Pubmatic, Inc. quarterly report, Q1 FY2022

PubMatic, Inc. — Q1 2022 Form 10-Q Summary

Business context and reporting period

PubMatic operates a cloud infrastructure and sell-side platform that enables real-time programmatic advertising transactions for publishers, app developers and buyers across mobile, desktop, video, OTT and connected television. The filing covers the unaudited three months ended March 31, 2022, compared with the three months ended March 31, 2021.

• The platform processed approximately 32.6 trillion impressions during the quarter, versus 18.5 trillion in the prior-year quarter, and approximately 383 billion impressions daily in March 2022.
• PubMatic served approximately 1,490 publishers and app developers as of March 31, 2022, and reported a trailing-twelve-month net dollar-based retention rate of 140%, compared with 130% a year earlier.
• Mobile and video, including OTT/CTV, represented approximately 67% of first-quarter revenue.

Financial results and key metrics

Metric	Q1 2022	Q1 2021	Change
Revenue	$54.6 million	$43.6 million	+25%
Gross profit	$36.6 million	$31.3 million	+17%
Gross margin	67%	72%	Down 5 percentage points
Operating income	$4.6 million	$6.6 million	Down 31%
Operating margin	8%	15%	Down 7 percentage points
Net income	$4.8 million	$4.9 million	Down 3%
Diluted EPS	$0.08	$0.09	Down $0.01
Adjusted EBITDA	$17.0 million	$14.5 million	+17%
Net cash from operating activities	$19.3 million	$12.7 million	+52%

Cost of revenue increased 46% to $18.0 million, primarily from higher data-center depreciation and software amortization, data-center costs, support and maintenance, personnel costs and stock-based compensation. Operating expenses increased 30% to $32.0 million, led by sales and marketing and general and administrative investment.

• Technology and development expense: $4.8 million, up 28%.
• Sales and marketing expense: $16.5 million, up 29%.
• General and administrative expense: $10.8 million, up 32%.
• Stock-based compensation: $5.1 million, versus $3.2 million.
• Effective tax rate: 23%, versus 28%.

Balance sheet, liquidity, debt and cash flow

• Cash and cash equivalents were $74.5 million at March 31, 2022, compared with $82.5 million at December 31, 2021.
• Marketable securities increased to $100.3 million from $77.1 million. Cash, cash equivalents and marketable securities totaled approximately $174.7 million.
• Net working capital was $204.3 million; total assets were $497.6 million and total liabilities were $229.9 million.
• Accounts receivable declined to $218.4 million from $286.9 million, while accounts payable declined to $186.0 million from $244.3 million.
• Operating cash flow was $19.3 million. Investing cash flow was negative $27.8 million, including $4.2 million of capitalized software development and a $23.4 million net increase in marketable securities. Financing cash flow was positive $0.5 million.
• PubMatic had no borrowings under its $25.0 million Silicon Valley Bank revolving credit facility. The facility matures June 6, 2024, and the company was in compliance with its financial covenants.
• Contractual obligations totaled $63.8 million, including operating and finance lease liabilities and other commitments primarily related to data-center providers. The company also had $1.7 million of long-term income tax liabilities related to uncertain tax positions.

Material changes versus the prior comparable period

• Revenue growth remained strong at 25%, driven by increased impressions from existing and new publishers, mobile and video adoption, and buyer demand.
• Profitability weakened despite revenue growth: gross margin fell from 72% to 67%, and operating margin fell from 15% to 8%, primarily because of infrastructure investment, higher operating expenses and seasonal advertising-spend patterns.
• Adjusted EBITDA increased 17%, benefiting from the add-back of higher depreciation, amortization and stock-based compensation.
• Operating cash flow improved substantially, aided by a $68.6 million decrease in accounts receivable, partially offset by a $58.6 million decrease in accounts payable.
• Unrealized gains on an equity investment contributed to the increase in other income and made earnings less representative of underlying operating performance.
• Stock-based compensation and unrecognized future equity compensation increased, with $42.9 million remaining for unvested RSUs and $20.9 million for unvested options as of March 31, 2022.

Guidance, outlook, commentary, risks and unusual items

The filing does not provide formal numerical full-year guidance. Management expects revenue to continue growing in 2022, with mobile and omnichannel video, including OTT/CTV, identified as primary growth drivers. Management also expects cost of revenue, technology and development, sales and marketing, and general and administrative expenses to increase in absolute dollars as PubMatic expands infrastructure, headcount, technology and international operations.

• Management expects normal digital advertising seasonality, with stronger spending typically in the fourth quarter and lower spending in the first quarter.
• COVID-19 effects remain uncertain, including potential impacts on advertising demand, customer budgets, collections and operations.
• The Russia-Ukraine conflict may create economic and political instability, particularly in Europe.
• Key business risks include dependence on advertising demand, major publishers and DSP buyers, competition and pricing pressure, privacy and data regulations, cookie and mobile-identifier restrictions, fraud, cybersecurity, platform outages, third-party data centers and the need to scale infrastructure.
• One publisher represented 14% of revenue in Q1 2022, compared with 20% in Q1 2021. Two buyers represented 29% and 20% of accounts receivable at March 31, 2022.
• In April 2022, PubMatic entered into a New York office sublease with annual first-year payments of approximately $1.6 million, escalating 2.5% annually thereafter.
• The company disclosed a Nasdaq audit committee composition deficiency following the death of a director. It had until the applicable cure-period deadline, no later than December 25, 2022, or an earlier specified date if its annual meeting occurred before June 23, 2022, to regain compliance.
• Management concluded that disclosure controls and procedures were effective as of March 31, 2022, and disclosed no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Whether revenue growth in mobile, video and OTT/CTV can offset continued infrastructure investment and margin pressure.
• The sustainability and quality of the $19.3 million operating cash flow, including the effects of buyer collections and publisher-payment timing.
• Exposure to concentration among major publishers and DSP buyers, including the largest publisher’s 14% revenue contribution.
• Trends in take rates, pricing concessions, impression volumes and revenue per impression amid competitive pressure.
• Progress in complying with Nasdaq audit committee requirements and any resulting listing risk.
• Potential effects of privacy regulation, third-party-cookie restrictions, consent requirements and changes in mobile identifiers on inventory and demand.
• The impact of higher stock-based compensation, capitalized software costs and future infrastructure commitments on GAAP profitability and free cash flow.
• Future tax cash payments and the $1.7 million uncertain-tax-position liability, for which settlement timing was not estimable.