The Rubicon Project's (RUBI) CEO Frank Addante on Q1 2014 Results - Earnings Call Transcript

| About: The Rubicon (RUBI)

The Rubicon Project Inc (NYSE:RUBI)

Q1 2014 Earnings Conference Call

May 13, 2014 05:00 PM ET


Frank Addante - CEO, Founder and CPA

Greg Raifman - President

Todd Tappin - COO and CFO


Jordan Monahan - Morgan Stanley

Debra Schwartz - Goldman Sachs

Rohit Kulkarni - RBC Capital Markets

Kerry Rice - Needham & Company

Jason Helfstein - Oppenheimer


Good afternoon everyone and welcome to Rubicon Project’s 2014 First Quarter Earnings Conference Call. As a reminder this conference call is being recorded. Joining me today are Frank Addante, CEO, Founder, Chief Product Architect; Greg Raifman, President; Todd Tappin, Chief Operating Officer and Chief Financial Officer. Before we get started I would like to remind our listeners that our prepared remarks and answers to question will include predictions, estimates and other information that might be considered to be forward looking statements, including but not limited to the guidance we’re providing and other non-historical statements related to our anticipated financial performance, operating and strategic plans and the markets and our competitive position.

Forward-looking statements involve risks, uncertainties and assumptions and actual results may differ significantly from the results suggested by forward looking statements for various reasons, including without limitation, if such risk or uncertainties materialize or assumptions prove to be inaccurate. Reported results should not be considered an indication of future performance. A discussion of some of the risks and uncertainties and assumptions is set forth in more detail in the company’s registration on Form S-1 and quarterly report on Form 10-Q including under the headings risk factors and management’s discussion and analysis of financial condition and results of operations.

We undertake no obligation to update forward-looking statements or relevant risks. Our commentary today will include non-GAAP financial measures, reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings press release which we have posted to our web site. At times in response to your questions we may offer incremental information which provides greater insight into the dynamics of our business or quarterly results. Please be advised this additional information maybe one-time in nature and we may or may not update it in the future. I encourage you to visit our investor relations web site at to access our first quarter press release, periodic SEC reports a web cast replay of today’s call or to learn more about the Rubicon Project.

With that let turn the call over to Frank.

Frank Addante

Thank you. Greg. Greetings everyone. Welcome to the first Rubicon Project earnings call. I am pleased to report that we had a record first quarter. Revenue for Q1 was up 39% compared to Q1 of the prior year to $23 million. Managed revenue was up 34% compared to the first quarter last year to $129.6 million.

Later in the call, Greg will cover our operating initiatives and customer developments and Todd will give an overview of our financial results. Since many of you are new to the Rubicon Project I’d like to begin by outlining our mission, our unique and strategic position in the ad-tech ecosystem and our views on the market going forward. We pioneered advertising automation when we founded Rubicon Project seven years ago. Our mission is to automate the buying and selling of all advertising including television and even digital billboards.

Advertising has been broad and so manually productive using telephones, fax machines and complicated Excel spreadsheets. We are dealing for advertising but innovators such as NASDAQ and [Indiscernible] Systems did to automate their respective industries. We chose to start with automating digital because it is the fastest growing market and its entries and complexity created the greatest immediate need for automation. Today the ad-tech market is complex, dynamic and fragmented. There are more than 500 disparate buying solutions assuming more than 100,000 advertisers. There are 1,000s of premium Web sites and applications that are trying to reach those advertisers. Sellers and buyers need to connect with each other more efficiently. Many solutions without a central marketplace equals confusion. The advertising market needs one centralized marketplace to organize and connect buyers and sellers and that’s exactly what we do. We become projects exchange in terms of complexity into opportunity enabling market growth. We are a technology company. We do not buy or sell media or make money from arbitrage. Our revenue is generated by the use of our technology.

We have developed a strategic and critical position in the digital advertising market. Advertisers are constantly moving money across various fine technologies as a search for the best performance. Therefore they may move campaign budget dollars from one ad (ph) to another or from one DSP to another. As advertisers shift their spending across these various solutions much of this activity is ultimately transacted across our platform because of our strategic position as the seller’s platform. Someone (ph) for stock trend is a company cheers us to list for the stock if we are stock exchange. Buyers are ultimately purchasing stock trends processed by their exchange. While there are more than 500 buying solutions there are only a few large scale exchanges. Rubicon Project is one of them and has many unique advantages.

First is scale; Our exchange rate has 97% of U.S. Internet users, no display advertising company reaches more users in the U.S. than our platform. Additionally, our technology reaches approximately 600 million users on a global scale. The second is quality; We focused on the top 500 sellers in the regions we operate in while the tail is an opportunity for us in the future our focus right now is premium Web sites and applications; third our direct integrations. We have development a rep integration with a critical mass of top sellers including 40% of the comScore 100. This means that buyers who want to reach the Web sites application that have integrated our platform buyers have to use our platform to reach those sellers.

Four is independence; Rubicon Project provides an independent transparent exchange to buyers and sellers without conflict. And last is performance; data drives performance. Our machine learning algorithms learn from trillions of new date signals each month and are able to more effective price inventory and match buyers and sellers as a result. Our business stands many vertical, horizontal and geographic markets. Today, we are a leader in digital display the largest of digital advertising markets. Mobile and video are growth opportunities for us and television and digital billboards are on the horizon. There are three main buying methods for digital advertisers; real time bidding, static bidding and direct sort orders.

With the introduction of automated technologies we are seeing faster growth in the market. For example real time bidding or RTB has grown to a $4.5 billion market in just four years for IDC. While RTB is just the subset of our market it’s a good illustration as a high demand for automation given the value it delivers to both buyers and sellers. We continue to grow our market share and extend our leadership position in real time bidding. The growth of our RTB revenue is outpacing the market which according to IDC is projected to grow 50% in 2014. While RTB attracts much of the attention, the static bidding market is two times the size of the RTB market. And the direct sold orders of $37 billion market opportunity in digital alone. Our solution enabled us to participate in the full digital advertising market, not just RTB. To address this market, we have three solutions; the first is seller class which websites and applications used to automate the sale of their advertising inventory to DSPs, ad networks and agencies. Next of buyer class, which agencies, DSPs, and ad networks used to automate the purchase of advertising from these sellers. And third is the advertising automation class which is the exchange the processes. These solutions allow both buyers and sellers to leverage the data in our system to effectively identify audiences, price and match impressions and execute transactions.

Our goal for buyer class are to better connect spend from agencies, the training desks and advertisers through third-party connectors such as DSPs and ad networks, ultimately for sellers of ad inventory. We are also developing technologies to enable the creation of new DSPs and ad networks and buying solutions for underserved markets or sub-sections of markets. As we enable more spend through these buying channels, we expect the volume transaction to factor through all platform to interest. We continue to invest in the speed and scale of our automation class. Our real-time trading platform executes trades between buyers and sellers, outside has the process transactions faster than website and faster than all of the buyers can bid. We process more than 3 trillion bid requests per month and analyze billions of data points in real-time to enable our solutions to make approximately 300 data driven decisions per transaction within milliseconds and execute up to 2.5 million key queries per second.

Faster processing results in greater revenue performance. Our specially engineered hardware, the RubiCube has enabled us to scale our operations faster in lower latency and lower costs. We continue to innovate in this area. We are in the early stages of testing for programming silicon; this is the next step for us to further reduce latency to improve revenue performance. We are testing FBGA that’s field-programmable gateway array cards where we are putting our proprietary option logic directly onto the chips themselves. In Q1, we engineered and launched a number of new innovations to our platform. We launched new capabilities in our selling class that automates the integration of existing legacy ad sellers. It gives sellers the ability to leverage the data intelligence of our automation class and the ability to automatically provision inventory on demand with existing ad seller.

These capabilities help sellers operate more efficiently and provide buyers even greater access to inventory and audiences. We also launched our actionable insights capabilities which levered wealth of data to provide data visualization for our customers at trading site. These data visualizations and controls enable sellers to better manage and optimize their advertising revenue. Looking to the future, our media product growth opportunities are focused on the following three areas, automatic direct sold orders, mobile and video. The next base frontier in digital advertising is automating orders that are negotiated directly between a buyer and seller which today is far too cumbersome and far with manual processes. We have seen great traction with our direct order automation products.

We saw strong growth in our direct orders business in our international markets from Q4 to Q1 at a time where overall advertising spend is usually down due to seasonality. The CPM of direct orders are approximately three times that of RTB. I am also excited about the potential for both mobile and video. When we launch new products, our number one priority is capturing market share. Critical mass of buyers and sellers creates a dual network effect. Integrations with these sellers are most important. Those integrations bring audience and inventory to our platform. In critical mass of audience and inventory creates gravity for buyers. The transactions between the sellers and buyers produces invaluable data that helps to make our machine-learning algorithms even more effective.

We already have critical mass in display. Starting in 2013, we focused on on-boarding mobile inventory from our existing premium customer base for both the smartphone and tablet. We also expanded our core platform to support mobile applications in addition to mobile web. With mobile and video, market share is our number one priority and revenue is secondary for now. As such we now have hundreds of buyers and sellers using our mobile capabilities. Video is an area where we have recently started to invest. So you’ll hear more from us later in 2014 on this initiative. As Chief Product Architect another product that I oversee is culture. We manage culture as a product, we have a roadmap for it, we measure it, the goals at culture are two folds. One is to attract the greatest talents and innovators in the world. And two, is to make them as productive as possible. As such we’re beta testing a new measurement tool this year called ROP, return on productivity.

Our goal is a 1% return in productivity for the company in 2014. Every dollar we make or say is a dollar that we can reinvest into innovating solutions for this $100 billion and growing market. We have a formula for success here at the Rubicon Project; people, products, customers in that order. We strongly believe that by putting people first we’re able to create the greatest value for our customers. Great people innovate great products and great products attract great customers. Our people platform in my opinion is what makes Rubicon Project an extraordinary company.

As always I would like to thank our team for continually investing in our culture of innovation. Our customers and partners are constantly pushing to innovate, and of course our shareholders for their support as we continue to make history by changing the way that advertising is brought into. I am really excited for Q2 and the rest of 2014.

Now I would like to introduce our President, Greg Raifman to talk about our operational initiatives and customers. Greg is responsible for the day to day execution of our operating platform. Greg joined our team in January of 2013 but I known him for 14 years. He and I have shared a passion and a common vision for advertising automation from his early days with the Founding CEO of Mediaplex an early pioneer of advertising technology.

Greg Raifman

Thank you Frank. We started this year with five major strategic initiatives. Expanding the inventory on our Advertising Automation Cloud; two, bringing buyers closer to sellers; three, growing our international footprint; four, expanding our platform up to mobile and video; and five, continuing to automate internal operations to extract additional operating leverage.

First let’s discuss how we expanded seller inventory on the Rubicon Project platform during Q1. Quality supply is the lifeline of our business. We’re excited to announce that in Q1 we procure additional large comScore 500 customers to our platform for both open auctions and direct orders. These customers include eBay U.S. which complements our long spending eBay international business, Seeking Alpha Thompson Reuters. The addition of these clients further expands our premium publisher inventory and increase the network effects of our business which helps buyers and sellers maximize efficiencies.

In Q1 two of the largest automotive sellers adopted Rubicon Project’s platform to launch their own target exchanges to capture the growing premium programmatic ad spend in the automotive sector. We signed Jumpstart Automotive Group a host media services company which represents the broadest most diverse audience of in market car shoppers and influencers across automotive web sites including consumer guide, automotive J.D. Power Auto, Car and Driver, Road & Track and U.S. News Autos, are leading auto comparison sites has also joined the automation cloud and partnered with Rubicon Project to execute automated orders with near and non-endemic clients, such as insurance companies and is adding incremental revenue deploying our open auction.

We’re further hardened to see the many ways the companies are partnering with us and adopting Rubicon Project’s Advertising Automation Cloud. For example, Triad Retail Media has partnered with Rubicon Project to drive sophisticated programmatic ad strategies for retailers in the United States and across Europe. Together we power data rich orders in auctions programs for key retailers including Wal-Mart, eBay, Sam’s Club and more. Thomson Reuters has standardized on our Advertising Automation Cloud to power global private exchange. We’re seeing this as a growing trend giving sellers a greater ability to manage which buyers participate and to control pricing. This is similar to what we have done for companies such as News Corp and Viacom.

In fact our partnership with the new News Corp continues to power growth globally for us. In Q1, the News Corp exchange reached to new milestone by adding the New York Post on our platform joining an already impressive list of first tier news site such as News Australia, Dow Jones and News UK. This product global change is one of the largest in advertising and is garnered to definite adoption within the News Corp family of sites. These very impressive wings indicate a trend that we’re experiencing. Notable comScore enterprise level clients are consistently choosing the Rubicon Project platform as the primary technology provider for monetizing valued ad inventory.

Our second strategic initiative was to deploy our advertising automation to bring buyers closer to sellers. The growing number of unique and high value sellers continues to drive advertisers to our platform. The number of bid request process from these advertisers on our advertising automation cloud has now grown to over 3 trillion bid requests per month. Unlike in years past, large media agencies and media conglomerates are now willing to learn and beginning to adopt automation as common practice in private market places as well as in open RTB auctions. And we are seeing this trend unfold through the strength of our direct orders business as Fred discussed earlier. Premium brands and publishers have quickly adopted our direct orders product. Buyers utilizing this channel include Netflix, and the Merkle Group among others. Many luxury and high end brands have also deployed our buyer automation tools to drive their digital marketing initiative. It’s also important to note that the average CPM for media transacted via direct orders product is approximately three times that of open auction RTB, indicating that more and more premium ad inventories moving towards automation.

Finally, we have worked consistently to connect buyers and sellers by creating environments in which they can work together. For example, we have expanded our marketplace summit program in which we bring buyers and sellers together physically in offside locations to meet one-on-one to discuss and conduct transactions through automation tool. In Q1, we held market place summits in Australia, New York City and Chicago and we expect to hold about 10 more globally for the remainder of 2014. These summits usually bring immediate revenue to our platform from the deals that are transacted and also further drive markets faster towards automation. Our third strategic initiative was to grow our international foot print, Rubicon Project is a global company, in addition to the US we have a market leading position in the UK, France and Australia and are making great strides in Germany, Italy and the rest of Europe, including Eastern Europe. In Q1 we added key client in those regions including Tiscali a leading ISP and portal in Italy and Seznam the leading portal in the Czech Republic as additional large sellers onto our platform. These markets continue to grow, many of which are emerging or even on top when it comes to automation. Japan is the second largest advertising market in the world and one where we believe our solution has a great deal of relevance and potential.

In Q4 of last year we opened a data center in Tokyo and in the first quarter of this year we opened an office there. We have also opened an office in Singapore and just last week we announced our entry into the Latin American market with an office opening in Sao Paulo, Brazil and have already Grupo Abril one of the largest magazine publishers in Brazil, later this year we will open our office in Miami Florida to further strengthen our position in Latin America. Our fourth strategic initiative was to expand our platform into other adjustable markets such mobile and video. As mobile RTB continues to grow Rubicon Project is well positioned to assist advertisers and reaching their mobile audience. Leveraging efficient and automated buying channels that we have pioneered over many years. Because of the device and operating system fragmentation however, one mobile inventory has historically been extremely difficult, yet we have addressed these challenges by making it easier for buyers to transact mobile inventories via either the open RTB auction protocol or through the private market place or private exchange opportunities. For instance, we ungraded our oldest product to more easily sort premium packages by tablet, smartphone and display platforms as well as by iOS and Android operating systems for further targeting options. As Frank mentioned earlier we looked at other skill to both the buyers and sellers on this platform throughout the coming year. In addition to mobile we have been developing digital video capabilities for the advertising automation cloud. We’re excited for these opportunities that video brings and we view it as a stepping stone to automating television advertisement over the long term. Our fifth strategic initiative was to continue automating internal processes, as a company with an automation focus it is critical that we focus on automation each and every aspect of our business operations. This allows us to gain additional operating leverage from our current asset base while still providing the service levels that help differentiate our product and technology offering. For example, we automated the on boarding of new sellers which desire to deploy our advertising automation cloud. This was made possible by the development of an automated installer which has reduced time to launch a new seller on our platform. In addition, we established a technical solutions team to ensure that buyer and seller integration are successfully consummated and continually improve reducing the amount of manual effort required from both Rubicon Project and customer resources, we believe these initiatives contributed to our successful Q1. And with that I would like to turn it over to Todd.

Todd Tappin

Thank you, Greg. Overall we have continued to experience tremendous growth led by our RTB solutions, while continuing to invest in the business to drive future growth as well as building our infrastructure to support becoming a public company. Due to the seasonality of our business we will compare the first quarter of 2014 with the first quarter of 2013. Managed revenue which is the media spend transacted through our platform in a given period is an important operating metric for both internal and external purposes. Many companies in our industry record revenue on a gross basis, therefore managed revenue provides a comparison to others in our industry. Managed revenue for the first quarter of 2014 was $129.6 million compared to $96.4 million in the first quarter of 2013 representing an increase of 34% year-over-year. The increase in managed revenue was primarily driven by an increase in both pricing and bidding activity led by RTB which represents the largest portion of our business. The increase in managed revenue resulting from an increase in average CPM was partially offset by a decrease in the volume of paid impressions year-over-year which was mainly the result of the quality control initiatives we implemented during the end of 2013.

We report revenue on a net basis, we generate these buyers and sellers transacting on our platform based on a percentage of managed revenue. Our take rate represents the total of the buyer and seller fees that we charge. Take rate is influenced by a number of factors but primarily by the mix of RTB to other offerings which is increasing as a percentage of our mix therefore if the operating mix remains constant we would expect take rates to be relatively constant in future periods. Revenue in the first quarter of 2014 was $23 million compared to $16.6 million in the same period of 2013 representing an increase of 39%. The increase in revenue which primarily due to managed revenue and the related metric fluctuations as previously mentioned and an increase in take rate. The take rate increased to 17.8% in the first quarter of 2014 as compared to 17.2% in the same period of 2013 which was primarily due to a higher mix of RTB managed revenue which generally carries higher fees.

Operating expenses including cost of revenue increased to $29.5 million in the first quarter of 2014 from $18.4 million during the same quarter in 2013. The increases in operating expenses were primarily due to the expansion of our sales efforts and general and administrative expenses associated with becoming a public company. Cost of revenue included in total operating expenses increased their foreface in revenue as a result of the operating leverage associated with the cost of operating our platform. Cost of revenue increased by 30% compared to revenue increase of 39% during the first quarter of 2014 compared to the same period in 2013.

Adjusted EBITDA was a loss of $1.6 million for the first quarter of 2014 compared to a profit of $2 million in the first quarter of 2013. The decrease was primarily due to the increase in operating expenses from both hiring and infrastructure investments incurred toward the end of 2013 associated with an increase in engineering and product related development enhancements our sales efforts as well as cost associated becoming a public company. We expect 2014 cost to significantly increase over 2013 as 2014 will reflect the full year effect of 2013 investments as well as planned production international expansion efforts in 2014.

Earnings per share on a GAAP basis was a negative $0.59 based on weighted average basic and diluted shares of $12.2 million for the first quarter of 2014 this compares to a negative $0.28 during the same period in 2013 which was based on weighted average basic and diluted shares of $11.3 million. The GAAP share count excludes the conversion of our preferred stock which occurred with the IPO, the net exercise of preferred stock warrant which occurred with the IPO and shares issued in our public offering. Net GAAP loss per share in the first quarter 2014 was negative $0.15 based on weighted average basic and diluted shares of $26.9 million this compares to breakeven in the same period of 2013 which was based on weighted average basic and diluted shares of $26 million.

Non-GAAP loss per share excludes; one, preferred stock dividends; two, stock based compensation; three, amortization of intangible assets; four, acquisition related cost; and five, change in fair value of our preferred IPO preferred stock warrants as well as net foreign currency exchange gains and losses. And assumes the conversion of our preferred stock occurred in the beginning of the quarter and that exercise in preferred stock warrants occurred in the beginning of the quarter but excludes the 6.4 million shares issued in our initial public offering.

Capital expenditures including property and equipment as well as internal used software net of amounts financed were $3.1 million in the first quarter of 2014 or primarily compares of investments in buyer club features and functionalities capacity expansion, orders, mobile and video. We expect capital expenditures to increase throughout 2014. Capital expenditures are expected to range between $10 million and $20 million this year and the wide range is mostly due to how much of our internally developed software is capitalized which is a monthly assessment. The determination of how much is capitalized may also impact cost of revenue. Since amortization related to most of these capitalized cost is reported in cost of revenue, cost of revenue pertains to those costs associated with operating our platform these costs are mostly fix in nature and not directly driven by revenue.

We assess technology related cost such as internally developed software personal cost and maintenance on our customer facing platform as well as our internal systems to determine whether these costs or on cost of revenue or technology and development. Therefore for a clear view on our total technology expenses we recommend adding cost or revenue and technology and development cost together. Cost of revenue may range from 20% to 25% in revenue this year depending on factors such as managed revenue in the amount of capitalized costs. Moreover, as we increase investments in technology associated with our 2014 initiatives, we expect those technology investments to impact both cost of revenue and technology and development line items.

We believe we have adequately included all technology related cost in our guidance regardless of classification. We closed Q1 2014 in the $24.5 million cash and subsequently $86 million in proceeds from our IPO in April net of expenses. Debt including capital lease obligations was $4 million at the end of Q1, 2014 but was largely retired early in the second quarter of 2014. As a result of our strong first quarter results, we are raising our internal projections for the full year. Your initiating guidance as follows, in the second quarter ending June 30, 2014, we expect a revenue between $24.5 million and $25.5 million, adjusted EBITDA loss to be between $5 million and $4 million and non-GAAP loss per share to be between $0.24 and $0.21 based on approximately $33.2 million weighted average shares.

For the full year 2014, we expect revenue for the full year to be between $111 million and $114 million. Adjusted EBITDA loss to be between $7 million and $5 million, non-GAAP loss per share to be between $0.60 and $0.50 based on approximately 32 million weighted average shares. We would expect a typical seasonal pattern whereby the fourth quarter represents the largest revenue quarter where the second, third quarters are generally flat.

We would further like to comment some of the trends we see in the business. We continue to hold a leadership position in reach and experiencing continued strong growth in RTB fueled by increased bidding activity and pricing. We operate in a large market and plan to invest in our business opportunity as more buyers and sellers increase the RTB activity across multiple platforms. We believe we will benefit from the positive trends in the industry and is on trailing 12-month basis quarter-over-quarter as a number of sellers continues to increase as well as the average spend per buyer on our platform. We expect to see continued near term growth from international seller expansion efforts primarily from existing territories that contribute later in the year from new territories, buyer, seller and product expansion efforts, orders in mobile and continued expansion of RTB and related pricing and bidding activity.

We continue to experience tremendous growth led by RTB solutions while at the same time investing in the business to drive future growth and realize the market opportunity. We now like to open the line for any questions.

Question-and-Answer Session


(Operator Instructions) And our first question comes from Jordan Monahan from Morgan Stanley. Your line is open.

Jordan Monahan - Morgan Stanley

Oh great, well thank you. Congrats on a good first quarter. I actually had couple of questions if I can, the first is around video and I think that was certainly on your list of top three priorities. There have been a number of questions in I think the broader marketplace about how to make video little more brand safe and publisher safe and given you have direct integrations with publishers, I am wondering if you can just talk about some of the advantages you may bring to video relative to some of the other exchanges that are out there? And then I guess secondly just in mobile, Facebook certainly has talked quite a bit about its mobile ad network and they certainly have ambitions to become very large player at scale. And there too I am wondering if you can just talk maybe a little bit about how your publisher relationships may or may not insulate you from some of the competition around?

Frank Addante

Hi, Jordan this is Frank here. So, I will address your video question first then your mobile question after it, when it comes to video many of the buyers and sellers of existing video are a very similar to that of the display market where we have got our leadership position. So, you have got companies like News Corp or Viacom who are customers of us and we believe that as this market progresses there is a lot of advantages to having a single platform to address multiple channels. With that said, data is something that of course powers our algorithms that does better matching as well as better pricing of this inventory. And ultimately what that comes down to is the value of the user, so our 97% reach in the U.S. of U.S. users, is the very strategic asset for us. It’s about, just about the seller negotiations but it’s also about the reach of consumers.

You also mentioned something about the security and safety in video. Security and safety was a big issue in the display market before we pioneered automation. So, it’s been a big area of investment for us and an area that we have taken leadership position. When we started seven years ago, there was a lot of risk for publishers to make their inventory available to ad networks, ad networks didn’t provide them the transparency into the actual campaigns. So, we have to develop a lot of technologies that give publishers the controls and the visibility to be able to protect their inventory and their user experiences when selling through third-parties. These technologies are translatable into video. The difference between display and video is that in video you have to do this, hundreds of frames per second versus looking at one individual but this is where the speed and the scale of our automation come, particularly the performance power of our RubiCube, I think gives us a good platform to be able to build this capabilities on.

Your second question was around mobile and the Facebook ad network. I think that’s a great development for mobile. I think the biggest challenge in mobile today is bringing the advertiser dollars into the market. So, just like in display, we encouraged the creation of many new ad networks as well as the whole category of DSPs. The reason that that’s been part of our business strategy and display is because if there are more companies out there that are trying to provide solutions to advertisers to bring more money into the market that’s ultimately good for the market and ultimately good for our platform. Facebook of course being an important player and if you look at the display market, you have got companies like Google, AOL, Microsoft who have developed ad networks for display. I think those are very important parts of the ecosystem, many of those companies are customers of us and they buy across our platform to reach the premium publishers and applications that exist in our platform.

Todd Tappin

We add, just to one more thing to that Jordan, this is Todd, with regard to mobile. We talked about the fact that we started our strategy there on mobile web since we had a strong relationship with publishers and it was a natural extension of our display business, developing the app side of that particular platform with something as 2014 initiative and we are seeing good traction there. In fact apps as a percentage of revenue against mobile web is starting to now catch up a bit and we are seeing good growth in the mobile side through this first quarter.

Jordan Monahan - Morgan Stanley

Great, well thank you Frank, thank you Todd.


And our next question comes from the line of Deb Schwartz from Goldman Sachs. Your line is open.

Debra Schwartz - Goldman Sachs

Great, thanks so much. Two questions, first one, thinking about your price volume dynamic, I was wondering if you could just give us an update on where you are in the quality control initiative given the fact impression decline in the quarter and particularly as you are adding more and more premium publishers, when do we expect to see impression growth? And then second question just on take rate, given the mix of products that you have in terms of RTB and direct orders, how should be think about taper it for the rest of the year?

Todd Tappin

Sure Deb, this is Todd. With regard to the quality control initiatives we implemented some very stringent components to that initiative at the end of the 2013. We continued those through 2014 and are still doing that and we think that we will probably always have that. It’s not a solution that you would be able to solve a 100% but at the same time it’s something that’s inherent in our business and now inherent operations. It’s important to note that paid impressions by itself doesn’t necessarily have an impact on revenue because when we are taking out that lower quality inventory, we simply see buyers reallocate their campaigns to the higher quality inventory which you would naturally expect anyway. So, at the same time we might see a corresponding increase in CPM or we might just have an imbalance between supply and demand at that particular point in time.

So, the impact of the quality control initiatives is de minimis with respect to revenue, I think that’s important point to me. But we continue to have those as far as whether or not we will see increases or significant increases in paid impressions as a result of that I think we are still getting through the year to make that determination. But we at the same time are continuing to see strong growth on the CPM side and do believe that that will continue to grow. With respect to take rates, most of the increase that you have seen to-date has been the result of a higher mix of RTB which carries higher fees and that was continuing to be the case in Q1. We are approaching approximately 80% of our business to the RTB and so as that mix starts to level out, we would expect take rates to level out.

Just to talk a little bit more about the market dynamics that effect take rates, while we certainly have competition with regard to the sellers that we sign and that’s quite a thing. We have upward momentum as well as a result of our machine-learning algorithms which continue to create better matching which then provides more bidding activity as well as higher CPMs. And so, we have some leverage there but I think probably one of the most important components is our position in the market. Since we have direct integrations with 97% of the U.S. audience through those publishers and have a prominent position with regard to the premium segment of that market, we feel that that gives us a very strong position which to provide a great ROI and service to those buyers and sellers.

With that said though I think we believe that the low cost provider and the penetration pricing strategy that we employed historically is still the right one. We think that there is still an amount of inefficiency in the market with regard to arbitrage and believe that that’s the right strategy in the near-term. But let me add a couple of things to that, so Deb, as our business has evolved early on your paid impressions was a big driver of our growth in the auction business when it came to static bidding that’s because in the auction business we needed to hold the inventory in our platform to make it available for auction. So, it’s about moving high volumes of inventory at the lower CPM rates then as our business evolved to RTB, it was really about a better matching individual impressions within the digital buyers, so it’s less volume at higher rates.

And as our business is now evolving into the direct orders business there it’s about creating scarcity, so we don’t necessarily want to sale huge volumes of inventory on behalf of the sellers through the platform we’re trying to creates pockets of scarcity with that which as we mentioned before our direct orders is approximately three times the CPMs of that of RTB and so that’s one point. The second point that I want to make is with our advancement in our seller class the integrations that we’ve now created with the legacy ad servers we don’t even have to have impressions made available in our platform because now when buyers come into the platform and they place an order through our technology our systems able to dynamically and directly go into the ad server and automatically provision that inventory on demand which puts us in an even more strategic position with our sell integrations.


And our next question comes from Rohit Kulkarni from RBC Capital Markets. Your line is open.

Rohit Kulkarni - RBC Capital Markets

Great, congrats on the quarter guys. First on direct orders versus RTB as in can you talk a little bit about how your go to market strategy is different for as you talk to both buyers and sellers for RTB versus direct orders, do you think you are getting net new customers as there is probably a faster adoption of direct orders or do think it’s just today it’s just a matter of deeper share of wallet and later on there would be a evolution of net new customers? And then I have a follow up.

Frank Addante

Sure, this is Frank here. So with the direct orders business in the go to market we already have the sellers integrated as well as the buyers integrated into our platform so we’re taking the solution first to those that have already integrated the platform along both the display as well as the mobile markets. One of the critical aspects of our business that gives us some advantage here in addition to those integrations is the transparency that exists with our platform. So as I mentioned before we don’t make money by selling media and we don’t make money from arbitrage.

So we are encouraged to put the buyer and seller directly together to do those transactions. It does open up a new customer segment to us so when we lost our first product that optimized Ad Networks say via static bidding there were a number of sellers that were reluctant to work with Ad Networks just because of the history and the legacy that existed with some of the challenge that existed in the Ad Network and seller relationship before. With RTB we were able to provide additional controls to the sellers so they can protect their user experiences, protect their pricing as well as to protect channel conflict. With direct orders they have complete and total control over who they chose to do those direct orders with and it also activates their direct sales team.

So the assets that they have in their direct sales team they’re able to put them together with the media buyers that are purchasing. So that control opens up a whole new category of customer segments to us and also gives us the ability to process a large portion of the spend that exist in the market that we weren’t able to tap into before. So there is about $37 billion that spends directly between media buyers as well as sellers and we’re now able to active that spend. So it’s not just new customers it’s more and more transactions and volume from existing customers.

Rohit Kulkarni - RBC Capital Markets

Okay. And if you could just draw out all the puts and takes that you think around take rates as it has been a growing part of our conversation with investors and essentially there is one obvious upward momentum that you have with regards to RTB and better matching and better algorithm in shift towards premium inventory. What are the other factors that you think would affect take rates over the next say 12 to 24 months?

Todd Tappin

As we go through our particular data and metrics associated with the market and look at the price elasticity we would see that the market right now has a fair amount of arbitrage overall some of the analysis you probably seen from others as well as ourselves indicates there could be upwards of 60% of any particular dollar from the advertiser making his way through the ecosystem resulting and only 40% of that ending into publisher. So when you take that in consideration versus our take rates it is starting to do so there is probably a fair amount of elasticity associated with that.

But it’s our position that a lot of that is not a value ad service to advertiser and publishers, some of it is. And so we’re not saying that all of that is not value add services to which those intermediaries will retain their position we think there is. However the portion is not. And so we think that providing a solution to those buyer and sellers that allows them to maximize their ROI on a transparent basis really provides the best ecosystem and best market and the best platform over the long term.

So that’s how we think about that. And so we talked about the upward momentum drivers of take rates for us, position in the market the algorithms ability to drive more CPMs that fact that we’re bringing more and more buyers and sellers the use of that data the network effects associated with both certainly are components of upward momentum. We do obviously have competition in the market as well which will be a downward force. But that is less than the upward, but it is our strategic choice therefore to really hold these take rates as I said relatively flat because we do think that there is penetration for pricing strategy is sensible in the near-term. There is will come a point whereby we will assess whether or not we think we’ve hit that point where there is additional price elasticity to which we should recoup and that has not been taken out of the market, or we may find at that point in time and just to remember when that is that we’ve taken in inefficiency out and there is less elasticity. But I think that’s an evaluation that we have to make in the future.

Frank Addante

As Todd mentioned this strategic strategy or the strategy that we have employed here and it’s been the strategy from day one. So when we started the company seven years ago, there are about ad networks and our belief as that if can bring all first buyers and sellers into a centralized marketplace, just like with other markets that have become automated, those markets grow both in terms of total volume as well as the number of participants. So the number of ad networks has gone from 100 to 100s of them and when we pioneered RTB and we standardized the integration into our platform were zero DSPs before that and now there are over 100 DSPs around the world.

So it’s been a big part of our strategy to enable the creation of new because again as I mentioned that brings in more dollars in the market and also a more dollars that go to our customers and because we’re not revenue stream we get paid. So it’s really important for us to continue that strategy and part of that is keeping our take rates where they are.


And our next question comes from the line of Kerry Rice from Needham. Your line is open.

Kerry Rice - Needham & Company

Great quarter guys. First question is on competition and maybe you can kind of help explain that in what you’re seeing around the focus on the publisher and seller side and where you focus on the premium versus maybe some of your other competitors such as maybe Google. And then the other side is on direct orders, so the question on direct orders. Can you, it doesn’t sound like it’s big enough to maybe be broken out as a percentage of revenue at this point, so certainly getting traction. When I think about the growth in direct orders will we see that primarily as setting up a private exchange or do you think it will manifest itself in more kind of a guaranteed arrangement, if you can maybe comment on that? And then just a couple of housekeeping questions.

Frank Addante

So from a competition standpoint, as we mentioned before our scale at 97% reach is important because that reach of audience creates gravity for the buyers. Ultimately, it’s the advertisers using all their various buying channels that are trying to reach that audience. So the greater the reach the more gravity it creates for those buyers. As I highlighted in the earlier section of the call there are number of things that I think are advantages to our platform, one is the transparency; two is the scale of integrations with those sellers, 40% of the comScore 100. Three is the global nature of our business, many of these sellers have global audiences, they don’t have sales teams in all regions that their audience is coming from. So our global footprint is important there.

And then data is also a huge advantage and barrier for us. So as long as you don’t have other systems where all the buyers sellers that we have or the audience, then they have got a limited view of the market, so they might have a limited view of consumers and users, where as there are unable to understand the value of each of those users. If they have a competitive position where maybe they’re competitive with other large sellers as an example and those sellers choose not to participate other buyers or sellers. They are not able to get a full view of the value of inventory as an example. Or they are not able to provide access to all the buyers in the market. So our independent position in this market is also very important.

A lot of our competition comes from some of the large companies that were mentioned. Those companies are customers of ours, more than they are competitors because they are large buyers through our platform, because they are trying to provide access to their advertisers to reach that premium part of the market on web sites and applications.

Greg Raifman

Kerry this is Greg, I wanted to provide a little more insight to what Frank just discussed on, you mentioned competition in the market for relative to others like Google and particularly in the selling the seller cloud outside of our business. And with respect to what Frank was saying that we do reach 97% of the marketplace in United States and we are a global base company. So as a consequence we pretty much see each and every major opportunity in the world for premium buyers and sellers. And with that in mind we see all sorts of pricing opportunities coming at us in a lot of different ways and one of the things I think we’re excited to be able to report is a growing trend that time and time again the premium brands the premium sellers are selecting Rubicon and Rubicon Project’s platform, because of the network efforts that we provide. We do have among the best buyers and sellers on our platform and so we don’t feel like we have to be the absolute lowest cost provider in that sense of our product base, we have been focused on the outset on quality and overtime that’s becoming, we’re seeing that resonate more and more and so as a consequence you’re going to be seen from time to time and taking some information from us over the course of the rest of the year where we introduce to you new buyers and sellers, premium brands that are deploying our platform and that’s something we expect to be sharing with you in time.

Todd Tappin

And Kerry, this is Todd, let me start on your orders question, I think it’s two parts, I’ll turn the second part over to Frank, you asked about the growth and breaking it out, we don’t break it out yet but obviously when we get to a point where we think that it’s meaningful material we will do so, as you point out and as Frank mentioned in his opening remarks we did see very strong and we continue to see very strong growth in orders and in particular during the first quarter of this year, in fact the growth was so strong it grew right through seasonality so it is very possible that in the near term you might see us start to break it out as a result.

Frank Addante

And your question around private market places, first I’ll say that private marketplaces is really just a fancy way of saying that you’re giving the seller control over who’s buying and more visibility and control into the pricing of who can buy what from whom at what prices, in what periods of time or regions et cetera. I try not to use fancy words because I think that as an industry we tend to overcomplicate these things by packaging them a fit with fancy words. The best way for me to describe this is to use that travel analogy again, so in travel if you wanted to go book a flight or a hotel room, you can go to Priceline and bid on something, or you can go to Expedia and buy it in a private market place, or you can go directly to or call a Delta agent. All three of those transactions are processed in an automated way, in the travel industry. We’re providing the same three capabilities here for advertising so you can go bid on something via static bid you could do it via real time bidding or you can go directly to the seller or to the buyer, think about it as going directly to and that’s what we call a direct order. Private marketplaces are something that kind of straddles the line between using the RTB protocol as a way to more directly transact some of the sellers, although when we talk about direct orders and the future of direct orders we’re really talking about that one where it’s the buyer and seller buying directly from each other and negotiating the price and it’s our system it’s processing just like it’s done in travel.


And our next question comes from Jason Helfstein from Oppenheimer, your line is open.

Jason Helfstein - Oppenheimer

Thanks, can you talk about just the idea of exclusivity, give us an example of like what our name is to the big advertiser but where would a seller choose to go exclusive on the sell side and then other examples where the inventory is shared, and do have examples where someone perhaps shows you among, as one of their providers and also we’ve moved all of their, the majority of their inventory to you. And then second you know just given the kind of opening comment just around buyer cloud, seller cloud and exchange, would you think about breaking down the business by those lines to help investors better understand kind of what’s driving the growth, just because again there’s a 10 of you out there that just look at one number and it ultimately doesn’t do you justice, and then also just a kind of potential to think about, you know talking about client count so people can understand the momentum, you’re seeing both kind of what the buyers and sellers as you’re adding more clients on the platform, thanks.

Frank Addante

Great, let me take the first part of the exclusivity question and Greg or Todd can take the second part. Each and every impression that’s in our platform is exclusive, because this is real time these transactions need to be made and these matches need to happen 80 milliseconds. So every impression that exists on our system that generates these 3 trillion bids on a monthly basis is exclusively only on our platform, you can’t take one impression and put it into multiple platforms at the same time. Todd can talk about the [Indiscernible].

Todd Tappin

We have very very few agreement that are exclusive and really as Frank mentioned it’s about being able to provide great monetization and a great solution in our case we believe that that’s through a product suite that allows publishers to maximize their inventory on a volume basis as well as rate basis and that’s really what’s going to retain a seller and we had tremendous retention rates historically and continue to have very strong retention rates and really that’s what it boils down to, so it’s not something that we really insist upon, there are some rare instances where that occurs when it might be a global arrangement of some sort and we might be providing some customized services or something like that, but I would say generally speaking you wouldn’t expect us to increase the amount of deals that we do on an exclusive basis. With regard to your question on client count I’m not sure that it makes sense to provide specific numbers each quarter just because there is seasonal fluctuations in different patterns, but I would say is some comments on trends to help you on that question. One is with respect to buyers the number of buyers is really not an influencing factor, we’ve 100s of DSPs, 100s of advertising networks, what matters really more is the average spend per buyer, we think that’s an important element and what’s important there is trends, not withstanding again seasonal fluctuation. I can tell that the spend per buyer has been increasing, with regard to the publisher side of the sellers for same reason, sure it makes sense to give that on a quarterly basis but I can tell you from a trends standpoint our number of sellers does continue to increase, and both of those average spend per buyer and average seller that increases both year-on-year as well as sequential. So that’s hopefully giving you some context.

Frank Addante

And another thing I’d add to that is being the direct integration with that seller as money is moving around in the market and as our customers are growing both the buyer customers as well as the seller customers because we’re about direct integration with that seller and because that expense is transacted through our platform our revenue grows. So I haven’t spoken to any one of our customers that don’t believe that their own businesses are going to grow over time, everybody seems very ambitious so they’re investing in growing their user base, they’re investing in growing the inventory analysis, they’re investing in growing their direct sales force which now with our direct orders process, processing capabilities as they benefit. As the sellers are growing the inventory it’s creating more value for more of the spends which comes to the platform, I’m sorry to our platform ultimately to the site as well as the buyers that are growing as well, so as the market’s growing a lot of that money makes its way to our existing customer base.


And we have no further questions in queue this concludes today’s conference call, you may now disconnect.

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