PubMatic, Inc. — Form 10-Q Summary
Business context and reporting period
PubMatic operates a cloud infrastructure platform for real-time programmatic advertising, serving publishers, app developers, advertisers, agencies and demand-side platforms globally. The filing covers the quarter and six months ended June 30, 2021; results are unaudited and prepared under U.S. GAAP.
- Approximately 1,300 publishers and app developers were served as of June 30, 2021.
- The platform processed approximately 20.2 trillion ad impressions during the second quarter, compared with 10.3 trillion in the prior-year quarter, and approximately 229 billion impressions daily in June 2021.
- Mobile and video, including OTT/CTV, represented approximately 65% of second-quarter revenue.
- Net dollar-based retention was 150% for the trailing twelve months ended June 30, 2021, compared with 107% in the prior-year period.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $49.7 million | $26.4 million | $93.3 million | $54.7 million |
| Revenue growth | 88% | — | 70% | — |
| Gross profit | $36.6 million | $17.2 million | $67.9 million | $35.5 million |
| Gross margin | 74% | 65% | 73% | 65% |
| Operating income | $10.1 million | $0.7 million | $16.8 million | $1.8 million |
| Net income | $9.9 million | $0.7 million | $14.8 million | $1.6 million |
| Net margin | 20% | 2% | 16% | 3% |
| Adjusted EBITDA | $18.6 million | $4.9 million | $33.1 million | $10.0 million |
| Adjusted EBITDA margin | 37% | 19% | 35% | 18% |
| Operating cash flow | $21.1 million | $(2.7) million | $33.8 million | $12.0 million |
Revenue growth was driven primarily by higher impression volumes from existing and new publishers, increased mobile and video activity, and greater buyer demand. Cost of revenue increased more slowly than revenue, and management attributed the margin expansion primarily to greater platform utilization.
- Technology and development expense increased 30% in Q2 and 29% for the six-month period, while declining to 8% of revenue from 11%.
- Sales and marketing expense increased 52% in Q2 and 39% year to date, but declined to 28% and 29% of revenue, respectively, from 35%.
- General and administrative expense increased 103% in Q2 and 95% year to date, reflecting higher personnel, professional services, insurance and public-company costs.
- Stock-based compensation was $3.6 million in Q2 and $6.8 million for the six months, compared with $0.5 million and $1.0 million, respectively, in the prior-year periods.
- The six-month effective tax rate was 11%, compared with 24% in the prior-year period.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $90.6 million at June 30, 2021, compared with $81.2 million at December 31, 2020.
- Marketable securities were $31.4 million, resulting in total cash, cash equivalents and marketable securities of approximately $122.0 million.
- Net working capital was $155.2 million.
- Total assets were $383.8 million and total liabilities were $181.7 million; stockholders’ equity was $202.1 million.
- Accounts receivable were $195.4 million and accounts payable were $162.6 million. These balances are large relative to reported revenue because revenue is presented net of publisher amounts, while receivables reflect amounts collected from buyers and payables reflect amounts owed to publishers.
- The company had no borrowings outstanding under its amended $25.0 million revolving credit facility with Silicon Valley Bank. The facility matures June 6, 2024, bears interest at the greater of the prime rate or 3.25%, and is secured by substantially all assets other than intellectual property.
- PubMatic was in compliance with its financial covenants at June 30, 2021, including the minimum adjusted quick ratio requirement.
- Six-month investing cash outflows included $11.8 million of property and equipment purchases, $4.8 million of capitalized software development and a net $11.6 million increase in marketable securities.
- Contractual commitments totaled $24.9 million, including $2.1 million of lease commitments and $22.8 million of other obligations, primarily data-center commitments. Long-term uncertain tax liabilities were $3.7 million, with timing of payment not estimable.
Material changes versus the prior comparable period
- Revenue increased 88% in Q2 and 70% for the first six months, while gross profit increased 113% and 91%, respectively.
- Operating income increased to $10.1 million in Q2 from $0.7 million and to $16.8 million year to date from $1.8 million.
- Operating cash flow improved to $21.1 million in Q2 from cash used of $2.7 million and increased to $33.8 million for the first six months from $12.0 million.
- Gross margin expanded by nine percentage points in both the quarter and year-to-date period.
- Accounts receivable declined from $219.5 million at year-end 2020 to $195.4 million, while cash and marketable securities increased by approximately $21.0 million in aggregate.
- Property, equipment and software, net increased from $30.0 million to $43.6 million, reflecting continued infrastructure and software investment.
- In June 2021, the company amended and restated its SVB credit agreement, extending the maturity date and maintaining a $25.0 million revolving capacity.
- Revenue concentration declined modestly: the largest publisher represented 17% of Q2 revenue versus 21% in the prior-year quarter. Three buyers represented 33%, 13% and 11% of accounts receivable at June 30, 2021.
Guidance, outlook, management commentary, risks and unusual items
Management expects revenue to continue growing in 2021, driven primarily by continued recovery in advertising demand following the pandemic and growth in mobile and omnichannel video, including CTV. The company expects absolute cost of revenue, technology and development, sales and marketing, and general and administrative expenses to increase as it expands capacity, personnel, product capabilities and public-company infrastructure. No quantitative revenue or earnings guidance was provided in the filing.
- Management believes existing liquidity, anticipated operating cash flow and available credit capacity will satisfy working-capital needs for at least the next 12 months, but notes that weaker operating performance or prolonged COVID-19 effects could adversely affect liquidity.
- Advertising demand remains sensitive to macroeconomic conditions, seasonality and the continuing effects of COVID-19. The company expects higher advertising activity in the fourth quarter and lower activity in the first quarter.
- Key industry risks include intense competition, pricing and take-rate pressure, reliance on major publishers and DSPs, buyer payment defaults, inventory quality and fraud, platform outages and cybersecurity incidents.
- Privacy and data-protection changes, including restrictions on cookies, mobile identifiers and targeted advertising, as well as CCPA, CPRA, GDPR and related requirements, could reduce inventory value, increase compliance costs or require product changes.
- Google announced plans to phase out third-party cookies beginning in mid-2023, and PubMatic cautioned that the transition could be more disruptive, costly or prolonged than anticipated.
- Foreign-exchange exposure is material to operating results; management estimated that a hypothetical 10% change in the U.S. dollar exchange rate against the Indian rupee or British pound would change six-month operating income by approximately $0.5 million or $0.7 million, respectively.
- No material legal proceedings were reported. The company stated that ordinary-course claims and indemnification exposures were not material based on currently available information.
- Disclosure controls and procedures were effective as of June 30, 2021, and no material change in internal control over financial reporting was reported.
- PubMatic remained an emerging growth company during the period but expected to become a large accelerated filer and cease being an emerging growth company at year-end 2021.
Important facts for investors to verify
- Whether the exceptionally high revenue growth and 150% net retention rate are sustained after pandemic-related recovery effects normalize.
- Trends in revenue concentration among the largest publisher and DSP relationships, including the ability to retain and expand those relationships.
- The durability of the 73%–74% gross margins as infrastructure capacity, headcount and data-center costs continue to increase.
- Cash conversion, collections from buyers and payment obligations to publishers, particularly given the large accounts-receivable and accounts-payable balances.
- The effect of third-party cookie deprecation, mobile identifier restrictions, privacy regulation and consent requirements on impression volume, pricing and revenue.
- The scale and recurring nature of stock-based compensation and related dilution; unrecognized compensation totaled $39.5 million across options, RSUs and the employee stock purchase plan at June 30, 2021.
- Execution of mobile, video, OTT/CTV, private marketplace and international expansion initiatives, including their effect on growth and take rates.
- Compliance with SVB covenants and the implications of the lender’s security interest and restrictions on dividends and other financing activities.