Rocket Fuel's (FUEL) CEO George John on Q2 2014 Results - Earnings Call Transcript

| About: Rocket Fuel (FUEL)

Rocket Fuel (NASDAQ:FUEL)

Q2 2014 Results Earnings Conference Call

August 05, 2014 05:00 PM ET

Executives

Alex Wellins – IR, The Blueshirt Group

George John - Chairman and CEO

Richard Frankel - Co-Founder and President

Peter Bardwick - Chief Financial Officer

Analysts

Jason Helfstein - Oppenheimer & Company

Peter Stabler - Wells Fargo

Andrew McNellis - Evercore

Todd Van Fleet - First Analysis

Kerry Rice - Needham & Company

Operator

Good day and welcome to the Rocket Fuel Second Quarter 2014 Conference Call. Today's conference is being recorded. All participants are in a listen-only mode and a question-and-answer session will follow the prepared remarks. (Operator Instructions).

At this time I would like to turn the call over to Alex Wellins Investor Relations. Please go ahead.

Alex Wellins

Good afternoon and welcome to Rocket Fuel’s second quarter 2014 financial results conference call. Joining me on the call today are George John, Chairman and Chief Executive Officer of Rocket Fuel; Richard Frankel, the company’s Co-Founder and President; and Peter Bardwick, the company’s Chief Financial Officer.

Please note that this call is being broadcast on the Internet. A replay of this call along with our SEC filings and earnings release will be available on the Investor Relations section of our website at rocketfuel.com. Our earnings release, this presentation, and our comments include forward-looking statements regarding future events and our future financial performance, including statements regarding our business strategy, product demand, projected financial results and operating metrics, product development, client retention, market or business growth, R&D spending and the expected impact of our proposed acquisition of [x+1].

Words such as expect, believe, anticipate, plan and other similar words are also intended to identify such forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from the results anticipated by such statements. For a discussion of risks that could cause actual results to differ materially from the results anticipated by our forward-looking statements please see our press release issued earlier today as well as the risk factors and our annual report on form 10-K filed with the SEC on February 28, 2014 and in subsequent SEC filings. We make these statements as of August 5, 2014 and expressly disclaim any obligation or duty to update any forward-looking statements made during this call.

During this call all financial measures are presented on a GAAP basis unless specifically identified as non-GAAP. Our earnings release provides a reconciliation of GAAP to non-GAAP measures. These non-GAAP measures are not intended to be considered in isolation from, as a substitute for, or superior to our GAAP results. We encourage investors to consider all measures before making an investment decision. All comparisons made in the course of this call are against the same period in the prior year unless otherwise stated.

That said, I'd like to turn the call over to George John. George?

George John

Thanks Alex. And thanks to everyone joining us on the call today. As we’ve seen from the releases that have gone out we have good news to share regarding our Q2 performance and new products, and great news on the acquisition of [x+1], which expands our total addressable market and adds enterprise SaaS DNA. We're also tempering our guidance for the remainder of the year based on industry trends that I’ll review in a moment.

We'll break our call today into four sections. First, I’ll review our Q2 highlights including the new products we recently launched. Second, I’ll give you some perspective on market trends that inform our guidance for the second half of 2014. Third, Richard will talk about the planned acquisition of [x+1] and the benefits we expect. Finally, Peter will give more details on our financials and guidance, and then of course we'll happy be to answer questions.

I’ll start with the highlights of the quarter. In Q2, we grew revenue by 70% year-over-year to a record, $93.6 million. Revenue less media costs, a non-GAAP financial measure, grew even faster, up 84% year-over-year to $54.7 million. We also continued to take share from competitors and significantly outpaced the growth rate of digital advertising and also outpaced growth in programmatic buying which Magna Global and IDC estimates at 38% and 50% growth in 2014 respectively.

Other channels revenue which includes revenues from mobile, social and video campaigns grew to $40.8 million in Q2. This 317% year-over-year increase demonstrates the strength of our technology across channels. Mobile remained a driving force for our growth and represented 31% of our Q2 revenue, up from 26% of revenue in Q1 and 19% in Q4 of 2013.

As in previous periods, our revenue growth is powered significantly by customers coming back and spending more with us. Our revenue retention rate was 149% over the trailing 12 months versus the prior 12 months. In other words, if we had to sign no new customers in the last 12 months, revenue over that period would still have grown 49% from customer retention and same customer growth. We continue to see strong growth in active customers which reached 1,444 at the end of Q2, up from 784 at the end of Q2 ‘13. We also continued to focus on driving gross profit, generating $45.7 million in gross profit in the second quarter, up 80% year-over-year. And this represented a 265 basis points gross margin improvement to 49.4%.

So, Rocket Fuel had a strong Q2 that was driven by our proprietary AI based technology platform that fuels our competitive advantage and delivers superior results for our customers and produces industry leading margins for ourselves.

On average in Q2, we evaluated more than 45 billion ad opportunities every day, up from 43 billion in the first quarter and that number today is over 50 billion a day. As the volume of ad inventory rises, our opportunity to deliver scale and results grows. We are also working with private exchanges. In Q2 we ran campaigns for one of the nation’s largest health networks leveraging private inventory on two different exchanges to run ads on the Wall Street Journal and New York Times optimized for lead generation. This has been an exciting development and that it means that advertisers don’t have to choose between Rocket Fuel and premium sites and ad spots, and publishers don’t have to build their own optimization technology or resist exposing their premium ad space to exchanges. And as an example Rocket Fuel can bid on the best impressions from these premium publishers with full context on the campaign in a way that a single publisher cannot do on its own. And increasing ability to access inventory on private exchanges and to sell premium optimization to advertisers is another growth opportunity for Rocket Fuel.

During Q2, we continued to grow our diversified base of customers and increased penetration across categories. In prior quarters I gave statistics on the number of customers that had 1 million in lifetime spend with Rocket Fuel. I am happy to report that as of the end of Q2, we now have 14 customers with the 5 million lifetime spend and more than 10 million lifetime spend customer. In addition, we have 60 of the Fortune 100 and 84 of Ad Age 100 spending with us in the last 12 months.

We've also increased the percentage of revenue that comes from multi-channel advertising to 82% of revenue in Q2 compared to 65% in Q2 of the prior year. In our IPO road show we said our mission was to fuel [inaudible] success for our customers using Big Data and AI. In that vein, one of the exciting developments in Q2 was our customer Brandon Miller at the Carmichael Lynch agency winning Adweek’s 2014 Media All-Stars award for a campaign for Subaru. According to the article, “Miller’s shining moment came when he pioneered a program with artificial intelligence firm Rocket Fuel to reach consumers who were not considering Subaru, it worked.”

We are proud of our partnership with Brandon and Carmichael Lynch, and you will find the Subaru story and 100 other named case studies [inaudible] on our website. We hosted our first Annual Customer Summit meeting this May in New York, our event attracted many of the largest brands and agencies including speakers from MIT, Nielsen, McCann and Walmart. Andrew McAfee from MIT spoke about his book ‘The Second Machine Age’ and the trend across many industries, outsiders and geeks using Big Data and AI to outperform incumbents in diverse fields ranging from medicines to wine tasting. We intend to continue to promote Rocket Fuel’s thought leadership and create unique forums like the summit to discuss further disruptions in digital marketing and other areas of business by new approaches using Big Data and AI.

I will wrap up my Q2 comments with progress on mobile, social and video as well as a recap of key product developments. Mobile now represents almost one third of our revenue and we continue to add new product and functionality to our mobile suite. Our advance hyper local geographic targeting capabilities are resonating strongly with customers including brick and mortar sellers looking to drive foot traffic, as well as online advertisers wanting to use geographic behavior as an indication of audience interest. We’re winning mobile customers from our competitors because these customers like our focus on measurable objectives. Rocket Fuel is leading a transformation in mobile advertising from both [inaudible] generation to ROI driven targeting. Our app advertising business continues to grow with [inaudible] success around ROI driven app developers looking to measure and optimize an app activity and transactions from premium customers, not just driving cheap downloads users who are are incentivized, for example being forced to install an app to reach the next level in a game. Generally, our app customers are getting much more savvy and sophisticated in the use of measurement tools to drive real ROI and this plays nicely into our capabilities and positioning as a provider who’s aggressively extending its results oriented approach into mobile media.

Social is the next largest piece of our other channels revenue growing more than 200% in Q2. We continue to see a rapid increase in customer adoption as the market comes to recognize that Rocket Fuel’s technology produces better results for advertiser on Facebook. We ran social campaigns for almost one third of our advertisers in Q2, 2014 more than twice that of Q2 2013. I would also add that we’re not only seeking [inaudible] increase social spend year-over-year from existing clients but also a strong uptick in new clients for social spend and new social ad space partners interested in working with us.

Last quarter I spoke about initiatives and brand advertising as TV dollars come online. We launched our audience guarantee products in Q2, which has already been adopted by customers including Denny’s and BP. During the quarter we tripled our [supplier] [ph] video ad space which will allow us to increase scale and performance. Across all channels, we have seen increased advertiser and agency interest and the quality of ad space and audiences they buy with increased concerns around both traffic and durability.

We’ve used our artificial intelligence technology to automatically deliver higher quality results against the viewability and audience goals that our customers require so they are separating us from the rest of the industry relying on outdated manual methods. We're also working with leading measurement and validation partner such as Forensic, (inaudible) outside of comScore and Nielsen to cover the importance of third-party validation in our industry.

Finally on the product front, we announced the availability of our mission control SaaS DSP offering. And in the background we first offered Self Service access to Dentsu Subsidiary to CCI in Japan in 2012. And we're now making self service [access] [ph] available to customers in North America and Europe. Mission control enables advertisers and agencies to create and manage digital media campaign, set objectives and targeting criteria and gather valuable reporting and insights.

Unlike existing self service offerings Mission Control is a truly low touch higher performance platform that allows marketers to include a budget and a goal and let AI algorithms drive their campaigns to maximum performance. Other DSP solutions are automated in a sense but it's more like the way salesforce automation software, automate sales. It's not a flock of robots that go out and sell your products for you, it's really just keeping track of the paperwork and workflow and reporting while people do the hard work.

These other DSPs still require hours of manual adjustments weekly with the person doing the hard work of manually testing different site and audience segments, and shifting budgets and bids in efforts to maximize results. What's really new is the ability to tell our software what you're trying to achieve and have it go out and find the best possible impressions out of a sea of over 45 billion impressions globally every day.

Our long-term client [inaudible] advertising tried few other DSPs in the last couple of years while concurrently using Rocket Fuel as a managed service. They are now migrating off of their old DSP and on to Rocket Fuel because our results have been superior. In their first days of using our mission control platform they reported that it was already easier to use than the old DSP because of the AI, auto pilot style controls and user interface.

We are very excited about mission control as a way to satisfy agency and advertiser demand to be more involved and build more of their own direct expertise and their customer acquisition via digital media.

Turning to our second half outlook and industry trends as we saw in our press release we are lowering our full year guidance by approximately 8% at the midpoint of our range. The 385 million to 405 million on the standalone basis. Now on one hand growing from 241 million last year to 395 million this year at the midpoint of our range would still put us comfortably in the hyper growth segment of public companies with growth of 64% this year at a two year CAGR of 92%.

But on the other hand we were surprised by the strength of trends in passing our bookings in June and we now feel our full year guidance should take into account slightly lower sales productivity based on the following three factors. One, the agencies directing ad spend to their internal trading desks or preferred partners more aggressively. Two, industries buzz this summer around bot traffic and low quality ad space on digital exchanges which has led some agency media buyers to begin questioning exchange [based buying] [ph] generally. Three, advertisers and agencies feeling like there is strategic value in managing their ad campaigns themselves with software [inaudible] solutions that we cannot previously address.

The 64% growth implied by our guidance is also not satisfying to us and we are addressing these trends in the following manner. One, treating desks and agency relations. We're exploring ways of working with the treating desks now that we have our mission control product to offer them. For example, we are executing our machine control system as part of their internal trading desk.

Among this top five holding companies; we do power Dentsu CCI trading desk in Japan and we've also developed a preferred relationship with another of the big five [asset holding] [ph] companies in the U.S. Our revenues with these two holding companies are growing significantly faster than our overall revenues.

Our revenues are also growing faster in Europe where we have also focused on building preferred agency relationships. We believe focused efforts on creating win win relationships with other holding companies and trading desks will be rewarding. Two, quality ad space; part of the real results that Rocket Fuel delivers comes from aggressively filtrating out bot traffic and brand [unfaced] [ph] sites from the aspects we consider for our advertisers. In our road show we said, we discarded approximately one-third of all impressions and [inaudible]. We continue to invest in bot deduction technology and third-party partnerships so that advertisers know they can trust Rocket Fuel to deliver quality audiences and results. And three software, we are acquiring [x+1] as a way to inject enterprise software and fast DNA into Rocket Fuel not just building technology, but taking us to market and winning enterprise RFPs and delighting customers. [x+1] is the only company to be ranked as a leader in for through the DSP and DMP [waiver port] and their knowhow around enterprise software will be a powerful complement to our capabilities in delivering best in plan results.

We've consistently talked about expanding our software business beyond CCI in Japan and we've also said we're interested in significant M&A transactions related to data and attribution that will help us develop more sticky strategic relationships with marketers. We're very excited about this major evolution of Rocket Fuel and I'd like to have our Co-Founder and President, Richard Frankel, discuss it in more detail. Richard?

Richard Frankel

Thank you, George. We’re all very excited about adding the [x+1] team and products to Rocket Fuel. As we thought about how to continue to expand our market opportunity and grow our business, we studied usage patterns of agencies and large advertisers. This research led us to the following conclusions. First, we have to offer solutions that address CMO’s needs, on the [inaudible] single platform for integrated story telling across all touch points.

Second, we have to create solutions that leverage our core Rocket Fuel strength, turning data into value with technology in ways that are easier and deliver better returns to marketers that achieve historically. Third, we have to help marketers turn their big data into big business by enabling them to far better understand organize, manage and deploy their data to achieve marketing goals. And finally, we have to establish closer direct relationship with larger agencies and brands and with a skilled enterprise sales force to do that.

Customers are asking for a data management solution and we’re in the business of saying yes to customers. So, we look to build versus buy decision. Of course we could build the DMP ourselves; in fact we already have some basic DMP functionality. But we recognize that it would take one to two years of heavy investment at a time when we’re already managing rapid growth in our business.

We then began the study the market leaders and quickly focused on [x+1]. Why? Well, I’ll start from the top. The leaders of [x+1] bring amazingly deep expertise in digital marketing technology and measurement and have strong experience working with and understanding largest agencies and advertisers. They’re committed to their customer success and they know how to deliver it and they’ve built a great team. They have nearly 200 people and like Rocket Fuel are high tech focused.

Second, they have fantastic customers who are fans and promoters of [x+1]’s products such as Allstate, Vonage, JPMorgan Chase, Citi, Discover, Intuit, Ally Bank, Verizon, Electronic Arts and many more. They’re heavily focused on the needs of marketers and have a deep feature set and technology to match. And finally, to have an excellent enterprise oriented front office with strong sales, professional services, customer service and documentation teams. They're not just selling software to major marketers, they're partnering deeply with those clients to help them leverage big data and digital technology to transform their businesses.

In short, we think the combination of the industry’s best AI fueled DSP plus the industry’s best DMP will be a powerful driver of business growth for our clients and for ourselves. We expanded our TAM by 40% or an increase of $20.4 billion, as we had opportunity in the marketing automation and in intelligent sector to our base in advertising. This will allow us to leverage Rocket Fuel strength and offer big data software from marketers and make data available to customers the way they want it.

In short, we believe this transaction makes our company much stronger and take us into direction that our customers are asking us to go. With our growth in mobile, social and video, we have proven the flexibility of our core AI engine to improve any digital marketing channel that touches. With the addition of [x+1], we can now touch huge new areas including data management and content optimization and allow marketers to rapidly take advantage of their investments in developing data assets.

During our IPO road show, we talked about our goal of consolidating the fragmented digital marketing landscape and we believe this is the powerful indication of our ability to do just that. We have proven that AI can disrupt digital advertising and we believe this transaction is a milestone in fulfilling our brand revision around digital marketing. So we are really excited and looking forward to closing the transaction as quickly as possible. Peter will now review our financials before we take questions. Peter?

Peter Bardwick

Thanks Richard. I'll now review our second quarter results in more detail. Unless otherwise stated, all comparisons are on a year-over-year basis. I’ll also provide some financial background on the [x+1] transaction. As George mentioned, Rocket Fuel grew revenues 70% in Q2 to $92.6 million. Revenue outside of North America in the second quarter reached $14.7 million, an increase of 146%. Revenue outside of North America now accounts for 16% of our total, up from 11% in the second quarter of 2013. In the second quarter, revenue less media cost, a non-GAAP financial measure continued to increase at a faster pace than revenue, up 84% to $54.7 million. At 59%, our revenue less media cost as a percent of revenue was up from 55% in the prior year but down slightly from the 60% achieved in the previous quarter. As we have previously stated, we expect this measure to vary over time, depending on the mix of campaigns we are running any volume related discounts we might offer.

Q2 gross profit was $45.7 million, up 80%, representing a gross margin of 49.4% compared with 46.7% in Q2 2013. The 265 basis-point gross margin expansion was driven by an increase in revenue less media cost as a percentage of revenue, partially offset by increased expenses in our other cost of sales.

Total operating expenses increased to $54.4 million up from $27.9 million for the same quarter last year, primarily due to our continued investments in growth, our technology platform and the G&A requirements of being a rapidly growing public company. Breaking that down into categories, we spent $8.4 million in research and development or 9% of revenue in the second quarter, up from $3.7 million in the prior year quarter. In addition to continuing to invest in our core R&D, we expect the incremental investments in R&D in the back half of this year associated with the integration of [x+1].

We spent $33.8 million on sales and marketing in the second quarter or 36% of revenue, up from $18.4 million in prior year. General and administrative expense totaled $12.1 million or 13% of revenue, up from $5.8 million in the prior year. For the remainder of this year additional G&A expenses were primarily be oriented towards enhancing our IT infrastructure and tax compliance as well as investments related to bringing [x+1]'s employees on board.

In previous periods, we've achieved leverage in our operating expenses as a percent of revenue. In the second quarter, we saw operating expense as a percent of revenue increase and we anticipate this trend to continue in the second half of this year. This trend relates to both our lower expectations for record revenue in the second half as well as incremental expenses related to [x+1] transaction. We expect that over the long-term we will drive leverage in sales and marketing to the growth in our SaaS business as well as enhanced productivity within our sales team as our tenure increases. Additionally, we expect leverage in R&D and G&A as a function of scale. Total worldwide headcount at the end of quarter was 826.

Net loss in Q2 was $9.8 million or $0.28 per diluted share compared to a net loss of $3.8 million or $0.46 per diluted share for the same period last year. On a non-GAAP basis, adjusted net loss for the quarter was $3.8 million or $0.11 per diluted share compared to adjusted net loss of $1.5 million or $0.07 per diluted share in the second quarter of 2013. On a non-GAAP basis, our adjusted EBITDA for the quarter was $0.4 million negative compared to a positive adjusted EBITDA of $0.3 million in Q2, 2013.

Capital expenditures in property equipment and software were $23 million in the second quarter which were primarily related to leasehold improvements. While this is a significant number, note that we have approximately $11 million in reimbursable expenses related to leasehold improvements that we expect to receive during the second half of 2014.

We’ve originally guided $55 million in capital expenditures during 2014 we’re now expecting a net cash impact approximately $53 million for the year as a whole, net of $10 million lease financing activities. As of June 30, 2014, our cash and cash equivalents were $204 million. Days sales outstanding or DSOs were 91 days in Q2, DSOs are down compared to the Q1 of this year which were a 102 days and down from DSOs in Q2 of 2013 which were 99 days. Our target average DSOs have been 90 to 95 days which we’re very pleased have achieved. We ended the quarter with the 35.8 million shares outstanding.

Turning now to the financial impact and anticipated strategic benefits from the [x+1] transaction. Total consideration is approximately $230 million comprised of a $100 million in cash and approximately 5.4 million shares of common stock. We expect the transaction to close by early in the fourth quarter following the confirmation of this transaction we anticipate having approximately a $130 million in cash and unused credit lines. We believe that following the close of transaction we will remain well capitalized. The transaction will be dilutive to non-GAAP EPS and adjusted EBITDA in the near to mid-term but we believe the transaction creates a significant foundation for future top-line growth as well as opportunities to drive expansion of combined companies growth and adjusted EBITDA margins.

In terms of [x+1]’s historical financials the revenues were approximately $72 million in the 2013 which represented growth of approximately 35% year-over-year the gross margin was approximately 25% and they operated at approximately breakeven. For 2014, we anticipate that the growth on a standalone basis will be in the range of 20 to 25% and the gross margin will be similar to the 25% achieved at 2013.

We’re expecting somewhat lower growth this year as we take into account the challenge of forecast and what is a new business for us as well as any potential disruptions related to the acquisition. There business has two primary components. The first is SaaS business is being DMP slide optimization and analytics. And these relationships are based on long-term contracts. The second is the media business which includes media buying on behalf of the DMP clients and other advertisers and agencies, the latter relationships are based on the short-term contracts call them searching orders that are typical at the advertising business.

We will account for [x+1]’s business pursuant to GAAP in the same manner we account for ours. Media revenue where [x+1] bears inventory risk will be recognized on a gross basis, past licensing revenue will be recognized on a net basis. For 2014, licensing revenue will not be material to our business as a whole.

Let me turn to our guidance for Q3 and the full year. Well, second quarter revenue were in line with our expectations commitments for advertisers for future advertising campaigns were below our internal expectations. As these commitments tend to occur later in the quarter, we did not have full visibility around this until June. It was this dynamic that is causing us to revise our expectations for the second half of the year. We attribute these lower than expected commitments to the fact as George mentioned to the extent that they impact our business with large customers the impact will be magnified.

We believe that our initiatives which include our strict quality controls, working with trading desks and growing our SaaS business are appropriate steps to respond to these industry trends. On the standalone basis, we are guiding a third quarter revenue between 96 million and 100 million which represents revenue growth of 54% to 60% over Q3 2013. We are guiding for range of 385 to 405 million for the full year 2014 down the mid-point approximately 8% from our previous guidance of 420 million to 435 million and representing year-over-year growth of 64% at the mid range. This implies a slightly slower rate of growth in the fourth quarter compared to our third quarter expectations.

For Q3 we expect an adjusted EBITDA loss between 8.5 million and 7 million note that we expect these larger losses in the third quarter impart due to [IT and Fox] projects begun in the second quarter that have run into the third quarter as well as our lower revenue expectations. On a standalone basis for the full year basis we are guiding to an adjusted EBITDA loss in the range of 8 million to 5 million, these expected losses are in part due to our lower revenue expectations for the second half of the year, projects delayed from previous periods as well as increasing related to operating combined companies.

For the full year assuming that we close the transaction by early in the fourth quarter we expect [x+1] to contribute revenue of $18 million to $22 million from an adjusted EBITDA perspective we expect [x+1] to generate a loss of $4 to $2 million.

We expect our gross margin to declined with the intended acquisitions due to [x+1]’s lower margin profile and because amortization of intangibles will be reflected in our cost of goods sold, therefore on a combined basis we are guiding toward revenue of 403 million to 427 million and adjusted EBITDA loss of 12 million to 7 million for full year 2014.

We are assuming that the transactions will close by early in the fourth quarter on our third quarter call we intend to provide a fourth quarter outlook for both [x+1] and Rocket Fuel. Then we plan to report actual fourth quarter results on a consolidated basis and we’ll seize providing separate guidance for the two entities beginning in 2015.

We are very excited about [x+1] and over the course of time we expect to see significant financial upsides in this transaction. To be clear the opportunities from the transaction are not focused on cost cutting consolidation or rather an accelerating growth. We plan to do this by bringing the products to market for our global sales team while bringing our AI driven platform to their SaaS media clients.

As we grow the SaaS business overtime, we expect to see enhancements in both our gross margin and in the ratio of sales and marketing to revenues. This deal is about enhancing growth for both companies, building long-term strategic relationships with key customers and bringing together [x+1]'s terrific products with our AI driven platform.

We believe that we are taking the right steps to maintain our market leadership including the launch of Mission Control, the acquisition of [x+1] and other new product initiatives. We believe that with our technology and data we will continue to outpace the programmatic markets rate of growth.

Finally, I'd like to make some housekeeping comments about changes we're making towards definitions of certain non-GAAP measures. We're making these changes to conform the industry standards and to reflect the acquisition of [x+1]. We'll make these changes beginning with our third quarter earnings announcement.

Beginning in Q3, our adjusted EBITDA calculation will exclude acquisition related and other expenses, amortization of intangible assets, interest and other expenses primarily foreign exchange gains and losses and payroll tax related to stock based compensation expense.

We believe that these changes make this measure more meaningful since they better reflect the results of operations. Regarded adjusted net income or loss for non-GAAP EPS, we have already been excluding stock based comp from this calculation. We're also going to begin excluding amortization of intangibles and acquisition related and other expenses primarily foreign exchange gains and losses as well.

For Q3 and Q4, we will provide both our historical and new adjusted EBITDA and non-GAAP adjusted net income or loss calculation as well as provide some historical comparisons for 2013 and 2014 year-to-date.

Lastly, we are going to start calling revenue less media costs, revenue ex-TAC. Today’s guidance reflects these new definitions while historical results reflect the prior definitions. And now we’ll open the call to your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We’ll take our first question from [Steven Jew with Credit Suisse].

Unidentified Analyst

Okay, thanks. George, I am looking to reconcile the agency trading desk commentary given that you should be producing better ROI. I guess it seems like preventing additional budget deployment on Rocket Fuel would be counterproductive versus ultimately the advertising client’s goals? And then second in regards to the industry concern around [bot] traffic, because it seems like the lack of ROI from bot driven traffic should already be well reflected enterprise. So can you add some additional color on the advertising concerns here? Thanks.

George John

Sure. This is George, I’ll answer and then since Richard is here too to talk about the transaction but he also manages our sales and customer service (inaudible) if he has any other thoughts as well. Yes, on trading desk, I think your point is reasonable why if the advertisers and agencies are [taking] maximum results (inaudible). And I think there is just a lot of factors that play into this set of partners that an agency recommends as part of the portfolio for an advertiser. And as I was saying on the call, we’ve made investments in certain agencies either to power the trade industrial technology or otherwise to work with them and figure out more of a partnership approach where we can work together as preferred partners. And in those cases growth has been excellent. There is others where we have I think the agencies and trading desks, their own independent companies and they have their own objectives so this doesn’t always go to the way of superior results for the client. First of all on trading, the [bot] is actually a similar comment, namely you think if you're selling shoes or cars or whatever it is, there is a certain rate, it sort of irrelevant some performance. So I guess what's bot competition of that traffic and anyway we filter out the traffic, suspicious traffic so aggressively, the bot composition is very low.

So I think it's just maybe few things, one is from the customer perspective is I think a phenomenon in the industry, but hasn’t been well understood I think by a lot of advertisers, I think agencies have understood but maybe hadn't really [spoke] to a little bit down to advertisers yet. So it's going through I think a brief period of time here where sort of like the new things be confused about in trying to understand. But you're right ultimately that it's -- this is only a piece of a puzzle and if haven’t still able to generate better ROI. You would think you would only do that if you [Technical Difficulty]. So I think we feel very comfortable about historical approach, there about using our own technology and working with partners that we mentioned on the call and we’ll add science and forensic now as part of that. I'll see if Richard has any other towards that.

Richard Frankel

Well, the only thing I would add is that we’ve made a significant technology investment in cleaning the robots out of the platform; making sure that we don't actually buy any of that traffic. But not every company in the space has the ability to look, develop this kind of sophisticated technology. So I do think that there is some variation in the space in terms of what kind of bot traffic is getting through and that's some advertisers are seeing more through other vendors?

George John

I may mention just for color, I mentioned bots and viewability; we have one campaign where the third-party viewability partner was [signing] that Rocket Fuel ads had a huge rates of lack of viewability. And then it just it turned out that our own technology was able to model this across all browsers and the third-party could only detect viewability, anyway I think it was on Firefox and maybe IE and judged all their ads as being unviewable even though they were. So it’s -- this is one other kind of thing that requires efforts and ecosystem right now that we’re very confident about our own approach and technology but we are -- we kind of need to let the whole industry kind of incubate it and sort of metabolize it for a while.

Unidentified Analyst

Thank you.

Operator

Our next question comes from Jason Helfstein - Oppenheimer & Company.

Jason Helfstein - Oppenheimer & Company

Thanks. I wanted to talk a bit about the [x+ 1] acquisition. And when you think about the kind of the long-term impact on cost structure, specifically selling expense, just talk about how you think about that. Do you have two sales forces; is it a joint sales force; how are you thinking about it? Second, can you comment on how many customers [x+ 1] has today and if there is a numerical overlap? And then lastly, my understanding was that the bulk of [x+ 1]’s revenues is SaaS and then kind of the smaller pieces the insert orders and just reconcile that relative to the gross margin given that typically that the SaaS business should usually have a higher gross margin than the media business. Thanks.

Alex Wellins

Okay, thanks Jason. Great questions, I am glad to get a chance to address. So I think Richard will talk about how we intend to integrate sales and the current [x+1] customers and then Peter will talk a bit about the revenue mix. Sales integration is a great opportunity for us because we have quite a few direct sellers at Rocket Fuel already who are selling existing products to large enterprises. And so we are going to integrate the sales teams really rapidly and that will immediately put quite a few additional feet on the streets to start to sell [x+1]’s products as our sales team is, I would say propping it a bit to bring these products into market. Additionally, in some markets such as in Europe where [x+1] doesn't really have a foothold, we have the visibility to move their products through our team there as well.

George, do you want to cover the customer question or would you like me to?

George John

Alright. Go ahead.

Alex Wellins

So, right now [x+1] has about 40 customers, large enterprises primarily, they are at some overlap at Rocket Fuel, although they’re extremely complementary in nature.

Peter Bardwick

Hey, Jason, it's Peter. Thanks for the question. On a gross revenue basis, the media side of [x+1]'s business is larger than their DMP business. If you look at net revenues, DMP and media are about equal. And the gross margin that you see reflects in large part the fact that their media business has a significantly lower margin than ours. As I think most people know our margin, our media margin is quite high. And we believe that that’s one of the opportunities in this transaction is as we bring our AI -- our platform to their customers, enhancing their margin while providing better performance to the customers.

George John

And Jason, by the way, there's a short deck on the acquisition that you can find on our IR website. It will include a slide of customers and so forth.

Jason Helfstein - Oppenheimer & Company

And just a quick follow-up, Peter, I just want to make sure I heard it correctly. You said the higher costs in the third quarter has to do with IT and tech, is that what you said?

Peter Bardwick

No, no. The higher costs in the third quarter, let me back up. We significantly outperformed on an adjusted EBITDA basis in Q2, in part because some of our intended projects, our ongoing projects which are IT infrastructure and SOX were a little delayed. So, we'll see those expenses

move into Q3. Does that answer your question?

Jason Helfstein - Oppenheimer & Company

Yes, SOX, that’s what I misheard. Okay, thanks.

Peter Bardwick

Yes.

Operator

We’ll now take a question from Peter Stabler with Wells Fargo.

Peter Stabler - Wells Fargo

Good afternoon. Thanks for taking the question. George, wondering if you could talk a little bit about the trend of marketers taking some of this licensing in house, what are the motivating factors here? What are they seeking to gain, and does it relate to protecting their own data? And then secondly to revisit Jason’s question, could you provide us with the revenue ex-TACnumber for [x+1]? Thank you.

George John

Sure. I’ll talk about some -- the trend towards license software and see how Peter can satisfy you on the ex-TAC number. So, on licensing, I think what’s behind -- I think it’s just -- it will seem sort of real that our marketing team maybe together with our agency really wants to feel like they’re developing their own expertise around customer acquisition and other types of marketing campaigns that they’re running in digital media, and I think there is a bit of a feeling they have, but it’s not right just to kind of throw it over the wall and outsource it to us. Now that’s not the way we work. We’ve invested a lot in our analyst team that very proactively works with customers and keeps them in a loop in terms of what we’re finding in terms of patterns and how brand and direct response create and blend together to synergistically create better results for their campaign. It’s not the model that we work in, but I think still advertisers want to be closer, and so that’s really I think what we’re seeing is that giving them that software, giving them that control gives them kind of more of a ringside seat versus somewhere in the orchestra, so orchestra seating.

I think there is a few other trends behind it. You asked is it about protection of their data, and I don’t perceive that as a big one. To me, I see them just warning to try to understand the mechanics better of digital media given its increasing importance for them as a marketing channel. And then Peter on the --?

Peter Bardwick

Yes, hi Peter. I want to say thank you for participating today and following the company as well. We will not be providing revenue ex-TAC for [x+1] on a standalone basis. The information that we will be providing is available on the website, as mentioned, that being revenue gross margin, revenues last year and growth rate last year, and that's important because the businesses are so complementary. We will very quickly be bringing together and integrating, particularly the media buying through our platform, so very quickly become one company.

Peter Stabler - Wells Fargo

Thanks very much.

George John

Thank you.

Operator

From Evercore we will now take Andrew McNellis.

Andrew McNellis - Evercore

Great, thanks. Just a couple of questions if I can, will [x+1] be integrated into Mission Control or will they be marketed as two separate products, one more low touch and one more high touch. And then secondly, would you say the biggest impact [x+1] will have on Rocket Fuel will be the addition of data management capabilities or is it really about the full stack of self-serve workload tools from media buying?

George John

I will ask Richard to comment, I think the media -- also just to mention on the one hand, we're very excited about the products we are getting, but I would just continue to emphasize that it's behind the products I think the reputation that their team has built, the knowhow, and the excited customers, I mean the best part of the whole diligence was getting feedback from their customers about how their relationship has gone. So, there is a lot more to it than the product, but with that I’ll let Richard to talk about product and what our products integration and sales plan will be.

Richard Frankel–

Yes, our long-term cycle for the product plan is to really bring the platforms together. So, of course technology integration takes time, so it won’t happen immediately, but we do intend to begin work on that as quickly as possible and integrate the platform closely. So what the marketplace will see over time is the products are coming together into a single suite, that’s well unified. And as George said, while we see the DMP technology asset as really being the crucial complementary component in terms of tech, it is really – this deal is really about a whole business acquisition, it’s about team process, experienced customers, and all of that together makes this really a strategic deal for Rocket Fuel.

Andrew McNellis - Evercore

Okay thank you.

Operator

Our next question comes from Todd Van Fleet with First Analysis.

Todd Van Fleet - First Analysis

Hi guys, just thinking about the issues that are impacting the outlook in the back half of this year. I am hoping you can just kind of qualitatively stratify them for us. I mean are the most -- is the most significant issue the inventory quality or is it the relationships with the trading desk, just trying to get a better understanding as to the market dynamics and places you see them, and what’s really having the more significant impact on the outlook?

George John

Well, it’s a fair question. The relationships, if you could solve one, you’d solve – you’d wave a wand and make all agencies love us the most among all of their media partners and magically cause to appear $500 million commits and you guarantee spends with them. So, I think focusing on that and building out agency relation teams here in the U.S. to mirror what we have done in Europe is a big one. I would say the inventory quality one is -- to me that’s less of a long-term ever agreeing issue in the sense not that it won’t be something that any media buyer doesn’t need to be attentive to kind of forever more.

But I think that it's really sort of a novel issue right now in the minds of a lot of advertisers, so it's been more front of mind and a more common topic in the press and at trade shows and that kind of things, but my own feeling is that right now the top players in the industry are already addressing that well, so it is more of an issue of all of us communicating well to advertisers what are the mechanics of digital and how we're addressing that problem. I don't see that one as, what would I say, sort of the meaningful of an impact.

Todd Van Fleet - First Analysis

Yes. George, just a follow up on it then, if the agencies is I guess a more significant issue, both in the near term and the longer term, I'm just wondering how you feel about the acquisition, the [x+ 1] deal despite the fact that I think it's probably a pretty good move for you guys. I'm just wondering about how you think about that acquisition potentially exacerbating that tension or that issue that might exist with a select group of agencies? Thanks.

George John

Thanks so much for asking that question. So, it's interesting agencies are evolving a little bit the role they are playing. For example, one of [x+1]'s big automotive clients is one where the agency essentially acted almost as a systems integrator for the automotive company, so the agency actually selected [x+1], and the agency team that was buying media formerly is operating the [x+1] system along with [x+1] for the automotive company.

So, I think -- I may not have been clear before when I saying, I was saying this seems real that marketers working with their agencies should get closer and understand more, participate more in the customer acquisition process digitally. Agencies can still play there, they don't need to be excluded. So, I think a definite trend we are seeing sort of more agencies being involved versus just having the advertisers take it themselves. The agencies are still involved in that selection, and [x+1] has been succeeding in that regime.

Todd Van Fleet - First Analysis

Thanks.

Operator

And we’ll now take Needham & Company, Kerry Rice.

Kerry Rice - Needham & Company

Thanks a lot. Just maybe a clarification, I had to jump on the call late, so I apologize if you already answered this. But as it relates to the agency trading desk and kind of the lower guidance, am I to understand that clients that advertisers that went through the agency trading desks, are they purchasing less media through Rocket Fuel than they were or was it that your expectation for the second half of the year included some additional agency trading desk partners, and so that didn’t -- maybe those partnerships didn’t materialize, so that spend that you expected to occur is not going to occur, can you help clarify that?

George John

Yes, thanks for asking. So, it’s not as we expected a partnership with one of the big five and darn, it didn’t happen. It’s really more just really more of kind of a mathematical factor that’s adding a little bit of difficulty to sales for us that we haven’t invested earlier in agency relations and relationships with the trading desk. So, in the end, you end up kind of pushing against the agency and some of their interests versus you’re having more of a win-win architected as we do with, I guess the ones we mentioned on the call in Europe. So it’s more of a percent extra difficultly that we’ve created for ourselves by not investing in that sooner versus any sort of monolithic deal that we failed to get.

Kerry Rice - Needham & Company

And to that end, I guess if you and you’d mentioned obviously, we know that you have a direct kind of platform at CCI in Japan. Your relationship there, is that if you maybe had a platform here domestically, would that have maybe made this -- would that have addressed this issue that's kind of cropped up, do you think, or that really didn't take part? And then again, sorry, what was the update that you gave around rolling out your platform here domestically?

George John

So the question, if I understand it, so if we had adopted for the CCI approach here sooner in the U.S. with that success, sort of -- I think our model wasn’t that we needed to power trade invest here to achieve our numbers, just that we expect a certain degree of win rates from sales and certain degrees of budget that we win and then budgets that we grow. In fact, it is more like we had a customer at 300,000, we would have thought they would have gone to 500,000 but instead they went to 480,000 or something like that because a little bit of extra budget was being taken from other partners or the trading desk. And again, I think we’re just saying that in hindsight, if we had developed preferred relationships with the agencies, they would have been instead of going 300,000 to 500,000, it would have been 300,000 to 600,000 something like that.

So does that make sense?

Kerry Rice - Needham & Company

Yes, that makes sense. And then maybe update on the rollout of the licensing or the platform, your self-service platform in the United States?

George John

Right, so that’s been well received. I think we have announced one customer publicly so far, and we haven’t announced any others, so stay tuned. But I would say that it’s been – it is very positive experimental results to see the customers that have been working with us in this managed service mode are very excited to continue working with us in the software mode with essentially economics that are about the same for us.

And I guess the other positive -- I’ll mention one more thing, the other positive outcome of that experiment is that, we have our existing sales team selling a software package now to an agency which is not really normal for us, normally back and forth between a sales reps and products is can we run this video campaign, what are the avails if we wanted to target women in northeastern New York state or something, and now with (inaudible) back from the – sales team saying, okay they have questions about these 17-features and details, and here is what I understand currently, and here is what we need to know. I think improving our existing sales team is actually quite capable of selling more sort of the feature-based versus media based was interesting to us and that made us more excited about [x+1] and synergies we will find and pushing their software products to our existing sales force.

Kerry Rice - Needham & Company

Okay. And then two housekeeping, Peter, did you mentioned how many customers were on the CCI platform?

Peter Bardwick

Let me give you that information, total customers were 1,444, excluding CCI 1,304, which gives you 140 for CCI.

Kerry Rice - Needham & Company

Okay, and then did you mentioned any revenue retention rate and if not…?

Peter Bardwick

Yes, tailing 12-month revenue retention rate of 149%.

Kerry Rice - Needham & Company

Great, thank you so much.

Peter Bardwick

Thank you Kerry.

Operator

And we will now take Goldman Sachs, Debra Schwartz.

Debra Schwartz – Goldman Sachs

Great thanks. Two questions if I may, so first can you talk about the mix of your business that’s coming from always-on type of business, and how you would expect that to change with the roll out of Mission Control? And then second, just back on hiring, with the acquisition and rollout of Mission Control, how should we sort of think about net hiring from here?

George John

So, first question is how do things change with Mission Control, and I think what we have seen so far is that it’s the customer instead of calling the sales rep on the phone and saying I need to run $100,000 campaign, oops, no now it’s $115,000, that is doing that through the software, but their experience is very similar in terms of you are having a budget at your campaign based on your goal, and they are just typing that in. The economics that kind of, the results they are seeing and the economics we're seeing are actually not that different from the existing media business. Does that make sense or answer your question?

Debra Schwartz – Goldman Sachs

Yes.

George John

And then second question, Peter can address.

Peter Bardwick

Yes, obviously like any management team, specialty management team is very focused on the bottom line. We adjust our operating expenses based on how revenues are coming in. Revenues, as we've talked about today, we're anticipating being a little bit wider than we had anticipated and talked last quarter. So we will slowdown in hiring a tad, although we are still very much in growth mode guiding towards growth at greater than 60% this year.

And assuming the transaction closes, we have a significant number of great new employees coming with [x+1].

Debra Schwartz – Goldman Sachs

Great. Thank you.

Operator

And at this time, we have no further questions. So, I'd like to turn the conference back over to management for any additional or closing remarks.

George John

No, we'll keep it short. Thanks everyone for great questions today, that really helped us kind of round out the story I think. And we've got a lot to do, but we are very excited about the acquisition of [x+1], it's a great team, great people, customers are very excited about them, and very excited about our initiatives in the second half here. So, look forward to giving you an update again next time.

Operator

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation.

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