January 24, 2017 - 9:08pm EST by
2017 2018
Price: 8.50 EPS .95 .75
Shares Out. (in M): 49 P/E 9 12
Market Cap (in $M): 363 P/FCF 10 10
Net Debt (in $M): -193 EBIT 65 62
TEV ($): 170 TEV/EBIT 3.5 3.5

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RUBI is a broken adtech IPO which is, according to the WSJ is “exploring strategic options” following a slowdown in its revenue growth and 55% decline in its stock price since last April. I believe a sale is reasonably likely: despite recent headwinds, the company still has meaningful scale, good relationships with publishers and is in an area where there has been significant M&A activity.  In the event of no-sale the company has 40% of its market cap in net cash and is trading at approx. 7x EV to 2016 FCF, giving pretty strong downside protection and setting up a favorable risk reward. 


The Rubicon Project is a supply side platform (SSP) ad exchange network for publishers looking to get access to programmatic ad-dollar liquidity.  Sellside estimates Rubicon’s addressable market is the $6.4bn spent on real-time bidding (RTB) outside of social (Facebook) and Google.  


Between 2007 and 2009, RUBI developed direct relationships with buyers and created applications to assist buyers to increase their return on investment (division formerly known as Static). It was not until 2010 that they added RTB capabilities, allowing sellers’ inventory to be sold in an auction to buyers, creating a real-time unified auction where buyers compete to purchase sellers’ advertising inventory. During 2012, RUBI launched a private marketplace Orders application, which allows sellers to connect directly with pre-approved buyers to execute direct sales of previously unsold advertising inventory.  As of 3Q16, Static was discontinued being totally replaced by RTB (75% of Rev) and Orders (23% of Rev).


In 2015 RUBI had a foray into the demand-side platform – similar exchange but serving advertisers rather than publishers with their acquisition of Chango (8% of rev), which was subsequently shut down earlier this year.    Chango was an ill-fated acquisition and revenue declines in that segment (sell side est. of ~50% from 2015 to 4Q16) have weighed heavily on overall results. 


Header bidding.  RUBIs real time bidding product has been hurt by the increased adoption of header bidding.  Their sell side platform works as part of a waterfall auction with levels whereas header bidding allows the publisher to conduct a simultaneous auction.  Because of the increased number of potential bidders and the fact that it’s a first price rather than second price auction, publishers make more money this way and have been quick to adopt header bidding once it became technically feasible.  RUBI launched their header bidding product, called Fastlane in 2015 and their mobile version Fastlane 2.0 in Feb of 2016.  By their own admission they did not focus enough on this product as they did not expect header bidding to take off (they gave various technical reasons for their view, but in either case they were wrong).  Ad spend from FastLane is growing 10% m/m and reached ad spend of $80M so far. FastLane accounted for ~16% of ad spend, up from less than 5% six months ago. Management expects contribution from FastLane to reach 20% exiting 2016.


While header bidding has been a problem, it’s worth noting that RUBI is more insulated from the two other bear theses in adtech.  As a supply side platform with relationships with (broadly speaking) high quality content publishers, RUBI is better insulated from fraudulent impressions than demand side platforms who end up placing ads on random websites no one vists/clicks on.  And as a fee for service business (their revenue is just a take rate on what the publisher ultimately receives), they are not in the business of owning inventory /competing against their clients. 


RUBIs value lies in their relationships with high quality publishers (such as News Corp, Conde Nast, Reuters, The Economist, LA Times etc.), access to demand sources (agencies, demand side platforms, Networks) and scale (over $1B LTM Managed Revenue).  While switching costs are pretty low, there is evidence of strong relationships / sticky-ness of the client base.  FastLane was admittedly late to the header bidding market, and now is up to 20% of revenue from nothing.  They were similarly late on a mobile product cycle in an earlier shift from desktop to mobile back in 2014, and subsequently caught up.  Roughly half of RTB managed revenue in 2015 was from clients who’ve been with RUBI since 2012.


Recent multiples in the space include ~3x net revenue paid by Adobe for the now-closed TubeMogul deal and ~3.5x offered by PE firm Golden Gate (private) for still-public NeuStar.  A less direct comp would be Sapient which Publicis bought back in 2015 for 2.7x revenue.  At 3x cons. revenue stock would be $17.  Given the issues around RUBI and the flatish revenue growth profile during the revenue transition I think 2x is a more likely takeout value, that triangulates to $13, 45% up from here, 9.4x cons ‘16 EBITDA and a 9.5% fcf on EV. 


Potential buyers include non-media owning ad tech consolidators (ORCL, Adobe, Salesforce), telcos (VZ has been most aggressive moving into the space), P/E firms, other private platforms or ad agencies.  I view large publishers as least likely buyer (even though NEWS owns 10% of RUBI) because relationships with other publishers rely on RUBIs independence from them. 


In a no-deal case, my run down DCF where header bidding completely cannibalizes RTB gets you down to $6-$8/share.  Your mileage may vary and this is highly dependent on your decline rate and margin assumptions but there seems to still be a decent amount of fat in the system.  In the last quarter 2016 revenue was guided down by ~15MM and EBITDA by ~1MM on cost cutting.  I expect they will generate 35-40MM in FCF (15-20% yield on EV) in ’17 off a -5% revenue base case. 


Trading wise biggest risk is no sale which probably sends the stock back down to 7 and change, though given the high cash balance that could be paired with a large buyback.  An acceleration of header bidding cannibalization of RTB + lack of adoption of FastLane would also weigh on the stock. 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Sale of company


Beyond a sale, header bidding could go out of favor with publishers driving volume back to exchanges; RUBI’s own header bidding product (Fastlane) could take off, cannibalizing revenues but offsetting the declines along with expected growth in mobile/video.

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