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Demand Media Reports Second Quarter 2016 Results

Demand Media, Inc. (NYSE: DMD), a diversified Internet company comprised of several marketplaces and media properties, today reported financial results for the second quarter ended June 30, 2016.

“Q2 was another strong quarter for our Marketplace businesses, with Saatchi Art and Society6 both growing in revenue, traffic and conversion rates,” said Sean Moriarty, CEO of Demand Media. “In addition, Livestrong.com delivered its highest Q2 traffic of all time and increased revenue versus Q1.”

Q2 2016 Financial Summary:

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

“In Q2, our Marketplaces businesses grew to 55% of our total revenue and grew 28% year-over-year,” said Rachel Glaser, Demand Media’s CFO. “That growth, coupled with gradually increasing stability of our media businesses and streamlined corporate overhead costs, puts us on a great trajectory for 2017.”

For the second quarter of 2016:

  • Total revenue declined 18% year-over-year due to a 43% decline in Content & Media revenue partially offset by a 28% increase in Marketplaces revenue. On a pro forma basis eliminating the impact of the dispositions of the Cracked business and other non-strategic properties, total revenue declined 7% year-over-year.
  • Marketplaces revenue grew 28% year-over-year driven primarily by increased traffic, new product introductions and higher conversion rates.
  • Content & Media revenue declined 43% year-over-year driven primarily by the divestitures of certain online properties including Cracked, traffic declines to eHow and lower ad monetization yields. On a pro forma basis eliminating the impact of the dispositions of the Cracked business and certain other non-strategic properties, Content & Media revenue declined 30% year-over-year.
  • Adjusted EBITDA was $(5.2) million for the quarter, primarily reflecting the decline in higher margin Content & Media advertising revenue, partially offset by growth in Marketplaces and managed reductions in operating expenses other than product and marketing costs. On a pro forma basis eliminating the impact of the dispositions of the Cracked business and certain other non-strategic properties, Adjusted EBITDA was $(4.9) million for Q2 2016.
  • Cash and cash equivalents was $60.9 million at period end with no debt outstanding.
  • Demand Media continued to reduce operating costs during Q2, and also expects that the integration of its studioD business into its broader Content & Media business during the quarter will result in annualized savings of approximately $8 million.

Business Highlights:

  • On a consolidated basis, Demand Media’s properties reached more than 46 million unique visitors in the US in June 2016, including more than 33 million mobile visitors (source: June 2016 US comScore).

Marketplaces:

  • Society6 launched towels as a new product during Q2, as well as metal prints at the end of the quarter, and now has 32 products available for customization on the site. Society6 saw strong growth in revenue, traffic and conversion rates year-over-year, including an increase in the number of repeat customer transactions. Society6 ended Q2 with over 620,000 followers across social sites, primarily Facebook and Pinterest.
  • Saatchi Art continued to demonstrate strong growth in revenue, traffic and gross transaction value in Q2 versus the prior year. Both new customers and repeat customers increased more than 60% year-over-year, and traffic from social channels grew nearly 50%. During Q2, Saatchi Art introduced “all-inclusive pricing” and continued to increase Art Advisory sales, both of which helped lead to a significant lift in the conversion rate for the quarter. Saatchi Art ended the quarter with over 470,000 followers across social sites, primarily Facebook and Pinterest.

Content & Media:

  • eHow saw strong social growth during Q2, with followers increasing on Facebook and Pinterest, and ended Q2 with approximately 1.1 million followers across social sites, primarily Facebook and Pinterest. In June 2016, eHow Home ranked as the #6 Home property in the US among ad-supported websites, and eHow reached nearly 16 million unique visitors in the US across desktop and mobile platforms (source: June 2016 US comScore).
  • Livestrong.com revenue grew during Q2 as compared to Q1, driven by increasing revenue per one thousand visits, or RPVs, during the quarter. Traffic also grew year-over-year in multiple channels including search, email and social, resulting in the site’s highest Q2 traffic ever. Livestrong.com ended Q2 with over 580,000 followers across social sites, primarily Facebook and Pinterest. In June 2016,
  • Livestrong.com ranked as the #4 Health property in the US among ad-supported websites, and Livestrong.com reached more than 25 million unique visitors in the US across desktop and mobile platforms (source: June 2016 US comScore).
  • studioD, which is comprised of the company’s content channels and custom content businesses, was realigned during Q2 to be better integrated within the company’s media operations. studioD will continue to create content for third-party brands and publishers, with the custom content business focused on creating sponsored content and integrated native advertising campaigns that include distribution of the custom content on the company’s owned and operated properties.

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, together with the GAAP financial results, 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 and gains 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, to evaluate investment decisions, and in its discussions with investors, commercial bankers, equity research analysts and other users of the company’s financial statements. Accordingly, the company believes that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating the company’s operating results in the same manner as management and in comparing operating results across periods and to those of Demand Media’s peer companies.

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. In addition to the non-GAAP financial measures presented in this press release, the company is also providing certain pro forma financial information to reflect the dispositions of the Cracked business and certain other non-strategic properties. 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) excluding interest (income) 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, stock-based compensation and acquisition, disposition and realignment costs. Management believes that the exclusion of certain expenses and gains in calculating Adjusted EBITDA provides a useful measure for period-to-period comparisons of the company’s underlying core revenue and operating costs that is focused more closely on the current costs necessary to operate the company’s businesses and reflects its 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) excluding 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, disposition 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 and gains 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, disposition 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 and LIVESTRONG.COM) 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 custom content solutions (studioD) and diverse advertising 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 Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements set forth in this press release include: the company’s expectations regarding its trajectory for 2017; the company’s expectation that the integration of its studioD business into its broader Content & Media business will result in annualized savings of approximately $8 million; and the company’s plans that the studioD business will continue to create content for third-party brands and publishers, with the custom content business focused on creating sponsored content and integrated native advertising campaigns that include distribution of custom content on the company’s owned and operated properties. In addition, 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. 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. 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, 2015 filed with the Securities and Exchange Commission (http://www.sec.gov) on March 1, 2016, as such risks and uncertainties are updated in Demand Media’s quarterly reports on 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 traffic to the company’s online properties; the effects of shifting consumption of media content and online shopping from desktop to mobile; the potential impact on advertising revenue of lower ad unit rates, a reduction in online advertising spending, a loss of advertisers, lower advertising yields and/or increased availability of ad blocking software, particularly on mobile devices; the company’s dependence on material agreements with a specific business partner for a significant portion of its revenue; the impact on revenue and expenses of changes made to the company’s Content & Media properties that are intended to improve user experience and engagement; the company’s ability to attract new customers to its marketplaces and successfully grow its marketplaces business; the company’s ability to successfully expand its current lines of business and grow new lines of business; 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.

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