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Company Overview
Q3 2016
This document and any related oral presentation does not constitute an offer or invitation to subscribe for, purchase or otherwise acquire any debt or equity securities of Demand Media, Inc. (“Demand Media” or the “Company”) and nothing contained herein or in the related oral presentation shall form the basis of any contract or commitment.
The distribution of this document and any related oral presentation in certain jurisdictions may be restricted by law and persons into whose possession this document or any related oral presentation comes should inform themselves about, and observe, any such restriction. Any failure to comply with these restrictions may constitute a violation of the laws of any such other jurisdiction.
The information contained herein does not constitute investment, legal, accounting, regulatory, taxation or other advice and the information does not take into account your investment objectives or legal, accounting, regulatory, taxation or financial situation or particular needs. You are solely responsible for forming your own opinions and conclusions on such matters and the market and for making your own independent assessment of the information. You are solely responsible for seeking independent professional advice in relation to the information and any action taken on the basis of the information.
This presentation contains certain forward-looking statements. All statements other than statements of historical facts contained in this presentation, including statements regarding the Company’s future results of operations and financial position, business strategy, plans and objectives for future operations, are forward-looking statements. You should not rely upon forward-looking statements as guarantees of future performance. The Company has based these forward-looking statements largely on its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions that may cause actual results to differ materially from those contained in any forward-looking statements, including those described under the heading “Risk Factors” in the Company’s periodic reports filed from time to time with the Securities and Exchange Commission (the “SEC”), which are incorporated herein by reference. Moreover, the Company operates in a very competitive and rapidly changing environment and new risks emerge from time to time. In light of these risks, uncertainties and assumptions, the forward-looking statements included in this presentation may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Except as required by law, the Company undertakes no obligation to update any forward-looking statements for any reason after the date of this presentation to conform these statements to actual results or to changes in the Company’s expectations.
The Company is publicly traded on the New York Stock Exchange under the ticker symbol “DMD” and is a registrant under the rules and regulations promulgated by the SEC. Before evaluating whether you should consider an investment in the Company’s securities, you should read all of the disclosures set forth in the Company’s annual, quarterly and periodic reports filed with the SEC, including the disclosures under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Company’s SEC filings can be found at www.sec.gov and ir.demandmedia.com.
2
Disclaimers
3
We build platforms for communities of creators to reach passionate audiences in large and growing lifestyle categories
Our Mission
4
Investment Thesis
• Strong and experienced management team with significant breadth and depth of operating and marketplace businesses.
• Marketplace business represents over 50% of total revenue. Revenue growing over 25% year-over-year, Gross Transaction Value growing 34% year over year (Q2’16).
• Transforming Content & Media business with strong well-known brands. Significantly improved products and content. Growing social reach with 1.6 million combined followers on Facebook and Pinterest (Q2’16).
• Reduced operating costs by over $18 million per year on a run rate basis. Corporate overhead provides significant operating leverage going forward.
• More focused portfolio with sale of Cracked in Q2 and divestitures of other non-core properties
• Sum of the Parts analysis points to significant value dislocation.
• Clean balance sheet with ~$60 million cash and no debt (Q2’16).
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Our Portfolio
Marketplace Model 55% of total revenue (Q2’16) $17M GTV in Q2, +34% Y/Y
Blended Take Rate ~76%
Ad Supported Model 45% of total revenue (Q2’16)(1)
51M Average Visitors per Month(2)
Marketplaces Content & Media
(1) Revenue is shown on a pro forma basis net of Cracked and certain other non-strategic properties that were disposed of over the last year (2) Average monthly unique visitors in the U.S. reached by Demand Media properties in Q2’16 across desktop and mobile (Source: April-June 2016 U.S. comScore)
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Executive Leadership
Rachel Glaser Chief Financial Officer
Sean Moriarty Chief Executive Officer Prior: • CEO at Saatchi Art • President, CEO, EVP, Tech and COO of
Ticketmaster • EVP, Technology at Citysearch
Brian Pike Chief Operating Officer & Chief Technology Officer
Daniel Weinrot EVP, Legal & General Counsel
Prior: • CFO at Move, Inc • Senior VP, Finance at Yahoo! • VP, Walt Disney Company
Prior: • CTO at Rubicon Project • CTO at Ticketmaster
Prior: • VP & Deputy General Counsel at Las
Vegas Sands Corp. • Corporate associate at Latham &
Watkins LLP
Tawn Albright EVP, Corporate Development Prior: • CEO and founding partner at
Rockhouse Partners • Executive VP for Etix
Jill Angel EVP, People Prior: • VP Operations at Saatchi Art • Team leader at Cocodot, Swirl by
DailyCandy, and GSI Commerce
Dion Camp Sanders EVP, Marketplaces Prior: • Vice President, Emerging Businesses
within the Labs Group at Disney • Founder and CEO of Pacific Edison
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Transformation of Demand Media
2014 – 2016
Rebuilt the Executive and
Senior Leadership Team
Invested in an Art and Design
Marketplace, now 55% of total
company revenue
Restored LIVESTRONG.COM
to healthy & growing lifestyle
brand
Significantly improved content
quality, product and user experience on
eHow
Rationalized the portfolio and focused the
company on fewer bigger opportunities
Reduced headcount and
operating expense while investing in
core businesses for growth
Strengthened the balance sheet,
while adding $35 million in cash in
Q2’16 and maintaining zero
debt
Approximately 46M (1)
Total Unique Monthly Visitors
8
Approximately $19M (3)
Paid to Creators in 2015 Approximately 240,000 (2)
Creators Across Platforms
$106M LTM(4)
Diversified Revenue Mix Clean Balance Sheet Employees
Key Statistics
(1) Average monthly unique visitors in the U.S. reached by Demand Media properties in Q2’16 across desktop and mobile (Source: April-June 2016 U.S. comScore) (2) Total creators across platforms: number of active creators for Society6, Saatchi Art and StudioD in 2015; based on internal data (3) Total paid to creators: full year 2015 for Society6, Saatchi Art and StudioD; based on internal data (4) LTM as of 6/30/16. Revenue is shown on a pro forma basis net of Cracked and certain other non-strategic properties that were disposed of over the last year
$0M
$61M
–
$10M
$20M
$30M
$40M
$50M
$60M
$70M
Debt Cash
446
279
–
100
200
300
400
500
Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16
As of 06/30/16
Scaling the Operation
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Content & Media
studioD LIVESTRONG.COM
eHow
10
Mobile Evolution
Source: Demand Media internal data
Mobile visits as a percentage of total visits
Video Views (in millions)
116.6
15.5
Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16
eHow LIVESTRONG.COM
+12% Y/Y
Source: Demand Media internal data, YouTube and Facebook
37%
42% 42% 40% 41%
46%
55%
59% 60% 60% 63%
67%
Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16
eHow LIVESTRONG.COM
11
Content & Media Ecosystem
(1) Average monthly unique visitors in the U.S. reached by Demand Media properties in Q2’16 across desktop and mobile (Source: April-June 2016 U.S. comScore) (2) LTM as of 6/30/16. Revenue is shown on a pro forma basis net of Cracked and certain other non-strategic properties that were disposed of over the last year. (3) Source: comScore June 2016 for ad-supported sites.
• 46m monthly unique visitors(1)
• $48m in LTM revenue(2) • eHow: Top 6 site in comScore Home Category(3)
• LIVESTRONG.COM: Top 5 site in comScore Health Category(3)
• Monetization and Yield Management Team • Creator Marketplace • Technology Platform
Owned & Operated Properties
Brands (Sponsored Content)
Content Channels
• Distribution & Reach • Data Content Expertise
Content Creation, Audience and Contributor Platform
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eHow
(1) Source: Across desktop and mobile (US comScore Apr.-Jun. 2016) (2) Source: YouTube & Facebook (Apr.-Jun. 2016)
Multi-Year Transformation Commences in 2H’2014 • Removal of 2.4m low quality/duplicative titles between Q3’14
and Q2’15 • Removal of 3 ads per page in Q1’15; one additional ad unit
removed Q2’15 • New site team leadership (GM, product, content) • Category rationalization
Product • New responsive homepage design and site wide header to
optimize mobile web experience • Public facing contributor and user profiles • Growing social audience and distribution channels (Pinterest,
Facebook)
Key Metrics • 18m average monthly unique users(1)
• ~39m monthly average video streams (2)
• Management estimates that proactive transformation efforts resulted in a revenue decline of ~$40m in FY15
13
eHow Site Renovation
Current Version Prior Version
14
LIVESTRONG.COM Transformation Facts
• 300k articles removed since Q4’14
• Reduced ad density: 3 Ads removed from every page (2014)
Product
• Redesigned home page; new and improved legacy content more easily shareable
• New native mobile ad unit
• Header bidding live on desktop platform Key Metrics
• Nearly 21m average monthly unique users (1)
• Significant mobile audience growth +31% Y/Y (Q2’16) (2)
• 5m total app downloads with over 300k monthly active users (3)
• Over 5m average monthly video streams in Q2’16 (4)
(1) Source: Across desktop and mobile (US comScore Apr.-Jun. 2016) (2) Source: Demand Media Internal Data (3) Source: Demand Media Internal Data; App downloads over the life of the app; monthly active users in June 2016 (4) Source: YouTube & Facebook (Apr.-Jun. 2016)
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LIVESTRONG.COM Site Redesign
FEBRUARY 2016 Helping You Live STRONG
New Nav Site Wide
NOVEMBER 2016 Out With the Old!
Lose Weight and Keep It Off
JUNE 2016 Continuing to improve on Site
Nav with trending articles
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StudioD: Branded Content Production
studioD
• Specialized team focused on telling branded stories for ownership or distribution across our audiences
• Leverages insights data, content formats and production process to build award winning content programs for brands and advertisers
Content Channels
• 31 live hosted channels with top brands and publishers fully managed by DMD
• ~500,000 articles
• Ad-Supported Business Model
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16
-2% Q/Q
–
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16
+12% Y/Y
17
Content & Media Key Metrics Revenue Per Visit(2)
Video Views (m)(4)
Revenue ($m)(1)
Visits (m)(3)
$0
$5
$10
$15
$20
Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16
-7% Q/Q
(1) Revenue is shown on a pro forma basis net of Cracked and other non-strategic properties that were disposed of over the last year. (2) Based on internal data. Revenue Per Visit is defined as Content & Media revenue per one thousand visits. Revenue per visit is shown on a pro forma basis net of Cracked and certain other non-strategic properties that were disposed of over the last year. (3) Based on internal data. Visits are defined as the total number of times users access the company’s content across (a) one of its owned and operated online properties and/or (b) one of its customers’ online properties, to the extent that the visited customer web pages are
hosted by the company’s content services. In each case, breaks of access of at least 30 minutes constitute a unique visit. Visits are shown on a pro forma basis net of Cracked and certain other non-strategic properties that were disposed of over the last year. (4) Source: YouTube, Facebook and internal data.
352
277
0
200
400
600
800
1,000
Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16
Desktop Mobile
-6% Q/Q 630
Society6 Saatchi Art
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Marketplaces
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Society6 Marketplace platform empowering artists to make their designs available for sale on a variety of products.
Business Model
• Original designs from a global community of over 200k artists
• Over 2.8m original designs
• Print-on-demand for 32 products
• Third-party vendors produce, pack and ship directly to customers
• Artist earns a royalty on every product sold
Key Metrics
• 131k new customers / 190k total customers in Q2’16
• Visits up 15% Y/Y; transactions up 18% Y/Y in Q2’16
• Over 600k social followers (1)
• Over $12m in total transaction value in Q2’16, up 25% Y/Y
Source: Figures based on internal data. (1) Source:, Facebook, Instagram, and Pinterest
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Saatchi Art A leading online art gallery, redefining the experience of buying and selling art by making it easy, convenient and welcoming for both collectors and artists.
Business Model
• Original art from a global community of over 60k artists
• Commission based model; artist earns 70%
• Best in class logistics management (packaging, shipping, customs, delivery)
• Over $1.5b in total retail value of art available on the site based on list price of artworks as of June 2016
• Over 500k artworks for sale
• Have shipped to ~80 countries
• Unique Art Advisory program led by Chief Curator, Rebecca Wilson
Key Metrics
• $4.5m in gross transaction value (Q2’16)
• Average order value ~$1,300 (Q2’16)
• 64% Y/Y revenue growth (Q2’16)
Source: Figures based on internal data.
21
Marketplace Key Metrics
Revenue ($m) Revenue Per Transaction(1)
Total Transactions(2)
$0
$5
$10
$15
$20
Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16
+28% Y/Y
0
50
100
150
200
250
300
350
400
Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16
+19% Y/Y
$0.00
$15.00
$30.00
$45.00
$60.00
$75.00
Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16
+7% Y/Y
Marketplaces Revenue as a Percent of Total Revenue(3)
55%
–
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16
(1) Average revenue per transaction is calculated by dividing Marketplaces revenue for a period by the number of transactions in that period (2) Number of transactions is defined as the total number of successfully completed Marketplaces transactions during the applicable period (3) Total Revenue is on a pro forma basis net of Cracked and other non-strategic properties that were disposed of over the last year
Financials
23
Quarterly Revenue Composition (Pro Forma)
$18.5
$15.5
$12.5 $13.2 $11.7 $10.8 $10.7 $10.5
$12.6
$18.3
$13.5 $13.4
Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16
Content & Media Marketplaces(1)
(in millions)
Y/Y (43%) 59% (48%) 59% (56%) 63% (45%) 28% (37%) 26% (30%) 28% Q/Q (22%) (25%) (16%) (2%) (20%) 20% 5% 45% (11%) (27%) (7%) (0%)
(1) Revenue is shown on a pro forma basis net of Cracked and certain other non-strategic properties were disposed of over the last year
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Cost Breakdown
$20
$22
$24
$26
$28
Q2'15 Q3'15 Q4'15 Q1'16 Q2'16
-14% Y/Y
Total Non-GAAP Expenses Excl. Product Costs (in millions)
~$4m savings per qtr
Cost Breakout By Type
32% 24%
21% 37%
48% 39%
0%
25%
50%
75%
100%
Q2'15 Q2'16
Direct Business Costs Variable Costs Corporate Overhead
% of Total Costs
% of Total Costs
Assets Liabilities
Cash & Cash Equivalents $ 60.9 Accounts Payable, Accrued Expenses, and Other Current Liabilities $ 14.5
Other Current Assets 10.7 Deferred Revenue 2.5
Property and Equipment, Net 12.0 Non-current Liabilities 1.7
Other Long Term Assets(1) 30.5 Stockholders’ Equity 95.4
Total Assets $ 114.1 Total Liabilities and Stockholders’ Equity $ 114.1
25
Balance Sheet Summary (in millions)
As of June 30, 2016
(1) Includes intangible assets, net, goodwill and other assets.
26
Cracked Transaction • Buyer The E.W. Scripps Company
• Closing Date April 12, 2016
• Cash Purchase Price $39m (37% of DMD market cap at close)
• Holdback 10% ($3.9m) held in escrow for 15 months
• 2015 Revenue $10.9m (9% of total DMD revenue)
• 2015 Revenue Multiple 3.6x
• 2015 Op Profit Multiple 12.7x
• DMD’s Purchase Price for Cracked Assets (2007) ~$1m
27
Selected Recent Valuation Comparables for DMD Businesses
Art and Design Marketplace
Content and Media
ASX Mkt Cap $170M (USD) on ~$85M
(USD) FY 2016 revenue
Time Warner Invests $50m at a $300m valuation
2016 Revenue estimated $100m
NBCU invests $200m $1.5 billion valuation
2016 Revenue estimated $250m
Content and Media
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