Aug 2, 2016
Executives
Erik Randerson - Vice President, Investor Relations Frank Addante - Chief Executive Officer and Founder, Chairman of the Board Gregory R. Raifman - President & Director David Day - Chief Accounting Officer and Interim Chief Financial Officer
Analysts
Brian J. Pitz - Jefferies LLC Brett Huff - Stephens, Inc.
Youssef Squali - Cantor Fitzgerald Securities Aaron M. Kessler - Raymond James & Associates, Inc.
Kerry Rice - Needham & Co. LLC Jason Helfstein - Oppenheimer & Co., Inc.
(Broker)
Operator
Good afternoon, and welcome to The Rubicon Project Second Quarter Earnings Conference Call. All participants will be in listen-only mode.
As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Rubicon Project's website following the call. After today's presentation, we will conduct a question-and-answer session.
I would now like to turn the conference over to Eric Randerson, Vice President of Investor Relations for The Rubicon Project. Please go ahead.
Erik Randerson - Vice President, Investor Relations
Good afternoon, everyone, and welcome to Rubicon Project's 2016 second quarter earnings conference call. As a reminder, this conference call is being recorded.
Joining me today are Frank Addante, CEO and Founder; Greg Raifman, President; and David Day, our Interim Chief Financial Officer. Before we get started, I'd like to remind our listeners that our prepared remarks and answers to questions will include expectations, predictions, estimates and other information that might be considered to be forward-looking statements, including, but not limited to, guidance we are providing and other non-historical statements related to our anticipated financial performance, operating and strategic plans, expectations regarding new initiatives, our relationships and business with buyers and sellers using our platform, competitive differentiation, fees and take rate, capital investment and organizational development, our competitive position, and market conditions and trends and growth expectations, including growth in orders, mobile and video.
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 risks or uncertainties materialize or assumptions prove to be inaccurate. Further, we may adjust our plans and expectations in response to market conditions or other factors.
Reported results should not be considered an indication of future performance. A discussion of these and other risks, uncertainties and assumptions is set forth in the company's Annual Report on Form 10-K for the year ended December 31, 2015, as well as our quarterly reports on Form 10-Q, including under the headings Risk Factors and Management Discussion and Analysis of Financial Condition and Results of Operations.
We undertake no obligation to update forward-looking statements or relevant risks. Our commentary 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 the Investor Relations website at investor.rubiconproject.com. At times, in response to your questions, we may offer incremental metrics to provide greater insights 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 in the future on these metrics. I encourage you to visit our investor relations website to access our press release, periodic SEC reports, a webcast replay of today's call or to learn more about Rubicon Project.
With that, let me turn the call over to Frank.
Frank Addante - Chief Executive Officer and Founder, Chairman of the Board
Thank you, Erik, and good afternoon, everyone. Q2 was a solid quarter for Rubicon Project, highlighted by strong contributions from our key strategic growth drivers of mobile, video and orders.
GAAP revenue was $70.5 million, an increase of 33% year-over-year. Non-GAAP net revenue was $65.1 million, an increase of 34% year-over-year.
GAAP net loss was $2.7 million, a significant improvement from a GAAP net loss of $11.9 million in the second quarter of 2015. And adjusted EBITDA was $18.4 million, nearly tripling year-over-year.
Finally, our business continued to generate healthy cash flow, further strengthening our balance sheet. Rubicon Project's ability to generate cash flow is a major differentiator in our industry that helps to position us to capitalize on future growth opportunities.
While we are reporting solid second quarter results in spite of some rapidly changing market dynamics. We are lowering our full year revenue guidance to reflect changes we're seeing in the marketplace.
Given the leverage in our business, despite the lower revenue guidance, we are increasing our guidance for adjusted EBITDA for the full year of 2016. From a macro perspective, the digital advertising market has experienced significant changes.
Rubicon Project has benefited from a lot of these changes given our scale and our early market innovations. In mobile, for example, we continued on a rapid growth trajectory that has outpaced the industry's growth rate for mobile advertising.
In Q2 we achieved 68% growth year-over-year in mobile manage revenue or advertising spend in our marketplace, further securing our position as a top three mobile exchange globally. And video is rapidly emerging and becoming a meaningful contributor to our results this year.
Greg will discuss our plans to increase our video investment to further accelerate our growth potential. Advertising budgets continue to gradually shift to emerging areas such as mobile and video to capitalize on the proliferation of mobile technology and the demand for video content.
Desktop advertising spend on our marketplace is being impacted by the accelerated adoption of header bidding. We initially thought that header bidding was a solution that would have had a short existence based on historical trends we witnessed in early years of the business.
This was a misread of the market on our part. In response to the adoption of header bidding, we launched FastLane, our own header bidding solution in December of 2015, which at the time was the first and only header bidding solution capable of monetizing both desktop and mobile app inventory.
However, we would have pursued FastLane more vigorously if we have foreseen the impact of header bidding at that time. We've recognized some leakage of impressions in a resulting deceleration and managed revenue, which we now attribute to competitive header bidding solutions that have filled premium impressions before they ever made it to our exchange.
However, we did not lose any customers. And our strategic position, technological integrations and relationships with our customers has helped us to get FastLane implemented quickly, which gives me confidence in our ability to compete and win.
In the past, we've chosen the path to be best to market versus first to market, and that strategy has served us well with keeping a balance between our long-term strategy and shorter-term market dynamics. With FastLane, we are also positioned to become a leader in the important header bidding markets at mobile apps and the international markets that are in very early stages of development.
Our global footprint and publisher and application developer integrations provide a significant leg up on smaller competitors that have had to focus their efforts primarily on one vertical, and one geographic market. Looking ahead, we are focused on our faster growing business segments mobile and video, and newer growth opportunities I will discuss with you in a minute.
And based on the strong growth we experienced in the first half, we are very optimistic about their future. While we have historically relied primarily upon traditional desktop advertising, today mobile, video and orders on a combined basis will account for more than half of our total managed revenue or advertising spend exiting 2016.
And advertising spend in a marketplace from mobile, video and orders is growing at a substantially faster rate than our overall total managed revenue. For instance, mobile alone has grown to become more than $325 million of advertising spend on our platform over the last 12 months.
Simply put, our investments in our new strategic growth areas as the market gives us a growth foundation that will begin to pay dividends in 2017 and beyond. Our commitment to continuous reinvention is a core cultural value of our company that positions us for success in pursuing these attractive growth markets.
Our ability to leverage our buyer and seller integrations and leading engineering and technology capabilities positions Rubicon Project to continue to disrupt and capture market share. That reinvention also includes our vision for the consumer.
Over the next few quarters, we are moving to make it an important component of our growth strategy. We believe that involving and enabling the end user of advertising, the consumer, to have a meaningful and material choice on their advertising experience is great for our existing customers, great for consumers and solid mechanism of value creation for shareholders.
Our data in support of this comes from a number of sources, we see a gradual, but steady rise and concern about privacy, and the use of ad blocking technologies is the early signs that consumers will demand to be involved in their advertising experience. Instead of saying these trends as hindrances, we see ad blocking as evidence for an appetite, an opportunity for Rubicon Project to move our consumer vision forward, faster, because it now has become an important topic for the customers of our marketplace.
We will be unveiling a number of products and services in the next few quarters designed to tap into this emerging market dynamic. Rubicon Project sits in a very unique and a highly strategic position.
We reached more than 1 billion consumers across more than 50% of the top websites and applications. This position enables us to address trends at a scale that is on par with the largest consumer tech companies in the world.
While most of those consumers today are not familiar with our brand, we believe that there is an opportunity to make those consumers active participants in our marketplace. Very few companies in the world have this kind of reach, scale and technological capacities to create such a meaningful difference in the future of advertising for businesses and consumers.
We're excited about this direction and the experiences we'll be bringing to market to play a significant role in this transformation. With our culture, technology, strong capital position, buyer and seller relationships, and technical integrations driving network effects, and our continued focus on innovating the consumers' digital experience, Rubicon Project is well positioned to capitalize on the growth of advertising for years to come.
I remain extremely confident in our business and the steps we're taking to reaccelerate growth. With that, I will now turn the call over to Greg.
Gregory R. Raifman - President & Director
Thank you, Frank. I'd like to take some time this afternoon to expand on several top line themes that Frank mentioned, as well as discuss a few trends that we are seeing throughout the market, that will continue to have wide-ranging implications for the advertising industry.
Clearly from a high-level perspective, there are reasons to be optimistic about the overall health of advertising and digital advertising in particular. Global advertising is expected to grow between 3% to 5% annually for the next five years, surpassing $600 billion globally this year.
Digital is the main driver of ad spend growth, and is expected to grow at more than three times the global average rate this year. And digging into the core drivers even more deeply, mobile will easily surpass the entire sector, growing three times faster than the overall digital market, tripling in size over the next four years and thus surpassing $100 billion.
This reality, the dramatic shift to mobile, has so totally reshaped the entire industry that every business model has been compelled to adapt or risk obsolescence. Even Facebook, which now draws more than 80% of its total revenue from mobile ad spend needed to begin its own multi-year transition from a nearly non-existent mobile business in 2012.
We have embraced the customers' accelerated expansion into mobile, with no less conviction. Over the past 18 months, we have seen mobile grow to one-third of the total advertising spend in our marketplace.
Importantly, we expected mobile alone will generate the majority of our advertising spend by the end of 2017. These kinds of business evolutions are never easy, and they always involve trade-offs between short, lived immediate gain and longer-term positioning for sustained growth.
We also recognized that many of our investors want to better understand the short-term headwinds that Frank highlighted, as well as the strategy we put in place to return to stronger top line growth in the next 12 months. Therefore, I will take a few extra minutes to detail our short, mid and longer-term business strategies given the broader market dynamics we are now seeing.
The roadmap we established back in 2015 to evolve our business from one dominated by legacy desktop advertising to one offering a comprehensive market solution, presented us with clear choices that had to be made about where and when to invest our resources to maximize growth. Specifically, we made the strategic decision in 2015 to invest heavily into mobile and orders.
We believe then, as we do now, that the market would follow the consumer, and that any business not fully invested in rapid mobile acceleration and innovation would simply be incapable of succeeding in a mobile-first world, which we are now entering. We also believe that the rapid nature of the shift to mobile, and our own scaling efforts for video and orders would sustain our short-term growth trajectory.
And we believe that our desktop business would essentially follow patterns we had previously experienced, and continue to perform in predictable ways without significant increases in investment. There can be no doubt that our focus on investing in mobile was the right decision for our business.
Our growth in mobile has continued to outperform industry rates, and has placed us in a very solid competitive position relative to our principal competitors. It is also clear, however, that the mobile expansion, in which we anticipated and invested, has not been sufficient yet to offset the unexpected slowing in desktop spending in our marketplace, which was further amplified by the rapid adoption of header bidding.
When we look back on the first half of 2016, we see two fundamental sea change events in our industry, and particularly for own business that occurred faster than anticipated; first, the deceleration of growth in traditional desktop display advertising; and secondly, the dramatic shift by desktop publishers to header bidding to garner every possible ad dollar, thereby increasing competition for available desktop inventory. Initially, we believe that the combination of our rapid growth in in-mobile and the pace of implementations of our own header bidding solution FastLane, which we introduced in Q4 of 2015, will provide adequate runway to support our transition efforts in 2016.
However, our recent experience and an extensive strategic review that we have just completed show that these assumptions were inaccurate. Desktop spending is not behaving as we had anticipated, and external pressures on publishers to drive incremental revenue accelerated the adoption of desktop header bidding faster than we expected.
This created an opening for smaller players with more established header bidding solutions. It is important to note, that while we have experienced some leakage of available impressions, especially in sellers where we have not yet launched FastLane, we have not experienced any customer losses due to header bidding.
The combination of both the macro slowdown in overall desktop advertising growth, which we anticipated, but not as rapidly as it has unfolded, and the accelerated adoption of header bidding, which we did not anticipate proved too great a headwind during a transitional year, and directly contributed to the slowdown in desktop managed revenue that we experienced in Q2 and that we expect to see continue to impact our business through the end of the year. In response to these unanticipated market conditions, we pivoted resources in the second quarter of 2016 to advance adoption of our own header bidding solution to ensure that we maintained our leadership position in desktop, while expanding more deeply into mobile.
Let me provide a little color on our overall success with header bidding before turning to the longer-term growth drivers of mobile, video and orders that we have focused the bulk of our efforts on this year. Earlier this year, we shared with you that we would reach 100 installations of FastLane by the end of Q2.
I'm pleased to report that we have surpassed that goal by approximately 30%. We are now live with more than 130 premium sellers which have deployed FastLane across more than 750 websites globally.
Furthermore, we are seeing growth of FastLane accelerating month-over-month. At the beginning of this year, header bidding was responsible for less than 1% of the total ad spend in our marketplace.
As of the end of Q2, it had grown to 10%, and is currently on a trajectory to more than double by the end of the year to over 20% of our total ad spend. As a reference point, FastLane represented 13% in June of 2016.
We have also become far more efficient at on-boarding publishers, accelerating integration time by 22% from Q1 to Q2. Our reason for optimism in header bidding comes not only from the pace of industry adoption and the success we have had on-boarding clients to-date, but also from a robust pipeline.
We have more than two dozen additional premium publishers already in the queue for integration, and from the incredible feedback we are receiving as well from some of our biggest customers that have gone live with FastLane to-date. Ross Geier, Programmatic Director at Gannett, the parent company of USA TODAY, which sees over 1.8 billion monthly user minutes across its sites, had this to say about their experience with FastLane.
Quote, Since going live with header bidding, Gannett has seen average daily private marketplace revenue increase 64%, and eCPMs increase 54% utilizing Rubicon Project's FastLane feature. FastLane is a solution we expect to rely on as we continue to grow and scale our programmatic advertising offering, end quote.
Companies like Gannett also reflect our strategic approach to implementations, while many smaller players focused on rapid scale of the mid-tail, we have always focused and will continue to focus first on the biggest sellers in the business. With FastLane we are also positioned to become a leader in the important header bidding markets internationally that are in the very early stages of development.
Our global footprint provides a significant leg up on smaller competitors that have had to focus their efforts primarily on one vertical and one geographic market. Bauer Media Group, Europe's largest magazine publisher with more than 100 leading brands had this to say about their experience with FastLane.
Quote, after implementing FastLane, we found that on most days private marketplace eCPMs were higher than brand direct, even more impressively our average daily revenue increased by 4x, end quote. Clearly, header bidding will continue to be a hot topic for the industry in the short-term, and we believe we have the right plan in place to meet our customer needs.
Shifting from the seller side to the buyer side, we are also addressing another market shift that is occurring which impeded our business in Q2. Buyers are now choosing to spend via self-service programmatic methods versus the managed service method they deployed beforehand.
Agencies and brands are looking to add value more directly by utilizing self-service hands on keyboards capabilities. At the same time, they are seeking greater transparency in the ad market, at a time when there was increased competition from agency-owned technology.
These factors have combined to adversely impact our intent marketing opportunity. We have concluded that this market shift towards self-serve models will also directly impact the future growth potential for our intent marketing offering.
We have therefore begun a process of transitioning away from the managed service model to one where today's buyers are spending more, namely, guaranteed audiences. We believe that this shift in spend directly contributed to softness in demand during Q2 for our intent marketing capabilities, which is primarily a domestic desktop offering, and has contributed to our lower second half revenue outlook.
Not surprisingly, a major focus of our product roadmap for the second half of 2016 will involve developing new buyer capabilities that address the industry's move towards guaranteed audiences. After making these changes, we feel confident about 2017 because we have made similarly successful transitions in the past at Rubicon Project, such as our evolution from static bidding or ad tech injection buying to automated RTB open auctions.
Each time we have emerged as a stronger player in the industry, with a better or more leveraged position in the ad ecosystem, and each time we have made the tough decisions necessary to succeed in a rapidly changing environment. With that, I would like to turn the remainder of my remarks to the successes we have seen, setting the strong foundation for long-term growth I referenced earlier.
To begin with, let me discuss our continued successes in building a world-class mobile-first offering. Mobile advertising spending in our marketplace grew 68% year-over-year, increasing to 33% of our total managed revenue from just 22% a year ago.
The future growth of our mobile platform is underpinned by several core initiatives that will establish a strong foundation for our entire business for years to come. First, adding new exchange API partners, we have a large pipeline of potential exchange API partners, which allow us to scale further our mobile supply.
We have proven the success of exchange API by scaling partnership, scaling relationships with mobile advertising platforms such as InMobi, Tapjoy and xAd and mobile app developers like Gameloft, while significantly increasing the supply of inventory available through Rubicon Project. Second, we intend to leverage our early lead in header bidding for mobile apps as a strategy to further expand our direct mobile relationships.
By way of background, we are seeing healthy demand for our FastLane for Apps offering, which requires mobile applications to deploy our Software Development Kit or SDK. Installation of our SDKs by mobile apps is strategic and beneficial for Rubicon Project, because it also allows us to grow significantly our direct access to in-app inventory.
Our cross-channel initiatives continue to deliver for our clients, both buyers and sellers. In fact 99% of our top 2,000 advertisers purchased both mobile and desktop inventory in our marketplace in Q2.
And for sellers 90% of our top 100 sellers were across-channel with us to monetize both mobile and desktop inventory. With mobile now driving one-third of our business, we remain very optimistic about our growth opportunities in this fast moving part of the market.
Moving from mobile, our orders marketplace continues to gain momentum as advertising spend increased 38% year-over-year, and now represents 21% of total managed revenue, up from 17% a year ago. In orders, we continue to entertain a host of opportunities to expand our reach globally.
For example, just in time for the summer games, we partnered with dozens of premium sellers from around the world like Condé Nast and USA TODAY to launch a special sports advertising marketplace, leveraging our orders platform, featuring inventory packages, targeting users interested in the summer games. We also continue to expand our orders platform into entirely new markets for Rubicon Project.
In late July, we announced an exciting new partnership with Spotify, expanding our business into digital programmatic audio. Les Hollander, Head of Global Audio Monetization for Spotify had this to say about our work together.
Quote, our continued partnership with Rubicon Project allows us to sell audio programmatically, with Deal IDs in private marketplaces. Combined with Spotify's first-party data, this new market opportunity allows buyers to purchase Spotify audio, display and video impressions programmatically.
Our combined goals align to build out the audio ad stack behind display and video giving buyers the opportunity to purchase in a more frictionless process, end quote. We also announced a partnership with Screenvision, a national cinema advertising company that is making its inventory available to programmatic buyers for the first time through our orders platform.
These are just two of the many examples we have seen this year, of how orders expands the playing field for Rubicon Project, as we move to automate the entire advertising market. Our orders platform has now demonstrated support for a wide range of non-traditional ad units, including digital billboards, elevator screens, in-mall displays and linear television.
In the coming months, we will be announcing our first over-the-top television integration for digital television further proving the value that automation can deliver to literally every format of advertising globally. Orders is clearly a long-term play for our company, and with each passing month we are seeing it open bigger brands, new formats, and entirely new markets to our business.
Turning now to video; we have told you for some time that we have taken a measured approach to including video inventory into a premium marketplace, notwithstanding that other companies in ad tech have sought short-term gains from video, even if the video quality was substandard. But after years of work focusing on delivering premium video ad units, we are now very excited about our video business.
We are delivering rapid growth in video, driven by deeper engagement, with a growing number of high quality buyers and sellers. On the seller front, in Q2 we added three new Exchange API partners that collectively add a considerable amount of coveted supply to our video marketplace.
Adding further to our premium video supply, is our recent with Nucleus Marketing Solutions, which has selected Rubicon Project to automate its video ad units. Nucleus is an affiliation of elite media brands, such as Hearst, Gannett and McClatchy, reaching more than 185 million users each month.
In fact, in Q2 45% of our top 100 sellers work us in video, up from just 17% of the top 100 sellers a year ago. And from the demand side, we increased the number of buyers of mobile video by 20% in Q2.
We believe our video managed revenue is now on track, to accelerate to well over $100 million in 2017. To sum up, I would like to leave you with this last data point than more than anything highlights the urgency with which we have worked to establish a strong growth foundation.
We are now on track for mobile, video and orders to account for more than 50% of the total advertising spend in our marketplace by the end of this year. That is exactly the business transition we set out to deliver over a year ago, moving our business to where the consumer was spending the vast majority of his or her time on mobile and consuming video, and to the future platform of choice for buyers and sellers of every format of advertising, orders.
We will continue to balance, driving growth and managing expenses, and are confident the investments we are making in these key growth drivers position us well for 2017 and beyond. And with that, I will turn it over to David Day, to review the financials.
Here is David.
David Day - Chief Accounting Officer and Interim Chief Financial Officer
Thank you, Greg. Now, to recap our results, starting with revenue; GAAP revenue for the second quarter of 2016 was $70.5 million compared to $53 million in the second quarter of 2015, representing a year-over-year increase of 33%.
Managed revenue, which is the advertising spend transacted on our platform, for the second quarter of 2016 was $257.4 million compared to $227.2 million in the second quarter of 2015, an increase of 13% year-over-year. Non-GAAP net revenue for the second quarter of 2016 was $65.1 million compared to $48.5 million in the second quarter of 2015, an increase of 34% year-over-year.
The deceleration of our year-over-year growth rate in managed revenue in the second quarter was primarily due to the desktop advertising trends discussed earlier, and to a lesser extent, softness in demand for our intent marketing offering, as Greg discussed. In the second quarter, managed revenue for mobile increased by 68% year-over-year, while desktop declined 2% year-over-year.
Managed revenue was composed of 33% mobile and 67% desktop for the second quarter of 2016, compared to just 22% mobile and 78% desktop a year ago. In addition, managed revenue by inventory type was composed of 76% real-time bidding or RTB, 21% orders and 3% static during the second quarter of 2016 compared to 75% RTB, 17% orders and 8% static in the second quarter of 2015.
Going forward, we continue to expect orders to grow as a percentage of total managed revenue. As for static, today, we announced our plans to sunset the static bidding offering.
As many of you know static bidding, which pre-dates RTB, was our original offering for ad networks. In the past five years, static has decreased from nearly 100% of managed revenue to about 3% of managed revenue, as ad spending has migrated to real-time bidding.
Our decision to end this legacy platform, frees up important resources that will be refocused on our growth initiatives in mobile, video and orders. Take rate, which is non-GAAP net revenue, divided by total managed revenue, moderated slightly on a sequential quarter basis to 25.3% in the second quarter of 2016 from 25.6% in the first quarter of 2016, a decrease of 30 basis points.
In the second quarter of 2015, take rate was 21.4%. The higher take rate in the second quarter of 2016 on a year-over-year basis largely explains why the year-over-year growth rate in our GAAP revenue and non-GAAP net revenue is much greater than the year-over-year growth rate in managed revenue.
Operating expenses, including cost of revenue, increased by $4.6 million or 7% to $69.2 million in the second quarter of 2016 from $64.5 million in the second quarter of 2015. Operating expenses were lower than we had implied in our outlook, due primarily to lower than estimated average head count and other delayed spending.
Continuing on the topic of operating expenses, we will accelerate the non-cash amortization expense for certain acquired technologies, and customer relationships associated with the acquisition of Chango. The accelerated amortization schedule was triggered by reductions in the estimated useful lives of these intangible assets.
This change does not impact adjusted EBITDA, non-GAAP EPS or free cash flow. The accelerated amortization resulted in approximately $500,000 in additional non-cash amortization expense in the second quarter and will result in approximately $1.6 million in additional amortization expense on a quarterly basis, going forward, through the respective amortization periods.
An updated amortization schedule is included in the Q2 2016 Financial Highlights presentation available on our Investor Relations website. Net loss was $2.7 million in the second quarter of 2016 compared to a net loss of $11.9 million in the second quarter of 2015.
Net loss in the second quarter of 2016 included a tax provision of $4.9 million whereas our guidance did not include an estimate for a tax provision or a tax benefit because inclusion of an estimated tax provision at this stage in the company's development would not be meaningful for investors. Excluding the tax impacts, our pre-tax income improved by more than $14 million year-over-year.
Adjusted EBITDA was $18.4 million in the second quarter of 2016 compared to $6.7 million in the second quarter of 2015, an increase of 177%. The outperformance in adjusted EBITDA, relative to our guidance, reflects revenue coming in slightly higher than our guidance as well as the lower than expected operating expenses I referenced earlier.
GAAP loss per share was $0.06 for the second quarter of 2016 which includes the tax provision of $4.9 million, compared to GAAP loss per share of $0.30 in the same period in 2015. Non-GAAP earnings per share in the second quarter of 2016 was $0.17, also including the tax provision of $4.9 million, compared to $0.06 reported in the same period in 2015.
Capital expenditures were $5.2 million for the second quarter of 2016. We closed the period with $186.9 million in cash and marketable securities, up $20 million from $166.9 million at March 31, 2016.
And we generated free cash flow of $17.4 million during the second quarter of 2016. We calculate free cash flow as net cash provided by operating activities less capital expenditures.
Looking ahead, we expect the following for the third quarter 2016 – GAAP revenue to be between $64 million and $70 million; non-GAAP net revenue to be between $60 million and $64 million; adjusted EBITDA to be between $9 million and $11 million; and non-GAAP earnings per share to be between $0.07 and $0.09 per share based on approximately 50 million forecasted weighted average shares. For the full year, we expect the following – GAAP revenue to be between $275 million and $305 million; non-GAAP net revenue to be between $260 million and $275 million; adjusted EBITDA to be between $60 million and $68 million; and non-GAAP EPS to be between $0.75 and $0.85 per share, based on approximately 50 million forecasted weighted average shares.
We'd like to provide a few comments regarding the guidance. Although we don't provide explicit guidance on managed revenue, directionally speaking, we expect managed revenue growth on a year-over-year basis to decelerate further in the second half of the year.
The lower GAAP and non-GAAP revenue outlook for the full year compared to our prior guidance ranges, primarily reflects the desktop advertising and intent marketing headwinds that Greg discussed. Furthermore, we expect our take rate in both the third quarter and the fourth quarter to decline on a sequential quarter basis by a greater amount than the second quarter's sequential decrease of 30 basis points.
A couple of actors are driving this. One, in certain instances we are evaluating or already providing pricing strategies that involve lower fees.
Another is product mix. For example, an increase in orders as a percentage of our managed revenue will drive a lower take rate since orders carries a lower take rate.
Additionally, to reiterate my earlier commentary, the shifting of some hiring and spending from the second quarter to the third quarter, explains the sequential decrease from Q2 to Q3 in adjusted EBITDA and non-GAAP EPS. It's worth mentioning that we have further increased our adjusted EBITDA guidance for the full year by $4 million, despite a decrease in our full year revenue outlook for 2016 versus our prior guidance range.
This increase in adjusted EBITDA guidance reflects overall reductions in anticipated spending compared to our prior guidance. For the full year 2016, we have now increased our adjusted EBITDA guidance by 22% from the midpoint of our initial 2016 guidance range provided in October 2015.
Lastly, as previously discussed, please note that our non-GAAP EPS guidance for Q3 and Q4 does not include an estimate for any tax expense or tax benefit. In summary, while we have some near-term challenges, I'm confident that the investments we're making and our key growth drivers in the second half of the year position us well for longer-term success.
That concludes our prepared remarks. We would now like to open the line for any questions.
Operator
We will now begin the question-and-answer session. Please limit your questions to one question and a single follow-up.
Our first question comes from Brian Pitz with Jefferies. Please go ahead.
Brian J. Pitz - Jefferies LLC
Thanks. I'm a little surprised by the significant change since our May conference regarding header bidding and your outlook.
Maybe you could just comment on a few things. As header bidding continues to gain share, would you talk about the longer-term impact to CPMs, and maybe what take rates will look like.
And just secondly, can you tell us more about the strategic review you talked about? Thanks.
Frank Addante - Chief Executive Officer and Founder, Chairman of the Board
Hi, Brian. It's Frank here.
So yeah, we went through this six-week strategic review that Greg will share with you in more detail. And what we've learned really in the past six weeks is that we're dealing with a little bit of a perfect storm here.
Header bidding is certainly a major factor in that, that combined with the desktop, overall desktop market slowdown. We may have swung the pendulum a little too far in the mobile and video direction, I think as we did report.
We're seeing terrific results there with mobile and better-than-expected results with video. Some of that has come at the expense of taking the eye off the ball there on the desktop business.
Some of the execution issues that we talked about here with intent marketing, and then just a mix of smaller things, nothing meaningful overall, things like ad blocking, some smaller, technical issues that we had throughout the quarter. But all these things combined, I think, have put us in the position that we're in.
I think one or two or even three of these things, I think we've been able to navigate through in the past, but a lot of these things really came to fruition in Q2 and the analysis that we did that Greg led the team through really shed a bright light on where we stand with them. With that said, we did anticipate some of them.
As we mentioned, we put our header bidding product in the market in December 2015. As a reminder, we did have a product in the market that sort of resembled at least the value proposition of header bidding, very different technology, but the value proposition called Real-Time Pricing a couple of years ago in the market.
It didn't work out. So, when we saw header bidding, we just didn't think that it would be a major factor in the market and certainly not something that was going to accelerate as quickly as it has.
But we do have what we believe to be the right things in the market today. It just takes some time to get these things implemented and then see the resulting revenue impact from it.
I'll turn it over to Greg to talk about that analysis.
Gregory R. Raifman - President & Director
Great. Brian, so let me take a moment or two and talk about that and a few other things that Frank mentioned because I think a number of you are going to ask the same question.
So, let me address it. As you all know that in late May we reiterated our second quarter and full-year guidance and at that point in time we had confidence that those were the right numbers to work with.
And then we began a six-week strategic analysis starting in early June that was more comprehensive than we've ever gotten. We actually conducted a 107 customer meetings, we had 88 investor and analyst meetings and we looked at a number of challenges and headwinds in the industry and we took a very honest perspective on what we thought we were doing very well and at the same time, where we thought we were seeing headwinds that were either because of our execution or because of assumptions that we made that turned out not to be true and I addressed some of them in my remarks.
At the end of that process, what we look back on is that we found there was two key events going on in the first half of the year that impacted our forecast for the second half of the year. The first one, as I mentioned was the clear deceleration in desktop spending.
We anticipated there would be over time a deceleration of desktop spending. We didn't anticipate it would be as great as it has been.
Point number two is that, at the same time, we were looking for reasons as to why, and we couldn't. We kept coming back to header bidding as a clear indicator that we were starting to lose, or as Frank mentioned in his remarks, some leakage in impressions.
We haven't lost customers, but we have lost some impressions in the marketplace. So we're affecting the growth going forward.
And just to be clear and be fair, we have been actively involved in header bidding type technology for several years now. Our product and engineering team were in market in 2012 and 2013 with FastLane 1.0, with Real-Time Pricing that has features that's probably not worth going into now.
But what we found at that point in time was that the market wasn't ready for it. We got adoption from about six key publishers, and the rest of the publishers didn't seem to be interested.
So, for the most part, we put the product on the shelf, which is why we were a bit surprised to find in 2015 that the market has changed so dramatically, and was interested in adopting this client-side technology, that some think impact consumer experience adversely. So, with that, once we realized that publishers were moving in that direction faster than we had anticipated, we, of course, pivoted in Q2.
And as I mentioned in the remarks, when you look at our results, we're now ahead of our schedule. We have 130 installations moving to 300 the course of the year.
Our growth in header bidding has gone from 1% in managed revenue to 13% in June. And we expect it to be over 20% by the end of the year.
So, we have no question, we have tremendous confidence we'll reach parity in terms of feature sets and market position by the end of this year, but we do feel like we were late to market in returning to our header bidder roots, and allowing some point solutions and smaller players to come and grab some share for us for a period of time. But we have a plan, we're on target, we expect to be back where we need to be by the end of this year.
One other thing just to point out, as for CPMs, I did mention in the script that through our installations we have seen a number of cases where header bidder installations resulted in revenue increases of 64% or CPM increases of 50%-plus in cases like USA TODAY. And with respect to Bauer, I mentioned that the average daily revenue had increased by four times.
So, we are seeing beneficial results with our header bidding solution FastLane and we expect that to continue.
Operator
The next question comes from Brett Huff with Stephens. Please go ahead.
Brett Huff - Stephens, Inc.
Good afternoon. Thanks for taking my questions.
I want to follow up on the header bidding question again, and I want to make sure that we understand where the competition is coming from. This is – you keep saying it's coming from smaller players.
Is Google or other larger players a part of this problem, or do we have in our sights kind of who the competition is that we need to go after?
Frank Addante - Chief Executive Officer and Founder, Chairman of the Board
Sure. Absolutely.
So yeah, primarily it's come from smaller point solutions, primarily in the U.S. market.
I should also note that it's not just coming from competitive solutions. There are non-competitive solutions like Amazon is an example, has a header bidder solutions, not a competitive exchange by any means, but they're using that as an opportunity to basically get ahead of their competitors when they're trying to buy media.
Criteo, as an example, also has a header bidder in the market. But when these header bidders exist in the market, they are taking away the ability for that supply to end up in our exchange.
So while it's not a competitive company, it does have some impact on taking away some of those impressions. With Google, yeah, I think there is some speculation in the market that Google has also been impacted by header bidding.
They've announced some initiatives that they've been taking, one of those was a pilot integration that they're working with us on. And again, just to put the header bidding into perspective, header bidding is not an elegant solution for the long term, and I think most people would agree with that.
Header bidding is a piece of JavaScript that gets installed on a consumers – on a webpage that ultimately is putting sort of a pre-auction process into a consumer's browser. So your browser is going sort of – doing this JavaScript's pre-auction process, using your CPU to do that in advance of it going to an exchange or a marketplace.
So it's not really an elegant technical solution, and some would argue that it just doesn't scalar, that it slows down the webpage loading or impacts the user experience. I think Google has recognized this, and this is the pilot program that they've been working with us on.
And we would sort of agree with that, and that's – part of our mystery (47:24) is we tend to look at things from a technical perspective and say, what's long-term sustainable for the market, what are technologies that we think will help sort of grow the market and improve the consumer experience, and improve a publisher and application developers' page loading. So that was sort of part of our mystery (47:49).
With that said, header biddings become a real thing. When we did launch our FastLane product, our header bidding product, we launched it in mobile because that's where a lot of our focus was, and I think you've seen that from our mobile reporting.
In hindsight, if we were kind of focused more on the desktop market, I think we would have launched it first in desktop versus mobile.
Operator
The next question comes from Youssef Squali with Cantor Fitzgerald. Please go ahead.
Youssef Squali - Cantor Fitzgerald Securities
Thank you very much. Hi, guys.
Couple of questions. Staying with the header bidding, so as you pivot your resources to advance the header bidding solution in the second half, can you just help us understand what exactly are you doing to pivot?
Is it trying to catch up with what's out there in the market, is it trying to differentiate your offer, and if so, how? And then on the guidance, David, maybe help us bridge the gap between the old revenue and the new revenue guidance between ShareFile (48:58) and desktop, header bid in, static, et cetera?
And the static – does static go to zero starting in Q3, or when does it go to zero? Thanks.
Gregory R. Raifman - President & Director
Okay. Let me address the first part.
I'll turn it over to David for the guidance question. But, let's talk for a minute more about header bidding, because I think your question is a very good one, how are we resourcing or how are we moving or expanding further.
I mean, to be fair, we've always had the approach that we are not necessarily going to be first-to-market, we're going to be best-to-market. So we look at what goes on in the marketplace and we think about everyday how we can do a better job of it.
We know that we fell slightly behind in the header bidding installation. So naturally we reoriented a lot of our selling efforts and our sales engineering efforts to do a better job installing header bidders, our FastLane product, in market as quickly as possible.
And as I mentioned in the script, we're very pleased that the time to installation is starting to come down over time and accelerating. So from our perspective, we see that as another proofpoint that we are beginning to make inroads in this area.
Number two is, we've been very successful moving internationally, and keep in mind that a number of the other companies that have been involved in header bidding don't have the reach and scale that we do internationally. So we use the Bauer Media as another proofpoint that we are frankly probably ahead of the market now in FastLane adoption internationally compared to other smaller companies.
And then finally, as Frank mentioned, we were first-to-market in FastLane for mobile, and have now seen a number of adoptions. We went live in Q2, we announced it in Q1, and open beta went live in Q2.
We already have some adoptions there. We're going to expect to accelerate that in Q3 and Q4, and we're starting to see pretty strong results in mobile as well.
So when you put all those together, we think we're catching up very quickly. We think we're actually well-positioned given that we will be at parity in short order feature wise.
But with our reach in international and mobile, I think we're going to be actually in competitive advantage situation. So with that, let me turn it over to David and you can talk about guidance.
David Day - Chief Accounting Officer and Interim Chief Financial Officer
Great. Thanks for that question Youssef.
I think the primary driver in our guidance GAAP in the second half of the year does result from the slowdown in desktop, and as discussed, accentuated by the header bidding headwinds. I think secondary then are the challenges that we're having in our intent marketing business.
On the static side, we do expect to wind down operations by the end of the third quarter, and don't expect any significant activity in static during the fourth quarter.
Operator
The next question comes from Aaron Kessler with Raymond James. Please go ahead.
Aaron M. Kessler - Raymond James & Associates, Inc.
Great. Couple of questions.
First, I think back on header bidding. Can you just give us a sense where the take rates are?
I think we've heard them to a little closer to mid-teens versus kind of a 20%-plus for your RTB business. And then just an overall take rates for your business, I believe they're still up about 400 basis points year-over-year.
Can you just talk about the drivers that are driving up kind of on a year-over-year basis your overall take rate? Thank you.
David Day - Chief Accounting Officer and Interim Chief Financial Officer
Sure. We don't break down take rates on a product basis.
From an overall macro perspective on take rates, as mentioned, we do believe that they will be decreasing in the second half of the year. As mentioned, we believe they'll on a quarter-over-quarter basis decrease more than they did Q1 to Q2.
As mentioned, there are couple of factors driving that; one, a mix factor, we've talked in the past about orders expanding or growing as part of our managed revenue, and that certainly will be a part of it; and then also in certain instances we're evaluating or already providing pricing strategies that could involve lower fees as we determine what may drive expanded and more growth in our managed revenue.
Operator
The next question comes from Kerry Rice with Needham. Please go ahead.
Kerry Rice - Needham & Co. LLC
Thanks a lot. One more on header bidding, just maybe to help me understand at least.
With FastLane and implementation you're talking about, I guess, I don't understand how does that change maybe the dynamics if someone like an Amazon or a Criteo or smaller competitor is diverting some impressions away from you, does FastLane prevent that? And are these diverted impressions being diverted simply because of a higher price, or they are in front of the line and the publishers worrying just about selling impressions, so they're willing to take a lower price, and going again through FastLane maybe ensures that the yield is higher?
Can you give us some sense of why FastLane will kind of negate what we've seen? And then finally, given the confidence on the second half, or maybe after the second half, is there any thought about buying shares back given that the stock will likely be down?
You've got a pretty good, pretty solid cash-rich balance sheet. Could you use some of that, or have you thought about using some of that for share repurchases?
Thanks.
Frank Addante - Chief Executive Officer and Founder, Chairman of the Board
Great. Hi Kerry.
So again, just to put the header bidding into context, header bidding is basically traded a pre-auction before it goes to the overall exchange or marketplace. So some of these point solutions have created this JavaScript capability to conduct this pre-auction before it goes to a platform like Rubicon Project.
Our header bidder solution is a feature, just to be clear, it's not a whole different platform, it's not a different product altogether, it's a feature of our exchange, and what we're able to do now is we're able to also participate in that pre-auction. So we can participate in the pre-auction, we can participate in the typical exchange marketplace auction that we have in the past.
One of the things that's particularly interesting for us from an offensive perspective with header bidding, and this is the reason that we toyed with this concept a couple of years ago, is that, combined with our orders product, if we have the ability to gain access to more impressions, and to see those impressions before they go to an ad server or before they go to other exchanges, or before they go to direct sell deals, it helps us to provide greater access for our orders product, which helps build up that marketplace. And as we've mentioned, we think that orders is the largest opportunity in the advertising space.
I think it's a question of when and how much because we're early to that market. But offensively, your header bidding gives us the ability to participate in that, which we think is a great thing.
Defensively we're just taking that technology and that feature and now you're going back into our existing customers where we already have integrations, we already have the relationship and saying, hey, we have one too, just allow our exchange to participate in that pre-auction, not just the standard typical auction that we've had. For your second question on a buyback, you look historically, the company has done very well, we had a terrific 2015, even Q1 and Q2 were very strong for us.
As Greg mentioned, we have a number of growth opportunities ahead of us, certainly in mobile and video, where we're doing very, very well. As I mentioned, over the last 12 months, our mobile business has grown to over $325 million business.
We're now participating in things like cinema advertising, audio advertising, television advertising, we're having conversations with companies around digital billboards. If you asked me a few years ago if those would be real opportunities today, I would have said no, I would have said that those are sort of five-year, 10-year out opportunities.
But I think, they're coming towards us much faster than we would have expected. With that said, we intend to return back to reaccelerating that growth.
I think we're facing some of these shorter term headwinds for the reasons that we've discussed. But we intend to be a growth company, and we think there are growth opportunities, and therefore we think it's wise for us to retain that cash to grow both organically and through M&A.
Operator
And we have time for just one more question. That question comes from Jason Helfstein with Oppenheimer.
Please go ahead.
Jason Helfstein - Oppenheimer & Co., Inc. (Broker)
Hi. So just kind of trying to get a little more specific here.
So if I look at the full year guidance, there is a $45 million delta in GAAP revenue, and then an $18 million delta in non-GAAP. And so obviously, the biggest difference between those two is Chango.
Can you help us understand then within the $18 million how much of that is header bidding? And then, you look at what's happening in Facebook and Google are eating the world, Facebook now has got Fan that they're citing bigger numbers on, Google is clearly still doing very good things, both with Search and with DoubleClick.
I mean, just help us understand specifically what's in that $18 million guide down, because I think the concern is going to be, that ultimately it's not just header bidding, it's that you have companies who have better data on consumers than you, targeting more efficiently. Thanks.
Frank Addante - Chief Executive Officer and Founder, Chairman of the Board
Yeah. Hey, Jason, I'll let David get into the specifics.
But as you mentioned, some of that is Chango, and now we've integrated those businesses. So it's a little bit more difficult to specifically call out what was Chango and what was not Chango.
But clearly we've had some challenges integration-wise, people, technological integrations with what was the formally Chango business. It didn't work out, as expected when we acquired the company.
While it didn't work out as expected, I think we are better off having done it than not. I think we've gained some momentum, gained some assets, some relationships, some know-how, some technology that certainly furthered that part of our business, particularly when it comes to orders, which again we think is a great opportunity for us in the future.
The Mediaocean partnership, I'm not sure that we would have been as successful, really understanding that business and learning that business. And even in our core business, really understanding what the drivers are for the end buyers of advertising, the agencies, it's really helped us strengthen a lot of those relationships.
With that said, Chango was a significant contribution to that, and it didn't work out as well as expected, even though we did gain quite a bit of benefit from doing that. I'll let David address the rest of your question.
David Day - Chief Accounting Officer and Interim Chief Financial Officer
Great. Yes, Jason, that's correct.
On the disproportionate impact in GAAP revenue versus net revenue, driven by Chango, which our intent marketing, which is the product that we have out of that acquisition, which is generally accounted for on a growth revenue basis. As far as the $18 million in GAAP, we don't break out guidance on a product basis, but obviously the area that we've discussed, the desktop slowdown and header bidding issues and intent marketing are both the significant drivers in that slowdown.
Jason Helfstein - Oppenheimer & Co., Inc. (Broker)
Maybe just real quick follow up...
Gregory R. Raifman - President & Director
Jason?
Jason Helfstein - Oppenheimer & Co., Inc. (Broker)
Yeah.
Gregory R. Raifman - President & Director
It's Greg, let me answer your other question about the walled garden, so Facebook and Google leading the world, which is a valid concern, and we saw the numbers they just posted, and they're both growing faster than the overall market. I think it is important to recognize still that we're still dealing with a $600 billion market opportunity that's growing, continues to grow, and it still does leave a lot of room for growth for a number of different players that are successful in building trust with those gardens.
So one thing to keep in mind is, as we just announced our deal with Spotify, we expect to have more deals in the works with companies like Spotify that have their own smaller walled garden, if you will. So we don't feel like the entire world is going to Google and Facebook just yet, especially internationally where Google isn't as strong as it is domestically.
And then finally, as Frank mentioned, there are new formats coming into our marketplace such as soon to be TV, programmatic audio, outdoor, all of which are still greenfield opportunities, which is why we've been optimistic that our orders business would be able to capture a lot of that premium or good part of that premium spend over time. So I want to make sure we answer that for you.
What was your next question?
Jason Helfstein - Oppenheimer & Co., Inc. (Broker)
Just technically, I mean, I think well you were trying to say in the prepared remarks is that the Java effectively header bidding solution that is an issue doesn't basically work in mobile. Is that clear?
And so to extent that once that – look we know desktop advertising continues to decelerate, you look at the Rocket Fuel (01:03:02) all that, but ultimately this was a – it seemed like a temporary acceleration for anybody who embrace header bidding do job, but then ultimately, technically that will not work on mobile. So just kind of confirm, I'm correct on that.
Gregory R. Raifman - President & Director
So Jason, I mean, you and I could spend the rest of the day talking about what does and doesn't work in mobile. A lot of things right now don't really work perfectly well in mobile that's carried over from desktop.
And header bidding is one example of that, which is why we felt pretty good about our FastLane for Mobile Apps capability that no one else had. It's now only first been going into market over the last quarter, and we're seeing early promising results, but there's a lot more work to be done in making mobile advertising work to catch up with the amount of time consumers are spending on their mobile devices.
So with that in mind, keep in mind, a lot of our mobile business has moved or has incorporated mobile video, which we all know consumers are spending more time on their devices consuming video. And that's a big growth driver for our mobile business too.
So that's one of the areas that we're starting to get right. But we're far from feeling like we have mastered mobile advertising.
So I hope that helps.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Erik Randerson - Vice President, Investor Relations
Thank you all for joining us today. We look forward to seeing you at investor conferences in the coming weeks.
Operator
The conference is now concluded. Thank you for attending today's presentation.
You may now disconnect.