CNET ZW Data Action Technologies Inc

CNET Networks, Inc. (Nasdaq:CNET): -- Company Posts Total Revenue of $86.3 Million -- Interactive Revenue up 28% -- Monthly Unique Users up 24% and Average Daily Page Views up 61% CNET Networks, Inc. (Nasdaq:CNET) today reported results for the third quarter ended September 30, 2005. "In the third quarter, we continued to deliver on our key growth objectives, including 28 percent interactive revenue growth, increasing profit margins and strong free cash flow generation," said Shelby Bonnie, chairman and chief executive officer of CNET Networks. "The strong growth in users and usage that we have experienced over the past year positions us with significant inventory and capacity to take advantage of the continued strength in the online advertising industry." -- Total revenues for the third quarter equaled $86.3 million, a 22 percent increase compared to revenues of $70.5 million for the same period of 2004. -- Interactive revenue increased 28 percent to $78.6 million in the third quarter versus $61.4 million in the same period of 2004. -- Including an $8.9 million non-cash asset impairment charge associated with Computer Shopper magazine and the impairment of the carrying value of an office building in Switzerland, the company reported an operating loss of $917,000 during the third quarter of 2005. The non-cash asset impairment charge was recognized as a result of our annual goodwill impairment evaluation of Computer Shopper magazine which resulted in a reassessment of the carrying value of goodwill as well as the write-down of a building in Switzerland to its estimated fair value based on current market data. Excluding the non-cash asset impairment charge, operating income was $8.0 million. This compares to operating income of $1.8 million in the third quarter of 2004. -- Operating income before depreciation, amortization, and asset impairment was $15.4 million, a 118 percent increase compared to $7.1 million during the third quarter of 2004. -- The profit margin of operating income before depreciation, amortization, and asset impairment increased to 18 percent from 10 percent during the third quarter of 2004. -- Net cash provided by operating activities for the third quarter of 2005 was $12.7 million, up from $775,000 in the third quarter of 2004. Free cash flow for the third quarter of 2005 was $7.4 million. Free cash flow is defined as cash flow from operating activities less capital expenditures. -- Including an $8.9 million non-cash asset impairment charge and $1.9 million loss on investments related to the full write-down of the company's investment in two private companies which it deems unrecoverable, the company reported a net loss for the third quarter of 2005 of $3.4 million, or $0.02 per share. Excluding the non-cash asset impairment charge and loss on investments, net income was $7.5 million, or $0.05 per diluted share. This compares with net income of $1.1 million, or $0.01 per diluted share, for the same period of 2004. Business Review "As a leading interactive content company, we know how to attract passionate audiences, addressing the needs of the people who are the most interested in the categories we cover," said Bonnie. "The past quarter reflects our continued efforts to enhance the functionality of our sites and provide a comprehensive experience, with the goal of expanding our audience and deepening our relationship with them." -- CNET Networks' global network of Internet properties reached an average of 110 million unique monthly users during the third quarter of 2005(1), an increase of 24 percent from the third quarter of 2004. Average daily page views increased to over 99 million during the third quarter(1), up 61 percent from the year-ago quarter. -- CNET Networks' properties continued to make strides to enhance the authentic brand experience for both users and marketers across its sites with the launch of new features and updates. Examples include: -0- *T -- CNET News.com recently re-launched with emphasis on "News of Change" that highlights the growing impact of technology on all aspects of life. The site, which has focused primarily on business news for technology decision makers, now provides broader coverage on the business, political, and cultural impact of technology, enabling users to track the technology-related news that is most valuable to them, personally as well as professionally. In addition to broadening the scope of award-winning editorial coverage, the front door and the individual story pages now feature three views of the day's news, incorporating the insight and expertise from the CNET News.com editorial team, the usage activity of, and opinions of its readers, and the user's own personal news preferences. -- Earlier this quarter, CNET Download.com re-launched with a new look and feel, including the beta launch of a video download feature built on its existing collections of software, music and games. The new offering includes free video samples and clips, ranging from movie trailers, to independent video content, to how-to videos. -- This month, CNET Networks' Games & Entertainment division redesigned its GameSpot and MP3.com Web sites to match the look and feel of its TV.com site, which launched in June with a cutting-edge design that strikes a balance between its comprehensive content and community features. The redesigns enhance the user experience on each individual site, while providing users a universal navigation experience across the three sites. This is the first step of an ongoing strategic integration aimed at providing users the ability to seamlessly follow their interests across the video games, digital music, and television genres through universal search and navigation. In addition, marketers gain the opportunity to launch targeted yet scalable advertising campaigns in a rich, authentic online environment across all of the company's games and entertainment properties. -- Several CNET Networks properties scaled their podcasting features during the third quarter. Recent examples include: -- CNET.com launched the daily "Buzz Out Loud," an entertaining take on the latest personal technology news from CNET's editors, as well as "Car Tech," a weekly podcast about the latest advancements in car technologies. -- In addition, building on their product review licensing partnership with The San Francisco Chronicle, CNET.com editors participate in the online publication's weekly podcast, "Tech Talk," providing consumers audio product insight and recommendations. -- CNET News.com hosts "Top Technology News" daily, featuring reporters' takes on the most noteworthy breaking technology stories. -- GameSpot launched "The HotSpot," a weekly audio report on the hottest trends in gaming. -- ZDNet continues to host its long-standing "The Dan & David Show," providing commentary on the IT industry from ZDNet editors. *T -- One year ago in August, CNET Networks acquired Webshots. Since then, the site has maintained its position as a leader among the photography-related sites and has dramatically enhanced community participation, tripling the size of its photo library to a total of more than 285 million publicly and privately shared photos to become the largest public photo library available online. Webshots continues to innovate and enhance its community content features and functionality, as well as integrate new marketing partners such as New Line Cinema, Warner Brothers Films, and AOL.com. -- During the third quarter, CNET Networks saw continued momentum in securing content licensing agreements with leading media and retail organizations, which recognize the value of incorporating the company's high-demand, top-quality content into their media offerings. The latest partnerships build on the company's established long list of licensing agreements with top online, print, and retail media providers. Most recently, CNET.com entered into content licensing arrangements with RadioShack.com, Forbes.com Auto, USAToday.com's Technology Review section, USA Today NOW Personal Technology magazine, and in-store media networks, STORS and Four Winds Interactive. -- During the third quarter, CNET News.com took first-place honors in the "2005 Online Breaking News" category of the Society of Professional Journalists' annual "Excellence in Journalism" awards. In addition, CNET.com's Digital Living was awarded a Communication Arts Interactive "annual 11 Award" for design. Business Outlook For the fourth quarter of 2005, management anticipates total revenues of $102 million to $109.5 million. Interactive revenues are expected to be in the range of $95 million to $100 million, and publishing revenues are expected to be between $7.0 million and $9.5 million. Management estimates operating income between $21.5 million and $26.5 million during the fourth quarter, and operating income before depreciation and amortization of between $29 million and $34 million for the quarter. Earnings per share are expected to be in the range of $0.13 and $0.16 during the fourth quarter. For the full-year 2005, management is estimating total revenues will be in the range of $347.5 million and $355 million. Management expects Interactive revenue to be in the range of $319 million to $324 million, and publishing revenues are expected to be between $28.5 million and $31.0 million. Including the impact of the $8.9 million non-cash asset impairment during the third quarter of 2005, management estimates operating income between $28.6 million and $33.6 million during 2005. Excluding non-cash asset impairment, management expects operating income between $37.3 million and $42.3 million. Management expects operating income before depreciation, amortization and asset impairment to be between $65 million and $70 million. Including non-cash asset impairment and a $1.9 million non-cash impairment of investments, earnings per share is expected to be in the range of $0.16 and $0.19 for the year. Excluding these items, earnings per share is expected to be in the range of $0.23 to $0.26 for the year. More detailed guidance, as well as a table that reconciles operating income (loss) before depreciation, amortization, and asset impairment guidance to operating income (loss) guidance can be found on the "Guidance to the Investment Community" sheet that accompanies this press release. Conference Call and Webcast CNET Networks will host a conference call to discuss its third quarter 2005 financial results and business outlook beginning at 5:00 p.m. ET (2:00 p.m. PT), today, October 24, 2005. To listen to the discussion, please visit http://ir.cnetnetworks.com and click on the link provided for the webcast conference call or dial (800) 344-1035 (international dial-in: (706) 679-3076). A replay of the conference call will be available via webcast at the URL listed above or by calling (800) 642-1687 (international dial-in: (706) 645-9291) and entering the conference ID number 1347130. The company's past financial news releases, related financial and operating information, and access to all Securities and Exchange Commission filings, can also be accessed at http://ir.cnetnetworks.com. Safe Harbor This press release and its attachments include forward-looking information and statements that are subject to risks and uncertainties that could cause actual results to differ materially. These forward-looking statements include the statements under the sections entitled "Business Outlook" and "Guidance to the Investment Community" which sets forth our estimated financial performance for the fourth quarter and full year of 2005, and statements regarding our growth prospects and expectations regarding the future success of our products and services. In addition, management expects to provide forward-looking information statements on the conference call to be held shortly following the issuance of this release, which are also subject to risks and uncertainties that could cause actual results to differ materially. The forward-looking statements in this release and on the conference call are identified by the words "expect," "estimate," "target," "believe," "goal," "anticipate," "intend" and similar expressions or are otherwise identified in the context in which they are made as being forward-looking. These statements are only effective as of the date of this release and we undertake no duty to publicly update these forward-looking statements, whether as a result of new information, future developments or otherwise. The risks and uncertainties that could cause actual results to differ materially from those projected include: a lack of growth or a decrease in marketing spending on the Internet due to failure of marketers to adopt the Internet as an advertising medium at the rate that we currently anticipate; a lack of growth or decrease in marketing spending on CNET Networks' properties in particular, which could be prompted by competition from other media outlets, both on and off the Internet, dissatisfaction with CNET Networks' services, or economic difficulties in our clients' businesses; economic conditions such as weakness in corporate or consumer spending, which could prompt a reduction in overall advertising expenditures or expenditures specifically on our properties; the failure of existing advertisers to meet or renew their advertising commitments as we anticipate, which would cause us to not to meet our financial projections; the failure to attract advertisers outside of our traditional technology and consumer electronics categories, which would cause us to not meet our financial projections; a continued decline in revenues from our print publications as advertising dollars shift to other media; the acquisition of businesses or the launch of new lines of business, which could decrease our cash position, increase operating expense, and dilute operating margins; an increase in intellectual property licensing fees, which could increase operating expense, including amortization; the risk of future impairment of our intangible assets, goodwill or investments based on a decline in our business or investments; and general risks associated with our business. For risks about CNET Networks' business, see its Annual Form 10-K for the year ended December 31, 2004 and subsequent Forms 10-Q and 8-K, including disclosures under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Conditions and Results of Operations," which are filed with the Securities and Exchange Commission and are available on the SEC's website at www.sec.gov. About CNET Networks, Inc. CNET Networks, Inc. is a worldwide media company and creator of content environments for the interactive age. CNET Networks takes pride in being "a different kind of media company," creating richer, deeper interactive experiences by combining the wisdom and passion of users, marketers and its own expert editors. CNET Networks' leading brands -- such as CNET, GameSpot, MP3.com, Webshots, and ZDNet -- focus on the personal technology, entertainment, and business technology categories. The company has a strong presence in the US, Asia and Europe. (1) CNET Networks July 2005 - September 2005 (internal log data) -0- *T Consolidated Statements of Operations Unaudited (in thousands, except share and per share data) Three Months Ended Nine Months Ended September 30, September 30, ------------ ------------ ------------ ------------ 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Revenues Interactive $ 78,646 $ 61,351 $ 223,926 $ 176,099 Publishing 7,653 9,108 21,598 25,845 ------------ ------------ ------------ ------------ Total revenues 86,299 70,459 245,524 201,944 Operating expenses: Cost of revenues 40,535 36,617 119,278 105,167 Sales and marketing 19,693 17,954 58,283 54,080 General and administrative 10,654 8,803 31,917 27,732 Depreciation 4,403 3,695 12,513 14,941 Amortization of intangible assets 2,974 1,578 7,479 4,134 Asset impairment 8,957 - 8,957 - ------------ ------------ ------------ ------------ Total operating expenses 87,216 68,647 238,427 206,054 Operating income (loss) (917) 1,812 7,097 (4,110) Non-operating income (expense): Realized gains on investments - - 568 11,338 Impairment of privately held investments (1,885) - (2,083) - Interest income 375 353 1,259 1,376 Interest expense (532) (709) (2,322) (5,418) Other (152) (270) (292) (356) ------------ ------------ ------------ ------------ Total non- operating income (expense) (2,194) (626) (2,870) 6,940 ------------ ------------ ------------ ------------ Income (loss) before income taxes (3,111) 1,186 4,227 2,830 Income tax expense (benefit) 268 125 (521) 372 ------------ ------------ ------------ ------------ Net income (loss) $ (3,379) $ 1,061 4,748 $ 2,458 ============ ============ ============ ============ Basic net income (loss) per share $ (0.02) $ 0.01 0.03 $ 0.02 ============ ============ ============ ============ Diluted net income (loss) per share $ (0.02) $ 0.01 0.03 $ 0.02 ============ ============ ============ ============ Shares used in calculating basic net income (loss) per share 147,057,102 143,410,759 145,208,529 143,060,255 Shares used in calculating diluted net income (loss) per share 147,057,102 149,772,652 151,992,886 150,132,791 Consolidated Balance Sheets Unaudited (in thousands, except share data) September 30, December 31, 2005 2004 ------------ ----------- ASSETS Current Assets: Cash and cash equivalents $ 61,837 $ 29,560 Investments in marketable debt securities 33,593 22,193 Accounts receivable, net 63,228 66,712 Other current assets 12,304 15,155 ------------ ----------- Total current assets 170,962 133,620 Restricted cash 4,574 19,774 Investments in marketable debt securities 12,674 22,199 Property and equipment, net 53,311 48,989 Other assets 19,296 21,722 Intangible assets, net 37,280 34,756 Goodwill 132,944 126,287 ------------ ----------- Total assets $ 431,041 $ 407,347 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,425 $ 6,903 Revolving credit facility - 5,000 Accrued liabilities 57,774 61,992 Current portion of long-term debt 2,717 4,007 ------------ ----------- Total current liabilities 67,916 77,902 Non-current liabilities: Long-term debt 138,614 135,614 Other liabilities 690 252 ------------ ----------- Total liabilities 207,220 213,768 Stockholders' equity: Common stock; $0.0001 par value; 400,000,000 shares authorized; 149,185,141 outstanding at September 30, 2005 and 144,455,283 outstanding at December 31, 2004 15 14 Additional paid-in-capital 2,745,557 2,719,576 Accumulated other comprehensive loss (13,140) (12,652) Treasury stock, at cost (30,453) (30,453) Accumulated deficit (2,478,158) (2,482,906) ------------ ----------- Total stockholders' equity 223,821 193,579 ------------ ----------- Total liabilities and stockholders' equity $ 431,041 $ 407,347 ============ =========== Statements of Cash Flows Unaudited (in thousands) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 2005 2004 2005 2004 -------- -------- -------- --------- Cash flows from operating activities: Net Income (loss) $ (3,379) $ 1,061 $ 4,748 $ 2,458 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 7,376 5,273 19,991 19,075 Asset impairments 8,957 - 8,957 - Asset disposals 11 5 42 279 Noncash interest expense 47 170 291 1,533 Allowance for doubtful accounts 294 1,246 1,311 2,798 Equity losses in investees 66 - 308 - Gain on sale of marketable securities and privately held investments - - (568) (11,338) Loss on impairment of privately held investments 1,860 - 2,058 - Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (646) (1,639) 2,580 1,997 Other assets 1,372 2,066 1,040 (410) Accounts payable (2,291) (975) 510 (2,251) Accrued liabilities (951) (4,856) (5,896) (2,779) Other long-term liabilities (51) (1,576) (164) (1,632) -------- -------- -------- --------- Net cash provided by operating activities 12,665 775 35,208 9,730 -------- -------- -------- --------- Cash flows from investing activities: Purchase of marketable debt securities (27,305) (1,004) (31,580) (32,969) Proceeds from sale of marketable debt securities 18,418 27,805 35,402 39,964 Proceeds from sales of investments in privately held companies - 34 568 13,240 Release of restrictions on cash 10,200 - 10,200 - Investments in privately held companies (71) (250) (1,759) (982) Net cash paid for acquisitions - (57,679) (15,924) (64,821) Capital expenditures (5,262) (3,762) (16,974) (10,635) -------- -------- -------- --------- Net cash used in investing activities (4,020) (34,856) (20,067) (56,203) -------- -------- -------- --------- Cash flows from financing activities: Payments received on stockholders' notes - - - 137 Net proceeds from issuance of convertible notes - - - 120,800 Net proceeds from employee stock purchase plan 272 275 910 722 Net proceeds from exercise of options 15,378 592 22,826 4,647 Principal payments on borrowings (4,988) (65) (5,873) (113,975) -------- -------- -------- --------- Net cash provided by financing activities 10,662 802 17,863 12,331 -------- -------- -------- --------- Net increase (decrease) in cash and cash equivalents 19,307 (33,279) 33,004 (34,142) Effect of exchange rate changes on cash and cash equivalents 332 (229) (727) (2,653) Cash and cash equivalents at the beginning of the period 42,198 62,626 29,560 65,913 -------- -------- -------- --------- Cash and cash equivalents at the end of the period $ 61,837 $ 29,118 $ 61,837 $ 29,118 ======== ======== ======== ========= Business Segments Unaudited (in thousands) CNET's primary areas of measurement and decision-making include two principal business segments. CNET has determined that its business segments are U.S. Media and International Media. U.S. Media consists of an online network focused on three content categories: personal technology, games and entertainment and business technology. International Media includes the delivery of online technology information and several technology print publications in non-U.S. markets. Management believes that segment operating income (loss) before depreciation and amortization and asset impairment expenses is an appropriate measure of evaluating the operating performance of the company's segments. However, segment operating income (loss) before depreciation and amortization and asset impairment expenses should not be considered a substitute for operating income, cash flows or other measures of financial performance prepared in accordance with generally accepted accounting principles. U.S. International Media Media Other (1,2) Total --------- ------------- --------- -------- Three Months Ended September 30, 2005 Revenues $ 70,272 $16,027 $ - $ 86,299 Operating expenses 55,341 15,541 16,334 87,216 -------- ------- -------- -------- Operating income (loss) $ 14,931 $ 486 $(16,334) $ (917) ======== ======= ======== ======== Three Months Ended September 30, 2004 Revenues $ 57,278 $13,181 $ - $ 70,459 Operating expenses 49,536 13,838 5,273 68,647 -------- ------- -------- -------- Operating income (loss) $ 7,742 $ (657) $ (5,273) $ 1,812 ======== ======= ======== ======== Nine Months Ended September 30, 2005 Revenues $200,116 $45,408 $ - $245,524 Operating expenses 162,545 46,933 28,949 238,427 -------- ------- -------- -------- Operating income (loss) $ 37,571 $(1,525) $(28,949) $ 7,097 ======== ======= ======== ======== Nine Months Ended September 30, 2004 Revenues $164,406 $37,538 $ - $201,944 Operating expenses 145,556 41,423 19,075 206,054 -------- ------- -------- -------- Operating income (loss) $ 18,850 $(3,885) $(19,075) $ (4,110) ======== ======= ======== ======== (1) For the three months ended September 30, 2005, Other represents operating expenses related to depreciation of $4,403, amortization of $2,974 and asset impairments of $8,957. For the three months ended September 30, 2004, Other represents operating expenses related to depreciation of $3,695 and amortization of $1,578. (2) For the nine months ended September 30, 2005, Other represents operating expenses related to depreciation of $12,513, amortization of $7,479 and asset impairments of $8,957. For the nine months ended September 30, 2004, Other represents operating expenses related to depreciation of $14,941 and amortization of $4,134. Quarterly Statistical Highlights Unaudited Q3-05 Q2-05 Q1-05 Q4-04 Q3-04 ------- ------- ------- ------- ------- Total Quarterly Revenue ($mm) $ 86.3 $ 84.5 $ 74.7 $ 89.2 $ 70.5 Revenue Distribution (%)(a) Marketing Services 79% 80% 78% 79% 75% Licensing, Fees and User 12% 11% 14% 11% 12% Publishing 9% 9% 8% 10% 13% Advertiser Metrics CNET Networks Top 100 US Advertisers' Renewal Rate (Q-to-Q) 97% 95% 97% 96% 95% CNET Networks Top 100 US Advertisers' % of Network Revenue 55% 55% 56% 54% 57% Select Business Metrics Network Unique Users (mm) 110.1 115.1 105.9 103.0 88.7 Network Average Daily Page Views (mm) 99.4 97.7 94.7 85.0 61.8 Balance Sheet Highlights ($mm) Cash $ 61.8 $ 42.2 $ 34.9 $ 29.5 $ 29.1 Marketable Debt Securities 46.3 32.1 42.3 44.4 44.7 Restricted Cash 4.6 19.8 19.8 19.8 19.8 ------ ------ ------ ------ ------ Total Cash and Equivalents $112.7 $ 94.1 $ 97.0 $ 93.7 $ 93.6 Total Debt $141.3 $146.4 $146.5 $144.6 $129.3 Days Sales Outstanding (DSO) 66 67 72 67 65 (a) Revenue distribution definitions are as follows: Marketing Services -- sales of advertisements on our Internet network through impression-based and activity-based advertising. Licensing, Fees and User -- licensing our product database, online content, subscriptions to online services, and other paid services. Publishing -- sales of advertisements in our print publications, subscriptions and newsstand sales of publications, and custom publishing services. Guidance to the Investment Community ---------------------------------------------------------------------- Q3-05 Q4-05 estimate FY 2005 estimate $ in millions, except Actual Low - High Low - High per share ---------------------------------------------- Interactive Revenues $78.6 $95.0 - $100.0 $319.0 - $324.0 Publishing Revenues $7.7 $7.0 - $9.5 $28.5 - $31.0 Total Revenues $86.3 $102.0 - $109.5 $347.5 - $355.0 Operating income before depreciation, amortization and asset impairment $15.4 $29.0 - $34.0 $65.0 - $70.0 Depreciation expense ($4.4) ($4.8) ($17.3) Amortization expense ($3.0) ($2.7) ($10.2) Impairment of assets ($8.9) - ($8.9) Operating income ($0.9) $21.5 - $26.5 $28.6 - $33.6 Interest expense, net ($0.2) ($0.3) ($1.4) Other income (expense) ($2.0) ($0.3) ($2.1) Tax benefit (expense) ($0.3) ($0.5) $0.02 Earnings per share ($0.02) $0.13 - $0.16 $0.16 - $0.19 ---------------------------------------------------------------------- Note: FY 2005 earnings per share guidance includes $8.9 million non- cash asset impairment expense and $1.9 million realized loss on investment as reported in the third quarter 2005. Excluding these items, FY 2005 earnings per share guidance would be in the range of $0.23 to $0.26. Note: 4Q 2005 earnings per share guidance is based on a diluted share count of approximately 165 million shares, of which 8.3 million shares are attributable to the impact of EITF 04-8. Safe Harbor Statement This press release and its attachments include forward-looking information and statements that are subject to risks and uncertainties that could cause actual results to differ materially. These forward-looking statements include the statements under the section entitled "Business Outlook," which sets forth our estimated financial performance for the fourth quarter and full year of 2005, and statements regarding our growth prospects and expectations regarding the future success of our products and services. In addition, management expects to provide forward-looking information statements on the conference call to be held shortly following the issuance of this release, which are also subject to risks and uncertainties that could cause actual results to differ materially. The forward-looking statements in this release and on the conference call are identified by the words "expect," "estimate," "target," "believe," "goal," "anticipate," "intend" and similar expressions or are otherwise identified in the context in which they are made as being forward-looking. These statements are only effective as of the date of this release and we undertake no duty to publicly update these forward-looking statements, whether as a result of new information, future developments or otherwise. The risks and uncertainties that could cause actual results to differ materially from those projected include: a lack of growth or a decrease in marketing spending on the Internet due to failure of marketers to adopt the Internet as an advertising medium at the rate that we currently anticipate; a lack of growth or decrease in marketing spending on CNET Networks' properties in particular, which could be prompted by competition from other media outlets, both on and off the Internet, dissatisfaction with CNET Networks' services, or economic difficulties in our clients' businesses; economic conditions such as weakness in corporate or consumer spending, which could prompt a reduction in overall advertising expenditures or expenditures specifically on our properties; the failure of existing advertisers to meet or renew their advertising commitments as we anticipate, which would cause us to not to meet our financial projections; the failure to attract advertisers outside of our traditional technology and consumer electronics categories, which would cause us to not meet our financial projections; a continued decline in revenues from our print publications as advertising dollars shift to other media; the acquisition of businesses or the launch of new lines of business, which could decrease our cash position, increase operating expense, and dilute operating margins; an increase in intellectual property licensing fees, which could increase operating expense, including amortization; the risk of future impairment of our intangible assets, goodwill or investments based on a decline in our business or investments; and general risks associated with our business. For risks about CNET Networks' business, see its Annual Form 10-K for the year ended December 31, 2004 and subsequent Forms 10-Q and 8-K, including disclosures under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Conditions and Results of Operations," which are filed with the Securities and Exchange Commission and are available on the SEC's website at www.sec.gov. Operating Income (Loss) Reconciliation (in thousands) Three Months Nine Months Ended Ended September 30, September 30, ---------------- ----------------- 2005 2004 2005 2004 ---------------- ----------------- Operating income (loss) before depreciation, amortization and asset impairment $ (917) $1,812 $ 7,097 $(4,110) Asset impairment 8,957 - 8,957 - ---------------- ----------------- Operating income before asset impairment 8,040 1,812 16,054 (4,110) Depreciation 4,403 3,695 12,513 14,941 Amortization of intangible assets 2,974 1,578 7,479 4,134 ---------------- ----------------- Operating income before depreciation, amortization and asset impairment $15,417 $7,085 $36,046 $14,965 ================ ================= The company believes that "operating income (loss) before depreciation, amortization and asset impairment" is useful to management and investors in evaluating the current operating performance of the company, since depreciation and amortization include the impact of past transactions and costs that are not necessarily directly related to the current underlying capital requirements or performance of the business operations. Management refers to "operating income before depreciation, amortization and asset impairment" to compare historical operating results, in making operating decisions and for planning and compensation purposes. A limitation associated with this measure is that it does not reflect the costs of certain capitalized tangible and intangible assets used in generating revenue. Management evaluates the costs of these assets through other financial measures such as capital expenditures. "Operating income before depreciation, amortization and asset impairment" should be considered in addition to, and not as a substitute for, other measures of financial performance prepared in accordance with US GAAP. Reconciliation of Net Gain (Loss) from Unusual Items (in thousands, except share and per share data) Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2005 2004 2005 2004 -------------------------- -------------------------- Net income (loss) $ (3,379) $ 1,061 $ 4,748 $ 2,458 =========== ============ ============ ============ Unusual Items: Asset impairment(1) $ 8,957 $ - $ 8,957 $ - (Gain) Loss on privately held investments(2) 1,885 - 1,515 (11,338) Accelerated depreciation(3) - - - 3,513 Foreign currency gain (3) - - - (1,720) Prepayment penalty (4) - - - 1,625 Additional interest (4) - - - 1,394 ------------ ------------ ------------ ------------ Effect on earnings from unusual items 10,842 - 10,472 (6,526) ------------ ------------ ------------ ------------ Net income (loss) excluding unusual items $ 7,463 $ 1,061 $ 15,220 $ (4,068) ============ ============ ============ ============ Diluted net income (loss) per share excluding unusual items $ 0.05 $ 0.01 $ 0.10 $ (0.03) ============ ============ ============ ============ Shares used in calculating diluted net income (loss) per share 154,296,961 149,772,652 151,992,886 143,060,255 (1) During the three months ended September 30, 2005, the company recorded an asset impairment of $7.3 million associated with the write-down of goodwill and tradename of our Computer Shopper reporting unit and a $1.6 million of loss associated with the evaluation of the carrying value of its office building held for sale in Switzerland. (2) The company recognized $1.9 million and $2.1 million of losses associated with impairments of private investments during the three and nine months ended September 30, 2005, respectively. The company recognized $11.3 million of gains, net of impairments, on the sale of investments during the nine months ended September 30, 2004. (3) During the nine months ended September 30, 2004, the company recorded $3.5 million of accelerated depreciation and a related $1.7 million foreign currency gain associated with the evaluation of the carrying value of its office buildings and other fixed assets in Switzerland upon integration of those operations into US Media. The foreign currency gain is included in the "Other" line of the income statement. (4) In conjunction with the retirement of the company's 5% Convertible Subordinated Notes in 2004, the company recorded a $1.6 million prepayment penalty and additional interest expense of $1.4 million. The prepayment penalty is included in the "Other" line of the income statement. The company believes that this information is useful to investors because these items are infrequent in nature and may affect the comparability of the current quarter and full year results to other quarter and full year results. Free Cash Flow Reconciliation (Unaudited) (in thousands) Three Months Nine Months Ended Ended September 30, September 30, ----------------- ------------------ 2005 2004 2005 2004 -------- ------- --------- -------- Cash flow from operating activities $12,665 $ 775 $ 35,208 $ 9,730 Capital expenditures (5,262) (3,762) (16,974) (10,635) ------- ------- -------- -------- Free cash flow $ 7,403 $(2,987) $ 18,234 $ (905) ======= ======= ======== ======== Free Cash Flow is defined as net cash provided by operating activities less capital expenditures. The company believes that free cash flow provides useful information about the amount of cash generated by the business after the purchase of property and equipment. A limitation of free cash flow is that it does not represent the total increase or decrease in the cash balance for the period. Free cash flow should be considered in addition to, and not as a substitute for, other measures of financial performance prepared in accordance with US GAAP. *T