Demand Media Earnings: Public but Still Playing Shell Games

Demand Media had its first earnings announcement and started on what seemed to be a good note -- an actual profit. Ah, but don't get too excited, as Demand says to expect losses this year starting with its first quarter.

Granted, ramping up is hard to do, and CEO Richard Rosenblatt was defensive about the company's content model in the face of broad criticism of the junk articles it pushes on sites like eHow.com. However, his parries of criticism seemed like misdirection. Maybe that was to keep people from looking at the hard numbers that show just how tough a road Demand faces if the warnings about losses aren't to become boilerplate in future earnings releases.

Even the earnings press release had a tinge of hyperventilation when it came to performance metrics. It quotes Rosenblatt claiming more than 100 million unique monthly visitors as measured by comScore. But comScore uses estimated based on sampling people who have agreed to be monitored. It's not a representative set, meaning that their accuracy is questionable -- and you'd think that Demand would have its own direct measurements. After all, it offers its own numbers for page views.

Interesting accounting choices
The financials raise questions, mostly because of Demand's interesting accounting choices (though the SEC signed off). The company assumes that its content has a five year lifespan -- overly optimistic if you know the industry at all -- and so it amortizes the cost of creating that material, editing and writing expenses, over the same five years.

When you compare the increase in content revenue grow for the fourth quarter by some 45 percent and product development costs increase by 18.9 percent, it seems like the company is moving in the right direction. Only, Demand is effectively pushing off hard costs to show up in the future. It's like trying to understand the real revenue of iPhone sales before a change in accounting standards allowed Apple to recognize most of the income when it sold units. For Apple, there was a growing wave of accumulated revenue finally coming together into an enormous mass. For Demand, it will be accumulated expenses crashing upon the bottom line.

Demand likes to use a measure called "adjusted OIBDA" to look at its results (in addition to SEC-mandated GAAP). It discusses operating income or loss before "depreciation, amortization, stock-based compensation and certain non-cash purchase accounting adjustments." But all that labor is amortized. Oops. That's what can change the guidance for the current quarter from a GAAP operating loss of $1.4 million to $7.4 million into an operating profit of between $80 million and $86 million, all within a sentence or two.

Demand continues a shell game that started before the IPO, when the company claimed to be profitable, even though it wasn't close. Wonder if Rosenblatt read the eHow article, How to Run a Public Company.

Related:

• Content Mill Bubble? No, Just Hype and a Business Model Shake-Out
• New Media Dreams Are the Old Delusions of Marketing
• Why Demand Media Won't Make a Profit Soon, IPO or Not
• Demand Media Backlash Highlights the Dangers of Pre-IPO Spin
• Demand Media IPO Filing Shines Harsh Light on Its Strategy