Demand Media shares soar 40% in IPO
By Julianne Pepitone, staff reporter
NEW YORK (CNNMoney) -- Shares of online content creator Demand Media rose 40% in the first minutes of trading Wednesday as the company made its public debut, raising $66.5 million in an IPO that valued the company at more than $1 billion.
The offering included 8.9 million shares, with Demand selling 4.5 million shares at $17 per share. Existing shareholders sold another 4.4 million shares -- a last-minute boost over the 3 million shares they intended to sell. Demand Media also raised the offering price beyond the anticipated $14 to $16 range.
Demand said it expects to raise around $67 million from the sale, after deducting its expenses for the IPO. The company plans to use the proceeds for content investments, working capital and international expansion.
The company trades under the New York Stock Exchange under the ticker symbol DMD (DMD). Shares were at $23.35 about 10 minutes into trading, after touching a high of $25.
Demand hires a stable of freelancers -- 13,000 are currently active -- to create content at rock-bottom rates, typically $15 for an article of several hundred words or $30 for a video.
Demand then sells ads around the content. Most of the articles appear on network of sites Demand owns, including eHow. Some traditional media companies, such as USAToday.com and the San Francisco Chronicle, also have licensed the content.
The articles are meant to appear high in search engine results -- but Google (GOOG, Fortune 500) has publicly said it's changing its algorithm to improve search results.
"We hear the feedback from the Web loud and clear: people are asking for even stronger action on content farms and sites that consist primarily of spammy or low-quality content," the company said in a blog post last week.
About half of the company's revenue comes from its Internet registry business, where it manages 10 million domain names. Demand has also experimented with online publishing and social media tools.
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For years executives at Demand had said publicly that the company is profitable. But in its IPO filing in August, Demand disclosed that it was more than $6 million in the red for 2010 so far. It posted a net loss of $22 million in 2009 and millions more the previous two years.
The company has also faced criticism of its unorthodox accounting methods. Demand doesn't expense the cost of paying its writers upfront, as content companies typically do. Instead, it spreads those costs over five years, which boosts its bottom line.
Demand's rationale is that the writers' content will generate revenue for the company revenue for multiple years, so it shouldn't have to recognize the costs upfront. It estimates the "average useful life" -- meaning the amount of time it will make money -- of its content to be 5.4 years.
Credit: CNN (www.cnn.com)
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