Rubico Inc (RUBI) 2014 Q2 法說會逐字稿

Good afternoon, my name is Courtney, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2014 earnings conference call for the Rubicon Project.

(Operator Instructions)

Derek Brown, Investor Relations, you may begin your conference.

Good afternoon everyone, and welcome to Rubicon Project's 2014 second quarter earnings conference call. As a reminder, this conference call is being recorded. Joining me today are Frank Addante, CEO, Founder, and 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 market 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 inaccurate. 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 S-1 and quarterly reports 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 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 second 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, Derek, good afternoon, everyone. We appreciate the opportunity to update you as we continue our mission to automate the buying and selling of advertising. Advertising is undergoing one of the greatest revolutions in its history. Rubicon Project pioneered advertising automation seven years ago. Today, we are driving this transformation. I'll be speaking briefly about the trends and opportunities in the automated advertising market and the advancements we have made to accelerate our vision. Then, Greg and Todd will provide updates on our operating and financial results.

Q2, our first full quarter as a public company, was a strong quarter. We exceeded our guidance for both revenue and adjusted EBITDA. Year-over-year revenue growth accelerated to 49%. While we have projected an adjusted EBITDA loss, I'm happy to report we delivered a positive-adjusted EBITDA in our first quarter as a publicly-traded company. As a result of this strong performance and product and customer advancements, we will be increasing our outlook for the rest of the year. We hold a unique position in the market as the largest in the advertising exchange. Rubicon Project plays a critical role in advertising automation.

Publishers and Application Developers rely upon the Rubicon Project exchange to manage hundreds of DSPs, ad networks, and agency trading disks. DSPs, ad networks, and agencies rely upon our exchange for automated access to these websites and applications. This critical condition comes with deep integration to both sellers and buyers that are sticky and have strong network effects. These were large contributors to accelerated growth and the leverage in our bottom line results this quarter. The stickiness of these integrations adds greater levels of predictability to our business.

Our team remains focused on being aggressive with innovation while being physically prudent. Clearly, these results reflect our commitment to this philosophy. According to data from Zacks Investment Research, less than 4% of publicly traded companies share the following attractive characteristics: Greater than $100 million in revenue; growing faster than 40% year-over-year, and have a positive adjusted EBITDA. Rubicon Project is one of the elite 4% companies. Despite this clear distinction, there's a disparity between our operating performance and our stock performance. While I urge my team to manage the business and not the stock price, it's also important to us that we perform for our shareholders.

I often hear comments like, ad tech is not understood, or ad tech is confusing. From an operating and product standpoint, this complexity is great. This is why we need to exist, to simplify advertising. However, from a Wall Street perspective, complexity and confusion are not an acceptable excuse for us. It is our responsibility to educate investors. We need to clearly articulate the market opportunity and why Rubicon Project holds such an important and unique position in the market. Like other early disruptive technologies, we need to step up our education efforts to make sure everyone sees the opportunity as clearly as we do. In just seven short years, we have made advertising automation top of mind for the largest media companies and agencies in the world. Now we need to bring that same level of education and understanding to Wall Street.

Advertising is one of the largest global markets. It's a market that's been growing for decades. As entrepreneurs, we chose to invest our time into this market because there are very few large markets that are right for disruption. Advertising is a $200 billion and growing market. While many would say that all of it will become automated, if we estimate the automation opportunity to be at least 50%, that's a $100 billion opportunity.

Rubicon Project pioneered advertising automation, before us it didn't exist. Today, advertising automation is by far the fastest growing segment in advertising. According to IDC, Real Time bidding, or RTB, has grown from zero to $7 billion in just five years. While RTB is just one of the sub segments of the automation market opportunity, it is a good illustration. For example, Proctor & Gamble has publicly proclaimed that its intention is to automate 70% of all of its advertising expense by the end of the year. And further, John Wren, CEO of Omnicom, in an earnings call said -- Digital media buying is done by machines as if you're standing on the floor of the NASDAQ. He goes on further to say I hold the long-term belief that eventually traditional media, [a lot] of traditional media, will get purchased that way. With anecdotes like these and the growth trend of RTB, the prospects for this $200 billion market are incredible.

While this market is growing fast, Rubicon Project is growing even faster than the market. We are transforming this market and doing for advertising what NASDAQ did for stock trading. This market is growing largely in part as a result of our disruption and our innovation. The market is expanding both in terms of total volume and in the number of participants, just as similar [trends] that we have seen other markets that have become automated. When NASDAQ introduced automated trading, the market grew and new companies with new solutions emerged.

After we introduced the Rubicon Project exchange, hundreds of new companies have emerged in our platform. These are positive signs for the market and for Rubicon Project. As a result of this growth and success, public and private investors are now being bombarded with a long list of new companies and the industry jargon [accent]. But make no mistake, Rubicon Project is at the center of this innovation. There are now hundreds of ad tech companies. And while it might seem confusing, to be clear, many of them are customers of the Rubicon Project exchange.

However, there are only two large exchanges. Rubicon Project and Google. Rubicon Project differentiates by powering an open, transparent, independent market, without owned-and-operated properties competing with our customers. It's like Visa and MasterCard, who power an open market for all banks and retailers to participate; whereas, American Express operates a closed market. They can both exist as leaders, but offer very different value propositions.

I'm reminded of the humble beginnings of Silicon Valley. I'm beginning to see ad tech as the new Silicon Valley. But what's confused people, with complicated acronyms in the early days of computing, such as CPUs, RAM, TCP/IP, and OSs. Advertising technology today is similarly confusing the world with an array of acronyms. DSPs, DMPs, SSPs, RTV. One of our jobs as a public company is to help the investor community more easily understand all of these acronyms and why they need to exist and how they all come together on our platform.

It wasn't until companies like apple, IBM, and Dell came along to invent the personal computer that people widely understood the confusing acronyms of Silicon Valley. Those companies consolidated to CPUs, OS, and RAM into one system and made them easy to use. Rubicon Project is consolidating the advertising acronyms into a single, effective, and useable platform. Seven years after we created Rubicon Project, I'm proud to say that we are now the largest independent advertising exchange in the world. This unmatched scale and quality is a direct reflection of the performance that we deliver for our customers. Additionally, our exchange is directly and uniquely, I might add, integrated into the backings of premium publishers and applications, providing us with a vastly different and defensible market position that has delivered what we believe to be industry leading rates of retention.

Just as in the stock market, when a company selects an exchange to list their stock, they typically don't switch. In advertising, everything needs to be real time, requiring sellers and buyers to have deep integrations with our software. These integrations are sticky and the stickiness adds additional levels of predictability to our business. I'd like to highlight a few advancements I'm particularly excited about.

First, InMobi. Earlier in the quarter, we announced a new customer win, InMobi. This win not only validates the strength of our mobile products but it illustrates the defensible value of our network effects. The Rubicon Project is now powering the InMobi exchange, creating the world's largest native ad exchange for mobile. According to e-marketer, the native advertising opportunity alone will be $9.4 billion by 2018. This new exchange reaches 750 million mobile users globally across 30,000 mobile apps. We expect this deal to significantly accelerate our growth in mobile.

Second, Comcast selected us as the technology provider for its private exchange. The Comcast exchange, powered by Rubicon Project, gives advertisers the ability to purchase ads across Comcast, XFINITY, and XFINITY TV sights. In addition to powering the largest independent open exchange, we also power private exchanges like Comcast. This is a great illustration of Rubicon Project's strength as a software company. Comcast adds to the growing list of private exchanges that we [bid] on, which also includes news corporations -- Turner, eBay, and Viacom. Third is a video. I'm pleased to announce that as planned, we have released our video product into private beta. Rubicon Project already powers many of the most important media companies in the world, such as Viacom, CNN, and Fox, just to name a few. We are excited to now offer video capabilities to our customers to complement our display and mobile offerings.

Now, I would like to discuss the key drivers of our performance. Market growth, market diversification, product performance, financial performance, and the way that we manage and optimize our business. I'll address each of these key drivers separately. First, market growth. Advertising is a large and growing market. Automation is the fastest growing segment of that market. And Rubicon Project is growing faster than the market.

Next, market diversification. We are a global company, which serves 30 diversified markets around the world. We have a diversified customer base. As a seller platform, while advertising and money may shift from one DSP to another, that revenue still comes to us to access the inventory on our exchange. We have a diversified product set. For example, as spending moves toward static bidding from an ad mill, to realtime bidding from agency, that revenue is still processed by our exchange. We service multiple diversified markets -- display, mobile, and now video. And we hold a strategic position. Many of our companies are dependent on our exchange for their revenue, including DSPs, ad networks, publishers, and application developers.

Next is product performance. Our products continue to outperform the competition for the following reasons. Data. Data drives performance. Each month our exchange processes more than 4 trillion [impressions] across approximately 600 million consumers. Audience reach -- Our leading reach of global consumers creates gravity for buyers. Advertisers follow the eyeballs. Network effects -- more buyers attract more sellers, and more sellers attract more buyers. If we provide a full product set, our product should modernize all forms of advertising [step] not just RTB, including static bidding and direct orders.

Moving on to financial performance. Our softer model, sticky integrations create more predictable revenue results. And we benefit directly from market growth. Our pricing model is to charge a percentage of the revenue processed by our exchange. So, as our customers' revenue grows, so does ours. Lastly, the way we manage and optimize our business. We have a track record of driving our Company to be aggressive with innovation while being fiscally prudent.

While many would say that some investors don't need to hear about our culture, if I didn't mention it, I'd be failing to highlight what we believe to be our most important asset. The greatest companies are driven by the greatest teams. Our unique and special culture enables us to attract the greatest innovators and leaders and drive them to perform well together as a team. I would like to thank the entire team for everything they've done to exceed our expectations for Q2. Our strong financial results and increased guidance are clear indications that Rubicon Project is a truly unique Company. Rubicon Project continues to separate itself from a technology standpoint, a customer standpoint, and a financial standpoint. We are excited to continue our mission to revolutionize advertising and to change the way that advertising is bought and sold, forever.

With that, I'd like to hand it over to Greg.

Thank you, Frank.

As we discussed in our last earnings call, Rubicon Project has a number of major strategic initiatives that we are focused on this year. I am pleased to report that in Q2 we made progress on several of those initiatives that will help our business continue to grow and strengthen our position as a leading destination for buyers and sellers of advertising. One of our strategic initiatives is to expand seller inventory on the Rubicon Project platform. During Q2, we had some significant wins as we continued to grow our inventory base, which comprises many of the most premium publishers and applications on the Internet.

There are a number of reasons why sellers have been choosing Rubicon Project as their primary monetization platform. Our industry leading auction capabilities enable both static bidding and RTB purchasing, and we are increasingly finding that our orders technology is a major differentiator for premium sellers. This orders functionality helps to automate the workflow and processes involved in direct negotiation of media sales between buyers and sellers. The market for orders has the potential to be many times the size of both static bidding and RTB, and the CPMs we enjoy here are much higher as well.

Our ability to provide a single platform for sellers to monetize inventory via all three buying methods, static, RTB, and orders. Across all of their properties, all of their geographies, and all channels, including display, mobile, and now video, which as promised is on schedule and already in private beta, further adds to the value we bring. As Frank mentioned previously, we are very happy to have welcomed Comcast and its 19 million monthly visitors to our family of premium publishers during the second quarter. We are similarly pleased by the additions of Ziff Davis, PBS, NPR, Move Inc, and Technology Guide among other premium publishers in the quarter.

Additionally we place a great deal of focus on creating a safe, well lit platform on which buyers and sellers can transact. While we strive to grow the amount of inventory on our platform, we continue to enhance the quality of that inventory to ensure that buyers can purchase from Rubicon Project in a safe environment, which we believe will drive more revenue in the long term. Our efforts to improve the safety of our platform include processes and technology to reduce malware, categorize and filter ads and maintain inventory quality. These inventory quality efforts include prescreening of publishers, monitoring of inventory trends, and when necessary, removal of problematic publishers from our platform. While perfection is impossible because these are moving targets.

We believe we are one of the safest places to buy advertising, and we will continue to invest to stay ahead in this area and minimize its impact on our and our customers' businesses. One of the major drivers is new-seller activity is our marketplace summons. In these events, we bring together many of our largest buyers and sellers to enable orders and RTB revenue in our marketplace. These summons not only help marketplace participants to get to know Rubicon Project and our offerings better, but also to meet each other directly in person. Through these events our customers further see the significant value that Rubicon Project provides them, which both reinforces our existing relationships and helps grow new relationships at an accelerated pace.

We are also focused on automating our internal processes, and in that theme we have automated the process by which new sellers deploy our advertising automation clout. This was made possible by the development of an automated installer, which has reduced time to launch a new seller on our platform. Another major initiative for Rubicon Project this year is to deploy our advertising automation to bring buyers closer to sellers.

Our platform has always been focused on connecting buyers and sellers. We've had a great deal of success gathering a critical mass of both to create a vibrant marketplace to help them run they're advertising businesses. As a result of that critical mass, we now have the ability to expand into new types of media sales and ad units that have never before been available programmatically. One example of this is our recent expansion to allow home page takeovers, the most premium inventory on a publisher's site, to be purchased via our platform. For the first time, publishers such as Hearst, Time, and Business Insider have sold premium homepage takeovers through our technology platform, executing on direct transactions with premier media agencies, such as Merkle and others.

One vehicle through which we are bringing buyers closer to sellers is our newly formed market-making team. The goal of this team is to help accelerate the connection between our buyers and sellers, leveraging analytics and big data. We will [abstract] the complexity for our buyers and allow them to reach their audiences at scale and tell their stories while helping our sellers better package their inventory and create better yield. The international component of our business is key, and we are focused on continuing to grow our international footprint. We continue to maintain and expand our market leading positions in the UK, France, and Australia, as well as expand our reach in other existing end new markets.

In the UK, we continue to be the go-to source for news inventory, adding Mediaforce, Trinity Mirror, and Newsquest, as well as future publishing one of the largest magazine publishers in the UK and the Hearst luxury portfolio. Further more, I am pleased to report that we have made particular strides in the Italian market, where we have signed a number of leading Italian publishers, such as Corrillium, RCS, Manzoni, ItaliaOnline, and Bonsai. We look forward to working with the leading publishers in these markets to drive automation more rapidly. Overall, managed revenue associated with non-US sellers can range between 35% to 40% of global managed revenue in any given quarter, and this in an area which we are focusing growth efforts.

In Q1, we opened new offices in Tokyo and Singapore and have since added a Latin America location in San Paulo. Combined, these markets at $10 billion in digital advertising to our addressable market. Having local team members in those markets is helping drive adoption with buyers and sellers who are just getting ready to enter the automation market. Also, our team in Japan is educating the market, and helping those buyers and sellers learn how to leverage the technology to drive their businesses. We have already signed five premium publishers in several demand-side platforms and feel good about our early progress in that market. And, our Brazilian team has been able to bring on a number of quality publishers in the short time we've been in market. In addition to Grupo Abril, we on-boarded Tera and a number of other premium publishers.

Another major component of our go-forward strategy is to extend our platform into other addressable markets. We have seen considerable expansion in our mobile inventory and mobile-managed revenues in Q2. In 2013, we focused primarily on mobile web traffic as we expanded the reach of our technology platform beyond the desktop. In Q1 of this year, we grew that focus to include mobile app inventory as well and have added a good deal of quality inventory in this space. As mentioned previously in this call, the addition of InMobi, as our customer on our platform, accelerates our mobile trajectory and brings significant scale to our technology platform with over 750 million unique users a month around the globe, 30,000 apps and billions of impressions per day. Together with InMobi, we will be plowing new ground by focusing not just on mobile, but on high demand mobile [native].

We believe these initiatives contributed to our very successful Q2. And with that, I would like to 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. Due to seasonality of our business, we will compare the second quarter of 2014 to the second quarter of 2013. Managed revenue, which is the media 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 second quarter of 2014 was $153.5 million, compared to $112.7 million in the second quarter of 2013, an increase of 36% year over year. The increase in managed revenue was primarily driven by increase in both pricing and bidding activity led by RTB, which represents the largest portion of our business.

According to IDC, RTB spending globally was expected to grow approximately 50% year-over-year from 2013 to 2014. Rubicon Project's RTB managed revenue grew 75% for the six months ended June 30, 2014 versus 2013, thereby, significantly outpacing expected industry growth rates. The increase in managed revenue resulting from the increase in average CPM, with more targeted buying, was partially offset by a decrease in the volume of paid impressions year-over-year, which is primarily a result of the quality control initiatives we instituted during the end of 2013. As a result of the end of year 2013 anniversary of the traffic quality control initiatives, we expect to experience the same comparisons throughout the remainder of 2014 versus 2013. We report revenue on a net basis and generate fees from buyers and sellers transacting on our platform based on a percentage of managed revenue. Our take rate represents the total of the buyer and seller fees that we charge and as influenced by a number of factors.

Revenue in the second quarter of 2014 was $28.3 million compared to $19 million in the same period in 2013, representing a year-over increase of 49% and well above the midpoint of our guidance of $25 million. The increase in revenue was primarily due to the increase in managed revenue and related metric fluctuations as previously mentioned and an increase in take rate. The take rate increased to 18.4% in the second quarter of 2014 as compared to 16.9% the same period in 2013. The increase in take rate year-over-year was primarily due to the higher mix of auction RTB managed revenue, which is approaching 80% of our total managed revenue and which carries a higher take rate compared to overall managed revenue.

Operating expenses, including cost of revenue increased to $35.4 million in the second quarter of 2014 from $20.6 million during the same quarter in 2013. The increases in operating expenses were primarily due to the expansion of our sales efforts and general administrative expenses associated with becoming a public company. The total year-over-year increase of $14.8 million included an increase of $5.6 million of non-cash stock-based compensation. Net loss increased sequentially from $6.1 million Q1 of this year, to $9.4 million this quarter, primarily due to an increase in non-cash stock-based compensation expense, which was $7.1 million, a sequential increase of $4.6 million. The sequential improvement in adjusted EBITDA was primarily due to an increase in revenue and additional capitalized costs partially offset by an increase in expenditures, primarily compensation.

Adjusted EBITDA was $2.7 million in the second quarter of 2014, compared to $2.1 million in the second quarter of 2013. The year-over-year increase was primarily due to the increase in revenue, partially off set by the increase in operating expenses from both hiring and infrastructure investments and occurred toward the end of 2013, associated with an increase in engineering of product-related development, enhancements in our sales efforts, as well as costs associated with becoming a public company. We expect 2014 costs to significantly increase over 2013 as 2014 will reflect the full year effect of these 2013 investments, as well as planned product international expansion efforts in 2014. Q2 2014 adjusted EBITDA was $2.7 million, was favorable to the midpoint of our guidance, a loss of $4.5 million.

The favorable variance to guidance was primarily due to the strong revenue performance and secondarily, due to slower than expected hiring. We plan to accelerate our hiring in the second half of 2014 in accordance with our initial plan. In the second quarter of 2014, our GAAP loss per share was $0.29 based on the weighted average basic and diluted shares of 32.3 million. This compares to a loss of $0.28 per share during the same period of 2013, which was based on a weighted average basic and diluted shares of 11.4 million. Non-GAAP earnings per share in the second quarter of 2014 was breakeven based on non-GAAP weighted average basic and diluted shares of 33.2 million, well above the midpoint of our guidance loss per share of $0.23. This compares to a gain of $0.01 per share in the same period in 2013, which was based on non-GAAP weighted average basic and diluted shares of 26.1 million.

Capital expenditures, including property and equipment as well internally used software, excluding capitalized stock compensation was $7 million in the second quarter of 2014 and was primarily composed of investments in buyer crowd features and functionalities, capacity expansion, orders, mobile, and video. We expect capital expenditures to increase throughout the rest of 2014 and are expected to range between $15 million to $20 million this year. We closed Q2 2014 with $105.7 million in cash, which includes $86 million in proceeds from our IPO in April, net of expenses. Debt, including capital lease obligations was $0.2 million at the end of Q2 2014. As a result of our strong second quarter results, we are raising our guidance for the balance of the year.

Consistent with historical trends, we expect revenue in Q3 to be relatively in line with Q2, which results in an increase in prior Q3 estimates. By way of comparison, revenue in 2012 Q2 was $13 million versus $13.9 million in Q3; and in 2013, Q2 was $19 million versus $20.1 million in Q3. For the third quarter ending September 30, 2014, we expect revenue to be between $28.5 million and $29.5 million. Adjusted EBITDA loss to be between $3.5 million and $2.5 million. And non-GAAP loss per share to be between $0.20 and $0.17 based on approximately 33.7 million weighted average shares. As previously noted, we expect to accelerate our hiring efforts during the second half of 2014 in accordance with our initial plan.

For the full year 2014, we expect revenue for the full year to be between $117 million and $119 million, adjusted EBITDA to be between positive and negative $1 million, and non-GAAP loss per share to be between $0.41 per share and $0.34, based on approximately 32 million weighted average shares. Despite our planned acceleration of costs in the second half of 2014, we expect the full year 2014 adjusted EBITDA to be favorable to prior guidance due to the strong results in the first half of 2014. We would further like to comment on some of the trends we see occurring in the business. We continue to hold a leadership position in reach and have experienced strong growth in RTB fueled by increased spending activity and pricing. We operate in a large 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 and, as viewed on a trailing twelve month basis quarter-over-quarter, the average revenue per seller and average spend per buyer on our platform continued to increase. We expect to see continued near-term growth from international seller expansion efforts, primarily from existing territories with contributions later in the year from new territories. Buyer tools, orders, and other product expansion efforts, mobile, which may accelerate as a result of our recently signed agreement with InMobi, and continued expansion of RTB and the related pricing of bidding activity.

In summary, advertising is a large market, and we are leading the fastest growing portion, automation. Our strong financial results and RTB growth rates are evidence of this leadership. Our product consistently out-performs the competition and our customers expectations as evidenced by recent signings of InMobi and Comcast, high retention rates, and network effects. Lastly, we continue to invest in growth and innovation with fiscal prudence.

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

(Operator Instructions)

Deb Schwartz, Goldman Sachs.

Great, thanks, and congrats on the quarter.

You talked about several of the initiatives that you had in the quarter, including increasing the number of sellers. Just wondering if you could give us a little bit more clarity of what drove the upside from your guidance, whether it was more sellers, better penetration of existing sellers, or even mobile and how much that contributed in the quarter?

Sure, Deb. Thanks.

Most of that increase in revenue was driven by the increased average spend per buyer. We also saw increased bidding activity. We think our matching algorithms were operating quite effectively, certainly leveraging the massive amounts of data that we have accumulated, and, really, I think, that's been a core driver. RTB continues to be the standout performer amongst our product suite.

Great.

And then also, as it relates to the price volume dynamic, you mentioned increasing number of sellers and, then similarly, trying to improve quality. Can you talk about how CPMs and impressions played out in the quarter?

CPMs were really pretty strong. Paid impressions was also one of those metrics that continues to do well, but it's going to have a lower number compared to 2013 because of the traffic quality control initiatives.

We really spent a lot of effort on making sure that our traffic is clean of non-human traffic and those sort of things. And when we took the biggest initiative that was actually in December of 2013, so a late anniversary, if you will, which means that we expect 2014 numbers to be lower than 2013 as a result of those efforts.

However, a lot of those initiatives still continued through 2014. We now have built it into an ongoing component of our operations. That said, if we want to break down the paid impression growth between the different product suites, you'd actually see that paid impressions for RTB rose, and that's in contrast to the static type of product base, which we're actually seeing a shift moving more from those static ads and that product base toward RTB.

So, that's one of the reasons you're seeing the higher mix of RTB revenue in conjunction with the rest of our business, as well as some influence with regard to paid impressions. Those traffic quality control initiatives really have a minimal impact on revenue, especially with the shift toward RTB because buyers will simply just reallocate to the higher quality traffic.

Deb, I'll add to that that our orders business continues to grow. And the orders business is different from the auction business in the sense that, in the auction business we need to hold impressions in our system for them to be available in realtime for the auction; whereas, our orders business is driven by higher CPMs but in lower volume. And part of that is that our algorithms are trying to more discreetly match buyers with the exact impressions that they're looking for, and part of what drives pricing in this arena is creating scarcity.

So, our algorithms are driven in the orders business partially by scarcity. And the third part of the orders business, as well, is that the orders are processed in advance versus in realtime, so the inventory or the impressions can be provisions on demand using the technology, versus sitting in the auction environment in advance.

Deb, this is Greg, I'd like to further augment Frank's point by saying that, as we moved into higher quality inventory, we're also seeing a growth in private marketplaces as well. And in those kinds of environments, you're going to see higher CPMs; you're going to see better quality inventory; and you're going to see more control that sellers and buyers put in place to work together.

So, this is part of our strategy, long term, and we're pleased with the direction it's going.

That's helpful. Thank you.

Kerry Rice, Needham.

Thanks a lot, and also great quarter.

Can we continue along the lines of the orders business and the automation. If we take a step back or think about some of the things that were said in the industry over the quarter about some shifts to private exchanges, can you talk about maybe where we are in that cycle? Are we in just inning one here?

And then, how do I think about the industry evolving? Is it going to primarily evolve as private exchanges initially, do you think, from advertisers until they get some comfort level with that and then, maybe, shift more towards open exchanges? If you can talk about that a little bit.

And then, the second question is the adoption of RTB by large brands. You mentioned PNG shifting a big portion of their online advertising towards RTB. Would you say we're in the early stages there, as well, or if we're in the later stages of that?

Great, I'll take the first part, and then Greg will take the second part of that.

So the orders business -- if you look at the evolution of our product suite, initially we created a static bidding product that automated the sale of inventory between publishers and applications with ad networks, and that's where we first entered the market. Then that evolved to realtime bidding, which, essentially, standardized those integrations.

Prior, those integrations were all [one-offs]. Our technology had to integrate into every single ad networks reporting system uniquely, had to standardize all the counting methods from all the ad networks -- RTB put a standard in place for all those transactions to occur. On top of that protocol, I'm sorry, both of those protocols, realtime bidding as well as static bidding, is where we're able to build our orders business.

So, if you look at the evolution of RTB, initially it actually started off as a pretty controlled environment. We had features in our product called permission controls. Essentially, what those permission controls did is they allowed the seller to be able to set pricing rules, to be able to exclude certain buyers or only make it available to certain buyers, and those buyers could have been DSPs, they could have been ad networks, they could have been certain advertisers or agencies.

From that was essentially born this term that we use in this industry called private marketplaces, which, essentially, is just controlled RTB. You're putting rules around RTB. That's evolved a little bit further now to what we'll call the private exchange.

The private exchange is basically -- you think of it as an opt in versus an opt out. Companies like Comcast can set up a private exchange where it's invite only to certain advertisers, and they could set certain rules or promotions or incentives for those buyers to purchase.

So, I guess that was a long way of saying that I think this is just another step in the evolution and the use of automation. We use all these fancy terms to describe these things in the industry. But, if I were to simplify it with static bidding from ad networks, then it became realtime bidding from DSPs. Now you've got controlled or private realtime bidding from DSPs, agencies, as well as advertisers. And now you have the ability for publishers to set up private controlled environments.

So, that's the private exchange business. It's an important part of our business. There's the open exchanges, which has been, obviously, an area that we've been leading. But, as a technology company, we also supply technology to these large media companies to be able to set up their own exchanges, and thus being a software company that's an important differentiator for us.

And then, the orders part of it is also important in the idea that we're trying to connect sellers and buyers in the best ways, in the ways that they prefer. Sometimes a buyer or an advertiser or agency prefers to buy certain ad network or a DSP, and sometimes they prefer to buy directly from the publisher, depending on what their relationships are. And not only do we encourage, but we support all those capabilities. That's the answer to your first question.

And the second question, in terms of the adoption of RTB, we are seeing that the brands are recognizing the value that this provides. I think in the past before automation existed, the way the industry worked is you basically shoved a whole bunch of inventory at the advertiser and then the advertiser had to filter it.

It was like panning for gold to filter out the inventory that they didn't want to go find the audience and the inventory that they did. And obviously, that's changed. Now, they've got the ability to find the exact audience, the exact users that they're looking for with realtime bidding.

And I've been, of course, very encouraged to see how rapidly the adoption of RTB has come into the market, growing from zero to $7 billion in just five years alone. I think we're in that evolution. I think it is -- it's being adopted rapidly. But I think we're still at the early stages of that adoption by the big brand buyers. But they're definitely catching on, they're catching on quickly.

I don't know if I can have one follow-up there on the first question. Do you think that ultimately the private exchanges continue to evolve to where everybody eventually adopts an open exchange type of platform? And then, just one other question as far as any comments on Facebook's acquisition of LiveRail on the video side, how that may change the market place? Thanks.

Kerry, hi, it's Greg.

As you can tell, you've asked a couple questions that we could spend the whole afternoon talking about. This is very close to us. And Frank talked extensively about the progression of technology with respect to the various products that we've developed. And I think it's important to note that we develop products for buyers and sellers of all different kinds. Some buyers want to participate in private exchanges like group [M] just announced that they'd prefer to work in private exchanges rather than open exchanges.

Some of our sellers want to sell some of their inventory in public open environment. Others want to work in private, and some do both. Some sell some of their inventory in private and public. We provide the range of products for all different types of buyers or sellers to conduct or transact the buying and selling of advertising.

And, what we are seeing, as time goes on, is that there's not only a move towards automation that we've spoken about, Frank's spoken about for seven years now, and we've added to that. But, in fact, there's a move to automation in the more premium inventory. And that's, I think, one of the directions we're seeing.

As you know, we announced our own product, 49BC, a couple months ago that we intend to go to mark with later in the year dealing with automated guarantee and premium inventory. That's the next evolution of private exchanges and direct orders.

If buyers want to buy by all different methods, static, RTB, private, open, we're agnostic and we're happy to support that in all different ways. We're happy to support buyers reaching their audiences at scale, and I think that's what we do better than anybody else.

Thank you.

I'll just add onto that real quick is that, I think the big media companies have had a long standing relationship with the advertisers and with the agencies. And, I think in some cases they're perfectly fine selling their inventory at an open auction environment. And, in other cases they want to maintain those relationships and grow those relationships and describe their unique differentiators.

So, I think that's where the private exchange capabilities come in. I don't think it's one or the other. I think that the sellers of advertising will utilize both depending on the case.

You also asked about the Facebook acquisition of LiveRail. LiveRail, great company, great team. I think it's a positive sign for the market overall. I think it's showing that the adoption of automation is important. And I think Facebook has certainly been a great player in that, and I think in the world of social there's certainly a leader.

We break the world down into, really, three parts. There's search, there's social, and then there's premium content. And of course, Google's leading in search. I think Facebook's leading in social.

And then, the premium content is the Fox's of the world and the Viacoms and the eBays of the world who are our customers. I think there are three segmented markets, of which we're, of course, leading in the third.

When it comes to video, I think Facebook has a lot of video, of course, on their site, and they're trying to find new and better ways to monetize it, and I think Live Rail is going to be very helpful in that. But, Facebook has not traditionally made their product available to third-party sellers, whether that be websites or applications, and I think one of the reasons that we need to exist is to be that open, independent exchange that doesn't have owned-and-operated properties that compete with those sellers and isn't trying to sell our own advertising from those owned-and-operated properties to the advertisers that puts us in channel conflict with the customers, whether those be buyers or sellers.

And then, the last point: there is -- while video is certainly important, we, again, just launched our video capabilities in private beta. From an advertisers' perspective, they're trying to reach their audience in all available ways in digital, whether that be display or mobile or video, and one of the advantages of our platform is that we provide the capabilities to access those audiences across all three forms, not just one.

Thank you, I appreciate all the insight. Of course.

Rohit Kulkarni, RBC Capital Markets.

Great, thanks.

On take rates, can you provide any more color around what led to sequential rise in take rates, assuming RTB as opposed to [page] of managed revenue stayed, more or less, around 80% from Q1 to Q2. And if you could call out one or two factors that you think are sustainable or you felt were one time-ish in nature?

And on the take rate side, how should we think about take rates as your business makes shift more towards, perhaps, international or more mobile over the next, say, 12 to 24 months?

Sure, thanks for the question, Rohit.

Take rates on a sequential basis increased primarily due to an increase in RTB mix. It did increase quarter over quarter on a sequential basis, obviously, considerably more on a year-over-year basis. So, that was still primary driver, and what we've been saying for some time, as you know, and we'll continue to emphasize is that we do see more upward momentum on take rates than downward pressure.

And, there was no one time event. And, I think that we have, certainly, a leveraged position and a critical position in the market.

That all said, we also think that the penetration pricing strategy that we've been using is still the right one in the near term, and, therefore, while there are opportunities, sometimes, to increase those take rates, we would still guide investors to think of them as being relatively constant going forward.

Okay.

And just another question on the buyer side of things as in -- as you look forward to your product road map for direct orders, particularly from the buyer side, are there any missing strategic pieces that you think you need to build out completely from your 49BC [Btel] launch? Perhaps any post party advertiser data, or [dues] not just for DSPs but more going towards agencies and [trading desks] -- anything that you think is strategically missing there?

It's a very good question.

So, we've had buyer capabilities really since inception. Initially, the target user for the buyer capabilities was the ad networks, and we provided a self-serve interface for those ad networks to be able to buy inventory using static bidding from publishers and now application developers.

Realtime bidding, the product was with an EPI for DSPs to create applications and be able to access inventory in realtime. And then, as we've moved into the order automation capabilities, we're providing interfaces for agencies as well as the advertisers to be able to purchase directly from the publishers in the applications that exist in our platform.

We're not in the business of selling media. We are in the business of supplying technology. And when these advertisers and agencies are buying directly from the publishers, sometimes they might use a DSP to be able to execute that campaign. And sometimes, they're processing that order directly with the publisher. Our job is to connect them in all the ways that both the sellers and the buyers prefer.

In terms of holds, we sit on and process mounds and mounds of data, six petabytes of data, over 4 trillion bids, which are essentially data signals on a monthly basis across 600 million users on a global basis. So, as you can imagine, the value of that data is incredible. And I think we're really just at the tip of the Iceberg in terms of putting the data to use. To identify a whole, I think it's in taking that data and creating value from that for the buyers.

And just a quick housekeeping question on 49BC and InMobi. What is the expected launch or general acceptance launch for both of them?

Well, Rohit, this is Greg.

InMobi, we're already in market with the -- powering the InMobi exchange. We have a number of phases that are underway. We're well through our first phase and continuing along.

This is a very large partnership, and we expect it to grow to fruition over the course of the rest of this year and into next year. And we want to get it right. And we're working with the significant, large InMobi team to get it right, all aspects of it.

So, we expect to see improvements in the phases through the course of later this year. To reach the ultimate potential of multi-billion impressions per day.

With respect to 49BC, we also see that as an evolution, the beginning of a process of automating the order side of the business in a guaranteed manner. It's going to take both acceptance from buyers and sellers. And so, we see that we're at the beginning of that process, and the industry is, frankly, at the beginning of that process.

Now, as Frank mentioned, you see companies like Proctor & Gamble and American Express and others talking about how they can automate the multi-billions of dollars that they spend per year. So this is not -- you know, we don't expect to see any given product taking over the marketplace in a short period of time. We see it to be an evolution from where we are today to looking back several years from now.

One additional point on that is, with InMobi, Naveen and his team over at InMobi built an incredible business, just massive scale, 759 million users on a global basis, 30,000 mobile apps. Typically for a publisher there's a good 60 to 90-day ramp-up period that just gets a customer up and running, get everything configured. And then, the network effects of our business kick in. The advertisers typically follow the audience. So once we activate that audience and make it available in an automated environment, then the buyers come and then activate the dual network effects, where more seller inventory and audience attracts more and more buyers.

So, as Greg was saying, I think there's a pretty quick ramp-up time. Clearly, this is an important deal, an important customer and partnership for us. But, we're already up and running in market, and that will continue to grow and those network effects continue to grow and that's something that gets fueled over many months into the year plus.

Thanks a lot, guys. Good quarter.

Thank you.

There are no further questions at this time. I'll turn the call back over to the presenters.

Thank you all for joining us this quarter, and we look forward to staying in touch as the days and months progress.

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