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EDITED TRANSCRIPT
DMD - Q1 2015 Demand Media Inc Earnings Call
EVENT DATE/TIME: MAY 06, 2015 / 8:30PM GMT
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MAY 06, 2015 / 8:30PM, DMD - Q1 2015 Demand Media Inc Earnings Call
CORPORATE PARTICIPANTS
David Glaubke Demand Media, Inc. - VP Corporate Communications
Sean Moriarty Demand Media, Inc. - CEO
Rachel Glaser Demand Media, Inc. - CFO
CONFERENCE CALL PARTICIPANTS
Sameet Sinha B. Riley & Co. - Analyst
PRESENTATION
Operator
Good day and welcome to the Demand Media fiscal first quarter 2015. Today's conference is being recorded. At this time I would like to turn the
call over to David Glaubke. Please go ahead.
David Glaubke - Demand Media, Inc. - VP Corporate Communications
Good afternoon. On behalf of Demand Media welcome to our first quarter 2015 conference call. You can find our related release along with
supplemental materials posted on the investor relations section of our website located at ir.demandmedia.com. On the call with me is Sean Moriarty,
our Chief Executive Officer, and Rachel Glaser, our Chief Financial Officer. Following the Safe Harbor statement that I will make Sean will update
you on our business and then Rachel will provide details on our first quarter financial performance and key operating metrics.
Following the prepared remarks we will open up the lines for Q&A. Before we get started we need to make the following Safe Harbor statement.
We would like to remind everyone that during today's conference call management will make certain forward-looking statements subject to various
risks and uncertainties that can cause actual results to differ materially from our current expectations discussed in the forward-looking statements.
In particular, comments about our anticipated future revenue, earnings, operated expenses, operating metrics and growth rates, as well as statements
regarding our business strategy and objectives, plans, intentions, operating outlook and planned investments are considered forward-looking
statements.
Factors that could cause actual results to differ materially from anticipated results are detailed in our press release furnished to the SEC. I would
like to point out during this call we will discuss certain non-GAAP measures while talking about the Company's financial and operating performance
including adjusted EBITDA, adjusted EPS and free cash flow. A reconciliation of these non-GAAP financial measures to their most directly comparable
GAAP measures can be found in the tables included at the end of our press release.
Lastly, before we begin, I would like to remind everyone that today's conference call is being recorded and it is also available via web cast on the
internet through the investor relations section of our corporate website. A replay will be available on our website. With that, I will now turn the call
over to Sean Moriarty, our CEO.
Sean Moriarty - Demand Media, Inc. - CEO
Thanks, David, and thank you all for joining our first quarter earnings call this afternoon. Let me begin this call by reiterating our mission at Demand
Media. We build platforms across our media and market place properties to enable communities of creators to reach passionate audiences and
large and growing lifestyle categories while helping advertisers find innovative ways to engage with their customers. We have made significant
strides since the beginning of the year and I am pleased to take you through some of the key highlights.
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MAY 06, 2015 / 8:30PM, DMD - Q1 2015 Demand Media Inc Earnings Call
I'll divide my comments today into three parts. First I will discuss eHow and LIVESTRONG, both businesses in transformation. Second, I will discuss
our growth opportunities in the content solutions market places and Cracked businesses and the progress we are making so far. Finally, I will talk
about how we improving and strengthening operations with people, processes and sound investment strategies to return the Company to growth
and profitability. Starting with the eHow which represented 28% of our total revenue in Q1.
EHow was down 58% year-over-year primarily as a result of the ongoing impact of traffic declines following algorithm changes by search engines
as well as lower admonitization. In addition, we have made very hard choices that have negatively impacted revenue in the short-term, but will
significantly improve the experience for users and make eHow much more attractive for advertisers. This year we have continued to remove
duplicative articles, also focusing our talented creator pool on renovating articles by adding photos, rewriting content and testing with contextual
companion videos. Since November we have removed 2.4 million articles including nearly 400,000 we took down just last week.
We now have 760,000 articles live on site compared to three million before the take downs. Our approach to this renovation is methodical. We've
identified an important subset of five categories that have the highest potential and we are focused on improving the depth and quality of content
in those areas. We have also redesigned the eHow web site, made strides toward optimizing the mobile experience and are seeing promising
growth from traffic sources such as Pinterest as we work to become less dependent on any one single algorithm. Additionally, we plan to launch
a slate of everyday life [hack] videos this quarter as well as an eHow app later in the year. These products are the beginning of eHow's reinvention.
This turn around is not easy and requires significant investment but stabilized this high margin business will provide benefits well into the future
and we believe that it's worth the effort. Now, I'm excited to discuss LIVESTRONG which is well into a transformation of its own and is a great
example of the impact at right sizing and improving content can have on audience and engagement. In Q1 LIVESTRONG accounted for 11% of
total revenue and achieved over 60% traffic growth compared to the first quarter of 2014.
Registrations and app downloads are also up in the double digits year-over-year. LIVESTRONG has also built a set of well designed apps like the
LIVESTRONG calorie tracker for weight loss and the My Quick Coach for smoking cessation. Both of which saw double-digit growth in monthly
average users during Q1 as compared to last year. In January, LIVESTRONG had its biggest month ever for community posts. More and more people
are finding LIVESTRONG to be the destination of choice for health, wellness and living their strongest possible lives. Moving on to the second area
of focus for today's call are businesses that offer the best near term growth opportunities for the Company.
The first growth business to speak of is our content solutions business. Content solutions revenue increased 16% year-over-year representing 11%
of our total Q1 revenue, and 7% of our trailing 12-month revenue. Leveraging the same studio talent that produces content for our owned and
operated media properties, the content solutions team develops and executes custom content marketing strategies for some of the world's largest
brands looking to tell their stories directly to consumers.
Our data and insights publishing systems work flow tools and contributor network allow us to provide high quality editorial and video content
from strategy through execution and optimization. During Q1 the content solutions team signed several new customers and the pipeline remains
strong. Our team has recently worked with creators to produce content as varied as a Valentine's Day, love the wine you're with, for a major wine
marketer, to a countdown to taxes checklist and employee appreciation day decision free for Office Depot. It is early days for this business and we
plan to invest intelligently as the market takes shape.
But we believe this business can grow substantially for us over the long-term. Another growth area for us is market places which represented 32%
of our Q1 revenue and 25% of our trailing 12-month revenue and demonstrated strong momentum exiting the Q4 holiday season. Q1 year-over-year
revenue growth for market places was 59%. Society six continues to deliver impressive growth in traffic, conversion rates and revenue. The product
portfolio is well balanced and diverse. In March the team launched another new product, Wall Tapestries, bringing the total number of products
available to 22. The site now has over two million unique designs that can be printed on these products.
A 48% increase from a year ago. Saatchi Art brought some of its artists from the virtual world into the real world connecting artists and collectors
in person at South by Southwest, the affordable art fair in New York, and a solo show in London for one of Saatchi Art's most successful artists,
(inaudible). In addition, Saatchi Art app, which launched late last year just won a webbie for best life style mobile site and app validating the
transformative impact we are having on the experience of buying and selling art on-line. Our third growth business, Cracked, represented 7% of
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MAY 06, 2015 / 8:30PM, DMD - Q1 2015 Demand Media Inc Earnings Call
our Q1 revenue and 6% of our trailing 12-month revenue. During the first quarter Cracked continued to focus on producing high quality video
content including a second season of ron.com, a must watch video titled If the Internet Was a High School, and a production spree of 10 original
videos in 10 days.
Our after hours series produced a video which had a record 175,000 views on YouTube in the first 24 hours. Cracked has grown to over 700,000
subscribers on YouTube and we exited the quarter with over 10 million streams on the channel. We have also significantly grown views on Facebook
and the Cracked app. Our best performing video on Facebook, Drivers Ed For the Real World, currently has over 4 million views. In addition, last
week we were awarded The People's Voice Webbie for best humor site marking the fourth year in a row that Cracked has won a Webbie.
Finally, let me turn to how we are changing the way we operate our business. As I said on our last call we are at the beginning stages of a six to
eight quarter transformation and we have a lot of work in front of us. The corner stone of any company's success is the strength of it's people so
retaining and recruiting the strongest possible executive team has been one of my highest priorities. We recently announced the additions of our
new CFO, Rachel Glaser, and our new Head of Corporate Development, Tom Albright. I am thrilled to have these strong and seasoned executives
to our existing leadership group and I'm confident that we now have a team ready to lead the Company through this transition to a path of healthy
and sustainable growth. A very important operating principal for us is fiscal discipline.
We are committed to maintaining a cash balance of at least $40 million this year even as we invest intelligently in our businesses. We are carefully
evaluating the changing landscape, navigating through our current challenges and building the business for the long-term. Our core businesses
consists of properties and growing lifestyle categories that people are passionate about. Categories that are rapidly moving online and across
mobile platforms. We see a real opportunity for market leadership. Given the growing audience for high quality content in these lifestyle categories.
And our businesses at scale can be strong and profitable. While the picture should become more clear over the next few quarters I feel very good
about the steps we have taken and the impact we have seen so far. Now I will turn the call over to Rachel for the financials.
When I first met Rachel late last year I was impressed by her back ground. As I got to know her over the CFO selection process I became convinced
that she was the right CFO and leader for us. She has been through a successful transformation at realtor.com as an executive leader and knows
firsthand what it takes. I am thrilled to have her on board. In the few weeks she has been here she has already demonstrated a real appetite for the
challenge and she will be an outstanding partner as we take on the transformation of our business. Now, over to Rachel.
Rachel Glaser - Demand Media, Inc. - CFO
Thank you, Sean. It is a pleasure to be part of the Demand team and I am very happy to join you for this Q1 2015 earnings call. Before I dive into
the Q1 financial commentary I thought I would spend a couple of minutes talking about why I am excited to be here. I joined Sean at Demand
because I see a tremendous amount of potential in the assets of the Company. We have a portfolio of businesses, each with their own unique set
of challenges, opportunities and strategies. We have businesses like eHow and LIVESTRONG with a clear and articulated plan for improvement.
Content Solutions, our burgeoning content marketing group, is penetrating new territory and it is just at the beginning of its growth curve when
it can benefit from investment, and tools and people. Our market places business has growing audiences and operates in large and attractive
adjustable markets where there is not yet a clear leader. We are in the enviable position of having one of the largest audiences on the internet. Our
fundamentals include a healthy cash balance and no debt. In short, we have the assets and the talent to fuel future growth. I am pleased to be part
of the team that can unlock what I see as tremendous potential.
Now let me take you to the results of the quarter. I will start with the straight forward numbers as outlined in our press release. Total revenue in
Q1 was $33.2 million, down 26% year-over-year driven primarily by declines in the content and media business partially offset by growth in the
market places businesses. Adjusted EBITDA in Q1 was $0.5 million, down 96% year over year largely reflecting the impact of revenue declines in
the higher margin content and media business. Free cash flow was negative $3 million for the quarter reflecting challenges in content and media
revenue as well as the timing of certain working capital payments. Let me provide further color on these results starting with revenue. As we
expected, the content and media business continued to experience declines in ad monetization yields, in particular, in the eHow business which
is continuing to undergo the renovation we discussed on last quarter's call.
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MAY 06, 2015 / 8:30PM, DMD - Q1 2015 Demand Media Inc Earnings Call
Overall, the content and media business declined 41% year-over-year to $22.5 million. Revenue per thousand visit was down 38% year-over-year
to $23.87 due to lower ad monetization yields, a strategic reduction in higher yield and higher yielding direct sold display advertising and the sales
of our Cover At Live and Pluck social media businesses. Pealing the onion further on content and media revenue, there are a few puts and takes to
call out. First, traffic continues to be depressed from the impact of ongoing search engine algorithm changes. Visits across all sites in Q1 were 943
million, down 5% year-over-year. Traffic declines were driven primarily by decreases in eHow, down approximately 34%, while LIVESTRONG traffic
increased more than 60%.
Mobile traffic across all properties grew roughly 41%. Lower traffic coupled with a decrease in monetization yields from our cost for quick advertising
accounted for approximately 55% of the content and media revenue decline versus prior year. Second, as we have discussed previously we have
shifted from a direct branded ad sales effort toward a focus on programmatic selling. Our expectation is that while programmatic CPMs are generally
lower as compared to branded, as we increase sales through the programmatic channel we will optimize paid yield at higher margins.
Reduction and display revenue de to our strategic shift away from direct branded ad sales therefore accounts for 15% of the revenue decline in
the quarter. Third, we have been ferociously working to improve the quality of eHow content with a goal to restore traffic growth and improve our
ranking in relevant search queries. The content reduction on eHow that Sean discussed, which supports this goal, accounts for 13% of the revenue
decline in the quarter. Fourth, revenue loss related to divested businesses accounted for 12% of the revenue decline in the quarter.
Normalizing for the removal of Pluck and Cover it Live, revenue from our content and media business would have been down 39% versus the 41%
just cited. Lastly, as previously discussed during Q4 we removed three ad units from each eHow article to enhance the consumer experience and
stimulate engagement. While this move accounted for the last 5% of the Q1 content and media revenue decline versus prior year, there are early
positive signs that we are improving overall quality and experience.
Following the reduction in ad units we have seen user engagement on eHow increase by 5% based on the number of visitors clicking on related
eHow articles. Turning now to market places, revenue was up 59% year-over-year, to $10.7 million as compared to 24% growth in Q1 2014 on a
pro forma basis. This demonstrates acceleration and momentum in this business which was fueled in part by the addition of Saatchi Art to this
revenue stream but driven largely by Society6 growth versus prior year. Conversion rates increased this quarter driving total transactions up to
approximately 182,000, a 31% increase year-over-year. Average revenue per transaction was $58.65, up 21% year-over-year primarily due to a shift
to higher priced items of Society6 as well as the acquisition of Saatchi Art. Turning to consolidated operating expenses Q1 GAAP operating expenses
were $42.9 million, down 16% year-over-year.
Excluding depreciation, amortization and stock based compensation total operating expenses were $33.1 million, down $600,000 year-over-year
on an absolute dollar basis. Excluding product cost for Society6 all of our other operating expense items were lower year-over-year on an absolute
basis. Specifically, service costs were down year over year due to lower IT, traffic acquisition and ad serving costs, partially offset by an increase in
content renovation expenses. Sales and marketing expenses declined year-over-year due to a smaller sales infrastructure as a result of our previous
strategic decision to transition away from direct branded advertising sales partially offset by increased marketing activities for our market places
business.
Product development expense is lower year-over-year due to reduced head count as we streamline some of our operations and maintain disciplined
hiring partially offset by increases in product development expenses for our market places business. And general and administrative businesses
were slightly lower partially due to head count reductions. At the end of Q1, total head count was 16% lower than it was a year earlier. A little more
than half of this reduction was related to divested business net of Saatchi additions, and the balance is due to careful management of expenses.
This takes us to Q1 cash flows.
Free cash flow, defined as GAAP cash flow from operations excluding acquisition and realignment payments, left capital expenditures and investment
in intangible assets with negative $3 million in the quarter reflecting challenges in content media revenue as well as timing of certain working
capital payments. Our expectations is that we may continue to consume rather than generate cash for several quarters as we invest in righting the
eHow ship as well as seating our less mature businesses to position them for growth. We are committed to disciplined oversight of expenses and
investments. At March 31, our balance sheet remains healthy with $47.3 million of cash and cash equivalence and there is no outstanding debt.
Before I conclude my remarks let me give you a little color on what the environment is like here.
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MAY 06, 2015 / 8:30PM, DMD - Q1 2015 Demand Media Inc Earnings Call
As I was leaving the office last Friday night there were teams still huddled around screens, conference rooms were in use and the sound of Ping-Pong
was coming from the common area. This place is buzzing with activity. There is energy, focus and ambition. People here want to win. The expression
when the going gets tough, the tough get going, keeps coming to mind and is emblematic of this spirit. I look forward to meeting you all and
sharing updates with you as we embark on this journey. Peter Kim, our interim Chief Accounting Officer is alongside me right now and will help
address your questions.
I will now turn the call back over to Sean for some closing remarks. Sean?
Sean Moriarty - Demand Media, Inc. - CEO
Thank you, Rachel. Last week the world lost one of the brightest of lights, Dave Goldberg, CEO of Survey Monkey. Dave was a friend and mentor
to many of us, an outstanding entrepreneur and business leader and an extraordinary human being. As we remember Dave we share our deepest
sympathies with his family, friends and colleagues. When we think of a standard for a life well lived personally and professionally, Dave set the bar.
This concludes our prepared remarks. Operator, please open the line for Q&A at this time.
QUESTIONS AND ANSWERS
Operator
Thank you. (Operator Instructions). We will take our first question from Brian Fitzgerald with Jeffries.
Unidentified Participant
Hi. This is (inaudible) sitting in for Brian. A couple of questions. The first is, have you seen any impact to traffic in the quarter following Google's
algorithms that took place, well publicized changes that took place in the quarter? And then two, can you give us a sense of how much of your
advertising revenue is coming from Google's ad sense program versus some of your other programmatic sources? Thank you.
Sean Moriarty - Demand Media, Inc. - CEO
On the first part of your question are you referring to correct quarter?
Unidentified Participant
Yes.
Sean Moriarty - Demand Media, Inc. - CEO
As we said earlier we just recently took down 400,000 articles and at the same time there has been some talk of volatility out there. Although, I
believe Google has not yet disclosed if in fact there was a algorithmic change. We have seen some downward volatility but again, in the context
of the take down we initiated so it is a bit early for us to tell but we are keeping a close eye on it as we go forward.
Rachel Glaser - Demand Media, Inc. - CFO
This is Rachel. The second question was regarding the percentage of our total revenue that is Google access.
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MAY 06, 2015 / 8:30PM, DMD - Q1 2015 Demand Media Inc Earnings Call
Unidentified Participant
Correct.
Rachel Glaser - Demand Media, Inc. - CFO
I don't believe we have disclosed those numbers before, but I can tell you it is less than 50%, and is decreasing. So our strategy is to continue to
diversify our monetization streams as we build our businesses and as we add market places. Businesses which are completely independent of that.
Unidentified Participant
Great. Thanks a lot.
Operator
(Operator Instructions). And we will take our next question from Sameet Sinha with B. Riley.
Sameet Sinha - B. Riley & Co. - Analyst
Thank you, very much. Couple of questions starting with content and media. 400 articles have been moved and now you're left with about 700,000.
Do you think that is the right number or is there a right number that you are targeting for number of articles in the five categories you plan to focus
on? In terms of ad unit removals can you confirm that has been done? And the three that you've moved in the fourth quarter that was the final
removal? And if you can shed some light on just programmatic and the trends that you're seeing over there? What sort of CPM declines are you
seeing for the same ad unit versus today? Let's start off with that, and I have a couple of follow-ups.
Sean Moriarty - Demand Media, Inc. - CEO
The first part of your question, Sameet, was really on the take down and the number of articles. I don't think there is a magic number. What we are
looking at is every article that we are creating meeting our standard of quality and does it help fulfill what robust resource within a particular
category needs to be for eHow to be compelling to users. There is no magic number. And quality is first.
That said, we had a proportionally similar take down for LIVESTRONG. Again predicated first and foremost on quality.
We were successful with that. We are guided somewhat by prior success, but most importantly it is really about the quality of the product and
where we think we have the right coverage within the categories that we are. We think we are substantially there at this point but again, the bar
we are going to set is always going to be qualitative and we will end up where we end up. From a pure numbers perspective we are probably in
the zone, maybe slightly more condensed as we address the way the product works and as we consolidate certain Q&A articles into more robust
topics where your article count would actually go down as measured by article count but your information density and relevance would be the
same or greater. The second question I believe you had was with respect to the number of ad units. I can confirm we did, in fact, take down three
as of Q4 last year.
I think you also asked, does that reflect some sort of fixed state for us? What I would say to that is we are constantly looking to see how we
appropriately balance a great user experience with a great products for advertisers. As the world evolves and the needs of advertisers change and
as people move to mobile and video it will probably result in changes to ad density. Because we really need to focus on experience first. I don't
think there is a fixed appropriate number of ads. It's really about, are we are striking that right balance from quality of user experience and quality
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MAY 06, 2015 / 8:30PM, DMD - Q1 2015 Demand Media Inc Earnings Call
of the audience we are delivering to advertisers in meeting their needs as well. I wouldn't want to get anyone stuck on a particular number at a
given point in time. More focused on, again, quality of engagement and monetization trends longer term over time.
Rachel Glaser - Demand Media, Inc. - CFO
And I will add to that quickly that number of units is one thing, but also who will we sell those units to is another thing we are being open minded
about. We just talked on the question before with percentage and revenue that's coming from Ad Sense that we'll look be to be diversifying and
a maybe higher yield from other kinds of advertising in the same (inaudible) of inventory. And your last question was on CPMs, and we haven't
disclosed CPMs but I can say as with any publisher there are three or four kinds of selling activity out there. There's branded, there's remnant, there's
programmatic and those things that you might call sponsorship's, we have them all. We've shifted the branded sales team and they are selling
more programmatic than they were before. Programmatic has been a higher CPM than remnant was but right now the sell through is highest on
remnant and we're going to continue to move to get more of the sell through to go through the programmatic selling certain apparatus and as
we do that we should see CPM improve.
Sameet Sinha - B. Riley & Co. - Analyst
Finally on market places obviously tremendous momentum continuing to Q1. How should we think about that business? The way we see it is an
e-commerce business and a highly competitive category. It's growing fast. You're doing all the right things in terms of (inaudible) the noise in
traffic, (inaudible) but margins are still low. At what level of revenue does it become, get to break even on a stand alone basis?
Sean Moriarty - Demand Media, Inc. - CEO
You know, it is important to point out this is market place e-commerce and not retail e-commerce and these should be very good, healthy businesses
at scale. The question you ask is somewhat predicated on how quickly we believe we can grow and grow in a healthy manner. I.e., if you wanted
to get profitable very quickly you could constrain growth to do that. We are much more interested in building a differentiated large business which
we know has healthy margins at scale, than hitting profitability for profitability sake early in these growing categories. Based on existing performance
we feel these businesses can be good, healthy businesses for us.
Rachel Glaser - Demand Media, Inc. - CFO
(inaudible) is earlier in its life cycle than Society6 so we told you some of the growth rates for Society6. I can say for the category market places and
even though we talk about segments, but we are seeing break even across the category. Going forward depending on how much we want to invest
in one or the other to make it grow faster could influence that favorably or negatively. But we already have the positive indicators these can be
healthy and profitable businesses for us.
Sameet Sinha - B. Riley & Co. - Analyst
Great, thank you.
Operator
And there are currently no other questions at this time. (Operator Instructions).
Sean Moriarty - Demand Media, Inc. - CEO
If there is no more questions we will talk to you all next quarter. Thank you for tuning in.
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MAY 06, 2015 / 8:30PM, DMD - Q1 2015 Demand Media Inc Earnings Call
Operator
Ladies and gentlemen this does conclude today's conference. We thank you for your participation.
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