Ever since its IPO, we have thought Demand Media(DMD) to be a strange beast- a content farm with a domain registration business bolted on. Well, the company announced today that it will be loosening those bolts and spinning off the domain registration business to shareholders. The company hopes to complete the spin in the next nine to twelve months. After the spin, shareholders will be left with two independent public comapnies:
- A pure-play domain services company that would be the only end-to-end provider offering registry services, expansive wholesale and retail distribution, and comprehensive aftermarket services.
- A pure-play media company with a powerful outsourced content creation platform that organically grows its audience, leading web properties that reach over 100 million monthly unique visitors, and an integrated monetization platform that incorporates branded, network and mobile revenue streams;
The company anticipates that the transaction will be tax-free to shareholders and explains the rationale in the press release:
Both businesses have grown to become leaders in their respective markets, and we now want to provide additional operational and strategic flexibility to drive sustainable growth,” said Richard Rosenblatt, Chairman and CEO, Demand Media. “We believe a separation will position each business to better pursue its specific strategic priorities and vision, as well as improve transparency for investors and enable the capital markets to better assess each company’s value, performance and potential.”
Rosenblatt added: “We intend to appropriately capitalize both companies to pursue their distinct growth opportunities, such as the upcoming launch of new generic Top Level Domains that is a transformative event for our domain services business, as well as further diversifying our content offerings in our media business.”
The company also released earnings for 2012 today. Though the registrar business grew revenue at a not-to-shabby 12% rate, YoY, the content business grew at a healthy 18%. More importantly, though the company does not break out earnings by division, the content business would almost definitely have much healthier margins that the domain registration business, as domains are usually sold at razor-thin margins. Ancillary services can add significant profit, but can vary widely from company to company. GoDaddy, which is a private company,is thought to make significant margins on ancillary offerings. Tucows(TCX) on the other hand, perhaps the best public comp to the registration business, has historically had tight margins and has been consistently given a low valuation by the market. On the other hand, domain registration is a sticky product with relatively low churn, and there is the significant advantage of recurring revenue.
As long time holders of Tucows, we are quite interested to see the detailed financials of the domain registration business when they are released. While the business has lower growth and lower margins, it can generate significant cash flow. The industry also faces significant changes with the introduction of new top level domains, and Demand has spent aggressively in positioning itself well for these changes. The market is excited about the prospects, with the company’s shares up over 15% in after hours trading.
This is different from another upcoming spin we have covered previously, Marchex’s(MCHX) spin of Archeo. Archeo is in the domain business, but as an owner and reseller of many thousands of domains, not as a registrar.
Disclosure: The author holds shares of TCX
- Demand Media shares surge on plan for split (marketwatch.com)
- Tucows: fewer big domain sales, but good numbers on lower priced domains (domainnamewire.com)