UPDATE 2-Demand Media ponders splitting media, domain businesses

Tue Feb 19, 2013 5:17pm EST

Feb 19 (Reuters) - Demand Media Inc will explore separating its media business from its domain name service, the company said on Tuesday, a disclosure that sent its shares up nearly 20 percent in after hours trading.

The company said the contemplated move would be a tax-free distribution to U.S. stockholders of new publicly traded stock and could be completed in nine to 12 months.

"The catalyst is the level of investment we see and we don't want to handicap either business from realizing their full potential," Demand Media CFO Mel Tang said in an interview.

As Demand Media grows its top level domain business it will need to invest money into building out its technology and operational infrastructure, said Tang.

Demand Media has two sources of revenue. In its media business, freelance writers, photographers and videographers provide articles and videos designed to appear at the top of Internet searches that in turn generate advertising. The other is a growing registrar business that maintains top level generic web domains.

Its media sites include eHow, Livestrong and Cracked.

"I think both businesses are going in different directions," said Doug Arthur, an analyst with Evercore Partners. "Historically there was some cross pollination. I see the logic behind it."

Revenue from its registrar business represents about one-third of total revenue. Tang estimated that a stand-alone registrar business could roughly generate about $150 million in revenue with margins approaching 20 percent.

Demand Media also reported fourth-quarter revenue rose 22 percent to $103.1 million.

The company said adjusted for items including stock-based compensation, net income rose to $10.8 million, or 12 cents per share, from $6.8 million, or 8 cents per share, in the same period a year ago. Analysts were expecting 11 cents per share, according to Thomson Reuters I/B/E/S.

The spike in shares came in after hours trading after closing at $7.84 on Tuesday.

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