The Rubicon Project, Inc. (RUBI) CEO Michael Barrett on Q3 2018 Results - Earnings Call Transcript

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About: The Rubicon Project, Inc. (RUBI)
by: SA Transcripts

The Rubicon Project, Inc. (NYSE:RUBI) Q3 2018 Earnings Conference Call November 7, 2018 4:30 PM ET

Executives

Nick Kormeluk - Investor Relations

Michael Barrett - President and Chief Executive Officer

David Day - Chief Financial Officer

Analysts

Jason Kreyer - Craig-Hallum

Matthew Thornton - SunTrust

Operator

Good day and welcome to the Rubicon Third Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mr. Nick Kormeluk. Please go ahead, sir.

Nick Kormeluk

Thank you, operator, and good afternoon, everyone. Welcome to Rubicon Project's third quarter 2018 earnings conference call. As a reminder, this conference call is being recorded. Joining me on the call today are Michael Barrett, President and CEO; and David Day, our CFO. I would like to point out that we have posted the financial highlights slides to our Investors Relations website to accompany today's presentation.

Before we get started, I would like to remind you that our prepared remarks and answers to questions will include information that might be considered to be forward-looking statements including, but not limited to, statements concerning our anticipated financial performance and strategic objectives.

These statements are not guarantees of future performance, they reflect our current views with respect to future events and are based on assumptions and estimates, and subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from expectations or results projected or implied by forward-looking statements.

A discussion of these and other risks, uncertainties and assumptions is set forth in the Company's periodic reports filed with the SEC, including our 2017 Annual Report on Form 10-K and subsequent filings. 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 and in the financial highlights deck, which we have posted to the Investor Relations website.

At times, in response to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business. Please be advised that this additional detail may be one-time in nature, and we may or may not provide an update on the future of these metrics. I encourage you to visit our Investor Relations website and access our press release, financial highlights deck, periodic SEC reports and webcast replay of today's call to learn more about Rubicon Project.

I will now turn the call over to Michael. Please go ahead.

Michael Barrett

Thank you, Nick. I'm very pleased to report that I'm very pleased to report that our business has continued to improve as seen by our higher ad spend growth rate this quarter and continued improvement in our take rate. Year-over-year ad spend growth increased to 24% in Q3 from 16%% in Q2 and 10% in first quarter, which marks the third consecutive quarter of double-digit adds been growth

As been growth combined with achieving our Cascos [ph] deliverey improved financial performance in Q3 and will lead to positive adjusted EBITDA in Q4 as we remain focused on achieving positive free cash flow.

I’ll now touch and some of the positive drivers in our business. Our inventory continues to more than double year over year. Audio and video drove strong results for us and we outpaced industry growth rates. We continued to see gains in mobile ad spend this quarter with year over year growth of 45%. And importantly we also grew desktop 6%.

[indiscernible] continues to evolve as well and I wanted to make some general comments about its adoption and opportunities. We've seen that even the most sophisticated publishers want help managing the complexities of heard [ph] billing, we believe the combination of transparent, open source wrappers, easy to use tools and managed services is the feature of header bidding and we're already offering the solutions to some of our largest sellers.

Secondly, mobile app and video have been slower in their migration to header bidding, mobile app primarily because it has to be done server side since managing the bidding process from within the app is nearly impossible and slower in video given supply constraints. We see this changing as more long form premium video supply becomes available via OTP and CTV.

Matraid [ph] vary across different types of heter bidding and continue to improve over time, especially server side. So what does this mean? We think this presents a very opportunistic market in front of us in 2019,’ 20. We enter this next phase in heter as a large growing independent exchange that offers all header bidding favors who can manage and host wrappers for its publishers, who has the broadest expertise across inventory types and who is known for being trusted, transparent and high quality.

We feel really good about our chances in this upcoming fight for share as the industry evolves. We now have over 1200 head or bitting connections generating more than 80% of our revenue. Our belief is that by the end of next year almost our entire business will be bidding. Our pre-bid solution continues to gain traction, as well as our partnerships with Google and Amazon.

We get quite a few questions about the speed at which we can gain market share with the supply side consolidation by buyers. The acquisition of Nexus [ph] by AT&T and some of the missteps by competitors in this space. I would say that just as it took time for us to demonstrate ads spring growth and market share gains from adding traffic shaping and emoving buyer fees and launching EMR these new drivers will also take some time to make it from headlines to actual ad spend and revenue gains . There is no question we want these market forces to play out faster.

However the great news looking forward is that we believe there is significant upside from these drivers has not yet made it into our results, allowing for this growth to be realized in the quarters ahead.

Now that we have made solid progress on stabilizing the business and returning to growth and are getting close to generating profits again, I wanted to share some insights for what our long term vision for the business is.

Some of these goals are aspirational and are not ones that I can assign specific timelines to but I wanted to share the vision we are working towards. We aim to be if not the independent leader across all header bidding options whether it's our own pre-bid powered solutions or via external partners such as Googl,e Beeby and Amazon Tam.

We plan to continue to be the leading independent exchange in video mobile, app in audio especially as heter building accelerates growth in these markets in the coming years. We think over time the number of exchanges will reduce to very few in number. And we believe a broad offering will be critical and have chosen to invest across all media types especially the largest and fastest growing.

We look ahead to how we reach multiple billions has been versus the roughly 1 billion by capturing 10 %t o 15% percent market share of our addressable digital programmatic advertising market. We look to consistently grow annual revenue greater than 20%. And we are targeting 25%% or greater adjusted EBITDA margins by prudently managing growth costs and investments.

We are pleased with her market position in progress year to date and very excited about the market opportunity that lies ahead of us. We have spent the last year and a half plus since I joined Rubicon in investing in our technology pushing the industry towards transparency, getting pricing rate, rightsizing our cost structure and returning the company to ad spend in market share growth. We are pleased that these actions will put us in a position to deliver year over year ad spending and revenue growth and be adjusted EBITDA positive in Q4 this year and be cash flow positive by the end of 2019.

With that I will hand things over to David who go into greater detail regarding our financial performance. David.

David Day

Thanks, Michael. We made solid progress during the third quarter towards generating positive adjusted EBITDA driven by ad spend growth of 24% and increase in our take rate and managing our expenses which came in at the target we provided earlier in the year.

Balancing growth and cost reductions is not easy to achieve and we are pleased with this accomplishment and with our position going forward, with only a $1.4 million adjusted EBITDA loss in Q3 we feel very confident about generating positive adjusted EBITDA in Q4.

Turning to Q3 results. For the third quarter of 2018, we generated $29.7 million in revenue, a 4% percent sequential increase, $242 point two million in advertising spend, up 24% year over year and adjusted EBITDA loss of $1.4 resulting in a loss of $0.18 per share in non-GAAP EPS.

The 24% total advertising spend increase in Q3 2018 versus prior year was meaningfully better than the 16% in Q2 and 10% in Q1 of 2018. The year over year increase was driven by a 45% increase in mobile ad spend and importantly an increase in desktop that Michael cited earlier.

Mobile represented a 55% of ad spend mix in the third quarter versus 47% in Q3 of last year. As Michael noted, video and audio continue as the fastest growing areas. Revenue for the third quarter was down year over year due to the elimination of our buyer fees on November 1st 2017 partially offset by the increase in year over year ad spend. As noted, this year this year over year comparisons will be cycled in this current quarter for two of the three months of the quarter.

Recently we have seen buyers benefit from DSPs refining their first price auction bidding algorithms and also from our EMR pricing tool. In addition, we have seen privacy initiatives drive more contextual impressions targeting, both of these factors have put some near term pressure on CPMa which is a trend we are monitoring. We believe the CPM movement is to be expected, and as customary as our industry continuously adapts to changing factors.

Our average take rate was 12.3% during the third quarter of 2018, an increase of 20 basis points sequentially due to the continued rightsizing of fees from publishers following the elimination of buyer fees in November. Take rate is defined as revenue divided by total outspend.

Operating expenses which in our case includes cost of revenue for the third quarter of 2018 were 44 million down from $51 million in the same period a year ago, excluding the $90 million goodwill impairment charge in 2017. On an adjusted EBITDA basis operating expenses including costs of revenue for the third quarter were $31.2 million versus $37.5 million dollars in Q3 of 2017. The declines in both reflect benefits from our cost are done reduction actions during the year.

Net loss was $13.8 million in the third quarter of 2018, as compared to a net loss of $104 million in the third quarter of 2017. The decrease in net loss year over year was primarily a result of the $90 million goodwill impairment charge in 2017.

Adjusted EBITDA was $1.4 million in the third quarter of 2018, representing an improvement as compared to an adjusted EBITDA loss of $2.3 million reported in the same period one year ago. The decrease in adjusted EBITDA loss was driven primarily by lower costs, partially offset by lower revenue.

GAAP loss for share was $0.27 for the third quarter of 2018 compared to GAAP loss per share of $2.11 in the same period in 2017, which included the goodwill impairment. Non-GAA loss per share IN the third quarter of 2018 was $0.18 compared to non-GAAP loss per share of $0.14 reported for the same period in 2017.

Capital expenditures including purchases of property and equipment, as well as capitalized internally use software development costs were $6 million for the third quarter of 2018 bringing the year to date 2018 total to $12 million. We continue to expect that CapEx will come in at roughly $20 million for the full year.

We closed the third quarter of 2018 with $97 million in cash and marketable securities, a decrease of 7 million from Q2. This reduction resulted primarily from capital expenditures and cash operating losses in the quarter.

Free cash flow for the third quarter of 2018 was negative $7.5 million for the reasons stated earlier. We calculate free cash flows, net cash provided by our used in operating activities, less capital expenditures including capitalized software development costs.

Since the filing of annual tax returns drives our net operating loss calculations are NOLs, we do not update them quarterly. As a reminder, as of December 31, 2017 our federal NOLs were approximately $240 million resulting in a tax affected federal benefit calculation of $50 million which reflects the new U.S. corporate tax rate of 21% a total potential tax affected NOL benefit adding state and Canadian benefits to this federal amount is approximately $65 million.

I will now shift to sharing some indications for our fourth quarter expectations. We expect that year over year ad spending growth will be approximately 20%. We expect that take rate in Q4 will approach 13%. We expect Q4 2018 revenue to grow over 20% year over year even with a month of buyer fees in Q4 of last year.

We also expect that adjusted EBITDA operating expenses in Q4 including costs of revenue will be approximately $32 million in line with our target discussed at the beginning of the year.

As a reminder we settled the Guardian lawsuit shortly after the end of Q3 and the resolution was not material to our financial results. We are pleased to report improved financial results driven by ad spending growth coupled with benefits from our cost actions. We feel very good about sustainable top line growth, achieving our near term goal of being adjusted EBITDA positive in Q4 and being cash flow positive by the end of next year. With a strengthened competitive position, we look forward to growing market share and showing continued improvement in our future financial results.

And with that let's open the line for Q&A

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Jason Kreyer from Craig-Hallum. Please go ahead.

Jason Kreyer

Hey gentlemen, good afternoon. Congratulations you just continued good performance. First question on the take rate improvement, just if you can give any color on the sequential improvement in Q3 over Q2, more specifically the improvements you're forecasting for Q4, what's driving that is that more of a mix shift or is that just a renegotiation with sellers?

David Day

Sure. Jason, its David. That's really driven mostly by renegotiation. So not much mix shift going on there. You know, I think as we've talked about in the past we've - when we got rid of buyer fees there was really a significant subsidy - subsidy from buyer fees relate to seller fees and so this is really just sort of right sizing, you know, those seller fee levels. So we continue to work on that and feel good about our progress.

Jason Kreyer

So in other words there's no anticipated anomaly in your projection for Q4?

David Day

That's right. There's no mix there's no mix anomaly. It's really just the impact of our renegotiations that you know we'll have a little bit bigger impact in Q4 than they did the last couple of quarters.

Jason Kreyer

Okay. Got it. Michael some of the color that you gave on the move to - mobile app and video what gives you the confidence that you're in the right place to take some of that market over. And then what do you think is the linchpin that really drives better header bidding adoption in those industries?

Michael Barrett

Yeah. Jason ,great question. So you know I think the - r confidence in our ability to succeed in these areas of opportunity driven largely by relationships with the publishers. So a lot of the folks that are going to be playing in the ad supported premium long form videogame are existing publishers already that we've been helping monetize their banners and their web video in their audio for years.

So I think there's a trust there. We are aggressively building out our product suite to be able to be best in class in that area as well. Mobile slightly different marketplace and again we have a lot of relationships indirect - direct with the mobile app providers and I think they all look it, generally speaking mobile app advertising has been heavily performance based mostly app install advertising and it's worked extraordinarily well.

However that's kind of - that has a TAM [ph] to it if you will. And all the app guys that we talked to are very desirous of the type of demand that we can bring which is more brand centric and brands have gotten increasing comfort with the taxonomy we're using for mobile app inventory. So I think that that the combination of those relationships and the type of demand that we're bringing to the mobile bodes well for us.

Jason Kreyer

That's fair. Thank you. Also the some of the long term growth figures you gave were very helpful. So I just want to express my appreciation for that, In regards to that David can you give any color on you know as we progress over the long term what we should anticipate for incremental margins?

David Day

Yeah I think you know - we have as we talked about long term 25$ percent adjusted EBITDA margins. And if you kind of do the math and how you get there it certainly implies you know a pretty significant flow through. So we're not putting any specific numbers out there, but you know certainly a majority of the increases that we get are going to flow through from a margin perspective because we continue to have very significant leverage in our model and at this point it's - you know we've shown that leverage in the past and you know we have to we have the leverage a little higher scale now but we're now growing into that higher scale.

Jason Kreyer

Okay. Last one for me Michael. It's been somewhere in the 3 weeks since you made the move to remove buyer fees. So just wondering if you can kind of give a summary of what the conversations were with publishers and with DSP a year ago and how those conversations have progressed how has that changed to the dialogue that you're having with your customers today.

Michael Barrett

The more key difference sest. So the little tick the buyside first. The interesting phenomenon that's occurred since I joined Rubicon [ph] is how much more active marketers are who actually have the wallet so to speak in their agency partners.

If you were to typify our relationship with the buy side it was probably didn't begin and end with the DSPs but it was heavily focused on DSPs. And so now we're talking to the source of dollar the idea of removing any friction from a sea base as had very very positive impact. And so I would characterize we have - we've figured out the right pricing for the buyside which is zero.

The sell – on side I think that we've seen the flowthrough rate there they're seeing greater payments through you know our publisher revenue. And there couldn't be more enthusiastic about our return to prominence about our return to moving to the first chair of the monetization partners and we really do think there's a heck of a lot of more runway to go, so all in all however painful it was. It seems like 530 weeks in 50 degrees but it it's all worked out exceedingly well.

Jason Kreyer

Okay. great. Thanks a lot for taking the questions.

Michael Barrett

Thanks, Jason.

Operator

Thank you. Your next question comes from Matthew Thornton from SunTrust. Please go ahead.

Matthew Thornton

Good afternoon, guys. And can congrats for all the success and progress here. I know it's been tough, but the numbers are great. On take rate these, maybe to get an update there as to where you think the sustainable number is if we think out over the next. I mean I don't know how long we can go but you know two years or so left to get an update on your thinking there.

And then on the on the 20 percent plus you know type of ad, I think he called out 20 percent plus ad spend and revenue growth is the aspiration per year. I'd love to get maybe your sense of what you think the industry is growing 10% 15% percent. So let me get some thoughts there.

And then also as we - how do you think about over the next 1 to 2 years counterbalancing, you called out some of those data privacy issues so you IDP 2.0 and [indiscernible] privacy settings and GDPR and you know those are headwinds. And then on the flip side you've got some of this recent consolidation without nexus and adds with a couple of your direct comps stumbling a little bit recently.

So you know in the context of that 20% plus - how you how we should be thinking about the catarrh balance of those kind of forces there. And I'll stop there and I've got a couple of follow ups.

Michael Barrett

Okay. So I'll start with the year the take rate. Yeah think it's kind of in the near term. You've seen the trends that we've had on near term on you know on the margin, we think there's room for you know a little bit of negotiated lift what happens over time though is the mix shift that we've talked about. And so you know take rate you know we think ultimately as PMP grows as a percentage of the business that typically carries a lower take rate and now you know over time tend to have a depressing impact on take rate. But at the same time you're typically buying you know video and other higher CPM by units and so you're having you know at a much higher flow through so you'll see a lower take rate but it should result in greater ad spending growth.

So you will see lower take rate but it should result in greater ad spend growth. So in the revue its net positive. So that’s how we see that sort of playing out. Hard to sort of say where it's actually at in you know two years.

From a market growth perspectivem, if you look at you know everyone's got you know, different numbers but they all sort of are so close together if you look at Magna they sort of got 15% you know kind of CAGR you know general growth over - over time. And so you know we think of the market growth as 15% you know maybe a little higher depending on who you talk to. That's on market and you want to take the privacy.

David Day

Yes sure. So privacy [indiscernible] we obviously looked through GDPR what we normally find at first there is an imbalance you have a bunch of impressions that used to be targeted prior. Now the ability of today to target them is eliminated but over time that money sometimes goes off to impressions on the exchange that are able to be targeted. And then of course with contextual targeting becoming more popular OR becoming more valuable over time.

You know, you start to see this equilibrium take place - take place. I think you know they're disruptive but long term I don't think it spells a winter of lower CPM across the board. And of course we have much higher value inventory if you look ahead much higher value inventory coming on in the form of video and long form in premium.

Then if you look back the big banner are setting sun setting Overall we're very hopeful that we're not talking about cookies a year from now, a year and a half from now. We really do as an industry have to stop glamming up the browser gobbling up the page with all bunch of code in order to track folks around the Internet and move much more to an elegant solution on the server with match tables .And we're leading a charge in that on several different initiatives. So we remain hopeful that this automated aerators and programmatic data driven business is still incredibly healthy in the long run.

Matthew Thornton

That's helpful. And then maybe just got a couple follows up is I could, maybe are for Michaela you talked a little bit about the number of exchanges you know coming down to a few. Is that a function of you know places closing the door is a consolidation and how would you view because participation there I guess at the first follow up.

Second follow up any thoughts on our macro obviously we've had some turbulence here recently certainly in the equity markets there's a lot to hear if you've seen any evidence of that out there in the advertising in the exchange business. And then just finally and relatedly when you look at herder [ph] bidding server side versus client side as well as your first party auction first second party auction. I'd love to hear just where you think those debates are - are shaking out okay where we think we're headed. And if Rubicon has more chips in the game one - one versus the other or are you guys pretty you know I'm not carrying so much as to how that shakes up are pretty evenly stacked on both. And that that be it for me. Thanks guys.

David Day

Thanks, Matthew. So on the consolidation front other than just kind of pattern recognition of a maturing industry and knowing that there are still too many players. It's really driven from conversations with buyers. They very quickly change their strategy from trying to find an individual on any platform kind of regardless of the content on their platform trying to get them at the cheapest price for their client the marketer to being very, very concerned about the quality of the content on the exchange and knowing that they don't have to plug into new platforms any longer.

And so we've talked to many agencies who say they see a future state over time where they're not buying off more than 10 platforms and today they're still probably in the 40 to 60 neighborhood. So we feel very encouraged about the trend lines and that's coming straight from the buyers that have all the power because they have the money. So I think that covers a consolidation from our point of view.

On the macro, I'm not entirely clear the question but we haven't seen from a you know from a spender or budgets or been told from any of our buyers that they have less money to spend because they're their clients are cutting ad spend so I don't know if that answers the question Matthew

Matthew Thornton

Is there is evidence of [indiscernible] equity markets kin d of seeping into that into the end markets here, but doesn't sound like you're seeing any signs of that?

David Day

No, no. And then on the other side the server to server in an auction dynamics for first for a second, I think we feel as a company that it's a better longer term approach server and so we're putting a lot of energy and effort into it for all the reasons I kind of cited before when we were talking about data privacy and that is let's get all this stuff off the page. Let's get it out of the browser and let's do it on the server. It'll be more efficient effective, more privacy compliant. And I think that that's where the future's heading and we're putting a lot of energy and resources into it.

It's also a great way to crack into the mobile app market. You know if you have one pre-bid STK as opposed to Guam up your mobile app with 10 monetization SDK it really is kind of where the future's heading so terribly excited about that.

As you release the first verse second we've obviously moved to first press shop. It's the bar none it's the most transparent way to go about it. It's pretty simple.

First price. We also accompany buyers as you know by coming out with an estimate of marker tool which allowed them to transition from the second place algorithms that they had to a first price world. Google still operates their exchange and second pricing will defend that to the hilt. I think really what we try to do and this is appease both sides in the marketplace.

We don't really have a religious stance as to whether first or second is the right way to go, we all dominate [ph] the marketplace very well have downstream some publishers wanting to run an auction just on their inventory that's slightly different from the rest of the auction that's kind of what we alluded to when we talked about the next phase of heder bidding and more of a managed more of an enterprise solution.

So I think you always get more interesting but as it relates to auction dynamics whatever it is we're just going to be transparent about it. We're just going to tell you what it is and you can choose to buy or sell it if you don't like it you don't do it if you like it you do it. But transparency is the key here whether it's second whether it's first whether began soon comes back, whatever the case may be, transparency is the most important aspect.

Matthew Thornton

Great. Thanks guys.

Operator

Thank you. This concludes our question and answer session. I would now like to turn the conference back over to Mr. Kormeluk for closing remarks.

Nick Kormeluk

Actually this is Michael Barrett and I would just like to thank all of our employees for their efforts and hard work, as well as our partners and shareholders for their support in the last couple of years in putting us in that position to grow market share. We look forward to seeing some of you at some -we look forward to seeing some of you at our presentation at the Craig-Hallum conference in New York -on November 15 and marketing in Boston on November 16th. Thank you for joining us for our Q3 results call and have a good evening.