Demand Stock Up With Solid Revenue and Acquisitions

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ADOTAS – With the stock market madness of the last few days, I can’t avoid the temptation to take a peek at Demand Media. Back in January, the company’s IPO, valued at $1 billion, suggested that Wall Street highly approved of its formula-driven online content production at the lowest cost — content farming was the term du jour — that relied on SEO gimmickry to propel its network of sites to the top of many Google search results.

But that was before Google rolled out the Panda search algorithm update between February and April, which somehow (magically?) gave many of Demand’s media properties (eHow most notably) a kick down search results pages. Demand’s stock has followed with a steady decline since a $27 peak in April, falling as low as $7.65 in the turmoil over the last week — it’s about a 60% tumble since the IPO in January.

Source: Google Finance

However, today the stock is back above $10 and climbing following Demand’s second-quarter 2011 earnings report, which cited better revenue than the prior year and smaller losses compared to both the Q210 and Q111. Plus, the company made a few choice acquisitions and extended its global advertising relationship with Google as a major AdSense partner for another three years.

Demand’s second-quarter revenue (excluding traffic acquisition costs) increased 34 percent year over year to $76.6 million ($57.3 million in Q210), above analysts’ expectations of $73.9 million. This was higher than first quarter revenue of $76.3 million. Flagship website eHow accounted for 32% of revenue.

Reading the writing on the wall (“PANDA” in giant block letters), Demand has expanded its media array through widely-publicized publishing partnerships with celebrities such as Tyra Banks and Rachael Ray. Demand shared its estimate that Google algorithm changes would affect revenue by 6% in 2011.

In addition, the company has acquired two companies to bolster its marketing initiatives: IndieClick offers advertisers custom rich media ad units intentionally places to reach the much-valued 18-34-year-old demographic, while RSS Graffiti enables brands to build custom social content feeds with advanced sharing controls.

Demand is still struggling with operational losses, which were at $0.9 million compared to a $1 million loss in Q210 and a $4.2 million loss in Q111. Net loss was $2.4 million, compared to a $1.9 million loss in Q210 and a $5.6 million loss in the prior quarter. Net loss per share was $0.03 ($0.75 in Q210, $0.94 in Q111).

As for guidance for the third quarter of 2011, Demand expects revenue to be between $78.5 and $82.5 million, with losses from operations between $5.8 and $4.3 million. For fiscal 2011 on the whole, the company is estimating revenue to come in between $321.5-$329.5 million, with losses from operation falling somewhere between $10.1 and $7.1 million.

“Turning the corner” may be an exaggeration, but Demand seems to have proven to wary investors that it’s still alive, bringing in revenue and planning for a bolder future.

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