Business context and reporting period
This is The Rubicon Project, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2018, filed May 3, 2018. The filing describes a digital advertising exchange that earns fees on advertising transactions. Note: the request identifies Magnite, Inc., but the filing itself is for The Rubicon Project, Inc.
Key financial metrics
Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $24.9 | $46.0; down 46% |
| Advertising spend | $211.0 | $191.5; up 10% |
| Take rate | 11.8% | 23.7% |
| Operating loss | $(27.7) | $(15.5) |
| Net loss | $(27.8); $(0.56) per diluted share | $(15.8); $(0.33) per diluted share |
| Adjusted EBITDA | $(14.2) | $1.1 |
| Cash from operating activities | $(9.8) | $2.9 |
| Cash and cash equivalents | $67.5 at March 31 | $76.6 at December 31, 2017 |
| Marketable securities | $51.8 at March 31 | $52.5 at December 31, 2017 |
| Current assets / current liabilities | $267.3 / $194.2 | Current ratio approximately 1.38 |
Operating margin was approximately negative 111% of revenue, versus negative 34% a year earlier. Cost of revenue was 60% of revenue versus 32%, reflecting the steep revenue decline while cost of revenue was nearly flat. The company had no borrowings under its credit facility at quarter-end; $40 million was available, subject to borrowing-base and covenant conditions. The facility matures in September 2018.
Material changes versus the prior comparable period
- Revenue fell $21.1 million, principally after the company eliminated buyer fees effective November 2017, alongside market competition, weaker traditional desktop display trends, header-bidding dynamics, and the exit from intent marketing.
- Despite lower revenue, advertising spend increased 10%, mainly due to higher CPMs. Mobile advertising spend rose 34%, while desktop spend declined 3%; mobile represented 43% of spend, versus 35% a year earlier.
- Take rate nearly halved, from 23.7% to 11.8%. The company said buyer-fee reductions had materially reduced revenue and margins.
- Total expenses declined 15%, but the operating loss widened as revenue contracted more sharply. Operating cash flow swung from a $2.9 million inflow to a $9.8 million outflow.
- Cash and marketable securities totaled $119.3 million at March 31, down from $129.1 million at year-end.
Outlook, management commentary, risks and unusual items
- The company projected approximately $24 million of annualized cash cost savings from its 2018 restructuring, with savings expected to begin in Q2. It reduced headcount by about 100 employees, or 19% of its workforce, and expected lower sales and marketing, technology and development, and general and administrative expenses in 2018.
- Management stated existing cash, investments, and operating cash flows were expected to meet working-capital needs for at least 12 months. It also warned that continued losses could deplete liquidity and that renewing or replacing the credit facility could be difficult, particularly without a path to positive cash flow.
- The company expected cost of revenue to rise in absolute dollars in 2018 as it invested in data centers, technology, and transaction-processing capacity. It provided no specific revenue or earnings guidance in this filing.
- The EU GDPR was to become effective May 25, 2018. Approximately $67.7 million, or 32%, of Q1 advertising spend related to EEA user impressions. The company anticipated near-term reductions in EEA advertising spend and revenue, with the extent and duration uncertain; potential penalties can reach the greater of €20 million or 4% of worldwide annual revenue.
- Guardian News & Media’s UK proceeding alleges underpayment related to buyer fees; damages were unspecified and the outcome uncertain. The company disputed the claims and did not expect the matter, as currently assessed, to be material, while noting similar claims or resulting business changes could have a larger effect.
- Q1 restructuring charges were $2.5 million, mainly severance. The company also reported a provisional $1.4 million GILTI inclusion for tax accounting; its $0.6 million provisional transition-tax estimate recorded in 2017 was unchanged.
- Management said disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is for The Rubicon Project, Inc., not Magnite, Inc.
- Track whether advertising-spend growth and higher CPMs can offset the lower take rate and restore revenue, margins, and positive operating cash flow.
- Assess actual realization of the projected $24 million annualized savings and whether cuts constrain technology investment or growth initiatives.
- Monitor cash burn, working-capital movements, credit-facility renewal or replacement before its September 2018 maturity, and borrowing availability under its covenants.
- Evaluate the realized impact of GDPR on EEA inventory, demand, and revenue, and the development of regulatory guidance and consent practices.
- Follow the Guardian litigation and any similar buyer-fee claims, as well as the potential implications for pricing and business practices.