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MILLENNIAL MEDIA INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases "would be," "will allow," "intends to," "will likely result," "will continue," "is anticipated," "estimate," "project," "believe," "expect," or similar expressions, or the negative of such words or phrases, are intended to identify "forward-looking statements." We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include those below and elsewhere in this Quarterly Report on Form 10-Q, particularly in "Risk Factors," and our other filings with the Securities and Exchange Commission, or "SEC". Statements made herein are as of the date of the filing of this Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the fiscal year ended December 31, 2013 appearing in our Annual Report on Form 10-K filed with the SEC on March 3, 2014. Overview We are the leading independent mobile advertising platform company delivering marketleading products and services to advertisers and developers. We offer advertisers a suite of solutions that allow them to reach and connect with their target audiences across screens-from smartphones, tablets and other mobile devices to PCs-with the scale to make significant impact to their business. We offer developers the ability to maximize their advertising revenue and acquire new users for their apps. We operate a proprietary technology and data platform that allows advertisers and developers to interact with us in the way that suits them best. For clients that want to interact on a managed basis, meaning that they have a higher degree of customer service, we have dedicated account teams that use our technology platform to deliver highly engaging advertising campaigns for advertisers and optimized monetization solutions for developers. For our clients that want to interact with us on an automated basis, our platform offers tools to allow advertisers to buy our ad inventory in a programmatic fashion through our ad exchange, MMX, and to allow developers the opportunity to manage and monetize their ad inventory through our supply side tool, mMedia. In addition, we offer advertisers the ability to consolidate all of their mobile media buying through our demand side platform, mmDSP. One of the main strengths of our platform is that it accesses and analyzes mass volumes of data-including location, social, interest, and contextual data, as well as our own insights that we derive from measuring ad effectiveness-to provide a unique, multidimensional view of individual consumer profiles. We call this data asset our Relevance Graph. To date, we have developed more than 650 million active serverside unique user profiles, many of which link multiple mobile devices and PCs to a single specific user on an anonymous basis. These user profiles and the Relevance Graph, combined with third party data from our data partners and our proprietary data management platform, enable us to deliver more relevant, engaging and effective advertising to our advertising clients. Our data asset also allows us to measure the impact of mobile advertising on consumer engagement, intent and action. We have developed a suite of solutions, which we call Omni Measurement, that measure several different areas of mobile advertising impact. As of June 30, 2014 our platform reached more than 650 million monthly unique users worldwide, including approximately 170 million monthly unique users in the United States alone. Approximately 60,000 apps and mobile sites are enabled by their developers to receive ads delivered through our platform. 13 -------------------------------------------------------------------------------- Table of Contents Key Operating and Financial Performance Metrics We monitor the key operating and financial performance metrics set forth in the tables below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess our operational efficiencies. Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 (in thousands, except percentages and per share amounts) Revenue $ 67,308 $ 57,009 $ 139,928 $ 106,447 Gross margin 40.2 % 42.4 % 40.7 % 42.0 % Net loss $ (15,090) $ (3,053) $ (28,037) $ (6,807) Adjusted EBITDA $ (6,111) $ 1,914 $ (10,770) $ 1,145 Basic and diluted net loss per share $ (0.14) $ (0.04) $ (0.26) $ (0.09) Diluted non-GAAP net income (loss) per share $ (0.06) $ 0.02 $ (0.10) $ 0.01 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. Adjusted EBITDA represents our earnings before interest, income taxes, depreciation and amortization, adjusted to eliminate noncash stockbased 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 longterm operational plans. In particular, we believe that the exclusion of the expenses eliminated in calculating adjusted EBITDA can provide a useful measure for periodtoperiod 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 incentivebased 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 (loss) 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 (loss) 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. 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: ? 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; ? adjusted EBITDA and diluted non-GAAP net income (loss) per share do not reflect changes in, or cash requirements for, our working capital needs; ? adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; ? adjusted EBITDA and diluted non-GAAP net income (loss) per share do not reflect tax payments that may represent a reduction in cash available to us; and ? other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure. 14 -------------------------------------------------------------------------------- Table of Contents Because of these and other limitations, you should consider adjusted EBITDA and diluted non-GAAP net income (loss) per share alongside other GAAP-based financial performance measures, including various cash flow metrics, net loss and our other GAAP financial results. The following table presents reconciliations of net income (loss) to adjusted EBITDA for each of the periods indicated: Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 (in thousands) Net loss $ (15,090) $ (3,053) $ (28,037) $ (6,807) Adjustments: Interest expense, net 35 10 63 21 Income tax expense 11 21 27 36 Depreciation and amortization expense 4,264 1,061 8,211 2,002 Acquisition-related costs 976 120 1,251 481 Deferred compensation - 250 250 250 Stock-based compensation expense 3,693 3,505 7,465 5,162 Total net adjustments 8,979 4,967 17,267 7,952 Adjusted EBITDA $ (6,111) $ 1,914 $ (10,770) $ 1,145 The following table presents reconciliations of GAAP net loss per share attributable to common stockholders to diluted non-GAAP net income (loss) per share for each of the periods indicated: Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Net loss per share $ (0.14) $ (0.04) $ (0.26) $ (0.09) Adjustments: Interest expense, net - - - - Income tax expense - - - - Depreciation and amortization expense 0.04 0.01 0.08 0.02 Acquisition-related costs 0.01 - 0.01 0.01 Deferred compensation - - - - Stock-based compensation expense 0.03 0.05 0.07 0.07 Total net adjustments 0.08 0.06 0.16 0.10 Diluted non-GAAP net income (loss) per share $ (0.06) $ 0.02 $ (0.10) $ 0.01 15 -------------------------------------------------------------------------------- Table of Contents Components of Operating Results Jumptap Acquisition On November 6, 2013, we completed our acquisition of Jumptap, Inc. The three and six month periods ended June 30, 2014 include the impact of the results of operations from Jumptap, which has been fully integrated into our business. The three and six month periods ended June 30, 2013 do not include the results of operations from Jumptap. 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. We classify our advertiser clients as "brand" advertisers or "performance" advertisers, depending on the intent of the advertiser. When an advertiser purchases on a CPM basis, we consider them a brand advertiser. When an advertiser purchases on a CPA basis, we consider them a performance advertiser. When a brand or performance advertiser purchases on a CPC basis, we use various metrics, such as CPC rates and measurement goals, to determine which campaigns are brand or performance. 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 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 typically represented about 60% of our annual revenues, with performance advertisers generating the remainder. Following our acquisition of Jumptap, Inc. in November 2013, this split between brand and performance revenue shifted to approximately 50% brand and 50% performance where it remained until the second quarter of 2014. During the second quarter of 2014, we experienced another shift in this trend primarily caused by lower than expected performance revenue which resulted in our brand revenue representing approximately 60% of our total revenue. 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 onehalf and twothirds 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. Overall, our revenue tends to be seasonal in nature, with the fourth quarter of each calendar year historically representing the largest percentage of our total revenue for the year, and the first quarter representing our smallest percentage of total revenue for the year. Many brand advertisers spend the largest portion of their advertising budgets during the fourth quarter, in preparation for the holiday season. 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 auctionbased marketplace exchanges. We recognize cost of revenue on a developerbydeveloper 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 16 -------------------------------------------------------------------------------- Table of Contents 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 auctionbased 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 expense categories. We expect to continue to hire new employees in order to support our anticipated revenue growth. We include stockbased 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 advertiserfocused sales and marketing employees, including stockbased compensation, commissions and bonuses. 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 stockbased compensation and bonuses. 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 information technology, or 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 stockbased compensation and bonuses. 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 and commitment fees on loans. We have not borrowed under our existing credit facility to date. 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 expenses for the three and six month periods ended June 30, 2014 and 2013. Critical Accounting Policies and Estimates We prepare our consolidated financial statements in accordance with U.S. GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. During the six months ended June 30, 2014, there were no material changes to our 17 -------------------------------------------------------------------------------- Table of Contents critical accounting policies and use of estimates, which are disclosed in the footnotes to our audited consolidated financial statements for the year ended December 31, 2013 included in our Annual Report on Form 10-K filed with the SEC on March 3, 2014. Results of Operations Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013 Three Months Ended June 30, 2014 2013 (in thousands) Period-to-Period Change Consolidated Statement Percentage of Percentage of of Operations Data: Amount Revenue Amount Revenue Amount Percentage Revenue $ 67,308 100.0 % $ 57,009 100.0 % $ 10,299 18.1 % Cost of revenue 40,277 59.8 32,824 57.6 7,453 22.7 Gross profit 27,031 40.2 24,185 42.4 2,846 11.8 Operating expenses: Sales and marketing 13,433 20.0 8,351 14.6 5,082 60.9 Technology and development 7,458 11.1 4,071 7.1 3,387 83.2 General and administrative 21,184 31.5 14,785 25.9 6,399 43.3Total operating expenses 42,075 62.6 27,207 47.6 14,868 54.6 Loss from operations (15,044) (22.4) (3,022) (5.2) (12,022) 397.8 Other income (expense): Interest expense, net (35) (0.1) (10) - (25) 250.0 Total other income (expense) (35) (0.1) (10) - (25) 250.0Loss before income taxes (15,079) (22.5) (3,032) (5.2) (12,047) 397.3 Income tax expense (11) - (21) - 10 (47.6) Net loss $ (15,090) (22.5) % $ (3,053) (5.2) % $ (12,037) 394.3 Revenue. Revenue was $67.3 million for the quarter ended June 30, 2014, compared to $57.0 million for the quarter ended June 30, 2013, an increase of $10.3 million, or 18.1%. This growth was primarily attributable to our acquisition of Jumptap and 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 28.7% during the quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013 and represented 73.7% of total revenue for the quarter ended June 30, 2014. This increase was primarily driven by more spending from brand advertisers on our new product offerings. Revenue from our new advertiser clients decreased by 2.6% during the quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013 and represented 26.3% of total revenue for the quarter ended June 30, 2014. Our revenue from international operations decreased to $10.1 million, or 15.0% of total revenue, for the quarter ended June 30, 2014, from $15.5 million, or 27.2% of total revenue, for the quarter ended June 30, 2013. The decrease in revenue in our international operations during the quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013 was primarily attributable to decreases in revenue from some of our performance advertiser clients. We classify revenue based on the geographic location where the advertising was sold. Performance advertising often is displayed globally. For example, we may sell a campaign to a large performance advertiser in one location, such as Europe, and principally deliver ads for that campaign to consumers located in the United States. We also increased the size of our overall sales force during the quarter ended June 30, 2014 compared to the same period in the prior year, allowing us to increase our number of advertising client relationships and the number of developer applications enabled to receive ads delivered through our platform. Cost of revenue. Cost of revenue was $40.3 million, or 59.8% of revenue, for the quarter ended June 30, 2014, an increase of $7.5 million, or 22.7%, from $32.8 million, or 57.6% of revenue, for the quarter ended June 30, 2013. The increase in cost of revenue in absolute dollars was the direct result of the increase in our revenue, as we pay a percentage of that revenue to developers for use of their 18 -------------------------------------------------------------------------------- Table of Contents ad space in delivering mobile ads for our advertiser clients. The increase in cost of revenue as a percentage of revenue is the result of changes in revenue mix between performance and brand advertiser clients. Sales and marketing. Sales and marketing expense was $13.4 million, or 20.0% of revenue, for the quarter ended June 30, 2014, an increase of $5.0 million, or 60.9%, from $8.4 million, or 14.6% of revenue, for the quarter ended June 30, 2013. The increase in sales and marketing expense, both in absolute dollars and as a percentage of revenue, was primarily attributable to a $2.3 million increase in salaries and personnel-related costs associated with an increase in headcount, including employees added as a result of our acquisition of Jumptap. The number of full-time sales and marketing employees increased to 221 at June 30, 2014 from 142 at June 30, 2013. We also incurred an additional $1.2 million in depreciation and amortization expense, primarily related to intangible assets acquired in 2013, and $831,000 in marketing costs primarily attributable to an increase in event marketing. In addition, we experienced a $532,000 increase in travel expense and an additional $280,000 in other operating expenses, mainly attributable to an increase in our office lease costs. Technology and development. Technology and development expense was $7.5 million, or 11.1% of revenue, for the quarter ended June 30, 2014, an increase of $3.4 million, or 83.2%, from $4.1 million, or 7.1% of revenue, for the quarter ended June 30, 2013. The increase in technology and development expense, both in absolute dollars and as a percentage of revenue, was attributable to a $1.8 million increase in salaries and personnel costs associated with an increase in headcount, including employees added as a result of our acquisition of Jumptap. The number of full-time technology and development employees increased to 143 at June 30, 2014 from 87 at June 30, 2013. This increase was offset by a $304,000 decrease in stock-based compensation primarily relating to lower compensation expense for the period for unvested restricted stock awards from the 2011 acquisition of Condaptive, Inc. We also incurred an additional $1.6 million in depreciation and amortization expense primarily related to intangible assets acquired in 2013 and an additional $219,000 in other operating expenses, mainly attributable to an increase in our office lease costs. General and administrative. General and administrative expense was $21.2 million, or 31.5% of revenue, for the quarter ended June 30, 2014, an increase of $6.4 million, or 43.3%, from $14.8 million, or 25.9% of revenue, for the quarter ended June 30, 2013. The increase in general and administrative expense, both in absolute dollars and as a percentage of revenue, was primarily attributable to a $2.6 million increase in salaries and personnel-related costs associated with an increase in headcount, including employees added as a result of our acquisition of Jumptap, and a related $542,000 increase in stock-based compensation expense. The number of full-time general and administrative employees increased to 231 at June 30, 2014 from 178 at June 30, 2013. In addition, we experienced a $1.7 million increase in IT expenses related to server hosting costs and a $798,000 increase in acquisition-related costs primarily related to legal and severance costs from our acquisition of Jumptap. We also incurred an additional $381,000 in amortization and depreciation expense primarily related to intangible assets acquired in 2013 and $366,000 in increased travel expenses. 19 -------------------------------------------------------------------------------- Table of Contents Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013 Six Months Ended June 30, 2014 2013 (in thousands) Period-to-Period Change Consolidated Statement of Percentage of Percentage of Operations Data: Amount Revenue Amount Revenue Amount Percentage Revenue $ 139,928 100.0 % $ 106,447 100.0 % $ 33,481 31.5 % Cost of revenue 83,002 59.3 61,698 58.0 21,304 34.5 Gross profit 56,926 40.7 44,749 42.0 12,177 27.2 Operating expenses: Sales and marketing 26,970 19.3 16,493 15.5 10,477 63.5 Technology and development 14,967 10.7 8,264 7.8 6,703 81.1 General and administrative 42,936 30.7 26,742 25.1 16,194 60.6 Total operating expenses 84,873 60.7 51,499 48.4 33,374 64.8 Loss from operations (27,947) (20.0) (6,750) (6.4) (21,197) 314.0 Other income (expense): Interest expense, net (63) - (21) - (42) 200.0 Total other income (expense) (63) - (21) - (42) 200.0 Loss before income taxes (28,010) (20.0) (6,771) (6.4) (21,239) 313.7 Income tax expense (27) - (36) - 9 (25.0) Net loss $ (28,037) (20.0) % $ (6,807) (6.4) % $ (21,230) 311.9 Revenue. Revenue was $139.9 million for the six months ended June 30, 2014, compared to $106.4 million for the six months ended June 30, 2013, an increase of $33.5 million, or 31.5%. 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 45.2% during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 and represented 79.7% of total revenue for the six months ended June 30, 2014. This increase was primarily driven by more spending from brand advertisers on our new product offerings. This increase is also driven by additional performance revenue primarily related to our acquisition of Jumptap. Revenue from our new advertiser clients decreased by 2.8% during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 and represented 20.3% of total revenue for the six months ended June 30, 2014. Our revenue from international operations increased to $27.3 million, or 19.5% of total revenue, for the six months ended June 30, 2014, from $24.7 million, or 23.2% of total revenue, for the six months ended June 30, 2013. The revenue growth in our international operations during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 was primarily attributable to increases in revenue from some of our performance advertiser clients. We classify revenue based on the geographic location where the advertising was sold. Performance advertising often is displayed globally. For example, we may sell a campaign to a large performance advertiser in one location, such as Europe, and principally deliver ads for that campaign to consumers located in the United States. We also increased the size of our overall sales force during the six months ended June 30, 2014 compared to the same period in the prior year, allowing us to increase our number of advertising client relationships and the number of developer applications enabled to receive ads delivered through our platform. Cost of revenue. Cost of revenue was $83.0 million, or 59.3% of revenue, for the six months ended June 30, 2014, an increase of $21.3 million, or 34.5%, from $61.7 million, or 58.0% of revenue, for the six months ended June 30, 2013. The increase in cost of revenue in absolute dollars was the direct result of the increase in our revenue, as we pay a percentage of that revenue to developers for use of their ad space in delivering mobile ads for our advertiser clients. The increase in cost of revenue as a percentage of revenue was the result of changes in revenue mix between performance and brand advertiser clients. 20 -------------------------------------------------------------------------------- Table of Contents Sales and marketing. Sales and marketing expense was $27.0 million, or 19.3% of revenue, for the six months ended June 30, 2014, an increase of $10.5 million, or 63.5%, from $16.5 million, or 15.5% of revenue, for the six months ended June 30, 2013. The increase in sales and marketing expense, both in absolute dollars and as a percentage of revenue, was primarily attributable to a $5.1 million increase in salaries and personnel-related costs associated with an increase in headcount, including employees added as a result of our acquisition of Jumptap, and a related $192,000 increase in stock-based compensation expense. The number of full-time sales and marketing employees increased to 221 at June 30, 2014 from 142 at June 30, 2013. We also incurred an additional $2.3 million in depreciation and amortization expense, primarily related to intangible assets acquired in 2013 and a $1.1 million increase in marketing expenses, mainly attributable to event marketing. In addition, we experienced a $1.1 million increase in travel expenses and an additional $622,000 in other operating expenses, mainly attributable to an increase in our office lease costs. Technology and development. Technology and development expense was $15.0 million, or 10.7% of revenue, for the six months ended June 30, 2014, an increase of $6.7 million, or 81.1%, from $8.3 million, or 7.8% of revenue, for the six months ended June 30, 2013. The increase in technology and development expense, both in absolute dollars and as a percentage of revenue, was attributable to a $4.0 million increase in salaries and personnel costs associated with an increase in headcount, including employees added as a result of our acquisition of Jumptap. The number of full-time technology and development employees increased to 143 at June 30, 2014 from 87 at June 30, 2013. This increase was offset by a $989,000 decrease in stock-based compensation relating to lower compensation expense for the period for unvested restricted stock awards from the 2011 acquisition of Condaptive, Inc. We also incurred an additional $3.1 million in depreciation and amortization expense primarily related to intangible assets acquired in 2013 and an additional $342,000 in other operating expenses, primarily attributable to the increase in our office lease costs. General and administrative. General and administrative expense was $42.9 million, or 30.7% of revenue, for the six months ended June 30, 2014, an increase of $16.2 million, or 60.6%, from $26.7 million, or 25.1% of revenue, for the six months ended June 30, 2013. The increase in general and administrative expense, both in absolute dollars and as a percentage of revenue, was primarily attributable to a $6.4 million increase in salaries and personnel-related costs, associated with an increase in headcount, including employees added as a result of our acquisition of Jumptap, and a related $3.1 million increase in stock-based compensation expense. The number of full-time general and administrative employees increased to 231 at June 30, 2014 from 178 at June 30, 2013. In addition, we experienced a $3.2 million increase in IT expenses related to server hosting costs, and an additional $1.1 million in other operating expenses, mainly attributable to our increase in office lease costs. We also incurred an additional $903,000 in travel expenses and $756,000 in amortization and depreciation expense primarily related to intangible assets acquired in 2013. Liquidity and Capital Resources Sources of Liquidity As of June 30, 2014, we had cash and cash equivalents totaling $92.4 million. In August 2011, we entered into a line of credit with Silicon Valley Bank, or SVB, which allowed for borrowings up to $15.0 million. Amounts borrowed under the line of credit are secured by substantially all of our assets. The loan agreement was amended in May 2014, increasing allowed borrowings to $20.0 million. Advances under the line of credit bear interest at a floating rate equal to the prime rate published in the Wall Street Journal, with interest payable monthly. The line of credit agreement requires that we maintain a ratio of cash, cash equivalents and billed accounts receivable to current liabilities of at least 1.25 to 1.00. Additionally, the line of credit agreement contains an unused line fee of 0.25% per year, calculated based on the average unused portion of the loan, payable monthly. The line of credit is scheduled to mature on May 8, 2015. As of June 30, 2014, we had not yet drawn on this line of credit. As part of the line of credit, we have a maximum of $2.0 million in available letters of credit. As of June 30, 2014, we had $471,000 in standby letters of credit outstanding against the available balance under the line of credit. Cash Flows Our cash and cash equivalents at June 30, 2014 were held for working capital purposes. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our cash and cash equivalents are invested primarily in demand deposit accounts and money market funds that are currently providing only a minimal return. Of our total cash and cash equivalents, less than 2% was held outside of the United States at June 30, 2014 and December 31, 2013. Our international operations consist of selling and marketing functions supported by our U.S. operations, and we are dependent on our U.S. operations for our international working capital needs. If our cash and cash equivalents held outside of the United States were ever needed for our operations inside the United States, we may be required to accrue and pay U.S. taxes to repatriate these funds. We currently intend to permanently reinvest these foreign amounts outside the United States, and our current plans do not demonstrate a need to repatriate the foreign amounts to fund our U.S. operations. 21 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our cash flows for the six months ended June 30, 2014 and 2013: Six Months Ended June 30, 2014 2013 (in thousands) Cash provided by (used in): Operating activities $ (1,915) $ (651) Investing activities (6,100) (14,447) Financing activities 1,204 598 Operating Activities For the six months ended June 30, 2014, our net cash used in operating activities of $1.9 million consisted of a net loss of $28.0 million offset by $9.5 million of cash provided by changes in working capital and $16.7 million of non-cash items. Non-cash items primarily consisted of depreciation and amortization expense of $8.2 million, stock compensation expense of $7.5 million, and bad debt expense of $706,000. Depreciation and amortization expense primarily related to increased capital expenditure requirements and amortization of our intangible assets resulting from acquisitions. The cash provided by working capital changes primarily consisted of a decrease in accounts receivable of $36.7 million due to timing of collections. In addition, there was an increase in other long-term liabilities of $804,000 and $599,000 in accounts payable and accrued expenses due to 2014 capital projects. These cash inflows were offset by a $25.1 million decrease in accrued cost of revenues resulting from payments to our developers for fourth quarter advertising inventory utilized and the seasonal decrease in quarterly revenue compared to the fourth quarter of 2013, as well as an increase in prepaid expenses and other current assets of $1.6 million and an increase in other assets of $1.4 million. For the six months ended June 30, 2013, our net cash used in operating activities of $651,000 consisted of a net loss of $6.8 million and $2.1 million of cash used to fund changes in working capital, which was primarily driven both by the domestic and international expansion of our operations and by our investment in technology and development and personnel to facilitate our growth, offset by $8.3 million in non-cash items. Non-cash items primarily consisted of stock compensation expense of $5.2 million, depreciation and amortization expense of $2.0 million and bad debt expense of $905,000. Depreciation and amortization expense primarily related to increased capital expenditure requirements and our intangible assets resulting from the acquisition of a business. The changes in working capital primarily consisted of a decrease in accounts receivable of $1.3 million, primarily the result of timing of cash collections, offset by $1.3 million increase in prepaid expenses and other current assets, as we had a number of annual contracts that began in the second half of 2013, and the deferred compensation recorded as part of our acquisition of Metaresolver in April 2013. Additionally, we had an increase of $1.4 million in accrued cost of revenue, driven primarily by an increase in developer-related costs. Investing Activities For the six months ended June 30, 2014, net cash used in investing activities was $6.1 million and was the result of purchases of network equipment and the build out of office space for our Baltimore, Maryland corporate headquarters. For the six months ended June 30, 2013, net cash used in investing activities was $14.4 million, consisting of purchases of property and equipment of $2.8 million and $11.7 million paid for the acquisition of Metaresolver, net of cash acquired. Financing Activities For the six months ended June 30, 2014, net cash provided by financing activities was $1.2 million, consisting of $1.9 million in proceeds received upon the exercise of stock options, offset by cash used for payment of employee withholding taxes related to restricted stock unit vesting of $691,000. For the six months ended June 30, 2013, net cash provided by financing activities was $598,000 consisting of $957,000 in proceeds received upon the exercise of stock options, offset by cash used for payment of employee withholding taxes related to restricted stock unit vesting of $359,000. 22 -------------------------------------------------------------------------------- Table of Contents Operating and Capital Expenditure Requirements and Contractual Obligations We believe our existing cash balances and the interest income we earn on these balances, together with the amounts available to us under our existing line of credit, will be sufficient to meet our anticipated cash requirements for at least the next 12 months. There have been no material changes in our commitments under contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the SEC on March 3, 2014. Off-Balance Sheet Arrangements As of June 30, 2014, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities. |