Paramount Global (PARA) 2005 Q3 法說會逐字稿

Good afternoon.

My name is Sharilyn and I will be your conference facilitated 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. (Operator Instructions).

Thank you.

Ms. McLaughlin, you may begin your conference.

Thank you and good afternoon.

Before we begin our formal comments, I would like to remind you that in the financial news announcement release 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 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, October 24, 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 the slide presentation that accompanies this call, located at our Investor Relations website, ir.cnetnetworks.com.

Hosting today's call are Shelby Bonnie, CNET Networks' Chairman and Chief Executive Officer, and George Mazzotta, our Chief Financial Officer.

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

Now let me turn the call over to Shelby.

Thanks, Cammeron, and thanks, everyone, for joining us.

We're pleased with the growth exhibited during the quarter and believe that we're well-positioned as we enter the fourth quarter and on into 2006.

User and usage trends were strong, with CNET Networks reaching over 110 million unique users per month, up 24% year over year, turning close to 100 million page views per day, up 61% year over year.

Total revenues were 86.3 million in the third quarter, up 22% from the same quarter of '04.

Interactive revenue was up 28% from the third quarter of 2004 to 78.6 million.

Overall strength in interactive revenue was a result of growth in both marketing services and licensing fee and user revenue across all categories.

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

Operating income before depreciation, amortization and asset impairment was 15.4 million, with margins increasing to 18% during the quarter.

It was also a good quarter for our industry, and specifically for the content category, which continued to give us confidence in our strategy and in our momentum.

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

Thank you, Shelby.

We're very pleased to report continued growth across all key financial and operating metrics during the third quarter of 2005.

We generated 86.3 million of total revenue in the third quarter, which was 22% above last year.

Total revenues were driven primarily by strong growth in interactive revenue offset by a year-over-year decline in publishing revenue.

Supporting our total revenue growth is a strong advertiser based.

Across the entire network, our 100 largest customers represented 55% of total revenue, which is similar to previous quarters.

We continue to experience a very high renewal rate from our top advertisers. 97% of our top 100 advertisers in Q2 renewed with us in Q3.

Our interactive revenue for the third quarter was 78.6 million, which was 28% above last year.

Our growth in interactive revenue reflects a 30% growth in marketing services revenue and a 16% increase in licensing fee and user revenue.

On a pro forma basis, as if we had owned Webshots during all of the third quarter 2004, our interactive revenue increased 26% compared to last year.

We're particularly proud of the 30% growth we achieved in marketing services revenue, as we believe that this is an important measure of the success of our business model.

Our growth in marketing services revenue reflects our Company's ability to gain market share and extend our customer base in both existing and new categories.

Our marketing services revenue was driven by growth across all businesses, including games and entertainment, personal technology, business technology and Webshots.

We continue to experience growth from existing advertising clients as we gain further share of their marketing budgets.

While still a small portion of total revenue, we are encouraged by our ability to successfully expand our advertiser base into more consumer-focused categories.

Our 16% growth in licensing fee and user revenue was driven by expansion of our Webshots premium services and our data licensing business.

Underlying our revenue performance during the quarter was strong growth in user and usage metrics.

Monthly unique users increased 24% year over year to over 110 million.

Average daily page views increased 61% to almost 100 million pages per day.

Our games and entertainment and personal technology properties were the largest contributors to this growth.

Our growth in usage translates into interactive revenue per thousand page views, or RPM, of $8.79 during the third quarter.

Variations in business mix and revenue growth will cause fluctuations in this metric.

For example, our year-over-year change in RPM is influenced by the growth in Webshots traffic, which monetizes at a lower effective RPM than other properties.

We recognize that we could experience downward or upward shifts in RPM as we expand into new categories with different monetization rates.

As we have stated in the past, CNET Networks remains focused on overall growth in revenue and accelerating user and usage growth ahead of the overall opportunity in the online advertising market.

Publishing revenues of 7.7 million declined year over year by 16%.

This decrease was expected and consistent with long-term trends of media consumption and ad spending in our category shifting towards interactive media, both in the U.S. and international markets.

We're also pleased with the level of operating leverage achieved during the third quarter, particularly given the efforts made across the network to enhance overall user experience and launch new product features.

Total cash operating expenses of 70.9 million in the third quarter increased 12% from last year.

This increase was driven primarily by investments in additional personnel for our fastest-growing categories.

Our ability to effectively manage the growth in cash operating expenses to a level significantly lower than the revenue growth drove very strong margin improvement during the quarter.

Our third-quarter operating income before depreciation, amortization and asset impairment of 15.4 million increased 118% from 7.1 million last year.

Margin reached 18% compared to 10% last year, and as a result, we achieved a 52% incremental margin for the quarter.

This margin expansion translated into strong profitability metrics for the quarter.

Excluding asset impairment and investment losses, net income for the third quarter equaled 7.5 million or $0.05 per share diluted, compared to net income of 1.1 million or $0.01 EPS last year.

During the third quarter, we generated 12.7 million of cash from operating activities and invested 5.3 million in capital projects, which resulted in producing 7.4 million of free cash flow, compared to a 3 million usage last year.

The free cash flow we generated this year represented a conversion rate of operating income before depreciation, amortization and asset impairment to free cash flow of nearly 50%.

Our ability to effectively convert profits into cash also strengthened our balance sheet during the quarter.

Our cash position at the end of Q3 2005 increased 19.1 million from last year to 12.7 million.

This increase in cash was driven by free cash flow from operations and proceeds from stock options.

Now let me take a moment to review the items that affected our third-quarter results.

In total, we reported 10.8 million in non-cash charges, 8.9 million of which is associated with asset impairments and 1.9 million represents investment losses.

Of the 8.9 million of asset impairments, 7.3 million is related to the impairment of Computer Shopper Magazine and 1.6 million is attributed to the impairment of our office building in Switzerland.

As a result of our annual testing process, which examines the fair value versus the carrying value for each of our businesses, it was determined that the Computer Shopper Magazine should be impaired.

As a result, a 7.3 million non-cash charge is reflected on our income statement as an operating expense labeled asset impairment, and goodwill was reduced on the balance sheet by the same amount.

Our U.S. print operations remain profitable; however, similar to other off-line publishers, this businesses is experiencing declining revenue as a result of the secular shift towards online media.

As discussed earlier in 2004, when we integrated the management of our channel services data business, which operated in Switzerland, into our U.S. operations, we classified our Swiss office facilities as assets held for sale.

Based on our periodic review of the carrying value of this real estate, we determined that this asset should be impaired to its fair value.

This resulted in a non-cash charge of 1.6 million, reflected on our income statement as an operating expense labeled asset impairment, and reduced other current assets on our balance sheet by the same amount.

In addition to the non-cash asset impairment charges, we reported 1.9 million loss on the sale of investments.

This charge reflected the full write-down of our investments in two private companies which we do not expect to recover.

This charge is reflected on our income statement as a non-cash, non-operating expense labeled realized loss on investments, and on the balance sheet as a reduction to other long-term assets.

The aggregate effect of our 10.8 million of asset impairment and investment losses resulted in a reported net income loss of 3.4 million, or a loss of $0.02 per share diluted.

Now I would like to provide you with CNET Networks' guidance for the fourth quarter of 2005.

We expect the following results -- total revenue to be within the range of 102 to 109.5 million.

This translates into interactive revenue of between 95 million to 100 million, representing a growth rate of 19 to 25% and driven by continued growth across all properties.

Publishing revenue is expected to be between 7 and 9.5 million.

Operating income before depreciation, amortization and asset impairment is estimated to be between 29 million and 34 million.

And earnings per share is expected to be within the range of $0.13 to $0.16.

For the full year 2005, we expect the following -- total revenues to be in the range of 347.5 to 355 million; interactive revenues to be in the range of 319 to 324 million, representing an annual growth rate of 24 to 26%; publishing revenues to be in the range of 28.5 to 31 million; 2005 operating income before depreciation, amortization and asset impairment of between 65 and 70 million.

We expect to achieve above a 50% incremental margin for the full year 2005.

Excluding asset impairment and investment losses during the third quarter, full-year 2005 earnings per share will be between $0.23 and $0.26.

Including the third-quarter unusual item, this translates into an EPS range of $0.16 to $0.19 for the year, and capital expenditures will be in the range of 23 to 25 million.

For 2006, as we had stated previously, we're focused on long-term, sustainable 20%-plus interactive revenue growth.

In addition, we remain committed to expanding our profit margin and target an incremental margin rate of approximately 50%.

However, we are equally committed to expanding our existing brands and building brands in new categories.

So the incremental margin we may achieve could be less than 50% during the period in which we pursue strategic investments.

To summarize our third-quarter results, we're very pleased with the profitable growth we have achieved thus far in 2005, and we believe that these results demonstrate the potential of our business model.

The strong fundamental growth trends we have experienced in the size of our audience and their usage of our properties makes us very confident in the future.

I would now like to turn the call back to Shelby.

Thanks, George.

I would like to provide a little color on the quarter and then spend some time on the industry overall and the implications for CNET Networks.

Overall, this was a good quarter, characterized by strong growth in users and usage, revenues and profits and the further expansion of our brands.

Similar to what we've seen over the past nine months, we see positive trends with respect to our ability to attract new users and drive increased user activity.

CNET Networks users and page views growth of 24% and 61%, respectively, continue to outpace the growth rates experienced by many of our online peers.

The sheer size of our audience ranks CNET Networks among the top 10 global Internet sites, according to comScore Media Metrix.

We know how to build engaging and rich content properties, and these trends reflect that expertise.

The further engagement and growth of our user base is due to a variety of factors, one of which is our focus on continuing to improve our products on an ongoing basis.

As an example of this, you will hear about a number of site redesigns later on in my comments.

For an overall network perspective, we continue to focus on making the sites richer with more audio and video.

Video presents a unique opportunity for interactive content environments to deepen engagement with their audience and further monetize users and traffic.

Our effort in this area has resulted in a 100% increase in the number of video streams across the entire network since this time last year.

This is a networkwide initiative, and the growth in streams is reflective of our ability to leverage in-house editorial as well as licensed content to provide relevant and engaging features.

Examples this quarter included more video at TV.com, MP3.com, the launch of a new video category in CNETdownload.com, in addition to the efforts being made at all of our different sites.

While video advertising remained immaterial as a percent of revenue, advertiser interest continues to increase.

Advertisers such as Showtime, Wrigleys and Dodge were advertisers in video format during the quarter on our games and entertainment properties, and Best Buy, Volkswagen and Cannon advertised in video format on our CNET-branded properties.

Additionally, we have significantly increased our audio content offering across the network.

In the third quarter, we rolled out a series of new audio podcasts at CNETnews.com, CNET.com and Gamespot and ZDNet.

And the network growth you see in this quarter is reflective of our strong position with our in category and contextual advertiser base.

At the same time, we continue to focus on extending our offerings to an even broader consumer-focused marketing community.

We continue to see traction in this area, though similar to what we said last quarter, the percentage numbers remain small.

As we look into next year and beyond, we remain encouraged that this will become a much more material component of our growth rates overall.

Let me take you through some of the specifics of our individual properties in this quarter.

Our CNET-branded properties continue to extend their footprint and provide an even richer overall experience.

CNETnews.com recently relaunched with new features and an even broader focus.

From an editorial perspective, CNETnews.com has continued to gradually broaden its coverage to focus into areas that are seeing the impact of technological innovation in putting biotech space in science.

Additionally, the redesign took a big step forward, embracing our role as both a generator and aggregator of news.

There was a nice write-up in FORTUNE online that used this redesign as an example of how a new media company can embrace technology to create a better, more useful user experience.

At CNETDownload.com, we also relaunched the service with a cleaner, better-designed user interface.

It focused on improving the experience for both users and marketers.

So far, we've been very pleased with the results.

At CNET.com, we continue to add more how-to content, expand our car technology coverage and increase the amount of audio and video.

Let me turn to our games entertainment properties.

Earlier this month, Gamespot and MP3.com also underwent redesigns to match the look and feel of TV.com.

The redesigned sites enhance the user experience on each individual site while providing more user and marketer consistency across the three major games and entertainment properties.

This is the first step in an ongoing effort aimed at providing users the ability to follow their interests across the video game, digital music and television genres through universal search and navigation.

In addition, marketers gain the opportunity to launch targeted yet scalable advertising campaigns in a rich, authentic online environment across all the Company's games and entertainment properties.

As a side note, great interactive properties need to continually reinvent themselves, and redesigns are a critical part of that.

Our experience has shown that there's a certain amount of temporary dislocation of traffic when the redesigns are released.

This is normal and to be expected.

At TV.com, the fall television season proved to be a strong contributor to growth in traffic and usage.

Since launch in June, TV.com continues to add more features, which have helped drive the increased user activity and time spent on the site.

During the quarter, TV.com launched Personalized Listings, a suite of free personalized features that allow users to quickly get local TV listings by typing in their ZIP code and cable or satellite provider.

Given what is happening in the television industry, this site is in a very interesting position to take advantage of some of the changes that are occurring.

Our business properties are evolving with the changing nature of the medium and are broadening out into other network audiences.

We continue to serve the most influential people in the enterprise space with a directory of over 130,000 white papers and web-casts related to IT and broader business topics.

This is over four times larger than the next closest competitor.

Our business properties also benefit from the engagement of the most knowledgeable and influential people in the enterprise.

TechRepublic is a great example of our ability to blend content and community for essential work interaction.

As a result, the TechRepublic user base is one of the most engaged on the web in all sorts of activities, including profiling, filtering, tagging and downloading content from us and our marketing partners.

Our international business continues to grow, and we continue to increase our online exposure in key markets.

We're pleased with the progress of both ZOL and PCHome in China and are encouraged by the results in future prospects for that market and business.

We plan to launch brands like CNET from the U.S. into China in the near future.

We have an outstanding portfolio of assets in China and remain encouraged by the future growth trends.

In Europe, we launched CNETFrance.fr during the recent quarter.

The site leverages the look and feel, as well as popular features, of CNET.com in the U.S.

Let me briefly touch on Webshots.

This quarter marks the one-year anniversary of the Webshots transaction, which was completed in August of 2004.

The Webshots community continues to rank among the top online photo sites.

Traffic and user growth since the acquisition has been strong as we have made significant progress in regards to enhancing the technology capacity to help scale the site and meet a high level of user demand.

On the one-year anniversary almost to the day, 250 millionth digital photo was uploaded to the site.

The number of photos in the White Board has nearly tripled in the last year.

We've added resources to our dedicated sales effort against Webshots.

Advertiser interest is picking up, but it still remains early.

As we look forward towards 2006, we made some organizational changes to make sure that the organization can scale as we grow with our opportunity.

We have organized around key brands and key categories with an eye towards adding more.

Barry Briggs was promoted to President and Chief Operating Officer and made acting head of the CNET-branded properties, a new role for the Company bringing together CNET.com, CNETNews.com and CNETDownload.com under a single head.

Neil Ashe has been promoted to EVP and has picked up additional operational responsibilities, including international, our business properties and the community group, which includes webshots.

He will continue to reports to me and is also charged with continuing our strategic expansion and moving us into new categories, both through builds and acquisitions.

As I said in my opening comments, this has been a good quarter for the Internet and the category -- the content category specifically.

For all of those folks who have been around the industry for awhile, there's a certain aspect of what is going on that is reminiscent of the late '90s.

What's different is there are real business models now and real businesses.

In one of the most important bellwether announcements, Ford said it will spend 15% of its overall marketing budget on digital advertising.

What is notable about this announcement was it was based on real research -- a lot of great work done including the cross-media research study done in cooperation with the IAB, which is commonly referred to as XMOS.

You see mainstream media companies beginning to make serious financial commitments to this area.

Whether it is the newspaper or television companies, they're starting to make significant investments into the media.

Much of the focus and buzz has been on the content area, which validates a theme we've been talking about for a long time.

What is really important is that it is being driven by what mainstream media companies are hearing from their advertising customers.

Imagine if you were a major TV company and you hear a client like Ford, one of your largest, making an announcement like the one they did in this quarter.

If we look a little bit more specifically at that Ford announcement and the XMOS research which played a key role in their decision, there are some interesting implications for how that money can and should be spent.

As part of the XMOS research, Ford bought a series of keywords on search engines which performed quite well.

Someone who searched on one of these keywords was four times more likely to purchase a Ford F-150 than other Internet users.

But, importantly, these keywords only reached 0.6% of Internet users and 3% of Ford F-150 buyers.

So given that search does not reach 97% of Ford F-150 buyers, you have to think about where those Ford dollars will be going.

This underscores a theme that we've been talking about for awhile -- drawing the distinction between dollars spent to generate demand and dollars spent to fulfill demand.

This points to the need for marketers to spend significant dollars in environments that generate demand with a key participant being content.

Another significant move in the quarter was the announcement by Disney that they will be selling versions of both Lost and Desperate Housewives over the web.

Currently on iTunes, you can buy a copy of either show the day after it airs for $1.99, and they will roll this out more broadly to other places in the future.

This is not simply the ability to watch video on a small screen iPod because it is available to watch through any iTunes-enabled device, like your laptop.

I encourage you if you haven't done it to download it to your computer and watch it on your next plane flight.

The file size is about 240 MB and the quality is quite good.

This is an important event for the industry on a couple of levels.

In doing this, Disney put into motion more widespread distribution of video via IP on a pay model basis, a significant departure from the current model.

Disney was in a unique position because they were both the producer and distributor of these two shows.

With Disney taking the first step, we're likely to see a lot more activity, as with both TV and movie product, companies looking to position themselves ahead of what is inevitable change.

This has real implications for how value is captured between producers of content versus the distributors of content.

IP distribution can provide a great deal less friction in cost, allowing content companies to capture more of the value.

For content producers, this shift in the balance of power has enormous ramifications beyond just the producers of TV shows and movies.

Clearly at the most tactible (ph) level, it is interesting for us with our games entertainment properties.

But also foretells a media world not dependent on a traditional distribution platform, providing more opportunities for content brand and new players with economics weighted more to the content producers like ourselves.

We continue to believe that all of this is positive for us and how we're positioned as a company, and if anything, we need to be more aggressive in pursuing our path.

We are unique as a content producer with journalists, editors, video and audio producers, catalog production, augmented with aggregating content for both professional and the highest-quality users.

In the future, your ability to own unique content is that much more important.

We also focus on unique brands against individual verticals, focusing on what we refer to as the passionate third -- the top third of the audience, defined by their passion for that particular vertical.

We also look to partner with other media companies through content licensing and other commercial relationships, often horizontal players like portals, so they can more effectively serve the other two-thirds of the audience.

We need to look at more category coverage like we did with TV.com, MP3 and ZDNet.

Unlike many other companies, we have shown an ability to build things ourselves or take sites that are small, underleveraged and unknown and make them quite attractive.

This focusing on broadening our business not only diversifies our customer base, but also increases our awareness with a broader set of agencies and marketers, making each incremental dollar that much easier.

As we look towards the fourth quarter and into 2006, we like what we see in the marketplace and believe that we are extremely well-positioned.

We don't see any real changes in our strategy.

We will continue to focus on a multibrand strategy anchored around verticals that we think are attractive for both users and marketers.

As we've done over the last three years, we will continue to add more brands and more categories, and investors should expect that they will see us being more aggressive in this strategy in 2006.

We will focus on increasing both users and usage ahead of our ability to monetize it, and will continue to increase engagements through richer offerings of audio and video.

As we've said many times over the last couple of years, we remain focused on delivering attractive growth of between 20 and 25% over a long period of time.

We've demonstrated an ability to grow our margin, translating revenue growth into cash flow.

And as George mentioned, we continue to target around a 50% incremental margin, but will continue to evaluate that over time as we look at opportunities to reinvest into new areas.

The long-term financial picture of this business is an attractive one, composed of sustainable topline growth, margin expansion and significant free cash flow generation.

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

(Operator Instructions).

Mark Mahaney, Citigroup.

A couple of questions.

First, I think if the trend holds seasonally in the December quarter, international will be profitable for the first time I think ever for CNET.

I just wanted to see if you would comment on that.

Secondly, on the publishing side of the business, I know you're not giving -- you've given some guidance for 2006.

What is your confidence level that publishing can actually not decline year over year or can actually be -- what is your confidence that it can grow again at some point?

That's it.

Thanks, Mark.

Let me -- on the first question, that is right.

We will see international profitable in the fourth quarter.

I think I'm correct in saying it was slightly or just marginally profitable by a little bit in the fourth quarter of last year, so this would be the second time.

But I think it really speaks to the leverage that we're beginning to see in that business and going into 2006.

On the publishing side, it's kind of good news/bad news.

I think the good news is we've done an incredible job over time of shifting dollars from off-line to online.

I think what you see in our own results in the publishing area is consistent with what you're seeing throughout the market.

And I think as we've said before, we are an interactive content company.

We're focused on building out interactive content, and as long as we believe that the publishing assets can be strategic to us, we will keep them and use them, and when we think that is no longer the case, we won't.

Gordon Hodge, Thomas Weisel Partners.

This is Lloyd in for Gordon.

I was just wondering if you could comment a little bit -- you mentioned that you were unifying some of the game and entertainment properties to make a unified marketing platform.

I was wondering if you all were considering integrating Webshots into a similar platform.

And as a sort of a follow-up to that, if you could perhaps give us some color as to how you all were able to attract New Line/Warner and AOL to the Webshots properties, whether they came from other CNET properties or whether they were new to Webshots and CNET altogether, and how they sort of look at Webshots versus other CNET properties?

On the unification side, one of the really interesting opportunities we've seen as you look at our games and entertainment properties is you have so many overlaps.

When we launched MP3.com, one of the things we did well was beginning to take, for instance, soundtracks from games and tying them in and being able to do a lot of smart cross-promotion between the game site and the music site.

And we're finding a lot of similar things with respect to the TV site.

And so we've seen a real ability to take all of the different entertainment properties and literally have users stand at the center and be able to navigate and trade information between all the different properties.

Now I think you should -- you'll continue to see us add more and build out around that general theme within that group.

At the same time, we think of Webshots really kind of in a different light.

And I think it's a form of entertainment, but is really more focused kind of overall with respect to community and what we can build out there.

And I think as you've seen in the last six to nine months, you're seen a lot more interest on behalf of marketers in that area.

We're putting more focus behind it and our plans will be to be more aggressive in that area.

I think we've demonstrated an ability to take Webshots, take what was already a valuable asset and I think make it more valuable, and that's been both through product enhancement and through platform enhancement.

So I think we're feeling really good about that area.

As I've mentioned, we've beefed up the dedicated sales effort behind Webshots, and I think, again, we're still early, but I think we're seeing some good traction there.

I think the two advertisers that you pointed out are examples of what we're seeing with respect to traction of kind of bringing in new people into that opportunity.

And have they been advertisers elsewhere on CNET before that, or was this --

No, these were new advertisers.

And I think it's back to that theme -- one of the things I said earlier is the more things we continue to do to broaden the opportunity, the more people we make aware of who we are and what we have, and so part of our focus on continuing to expand and add more categories really is the notion that it makes the whole thing more valuable, every new thing that we add.

Anthony Noto, Goldman Sachs

Shelby, I was wondering if you could comment on whether or not there will be an increased focus or is there an increased opportunity to really leverage user-generated content and really the high-margin profitability of that type of content, as opposed to content that you're creating per se, and obviously user-generated content can actually be exclusive to you depending on how you deploy it.

And then secondly, if I look at your trend in RPMs, it really -- and using just the marketing services revenue as opposed to interactive revenue -- it really looks like sort of bottomed out here.

Do you think we've hit an inflection point where RPM could actually increase in 2006, given that the trend looks like it's bottomed out sequentially June to September?

Thanks.

Great.

We have been very focused over the last really two years on user-generated content.

I think you see it if you look at all of our different properties, whether it's users contributing FAQs within our games environments or writing user opinions or helps and how-tos or other things.

Same thing on CNET.com, when you look at kind of a show me yours, where users are going in and showing their own systems and how they set them up and what they bought and what has worked and what has not worked.

What is unique about how we focus on user-generated content is we focus on really delivering high-quality user-generated content.

So one of the things, for instance, you've seen on sites like TV.com is even things like a minimum number of words you have to do to fill out a review of a show.

And so kind of consistent with this notion of the passionate third, we very much are positioning user-generated content as something that we think is critical to everything we do, but we're very much focused on kind of the best users and the highest-quality content that can be provided.

With respect to RPM, I think as we have said consistently over the last couple of quarters, we're really focused on two things.

One is we're focused on growing users and usage faster, as fast as we can, to kind of build inventory in anticipation of the opportunity we see, and second, growing revenue.

So at different times I think you're going to continue to see RPMs bounce around.

We really aren't building or designing the business against that particular stat.

That's more kind of a function of both users and usage and revenue rather than something we're kind of driving to independently.

I was wondering if we could revisit the first topic on user-generated content.

Do you think you could take it to the next level -- I'm not suggesting that it's the right thing to do, but Yahoo! started to experiment with some things sort of below the radar screen, like the Yammys when they've had users send in various types of entertainment content.

Is there an opportunity to take a whole new dimension on user-generated content for CNET?

Yes.

We think of user-generated content as a very important kind of piece of the puzzle.

But we believe it needs to be much more kind of the notion of structured participation.

So how do you create forums where it can be done in a way that people can -- you can kind of optimize to getting the highest-quality information, it's easy to find and it's functional, things like that.

So it's clearly a very important theme.

We think it's a important complement to what we do.

Even when you look at, for instance, the redesign of News.com, you see that we're beginning to really focus on how do we leverage more content from our user base, even within a news environment?

So it's something that we recognize and believe in as kind of a critical component and we continue to look for more ways to do it, but it's not something that's really new and it's something since way back when, launch of CNET.com in 1995, the whole notion of user participation has been important.

I just think as the medium is getting richer, broadband is -- you're seeing broader penetration, there's a lot more ability to get participation, especially among sites like our games and entertainment group, where you're dealing against a younger demo.

So it's an area that I think is an important area.

We think we have a unique ability because we can really anchor it against high-quality content, so we give people a reason to be there and a reason to kind of participate with our brands.

And we also do it in a way that we make it attractive to marketers.

And so marketers want it to be an environment that's credible that they understand that is well-organized, and I think that mix of how do we take good journalistic content and marry it with really good user content I think is something we can do uniquely and is a real opportunity.

Paul Keung, CIBC World Markets.

It's Akil (ph) for Paul.

Just one quick housekeeping question.

What was search as a percentage of revenue?

Then also, the sequential growth in uniques was down for the first time since 2Q '04.

Was that just from redesigns or was there something else behind that?

And then finally as it relates to Computer Shopper, the publishing trialing that Google is doing with the magazine ad initiative.

That's something that they mentioned some of the Computer Shopper's competitors have embraced.

Can you give us any color there?

Is this something that you're looking into or already trialing?

Thank you.

The search as a percentage of revenue we don't break out.

Over time, what we've said about kind of our Google relationship, which makes up most of our searches, has been -- at different times been at 10% or close to a 10% revenue stream for us.

On the uniques being down, we did do a lot of redesigns this quarter, and I think it's something -- we went in with expectations of we want to get our services kind of buttoned up into great position as we go into fourth quarter.

And as I mentioned in my comments, you always get dislocation when you make redesigns.

This is just kind of part of it.

But it is really critical if you're going to do this well, you need to keep kind of raising the bar and challenging sites and building better and better services.

And I think we're very pleased with where we are overall with respect to product.

And now on the third question, it is not something that we're participating in now or really planning on participating in.

Brian Fitzgerald, Morgan Stanley.

I got the majority of my questions answered.

One I had was you mentioned advertisers in video advertising right now is at about 1% of revenues, but interest is high.

Do you care to comment on how high that could -- what percentage that could get to in, say, '06 or '07, ballpark range?

We did not break out a percentage, but we did say that it's a small number.

You know, it's hard to know right now because the market is changing a lot faster than I think any of us could have imagined.

I think, as I mentioned, I think that the iTunes announcements with Disney is an important one and really could mean kind of a further acceleration of what we see with respect to video.

But as I think I said on the quarterly call 90 days ago, part of what's been the most helpful about video is it's really forced advertisers to take a hard look at the medium, and I think for many, they've said this is a direct marketing medium.

And as they see the really interesting things and the way you can deliver kind of very meaningful emotive stories within video delivery, I think it's really changing people's perceptions.

So I don't know that we have a forecast for what it looks like 2006 and 2007, but what we do see is it's having a very meaningful impact on kind of overall perceptions of broader marketers.

And I think that is very important for what you see kind of in the broader advertising opportunity.

Safa Rashtchy, Piper Jaffray.

A couple of questions.

First, could you give us some measure, if necessary, qualitatively at least, on the revenue breakdown between the traditional -- kind of your classic CNET-branded properties and tech advertisers -- those might be two different ways of looking at it -- and your new properties and the new type of advertisers.

And I have a follow-up.

We haven't broken those numbers out.

You know, I think what we have said kind of publicly is that the CNET brand of properties from a size-wise have been our largest as compared to our other properties.

But we don't break them out specifically.

What I can say overall is when you look at kind of overall growth in our business in the second quarter or third quarter, most of it has come from kind of that definition of in category contextual advertisers.

And so whether it's within the Red Bull (ph) environment, people that are advertising in an overall personal technology environment, or the games and entertainment group, where you're going to see game companies and TV companies and music companies and others, or in the B-to-B properties, where you see people that are marketing into the enterprise space.

So we're still overall looking at kind of revenue growth.

It's still really coming out of what we kind of commonly refer to as endemics.

So I think the whole notion of what we see out of kind of broader-based consumer advertising is still something that we see being more of a 2006 and 2007 story.

And second, as I'm sure you have noticed, there have been many reports in the media about potential takeover or merger between CNET and others.

And it's been reported that this has been an ongoing kind of discussion between the management and many potential acquirers.

And I obviously don't expect you to comment on it directly, but my question is with these stories continuing, how much of the management time is devoted to these issues and to what degree kind of it distracts you from focusing on a longer-term strategy?

I would say we're very focused on operating our business.

As we have all kind of looked at each other, if you think about what it was like to put your trousers on and go to work in 2001 and 2002, it's a very different market today.

And we're seeing a lot of opportunity.

We're really excited.

We have a lot of confidence in our ability not only to deliver on the categories we're in, but to be able to add new categories.

It's nice for the first time in a while to have a little bit of wind at your back, and we're just seeing a lot of opportunity.

And so I think it's a time that we're very encouraged about what we're seeing in our business.

Clearly, there's been a lot of broader interest in the content space, and I think when you live in an attractive neighborhood, other people are going to want to live there.

And so we do see a lot of that interest as a real validation on the things we're doing.

But you know, management team is very focused on delivering for the fourth quarter and delivering going into 2006 and 2007, and it's a time where I think we're very excited about what we're seeing overall.

William Morrison, JMP Securities.

I was wondering if you could clarify the comment about the incremental margins.

I just wanted to make sure I got it right.

And what I heard was that you said the 50% incremental margin target is still unchanged, although it may bounce around from quarter to quarter.

I just wanted to make sure that you weren't trying to say the 50 -- you made maybe below 50% next year, if you could just comment on that.

And then secondly, you mentioned both in your verbal comments, Shelby, and in the release a bunch about the podcast products you added in the quarter.

I was wondering if you could comment about how your you're monetizing those products and services, or if you're just using it to drive traffic to the site or if you might -- if you're going to be putting ads in front of them or inside the podcast to monetize those products?

Thanks.

I'll take the first question, which was about our expectation for incremental margin.

And that's just to say that we expect that our future performance will generate incremental margin on EBITDA of 50%.

But if in a particular period we see attractive investment opportunities to expand existing brands or to launch new brands that we would expect that that 50% incremental margin rate may be below that level.

And I just -- I might add to that that overall, our number one focus is how do we build the most shareholder value.

And I think the degree to which -- we don't -- as we go over time, we want to make sure that we're being prudent in terms of our own ability to reinvest against our business.

And so it's just I think we want to be in a neutral position relative to what we see, and our expectation is it would all be done kind of against the guise of how do we ultimately build the most shareholder value and deliver the best returns for our shareholders?

With respect to the podcast side, we've seen some good sponsorship opportunities around podcast.

I think it's still early.

I would say it's unclear to me whether video is not going to kind of jump over podcast.

So it's unclear to me how significant and important podcasts are going to be.

It clearly gets more interesting when you get Wi-Fi-enabled automobiles and people can in theory listen to podcasts interactively on their way to work and other things.

But I think we're putting a lot more shoulder and see a lot more opportunity specifically on the video side.

Yet you did see us make a series of announcements.

And we think you've got to do everything; you've got to try everything.

And our number one objective is to just deliver better, more engaging, more authentic experiences for our users.

John Glen, CSFB.

It's actually Bill Drewry (ph) here.

A couple of questions, Shelby.

On the 16 million of international revenue, how much of that came from China?

We do not break the percentage out of China.

What we have said is that China and the UK are our two largest markets and our two most attractive markets within our international properties.

Okay.

And given that you guys continue to make acquisitions here, I mean, you are not seeing any issues with the authorities there in terms of, you know, they've obviously had some high-profile crackdowns on the traditional media companies in terms of incremental investment and they're taking some steps to ensure that control of content is still within their realm.

Do you see any of that in the space that you're trafficking in?

No.

Clearly, we've been with our China properties, been very focused on kind of product-focused coverage as opposed to kind of general news-focused coverage.

And so we've had a team kind of that's been in place since 1996, I think.

We've been very happy with both what our team has been able to deliver in terms of kind of existing businesses and their ability to find new business under attractive terms.

And so I think we've been very pleased with what we've seen.

You always kind of want to knock wood a little bit, but it's been very attractive.

And I think importantly, we're seeing strong growth out of our online properties within China, and I think that was one of the more encouraging things we've really seen over the last three months to six months, is we made some key acquisitions with both ZOL and PCHome, and I think those are paying off and we're very encouraged with what we're seeing.

And just two other follow-ups.

You cited traditional media companies moving into the online realm pretty aggressively here, and I'm just wondering as these deals get done -- News Corp.'s probably a good example here recently -- are you seeing either competition for properties that you might be interested, or are you seeing -- and/or are you seeing potential prices go up against what you might otherwise be willing to pay for something?

Bill, it's Neil.

We have -- obviously, we've seen more people at every potential acquisition than we did six to 12 months ago.

We've had the most success in our acquisition strategy around smaller properties, where we haven't run into these folks as much.

As they've entered the market, they have been focused on the larger opportunities.

So as we participate in those ongoing forward, we probably will see them there, but we continue to have an attractive backlog of interesting smaller to medium-sized opportunities that we're focused on.

And just one last question, if I could, for you, Shelby.

You were talking about pre-2000 trends and also what you thought the sustainable growth rate for you guys is going forward.

And I was just wondering against that, there is a school of thought with portfolio managers that going forward, we could see some consumer-led economic weakness.

And I think investors are worried on the traditional media companies that an advertising slowdown could be a reality going forward -- not saying it's going to happen, but that's just one school of thought.

And so under that kind of scenario where we potentially have an advertising recession again, '06-'07, what this time around do you think your growth rate would be against that?

Would you go down with the market, or do you think you can grow through it this time?

Well, I think the more interesting thing going on right now kind of with respect to that question is you look at an announcement like the Ford announcement, which is to take 15% of their budget, which would be about $150 million, and move it to the interactive space.

And that is not a single announcement you've seen.

You've seen that among a lot of different players, which is clearly you are seeing very dramatic shifts or intended shifts in dollars.

And the truth is there isn't that much really good premium inventory right now on the web.

I mean, there's -- in general there's a lot of inventory, but there's not a lot of great inventory.

There are not a lot of great CNETs out there.

And so I think one of the questions you have to ask is I think to its advantage, you're seeing very good research supporting it.

This is a medium that's getting more and more measurable as compared to a lot of other mediums.

So, when you -- if you think kind of a downtime, can -- how is that money going to get put to work, and if you can measure it and how does that compare?

Third, you're going to have more and more dollars that are in the process of transferring, and if anything, there might not be in theory enough great inventory to put it to.

And so I think you've got, unlike what you saw really in the 2001 and 2002 period, where you went into what was I think an advertising slowdown, but we very much had a headwind, my belief is that you would see somewhat of a tailwind going into it.

And it's not to say you wouldn't be impacted, which I think you would be.

But I think the degree to which you did have a tailwind I think it would somewhat mitigate the overall risks.

Thanks.

Congrats on another first-rate quarter.

Steve Weinstein, Pacific Crest.

There's been a lot of discussion about I guess very strong demand, primarily in advertising, for the December quarter.

So I'm wondering if you could put it in perspective relative to the first nine months of the year.

How much visibility do you have to your targets for the December quarter, or how much is already sold versus what you still need to do?

And I guess in connection with that, the difference between the high end and the low end of your expectations for December, how much of that is driven by real sales execution versus your ability to drive traffic and users and create inventory?

I would say from a visibility standpoint, it's -- the business has gotten to a place where I think we have much more visibility than we would have in a comparable time two or three years ago.

So if you look at how we've guided throughout the year, I think guidance has remained relatively consistent throughout the year.

I think it's also consistent with what we saw kind of pattern-wise from last year.

If you look at the first half of this year in places where we had numbers relative to what other people were doing in the space, we overperformed the industry both in the first quarter and the second quarter.

So I think overall, we've got a pretty good view of it.

I think that there are a number of different factors.

In the big scheme of things, I think it's relatively tight guidance ranges, but I think we're basing it on really kind of how we're seeing our business develop and kind of where we are overall, which I think is pretty good.

We're very pleased with kind of how the year is progressing, where we've gotten in terms of our ability to penetrate accounts, our ability to grow revenues and our ability to continue to improve our product and increase user engagement.

So I think overall, we're feeling pretty comfortable with where things are at.

Operator, we have time for one more question.

We're just about at the hour.

Thanks.

Imran Khan, J.P. Morgan.

Shelby, a couple of questions.

Actually, I totally agree with you that there's not a lot of great inventory on the websites.

So in terms of as these traditional companies start spending more money online, how capable are you to create more inventory?

And if you're not able to create inventory, if the CPM prices goes up further, what does that mean for ROI and what does that mean for future on that advertisement?

And second question is in terms of if you look for Q4, which verticals are doing well, if you can give us some color about which part of those we should look for?

With respect to the first question, which is kind of traditional -- you know, kind of where do the dollars go?

Part is that I think in many ways the easiest thing is to be -- you kind of look from an overall industry perspective, then front-door takeovers and guess what, you can only sell a certain day once.

And so a lot of it you've gone kind of low-hanging fruit, and you see in terms of how people are doing a smarter job of packaging, how you get smarter about taking inventory, whether it's using behavioral targeting or other types of targeting.

I think there is an ability to be more thoughtful and strategic about how overall you package inventory.

But I think, too, the overall question is why kind of going back two years ago, we said, look, in some respects, RPMs be damned, we're going to grow users and usage as quickly as we can because you can see dollars coming.

The question is how are they going to get put to work?

And so our thought for the last two or three years really has been that we believe it's going to be a lot cheaper to build inventory now and to build traffic and user experiences now than it will be going forward.

And so it's something we've been very focused on, and I think it's something that's really over time going to pay a real premium for us.

And I'm sorry, I didn't catch your second question.

Second question is that looking forward in Q4, as you look at your inventory sold out, like you said, that you feel much comfortable about Q4.

Can you give us some color which verticals you're seeing the strength coming from?

It seems pretty consistent across the board.

I think in a good way, we've gotten businesses in a place where I think each have really found their sea legs, and we're kind of very comfortable with what we're seeing among all of our different categories.

Clearly, as we've said, we're much more dependent on kind of the -- what we refer to as endemics or the in category advertisers who are buying contacts.

And so those are clearly going to be your most -- you know, the really good contextual placeholders (ph) are going to be your most valuable.

But I'd say we're seeing it across the board and I think are very encouraged kind of with what we're seeing this year as it kind of unfolds as we go and begins to look through the budgeting cycle in 2006.

And so I think we're in a pretty good position.

With that, I think that was our last question.

I want to thank everyone for joining us this quarter.

We look forward to talking to you next quarter.

This concludes today's CNET Networks' third-quarter financial results conference call.

You may now disconnect.