Aug 1, 2018
Executives
Nick Kormeluk - Investor Relations Michael Barrett - President and Chief Executive Officer David Day - Chief Financial Officer
Analysts
Jason Kreyer - Craig-Hallum Capital Group LLC Matthew Thornton - SunTrust Robinson Humphrey
Operator
Good afternoon and welcome to the Rubicon Project Second Quarter Earnings Conference Call. 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 Nick of Investor Relations. Please go ahead, sir.
Nick Kormeluk
Thank you, operator, and good afternoon, everyone. Welcome to Rubicon Project's second 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 we've made continued progress in our recovery.
Since our last call and I've seen healthy acceleration in our ad spend growth. We've seen our year-over-year ad spend growth rate build from 10% in Q1 to 16% in Q2 to above 20% for the start of Q3.
This growth combined with our cost reduction efforts implemented late in Q1. Make us increasingly confident that we will deliver on our goal of being adjusted EBITDA positive in the fourth quarter of this year.
I will now touch on some of the growth drivers in our business. Audio and video continue to drive meaningful growth for us and we continue to outpace industry growth rates and growth share again this quarter.
On a year-over-year basis video ad spend grew well over 50% and audio nearly tripled. We continue to invest in seek ways to support this growth and be a leading exchange for buying video and audio impressions.
We also saw a sizable increase in our mobile growth this quarter and which ad spend grew 40% year-over-year driven largely by mobile app pushing our mobile mix to over 50% of ad spend. In Q2 2018 our access to inventory doubled from what we saw in Q2 2017.
We now have over 1000 header bidding connections generating more than 77% of our revenue. This compares to just over 780 connections in a little over 70% of revenue at the end of Q1.
Our pre-bid solution continues to gain traction in both client and server side and we continue to grow our server side footprint who are partnerships with Google in their exchange biding technology also known as eBay as well as with Amazon in their transparent advertising marketplace technology also known as TAM. We have built a very powerful model in efficient tools to rapidly ad partners and both client side and server side.
We have been talking for sometime about consolidation in our space and that a key priority for our client base has been to streamline their supply chain and by impressions from fewer exchanges since the onset of header bidding. The first catalyst was duplicate impressions generated by client-side header bidding and now server-side is exacerbating this issue in driving consolidation.
Some of our demand partners have told us they plan to cut the number of exchanges they work with by more half in 2018. Through these early stages of consolidation no major demand partner has stopped buying on our platform.
In fact, many have reaffirmed their commitment to work with Rubicon Project over the other exchanges. Our focus on tech innovation service, breath of impressions, quality, transparency and efficiency, combined with a competitive total take rate put us on the winning side of this exchange consolidation.
We believe the biggest opportunities from this consolidation are still ahead of us. Two of the most notable technical differentiators for our clients are our traffic shaping technology for filtering and prioritizing impressions and our estimated market rate also known as EMR, a feature that enables buying platforms to achieve better performance by reducing overbidding without significantly undermining option win range.
Buying platforms of all sizes continue to opt-in to use EMR on average platforms using EMR this quarter, so other CPM decreased by about 20% for header bidding inventory with less than a 100 basis point tradeoff to win rate. The tool plays a key part in achieving best in class buyer outcomes, while providing consistent revenue streams for publishers.
In regards to our traffic shaping technology, we are developing our next gen evolution which optimizes ad and bid requests to further improve efficiency across our and our clients' infrastructures in a header bidding world. Earlier this year, when midsize DSP client called their traffic shaping capability is a game changer which enabled them to gain access to 10 times more traffic without any additional infrastructure costs generating a 94% lift in win rates and 138% lift in spend.
There was tremendous amount of attention and concern paid to GDPR this last quarter. We did experience some implementation friction after the effective date of GDPR which did slightly lower ad spend.
We will continue to monitor regulatory guidance and industry practice regarding GDPR in other global privacy regulations. On the consolidation front, we are also very encouraged to see AppNexus agreed to be acquired by AT&T and the implications the deal has for our space.
This transaction demonstrates the valuable role that exchanges play in the digital advertising ecosystem, especially those with scale and capacity of process trillions of ad and bid requests quarterly and monetize over $1 billion in gross ad spend on an annual basis for publishers. Most importantly, we have the opportunity to compete for market share with clients, who prefer to work with truly independent technology partners.
Rubicon has never been more valuable to clients and it is today by continuing to grow publisher revenue, while also delivering high return campaigns for our buyers. In fact, we delivered the largest APS or amounts paid to sellers in the first half of 2018 then we did in any first half in the company's history.
We are very well positioned in the attractive and fast growing programmatic digital advertising market. A recent eMarket report showed that 82.5% of U.S.
digital display ads will be bought programmatic in 2018 and will grow to 86% in 2020. Header bidding is a driving force of this growth and our investments in header are paying off with attractive market segment growth across video, audio and mobile.
As I noted at the start of my remarks, we have clear evidence that the actions we have taken are working and that market opportunities have improved. We are pleased that this is reflected in key areas of Q2 results.
With that, I will hand things over to David, who will go into greater detail regarding our financial performance.
David Day
Thanks, Michael. Our investments in technology changes in our go-to-market strategy and efforts to improve internal efficiency are becoming more visible in our financial results as we move through 2018.
We made considerable progress toward our near-term goal of being adjusted EBITDA positive in Q4 and our bigger goal of being cash flow positive by the end of next year. Turning to Q2 results, for the second quarter of 2018 we generated $28.6 million in revenue, $237.7 million in advertising spend, up 16% year-over-year and adjusted EBITDA loss of $5.5 million, which included $500,000 of non-recurring severance costs, resulting in a loss of $0.27 per share in non-GAAP EPS.
The 16% total advertising spend increase in Q2 2018 versus prior year was stronger than the low double-digit start to the quarter we mentioned in our Q1 call. The year-over-year increase was driven by 40% increase in mobile ad spend with desktop being relatively flat versus prior year.
Mobile represented 51% of ad spend mix in the second quarter versus 42% in Q2 of last year. As Michael indicated, video and audio were the fastest growing areas.
When looking at amounts paid to sellers or APS, which we referenced last quarter, we had a year-over-year increase of 29% in Q2. This is slightly better than the 28% APS growth number we delivered in Q1 2018.
This continues to drive great publisher engagement and shows that we are gaining share and delivering more revenue to them. Revenue for the first quarter was down year-over-year due to the elimination of our buyer fees on November 1, 2017 partially offset by the increase in year-over-year ad spend.
Our average take rate was 12.1% during the second quarter of two thousand and 2018, an increase of 30 basis points sequentially, due to some improvement in take rates with publishers, following the elimination of buyer fees in November. Take rate is defined as revenue divided by total ad spend.
Operating expenses, which in our case includes cost of revenue for the second quarter of 2018 were $48 million, down from $54 million in the same period a year-ago. On an adjusted EBITDA basis, operating expenses for the second quarter was $34.1 million, which includes $500,000 of non-recurring severance costs.
The declines in both reflected benefits from our recent a cost reduction actions. Net loss was $18 million in the second quarter of 2018 as compared to net loss of $11.6 million in the second quarter of 2017, the increase in net loss year-over-year as a result of lower revenue partially offset by lower operating expenses.
Adjusted EBITDA loss was $5.5 million in the second quarter of two thousand and 2018 as compared to positive adjusted EBITDA of $3 million reported for the same period one year-ago. The decrease in adjusted EBITDA was driven primarily by a decrease in revenue resulting from a lower take rate partially offset by lower costs as previously discussed.
GAAP loss per share was $0.36 for the second quarter of 2018, compared to GAAP loss for share of $0.24 in the same period in 2017. Non-GAAP loss per share in the second quarter of 2018 was $0.27 compared to non-GAAP loss per share of $0.10 reported for the same period in 2017.
Capital expenditures including purchases of property and equipment as well as capitalized internal use software development costs were $3 million for the second quarter of 2018, bringing the year-to-date 2018 total to $6 million. We closed the second quarter of 2018 with $104.3 million in cash and marketable securities, the decrease of $15 million from Q1.
This reduction resulted from the combined cash operating losses, capital expenditures and working capital needs in the quarter. Free cash flow for the second quarter of 2018 was negative $15 million for the reasons stated above, as compared to a negative free cash flow of $6 million during the second quarter of 2017.
We calculate free cash flow as net cash provided by operating activities less capital expenditures including capitalized software development costs. Since the filing of annual tax returns drives our net operating loss calculations or NOLs, we do not update them quarterly.
As of December 31, 2017, our total 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%.
Our total potential tax affected NOL benefit adding state and Canadian benefits to this federal amount is approximately $65 million. I will now shift to giving some indications for what we expect in the third quarter.
We expect that ad spend will be relatively flat sequentially which represents year-over-year percentage growth in the low-20's. Keep in mind the last year we experienced a 4% sequential decline from Q2 to Q3.
We expect take rate in Q3 to be add or slightly above the 12.1% take rate level from Q2 which continues to position us as a low cost provider. We expect Q3 2018 revenue to be flat to slightly up sequentially.
We expect that adjusted EBITDA operating expenses in Q3 including cost of revenue will be approximately $33 million. We continue to expect that CapEx will come in below $20 million for the full-year representing a 50% decrease from 2017.
A significant portion of this benefits results from utilizing our traffic shaping technology to better manage our ad request prioritization and overall ad and bid request efficiency. We are pleased to see accelerating positive momentum in ad spend and revenue from the investments made over the last year and the improved financial performance driven by the cost actions taken.
These both support our near-term goal of being adjusted EBITDA positive in Q4 of this year and being cash flow positive by the end of next year. With the strength in competitive position and positive market conditions we are encouraged by the opportunity to gain share in a growing addressable market and drive leverage through our financial model.
With that, let's open the line for Q&A.
Operator
We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Jason Kreyer from Craig-Hallum.
Please go ahead.
Jason Kreyer
Hey, guys. Good afternoon.
Congratulations on the continued progress on the rebuild. So we see an acceleration in ad spend as the year has progressed obviously in Q2 that was driven more so by the progress you've seen in Mobile.
Just wondering if you can you know break that down any further into different pockets and then what you're seeing right now that gives you confidence in the continued acceleration going into Q3?
David Day
Yes I'll start and then Michael feels free to weigh in. Yes, as you mentioned Mobile not mutually exclusive, but video and audio just continue to be very strong players for us.
And I think also a factor that helped us this quarter is that the desktop is stabilized in the past that's been dropping in greater measure. And so on balance we're not disclosing specific audio and video numbers at this point in time but they're certainly significant drivers.
Michael Barrett
Yes. Hey Jason, it's Michael.
I think that the - the think that the - continued confidence in the growth in ad spend really comes from feedback in the marketplace, where we're looking at the number of new clients are signing up the number of clients that we had relationships with, our relationships are only deepening. As you know, we have begun to assume then this past quarter and can and you know we did team took close to 50 meetings and while the feedback was 180 degrees different from this time last year.
And so I think that in there the metrics that David share with you on the specific media types I think just generally speaking feedback from clients has been incredibly positive and we feel really energize and clients meeting both publishers and buyers.
Jason Kreyer
One of the things you mentioned you know that the components of the growth is there any way to breakdown further the growth that you're seeing taking on additional wallet share from your existing customers versus bringing a new publisher and assuming more wallet share there any breakdown you can provide?
Michael Barrett
I think that a lot of our clients are our private and so it's tough to really look at it from a pure share perspective. But we here's how we think about it in if this doesn't satisfy you can ask the question in a different way.
But we kind of look at macro report that fits in the industry programmatic is growing at around 20%. So we don't even feel as though obviously a year-ago we're still playing media catch up in this whole header game right.
And so we couldn't be more pleased with the traction that we've gained but we really think that we really even haven't - we haven't even started to eat into the share that most of what you're seeing is catch-up to our rate flow position. And we haven't seen I don't think any benefit to the consolidation we've often talked about that the tertiary players are the ones are going to be affected first, but little by little it's going to get to the core players and there's simply not going to buy from all of us.
And I think that that will be another wave of momentum that we will see. So I think we're just headed down blocking, tackling, regaining the trust of our existing clients and our new clients, getting our fair share, and then I think the next phase of our success will be getting our say unfair share and starting to steal share from competitors.
Is that makes sense?
Jason Kreyer
It does. On EMR, so back in January you move to first price auctions, we talked about EMR at that point in time, and I believe the thought process was there would probably be kind of a short lived period were EMR would be a helpful tool to buyers.
That hasn't really materialized. It seems to me that EMR has been a very helpful tool and a key differentiator in what you guys are doing.
So can you help me bridge the gap between from January to today how the positioning of EMR has changed?
Michael Barrett
Yes. Great question.
And I think we'll tickle with this success as well. Here's what I thought.
Here's what we've thought six months ago. That it might not be the tool for use by the top DSPs, but it would really benefit, DSPs tend through blank.
And what we have seen is wide adoption of EMR. So that was the first surprise.
The second surprise was will sooner or later every DSP is going to build their own bid shaping technology and it might even rival ours. And so sooner or later this will be this bridge.
And to tell you the truth, we haven't seen that. I think that folks are very pleasantly surprised buyers with our sophistication and with our algos.
And I think that we kind of feel though this is a big longer term differentiator and it's not just building this sort of bridge to help people get off the second price to the first price that this could be kind of a permanent differentiator of the platform which is really exciting, because even if others come up with it and I'm sure they will. We're on diversion 2.0 already, which is tweaking win rates in the high value areas.
So we're now fine tuning after a big blunt launch. And so I think there are plenty of bright days ahead for EMR.
Jason Kreyer
Okay. Try to sneak in a couple extras here.
So following AT&T's acquisition of AppNexus, what I've been hearing is, is probably more of a move to independence across publishers. And so I'm just wondering if you can provide any thoughts on or any feedback on the conversations that you're having with publishers'?
Are you hearing these things? Or is just too early to speculate?
Michael Barrett
I think it's too early to speculate. I think that, listen we know that this positioning resonates, the independent positioning.
And to be clear what we mean by that is, we don't own inventory, so we'll never compete with our publishers in selling inventory and we don't own a sales team that cause an agencies to run money through our DSP. And so we can look at our buyers and our sellers and say hey, we're never going to be competition with you, we're here to try to make you the most amount of money.
AppNexus now being owned by a company that owns a lot of content, so they own no now, and they have a DSP, the legacy AppNexus DSP and they haven't really take marketing with AT&T, which is one of the biggest spenders. There's definitely concern in the marketplace.
I wouldn't even begin to say that we're picking up any momentum from it, but I do know that it's helpful that we're the only scaled global independent player out there, and I think it's going to benefit us long-term.
Jason Kreyer
Perfect. Last one for me.
David you just talked about exiting 2019 free cash flow positive, just want to make sure we break that down, so we're on the same page. You're talking Q4 would be free cash flow positive Q4 2019 and then are you talking about that on the basis of EBITDA less CapEx or are you talking like operating cash flow?
David Day
Yes. Q4 2019 that's the target and defining that as adjusted EBITDA less CapEx.
That's correct. Yes, working capital is really hard to forecast.
It ebbs and flows and so for the things that we can more directly control for that time period, that's what we're targeting.
Jason Kreyer
Got it. Thanks a lot for the time guys.
David Day
All right. Thank you.
Operator
And our next question comes from Matthew Thornton from SunTrust. Please go ahead.
Matthew Thornton
Hey. Good afternoon, guys and congrats on the quarter, and that's a pretty tough environment out there with GDPR and currency and all the stuff going on, so congrats on the print.
David Day
Thanks.
Matthew Thornton
You guys talked a little bit about AppNexus, I'm also curious about ROE is a hard area, you guys are one of the bigger players there. Obviously there is an acquisition - vertical acquisition in that space.
Wondering if you're seeing any ripple effects or benefits or thinking that you're going to get some benefits coming your way from that acquisition?
Michael Barrett
Yes, Matt. It's Michael Barrett.
I think it will benefit as twofold, number one, there are definitely clients that were ad with clients that will no longer be ad with clients given if you wants the exchange now because of competitive reasons. So I think we stand to pick up share there.
But also I think given our long-term relationship with Pandora that there's also the possibility of us bringing demand to the adverse platform. So we could actually act as a buyer in that respect.
And so I think it's doubly positive for us and again I think, as with the overall story, most of the success we've had in audio and overall for the business, I don't think is combat share shift. It is combat playing catch up, working hard, bringing the right markets to - bringing the right tools to market and I think those days of being able to catch a break with a share shift are still ahead of us and we look forward to those days when they arrive.
Matthew Thornton
Gotcha. And then obviously there's couple of headwinds out there to GDPR, definitely curious to hear maybe if you're able to kind of quantify a little bit higher thinking about the GDPR headwind to ad spend in 2Q and then how that kind of shapes, does it works better the same in 3Q, 4Q?
Love to hear your - just kind of thoughts if any from your thoughts just around your privacy shaping up the recent California legislation and then obviously some of the Safari updates are coming year in September would love to get your thoughts around some of stuff as well?
Michael Barrett
Yes, so I think some of those change as well impact certain players in the ecosystem more than they would. So for instance in the Safari world, I think that that you saw certain buyers being impacted by us.
But as an exchange given the breath of our inventory, the breath of our users, it didn't really have a material impact to us. GDPR definitely I know obviously we talked at length about it our last call.
GDPR was a big unknown. We thought we were prepared for it.
We thought the whole ecosystems prepared. We learned at midnight, the day it went live then they were glitches and we battled storm.
But most of the resistance we saw was more in the form of technical than it was in terms of a wholesale change in terms of how we're doing business with the EU users. We know the situation is terribly fluid.
We stand top of it. We have outstanding folks in that area that seemingly even when step ahead of it all and they're working hard it and we don't see another shoe to drop anytime soon.
It's just an ongoing awareness of the fact that it's important to respect users' rights. There is new rules as it relates to certain users in certain countries and we're always going to be at the vanguard of that.
California, too early to call, but simply put, well plugged were obviously base in California. So that give us a little bit of advantage being wired into that scene.
And ultimately all the stuff is good for the end user. How we get there sometimes is a little friction filled but we are usually supportive of it and will always kind of play above board on it.
On the ePrivacy front, that legislation is still evolving in developing and probably won't become effective till perhaps 2020 maybe at the earliest. And I think having gone through the GDPR process that we've gone through, there's a template now for folks as they work through ePrivacy that probably helps facilitate that move and probably lessens the bumps that you might have had otherwise?
Matthew Thornton
Gotcha. And then I guess maybe one more for me on currency.
How are you thinking about just kind of currency headwind, what was the impact in the second quarter and how you're thinking about in kind of the third quarter, fourth quarter, just so we can think about the right way to model ad spending growth?
Michael Barrett
Yes, pretty truly interesting for us because we have a different structure then some other companies are - for revenue purposes, our global structure is on a U.S. functional currency basis and more than 90% of our by side demand dollars come in to us in USD.
And so we don't have the same kind of exposure that perhaps other companies have and the exposure we do have might come in the form of maybe slightly smaller budgets that are converting from foreign currency budgets to the U.S. the budgets that eventually make their way to us.
But they're not - they're very challenging to quantify and in the last quarter, we did not really experienced any significant measurable impact. And so going forward, so it's less of a - currency is really less of an impact for us then for many other companies.
Matthew Thornton
All right, perfect. And then something I have, but thanks and again congrats on the [print customer].
Michael Barrett
Thanks.
David Day
Thanks, appreciate it.
Operator
This concludes our question-and-answer session. I would now like to turn the conference back over to Michael Barrett for any closing remarks.
Michael Barrett
Yes, thank you. So I just like to thank all of our employees for their efforts and hard work as well as our partners and shareholders for their support during our turnaround in the work that remains ahead.
We look forward to seeing some of you at some of our investor marketing activities as at September. Thank you for joining us for our Q2 results call and have a good evening.
Operator
The conference is now concluded. Thank you for attending today's presentation.
You may out disconnect.