CNet Posts a Loss but Beats Street Expectations

An ambitious $100 million advertising campaign drives losses at the company. Also, Salon.com beats its Wall Street forecast.
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CNet

(CNET) - Get Report

reported late Thursday that it had a slightly smaller loss in the third quarter than Wall Street expected and that its revenue had nearly doubled.

The pro forma loss was partly a result of the millions of dollars that CNet has been spending on advertising to promote its technology-oriented Web sites and TV programs, the company said.

The company also disclosed that first-quarter earnings were slightly lower than it had previously reported.

For the quarter ended Sept. 30, CNet reported a net loss of $23.1 million, or 32 cents a diluted share, compared with earnings of $1.07 million, or 2 cents a diluted share, in the year-ago quarter. Analysts surveyed by

First Call/Thomson Financial

expected CNet to lose 33 cents a share.

Revenue jumped 93% from $14.7 million to $28.4 million, but the company spent more than that on advertising alone.

The numbers exclude goodwill amortization, equity losses, gains on investment sales and related taxes. The company also made a profit of $98 million selling investments. If that were included in the accounting, the company would have posted earnings of $29.3 million, or 35 cents a diluted share.

CNet also revised its earnings for the first quarter, saying it neglected to include previously capitalized merger-related charges of $1.2 million. Those charges should have been accounted for as expenses; doing so would have knocked earnings to 29 cents a diluted share from the previously reported 30 cents.

One key number on the San Francisco Internet network company's third-quarter balance sheet was operating expenses for sales and marketing. The company had launched a $100 million advertising campaign during the quarter, spending $32.9 million this quarter compared with $3.9 million in the same quarter a year ago.

"Our goal very clearly is to drive profitability in 2000," said Halsey Minor, chairman and CEO, in a conference call with analysts and investors. "The marketing campaign is absolutely the right thing for our company."

Minor responded to articles that appeared in

The Wall Street Journal

detailing what the paper called abrupt changes in the concept of the advertising campaign and the replacement of ad firm

Citron Haligman Bedecarre

with

Leagas Delaney

.

The campaign was launched during a period of "less clutter," the summer ad season when placement is cheaper but viewers are more difficult to reach, Minor said. He said the change to simpler messages was a planned second phase the company entered as its brand gained recognition.

He added that the company had also hired a San Francisco firm called

Lot 21

to handle online advertising.

"It seemed like they were trying to work the marketing campaign the best way possible," said Robert Martin, who covers the stock for

Friedman Billings Ramsey

, which has not done underwriting for CNet. But, he said, the real question is, "How do they expand that niche they've created for themselves?"

Martin rates the stock buy.

The company says the campaign is working, citing a survey it commissioned from

Opinion Research Corporation International

that found a 61% increase in consumer awareness from June to September. The company did not specify the awareness level before June.

During the quarter, the company introduced several new services, including

CNet Store.com

, an online store-building service, and the

Business Computing Channel

, a resource for professional computer buyers and sellers. Start-up costs for the "CNet News.com" TV program reduced the company's television revenue to $1.5 million from $1.7 million in the comparable year-ago quarter.

Shares of CNet climbed 3 1/8 to close at 53 9/16 ahead of the earnings and traded as high as 55 27/32 during the day. They showed little change in after-hours trading.

Separately,

Salon.com

(SALN)

, a San Francisco online magazine publisher and community host, reported that revenue increased 123%, and the company beat a Wall Street forecast, posting a loss of 34 cents a diluted share.

The company reported a $3.8 million loss on revenue of $1.4 million. In the comparable year-earlier quarter, the company lost $1.3 million, or 35 cents a share, on revenues of $619,000.

The company said it has 1.9 million registered users in September 1999, a 90% increase from last year.

Shares of Salon rose to 6 points in after-hours trading, according to

Instinet

, after ending regular trading up 5/8 at 5 5/8.