03:56pm EDT 22-Apr-99 EVEREN Securities CNET
CNET: 1q results
EVEREN Securities, Inc. Equity Research Note
April 22, 1999
Anthony Blenk, CFA Andrea Grosz Erik Brynolfson
(312) 574-6235 (312) 574-5939 (312) 574-5992
ablenk@everensec.com agrosz@everensec.com ebrynol@everensec.com
Company: CNET, Inc. (CNET-$ 119 3/4 as of 7:00 a.m. CDT)
Industry: Internet
Int. Term Rating: 1 - Outperformer Target Price: to $157 from $134
Long Term Rating: 1 - Outperformer Target Price: to $199 from $155
Suitability: High Risk
First quarter results exceed our consensus $0.03 by $0.06;
Company declares 2-for-1 stock split; price targets raised; re-
iterate 1-1.
Dividend: 0.00 PE1999: 299.4 x Bk Value: $1.91/sh.
Yield: 0.00% PE2000: 176.1 x 52-Wk. Range: $160-14
ROE: N.M. 1999E Cash Flow: $0.69/sh. Shares Outstanding:37.4 mm
Inst. Hldgs: 28% Insider Hldgs: 63% Market Cap: $4,550 million
FY: December Next Reporting Date:7/23/99 3yr EPS Est'd CAGR : 30%
EPS 1997A *1998A 1999 E 2000 E
Q1 (Mar.) $(0.22) ($0.19) $0.03 $0.09
Q2 (June) (0.18) ($0.14) 0.07 0.13
Q3 (Sept.) (0.23) (0.03) 0.07 0.13
Q4 (Dec.) (0.31) 0.09 0.14 0.23
Year. ($0.95) ($0.29) $0.31 $0.58
Consensus N. A. N. A. $0.31 $0.57
*EPS estimates are fully diluted and adjusted for 2-for-1 split
declared 2/10/99; 2Q and 3Q 98 EPS exclude about $ 5 million
gain in each quarter from sale of Vignette equity. Totals (and
changes in total EPS) may not add due to changes in share counts
based on quarterly profitability.
Prior Prior
Revs ($000) 1997A 1998A 1999E 2000E
Q1 (Mar.) $6,318 $9,671 $18,555 $26,486
Q2 (June) 8,314 13,067 20,375 26,923
Q3 (Sept.) 8,672 14,930 21,289 28,535
Q4 (Dec.) 10,335 19,210 29,320 38,884
Year. 33,639 56,428 $86,000 $115,00
Investment Summary
First quarter results exceed our consensus $0.03 by $0.06;
Company declares 2-for-1 stock split; re-iterate 1-1. CNET's
first quarter results came in $0.06 ahead of our forecast mainly
as a result of gross margins exceeding our estimate of 46.3% by
10.6%. Essentially, the story improved during the quarter purely
as a function of better financial performance. The investment
thesis - that CNET will garner a significant share of the
advertising dollars that are following the computer revenue shift
to the Internet - also strengthened during the quarter as more
companies in the technology space indicate that a share of their
revenues are shifting to the internet. We are raising our
revenue estimates to $95 and $130 million from $89.5 and $120.5
million for 1999 and 2000, respectively. We are raising our EPS
estimates to $0.40 and $0.68 from $0.31 and $0.58, for 1999 and
2000, respectively, and a function of higher EPS estimates. Re-
iterate 1-1.
Key Points
The quarter itself had essentially two positive surprises. First,
revenues on the Internet advertising side came in $1.2 million
ahead of expectations. This meant that, excluding the $700,000
revenue generated in the fourth quarter from an online
conference, ad revenues rose 7% sequentially. This was an
especially strong performance given typical seasonal weakness in
computer sales in the first quarter and concomitantly lower tech-
based ad revenue. The key to the company's bucking this seasonal
trend is, first, the amount of sales of technology products going
over the Internet is growing rapidly, overcoming seasonal trends,
and the vendors of technology products, particualry personal
computer-relatied products, are increasing their online ad
budgets to capture sales on this new "channel". Second, CNET is
creating more salable ad space. This has been a focus of the
company for four quarters now.
* Second big surprise in the quarter is that Internet gross
margins came in at 61.9%, 10.4% over our estimate of 51.5% as
costs of providing service were held flat. Overall gross
margins, including television, which esseentially is run to yield
no gross margins, were 57.1%, 10.8% over our forecast of 46.3%.
The essential take-away from this result is that creating space
that is highly salable is not relatively more expensive to make
than other kinds of space.
* New sites will be coming on stream in the second through fourth
quarters which can boost revenue further. These sites all share
the characteristic of facilitating internet commerce, primarily
from businesses to consumers. The impact of the new sites will
be felt in the gross margin line, but should also bring higher
revenues.
* As a result of the excellent results seen in the fourth
quarter, we are raising our EPS estimates for 1999 and 2000.
Revenues are increased by $5.4 million to about $95 million for
1999 and by $ 9.5 million in 2000 to $130 million.
* While the excellent gross margins of the first quarter will
probably set the tone for the rest of the year, the increase in
gross margins cannot continue into the next few quarters as
investment is needed in the physical infrastructure to generate
pageviews and in some personnel increases in the content creation
area. So our total gross margin for the final three quarters of
1999, we are actually lowering our gross margin estimates 1.3%,
4.2% and 1.1%, respectively. For the full year, this means that
our gross margin estimate for Internet operations actually falls
50 basis points, despite the surprise in the first quarter.
However, we expect gross margins to do better in 2000, when they
increase 200 basis points, to 64.3%. Nevertheless, this is
essentially unchanged from our prior margin estimate of 64.4%.
Overall, gross margins in 2000 are forecast to increase 30 basis
points as a function of mix shift to the high gross margin
revenues of the Internet business.
*Our operating expense forecast (excluding goodwill amortization
of $900,000 per quarter) has been lowered $1,940,000 for the
remaining quarters of 1999. This is a function of lower expenses
in selling and marketing.
* Net-net, our operating income is increased for all of 1999
about $5,735 million; but increased interest expense from the
$175 million in convertible deventure issued in the first quarter
is lowering the overall net gain by about $1.7 million to about
4.0 million operating; after a 10% tax bite, the net increase in
EPS is $0.09 for the full year; of which $0.06 came in the first
quarter.
* This company has achieved in the first quarter, one seasonally
weak for advertising, an operating margin (excluding goodwill, as
is customary in this space), of 16.6%. It also achieved a
positive operating cash flow of $5.0 million. Clearly, this
company has separated itself from the pack of internet companies
which are running at losses while they build their traffic and
revenues. For all of 1999, we are now forecasting an operating
margin of 13.2%, and for all of 2000 our forecast is for 22.6%.
The latter figure puts it at about 60-65% of Yahoo!, Inc.'s
profitability.
Valuation
Purely as a result of the increase in EPS in the two valuation
years, we are raising our price targets to $157 and $199 from
$134 and $155, respectively. As before, we continue to believe
that CNET can sell at 67% of Yahoo's P/E.
TARGET PRICE CALCULATION, INCORPORATING
NEW P/E TARGETS ESTABLISHED 4/21/99
NEW PRIOR
TARGET P/E - NEXT 6 MONTHS 233 233
2000 E EPS X $0.68 $0.58
TARGET PRICE - NEXT 6 MONTHS = $157 $134
2001 E EPS $0.90 0.70
TARGET P/E - NEXT 12-18 MONTHS X 221 221
TARGET P/E - NEXT 12-18 MONTHS X $199 $155
CURRENT PRICE: $119.75
1999 EST EPS $0.40 P/E 299.4
2000 EST EPS $0.68 176.1
2001 EST EPS $0.90 133.1
CURRENT MARKET CAP. ($ MILLIONS) $4,550
MKT CAP/REV.
1999 EST REVENUE ($000's) 94,857 48.0
2000 EST REVENUE ($000's) 129,973 35.0
2001 EST REVENUE ($000's) 164,694 27.6
Source: EVEREN Securities, Inc. estimates
Time: 2:25 p.m. CST S&P 500: 1353.58
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