The Rubicon Project's (RUBI) CEO Frank Addante on Q2 2014 Results - Earnings Call Transcript

| About: The Rubicon (RUBI)

The Rubicon Project, Inc (NYSE:RUBI)

Q2 2014 Earnings Conference Call

July 29, 2014, 05:00 PM ET


Frank Addante - Chief Executive Officer and Chief Product Architect

Greg Raifman - President

Todd Tappin - Chief Operating Officer and Chief Financial Officer


Deb Schwartz - Goldman Sachs

Kerry Rice - Needham

Rohit Kulkarni - RBC Capital Markets


Good afternoon. My name is Courtney, and I will be your conference operator today. At this time, I would like to welcome everyone to Q2 2014 Earnings Conference Call for The Rubicon Project. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. [Seth Brown], Investor Relations, you may begin your conference.

Unidentified Company Representative

Good afternoon, everyone, and welcome to Rubicon Project's 2014 second quarter earnings conference call. As a reminder, this conference call is being recorded. Joining me today are Frank Addante, CEO, Founder and Chief Product Architect; Greg Raifman, President; and Todd Tappin, Chief Operating Officer and Chief Financial Officer.

Before we get started, I'd like to remind our listeners that our prepared remarks and answers to question will include predictions, estimates and other information that might be considered to be forward-looking statements, including but not limited to the guidance we're providing and other non-historical statements related to our anticipated financial performance, operating and strategic plans and the markets and our competitive position.

Forward-looking statements involve risks, uncertainties and assumptions and actual results may differ significantly from the results suggested by forward-looking statements for various reasons, including without limitation, if such risk or uncertainties materialize or assumptions prove to be inaccurate. Reported results should not be considered an indication of future performance. A discussion of some of the risks, uncertainties and assumptions is set forth in more detail in the company's registration statement on Form S-1 and quarterly reports on Form 10-Q including under the headings Risk Factors and Management's Discussion and Analysis of financial condition and results of operations. We undertake no obligation to update forward-looking statements or relevant risks.

Our commentary today will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings press release, which we have posted to our website. At times in response to your questions, we may offer incremental metrics to provide greater insights into the dynamics of our business or quarterly results. Please be advised this additional detail may be one-time in nature and we may or may not provide an update in the future on these metrics. I encourage you to visit our Investor Relations website at to access our second quarter press release, periodic SEC reports, a webcast replay of today's call or to learn more about The Rubicon Project.

With that, let turn the call over to Frank.

Frank Addante

Good afternoon, everyone, and we appreciate the opportunity to update you as we continue our mission to automate the buying and selling of advertisement. Advertising is undergoing one of the greatest revolutions in its history. Rubicon Project pioneered advertising automation seven years ago. And today, we are driving this transformation. I'll be speaking briefly about the trends and opportunities in the automated advertising market and the advancements we have made to accelerate our vision. Then Greg and Todd will provide updates on our operating and financial results.

Q2, our first full quarter as a public company, was a strong quarter. We exceeded our guidance for both revenue and adjusted EBITDA. Year-over-year revenue growth accelerated to 49%. And while we have projected an adjusted EBITDA loss, I'm happy to report we delivered a positive adjusted EBITDA in our first quarter as a publicly-traded company. As a result of this strong performance and product and customer advancements, we will be increasing our outlook for the rest of the year.

We have a unique position in the market as the largest independent exchange. Rubicon Project plays a critical role in advertising automation. Publishers and application developers rely upon The Rubicon Project Exchange to manage hundreds of DSPs, ad networks and agency trading desks. And DSPs, ad networks and agencies rely upon our exchange for automated access to these websites and applications. This critical position comes with deep integration into both sellers and buyers that are sticky and have strong network effects. These are large contributors to our accelerated growth and leveraged in our bottomline results this quarter. It's taking these integrations at greater levels of predictability to our business.

Our team remains focused on being aggressive at innovation, while being fiscally prudent. Clearly, these results reflect our commitment to this philosophy. According to data from Zacks Investment Research, less than 4% of publicly-traded companies share the following attractive characteristics: greater than $100 million in revenue, growing faster than 40% year-over-year, and have a positive adjusted EBITDA. Rubicon Project is one of the lead 4% companies.

Despite this clear distinction, there is a disparity between our operating performance and our stock performance. And while I urge my team to manage the business and not the stock price, it's also important for us that we perform for our shareholders. I often hear comments like ad tech is not understood or ad tech is confusing. From an operating product standpoint, this complexity is great. This is why we need to exist to simplify advertising. However, from a Wall Street perspective, complexity and confusion are not an accessible excuse for us. It's our responsibility to educate investors.

We need to clearly articulate the market opportunity and while Rubicon Project holds such an important and unique position in the market. By other early disruptive technologies, we need to step up our education efforts to make sure everyone sees the opportunity as clearly as we do. In just seven short years, we have made advertising automation a powerful behemoth for the largest media companies and agencies in the world. Now we need to bring out same level in education and understanding to Wall Street.

Advertising is one of the largest global markets. It's a market that's been growing for decades. And entrepreneurs reach out to investors out in this market, because there are very few large markets that are right for disruption. Advertising is a $200 billion and growing market. While many would say that all of it will become automated, if we estimate the automation opportunity to be at least 50%, that's a $100 billion opportunity.

Rubicon Project pioneered advertising automation. Before us, it didn't exist. But today, advertising automation is by far the fastest growing segment in advertising. According to IDC, real-time bidding or RTB has grown from 0 to $7 billion in just five years. And while RTB is just one of its sell segments of the automation market opportunity, it is a clear illustration. For example, Procter & Gamble has publicly proclaimed its intention is to automate 70% of all its advertisement spend by the end of the year. And further, John Wren, CEO of Omnicom in an earnings call said, digital media buying is done by machines as if you're standing on the floor of the NASDAQ. He goes on further to say, I hope the long-term belief that eventually traditional media, well a lot of traditional media will get purchased that way.

With anecdotes like these and the growth trend of RTB, the prospects of this $200 billion market are incredible. While this market is growing fast, Rubicon Project is going even faster than the market. We are transforming this market and doing for advertising what NASDAQ did for stock trading. This market is growing large in part as a result of our disruption and our innovation. The market is expanding both in terms of total volume and in the number of participants. This is similar to the trends we're seeing in other markets that have become automated.

When NASDAQ introduced automated trading, the market grew and new companies with new solutions emerged. After we introduced The Rubicon Project Exchange, hundreds of new companies have emerged on our platform. These are positive signs from the market and for Rubicon Project. As a result of this growth and success, public and private investors are now being bombarded with a long list of new companies and industry [jargon evidenced].

But make no mistake, Rubicon Project is at the center of this innovation. There are now hundreds of ad tech companies. And while I've seen confusion, to be clear, many of them are customers of The Rubicon Project Exchange. However, there are only two large exchanges, Rubicon Project and Google. Rubicon Project differentiates by pairing an open, transparent, independent market without always competing with our customers. Just like take Visa and MasterCard, prepare an open market for all the retailers to participate, while the American Express operates a closed market. They can both exist as leaders, but offer very different value proposition.

I'm reminded of the humble beginning of Silicon Valley. And I'm beginning to see ad tech as the new Silicon Valley. What once confused people of the complicated acronyms in the early days of computing such as CPUs, RAM, TCP/IP and OSs, advertising technology today is similarly confusing the world with an array of acronyms, DSPs, DMPs, SSPs, RTB. One of our jobs as a public company is to help the investor community more easily understand all of these acronyms and why need to exist and how they all come together on our platform. It wasn't until companies like Apple, IBM and Dell came along to invest in personal computer that people widely understood the confusing acronyms of Silicon Valley. These companies consolidated the CPUs, OS and RAM into one system and made them easy to use. Rubicon Project is consolidating the advertising acronyms into a single effective and usable platform.

Seven years after we created Rubicon Project, I'm proud to say that we are now the largest independent advertising exchange in the world. This unmatched scale and quality is a direct reflection of the performance that we deliver to our customers. Additionally, our exchange is directly and uniquely, I might add, integrates to the back-end of premium publishers navigations, providing us with a faster differentiated and distinctable market position that has delivered, what we believe, to be industry-leading rates of retention.

Just as in the stock market when a company selects an exchange to list their stock, they typically don't twitch. In advertising, everything needs to be real-time, requiring sellers and buyers to have deep integration with our software. These integrations are sticky and the stickiness adds additional levels of predictability to our business. I'd like to highlight a few advancements that I'm particularly excited about, first InMobi.

Earlier in the quarter, we announced a new customer InMobi. This win not only touted for strength of our mobile products, but it demonstrates the potential value of our network effects. The Rubicon Project is now powering the InMobi Exchange, creating the world's largest native ad exchange for mobile. According to eMarketer, the native advertising opportunity alone will be $9.4 billion by 2018. This new exchange reaches 750 million mobile users globally across 30,000 mobile apps. We expect this deal to significantly accelerate our growth in mobile.

Second, Comcast selected us as the technology provider for its private exchange. The Comcast exchange powered by Rubicon Project gives advertisers the ability to purchase ads across Comcast XFINITY and xfinityTV sites. In addition to powering the largest independent open exchange, we also power private exchanges like Comcast. This is a great illustration of Rubicon Project's strength as a software company. Comcast adds to the growing list of private exchanges that we cater, which also includes News Corporation, Turner, eBay and (inaudible).

And third is in video. I'm pleased to announce that as planned, we've released our new product into private beta. Rubicon Project already powers many of the most important media companies in the world such as Viacom, CNN and Stocks, just to name a few. We're excited to now offer video capabilities to our customers to complement our display offerings.

Now I'd like to discuss the key drivers of our performance: market growth, market diversification, product performance, financial performance and the way that we manage and optimize our business. I'll address each of these key drivers separately.

First, market growth. Advertising is a large and growing market. Our mission is the fastest growing segment of that market. And Rubicon Project is growing faster than the market. Next, market diversification. We are a global company which serves 30 diversified markets around the world. We have a diversified customer base. As a seller platform, our advertising money may shift from one DSP to another. That revenue still comes to us to access the inventory on our exchange. We have a diversified product set. For example, as spending moves from static (inaudible) the real-time bidding from agency, that revenue is still processed by our exchange. We serve these multiple diversified markets: display, mobile and now video. And we hold the strategic position. Many other companies are dependent on our exchange for their revenue, including DSPs, ad networks, publishers and application developers.

Next is product performance. Our products continue to outperform the competition for the following reasons. Data, data drives performance. Each month, our exchange processes more than 4 trillion bids across only 600 million consumers. Our leading reach in global consumers creates gravity for buyers. Advertisers follow the eyeballs.

Network effects. More buyers attract more sellers and more sellers attract more buyers. And we provide a full product set. Our target is to monetize all forms of advertising spend, not just RTB, including static bidding and direct orders.

Moving on to financial performance. Our software model, sticky integrations create more predictable revenue results. And we benefit directly from market growth. Our pricing model is to target percentage of the revenue process by our exchange. So as our customers revenue grows, so does us.

Lastly, the way we manage and optimize our business. We have a track record of driving our company to be aggressive with innovation, while being fiscally prudent. And while many would say that some investors don't need to hear about our culture, if I didn't mention it, I'd be failing to highlight what we believe to be our most important asset. The greatest companies are driven by the greatest teams. Our unique and special culture enables us to attract the greatest innovators and leaders and drives them to perform well together as a team.

I would like to thank the entire team for everything they've done to exceed our expectations for Q2. Our strong financial results and increased guidance are clear indications that Rubicon Project is a truly unique company. Rubicon Project continues to separate itself from a technology standpoint, the customer standpoint and the financial standpoint. We're excited to continue our mission to revolutionize advertising and to change the way that advertising is bought and sold for ever.

With that, I'd like to hand it over to Greg.

Greg Raifman

Thank you, Frank. As we discussed in our last earnings call, Rubicon Project has a number of major strategic initiatives that we are focused on this year. I'm pleased to report that in Q2, we made progress on some of those initiatives that will help our business continue to grow and strengthen our position as a leading destination for buyers and sellers or advertising.

One of our strategic initiatives is to expand our inventory on the Rubicon Project platform. During Q2, we had some significant wins as we continue to grow our inventory base, which comprises many of the most premium publishers and applications on the internet.

There're a number of reasons why sellers have been choosing Rubicon Project as their primary monetization platform. Our industry-leading auction capabilities enabled static bidding and RTB purchasing, and we are increasingly finding that our orders technology is a major differentiator for premium sellers. This orders functionality helps to automate the workflow and processes involved in direct negotiation of media sales between buyers and sellers.

The market for orders has the potential to be many times the size of both static bidding and RTB. And the CPMs we enjoy here are much higher as well. Our ability to provide a single platform for sellers to monetize inventory of the all three buying methods, static, RTB and orders across all of their properties, all of their geographies and all channels including display, mobile and now video, which has promises on schedule and already in private beta, further adds to the value we bring.

As Frank mentioned previously, we are very happy to welcome Comcast and its 19 million monthly visitors to our family of premium publishers during the second quarter. We are similarly pleased by the additions of Ziff Davis, PBS, MPR, Move Inc. and TechnologyGuide among other premium publishers in the quarter. Additionally, we placed a great deal of focus on creating a safe, well lit platform on which buyers and sellers can transact. While we strive to grow the amount of inventory on our platform, we continue to enhance the quality of that inventory to ensure that buyers can purchase from Rubicon Project in a safe environment, which we believe will drive more revenue in the long term.

Our efforts to improve the safety of our platform include process and technology to reduce malware, categorize and filter ads and maintain inventory quality. These inventory quality efforts include prescreening of publishers, monitoring of inventory trends and when necessary removal of problematic publishers from our platform. While perfection is impossible, because these are moving targets, we believe we are one of the safest places to buy advertising and we will continue to invest to stay ahead in this area and minimize its impact on our and our customers' businesses.

One of the major drivers of new seller activity is our marketplace summits. In these events, we bring together many of our largest buyers and sellers to enable orders and RTB revenue in our marketplace. These summits not only help marketplace participants to get to know Rubicon Project and our offerings better, but also to meet each other directly in person. Through these events, our customers further see the significant value that Rubicon Project provides them, which both reinforces our existing relationships and helps create new relationships in an accelerated pace.

We're also focused on automating our internal processes and in that being we have automated the process by which new sellers deploy our advertising automation cloud. This was made possible by the development of an automated installer, which has reduced times to launch a new seller on our platform. Another major initiative for Rubicon Project this year is to deploy our advertising automation to bring buyers closer to sellers. Our platform has always been focused on connecting buyers and sellers, and we've had a great deal of success gathering a critical mass of both to create a vibrant marketplace to help them run their advertising businesses.

As a result of that critical mass, we now have the ability to expand into new types of media sales and ad units that have never before been available programmatically. One example of this is our recent expansion to allow homepage takeovers, the most premium inventory on a publisher's site to be purchased via our platform. For the first time, publishers such as Hearst, Time and Business Insider have sold premium homepage takeovers through our technology platform, executing on direct transactions with premier media agencies such as Merkle and others.

One vehicle through which we are bringing buyers closer to sellers is our newly formed market-making team. The goal of this team is to help accelerate the connection between our buyers and sellers, leveraging analytics and big data. We will abstract the complexity for our buyers and allow them to reach their audiences at scale and tell their stories, while helping our sellers better package their inventory and create better yield.

The international component of our business is key and we are focused on continuing to grow our international footprint. We continue to maintain and expand our market leading positions in the UK, France and Australia as well as expand our reach in other existing and new markets. In the UK, we continue to be the go-to source for news inventory, adding Mediaforce, Trinity Mirror and Newsquest as well as Future Publishing, one of the largest magazine publishers in the UK and the Hearst luxury portfolio.

Furthermore, I'm pleased to report that we have made particular strides in the Italian market where we have signed a number of leading Italian publishers such as (inaudible), RCS, Manzoni, Italiaonline and Bonzai. We look forward to working with the leading publishers in these markets to drive automation even more rapidly. Overall, managed revenue associated with non-US sellers could range between 35% to 40% in global managed revenue in any given quarter. And this is in an area which we're focusing growth efforts.

In Q1, we opened new offices in Tokyo and Singapore and have since added Latin America location in São Paulo. Combined, these markets add $10 billion in digital advertising to our addressable market. Having local team members in those markets is helping drive adoption with buyers and sellers who are just getting ready to enter the automation market. Also, our team in Japan is educating the market and helping those buyers and sellers learn how to leverage the technology to drive their businesses.

We have already signed five premium publishers in several demand side platforms and feel good about our early progress in that market. And our Brazilian team has been able to bring on a number of quality publishers in the short time we've been in market. In addition to Grupo Abril, we've (inaudible) and a number of other premium publishers.

Another major component of our go-forward strategy is to extend our platform into other addressable markets. We have seen considerable expansion in our mobile inventory and mobile managed revenues in Q2. In 2013, we focused primarily on mobile web traffic as we expanded the reach of our technology platform beyond the desktop. In Q1 of this year, we grew that focus to include mobile app inventory as well and have added a good deal of quality inventory in this space.

As mentioned previously in this call, the addition of InMobi as our customer on our platform accelerates our mobile trajectory and brings significant scale to our technology platform with over 750 million unique users a month around the globe, 30,000 apps and billions of impressions per day. Together with InMobi, we will be ploughing new ground by focusing not just on mobile, but on high-demand mobile needle. We believe these initiatives contributed to our very successful Q2.

And with that, I would like to turn it over to Todd.

Todd Tappin

Thank you, Greg. Overall, we have continued to experience tremendous growth, once again led by our RTB solutions, while continuing to invest in the business to drive future growth. Due to seasonality of our business, we will compare the second quarter of 2014 to the second quarter of 2013.

Managed revenue, which is the media spend transacted through our platform in a given period, is an important operating metric for both internal and external evaluation purposes. Because many companies in our industry record revenue on a gross basis, managed revenue provides comparison to others in our industry. Managed revenue for the second quarter of 2014 was $153.5 million compared to $112.7 million in the second quarter of 2013, an increase of 36% year-over-year. The increase in managed revenue was primarily driven by an increase in both pricing and bidding activity led by RTB, which represents the largest portion of our business.

According to IDC, RTB spending globally was expected to grow approximately 50% year-over-year from 2013 to 2014. Rubicon Project's RTB managed revenue grew 75% for the six months ended June 30, 2014, versus 2013, thereby significantly outpacing expected industry growth rates. The increase in managed revenue resulting from the increase in average CPM with marked high buying was partially offset by a decrease in the volume of paid impressions year-over-year, which was primarily a result of the quality control initiatives we instituted during the end of 2013. As a result of the end of year 2013 anniversary of the traffic quality control initiatives, we expect to experience the same comparison throughout the remainder of 2014 versus 2013.

We report revenue on a net basis and generate fees from buyers and sellers transacting on our platform based on a percentage of managed revenue. Our take rate represents the total of the buyer and seller fees that we charge and is influenced by a number of factors. Revenue in the second quarter of 2014 was $28.3 million compared to $19 million in the same period in 2013, representing a year-over-year increase of 49% and well above the midpoint of our guidance of $25 million.

The increase in revenue was primarily due to the increase in managed revenue and related metric fluctuations, as previously mentioned, and an increase in take rate. The take rate increased to 18.4% in the second quarter of 2014 as compared to 16.9% in the same period in 2013. The increase in take rate year-over-year was primarily due to the higher mix of auction RTB managed revenue, which is approaching 80% of our total managed revenue and which carries a higher take rate compared to overall managed revenue.

Operating expenses including cost of revenue increased to $35.4 million in the second quarter of 2014 from $20.6 million during the same quarter in 2013. The increases in operating expenses were primarily due to the expansion of our sales efforts and general and administrative expenses associated with becoming a public company. The total year-over-year increase of $14.8 million included an increase of $5.6 million of the non-cash stock-based compensation.

Net loss increased sequentially from $6.1 million in Q1 of this year to $9.4 million this quarter, primarily due to an increase in non-cash stock-based compensation expense, which was $7.1 million, a sequential increase of $4.6 million. The sequential improvement in adjusted EBITDA was primarily due to an increase in revenue and additional capitalized cost, partially offset by an increase in expenditures, primarily compensation.

Adjusted EBITDA was $2.7 million in the second quarter of 2014 compared to $2.1 million in the second quarter of 2013. The year-over-year increase was primarily due to the increase in revenue, partially offset by the increased operating expenses from both hiring and infrastructure investments incurred toward the end of 2013 associated with an increase in engineering and product related development, enhancements in our sales efforts as well as costs associated to becoming a public company. We expect 2014 cost to significantly increase over 2013 as 2014 will reflect the full year effect of these 2013 investments as well as planned product international expansion efforts in 2014. Q2 2014 adjusted EBITDA was $2.7 million, was favorable to the midpoint of our guidance, a loss of $4.5 million.

The favorable variance to guidance was primarily due to the strong revenue performance and secondarily due to slower than expected hiring. We plan to accelerate our hiring in the second half of 2014 in accordance with our initial plan.

In the second quarter of 2014, our GAAP loss per share was $0.29 based on the weighted average basic and diluted shares of 32.3 million. This compares to a loss of $0.28 per share during the same period in 2013, which was based on a weighted average basic and diluted shares of 11.4 million. Non-GAAP earnings per share in the second quarter of 2014 was breakeven based on non-GAAP weighted average basic and diluted shares of 33.2 million, well above the midpoint of our guidance loss per share of $0.23. This compares to a gain of $0.01 per share in the same period in 2013, which was based on non-GAAP weighted average basic and diluted shares of 26.1 million.

Capital expenditures, including property and equipment as well as internally used software, excluding capitalized stock compensation, was $7 million in the second quarter of 2014 and which is primarily composed of investments in buyer cloud features and functionalities, capacity expansion, orders, mobile and video. We expect capital expenditures to increase throughout the rest of 2014 and are expected to range between $15 million to $20 million this year.

We closed Q2 2014 with $105.7 million in cash, which includes $86 million proceeds from our IPO in April net of expenses. Debt including capital lease obligations was $0.2 million at the end of Q2 2014.

As a result of our strong second quarter results, we are raising our guidance for the balance of the year. Consistent with historical trends, we expect revenue in Q3 to be relatively in line with Q2, which results in an increase in prior Q3 estimates. We have comparison revenue in 2012 Q2 was $13 million versus $13.9 million in Q3. And in 2013, Q2 was $19 million versus $20.1 million in Q3. For the third quarter ending September 30, 2014, we expect revenue to be between $28.5 million and $29.5 million, adjusted EBITDA loss to be between $3.5 million and $2.5 million, and non-GAAP loss per share to be between $0.20 and $0.17 based on approximately 33.7 million weighted average shares.

As previously noted, we expect to accelerate our hiring efforts during the second half of 2014 in accordance with our initial plan. For the full year 2014, we expect revenue for the full year to be between $117 million and $119 million, adjusted EBITDA to be between positive and negative $1 million and non-GAAP loss per share to be between $0.41 per share and $0.34 based on approximately 32 million weighted average shares.

Despite our planned acceleration of cost in the second half of 2014, we expect the full year 2014 adjusted EBITDA to be favorable to prior guidance due to the strong results in the first half of 2014. We would further like to comment on some of the trends we see occurring in the business. We continue to hold our leadership position in reach, and we experienced growth in RTB, fueled by increased bidding activity and pricing. We operate in a large market and plan to invest in our business opportunity as more buyers and sellers increase the RTB activity across multiple platforms.

We believe we will benefit from positive trends in the industry and as viewed on a trailing 12-months basis quarter-over-quarter, the average revenue per seller and average spend per buyer on our platform continued to increase. We expect to see continued near-term growth from international seller expansion efforts primarily from existing territories with contributions later in the year from new territories.

Buyers tools orders is another product expansion efforts, mobile which may accelerate as a result of our recently signed agreement with InMobi and continued expansion of RTB and related pricing and bidding activity. In summary, advertising is a large market and we are leading the fastest growing portion, automation. Our strong financial results and RTB growth rates are evidence of this leadership. Our product consistently outperforms the competition and our customers' expectations, as evidenced by recent signs of InMobi and Comcast, high retention rates and network effects. Lastly, we continue to invest in growth and innovation with fiscal prudence.

We'd now like to open the line for any questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Deb Schwartz with Goldman Sachs.

Deb Schwartz - Goldman Sachs

So you talked about several of the initiatives that you had in the quarter, including increasing the number of sellers. Just wondering if you could give us a little bit more clarity of what drove the upside from your guidance, whether it was more sellers, better penetration of existing sellers or even mobile and how much that contributed in the quarter.

Todd Tappin

Most of that increase in revenue was driven by the increase in average spend per buyer. We also saw increased bidding activity. We think our matching algorithms are operating quite effectively, certainly leveraging the massive amounts of data that we have accumulated and really I think that's been a core driver. RTB continues to be the stand-out performer amongst our product suite.

Deb Schwartz - Goldman Sachs

As it relates to the price/volume dynamic, you mentioned increasing number of sellers and then similarly trying to improve quality. Can you sort of talk about how CPMs and impressions played out in the quarter?

Todd Tappin

CPMs were really pretty strong. Bid impressions were also one of those metrics that continued to do well, but it's going to have a lower number compared to 2013 because of the traffic quality control initiatives. We really spent a lot of effort on making sure that our traffic is clean of non-human traffic and those sort of things. And when we took the biggest initiative, that was actually in December of 2013. So a late anniversary, if you will, which means that we expect 2014 numbers to be lower than 2013 as a result of those efforts. However, a lot of those initiatives still continue through 2014. We now have built it into an ongoing component of our operations.

And that said, if we want to break down the bid impression growth between the different product suites, you'd actually see the bid impressions for RTB rose. And that's in contrast to the static type of product base, which we're actually seeing a shift moving more from those static ads in that product base toward RTB. And so that's one of the reasons you're seeing the higher mix of RTB revenue in conjunction with the rest of our business as well as some influence regard to bid impressions.

Those traffic quality control initiatives really have a minimal impact on revenue, especially with this shift toward RTB, because buyers will simply just reallocate to the higher quality traffic.

Frank Addante

I'll add to that that our orders business continues to grow and the orders business is different from the auction business. In the auction business, we need to see holes impressions in our system for them to be available in real time for the auction, whereas our orders business is driven by higher CPMs, but on lower volume. And part of that is that our algorithms are trying to more discretely match buyers with the exact impressions that they're looking for. And part of what drives pricing in this arena is creating scarcity. So our algorithms are driven in the orders business partially by scarcity.

And the third part of the orders business as well as that of the orders are processed in advance versus in real time. So the inventory or the impressions can be provisions on demand using the technology versus sitting in the auction environment in advance.

Greg Raifman

As we moved into higher quality inventory processing the growth in private marketplaces as well, and in those kinds of environment, you're going to see higher CPMs, you're going to see better quality inventory and you're going to see more controlled sellers and buyers put in place to work together. So this is part of our strategy long term and we're pleased with the direction it's going.


Your next question comes from the line of Kerry Rice with Needham.

Kerry Rice - Needham

Maybe can we continue along the lines of the orders business and the automation? Maybe if we take a step back or think about some of the things that were said in the industry over the quarter about some shifts to private exchanges, can you talk about maybe where we are in that cycle? Are we in just ending one here? And then how do I think about the industry evolving? Is the industry going to primarily evolve as private exchanges initially do you think from advertisers until they get some comfort level with that and then maybe shift more towards open exchanges? If you can talk about that a little bit.

And then the second question is the adoption of RTB by large brands, you mentioned P&G shifting a big portion of their online advertising towards RTB. Would you say we're in the early stages there as well or if we're in the later stages of that?

Frank Addante

If you look at the evolution of our product suite, initially we created a static bidding product that automated the sale of inventory between publishers and applications with ad networks. And that's where we first entered the market. Then that evolved to real-time bidding, which essentially standardized those integrations. Prior, those integrations were all one-offs. Our technology, how to integrate into every single ad network's reporting system uniquely, how to standardize all the counting methods from all the ad networks. RTB put a standard in place for all those transactions to occur. Both of those protocols, real-time bidding as well as static bidding, is where we're able to build our orders business.

So if you look at the evolution of RTB, initially it actually started off as a pretty controlled environment. We had features in our product called permission controls. Essentially what those permission controls did is they allowed the seller to be able to set pricing rules to be able to exclude certain buyers or only make it available to certain buyers. And those buyers could have been DSPs, they could have been ad networks, they could have been certain advertisers or agencies.

From that was essentially born this term that we use in this industry called private marketplaces, which essentially is just controlled RTB. You're putting rules around RTB. That's evolved a little bit further now to what we call the private exchange. So the private exchange is basically think of it as an opt-in versus an opt-out. So companies like Comcast can set up a private exchange where it's invite-only to certain advertisers and they could set certain rules or promotions or incentives for those buyers to purchase.

So I guess it was a long way of saying that I think this is just another step in the evolution and the use of automation. We use all these fancy terms, I think, to describe these things in the industry. But if I were to simplify, it's static bidding from ad networks. Then it became real-time bidding from DSPs. Now you've got controlled or private real-time bidding from DSPs, agencies as well as advertisers. And now you have the ability for publishers to set up private controlled environments.

So that's the private exchange business. It's an important part of our business. There is the open exchanges, which has been obviously an area that we have been leading as a technology company. We also supply technology to these large media companies to be able to set up their own exchanges and thus being a software company. That's an important differentiator for us. And then the orders part of it is also important in the idea that we're trying to connect sellers and buyers. And the best way is the ways that they prefer. So sometimes a buyer or an advertiser or an agency prefers to buy certain ad network or DSP. And sometimes they prefer to buy directly from the publisher depending on what their relationships are. And not only do we encourage, but we support all of these capabilities. So that's the answer to your first question.

Second question in terms of the adoption of RTB, we are seeing that the brands are recognizing the value that this provides. I think in the past before automation existing, the way the industry worked is you basically shove the whole bunch of inventory at the advertiser. And then the advertiser had to sort of filter it. It was kind of like panning for growth to filter the inventory that they didn't want to go find the audience inventory that they did. And obviously that's changed, because now they've got the ability to find the exact audience, exact users that they're looking for with real-time bidding. And I've been of course very encouraged to see how rapidly the adoption of RTB has come in the market, growing from zero to $7 billion in just five years alone.

I think we're in that evolution. I think it's being adopted rapidly. But I think we're still at the early stages of that adoption by the big brand buyers. But they're definitely catching on quickly.

Kerry Rice - Needham

Do you think that ultimately the private exchanges kind of continue to evolve to where everybody eventually adopts kind of an open exchange type of platform? And then just other question as far as any comments on Facebook's acquisition of LiveRail on the video side, how that may change the marketplace?

Greg Raifman

As you can tell, you've asked a couple of questions that we could spend a whole afternoon talking about. I mean this is very close to us. And Frank talked extensively about the progression of technology with respect to the various products that we've developed. And I think it's important to note that we develop products for buyers and sellers of all different kinds. Some buyers want to participate in private exchanges like GroupM just announced that they prefer to work in private exchanges rather than open exchanges. Some of our sellers want to sell some of their inventory in public open environment. Others want to work in private. And some do that. Some sell some of their inventory in private and public.

So we provide the gamut or the range of products for all different types of buyers and sellers to conduct their transact of buying and selling of advertising. And what we are seeing as time goes on is that there is not only a move towards automation that we've spoken about, Frank has spoken about for seven years ago and we've added to that, but in fact there is a move to automation in the more premium inventory. And that's I think one of the directions we're seeing. As you know, we announced our own product 49bc about a couple of months ago that we intend to go to market with later in the year, dealing with automated guarantee and premium inventory. That's the next evolution of private exchanges and direct orders.

So if buyers want to buy by all different methods, static, RTB, private, open, we were agnostic and we're happy to support that in all different ways. We're happy to support buyers reaching their audiences at scale and I think that's what we do better than anybody else.

Frank Addante

I think the big media companies have had a longstanding relationship with the advertisers and with the agencies. And I think in some cases, they're perfectly fine selling their inventory in open auction environment. And in other cases, they want to maintain those relationships and grow those relationships and describe their unique differentiators. So I think that's where the private exchange capabilities come in. So I don't think it's one or the other. I think that the sellers or advertising will utilize both depending on the case.

You also asked about the Facebook acquisition of LiveRail. LiveRail, great company, great team. I think it's a positive sign for the market overall. I think it's showing that the adoption of automation is important. And I think Facebook has certain been a great player in that. And I think in the world of social, they're certainly a leader. We worked a little down into really three parts. There's search. There's social. And then there's premium content. And of course, Google is leading in search. I think Facebook is leading in social. And then the premium content is the Foxes of the world and Viacoms and eBays of the world to our customers. So I think there're three segments of markets, which of course leading in the third.

When it comes to video, I think Facebook has a lot of video of course on their side and they're trying to find new and better ways to monetize them. And I think LiveRail is going to be very helpful in that. But Facebook has not traditionally made their product available to third-party sellers whether that be websites or applications. And I think one of the reasons that we need to exist is to be that open independent exchange that doesn't have owned and operated properties to compete with their sellers and isn't trying to sell our own advertising from those owned and operated properties to the advertisers to put this in channel conflict with the customers, whether it be buyers or sellers.

And then the last point, while video is certainly important, we again just launched our video capabilities in private beta, from an advertiser's perspective, they're trying to reach their audience in all available ways in digital whether that be display or mobile or video. And one of the advantages of our platform is that we provide the capabilities to access those audiences across all three forms, not just one.


Your next question comes from the line of Rohit Kulkarni with RBC Capital Markets.

Rohit Kulkarni - RBC Capital Markets

Can you provide for me any more color around what led to sequential rise in take rates assuming RTB as a percentage of managed revenue kind of stayed more or less around 80% from Q1 to Q2? And if you could call out one or two factors that you think are sustainable or you felt were one-time-ish in nature? And just on the take rate side, how should we think about take rates as your business shifts more towards perhaps international or more mobile over the next 12 to 24 months?

Todd Tappin

Take rates on a sequential basis increased primarily due to an increase in RTB mix. It did increase quarter-over-quarter and sequential basis obviously considerably basis more on a year-over-year basis. That was still primary driver. And what we've been saying for some time and we'll continue to emphasize is that we do see more upward momentum on take rates than downward pressure. And there was no one-time event and I think we have certainly a leverage position and a critical position in the market.

That all said, we also think that the penetration pricing strategy that we've been using is still right for the near term. And therefore while there are opportunities sometimes to increase the take rates, we would still guide investors to think of them as being relatively constant going forward.

Rohit Kulkarni - RBC Capital Markets

Just a question on the buyer side of things. As you look forward to your product roadmap for direct orders, particularly from the buyer side, are there any missing strategic pieces that you think you need to build out completely from your 49bc beta launch, perhaps any first-party advertiser data or tools not just for DSPs, but more going towards agencies and trading desks, anything that you think is strategically missing there?

Frank Addante

We have buyer capabilities really since inception. Initially the target user for the buyer capabilities was the ad networks and we provided a self-serve interface for those ad networks to be able to buy inventories at static bidding from publishers and now application developers. Real-time bidding, the product was in API for DSPs to create applications and be able to access inventory real time. And then as we've moved into the order automation capabilities, we're providing interfaces for agencies as well as the advertisers to be able to purchase directly from the publishers and the applications that exist in our platform.

We are not in the business of selling media. We are in the business of supplying technology. And when these advertisers agencies are buying directly from the publishers, sometimes they might use a DSP to be able to execute campaign and sometimes they're processing that order directly with the publisher. Our job is to connect them in all the ways that both the sellers and the buyers prefer.

In terms of holes, we sit on and process mounds and mounds of data, I mean 6 petabytes of data over 4 trillion bids which are essentially data signals on a monthly basis across 600 million users on a global basis. So as you can imagine, the value of that data is incredible. And I think we're really just at the tip of the iceberg in terms of putting that data to use. So we identify a hole as in taking that data and creating value from that for the buyers.

Rohit Kulkarni - RBC Capital Markets

And just a housekeeping question on 49bc and InMobi. What is the expected launch or general acceptance launch of both of them?

Greg Raifman

InMobi, we're already in market with the powering InMobi Exchange. We have a number of phases that are underway. We're well through our first stage and continuing along. This is a very large partnership and we expect it to go to fruition over the course of the rest of this year and into next year. And we want to get it right. And we're working with the significant large InMobi team to get it right in all aspects of it. So we expect to see improvements in the phases through the course of later this year to reach the ultimate potential of multi-billion impressions per day.

With respect to 49bc, we also see that as an evolution, as the beginning of a process of automating the order side of the business in a guaranteed manner. It's going to take both acceptance from buyers and sellers. And so we are at the beginning of that process and the industry is frankly at the beginning of that process. Now as Frank mentioned, you see companies like Proctor & Gamble and American Express and others talking about how they can automate the multi-billions of dollars of their spend per year. We don't expect to see any given product taking over the marketplace in a short period of time. We see it to be an evolution from where we are today to looking back several years from now.

Frank Addante

With InMobi, Naveen and his team over at InMobi have been built an incredible business, just massive, massive scale, 759 million users on a global basis, 30,000 mobile apps. Typically, for publisher, there's a good 60 to 90 day ramp-up period that just gets the customer up and running, get everything configured. And then the network effects of our business kick in. So the advertisers typically follow the audience. So once they activate that audience and make it available in an automated environment, then the buyers come and then kind of activate those deal networks, more seller inventory and audience attracts more and more buyers.

So as Greg way saying, I think there's a pretty quick ramp-up time. Clearly, this is an important deal and an important customer and partnership for us. But we're already up and running in market and then that will continue to grow and as network effects continue to grow, then that's something that gets fueled over many months into a year-plus.


There are no further questions at this time. I'll turn the call back over to the presenters.

Frank Addante

Thank you all for joining us this quarter and we look forward to staying in touch as the days and months progress.


This concludes today's conference call. You may now disconnect.

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