Demand Media Reports Second Quarter 2014 Results

• Revenue ex-TAC of $87.1 Million and Adjusted EBITDA of $10.7 Million
• Registrar Revenue Increases 13% Year-over-Year to $41.2 Million
• Free Cash Flow of $9.8 Million

SANTA MONICA, Calif.--(BUSINESS WIRE)-- Demand Media, Inc. (NYSE: DMD), a leading digital content & media company, today reported financial results for the second quarter ended June 30, 2014.

"The focus on user experience and content improvements we have made over the past several quarters are starting to show positive results,” said Shawn Colo , Interim CEO of Demand Media. “Specifically, Livestrong.com achieved record user registrations and community engagement while returning to historic traffic levels. These trends demonstrate that continued focus on our core initiatives can deliver long-term stability and growth across our consumer brands.”

Q2 2014 Financial Summary:

• Total revenue ex-TAC declined 10% year-over-year, with 13% year-over-year growth in Registrar revenue offset by a 24% decline in Content & Media revenue ex-TAC. Pro forma for Society6 in the prior year period, total revenue ex-TAC decreased 15%.
• Registrar revenue grew 13% year-over-year, primarily due to growth in domain name registrations as well as higher Name.com domains under management.
• Owned & Operated revenue decline of 25% was driven primarily by the cumulative effect of traffic declines to key properties, lower aftermarket domain sales, and the strategic shift away from higher CPM direct sold display advertising sales, partially offset by revenue of $6.6 million from Society6, which was acquired at the end of Q2 2013, and mobile monetization growth. Pro forma for Society6, Owned & Operated revenue decreased 31%.
• Network revenue ex-TAC declined 19% due to lower revenue from our domain name monetization and social tools businesses.
• Adjusted EBITDA decreased 60% year-over-year, primarily reflecting the impact on higher margin revenue from traffic declines and lower domain sales, the inclusion of gTLD operating expenses, and a mix shift to lower margin ecommerce and Registrar revenue.

“The successful separation of the business into two standalone companies marks a significant achievement and milestone for Demand Media,” said Demand Media's CFO Mel Tang . “Our continued strong free cash flow generation and healthy balance sheet allow us to continue to make targeted investments to reaccelerate revenue growth and increase shareholder value.”

Business Highlights:

Content & Media:

• June 2014 US and Worldwide comScore Rankings:
  
  
  • On a consolidated basis, Demand Media ranked as the #22 US web property and Demand Media's properties reached more than 75 million unique users worldwide.
  • eHow.com reached more than 43 million unique users worldwide. In addition, eHow’s international properties reached more than 15 million unique users worldwide.
  • Livestrong/eHow Health ranked as the #3 Health property in the US, with more than 19 million unique users worldwide.
  • CollegeHumor/Cracked Network ranked as the #2 Humor property in the US, with more than 10 million unique users worldwide. Cracked.com itself had nearly 5 million unique users worldwide.
  • Demand Media ranked as the #32 US mobile web property and reached more than 28 million unique mobile users in the US.
• During Q2 2014, Society6 membership grew to more than 600,000, a 100% increase from a year ago. Additionally, image uploads increased 22% year-over-year, and there are now more than 1.6 million unique designs available on the site.

Domain Name Services:

• Rightside has signed 32 registry operator agreements with ICANN to date, with 13 of its extensions currently in “general availability” phase.
• To date, businesses and consumers have registered more than 160,000 new gTLD domains at eNom and Name.com, making Rightside one of the largest distributors of new gTLDs.
• Rightside’s back-end registry platform now powers more than 150 of the 262 new gTLDs and has processed almost 800,000 new gTLD domain registrations to date.

Operating Metrics:

Q2 2014 Operating Metrics:

• Owned & Operated page views increased 1% year-over-year to 4.5 billion, driven primarily by traffic growth on our international websites as well as mobile page view growth on Cracked.com and Livestrong.com, which more than offset the continuing impact of desktop traffic declines. Owned & Operated RPM decreased 26% year-over-year, reflecting the mix shift to lower yielding international and mobile page views, lower domain sales, and a strategic shift away from higher CPM direct display advertising, offset partially by revenue generated by Society6.
• Network page views decreased 78% year-over-year to 1.4 billion, reflecting the Company’s decision in Q3 2013 to reduce the number of network partner sites we represent as part of our Indieclick network. Network RPM ex-TAC increased 272% year-over-year, reflecting the removal of lower monetizing page views from the Indieclick network.
• End of period domains increased 10% year-over-year to 15.6 million, driven by growth in domain registrations as well as from Name.com.

Conference Call and Webcast Information

Demand Media will host a corresponding conference call and live webcast at 4:30 p.m. Eastern time today. To access the conference call, dial 800-890-0881 (US/CAN) or 719-325-2167 (International) and reference conference ID 1968935. 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 “Reconciliations of Non-GAAP Measures” included at the end of this release.

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 has been the primary measure used by the compensation committee of the Company's board of directors to establish the funding targets for and to 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 (benefit), interest and other income (expense), net, 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, net gains or losses on withdrawals of interest in gTLD applications, 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, (3) employee severance and other payments attributable to acquisition or corporate realignment activities and (4) expenditures related to the separation of Demand Media into two distinct publicly traded companies. Management does not consider these costs to be indicative of the Company's core operating results.

Management believes that this non-GAAP financial 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 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 (Adjusted EPS) is defined by the Company as Adjusted Net Income divided by the weighted average number of shares outstanding. Adjusted Net Income (Loss) 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 content intangible assets removed from service, accelerated depreciation of fixed assets removed from services due to restructuring, acquisition and realignment costs, the formation expenses directly related to its gTLD initiative, net gains or losses on withdrawals of interest in gTLD applications, 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, (3) employee severance and other payments attributable to acquisition or corporate realignment activities, and (4) expenditures related to the separation of Demand Media into two distinct publicly traded companies. Management does not consider these costs to be indicative of the Company's core operating results.

Management believes that Adjusted Net Income and Adjusted EPS 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, including expenditures related to the separation of Demand Media into two distinct publicly traded companies, 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 net payments for gTLD applications, which were $11.5 million for the six months ended June 30, 2014, or net proceeds from the withdrawal of interest in gTLD applications, which were $6.1 million for the six months ended June 30, 2014.

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 content & 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 and individuals to expand their online presence. Headquartered in Santa Monica, CA, Demand Media has offices in North America and South America. For more information about Demand Media, please visit www.demandmedia.com.

About Rightside

Rightside™ inspires and delivers new possibilities for consumers and businesses to define and present themselves online. The company, with its affiliates, is a leading provider of domain name services, offering one of the industry’s most comprehensive platforms for the discovery, registration, development, and monetization of domain names. This includes more than 16 million names under management, the most widely used domain name reseller platform, more than 20,000 distribution partners, an award-winning retail registrar, the leading domain name auction service through its NameJet joint venture and an interest in approximately 100 new Top Level Domain registry operator agreements or applications through its affiliate, United TLD Holdco Limited, trading as Rightside Registry. Rightside is home to some of the most admired brands in the industry, including eNom, Name.com, and NameJet (in partnership with Web.com). Headquartered in Kirkland, WA, Rightside has offices in North America, Europe and Australia. For more information please visit www.rightside.co.

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 that could affect our operating and financial results are described in our annual report on Form 10-K for the fiscal year ending December 31, 2013 filed with the Securities and Exchange Commission (http://www.sec.gov) on March 17, 2014, as such risks and uncertainties may be updated in our 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: the impact of the separation of our business into two separate smaller, less diversified public companies; the expectation that the separation transaction is tax-free; revenue and growth expectations for the two independent companies, and the ability of each company to operate as an independent entity, following the separation transaction; changes in the methodologies of internet search engines, including ongoing algorithmic changes made by Google 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 & operated websites and the websites of our network customers; the impact of product and ad format changes to improve user experience; changes in our content creation and distribution platform, including the removal of content and article rewrites designed to improve user experience, the possible repurposing of content to alternate distribution channels, and reduced investments in intangible assets; our ability to successfully grow adjacent lines of business such as commerce and content solutions as part of our growth strategy; the effects of shifting consumption of media content from desktop to mobile; our ability to successfully pursue and implement our gTLD initiative; our dependence on material agreements with a specific business partner for a significant portion of our revenue; 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 our ability to retain key personnel. 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. 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.

Source: Demand Media, Inc.