Millennial Media's Black Ink Is a Red Herring

The market isn't buying Millennial Media's (NYSE: MM  ) excuses.

Shares of the country's leading independent mobile advertising platform provider fell in after-hours trading after the company posted quarterly results and announced a major acquisition. As of about 10 a.m., the stock is down nearly 20%.

There was plenty of good news to be found. Millennial's adjusted profit of $0.02 a share was better than the small loss that analysts were projecting. Margins improved, and there was welcome growth to be had in new areas, as video ad revenue more than tripled.

Millennial is also growing rapidly overseas, as its international revenue has gone from 12% of the revenue mix to 20% over the past year.

However, the market just can't shake that Millennial's revenue climbed just 45% higher to $57 million. Analysts and Millennial's own guidance called for 50% top-line growth. It doesn't matter that Millennial was hitting it out of the park nearly everywhere else. If revenue isn't growing as quickly as Millennial itself thought it would, there's something wrong.

Making matters worse, Millennial is taking some of the shine off of the smart decision to purchase smaller rival Jumptap by offering pro forma guidance for the balance of the year that leaves investors wondering how badly things were going to go during the balance of 2013 if it didn't make this deal. The new outlook calls for 40% to 44% in combined growth for 2013, suggesting that either Jumptap's not growing so quickly -- or the more likely scenario that growth at Millennial itself is decelerating.

The Jumptap acquisition is smart. When you combine Millennial's 18% slice of the market and Jumptap's 11% piece you get a company whose 29% chunk rivals market leader Google (NASDAQ: GOOGL  ) . More than just the synergies and the advantages of scale, Millennial can embrace Jumptap's strengths in areas including real-time bidding for ads. The move can help it broaden its Rolodex as it makes a strong argument against using Google in favor of going with a platform-agnostic independent.

It's also getting a fair price.

Handing over 24.6 million new shares may seem steep given Millennial's depressed stock price, but it's just 22.5% of the total company. That's a discounted price when you compare the market share of the two companies. It's also a discount if we look at last year's revenue, where Jumptap's $64.6 million is 27% of the combined top-line results of $242.3 million in 2012.

If you're wondering why Jumptap didn't just test the IPO waters itself, have you seen the market's reception to online marketing rookies? Tremor Video (NYSE: TRMR  ) and YuMe went public this summer, and neither company is bragging about it.

Tremor went public at $10 in June, and it's trading in the single digits. YuMe hastn't budged since hitting the market late last week at $9.

Tremor and YuMe are specialists in monetizing digital video. If this is the area where Millennial is growing the fastest -- and investors still can't get excited -- Millennial may have problems too big to use an acquisition to hide behind.

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  • Report this Comment On August 14, 2013, at 11:55 AM, alexrc99 wrote:

    So long as they're growing and making smart decisions, I'm long. At this stage, growing at a 45% clip is fine in my book. Advertisers have only recently seen the proof statement in FB. It will just take a bit more time for that piece of the advertising budget allocated to mobile to grow.

  • Report this Comment On August 14, 2013, at 4:58 PM, maholder wrote:

    you need to strip out the $10.6M in revenue from Jumptap for a division that was discontinued portal biz. Total revenue is estimated to grow 52% on the top line excluding that business that MM isn't buying.

    When accurately excluding those revenues, the rational for the downbeat article disappears.

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