Demand Media's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Aug. 7.12 | About: Demand Media (DMD)

Demand Media, Inc. (NYSE:DMD)

Q2 2012 Earnings Call

August 7, 2012; 05:00 pm ET

Executives

Richard Rosenblatt - Chairman & Chief Executive Officer

Mel Tang - Senior Vice President, Finance & Incoming Chief Financial Officer

Julie MacMedan - Investor Relations

Analysts

Neil Doshi - CitiGroup

Pat Walravens - JMP Securities

Heath Terry - Goldman Sachs

Nat Brogadir - Stifel Nicolaus

Sean Kim - RBC Capital Markets

Rory Meyer (ph) - Core Capital Investments

Peter Stabler - Wells Fargo

Anil Gupta - Imperial Capital

Jordan Monahan - Morgan Stanley

Operator

Good afternoon. My name is Jay and I will be your conference operator today. At this time I would like to welcome everyone to Demand Media’s second quarter 2012 financial results call.

Today’s speakers will include Julie MacMedan, Richard Rosenblatt and Mel Tang. A question-and-answer session will be made available to all attendees at the end of the call when prompted.

Ms. MacMedan, you may begin your conference call.

Julie MacMedan

Thank you Jay and good afternoon everyone. One behalf of Demand Media, welcome to our second quarter 2012 conference call. Thanks everyone for joining us today. You can find our Q2 release along with supplemental material 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 Incoming Chief Financial Officer.

Following the safe harbor statements 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 to finish with guidance for the third quarter ending September 30, 2012 and fiscal year ending December 31, 2012. Following the prepared remarks we will open up the line 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 actually results to differ materially from our current exceptions discussed in such forward-looking statements.

In particular, comments about our anticipated future revenue, earnings, operating expenses, page views and growth rate, as well as statements regarding our business strategy and objectives, plans, intentions, operating outlook and planed investment are considered forward-looking statements. Factors that could cause actually results to different material 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 in our press release.

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

With that, I will now turn the call over to Richard Rosenblatt, our Chairman and Chief Executive Officer. Rich.

Richard Rosenblatt

Thank you Julie and welcome everyone to our 2012, second quarter results call. On today’s call I’ll discuss the momentum in our core business, driving our Q2 out performance, as well as talk about some of the exciting new thing happening here at Demand Media.

We had another strong quarter with double-digit revenue growth in both our Content & Media registrar business. As forecasted we have returned to accelerating revenue growth, led by growth in our Content & Media business. Our approach of using proprietary data to understand and then meet the consumers’ need is driving this momentum.

Traffic growth continues as we executive on the improvements we have discussed on the prior calls. These included continued innovation to our content creation platform and progress, increasing engagement across our vast library content and diversify into new formats such as premium video, ebooks and image rich articles. These improvements combined with continued product innovation have led to a better user experience and new unique monetization opportunities.

One such example of these new monetization opportunities is our new social add formats, which offer bands new and excited ways to connect with our audience. We are pleased with the early test results. Social ad campaigns saw dramatically higher results. Engagement was up to 10-times higher than the industry average for generic rich media ad units, and the click through rate was up to seven times higher than the industry average for standard banner ad.

We believe that these new socialized formats will be enable brands to build stronger connections and engagements with our customers. We’ve got a strong pipeline of an innovative ad format and more will be rolling out over the next several months.

Now on to our core media properties; eHow, LiveStrong and Cracked. eHow has tremendous scale. In June eHow was ranked as the number 16th largest web domain in the US according to comScore. The site has sustained over a 100 million unique visitors worldwide for each of the past eight months based on our internal data.

But beyond the audience size, we are pleased with the improvement in eHow’s key engagement metrics with comScore reporting average minutes per visitor growing 11% in June 2012 as compared to June 2011. We believe that this growth is due in part to our focus on diversifying our content and better engaging the consumer. We even proved the user interface and how we package content, the topic areas for advertisers.

For example, our eHow touch channel launched in March and the time on page increased 20% and that channel’s become a most popular area for branded advertisers. We are using this approach to revamp all our major verticals. We launched eHow Mom in May and attracted a higher concentration of mothers during its first month than any of comScore’s top five parenting networks. We’ve seen strong interest in eHow Mom from advertisers such as Proctor & Gamble who want to reach its very targeted demographic.

LiveStrong like eHow has also achieved scale. LiveStrong is now ranking as the number two health property in the US throughout Q2. Total uniques are up 81% and average minutes per visitor are up 9% year-over-year in June for comScore. Our investment in both the content and experiences on LiveStrong have driven this audience growth and we continue to enhance the content with articles from new lifestyle, fitness and health experts that each have large social audiences.

We are also focusing on making LiveStrong more attractive to marketers with new targeted and topical advertising packages, many which are scheduled to roll out over the next few weeks.

Cracked.com; in Q2 Cracked’s growth continued with page views up 60% year-over-year based on internal data. Given this scale, we are beginning to see momentum with branded advertisers and are redesigning and refreshing our home page to feature more of our engaging video and click hitting, timely and funny content.

Lets talk about our registrar. In Q2 our registrar revenue grew 13%, driven by the expanding number of domains on our platform as we position our self for the exciting new GTO 2DOD opportunity, which I will discuss in depth later.

Let me now talk about newer business opportunities that leverage the scale and momentum from both our core owned and operated media properties and our registrar. We have seen encouraging trends in some of these newer businesses.

Lets talk about our content partnerships, premium video international and mobile. First our content partnership. This is what publishes our brand, license our studio content to expand our audience and generate revenue. We see a big opportunity to grow this piece of our business.

During Q2 content partner revenue and page views grew significantly, driven by strong traffic across our partner sites, as well as new partners and new content. We are seeing renewals, request for additional content and the addition of second and third channels for many of our partners.

In responses demand we increased tech content creation by more than 200%. In fact nearly half of our production is now going towards these partners with very attractive estimated internal rates return. With large partners such as Gannett and Hearst, we see it as a growing opportunity to distribute our data driven content from our studio more broadly and expect continued momentum throughout 2012.

YouTube; we continue to scale and expand our premium video platform. Through Q2 we have delivered more than 950 new YouTube channel episodes, representing nearly 3,200 minutes of new content. This helped drive significant year-over-year network revenue growth.

Our three major channels have been well received by YouTube and large brands. We’ve also had strong support from our talent while promoting the respective channels through the expense of social media networks. We review video as an important long-term growth opportunity for Demand Media and believe the production quality, the scale and the economics that we are delivering on throughout our YouTube channel underscores the competitive advantage we have today and in the future.

International; another exciting growth area for us is the international statutes. While still reaching scale, we continue to see great traction on our eHow and Espanol sites, where we are balancing content library growth for the consumer engagement and social traffic. We sold over $2 million uniques in June, up nearly 10 times from January.

Our Q2 page view has increased nearly 600% sequentially, driven by increases in both social and search. This site now has over one million highly engaged Facebook fans and Facebook referrals drove over 50% of the total page views in Q2.

I’d like to talk about a very important topic, mobile. Mobile is helping drive our growth today and we see it as one of our most promising opportunities long term. Our mobile traffic to our owned and operated properties reached 20 million uniques according to comScore in June, thereby achieving scale.

In Q2 the percentage of our owned and operated business from mobile was 21%, up from only 16% in Q1 according to our internal data. While RPMs on mobile traffic are lower than our owned and operated average RPM, they are improving at a faster rate, growing more than 15% sequentially just in Q2.

While we are still in the very early days of mobile monetization, these trends are encouraging as we begin to test different mobile monetization strategies. Probably most importantly however is that our mix of mobile traffic grew significantly in Q2, while we actually increased our owned and operated RPMs by 8% compared to Q1.

Here is why we are excited about our specific content in this new mobile world. One, we already have a very large organic and rapidly growing mobile audience as I mentioned in June, over 20 million uniques. Second, our vast library of content is ideally suited for mobile, because it is short content, it concise and to the point, its actionable, its visual and its designed to the active consumer who is unthread to their desktop.

For example, you need mobile, not desktop content when your stranded with a dead battery and need to learn how to use jumper cable or when your in the backyard grilling or putting a fishing line on a spinning real. At those precise moments and others where our content fits, you need your mobile device.

We recognize that the mobile consumer experience is different and we are focused on optimizing our sites for the smaller screen. We have both designed our site navigation and layout from the ground up for mobile users, making it easier to discover content through browsing. We plan to continue to innovate and improve our mobile contents brand with a number of new updated schedules for Q3.

Lets talk about the new gTLD opportunity. With the introduction of new gTLDs, a big change has come into the way organizations and individuals identify themselves online. By the time the ICANN process concluded and the new gTLD has been rolled out, online branding and Internet navigation will experience a remarkable change.

We believe this change ushers in a historic opportunity in a multi billion dollar industry with more than 230 million domains currently under registration. With applications for 1,409 unique gTLDs we believe ICANNs new program will generate a number of new business opportunities. Small business and consumers can now chose more meaningful and expressive web addresses.

We have emerged as one of the leading participants in this new initiative. As previously discussed, we expect to generate additional revenue growth from new gTLDs in three primary ways. First, as a registry.

As we announced in June with the sole applicant for 16 of the 26 gTLDs we applied for directly. We believe our data driven approach to the selection paid off as reflected in this high number of sole application. We also have equal rights in additional 107 gTLDs through our strategic arrangement with Donuts Inc. Donuts is a sole applicant for a portion of these applications.

Second, revenue stream is we’ve been selected as the technical registry operator for gTLD strings awarded to Donut Inc and they are the largest applicant with over 300 applications.

Lastly, we expect to see increased volumes through our registrar, the second largest in the world, which we have spent the last year strategically expanding to over 13.5 million domains under management.

While we expect to be generating revenues from this initiative in 2013, it is dependant on ICANNs timeline. Ultimately we believe that gTLD has the opportunity to represent the strategic opportunity for the company and we will continue to keep you updated on our progress on future calls. For additional general information, please refer to the white paper we posted today at demandmedia.com.

Summing things up, we are seeing the strong performance and continued momentum in our content and media and registrar businesses. We plan to leverage the strength as we capitalize on the newer growth initiatives, which include our content partnerships, video, mobile, international and gTLD.

Lastly, I am pleased to acknowledge two executive appointments. Mel Tang is becoming our CFO and Michael Blend who as we just announced today will become our President and COO. Both of these gentlemen have been integral parts of our executive team since 2006 and their promotions are well deserved.

I also want to thank Charles Hilliard for his service to the company. As you know Charles will be moving into a new role as special advisor to the board and I want to thank Charles for his many, many valuable contributions and we look forward to continue to work with them in the future.

Now, I’ll turn the call over to Mel, to review our Q2 financial results and business outlook. Mel.

Mel Tang

Thanks Rich. We are pleased to report strong second quarter results, thanks to both our content media and our registrar businesses. Importantly we delivered on the three financial themes we introduced earlier this year.

First, a return to accelerating top line growth; second, generating significant cash flow and third, investing in new growth opportunities. In light of our strong first half performance and outlook, we are increasing our guidance for 2012, the specifics of which I will cover towards the end of my prepared remarks.

Now lets discuss our second quarter results in more detail. Revenue excluding traffic acquisition costs or TAC was $88.7 million, up 16% year-over-year, which was an acceleration from Q1s 9% year-over-year growth. Adjusted EBITDA was $24.6 million, up 20 year-over-year, resulting in 90 basis points of year-over-year margin expansion as a percentage of revenue ex-TAC to 27.7%.

Free cash flow was $16.6 million up from a negative $4.8 million in the year ago quarter. Importantly Q2s strong free cash flow funded nearly all of the $18.1 million we invested in gTLD application deposits during the quarter. We were pleased with Q2s performance from both our businesses.

Beginning with content and media, content and media revenue ex-TAC was $55.3 million, up 18% year-over-year, which was comprised of a 15% increase in owned and operated revenues, driven by accelerating traffic trends and a 29% growth and network revenue ex-TAC, due primarily from growth in our network content partners and IndieClick sales.

Our owned and operated revenue increase of 15% was driven by a 30% year-over-year growth in owned and operated pages to $3.3 billion, led by strong growth in our core owned and operated websites. This traffic growth was probably offset by 11% year-over-year decline in owned and operated RPMs to $13.50, due to higher year-over-year page view growth on LiveStrong and Cracked, which currently have relatively lower RPMs as compared to eHow. Sequentially owned and operated RPMs improved 8% versus $12.52 reported in Q1.

Network revenue ex-TAC growth was driven by a 29% growth in network pages to $4.8 billion, driven by our IndieClick acquisition which added $1.8 billion page views in the quarter, offset somewhat by lower traffic on applied social media partners and flat network RPMs ex-TAC year-over-year of $2.16, which reflects higher RPMs from our new YouTube channels, offset by lower net RPMs due to our IndieClick acquisition.

On to our registrar, revenue was $33.4 million, up 13% year-over-year, driven by 14% year-over-year growth and end of period domains to $13.5 million, due primarily to the addition of new large resellers during the past 12 months. Annualized revenue per domain or ARPD decreased 2% year-over-year to $9.96 due to a mix shift to these larger, higher volume resellers.

Turning to consolidated operating expenses. Our Q2 GAAP operating expenses were $92.1 million, up 15% year-over-year. Excluding amortization, stock based comp and other non-GAAP adjustments, total operating expenses were $73.9 million, up 13% year-over-year and down 270 basis points as a percentage of revenues, driven primarily by a modest mix shift to higher margin content and media revenue, as well as operating leverage from product development and G&A, offset partially by higher expenses as we invested in sales force infrastructure and marketing, which takes us to 2Q cash flows.

Cash flow from operations was $21.9 million, up 30% year-over-year, driven by growth in EBITDA and disciplined working capital management. As a reminder, we pay our annual bonuses in Q2. Discretionary free cash flow was $19.2 million, up 73% year-over-year, driven by cash flow from operations growth and a 46% year-over-year CapEx decrease to $3.1 million, the comparison of which reflects last years CapEx from the build out of our new office in Kirkland, Washington.

Now, free cash flow. In Q2 we generated $16.6 million of free cash flow versus negative $4.8 million in the year ago quarter. The $21.4 million year-over-year improvement reflects an 84% decrease and intangible investment to $2.5 million due to our previously discussed planned reduction in eHow tech content spend.

As I noted earlier, we invested $18.1 million towards gTLD applications during Q2, which were presented in other long-term assets on our balance sheet. While we may incur gains in or losses during the next stage of the application process, we do not anticipate generating any revenue from gTLDs until 2013.

Now I want to spend a few minutes on content investments. In Q2 we shifted most of our text content production to non eHow.com distribution channels, such as our partner network and our owned and operated international site, eHow in espanol.

We estimate lifetime internal rates of return of over 50% for text content published at these sites. As such we estimate at least 40% of our investments be returned in the first 12 months, with an additional 60% returned in months 12 through 24, resulting in full pay back within two years. On standard video content, we continue to estimate the internal rates of return on new video content to be much higher than those on new text content.

Given the improvements we have made to our context creation and distribution platform, as well as progress we have made in establishing new distribution channels, we now anticipate increasing our quarterly and tangible investments by between 50% and 100% in the second half of 2012 as compared to our spend in Q2.

A brief update on balance sheet and liquidity; at June 30 we had $94.2 million of cash in equivalence, no long-term debt and net of our $7 million in letters of credit, $98 million available under our $105 million revolving credit facility.

Now onto financial guidance; we are introducing guidance for Q3 and updating our previously issued full year 2012 guidance. Our updated 2012 guidance reflects a few key trends. First, we continue to project second half year-over-year revenue growth to continue to accelerate as we move past the full comps given search algorithm changes during the first half of 2011.

Within content and media, second half owned and operative growth will be led by traffic growth with RPMs increasing slightly. Additionally, we anticipate that our network revenue growth will be higher than owned and operated, driven by revenue from the YouTube channel deal, as well as growth in content channel partners.

Further we are forecasting our content and media revenue growth to out pace our registrar business for the remainder of 2012, as content and media revenue growth accelerates and registrar growth normalizes back to its historic levels in the low double digits. Our revised 2012 adjusted EBITDA guidance continues to reflect our commitment to deliver current year results while reinvesting in long-term growth initiatives.

Also as we have demonstrated in the first half, we plan to deploy capital in to data driven strategic investments such as new gTLDs and content. So specifically for Q3, we are guiding to revenue ex-TAC between $90 million and $92 million, implying 17% year-over-year growth at the mid point.

Adjusted EBITDA of between $25 million and $26 million imply a 28% margin on revenue ex-TAC at the mid point. Adjusted EPS of between $0.09 and $0.10 per share implies 67% year-over-year growth at the mid point.

For 2012 we are increasing our guidance to revenue ex-TAC of between $355.5 million and $359.5 million implying 14% growth at the mid point, up from a previous mid-point of 12%.

Adjusted EBITDA of between $98.5 million and $100.5 million implying a 27.8 margin of revenue ex-TAC at the mid point and adjusted EPS between $0.35 and $0.37 per share, implying 44% growth at the mid-point up from our previous mid-point of 36%.

To summarize, we are very pleased with Q2 strong results and our outlook remains positive.

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question on the line comes from Mark Mahaney with CitiGroup. Your line is open.

Neil Doshi - CitiGroup

Hey guys, this is actually Neil Doshi calling in for Mark. Congrats on the quarter. Richard can you talk a little bit about the mobile side and what are you doing in terms of creating a kind of a unified eHow mobile experience and it seems like that was a pretty impressive gap that you were able to close in terms of mobile RPMs. Do you foresee mobile RPM reaching kind of desktop RPMs anytime soon and what are some things that you guys are doing to close that gap even faster. Thanks.

Richard Rosenblatt

Thanks for the question. We are very excited about mobile. I think there is a lot of ways to ask the question. I think the first thing just to start with is our content and that’s my focus on. We have a library of over four million pieces of content and we took a look at the most popular articles on mobile and the most popular articles on the desktop and while there is some overlap, you’d be surprised at how many of the articles are really working on mobile even better than they were on the desktop, which means that we are starting to gather data and starting to understand.

We think in a pretty effective way what type of content that mobile user wants. We are also collecting that data and changing experience. If you go for instance the mobile experience for eHow, it is very different than the web experience from the way in which the home page looks to the way in which you browse, to the way in which you surface content.

We are also starting to do that on LiveStrong and we are currently doing that on Cracked. Between all that data, all these learning together and we believe in the long term that our studio will be able to make very specific contents for the mobile device, for people on the go.

On the RPMs and the CPMs as I said, they continued to grow significantly, sequentially and we expect that growth to continue and we are learning a lot and there is lot of networks that are really interested in this very intent driven content that our mobile users are using, as well as branded is now rolling out a number of packages, specifically for the mobile device.

Mel, do you have comments?

Mel Tang

Yes, I think Neil, similar to what we’ve seen in the video over the past few years when video started out, RPM and CPMs were low, but they have been ramping significantly. So we think that something similar will probably happen of the mobile space. As that market place becomes more efficient you will see CPMs begin to increase. But secondly, I think our content lends itself well to potentially yielding better, just given the nature of the intent driven content of our library.

Richard Rosenblatt

And then the last part of your question, its interesting, on the iPad we are already seeing very similar CPMs and RPMs to the desktop and as I mentioned on the mobile device in general, it is growing significantly.

Neil Doshi - CitiGroup

Great. Thank you Richard, thank you Mel.

Operator

The next question comes from Pat Walravens with JMP Securities. Your line is open.

Pat Walravens - JMP Securities

Oh great, thank you and congratulations on the quarter you guys. Richard my question is around the gTLDs and so you know big picture and you don’t have to put a timeframe on it, but currently this is around $130 million business, low double digit growth and I think a relatively low margin profile. How should investors think about what the new gTLDs can do for the growth of that business and for the margin profile?

Richard Rosenblatt

Okay without being too specific and then if Mel wants to chime in, I’ll let him chime in, that the current business we are in right, the registrar, as a reseller of registrars, we are predominantly selling dot coms, dot orgs and dot net at a very low margin. Again that’s because we are reseller.

This changes the game for us in a big way, because we are able to leverage that platform, by searching up million domains and a lot of the data we collected to being selling domains directly, as well as I mentioned operating a registry, both of which are much higher margin business, they look much more like media businesses and registrar business.

So we think that will lead to expansion of margins. Again this maybe till 2013 or plus. Its based on the ICANN timeline, but we think all three of those new revenue streams, as well as just the marketing growing is going to lead to having the eHow asset be much more valuable than it currently is today.

Pat Walravens - JMP Securities

Perfect, thank you.

Operator

The next question is from Heath Terry with Goldman Sachs. Your line is open.

Heath Terry - Goldman Sachs

Great. Richard I was wondering if you could give us a sense of to the extent that you are seeing any changes in the mix of traffic that you are seeing, whether its referral traffic, how meaningful Google is at this point and whether or not there has been a meaningful shift in the sources of traffic over the last quarter or so.

Richard Rosenblatt

I think we have the exact numbers.

Mel Tang

Yes, so...

Richard Rosenblatt

Mel will address them, go ahead.

Mel Tang

Specifically on eHow Google represented 51% of page view traffic to eHow relative to 59% last year. So we are seeing a diversification away from Google. Part of that is mobile, but as we think about the traffic, the referral to eHow, LiveStrong and Cracked, each on those clearly has differing search referral basis, Cracked has very little, whereas eHow tends to have more and as we build out user engagement and other product features on there, we hope to continue to diversify our traffic sources.

Richard Rosenblatt

Well Heath, I think if you take a look at the nature of our content and as you’ve seen the transition we’ve gone over to the last year to be very careful, to make sure that our content is consumer focused and even more engaging, that its going to generate a lot of traffic from search and as we know, search traffic continues to be more valuable from an RMP basis and most forms of traffic. So growing search traffic, we see as a positive as long as the rest of the traffic from other sources grow in also and that’s exactly what we are focused on.

Heath Terry - Goldman Sachs

Great. I appreciate that. On the YouTube channels, this is obviously something you guys started with the encouragement from Google and even some funding. Has that business started to become self-funding? Is it profitable enough or are you seeing enough of a revenue contribution that you are going to be accelerating or increasing the amount of revenue that’s going towards – not revenue sorry, the spending that’s going towards content creation in that channel and how did the economies within YouTube compare to economies for video content across your other distribution options.

Richard Rosenblatt

Heath, let me take the first part of that. So the answer is partially yes. In that as we talk about the premium video that we are creating which goes on different YouTube channels than the ones that YouTube prepaid for, as well as our sties. We talked about those returns are very high, much, much higher than even text as Mel talked about. We are ramping that up aggressively, continuing to look into better ways to create more and more of what we call backed premium content. So video is a very big growth area for us.

On the YouTube side there’s kind of three components. The first is can you create the content that makes YouTube happy and the consumer engaged and the answer is yes. A couple of examples are some of the contents we made for our eHow Pet channel, have been viewed over 1.3 million times already.

The same component is there an advertiser demand and the answer is yes. As we mentioned in the last call, all three channels were sold out buy YouTube, then the only third ingredient to answer your question positively is, can we generate enough traffic to make those other two make sense and its still early; its only really our second quarter of increasing volume.

Traffic continues to grow and YouTube says they are rolling out a couple of $100 million advertising campaign to help drive more traffic into the challenges. So as long as that traffic continues to grow, it does look like it will be a sustainable business and we are still waiting as I think all content channel partners are for that third component.

Mel Tang

Yes, I think that the YouTube market place is evolving, and we believe we have competitive advantages in producing into that market place and it would just be a question of how that evolves and where they take it.

Richard Rosenblatt

And then its – well that part is, we are now being approached by the number of different partners who are interested in our video offering. So you can imagine some very large partners that have a lot of tariff and we know video, CPMs are very high. So if we could create the content that the consumer wants and they can help drive the traffic, you could see us be able to expand our business off our network.

Heath Terry - Goldman Sachs

Got it, got it, great. Thank you very much.

Operator

The next question is from Nat Brogadir with Stifel Nicolaus. Your line is open.

Nat Brogadir - Stifel Nicolaus

Hey guys, thanks for taking my question. Two quick ones; one is, can you just talk about eHow. How much of a percentage total for revenue and page view if you can. And secondly on the gTLD front, it looks like the investment will be about a $1.5 million each quarter for the back half of the year. At that point should we assume no further investment in ‘13 or how should we think about that? Thanks.

Mel Tang

Yes, let me take both of those Nat. First on eHow, eHow as a percent of total revenues was 32% of total revenues consistent with last year. And on the gTLD investment for the back half, we think it will be more back end loaded. A lot of that will depend on the timing of ICANN as they advance in the next phase of the process. So we’ll keep folks updated, but the spending will be dictated by the rollout of the next phase of the process.

Nat Brogadir - Stifel Nicolaus

Great, I appreciate the time.

Operator

The next question is from Sean Kim with RBC Capital Markets. Your line is open.

Sean Kim - RBC Capital Markets

Hi, thanks. One question on the content side; can you talk about your progress in branded ad sales. I thought you mentioned new social apps and good early results, but how has it been trending as a percentage of owned and operated ad revenue. And the second question on the gTLD initiative, can you give us a little more color on how your partnership with Donuts work. Is it a rev share agreement or an annual fee per gTLD. Any color there would be very helpful. Thank you.

Richard Rosenblatt

Let me jump in a real quick in the first one. Branded continues to be about 10% of our revenue in the Content & Media business and it continues to grow, its grown double digits sequentially, as well as it grew double digits year-over-year. So we continue to be encouraged by our branded business and we think there is a lot of upside in both LiveStrong as well as Cracked and I talked about the very large page view growth that’s continuing across them both. So again, we are having a lot of progress with new app formats on eHow and we are rolling out new patches across LiveStrong and Cracked.

Sean Kim - RBC Capital Markets

Great, thanks. And on the partnership with Donuts?

Richard Rosenblatt

I’m sorry, on the Donuts, I’m not sure – we can’t disclose too much of that as per the agreement. I think most of that we’ve talked about publicly.

Mel Tang

Yes, it probably comes back to one, we have share back and app rights to 107 of the applications and then two, we are the backend provider for the registry infrastructure on the gTLDs that they eventually get delegated. So those are the two main facets of that arrangement.

Sean Kim - RBC Capital Markets

Okay thanks.

Operator

The next question is from Rory Meyer (ph) with Core Capital Investments. Your line is open.

Rory Meyer (ph) - Core Capital Investments

Thanks, two questions. One on eHow; what percentage of eHow impressions are coming from video now and where do you want it to be a year from now and maybe even two yeas out and then on the new gTLDs, could you talk a little bit more as best you can about the technology you said you were using to gauge what to mains was to bid for and how you came in as the only bidder.

What kind of data did that pick up indicate that those domains were the right ones to buy, and then do you have any kind of sense or data just to kind of indicate what the consumer demands for those might be in 2013 when it kind of gets momentum.

Mel Tang

Yes let me – it’s Mel. Let me cover the first quarter and I can over the rest of them too, but. So on eHow impressions for video, what we are seeing is still relatively small (inaudible). Its kind of less than 10% of total page views to eHow, but growing.

On the gTLDs how we went about selecting what we are applying for. What I can say it was a very rigorous data driven using proprietary data, as well as I think some pretty unique analysis to come up with the strings that we think would be valuable and even to the point of coming up the valuations for each one and what was the third questions, I’m sorry.

Richard Rosenblatt

I can do this one. Also Rory, part of it was the reason why we ended up with 16 and the uncontested 26 was again, the assets to proprietary data, understanding where the consumer is. What type of contact consumers are looking for, as well as where small business are registering domains, because of the size of our platform. So we are able to find pockets, gTLDs that we know the small business of consumers’ want that is not obviously.

On the demand, again we don’t know what the demand is, but if you do go to the eHow.com website we did ask people would be they be interested in gTLDs and how many and which ones. We got hundreds of thousands of responses and we have a list of the top gTLDs that consumers want and we are very fortunate that we are either solo or on an application from us, all at the top gTLDs. So we do believe there will be a lot of consumer demand, but we can’t predict how much until it actually occurs.

Rory Meyer (ph) - Core Capital Investments

Okay. All right great, that’s helpful. One quick question on YouTube; do you have a sense kind of how YouTube feels earlier on. You mentioned they are going to put about a $100 million in marketing the challenges. Do you have a sense if they are going to maybe invested in more channels, put more money to work there and then could can you just run this really quickly, the length of the term on the agreement with Google and when that copyright kind of reverts back to you guys and you should start using it on your own sites.

Richard Rosenblatt

So on the first question, we have spoken to YouTube about it. I do not do think that they’ve made that determination yet on what their next step is and whether or not they are going to fund, they are going to support or exactly what it is, they have not told us that yet. It would reverse back to us in a year and a half.

Rory Meyer (ph) - Core Capital Investments

Great. Thanks a lot guys.

Operator

The next question on the line is from Peter Stabler with Wells Fargo securities. Your line is open.

Peter Stabler - Wells Fargo

Good afternoon, thanks very much. So Richard you asked earlier a little about the social ad format and I just was hoping to get a little bit more detail on exactly what that means, how consumers are sharing that, any color if you could offer on the kind of magnitude of sharing of social ads; I think that’s a very interesting topic and then I have one quick follow up. Thank you.

Richard Rosenblatt

Sure. Again, it’s a relatively small task, but it is across millions of impressions. And what it is, it allows them to see what is going on in the social stream around a brand. And as I mentioned, you are seeing them engaged up to seven to 10 times more than they typically do, because if they are looking at a certain brand, they can see what people are saying about it, if it’s a Facebook social ad, if it’s a pin to a social ad, they can see what they are doing around pinning and Twitter and such.

So just think of a much more active advertisement around the brand that goes into the social graph and this came from one of our small acquisitions. IndieClick have been doing for a long time across a lot of partners. So we are leveraging the technology to roll out a number of them.

Mel Tang

But more specifically when you go to that social add, you roll over it expands and you have the option of engaging with it on the various social channels and there is feedback that goes back to the brands on that.

Richard Rosenblatt

I mean the thing that’s exciting about is advertisers are continuing to look for a combination of scale plus innovation. We clearly have scale as I’ve talked about throughout my comments and now being able to roll out these different types of ads, we think that provides a real opportunity for us.

Peter Stabler - Wells Fargo

Great and then a quick one on pricing, I think for the last couple of calls you’ve mentioned the gap in pricing between the fast growing assets and LiveStrong and Cracked and eHow. I’m wondering if could offer any color about the trend there? Do you see a pricing gap closing, do you see getting more traction on pricing with the fast growing assets and that gap narrowing over time, thank you.

Richard Rosenblatt

We do. We see as I mentioned momentum each quarter, where we continue to monetize Cracked and LiveStrong better and the RPMs and those properties are growing, and we do think we have now a real roadmap into increasing those RPMs and TCMs.

What happened was, eHow had so much scale so early, we had our entire team focused on that, and now its just taken a while, its just taken a few quarters to be able to really understand from talking to brands and talking to advertisers, what types of packages they want on those two properties. And just one example as we found out on Cracked, the video is the most popular part and people will buy as much video as we can create when it comes to Cracked.

On LiveStrong, we are rolling out a bunch of different packages about the navigation, to be able to provide advertisers exactly what they have been looking for. So I am encouraged that the gaps have continued to close quarter after quarter.

Peter Stabler - Wells Fargo

Thank you.

Operator

The next question is from Anil Gupta with Imperial Capital. Your line is open.

Anil Gupta - Imperial Capital

Great, thanks guys. So two questions; I think you mentioned before, but social media seems to be a bigger source of traffic for Cracked and LiveStrong compared to eHow and I was wondering if you have particular strategies to kind of increase social media penetration for eHow? Is that a goal or do you think this content perhaps is not as quite as social as the other two properties.

Richard Rosenblatt

Well, it’s probably not as social just in general, right. I think its more mobile than the other two properties. I think LiveStrong actually has a lot of mobile opportunities too, but its just not as broad. However we launched eHow spark which we talked about, which is getting seven times more page views, because people are sharing it and I think we will continue to try a number of different products to rollout, but it will always be less social.

Mel Tang

Yes, I mean the key of these, of our properties is what’s the best experience for the consumer and a eHow reference site, the best experience might be something where get an answer very quickly and timely and wherever you are at. If you book the site or share, we’ll make those features available, but it doesn’t necessary have to be at the top of the food chain in terms of product priority for us.

Anil Gupta - Imperial Capital

Okay, thanks, and then the second question is just a quick one on your cash balance. You have a nice chunk of cash accruing. Do you have a buyback authorization is place and if so, how big. Just wondering how you think about the cash? Is there anything on the M&A front that may look interesting to you out there or just some general thoughts on your Cap structure. Thanks.

Mel Tang

Say, specifically on the buyback we spent about $21 million to-date. We will buyback up to $50 million. The way that we think about capital is very similar to kind of how we’ve invested in the past, which is data driven ROI. So we will look at, long term growth investments. You saw this quarter we invested heavily in the gTLD applications. We are ramping up our content again. So we are focused on deploying out capital where we see good returns and that will continue to be the focus for us.

Anil Gupta - Imperial Capital

Thank you very much.

Operator

And the next question is from Jordan Monahan with Morgan Stanley. Your line is open.

Jordan Monahan - Morgan Stanley

Hi, thanks for taking the questions. Actually a couple if I might. The first is just a clarification or maybe just sticking in a bit Mel on your comment earlier and I think Richard as well on the RMPs.

So it looks like on the network side of the business the RMPs have more or less stabilized and so have the number of page view. So I’m wondering if you can talk about if that’s kind of a fair way to think about going forward and what the various impacts of YouTube and IndieClick are on the network side.

And then on the operated side, I think the comment was about improving RPMs in the back half of the year and I’m assuming that’s a sequential comment. Could you just maybe talk about – I know the mix shift is away from me, how it was dragged down those RPMs year-on-year, but what gives you confidence that they will continue to improve sequentially in the third and fourth quarters and then if time, one more follow up.

Mel Tang

Yes, I think it goes back to the comment that Rich made, where you know we are making great strives and improving the yield on LiveStrong and Cracked, as well as just improving the yield overall on our owned and operative properties.

I think we have demonstrated in the past that while our monetization growth currently may lag our traffic growth, we do think that we are able to be a very effective player in improving the yield overall. The focus clearly continues to be on ensuring that we get the traffic growth and the user engagement and our monetization skills that follow.

Jordan Monahan - Morgan Stanley

And maybe just on the network as well. If you can just talk about IndieClick versus YouTube and what’s the driver there and are we are at kind of a normalized level of page views and monetization.

Mel Tang

Yes, on the network side what’s driving that clearly is going to be YouTube for this year, which has higher RPMs than IndieClick. But you know we are going things on the IndieClick front in addition to what the current yield is, to help improve the monetization on that network as well. So monetization is a big focus for us and we’ll continue to look for ways to increase yield across both our owned and operated network.

Jordan Monahan - Morgan Stanley

Okay, and then just one more on the sift away from eHow content production. I guess when you look at the your product development expenses and then gross margin, product development is about flat, revenue is higher and gross margins improved. So can you maybe just talk about wheatear eHow is rather whether pulling back on some of the eHow investments, what’s primarily responsible or what else are you doing to improve gross margin.

Mel Tang

I think gross margin is improving just as you see a mix shift to higher margin content in media. Specifically on operating leverage on product development, it does not see a pull back on eHow by any stretch of their imagination. I think we are focused, continue to focus on improving the user interface and the product features of that site. I think what you are seeing is really is just a little bit of operating leverage from higher content media growth.

Jordan Monahan - Morgan Stanley

Okay, great, thank you.

Operator

Great.

Operator

There are no further questions at this time. I will now turn the call back over to the presenters.

Julie MacMedan

Great. Well, thank you very much, that concludes our call and we appreciate you joining us today. We look forward to speaking with you again next quarter.

Richard Rosenblatt

Thank you very much.

Operator

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

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