Magnite Inc (MGNI) 2014 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to Rubicon Project's 2014 first-quarter earnings conference call. As a reminder, this conference call is being recorded.

Joining me today are Frank Addante, CEO, Founder, Chief Product Architect; Greg Raifman, President; and Todd Tappin, Chief Operating Officer and Chief Financial Officer.

Before we get started, I'd like to remind our listeners that our prepared remarks and answers to questions will include predictions, estimates and other information that might be considered to be forward-looking statements, including, but not limited to, the guidance we are providing and other non-historical statements related to our anticipated financial performance, operating and strategic plans and the markets and our competitive position.

Forward-looking statements involve risks, uncertainties and assumptions, and actual results may differ significantly from the results suggested by forward-looking statements for various reasons, including, without limitation, if such risks or uncertainties materialize or assumptions prove to be inaccurate. Reported results should not considered an indication of future performance.

A discussion of some of the risks and uncertainties and assumptions is set forth in more detail in the Company's registration on Form S1 and quarterly report on form 10-Q, including under the headings Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations. We undertake no obligation to update forward-looking statements or relevant risks.

Our commentary today will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings press release, which we have posted to our website. At times in response to your questions, we may offer incremental information to provide greater insight into the dynamics of our business or quarterly results.

Please be advised that this additional information may be one time in nature and we may or may not update it in the future. I encourage you to visit our investor relations website at investor.rubiconproject.com to access our first-quarter press release, periodic SEC reports, a webcast replay of today's call or to learn more about the Rubicon Project.

With that, let me turn the call over to Frank.

Thank you, Greg. Greetings, everyone. Welcome to the first Rubicon Project earnings call.

I'm pleased to report that we had a record first quarter. Revenue for Q1 was up 39%, compared to Q1 of the prior year, to $23 million. Managed revenue was up 34%, compared to the first quarter last year, to $129.6 million. Later in the call, Greg will cover our operating initiatives and customer developments and Todd will give an overview of our financial results.

Since many of you are new to the Rubicon Project, I would like to begin by outlining our mission, our unique and strategic position in the ad tech ecosystem and our views on the market going forward. We pioneered advertising automation when we founded Rubicon Project seven years ago.

Our mission is to automate the buying and selling of all advertising, including television and even digital billboards. Advertising has been bought and sold manually for decades using telephone, fax machine and complicated Excel spreadsheets. We are doing for advertising what innovators such as NASDAQ and [Saber] systems did to automate their respective industries.

We chose to start with automated digital because it is the fastest growing market and its increasing complexity created the greatest immediate need for automation. Today, the ad tech market is complex, dynamic and fragmented. There are more than 500 disparate buying solutions serving more than 100,000 advertisers. There are thousands of premium websites and applications that are trying to reach those advertisers.

Sellers and buyers need to connect with each other more efficiently. Many solutions without a central marketplace equals confusion. The advertising market needs one centralized marketplace to organize and connect buyers and sellers, and that is exactly what we do.

Rubicon Project's exchange turns complexity into opportunity, enabling market growth. We are a technology Company. We do not buy or sell media or make money from arbitrage Our revenue is generated by the use of our technology.

We have developed a strategic and critical position in the digital advertising market. Advertisers are constantly moving money across various buying technologies as they search for the best performance. Therefore, they may move campaign budget dollars from one ad network to another or from one DSP to another.

As advertisers shift their spending across these various solutions, much of this activity is ultimately transacted across our platform because of our strategic position as the sellers' platform. Similar to stock trading, if a company chooses to list their stock with the New York Stock Exchange, buyers are ultimately purchasing stock trades processed by their exchange.

While there are more than 500 buying solutions, there are only a few large-scale exchanges. Rubicon Project is one of them and has many unique advantages.

First is skill. Our exchange reaches 97% of US Internet users. Network display advertising company reaches more users in the US than our platform. Additionally, our technology reaches approximately 600 million users on a global scale.

The second is quality. We focus on the top 500 sellers in the regions we operate in. While the tail is an opportunity for us in the future, our focus right now is premium websites and applications.

Third, are our direct integrations. We have developed direct integrations with a critical mass of top sellers, including 40% of the comScore 100. This means that buyers who want to reach the websites and applications that have integrated our platform, buyers have to use our platform to reach those sellers.

Fourth is independence. Rubicon Projects provides an independent transparent exchange to buyers and sellers without conflict.

Last is performance. Data drives performance. Our machine learning algorithms learn from trillions of new data signals each month and are able to more effectively price inventory and match buyers and sellers as a result. Our business spans many vertical, horizontal and geographic markets.

Today, we are a leader in digital display, the largest of digital advertising markets. Mobile and video are growth opportunities for us, and television and digital billboards are on the horizon. There are three main buying methods for digital advertising. Real-time bidding, static bidding and direct sold orders.

With the introduction of automated technologies, we are seeing faster growth in the market. For example, real-time bidding, or RTB, has grown to a $4.5 billion market in just four years per IDC. While RTB is just a subset of our market, it's a good illustration of the high demand for automation given the value it delivers to both buyers and sellers.

We continue to grow our market share and extend our leadership position in real-time bidding. The growth of our RTB revenue is outpacing the market, which, according to IDC, is projected to grow 50% in 2014.

While RTB attracts much of the attention, the static bidding market is two times the size of the RTB market. And direct-filled orders is a $37 billion market opportunity in digital alone.

Our solution enables us to participate in the full digital advertising market, not just RTB. To address this market, we have three solutions. The first is seller cloud, which websites and applications use to automate the sale of their advertising inventory to DSPs, ad networks and agencies.

Next is buyer cloud, which agencies, DSPs, and ad networks use to automate the purchase of advertising from these sellers. And third is the advertising automation cloud, which is the exchange that processes these traits.

These solutions allow both buyers and sellers to leverage the data in our system to more effectively identify audiences, price and match impressions and execute transactions. Our goals with buyer cloud are to better connect to spend from agencies, their trading desks and advertisers through third-party connectors such as DSPs and ad networks, ultimately to sellers of ad inventory.

We are also developing technologies to enable the creation of new DSPs and ad networks in buying solutions for underserved markets or subsections of markets. As we enable more spend through these buying channels, we expect the volume of transactions effected through our platform to increase.

We continue to invest in the speed and scale of our automation cloud. Our real time trading platform executes trades between buyers and sellers. This means that our cloud has to process transactions faster than websites load and faster than all of the buyers can bid.

We process more than 3 trillion bid requests per month and analyze billions of data points in real-time to enable our solutions to make approximately 300 data-driven decisions per transaction within milliseconds and execute up to 2.5 million peak queries per second.

Faster processing results in greater revenue performance. Our specialty engineered hardware, the Rubicube, has enabled us to scale our operations faster in lower latency and lower costs. We continue to innovate in this area.

We are in the early stages of testing for programming silicon. This is the next step for us to further reduce latency to improve revenue performance. We are testing FPGA, that is fewer programmable gateway array cards where we are putting our proprietary auction logic directly onto the chips themselves.

In Q1, we engineered and launched a number of new innovations to our platform. We launched new capabilities in our seller cloud that automates the integrations existing legacy out servers. It gives sellers the ability to leverage the data intelligence of our automation cloud and the ability to automatically provision inventory on demand with their existing ad server. These capabilities help sellers operate more efficiently and provide buyers even greater access to inventory and audiences.

We also launched our actionable insights capabilities, which leverages this wealth of data to provide data visualization for our customers ad trading trends. These data visualizations and controls enable sellers to better manage and optimize their advertising revenue.

Looking to the future, our immediate product growth opportunities are focused on the following three areas: automating direct sold orders, mobile, and video. The next big frontier in digital advertising is automating orders that are negotiated directly between a buyer and seller, which today is far too cumbersome and fraught with manual processes.

We have seen great traction with our direct order automation products. We saw strong growth in our direct orders business in our international markets from Q4 to Q1 at a time when overall advertising spend is usually down due to seasonality. The CPMs of direct orders are approximately three times that of RTB.

I'm also excited about the potential for both mobile and video. When we launch new products, our number one priority is capturing market share. Critical mass of buyers and sellers creates dual network effects. Integrations with the sellers are most important.

Those integrations bring audience and inventory to our platform, and critical mass of audience and inventory creates gravity for buyers. The transactions between these sellers and buyers produces invaluable data that helps to make our machine-learning algorithms even more effective.

We already have critical mass in display. Starting in 2013, we focused on onboarding mobile inventory from our existing premium customer base for both the smartphone and tablet. We also extended our core platform to support mobile applications in addition to mobile web.

With mobile and video, market share is our number one priority and revenue is secondary, for now. As such, we now have hundreds of buyers and sellers using our mobile capabilities. Video is an area where we have more recently started to invest, so you will hear more from us later in 2014 on this initiative.

As chief product architect, another product that I oversee is culture. We manage culture as a product. We have a road map for it, we measure it. The goals of culture are twofold, one is to attract the greatest talents and innovators in the world, and two is to make them as productive as possible.

As such, we are beta testing a new measurement tool this year called ROP, or return on productivity. Our goal is a 1% return on productivity for the Company in 2014. Every dollar we make or save is a dollar that we can reinvest into integrating solutions for this $100 billion and growing market.

We have a formula for success here at the Rubicon Project; people, products, customers, in that order. We strongly believe that by putting people first, we are able to create the greatest value for our customers. Great people innovate great products, and great products attract great customers. Our people platform, in my opinion, is what makes Rubicon Project an extraordinary Company.

As always, I would like to thank our team for continually investing in our culture of innovation. Our customers and partners are constantly pushing us to innovate, and of course, our shareholders, for their support as we continue to make history by changing the way that advertising is bought and sold. I'm really excited for Q2 and the rest of 2014.

Now I would like to introduce our President, Greg Raifman, to talk about our operational initiatives and customers. Greg is responsible for the day-to-day execution of our operating plan.

Greg joined our team in of January 2013, but is someone that I have known for 14 years. He and I have shared a passion and a common vision for advertising automation from his early days as the founder CEO of Mediaplex, an early pioneer of advertising technology.

Thank you, Frank.

We started this year with five major strategic initiatives: expanding inventory on our advertising automation cloud; two, bringing buyers closer to sellers; three, growing our international footprint; four, expanding our platform onto mobile and video; and five, continuing to automate internal operations to extract additional operating leverage.

First, let's discuss how we expanded seller inventory on the Rubicon Project platform during Q1. Quality supply is the lifeblood of our business. We are excited to announce that in Q1 we procured additional large comScore 500 customers to our platform for both open auctions and direct orders.

These customers include eBay US, which complements our long-standing eBay international business, SeekingAlpha and Thomson Reuters. The addition of these clients further expands our premium publisher inventory and increases the network effects of our business, which helps buyers and sellers maximize efficiencies.

In Q1, two of the largest automotive sellers adopted Rubicon Project's platform to launch their own private exchanges to capture the growing premium programmatic ad spend in the automotive sector. We signed Jumpstart Automotive Group, a Hearst Media Services company, which represents the broadest, most diverse audience of in-market car shoppers and influencers across automotive websites, including Consumer Guide Automotive, JD Power Auto, Car and Driver, Road and Track and US News Autos. Edmunds.com, a leading auto comparison site, has also joined the automation cloud and partnered with Rubicon Project to execute automated orders with near and [non-endemic] clients such as insurance companies and is adding incremental revenue deploying our open auction.

We are further heartened to see the many ways that companies are partnering with us and adopting Rubicon Project's advertising automation cloud. For example, Triad Retail Media has partnered with Rubicon Project to drive sophisticated programmatic ad strategies for retailers in the United States and across Europe. Together we powered data-rich orders and auctions programs for key retailers, including Walmart, eBay, Sam's Club and more.

Thomson Reuters has standardized on our advertising automation cloud to power global private exchange. We are seeing this as a growing trend, giving sellers a greater ability to manage which buyers participate and to control pricing. This is similar to what we have done for companies such as News Corp and Viacom.

In fact, our partnership with the new News Corp continues to power growth globally for us. In Q1, the News Corp Exchange reached a new milestone by adding the New York Post on our platform, joining an already impressive list of first-tier new sites such as News Australia, Dow Jones and News UK. This product global exchange is one of the largest in advertising and has garnered significant adoption within the News Corp family of sites.

These very impressive wins indicate a trend that we are experiencing. Notable comScore enterprise level clients are consistently choosing the Rubicon Project platform as their primary technology provider for monetizing valued ad inventory.

Our second strategic initiative was to deploy our advertising automation to bring buyers closer to sellers. The growing number of unique and high-value sellers continues to drive advertisers to our platform. The number of data request processed from these advertisers on our advertising automation cloud has now grown to over 3 trillion bid requests per month.

Unlike in years past, large media agencies and media conglomerates are now willing to learn and begin to adopt automation as common practice in private marketplaces, as well as in open RTB auctions. And we are seeing this trend unfold through the strength of our direct orders business, as Frank discussed earlier.

Premium brands and publishers have quickly adopted our direct orders product. Buyers utilizing this channel include Netflix and the[Merkel] Group, among others.

Many luxury and high end brands have also deployed our buyer automation tools to drive their digital marketing initiatives. It's also important to note that the average CPM per media transacted via our direct orders product is approximately three times that of open auction RTB, indicating that more and more premium ad inventory is moving toward automation.

Finally, we have worked consistently to connect buyers and sellers by creating environments in which they can work together. For example, we have expended our marketplace summit program in which we bring buyers and sellers together physically in off-site locations to meet one-on-one to discuss and conduct transactions through automation tools.

In Q1, we held marketplace summits in Australia, New York City and Chicago, and we expect to hold about 10 more globally for the remainder of 2014. These summits usually bring immediate revenue to our platform from the deals that are transacted and also further drive markets faster towards automation.

Our third strategic initiative was to grow our international footprint. Rubicon Project is a global Company. In addition to the US, we have a market-leading position in the UK, France and Australia, and are making great strides in Germany, Italy and the rest of Europe, including Eastern Europe.

In Q1 we had a key client in those regions, including Tiscali, a leading ISP headquartered in Italy and Seznam, the leading portal in the Czech Republic, as additional large sellers onto our platform. These markets continue to grow, many of which are emerging or even on tap when it comes to automation.

Japan is the second largest advertising market in the world, and one where we believe our solution has a great deal of relevance and potential. In Q4 of last year we opened a data center in Tokyo, and in the first quarter of this year we opened an office there.

We have also opened an office in Singapore, and just last week we announced our entry into the Latin American market with an office opening in San Paolo, Brazil and have already added Groupo Abril, one of the largest magazine publishers in Brazil. Later this year we will open our office in Miami, Florida, to further strengthen our position in Latin America.

Our fourth strategic initiative was to expand our platform into other addressable markets such as mobile and video. As mobile RTB continues to grow, Rubicon Project is well positioned to assist advertisers in reaching their mobile audience, leveraging efficiency in automated buying channels that we have pioneered over many years.

Because of device and operating system fragmentation, however, buying mobile inventory has historically been extremely difficult, yet we have addressed these challenges by making it easier for buyers to transact mobile inventory via either the open RTB auction protocol or through private marketplace or private exchange opportunities. For instance, we upgraded our orders product to more easily sort premium packages by tablet, smartphone and display platforms, as well as by iOS and android operating systems for further targeting options.

As Frank mentioned earlier, we will look at further scale to both the buyers and sellers on this platform throughout the coming year.

In addition to mobile, we have been developing digital video capabilities for the advertising automation cloud. We are excited for these opportunities that video brings, and we view it as a stepping stone to automating television advertising over the long term.

Our fifth strategic initiative was to continue automating internal processes. As a Company with an automation focus, it is critical that we focus on automating each and every aspect of our business operations. This allows us to gain additional operating leverage from our current asset base, while still providing the service levels that help differentiate our product and technology offerings.

For example, we automated the onboarding of new sellers, which desire to deploy our advertising automation cloud. This was made possible by the development of an automated installer, which has reduced time to launch a new seller on our platform.

In addition, we established a technical solutions team to ensure that buyer and seller integrations are successfully consummated and continually improved, reducing the amount of manual effort required from both Rubicon Project and customer resources. We believe these initiatives contributed to our successful Q1.

And with that, I would like to turn it over to Todd.

Thank you, Greg.

Overall, we have continued to experience tremendous growth led by our RTB solutions, while continuing to invest in the business to drive future growth, as well as building our infrastructure to support becoming a public company. Due to the seasonality of our business, we will compare the first quarter of 2014 to the first quarter of 2013.

Managed revenue, which is media spend transacted to our platform in a given period, is an important operating metric for both internal and external purposes. Many companies in our industry record revenue on a gross basis, therefore, managed revenue provides a comparison to others in our industry. Managed revenue for the first quarter of 2014 was $129.6 million, compared to $96.4 million in the first quarter of 2013, representing an increase of 34% year over year.

The increase in managed revenue was primarily driven by an increase in both pricing and bidding activity led by RTB, which represents the largest portion of our business. The increase in managed revenue resulting from an increase in average CPM was partially offset by a decrease in the volume of paid impressions year over year, which are mainly the result of the quality control initiatives we implemented during the end of 2013.

We report revenue on net basis. We generate fees from buyers and sellers transacting on our platform based on a percentage of managed revenue. Our take rate represents a total of the buyer and seller fees that we charge. Take rate is influenced by a number of factors, but primarily by the mix of RTB to other offerings, which is an increase as a percentage of our mix. Therefore, if the operating mix remains constant, we would expect take rates to be relatively constant in future periods.

Revenue in the first quarter of 2014 was $23 million, compared to $16.6 million in the same period of 2013, representing an increase of 39%. The increase in revenue was primarily due to managed revenue and the related metric fluctuations, as previously mentioned, and an increase in take rate. The take rate increased to 17.8% in the first quarter of 2014, as compared to 17.2% in the same period of 2013, which was primarily due to a higher mix of RTB managed revenue, which generally carries higher fees.

Operating expenses, including cost of revenue, increased to $29.5 million in the first quarter of 2014, from $18.4 million during the same quarter in 2013. The increases in operating expenses were primarily due to the expansion of our sales efforts and general and administrative expenses associated with becoming a public company.

Cost of revenue included in total operating expenses increased at a slower pace than revenue as a result of the operating leverage associated with the cost of operating our platform. Cost of revenue increased by 30%, compared to revenue increase of 39% during the first quarter of 2014, compared to the same period of 2013.

Adjusted EBITDA was a loss of $1.6 million in the first quarter of 2014, compared to a profit of $2 million in the first quarter of 2013. The decrease was primarily due to the increase in operating expenses from both hiring and infrastructure investments incurred toward the end of 2013, associated with an increase in engineering and product-related development enhancements in our sales efforts, as well as costs associate with becoming a public company. We expect 2014 costs to significantly increase over 2013, as 2014 will reflect the full year effect of 2013 investments, as well as planned product international expansion efforts in 2014.

Earnings-per-share on GAAP basis was a negative $0.59 based on a weighted average basic and diluted shares of $12.2 million for the first quarter of 2014. This compares to a negative $0.28 during the same period in 2013, which was based on a weighted average basic and diluted shares of $11.3 million. The GAAP share count excludes the conversion of our preferred stock, which occurred with the IPO, the net exercise of preferred stock warrant, which occurred with the IPO, and shares issued in our public offering.

Net debt loss per share the first quarter 2014 was negative $0.15, based on weighted average of basic and diluted shares of $26.9 million, which compares to breakeven at the same period of 2013, which was based on weighted average basic and diluted shares of $26 million.

Non-GAAP loss per share excludes, one, preferred stock dividends; two, stock-based compensation; three, amortization of intangible assets; four, acquisition-related costs; and five, change in fair value of our preferred IPO preferred stock warrants, as well as net foreign currency exchange gains and losses. And assumes the conversion of our preferred stock occurred in the beginning of the quarter, the net exercise our preferred stock warrants occurred in the beginning of the quarter, but excludes the 6.4 million shares issued in our initial public offering.

Capital expenditures, including property and equipment, as well as internal use software net of amounts financed, were $3.1 million in the first quarter of 2014, and were primarily composed of investments in buyer cloud features and functionalities, capacity expansion, orders, mobile and video. We expect capital expenditures to increase throughout the rest of 2014. Capital expenditures are expected to range between $10 million and $20 million this year, and the wide range is mostly due to how much of our internally developed software is capitalized, which is a monthly assessment.

The determination of how much is capitalized may also impact cost of revenue, since amortization related to most of these capitalized costs is recorded in cost of revenue. Cost of revenue pertains to those costs associated with operating our platform. These costs are mostly fixed in nature and not directly driven by revenue.

We assess technology-related costs such as internally developed software, personnel costs and maintenance, on a customer-facing platform, as well as our internal system to determine whether these costs borne on cost of revenue or technology in development. Therefore, for a clear view on our total technology expenses, we recommend adding cost of revenue and technology and development cost together.

Cost of revenue may range from 20% to 25% of revenue this year, depending on factors such as the amount of revenue and the amount of capitalized cost. Moreover, as we increase investments in technology associated with our 2014 initiatives, we expect those technology investments to impact both cost of revenue and technology in development line items. We believe we have adequately included all technology-related costs in our guidance, regardless of classification.

We closed Q1 2014 with $24.5 million cash and subsequently received $86 million in proceeds from our IPO in April, net of expenses. Debt, including capital lease obligations, was $4 million at the end of Q1 2014, but was largely retired early in the second quarter of 2014.

As a result of our strong first quarter results, we are raising our internal projections for the full year. We are initiating guidance as follows: In the second quarter ending June 30, 2014, we expect revenue between $24.5 million and $25.5 million; Adjusted EBITDA loss to be between $5 million of $4 million; and non-GAAP loss per share to be between $0.24 at $0.21, based on approximately [33.2] million weighted average shares.

For the full year 2014, we expect revenue for the full year to be between $111 million and $114 million, adjusted EBITDA loss to be between $7 million and $5 million, non-GAAP loss per share to be between $0.60 and $0.50 based on approximately 32 million weighted average shares. We would expect a typical seasonal pattern whereby the fourth quarter represents the largest revenue quarter when our second and third quarters are generally flat.

We would further like to comment on some of the trends we see in the business. We continue to hold a leadership position in reach and experiencing continued strong growth in RTP fueled by increased bidding activity and pricing.

We operate in a large market and plan to invest in our business opportunity as more buyers and sellers increase their RTP activity across multiple platforms. We believe we will benefit from the positive trends in the industry and as we lead on a trailing 12 month basis quarter over quarter, as the number of sellers continues to increase, as well as the average spend per buyer on our platform.

We expect to see continuing near-term growth from international seller expansion efforts, primarily from [existing] territories with contributions later in the year from new territories, buyer sales and product expansion efforts, orders in mobile and continued expansion of RTP and related pricing and bidding activity. We continue to experience tremendous growth led by our RTB solutions, while at the same time investing in the business to drive future growth and realize our market opportunity.

We would now like to open the line for any questions.

(Operator Instructions)

Jordan Monahan, Morgan Stanley.

I actually had a couple of questions, if I can. The first is around video, and I think that was certainly on your list of top three priorities. There have been a number of questions in, I think the broader marketplace about how to make video a little more brand safe and publisher safe. And given that you have direct integrations with publishers, I'm wondering if you could just talk about some of the advantages you may bring to video relative to some of the other exchanges that are out there.

And then secondly in mobile, Facebook certainly has talked quite a bit about its FAN mobile ad network. And they certainly have ambitions to become very large player at scale. And there too, I'm wondering if you can just talk maybe a little bit about how your publisher relationships may or may not insulate you from some of the competition around FAN.

Hi, Jordan, this is Frank here. I'll address your video question first and then your mobile question afterward. When it comes to video, many of the buyers and sellers that exist in video are very similar to that of the display market where we've got a leadership position. You've got companies like News Corp or Viacom, who are customers of ours. And we believe that as this market progresses, there's a lot of advantages to having a single platform to address multiple channels.

With that said, data is something that, of course, powers our algorithms that does better matching as well as better pricing of this inventory. And ultimately what that comes down to is the value of the user. Our 97% reach in the US of US Internet users is a very strategic asset for us. It is not just about the seller integrations, but it is also about the reach of consumers.

You also mentioned something about the security and safety of video. Security and safety was a big issue in the display market before we pioneered automation. So, it is been a big area of investment for us and an area where we've taken a leadership position.

When we started seven years ago, there was a lot of risk for publishers to make their inventory available to ad networks. Ad networks didn't provide them the transparency into the actual campaigns and creatives, so we had to develop a lot of technologies that gave publishers the controls and the visibility to be able to protect their inventory and their user experiences when selling through third parties. Those technologies are translatable into video.

The difference, though, between display and video is that the video, you have to do this at hundreds of times per second versus looking at one individual banner ad. But this is where the speed and the scale of our automation cloud, and particularly the performance power of our Rubicube, I think gives us a good platform to be able to build those capabilities on.

Your second question was around mobile and the Facebook ad network. I think that's a great development for mobile. I think the biggest challenge in mobile today is bringing the advertiser dollars into the market. Just like in display, we encouraged the creation of many new ad networks, as well as the whole category of DSPs.

The reason that that's been part of our business strategy in display is because if there are more companies out there that are trying to provide solutions to advertisers to bring more money into the market, that's ultimately good for the market and ultimately good for our platform. Facebook, of course, being an important player. If you look at the display market you've got companies like Google, AOL, Microsoft who have developed ad networks for display. I think those are very important parts of the ecosystem. Many of those companies are customers of ours and they buy across our platform to reach the premium publishers and applications that exist on our platform.

I would add just one more thing to that, Jordan, this is Todd, with regard to mobile. We talked about the fact that we started our strategy there on mobile web since we had a strong relationship with publishers and it was a natural extension of our display business, developing the app side of that particular platform with something as a 2014 initiative, and we are seeing good traction there. In fact, apps as a percentage of revenue against mobile web is starting to now catch up a bit, and we're seeing good growth in the mobile side through this first quarter.

Deb Schwartz, Goldman Sachs.

Two questions, the first one, thinking about your price volume dynamic, I was wondering if you could give us an update on where you are on the quality control initiatives, given the fact that you saw impressions decline in the quarter. And particularly as you're adding more and more premium publishers, when should we expect to see impression growth? And then second question just on take rate, given the mix of products that you have in terms of RTB and direct orders, how should we think about take rate for the rest of the year?

Sure, Deb this is Todd. With regard to the quality control initiatives, we implemented some very stringent components to that initiative at the end of 2013. We continued those through 2014 and are still doing that, and we think that we will probably always have that. It's not a solution that you would be able to follow 100%, but at the same time, if something that's inherent in our business and now inherent in our operations.

Is important to note that paid impressions by itself doesn't necessarily have an impact on revenue. Because when we are taking out that lower quality inventory, we simply see buyers reallocate their campaigns to the higher quality inventory, which you would naturally expect anyway. At the same time, we might see a corresponding increase in CPM or we might just have an imbalance between supply and demand at that particular point in time.

The impact of the quality control initiatives is de minimis with respect to revenue. I think that is an important point to make. But we continue to have those. As far as whether or not we will see increases or significant increases in paid impressions as a result of that, I think we're still getting through the year to make that determination. But we, at the same time, are continuing to see strong growth on the CPM side and do believe that that will continue to grow.

With respect to take rates, most of the increase that you have seen to date has been a result of a higher mix of RTB which carries higher fees, and that was continuing to be the case in Q1. We are approaching approximately 80% of our business to the RTB, and so as that mix starts to level out, we would expect take rates to level out. Just to talk a little bit more about the market dynamics effect take rates, while we certainly have competition with regard to the sellers that we sign and that sort of thing, we have upward momentum as well as a result of our machine-learning algorithms which continue to create better matching, which then provides more bidding activity as well as higher CPMs, and so we have some leverage there.

But I think probably one of the most important components is our position in the market. Since we have direct integrations with 97% of the US audience through those publishers and have a prominent position with regard to the premium segment of that market, we feel that that gives us a very strong position in which to provide a great ROI and service to those buyers and sellers. With that said though, I think we believe that the low-cost provider and the penetration pricing strategy that we employ historically is still the right one. We think that there still an amount of inefficiency in the market with regard to arbitrage and believe that that's the right strategy in the near term.

Let me add a couple things to that, Deb. As our business has evolved, early on, paid impressions was a big driver growth in the auction business when it came to static bidding. That is because in the auction business we needed to hold the inventory in our platform to make it available for auction. So, it was about moving high volumes of inventory at lower CPM rates.

Then as our business evolved to RTB, it was really about better matching individual impressions with individual buyers. So, it was less volume at higher rates. And as our business is now evolving into the direct orders business, they it's about creating scarcity. We don't necessarily want to sell huge volumes of inventory on behalf of the sellers through the platform. We are trying to create pockets of scarcity with that which, as we mentioned before, direct orders is approximately 3 times the CPMs of RTB. That is one point.

The second point that I want to make is with our advancements in our seller cloud, the integrations that we've now created with the legacy ad servers, we don't even have to have impressions made available in our platform because now when buyers come into the platform and they place an order through our technology, our system is able to dynamically and directly go into the ad server and automatically provision that inventory on demand, which puts us in an even more strategic position with our sale integrations.

Rohit Kulkarni, RBC Capital Markets.

First on the direct orders versus RTB, can you talk a little bit about how your go to market strategy is different for, as you talked about buyers and sellers, for RTB versus direct orders? Do think you are getting net new customers as that is probably a faster adoption of direct orders, or do you think it's just -- today it's just matter of deeper share of wallet and later on there would be a evolution of net new customers? Then I have a follow up.

Sure, this is Frank here. With the direct order business in the go to market, we already have the sellers integrated as well as the buyers integrated into our platform. We're taking the solution first to those that have already integrated the platform along both the display as well as the mobile markets.

One of the critical aspects of our business that gives us an advantage here in addition to those integrations is the transparency that exists within our platform. As I mentioned before, we don't make money by selling media we don't make money from arbitrage. We are encouraged to put the buyer and seller directly together to do those transactions.

It does open up our new customer segment to us. So, when we launched our first product that optimized ad networks via static bidding, there were a number of sellers that were reluctant to work with ad networks just because of the history and the legacy that existed with some of the challenge that existed in the ad network and seller relationship before.

With RTB, we are able to provide additional controls to the sellers as they can protect their user experiences, protect their pricing, as well as to protect channel conflict. With direct orders they have complete and total control over who they choose to do those direct orders with, and it also activates their direct sales team. The assets that they have in their direct sales team, they are able to put them together with the media buyers that are purchasing. So, that control opens up a whole new category of customer segments to us and also gives us the ability to process a large portion of the spend that exists in the market that we weren't able to tap into before.

There's about $37 billion that is spent directly between media buyers as well as sellers, and we are now able to activate that spend. It's not just new customers, but it's more and more transactions in volume from existing customers.

If you could just draw out all the puts and takes that you think around take rates, as it has been a growing part of our conversation with investors. And essentially, there is one obvious upward momentum that you have with regards to RTB and better matching and better algorithm and shift towards premium inventory. What are the other factors that you think would affect take rates over the next, say, 12 to 24 months?

As we go through our particular data and metrics associated with the market and look at the price elasticity, we would see that the market right now has a fair amount of arbitrage overall. Some of the analysis you've probably seen from others as well as ourselves indicates there could be upwards of 60% of any particular dollar from the advertiser making its way through the ecosystem resulting in only 40% of that ending up with the publisher.

When you take that in consideration versus our take rates, you can start to deduce that there's probably a fair amount of elasticity associated with that. But it's our position that a lot of that is not a value add service to advertisers and publishers. Some of it is, so we're not saying all of that is not value add services to which those intermediaries will retain their position; we think there is. However, a portion is not. And so we think that providing a solution to both buyers and sellers that allows them to maximize their ROI on a transparent basis really provides the best ecosystem in the best market in the best platform over the long term. That's how we think about that.

We've talked about the upward momentum drivers of take rates for us, our leverage position in the market, the algorithm's ability to drive more CPMs, the fact that we are bringing more and more buyers and sellers, the use of that data and the network effects associated with both certainly are components of upward momentum. We do obviously have competition in the market as well, which would be a downward force, but that is less than the upward. But it is our strategic choice, therefore, to really hold these take rates, as I said, relatively flat because we do think that this penetration pricing strategy is sensible in the near term.

There will come a point whereby we will assess whether or not we think we've hit that point where there is additional price elasticity to which we should recoup and that has not been taken out of the market. Or we may find at that point in time, and it's yet to determine when that is, that we've taken an inefficiency out and there is less elasticity. But I think that's an evaluation that we have to make in the future.

As Todd mentioned, the strategic strategy -- or the strategy we've employed here has been the strategy from day one. When we started the Company seven years ago, there were about 100 ad networks. And our belief was that if we can bring all the buyers and sellers into a centralized marketplace, just like with other markets that have become automated, those markets grow, both in terms of total volume as well as the number of participants. The number of ad networks has gone from 100 to hundreds of them, and when we pioneered RTB and we standardized the integration into our platform, there were zero DSPs before that and now there are over 100 DSPs around the world.

It's been a big part of our strategy to enable the creation of new companies because again, as I mentioned, that brings in more dollars into the market and ultimately, more dollars that go to our customers. And because we are in that revenue stream, we get paid. It's real important for us to continue that strategy, and part of that is keeping our take rates where they are.

Kerry Rice, Needham.

First question is on competition, and maybe you can help frame it in what you are seeing around the focus on the publisher or the sellers side and where you focus on the premium versus maybe some of your other competitors such as maybe Google. And then the other side is on direct orders, another question on direct orders.

Can you -- it doesn't sound like it's big enough to be broken out as a percentage of revenue at this point, but certainly getting traction. When I think about the growth in direct orders, will we see that primarily as setting up a private exchange, or do you think it will manifest itself in more of a guaranteed arrangement? If you can maybe comment on that. And then just a couple housekeeping questions.

From a competition standpoint, as we mentioned before, our scale, that 97% reach is important because that reach of audience creates gravity for the buyers. Ultimately it is the advertisers using all their various buying channels that are trying to reach that audience. So, the greater the reach, the more gravity it creates for those buyers.

As I highlighted in the earlier section of the call, there are a number of things that I think are competitive advantages to our prompt in platform. One is the transparency, two is the scale of integrations with those sellers, 40% of the comScore 100. Three is the global nature of our business. Many of these sellers have global audiences where they don't have sales team in all the regions that their audience is coming from, so our global footprint is important to that.

And then data is also a huge advantage and barrier for us. As long as you don't have other systems where they've got all the buyers and sellers that we have or the audience, then they've got a limited view of the market. So, they might have a limited view of consumers and the users whereas their algorithms aren't able to understand the value of each of those users.

Or if they have a competitive position where maybe they're competitive with other large sellers, as an example, and those sellers choose not to participate either as buyers or sellers. Then they're not able to get a full view of the value of inventory, as an example, or they're not able to provide access to all of the buyers in the market. So, our independent position in this market is also very important.

A lot of our competition comes from some of the large companies that were mentioned. Those companies are customers of ours more than they are competitors because they are large buyers through our platform because they are trying to provide access to their advertisers to reach that premium part of the market on websites and applications.

Kerry, this is Greg. I wanted to provide a little more insight to what Frank just discussed on -- you mentioned competition in the market for relative to others like Google and particularly in the selling -- the seller cloud side of our business. With respect to what Frank was saying that we do reach 97% of the marketplace in the United States, and we are a global-based Company. As a consequence, we pretty much see each and every major opportunity in the world for premium buyers and sellers. And with that in mind, we see all sorts of pricing opportunities coming at us in a lot of different ways.

And one of the things I think we are excited to be able to report is a growing trend that time and time again the premium brands, the premium sellers are selecting Rubicon and Rubicon Project's platform because of the network effects that we provide. We do have among the best buyers and sellers on our platform, and so we don't feel like we have to be the absolute lowest cost provider in that sense of our product base.

We have been focused from the outset and quality and over time, that's becoming -- we are seeing that resonate more and more. And so as a consequence, you're going to be seeing from time to time a cadence of information from us over the course of the rest of the year where we introduce to you new buyers and sellers, premium brands that are deploying our platform and that's something we expect to be sharing with you in time.

Kerry, this is Todd. Let me start on your orders question, I think it was two parts, and I'll turn the second part over to Frank. You asked about the growth and breaking it out. Yes, we don't break it out yet, but obviously when we get to a point where we think that it's meaningful materially, we will do so. As you point out, and I think as Frank mentioned in his opening remarks, we did see very strong growth and we continue to see very strong growth in orders and in particular during the first quarter of this year. In fact, the growth was so strong it grew right through seasonality. It is a very possible that in the near term you might see us start to break it out as a result.

And your question around private marketplaces, first I'll say that private marketplaces is really just a fancy way of saying that you're giving the seller control over who's buying and more visibility and control into the pricing of who can buy what from whom at what prices in what periods of time or regions, et cetera.

I try not to use fancy words because I think that as an industry we tend to overcomplicate these things by packaging them with fancy words. The best way for me to describe this is to use that travel analogy again. So, in travel, if you wanted to go book a flight or a hotel room, you can go to Priceline and bid on something, or you can go to Expedia and buy it in a private marketplace, or you can go directly to Delta.com or call a Delta agent. All three of those transactions are processed in an automated way in the travel industry.

We're providing those same three capabilities here for advertising. So, you can go bid on something via static bid, you can do it via real time bidding, or you can go directly to the seller or to the buyer, think of that as going directly to Delta.com, and that is what we call a direct order. Private marketplaces is something that straddles the line between using the RTB protocol as a way to more directly transact some of these orders. But when we talk about direct orders and the future of direct orders, we're really talking about that one where the buyer and seller buying directly from each other and negotiating the price, and it's our system that is processing, just like it does in travel.

Jason Helfstein, Oppenheimer.

Can you talk about just the idea of exclusivity, give us an example of, without naming specific advertisers, but where would a seller choose to go exclusive on the sell side? And then other examples where the inventory is shared. And do you have examples where someone perhaps shows you among -- as one of their providers then ultimately moved all of their, or the majority of their inventory to you.

And then second, given opening comments just around buyer cloud, seller cloud and the exchange, would you think about breaking down the business by those lines to help investors better understand what's driving the growth? Because again, there's probably a tendency out there to just look at one number and it ultimately doesn't do you justice. And then also just to potentially think about, talking about client count so people could understand the momentum you're seeing both with the buyers and sellers as you are, again, adding more clients on the platform.

Great, let me take the first part of the exclusivity question, then Greg or Todd can take the second part. Each and every impression that is in our platform is exclusive. Because this is real time, these transactions need to be made and these matches need to happen within 80 milliseconds. So, every impression that exists in our system that generates these 3 trillion bids on a monthly basis is exclusively and only in our platform. You can't take one impression of put it into multiple platforms at the same time. Todd can talk about the contractual nature.

We have very, very few agreements that are exclusive. And really, as Frank mentioned, it's about being able to provide great monetization, a great solution. In our case, we believe that that's through a product suite that allows publishers to maximize their inventory from a volume basis as well as a rate basis and believe that that's really what's going to retain a seller. And we've had tremendous retention rates historically and continue to have very strong retention rates, and really, that's what it boils down to.

It's not something that we really insist upon. There are some rare instances where that occurs when it might be a global arrangement of some sort and we might be providing some customized services or something like that. But I would say generally speaking, you wouldn't expect us to increase the amount of deals that we do on an exclusive basis.

With regard to your question on client counts, I'm not sure that it makes sense to provide specific numbers each quarter just because there is seasonal fluctuations and different patterns. But what I would say is some comments on the trends to help you on that question. One is with respect to buyers, the number of buyers is really not an influencing factor. We have hundreds of DSPs, hundreds of advertising networks. What matters really more is the average spend provider. We think that's an important element, and what's important there is trend, notwithstanding, again, seasonal fluctuations.

I can tell you that the spend per buyer has been increasing. With regard to the publisher side and the sellers, for the same reason, not sure it make sense to give that on a quarterly basis. But I can tell you that from a trend standpoint, our number of sellers does continue to increase. And both of those average spend per buyer, number of sellers, that increase is both year on year as well as sequential. That's hopefully giving you some context.

Another thing I would add to that as being the direct integration with that seller, as money is moving around in the market and as our customers are growing, both the buyer customers as well as the seller customers, because we're that direct integration with that seller and because that spend is transacted through our platform, our revenue grows. I haven't spoken to any one of our customers that don't believe that their own businesses are going to grow over time. Everybody seems very ambitious, so they're investing in growing their user base, they're investing in growing their inventory and audiences, they're investing and growing their direct sales force, which now with our direct orders process -- processing capabilities is a benefit to us.

As the sellers are growing their inventory, it is creating more gravity for more of the spend to come through -- to their platform --I'm sorry, to our platform, ultimately to their site, as well as the buyers that are growing as well. If the market's growing, a lot of that money makes its way to our existing customer base.

We have no further questions in queue. This concludes today's conference call. You may now disconnect.