Demand Media Reports Third Quarter 2015 Results

05 Nov 2015, 16:05 PM EST

Demand Media Properties Reach Nearly 49 Million Unique Monthly
Visitors in the US
Q3 Marketplaces Revenue Grows 63% Year-over-Year
Total Q3 Revenue of $28.5 Million

SANTA MONICA, Calif.–(BUSINESS WIRE)–Demand Media, Inc. (NYSE: DMD), a diversified Internet company comprised
of several media and marketplace properties, today reported financial
results for the third quarter ended September 30, 2015.

“I am excited by the rapid growth of our marketplaces business during
Q3,” said Sean Moriarty, CEO of Demand Media. “As we move into 2016, our
top priorities will be creating high-quality and authoritative content
across all of our media properties, stabilizing the eHow business and
maintaining accelerating growth in our marketplaces business.”


Financial Summary
(In millions, except per share amounts)

	Three months ended
	September 30,
	2015			2014
Content & Media revenue	$	15.9		$	33.6
Marketplaces revenue		12.6			7.7
Total revenue	$	28.5		$	41.3

Adjusted EBITDA⁽¹⁾	$	(3.6	)	$	8.1
Net loss	$	(13.8	)	$	(223.8	)
Adjusted net loss⁽¹⁾	$	(5.4	)	$	(0.4	)

EPS⁽²⁾	$	(0.69	)	$	(11.69	)
Adjusted EPS⁽¹⁾⁽²⁾	$	(0.27	)	$	(0.02	)

Free cash flow⁽¹⁾	$	(3.1	)	$	6.5


(1)		These non-GAAP financial measures are described below and reconciled to their comparable GAAP measures in the accompanying tables.

(2)		Demand Media common stock share information and related per share amounts included in this earnings release and the accompanying tables have been adjusted retroactively for the 2014 periods to reflect the one-for-five reverse stock split of Demand Media common stock that was effected on August 1, 2014.

Q3 2015 Financial Summary:

Demand Media is comprised of two service offerings: Content & Media and
Marketplaces.

“We continue to make strides in improving our operational efficiency and
strengthening our foundation,” said Rachel Glaser, Demand Media’s CFO.
“In the third quarter, we completed several initiatives designed to
improve the long-term profitability of our business, including
realigning personnel and reducing headcount, consolidating offices,
divesting non-core media properties and implementing enterprise wide
platform upgrades.”

For the third quarter of 2015:

Total revenue declined 31% year-over-year due to a 53% decline in
Content & Media revenue partially offset by a 63% increase in
Marketplaces revenue.
Content & Media revenue declined 53% year-over-year driven primarily
by traffic declines to eHow and lower ad monetization yields.
Marketplaces revenue grew 63% year-over-year, driven primarily by new
product introductions, increased conversion rates and traffic growth
on Society6, as well as increased average revenue per transaction
resulting from a shift towards higher priced items on Society6 and the
acquisition of Saatchi Art in August 2014.
Adjusted EBITDA was $(3.6) million for the quarter, primarily
reflecting the decline in higher margin advertising revenue in Content
& Media, partially offset by growth in Marketplaces and managed
reductions in operating expenses.
Cash and cash equivalents was $37.9 million at period end with no debt
outstanding.

Business Highlights:

On a consolidated basis, Demand Media ranked as the #64 US digital
media property across desktop and mobile platforms in September 2015.
Demand Media’s properties reached nearly 49 million unique visitors in
the US, including nearly 28 million mobile visitors (source: September
2015 US comScore).

Content & Media:

Demand Media acquired LEAFtv, a modern lifestyle resource for women
featuring high-quality, short form how-to videos in the categories of
stylish living, food and fashion.
eHow has shifted its model to creating inspirational, high-quality DIY
content through partnerships with top influencers and experts. During
the third quarter, eHow introduced a single page mobile layout to help
improve the user experience and initiated traffic exchange
partnerships. eHow reached over 24 million unique visitors in the US
in September 2015 across desktop and mobile platforms (source:
September 2015 US comScore).
Livestrong.com launched its first seven Condition Centers in the third
quarter. The Condition Centers are comprehensive article guides
written by leading medical experts that are focused on highly searched
medical conditions. Livestrong/eHow Health had nearly 24 million
unique visitors in the US in September 2015 across desktop and mobile
platforms (source: September 2015 US comScore).
Cracked Video continues to gain momentum with over 16 million views
across YouTube and Facebook in September, including a record number of
views on YouTube. The Cracked YouTube channel saw significant
subscriber growth, with a 54% increase year-over-year. The
CollegeHumor/Cracked Network ranked as the #1 Humor property in the US
in September 2015, with more than 15 million unique visitors across
desktop and mobile platforms (source: September 2015 US comScore).
studioD, which provides integrated content marketing solutions for
brands, agencies and publishers, launched its first influencer program
with a major Consumer Packaged Goods (CPG) brand during the third
quarter, and continued to expand its talent network and customer list
with the addition of major brands, such as Kellogg’s.

Marketplaces:

Society6 released two new products in the third quarter — laptop
sleeves, which launched in time for Back to School shopping, and
iPhone 6s cases, which were available for pre-sale on the day of the
Apple announcement on September 9th. Society6 now has 25 products
available for customization on the site, as well as a growing supply
of artwork with over 2.5 million unique designs, up 53% year-over-year.
Saatchi Art focused on expanding its visibility by designing and
producing its first catalog, which shipped to approximately 100,000
households in early October. Repeat buyers on Saatchi Art increased
25% year-over-year in the third quarter, demonstrating consumer
satisfaction with the products and services delivered by Saatchi Art.


Operating Metrics:

	Three months ended
	September 30,
	2015		2014		% Change
Content & Media Metrics:
Visits⁽¹⁾ (in thousands)		780,990		1,051,912	(26)	%
Revenue per Visit (RPV)⁽²⁾	$	20.33	$	31.91	(36)	%

Marketplaces Metrics:
Number of Transactions⁽³⁾		203,768		143,024	42	%
Average Revenue per Transaction⁽⁴⁾	$	61.95	$	54.18	14	%

(1)		Visits are defined as the total number of times users access the company’s content across (a) one of its owned and operated online properties and/or (b) one of its customers’ online properties, to the extent that the visited customer web pages are hosted by the company’s content services. In each case, breaks of access of at least 30 minutes constitute a unique visit.

(2)		RPV is defined as Content & Media revenue per one thousand visits.

(3)		Number of transactions is defined as the total number of successfully completed Marketplaces transactions during the applicable period.

(4)		Average revenue per transaction is calculated by dividing Marketplaces revenue for a period by the number of transactions in that period.

Conference Call and Webcast Information

Demand Media will host a corresponding conference call and live webcast
today at 4:30 p.m. Eastern time (1:30 p.m. Pacific time). To access the
conference call, dial 888-510-1785 (US/CAN) or 719-325-2308
(International) and reference conference ID 1680340. 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 Demand Media’s corporate website at http://ir.demandmedia.com
and via replay beginning approximately two hours after the completion of
the call.

Use of Non-GAAP Financial Measures

To supplement its consolidated financial statements, which are prepared
and presented in accordance with generally accepted accounting
principles in the United States of America (“GAAP”), Demand Media uses
certain non-GAAP financial measures, as described below. These non-GAAP
financial measures are presented to enhance the user’s overall
understanding of Demand Media’s financial performance and should not be
considered a substitute for, or superior to, the financial information
prepared and presented in accordance with GAAP. 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
the company’s financial performance and operating trends, including
period-to-period comparisons, because they exclude certain expenses that
management believes are not indicative of the company’s core operating
results. Management also uses these measures to prepare and update the
company’s short and long term financial and operational plans, including
evaluating investment decisions, and in its discussions with investors,
commercial bankers, securities analysts and other users of the company’s
financial statements.

The use of 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 non-GAAP
financial measures is that they do not have standardized meanings, and
therefore other companies, including peer 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 in the tables captioned “Reconciliations of
Non-GAAP Financial Measures” included at the end of this release.
Investors and others are encouraged to review the company’s financial
information in its entirety and not rely on a single financial measure.

The company defines Adjusted earnings before interest, taxes,
depreciation and amortization (Adjusted EBITDA) as net income (loss)
less income (loss) from discontinued operations, net of taxes, excluding
net interest expense, income tax expense (benefit), and certain other
non-cash or non-recurring items impacting net income (loss) from time to
time, principally comprised of depreciation and amortization and
stock-based compensation. Management believes that the exclusion of
certain expenses in calculating Adjusted EBITDA provides a useful
measure for period-to-period comparisons of the company’s underlying
recurring revenue and operating costs that is focused more closely on
the current costs necessary to utilize previously acquired long-lived
assets and reflects the company’s ongoing business in a manner that
allows for meaningful analysis of trends. Management also believes that
excluding certain non-cash charges can be useful because the amount of
such expenses is the result of long-term investment decisions in
previous periods rather than day-to-day operating decisions.

The company defines Adjusted Net Income (Loss) as net income
(loss) less income (loss) from discontinued operations, net of taxes,
before the effect of certain non-cash items and other items not directly
related to the operation of the company’s ongoing business, principally
comprised of stock-based compensation, amortization of intangible
assets, acquisition and realignment costs and gains or losses on asset
dispositions. Adjusted Net Income (Loss) is calculated using the
application of a normalized effective tax rate. The company defines Adjusted
Earnings Per Share (Adjusted EPS) as Adjusted Net Income (Loss)
divided by the weighted average number of shares outstanding. Management
believes that Adjusted Net Income (Loss) and Adjusted EPS provide
investors with additional useful information to measure the company’s
financial performance, particularly from period to period, because they
exclude certain non-cash and other expenses that are not directly
related to the operation of the company’s ongoing business.

The company defines Free Cash Flow as net cash provided by (used
in) operating activities net of cash outflows from acquisition and
realignment activities, capital expenditures to acquire property and
equipment and purchases of intangible assets. Management believes that
Free Cash Flow provides investors with useful information to measure
operating liquidity because it reflects the company’s underlying cash
flows from recurring operating activities after investing in capital
assets and intangible assets. Free Cash Flow is 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
reinvesting in the business, pursuing new business opportunities and
potential acquisitions, paying dividends and repurchasing shares.

About Demand Media

Demand Media, Inc. (NYSE: DMD) is a diversified Internet company that
builds platforms across its media (eHow, LIVESTRONG.com, Cracked and
LEAFtv) and marketplace (Society6 and Saatchi Art) properties to enable
communities of creators to reach passionate audiences in large and
growing lifestyle categories. In addition, Demand Media’s branded
content creation (studioD) and programmatic advertising (Demand360)
offerings help advertisers find innovative ways to engage with their
customers. 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 the company’s 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 that could affect the company’s operating and financial
results are described in Demand Media’s annual report on Form 10-K for
the fiscal year ending December 31, 2014 filed with the Securities and
Exchange Commission (http://www.sec.gov)
on March 16, 2015, as such risks and uncertainties are updated in Demand
Media’s annual and quarterly reports on Form 10-K and 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. These risks and uncertainties include, among others: changes
in the methodologies of internet search engines, including ongoing
algorithmic changes made by Google, Bing and Yahoo!, as well as possible
future changes, and the impact such changes may have on visits and
driving search related traffic to the company’s owned & operated online
properties and its customers’ online properties; the effects of shifting
consumption of media content from desktop to mobile; the company’s
dependence on material agreements with a specific business partner for a
significant portion of its revenue; the fact that the company generates
the majority of its revenue from advertising and the potential impact of
a reduction in online advertising spending, a loss of advertisers,
increased availability of ad blocking software, particularly on mobile
devices, and/or lower advertising yields; the impact on revenue and
expenses of changes being made to the company’s Content & Media
properties that are intended to improve user experience and engagement;
the company’s ability to successfully grow new lines of business such as
online marketplaces and branded content creation; the impact of Demand
Media’s separation into two smaller, less diversified public companies;
the expectation that the separation transaction is tax-free; 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; and the company’s ability to retain key personnel. From
time to time, the company 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. 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,
	2015			2014			2015			2014
Revenue:
Service revenue	$	16,755		$	33,712		$	60,047		$	108,373
Product revenue		11,750			7,603			31,436			21,075
Total revenue		28,505			41,315			91,483			129,448
Operating expenses:
Service costs (exclusive of amortization of intangible assets shown separately below)⁽¹⁾⁽²⁾		9,566			11,256			29,103			33,198
Product costs		7,638			5,506			21,240			15,507
Sales and marketing⁽¹⁾⁽²⁾		5,424			4,699			14,797			15,422
Product development⁽¹⁾⁽²⁾		6,520			7,050			18,923			21,221
General and administrative⁽¹⁾⁽²⁾		9,883			12,464			30,200			36,868
Goodwill impairment charge		—			232,270			—			232,270
Amortization of intangible assets		3,441			7,388			15,377			25,203
Total operating expenses		42,472			280,633			129,640			379,689
Loss from operations		(13,967	)		(239,318	)		(38,157	)		(250,241	)
Interest income (expense), net		(3	)		(627	)		216			(2,331	)
Other income, net		178			782			3,024			736
Loss from continuing operations before income taxes		(13,792	)		(239,163	)		(34,917	)		(251,836	)
Income tax (expense) benefit		(13	)		16,631			(45	)		13,917
Net loss from continuing operations		(13,805	)		(222,532	)		(34,962	)		(237,919	)
Net loss from discontinued operations⁽¹⁾⁽²⁾		—			(1,306	)		—			(11,208	)
Net loss	$	(13,805	)	$	(223,838	)	$	(34,962	)	$	(249,127	)

Earnings (Loss) per share – basic and diluted
Net loss from continuing operations	$	(0.69	)	$	(11.62	)	$	(1.76	)	$	(12.90	)
Net loss from discontinued operations		—			(0.07	)		—			(0.60	)
Net loss per share	$	(0.69	)	$	(11.69	)	$	(1.76	)	$	(13.50	)

Weighted average number of shares – basic and diluted⁽³⁾		20,021			19,151			19,879			18,450
__________________

⁽¹⁾ Depreciation expense included in the above line items:
Service costs	$	2,041		$	1,559		$	4,663		$	5,123
Sales and marketing		15			37			52			115
Product development		47			135			154			382
General and administrative		1,611			1,112			4,118			3,628
Discontinued operations		—			559			—			4,662
Total depreciation	$	3,714		$	3,402		$	8,987		$	13,910

⁽²⁾ Stock-based compensation included in the above line items:
Service costs	$	182		$	451		$	806		$	1,147
Sales and marketing		122			178			432			511
Product development		350			832			1,277			2,367
General and administrative		905			2,921			3,168			8,390
Discontinued operations		—			351			—			2,949
Total stock-based compensation	$	1,559		$	4,733		$	5,683		$	15,364

⁽³⁾		Demand Media common stock share information and related per share amounts included in this earnings release and the accompanying tables have been adjusted retroactively for the 2014 periods to reflect the one-for-five reverse stock split of Demand Media common stock that was effected on August 1, 2014.


Demand Media, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(In thousands)

	September 30,			December 31,
	2015			2014
Assets
Current assets
Cash and cash equivalents	$	37,942		$	47,820
Accounts receivable, net		9,618			14,504
Prepaid expenses and other current assets		4,954			7,447
Total current assets		52,514			69,771
Property and equipment, net		15,516			22,836
Intangible assets, net		24,935			40,535
Goodwill		10,358			10,358
Other assets		1,205			6,055
Total assets	$	104,528		$	149,555
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	1,149		$	4,762
Accrued expenses and other current liabilities		12,765			24,225
Deferred revenue		2,978			3,569
Total current liabilities		16,892			32,556
Deferred tax liability		316			334
Other liabilities		1,704			1,823
Commitments and contingencies
Stockholders’ equity
Common stock		2			2
Additional paid-in capital		503,543			497,809
Accumulated other comprehensive loss		(74	)		(76	)
Treasury stock		(30,767	)		(30,767	)
Accumulated deficit		(387,088	)		(352,126	)
Total stockholders’ equity		85,616			114,842
Total liabilities and stockholders’ equity	$	104,528		$	149,555


Demand Media, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)

	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Cash flows from operating activities
Net loss	$	(13,805	)	$	(223,838	)	$	(34,962	)	$	(249,127	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		7,155			11,434			24,364			43,356
Deferred income taxes		—			(18,226	)		—			(13,625	)
Stock-based compensation		1,559			4,733			5,683			15,364
Goodwill impairment charge		—			232,270			—			232,270
Loss (Gain) on disposals		(197	)		(795	)		(3,105	)		(795	)
Loss (Gain) on other assets, net		—			2			—			(5,745	)
Other		(275	)		(191	)		(76	)		(1,638	)
Change in operating assets and liabilities, net of effect of acquisition
Accounts receivable, net		352			2,511			4,712			7,402
Prepaid expenses and other current assets		944			(857	)		550			(1,650	)
Deferred registration costs		—			81			—			(8,876	)
Deposits with registries		—			(553	)		—			(259	)
Other long-term assets		(8	)		117			(140	)		(557	)
Accounts payable		286			(2,266	)		(3,572	)		(5,153	)
Accrued expenses and other liabilities		536			(345	)		(3,367	)		(472	)
Deferred revenue		313			572			164			12,296
Net cash (used in) provided by operating activities		(3,140	)		4,649			(9,749	)		22,791
Cash flows from investing activities
Purchases of property and equipment		(1,004	)		(1,687	)		(3,590	)		(7,597	)
Purchases of intangible assets		(8	)		(1,092	)		(64	)		(5,406	)
Payments for gTLD applications		—			(4,369	)		—			(15,829	)
Proceeds from gTLD withdrawals, net		—			—			—			6,105
Cash received from disposal of businesses and properties, net of cash disposed		935			13,696			4,766			13,696
Cash received from early repayment of promissory note		5,100			—			5,100			—
Cash received from disposition holdback		998			—			998			—
Cash paid for acquisitions, net of cash acquired		(58	)		(2,240	)		(58	)		(2,240	)
Restricted deposits		671			(1,700	)		671			(1,700	)
Other		(129	)		(295	)		76			996
Net cash (used in) provided by investing activities		6,505			2,313			7,899			(11,975	)
Cash flows from financing activities
Long-term debt repayments, net		—			—			—			(22,500	)
Proceeds from exercises of stock options and contributions to ESPP		(33	)		91			215			343
Net taxes paid on RSUs and options exercised		(123	)		(590	)		(563	)		(2,236	)
Cash paid for acquisition holdback		(7,561	)		(400	)		(7,561	)		(1,942	)
Cash distribution related to spin-off		—			(24,145	)		—			(24,145	)
Other		(9	)		(233	)		(121	)		(529	)
Net cash used in financing activities		(7,726	)		(25,277	)		(8,030	)		(51,009	)
Effect of foreign currency on cash and cash equivalents		11			(42	)		2			(87	)
Change in cash and cash equivalents		(4,350	)		(18,357	)		(9,878	)		(40,280	)
Cash and cash equivalents, beginning of period		42,292			131,588			47,820			153,511
Cash and cash equivalents, end of period	$	37,942		$	113,231		$	37,942		$	113,231