Will an IPO Still Be in Demand LABJ 010311.Pub

www.labusinessjournal.com ® Volume 33, Number 1 January 3-9, 2011 $3.00 Will an IPO Still Be In Demand? INTERNET: SEC raises flags over website operator’s accounting. By Natalie Jarvey Staff Reporter When one of L.A.’s hot media startups announced in August that it was preparing for an initial public offering, analysts widely assumed it would have happened by now. But questions about Demand Media Inc.’s accounting have pushed its public debut back to an undeter- mined date. Now, analysts are saying that if the Securities and Exchange Com- mission allows the Santa Monica company to go public despite its unconventional expensing method, it could be a game-changer for similar media companies. Demand, a content-creation company that churns out thousands of articles and videos daily for its Demand-ing Boss: Richard Rosenblatt, chief executive of Demand Media, at many websites, amortizes the cost the company’s Santa Monica office in 2007. of producing this online content over a five-year period. In its SEC filing Dec. 21, the company claims Demand, which is headed by that it planned to raise up to $125 that it can do this because its con- Myspace veteran Richard Rosen- million in an initial public offering. tent continues to generate revenue blatt, contracts more than 13,000 Demand plans to be traded on the years after it was first published. freelancers to produce articles and New York Stock Exchange under Most online publishing companies videos for its websites, such as the ticker symbol “DMD” and use expense the cost of creating content eHow.com and LiveStrong.com, or the money from the sale of its 7.5 immediately. outside publishers, such as USATo- million shares – 3 million of which If the accounting method is ap- day.com. The majority of the com- will come from current stockhold- proved, “this will set a precedent pany’s revenue comes from the ers – to expand internationally, de- and cause other media companies advertising it sells around this con- velop content and products, and already in the public domain to tent. Demand also runs a domain invest in sales and marketing initia- change their accounting,” said name registry, eNom, which makes tives. Lloyd Greif, chief executive of up about 44 percent of its revenue. But the SEC appears to have downtown L.A. investment banking The company announced Aug. 6 asked Demand to push back its firm Greif & Co. public debut, which was underwrit- Demand has yet to reach profita- Demand in 2006 with Shawn Colo, ten by Goldman, Sachs & Co. and bility. The company reported a net the company’s head of mergers and Morgan Stanley, until the company loss of $22 million in 2009, down acquisitions, he served as chief ex- better explained how it amortizes from a net loss of $14.2 million in ecutive of Intermix Media Inc. of the cost of making its content. 2008. In recent months, Demand Beverly Hills, the former parent “It looks like they filed in the has shown that it is moving closer company of Myspace, and helped summer expecting the deal would to profitability. It reported a net loss lead that company’s $580 million get done well ahead of the holi- of $305,000 in the third quarter of acquisition by News Corp. Rosen- days,” Greif said. “But clearly the 2010, compared with a net loss of blatt also sold his first startup, original filing was deemed to be $4.17 million in the same quarter in iMall, for $565 million to Internet incomplete.” 2009. portal Excite. Now that it has submitted its In the years before Demand filed “Entrepreneurs can get lucky amended filing, Demand must wait for a public offering, Rosenblatt once, but they almost never get for the commission to give it the was quoted in several interviews lucky twice. This is Richard’s third green light to continue with its IPO. claiming that the company was significant success,” Kerner said. “I profitable. Although the company’s think investors should get great Accounting questions nonadjusted financials show a net comfort from that.” The company did not want to loss each year, its adjusted operat- Since 2006, Rosenblatt has helped comment. But in its updated filing ing income before depreciation and Demand raise more than $350 mil- with the SEC, it explains that be- amortization shows that the compa- lion in funding. cause Demand creates mostly “how ny made $36.8 million in 2009. In 2009, the company was ru- -to” articles and videos, its content A number of Wall Street insiders mored to be the subject of a billion- stays relevant for several years and have said that Demand would be dollar acquisition by Yahoo Inc., can continue generating advertising better off reporting a worse bottom Google Inc. or AOL Inc. Now, revenue for up to 5.4 years. That line than generating controversy however, Yahoo owns Demand’s means the company can amortize over accounting practices. largest competitor, Associated Con- the cost of creating this content – it In a Business Insider article titled tent, and AOL has incubated its pays freelancers $15 to $30 per “Come On, Demand Media, Just own content creator, Seed.com. story or video – in a straight line Drop the Bogus Accounting,” Hen- If the SEC green-lights Demand’s over five years. ry Blodget, the website’s editor and IPO, it could change how these “These estimates are based on our a former analyst, calls Demand’s public companies, and other pub- current plans and projections for accounting “unusual and aggres- lishers that produce similar long- our content, our comparison of the sive.” He argues that the company lived how-to content for the Inter- economic returns generated by con- will draw more speculation from its net, report their financials. tent of comparable quality and anal- amortization method than from “If they go public and the SEC ysis of historical cash flows gener- showing a wider net loss. allows them to use this accounting ated by that content to date,” the Peabody said Demand should standard, every other media compa- company stated in the filing. wait to go public until it can show a ny is going to go and restate their The updated filing also includes a few quarters of profitability without earnings and restate them higher,” warning from Demand about its amortizing the cost of content. Peabody said. accounting, stating that any short- “It’s not that I think the business What the SEC will do with De- ening of the company’s amortiza- is corrupt. They just need to follow mand’s amended filing is unclear. tion schedule would hurt its finan- the same accounting standards that But Greif said the company has cials. all media companies follow,” he explained its accounting in a way But some analysts question said. “It would be better for the that should satisfy the SEC. Once whether the amortization method is public markets to allow them to the company goes public, it’s up to just a way for Demand to artificial- show that they can generate three or potential investors to educate them- ly boost its bottom line. four quarters of sustained profits selves on how Demand reports its “They’re playing games,” said Bo before going public.” financials. Peabody, a managing general part- “As long as there’s full disclo- ner at New York venture capital Content creation sure, you, the individual investor, firm Village Ventures. “The fact is But Lou Kerner, vice president in can decide if you’re comfortable most of the content that gets gener- equity research at Wedbush Securi- with the accounting,” he said. ated, it generates the vast majority ties in New York, said Rosenblatt’s “Ultimately, it’s your decision.” of its revenue in the first year or past successes should make poten- two. What they’re hoping is that tial investors bullish on Demand’s they’ll use this accounting method- forthcoming IPO, despite the com- ology to increase the value that the pany’s financials. public gives to them.” Before Rosenblatt co-founded .

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