Rubico Inc (RUBI) 2016 Q4 法說會逐字稿

Good day everyone and welcome to the Rubicon fourth quarter and FY16 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Bonnie McBride, please go ahead.

Thank you and good afternoon, everyone. Welcome to Rubicon Project's fourth quarter FY16 earnings conference call. As a reminder, this conference call is being recorded. Joining me today are Frank Addante, Founder and Chairman; Michael Barrett, the Company's newly appointed President and CEO; and David Day, our CFO.

Before we get started, I would like to remind you that our prepared remarks and answers to questions will include expectations, predictions, estimates and other information that might be considered to be forward looking statements; including, but not limited to, guidance we are providing and other non-historical statements related to our anticipated financial performance, operating and strategic plans, expectations regarding new initiatives, our relationship and business with buyers and sellers using our platform, competitive differentiation, fees and take rate, capital investment and organizational development and competitive position, and market conditions and trends and growth expectations, including growth in header bidding, orders, mobile, and video.

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 these and other risks, uncertainties and assumptions is set forth in the Company's periodic reports under the heading Risk Factors and Management Discussion of Analysis of Financial Conditions and Results of Operations. We undertake no obligation to update or looking statements or relevant [remarks].

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 and in the financial highlights deck, which we have posted to the Investor Relations website at investors.rubiconproject.com.

At times, in response to your questions, we may offer incremental metrics to provide greater insights into the dynamics of our business. Please be advised that this additional detail may be one-time in nature, and we may or may not provide an update on the future on these metrics. I encourage you to visit our Investor Relations website to access our press release, financial highlights decks, periodic SEC reports, and webcast replay of today's call, or to learn more about Rubicon Project. I will now turn the call over to Frank.

Thank you Bonnie and good afternoon everyone. I'm excited to welcome Michael Barrett, joining David and me on today's call. Michael is joining us as our new CEO this week. I will speak more about the context that lead to our decision to ask Michael to join the team, but before I talk about the state of the business, I would like to say that we are pleased that our financial results in Q4 came in within the range of outlook that we provided last quarter.

Our fourth-quarter wrapped up a difficult but highly productive year for Rubicon Project as the team faced multiple challenges throughout the year and met them head on, enabling us to further expand our platform. In addition to the success we have seen in mobile, video and orders, we are now beginning to see very promising results in [adder] bidding. The difficult decisions and changes we made in 2016 have resulted in a Company reinvigorated with focus. We now have all of our resources, capital and attention committed to our most important business, the ad exchange.

Over the past couple of quarters, we have gone through a lot of effort to restructure the Company so we can successfully transition our platform to best serve the ad exchange. This includes our accelerated product introduction of FastLane, our organizational changes in our decision to divest the end to end marketing business. To move forward in the right direction and return to revenue growth, we must continue to build strong relationships with publishers and application developers, operate at scale and continue our transition to build technologies required in a mobile first world.

With that, I'm excited to have Michael Barrett joining us as CEO. Michael and I are very aligned on vision and he's a perfect cultural fit for the Company, which is why I decided to approach Michael about joining Rubicon Project as our CEO. I've know Michael for 10 years, he is a proven advertising executive and has a strong personal brand with customers.

He deeply understands our space and demands of our customers, having worked as Chief Revenue Officer at Yahoo and Fox. As CEO, he successfully led a supply side platform, Admeld, that competed directly with Rubicon Project for years before he sold it to Google.

He continued on with Google's advertising business and enjoyed Millennial Media, a mobile only marketplace as CEO, which was later acquired by Verizon AOL. And now, Michael Barrett is joining Rubicon Project as CEO to own and lead the operation and execution of our business strategy as we focus on continuing to grow Rubicon Project as the largest, independent global exchange for advertising.

I will continue to be a very active, engaged and passionate Chairman. The best way I can serve our team, shareholders and our mission is by having the bandwidth to look forward and guide our future and by paving a path to the future through thought leadership and evangelizing our vision. Michael's arrival will enable this additional bandwidth and I'm excited to partner with him and Tom Kershaw, our CTO, to execute against Rubicon Project's strategic, operational and product roadmap.

Before we talk about the success we have had with our strategic growth areas, I'd like to start by sharing why we remain confident that the strength of our global exchange, premium marketplace and strong balance sheet uniquely position us to win. In a $600 billion global ad market, there continues to be a tremendous opportunity for an independent mobile exchange.

Our customers need the technology and scale that Rubicon Project offers to compete with the walled gardens and to offer consumers a better advertising experience. Rubicon Project continues to be well-positioned strategically as the independent and inherently neutral global exchange.

Our strategy for growth has always been to attract the most supply or impressions from the world's top publishers and application developers to our marketplace. That is why in 2017 we will be focusing our efforts on increasing market share of supply. Signing up more publishers, application developers and getting as much inventory into our exchange as possible which we believe will result in revenue growth in the future.

As we continue through 2017, we plan to invest in engineering technologies and deploying our sales resources in strategic growth areas in mobile, video and orders. We plan to continue to optimize our algorithms for header bidding to capture and monetize as much supply as possible. We believe that there is an immediate window of opportunity to accelerate our market share capture supply. Therefore, we also plan to continue to evolve and optimize our business and pricing models to focus first on accelerating market share capture supply and then growing revenue.

We are a marketplace business, driven by marketplace network effects. Losing access to supply from header bidding was a significant factor that stunted our growth in 2016. We've made great progress in solving the problem of access to supply. We have now grown the number of ad requests that is supply to our exchange by more than 50% from last year. Investing in market share capture supply this year is our number one priority and we believe that this will lead to revenue growth just as it has in the past.

We will also continue to prioritize investments in our proprietary cloud computing infrastructure, which not only gives us a competitive edge by driving better performance for our customers, but also becomes a competitive differentiator and a competitive barrier. Our investments in our own cloud enable us to bring on more bidders, creating more demand and more differentiated ad spend.

We are also built to operate our platform incredibly efficiently. You've seen this through the leverage in our business in the past that is driven our profit and going forward, we plan to continue to leverage this further to capture more market share profitably. Our smaller competitors will have a tough time competing with our infrastructure, scale and efficiency.

Now let's talk about the business drivers specifically around the dynamics of the global exchange and what drives growth. Supply creates gravity for demand and we have seen this strategy work again and again over the last 10 years. Every product Rubicon Project launched has followed this model, beginning with supply. This is why it is so important that we focus on capturing market share supply this year setting the stage for our return to revenue growth in the future.

Let me give you some examples as to how this strategy has worked successfully in the past. In our first three years, Rubicon Project's ad network optimization technology grew to more than 500 customers and billions of impressions by focusing on signing publishers and gaining access to supply of ad impressions first. RTP then grew from zero in 2011 to $620 million of cumulative revenue through 2016. Again, focusing on market share capture of supply first.

Orders, which were pioneered in 2014, has a 71% GAAP revenue CAGR since we achieved critical mass of supply. Mobile in 2015 and 2016 alone represented almost $600 million in ad spend, growing faster since its launch than RTB over that similar period of time. Video continues to grow with more than half of our top 100 customers using our ad exchange for video and the ad spend is following. And in 2016, FastLane has grown from zero to more than $120 million of advertising spend in just over three quarters, with more than 300 deployments.

All of these strategies were successful by focusing on capturing market share access to supply first with revenue growth coming over time. Even our name Rubicon Project originated from this strategy. We figuratively crossed the river when we started by focusing on publishers and supply of ad impressions. While just about every other company in the advertising business has focused on advertisers, we crossed the river to focus on publishers and gaining access to supply.

To this end, we're making great progress on market share capture of supply. Consider that in 2016, we increased the number of impressions available on our global exchange by 50% year-over-year. We sold or upsold more than 400 new customer deals and in Q4 alone, we processed approximately 45 trillion transactions. All this while continuing to maintain a strong balance sheet with nearly $200 million in cash today, enabling us to strategically invest for growth.

As I said at the beginning of this call, I remain very excited by the advertising industry and by Rubicon Project's future growth potential. The value of an independent global exchange cannot be overstated and we look forward to the next phase of growth.

I have been super appreciative and proud to serve our team as CEO for the past 10 years. I love this Company and I am proud to continue to serve our team and shareholders as Chairman and Founder. With that, I'd like to turn it over to Michael to say a few words before we get into the financials.

Thank you, Frank. I'm very excited to be joining Rubicon Project and to work alongside you and the terrific team that you have built. As Frank noted in his comments, I've had the opportunity to compete against Rubicon Project as well as be a customer and have always been very impressed with the professionalism and industry leadership that you have shown over the years. So when Frank approached me, I was excited by the opportunity and I am delighted to be a member of this team.

The advertising space, particularly the programmatic piece, continues to grow, both in size and importance to buyers and sellers. Rubicon Project is well-positioned to capitalize on these trends, yes the industry is dynamic and this reality can lead to disruption. Frank has spoken in the past about the challenges and opportunities that innovations like header bidding bring for Rubicon Project. I look forward to working with our customers and team to make sure we are delivering the best possible product and monetization capabilities going forward.

Rubicon Project has a strong leadership position, a strong balance sheet and an aggressive and innovative product strategy. We are well-positioned to become the leading independent global exchange for publishers, application developers and advertisers.

I will be heads down for the next few months meeting with customers and our team, soon after I look forward to meeting with all of you. Again, thank you Frank and the rest of the Board for this opportunity. David will now give an update on the Company's financials.

Thanks, Michael and welcome to the team. I would like to start by saying that we are grateful for Frank's pioneering vision over the last 10 years, which has led Rubicon Project to the position in the industry that we enjoy today. I look forward to Frank's continuing involvement with the Company and I'm excited to work together with Michael.

For the full year 2016, we generated over $1 billion in advertising spend, $278.2 million in GAAP revenue, $256.1 million in non-GAAP net revenue, $70.9 million in adjusted EBITDA and $1.07 per share in non-GAAP EPS. We executed well against our revised goals for the fourth quarter, which took into account the continued year-over-year decline in desktop advertising.

Advertising spend for the fourth quarter of 2016 was $277.1 million. GAAP revenue for the fourth quarter was $72.7 million and non-GAAP net revenue for the fourth quarter was $66.9 million. The decline in advertising spend of 18% year-over-year during the fourth quarter of 2016 was driven primarily by a continued decline in desktop, which declined 23% year-over-year to $178.2 million.

We also experienced a decline of 5% year-over-year and total mobile advertising spend to $98.9 million. This is a result of declines in our mobile web business, which still represents the majority of our total mobile business. In contrast to our mobile app business were we expect more promising growth in the future.

Advertising spend was composed of 36% mobile and 64% desktop for the fourth quarter of 2016, compared to 31% mobile and 69% desktop a year ago, reflecting our continued shift towards mobile.

While we've historically shared additional advertising spend detail, for real time bidding and orders we will no longer be sharing those details for a couple of reasons. From a product perspective, we're focused on developing additional products for our buyers that will further allow them to discover and transact based on extended audiences across our platform on a guaranteed basis. As these products emerge, orders and RTB distinctions will become less relevant. In addition, continuing to provide this information would also require us to provide associated revenue detail and could expose sensitive pricing strategies to our competitors.

Non-GAAP net revenue for the fourth-quarter declined 20% year-over-year or slightly more than advertising spend, due to lower take rates, which are defined as non-GAAP net revenue divided by total advertising spend. Take rates decreased 80 basis points to 24.1% in the fourth quarter of 2016 from the year ago period. And also decreased 80 basis points on a sequential quarter basis from the third quarter.

Take rate decreased primarily due to an increase in the overall mix of ad spend through orders, which has a lower take rate than RTB. Additionally, take rate decline due to ad spend and mix shift towards FastLane and exchange API, which carry lower RTB take rates than our traditional business, due to auction dynamics and pricing strategies related to those APIs. We also began testing various pricing strategies in the fourth quarter, which had an impact on take rates.

Our fourth-quarter advertising spend and revenue results include results from our static solution, which we exited in the third quarter of 2016 and from our intent marketing solution, which we exited in the first quarter of 2017. To assist understanding our results in the context of our ongoing activities, we're also providing, as adjusted, advertising spend, revenue and take rate, as though the static and intent marketing solutions were discontinued at the beginning of calendar year 2015.

Note also that intent marketing was the only component of our revenue reported on a gross basis. Best GAAP revenue and non-GAAP net revenue are the same after excluding these solutions on an as adjusted basis and will be the same in the future. Therefore on an as adjusted basis, for the fourth quarter of 2016 advertising spend would have been $266 million and GAAP revenue would have been $62.4 million. For the full year 2016 advertising spend would have been $955.1 million and GAAP revenue would have been $234.6 million. And take rate would have been 23.5% in the fourth quarter of 2016 compared to 25% for the same period in 2015 and compared to 24.4% in the third quarter of 2016.

Operating expenses for the fourth quarter of 2016 were $94.6 million. Note that these expenses included a $23.5 million non-cash impairment charge on intangible assets related to customer relationships and developed technology, which was caused by our exit for our intent market activities and a $3.3 million restructuring charge related to our workforce reduction in the fourth quarter. Excluding these two effects from impairment and restructuring, operating expenses for the fourth quarter of 2016 would have decreased year-over-year by $8 million or 11%.

On an adjusted EBITDA basis, operating expenses for the fourth quarter were $45.2 million, a decrease of $2.6 million compared to the fourth quarter of 2015. Reflecting savings associated with lower headcount driven by cost management initiatives, including our workforce reduction in November. Note that the operating expenses in our adjusted EBITDA calculation include the $3.3 million in restructuring costs mentioned earlier.

Net loss was $21.2 million in the fourth quarter of 2016 compared to net income of $20.4 million in the fourth quarter of 2015. The change in net income was driven primarily by the non-cash impairment charge associated with our intent marketing exit of $23.5 million and the $3.3 million restructuring charge and [by built] lower net revenue, partially offset by other reduced operating expenses.

Adjusted EBITDA was $21.7 million in the fourth quarter of 2016, representing a year-over-year decrease of $14.3 million. Note that we exclude the $23.5 million non-cash impairment charge associated with our intent marketing exit, but we do not exclude the $3.3 million in restructuring costs mentioned earlier in our adjusted EBITDA calculation. The decrease in adjusted EBITDA was driven primarily by decreases in revenue mentioned earlier, partially offset by lower costs.

Diluted GAAP loss per share was $0.44 for the fourth quarter of 2016 compared to diluted GAAP income per share of $0.43 in the same period in 2015. Non-GAAP earnings per share in the fourth quarter of 2016 was $0.37 compared to $0.74 reported for the same period in 2015.

These amounts included estimated tax impact based on the expense items reconciling between net income and non-GAAP net income. We had not previously included any estimated tax impact and thus have now adjusted historical amounts to also reflect an estimated tax impact for consistency.

Capital expenditures, including purchases of property and equipment, as well as capitalized internal use software development costs, were $14.5 million for the fourth quarter of 2016 and $33.4 million for the full year 2016. We closed the period with $190 million in cash and marketable securities, down $3.2 million from September 30, 2016.

Free cash flow was a negative $3.2 million during the fourth quarter of 2016 and a positive $26.7 million during the full-year 2016. We calculate free cash flow as net cash provided by operating activities, less capital expenditures including capitalized software development costs.

As we migrate from our traditional reliance on desktop display towards our growth initiatives including mobile, video, orders, header bidding and other emerging opportunities, we expect we will continue to experience uncertainty with respect to the timing and financial impact of these initiatives. Accordingly, we will provide guidance for the first quarter of 2017, however we're not providing specific guidance for the full year 2017 at this time. In addition, we do not expect to provide quarterly guidance in subsequent quarters.

For the first quarter of 2017 we expect the following. GAAP revenue do be between $41 million and $45 million, non-GAAP net revenue to be between $41 million and $44 million, adjusted EBITDA to be between negative $6 million and negative $4 million. Note that this range includes the impact of nonrecurring costs of approximately $5 million associated with the exit from our intent marketing solution and with our executive management restructuring.

Non-GAAP EPS to be between negative $0.26 and negative $0.22 per share, based on approximately $48 million forecasted weighted average shares and roughly $6 million in CapEx spend. This guidance includes intent marketing, GAAP revenue of approximately $1.5 million and non-GAAP net revenue of approximately $500,000 during the first quarter of 2017.

Directionally, for the remainder of 2017, we anticipate that take rates may decline sequentially at a rate similar or greater than what was seen during the fourth quarter of 2016, driven by factors discussed previously. That we will realize efficiencies and operating expenses driven by our previous restructuring activities and ongoing cost management measures such that adjusted EBITDA operating expenses may grow only marginally on a sequential quarter basis, after adjusting for first-quarter restructuring costs and the CapEx spend levels may be similar to 2016.

As we look forward, we remain optimistic about our long-term growth prospects. We occupy a strategic position in a dynamic and growing global marketplace and with the appointment of Michael Barrett as CEO, have further strengthened our already strong management and technical team. We will continue to prudently manage our financial resources and to protect our balance sheet while making the right investments to position us well for longer term success.

Thank you David. I spoke earlier about why we feel positive about our product innovation and our execution in capturing market share of supply, both key drivers for our future success. While it is clear we still have some work to do to get this optimism reflected in the financials, we believe that by building on the strong positions we have in mobile, video and orders, and continuing the accelerated progress we're making in FastLane, we will emerge as the leading independent global exchange.

Before I open it up for questions I wanted to reiterate my excitement that Michael is joining our team. He's a proven leader and has the operational experience and strong customer brand. We're lucky to have him on board. With that, we will now open up the call for questions.

(Operator Instructions)

Kerry Rice, Needham.

Maybe first, a question on the header bidding or FastLane, what is the best way to best understand the penetration of FastLane? Is that the number of publishers, which I think you mentioned around 300 deployments out of roughly 500, or is it maybe the percentage of impressions that the assets sell? If you can give any more details around that, that would be great.

The second question is really around mobile. You mentioned that mobile came down, that was primarily the mobile web, which I assume again was in relation to header bidding. When do think about mobile app revenue being the primary or the majority of mobile revenue?

Hi Kerry, it's Frank here. The best way to understand the penetration of header bidding, first just to set the context of this, header bidding is not an entirely new platform for us, it's an API. It is another way to integrate into the existing customer base, as well as new customers. So we have 1,300 customers overall, we have 300 deployments now with header bidding.

The first stage is to assign the customer, then we've got to get it implemented, then we've got to get it tuned and make sure that, that implementation integration is clean and operating efficiently. Then, from there we've got to make sure that the algorithms are optimized for that particular site and then your revenue growth expands from there.

So if you look to the numbers, we have got 300 of our existing 1,300 customers, so there's a lot of room to grow from there. That is not including new customer opportunities, by the way. Even within that existing customer base, we estimate that about half of those are tuned and fully efficient deployments, so even within those deployments we have there is some room for growth there as well.

We are pretty excited obviously about the prospects of it. What really drives that revenue growth given that we are a marketplace business is the access, as I mentioned, to supply. In header bidding, it's ad requests, and ad requests overall in our platform grew 50% on a year-over-year basis even though we had a challenging 2016 year.

Reconnecting that supply is critical for us in reconnecting that revenue growth. So, we are feeling pretty good about that supply reconnection even with some of the deployments that we have.

Frank can I maybe just follow-up there briefly. When I think about 300 versus 1,300 total customers, is it the intent or is it the plan to all 1,300 should use the implementation of FastLane? If so, how do we think about that progression of the other 1,000 deployments? Thanks.

It's a great question. Our platform is designed to integrate with the publishers or app developers in any way they would like to integrate. So in some cases we have multiple integrations; sometimes it is FastLane and our traditional smart tag business and our orders business, and sometimes they'll also integrate our mobile business through [SDKs].

Sometimes within that existing customer base, there is multiple integration points. We don't necessarily expect that every single one of them are going to implement header bidding, it's really the customers choice. Header bidding has grown more in North America, for example, it's gone more obviously in desktop.

As you move into things like mobile app, there is some nuances that change there. Also, with our orders product some customers just use our orders products. In which case header bidding could be helpful. Is certainly is, but not necessarily required.

Also our ex-API products, as well, is a different type of integration, blends basically server to server integration point. So while there is a lot of opportunity in that existing customer base -- we don't have to implement it with every single one of our customers to go reconnect that supply.

Okay, and then on the mobile web versus mobile app, the inflection point?

Mobile web does continue to constitute a majority of our spend, so I think we see a couple of different dynamics there. First, as we make better progress on our header bidding, that will stabilize the mobile web side of the equation. On the mobile app side, we certainly continue to -- it is still a growth area for us.

We have a product roadmap that we'll provide using our ex-API. We will provide much greater access without having to have the SDK implementation. So we think from a product perspective, we're building that out, we have got significant momentum there.

The timing of when that turns is hard to say, as we mentioned on the call, it is challenging right now with visibility, but we are certainly headed in the right direction.

We're making some good progress there already, one of the reasons that we're excited to bring Michael on board, his most recent gig was CEO of Millennium Media, a mobile only marketplace. So he's a lot of expense in that area and I think that's going to be really helpful to accelerating hopefully our efforts in that area.

Great, thank you. Welcome aboard, Michael.

Thanks, Kerry.

Andrew Bruckner, RBC Capital Markets.

Thank you very much, two if I could. The first one, Frank, last quarter you talked with the strategic market position as being a key question. I'm wondering if you thought about that any differently over the past quarter and if you think any sort of M&A or inorganic points are necessary.

Secondarily, if you disclosed any economics on the Tapad Cross-Device partnership and if these are any capabilities that you could eventually have in house versus having a partnership.

From a strategic market position, we are pretty bullish. If you look at header bidding, which was obviously an area that caused some challenges for us in the desktop display market last year. Again, an area that we were less focused on because it shifted our attention and resources to mobile, video and orders which was where the market is heading.

If you take that, you take something that was a challenge for us and if you look at the rate that we have been able to turn that around from a customer implementation standpoint and a product implementation stand point, you're pretty much coming from a cold start. We launched a product in the market, you get 300 deployments, go from zero to $129 million of ad spend in just over three quarters.

I think that illustrates the strength of our market position, it illustrates the strength of our customer relationships. I think it illustrates not only the need, but the importance for platform like ours to have strength of being desktop, mobile, video, orders, all of those things in one place. Our global reach of demand is a critical factor there as well.

If you look at our cloud computing infrastructure, our ability to bring on hundreds of bidders onto that, not only bring differentiated demand but also creates more competition in the auction. So when we deploy something like header bidding or mobile, or video or orders, we see that, that market share capture supply rapidly increases, because we're able to leverage that differentiated demand, that scale of our existing customer base.

So we feel pretty good about that, even though with the header bidding piece that created a little bit of a hiccup for us.

Our ability to turn that around so quickly I think makes us more bullish about our ability to continue to deploy new products to the market in the future.

With respect to Tapad, do you think that's any sort of capabilities you'll ever have in-house?

Yes, the Tapad part, it's too new to communicate any of the economics. If a cross device will want to support any device graph that has buyer adoption and can grow ad spend for our customers, which could include proprietary and external solutions.

Thanks.

Brian Fitzgerald, Jefferies.

This is John on for Brian. Thanks for taking my question. Just wanted to touch back on take rate for a little bit. In your ad [adjusted] numbers, you had take rate coming down to about 23.5% this quarter.

Just curious what your thoughts on the long term take rate that you think this business can manage as you move to some of these other products such as FastLane. Then, just another follow-up on header bidding, anything that you are seeing there from a client demand-side on video and any implementation that you are looking to rollout over 2017, there would be great. Thanks.

On the take rate front, certainly as we mentioned before, in the short- and medium-term we do see continuing decreases. As mentioned, we expect that on a sequential basis we should decline equal to or perhaps greater than what we have seen the last few quarters.

From a long-term perspective it is very challenging because there is such a significant mix of different types of channels that we run through. It will certainly decrease. And we don't really have the visibility at this point to know where that ends up, and so we will play out this year and see where that leads us.

And on your header bidding for video question, we're pretty excited about the opportunity there, particularly combined with our orders platform. Because now header bidding enables us to gain access to the most premium supplier impressions at the publisher. So if you connect that to our orders products, where you have got higher CPM, more valuable deals occurring there, it opens up a new opportunity for us in video that did not exist even a year ago.

Thank you.

Jason Helfstein, Oppenheimer.

Hi guys, this is Alok filling in for Jason.

You noted during your prepared remarks that you were going to look to leverage the $200 million-or so in cash on your balance sheet in your quest to reaccelerate growth. But the Company was cash flow positive in 2016. So could you give us a little bit more color on how you are planning to use that cash? Thank you.

Let me start with, we are very committed to protecting our balance sheet. And so, I'm not sure that we talked about significant initiatives using our cash, but we are very committed to protecting our balance sheet. At the same time, we do want to make sure we make the appropriate investments, products, our go to market strategies, we want to make the investments in our serving cost, for example, per ad request. Which we think can be a great competitive advantage over time.

And so as we play out this year, one of the advantages that we do have is that strong balance sheet, so we can continue to make those important investments even amidst some of this uncertainty and some of the challenging visibility. We don't plan on expending significant amounts of cash. But we have that in reserve in case that dynamic between our decreasing spend on our legacy desktop display doesn't stabilize as soon as we hope, compared with the growth of our investment opportunities.

Andrew asked a question before about the M&A and I think that might be [getting to]. We've grown this business organically and inorganically in the past. We have done seven acquisitions, both as a private and public company.

We acquired a company long time ago from Fox, which became the foundation of our cloud, which is pretty critical for RTB. We acquired a data and security company that was again, very important for us to build a premium marketplace. We acquired two companies for orders and clearly we're seeing some great success with that.

Also there's foundation for mobile. While it was a small acquisition, it was a pretty significant acquisition and we've built a tremendous business now in mobile from that. The bar for us is really high, both from an engineering perspective and a people perspective. But if there are opportunities for us to advance our roadmap and better serve our customers and if it makes financial [answer to make] sense, it's nice to have a strong balance sheet to evaluate those possibilities.

That's really helpful, thank you for the question.

Matthew Thornton, SunTrust.

Thanks for taking my question. Good afternoon guys and welcome aboard, Michael. One for Frank and one for David. Frank, you guys gave some good color on the take rate side of things. On the volume side of things, have you seen any precedent where perhaps your share was waiting on a client but as you got FastLane and header bidding implemented and perhaps some of the video and mobile products implemented, where you've actually seen that share start to inflect and come back? I'm just curious if you have seen any precedent there.

Similarly, when you think about clients, is client growth still positive? Is the client count still growing? Just secondly for David, the cost rationalization program I think in total was about $30 million annualized. Are we at that full run rate as we exit 1Q or is there still work to be done into 2Q? Any color there would be helpful, thanks guys.

Hi Matthew. I think you nailed one of the most critical things that we saw in 2016 that we're seeing quickly turn around here from a supply perspective. This is not necessarily the best analogy, but I'll give it a try.

Pretend that there was a big storm in Manhattan and let's say that Uber had all the Uber drivers in New Jersey and let's say that storm cut off the bridge, so those Uber drivers could not get into Manhattan. That is basically effectively cutting off the supply. Uber is not going to be able to generate revenue because there is a lack of supply or drivers that are in Manhattan.

It doesn't mean that, that revenue is lost forever, but it cannot monetize something if that supply access is not there. So what happened in North America desktop display with us in 2016 is that some of that supply was cut off and wasn't able to make its way to our platform. So it's as though somebody poked a hole in a pipeline that was oil wasn't actually able to get to our system.

Once we deployed our own FastLane solution and as we are making those integrations, making sure those integrations are clean and efficient and working well, we have reconnected that supply. Some of the stats that we gave, we have seen now a 50%, five-zero, 50% increase in ad requests or impression access on a year-over-year basis. Which has grown pretty rapidly.

300 new deployments obviously in header bidding, as we just talked about, but 400 new deals overall. So to answer your question about client deals and client activity, new deals are being signed all the time.

One critical point to make there is that because we are a marketplace business, as the supply in the past, some supply was cut off, it took a while for that revenue declined to lag. And now as it is being reconnected, it's got to first, be made available in the marketplace and then it's available again for the bidders to bid on and then those marketplace effects start to reverse.

Great. Matthew regarding the cost control initiatives, a vast majority of those initiatives and their impact will be complete by the end of this quarter. So if you look at our Q1 expense run rate and normalize for the roughly $5 million in one-time were nonrecurring costs, that would give you a pretty good baseline for the rest of the year.

(multiple speaker) Two additional stats on your previous question. In terms of client growth, the number of sellers, publishers and application developers grew by 172 on a year-over-year basis. And then FastLane accounts with header bidding installed, we're seeing three times now the number of ad requests per account per month versus our traditional smart tag business.

And that is why we are pretty excited about the growth prospects in the future, especially when you combine that with our orders platform. But we're now accessing inventory, especially the most premium inventory that we weren't able to see before.

That's really helpful, appreciate that, Frank. Maybe one quick follow-up, housekeeping, for David, if I could. I think you talked about tax rate a little bit. How should be thinking about tax rate this year and if you could just give us an update on the NOL balance, that would be very helpful. Thanks, guys.

We still have a significant portion of NOLs and so from that perspective, we should have de minimis taxes, at least for the short-, medium-term. The NOL balance for federal is I think $38 million.

Sameet Sinha, B Riley.

Thank you. Let me start with a question for Mike. Mike you have been at big companies, small companies, and you decided to join Rubicon. My question is, in this ecosystem where a lot of companies are taking most of the share, what are you seeing in Rubicon that attracted you to joining the Company?

And then I have a couple of follow-ups for Frank and David.

Thanks Sameet. To me, having been in the space for as long as I have and being as close to the clients and customers, a continual refrain that you hear from them is a desired alternative to just the big guys who, in many times, are in varied competition with them. They are either outselling advertising and if you are a buyer at our exchange, that is direct competition.

On the other hand, if they own inventory, they're out selling their own inventory and our publishers and application developers fight against that. So the idea this global, at scale, independent exchange resonates incredibly well with the customers and is more topical now than it ever has been. So that to me is the biggest driver.

Obviously I know the guys at Rubicon well. I've known Frank for years, respect the leadership, respect the team, really respect the product and the innovation that is coming downstream. Just thought it was a perfect opportunity both from a marketplace and from a company specifics to join Rubicon at this point.

Okay. Secondly, Frank, if you could just talk about header bidding, [with years of other] deployments. Do you still think that from a technology perspective, is that still a good technology? When we hear about header bidding challenges, where they [get a sense of server] capacity that soaks up all of the challenges regarding fraud or even viruses.

That is one question. Then, if you could also talk about -- in terms of, you mentioned lack visibility a couple times and that's going to be the reason for removing guidance going forward after the first quarter. If you talk about the business, about getting supply back, making more deeper penetration to current clients, would it not be helpful having brought guidance out there so we out here who have less visibility than you do can at least track the business as we go along?

Sameet, header bidding from a tech perspective -- header bidding is a technology that clearly needs to operate at massive, massive scale. It is putting a lot of pressure on the DSPs as well, so making a header bidding work and making it scale are two different things. And the latter is a much more complicated challenge than the former.

So from a tech perspective, the client side implementations, the technology that was initially used in the market, it was pretty primitive. There's some open source technologies that we have embraced. Us being able to take that and add onto it, a lot of the investments that have made us really successful in the past, things like our security technologies, our brand protection safety, things that have really enabled us to attract the most premium publishers in the world and create a safe marketplace environment for the most important brands, advertiser brands in the world to buy.

Those are the things that drove not only our success in the market to date, but also made programmatic and automation in real time bidding something that was not only a reality, but something that could be trusted within the entire industry. DSPs, agencies, advertisers, publishers themselves, et cetera.

Us being able to bring those technologies into header bidding certainly makes header bidding not only safer, more robust, but gives us a differentiator. But hopefully will also solve a few bigger problems for the entire market, which will hopefully grow the market as a whole. I would say is something we have always been very focused on.

In terms of data centers, serving capacities, I've talked about this in the past. We made investments from day one of this Company to create a super highly efficient infrastructure. We knew that as an exchange, we will have to process massive amounts of volume at relatively speaking low margins, just given the nature of our business.

So we made sure that we can process things incredibly efficiently, and that served us well. We made some acquisitions in the past, as I mentioned before, to bolster that. We continue to make investments in that cloud and that is not only enabled us to scale to do so, profitably in the past and gives us the ability to capture market share on a global basis.

In looking forward, I think that is going to be a critical point not only to our success to continue to scale, I think it's going to become a critical point for us to help the DSPs who are getting hammered by a lot of these ad requests across the board. I think it's going to become something that not only becomes a differentiator for us, but a barrier to entry for smaller competitors because it is going to be really difficult to scale and make money at the same time doing this. And having our proprietary cloud infrastructure is going to be very, very critical for us to do that and I think something that is going to be tough to replicate.

And Sameet, regarding visibility, we certainly recognize what a challenge it is for analysts and investors to not have broader guidance from us. We have tried to share directionally some things that we think we have some visibility into with regards to take rate declines. Certainly from a cost perspective, holding those steady and CapEx levels.

Beyond that, I guess a couple of things. We certainly are committed to protecting our balance sheet so we will be mindful as this year plays out. How that pacing and how that growth develops and we will be mindful of our cash burn.

We are in the position to utilize some of that cash as mentioned to make the most important investments, which we will do. But we will monitor that carefully and we will play out this year and try to directionally provide information where we can.

And some additional color to that as well. As I said multiple times in my script, our number one priority this year is capturing market share of supply. And try to illustrate how that has been a successful strategy for us in the past.

If we need to balance or sacrifice some short-term revenue to bolster that strategic position, based on history that is a smart thing for us to do. We want to make sure that we leave ourselves some room and flexibility to make sure that we are truly optimizing for that.

And that we are making sure that both our business model and pricing models are reflecting our ability to capture market share, make sure this Company is best positioned strategically. We think that is a smart thing to do, and we want to make sure that we are leaving ourselves some room to do that, versus trying to tie ourselves to some strict guidance, at least in the short term.

Thank you very much.

Jason Kreyer, Craig-Hallum.

Thanks for taking my question, Michael welcome to the call. Frank, you mentioned several times -- just piggybacking on the last comment, the effort to capture additional supply as you move forward as a marketplace focused business. How does that sale change, trying to capture supply going forward from here versus your success capturing supply in the RTB business, capturing supply of the orders business, how does that shift from here on out?

The strategy is actually pretty similar. When we first launched our very first product, ad network optimization, similar strategy with real time bidding, similar strategy with mobile, video orders and similarly with the header bidding. We first go to our existing customer base.

I don't want to say it's an easy add-on but it is an easier add-on, because we say, you already have desktop and mobile, and why don't you turn this additional feature on as well. We are also -- having the position to be able to leverage existing buyers, whether that be DSPs or advertising agencies that are using our order products. First it is about, you're going to our existing customer base, sometimes were able to use new products to enter into new customers that are using existing products of an entry point.

For example, when we just had real time bidding we introduced orders into the market. Some of the most premium brands in the world, where they may below sensitive to auctioning their inventory, so we were able to enter with the orders product.

They get comfortable with that, we establish a relationship with them and we're able to then go back and upsell them the real time bidding product or now the FastLane product, et cetera. Having a portfolio of multiple products helps us to either leverage existing customers or bring new products to new customers and then continue to upsell them.

Okay, thanks. And then the Q1 guidance implies a more significant deceleration, just wondering if you can walk through the factors that are impacting Q1 more strongly than what has impacted Q4.

I think it is a continued deceleration of our legacy mobile desktop display. The growth areas, while we are encouraged by the momentum that we have there, they are not -- we haven't hit that tipping point quite yet and that is also the foundation for some of the lack of visibility that we have going forward this year as it regards guidance. Frank, I don't know if there's anything you want to add to that.

No. I think just another comment on the guidance pieces, we have a new CEO that is joining here. So I think giving him the opportunity to come in, to take a look around, really dig in, galvanize some of our strategies. I think it's a fair thing to do to give him some space and time to do that.

Thanks.

Mark Kelley, Citigroup.

Hey guys, thanks a lot. Two quick ones. The first one, you talked about the 50% growth in ad requests in your prepared remarks. I just want to clarify, is that a 4Q 16 over a 2015 number or is that full-year?

The second, any thoughts on the SoundCloud partnership? I know it is very, very early, but anything you could provide there would be helpful. Thank you.

The 50% increase in impressions was full-year. For SoundCloud, it is not launched yet, so too early to give any specific comments around that. (multiple speakers) Sure.

Last quarter you called out a lot of smaller solutions that maybe gained some traction header bidding early on and that caused some of the disruption. As the shift to server-side header bidding happens, obviously scale will matter. Are you seeing some of the smaller guys already go away or do think it will take something like server side to make that happen?

Go away is probably not a term that is used in ad tech very much. There's always ebbs and flows. We have been at this now for 10 years.

There is a reason that there's only a handful of exchanges and only a couple of really large ones, us being one of them. The shift to server-side, we have a server side product, our ex-API. We've been in market with this for a year and a half now with our cloud computing infrastructure.

We are certainly extremely well positioned there, so I think we're pretty bullish if that is where the market goes. Part of that is effectively what we have been doing for 10 years. With that said, there are some challenges in server to server header bidding without getting into too much detail.

There some kooky translation issues where it might become difficult for some of the buyers to be able to do some of their retargeting or some of their general targeting and things like that. So we are excited if the market goes there -- we are prime positioned for it. Again, we have been a market with the server to server product, our ex-API.

In terms of what that does to smaller solutions, it is hard to tell exactly what is happening to smaller solutions, but we have clearly made a lot of progress with our own FastLane header bidding solutions, even on the client side. With the 50% increase in ad impressions, the overall 300 deployments. You have to imagine that we're doing some damage to the smaller competitors.

But it is a huge market, it is a $600 billion market, there are plenty of dollars to go around. I think we are more focused on trying to grow the market for everybody versus trying to necessarily do away with any particular smaller competitor.

That's fair. Helpful. Thank you very much.

Looks like we have no further questions. So this will conclude our question-and-answer session and also today's conference call. Thank you all for attending today's presentation and you may now disconnect your lines.