

And then is this a new channel that you might, you know, expand further as you grow the business externally or internally?

Thanks.

Yeah, on Q2, on paid search and our relationship with Google, that relationship represented just slightly under 10% of total revenues for the quarter.

You may have -- you may go back and look back in Q1.

It was 12% of total revenues.

That remains an important revenue stream.

It has some nice growth year over year yet and it's working well and that kind of sides it for you.

On a percentage basis, and on a dollar basis.

You're still in a minimum guarantee level there, I gather, you're not on a variable?

Well, it's -- we're first year into.

We're kind of on a mix of both, and, you know, our focus is on -- is really on maximizing that opportunity within search.com as well as within the other site where is we anchor the Google search results and, you know, it's been a good revenue stream for us, good partner for us, an we -- you know, expect to continue in that type of success frame and -- for the balance of the year.

Webshots?

On Webshots, you're right, they have principally three revenue streams today, really anchored by online advertising.

We think one of the opportunities is, you know, they have built in very large viral community of users, 14 million, that are very, you know, passionate users of this -- of the photography category on helping to monetize higher as a bigger revenue opportunity for us.

So that's about 50%ish of the total revenues in today's world.

Over time that will be a bigger -- advertising will be a bigger percentage going forward.

They have have a nice subscription base of business, which is about 25% roughly of total revenues, and then the traditional kind of print and gifts opportunities would be the other 25%, but, you know, we're as Shelby outlined, one of the multiple opportunities here is to bring, you know, a heightened sales and marketing effort against the inventory that they have.

I think one of the things -- you look at the results, I think have you to really commend the job we've done.

At the same time, if you look at what they've done from the inside sales standpoint, it's really been done with three people.

A lot of where the sales comes from is selling to outside ad networks.

We think there's a lot of opportunity of things we can do to add value over time with respect to the ability to monetize that and also use it as a way to introduce the properties that we have to a new user base that's not using them.

Thanks.

Your next question comes from Safa Rashtchy with Piper Jaffrey.

Good afternoon, Shelby.

Couple questions.

First, can you give us a sense of what percentage of revenues and some color on how much of the revenue is coming from the new initiatives that you have, be it GameSpot, MP3.com, as well as the new breed of advertisers that you've been attracting to these new initiatives and also related to that, if you have seen any slow down or you expect any slow down from the technology advertisers, given some slow down in preannouncements in the software sector you've seen.

The second question I have is maybe broader for you Shelby, you're aggregating a fairly number of interesting sites, mostly on the entertainment and community related activities.

What are your plans if any, to kind of integrate these to cross sell if you will the services to users, is there any such plan to maybe create sort of a mini entertainment portal or will you continue to mostly operate these as independent brands?

Thanks.

Okay.

We'll -- to the first question, we don't actually break out the percentage of revenue from GameSpot and MP3.com, but, you know, the thing I -- you know, you know and we know I think you've seen in terms of overall results is that, you know, we've seen a lot of growth.

I think in the games and entertainment group for us has done extraordinarily really during the last year and a half.

We we we've seen a lot of attention from the game publishers side.

I think in a good way we're starting to see traction on the nonendemic side.

As we mentioned on the last quarter call, for the first time we really began to staff so we could put more teamwork against the nonendemic category.

I think we're starting to see some fruits of that.

I anyone who has managed sales force know you got to put feet on the street and we're starting to see that.

I think we saw some nice addition to the new advertisers.

And so I think, you know, we're pleased with what we are we're seeing.

I think we're seeing good -- I think to your second question, is on the enterprise side, the enterprise side has remained a challenging category.

I think we've got some good properties there with news like news.com, like (PH) term and like ZDNet.

I think they're doing some good things from a product side.

As you've seen, that remains a challenge in the market.

We saw a lot of companies preannounce in quarter.

I think the good news is we have a very strong portfolio products and I think with a -- you know, we had good results in the quarter and I this think it really speaks to the fact that we've been able to over time diversify our overall advertiser base and I think we feel good that, you know, as we do the right things that we're going to see some growth out of that category.

To your third question, you know, one of the things that we really believe is in have you to have teams and brands that are focused on doing something and doing it really well.

And, you know, we want to be a service that the stuff we do, we do really well.

We provide very quality services, so, you know, part of us, you know, doesn't want to overly try to merge things together.

At the same time, there is a lot of opportunities for us to be very smart about how we use relationships with different users and marketers to allow the network to create more value for us as a business and to be able to introduce people to new products and new services, and I think we will continue to do that very intelligently and smartly in how we can kind of optimize the networks to get the most value out of.

Thanks.

Thanks, Safa.

Your next comes comes from Anthony Noto with Goldman Sachs.

Thanks.

Could you talk about what percent of the top 10 advertisers in the U.S. that are advertising on CNET today what's the gross was in your non search advertising revenue and then last, is blogging a threat or an opportunity?

Well, I think if you look at -- I don't have the numbers on top of my -- at my fingertips, but if you look at the numbers in terms of where Google was as a percentage during the first quarter, to slightly less than 10 now and look at overall growth in the marking services, I think you can see that, you know, we've seen some nice healthy growth in the second quarter.

You know, we still don't have the breadth of marketers that a lot of other, you know, broader base services do, but at the same time, I think as we continue to grow our audience and grow our product base, we're doing a better and better job of bringing, you know, people to the game.

And it is -- you know, as we all know, we're still very early in the cycle.

We think there's a lot of opportunity in and our job is to really make sure we -- you know, we content environments positioned to capture those dollars.

I'm sorry, go ahead.

On the --your initial question was with, you know, top 10 U.S. advertisers and are they also advertising with us in internationally.

The answer is yes, you know, by and large that a vast majority of those advertisers, you know, on a proportionately smaller basis, obviously, are clientele with us internationally as well as in the U.S.

Yeah, and to the to the blogging question, you have still -- it's still a little early to figure out where the blogging world goes and I think, you know, have you a lot of fans of blogging certainly but the thing I would say is the degree to which its content, it's an opportunity for us.

And there's a lot of things when you look at news.com and you look at the type of services that we do, we think there's a lot of things we can do and I think we're supportive of things and we think there's opportunity for us in places where there's good content.

I think it's an area we know, it's in our DNA, and as we've said before, we think there's going to be huge opportunity for in the next 10 years.

Thank you.

Your next question comes from Mark Mahaney with American Technology.

Thank you very much.

Three quick questions.

That 98% renewal rate, that's the highest rate that you've had -- maybe ever but it's the highest rate that you've had in a while.

Can you set some expectations for what kind of renewal rates that we should see in the future?

Secondly the international side, switching around from fairly material losses last quarter to a gain this quarter, was a positive move.

Any thoughts on what we should expect going forward there?

And third, really quickly comparing Webshots with Picasso, which was just bought by Google, there's some differences but there's some similarities.

Do consider as a shortcut just buying Google?

Thanks.

Thanks.

We're not announcing that today.

On the renewal side, it was a very, very satisfying getting a 98% of the top, you know, customers renewing with us in Q2.

And it was one of our -- probably the highest rate in the last couple of years.

We typically have our highest two rates in Q4 because your Q3 customers want to participate in the heightened season of shopping in Q4, as well as in Q2.

So there's a little bit of seasonality there to kind of temper our expectations or think about it a little bit while we don't project renewal rates of these top customers, you know, the -- that renewal rate is a sequential measurement, so, you know, Q3 sometimes can be just from a participation rate.

You might have a more -- see more clients not participate as they, you know, save their budgets for Q4, but that's not an usual phenomena.

On the international side, yes, we were very satisfied both on top line and bottom line in Q2 on getting to the point of break even for the quarter.

The growth was pretty well broadly contributed by both Europe and Asia, and, you know, it is representative of a fairly fixed cost business.

We had nice revenue growth, as you can tell, in the quarter.

And a lot of that passed through into profitability this quarter.

Still a little bit behind the U.S. in terms of the on-line marketplace, but nonetheless, we're -- you know, we're beginning to make financial as well as operating progress as we had hoped to this year, so we're happy with that.

Q3 is a bit seasonal, as we know, so -- but we're happy with the progress made and where their trajectory is for the balance of the year.

I would like to underscore that because I think at different times, you know, we've all looked at international.

I think it was -- when you look at some parts of Europe.

Have you to give credit to that theme.

They've done a good job of -- we have strong presence in different markets both in Europe and Asia.

We see a lot of opportunities as an example on places like China, and I think the fact that, you know, we have been able still early in a cycle because as Doug mentioned, it is behind the U.S. early, early in a cycle to get that business where it is now and I think it's very encouraging.

With the respect to the question on Picasso versus Webshots, they are different.

If you look at Picasso, it really is more of -- kind of its nature is a client.

What Webshots is a community.

It's a viral community, it's been built over a long period of time.

As -- for those of who you followed it, it was purchased by Excite and then when they got in trouble, was bought back from the management team.

And I think they've remained dedicated over time to really building a viral community with 58 million publicly available images were people go on and share and browse and make their photos available and so we think, you know, when you actually look at the two, they're more complimentary in nature and as I think Doug said to one of the first question, we over time had a really, you know, good relationship with Google.

You know, they've been a very important partNER for us and we look for more ways to work together.

Thank you.

[INAUDIBLE] Your line is open.

Your next question comes from Chuck Grange with Atlas Capital.

Good afternoon, guys, just a couple of questions.

First beginning with the slight decline in page views and unique users.

Can you give us a little bit of color on despite having a few more properties if you will, available to users, was it seasonality?

What do you attribute the sequential decline to?

Yeah, I mean, it's one of the -- you know, I think since, you know, you look back, you know, over -- since we launched CNET.com back in '95, if you look from an perspective, there's traditionally been a slow down in the second and third quarter of usage and you see stronger quarters in the fourth quarter and the first quarter.

A lot has to do with, you know, how much time people spend inside, students getting out of school and, you know, spending more time doing things in the summer.

So that's been a pretty traditional usage pattern.

I don't think anything real surprising in it.

And I think, you know, we had some services that we just launched and I think we've been pretty happy with what we've so I don't any any surprises in the usage patterns.

I this if you look at the year over year comparison,17% - 15%) the usage that we're happy with and I think pleased in where we're going.

Okay.

Could you disclose the revenues from Adventure and WGRME in the quarter?

No, we haven't but we can tell you they're very, very small.

You know, well below 5%.

They're nice strategic fit and we're building from them in their respective areas of gaming and entertainment and business technology, but financially contributors, they're very modest at the moment.

All right.

Then the last question I had was on the operating leverage, it looked like sales and marketing as a sales of revenues came down a little over 200 basis points and G and A as a percent of revenue went up a little bit.

Can you talk about each one of those line items and how we should think about them?

Yeah.

You know, our financial results in the second quarter and then if you want to look at basically our guidance for the third quarter, our relationship, our cost relationships will remain may recall intact at this level of revenue.

So sales and marketing as a percentage of revenue roughly speaking in Q3 probably doesn't differ a whole lot in Q3 or G and A or cost of revenue.

An then we get, you know, much more leverage in Q4 as our revenues increase our margins increase as well.

So those both cost relationships would decline in our bigger revenue quarter such as Q4.

Was G and A more of a function of just absorbing some head count related to the acquisition sessions or --

Yeah, we don't see anything materially change there.

I tell you the percentage basis, we're comfortable where we are and where we're going to manage that particular cost category going forward, you know, in our more -- in our more encompassing objective of, you know, over on an annual basis getting the right incremental margin against the top line growth, so our overall margins at the operating income before depreciation and amortization level continue to expand.

All right.

Thank you very much.

Thank you.

Your next question comes from Emron Kahn with J.P. Morgan.

I missed the last question.

Two questions.

In terms of -- it seems like you are getting some advertisement from the segment that you are not very close to, a consumer segment, like McDonald's and auto like Toyota [INAUDIBLE].

I was wondering what are you doing to generate more advertisement revenue from the consumer side because it seems like CPG is spending more and more money on the online advertisement side and secondly, after the acquisition, after the close of the acquisition, you will have 93 million cash but if we exclude that, it while be like 73 million or so.

How comfortable you are with your cash balance position, so if you could talk about that.

Thanks.

Yeah, on the consumer side, you know, if you -- you know, if you look at us over really the last year, year and a half and we've continued to look for ways, you know, to expand our product offering to bring in a broader more diverse set of advertisers, so you have seen us focus on growing the games and entertainment section, which does a phenomenal job on focusing on a 18 to 30, male demeanor yoe, which we know is attractive to that advertiser base.

We've done more things to grow inventory and to grow relationships those users base.

I think things like Webshots are further additions to that overall portfolio.

At the same time really beginning this year, we've put more sales effort behind it.

I think you're starting to see the benefits that have really in the, you know, starting to show up in the second quarter and I think it's still early but we're encouraged in what we're seeing both in our ability to make sure that, you know, we have the right media and content properties for those marketers and at the same time, we have the relationships to sell to them.

With respect to the -- I'll speak just, you know, and Doug can be -- I would say we're overall very comfortable on a cash basis.

When we did the refinancing of our convertible, you know, one of the advantages was by pushing out the maturity to 2009, we freed up some flexibility from an overall balance sheet standpoint.

And one of the things that I think -- you know, we believe we've done well if you look over the last three years, I think we've done a smart job of managing our balance sheet when the original converge dropped in price, we were able to buy back, you know, I think a sizeable portion of it, what it looked like now very attractive values.

I think we did a smart job in terms of the refinancing we did earlier in this year, and so -- you know, I think we continue to believe that, you know, we have flexibility and we can be very prudent and smart in how we overall manage our balance sheet so that we can continue to fund growth going forward.

I would just add to that, I mean, we're also at, you know, did from where we're CNET is today, we're generating cash.

So, you know, prior to the transaction with Webshots, CNET is in a position now to generate free cash flow going forward and, you know, Webshots, in its high -- you know, pretty high margin business, not requiring a lot of capital expenditure, reinvestment is also -- fits in with that notion of cash on balance sheet plus the company itself beginning to generate cash.

So the two beginning to go hand and hand.

Great.

Thank you.

Your next question comes from Scott Kessler with Standard & Poors.

Thanks very much.

I was wondering if you could expound a little bit about how you think about not only your cash position but how you use not only cash but perhaps your stock, what I've noticed recently is that acquisitions that you've made have been largely financed by cash.

I'm kind of wondering how you make those determinations in terms of acquisitions, especially going forward, how we should think about that.

Thanks a lot.

Yeah, you know, you really got to -- it's almost possible to answer the question until you're kind of understanding what kind of opportunity you're looking at in terms of its size, its growth rate, its cash flow capabilities.

We try to be prepared for both.

And of course, you know, an outside type of opportunity, you know, that probably -- and if it was an opportunity, would probably need a blend of the two.

But it's really -- we like to stay in position to be able to do both, which is to find these opportunities and put cash to work against them or if a particular company is more interested in a mix, we can do that, and we're also keep -- you know, our eyes on overall managing the leverage of our balance sheet in a prudent way, because it's a fairly young industry yet and we want to make sure we (PH) maintain our anymore to bring fresh capital in in an efficient fish manner.

So we keep all of that in mind as different opportunities are reviewed.

Thanks a lot.

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

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

Thank you.

Just wondering, Shelby, if you could talk about CPMs and, you know, how those are trending just wondering if given the seasonal -- of the seasonal patterns that we're starting to see across the sector in terms of usage, if that's going to have any effect on CPMs going forward?

If you're seeing any erosion or any erosion or what areas that you're seeing pickup and wondering if there's a lot of volatility in pricing and how you see that playing out over the next 6 to 12 months.

Yeah, I'd say overall they've been pretty stable.

We have found that, you know, because we have a mix of properties and we have some, you know, very high value inventory and we have some, you know, inventory that's of lessor value, that it's really -- you know, it's different depending on what categories you've seen.

I would say if you step back from an industry perspective, that what has been happen something I think we're starting to see us as, you know, marketers take it more seriously.

I think you've seen a lot of the very low CPM inventories start to tick up in price.

You know, where people were being able to sell, you know,, marketers were being able to buy very low CPMs.

I think that's starting to tighten up a bit.

And I think, you know, the good news is that went we look at overall willingness to spend branding dollars and the value people put on content, we're encouraged.

As we said on the last call, I think we're managing more as an industry and I think is how we do a better job of bringing up volume in terms of instead of a lot of pressure on pricing from an upward perspective right now.

Okay.

Great.

Thank you.

Your next question comes from Shawn George with Drake Management.

Hi, guys.

Could you disclose how much cash Webshots had at the time you announced the acquisition?

A modest amount, but I don't think we are in a position to disclose that information until it's all in a consolidated manner.

Okay.

Thanks.

At this time there are no further questions.

Good.

We want to thank everyone for joining us and we look forward to talking to you again next quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.