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Ahead of the Bell: Demand Media shares surge

NEW YORK (AP) -- Shares of Demand Media Inc. surged before the market opening Wednesday after the Internet content company brightened its outlook for the year, calming some long-running concerns about its reliance on Google.

Citi Investment Research analyst Mark Mahaney lifted the company to "Buy" from "Hold" on Tuesday night, saying Demand Media looks set to ramp up revenue and profit growth. The company predicted that revenue growth will accelerate in the current quarter for the first time in more than a year.

Mahaney said Demand Media's eHow.com website is less dependent on Google for its revenue than it was a year ago and noted more than a year has passed since Google made changes to its Internet search engine that had diminished visits to Demand Media sites. Mahaney also sees growth coming from its YouTube presence as online video becomes increasingly popular.

In 2012, the company expects earnings, excluding one-time items, of 33 cents to 35 cents per share, topping analysts' prediction of 30 cents. It expects revenue of $361 million to $367 million. Analysts polled by FactSet had expected $354 million. Demand Media's results in the January-March quarter and its forecast for the current quarter, posted Tuesday after the market close, also topped analyst estimates.

In February 2011, Google changed the way it ranks websites in an effort to weed out low-quality content. That hurt traffic to Demand Media sites such as eHow.com and Livestrong.com, which contain articles written by the company's thousands of freelancers. Lower traffic gave the company fewer opportunities to show ads, which generate most of its revenue. The company's shares took a beating, bottoming at $5.24 in October. Demand Media went public at $17 per share in January 2011.

But the stock has recovered since then. Demand Media posted a 2012 outlook in February that was better than analysts had expected, and business seems to be improving further — it lifted that forecast Tuesday.

The company has been trying to adjust to Google's change by putting more emphasis on longer, more in-depth articles that are more likely to rank high on Google's search results. It is also producing more video on channels it has set up on Google-owned YouTube.

From January to March, Demand Media said eHow posted its second straight quarter of revenue growth.

Shares of the Santa Monica, Calif., company jumped $1.60 to $9.53 in premarket trading. The stock has gained 19 percent this year, although it's still down 53 percent over the past 12 months.