This Chart Shows The No.1 Problem At Millennial Media Right Now

Paul Palmieri, Millennial Media

One of the central mysteries of mobile ad server Millennial Media’s IPO is why the company doesn’t make a profit. It’s close to making money, but it hasn’t actually gotten there yet.

So what is the problem?

It’s not revenue growth — Millennial has plenty of that. Revenues grew to $69 million in the first nine months of 2011, up from $29 million the year before. Its gross profit — the portion of sales dollars it keeps after its pass-through costs are removed from its revenues — also grew, to $26.5 million from $9.6 million. (“Gross profit” is therefore the meaningful revenue number at Millennial.)

As that growth occurred, however, Millennial’s operating costs soared too. It’s total operating costs were $27.4 million through September 2011, up from $15 million — more than its gross profit.

Those numbers suggest Millennial’s operating costs are declining as a portion of its gross profit, and that eventually the two lines should cross and Millennial should begin making money. But if you run Millennial’s quarterly numbers in a chart, it turns out that is not quite what’s happening:

millennial media

Every time it looks like gross profits have risen enough to overtake operating costs, Millenial’s operating costs rise even higher.

Usually when this happens it’s because the company is driving its revenue via its sales force, and is immediately eroding any potential profit by paying it out in commissions and salaries. Although 61 of Millennial’s 190 staff are sales and marketing people, that is not what’s happening here. Sales and marketing costs are actually declining as a portion of gross profit. That bodes well for Millennial, because it suggests that on average each salesperson is becoming more effective as time goes by.

The real culprit is general and administrative expenses — “product, operations, developer support, business development, administration, finance and accounting, legal, information systems and human resources employees,” as Millennial describes them. G&A expenses (in orangey-brown, below) are growing faster than any of the company’s other operating costs:

millennial media

This ought to be CEO Paul Palmieri’s No.1 issue right now: Controlling his bloated admin costs. If Palmieri (pictured at top) can’t get those down as a portion of gross profit then it doesn’t matter how successful his salesforce is.

That distinction — whether Millennial can grow profitably or not — is crucial because Millennial’s operating cashflow, and its cashflow picture overall, is negative.

(Millennial Media declined comment due to its pre-IPO quiet period.)