Entity and reporting period
Important identification issue: The supplied filing is The Rubicon Project, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2015—not a filing under the name MAGNITE, INC. The summary below reflects the filing’s stated registrant and results.
Rubicon Project operated an automated digital-advertising buying and selling platform. It completed its acquisition of Chango Inc. on April 24, 2015, expanding its buyer-side and intent-marketing business. The acquisition also introduced arrangements reported on a gross basis, affecting comparisons of GAAP revenue and margins.
Financial results
Amounts below are in millions of dollars, except per-share data, percentages, and operational measures.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $53.0 | $28.3 | $90.2 | $51.3 |
| Managed revenue | $227.2 | $153.5 | $424.4 | $283.1 |
| Take rate | 21.4% | 18.4% | 20.2% | 18.1% |
| Cost of revenue | $14.0 | $4.9 | $20.6 | $9.3 |
| Operating loss | $(11.5) | $(7.1) | $(18.6) | $(13.6) |
| Net loss | $(11.9) | $(9.4) | $(17.0) | $(15.5) |
| Adjusted EBITDA, non-GAAP | $6.7 | $2.7 | $10.9 | $1.0 |
| Basic and diluted loss per share | $(0.30) | $(0.29) | $(0.45) | $(0.74) |
Q2 revenue rose 88% year over year; first-half revenue rose 76%. Managed revenue increased 48% and 50%, respectively. Management attributed revenue growth mainly to higher average CPMs, changes in transaction mix, and buyer-cloud activity, including Chango. The filing cautions that gross reporting for buyer-cloud transactions raises reported revenue and cost of revenue relative to net-reported marketplace activity; this limits direct period-to-period margin comparisons.
Calculated from reported figures, gross margin was about 74% in Q2 2015 versus 83% in Q2 2014, and about 77% for the first half of 2015 versus 82% in 2014. Operating margin was approximately negative 22% versus negative 25% in Q2, and negative 21% versus negative 26% for the first half. These margins are affected by the gross-versus-net reporting change. The GAAP net loss widened in Q2 despite higher Adjusted EBITDA; the six-month net loss also increased year over year.
Cash flow, balance sheet and liquidity
- At June 30, 2015, cash and cash equivalents were $99.2 million; available-for-sale securities had a fair value of approximately $18.0 million. Current assets were $266.7 million and current liabilities $179.3 million.
- Operating cash flow was $28.6 million for the first half, compared with $0.5 million a year earlier. Management said the 2015 result was supported by working-capital movements, particularly a $19.8 million increase in accounts payable and accrued expenses, largely reflecting the timing of payments to sellers.
- Investing cash use was $33.9 million, including $18.1 million in securities, $8.6 million for the Chango acquisition net of cash acquired, $4.2 million in property and equipment, and $4.1 million in capitalized software. Financing cash provided was $7.4 million, mainly from option exercises and employee stock purchases.
- Cash increased by $2.0 million during the half, ending at $99.2 million. The company reported no borrowings under its $40 million Silicon Valley Bank revolving facility and stated that $40 million remained available. It reported compliance with covenants and a fixed-charge coverage ratio of 2.1 to 1.0.
- Management believed cash, operating cash flow, and the undrawn facility would be sufficient for at least 12 months, while warning that an acquisition or weaker-than-expected performance could alter liquidity needs. The company had no outstanding debt at quarter-end.
Material changes and unusual items
- Chango was acquired for total preliminary purchase consideration of $101.9 million, including $72.5 million in common stock, $9.1 million in cash, $4.3 million for pre-acquisition services related to exchanged options, and $16.2 million of estimated contingent consideration. The company recorded $52.5 million of acquisition goodwill and $52.4 million of acquired intangible assets; the purchase-price allocation was preliminary.
- Chango integration caused the company to report revenue gross for certain buyer-managed campaigns. The filing says most buyer-cloud transaction revenue is gross-reported, while other marketplace transactions continue to be reported net.
- Accounts receivable increased to $147.7 million from $133.3 million and accounts payable and accrued expenses increased to $177.3 million from $151.0 million. Seller payables represented $157.0 million of the latter balance.
- Shares outstanding increased to 43.6 million at June 30, from 37.2 million at year-end, including shares issued in the Chango acquisition. The filing reported 43,835,507 shares outstanding as of July 28, 2015.
- The company did not exercise an early termination option for its Los Angeles headquarters sublease; future non-cancelable commitments increased by $8.9 million. The filing gives differing end dates for certain new lease commitments in separate sections, so the schedule should be checked against the full filing.
- After quarter-end, on August 3, 2015, the CEO, President, and COO/CFO received amendments increasing severance benefits, including longer salary and equity-vesting acceleration for certain involuntary terminations and additional target-bonus coverage in specified change-in-control terminations.
Outlook, commentary and risks
Management expected annual revenue to continue growing, but the filing provided no quantified revenue, earnings, margin, or cash-flow guidance. Management anticipated continued investment and absolute-dollar increases in cost of revenue, sales and marketing, technology and development, and general and administrative expense. It noted that Q4 typically brings the highest advertising activity and Q1 the lowest.
Key risks include continued operating losses and uncertain profitability; competition and pricing or take-rate pressure; dependence on large buyers and sellers and generally non-exclusive arrangements without minimum volumes; execution and integration risks for Chango and other acquisitions; uncertainty around intent marketing, automated guaranteed products, mobile and video growth; privacy, data-use, cookie and regulatory changes; cyberattacks, fraud, malware and platform outages; foreign-exchange exposure; and reliance on working-capital timing. The filing estimated that an immediate 10% adverse currency move on foreign-denominated balances, including intercompany balances, would produce an approximately $1.9 million loss. Management stated that pending legal matters were not expected to have a material adverse effect, while noting that outcomes were uncertain.
Investor verification points
- Confirm the issuer identity: the filing names The Rubicon Project, Inc., not Magnite, Inc.
- Assess revenue growth and margins using managed revenue, take rate, and the gross-versus-net accounting change—not GAAP revenue alone.
- Check the sustainability of operating cash flow, especially the contribution from higher seller payables and payment timing.
- Review Chango’s integration, preliminary purchase accounting, contingent consideration (reported at $27.6 million at quarter-end), and expected returns.
- Reconcile lease commitment amounts and dates across the filing, and review the impact of the additional headquarters sublease commitments.
- Track losses, spending growth, liquidity and facility covenants, as well as dilution from acquisition shares, equity awards, and potential earn-out shares.