Filing identity and reporting period
The supplied filing is The Rubicon Project, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. It is not a filing for Magnite, Inc.; investors should verify the issuer before relying on this summary.
Rubicon operated a digital advertising exchange connecting buyers and sellers. Unless otherwise noted, financial amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $35.2 million | $65.8 million | $124.1 million | $205.6 million |
| Operating income (loss) | $(105.8) million | $(2.4) million | $(132.5) million | $(2.9) million |
| Net income (loss) | $(103.6) million | $3.5 million | $(131.0) million | $3.1 million |
| Adjusted EBITDA | $(2.3) million | $15.3 million | $1.8 million | $49.2 million |
| Operating cash flow | Not stated for quarter | $9.2 million | $48.8 million |
Q3 cost of revenue was 37% of revenue, versus 27% a year earlier; for the nine-month periods it was 33%, versus 25%. The filing does not provide a separate GAAP gross-margin line.
At September 30, cash and cash equivalents were $99.5 million and marketable securities were $39.5 million, compared with $149.4 million and $40.6 million, respectively, at December 31, 2016. Total liabilities were $170.7 million; the company had no borrowings under its credit facility, with $40 million available and up to another $30 million potentially available at the lender’s discretion. Management said existing cash, operating cash flow and the undrawn facility were expected to cover working capital needs for at least 12 months, while warning that cash could decline and assumptions might prove incorrect.
Material changes versus the prior comparable periods
- Revenue fell 47% in Q3 and 40% for the first nine months year over year. The company attributed the decline to lower platform advertising spend, desktop weakness, header-bidding competition, pricing and mix changes, and the discontinuation of its intent-marketing business.
- Advertising spend was $195.0 million in Q3, down from $242.8 million; for nine months it was $591.0 million, down from $748.7 million. Take rate was 18.1% in Q3 versus 24.9%, and 20.9% for nine months versus 25.3%.
- Desktop advertising spend declined 32% for the first nine months; mobile spend increased 1%. Mobile represented 47% of Q3 advertising spend, compared with 34% a year earlier.
- The company recorded a non-cash $90.3 million goodwill impairment in Q3, leaving no goodwill on the September 30 balance sheet. The assessment cited lower market capitalization and negative changes to the near-term business outlook.
- Rubicon acquired nToggle in July for $38.6 million net cash consideration. The acquisition added traffic-shaping technology; purchase-price allocation was preliminary.
- Nine-month operating cash flow decreased to $9.2 million from $48.8 million. Cash, cash equivalents and restricted cash declined $49.9 million during the period.
Outlook, management commentary and risks
- Effective November 1, 2017, Rubicon eliminated buyer transaction fees. Assuming no increase in seller fees, management expected take rate to fall 400–500 basis points in Q4 versus the Q3 exit rate, with a further 100–150 basis-point decline in Q1 2018 from the full-quarter effect.
- Management warned revenue could continue declining, cash could be consumed, and holiday-season spending might not produce the usual Q4 revenue uplift. Offsetting lower fees depends on growth in transaction volume or value, or increased seller fees; management said it was uncertain whether pricing reductions would generate enough additional spend.
- Strategic priorities included mobile, video, Orders and header bidding, alongside cost and infrastructure-efficiency efforts. Management expected certain Q4 operating expenses to be higher than in the prior two quarters, including costs associated with nToggle and technology investment.
- Key risks include buyer and seller pressure on fees and payment terms, competition and commoditization, desktop declines, header-bidding execution and capacity needs, reliance on large advertising platforms, and potential cash depletion or difficulty raising capital.
- Guardian News & Media sued over buyer fees allegedly charged on its inventory; damages were unspecified. Rubicon disputed the claims and said it did not expect a material financial effect, but acknowledged the outcome was uncertain and similar claims could prompt business changes.
- The company reported effective disclosure controls at September 30, 2017, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the filing’s registrant: this document is for The Rubicon Project, Inc., not Magnite, Inc.
- Review subsequent results for the effects of eliminating buyer fees, including actual take rate, revenue, advertising spend and cash flow.
- Assess operating cash use, remaining liquidity, credit-facility availability and the September 2018 facility maturity.
- Check nToggle integration, acquisition accounting and whether anticipated technology or growth benefits materialized.
- Monitor the Guardian litigation and any related fee, contract or business-practice changes.
- Consider the $90.3 million goodwill impairment and the assumptions used in the valuation; the filing cites a 16.2% discount rate and market-based valuation methods.