After last night’s strong earnings report, Jefferies analyst Youssef Squali is upgrading Demand Media to a “buy.”Here’s Squali’s bullet points for why he’s excited about the company:
DMD beats top-line/OIBDA consensus/guidance. Demand Media reported net revenues (ex-TAC) of $76.3M, up 49.8%, vs. consensus of 69.0M. Adj. OIBDA came in at $20.2M, up 78.4% Y/Y vs. consensus of 17M. NEPS was $0.06, vs. consensus of $0.04.
Branded ad sales drive impressive O&O Display growth. Revs. on O&O websites were $40.5M, up an impressive 93.6% Y/Y, due in part to growth of premium branded ad sales. Over 50% of eHow.com pages currently have branded ads. RPMs on O&O sites were up over 46% Y/Y, to $15.69 vs. $10.72 a year ago, as more branded ads were deployed across eHow.com and other properties. Branded ad sales tripled Y/Y as the company added several brand advertisers over recent quarters. Additionally, the mix shift towards eHow during 1Q11, possibly as a result of Google’s original “Farmer” algo update, was also a driver of the RPM improvement.
PV’s on O&O sites were up 32.1% Y/Y to 2.6M vs. 1.9M a year ago, while PV’s on network sites were up 37.4% Y/Y to 3.8M vs. 2.7M a year ago. As a result of Google’s second “Panda” algo tweak in April, eHow.com’s traffic was adversely affected by about 20% vs. the pre-February level. That said, mgt guided to PV growth comparable to 2Q10’s low-20%s Y/Y. DMD is focused on improving content quality by removing “uncurated” legacy user generated content on eHow, adding a “curation layer” which allows greater feedback and focusing on feature length articles to improve search engine visibility. While PVs growth will be more moderated than previously estimated short-term, they should be offset by a significant RPM rise Y/Y due to premium branded ad sales.
We are tweaking our estimates to account for the lower traffic; higher RPMs. We’re upgrading the stock to Buy and maintaining a PT of $22.
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