PubMatic, Inc. — Q3 2021 Form 10-Q Summary
Business Context and Reporting Period
PubMatic operates a cloud infrastructure platform for real-time programmatic advertising transactions, serving publishers, app developers, advertisers, agencies and demand-side platforms globally. The filing covers the quarter and nine months ended September 30, 2021, with unaudited results under U.S. GAAP.
In September 2021, the platform processed approximately 272 billion ad impressions daily. As of September 30, 2021, PubMatic reported approximately 1,370 publishers and app developers. Mobile and video, including OTT and connected television, represented approximately 65% of third-quarter revenue. The filing contains differing descriptions of the number of domains and apps served; investors should verify the applicable definition and period.
Financial Performance and Key Metrics
| Metric | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Revenue | $58.1 million | $37.8 million | Up 54% |
| Gross profit | $42.1 million | $27.3 million | Up 54% |
| Gross margin | 72% | 72% | Flat |
| Operating income | $14.0 million | $7.8 million | Up 80% |
| Operating margin | 24% | 20% | Improved |
| Net income | $13.5 million | $6.2 million | Up 117% |
| Net margin | 23% | 16% | Improved |
| Adjusted EBITDA | $24.3 million | $13.4 million | Up 81% |
| Adjusted EBITDA margin | 42% | 35% | Improved |
| Operating cash flow | $26.4 million | $3.7 million | Up materially |
| Operating cash flow margin | 46% | 10% | Improved |
| Metric | Nine Months 2021 | Nine Months 2020 | Change |
|---|---|---|---|
| Revenue | $151.4 million | $92.5 million | Up 64% |
| Gross profit | $109.9 million | $62.8 million | Up 75% |
| Gross margin | 73% | 68% | Improved |
| Operating income | $30.8 million | $9.5 million | Up 223% |
| Net income | $28.4 million | $7.8 million | Up 264% |
| Adjusted EBITDA | $57.4 million | $23.4 million | Up 145% |
| Operating cash flow | $60.2 million | $15.7 million | Up 283% |
Basic and diluted earnings per share were $0.27 and $0.24, respectively, in Q3 2021, compared with $0.12 and $0.10 in Q3 2020. The increase in diluted weighted-average shares reflects the company’s post-IPO capital structure, option exercises and other equity activity.
Balance Sheet, Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $89.4 million at September 30, 2021, compared with $81.2 million at December 31, 2020.
- Marketable securities were $47.4 million, bringing cash, cash equivalents and marketable securities to approximately $136.7 million.
- Net working capital was $165.1 million. Accounts receivable were $228.4 million and accounts payable were $195.3 million, reflecting PubMatic’s net revenue reporting model and its role in collecting buyer billings and remitting publisher amounts.
- Net cash provided by operating activities was $60.2 million for the first nine months, compared with $15.7 million in the prior-year period.
- Investing cash outflows were $57.1 million, including $22.8 million for property and equipment, $6.8 million for capitalized software and a net $27.5 million increase in marketable securities.
- Cash increased by $8.2 million during the first nine months to $89.4 million.
- PubMatic had no outstanding borrowings under its Silicon Valley Bank revolving facility. The facility provides up to $25.0 million, subject to eligible accounts receivable, bears interest at the greater of the prime rate or 3.25%, and matures June 6, 2024.
- The company was in compliance with its credit-facility covenants at September 30, 2021. The facility is secured by substantially all assets other than intellectual property and restricts dividends without lender consent.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by increased impressions from existing and new publishers, greater mobile and video penetration, expanded buyer relationships and supply-path-optimization arrangements.
- Impressions processed during Q3 increased to approximately 23.9 trillion from 11.8 trillion in Q3 2020.
- Gross margin remained 72% in Q3 but increased to 73% for the nine-month period from 68%, primarily due to greater platform utilization, partly offset by capacity investments.
- Operating expenses increased, including sales and marketing expense of $15.0 million, general and administrative expense of $8.9 million and technology and development expense of $4.1 million. General and administrative expense increased particularly because of public-company costs, professional services and insurance.
- Stock-based compensation increased to $10.5 million for the first nine months from $2.4 million. Unrecognized compensation expense totaled approximately $19.0 million for unvested options, $14.7 million for RSUs and $2.4 million for the employee stock purchase plan.
- Property, equipment and software, net increased to $51.9 million from $30.0 million at year-end 2020, reflecting infrastructure and software investment.
- Net dollar-based retention increased to 157% for the trailing twelve months ended September 30, 2021, compared with 110% for the comparable 2020 period.
- Revenue concentration remained significant: the largest publisher represented 17% of Q3 revenue. Three buyers represented 28%, 20% and 10% of accounts receivable at September 30, 2021.
Guidance, Outlook, Commentary and Risks
Management expected 2021 revenue to continue growing, supported by advertising recovery from the pandemic, increased open-internet activity, mobile expansion and omnichannel video. The filing does not provide a specific numerical revenue or earnings guidance range.
Management 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, international operations and public-company functions. Fourth-quarter advertising seasonality is expected to support higher industry spending, while the first quarter is typically weaker.
- COVID-19 impacts had generally receded through the first three quarters of 2021, but future effects remained uncertain.
- Key risks include dependence on advertising demand, large publishers and buyers, pricing and take-rate pressure, seasonal volatility, competition, platform outages, cybersecurity, ad fraud, data privacy regulation, cookie and mobile identifier restrictions, and the adoption rate of mobile, video and CTV products.
- Foreign-exchange exposure is material: management estimated that a hypothetical 10% change in the U.S. dollar exchange rate against the Indian rupee or British pound could change nine-month 2021 operating income by approximately $0.9 million or $1.0 million, respectively.
- Future minimum commitments at September 30, 2021 totaled $24.2 million, including $1.6 million of leases and $22.6 million of other contractual obligations, primarily data-center commitments.
- The company had approximately $3.5 million of long-term income-tax liabilities related to uncertain tax positions, with timing of cash outflows not estimable.
- In October 2021, PubMatic entered into a sublease for approximately 34,229 square feet in Redwood City, California. The term commenced December 1, 2021, with first-year annual payments of approximately $3.4 million and an approximately $3.5 million letter of credit.
- PubMatic expected to cease being an emerging growth company and become a large accelerated filer as of December 31, 2021, increasing reporting and internal-control requirements.
Most Important Facts for Investors to Verify
- Confirm the sustainability of 54% quarterly and 64% year-to-date revenue growth as pandemic-related comparisons normalize.
- Assess publisher and buyer concentration, including the largest publisher’s 17% revenue contribution and the three largest buyers’ share of receivables.
- Monitor gross margin, revenue per impression, take-rate pressure and the effect of infrastructure investments on future profitability.
- Reconcile adjusted EBITDA to GAAP earnings and evaluate the substantial increase in stock-based compensation and remaining unrecognized expense.
- Track accounts-receivable collections and publisher-payable obligations because PubMatic may bear payment risk if buyers delay or fail to pay.
- Evaluate the impact of privacy regulation, cookie and mobile-identifier changes, and publisher consent requirements on inventory quality and monetization.
- Review the new Redwood City sublease, related letter of credit and other data-center commitments for their effect on future cash requirements.
- Consider the dual-class structure: Class B shares carry ten votes per share, and insiders and large holders controlled approximately 89% of voting power as of September 30, 2021.