Demand Media clears SEC and prices IPO

Online publisher offers 4,500,000 shares, priced at $14-$16, and will be listed on the New York Stock Exchange under the symbol "DMD."

Demand Media is set to go public, according to an amended filing with the Securities and Exchange Commission, with shares priced from $14 to $16 each.

The online publisher could sell up to 8.625 million shares and, if it prices at the top of the range, it could be worth about $1.3 billion and raise $138 million.

That includes 4.5 million shares from the company, 3 million shares from existing shareholders, and another 1.125 million shares that its underwriters have an option to sell.

Demand will net $58.1 million if the IPO price is $15.00 per share, which it said it will use for "investments in content, international expansion, working capital, product development, sales and marketing activities, general and administrative matters, and capital expenditures."

The company added that "we currently anticipate that our aggregate investments in content during the year ending December 31, 2011, will range from $50 million to $75 million."

Demand's ticker symbol will be DMD on the New York Stock Exchange.

In its amended prospectus, Demand said:

This is an initial public offering of shares of common stock of Demand Media, Inc.

Demand Media is offering 4,500,000 of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional 3,000,000 shares. Demand Media will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $14.00 and $16.00.

The common stock of Demand Media has been approved for listing on the New York Stock Exchange under the symbol "DMD."

Demand's road to an IPO has been relatively quick.

One bump came last month, as AllThingsDigital reported after the Santa Monica, Calif., company had to satisfy government regulatory questions over the way it recognizes costs of creating content.

Currently, using a concept of "long-lived" content, Demand has been amortizing those expenses over five years, since it says it continues to generate revenue on that material over that much time. Most publishers recognize costs immediately.

That's different from many companies in the publishing business, which typically account for costs of creating content immediately as they are incurred or over a much shorter time period.

Demand has determined that its content has a more evergreen nature, compared to more topical--and perishable, from a revenue point of view--material produced by others.

Obviously, since this accounting treatment results in more attractive financial results, the longer expense period is of great interest to many other online content creators--such as AOL and Yahoo--which are watching the Demand IPO closely.

While the SEC did not ask Demand to make changes to its accounting practices, the amended S-1 is more detailed about them.

To be allowed to expense over five years, Demand said, the company has to use a sophisticated algorithmic platform--which other content creators do not have--to provide proof of "probable economic benefits" from that content over that time.

Since Demand has long claimed that it has a new and innovative approach to content creation, it is making the case to investors that it needs to have the correct accounting for that approach.

Said Demand in its amended filing:

"In determining whether content embodies probable future economic benefit required for asset capitalization, management has reviewed and intends to regularly review the operating performance of content published."

But, it warned:

"Changes from the five-year useful life we currently use to amortize our capitalized content would have a significant impact on our financial statements. For example, if underlying assumptions were to change such that our estimate of the weighted average useful life of our media content was higher by one year from January 1, 2010, our net loss would decrease by approximately $1.6 million for the nine months ended September 30, 2010, and would increase by approximately $2.4 million should the weighted average useful life be reduced by one year."

The practice has passed government scrutiny and now investors will decide what they think of this and the entire business of Demand.

Demand execs will now go on a road show for the offering, which is being led by Goldman Sachs and Morgan Stanley.

 

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