Where Did Demand Media’s Profits Go?

I read their financial statements with interest. They have a charge in the $2X million range for the latest year for amortization of non-tangible property. Here's some semi-informed speculation for you: when you or I buy a domain name for $8.95 a year, we can generally get away with deducting 100% of that on our taxes for this year (IRS guidance is unclear and, hey, nobody cares about 30% of $8.95). When you buy a domain name portfolio for $40 million, all of a sudden the accountants get cautious about rules. One cautious treatment of that purchase is to treat the $40 million as a capital investment and amortize it over a period of years.

This is based on the assumption that capital improvements, like say a factory, have a certain defined useful life, and that spreading out the cost over the useful life of the capital improvement gives a better picture of the actual state of the company.

The problem with amortization for domain names is that domain names don't really have a useful life and, to the extent that they depreciate, they depreciate negatively. The economics of large domain portfolios that are not just garbage and virtually any developed domain means that the domain gets more valuable over time. They also can be maintained, indefinitely, for a pittance per year.

What this means concretely for Demand Media is that when they buy a property -- let's say SchmeeNow for $10 million based on their current revenue of $500k a year -- they book 10 years of $1 million accounting charges. That will help to decrease their apparent profits for the next 10 years, but in those years the money will not be actually leaving their pockets (modulo quirky financing deals which sometimes happen in the high-end domain market).

Software is dealt with in a similar fashion, although I think software tends to be closer to factories in terms of having a measurable useful lifespan.

The above comment ignores Demand Media's single risk factor, which is that there are probably a few dozen people in Mountain View which could, given management approval, end their company with a mouse click.

Just a guess, but maybe with "profitable" they meant that if they stopped acquiring sites and just ran with what they have now, they would be profitable on that $200 million revenue. Instead they choose to put those profits right back into growing their business.

This is getting ridiculous.

Demand Media is negative because they used their money to acquire perpetuities (aka. cash-cow niche content sites). What do you think happens when they stop acquiring sites?

Profits.

The article answers the question:

"Adjusted to OIBDA - or adjusted operating income before depreciation and amortization expense - show the company made $36.8 million in 2009"

As noted otherwise here on the board, they are profitable sans aquisitions and related expenses.

Happy to see these web polluters losing money; hope their IPO is pulled or disappointing. Maybe Google can push an index update in the weeks before the IPO that drops their traffic 50% or more? (No neutrality -- for SEO spablum.)

Isn't this the shady company that is doing something similar to Jason Calacanis' Mahlo? Mainly that they have machine generated pages designed to return minimal data that returns high results in search engine rankings?

Once search engines optimize their algorithms to ignore these sites, won't the money stop flowing?

Does anyone know how to identify the niche content properties owned by Demand Media?

google bribes?

I'm thinking of filing an IPO. I mean, I'm more profitable than that, I actually make money, and maybe I could make a lot more if I had some more.

Apparently, any person with some public credibility(?) can pull that off.