Good afternoon, and welcome to the Rubicon second quarter earnings 2019 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Nick Kormeluk. Please go ahead.
Thank you, operator, and good afternoon, everyone. Welcome to Rubicon Project's second quarter 2019 conference call. As a reminder, this conference call is being recorded. Joining me on the call today are Michael Barrett, President and CEO, and David Day, our CFO. I would like to point out that we have posted financial highlight slides to our investor relations website to accompany today's presentation. Before we get started, I would like to remind you that our prepared remarks and answers to questions will include information that might be considered to be forward-looking statements, including, but not limited to, statements concerning our anticipated financial performance and strategic objectives. These statements are not guarantees of future performance.
They reflect our current views with respect to future events and are based on assumptions and estimates and subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from expectations or results projected or implied by forward-looking statements. A discussion of these and other risks, uncertainties and assumptions is set forth in the company's periodic reports filed with the SEC, including our 2018 annual report on Form 10-K, the first quarter 2019 10-Q, and subsequent filings. 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 and the financial highlights deck that is posted on our investor relations website.
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 of these metrics. I encourage you to visit our investor relations website to access our press release, financial highlights deck, periodic SEC reports, and webcast replay of today's call to learn more about Rubicon Project. I will now turn over the call to you, Michael. Please go ahead.
Thank you, Nick. We are happy to post solid financial results in Q2, with top line year-over-year revenue growth of 32% and bottom line coming in with $4.4 million in positive adjusted EBITDA, representing a 12% margin. We are continuing to show strong financial performance with three quarters in a row of 30% or greater revenue growth, demonstrating our ability to increase share in the growing programmatic advertising market. We saw a nice revenue lift in May and June that has continued into Q3, allowing us to maintain healthy future revenue growth expectations, which David will cover. This helped us to meaningfully outperform guidance we gave for Q2 and puts us in a position to deliver 2019 revenue growth solidly above our long-term annual revenue growth target of 20%.
The outperformance we experienced came largely from stabilization in CPM trends, greater than expected strength in audio and video, and favorable year-over-year take rate comps. Our audio business continued to grow in the second quarter, helped by a multi-partner roadshow in Europe together with Spotify, Google, and Adobe. This roadshow educated buyers about the value of programmatic audio. Supply path optimization, or SPO, also continues to pick up momentum in the industry, as evidenced in the press and media this quarter. There is a strong need in the market for an independent, omni-channel global exchange that is brand safe and highly efficient. We continue to build out our capabilities to fill that need and continue to gain momentum with brands, agencies, DSPs, and publishers. SPO is a trend that started with DSPs and has continued to be further embraced by agencies and brands and is becoming increasingly important to publishers.
Our primary current business growth drivers remain unchanged, SPO and video. In addition, the response continues to be strong for Demand Manager, the service for publishers we formally announced in Q2. SPO and vendor consolidation grabbed some headlines this quarter in the press. MediaMath, one of the largest global demand-side platforms, together with us and Havas, one of the largest agencies, announced a partnership to architect a direct and transparent programmatic delivery infrastructure. Havas was quoted in AdExchanger saying they reduced their number of supply-side partners from over 40 to around eight. This is illustrative of more buy-side partners wanting to reduce sources of supply within our ecosystem for more efficient and targeted buying. Our ability to differentiate ourselves as a scaled, efficient, omni-channel exchange with safe inventory puts us in a great position to continue to gain share as the industry further consolidates.
Video was a strong growth driver, and our video revenue grew two times the industry growth rate in Q2 year-over-year. Video inventory remains in extremely high demand, and we continue to work with our publishers to bring more video to market. Prebid's video capabilities continue to expand, which we believe will increasingly provide access to more inventory and drive additional video growth for us. We believe engagement and ROIs are very high across all forms of video, propelling significant growth, and that this growth will continue for quite some time. Our very broad video offering, from CTV to desktop to mobile web and mobile app, addresses all areas of growth today and the years ahead. We are also excited to bring Demand Manager to market in Q2 to help publishers address the challenges and complexities that header bidding introduced.
The technical complexity of managing multiple exchanges in the header requires sellers to invest significant time and resources. It adds layers of code to the page, which erodes the end-user experience, and it makes it easier for bad actors to hide their practices. Our solution is built on Prebid, the open-source standard that's used by hundreds of the world's largest sellers and respected across the ecosystem for its transparency and flexibility. Since launching Demand Manager in May, we are pleased with the strength of our customer pipeline, joining early partners such as Publishers Clearing House, Discovery, and Autotrader. We have consistently received positive feedback from those using the service, with publishers experiencing revenue gains and significant efficiency improvements. For these reasons, we remain confident that Demand Manager will be a growth driver starting in 2020.
In order to provide greater insights into the product, we will be hosting a live demo for our analysts and institutional investors in our New York office on the morning of Tuesday, September 24th. Please reach out to Nick for more details. We are pleased with the top-line growth and the corresponding bottom-line performance this quarter. The moves we made over the past two years have put us in a position to take market share and continue to grow at a healthy rate throughout this year. We are also pleased to have the ability to continue to invest in important areas such as video, audio, mobile, Demand Manager, and network efficiency to fuel our future growth. With that, I will hand things over to David, who will go into greater detail regarding our Q2 financial performance.
Thanks, Michael. We are happy with our very strong results for Q2. We generated $37.9 million in revenue, a 32% increase year-over-year, and generated adjusted EBITDA of $4.4 million. We were also cash flow positive in Q2. The year-over-year increase in revenue was once again driven by solid growth in both take rate and ad spend. Revenue exceeded our initial expectations as May and June growth was stronger than our April trends initially indicated. Our mobile revenue grew 42%, our desktop revenue grew 21%, and video and audio revenue continued to drive significant growth. Operating expenses, which in our case includes cost of revenue, for the second quarter of 2019 were $46 million, down from $48 million in the same period a year ago.
On an adjusted EBITDA basis, operating expenses, including cost of revenue, for the second quarter were slightly lower at $33.5 million versus $34.1 million in Q2 2018. This cost level reflects benefits from our cost reduction actions during 2018, offset by investment in Demand Manager this year, in line with the expectations we provided on our last call. Net loss was $8.3 million in the second quarter of 2019, as compared to a net loss of $18 million in the second quarter of 2018. As I mentioned earlier, adjusted EBITDA was $4.4 million, which represents a 12% margin compared to an adjusted EBITDA loss of $5.5 million reported in the same period one year ago. The improvements in net loss and adjusted EBITDA were driven primarily by higher revenues and measured investment.
GAAP loss per share was $0.16 for the second quarter of 2019, compared to GAAP loss per share of $0.36 in the same period in 2018. non-GAAP loss per share in the second quarter of 2019 was $0.06, compared to non-GAAP loss per share of $0.27 reported for the same period in 2018. Capital expenditures, including purchases of property and equipment, as well as capitalized internal use software development costs, were $4.1 million for the second quarter of 2019. We closed the second quarter with $86 million in cash, an increase of $5 million from Q1. The increase resulted primarily from the timing of receivable collections and seller payments.
Our cash and marketable security balances can swing disproportionately, both up and down, compared to the run rate of our business, since we collect and pay the gross amount of flow-through to our sellers while we record revenue on a net basis. We had $300,000 of positive cash flow, excluding changes in working capital, which we calculate as adjusted EBITDA less CapEx.
I'll now share some indications for our third quarter expectations. We expect the year-over-year revenue growth for Q3 to be approximately 30%. We expect that adjusted EBITDA operating expenses in Q3, including cost of revenue, will be approximately $35 million. The increase from Q2 is primarily driven by annual compensation increases. We continue to expect that CapEx for the full year of 2019 will be in line with prior guidance at the $20 million level, similar to 2018. We are very pleased with our continued strong revenue growth for the quarter, expense management, and with our positive cash flow. We are confident about growing share through SPO and video, and that our investment in Demand Manager will further strengthen our relationship with sellers and create long-term upside. With that, let's open the line for Q&A.
Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Jason Kreyer with Craig-Hallum. Please go ahead.
Gentlemen, good afternoon, and congrats on another strong quarter.
Thanks.
Thanks, Jason.
Just starting out on Demand Manager, just a couple kind of update items since you launched it two, three months ago. Can you give any thoughts on how you see that pipeline building up, what you've seen those install timeframes from going into beta to the closed beta? Any kind of updated thought process on the ROI for customers? Perhaps you can give some sort of an indication on what the revenue model looks like there.
That's a mouthful, Jason. Sure. As we kind of signaled when we talked about Demand Manager last quarter, that we were going to hold off on any kind of hard projections until it started to become revenue positive or revenue producing into 2020. We remain really excited about the prospects. I think that our time in market with Demand Manager since we last spoke has been very well spent, very well received. It's really validated the market need for it. As we kind of had alluded to, there's really not a competition that we're trying to unseat here. Our competition, in essence, is Prebid. Can we build an interesting enough product that has enough benefits for our publishers that they would utilize Demand Manager, obviously built on Prebid, as opposed to running Prebid by themselves?
I think that we're finding that it's playing out as we thought it would, that the biggest enterprise clients probably will be the longest sales cycle, and the middle tier of the upper torso are the sweet spot initially. As far as installs, it's pretty much sticking to what we thought going in. The cycle of installing is not radically different than what we're used to whenever we onboard a client. We're super excited about it. Obviously, light on the economics of it. We're finding that generally speaking from a fee model, that most publishers prefer the share of media. In other words, we just take a percentage of all the revenue that flows through their Demand Manager. It seems to suit their budgeting purposes as well.
We are certainly open to and are prepared to do flat rate pricing on more of a software service approach. Yeah, we're very excited for the demo in New York. I know you've had a chance to peek at some of the tools, but I think that it becomes, when folks see the demo, they understand what we're talking about and how much time it saves the publisher through things like the configuration management, how much smarter it makes them through the performance analytics tab. Yeah, super excited about it.
Okay. I threw a lot at you, but thanks for unpacking all that. Pivoting over to this supply chain announcement with MediaMath, just can you give your thoughts, do you view this as a one-off type of a relationship? How do you expect this to evolve across the industry? What does that do for you in terms of initiating that relationship with buy-side clients? What does that give you in terms of tools and how you can go after publishers with that?
Yeah, great question. I think whenever you work with the largest agencies, By that I mean the five or six big holding companies, they're all going to have their own flavor. Keep in mind, theirs is a very competitive business as well, so they don't want to be able to tell their marketing partners or their clients, "Hey, my solution is the exact same as Publicis," and "I'm Omnicom." There's always going to be a different flavor to them, but they all have the same general
That is the cleaner the pipes are, the more transparent the pipes are, and the closer you can get to high premium quality supply, the greater value you can add as a buyer. Generally speaking, it will drive a lower ad tax. We're seeing that kind of play out with all these discussions. I think it puts us in a great position to have one in place to be able to talk to the other major holding companies about what it could look like. It does seem to be that there will always be a business for the open market, the open auction. This centers more, in my thinking, around things like the private marketplace deals or the programmatic guaranteed deals that are now coming to market.
It could actually be accretive that you still have the open market business and then more dollars that used to be transacted in digital the traditional way, seller going in, signing an insertion order, et cetera, now gets done through these pipes because, boy, they have a cleaner line to publishers and it's lower cost. We're kind of excited about the fact that this could be expansive as opposed to just looking at this as, well, you have to take down your take rate to get the business you were getting before. Lastly, for publishers, they're very excited too. They had gotten separated from the traditional demand source, whether it's the market or the agency, by the DSP, by us, and anytime they can have a direct relationship with an advertiser like a Target or a Procter & Gamble, that's kind of what publishers live for.
I think the idea of just bringing the dollars closer to the media resonates well across the whole food chain.
Got it. A couple of times you mentioned the trajectory you saw in April kind of shifted to the positive side in May and June, and I know last quarter you gave a little bit of color that CPMs had stabilized. Is that just a function of CPMs or is there something else baked into that comment?
I think generally, and I'll let David expand upon it, but I think what we had cautioned when we saw the decline in CPMs, we said, "Hey, this isn't our first rodeo. We've seen this before." Sometimes a tool gets added on one side of the fence, header bidding on the supply side, and it drove up pricing because buyers weren't accustomed to it, and they got caught flat-footed. Buyers come back with certain tools. They start to press down CPMs to try to find what the bottom might be, where it's the perfect optimal solution of still not impairing your win rate, but getting the inventory less expensively. What happens is, when your win rate starts to erode, you're in the business of fulfilling these budgets for marketers. You're not in the business of just buying at the cheapest possible price.
You start to adjust your algorithm. We kind of see this cat and mouse seesaw in a marketplace-driven world, and I think that's our best guess as to what we're seeing.
Yeah, I think that covers it.
Okay. Last one for me. We're a month into Google rolling out first-price auctions. I know there's very limited volume over there. Wondering, have you seen any difference in the market? Any different trends? Do you have any expectations on that having an impact on you?
No, I think we remain committed to our original assessment of it, and that is the world had already moved to first-price. Buyers are accustomed to it, and we don't think we'll see any kind of negative or positive impact at Rubicon. You are right, although they are into the first pricing, it's just a small sliver of the AdX inventory. I think they've now signaled that they're delaying the complete rollout for another period of time. We haven't seen the full impact of it, but nothing that we've seen has changed our belief that this is not going to be an impact to our business.
All right. Thanks, guys. Look forward to the September demo.
Thanks.
Thanks, Jason.
Our next question comes from Matthew Thornton with SunTrust. Go ahead.
Hey. Good afternoon, guys. Most of my questions I think have already been asked. Maybe just one on video and audio. On video, you mentioned you guys grew video about double the industry rate. Just curious kind of what the industry rate is right now. Secondly and relatedly, video and audio, any customer concentration, or kind of key customers driving either of those buckets would be helpful to know. Maybe just finally coming back to Demand Manager, I don't think you hit on this, but I guess just any early findings or sense as to, number 1, customer willingness to pay for the product, of course, and then just if there's any other alternatives out there or fast followers or anything like that within the Prebid ecosystem. Any color there would be helpful. Thanks, guys.
Sure. Market rate on the video, I think a lot of folks peg it in the sort of 30s, low 30s range. Yeah, we've got healthy growth in video. As far as concentration, on the audio front, we've talked about Spotify. Obviously, they're a great partner. Michael talked about we were on the road with them in Europe in the second quarter. I would say they're an important tent pole from an audio perspective. I think on the video front, it's fairly distributed.
Yeah, I think, Matt, your last question was Demand Manager competitors. Again, what we found going to market is what we thought we'd find, and that is Prebid is going to be our biggest competitor. In other words, the open-sourced software that folks can download and install on their pages for free, and I do that with quotation marks, is how Prebid becomes so widely installed. That's just big bonus for us because we don't have to go in and extol the virtues of Prebid. The publisher already has seen it, and it works. We just come in and say, "We can make Prebid better, and it can cost you less money. Even if you're paying us directly for it, look at all the indirect costs that you're incurring.
You're incurring engineering costs, you're incurring revenue costs because you're slow to change to make configurations work. We're saving you money by paying. To answer your question about response about paying for a free product, it's been universal. Everyone understands the value, and everyone's willing to pay that we have talked to date. That is not the biggest pushback. The biggest pushback is among the largest enterprise folks, "Hey, I've got this under control. We don't see an immediate need for a paid service." We feel as though, as our product evolves, as the complexity of the marketplace evolves, and especially as things start to migrate to the server, there will be many opportunities for folks to adopt Demand Manager. We're very bullish about the prospects.
Great. That's very helpful. Congrats on the results, and I will cede the floor. Thank you.
Awesome.
Thank you.
Thanks.
Our next question comes from Lee Krowl with B. Riley FBR. Please go ahead.
Great. Thanks for taking my question, guys. First quick housekeeping question.
Hey, Lee.
Hey. I know you guys don't break out take rate, but maybe just directionally how it trended from Q1 to Q2, if you could.
Yeah, we're not sort of commenting on the take rate trend throughout the year. Early in the year, we talked about expectations of the mid-thirteens on take rate.
Got it. I think, someone asked this earlier, but I kind of wanted to take a different approach. Obviously April to now, it seems like there's a clear acceleration. I guess overall, it seems like the industry is fairly tracking to norm. I guess outside of the CPM stabilization, is there any other things that perhaps caused the acceleration in May and June, outside of the CPM comments you've already made?
I'm sorry, Lee, are you talking specifically as it relates to our quarter, or are you saying kind of in a macro standpoint, you're seeing a trend here and you're just trying to better understand it?
I'm just saying the industry seems fairly stable, you guys have seen a notable acceleration per your comments. I was just curious if beyond the CPM, if there was any other drivers, perhaps some unexpected market share or something along that line.
I think we alluded to three specific ones for us, which would be, again, supply path optimization. Not one holdco is centered on us and dropped everyone else, but it's getting closer, right? We first talked about 100 platforms going to 60 to 40. You see Havas announcing 40 to eight. That's going to help us. If you're a leading independent omni-channel platform and they're looking to replace where that spend went, we're a logical choice. Let's face it, none of the big holding companies are looking to give Google more money. We're a wonderful alternative to that omni-channel exchange. We also talked about video. Our video growth on our platforms outpacing the industry by 2x, so there's another driver. Yeah, certainly in terms of year-over-year comps, we get a good guy with the take rate.
Those to me, in addition to the CPM strengthening that we alluded to, are the big drivers for the quarter.
Got it. That's helpful. Then just on your point about video, I believe in the press release, you guys indicated, obviously a key addressable market for investment. Is it additional tools or capacity? Just kind of curious what exactly you guys are investing in on the video front in terms of what you need to continue to drive growth there.
Yeah, I think video, it's funny, people are starting to refer to it as traditional video, which is desktop video, web mobile app video, and mobile web video, the video that we all know and love as internet consumers, digital consumers. That's still terribly complex. There's a lot of breakage. Render rates are much lower than other forms of media. There's player differences. You're continually mopping up the spill on aisle three in video, and so you're throwing more engineering resources at it. You're just getting smarter at it. You're building better tools. A lot of those go into Prebid, and as the leader of Prebid, a lot of our work is going into Prebid, but we're starting to see video tools thrown in from the AppNexus consortium as well. There's the normal blocking and tackling that always requires vigilance.
What we would do in terms of investment on our part primarily is the new flavor of video, which would be CTV. That carries with it some different technical challenges, but a lot of business rule challenges that have to mirror the traditional linear world for it to really work. That's primarily measurement. It's podding, it's separation. It's all sorts of things that are a little bit different than running a traditional video online business. Yeah, that's where most of the investment would go, Lee, and a lot of it's going to manifest itself into Prebid to strengthen our Demand Manager offering, which we think will be very attractive to CTV players, given how restrictive they're going to be about access to this high-quality, high-demand inventory and how they're going to source the demand primarily themselves.
A software tool that allows them to do that efficiently and at very low cost, we think is going to be of great appeal.
Got it. That makes sense. Definitely appreciate the details. Thanks for taking my questions and congrats on a solid quarter and continued momentum, guys.
Thanks, Lee.
This concludes our question and answer session. I would now like to turn the conference back over to Michael Barrett for any closing remarks. Please go ahead.
Yeah, thank you. We're really happy to post a third consecutive quarter of 30% or higher revenue growth, allowing us to meaningfully outpace our long-term revenue growth target of 20% and demonstrate the leverage in our financial model. SPO, video, and seller tools are powerful growth drivers for Rubicon's short, medium, and long-term future. We look forward to seeing many of you in September in New York, Boston, Chicago, L.A., or San Francisco as we're on the road. Thanks again for joining us for our Q2 results call, and have a good evening.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.