Millennial Media's CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: Millennial Media, (MM)

Millennial Media, Inc. (NYSE:MM)

Q3 2012 Earnings Call

November 5, 2012 5:00 p.m. ET


Paul Palmieri - President, CEO

Michael Avon - CFO and EVP

Andrew Jeanneret - SVP-Accounting and Controller


Jordan Monahan – Morgan Stanley & Co.

Kevin Smyth - Barclays Capital Inc.

Jason Helfstein - Oppenheimer & Co. Inc.

Rory Maher - Capstone Investments

Heath Terry - Goldman Sachs

Mark Skitovich - Piper Jaffray


Good day ladies and gentlemen and welcome to the Q3 2012 Millennial Media Earnings Conference Call. My name is [Darsal] and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will facilitate a question-and-answer session. (Operator Instructions) As a reminder, today’s conference call is being recorded for replay purposes.

I’d now like to turn the conference over to your host for today, Mr. Andrew Jeanneret. Please proceed.

Andrew Jeanneret

Thanks operator. Good afternoon and welcome to Millennial Media’s earnings call for the third quarter ended September 30, 2012. Before we begin, I’d like to remind you that during the call, we will make forward-looking statements which may include projected financial results or operating metrics, business strategies, anticipated future products or services, anticipated market demand or opportunities and other forward-looking topics. These statements are subject to risks, uncertainties and assumptions. Accordingly, actual results could differ materially from the results discussed in the forward-looking statements.

For detailed disclosures of the risks and uncertainties that could cause our results to differ from today’s discussions, please refer to today’s press release as well as the documents we file from time to time with the Securities and Exchange Commission, including the Form 10-Q that we will file for the third quarter ended September 30, 2012.

Also I’d like to remind you that during the course of this conference call we may discuss non-GAAP measures of our performance. Reconciliations to the most directly comparable GAAP financial measures are provided in today’s press release and on our website under the Investor Relations section.

Today’s call is available via webcast and a replay will be available following the conclusion of the call for one week. To access the press release, supplemental financial information or the webcast replay, please consult the Investor Relations section of the Millennial Media website.

Now I will turn the call over to Paul Palmieri, Co-founder, President, and CEO of Millennial Media.

Paul Palmieri

Thanks, Andrew. Good afternoon. And thanks to everyone joining the call. And as we recently completed a follow-on offering, I would like to welcome any shareholders joining us for the first time. As you saw in today’s release, we exceeded all of our third quarter preliminary results that we previously reported in October. We are also raising our full year 2012 outlook to reflect our performance in Q3 and indications of demand in the fourth quarter.

For the third quarter we reported an 88% year over year increase in revenue to $47.4 million which marks acceleration in our top line growth rate compared to 76% year over year growth in Q2. This was above our initial guidance for the quarter released in August in the range of $43.5 million to $45 million.

We also reported strong gross margins of 40.9% squarely in our target gross margin range 40% to 42% and up from 39.7% in Q2 of this year and 39.3% in Q3 of 2011. We also reported positive adjusted EBITDA of $2.1 million representing significant sequential and year-over-year improvement. In fact, year over year adjusted EBITDA was up more than 250% as compared to Q3 of 2011. We also reported growth in our developer base, unique users, user profiles and audiences.

Our strong results for the period along with our increased full-year outlook speak to the traction we established as the go to provider of mobile monetization solutions. There has been a lot of discussion in the media lately about a mobile monetization problem from our perspective and that’s reflected in these financial results. There is no mobile monetization problem just the growing opportunity for Millennial Media to capitalize on.

Mobile is growing at a very healthy pace and as we have noted before, there is a significant gap between media consumption via mobile at 10% and the resulting ad spending up just 1%. Advertiser demand generally follows consumer usage and we are poised to take advantage of this shift. While others may be experiencing challenges migrating their online businesses to an increasingly mobile universe, we are excelling because mobile monetization is our business. We maintain a singular focus on mobile. We operate more than 7000 devices across all major operating systems with a healthy mix of business coming from both native apps and mobile web.

Our business was built with the belief that consumers would move to mobile and consume more of their content through mobile apps and sites. We also believe that content would be monetized primarily through advertising and advertising on mobile would be different and more difficult than advertising online. As each of these trends have continued to play out in the market, our business has continued to thrive.

In September, we saw 380 million unique users on our platform which represents an increase of 30 million monthly unique users from June of this year. More than 38,000 apps were enabled on our platform as of September 30, up from 35,000 at the end of Q2. As consumers shift to consuming more content on mobile, we are there to help developers monetize their content and help advertisers reach and engage consumers wherever they may be.

Millennial Media is proud to count 75 of the top 100 global advertisers as clients, including 24 of the top 25. Brand advertisers tend to buy more engaging ads like rich media and video and tend to use our platform for more refined audience targeting to reach specific interest base or demographic audiences. This level of targeting and engagement leads to superior results and positive ROI for our clients. It is this proven return on investment that is driving the shift to mobile as the central part of any advertising strategy.

Performance advertisers such as app developers who want to drive downloads of their apps use our platform to reach and target customers who will generate lifetime value for them. Lifetime value or LTV is a specific financial metric used by performance advertisers to determine the difference between the cost to drive a download and the revenue generated from that download over the lifetime of that app’s usage by a single consumer. Because we are able to deliver this long-term value or lifetime value by delivering quality downloads in addition to the quantity of downloads, we have become an invaluable source for delivering differentiated value for this segment of our advertiser base.

Overall effective CPMs in Q3 increased over Q2. This was primarily driven by advertisers buying more targeted and engaging ad formats. Typically the more engaging and the more highly targeted the ad is the higher the price point for us. With highly targeted, highly engaging ads, we can charge advertisers prices that can be at parity or above comparable online display ads. As we continue to shift more of our business towards these more targeted and engaging ad types, we have seen effective CPMs across our platform increase.

While prices for mobile performance advertising are still lower compared to highly targeted and engaging brand ads, we believe that our approach delivers better long-term ROI for developers promoting their apps. Ultimately this should lead to increased pricing for performance advertising in mobile.

Our success in delivering superior ROIs to both our advertising customers and our developer partners is demonstrated through the lens of our gross margin performance. For the third quarter, our margin performance was strong and already solidly within the targeted range. As the only independent platform provider among the Big 3 of Google, Millennial Media and Apple, brands touch Millennial and know that we can deliver the right audience through the right applications based on their targeting requirements.

Since our IPO in March, we have doubled the number of anonymous user profiles we maintain to more than 300 million. Our unique approach to location-based audiences is one of the strongest differentiators of our platform. Unlike online behavioral targeting which rely solely on contextual data and browsing behaviour, mobile advertising can incorporate physical, real world behavior into the mix. At Millennial Media, we combine location data along with other third party data points and using our own unique identifier build an anonymous profile. We then utilize our proprietary technology to generate additional insights based on our first party knowledge of things like location recency, local frequency, app usage, activity propensity, points of interest, among other factors. All of this gives us a picture of their interests and audience compatibility. This is what’s most exciting to us, taking location based data to the next level.

By understanding a user’s behavior in this way, we are developing a next-generation relevance graph that enables us to more effectively target the right audience for advertisers looking to generate disparate results. Take the example of someone who we know is a coffee drinker. We know that person is a coffee drinker because they frequent a well-known chain of coffeehouses on a regular basis. By combining this piece of actual observed behavior with other data points, we can conclude that this person is an affluent female in her late 20s, who is physically active, one gets to shop at high end retailers and appears to be in the market for a new luxury car. This is where the power of mobile can transcend traditional media, building our data asset and packaging data in such a way that our advertising clients can benefit each principal to our business.

And we’re not alone in seeing the power of mobile data for advertisers. In fact, today we announced a strategic partnership with MediaVest, one of the leading full-service media specialist companies to provide data and technology assets to their global client base. Through the partnership, MediaVest will gain unique access to Millennial Media's leading proprietary data assets. In addition, MediaVest will get access to beta test new mobile advertising technology with their clients. MediaVest will also gain access to Millennial Media's audience insight reports where brand advertisers can see data on the impact their campaigns made on hundreds of real-world consumer audience categories.

MediaVest clients will then be able to leverage the data and insights to optimize ad spend both in online and off-line media. In addition to expanding our data rich offerings and relationships with advertisers in the third quarter, we also continue to expand our reach and deepen our relationships with developers and publishers. We added over 3000 apps to our platform during the quarter. App developers have a choice to make around whom they select to help monetize their offering.

In addition to providing superior monetization in terms of pricing and fill rates, we also serve as a true partner providing a full suite of tools, technologies and services as one of three entrenched players in the space. Our international business continued to grow in Q3 of this year. International revenue represented 13% of our overall revenue for the third quarter, up from 12% sequentially and 10% for the full year of 2011. On the strength of our developer base, the inventory that we offer to advertisers is global. This presents us with a tremendous opportunity to expand our local sales force capabilities and cater to both top brands as well as more regional advertisers while leveraging G&A, technology and data assets out of our headquarters in the U.S.

In the third quarter, the Asia-Pacific region performed very well growing in excess of our overall business. Relying on our operational hub in Singapore and a sales office in Jakarta, we drove revenue in these markets as well as in Australia, Hong Kong, Mainland China and Japan among other countries and regions. Our European operation performed well in Q3 quarter. As the quarter built, we saw a meaningful acceleration of growth in September following a weaker start to the quarter over the summer months as is typical in the media business. We plan to continue to invest in our international operations as we see a tremendous opportunity to leverage our technology, brand relationships, developer base and other resources into promising new markers.

Our focus in the near-term continues to be on Europe and Asia with London and Singapore serving as operational hubs in each respective markets. In Europe we currently have sales offices in Germany and France that rely on the London hub for operational support. The UK also generates revenue from numerous other European markets as well as from certain countries in Africa and the Middle East. In Asia, we have a sales office in Jakarta, Indonesia that uses our hub in Singapore for operational support. We also have done meaningful business in Japan with a consultant assisting us in that market and we have plans to enhance our presence in Japan in the near future.

Lastly, I want to talk our recent key addition to our management team. On October 1, we announced that Mollie Spilman joined the team as EVP and Chief Marketing Officer. Mollie is now heading up our global marketing, advertising and branding efforts in addition to leading our business development efforts. Mollie joined us from Yahoo! where she most recently served as the company's Chief Marketing Officer. We are excited to have her on board and look forward to great things from her.

To recap, our key priorities are: expanding and further penetrating our developer base, expanding and deepening our relationships with advertising clients, growing our international presence and investing in technology and data. In each of these areas we made significant progress in the third quarter as reflected in our key financial and non-financial metrics. We believe both our recent and sustained performance speak to our success in establishing Millennial Media as the go-to-provide for mobile advertising audience scale and monetization.

Where others are struggling to adapt to the new mobile world, Millennial Media is exceling. With market leading technology and a singular focus on mobile, supported by the continued migration of ad budgets to mobile, we are excited that our prospects and remain passionate about driving ROI for our developer and advertiser partners in the emerging mobile market.

And with that, let me turn it over to Mike Avon, our CFO, who will give you more detail on our financial performance and outlook. Mike?

Michael Avon

Thank you, Paul and good afternoon everyone. Our performance in the recent period demonstrates the strength of our product offering and our leadership position in a growing and dynamic market. I’d like to take the next few minutes to review our financial results for the quarter in more detail and then I would like to talk about our outlook for the remainder of the year.

For the third quarter of 2012, revenue increased 88% to $47.4 million from $25.2 million in Q3 of 2011 and ahead of our preliminary range of $46.5 million to $47 million now through mid-October. This compares to our initial guidance of $43.5 million to $45 million for the quarter that we announced back in August.

Total revenue from existing advertiser clients increased 141.6% year-over-year representing 75.6% of third quarter revenue. Total revenue from new advertiser clients increased 13.5% year-over-year comprising the remaining 24.4% of third-quarter revenue.

For reporting purposes, we consider a new client for Q3 2012 as a client who was not using our platform in Q3 of 2011 or before while the new client for Q3 2011 would be a client who was not using our platform in Q3 of 2010 or before. Our clients who were not new clients for a particular reporting period are classified as existing clients for that period.

As we already maintain very broad reach across major brand and performance advertisers, our primary focus is on further penetrating existing relationships, which is also more cost-effective for us. Additional campaigns and larger campaigns with existing brand advertisers along with campaigns for new brands from existing advertisers were are the main drivers of revenue this quarter.

As we’ve discussed before, once brand advertisers experience the ROI that we can deliver and gain comfort with our mobile advertising platform and capabilities, they often look to Millennial Media to advertise other brands within their portfolio. Our business tends to be seasonal in nature and we expect that most brand advertisers will spend the largest portion of their advertising budgets during the fourth quarter in conjunction with the holiday season.

As Paul made it earlier, effective CPMs were higher in Q3 than they were in Q2 of this year. Global fill rates in Q3 were approximately the same as those in Q2 while the overall number of impressions on our platform grew in Q3 as compared to the second quarter. Revenue from international operations in the third quarter of 2012 was $6.2 million or 13% of total revenue. This is up 12% in Q2 of this year.

Revenue growth in our international operations for the third quarter was principally driven by the increase in size of our sales force in international markets, enabling us to sell more effectively to both global and more regional brands, in addition to broadening our developer base, which helps to build our inventory.

While European business slowed in July and August consistent with an overall slowing in the European advertising spend during that period, we saw a pronounced reacceleration of growth in Europe in September as the strong European bookings going into Q4. Our Asia-Pacific business grew more quickly than our overall business during the quarter but was growing from a relatively small base. We continue to have high expectations for our prospects in the Asia-Pacific region.

Moving on to profitability, our gross profit increased 95.6% to $19.4 million in the third-quarter of 2012 from $9.9 million in the third quarter of 2011. Our gross margin increased to 40.9% in the third quarter of 2012, up from 39.3% in the third quarter of 2011 and exceeding our preliminary third-quarter range of 40.5% to 40.8% and up from gross margin of 39.7% in the second quarter of this year.

Our improvement in gross margin reflects the continued importance of our developer’s place in our business and the tools that we offer them to better monetize their apps. As I said on a prior call, our ability to deliver higher return on inventory and a higher net payout per available impression than our competitors enables us to win more business from developers and at a higher margin.

I would note that now that we are in our target gross margin range of 40% to 42%, you should not expect continued sequential improvements in gross margin moving forward. Though our gross margin could be above or below our target range in any given quarter, we plan to continue to target gross margins in the 40% to 42% range going forward unless market conditions lead us to reassess our long-term range.

Sales and marketing expense was $5.9 million in the third quarter of 2012 versus $3.2 million in Q3 of last year. Globally we increased the number of full-time sales and marketing employees to 107 at the end of Q3 2012 compared to 61 in Q3 of 2011. Within the United States we grew the number of sales people about 61% year-over-year which is less than our growth in the second quarter of 2012 as we continue to leverage the efficiency in our sales model.

Many of the sales people that we're adding in the U.S. today are inside sales reps typically based in our Baltimore office. Inside sales reps serve performance advertisers and smaller brands and agencies. Internationally we continue our investment in Europe and Southeast Asia as we’ve added sales people in France, Germany, the UK and Singapore in the third quarter.

Technology and development expense increased $3.2 million from $1.5 million in the third-quarter of 2011 to $4.7 million in the third quarter of 2012. The increase in technology and development expense was driven by increase in head count but includes about $1 million of one-time stock based compensation charges that I discussed in our last earnings call.

The number of full-time technology and development employees increased to 73 from 34 in Q3 last year. Non-employee IT support costs and internally developed software amortization represents most of the remaining increase. We continue to invest in self-service tools and automation which empowers our customers both developers and advertisers to better control their interactions with Millennial Media and creates efficiencies for our internal operating teams.

We also continue to invest in audience intelligence targeting capabilities, rich media tools and enhanced analytics and reporting as well as our core data asset, including our location and relevance graphs. We expect these investments to continue for the remainder of 2012.

General and administrative expense was $10.5 million in the third quarter of 2012 versus $5.4 million in the third quarter of 2011. The increase primarily resulted from the year-over-year increase in the number of full-time general and administrative employees from 95 to 143. Approximately 50% of that head count increase and related costs was in our operations and developer support groups as well as our information technology group that supports those groups. Remaining costs were incurred in our general information technology and product management areas and our finance general corporate and human resource areas as we continue to transition to support a global public company.

Our adjusted EBITDA which excludes non-cash stock-based compensation expense of $3.2 million for the quarter was positive $2.1 million for the third quarter of 2012 slightly exceeding the top end of our preliminary range of $1.5 million to $2 million and well ahead of our earlier outlook, which initially called for adjusted EBITDA loss for the quarter. This compares to adjusted EBITDA of $0.6 million in the third quarter of 2011 or more than 250% year-over-year growth.

Adjusted EBITDA is a key metric that we track internally and we will continue to report this metric moving forward Adjusted EBITDA is a non-GAAP financial measure and we’ve provided a reconciliation of adjusted EBITDA to net income or net loss the nearest GAAP measure in today’s earnings release which is also available on our website. Including one-time stock based competition expense equal to approximately $1.3 million for the quarter, net loss attributable to common shareholders was $1.8 million in the third quarter of 2012 compared to a net loss attributable to common shareholders of $1.5 million in the third quarter of 2011.

Basic and diluted GAAP EPS was a $0.02 loss for the third quarter of 2012 versus a $0.09 loss for the third quarter of 2011. As we’ve just closed on a follow-on offering of our common stock on October 29 in which we issued and sold approximately 922,000 new shares, I wanted to provide some share count data for the remainder of 2012. We estimate our share count used in our basic and diluted EPS calculation to be approximately 77 million shares for the fourth quarter and 60.5 million shares for the full year. This also assumes that we have a net loss for the period that new equity awards are granted and that no options are exercised prior to the end of the year.

We still expect to incur a net loss for the year. So our income tax expense is expected be minimal for 2012. Our capital spending was about $3.5 million for the first nine months of 2012 and we continue to expect our full year 2012 capital spending to be in the range of $4 million to $5 million.

Now in terms of future outlook, I would like to share our thoughts regarding the fourth quarter and full year 2012 based on information available to us as of today. For the fourth quarter 2012 we anticipate revenue in the range of $61.5 million to $63 million or 80% year-over-year growth at the midpoint. We anticipate adjusted EBITDA which again excludes non-cash stock-based compensation to be in the range of $3 million to $3.5 million for the fourth quarter.

For the full year 2012 we are raising our outlook to take into account our strong third quarter performance as well as an anticipated continuation of favorable trends in our business in Q4. As a result, we expect 2012 annual revenue to be in the range of $181 million to $182.5 million or 75% year-over-year growth at the midpoint. We anticipate adjusted EBITDA to be in the range of $2 million to $2.5 million for the full year.

We’re excited about our performance in Q3 and our prospects throughout the remainder of 2012. Our out-performance in Q3 was broad-based and wasn’t dependent on any single advertising vertical or specific market trend. We saw increasing pricing across our business in Q3 and saw meaningful increases in spend from our key customers. We continue to widen the base of advertisers with many new smaller advertisers coming to our platform through our mMedia self service offering and through our inside sales team.

We continued to expand our reach, increased the number of developers enabled on our platform and increased the number of consumer profiles that we can use to deliver more effective ads. We were able to continue our investments in technology and data as well as our investment in international growth all while delivering adjusted EBITDA profitability a quarter earlier than initially anticipated.

And with that, I would like to ask the operator to open up the line for questions please.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Jordan Monahan with Morgan Stanley.

Jordan Monahan – Morgan Stanley & Co.

Actually just two questions if I can. The first is I am wondering if you can talk a little bit about the performance that you're seeing on tablets versus smartphones and whether that has a pricing uplift top with performance. And then the second part of that question is do you see larger screen sizes on smartphones also having a positive impact on either pricing or other metric? And then the second question is just on the gross margin. Was that actually boosted by more self-service advertisers on the platform or were there mix or other factors there?

Paul Palmieri

I will take the first one and Mike will take the second one there. First around tablets, we certainly are seeing a meaningful portion of our business coming from tablets. We have for some time and we continue to see a nice growth in that area. And while I will say we do see some higher pricing coming from tablets, I will say it’s directly proportionate to the size of those tablets and very related to your next question which was screen size. And so certainly we see the larger the canvas that we can put out there for an advertiser to paint, the higher the price. And so we’re definitely seeing that trend tablets and other non-phone connected devices making up close to about 20% of our business. We’re also seeing larger screen sizes very, very helpful in terms of things like interaction rates and also things like pricing, particularly for brand advertisers.

Michael Avon

On your second question on gross margin, you asked the question of was this driven by self service or by mix. Almost all the both, the vast majority developers on our platform come through to us through our self-service interface. But we saw improved margins really across-the-board across developers and all segments of developers from large publishers and developers that might have complex negotiated deals with us to longer tail developers who come to us directly through self-service. We saw improvements in both segments and we think that’s a reflection of the ROI that we delivering to developers, ultimately the return on impression and the net payout to developers allowing us to capture more of the upside.


Your next question comes from the line of Mark May with Barclays.

Kevin Smyth - Barclays Capital Inc.

Hey guys, it’s Kevin for Mark. It’s bit of a higher level industry type question for you. I love to get your thoughts on real-time bidding as it relates to the mobile industry, specifically where are we currently in terms of adoption and how do you kind of see that evolving over the next 12 months or so?

Michael Avon

Yeah, you’re hearing a lot of noise about real time bidding in mobile. I think it’s the very early days for our TV and mobile. There are few companies out there that are starting to put offerings out on the market. I think it’s still some time before you see broad adoption of our TV and mobile given the complexities on the supply side of mobile that many different devices and capabilities of the devices. But all that said we run a real time bid at exchange within our core platform internally and over the long-term we think we’re very well positioned if the market moves to real-time bidding. But I think it’s early days today, it’s a very small percentage of the market and we'll see how it increases from there.


Your next question comes from the line of Jason Helfstein with Oppenheimer.

Jason Helfstein - Oppenheimer & Co. Inc.

I have two questions. So the guidance just from a numerical standpoint and by the slowdown, am I understanding the base that you come from – or are you simply being conservative or is there something out there that you are concerned about because your commentary was generally positive. And maybe you just want to give us October the year over year data point of the whole company, maybe that could just explain kind of that?

And then secondly, are there any read-throughs of the impact of the iPhone as far as having overall monetizing, clearly monetization was up in the quarter. Sequentially I don’t think iPhone have much of an impact. Wondering what you are thinking about the fourth quarter. And then lastly, the guidance taking into the account any impact of the hurricane.

Michael Avon

Let me start with the – I think the first and third question, and Paul will take the iPhone question. So midpoint of the guidance range is 80% in Q4. You are right that's lower than 88% that we ultimately saw in Q3, it’s above the initial guidance for Q3. We think that's a prudent range for guidance, 80% year-over-year growth we think it's certainly quite strong for a typically strong quarter in Q4. I can’t give you any October data, we don’t report that. We don’t report our monthly data. And then we haven't seen any kind of material or meaningful impact one way or the other from the hurricane. Other than we’re participating in some relief efforts and donating some a little bit to those as many other companies are.

Paul Palmieri

Hi Jason. On the iPhone what I will say is we're particularly excited about the iPhone in a number of ways. First as Jordan talked a little earlier the size of the screen is very exciting to us. So there's a lot more that we think can be done with larger screens and Apple’s not the only manufacturer to have come out with a bit larger screen, we see that trend across any of the Android devices as well. So we are excited about screen size.

The second thing is 4G capabilities allow us to run more rich media and allows video to run in a much more compelling way than necessarily 3G. So that's a very, very positive thing for us as well. And last thing I will say is we are also excited about passbook app and the passbook experience and we are certainly looking very closely at what the opportunities over the long-term could be in terms of delivering passbook objects as results for advertisers.


Your next question comes from the line of Nat Brogadir with Stifel Nicolaus.

Nat Brogadir – Stifel Nicolaus

First for Mike, I just want to clarify, so if adjusted EBITDA guidance 3 to 3.5 million for 4Q, did you say net loss still expected to be negative? I am wondering if there is something going on below the line or if that was just a full year net loss negative guidance.

Michael Avon

That was a full year for income tax purposes. That’s correct, full year and not quarter. We don’t give guidance on net income or net loss.

Nat Brogadir – Stifel Nicolaus

And then secondly, the revenue growth of over 80%, I was just wondering if you look at the request prior to fill rate, how should we think about the year over year growth in request for 3Q and into 4Q. I imagine it’s over 100% growth for both quarters. But could you just add some color around that prior to the fill rate?

Michael Avon

We haven’t broken out specifically prior to the quarters that you laid out. I can say that requests were up Q3 over Q2 and sequentially been up Q2 over Q1. You are right requests were up quite a bit year over year as well. Typically you do see the highest number of requests in the year and the fourth quarter, seasonally that tends to be a quarter both where you have the heaviest brand advertising and you also have very heavy usage of devices going into the holidays. And so historically we have seen that seasonal trend.


Your next question comes from the line of Rory Maher with Capstone Investments.

Rory Maher - Capstone Investments

A question on targeting, how do you look at what inning we are in right now and what kind of targeting capabilities are you guys preparing for and say that’s 3 to 5 years that you might on half now (ph). And then on the fourth quarter, is there any kind of differences in the campaigns that you run in the fourth quarter given the holiday shopping season? Are there different kinds of advertisers that spend or perhaps buy different kinds of inventory?

Paul Palmieri

First, I will take the targeting question. And really what we're doing is an ongoing building of data asset that in the short-term and now given our scale and given our position in the marketplace, we believe represents some substantial differentiation today. But as we go forward it’s not only to grow from here but it’s the constant learning that we see everyday from things like we mentioned on the call whether that's a location recency, location frequency, insights about a particular place, insights about a particular set of places that would tell you for example that a consumer is affluent. If there is a device that’s regularly in the same city but each weekend it’s at resort or a resort location, that is an indicator for us affluence.

So over the next five years or so I think it’s going to become very, very clear in the digital media business that mobile is substantially in the lead in the ability to deliver true relevance to the advertisers. It’s one thing to have a social graph, it's one thing to have an interest graph, it’s quite another thing – I am sorry, one thing to have search graph or contextual graph, it’s quite another thing to actually see user’s physical behavior and be able to bring that plus insights like recency, like affluence, for example and bring it all together for the advertiser in what we are calling a relevance graph.

Michael Avon

Rory, to your question on Q4, the types of advertisers that we see, Q4 tends to be historically the most brand focused quarter, different types of advertisers. I don’t think we really see different types of advertisers. There are some specific holiday advertisers you might see year to year but that’s a small part of the business. We do tend to see heavy retail advertising particularly, the type you would expect throughout Thanksgiving and leading up into the holiday season, we will sometimes see some large retailers to major buyers on the platform. In that time of year I see entertainment going in the holidays tends to surge and with that we will maybe see an increase in rich media and video ads which both of those categories tend to like to use. But overall it’s heavier brand spending and just overall very heavy spending typically in Q4 as you would see in most media, Q4 is typically the strongest quarter of the year and the strongest quarter for brands.


And your next question comes from the line of Heath Terry with Goldman Sachs.

Heath Terry - Goldman Sachs

I was wondering if you could – if you have any sense yet as it relates to retail spending in Q4, to what degree advertisers are going to be taking advantage of some of the higher value offerings that you have like geo location and geo fencing in their campaigns. Obviously it’s something that seems like it will make sense during a shopping season like Q4 but we’d be curious whether or not you're seeing that in the early indications on campaigns?

Michael Avon

What I will tell you is last year in -- we don't give any other specific guidance on the Q4 or just really into Q4 beyond the guidance that we’ve given. But I’d say last year during Q4 and historically in Q4 we've seen heavier usage of whatever the state-of-the-art targeting capabilities we were at that time. We also saw a heavier usage of targeting and also richer and engaging ad in September and September tends to be the first month leading into the holiday season for us. It’s a month that looks more like Q4 than like the rest of Q3 historically.

Heath Terry - Goldman Sachs

And without getting into CPM detail because we know it’s not an area you want to discuss specifics on. Can you give us just some qualitative sense of the impact that taking advantage of some of those higher end services like that has on monetizing the inventory that you have available to you?

Paul Palmieri

So I think what we said is CPMs did go up from – in Q3 over Q2 and as we look at that, that definitely came from, some from the mix shift to a more engaging ads. And so as I look at our Q3 performance I will definitely say there’s more rich media and there’s more video in there than in previous quarters. And so the trend is going in the right direction. I think beyond that I don’t think we are offering much color beyond that. I will leave it up to Mike take a crack as well.

Michael Avon

Yeah, I would say one other metric you can look at is gross margin which is a derivative of the overall increased pricing if we’re able to deliver better results for developers and pay them out a net payout that’s higher than competitors because we're driving more highly targeted ads, more engaging ads to drive higher-price. It allows us to keep a higher percentage. So they are not directly correlated, higher gross margin is a derivative of the higher pricing.


And your final question comes from the line of Mark Skitovich with Piper Jaffray.

Mark Skitovich - Piper Jaffray

Just a broad question here, hoping you can comment a little bit on your branding versus DR mix of revenue, where is today where it was a year ago and sort of where you see that over the next 12 months? And then maybe just to take on the – to the holiday question, obviously you’re doing more I would assume holiday campaigns than your Europe areas. So just trying to get a sense of -- is holiday incremental driver to Q4 if you could qualify that in some way?

Michael Avon

On branding versus performance, we have said on many of these calls, our typical breakout across the year is about 60% brand, 40% performance. Q4 tends to be the heaviest brand quarter, Q2 is also a fairly heavy brand quarter. Q3 typically is a little bit more performance going through the summer. And that was the case here but we’re very close to our target 60:40 split. The Q1 tends to be a very performance oriented quarter and that’s fairly held steady for us. Performance business is great for us as well, we talked a lot about brand because that’s the higher price business and it’s also an area that we’ve been very focused on, it’s the majority of our business which you heard Paul talk about the power of delivering positive LTV to performance advertisers. That’s also a key part of our business and we expect to continue to grow both portions of our business.

Paul Palmieri

On holiday and retail I guess what I'd say is given the size of Q4 and the growth that we see, yes there is a lot of retail holiday campaigns that are in there. But I would say it's not incremental to the guidance that we just gave.

Mark Skitovich - Piper Jaffray

One last on the location and relevance graphs that you’ve talked about, when is it reasonable to expect revenue from those segments and sort of what's required to get there? I guess generally speaking and I would think most advertisers are looking for some type of ROI stats from a scalable standpoint. Just curious what you have to show them today and if that's not something you have today that a year from now or is that two years from now where you feel like you will have sort of that scalable value proposition?

Paul Palmieri

Well, first, the scalable value proposition is in the market today. And so we see percentage of our business does come from the usage of this first party data access that we've been building which we prefer to today as more of a relevance graph. And so Mike, I don’t know – you will comment a little bit on the portion of our business that’s more targeted business but what I will say is we’re seeing it today and we are seeing very, very fast pickup from particularly brand advertisers. And they are enjoying the reporting that we are getting at the back end. MediaVest partnership is a great example of how an agency and their brands would use those.

So they not only get target users with this first party data access but they also get to come back and see our branded campaigns against which audiences that I do run the campaign, did the campaign actually also perform? And so these are things that are available today and part of our what we think is our differentiated propositions in the marketplace today.

Michael Avon

And as far as breakdown in the business, the vast majority of our campaigns have some degree of targeting. So they have been to our data and technology capabilities, at least some degree. But the really high end audience targeted campaigns are less than half of our business today, there is certainly room to grow there. As Paul said, we have to prove ROI today, we’ve been able to do that with particularly our brand customers who many of them are now spending on this relevance -- location targeted advertising leveraging the relevance graph. Over time we hope that we can establish some standards so that we can make it even easier for them to spend faster, today it can take some time to prove that ROI but then we see really great results. And that’s probably the reason we do breakout this repeat advertisers stat in our 10-Q and on these calls to show that, that group is growing are at 140+ percent year-over-year. That’s a great sign that advertisers are with us particularly the big brand advertisers that have seen the power of leveraging the data set that we have enough and using that for targeted advertising. They are seeing the ROI and ultimately that’s delivering growth for us.


Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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