WebProNews » ehow

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

Chris Crum — Wed, 07 Nov 2012 11:00:28 +0000

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

Chris Crum — Tue, 07 Aug 2012 21:17:28 +0000

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 propertythroughout 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

Chris Crum — Thu, 10 May 2012 12:38:23 +0000

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 MediaQ1 results even better than expected. 8 minutes ago via web · Reply · Retweet · Favorite · powered by @socialditto

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

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

@demandmedia
Demand MediaWe 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 MediaTraffic 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

Chris Crum — Tue, 08 May 2012 20:28:46 +0000

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.”

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 propertythroughout 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

Chris Crum — Wed, 02 May 2012 20:40:37 +0000

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%

Mike Fossum — Mon, 30 Apr 2012 15:27:02 +0000

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

Chris Crum — Wed, 28 Mar 2012 14:15:59 +0000

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

Chris Crum — Thu, 16 Feb 2012 22:35:40 +0000

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

Chris Crum — Mon, 07 Nov 2011 22:43:09 +0000

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

Chris Crum — Mon, 07 Nov 2011 21:47:14 +0000

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-TAC¹Grows 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 %

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	%

	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.

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

(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.


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


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	)%


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


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
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


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


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.

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

(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.