When Demand Media Inc. went public in early 2011, the Santa Monica Internet company quickly surpassed the market cap of old-media titan New York Times Co. and was heralded as the future of online content.
Nearly three years later, Demand’s stock is floundering and search referral traffic to its Web properties is waning. The future isn’t what it used to be.
The company has pinned its hopes on the pending spinoff of its domain services business and a new chief executive who can turn around its content business. But analysts say that whoever is tapped for the job will face some big challenges.
“There’s no magic formula,” said Sameet Sinha, an Internet analyst for the San Francisco office of West L.A’s B. Riley & Co. “They’re in a really tough spot with the core business declining. And the new e-commerce business will take time to grow. Will that be able to stem the tide? Probably not, and that’s the issue.”
Demand’s problems began just a month after its public debut when Google Inc. announced changes to its search algorithm that would push mass-produced content – Demand’s specialty – to the bottom of search results in favor of news and social networking sites.
By the time Demand celebrated its one-year anniversary as a public company, its stock price had plunged nearly 70 percent from its first-day close of more than $21. It never recovered. Shares now hover under $6.
To make up for the declining traffic that followed Google’s update, Demand has looked to decrease its dependency on advertising dollars by adding revenue from e-commerce through recent acquisitions, such as online artist community Society6 and do-it-yourself site CreativeBug.
But those acquisitions have yet to pay off. Demand last month reported a net loss of $10.4 million (-12 cents per share) for the third quarter, compared with net income of $3.2 million (4 cents) in the same period last year. Revenue fell 2 percent to $96.3 million for the quarter.
The month before, co-founder and longtime Chief Executive Richard Rosenblatt announced his resignation. Shawn Colo, another co-founder, was named interim CEO.
Demand has retained Chicago executive recruiter Spencer Stuart to find Rosenblatt’s replacement. Colo, who previously served as Demand’s executive vice president of corporate development, said the search for a new head is well under way.
“I think anyone who’s going to be interested in this position is going to see a big opportunity,” he said. “The culture and the people are super important. We want to make sure that we can find someone who understands all of those things and has the capacity to drive growth going forward.
‘Separate parts’
Whoever takes the job will find a company in flux.
In the midst of searching for a chief executive, Demand is also prepping to spin off its domain services business, which includes marketplace eNom and registrar Name.com.
Demand last month announced that the new firm will be called Rightside Group Ltd. and will be led by Taryn Naidu, currently Demand’s executive vice president of domain services.
The spinoff, which could happen as soon as early next year, will result in two smaller public companies. Sinha said that could make it difficult for both businesses to find institutional investors.
“They seem to think there is value to separating the company into two separate parts,” he said. “But there’s always an issue. As your market cap gets smaller, what sort of investors can invest in companies that are small? It limits the playing field.”
Furthermore, Demand’s domain services business has been the one bright spot in its otherwise lackluster financial performance. That division reported an 11 percent increase in revenue during the third quarter, compared with a 7 percent decline in revenue in its content and media business.
Colo said the split is meant to release both businesses from the shackles of an unnatural pairing.
“What we’ve decided is that companies will be best served with their own capital structures and their own separate teams and focus,” he said. “In a world of limited resources, I think we’ve lost out on some opportunities because the businesses have been together.”
New leader
After the split is finalized, Demand’s new chief executive will oversee the company’s content portfolio, which includes how-to website eHow and healthy living site Livestrong.
The content business makes up about two-thirds of the combined company’s total revenue, but has also been the most beleaguered in recent years.
Page views at Demand-owned and -operated sites increased 21 percent during the third quarter due to increased mobile traffic, offsetting continued declines in traffic from search engines such as Google. But RPM – or revenue per thousand views – declined 13 percent due to lower ad rates. Page views for Demand’s network of customer sites declined 37 percent and RPM fell 10 percent.
Though Demand’s mobile traffic is growing, Laura Martin, a media analyst in the San Marino office of Needham & Co., said the company needs to develop individual mobile phone apps for its portfolio and add more video to its content so it can charge advertisers a premium.
“Those are two strategic priorities that the new CEO will have to focus on urgently,” she said.
Who would take that job?
Todd Gitlin, who runs Beverly Hills executive search firm Safire Partners, said Demand could be an attractive target for an executive looking to leave a mark.
“Upside comes in many forms, and with Demand’s undervalued stock price, the CEO position will be very lucrative,” he said. “Compare it to when Marisa Mayer was hired at Yahoo with a $11-$13 share price, which today trades at $36. The legacy tied into a successful turnaround will draw some of the best candidates to Demand Media.”
