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MM > SEC Filings for MM > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for MILLENNIAL MEDIA INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MILLENNIAL MEDIA INC.


14-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases "would be," "will allow," "intends to," "will likely result," "will continue," "is anticipated," "estimate," "project," "believe," "expect," or similar expressions, or the negative of such words or phrases, are intended to identify "forward-looking statements." We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include those below and elsewhere in this Quarterly Report on Form 10-Q, particularly in "Risk Factors," and our other filings with the Securities and Exchange Commission, or "SEC". Statements made herein are as of the date of the filing of this Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the fiscal year ended December 31, 2012 appearing in our Annual Report on Form 10-K filed with the SEC on February 20, 2013.

Overview

We are the leading independent mobile advertising platform company and the second largest mobile display advertising platform overall in the United States. Our technology, tools and services help developers maximize their advertising revenue, acquire users for their apps and gain insight about their users. To advertisers, we offer significant audience reach, sophisticated targeting capabilities and the opportunity to deliver interactive and engaging ad experiences to consumers on their mobile connected devices. More than 49,000 apps are enabled to receive ads through our platform, and we can deliver ads on over 8,500 different mobile device types and models. Our platform is compatible with all major mobile operating systems, including Apple® iOS, Android™, Windows Phone and BlackBerry®.

We help developers and advertisers remove complexity from mobile advertising. By working with us, developers gain access to our tools and services that allow their apps to display banner ads, interactive rich media ads and video ads from our platform. In return, developers supply us with space on their apps to deliver ads for our advertiser clients and also provide us with access to anonymous data associated with their apps and users. We analyze this data to build sophisticated user profiles and audience groups that, in combination with the real-time decisioning, optimization and targeting capabilities of our technology platform, enable us to deliver highly targeted advertising campaigns for our advertiser clients. Advertisers pay us to deliver their ads to mobile connected device users, and we pay developers a fee for the use of their ad space. As we deliver more ads, we are able to collect additional anonymous data about users, audiences and the effectiveness of particular ad campaigns, which in turn enhances our targeting capabilities and allows us to deliver better performance for advertisers and better opportunities for developers to increase their revenue streams.

Recent Developments

On November 6, 2013, we completed our acquisition of Jumptap, Inc., or Jumptap, a privately held mobile advertising platform, pursuant to the terms of an Agreement and Plan of Reorganization, or Acquisition Agreement, dated as of August 13, 2013, and as amended on November 1, 2013, by and among us, our wholly owned subsidiary Polo Corp., and Jumptap. At the closing, Polo Corp. was merged with and into Jumptap, which we refer to in this report as the Acquisition. As a result of the Acquisition, the separate corporate existence of Polo Corp. ceased, and Jumptap continues as the surviving corporation and a wholly-owned subsidiary of our company.

Pursuant to the Acquisition Agreement, we issued an aggregate of 24,745,470 shares of our common stock to the former securityholders of Jumptap and participants in Jumptap's Management Incentive Plan, or MIP, and we also assumed options to purchase Jumptap stock, which were converted into options to purchase 861,584 shares of our common stock. In the aggregate, the shares issued and options assumed equaled approximately 22.8% of the total number of shares of our common stock on a fully diluted basis following the closing of the Acquisition. Of the shares of common stock we issued in connection with the Acquisition, 2,560,709 shares are being held in escrow as partial security for the indemnification obligations of the Jumptap securityholders and management participants in the MIP. We also paid an aggregate of $9.5 million in cash consideration in lieu of shares under the terms of the Acquisition Agreement. All outstanding warrants exercisable for, and all outstanding debt instruments convertible into, common stock of Jumptap, were exchanged for a portion of the 24,745,470 shares of our common stock issued at the closing.


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Based on the issuance of an aggregate of 24,745,470 shares of our common stock at the closing, each valued at $7.09, the closing price per share of our common stock on November 6, 2013, and including options assumed with a fair value of $1.7 million and the $9.5 million in cash consideration, the transaction was valued at an aggregate of $186.6 million.

Key Operating and Financial Performance Metrics

We monitor the key operating and financial performance metrics set forth in the tables below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess our operational efficiencies.

                                        Three Months Ended September 30,          Nine Months Ended September 30,
                                           2013                  2012                 2013                2012
                                                (in thousands, except percentages and per share amounts)
Revenue                              $          56,061     $          47,366    $        162,508    $        119,707
Gross margin                                      39.6 %                40.9 %              41.2 %              40.1 %
Net loss                             $          (4,605 )   $          (1,769 )  $        (11,410 )  $         (7,981 )
Adjusted EBITDA                      $             220     $           2,138    $          1,368    $         (1,017 )
Basic and diluted net loss per
share                                $           (0.06 )   $           (0.02 )  $          (0.14 )  $          (0.17 )
Diluted non-GAAP net income
(loss) per share                     $            0.00     $            0.03    $           0.02    $          (0.02 )

Gross margin is our gross profit, or revenue less cost of revenue, expressed as a percentage of our total revenue. Our gross margin has been and will continue to be primarily affected by our pricing terms with new and existing developers.

Adjusted EBITDA represents our earnings before interest, income taxes, depreciation and amortization, adjusted to eliminate stock-based compensation expense, which is a non-cash item, and expenses related to acquisitions, such as costs for services of lawyers, investment bankers, accountants, and other third parties, and accrual of retention payments of deferred compensation to employees who are acquired as part of our acquisitions that represent contingent compensation to be recognized as expense over a requisite service period. We do not consider the inclusion of these costs to be indicative of our core operating performance. Adjusted EBITDA is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, we believe that the exclusion of the expenses eliminated in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the development of incentive-based compensation for our executive officers. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Diluted non-GAAP net income (loss) per share is calculated as adjusted EBITDA divided by the diluted weighted average number of shares outstanding during the period.

Adjusted EBITDA and diluted non-GAAP net income (loss) per share are not measures calculated in accordance with U.S. generally accepted accounting principles, or GAAP, and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with GAAP. In addition, these non-GAAP measures may not be comparable to similarly titled measures of other companies because other companies may not calculate them in the same manner that we do.

These non-GAAP measures have limitations as an analytical tool, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under GAAP. Some of these limitations are:

† although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA and diluted non-GAAP net income (loss) per share do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
† adjusted EBITDA and diluted non-GAAP net income (loss) per share do not reflect changes in, or cash requirements for, our working capital needs;
† adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation;
† adjusted EBITDA and diluted non-GAAP net income (loss) per share do not reflect tax payments that may represent a reduction in cash available to us; and
† other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.


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Because of these and other limitations, you should consider adjusted EBITDA and diluted non-GAAP net income (loss) per share alongside other GAAP-based financial performance measures, including various cash flow metrics, net loss and our other GAAP financial results. The following tables present reconciliations of net loss to adjusted EBITDA for each of the periods indicated:

                                          Three Months Ended       Nine Months Ended
                                            September 30,            September 30,
                                           2013         2012        2013        2012
                                                        (in thousands)
Net loss                                $    (4,605 ) $ (1,769 ) $  (11,410 ) $ (7,981 )
Adjustments:
Interest expense, net                            15         14           36         52
Income tax (benefit) expense                     (6 )       36           31         46
Depreciation and amortization expense         1,142        631        3,144      1,593
Acquisition-related costs                     1,787          -        2,268          -
Deferred compensation                           250          -          500          -
Stock-based compensation expense              1,637      3,226        6,799      5,273
Total net adjustments                         4,825      3,907       12,778      6,964
Adjusted EBITDA                         $       220   $  2,138   $    1,368   $ (1,017 )

The following tables present reconciliations of GAAP net loss per share attributable to common stockholders to diluted non-GAAP net income (loss) per share for each of the periods indicated:

                                        Three Months Ended              Nine Months Ended
                                          September 30,                   September 30,
                                       2013            2012            2013           2012
Net loss per share                 $      (0.06 )  $      (0.02 )  $      (0.14 )  $     (0.17 )
Adjustments:
Accretion of dividends on
preferred                                     -               -               -           0.02
Interest expense, net                      0.00            0.00            0.00           0.00
Income tax benefit (expense)              (0.00 )          0.00            0.00           0.00
Depreciation and amortization
expense                                    0.02            0.01            0.04           0.03
Acquisition-related costs                  0.02               -            0.03              -
Deferred compensation                      0.00               -            0.01              -
Stock-based compensation
expense                                    0.02            0.04            0.08           0.10
Total net adjustments                      0.06            0.05            0.16           0.15
Diluted non-GAAP net income
(loss) per share                   $       0.00    $       0.03            0.02    $     (0.02 )
Diluted weighted average common
shares outstanding                       83,526          82,173          83,346         55,146

Components of Operating Results

Revenue

We generate revenue by charging advertisers to deliver ads to users of mobile connected devices. Depending on the specific terms of each advertising contract, we generally recognize revenue based on the activity of mobile users viewing these ads. Our fees from advertisers are commonly based on the number of ads delivered, views, clicks or actions by users on mobile advertisements we deliver, and we recognize revenue at the time the user views, clicks or otherwise acts on the ad. We sell ads on several bases: cost per thousand, or CPM, on which we charge advertisers for each ad delivered to a consumer; cost per click, or CPC, on which we charge advertisers for each ad clicked on by a user; and cost per action, or CPA, on which we charge advertisers each time a consumer takes a specified action, such as downloading an app.

We classify our advertiser clients as "brand" advertisers or "performance" advertisers, depending on the intent of the advertiser. We believe this classification is typical in the advertising and media industries. The goal of a brand advertiser, such as a large automobile manufacturer, is primarily to promote recognition and awareness of its brand among potential consumers and to induce


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those consumers to purchase a product or service over time. On the other hand, a performance advertiser, such as a social gaming company, typically seeks to cause a specific action by the viewer of the ad, such as clicking on the ad to be taken to a mobile website, downloading an app on the viewer's mobile device or registering the viewer's email address in order to receive further communications from the provider of a product or service.

Most of our brand advertiser clients, whether based in the U.S. or internationally, pay us on a CPM basis, as their primary goal is to maximize the number of ad impressions being viewed, although some brand advertisers may use CPC pricing terms from time to time. On the other hand, U.S. and international performance advertisers generally pay us on a CPC or CPA basis, in which case we are only paid when a viewer takes the specified action, such as clicking on the ad or downloading an app.

Brand advertisers have typically represented about 60% of our annual revenues, with performance advertisers generating the remainder. Historically, we have not experienced meaningful trends in the mix of our annual revenue between these types of advertisers; however, the composition of revenue from brand and performance advertisers on our platform often changes throughout the year. For example, we typically see a larger proportion of our revenue derived from brand advertisers in the second and fourth quarters, reflecting what we believe to be traditional seasonality in the advertising industry due to increased consumer spending going into the summer and winter holiday seasons. We tend to see the lowest percentage of brand advertising and the highest percentage of performance advertising in the first quarter of the year. Following these seasonal trends, brand advertising typically represents between one-half and two-thirds of our revenue in any particular quarter. In addition, based on our historical experience, a higher percentage of our international revenue is derived from performance advertisers than is the percentage for domestic revenues, although there is a wide variation from country to country, even within a global region, of the mix between performance and brand advertising in any particular quarter.

During the nine months ended September 30, 2013, and particularly during the three months ended September 30, 2013, we have experienced a decline in our U.S. performance advertising business and corresponding increase in the percentage of our business from brand advertisers. We believe this decline was the result of certain performance advertisers looking to drive downloads of their applications moving their business to competitive platforms, particularly those that enabled them to buy across multiple mobile exchanges. Jumptap, which we recently acquired, had captured a meaningful portion of this business. After we announced the Acquisition on August 13, 2013, we saw an acceleration of this trend, as some performance advertisers consolidated their spending on Jumptap's buying platform understanding that Jumptap could purchase advertising through us as needed. We believe the Acquisition will help reverse the trend of slowing growth in our U.S. performance business.

Cost of Revenue

Cost of revenue consists primarily of the payments we make to developers for their advertising space on which we deliver mobile ads. These payments are typically determined in advance either as a percentage of the advertising revenue we earn from mobile ads placed on the developer's app or as a fixed fee for the ad space. We recognize cost of revenue on a developer-by-developer basis at the same time as we recognize the associated revenue. Costs owed to developers but not yet paid are recorded on our consolidated balance sheets as accrued cost of revenue. The use of CPM, CPC, or CPA pricing, whether by U.S. or international advertisers, does not directly affect the gross margin percentage we earn because we pay the same percentage or fixed fee to a developer regardless of what pricing model generated the revenue for us. In addition, the geographic location of our developers is not a factor in determining the percentage or fixed fee we pay for ad space.

Operating Expenses

Operating expenses consist of sales and marketing, technology and development and general and administrative expenses. Salaries and personnel costs are the most significant component of each of these expense categories. We expect to continue to hire new employees in order to support our anticipated revenue growth. We include stock-based compensation expense in connection with the grant of any equity instrument in the applicable operating expense category based on the respective equity award recipient's function. Additionally, with the close of our Acquisition and our assumption of the Jumptap sales and marketing, technology and development and general and administrative functions, we expect to see an immediate increase in our operating expenses.

Sales and marketing expense. Sales and marketing expense consists primarily of salaries and personnel costs for our advertiser-focused sales and marketing employees, including stock-based compensation, commissions and bonuses. Additional expenses include marketing programs, consulting, travel and other related overhead. We expect our sales and marketing expense to increase in the foreseeable future as we further increase the number of our sales and marketing professionals and expand our marketing activities.


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Technology and development expense. Technology and development expense primarily consists of salaries and personnel costs for development employees, including stock-based compensation and bonuses. Technology and development employees are focused on new product and technology development. Additional expenses include costs related to the development, quality assurance and testing of new technology and enhancement of existing technology, amortization of internally developed software related to our technology infrastructure, consulting, travel and other related overhead. Other general IT costs are included in general and administrative expenses. We engage third-party consulting firms for various technology and development efforts, such as documentation, quality assurance and support. We intend to continue to invest in our technology and development efforts by hiring additional development personnel and by using outside consulting firms for various technology and development efforts. We believe continuing to invest in technology and development efforts is essential to maintaining our competitive position.

General and administrative expense. General and administrative expense primarily consists of salaries and personnel costs for product, operations, developer support, business development, administration, finance and accounting, legal, information systems and human resources employees, including stock-based compensation and bonuses. Additional expenses include consulting and professional fees, travel, bad debt expense, insurance and other corporate expenses. We expect our general and administrative expenses to increase in the foreseeable future as we further increase the number of general and administrative personnel and expand our organization as a public company, including additional compliance costs associated with the Sarbanes-Oxley Act and other regulations covering public companies, maintaining directors' and officers' liability insurance, engaging professional services firms and enhancing our investor relations function.

Other Expense

Other expense consists primarily of interest expense, offset by interest income. Interest income is derived from interest received on our cash and cash equivalents. Interest expense consists primarily of the fees incurred on the unused portion of our credit facilities.

Prior to our IPO in April 2012, the fair value of our preferred stock warrant liability was re-measured at the end of each reporting period and any changes in fair value were also recognized in other income or expense. Upon the closing of our IPO in April 2012, the preferred stock warrant was automatically converted into a warrant to purchase common stock, which resulted in a reclassification of the preferred stock warrant liability to additional paid-in capital. Upon reclassification of the preferred stock warrant liability, no further changes in fair value have been or will be recognized in other income or expense.

Income Tax Expense

Income tax expense consists of U.S. federal, state and foreign income taxes. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses. We incurred minimal state and foreign income tax expenses for the three and nine month periods ended September 30, 2013 and 2012.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statements presentation, financial condition, results of operations, and cash flows will be affected. During the nine months ended September 30, 2013, there were no material changes to our critical accounting policies and use of estimates, which are disclosed in our audited consolidated financial statements for the year ended December 31, 2012 included in our Annual Report on Form 10-K filed with the SEC on February 20, 2013.


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Results of Operations



Three Months Ended September 30, 2013 Compared to the Three Months Ended
September 30, 2012



                                                       Three Months Ended September 30,
                                                       2013                        2012
                                                                (in thousands)
                                                        Percentage of               Percentage of      Period-to-Period Change
Consolidated Statement of Operations Data:    Amount       Revenue        Amount       Revenue         Amount        Percentage
Revenue                                      $ 56,061           100.0 %  $ 47,366           100.0 %  $     8,695             18.4 %
Cost of revenue                                33,860            60.4      28,005            59.1          5,855             20.9
Gross profit                                   22,201            39.6      19,361            40.9          2,840             14.7
Operating expenses:
Sales and marketing                             8,626            15.4       5,922            12.5          2,704             45.7
Technology and development                      3,939             7.0       4,667             9.9           (728 )          (15.6 )
General and administrative                     14,232            25.4      10,491            22.1          3,741             35.7
Total operating expenses                       26,797            47.8      21,080            44.5          5,717             27.1
Loss from operations                           (4,596 )          (8.2 )    (1,719 )          (3.6 )       (2,877 )          167.4
Other income (expense):
Interest expense, net                             (15 )             -         (14 )           0.0             (1 )            7.1
Total other income (expense)                      (15 )           0.0         (14 )           0.0             (1 )            7.1
. . .
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