UPDATE 3-Demand Media beats quarterly revenue forecasts

Tue Aug 9, 2011 7:29pm EDT

* Q2 rev ex-TAC $76.6 million vs. Wall St. view $73.9 mln

* Q2 Adj EPS 6 cents vs. Wall St. view 5 cents

* Shares closed up 7.4 pct at $8.98 (Adds executive comment, revenue outlook)

By Jennifer Saba

NEW YORK, Aug 9 (Reuters) - Demand Media Inc (DMD.N) beat revenue expectations, pointing to a possible sign that search engine changes at Google Inc (GOOG.O) have not affected the company as much as feared.

Second-quarter revenue excluding traffic acquisition costs was up 34 percent to $76.6 million, above analysts' average expectation of $73.9 million according to Thomson Reuters I/B/E/S, Demand said on Tuesday.

Demand Media is an online company that relies on freelance writers to provide articles and videos designed to appear at the top of Internet searches that in turn generate ad revenue.

The company also said it renewed its global advertising relationship with Google through a three-year agreement and bought online ad company Indie Click, as well as social media company RSS Graffiti.

The agreement with Google includes the inclusion of Demand Media in the search giant's display ad network reserved for quality content.

Based in Santa Monica, California, Demand Media works with about 13,000 freelancers who churn out articles, such as "How to plant heirloom sunflowers," that appear on its Websites eHow and LiveStrong, as well as its partners sites such as Gannett Co Inc's (GCI.N) USA Today.

Since its founding in 2006, Demand has raised the eyebrows of news editors because of its use of software algorithms to forecast what stories consumers want.

The company has been striking partnerships with celebrities such as Rachael Ray and Tyra Banks for branded content and has been commissioning longer reported pieces to raise the quality of its offerings.

It was one of the first online companies to go public this year, testing the waters with an IPO that surged about 33 percent above its initial price. But since its January IPO, Demand shares have fallen roughly 60 percent.

Investors are concerned that changes Google made to its formula to return search results of higher quality -- known in technology circles as "panda" -- have hurt Demand Media's traffic and therefore its ability to generate revenue based on advertising.

During the second quarter, Google made two changes to how search engine results are delivered. Demand's Chief Financial Officer Charles Hilliard said it affected revenue at eHow, but the site represents about 32 percent of second quarter revenue.

Overall, the company expects the Google changes to impact revenue by 6 percent for 2011.

Demand forecast yearly revenue ex-TAC in the range of $308 million to $316 million.

Analysts's revenue outlook for 2011 is $314.3 million.

Demand reported a net loss of $2.4 million, or 3 cents per share, compared with a loss of $1.9 million, or 75 cents per share, a year earlier.

Adjusted for stock based compensation, Demand reported EPS of 6 cents per share beating analysts' estimate by a penny.

Earlier in the day, AOL shares plummeted more than 25 percent after it reported a second-quarter loss, citing weaker than expected advertising growth. [ID:nL3E7J92PQ] (Editing by Gunna Dickson and Andre Grenon)

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