Demand Media Reports A Loss: Content Revenue Up 15%; Registrar Revenue Up 17% & Has $86 Million In The Bank

Demand Media (NYSE: DMD) reported its earnings for the 4th quarter of 2011 after the market closed today.

Shares of Demand are up over 2% in after hours trading, but fell almost 5% in trading today.

  • Q4 2011 Content & Media revenue ex-TAC grew 15% year-over-year and increased 5% compared to the third quarter of 2011. The 5% sequential improvement represented the second consecutive quarter of accelerating sequential growth and included the return to sequential growth for eHow for the first time since the first quarter of 2011.
  • Q4 2011 Registrar revenue grew 17% year-over-year and 2% compared to the third quarter of 2011. During the fourth quarter of 2011, the number of registered domains grew by a net 482,000 compared to 404,000 in the fourth quarter of 2010, due to growth from new partners and organic growth from resellers.
  • Q4 2011 and year ended December 31, 2011 loss from operations and net loss include $5.9 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.
  • Q4 2011 free cash flow grew more than fivefold year-over-year to $18.3 million. The increase was driven by a 30% increase in cash flow from operations, combined with a 13% decrease in capital expenditures and a 59% reduction of investment in intangible assets. The intangible assets investment decline was a result of decreased content spend on eHow as the Company changes its content and distribution platform.
  • At December 31, 2011, cash & cash equivalents balance was $86.0 million.

“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 Demand Media’s President and 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.”

Business Highlights:

  • Demand Media ranked as a top 20 US web propertythroughout 2011, and ranked #17 in January 20121.
  • Demand Media recently launched the first two major channels in its partnership with YouTube: eHow Home and LIVESTRONG Woman.
  • eHow.com ranked as the #19 website in the US, with 48.2 million unique users in the US in January 20121.
  • Cracked.com was the most visited humor site in the US in January 2012, and its audience spent more time on the site than any other comedy website1.
  • In 2011, Demand Media’s Registrar business added 1.7 million domains under management, surpassing the 12 million domain milestone.
  • During the fourth quarter of 2011, Demand Media repurchased 1.9 million shares of common stock for $13.3 million under its Board-authorized $25.0 million share repurchase program. To date, the Company has repurchased 2.8 million shares of common stock for $20.1 million. On February 8, 2012, Demand Media’s Board authorized an increase of $25.0 million to the program, taking its total authorized repurchases to $50.0 million.

“2011 finished strong and was led by record revenue from both our Content & Media and Registrar business lines,” said Richard Rosenblatt, Chairman and CEO of Demand Media. “We enter 2012 positioned to expand our existing business lines while investing in areas where we see significant future growth. We plan to leverage our data, studio and extensive distribution in new ways to solidify our leadership in the rapidly growing digital content marketplace.”

Financial Summary
In millions, except per share amounts
Three months ended

December 31,
Year ended

December 31,
2010 2011 Change 2010 2011 Change
Total Revenue $ 73.6 $ 84.4 15 % $ 252.9 $ 324.9 28 %
Content & Media Revenue ex-TAC(1)
$ 43.5 $ 49.9 15 % $ 140.7 $ 193.0 37 %
Registrar Revenue
26.8 31.4 17 % 100.0 119.4 19 %
Total Revenue ex-TAC(1) $ 70.3 $ 81.3 16 % $ 240.7 $ 312.4 30 %
Income (loss) from Operations(2) $ 2.8 $ (4.8 ) NA $ (0.5 ) $ (13.1 ) NA
Adjusted OIBDA(1) $ 20.1 $ 23.7 18 % $ 62.0 $ 86.0 39 %
Net income (loss)(2) $ 1.0 $ (6.4 ) NA $ (5.3 ) $ (18.5 ) NA
Adjusted net income(1) $ 5.6 $ 6.8 21 % $ 15.9 $ 21.9 38 %
EPS(2) $ (0.54 ) $ (0.08 ) NA $ (2.86 ) $ (0.27 ) NA
Adjusted EPS(1) $ 0.06 $ 0.08 33 % $ 0.18 $ 0.25 39 %
Cash Flow from Operations $ 20.9 $ 27.2 30 % $ 61.6 $ 85.3 38 %
Free Cash Flow(1) $ 3.3 $ 18.3 455 % $ (7.0 ) $ 19.5 NA

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

(2) Q4 2011 and full-year 2011 loss from operations and net loss includes $5.9 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.

(1) Source: comScore.

Operating Metrics:
Three months ended

December 31,
Year ended

December 31,
2010 2011 %
Change
2010 2011 %
Change
Content & Media Metrics:
Owned and operated
Page views(1) (in millions) 2,201 2,696 22 % 8,234 10,378 26 %
RPM(2) $ 15.81 $ 14.53 (8 )% $ 13.45 $ 15.14 13 %
Network of customer websites
Page views(1) (6)(in millions) 3,866 4,935 28 % 13,155 17,436 33 %
RPM(2) $ 3.11 $ 2.81 (10 )% $ 3.20 $ 2.77 (13 )%
RPM ex-TAC(3) $ 2.25 $ 2.18 (3 )% $ 2.28 $ 2.06 (10 )%
Registrar Metrics:
End of Period # of Domains(4) (in millions) 11.0 12.7 15 % 11.0 12.7 15 %
Average Revenue per Domain(5) $ 9.94 $ 10.08 1 % $ 9.96 $ 10.08 1 %

____________________

(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 December 31, 2011 would have increased 22% 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 months and year ended December 31, 2011 would have decreased 5% and 2%, respectively, compared to the corresponding prior-year periods.
(6) The Company acquired IndieClick on August 8, 2011, which contributed 1,553 million and 3,069 million page views, respectively, during the three months and year ended December 31, 2011.

Share Repurchase Program Increase

On February 8, 2012, Demand Media’s Board of Directors authorized an additional $25 million of share repurchases bringing the share repurchase program to a total of $50 million. Under the program, Demand Media is authorized to repurchase, in addition to the $20.1 million of repurchases to date, up to an additional $29.9 million of its outstanding shares from time to time on the open market or in negotiated transactions. The timing and amounts of any purchases will be based on share price, market conditions and other factors. The program does not require the Company to purchase any specific number of shares and may be suspended or discontinued at management’s discretion at any time without prior notice.

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.

Hilliard added, “Our guidance reflects sustained revenue growth throughout 2012, including during the first half of the year where comparisons are challenged by early 2011′s search algorithm changes. As such, we anticipate year-over-year comparisons to improve in the second half of 2012 and Q2′s year-over-year revenue growth to accelerate compared to Q1′s. In addition, we intend to generate positive free cash flow in 2012 while continuing to make data-driven investments that yield strong returns and long-term growth.”

Excluding up to $5 million of 2012 operating expenses, which the Company expects to incur related to its generic Top Level Domain (“gTLD”) initiative, the Company’s guidance for the first quarter ending March 31, 2012 and fiscal year ending December 31, 2012 is as follows:

First Quarter 2012

  • Revenue in the range of $81.5 – $83.5 million
  • Revenue ex-TAC in the range of $78.0 – $80.0 million
  • Adjusted EBITDA in the range of $19.0 – $20.0 million
  • Adjusted EPS in the range of $0.05 – $0.06 per share
  • Weighted average diluted shares 87.5 – 88.5 million

Full Year 2012

  • Revenue in the range of $351.0 – $358.0 million
  • Revenue ex-TAC in the range of $337.0 – $344.0 million
  • Adjusted EBITDA in the range of $92.0 – $95.0 million
  • Adjusted EPS in the range of $0.30 – $0.32 per share
  • Weighted average diluted shares 88.0 – 90.0 million

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