Is This Mobile Ad Company Going Places?
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Global mobile ad spending will reach $6.43 billion this year, according to a recent study from research firm eMarketer. The firm predicts a 96.6% spending increase in the U.S. alone, which would account for $2.29 billion of the global total and push the nation to the forefront of shelling out mobile moolah. The surge forward is impressive, but worldwide mobile ads will still account for only 1% of general ad spending. That’s an ancillary reason as to why Facebook is struggling with mobile monetization. Can Millennial Media (NYSE: MM), a mobile-only ad platform, fare any better?
MM doesn’t have a well-known name but it runs against some very well known competitors. In an eMarketer report earlier this year, MM had a market share just below that of Apple (NASDAQ: AAPL) with 6.3% and 6.4%, respectively. Google (NASDAQ: GOOG) left them both in the dust with 51.7% of the market. The primary difference between the three companies (other than market cap) is that MM is alone in having the sole focus of mobile ads. That gives MM the ability to have a tighter focus but also exposes the company to a lot of vulnerability in an unproven industry.
The monetization method for MM ads works similarly to online advertising. The terms will likely be familiar to you if you’ve utilized Google’s AdSense program, for example.
MM doesn’t have the same mobile ad issues that Facebook is facing because mobile advertising is all Millennial has ever done. The company essentially acts as a go-between for advertisers hoping to promote and app developers wanting to rent a bit of in-app space.
There are a few different ways that MM can charge advertisers:
- Cost Per Click (CPC): Advertisers are charged every time a user clicks on the ad
- Cost Per Thousand (CPM): Advertisers are charged for each ad delivered to a user
- Cost Per Action (CPA): Advertisers are charged when a user performs a specific action, like downloading a feature in the app.
The majority of MM ad clients use the CPM method, though it’s not uncommon to alternate methods. Using proprietary technologies, MM is able to deliver the ads to users in a real-time manner.
Ad customers seem to like what MM is offering since the retention rates are high and the customers that are staying are spending more. Existing customers accounted for nearly 72% of Q2 revenues, with a 118.3% year-over-year increase in preexisting customer spending.
The client base is also expanding. In Q2, apps running MM’s ad platform increased 17% from the previous quarter. That means there are now over 35,000 apps with an audience of 140 million unique U.S. users and over 350 million worldwide.
That’s all great news but there’s a problem – MM is still leaking funds. Q2 revenues beat estimates at $39.4 million, compared to the predicted $38 million, which was 76% higher than the previous year’s quarter. Losses measured at $2.2 million, or 3 cents per share, compared to the 5 cents per share predicted by analysts. Q2 losses were higher than the prior year’s loss of $152,000 but lower than Q1’s $4.0 million loss. Second quarter EBITDA was a loss of $0.7 million compared to Q1’s $2.4 million loss and the $0.1 million loss from the prior year.
MM is continuing its international expansions In hopes of maximizing earnings while easing the risk burden. The Q2 report showed that international operations increased to $4.6 million, or 11.7% of total revenues, from the previous year’s $1.8 million (8% of revenues). The expansion is primarily in Europe, which came in third place in eMarketer’s study, coming in just behind the Asia-Pacific region.
It’s important for MM not to be solely dependent on domestic spending but international expansions also need to happen cautiously. The European economic situation still isn’t stabilized and a parallel move into the booming Asia-Pacific region would be wise.
Will MM Fall?
Investors still aren’t sure what to think of MM. MM finished last Thursday up nearly 30% following a better than expected Q2 report. It’s currently trading just above its March IPO price of $13 and has had a range of $9.00 to $27.90. The upper end was due to listing day hype but MM does deserve its current bump further away from the bottom.
In its quarterly report, MM admitted that the company is seasonal, with the second and fourth quarters being stronger in general and the fourth being the strongest overall. The company’s Q3 predictions include revenues of are $43.5 million to $45 million. Full year guidance was increased from $173 million - $176 million to $176 - $179 million. Full year EBITDA is expected to be negative, in the range of $1 to $2 million.
There’s still plenty of time to wait on the sidelines, watching how MM proceeds. Due to its lower profile, it will likely have time to find its feet, unlike the publicly floundering IPOs of Zynga and Groupon. The Q4 and annual reports will provide a better picture on whether this mobile ad company is going places.
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