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Demand Media (NYSE:DMD)

Q2 2013 Earnings Call

August 07, 2013 5:00 pm ET

Executives

Julie MacMedan - Vice President of Investor Relations

Richard M. Rosenblatt - Co-Founder, Chairman and Chief Executive Officer

Mel Tang - Chief Financial Officer

Analysts

Sachin Khattar - Jefferies LLC, Research Division

Kevin Potterton - RBC Capital Markets, LLC, Research Division

Sameet Sinha - B. Riley Caris, Research Division

Douglas M. Arthur - Evercore Partners Inc., Research Division

Laura A. Martin - Needham & Company, LLC, Research Division

Michael B. Purcell - Stifel, Nicolaus & Co., Inc., Research Division

Ignatius Njoku - Wells Fargo Securities, LLC, Research Division

Operator

Good afternoon. My name is Tiffany, and I'll be your conference operator today. At this time, I would like to welcome everyone to Demand Media's Q2 2013 Financial Results call. Today's speakers will include Julie MacMedan, Richard Rosenblatt and Mel Tang. [Operator Instructions] And I would now like to turn the conference over to Julie MacMedan, Vice President of Investor Relations. Ms. MacMedan, you may begin.

Julie MacMedan

Thank you, Tiffany, and good afternoon, everyone. On behalf of Demand Media, welcome to our Second Quarter 2013 Conference Call. You can find our related news release and supplemental materials posted on the Investor Relations section of our corporate website located at ir.demandmedia.com.

On the call with me today are Richard Rosenblatt, our Chairman and Chief Executive Officer; and Mel Tang, our Chief Financial Officer. Following the Safe Harbor statement that I will make, Rich will update you on our business. Mel will then provide details on our second quarter financial performance and key operating metrics and finish with guidance for the third quarter and year ending December 31, 2013. Following the prepared remarks, we will open up the lines for Q&A.

Before we get started, we need to make the following Safe Harbor statement. We would like to remind everyone that during today's conference call, management will make certain forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from our current expectations discussed in such forward-looking statements.

In particular, comments about our anticipated future revenue, earnings, operating expenses, page views and growth rates, as well as statements regarding our business strategy and objectives, plans, intentions, operating outlook and planned investments are considered forward-looking statements. Factors that could cause actual results to differ materially from anticipated results are detailed in our press release furnished to the SEC.

I would also like to point out that during this call, we will discuss certain non-GAAP financial measures while talking about the company's financial and operating performance, including Revenue ex-TAC, adjusted EBITDA, adjusted EPS and certain free cash flow metrics. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures can be found in the financial tables included at the end of our press release. In addition, unless otherwise noted, all references to traffic-related metrics in our remarks today are based on comScore data.

Lastly, before we begin, I would like to remind everyone that today's conference call is being recorded and that it is also available via webcast on the Internet through the Investor Relations section of our corporate website. A replay will be available on our website.

With that, I'll now turn the call over to Richard Rosenblatt, our Chairman and CEO. Rich?

Richard M. Rosenblatt

Thank you, Julie, and welcome to our 2013 Second Quarter Results Call. Strategically, Q2 was a very important quarter as we continue to build both of our businesses. This

[Audio Gap]

integrated -- I'm sorry, it went on mute. Launching our new integrated content and commerce offerings, including eHow now and Stronger, and we acquired digital marketplace, Society6. These efforts, which we began exploring in 2012, provide new revenue opportunities and leverage our existing audience and content capabilities.

Conversely, we experienced significant volatility in our core Content & Media business. We have a plan to address this volatility, which includes the development of an integrated content and commerce offering, as well as continued investments in our web properties and content platform.

In our domain services business, our new gTLD initiative gained momentum, with 22 of our applications passing initial evaluation by ICANN.

Lastly, we made progress in the separation of our Content & Media and Domain Services business, and we are still on track to have this completed by the end of this year or early next year. Let me review these in more detail starting with our content commerce initiatives.

Demand Media has the key components for building successful content commerce business. We have one of the largest intent-driven audiences in the world, the leading content-creation studio and a scalable optimization platform. Over the past few quarters, we developed or acquired the products and services we believe our audience is looking for.

Highlighted by a recent acquisition of Society6, we are now ready to aggressively and seamlessly integrate commerce into our content offerings. Our type of content commerce is about offering unique products and services, what some have called emotional commerce.

Emotional commerce can be found in the distinct designs discovered on Society6; the unique craft tutorials on Creativebug; the realtime interaction with a qualified expert via eHow Now; or the customized workout nutrition plan from Stronger. It's about the stuff that can't be found anywhere else and surrounding it with a natively integrated content experience.

Last month, we significantly accelerated our growing content commerce strategy by acquiring digital artist marketplace Society6 for $94 million, which represents a multiple of less than 10x 2014 projected EBITDA. This rapidly growing e-commerce platform enables a large community of talented artists to seamlessly sell products with their designs directly to consumers.

Artists digitally upload their artwork to Society6, and upon purchase, it is printed on a variety of products such as smartphone cases, art prints, custom t-shirts and home decor products. Unlike the products and the shopping experience at a mass retailer or major e-tailer, Society6 designs are distinctive and unique, with a shopping experience that encourage discovery on a very individualized level. It's emotional commerce, not commodity commerce. From the artist's perspective, Society6 is a true end-to-end platform with integrated merchandising, manufacturing and fulfillment.

On the back end, Society6 leverages external partners for all fulfillment and manufacturing, removing inventory risk and manufacturing investment. Further, Society6's artists promote their designs through dedicated pages and social media tools, which result in 73% of total site traffic coming from referral and direct sources. We intend to grow this business significantly by leveraging our content-creation platform, large audience and overall business infrastructure.

In addition to this significant acquisition, we continue to develop commerce extensions to our own media properties. This week, we officially launched eHow Now, a service on ehow.com, where customers ask live experts specific questions in real time. eHow Now is currently available in 6 categories and we plan to expand it to more than 30 categories, from tech and finance to fashion and home decor.

While on a 6-month beta, over 1.5 million free questions were asked, showing the significant consumer opportunity, and we're now focused on converting them into paying members.

Earlier in March, we acquired Creativebug, a leading destination for online arts and crafts instruction where users can select from over 150 video courses starting $10 per course. We are leveraging our large audience to drive traffic to Creativebug, increasing its traffic by nearly fourfold quarter-over-quarter. With one of the largest arts and crafts audience on the web, we now have a compelling product for consumers in this multibillion dollar crafts market.

At the end of June, we launched Stronger, a subscription-based digital fitness and nutrition program on LIVESTRONG.COM. Stronger is a multiplatform experience that includes 30-minute workout videos, meal plans and a thriving community. We've just begun to sign up subscribers, and we'll have more to report in future quarters.

We're also adding a commerce component to CRACKED.com this month. CRACKED.com has a loyal fan base of nearly 8 million visitors per month looking for unique apparel and products. However, we are doing this in a typical Cracked fashion, where, like our content model, the community is picking and helping create the products. You will soon see these products integrated directly within the Cracked experience.

We believe that the future of all media businesses will require the seamless intersection of content, commerce and community. As you engage in consumer content, you will also be interacting and transacting at the same time. While our content commerce initiatives are still early, we are confident they will generate meaningful revenue growth. By the end of next year, we believe that commerce revenue will contribute as much as 25% of total content and media revenue.

Turning now to our core Content business. Starting in May, we experienced continued decreases in site visits as a result of a number of search engine changes. Notwithstanding declines, our Content & Media platform remains one of the largest in the world, reaching 100 million people organically each month. In fact, over the past 2 years, where we have experienced over 30 significant algorithm changes, some positive and some negative, our Content & Media revenue, ex-TAC, grew to a CAGR of approximately 10%. In addition, our studio content continues to perform well across our partner sites as well as for our brand advertisers. This indicates to us that the recent algorithm changes are not a reflection of the quality of each individual piece of content, but rather the evolving needs of the consumer.

To that end, we have begun to redesign and augment LIVESTRONG.COM's website and active community with new tools and features. The new -- the site's new look and feel will focus on the active community, the unique content and cater to a more mobile web audience. We're also conducting a detailed editorial audit of the content library and updating our content to ensure it is compelling and complete. Our goal is to deliver superior consumer experience that is best-in-class as an important consumer category.

As we gather data from the LIVESTRONG.COM improvements, we'll be looking to make similar changes to eHow. We believe that this renewed focus and investment in our core owned and operated websites will not only drive additional user engagement and traffic growth over the long term, but ultimately reduce the traffic volatility we have been experiencing.

Revenue from our core websites grew 12% year-over-year even with these search challenges. This performance was driven by significant growth in mobile traffic, driving a sequential acceleration year-over-year page view growth of 36%, as compared to 23% year-over-year growth last quarter. Mobile now represents more than 25% of visits and over 15% of revenue on these sites.

On the network side, our Content Channel business continues to gain momentum with page views growing more than 230% and revenue up more than 150% year-over-year, respectively. During the quarter, we launched new channels and we'll continue to invest in growing this business. As brands increasingly focus on becoming publishers, our content studio is uniquely positioned to help them produce content that is relevant to their audience through their own social channels and websites.

Overall, we are proud to have built a leading consumer media company that provides high-quality, practical content to over 100 million people each month. eHow is the #18th most popular website in the U.S. and reached more than 65 million unique visitors worldwide in June. LIVESTRONG, combined with eHow Health, still ranks the #3 property and health in the U.S., reaching more than 25 million unique visitors worldwide in June. And CRACKED.com ranks the #3 humor website, reaching nearly 8 million unique visitors worldwide in June.

Now let's turn to our Domain Services business. In Q2, our Registrar business posted 10% revenue growth, fueled by higher domain pricing in Name.com. We continue to position ourselves to become the largest end-to-end provider of domain services with a strong competitive position that includes the following: a large owned and operated portfolio of gTLDs; expansive distribution via owned and partner channels; and premium domain services that help consumers buy, sell and monetize domain names.

The gTLD process continues to move forward. To date, 22 of the 26 direct gTLD applications that we filed passed initial evaluation by ICANN. Subject to ICANN's timeline, we expect the first of our new gTLDs to launch during the first quarter of 2014.

As a reminder, for gTLDs with multiple applicants, there's an auction process for determining ownership. Competing applicants can choose to sell the ownership through private auctions or other mechanisms, or go to an auction hosted by ICANN. We expect the ICANN auctions to begin in Q3 of 2013 and to run through the fiscal half of 2014. By the end of these ICANN auctions, we'll have a much more detailed picture of our gTLD portfolio and overall landscape.

As we mentioned in the past, we're providing back-end registry services for gTLDs, as well as for other registries. To date, of the 333 gTLD applications that will be using the company's back-end registry services, 274 passed ICANN's initial evaluation process.

In Q2, we signed a strategic partnership with a web hosting and cloud storage leader, DreamHost. We will power DreamHost's domain registration back-end and offer their shared-hosting services throughout our distribution network. DreamHost will distribute our owned gTLDs through their channels.

We also expanded our gTLD value-added services with the addition of the Designs.com platform, allowing users to register a domain name and easily build a web presence through gTLD very specific templates.

Lastly, NameJet, our auction service provider, signed exclusive partnerships with several new registries to support the launch of their gTLDs. For example, .MENU, .BUILD and .BUZZ. By putting all these components into one integrated offering, we intend to provide the leading end-to-end solution in the domain industry.

In closing, we recognize that the volatility in our media business is frustrating for our investors and our employees. However, we are not deterred, and moving forward aggressively to adapt, evolve and grow over the long term.

With that, I'll turn the call over to Mel.

Mel Tang

Thank you, Rich. While our Q2 results were negatively impacted by search algorithm changes, we remain excited about the content platform we have built and the growth opportunities that we have identified. Our Content & Media business still achieved 9% year-over-year revenue ex-TAC growth, while our Registrar grew 10% year-over-year.

Further, we generated over $20 million of cash flow from operations in the quarter, which more than funded our strategic investments in content and fixed assets, as well as help fund some of the cash consideration for Society6. Our strong financial profile allows us to continue to invest in our core websites, our content platform, as well as in our emerging content commerce initiatives.

Now let's discuss our second quarter results in more detail.

Revenue excluding traffic acquisition costs, or TAC, was $97 million, up 9% year-over-year. Adjusted EBITDA was $26.8 million, up 9% year-over-year, and adjusted EPS of $0.10 was up 11% year-over-year.

More specifically, year-over-year Q2 Content & Media revenue ex-TAC grew 9% to $60.4 million. Owned and operated revenue grew 15%, while network revenue ex-TAC decreased 15%. Our owned and operated revenue increase of 15% was driven by 33% year-over-year growth in owned or operated page views to 4.4 billion, led by growth in mobile page views on eHow and LIVESTRONG, as well as pages on our international properties, which together, more than offset the traffic declines from search engine changes throughout the quarter. For our core websites, mobile business grew over 50% year-over-year in Q2 and now represent over 25% of total visits.

Owned and operated RPMs of $11.64 decreased 14% year-over-year, reflecting this mix shift to lower RPM, mobile and international page views, offset partially by the $2 million sale of the domain portfolio.

Network revenue ex-TAC declined 15% year-over-year, primarily reflecting lower YouTube premium channel revenue, as compared to last year, and lower social media revenue.

Specifically, we saw a 37% increase in network page views to 6.6 billion, due to growth from our IndieClick and Content Channel partner networks, offset somewhat by lower reported page views from our Pluck social media partners. And a 38% decrease year-over-year in network RPMs ex-TAC to $1.33, due primarily to lower YouTube premium channel revenue and a mix shift to lower monetizing IndieClick page views.

Onto our Registrar. Revenue was $36.6 million, up 10% year-over-year, driven by 4% year-over-year growth to 14.2 million domains for which we have recognized revenue, due primarily to the Name.com acquisition.

Annualized revenue per domain, or ARPD, of $10.39, increased 4% year-over-year due to an increase in the pricing of .com domains, as well as higher Name.com ARPDs. Excluding the Name.com acquisition, Registrar revenue growth would've been 4%.

Turning to consolidated operating expenses. Q2 GAAP operating expenses were $99 million -- $99.7 million, up 8% year-over-year. Excluding depreciation, amortization, stock-based comp, total operating expenses were $77.4 million, up 250 basis points, as a percentage of revenue, and driven by higher cost of services due to increased domains and registration costs from last year's aggressive reseller base expansion ahead of new gTLDs and the acquisition of Name.com in Q4 2012. Product development expense growth, as we grew our engineering base, partially in preparation for the launch of gTLDs. Higher G&A expenses, due primarily to $1.1 million related to spinoff preparation and M&A fees, as well as approximately $600,000 of rent overlap as we transitioned to our new headquarters.

Also included in our 2Q operating expenses, our total gTLD startup expenses of $2.1 million, up $1.6 million year-over-year, as we continue to prepare for the launch of our new gTLDs in the coming quarters.

Excluding these spinoff M&A and gTLD startup costs, total operating expenses, excluding depreciation, amortization and stock-based comp, would've been $73.6 million, down 20 basis points as a percentage of revenue as compared to last year.

Which takes us to Q2 cash flows. Cash flows from operations was $20.8 million, down 5% year-over-year, due primarily to an increase in the aforementioned spinoff M&A and new gTLD startup expenses. Excluding these expenses, cash flow from operations would've been flat year-over-year. Discretionary free cash flow was $13.7 million, down 29% year-over-year, due to higher fixed asset CapEx, of which the majority is related to our new headquarter build out, which we completed in Q3. Not only are we -- our employees in a more creative and collaborative working environment, this move also significantly reduced our future rent expense growth.

Free cash flow. In Q2, we generated $7.5 million of free cash flow, which reflects the higher CapEx I just mentioned, as well as an increase in our investment intangibles by $3.6 million year-over-year, primarily in content post [ph] to our content partners, where we continue to achieve attractive returns of over 50%.

A brief update on our balance sheet and liquidity. At June 30, we had approximately $145 million of liquidity, comprised of approximately $70 million of cash and equivalents and $75 million available under our revolving credit facility. During the quarter, we acquired Society6 for a total consideration of $75 million in cash and $90 million of stock. As Richard mentioned, we believe we paid a multiple less than 10x 2014 EBITDA.

Now, on to financial guidance. Given the recent and ongoing volatility from search engine algorithm changes, we're setting our guidance ranges under the assumption that the declines we have experienced to date do not reverse. More specifically, we estimate that the changes we experienced in May, June and July, have negatively impacted revenue in 2013 by approximately $22 million to $25 million.

And arriving at the low end of our guidance ranges, we then further assume continued monthly declines through the rest of the year. While we cannot predict whether these declines will actually occur, we believe that our low end reflects a conservative downside scenario.

Specifically, our guidance reflects the following trends: Content & Media revenue for the full year growing in the low to mid single-digit percentage year-over-year, comprised of owned and operated revenue growth in the high single-digit percentage, which includes projected Society6 revenue of approximately $10 million to $15 million in the second half of 2013; offset by network revenue down year-over-year, due to the YouTube premium channel deal last year, but flat to slightly up sequentially.

For the Registrar, we expect high single-digit Registrar growth, which does not include any revenue from the new gTLD opportunity. Adjusted EBITDA -- our adjusted EBITDA guidance reflects the high margin flow-through from the negative search engine impacts on revenue, partially offset by disciplined expense management, even as we continue to invest in improving our existing Content & Media platform, as well as in growing our commerce initiatives.

Turning now to cash flows. We plan to invest between $20 million and $25 million in intangible purchases in 2013 versus $13 million in 2012, with the majority of capitalized content being invested in content channels and international, where we continue to achieve over 50% returns. Additionally, we incur the remains of our headquarter build out of $5 million in Q3.

Now for our guidance ranges. For Q3, we are guiding to revenue ex-TAC of between $94 million and $96 million; adjusted EBITDA of between $18 million and $20 million, implying a 20% margin on rev ex-TAC at the midpoint; and adjusted EPS between $0.04 and $0.05 per share.

For 2013, we are guiding to revenue ex-TAC between $385 million and $390 million, implying 7% at the midpoint; adjusted EBITDA between $90 million and $95 million, implying a 23.9% margin on rev ex-TAC at the midpoint; and adjusted EPS between $0.28 and $0.31 per share.

As Rich mentioned, we are making good progress on separating Demand Media into 2 publicly traded companies. We expect to file our Form 10 registration statement later this quarter.

To close, this had been one of the more turbulent environments that our media business has faced, but we are confident that we can navigate through this volatility as we have in the past. Our content and media business will still grow organically year-over-year in 2013 and is expected to continue to generate significant discretionary cash flow. We plan to utilize our strong balance sheet and ample liquidity to grow our medium platform and offer new products and services to one of the largest audiences in the world.

That concludes my prepared remarks. We would now like to open the line for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Brian Fitzgerald with Jefferies.

Sachin Khattar - Jefferies LLC, Research Division

Sachin sitting in for Brian. A couple of questions. The first is, what are the kind of the primary sources of traffic? You guys said you had a pretty big mix shift from mobile coming in this quarter. So I was wondering, what are the sort of primary sources of traffic? Are those apps? Search engine referrals? And then the second, can you talk a little bit more about the eHow Now opportunity and kind of how you guys are thinking about it? How it will fit on sort of your traditional eHow business?

Mel Tang

Sure.

Richard M. Rosenblatt

You want to go to mobile first, I'll talk about eHow Now.

Mel Tang

Specifically on mobile, most of that traffic is coming directly to our mobile websites. We see people surfing directly on their smartphone or their tablets directly to our mobile web. So certain of our sites have apps, LIVESTRONG and Cracked where they did generate traffic there, but on eHow, for example, a lot of that traffic is coming by surfing on Safari or other mobile browsers.

Richard M. Rosenblatt

And the question on eHow Now is we put it into beta in January, and as I talk about on my script, we had 1.5 million questions answered. So the whole -- sorry, 1 million question asked. The whole idea is when you're on eHow and you're either on a text article or a video article, you're getting a quick answer. However, if you want to go deeper and you want to ask a live question, you click on a button, you then go to one of our studio experts, which -- this platform makes a lot of sense for us because, as I mentioned, kind of in my script, we already have the traffic into our studio platform. We have experts answering those questions. If you're then satisfied with the answer, you then pay. And during the testing, we have over 90% of the people have said that they're willing to pay for the question they have paid. So you can see it going across every single vertical and every single category that we have across eHow. And a competitor that we looked at, that does not have our type of traffic, built a very significant business doing exactly this.

Sachin Khattar - Jefferies LLC, Research Division

Got it. And when do you think you guys will go live with that product?

Mel Tang

It actually went live yesterday. So you can now see it on the -- our homepage. But we do have 1,000-plus paying customers already, and we've really just been testing it recently.

Operator

Our next question comes from the line of Andre Sequin with RBC Capital Markets.

Kevin Potterton - RBC Capital Markets, LLC, Research Division

This is Kevin on for Andre. I'm just wondering if you can give me some color on sort of how you're expecting the content commerce strategy to address the volatility that you've seen in the results? It seems like in some ways, it still relies on traffic to many of the same sites that have been affected by algorithm changes in the past.

Richard M. Rosenblatt

Well, right, so that's partially true. Not on Cracked, right? As you probably know, Cracked has not been affected by the changes at all. And again, just looking at the landscape, a Cracked competitor that is selling products directly, integrated in the system with much less traffic, is selling literally tens of millions of dollars worth of products. So that will just be leveraging our direct traffic. On the eHow and LIVESTRONG side, there is so much traffic already, right, between 100 million unique visitors between those properties, that even if the traffic continue to drop, which we hope it does not, there's still a large opportunity there. Once you figure it out our own properties, then you could use a network type of effect. eHow Now, for instance, we've already have a couple.

[Technical Difficulty]

I'm sorry -- I think we have a crossed line.

Okay. So you can see that once we prove it out on our own properties, and with the amount of visitors we have, as I mentioned, we would have a very large e-commerce business. I mean, we expect it to be 25%, as we mentioned, of revenues next year, and that's only tapping a small part of our traffic. Once you prove it out on our own traffic, you can then expand it across the entire web. Because the majority of people that build these large e-commerce businesses don't start with the base of traffic that we have. And if you combine the base of traffic, plus the content that we can create to drive new traffic as we add to our content partners, and then our optimization platform that has allowed us to monetize our website so well, those are all the ingredients you need to build what we believe will be a successful Content for Commerce business. On top of that, Society6 receives 73% of its traffic not from search, both from direct and social.

Mel Tang

Let me put it through one other way for you Kevin, is if you think about just sell-through rates on our traffic, right now we're starting from a sell-through rate of almost 0. And so I think there's a lot of upside there, notwithstanding the changes to the overall traffic mix. So if we can increase our sell-through rates on whatever base of traffic, I think that is a significant upside irrespective of the traffic volatility that we see.

Kevin Potterton - RBC Capital Markets, LLC, Research Division

That makes sense. And just one follow-up, if I may. I think you pointed generally to sort of trying to integrate your content and commerce initiatives. Is Society6 -- are there any plans to integrate that into some of your existing sites, or is that going to continue to just be a stand-alone entity?

Richard M. Rosenblatt

That's a good question. Well, when you say -- I mean, it's going to be a combo, right? So we think that business on its own, just based on its current growth rates, is going to grow significantly on its own. We will drive traffic from our properties into Society6. And what's great about Society6 is that it's so broad, whether it's iPhone cases and tech products that fit directly within the Cracked audience, or it's throw pillows and home apparel, which fit within eHow Home and Garden, where we're #1, or it's fashion and T-shirts and clothing, that we think our audience will be very excited about the Society6 products. That's completely separate from what we think the business will grow significantly on its own. And then we've already had a number of partners approach us about asking if whether or not we would sell these unique artist Society6 products on their sites. So you'll always see us have an owned and operated strategy and an off-network strategy.

Operator

Our next question comes from the line of Sameet Sinha with B. Riley.

Sameet Sinha - B. Riley Caris, Research Division

A couple of questions. If you can elaborate on some of the reasons for the traffic drop-off, and what are some of the steps that you are taking to counter this move? Secondly, in light of the guidance coming down, what do you think of the possibilities that the spinoff might have to be canceled?

Richard M. Rosenblatt

Okay. So, Sameet, the first one, we are not going to cancel the spinoff. In fact, we are moving forward and we would like to take the volatility of the media business out of the spin. So there's no plans right now to slow down the spin at all. So that's still planned for this year or next year, based on just how long the SEC process is.

Mel Tang

Yes, I think as I mentioned in my comments, we're targeting on filing the Form 10 registration later this quarter.

Richard M. Rosenblatt

So that is not being slowed down at all. So I can be clear on that one. On the second one, what we did differently with guidance this year, sorry -- this quarter was we wanted to show people that even if things continue to get worse and worse, and even if traffic drops from Google another 50%, this is what the business looks like. Meaning that, that we've got a very strong business even within these fluctuations. Now that said, as you remember, we experienced this in 2011. We were able to improve the websites, improve the experience, and in fact, we hit record levels of traffic. We were one of the fastest growing companies in 2012. So we are not going to count on that, but clearly, that's still our goal. And what we're doing a little differently this time is we do believe that the web continues to evolve, we understand. We're going to be focusing much more on the product, a much more mobile experience, as you can see, our mobile traffic continues to grow. And LIVESTRONG is one of the most active communities, so instead of being just focused on adding content, we're much more focused on integrating that community into the content. And begin to switch the signals. So again, all of the guidance and numbers we gave you assumes that, that stuff doesn't work. So we're really trying to show, going forward, that this business, going into 2014 is a stand-alone business with content and commerce is going to be strong, with or without these Google fluctuations.

Sameet Sinha - B. Riley Caris, Research Division

I just wanted to ask, Mel, in light of what Rich was just talking about, could you repeat some of the segment by segment guidance that you'd given? You kind of zipped through it, I couldn't really write everything down.

Mel Tang

Specifically, which...

Sameet Sinha - B. Riley Caris, Research Division

I mean, when you were talking about Content & Media, low to single -- mid to single-digit growth, O-and-O high single digits, that sort of detail for the second half.

Mel Tang

Yes, sure. I can sort of talk about -- so our owned and -- on our owned and operated, we have, in our guidance, assumed that the hits don't reverse themselves, so I mentioned that the range of revenue, high-margin revenue hit from the May, June and July impacts, were approximately $22 million to $25 million. On top of that, we have reflected these additional hits on a regular basis through the rest of the year. Specifically, on the owned and operated, I think we -- what I said was, it was going to grow in the mid single digits, which includes Society6 revenues of $10 million to $15 million, offset against declines in network, due to the lower YouTube channel deal last year, but would be, roughly sequentially kind of flattish. So I don't know if you need more color than that, we can certainly talk about it offline, we'll have to get into more detail.

Operator

Our next question comes from the line of Doug Arthur with Evercore.

Douglas M. Arthur - Evercore Partners Inc., Research Division

Yes, I just wanted to follow up on the kind of the mix issue which you talked about, with the sort of -- it seems like, I mean, the page view number was quite large in the quarter. You're pretty much putting that on mobile, obviously, then the RPM was down a lot sequentially and somewhat year-over-year. And the same sort of thing happened in network. So I mean, is that a mix that you, in your guidance, you think will continue? Or is it -- do you think things can move around? It just seems like the quarter-to-quarter volatility of the page view mix is really quite extreme this year.

Mel Tang

Yes, and it is something that we believe will continue. Mobile traffic, particularly as people utilize their smartphones more and more, are engaging, quite frankly, a lot more with our mobile formats, which are driving up page views per visit. So I do think it's a trend that continues, it's something that we are specifically developing our product roadmap around.

Richard M. Rosenblatt

Right. Doug, this is something that I talked about -- I mean, oh my God, 1 year, 1.5 years ago when our mobile was relatively small. And I remember saying that, for the emerging mobile device, our content, while sometimes criticized because it's short and to the point, is exactly the type of content you need on a mobile device where you cannot scroll through 10 pages and you just need something quick and to the point, particularly when you're traveling. So we think we're seeing the benefit of that, by people consuming our content much more on the mobile device, and then we're experiencing the challenges from the search engine changes much more clearly on the desktop.

Douglas M. Arthur - Evercore Partners Inc., Research Division

I mean, I guess the derivative question is, when you -- obviously, you start to see this impact with Google and on O-and-Os early in the quarter. Were the measures you took to kind of drive and galvanize the mobile? Because it just seems like -- I mean, you've talked about the mobile thing for a long time, but all of a sudden, boom, it just -- you had this sequential explosion in page views at much lower RPMs. So is there something you did, or did it happen organically?

Mel Tang

I think it's both, Doug. So organically, mobile traffic has been kind of increasing. I think also, what we did is part of addressing product and format and user experience, we rolled out more photo-centric mobile formats. So slide step's being one of them, when you comes through an eHow article, you're swiping through the steps that are accompanied by photos. Again, increasing the page views per visit. So we made some product improvements to our mobile formats, but we're also seeing a lot of just organic traffic continuing to come to our sites.

Mel Tang

And, Doug, I think that ties into what we talked about last quarter. We were pretty proud of the fact that we added the photo editor role as part of our studio, where now, we can get at a very low cost thousands of original photos that enhance the quality of our content. And on the mobile device, that's especially important. So I think you'll see a content of us make what, we believe, were smart product changes, which actually we made more revenue from in the additional page views. And at the same time, it's just organically growing very quickly.

Operator

Our next question comes from line of Laura Martin with Needham & Company.

Laura A. Martin - Needham & Company, LLC, Research Division

Let's stay on mobile and build on Doug's question a little bit. I think you said that usage was about 25% mobile and pricing was about 15%. As you look forward into 2014, do you see that gap closing? Do you see a momentum towards higher mobile pricing?

Mel Tang

So just to clarify, the 15% price, that was the 15% of our revenue coming from mobile on our core sites, not a 15% of the desktop yield, just to be clear. We see monetization -- if you look at it on a revenue per visit basis, mobile visitor is kind of in the neighborhood of 50% of a nonmobile visitor. I think it's leveled off a little bit after some very rapid growth. But everything that we see and hear out there is that ad TAC -- mobile ad TAC and advertisers, as well as publishers, will figure out how to close that gap in the near term. So I think we feel bullish about where mobile monetization is going. It has, I think, after again, very rapid growth, has slowed a little bit, but we do think that gap gets closed.

Richard M. Rosenblatt

Right. And just to clear what I said in my prepared remarks, was that mobile represents more than 25% of our core website visits and over 15% of revenue on those sites.

Laura A. Martin - Needham & Company, LLC, Research Division

Okay, great. And then secondly, maybe you can help me, Mel, a little bit. It wouldn't -- when I incorporate your guidance for the second half of the year, I do almost nothing to my revenue line. But I take my EPS line down by about half from $0.10 to $0.05 in each of the next 2 quarters to hit your full year guidance. Could you give us a little more granularity on which expense items are leaning on the margins the most. Is it mostly service costs or you're doing a lot more sales and marketing? What are the costs that are going up to do that to the margins?

Mel Tang

They're not going up. I think the way I would characterize it is the mix shift of the revenues. Clearly with these algo changes, they effected very high-margin revenue. So what you're seeing is high-margin revenue kind of flow through down to our operating margins, which would compress our margins. I mean, if you run through the math, I think, the flow-through, due to some of our discipline expense, isn't quite 100%. In fact, it's closer to 60%. So I think what you're seeing is essentially a mix shift of this high-margin kind of impact from these algo changes flowing through.

Operator

Our next question comes from the line of Michael Purcell of Stifel and Company.

Michael B. Purcell - Stifel, Nicolaus & Co., Inc., Research Division

Two questions. Mel, I'm just wondering if you could just help me with some quick math. On the revenue ex-TAC, you were previously about $415 million for the year at the middle -- at the midpoint. And you bought it down by about $5 million when you preannounced the second quarter. When I back out where you are now into the guide, that comes to like a delta of about $22 million. But within there, we're adding in about $9 million, $10 million-ish of e-comm. So is that the way I should think about the, how much you're bringing down the content business by about $30-ish million? Are you following my math?

[Technical Difficulty]

I'm sorry, I'll ask the question again. Mel, I'm hoping you can help me with revenue ex-TAC. You were previously about $415 million for the year at the midpoint. And you brought down by about $5 million the second quarter, previously, so, call it, $410 million. And now you're around $388 million or so, so a delta of about $22 million. And within that, you're adding on e-commerce revenue of, call it, $10 million. So should I think about the content is coming down by about $30 million in the back half, is that fair?

[Technical Difficulty]

Mel Tang

We apologize to everyone on the phone. This is the conference service, we're not sure exactly what's going on.

Richard M. Rosenblatt

So why don't you repeat it, Michael.

Michael B. Purcell - Stifel, Nicolaus & Co., Inc., Research Division

Okay. I'm sorry. So this one real quick. I just need help with the math. The revenue ex-TAC, previously guidance for the year was $415 million and you brought down 2Q by $5 million before so, call it, $410 million. And now you're guiding to $388 million at the midpoint, so a delta of $22 million. But we're adding on e-commerce revenue of about $10 million, so should I think about you're bringing down the content by about $30-ish million?

Mel Tang

Yes, I think that's right. I think the one thing, Michael, that -- try to make clear is, we actually saw another impact in July, which was on the year, kind of $4 million to $5 million as well. So on top of the impacts that we saw in Q2, we saw an additional impact, in part of Q3. And then sort of, we get down to the low end, I assume additional hits in Q3 and Q4. So that sort of, hopefully, helps you bridge that gap.

Michael B. Purcell - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And to that end, and for Richard and Mel, I'm wondering to myself, you did not get hit by this algorithm change at Cracked, right? And so, is the eHow asset, perhaps, or the domain site impaired, perhaps in the eyes of Google, and they keep changing the algorithms? And then to that end I'm wondering, is it the site or is it the content? And the further to that question is, is there an opportunity to take the content elsewhere, to syndicate it, or do something else with it? You spend years building up this content library. Just postulating here.

Richard M. Rosenblatt

Well, Michael, it's very smart and it's something that we're testing right now. As we said on our content partners, we've had continued growth, a very successful growth. We've also had, as we've moved and remediated content to different websites, it's performed very well. So we're just being very careful to make sure that we follow all the right policies. We would never put the same piece of content in 2 places and we are going through those tests right now. We will know from LIVESTRONG a lot. And if LIVESTRONG turns out as successfully as we hope it is, in as much effort we're putting into it, we then will test moving the eHow content. And all the proper ways, updated good content to different sites to try and grow that traffic. So we have a number of tests going on. But I agree with you, we have 3 million pieces of content, which the vast majority is exactly what people are looking for and the type of content that we know performs well for branded advertisers, who we hear back, we have some of the best performance, and we know performs really well across a couple dozen different partners.

Michael B. Purcell - Stifel, Nicolaus & Co., Inc., Research Division

Great. So just rough math, the content business, call it $250 million-ish this year, plus or minus, just ballpark. And even if it's flat next year and the quote of 25% of the e-commerce, or how should I think about it, 25% would be commerce. So are you thinking kind of $60 million, $70 million for that business next year?

Mel Tang

Yes, I think on the first part, Michael, the $250 million, clearly that number has come down significantly. And then also on a sort of spun basis, it ends up being a little bit lower because of the undeveloped websites that we're shifting over. So I think we'll be seeing up to 25%, it's off more of a base of, call it, around $200 million.

Michael B. Purcell - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So it's a $50-ish million business, and then would that be all Society6?

Richard M. Rosenblatt

No, that's a combination of continued growth in Society6, but also growth on eHow Now is stronger, and Creativebug. All of which today are small, but all of which are really starting to grow. And I think the best thing about a commerce businesses is once you understand the formula, meaning, you have the product right and you understand the conversion page, right, what the price is and what the customer is looking for, those businesses scale very, very quickly. So I mean, what I was proud of -- and I think my remarks got cut off in the beginning, was strategically, we were able to build 4 pretty significant e-commerce businesses with more rolling out, and we will figure out which of those products work the best with our customer base then take it off network and then continue to scale it.

Operator

Our next question comes from the line of Peter Stabler with Wells Fargo Securities.

Ignatius Njoku - Wells Fargo Securities, LLC, Research Division

This is Ignatius Njoku for Peter. Just a quick question on M&A strategy. Given your recent acquisitions, can you talk about what's your primary focus in M&A moving forward? Should we expect more focus on e-commerce? Should we -- should it also be smaller acquisitions? If you can like comment on that.

Richard M. Rosenblatt

Sure. Sure. I think you would see more smaller acquisitions going forward. We're excited about Society6 and we put a lot of focus on that. I think I would look at our acquisitions in the areas that we see as kind of the future long-term value. So clearly in mobile, right, as we continue to build one of the largest mobile consumer base. I think you also would look in content-for-commerce type of products. So you can again imagine, with a user base of 100 million, if we could find commerce-related products that integrate directly into our content, we would look for those. And kind of, if you just step back for a second, you think of Creativebug for instance, right? We have over 50 million people a year that visit the arts and crafts section on eHow.com. When you're in there, we know you're intent-based, looking for something related to arts and crafts, and for instance, let's say, it's sewing, we can offer you that commerce product of 100-plus videos around that area at $10 each. So you can imagine more types of products that sell directly into our audience where we can quantify the returns and then be able to expand. But we're not looking currently for any more large acquisitions, but we would always look for possible tuck-in acquisitions to either grow mobile or content for commerce.

Operator

We have a follow-up question from Doug Arthur with Evercore.

Douglas M. Arthur - Evercore Partners Inc., Research Division

Yes, Mel, on the domain business. Is the Name.com -- Is it still fair to say that the Name.com acquisition brought in 1 million -- 1.4 million registries? So I'm just trying to -- I think you mentioned this, but I'm trying to understand the underlying growth of that business right now.

Mel Tang

Yes, that's right, Doug. The Name.com acquisition added 1.4 million, 1.5 million names to our platform, the way that we clearly -- just to be very clear about what's included in our domain count, we only include the ones that have generated revenue in that period. So the way that it works is, even though those names are on our platform, until they renew, they don't generate revenues, they don't go in that count. So if you're trying to bridge the gap between the 14.2 against the 15, it's obviously lower because roughly half of those names on Name.com have generated revenues so far. So we're trying to match apples to apples when we calculate the ARPD.

Douglas M. Arthur - Evercore Partners Inc., Research Division

And so I think that's -- I think what you said is that adjusted for that, the underlying growth was 4%, is that fair?

Mel Tang

Correct.

Operator

[Operator Instructions] There are no further questions at this time.

Julie MacMedan

Thank you, and sorry for the technical difficulties on today's call. We appreciate you joining us and we look forward to updating you next quarter.

Richard M. Rosenblatt

Thank you very much.

Operator

This concludes today's conference call. You may now disconnect.

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