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  • Demand Media Earnings Continue To Suffer Google’s Wrath

    Demand Media reported its financial results for Q4 and fiscal 2013 on Tuesday. The company continues to suffer at the hands of Google algorithm changes (it just so happens that this week marks the three-year anniversary of the Panda update).

    While things seemed to be going better for Demand Media after it navigated around its initial Panda obstacles, somewhere down the line, Google’s algorithm caught up with the company’s properties (specifically eHow) once again. Last quarter, the company reported revenue decline thanks to the lost of search referrals, and this report paints a similar picture.

    Revenue declined by 6% to $96.7 million for the quarter, and the outlook isn’t looking much better.

    CFO Mel Tang said, “We need to fix eHow.”

    On top of that, parking revenue and domain sales are down 33% for the year, compared to 2012.

    Interim CEO Shawn Colo said, “The fourth quarter was highlighted by solid performance from Society6, Content Solutions and our registrar business, offset by continued declines in the Company’s core eHow business. Additionally, we have made steady progress against key initiatives, such as product improvements on Society6 and relaunching the Livestrong.com website, while continuing to prepare for our upcoming spin-off of Rightside Group. I continue to be excited about long-term strategic opportunities within our large and growing markets.”

    Demand Media stock is down nearly 10% on Wednesday morning.

    Since the earnings call, the company has announced a new strategic advertising partnership with Healthline, which will see the latter creating digital ad solutions and exclusively representing key categories for LiveStrong.com.

    Here’s the release in its entirety:

    SANTA MONICA, Calif.–(BUSINESS WIRE)– Demand Media, Inc. (NYSE: DMD), a leading digital content & media and domain name services company, today reported financial results for the fourth quarter and fiscal year ended December 31, 2013.

    “The fourth quarter was highlighted by solid performance from Society6, Content Solutions and our registrar business, offset by continued declines in the Company’s core eHow business. Additionally, we have made steady progress against key initiatives, such as product improvements on Society6 and relaunching the Livestrong.com website, while continuing to prepare for our upcoming spin-off of Rightside Group,” said Shawn Colo , Interim CEO of Demand Media. “I continue to be excited about long-term strategic opportunities within our large and growing markets.”

    Financial Summary
    In millions, except per share amounts
    Three months ended
    December 31,    		 Year ended
    December 31,
    2013 2012 Change 2013 2012 Change
    Total Revenue $ 96.7 $ 103.1 (6 %) $ 394.6 $ 380.6 4 %
    Content & Media Revenue ex-TAC(1) $ 55.4 $ 62.3 (11 %) $ 230.4 $ 227.0 1 %
    Registrar Revenue 38.6 34.5 12 %   148.2   134.2 10 %
    Total Revenue ex-TAC(1) $ 94.0 $ 96.8 (3 %) $ 378.6 $ 361.2 5 %
    Income (loss) from Operations $ (11.3 ) $ 6.1 NA $ (18.5 ) $ 8.7 NA
    Adjusted EBITDA(1) $ 18.0 $ 29.4 (39 %) $ 88.4 $ 103.4 (15 %)
    Net income (loss) $ (11.5 ) $ 4.7 NA $ (20.2 ) $ 6.2 NA
    Adjusted net income(1) $ 3.0 $ 10.8 (72 %) $ 23.2 $ 34.3 (32 %)
    EPS – diluted $ (0.13 ) $ 0.05 NA $ (0.23 ) $ 0.07 NA
    Adjusted EPS – diluted(1) $ 0.03 $ 0.12 (75 %) $ 0.26 $ 0.39 (33 %)
    Cash Flow from Operations $ 9.7 $ 26.0 (63 %) $ 76.2 $ 91.0 (16 %)
    Free Cash Flow(1) $ 8.3 $ 17.1 (51 %) $ 44.4 $ 62.3 (29 %)
    ____________________
    (1) These non-GAAP financial measures are described below and reconciled to their comparable GAAP measures in the accompanying tables.

    Q4 2013 Financial Summary:

    • Total revenue ex-TAC declined 3% year-over-year, with 12% year-over-year growth in Registrar revenue offset by an 11% decline in Content & Media revenue ex-TAC. Excluding the acquisitions of Society6 and Name.com, total revenue ex-TAC decreased 15%.
      • Registrar revenue grew 12% year-over-year, primarily due to the addition of Name.com, which was acquired at the end of Q4 2012. Excluding the acquisition of Name.com, Registrar revenue increased 2%.
      • Owned & Operated revenue decline of 5% was driven primarily by reductions in search engine referral traffic, offset by revenue of $8.4 million from Society6, which was acquired at the end of Q2 2013. Excluding the acquisition of Society6, Owned & Operated revenue decreased 23%.
      • Network revenue ex-TAC declined 31% due primarily to $3.5 million less revenue from the Company’s YouTube Channels as well as declines in the Company’s Social Media and Network Monetization businesses, offset partially by growth in Content Solutions.
    • Adjusted EBITDA decreased 39% year-over-year, primarily reflecting the negative impact from search engine referral traffic on high-margin revenues and a mix shift to lower margin commerce and Registrar revenue.

    “We generated over $8 million of free cash flow in the fourth quarter and over $44 millionfor the year,” said Demand Media’s CFO Mel Tang . “We will continue to invest our free cash flow into our strategic content, commerce and new gTLD initiatives.”

    Business Highlights:

    Content & Media:

    • January 2014 US and Worldwide comScore Rankings:
      • On a consolidated basis, Demand Media ranked as the #19 US web property and Demand Media’s properties reached more than 88 million unique users worldwide.
      • eHow.com ranked as the #27 website in the US and reached more than 50 million unique users worldwide.
      • Livestrong / eHow Health ranked as the #3 Health property in the US, with more than 20 million unique users worldwide.
      • Cracked ranked as the #5 Humor property in the US, with more than 8 million unique users worldwide.
    • In Q4 2013, our Content Solutions business, which delivers custom and hosted content marketing services to partners, grew revenue ex-TAC 50% year-over-year to$2.8 million.
    • During Q4 2013, Society6 had a record $8.4 million of revenue and its sales on Cyber Monday increased 73% year-over-year. Society6 also expanded its product line-up to include mugs, baby onesies, kids T-shirts and a calendar created in collaboration with the artist community.

    Domain Name Services:

    • Launched our back-end registry platform in Q4 2013, powering the launch for over 60 new gTLDs and over 150,000 domain registrations to date.
    • Signed our first registry operator agreements with ICANN in Q4 2013, and have signed 14 agreements to date, including .dance, .democrat, .immobilien and .ninja, which are currently in their ‘sunrise’ launch phase.
    • Our registry entered into its first agreements with registrars to distribute our owned gTLDs, with over 40 signed to date.
    • Our eNom and Name.com registrar channels signed agreements with new registry operators to distribute new gTLDs and have launched over 80 new gTLDs to date.
    Operating Metrics:
    Three months ended
    December 31,    		 Year ended
    December 31,
    2013 2012 %
    Change    		 2013 2012 %
    Change
    Content & Media Metrics:
    Owned and operated websites
    Page views(1) (in millions) 4,054 3,354 21 % 16,348 13,192 24 %
    RPM(2) $ 11.38 $ 14.55 (22 )% $ 11.96 $ 13.53 (12 )%
    Network of customer websites
    Page views(1) (in millions) 2,245 4,530 (50 )% 16,793 18,989 (12 )%
    RPM(2) $ 5.30 $ 4.38 21 % $ 3.03 $ 3.58 (15 )%
    RPM ex-TAC(3) $ 4.12 $ 2.98 38 % $ 2.08 $ 2.55 (18 )%
    Registrar Metrics:
    End of Period # of Domains(4) (in millions) 15.0 13.7 9 % 15.0 13.7 9 %
    Average Revenue per Domain(5) $ 10.47 $ 10.09 4 % $ 10.36 $ 10.19 2 %
    ____________________
    (1) Page views represent the total number of web pages viewed across (a) our owned and operated websites and/or (b) our network of customer websites, to the extent that the viewed customer web pages host the Company’s monetization, social media and/or content services.
    (2) RPM is defined as Content & Media revenue per one thousand page views.
    (3) RPM ex-TAC is defined as Content & Media revenue ex-TAC per one thousand page views.
    (4) A domain is defined as an individual domain name registered by a third-party customer on our platform for which we have begun to recognize revenue.
    (5) Average revenue per domain is calculated by dividing Registrar revenue for a period by the average number of domains registered in that period. Average revenue per domain for partial year periods is annualized.

    Q4 2013 Operating Metrics:

    • Owned & Operated page views increased 21% year-over-year to 4.1 billion, driven primarily by mobile page view growth on our core Owned & Operated sites, which more than offset significant declines in search engine referral traffic. Owned & Operated RPM decreased 22% year-over-year, reflecting the mix shift to lower yielding mobile page views as well as lower direct display advertising, offset partially by increased revenue from Society6.
    • Revenue per visit to our Owned & Operated Content sites was $0.05, up 25% year-over-year.
    • Network page views decreased 50% year-over-year to 2.2 billion, reflecting the Company’s decision in Q3 2013 to focus its monetization efforts on its Owned & Operated properties. Additionally, there were lower reported page views from its Pluck customers. Network RPM ex-TAC increased 38% year-over-year, reflecting higher monetization of our Social Media and Monetization page views.
    • End of period domains increased 9% year-over-year to 15.0 million, driven by the acquisition of Name.com, with average revenue per domain up 4% year-over-year, due to higher average revenue per domain on Name.com.

    Business Outlook:

    The following forward-looking information includes certain projections made by management as of the date of this press release. The Company does not intend to revise or update this information, except as required by law, and may not provide this type of information in the future. Due to a variety of factors, actual results may differ significantly from those projected. The factors that may affect results include, without limitation, the factors referenced later in this announcement under the caption “Cautionary Information Regarding Forward-Looking Statements.” These and other risk factors are discussed in more detail in the Company’s filings with the Securities and Exchange Commission.

    Due to the planned separation of the Company’s domain name services business and evolution of its content and media business, the Company is replacing quarterly and annual guidance with a discussion of expected short and long term trends.

    In 2014, the Company expects the following:

    • Slightly declining revenue year-over-year driven by the Company’s shift away from traditional branded display sales and continued declines in eHow coupled with product and ad format changes to improve user experience, offset partially by growth in Society6, Content Solutions and Registrar revenue.
    • Adjusted EBITDA margins in the mid-teens, reflective of the inclusion of $8-$10 million of annual gTLD operating expenses post the launch of our first gTLDs inFebruary 2014, $10-$15 million of operating expense related to content remediation and infrastructure ramp for Society6 and Content Solutions, and a revenue mix shift to lower margin commerce and domain name services revenue.
    • Significant free cash flow generation.

    Longer term, the Company expects the following:

    • Demand Media standalone revenue driven by a return to growth in eHow, as well as our growing Content Solutions and commerce businesses contributing a significantly higher percentage of total revenue.
    • Rightside revenue driven by growth in domain name services revenue from the new gTLD opportunity, partially offset by continued declines in domain parking revenue.
    • For both businesses, we expect margin expansion and to continue to generate significant free cash flow.

    Conference Call and Webcast Information

    Demand Media will host a corresponding conference call and live webcast at 5:00 p.m. Eastern time today. To access the conference call, dial 877.430.7751 and reference conference ID 51526222. To participate on the live call, analysts should dial-in at least 10 minutes prior to the commencement of the call. A live webcast also will be available on the Investor Relations section of the Company’s corporate website athttp://ir.demandmedia.com and via replay beginning approximately two hours after the completion of the call.

    About Non-GAAP Financial Measures

    To supplement our consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we use certain non-GAAP financial measures described below. The presentation of this additional financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures, please see the tables captioned “Reconciliations of Non-GAAP Measures” included at the end of this release.

    The non-GAAP financial measures presented in this release are the primary measures used by the Company’s management and board of directors to understand and evaluate its financial performance and operating trends, including period-to-period comparisons, to prepare and approve its annual budget and to develop short and long term operational plans. Additionally, Adjusted EBITDA has been the primary measure used by the compensation committee of the Company’s board of directors to establish the funding targets for and fund its annual bonus pool for the Company’s employees and executives. We believe our presented non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) management frequently uses them in its discussions with investors, commercial bankers, securities analysts and other users of its financial statements.

    Revenue ex-TAC is defined by the Company as GAAP revenue less traffic acquisition costs (TAC). TAC comprises the portion of Content & Media GAAP revenue shared with the Company’s network customers. Management believes that Revenue ex-TAC is a meaningful measure of operating performance because it is frequently used for internal managerial purposes and helps facilitate a more complete period-to-period understanding of factors and trends affecting the Company’s underlying revenue performance of itsContent & Media service offering.

    Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) is defined by the Company as net income (loss) before income tax expense, interest and other income (expense), depreciation, amortization, stock-based compensation, as well as the financial impact of acquisition and realignment costs, the formation expenses directly related to its gTLD initiative, net gains or losses on withdrawals of interest in gTLD applications, and any gains or losses on certain asset sales or dispositions. Acquisition and realignment costs include such items, when applicable, as (1) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (2) legal, accounting and other professional fees directly attributable to acquisition activity, (3) employee severance payments attributable to acquisition or corporate realignment activities and (4) expenditures related to the separation of Demand Media into two distinct publicly traded companies. Management does not consider these expenses to be indicative of the Company’s ongoing operating results or future outlook.

    Management believes that this non-GAAP financial measure reflects the Company’s business in a manner that allows for meaningful period-to-period comparisons and analysis of trends. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of the Company’s underlying recurring revenue and operating costs, which is focused more closely on the current costs necessary to utilize previously acquired long-lived assets. In addition, management believes that it can be useful to exclude certain non-cash charges because the amount of such expenses is the result of long-term investment decisions in previous periods rather than day-to-day operating decisions. For example, due to the long-lived nature of a majority of its media content, the revenue generated by the Company’s media content assets in a given period bears little relationship to the amount of its investment in media content in that same period. Accordingly, management believes that content acquisition costs represent a discretionary long-term capital investment decision undertaken at a point in time. This investment decision is clearly distinguishable from other ongoing business activities, and its discretionary nature and long-term impact differentiate it from specific period transactions, decisions regarding day-to-day operations, and activities that would have an immediate impact on operating or financial performance if materially changed, deferred or terminated.

    Adjusted Earnings Per Share (Adjusted EPS) is defined by the Company as Adjusted Net Income divided by the weighted average number of shares outstanding. Adjusted Net Income is defined by the Company as net income (loss) before the effect of stock-based compensation, amortization of intangible assets acquired via business combinations, accelerated amortization of content intangible assets removed from service, acquisition and realignment costs, the formation expenses directly related to its gTLD initiative, net gains or losses on withdrawals of interest in gTLD applications, and any gains or losses on certain asset sales or dispositions, and is calculated using the application of a normalized effective tax rate. Acquisition and realignment costs include such items, when applicable, as (1) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (2) legal, accounting and other professional fees directly attributable to acquisition activity, (3) employee severance payments attributable to acquisition or corporate realignment activities, and (4) expenditures related to the separation of Demand Mediainto two distinct publicly traded companies. Management does not consider these expenses to be indicative of the Company’s ongoing operating results or future outlook.

    Management believes that Adjusted Net Income and Adjusted EPS provide investors with additional useful information to measure the Company’s underlying financial performance, particularly from period to period, because these measures are exclusive of certain non-cash expenses not directly related to the operation of its ongoing business (such as amortization of intangible assets acquired via business combinations, as well as certain other non-cash expenses such as purchase accounting adjustments and stock-based compensation) and include a normalized effective tax rate based on the Company’s statutory tax rate.

    Discretionary Free Cash Flow is defined by the Company as net cash provided by operating activities excluding cash outflows from acquisition and realignment activities, including expenditures related to the separation of Demand Media into two distinct publicly traded companies, and the formation expenses directly related to its gTLD initiative, less capital expenditures to acquire property and equipment. Free Cash Flow is defined by the Company as Discretionary Free Cash Flow less investments in intangible assets and is not impacted by net payments for gTLD applications, which were $3.9 million and $18.2 million for the twelve months ended December 31, 2013 and 2012, respectively, or net proceeds from the withdrawal of interest in gTLD applications, which were $5.6 million for the year ended December 31, 2013. Management believes that Discretionary Free Cash Flow and Free Cash Flow provide investors with additional useful information to measure operating liquidity because they reflect the Company’s underlying cash flows from recurring operating activities after investing in capital assets and intangible assets. These measures are used by management, and may also be useful for investors, to assess the Company’s ability to generate cash flow for a variety of strategic opportunities, including reinvestment in the business, pursuing new business opportunities, potential acquisitions, payment of dividends and share repurchases.

    The use of these non-GAAP financial measures has certain limitations because they do not reflect all items of income and expense, or cash flows that affect the Company’s operations. An additional limitation of these non-GAAP financial measures is that they do not have standardized meanings, and therefore other companies may use the same or similarly named measures but exclude different items or use different computations. Management compensates for these limitations by reconciling these non-GAAP financial measures to their most comparable GAAP financial measures within its financial press releases. Non-GAAP financial measures should be considered in addition to, not as a substitute for, financial measures prepared in accordance with GAAP. Further, these non-GAAP financial measures may differ from the non-GAAP financial information used by other companies, including peer companies, and therefore comparability may be limited. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure. The accompanying tables have more details on the GAAP financial measures and the related reconciliations.

    About Demand Media

    Demand Media, Inc. (NYSE: DMD) is a leading digital media and domain name services company that informs and entertains one of the internet’s largest audiences, helps advertisers find innovative ways to engage with their customers and enables publishers, individuals and businesses to expand their online presence. Headquartered in Santa Monica, CA, Demand Media has offices in North America, South America and Europe. For more information about Demand Media, please visit www.demandmedia.com.

    About Rightside

    Rightside™ inspires and delivers new possibilities for consumers and businesses to define and present themselves online. The company, with its affiliates, is a leading provider of domain name services, offering one of the industry’s most comprehensive platforms for the discovery, registration, development, and monetization of domain names. This includes 15 million names under management, the most widely used domain name reseller platform, more than 20,000 distribution partners, an award-winning retail registrar, the leading domain name auction service through its NameJet joint venture and an interest in more than 100 new Top Level Domain registry operator agreements or applications through Rightside affiliate, United TLD Holdco Limited, trading as Rightside Registry. Following its planned separation from Demand Media, Rightside will be home to some of the most admired brands in the industry, including eNom, Name.com, andNameJet (in partnership with Web.com). Headquartered in Kirkland, WA, Rightside has offices in North America, Europe and Australia. For more information please visitwww.rightside.co.

    Cautionary Information Regarding Forward-Looking Statements

    This press release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements involve risks and uncertainties regarding the Company’s future financial performance, and are based on current expectations, estimates and projections about our industry, financial condition, operating performance and results of operations, including certain assumptions related thereto. Statements containing words such as guidance, may, believe, anticipate, expect, intend, plan, project, projections, business outlook, and estimate or similar expressions constitute forward-looking statements. Actual results may differ materially from the results predicted, and reported results should not be considered an indication of future performance. Potential risks and uncertainties that could affect our operating and financial results are described in our annual report on Form 10-K for the fiscal year ending December 31, 2012 filed with the Securities and Exchange Commission (http://www.sec.gov) on March 5, 2013,as such risks and uncertainties may be updated in our annual and quarterly reports on Form 10-K and Form 10-Q filed with the Securities and Exchange Commission, including, without limitation, information under the captions Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations. These risks and uncertainties include, among others: our ability to complete a separation of our business into two separate public companies and unanticipated developments that may delay or negatively impact such a transaction; the possibility that we may decide not to proceed with the separation of our business as previously announced if we determine that alternative opportunities are more favorable to our stockholders; the impact and possible disruption to our operations from pursuing the separation transaction; the expectation that the separation transaction will be tax-free; revenue and growth expectations for the two independent companies, and the ability of each company to operate as an independent entity, following the separation transaction; changes in the methodologies of internet search engines, including ongoing algorithmic changes made by Google as well as possible future changes, and the impact such changes may have on page view growth and driving search related traffic to our owned & operated websites and the websites of our network customers; the impact of product and ad format changes to improve user experience; changes in our content creation and distribution platform, including the possible repurposing of content to alternate distribution channels, reduced investments in intangible assets or the sale or removal of content; our ability to successfully grow adjacent lines of business such as commerce and content solutions as part of our growth strategy; the effects of shifting consumption of media content from desktop to mobile; our ability to successfully pursue and implement our gTLD initiative; our dependence on material agreements with a specific business partner for a significant portion of our revenue; changes in amortization or depreciation expense due to a variety of factors; potential write downs, reserves against or impairment of assets including receivables, goodwill, intangibles (including media content) or other assets; and our ability to retain key personnel. From time to time, we may consider acquisitions or divestitures that, if consummated, could be material. Any forward-looking statements regarding financial metrics are based upon the assumption that no such acquisition or divestiture is consummated during the relevant periods. If an acquisition or divestiture were consummated, actual results could differ materially from any forward-looking statements. The Company does not intend to revise or update the information set forth in this press release, except as required by law, and may not provide this type of information in the future.

    Demand Media, Inc. and Subsidiaries

    Unaudited Condensed Consolidated Statements of Operations

    (In thousands, except per share amounts)
    Three months ended
    December 31,    		 Year endedDecember 31,
    2013 2012 2013 2012
    Revenue $ 96,661 $ 103,142 $ 394,598 $ 380,578
    Operating expenses:
    Service costs (exclusive of amortization of intangible assets shown separately below)(1) (2) 55,127 48,865 204,763 181,018
    Sales and marketing (1) (2) 9,587 12,823 46,445 46,501
    Product development (1) (2) 10,920 9,719 44,187 40,708
    General and administrative (1) (2) 18,677 16,171 73,277 63,025
    Amortization of intangible assets 13,685 9,460 44,409 40,676
    Total operating expenses 107,996 97,038 413,081 371,928
    Income (loss) from operations (11,335 ) 6,104 (18,483 ) 8,650
    Interest income 5 8 21 42
    Interest expense (668 ) (157 ) (1,642 ) (622 )
    Other income (expense), net (12 ) (34 ) (61 ) (111 )
    Gain on sale of assets 1,666 – 4,232 –
    Income (loss) before income taxes (10,344 ) 5,921 (15,933 ) 7,959
    Income tax expense (1,177 ) (1,172 ) (4,241 ) (1,783 )
    Net income (loss) $ (11,521 ) $ 4,749 $ (20,174 ) $ 6,176
     
    (1) Stock-based compensation expense included in the line items above:
    Service costs $ 700 $ 679 $ 2,778 $ 2,820
    Sales and marketing 851 1,597 5,328 6,118
    Product development 1,084 1,283 5,186 6,452
    General and administrative 3,120 3,823   14,092 15,978
    Total stock-based compensation expense $ 5,755 $ 7,382 $ 27,384 $ 31,368
    (2) Depreciation expense included in the line items above:
    Service costs $ 3,352 $ 3,663 $ 14,213 $ 14,452
    Sales and marketing 84 108 379 453
    Product development 203 238 865 1,025
    General and administrative 1,527 1,025 5,044 3,728
    Total depreciation expense $ 5,166 $ 5,034 $ 20,501 $ 19,658
    Net income (loss) per share – basic $ (0.13 ) $ 0.06 $ (0.23 ) $ 0.07
    Net income (loss) per share – diluted $ (0.13 ) $ 0.05 $ (0.23 ) $ 0.07
    Weighted average number of shares – basic 90,310 86,140 88,534 84,553
    Weighted average number of shares – diluted 90,310 88,444 88,534 87,237
    Demand Media, Inc. and Subsidiaries
    Unaudited Condensed Consolidated Balance Sheets
    (In thousands)
    December 31,
    2013    		 December 31,
    2012
    Assets
    Current assets
    Cash and cash equivalents $ 153,511 $ 102,933
    Accounts receivable, net 33,301 45,517
    Prepaid expenses and other current assets 7,826 6,041
    Deferred registration costs 66,273 57,718
    Total current assets 260,911 212,209
    Property and equipment, net 42,193 35,467
    Intangible assets, net 88,766 91,746
    Goodwill 347,382 266,349
    Deferred registration costs, less current portion 12,514 11,320
    Other long-term assets 25,322 20,906
    Total assets $ 777,088 $ 637,997
    Liabilities and Stockholders’ Equity
    Current liabilities
    Accounts payable $ 12,814 $ 10,471
    Accrued expenses and other current liabilities 34,679 40,489
    Deferred tax liabilities 22,415 18,892
    Current portion of long-term debt 15,000 –
    Deferred revenue 84,955 75,142
    Total current liabilities 169,863 144,994
    Deferred revenue, less current portion 16,929 15,965
    Long-term debt 81,250 –
    Other liabilities 13,041 4,847
    Stockholders’ equity
    Common stock and additional paid-in capital 611,039 562,703
    Treasury stock (30,767 ) (25,932 )
    Accumulated other comprehensive income 502 15
    Accumulated deficit (84,769 ) (64,595 )
    Total stockholders’ equity 496,005 472,191
    Total liabilities and stockholders’ equity $ 777,088 $ 637,997
    Demand Media, Inc. and Subsidiaries
    Unaudited Condensed Consolidated Statements of Cash Flows
    (In thousands)
    Three months ended
    December 31,    		 Year ended
    December 31,
    2013 2012 2013 2012
    Cash flows from operating activities:
    Net income (loss) $ (11,521 ) $ 4,749 $ (20,174 ) $ 6,176
    Adjustments to reconcile net income (loss) to net cash provided by operating activities:
    Depreciation and amortization 18,851 14,494 64,910 60,334
    Stock-based compensation 5,755 7,382 27,384 31,368
    Gain on other assets, net (1,666 ) – (4,232 ) –
    Other 691 1,134 3,038 1,717
    Net change in operating assets and liabilities, net of effect of acquisitions (2,375 ) (1,722 ) 5,237 (8,612 )
    Net cash provided by operating activities 9,735 26,037 76,163 90,983
    Cash flows from investing activities:
    Purchases of property and equipment (3,986 ) (5,283 ) (26,746 ) (17,708 )
    Purchases of intangibles (3,509 ) (4,647 ) (16,772 ) (13,237 )
    Proceeds from gTLD withdrawals, net 2,740 – 5,616 –
    Payments for gTLD applications, net (3,546 ) (16,200 ) (3,949 ) (18,202 )
    Cash paid for acquisitions (397 ) – (73,626 ) (17,480 )
    Change in restricted cash – – – (855 )
    Other 473 – 942 –
    Net cash used in investing activities (8,225 ) (26,130 ) (114,535 ) (67,482 )
    Cash flows from financing activities:
    Long-term debt borrowings 50,000 – 120,000 –
    Long-term debt repayments (3,750 ) – (23,750 ) –
    Debt issuance costs – – (1,936 ) (144 )
    Repurchases of common stock – (4,913 ) (4,835 ) (8,869 )
    Proceeds from exercises of stock options and contributions to ESPP 253 1,451 4,746 12,467
    Net taxes paid on RSUs vesting and options exercised (834 ) (6,151 ) (4,575 ) (9,496 )
    Other (180 ) (258 ) (620 ) (524 )
    Net cash provided by (used in) financing activities 45,489 (9,871 ) 89,030 (6,566 )
    Effect of foreign currency on cash and cash equivalents (17 ) (19 ) (80 ) (37 )
    Change in cash and cash equivalents 46,982 (9,983 ) 50,578 16,898
    Cash and cash equivalents, beginning of period 106,529 112,916 102,933 86,035
    Cash and cash equivalents, end of period $ 153,511 $ 102,933 $ 153,511 $ 102,933
    Demand Media, Inc. and Subsidiaries
    Reconciliations of Non-GAAP Measures
    (In thousands, except per share amounts)
    Three months ended
    December 31,    		 Year ended
    December 31,
    2013 2012 2013 2012
    Revenue ex-TAC:
    Content & Media revenue $ 58,022 $ 68,633 $ 246,397 $ 246,399
    Less: traffic acquisition costs (TAC) (2,644 ) (6,332 ) (15,989 ) (19,441 )
    Content & Media Revenue ex-TAC 55,378 62,301 230,408 226,958
    Registrar revenue 38,639 34,509 148,201 134,179
    Total Revenue ex-TAC $ 94,017 $ 96,810 $ 378,609 $ 361,137
    Adjusted EBITDA:
    Net income (loss) $ (11,521 ) $ 4,749 $ (20,174 ) $ 6,176
    Income tax expense 1,177 1,172 4,241 1,783
    Interest and other expense, net 675 183 1,682 691
    Gain on gTLD application withdrawals, net(1) (1,666 ) – (4,232 ) –
    Depreciation and amortization 18,851 14,494 64,910 60,334
    Stock-based compensation 5,755 7,382 27,384 31,368
    Acquisition and realignment costs(2) 1,880 314 6,113 446
    gTLD expense(3) 2,875 1,061 8,428 2,650
    Adjusted EBITDA $ 18,026 $ 29,355 $ 88,352 $ 103,448
    Discretionary and Total Free Cash Flow:
    Net cash provided by operating activities $ 9,735 $ 26,037 $ 76,163 $ 90,983
    Purchases of property and equipment (3,986 ) (5,283 ) (26,746 ) (17,708 )
    Acquisition and realignment cash flows(2) 2,861 25 4,587 25
    gTLD expense cash flows(3) 3,239 974 7,152 2,198
    Discretionary Free Cash Flow 11,849 21,753 61,156 75,498
    Purchases of intangible assets (3,509 ) (4,647 ) (16,772 ) (13,237 )
    Free Cash Flow $ 8,340 $ 17,106 $ 44,384 $ 62,261
    Adjusted Net Income and Adjusted EPS:
    Net income (loss) $ (11,521 ) $ 4,749 $ (20,174 ) $ 6,176
    (a) Stock-based compensation 5,755 7,382 27,384 31,368
    (b) Amortization of intangible assets – M&A 3,872 2,572 13,162 10,904
    (c) Content intangible assets removed from service 2,387 237 2,453 2,055
    (d) Acquisition and realignment costs(2) 1,880 314 6,113 446
    (e) Gain on gTLD application withdrawals, net(1) (1,666 ) – (4,232 ) –
    (f) gTLD expense(3) 2,875 1,061 8,428 2,650
    (g) Income tax effect of items (a) – (f) & application of 38% statutory tax rate to pre-tax income (632 ) (5,473 ) (9,962 ) (19,262 )
    Adjusted Net Income $ 2,951 $ 10,842 $ 23,173 $ 34,337
    Adjusted EPS – diluted $ 0.03 $ 0.12 $ 0.26 $ 0.39
    Shares used to calculate Adjusted EPS – diluted 90,911 88,444 89,428 87,237
    (1) Net gains on withdrawals of interest in gTLD applications, included in gain on other assets, net.
    (2) Acquisition and realignment costs include such items, when applicable, as (a) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (b) legal, accounting and other professional fees directly attributable to acquisition activity, (c) employee severance payments attributable to acquisition or corporate realignment activities and (d) expenditures related to the separation of Demand Media into two distinct publicly traded companies. Management does not consider these costs to be indicative of the Company’s core operating results.
    (3) Comprises formation expenses directly related to the Company’s gTLD initiative that did not generate associated revenue in 2013 or 2012.
    Demand Media, Inc. and Subsidiaries
    Unaudited GAAP Revenue, by Revenue Source
    (In thousands)
    Three months ended
    December 31,    		 Year ended
    December 31,
    2013 2012 2013 2012
    Content & Media:
    Owned and operated websites $ 46,127 $ 48,796 $ 195,546 $ 178,511
    Network of customer websites 11,895 19,837 50,851 67,888
    Total Revenue – Content & Media 58,022 68,633 246,397 246,399
    Registrar 38,639 34,509 148,201 134,179
    Total Revenue $ 96,661 $ 103,142 $ 394,598 $ 380,578
    Three months ended
    December 31,    		 Year ended
    December 31,
    2013 2012 2013 2012
    Content & Media:
    Owned and operated websites 48 % 48 % 49 % 47 %
    Network of customer websites 12 % 19 % 13 % 18 %
    Total Revenue – Content & Media 60 % 67 % 62 % 65 %
    Registrar 40 % 33 % 38 % 35 %
    Total Revenue 100 % 100 % 100 % 100 %

     

    Source: Demand Media, Inc.

    Images via Demand Media

  • Demand Media Enters New Ad Partnership In Latin America

    Demand Media announced that it has entered into a digital advertising partnership with Cisneros Interactive’s RedMas, which will see RedMas gain exclusive representation for branded digital ad solutions eHow en Español, in certain Latin American countries.

    Demand Media will provide RedMas’ sales force with training and assistance on offering its ad solutions – including custom content, brand sponsorships and rich media units – to brands in the region.

    The company has worked with brands like Netflix, P&G, Sony, Coca-Cola, Nissan, Renault, Claro and Nokia.

    Stewart Marlborough, executive vice president of media at Demand Media, said, “Our international sites are experiencing explosive growth, particularly eHow en Español, which has increased its unique visitors nearly six-fold from the previous year and now attracts more than 25 million monthly uniques1. Our partnership with RedMas significantly expands our digital advertising footprint in the fast-growing Latin American market. The biggest brands and advertisers in the region will now have access to premium, affluent and intent-driven audiences ready to take action on advertisers’ contextually relevant messages.”

    “Representing inventory from eHow en Español provides RedMas with the opportunity to meet the increasing demand for more premium branded inventory from advertisers in the region,” said Victor Kong, president of Cisneros Interactive. “This product is an excellent complement to RedMas’ existing product line, and will significantly improve our offering of top quality branding solutions, especially those targeting young women and mothers.”

    The partnership covers Argentina, Bolivia, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Mexico, Panama, Paraguay, Peru, Uruguay, and Venezuela.

  • Variety Calls Demand Media ‘Epic Fail’

    We’ve been following the Demand Media story with intrigue over the last few years, as it has proven to be the highest profile example of how a site can truly game Google, and make a business out of it, only to have that backfire at the hands of a Google algorithm update.

    On the content side of things (as opposed to Demand Media’s domains business), the company had perfected figuring out what people are searching for on Google, and crafting content (cheaply) to cater to those searches. The result was the ultimate content farm with an answer for pretty much everything. The problem was that the quality wasn’t always there, and Google responded.

    Demand Media (mostly by way of its eHow site) was certainly not the only contributor to the content farm epidemic, but it was the most obvious. Interestingly enough, the initial Panda update didn’t even hit Demand Media. But eventually it did, and with a vengeance. I won’t rehash the entire story, as you probably already know it. If not, peruse our coverage.

    Earlier this year, the company revealed that it had once again been negatively impacted by Google algorithm changes, and CEO Richard Rosenblatt stepped down from the company. Demand Media’s most recent earnings report once again showed a decline in revenue thanks to a loss of search referrals.

    Variety (of all publications) recently put out a big piece about the company, which is now getting some attention from the tech media, calling the “rise and fall of Demand Media” an “epic fail.”

    “The freefall of Demand serves as a cautionary tale for hype in the Internet age: No company burns so hot that it can’t cool off,” writes Andrew Wallenstein.

    This comes at a time when such a tale deserves the spotlight, because Google isn’t the only one businesses have to worry about.

    Facebook, as you may know, has updated its News Feed algorithm, like Panda, to promote what it deems to be high quality content, and whether or not that means less referrals for Demand Media (I guess we’ll see what happens in the next earnings report), it can have a similar affect on any site that has been relying on Facebook for traffic.

    Already in the short time since Facebook announced the changes, brands have seen major drop offs in their organic reach. Facebook wants them to pay for visibility. But what about media sites? Facebook claims that it wants to deliver in depth articles, but as we’ve discussed, that may only be for the select few that Facebook wants to give special treatment.

    It will be very interesting to see where sites like Demand Media’s fall into that.

    Image: Demand Media

  • Demand Media Launches eHow Crafts, Google’s Algorithmic Effects Remain To Be Seen

    Demand Media has launched a new channel for its popular eHow site – eHow Crafts.

    “We’ve seen explosive consumer demand for craft-related content on eHow, which is why we’re bringing together and adding a wide variety of helpful content in a single destination on eHow,” a spokesperson for the company says. “It will include everything, from tips on making felt flowers to learning how to make a yarn painting. The new channel will offer step-by-step text articles, video demonstrations, original photography, and even templates for printable coloring books.”

    eHow Crafts

    “With the launch of new channel and the acquisition of Creativebug earlier this year, we’re brought together one of the largest arts and crafts audiences on the Web,” the spokesperson adds. “We believe there will be synergies between both sites, as users go back and forth and enjoy the task-oriented, short-form content on the Crafts Channel to the project-oriented, long-form content on Creativebug.”

    More on the CreativeBug acquisition here.

    Crafts seems like an obvious vertical for how-to content. One might wonder why eHow is just now launching a channel.

    “We’ve been focused on growing our dominant position in other categories, and it’s paid off,” Paul Lively, SVP and GM of eHow tells WebProNews. “We hold a top 10 position in the top categories, including home (#1), personal finance (#2), health (#3 with LIVESTRONG) and pets (# 5). We’re now turning our attention to the crafts category and we plan to build up this channel (as we believe that crafting is an essential category for eHow, which is a resource that people turn to everyday to learn how to do things). We invested in the multi-billion dollar, arts and crafts market when we acquired Creativebug earlier this year. We believe in this opportunity and we plan to dominate the the crafts category with a dedicated channel that can serve as an online hub for this passionate community.”

    “Our entire business is built on listening to our consumers and giving them what they want,” he says. “This includes listening to what people want and giving them that content, which is what we’ve done by giving people more crafts content on a dedicated channel on eHow.”

    Last month, Demand Media launched eHow Now, a paid platform where users can chat directly with so-called experts, and get advice and guidance. Crafts seems like a natural vertical for such an offering. It’s not available for Crafts yet, but it’s in the cards.

    “We do have plans to make eHow Now available in the Crafts Channel for users who have questions they want answered by experts,” says Lively. “This will complement the 6 key categories currently available on eHow Now: auto, tech, health, legal, personal finance and pets.”

    No word on when that availability will happen.

    As those who follow the search industry may know, Demand Media and eHow in particular have been key properties of interest in relation to Google’s famous (or infamous if you prefer) Panda update. It was believed by many that “content farm” sites like eHow (at least the eHow of old) were largely responsible for the update to begin with, and the update made a significant impact on the company’s earnings, though it has managed to weather the storm. Last year, it returned to record profitability.

    More recently, however, Google’s algorithms have been affecting Demand Media’s properties again. On the company’s Q2 earnings call, CEO Richard Rosenblatt said that they were impacted by 30 algorithm changes since March, but noted that some were negative and others were positive.

    When asked about the new channel’s vulnerability to Google’s algorithms, Lively tells us, “We don’t break out traffic for individual categories on our sites. We do see fluctuations in traffic across all our sites over time, both up and down. Our primary focus is to provide the best consumer experience.”

    When asked if Demand Media has been affected by any Google algorithm changes since the last earnings call, he said, “We can’t specifically comment on Google’s practices. Our goal is to provide the best consumer experience, and that’s where we’ll continue to focus.”

    Image: eHow

  • Google Was Not Kind To Demand Media In Q2

    Demand Media just posted its earnings report for its Q2 earnings, with revenue and revenue ex-TAC up 9% year-over-year. Revenue growth, the company says, was primarily driven by 15% Owned & Opearted revenue growth. Registrar revenue grew by 10% year-over-year.

    Owned & Operated page views increased 33% year-over-year to 4.4 billion, the company says. This was driven primarily by mobile page view growth on eHow.com and Livestrong.com as well as international page view growth, which DM says “more than offset significant declines in search engine referral traffic.” (emphasis added).

    That’s interesting, because the Google Panda update was supposed to be lightening up a little bit (though a recent iteration included some new signals).

    I probably don’t have to rehash Demand Media’s history with the Panda update (you can dig through these articles for that if you like).

    CFO Mel Tang had this to say about search: “Despite reduced search engine referral traffic to our websites, throughout Q2, we posted double-digit year-over-year growth from our Owned & Operated sites, underscoring the strength of our Content & Media platform. Our Registrar business also grew double digits year-over-year as we continue to progress towards separating the businesses. We plan to use our strong balance sheet and cash flow generation to continue to invest in our long-term growth initiatives.”

    CEO Richard Rosenblatt said, “Demand Media accelerated its content commerce strategy in Q2 with the acquisition of e-commerce marketplace Society6, complementing our content platform as well as our other commerce initiatives like Creativebug, eHow Now and Stronger. In addition to leveraging our strong Content & Media platform to create new integrated content and commerce offerings, we remain focused on creating the best user experience on our Owned & Operated sites. Our new gTLD initiative gained momentum with 22 of our applications passing initial evaluation by ICANN, and we continue to be excited about the planned launch of our Domain Services business as an independent publicly traded company late this year or early next year.”

    The company announced the launch of eHow Now on Tuesday.

    “After an exciting beta period with more than a million and a half users, we’re happy to announce that eHow Now has officially launched in six categories: auto, tech, health, legal, personal finance and pets,” a spokesperson for the company told WebProNews. ” It’s all part of fulfilling the mission of eHow.com, a top 20 website dedicated to solving people’s everyday needs with Content for Real Life. eHow Now provides consumers the opportunity to chat one-on-one with experts and get personalized consultations that help them save time and money.”

    On the earnings call, Rosenblatt said the company is still on track to have the media and domain businesses split by the end of the year or early next year.

    He touched on the decline in search traffic, saying that starting in May, they’ve seen continued decreases as result of a number of search engine changes. Since March, he says, they’ve experienced effects from 30 algorithm changes, some of which were negative, while others were positive.

    He says he doesn’t believe the changes are a reflection of the quality of each piece of content, but that they’re looking at making some design changes to Livestrong, and monitoring the data effects of these before looking to make similar changes to eHow.

    On mobile, most of DM”s traffic is coming to the mobile site, as opposed to apps.

    Here’s the release in its entirety:

    SANTA MONICA, Calif.–(BUSINESS WIRE)–Aug. 7, 2013– Demand Media, Inc.(NYSE:DMD), a leading digital media and domain services company, today reported financial results for the second quarter ended June 30, 2013.

    “Demand Media accelerated its content commerce strategy in Q2 with the acquisition of e-commerce marketplace Society6, complementing our content platform as well as our other commerce initiatives like Creativebug, eHow Now and Stronger,” said Richard Rosenblatt, Chairman and CEO of Demand Media. “In addition to leveraging our strongContent & Media platform to create new integrated content and commerce offerings, we remain focused on creating the best user experience on our Owned & Operated sites. Our new gTLD initiative gained momentum with 22 of our applications passing initial evaluation by ICANN, and we continue to be excited about the planned launch of our Domain Services business as an independent publicly traded company late this year or early next year.”

    Financial Summary
    (In millions, except per share amounts)
    Three months ended June 30,
    2013 2012 Change
    Total Revenue $ 101.1 $ 93.1 9 %
    Content & Media Revenue ex-TAC(1) $ 60.4 $ 55.3 9 %
    Registrar Revenue $ 36.6 $ 33.4 10 %
    Total Revenue ex-TAC(1) $ 97.0 $ 88.7 9 %
    Income from Operations $ 1.3 $ 0.9 44 %
    Adjusted EBITDA(1) $ 26.8 $ 24.6 9 %
    Net income $ 1.1 $ 0.1 NA
    Adjusted net income(1) $ 8.8 $ 7.8 13 %
    EPS – diluted $ 0.01 $ — NA
    Adjusted EPS(1) $ 0.10 $ 0.09 11 %
    Cash Flow from Operations $ 20.8 $ 21.9 (5 )%
    Free Cash Flow(1) $ 7.5 $ 16.6 (55 )%
    (1) These non-GAAP financial measures are described below and reconciled to their comparable GAAP measures in the accompanying tables.

    Q2 2013 Financial Summary:

    • Content & Media revenue ex-TAC grew 9% year-over-year. This was driven primarily by 15% Owned & Operated revenue growth, which slowed sequentially from 26% year-over-year growth in Q1 2013, due primarily to traffic declines from lower search engine referrals. Network revenue ex-TAC declined 15%, due primarily to lower revenue from YouTube Channels.
    • Registrar revenue grew 10% year-over-year, due to growth from existing partners and the Q4 2012 acquisition of Name.com. Excluding the acquisition, registrar revenue would have grown 4% year-over-year.
    • Adjusted EBITDA increased 9% year-over-year, reflecting balanced investment and cost management.

    “Despite reduced search engine referral traffic to our websites, throughout Q2, we posted double-digit year-over-year growth from our Owned & Operated sites, underscoring the strength of our Content & Media platform,” said Demand Media’s CFOMel Tang. “Our Registrar business also grew double digits year-over-year as we continue to progress towards separating the businesses. We plan to use our strong balance sheet and cash flow generation to continue to invest in our long-term growth initiatives.”

    Business Highlights:

    • June 2013 comScore Rankings:
    • On a consolidated basis, Demand Media ranked as the #17 US web property and Demand Media’s properties reached more than 103 million unique visitors worldwide.
    • eHow.com ranked as the #18 website in the US and had more than 65 million unique users worldwide.
    • Livestrong.com/eHow Health ranked as the #3 Health property in the US.
    • Cracked.com ranked as the #3 Humor website in the US.
    • In June 2013, Demand Media acquired Society6, a rapidly growing e-commerce marketplace that augments and diversifies the Company’s Content & Mediaplatform by connecting a large community of talented artists to consumers via an online marketplace with diversified traffic sources.
    • In June 2013, Demand Media launched Stronger, a digital fitness and nutrition program offered on a monthly subscription basis. The Stronger program marks another key initiative in the Company’s growing paid content portfolio that also includes Creativebug, an online e-learning site offering high-quality arts and craft video workshops.
    • In August 2013, Demand Media launched eHow Now, a new platform where customers chat directly with experts to receive advice and guidance quickly, conveniently and affordably. After a beta period with more than 1.5 million users engaging with the product, eHow Now is available in six categories – auto, tech, health, legal, personal finance and pets.
    • To date, 22 of Demand Media’s new gTLD applications have passed ICANN’s initial evaluation, moving the Company’s Domain Services business closer to executing on its strategy to become one of the largest end-to-end domain services providers.

    Operating Metrics:

    Three months ended June 30,
    %
    2013 2012 Change
    Content & Media Metrics:
    Owned and operated
    Page views(1) (in millions) 4,441 3,333 33%
    RPM(2) $11.64 $13.50 (14)%
    Network of customer websites
    Page views(1)(in millions) 6,557 4,770 37%
    RPM(2) $1.95 $3.08 (37)%
    RPM ex-TAC(3) $1.33 $2.16 (38)%
    Registrar Metrics:
    End of Period # of Domains(4) (in millions) 14.2 13.5 4%
    Average Revenue per Domain(5) $10.39 $9.96 4%
    (1) Page views represent the total number of web pages viewed across (a) our owned and operated websites and/or (b) our network of customer websites, to the extent that the viewed customer web pages host the Company’s monetization, social media and/or content services.
    (2) RPM is defined as Content & Media revenue per one thousand page views.
    (3) RPM ex-TAC is defined as Content & Media revenue ex-TAC per one thousand page views.
    (4) A domain is defined as an individual domain name registered by a third-party customer on our platform for which we have begun to recognize revenue.
    (5) Average revenue per domain is calculated by dividing Registrar revenue for a period by the average number of domains registered in that period. Average revenue per domain for partial year periods is annualized.

    Q2 2013 Operating Metrics:

    • Owned & Operated page views increased 33% year-over-year to 4.4 billion, driven primarily by mobile page view growth on eHow.com and Livestrong.com as well as international page view growth, which more than offset significant declines in search engine referral traffic. Owned & Operated RPMs decreased 14% year-over-year, reflecting the mix shift to lower yielding mobile and international page views, offset in part by increased revenue from the sale of certain undeveloped websites.
    • Network page views increased 37% year-over-year to 6.6 billion, due primarily to growth in IndieClick page views. Network RPM ex-TAC decreased 38% year-over-year, reflecting lower YouTube revenue and the mix shift to lower yielding IndieClick page views.
    • End of period domains increased 4% year-over-year to 14.2 million, driven by the acquisition of Name.com, with average revenue per domain up 4% year-over-year, due to higher domain pricing and higher average revenue per domain on Name.com.

    Business Outlook

    The following forward-looking information includes certain projections made by management as of the date of this press release. The Company does not intend to revise or update this information, except as required by law, and may not provide this type of information in the future. Due to a variety of factors, actual results may differ significantly from those projected. The factors that may affect results include, without limitation, the factors referenced later in this announcement under the caption “Cautionary Information Regarding Forward-Looking Statements.” These and other factors are discussed in more detail in the Company’s filings with the Securities and Exchange Commission.

    The Company’s third quarter and fiscal year guidance assumes that the recent substantial declines in search engine referrals to some of the Company’s websites will not reverse. Further, the low end of the Company’s guidance allows for significant additional traffic declines through the rest of the year.

    The Company’s guidance is as follows:

    Third Quarter 2013

    • Revenue in the range of $99.0 – $101.0 million
    • Revenue ex-TAC in the range of $94.0 – $96.0 million
    • Adjusted EBITDA in the range of $18.0 – $20.0 million
    • Adjusted EPS in the range of $0.04 – $0.05 per share
    • Weighted average diluted shares 88.0 – 89.0 million

    Full Year 2013

    • Revenue in the range of $405.0 – $410.0 million
    • Revenue ex-TAC in the range of $385.0 – $390.0 million
    • Adjusted EBITDA in the range of $90.0 – $95.0 million
    • Adjusted EPS in the range of $0.28 – $0.31 per share
    • Weighted average diluted shares 87.5 – 88.5 million

    The Company’s guidance excludes estimated expenses in 2013 of $8 to $10 millionrelated to the formation of the Company’s gTLD initiative and $5 to $7 million associated with separating Demand Media into two distinct publicly traded companies.

    Conference Call and Webcast Information

    Demand Media will host a corresponding conference call and live webcast at 5:00 p.m. Eastern time today. To access the conference call, dial 877.565.1268 (for domestic participants) or 937.999.3108 (for international participants). The conference ID is 21884706. To participate on the live call, analysts should dial-in at least 10 minutes prior to the commencement of the call. A live webcast also will be available on the Investor Relations section of the Company’s corporate website at http://ir.demandmedia.com and via replay beginning approximately two hours after the completion of the call.

    About Non-GAAP Financial Measures

    To supplement our consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we use certain non-GAAP financial measures described below. The presentation of this additional financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures, please see the tables captioned “Reconciliation of Non-GAAP Measures to Unaudited Consolidated Statements of Operations” included at the end of this release.

    The non-GAAP financial measures presented in this release are the primary measures used by the Company’s management and board of directors to understand and evaluate its financial performance and operating trends, including period to period comparisons, to prepare and approve its annual budget and to develop short and long term operational plans. Additionally, Adjusted EBITDA is the primary measure used by the compensation committee of the Company’s board of directors to establish the funding targets for and fund its annual bonus pool for the Company’s employees and executives. We believe our presented non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) management frequently uses them in its discussions with investors, commercial bankers, securities analysts and other users of its financial statements.

    Revenue ex-TAC is defined by the Company as GAAP revenue less traffic acquisition costs (TAC). TAC comprises the portion of Content & Media GAAP revenue shared with the Company’s network customers. Management believes that Revenue ex-TAC is a meaningful measure of operating performance because it is frequently used for internal managerial purposes and helps facilitate a more complete period-to-period understanding of factors and trends affecting the Company’s underlying revenue performance of its Content & Media service offering.

    Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) is defined by the Company as net income (loss) before income tax expense, interest and other income (expense), depreciation, amortization, stock-based compensation, as well as the financial impact of acquisition and realignment costs, the formation expenses directly related to its gTLD initiative, net gains or losses on sales and withdrawals of interest in gTLD applications, and any gains or losses on certain asset sales or dispositions. Acquisition and realignment costs include such items, when applicable, as (1) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (2) legal, accounting and other professional fees directly attributable to acquisition activity, (3) employee severance payments attributable to acquisition or corporate realignment activities, and (4) expenditures related to the separation ofDemand Media into two distinct publicly traded companies. Management does not consider these expenses to be indicative of the Company’s ongoing operating results or future outlook.

    Management believes that these non-GAAP financial measures reflect the Company’s business in a manner that allows for meaningful period-to-period comparisons and analysis of trends. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period to period comparisons of the Company’s underlying recurring revenue and operating costs, which is focused more closely on the current costs necessary to utilize previously acquired long-lived assets. In addition, management believes that it can be useful to exclude certain non-cash charges because the amount of such expenses is the result of long-term investment decisions in previous periods rather than day-to-day operating decisions. For example, due to the long-lived nature of a majority of its media content, the revenue generated by the Company’s media content assets in a given period bears little relationship to the amount of its investment in media content in that same period. Accordingly, management believes that content acquisition costs represent a discretionary long-term capital investment decision undertaken at a point in time. This investment decision is clearly distinguishable from other ongoing business activities, and its discretionary nature and long-term impact differentiate it from specific period transactions, decisions regarding day-to-day operations, and activities that would have an immediate impact on operating or financial performance if materially changed, deferred or terminated.

    Adjusted Earnings Per Share is defined by the Company as Adjusted Net Income divided by the weighted average number of shares outstanding. Adjusted Net Income is defined by the Company as net income (loss) before the effect of stock-based compensation, amortization of intangible assets acquired via business combinations, accelerated amortization of intangible assets removed from service, acquisition and realignment costs, the formation expenses directly related to its gTLD initiative, net gains or losses on sales and withdrawals of interest in gTLD applications, and any gains or losses on certain asset sales or dispositions, and is calculated using the application of a normalized effective tax rate. Acquisition and realignment costs include such items, when applicable, as (1) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (2) legal, accounting and other professional fees directly attributable to acquisition activity, (3) employee severance payments attributable to acquisition or corporate realignment activities, and (4) expenditures related to the separation of Demand Media into two distinct publicly traded companies. Management does not consider these expenses to be indicative of the Company’s ongoing operating results or future outlook.

    Management believes that Adjusted Net Income and Adjusted Earnings Per Share provide investors with additional useful information to measure the Company’s underlying financial performance, particularly from period to period, because these measures are exclusive of certain non-cash expenses not directly related to the operation of its ongoing business (such as amortization of intangible assets acquired via business combinations, as well as certain other non-cash expenses such as purchase accounting adjustments and stock-based compensation) and include a normalized effective tax rate based on the Company’s statutory tax rate.

    Discretionary Free Cash Flow is defined by the Company as net cash provided by operating activities excluding cash outflows from acquisition and realignment activities, the formation expenses directly related to its gTLD initiative, and expenditures related to the separation of Demand Media into two distinct publicly traded companies, less capital expenditures to acquire property and equipment. Free Cash Flow is defined by the Company as Discretionary Free Cash Flow less investments in intangible assets and is not impacted by net gTLD application payments, which were $18.1 million in Q2 2012, or net gains on sales and withdrawals of interest in gTLD applications, which were $1.2 million in Q2 2013. Management believes that Discretionary Free Cash Flow and Free Cash Flow provide investors with additional useful information to measure operating liquidity because they reflect the Company’s underlying cash flows from recurring operating activities after investing in capital assets and intangible assets. These measures are used by management, and may also be useful for investors, to assess the Company’s ability to generate cash flow for a variety of strategic opportunities, including reinvestment in the business, pursuing new business opportunities, potential acquisitions, payment of dividends and share repurchases.

    The use of these non-GAAP financial measures has certain limitations because they do not reflect all items of income and expense, or cash flows that affect the Company’s operations. An additional limitation of these non-GAAP financial measures is that they do not have standardized meanings, and therefore other companies may use the same or similarly named measures but exclude different items or use different computations. Management compensates for these limitations by reconciling these non-GAAP financial measures to their most comparable GAAP financial measures within its financial press releases. Non-GAAP financial measures should be considered in addition to, not as a substitute for, financial measures prepared in accordance with GAAP. Further, these non-GAAP financial measures may differ from the non-GAAP financial information used by other companies, including peer companies, and therefore comparability may be limited. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure. The accompanying tables have more details on the GAAP financial measures and the related reconciliations.

    About Demand Media

    Demand Media, Inc. (NYSE: DMD) is a leading digital media and domain services company that informs and entertains one of the internet’s largest audiences, helps advertisers find innovative ways to engage with their customers and enables publishers, individuals and businesses to expand their online presence. Headquartered in Santa Monica, CA, Demand Media has offices in North America, South America and Europe. For more information about Demand Media, please visit www.demandmedia.com.

    Cautionary Information Regarding Forward-Looking Statements

    This press release contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements involve risks and uncertainties regarding the Company’s future financial performance, and are based on current expectations, estimates and projections about our industry, financial condition, operating performance and results of operations, including certain assumptions related thereto. Statements containing words such as guidance, may, believe, anticipate, expect, intend, plan, project, projections, business outlook, and estimate or similar expressions constitute forward-looking statements. Actual results may differ materially from the results predicted, and reported results should not be considered an indication of future performance. Potential risks and uncertainties include, among others: our ability to complete a separation of our business into two separate public companies as previously announced and unanticipated developments that may delay or negatively impact such a transaction; the possibility that we may decide not to proceed with the separation of our business as previously announced if we determine that alternative opportunities are more favorable to our stockholders; the possibility that we decide to separate our business in a manner different from that previously disclosed; the impact and possible disruption to our operations from pursuing the previously announced separation transaction; our ability to retain key personnel; the high costs we will likely incur in connection with such a separation transaction, which we would not be able to recoup if such a transaction is not consummated; the expectation that the previously announced separation transaction will be tax-free; revenue and growth expectations for the two independent companies following the separation of our business; the ability of each business to operate as an independent entity upon completion of such a transaction; changes in the methodologies of internet search engines, including ongoing algorithmic changes made by Google as well as possible future changes, and the impact such changes may have on page view growth and driving search related traffic to our owned and operated websites and the websites of our network customers; changes in our content creation and distribution platform, including the possible repurposing of content to alternate distribution channels, reduced investments in intangible assets or the sale or removal of content; our ability to effectively integrate, manage, operate and grow a crowd-sourced e-commerce website such as Society6; our ability to manage risks associated with the sale of goods over the internet; our ability to successfully launch, produce and monetize new content formats; the inherent challenges of estimating the overall impact on page views and search driven traffic to our owned and operated websites based on the data available to us as internet search engines continue to make adjustments to their search algorithms; our ability to compete with new or existing competitors; our ability to maintain or increase our advertising revenue; our ability to continue to drive and grow traffic to our owned and operated websites and the websites of our network customers; our ability to effectively monetize our portfolio of content; our dependence on material agreements with a specific business partner for a significant portion of our revenue; future internal rates of return on content investment and our decision to invest in different types of content in the future, including premium video and other formats of text content; our ability to attract and retain freelance creative professionals; changes in our level of investment in media content intangibles; the effects of changes or shifts in internet marketing expenditures, including from text to video content as well as from desktop to mobile content; the effects of shifting consumption of media content from desktop to mobile; the effects of seasonality on traffic to our owned and operated websites and the websites of our network customers; the impact of seasonality on our e-commerce business; intense competition, which could lead to pricing pressure among other effects; our ability to expand our customer base and meet production requirements; our ability to develop additional adjacent lines of business to complement our growth strategies; our ability to continue to add partners to our registrar platform on competitive terms; our ability to successfully pursue and implement our gTLD initiative; changes in stock-based compensation; changes in amortization or depreciation expense due to a variety of factors; potential write downs, reserves against or impairment of assets including receivables, goodwill, intangibles (including media content) or other assets; changes in tax laws, our business or other factors that would impact anticipated tax benefits or expenses; our ability to successfully identify, consummate and integrate acquisitions; our ability to retain key customers and key personnel; risks associated with litigation; the impact of governmental regulation; and the effects of discontinuing or discontinued business operations. From time to time, we may consider acquisitions or divestitures that, if consummated, could be material. Any forward-looking statements regarding financial metrics are based upon the assumption that no such acquisition or divestiture is consummated during the relevant periods. If an acquisition or divestiture were consummated, actual results could differ materially from any forward-looking statements. More information about potential risk factors that could affect our operating and financial results are contained in our annual report on Form 10-K for the fiscal year ending December 31, 2012 filed with the Securities and Exchange Commission (http://www.sec.gov) on March 5, 2013, and as such risk factors may be updated in our quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, including, without limitation, information under the captions Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

    Furthermore, as discussed above, the Company does not intend to revise or update the information set forth in this press release, except as required by law, and may not provide this type of information in the future.

    Demand Media, Inc. and Subsidiaries
    Unaudited Condensed Consolidated Statements of Operations
    (In thousands, except per share amounts)
    Three months ended June 30, Six months ended June 30,
    2013 2012 2013 2012
    Revenue $ 101,066 $ 93,055 $ 201,686 $ 179,289
    Operating expenses:
    Service costs (exclusive of amortization of intangible assets shown separately below) (1) (2) 48,575 44,367 96,752 85,629
    Sales and marketing (1) (2) 12,243 11,660 26,326 22,053
    Product development (1) (2) 10,742 10,587 21,902 20,711
    General and administrative (1) (2) 17,622 15,754 33,997 31,149
    Amortization of intangible assets 10,551 9,759 20,110 21,715
    Total operating expenses 99,733 92,127 199,087 181,257
    Income (loss) from operations 1,333 928 2,599 (1,968 )
    Interest income 6 10 13 25
    Interest expense (165 ) (173 ) (318 ) (310 )
    Other income (expense), net (45 ) (45 ) (123 ) (64 )
    Gain on other assets, net 1,229 — 1,229 —
    Income (loss) before income taxes 2,358 720 3,400 (2,317 )
    Income tax benefit (expense) (1,240 ) (626 ) (1,613 ) 569
    Net income (loss) $ 1,118 $ 94 $ 1,787 $ (1,748 )
    (1) Stock-based compensation expense included in the line items above:
    Service costs $ 726 $ 761 $ 1,337 $ 1,469
    Sales and marketing 1,406 1,585 3,329 3,121
    Product development 1,270 2,085 2,435 3,773
    General and administrative 3,478 4,118 7,042 7,577
    Total stock-based compensation expense $ 6,880 $ 8,549 $ 14,143 $ 15,940
    (2) Depreciation included in the line items above:
    Service costs $ 3,466 $ 3,552 $ 7,448 $ 7,202
    Sales and marketing 99 106 206 240
    Product development 225 271 461 553
    General and administrative 1,094 899 2,114 1,797
    Total depreciation $ 4,884 $ 4,828 $ 10,229 $ 9,792
    Income (loss) per common share:
    Net income (loss) attributable to common stockholders $ 1,118 $ 94 $ 1,787 $ (1,748 )
    Net income (loss) per share – basic $ 0.01 $ — $ 0.02 $ (0.02 )
    Net income (loss) per share – diluted $ 0.01 $ — $ 0.02 $ (0.02 )
    Weighted average number of shares – basic 87,370 83,925 86,997 83,433
    Weighted average number of shares – diluted 88,451 86,802 88,143 83,433
    Demand Media, Inc. and Subsidiaries
    Unaudited Condensed Consolidated Balance Sheets
    (In thousands)
    June 30, December 31,
    2013 2012
    Assets
    Current assets
    Cash and cash equivalents $ 69,876 $ 102,933
    Accounts receivable, net 38,320 45,517
    Prepaid expenses and other current assets 8,085 6,041
    Deferred registration costs 63,729 57,718
    Total current assets 180,010 212,209
    Deferred registration costs, less current portion 12,246 11,320
    Property and equipment, net 43,174 35,467
    Intangible assets, net 101,994 91,746
    Goodwill 348,333 266,349
    Other assets 20,072 20,906
    Total assets $ 705,829 $ 637,997
    Liabilities and Stockholders’ Equity
    Current liabilities
    Accounts payable $ 14,392 $ 10,471
    Accrued expenses and other current liabilities 35,049 40,489
    Deferred tax liabilities 18,195 18,892
    Deferred revenue 82,337 75,142
    Total current liabilities 149,973 144,994
    Deferred revenue, less current portion 16,866 15,965
    Other liabilities 14,714 4,847
    Long-term debt 20,000 —
    Total liabilities 201,553 165,806
    Stockholders’ equity
    Common stock 11 11
    Additional paid-in capital 597,881 562,692
    Accumulated other comprehensive income (loss) (41 ) 15
    Treasury stock at cost (30,767 ) (25,932 )
    Accumulated deficit (62,808 ) (64,595 )
    Total stockholders’ equity 504,276 472,191
    Total liabilities and stockholders’ equity $ 705,829 $ 637,997
    Demand Media, Inc. and Subsidiaries
    Unaudited Condensed Consolidated Statements of Cash Flows
    (In thousands)
    Three months ended June 30, Six months ended June 30,
    2013 2012 2013 2012
    Cash flows from operating activities:
    Net income (loss) $ 1,118 $ 94 $ 1,787 $ (1,748 )
    Adjustments to reconcile net (loss) to net cash provided by operating activities:
    Depreciation and amortization 15,435 14,587 30,339 31,507
    Deferred income taxes 1,210 931 1,419 105
    Stock-based compensation 6,880 8,549 14,143 15,940
    Other (1,719 ) 106 (1,719 ) (488 )
    Net change in operating assets and liabilities, net of effect of acquisitions (2,125 ) (2,394 ) 1,645 (4,965 )
    Net cash provided by operating activities 20,799 21,873 47,614 40,351
    Cash flows from investing activities:
    Purchases of property and equipment (8,978 ) (3,122 ) (14,803 ) (7,443 )
    Purchases of intangible assets (6,175 ) (2,549 ) (10,028 ) (5,122 )
    Proceeds from other assets 1,384 — 1,384 —
    Payments for gTLD applications — (18,072 ) — (18,202 )
    Cash paid for acquisitions, net of cash acquired (67,137 ) (26 ) (73,229 ) (269 )
    Other 511 (855 ) 511 (855 )
    Net cash used in investing activities (80,395 ) (24,624 ) (96,165 ) (31,891 )
    Cash flows from financing activities:
    Borrowing from revolving credit facility 20,000 — 20,000 —
    Proceeds from exercises of stock options and contributions to ESPP 1,603 3,741 3,349 5,856
    Repurchases of common stock — (966 ) (4,835 ) (3,956 )
    Payments of withholding tax on net exercise of stock-based awards (1,316 ) (1,166 ) (2,699 ) (1,962 )
    Other (173 ) (225 ) (265 ) (225 )
    Net cash provided by (used in) financing activities 20,114 1,384 15,550 (287 )
    Effect of foreign currency on cash and cash equivalents (13 ) (14 ) (56 ) (21 )
    Change in cash and cash equivalents (39,495 ) (1,381 ) (33,057 ) 8,152
    Cash and cash equivalents, beginning of period 109,371 95,568 102,933 86,035
    Cash and cash equivalents, end of period $ 69,876 $ 94,187 $ 69,876 $ 94,187
    Demand Media, Inc. and Subsidiaries
    Reconciliations of Non-GAAP Measures to Unaudited Consolidated Statements of Operations
    (In thousands, except per share amounts)
    Three months ended June 30, Six months ended June 30,
    2013 2012 2013 2012
    Revenue ex-TAC:
    Content & Media revenue $ 64,499 $ 59,667 $ 129,790 $ 113,630
    Less: traffic acquisition costs (TAC) (4,045 ) (4,380 ) (9,481 ) (7,759 )
    Content & Media Revenue ex-TAC 60,454 55,287 120,309 105,871
    Registrar revenue 36,567 33,388 71,896 65,659
    Total revenue ex-TAC $ 97,021 $ 88,675 $ 192,205 $ 171,530
    Adjusted EBITDA:
    Net income (loss) $ 1,118 $ 94 $ 1,787 $ (1,748 )
    Income tax expense/(benefit) 1,240 626 1,613 (569 )
    Interest and other expense, net 204 208 428 349
    Gain on other assets, net(1) (1,229 ) — (1,229 ) —
    Depreciation and amortization(2) 15,435 14,587 30,339 31,507
    Stock-based compensation 6,880 8,549 14,143 15,940
    Acquisition and realignment costs(3) 1,076 52 1,452 113
    gTLD expense(4) 2,052 453 3,670 882
    Adjusted EBITDA $ 26,776 $ 24,569 $ 52,203 $ 46,474
    Discretionary and Total Free Cash Flow:
    Net cash provided by operating activities $ 20,799 $ 21,873 $ 47,614 $ 40,351
    Purchases of property and equipment (8,978 ) (3,122 ) (14,803 ) (7,443 )
    Acquisition and realignment cash flows 599 — 901 —
    gTLD expense cash flows(4) 1,242 422 2,363 736
    Discretionary Free Cash Flow 13,662 19,173 36,075 33,644
    Purchases of intangible assets (6,175 ) (2,549 ) (10,028 ) (5,122 )
    Free Cash Flow $ 7,487 $ 16,624 $ 26,047 $ 28,522
    Adjusted Net Income:
    GAAP net income (loss) $ 1,118 $ 94 $ 1,787 $ (1,748 )
    (a) Stock-based compensation 6,880 8,549 14,143 15,940
    (b) Amortization of intangible assets – M&A 3,024 2,737 5,815 5,666
    (c) Content intangible assets removed from service(2) — — 66 1,818
    (d) Acquisition and realignment costs(3) 1,076 52 1,452 113
    (e) gTLD expense(4) 2,052 453 3,670 882
    (f) Gain on other assets, net(1) (1,229 ) — (1,229 ) —
    (g) Income tax effect of items (a) – (f) & application of 38% statutory tax rate to pre-tax income (4,141 ) (4,128 ) (8,767 ) (8,968 )
    Adjusted Net Income $ 8,780 $ 7,757 $ 16,937 $ 13,703
    Non-GAAP Adjusted Net Income per share – diluted $ 0.10 $ 0.09 $ 0.19 $ 0.16
    Shares used to calculate non-GAAP Adjusted Net Income per share – diluted 88,451 86,802 88,143 83,433
    (1) Net gains on sales and withdrawals of interest in gTLD applications included in gain on other assets, net.
    (2) The Company elected to remove certain content assets from service, resulting in accelerated amortization expense of $0.1 million and $1.8 million in the first quarter of 2013 and 2012, respectively.
    (3) Acquisition and realignment costs include such items, when applicable, as (a) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (b) legal, accounting and other professional fees directly attributable to acquisition activity, (c) employee severance payments attributable to acquisition or corporate realignment activities, and (d) expenditures related to the separation of Demand Media into two distinct publicly traded companies. Management does not consider these costs to be indicative of the Company’s core operating results.
    (4) Comprises formation expenses directly related to the Company’s gTLD initiative that did not generate associated revenue in 2013 or in 2012.
    Demand Media, Inc. and Subsidiaries
    Unaudited GAAP Revenue, by Revenue Source
    (In thousands)
    Three months ended June 30, Six months ended June 30,
    2013 2012 2013 2012
    Content & Media:
    Owned and operated websites $ 51,709 $ 44,990 $ 101,412 $ 84,338
    Network of customer websites 12,790 14,677 28,378 29,292
    Total Revenue – Content & Media 64,499 59,667 129,790 113,630
    Registrar 36,567 33,388 71,896 65,659
    Total Revenue $ 101,066 $ 93,055 $ 201,686 $ 179,289
    Three months ended June 30, Six months ended June 30,
    2013 2012 2013 2012
    Content & Media:
    Owned and operated websites 51 % 48 % 50 % 47 %
    Network of customer websites 13 % 16 % 14 % 16 %
    Total Revenue – Content & Media 64 % 64 % 64 % 63 %
    Registrar 36 % 36 % 36 % 37 %
    Total Revenue 100 % 100 % 100 % 100 %

     

    Source: Demand Media, Inc.

  • This Google Panda “Victim” Just Posted Record Revenue And Profitability

    The Google Panda update, originally unleashed in early 2011, continues to take its toll on the Internet, for better or for worse (most would probably say better). While there are frequently rumors about new updates or refreshes to Panda, the last one that we’ve had official confirmation on was only last month (Update: Speak of the devil. Google just confirmed one is rolling out). Panda will continue to patrol Google’s search results for the foreseeable future, so webmasters who want to attract visibility in them should pay attention to the kinds of things Panda likes (or doesn’t like).

    Have you been hit by the Panda update at any time since it was first launched? Were you able to recover? Share your story.

    Demand Media paid attention when its major content property eHow fell victim to the update last year. Now, the company has released its quarterly earnings report to record revenue and popularity. If that’s not a Panda recovery story, I don’t know what is. It appears to be safe to say that Demand Media has conquered Panda, and is flourishing.

    Revenue was up 20% year-over-year at $98.1 million, with $3.2 million profit (compared to a $4.1 million loss for the same quarter last year).

    CEO Richard Rosenblatt said, “Demand Media’s audience surpassed 125 million monthly unique visitors during the third quarter, as we delivered record revenue and profitability. For the first time in over a year, we increased our content investments for two consecutive quarters as we expanded the distribution of our content platform. We remain focused on our long-term growth initiatives, which include continuing to increase our investment in core content as well as in opportunities across mobile, video, international, and new generic Top Level Domains.”

    Now, to be clear, Demand Media has revenue sources that have little to do with Panda. For one, the company runs a major registrar business. However, the content side of things, and even eHow itself, continue to improve in performance. Make no mistake. Demand Media has come back from the Panda update.

    The company’s owned and operated page views increased 33% year-over-year, driven primarily by strong traffic growth on eHow.com and LiveStrong.com, the company says.

    eHow has historically been the poster child of the Panda update, you might say. Some believe Demand Media was one of the major drivers in Google even creating the update. If you can remember back before the update was first unleashed, there was a lot of discussion in the media and Blogosphere about content farms. eHow was often cited (if not the most often cited) as falling into this category. In fact, many were shocked when Google finally pushed the update, and eHow appeared to escape unscathed.

    That did not last, however. As Google continued to push out more updates for Panda, Demand Media eventually felt the effects, and by then it was a public company, and had to answer to investors. It deleted tons of articles. At first the number it gave was 300,000. In May, Demand Media revealed that it had deleted as many as 600,000 articles. It’s unclear whether they’ve deleted more since then. They didn’t just delete articles they found to be of low quality though. They also sent numerous articles through a more rigorous editing process, and added a feedback tool to all content so users could indicate any problems they come across. They also got rid of a lot of non-professional writers, and added more “expert” and celebrity curators. Essentially, eHow got a big boost in the quality control department.

    Since the clean-up initiative, the company has hardly looked back. eHow has increased its audience steadily. Now, eHow is ranked as the #13 site in the U.S. according to comScore. That’s up even from the previous quarter, when it was ranked #16. ehow had over 100 million unique monthly visitors worldwide for the 11th consecutive quarter, according to Rosenblatt, who cited internal numbers.

    Demand Media’s properties are seeing a billion worldwide monthly uniques, which is a record for the company. Demand has been so pleased with the progress it has made in the content area, the company promoted Michael Blend, who had been leading its content and media services, to President and COO earlier this year.

    Rosenblatt discussed the progress during the company’s earnings conference call, attributing the success largely to articles, videos and mobile apps with quality content and engaged communities. “All in all we really raised our game,” he said, noting that they have expanded the diversity of articles and added assignment curators.

    He also noted that almost half of the company’s articles are being published to its network of content partners.

    One important thing to note about all of this, with regards to the Panda update and search referrals, is that this whole quality control initiative has greatly helped the company to gain traffic from social media (especially Facebook). I think it’s safe to say that a decreased dependence on Google is really the cornerstone for a true Panda recovery. That way, if you do get hit by Panda at a later time, it doesn’t kill your traffic entirely. Of course, if you’re producing the kind of content that people want to share on social networks, it’s highly unlikely that you’re doing things that Panda wouldn’t like.

    If you still haven’t taken the time to assess the quality of your site’s content. You may want to do so. The next Panda refresh is likely just around the corner.

    What do you think of Demand Media’s efforts in bouncing back from Panda? Let us know in the comments.

    Here’s Demand Media’s earnings release in its entirety: 

    SANTA MONICA, Calif.–(BUSINESS WIRE)–Nov. 5, 2012– Demand Media, Inc. (NYSE: DMD), a leading digital media company, today reported financial results for the quarter ended September 30, 2012.

    “Demand Media’s audience surpassed 125 million monthly unique visitors during the third quarter, as we delivered record revenue and profitability,” said Richard Rosenblatt, Chairman and CEO ofDemand Media. “For the first time in over a year, we increased our content investments for two consecutive quarters as we expanded the distribution of our content platform. We remain focused on our long-term growth initiatives, which include continuing to increase our investment in core content as well as in opportunities across mobile, video, international, and new generic Top Level Domains.”

    Financial Summary
    In millions, except per share amounts
    Three months ended September 30,
    2011 2012 Change
    Total Revenue $ 81.5 $ 98.1 20 %
    Content & Media Revenue ex-TAC(1) $ 47.4 $ 58.8 24 %
    Registrar Revenue 30.7 34.0 11 %
    Total Revenue ex-TAC(1) $ 78.1 $ 92.8 19 %
    Income (loss) from Operations $ (3.3 ) $ 4.5 NA
    Adjusted EBITDA(1) $ 21.7 $ 27.6 28 %
    Net income (loss) $ (4.1 ) $ 3.2 NA
    Adjusted net income(1) $ 5.0 $ 9.8 97 %
    EPS $ (0.05 ) $ 0.04 NA
    Adjusted EPS(1) $ 0.06 $ 0.11 83 %
    Cash Flow from Operations $ 22.1 $ 24.6 12 %
    Free Cash Flow(1) $ 6.0 $ 16.6 177 %
    (1) These non-GAAP financial measures are described below and reconciled to their comparable GAAP measures in the accompanying tables. Effective Q1 2012, the Company began reporting Adjusted EBITDA instead of Adjusted OIBDA. Reconciliations for both measures are available on the investor relations section of the Company’s website.

    Q3 2012 Financial Summary:

    • Content & Media Revenue ex-TAC grew 24% year-over-year, due primarily to strong page view growth on the Company’s owned & operated properties, as well as 50% growth in network RPMs, reflecting higher revenue from our growing network of content partners. Sequentially, Content & Media Revenue ex-TAC increased 6% compared to the second quarter of 2012, driven primarily by network RPM growth.
    • Registrar revenue grew 11% year-over-year and increased 2% compared to the second quarter of 2012. Revenue growth was driven by an increase in number of domains on our platform, due primarily to growth from new partners.
    • Free Cash Flow was $16.6 million compared to $6.0 million a year ago, reflecting growth in cash flow from operations and a year-over-year reduction in intangible asset content spend, primarily on eHow. Sequentially, investment in intangible assets increased 36% compared to the second quarter of 2012.

    “We continued our 2012 financial momentum in Q3 with record adjusted EBITDA and strong free cash flow growth, while increasing our investment in content sequentially,” said CFO Mel Tang. “We are raising our 2012 financial guidance and remain focused on driving Demand Media’s long-term growth through continued disciplined investments.”

    Q3 2012 Business Highlights(1):

    • On a consolidated basis, Demand Media ranked as a top 20 US web property throughout the first nine months of 2012, ranking as #13 in September 2012, up from #17 in January 2012. Demand Media’s web properties reached over 125 million unique users worldwide in September 2012.
    • On a standalone basis, eHow.com ranked as the #13 website in the US in September 2012.
    • LIVE ranked as the #3 Health property in the US in September 2012.
    • Cracked.com maintained its ranking as the most visited humor site in the US throughout the first half of 2012, with more time spent on the site than any other humor website. The Cracked Network, which includes IndieClick, ranked as the #1 Humor property in the US in September 2012.

    (1) Source: comScore.

    Operating Metrics:

    Three months ended
    September 30,
    2011 2012 %
    Change
    Content & Media Metrics:
    Owned and operated
    Page views(1) (in millions) 2,527 3,363 33 %
    RPM(2) $ 15.16 $ 13.49 (11 )%
    Network of customer websites
    Page views(1) (in millions) 5,046 4,965 (2 )%
    RPM(2) $ 2.47 $ 3.78 53 %
    RPM ex-TAC(3) $ 1.80 $ 2.70 50 %
    Registrar Metrics:
    End of Period # of Domains(4) (in millions) 12.2 13.7 12 %
    Average Revenue per Domain(5) $ 10.20 $ 9.99 (2 )%

    ____________________

    (1) Page views represent the total number of web pages viewed across (a) our owned and operated websites and/or (b) our network of customer websites, to the extent that the viewed web pages of our customers host the Company’s content, social media and/or monetization services.
    (2) RPM is defined as Content & Media revenue per one thousand page views.
    (3) RPM ex-TAC is defined as Content & Media Revenue ex-TAC per one thousand page views.
    (4) Domain is defined as an individual domain name paid for by a third-party customer where the domain name is managed through our Registrar service offering.
    (5) Average revenue per domain is calculated by dividing Registrar revenue for a period by the average number of domains registered in that period. Average revenue per domain for partial year periods is annualized.
    Beginning July 1, 2011, the number of net new domains has been adjusted to include only new registered domains added to our platform for which we have recognized revenue. Excluding the impact of this change, average revenue per domain during the three months ended September 30, 2012 would have increased 1% compared to the corresponding prior-year periods.

    Q3 2012 Operating Metrics:

    • Owned & Operated page views increased 33% year-over-year, driven primarily by strong traffic growth on eHow.com and LIVESTRONG.COM. Owned & Operated RPMs decreased 11% year-over-year, due primarily to page view growth from lower RPM properties and traffic sources, including growth in mobile traffic.
    • Network page views decreased 2% year-over-year to 5.0 billion, due primarily to lower traffic from our social media partners. Network RPM ex-TAC increased 50% year-over-year, reflecting higher revenue from our growing network of content partners, primarily YouTube.
    • End of period domains increased 12% year-over-year to 13.7 million, driven primarily by the addition of higher volume customers and continued growth from existing resellers, with average revenue per domain decreasing by 2%, due to a mix shift to higher volume resellers.

    Business Outlook

    The following forward-looking information includes certain projections made by management as of the date of this press release. The Company does not intend to revise or update this information, except as required by law, and may not provide this type of information in the future. Due to a variety of factors, actual results may differ significantly from those projected. The factors that may affect results include, without limitation, the factors referenced later in this announcement under the caption “Cautionary Information Regarding Forward-Looking Statements.” These and other factors are discussed in more detail in the Company’s filings with the Securities and Exchange Commission.

    Excluding up to $3 million of 2012 expenses that the Company expects to incur related to the formation of its generic Top Level Domain (“gTLD”) initiative, the Company’s guidance for the fourth quarter and fiscal year ending December 31, 2012 is as follows:

    Fourth Quarter 2012

    • Revenue in the range of $101.5 – $103.5 million
    • Revenue ex-TAC in the range of $95.5 – $97.5 million
    • Adjusted EBITDA in the range of $27.5 – $28.5 million
    • Adjusted EPS in the range of $0.10 – $0.11 per share
    • Weighted average diluted shares of 89.5 – 90.5 million

    Full Year 2012

    • Revenue in the range of $378.9 – $380.9 million
    • Revenue ex-TAC in the range of $359.8 – $361.8 million
    • Adjusted EBITDA in the range of $101.6 – $102.6 million
    • Adjusted EPS in the range of $0.37 – $0.38 per share
    • Weighted average diluted shares of 86.5 – 87.5 million

    Conference Call and Webcast Information

    Demand Media will host a corresponding conference call and live webcast at 5:00 p.m. Eastern timetoday. To access the conference call, dial 877.565.1268 (for domestic participants) or 937.999.3108 (for international participants). The conference ID is 48753341. In order to participate on the live call, it is recommended that analysts should dial-in at least 10-minutes prior to the commencement of the call. A live webcast also will be available on the Investor Relations section of the Company’s corporate website at http://ir.demandmedia.com and via replay beginning approximately two hours after the completion of the call.

    About Non-GAAP Financial Measures

    To supplement our consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we use certain non-GAAP financial measures described below. The presentation of this additional financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures, please see the tables captioned “Reconciliation of Non-GAAP Measures to Unaudited Consolidated Statements of Operations” included in this release.

    Effective Q1 2012, the Company began reporting Adjusted EBITDA instead of Adjusted OIBDA. While the dollar value of each measure is the same, a comparison of the historical reconciliation of both measures is provided in our supplemental financial schedules posted on the investor relations section of our corporate website at http://ir.demandmedia.com. The non-GAAP financial measures presented in this release are the primary measures used by the Company’s management and board of directors to understand and evaluate its financial performance and operating trends, including period to period comparisons, to prepare and approve its annual budget and to develop short and long term operational plans. Additionally, Adjusted EBITDA is the primary measure used by the compensation committee of the Company’s board of directors to establish the funding targets for and fund its annual bonus pool for the Company’s employees and executives. We believe our presented non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) management frequently uses them in its discussions with investors, commercial bankers, securities analysts and other users of its financial statements.

    Revenue ex-TAC is defined by the Company as GAAP revenue less traffic acquisition costs (“TAC”). TAC comprises the portion of Content & Media GAAP revenue shared with the Company’s network customers. Management believes that Revenue ex-TAC is a meaningful measure of operating performance because it is frequently used for internal managerial purposes and helps facilitate a more complete period-to-period understanding of factors and trends affecting the Company’s underlying revenue performance of its Content & Media service offering.

    Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) is defined by the Company as net income (loss) before income tax expense, other income (expense), interest expense (income), depreciation, amortization, stock-based compensation, as well as the financial impact of acquisition and realignment costs, the formation expenses directly related to its gTLD initiative, and any gains or losses on certain asset sales or dispositions. Acquisition and realignment costs include such items, when applicable, as (1) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (2) legal, accounting and other professional fees directly attributable to acquisition activity, and (3) employee severance payments attributable to acquisition or corporate realignment activities. Management does not consider these expenses to be indicative of the Company’s ongoing operating results or future outlook.

    Management believes that these non-GAAP financial measures reflect the Company’s business in a manner that allows for meaningful period to period comparisons and analysis of trends. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period to period comparisons of the Company’s underlying recurring revenue and operating costs, which is focused more closely on the current costs necessary to utilize previously acquired long-lived assets. In addition, management believes that it can be useful to exclude certain non-cash charges because the amount of such expenses is the result of long-term investment decisions in previous periods rather than day-to-day operating decisions. For example, due to the long-lived nature of a majority of its media content, the revenue generated by the Company’s media content assets in a given period bears little relationship to the amount of its investment in media content in that same period. Accordingly, management believes that content acquisition costs represent a discretionary long-term capital investment decision undertaken at a point in time. This investment decision is clearly distinguishable from other ongoing business activities, and its discretionary nature and long-term impact differentiate it from specific period transactions, decisions regarding day-to-day operations, and activities that would have an immediate impact on operating or financial performance if materially changed, deferred or terminated.

    Adjusted Earnings Per Share is defined by the Company as Adjusted Net Income divided by the weighted average number of shares outstanding. Adjusted Net Income is defined by the Company as net income (loss) before the effect of stock-based compensation, amortization of intangible assets acquired via business combinations, accelerated amortization of intangible assets removed from service, acquisition and realignment costs, the formation expenses directly related to its gTLD initiative, and any gains or losses on certain asset sales or dispositions, and is calculated using the application of a normalized effective tax rate. Acquisition and realignment costs include such items, when applicable, as (1) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (2) legal, accounting and other professional fees directly attributable to acquisition activity, and (3) employee severance payments attributable to acquisition or corporate realignment activities. Management does not consider these expenses to be indicative of the Company’s ongoing operating results or future outlook.

    Management believes that Adjusted Net Income and Adjusted Earnings Per Share provide investors with additional useful information to measure the Company’s underlying financial performance, particularly from period to period, because these measures are exclusive of certain non-cash expenses not directly related to the operation of its ongoing business (such as amortization of intangible assets acquired via business combinations, as well as certain other non-cash expenses such as purchase accounting adjustments and stock-based compensation) and include a normalized effective tax rate based on the Company’s statutory tax rate.

    Discretionary Free Cash Flow is defined by the Company as net cash provided by operating activities excluding cash outflows from acquisition and realignment activities, and the formation expenses directly related to its gTLD initiative, less capital expenditures to acquire property and equipment. Free Cash Flow is defined by the Company as Discretionary Free Cash Flow less investments in intangible assets and is not impacted by gTLD application payments, which were$18.1 million in Q2 2012. Management believes that Discretionary Free Cash Flow and Free Cash Flow provide investors with additional useful information to measure operating liquidity because they reflect the Company’s underlying cash flows from recurring operating activities after investing in capital assets and intangible assets. These measures are used by management, and may also be useful for investors, to assess the Company’s ability to generate cash flow for a variety of strategic opportunities, including reinvestment in the business, pursuing new business opportunities, potential acquisitions, payment of dividends and share repurchases.

    The use of these non-GAAP financial measures has certain limitations because they do not reflect all items of income and expense, or cash flows that affect the Company’s operations. An additional limitation of these non-GAAP financial measures is that they do not have standardized meanings, and therefore other companies may use the same or similarly named measures but exclude different items or use different computations. Management compensates for these limitations by reconciling these non-GAAP financial measures to their most comparable GAAP financial measures within its financial press releases. Non-GAAP financial measures should be considered in addition to, not as a substitute for, financial measures prepared in accordance with GAAP. Further, these non-GAAP financial measures may differ from the non-GAAP financial information used by other companies, including peer companies, and therefore comparability may be limited. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure. The accompanying tables have more details on the GAAP financial measures and the related reconciliations.

    About Demand Media

    Demand Media, Inc. (NYSE: DMD) is a leading digital media company that informs and entertains one of the internet’s largest audiences, helps advertisers find innovative ways to engage with their customers and enables publishers to expand their online presence. Headquartered in Santa Monica, CA, Demand Media has offices in North America, South America and Europe. For more information about Demand Media, please visit www.demandmedia.com

    Cautionary Information Regarding Forward-Looking Statements

    This press release contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements involve risks and uncertainties regarding the Company’s future financial performance, and are based on current expectations, estimates and projections about our industry, financial condition, operating performance and results of operations, including certain assumptions related thereto. Statements containing words such as “guidance,” “may,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” and “estimate” or similar expressions constitute forward-looking statements. Actual results may differ materially from the results predicted, and reported results should not be considered an indication of future performance. Potential risks and uncertainties include, among others: changes in the methodologies of internet search engines, including ongoing algorithmic changes made by Google to its search results as well as possible future changes, and the impact such changes may have on page view growth and driving search related traffic to our owned and operated websites and the websites of our network customers; changes in our content creation and distribution platform, including the possible repurposing of content to alternate distribution channels, reduced investments in intangible assets or the sale or removal of content; our ability to successfully launch, produce and monetize new content formats; the inherent challenges of estimating the overall impact on page views and search driven traffic to our owned and operated websites based on the data available to us as internet search engines continue to make adjustments to their search algorithms; our ability to compete with new or existing competitors; our ability to maintain or increase our advertising revenue; our ability to continue to drive and grow traffic to our owned and operated websites and the websites of our network customers; our ability to effectively monetize our portfolio of content; our dependence on material agreements with a specific business partner for a significant portion of our revenue; future internal rates of return on content investment and our decision to invest in different types of content in the future, including premium video and other formats of text content; our ability to attract and retain freelance creative professionals; changes in our level of investment in media content intangibles; the effects of changes or shifts in internet marketing expenditures, including from text to video content as well as from desktop to mobile content; the effects of shifting consumption of media content from desktop to mobile; the effects of seasonality on traffic to our owned and operated websites and the websites of our network customers; our ability to continue to add partners to our registrar platform on competitive terms; our ability to successfully pursue and implement our gTLD initiative; changes in stock-based compensation; changes in amortization or depreciation expense due to a variety of factors; potential write downs, reserves against or impairment of assets including receivables, goodwill, intangibles (including media content) or other assets; changes in tax laws, our business or other factors that would impact anticipated tax benefits or expenses; our ability to successfully identify, consummate and integrate acquisitions; our ability to retain key customers and key personnel; risks associated with litigation; the impact of governmental regulation; and the effects of discontinuing or discontinued business operations. From time to time, we may consider acquisitions or divestitures that, if consummated, could be material. Any forward-looking statements regarding financial metrics are based upon the assumption that no such acquisition or divestiture is consummated during the relevant periods. If an acquisition or divestiture were consummated, actual results could differ materially from any forward-looking statements. More information about potential risk factors that could affect our operating and financial results are contained in our annual report on Form 10-K for the fiscal year ending December 31, 2011 filed with the Securities and Exchange Commission(http://www.sec.gov) on February 24, 2012, and as such risk factors may be updated in our quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, including, without limitation, information under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

    Furthermore, as discussed above, the Company does not intend to revise or update the information set forth in this press release, except as required by law, and may not provide this type of information in the future.

    Demand Media, Inc. and Subsidiaries

    Unaudited Condensed Consolidated Statements of Operations

    (In thousands, except per share amounts)
    Three months ended September 30, Nine months ended September 30,
    2011 2012 2011 2012
    Revenue $ 81,473 $ 98,147 $ 240,451 $ 277,436
    Operating expenses
    Service costs (exclusive of amortization of intangible assets shown separately below) (1) (2) 40,109 46,524 115,632 132,153
    Sales and marketing (1) (2) 9,200 11,625 28,069 33,678
    Product development (1) (2) 9,791 10,278 28,684 30,989
    General and administrative (1) (2) 14,837 15,705 45,648 46,854
    Amortization of intangible assets 10,828 9,501 30,781 31,216
    Total operating expenses 84,765 93,633 248,814 274,890
    Income (loss) from operations (3,292 ) 4,514 (8,363 ) 2,546
    Other income (expense)
    Interest income 5 9 52 34
    Interest expense (385 ) (155 ) (710 ) (465 )
    Other income (expense), net (79 ) (13 ) (338 ) (77 )
    Total other expense (459 ) (159 ) (996 ) (508 )
    Income (loss) before income taxes (3,751 ) 4,355 (9,359 ) 2,038
    Income tax (expense) benefit (394 ) (1,180 ) (2,739 ) (611 )
    Net income (loss) $ (4,145 ) $ 3,175 $ (12,098 ) $ 1,427
    (1) Stock-based compensation expense included in the line items above:
    Service costs $ 757 $ 672 $ 1,341 $ 2,141
    Sales and marketing 1,405 1,400 3,441 4,521
    Product development 1,403 1,396 3,649 5,169
    General and administrative 4,190 4,578 13,671 12,155
    Total stock-based compensation expense $ 7,755 $ 8,046 $ 22,102 $ 23,986
    (2) Depreciation included in the line items above:
    Service costs $ 4,112 $ 3,587 $ 12,305 $ 10,789
    Sales and marketing 109 105 296 345
    Product development 399 234 1,158 787
    General and administrative 683 906 2,133 2,703
    Total depreciation $ 5,303 $ 4,832 $ 15,892 $ 14,624
    Income (loss) per common share:
    Net income (loss) $ (4,145 ) $ 3,175 $ (12,098 ) $ 1,427
    Cumulative preferred stock dividends (3) — — (2,477 ) —
    Net income (loss) attributable to common stockholders $ (4,145 ) $ 3,175 $ (14,575 ) $ 1,427
    Net income (loss) per share – basic $ (0.05 ) $ 0.04 $ (0.19 ) $ 0.02
    Net income (loss) per share – diluted $ (0.05 ) $ 0.04 $ (0.19 ) $ 0.02
    Weighted average number of shares – basic 83,934 85,182 77,001 84,020
    Weighted average number of shares – diluted 83,934 88,751 77,001 86,895
    (3) As a result of the Company’s initial public offering which was completed on January 31, 2011, all shares of the Company’s preferred stock were converted to common stock.
    Demand Media, Inc. and Subsidiaries

    Unaudited Condensed Consolidated Balance Sheets

    (In thousands)
    December 31,
    2011    		 September 30,
    2012
    Current assets
    Cash and cash equivalents $ 86,035 $ 112,916
    Accounts receivable, net 32,665 41,118
    Prepaid expenses and other current assets 8,656 8,501
    Deferred registration costs 50,636 57,437
    Total current assets 177,992 219,972
    Property and equipment, net 32,626 33,740
    Intangible assets, net 111,304 88,577
    Goodwill 256,060 256,037
    Deferred registration costs 9,555 11,108
    Other long-term assets 2,566 21,607
    Total assets $ 590,103 $ 631,041
    Liabilities, Convertible Preferred Stock and Stockholders’ Equity
    Current liabilities
    Accounts payable $ 10,046 $ 11,340
    Accrued expenses and other current liabilities 33,932 33,623
    Deferred tax liabilities 18,288 19,586
    Deferred revenue 71,109 78,805
    Total current liabilities 133,375 143,354
    Deferred revenue 14,802 15,966
    Other liabilities 1,660 2,361
    Total liabilities 149,837 161,681
    Stockholders’ equity
    Common stock and additional paid-in capital 528,042 559,689
    Treasury stock (17,064 ) (21,020 )
    Accumulated other comprehensive income 59 35
    Accumulated deficit (70,771 ) (69,344 )
    Total stockholders’ equity 440,266 469,360
    Total liabilities, convertible preferred stock and stockholders’ equity $ 590,103 $ 631,041
    Demand Media, Inc. and Subsidiaries

    Unaudited Condensed Consolidated Statements of Cash Flows

    (In thousands)
    Three months ended September 30, Nine months ended September 30,
    2011 2012 2011 2012
    Cash flows from operating activities:
    Net income (loss) $ (4,145 ) $ 3,175 $ (12,098 ) $ 1,427
    Adjustments to reconcile net income (loss) to net cash provided by operating activities:
    Depreciation and amortization 16,131 14,332 46,673 45,839
    Stock-based compensation 7,727 8,046 21,989 23,986
    Other 294 967 2,363 584
    Net change in operating assets and liabilities, net of effect of acquisitions 2,050 (1,925 ) (802 ) (6,890 )
    Net cash provided by operating activities 22,057 24,595 58,125 64,946
    Cash flows from investing activities:
    Purchases of property and equipment (3,194 ) (4,982 ) (14,024 ) (12,425 )
    Purchases of intangibles (13,927 ) (3,468 ) (43,989 ) (8,590 )
    Payments for gTLD applications — — — (18,202 )
    Cash paid for acquisitions (27,133 ) (1,011 ) (30,972 ) (1,280 )
    Other — — — (855 )
    Net cash used in investing activities (44,254 ) (9,461 ) (88,985 ) (41,352 )
    Cash flows from financing activities:
    Proceeds from issuance of common stock, net — — 78,625 —
    Repurchases of common stock (3,728 ) — (3,728 ) (3,956 )
    Proceeds from exercises of stock options and contributions to ESPP 2,832 5,160 4,357 11,016
    Other (1,332 ) (1,568 ) (1,547 ) (3,755 )
    Net cash provided by (used in) financing activities (2,228 ) 3,592 77,707 3,305
    Effect of foreign currency on cash and cash equivalents (23 ) 3 (31 ) (18 )
    Change in cash and cash equivalents (24,448 ) 18,729 46,816 26,881
    Cash and cash equivalents, beginning of period 103,602 94,187 32,338 86,035
    Cash and cash equivalents, end of period $ 79,154 $ 112,916 $ 79,154 $ 112,916
    Demand Media, Inc. and Subsidiaries

    Reconciliations of Non-GAAP Measures to Unaudited Consolidated Statements of Operations

    (In thousands, except per share amounts)
    Three months ended September 30, Nine months ended September 30,
    2011 2012 2011 2012
    Revenue ex-TAC:
    Content & Media revenue $ 50,744 $ 64,136 $ 152,418 $ 177,766
    Less: traffic acquisition costs (TAC) (3,381 ) (5,350 ) (9,384 ) (13,109 )
    Content & Media Revenue ex-TAC 47,363 58,786 143,034 164,657
    Registrar revenue 30,729 34,011 88,033 99,670
    Total Revenue ex-TAC $ 78,092 $ 92,797 $ 231,067 $ 264,327
    Adjusted EBITDA(1):
    Net income (loss) $ (4,145 ) $ 3,175 $ (12,098 ) $ 1,427
    Income tax expense/(benefit) 394 1,180 2,739 611
    Interest and other expense, net 459 159 996 508
    Depreciation and amortization(2) 16,131 14,333 46,673 45,840
    Stock-based compensation 7,755 8,046 22,102 23,986
    Acquisition and realignment costs(3) 1,058 20 1,828 132
    gTLD expense(4) — 707 — 1,589
    Adjusted EBITDA $ 21,652 $ 27,620 $ 62,240 $ 74,093
    Discretionary and Total Free Cash Flow:
    Net cash provided by operating activities $ 22,057 $ 24,595 $ 58,125 $ 64,946
    Purchases of property and equipment (3,194 ) (4,982 ) (14,024 ) (12,425 )
    Acquisition and realignment cash flows 1,068 — 1,068 —
    gTLD expense cash flows(4) — 488 — 1,224
    Discretionary Free Cash Flow 19,931 20,101 45,169 53,745
    Purchases of intangible assets (13,927 ) (3,468 ) (43,989 ) (8,590 )
    Free Cash Flow(4)(5) $ 6,004 $ 16,633 $ 1,180 $ 45,155
    Adjusted Net Income:
    GAAP net income (loss) $ (4,145 ) $ 3,175 $ (12,098 ) $ 1,427
    (a) Stock-based compensation 7,755 8,046 22,102 23,986
    (b) Amortization of intangible assets – M&A 2,969 2,666 9,799 8,332
    (c) Content intangible assets removed from service(2) — — — 1,818
    (d) Acquisition and realignment costs(3) 1,058 20 1,828 133
    (e) gTLD expense(4) — 707 — 1,589
    (f) Income tax effect of items (a) – (e) & application of 38% statutory tax rate to pre-tax income (2,658 ) (4,822 ) (6,521 ) (13,789 )
    Adjusted Net Income $ 4,979 $ 9,792 $ 15,110 $ 23,496
    Non-GAAP Adjusted Net Income per share – diluted $ 0.06 $ 0.11 $ 0.17 $ 0.27
    Shares used to calculate non-GAAP Adjusted Net Income per share – diluted(6) 87,973 88,754 89,098 87,003
    (1) Effective Q1 2012, the Company began reporting Adjusted EBITDA instead of Adjusted OIBDA. While the dollar value of each measure does not differ, a comparison of the historical reconciliation of both measures is provided in our supplemental financial schedules available on the investor relations section of our corporate website.
    (2) In conjunction with its previously announced plans to improve its content creation and distribution platform, the Company elected to remove certain content assets from service, resulting in $1.8 million of accelerated amortization expense in the first quarter of 2012.
    (3) Acquisition and realignment costs include such items, when applicable, as (1) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (2) legal, accounting and other professional fees directly attributable to acquisition activity, and (3) employee severance payments attributable to acquisition or corporate realignment activities. Management does not consider these costs to be indicative of the Company’s core operating results.
    (4) Comprises formation expenses directly related to the Company’s gTLD initiative that is not expected to generate associated revenue in 2012.
    (5) In April 2012, the Company invested $18.1 million in gTLD applications, which did not impact its recurring Free Cash Flow metric.
    (6) Shares used to calculate non-GAAP Adjusted Net Income per share – diluted include the weighted average common stock for the periods presented and all dilutive common stock equivalents at each period. Amounts have been adjusted in 2011 to reflect the revised capital structure following the Company’s initial public offering which was completed on January 31, 2011, whereby the Company issued 5,175 shares of common stock and converted certain warrants and all of its previously outstanding convertible preferred stock into 62,155 shares of common stock as if those transactions were consummated on January 1, 2011.
    Demand Media, Inc. and Subsidiaries

    Unaudited GAAP Revenue, by Revenue Source

    (In thousands)
    Three months ended September 30, Nine months ended September 30,
    2011 2012 2011 2012
    Content & Media:
    Owned and operated websites $ 38,298 $ 45,377 $ 117,917 $ 129,715
    Network of customer websites 12,446 18,759 34,501 48,051
    Total revenue – Content & Media 50,744 64,136 152,418 177,766
    Registrar 30,729 34,011 88,033 99,670
    Total revenue $ 81,473 $ 98,147 $ 240,451 $ 277,436
    Three months ended September 30, Nine months ended September 30,
    2011 2012 2011 2012
    Content & Media:
    Owned and operated websites 47 % 46 % 49 % 47 %
    Network of customer websites 15 % 19 % 14 % 17 %
    Total revenue – Content & Media 62 % 65 % 63 % 64 %
    Registrar 38 % 35 % 37 % 36 %
    Total revenue 100 % 100 % 100 % 100 %

     

    Source: Demand Media, Inc.

  • Demand Media Has A New President, Reports Q2 Earnings

    Demand Media just released its earnings report for the second quarter. The company also just happened to announce that it has promoted Michael Blend, who has been leading the company’s content and media services, to President and COO.

    CEO Richard Rosenblatt said, “Michael’s leadership will be instrumental as we continue to build upon our successful growth in content and media, as well as embark on a new era of internet domain expansion. Michael brings deep experience and proven success leading both of these teams. I couldn’t be more pleased to have his committed leadership in place to oversee our continued growth and innovation on both fronts.”

    Blend was the founder and CEO of Hotkeys, which was acquired by Demand Media. He will replace Charles Hilliard, who stepped down from the President role in June.

    The company’s revenue grew 17% year-over-year, reaching $93.1 million.

    Rosenblatt said of the quarter, “We are pleased to report another strong quarter reflecting solid company performance. We intend to continue to execute on our long-term growth initiatives, which include expanding our content platform and large audiences into mobile, video and international channels. We also see significant opportunities in the new generic Top Level Domainprocess and invested over $18 million in Q2 in what we believe is a seminal event for the internet and our leading Registrar.”

    eHow, by the way, is still going stong, according to the company (following fallout from Google’s Panda update). In June, comScore had eHow as the number 16 domain in the U.S., according to the company, and it has sustained 100 million unique visitors worldwide for the past 8 months.

    Rosenblatt noted on the company’s earnings call that the average minutes per visitor on the site grew by 11 in June, year-over-year.

    In May, Demand Media revealed that it had deleted 600,000 articles from eHow.

    Rosenblatt indicated that a number of mobile updates are in store for Q3, as you are often away from your computer when you need to know “how” to do something (like jump starting a car or grilling something – those are the examples he gave).

    Here’s the earnings release in its entirety:

    SANTA MONICA, Calif.–(BUSINESS WIRE)–Aug. 7, 2012– Demand Media, Inc. (NYSE: DMD), a leading digital media company, today reported financial results for the quarter ended June 30, 2012.

    “We are pleased to report another strong quarter reflecting solid company performance,” said Richard Rosenblatt, Chairman and CEO of Demand Media. “We intend to continue to execute on our long-term growth initiatives, which include expanding our content platform and large audiences into mobile, video and international channels. We also see significant opportunities in the new generic Top Level Domainprocess and invested over $18 million in Q2 in what we believe is a seminal event for the internet and our leading Registrar.”

    Financial Summary
    In millions, except per share amounts
    Three months ended June 30,
    2011 2012 Change
    Total Revenue $ 79.5 $ 93.1 17%
    Content & Media Revenue ex-TAC(1) $ 47.0 $ 55.3 18%
    Registrar Revenue 29.6 33.4 13%
    Total Revenue ex-TAC(1) $ 76.6 $ 88.7 16%
    Income (loss) from Operations $ (0.9 ) $ 0.9 NA
    Adjusted EBITDA(1) $ 20.5 $ 24.6 20%
    Net income (loss) $ (2.4 ) $ 0.1 NA
    Adjusted net income(1) $ 5.0 $ 7.8 54%
    EPS $ (0.03 ) $ — NA
    Adjusted EPS(1) $ 0.06 $ 0.09 50%
    Cash Flow from Operations $ 16.8 $ 21.9 30%
    Free Cash Flow(1) (2) $ (4.8 ) $ 16.6 NA
    (1) These non-GAAP financial measures are described below and reconciled to their comparable GAAP measures in the accompanying tables. Effective Q1 2012, the Company began reporting Adjusted EBITDA instead of Adjusted OIBDA. Reconciliations for both measures are available on the investor relations section of the Company’s website.
    (2) In April 2012, the Company invested $18.1 million in generic Top Level Domain (“gTLD”) applications, which did not impact its recurring Free Cash Flow metric.

    Q2 2012 Financial Summary:

    • Content & Media revenue ex-TAC grew 18% year-over-year, and increased 9% compared to the first quarter of 2012, with sequential growth driven primarily by accelerating revenue and traffic in our core Owned & Operated properties.
    • Registrar revenue grew 13% year-over-year, and increased 3% compared to the first quarter of 2012. Revenue growth was driven by an increase in number of domains on our platform, due primarily to growth from new partners.
    • Free Cash Flow increased by $21.4 million year-over-year. The increase was driven by 30% growth in cash flow from operations and an 84% decline in investment in intangible assets to $2.5 million. The decrease in intangible assets investment was the result of a managed reduction in content spend, primarily on eHow, as the Company continues to make improvements to its content creation and distribution platform.

    “In addition to accelerating revenue growth, expanding our EBITDA margin and growing our cash flow from operations, we delivered our first quarter of positive net income as a public company in Q2,” said Senior Vice President, Finance and incoming CFO Mel Tang. “Based on our strong first half performance and outlook for the remainder of 2012, we are increasing guidance for fiscal year 2012.”

    Q2 2012 Business Highlights:

    • During the quarter, Demand Media invested $18.1 million in gTLD applications, 26 individually, and an additional 107 through a strategic arrangement with Donuts Inc., as previously disclosed on June 11, 2012. Demand Media is the only applicant for 16 of its 26 stand-alone applications for new gTLDs. In addition, Demand Media has been selected as the technical registry operator for gTLD strings awarded to Donuts, the single largest applicant in the process. The Company expects to begin generating revenue from its new gTLD initiative starting in 2013, subject to ICANN’s timeline.
    • On a consolidated basis, Demand Media ranked as a top 20 US web property throughout the first half of 2012, ranking as #17 in June 2012(1). Demand Media’s worldwide unique users exceeded 109 million in June 2012(1).
    • On a standalone basis, eHow.com ranked as the #16 website in the US in June 2012(1).
    • LIVESTRONG.COM/eHow Health improved its ranking to the #2 Health property in the US, based on unique visits, throughout the second quarter of 2012(1).
    • Cracked.com continued its ranking as the most visited humor site in the US throughout the first half of 2012, with more time spent on the site than any other humor website(1).
    • During the second quarter of 2012, Demand Media repurchased 111,000 shares of common stock for$1 million under its Board-authorized $50 million share repurchase program. Since the program’s inception, the Company has repurchased nearly 2.9 million shares of common stock for $21 million.

    (1) Source: comScore.

    Operating Metrics:
    Three months ended June 30,
    %
    2011 2012 Change
    Content & Media Metrics:
    Owned and operated
    Page views(1) (in millions) 2,573 3,333 30 %
    RPM(2) $ 15.19 $ 13.50 (11 )%
    Network of customer websites
    Page views(1) (in millions) 3,688 4,770 29 %
    RPM(2) $ 2.91 $ 3.08 6 %
    RPM ex-TAC(3) $ 2.15 $ 2.16 — %
    Registrar Metrics:
    End of Period # of Domains(4) (in millions) 11.9 13.5 14 %
    Average Revenue per Domain(5) $ 10.17 $ 9.96 (2 )%

    ____________________

    (1) Page views represent the total number of web pages viewed across (a) our owned and operated websites and/or (b) our network of customer websites, to the extent that the viewed customer web pages host the Company’s content, social media and/or monetization services.
    (2) RPM is defined as Content & Media revenue per one thousand page views.
    (3) RPM ex-TAC is defined as Content & Media Revenue ex-TAC per one thousand page views.
    (4) Domain is defined as an individual domain name paid for by a third-party customer where the domain name is managed through our Registrar service offering.
    (5) Average revenue per domain is calculated by dividing Registrar revenue for a period by the average number of domains registered in that period. Average revenue per domain for partial year periods is annualized.

    Beginning July 1, 2011, the number of net new domains has been adjusted to include only new registered domains added to our platform for which the Company has recognized revenue. Excluding the impact of this change, end of period # of domains at June 30, 2012 and average revenue per domain during the three months ended June 30, 2012 would have increased 15% and decreased 4%, respectively, compared to the corresponding prior-year periods.

    Q2 2012 Operating Metrics:

    • Owned & Operated page views increased 30% year-over-year, driven by strong traffic growth on LIVESTRONG.COM and Cracked.com as well as continued growth on eHow.com. This mix shift in page views to relatively lower RPM properties in Q2 2012 resulted in an 11% year-over-year decline in RPM.
    • Network page views grew 29% year-over-year, primarily due to the acquisition of IndieClick in August 2011, which generated nearly 1.8 billion page views during the quarter ended June 30, 2012, offset partly by a decline in page views associated with certain social media customers. Network RPM ex-TAC was flat year-over-year, reflecting higher RPMs ex-TAC from YouTube Channels offset by lower RPMs ex-TAC from IndieClick.
    • End of period domains increased 14% to 13.5 million year-over-year, driven by the addition of higher volume customers and continued growth from existing resellers, with average revenue per domain decreasing by 2%, due to a mix shift to higher volume resellers.

    Business Outlook

    The following forward-looking information includes certain projections made by management as of the date of this press release. The Company does not intend to revise or update this information, except as required by law, and may not provide this type of information in the future. Due to a variety of factors, actual results may differ significantly from those projected. The factors that may affect results include, without limitation, the factors referenced later in this announcement under the caption “Cautionary Information Regarding Forward-Looking Statements.” These and other factors are discussed in more detail in the Company’s filings with the Securities and Exchange Commission.

    Excluding up to $4 million of 2012 expenses that the Company expects to incur related to the formation of its generic Top Level Domain (“gTLD”) initiative, the Company’s guidance for the third quarter endingSeptember 30, 2012 and fiscal year ending December 31, 2012 is as follows:

    Third Quarter 2012

    • Revenue in the range of $94.5 – $96.5 million
    • Revenue ex-TAC in the range of $90.0 – $92.0 million
    • Adjusted EBITDA in the range of $25.0 – $26.0 million
    • Adjusted EPS in the range of $0.09 – $0.10 per share
    • Weighted average diluted shares of 87.5 – 88.5 million

    Full Year 2012

    • Revenue in the range of $373.0 – $377.0 million
    • Revenue ex-TAC in the range of $355.5 – $359.5 million
    • Adjusted EBITDA in the range of $98.5 – $100.5 million
    • Adjusted EPS in the range of $0.35 – $0.37 per share
    • Weighted average diluted shares of 87.0 – 88.0 million

    Conference Call and Webcast Information

    Demand Media will host a corresponding conference call and live webcast at 5:00 p.m. Eastern timetoday. To access the conference call, dial 877.565.1268 (for domestic participants) or 937.999.3108 (for international participants). The conference ID is 12779178. In order to participate on the live call, it is recommended that analysts should dial-in at least 10-minutes prior to the commencement of the call. A live webcast also will be available on the Investor Relations section of the Company’s corporate website at http://ir.demandmedia.com and via replay beginning approximately two hours after the completion of the call.

    About Non-GAAP Financial Measures

    To supplement our consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we use certain non-GAAP financial measures described below. The presentation of this additional financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures, please see the tables captioned “Reconciliation of Non-GAAP Measures to Unaudited Consolidated Statements of Operations” included in this release.

    Effective Q1 2012, the Company began reporting Adjusted EBITDA instead of Adjusted OIBDA. While the dollar value of each measure is the same, a comparison of the historical reconciliation of both measures is provided in our supplemental financial schedules posted on the investor relations section of our corporate website at http://ir.demandmedia.com. The non-GAAP financial measures presented in this release are the primary measures used by the Company’s management and board of directors to understand and evaluate its financial performance and operating trends, including period to period comparisons, to prepare and approve its annual budget and to develop short and long term operational plans. Additionally, Adjusted EBITDA is the primary measure used by the compensation committee of the Company’s board of directors to establish the funding targets for and fund its annual bonus pool for the Company’s employees and executives. We believe our presented non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) management frequently uses them in its discussions with investors, commercial bankers, securities analysts and other users of its financial statements.

    Revenue ex-TAC is defined by the Company as GAAP revenue less traffic acquisition costs (“TAC”). TAC comprises the portion of Content & Media GAAP revenue shared with the Company’s network customers. Management believes that Revenue ex-TAC is a meaningful measure of operating performance because it is frequently used for internal managerial purposes and helps facilitate a more complete period-to-period understanding of factors and trends affecting the Company’s underlying revenue performance of its Content & Media service offering.

    Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) is defined by the Company as net income (loss) before income tax expense, other income (expense), interest expense (income), depreciation, amortization, stock-based compensation, as well as the financial impact of acquisition and realignment costs, the formation expenses directly related to its gTLD initiative, and any gains or losses on certain asset sales or dispositions. Acquisition and realignment costs include such items, when applicable, as (1) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (2) legal, accounting and other professional fees directly attributable to acquisition activity, and (3) employee severance payments attributable to acquisition or corporate realignment activities. Management does not consider these expenses to be indicative of the Company’s ongoing operating results or future outlook.

    Management believes that these non-GAAP financial measures reflect the Company’s business in a manner that allows for meaningful period to period comparisons and analysis of trends. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period to period comparisons of the Company’s underlying recurring revenue and operating costs, which is focused more closely on the current costs necessary to utilize previously acquired long-lived assets. In addition, management believes that it can be useful to exclude certain non-cash charges because the amount of such expenses is the result of long-term investment decisions in previous periods rather than day-to-day operating decisions. For example, due to the long-lived nature of a majority of its media content, the revenue generated by the Company’s media content assets in a given period bears little relationship to the amount of its investment in media content in that same period. Accordingly, management believes that content acquisition costs represent a discretionary long-term capital investment decision undertaken at a point in time. This investment decision is clearly distinguishable from other ongoing business activities, and its discretionary nature and long-term impact differentiate it from specific period transactions, decisions regarding day-to-day operations, and activities that would have an immediate impact on operating or financial performance if materially changed, deferred or terminated.

    Adjusted Earnings Per Share is defined by the Company as Adjusted Net Income divided by the weighted average number of shares outstanding. Adjusted Net Income is defined by the Company as net income (loss) before the effect of stock-based compensation, amortization of intangible assets acquired via business combinations, accelerated amortization of intangible assets removed from service, acquisition and realignment costs, the formation expenses directly related to its gTLD initiative, and any gains or losses on certain asset sales or dispositions, and is calculated using the application of a normalized effective tax rate. Acquisition and realignment costs include such items, when applicable, as (1) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (2) legal, accounting and other professional fees directly attributable to acquisition activity, and (3) employee severance payments attributable to acquisition or corporate realignment activities. Management does not consider these expenses to be indicative of the Company’s ongoing operating results or future outlook.

    Management believes that Adjusted Net Income and Adjusted Earnings Per Share provide investors with additional useful information to measure the Company’s underlying financial performance, particularly from period to period, because these measures are exclusive of certain non-cash expenses not directly related to the operation of its ongoing business (such as amortization of intangible assets acquired via business combinations, as well as certain other non-cash expenses such as purchase accounting adjustments and stock-based compensation) and include a normalized effective tax rate based on the Company’s statutory tax rate.

    Discretionary Free Cash Flow is defined by the Company as net cash provided by operating activities excluding cash outflows from acquisition and realignment activities, and the formation expenses directly related to its gTLD initiative, less capital expenditures to acquire property and equipment. Free Cash Flow is defined by the Company as Discretionary Free Cash Flow less investments in intangible assets and is not impacted by payments for gTLD applications, which were $18.1 million in Q2 2012. Management believes that Discretionary Free Cash Flow and Free Cash Flow provide investors with additional useful information to measure operating liquidity because they reflect the Company’s underlying cash flows from recurring operating activities after investing in capital assets and intangible assets. These measures are used by management, and may also be useful for investors, to assess the Company’s ability to generate cash flow for a variety of strategic opportunities, including reinvestment in the business, pursuing new business opportunities, potential acquisitions, payment of dividends and share repurchases.

    The use of these non-GAAP financial measures has certain limitations because they do not reflect all items of income and expense, or cash flows that affect the Company’s operations. An additional limitation of these non-GAAP financial measures is that they do not have standardized meanings, and therefore other companies may use the same or similarly named measures but exclude different items or use different computations. Management compensates for these limitations by reconciling these non-GAAP financial measures to their most comparable GAAP financial measures within its financial press releases. Non-GAAP financial measures should be considered in addition to, not as a substitute for, financial measures prepared in accordance with GAAP. Further, these non-GAAP financial measures may differ from the non-GAAP financial information used by other companies, including peer companies, and therefore comparability may be limited. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure. The accompanying tables have more details on the GAAP financial measures and the related reconciliations.

    About Demand Media

    Demand Media, Inc. (NYSE: DMD) is a leading digital media company that informs and entertains one of the internet’s largest audiences, helps advertisers find innovative ways to engage with their customers and enables publishers to expand their online presence. Headquartered in Santa Monica, CA, Demand Media has offices in North America, South America and Europe. For more information about Demand Media, please visit www.demandmedia.com

    Cautionary Information Regarding Forward-Looking Statements

    This press release contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements involve risks and uncertainties regarding the Company’s future financial performance, and are based on current expectations, estimates and projections about our industry, financial condition, operating performance and results of operations, including certain assumptions related thereto. Statements containing words such as “guidance,” “may,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” and “estimate” or similar expressions constitute forward-looking statements. Actual results may differ materially from the results predicted, and reported results should not be considered an indication of future performance. Potential risks and uncertainties include, among others: changes in the methodologies of Internet search engines, including ongoing algorithmic changes made by Google to its search results as well as possible future changes, and the impact such changes may have on page view growth and driving search related traffic to our owned and operated websites and the websites of our network customers; changes in our content creation and distribution platform, including the possible repurposing of content to alternate distribution channels, reduced investments in intangible assets or the sale or removal of content; our ability to successfully launch, produce and monetize new content formats; the inherent challenges of estimating the overall impact on page views and search driven traffic to our owned and operated websites based on the data available to us as internet search engines continue to make adjustments to their search algorithms; our ability to compete with new or existing competitors; our ability to maintain or increase our advertising revenue; our ability to continue to drive and grow traffic to our owned and operated websites and the websites of our network customers; our ability to effectively monetize our portfolio of content; our dependence on material agreements with a specific business partner for a significant portion of our revenue; future internal rates of return on content investment and our decision to invest in different types of content in the future, including premium video and other formats of text content; our ability to attract and retain freelance creative professionals; changes in our level of investment in media content intangibles; the effects of changes or shifts in internet marketing expenditures, including from text to video content as well as from desktop to mobile content; the effects of seasonality on traffic to our owned and operated websites and the websites of our network customers; our ability to continue to add partners to our registrar platform on competitive terms; our ability to successfully pursue and implement our gTLD initiative; changes in stock-based compensation; changes in amortization or depreciation expense due to a variety of factors; potential write downs, reserves against or impairment of assets including receivables, goodwill, intangibles, and media content or other assets; changes in tax laws, our business or other factors that would impact anticipated tax benefits or expenses; our ability to successfully identify, consummate and integrate acquisitions, including integrating our recent acquisitions; our ability to retain key customers and key personnel; risks associated with litigation; the impact of governmental regulation; and the effects of discontinuing or discontinued business operations. From time to time, we may consider acquisitions or divestitures that, if consummated, could be material. Any forward-looking statements regarding financial metrics are based upon the assumption that no such acquisition or divestiture is consummated during the relevant periods. If an acquisition or divestiture were consummated, actual results could differ materially from any forward-looking statements. More information about potential risk factors that could affect our operating and financial results are contained in our annual report on Form 10-K for the fiscal year endingDecember 31, 2011 filed with the Securities and Exchange Commission (http://www.sec.gov) on February 24, 2012, and as such risk factors may be updated in our quarterly reports on Form 10-Q filed with theSecurities and Exchange Commission, including, without limitation, information under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

    Furthermore, as discussed above, the Company does not intend to revise or update the information set forth in this press release, except as required by law, and may not provide this type of information in the future.

    Demand Media, Inc. and Subsidiaries
    Unaudited Condensed Consolidated Statements of Operations
    (In thousands, except per share amounts)
    Three months ended June 30, Six months ended June 30,
    2011 2012 2011 2012
    Revenue $ 79,455 $ 93,055 $ 158,978 $ 179,289
    Operating expenses
    Service costs (exclusive of amortization of intangible assets shown separately below) (1) (2) 37,869 44,367 75,523 85,629
    Sales and marketing (1) (2) 9,286 11,660 18,869 22,053
    Product development (1) (2) 9,642 10,587 18,893 20,711
    General and administrative (1) (2) 13,787 15,754 30,811 31,149
    Amortization of intangible assets 9,750 9,759 19,953 21,715
    Total operating expenses 80,334 92,127 164,049 181,257
    Income (loss) from operations (879 ) 928 (5,071 ) (1,968 )
    Other income (expense)
    Interest income 5 10 47 25
    Interest expense (163 ) (173 ) (325 ) (310 )
    Other income (expense), net (2 ) (45 ) (259 ) (64 )
    Total other expense (160 ) (208 ) (537 ) (349 )
    Income (loss) before income taxes (1,039 ) 720 (5,608 ) (2,317 )
    Income tax (expense) benefit (1,332 ) (626 ) (2,345 ) 569
    Net income (loss) $ (2,371 ) $ 94 $ (7,953 ) $ (1,748 )
    (1) Stock-based compensation expense included in the line items above:
    Service costs $ 347 $ 761 $ 584 $ 1,469
    Sales and marketing 1,136 1,585 2,036 3,121
    Product development 1,130 2,085 2,246 3,773
    General and administrative 2,807 4,118 9,481 7,577
    Total stock-based compensation expense $ 5,420 $ 8,549 $ 14,347 $ 15,940
    (2) Depreciation included in the line items above:
    Service costs $ 4,149 $ 3,552 $ 8,193 $ 7,202
    Sales and marketing 115 106 187 240
    Product development 438 271 759 553
    General and administrative 878 899 1,450 1,797
    Total depreciation $ 5,580 $ 4,828 $ 10,589 $ 9,792
    Income (loss) per common share:
    Net income (loss) $ (2,371 ) $ 94 $ (7,953 ) $ (1,748 )
    Cumulative preferred stock dividends (3) — — (2,477 ) —
    Net income (loss) attributable to common stockholders $ (2,371 ) $ 94 $ (10,430 ) $ (1,748 )
    Net income (loss) per share – basic $ (0.03 ) $ — $ (0.14 ) $ (0.02 )
    Net income (loss) per share – diluted $ (0.03 ) $ — $ (0.14 ) $ (0.02 )
    Weighted average number of shares – basic 83,088 83,925 73,477 83,433
    Weighted average number of shares – diluted 83,088 86,802 73,477 83,433
    (3) As a result of the Company’s initial public offering which was completed on January 31, 2011, all shares of the Company’s preferred stock were converted to common stock.
    Demand Media, Inc. and Subsidiaries
    Unaudited Condensed Consolidated Balance Sheets
    (In thousands)
    December 31, June 30,
    2011 2012
    Current assets
    Cash and cash equivalents $ 86,035 $ 94,187
    Accounts receivable, net 32,665 37,511
    Prepaid expenses and other current assets 8,656 8,958
    Deferred registration costs 50,636 57,513
    Total current assets 177,992 198,169
    Property and equipment, net 32,626 34,105
    Intangible assets, net 111,304 94,525
    Goodwill 256,060 256,037
    Deferred registration costs 9,555 11,128
    Other long-term assets 2,566 23,471
    Total assets $ 590,103 $ 617,435
    Liabilities, Convertible Preferred Stock and Stockholders’ Equity
    Current liabilities
    Accounts payable $ 10,046 $ 12,865
    Accrued expenses and other current liabilities 33,932 31,496
    Deferred tax liabilities 18,288 20,109
    Deferred revenue 71,109 79,366
    Total current liabilities 133,375 143,836
    Deferred revenue 14,802 16,200
    Other liabilities 1,660 2,663
    Total liabilities 149,837 162,699
    Stockholders’ equity
    Common stock and additional paid-in capital 528,042 548,237
    Treasury stock (17,064 ) (21,020 )
    Accumulated other comprehensive income 59 38
    Accumulated deficit (70,771 ) (72,519 )
    Total stockholders’ equity 440,266 454,736
    Total liabilities, convertible preferred stock and stockholders’ equity $ 590,103 $ 617,435
    Demand Media, Inc. and Subsidiaries
    Unaudited Condensed Consolidated Statements of Cash Flows
    (In thousands)
    Three months ended June 30, Six months ended June 30,
    2011 2012 2011 2012
    Cash flows from operating activities:
    Net income (loss) $ (2,371 ) $ 94 $ (7,953 ) $ (1,748 )
    Adjustments to reconcile net income (loss) to net cash provided by operating activities:
    Depreciation and amortization 15,330 14,587 30,542 31,507
    Stock-based compensation 5,426 8,549 14,262 15,940
    Other 1,214 1,037 2,069 (383 )
    Net change in operating assets and liabilities, net of effect of acquisitions (2,751 ) (2,394 ) (2,852 ) (4,965 )
    Net cash provided by operating activities 16,848 21,873 36,068 40,351
    Cash flows from investing activities:
    Purchases of property and equipment (5,746 ) (3,122 ) (10,830 ) (7,443 )
    Purchases of intangibles (15,858 ) (2,549 ) (30,062 ) (5,122 )
    Payments for gTLD applications — (18,072 ) — (18,202 )
    Cash paid for acquisitions — (26 ) (3,839 ) (269 )
    Other — (855 ) — (855 )
    Net cash used in investing activities (21,604 ) (24,624 ) (44,731 ) (31,891 )
    Cash flows from financing activities:
    Proceeds from issuance of common stock, net (249 ) — 78,625 —
    Repurchases of common stock — (966 ) — (3,956 )
    Proceeds from exercises of stock options and contributions to ESPP 674 3,741 1,525 5,856
    Other (107 ) (1,391 ) (215 ) (2,187 )
    Net cash provided by (used in) financing activities 318 1,384 79,935 (287 )
    Effect of foreign currency on cash and cash equivalents (16 ) (14 ) (8 ) (21 )
    Change in cash and cash equivalents (4,454 ) (1,381 ) 71,264 8,152
    Cash and cash equivalents, beginning of period 108,056 95,568 32,338 86,035
    Cash and cash equivalents, end of period $ 103,602 $ 94,187 $ 103,602 $ 94,187
    Demand Media, Inc. and Subsidiaries
    Reconciliations of Non-GAAP Measures to Unaudited Consolidated Statements of Operations
    (In thousands, except per share amounts)
    Three months ended June 30, Six months ended June 30,
    2011 2012 2011 2012
    Revenue ex-TAC:
    Content & Media revenue $ 49,822 $ 59,667 $ 101,674 $ 113,630
    Less: traffic acquisition costs (TAC) (2,813 ) (4,380 ) (6,003 ) (7,759 )
    Content & Media Revenue ex-TAC 47,009 55,287 95,671 105,871
    Registrar revenue 29,633 33,388 57,304 65,659
    Total Revenue ex-TAC $ 76,642 $ 88,675 $ 152,975 $ 171,530
    Adjusted EBITDA(1):
    Net income (loss) $ (2,371 ) $ 94 $ (7,953 ) $ (1,748 )
    Income tax expense/(benefit) 1,332 626 2,345 (569 )
    Interest and other expense, net 160 208 537 349
    Depreciation and amortization(2) 15,330 14,587 30,542 31,507
    Stock-based compensation 5,420 8,549 14,347 15,940
    Acquisition and realignment costs(3) 638 52 771 113
    gTLD expense(4) — 453 — 882
    Adjusted EBITDA $ 20,509 $ 24,569 $ 40,589 $ 46,474
    Discretionary and Total Free Cash Flow:
    Net cash provided by operating activities $ 16,848 $ 21,873 $ 36,068 $ 40,351
    Purchases of property and equipment (5,746 ) (3,122 ) (10,830 ) (7,443 )
    gTLD expense cash flows(4) — 422 — 735
    Discretionary Free Cash Flow 11,102 19,173 25,238 33,644
    Purchases of intangible assets (15,858 ) (2,549 ) (30,062 ) (5,122 )
    Free Cash Flow(4)(5) $ (4,756 ) $ 16,624 $ (4,824 ) $ 28,522
    Adjusted Net Income:
    GAAP net income (loss) $ (2,371 ) $ 94 $ (7,953 ) $ (1,748 )
    (a) Stock-based compensation 5,420 8,549 14,347 15,940
    (b) Amortization of intangible assets – M&A 3,097 2,737 6,830 5,666
    (c) Content intangible assets removed from service(2) — — — 1,818
    (d) Acquisition and realignment costs(3) 638 52 771 113
    (e) gTLD expense(4) — 453 — 882
    (f) Income tax effect of items (a) – (e) & application of 38% statutory tax rate to pre-tax income (1,752 ) (4,128 ) (3,864 ) (8,968 )
    Adjusted Net Income $ 5,032 $ 7,757 $ 10,131 $ 13,703
    Non-GAAP Adjusted Net Income per share – diluted $ 0.06 $ 0.09 $ 0.11 $ 0.16
    Shares used to calculate non-GAAP Adjusted Net Income per share – diluted(6) 88,691 86,802 89,258 86,117
    (1) Effective Q1 2012, the Company began reporting Adjusted EBITDA instead of Adjusted OIBDA. While the dollar value of each measure does not differ, a comparison of the historical reconciliation of both measures is provided in our supplemental financial schedules available on the investor relations section of our corporate website.
    (2) In conjunction with its previously announced plans to improve its content creation and distribution platform, the Company elected to remove certain content assets from service, resulting in $1.8 million of accelerated amortization expense in the first quarter of 2012.
    (3) Acquisition and realignment costs include such items, when applicable, as (1) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (2) legal, accounting and other professional fees directly attributable to acquisition activity, and (3) employee severance payments attributable to acquisition or corporate realignment activities. Management does not consider these costs to be indicative of the Company’s core operating results.
    (4) Comprises formation expenses directly related to the Company’s gTLD initiative that is not expected to generate associated revenue in 2012.
    (5) In April 2012, the Company invested $18.1 million in gTLD applications, which did not impact its recurring Free Cash Flow metric.
    (6) Shares used to calculate non-GAAP Adjusted Net Income per share – diluted include the weighted average common stock and restricted stock for the periods presented and all dilutive common stock equivalent at each period. Amounts have been adjusted in 2011 to reflect the revised capital structure following the Company’s initial public offering which was completed on January 31, 2011, whereby the Company issued 5,175 shares of common stock and converted certain warrants and all of the convertible preferred stock into 62,155 shares of common stock as if those transactions were consummated on January 1, 2011.
    Demand Media, Inc. and Subsidiaries
    Unaudited GAAP Revenue, by Revenue Source
    (In thousands)
    Three months ended June 30, Six months ended June 30,
    2011 2012 2011 2012
    Content & Media:
    Owned and operated websites $ 39,095 $ 44,990 $ 79,619 $ 84,338
    Network of customer websites 10,727 14,677 22,055 29,292
    Total revenue – Content & Media 49,822 59,667 101,674 113,630
    Registrar 29,633 33,388 57,304 65,659
    Total revenue $ 79,455 $ 93,055 $ 158,978 $ 179,289
    Three months ended June 30, Six months ended June 30,
    2011 2012 2011 2012
    Content & Media:
    Owned and operated websites 49 % 48 % 50 % 47 %
    Network of customer websites 14 % 16 % 14 % 16 %
    Total revenue – Content & Media 63 % 64 % 64 % 63 %
    Registrar 37 % 36 % 36 % 37 %
    Total revenue 100 % 100 % 100 % 100 %

     

    Source: Demand Media, Inc.

  • Demand Media: Everything Looking Good For eHow After Deleting 600K Articles

    As previously reported, Demand Media released its Q1 earnings report today, beating estimates. During the company’s last earnings call, the company indicated that eHow had not been impacted by a Google algorithm change since July. It would appear that this has remained the case, through Q1.

    CEO Richard Rosenblatt discussed eHow’s progress during the company’s earnings call.

    It was the second quarter in a row in which eHow saw revenue growth. The company’s free cash flow was also greatly impacted (increased by $11.8 million YoY) by the company’s decreased content spend on eHow.

    He said they have removed over 600,000 pieces of low quality content, while adding additional higher quality content. The company had indicated in the past that it deleted 300,000 articles, so clearly this is a substantial decrease in content.

    Rosenblatt also made another interesting comment, seemingly implying that the “clean-up” process may evolve to finding other uses for some of the content. He said they may remove some content form the site and put it elsewhere where it can still generate revenue. This is apparently for things that are too similar to other existing articles on the property, rather than necessarily low quality content.

    With regards to the content that has already been deleted, he said, “We just wanted to take that one broad stroke and show that we could clean it up.”

    Other improvements included: redesigning article pages, increasing the number of image rich pages, creating high quality video content, incorporating high production value video content from the YouTube channel and launching eHow spark, a social product. eHow Spark users, he said, generate three times the page views of typical eHow users.

    eHow’s mobile audience, he said, grew by 29%. He also said they’re increasing their efforts in mobile monetization.

    The company has been tweeting out various stats as well:

    @demandmedia
    Demand Media    Q1 results even better than expected. 8 minutes ago via web ·  Reply ·  Retweet ·  Favorite · powered by @socialditto

    @demandmedia
    Demand Media    March comScore reports @eHow moved up to #17 in US! 8 minutes ago via web ·  Reply ·  Retweet ·  Favorite · powered by @socialditto

    @demandmedia
    Demand Media    and more than 100 million people visit @eHow each month 8 minutes ago via web ·  Reply ·  Retweet ·  Favorite · powered by @socialditto

    @demandmedia
    Demand Media    We created 400 new @YouTube Channel episodes – almost 1,500 minutes of video 4 minutes ago via web ·  Reply ·  Retweet ·  Favorite · powered by @socialditto

    That’s the company as a whole – not just eHow, by the way, but eHow is obviously a huge part of it.

    @demandmedia
    Demand Media    Traffic on @eHowEnEspanol was up 500% since last quarter! 4 minutes ago via web ·  Reply ·  Retweet ·  Favorite · powered by @socialditto

    Another interesting point brought out by Rosenblatt during the Q&A portion of the call: monetization on the iPad is the same or better than the deskop for eHow.

    It’s also clear that mobile is a major focus. Rosenblatt says people would rather consume the content on mobile, for eHow’s cooking/fixing things-type videos.

  • Demand Media Earnings: $86.2 Million In Revenue

    Demand Media just released its first quarter 2012 results, posting record first quarter revenue and raising 2012 guidance. For the quarter, ended March 31, total revenue was up 8% year-over-year, to $86.2 million

    CEO Richard Rosenblatt said, “Driven by continued growth across our businesses, our first quarter revenue exceeded our seasonally strong Q4 2011 results. We are pleased with our first quarter results and remain focused on investing in our long-term growth initiatives, including enhancing the quality of our Owned & Operated properties, expanding our content distribution channels and partnerships, and pursuing new generic Top Level Domain opportunities.”

    It was the second quarter in a row in which eHow saw revenue growth. The company’s free cash flow was also greatly impacted (increased by $11.8 million YoY) by the company’s decreased content spend on eHow.

    According to the report, eHow ranked as the #17 website in the US in March 2012, up from #19 in July 2011. LIVESTRONG.COM/eHow Health continued to rank as the #3 Health property in the US based on unique visits throughout the first quarter of 2012, it says.

    Another major point of interest:

    Owned & Operated page views increased 22% year-over-year, driven primarily by strong traffic growth to Cracked.com and LIVESTRONG.COM, partially offset by lower year-over-year eHow.com page views due to early 2011 search algorithm changes.

    That would be Google’s Panda update. During its last earnings call, however, the company said it had not been impacted by a Google algorithm change since July. We’ll be listening to today’s call, and will see what they have to say about it this time. Stay tuned.

    For now, here’s the release in its entirety:

    SANTA MONICA, Calif.–(BUSINESS WIRE)–May. 8, 2012– Demand Media, Inc. (NYSE: DMD), a leading content and social media company, today reported financial results for the quarter ended March 31, 2012 and raised its previously issued fiscal 2012 financial guidance.

    “Driven by continued growth across our businesses, our first quarter revenue exceeded our seasonally strong Q4 2011 results,” said Richard Rosenblatt, Chairman and CEO of Demand Media. “We are pleased with our first quarter results and remain focused on investing in our long-term growth initiatives, including enhancing the quality of our Owned & Operated properties, expanding our content distribution channels and partnerships, and pursuing new generic Top Level Domain opportunities.”

    Financial Summary
    In millions, except per share amounts
    Three months ended March 31,
    2011 2012 Change
    Total Revenue $ 79.5 $ 86.2 8 %
    Content & Media Revenue ex-TAC(1) $ 48.7 $ 50.6 4 %
    Registrar Revenue 27.7 32.3 17 %
    Total Revenue ex-TAC(1) $ 76.3 $ 82.9 9 %
    Income (loss) from Operations(2) $ (4.2 ) $ (2.9 ) NA
    Adjusted EBITDA(1) $ 20.1 $ 21.9 9 %
    Net income (loss)(2) $ (5.6 ) $ (1.8 ) NA
    Adjusted net income(1) $ 5.1 $ 5.9 17 %
    EPS(2) $ (0.13 ) $ (0.02 ) NA
    Adjusted EPS(1) $ 0.06 $ 0.07 17 %
    Cash Flow from Operations $ 19.2 $ 18.5 (4 )%
    Free Cash Flow(1) $ (0.1 ) $ 11.8 NA
    (1) Non-GAAP measures are described below and reconciled to their comparable GAAP measures in the accompanying tables. Effective Q1 2012, the Company is reporting Adjusted EBITDA instead of Adjusted OIBDA. Reconciliations for both measures are presented on the Company’s investor relations site.
    (2) Q1 2012 loss from operations and net loss include $1.8 million of accelerated non-cash amortization expense associated with content intangible assets removed from service in conjunction with the Company’s previously announced plan to improve its content creation and distribution platform.

    Q1 2012 Financial Summary:

    • Content & Media revenue ex-TAC grew 4% year-over-year and increased 1% compared to the fourth quarter of 2011. Year-over-year comparisons were impacted by early 2011 search algorithm changes. The 1% sequential improvement included the second consecutive quarter of revenue growth for eHow.
    • Registrar revenue grew 17% year-over-year and 3% compared to the fourth quarter of 2011. During the first quarter of 2012, the number of registered domains grew by a net 593,000 compared to 442,000 in the first quarter of 2011, due to growth from new partners and organic growth from resellers.
    • Loss from operations and net loss include $1.8 million of accelerated non-cash amortization expense associated with content intangible assets removed from service in conjunction with the Company’s previously announced plan to improve its content creation and distribution platform.
    • Free cash flow increased by $11.8 million year-over-year. The increase was driven by an 81% reduction of investment in intangible assets to $2.7 million. The intangible assets investment decline was the result of planned decreased content spend on eHow as the Company continued to make improvements to its content creation and distribution platform.

    “Our first quarter growth and significant free cash flow marks a great start for 2012, particularly in light of a tough year-over-year comparison due to early 2011 search algorithm changes,” said Charles Hilliard, President and CFO. “Demand Media’s increased guidance reflects our first quarter performance, our improved outlook for the remainder of 2012 and, for the first time in more than a year, a return to accelerating year-over-year revenue growth beginning in Q2.”

    Business Highlights:

    • In April 2012, Demand Media invested $18 million in pursuit of its generic Top Level Domain (“gTLD”) initiative, which it believes represents a complementary strategic growth opportunity for its Registrar services.
    • On a consolidated basis, Demand Media ranked as a top 20 US web property throughout the first quarter of 2012, ranking as #18 in March 2012(1). Demand Media’s worldwide unique users exceeded 104 million in March 2012(1).
    • On a standalone basis, eHow.com ranked as the #17 website in the US in March 2012, up from #19 inJuly 2011(1).
    • LIVESTRONG.COM/eHow Health continued to rank as the #3 Health property in the US based on unique visits throughout the first quarter of 2012(1). In May 2012, LIVESTRONG.COM won the People’s Voice Webby award for Health Websites.
    • Cracked.com continued its ranking as the most visited humor site in the US throughout the first quarter of 2012(1), and more time was spent on the site than any other humor website(1). In May 2012, Cracked.com won the People’s Voice Webby award for Humor Websites.
    • In February 2012, Demand Media introduced its innovative Social Feed ads, which allow advertisers to deliver customized social media content directly into their live rich media ads.
    • In March 2012, Demand Media launched the eHow.com Tech channel, with RadioShack as its lead sponsor, to help users master everyday tech-related tasks and projects.
    • In April 2012, Demand Media launched eHow Pets, the third major channel in its partnership withYouTube.
    • During the first quarter of 2012, Demand Media repurchased 421,000 shares of common stock for $3 million under its Board-authorized $50 million share repurchase program. Since the program’s inception, the Company has repurchased 2.8 million shares of common stock for $20 million.

    (1) Source: comScore.

    Operating Metrics:

    Three months ended March 31,
    2011 2012 % 
    Change
    Content & Media Metrics:
    Owned and operated
    Page views(1) (in millions) 2,582 3,142 22 %
    RPM(2) $ 15.69 $ 12.52 (20 )%
    Network of customer websites
    Page views(1) (in millions) 3,766 4,722 25 %
    RPM(2) $ 3.01 $ 3.10 3 %
    RPM ex-TAC(3) $ 2.16 $ 2.38 10 %
    Registrar Metrics:
    End of Period # of Domains(4) (in millions) 11.4 13.3 16 %
    Average Revenue per Domain(5) $ 9.88 $ 9.94 1 %

    ____________________

    (1) Page views represent the total number of web pages viewed across (a) our owned and operated websites and/or (b) our network of customer websites, to the extent that the viewed customer web pages host the Company’s content, social media and/or monetization services.
    (2) RPM is defined as Content & Media revenue per one thousand page views.
    (3) RPM ex-TAC is defined as Content & Media Revenue ex-TAC per one thousand page views.
    (4) Domain is defined as an individual domain name paid for by a third-party customer where the domain name is managed through our Registrar service offering.
    (5) Average revenue per domain is calculated by dividing Registrar revenue for a period by the average number of domains registered in that period. Average revenue per domain for partial year periods is annualized.

    Beginning July 1, 2011, the number of net new domains has been adjusted to include only new registered domains added to our platform for which the Company has recognized revenue. Excluding the impact of this change, end of period # of domains at March 31, 2012 and average revenue per domain during the three months ended March 31, 2012 would have increased 20% and decreased 4%, respectively, compared to the corresponding prior-year periods.

    Q1 2012 Operating Metrics:

    • Owned & Operated page views increased 22% year-over-year, driven primarily by strong traffic growth to Cracked.com and LIVESTRONG.COM, partially offset by lower year-over-year eHow.com page views due to early 2011 search algorithm changes. The mix shift in page view growth to relatively lower RPM properties in Q1 2012 resulted in a 20% year-over-year decline in RPM.
    • Network page views grew 25% year-over-year, primarily due to the acquisition of IndieClick in August 2011, which generated 1.6 billion page views during the quarter ended March 31, 2012, offset partly by a decline in page views associated with certain of our social media customers. Network RPM ex-TAC increased 10% year-over-year, reflecting higher RPMs from YouTube Channels that more than offset lower RPMs from IndieClick.
    • End of period domains increased 16% to 13.3 million year-over-year, driven by the addition of higher volume customers and growth from existing resellers, with average revenue per domain increasing by 1%.

    Business Outlook

    The following forward-looking information includes certain projections made by management as of the date of this press release. The Company does not intend to revise or update this information, except as required by law, and may not provide this type of information in the future. Due to a variety of factors, actual results may differ significantly from those projected. The factors that may affect results include, without limitation, the factors referenced later in this announcement under the caption “Cautionary Information Regarding Forward-Looking Statements.” These and other factors are discussed in more detail in the Company’s filings with the Securities and Exchange Commission.

    Excluding up to $4 million of 2012 expenses that the Company expects to incur related to the formation of its generic Top Level Domain (“gTLD”) initiative, the Company’s guidance for the second quarter endingJune 30, 2012 and fiscal year ending December 31, 2012 is as follows:

    Second Quarter 2012

    • Revenue in the range of $89.0 – $91.0 million
    • Revenue ex-TAC in the range of $85.0 – $87.0 million
    • Adjusted EBITDA in the range of $22.0 – $23.0 million
    • Adjusted EPS in the range of $0.07 – $0.08 per share
    • Weighted average diluted shares of 86.0 – 87.0 million

    Full Year 2012

    • Revenue in the range of $361.0 – $367.0 million
    • Revenue ex-TAC in the range of $347.0 – $353.0 million
    • Adjusted EBITDA in the range of $96.0 – $99.0 million
    • Adjusted EPS in the range of $0.33 – $0.35 per share
    • Weighted average diluted shares of 86.5 – 87.5 million

    Conference Call and Webcast Information

    Demand Media will host a corresponding conference call and live webcast at 5:00 p.m. Eastern timetoday. To access the conference call, dial 877.565.1268 (for domestic participants) or 937.999.3108 (for international participants). The conference ID is 74265713. To participate on the live call, analysts should dial-in at least 10-minutes prior to the commencement of the call. A live webcast also will be available on the Investor Relations section of the Company’s corporate website at http://ir.demandmedia.com and via replay beginning approximately two hours after the completion of the call.

    About Non-GAAP Financial Measures

    To supplement our consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we use certain non-GAAP financial measures described below. The presentation of this additional financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures, please see the tables captioned “Reconciliation of Non-GAAP Measures to Unaudited Consolidated Statements of Operations” included in this release.

    Effective Q1 2012, the Company is reporting Adjusted EBITDA instead of Adjusted OIBDA. While the dollar value of each measure is the same, a comparison of the historical reconciliation of both measures is provided in our supplemental financial schedules posted on the investor relations section of our corporate site. The non-GAAP financial measures presented in this release are the primary measures used by the Company’s management and board of directors to understand and evaluate its financial performance and operating trends, including period to period comparisons, to prepare and approve its annual budget and to develop short and long term operational plans. Additionally, Adjusted EBITDA is the primary measure used by the compensation committee of the Company’s board of directors to establish the funding targets for and fund its annual employee bonus pool. We believe our presented non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision making and (2) management frequently uses them in its discussions with investors, commercial bankers, securities analysts and other users of its financial statements.

    Revenue ex-TAC is defined by the Company as GAAP revenue less traffic acquisition costs (“TAC”). TAC comprises the portion of Content & Media GAAP revenue shared with the Company’s network customers. Management believes that Revenue ex-TAC is a meaningful measure of operating performance because it is frequently used for internal managerial purposes and helps facilitate a more complete period-to-period understanding of factors and trends affecting the Company’s underlying revenue performance.

    Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) is defined by the Company as net income (loss) before income tax expense, other income (expense), interest expense (income), depreciation, amortization, stock-based compensation, as well as the financial impact of acquisition and realignment costs, the formation expenses directly related to its generic Top Level Domain (“gTLD”) initiative, and any gains or losses on certain asset sales or dispositions. Acquisition and realignment costs include such items, when applicable, as (1) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (2) legal, accounting and other professional fees directly attributable to acquisition activity, and (3) employee severance payments attributable to acquisition or corporate realignment activities. Management does not consider these expenses to be indicative of the Company’s ongoing operating results or future outlook.

    Management believes that these non-GAAP measures reflect the Company’s business in a manner that allows for meaningful period to period comparisons and analysis of trends. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period to period comparisons of the Company’s underlying recurring revenue and operating costs which is focused more closely on the current costs necessary to utilize previously acquired long-lived assets. In addition, management believes that it can be useful to exclude certain non-cash charges because the amount of such expenses is the result of long-term investment decisions in previous periods rather than day-to-day operating decisions. For example, due to the long-lived nature of a majority of its media content, the revenue generated by the Company’s content assets in a given period bears little relationship to the amount of its investment in content in that same period. Accordingly, management believes that content acquisition costs represent a discretionary long-term capital investment decision undertaken at a point in time. This investment decision is clearly distinguishable from other ongoing business activities, and its discretionary nature and long-term impact differentiate it from specific period transactions, decisions regarding day-to-day operations, and activities that would have an immediate impact on operating or financial performance if materially changed, deferred or terminated.

    Adjusted Earnings Per Share is defined by the Company as Adjusted Net Income divided by the weighted average number of shares outstanding. Adjusted Net Income is defined by the Company as net income (loss) before the effect of stock-based compensation, amortization of intangible assets acquired via business combinations, accelerated amortization of intangible assets removed from service, acquisition and realignment costs, the formation expenses directly related to its generic Top Level Domain(“gTLD”) initiative, and any gains or losses on certain asset sales or dispositions, and is calculated using the application of a normalized effective tax rate. Acquisition and realignment costs include such items, when applicable, as (1) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (2) legal, accounting and other professional fees directly attributable to acquisition activity, and (3) employee severance payments attributable to acquisition or corporate realignment activities. Management does not consider these expenses to be indicative of the Company’s ongoing operating results or future outlook.

    Management believes that Adjusted Net Income and Adjusted Earnings Per Share provide investors with additional useful information to measure the Company’s underlying financial performance, particularly from period to period, because these measures are exclusive of certain non-cash expenses not directly related to the operation of its ongoing business (such as amortization of intangible assets acquired via business combinations, as well as certain other non-cash expenses such as purchase accounting adjustments and stock-based compensation) and include a normalized effective tax rate based on the Company’s statutory tax rate.

    Discretionary Free Cash Flow is defined by the Company as net cash provided by operating activities excluding cash outflows from acquisition and realignment activities, and the formation expenses directly related to its generic Top Level Domain (“gTLD”) initiative, less capital expenditures to acquire property and equipment. Free Cash Flow is defined by the Company as Discretionary Free Cash Flow less investments in intangible assets. Management believes that Discretionary Free Cash Flow and Free Cash Flow provide investors with additional useful information to measure operating liquidity because they reflect the Company’s underlying cash flows from recurring operating activities after investing in capital assets and intangible assets. These measures are used by management, and may also be useful for investors, to assess the Company’s ability to generate cash flow for a variety of strategic opportunities, including reinvestment in the business, potential acquisitions, payment of dividends and share repurchases.

    The use of these non-GAAP financial measures has certain limitations because they do not reflect all items of income and expense, or cash flows that affect the Company’s operations. An additional limitation of these non-GAAP financial measures is that they do not have standardized meanings, and therefore other companies may use the same or similarly-named measures but exclude different items or use different computations. Management compensates for these limitations by reconciling these non-GAAP financial measures to the most comparable GAAP financial measures within its financial press releases. Non-GAAP financial measures should be considered in addition to, not as a substitute for, measures prepared in accordance with GAAP. Further, these non-GAAP financial measures may differ from the non-GAAP information used by other companies, including peer companies, and therefore comparability may be limited. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure. The accompanying tables have more details on the GAAP financial measures and the related reconciliations.

    About Demand Media

    Demand Media, Inc. (NYSE: DMD) is a leading content and social media company that informs and entertains one of the Internet’s largest audiences, helps advertisers find innovative ways to engage with their customers and enables publishers to expand their online presence. Headquartered in Santa Monica, CA, Demand Media has offices in North America, South America and Europe. For more information aboutDemand Media, please visit www.demandmedia.com

    Cautionary Information Regarding Forward-Looking Statements

    This press release contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements involve risks and uncertainties regarding the Company’s future financial performance, and are based on current expectations, estimates and projections about our industry, financial condition, operating performance and results of operations, including certain assumptions related thereto. Statements containing words such as “guidance,” “may,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” and “estimate” or similar expressions constitute forward-looking statements. Actual results may differ materially from the results predicted, and reported results should not be considered an indication of future performance. Potential risks and uncertainties include, among others: changes in the methodologies of Internet search engines, including ongoing algorithmic changes made byGoogle to its search results as well as possible future changes, and the impact such changes may have on page view growth and driving search related traffic to our owned and operated websites and the websites of our network customers; changes in our content creation and distribution platform, including the possible repurposing of content to alternate distribution channels, or the sale or removal of content; our ability to successfully launch, produce and monetize new content formats; the inherent challenges of estimating the overall impact on page views and search driven traffic to our owned and operated websites based on the data available to us as Google continues to make adjustments to its search algorithms; our ability to compete with new or existing competitors; our ability to maintain or increase our advertising revenue; our ability to continue to drive and grow traffic to our owned and operated websites and the websites of our network customers; our ability to effectively monetize our portfolio of content; our dependence on material agreements with a specific business partner for a significant portion of our revenue; future internal rates of return on content investment and our decision to invest in different types of content in the future, including video and other formats of text content; our ability to attract and retain freelance creative professionals; changes in our level of investment in media content intangibles; the effects of changes in marketing expenditures or shifts in marketing expenditures; the effects of seasonality on traffic to our owned and operated websites and the websites of our network customers; our ability to continue to add partners to our registrar platform on competitive terms; our ability to successfully pursue and implement our gTLD initiative; changes in stock-based compensation; changes in amortization or depreciation expense due to a variety of factors; potential write downs, reserves against or impairment of assets including receivables, goodwill, intangibles, and media content or other assets; changes in tax laws, our business or other factors that would impact anticipated tax benefits or expenses; our ability to successfully identify, consummate and integrate acquisitions, including integrating our recent acquisitions; our ability to retain key customers and key personnel; risks associated with litigation; the impact of governmental regulation; and the effects of discontinuing or discontinued business operations. From time to time, we may consider acquisitions or divestitures that, if consummated, could be material. Any forward-looking statements regarding financial metrics are based upon the assumption that no such acquisition or divestiture is consummated during the relevant periods. If an acquisition or divestiture were consummated, actual results could differ materially from any forward-looking statements. More information about potential risk factors that could affect our operating and financial results are contained in our annual report on Form 10-K for the fiscal year ending December 31, 2011 filed with the Securities and Exchange Commission (http://www.sec.gov) on February 24, 2012, and as such risk factors may be updated in our quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, including, without limitation, information under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

    Furthermore, as discussed above, the Company does not intend to revise or update the information set forth in this press release, except as required by law, and may not provide this type of information in the future.

    Demand Media, Inc. and Subsidiaries

    Unaudited Condensed Consolidated Statements of Operations

    (In thousands, except per share amounts)
    Three months ended March 31,
    2011 2012
    Revenue $ 79,523 $ 86,234
    Operating expenses
    Service costs (exclusive of amortization of intangible assets shown separately below) (1) (2) 37,654 41,262
    Sales and marketing (1) (2) 9,583 10,393
    Product development (1) (2) 9,251 10,124
    General and administrative (1) (2) 17,024 15,395
    Amortization of intangible assets 10,203 11,956
    Total operating expenses 83,715 89,130
    Income (loss) from operations (4,192 ) (2,896 )
    Other income (expense)
    Interest income 42 15
    Interest expense (162 ) (137 )
    Other income (expense), net (257 ) (19 )
    Total other expense (377 ) (141 )
    Income (loss) before income taxes (4,569 ) (3,037 )
    Income tax expense (1,013 ) 1,195
    Net loss $ (5,582 ) $ (1,842 )
    (1) Stock-based compensation expense included in the line items above:
    Service costs $ 237 $ 708
    Sales and marketing 900 1,536
    Product development 1,116 1,688
    General and administrative 6,674 3,459
    Total stock-based compensation expense $ 8,927 $ 7,391
    (2) Depreciation included in the line items above:
    Service costs $ 4,044 $ 3,650
    Sales and marketing 72 134
    Product development 321 282
    General and administrative 572 898
    Total depreciation $ 5,009 $ 4,964
    Loss per common share:
    Net loss $ (5,582 ) $ (1,842 )
    Cumulative preferred stock dividends (3) (2,477 ) —
    Net loss attributable to common stockholders $ (8,059 ) $ (1,842 )
    Basic and diluted net loss per share $ (0.13 ) $ (0.02 )
    Weighted average number of shares 63,759 82,942
    (3) As a result of the Company’s initial public offering which was completed on January 31, 2011, all shares of the Company’s preferred stock were converted to common stock.
    Demand Media, Inc. and Subsidiaries

    Unaudited Condensed Consolidated Balance Sheets

    (In thousands)
    December 31,
    2011    		 March 31, 
    2012
    Current assets
    Cash and cash equivalents $ 86,035 $ 95,568
    Accounts receivable, net 32,665 32,323
    Prepaid expenses and other current assets 8,656 7,995
    Deferred registration costs 50,636 56,540
    Total current assets 177,992 192,426
    Property and equipment, net 32,626 34,481
    Intangible assets, net 111,304 101,864
    Goodwill 256,060 256,060
    Deferred registration costs 9,555 11,249
    Other long-term assets 2,566 4,239
    Total assets $ 590,103 $ 600,319
    Liabilities, Convertible Preferred Stock and Stockholders’ Equity
    Current liabilities
    Accounts payable $ 10,046 $ 7,871
    Accrued expenses and other current liabilities 33,932 33,706
    Deferred tax liabilities 18,288 18,663
    Deferred revenue 71,109 76,844
    Total current liabilities 133,375 137,084
    Deferred revenue 14,802 16,540
    Other liabilities 1,660 3,160
    Total liabilities 149,837 156,784
    Stockholders’ equity
    Common stock and additional paid-in capital 528,042 536,150
    Treasury stock (17,064 ) (20,055 )
    Accumulated other comprehensive income 59 53
    Accumulated deficit (70,771 ) (72,613 )
    Total stockholders’ equity 440,266 443,535
    Total liabilities, convertible preferred stock and stockholders’ equity $ 590,103 $ 600,319
    Demand Media, Inc. and Subsidiaries

    Unaudited Condensed Consolidated Statements of Cash Flows

    (In thousands)
    Three months ended March 31,
    2011 2012
    Cash flows from operating activities:
    Net loss $ (5,582 ) $ (1,842 )
    Adjustments to reconcile net loss to net cash provided by operating activities:
    Depreciation and amortization 15,212 16,920
    Stock-based compensation 8,836 7,391
    Other 855 (1,420 )
    Net change in operating assets and liabilities, net of effect of acquisitions (101 ) (2,571 )
    Net cash provided by operating activities 19,220 18,478
    Cash flows from investing activities:
    Purchases of property and equipment (5,084 ) (4,321 )
    Purchases of intangibles (14,204 ) (2,703 )
    Cash paid for acquisitions (3,839 ) (243 )
    Net cash used in investing activities (23,127 ) (7,267 )
    Cash flows from financing activities:
    Proceeds from issuance of common stock, net 78,874 —
    Repurchases of common stock — (2,990 )
    Proceeds from exercises of stock options and contributions to ESPP 851 2,115
    Other (108 ) (796 )
    Net cash provided by (used in) financing activities 79,617 (1,671 )
    Effect of foreign currency on cash and cash equivalents 8 (7 )
    Change in cash and cash equivalents 75,718 9,533
    Cash and cash equivalents, beginning of period 32,338 86,035
    Cash and cash equivalents, end of period $ 108,056 $ 95,568
    Demand Media, Inc. and Subsidiaries

    Reconciliations of Non-GAAP Measures to Unaudited Consolidated Statements of Operations

    (In thousands, except per share amounts)
    Three months ended March 31,
    2011 2012
    Revenue ex-TAC:
    Content & Media revenue $ 51,852 $ 53,963
    Less: traffic acquisition costs (TAC) (3,190 ) (3,379 )
    Content & Media Revenue ex-TAC 48,662 50,584
    Registrar revenue 27,671 32,271
    Total Revenue ex-TAC $ 76,333 $ 82,855
    Adjusted EBITDA(1):
    Net loss $ (5,582 ) $ (1,842 )
    Income tax expense/(benefit) 1,013 (1,195 )
    Interest and other expense, net 377 141
    Depreciation and amortization(2) 15,212 16,920
    Stock-based compensation 8,927 7,391
    Acquisition and realignment costs(3) 133 61
    gTLD expense(4) — 429
    Adjusted EBITDA $ 20,080 $ 21,905
    Discretionary and Total Free Cash Flow:
    Net cash provided by operating activities $ 19,220 $ 18,478
    Purchases of property and equipment (5,084 ) (4,321 )
    gTLD expense cash flows(4) — 314
    Discretionary Free Cash Flow 14,136 14,471
    Purchases of intangible assets (14,204 ) (2,703 )
    Free Cash Flow $ (68 ) $ 11,768
    Adjusted Net Income:
    GAAP net income (loss) $ (5,582 ) $ (1,842 )
    (a) Stock-based compensation 8,927 7,391
    (b) Amortization of intangible assets – M&A 3,733 2,929
    (c) Content intangible assets removed from service(2) — 1,818
    (d) Acquisition and realignment costs(3) 133 61
    (e) gTLD expense(4) — 429
    (f) Income tax effect of items (a) – (e) & application of 38% statutory tax rate to pre-tax income (2,112 ) (4,840 )
    Adjusted Net Income $ 5,099 $ 5,946
    Non-GAAP Adjusted Net Income per share – diluted $ 0.06 $ 0.07
    Shares used to calculate non-GAAP Adjusted Net Income per share – diluted (5) 89,861 85,540
    (1) Effective Q1 2012, the Company is reporting Adjusted EBITDA instead of Adjusted OIBDA. While the dollar value of each measure does not differ, a comparison of the historical reconciliation of both measures is provided in our supplemental financial schedules posted on our investor relations site.
    (2) In conjunction with its previously announced plans to improve its content creation and distribution platform, the Company elected to remove certain content assets from service, resulting in $1.8 million of accelerated amortization expense in the first quarter of 2012.
    (3) Acquisition and realignment costs include non-cash purchase accounting adjustments, acquisition-related legal and accounting professional fees and employee severance payments attributable to corporate realignment activities. Management does not consider these costs to be indicative of the Company’s core operating results.
    (4) Comprises formation expenses directly related to the Company’s gTLDs initiative that is not expected to generate associated revenue in 2012.
    (5) Shares used to calculate non-GAAP Adjusted Net Income per share – diluted include the weighted average common stock and restricted stock for the periods presented and all dilutive common stock equivalent at each period. Amounts have been adjusted in 2011 to reflect the revised capital structure following the Company’s initial public offering which was completed on January 31, 2011, whereby the Company issued 5,175 shares of common stock and converted certain warrants and all of the convertible preferred stock into 62,155 shares of common stock as if those transactions were consummated on January 1, 2011.
    Demand Media, Inc. and Subsidiaries

    Unaudited GAAP Revenue, by Revenue Source

    (In thousands)
    Three months ended March 31,
    2011 2012
    Content & Media:
    Owned and operated websites $ 40,524 $ 39,348
    Network of customer websites   11,328   14,615
    Total revenue – Content & Media   51,852   53,963
    Registrar   27,671   32,271
    Total revenue $ 79,523 $ 86,234
    Three months ended March 31,
    2011 2012
    Content & Media:
    Owned and operated websites   51 %   46 %
    Network of customer websites   14 %   17 %
    Total revenue – Content & Media   65 %   63 %
    Registrar   35 %   37 %
    Total revenue   100 %   100 %

     

    Source: Demand Media, Inc.

  • eHow Pets YouTube Channel Launches, Continuing Demand Media’s Partnership With Google

    Demand Media debuted the latest of its new eHow YouTube channels today, eHow Pets. It’s the third of the company’s new channels created as part of Google’s new YouTube original programming initiative. The others are eHow Home and Livestrong Woman.

    “Demand Media creates high-quality content that entertains and inspires users across the web. We’ve been programming content specifically for the YouTube platform since 2007 and have grown our audience to nearly 7 million users per month, with more than 3.6 billion views,” says Demand Media EVP, Media & Marketplace, Michael Blend. “We believe YouTube’s movement towards original production and content aligns well with our mission to deliver what consumers want, and we’re pleased to be one of the leaders on this path.”

    Programming for the new channel includes shows called: Heavy Petting, Teacher’s Pet, American Dog, Smudge & Squeak (Defenders of the Flock) and Farm Raised. Hosts include: Mike Weaver, Victoria Stillwell and P. Allen Smith.

    Stilwell has hosted Animal Planet’s “It’s Me or The Dog”. Smith hosts two public television programs, and Weaver is a comedian. Demand Media says each of them works as a partner with Demand Media from the conception of new ideas to socializing content with fans (engaging them and gathering feedback).

    “YouTube is expanding our channels to bring an even broader range of entertainment to consumers. Demand Media has been a long-time partner in identifying and creating programming consumers want to see and that keeps them coming back again and again,” says Robert Kyncl, Global Head of Content Partnerships at YouTube. “For advertisers, these channels represent a new way to engage and reach their global consumers.”

    We’ve followed Demand Media pretty closely since the pre-Google Panda update days. The company, and its eHow property in particular have been focal points throughout the Panda saga, a time period which also happened to coincide with Demand Media’s IPO.

    Daniel Frankel at PaidContent makes a pretty good point in that the company has made quite a turn around, particularly in its relationship with Google. Now, Google and Demand Media were already partners before the Panda update, and when the update didn’t immediately impact eHow, there were certainly suspicions that they were getting some kind of special treatment, given that eHow appeared to be the poster child for the type of site Google claimed to be targeting with the Panda update. Eventually, however, Panda did strike at Demand and eHow, and the company initiated a major shift in strategy.

    During its last earnings call, Demand Media indicated that eHow had not been impacted by a Google algorithm change since July. The company will report its Q1 earnings on May 8. It will be interesting to hear what they have to say about it then (it usually comes up in their earnings calls).

    eHow Pets should do well. We all know how popular animal videos are on YouTube.

  • Demand Media Shares up 20%

    Demand Media, Inc., the content and social media company that operates brands including eHow and Cracked, has just seen its stock rise roughly 20% to $8.68 per share, the highest price since August. Last summer the company saw another surge in prices while discussing a $1.2 billion deal to go private with Thomas H. Lee and Partners, which never actually happened, though the company was still able to post a record 4th quarter in 2011. Stocks have now risen again upon reports from AllThingsD that the deal with Thomas H. Lee and Partners has dissolved.

    Demand Media stocks peaked at $9.51, the highest since August 15th, and gained 9% in general so far on the year. The company went public in January 2011, selling 8.9 million shares at $17 a pop, and as of April 27th, has a market value of $608 million, and will deliver its Q1 earnings report on May 8th.

    Demand Media has been expanding, and recently launched a new tech channel for its eHow brand, a top-20 internet domain in the U.S., and the entire Demand network brings in about 100 million unique users per month. And a focus on also monetizing Cracked and Livestrong.com has obviously worked. Demand Media has had some ups and downs in the last year after going public, one of which was the launch of Google’s Panda search update and it’s effect on eHow. Though, the changes haven’t seemed to have affected the Demand’s holdings on a major level.

  • eHow Launches Tech Channel, Continues Down The “Expert” Path

    Demand Media has launched a new eHow Tech channel for tips and advice for consumers from “experts” on technology topics. The company refers to it as a “Tech 101” destination, where consumers can get info for “troubleshooting most tech conundrums.”

    “More than 71 million people visit eHow each month, and by analyzing user engagement, we know there is a growing need for online help that translates complex technology problems into easy-to-understand language and straightforward directions,” said Erika Nardini, SVP of sales and marketing at Demand Media. “Last month in the U.S. alone, more than 10 million consumers visited eHow for answers to their technology-related questions. We developed eHow’s new Tech channel as part of our ongoing mission to listen to consumers and provide content that meets their needs.”

    RadioShack is currently sponsoring the channel, and Demand Media is highlighting two experts who will contribute on an ongoing basis: Digitwirl.com founder Carley Knoblock and TechnoBuffalo.com founder Jon Rettinger. The former will offer tips on things like Facebook privacy settings, creating effective tweets, etc. The latter will talk about things like 3D TVs, universal remotes, etc.

    “Technology is increasingly such a part of our day-to-day lives, but people are just too busy to read lengthy manuals – we all want technology to just work,” said Knobloch. “At eHow Tech, we aim to shorten the learning curve for people with concise, clearly explained instructions and ‘how to’ videos. Through our collaboration with RadioShack, we want to empower users to tackle any curve ball the tech world throws their way and take the anxiety out of using these gadgets we all own and love.”

    These two may not be the celebrities that Tyra Banks or Rachael Ray (two other Demand Media partners) are, but it does continue down Demand Media’s path of forming relationships with “experts” in certain areas of interest, and less of the content farm free-for-all, which became quite the controversy for the company, and ultimately led to eHow getting hit by Google’s Panda update last year.

    I’m not going to get into all of that here. We’ve covered the saga rigorously for over a year, and you can read all about the Panda update here and Demand Media’s ups and downs here.

    The company did say during an earnings call last month that eHow has not been affected by a Google algorithm change since last July.

  • Demand Media: eHow Hasn’t Been Affected By Panda Since July

    I think it’s safe to say that Demand Media has survived the Panda update. The company put out its Q4/full-year 2011 earnings report today, including a 5% quarterly increase in revenue for its content/media business and a 15% year-over-year increase. Considering the Panda update first launched just about a year ago, it hasn’t hurt Demand Media too much.

    On the company’s conference call, CEO Richard Rosenblatt said Demand Media’s first year a s public company was “more turbulent than many of us expected.”

    Still, it looks like they came out ok, even on the content side.

    “Demand Media’s record 2011 financial performance, while navigating early year search algorithm challenges, underscores the strength of our complementary advertising and subscription businesses,” said CFO Charles Hilliard. “Importantly, our fourth quarter results delivered both growth and significant free cash flow, reflecting the value of our long-lived content library as well as our disciplined investment approach.”

    Rosenblatt said on the call, that the last algorithm update to affect eHow was in July. There was in fact, a Panda update on or around July 23.

    Rosenblatt says search is still an importan traffic channel, but that social, mobile and video are growing in importance.

    He also pointed out that the company reduced eHow content production in Q4, and traffic and engagement is increasing.

    eHow’s mobile audience is up to 10 million uniques. eHow is the 19th largest web domain in the U.S., the company says, citing comScore data. Meanwhile, they emphasize that there will be a great deal of focus on monetizing Cracked and Livstrong.com this year.

    Demand Media’s properties are getting 100 million visitors per month, according to the company.

  • Demand Media: eHow Not Affected By Recent Google Update

    Demand Media released its Q3 earnings report today, including a 25% revenue increase. Also in the report, it said that eHow.com is a top 20 site in the U.S., and had 71.5 million unique users worldwide in September.

    On the earnings call, CEO Richard Rosenblatt ran down the latest on the company’s strategy, which of course consists of various content properties, social platforms, advertising and a domain registrar service. The company’s sites get 95 million uniques, he said.

    “ehow was not affected,” by Google’s most recent freshness-related algorithm, he said.

    You may recall that earlier this year, the company launched a content clean-up initiative for eHow. On the last quarter’s earnings call, the company reported that it had deleted about 300,000 eHow articles in addition to implementing its feedback tools and launching various partnerships.

    There was no update on the number of articles deleted as of today, but he did say they are continuing to take more steps to improve content quality, including evolving Demand Studios (the content creation platform), increasing the variety of content (with a wider breadth of topics), new formats (such as photo-driven articles), rigorous fact checking, improved content recommendations, and applying things learned from its other content properties like LiveStrong and Cracked (which tend to have better reputations than eHow) to eHow itself. This means taking select passion areas and tapping different kinds of content formats.

    He said they’re reducing the volume of new text content by over 50%. That’s in line with the recent (controversial) reduction in article assignments the company announced.

    Rosenblatt also noted that they’re looking at expanding more internationally, adding that in the last two months, they launched eHow en Espanol and eHow Brazil.

    The subject of that recent traffic glitch did come up. Rosenblatt reiterated that this was just a temporary technical server-related glitch that shouldn’t happen again. Everything was recovered.

    The company has also emphasized its growing investment in video, including new YouTube channels, which they’ll start launching content for in early 2012.

    About 33% of Q3’s revenue came from Google.

  • Demand Media Q3 Earnings Released

    Demand Media Q3 Earnings Released

    Demand Media released its earnings report for the third quarter. That includes a revenue increase of 25% (ex-TAC up 26% year-over-year) to $81.5 million for the quarter, compared to $65.4 million a year ago.

    “We reported another strong quarter as we continue to build Demand Media’s foundation for long-term growth,” said CEO Richard Rosenblatt. “The Company is uniquely positioned to deliver data-driven professional content through its robust content publishing platform. We are now in the process of optimizing that platform while increasing our investment in video content and enhancing the quality, engagement and user experience of our sites.”

    The report points out that last month, YouTube announced an original Channels initiative launching in 2012. Demand Media will be partnering with YouTube on three of these channels: eHow Home, eHow Pets & Animals, and LIVESTRONG.

    eHow.com, the company says, is a top 20 site in the U.S., and had 71.5 million unique users worldwide in September.

    The last time we talked to Demand Media, they told us they would have a progress report on the eHow quality clean-up initiative during today’s earnings call. We’ll see what more they have to say.

    The call is scheduled for 5:00 Eastern. Stay tuned to WebProNews.

    Here’s the release in its entirety:

     

    Demand Media Reports Third Quarter 2011 Financial Results

    • Revenue Increases 25% and Revenue ex-TAC1 Grows 26% Year-over-Year
    • Cash Flow from Operations up 36% Year-over-Year
    • Adjusted OIBDA Increases 33% Year-over-Year

    SANTA MONICA, Calif., Nov 07, 2011 (BUSINESS WIRE) —

    Demand Media, Inc. (NYSE: DMD), a leading content and social media company, today reported financial results for the quarter ended September 30, 2011.

     

    Q311 Financial Summary:

    GAAP

     

    • Revenue increased 25% to $81.5 million, compared with $65.4 million in Q310.
    • Loss from operations of $(3.3) million compared with income from operations of $0.9 million in Q310.
    • Net loss of $(4.1) million compared with a net loss of $(0.3) million in Q310. Net loss per share of $(0.05) compared with $(0.64) in Q310.
    • Cash flow from operations grew 36% to $22.1 million, from $16.3 million in Q310.

     

    Non-GAAP1

     

    • Revenue ex-TAC increased 26% to $78.1 million, from $62.2 million in Q310.
    • Adjusted OIBDA grew 33% to $21.7 million, or 27.7% of Revenue ex-TAC, compared with $16.3 million, or 26.2% of Revenue ex-TAC, in Q310.
    • Adjusted Net Income of $5.0 million increased 12% compared with $4.5 million in Q310. Adjusted Net Income per share – diluted of $0.06, grew 20% compared with $0.05 in Q310.
    • Discretionary Free Cash Flow increased 116% to $19.9 million compared with $9.2 million in Q310.
    • Free Cash Flow of $6.0 million compared with $(4.0) million in Q310.

     

    “We reported another strong quarter as we continue to build Demand Media’s foundation for long-term growth,” said Richard Rosenblatt, Chairman and CEO of Demand Media. “The Company is uniquely positioned to deliver data-driven professional content through its robust content publishing platform. We are now in the process of optimizing that platform while increasing our investment in video content and enhancing the quality, engagement and user experience of our sites.”

    ____________________

    1 Non-GAAP measures are described below and are reconciled to the corresponding GAAP measures in the accompanying tables.

    Q311 Financial Highlights:

     

    • Content & Media Revenue increased 27% to $50.7 million, compared with $39.8 million in Q310.
    • Traffic acquisition costs (TAC), which represent the portion of Content & Media revenue shared with Demand Media partners, of $3.4 million, or 6.7% of Content & Media revenue, compared with $3.2 million, or 7.9% of Content & Media revenue, in Q310.
    • Content & Media Revenue ex-TAC grew 29% to $47.4 million, from $36.7 million in Q310.
    • Registrar Revenue increased 20% to $30.7 million compared with $25.5 million in Q310.
    • Investment in Intangible Assets of $13.9 million increased 5% from $13.3 million in Q310.

     

    “With consistent traffic trends to our Owned & Operated properties in Q3, we are pleased to report that we achieved our financial objectives in a challenged economic environment and generated $6.0 million of free cash flow during the quarter,” said Demand Media’s President and CFO Charles Hilliard.

    Q311 Business Highlights and Recent Developments:

    Content

     

    • In October 2011, YouTube announced an original Channels initiative launching in 2012. Demand Media will be partnering with YouTube on three of these channels: eHow Home, eHow Pets & Animals, andLIVESTRONG.
    • eHow.com is a top 20 website in the US, and had 71.5 million unique users worldwide in September 2011, according to comScore.
    • LIVESTRONG.COM‘s traffic and engagement continues to grow, with 9.5 million unique US users in September 2011, up 87% year-over-year, according to comScore. In September, the Company re-launched LIVESTRONG.COM to deliver distinct content for men and women and to introduce a new advisory board comprised of well-known nutritionists, fitness gurus and doctors.
    • Cracked.com was the most visited humor site in the US in September 2011, and its audience spent more time on the site than the other top five comedy sites combined, according to comScore. Cracked’s Facebook fans have grown to more than 1.8 million today.

     

    Advertising

     

    • Demand Media has integrated IndieClick, which the Company acquired in August 2011, into its brand advertising sales capabilities. IndieClick helps advertisers reach the highly sought after 18-34 year old demographic through innovative ad formats – including rich media, video, mobile and social media – that are integrated onto carefully selected destinations.

     

    Social

     

    • The Company has integrated RSS Graffiti, which it acquired in August 2011 to expand its social content capabilities. During September 2011, over 800,000 brands, online publishers and individuals shared nearly 80 million pieces of content with their friends and fans using the RSS Graffiti social publishing application, up from over 600,000 brands, online publishers and individuals, and more than 60 million pieces of content in July 2011.

     

    Share Repurchase

     

    • On August 19, 2011, the Company announced a $25 million repurchase program authorized by its Board of Directors. Through September 30, 2011, the Company repurchased approximately 456,000 shares of common stock for approximately $3.6 million.

     

    Operating Metrics:

    Three months ended
    September 30,    		 Nine months ended
    September 30,
    2010 2011 %
    Change    		 2010 2011 %
    Change
    Content & Media Metrics:
    Owned and operated
    Page views(1) (in millions) 2,085 2,527 21 % 6,033 7,682 27 %
    RPM(2) $ 14.08 $ 15.16 8 % $ 12.59 $ 15.35 22 %
    Network of customer websites
    Page views(1)(6)(in millions) 3,490 5,046 45 % 9,289 12,501 35 %
    RPM(2) $ 3.00 $ 2.47 (18 )% $ 3.24 $ 2.76 (15 )%
    RPM ex-TAC(3) $ 2.10 $ 1.80 (14 )% $ 2.28 $ 2.01 (12 )%
    Registrar Metrics:
    End of Period # of Domains(4) (in millions) 10.6 12.2 15 % 10.6 12.2 15 %
    Average Revenue per Domain(5) $ 9.87 $ 10.20 3 % $ 9.92 $ 10.12 2 %

    ____________________

    (1) Page views represent the total number of web pages viewed across (1) our owned and operated websites and/or (2) our network of customer websites, to the extent that the viewed customer web pages host the Company’s monetization, social media and/or content services.

    (2) RPM is defined as Content & Media revenue per one thousand page views.

    (3) RPM ex-TAC is defined as Content & Media Revenue ex-TAC per one thousand page views.

    (4) Domain is defined as an individual domain name paid for by a third-party customer where the domain name is managed through our Registrar service offering. Beginning July 1, 2011, the number of net new domains has been adjusted to include only new registered domains added to our platform for which the Company has recognized revenue. Excluding the impact of this change, end of period domains at September 30, 2011 would have increased 25% compared to the corresponding prior-year periods.

    (5) Average revenue per domain is calculated by dividing Registrar revenue for a period by the average number of domains registered in that period. Average revenue per domain for partial year periods is annualized. Beginning July 1, 2011, the number of net new domains has been adjusted to include only new registered domains added to our platform for which the Company has recognized revenue. Excluding the impact of this change, average revenue per domain during the three and nine months ended September 30, 2011 would have decreased 1% and 2%, respectively, compared to the corresponding prior-year periods.

    (6) The Company acquired IndieClick on August 8, 2011, which contributed 1,516 million page views during the quarter and nine months ended September 30, 2011.

    Business Outlook

    The following forward-looking information includes certain projections made by management as of the date of this press release. The Company does not intend to revise or update this information, except as required by law, and may not provide this type of information in the future. Due to a variety of factors, actual results may differ significantly from those projected. The factors that may affect results include, without limitation, the factors referenced later in this announcement under the caption “Cautionary Information Regarding Forward-Looking Statements.” These and other factors are discussed in more detail in the Company’s filings with the Securities and Exchange Commission.

    Below is the Company’s guidance for the quarter and fiscal year ending December 31, 2011.

    (In millions) Fourth Quarter2011 Fiscal Year2011
    Revenue $83.0 – $87.0 $323.4 – $327.4
    TAC (traffic acquisition costs) $4.5 $13.8
    Revenue ex-TAC $78.5 – $82.5 $309.6 – $313.6
    Income (loss) from operations $(0.6) – $0.7 $(9.0) – $(7.5)
    Depreciation $4.9 $20.8
    Amortization of intangible assets (1) $10.2 $41.0
    Stock-based compensation $7.5 $29.6
    Acquisition and realignment costs(2) $0.3 $2.1
    Adjusted OIBDA $22.3 – $23.8 $84.5 – $86.0
    Weighted average diluted shares(3) 88.0 – 89.0 88.0 – 89.0

    ____________________

    (1) The Company is currently evaluating potential changes to its content creation and distribution platform, including repurposing a portion of its content to alternate distribution channels, selling such content, and/or removing such content. The Company intends to implement such changes, if any, only to the extent it believes that their collective impact will improve the customer experience and/or increase the future overall revenue generated from its existing portfolio of media content. If these discretionary changes are implemented, it is possible that they could adversely impact the book value of some individual units of media content, the effect of which could result in higher amortization expense in the fourth quarter of 2011. Excluded from guidance above is any incremental amortization expense, currently anticipated to be less than 10% of the carrying value of the Company’s content assets at September 30, 2011, associated with these potential decisions that are expected to be made by December 31, 2011.

    (2) Acquisition and realignment costs include non-cash purchase accounting adjustments, acquisition-related legal and accounting professional fees and employee severance payments attributable to corporate realignment activities. Management does not consider these expenses to be indicative of the Company’s core operating results.

    (3) Weighted average diluted shares include the weighted average common stock and restricted stock for the periods presented and all dilutive common stock equivalents in each period. Fiscal year 2011 amounts have been adjusted to reflect the revised capital structure following the Company’s initial public offering, which was completed on January 31, 2011, whereby the Company issued 5.2 million shares of common stock and converted certain warrants and all of its convertible preferred stock into 62.2 million shares of common stock as if those transactions were consummated on January 1, 2011.

    Conference Call and Webcast Information

    Demand Media will host a corresponding conference call and live webcast at 5:00 p.m. Eastern time today. To access the conference call, dial 877.565.1265 (for domestic participants) or 937.999.3108 (for international participants). The conference ID is 19999778. To participate on the live call, analysts should dial-in at least 10-minutes prior to the commencement of the call. A live webcast also will be available on the Investor Relations section of the Company’s corporate website at http://ir.demandmedia.com and via replay beginning approximately two hours after the completion of the call. An audio replay of the call will also be available to investors beginning at approximately 6:00 p.m. Eastern on November 7, 2011 until 11:59 p.m. Eastern on November 9, 2011, by dialing 855.859.2056 (for the U.S. and Canada) or 404.537.3406 (for international callers) and entering passcode 19999778.

    About Non-GAAP Financial Measures

    To supplement our consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we use certain non-GAAP financial measures described below. The presentation of this additional financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures, please see the tables captioned “Reconciliation of Non-GAAP Measures to Unaudited Consolidated Statements of Operations” included at the end of this release.

    The non-GAAP financial measures presented are the primary measures used by the Company’s management and board of directors to understand and evaluate its financial performance and operating trends, including period to period comparisons, to prepare and approve its annual budget and to develop short and long term operational plans. Additionally, Adjusted OIBDA is the primary measure used by the compensation committee of the Company’s board of directors to establish the target for and fund its annual employee bonus pool. We believe these non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision making and (2) management frequently uses them in its discussions with investors, commercial bankers, securities analysts and other users of its financial statements.

    Revenue ex-TAC is defined by the Company as GAAP revenue less traffic acquisition costs (TAC). TAC comprises the portion of Content & Media GAAP revenue shared with the Company’s network customers. Management believes that Revenue ex-TAC is a meaningful measure of operating performance because it is frequently used for internal managerial purposes and helps facilitate a more complete period-to-period understanding of factors and trends affecting the Company’s underlying revenue performance.

    Adjusted operating income before depreciation and amortization (“Adjusted OIBDA”) is defined by the Company as operating income (loss) before depreciation, amortization, stock-based compensation, as well as the financial impact of acquisition and realignment costs, and any gains or losses on certain asset sales or dispositions. Acquisition and realignment costs include such items, when applicable, as (1) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (2) legal, accounting and other professional fees directly attributable to acquisition activity, and (3) employee severance payments attributable to acquisition or corporate realignment activities. Management does not consider these expenses to be indicative of the Company’s ongoing operating results or future outlook.

    Management believes that this non-GAAP measure reflects the Company’s business in a manner that allows for meaningful period to period comparisons and analysis of trends. In particular, the exclusion of certain expenses in calculating Adjusted OIBDA can provide a useful measure for period to period comparisons of the Company’s underlying recurring revenue and operating costs which is focused more closely on the current costs necessary to utilize previously acquired long-lived assets. In addition, management believes that it can be useful to exclude certain non-cash charges because the amount of such expenses is the result of long-term investment decisions in previous periods rather than day-to-day operating decisions. For example, due to the long-lived nature of a majority of its media content, the revenue generated by the Company’s content assets in a given period bears little relationship to the amount of its investment in content in that same period. Accordingly, management believes that content acquisition costs represent a discretionary long-term capital investment decision undertaken at a point in time. This investment decision is clearly distinguishable from other ongoing business activities, and its discretionary nature and long-term impact differentiate it from specific period transactions, decisions regarding day-to-day operations, and activities that would have an immediate impact on operating or financial performance if materially changed, deferred or terminated.

    Adjusted Net Income is defined by the Company as net income (loss) before the effect of stock-based compensation, amortization of intangible assets acquired via business combinations and acquisition and realignment costs, and any gains or losses on certain asset sales or dispositions, and is calculated using the application of a normalized effective tax rate. Acquisition and realignment costs include such items, when applicable, as (1) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (2) legal, accounting and other professional fees directly attributable to acquisition activity, and (3) employee severance payments attributable to acquisition or corporate realignment activities. Management does not consider these expenses to be indicative of the Company’s ongoing operating results or future outlook.

    Management believes that Adjusted Net Income and Adjusted Net Income per share provide investors with additional useful information to measure the Company’s underlying financial performance, particularly from period to period, because these measures are exclusive of certain non-cash expenses not directly related to the operation of its ongoing business (such as amortization of intangible assets acquired via business combinations, as well as certain other non-cash expenses such as purchase accounting adjustments and stock-based compensation) and include a normalized effective tax rate based on the Company’s statutory tax rate.

    Discretionary Free Cash Flow is defined by the Company as net cash provided by operating activities excluding cash outflows from acquisition and realignment activities, less capital expenditures to acquire property and equipment. Free Cash Flow is defined by the Company as net cash provided by operating activities excluding cash outflows from acquisition and realignment activities, less capital expenditures to acquire property and equipment and less investments in intangible assets. Management believes that Discretionary Free Cash Flow and Free Cash Flow provide investors with additional useful information to measure operating liquidity because they reflect the Company’s underlying cash flows from recurring operating activities after investing in capital assets and intangible assets. These measures are used by management, and may also be useful for investors, to assess the Company’s ability to generate cash flow for a variety of strategic opportunities, including reinvestment in the business, potential acquisitions, payment of dividends and share repurchases.

    The use of these non-GAAP financial measures has certain limitations because they do not reflect all items of income and expense, or cash flows that affect the Company’s operations. An additional limitation of these non-GAAP financial measures is that they do not have standardized meanings, and therefore other companies may use the same or similarly-named measures but exclude different items or use different computations. Management compensates for these limitations by reconciling these non-GAAP financial measures to the most comparable GAAP financial measures within its financial press releases. These non-GAAP financial measures should be considered in addition to, not as a substitute for, measures prepared in accordance with GAAP. Further, these non-GAAP financial measures may differ from the non-GAAP information used by other companies, including peer companies, and therefore comparability may be limited. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure. The accompanying tables have more details on the GAAP financial measures and the related reconciliations.

    About Demand Media

    Demand Media, Inc. (NYSE: DMD) is a leading content and social media company. Through brands like eHow, LIVESTRONG.COM, Cracked and typeF, Demand Media informs and entertains one of the Internet’s largest audiences, helps advertisers find innovative ways to engage with their customers and enables publishers to expand their online presence. Headquartered in Santa Monica, CA, Demand Media has offices in Kirkland, WA; Austin, TX; Chicago, IL; New York, NY; London, UK; and Buenos Aires, AR. For more information about Demand Media, visit: www.demandmedia.com.

    Cautionary Information Regarding Forward-Looking Statements

    This press release contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended.These forward-looking statements involve risks and uncertainties regarding the Company’s future financial performance, and are based on current expectations, estimates and projections about our industry, financial condition, operating performance and results of operations, including certain assumptions related thereto.Statements containing words such as “guidance,” “may,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” and “estimate” or similar expressions constitute forward-looking statements.Actual results may differ materially from the results predicted, and reported results should not be considered an indication of future performance. Potential risks and uncertainties include, among others: changes in the methodologies of Internet search engines, including ongoing algorithmic changes made by Google to its search results as well as possible future changes, and the impact such changes may have on page view growth and driving search related traffic to our owned and operated websites and the websites of our network customers; changes in our content creation and distribution platform, including the possible repurposing of content to alternate distribution channels, or sale or removal of content; the inherent challenges of estimating the overall impact on page views and search driven traffic to our owned and operated websites based on the data available to us as Google continues to make adjustments to its search algorithms; our ability to compete with new or existing competitors; our ability to maintain or increase our advertising revenue; our ability to continue to drive and grow traffic to our owned and operated websites and the websites of our network customers; our ability to effectively monetize our portfolio of content; our dependence on material agreements with a specific business partner for a significant portion of our revenue; future internal rates of return on content investment and our decision to invest in different types of content in the future, including video and other formats of text content; our ability to attract and retain freelance content creators; changes in our level of investment in media content intangibles; the effects of changes in marketing expenditures or shifts in marketing expenditures; the effects of seasonality on traffic to our owned and operated websites and the websites of our network customers; changes in stock-based compensation; changes in amortization or depreciation expense due to a variety of factors; potential write downs, reserves against or impairment of assets including receivables, goodwill, intangibles, and media content or other assets; changes in tax laws, our business or other factors that would impact anticipated tax benefits or expenses; our ability to successfully identify, consummate and integrate acquisitions, including integrating our recent acquisitions; our ability to retain key customers and key personnel; risks associated with litigation; the impact of governmental regulation; and the effects of discontinuing or discontinued business operations.From time to time, we may consider acquisitions or divestitures that, if consummated, could be material.Any forward-looking statements regarding financial metrics are based upon the assumption that no such acquisition or divestiture is consummated during the relevant periods.If an acquisition or divestiture were consummated, actual results could differ materially from any forward-looking statements.More information about potential risk factors that could affect our operating and financial results are contained in our annual report on Form 10-K for the fiscal year ending December 31, 2010 filed with the Securities and Exchange Commission (http://www.sec.gov) on March 1, 2011, and as such risk factors may be updated in our quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, including, without limitation, information under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

    Furthermore, as discussed above, the Company does not intend to revise or update the information set forth in this press release, except as required by law, and may not provide this type of information in the future.

    Demand Media, Inc. and Subsidiaries
    Unaudited Condensed Consolidated Statements of Operations
    (In thousands, except per share amounts)
    Three months ended
    September 30,    		 Nine months ended
    September 30,
    2010 2011 2010 2011
    Revenue $ 65,355 $ 81,473 $ 179,357 $ 240,451
    Operating expenses
    Service costs (exclusive of amortization of intangible assets shown separately below) (1) (2) 33,474 40,109 95,209 115,632
    Sales and marketing (1) (2) 6,409 9,200 16,805 28,069
    Product development (1) (2) 6,622 9,791 19,136 28,684
    General and administrative (1) (2) 9,595 14,837 27,035 45,648
    Amortization of intangible assets 8,309 10,828 24,482 30,781
    Total operating expenses 64,409 84,765 182,667 248,814
    Income (loss) from operations 946 (3,292 ) (3,310 ) (8,363 )
    Other income (expense)
    Interest income 8 5 19 52
    Interest expense (168 ) (385 ) (517 ) (710 )
    Other income (expense), net (36 ) (79 ) (164 ) (338 )
    Total other expense (196 ) (459 ) (662 ) (996 )
    Income (loss) before income taxes 750 (3,751 ) (3,972 ) (9,359 )
    Income tax expense (1,055 ) (394 ) (2,382 ) (2,739 )
    Net loss $ (305 ) $ (4,145 ) $ (6,354 ) $ (12,098 )
    (1) Stock-based compensation expense included in the line items above:
    Service costs $ 235 $ 757 $ 663 $ 1,341
    Sales and marketing 653 1,405 1,621 3,441
    Product development 441 1,403 1,216 3,649
    General and administrative 1,043 4,190 3,643 13,671
    Total stock-based compensation expense $ 2,372 $ 7,755 $ 7,143 $ 22,102
    (2) Depreciation included in the line items above:
    Service costs $ 3,598 $ 4,112 $ 10,424 $ 12,305
    Sales and marketing 46 109 128 296
    Product development 337 399 996 1,158
    General and administrative 494 683 1,415 2,133
    Total depreciation $ 4,475 $ 5,303 $ 12,963 $ 15,892
    Loss per common share:
    Net loss $ (305 ) $ (4,145 ) $ (6,354 ) $ (12,098 )
    Cumulative preferred stock dividends (3) (8,443 ) — (24,649 ) (2,477 )
    Net loss attributable to common stockholders $ (8,748 ) $ (4,145 ) $ (31,003 ) $ (14,575 )
    Basic and diluted net loss per share $ (0.64 ) $ (0.05 ) $ (2.32 ) $ (0.19 )
    Weighted average number of shares 13,698 83,934 13,350 77,001

    ____________________

    (3) As a result of the Company’s initial public offering which was completed on January 31, 2011, all shares of the Company’s preferred stock were converted to common stock.

    Demand Media, Inc. and Subsidiaries
    Unaudited Condensed Consolidated Balance Sheets
    (In thousands)
    December 31,
    2010    		 September 30,
    2011
    Current assets
    Cash and cash equivalents $ 32,338 $ 79,154
    Accounts receivable, net 26,843 32,972
    Prepaid expenses and other current assets 7,360 9,548
    Deferred registration costs 44,213 48,816
    Total current assets 110,754 170,490
    Property and equipment, net 34,975 34,044
    Intangible assets, net 102,114 122,920
    Goodwill 224,920 256,151
    Deferred registration costs 8,037 9,127
    Other long-term assets 7,667 3,489
    Total assets $ 488,467 $ 596,221
    Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit)
    Current liabilities
    Accounts payable $ 8,330 $ 8,375
    Accrued expenses and other current liabilities 29,570 35,224
    Deferred tax liabilities 15,248 17,882
    Deferred revenue 61,832 67,723
    Total current liabilities 114,980 129,204
    Deferred revenue 14,106 14,431
    Other liabilities 1,043 1,774
    Total liabilities 130,129 145,409
    Convertible preferred stock
    Total convertible preferred stock 373,754 —
    Stockholders’ equity (deficit)
    Common stock and additional paid-in capital 36,723 515,079
    Accumulated other comprehensive income 108 78
    Accumulated deficit (52,247 ) (64,345 )
    Total stockholders’ equity (deficit) (15,416 ) 450,812
    Total liabilities, convertible preferred stock and stockholders’ equity (deficit) $ 488,467 $ 596,221
    Demand Media, Inc. and Subsidiaries
    Unaudited Condensed Consolidated Statements of Cash Flows
    (In thousands)
    Three months ended
    September 30,    		 Nine months ended
    September 30,
    2010 2011 2010 2011
    Cash flows from operating activities:
    Net loss $ (305 ) $ (4,145 ) $ (6,354 ) $ (12,098 )
    Adjustments to reconcile net loss to net cash provided by operating activities:
    Depreciation and amortization 12,784 16,131 37,445 46,673
    Stock-based compensation 2,281 7,727 6,859 21,989
    Other 978 294 2,259 2,363
    Net change in operating assets and liabilities, net of effect of acquisitions 532 2,050 483 (802 )
    Net cash provided by operating activities 16,270 22,057 40,692 58,125
    Cash flows from investing activities:
    Purchases of property and equipment (7,038 ) (3,194 ) (16,540 ) (14,024 )
    Purchases of intangibles (13,260 ) (13,927 ) (34,401 ) (43,989 )
    Proceeds from maturities and sales of marketable securities, net — — 2,300 —
    Cash paid for acquisitions — (27,133 ) — (30,972 )
    Net cash used in investing activities (20,298 ) (44,254 ) (48,641 ) (88,985 )
    Cash flows from financing activities:
    Payment of debt — — (10,000 ) —
    Proceeds from issuance of common stock, net — — 78,625
    Repurchases of common stock — (3,728 ) — (3,728 )
    Proceeds from exercises of stock options 314 2,832 1,028 4,357
    Other (614 ) (1,332 ) (1,395 ) (1,547 )
    Net cash provided by (used in) financing activities (300 ) (2,228 ) (10,367 ) 77,707
    Effect of foreign currency on cash and cash equivalents (3 ) (23 ) (62 ) (31 )
    Change in cash and cash equivalents (4,331 ) (24,448 ) (18,378 ) 46,816
    Cash and cash equivalents, beginning of period 33,561 103,602 47,608 32,338
    Cash and cash equivalents, end of period $ 29,230 $ 79,154 $ 29,230 $ 79,154
    Demand Media, Inc. and Subsidiaries
    Reconciliations of Non-GAAP Measures to Unaudited Consolidated Statements of Operations
    (In thousands, except per share amounts)
    Three months ended
    September 30,    		 Nine months ended
    September 30,
    2010 2011 2010 2011
    Revenue ex-TAC:
    Content & Media revenue $ 39,818 $ 50,744 $ 106,109 $ 152,418
    Less: traffic acquisition costs (TAC) (3,155 ) (3,381 ) (8,912 ) (9,384 )
    Content & Media Revenue ex-TAC 36,663 47,363 97,197 143,034
    Registrar revenue 25,537 30,729 73,248 88,033
    Total Revenue ex-TAC $ 62,200 $ 78,092 $ 170,445 $ 231,067
    Adjusted OIBDA:
    Income (loss) from operations $ 946 $ (3,292 ) $ (3,310 ) $ (8,363 )
    Depreciation 4,475 5,303 12,963 15,892
    Amortization of intangible assets 8,309 10,828 24,482 30,781
    Stock-based compensation 2,372 7,755 7,143 22,102
    Acquisition and realignment costs(1) 191 1,058 616 1,828
    Adjusted OIBDA $ 16,293 $ 21,652 $ 41,894 $ 62,240
    Discretionary and Total Free Cash Flow:
    Net cash provided by operating activities $ 16,270 $ 22,057 $ 40,692 $ 58,125
    Purchases of property and equipment (7,038 ) (3,194 ) (16,540 ) (14,024 )
    Acquisition and realignment cash flows — 1,068 — 1,068
    Discretionary Free Cash Flow 9,232 19,931 24,152 45,169
    Purchases of intangible assets (13,260 ) (13,927 ) (34,401 ) (43,989 )
    Free Cash Flow $ (4,028 ) $ 6,004 $ (10,249 ) $ 1,180
    Adjusted Net Income:
    GAAP net income (loss) $ (305 ) $ (4,145 ) $ (6,354 ) $ (12,098 )
    (a) Stock-based compensation 2,372 7,755 7,143 22,102
    (b) Amortization of intangible assets – M&A 3,880 2,969 12,818 9,799
    (c) Acquisition and realignment costs(1) 191 1,058 616 1,828
    (d) Income tax effect of items (a) – (c) & application of 38% statutory tax rate to pre-tax income (1,678 ) (2,658 ) (3,928 ) (6,521 )
    Adjusted Net Income $ 4,460 $ 4,979 $ 10,295 $ 15,110
    Non-GAAP Adjusted Net Income per share – diluted $ 0.05 $ 0.06 $ 0.12 $ 0.17
    Shares used to calculate non-GAAP Adjusted Net Income per share – diluted (2) 87,224 87,973 85,869 89,098

    ___________________

    (1) Acquisition and realignment costs include non-cash purchase accounting adjustments, acquisition-related legal and accounting professional fees and employee severance payments attributable to corporate realignment activities. Management does not consider these costs to be indicative of the Company’s core operating results.

    (2) Shares used to calculate non-GAAP Adjusted Net Income per share – diluted include the weighted average common stock and restricted stock for the periods presented and all dilutive common stock equivalent at each period. Amounts have been adjusted in all periods to reflect the revised capital structure following the Company’s initial public offering which was completed on January 31, 2011, whereby the Company issued 5,175 shares of common stock and converted certain warrants and all of the convertible preferred stock into 62,155 shares of common stock as if those transactions were consummated on January 1, 2010.

    Demand Media, Inc. and Subsidiaries
    Unaudited GAAP Revenue, by Revenue Source
    (In thousands)
    Three months ended
    September 30,    		 Nine months ended
    September 30,
    2010 2011 2010 2011
    Content & Media:
    Owned and operated websites $ 29,347 $ 38,298 $ 75,983 $ 117,917
    Network of customer websites 10,471 12,446 30,126 34,501
    Total revenue – Content & Media 39,818 50,744 106,109 152,418
    Registrar 25,537 30,729 73,248 88,033
    Total revenue $ 65,355 $ 81,473 $ 179,357 $ 240,451
    Three months ended
    September 30,    		 Nine months ended
    September 30,
    2010 2011 2010 2011
    Content & Media:
    Owned and operated websites 45 % 47 % 42 % 49 %
    Network of customer websites 16 % 15 % 17 % 14 %
    Total revenue – Content & Media 61 % 62 % 59 % 63 %
    Registrar 39 % 38 % 41 % 37 %
    Total revenue 100 % 100 % 100 % 100 %

     

  • eHow Suffers Temporary Traffic Glitch

    eHow Suffers Temporary Traffic Glitch

    Demand Media announced that eHow’s traffic experienced a decline, but that the company believes this “is temporary and was the result of an internal technical issue.”

    “The technical issue has recently been remediated,” the company said, indicating this was not Panda-related. According to Business Insider, citing a “source familiar with the situation,” eHow’s traffic is already on the mend since the glitch was fixed.

    The incident evidently had a negative effect on the company’s stock, but today, it’s on the way up. At the time of this writing, it’s up +0.19 at 5.83.

    As you may know, over the last couple weeks, the company told writers it would be making less assignments available, and a new program called “First Look” was announced. This gives its highest rated writers first dibs on writing assignments.

    Both moves are extensions of the company’s broader eHow clean-up initiative, which was revealed earlier this year. At last count, the company had deleted 300,000 articles. They also implemented a user feedback system designed to help them improve articles when the response is negative.

    Demand has told us that it’s pleased with the progress of the clean-up initiative. We should hear more about all of this and its progress when the company has its earnings call next month.

    Demand Media will report its third quarter earnings on November 7.

  • Demand Media Giving Top Writers Assignment Priority

    Demand Media Giving Top Writers Assignment Priority

    Demand Media is no stranger to controversy, and while the company has clearly taken a much firmer stance on content quality this year, it’s leaving some writers lacking a significant source of income.

    Editor’s note: This article has been updated from its original form. Just so everything’s clear right up front: Demand Media does have a new program called “First Look” but the company says another program that’s been discussed in various reader comments, “eHow Select” is “a scam”. Please see the end of the article for statements from Demand Media.

    The company recently announced it would be cutting down on the number of writing assignments – something that a lot of writers will tell you was already happening. Now, it looks like it will be harder than ever for some of these writers to get their hands on assignments.

    The email indicates that Demand is implementing a new program that gives its “highest-rated writer” first dibs on new assignments.

    Thanks to reader Kim for sharing the email:

    Studio Writers,

    We are excited to announce a new program called First Look. It is intended to reward our highest-rated writers by giving them the first look at new titles. Starting this week, the highest-rated writers will have advanced access to view and claim new assignments for 48 hours before they are released into the Find Assignments pool. 

    We’ve all invested a lot and we want to further reward writers who best exemplify the attributes of good writing. The eligible group will be those writers who maintain an average structure of 4.0 or higher for their last 50 articles.

    The score will be recalculated with every new article. While we plan to add this updated score to your Work Desk, it will not be immediately visible. We may also at some point modify this method of calculation. If your average falls below 4.0, you will lose First Look privileges until you bring your score back within the qualifying range.

    In an attempt to be mindful and fair to all eligible writers, all writers’ assignment claim limits will be set to 10. As with the current system, once you submit an article, you may claim another assignment. We will notify those writers eligible for First Look via email. All changes will go into effect in the next few days.

    We will continue to listen to your feedback and invest in programs like this. Please visit this forum thread if you have any questions
    Thanks,

    Jeremy Reed, SVP Editorial

    Update: There was some question about the legitimacy of the email at first, as we had some trouble getting confirmation from Demand Media (which is not typical), but Noah Davis at Business Insider says he’s been able to confirm it, though he says too in his own article that he’s so far been unable to get further comment from the company thus far.

    Information about the “First Look” program is scarce on the web. There is not even a post about it on the Demand Studios blog.

    Finally, another reader, Geoff, shared a different email allegedly from eHow about something called “eHow Select”. This one says:

    Dear eHow Select writers,
    On behalf of the eHow Select project team, I would like to thank you for the articles submitted to the program so far. We are all extremely proud to be working with such a dedicated and passionate team of writers, as evidenced by the lowest rewrite and rejection percentages among all eHow sections.
    Based on those encouraging numbers and on several other factors, we have decided to introduce a new feature that will allow you to nominate other writers for future inclusion in the program. At the bottom of each article published on eHow, you will now find a “Nominate” link that allows you, in effect, to vote for its author. The portfolio of writers who have been nominated by current eHow Select members will be reviewed by our team and, if their portfolio meets our quality standards, may be given access to eHow Select.
    This new feature, however, does not affect the current recruitment procedure. Our team will continue to review non-nominated writers, as well as applications made through the HelpDesk.
    We would also like to remind you of the confidentiality of the project. As outlined in the guidelines that were sent to you, discussing the project on third-party websites or in the general sections of the Demand Studios forums can lead to having your eHow Select privileges revoked.
    Lydia
Content Manager eHow Select

    Geoff says, “More proof that Demand Media deliberately LIES to its writers. It has a section called eHow Select that the company pretends doesn’t exist, yet it has many assignments available. DMS forbids the writers within this section from telling other writers about it. This at a time when most sections over at Demand have zero titles for writers to write.”

    Some replies to this comment indicate that this email was fabricated to make DM look bad. Others are defending it.

    At this point, it’s looking like the First Look program is legit, but questions remain about the eHow Select email.

    We will update as soon as we get response from Demand Media.

    Update: Demand Media’s Kristen Moore tells us about First Look:

    “We’ve just announced First Look to our writing community, and the formal launch is planned for tomorrow. In short it’s a program that allows us to reward our highest rated writers. For writers who maintain an average structure score of 4.0 or higher over their last 50 articles, they’ll have advanced access to new assignments. They’ll be allowed to claim those assignments 48 hours before they’re released into the general Find Assignments pool. In order to keep it fair we will only allow those with First Look access to claim 10 assignments at one time.”

    “This is all part of our ongoing focus on quality and expertise. Let me know if you have any questions about the program.”

    She also tells us: “’eHow Select’ is indeed a scam. It’s not an eHow or Demand Media program.”

  • Demand Media Writers Offer Different Viewpoints of Assignment Reduction

    Demand Media Writers Offer Different Viewpoints of Assignment Reduction

    Demand Media recently alerted Demand Media Studios writers that it would be reducing the amount of assignments it would be given out. As discussed in a recent article, this has left a fair amount of writers without a significant source of income. While that article focused a bit more on Demand’s strategy as a business, we wanted to take a closer look at some perspectives from the writers.

    Many have expressed frustration. Some have gone so far as to accuse Demand Media of lying at worst or misleading at best. Others think such claims are way off base. In this article, we’ll take a look at these different points of view.

    What do you think? Share your thoughts in the comments. And if you find this subject interesting, please don’t hesitate to share it on Stumbleupon, Facebook, Twitter, +1, etc.

    A writer, who wishes to remain anonymous, tells WebProNews, “I’ve been writing for Demand Studios since 2009 and have only used the income for pocket money, however recently I intended to expand my writing with them. In May 2011 I qualified to write for eHow Money a specialized category for writers with professional experience and the appropriate credentials in addition to my current status as a general writer.”

    “I retired as an Assistant Vice President in 2008 from a corporate career in Financial Services in mutual funds from a major financial institution,” they added. “I was a licensed registered principal and have over 30 years experience in financial services and a Bachelor of Arts degree in Economics. My attention was to fulfill a lifelong goal to pursue a fulltime writing career post-retirement. I’ve had extensive business writing experience so I qualified very easily for the general writing and subsequently eHow Money based on my writing ability, business experience and education.”

    The writer tells us that they, along with may other Demand Studios writers received vague responses when expressing concern at the lack of assignments. They said they felt “they were being strung along, which is akin to lying.”

    “They continually developed new writing categories (eHow Money [and] eHow Garden are examples) as the titles disappeared and the promises that they were providing a better writing experience for their freelance writers,” the writer tells us. “Specifically, shortly after I qualified for eHow Money I contacted the editorial staff because the titles for this category were drastically reduced, and questioned them about qualifying me for a category when the titles were rapidly disappearing. Their response was that they were sorry but working on getting titles out. This is basically the standard response [to] all of their writers when the quantity of titles are questioned. It’s almost as if all of the changes for ‘new writing opportunities’ were a coverup when they were actually taking away the writing opportunities at the same time.”

    The writer says Demand Media raised the pay for eHow Money articles, but that there were “no articles to write”.

    “Many of the writers were optimistic and waited patiently,” the writer says. “Some writers also encouraged others that more titles would be available via our writers’ forum. There were a significant number of writers earning enough money to pay a good portion of their bills…Writers sincerely believed that they could depend on Demand Studios and continued to write for them because they are one of the few online organizations that pay upfront.”

    The writer says they expected this when Demand Media went public and the Panda Update came. “I instinctively knew this was going to be a disaster.”

    “It is also very important for the writing community to understand that Demand Studios had and still has writers who provide them with content of the highest professional quality,” the writer adds.

    “I’m done with them and will not devote my energy to a company any longer who has no respect for its writers,” the writer tells us. “They’re still making money tens of times over the amount they paid me and all of the other writers.”

    This is just the perspective from one writer, but we have seen plenty of other similar tales. Noah Davis at Business Insider shares a response to the freelancer backlash from Demand Media’s Chief Revenue Officer Joanne Bradford: “It’s still one of the largest pools of writing assignments available in the world. We don’t feel like it’s that dramatic of a change because it’s not like every assignment was being taken.”

    Our anonymous writer says the response is an “insult.” Davis says he heard from other writers that the quote was “hilarious to those of us who are still working for [Demand Studios].”

    Bradford is also quoted as saying, “The folks that are more generalists and have written the short-form how-to articles are finding less assignments. This goes hand-in-hand with our quality improvement and focus on using people who have expertise about the topics they write about.”

    Not all Demand Studios writers are so upset though. Some don’t feel that they’ve been misleading at all.

    Ken Crawford of The Freelancer Today, for example, has been writing for Demand since July of 2009, and says Demand was his “bread and butter” for quite some time. He acknowledges that things have changed, but he still writes for Demand on a regular basis, he says.

    “The perception of whether Demand lied to writers or not, depends on who you ask,” Crawford tells WebProNews. “To be honest, Demand never lied to anybody or made statements that promised one thing while delivering another. Many of the writers that are accusing Demand of lying are ones who are finding themselves without work. Many of these writers are ones who didn’t apply the guidelines, had high percentages of abandoned rewrites/rejections or were basically writing the thinnest content just to grab the $15 justifying it with ‘you get what you pay for.’ Granted $15 is not a lot for content, but if the writer agrees to the rate of pay they should still put out quality work. Nothing is hidden.”

    “Demand has not hidden the fact that changes were coming,” he adds. “Even in the latest announcement, the people claiming lies only scanned the information instead of actually reading it. Ehow is not going away, but there will be less title availability. Face it there are only so many ways you can write ‘How To Boil an Egg’ before you finally have to move on to ‘How To Peel a Boiled Egg.’”

    eHow has been talking about its content clean-up initiative for a good portion of the year. This includes the deletion of at least 300,000 articles and a feedback feature that tells the company when users are unsatisfied with content, so it can then be more heavily scrutinized and either deleted or edited as necessary.

    “While Demand hasn’t come out and spelled out specifically what they are doing in detail, they haven’t outright lied to anybody,” says Crawford. “People make assumptions on limited knowledge. People make accusations out of fear and anger.”

    “The work is still there,” he adds. “I, like many other writers, manage to keep my queue filled daily and write consistently. Sure there are issues with editing consistency and so forth, but the work is there for those that work within the system.”

    In our previous article, we mentioned the potential financial impact on Demand Media. Is it possible that less assignments means less growth?

    “My gut feeling is that this is a good move for Demand,” says Crawford. “It will ‘weed’ out writers who are simply there to put words on a screen for a quick buck. Demand is making efforts to match both writers and editors in their fields of expertise. It’s a growing process and one that is not without it’s challenges. But looking at it long-term, I believe it will benefit not only Demand Studios and it’s writers but also the reader. Less articles at the moment generated for eHow will bring better quality and, one would hope, more value to the reader.”

    “Demand Studios is accountable to the shareholders and not just themselves,” he adds. “While the ‘creative’ plan to show profit over 5 years on content is nice, it is vital that they show profit now. It’s business. They will concentrate in areas that give more of a return on investment. Ehow is still a big part of that process, and as far as I can see it will continue to be a big part.”

    Crawford also wanted to make one last point about his own position.

    “People tend to think I’m a cheerleader or somehow stir the vat of the DMS Kool-Aid,” he says. “My only affiliation with Demand is that of a service provider, plain and simple. The fact is, Demand fills a void for writers. Unfortunately the way the system was set-up in the past, it also provided income for those who simply wanted to make a quick buck. Regardless if you agree to write for $15 or $100, the end result of a writer’s work should be the same. It’s about quality. It’s about bringing value to your client and the readers. If $15 is beneath you, don’t write for Demand Studios.”

    A lot of writers apparently don’t feel like they have much of a choice.

    Jennifer Mattern at AllFreelanceWriting.com writes, “I’ve also seen writers’ responses to this news. On one hand it’s difficult for me to have sympathy when we’ve spent so much time and energy here helping writers improve their freelance businesses. The information is out there — not only here, but from many great freelancers such as Lori Widmer, Anne Wayman, and Peter Bowerman, and the folks at Freelance Zone, Freelance Folder, and Freelance Switch. If you want to be a more successful freelance writer, you have seemingly endless information available to help you do that.”

    “On the other hand, I can’t help but sympathize with some of these writers,” she says. “The news came somewhat suddenly and not long before the holidays. While it’s true no one should have been relying too heavily on any single client, content mill or not, I know they’ll have a tough road ahead as their own business models are forced into a period of transition.”

    It’s not a simple situation. There are other opportunities out there for freelance writers though, and it’s clear that quality is a highly sought after quality to have. I suggest continue improving your skills and writing about what you know about. Prove to your prospective clients that they would be better off with your content.

    Content can still goes a long way on the web.

    What is your position on this discussion? Share your thoughts in the comments.

  • Former eHow Owner Impressed With Site’s Direction

    Demand Media’s eHow site is no stranger to controversy. It’s often been criticized for saturating the web with content of questionable quality, but the company has heard these complaints loud and clear, and has been making numerous efforts to bring its overall quality up. This has included the deletion of at least 300,000 articles, new feedback tools, and partnerships with various leading voices in their respective fields. Most recently, the company has greatly reduced its number of writing assignments.

    We’ve chronicled all of this throughout the past year, and you can view all of our coverage oh eHow here for more background.

    We had a conversation with Jack Herrick, who used to run eHow before selling it to Demand Media about the direction the site is going in. We had talked to him in the past about eHow’s strategy vs. wikiHow‘s (Herrick’s current site) – basically the content farm vs. wiki approach and their relationships to content quality. He’s impressed with eHow’s current direction.

    “Overall, I’m impressed with eHow’s new focus on quality,’ Herrick tells us. “Web readers win when publishers focus on quality over quantity. And when one of the highest volume publishers on the web turns more attention to quality, web users should crack open the bubbly. The old eHow focused on pleasing the mighty Google overlord. The new eHow is trying to convince consumers to create their own individual magazine on eHow and then share it with their social network. It’s a big shift.”

    It’s worth noting that the “Google overlord” has taken a drastically different view of content farm-style content over the past year. That’s not to say that Google didn’t care about quality in the past, but the Panda update introduced this year, has made it more difficult for this type of content to do well in search.

    “Just to be clear, wikiHow has always been going a different direction than eHow,” says Herrick. “At wikiHow, we’ve been working on building the world’s best how-to manual from day one. Instead of saturating the web with 3 million articles, we built ‘only’ 123,000 articles over 6 years. And all of our articles are being constantly improved via the magic of wiki editing. Our work is better today than it was 6 months ago and 6 months from now we will be even better.”

    “eHow appears to be making 3 big shifts in their content production: They will be producing more videos, more slideshows, and more feature length articles,” he says. “The new prominence of slideshows indicates they are increasingly moving away from their initial focus on ‘how-to’ to a broader magazine-like media site.  For example the new eHow site ‘Shift,’ reminds me of a combination of iVillage meets Huffington Post meets Business Insider.  Instead of traditional how-tos they are producing click friendly slideshows like this one of “top 100 women on the move”.

    “Media like this is much more likely to get shared on social networks than a useful but arguably boring how-to article,” says Herrick. ” An SEO bonus: If Google’s Panda algorithm measures time on site as a quality factor, time consuming media like slideshows and videos may boost overall search visibility for all of ‘old’ eHow.”

    I’d add that the more that a piece of content is shared, the better it’s likely to do in search as well.

    “eHow has increasingly produced feature articles with over 1,000 words and more research and fact checking than the arguably shallow 350-500 standard articles that make up the vast majority of their how-to library,” says Herrick. “I think these new feature articles are a big improvement. At wikiHow, we have always thought it makes sense to take as many words as necessary to adequately cover the topic.  Sometimes we write just a few hundred words to cover a simple topic such as: How to Make a Wi-Fi Booster Using Only a Beer Can or How to Peel a Kiwi.”

    “Other times we need thousands of words to cover complex topics like: How to Survive in Federal Prison.”

    “It’s good to see eHow finally recognizing that some topics need more depth than 500 words allows,” he says. “The Demand Media guys are smart. I’m sure this shift in strategy is based on a lot of user data.   I think it’s going to work well for them.”

    “wikiHow on the other hand is sticking to our founding mission,” Herrick notes. “We have the not so humble ambition of building the world’s default how-to manual.  We’re going to keep using new technology and our fantastic community of volunteer editors to provide the best how-tos on the web. Our work is far from done.”

  • Demand Media Shifts from “Content Farm” Approach, Writers Lose Income Source

    Demand Media Shifts from “Content Farm” Approach, Writers Lose Income Source

    Demand Media, with its site eHow, has essentially been the poster child for the term “content farm” – something the company has done much to distance itself from. CEO Richard Rosenblatt has said flat out that he doesn’t consider what the company does to be a “content farm”. Fair enough, but plenty disagreed.

    Do you think Demand Media is moving in the right direction? Let us know in the comments.

    Eventually, Google’s Panda update, sometimes referred to as the “farmer” update caught up with eHow, but the damage wasn’t as bad as one could have imagined. However, as we told you about earlier this year, the company did begin a large effort to boost eHow’s reputation and content quality. This included new feedback tools for readers, partnerships for niche content, and the deletion/further editing of a lot of articles.

    During Demand Media’s last earnings call, it said that it had already removed 300,000 articles. After a recent iteration of Google’s Panda update, we reached out to the company for comment, and VP, Corporate Communications Kristen Moore told us, “I can tell you that we’ve been really pleased with the pace and the results of the new initiatives we announced and implemented in the spring to ensure tighter controls around quality on eHow and across our studio model. We’ll be providing a more specific update on those initiatives and what our sites have seen relative to the Panda updates when we announce Q3 earnings in just a few weeks.”

    Since then, Demand Media Studios has sent out the following email to writers and editors (hat tip to Noah Davis):

    Dear Writers and Editors,
     
    We realize there has been recent concern around assignment availability. We know many of you rely on Demand Media Studios as a regular income source and as a way to grow your careers. For those reasons and others, we want to be as transparent as we can about the future.
     
    In just a few years, we’ve worked together to grow the eHow.com library to an astounding 3 million articles. While eHow has been the main publisher of content produced by DMS writers, we’ve also developed other writing outlets on our own properties like typeF.com and LIVESTRONG.COM as well as through partnerships like Chron.com and USAToday. With our eHow.com library already so comprehensive, we saw the opportunity to shift our focus to more targeted categories and other forms of content such as slide shows, video series and feature articles. Good examples of these new formats can be found on  eHow and LIVESTRONG.COM.
     
    None of this would have been possible without having spent so many years working with you, our writers and editors, to build our comprehensive library.
     
    Looking ahead, as we continue to publish articles for eHow and our other sites, we want to be sure we are building on what already exists, not replicating it. This is not to say we will stop assigning standard titles in How to and Topic View format for eHow.com. But it does mean that we will have fewer eHow.com assignments for the foreseeable future.
     
    However, we will continue to add more publishers and sections as we’ve done over the years, and ultimately the work and opportunities will grow for our best writers and editors. We are also excited to completely execute on our vision of having the most qualified writers and editors working on titles within their areas of expertise.
     
    In order for this to happen, we need to make sure of a few things:

    • That only executable, valid and unique titles make it to your Work Desk.
    • That every article is written and copy edited by a qualified professional with background, knowledge or experience in the topic.
    • That every article has the appropriate format and word count for the topic to be comprehensively covered.

    We will also be putting additional focus on helping you grow within your fields. This means offering ways for you to gain exposure on our sites and new tools for you to promote yourself and your work. We will send additional updates and information on assignments going forward. We will also set up some new avenues for you to ask questions and offer feedback. For the time being, if you have any additional questions, please use this forum thread.
     
    Best Regards,
    Demand Media Studios Team

    This, along with the aforementioned eHow content clean-up initiative, seems to signal a drastically different content strategy than what Demand Media has come to be known for – the “content farm” (or call it what you like) strategy. That’s a strategy, mind you, was generally about writing assignments based on what people are searching for, and including numerous articles on the same topics, covering a variety of different title options. The strategy worked for Google search visibility. No question about it. At least it did for a while. That doesn’t mean that they’re not assigning content based on “demand,” but it seems to be less about saturating the web with run of the mill content.

    The company has also talked a lot this year about the increasing diversity in its traffic sources, and its earnings reports have indicated the company is not completely reliant on Google.

    We reached out for further comment on the company’s evolving strategy, but they’d not comment on my specific questions. They did say, however, that they’ll be sharing more details in the weeks to come around the new tools they’ll be using to help promote writers, as mentioned in the email.

    We’ll certainly be covering the Q3 report when it comes. It’s going to be interesting to hear more about the company’s post Panda content strategy. It may even provide some insight into how others impacted by the update may be able to recover.

    Another angle to this whole thing is that a lot of people just lost a source of income, and from the sound of it some of them are taking it pretty hard. In this economy, that’s not hard to believe. In the comments of this article, for example, Vicky Hunter writes:

    There were no articles available in the main eHow pool today for the first time ever. All but a few other specialty channels have been empty, as well. Demand’s thousands or writers are panicking on their forums. Crying, screaming, blaming, begging, fighting, pleading for help from fellow writers – even hinting at suicide. No matter what you think about them, you can’t help but feel some real pain for some of these writers. And Demand still won’t be honest about what’s going on, or when things will stabilize. Some of the jumpers are still hanging on at the site, waiting for things to get better, which, at best, means some few articles for some few lucky writers to grab each day.

    The bottom must have dropped out, in terms of revenue, for this to happen. I assume the next earnings report will show this. The stock will really tank after that. I feel bad for the writers. Some were making $4,000+ a month, and many were able to keep families afloat during this bad economy – and now it’s all gone, like that – poof.

    One major factor about cutting off these writing assignments is the potential loss of the growth curve, which could come back to haunt the company.

    That said, in the last report, the company reported a 32% increase in revenue, with 76% growth in cash from operations. You have to remember that the Demand Media Studios isn’t Demand Media’s only source of revenue. Rosenblatt cited not only the company’s content and media business, but its registrar business as providing significant year-over-year growth. ““We plan to build on this momentum by expanding our brand advertising relationships and accelerating our content platform’s international and social media growth initiatives,” he said.

    I guess we’ll find out more about those initiatives during the next call.

    There are a lot of questions surrounding Demand’s shift in strategy. Has Demand Media taken too drastic an approach to improve quality? Are writers getting the short end of the stick? Is this going to hurt Demand Media in in the long run? Or is this what’s best for the company, and ultimately for search engine results?

    We want to know what you think. Let us know in the comments.

  • Google Panda Update: eHow Untouched, Says Pleased with Progress on Content Quality

    Google Panda Update: eHow Untouched, Says Pleased with Progress on Content Quality

    While escaping the wrath of the Panda update again, Demand Media tells WebProNews that it’s pleased with the results of its eHow clean-up initiative.

    Demand Media and its eHow property in particular were always part of the Google Panda update conversation. In fact, it was a major part of the discussion even before the update came to be known as Panda, and even before it was rolled out. eHow was often characterized as the poster child of content farms, despite Demand Media’s continued efforts to clean up its reputation and denials that it actually is a “content farm”.

    Waves of astonishment rippled throughout the industry when Google finally launched its Panda update, supposedly targeting content farms, and eHow didn’t take a hit, but actually gained in search visibility. The update was even referred to as the “farmer” update throughout the industry before Google mentioned the “Panda” name in an interview.

    Demand Media no doubt breathed a gigantic sigh of relief, as the initial update and the company’s IPO were interestingly close together on the timeline. But eHow (not to mention some other DM sites) would not escape the Panda for long. A later iteration struck a blow to eHow, and Demand Media inevitably announced a big clean-up initiative to help weed out the lower-quality content and get the site’s search visibility back up.

    When asked for comment last week’s update, Kristen Moore VP, Corporate Communications at Demand Media gave us the following statement:

    We don’t comment on whether or what kind of impact our sites see with each individual Panda update. As you know Google continually adjusts their algorithms, so the updates are pretty frequent.
     
    I can tell you that we’ve been really pleased with the pace and the results of the new initiatives we announced and implemented in the spring to ensure tighter controls around quality on eHow and across our studio model. We’ll be providing a more specific update on those initiatives and what our sites have seen relative to the Panda updates when we announce Q3 earnings in just a few weeks.

    Looking at SearchMetrics’ data it seems pretty clear that eHow was not “pandalized” this time around.

    During the last earnings call in August, Demand Media indicated that Panda turned out to not be too big a blow to the company’s revenue. At the time, the company had said that 300,000 eHow articles had already been removed.