Let’s Go SaaS: Parsing Rocket Fuel’s Purchase Of [X+1]

merging x rocketfuelAgencies and marketers are forcing change on ad networks.

Rocket Fuel’s $230 million acquisition of [x+1], announced Tuesday, was about more than one ad tech platform’s attempts to add new capabilities.

While Rocket Fuel will benefit from [x+1]’s strong data management, demand-side platform, and site-side optimization features, Rocket Fuel CEO George John said on the company’s earnings call that agencies and marketers have begun to spurn insertion order-based media buying and to reduce spend with intermediaries that add layers between buyers and sellers of media. This has been a well-documented trend, but the speed of the transition may have caught Rocket Fuel somewhat off guard.

And if that’s true of Rocket Fuel, a well-established and public-traded company in the programmatic arena, how many others are scrambling too?

Below is a rundown of some key facts about this deal and how it fits into the larger shift to self-serve programmatic.

What does Rocket Fuel get by buying [x+1]?

[X+1] has two businesses. The first is its Software-as-a-Service (SaaS) based suite consisting of data-management platform (DMP), demand-side platform (DSP) and website optimization. The second is a managed services-based media business similar to that of an ad network. The former represents the opportunity Rocket Fuel is going after.

Another thing that Rocket Fuel loves about [x+1] is its mature enterprise focus with strength in sales, professional services, customer service and documentation.

“They’re not just selling software to major marketers, they’re partnering deeply with those clients to help them leverage big data and digital technology to transform their businesses,” John said.

What about [x+1]’s financials?

Interestingly, despite the fact that [x+1] has been around a long time, the company’s 2013 revenue was only about $72 million, including media costs. (Rocket Fuel did not break out revenues ex-TAC.) That’s up from approximately $60 million in 2012. [X+1]’s 2014 revenues are expected to be about $86 to $90 million.

These are relatively small numbers compared to Rocket Fuel, which recorded second quarter revenues less media costs of $54.7 million. Its total managed revenue, including media costs, will be about $420 million this year.

Gross margins are another story, and an example of how the usual rules don’t always apply in ad tech. [X+1]’s margins are in the 25% range, much lower than many SaaS-based margins.  Meanwhile Rocket Fuel’s media margins are in the 60 to 70% range, far higher than your typical ad network.

In short, the revenue impact [x+1] will have on Rocket Fuel’s business is less than one might have expected. It’s all about the enterprise platform opportunity.

Why is now the right time for Rocket Fuel to buy [X+1]?

Rocket Fuel needs to bake licensing-based revenue into its platform. Some advertisers and agencies have either reduced spend or failed to increase their media investment at the rate Rocket Fuel had hoped. Rocket Fuel gave three reasons for this: (1) agencies diverting ad spend to trading desks or direct buys using demand-side platforms, (2) agencies avoiding exchange buying due to concerns over botnet traffic, and (3) advertisers and agencies managing programmatic spend directly using software.

“We’re acquiring [x+1] as a way to inject enterprise software and SaaS DNA into Rocket Fuel,” John said. “[X+1]’s know-how around enterprise software will be a powerful complement to our capabilities in achieving … results.”

Does this mean Rocket Fuel’s core business is flagging?

Not exactly. The company reported Q2 revenue growth of 84%, less media costs. That’s quite healthy. But it did lower guidance, indicating it was surprised at the speed of these negative developments. And investors have punished the company’s stock, which hit an all-time low Thursday, despite the [x+1] buy.

But didn’t Rocket Fuel competitor Criteo just report strong Q2 results?

Yes, it did. And Criteo raised 2014 guidance. That suggests either that the negative trends Rocket Fuel has observed are not evenly spread across ad tech companies, or that Criteo is insulated somewhat from those trends. Notably, Criteo has heavily pursued the mid-market – both publishers and advertisers — which may be helping. And it has a lot of recurring revenue, where advertisers choose to keep their retargeting campaigns “always on.”

Can Rocket Fuel really buy its way out of reliance on insertion order-based revenue?

Maybe. Rocket Fuel is one of the lucky ones, in that it went public and raised a bunch of money near the beginning of the most recent spate of digital advertising IPOs. As a result it had $203.5 million in the bank as of June 30, and that’s money it can use to acquire opportunistically. Few other ad networks – programmatic or otherwise – have those resources.

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1 Comment

  1. How does rocketfuel take the SAAS piece of X+1 and turn any of their revenues into a true SAAS and not Transactional valuation? The acquisition price seems like a standard advertising multiple of 3X and its not like the public markets are giving Rocket fuel a SAAS like multiple either, far from it. So while I hear all the benefits of SAAS valuations, I still don’t see many in Advertising. I will admit the criteo example being always-on should absolutely be viewed as a SAAS valuation in the ad ecosystem. I would love to get a laundry list of all ad tech companies who are successfully pricing as SAAS and list any confirmed SAAS valuations. Ad Tech pricing model evolution is a great topic.

    Congrats to both Rocketfuel and X+1, now lets prove SAAS pricing and valuations, it benefits all of us.