10:00am EDT 22-Apr-99 Morgan Stanley\DW (Meeker, Mary (212)761-8042) CNET
CNET: MO' REVENUE, MO' LEVERAGE/P2
Basic Online Revenue Growth Metrics for CNET,
CQ2:98 - CQ1:99
CQ2: CQ3: CQ4: CQ1:
98 98 98 99
CNET Rev. ($K) $13, $14, $19, $19,
067 390 210 602
Q/Q Growth 34% 10% 33% 2%
Qtr. Avg. Page 6,30 6,80 8,20 9,50
Views (000s) 0 0 0 0
Q/Q Growth 0% 8% 21% 16%
Qtr-End Avg. 6,50 7,20 7,80 10,0
Page Views 0 0 0 00
(000s)
Q/Q Growth -- 11% 8% 28%
Advertisers 226 280 310 347
Q/Q Growth 16% 24% 11% 12%
Qtr-End -- 50 70 83
Merchants
Qtr-End Sales 40,0 70,0 90,0 104,
Leads per Day 00 00 00 000
Gross Margin Holds at 57% -- Gross margin held at 57% Q/Q (the highest
level in the company's history) with gross profits of $11.2MM.
Opex Decline Q/Q - Opex declined to $8.0MM, up 62% Y/Y but down 4%
Q/Q, with corporate expenses down and other opex lines flat. Sales
and marketing rose $0.1MM Q/Q to $4.9MM or 25% of revenue (the same as
in CQ4). The $14.5 two-and-a-half year marketing deal signed with AOL
on February 9 (described below) should cause sales and marketing
expenses to ramp up going forward.
Development costs rose $0.2MM Q/Q to $1.5MM or 8% of revenue (up from
7% in CQ4). Corporate expenses declined $0.6MM Q/Q to $1.5MM or 8% of
revenue (down from 11% in CQ4). The relatively high level of
corporate expenses in CQ4 was in part due to the payment of bonuses to
approximately 120 employees as part of an incentive compensation
program.
Operating Margin reached a record 16%, up from 13% in CQ4, 7% in CQ3,
and 1% in CQ2, CNET's first quarter of operating profitability. This
is a real impressive trend. CNET also recorded its highest operating
profits to date -- $3.2MM, well ahead of our expectations of $0.5MM.
Positive Operating Net Income for CNET for the 2nd Straight Quarter -
Operating net income, excluding $300,000 in goodwill amortization and
a $19.9MM gain on investments, was $3.4MM or EPS of $0.09, ahead of
our and the First Call mean estimate of $0.03. (Our estimate assumed
a 10% tax rate; with that tax rate, CNET's operating EPS would have
been $0.08.)
Balance Sheet Getting Stronger - CNET ended CQ1 with a cash and
equivalents balance of $408MM, up from $52MM in CQ4. Gross proceeds
of $172MM from a March 8th convertible security offering were partly
responsible for this increase. CNET's current share in Vignette and
BuyDirect.com currently account for almost $200MM in marketable
securities. Operating cash flow for the quarter was approximately
$5MM. DSOs (by our count, which is based on 180-day revenue period)
improved significantly to 77 from 90 in CQ4. Capex during the quarter
was approximately $1MM. Headcount at the end of CQ1 was 510, up from
490 in CQ4.
STATUS OF MERCHANT PROGRAMS:
On October 19, CNET announced its merchant auctions results. As part
of its effort to diversify and grow its revenue streams and monetize
the commerce-related traffic over its network, CNET auctioned listings
on its Shopper.com and Computers.com sites. At the end of CQ1, CNET
was generating 104,000 sales leads per day. Over 135,000 products (at
1.5MM prices) are now available via Shopper.com and Computers.com.
Under the terms of the program, merchants pay CNET for each lead
generated to their online stores. Further, the program offers three
tiers of visibility for online merchants: Premier, Preferred, and
General. The tier ranking is based on the merchant's advertising
commitment to CNET.
Differences between the three tiers are the merchant's location on the
results search page and the size of the merchant link on that page.
When a user searches for a particular product, he/she will receive a
page that lists all the participating merchants selling that product.
Premier partners will appear first in the listings, followed by
Preferred and General merchant partners.
CNET recently renegotiated and increased the sales lead prices with
its merchants; the prices went into effect at the beginning of April.
Key is the fact that CNET retained 83 of its 85 existing merchant
partners even while increasing their fees.
Behind CNET's merchant program and its efforts to tap ecommerce
revenues are two goals: 1) to help tech buyers decide what to buy, and
2) to help tech buyers decide where to buy. The tech-oriented
ecommerce opportunity is enormous - according to Jupiter
Communications, PC hardware and software should account for 45% of all
consumer spending on the Web in 1999; according to Forrester,
computers and electronics should account for 46% of all business
spending on the Web this year.
Note that CNET's recent acquisitions of NetVentures, AuctionGate.com,
WinFiles.com and KillerApp - described below in recent highlights -
are all geared to help CNET tap into ecommerce opportunities.
AOL DEAL:
On February 9, CNET announced a $14.5MM, 27-month distribution deal
with America Online. Under the terms of the deal, CNET will be the
exclusive provider of computer hardware and software buying guides on
AOL and AOL.com, as well as the primary provider of computer buying
guides on CompuServe and AOL's Digital City. Further, CNET will be
the exclusive provider of free-to-download software on AOL.com.
The $14.5MM amount works out to $1.6MM a quarter, which is included in
CNET's sales and marketing expenses beginning in CQ2:99. The $14.5MM
amount is guaranteed; if performance thresholds are met, AOL will be
eligible for additional payments.
The company indicated that the distribution deal should go into effect
this month.
As we've stated before, we believe the deal should be beneficial to
CNET. AOL's 19MM member base (17MM AOL, 2MM CompuServe), plus
AOL.com's extensive Web reach, should help CNET broaden its brand
exposure and customer base. The lack of significant overlap between
CNET and AOL's customer base -- only 15% of visitors to AOL.com's
computing channel also visit CNET - also augurs well for CNET.
COMPETITIVE LANDSCAPE:
Measured in terms of reach among U.S. Internet users, CNET is a
leading online source of technology news - According to Media Metrix,
CNET recorded March combined home/work reach of 13.3%, versus 11.4% in
December and 11.3% in September. ZDNet recorded March reach of 14.7%,
versus December reach of 12.6% and September reach of 12.0%. These
reach numbers imply that CNET had approximately 8.2MM unique users in
March, compared to 9.0MM for ZDNet.
ZDNet went public on March 31st and should be reporting CQ1 results
shortly. As we've noted before, this is in many ways a two-horse
race, with both companies well positioned to tap into the large and
fast growing technology-oriented advertising and commerce market on
the Internet. Our opinion remains - the field is big enough for two
winners.
FINANCIAL OUTLOOK:
Increasing our top line and EPS estimates for C1999 and C2000. For
C1999, we are increasing our revenue estimate by $7MM to $94MM (up 67%
Y/Y) on account of strong momentum in CNET Online advertising and
commerce revenues. For the year, we look for operating net income of
$16MM, up from our previous estimate of $10MM. We have increased our
EPS from $0.31 to $0.42.
For C2000, we are increasing our revenue estimate by $5MM to $121MM
(up 28% Y/Y). For the year, we look for operating net income of
$25MM, up from our previous estimate of $21MM. We have increased our
EPS from $0.53 to $0.62.
For CQ2:99, we look for revenue of $23MM, up 74% Y/Y and 16% Q/Q. We
estimate opex (including $1.6MM in AOL-related expenses) of $10MM, up
80% Y/Y and 20% Q/Q. We look for operating net income of $3.9MM or
EPS of $0.09.
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