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MM > SEC Filings for MM > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for MILLENNIAL MEDIA INC.

Form 10-K for MILLENNIAL MEDIA INC.


3-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes to those statements included later in this Annual Report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in "Item 1A. Risk Factors" and "Special Note Regarding Forward-Looking Statements."

Overview

We are the leading independent mobile advertising platform company and one of the largest mobile display advertising platforms 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 the ability to reach more than 600 million monthly unique users, including approximately 170 million monthly unique users in the United States alone. We also offer advertisers sophisticated targeting capabilities and the opportunity to deliver interactive and engaging ad experiences to consumers on their smartphones, tablets, other mobile connected devices and PCs. More than 50,000 apps are enabled to receive ads through our platform, and we can deliver ads on over 9,000 different mobile device types and models. We have developed more than 625 million proprietary, anonymous user profiles that we can use to more accurately and efficiently target ads. 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 video ads, banner ads, interactive rich media ads and native ad formats 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.

We have built relationships with developers and advertisers of all sizes. Our developer base includes large mobile web publishers, large app developers and other developers. Our advertiser clients include leading advertising agencies and brands, including 90 of Ad Age's top 100 national advertisers, as well as smaller advertisers and often the developers themselves. Advertisers and developers are able to access our platform through our full-service offering and through self-service interfaces. We offer programmatic buying capabilities to advertisers through our exchange, MMX, and through our demand side platform, mmDSP. We offer programmatic selling capabilities to developers through our developer portal, mMedia, which includes access to MMX.

We operate in one segment, mobile advertising services. We have increased our revenue from $16.2 million for the year ended December 31, 2009 to $259.2 million for the year ended December 31, 2013. During the year ended December 31, 2013, approximately 24.0% of our revenue was derived from outside of the United States, up from 14.8% during the year ended December 31, 2012. We commenced our international operations in the Europe during the first half of 2010 and in Asia during the fourth quarter of 2011 with the launch of operations in Singapore. We further expanded our international


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operations by opening additional offices in Europe and Asia in 2012 and 2013. We offer the same services internationally as we do in the United States, and we intend to continue to pursue a strategy of expanding our international operations.

Key Operating and Financial Performance Metrics

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

                                                    Year Ended December 31,
                                              2013             2012            2011
                                             (in thousands, except percentages and
                                                       per share amounts)
  Revenue                                  $    259,171     $    177,667     $ 103,678
  Gross margin                                     40.3 %           40.5 %        38.7 %
  Net loss                                 $    (15,113 )   $     (5,430 )   $    (287 )
  Adjusted EBITDA                          $      8,961     $      4,543     $   1,839
  Basic and diluted net loss per share     $      (0.18 )   $      (0.11 )   $   (0.32 )
  Diluted non-GAAP net income per share    $       0.10     $       0.07     $    0.09

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, as well as the mix of offerings used by our clients. Certain offerings such as MMX can generate a lower gross margin for us at times than our network business, for example.

Adjusted EBITDA represents our earnings before interest, income taxes, depreciation and amortization, adjusted to eliminate non-cash stock-based compensation expense and expenses related to acquisitions, such as costs for services of lawyers, investment bankers, accountants, and other third parties and acquisition related severance costs, bonuses, retention bonuses and accrual of retention payments 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 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 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.


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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:

º •
º 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;

º •
º adjusted EBITDA and diluted non-GAAP net income per share do not reflect changes in, or cash requirements for, our working capital needs;

º •
º adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation;

º •
º adjusted EBITDA and diluted non-GAAP net income per share do not reflect tax payments that may represent a reduction in cash available to us; and

º •
º other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.

Because of these and other limitations, you should consider adjusted EBITDA and diluted non-GAAP net income 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:

                                                    Year Ended December 31,
                                                   2013        2012      2011
                                                         (in thousands)
         Net loss                                $ (15,113 ) $ (5,430 ) $  (287 )
         Adjustments:
         Interest expense, net                          95         64        21
         Income tax (benefit) expense                  (47 )       70      (486 )
         Depreciation and amortization expense       5,913      2,365       759
         Acquisition-related costs                   8,410          -         -
         Deferred compensation                         750          -         -
         Stock-based compensation expense            8,953      7,474     1,832


         Total net adjustments                      24,074      9,973     2,126


         Adjusted EBITDA                         $   8,961   $  4,543   $ 1,839


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

                                                             Year Ended December 31,
                                                            2013       2012       2011
Net loss per share                                        $  (0.18 ) $  (0.11 ) $  (0.32 )
Adjustments:
Impact of difference in denominator due to dilutive
shares*                                                          -          -       0.06
Accretion of dividends on preferred                              -       0.02       0.24
Interest expense, net                                         0.00       0.00       0.00
Income tax benefit (expense)                                  0.00       0.00      (0.02 )
Depreciation and amortization expense                         0.07       0.04       0.04
Acquisition-related costs                                     0.10          -          -
Deferred compensation                                         0.01          -          -
Stock-based compensation expense                              0.10       0.12       0.09


Total net adjustments                                         0.28       0.18       0.41


Diluted non-GAAP net income per share                     $   0.10   $   0.07   $   0.09

Diluted weighted average common shares outstanding (in thousands) 87,172 67,215 20,802


º *
º GAAP diluted net loss per share is the same as GAAP basic net loss per share as the effects of potentially dilutive items were anti-dilutive given our net loss. These anti-dilutive items are included in the denominator for the calculation of diluted non-GAAP net income per share.

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 impressions, 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. Our revenue recognition policies are discussed in more detail in the section below entitled "-Critical Accounting Policies and Significant Judgments and Estimates."

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 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 United States or internationally, pay us on a CPM basis, as their primary goal is to maximize the number of ad impressions being viewed, although


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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.

Historically, brand advertisers have typically represented about 60% of our annual revenues, with performance advertisers generating the remainder. Factoring in our acquisition of Jumptap in November 2013, our split between brand and performance revenue was approximately 50% brand and 50% performance for the fourth quarter of 2013. We have not generally 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 year ended December 31, 2013, we experienced a decline in our U.S. performance advertising business and a corresponding increase in the percentage of our business derived from brand advertisers. This decline was the result of some performance advertisers looking to drive downloads of their applications by 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 of Jumptap 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, following the closing of the acquisition, Jumptap would be able to purchase advertising through us as needed. This acceleration also continued in the fourth quarter, and we believe the acquisition will help reverse the trend of slowing growth in our U.S. performance business, and we expect our annual mix of brand and performance advertising to be about equal going forward.

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 as either 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 or fees paid to win bids for advertising inventory purchased from auction-based marketplace exchanges. 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. The cost of revenue for ads delivered through auction-based exchanges can vary depending on our ability to purchase inventory at competitive rates to win the auction bid. In addition, the geographic location of our developers is not a factor in determining the percentage or fixed fee we pay for ad space. We expect that our exchange business may generate a lower gross margin for us than our network business, as is typical in the industry.

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


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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 closing of the acquisition of Jumptap and our assumption of the Jumptap sales and marketing, technology and development and general and administrative functions, we saw an immediate increase in our operating expenses beginning in the fourth quarter of 2013.

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. Historically, salaries and personnel costs have been approximately 70% of total sales and marketing expenses. Additional expenses include marketing programs, consulting, amortization of customer relationship intangible assets, 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.

Technology and development expense. Technology and development expense primarily consists of salaries and personnel costs for development employees, including stock-based compensation and bonuses. Historically, salaries and personnel costs have been 75% to 85% of total technology and development expenses. 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 technology intangible assets and 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. Historically, salaries and personnel costs have been approximately 50% to 60% of total general and administrative expenses. 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 to support our continued growth.

Interest and Other Income (Expense)

Interest expense, net consists primarily of interest expense, offset by interest income. Interest expense consists primarily of interest from capital leases, amortization of deferred financing costs and commitment fees on loans. We have not borrowed under our existing credit facility to date.

Prior to our IPO, 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 recognized in other income or expense. Upon the closing of our IPO, the preferred stock warrant was, in accordance with its terms, automatically converted into a warrant to purchase common stock, which resulted in the reclassification of the preferred stock warrant liability to additional paid-in capital. Upon reclassification, no further changes in fair value will be recognized in other income or expense.

Income Tax Benefit (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 expense for the years ended December 31, 2013 and 2012.


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Results of Operations

The following table sets forth our consolidated statement of operations data, both in dollars and as a percentage of revenue, for each of the periods indicated.

     Comparison of Years Ended December 31, 2013 and 2012

                                  Year Ended December 31,
                            2013                           2012
                                       (in thousands)
                              Percentage of                  Percentage of         Period-to-Period Change
                  Amount         Revenue         Amount         Revenue            Amount         Percentage
Consolidated
Statement of
Operations
Data:
Revenue          $ 259,171             100.0 %  $ 177,667             100.0 %   $      81,504             45.9 %
Cost of
revenue            154,774              59.7      105,739              59.5            49,035             46.4


Gross profit       104,397              40.3       71,928              40.5            32,469             45.1
Operating
expenses:
Sales and
marketing           38,682              14.9       23,816              13.4            14,866             62.4
Technology and
development         18,966               7.3       13,620               7.7             5,346             39.3
General and
administrative      61,891              23.9       38,954              21.9            22,937             58.9


Total
operating
expenses           119,539              46.1       76,390              43.0            43,149             56.5


Loss from
operations         (15,142 )            (5.8 )     (4,462 )            (2.5 )         (10,680 )          239.3
Interest and
other expense:
Interest
expense, net           (95 )             0.0          (64 )             0.0               (31 )           48.5
Other income
(expense)               77               0.0         (834 )            (0.5 )             911           (109.3 )


Total interest
and other
expense                (18 )             0.0         (898 )            (0.5 )             880            (98.0 )
Loss before
income taxes       (15,160 )            (5.8 )     (5,360 )            (3.0 )          (9,800 )          182.8
Income tax
benefit
(expense)               47               0.0          (70 )             0.0               117           (167.1 )


Net loss         $ (15,113 )            (5.8 )% $  (5,430 )            (3.0 )%  $      (9,683 )          178.3

Revenue. Revenue was $259.2 million for the year ended December 31, 2013 compared to $177.7 million for the year ended December 31, 2012, an increase of $81.5 million, or 45.9%. 2013 revenue includes revenue from Jumptap of $25.6 million for the period from November 6, 2013 to December 31, 2013. This growth was primarily attributable to an increase in spending from our existing advertiser clients as well as an increase in the number of advertiser clients using our platform. Revenue from our existing advertiser clients increased by 52.8% during the year ended December 31, 2013 as compared to the year ended December 31, 2012 and represented 87.3% of our total revenue for the year ended December 31, 2013. The increase in revenue from existing clients was driven by additional campaigns from brand and performance advertisers that had previously . . .

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