Inside the Numbers: How Demand Media Will Pitch a Billion-Dollar IPO

Demand Media is a money-losing company. How will it convince Wall Street to value it at a billion dollars or more?

By directing investors’ attention to a set of numbers which say it’s a very profitable company.

The official term for these numbers are “non-GAAP financial measures”. In English, that translates into “accounting you can’t try at home, but which shows off our company in the best possible light.”

And it does! Depending on which set of numbers you want to look at, Demand lost either $4.3 million or $22.3 million on revenues of $114 million in the first half of this year. But Demand’s “Adjusted OIBDA” numbers show a company that made $25.6 million on revenue of $108 million. Much better!

Some investors may balk at these non-GAAP numbers, but Demand, Goldman Sachs (GS) and its other underwriters clearly think there’s a market for them. And there’s certainly a hunger in the tech world for a big, brand name IPO to break the dry spell. You can feel people willing this thing to work.

If Demand did, say, $55 million in OIBDA this year, it would need a multiple of 18 times trailing 12 months earnings to get to a $1 billion valuation. It would need 27x to get the $1.5 billion number that people are whispering to reporters.

Another way to get to $1.5 billion: Project OIBDA of $100 million for 2011, and ask for 15 x on that number. Reminder: $1.5 billion would make Demand worth more than the New York Times (NYT).

Accounting aside, I think the real hurdle for Demand will be making investors comfortable with its reliance on Google to bring in traffic and revenue: Demand relies on Google to bring eyeballs to its content, and Demand relies on Google to turn those eyeballs into money, via AdSense.

If Google (GOOG) changes the way it answers search queries, or overhauls its  contracts with Demand, or even decides to compete with Demand, it could torpedo the company.

The counter to that argument: Every Web publisher is dependent on Google. That’s why all of them spend so much time complaining about the search engine, sucking up to the search engine, and hiring search gurus to help them impress the search engine.

And Google seems to like Demand just fine. All those AdSense clicks are good for Google, and Demand is YouTube’s biggest supplier of content, to boot. So let’s see what investors make of this. We’ll know the answers in a few months.

Meantime, here’s a preview of the Demand roadshow, in the form of an interview Demand CEO Richard Rosenblatt conducted with Kara Swisher a couple of years ago: