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Demand Media Reports Third Quarter 2012 Financial Results

Stocks in this article: DMD

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 %




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