Magnite Inc (MGNI) 2014 Q4 法說會逐字稿

Welcome to the fourth quarter 2014 Rubicon Project earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded, and will be available for replay from the investor relations section of Rubicon Project's website following this call.

I'll now turn the call over to Erik Randerson, Vice President of Investor Relations for Rubicon Project. Sir you may begin.

Thank you. Good afternoon, everyone, and welcome to Rubicon Project's 2014 fourth quarter earnings conference call.

As a reminder, this conference call is being recorded. Joining me today are Frank Addante, CEO, Founder, and Chief Project 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, expectations regarding new initiatives, including our orders, mobile and video business, and international expansion, our relationships and business with buyers and sellers using our platform, fees and take rate, capital investment and organizational development, treatment of software development costs, market conditions, and trends and growth expectations, 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.

Further, we may adjust our plans and expectations in response to market conditions or other factors. Reported results should not be considered an indication of future performance. A discussion of some of these risks, uncertainties, and assumptions is set forth in more detail in the company's registration statement on form S1 and quarterly reports on form 10-Q, including under the headings risk factors and management discussion, analysis of financial condition, and result of operations. We undertake no obligation to update forward-looking statements or relevant risks.

Our commentary 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 the investor relations page of our website, which can be found at Rubiconproject.com.

At times, in response to your questions, we may offer incremental metrics to provide greater insights into the dynamics of our business or our quarterly results. Please be advised that this additional detail may be one time in nature, and we may or may not provide an update in the future on these metrics. I encourage you to visit our investor relations website at investor.Rubiconproject.com to access our fourth quarter press release, periodic SEC reports, a webcast replay of today's call or to learn more about Rubicon project.

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

Thank you, Erik, and good afternoon, everyone.

We had another strong quarter that exceeded our forecasts. Fourth quarter revenue increased 49% and adjusted EBITDA more than doubled year-over-year.

We also achieved GAAP profitability for the first time as a public company. Demonstrating our success in being aggressive with innovation while remaining fiscally prudent and building a profitable business.

For the full year, revenue increased 49%. Managed revenue grew to $668 million, and adjusted EBITDA grew 70%. Outperforming the expectation set during our IPO process.

It's an exciting time to be in the advertising market. A market that is increasingly embracing automation. Our team continues to execute very well in driving strong growth in our business while enhancing our strategic position for the opportunities ahead, as we pursue our mission to reinvent advertising.

That's what I would like to discuss today. First, our unique and strategic market position and the growing market opportunity. Second, key trends in advertising automation today. Third, our investment in technologies that continue to reinvent advertising to address the large and growing market opportunities that lie ahead.

Let's start with our unique market position and growing opportunity. Rubicon Project built the central infrastructure that thousands of companies rely on trade inventory and increase revenue. Our technologies target the $200 billion and growing advertising market opportunity globally. We're a leader in the fastest growing portion of that market: automation.

The most exciting thing about the market opportunity is its rapid growth. In only five years, real time bidding has grown from zero to $9 billion in 2014, and is expected to reach $30 billion by 2018, according to Magna Global.

But RTB is only a small segment of our overall market opportunity. For example, the market for direct orders as much larger than the RTB market, and most direct orders today continue to be bought and sold manually.

Just as our pioneering efforts in RTB helped to create industry momentum, we are catalyzing the larger market opportunity by directly connecting buyers and sellers globally with our orders technology. As a component of our core infrastructure, we are again uniquely positioned to capitalize on massive growth opportunities ahead, such as bringing the same efficiencies to traditional advertising, including TV and digital billboards.

In fact, we have already demonstrated our ability to expand our market position. As the core infrastructure that powers advertising automation to new market segments.

Two years ago, desktop advertising was nearly our entire business. In a short period of time, we've leveraged our core technology infrastructure to extend into mobile.

Today, we have integrations with 50 of the top 200 comScore Mobile sellers, which has driven a further increase in buying spending. Demonstrating that our dual network effects are taking hold in mobile. Just as it did for us in desktop advertising.

Although it is still the early days, many companies are employing our technologies to buy and sell [video] inventory as a further extension to our existing infrastructure. As Greg discussed in our last earnings call, we plan to employ the same strategy we used for desktop and mobile inventory, by focusing on premium quality inventory and leveraging our existing customer base.

Now let's discuss key trends in the advertising market. During our IPO, we talked about how automation in many markets typically begins with lower-priced inventory and then expands to include high-priced inventory over time.

For example, eBay began as an auction for garage sale items, and today sells a car every minute. We recognize these market dynamics, which is why our product strategy focuses on premium buyers and sellers.

As expected, we continue to see an acceleration in the adoption of automation technologies to trade premium advertising inventory. For example, we have recently grown our base of direct seller integrations to include more than 50% of the comScore 100 publishers in the US, and also have strong market share with sellers in several key international markets including the UK, France, Italy and Australia.

Our marketplace is increasingly being recognized as a de facto standard for premium sellers to maximize their revenue, while ensuring brand safety. At the same time, we've grown our integrations and relationships with premier buyers, such as DigitasLBI and Amnet Group a division of Dentsu Aegis media, demonstrating the confidence buyers have in our technology.

Buyers of also significantly increased their average spend on our marketplace. For example, one of our DSP customers approximately doubled its spending on our marketplace in 2014.

Considering these trends, we believe a significant portion of the future market growth will come from automating the buying and selling of premium inventory through direct order automation. Through our recent acquisitions of iSocket and Shiny Ads, we're the first company to combine a marketplace with the following four elements:

First, critical mass of premium inventory and audience. Second, workflow solutions for inventory packaging, discovery, negotiation, campaign execution and insights.

Third, direct connections established between top buyers and sellers. And Lastly, the ability to automate the buying and selling of direct orders of guaranteed inventory, which is reserved inventory at a fixed price.

As I described on last quarter's conference call, executing campaigns for direct orders has historically required a cumbersome and inefficient multi-step manual process of documentation, phone calls, faxes, reconciliation and more, which is exactly why we believe this very large market is ready for automation.

Now, moving on to innovation. Seven years ago, we founded Rubicon project with a mission to automate the buying and selling of advertising. Our pioneering efforts advanced the market growth for ad-network optimization, followed by RTB and then order automation. Our efforts to move the market forward significantly benefited our customers, that include sellers such as publishers and application developers, and buyers such as DSPs, ad networks, agencies, and advertisers.

In 2015 we're further increasing our investment in disruptive innovation. We have established an innovation center, called the Garage, dedicated to these efforts.

With a $200 billion and growing market opportunity, and our proven track record of developing disruptive innovations that accelerate the growth of the advertising market, our objective with the Garage is to further accelerate the growth of this market. As we continue to enable our customers and the market to grow, we benefit directly and grow from increased spending in our marketplace.

Our commitment to innovation is especially important considering our technology processes 5 trillion bid requests per month. We're up to 3.5 million bid request per second. Speed and latency are critically important, since every visit to a website or application requires our infrastructure to manage and auction in real-time, enabling buyers the opportunity to bid.

The entire auction process must be completed in milliseconds before the page loads and faster than bidders can bid. This requires the ability to had a high-frequency, extremely fast performance with very low latency at a scale that very few companies in the world have achieved.

The need to accommodate this requirement is why we needed to engineer our own custom hardware and program our own proprietary silicone. Off-the-shelf infrastructure technologies or existing cloud computing services cannot accommodate this level of latency or speed. This is why we needed to engineer our own proprietary real-time cloud.

Continuously pushing the boundaries of existing technologies further improves our value proposition with customers, which in turn, leads to increased spending in our marketplace. Considering our large market opportunity, the increasing availability of premium inventory for advertising automation, and our increased commitment to disruptive innovation, I'm really excited for 2015. It is a great time to be in the advertising market, and it is a lot of fun to be reinventing advertising.

In closing, I would like to express how proud I am of the focus and execution demonstrated by our team at Rubicon Project throughout 2014. In 2014, we expanded into several international territories, across four continents.

The number of team members around the globe grew by nearly 40%. We completed and integrated two strategic acquisitions. Bid requests on our technology platform grew from 3 trillion to 5 trillion per month, and we became a publicly traded company on the New York Stock Exchange.

I'm proud that during an exciting year of growth and positive advancements for our Company, we kept our eyes squarely on the ball, and our execution remains strong. We held true to our commitment to be aggressive with innovation, while remaining fiscally prudent. A strategy that we will continue to employ going forward.

Our strong results validate that our focus on making culture our number one priority is working. Today, our culture is stronger than ever, and serves as our most important platform to enable continued growth in the years ahead.

With that, I would let Greg and Todd walk you through a more detailed analysis of our results.

Thank you, Frank, and thank you all for joining us on the call this afternoon.

Frank's comments about our market position reinforce that we have continued to achieve measurable progress against our mission to lead the automation of advertising for buyers and sellers. I'll focus my remarks of the operational highlights for the fourth quarter, of which there were many.

Q4 was an incredibly busy time for everyone at Rubicon Project, and I am proud of the unified effort our team has brought to delivering success. We closed and integrated two important acquisitions, signed and on-boarded dozens of new sellers, tightened our relationships with our key agency buyers, and signed major new deals with Apple and Amnet Group, a division of Dentsu Aegis Media.

A common theme is that Rubicon project is increasingly recognized as one of the most trusted marketplaces for premium buyers and sellers to transact. Often leveraging their first party data within our brand-safe and transparent environment to do so. Our strong financial and operational performance further validates that our solutions resonate with our customers and the market at large.

There are four core pillars of our business that we focus on day in and day out. First, providing premium sellers with innovative and scalable solutions to help them maximize revenue from their advertising inventory.

Second, providing buyers the capabilities needed to efficiently access our marketplace. Third, enhancing our cross-platform solutions for all buyers and sellers. Fourth, international growth.

Let me touch on each of these briefly, starting with our seller efforts. The seller team closed out 2014 by signing an impressive roster of premium publishers in Q4, some of which included Publisher's Clearinghouse, [Wo Kia], [Kajiji] Canada, and the Motley Fool. With these and other important wins, we now have direct seller integrations with more than half of the US comScore 100.

This leading market share among premium sellers, combined with our industry leading reach across approximately 600 million consumers globally, serves as a clear differentiator for us. Quite simply, if buyers want premium quality inventory that truly performs, Rubicon project is becoming the logical place to gain access to such quality premium inventory at scale.

We continue to deliver successful new solutions for sellers, including further enhancements to our Ad Engine offering, which optimizes revenue for sellers across all types of inventory and all sales channels. Ad Engine's real-time decisioning engine efficiently manages and allocates buyer demand, enabling our seller customers to maximize revenue for their inventory.

A common theme with Ad Engine and other newer initiatives is that our technology is often becoming more tightly integrated with our sellers' ad servers and other core technologies. For example, during Q4 a number of our key seller clients embedded our real-time pricing scripts on every page of their websites or applications. This ensures that each available impression will be directed to the most suitable demand source, where the optimal revenue can be achieved.

Turning now to our buyer initiatives. Open auction RTB continues to grow rapidly, and represents the majority of spending on our marketplace. We are benefiting from multiple tailwinds, including adding new sellers as well as growth in RTB inventory from existing sellers. This increased supply of premium inventory has led to a continued strong growth in RTB bids from our buyer customers.

We're also continuing to experience exceptional growth in our orders business. Buyers are increasingly seeking greater brand safety for their ad investments and private marketplace powered by our technology provide just this type of well lit environment they are looking for. In fact, the number of buyers on our orders platform has grown more than 70% year-over-year.

Additionally, growth in our orders business has increasingly allowed us to establish and build direct relationships with brand marketers, which has advanced our efforts to drive increased spending and buyer demand on our marketplace. Building strong relationships with marketers is also important, considering there's a trend among some large brands to bring automation expertise in-house, and assume greater control over managing their media buys. We applaud these efforts and stand ready and willing to help buyers of all kinds transact in our marketplace.

In Q4 we achieved early progress in introducing what we are now calling our guaranteed order solution, gained through the acquisitions of iSocket and Shiny Ads, and which builds on the integration of our 49 BC technology. The iSocket and Shiny Ads acquisitions give us a distinction of being the first company to offer a fully integrated automated platform for guaranteed and non-guaranteed direct orders, allowing us to address all aspects of the premium marketplace for buyers and sellers.

Furthermore our offering addresses what is often referred to as the automated guarantee market, which is expected to surpass $8 billion in the US alone by 2016, according to E-Marketer. Automated guarantee is a subset of the much larger market for direct orders.

To illustrate the truly premium nature of transactions facilitated by this offering, in Q4 our new guaranteed orders platform was used to execute the buying and selling workflow for a full-page takeover ad on the New York Post. Full-page takeover means that the advertiser bought ads for the entire homepage. This was the first automated guaranteed campaign ever executed on the New York Post, so we're truly blazing new ground here.

Finally, following on the heels of last quarter's announcement of an important agency partnership with DigitasLBI, I am pleased to report that in Q4 we entered into another important agency partnership with Amnet Group, a division of Dentsu Aegis Media. Amnet Group has chosen both of our order solutions, including our new offering for guaranteed orders to provide full and direct access to our automation technology to power buying for it's clients. As a global partnership, buying interest has already emerged from Amnet clients in multiple countries.

We're now working with virtually every premium buyer, including all the major DSPs, agencies, agency trading desks and ad networks. Shifting now to our cross platform efforts, I would like to share highlights of our continuing progress in reaching audiences across devices and ad formats.

Our growth in mobile continues to be strong, and has benefited from increased mobile impressions available from Nimbi and other mobile advertising platforms, which have already integrated with our exchange API. The exchange API is an exciting technology innovation we pioneered to bring additional quality inventories to our marketplace at scale, while also helping sellers increase the revenue across all sales channels.

Our seller accounts team has done a Yeoman's job of increasing the supply of mobile inventory available from our premium sellers that had formally been working with us only for desktop display inventory. With the on boarding of many mobile sellers during Q4, today we serve more than 50 of the comScore 200 mobile web properties, as well as a rapidly increasing range of mobile apps.

The increased availability of premium mobile inventory suggests that spending on mobile exchanges is now moving beyond the industry's initial growth phase, which had largely been driven by performance campaigns for incentivized app downloads. While mobile remains in an early stage of growth for many industry participants, we expect brand marketers to drive a greater share of mobile advertising spend in the future. Which should benefit companies like Rubicon Project with access to premium mobile inventory.

Lastly, I would like to update you on our international expansion. I just returned from an extensive three-week business trip throughout Europe, visiting colleagues in our London and Paris offices, meeting with international clients located in several European countries, keynoting at a major client event and attending a Rubicon Project marketplace summit in Belgium. The visit reinforced my view that our international business, which accounts for approximately 40% of our managed revenue has a great foundation for continued strong growth.

In Europe we have had several wins I would like to discuss, including Triad Retail, which operates online media programs for retail websites; [Coupa Citas], a media services company operating in more than 20 European countries; Roularta, one of Belgium's larger media owners; and Covina, a Portuguese media conglomerate. We're especially pleased to announce a new global deal with BBC worldwide. Expanding on a two-year relationship with the team behind BBC in the US, the new agreement will support BBC worldwide in over 200 countries, and includes our platform for both orders and auction-based transactions.

We are also thrilled to announce that we have entered into a three-year partnership with eBay Europe, as one of the largest e-commerce platforms in Europe, eBay has rich consumer intent insights across a highly scaled audience in many European markets. As a result eBay sees significant uplift in [CBM's] in private marketplaces compared to the open market RTB. This long-term deal will allow us to work together to maximize the advertising automation opportunity from eBay's unique customer insights and inventory assets.

The BBC end eBay International wins illustrate the strengthening of our relationships with premium sellers, globally, through our increasing range of offerings and growing international footprint. We also signed a country Cooperative deal with a premium publishers network to bring seven of Greece's largest media companies onto the platform all at once. We now power several international cooperatives, where our innovative automation technology allows multiple sellers to unify and compete far more effectively than they could on their own.

Our newly expanded team in Latin America has also done an excellent job attracting new sellers, including Internet Group, one of the largest portals in Brazil. Of note, Latin America is expected to achieve triple digit growth in programmatic ad spending through 2017, according to E-Marketer.

Lastly, I'm encouraged by our continuing progress in Japan. The second-largest advertising market in the world. Less than a year after establishing an office in Tokyo, we have brought 35 premium sellers live, and we have many more in the implementation queue. Programmatic ad spending in Japan is expected to more than quadruple by 2018, according to Magna Global, highlighting the attractive growth opportunity in the country.

Clearly, we have much to be proud of as we look back on 2014. I want to send a personal congratulations to our team for the impressive contributions around the world that lead to our strong results.

And with that, I will turn it over to Todd.

Thank you, Greg.

Overall we have continued to experience tremendous growth, once again led by our RTB solutions while continuing to invest in the business to drive future growth. Managed revenue, which is the advertising spend transacted through our platform in a given period is an important operating metric for both internal and external evaluation purposes. Because many companies in our industry record revenue on a gross basis, managed revenue provides a comparison to others in our industry.

Managed revenue for the fourth quarter of 2014 was $216 million, compared to $158 million in the fourth quarter of 2013, an increase of 37% year-over-year. Managed revenue was $668 million for the full year 2014, compared to $485 million in 2013, a 38% increase. 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 at approximately 75% of overall managed revenue, followed by orders which grew throughout 2014 and represented 10% of overall managed revenue for the full year 2014, and 13% for Q4 2014.

The average CPM for the full year 2014 was $0.67, compared to $0.36 in 2013. The growth in CPM was primarily due to algorithmic efficiency, increased buyer spend, and the continued shift from static inventory purchases to RTB. Total paid impressions for 2014 were 999 billion, compared to 1.3 trillion in 2013.

The decrease in paid impressions was mainly a result of quality control initiatives we instituted at the end of 2013, and an ongoing shift from static bidding to RTB. Accordingly, RTB paid impressions grew year on year from 457 billion to 548 billion.

Revenue which we report on a net basis, consists of our fees from buyers and sellers transacting on our platform. Revenue in the fourth quarter of 2014 was $42 million, compared to $28 million in the same period in 2013, representing a year-over-year increase of 49% and above the midpoint of our guidance of $39 million.

Revenue for the full year 2014 was $125 million, compared to $84 million in 2013, an increase of 49%. The quarterly and annual increases in revenue were primarily due to the increase in managed revenue and related metric fluctuations as previously mentioned, and an increase in take rates. Take rate is our fees as a percentage of managed revenue.

The take rate increased to 19.3% in the fourth quarter of 2014, as compared to 17.8% in the same period in 2013. For the full year 2014, take rate was 18.8%, compared to 17.3% in 2013. The increase in take rate year-over-year was primarily due to the higher mix of RTB managed revenue, which carries a higher take rate than other elements of managed revenue.

We expect orders to increase as a percentage of overall managed revenue mix throughout 2015. Orders have CPMs in excess of 3x RTB and lower fees, therefore as orders comprise a larger part of our revenue mix, revenue per transaction would increase and overall take rate would decrease. Accordingly, we expect take rates in 2015 to trend down throughout the course of the year, as orders contribute a greater mix of managed revenue throughout 2015.

Operating expenses, including costs of revenue, increased to $42 million in the fourth quarter of 2014, from $26 million during the same quarter in 2013. For the full year 2014, operating expenses, including cost of revenue, were $144 million compared to $88 million in 2013. The increase in operating expenses were primarily due to the expansion of our sales efforts and general and administrative expenses associated with becoming a public company, as well as non-cash stock based compensation.

Comparing December 31, 2013 to December 31, 2014, our team grew from 344 to 470. The total full year year-over-year increase of $56 million in operating expenses included an increase of $17 million of non-cash stock-based compensation.

Net income was $1 million in the fourth quarter of 2014. The net loss for the full year 2014 was $19 million, compared to a net loss of $9 million in 2013.

The year on year increase in net loss was primarily due to an increase in non-cash stock-based compensation costs of $17 million, which were $7 million in the fourth quarter 2014, and $24 million for the full year of 2014. Net loss improved sequentially throughout the course of the year, primarily due to revenue growth, partially offset by costs associated with planned head count additions.

Adjusted EBITDA was $13 million in the fourth quarter of 2014, compared to $7 million in the fourth quarter of 2013, and well above the midpoint of our guidance of $4 million. Adjusted EBITDA for the full year 2014 was $19 million, compared to $11 million in 2013. Adjusted EBITDA improved sequentially throughout 2014, was favorable to 2013, and well above guidance targets, primarily due to an increase in revenue and more cost being capitalized than expected.

Notably, our adjusted EBITDA margin in Q4 2014 was 32%, our highest quarterly adjusted EBITDA margin to date. The adjusted EBITDA margin for the full year 2014 was 15%.

GAAP EPS was profitable $0.04 in the fourth quarter of 2014. And a loss of $0.70 for the full year 2014. This compares to a loss of $0.10 per share during the fourth quarter of 2013, and a net loss per share of $1.17 for the full year 2013.

Non-GAAP earnings per share in the fourth quarter, 2014 was $0.25, compared to a non-GAAP earnings per share of $0.14 in the same period in 2013. Non-GAAP earnings per share for the full year 2014 was $0.20, compared to $0.11 for the full year 2013. For an explanation of the various share counts that affect these computations, please see the table in the earnings release and the explanation of Non-GAAP EPS and Non-GAAP weighted average shares outstanding.

Capital expenditures, including property and equipment as well as internal use software, excluding capitalized stock compensation, were $22 million for the full year 2014, compared to $11 million in 2013. Capitalized internally developed software was $9 million in 2014, compared to $4 million in 2013. We expect that, in 2015, more internally developed software costs will be expensed instead of capitalized, as many 2014 initiatives move from the development phase and placed into production in 2015.

We closed Q4 2014 with $97 million in cash, and less than $1 million in debt. In terms of outlook for 2015, we expect the following for Q1. Revenue to be between $34 million and $35 million, adjusted EBITDA loss to be between $2.5 million and $1.5 million, and Non-GAAP loss per share to be between $0.13 and $0.10, based on approximately 35 million weighted average shares.

For the full year 2015, we expect revenue to be between $175 million and $178 million, which represents approximately 40% year-over-year growth for the midpoint of the range. Adjusted EBITDA to be between $19 million and $22 and non-GAAP earnings per share to be between $0.20 and $0.25, based on approximately 41 million to 42 million weighted average shares.

As we have previously noted, we believe that we are in the right position to be a leader in this fast-growing and large $200 billion market opportunity, as evidenced by our 2014 results. Accordingly, we plan to continue to invest in discretionary innovation and R&D, and to a lesser extent, marketing at higher levels in 2015 relative to 2014.

Other important areas of investment include international expansion, mobile, video, buyer credit initiatives, and orders. Additionally, we continue to anticipate that more internally developed software expenditures will be expensed rather than capitalized in 2015 compared to 2014, which will negatively impact adjusted EBITDA margins for the year.

We would like to comment on some trends we're seeing occurring in the business. We continue to hold a leadership position in reach, and have experienced strong growth in RTB, fueled by increased bidding and pricing activity.

We operate in a larger market and plan to invest in our business opportunity, as more buyers and sellers increase their RTB activity across multiple platforms. We believe we will benefit from positive trends in the industry.

In 2014, average RTB managed revenue per seller increased approximately 50%, and the average managed revenue per buyer increased 43% when compared to 2013. The number of sellers in our platform continued to increase year-over-year, despite our quality control initiatives, which resulted in elimination of some sellers.

Key areas of focus in 2015 include orders, for which non-guaranteed is expected to continue its momentum that began in 2014.; and the addition of guaranteed orders, which was recently introduced in 2015; building our buyer sales efforts, to support our orders initiatives and private marketplace development to directly connect buyers and sellers; international seller expansion efforts, primarily from existing territories with contributions from new territories; mobile, in which the development of the audience normally precedes revenue, and for which our audience expansion has grown significantly, and from which we expect a meaningful contribution to revenue in 2015. Mobile managed revenue grew 3x year-over-year, 2014 compared to 2013, and continued expansion of RTB.

In summary, advertising is a large market, and we are leader in the fastest growing portion: automation. Our strong financial results were evidence of this leadership, and we plan continued investment in growth and innovation with fiscal prudence.

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

(Operator Instructions)

Kerry Rice, Needham.

Couple questions here. We've heard some chatter about DSPs trying to build their own direct relationship with publishers. I don't know if you have seen that trend, and if you have, can you talk about how that might impact Rubicon?

The second comment, or question I have is on native advertising. I know InMobi does native advertising, but could you talk a little bit about how you've planned to integrate display or native advertising on the platform in more quantity?

That is a great question, or set of questions. This is Greg Raifman.

You have asked two questions. One about native, and we can start about that and then come back to your first question, if you want.

There has been a lot of talk about native in the industry. I'm sure you've followed that. It's in every mobile conference you go to, it's all the rage, and we are participating in that process. We're building out our capabilities in native right now.

We expect to be in market very soon both for our -- powering the InMobi exchange for our other mobile clients, and our general mobile capabilities. We see tremendous opportunities in, of course, in mobile. You've seen the growth we've shown in the last year, and we see native as being a big component of that growth going forward.

With that, I'll turn it over to Frank. He can handle your first question. Frank?

I think a lot of companies would love to have the position that we have as being that sellers platform. It certainly would give them an advantage over all of their competitors. There are hundreds of DSPs and ad networks that exist in the market.

I think it is important to remember where we started. When we started in this market, there were between 50 and 100 ad networks that existed in the market, and they all had a direct relationship with the seller, whether that be a publisher, an application creator.

Part of that created the confusion and the high cost of operation in managing all of these different relationships. So it is part of the reason that Rubicon Project needed to exist in the first place, was to create this platform that enabled the sellers to be able to manage all of the different buyers in one place. I think it's rare that you will see a DSP trying to build a direct relationship with a seller. If they do, it's usually around some kind of special data sharing relationship, and even that case, often times that's still coming through our exchange.

It's nothing that we're concerned about going forward in the future, I think the more confusion that is created in the market, the more opportunity it creates for us to be that platform that sorts through that confusion.

Kerry, it is Todd. I'll add on to that.

As you can see from our results, and as you heard us discuss in the opening remarks, the performance of our solution has really been quite strong. And the reason for that is that we have developed that set of software, hardware, and architecture to really improve the monetization and improve the economics and efficiencies of a marketplace.

To do that takes not only a tremendous amount of time to build and ingenuity, especially with respect to being able to monetize every type of inventory placement. But of course the culmination and mining of the massive amounts of data, to which power the algorithms that make that matching and pricing so effective.

To do that is obviously one of the things that puts us in a tremendous position, as well as where we sit in the ecosystem, as Frank mentioned.

Deb Schwartz, Goldman Sachs.

Couple questions. First on orders.

Can you talk about what you are seeing on both desktop and mobile from orders? And then whether or not you can break out or give us a sense of how much it contributed to 2014?

Then, secondly on guaranteed. Can you talk a little bit about the benefits for publishers in automating guaranteed? Is it an argument of better pricing, or better yield, or is it more along the lines of cost savings?

Deb, good questions too.

Let's start with the non-guaranteed piece that you asked about, and then we can come back to the automated guarantee. We are very bullish on the direct order automation in general, both guaranteed and non-guaranteed.

As you know, we acquired two companies in the space, and we were early to market in RTB automation, and as you know, that market has grown dramatically in the last five years. And frankly that is the part of Internet advertising that's growing the fastest in the last five years. So now we've turned our attention to the part of the market that we see as ripe for automation over the next five years, and that has been absent of automation to date, and that is the automated guarantee peace.

With respect to non-guaranteed, we've been in market now for several years, we're seeing tremendous growth in this area, and real adoption. We are working very diligently with buyers and sellers to perfect the process, because we see this as a continually growing area as premium buyers and sellers want to work more closely together, and in private market places where they can control the rules and the process even better. So that was one of the reasons for us building out our buyer capabilities in our own environment, which would facilitate it better for our sellers.

And frankly, it would create the opportunity for all buyers in our marketplace to be able to access better inventory, a better quality inventory in private marketplace. That has been going very smoothly.

Of course, we are extremely bullish about where we are seeing automated guarantee going. We have been in market for a short time now with both our 49 BC technology, which has been merged into iSocket and Shiny Ads, and we are seeing really promising adoption. But keep in mind, we're still early in the market, and with that regard we want to be measured about where we see things going over the course of the next 24 months, because we're making a market in a new area, and we are changing behavior.

Deb, I will add onto that as well, with the guaranteed piece. It is certainly not just a cost savings play for the customer, it is a revenue generating play.

If you look at your typical seller, they have a salesforce that maybe reaches 200 advertisers that are out there. There are over 100,000 advertisers that have bought advertising in our marketplace across our platform. So it's really an access and a liquidity opportunity for them.

Sales channel for any company is the most expensive channel and the most difficult channel for any company to be able to scale. So being able to automate the direct orders simply provides them a greater access to the larger market, which will equate to not only more liquidity from a revenue standpoint, but hopefully increases in rates as well.

Deb, I think you asked about the number in terms of what orders comprised. So, orders was up 13% of our revenue in Q4, was 10% overall for 2014.

Rohit Kulkarni, RBC Capital Markets.

If you look at your 2015 guidance, and if I simplify the sources of growth as a greater monetization from existing and [renting] with existing publishers, number two would be more [vertical] access from existing publishers, be it mobile, video, or premium. All net new publishers, how will you help us figure out what would be the highest source of growth?

Do you think, overall, all three buckets you think are pretty long run rate of growth, and second question is about pricing leverage. Can you talk about how much leverage you think you will have given that you're the lead in the marketplace on the one hand, but the benefits are straightforward in terms of higher yields or cost savings and what have you. But on the other hand, the general investor belief about pricing pushback from both buyers and sellers in advertising technology space?

Let me first address the 2015 growth drivers. Really, it is a combination of several things.

We're certainly seeing tremendous growth from our product suite, which consist naturally of orders, RTB, and static. And you can see by virtue of disclosures we've made with regard to orders, the pace at which that adoption is now being embraced in the market. But in addition to that, the guaranteed portion of that is brand-new for 2015, to which we have really strong expectations.

That is one, but what you should also not lose sight of the fact that the core business of RTB does also continue to grow nicely. You can see from our CPM increase year-on-year of about 84% that the monetization and aspect of the algorithms, the pricing and the overall solution is really working well.

I think we can't discount the fact that the core business continues to grow at a very nice pace, and that certainly is fueled by more and more inventory allocation toward RTB, as well as the addition of new sellers. That also is propelled by increased expansion internationally with new sellers, as well. I think we really need to look at all of those.

We think about those core products, as I mentioned, orders, RTB, and static as the core products because that is the solution for the customers. We then look at the different ad units. Whether it be display, or native, or video, they're simply just ad units inside of those core products. We would take that entire package to multiple platforms. Those platforms being desktop, mobile, and in the future, cable, satellite, set top box, that sort of thing.

We view our business differently. We recognize that as some participant in the markets have become public and they are specialized in certain areas, we don't really view our business that way. We have a technological logical solution that brings buyers and sellers together in the marketplace, and those core products of orders, RTB, and static is really how we look at that.

To single out certain platforms, single out certain ad units isn't exactly in line with the way we develop, manage, or view the business as developing. That said, it is clear that our traction in gaining more audience scale on mobile has continued to move at a great pace. And like all other products and all other platforms that develop over time, usually audience comes first and then the monetization follows, and we're seeing that play out the same way with mobile.

Jason Helfstein, Oppenheimer.

This is Jed on for Jason. Just looks like your scaling your sales force better than most of our models -- than most of our models are forecasting. Can you just discuss the factors driving this leverage, and has this -- and has the better productivity changed any of your hiring plans for 2015, and do you have to have a different salesforce to grow into video?

Jason, good question, and that sounds like I might have not completed the answer to Rohit's. So Rohit, let me finish the answer to yours in the same vein. So, operating leverage, about 90% of our costs are fixed. Naturally, when we have such strength in the top line, we're going to see the bottom line follow suit.

With respect to how we see our cost structure growing, we think that the technology costs will grow pretty much in line with the way they have over the past several quarters. And we would certainly point investors to look at both costs of revenue as well as the technology line, when considering that overall level of expenditure. Most of the CapEx is also technology spend. So when you add those together, that is the majority of our overall cash spend. Is in the area of technology, and that will certainly still be the leading area of spend going into 2015.

With regard to sales and marketing, we do think it will tick up a bit with respect to growth rates from the prior year, and that is because of our buyer cloud initiatives. In the orders business, we're bring a private marketplace together of advertisers and sellers or any form of a buyers and sellers, you have to be more and more direct capacity. That is a different type of sales force.

In addition to that, international expansion is also another reason to add to the sales force. We will see a slightly more disproportional increase there for those reasons, but then we will see tremendous leverage on the G&A front.

In 2014, you had the full year effect of developing the infrastructure to become a public company. And then as we go into 2015, you won't have that full year effect you had in 2014 there, so we will see tremendous leverage on the G&A side.

One more follow up, given your earlier comments around computing power and taking a lot of the data in-house, should we expect CapEx to stay consistent as a percentage of managed revenue in 2014?

We would think CapEx is still going to be in that same sort of ballpark. We don't think, however, that we'll be capitalizing quite as much of the internally developed software simply because we had so many initiatives in 2014 that were put into production at the end of the year and the beginning of 2015.

Many of those R&D type of expenditures and those which then went to develop, and now being put in production, will now be expense versus being capitalized in 2015 versus 2014. Overall, a comparable amount of CapEx spend, but a little bit different accounting when it comes to internally developed software.

There are a few things I'd like to highlight about you're first question. This is Frank, here.

I think it is important to note that our business model is quite different than a lot of other advertising companies. We don't have to go and sell new campaigns every single quarter to drive growth in our business. We're not like a software -- a typical software company where we have to sign up new customers every single quarter to grow our business. We certainly do those things, but we have a lot of things that are naturally happening in our business within our existing customer base that drives growth.

Let's pretend for a second that we didn't sign up any new customers. Of course, we would never want that to happen but let's pretend for a second that we didn't.

Within our existing customer base, there is a number of growth drivers. The first is that, as our customers revenue grows, so does ours. They're constantly doing things to drive more users to their website, they're trying to attract more and more advertisers, so as our customers grow, because our business model is to charge a percentage fee of the revenue managed by our platform, then our revenue grows as well.

The second is, as the market grows, of course because we already have the integrations with many the most important buyers and sellers on our platforms, as the markets grow, so does our revenue.

The third is the usage of data. As either first party data from the seller themselves, could be the buyers data, could be usage of our own data. That data makes every individual transaction potentially more valuable. And as the rate of that particular transaction increases, let's say that it goes from $0.50 to $2, or from $2 to $10, because we charge a percentage of the revenue, our revenue increases.

And then the fourth is our transition from static bidding to real time bidding to direct orders. Again very similar to the data point. As those transactions become more specific, more targeted, more valuable, those rates are increasing, and again our revenue increases off of our existing customer base.

I just wanted to highlight those few things.

Sameet Sinha, B Riley.

Couple of questions. Actually several questions on mobile.

Can you talk about how that audience is scaling? Obviously InMobi integration has started. Can you talk about iAd? When should we expect that business to take off?

On that grain, our mobile monetization has always been an issue. Are your take rates on mobile any different? If you can point that out.

And my second question is, you spoke but integration with 50 of the comScore 200 with your mobile product. How should we view -- Is that the mobile web? Is that the app? Can you clarify that?

A number of questions, there. Let's start initially, and I'm going to turn it over to Todd to finish, I will take the first half and he will finish with the second half.

The mobile adoption has been very steady. We have been at this now for several years.

We've learned very carefully what our buyers and sellers want as they convert into more and more mobile buyers and sellers, and as a result, you are seeing steady and steady mobile adoption from us. When you look back to two years, where we were barely into market and now, as we've said, we have got 25% and growing of the comScore 200, which parallels where we are with as we moved into display. Now we are well over 50% of the comScore 100 in display.

What you are seeing is that slow and steady progression of us continuing to turn our buyers and sellers that were formally display buyers and sellers into now mobile buyers and sellers. You will see that same kind of process for us with respect to video. That was a question asked earlier. We don't intend to hire a different video sales team to take on video.

With that respect, I think you are going to see quarter by quarter blocking and tackling. We are now in finishing up phase 2 of our InMobi relationship, and moving into the third phase. We've now been bringing in tens of thousands of mobile apps onto the platform, and a sizable amount of mobile buyers as well, who are now eager to be purchasing or accessing the users from the InMobi exchange.

Really, this is going according to plan and you are going to see continued process from us in mobile, as a we did in display, and then in the future we will in video.

With regard to your question, the 50 of the 200 is just mobile web, so apps are actually on top of that an additional number. With respect to take rates, as we're trying to explain in one of the prior questions, we really view our offering as an overall solution and we focus on our core products being orders, RTB, and static.

When we think about taking that and the different ad units to the different platforms, it is still the same solution, the same business. So, as a result, take rates are really the same between mobile, as well as desktop.

I have one follow up question.

If I can ask you to look a couple years down the line, I think we saw (Inaudible) TV ads sold programmatically this year already. Where do you think you stand in that? Obviously, these acquisitions that you made towards the end of last year will give you some of that capability. Can you talk about when do you plan to come up with your solution?

Sameet, we've been thinking about that for eight years, now. That's why we exist.

Our mission statement from the very beginning has been to automate the buying and selling of advertising, and what you will notice is that it doesn't -- we don't have the were digital in there. So our vision was to automate all advertising. Digital was the natural place to start.

If you look back at our history and our, the way we built our business, we focused on the premium part of the market because those customers are the same customers that are transacting across display, mobile, video, TV, magazines, billboards. We took the harder route to building out our business, because we look at this business over the mid- to the long-term as automating all advertising, and we've made those investments into those premium customer relationships early.

We probably could have driven a lot more margin and profit earlier on if we were focused on some of the lower hanging fruit, that maybe it would have been some short-term revenue. But didn't have long-term strategic value.

I guess to answer your question in short, we wake up every day thinking about that. That is what drives our platform, that is the way we build out our platform, and that is where our innovation is heading.

Todd Van Fleet, First Analysis.

Just thinking about the scalability of the business, this year. I know you had said you had some -- or you are going to see some changes in capitalization versus expensing this year but, the revenue's supposed to be up about $50 million this year, the adjusted EBITDA is about flat.

How should we think about the operating leverage in the business versus the core, the operating leverage in the core business versus the incremental investments that might be made this year for sales, international, and so forth?

Todd, we did guide to about a 40% year-over-year increase in revenue.

While we -- we're certainly excited about those prospects, the adjusted EBITDA on an absolute dollar basis does increase year-over-year and the margin is down slightly for a few reasons. One is, as you noted and as we previously mentioned, slightly more expensing of internally developed software cost that we expect, versus that which is capitalized.

But also we had some more discretionary spending this year. Discretionary spending primarily in the areas of R&D, and with respect to the Garage, as Frank mentioned, and also in marketing. Those discretionary items were ones that we can dial as we deem necessary as appropriate. If we were to take this on more of a same-store sales type of a basis, without that increase in discretionary spending, you certainly would see the adjusted EBITDA margins rise year-over-year.

Todd, are we still talking about that 30% to 35%, I think that is your target for the longer term, but incrementally, I'm just thinking one year to the next absent any investments and accounting issues and so forth. Is that still how we should roughly think about the business year in and year out?

Those long-range targets, we still feel very good about. In fact, in Q4 of this year, we actually hit that target. Just looking at one quarter, this past quarter, we actually were already there.

I think to get there over that long-range target plan is certainly achievable. And I think right now we see so much opportunity in the areas of growth and where we want to invest that we think it is prudent to go ahead and do that.

But again, it is discretionary, and we always want to invest with fiscal prudence. So it is our intent to maintain a high adjusted EBITDA margin in that north of 10% range, that is our intent. And we want to spend commensurately with the market opportunity.

That is really what we mean when we talk about investing, but with fiscal prudence. I think that is what is reflected in the guidance.

Naturally, there is the case where you could simply outgrow that, and then the margins would grow as a result. That is what we saw in 2014. With that as backdrop, again looking at those long-range targets, we think are still pretty reasonable.

One more, if I could. On inventory quality.

Is there anything -- any metrics that you guys could point to that maybe you track internally that would suggest that the overall level of inventory, the overall amount of inventory across your system, or at least that makes it through to a transaction, is improving? Or -- Because it seems like that is one of the things that certainly might hold back spend, drifting into programmatic and automated channels is the overall quality of the inventory. I am trying to get some way to qualitatively or quantitatively flush out maybe with your help the progress on that front, if that makes sense?

We have been talking about inventory quality since we started doing earnings calls, because it has been such an important part of our thought process going forward. We've talked about it in the earnings group, we've talked about how we are creating a clean, well-lit marketplace, as we like to use that term, and as you know recently, we were just rated number 3 of 400 best inventory providers by [pixelaid]. We take a lot of pride in this. We continue to really focus on it.

We have a team of people that are dedicated looking at both in-house and also even third-party solutions to create the best inventory quality. We talk about it in terms of the PPT, People, Process and Technology. A combination of, frankly, all three, and relying on our technology but also putting in the right process and the expertise to drive the highest inventory quality.

We, our views on this are such that our quality must, we have incredibly high standards and they are unwavering. And we don't really relent on that when it comes to short-term revenue at the expense of long-term growth and the safety of our marketplace.

We look at it from a holistic point of view, a more qualitative than we do any given specific metric. From our perspective, we are going to try to make sure that not one ad goes through our system that we're not pleased with.

At this point in time, there is nothing specific in terms of metrics that we can really share with you at this time.

At this time, I will turn the call back over to Management for closing comments.

Thank you all for joining us this quarter. We look forward to seeing many of you at investor conferences in the coming weeks.

This concludes today's conference call. You may now disconnect.