TubeMogul's (TUBE) CEO Brett Wilson on Q2 2016 Results - Earnings Call Transcript

| About: TubeMogul (TUBE)


Q2 2016 Earnings Conference Call

August 8, 2016 5:00 PM ET


Nicole Borsje - Investor Relations, The Blueshirt Group

Brett Wilson - Chief Executive Officer

Ron Will - Chief Financial Officer


Douglas Anmuth - JPMorgan

Brett Huff - Stephens Inc.

Ron Josey - JMP Securities

Gene Munster - Piper Jaffray

Matthew Thornton - SunTrust Robinson Humphrey

Dan Salmon - BMO Capital Markets

Murali Sankar - Boenning & Scattergood

Nat Schindler - Bank of America Merrill Lynch

Mark Kelley - Citigroup

Richard Tullo - Albert Fried & Company

Justin Patterson - Raymond James

Jason Helfstein - Oppenheimer& Co.


Good day and welcome to the TubeMogul Second Quarter 2016 Earnings Conference Call. Today’s call is being recorded.

At this time, I would like to turn the call over to Nicole Borsje. Please go ahead.

Nicole Borsje

Great, thanks. Good afternoon and welcome to TubeMogul’s second quarter 2016 financial results conference call. Joining me on the call today are Brett Wilson, Chief Executive Officer of TubeMogul; and Ron Will, the company’s Chief Financial Officer.

Please note that we distribute our earnings releases through our Investor Relations website located at So please refer to our IR website for our earnings release as well as the supplementary slides that accompany this call.

Now let me quickly cover the Safe Harbor. Some of the statements that we make today may be considered forward-looking statements regarding future events and TubeMogul’s future financial performance, including statements regarding our business strategy, growth and market opportunities, forecasted financial results and operating metrics, such as Total Spend, revenue, gross profit and adjusted EBITDA.

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. These forward-looking statements are made as of the date of this conference call and we undertake no obligation to update the forward-looking statements discussed on this conference call to reflect new information or events that occur after this conference call. Please refer to our SEC filings for a more detailed description of the risk factors that may affect our results.

Also please note that certain financial measures that we discuss on this call, such as Total Spend, Platform Direct Spend and Adjusted EBITDA have not been prepared in accordance with Generally Accepted Accounting Principles in the United States. We have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in our Q2 2016 earnings press release issued on August 8, 2016, which should be reviewed in conjunction with this conference call.

With that said, I’ll turn the call over to Brett Wilson. Brett?

Brett Wilson

Thank you, Nicole, and thanks to everyone for joining us. In Q2, we saw significant growth in mobile, social, display and particularly in Programmatic TV, driven by our unique cross-screen capabilities. While our top line fell slightly short of our expectations, this was due to an accelerated shift towards mobile, which we believe TubeMogul is well-positioned to benefit from over the long-term, and I’ll elaborate more on this in a moment.

In terms of financial highlights for the quarter, Total Spend grew 33% year-over-year to $139 million. Mobile spend grew a 146% and now represents almost 30% of Total Spend. Spend from our Platform Direct offering grew 39%, and represented 77% of Total Spend. Gross profit grew 28% year-over-year and gross margin was 69.6%, and we had a record quarter for PTV doubled the spend we saw in Q1.

Before we delve into the highlights of the quarter, I want to address our Q2 results relative to the guidance we provided, as well as the factors that caused us to modestly lower our outlook for the year. As we reflect our results in Q2, we’re energized by the increasingly cross-screen ecosystem brand phase in reaching their audience, because we believe TubeMogul is uniquely positioned to partner with brand in the next-generation of cross screen video advertising.

Also, we’re pleased that a better than expected operating leverage resulted in adjusted EBITDA in line with our guidance. As I mentioned, Total Spend in Q2 came in slightly below our expectations, primarily due to an accelerating shift from desktop to mobile. In fact, this is the first quarter where we saw a decline in desktop spend. More of us, especially the younger demographics desired by advertisers watch video content on tablets and smartphones in connected TV devices.

While this is not a new phenomenon, during Q2, this trend accelerated beyond our expectations. Now amidst this shift, the investments that we’ve made in our mobile offering over the last two years are increasingly paying off. Again in Q2, mobile spend through our platform grew 146% and makes up nearly 30% of our spend.

That said, as many of you know, mobile video measurement is not yet on par with desktop video measurement. So desktop dollars are moving from desktop to mobile fast enough to make up for the shift away from desktop. We expect this to be a short-term trend as the mobile industry is transitioning to new technology that enables viewability and other metrics that will bring it on par with desktop over the next two quarters.

In addition, we expect mobile to surpass desktop as a percentage of Total Spend in the first-half of 2017, ensuring our strong overall growth. While we’re modestly revising our outlook for the year based on our Q2 results and the accelerated transition from desktop to mobile, we’re more confident than ever in our strategy to grow cross-screen brand spending at a platform.

There are three components to our cross-screen strategy that I’ll review now; mobile, programmatic TV, and social. We’re in constant discussions with our brand customers and in a world, where consumers are fragmenting across multiple screens each day, software that enables advertisers to efficiently deliver and measure ads across all the screens of paramount, we have built the most comprehensive media buying platform in the world, the only platform that enables brands and agencies to buy TV, digital video, social video, video-on-demand, connected TV and display advertising from a single dashboard.

Expanding into these new channels and supporting our growth, as evidenced by the increase in non-desktop video spend we saw in Q2, which climbed to 48% of Total Spend, up from 26% in the second quarter last year. Our clients are increasingly valuing the ability to consolidate their cross-screen spend by using our software and are spending more through our platform as a result.

In addition, our solution which now enables brands to plan a campaign that complements their intended TV buy is resonating with clients. And as TubeMogul becomes a more critical part of our clients TV buying strategy, we believe we can ultimately be the single platform that our clients are using for their overall video buys.

In addition to mobile, the critical component of our cross-screen strategy is our significant progress with Programmatic TV, and the lead we’ve established in this new market. Programmatic TV was a highlight in the quarter as we generated more than $20 million in PTV spend in Q2. This is up over 140% year-over-year and it’s nearly twice the amount we saw in Q1.

We had a number of significant renewals from large advertisers in the quarter. We continue to see new clients experimenting with PTV as well. We also made a number of product enhancements to streamline the planning, execution and reporting of PTV campaigns. In particular, we added the ability to evaluate a client’s existing base TV plan or their intended TV plan to highlight areas of inefficiency and work with them to create a better overall video strategy.

We also received notable third-party validation for our efforts with PTV in the quarter. In mid-May eMarketer published a survey conducted by WideOrbit. The polled U.S. marketers on who they considered serious players in Programmatic TV, TubeMogul was the number one company named by a Landslide with a response rate of 68%.

The next closest platform have less than half our score, the clear indication that we are a far ahead of anyone else in the development and execution of PTV. eMarketer also recently released their first forecast quantifying the U.S. Programmatic TV market. They expect spending on PTV in the U.S. in 2016 to grow over 125% to approximately $700 million.

They also expect that PTV will increase from 1% of the overall U.S. TV market in 2016 to 6% by 2018, which translates to over $4.4 billion in PTV spend by 2018. We’re extremely pleased with the momentum we’re seeing here, and we expect PTV will represent 10% to 15% of our Total Spend in 2016.

Social video remains one of the hottest growth areas in our industry. And in the last six months, TubeMogul has established itself as the clear leader in this space as we’re the only media buying platform that can access inventory from Facebook, Instagram, Twitter and later this year Snapchat. In fact, just to state [ph] it even more emphatically for each of these partners, we are the only major DSP that partners with them video advertising.

While we have established the key partnerships to be successful with social video, brand advertisers are still in their early adoption of this channel through our platform, though interest levels are high. We saw very strong growth in Q2 with spend on social rising more than 11 times Q2 of last year. And as we highlighted during our Q1 call, our partnership with Facebook and Instagram is live and we’ve received great early feedback on the partnership from Facebook directly and from clients using the offering.

We also announced in June and that we became one of the first video advertising software platforms to join Twitter’s pre-roll ads program. Our Twitter partnership, which is live now provides brand marketers the opportunity to purchase real-time ads that proceed in-Tweet video content posted by over 200 premium TV and digital publishers.

We had several clients run campaigns with Twitter in the quarter and we expect this business to grow as our clients want to create more comprehensive campaigns across multiple social platforms. We also announced that TubeMogul has been named to Snapchat partner, which will enable clients to buy snap ads through our platform later this year. We believe we have a considerable edge in social video. Like PTV, we expect it will take a couple of quarters to ramp, but also like PTV we expect this to be a high growth area for TubeMogul, and for our company to be the leader in this movement.

Lastly, our display advertising offering also grew over 50% in the quarter. The progress in PTV, mobile video, social video and display, coupled with the addition of Snapchat and Twitter to our platform, enhances our overall cross-screen offering and provides our clients with more options to create holistic campaigns that utilize these different media types.

We’ve also seen strong growth in clients using TubeMogul software to execute campaigns using private inventory, either through our premium on-demand offering, featuring over 150 pre-integrated, premium TV-centric publishers or their own privately negotiated deals.

Private inventory accounted for 23% of spend in the quarter, up a 175% year-over-year. This further demonstrates that clients are using TubeMogul as a software platform to consolidate their overall ad buy, as opposed to simply using us as a source of media.

Our large branding agency clients continue to ramp spend through our platform. Notably in Q2, we had 26 clients spend over $1 million in the quarter, up from 16 in Q2 of last year, and 18 last quarter. We also had several exciting client wins in the quarter. We not always able to announce these publicly, but our new client wins included signing a top five global beverage brands, a top 10 global financial services company, and a top 10 technology company, who all chose TubeMogul as their preferred media buying software.

Additionally, 22squared, an independent full-service advertising agency, named TubeMogul one of its preferred partners for video advertising. Through the partnership, 22squared will leverage TubeMogul software to create a true audience first approach for its clients, including Southeast Toyota, Mizuno, Dunkin’ Donuts and Publix. Also, Australia’s largest automobile classified site, named TubeMogul software partner for video advertising after taking programmatic buying in-house.

Training and education remains a core focus for us. In the quarter, over a 150 executives and media traders completed our client certification program. Brand certified included Clorox, Dairy Farmers of Canada, Diageo, Foxtel, Klick Health, Pernod Ricard and Qantas and Walmart Canada; agencies and trading desks certified included Boulder Strategies, Cadreon, Carat, FCB New Zealand, IKON, Mindshare, and Publicis Health.

Patrick Djandji from Walmart Canada went so far as to say and that quote TubeMogul’s client certification program gave me a deeper understanding of today’s programmatic landscape and TubeMogul’s technology platform, which will certainly play a meaningful role in our digital media campaigns. We were also pleased to be named one of the 100 best workplaces for Millennials in the U.S. by Fortune, demonstrating that our focus on our people and our culture remains one of the top priorities of TubeMogul.

Before I turn it over to Ron, I want to reiterate that while our results this quarter fell slight of our expectations, we remain at a very strong position to be the long-term strategic platform to brand. Given our client wins of three Fortune 100 brands in the quarter, the increase of in-quarter million dollar spenders from 16 to 26, the significant growth in most areas of the business is clear that our strategy of building 100% buy-side software that enables advertisers to plan and execute campaigns across multiple screens and media types, including televisions, the highest level of control transparency and efficiency is working and it’s increasingly differentiated from any player in the market.

We’re excited about second-half of the year as we head towards fall in the holiday seasons and lookout for some exciting announcements around our TubeMogul University event in September that will enhance what is already the premier independent advertising software platform.

Furthermore, as we look out to 2017, we foresee several favorable trends, including the expected market growth in mobile video, social video and PTV that should accelerate our top line growth. Additionally, we’ve made significant investments this year to support our corporate infrastructure and long-term growth that will not be ongoing. As a result, we expect to deliver material profitability in 2017 on an adjusted EBITDA basis.

With that, I’ll turn it over to Ron to run through the financials before we get into Q&A. Ron?

Ron Will

Thanks, Brett. I’ll go through our financial results and guidance. Unless otherwise stated, all comparisons are on a year-over-year basis. As a reminder, our key top line metrics are Total Spend, revenue and gross profit.

Total Spend represents our clients total advertising spend through our software. Revenue is different from Total Spend because of the different revenue recognition treatment of our two offerings. Platform Direct is our self-serve offering, where we recognize revenue on a net basis and platform services is our managed services offering, where we recognize revenue on a gross basis. Revenue is, therefore, mixed dependent between the two offerings. So as a management team, we focus on maximizing Total Spend and gross profit.

Our financial results in Q2 showed ongoing progress toward achieving our long-term goal, including driving more operating leverage. Total Spend for the quarter was $139.3 million, an increase of 33% compared to Q2 2015. The growth was driven by two factors.

First, as Brett highlighted, our investments in cross-screen and PTV are paying off. Non-desktop pre-roll represented 48% of Total Spend in Q2, up from 26% last year.

Second, Platform Direct increased as a proportion of Total Spend to 77% compared to a 74% a year ago.

Our strategy continues to be driving brand advertising spend for Platform Direct, as this is where our clients benefit the most from transparency and control and where we see the greatest growth opportunity and operating leverage in our business. Several metrics highlight our success in achieving this in Q2.

As Brett noted, we had 26 Platform Direct clients spend over $1 million in Q2, up from 16 in Q2 last year and 18 in Q1. The average spend for Platform Direct client among our top 25 vendors jumped more than 50% of what we saw in Q2 last year and 68% of Platform Direct spend was from brands and their partner agencies, up from 59% last year, which demonstrates the success of our continued focus on signing brand clients, thereby decreasing our reliance on holding company trading desks and ad networks.

These trends are positive indicators that our strategy is working. We’ve been successful in signing larger brand advertisers to Platform Direct and these advertisers are spending more to our software over time.

As we shared in Q2, we fell short of our growth expectations, primarily due to the faster transition in ad spending from desktop to mobile. We’ve emphasizing our focus and investment in cross-screen for the past several quarters. Q2 spend patterns marked a meaningful inflection point in the shift from desktop to mobile.

Despite the impact of these issues on Q2 top line results, we exceeded the midpoint of our adjusted EBITDA guidance, demonstrating the operating expense discipline we’ve shown since our IPO and the improving operating leverage we see in our model. I’ll go over operating expenses and adjusted EBITDA in more detail shortly.

Revenue in Q2 was just over $55.4 million, an increase of 22% over last year. Revenue is mixed dependant and impacted by our continued migration from gross recognized platform services to net recognized Platform Direct. Our Platform Direct take rate, which is Platform Direct revenue as a percent of Platform Direct spend was 21.8% in Q2, compared to 22.6% last quarter and 23% a year ago.

As we’ve discussed, PTV take rates have tended to be lower than digital take rates. We have gross profit dollar focus and PTV is the large opportunity to drive gross profit. Given the relative strength of PTV in the quarter, we saw overall take rate come down slightly. We expect the blended rate gradually decline, as we benefit from the increasing proportion of Total Spend coming from PTV.

Gross profit grew 28% to $38.6 million in Q2, of which 59% was from Platform Direct. Gross margin was 69.6% in Q2, up from 66.3% due to the greater portion of our business coming from Platform Direct. Longer-term, we expect that our gross margin will expand with the increasing percentage of spend from Platform Direct, but we expect to see fluctuations due to the quarterly changes in the offering mix.

Our operating expenses for Q2 were $42 million. We continue to invest in areas that we believe will dramatically expand our market opportunity and differentiation, such as cross-screen and specifically PTV, which has become a meaningful part of our business in just a year and increased our adjustable market by 10X. Of course, operating expense discipline continues to be important to our business.

Looking at the three operating expense components in Q2, we spent $13.3 million on research and development in the second quarter, up from $9.5 million. Our product and engineering functions remain important differentiators to this and we have continued to add technical talent in Emeryville and expanded our Chengdu Engineering Center to help accelerate our pace of innovation.

Our sales and marketing expense in Q2 was $16.3 million, which was up from $13.5 million. Sales and marketing expense grew only 21% year-over-year compared to Total Spend growth of 33%. Sales and marketing headcount grew only 23% year-over-year, highlighting the key source of leverage in our model.

General and administrative expenses in Q2 were $12.4 million, up from $8.6 million. We’re seeing the G&A infrastructure we built scale and expect to see more leverage in this area. Notably, we’ve made investments in senior management and office expansion.

Our operating loss was $3.4 million in Q2 compared to an operating loss of $1.5 million a year ago, and net loss of $3.8 million compared to a net loss of $1.3 million in Q2 last year.

As I mentioned earlier, we recorded adjusted EBITDA in Q2 of $2.4 million above the midpoint of our guidance versus the adjusted EBITDA of $2 million in Q2 last year. We had $4.5 million of stock-based compensation in Q2, which is the biggest contributor to the difference between net loss and adjusted EBITDA. We ended Q2 with cash and cash equivalents of $83 million, essentially flat with $83.8 million at the end of Q1. Our total available liquidity remains nearly $120 million.

Now, I’ll turn to guidance. For Q3, our top line guidance is factoring in Q2’s performance and historic seasonal patterns for Q3. Three specific things to keep in mind.

First, similar to last year, we expect spend will be lower in Q2 due to normal seasonality. The Q3 spend growth anticipated to be 31% at the midpoint.

Second, our premier annual client event TubeMogul University will be held in Q3 this year, whereas last year, it was in Q4. This will increase our sales and marketing expense in the quarter.

And third, while we’re excited about the growth in PTV as a percent of Total Spend, this will likely have a slight negative effect on overall take rate in Q3 and Q4. Given these factors for Q3, we expect Total Spend between $134 million and $136 million, revenue in the range of $53 million to $55 million, gross profit in the range of $35 million to $37 million, and adjusted EBITDA in the range of minus $5 million to minus $3 million.

Given the Q2 results and the impact of the shift from desktop to mobile that Brett described, we’re modestly reducing our full-year guidance by 3% of spend at the midpoint. This represents 35% growth in Total Spend over 2015. For full-year 2016, we’re guiding to Total Spend from $558 million and $562 million, revenue in the range of $217 million to $221 million, gross profit in the range of $149 million to $153 million, and adjusted EBITDA of at least $1 million.

Lastly, to reiterate Brett’s comments, we feel strongly that the investments we made in PTV, mobile and social, along with the mix shift to these areas positions us well to see top line growth in 2017. This growth will flow through to the bottom line and combined with the fact that we should be able to pullback on corporate and infrastructure spending next year on a percentage basis should result in significantly improved operating leverage in 2017.

With that, let’s open the call for questions. Operator?

Question-and-Answer Session


Thank you. [Operator Instructions] We’ll take our first question from Douglas Anmuth with JPMorgan.

Douglas Anmuth

Thanks for taking the questions. I just wanted to dig in more to the accelerated shift from desktop to mobile. You kind of attributed a decent amount, but it seems like to some of the measurement and some of the kind of attribution dynamics perhaps on mobile, are there other factors involved? And I guess, in particular, just curious how you’re thinking about kind of where you are with mobile, inventory right now? And then also there’s obviously been a lot of talk around header bidding as well, I just wanted to understand your take on that, and whether that was a factor in the desktop business as well? Thanks.

Brett Wilson

Doug, it’s Brett, thank you for the question. This is really the first quarter, where we saw a decline in desktop event. So to be prudent, we’re modeling a little bit of weakness in desktop with flat to little growth throughout the year. What we are seeing, we don’t think it’s a result of competitive issues or anything fundamental or systemic with the business.

In fact, the shift is something that that we’ve talked about a lot and we’ve invested in our mobile offering for quite sometime. It’s just in the quarter what we saw as a viewability, it really became your ubiquitous metric for the advertisers that use our platform, which makes sense right?. We’re selling primarily to brand advertisers. They care a lot about video, and they care whether or not their video ads have the opportunity to be viewed.

So while it’s always been a key KPI, we saw a lot of demand for the same scarce high viewability inventory, which drove up viewable CPMs and desktop. Now some advertisers just shifted spend to mobile, where we’ve seen actually an explosion of inventory and this is why our mobile offering is growing so quickly, it grew 146% in the quarter.

But other advertisers have been reluctant to buy any type of video, including mobile video until they can measure it with a third-party viewability provider. And we estimate maybe around 5% to 10% of mobile video inventory can be measured right now by these third-party providers. So not – TubeMogul is an industry issue. And we think that if mobile video viewability were on par with desktop viewability, we would have captured these desktop dollars that we lost more one-for-one.

Now, we do think that this is a short-term issue for a couple of reasons. One, there’s a lot of demand right now for viewable inventory or inventory that can be measured as being viewable, so there’s a big opportunity here for publishers.

Secondly, there’s a technical switch happening in market, where publishers are changing their video players from flash to HTML 5. In fact, a lot of browsers have said, they’regoing to stop supporting flash players within a year. We think if that happens, they’ll be converting not just the HTML 5 players, but HTML 5 players where we can measure viewability.

And then lastly, in the quarter, the MRC, the Media Ratings Council just suddenly stamped the mobile viewability standard. So we think some publishers were kind of waiting for this to be done. So, again, we think it’s a short-term thing. You have 52% of our business was desktop. So when it slows or in this case that it shrink by single digits percentage, it has an effect on the business even though 48% of the business, which comprises PTV and mobile and social where we have triple-digit growth, that 48% comprised about 140% of our business.

So we think this is really a mix shift issue. And as mobile viewability works itself out in the near-term and as the non-desktop part of our business becomes a greater percentage of the business, we think we’ll return to normal growth rates in 2017.

With respect to header bidding, this is really a supply side concept right now. It’s a technology that allows publishers to essentially check the market for demand before prioritizing demand from anyone exchange or even the advertisers own direct or the publishers own direct self demand. This means that header bidding can bid in front of the exchange, which can be threat to a pure play SSP or anybody building technology to help publishers monetize their inventory.

But for us, header bidding, it’s really not a threat as we tend to access inventory wherever publishers choose to make it available. In fact, while we just haven’t seen header bidding become very prevalent yet in video. We think as it does, if it does, it probably becomes a positive for us, because it will make it easier to scale audience clause on top of video, which is difficult to do right now.

So it could actually mean lower effective CPMs for advertisers, because they’re reaching more of the people that that they’re actually targeting. And then the last thought on header bidding is keep in mind that our on-demand offering, it looks a little light header bidding, because it’s publisher inventory that we’re directionally integrating in our software, pre-integrated, and we work with the publishers to make sure that the advertisers behind that inventory kind of follow a set of rules. So our inventory access we felt good about and header bidding shouldn’t be an issue at all for us.

Douglas Anmuth

Great. Thank you, Brett.


We’ll go next to Brett Huff with Stephens.

Brett Huff

Hey, thanks for taking my calls – thanks for taking my questions. Just a quick follow-up on the attribution point that you made and thanks for articulating sort of the three issues and why you think it’s short-term? Just – can you give us a sense of why those issues are short-term? And how quickly can a viewability really kind of ramp or the measurement kind of ramp in order to kind of assuage this reticence on the part of mobile buyers or video buyers to participate at the same level you like them too?

Brett Wilson

Yes. Thank you, Brett, for the questions, this is Brett. I mean, what’s ironic is that, we actually have a lot of presumably highly viewable and premium mobile inventory. I mean, that’s where we’re all watching video now. So it makes sense that’s where the inventory should be.

So it’s purely a measurement issue. And we think it’s short-term one, because if you’re a publisher and you’re using a flash player, which a lot of them do, you have to switch by the end of the year to HTML5 player, which is the same player that you used to render video in a mobile experience only, because advertisers are already used to getting viewability reporting for their desktop buys. They’re going to need to make this HTML5 players compliant with VPAID. This ID standard that lets us measure viewability and kind of other brand safety metrics. So we really do think, it’s a short-term issue and we think growth really accelerates in 2017.

Brett Huff

Okay, one follow-up question, this is a housekeeping. You said, I think two different numbers for percentage growth in display. And I think one was down year-over-year in display spend, and then you also said, display was up 50%. But I believe that was just within the cross-screen, is that the difference between those two numbers?

Ron Will

Sorry, I said desktop spend is down.

Brett Huff


Ron Will

Our display spending is up 50%.

Brett Huff


Ron Will

Over 50%.

Brett Huff

Okay. That’s what I need. Thank you.


We’ll go next to Ron Josey with JMP Securities.

Ron Josey

Great. Thanks for taking the question. I wanted to ask maybe a little bit more about the investments in the back-half of the year and also the comments around material probability in 2017. On the investments in the back-half, it appears that 1H EBITDA was sort of right in line with your guidance, but now you’re calling for, at least, $1 million in EBITDA versus, I believe, $7 million in prior. So how can we think about those investments? And then material probability on adjusted EBITDA basis in 2017, how does that compared to your long-term goals of 26% to 30%? Thanks.

Ron Will

Ron, it’s Ron. Ron, we just walked through the components there. What we’re seeing is, spend declined modestly in Q2, we’re rolling forward to – in our Q3 guidance as well as Q4. But keep in mind, our operating expense growth has also slowed significantly over the past year. So operating expense in the quarter grew at a 33% rate, last year, it grew something like 53%.

We feel very comfortable with our OpEx profile and really feel like we’re making the investments in the next few quarters that really wouldn’t be right for the long-term health of the business that dramatically reduce. These are thing, obviously like TubeMogul University and our significant investment in technology. But we do feel very good about our OpEx foundational investments going forward.

So we don’t see those when we think about a growth rate off of this year. We don’t feel like those going forward are going to grow anywhere near historic rate, while spend will approach a more historical pattern.

And I think if you take a look at the two components of that operating expense, one is, G&A expense that we’ve had to scale dramatically, obviously, since becoming a public company. And I think most importantly, on the technology side, we’ve made some critical investments in PTV, obviously, which had significant returns this quarter, as well as in cross-screen overall, and we feel like those are very important investments for us to make.

Brett Wilson

Hey, it’s Brett. I want to add a fine point on that, say, I think it would be easy for us to show the original kind of EBITDA guidance for the year by puling back in OpEx. But we think that’s exactly the wrong thing to do, given that the growth that that we’re seeing, and given that we think growth is going to accelerate in 2017.

Secondly, our OpEx investments this year, I can’t characterize in two fold. As Ron said, there has been a set of foundational investments, executives, leadership, internal infrastructure, finance, human resources, things that we really don’t think we need to – we’re going to need to grow much next year.

And then secondly, we have been investing in areas like PTV and social and other areas, which we think are going to drive our growth for a while. So while we’re not guiding to 2017, we do expect accelerated growth and we do expect to see a lot of the EBITDA leverage.

Ron Josey

Thank you.


We’ll go next to Gene Munster with Piper Jaffray.

Gene Munster

Hey, good afternoon. Particularly as walk through, I’m going to miss this earlier just how should we think about the impact of the elections on the September and I guess December quarter, and what that, I think, kind of implies for an underlying growth rate? And separately is, given the shift to mobile, should we think of this is kind of the next three quarters are going to be impacted by it, and then we kind of get back to a more easier comparables after we anniversary this shift, or is it going to be more of a kind of a rapid movement over the mobile and won’t go on for a year? Thanks.

Brett Wilson

Hi, Gene, it’s Brett. We didn’t mention political, because we just didn’t see much political spend materializing in the quarter. We actually talked about this on our earnings call during the Investor Day. It’s just been a different kind of election. Trump’s running a very different kind campaign. We’re not seeing the parties raise as much money as previously, and that’s a shame, because TubeMogul really is kind of a perfect tool for political, where we’ve got to built-in polling tool essentially called band sites and congressional targeting, on-boarded voter file data.

We think there could be some upside here for us in Q3, we’re not counting on it based on what we’ve seen. But we do know that a lot of the budgets for these elections, it really ramps up in just the few weeks right before the election. And then, of course, on an ongoing basis, we’ll always keep spend from congressional and gubernatorial and special interest campaign.

In terms of the shift, we think it’s a Q quarter shift. And I got to say, we’ve been public for nine quarters. For eight of those quarters, we exceeded our guidance. And this is a company that has really built on doing what we say. And so it’s a gut-wrenching to have a mix. But we really don’t think this is due to anything fundamental. It’s not due to losses to competition and we’re really well-positioned with respect to mobile technology and mobile inventory. We just need to wait until mobile video viewability, it’s kind of more widely covered and we think that will happen soon.

Gene Munster

Thank you.


We’ll go next to Matt Thornton with SunTrust.

Matthew Thornton

Hey, good afternoon. Thanks for taking my questions, guys. A couple if I could. First, we talk about political aspect in the prior question. I guess, how about the Olympics in 3Q, I guess, being impacted from the Olympic that we should be thinking about 3Q?

Secondly, if you could just break-out the percentage contribution to stand in the quarter from display and social?

And then third, could you just remind us, when you went live in terms of Facebook and Instagram buying, when you went live with Twitter, which I think was very late in the quarter? And when Snapchat should go live? Thank you.

Brett Wilson

Hi, Matt, it’s Brett, thank you for the question. In terms of the Olympics, we think it’s a negligible impact on our business. Advertisers do use it as kind of a tent pole center of their marketing. So it can influence strategies in creative and tactics used, but we don’t think it’s going to have a budget impact either way.

Display and social currently make up less than 5% of the business of Total Spend. That said growing very quickly to reiterate that the growth numbers displayed grew over 50%. Social grew 11X. Now, last Q2, we were live with social, but only for our platform services clients.

We went live with Facebook and Instagram to our self-serve platform direct clients in Q1 of this year. And when we take a product from platform services to Platform Direct, which is a typical product migration from us, that usually ends up being kind of catalyst for spend. We went live with Twitter to both Platform Services and Platform Direct client in June, so mid-Q2, and Snapchat goes live in Q4 and we announced it in Q2.

Matthew Thornton

Perfect. And then maybe one follow-up, if I could, your gross profit mix between Platform Direct and Platform Services, I think, you mentioned it, but I didn’t catch up?

Brett Wilson

Yes, the gross profit mix within our prepared remarks the – we had a total gross margin of 69.6%. Platform Direct had a gross margin of 96.9% and Platform Services at 49.8%. The mix was one second, but up shows 59% in Platform Direct and 41% in Platform Services.

Matthew Thornton

Perfect. Thanks, Brett. I’ll hop back in the queue. Thanks.


We’ll go next to Dan Salmon with BMO Capital Markets.

Dan Salmon

Hey, good afternoon, guys. Three questions. First, Brett, you mentioned with the MRC putting down mobile attribution standards, and this being a bit of a short-term issue. I’m curious to hear your thoughts on who will be the provider of that mobile attribution? Is it a traditional measurement player like Nielsen or comScore, some of the more modern ones like Moat and Integral and DoubleVerify, or is that something that you’re looking at for TubeMogul to develop yourself?

And then second, if you could just comment on the potential impact of the transition at LiveRail during the quarter?

And then lastly, you rolled out a really interesting program last quarter the Bot traffic rebate program, and I was just curious to hear how the conversations with clients on that program have been picking up?

Brett Wilson

Hi, Dan, this is Brett, thanks for the questions. With respect to its mobile viewability, not attribution, just to be really specific. Typically, we do a couple of things. We enable – for desktop, we enable viewability in our software using our metrics. And then we also integrate third parties for viewability Moat, Integral tend to be the main third-party viewability vendors, we’re already integrated with them.

So for advertisers that want the third-party viewability reporting, it will be there once it’s there for the industry. For advertisers that are okay with our reporting, that pre-integrated as part of our standard offering.

In terms of LiveRail your second question Facebook kind of shutdown LiveRail inventory within the quarter. And what we’ve seen is a little bit of a renaissance on the supply side, where we’re seeing some new players. We’re seeing a lot of growth from existing players, no one exchange or marketplace or supply-side platform account for more than 13% of spend and that number has been going down, and we’ve added just a lot of supply sources, in general, as we add all these different media channel. So we feel like that that’s a good trend.

And then lastly, you brought up the Non-Human Traffic Credit Program, which we launched in Q1. The idea there is, we’ve been investing in protecting advertisers from multiple types of ad fraud, including safe traffic generated by computers or botnets for a long time. But as a matter of policy in Q1 for a Platform Direct clients, we said any fraudulent botnet traffic will be refunded and the refunds that that we made in the quarter were negligible.

Dan Salmon

Great. Thank you.


We’ll go next to Murali Sankar with Boenning.

Murali Sankar

Yes. Hi, thank you for taking the questions. I was wondering whether you could talk a little bit about the dynamics in agency spend, and whether you think it will affect kind of total spend revenue margins going forward? One of your peers last week called it out as a source of trouble in the quarter.

And I had another question on sort of desktop, how does that differ to the trends in desktop? Does that differ much between what you see in Platform Services versus Platform Direct?

Brett Wilson

Thank you for the question. Yes, in terms of trends on the client base, I think the trends across the board were very positive. Brands and agencies now account for 68% of total PD Spend that’s up from 43% in Q2. And we’ve always talked about brands and agencies as being more strategic and more along the clients that we think are going to be more likely to continue spending in kind of future years.

So more of our spend is coming from the branding agency clients that we’re targeting. In fact, one thing that we’ve seen in the quarter that increasingly holding companies now have multiple models with respect to Programmatic, the trading desk model used to be kind of a black box model, now they’re also offering a transparent service model on top of – as a Programmatic technology, that’s actually made it easier for us to work with agencies and holding companies.

So I feel like we’re more aligned there than we’ve ever been. We’re also seeing the largest client spend more. Ron mentioned in his script that, we had 26 clients spend over a $1 million in the quarter, that’s up from 2016 last year, so that’s a good trend. And of course, we’re seeing those clients really invest in a diversity of inventory, not just desktop for you all, but PTV mobile, social, and so on.

As far as your second question, you asked about the implication on the transition from desktop to mobile for PD versus PS, it’s affected kind of both sides of the business, but PD disproportionately.


We’ll go next to Nat Schindler with Bank of America Merrill Lynch.

Nat Schindler

Yes. Hi, Brett, just want to clarify something you said. You said the significant profitability in 2016, but you also said later, I thought, I heard accelerating growth. Is that accelerating growth in 2017 on the 35% at the midpoint that you arrange for the year, or accelerating off the implied Q4 growth levels that your guidance imply?

Brett Wilson

So we’re not providing 2017 guidance right now, Nat, it’s Brett by the way. What we think, because 48% of our business is growing 140%. That – as that part of the business becomes a larger and larger percent, that will be a catalyst to reaccelerate the business. And when I talked about the operating leverage and EBITDA, I was talking about 2017. So we just see a year where growth accelerates or it stays flat. But we feel like we’re going to see a lot of growth next year, and we don’t think we’re going to see as much need for OpEx growth.

Nat Schindler

Totally understand. Thank you.


We’ll go next two Mark Kelley with Citi.

Mark Kelley

Yes. Hi, guys, thanks for taking the question. I wanted to ask about the PTV, that’s growing at such a nice clip and becoming a bigger part of your mix. How should we think about just take rates over time, I know, it’s a slight headwind over the next quarter or so. But does that becomes a bigger component of just total advertising budgets and is competition for yourself picks up, how do we think about that dynamics? Thanks.

Brett Wilson

Well, one talk about PTV and then I’ll let Ron talk – address the take rate part of the question. We are excited about PTV. We’ve said it before, but this business – this market, it didn’t exist when we started investing in it. We think PTV could be $70 million business for us this year. I think it’s likely to be $100 million-plus business next year.

We’re seeing more demand repeat spend from clients. We’re seeing a lot of progress on the supply side. You see the biggest broadcasters making announcements, I think, we’ve run media in almost every major cable and broadcast network. We’ve got access to all the NBTV’s grew Programmatic TV supplies that platforms. And now you’ve got kind of eMarketer and others kind of validating that that the market is real.

So it’s certainly an exciting part of the business. And the strategy is because of our advertisers, TV is their lead media, it’s where they spend the most money. We think if you build a platform, anchored around television as you become more and more important, they’ll begin to consolidate all of their other video channels through our software.

Ron, I’d like you to handle the take rate.

Ron Will

So for Q2, the take rate was 21.8% versus 22.6% in Q1. Now, it was really about the impact of PTV in the quarter. So that had a negative effect on it, but it was obviously a significant contribution to growth and gross profit.

Brett Wilson

It’s Brett. One more thing I’ll add is, the scenarios where take rates go down are often positive scenarios for us. It may mean, we’re seeing an outside contribution from PTV, which is great, that means more gross profit. It may mean that we’re signing more or large advertisers where we choose to make tech fee or take rate concession. So while take rate is useful to model the business, it’s not always a useful indicator as to the help of the business, and we think PTV helps us to drive up incremental gross profit.

Mark Kelley

That’s helpful. Thank you.


[Operator Instructions] We’ll go next to Rich Tullo with AFCO.

Richard Tullo

Hey, guys, thank you for taking my call. I would point during the quarter, did you start to understand what was going on with desktop?

Brett Wilson

Hi, Rich, it’s Brett. It was towards the end of the quarter. Like I said, what we feel like happened is viewability went from an important KPI, which is ubiquity. So all of a sudden you have a lot of demand chasing the same inventory. Meanwhile, we’ve got just a vast amount of mobile viewable inventory as we all shift to mobile devices to watch video. The industry just can’t yet measure it. So that’s what happened and it took us by surprise.

Richard Tullo

Okay. And so the MRC posted its guide – guidelines on – how fast on measurement viewability. How fast you think the measurement companies are going to come to market with a product? Is this something that they’ll just follow the guidelines and produce, or is this requires some R&D on their part?

Brett Wilson

Well, it’s actually already happening. In terms of measuring mobile app inventory, moat is increasingly kind of embedding their technology within mobile apps, also the third-party providers. They also – they already measure viewability in mobile is just be the video player that the publisher uses needs to be able to accept VPAID, which is a standard or a protocol for measuring viewability.

So that’s what needs to happen. And because of the reasons that I mentioned, we really believe, it’s a short-term trend and affected us maybe disproportionately just because our clients are our brand advertisers. They care a lot about video and therefore video viewability.

Richard Tullo

Okay. And just quick follow-up on this. Was the – did the drop correspond with the ANA report, and if you think that influenced to consumer behavior on the part of advertisers?

Brett Wilson

No, not at all, I mean, the ANA report had to do with a legit [ph] rebates and the practices of agencies themselves. And just in general on that point, we’ve always been completely aligned with advertisers.

Richard Tullo


Brett Wilson

When they spend through us, they know what we charge? Where the money is going? What the publishers are making? So we’ve always been very transparent and we think that ANA report is good for the industry, good for us, and there was no connection between the ANA report and the mobile viewability measurement challenge that that I mentioned.

Richard Tullo

Do you think on a kind of CPM for CPM basis, that these desktop advertisers once they get the measurement, they need – will go into mobile and perhaps the aggregated the growth that you were seeing in desktop plus the growth that you’re currently seeing in mobile is supporting these views on the guidance beyond the fourth quarter?

Brett Wilson

Yes, absolutely, I mean, the guidance beyond the fourth that comes from the fact [Multiple Speakers]

Richard Tullo


Brett Wilson

It’s doing so well. So, again, we think that when we work through the mobile video viewability issues, when the industry works through them, it’s a lot easier to capture the decline or lack of growth in desktop dollars and that’s all is happening.

Richard Tullo

Okay. Thank you.

Brett Wilson

Thanks, Rich.


We’ll go next to Justin Patterson with Raymond James

Justin Patterson

Great. Thanks for getting me in there. Brett, apologies for beating a dead horse again with viewability. Just trying that’s from a different angle, I believe you mentioned earlier that you’ve seen price of viewable CPM’s increase, which I think we’d all expect this thing more valuable. We’ve also seen some companies that have lowered the viewability threshold on video this earning season and those ones have all faced some pricing headwinds.

So this is a little bit granular. But how much of this is strictly a volume gain, mobile not fully offsetting desktop, as we’ve got this viewability gap? And then how much of it is coming from pricing on some of that inventory just being depressed, given the lack of viewability today?

And then, Ron, a quick one for you. You called out the leverage against sales and marketing in the quarter. Just curious on how you’re thinking about staffing there? Is that really a trend line that should continue or a sales a function where maybe you would have liked to have hired a little bit more this quarter, but the competitive hiring environments limiting some of that? Thanks.

Brett Wilson

Justin, hi, it’s Brett, thanks for the question. In terms of viewable CPM, or what we call VCPM. The VCPMs in desktop really increased a lot, because you’ve got a lot of people using the same KPI bidding for the same inventory. Meanwhile, due to how we’re all watching video analysis, most of us is not on desktop. A lot of the growth in inventory is on the mobile side, but it’s not instrumented yet to albeit be measured.

In terms of viewability threshold, remember, advertisers are in control of what they buy through our software. We’re typically not selling on any type of viewability threshold. So advertisers will buy through our media, they’ll measure it, and then they’re in-charge of what they want to do with that information. And in the quarter what happened is a lot of advertisers decided it just wasn’t worth it to keep buying bid it up desktop, the CPM inventory. Some of them bought mobile inventory, because it is more highly viewable, some of them didn’t felt, those were the factors that led to the surprise.

Ron Will

Justin, on the second question leverage against sales and marketing, so we definitely don’t see the dynamics where we feel like we should continue to hire more. I think if you think about our business model, it’s really around selling a client once they aggregate to spend and then we have minimal sales cost going forward.

So it’s really about – the sales team is really about new clients coming onto the platform. But if you think about the bulk of our revenue, we’re heard in cohort analysis from 2015 that about 82% of sales last year came from client we signed in 2011/2014. So hiring a new sales person takes quite a while to get ramped up, particularly in PD. And we feel like, we’re adequately staffed down the PSI. We actually didn’t grow the sales team really at all in the past year, I think it was about two or three had total in ramp sales people.

So I think we’re actually seeing the benefits of the model and really be a fact that we saw this quarter with more around the desktop to mobile transition that Brett mentioned versus a sales productivity issue.


We’ll take our final question from Jason Helfstein with Oppenheimer.

Q - Jason Helfstein.

Thanks. Can you just – I’ve got few things and then Rich a question. So can you give us what the difference in pricing is between mobile and desktop? However, you guys look at on average CPM, I guess. And then I guess why – given, you’ve had this leading cross-screen product? Why didn’t help – that help you kind of capture again some of those dollars as advertisers, who want to make sure they got that already.

And then I guess on the bigger picture, I mean given that you’re bringing up the viewability, I mean, look at the – a nagging question of many people of that is there just a lot of not real inventory out there, and I guess, does this just kind of stoke a bogeyman in the room that too much inventory out there is really not viewable and this won’t be a two quarter issue, but they require more industry cleanup? Thanks.

Brett Wilson

Thank you, Jason. It’s Brett. In terms of pricing, it’s really a tale of two cities where you’ve got inventory that comes from exchanges and marketplaces work for pretty well that maybe in the $10 to $20 range. And then more premium inventory like our on-demand publishers or publishers and advertisers would do a deal with directly that that can be higher than that.

The VCPMs in desktop can range. They can be 50% to 70% higher than those raw CPMs that that I mentioned and we’ve always talked about the scarcity of a video and we’ve helped to educate the market what video is and if you define a videos somebody clicking at a future content, there’s always so many people and always so much time.

So there’s always going to be scarcity, how we’ve always dealt with that is by making it really intuitive and easy for an advertisers to bring in their own publisher deals. And then of course we’re bringing in all these other media channels, you have better growing and doing perfectly well.

So that’s what happened and I think that a matter of point if you will, we’re excited about how we performed since the IPO. Again we’ve had eight quarters – in our guidance, by an average 12%. We tripled our spend since December 2014. We doubled our revenue. We doubled our gross profit. We’ve grown our cross-screen business, at the time of the IPO, real number, Jason. Non-desktop was 5% of the business, now it’s 48% of the business. We launched PTV from nothing to a major business.

And then we continue to take a leadership position in issues like fraud and viewability, those are different issues by the way. So there’s no boogeyman issue. It’s simply a matter of all the mobile inventory that were awash and a lot of it just isn’t yet measurable by third-parties, and when it is we will recapture those dollars and that’s why, we’re excited about the second-half and 2017.

Jason Helfstein

So you don’t have on average mobile is X percent – less expensive on a CPM basis and the average desktop?

Brett Wilson

I think in general, mobile inventory is less expensive and it’s less expensive because it’s not metered the same, because the measurement isn’t quite on par with desktop. And what really should happened is, as mobile video viewability is rolled out more widely, we’ll probably see pricing between desktop pre-roll and mobile pre-roll come to an equilibrium.

Jason Helfstein

I mean just kind of keep hopping on the points, as I’ve got a last question, I mean Facebook has been complaining about this kind of for a while right that early on everyone expected like video to get a premium to desktop, it didn’t mobile for them is in the same price as desktop. I guess, is this really just to hit your numbers you need to see pricing go up to match desktop. So, I mean, is that ultimately the risk that that the demand is there, but that advertisers get a better deal on mobile for longer than you might think?

Brett Wilson

Well, I mean, as a reminder, we just launched Facebook and Instagram and it grew quite significantly. So to the extent, advertisers are excited about that. They can now buy Facebook, given the same platform that they buy linear television. We think that’s going to happen, and it’s not really a pricing issue. There is a given set of advertisers that that we have that will only buy video inventories that measured by a third-party. Many of them are fine, not doing that, and that’s what driving our mobile growth, and so that part of the business is doing so well.

So really, I think, it’s not a lack of inventory. It’s not a competitive dynamic. It’s a kind of an industry short-term transitory issue around measurement.

Jason Helfstein

Thank you.

Brett Wilson

Thanks, Jason.


And at this time, I would like to turn the call back over to Brett Wilson for any additional or closing remarks.

Brett Wilson

We want to thank everybody for listening in on our Q2 earnings call. As always, we want to thank our incredible TubeMogulers for their loyal and hard work. Thank you very much. Goodbye.


This does conclude today’s conference. We thank you for your participation. You may now disconnect.

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