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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 abo...
This Google Panda “Victim” Just Posted Record Revenue And Profitability
Written by Chris Crum
  • 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.

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