Online content manufacturer Demand Media Inc. made money for the first time in the fourth quarter, a breakthrough that follows an initial public offering of stock that investors have quickly embraced.
The company said Tuesday that it earned $1 million in the final three months of 2010, compared with a loss of $3.9 million in the prior year.
But the profit turned into a loss for accounting purposes because of preferred stock that converted to common shares as part of last month's IPO. After factoring in that conversion, Demand Media lost $7.6 million, or 54 cents per share. The conversion formula won't apply to Demand Media's future results, making the calculation that resulted in the $1 million profit more meaningful to investors.
Revenue for the quarter totaled $73.6 million, a 33 percent increase from the prior year's $55.5 million.
Although the performance exceeded Demand Media's forecast, investors weren't impressed. The company's shares sagged 48 cents, or 2.1 percent, in extended trading after finishing the regular session at $22.88, up 24 cents.
Even with that dip, the shares have still surged more than 30 percent from their IPO price of $17 to give Demand Media a market value of nearly $1.9 billion. That's about $400 million higher than The New York Times. Co., whose flagship newspaper has won more than 100 Pulitzer Prizes.
The disparity reflects a steep downturn in revenue at the Times Co. and other major newspaper publishers during the past four years as less expensive and more convenient alternatives on the Internet siphoned advertising revenue away from their print editions. The shift has been devastating for newspapers because online advertising hasn't generated nearly enough income to replace the revenue that has evaporated from print.
But most newspapers are still earning money, something that Demand Media hadn't done until now. Heading into the fourth quarter, Demand Media had accumulated losses of $53 million since its 2006 inception.
Demand Media, based in Santa Monica, assigns roughly 13,000 freelance writers to produce stories about frequently searched topics and then sells ads alongside the content at its own websites, including eHow.com and Livestrong.com, and about 375 Internet other destinations operated by its partners. They include the National Football League and Gannett Co.'s USA Today, the nation's second-largest daily newspaper.
All told, Demand Media's content was called up on Web pages 6.1 billion times in the fourth quarter, a 35 percent increase from 4.5 billion times in the same 2009 period.
The search-driven approach to generating low-cost articles has caused some journalism purists to deride Demand Media as a "content mill." That criticism has raised fears that Internet search leader Google Inc. may revise its closely guarded algorithms in a way that will make it more difficult for Demand Media's material to rank high in the search results.
But Demand Media CEO and founder Richard Rosenblatt assured analysts in a Tuesday conference call that the company adheres to all of Google's guidelines for indexing websites. He also defended Demand Media's methods as an attempt to give people helpful information as quickly and as conveniently as possible.
In a show of confidence, Demand Media predicted its revenue will increase by at least 30 percent again in the first quarter and by least 23 percent for all of this year. The forecast calls for first-quarter revenue of as much as $73.5 million and full-year revenue of as much as $325 million.
Demand Media didn't project its earnings. The company plans to increase its spending on content in an effort to build an even bigger audience.
"None of us are breaking our arms patting ourselves on the back right now," Charles Hilliard, Demand Media's chief financial officer, said in a Tuesday interview.