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Demand Media Reports Third Quarter 2015 Results

Santa Monica, CA- 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.”

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.

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.

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.

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