A blog post published on BNet.com, entitled “Demand Media’s Dodgy Accounting Decoded: It May Never Make a Profit”, caught my attention especially on a day that Demand Shares hit an all time low of $7.12.
Basically the author says that “Demand amortizes its editorial budget rather than expensing it on a quarterly basis as the cash is spent , is not helping the company achieve profitability”.
It’s a pretty long post full of graphs that the author uses to support his argument so you should go to the original post to check it out.
Meantime here are the statements I found most interesting:
“Demand uses a controversial accounting method which many suspect either lessens the appearance of the company’s losses or will help it achieve apparent profitability sooner. But as time has dragged on, the effect of that accounting gimmick is becoming less significant.”
“Normally, publishers with large editorial bills like Demand expense the amount they pay for that material on a quarterly basis. ”
“Demand, however, argues that as its content will continue to earn ad revenue over several years, its content is a long-lived intangible asset. As such, its expense should be amortized, or spread over five years. ”
“This is a perfectly legal thing to do, and there is a reasonable argument to be made that Demand’s assets — its articles and stories — may indeed generate revenue for that long.”
“The problem is that amortization obscures how much the company is actually spending on a quarterly basis to pay its freelancers and staff. It may pay $50 in cash for an article today, but the “expense” of that will only be recognized as $2.50 per quarter for five years. Thus Demand’s expenses on its income statement might appear lower than they actually are (and the company may benefit by looking more profitable than it actually is.)”
“Demand’s operating costs appear to be in lockstep with its revenues, suggesting that the company cannot generate greater sales without generating greater expenses that immediately cannibalize the cash from those sales:”
So how does Demand stay afloat?
“Basically, it sells stock certificates. ”
“Demand added $72 million in cash to its coffers in the first six months of this year, almost none of which came from its operating or content buying activities. It came from a $79 million sale of stock. ”
nice copy paste.
I remember looking at a Q some time ago and couldn’t make sense of it. Once these guys have DMD on their radar then you know something is up. Interesting.
DMD = DOOMED
That is the reason why you usually adobt valuation models on base of cashflows to determine (better: estimate) the value of a company.
Of course the amortization is in this case an accounting trick that improves the financial statements (at least within the first five year period), but wise investors should not let them deceive by those numbers.
DMD=Pump ‘n Dump
It’s unfortunate to hear this, but then again there are probably several companies doing the same thing.
I like DMD’s long term prognosis. They are producing evergreen content. The lifetime value of this content will exceed five years. I do think they should have used some kind of accelerated depreciation formula. But that said, in year six and beyond, this content will be producing marginal revenue and there will be no marginal cost to offset it. The math is on their side in terms of $$ going into online advertising, they are able to monetize the long tail effectively, publisher monetization rates are getting better, not worse, as the value chain is getting more efficient cutting out the middleman which is benefiting publishers.
Not like anyone saw this coming.
I see these hater articles all the time. Filled with nice graphs and big flowery adjectives.
The simple fact is, DMD should amortize these costs, and the fact that they need to sell stock to raise money is very simple – growth.
DMD growth rate is exciting, they are producing more media each quarter. It takes time for revenues to catch up to the production. It is a classic growth funding mechanism.
I don’t know why no one understands this, unless all of these authors are short (which I guess is likely) trading on the ignorance of the mass of fools out there why can’t read simple financial statements.
One other thing… the relative value of content created is measure based on the overall available content and how fresh and relevant that content is. Do you really think that an article written by Demand Media where they paid someone $40 to write it is going to still be around like a Wikipedia article on the same subject.
Their accounting assumes that the web is operating in a content vacuum. The only vacuum is the one hooked up to your bank account from whoever is underwriting their stock offerings…. in my opinion. If we still paid $350 for a set of Encyclopedia Britannica, this amortization schedule might hold up.
Most people who read simple financial statements prefer that significant, up front expenses NOT be amortized over a half decade, unless there’s a damn good reason for it. It’s usually an accounting shenanigan intended to obfuscate real time operating losses.
5 years in tech is 20, 30 years in everything else.
Who seriously wants to bet that the value of DMD’s ‘content’ will be worth as much (or more) five years down the line? To accept this hoax accounting, that’s the foundation you’re standing on, before you even get into the possibility of a gain.
When the basis of your business is selling hope, then selling stock, that’s a shit model, but yeah. Some people are cool with it.
Disclaimer: Been openly short DMD since day 1. The poster above suggests this is because I’m ‘trading on the ignorance of fools.’ I would counter-propose I’m short because I do not hate money. The only ‘nice graph’ I’m concerned with is the one that shows DMDs price heading straight down the fucking loo.
-9.79% today, into 52 week low, and I’m still not covering this turd (although getting ready)
“entitled “Demand Media’s Dodgy Accounting Decoded: It May Never Make a Profit”, caught my attention especially on a day that Demand Shares hit an all time low of $7.12.”
It looks like Demand Media has managed to hit a new low today
Its showing as $5.62 eeeek