Analysts Cheer on CNET's Q1 Result, Think It as a Core Holding. Enjoy!
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06:50am EDT 22-Apr-99 Salomon Smith Barney (BAKER (415) 951-1665) CNET
CNET: Profits and Expansion of Scope Are Only Begining-Part 1
--SUMMARY:--CNet, Inc.--Online Media
+ CNET reported $19.6 million in 1Q99 revenue, $2 million better than our
expectation and modestly higher than 4Q98 revenues.
+ CNET's profitability has accelerated from a 1% margin in 2Q98, to 7% in
3Q98, to 13% in 4Q98, to 15% in 1Q99 (16% excl. goodwill amortization).
+ Upside in both revenue and margins leads to upward estimate revisions as
follows: 1999E was $0.28 goes to $0.42, 2000E was $0.55 goes to $0.75.
+ CNET will introduce new services for the used/refurbished computer mkt,
for consumer electronics, for communications, and all other tech-related
areas over the course of 1999. These are not fully reflected in current
estimates.
+ We are raising our target price to $150 per share and continue to rate
CNET a Buy, High Risk.
--EARNINGS:-----------------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 12/98 EPS $(0.19)A $(0.14)A $0.02A $0.09A $(0.22)A
Previous 12/99 EPS $0.03E $0.05E $0.08E $0.11E $0.28E
Current 12/99 EPS $0.09A $0.09E $0.11E $0.13E $0.42E
Previous 12/00 EPS $N/A $N/A $N/A $N/A $0.55E
Current 12/00 EPS $N/A $N/A $N/A $N/A $0.75E
Previous 12/01 EPS $N/A $N/A $N/A $N/A $N/A
Current 12/01 EPS $N/A $N/A $N/A $N/A $N/A
Footnotes: EPS are fully diluted.
--FUNDAMENTALS:-------------------------------------------------------------
Current Rank........:1-H Price 04/21/99......:$119.75
Prior Rank..........: Target Price........:$150.00
P/E 12/99...........:285.1X 52 Wk Price Range...:142.75 - 15.00
P/E 12/00...........:159.7X Proj. 5yr EPS Grth..:N/A%
Return on Equity 98.:N/A% BookValue...........:$1.35
LT Debt-to-Capital..:.27% Dividend............:$N/A
Revenue 1999........:$91.26 mil Yield...............:N/A%
Shares Outstanding..:36.74 mil Convertible.........:No
Mkt. Capitalization.:$4399.62 mil Hedge Clause(s).....:
Comments............:
--OPINION:------------------------------------------------------------------
+ SUMMARY & OVERVIEW +
C|Net's media operating model, management's focus and the growth of the
Internet combined to produce a powerful 1Q99 earnings result. On revenue
of $19.6 million, C|Net generated a 15% operating margin and $0.09 per
share in earnings before goodwill amortization in 1Q99. The company's
revenue was +10% better than our estimate, its operating margin was ten
points above our target, and per share earnings were three times as great
as we had anticipated. Roughly 52% of C|Net's revenue growth vs. 1Q98
dropped down to the operating income line, even after goodwill
amortization. From a cash flow perspective, C|Net produced $4 million in
cash from operations, with another $3 million in cash generated from
working capital management. Thus, in a quarter in which C|Net generated
roughly $20 million in revenue, the company netted $7 million in
additional cash, excluding the additional proceeds of $167 million from a
convertible bond offering.
At this point, C|Net is by far the most successful publicly-traded Online
Media content company, and its operating strength is backed up by a
balance sheet with over $200 million in cash. As a measure of C|Net's
operating muscle, we estimate that C|Net is producing over $3.75 of
operating income per 1,000 page views on its web site. As the number of
C|Net users grows -- the audience grew by +12% in 1Q vs. 4Q -- and the
company adds new content and shopping areas to its network, the earnings
growth engine should continue to accelerate. We project cash earnings of
$0.42 per share in 1999 and $0.75 per share in 2000, before slightly less
than $0.10 per share in goodwill amortization expenses in both years.
Within four years, we believe that C|Net's cash earnings could approach
$2 per share, with considerable room to grow from there. Based upon
C|Net's continued operating success and significant remaining potential
within the company's core computer marketplace, not to mention the
upcoming addition of new content and merchandise areas, we are raising
our target price to $150 per share, and continue to recommend purchase of
the stock. We rate C|Net a Buy, High Risk, or 1-H under the SSB ratings
code.
+ 1Q99 OPERATING HEADLINES +
C|Net's average daily page views rose +16% in 1Q99 vs. 4Q98, reaching 9.5
million on average in 1Q99. Comparing March 1999 page views to December
1998 page views, the figures are even stronger and show a +28% increase
in usage of the C|Net sites. Online revenue per 1,000 page views rose to
$21 in 1Q99, a 50% increase from less than $14 in 1Q98. According to
MediaMetrix, C|Net's regular user base was about 7.4 million people per
month in 1Q99, up +12% from 4Q98 levels.
C|Net's total revenue was $19.6 million in 1Q99, up from $9.8 million in
1Q98 and slightly ahead of 4Q98 sales. The company's Online Media
franchises contributed $18 million to 1Q99 sales, while the television
operations added $1.7 million in the quarter. The total was about $2
million, or +10%, higher than we had expected. Most of the revenue
upside came from a better revenue per thousand page view figure, as
C|Net's inventory enjoys increasing advertiser demand. The C|Net
audience represents an attractive and growing pool of computer- and
technology-interested consumers who hold great appeal for marketers and
manufacturers of these products.
On the expense side, C|Net's total expenses were slightly lower than we
projected for 1Q99, despite the stronger revenue figure. Site and
television production expenses were $8.4 million in 1Q99, or 43% of
sales. These costs have dropped from 49% of sales in the last six months
and 72% of sales a year ago. As advertising revenue grows, C|Net's
content and site costs are not scaling upward as quickly, providing
operating leverage. Sales and Marketing expenses were 25% of sales or
$4.9 million in 1Q99, and the company generated stronger audience and
page view growth than we had expected despite somewhat lower Sales and
Marketing expenses than we had projected. Product development and
overhead expenses were each about $1.5 million in 1Q99, in line with our
targets.
C|Net's revenue upside, operating leverage over content costs and lower
sales and marketing expenses conspired to produce $3.1 million in net
income in 1Q99, well ahead of our $1 million estimate. Earnings per
share were $0.09, excluding a penny of goodwill amortization. Our
estimate was only $0.03 per share for the quarter.
+ CHANGES TO FINANCIAL PROJECTIONS +
Based upon the stregth of C|Net's 1Q99 results, particularly its revenue
per 1,000 pages, we have raised our estimate of 1999 revenues to $98
million from $91 million previously. For 2000, our new revenue estimate
is $135 million, up from an earlier $123 million bogey. On the margin
side, we now expect C|Net to hit operating margins, even after deducting
goodwill amortization, of 13.6% in 1999 and 19.6% in 2000. Before now,
we had pegged the company's margins at 10.5% in 1999 and 17% in 2000.
Following the revneue revisions and margin hikes through our model, we
estimate that C|Net will earn $0.42 per share in 1999 and $0.75 per share
in 2000. These estimates are exclusive of just under $0.10 per share in
goodwill amortization charges.
+ VALUATION +
With increaed revenue and margin expectations, we are raising our target
price for C|Net to $150 per share. Our prior target price of $73 per
share was predicated upon C|Net gaining 15 million regular users and
achieving $10 of annual operating income per user by the year 2003. We
now believe C|Net will be able to achieve $20 of annual operating income
per user over that time frame, based upon faster revenue growth and
higher margins. Multiplying $20 of operating profit per user by 15
million users yeilds $300 million in total operating income. After
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