Analsysts are cheering CNET's Q1 results! Enjoy!
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09:11am EDT 22-Apr-99 BancBoston Robertson Stephens (Barnes, Cristy 415-676-28
CNET: Q1 results above estimates; Expanding merchant program; ... (Page 1 of 2)
April 22, 1999
C N E T , I N C .
Q1 results above estimates; Expanding merchant program; Buy.
Keith E. Benjamin, CFA (415) 693-3285 keith_benjamin@rsco.com
BancBonston Robertson Stephens BancBoston Robertson Stephens
CNET, INC. CNET $119 3/4 4/22/99
Industry: Internet Content
CHANGE IN.. YES/NO WAS IS Keith E. Benjamin 415 693 3285
...Rating: No BUY Cristy Barnes 415 676 2877
...EPS 1998A: Actual $0.13 FY DEC 1998A 1999E 2000E
...EPS 1999E: Yes $0.30 $0.40 EPS: 1Q ($0.07) $0.09A $0.12
...EPS 2000E: Yes $0.55 $0.70 2Q $0.01 $0.09 $0.15
52-Week Range $171-25 3Q $0.10 $0.10 $0.20
FD Shrs Outstanding (MM): 39.2 4Q $0.09 $0.11 $0.22
Market Cap: $4,694.2 Year $0.13 $0.40 $0.70
Avg Daily Volume (000): 641 P/E --- NM 170.3x
3/99 Bk Value/Sh:* $7.13 CY $0.13 $0.40 $0.70
3/99 Tot Debt/Tot Cap: 39.2% CY P/E --- NM 170.3x
1999E ROAE: NM Revs($M): 1998A 1999E 2000E
Price/Book Value: 16.8 1Q $9.8 $19.6A $29.4
Net Cash/Sh: $5.82 2Q $13.1 $23.4 $32.5
Dividend/Yield: 0% 3Q $14.4 $24.7 $37.6
3-Yr Sec Growth Rt: 45% 4Q $19.2 $27.3 $40.6
Year $56.4 $95.0 $140.0
Mkt Cap/Rev 83.2x 49.4x 33.5x
Shares Reflect 2-for-1 Stock Split Effective March 8, 1999.
Key Points:
** Q1 revenues of $19.6M and EPS of $0.09, above estimates of $17.0M and $0.03.
** Computers.com and Shopper.com are generating more than 104,000 sales leads
per day, up from 90,000 leads per day at the end of Q4.
** We believe the AOL deal could drive a significant amount of new traffic to
CNET's sites, and become a significant source of potential buyers of
computer-related products, which could accelerate growth in lead generation.
** We are raising estimates going forward.
** CNET announced another two-for-one stock split, effective May 28t h .
** We believe CNET is emerging as one of the most profitable Internet
companies.
SUMMARY: CNET reported Q1 revenues up 101% to $19.6 million, above our
estimate of $17.0 million. Q1 EPS were $0.09, excluding goodwill amortization
related to the WinFiles.com acquisition and gains on the sale of equity
investments, above our estimate of $0.03. Including these one-time charges,
CNET reported a net loss of $0.61 per share.
Q1 revenues for CNET's technology publishing division increased 124% to $18.0
million, higher than our estimate of $15.0 million, reflecting strong
advertising revenues and lead fees. Television revenues were slightly below
expectations at $1.7 million, versus our estimate of $2.0 million.
Gross margins of 56.9% and operating expenses of 40.6% were better than our
estmates of 55% and 50.7% respectively.
We believe the underlying franchise remains strong, with network page views up
16% to an average of 9.5 million page views per day in Q1 from 8.2 million in
Q4. In March, CNET relaunched CNET.com, with a new, easier to use interface.
We continue to view CNET as one of the most popular content networks on the
Internet. According to Media Metrix, the CNET network of sites had a combined
reach (at home and at work) of 13.3%, or a projected 8.2 million unique users
in March. This compares to its closest competitor, ZDNet, whose network of
sites had a combined reach of 14.7%, or 9.0 million unique users. Among the
shopping sites in March, CNET's Software Download Services (which includes
Download.com and Shareware.com) ranked #4 with 7.1% reach, or a projected 4.4
million unique users.
CNET's unique advertisers increased to 347 advertisers from 310 in Q4. Pricing
stayed relatively flat at approximately $21 CPM. Sell through in the quarter
was approximately 50%.
CNET generated over $90 million in sales for its 83 participating merchants for
its merchant programs on Shopper.com and Computers.com. The two sites currently
generate more than 104,000 sales leads per day, up from 90,000 leads per day in
December. We estimate the average price per lead is at least $0.50, and
increasing. This suggests a quarterly run rate approaching $5.0 million. In
Q1, we estimate revenues from leads represented over $4.6 million, up from over
$3 million in Q4. Egghead.com, NECX Direct and HardwareStreet.com all recently
renewed their #1 slotting positions, which proving, in our view, the value
merchants receive from placement on the two sites. The overall renewal rate
for the 1999 year was 93%, and 100% for its premier partners which pay the
highest slotting fees. New preferred merchants for 1999 include ONSALE,
Beyond.com and Buy.com, among others.
Employee headcount ended the quarter at 510 people, versus 490 at the end of
Q4.
CNET's television programs continued to have strong viewership, reaching over
2.3 million viewers per week, and airing in 35 countries, similar to last
quarter.
CNET ended the quarter with $214.1 million in cash, up from $52.5 million at
the end of December, reflecting a convertible debt offering, which raised $173
million. DSOs ended Q1 at -- days, down from 63 days in Q4. Capital
expenditures in Q1 remained stable at approximately $1 million.
CNET made several strategic acquisitions in the quarter, including:
** ShopBuilder, an online store creation system. We believe ShopBuilder will be
particularly important in the "white-box" PC market.
** AuctionGate.com, a computer product auction site, which should allow CNET to
participate in consumer-to-consumer and b-to-b auctions for used,
refubished, surplus and end-of-line computers products.
** WinFiles.com, a online software downloading service. We believe WinFiles.com
strengthens CNET's position as one of the largest software downloading sites
on the Internet.
** KillerAp, a network of comparison shopping services for computer and
consumer electronic products.
Also in Q1, CNET agreed to exclusively provide computer hardware and software
buying guides on AOL (AOL-$142), AOL.com, and AOL's CompuServe and Digital City
services. Over the 2 1/2 year agreement, CNET will pay AOL $14.5 million, plus
additional payments once certain thresholds are met. CNET plans to create co-
branded versions of its buying guides, and co-branded content areas on the
various AOL services. In addition, AOL will develop AOL-related content on CNET
television programming, and other video-based projects.
CNET's stock split, two-for-one, effective March 9, 1999. The company announced
another two-for-one stock split will be effective May 28th.
Earlier this week, CNET announced strategic partnerships with Dell, Compaq,
Gateway and Acer to participate in its new Premier PC Manufacturers Program.
This new program will be modeled after the merchant program, offering
manufacturers positioning throughout the CNET network, in exchange for lead
fees.
CNET still holds interests in 3 companies: (1) Vignette, of which CNET owns
approximately 9% after its recent IPO; (2) Snap!, of which CNET has a 40%
holding; and (3) 750,000 shares of Beyond.com, which it gained when BuyDirect
was acquried by Beyond.com. We estimate CNET's stakes in Beyond.com and
Vignette combined are worth more than $200 million.
BUSINESS IMPACT: We view these results as positive, in light of the fact that
Q1 has typically been a seasonally slow period for CNET. We believe the core
business of attracting readers and advertisers to the network remains strong.
In addition, we are encouraged by the merchant renewal rates for its Merchant
Program, as well as by the steady increase in leads per day on Shopper.com and
Computers.com. We believe CNET's success with the Merchant Program bodes well
for its recently decision to offer a similar type program to the PC
manufacturers. We believe the fact that CNET has been able to sign up major
brand name manufacturers for this program shows the perceived value of CNET's
audience, which is heavily focused on the computer and technology sector.
We believe AOL could drive a significant amount of new traffic to CNET's sites,
and become a great source of potential buyers of computer-related products.
Currently there doesn't appear to be much duplication of audience.
Based on these strong results, we are raising our estimates going forward. Our
new revenue estimates are $95 million for F1999, up from $85 million, $140
million for F2000, up from $120 million, and $196.5 million for F2001, up from
$149 million. Our new EPS estimates are $0.40 for F1999, up from $0.30, $0.70
for F2000, up from $0.55, and $1.00 for F2001, up from $0.75.
INVESTMENT IMPACT: We believe the stock is just beginning to reflect the value
of this currently profitable model. It boasts the leading franchise with
computer/technology content network. We see considerable revenue upside from
CNET's ability to aggregate computer/technology buyers and link them to
sellers, and believe we will able to raise estimates going forward even further
as the lead generation business accelerates.
THE COMPANY: CNET, located in San Francisco, CA, is a multimedia company
focused on providing original Internet content and television programming
relating to computers, the Internet and digital technologies. CNET's TV
programs, CNET Central, CNET: The Digital Domain and TV.COM, reach more than 8
million viewers per week through the USA Networks, The Sci-Fi Channel and
through national syndication. CNET's Internet division has a network of Web
sites, including Cnet.com, Shareware.com, Download.com, Gamecenter.com,
News.com, Computers.com, Builder.com, Browser.com, and Shopper.com. Cnet.com,
the company's flagship product, has over 700,000 registered users. Traffic to
the company's Web sites combined is at approximately 9.5 million page views per
day.
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