Photo: Okko Pyykko / Flickr, CC
Millennial Media’s finances, as presented in its IPO filing with the SEC, are dependent on a couple of accounting definitions that make the company seem bigger and more successful than it actually is.
To be clear, the mobile ad seller, led by CEO Paul Palmieri, has properly disclosed its numbers and hasn’t done anything illegal or wrong. And it presents it numbers in the same way that Google and other online ad sellers do.But unless you understand those definitions, Millennial appears to be a much larger business than it actually is.
For instance, Millennial says it got $69 million in revenue through the first nine months of 2011, up from $29 million the year before, all from the ads it sells on networks it operates on mobile devices (see page F-28). That’s terrific growth. The problem is that of that $69 million, $42.5 million is counted as “cost of revenue,” which Millennial defines as:
“…the agreed-upon 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 fixed 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.”
If this type of arrangement sounds familiar, that’s because it is: In the old, analogue world of Madison Avenue such pass-through costs for media placement are referred to as “billings,” not revenue, because that money was never destined for the agency’s top or bottom lines. Online ad servers tend to keep more of the billings they handle (Google keeps about 65 per cent of its revenues; traditional ad agencies keep about 10 per cent). Millennial keeps roughly 40 per cent of its billings.
Groupon was recently dinged by the SEC on this issue, and forced to change the definitions it uses to report revenue.
Once the cost of revenue is axed from Millennial’s income statement its “gross profit” for the same period is just $26.5 million — less than half its reported “revenues.” It would probably be more accurate to call Millennial’s “gross profits” its net revenues, because that’s what they really are — the sales dollars the company keeps. Here are the highlights:
These tiny revenues explain why Millennial isn’t profitable. Its operating expenses — the money it spent running the nuts and bolts of its business — were $27.4 million during the same period, more than the revenues it earned. Millennial made a net loss of $417,000 through September.The company declined comment.
Lastly, Millennial insists that on its own definitions it has made a small profit. On page 11 it presents its “adjusted EBITDA,” or earnings before interest, taxes, depreciation and amortization. On that measure, Millennial made a profit of $650,000.
It’s perfectly legit to give investors alternative benchmarks with which to measure the company, but Millennial asks them them to ignore more than $1 million in tax, interest and other expenses in order to show a profit. (Groupon amended its SEC filings after doing something similar but much more extreme last year.)
The good news is that costs of revenue at Millennial are declining as a portion of its total revenues (billings). In 2010, costs of revenue were 71.5 per cent of the total, by September 2011 they were down to 60.7 per cent.
If Millennial can keep driving those media costs down it may one day actually make some money.
NOW WATCH: Briefing videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.