10:49am EDT 22-Apr-99 Merrill Lynch (T.Pankopf/J.Cohen (Jon)) CNET
CNET:CNET 1Q99: Another Upside Surprise
ML++ML++ML Merrill Lynch Global Securities Research ML++ML++ML
CNET INC. (CNET/OTC)
CNET 1Q99: Another Upside Surprise
Tonia Pankopf (1) 212-449-1011
Jonathan Cohen (Jon) (1) 212 449-0773
ACCUMULATE*
Long Term
BUY
Reason for Report: Company Earnings
Price: $119 3/4
12 Month Price Objective: $145
Estimates (Dec) 1998A 1999E 2000E
EPS: $0.05 $0.44 $0.65
P/E: 2395.0x 272.2x 184.2x
EPS Change (YoY): 520.0% 109.7%
Consensus EPS: $0.31 $0.58
(First Call: 13-Apr-1999)
Q1 EPS (Mar): d$0.19 $0.03
Cash Flow/Share: NA NA NA
Price/Cash Flow: NM NM NM
Dividend Rate: Nil Nil Nil
Dividend Yield: Nil Nil Nil
Opinion & Financial Data
Investment Opinion: D-2-1-9
Mkt. Value / Shares Outstanding (mn): $4,550.5 / 38
Book Value/Share (Dec-1998): $2.08
Price/Book Ratio: 57.6x
LT Liability % of Capital: 0.0%
Est. 5 Year EPS Growth: 50%
Stock Data
52-Week Range: $159 1/2-$14 1/2
Symbol / Exchange: CNET / OTC
Options: Chicago
Institutional Ownership-Spectrum: 25.5%
Brokers Covering (First Call): 10
ML Industry Weightings & Ratings**
Strategy; Weighting Rel. to Mkt.:
Income: Underweight (07-Mar-1995)
Growth: Overweight (07-Mar-1995)
Income & Growth: Overweight (07-Mar-1995)
Capital Appreciation: In Line (28-Jan-1999)
Market Analysis; Technical Rating: Below Average (28-Dec-1998)
*Intermediate term opinion last changed on 01-Dec-1998.
**The views expressed are those of the macro department and do not necessarily
coincide with those of the Fundamental analyst.
For full investment opinion definitions, see footnotes.
Investment Highlights:
o Once again, CNET, Inc. reported strong operating results. CNET generated
revenues of $19.6 million, representing an increase of 101% year-over-year and
2% sequentially.
o Net income for the quarter was $3.4 million, or $0.09 per share, handily
beating our EPS estimate and (consensus estimate) of $0.03 per share.
o We attribute CNET's strong results to its continued focus on its e-
commerce strategy.
Fundamental Highlights:
o We expect CNET will continue to explore new commerce-related opportunities
in the coming year and will extend its commerce platform into a number of new
product categories this year.
o We strongly believe in the market opportunity and long term profitability
of CNET's business.
o We maintain our Accumulate/Buy rating on CNET shares.
Once again, CNET, Inc. reported strong operating results. For the first
quarter of 1999, CNET generated revenues of $19.6 million, representing an
increase of 101% year-over-year and 2% sequentially. On the top line, CNET
came in $3.4 million better than our $16.2 million revenue estimate for the
quarter. Excluding goodwill amortization relating to the WinFiles.com
acquisition and gains on the sale of equity investments, net income for the
quarter was $3.4 million, or $0.09 per share, handily beating our EPS estimate
and (consensus estimate) of $0.03 per share. Pending stockholder approval,
CNET intends to announce a 2-for-1 stock split effective May 28(**th).
We attribute CNET's strong results to its continued focus on its e-commerce
strategy. Through its network of sites, CNET brings together buyers and
sellers creating a highly efficient marketplace for technology consumers and
vendors. We endorse that strategy for the following reasons. The platform CNET
is developing is scalable and can extend to nearly every category of goods and
services relating to technology. As a result, we believe that CNET has the
opportunity to become the destination site for consumers interested in
researching or purchasing any type of technology product or service. We also
believe that technology vendors or advertisers benefit significantly from
CNET's efficient marketing channel.
Strength of Lead Generation Business Resulted in Better Gross and Operating
Margins
In the quarter, gross margins came in at 56.9%. We had been looking for gross
margin in the 54.5% range. As a percentage of revenues, sales and marketing,
development, and general and administrative expenses represented 25%, 8% and
8%, respectively. During the quarter, CNET continued to expand its sales and
marketing infrastructure, and we anticipate CNET will continue to invest in
sales and marketing expenditures in 1999. On a consolidated basis, CNET
generated $3.2 million in operating income equating to an operating margin of
16% which is a 300 basis point improvement over last quarter. As of the end of
the quarter, CNET's cash position stood at $214.0 million. (CNET completed a
$173 million convertible debt deal.)
CNET Shares Still Remain Attractive
CNET is intently focused on finding additional technology related markets and
distribution channels to use its content, traffic, technology and brand. In
that regard, we expect CNET will continue to explore new commerce-related
opportunities in the coming year. We fully expect CNET to extend its commerce
platform into a number of new product categories this year including consumer
electronics and high-end office equipment.
CNET's strong first quarter results lead us to believe that the company is
capable of achieving revenues of $100.0 million for 1999 versus our previous
estimate of $95.0 million. By the same token, we believe that the company will
achieve greater operating leverage from that higher revenue base despite the
assumption of increased sales and marketing expenses in 1999. We have therefore
raised our EPS estimate for 1999 from $0.31 to $0.44 per share. Additionally,
we have revised our 2000 revenue from $133.7 million to $134.4 million. Our
EPS estimate remains at $0.65 per share.
We strongly believe in the market opportunity and long term profitability of
CNET's business. As such, we have applied a multiple of 41x our $134.4 million
revenue estimate for 2000 to arrive at our new 12-month price objective of $145
per share. We maintain our Accumulate/Buy rating on CNET shares.
(CNET) The securities of the company are not listed but trade over-the-counter
in the United States. In the US, retail sales and/or distribution of this
report may be made only in states where these securities are exempt from
registration or have been qualified for sale. MLPF&S or its affiliates usually
make a market in the securities of this company.
Opinion Key (X-a-b-c): Investment Risk Rating(X): A - Low, B - Average, C -
Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12
mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 - Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9
- No Cash Dividend.
Copyright 1999 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S).
This report has been issued and approved for publication in the United Kingdom
by Merrill Lynch, Pierce, Fenner & Smith Limited, which is regulated by SFA,
and has been considered and issued in Australia by Merrill Lynch Equities
(Australia) Limited (ACN 006 276 795), a licensed securities dealer under the
Australian Corporations Law. The information herein was obtained from various
sources; we do not guarantee its accuracy or completeness. Additional
information available.
Neither the information nor any opinion expressed constitutes an offer, or an
invitation to make an offer, to buy or sell any securities or any options,
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investments"). MLPF&S and its affiliates may trade for their own accounts as
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position in any securities of this issuer(s) or in related investments. MLPF&S
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