Paramount Global (PARA) 2005 Q1 法說會逐字稿

[OPERATOR INSTRUCTIONS] Miss McLaughlin, you may begin your conference.

Thank you and good afternoon.

Before we begin our formal comments, I'd 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 actually or predicted results to differ materially.

These risks are outlined in our first quarter news announcement as well as in the Company's Securities and Exchange Commission filings, including its 10K for the year 2004, which can be obtained from the SEC's website or directly from our Investor Relations website.

All information discussed on this call is as of today, April 25, 2005, and CNET Networks undertakes no duty to update this information.

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 in our investor presentation located 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, our Chief Financial Officer.

Neil Ashe, Senior Vice President, Strategy and Development will also be available during the question-and-answer session.

Now let me turn the call over to Shelby.

Thanks, Cammeron, thanks everyone for joining us.

We are very pleased with our first quarter result and they demonstrate that we are starting off 2005 with good momentum in showing our ability to deliver consistent strong topline growth and expanding profit margins.

The market for on-line advertising continued to strengthen and so does our confidence in the interactive content category.

We remain focused on continuing to build our exposure to interactive content both domestically and internationally with new products, acquisitions, audiences, and customers.

I will go into specific examples in more detail later in the call.

Let me quickly review some highlights of this quarter's performance.

User and usage metrics were once again strong during the quarter driven by solid organic growth and the addition of new properties.

During the quarter, we achieved record audience figures, with CNET Networks reaching close to 106 million unique users per month turning close to 95 million page views per day.

Total revenues were 74.7 million in the first quarter, up 18% from the first quarter of 2004, interactive revenue was up 23% from the first quarter of 2004 to 68.5 million, overall strength in interactive revenue was a result of the growth in both marketing services and licensing fee and user revenue.

Print revenues down from a year-ago quarter to 6.2 million but ahead of guidance.

Our strong topline growth and minimal operating expense growth drove better than expected profit trends.

Operating income before depreciation and amortization was 6.5 million.

Profit growth was strong, with margins increasing to 9% during the quarter.

Net income was 383,000 or just over break even on a per share basis.

This is compared to a loss of $0.02 per share in the first quarter of '04, after normalizing that result for the impact of one-time gains and other items.

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

Thank you Shelby.

We are very pleased to report the growth across all the key financial and operating metrics for Q1, and as Shelby mentioned, these growth trends remain in place as we enter the second quarter of 2005, reflecting strong industry fundamentals and strong CNET Networks fundamentals.

Turning to the financial results, first-quarter revenues of $74.7 million were up 18% over last year, and above the high end of our guidance.

We are very pleased with the growth generated by our existing businesses, as well as the contributions from our recent acquisitions and the results of expanding our advertiser base.

Interactive revenues of $68.5 million for the quarter increased $13 million or 23% compared to last year.

This increase reflects strong growth from the areas of games and entertainment and personal technology, reflecting increased revenues from existing customers, and attracting a new set of advertisers, plus the addition of Webshots.

Publishing revenues of $6.2 million were down year-over-year, but above our guidance for the quarter.

And as you may recall, approximately half of our publishing results are generated by print operations in China, with the balance coming from Computer Shopper magazine in the United States.

Our print operations remained profitable and operate at a low double-digit EBITDA margin.

Moving down the P&L to operating expenses, total cash operating expenses of $68.2 million in the first quarter were up 12% from the year-ago quarter, but much lower than our revenue increase of 18%.

The expense increase is due to an increase in personnel costs, particularly in the areas where we are investing aggressively, such as games and entertainment and personal technology, and plus the addition of Webshots.

These investments will allow us to take advantage of multiple growth opportunities, both near-term and long-term, and leverage our user base and scalable technology platforms.

From a profitability perspective, as a result of higher revenues, first-quarter operating income before depreciation and amortization equaled $6.5 million compared to 2.4 million last year.

Margins reached 9% in Q1, that's up from 4% in the year-ago quarter.

We produced a 36% incremental margin in Q1, 2005 and we remain on track to achieve a 50% incremental margin for the full year 2005.

As discussed on our February conference call, incremental margins are expected to be lower in the first half of 2005 and build progressively during the year reflecting the seasonality of revenues in the first quarter and additional investments made across our products in the second half of 2004.

Our operating income equaled $413,000, compared to guidance, which reflected an operating loss for the quarter, and these results reflect strong revenue growth and lower levels of operating expense than anticipated.

Net income for the first quarter, including a small gain from the sale of investments, equaled $383,000 or break even on a per share basis, well ahead of guidance of a net loss for the quarter, and compares very favorably with a net loss of $3.3 million for the same period of 2004, excluding two unusual prior-year items which had added $6.2 million of net income last year.

Turning to some non-financial metrics and user statistics, unique users increased 38% year-over-year to nearly 106 million monthly visitors and average daily page views were up 114% to 95 million pages per day.

The strong increase in users and usage reflects growth across all of our properties.

During the first quarter, CNET Networks' 100 largest customers represented about 56% of total revenue, which is similar to previous quarters, and we continue to experience a very high renewal rate from our advertisers.

In fact, 97% of our top 100 Q4 advertisers renewed with us in Q1.

The loyalty shown by our user base continues to be equally demonstrated by our advertiser base.

CNET's great products are attracting great advertisers.

Turning to the balance sheet, our cash position at the end of Q1 2005 increased $3.2 million sequentially to 97 million.

During the quarter, we generated $9.6 million of cash from operations and purchased $5.2 million in property and equipment, which resulted in producing $4.4 million of free cash flow for the quarter.

Our business model is healthy, it's exhibiting fast-growing revenues and expanding profit margins, and our capacity to generate free cash flow will increase going forward.

Our Days Sales Outstanding equals 72 as of March 31, which is up from 67 as of December 31, and we anticipate DSOs to decline during Q2.

Capital expenditures in the first quarter, as mentioned earlier, came in at $5.2 million.

And we continued to expect 2005 capital expenditures of approximately 20 to $22 million, which would be approximately 5 to 6% of total revenues, a level that is consistent with historical capital expenditures.

Turning to CNET's guidance.

For the second quarter of 2005, we anticipate the following results: Total revenues of between 81 and $85 million.

This translates into interactive revenues of between 75 and $78 million and publishing revenues of between 6 and 7 million.

Operating income before depreciation and amortization between 11.5 million and 13.5 million for the second quarter.

And Q2 earnings per share is estimated at between cents and $0.03 per share.

For the full year, 2005, we are adjusting our guidance as follows: We expect total revenues of between 345 to $355 million, and this compares favorably to our previous guidance, which was 340 to $355 million provided in February.

We are increasing our interactive revenue expectations from 310 to $320 million to a higher level of between 315 to $323 million, representing a growth rate of 23 to 26%.

We are adjusting our publishing revenue guidance from 30 to $35 million to a new range of between 30 and 32 million. 2005 operating income before depreciation and amortization is being adjusted from 63 to 69 million to revise expectations of 64 million to 69 million.

And full-year 2005 earnings per share is being increased from $0.18 to $0.22 per share to a higher range of between $0.20 and $0.23 per share.

And these 2005 guidance figures exclude the impact of stock option-related expenses.

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

Thanks, Doug.

We are starting 2005 with good momentum.

From the strong financial performance to the continued growth of our audience to the addition of new properties, customers and products across our network, we have shown that we have the ability to grow the business and take advantage of the significant opportunity that is emerging in the on-line advertising space.

I would like to take some time going through some of the places where CNET Networks is seeing momentum from a user, financial, advertiser, and product perspective.

Let me start with user and usage.

We ended the first quarter with close to 106 million unique visitors, up 38% year-over-year generating close to 95 million page views per day, up 114% year-over-year.

As we see significant opportunity in the on-line advertising market, we have clearly made a goal of increasing our inventory by both growing users and usage.

The first focus has been to increase usage from existing users by focusing on the product.

The second focus has been bringing in new users by utilizing PR and content licensing to introduce new users to our brands.

And finally we continue to look for opportunities to grow our scale through acquisitions and new properties added to our network.

On our product improvement side we continued to invest in our brands and our user experience with more community features.

Here are a few examples of how we are increasing user loyalty and usage across our network of brands: We added more community futures on CNET.com TechRepublic and Download.com that really leverage our user base.

Through enhanced user opinion features at CNET and Download we make it easier for users to share and browse opinions on products and services and underscore the important part that users play in adding value to the overall content experience.

We also added new features to the GameSpot community and are seeing the initial interest is very high.

We added a community publishing cool called Unions, where groups of users with similar interests can join together to create a union to share views and interests about a specific topic, game title, et cetera.

Unions are not just about game topics, but also provide the ability for the GameSpot community members to join together on a variety of topics ranging from politics to sports to movies.

We've had good traction in terms of user involvement and engagement with these features and are excited about the opportunity to continue to add more features like this across our network to help drive loyalty and usage on all of our sites.

With respect to marketing, as I mentioned, we continue to look for opportunities both with respect to PR and syndication.

We continue to have great success leveraging our editorial team to gain exposure through other media outlets as they look for unbiased experts on the topics we cover.

We also continue to extend our content relationships and get our brands exposed to even more users through key partnerships.

During the first quarter, we entered into content licensing agreements, with ESPN, Knight Ridder and some additional AOL Web properties adding these names to our growing list of partners that include Yahoo, MSN, Business Week, New York Times Digital, PRN, Market Watch, ABC news, EBGames, Sony PlayStation, et cetera.

Finally, we will continue to look for opportunities to launch new brands, organically and through acquisitions, as we have done over the past years.

Overall, looking at the user and usage numbers, we are happy with what we are seeing with respect to the overall strategy.

Let me spend a minute on financial results.

Doug covered many of the key financial highlights earlier in the call so I don't want to repeat what he's already gone through.

But I do want to underscore the positive trends that we continue to see.

Revenue growth was strong as we continued to extend relationships with our core customers as well as make significant inroads with a newer out of category advertiser base.

These efforts resulted in 23% growth in interactive revenue, as well as a high customer renewal rate.

The strong revenue growth along with minimal growth in operating expenses showed the financial leverage in our model.

Culminating in a 9% profit margin for the quarter.

We generated over $4 million of free cash flow during the first quarter, showing that we were on path towards achieving our goal and providing our ability to generate significant free cash flow for the long term.

Let me spend a minute with respect to advertising.

While media consumption trends are clearly shifting towards the Internet, we are just beginning to see that reflected in the on-line marketing budgets.

Though the on-line advertising market has seen a real resurgence in the past two years, it is still less than 5% of overall budgets and it has largely been led by paid search.

We are just beginning to see the growing acceptance and momentum around on-line display advertising.

As we have said consistently, we remain big believers in the size of this opportunity and for authentic branded environments that deliver specialty demographics or psychographics to help advertisers as they look for ways to drive demand for a particular category a product or a brand.

What makes CNET Networks properties that much more valuable is that advertisers not only desire the demographic or psychographic but also are drawn to and want to be associated with the high level of passion that's reflected in brands like ours.

Clearly, one of our major growth drivers is our ability to move beyond endemics into more out of category segments.

Through a multibranded, multicategory strategy, we have built distinct brands that attract large passionate audiences with attractive demographics and psychographics.

For example, the average GameSpot user is a male between the ages of 13 to 34, has very different demographic characteristics than the average CNET.com user, a male between the ages of 25 to 54, or a Webshot user, an audience that skews actually more female.

With the size and reach that we have in key audience categories, we have the ability to attract a broad segment of advertiser and provide an ideal marketing platform for our customers.

Because the audience characteristics are different across our network brands, we have the opportunity to bring in different types of advertisers.

During the first quarter, advertisers including McDonald's, Pepsi, Honda, Wrigley, and many film and movie companies were customer on our games and entertainment properties.

While our initial efforts to settle to the out of category customer base was focused on our entertainment properties, during the first quarter we extended our efforts to sell to the non-tech customer base within our personal technology platform including CNET branded properties like CNET.com, Download.com, News.com, as well as Webshots.

We've developed some unique sales packages that allow us to bundle inventory across all of these properties, that is highly attractive to the out of category customer and allows us to increase the overall monetization of our inventory.

Advertisers that took advantage of this new sales packaging included General Motors, Starwood Hotels, Visa, Marriott Hotels, State Farm Insurance, just to name a few.

As a result of our new sales efforts, we almost doubled the number of out of category customers advertising on our CNET branded properties quarter over quarter.

While our entire out of category sales effort is still early, we are very encouraged by the initial results we are seeing and our effort to get CNET Networks brands and audiences in front of the key agencies and marketing executives that influence spending within the out-of-category segment.

Given the sheer size of our audience, CNET Networks is now a top-10 global Internet property measured by ComScore.

We sit in a position to truly capitalize on the growth occuring with the on-line advertising market and attract advertising dollars from a broad segment of customers.

Finally, let me spend a minute with respect to product.

As I mentioned earlier, we continued to look to increase our exposure to on-line advertising by growing users and usage through a focus on product.

We are doing that by focusing on growing the brands that we have, and looking for ways to add new brands organically or through acquisitions like we did with Webshots.

Across our CNET branded properties we continue to see strong momentum and new product development across CNET.com, News.com, and Download.com.

Since a relaunch of CNET.com last year we continued to add more unique features and build out that offering.

For more community to more video to more content overall across the site and we continue to see growing usage in brand recognition.

I want to highlight one content development at CNET.com as an example of how we continue to expand a brand's opportunity.

In the coming weeks we are launching a Car Technology section on CNET.com.

At one level this might seem out of place but if you visited a consumer electronics show or an auto dealership lately you recognize that technology has become one of the key differentiators in the auto industry.

The Car Tech content on CNET.com, will provide our users with a technology lens through which they can see and evaluate tech products for automobiles, like audio, navigation, video, networking, et cetera.

Like we have successfully done with other categories over the past 10 years, CNET.com will leverage the interactive nature of the medium, with text, photos, and videos and provide a unique and relevant experience for the CNET.com audience.

Car Tech an ideal addition for this audience, which is of course high income males who like gadgets.

We will leverage existing resources and editorial staff expertise for the launch, we've already had some success with advertising from the auto category with marketers like GM, Toyota, Honda who are already spending with us this year and with efforts like Car Tech, we see as only increasing our traction.

We will provide updates on this initiative once launched.

The outstanding product we have built in News.com once again was reaffirmed by outside sources.

We recently won an award from the Society of Professional Journalists and a best in business award from the Society of American Business and Economic Writers, for a special reporting features on News.com.

The News.com product continues to expand with new features that take advantage of the growth and blogs as well as aggregating broader news coverage from other sources across the Web.

We will -- we continue to remain excited about the on-line photo category and further extending our leadership position there.

With the largest and no. 1 ranked site in the on-line photo category Webshots, we will continue to look at ways to build out this property and make both the user and marketer experience even better.

We are pleased with the level of user activity on the site and it continues to grow.

We now have more than 750,000 photos uploaded daily and its photo library grew by 66 million photos in the first quarter of 2005 alone.

For a total now of 175 million shared photos.

To further enhance the user experience and make it an even more robust and rich service, in the first quarter we acquired a product called HeyPix!.

HeyPix! is an innovative service that provides enhanced photo management, editorial and organizational tools as well as features such as photo tagging and social networking features and the ability to publish photos to a blog.

HeyPix! allows us to accelerate our planned product development schedule for Webshots.

Webshots already has a tremendous audience size and community presence and with new features we are in a position to bring photo sharing to a new level and further build out a leadership position in this fast-growing market.

Another area of continued expansion and progress is our games and entertainment category.

This is our fastest growing category and an area where we see tremendous opportunity to build out our out of category advertiser efforts.

I already mentioned some of the great product initiatives happening in the GameSpot so I will not repeat them.

As implied by the games and entertainment name we are focused on extending our audience even further beyond games and music verticals into other entertainment categories.

I do however, want to highlight a new area of coverage.

In the first quarter we made a small acquisition in the television and content category of a site called TVtome.com which we plan to relaunch in the coming months.

Similar to what we have done in GameSpot and MP3.com we will look to build out a television focused property that appeals to a broad set of users and advertisers alike.

We will update you over time as it relates to this new launch.

We also announced a new property in our business technology category called BNET during the quarter.

With over 6 million IT decision makers visiting our business technology properties each month we are experienced with how to reach professional audience.

Building upon the success we have gained in this category, we quietly launched a property in Beta called BNET over a year ago, and have had good traction since launch.

BNET provides a comprehensive library of business content, with over 50,000 white papers, case studies, Webcasts and audiocasts on a variety of topics of interest for a broad spectrum of business professional from finance to human resource to sales to communications.

Not only are we focused on extending our reach domestically but we are also focused on international expansion and building up our exposure in China in particular.

Last week we announced that we'd further solidified our position in that growing marketplace by adding PCHome, a leading personal technology property in Shanghai to our portfolio of properties in China.

PCHome combined with the two sites that we acquired in 2004, ZOL and Fengniao significantly bolsters our personal technology presence in China.

With a strong position in Shanghai through PCHome and in Beijing through ZOL and Fengniao we now have a strong position in two critical markets in China.

With little audience overlap, PCHome brings an audience reach similar to that of ZOL and Fengniao combined.

The Chinese market is poised for continued growth and we are well-positioned there.

Looking forward, we will look to continue to leverage the assets and brands that we have and extend our coverage and exposure to this market.

We are well-positioned as we start off 2005 on a positive note, with key trends lining up in our favor.

We will continue to focus on growth and expansion of our products and customer base, as well as additional ways to further monetize and engage our user base.

As we celebrate our tenth year anniversary of the launch of CNET.com later this year we're reflecting on the vision that put CNET Networks on the map during the early years of the Internet.

And that today continues to position us for future growth.

CNET Networks has always been a different kind of media company and has stood apart from the rest.

By realizing the power of the on-line content category early on, we sit in a unique position to capitalize on the expected growth of on-line advertising market with a portfolio of market-leading brands, a growing user and customer base, and a strong financial model with significant scale and leverage.

We are pleased with the accomplishments we have made as an organization over our history and look forward to the growth prospects that lie ahead.

We believe in the content business for the long term.

And the opportunities for our business are only getting larger and our position in the category is only getting stronger.

With that, it wraps up our formal comments and we would like to turn it over to the operator so that we can open up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Gordon Hodge with Thomas Weisel.

Good afternoon.

A couple questions.

One, it sounds like the traffic really kind of exploded on you in the quarter and I'm just wondering, how do you go about managing that spike in traffic?

Did you rely -- were you able to use the ad networks I guess to handle some of it?

Did some of it just kind of go by the wayside?

Would be an opportunity to manage down the road and maybe you can just talk about integrating some of that -- particularly the Webshots inventory into the sales packages and when you might expect to see the CPMs tick up there?

Right.

If we stepped back about -- looking back about a year and a half.

One of our key areas of focus over the last year and a half has really been on growing inventory and that comes out of the fact that as we look at the on-line advertising market, you see so many things lining up in terms of kind of attractiveness of the space, size of dollars that are transferring and other things so we've as a company made a very concerted effort on building out inventory in advance of that.

And I think importantly as you look at our user and usage number you see that playing out and it is in some respects going to get -- we're going to get ahead of it -- and should be ahead of the opportunity.

You see that in terms of our overall RPM rates coming down, but at the same time we think it's really as we look forward not only for this year but to 2006 and 2007, it's critical that we focus on building inventory and continuing to expand our relationships with users and grow our overall user base.

So I think what we've seen is exactly what we wanted to see.

I think at the same time, if you look at what we've done with respect to the ad networks we've really only used them on the Webshots acquisition as you know and I think we continue to do that but I'd say more importantly we're now, as mentioned in our formal comments, looking for ways to integrate in the Webshots inventory as part of an overall digital lifestyle package and rotation.

And I'd say overall we're pretty encouraged with what we're seeing with respect to traction on that and our ability to continue to kind of grow and further monetize and raise rates on that property.

Great.

Thanks.

Your next question comes from the line of Safa Rashtchy with Piper Jaffray.

Hi, guys.

Good quarter.

Couple of questions.

Kind of both of them in the same area.

And that has to do with your organic growth rate and the advertising segment.

First, can you give us some sense of how much in the interactive side you had in terms of organic growth year rate?

And if -- and more quantitative numbers if you can share with us, can you compare that rate to what you had in Q4?

And related to that, Shelby, if you could talk about what time frame do you see to be able to reach 30% plus growth rates that we see from Yahoo and others, obviously you have had a mix of advertising verticals that have had different growth rates but as you are getting more and more into the broader mix that the other companies have, I would expect that you can catch up with those rates.

Thanks.

I think starting your second question, if you look at guidance that we're providing not only for second quarter and for the full year of '05, you'll see guidance growth rates in the second quarter of between 27 and 32% on the interactive side and for the full year between 23 and 26.

So if you kind of step back and I think as we've talked about our overall business opportunity, we've been very much focused on this 20 to 25% growth rate over a long period of time and I think the numbers that we're seeing for the rest of the year I think look quite attractive.

And when you actually look at the first-quarter numbers, I think a little bit to the first part of your question.

One of the things that's happened is as we've added more international inventory and more consumer inventory over the past year, you have seen our business get slightly more seasonal.

As you know, especially with Chinese properties and the Chinese New Year, you see a lot of seasonality in the first quarter.

And so I think from our perspective as the slight -- the mix has slightly shifted among our properties.

I think it's more important to look out at the full year and I think we remain very encouraged and very happy with what we're seeing in terms of overall growth rates.

Okay.

And if I could have a follow-up, Doug.

I think you mentioned about incremental margins and I'm not sure what margins you are referring to but I was looking at your EBITDA margins, which were a little bit lower than Q4 but I thought you mentioned you expect them to go up throughout the year.

Can you discuss why you expect incremental margins to increase?

Yes.

Just as background.

Our definitional of incremental margin is for every one dollar of revenue increase, how much does that flow through our EBITDA line or our operating income before depreciation, amortization?

Yes.

And we did produce a 36% rate in Q1.

And we would expect and we're targeting for a full year 2005 incremental rate of 50%.

And to your question on why we are confident of that occurring is we have seasonally lighter revenues in Q1 so as a result you'll see a larger flow through of those revenues in -- as the quarters progress, beginning in Q2 as an example if you look at the guidance that we have provided for the second quarter, our incremental margin would be in the mid-40s.

So we are -- we are seeing these -- some of the investments we've made in the second half of last year and some earlier investments we're making this year, then that will begin to generate revenues more on a fixed-cost basis.

So you'll see higher flow throughs sequentially as we go through this calendar year.

And similar to '04, where we achieved a 50% incremental margin, we're targeting the same result this year.

Great.

Thank you.

Your next question comes from the line of Anthony Noto with Goldman Sachs.

Thank you very much.

Shelby, obviously you're driving very strong user and page view growth and offsetting that is the fact that your RPM is going down, which is completely understandable given your efforts to try to get out of category advertisers.

I was wondering if you could give us a perspective on when you think RPM bottoms out because I think that would put two tailwinds behind you, unit growth -- or inventory growth plus stable RPMs and maybe even improving RPMs and then secondly I was wondering if you could give us a sense of user metrics as it relates to Webshots, I wasn't sure if you actually hit on that or not.

Thanks.

Well, I think to the first part of the question, and I'll let Neil maybe jump in and add a little bit more to it.

But as you know when you look at overall RPMs, it has -- there's both a relationship between revenue and page growth and when we look out forward and as I stated earlier, really focus on building more and more inventory exposure in this category, we hope to continue to be able to drive overall volume rates.

And so I hope the trend you see with respect to both users and usage continues for a long time.

And I think to that degree, we're more optimizing in terms of our ability to grow overall revenue versus our ability necessarily to have a specific RPM rate.

And so I think from the long-term perspective, if we can continue to grow inventory economically and smartly and add new brands, that I think we will be able to create the most value for the dollar and for shareholders.

Neil, I don't know if you'd add anything to that.

Yes, just quickly on that.

We've aggressively chosen not to constrain our user and usage growth and so necessarily it's -- on a gross basis users and usage are outgrowing -- are outgrowing revenues.

So on a property-by-property basis, so you will see that obviously that trend in our highest value inventory levels continue to be strong where we continue to realize rates that we've been accustomed to over time.

So nothing in here is a -- is in any way a takedown on prices or -- but, rather, specifically growth in users and usage.

Specifically on the Webshots property, it continues to exceed our expectations for user and usage growth.

So if you -- as we pointed out and I think Nielsen came out today it remains the number 1 photo sharing site and we've had strong growth on user and user metrics there which have exceeded our expectations and the business performance has also been at or better than our expectations.

So we're really pleased with where that property's headed.

I would say it's --.

Sorry, go ahead.

As well, the other properties that we have continue to experienced good growth as well.

So in the areas of games and entertainment and CNET.com for example, as well contribute to this focus on more users and more usage creating a better -- larger audience and revenue capacity going forward.

Doug, one technical question about your revenue from China.

Are you treated as an advertising company there or as a technology services company, just because I know it impacts the way you're taxed and some other factors.

Yes.

We're treated more as an advertising services company and the -- we're profitable in China, as you know.

And from a tax perspective, they have -- they do have a nuance of really no kind of carry forward of NOLs.

So we're beginning to pay a little bit of tax there.

But there's nothing unique about our situation in the way that we're operating our business that -- that gets in the way of kind of the used -- developing the growth that we expect there and the business plan that we have in place.

Great.

Thank you.

Your next question comes from Imran Khan with J P Morgan.

Hi, guys.

A couple of questions.

In terms of like your unit users is growing very strongly, I was wondering how you are trying to monetize those unit users to drive the search revenue, I believe you have a partnership there.

And secondly, could you give us what's your organic unit users and page use growth and how much CPM pricing was down this quarter sequentially, I think it was like $10 last quarter?

Thanks.

First of all, let me ask -- answer the first question, which is around search revenue.

Clearly, we've had a very good partnership with Google and we continue to -- continues to be I think a very good relationship overall and we've done a lot as we've looked for ways to integrate in the Google product from a search perspective and from a -- from an ad words perspective.

And I think we continue to look for more and more ways to do that.

Having said that, we still think that the biggest opportunity for us remains around display advertising.

And so I think it is a revenue stream, we continue as with all revenue streams, want all of them to go up and so I think the more the better.

But at the same respect, I think what's really critical and important for us is our ability to really focus on how do we bring in more advertisers, a broader set of advertisers, and we really -- as we've mentioned, one of our big focuses in doing that has been bringing in out of category advertisers and that I think that's a little bit to your -- to your third questions.

We think about it really from an RPM perspective and what -- what the packaging we've talked about on the call has allowed is for us to -- for the endemics, so for Dell buying in the notebook area or Sony buying in the camcorder area, we've been able to -- based on contextual placement, drive very high premiums against what are attractive audiences.

What we've been able to do on top of that is create essentially a run of site inventory that does not have the same contextual guarantees but really is a way to leverage into that passioned audiences and we've been able to introduce that to a lot of new out-of-category advertisers and as I mentioned on the call I think we've been very encouraged with respect to what we're seeing.

With respect to your second question, we don't actually break -- we don't break out between kind of organic, non-organic, but what I would say overall is on an organic basis we've still seen very strong performance as the same -- kind of same general levels that we saw in the fourth quarter when we talked about it.

So we've been very happy with the ability to grow organic brands to add new brands.

It's really been across the board with respect to all of our different services so I think we're very pleased with what we're seeing in terms of our ability to engage users, to get them to use us more and to find new ways to introduce new users to our network.

Okay.

Thank you.

Your next question comes from Kit Spring with Stifel Nicolaus.

Hi, guys, good quarter.

Can you talk a little bit about your competitive situation, what your competitors are doing to duplicate the same kind of content that you have and who do you think is making the most changes or who are you most worried about?

Thanks.

Well, as you can imagine, because we live in a lot of different categories, we have a lot of different competitors with respect to individual categories.

One of the things I think we're pleased about is there's clearly been a lot more discussion of content.

And I think we've spent the last over 10 years really focused on the content place -- the content category, we've never -- we've never moved from it.

We believed in it.

There have been people that have kind of have fallen into content, fallen out of content.

They've been very inconsistent.

And we've remained very focused on it and we've produced tons of iterations of different forms of web sites, we've done television programming, we've done radio programming, we've done newsletters, we've done all sorts of different forms of content and it's something that takes a lot of people, a lot of users.

And so we welcome people coming into the space.

This takes the team, it takes the team with a lot of experience and I think we're going to see -- because more people are focusing on content as they look for new growth patterns.

I think more people are going to focus on it.

I think that's great.

And we look forward to competing against them.

Great.

Thank you.

Your next question is a follow-up from Gordon Hodge with Thomas Weisel.

Yes.

Just -- this might be a little bit silly question.

You mentioned that Toyota, Honda, et cetera are advertising on the site now but I gather auto sales as a percentage of total sales is quite low I'm just curious if that's accurate and it's obviously a huge category so it sounds like a good move to get into the tech auto space.

Yes.

It's still very modest but we think it can be a really nice category for us.

The -- the effort around Car Tech I think if you -- if you -- if you visited a consumer electronics show you know that half of the space at consumer electronics show is focused on the auto category.

We've done a lot of research against it and with our user base.

If you followed News.com and CNET.com you've seen already a lot of sampling and information that we've already put out with respect to the auto category and we've gotten very good traction.

So we're very encouraged with respect to what it means overall from our ability to create a product that will be meaningful for our users.

We also think it can be very meaningful in terms of allowing us to take more dollars out of the auto category overall.

Great.

Thanks.

Your next question comes from the line of Bill Morrisson with JMP Securities.

Thanks.

Can you maybe just go into a little bit more detail about the new launches, the television site and Car Tech as far as timing and kind of ad sales rollout?

Are you out there selling the products now, or does that follow after you've already launched and kind of tested the site?

It depends on the property.

I think you should expect to see both of them within the second quarter.

And I think both can be very good additions for us.

I've talked a little bit about the car technology area.

We've actually -- already out in the field selling that I think we're seeing some really good traction around it.

So you'll -- you should see that launch in the second quarter and I think the same thing around the -- the site focus or on the TV site.

We made as I mentioned a very small acquisition in TVtome.

We think it can be -- it's very good data, we think it can be a really interesting foundation for what we can do overall in the television space which I think overall is ironically a pretty -- is an area which people are really passionate about that tends to be underserved by other media services.

And Shelby, just one quick follow-up.

Are there -- maybe, can you help us understand what other areas you might be looking to move into over the course of the year?

Maybe just in kind of general broad terms?

Yes.

If you look at the categories that we serve right now I think you'll see an interesting thing in this call.

You take for instance the personal technology area and you see it's continuing to expand within that area with things like Car Technology and other places.

And so we continue to broaden the focus there.

The same when you think of the name games and entertainment you should see -- you'll see clearly something in the television space but you should imagine we're going to do more around kind of general entertainment in an effort to grow that.

I think the same thing in the business space with the launch of a property like BNET that came out of Beta this last month.

And so we're going to continue to look for ways to grow the focus of our actual -- of our category.

On top of that, the -- we love the on-line content space and we think we've been very strong in the three categories we're in.

We continue to look for ways to grow them but we also continue to look for opportunities of other categories or other brands that we think can be additive and continue to increase our overall exposure to the on-line advertising and content market and so if we can find those opportunities as you've seen us we'll continue to either grow them organically or grow them through acquisition.

Thanks.

Your next question comes from Steve Weinstein with Pacific Crest.

Great.

Thank you.

A couple questions for you.

One, can you tell us the assumptions you made or the impact you're expecting from -- I guess the HeyPix!

And the PCHome acquisitions relative to your guidance?

And then just looking at the results on the quarter, the licensing and the D business actually had really strong growth on a year-over-year basis and I'm wondering is all that Webshots, or is there something else going on over there that's working?

Yes, I'll start with the licensing fees and user growth.

And that's a -- a lot of that is coming from our channel business that they've had a nice -- that's a recurring revenue stream licensing business and they've had a very nice renewal rates on their -- on their customer base as well as expanding it.

So we're seeing a nice contribution from that group and, as well as Webshots does have a print and gifts area that contributed to that revenue stream as well that we didn't have a year ago.

And then as far as the assumptions for HeyPix!, very modest.

As Shelby described it's really the valuable product allowing us to accelerate our growth plans with that product over the next several months.

So it's really bringing on board some engineering expertise and already developed products that can be integrated into Webshots.

So financially it's very immaterial to us.

PCHome.

Similar to ZOL and Fengniao, gets a good foundation built in another area of China, in and around Shanghai.

Financially, much like ZOL.

They're very much further along with users and usage and not yet monetization.

And we would probably see that in the early days of us integrating PCHome into our China activities.

So there's not a whole lot of -- of financial impact from PCHome in the model, both either from a profit, nor from a loss.

So the growth in the Channel Services business, did -- I think that's been relatively flat for a while.

Do you think that's something that could continue to grow?

Or was there a -- I mean, it sounds like you added a lot -- new licenses and that was the primary driver of growth in that business.

It's been a steady grower for us.

I don't know that we would hold it out as to be a -- an accelerating type of growth opportunity but it had a very nice quarter.

Great.

Thank you.

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

Great.

Thank you.

I wanted to get back to the organic revenue growth.

Particularly given what seems to be very strong performance from Web Search.

It seems like the organic growth decelerated materially in the March quarter but then per your guidance looks like it's accelerating materially in the June quarter.

If you look at it on a year-over-year basis, which takes out seasonality.

Any more color you can provide on that?

What's happening to the organic revenue growth?

And then a second quick question on international revenue growth?

That looks like that decelerated significantly in the March quarter but I think that's probably print but any comment on that?

And again looking at it on a year-over-year basis.

Thank you.

Yes.

Here's a -- kind of again to the first-quarter question, the -- normally year-over-year would -- would take into account kind of the effect of seasonality.

That's assuming that the -- the exposure you have to different categories remains the same year-over-year and so as we've increased exposure to China, as we've increased exposure to more consumer dollars, we've actually seen the overall nature of our business become more seasonal.

So I think again, as you look at the year I think you look at the growth rates of 23 to 26 for the year or you look at the numbers we're seeing with respect to the second quarter growth rates, I think the observation more has to do with kind of overall mix and seasonality in the first quarter than it really has to do with anything else and I think that's what you see in terms of the overall first-quarter numbers.

You want to talk about international revenue growth?

I think -- if you look at international it grew about 17% in the first quarter.

They had a very, very strong Q4 as Shelby mentioned they had very good -- both organic and -- and the contributions from ZOL during the fourth quarter.

In the seasonal -- they have the most-pronounced seasonalities from our international operation, more so actually in Q1 this year than our US and that's where having more exposure to China on-line as well as some of our print publications in China are impacted by -- by a lots of seasonality there, so we anticipate good growth both for the U.S. and domestically in Q2.

And any update on Doug's next steps in the CFO transition?

Yes.

It's still under process.

I think we're very pleased -- with what we're seeing.

We're kind of happy and we'll tell you when we're there.

Thank you.

Your next question comes from the Jordan Rohan with RBC Capital Markets.

A couple of quick questions on Search.

First, what percentage of revenues was driven by Google in the quarter?

And second with respect to the announcement by Google today that -- of its push into better display ads through its AdSense for content network.

How do you think about that, is that going to drive a meaningful uptick in your Search derived revenues?

Is this -- can you send more inventory that way?

More unsold inventory?

Thanks.

Do you want to answer that one.

Google is a meaningful customer for us.

It happens to be less than 10% during the quarter but continues to be very important to us and our relationship with them is solid.

With respect to the second question, Google is a very good partner of ours and we look forward to kind of sitting down with them and hearing more what they're doing with respect to Dave's announcement.

Having said that, what -- in many ways it looks like they're talking about really is an ad network kind of ad networks as we've seen really over the last, however many years and it's been our experience that at least within our category, the ability to have an in-house sales staff that understands the brand, understands an ability to sell value to a brand, and can also work in terms of how you smartly integrate a market or message into the overall property, we think there's a lot of value to.

And -- and our sense is that you get the highest value on your inventory in terms of your ability to do it in-house and have sales staff that really can properly represent you.

So it's something we're clearly going to look at.

But I still think with respect to what we're doing which is really premium brands that we'll rely mostly -- continue to rely on our in-house sales efforts.

Operator, we have time for one more question.

Your next question comes from the line of Jason Avilio with First Albany.

Thanks for taking my call, guys.

Shelby, I was wondering if maybe you could give us a little bit of color on what you're seeing on the enterprise technology market.

Obviously that continues to be weak I think in advertising generally.

Should we expect 2005 to sort of see a bottom for enterprise technology spending?

And then a couple of housekeeping questions Doug, it looks like the share count was down pretty materially on a sequential basis, I was wondering if you could tell us what that was from.

And then DSO tick up, the reason for that?

Thanks

Overall on the enterprise category this quarter we saw basically flat to slightly up.

Which I think in the big scheme of things was actually relatively encouraging.

It's been a market that clearly if you -- if you followed another category, it's been a market that's been under an enormous amount of pressure and so I think we're pleased with what we're seeing on the product side.

I think -- we're are starting to see just -- I think flat to a very slight amount of growth is actually on relative terms actually very good against what's happening in that market.

So I think it's a step forward and I think -- our product team has done a very good job.

I think you've also seen with things like the launch of BNET an effort to really begin to -- begin to look to a slightly broader both audience and customer base and I think both of those are encouraging good steps.

So I think if we can say that that -- that that property and that area is stabilized I think in the big scheme of things that's pretty good in today's market.

On the share count.

What you're seeing is there we are not including the 8.3 million shares related to our $125 million convert in our Q1 EPS calculations because they're antidilutive.

So that's why you're seeing a step down from Q4 to Q1 on our share count.

And then as mentioned on our DSOs, they did go up to 72 from 67 in -- at the end of the first quarter from year-end.

We had a slight impact from a handful of U.S. ad agencies that we're focused on and we expect to make progress with those -- with that group of agencies during the second quarter.

And as a result, see our DSOs decline when we measure them next at June 30.

Good.

Well, thank you everybody for the time and we look forward to talking to you next quarter.

This concludes today's conference call.

You may now disconnect.