Paramount Global (PARA) 2004 Q3 法說會逐字稿

Good afternoon.

My name is Nicky.

And I will be your conference facilitator today.

At this time, I would like to welcome everyone to the CNET Networks third 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.

Mrs McLaughlin you may begin your conference.

Thank you.

Good afternoon.

Before we begin our formal comments, I would like to remind you that in the 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 or predicted results to differ materially.

These risks are outlined in our third quarter news announcement, as well as in the Company's Securities and Exchange Commission filings, including its 10-K for the year 2003, which can be obtained from the SECs 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 fourth quarter and year ending December 31, 2004.

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

If we decide to update our financial guidance, we will disseminate the information either by news release or other similar communication methods that need 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.CNETnetworks.com.

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

Now, let me turn the call over to Shelby.

Thanks, Cameron.

Thanks everyone for joining us.

Our third quarter results demonstrated another quarter of consistent solid performance in our ability to solidify our position as a multi-category interactive content company.

Overall, it was a very good quarter.

We saw strong user and traffic growth, both organic and through acquisitions.

It was a solid quarter financially.

Third quarter interactive growth was up 33% year-over-year and net income was $1.1 million.

We continue to expand our footprint, both domestically and abroad, with new product initiatives, new partnerships, and new acquisitions.

We are pleased with what we've accomplished this quarter.

We continue to focus on growing our customer base, innovating and leading on the product side, and utilizing acquisitions to expand the size and scope of our overall opportunity.

An example of this is two acquisitions that we announced today in China that I will discuss later in our presentation.

Looking at the financial performance in the third quarter, total revenues were 70.5 million, up 22% from the third quarter of 2003.

Interactive revenue was up 33% from the third quarter to $61.4 million.

If you remove the impact of Webshots during the quarter, interactive revenue growth was up a solid 29%.

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

User and usage metrics were quite strong during the quarter, driven by the addition of Webshots as well as solid organic growth.

During the quarter we reached close to 89 million unique users per month, turning approximately 62 million pages per day.

These are impressive figures and prove that we are building scale and reach that will only be more relevant as we focus on broadening out our customer base and bringing in more out of category marketers.

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

Our model is set up for long-term sustainable growth and free cash flow generation.

Our strong top line and minimal operating's expense growth drove better than expected profit.

Operating income before depreciation and amortization was 7.1 million.

Profit growth from core business was strong with margins in the double-digit range during the quarter.

Net income was 1.1 million, or 1 cent per share.

With that, let me turn it over to Doug to cover the financial highlights.

Then after that, I'll provide a little more insight into the overall quarter.

Thank you, Shelby.

As mentioned, the third quarter results demonstrate continued growth of our core interactive business and importantly, our ability to turn top line growth into profit.

Interactive revenue growth was up 33% during the quarter to $61.4 million, which included a $2 million contribution from Webshots.

Excluding Webshots, interactive revenue was up 29% during the quarter.

Looking at today's financial results and the significant growth of our online audience which now totals nearly 89 million unique users, which is up 35% compared to last year, we believe that CNET Networks remains very well positioned for long-term sustained growth and we'll continue to take advantage of the improving online advertising market, benefiting from the innovation and expansion of our interactive content across all categories and we're also excited about the acquisition of ZOL.com.CN and Fengniao which significantly strengthens our position and expands our opportunities in China.

Looking at some of the top line trends during the quarter, third quarter total revenues of $70.5 million, were up 22% over last year.

We're very pleased with the strong results demonstrated by our existing businesses during Q3, as well as from Webshots.

Excluding Webshots, revenues increased 19% to $68.5 million and looking at our primary components of revenue, which are interactive and publishing, during the third quarter, interactive revenues as mentioned of $61.4 million increased by $15.2 million, or 33% compared to last year and within interactive, the marketing services category grew 34% during the quarter.

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

Business technology, particularly the enterprise sector, continues to be a challenge, but the trends from our other businesses more than make up for the trend within that sector.

The $1.9 million or 28% increase in licensing fees and user revenue reflects equal amounts of growth from existing operations and the addition of Webshots premium paid service programs and publishing revenues of $9.1 million were down year-over-year, but that was in line with our expectations for the quarter due to the elimination of custom publishing revenue.

Moving down the P&L to our operating expenses, our total cash operating expenses of $63.4 million were up 12% from the year ago quarter, but much lower than our revenue increase of 22%.

The expense increase is primarily from existing operations, including additional investments being made in MP3.com and GameSpot and the acquisition of Webshots.

From a profitability perspective, as a result of the higher revenues, third quarter operating income before depreciation and amortization equaled $7.1 million, well above last year's operating income before depreciation and amortization of $1 million.

Webshots contributed approximately $700,000 to these results, before the inclusion of Webshots, our operating income before depreciation and amortization of $6.4 million, came in at the high end of the guidance range, which was 5.5 to 6.5 million.

International, while it generated a modest operating loss in Q3 of $650,000 due to the impact of seasonality in Europe, generated strong revenue growth and a lower quarterly loss compared to last year.

And we anticipate international will contribute an operating profit in Q4 at a level meaningfully higher than last year.

During the third quarter, each $1 of revenue increase generated 48 cents of additional operating profit before depreciation and amortization.

This performance keeps us on track to generate an incremental margin of 50% for the full year 2004, and as discussed last quarter we expect some quarters, including the third and fourth quarters to be less than 50% due to the timing of product investments and certain cost adjustments, such as our annual compensation adjustment that occurred in the third quarter and increased marketing efforts during the second half of the year.

As Shelby mentioned, net income for the third quarter equals $1.1 million, or 1 cent per share.

And that compares to a loss of $5.8 million, or a 4 cent per share loss in the year ago quarter.

Looking at some non-financial metrics and user statistics, unique users increased 35% year-over-year.

Paid leads were up 19% and day add average daily page use were up 52% year-over-year.

The improvements in user and page view metrics came from organic growth with users up 23% and page viewers up 12%, as well as the addition of Webshots.

During the third quarter, our 100 largest customers represented 57% of total revenue, which is similar to previous quarters and we continue to experience a very high renewal rate from our top advertisers. 95% of our top 100 Q2 advertisers renewed with us in Q3.

Turning to the balance sheet, our cash position, as of September 30, equaled $93.6 million, which is down 60 million compared to the June 30, cash position and that reflects the $60 million cash payment associated with the Q3 acquisition of Webshots.

In an effort to provide additional financial flexibility, beyond our cash balances and beyond our cash generated from operations, we announced today the signing of a $30 million two-year revolving credit facility led by Banc of America.

This improves our day to day cash management capabilities and provides an additional source of liquidity to simplify the funding of small transactions such as ZOL.com.CN and Fengniao that can be repaid from cash balances, as well as cash generated from operations.

And lastly we announced our intention to file a $300 million universal shelf registration statement.

And while we currently don't need the funds or don't have any plans to raise funds, completing a shelf registration provides CNET much greater flexibility and time to market advantages to fund growth and further expansion opportunity of those as they occur.

Our day sales outstanding equaled 65 as of September 30, which is in line with 65 days as of June 30, and 64 days a year ago.

Capital expenditures in the third quarter came in at $3.8 million, a bit less than our guidance of 4 to $5 million.

And we expect Q4 capital expenditures to be in the range of 3.5 to $4.0 million.

Turning to CNET's guidance, for the fourth quarter we anticipate the following results: Which is, for total revenues of between 86 to $89 million.

This translates into interactive revenue of between 77 to $79.5 million and publishing revenues of between 9 and $9.5 million and that reflects a decline from custom publishing.

We expect operating income before depreciation and amortization between 18 and $20 million for the fourth quarter and for the full year 2004, total revenue guidance is 288 to $291 million.

This translates into interactive revenues of between 253 and 255.5 million and publishing revenues of between 35 million to 35.5 million, which would bring our full year operating income before depreciation and amortization to between 33 million and $35 million.

And we're also introducing preliminary full year 2005 guidance as follows, which is for total revenues of between 340 million and $355 million.

This translates into interactive revenue between 305 million and 318 million, and publishing revenues of between 35 and $37 million.

And for the 2005 operating income before depreciation and amortization initial guidance is to generate between 62 million and $69 million.

And I will note that would be before any potential stock option related expenses.

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

Thanks, Doug.

We continue to like the overall improvements we are seeing in our business.

We have a strong position in three core areas, personal technology, games and entertainment, and business technology.

We have seen traction on both the user and usage standpoint and it is underscored by new product initiatives, new partnerships, and new acquisitions.

We are seeing strong, steady growth in our financial metrics.

We continue to find new opportunities that allow us to expand content coverage, diversify our audience and customer base, and build further reach, usage, and loyalty with our audience.

Finally, we remain very encouraged with respect to the continuing trends around internet advertising, and our position as a Company to take advantage of those trends.

If we step back for a second to focus on the last point, trends and internet advertising, we remain convinced that the long-term outlook only gets stronger as time passes.

More and more marketers embracing the medium and recognize that it is core to their marketing programs.

There is also a growing sense of importance of using the medium for broader purposes than purely generation.

I.e. to support awareness, consideration, and propensity to buy.

We believe the content properties are uniquely positioned to benefit and as we have said over the last year, we believe we are still early in the shift of dollars from offline to online.

Our strategy as an organization continues to be building content areas against passionate, engaged audiences in a way that uniquely serves the needs of an individual audience.

In doing that we focus on investing in content areas where there is both user and marketer interest, having unique brands that reflect the passion and sensabilities that have audience, delivering world class differentiated content from both our editorial team and from our user base and finally, monetizing through a mix of in category and out of category advertisers.

I'd like to pick up on three themes that we highlighted last quarter on our call as I provide some color on this quarter.

The first is growth in customer base.

The second is improvement and innovation of current products and services and the third is expansion through acquisitions.

With respect to the first, growth in customer base, we have continued to see growth this year and with that, we move beyond a heavy reliance on traditional technology accounts.

This quarter highlights that shift.

As anyone who follows the category recognizes the enterprise category remains a very challenging category.

You saw that in the Wall Street journal third quarter numbers with Tech Lineage being down dramatically versus the third quarter of last year.

Our ability to deliver 29% organic interactive growth this quarter speaks to the fact that we have dramatically grown and diversified our customer base in a way that allows us to decrease our exposure to any one category.

Most of the diversification has come from our ability to bring in a broader mix of marketers around our three current content categories with most of the growth coming out of personal technology and games and entertainment.

As we look to next year, we are putting much more emphasis around bringing in a greater amount of out of category advertisers to continue this trend of growth and diversification.

Through properties like CNET.com, GameSpot, MP3.com, Webshots and Download.com, we are building ideal environments for consumer advertisers to deliver their marketing messages.

We provide a nice opportunity for marketers to reach a high quality audience in quantity that is material.

While these initiatives really only began this year, we have had some initial customer wins in the consumer advertising category.

During the third quarter, customers such as Acura, Energizer, Citibank, Gillette, Nike, and Unileaver advertise with us on properties such as GameSpot, MP3.com and Download.com.

It is still early but we are encouraged for next year.

As we've mentioned in the past, the growth of this customer base really plays out over time and spend increases and step functions as new marketers move out of a testing phase.

As we look to next year, our ability to deliver growth around our end category marketers and introduce more out of category marketers provide the catalyst for us to continue to deliver sustained attractive long-term growth rates.

The second theme I want to talk about is improvement and innovation of current products and services.

Let me provide some quick highlights on some of the things that happened on the product side this quarter.

One of the most major was the relaunch of CNET.com.

When we launched CNET.com way back in June of 1995,we had a tab line, which was center of the digital universe.

At that time, digital universe was more of an idea than the reality that it is today.

And with this relaunch, we are finally delivering on that original concept.

The new CNET.com reflects the trends we all know and we all see, the merging of technology into our everyday lives, a notion of digital lifestyle.

We are a taking a much more holistic and expansive view of our mission than just where to go to get product reviews.

There are more how-tos, there are more tips and tricks, there's more how to get the most out of your product, more community. and more fun.

We've also made a further commitment to video.

All of our new product reviews now include video reviews.

We're doing a lot of additional video features like how to set up your wireless network or how to transfer your videos onto DVD or things like that.

In a funny way, when Hollgie (ph) and I started we had a vision of doing a 24-hour cable network and a companion online service, that was back in 1992.

And we quickly abandoned the idea of a 24-hour cable network based on our inability to get distribution.

What's funny now is with the relaunch of CNET.com we have done more to deliver on that original vision than anything I could have ever imagined.

The initial feedback from our relaunch has been quite positive.

User and usage trends have all been strong.

We've also received great feedback from marketers, both people who are current advertisers and those who are not yet advertisers.

It provides an environment for them that reflects the promise, excitement, and personal nature around the digital world.

We believe that CNET.com can reflect the cultural shift underway as digital products become core to how we live, how we work, and how we play.

CNET.com is a great example of innovation and leadership in product.

We've also had some other good examples this quarter that I wanted to just spend a second highlighting.

As usual, there's some great new features coming out of our games and entertainment group.

GameSpot and MP3.com are both seeing traction with respect to their community areas.

They have taken social networking functionality and they have introduced them to topical areas where people are incredibly passionate, i.e., games and music.

And we're seeing the benefit from both the usage and loyalty standpoint with our users.

We also continue to embrace aggregation and all the positive things that are happening both with wider adoption of RSS and the incredible growth in the blogosphere (ph).

News.com, ZDNET and TechRepublic are doing some really interesting experimentation in this area and we're really encouraged with the initial results we're seeing.

As you look at those trends, aggregation, wider adoption of RSS and the growth in the blogosphere, we think all of those trends ultimately benefit the content market.

Probably the best news overall is that what we're doing with respect to product development within CNET Networks has been reflective in the strong user and usage numbers that Doug took us through.

The third and final theme I want to talk about is expansion through acquisitions.

We continue to make acquisitions in ways that expand the size and scope of our overall opportunity.

As most of you remember, we announced the acquisition of Webshots during our last quarterly conference call.

Webshots provides an important addition to our focus on digital living.

We closed the acquisition at the beginning of August.

We've gotten pretty good at the integration process from acquisitions, having done a few over time and we've made significant progress on this one.

The team has moved into our office here in San Francisco and we are very happy to have them on board.

As we are shifting this site onto our infrastructure, we are already seeing some benefit thanks to the leverage provided by our systems and team and a modest investment in operating expenses, we have seen users and usage grow 20% since the service has come in-house.

Clearly this provides additional revenue capacity, which is helpful as we have started the process of integrating the Webshots inventory into our sales packages for 2005.

Overall, we remain very excited about Webshots.

Today we also announced the addition of two new acquisitions in China.

ZOL.com.CN and Fengniao.

As many of you know CNET has had a presence in China over the past ten years.

It came as part of the ZDNet acquisition.

We have an established local management team with extensive market expertise and experience.

We are currently operating eight magazines an events business and a series of online sites.

Our business in China has been growing and has reached profitability.

With revenue from existing operations in China expected to be approximately 5% of total revenues this year.

If we look at the first acquisition which is ZOL, ZOL is one of the top personal technology properties in China that enables users to evaluate products, compare features and prices, they make buying decisions.

This property features content and shopping services related to the overall personal technology category and it tends to focus more on the northern part of China, being centered really around Beijing.

The Company has product specs on over 45,000 different products.

And given the nacian (ph) state of online commerce this, site reflects an early generation of product/price comparison service.

In many ways it reminds me of the early roots of CNET.com which we launched in the summer of 1995.

Having said that it is clear that with wider adoption of credit cards and more players like Amazon and eBay focusing on the market, online commerce will come.

We know this plays out and we can use what we've learned here in the U.S. to grow this business in China.

Fengniao is one of China's leading Websites for digital photography and encompasses all aspects of researching, purchasing, and using digital cameras.

It has more than a thousand editorials reviews of digital cameras available on the site, it provides camera listings, data specifications, member forums, and a large image database.

ZOL and Fengniao bring large engaged audiences to our existing online properties.

If you take them on a combined basis, these two properties reach over 1 million unique users per day and generate over 7 million page views per day.

Given the attention that China has gotten in the financial markets, we probably don't need to spend a lot of time on the macro view of China.

Having said that, it should be pretty clear that we are excited about these acquisitions and their ability to provide another long-term growth catalyst.

Let me spend a second on outlook as we look forward to 2005.

As Doug mentioned, we've given our first initial guidance for 2005.

And I'd say generally we are quite excited about the year ahead.

The market continues to improve for internet advertising.

With the results of some trends that we're seeing that we think affect us directly as content providers.

We see increases in brand spending.

We see increases in broadband access.

We see increases in user adoption of video and finally we see an increase market or adoption of rich media.

We think all of those ultimately benefit the content area.

We have nice momentum both from a product and financial standpoint.

We continue to see opportunities to make acquisitions that are additive, both strategically and financially.

Overall we are well positioned to continue to build our business and extend our leadership position.

We have proven over the last year that we can turn revenue growth into profits.

The leverage in our model provides for an attractive long-term picture, it poses sustainable top line growth, margin expansion, and significant free cash flow generation.

The third quarter results demonstrate that we are clearly on the path to achieve strong, sustainable growth and that we are building and expanding our franchise for the long-term.

I would add on a more personal note, as you probably saw in the press release, we will be -- we will begin the process of a search for a CFO as Doug transitions to a new role within our organization.

This is just a career decision for Doug.

After several years of ups and down in this industry the Company is in great financial shape.

As we approach the end of the current fiscal year this was a good time to start the transition of the CFO role.

Doug intends to remain CFO through the completion of 2004 financial reporting process.

Doug has been a strong and valued member of this senior management team and has been a great partner to me.

And this provides us with the opportunity to leverage his skills and experience in a new role within our organization.

And for that, we're really happy.

So with that, I'll wrap up the formal comments.

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

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

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

Your first question comes from Safa Rashtchy with Piper Jaffray.

Hi.

It's Aaron Kessler for Safa Rashtchy.

One question here.

What visibility at this point do we have into either Q4 or 2005 numbers and what are your assumptions for price increases in 2005 versus volume growth in '05?

I would say with respect to visibility, I mean compared to what you would have seen, you know, two or three years ago, I'd say the visibility is actually pretty good.

As we go into the fourth quarter.

I'd say with respect to 2005, it's still early.

It's October.

And so I think we're giving really what is a first glimpse on 2005 and, you know, as we have told people and we've been very consistent over the year, you know, we want to build a business that can grow in the 20s and we want to be able to deliver a 50% -- target of 50% incremental margin against that business.

And I think, you know, if you look at the current guidance we're providing, it does that.

With respect to both price and volume, I would say the major thing we're seeing with respect to trends in price, as you look kind of in the Internet is there has certainly been a tightening of what you think of as kind of the lowest quality inventory on the Web and we've seen, you know, shifts in price there.

I would say with respect to kind of the more premiums basis, we've seen price be relatively comped.

And we've seen maybe a little bit of increase in places.

We currently -- we clearly are seeing some further interest and demand within the overall video space.

So I think as we think about 2005, we're much more focused on increases in volume than we really are increases in price.

Those really are what our numbers are based on.

Great.

Is there any key differences you're noticing so far between the new branded type of advertisers, the traditional ones versus your technology advertisers?

Yeah.

You know, as I mentioned in my talking points, this has been a relatively new area for us.

We, you know, during really the last five years, our major focus has been on in category advertisers and so we've put a lot of shoulder behind, you know, making environments that work for people within the personal technology category or within the games and entertainment or within the enterprise category.

And I think there is, you know, what we have learned as I think other people have, is, you know, how do we create different types of packages and different pricing and different opportunities, and I think as I mentioned, we're seeing some early success on that.

We've seen some success with some nice new advertisers in the third quarter.

So we're pretty encouraged.

I think as we look at 2005 and with the ability to begin to take some of the Webshots inventory and integrate it into our overall offering, you know, we're pretty optimistic in terms of our ability to begin to deliver on more out of category advertising.

I think it's still early, as I mentioned, going to come in a step function.

But I think, you know, so far, so good.

Great.

Thanks and good quarter.

Thank you.

Your next question comes from Lanny Baker with Citigroup.

Hi.

This is Teran Colera on behalf of Lanny Baker.

We were wondering, what are your thoughts on the stock price ranges and/or strategic events that would put you into motion to use your cell filing to raise money?

Well, I think as I mentioned, when I describe what we're doing in the quarter, which is, you know, first of all we have plenty of cash on our balance sheet as the foundation of our balance sheet, 93 million, and we're beginning to generate cash from operations through the first nine months of this year and through the fourth quarter of this year and certainly in larger amounts next year.

And we've added kind of a day-to-day enhancement of our liquidity with the line of credit that we announced.

Specifically on the shelf, as mentioned, you know, we really don't have the need or plans to raise money.

This is really more about getting ready, looking out forward a bit longer, if you will.

So we're -- we have more flexibility.

Our time to market is improved because with the shelf you go through the things of an SEC review and you get that sort of time to market thing behind you, if you will.

So it's really a tool of efficiency and flexibility for us with no imminent plans.

All right, thank you.

Great quarter.

Thank you.

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

Hey, this is Lloyd in for Gordon.

I was just wondering on Webshots if you could comment on the contribution specifically to marketing services and then if you have seen any pricing changes as you bundle in Webshots and MP3.com.

Sure.

As mentioned, Webshots contributed a couple million dollars of revenue to our results in the third quarter as we closed it on August 2.

So, you know, $1 million per month, and in equally about a million dollars of that was part of our marketing services.

So their advertising programs, and the other million, roughly speaking, was in our licenses and services area with Webshots premium paid services program.

So it's split about 50/50 during the quarter.

And I would say with respect to pricing changes, we're still, as I mentioned in my talking points, we're still early in the, in overall being able to package the Webshots inventory.

I think that's more really of a 2005 focus.

You know, as you can imagine by the time we closed the acquisition, we were pretty well in market with programs for the fourth quarter and so this really has allowed us, as we think about how you tell the story, how you position it and how you create packages that are attractive for marketers, this is really more of a 2005 topic than it is a fourth quarter of this year topic.

And is this the type of inventory you think you could use for sort of behavioral targeting, tracking users into the Webshots inventory and serving them as you may have identified them as interested in other areas?

Yeah, I mean we've got, you know, clearly we're doing a lot more and I think we talked about this a couple quarters ago.

We're doing a lot more with respect to being smart about how we can optimize within our network and how we can use technology as a way to, you know, optimize performance programs, use it also as a way to make sure content is more relevant to our users and so we've done a lot of, you know, work behind that overall.

And I think as we think about things like Download and Webshots and other places, you know, being able to apply some of that technology we think is really beneficial.

I think it's still early in terms of exactly what those packages look like in terms of how we go to market with, you know, especially with respect to kind of the broader consumer, consumer companies.

Great.

Thanks.

Thank you.

Your next question comes from Mark Mahaney with American Tech Research.

Great.

Hey, it's Mark Mahaney for Mark Mahaney.

Couple of questions.

One, some groundwork.

The G&A line seemed like it nicely dipped or it dipped this quarter.

Any particular, anything particular going on there?

Secondly, Webshots, you had given some guidance before for the December quarter, about 3.5 million and for '05 of about 17 million.

Is that guidance, is that reasonable continued expectation for that, for that segment, revenue for those two periods?

And I have some follow-ups too.

Sure.

On, yeah, Mark on the G&A, you know, it's down a little bit in Q3, nothing unusual.

You know, as a percent of sales, it will continue to kind of moderate itself over time, we, you know, have a little bit of, you know, volatility here and there between quarters, but there is nothing fundamentally changed in that cost area.

Yeah.

I would say with respect to Webshots, during the third quarter we tried to give people some insight into the Webshots results so they could have some further clarity around what came organically and what came from -- specifically from Webshots.

I would say right now that we think of its one company and are integrating in the piece, the Webshots.

As I mentioned on the Webshots side, one of -- I think the positive things that's happened is as we brought it under our infrastructure and we have made some investment from an operating expense standpoint against it.

We found that we have been able to get some significant growth in both users and usage, which are being up 20% since we brought it in-house.

So I think that's good.

You know, if we think about the ability to create additional revenue capacity as we go into 2004, I mean 2005.

And then two quick follow-ups.

International profitability, Doug, I think you said you'd expected profitability for the international segment to be materially or meaningfully higher than last year.

I think last year was around 750,000 in profit.

Is that -- is that right, like a double or something substantially higher than that?

How do we think of -- what does that meaningfully mean?

Well, first of all your thought on the last year number so we are looking at the same one is about 750 and I don't know that we'll put a specific growth number on that in Q4.

But, yes, it's -- we should see nice -- continued nice revenue growth out of international.

Year-over-year in Q4, and begin to see some very nice flowthrough from that revenue into the profitability.

We do anticipate a nice meaningful increase in their profitability, their absolute number in the fourth quarter.

Sequentially into the seasonally strong fourth quarter costs are fixed and therefore leverage gives you a higher profitability, is that the point?

Yeah, I mean as you look at international, if you think on the, you know, there's two kind of seasonally weak quarters.

You have one in the first quarter which really rotates around Chinese new year which affects clearly Asia.

And then you have in the third quarter you have weaker demand in Europe because everybody takes their August off.

So that tends to be a weaker quarter overall.

So if you think overall that it's a relatively fixed cost business, you're going to -- that's where you're going to see kind of the difference between first quarter, second quarter, third quarter and fourth quarter.

Okay.

And then one last quick question, the site design, Shelby, I think you talked about getting great feedback from advertisers.

Can you -- any specific examples you can provide, not necessarily in terms of advertisers, but have you actually had greater spend per existing advertisers given the site design or has this attracted an incrementally new advertiser base, anything like that would be helpful.

Thank you.

It's done both.

And I think it's a, you know, it's actually quite important point also as we think about, you know, how we make sure that the products we have are attractive with respect to bringing in not -- out of category advertisers.

And that is as CNET.com moves from being more focused as a review site to being really reflective of how people work, how people play, and how people live within kind of the digital world, and so it does, you know, it's much more expansive and holistic in terms of its view.

It does a couple of things.

One is you get a lot of, you know, you take retailers, consumer electronics retailers and other players like that who find that area and that type of theme much more interesting in terms of a place they want to associate themselves.

You also see, as we've done things like encouraging more video, we've been able to showcase kind of the pizzazz of a product.

So as marketers look and say, you know, I spent all this money on design to make this thing look really good, this -- the site does more to showcase that and really focuses more on, you know, how people like the product, how it feels, how it is in your hand.

And I think that's been really important with respect to in category marketers, making them feel a lot more comfortable.

But then if you look at out of category, what it also has done is by taking much more of a life-style view, we've had, you know, we had a meeting a couple weeks ago where we had some senior people from an agency and then one of the things they were talking about was this new emerging digital life-style and the fact that marketers want to be able to associate themselves with that and how do they tap into that, and, you know, kind of one of those, you know, kind of unique points of serendipity, you know, here we are with the service I've seen at .com and I think it's done a really nice job of over time being able to take that much more expansive view and reflect that real cultural change that we all see happening in the world.

Thank you.

Your next question comes from Anthony Noto with Goldman Sachs.

Thank you very much.

Couple of questions.

Shelby in the effort to sort of migrate to a new advertising piece that maybe looking to the demographics and cycographics that's on the CNET platform, what have you seen from, you know, other companies that are outside of the technology sector as it relates to pricing?

In some of our checks with media buyers we have heard while the audience is -- seen that they want to target the relative pricing on CNET compared to getting that demographic or cycographic on other platforms, is a premium.

Then I have one follow-up.

Thanks.

Yeah.

I think that's right.

I mean, I think as you look, you know,-- I have a plan.

Sound very John Kerry-like.

No, but as we look at next year and think about from a packaging standpoint, there are going to be types of programs that really work for in category advertisers.

So if you think about the things that we've done and how we've priced them relative to if you're a seller of cameras or you're a seller of TV's or you're a seller of PCs or whether, you know, you're a game publisher, there are programs that really work and should be priced accordingly.

As you then step back and say, okay, what kind of programs will work and be appropriate for out of category marketers, in a lot of ways it's different types of programs and so, you know, as we think about and have been building packages over times, I think, you know, part of the way we solve those issues is by thinking of different programs that are really tuned ultimately towards the needs of whatever the market, you know, with one notion of in category with another notion of out of category.

You know, the other thing you'd say overall if you look, you know, from a measure of engagement or if you look from a category quality standpoint in terms of, you know, users that are, you know, of a certain type, it's really, you know, we can deliver very premium, high quality inventories and in a nice way, we can do it in a way that actually provides some scale.

So I think, you know, one of the challenges that a lot of the smaller contact providers have is you could have a nice little audience that's of quality, but, you know, a marketer can't spend any dollars of any significance against it.

So, you know, as you look at what is CNET Networks, we provide a really interesting mix of quality audiences.

We can do it in size and their audiences where, I think, you can be very proud of the association you get from a brand standpoint with high quality brands.

So, you know, that exists.

We think we can provide real value both to in categories and out of categories and I think you should expect to us do a lot more of that next year.

I guess two follow-ups to that.

Could you give us a relative sense on where you think this sort of average CPM is for out of category on CNET vis-a-vis some of your competitive sets, you know, if Proctor & Gamble is looking to buy advertising on CNET, what's their alternative and where is that price on a relative basis, and have you thought about the elasticity of demand that may be able to increase the appeal to that, you know, consumer products, Good Company, as an example?

And then last, if I look at your growth expectations for interactive revenue in December and I back out the benefit of Webshots and I'm going to use 3.5 million, the growth year-over-year, you know, decelerates to about 22% year-over-year growth.

And you've been seeing acceleration in growth for a number of quarters.

And I was wondering what's going on with that year-over-year expectation?

Is it somewhat of a mix issue on pricing?

Is it lower expected unit demand, et cetera?

Yeah.

I'll start with the second question first.

I think that, you know, I think you can also look at that same question relative to the third quarter and, you know, I think as we looked at the third quarter, you know, we put up a 29% organic number, which is, I think, one we can be incredibly proud of, but at the same time, you know, I think you know if you follow the space that one of our major categories, which has been the business technology area, the enterprise categories has been under an enormous amount of pressure.

I think to our credit as an organization, we have been able to grow through that and not use that as a crutch as we have been able to deliver, you know, growth rates in the 20s throughout this year and so, you know, the enterprise category remains a challenge.

I think it's, you know, if you do any checks, you know, look at the Wall Street journal or other things, I think you see that there's a lot of pressure overall in that category, but I think at the same time it really does speak to the diversification and growth we've had overall with respect to personal technology and with respect to the games and entertainment.

You know, when you look then, you kind of switch gears and go back to your first question, which is really around kind of relative CPMs.

I think, you know, you can look at them in a lot of different flavors.

And I think, you know, we have some windows in that with respect to what we have seen in the games and entertainment area.

And you've seen, you know, depending on quality of audiences, you've seen CPM's that will range, you know from a $10 CPM to a $25 CPM, depending on kind of what area you are giving people and kind of the quality of it.

So, you know, if you use video as an example, kind of on the streaming side, which is an area that we're really excited about, you know, you see a mix.

You see, you know, probably on the lower end people kind of in a $20 range, on the higher end, you know, some of the more business oriented areas, you'll see somewhere between kind of a 70 and $80 CPM side.

So I think there is a mix and I think your point is right, which is, you know, we have to think differently from a packaging standpoint with respect to in category and out of category and the types of value that we can deliver to marketers, but also, you know, as we look to expand our audience and bring in more services like Webshots and, you know, ability to package in that type of inventory and other things, we're able to bring down the overall CPM's for a marketer in a way by kind of being smart about how we package.

And so, you know, I think we've been able to grow revenue capacity on Webshots.

I think that's been able to grow revenue capacity overall for next year and I think that really sets us up to be able to do a lot more creative things in terms of bringing in out of category marketers.

Great.

Thank you very much.

Your next question comes from Imran Khan with JP Morgan.

Imran, your line is open.

This is Joe Ogelbarry on behalf of Imran.

How are you?

Very good, very good.

I wanted to switch gears a little bit towards the search side of things and given that you guys have very strong unique user numbers, I was wondering if you guys are out making any attempt to leverage that to drive more search traffic and also if you could comment on the revenue that you received from your relationship with Google.

Yeah, Doug, why don't you have the first one.

Yeah, Google remains a good partner of ours and from a financial relationship remains, you know, around a 10% customer for the third quarter, which was similar to the economic relationship in the first and the second quarter.

And I would say they probably, probably did a little bit more in the third quarter in the area of their Ad sense program around content, but the relationship there has been good and it's kind of has the good economics for us and--

Yeah, I would say with respect to your first question, I mean, look, we like as much revenue from search as we can get.

I think having said that, you know, our focus is really on the content space.

And so I think search can be an important part of what we do.

I think as you've seen in those numbers, but as we really look out, we think, you know, the big wins for us come from being able to bring in what you think of more traditional advertising and, you know, the discussion that we had earlier with Anthony about kind of in category versus out of category, I think that probably as we look at 2005 is a bigger lever for us than our ability right now to, you know, transform ourselves or be able to do a lot more on the search side.

Okay.

Great.

Your next question comes from Joanie Jensen with McMahon Securities.

Hi.

I had a question about your convertible bonds.

Given that the FASB ratified the new convertible, contingently convertible accounting rules yesterday, have you given any thought as to how that's going to effect you and any actions you might choose to take?

My understanding is that your indenture is for equity only settlement.

Yeah.

You're exactly right.

We've been following the rule-making, as you might imagine.

It's a great question.

Because, it is implied into our 2005 earnings per share guidance as though we do nothing, which means for those of you who follow the accounting, our convertible debt that we issued in April of this year, which has a par value amount of $125 million has an exercise price of $15, which means it has an implied 8.3 million common shares related to that convertible security.

So next year what the rules are going to require securities like ours to do is to include those 8.3 million shares as though they were outstanding.

And that has an impact on us of about 1 cent per share next year from a GAAP EPS calculation.

So it's a great question because it's part of the, part of the modeling that we've, in our guidance that we provided today.

As far as doing something about that, you know, we'll evaluate that.

There's some, you know, there's some pros by getting, you know, having that one penny or two pennies less solution, but there are some -- certainly some cons associated with that from a financial planning perspective.

But at this point, we -- we're not planning to do -- to do anything, but we'll continue to evaluate it.

And if we happen to change our views, we'll certainly communicate that at the time.

Thank you.

Your next question comes from Steve Weinstein with Pacific Crest.

Great.

Thank you.

I just want to get a little better understanding of the different economics between some of your businesses because, you know, with the growth we're seeing in interactive, I make the assumption that we start to see a margin structure that starts to look like we would expect out of an Internet publisher, but without any growth in print next year, I'm wondering how much of a drag is that going to be on margins going forward and can you give us a better sense of sort of the relative profitability there?

And then I know you don't want to talk too much about the economics of the acquisitions you're working on in China, but can get, you know, any sense of those businesses, do they have any level of profitability or something like that?

Yeah, sure.

Regarding our margins and the relationship with print, yeah, maybe we'll just start with Q3 we just completed we had an overall EBITDA margin of 10%, operating income before depreciation and amortization, 7.1 million on 70.5 million of revenue and our online business is in fact expanding with revenue growth and margin growth, but our print is actually -- still remains ahead of our overall margin, so it really won't be a drag on the consolidated margins in 2005 at the levels of profitability even though the revenue growth rates are on the pretty modest side obviously within print.

And partly, Steve, that's a result of now, if you kind of look out to the numbers we that we put out, print is becoming, you know, you know as little as 10% of our overall business, so it shouldn't have, you know, it's going have less of a drag on our revenue growth and shouldn't impact our margin expansion opportunity in 2005.

I think you also asked about China.

Yeah, let me comment on China.

I'd say, first of all, that we're incredibly excited about the two acquisitions that we've made.

As we mentioned in the talking points we've been in China for ten years.

I think a lot of years, you know, you sit on the side and you, you know, you wonder what point to really put shoulder behind the -- behind the online space and what, you know, what is the right time to enter and how do we use the platform we already have to do that and I would say that, you know, what these two acquisitions really provide us is, you know, two acquisitions that provide significant users and usage and we kind of know how this story ends and when we know what these properties will look like, we know how the model goes, we know how you end up monetizing and we know a bunch of things about this.

And so this for us, is kind of core what we do and we think this is, you know, one of those great opportunities where because of the position we've had and the investment we've had over time, we've been able to step into what we think are, you know, an interesting opportunity.

I would say if you look, you know, from a kind of revenue standpoint, it's interesting.

It's still, you know, kind of, you know, low-single digits overall from a revenue standpoint, so it's not nothing, but it's also, you know, they are not huge numbers right now.

They have also, you know, both of them have been marginally profitable.

I think, you know, as we look at them though, the -- you know, the profits that they deliver really are a way for us to reinvest against what, you know, what is a opportunity that we think we can be really excited about for a long period of time.

We think this can be, you know, as you -- as a Company continue to look at what can be continued growth catalyst so you can maintain over a long period of time attractive growth rates.

We think, you know, things like this provide significant opportunity for us going forward.

Thanks a lot.

Your next question comes from Matt Kessler with Standard and Poors.

Hi.

Thanks very much.

I was wondering if you could give a little bit more information about what you're seeing with respect to MP3.com, particularly I'm wondering kind of what the road map is in terms of enhancements to that offering over the next say, six to twelve months.

Thanks a lot.

Okay.

One of the, I would say really important enhancements that we introduced and I think you should think of it as kind of a beginning part of functionality is the community functionality that we added in the last quarter.

And essentially what we've done is we've taken social networking functionality, integrated it into MP3.com in a way that you can, you know, keep track of bands, keep track of music, keep track of music you own, keep track of music you listen to, you know, maintain a friends list, be able to trade information, know things about your collection and that's, you know, in terms of ability to really tap into what we all know, I mean the music area is one of those incredibly passionate communities.

We think the ability to really build from a community standpoint at MP3.com is a really exciting one.

And so I think you've seen -- that's probably been the most major enhancement.

I think you should assume as you look at MP3.com that we'll continue to build upon those features and build in more enhancements and more services around MP3.com to make it a much richer, more useful service longer term.

And if I could follow-up, can you talk about what the business model is for MP3.com in terms of generating both revenue and profits?

Sure.

Thanks.

Well, I think if you remember back to MP3.com, it's an acquisition we made for not a lot of money.

We've been able to get enormous leverage from a platform standpoint in terms of what we've already done in the games/entertainment area, so this isn't a service where we've had to add, you know, tons of incremental costs.

It's also been a really nice way for us to bring in a new and different set of marketers within the overall kind of games and entertainment category.

So a lot of people take a much more expansive view and not think of us just as a games publisher, but also think about us with respect to what we represent with respect to teens and young adults.

And so I think from a revenue standpoint, it's delivered a lot of value in terms of not only its ability to, you know, deliver new users and services and, you know, functionality in terms of people who want to market against that, but also to think about with respect to a packaging standpoint.

You should also think that if you look at games and entertainment and look at games, look at music, that you should expect that we're going continue to over time fill out that category within games and entertainment as we continue to provide more services to serve that audience, which is teens and young adults.

And if I could just follow up with one more on a related note, I mean it appears to me that you currently have a more advertising focused model with MP3.com where you're employing branded advertising, obviously you have search advertising as well.

What I'm trying to get at is, is it your intention at some point to have a subscription-based revenue stream come in to MP3.com?

That's it, thanks a lot.

Not at this point.

I mean, our view really is there's a lot of great subscription services, there's a lot of great people that are selling songs on a one-off base.

I think, you know, you see a lot of great different types of services out there that I think meet different needs.

We're trying to do something slightly different.

Which is, as a content provider and as a community, how do we really build upon the passion of people that love music in a way that we can incorporate all of those great subscription services and people, you know, people that are selling music and other things in a way that's really helpful and meaningful.

And I think if you look right now at the service, I think we've been able to do that.

I think in a very short period of time, you know, if you think back to the spring, this site was shut down as we were in the process of building it.

We've really been able to in a relatively quick period, you know, build what for us is, you know, meaningful user and usage and also an ability to monetize that.

Great.

Thank you very much.

At this time there, are no further questions.

Are there any closing remarks?

No.

We would like, to you know, we think overall it was a good quarter.

We would like to thank everybody for their participation and we look forward to seeing them next quarter.

Take care.

This concludes today's conference call.

You may now disconnect.