Abstract: CASE DESCRIPTION The primary subject matter of this case concerns the corporate financial reporting policy of a company as it approaches its initial public stock offering. The case has a difficulty level of three: appropriate for college juniors and above. The case is designed be taught in one one and one-half class hours and is expected require two hours of outside preparation by students. CASE SYNOPSIS As Demand Media, Inc. approaches its initial public stock offering, analysts begin raise questions about its accounting for Media Content Costs, which are the small fees it pays independent contractors write or film the millions of how to articles and videos that form the basis of the company's numerous websites. Unlike some of its competitors, Demand Media has chosen capitalize these costs and amortize them over a five-year life. The student is asked debate the relative merits of capitalization versus expensing these costs, and then is encouraged discover the importance of this single accounting decision in understanding recent trends in the company's net income, cash flow from operations, and its own internally-developed non-GAAP measure of performance. Then students are presented with an unusual development: a decision by Google change its search engine algorithm which causes an immediate sharp decline in the number of visitors Demand Media's sites, and thus triggers possible declines in the economic value of its massive library of articles and videos. This new event can then lead a discussion about the possible impairment of their large Media Content asset. Instructors who wish go further can then provide (or require students provide) updates on the company's fortunes after its public offering. DEMAND MEDIA, INC. The following headline appeared in CNNMoney.com on December 23, 2010: Demand Media IPO Stalls Amid Accounting Questions Online content creator Demand Media filed for an IPO back in August, but the company is still answering regulators' questions about its unorthodox accounting practices. Demand CEO Richard Rosenblatt has been insisting for years media outlets, including Fortune, that his company--which churns out vast amounts of low-cost content optimized grab search-engine clicks--is profitable. But in its IPO filing, Demand disclosed that it was more than $6 million in the red for 2010 as of August. It posted a net loss of $22 million in 2009, a $14 million loss in 2008 and a nearly $6 million loss in 2007. All Things D reported Thursday that regulators are taking a closer look at Demand's unusual accounting practices. Demand Media filed an amended Form S-1 the Securities and Exchange Commission (SEC) on Tuesday that shed more light on its accounting ... Having previously raised $355 million in private funding, in late 2010 Demand Media tried become the first internet-related company go public with a valuation of over $1 billion since Google in 2004. Their initial public offering involved selling 7.5 million shares of its common stock for $125 million, thus creating a total market capitalization for the firm of $1.5 billion. However, the SEC has ultimate jurisdiction over the accounting methods used by publicly-owned firms and its questions can cause investors shy away from new securities offerings, especially if they suspect that the accounting methods used may be obscuring a company's true performance. After the dot.com craze of the late 1990's when buyers paid very high prices for stock in internet firms that never made any money, wary investors have demanded either demonstrated current profits or at least a discernable trend in that direction as a precondition for investment in new public offerings. Was Demand Media a rising star among internet-related investments, or simply an eye-catching idea chasing elusive profitability? COMPANY HISTORY Richard Rosenblatt, a quintessential serial entrepreneur, founded Demand Media, along with Shawn Colo, in June 2006. …
Publication Year: 2013
Publication Date: 2013-07-01
Language: en
Type: article
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Cited By Count: 16
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