November 8, 2011 / 12:21 AM / 8 years ago

Demand Media reports higher third-quarter revenue

(Reuters) - Demand Media DMD.N reported a rise in quarterly revenue, though it still faces tough questions about its reliance on Google (GOOG.O) for traffic at one of its signature websites.

Third-quarter revenue, excluding traffic acquisition costs, rose 26 percent to $78.1 million, the company reported on Monday. That was in line with analysts’ average estimate of $78.2 million, according to Thomson Reuters I/B/E/S.

Third-quarter adjusted earnings per share of 6 cents beat analysts’ forecast of 4 cents.

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 advertising revenue. It operates a clutch of websites including eHow, LiveStrong and Cracked.

Shares of Demand Media are off more than 70 percent from its year high in March of $26.25 over worries that Google’s (GOOG.O) search engine changes have dented the company’s prospects.

Google has made key adjustments to its formula used to return search results of higher quality, known as project “panda.”

Indeed the New York Times Co’s (NYT.N), a competitor to Demand, reported that third-quarter revenue at that group plunged almost 21 percent, citing increased competition and the changes Google made to its search results.

During the third quarter, Demand said that a little over 31 percent of its revenue was from Google, compared with 33 percent in the second quarter of 2011.

Demand is attempting to diversify its revenue with an emphasis on video — partnering with Google’s YouTube in three new original channels — and is evaluating its content offerings of eHow.

EHow is the company’s biggest contributor representing 29 percent of total revenue and Demand is focusing on increasing the quality of its content.

The consumer may have gotten a “thinner” experience in the past, said Demand Media Chief Executive Richard Rosenblatt. He cited the example that a reader may have learned only one way to work out and lose weight. Now the company wants to expand that content to explain several different methods to work out, for instance.

The company is also taking stock of its content database pulling articles is does not consider to be of quality. That move could result in a write-down of up to $8 million, the company warned.

“This is clearly a company in transition,” said Stifel Nicolaus analyst Jordan Rohan.

“The business model is being changed materially with an increased focus on the production of video. Despite a positive spin from the company, the write-down of up to $8 million in content assets ... is troubling and signals that eHow is in decline.”

The company forecast fourth-quarter revenue excluding acquisition costs in the range of $78.5 million to $82.5 million.

Analysts are expecting revenue of $83.7 million.

Reporting by Jennifer Saba; Editing by Gary Hill

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