Leaf Group has profitability in sight again after a steep fall from grace.
The Santa Monica-based internet portfolio company’s Chief Executive Sean Moriarty believes the firm has turned a corner after bleeding cash and watching its annual revenue sink 70.2 percent to $113.5 million in 2016 from its peak at $380 million in 2012.
The company posted $191 million in losses over the same period.
Moriarty has led a complex juggling act since he was brought aboard to right the ship in August 2014. His tenure has seen Leaf Group simultaneously cut costs via layoffs and divestitures, stabilize declining traffic to its web properties by improving quality of content, and acquire fast-growing e-commerce businesses to boost revenue.
The firm, formerly Demand Media, changed its name to Leaf Group in October 2016.
The changes helped steady the firm’s internet media division revenue, and have combined with growth in the e-commerce division to put the company on the verge of getting back into the black on an operating basis, Moriarty said.
“We are back to a place not only of a stable foundation, but solid growth,” he said. “We expect to be profitable, on an EBITDA basis, in Q4 of next year.”
Leaf Group’s revenue is expected to rise 12.8 percent this year, to $128 million, according to Jason Kreyer, an analyst with Craig-Hallum Capital Group in Minneapolis. That would be the firm’s first revenue growth in five years.
The firm had little outstanding debt and $33 million in cash, as of the quarter ended Sept. 30. It generated $33.5 million in revenue and recorded a loss of $6.8 million for the period.
The company’s $175 million market capitalization remains a shadow of its former $2 billion value, but some see a small cap internet company with a legitimate claim to future growth prospects.
“If you look at it in terms of a turnaround, I’d argue the turnaround has already taken shape,” said Kreyer of Craig-Hallum. “That’s generated some excitement on where they can go going forward.”
Righting the ship
Demand Media rocketed to the top of the internet publishing world when it debuted in 2006 as a cheap content mill that gamed the biases of search engines. In 2011 the search engine winds shifted as Alphabet Inc.’s Google Inc. rejiggered its algorithm to direct traffic to higher-quality content – partly as an effort to remove low-quality webpages, such as those pushed by Demand Media, from its search engine results. Traffic to the company’s websites fell off a cliff, its advertising revenue soon followed and it’s spent the past five years recovering.
The company brought on Moriarty in 2014 to lead a turnaround when it acquired online art seller Saatchi Art, where he was chief executive.
Leaf has jettisoned several of its internet and software properties in recent years, including humor website Cracked.com, social media engagement tool CoverItLive and domain registry Rightside.
The sell-offs raises tens of millions of dollars that helped the company sustain operations as Moriarty’s turnaround strategy played forward.
It also went back to its publishing roots, launching four new consumer-focused web properties, and upping the quality of legacy how-to website eHow and health advice website Livestrong.
The company’s shift towards e-commerce, starting with the purchase of home décor e-tailer Society6 in 2013, has been its most profitable move. Its e-commerce division generated $66.1 million in revenue last year, up 86.9 percent since 2014.
Leaf Group aims to build on that momentum, according to Moriarty, and in May acquired for $12 million online furniture seller Deny Designs of Denver. The company believes it can upsell higher priced furniture to its customers already buying home décor on Society6.
“There are many products Deny Designs offers that Society6 was not offering,” Moriarty said.
He pointed out that the average order value for Deny Designs is $130 versus an average order value of $60 for Society6.
Leaf Group’s media websites haven’t fared as well during Moriarty’s tenure, however. Advertising revenue generated from Leaf Group’s internet sites fell 65.5 percent to $47.3 million last year from $137 million in 2014.
The company had 42 million average monthly unique visitors between July and September 2017 across all its media brands, down 8.7 percent from December 2016 when it had 46 million unique visitors, according to Comscore.
Moriarty claims that sales in the media division have bottomed out and should resume growth in the near future. He points out that revenue coming from the company’s websites stabilized around $11 million a quarter over the past 12 months, a result of the firm negotiating better terms with its advertisers.
Over the past year the company launched pet website Cuteness.com, family technology website Techwalla.com, personal finance website Sapling.com and interior design website Hunker – niche publications that were spun off from popular sections of eHow.com. Moriarty said he believes reversing declining web traffic across its websites through a focus on well-branded, tightly-focused sites will ultimately be what tips Leaf Group into the black.
“Even in the age of mass distribution I am a big believer in the power of brands,” he said, explaining the impact to the company’s top line: “Audience engagement went up; audience grew as a consequence of that and the audience became more attractive to advertisers.”
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