Pubmatic, Inc. annual report, FY2021

PubMatic, Inc. — Fiscal 2021 Form 10-K Summary

Business context and reporting period

PubMatic operates an independent sell-side platform for programmatic digital advertising, connecting publishers and app developers with advertisers, agencies and demand-side platforms across mobile, desktop, video, OTT/CTV and other formats. The filing covers the fiscal year ended December 31, 2021, with audited comparisons for 2020 and 2019. The filing is an annual report rather than a standalone quarterly filing, although fourth-quarter 2021 results are separately presented.

• Approximately 1,450 publishers and app developers were served at year-end, representing more than 97,000 domains and apps.
• Approximately 250 new publishing partners were added during 2021.
• The platform processed approximately 92.2 trillion ad impressions during 2021, up 96% from 2020; fourth-quarter volume was approximately 29.6 trillion impressions.
• Mobile and video, including OTT/CTV, represented approximately 67% of fourth-quarter revenue.
• Net dollar-based retention increased to 149% from 122% in 2020.

Financial results and key metrics

Metric	2021	2020	Change
Revenue	$226.9 million	$148.7 million	Up 53%
Gross profit	$168.6 million	$107.6 million	Up 57%
Gross margin	74%	72%	Up 2 percentage points
Operating income	$58.8 million	$31.8 million	Up 85%
Operating margin	26%	21%	Up 5 percentage points
Net income	$56.6 million	$26.6 million	Up 113%
Diluted earnings per share	$1.00	$0.46	Up 117%
Adjusted EBITDA	$96.3 million	$50.3 million	Up 91%
Net cash from operating activities	$88.7 million	$24.3 million	Up $64.4 million

Fourth-quarter 2021 revenue was $75.6 million, up from $56.2 million in the fourth quarter of 2020. Fourth-quarter operating income was $28.0 million and net income was $28.2 million. Fourth-quarter net income included a $5.4 million unrealized gain on an equity investment, which contributed to unusually strong other income.

• Cost of revenue increased 42% to $58.3 million, but cost per impression declined 28%, reflecting platform scale and utilization.
• Technology and development expense increased 30% to $15.9 million; sales and marketing increased 34% to $58.2 million; general and administrative expense increased 77% to $35.8 million.
• Stock-based compensation increased materially to $14.1 million from $3.6 million.
• The effective tax rate was approximately 13%, compared with approximately 16% in 2020.

Cash flow, liquidity and debt

• Cash and cash equivalents were $82.5 million and marketable securities were $77.1 million at December 31, 2021, for total cash, cash equivalents and marketable securities of $159.6 million.
• Net working capital was $193.8 million.
• Investing cash outflows were $96.7 million, including $30.4 million for property and equipment, $8.9 million for capitalized internal-use software and a $57.4 million net increase in marketable securities.
• The company had no outstanding borrowings under its $25.0 million revolving credit facility with Silicon Valley Bank. The facility matures June 6, 2024 and is secured by substantially all assets other than intellectual property.
• The company was in compliance with its financial covenants at year-end, including the minimum 1.0-to-1.0 adjusted quick ratio.
• Total contractual obligations were $55.9 million, including $31.8 million of other contractual obligations, primarily data-center commitments, and $24.1 million of lease liabilities.

Material changes versus the prior comparable period

• Revenue growth accelerated substantially, driven by higher impression volumes, publisher additions, mobile and video adoption, and supply-path-optimization initiatives.
• Profitability expanded as gross margin increased to 74% and operating expenses declined to 48% of revenue from 51%.
• Operating cash generation improved significantly, although accounts receivable increased $67.4 million and accounts payable increased $68.3 million, reflecting the transaction settlement model.
• Infrastructure investment increased, with property and equipment purchases rising from $24.2 million to $30.4 million and capitalized software costs rising from $7.2 million to $8.9 million.
• Liquidity increased through operating cash flow and marketable-security investments, while the company remained debt-free under its revolving facility.
• The company adopted the lease accounting standard ASC 842 in 2021, recognizing operating lease right-of-use assets and liabilities; the adoption did not materially affect net income or cash flows.
• Revenue concentration declined but remained material: the largest publisher represented 17% of revenue in 2021 versus 20% in 2020 and 28% in 2019. Two buyers represented 29% and 19% of accounts receivable at year-end.

Guidance, outlook, commentary and risks

Management expects revenue to continue growing in 2022, with mobile and omnichannel video, including OTT/CTV, identified as primary growth drivers. Management also expects higher absolute cost of revenue, technology and development expense, sales and marketing expense, and general and administrative expense as the company expands infrastructure, headcount and public-company capabilities. The filing does not provide a specific 2022 revenue or earnings forecast.

• Advertising demand is cyclical and seasonal, with materially higher spending typically occurring in the fourth quarter.
• COVID-19 and related economic effects could reduce advertising budgets, delay campaigns, impair collections or disrupt operations, although management stated that the pandemic had not materially reduced cash flow or liquidity through year-end.
• Privacy and data-use changes, including GDPR, CCPA, CPRA, Virginia’s CDPA, browser restrictions on third-party cookies, Apple’s IDFA changes and potential changes to identity technologies, could reduce data availability and advertising effectiveness.
• The business depends on a relatively small number of large publishers and DSPs, including Yahoo, Google DV360 and The Trade Desk, without minimum volume commitments.
• Competition, pricing pressure, fee concessions and the potential cannibalization of open-marketplace activity by private marketplaces could pressure revenue per impression and margins.
• Platform outages, cyberattacks, data-center disruptions, software defects, fraud, malware and viewability or inventory-quality issues could harm customer relationships and financial results.
• International operations create foreign-exchange, regulatory, tax, data-transfer and employee-cost risks. A hypothetical 10% change in the U.S. dollar/rupee exchange rate would have affected 2021 operating income by approximately $1.2 million; a comparable dollar/pound change would have affected operating income by approximately $1.4 million.
• The company disclosed a Nasdaq audit-committee composition deficiency following the death of a director in December 2021. It had until the applicable cure-period deadline, no later than December 25, 2022 or June 23, 2022 depending on the annual-meeting date, to regain compliance and stated its intention to appoint a third independent director.
• Management, and Deloitte & Touche, concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021.
• The company disclosed no material pending legal proceedings, but noted ordinary-course claims, indemnification exposure and an ongoing IRS audit of its 2019 federal tax return. Unrecognized tax benefits were approximately $2.4 million.

Most important facts for investors to verify

• Whether 2022 growth in mobile, video and OTT/CTV offsets pricing pressure, privacy-related changes and possible advertising-market normalization.
• The sustainability of the 74% gross margin and the effect of continued data-center, personnel and public-company investments.
• Collection performance and working-capital requirements given the large accounts-receivable and accounts-payable balances and buyer concentration.
• Revenue exposure to the largest publisher and major DSP relationships, including the absence of minimum spending commitments.
• The magnitude and recurrence of the $5.4 million unrealized equity-investment gain included in 2021 other income.
• Progress in satisfying Nasdaq audit-committee requirements and the potential consequences if compliance is not restored.
• Future stock-based compensation, dilution from outstanding options and RSUs, and the effect of the dual-class structure, under which Class B shares carry ten votes per share.