Seeking Alpha

The Rubicon Project Has Further To Go

|
About: the Rubicon Project, Inc. (RUBI)
by: Shareholders Unite
Summary

Our earlier turn-around thesis has played out with the shares more than doubling in a year.

Tailwinds from programmatic, video and audio, and new features like Supply Path Optimization and Demand Manager will keep growth going.

We are quite impressed with management which is highly adept at introducing new features which give the company a leg up.

There is considerable operational leverage and cash flow is at break-even already.

We first introduced The Rubicon Project (RUBI), an independent programmatic ad marketplace, late September last year, when we argued it was an interesting turn-around play. Indeed, that scenario played out with the shares up nearly 2.4x since:

The company has indeed made progress:

Chart Data by YCharts

But GAAP losses are still substantial, even if the company managed to get into the black on an adjusted EBITDA basis in Q2. Some of these GAAP losses stem from amortization of acquired intangibles ($0.8M in Q2) but this should be done by 2022, from the earnings deck:

Much of the rest is the result of share based compensation ($4.8M in Q2).

Growth

Where does the growth come from, well the main drivers are:

  • The shift towards programmatic advertising
  • SPO (Supply Path Optimization)
  • Demand Manager
  • Consolidation of supply-side partners
  • The rapid growth in video and audio ads
  • Stabilizing CPM

Programmatic advertising is software driven automatic ad placement. From Marketingweek:

"Programmatic is buying digital advertising space automatically, with computers using data to decide which ads to buy and how much to pay for them. Kenneth Kulbok, LinkedIn Programmatic... Put simply, brands or agencies use a demand side platform (DSP) to decide which impressions to buy and how much to pay for them, while publishers use a supply side platform (SSP) to sell ad space to brands. These two platforms are then matched up in real time.

Unlike many competitors, The Rubicon Project isn't favoring one side, it's completely independent, they're never in competition with either buyers or sellers.

What they try to do instead is Supply Path Optimization (see Digiday for an intro), which (Digiday):

gives media buyers the ability to bid on and win inventory at the most reasonable price, while it lets publishers maximize their revenue over the long run.

And, not surprisingly, management itself is touting its SPO. There is increasing demand for consolidation (Q2CC):

MediaMath, one of the largest global Demand Side Platforms together with us and Havas, one of the largest agencies announced the partnership to architect the direct and transparent programmatic delivery infrastructure. Havas is quoting an ad exchanger saying they reduce their numbers of supply-side partners from over 40 to around eight. This is illustrative of more buy-side partners wanting to reduce sources of supply within our ecosystem from more efficient and targeted buying. Our ability to differentiate ourselves as a scaled efficient omnichannel exchange with safe inventory puts us in a great position to continue to gain share as the industry further consolidates.

SA contributor Eight Diamonds Advisors wrote extensively about Rubicon's Demand Manager (introduced in May this year) so we refer you to this excellent article for details.

It's a solution to deal with complexity for publishers having to deal with multiple exchanges and different interfaces and software. Demand management enabled (Eight Diamonds Advisors):

large publishers to deploy, configure and optimize their own Prebid-based header bidding solutions... Demand Manager provides enhanced tools for configuration management, user interface and performance analytics. It allows publishers to manage all of their exchange connections in one simple universe.

Rubicon earns a fee from consulting and optimizing for what is an open source as demand management is built on the open software code Prebid which was founded by Rubicon and AppNexus.

Management believes Demand Manager will be a growth driver starting next year, assuming that there are enough clients who prefer to pay a small fee (commensurate to revenue) for Demand Manager, rather than run the free Prebid by themselves as it will save time and effort on configuration.

Q2 results

From the earnings deck:

Both revenue (by $2.76M) and non-GAAP EPS (by a whopping $0.08) were solid beats with mobile revenue growing even faster (+42%) and it now constitutes 56% of revenue. From the 10-Q:

Video has been a strong driver of late and Q2 wasn't different, with revenue increasing at roughly twice the rate of the industry growth (which is in the low 30s) and audio revenue doubled.

Outlook

Q3 looks pretty promising as well as management noted that July has continued the lift experienced in May and June. Management expects Q3 revenue growth to be 30%.

Margins

Chart Data by YCharts

Gross margin is recovering from the abolition of buy-side fees in November 2017 (which were responsible for 50% of revenue at the time). There also is considerable operating leverage, from Q2CC:

Operating expenses which in our case includes cost of revenue for the second quarter of 2019 were $46 million down from $48 million in the same period a year ago.

GAAP operating margins are still deeply red (mostly because of share based compensation) but recovering.

Cash

From the earnings deck:

The company produced positive free cash flow of $300K (excluding changes in working capital) and have $86M in cash and equivalents. After difficult years cash flows are improving again:

Chart Data by YCharts

Share based compensation has fallen and dilution hasn't been a recent problem.

Chart Data by YCharts

There are 4.6M shares to be added from compensation plans, per the 10-Q:

Valuation

Chart Data by YCharts

Valuation, which had fallen rather deep, is climbing again, but 3x sales for a company growing revenue at 30%+ and producing 60% gross margin isn't excessive.

This year, analysts expect an EPS loss of $0.19, falling to a loss of $0.08 next year.

Conclusion

The company has successfully climbed out of the valley that was largely the result of abolishing buy-side fees. The recovery isn't yet complete, the company still makes a (small) loss, but cash flow was already break-even in Q2.

Given the tailwinds by programmatic, mobile, video and audio, we don't see why the recovery won't continue, unless the economy worsens considerably. We think management has proven quite adaptable and adroit in introducing new features that customers like.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RUBI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.