Demand Media filed their S-1 to kickstart the IPO process on August 6, according to EDGAR. Over the intervening week, a spate of negative articles have greeted it.
- CNN Money : Unprofitable Demand Media files for IPO
- CBS Business : Demand Media IPO Filing Shines Harsh Light on Its Strategy
- Slate : What Happened to Demand Media’s Audience?
- WSJ Blogs : Where Did Demand Media’s Profits Go?
- CBS Business : Demand Media Backlash Highlights the Dangers of Pre-IPO Spin
Despite repeated proclamations to the contrary by co-founder Richard “Richie” Rosenblatt, Demand Media has never indeed turned a profit.
How to show OIBDA Profits
In 2008, Demand showed a net loss of $14.2 million on revenue of $170 million. In 2009, the loss increased to $22 million on revenue of $198 million. The first half of fiscal 2010 brought in revenue of $114 million, on losses of $6 million. Shows improvement, right?
As of June 30, the company did have plenty of cash on hand, with $34 million available. At a current burn rate of $1 million per month, that leaves a hefty cushion. Accepted wisdom holds that a company should seek investment with a substantial war chest already on hand, so as not to be torn apart by the sharks. Investors in Demand Media are on the hook for over $350 million, so you can bet they’re pushing to get while the getting’s good.
As for the legality of his claims, Richie can probably waltz a Clintonian dance around the finer nuance of language. The pre-IPO quiet period is always a convenient excuse to dodge a difficult question. Demand Media has also provided the wonderfully acronystic ”adjusted OIBDA,” or adjusted operating income before depreciation and amortization expense as a measure of profitability in their S-1. Adjusted OIBDA, after all, reveals the company made $36.8 million in 2009. What type of non-GAAP crap is that? It may not be Enron, but it sure ain’t kosher.
Scott Austin, in his WSJ Blog article, rightfully claims,
“Adjusted OIBDA is hardly what most people think of when a CEO says a company is profitable.”
Austin’s WSJ Blog hit burns Demand’s false profits in a harsh toke. He outlines a series of wonderful examples of Richie’s OIBDA adjusted spin. On January 28, 2010, Rosenblatt appeared at the Twiistup tech conference in Los Angeles, and his words have been recorded for posterity. During an interview with Giga Omni Media founder Om Malik, Richie stated clearly,
“[W]e’ve been profitable since we started.”
Our friend Content Millie did us the favor of excerpting the relevant quote into an 8-second clip, so judge for yourselves on the ambiguity of Richie’s statement:
Link to Video on Youtube
Excellent article, Wretched!
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I did find this article at Business Insider interesting to read and the author makes very valid points:
http://www.businessinsider.com/demand-medias-ipo-everything-you-need-to-know-2010-8
Just another in what will be thousands of different people speculating over exactly what this means long term. It is still way to early to tell what direction this will all go in for creators, but you have got to keep one thing in mind….just like any other business, when they start placing people on the chopping block look for the lower scores and low quantity people to be gone first.
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Guys, SamR is a fellow DMS writer and they a common flesh eater than lurks the DMS forums like a piranh. I think the DMS zombies finally found this site and are a little bit butt hurt. Stop crying!
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What I do not understand is this:
How did Demand think they could hide the losses when filing the IPO?
Did they not think they would be investigated?
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MomZomb posted in the zombie forum that she’s been instructed by TPTB to take down all threads pertaining to the IPO because NO ONE is allowed to discuss it on a site run by DMS. It’s supposedly part of the “quiet period” before the IPO.
I guess by “quiet” they mean, “Let’s not let any damning truth slip out while we silently pray that nobody reads all 170+ pages of that S-1 with comprehension before we line up a bunch of suckers with cash to burn.”
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SamR needs to go back to the community college where he got his Associate of General Studies degree and ask for a refund. Apparently a $15 dollar article gig is the only success he’s had.
Congrats.
Now get a real job.
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SamR is just like ChristopherSkylab or whatever is his name. Just looking for attention wherever they can get it. They will always find a point to argue when they have no point to argue.
As far as the IPO I don’t have any idea what it all means from a financial stand point. I really could care less. My only concern is the business model itself. Things do need to change, but not for the worse. Change meaning better copy editing and higher pay across the board. I wouldn’t mind the pay staying as it is, if they would get a better grip on the copy editing. Too many variables at play with the editing process. Just assign specific editors to specific topics and have them edit by the same rules across the board.
This IPO has everybody up in arms squawking about this and that and what it means. It is amazing however, how many financial gurus crop up on the boards that don’t know their ass from a hole in the ground. NOT directed at you Rhead just some of the other folks that seem to like to argue with…..everybody.
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Interestingly, SamR was accused of hoping for Demand’s demise, for posting his own speculation on the IPO in the Z-forums.
And here he is doing it here.
Amazing.
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SamR, I guess the sides of your rectum keep you from turning your head and looking around. A more representative google search of news with the terms ["demand media" ipo -hulu -skype] draws up 51 articles. A quick scan down the first page shows a lot of the same titles I linked rewritten on different sites. Seems like a representative sample to me. A spate even. I’m wondering where the positive articles are. I don’t see a one.
So, we’re damning the facts by pointing out how Richie repeatedly and continuously claimed publicly that Demand was profitable? Exactly how? Wasn’t Rosenblatt the one playing fast and loose with the truth? That’s the point.
Nobody is trying to take down Demand Media. To even suggest so is folly. We’re all just trying to shed some much needed light on their business. Demand’s contract labor might be interested in the whole story, and not just the ass-kissing pablum they’ll get on DMS boards.
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Dear DPG09MOFO,
Your reply was every bit as lucid as it was valuable.
Keep up the good work!
SamR
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SamR spends too much time twiddling his or her thumbs while holding a torch for Demand Studios. Sure, they pay $15 bucks an article quick and easy for mindless scribble, but i find it hard to beileve its the only source of anyone’s income. And no offense to any of those looking at these posts, but if it is your sole source of income, you need to go back to school.
Now having said that, i’m sure that many of these statements are TRUE. Not everyone does a google search on how to be an arrogant underacheiving fool (written by the one and only SamR), so its hard to beileve they make SOOO much money based on these articles.
Oh, and I found the article quite easy to follow.
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RHead, I have taken absolutely zero accounting, ever. It was never required in HS and I damned sure wasn’t going to voluntarily take any more math-based courses than necessary, while pursuing my art-based degree.
So I was even farther behind disCONTENTed.
The clarification makes sense. However, I urge you to consider your audience. This is not a financial website, and everyone won’t have “First month of Intro to Accounting” under their belt.
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A search, “demand media ipo”, returned 554,000 hits on Google News. Your representative sample (rather a weak ‘spate’) of five negative articles seems somewhat inconsequential, but I’m sure we find solace where we may. While I admire your diligence in seeking to bring down one of the companies that currently pays you to write, I must nevertheless note with regret that your arguments are statistically shy of being compelling. Notwithstanding, do stay the course: “Damn the facts, full speed ahead!”
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MomZomb (B****e A*****z turned M****n L***h) is going around shutting down basically every thread that mentions this issue. They are getting even more ridiculous than normal over there. One person started a thread just asking about what was going on with this and linking to the WSJ and CNN Money articles and it was instantly closed and deleted.
Then MaddieG starts one saying, “Oh it’s okay, lots of companies file for IPOs before they are profitable” (never mind that most don’t pretend to be raking it in beforehand) and she left it open, saying it was different because it wasn’t “predicting doom and gloom.” In other words, she is closing any thread that isn’t just cheerleading about the situation. Not a proper way to monitor a board at all. I’m betting she’s never done any forum moderation before Demand plucked her up for the job because she’s such a company suck up. Makes me sick. They get more cultish every day.
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rhead, I took a whole year of Accounting once, hated it but managed to pass with a B, and was just barely following your post. But your clarifications made perfect sense. “Accounting for Dummies” works for me!
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Whoops, should have said “Profits are income (or revenues) in excess of expenses.”
What may be confusing is that money can be spent in 2007 that still shows up as an expense years after the fact. These are, in effect, paper losses. This gets into the difference between cash flows and profits. A company can be taking in more than they are spending every month, but still be unprofitable. Rosenblatt has been publicly saying that Demand Media is profitable, when really he should have said “cash flow positive”. The D & A of OIBDA are money spent in previous years which still shows up as an expense.
Here’s another example which might help. What if you get a credit card which promises “No interest and no payments for 24 months”? You go out and rack up $4800 of purchases on it. For two years, you don’t have to pay anything. You are still on the hook for just under $5 Gs. Your expense was $4800-. For the 24 months of the offer, your cashflow did not reflect the need to pay that. If you are prudent, and you set aside $200/month in a savings account for that payment, at the end of the 2 years you would have the entire amount and could pay it in full.
Demand MediaRichard Rosenblatt (in claiming they are profitable) is trying to say, “Just ignore the $4800, because it’s only a paper expense.” Not really that simple, but perhaps this example “dumbs things down” enough?Like or Dislike:
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Hmmm … Do I need to do the eHow version of revenue, profits, and losses? I’m not sure how much I can dumb it down. This is all first-month of Intro. to Accounting type material.
The mistake you are making is to equate revenues with profits. Revenues are income. Profits are income in excess of expenses
revenues.“In 2008, Demand showed a net loss of $14.2 million on revenue of $170 million…” This says that in 2008 Demand Media spent $184.2 million dollars to make $170 million dollars.
What if you had to write your articles for Demand Studios at a cafe that charged for Internet access? Say it took you one hour to write an article. You make $15. What if you had to pay $12 for the Internet access, and you bought a latte for another $4? That would mean your revenues are $15 and your losses are $1. It cost you $16 to make $15.
What Rosenblatt is doing with OIBDA is a bit more complicated then my icafe example. The company is basically excluding depreciation and amortization out of their equations for profitability. Accountants say, “No, can’t do that, ” so the company has to call that something else (“adjusted OIBDA”) to the SEC.
Computers depreciate. Software development costs can be amortized. Instead of taking the entire expense in the year of purchase, you spread it out over a number of years. To simplify, if a computer costs $1000, and you were to depreciate (in a straight line), you would count that as $200 a year of expense for 5 years. If you purchased Adobe CS3 Studio for $600, you could amortize the costs of that over 3 years, or $200 per year will show up as an expense.
Does that help?
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My sentiments exactly. I’m a right-brained hippie freak, I get the gist that something is rotten in Denmark but this article is going over my head.
Specifically when you go into the profit and loss information.
“In 2008, Demand showed a net loss of $14.2 million on revenue of $170 million…”
They made 170 million and lost 14.2… which still leaves over 150 million. Is it not a profit because they had a loss? Or is there some other reason.
I’m not challenging the idea that they never made a profit, I’m just coming from the standpoint of someone who is lucky if he understands his bank statements every month.
Like I said, right-brained hippie freak.
I think we need a dumbed down version for those of us who can barely balance our check books.
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Huh?
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