Clawback dings Demand Media earnings, plus first look at Rightside numbers — Domain parking

Firm hit with parking clawback from a previous quarter.

Ask any domain parking firm regarding their top frustrations, and clawbacks will be high on the list. Basically, their upstream ad partner will clawback previously paid revenue based on traffic quality. This often happens following the parking client has paid its partner.

These clawbacks can apparently be quite big, as evidenced in today’s Demand Media earnings call.

Speaking regarding a tough third quarter, Demand Media CFO Mel Tang noted that a parking clawback was one of three factors that hurt earnings in the quarter:

Results were impacted by 3 main factors: lower search engine referrals, causing additional traffic declines, softer-than-expected display advertising revenue and an adjustment from an advertising partner related to activity on certain third-party domains prior to the third quarter that negatively impacted revenue and EBITDA.

In this case it appears the clawback was from an earlier quarter. It must have been significant to warrant mention on the conference call. [Update: from Demand Media’s 10-Q, the clawback was $1.6 million.]

Later in the call, Tang elaborates on the clawback:

Yes. So basically, related to a catch-up adjustment that we got notified of quarters following, I think the traffic quality was identified. And so it was unexpected in the quarter, it came in, in fact, sort of right as the quarter was closing. And so we put additional processes and communication lines in place with that partner to ensure that we don’t get a negative surprise like this in the past, that we try and be very rigorous in terms of who we onboard into that system. But at times, it’s hard to see who’s — what people are putting through. But we’re working very closely with that partner to ensure again that there isn’t sort of such a delayed negative surprise.

Also on the earnings call, Demand Media broke out revenue between the firm’s content business and the domain name spinoff called Rightside.

In Q3, domain services revenue, which primarily represents domain registration fees and value-added services, was approximately $36 million. Aftermarket services revenue, which represents premium domain sales and advertising revenue from Rightside’s own domains, was approximately $10 million.

It seems that the business is not doing very well from a growth perspective. Domain services revenue was up mostly due to the Name.com buyout, and Aftermarket was down 7% year-over-year. In Aftermarket, growth in domain sales partially offset a domain parking revenue decrease and the clawback.

No wonder Rightside is looking forward to the introduction of fresh top level domain names.