Q3 2013 Demand Media Earnings Conference Call on November 07

THOMSON REUTERS STREETEVENTS EDITED TRANSCRIPT DMD - Q3 2013 Demand Media Earnings Conference Call

EVENT DATE/TIME: NOVEMBER 07, 2013 / 10:00PM GMT

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CORPORATE PARTICIPANTS Julie MacMedan Demand Media, Inc. - VP of IR Shawn Colo Demand Media, Inc. - Co-Founder & Interim CEO Mel Tang Demand Media, Inc. - CFO

CONFERENCE CALL PARTICIPANTS Sameet Sinha B. Riley - Analyst Doug Arthur Evercore Partners - Analyst Pete Lowery JMP Securities - Analyst

PRESENTATION Operator Good afternoon, my name is Jeremy and I will be your conference operator today. At this time I would like to welcome everyone to the Demand Media third-quarter 2013 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn the call over to Ms, Julie MacMedan, Vice President of Investor Relations.

Julie MacMedan - Demand Media, Inc. - VP of IR Thank you, operator, and good afternoon, everyone. On behalf of Demand Media welcome to our third-quarter 2013 conference call. You can find our related release along with supplemental materials posted on the Investor Relations section of our corporate website located at IR. DemandMedia.com.

On the call with me today are Shawn Colo, our Interim Chief Executive Officer, and Mel Tang, our Chief Financial Officer. Following the Safe Harbor statement that I will make Shawn will update you on our business; Mel will then provide details on our third-quarter financial performance and key operating metrics and finish with guidance for the fourth quarter and year ending December 31, 2013. 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 which are subject to various risks and uncertainties that could cause actual results to differ materially from our current expectations discussed in such forward-looking statements.

In particular, comments about our anticipated future revenues, earnings, operating expenses, page views 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 also like to point out that during this call we will discuss certain non-GAAP financial measures while talking about the Company's financial and operating performance including revenue ex-TAC, adjusted EBITDA, adjusted EPS and certain free cash flow metrics. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measure can be found in the financial tables included at the end of our press release.

In addition, unless otherwise noted, all references to traffic-related metrics in our remarks today on based on comScore data. Lastly, before we begin I'd like to remind everyone that today's conference call is being recorded. And that it is also available via webcast on the Internet through

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©2013 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. NOVEMBER 07, 2013 / 10:00PM, DMD - Q3 2013 Demand Media Earnings Conference Call the Investor Relations section of our corporate website. A replay will be available on our website. And with that I would now like to turn the call over to Shawn Colo, our Interim CEO. Shawn?

Shawn Colo - Demand Media, Inc. - Co-Founder & Interim CEO Thank you, everyone, for joining and welcome to our 2013 third-quarter results call. First let me say thank you to our employees, executive team and Board of Directors for their continued support and steady focus.

As a cofounder of the Company and Head of Corporate Development, I've been intimately involved in many aspects of our business for many years. Over the past several weeks in my current role as Interim CEO I've had the opportunity to spend time with employees across the organization and I'm inspired by the dedication and commitment our teams exhibit day in and day out.

I'm also very encouraged by the progress we've made towards our strategic initiatives. The long-term success of our Company depends on our ability to build relationships with end-users. It's about leveraging our platforms to allow artists, writers, photographers and experts to express themselves and reach their audiences. It's about consumers and businesses creating their Internet identities with new domain extensions, customized site builders and social tools. It's about people, not page views.

When we founded Demand Media we saw the opportunity to build a new kind of media platform that was data-driven and scalable and we succeeded. But our future success will not be based solely on the number of articles we produce; it will also be based on our ability to engage the consumer in new and innovative ways. And we are confident that this will in turn drive a more stable and diversified business.

Engaging the consumer will clearly demand more product innovation on our core media websites. Our team is up to the challenge. Just this past week we launched the site redesign of LIVESTRONG.com putting the community back at the forefront. The new homepage highlights a real-time community activity with five new modules [above full].

Further, we introduced new community features with topic specific guides to drive discussions. We've also recently updated our popular MyPlate app with significant enhancements and are planning additional improvements to the desktop experience.

Lastly, we've significantly consolidated our article library in order to display only the most unique engaging content. Throughout this process this property has remained number three in the health category in the US and reached more than 21 million unique visitors worldwide in September. These changes are just the beginning of a broader product roadmap designed to offer consumers a best-in-class healthy living destination with informative content, helpful applications and an active community.

On eHow our product investments have centered mainly around eHow Now. eHow Now is a live expert service where consumers are able to chat with an expert on demand and in real-time for a one-time or monthly fee. We are currently supporting seven topic categories and we plan to continue to expand the categories offered given the positive reception from our customers. To date we have had over 3 million questions asked and 1.4 million users have trusted us with their email address in order to answer their questions. eHow Nom now is a great example of an organic extension of eHow's content library and audience which allows us to add even more value to the user as well as diversify our business.

We also see paid learning as a big opportunity and another natural extension of our core eHow property. We started with the craft category and Creativebug. During the quarter we launched an eHow class channel and we were able to drive a significant number of these visitors over to our Creativebug site. Similar to eHow Now, these efforts are in their early development and will require great execution for us to make them more meaningful financially.

In addition to product extensions we continue to see a geographic expansion opportunities. eHow and Español.com, our Spanish language version of eHow, has quietly amassed an audience of 25 million unique visitors per our internal data, up nearly 6X from 4 million last year. We will continue to develop additional sites in other languages as well over the coming quarters.

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In summary, despite declines in Google referrals, eHow remains a top 25 site in the US and is a tremendous platform to extend additional products and services both domestically and on a global basis.

Across all of our sites mobile continues to be a significant growth driver. Demand Media ranked as a top 25 mobile property in the US in September with over 25 million total unique visitors with eHow.com's mobile audience of over 15 million monthly uniques. The size of this audience is a function of the nature of our content as well as investments we are making in our underlying platform.

For example, one investment we continue to be excited about is the development of original photography assignments within our studio. We architected our studio in a way that allows us to quickly launch new formats with minimal investment. As the Web increasingly becomes more visual our ability to launch new visual formats such as infographics, find videos and animated gifts is a strategic competitive advantage.

Because of our continued investment in our studio platform we are well-positioned to capitalize on new content trends as they emerge. We already deliver hosted content solutions to publishers and brands such as USA Today and LegalZoom. Collectively we help our partners attract over 20 million incremental unique visitors per month and that number is doubling year over year.

This success positions us very well as brands increasingly seek to become publishers. Many of these brands lack the expertise to know what to produce let alone the capability to produce it in a scalable and cost-effective way. This quarter we created a dedicated team to pursue this opportunity and expect to ramp this business in 2014. We believe the market opportunity to produce content for global brands is a $40 billion market and we are uniquely positioned to compete.

In addition to this standalone content offering we are also pursuing growth opportunities within branded advertising. We are working closely with brands to deliver premium programmatic packages as these become an increasingly larger portion of advertising budgets. Our sales and support team will be fully trained this quarter and we expect that our programmatic offering will be very competitive with the market.

In summary, our continent platform has enabled us to build a relationship with nearly 100 million people every month. And we see a big opportunity to grow our audience, deliver innovative new products and services and quickly capitalize on new trends as they emerge.

Our acquisition of Society6 in June of this year is a great example of this. With Society6 we are able to build relationships with artists and provide their fans with products they love. The acquisition significantly expanded our addressable market while at the same time diversified our business.

As a reminder, Society6 is a growing profitable marketplace business and we continue to be excited about its momentum and overall direction. In the third quarter compared to last year the Society6 artist community increased 100% and image uploads grew 50%. Since the acquisition we have applied our expertise around page level optimization and audience acquisition.

We have also reallocated some of our engineering and product staff to support Society6's continued growth. We've also been doing a lot of work on the platform itself including a new top navigation layout and an optimized mobile checkout process which has driven a 10% increase in conversion rates. New product lines, such as our recently launched line of coffee mugs, are also important drivers of revenue growth and we plan to continue to launch new products each quarter.

Lastly, we have spent time developing deeper relationships with key partners like Wanelo, an emerging social shopping platform where Society6 is very popular and has amassed over 350,000 total followers. Developing relationships with emerging social platforms is core to our customer acquisition strategy going forward.

In addition to Society6 we have a number of other commerce initiatives underway such as eHow Now and Creativebug which I mentioned previously. To help drive these initiatives we've made a concerted effort to hire key commerce talent. During the quarter we made a number of strategic hires who we expect will help shape and drive these initiatives.

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Our commerce team has been working closely with our media team to seek new ways to leverage our content studio and existing audience to drive more transactional revenue and diversify our business. As I mentioned earlier, our organic commerce initiatives are in their infancy and are not expected to be meaningful financial contributors over the next few quarters.

That said, we are confident that the macro trends of online learning and commerce represent exciting growth opportunities for us and we are positioned to win in this market given our collection of sites, our content studio and our growing commerce capabilities.

Now let's turn to our domain name services business. In Q3 we made significant progress against our new TLD initiative and we continue to prepare for the separation of our leading end-to-end domain name services business into a pure play standalone public company. Our mission is to advance the way businesses and consumers define and present themselves online.

On Tuesday we announced the new name for this business, Rightside. The name represents a new way to navigate the Web and emphasizes our focus on guiding customers in the right direction. It is everything to the right of the dot and more, encompassing our new registry initiative as well as our current Registrar and premium domain name services.

We also announced that upon separation Rightside will be led by Taryn Naidu serving as CEO and Dave Panos as Chairman of the Board. Taryn joined us in 2006 and has been instrumental in building our domain name services business ever since. Dave has been part of the Demand Media executive team since 2008 and has played a key role in developing our new registry business.

In addition to solidifying the team and developing a new corporate identity, we also marked a significant milestone with the signing of our first two ICANN registry contracts for the .DANCE and .DEMOCRAT TLD's. On Tuesday we also received and signed ICANN registry contracts for five more TLD's. Three of these represent the global nature of this opportunity -- .IMMOBILIEN, which means real estate in German; .MODA, which means fashion in Spanish, Portuguese, Italian and Russian; and .KAUFEN which means to shop or buy in German. The other two were .SOCIAL and, one of our personal favorites, .NINJA.

We expect to receive a countersigned agreement from ICANN this week and we anticipate a steady stream of additional contracts to be signed over the next few months. Once a contract has been signed the process of generating revenue from these TLD's may take several quarters. Recently the new TLD program as a whole had a significant milestone with the first four new TLDs becoming live in the domain name system. This means they will be allowed to start accepting registrations in the coming weeks.

One of these TLD's, the Chinese word for games, has been delegated to our partner Donuts who utilizes our back end registry platform. Additional recent milestones for our domain name services business includes the signing of ICANN's new Registrar accreditation agreement which authorize our eNom and Name.com Registrars to sell the new TLD's. Also our back end registry platform has passed ICANN's rigorous technical testing standards and is now operational.

We have great confidence in our ability to drive growth in new TLD's because of three significant competitive advantages -- the scale of our portfolio, our distribution network and our direct relationships with several hundred thousand retail customers. The next few quarters will be a very exciting time for Rightside and the Internet in general. We look forward to continuing to keep you updated on the progress of the new TLD rollout.

In closing, despite the short-term challenges we have had this year, I'm excited about the long-term prospects for both our content and media business as well as for Rightside. We have a unique set of assets to capitalize on the ever-changing digital media landscape. We have an audience of nearly 100 million unique visitors worldwide, a flexible content studio, established media brands, an exciting marketplace business and one of the only end-to-end domain name services providers. We also have a great corporate culture and, most important of all, a team that wants to win.

Before I turn the call over to Mel I wanted to let you know that our Board has already commenced the search for a permanent CEO of our content and media business. And in the meantime I will continue to work closely with our team as we execute on these exciting opportunities for our business. With that I would like to turn the call over to Mel to review the financials. Mel?

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Mel Tang - Demand Media, Inc. - CFO Thank you, Shawn. Q3 was a challenging quarter. Results were impacted by three main factors, lower search engine referrals causing additional traffic declines, softer than expected display advertising revenue, and an adjustment from an advertising partner related to activity on certain third-party domains prior to the third quarter that negatively impacted revenue and EBITDA.

However, even with these headwinds our platform still delivers. In Q3 our content library generated annualized revenue of approximately $100 million. Additionally, our content is driving audience growth internationally and for our partners. In the quarter international revenue doubled year-over-year, partner content channel revenue grew over 50% year-over-year and our mobile revenue doubled year-over-year contributing in aggregate to nearly 50% of content and media revenue in Q3 or over $30 million annualized.

Moreover our strong balance sheet and $225 million credit facility provides us substantial liquidity and financial flexibility to invest in our growth opportunities, including the strategic decision to separate our two businesses. And so, while we were disappointed with our Q3 results, we continue to focus on growth opportunities in content, commerce and new gTLD's and believe we are well-positioned to achieve our long-term strategic initiatives.

As I review our Q3 results, in going forward I'm going to provide more visibility into the components of our business and introduce a few new metrics as we continue to diversify our platform and focus on new growth initiatives. Now let's discuss the third-quarter results in more detail.

Revenue excluding traffic acquisition costs, or TAC, was $92.4 million, essentially flat year-over-year with 11% year-over-year growth in Registrar revenue being offset by a 7% decline in content and media revenue ex-TAC.

Adjusted EBITDA was $18.1 million, down 34% year-over-year, reflecting the impact of reduced high-margin owned and operated advertising revenue from lower search engine referrals, headwinds in display advertising, and a revenue mix shift to commerce and Registrar revenue, as well as the impact of the one-time negative $1.6 million adjustment from an advertising partner I just mentioned.

Free cash flow was $10 million, down 40% year-over-year, reflecting lower adjusted EBITDA, higher fixed asset CapEx related to our HQ move and investments to build out registry infrastructure, offset somewhat by positive working capital in the quarter due primarily to the timing of payments.

More specifically, year over year in Q3 Content & Media revenue ex-TAC decreased 7% to $54.7 million due to a 50% decline in network revenue that more than offset a 6% increase in Owned & Operated revenue. Owned & Operated page views grew 21% to 4.1 billion, led by a tripling of mobile page views on our core owner operated site as well as 4X growth in traffic to our international sites. This more than offset lower search engine referrals that were approximately 30% throughout the quarter and negatively impacted eHow and LIVESTRONG.

Importantly we estimate that Google referrals now contribute only about a third of traffic and approximately $35 million of annualized revenue to eHow and LIVESTRONG as compared to more than half of traffic and over $70 million of annualized revenue exiting last year.

Owned & Operated RPMs of $11.78 decreased 13% year-over-year reflecting this mix shift to lower monetizing and higher page view per visit mobile traffic, as well as softness in the direct display ad marketplace offset partially by higher domain portfolio sales, or approximately $3 million year-over-year, and Society6 revenue of $5.6 million.

As we focus on growing our commerce revenue streams one of the metrics we are focusing on is revenue per visit to our Owned & Operated properties. Revenue per visit to our Owned & Operated websites increased 25% year-over-year to $0.05 primarily driven by the addition of Society6 as well as momentum in mobile monetization. For perspective, we estimate that the RPV's of our Internet peers ranged from $0.15 to well over $1. So we see a lot of potential upside.

Now on to network. Network revenue ex-TAC declined 50% year-over-year driven by $3 million less revenue from YouTube premium channels as compared to last year. And the aforementioned negative $1.6 million revenue adjustment and declines in our other network businesses.

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With respect to network page views and RPMs we saw a 37% decrease in network page views to 3.1 billion. During the quarter, in order to better focus our direct sales force efforts on our Owned & Operated sites, we significantly reduced the number of websites we represent as part of our IndieClick network. There was also a decrease in reported page views for our Pluck social tools partners.

We also saw a 20% decrease year-over-year in network RPMs ex-TAC to $2.15 reflecting the YouTube premium channel revenue comp and the negative revenue adjustment that I just mentioned.

On to our Registrar. Revenue was $37.7 million, up 11% year-over-year driven by 7% year-over-year growth to 14.6 million domains for which we have recognized revenue due primarily to the Name.com acquisition. Annualized revenue per domain, or ARPD, of $10.49 increased 5% year over year due to an increase in the pricing of dot.com domains as well as higher Name.com ARPD's.

As it relates to our domain name services business, we are committed to and are continuing to move forward with preparing for the separation of Demand Media into two stand-alone businesses. Operationally we are still heads down on separating key functions and continue to work towards finalizing our Form 10 filing. We hope to make significant progress on both of these by the end of the year.

And as we move towards the separation we will be providing a more detailed separate disclosure on our content and media and domain name sources businesses which we have formally named Rightside. For now I will share our high-level estimates for revenue breakdowns for each business in Q3.

Specifically for our media business we are breaking out revenue into two line items -- advertising revenue and commerce and other revenue. In Q3 advertising revenue ex-TAC, which is comprised only of advertising base revenue, but excludes advertising revenue from our owned and third-party network of undeveloped websites was approximately $39 million and down 11% year over year due to lower search engine referrals and headwinds at display advertising.

Commerce and other revenue, which is primarily comprised of all transaction-based and other non-advertising revenue, was approximately $11 million and up 11% year over year primarily due to revenue from Society6 of $5.6 million, more than offsetting the previously mentioned lower YouTube premium channels comps and declines in Pluck revenue.

For [Spinco] or Rightside, there will also be disclosure for two revenue line items -- domain services revenue and aftermarket services revenue. In Q3 domain services revenue, which primarily represents domain registration fees and value added services, was approximately $36 million and increased 12% year over year, driven by growth in end of period domain and an increase in the pricing of dot.com domains in the Name.com acquisition.

Aftermarket services revenue, which represents premium domain sales and advertising revenue from our Owned & Operated and network domains of approximately $10 million, was down 7% year over year with growth in domain sales partially offsetting declines in advertising yield on our undeveloped websites and the negative one-time revenue adjustment.

With respect to adjusted EBITDA of each business, we estimate that year-to-date margins are as follows. Content and media standalone adjusted EBITDA margins of approximately 30% to 35%, and Rightside standalone adjusted EBITDA margins of 5% to 10% due to the significant OpEx investments this year and the new gTLD initiatives. Note that this margin does not include stand-alone public company costs that will be incurred by Rightside post separation.

Turning to consolidated operating expenses, Q3 GAAP operating expenses were $106 million, up 13% year over year. Excluding depreciation, amortization and stock-based comp, total operating expenses were $82.8 million, up 13 points as a percentage of revenue and driven by higher cost of services due to the acquisition of Name.com in Q4 2012, increased registration costs from last year's aggressive reseller base expansion ahead of new gTLD's, and the acquisition of Society6.

Product development expense growth, as we continue to ramp infrastructure investment in commerce and in preparation for the launch of gTLD's, and higher G&A expenses due primarily to $3.7 million related to spin-off preparation fees and gTLD start-up expense. Excluding spin-off and gTLD

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©2013 Thomson Reuters. All rights reserved. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. NOVEMBER 07, 2013 / 10:00PM, DMD - Q3 2013 Demand Media Earnings Conference Call start costs, total operating expenses excluding depreciation, amortization and stock-based comp would've been approximately $78.1 million, up 9 points as a percentage of revenue compared to last year.

Which takes us to Q3 cash flows. Cash flow from operations was $18.8 million, down 24% year over year due primarily to costs associated with the aforementioned spin-off and new gTLD start-up expenses. Excluding these experiences cash flow from operations would have been $21.2 million.

Discretionary free cash flow was $13.2 million, down 34% year over year due to higher fixed asset CapEx of which the majority related to our new headquarter build out which we completed in Q3. Excluding the headquarter build out, discretionary free cash flow would have been approximately $16.2 million in the quarter.

Free cash flow -- in Q3 we generated $10 million of free cash flow after investment in content where we continue to achieve attractive returns.

A brief update on our balance sheet and liquidity. As of September 30 we had approximately $270 million of liquidity comprised of approximately $100 million of cash and equivalents and $164 million available under our credit facility net of our outstanding letters of debt.

Now on to financial guidance. Due to recent traffic and advertising trends we are forecasting Q4 2013 to be essentially flat sequentially with Q3. For Q4 we are guiding to revenue ex-TAC of between $93 million and $96 million, adjusted EBITDA between $16 million and $19 million and (inaudible) an 18.5% margin on REV ex-TAC at the midpoint and adjusted EPS between $0.03 and $0.04 per share.

For full-year 2013 we are guiding to revenue ex-TAC between $378 million and $381 million implies 5% growth at the midpoint; adjusted EBITDA of between $86 million and $89 million implying a 23% margin on revenue ex-TAC at the midpoint; and adjusted EPS of between $0.26 and $0.28 per share.

In closing, we continue to navigate near-term challenges but our platform provides us with the financial flexibility to focus on the long-term and invest against our strategic growth initiatives. That concludes my prepared remarks. I would now like to open the line for Q&A.

QUESTIONS AND ANSWERS Operator (Operator Instructions). Sameet Sinha, B. Riley.

Sameet Sinha - B. Riley - Analyst A couple of questions. Yes, so first question will be in terms of Google's traffic referrals. Have you been able to identify what exactly the reason why the referrals are coming down and do you think there is a potential way to turn that around?

And secondly, in terms of the spin-off, you're moving ahead with it, your market cap is about $500 million, you end up with two companies with (inaudible) $200 million to $250 million market cap, substantially reduced liquidity in terms of share volume traded every day. Would it be better just to keep the two consolidated companies together for a while before some of the initiatives gain traction, gTLD's start accruing and maybe then preceding the spin-off?

Shawn Colo - Demand Media, Inc. - Co-Founder & Interim CEO Hey, Sameet, it is Shawn. So let me just take the first one on the traffic referrals. Look, we have been spending a lot of time just understanding what consumers are interested in. And obviously we have spent a lot of time looking at and understanding search patterns, etc. But what we have been able to determine is that the best path forward is to make sure that we are creating great content.

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And so we are -- and have been investing in our platforms, as I mentioned, talking about investing in original photography and other new formats. And so, we obviously through the course of a year have spent a lot of time trying to understand what is going on. I think we have got a good sense of where we are going. So that is kind of what our focus has been. I think the second question was about the spin, right. So, Mel, do you want to take that one?

Mel Tang - Demand Media, Inc. - CFO Yes, I think just going back to why we announced the spin to begin with, there are significant operational strategic benefits to having these businesses on a standalone basis. And we continue to believe that. So I think there's been some very positive momentum on the Registrar side and the -- the registry side, I mean. And on the media side we continue to look toward our growth initiatives. So I don't think those sentiments have changed.

Sameet Sinha - B. Riley - Analyst Thank you.

Operator Doug Arthur, Evercore Partners.

Doug Arthur - Evercore Partners - Analyst Two questions just on the numbers. First on page views for Owned & Operated, up 21% I believe. What does that look like? I mean how did Society6 impact that? You broke it out on the revenue side, I'm just interested in the page view aspect of it, that is the first question.

Mel Tang - Demand Media, Inc. - CFO Hey, Doug, it is Mel. What you are seeing on the page view side is much more so massive momentum from mobile, which tends to have higher page views. And that is accounting for more than all the growth on page views.

Doug Arthur - Evercore Partners - Analyst Okay. So, all right, so the Society6 impact --.

Mel Tang - Demand Media, Inc. - CFO Yes, Society6 impact is --

Doug Arthur - Evercore Partners - Analyst Minimal.

Mel Tang - Demand Media, Inc. - CFO -- (multiple speakers) to the mobile momentum that we are seeing.

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Doug Arthur - Evercore Partners - Analyst But nonetheless you included in your revenue count for content -- for Owned & Operated Content & Media the --

Mel Tang - Demand Media, Inc. - CFO Right.

Doug Arthur - Evercore Partners - Analyst -- 5.6 million --.

Mel Tang - Demand Media, Inc. - CFO Correct.

Doug Arthur - Evercore Partners - Analyst Okay. And then I mean how -- the network business jumps around quite a bit quarter to quarter, to state the obvious, how should we think about that going forward? I mean the YouTube impact will roll off at some point in terms of at least a comp. You mentioned again that the sales force is more focused on O&O now, you had this one-time adjustment. I mean, how is this business going to look in 2014?

Shawn Colo - Demand Media, Inc. - Co-Founder & Interim CEO In 2014, and I go back to the additional disclosure provided around Demand Media and Rightside, there is a chunk of the volatility coming from the advertising and the -- on third-party domains. I think post spin what will continue to be in our network business is going to be primarily Pluck, our social media tools business.

We will be looking to grow partner content through there, but it should be a lot more clean sort of post spin. As I sort of said in the past, I tend to think about that business less from a page views and RPM perspective right now, but it's a business that's flat to slightly down these onetime adjustments notwithstanding.

Doug Arthur - Evercore Partners - Analyst So, in that context how does IndieClick work into it?

Mel Tang - Demand Media, Inc. - CFO IndieClick was a network where we represented a number of sellers, we did a rev share with those sites, so our ex-TAC is relatively small compared to there. I think what you're going to see in the network business in the coming quarters is growth from what we do with partner content -- publishing white label solutions for other publishers, creating content for them.

And so, that is going to, I think, hopefully offset trends in Pluck. And then on the Aftermarket Services side, that is where you'll see probably flat to -- continued flat to declining growth in the advertisements placed on third-quarter undeveloped websites.

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Doug Arthur - Evercore Partners - Analyst Okay, thank you.

Operator (Operator Instructions). Peter Stabler, Wells Fargo Securities.

Unidentified Participant Hey, guys, this is Steve filling in for Peter. I had two questions. First I wanted to touch upon programmatic. I was just wondering how much inventory are you guys selling via programmatic currently. And what is the strategy there and how has this impacted your direct sales?

Shawn Colo - Demand Media, Inc. - Co-Founder & Interim CEO Okay, so this is Shawn. On the programmatic piece, we do have a sales team that is now fully trained. So we have got packages in market and we're just getting started so it is still early days for us around programmatic. But we definitely see a big opportunity there.

Mel Tang - Demand Media, Inc. - CFO Yes, I mean, I think technically virtually all of our inventory in the programmatic. I mean we built this business around exchanges and automated solutions. The branded team is kind of around 8% to 10% of our total revenue. So I think we are getting in front of that shift, we have been aware of it for quite some time. And I think we have been doing a good job of training our sellers to be able to sell directly into more kind of premium programmatic exchanges, but it is not something that is just catching up to us.

Shawn Colo - Demand Media, Inc. - Co-Founder & Interim CEO Yes and obviously the benefit of programmatic is being able to lift some of the lower value inventory that is unsold. And so for us our branded team is doing a great job on the premium side, but we still have a lot of inventory that is not being monetized at its highest potential. So we see that as a pretty big opportunity for next year.

Unidentified Participant Great. My second question, we want to say thanks for breaking out the content and media sales by advertising rev and commerce. I think you guys mentioned in the past that you were expecting commerce to be about 25% of sales in that segment. I was just wondering if you could give us an update there given Society6's performance?

Mel Tang - Demand Media, Inc. - CFO I think that if we execute and do what we think that some of these business could do, I think exiting next year at 25% of content media is still very real. But there is a lot of execution clearly to get it there. But it is not just S6.

I think the way we think about commerce is it also includes the partner content that we do where we are creating custom content solutions for folks. And we have other content -- commerce initiatives in house as well like eHow Now and Creativebug. So there's a number of things that I think that clearly we need to execute on. But exiting next year at 25% is certainly possible.

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Shawn Colo - Demand Media, Inc. - Co-Founder & Interim CEO Yes, and I think we feel good about where those initiatives are. We've got some of the infrastructure that is being built basically this quarter to be able to track lifetime value of the customer, customer acquisition costs and just be very specific about it. And it does -- as you know, it takes time to build subscription businesses and recurring revenue businesses. But we are optimistic about those businesses in 2014.

Unidentified Participant It's great to hear. Thanks for the comments.

Operator Patrick Walravens, JMP Securities.

Pete Lowery - JMP Securities - Analyst Yes, hi, great. It is [Pete Lowery] actually in for Pat. Outside of the core Registrar business, and I understand that the gTLD revenue is probably a couple quarters out, but is there some way we can think about quantitatively, and even if it is qualitatively commenting on it, what the upside is created by the new gTLD initiatives?

Mel Tang - Demand Media, Inc. - CFO I think it's dependent on a number of things obviously -- the timing of the rollouts, which ones we actually end up with, etc. One way that you can get some hard data points and how we built up our analysis is if you go to our website and you are not a TLD and you click through we would put up there a number of the TLD's that we applied for and sort of a just kind of market sizing.

So if you go in on some of them you will see how many folks are part of the trade group associated with that TLD, as well as I think a number of other pockets where we think people would register. And I think from there you can assume sort of reasonable uptake rates and reasonable pricing, come up with what an annual revenue could look like.

So look, we are not -- clearly we are not at a place where we can provide a range or guidance around what that is. Clearly we think the market opportunity is very, very large. And I think there are enough data points out there plus on our website to just do some quick math if that is something you want to do.

Pete Lowery - JMP Securities - Analyst Okay, great. Thank you.

Operator Doug Arthur, Evercore Partners.

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Doug Arthur - Evercore Partners - Analyst Yes just a follow-up on this unfavorable revenue adjustment. Are you -- A, can you expand on that? And B, are you relatively comfortable that you have cleaned that up and we are not going to see any kind of a lingering impact in Q4?

Mel Tang - Demand Media, Inc. - CFO Yes, I -- so basically related to a catch-up adjustment that we got notified of quarters after I think the traffic quality was identified. And so it was unexpected in the quarter, it came in in fact sort of right as the quarter was closing. So we put additional processes and communication lines in place with that partner to ensure that we don't get a negative surprise like this in the past.

We try and be very rigorous in terms of who we on board into that system. But at times it is hard to see who is -- what people are putting through. But we are working very closely with that partner to ensure again that there isn't sort of such a delayed negative surprise.

Doug Arthur - Evercore Partners - Analyst Great, thank you.

Operator There are no further questions at this time. I would like to turn the call back over to our presenters.

Julie MacMedan - Demand Media, Inc. - VP of IR Thank you. And thanks, everyone, for joining us today. We look forward to reporting out to you next quarter.

Mel Tang - Demand Media, Inc. - CFO Thanks, everyone.

Operator And this concludes today's conference call. You may now disconnect.

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