Rubicon Project’s Q1 Earnings Offer A Peek Into Ad Tech Tax

Rubicon-Q1-2016-earningsRubicon Project enjoyed a strong first quarter, growing overall advertising revenue by 26% year over year, while its cut of the revenue swelled even more. Non-GAAP net revenue reached $63.6 million, a 71% year-over-year increase.

That’s largely because Rubicon Project acquired the DSP Chango a year ago to form its Buyer Cloud, causing take rates to spike in year-over-year comparisons. Before the acquisition, its 2015 Q1 take rate was 18.6%, compared to 25.6% this Q1.

Chango, the acquisition behind the rising take rates, is a performance marketing DSP – a category associated with sky-high margins. When Rocket Fuel went public, for example, it ran into problems with its agency partners because they were able to see how little of their spend with Rocket Fuel was used to buy media.

But Rubicon, like Google, mushes together its numbers to make it harder to tease out the margins on different parts of its business. A growing take rate is the main signal of Chango’s impact on Rubicon’s previously sell-side-only business.

Huge margins in advertising aren’t sustainable, as awareness of the “ad tech tax” and a push for transparency from buyers and sellers pressures these companies to compress their margins.

Recognizing this, Rubicon reiterated a point it’s mentioned before when reporting earnings during the past few quarters: Long-term, it expects take rates to decline.

Part of that will be driven by increased transparency. It plans to roll out a transparent buying option for its Buyer Cloud customers, which includes retailers such as Overstock. This initiative, originally scheduled for early 2016, has been pushed back to the second half of the year.

“[Providing] different pricing alternatives for Buyer Cloud will lower the take rate, but with the offset of higher volume,” said Rubicon CFO and COO Todd Tappin.

Another factor affecting take rates is the “orders” business, which includes private marketplaces and automated guaranteed. Rubicon will take a smaller percentage on these transactions because it tends to have higher CPMs.

While strong take rates are great for Rubicon’s bottom line, investors also like to see top-line growth, or more overall advertising dollars going into Rubicon’s platform. Rubicon said it wasn’t clear where it was outpacing, meeting or falling short of industry growth.

“You’ve got to break that down into what’s desktop and what’s mobile. I’m not sure that we have a perfect answer,” Tappin said.

But the company did share that 30% of its business is in mobile and 70% of it is desktop.

That split puts mobile revenue share both above and below other public advertising companies. Since mobile revenue overall is growing, while desktop stagnates, according to a recent IAB Advertising Revenue report, companies need to shift to mobile in order to grow. On the high end, Facebook reported that 82% of its Q1 revenue was mobile. Criteo, in the middle, said mobile accounted for 47% of its 2015 revenue. In its Q4 earnings, Rocket Fuel’s “mobile, social and video” revenue declined, and it combined to account for a third of its revenue.

Rubicon’s stock dipped 6% in after-hours trading.

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