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RUBI - Rubicon Project


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If management proves out the sustainability of the business, then this stock looks cheap.

 

$4 per share of cash. No LT debt.  But market concerned how that cash will be used ( history of bad M&A) and why a buyback hasn't been announced. Which is curious.

EV ~150 M

Est. Free cash flow 2016 ~40M

Low maintenance capex biz.

EV/ EBITDA ~4x

Recent competitor, TUBE, bought out by Adobe.

The company does not carry any  inventory, unlike other players in the space.

 

Revenue has tripled over the last three years -- those growth rates will not continue but any stabilization of modest growth could give the market comfort that management can right the ship. There is significant competition but RUBI has achieved some scale to date with $1B of ad dollars on their platform.

 

Newscorp is a shareholder and investing in others in the space. Seems that the content providers value this type of ad tech -- purchase of TUBE validates this to some degree. 

 

Ad tech space has been in the news lately with a fair share of negative publicity.

 

Would love other thoughts and feedback.

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That's a good question -- I believe there is some stickyness with their publishers (switching costs and the like)but it is not clear to me that revenues are subscription based.  If anyone else can chime in that would be great.

 

 

 

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Agreed. The AP,AR turnover is too slow and a  yellow flag. But it does looks like the cash is coming in -- Post IPO they had about 95M in bank. Should end the year with about 200M. Since the IPO, about 26M has been generated from the exercise of stock options (SBC is far too high here) so about 74M generated from the business. Can't seem to pinpoint any divestitures or other major cash raises.

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Balance sheet seems a bit odd.  Around 1x turnover of A/R and A/P is a flag for me.  Also, why do they keep issuing shares when they really haven't used the cash (war chest?).

 

The A/R and A/P being large is a non-issue:

 

From the 10Q:

 

Our accounts receivable are recorded at the amount of gross billings to buyers, net of allowances, for the amounts we are responsible to collect, and our accounts payable are recorded at the net amount payable to sellers. Accordingly, both accounts receivable and accounts payable appear large in relation to revenue reported on a net basis.   

 

This is something I've experienced at the company I worked for, albeit on a smaller scale. We billed for a collected a fee that we passed forward to another entity, hence it was not revenue or cost to us, but our AR and AP balanced were elevated as a result.

 

RUBI revenue is $60-65M/Quarter, but gross billings are $240M. Based on that total, collection cycle is around 60 days.

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Awindenberger,

 

Thanks for pointing that out.  So since gross revenues were $1B and reported revenues were $248MM for 2015 lets assume net A/R would of been 25% of reported amounts also.  So turnover is (218/4)/(248/365) = 80 days, less if you take average A/R over 2015.  Looks like it is decreasing too (turnover increasing) as A/R reported on 9/30/16 were a decent drop from 12/30/15.

 

So the question is: why is CFO so different from Operating Income and it looks like it could be stock-based compensation.  Stock-based compensation was $22 million for the first nine months of both 2015 and 2016.  Good for the company in the short term but not so much in the long term unless profits actually start rolling in. 

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Awindenberger,

 

Thanks for pointing that out.  So since gross revenues were $1B and reported revenues were $248MM for 2015 lets assume net A/R would of been 25% of reported amounts also.  So turnover is (218/4)/(248/365) = 80 days, less if you take average A/R over 2015.  Looks like it is decreasing too (turnover increasing) as A/R reported on 9/30/16 were a decent drop from 12/30/15.

 

So the question is: why is CFO so different from Operating Income and it looks like it could be stock-based compensation.  Stock-based compensation was $22 million for the first nine months of both 2015 and 2016.  Good for the company in the short term but not so much in the long term unless profits actually start rolling in.

 

AR will be back up for Q4 this year. If you look at last year, their Q4 revenue and gross sales are way higher than other quarters. That explains the higher AR at the end of that quarter.

Their customers are clearly paying the bills, so thats not an issue.

 

The amount of stock based compensation is certainly an issue if it continues. The positive is that a lot of those options are only excersizable at higher price points than the current price. Thus they would expire worthless unless the stock went up. On the other hand, the cashflow is already in the coffers, and will improve next year with the lay-offs and restructuring initiatives.

 

The more I look at this, the more interested I am. Sure the company stopped growing, but they aren't falling apart and generate substantial cashflow that will improve in 2017.

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While stock based compensation is significant here (at which tech company is it not?), this is a non-capital intensive business (basically internet/software) with zero debt, cash of $4 per share, and rapidly growing revenue, earnings, and cash production. The slowdown in the middle of last year has driven the shares down (due to perceived disruptive threat of header bidding).

 

Right now, it trades at a EV/Cash Flow ratio of about 4 which is incredibly cheap despite the fact that the company operates in a rapidly growing industry and is a major player in that arena. If it can join in the disruptive technology of header bidding (which management has recently made clear it understands and is tackling aggressively), then this becomes a high reward opportunity. The high cash and zero debt makes it seem like a lower risk opportunity than the usual small company operating in a disruptive field.

 

Overall, looks like a clear low risk-high reward opportunity.

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Agreed -- link to my valuation summary here: http://www.underthebridgecapital.com/single-post/2017/01/01/Rubicon-Project

$13 - $14  fair value, pricing in 8 - 10% growth per year over the next three years and pretty well kept margins (and SBC) in - line with historical trends. They've guided to take out $30 M from SG&A next year and I've only given them credit for half that.

 

I can throw up the full three statements if anyone is interested

 

If they can show just stabilization of the business, the market may see it as a positive.

 

Securing their territory in header bidding is important but avoiding a completely uncalled for acquisition is maybe doubly important. They blew it on their last deal and investors still have not forgot and wondering why no buy back.  Buying their own business may be the best deal they have and if not then why. CEO was evasive when asked on the last call..hopefully more clarity and transparency on the next one.

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So....to summarize:

 

The stock is trading near all time lows (even with announcement of potentially looking at sale).

 

Enterprise value is about $215M ($415M Market cap minus $200M cash plus $0 in debt)

 

So a potential buyer would be able to pick up a leading ad exchange company (well established with many major publishers) at just $215M net of cash at these prices which sounds like it would be a complete steal.

 

That by itself is strong evidence that in a sale, the transaction price would be significantly higher than where the shares are now (again, even after news today). To add even more to support that a potential sale price would be much higher than stock price is today:

 

- Management (CEO, President) all the way down to employees (remember, high stock based comp) own a large number of shares.

- A significant portion of CEO Addante's net worth is tied in RUBI shares (about $15M by quick estimate).

- Stock is way off IPO price and near all time lows

- Significant number of clients/publishers (ie. News Corp) own large number of shares

- Zero debt, $200M cash, EV/Cash flow ratio near 4

 

The shares at $8.59 still seem like an excellent low risk-high reward opportunity. The company seems like it would be especially attractive (and a drop in the bucket when it comes to acquisition costs) for large established tech companies (Microsoft, IBM, etc) who want game in the online ad space to take on established Google.

 

This looks like an incredible opportunity.

 

 

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Management also seemed to be very candid about the business on the Q3 call. They laid out the recent and short-term headwinds, and why they think they can improve long term. The company was already cash-flow positive last year, so the $30M in cuts will make a big difference. I'm annoyed I didn't have enough time to study this earlier this week and buy, but agree with Dalal's thoughts: this looks cheap and a sale would likely not pass the board without being at significantly higher prices.

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Updates:

Article on Adexchanger speculating on possible deal structures:

https://adexchanger.com/ad-exchange-news/rubicon-project-sale-competitors-weigh/

 

I disagree with quoted Cantu's statement below:

“Even at less than a $400 million price tag [Rubicon’s market cap], there are others that have built the tech or on the tech that can easily be acquired for a fraction of the investment and deliver a great deal of upside value and return,” Cantu said.

 

His price tag does not take into account the $200M in cash that an acquirer would receive on purchase of Rubicon. The real price tag would be only half of his $400M at these prices...(can't expect him to have done his balance sheet research anyway).

 

Rubicon shutting Chango division:

http://www.businessinsider.com/rubicon-project-kills-off-chango-division-2017-1

 

In an SEC filing on Wednesday, Rubicon Project said it was was shutting its intent marketing business and had instead entered into a partnership with digital marketing platform IgnitionOne.

 

(Rubicon Project also provided Business Insider a statement, which you can read in full below.)

 

IgnitionOne will take on any Rubicon Project intent marketing sales staff that want to make the switch. It will also accrue Rubicon Project's intent marketing clients. Rubicon Project is likely to retain some revenue share as part of the deal, although the percentage was not disclosed in the SEC filing or the company's official statement.

 

The changes have also led to Rubicon Project opting to close its Toronto office, according to the SEC filing. A small number of staff will leave the company as a result.

 

Even if a deal does not occur, it's reassuring that management seems to be cutting from areas of business that are underperforming--thus maintaining what seems to be a disciplined growth strategy.

 

More:

https://adexchanger.com/ad-exchange-news/rubicon-project-shutters-chango-biz-refers-clients-ignitionone/

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  • 4 weeks later...

SoundCloud Selects Rubicon Project to Automate its Streaming Audio and Video Ad Inventory - Stock up 7%+

 

http://www.prnewswire.com/news-releases/soundcloud-selects-rubicon-project-to-automate-its-streaming-audio-and-video-ad-inventory-300408603.html

 

Again, RUBI seems to be a nice limited downside, large upside opportunity.

 

While this deal sounds good, I'm surprised that it by itself resulted in a 7% pop for the shares. Looking forward to the earnings report. Hoping the top level numbers look poor to tank the stock while the underlying trends are actually good.

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  • 3 months later...

anyone still looking at this? Another bad day.

 

I'm sitting with a loss on this one. Trying to decide if I want to average down yet. At this point they have $187M in cash/equivalents, and a market cap of $232M. They also had positive CF for the quarter (although only $2.8M).

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