Demand Media dogged by Google changes, warns of revenue declines

By Jennifer Saba

Feb 25 (Reuters) - Demand Media Inc warned on Tuesday that revenue for this year will continue to decline because of troubles at its flagship advice website eHow.

Demand Media has been hurt by changes that Google Inc made to its search algorithm in order for people to receive higher quality search results.

Demand makes money from content from its clutch of websites including LiveStrong, Cracked and eHow that show up high in search results. In turn, it sells advertising against the number of people who click on its content.

Revenue fell 6 percent to $96.7 million in the fourth quarter and a muted forecast point to further hurdles the company has to overcome.

"We need to fix eHow," said Mel Tang, Demand Media CFO, suggesting an overhaul to turn the site into a destination rather than one that people stumble upon after conducting a search query. Demand plans to emphasize creating sponsored content for publishers and advertisers.

Tang estimates that over the past two years, Demand lost about $50 million in revenue because of eHow's woes related to Google's changes, which also weakened display ad revenue.

In January, Demand announced it planned to eliminate its direct sales force and instead focus on selling advertising through automated exchanges.

Shares of Demand Media closed down almost 1 percent at $5.55 per share on Tuesday.

Demand is also in the business of providing domain names and this summer plans to spin off a stand alone company named Rightside Group.

Adjusted for stock-based compensation and other items, net income for the fourth quarter fell to $3 million, or 3 cents per share, compared with $10.8 million, or 12 cents per share, in the same quarter last year.

Demand said it expects total revenue to decline "slightly" for the full year. Analysts are expecting revenue to grow about 1 percent according to Thomson Reuters I/B/E/S. Total revenue in 2013 rose 4 percent to $394.6 million.