Millennial Media's revenue growth hampered by traffic costs, eMarketer predicts

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Although the overall mobile advertising market is set to grow at a breakneck speed, research firm eMarketer recently lowered its revenue forecasts for ad network provider Millennial Media (NYSE:MM) due to concerns over continued traffic acquisition costs.

In its latest report, eMarketer said that the "most significant adjustment in the new forecast is a downward revision to Millennial Media's mobile display ad revenues and market share for 2012 through 2015. The company's traffic acquisition costs (TAC) paid to partners and ad publishers are not expected to fall in the next few years, as eMarketer previously believed."

According to eMarketer, Millennial is the sixth largest mobile advertising company in the United States, with revenues last year of $61.3 million. eMarketer said Millennial will take an estimated 2.8 percent of all U.S. mobile display revenues this year, excluding TAC. Apple will come in slightly higher at 6.3 percent, the firm said.

By 2017, eMarketer projects U.S. advertisers will allocate a total of $27.13 billion to mobile, which will represent just under 45 percent of all digital ad spending and 13.8 percent of total media ad spending that year.

eMarketer spokesperson Clark Fredicksen explained that the firm reduced its expectations for Millennial Media due to a margin warning Millennial issued during its fourth quarter earnings conference call.

"I would, however, note that we are now on our target gross margin range of 40 percent to 42 percent, and you should not expect continued sequential improvements in gross margin moving forward," Mike Avon, Millennial's CFO, said during the company's fourth quarter earnings conference call in February, according to a Seeking Alpha transcript of the event. "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 range of 40 percent to 42 percent unless market conditions lead us to reassess our long-term target."

eMarketer's Fredicksen explained that the firm's previous revenue forecast for Millennial assumed that the company's traffic acquisition costs--which he said are called "gross margins" by Millennial--would decrease over time. But Avon's warning to "not expect continued sequential improvements" caused eMarketer to revise its forecast on the company.

A Millennial spokesperson said the company "will be unable to provide comment at this time as the company is in a pre-earnings announcement quiet period."

Fredicksen explained that eMarketer's "traffic acquisition costs" refer to the money that an ad company like Millennial would pay to a publisher like the Wall Street Journal in order to display ads on the WSJ site, for example. Fredicksen said those types of costs typically decrease over time and already have in the desktop computer market for advertising.

For more:
- see this eMarketer post

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