Rocket Fuel's (FUEL) CEO Randy Wootton on Q2 2016 Results - Earnings Call Transcript

| About: Rocket Fuel (FUEL)

Rocket Fuel Inc. (NASDAQ:FUEL)

Q2 2016 Results Earnings Conference Call

August 2, 2016, 5 PM ET

Executives

Jane Underwood - Investor Relations

Randy Wootton - Chief Executive Officer and Director

Rex Jackson - Chief Financial Officer

Analysts

Gene Munster - Piper Jaffray

Peter Stabler - Wells Fargo

Murali Sankar - Boenning & Scattergood

Operator

Good day and welcome to the Rocket Fuel's Second Quarter 2016 Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jane Underwood. Please go ahead.

Jane Underwood

Good afternoon and thank you for joining us to discuss Rocket Fuel's second quarter 2016 financial results. With me on today’s call are Randy Wootton, our Chief Executive Officer; and Rex Jackson, our Chief Financial Officer.

I’d like to remind everyone our remarks today will contain forward-looking statements, including without limitation, statements regarding guidance, our three strategic imperatives, our customer and partnership strategies, changes in our revenue and margin mix and our agency and holding company relationships. These statements are subject to risks and uncertainties that may cause actual results to differ materially from anticipated results.

For more information, please refer to the risk factors discussed in today's earnings release and in our Form 10-Q filed with the SEC on March 14, 2016. Any forward-looking statements we make on this call are based on assumptions as of today. We undertake no obligation to update them.

During this call, we present GAAP and non-GAAP financial measures. Reconciliation of GAAP to non-GAAP measures are included in today's earnings release. This release and accompanying slide presentation are available through our Investor Relations website at investor.rocketfuel.com. A replay of this call will be available later today on our IR website.

With that, I’d like to turn the call over to Randy.

Randy Wootton

Thank you, Jane. Good afternoon everyone. I'm very proud of our accomplishments this quarter. We delivered solid results, meeting or exceeding our guidance as we continue to focus on our three strategic imperatives: one, becoming a trusted platform partner; two, strengthening our brand advertising products and services; and three, extending our direct response advertising leadership across all media channels. At the same time, we continue to apply executional rigor across the company.

From a top line perspective, we built on key areas of success from Q1, such as continued growth in platform solutions, which include our self-serve or SaaS demand side platform and our SaaS data management platform and associated services, with gross revenue up 180% year over year; progress with our brand advertising solutions with revenue up 16% year over year; and continued momentum in our international business with revenue up 31% year over year.

Non-GAAP Q2 net revenue was $66 million, above our guidance midpoint and up 6% sequentially, but down 7% year over year. As we have previously discussed, we expected Q2 net revenue to be down year over year as we continue working to improve our relationships with key holding companies in North America and due to the time it takes to fully activate our platform customers.

Moreover, we are continuing our transformation from a predominantly media services business where we’d execute insertion orders on behalf of agencies and for direct clients to a software plus services SaaS company powered by our moment scoring technology. As such, we expect our media margin to decrease over time as we move from relying on short term IOs for longer term customer commitments to platform solutions.

We also continued to optimize our operations and delivered adjusted EBITDA of $4.2 million, well above our guidance and a strong improvement sequentially and year on year. I'm also particularly pleased to report we were free cash flow positive in Q2, a major step towards meeting our stated goal of being free cash flow positive for 2016. Every Rocket Fuel employee knows becoming free cash flow positive is our number one goal for this year.

I’d now like to turn the call over to Rex for more color on our financial results.

Rex Jackson

Thank you, Randy. Good afternoon everyone. As Randy mentioned, we executed well in Q2. In the quarter, GAAP gross revenue was $117 million, up 12% sequentially, but down 3% year on year, mainly due to continuing North American holding company headwinds.

Non-GAAP net revenue was $66 million, above our guidance midpoint and up 6% sequentially on higher gross revenue, but down 7% year over year for the reasons Randy mentioned.

Non-GAAP operating expenses for Q2 were $61.8 million, down 5% sequentially and down 11% year on year. Sequential savings came mainly from improved management of headcount, real estate and travel and entertainment. With improved executional rigor, we delivered gross revenue comparable to last year with 11% lower headcount and increased trailing 12-month net revenue per employee 12% to $302,000 compared to $270,000 in Q2 last year.

Adjusted EBITDA grew sequentially to $4.2 million, significantly up from negative $2.6 million in Q1 due to lower operating expenses and higher net revenue. Adjusted EBITDA was also up significantly from $1.4 million in Q2 of last year, despite lower year over year net revenue.

From a geographic perspective, Q2 North American gross revenue was $92.8 million, up 9% sequentially, but down 9% year over year, again due to the factors Randy mentioned. International gross revenue at $24.1 million and now 21% of our business in Q2 was a particular highlight for us as our international team continues to execute well. International was up 22% sequentially and as Randy mentioned up 31% from last year. Notably, we're seeing great traction from holding companies and agencies in EMEA.

From a business model perspective, media services was 82% of our gross revenue; platform solutions represented 18%, a two point shift towards platform solutions sequentially and a 12 point shift year on year as we continued to pivot the company from media services to platform solutions sales.

From a marketer’s perspective, brand, principally our video products, was 7% of gross revenue, down 6% sequentially, but up 16% year on year. We see much opportunity ahead and brand remains an area for continued investment. Direct response, primarily our other display products, was 93% of gross revenue.

From a customer segment perspective, in Q2, direct sales accounted for 29% of gross revenue and channel, principally agencies, was 71%, unchanged from Q1. In Q2 last year, direct sales accounted for 24% and channel 76% of gross revenues, respectively.

Earlier this year, we restructured our sales team to focus on landing new high value prospects and expanding business with our largest existing customers. We continue to believe an important measure of our success will be higher revenue concentration with our top 50 and 250 customers.

In Q2, our top 50 customers represented 53% of our gross revenue versus 47% in last year's Q2, up 6 percentage points. Our top 250 customers represented 82% of our gross revenue versus 78% in Q2 last year, up 4 percentage points.

Turning to cash flow, as Randy mentioned, Rocket Fuel generated approximately $900,000 of free cash flow in the second quarter, due primarily to substantially improved adjusted EBITDA. DSO was 89 days, six days better sequentially and in line with last year and our expectations. We ended the quarter with $66.7 million in cash, down slightly from $67.4 million last quarter, due to the ongoing pay downs of capital lease obligations.

I'd now like to provide Q3 guidance. As Randy will be discussing further, we are continuing to drive activating platform customers by helping them realize the full benefits of our robust moment scoring solutions. Accordingly, though we expect slightly higher Q3 gross revenue versus last year, we expect net revenue to be $63 million to $66 million, down from last year's third quarter as our mix continues to shift from higher margin media services to increasing levels of lower margin platform services which we believe can grow faster over time, involve deeper and longer relationships with our customers and can produce more margin dollars at scale due to proportionately lower sales, service and support costs.

In Q3, we'll continue to manage our expenses carefully and expect our OpEx to decline further sequentially, providing improved operating leverage. Therefore, in Q3, and on slightly lower net revenue versus Q2, we expect adjusted EBITDA to be higher at $4 million to $7 million. Randy?

Randy Wootton

Thanks, Rex. Today, at Rocket Fuel, we are creating a culture that delivers on our strategic and financial commitment and to deliver some real value to our agency partners and their clients. Central to that value is our moment scoring technology that enables marketers to learn what is and is not really working with their digital campaigns.

I’d now like to take a few minutes to discuss our three strategic imperatives and several examples of how does it deliver real value for our customers. Our first strategic imperative is becoming a trusted platform partner and we're seeing some great momentum here with platform revenue up 180% year on year from $7 million to $21 million.

As Rex mentioned, we continue to experience strong adoption of our platform solutions, driven in part by new customer acquisitions as the number of new platform deals in Q2 increased 170% year over year.

We continue to make progress with several holding companies’ technology divisions. Over the past year, we had moved through several stages, deepening our level of engagement at each stage from outlining proof of concept, to engaging on trials, to winning in head to head tests and to working through robust evaluation and certification.

While this is a lengthy process, we are making progress as evidenced by modest sequential revenue growth from these important partners. More importantly, we’re not counting on material uptick in holding company revenue to achieve our free cash flow positive goal for this year.

The other key driver is increasing spending from our existing platform accounts. Year over year, total gross revenue from DSP customers increased by approximately 32%. Additionally, DSP accounts active as of January 1, 2016 grew 7% from Q1 to Q2.

Customers who use our DSP capabilities are increasingly taking advantage of our DMP platform [to tap into] our full offerings to get better return on their media investments. For example, Esurance began working with Rocket Fuel at the beginning of 2016 as a DSP customer and then expanded their relationships by adopting our DMP platform services. We aim for many customers to take this approach due to our impressive media performance, stellar customer support and deep understanding of customer’s business and media objectives.

Another great Q2 proof point comes from one of the world’s top gaming company which selected our DMP solution due to our turnkey offering and integration that delivers deeper customer insights and cross-channel analytics. We’re able to provide our DMP functionalities to the client bundle with their overall media spend which enabled the marketing decision maker to expedite internal approvals and enabled a quick and seamless integration. This is yet another advantage of our integrated approach to DSP and DMP.

Our second strategic imperative is strengthening our brand advertising products and services. A key part of this strategy is developing proprietary models that validate Rocket Fuel’s high quality video campaign performance with select measurement partners such as Moat, Integral Ad Science and Nielsen.

A great example is American Pet Nutrition and their agency [indiscernible] selected Rocket Fuel to raise brand awareness for new products. Rocket Fuel was able to beat the client’s goal by 50% and outperformed most video viewability benchmark by 2.7X. [Elizabeth Meehan] the agency’s integrated media director said we’re beyond confident with the capabilities Rocket Fuel provides in delivering high quality programmatic video and we’ll consider them first for future opportunities in this category.

During the second quarter, we improved our capabilities for brand advertisers on social media by significantly expanding our integration with Facebook video, having access to advertising opportunities with Facebook’s billions of videos each day. We believe social media advertising, in particular, social mobile and social video, remains an exciting growth area for us.

We continue to invest in both cross device and video technologies, partnerships and supply sources to further our objective to offer the broadest available, highest quality and targeted moments of influence across the entire PC and mobile web. As part of that ongoing innovation, we’ve partnered with IAS to build a first-in-market offering that allows marketers access to their IAS enhanced video quality ABI, giving agencies and marketers the confidence that their brand content is running on high-quality, highly-viewable places.

Our third strategic imperative is extending our direct response leadership. We expect direct response to remain the core of our business and we continue to see strong growth potential. As Rex mentioned, earlier this year, we reorganized our sales team to target new, high value enterprise prospects and expand our relationships with our largest existing customers.

I’m very pleased with our execution. As in Q1 we saw year over year spending increases from both our top 50 and top 250 customers. We attribute these increases to one simple thing, focus. By putting these customers and prospects at the center of our sales and services organization, we’re able to deepen these partnerships.

We have continued to invest in our sales force to help them become true enterprise sellers, backed by the focused go to market and the tools and training necessary to help our customers solve their toughest marketing challenge. Our service teams are now aligned closer to the customer, making it easier to address critical needs in rapid fashion.

Finally, these customers’ technology priorities are shaping our product wins. As the industry evolves and programmatic technology becomes a more important place, we’re committed to providing what we call actionable transparency, which we define as visibility into a process that actually helps marketers make better, smarter decisions.

To that end, we launched our Marketing that Learns graph, a powerful yet simple data visualization tool that shows how our marketing screen technology uses artificial intelligence to learn what works best at an individual campaign level and then optimizes when and where our DSP buys new moments over the life of a customer's campaign.

We included a sample Marketing that Learns graph on slide 19 in the supplementary investor deck. When you look at that graph, the blue line represents the number of significant attributes of the model, the black line shows the cost per acquisition or CPA, along the same time axis at the bottom. You can also see that cumulative number of conversions over the course of the illustrated campaign.

As you can see, our moment scoring technology is designed to learn over time which attributes work best for a specific campaign and that, as it does, the CPA should improve significantly. This graph enables our teams and clients to see learning as it happens and at the same time see the performance changes that come with that learning. Best of all, once the learning has occurred, our platform insights records enables client to see what moment scoring has learned about what is working in this campaign.

This real-time learning can drive down the cost per acquisition with these campaigns significantly, which in turn can improve the effective ROI a marketer can achieve by using Rocket Fuel solutions.

In Q2, we introduced the Marketing that Learn graph to our field sales team along with several key advertisers and the response has been overwhelmingly positive. We are now rolling out the Marketing that Learns graph for all of our customers to enable more real time visibility of how the models are working, as part of our commitment to provide more actionable transparency.

As we advance our actionable transparency through tools like this graph, our hope is to shatter the black box perception that cloud much of the programmatic space. As we parse data at a velocity [indiscernible] and translated into a very human understanding.

We also just announced our Dynamic Creative Optimization, DCO capability primarily targeted at the retail and travel verticals, incorporating significant upgrades to our moment scoring technology, our enhanced PCO offering, the design to enable advertisers to optimize the moment of engagement by dynamically presenting the right products for each consumer in that moment. We have seen strong early reception with top e-commerce customers, such as ShopAtHome.com, retail customers such as Under Armour and agency partners like [Who We Are].

As part of our previously announced Rocket Fuel insight strategy, we will work with system integrators and OEMs such as Salesforce, Mcadoo and others, we've added an exclusive partnership with two separate divisions of a multinational financial services institution. These divisions will leverage Rocket Fuel’s moment scoring technology to power new and existing customer acquisition efforts in the United States. This deal encompasses all applicable channels and will drive end to end strategy allowing the advertiser to use a data driven approach to influence and engage audiences.

Finally, we continue to build out our management team. I’m excited to announce Rick Song as our new Chief Revenue Officer. Rick is an accomplished media sales executive with over 20 years of experience in digital sales and management. I’ve known Rick for over 10 years and watched him grow revenue at leading technology and digital media companies like Microsoft, Yahoo!, iHeartMedia and ZEFR.

Additionally, Rick’s deep expertise in background and brand advertising will be invaluable to us as we intend to grow that area of our business. Rick completes our go to market team reboot. As a reminder, we hired Eric Duerr as CMO and Ben Saitz as Chief Customer Officer in Q1 and then Dave Gosen as Managing Director of International in Q2.

Rick’s long term relationship with agency heads and excessive network in New York media should not only accelerate our ability to drive revenue growth in North America, but will also be important to generating demand at the operating agency level within the holding companies once we sign the contracts.

In closing, I remain very excited about the opportunities we see before us in the second half of the year and beyond and I'm very pleased with the progress we’ve made in the first half of 2016 against our strategic imperatives, becoming a trusted platform partner, strengthening our brand advertising products and services and extending our direct response advertising leadership across all media channels.

Looking forward, we believe we now have the right go-to-market leadership team in place to land our world class moment scoring solutions in the market, enable us to gain share and accelerate our top line revenue growth.

Thank you. Operator, we will now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Stephen Ju with Credit Suisse.

Unidentified Analyst

This is [indiscernible] on for Steven. Just a couple of questions, if I may. Firstly, you are no longer disclosing the customer account and we understand that it may be somewhat irrelevant now, but I'm just wondering if you can give us some color on how your conversations are going with the advertisers who you're looking to have back to use Rocket Fuel? And is there any perspective on how long the sales cycles are now currently versus what you may have seen before?

Randy Wootton

So with customer accounts, yes, we have stopped sharing the total number of customers. As we mentioned, we're moving to an enterprise sales motion and that’s the top 50 and top 250, where we have seen an increase quarter over quarter of 14% and our top 50 advertisers revenue and 10% on our top 250, and additionally increased spend year over year with both of those segments.

The conversations are different depending on if we're trying to sell platform solutions or media. The primary business we have is media services and we continue those conversations, talking about performance, direct response and are locked in with the media planning cycle of the largest brands. Currently I think we have 75 of the top advertising [aged 100] that are advertising with us. That's a shorter sales cycle and that's the one that we are – drives most of our business in our media solutions.

On the platform business, that’s a longer sales cycle, as we mentioned in the prepared remarks, we've had an increase of 170% year over year in number of deals. So last year when I started we built out an enterprise sales team, a challenger sales methodology and started to line up our marketing behind it and we started to see that pay off, I think.

The other thing you’re seeing is from our DSP customers, in particular, continued growth where we've had 32% year over year growth on the customers that were there last year. So to net it out, there's two different sales motions; we continue to execute on the media services business and the platform solutions business. I would say that we continue to deliver performance on both and are improving our sales execution on the platform solutions business.

Unidentified Analyst

And the second one, if I may, it seems like your R&D budget is down significantly both sequentially and year over year even as we exclude the SPC, we're used to thinking about the company historically as an engineering driven organization. So can you help us reconcile the new run rate and where do you hope to differentiate yourself versus competition going forward?

Randy Wootton

Yes, there’s two different questions, one, I hand the first one off to Rex with regards to the numbers in terms of our spending and then I'll pick up on the strategy. But to be clear to everybody on the phone, we are a tech company. If anything, we're becoming more of a software company in how we build capabilities, how we go to market and how we think about sales. And so attracting and retaining and keeping our engineers motivated to develop new capabilities like the DCO that we announced today, the Marketing that Learns graph, solving some of the marketers’ biggest problem are what we're focused on as a company, as a core tech company. But Rex, can you talk a little bit about the numbers?

Rex Jackson

I can. So your observation is correct in terms of just the pure numbers, yes, the R&D line is down since last year. However, I’d have to agree with Randy, this is certainly the most engineering-focused company I've ever worked for. We’ve done a lot of things in the company to reduce our operating expenses and to get some additional operating leverage out of the company; did that last year and more recently we did some trimming in Q2, but in none of those circumstances have we focused on engineering. So we've made the changes that we need to need to do, our target model is unchanged and so I don't think there's any implication there other than we're increasing our operating leverage.

Randy Wootton

Two other thoughts on that, Rex. One is if you look at how much have we invested in technology and R&D over the last three years is $270 million. We still have 12 data center, 6,000 servers, 72,000 CPUs and are processing over 120 billion bid transactions a day. So the core asset of the moment scoring technology is well in place and we're doing a lot of innovation.

The other one is just coming on as a CRO over a year ago, one of the areas that I was really focusing on was streamlining our sales, service and marketing costs. And if you look at that, you'll see of those have gone down sequentially and year over year as we've lined up our sales investments to go after enterprise accounts and activating on the agency side and expect those to continue to go down as we land our platform solutions where over time it will be a lower cost of sales and service. So I think it's trying to right size our engineering investment, ensure our sales teams are appropriately supported to continue driving deals.

Operator

We'll take our next question from Gene Munster with Piper Jaffray.

Gene Munster

Curious on the native front, are you experiencing anything un-native that might become part of the offering in the future? And then second separately, how unique is your moment scoring system versus anything else out in the market today?

Randy Wootton

So with native, I'd put that under the category of brand and it's one of the areas we've talked about making investments over the past here both in product capability and sales capability and you'll see that our brand revenue has really remained broadly flat as a percent of total revenue. We've had some good development on video and continue to be recognized for a leader in pTV, native is one of the areas that we're definitely looking at.

Moment scoring will help in terms of determining what is the set of advertising that people will be seeing and I think if you look at the new dynamic creative optimization tool also powered by our moment scoring technology, we'll see how that’s playing out. So when you compare it to some of the other competitors in this space who have dynamic creative, they're unable to match the speed, performance and capability, the one specific example on dynamic creative for example is many competitors are only able to offer three to six ads. With our smart graph we're able to offer 36, which allows us to provide ads for virtually all the opportunities that you could be looking to do on that component.

And as we go into native, I think that that is another area of investment in brand that we're going to explore. There are other people who are looking at big data et cetera and I think this is where – going back to the other comment in terms of looking at what their technology investment is, one of our big differentiated assets is around doing big data at scale.

We have a six-year head start in terms of the investment we've made, the models they're learning, we can capture something like 72 petabytes of data. And so this is really about a difference in kind versus a difference in degree in the marketing. And so I think if you look at other tech companies, scratch one level deeper to find what is the capability of the assets and the investment they've made to power real time moment scoring and activation.

Gene Munster

I have just a follow up, high level question in terms of the visibility in the business and as you look back two years ago and compare that to your visibility today or a year ago compared to what your visibility is today and then how you think that that is going to progress in the future, in other words is the business more visible today and you can see you get more visible a year from now or is it kind of equal or just getting to the question then I think a core investor concern which is these stories can look good one quarter and then the next quarter things fall other place.

Randy Wootton

And I think what you mean specifically around visibility in the business is the OpEx of our different businesses, is that correct?

Gene Munster

Exactly, yes.

Randy Wootton

And so one of things I would say I was very excited have Rex come on board last quarter and when we reset how we were looking at our business. We did it on multiple fronts to make it easier for you all to see what was happening. First was we split the business into media services and platform solutions, media services being primarily IO-generated business from agency and direct response, platform solutions being software business. So we are trying to help find that more directly.

Number two was around channel and direct, so channels principally being agencies, but encompassing some of the exciting stuff we're doing with partners like Merkle et cetera, so you all can get a view into how are we using our channel versus our direct sales force. And then third was around brand and direct response. We’ve redefined brand and direct response, brand principally being video though there are certainly other types of display products that are in brand and direct response.

And so we’ve reset that last quarter and I’d hope as you looked at today’s deck that we provided as part of the investor deck and the conversations that Rex walked through, we went through geographic, business model, marketing objective, channel and we'll continue to do that on the go forward.

With regard to consistency and reliability, one of the things that I've really focused on when I first started as a sales guy was starting to forecast at the AE level, at the opportunity level to drive really consistent forecasts and expectations and I hope you would see that over the last couple of quarters where we've landed against our guidance in line with consensus and delivering some good news like the adjusted EBITDA growth.

I know Rick; Rick and I've known each other for 10 years and one of our new CRO in North America and that guy is a monster in terms of forecast discipline and bringing visibility. He is already talking to me about let's not just look at next quarter, let's look at two quarters. So I think as you start to continue to work with us at Rocket Fuel, you'll see even more visibility and transparency in the long term forecasting, both with Rick in the States and Dave Gosen in international.

Operator

We'll take our next question from Kerry Rice with Needham & Company.

Unidentified Analyst

This is [indiscernible] for Kerry. So a couple of questions. First is, could you give us more color on the conversation you are having with the channel partners and do you still expect reacceleration of revenue from the channel partners and what are some of the hurdles in signing long term deals with them? And then second is, can you give us some more color on how the DMP – utilization rate of DMP and what percentage of the DSP customers are kind of using the bundle with the DMP services?

Randy Wootton

Wow, that wasn’t just two questions, that was like six questions. So let me walk through there. The visibility at channel partners which is more than just agencies, what is going to cost – or what's it going to take to accelerate the revenue with channel partners, I'll talk about more than just agency hurdles, DMP utilization, DSP customers using full sack. Okay.

So on channel partners, when we think about channel, it’s [indiscernible] agencies and I'm sure we'll talk a little bit about holdcos in a second. I'd like to talk a little bit more about our Rocket Fuel insight strategy which we alluded to in the prepared remarks. One of things we fundamentally believe is that marketers are going to start with one of the four or five marketing platforms in the landscape, IBM, Oracle, Salesforce, Adobe, even SAP is in there now.

And our opportunity in that ecosystem, much like a classic software play is to be an application that helps those marketing platforms have better intelligence and form our moment scoring. We announced a partnership with Salesforce earlier in the year and we've continued making traction there. We alluded to one of the partnerships that we have within SI, so system integrators, in a classic software sales model you would have system integrators helping to land the sales of your software. And we've noted about two divisions at one large financial services that went through the classic system integrators sales motion.

I do think to your point that that will be a way that we will accelerate revenue of the platform over time as we get integrated into a tech stack that then in SI build services on top and primarily these would be about insights. We see this playing out with Merkle for example, which has been a long term marketing services provider; they’ve sold DMPs, they add insights on top.

So the agencies are improving and we'll talk a little about that in a second, but I just want to want to cover off a couple things on the hurdles. As you all know who cover software getting a SI to build a practice on your technology is really hard, you got to get some wins.

They're going to build on the primary stack like a Salesforce stack or an Adobe stack and you have to integrate into that stack and show how they can make some more money and that's exactly what we're doing for the OEMs and the SCIs is trying to find proof points where we can show how our technology leads to their money. When we do that, then it's an activation, a channel activation play, partner management play. Again, I've seen that at Microsoft; I've seen that at Salesforce. Dave Gosen has run that play at Microsoft. So we're ready to go as we start to land those deals.

On the DMP utilization question, where most DSP clients are DSP-only today, but DMP functionality will grow over time. We have seen some DSPs for example and you’re starting to see this in the evolution of the DSP market some other DSPs are starting to layer in some BMP capability, it's almost like a DSP 2.0 type model. And we are as we mentioned able to sell that part of the media bundle which has been effective and we’re starting get some traction as you're seeing in our deal flow.

DMP-only is an interesting market and can take follow up question on that later. The DSP, number of DSP customers using full stack, we are not public about that, but a significant percentage of our DSPs are tapping some of the DMP capability around audience insight to drive more intelligent media planning and deeper insights into conversions than what actually happened.

Operator

We'll take our next question from Brett Huff with Stephens.

Unidentified Analyst

This is [Boyce] on for Brett. I had a couple of questions. When you're gaining the new partnerships with the ad agencies, is there any update on how you think pricing will work, how much do you think you’ll have to give up in forming those deals?

Randy Wootton

That's one of the things that we've indicated in terms of the platform business in general which is inclusive of holding company relationship, it's a lower margin business than the media business. What we do is tiered based pricing, so looking for targets with each of the holding companies and aligning the pricing that makes sense, market competitive, but certainly not trying to break to the bottom.

And I think if you look at some of our competitors who established unsustainable margins in the marketplace, the holding companies that we're working with, we've reduced down to a couple and the starting assumption is, look, we want to make them money, but we need to be able to make money to make them money. And so we have to have deals where we are able to make money.

We tend to be carrying a premium because we have an invested technology, $270 million just over the last three years and that is value; it's driving a Ferrari versus a Yugo. And I think that the thing that becomes interesting is it's not just the margin you're signing up for though as far as the contract, it's the overall cost of sales conserved over time, the assumption being as we activate a holding company partner and those teams, those media planners and traders and buyers start to learn our technology.

We do a channel support model not an active fully deployed AE model having to go in every day to talk about the new media plan. So it's a different business model, that’s in part why we separated the business into media services and platform solutions as we expect there to be different margins et cetera that will break out over time.

Unidentified Analyst

And then secondly, could you just go over why you think the margins will be down flat to down 1% in 3Q? And then on top of that, where are you focusing most on decreasing expenses going forward?

Randy Wootton

Rex, why don’t you take those two.

Rex Jackson

Happy to. So the reason for the guide on the margin for Q3 is that the margin in Q1 was a little a little bit down, down a little bit more than we expected. Relatively speaking, as you know, we've guided to a point or two per quarter. So we think that Q1 was a little bit low – Q2 was a little bit low, so Q3 won't be as low, so flat to 1% down seems to be the right number.

In terms of places where we're focused on reducing expenses, we've done the software things over the last – this past month, month and a half, obviously we took some action last year. Looking forward, there are a number of places where we have opportunity not the least of which is in real estate. We have a bunch of real estate opportunities where we think we can take cost out of the structure.

I have been asked whether there are additional headcount reductions anticipated this year and the answer to that is no. So we've done whatever we're going to do in that regard. The rest of it just normal operating efficiency moves that you could estimate, be it automation, just doing things better with your people, you can see that we've got operating leverage already relative to what we accomplished this year in revenue with the number of people and assets that we have versus last year. We've shown the ability to get leverage and I would expect that to continue.

Operator

We’ll take our next question from Peter Stabler with Wells Fargo Securities.

Peter Stabler

A couple of questions. Randy, first of all, could you comment on your – offer us your thoughts on the A&A report. What started off as a project looking into the rebates seem to have pivoted fairly hard mainstream to taking on the transparency issue, you mentioned transparency in context of the media that learned, Advertising that Learns initiative, so just wondering if you could tell us how Rocket Fuel looks at the transparency issue and how your products could evolve going forward?

Randy Wootton

That A&A report was like a nuclear bomb, wasn’t it? It really got everyone all excited. We have been focused on transparency really in the last year and a half I've been here. We think of it along four dimensions, around trust and transparency, it’s around model transparency, audience transparency, performance transparency and price.

And the Marketing that Learns graph was a very specific and deliberate investment to bring more transparency, what we call actionable transparency, to the models because one of the things we've heard in the past is you guys are black box, we don't know how the models work and so now our customers and service teams and agencies can look literally at the model and see what's happening.

You can dig down to multiple levels of detail to drive insight. That's one example. We also do like site lists. We do transparent deals and the performance obviously on the ROI. So this will be a theme around transparency and trust, both the transparency and control, giving people the opportunity to take action on that transparency within the system that we're going to continue to write about, talk about, in fact, our CTO just wrote about viewability, in thinking about viewability you can find that on LinkedIn.

That's another area that we think bringing more transparency to especially as we move into brand, what are some of the exciting investments we can make there to help bring it. But I think transparency is a theme, it’s here to stay and I think there is an opportunity for technology partners to work together to create standards and to come out with capabilities to bring more transparency along the way they do the modeling, the way they represent aggregate audience, the way the performance is defined and the price that people are paying.

Peter Stabler

For these DR customers, is that includes transparency into the media properties that are included?

Randy Wootton

Yes.

Peter Stabler

Follow up question on your Facebook comments, wondering if you could add a little more color, you talked about your expanded relationship on the video side, what exactly does that mean for your customer base?

Randy Wootton

It's really about access to video and so I think one of the areas that we continue to try to get – Facebook had extraordinary earnings. Everything's moving to video. I mean one of those macro trends that you can talk about where you’ll looking at display ad in 20 years, I'm not sure, I think everything is sound and motion.

We're very excited about that and Facebook has brought a lot of video down and I think that our access to the Facebook inventory allows us to allow our customers to buy video at scale. And so one of things we talk about a quarter ago or two quarters ago if you remember was doubling down on brand, bringing video up to snuff which we now have done, extending the access to video inventory more broadly across the internet and then I think what you would see from us over time is the brand metrics, the reporting that enables us to provide even more transparency on viewability et cetera.

So I think that the moment scoring really helps evaluate where the different audiences are across the different moments of Facebook being just one moment and then optimizing the delivery of content, in this case video, for consumption and then reporting on the back end in optimizing over time. So it’s in line with what our goals are, especially as we continue to move into brand.

And in fact if you don't know, Rick Song came from – our new CRO came from ZEFR, which is a video ID company and have spent the last couple of years in particular looking at social video and how to make sense of that and I think he is going to bring a lot of capability and hard earned experience to our brand teams to help land more of those brand budgets.

Operator

We'll take our next question from Murali Sankar with Boenning.

Murali Sankar

I was wondering whether you could talk a little about political, the stock price reacted very strongly on the news that your involvement with one campaign in particular, is momentum kind of building there in your opinion and how do you kind of look at the second half as the presidential campaign intensifies?

Randy Wootton

It’s certainly exciting watching this presidential campaign unfold. I actually wrote an article about that on LinkedIn about programmatic political as well and just the opportunity that we see is that we play with both sides and enable – what we want is a civil debate. We want people to be able to engage, to be exposed to information and make informed decisions.

As far as the revenue, we've seen an uptick from Q2. It's not material in Q3 for our overall projections and it is very different than years past. And I think you can see that in terms of how Mr. Trump is executing his campaign versus how Hillary, Secretary Clinton has been executing her campaign. It's been playing out, but just in terms of revenue for this quarter in particular it’s not material.

Operator

[Operator Instructions] And with no further questions at this time I'd like to turn it back to Randy Wootton for any additional or closing remarks.

Randy Wootton

Just like to say thank you very much to everyone who's attended the call. We're very excited about the quarter and look forward to following up with you all in the call starting in a couple of minutes.

Operator

And that does conclude today's conference. Thank you for your participation and you may now disconnect.

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