Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
This Annual Report on Form 10-K and related statements by the Company contain forward-looking statements, including statements based upon or relating to our expectations, assumptions, estimates, and projections. In some cases, you can identify forward-looking statements by terms such as "may," "might," "will," "objective," "intend," "should," "could," "can," "would," "expect," "believe," "design," "anticipate," "estimate," "predict," "potential," "plan" or the negative of these terms, and similar expressions. Forward-looking statements may include, but are not limited to, statements concerning the proposed acquisition of SpotX, Inc. ("SpotX," and such proposed acquisition the "SpotX Acquisition") or the anticipated benefits thereof; completion of the proposed SpotX Acquisition on anticipated terms and timing; statements concerning the potential impacts of the COVID-19 pandemic on our business operations, financial condition, and results of operations and on the world economy; our anticipated financial performance, including, without limitation, revenue, advertising spend, non-GAAP earnings (loss) per share, profitability, net income (loss), Adjusted EBITDA, earnings per share, and cash flow; theperformance; anticipated benefits expectedor effects related to result from the previously announcedour completed merger with Telaria, Inc. ("Telaria" and such merger the "Merger"); strategic objectives, including our focus on connected television ("CTV"), mobile, video, header bidding, mobile, video, Demand Manager, identity solutions, and private marketplace opportunities; investments in our business; development of our technology; industry growth rates for ad-supported CTV and the shift in video consumption from linear TV to CTV; introduction of new offerings; the impact of transparency initiatives we may undertake; the impact of our traffic shaping technology on our business; the effects of our cost reduction initiatives; scope and duration of client relationships; the fees we may charge in the future; business mix and expansion of our CTV, mobile, video, and private marketplace offerings; sales growth; client utilization of our offerings; our competitive differentiation; our market share and leadership position in the industry; market conditions, trends, and opportunities; user reach; certain statements regarding future operational performance measures including ad requests, fill rate, paid impressions, average CPM, take rate, and advertising spend; benefits from supply path optimization; and factorsother statements that could affect these and other aspects of our business.are not historical facts. 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. These risks
We discuss many of these risks and additional factors that could cause actual results to differ materially from those anticipated by our forward-looking statements under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this report and in other filings we have made and will make from time to time with the Securities and Exchange Commission, or SEC, including Quarterly Reports on Form 10-Q for 2020 and our Rule 424(b)(3) Prospectus filed with the SEC on February 13, 2020.2021. These forward-looking statements represent our estimates and assumptions only as of the date of the report in which they are included. Unless required by federal securities laws, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made. Without limiting the foregoing, any guidance we may provide will generally be given only in connection with quarterly and annual earnings announcements, without interim updates, and we may appear at
industry conferences or make other public statements without disclosing material nonpublic information in our possession. Given these uncertainties, investors should not place undue reliance on these forward-looking statements.
Investors should read this Annual Report on Form 10-K and the documents that we reference in this report and have filed or will file with the SEC completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
This Annual Report on Form 10-K includes data that we obtained from industry publications and third-party research, surveys and studies. While we believe the industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data. Such third-party data and our internal estimates and research are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in "Item 1A—1A. Risk Factors" in this Annual Report on Form 10-K. These and other factors could cause results to differ materially from those included in this report.
PART I
Item 1. Business
Overview and History
Magnite, Inc., formerly known as The Rubicon Project, Inc., ("we," or Rubicon Project (the "Company""us"), was formed on April 20, 2007 in Delaware and began operations in April 2007. The Company is headquartered in Los Angeles, California.
We provide aprovides technology solutionsolutions to automate the purchase and sale of digital advertising inventoryinventory.
On April 1, 2020, we completed a stock-for-stock merger with Telaria, Inc , a leading provider of connected television ("CTV") technology, creating what we believe is the world's largest independent sell-side advertising platform, offering a single partner for transacting globally across all channels, formats, and auction types.
On February 4, 2021, we entered into a Stock Purchase Agreement (the "SpotX Purchase Agreement") with RTL US Holding, Inc. ("RTL") to acquire 100% of the issued and outstanding shares of capital stock of SpotX, Inc., a Delaware corporation, for a purchase price equal to $560 million in cash plus 14 million shares of the Company’s common stock. SpotX is one of the leading platforms shaping CTV and video advertising globally.We believe the acquisition will create the largest independent CTV advertising platform in the programmatic marketplace, making it easier for buyers to reach CTV audiences at scale from industry-leading streaming content providers, broadcasters, platforms and sellers. device manufacturers.The SpotX Acquisition is subject to receipt of regulatory approvals and satisfaction of customary closing conditions and is expected to close in the second quarter of 2021.
Our platform features applications and services for sellers of digital advertising inventory, sellers, includingor publishers, that own and operate CTV channels, applications, websites mobile applications and other digital media properties, to manage and monetize their representatives, to sell their digital advertising inventory; applications and services for buyers, including advertisers, agencies, agency trading desks, and demand side platforms, ("DSPs"), to buy digital advertising inventory; and a marketplace over which such transactions are executed. We power a comprehensive, transparent, independent advertising marketplace that brings buyers and sellers together and facilitates intelligent decision making and automated transaction execution for the digital advertising inventory managed on our platform.at scale. Our clients include many of the world’s leading publishers of websitesbuyers and mobile applications and buyerssellers of digital advertising inventory. We believe ourOur platform reaches approximately one billion users globally.
Advertising inventory takes different forms, referredprocesses over 6 trillion ad requests per month allowing buyers access to as advertising units, including display, audio and video; is purchased and sold through real-time bidding which includes (i) direct sale of premium inventory, which we refer to as private marketplace ("PMP"), and (ii) open auction bidding, which we refer to as open marketplace, ("OMP"); and is accessed by users through different channels, including mobile web, mobile application, desktop, and connected television (“CTV”) as well as across various out-of-home channels, such as digital billboards.
Sellers of digital advertising inventory monetize their inventory by using our platform to access a global, marketscaled, independent alternative to "walled gardens," who both own and sell inventory and maintain control on the demand side.
We provide a full suite of buyers representing top advertiser brands. We also helptools for sellers decrease coststo control their advertising business and protect their brandsthe consumer viewing experience. These controls are particularly important to CTV sellers who need to ensure a TV-like viewing and user experience.advertising experience for consumers.
At the same time, buyersBuyers leverage our platform to manage their advertising spending and reach their target audiences on brand-safe premium inventory, simplify order management and campaign tracking, obtain actionable insights into audiences for their advertising, and access impression-level purchasing from thousands of sellers. We believe that our scale, platform features, and omni-channel offering makes us an essential partner for buyers.
The Company is headquartered in Los Angeles, California with a presence in New York, New York. We operate our business on a worldwide basis, with an established operating presence in North America, Australia and Europe, and a developing presence in Asia and South America. Our non-U.S. subsidiaries and operations perform primarily sales, marketing, and service functions.
COVID-19 Pandemic Impact on the Business
The COVID-19 pandemic and resulting global disruptions negatively affected our revenue, results of operations, cash flows, and financial condition. Our business depends on the overall demand for advertising and on the economic health of our current and prospective sellers and buyers. In response to the pandemic and associated economic challenges, a significant number of advertisers, in particular with respect to certain categories of advertising that were particularly impacted by the pandemic and resulting stay-at-home orders, reduced their advertising budgets, resulting in an overall decrease in advertising spend through our platform compared to our pre-COVID expectations. This decrease was particularly pronounced through the first half of the year, where we experienced a significant decline in our revenues compared to our expectations. Our revenue trends improved significantly during the third and fourth quarters of 2020 as our revenue returned to positive growth.
In addition to the United States, we have personnel and operations in the United Kingdom, Canada, France, Australia, New Zealand, Germany, Italy, Japan, Singapore, and Brazil, and each of these countries has been affected by the pandemic and taken measures to try to contain it. Our global workforce maintained a work from home policy for the entirety of the second quarter through year-end 2020 and this policy is expected to continue in the foreseeable future for the majority of our employees. We believe that our employees have been able to work productively during the time period in which our global offices have been shut down. However, to the extent we have extended work from home requirements, or that work patterns are permanently altered, it is unclear how productivity may be impacted in the long-term. We intend to approach returning to our
offices with caution and to prioritize the safety and health of our employees, while following the guidance set by local authorities and our landlords.
The economic health of our current and prospective buyers also impacts the collectability of our accounts receivable. Although our liquidity has not been significantly affected by the effects of COVID-19 to date, any downturn in economic conditions in the future may severely impact our liquidity as we may need additional time to collect from buyers, which may impact our ability to pay sellers.
Due to the substantial uncertainties associated with the COVID-19 pandemic, the extent to which the pandemic (and actions taken in response to it by governments, businesses, and individuals) will ultimately impact our business is currently unknown, and depends on various factors, many of which are outside of our control. Refer to Item 1A. "Risk Factors" for additional information related to this risk.
Industry Trends
Continued Shift Toward Digital Advertising
Consumers are rapidly shifting their viewing habits towards digital mediums and expect to be able to consume content seamlessly across multiple devices, including computers, tablets, smartphones, and CTVs whenever and wherever they want. Several factors, including the availability of high-speed broadband and mobile network infrastructure, penetration of internet-connected devices, a proliferation of online content sellers and a behavioral shift towards online and on demand viewing are driving robust growth in digital content consumption. The shift to digital has created opportunities for buyers and sellers of advertising inventory to improve return on advertising investment by using data to more accurately target and measure campaigns. As digital content consumption continues to proliferate, we believe the percentage of advertising dollars spent through digital channels will continue to grow.
Automation of Buying and Selling
Due to the size and complexity of the advertising ecosystem and purchasing process, manual processes cannot effectively manage digital advertising inventory at scale. In addition, both buyers and sellers are demanding more transparency, better controls and more relevant insights from their advertising inventory purchases and sales. This has created a need for software solutions, known as programmatic advertising, that automate the process for planning, buying, selling and measuring digital advertising across screens. Programmatic buying enables the use of real-time bidding technology that allows for the dynamic purchase and sale of advertising inventory on an impression-by-impression basis, which includes direct sale of premium inventory to a buyer, which we refer to as private marketplace ("PMP"), and open auction bidding, where buyers bid against each other in real-time auction for the right to purchase a publisher's inventory, which we refer to as open marketplace ("OMP"). Programmatic transactions complement a publisher’s direct sales force by enabling them to automate their sales process and improve workflow capabilities to increase productivity. These transactions also create additional revenue opportunities by enabling buyers and sellers to directly communicate and share data to deliver more valuable targeted advertising. Programmatic has become the dominant method of transacting for desktop and mobile inventory and we expect it to continue to grow as a percentage of CTV advertising.
Convergence of TV and Digital
We expect CTV to be a significant driver of our revenue growth. CTV refers to the viewing of digital content on internet connected televisions, including through stand-alone streaming devices, gaming consoles and smart TV operating systems.
CTV viewership is growing rapidly and the pace of adoption is accelerating the transition of linear television to CTV programming. According to a November 2020 poll conducted by the Interactive Advertising Bureau, approximately 60% of US advertisers planned to shift ad dollars from linear TV to either CTV or OTT in 2021. eMarketer forecasted that advertisers will spent an additional $1.16 billion on programmatic CTV video ads in 2020 compared with 2019, and incremental spending in 2021 will increase to $2.37 billion. The adoption of CTV has disrupted the traditional linear TV distribution model, as eMarketer estimates that approximately 31.2 million U.S. households have "cut-the-cord" (i.e., canceled a pay TV service and continued without it) as of the end of 2020, and this number is expected to increase to close to 50% of all U.S. households by the end of 2024. This disruption has created new options for consumers and new economic opportunities for content sellers to compete with traditional linear TV.
Despite the growth in CTV viewership, the CTV advertising market, in particular programmatic advertising, is still in its early stages. Historically, the largest streaming applications have been subscription-based, and CTV sellers with ad-supported models have been slower to adopt programmatic solutions compared to desktop and mobile sellers due to a variety of technical and business reasons.
As the number of CTV channels continues to proliferate, we believe that ad-supported models or hybrid models that rely on a combination of subscription fees and advertising revenue will continue to gain traction. Furthermore, as the CTV
market continues to mature, we believe that a greater percentage of CTV advertising inventory will be sold programmatically, similar to trends that occurred in desktop and mobile.
Although the COVID-19 pandemic caused temporary headwinds related to demand challenges, we believe that the pandemic and resulting shelter-in-place orders have accelerated these positive long-term CTV trends. With people spending more time at home, we have seen a large increase in viewership on CTV. This increase in viewership has the potential to create long-term changes in viewing habits. Many CTV providers have committed to significant increases in investment in quality content, which we believe will further drive increases in viewership. At the same time, macroeconomic challenges are driving consumers away from pay subscriptions towards ad supported models. Prolonged macroeconomic challenges may lead CTV advertisers and sellers to more readily embrace programmatic advertising as they look to create economic efficiencies and reduce costs.
We believe that as streaming continues to become mainstream and ad supported models become more prevalent, brand advertisers that look to engage with streaming viewers will continue to shift their budgets from linear to CTV. As such, we expect CTV to be a significant driver of our revenue growth for the foreseeable future. We expect the pending acquisition of SpotX to further fuel this growth.
Identity Solutions
A number of participants in the advertising technology ecosystem have taken or are expected to take action to eliminate or restrict the use of third-party cookies and other primary identifiers that have historically been used to deliver targeted advertisements. For instance, Google has announced plans to fully eliminate the use of third-party cookies by January 2022, while Apple has further restricted the use of mobile identifiers on its devices. We believe that the elimination of third-party cookies has the potential to shift the programmatic ecosystem from an identity model powered by buyers that are able to aggregate and target audiences through cookies to one enabled by sellers that have direct relationships with consumers and are therefore better positioned to obtain user data and consent for implementing first party identifiers. We believe that our platform and scale position us well to provide the infrastructure and tools needed for a publisher-centric identity model to succeed, and we are already enabling sellers to create audience segments with their first-party data. In addition to actively working with sellers to develop solutions that could leverage their first party data, we are leading efforts through Prebid.org, with industry support, to create standardized open identity solutions that ensure a smooth transition to a cookieless environment, and offer an alternative to proprietary solutions. Prebid.org is an independent organization that we co-founded, which is dedicated to promoting fair, transparent open source solutions for the programmatic ecosystem. We are also participating in the Wc3 Web standards initiatives, which are being led by Google Chrome, to create anonymized advertising segments. We have contributed several product and design ideas to this process and expects to start production prototypes in the first half of 2021. Finally, we are also actively supporting single sign-on initiatives such as Universal ID 2.0 (UID) and other industry efforts.
We support industry privacy initiatives and believe that the next generation of identity solutions need to be open and ubiquitous, with consumer privacy, transparency and control at the core. We further believe that these solutions will ultimately lead to greater trust and consumer confidence in digital advertising, which will be positive for the advertising ecosystem in the long term. In the short term, however, these changes could create some variability in our revenue across certain buyers or sellers, depending on the timing of changes and developed solutions.
Supply Path Optimization
Supply Path Optimization ("SPO") refers to efforts by buyers to consolidate the number of vendors with which they work to find the most effective and cost-efficient paths to procure media. SPO is important to buyers because it can increase the proportion of their advertising ultimately spent on working media, with the goal of increasing return on their advertising spending, and can help them gain efficiencies by reducing the number of vendors with which they work in a complex ecosystem. We believe we are well positioned to benefit from SPO in the long run as a result of our transparency, our broad and unique inventory supply across all channels and formats, including CTV, buyer tools, such as traffic shaping that reduce the cost of working with us, and our brand safety measures.
Header Bidding and Data Processing
Header bidding is a programmatic technique by which sellers offer inventory to multiple ad exchanges and supply side platforms, such as our platform, simultaneously. Header bidding has been rapidly adopted in recent years in the desktop and mobile channels, and while the rise and rapid adoption of header bidding increased revenue for sellers, it has also created new challenges and technical complexities. Header bidding has led to a significant increase in the number of ad impressions to be processed and analyzed through our platform as well as by DSPs, which can lead to increased costs if not properly addressed.
We have invested in technology solutions to help manage the increased infrastructure costs of header-bidding while increasing our access to valuable seller inventory.
How We Generate Revenue
We generate revenue from the use of our platform for the purchase and sale of digital advertising inventory. We also generate revenue from the fee we charge clients for use of our Demand Manager product, which generally is a percentage of the client's advertising spending on any advertising marketplace.
Digital advertising inventory is created when consumers access sellers' content. Sellers provide digital advertising inventory to our platform in the form of advertising requests, or ad requests. When we receive ad requests from sellers, we send bid requests to buyers, which enable buyers to bid on sellers’ digital advertising inventory. Winning bids can create advertising, or paid impressions, for the seller to present to the consumer. The volume of paid impressions measured as a percentage of ad requests is referred to as fill rate. The price that buyers pay for each thousand paid impressions purchased is measured in units referred to as CPM, or cost per thousand.
The total volume of spending between buyers and sellers on our platform is referred to as advertising spend. We keep a percentage of that advertising spend as a fee, and remit the remainder to the seller. The fee that we retain from the gross advertising spend on our platform is recognized as revenue. The fee earned on each transaction is based on the pre-existing agreement between us and the seller and the clearing price of the winning bid. We also refer to revenue divided by advertising spend as our take rate.
Historically, our business primarily focused on supporting desktop display advertising. In 2013 and 2014, due in part to the rapid adoption and growth in smartphone use, we increased our focus on supporting advertising across mobile platforms, including mobile web and mobile applications. In 2016, we began to focus further on development of our video solution, helping grow our product footprint to allow our sellers to sell video advertising inventory across desktop or mobile platforms, and include instream, outstream and mobile-specific formats such as interstitials.
In 2016 we also introduced our header bidding solution. Header bidding is a programmatic technique where publishers offer inventory to multiple ad exchanges, such as Rubicon Project, at the same time. While the rise of header bidding increased revenue for sellers, it also created new challenges. Managing multiple exchanges on the page is technically complex, and in the early days of header bidding, this complexity was exacerbated by the lack of independent technology standards. In 2017, we began to address these issues through our support of Prebid, a free and open source suite of software products designed by advertising community developers to enable publishers to implement header bidding on their websites and from within their apps. Despite Prebid’s adoption by a number of the world’s largest sellers, deploying and customizing it still requires dedicated technical resources. In the second quarter of 2019, we announced the beta program for Demand Manager. Demand Manager helps sellers effectively monetize their advertising inventory through configuration tools and analytics to make it easier to deploy, configure, and optimize Prebid-based header bidding solutions. In October 2019, we acquired RTK.io, a provider of header bidding solutions that
has much in common with our Demand Manager product, including a foundation in Prebid. RTK’s technology and team enables Rubicon Project to extend the strategy we introduced with the launch of Demand Manager. We plan to integrate the two solutions to extend our Demand Manager product portfolio and client base, and to add talented header bidding experts and Prebid developers to our team. We believe that adoption of these tools will further strengthen our relationship with sellers and contribute to our future revenue growth. We charge sellers a fee for Demand Manager that is based on all of the sellers’ advertising spending managed through Demand Manager, whether the actual inventory monetization runs through our exchange or otherwise.
Header bidding has dramatically increased the volume of bid requests sent to buyers, increasing buyers’ processing costs and making it more difficult for them to find the impressions they want. To help address this challenge, in 2017, we acquired nToggle, Inc. ("nToggle"), a provider of technology to make it easier and more cost effective for programmatic buyers to find the inventory they are looking for among the billions of bid requests they receive each day. nToggle technology utilizes analytical and data science techniques to help shape real-time bidding requests, optimize traffic, and reduce the number of duplicates and irrelevant bid requests DSPs must process. The technology also helps us manage our infrastructure costs and increase our aggregate ingestion capacity by filtering out impressions that are not in demand before they are processed through the bid stream. In 2019, we incorporated this technology into our software, which provides additional efficiencies in managing auction volumes. The technology also allows us to optimize traffic toward DSPs and buyers based on their unique, historical buying behaviors, leading to an overall expansion of relevant bid requests to DSPs unable or unwilling to process the full stream of real-time bidding requests available from our platform.
In 2018, we made first-price our default auction dynamic for header bidding due to increased competition inherent in header bidding, which led other exchanges to submit bids on a first-price basis, rendering our second-price auction methodology less competitive. This allowed us to improve the rate at which we win header-bidding auctions. To support buyers that needed some time to adapt their systems and bidding strategies to first-price auction dynamics, or may not want to make those adaptations themselves, we developed our Estimated Market Rate (“EMR”) feature. This feature uses algorithms that monitor existing market conditions against our dataset of auction outcomes to look for opportunities to reduce the amount of the bid that we pass through to the downstream auction on behalf of our winning bidder, while maintaining high fill rates. This is intended to help buyers avoid overpaying for impressions while providing sellers with more stable, predictable demand. While most exchanges had already transitioned to first price auction dynamics, the largest exchange—Google Ad Manager—only transitioned to first price auction dynamics in September 2019.
On December 19, 2019, we announced a stock-for-stock merger (“Merger”) with Telaria, Inc., (“Telaria”), which will create a combined company offering a single partner for transacting CTV, desktop display, video, audio, and mobile inventory across all geographies and auction types. We believe the combination of Rubicon Project’s programmatic scale and expertise with Telaria’s leadership in CTV technology and premium partnerships, will create the world’s largest independent sell-side advertising platform with scale, capabilities, and solutions exceeding those offered by competitors. Together, the combined company will enable thousands of publishers to connect with hundreds of buyers and brands, creating a global, independent alternative to closed players. The combination will provide additional engineering and sales resources as well as deeper financial assets to seize the opportunity of CTV, the fastest-growing digital medium. We believe the combined company will be an essential omni-channel partner for buyers to reach target audiences, optimizing the supply path with industry-leading transparency, robust support for identity solutions and brand-safe premium inventory. In addition, Rubicon Project and Telaria have complimentary domestic and international footprints that will create a combined broader global reach.
Upon completion of the Merger, which is expected to close in early April 2020, each share of Telaria common stock issued and outstanding as of the effective time of the Merger will be converted into the right to receive 1.082 shares of Rubicon Project common stock. Based on the number of shares of Telaria and Rubicon Project common stock outstanding and reserved for issuance as of February 11, 2020, we estimate that former holders of Telaria common stock will own approximately 47.6% and pre-merger holders of Rubicon Project common stock will own approximately 52.4% of the common stock of the combined company on a fully diluted basis.
We operate our business on a worldwide basis, with an established operating presence in North America and Europe and a developing presence in Asia, Australia, and South America. Substantially all of our assets are U.S. assets. Our non-U.S. subsidiaries and operations perform primarily sales, marketing, and service functions.
Our Industry and Industry Trends
Continued Shift Toward Digital Advertising
The programmatic digital advertising market continues to experience growth. In October 2019, MAGNA estimated that the global programmatic market (excluding search and social) will grow from $44 billion in 2019 to $75 billion by 2023, which represents a 14% compound annual growth rate over that period. The expansion of the growth is continuously driven by the market
need for automated buying and selling of advertising inventory, through various channels and across all formats. The increased delivery of content to users digitally over the Internet or through applications, as opposed to analog and print media, such as newspapers, magazines, broadcast radio, and television, has created an opportunity for buyers of advertising inventory to improve return on advertising investment by targeting audiences more accurately using data-driven strategies and delivering more relevant advertising in real time on multiple screens. Buyers are able to utilize various technologies to analyze data relating to return on investment, demographics, user behavior, location, and other attributes that enable them to create and deliver targeted advertisements to users, which helps achieve specific advertising goals. Technological advances have also enabled sellers to sell their inventory on an impression-by-impression basis, as well as in bulk, making it easier for sellers to enhance the monetization of their inventory. Therefore, advertising is continuing to shift with content to digital media.
Continued Shift to Mobile
An ongoing trend in the digital advertising industry is automating inventory transactions through new and developing channels, including mobile, which has market growth rates exceeding those of the desktop channel. According to MAGNA estimates, mobile advertising is a $26 billion global market in 2019 that is expected to increase to $56 billion by 2023, producing a compound annual growth rate of 22%. Consistent with industry trends, our mobile business is growing faster than desktop. Our mobile revenue increased $22.5 million, or 34%, for the year ended December 31, 2019, compared to the year ended December 31, 2018, while our desktop revenue increased 16% during the same period. Our mobile business consists of two components, mobile web and mobile applications. Initially our mobile business was built upon mobile web, which is more similar to our desktop business, but our mobile application business has become the growth driver behind our mobile business and has shown growth rates in excess of industry projections. Revenue from mobile applications is approximately half of our mobile business.
In recent years, we have seen an industry-wide slowdown in the growth rate for traditional desktop advertising, and the growth rate for this portion of the market is expected to flatten in future years. According to MAGNA, programmatic desktop advertising is expected to grow at a 1% compound annual growth rate over the 2019-2023 period. This results from the market shift to mobile channels and other emerging formats noted above. These market factors still present long-term growth opportunities as we pursue spend consolidation on our platform; however, in the near term, these trends are dampening our overall growth rate, because desktop advertising continues to be a meaningful part of our core business.
Continued Shift to Video, Including CTV
Another important trend in the digital advertising industry is automating inventory transactions across all formats. We enable an omni-channel approach to expand beyond traditional display advertising and have observed growth trends in emerging formats like video and audio. According to MAGNA estimates, video advertising was $25 billion in 2019 and is projected to increase to $57 billion in 2023, with a compound annual growth rate of 22%. We expect video to be a meaningful driver of our future growth with a longer-term opportunity in connected television, or CTV, advertising as more linear TV budgets shift to programmatic. We expect the pending merger with Telaria will help us access these budgets.
Supply Path Optimization
Supply Path Optimization ("SPO") refers to efforts by buyers to consolidate the number of vendors they work with to find the most effective and cost-efficient paths to procure media. This practice emerged in 2018 and continues to gain momentum. SPO is important to buyers because it can increase the proportion of their advertising ultimately spent on working media, with the goal of increasing return on their advertising spending, and can help them gain efficiencies by reducing the number of vendors they work with in a complex ecosystem. Largely because of header bidding, buyers are able to choose the best partner (or a small number of partners) without limiting the available inventory to bid on. There are a number of criteria that buyers use to evaluate supply partners, including transparency, cost, quality of inventory, privacy standards, brand safety standards, including compliance with ads.txt and similar industry standards, and fraudulent traffic prevention policies. We believe we are well positioned to benefit from supply path optimization in the long run as a result of our broad inventory supply, buyer tools such as traffic shaping, our pricing tools, which reduce the overall cost of working with us, our transparency, and our brand safety measures.
Complicated and Manual Workflow for Direct Buying and Selling of Digital Advertising Inventory
Due to the size and complexity of the advertising ecosystem and purchasing process, manual processes cannot effectively manage digital advertising inventory at scale. In addition, both buyers and sellers are demanding more transparency, better controls and more relevant insights from their advertising inventory purchases and sales. Buyers and sellers benefit from a platform that enables them to leverage the targeting capabilities of their proprietary data assets. This has created a need to automate the digital advertising industry and to simplify the process of buying and selling advertising inventory. A variety of factors makes the digital advertising ecosystem highly complex and challenging to automate, including the perishable nature of the inventory, impression-level user matching, brand safety and inventory concerns, concerns about maintaining a positive user experience, large volumes of
data, lack of standardization in the industry, and increasing privacy demands. We believe we are well-positioned to help our buyers and sellers address these challenges.
Rubicon Project:Magnite: Competitive Strengths of Our PlatformPlatform. Key competitive strengths of our platform include:
Leadership in CTV
Our platform has been strategically built to meet the Digital Advertising Marketplaceunique requirements of CTV sellers. Many of these sellers have their roots in linear television and it is important that established business practices in television advertising can be translated to programmatic CTV advertising. For instance, our "ad-pod" feature provides long-form content sellers with a tool analogous to commercial breaks in traditional linear television, so that they can request and manage several ads at once from different demand sources, in a single ad-pod. In addition, we provide dynamic ad insertion to serve live streaming events, audio normalization tools to control for the volume of an ad relative to content, frequency capping to avoid exposing viewers to repetitive ad placements, and creative review so that a publisher can review and approve the ad units being served to its properties.
We have invested significant time and resources cultivating relationships with CTV sellers and have built a specialized team of CTV experts across our engineering and sales functions to support our clients and evangelize the benefits of CTV advertising. In addition, for certain larger CTV sellers, we may build custom features or functionality to help drive deeper adoption.
Rubicon Project was founded to address the inherent challenges associated with the digital advertising ecosystem. Buyers can direct their spending towards the impressions that are of most value to them based on demographics, pricing, timing, and other targeting objectives. Sellers can improve revenue per impression, while adhering to their own specific rules around advertising that is permissible on their websites and mobile applications.
Scaled Omni-Channel Platform
ServingWe offer a Broad Universe of Buyers and Sellers Across a Full Spectrum of Inventory Types, Advertising Units, and Channels Creates Network Effects
By accommodating a full spectrum of digital advertising inventory through various transaction types across multiple channels, our solutionscaled omni-channel platform that brings value to both buyers and sellers. Our sellers of ad inventory. For buyers, we offer a single omni-channel partner to reach target audiences globally across all channels, including CTV, mobile, desktop, and digital out-of-home, and formats, including video, display, and audio. For sellers, we partner as a one stop shop where they can sell digital advertising across all of their properties, regardless of device or format, and gain instant access to the world’s largest automated digital advertising buyers including hundreds of DSPs with the flexibility to sell their advertising inventory in an automated fashion on an impression-by-impression basis, such as with OMP transactions, in bulk, or in PMP transactions pursuant to arrangements directly between the seller and the buyer. Our buyers gain the ability to fulfill their audience needs in a cost-effective manner. Largebasis. We believe large numbers of diverse sellers on our platform attract more buyers and vice versa, resulting in a self-reinforcing network effect that adds value for all our clients and creates a strongstickier platform for growth.solution.
Private Marketplace Solutions Provide Unique Access to Quality Supply and Facilitate Transactions
A significant portion of premium inventory is purchased and sold through PMPs.PMPs, in particular with respect to CTV. Some sellers will continue to rely on their own sales forces for sales of premium inventory, but will benefit from automation to better price, match, and place campaigns, and to automate manual operations such as ad trafficking, quality assurance, and billing and collections. Our capabilities support sales functions rather than replacing them, which eliminates friction in the sales process. Buyers and sellers can also leverage their first-party data assets and third-party data assets in our platform to increase the value of sellers' inventory and the precision of buyers' targeting efforts.
Big Data Analytics and Machine-Learning Algorithms
Algorithms; Bid Filtering
A core aspect of our value proposition is our big data and machine-learning/artificial intelligencemachine-learning platform that is able to discover unique insights from our massive data repositories containing proprietary information on ad requests, bid requests, bid responses, and served advertisements.repositories. Our systems collect and analyze variable piecesa myriad of information such as pricing of advertisements, historical clearing prices, bid responses, what types of ads are allowed on a particular website, which sellers’ websites a buyer prefers, whatpreferences, ad formats are available to be served, advertisement size and location,, user location, which users a buyer wants to target,audience preferences, how many ads the user has
seen, browser or device information, and sellers’ proprietaryfirst party data about users. Our access to data puts us in a unique position to develop differentiated insights to help both buyers and sellers, and we have developed proprietary machine-learning algorithms that analyze trillions of these data points to enable our solution to make data-driven decisions in real time and to process high volumes of bid requests and responses.sellers. Our solution is constantly self-improving as we process more volume and accumulate more data, which in turn helps make our machine-learning algorithms more intelligent and contributes to higher-quality matching between buyers and sellers. This data also fuels our bid filtering technology, allowing us to more aggressively block traffic that is not likely to monetize. We believe that our traffic optimization toward our DSP partners and buyers coupled with more aggressivebid filtering of non-monetizable traffic improves return on investment for buyers and increases revenue for sellers, which in turn attracts more buyers and sellers to our platform. We believe this self-reinforcing dynamic contributes to theplatform creating a dual network effects described above, creatingeffect that makes our platform stickier. These capabilities also help us manage the costs associated with the high volumes of ad requests we receive.
Identity Solutions
We offer identity solutions that help buyers and sellers create better matches and increase advertising ROI and the value of the underlying impression.Our tools enable sellers to create audience segments based on first-party data, which makes their advertising inventory more valuable to buyers looking to achieve specific campaign goals.In addition, our technology is integrated with a strongnumber of third party data, attribution and identity vendors, allowingbuyers and sellers to leverage these solutions directly through our platform without the need for growth.multiple vendor contracts.
Header Bidding and Demand Manager Solutions
While thereWe are still some proprietary solutionsintegrated with declining usage, there are three primary header bidding solutions with broad-based adoption—one provided byall of the major header-bidding standards, including Prebid.org, which we co-founded, one provided by Amazon (called Amazon A9) and one providedas well as the solutions offered by Google (called Google EB), and we are integrated with all three.Amazon. We believe the various header bidding alternatives we offer, our buyer reach and scale, our buying efficiency, and our machine learningmachine-learning capabilities put us in a strong position to compete for seller impressions monetized through header-bidding solutions, and we expect each of these header bidding solutions to deliver a meaningful volume of impressions. We have also launched Demand Manager, a software solution that helps publishersdesktop and mobile sellers manage all of their header-bidding advertising inventory, regardless of exchange,who wins the impression, for a fee based on a percentage of that advertising spending. Demand Manager providesWe believe that adoption and proliferation of these tools will further strengthen our relationship with sellers and contribute to our future revenue growth.
Transparency and Controls
We generate revenue each time an intuitive user interfaceimpression is monetized on our platform based on a simple and transparent fee structure established with our publisherpartners, and do not collect any fees directly from buyers.Our clients direct the sale and management of ad inventory through our platform, including the ability to define supply hierarchies and demand tiers, set minimum price floors, and establish advertiser and category level blocked and allowed lists.We provide sellers with detailed analytics, which allows them to effectively monitor buying patterns and make real-time changes to take advantage of market dynamics and maximize their yield.
Self-Service Model
We offer a self-service model that lets sellers access our platform without extensive involvement by our personnel.This model allows us to scale efficiently and grow our business at a faster pace than the growth of our sales and support organization. As a result, we are able to achieve a high degree of operating leverage, which positions our business for growing profitability.
Buyer Tools
We have a suite of buyer tools designed to improve ROI for buyers and help them meet their campaign strategies.Our Direct Connect offering allows agency holding companies and major brands to create their own private label marketplaces and establish direct connections with sellers through our platform, while our custom auction packages provide buyers with a setversatile and cost effective way of tools that manages Prebidcurating and targeting open source software. Itmarket inventory based on categories such as audience, context, and viewability.In addition, our innovative bid shading technology, Estimated Market Rate, helps publishers to better monetize their advertising inventory through configuration tools and analytics to make improvementsbuyersbid more effectively in their yield, more efficiently than they do using their own engineering resources or tools or other third-party solutions.a first price auction environment.
Independence
We are fully aligned with the interests of our publisher clients.Independence
Unlike some large industry participants, we do not have our own media properties that compete for advertising spending with our sellers. Our independence means Therefore, we are agnostic and have none of theno preference towards delivering demand to any specific publisher.In addition, because we do not offer a demand side platform, we are able to avoid inherent conflicts of interests characterizing competing exchangesinterest that sell their own inventory, givingexist when serving both the buy- and sell-side.
Magnite: Growth Strategies. The key elements to our clients an important alternativelong-term growth strategy include:
Focus on CTV
We expect CTV to monetizebe the biggest driver of our growth. As streaming video continues to become mainstream and acquire inventory without subsidizing their competitors.
Growth Strategies
Two powerful market trends are affecting our business. First, our exchange volume historically consisted largely of OMP transactions conducted through an ad server waterfall for desktop display advertising, but this business is being displaced by other ad units, channels, and transaction types. Second, the ad tech market is demandingad-supported models become more efficiency and lower cost from intermediaries like us, andprevalent, we believe market sharebrand advertisers will consolidate. Our strategy forcontinue to shift their budgets from linear
television to CTV. We plan to invest significant resources in technology, sales and support related to our CTV growth ininitiatives. Consistent with this context isgrowth objective, on February 4, 2021, we entered into an agreement to operateacquire SpotX, a high-volume, low cost per transaction exchange,leading platform shaping CTV and focus on high-growth ad units, channelsvideo advertising globally. We expect the pending SpotX Acquisition to accelerate our CTV growth.
Supply Path Optimization
As described above, SPO refers to efforts by buyers to consolidate the number of vendors with which they work to find the most effective and transaction types.
| |
• | Increase volumes and efficiencies and reduce transaction costs on our exchange. We aim to increase our transaction volumes and to enhance the operational efficiency and value to clients of our exchange, enabling buyers and sellers to achieve their campaign and monetization objectives efficiently and to streamline the number of exchanges with which they work. While we were able to increase take rates slightly during the first half of 2018, our take rate growth in 2019 remained relatively flat since the fourth quarter of 2018, and we do not expect significant further increases in take rates, so any increase in revenue will have to come from volume increases rather than take rate increases. While we work to increase the volume of transactions on our exchange and compete more effectively, we must operate efficiently to relieve the pressure on our margins and cash resources that has resulted from our fee reductions and increased infrastructure required to support the increased volume of bid requests generated through header bidding and the increased volume of transactions that our growth plans require. We believe that increasing our revenue through transaction volume while still offering competitive fees to our buyers and sellers, paired with cost reduction measures we undertook in 2018 and ongoing cost discipline, will establish us as a lower cost exchange.
|
| |
• | Increasing Inventory Supply. Increased transaction volume begins with ad requests from sellers, which represent the inventory available for buyers to purchase on our platform. Our plan for increasing our inventory volumes includes active pursuit of more direct relationships with sellers, particularly of mobile, video, and PMP impressions, which are areas of industry growth, and expanding seller tools, including through Demand Manager. In particular, benefits from successful outcomes in the SPO process could drive meaningful increases of ad spend across our platform. Because our business has many fixed costs, increases in ad spend volume createcost-efficient paths to procure media. We believe we are well positioned to benefit from SPO due to the factors described above and that it presents an opportunity to disproportionately improve net income.
|
| |
• | Bid Filtering. We continue to improve our fill rate by using the technology we acquired from nToggle to filter out low-quality impressions so that a higher proportion of the ad requests on our platform are of interest to our buyers, and to analyze market dynamics to optimize impressions toward our buyers, enabling them to identify and purchase the impressions they want more efficiently. In addition, we expect the nToggle filtering technology, which we have incorporated into our platform, to help us and our buyers control the processing costs associated with higher volumes of ad requests and bid requests.
|
| |
• | Platform Enhancements. We are working on a number of platform innovations and enhancements designed to improve the value to clients and the operational efficiency of our platform. For example, new technology and techniques will improve upon our market-leading position in inventory and ad quality, responding to market demands for increased brand security and protection against fraud. Cookieless targeting, including device-based user identifiers, will improve audience identification and match rates. Audience-based selling and enhanced measurement and viewability technologies will improve inventory values for sellers and campaign effectiveness for buyers. Impression filtering and virtual machine support will improve the efficiency and effective capacity of our data processing infrastructure.
|
Our business historically consisted largely of OMP transactions conducted through an ad server waterfall for desktop display advertising, which has declined significantly. In order for us to growcapture market share and compete effectively,increase the volume of advertising spend on our platform. To capitalize on SPO opportunities, we musthave invested in our buyer focused sales team to pursue more direct relationships with advertisers and agencies.
Identity Solutions
As described above, we believe that the elimination of third party cookies has the potential to shift the programmatic ecosystem from an identity model powered by buyers that are able to aggregate and target audiences through cookies to one enabled by sellers that have direct relationships with consumers and are therefore better positioned to obtain user data and consent for implementing first party identifiers. As the largest independent supply side platform, we believe we are well positioned to take a leadership position in driving open identity solutions that will benefit buyers and sellers on our platform.
Increase Efficiencies on our Exchange
We aim to increase the operational efficiency of our platform, so as to enable buyers and sellers to achieve their campaign and monetization objectives in a cost-effective manner. Our solution is constantly self-improving as we process more volume and accumulate more data, which in turn helps make our machine-learning algorithms more intelligent and contributes to higher quality matching between buyers and sellers. We are continuing to invest in traffic optimization and bid filtering technology to allow us to monetize a higher proportion of the ad requests on our platform, which reduces costs for us as well as the process costs for buyers. We believe these cost savings make our platform more attractive to buyers, which in turn improves revenue opportunities for sellers.
Increasing Seller Inventory
In order to increase the transaction volume on our platform we are continuously looking to add new high quality sellers to our platform. In addition, we are seeking to expand our existing relationships with sellers to increase our share of their inventory, in particular in the CTV and OTT space where inventory is controlled by fewer sellers. Our plan for increasing our inventory volumes includes establishing and deepening our direct relationships with sellers, including through custom integrations, expanding our seller tools, capitalizing on our omni-channel capabilities and leveraging our header bidding integrations, including through Demand Manager.
Expand our International Footprint, Especially in Asia and South America
With established operating presence in North America, Australia and Europe, and a developing presence in Asia and South America, we serve buyers and sellers on a global basis. We plan to continue to focus on areas of the digital advertising business that are experiencingexpand our international presence and make additional investments in sales, marketing and infrastructure to support our long-term growth and to adapt to evolutionposition ourselves for expected increases in the penetration of programmatic advertising globally. We expect programmatic advertising to grow at different rates in different geographic markets, and are constantly evaluating new markets with a strategy to use our existing infrastructure and adjacent sales offices or by expanding our infrastructure footprint and placing personnel directly in those markets.
Continue to Innovate and Enhance our Platform
We are working on a number of platform innovations and enhancements designed to improve the value to our clients. We intend to invest in new features that facilitate the creation of first-party publisher segments, improve upon our traffic optimization and bid filtering, enhance our brand safety controls, and help sellers to optimize their yield. For example, we recently launched the open beta of Unified Decisioning, which gives sellers the tools and controls to define when and how direct sold and programmatic demand should compete. The solution works alongside all major ad servers so that the optimal ad set is chosen taking into consideration both direct and programmatic deal priority and yield while ensuring publisher’s business rules, including mobile, video (both traditional web-based videofrequency capping and connected television), identity solutions, and header bidding.competitive separation, are enforced.
Technology and Development
To support a majority of our solution,non-CTV transactions, we have developed a globally distributed infrastructure hosted at data centers in the U.S., Europe, and Asia that run our proprietary software;software. Our CTV transactions run primarily on a cloud-based infrastructure. These two approaches optimize the type of traffic we have also begun using cloud-based infrastructure, and we expect that to increase. Our hardware and cloud-based services provide significant scale and are programmedhandle - hosted data centers for high-frequency, low-latency transactions. Their massive scale supportlow-
latency transactions and cloud-supported for lower frequency transactions subject to more volatile viewing patterns, for example CTV prime-time viewing spikes.
Our approach supports the volume, diversity, and complexity of buyers’ bids on sellers’ advertising inventory to increasebidding patterns, which increases market liquidity, and achieve improved auction pricing using our machine-learning algorithms. This infrastructure is supported by a real-time data pipeline, a system that quickly moves volumes of data generated by our business into reporting and machine learning systems that allow usage both internally and by buyers and sellers. It also is supported by a 24-hour Network Operations Center, which provides failure protection by monitoring and rerouting traffic in the event of equipment failure or network performance issues between buyers and our marketplace.
We use matchmaking algorithms with both historical and real-time data to drive automated decision-making processes.liquidity. Bid efficiency algorithms provide bid prediction (i.e., which buyers are most likely to bid on a given impression) and throttling (i.e., the volume of bid requests a given buyer can process), to improve infrastructure load and execute transactions efficiently by only sending bid requests to those buyers of advertising inventory who can handle the volume and are likely to respond.
OurThis infrastructure is supported by real-time data pipelines, a system that quickly moves volumes of data generated by our business into reporting and machine-learning systems that allow usage both internally and by buyers and sellers. It also is supported by a 24-hour Network Operations Center, which provides failure protection by monitoring and rerouting traffic in the event of equipment failure or network performance issues between buyers and our marketplace, and our core technology and development team, which is responsible for the design, development, operation, and maintenance of our platform. Our technologyplatform, and employs an agile development process is based on agile development methodologies andthat emphasizes frequent, iterative, and incremental development cycles. Within the technology and development team, we have several highly aligned, independent sub-teams that focus on particular features of our platform. Each of these sub-teams includes engineers, quality assurance specialists, and product developers responsible for the initial and ongoing development of each sub-team’s feature. In addition, the technology and development team includes our technical operations sub-team, which is responsible for the performance and capacity of our platform.
We believe that continued investment in our platform, including its technologies and functionalities, is critical to our success and long-term growth.
Sales and Marketing
We market our solution to buyers and sellers through a global direct sales teams that operate from various locations around the world. These teams leverage market knowledge and expertise to demonstrate the benefits of advertising automation and our solution to buyers and sellers. We deploy a professional services team with each seller integration to assist sellers in extractinggetting the most value from our solution. Our client services teams work closely with clients to support campaigns. Our buyer team focuses on the unique challenges and priorities of buyers and is separately managed in order to properly represent this important client group. WeOur marketing initiatives are focused on managing our brand, increasing market awareness, and driving advertising spend to our platform. To do so, weWe often present at industry conferences, create custom events, and invest in public relations. In addition, our marketing team advertises online, in print, and in other forms of media, creates case studies, sponsors research, writes whitepapers, publishes marketing collateral, generates blog posts, and undertakes client research studies.
Competition
Our industry is highly competitive. Overall digital advertising spending is highly concentrated in a small number of very large companies that have their own inventory, including Google, Facebook, Comcast, Verizon, AT&T and Amazon, with which we compete for digital advertising inventory and demand. These companies are formidable competitors due to their huge resources and direct user relationships, and will become even more dominant as third-party cookie use decreases. Despite the dominance of large companies, there is still a large addressable market that is highly fragmented and includes many providers of transaction services with which we compete, including supply side platforms, or SSPs, and advertising exchanges. As we introduce new offerings, as our existing offerings evolve, or as other companies introduce new products and services, we may be subject to additional competition. There has been rapid evolution and consolidation in the advertising technology industry, and we expect these trends to continue, thereby increasing the capabilities and competitive posture of larger companies, particularly those that are already dominant in various ways, and enabling new or stronger competitors to emerge. There are many ways for buyers and sellers of digital advertising inventory to connect and transact, including directly and through many other exchanges, and advertising inventory buyers are increasingly demanding more transparency and lower transaction costs and establishing relationships directly with sellers of advertising inventory, which puts significant pressure on us. Our offering must remain competitive in terms of scope, ease of use, scalability, speed, data access, price, inventory quality, brand security, customer service, identity protection and other technological features that help sellers monetize their inventory and buyers increase the return on their advertising investment.
While our industry is evolving rapidly and becoming increasingly competitive, we believe that our solution enables us to compete favorably on the factors described above. However, competitive differentiation is difficult to achieve, both in terms of capabilities and in terms of client perception. We lack the scale of some of our competitors, which may have the ability to compete
effectively with us by offering broader capabilities or more aggressive pricing. Other competitors with capabilities inferior to ours may nevertheless compete effectively with us if clients do not perceive, or value, whatthese factors. In addition, we believe to be ourwe enjoy a number of competitive advantages.strengths, as further detailed above.
Overall, our revenue increased 25% from $124.7 million in 2018 to $156.4 million in 2019, which reflects both increased ad spend and higher overall take rates. Our ad spend increased to $1,117 million in 2019, up from $992 million in 2018. Our overall take rate in 2019 increased to 14.0%, compared to 12.6% in 2018. Our 2019 take rate is higher due primarily to seller pricing improvements negotiated during the first half of 2018. We believe this take rate puts us in a favorable competitive position in terms of pricing, but it is uncertain whether it represents a sustainable competitive advantage.
Human Capital: Our Team and Culture
Our team draws from a broad spectrum of experience, including data science, machine-learning algorithms, auctions, infrastructure, software development, and from experienced managersleadership on the seller and buyer sides.sides, including CTV, mobile
We focus heavily upon developing and maintaining a company culture that supports our goals. We strive to make our company an exciting place to work, not just a “job.” We reward team and individual excellence and constantly strive to build a stronger, more innovative team and a consistent culture across all our locations.
As of December 31, 2019, we had 444 full-time employees.video. In addition to the United States, we have personnel and operations in England,the United Kingdom, Canada, France, Australia, New Zealand, Germany, Italy, Japan, Singapore, and Brazil.Brazil in order to service buyers and sellers on a global scale.
Culture
We strive to build a culture that is high-performing and results-oriented while emphasizing transparency, collaboration and innovation. Our recruitment team seeks individuals that are committed to seeing the big picture and being catalysts of change. We ask our employees to empower others, make a difference and ensure our company is an exciting place to work, not just a "job."
Diversity, Equity and Inclusion
Our Magnify Council is focused on enhancing diversity, equity and inclusion. Our objectives, through the support of the Magnify Council, are to create "the best" employee experience, continually deploy programs to develop diverse talent, and support external partners that emphasize the global promotion of diversity, equity and inclusion.
Talent Retention
We reward team and individual excellence and are committed to creating an exceptional workplace environment in which we seek feedback from our employees in annual engagement surveys. We believe in continual feedback on performance. Our employees set goals at a regular cadence throughout the year and managers provide achievement ratings. Additionally, we routinely analyze voluntary employee turnover to understand and address trends. We give equity to our employees to promote alignment and ownership.
Employee Wellness and Safety
Due to the COVID-19 pandemic, our global workforce maintained a work from home policy for the entirety of the second, third, and fourth quarters of 2020 and is expected to continue in the foreseeable future for the majority of our employees. We believe that our employees have been able to work productively during the time period in which our global offices have been shut down. However, we recognize that stressful circumstances require us to provide additional care for our employees. In 2020, we introduced quarterly mental health days, deployed a global employee assistance program, and a digital platform with access to live classes and discussions supporting wellness.
Conduct
We are committed to promoting high standards of honest and ethical business conduct and compliance in alignment with our cultural values. We do not tolerate harassment or discrimination. Our employees are required to take annual harassment and discrimination training as well as acknowledge our Code of Business and Ethics Policy.
As of December 31, 2020, we had 569 full-time employees.
Our Intellectual Property
Our proprietary technologies are important and we rely upon trade secret, trademark, copyright, and patent laws in the United States and abroad to establish and protect our intellectual property and protect our proprietary technologies.
We have several issued patents and pending patent applications, some of which may ultimately be abandoned if we determine that the cost of prosecution or maintenance does not justify the utility of receiving the patent. None of these patents has been litigated and we are not licensing any of the patents, and we do not believe that any individual patent or patent application is material to our business. Their importance to our business is uncertain and there are no guarantees that any of the patents will serve as protection for our technology or market in the United States or any other country in which an application has been filed.
We register certain domain names, trademarks and service marks in the United States and in certain locations outside the United States. We also rely upon common law protection for certain trademarks. We generally enter into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with parties with whom we conduct business, in order to limit access to, and disclosure and use of, our proprietary information. We also use measures
designed to control access to our technology and proprietary information. We view our trade secrets and know-how as a significant component of our intellectual property assets, which we believe differentiate us from our competitors.
Any impairment of our intellectual property rights, or any unauthorized disclosure or use of our intellectual property or technology, could harm our business, our ability to compete and our operating results.
Client Dynamics
Sellers
While we serve many clients, certain buyersSellers own or operate media properties, websites and sellers account for a large share of business transactedapplications through our platform. On the buy-side of our business, while demand for advertising inventory is diffuse, spending by advertisers on digital advertising inventory has historically been channeled through intermediaries, including principally advertising agencies and DSPs, both of which are importantadvertisements can be delivered to us. We have generated a majority of our revenue through OMP, and most OMP inventory purchases are executed by a relatively small number of DSPs that have the bidding technologies, data assets, and client bases necessary to enable them to execute OMP purchases at scale on behalf of their clients. We have relationships with almost all of these major DSPs, but because there are relatively few of them, each of these relationships is important to us because it represents a source of demand that could be difficult for us to replace. Similarly, the majority of supply to date on our PMP product has been by a relatively small number of sellers. Creating new seller clients and expanding our business with existing seller clients is important to our growth, and the loss of any seller clients could adversely affect our PMP business. In addition, because large agencies often spend through multiple DSPs, new or enhanced agency relationships can result in increased spending onconsumers as they navigate across screens. Sellers use our platform by multiple DSPs, while a decrease in business or a decline in our relationship with a single agency can result in reduced spending by multiple DSPs. We are working to develop relationships directly with advertisers, to supplementmonetize and manage their DSP and agency relationships and also to encourage them to influence their DSPs and agencies to route their spending through our platform. We have increasingly beenadvertising inventory.
receiving requests from buyers for discounts, rebates, or similar incentives in order to move more advertising spending to our platform.
On the sell-side of our business, whileWhile we work with many clients, a relatively small number of them provide a large share of the unique user audiences accessible by buyers. This is particularly true in CTV, where sellers tend to be larger and more sophisticated compared to other online sellers. Given the limited number of CTV sellers, we are focused on building deeper, long-term strategic partnerships with these clients through a full-service business development strategy. We have invested significant resources in identifying and cultivating these relationships and our sales executives and account managers often serve a consultative role within a client’s sales organization to help establish best practices and evangelize the benefits of programmatic CTV advertising. This team is further supported by our product and engineering team with deep technical expertise, and for larger clients, we may build out custom features or functionality to help drive deeper adoption of our platform.
In addition,the mobile channel, most of the application providers that make inventory available through our platform utilize system development kits ("SDKs") and other proprietary technology of third parties, such as aggregators, and it is those third parties, not the application providers themselves, that contract with us to help monetize the inventory. Termination or diminution of our relationships with these third parties could result in a material reduction of the amount of mobile inventory available through our platform. We encourage application developers to use our own SDK when appropriate, but it is difficult to displace existing SDKs.
Buyers
Our contracts with buyersOn the buy-side of our business, while demand for advertising inventory is very distributed, spending by advertisers and sellers generally do not provideagencies on digital advertising inventory has historically been channeled through technological intermediaries, principally DSPs.
These DSPs are directly connected to our technology through server-to-server integrations and are responsible for any minimum volumesbidding on and may be terminated on relatively short notice. Buyer and seller needs and plans can change quickly, and buyers and sellers are free to terminate their arrangements with us or direct their spending andpurchasing advertising inventory to competing sources of inventory and demand, quickly and without penalty. Loss of a major buyer could result in a decrease of demand on our platform pursuant to master service agreements. We have relationships with almost all of these major DSPs, and lossbecause there are relatively few of them, each of these relationships is important to us and represents a major seller could result in decrease of inventory available on our platform. Despite such losses, there could still be adequate demand and inventory supply on our platform to sustain and grow our revenue, so it is not necessarily the case that loss of a buyer or seller equates to loss of revenue. However, loss of unique inventory and loss of any demand could result directly in revenue loss. In addition, just as growth in the inventory strengthens buyer activity in a network effect, loss of substantial inventory or demand could degrade our marketplace. Loss of major DSP sourcessource of demand could adversely affect bid density or pricing in our RTB auctions, and reduction in fees if we are not able to redirect inventory to other demand sources. Loss of important unique inventory could reduce fees from demand that cannot be shifted to other sellers. The number of large media buyers and sellers in the market is finite, and it could be difficult for us to replace the losses from any buyers or sellers whosereplace.
We maintain close relationships with us diminishDSPs to maximize the amount of spend being transacted through our platform. For instance, our sales team collaborates with DSPs to create custom private marketplaces that fit specific targeting criteria for a given campaign and our team of technical account managers continually monitors DSP bidding activities and provides recommendations that inform their trading practices.
While the DSP is directly responsible for purchasing advertising inventory, the overall direction of an advertising campaign is typically determined by the advertiser or terminate.
Becauseadvertising agency that has engaged the DSP. For certain private marketplace transactions, the specific parameters of these factors, we seek to expand and diversify our client relationships. In particular, as parta campaign may be negotiated directly with the advertiser or agency without involvement of our strategya DSP. Accordingly, in order to increase the volumeamount of advertising inventoryspend transacted on our exchange,platform, and in furtherance of our SPO efforts, we are continuingalso maintain close relationships directly with aggregators of inventorybrand advertisers and with large sources of supply that have their own monetization capabilities but also allow third parties to connect to their exchanges and bid on their inventory. These relationships represent additional risks in terms of inventory quality, transaction discrepancies, and collections, and may be less profitable because we may be required to compensate these partners or share the fees available for intermediaries in these transactions, and may incur higher serving costs relative to revenue.agencies.
Geographic Scope of Our Operations
The growth of programmatic advertising is also expanding into geographic markets outside of the United States, and in some markets, the adoption rate of programmatic digital advertising is greater than in the United States. We attribute advertising spend to the geographic location of the seller on whose inventory the advertising spend was directed. Our markets outside of the United States are more heavily built upon desktop display advertising than they are on mobile. In addition, as programmatic advertising has grown in markets outside of the United States, we have seen more competitors enter those markets aggressively and gain market share. Our international operations and expansion plans expose us to various risks. International operations require significant investment in developing the technology infrastructure necessary to deliver our solution and establishing sales, delivery, support, and administrative capabilities in the countries where we operate. We face staffing challenges, including difficulty in recruiting, retaining, and managing a diverse and distributed workforce across time zones, cultures, and languages. We must also adapt our practices to satisfy local requirements and standards (including differing privacy requirements that are sometimes more stringent than in the U.S.), and manage the effects of global and regional recessions and economic and political instability. Transactions denominated in various non-U.S. currencies expose us to potentially unfavorable changes in exchange rates and added transaction costs. Foreign operations expose us to potentially adverse tax consequences in the United States and abroad and costs and restrictions affecting the repatriation of funds to the
United States. For detailed information regarding our revenue and property and equipment, net by geographical region, see Note 4 and Note 7 of the "Notes to Consolidated Financial Statements."
User ReachRegulation
We believe our platform reaches approximately one billion users globally, however itOur business is not practicablehighly susceptible to determineemerging privacy regulations and oversight concerning the exactcollection, use and sharing of data. Data protection authorities in a number of unique users we reach because we do not collect personally identifiable information. In orderterritories have expressed a desire to estimate our user reach, we start with data we track on devices we see through our platform in a given time period: for web browsers, we identify each combination of browser user agent and originating IP address, and for mobile application users, we identify unique device identifiers. The resulting aggregated total counts some devices more than once because the same device creates different user agent and IP address combinations by using different browsers to access the Internet and/or accessing the Internet from locations with different IP addresses. We therefore make assumptions about the amount of duplication, as well as assumptions about the average
numbers of devices per person, which can vary by geography and over time, and apply these assumptions to estimate the number of users we reach.
Regulation
Behavioral or personalized advertising, or the use of data to draw inferences about a user’s interests and deliver relevant advertising to that user, has come under increasing scrutiny by legislative, regulatory, and self-regulatory bodies in the United States and abroad that focus on consumer protection or data privacy.the advertising technology ecosystem. In particular, this scrutiny has focused on the use of technology (including "cookies") to collect or aggregate information about Internet users’ online browsing activity. Because we, and our clients, rely upon large volumes of such data, it is essential that we monitor developments in this area domestically and globally, and engage in responsible privacy practices, including providing consumers with notice of the types of data we collect and how we use that data to provide our services.practices.
We provide this notice through our privacy policies, which can be found on our website at http://www.rubiconproject.com/privacy. As stated in our privacy policy, our technology platform does notdo not collect information, such as name, address, or phone number, that can be used directly to identify a real person, and we take steps not to collect and store such information. Instead, we rely on IP addresses, geo-location information, and persistent identifiers about Internet users and do not attempt to associate this data with other data that can be used to identify real people. This type of information is considered "personal" in some jurisdictions or otherwise may be the subject of future legislation or regulation. The definition of personal data varies by country, and continues to evolve in ways that may require us to adapt our practices to avoid violating laws or regulations related to the collection, storage, and use of consumer data. As a result, our technology platform and business practices must be assessed regularly in each country in which we do business.
There are also a number of specific laws and regulations governing the collection and use of certain types of consumer data relevant to our business. For example, the Children’s Online Privacy Protection Act ("COPPA"), imposes restrictions on the collection and use of data about users of child-directed websites. To comply withWith respect to COPPA, we have taken various steps to implement a system that: (i) flags seller-identified child-directed sites to buyers, (ii) limits advertisers’ ability to serve personalized advertisements on child-directed sites, (iii) helps limit the types of information that our advertisers have access to when placing advertisements on child-directed sites, and (iv) limits the data that we collect and use on such child-directed sites.
The use of and transfer of personal data in EUthe European Economic Area ("EEA") member states and the United Kingdom (“UK”) is currently governed by the General Data Protection Regulation (the "GDPR"). The GDPR sets out higher potential liabilities for certain data protection violations as well asand establishes significant new regulatory requirements resulting in a greater compliance burden for us in the course of delivering our solution in Europe. Among otherthe EEA and UK. While data protection authorities have started to clarify certain requirements under GDPR, significant uncertainty remains as to how the regulation will be applied and enforced.
In addition to the GDPR, obligates companies that process large amounts of personal data about EU residents to implement a number of formal processesnew privacy regulations will or have already come into effect. The California legislature passed the California Consumer Privacy Act ("CCPA") in 2018, which became effective January 1, 2020. This law imposes new obligations on businesses that handle the personal information of California residents. The obligations imposed require us to maintain ongoing significant resources for compliance purposes. Certain requirements remain unclear due to ambiguities in the drafting of or incomplete guidance. Adding to the uncertainty facing the ad tech industry, a new law, titled the California Privacy Rights Act ("CPRA") recently passed as a ballot initiative in California and policies for reviewingwill impose additional notice and documentingopt out obligations on the digital advertising space. This law, which will take effect in January 2023, will cause us to incur additional compliance costs and impose additional restrictions on us and on our industry partners. These ambiguities and resulting impact on our business will need to be resolved over time. In addition, other privacy implications ofbills have been introduced at both the development, acquisition,state and federal level. Certain international territories are also imposing new or use of all new products, technologies, or types of data. expanded privacy obligations. In the coming years, we expect further consumer privacy regulation worldwide.
Further, the European Union is expected to replace the EU ePrivacy Directive governing the use of technologies to collect consumer information with the ePrivacy Regulation. Current drafts of the ePrivacy Regulation impose fines for violations that are materially higher than those imposed under the ePrivacy Directive.
The GDPR also prohibits the transfer of personal data of EU and UK subjects outside of the European Economic Area ("EEA"),EEA and the UK, unless the party exporting the data from the EU or UK implements a compliance mechanism designed to ensure that the receiving party will adequately protect such data. We have historically relied on certain compliance mechanisms that have since been invalidated, and had to shift our business practices to rely on other legally sufficient compliance measures. However, guidance on exactly what measures must be taken to allow the lawful transfer of personal data to the United States remains unclear. While we will interpret the guidance and continue to explore the additional measures that are currentlycan be implemented to protect personal data that is transferred to us in the United States, we remain subject to legal challenge, and which directly subject us to regulatory enforcement by data protection authorities located in the European UnionEU, UK and the United States. By relying on these compliance measures, we risk becoming the subject of regulatory investigations in any of the individual jurisdictions in which we operate. Each such investigation could cost us significant time and resources, and could potentially result in fines, criminal prosecution, or other penalties. Further, to the extent any of the legal challengesnew guidance emerges to these compliance measures, are successful, thisit could further invalidate our approach to data export from
the EEA.EEA and UK. It may take us significant time, resources, and effort to restructure our business and/or rely on another legally sufficient compliance measure.
In addition to the GDPR, a number of new privacy regulations will or have already come into effect in 2020. The California legislature passed the California Consumer Privacy Act ("CCPA") in 2018, which became effective January 1, 2020. This regulation imposes new obligations on businesses that handle the personal information of California residents. The obligations imposed will require the Company to devote significant resources towards compliance. Certain requirements remain unclear due to ambiguities in the drafting of or incomplete guidance. These ambiguities and resulting impact on our business will need to be resolved over time. In addition, other privacy bills have been introduced at both the state and federal level. Certain international territories are also imposing new or expanded privacy obligations. For example, Brazil's data protection regulation, the LGPD, will also come into effect in August 2020. In the coming years, we expect further consumer privacy regulation worldwide.
Additionally, our compliance with our privacy policies and our general consumer privacy practices are also subject to review by the Federal Trade Commission, which may bring enforcement actions to challenge allegedly unfair and deceptive trade practices, including the violation of privacy policies and representations therein. Certain State Attorneys General may also bring enforcement actions based on comparable state laws or federal laws that permit state-level enforcement. Outside of the United States, our privacy and data practices are subject to regulation by data protection authorities and other regulators in the countries in which we do business.
Beyond laws and regulations, we are also members of self-regulatory bodies that impose additional requirements related to the collection, use, and disclosure of consumer data, including the Internet Advertising Bureau ("IAB"), the Digital Advertising Alliance, the Network Advertising Initiative, and the Europe Interactive Digital Advertising Alliance. Under the requirements of these self-regulatory bodies, in addition to other compliance obligations, we provide consumers with notice via our privacy policy about our use of cookies and other technologies to collect consumer data, and of our collection and use of consumer data to deliver personalized advertisements. We also allow consumers to opt-out from the use of data we collect for purposes of behavioral advertising through a mechanism on our website, linked through our privacy policy as well as through portals maintained by some of these self-regulatory bodies. Some of these self-regulatory bodies have the ability to discipline members or participants, which could result in fines, penalties, and/or public censure (which could in turn cause reputational harm). Additionally, some of these self-regulatory bodies might refer violations of their requirements to the Federal Trade Commission or other regulatory bodies.
Until prevailing compliance practices standardize, the impact of worldwide privacy regulations on our business and, consequently, our revenue could be negatively impacted.
For additional information regarding regulatory risks to our business, see "Item 1A. Risk Factors."
Business Seasonality
Our advertising spend, revenue, cash flow from operations, Adjusted EBITDA, operating results, and other key operating and financial measures may vary from quarter to quarter due to the seasonal nature of buyer spending. For example, many buyers devote a disproportionate amount of their advertising budgets to the fourth quarter of the calendar year to coincide with increased holiday purchasing. We expect our revenue, cash flow, operating results and other key operating and financial measures to fluctuate based on seasonal factors from period to period and expect these measures to be higher in the fourth quarters than in priorother quarters.
Working Capital Requirements
Our revenue is generated from advertising spend transacted on our platform using our technology solution. Generally, we invoice and collect from buyers the full purchase price for impressions they have purchased, retain our fees, and remit the balance to sellers. We attempt to coordinate collections from our buyers so as to fund our payment obligations to our sellers. However, in some cases, we may be required to pay sellers for impressions delivered before we have collected, or even if we are unable to collect, from the buyer of those impressions. There can be no assurances that we will not experience bad debt in the future. Any such write-offs for bad debt could have a materially negative effect on our results of operations for the periods in which the write-offs occur. In addition, growth and increased competitive pressure in the digital advertising industry are causing brand spenders to become more demanding, resulting in overall increased focus by all industry participants on pricing, transparency, and cash and collection cycles.
Some buyers have experienced financial pressures that have motivated them to challenge some details of our invoices or to slow the timing of their payments to us. In addition, although our liquidity has not been significantly affected by the effects of COVID-19 to date, any downturn in economic conditions in the future may severely impact our liquidity as we may need additional time to collect from buyers, which may impact our ability to pay sellers. If buyers slow their payments to us or our cash collections are significantly diminished as a result of these dynamics, our revenue and/or cash flow could be adversely affected and we may need to use working capital to fund our accounts payable pending collection from buyers. This may result in additional cash expenditures and cause us to forgo or defer other more productive uses of that working capital.
Available Information
The Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and accordingly files Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, and related amendments and other information with the U.S. Securities and Exchange Commission, or the SEC, pursuant to Sections 13(a) and 15(d) of the Exchange Act. Information filed by the Company with the SEC is
available free of charge on the Company’s website at investor.rubiconproject.cominvestor.magnite.com as soon as reasonably practicable after such materials are filed with or furnished to the SEC.
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk, including the risks described below, each of which may be relevant to decisions regarding an investment in or ownership of our stock. The occurrence of any of these risks could have a significant adverse effect on our reputation, business, financial condition, revenue, results of operations, growth, or ability to accomplish our strategic objectives, and could cause the trading price of our common stock to decline. You should carefully consider the risks set forth below and the other information contained in this report, including our consolidated financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations, before making investment decisions related to our common stock. However, this report cannot anticipate and fully address all possible risks of investing in our common stock, the risks of investing in our common stock may change over time, and additional risks and uncertainties that we are not aware of, or that we do not consider to be material, may emerge. Accordingly, you are advised to consider additional sources of information and exercise your own judgment in addition to the information we provide.
Risks Related to the Proposed Merger with TelariaAcquisition of SpotX
We may not complete the merger with Telariaacquisition of SpotX or complete the mergeracquisition within the time frame we anticipate. Failure to complete the mergeracquisition could have material adverse effects on us.
The completion of the mergeracquisition is subject to a number of customary closing conditions, including, among other things, the receiptabsence of stockholder approval,certain legal impediments and the expiration or termination of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which make the completion and timing of the mergeracquisition uncertain. The failure to satisfy all of the required conditions could delay the completion of the mergeracquisition for a significant period of time or prevent it from occurring at all. There can be no assurance that the conditions to the completion of the mergeracquisition will be satisfied or waived or that the mergeracquisition will be completed.
If the mergeracquisition is not completed, we may be materially adversely affected and, without realizing any of the benefits of having completed the merger,acquisition, will be subject to a number of risks, including the following:
•the market price of our common stock could decline;
•we could owe a substantial termination fee tobe liable for damages incurred or suffered by the other partyseller of SpotX in specified circumstances;
•if the merger agreementSpotX Purchase Agreement is terminated and our board seeks another business combination,acquisition, our stockholders cannot be certain that we will be able to find a party willing to enter into a transaction on terms equivalent to or more attractive than the terms that Telaria has agreed to inof the merger agreement;SpotX Purchase Agreement;
•time and resources, financial and other, committed by our management to matters relating to the mergeracquisition could otherwise have been devoted to pursuing other beneficial opportunities;
•we may experience negative reactions from the financial markets or from our customers, suppliers or employees; and
•we will be required to pay certain costs relating to the merger,acquisition, such as legal, accounting, financial advisory and printing fees, whether or not the mergeracquisition is completed.
In addition, if the mergeracquisition is not completed, we could be subject to litigation related to any failure to complete the mergeracquisition or related to any enforcement proceeding commenced against us to perform our obligations under the merger agreement.SpotX Purchase Agreement. Because our obligations under the SpotX Purchase Agreement are not conditioned on our receipt of or ability to obtain financing, there is a risk we could be liable for damages to the seller of SpotX or subject to litigation or enforcement proceedings even in circumstances where our inability to close the transaction is due to a failure to timely obtain financing on the terms contemplated by the Commitment Letter (discussed below) or at all. Any of these risks could materially and adversely impact our ongoing business, financial condition, financial results and stock price.
Similarly, delays in the completion of the mergeracquisition could, among other things, result in additional transaction costs, loss of revenue or other negative effects associated with delay and uncertainty about completion of the mergeracquisition and could materially and adversely impact our ongoing business, financial condition, financial results and stock price following the completion of the merger.acquisition.
We may not be able to achieve anticipated cost savings or other anticipated benefits of our acquisition of SpotX.
The success of the acquisition will depend, in part, on our ability to successfully integrate SpotX with our business and realize the anticipated benefits, including synergies, cost savings, innovation and technological opportunities and operational efficiencies from the acquisition in a manner that does not materially disrupt existing customer, supplier and employee relations and does not result in decreased revenues due to losses of, or decreases in use of our solutions by, buyers and sellers of
advertising inventory. If we are unable to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits may not be realized fully or at all, or may take longer to realize than expected, and the value of our common stock may decline. We may fail to realize some or all of the anticipated benefits of the acquisition if the integration process takes longer than expected or is more costly than expected. The integration of SpotX with our business may result in material challenges, including, without limitation:
•managing a larger, more complex business;
•maintaining employee morale and retaining key management and other employees;
•retaining existing business and operational relationships, including customers, suppliers and employees and other counterparties, as may be impacted by contracts containing consent and/or other provisions that may be triggered by the acquisition, and attracting new business and operational relationships;
•consolidating corporate and administrative infrastructures and eliminating duplicative operations, including unanticipated issues in integrating information technology, communications and other systems;
•coordinating geographically separate organizations; and
•unforeseen expenses or delays associated with the acquisition.
Many of these factors will be outside of our control, and any one of them could result in delays, increased costs, decreases in the amount of expected revenues or cost synergies, and other adverse impacts, which could materially affect our financial position, results of operations and cash flows.
Due to legal restrictions, we are currently permitted to conduct only limited planning for the integration of SpotX following the acquisition. The actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized on a timely basis, if at all.
Our proposed financing of the acquisition of SpotX will significantly increase our leverage, which may put us at greater risk of defaulting on our debt obligations and limit our ability to conduct necessary operating activities, make strategic investments, respond to changing market conditions, or obtain future financing on favorable terms.
We intend to finance the cash portion of the SpotX acquisition consideration in part through borrowings under certain proposed new credit facilities. In connection with the SpotX Purchase Agreement, we entered into a commitment letter (the "Commitment Letter" pursuant to which, subject to the terms and conditions set forth therein, Goldman Sachs Bank USA has committed to provide a senior secured term loan facility in an aggregate principal amount of up to $560 million (the "Term Loan Facility"). The funding of the Term Loan Facility provided for in the Commitment Letter is contingent on the satisfaction of customary conditions, including the execution and delivery of definitive documentation with respect to credit facilities in accordance with the terms set forth in the Commitment Letter and the consummation of the SpotX acquisition in accordance with the SpotX Purchase Agreement.
The completion of the Term Loan Facility, if at all, would significantly increase our indebtedness and require us to comply with certain financial metrics and restrictive covenants. The increased leverage could adversely affect our business and operating results by:
•making it more difficult for us to make payments on our indebtedness and comply with applicable financial metrics and covenants;
•requiring us to use a substantial portion of our cash flow to pay interest and principal, which reduces the amount available for operations, distributions, acquisitions and capital expenditures;
•making us more vulnerable to economic and industry downturns and reducing our flexibility to respond to changing business and economic conditions;
•requiring us to agree to less favorable terms, including higher interest rates, in order to incur additional debt, and otherwise limiting our ability to borrow for operations, working capital or to finance acquisitions in the future; or
•limiting our flexibility in conducting our business, which may place us at a disadvantage compared to competitors with less debt or debt with less restrictive terms.
We may be able to incur substantial additional indebtedness in the future, subject to the restrictions governing our existing indebtedness, which would further exacerbate the leverage risks described above.
If the acquisition of SpotX is completed, our current stockholders will generally have a reduced ownership and voting interest after the acquisition.
Our stockholders currently have the right to vote to elect our directors and on other matters affecting the company. Immediately after the completion of the acquisition, each of our stockholders will remain a stockholder, but with a percentage ownership that will be smaller than such stockholder’s percentage ownership as of immediately prior to the acquisition. As a result of this reduced ownership percentage, our stockholders will generally have less voting power after the acquisition than they did prior to the acquisition.
If the acquisition of SpotX is completed, the seller of SpotX will own a substantial portion of our outstanding common stock, and their interests may not always coincide with the interests of the other holders.
If the acquisition of SpotX is completed, the seller of SpotX, RTL or an affiliate of RTL designated pursuant to the SpotX Purchase Agreement, will receive 14 million shares of our common stock, subject to certain adjustments. As a result, RTL may have significant influence over all matters presented to our stockholders for approval, including election and removal of our directors and change in control transactions. The interests of RTL may not always coincide with the interests of the other holders of our common stock. As part of the SpotX Purchase Agreement, RTL has agreed to abide by certain standstill covenants with respect to us and our securities for a period of three years following the closing of the transaction.
Completion of the acquisition of SpotX may trigger change in control or other provisions in agreements to which SpotX is a party, which may have an adverse impact on our business and results of operations following completion of the acquisition.
The completion of the acquisition may trigger change in control and other provisions in certain agreements to which SpotX is a party. If SpotX and we are unable to negotiate waivers of those provisions, counterparties may exercise their rights and remedies under the agreements, including terminating the agreements or seeking monetary damages or equitable remedies. Even if we are able to negotiate consents or waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to us. Any of the foregoing or similar developments may have an adverse impact on our business and results of operations following completion of the acquisition, including by diminishing or making it more difficult for us to realize some or all of the anticipated benefits of the acquisition, or by increasing the costs to us of completing the acquisition.
Any acquisitions we undertake may disrupt our business, adversely affect operations, dilute stockholders, and expose us to costs and liabilities.
Acquisitions have been an important element of our business strategy, and we may pursue future acquisitions in an effort to increase revenue, expand our market position, add to our service offering and technological capabilities, respond to dynamic market conditions, or for other strategic or financial purposes. However, there is no assurance that we will identify suitable acquisition candidates or complete any acquisitions on favorable terms, or at all. Further, any acquisitions we do complete, including, if completed, our acquisition of SpotX, would involve a number of risks, which may include the following:
•the identification, acquisition, and integration of acquired businesses require substantial attention from management. The diversion of management's attention and any difficulties encountered in the transition process could hurt our business;
•the identification, acquisition, and integration of acquired businesses requires significant investment, including to determine which new service offerings we might wish to acquire, harmonize service offerings, expand management capabilities and market presence, and improve or increase development efforts and technology features and functions;
•the anticipated benefits from the acquisition may not be achieved, including as a result of loss of clients or personnel of the target, other difficulties in supporting and transitioning the target's clients, the inability to realize expected synergies from an acquisition, or negative organizational cultural effects arising from the integration of new personnel;
•we may face difficulties in integrating the personnel, technologies, solutions, operations, and existing contracts of the acquired business;
•we may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired company, technology, or solution, including issues related to intellectual property, solution quality or architecture, income tax and other regulatory compliance practices, revenue recognition or other accounting practices, or employee or client issues;
•to pay for future acquisitions, we could issue additional shares of our common stock or pay cash. Issuance of shares would dilute stockholders. Use of cash reserves could diminish our ability to respond to other opportunities or challenges. Borrowing to fund any cash purchase price would result in increased fixed obligations and could also include covenants or other restrictions that would impair our ability to manage our operations;
•acquisitions expose us to the risk of assumed known and unknown liabilities including contract, tax, regulatory or other legal, and other obligations incurred by the acquired business or fines or penalties, for which indemnity obligations, escrow arrangements or insurance may not be available or may not be sufficient to provide coverage;
•new business acquisitions can generate significant intangible assets that result in substantial related amortization charges and possible impairments;
•the operations of acquired businesses, or our adaptation of those operations, may require that we apply revenue recognition or other accounting methodologies, assumptions, and estimates that are different from those we use in our current business, which could complicate our financial statements, expose us to additional accounting and audit costs, and increase the risk of accounting errors;
•acquired businesses may have insufficient internal controls that we must remediate, and the integration of acquired businesses may require us to modify or enhance our own internal controls, in each case resulting in increased administrative expense and risk that we fail to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act");
•acquisition of businesses based outside the United States would require us to operate in foreign languages and manage non-U.S. currency, billing, and contracting needs, comply with laws and regulations, including labor laws and privacy laws that in some cases may be more restrictive on our operations than laws applicable to our business in the United States; and
•acquisitions can sometimes lead to disputes with the former owners of the acquired company, which can result in increased legal expenses, management distraction and the risk that we may suffer an adverse judgment if we are not the prevailing party in the dispute.
Risks Related to COVID-19
The recent COVID-19 pandemic and spread of COVID-19 has impacted and may have material adverse effects on our business, financial position, results of operations and/or cash flows.
Our business has been impacted and may be materially adversely impacted by the effects of the COVID-19 pandemic. In addition to the United States, we have personnel and operations in the United Kingdom, Canada, France, Australia, New Zealand, Germany, Italy, Japan, Singapore, and Brazil, and each of these countries has been affected by the pandemic and taken measures to try to contain it. These measures have impacted and may further impact our workforce and operations, and the operations of our sellers and buyers.
The COVID-19 pandemic has in the short-run and may over the longer term adversely affect the economies and financial markets of many countries. Adverse economic conditions and general uncertainty about economic recovery or growth, particularly in North America and Europe, where we conduct most of our business, has caused advertisers to significantly reduce their advertising budgets. Our business depends on the overall demand for advertising and on the economic health of our current and prospective sellers and buyers. As a result of advertisers significantly reducing their overall advertising spending, our revenue and results of operations have been directly affected. Though our revenue trends improved and stabilized in the second half of 2020, there can be no assurance that these trends will continue.
In addition, the economic health of our current and prospective buyers impacts the collectability of our accounts receivable. Although our liquidity has not been significantly affected by the effects of COVID-19 to date, any prolonged downturn in economic conditions in the future may severely impact our liquidity as we may need additional time to collect from buyers, which may impact our ability to pay sellers.
The degree to which the COVID-19 pandemic and responses thereto impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity, including any resurgence, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Although the full magnitude of the impact of the COVID-19 pandemic on our business and operations remains uncertain, the spread of COVID-19 and the imposition of related public health measures and travel and business restrictions has and is expected to continue to adversely impact our forecasted business, financial condition, operating results and cash flows.
Additional or unforeseen effects from the COVID-19 pandemic and the resulting economic distress could implicate or amplify many of the other risks discussed below.
Risks Related to Our Business, Growth Prospects and Operating Results
If CTV advertising spend grows more slowly than we expect our operating results and growth prospects could be harmed.
The growth of our platform is dependent, in part, on the continued growth in CTV advertising spend. Growth in the CTV advertising market is dependent on a number of factors, including the pace of cord-cutting (the replacement of tradition linear TV for CTV streaming), the continued proliferation of digital content and CTV providers, the adoption of ad-supported models by CTV sellers in lieu of, or in addition to, subscription models, and an acceleration in the shift of ad dollars from traditional linear TV to CTV to keep pace with changing viewership habits. If the market for ad-supported CTV develops more slowly than we expect or fails to develop as a result of these or other factors, our operating results and growth prospects could be harmed.
If CTV sellers fail to adopt programmatic advertising solutions, or adopt such solutions more slowly that we expect, our operating and growth prospects could be harmed.
As digital advertising has continued to scale and evolve, the amount of advertising being bought and sold programmatically has increased dramatically. Despite the opportunities created by programmatic advertising, CTV sellers have been slower to adopt programmatic solutions compared to desktop and mobile video sellers. Many CTV sellers have backgrounds in cable or broadcast television and have limited experience with digital advertising, and in particular programmatic advertising. For these sellers, it is extremely important to protect the quality of the viewer experience to maintain brand goodwill and ensure that online advertising efforts do not create sales channel conflicts or otherwise detract from their direct sales force. In this regard, programmatic advertising presents a number of potential challenges, including the ability to ensure that ads are brand safe, comply with business rules around competitive separation, are not overly repetitive, are played at the appropriate volume and do not cause delays in load-time of content. Our platform was designed to address these challenges and we have invested significant time and resources cultivating relationships with CTV sellers to establish best practices and evangelize the benefits of programmatic CTV.
While we believe that programmatic advertising will continue to grow as a percentage of overall CTV advertising, there can be no assurances that CTV sellers will adopt programmatic solutions or the speed at which they may adopt such solutions. Any such failure or delay in adoption could negatively impact our finance results and growth prospects.
We may not be able to maintain or increase access to the CTV advertising inventory monetized through our platform on terms acceptable to us.
Our success requires us to maintain and expand our access to premium and unique advertising inventory. We do not own or control the ad inventory upon which our business depends and do not own or create content. Sellers are generally not required to offer a specified level of inventory on our platform, and we cannot be assured that any publisher will continue to make their ad inventory available on our platform. Sellers may seek to change the terms on which they offer inventory on our platform, including with respect to pricing, or may elect to make advertising inventory available to our competitors who offer more favorable economic terms. Furthermore, sellers may enter into exclusive relationships with our competitors, which preclude us from offering their inventory.
These risks are particularly pronounced with CTV sellers. CTV inventory is highly sought after, and unlike desktop or mobile advertising, which may come from disparate sources, CTV inventory tends to be concentrated on a smaller number of larger sellers that enjoy significant negotiating leverage. This dynamic has been exacerbated by consolidation in the industry, as a number of digital-first CTV sellers have been acquired by larger established television and media brands. In some instances, consolidation may result in the loss of business with an existing client (for example, if an acquiror has a preferred relationship with one of our competitors or has a proprietary solution). As a result of this concentration, the loss of a CTV client may result in a significant decrease in the amount of CTV inventory available through our platform. Any decrease in our ability to access CTV inventory could negatively impact our results, as we view CTV revenue as a key differentiator and driver for our growth.
We may not be able to achieve anticipated benefits of the merger with Telaria.
The success of the mergerMerger will depend, in part, on our ability to successfully combine and integrate our business with Telaria, and realize the anticipated benefits, including synergies, cost savings, innovation and technological opportunities and operational efficiencies from the mergerMerger in a manner that does not materially disrupt existing customer, supplier and employee relations and does not result in decreased revenues due to losses of, or decreases in use of our solutions by, buyers and sellers of advertising inventory. If the combined company is unable to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits may not be realized fully or at all, or may take longer to realize than expected, and the value of the combined company common stock may decline. The combined company may fail to realize some or all of the anticipated benefits of the mergerMerger if the integration process takes longer than expected or is more costly than expected.
The integration of the two companies may result in material challenges, including, without limitation:
•managing a larger, more complex combined business;
•maintaining employee morale and retaining key management and other employees;
•retaining existing business and operational relationships, including customers, suppliers and employees and other counterparties, as may be impacted by contracts containing consent and/or other provisions that may be triggered by the merger,Merger, and attracting new business and operational relationships;
•consolidating corporate and administrative infrastructures and eliminating duplicative operations, including unanticipated issues in integrating information technology, communications and other systems;
•coordinating geographically separate organizations; and
•unforeseen expenses or delays associated with the merger.Merger.
Many of these factors will be outside of our control, and any one of them could result in delays, increased costs, decreases in the amount of expected revenues or cost synergies, and other adverse impacts, which could materially affect the combined company’s financial position, results of operations and cash flows.
Due
We may be unsuccessful in our Supply Path Optimization efforts.
SPO refers to legal restrictions, weefforts by buyers to consolidate the number of vendors with which they work to find the most effective and cost-efficient paths to procure media. There are currently permitted to conduct only limited planning for the integration of the two companies following the merger. The actual integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized on a timely basis, if at all.
If the merger with Telaria is completed, our current stockholders will generally have a reduced ownership and voting interest in the combined company after the merger.
Our stockholders currently have the right to vote to elect our directors and on other matters affecting the company. Immediately after the completion of the merger, each of our stockholders will remain a stockholder of the combined company, but with a percentage ownership that will be smaller than such stockholder’s percentage of the company as of immediately prior to the merger. As a result of this reduced ownership percentage, our stockholders will generally have less voting power in the combined company after the merger than they did prior to the merger.
Completion of the merger with Telaria may trigger change in control or other provisions in buyer, seller, and other agreements to which we or Telaria are a party, which may have an adverse impact on the combined company’s business and results of operations following completion of the merger.
The completion of the merger may trigger change in control and other provisions in certain agreements to which we or Telaria are a party. If we are unable to negotiate waivers of those provisions, counterparties may exercise their rights and remedies under the agreements, including terminating the agreements or seeking monetary damages or equitable remedies. Even if we are able to negotiate consents or waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to us. Any of the foregoing or similar developments may have an adverse impact on the combined company’s business and results of operations following completion of the merger.
Any acquisitions we undertake may disrupt our business, adversely affect operations, dilute stockholders, and expose us to costs and liabilities.
Acquisitions have been an important element of our business strategy, and we may pursue future acquisitions in an effort to increase revenue, expand our market position, add to our service offering and technological capabilities, respond to dynamic market conditions, or for other strategic or financial purposes. However, there is no assurance that we will identify suitable acquisition candidates or complete any acquisitions on favorable terms, or at all. Further, any acquisitions we do complete, including, if completed, our merger with Telaria, would involve a number of risks, which may include the following:
The identification, acquisition, and integration of acquired businesses require substantial attentioncriteria that buyers use to evaluate supply partners. While we believe we are well positioned to benefit from management. The diversion of management's attention and any difficulties encounteredsupply path optimization in the transition process could hurt our business.
The identification, acquisition, and integration of acquired businesses requires significant investment, including to determine which new service offerings we might wish to acquire, harmonize service offerings, expand management capabilities and market presence, and improve or increase development efforts and technology features and functions.
The anticipated benefits from the acquisition may not be achieved, includinglong run as a result of lossour transparency, our pricing tools, which reduce the overall cost of clientsworking with us, our broad and unique inventory supply across all channels and formats, buyer tools such as traffic shaping that reduce the cost of working with us, and our brand safety measures, we compete for demand with a number of well-established companies, and buyers have not always embraced our offering due to various factors, including the perception that competitors have superior technology or personnel of the target, other difficulties in supporting and transitioning the target's clients, the inability to realize expected synergies from an acquisition, or negative culture effects arising from the integration of new personnel.produce better results.
We must continue to adapt and improve our offerings to win buyers’ business. In order to achieve increased advertising spend, we may face difficulties in integrating the personnel, technologies, solutions, operations, and existing contracts of the acquired business.
We may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired company, technology, or solution, including issues related to intellectual property, solution quality or architecture, income tax
and other regulatory compliance practices, revenue recognition or other accounting practices, or employee or client issues.
To pay for future acquisitions, we could issue additional shares of our common stock or pay cash. Issuance of shares would dilute stockholders. Use of cash reserves could diminish our ability to respond to other opportunities or challenges. Borrowing to fund any cash purchase price would result in increased fixed obligations and could also include covenants or other restrictions that would impair our ability to manage our operations.
Acquisitions expose us to the risk of assumed known and unknown liabilities including contract, tax, and other obligations incurred by the acquired business or fines or penalties, for which indemnity obligations, escrow arrangements or insurance may not be available or may not be sufficient to provide coverage.
New business acquisitions can generate significant intangible assets that result in substantial related amortization charges and possible impairments.
The operations of acquired businesses, or our adaptation of those operations, may require that we apply revenue recognition or other accounting methodologies, assumptions, and estimates that are different from those we use in our current business, which could complicate our financial statements, expose us to additional accounting and audit costs, and increase the risk of accounting errors.
Acquired businesses may have insufficient internal controls that we must remediate, and the integration of acquired businesses may require us to modify or enhance our own internal controls, in each case resulting in increased administrative expense and risk that we fail to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
Acquisition of businesses based outside the United States would require us to operate in foreign languages and manage non-U.S. currency, billing, and contracting needs, comply with laws and regulations, including labor laws and privacy laws that in some cases may be more restrictive on our operations than laws applicablenegotiate discounts to our business in the United States.
Acquisitions can sometimes leadseller fees with agencies and advertisers, and we have increasingly been receiving requests from buyers for discounts, rebates, or similar incentives to disputes with the former owners of the acquired company, which can result in increased legal expenses, management distraction and the risk that we may suffer an adverse judgment if we are not the prevailing party in the dispute.
The purchase price allocation for any acquisition we complete is generally not finalized until well after the closing of the acquisition, and any final adjustment to the valuation could change the fair values assigned to the assets and liabilities, resulting in a changemove more advertising spending to our consolidated financial statements, including a changeplatform. We believe that because our business has many fixed costs, increases in advertising spend volume create opportunity to goodwill. Such changedisproportionately improve net income, even with increased seller fee discounts. However, our results could be material.negatively impacted if our advertising spend increases and cost leverage is not adequate to compensate for discounted fees.
Risks Related to Our Business, Growth Prospects and Operating Results
Our new DemandDemand Manager service requires significant upfront investments, has a long on-boarding and ramp-up period, and may not be successful.successful.
We haveIn 2019 we announced a new offering called Demand Manager. Demand Manager helps sellers effectively monetize their advertising inventory through configuration tools and analytics to make it easier to deploy, configure, and optimize Prebid-based header bidding solutions.We charge sellers a fee for Demand Manager that is based on all of the sellers’ advertising spending managed through Demand Manager, whether the actual inventory monetization runs through our exchange or otherwise. In October 2019, we also acquired RTK.io, Inc., a provider of header bidding solutions similar to Demand Manager. Before clients are able to begin using Demand Manager, we expend a significant amount of time and costs in the initial setup and implementation, and we do not recognize revenue from Demand Manager clients until we commence services, often after an additional initial trial period. Clients typically initially manage only a small portionThe pace of their inventory withadoption of Demand Manager and the pace of potential inventory ramp up will dependdepends on the successfeatures and capabilities provided by both our Demand Manager product,solution, as well as acceptance and to a large extent on the developmentexpansion of the underlying Prebid-based header bidding solutions, which we do not control. Moreover, these services remain in the early stages of development and will require significant time, effort, and cost before we can determine the likelihood of market success. While we anticipate long-term revenue growth from Demand Manager, there can be no assurance thatthat we will be able to add additional clients to our service or expand the inventory managed by current clients and thus grow revenue. We do not expect significant contributions from Demand Manager in the near term.
We made a strategic decision to reduce our pricing by lowering and then eliminatingeliminate our buyer fees in 2017, resulting inwhich at the time accounted for a significant revenue declines. We are now pursuing a higher volume, lower cost business model, which involves risks and may not succeed.percentage of our revenue.
The ad tech market is demanding more efficiency and lower cost from intermediaries like us. In an effort to be more competitive in attracting demand and capturing inventory supply, we made a strategic decision in mid-2017 to reduce the fees we
charged buyers in open market, real-time bidding, or RTB, transactions. In addition, in 2017 our business mix shifted to a higher proportion of header bidding transactions, and we charged lower buyer fees for header bidding transactions in order to pass higher bids to the downstream decisioning process. Finally, in response to increasing market pressure and in an effort to be more competitive, on November 1, 2017 we eliminated our buyer transaction fees altogether.
fees. Buyer transaction fees represented approximately 49% of our revenue for the first ten months of 2017, which is the period during which we charged buyer fees in 2017, and represented approximately 43% of our revenue in 2017. Consequently, the elimination of our buyer transaction fees has had a severe adverse effect on our revenue and margins. We must continue to increase transactional activity on our platform dramatically to make up for this lost revenue and maintain growth. A critical part of our planIn order to adjust tofor the elimination of these fees, we refocused our lower take rates is to increase advertising spendingbusiness on our platform and operate with improved efficiency that will support lower margins. To increase ourgrowing advertising spend we are taking stepsthrough increased volume of transactions and operating with increased efficiencies. These initiatives included investments in bid shaping and bid filtering technology that has allowed us to increase significantly the ad requests coming fromimprove our seller clients, which represent inventory available for purchase on our platform, and to increasefill rate, or the percentage of ad requests that we convert into successful transactions (fill rate). We also actively discuss with buyers consolidating their spend ontoon our platform (commonly known as supply path optimization, or SPO). that are monetized.
WeThough we’ve taken steps to significantly increase advertising spend on our platform, we may not succeed in continuing to increase the inventory on our platformtransaction volume or improvingimprove fill rates for various reasons. Some of our competitors have matched our price reductions and developed their own filtering capabilities, thereby reducing the competitive advantage we seek to develop, and this could increase in the future. From time to time, sellers decide to reduce the number of exchanges with which they integrate and choose competitors over us. Large sources of supply that have their own monetization capabilities and also allow us to connect to their exchanges and bid on their inventory have in some cases reduced or eliminated our access to their inventories. Providers of third-party header bidding solutions from time to time impose prohibitive terms. Much of our inventory growth has been through header bidding or other downstream decisioning arrangements; we must compete effectively with other sources of demand to purchase that inventory, which has been difficult because some of our competitors have more robust demand or more effective technology or offer better pricing or service. In addition, operating at higher volumes with lower margins requires scale and efficiency, and we have found it difficult to compete successfully with our largest competitors as the market has evolved to aggressive price cutting. Finally, buyers have demanded and we expect will continue to demand certain concessions, rebates, or other consideration in order to direct additional spend to us, and there is no guarantee that any additional spend will materialize even if we make these concessions or offer rebates or other forms of consideration.rates. To the extent we are unable to compensate for our price reductions by continuing to increase advertising spend on our platform, our revenue will decline, we will not be able to grow our business, our cash resources may be depleted, and we may be forced to seek additional capital to support our business and operations. If we are required to cut costs further in order to remain competitive, we may have difficulty identifying and implementing significant additional cost reduction measures without adversely impacting our operations and our ability to provide competitive services to our clients.
Our technology development efforts may be inefficient or ineffective, which may impair our ability to attract buyers and sellers.
We face intense competition in the marketplace and are confronted by rapidly changing technology, evolving industry standards and consumer needs, regulatory changes, and the frequent introduction of new solutions by our competitors thatto which we must adapt and respond to.respond. Our future success will depend in part upon our ability to enhance our existing solution and to develop and introduce competing new solutions in a timely manner with features and pricing that meet changing client and market requirements. Our solutions are complex and can require a significant investment of time and resources to develop, test, introduce, and enhance. These activities can take longer than we expect. We schedule and prioritize our development efforts according to a variety of factors, including our perceptions of market trends, client requirements, and resource availability; however, we may encounter unanticipated difficulties that require us to re-direct, scale back, or modify our efforts. If development of our solution becomes significantly more expensive due to changes in regulatory requirements or industry practices, or other factors, we may find ourselves at a disadvantage to larger competitors with more resources to devote to development. These factors place significant demands upon our engineering organization, require complex planning, and can result in acceleration of some initiatives and delay of others. We have expanded our use of outsourced software development,
which may put the company at greater risk with respect to our technology development because we may have less control over the performance of outside programmers and we may be at greater risk of losing their services. To the extent we do not manage our development efforts efficiently and effectively, we may fail to produce solutions that respond appropriately to the needs of buyers and sellers, and competitors may more successfully develop responsive offerings. If our solution is not competitive, buyers and sellers can be expected to shift their business to competing solutions. Buyers and sellers may also resist adopting our new solutions for various reasons, including reluctance to disrupt existing relationships and business practices or to invest in necessary technological integration.
The emergence of header bidding has increased competition from other demand sources and our header bidding solution may not result in revenue growth and may cause infrastructure strain and added cost.
SellersIn the mobile and desktop channels, sellers have embraced header bidding, a technology solution by which impressions that would have previously been exposed to different potential sources of demand in a sequence dictated by ad server priorities are instead available for concurrent
competitive bidding by demand sources. This can help sellers increase revenue by exposing their inventory to more bidders, thereby allocating more inventory to demand sources that value it most highly. However,While header bidding has the potential to increase our access to inventory that otherwise would have been allocated first to other exchanges, thus increasing our revenue opportunity, it has also resulted in a number of demand sources thatchallenges for our business. First, some sellers accept is limited because too many header bidding integrations can cause delays in the transaction execution process, and thereforewith which we must compete with other demand sources for allocations within a sellers' header bidding solution. With sellers thathave had direct relationships may choose not to integrate with us as a header-bidding demand source, withinin which case we will have less opportunity to access their header bidding solution, we may be able to participate in improved demand dynamics by competing for impressions that would previously have been allocated first to demand sources prioritized above us in the seller's ad server, with accompanying potential for improved revenue. However, some sellers choose not to do so, andadvertising inventory through our opportunities with those sellers has been impaired as a result. Certainplatform. Second, certain sources of demand, with unique value propositions areincluding owners of the header bidding solutions, may be prioritized by sellers in their header bidding implementation, leaving us to compete with other competitors forat a competitive disadvantage in the remainder. Further, header bidding allows smaller competitors with less demand and/or fewer established seller relationships to compete for higher-value impressions on a more even footing. Justauction. Third, just as header bidding allows us to compete with demand sources that would previously have been above us in sellers' ad server sequences, it exposes us to additional competition by demand sources that, prior to the emergence of header bidding, might have been below us in the sellers' ad server sequences or otherwise unable to compete effectively for inventory. ThisLastly, header-bidding has contributed to our loss of market share for RTB desktop display inventory.
We havevastly increased the number of installations of our header bidding solution with sellers. However, the productivity of our implementations to date has varied among sellers as a result of factors over which we have limited control, including seller systems and capabilities, technical proficiency of seller implementations, and third-party code that sellers load onto their pages. As a result, many implementations require individualized adaptation and troubleshooting. Because header bidding has typically relied upon the consumer’s browser for execution, header bidding auctions can fail if the consumer’s browser is not updated or if the consumer’s internet connection is slow, and header bidding can cause increased load times for content, adversely affecting user experience. Mobile browsers present additional difficulties. One alternative is to migrate functionality away from the client-side to the server-side, which is more highly controlled and should support faster load times. We are pursuing server-side solutions, but they present their own challenges. Adding an additional step between the user’s browser and the demand source can cause increased latency and limit the amount of user data that is transmitted, contributing to difficulties in user data syncing and resulting adverse effects on audience targeting. Server-side technology also significantly increases the volume of demand sourcesad requests that canneed to be accommodated,processed and analyzed through our system, resulting in increased competition for impressions. Further, the exchange hosting the server-side technology used in a particular transaction has an advantage in user sync with its demand sources, at least until some form of universal user identification approach gains significant market adoption. In the future,infrastructure costs.
If we plan to host more server-side header bidding solutions for our sellers, but this will increase our infrastructure costs, which we will not recover without increasing our fill rates.
As we invest in development of next-generation header bidding technology, we must continue working toare unable improve the efficiency and effectiveness of our current header bidding solution and installations. Untilinstallations we address these transitional issues, we willmay not fully offset thethese increased infrastructure costs, associated with the higher volume of ad and bid requests we process as a result of header bidding; and we will not be able to take full advantage of the opportunities made available through current header bidding technology to access a larger addressable market and increase our revenue by capturing a greater share of higher value inventory. In addition, our success in monetizing impressions through header-bidding solutions is dependent on the expansion of header bidding exposes more inventory to competitive bidding, thereby potentially resulting in increased volatilityinteroperability of our operating resultsplatform with little warning asproprietary header-bidding solutions, some of which are owned by our competitors. As a result, of various factors, includingwe may be susceptible to evolution in technology and changes in business practices by the owners of such as competitors’ bidding tactics and sellers’ ad server integration and management.header-bidding solutions that we cannot predict.
While header-bidding technologies have not been largely adopted by CTV sellers, such solutions or similar solutions geared towards unifying demand may become more prevalent in the future. If we are not able to effectively adapt our technology to such solutions or if their adoption results in increased competition for CTV inventory, we may have reduced opportunities or it may be more costly to monetize this inventory, which would negatively affect our results.
We must increase the scale and efficiency of our technology infrastructure to support our growth and transaction volumes.
Our technology must scale to process the increased ad requests on our platform. Additionally, for each individual advertising impression created when a user visits a website or uses an application where our auctions technology is integrated, our technology must send bid requests to appropriate buyers, receive and process their responses, select a winner, and, increasingly, integrate with downstream decisioning systems. It must perform these transactions end-to-end within milliseconds. We must continue to increase the capacity of our platform to support our high-volume strategy, to cope with increased data volumes and parties resulting from header bidding and an increasing variety of advertising formats and platforms, and to maintain a stable service infrastructure and reliable service delivery. Delivering this increased capacity while concurrently reducing organizational costs or maintaining our current lower cost structure will require us to implement more efficient data processing and traffic filtering. To the extent we are unable, for cost or other reasons, to effectively increase the capacity of our platform, continue to process transactions at fast enough speeds, and support emerging advertising formats or services preferred by buyers, our revenue is adversely affected by the inability to obtain new buyers or sellers, loss of existing buyers or sellers, or failure to process auction transactions in a timely manner.will suffer. We expect to continue to invest in our platform to meet increasing demand. Such investment may negatively affect our profitability and results of operations.
Our belief that there is significant and growing demand for private marketplace solutions may be inaccurate, and we may not realize a return from our investments in that area.
We believe there is significant and growing demand for PMPs, and we have made significant investments to meet that demand and grow our market share of PMPs. Currently, the majority of CTV transactions are executed through PMPs and we expect PMPs to grow as a percentage of revenue in mobile and desktop as well. PMPs may involve lower fees than we can charge for our real-time bidding services,OMP, which may not be fully offset by anticipated higher CPMs. In some cases, we have experienced fee pressure as we have built out our PMP offering, and we expect this fee pressure to increase as more competitors, including new entrants as well as sellers themselves, build their own technology and infrastructure to enter this business. Even if the market for these solutions develops as we anticipate, buyers and sellers might not embrace our offerings to the degree we expect due to various factors. For example, we may not be successful in building out these offerings consistent with our vision, and competitive offerings are offered at lower prices and are perceived as having better features and functionality. We may also be unable to scale our solution to markets outside of the United States due to local currency or other specific regulatory or operational requirements that we are unable to comply with.enable PMPs. Even if the market for these solutions develops as we anticipate, and our buyers and sellers embrace our offerings, the positive effect of our PMP offerings on our results of operations may be offset or negated if PMPs cannibalize our open marketplace transaction volumes, by similar offerings from our competitors, or through other adverse developments.
Our expectations regarding the growth prospects
We compete for demand with well-established companies that have technological advantages stemming from their experience in the market. We must continue to adapt and improve our demand technology to compete effectively, and buyers have not always embraced our offering due to various factors, including the perception that competitors have superior technology or produce better results. Buyers’ efforts to optimize their supply paths have resulted in demands for transparency, inventory quality accountability, and longer payment terms. Some buyers are demanding access to data that we are restricted from sharing by our arrangements with sellers. Providing transparency to our buyers could negatively affect our sellers if buyers favor inventory that have lower fees. Some buyers also seek certain concessions, rebates, or other forms of consideration in order to increase their spending or continue spending with us at all. These factors may make it difficult for us to increase our business with some buyers, cause some buyers to reduce their spending with us, and increase our costs of doing business.
We have invested heavily in our mobile technology, which poses additional risks that did not affect our legacy desktop display business. Mobile connected devices, their operating systems, Internet browsers, or content distribution channels, including those controlled by our competitors, have in some instances developed in ways that make it difficult for advertisements to be delivered to their users. Further, we rely upon relationships with third parties to provide our buyers with access to large numbers of mobile inventory sellers that utilize third-party technology to display ads. To the extent our access to mobile inventory is limited by third-party technology or lack of direct relationships with mobile sellers, our ability to grow our business will be impaired.
Due to increased usage of mobile devices and resulting migration of advertising spending to mobile platforms, we have invested heavily in our mobile technology and are relying on our mobile offerings to fuel our continued growth. Because mobile advertising uses different data-capture techniques and methods of recording payable transactions, caters to different buyer budgets, may require us to enter emerging markets in which we have less experience, including China and India, and involves development challenges imposed by differing technological requirements and standards, there can be no assurance that we will be successful in achieving our goals in this market. Moreover, buyers' spending to reach consumers through mobile advertising may evolve more slowly than expected, or not grow to levels we anticipate. Our mobile investment has been focused on real-time bidding of mobile impressions, and that market may not grow as we expect. Our success in the mobile channel depends upon the ability of our technology solution to provide advertising for most mobile-connected devices, as well as the major operating systems or Internet browsers that run on them and the thousands of applications that are downloaded onto them. The design of mobile devices and operating systems, applications, or Internet browsers is controlled by third parties. These parties frequently introduce new devices and applications, and from time to time they may introduce new operating systems or Internet browsers or modify existing ones in ways that may significantly affect our business, such as by providing ad-blocking capabilities or by limiting access to Internet user data. Network carriers may also affect the ability to access specified content on mobile devices. To the extent our solution is unable to work on these devices, operating systems, applications, or Internet browsers for any reason, our ability to generate revenue through mobile advertising is significantly impaired, and that impairment may be material.
Our growth depends uponWe expect mobile applications to be the largest driver of our ability to attract and retain buyers and sellers and increase business with them. Most of the application providers selling inventory through our platformmobile business. Many mobile apps utilize software development kits, or SDKs, and other proprietary technology of third parties, such as aggregators, and it is those third parties, not the application providers themselves, that contract with us to provide exchange services to help monetize the inventory. From timeDue to timethis consolidation, if our relationships with these third parties decline or are terminated, the scaleit may result in a larger than usual loss of these third parties' business with application providers is reduced, these third parties develop their own solutions that render ours obsolete, and the third parties' clients begin transacting directly between each other rather than through the
third party, which causes the amount ofaccess to mobile inventory available through our platform to decline.inventory. Any rapid and/or significant decline in the availability of mobile inventory can adversely affect our mobile advertising spend and growth prospects.
Fee issues have in the past and could in the future have a material adverse effect on our business.
A majority of our advertising spendrevenue comes from DSP buyers purchasing advertising inventory in RTB transactionsmade available by sellers on our platform. We experience requests from buyers and sellers for discounts, fee concessions or revisions, rebates or other forms of consideration, refunds, and greater levels of pricing transparency and specificity, in some cases as a condition to maintain the relationship or to increase the amount of advertising spend that the buyer sends to our platform. In addition, we charge fees to sellers for use of our technology, typically as a percentage of the cost of media, and we may decide to offer discounts or other pricing concessions in order to attract more inventory or demand, or to compete effectively with other providers that have different or lower pricing structures and may be able to undercut our pricing due to greater scale or other factors. Our revenue, take rate (our fee as a percentage of advertising spend), the value of our business, and the price of our stock could be adversely affected if we cannot maintain and grow our revenue and profitability through volume increases that compensate for price reductions, or if we are forced to make significant fee concessions, rebates, or refunds, or if buyers reduce spending with us or sellers reduce inventory available through our exchange due to fee disputes or pricing issues.
Our take rates may be difficult to forecast and may decrease in future periods; any decrease in our take rates may result in a decrease in our revenue notwithstanding an increase in the amount of spend transacted through our platform.
We generate revenue through our platform on a transactional basis where we are paid by a publisher each time an impression is monetized on our platform. Typically, this fee is structured as a percentage of advertising spend that the publisher receives for its inventory. Our take rate varies by publisher and transaction type. For instance, our take rate tends to be lower for PMP transactions compared to open auction, and tends to be lower on CTV transactions compared to other channels. We may also negotiate lower take rates with large sellers to win additional business or share of inventory, in particular in CTV.
Even if we are able to accurately forecast the anticipated total advertising spend transacted by buyers across our platform, we may have limited visibility regarding the revenue we will generate because we do not control what publisher inventory is purchased by a buyer. For substantially all transactions executed through our platform, our revenue is recognized net of any inventory costs that we remit to sellers. As a result, a decrease in our take rate could cause our revenue to decrease notwithstanding an increase in the total spend transacted through our seller platform.
We have a history of losses and we face many risks that may prevent us from achieving or sustaining profitability in the future.
Despite an increase in revenue in 2019, weWe reported net losses of $25.5$53.4 million and $61.8$25.5 million during the years ended December 31, 20192020 and 2018,2019, respectively. As of December 31, 2019,2020, we had an accumulated deficit of $341.1$394.5 million. We have implemented strategic plans designed to improve our financial performance and continue to increase revenue, and have taken steps to reduce unnecessary expenses and redirect spending to areas we expect to produce higher growth; however, these plans and steps may ultimately prove to be unsuccessful.
Notwithstanding these measures, and in light of the adoverall decline in advertising spend growth experienced in 2019,2020, revenue may continue to decrease due to competitive pressures, maturation of our business, or other factors, and additional cost-reduction measures may be required even as we must continue to increase investment in technology in response to industry
developments and to retain competitiveness. We may not be able to sustain growth or to achieve or sustain profitability in the future.
As a result of various factors, our operating results have in the past and may in the future fluctuate significantly, be difficult to predict, and fall below analysts' and investors' expectations.
Our operating results are difficult to predict, particularly because we generally do not have long-term contracts with buyers or sellers. We have experienced significant variations in revenue and operating results from period to period, and operating results may continue to fluctuate and be difficult to predict due to a number of factors, including:
•seasonality in demand for digital advertising, as many advertisers devote a disproportionate amount of their advertising budgets to the fourth quarter of the calendar year to coincide with increased holiday purchasing, and advertising inventory in the fourth quarter may be more expensive due to increased demand for advertising inventory;
•changes in pricing of advertising inventory or pricing for our solution and our competitors' offerings, including potential further reductions in our pricing and overall take rate as a result of competitive pressure, changes in supply, improvements in technology and extension of automation to higher-value inventory, uncertainty regarding rate of adoption, changes in the allocation of demand spend by buyers, changes in revenue mix, auction dynamics, pricing discussions or negotiations with clients and potential clients, header bidding and other factors;
•diversification of our revenue mix to include new services, some of which may have lower pricing than our historic lower-value inventory business or may cannibalize existing business;
•the addition or loss of buyers or sellers;
•general economic conditions and the economic health of our current and prospective sellers and buyers;
•changes in the advertising strategies or budgets or financial condition of advertisers;
•the performance of our technology and the cost, timeliness, and results of our technology innovation efforts;
•advertising technology and digital media industry conditions and the overall demand for advertising, or changes and uncertainty in the regulatory environment for us or buyers or sellers, including with respect to privacy regulation;
•the introduction of new technologies or service offerings by our competitors and market acceptance of such technologies or services;
•the phasing out of third-party cookies throughout the industry;
•our level of expenses, including investment required to support our technology development, scale our technology infrastructure and business expansion efforts, including acquisitions, hiring and capital expenditures, or expenses related to litigation;
•the impact of changes in our stock price on valuation of stock-based compensation or other instruments that are marked to market;
•the effectiveness of our financial and information technology infrastructure and controls;
•geopolitical and social factors, such as concerns regarding negative, unstable or changing economic conditions in the countries and regions where we operate, global and regional recessions, political instability, and trade disputes;
•foreign exchange rate fluctuations; and
•changes in accounting policies and principles and the significant judgments and estimates made by management in the application of these policies and principles.
Because significant portions of our expenses are relatively fixed, variation in our quarterly revenue can cause significant variations in operating results and resulting stock price volatility from period to period. In order to minimize adverse effects of our price reductions on revenue, we must increase the inventory and advertising spend on our platform and add more high-value inventory, which requires ongoing investment that can adversely affect earnings and might ultimately be unsuccessful. Period-to-period comparisons of our historical results of operations are not necessarily meaningful, and historical operating results may not be indicative of future performance. If our revenue or operating results fall below the expectations of investors or securities analysts, or below any guidance we may provide to the market, the price of our common stock could decline substantially.
Risks Related to the Advertising Technology Industry, Market, and Competition
Our revenue and operating results are highly dependent on the overall demand for advertising. Factors that affect the amount of advertising spending, such as economic downturns, can make it difficult to predict our revenue and could adversely affect our business.
Our business depends on the overall demand for advertising and on the economic health of our current and prospective sellers and buyers. If advertisers reduce their overall advertising spending, our revenue and results of operations are directly affected. Various macro factors could cause advertisers to reduce their advertising budgets, including adverse economic conditions and general uncertainty about economic recovery or growth, particularly in North America and Europe, where we do most of our business, the occurrence of a pandemic or other health crisis, instability in political or market conditions generally,
imposition of digital service taxes, and any changes in favorable tax treatment of advertising expenses and the deductibility thereof. Reductions in inventory due to loss of sellers make our solution less robust and attractive to buyers.
Risks Related to the Advertising Technology Industry, Market, and Competition
Market conditions are increasing the costs and risks of our operations.
Due to various factors, including header bidding, market pressure from the increasing share of the digital advertising economy absorbed by Google and Facebook, disintermediation, and demands by both buyers and sellers of digital advertising for increased efficiency and value throughout the ecosystem, business conditions are becoming more difficult for intermediary businesses like ours. We see this in various ways. Both demand and supply for digital advertising inventory outside the “walled garden” companies are becoming less unique, contributing to commodification of the business. Buyers and sellers are demanding more favorable trade terms, which puts pressure on our cash collections cycle and can require more of our cash to fund our payments, making it unavailable to invest in growth. Buyers increasingly require us to accept liability for inventory quality and sellers increasingly require us to accept liability for ad content, despite the fact that we are not in direct control of either. Increased buyer vigilance regarding non-human traffic and other inventory quality issues, and varying inconsistent methodologies for assessing inventory quality, are causing buyers increasingly to withhold payment for transactions they question. Buyers and sellers are increasingly insisting upon using their own data to resolve discrepancies in transaction counts more favorably to them, resulting in some revenue loss. These and similar trends increase the costs and risks of our operations and put pressure on our margins.
The digital advertising market is relatively new, dependent on growth in various digital advertising channels, and vulnerable to adverse public perceptions and increased regulatory responses.new. If this market develops more slowly or differently than we expect, or if issues encountered by other participants or the industry generally are imputed to or affect us, our business, growth prospects and financial condition would be adversely affected.
While our core business of desktop display advertising has been used successfully for many years, marketing via new digital advertising channels, such as mobile and social media, out-of-home, and digital video advertising, are emerging and may evolve in unexpected ways, and ourOur future growth will be constrained if we are not able to adapt successfully to market evolution. In addition, the success of our efforts to advance new solutions for increased advertising automation will depend upon adoption of our solution by personnel at buyers and sellers in lieu of their traditional methods of order placement. It is difficult to predict adoption rates, demand for our solution, the future growth rate and size of the digital advertising solutions market or the entry of competitive solutions.
Further, the digital advertising industry is complex and evolving, and the relatively few publicly traded companies operating in the business tend to be small and new to the public markets. Consequently, the digital advertising industry may not be as widely followed or understood in the financial markets as more mature industries. The markets may not fully appreciate our
particular place in the industry and our strengths and differentiating factors. Problems experienced by one industry participant (even private companies) or issues affecting a part of the industry have the potential to have adverse effects on other participants in the industry or even the entire industry. Emerging understanding of how the digital advertising industry operates has spurred privacy concerns and misgivings about exploitation of consumer information and prompted regulatory responses that limit operational flexibility and impose compliance costs upon industry participants.
Any expansion of the market for digital advertising solutions depends on a number of factors, including social and regulatory acceptance, the growth of the overall digital advertising market and the growth of specific sectors including social, mobile, video, and out-of-home as well as the actual or perceived technological viability, quality, cost, performance and value associated with emerging digital advertising solutions. If demand for digital display advertising and adoption of automationmarketing does not continue to grow, or there is a reductiondevelop in demand for digital advertising caused by weakening economic conditions, decreases in corporate spending, quality, viewability, malware issues or other issues associated with buyers, advertising channels or inventory, negative perceptions of digital advertising, additional regulatory requirements, or other factors, or ifthe manner we fail to develop or acquire capabilities to meet the evolvingexpect, our business and regulatory requirements and needs of buyers and sellers of multi-channel advertising, our competitive position willfinancial condition would be weakened.adversely affected.
We operate in an intensely competitive market that includes companies that have greater financial, technical and marketing resources than we do.
We face intense competition in the marketplace. Our revenue is vulnerable to acts by third parties that reduce the amounts of spending or inventory available to us. We compete for advertising spending against competitors that, in some cases, are also buyers and/or sellers on our platform. We also compete for supply of advertising inventory against a variety of competitors. Some of our existing and potential competitors are better established, benefit from greater name recognition, may have offerings and technology that we do not have or have significantly more financial, technical, sales, and marketing resources than we do. For example, the amount of inventory available to independent platforms like us could be reduced as a result of decisions by Facebook to emphasize content viewable through its site or to favor friends-and-family type feeds over third-party properties, or decisions by Google to utilize its ad server advantages to outbid us and other competitors in open-market transactions. In addition, some competitors, particularly those with greater scale or a more diversified revenue base and a broader offering, have greater flexibility than we do to compete aggressively on the basis of price and other contract terms, or to compete with us by including in their product offerings services that we may not provide. Some competitors are able or willing to agree to contract terms that expose them to risks that might be more appropriately allocated to buyers or sellers of advertising (including inventory risk and the risk of having to pay sellers for unsold advertising impressions), and in order to compete effectively we might need to accommodate risks that could be difficult to manage or insure against. Some existing and potential buyers have their own relationships with sellers or are seeking to establish such relationships, and many sellers are investing in capabilities that enable them to connect more effectively directly with buyers. Our business suffers to the extent that buyers and sellers purchase and sell advertising inventory directly from one another or through other intermediaries other than us, reducing the amount of advertising spend on our platform. In addition, as a result of solutions introduced by us or our competitors, our marketplace will experience disruptions and changes in business models, which may result in our loss of buyers or sellers. Our innovation efforts may lead us to introduce new solutions that compete with our existing solutions. New or stronger competitors may emerge through acquisitions and industry consolidation or through development of disruptive technologies. If our offerings are not perceived as competitively differentiated, we could lose clients, market share or be compelled to reduce our prices, making it more difficult to grow our business profitably. Finally, nefarious, illegal, or disreputable acts by one or more of our competitors could affect the reputation and trustworthiness of the ad tech industry as a whole, which could negatively affect our revenue because buyers and sellers could decide to focus their activities on larger, more established industry participants.
There has been rapid evolution and consolidation in the advertising technology industry, and we expect these trends to continue, thereby increasing the capabilities and competitive posture of larger companies, particularly those that are already dominant in various ways, and enabling new or stronger competitors to emerge. Many buyers and sellers are large consolidated organizations that may need to acquire other companies in order to grow. Smaller buyers and sellers may need to consolidate in order to compete effectively. There is a finite number of large buyers and sellers in our target markets, and any consolidation of buyers or sellers may give the resulting enterprises greater bargaining power or result in the loss of buyers and sellers that use our platform, and thus reduce our potential base of buyers and sellers, each of which would lead to erosion of our revenue.
As technology continues to improve and market factors continue to attract investment, competition and pricing pressure may increase and market saturation may change the competitive landscape in favor of larger competitors with greater scale and broader offerings, including those that can afford to spend more than we can to grow more quickly and strengthen their competitive position through innovation, development and acquisitions.position. In order to compete effectively, weaddition, our competitors or potential competitors may need to innovate, further differentiate our offerings, and expand the scopeadopt certain aspects of our operations more quickly than would be feasible through our own internal efforts. However, because some capabilities may reside only in a small number of companies,business model, which could reduce our ability to accomplish necessary expansion through acquisitions may be limited because available companies may not wish to be acquired or may be acquired bydifferentiate our solutions.
larger competitors with the resources to outbid us, orFor all of these reasons, we may need to pay substantial premiums to acquire those businesses. Our ability to make strategic acquisitions has also been hampered by the significant declines we have experienced in the value of our common stock in the past, because our stock may not be viewed favorably as acquisition currency by an acquisition target,able to compete successfully against our current and the lower our stock price, the more dilution results from stock-based acquisitions.future competitors.
Risks Related to Our Collection, Use and Disclosure of Data
Our business depends on our ability to collect and use data to deliver advertisements, and to disclose data relating to the performance of advertisements. Any limitation imposed on our collection, use or disclosure of this data could significantly diminish the value of our solution and cause us to lose sellers, buyers, and revenue. Consumer tools, regulatory restrictions and technological limitations all threaten our ability to use and disclose data.
The more informed advertising is about its audience, the more valuable it is. Programmatic advertising facilitated by the ad tech ecosystem, enables more precise audience targeting known as "behavioral" or "personalized" advertising. Behavioralbased on the identity and actions of the user. Targeted advertising is generally more effective and valuable for buyers than other types of advertising, resulting in more revenue for publishers.sellers. In order to perform behavioraltarget advertising, we and our clients must be permitted to use data in a variety of ways. Our ability to collect, use, and share data about advertising purchase and sale transactions and user behavior and interaction with content is critical to the value of our services, and any limitation on our data practices could impair our ability to deliver effective solutions that meet the needs of sellers and buyers of advertising, resulting in loss of volume and reduced pricing.to our clients. Any restriction on the types
of data we use to capture user or inventory informationcollect could make placement of advertising through our solution less valuable, with commensurate reductions in revenue.
Internet users can, with increasing ease, implement practices or technologies that may limit our ability, or that of our sellers, buyers and business partners, to collect anddata. For example, users may delete or block the use data to deliver advertisements, or otherwise inhibit the effectiveness of our solution. First, cookies may easily be deleted or blocked by Internet users. All of the most commonlycookies used Internet browsers allowto collect data, including through their browser or mobile device settings. Internet users to modify their browser settings to block first-party cookies (placed directly by the publisher or website owner that the user intends to interact with) or third-party cookies (placed by parties, like Rubicon Project, that have no direct relationship with the user). Browsers are increasingly blocking third-party cookies by default, and the industry is continuing to move away from third-party cookies altogether. Most browsersmay also now support temporary privacy modes that allow the user to suspend, with a single click, the placement of new cookies or reading or updates of existing cookies.
Some Internet users also download free or paid "ad blocking" software not only for privacy or security reasons, such as a desire to avoid being targeted for ads based upon location or online activity, but also to counteract the adverse effect advertisements can have on users' experience, including increased load times, data consumption, and screen overcrowding. Similar ad blocking technology has also emerged for mobile devices. Such ad blocking technology may preventthat prevents certain third-party cookies or other tracking technologies, from being stored on a user'suser’s computer or mobile device. If more Internet users adopt these measures, our business could be harmed. Ad blocking technologies have an adverse effect on our business when they reducedevice, including to prevent the volume or effectiveness (and therefore value)display of advertising.targeted advertisements. In addition, some ad blocking technologies block only adsmost widely used web browsers allow users to send "Do Not Track" signals to indicate that they do not wish to have their web usage tracked, while many device manufacturers and operating systems are targeted through useincreasingly promoting features that allow users to disable the collection of third-party data, while allowing ads based on first-party data (i.e. data owned by the provider of the website or application being viewed). These ad blockers place us at a disadvantage because we rely on third-party data, while large competitors have troves of first-party data they use to direct advertising. Other technologies allow ads that are deemed "acceptable," which could be defined in ways that place us or our clients at a disadvantage, particularly if such technologies are controlled or influenced by our competitors.data. Even if ad blockers do not ultimately have a material impact on our business, investor concerns about ad blockers could cause our stock price to decline.
In addition, new laws and regulations, such as the GDPR and CCPA, restrict the ability to collect and process certain types of user data, including, in the case of GDPR, requiring user consent or another legal basis in order to collect or process personal data and, in the case of CCPA, giving the user a right to opt out of the collection or processing of personal data. To the extent sellers are unable to obtain valid consent or otherwise provide a legal basis for collecting and processing personal data, it would impair the ability to deliver targeted advertisements on their inventory.
Further, much of the data we collect and use belongs to our buyers or sellers, and we receive their permission to use it. (Other data is subject to control by Internet users, either as a result of regulation or through choices such as behavioral advertising opt-outs or use of ad blocking technologies, as discussed below). We use data related to our buyers and sellers and their transactional activity on our platform to facilitate our services, but we must exercise care not to use this data in ways that provide unfair advantages to, or adversely affect, buyers or sellers. Although our sellers and buyers generally permit us to aggregate and use data from advertising placements, subject to certain restrictions, sellers or buyers might decide to restrict our collection or use of their data. There could be various reasons for this, including perceptions by buyers that their data can be used by sellers to extract higher prices for impressions, or perceptions by sellers that their data can be used by buyers to bid tactically to reduce pricing for impressions. Buyers and sellers may also request that we discontinue using data obtained from their transactions that has already been aggregated with other data. It would be costly and difficult, if not impossible, to comply with such requests. As consumers continue to increase their use of digital technology and to incorporate multiple devices into their lives, linking and using data across such devices will become increasingly important. Various challenges affect our ability to link data relating to discrete devices or browsers, including different technologies, increased user awareness and sensitivity regarding use of data about their device usage, and evolving regulatory and self-regulatory standards. These challenges may slow growth, and if we are not able to cope with these challenges as effectively as other companies, we will be competitively disadvantaged. Any limitation on our ability to collect data
about user behavior and interaction with content could make it more difficult for us to deliver effective solutions that meet the needs of sellers and buyers.
If cookies are replaced by alternative tracking mechanisms, our performance may decline and we may lose buyers and revenue.
Some prominent sellers, including Google,Industry participants in the advertising technology ecosystem have announced intentionstaken or may take action to discontinueeliminate or restrict the use of cookies and other identifiers, and we expect the use of third-party cookies to develop alternative methods and mechanisms for tracking web users. Itbe largely phased out by 2022. For instance, Google has announced plans to fully eliminate the use of third-party cookies, while Apple has further restricted the use of mobile identifiers on its devices. In the absence of third-party cookies, it is possible that these or other companies in our ecosystem may rely on proprietary algorithms or statistical methods to track web users without cookies, or may utilize log-in credentials entered by users, into other web properties owned by these companies, such as their digital email services, to track web usage, including usage across multiple devices, without cookies. Alternatively, such companies may build different and potentially proprietary user tracking methods into their widely-used web browsers.
If cookies While these new identification solutions will likely provide some level of consistency and compatibility with our platform, they are effectively replaced by proprietary alternatives, our continued reliance upon cookie-based methods may face negative consumer sentimentunreleased and otherwise place us at a competitive disadvantage, compellingunproven, and will require substantial development and commercial changes for us to develop or license alternative proprietary tracking methodologies. Development would take time, potentially subjecting us to competitive disadvantages, and require substantial investment from us. Developmentsupport. There is also may not be commercially feasible given our relatively small size, the fact that development of such technologies may require technical skills that differ from our core engineering competencies, and the likelihoodfurther risk that the market would adopt solutions developed by larger competitors. Licensing new proprietary tracking mechanisms and data from companies that have developed them may not be viable for us for various reasons; creatorschanges will disproportionately benefit the owners of such technology may compete with us and may offer to providethese platforms or the technology to us only on unfavorable terms or not at all, and if proprietary web tracking standards are owned by sellers or browser operatorslarge walled gardens that have access to user information by virtuelarge amounts of their popular consumer-oriented websites or browsers and design their technology for use in conjunction with the types of user information collected from their websites or design their browser to disfavor third-party cookies, we may still be at a competitive disadvantage evenfirst party data. Even if we license their technology.
If cookies are effectively replaced by open industry-wide tracking standards rather than proprietary standards, we may still incur substantial re-engineering costs to replace cookies with these new technologies. This may also diminish the quality or value of our services to buyers if such new technologies do not provide us with the quality or timeliness of the data that we currently generate from cookies.
Our belief that the elimination of third-party cookies will lead to an increased use of first-party publisher segments may be incorrect.
We believe that the elimination of third party cookies has the potential to shift the programmatic ecosystem from an identity model powered by buyers that are able to aggregate and target audiences through cookies to one enabled by sellers that have direct relationships with consumers and are therefore better positioned to obtain user data and consent for implementing first party identifiers. While we believe that our platform and scale position us well to provide the infrastructure and tools needed for a publisher-centric identity model to succeed, there is no guarantee that our efforts will lead to an increase of the use of first-party publisher segments in the ecosystem. It is also possible that the increased use of first-party publisher segments will disproportionately benefit sellers or the large walled gardens that have access to large amounts of first party data. Additionally, these changes could create some variability in our revenue across certain buyers or sellers, depending on the timing of changes and developed solutions, and even if there is an increase in the proliferation of first-party publisher segments, we may still incur substantial re-engineering costs to optimize our solution for use with such segments.
Risks Related to Regulation
Legislation and regulation of digital businesses, including privacy and data protection regimes, could create unexpected additional costs, subject us to enforcement actions for compliance failures, or cause us to change our technology solution or business model, which may have an adverse effect on the demand for our solution.
Many local, state, federal, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of data collected from and about consumers and devices, and the regulatory framework for privacy issues is evolving worldwide. Various U.S. and foreign governments, consumer agencies, self-regulatory bodies, and public advocacy groups have called for or implemented new regulation directed at the digital advertising industry in particular, and we expect to see an increase in legislation and regulation related to the collection and use of data to target advertisements and communicate with consumers—including the use of mobile device and cross-device data, geo-location data, anonymous Internet user data and unique device identifiers, such as IP address or mobile advertising identifiers—and the collection of data from apps and websites that are directed to children.consumers. Such legislation or regulation could affect the costs of doing business online and may adversely affect the demand for or the effectiveness and value of our solution. Some of our competitors may have more access to lobbyists or governmental officials and may use such access to effect statutory or regulatory changes in a manner that commercially harms us while favoring their solutions.
Various federal privacy bills have been introduced in the U.S. Congress recently and a number of state legislatures,states, including California, have passed or are considering privacy bills. These regulations may place significant restrictions on the collection and use of certain types of data used for behavioral advertising. The FTC has issued guidance on how companies should apply privacy principles to tracking and delivering targeted advertisements to consumers across multiple devices. The FTC has also adopted revisions to the Children's Online Privacy Protection Act that expand liability for the collection of information (including certain anonymousdevice information such as persistent identifiers) by operators of websites and other online services that are directed to children or that otherwise use (for certain purposes) information collected from or about children.
On June 18, 2018,Recently, California passed atwo privacy law inlaws broadly regulating business’ processing of personal information, the California Consumer Privacy Act of 2018 ("CCPA"), and the California Privacy Rights Act ("CPRA"). The CCPA, which grants California residents certain rights with respect to their personal information. The CCPAwent into effect on January 1, 2020, is the most comprehensive data privacy regulation to date in the United States, and could be the precursor to other similar legislation in other states or at the federal level. The CCPA expands the definition ofdefines personal information whichin a way that captures the types of data that we collect, such as device identifiers and IP addresses. Under the CCPA, businesses are requiredCalifornia residents have new privacy rights (including rights of access and deletion), which bear similarity to grant expansive access, deletion and portabilitysome of the data subject rights granted to consumers in the United States, similar to those providedEU residents under the GDPR. In addition, the CCPA gives California residents the
right to opt-out of the sale of their personal information;information or to opt in to such sales, in the case of data relating to minors). The CCPA defines "sale" broadly, which could be interpreted to include typical advertising technology activities; this opt-out right may impact the ability of ad tech companies to provide services to their customers if use of data in providing such services falls under the definition of a sale.customers. The law also imposes burdensome storage andestablishes a new privacy framework for covered businesses, imposing additional compliance obligations on publisherssellers and ad tech companies. Interpretation of the requirements remains unclear due to ambiguities in the recent passageregulations and a lack of enforcement actions to date. The California Attorney General issued final regulations implementing the regulation. CCPA that became enforceable in 2020. Additional modifications were subsequently proposed, though those modifications have yet to be finalized.
The law tookrecently-passed CPRA will take effect in January 2023 and will impose additional notice and opt out obligations on January 1, 2020, withthe digital advertising space, including an obligation to provide an opt-out for behavioral advertising. It will also give the Attorney General enforcement of the CCPA delayed until July 2020. The Attorney General has proposedbroad rule making authority to issue regulations that are still in a public comment period and could be revised. The delay in enforcement and finalizing of the applicable regulations creates uncertainty as to the requirements of the law and its impacthave additional impacts on our business. The CPRA, like the CCPA, will cause us to incur additional compliance costs and may impose additional restrictions on us and on our industry partners.
The CCPA and CPRA may precipitate additional privacy regulation by federal, state and local governments, which may increase our compliance costs and strain our technical capabilities, and which may conflict with each other. If we are unable to comply with the CCPA, CPRA, or other related legislation in the future, we may be subject to regulatory or private investigations, and if we are unable to use information for behavioral advertising as we have in the past, our business could be materially affected.
In addition, the European Union has adoptedEconomic Area ("EEA") and the United Kingdom ("UK"), the General Data Protection Regulation, Regulation (EU) 2016/679.679 ("GDPR"), has now been in effect for more than two years. A key feature of the GDPR is that it treats much of the end-user information that is critical to programmatic digital advertising as "personal data" and therefore subject to significant conditions and restrictions on its collection and use. Without this end-user information, the value of programmatic advertising inventory diminishes, resulting in lower demand and prices, and potentially less adadvertising spend and revenue for us and other industry participants. If European sellers react by choosing to monetize their content through non-advertising-based methods (such as paid subscriptions), or reduce use of personal data subject to the GDPR in order to reduce compliance cost and risk, the volume and value of impressions available through our exchange would decrease, with potentially significant adverse consequences for our business.
The GDPR also sets out higher potential liabilities for certain data protection violations and creates a greater compliance burden for us in the course of delivering our solution in Europe (as outlined further below)Europe. Compliance stakes are high because penalties for violation of the law can reach up to the greater of 20 million Euros or 4% of total worldwide annual turnover (revenue). The
Moreover, the regulatory climate in Europe, in particular, has grown increasingly unfavorable for advertising technology-based business. Regulators have expressed antipathy towards common technologies deployed in digital advertising and we anticipate increased regulatory scrutiny on the digital advertising industry as a whole.
Further, many governments are restricting the transmission or storage of information about individuals beyond their national borders. Such restrictions could, depending upon their scope, limit our ability to utilize technology infrastructure consolidation, redundancy, and load-balancing techniques, resulting in increased infrastructure costs, decreased operational efficiencies and performance, and increased risk of system failure.
These laws and regulations are continually evolving, not always clear, and not always consistent across the jurisdictions in which we do business. Any failure to protect, and comply with applicable laws and regulations or industry standards applicable to, personal data or other data relating to consumers could result in enforcement action against us, including fines, imprisonment of our officers, and public censure, claims for damages by consumers and other affected individuals, damage to our reputation, and loss of goodwill. This is particularly true given that
Recent rulings from the FTC, Attorneys GeneralCourt of various U.S. States and various international regulators (including numerous data protection authorities inJustice of the European Union), have specifically citedUnion invalidated the EU-U.S. Privacy Shield as enforcement priorities certain practices that relate to digital advertising. Evena lawful means for transferring personal data from the perception of concerns relating to our collection, use, disclosure, processing, and retention of data, including our security measures applicableEuropean Union to the data we collect, whether or not valid,United States; this introduces increased uncertainty and may harm our reputation (and the reputation of the digital advertising ecosystem) and inhibit adoption of our solution by current and future buyers and sellers. We are aware of ongoing lawsuits filed against, or regulatory investigations into, companies in the digital advertising industry concerning various alleged violations of consumer protection, data protection, and computer crime laws, asserting various privacy-related theories. Any such proceedings brought against us could hurt our reputation, forcerequire us to spend significant amounts in defense of these proceedings, distractchange our management, increase our costs of doing business, adversely affect the demand for our services or the digital advertising industry at large,EEA and ultimately result in the imposition of monetary liability or restrictions on our ability to conduct our business. We are sometimes contractually liable to indemnify and hold harmless buyers or sellers from the costs or consequences of litigation or regulatory investigations resulting from using our services or from the disclosure of confidential information, which could damage our reputation among our current and potential sellers or buyers, require significant expenditures of capital and other resources and cause us to lose business and revenue.
Legal and compliance uncertainties resulting from effectiveness of the GDPR may result in substantial risk to our ad spend and revenue.
The GDPR, which became effective on May 25, 2018, has imposed significant new regulatory requirements that are applicable to us as well as our clients and competitors. As is frequently the case with transformative new laws, some critical elements of the GDPR are still unclear, and consistent regulatory guidance has yet to be developed, and established industry complianceUK data practices have yet to emerge. Compliance stakes are high because penalties for violation of the law can reach up to the greater of 20 million Euros or 4% of total worldwide annual turnover (revenue). Further, compliance is complicated by the potential for differing interpretation and enforcement of the GDPR by regulators in each of the EEA’s member states. The reach of the GDPR extends well beyond ad tech, but some observers believe that ad tech may become a special focus of enforcement due to the concerns many European privacy regulators have expressed about digital behavioral advertising.
If European publishers react by choosing to monetize their content through non-advertising-based methods (such as paid subscriptions), or reduce use of personal data subject to the GDPR in order to reduce compliance cost and risk, the volume and value of impressions available through our exchange would decrease, with potentially significant adverse consequences for our business. If we are subjected to regulatory investigations or private claims, we could face significant fines and losses, and our financial position could be materially affected. In addition, the GDPR permits some form of representative actions, which may be similar to class actions or collective actions in the United States. Allowing such representative actions may incentivize parties, organizations, and/or advocates to pursue private legal action relating to data protection violations more aggressively.
rely on an alternative legally sufficient compliance measure.
The GDPR generally prohibits the transfer of personal data of EUEEA and UK subjects outside of the European Union and the UK to countries whose laws do not ensure an adequate level of protection, unless a lawful data transfer solution has been implemented orimplemented. On July 16, 2020, in a case known as "Schrems II," the Court of Justice of the European Union ("CJEU") ruled on the validity of two of the primary data transfer derogation applies.solutions. The Rubicon Project, Inc. is established infirst method, EU-U.S. Privacy Shield operated by the United StatesU.S. Department of AmericaCommerce, was declared invalid as a legal mechanism to transfer data from the EEA and hasUK to the U.S. As a result, despite the fact that we have certified itsour compliance to the EU-US Privacy Shield. TheEU-U.S. Privacy Shield, isthis mechanism can no longer be used as a privacy framework thatlawful means to transfer EEA and UK data to us in the European Commission has declared provides "adequate" protection for personal data,U.S. For the time being, the Department of Commerce continues to operate the EU-U.S. Privacy Shield, however, and this enables The Rubicon Project, Inc. to receive personal data lawfully from the EU for as long as it complies with the Privacy Shield. If The Rubicon Project, Inc. failsif we fail to comply with the Privacy Shield (or with EU data protection rules more generally), it risksrequirements, we risk investigation and sanction by EU or USU.S. regulatory authorities, includeincluding the Federal Trade Commission. Each suchSuch investigation could cost us significant time and resources, and could potentially result in fines, criminal prosecution, or other penalties.
Further, the Privacy Shield, as well as some alternative compliance measures that we may also use for extra-EU data transfers, such as EU Commission approved data export agreements calledThe second mechanism, Standard Contractual Clauses are facing legal and political challenges. For example, in July 2018, the EU Parliament called for the suspension of the EU-US Privacy Shield by September 1st, 2018, although this did not happen. Further, in Data Protection Commissioner v. Facebook and Maximillian Schrems (“Schrems II”("SCCs"), the question of whether Standard Contractual Clauses (“SCCs”) enable lawful transfers of personal data from the EU has been referred by the Irish High Court to the Court of Justice of the European Union (“CJEU”). If these challenges successfully invalidate the Privacy Shield or thean alternative compliance measurestransfer measure that we currently rely on or may choosealso offer to rely on in the future, it may take us significant time, resources,our EEA and effort to restructure our business and/or rely on another legally sufficient compliance measure. In December, 2019, an Advocate General to the CJEU issued an advisory opinion in the Schrems II case that could impact the SCCsUK customers for extra-EEA and the Privacy Shield. The Advocate General’s opinion confirmed the general validity of SCCsUK data transfers, was upheld as a valid legal mechanism for transnational data transfer but suggestedtransfer. However, the ruling requires that SCCs may be insufficient where a third country’s laws impose conflicting obligations. The opinion also recommended that the CJEU avoid rulingEEA and UK organizations seeking to rely on the validitySCCs to export data out of the EU-US Privacy Shield, but there have been at least some indications that the CJEU may be interested in taking on that broader issue. The CJEU is expected to issue a decision in the next three to six months. Additionally, such an invalidation might affect our reputation with our clients, who may choose to work with businesses that do not rely on such compliance mechanismsEEA and UK to ensure legal and regulatory compliance, such as EU-based companies or other competitorsthe data is protected to a standard that do not needis "essentially equivalent" to that under the GDPR including, where necessary, by taking "supplementary measures" to protect the data. It remains unclear what "supplementary measures" must be taken to allow the lawful transfer of personal data to the United States, and it is possible that EEA and UK data protection authorities may determine that there are no supplementary measures that can legitimize data transfers from the EEA and the UK to the U.S. For the time being, we will rely on SCCs for transfers of EEA and UK personal data to the U.S. and explore what "supplementary measures" can be implemented to protect such personal data that is transferred to us in orderthe United States. We may also need to avoidrestructure our data export practices as a result of Brexit. At the above-identified risksend of 2020, European Union law ceased to apply to the UK, and legal issues.
the UK and EU are currently working under a temporary cooperation agreement to establish rules governing the data flow between the UK and EEA.
The GDPR imposesand changes in U.S. laws impose new requirements for end user consent and legal basis for data processingor opt-out that are not yet well understood.
End-user consent to data collection through device access (including the placement of cookies) has been required for some time under the European Union Privacy and Electronic Communications Directive (Directive 2002/58/EC), commonly referred to as the "ePrivacy Directive," but the GDPR has added complexity and risk. risk regarding the obligations to obtain valid consent.
End-user consent is difficult for ad tech intermediaries like us to obtain because we do not have direct relationships with such end users, so we have historically relied upon publisherssellers to obtain consent for use of our technology under the ePrivacy Directive.technology. To the extent any seller does not adequately satisfy theirits consent obligations for our technology, we may face regulatory risk. Further, emerging regulatory guidance in the EU has challenged this method of obtaining consent. To the extent we (and/or our buyers) are required to obtain or confirm consent directly from end users, our ability to use cookies or access devices within the EEAapplicable jurisdictions may become significantly restricted.
While simple click-through cookie banners on EU-based digital media properties had been the norm for ePrivacy Directive compliance, it may become more challenging to obtain valid consent from European end users because the GDPR will likely be interpreted to impose additional requirements applicable to end-user consents generally. In order to obtain valid consent, end users must be provided with increasingly granular data about cookies placed in the course of delivering an advertisement, including cookies placed by us, or by buyers using our technology. Providing this granular level of data may be difficult to do, considering user interface restrictions, and in some cases, may not be possible. Further, if consent mechanisms become too cumbersome or unwieldy, end users are more likely to decline. This may result in lower levels of users' consent for accessing of their devices and processing of their personal data. Without consent, our publishers may not attempt to monetize inventory associated with such end users at all, or pass that inventory to us without personal data, which will reduce the value of such inventory.
In 2018, IAB Europe released a tool, the Transparency and Consent Framework (the "TCF"), in order to assist publishers,sellers, advertisers and advertising technology providers, with the process of obtaining consent from end users in accordance with the GDPR (and also to provide end users with greater transparency in the advertising chain). In order for a publisher to use this tool, it
must implement a "consent management provider" (CMP) to notify end users about the vendors that may access their personal data and their intended uses. The CMP then generates a consent string to distribute information to vendors about the end user’s consent preferences. There is limited guidance regarding proper implementation of the tool and some publisherssellers and ad tech providers may not be using the tool or interpreting consent signals correctly. The TCF continues to evolve and we will need to devote internal resources to support any additional requirements imposed by the TCF (and possibly other consent tools). It is also not yet clear whether the TCF (or any other) consent tool will be accepted by regulators as appropriate consent mechanisms. Consent tool adoption remains
In the US, some government regulators and privacy advocates have suggested creating a "Do Not Track" standard that would allow Internet users to express a preference, independent of cookie settings in their browser, not to have their online browsing activities tracked. "Do Not Track" has garnered renewed interest in light of the early stagesCCPA. The CCPA regulations contemplate browser-based or similar "do not sell" signals. Further, the CPRA contemplates the use of technical opt-outs for the sale and it is unclear whether the market will widely adopt one standard. Some buyers may decline to bid on impressions from the EEA due to ambiguity about their rights, or may only bid on impressions that are strippedsharing of personal datainformation for advertising purposes as well as to opt out of the use of sensitive information for advertising purposes.
Legal standards and convertedregulatory guidance will continue to contextual advertising. This will have the effect of reducing demand for and value of EEA impressions on our platform.
evolve. National regulators in the UK and European UnionEU are evolving their guidance on the use of advertising technologies and compliance with the GDPR and ePrivacy Directive. This guidance may be burdensome or inconsistent across countries, and present challenges to the way we operate. Some regulators are also undertaking enforcement investigations into advertising technology companies, and the outcome of these investigations may also present risks to our business.
As a result of all of the factors set forth above, our or our clients’ ability to place or use third-party cookies or access mobile devices,serve target advertisements may become significantly impaired or complicated in certain jurisdictions. The EU is also expected to replace the ePrivacy Directive with the ePrivacy Regulation. Current drafts of the ePrivacy Regulation propose significant requirements around obtaining consent, and impose fines for violations that are materially higher than those imposed under the ePrivacy Directive.
ItIn Europe, it remains unclear whether certain legal bases for data processing are permitted for behavioral advertising.
advertising.
The GDPR sets forth six alternative legal bases for processing personal data, but only two are relevant to ad tech: consent by the data subject and "legitimate interests," which means that "processing is necessary for the purposes of the legitimate interests pursued by the controller or by a third party, except where such interests are overridden by the interests or fundamental rights and freedoms of the data subject." We generally rely upon legitimate interests. There is minimal guidance on the factors that would override any legitimate interest for processing. Some EU regulators or courts may conclude that the processing of personal data for the purposes of behavioral advertising does not satisfy the legitimate interests of the controller, or that such interests do not outweigh the privacy rights of end users, even with respect to ad tech parties that only collect pseudonymous personal data. Unavailability of this basis for processing end users’ personal data would require us to obtain end-user consent for processing under the GDPR, which may not be possible for us, or other ad tech intermediaries, without changes to the ad tech business that would be difficult, time-consuming, expensive, and perhaps unattainable. These complexities are compounded by the ability of different national and state governmental authorities within the EU to adopt differing interpretative and enforcement approaches to the law.
Google currently relies on end-user consent as its legal basis for processing personal data, and has required its publishers and ad tech partners to obtain such end-user consent on behalf of Google. We are reliant upon third parties to obtain consent for Google in accordance with their policies. Consent is relatively easier for Google to obtain because of its direct relationships with end users and importance to publishers, but its practices may not translate well across the industry. If publishers are unable to obtain this consent our revenue and advertising spend could decline.
Legal uncertainty and industry unpreparedness may mean substantial disruption and inefficiency, demand constraints, and reduced inventory supply and value.
Some publisherssellers may be unprepared to comply with evolving regulatory guidance under the GDPR,US and foreign privacy laws, and therefore may remove personal data from their inventory before passing it into the bid stream, at least temporarily. This will lower their inventory onwhich would reduce the value scale from behavioralof the inventory to contextual advertising, resulting in loss of ad spend and revenue for us.buyers. Even well-prepared publisherssellers and buyers will be confronted with difficult choices and administrative and technical hurdles to implement their GDPRprivacy compliance programs and integrate with multiple other parties in the ecosystem. Further, compliance program design and implementation will be an ongoing processas understanding of the new law increases and industry compliance standards evolve. The resulting process friction could result in substantial inefficiency and loss of inventory and demand, as well as increased burdens upon our organization as we seek to assist clients and adapt our own technology and processes as necessary to comply with the law and adapt to industry practice. The uncertain regulatory environment caused by changes to privacy laws discussed in the GDPRsections above may benefit large, integrated competitors like Google, Facebook, Comcast Verizon, AT&T and Facebook,Amazon, which have greater compliance resources and can take advantage of their direct relationships with end users to secure consents from, and offer necessary choices to, end users that we and other intermediaries without direct user relationships are less able to obtain under current industry conditions.
We generally do notare subject to regulation with respect to political advertising, which lacks clarity and uniformity.
We are subject to regulation with respect to political advertising activities, which are governed by various federal and state laws in the U.S., and national and provincial laws worldwide. Online political advertising laws are rapidly evolving and in certain jurisdictions we have contractual privitycompliance requirements with Internet users who view advertisements that we place, andrespect to political ads delivered on our platform. In some jurisdictions we may determine not be able to disclaim liabilities from such Internet users or consumers.
Potential sourcesserve political advertisements due to uncertainty around these requirements and potential burdens of liability to Internet users include malicious activities, such ascompliance. In addition, our sellers may impose restrictions on receiving political advertising. The lack of uniformity and increasing compliance requirements around political advertising may adversely impact the introductionamount of malware into users' computers through advertisements servedpolitical advertising spent through our platform, and code that redirects users to sites other than the ones users sought to visit, potentially resulting in malware downloads or use charges from the redirect site. Sellers of advertisement space purchased throughincrease our solution often have terms of use in place with their users that disclaim or limit their potential liabilities to such users, or pursuant to which users waive rights to bring class-action lawsuits against the sellers related to advertisements. Certain of our competitors are also prominent sellers,operating and may be able to include protections in their website or application terms of use that also limit liability to users of their advertising services. We generally do not have terms of use in place with such users. As a consequence, we generally cannot disclaim or limit potential liabilities to such users through terms of use, which may expose us to greater liabilities than competing advertising networks that are also prominent sellers.
The evolving concept of viewability involves competitive uncertainty and may cause us to incur additional costs and liability risk.
Viewability of digital advertising inventory is relevant to marketers because it represents a way of assessing the value of particular inventory as a means to reach a target audience. However, there is no consensus definition of viewability. Some approaches focus on whether an advertisement can be seen at all, and others focus on whether an advertisement that can be seen is actually seen, in whole or part, or for how long. Low viewability can be caused by various factors, including technical issues (e.g. device screen size, browser functionality and settings, web site load times), media design (e.g. below-the-fold or sub-page placements), and user behavior (e.g. the decision whether to scroll down a website or click on an advertisement or how long to watch a video). Non-viewability is a separate issue and may result, for example, from stacking ads so the one in the back is obscured, or serving ads into a single pixel space too small to be seen.
Incorporating viewability concepts fully into our business as they evolve will require us to incur additional costs to integrate relevant technologies and process additional information through our system. If we do not handle viewability well, we could be competitively disadvantaged.
In addition, inventory that is well differentiated on the basis of viewability will also be differentiated on the basis of value, with less viewable inventory valued lower. In this context, if we are not positioned to transact the higher viewability inventory competitively, our revenue and profitability could be adversely affected.
As we have experienced in the past, buyers could attempt to hold us responsible, and not to pay us, for impressions that do not satisfy their viewability requirements or expectations, and depending upon how viewability evolves, market practice or emerging regulation may require us to incur compliance costs, and assume some responsibility for viewability of advertisements transacted through our solution. Divergent views of howsubject us to measure viewability and imperfect measurement technology could lead to disagreement, increasing risk of disputes, demands for refunds, and reputational harm.potential liability from regulatory agencies.
Failure to comply with industry self-regulation could harm our brand, reputation, and our business.
In addition to compliance with government regulations, we voluntarily participate in trade associations and industry self-regulatory groups that promulgate best practices or codes of conduct addressing privacy and the provision of digital advertising. However, in the past, some of these guidelines have not comported with our business practices, making them difficult for us to implement. If we encounter difficulties in the future, or our opt-out mechanisms fail to work as designed, or if digital media users misunderstand our technology or our commitments with respect toabiding by these principles, we may be subject to negative publicity, as well as investigation and litigation by governmental authorities, self-regulatory bodies or other accountability groups, buyers, sellers, or other private parties. Any such action against us could be costly and time consuming, require us to change our business
practices, divert management's attention and our resources, and be damaging to our reputation and our business. In addition, we could be adversely affected by new or altered self-regulatory guidelines that are inconsistent with our practices or in conflict with applicable laws and regulations in the United States and other countries where we do business. As a result of such inconsistencies or conflicts, or other business or legal considerations, we may choose not to comply with some self-regulatory guidelines. Additionally, as we expand geographically, we may begin to operate in jurisdictions that have self-regulatory groups in which we do not participate. If we fail to abide by or are perceived as not operating in accordance with applicable laws and regulations and industry best practices, or any industry guidelines or codes with regard to privacy or the provision of Internet advertising, our reputation may suffer and we could lose relationships with buyers and sellers.practices.
Risks Related to Our Relationships with Buyers and Sellers and Other Strategic Relationships
We rely on buyers and sellers to abide by contractual requirements and relevant laws, rules, and regulations when using our solution. The acts or omissions of buyers or sellers, or our own failure to meet advertising and inventory content standards and provide services that our buyers and sellers trust, could harm our brand and reputation and those of our partners, and negatively impact our business, financial condition and results of operations.
The buyers and sellers engaging in transactions through our platform impose various requirements upon each other, and they and the underlying advertisers are subject to regulatory requirements by governments and standards bodies applicable to their activities. Though we contractually require buyers and sellers to abide by relevant laws, rules and regulations, as well as restrictions by their counterparties, when transacting on our platform, we do not provide or control the content of the advertisements that we serve or the content of the websites providing the inventory, and there are many circumstances in which it is difficult or impossible for us to monitor or evaluate the compliance of our buyers and sellers. If buyers or sellers fail to abide by relevant laws, rules and regulations, or contract requirements, we could potentially face liability for such misuse.
In addition, both advertisers and inventory suppliers are concerned about being associated with content they consider inappropriate, competitive or inconsistent with their brands, or illegal, and they are hesitant to spend money or make inventory available, respectively, without some guarantee of brand security. Buyers increasingly require us to accept liability for inventory quality and sellers increasingly require us to accept liability for ad content. Consequently, our reputation depends in part on providing services that our buyers and sellers trust, and we have contractual obligations to meet content and inventory standards. We contractually prohibit the misuse of our platform by our buyers and sellers and actively monitor inventory against our quality guidelines. Despite such efforts, we may provide access to inventory that is objectionable to our buyers or serve advertising that contains objectionable content, which could harm our or our clients’ brand and reputation, decrease their trust in our platform, and negatively impact our business, financial condition and results of operations. Furthermore, we may receive public pressure to discontinue working with certain sellers or buyers on our platform.
Our contracts with buyers and sellers are generally not exclusive, may be terminated upon relatively short notice, and generally do not require minimum volumes or long-term commitments. If buyers or sellers representing a significant portion of the demand or inventory in our marketplace decide to materially reduce the use of our solution, we could experience an immediate and significant decline in our revenue and profitability and harm to our business.
Generally, our buyers and sellers are not obligated to provide us with any minimum volumes of business, may do business with our competitors as well as with us, may reduce or cancel their business with us or terminate our contracts without penalty, and may bypass us and transact directly with each other or through other intermediaries that compete with us. Accordingly, our business is highly vulnerable to changes in the macro environment, price competition, and development of new or more compelling offerings by our competitors, which could reduce business generally or motivate buyers or sellers to migrate to competitors'competitors’ offerings.
Sellers and buyers may seek to change the terms on which they do business with us, or allocate their advertising inventory or demand to our competitors who provide advertising demand and supply to them on more favorable terms or whose offerings are considered more beneficial. Supply of advertising inventory is also limited for some sellers, such as special sites or new technologies, and sellers may request higher prices, fixed price arrangements or guarantees that we cannot provide as effectively as our competitors, or that would reduce the profitability of that business. In addition, sellers sometimes place significant restrictions on the sale of their advertising inventory, such as strict security requirements, limitations on data sharing, prohibitions on advertisements from specific advertisers or specific industries, and restrictions on the use of specified creative content or format. Finally, with the proliferation of header bidding, sellers' inventory is available for purchase through multiple exchanges simultaneously, thereby reducing the number of ad impressions sold through our exchange even where we have historically had relationships with the seller.simultaneously. Buyers, in turn, are free to direct their spend to us or one or more of our competitors, and increasingly are seeking price concessions, rebates, or other consideration to direct more spend towards us.
We serve many buyers and sellers, but certain large buyers and sellers have accounted for and will continue to account for a disproportionate share of business transacted through our solution. Although we no longer earn revenue directly from buyers, as we ceased charging buyer fees in late 2017, in 2019In 2020 there were two buyers of advertising inventory that indirectly contributed to 37%approximately 40% of revenue through their buying activity from sellers on our platform. Buyer and seller needs and plans can change quickly, and buyers or sellers may reduce volumes or terminate their arrangements with us, quickly and without penalty, for a variety of reasons, including financial issues or other changes in circumstances; development or acquisition by buyers or sellers of their own technologies that reduce their reliance upon us; the new offerings by or strategic relationships with our competitors; change or removal of personnel with whom we traditionally had relationships; opportunities for buyers and sellers to bypass us and deal directly with each other; change in control (including consolidations through mergers and acquisitions); adoption of header bidding solutions; our decision not to participate in rebate or similar arrangements; supply path optimization; or declining general economic conditions (including those resulting from dissolutions of companies). Technical issues affecting our systems or the systems of our larger buyers or sellers could also cause a decline in spending. As is typical in our industry, some of the largest buyers and sellers on our platform are also competitors, which could increase the risk that such companies could reduce their business with us. These factors make it important for us to expand and diversify our client relationships. The number of large media buyers and sellers in the market is finite, and it could be difficult for us to replace revenue loss from any large buyers or sellers whose relationships with us diminish or terminate. Just as growth in our inventory strengthens buyer activity in a network effect, loss of inventory or buyers could have the opposite effect.
Because we do not have long-term contracts, our future revenue is difficult to predict and there is no assurance that our current buyers and sellers will continue to use our solution or that we will be able to replace lost buyers or sellers with new ones. If a buyer or group of buyers representing a significant portion of the demand in our marketplace, or a seller or group of sellers representing a significant portion of the inventory in our marketplace decides to materially reduce use of our solutions, it could cause an immediate and significant decline in our revenue and profitability and harm to our business. In addition, loss of substantial inventory or demand could degrade our marketplace. Loss of major DSP sources of demand could adversely affect bid density or pricing in our auctions, and reduction in fees if we are not able to redirect inventory to other demand sources. Loss of important unique inventory could reduce fees from demand that cannot be shifted to other sellers and make it harder to differentiate ourselves from our competitors. The number of large media buyers and sellers in the market is finite, and it could
be difficult for us to replace the losses from any buyers or sellers whose relationships with us diminish or terminate. Additionally, if we overestimate future usage, we may incur additional expenses in adding infrastructure without a commensurate increase in revenue, which would harm our profitability and other operating results.
Because of these factors, we seek to expand and diversify our client relationships. In particular, as part of our strategy to increase the volume of advertising inventory on our exchange, we are continuing relationships with aggregators of inventory and with large sources of supply that have their own monetization capabilities but also allow third parties to connect to their exchanges and bid on their inventory. These relationships represent additional risks in terms of inventory quality, transaction discrepancies, and collections, and may be less profitable because we may be required to compensate these partners or share the fees available for intermediaries in these transactions, and may incur higher serving costs relative to revenue.
We must provide value to both buyers and sellers of advertising without being perceived as favoring one over the other or being perceived as competing with them through our service offerings.
Buyers and sellers have different interests, with each trying to enhance its value in their transactions through use of data, requests that we adapt our solution to help them, and other means. We are interposed between buyers and sellers, and to be successful, we must continue to find ways of providing value to both without being perceived as favoring one at the expense of the other. For example, our proprietary auction algorithms, which are designed to improve auction outcomes, influence the allocation and pricing of impressions and must do so in ways that add value to both buyers and sellers. Continued technological evolution in our business results in the availability and use of more data more incisively to inform buying and selling decisions. Third-partydecisions necessitates that we, as an intermediary, use data
analytics providers encourage this dynamic by offering products to buyers and sellers to attempt to swing transactional dynamics to their advantage at in a manner that complies with the expense of the other. We come under pressure to provide raw data to fuel these products and to facilitate their use by buyers and sellers on our platform. Unlike some competitors, who focus on serving either buyers or sellers, we must serve the interestsexpectations of both meaning that we must exercise caution in use of dataour seller and may determine not to facilitate some data products, which could result in loss of business from clients that insist upon using such products.buyer clients. Furthermore, because new business models continue to emerge, we must constantly adapt our relationship with buyers and sellers and how we market ourselves to each. Consistent with our goal of connecting buyers and sellers, we inevitablyseek to grow closerour connections to each, and we must take care that our deeper connections with buyers, on the one hand, or sellers, on the other hand, do not come at the expense of the other's interests. For example, our decision to default to a first-price auction dynamic for all our header bidding auctions could be perceived by some buyers as serving the interests of sellers by increasing amounts paid for inventory, while some sellers could view our Estimated Market Rate service, which is designed to reduce buyers’ first price bids while maintaining their win rates, as favoring buyers and reducing sellers' revenue. In addition, as our own capabilities evolve, we may be perceived by clients, particularly buyers, as competing with them. If we fail to balance our clients' interests appropriately, our ability to provide a full suite of services and our growth prospects may be compromised.
We rely on buyers to use our solutiontechnological intermediaries such as DSPs to purchase advertising on behalf of advertisers. Such buyers may have or develop high-risk credit profiles or pay slowly, which may result in credit risk to us or require additional working capital to fund our accounts payable. In addition, direct billing arrangements between buyers and sellers may result in unfavorable fee dynamics and increased working capital demands.
Generally, we invoice and collect from buyers the full purchase price for impressions they have purchased, retain our fees, and remit the balance to sellers. However, in some cases, we may be required or choose to pay sellers for impressions delivered before we have collected, or even if we are unable to collect, from the buyer of those impressions. There can be no assurances that we will not experience bad debt in the future, and write-offs for bad debt could have a materially negative effect on our results of operations for the periods in which the write-offs occur. In addition, we attempt to coordinate collections from our buyers so as to fund our payment obligations to our sellers. However, some buyers and sellers may require direct billing and collection arrangements between themselves, and some providers of header bidding wrappers or other downstream decisioning mechanisms in which we participate (such as Google EB) may control billing and collection for transactions we win through their platforms. When we collect from buyers and pay sellers, we are able to retain our fees from cash we collect before remitting balances to sellers. However, if we do not manage collections and payments, we either need to bid into the auction net of our fees or need to invoice clients for our fees, which may delay our collections and increase visibility and result in pressure for more transparent or lower fees. Further, growth and increased competitive pressure in the digital advertising industry is causing advertisers and buyers to become more demanding, resulting in overall increased focus by all industry participants on pricing, transparency, and cash and collection cycles. Some buyers have experienced financial pressures that have motivated them to slow the timing of their payments to us. If buyers slow their payments to us or our cash collections are significantly diminished as a result of these dynamics, our revenue and/or cash flow could be adversely affected and we may need to use working capital to fund our accounts payable pending collection from the buyers. This may result in additional costs and cause us to forgo or defer other more productive uses of that working capital.
Our sales efforts with buyers and sellers may require significant time and expense and may not yield the results we seek.
Attracting new buyers and sellers and increasing our business with existing buyers and sellers involves substantial time and expense, and we may not be successful in our efforts. We may spend substantial time and effort educating buyers and sellers about our offerings, including providing demonstrations and comparisons against other available solutions. This process can be costly and time-consuming, and is complicated by us having to spend time integrating our solution with software of buyers and sellers. Because our solution may be less familiar in some markets outside the United States, the time and expense involved with attracting, educating and integrating buyers and sellers in international markets may be even greater than in the United States. If we are not successful in targeting, supporting and streamlining our sales processes, our ability to grow our business may be adversely affected. In addition, because of competitive market conditions and negotiating leverage enjoyed by large buyers and sellers, we are sometimes forced to choose between loss of business or contracting on terms that allocate more risk to us than we would prefer to accept.
We rely on buyers and sellers to abide by contractual requirements and relevant laws, rules, and regulations when using our solution, and legal claims or enforcement actions resulting from the actions of buyers or sellers could expose us to liabilities, damage our reputation, and be costly to defend.
The buyers and sellers engaging in transactions through our platform impose various requirements upon each other, and they and the underlying advertisers are subject to regulatory requirements by governments and standards bodies applicable to their activities. We assume responsibility for satisfying or facilitating the satisfaction of some of these requirements through the contracts we enter into with buyers and sellers. In addition, we may have responsibility for some acts or omissions of buyers or sellers
transacting business through our solution under applicable laws or regulations or as a result of common law duties, even if we have not assumed responsibility contractually. These responsibilities could expose us to significant liabilities, perhaps without the ability to impose effective mitigating controls upon, or to recover from, buyers and sellers.
We contractually require our buyers and sellers to abide by relevant laws, rules and regulations, as well as restrictions by their counterparties, when transacting on our platform, and we generally attempt to obtain representations from buyers that the advertising they place through our solution complies with applicable laws and regulations and does not violate third-party intellectual property rights, and from sellers about the quality and characteristics of the impressions they provide. We also generally receive representations from buyers and sellers about their privacy practices and compliance with applicable laws and regulations, including their maintenance of adequate privacy policies that disclose and permit our data collection practices. Nonetheless, there are many circumstances in which it is difficult or impossible for us to monitor or evaluate their compliance. For example, we cannot control the content of buyers’ advertisements or sellers’ media properties, and we are often unable to determine exactly what information a buyer collects after an ad has been placed, and how the buyer uses any such collected information. If buyers or sellers fail to abide by relevant laws, rules and regulations, or contract requirements, when transacting over our platform, or after such a transaction is completed, we could potentially face liability for such misuse. Similarly, if such misconduct results in enforcement action by a regulatory body or other governmental authority, we could become involved in a potentially time-consuming and costly investigation or we could be subject to some form of sanction or penalty. We may not have adequate indemnity to protect us against, and our policies of insurance may not cover, such claims and losses.
Our business relationships expose us to risk of substantial liability for contract breach, violation of laws and regulations, intellectual property infringement and other losses, and our contractual indemnities and limitations of liability may not protect us adequately.
Our agreements with sellers, buyers and other third parties typically obligate us to provide indemnity and defense for losses resulting from claims of intellectual property infringement, damages to property or persons, business losses or other liabilities. Generally, these indemnity and defense obligations relate to our own business operations, obligations and acts or omissions. However, under some circumstances, we agree to indemnify and defend contract counterparties against losses resulting from their own business operations, obligations and acts or omissions, or the business operations, obligations and acts or omissions of third parties. For example, because our business interposes us between buyers and sellers in various ways, buyers often require us to indemnify them against acts and omissions of sellers, and sellers often require us to indemnify them against acts and omissions of buyers. In addition, our agreements with sellers, buyers and other third parties typically include provisions limiting our liability to the counterparty and the counterparty's liability to us. These limits sometimes do not apply to certain liabilities, including indemnity obligations. These indemnity and limitation of liability provisions generally survive termination or expiration of the agreements in which they appear.
We have limited ability to control acts and omissions of buyers and sellers or other third parties that could trigger our indemnity obligations, and our policies of insurance may not cover us for acts and omissions of others. Because we contract with many buyers and sellers and those contracts are individually negotiated with different scopes of indemnity and different limits of liability, it is possible that in any case our obligation to provide indemnity for the acts or omissions of a third party such as a buyer or seller may exceed what we are able to recover from that party. Further, contractual limits on our liability may not apply to our indemnity obligations, contractual limits on our counterparties' liability may limit what we can recover from them, and contract counterparties may be unable to meet their obligations to indemnify and defend us as a result of insolvency or other factors. Large indemnity obligations, or obligations to third parties not adequately covered by the indemnity obligations of our contract counterparties, could expose us to significant costs.
In addition to the effects on indemnity described above, the limitation of liability provisions in our contracts may, depending upon the circumstances, be too high to protect us from significant liability for our own acts or omissions, or so low as to prevent us from recovering fully for the acts or omissions of our counterparties.
Our solution relies on third-party open source software components. Failure to comply with the terms of the underlying open source software licenses could expose us to liabilities, and the combination of certain open source software with code that we develop could compromise the proprietary nature of our solution.
Our solution utilizes software licensed to us by third-party authors under "open source" licenses. The use of open source software may entail greater risks than the use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software to the public. This would allow
our competitors to create similar solutions with lower development effort and time and ultimately put us at a competitive disadvantage.
The terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on us. Moreover, we cannot guarantee that our processes for controlling our use of open source software will be effective. If we are held to have breached the terms of an open source software license, we could be required to seek licenses from third parties to continue operating using our solution on terms that are not economically feasible, to re-engineer our solution or the supporting computational infrastructure to discontinue use of certain code, or to make generally available, in source code form, portions of our proprietary code.
Risks Related to Our Operations
Real or perceived errors or failures in the operation of our solution could damage our reputation and impair our sales.
We must operate our technology infrastructure without interruption to support the needs of sellers and buyers. Because our software is complex, undetected errors and failures may occur, especially when new versions or updates are made to our software or network infrastructure, changes are made to sellers' or buyers' software interfacing with our solution, or as we further integrate Telaria's technologies with our own. Errors or bugs in our software, faulty algorithms, technical or infrastructure problems, or updates to our systems could lead to an inability to effect transactions or process data to place advertisements or price inventory effectively, cause the inadvertent disclosure of proprietary data, or cause advertisements to display improperly or be placed in proximity to inappropriate content. ErrorsSuch errors or bugs in our software have in the past, and may in the future, not be found until the software is in our live operating environment. For example, changes to our solution have in the past caused errors in the reporting and analytics applications for buyers, resulting in delays in their spending on our platform. Errors or failures in our solution, even if caused by the implementation of changes by buyers or sellers to their systems, could also result in negative publicity, disclosure of confidential information, damage to our reputation, loss of or delay in market acceptance of our solution, increased costs or loss of revenue, loss of competitive position, or claims by advertisers for losses sustained by them.
We may make errors in the measurement of transactions conducted through our solution, causing discrepancies with the measurements of buyers and sellers, which can lead to a lack of confidence in us and require us to reduce our fees or provide refunds to buyers and sellers. Alleviating problems resulting from errors in our software could require significant expenditures of capital and other resources and could cause interruptions, delays, or the cessation of our business.
Various risks could interrupt access to our network infrastructure or data, exposing us to significant costs and other liabilities.
Our revenue depends on the technological ability of our solution to deliver and measure advertising impressions, and the operation of our exchange and our ability to place impressions depend on the continuing and uninterrupted performance of our IT systems. Our platform operates on our data processing equipment that is housed in third-party commercial data centers that we do not control or on servers owned and operated by cloud-based service providers. We rely on multiple bandwidth providers, which may leave us vulnerablemultiple internet service providers, as well as content delivery network, or CDN providers, and domain name systems, or DNS providers, and mobile networks to technical issues or outages that we cannot easily control or remedy.deliver video ads. In addition, our systems interact with systems of buyers and sellers and their contractors. Any damage to, or failure of, these systems could result in interruptions to the availability or functionality of our service. Moreover, the failure of our data center hosting facilities or any other third-party providers to meet our capacity requirements could result in interruptions in the availability or functionality of our solutions or impede our ability to scale our operations. All of these facilities and systems are vulnerable to interruption and/or damage from a number of sources, many of which are beyond our control, including, without limitation: (i) loss of adequate power or cooling and telecommunications failures; (ii) fire, flood, earthquake, hurricane, and other natural disasters; (iii) software and hardware errors, failures, or crashes; (iv) financial insolvency; and (v) computer viruses, malware, hacking, terrorism, and similar
disruptive problems. In particular, intentional cyber-attacks present a serious issue because they are difficult to prevent and remediate and can be used to defraud our buyers and sellers and their clients and to steal confidential or proprietary data from us, our clients, or their users. Further, because our Los Angeles headquarters and San Francisco offices and our California data center sites are in seismically active areas, earthquakes present a particularly serious risk of business disruption. These vulnerabilities may increase with the complexity and scope of our systems and their interactions with buyer and seller systems.
The steps we take to mitigate this risk may not protect against all problems, and our ability to mitigate risks to related third-party systems is limited. In addition, we rely to a significant degree upon security and business continuity measures of our data center operators, which may be ineffective. Our disaster recovery and business continuity plans rely upon third-party providers of related services, and if those vendors fail us, we could be unable to meet the needs of buyers and sellers. Any steps we take to increase the reliability and redundancy of our systems may be expensive and may not be successful in preventing system failures. Any failures with our solution or delays in the execution of transactions through our system may result in the loss of advertising placements on impressions and, as a result, the loss of revenue. Our facilities would be costly to repair or replace, and any such efforts would likely require substantial time.
Buyers may attribute to us any technical disruption or failure in the performance of advertisements on sellers' digital media properties, harming our reputation and resulting in buyers seeking to avoid payment or demand future credits for disruptions or
failures. If we are unable to operate our exchange and deliver advertising impressions successfully, our ability to attract potential buyers and sellers and retain and expand business with existing buyers and sellers could be harmed.
Malfunction or failure of our systems, or other systems that interact with our systems, or inaccessibility or corruption of data, could disrupt our operations and negatively affect our business and results of operations to a level in excess of any applicable business interruption insurance, result in potential liability to buyers and sellers, and negatively affect our reputation and ability to sell our solution.
Any breach of our computer systems or confidential data in our possession could expose us to significant expense and liabilities and harm our reputation.
We maintain our own confidential and proprietary information in our IT systems, and we control or have access to confidential, proprietary, and personal data belonging or related to buyers, sellers, and their clients and users, as well as vendors and business partners. Our clients and various third parties also have access to our confidential and proprietary information. There is no guarantee that inadvertent or unauthorized use or disclosure will not occur or that third parties will not gain unauthorized access to this data despite our efforts to protect this data.
We are subject to ongoing Though we undertake robust security threats and breaches, computer malware, computer hacking attacks, and inadvertent transmission of computer viruses, which continue to increase in sophistication. Other harmful software code may occur on our systems or those of our clients, business partners, or information technology vendors. Security measures, undertaken by us, our vendors, and our buyers and sellers may be ineffective as a result of employee error, failure to implement appropriate processes and procedures, malfeasance, cyber-attacks, cyber-extortion or other intentional misconduct by computer hackers, "phishing" or other tactics to obtain illicit system access, or otherwise. Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, and because we typically are not able to control the efficacy of security measures implemented by our clients and vendors, we may be unable to anticipate these techniques or to implement adequate preventative or mitigation measures.
Though it is difficult to determine what harm may directly result from any specific interruption or breach, any security incident could disrupt computer systems or networks, interfere with services to our sellers, buyers, or their clients, and result in unauthorized access to personally identifiable information, intellectual property, and other confidential business information owned by us or our buyers, sellers, or vendors. As a result, we could be exposed to legal claims and litigation, indemnity obligations, regulatory fines and penalties, contractual obligations, other liabilities, significant costs for remediation and re-engineering to prevent future occurrences, significant distraction to our business, and damage to our reputation, our relationships with buyers and sellers, and our ability to retain and attract new buyers and sellers. If personally identifiable information is compromised, we may be required to undertake notification and remediation procedures, provide indemnity, and undergo regulatory investigations and penalties, all of which can be extremely costly and result in adverse publicity.
Failure to detect or prevent fraud, intrusion of malware through our platform into the systems or devices of our clients and their customers, or other actions that impact the integrity of our solution or advertisement performance, could cause sellers and buyers to lose confidence in our solution and expose us to legal claims, which would cause our business to suffer. If we terminate relationships with sellers as a result of our screening efforts, our volume of paid impressions may decline.
We have in the past, and may in the future, be subject to fraudulent and malicious activities undertaken by persons seeking to use our platform for improper purposes, including to divert or artificially inflate purchases by buyers through our platform, or to disrupt or divert the operation of the systems and devices of our clients and their customers to misappropriate information, generate fraudulent billings, stage hostile attacks, or for other illicit purposes. Examples of such activities include the use of bots or other automated or manual mechanisms to generate fraudulent impressions that are delivered through our platform, which could overstate the performance of advertising impressions. Such activities could also include the introduction of malware through our platform by persons seeking to commandeer, or gain access to information on, consumers' devices. We use proprietary and third party technology to identify non-human inventory and traffic, as well as malware, and we generally terminate relationships with parties that appear to be engaging in such activities, which may result in fewer paid impressions in the year the relationships are terminated than would have otherwise occurred. Despite our efforts, it can be difficult to detect fraudulent or malicious activity for various reasons. We do not own content and must rely in part on sellers and buyers for controls with respect to such activity. Perpetrators of fraudulent impressions and malware can be ingenious and change their tactics to adapt to preventative measures, requiring us to improve over time our processes for assessing the quality of sellers' inventory and controlling fraudulent activity. We may be restricted from employing certain anti-fraud detection technology. Fraudulent activity is more difficult for us to detect and police in inventory we access through third-party aggregators, because in those situations we do not connect directly to the publishers and their servers. We plan to increase our reliance on this type of inventory as part of our strategy to increase the volume of transactions on our platform, which could expose us to increased risk of fraudulent activity. If we fail to detect or prevent fraudulent or other malicious activity, we could face legal claims from clients and/or consumers and the affected advertisers may experience or perceive a reduced return
on their investment or heightened risk associated with use of our solution, resulting in dissatisfaction with our solution, refusals to pay, refund demands, loss of confidence of buyers or sellers, or withdrawal of future business. We also face claims from sellers that we terminate because of known or perceived fraudulent activity, and any such claim could be material.
Failure to maintain the brand security features of our solution could harm our reputation and expose us to liabilities.
It is important to sellers that the advertising placed on their media not conflict with existing seller arrangements and be of high quality, consistent with applicable seller standards and compliant with applicable legal and regulatory requirements. It is important to buyers that their advertisements are placed on appropriate media, in proximity with appropriate content, that the impressions for which they are charged are legitimate, and that their advertising campaigns yield their desired results. We use various measures, including proprietary technology, in an effort to store, manage and process rules set by buyers and sellers and to ensure the quality and integrity of the results delivered to sellers and buyers through our solution. If we fail to properly implement or honor rules established by buyers and sellers, or if our measures are not adequate, advertisements may be improperly placed through our platform, which can result in harm to our reputation as well as the need to pay refunds and other potential legal liabilities.
The evolving concept of viewability involves competitive uncertainty and may cause us to incur additional costs and liability risk.
Viewability of digital advertising inventory is relevant to marketers because it represents a way of assessing the value of particular inventory as a means to reach a target audience. However, there is no consensus definition of viewability. Some approaches focus on whether an advertisement can be seen at all, and others focus on whether an advertisement that can be seen is actually seen, in whole or part, or for how long. Low viewability can be caused by various factors, including technical issues (e.g. device screen size, browser functionality and settings, web site load times), media design (e.g. below-the-fold or sub-page placements), and user behavior (e.g. the decision whether to scroll down a website or click on an advertisement or how long to watch a video). Non-viewability is a separate issue and may result, for example, from stacking ads so the one in the back is obscured, or serving ads into a single pixel space too small to be seen.
If we do not handle viewability well, we could be competitively disadvantaged. In addition, inventory that is well differentiated on the basis of viewability will be differentiated on the basis of value, with less viewable inventory valued lower. In this context, if we are not positioned to transact the higher viewability inventory competitively, our revenue and profitability could be adversely affected.
As we have experienced in the past, buyers could attempt to hold us responsible, and not to pay us, for impressions that do not satisfy their viewability requirements or expectations, and depending upon how viewability evolves, market practice or emerging regulation may require us to incur compliance costs and assume some responsibility for viewability of advertisements transacted through our solution. Divergent views of how to measure viewability and imperfect measurement technology could lead to disagreement, increasing risk of disputes, demands for refunds, and reputational harm.
If we fail to attract, motivate, train, and retain highly qualified engineering, marketing, sales and management personnel, our ability to execute our business strategy could be impaired.
We are a technology-driven company and it is imperative that we have highly skilled mathematicians, computer scientists, data scientists, engineers and engineering management to innovate and deliver our complex solutions. Increasing our base of buyers and sellers depends to a significant extent on our ability to expand our sales and marketing operations and activities, and our solution requires a sophisticated sales force with specific sales skills and specialized technical knowledge that takes time to develop. Appropriately qualified personnel can be difficult to recruit and retain. In addition, in international markets, we encounter staffing challenges that are unique to a particular country or region, such as recruiting and retaining qualified personnel in foreign countries and difficulty managing such personnel and integrating them into our culture. In particular, it may be difficult to find qualified sales personnel in international markets, or sales personnel with experience in emerging segments of the market. Skilled and experienced management is critical to our ability to achieve revenue growth, execute against our strategic vision and maintain our performance through the growth and change we anticipate.
Our success depends significantly upon our ability to recruit, train, motivate, and retain key technology, engineering, sales, and management personnel, and competition for employees with experience in our industry can be intense, particularly in California, New York, London and London,Sydney, where our operations and the operations of other digital media companies are concentrated and where other technology companies compete for management and engineering talent. Other employers may be able to provide better compensation, more diverse opportunities and better chances for career advancement. None of our officers or other key employees have an employment agreement for a specific term, and any of such individuals may terminate his or her employment with us at any time.
In addition, ifin connection with the merger with Telaria is completed, the combined company’s success will depend in part upon the ability of the combined companyCompany entered into certain retention compensation packages. As such agreements expire, it may be more difficult to retain certain key management personnel and employees. Priorsuch individuals or we may need to the completion of the merger, current and prospective employees may experience uncertainty about their roles following the completion of the transactions, which may have an adverse effect on our ability to attract or retain key management and other key personnel. In addition, no assurance can be given that the combined company, after the completion of the merger, will be able to attract or retain key management personnel and other key employees to the same extent that we have previously been able to attract or retain employees.enter into new retention arrangements.
It can be difficult, time-consuming, and expensive to recruit personnel with the combination of skills and attributes required to execute our business strategy, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. New hires require significant training and it may take significant time (often six months or more) before they achieve full productivity. As a result, we may incur significant costs to attract and retain employees, including significant expenditures related to salaries and benefits and compensation expenses related to equity awards before new hires contribute to sales or productivity, and we may lose new employees to our competitors or other companies before we realize the benefit of our investment in recruiting and training. Moreover, new employees may not be or become as productive as we expect, and we may face challenges in adequately or appropriately integrating them into our workforce and culture. At times we have experienced elevated levels of unwanted attrition, and as our organization grows and changes and competition for talent increases, this type of attrition may increase.
Our proprietary rights may be difficult to enforce, which could enable others to copy or use aspects of our solution without compensating us, thereby eroding our competitive advantages and harming our business.
Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop or otherwise acquire, so that we can prevent others from using our inventions and proprietary information. Establishing trade secret, copyright,
trademark, domain name, and patent protection is difficult and expensive. We rely on trademark, copyright, trade secret laws, confidentiality procedures and contractual provisions to protect our proprietary methods and technologies.
Unauthorized parties may attempt to copy aspects of our technology or obtain and use information that we regard as proprietary, and the steps we take to protect our proprietary information may not prevent misappropriation of our technology and proprietary information or infringement of our intellectual property rights. Policing unauthorized use of our technology and intellectual property is difficult. We may be required to protect our intellectual property in an increasing number of jurisdictions, a process that is expensive and may not be successful or which we may not pursue in every location. Our competitors and others could attempt to capitalize on our brand recognition by using domain names or business names similar to ours, and we may be unable to prevent third parties from acquiring or using domain names and other trademarks that infringe on, are similar to, or otherwise decrease the value of our brands, trademarks or service marks. In addition, the laws of some foreign countries may not be as protective of intellectual property rights as those of the United States, and mechanisms for enforcement of our proprietary rights in such countries may be inadequate. It may be possible for unauthorized third parties to copy or reverse engineer aspects of our technology or otherwise obtain and use information that we regard as proprietary, or to develop technologies similar or superior to our technology or design around our
proprietary rights, despite the steps we have taken to protect our proprietary rights.
From time to time, we may take legal action to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others, or defend against claims of infringement. Such litigation could result in substantial costs and the diversion of limited resources, and might not be successful. If we are unable to protect our proprietary rights (including aspects of our technology solution) we may find ourselves at a competitive disadvantage.
We may be subject to intellectual property rights claims by third parties, which are costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies and intellectual property.
Third parties may assert claims of infringement or misappropriation of intellectual property rights against us or buyers, sellers, or third parties with which we work; we cannot be certain that we are not infringing any third-party intellectual property rights, and we may have liability or indemnification obligations as a result of such claims. As a result of the information disclosure in required public company filings our business and financial condition are visible, which may result in threatened or actual litigation, including by competitors and other third parties.
Regardless of whether claims that we are infringing patents or infringing or misappropriating other intellectual property rights have any merit, these claims are time-consuming and costly to evaluate and defend, and can impose a significant burden on management and employees. The outcome of any claim is inherently uncertain, and we may receive unfavorable interim or preliminary rulings in the course of litigation. There can be no assurances that favorable final outcomes will be obtained in all cases. Welitigation, or we may decide to settle lawsuits and disputes on terms that are unfavorable to us. SomeWe may also have no way of our competitors have substantially greater resources than we do and are able to sustain the costs of complexremediating intellectual property litigation to a greater degreeviolations, and for longer periods of time than we could.
Although third parties may offer a license to their technology or intellectual property, the terms of any offered license may not be acceptable and the failure to obtain a license or the costs associated with any licensedo so could cause our business, results of operations or financial condition to be materially and adversely affected. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology or intellectual property licensed to us. Alternatively, we may be required to develop non-infringing technology or to make other changes, such as to our branding, which could require significant effort and expense and ultimately may not be successful. Furthermore, a successful claimant could secure a judgment or we may agree to a settlement that prevents us from distributing certain products or performing certain services or that requires us to pay substantial damages, including treble damages if we are found to have willfully infringed such claimant's patents or copyrights. Claims of intellectual property infringement or misappropriation also could result in injunctive relief against us, or otherwise result in delays or stoppages in providing all or certain aspects of our solution.
Risks Related to Our International Business StrategyStrategy.
Our international operations require increased expenditures and impose additional risks and compliance imperatives, and failure to successfully execute our international plans will adversely affect our growth and operating results.
We have numerous operations outside of North America, in Northern and Southern Europe,the UK, EU, Australia, New Zealand, Japan, Singapore, and Brazil, and achievement of our international objectives will require a significant amount of attention from our management, finance, legal, analytics, operations, sales, and engineering teams, as well as significant investment in developing the technology infrastructure necessary to deliver our solution and maintain sales, delivery, support, and administrative capabilities in the countries where we operate. Attracting new buyers and sellers outside the United States may require more time and expense than in the United States, in part due to language barriers and the need to educate such buyers and sellers about our solution, and we may not be successful in establishing and maintaining these relationships. The data center and telecommunications infrastructure in some
overseas markets may not be as reliable as in North America and Europe, which could disrupt our operations. In addition, our international operations will require us to develop and administer our internal controls and legal and compliance practices in countries with different cultural norms, languages, currencies, legal requirements, and business practices than the United States.
International operations also impose risks and challenges in addition to those faced in the United States, including management of a distributed workforce; the need to adapt our offering to satisfy local requirements and standards (including differing privacy policies and labor laws that are sometimes more stringent); laws and business practices that may favor local competitors; legal requirements or business expectations that agreements be drafted and negotiated in the local language and disputes be resolved in local courts according to local laws; the need to enable transactions in local currencies; longer accounts receivable payment cycles and other collection difficulties; the effect of global and regional recessions and economic and political instability; potentially adverse tax consequences in the United States and abroad; staffing challenges, including difficulty in recruiting and retaining qualified personnel as well as managing such a diversity in personnel; reduced or ineffective protection of our intellectual property rights in some countries; and costs and restrictions affecting the repatriation of funds to the United States.
One or more of these requirements and risks may make our international operations more difficult and expensive or less successful than we expect, and may preclude us from operating in some markets. There is no assurance that our international expansion efforts will be successful, and we may not generate sufficient revenue or margins from our international business to cover our expenses or contribute to our growth.
Operating in multiple countries requires us to comply with different legal and regulatory requirements.
Our international operations subject us to laws and regulations of multiple jurisdictions, as well as U.S. laws governing international operations, which are often evolving and sometimes conflict. For example, the Foreign Corrupt Practices Act ("FCPA"), and comparable foreign laws and regulations (including the U.K. Bribery Act) prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. and other business entities for the purpose of obtaining or retaining business. Other laws and regulations prohibit bribery of private parties and other forms of corruption. As we expand our international operations, there is some risk of unauthorized payment or offers of payment or other inappropriate conduct by one of our employees, consultants, agents, or other contractors, including by persons engaged or employed by a business we acquire, which could result in violation by us of various laws, including the FCPA. Safeguards we implement to discourage these practices may prove to be ineffective and violations of the FCPA and other laws may result in
severe criminal or civil sanctions, or other liabilities or proceedings against us, including class action lawsuits and enforcement actions from the SEC, Department of Justice, and foreign regulators. Other laws applicable to our international business include local employment, tax, privacy, data security, and intellectual property protection laws and regulations, including restrictions on movement of information about individuals beyond national borders. In particular, as explained in more detail elsewhere in this report, the GDPR imposes substantial compliance obligations and increases the risks associated with collection and processing of personal data. In some cases, buyers and sellers operating in non-U.S. markets may impose additional requirements on our non-U.S. business in efforts to comply with their interpretation of their own or our legal obligations. These requirements may differ significantly from the requirements applicable to our business in the United States and may require engineering, infrastructure and other costly resources to accommodate, and may result in decreased operational efficiencies and performance. As these laws continue to evolve and we expand to more jurisdictions or acquire new businesses, compliance will become more complex and expensive, and the risk of non-compliance will increase.
Compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business abroad, and violation of these laws or regulations may interfere with our ability to offer our solution competitively in one or more countries, expose us or our employees to fines and penalties, and result in the limitation or prohibition of our conduct of business. In addition, we have recently received numerous inquiries from foreign regulators asking for information about the advertising technology generally and our business specifically. These investigations are costly and time consuming to respond to and divert management attention.
Risks Related to Our Internal Controls and Finances
If we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately or timely report our financial condition or results of operations. If our internal control over financial reporting is not effective, it may adversely affect investor confidence in us and the price of our common stock.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting and provide a management report on our internal control over financial reporting.
Our platform system applications are complex, multi-faceted and include applications that are highly customized in order to serve and support our clients, advertising inventory and data suppliers, as well as support our financial reporting obligations. We regularly make improvements to our platform to maintain and enhance our competitive position. In the future, we may implement new offerings and engage in business transactions, such as acquisitions, reorganizations or implementation of new information systems. These factors require us to develop and maintain our internal controls, processes and reporting systems, and we expect to incur ongoing costs in this effort. We may not be successful in developing and maintaining effective internal controls, and any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods.
If we identify material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, or if we are unable to comply with the requirements of the Sarbanes-Oxley Act in a timely manner, then, we may be late with the filing of our periodic reports, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected. Such failures could also subject us to investigations by Nasdaq, the stock exchange on which our securities are listed, the SEC or other regulatory authorities, and to litigation from stockholders, which could harm our reputation, financial condition or divert financial and management resources from our core business.
Our ability to use our net operating losses and tax credit carryforwards to offset future taxable income may be subject to certain limitations, which could result in higher tax liabilities.
Our ability to fully utilize our net operating loss and tax credit carryforwards to offset future taxable income may be limited and may become further limited as a result of the merger with Telaria.limited.
At December 31, 2019,2020, we had U.S. federal net operating loss carryforwards, or NOLs, of approximately $288.8$453.2 million, state NOLs of approximately $176.2$280.0 million, foreign NOLs of approximately $18.0$25.0 million, federaland state research and development tax credit carryforwards, or credit carryforwards, of approximately $10.2 million, and state credit carryforwards of approximately $8.0 million. A lack of future taxable income would adversely affect our ability to utilize these NOLs and credit carryforwards. In
addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, and comparable state income tax laws, a corporation that undergoes an "ownership change" is subject to limitations on its ability to utilize its NOLs and credit carryforwards to offset future taxable income following the ownership change. As a result, future changes in our stock ownership, including because of issuance of shares of
common stock in connection with acquisitions or other direct or indirect changes in our ownership that may be outside of our control, could result in limitations on our ability to fully utilize our NOLs and credit carryforwards. The Company had an ownership change on December 31, 20152016 subjecting the federal and state NOLs to an annual limitation.limitations that have expired. Additionally, the Company had an ownership change in January 2008 and $2.3 millionresulting in not material limitation of federal and state NOLs are already subject to limitation under Section 382 of the Code. Additionally, approximately $3.4 million of ourCode and comparable state income tax laws. Moreover, not material federal NOLs and approximately $3.4 million of our state NOLs were generated during the pre-acquisition period by corporations that we acquired, and thus those NOLs already are subject to limitation under Section 382 of the Code and comparable state income tax laws. Also, prior to the merger, Telaria acquired corporations with pre-acquisition NOLs that are subject to limitation under Section 382 of the Code and comparable state income tax laws.
In addition, the merger withCompany and Telaria mayboth underwent ownership changes for tax purposes (i.e. a more than 50% change in stock ownership in aggregated 5% shareholders) on April 1, 2020 due to the Merger. As a result, in anthe use of the Company’s total domestic NOL carryforwards and tax credits generated prior to the ownership change for purposes ofwill be subject to annual use limitations under Section 382 which may impose additional limitations on the abilityand Section 383 of the combined company to utilize theseCode and comparable state income tax carryover assets. Whether anlaws. The Company believes that the ownership change occurs as a result ofchanges will not impact the merger is highly dependent on numerous factors, some of which are not in our control.
Moreover, the Internal Revenue Service, referred to as the IRS, recently proposed regulations that, if applicable to an ownership change, whether resulting from or following the merger with Telaria, could severely limit the combined company’s ability to utilize thesubstantially all of our NOLs and state research and development tax carryover assets. These proposed regulations are not expected to be applicablecredits to the merger, but they may applyextent we generate taxable income that can be offset by such losses. The Company reasonably expects its federal research and development tax credits will not be recovered prior to any subsequent ownership change of the combined company. If the merger does not result in an ownership change, the merger would substantially increase the likelihood that an ownership change could result in the near future, again creating the possibility that utilization of the tax carryover assets of the combined company would be limited and possibly expire unutilized. Given the uncertainty surrounding whether we will undergo an ownership change as a result of the merger, and the uncertainty surrounding the impact of these proposed regulations on any future ownership change, the extent to which the final version of the proposed regulations will limit the combined company’s ability to used its tax carryover assets following the merger is uncertain.expiration.
Also, depending on the timing and level of our taxable income, a portion of our NOLs and credit carryforwards may expire unutilized, which could prevent us from offsetting future taxable income we may generate by the amount of our NOLs and credit carryforwards generated in tax years beginning before December 31, 2017.2018. U.S. federal net operating loss carryforwardsNOLs generated for tax years beginning before December 31, 20172018 can offset 100% of taxable income, however, these NOLs can only be carried forward for 20 years. U.S. federal net operating loss carryforwardsNOLs generated for tax years beginning after December 31, 20172018 can offset 80% of taxable income, however, these NOLs can be carried forward indefinitely. We have recorded a full valuation allowance related to our NOLs, credit carryforwards, and other net deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets. To the extent we determine that all, or a portion of, our valuation allowance is no longer necessary, we will reverse the valuation allowance and recognize an income tax benefit in the reported financial statement earnings in that period. Once the valuation allowance is eliminated or reduced, its reversal will no longer be available to offset our current financial statement tax provision in future periods. Release of the valuation allowance would result in the recognition of certain net deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve and the impact of Section 382.
The purchase price allocation for any acquisition we complete, including our merger with Telaria, is generally not finalized until one year after the closing of the acquisition, and any final adjustment to the valuation could have a material change on what is reported as the fair value assigned to the assets and liabilities.
The final purchase price allocation for any acquisition we complete, including our merger with Telaria that was completed on April 1, 2020, depends upon the finalization of asset and liability valuations, among other things. The valuation studies necessary to estimate the fair values of acquired assets and assumed liabilities and the related allocation of purchase price generally are not finalized until one year after the closing of the acquisition. Initially, we allocate the total estimated purchase price to the acquired assets and assumed liabilities based on preliminary estimates of their fair values. The final determination of these fair values is subsequently determined based upon the actual net tangible and intangible assets that existed on the closing date of the acquisition. Any final adjustment could change the fair values assigned to the assets and liabilities, resulting in a change to our consolidated financial statements, including a change to goodwill. Such change could be material.
We may require additional capital to support our business, and such capital might not be available on terms acceptable to us, if at all. Inability to obtain financing could limit our ability to conduct necessary operating activities and make strategic investments.
Various business challenges and opportunities may require additional funds, including the need to respond to competitive threats or market evolution by developing new solutions and improving our operating infrastructure through additional hiring or acquisition of complementary businesses or technologies, or both. In addition, we could incur significant expenses or shortfalls in anticipated cash generated as a result of unanticipated events in our business or competitive, regulatory, or other changes in our market, or longer payment cycles required or imposed by our buyers.
Our available cash and cash equivalents, any cash we may generate from operations, and our available line of credit under our credit facility may not be adequate to meet our capital needs, and therefore we may need to engage in equity or debt financings to secure additional funds. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing on terms satisfactory to us when we require it or are unable to renew our credit facility when it matures or enter into a new one, our ability to continue to support our business growth and respond to business challenges could be significantly impaired, and our business may be adversely affected.
If we do raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, including the ability to pay dividends. This may make it
more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, if we issue debt, the holders of that debt would have prior claims on the Company's assets, and in case of insolvency, the claims of creditors would be satisfied before distribution of value to equity holders, which would result in significant reduction or total loss of the value of our equity.
We intend to finance the cash portion of the SpotX acquisition consideration in part through the Term Loan Facility contemplated by the Commitment Letter. If we fail to satisfy the closing conditions set forth in the Commitment Letter or Goldman Sachs Bank USA is unable to perform its obligations under the Commitment Letter for any reason, we will be required to find other sources of capital to fund the acquisition of SpotX, which would exacerbate the risks described above.
Our credit facility subjects us to operating restrictions and financial covenants that impose risk of default and may restrict our business and financing activities.
We have a $40.0$60.0 million credit facility with Silicon Valley Bank. Borrowings are secured by substantially all of our tangible personal property assets and all of our intangible assets are subject to a negative pledge in favor of Silicon Valley Bank. This credit facility is and any replacement credit facility that we may secure will be, subject to certain covenants and borrowing conditions, including those related to financial ratios and liquidity. If we fail to perform in accordance with covenants or to satisfy conditions, we may not be able to make borrowings under the facility. The credit facility is, and any replacement credit facility that we may secure will be, also subject to restrictions that limit our ability, among other things, to:
•dispose of or sell our assets;
•make material changes in our business or management;
•acquire, consolidate or merge with other entities;
•incur additional indebtedness;
•create liens on our assets;
•pay dividends;
•make investments;
•enter into transactions with affiliates; and
•pay off or redeem subordinated indebtedness.
These covenants may restrict our ability to finance our operations and to pursue our business activities and strategies. Our ability to comply with these covenants may be affected by events beyond our control. If a default were to occur and not be waived, such default could cause, among other remedies, all of the outstanding indebtedness under our loan and security agreement to become immediately due and payable. In such an event, our liquid assets might not be sufficient to meet our repayment obligations, and we might be forced to liquidate collateral assets at unfavorable prices or our assets may be foreclosed upon and sold at unfavorable valuations.
Our ability to renew our existing credit facility, which matures in September 2020,2022, or to enter into a new credit facility to replace or supplement the existing facility may be limited due to various factors, including the status of our business, global credit market conditions, and perceptions of our business or industry by sources of financing. In particular, it may be difficult to renew or replace our existing credit facility if we are not able to produce, or demonstrate a path to produce, positive cash flow. In addition, if credit is available, lenders may seek more restrictive covenants and higher interest rates that may reduce our borrowing capacity, increase our costs, and reduce our operating flexibility.
If we make borrowings under the facility and do not have or are unable to generate sufficient cash available to repay our debt obligations when they become due and payable, either upon maturity or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all. Our inability to obtain financing may negatively impact our ability to operate and continue our business as a going concern.
Risks Related to the Securities Markets and Ownership of our Common Stock
The price of our common stock has been and may continue to be volatile and the value of an investment in our common stock could decline.
Technology stocks have historically experienced high levels of volatility. The trading price of our common stock has fluctuated substantially and may continue to do so. These fluctuations could result in significant decreases in the value of an investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:
•announcements of new offerings, products, services or technologies, commercial relationships, acquisitions, or other events by us or our competitors, including the proposed merger with Telaria;competitors;
•price and volume fluctuations in the overall stock market from time to time;
•significant volatility in the market price and trading volume of technology companies in general and of companies in the digital advertising industry in particular;
•fluctuations in the trading volume of our shares or the size of our public float;
•actual or anticipated changes or fluctuations in our results of operations;
•actual or anticipated changes in the expectations of investors or securities analysts, and whether our results of operations meet these expectations;
•issuance of research reports by analysts or investors;
•litigation involving us, our industry, or both;
•regulatory developments in the United States, foreign countries, or both;
•general economic conditions and trends;
•major catastrophic events;
•political uncertainty;
•breaches or system outages;
•departures of officers or other key employees; or
•an adverse impact on the company resulting from other causes, including any of the other risks described in this report.
In addition, if the market for advertising technology stocks or the stock market, in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In addition, our employee restricted stock and restricted stock unit awards typically vest each May 15 and November 15, and are subject to automatic sale arrangements at those dates to cover taxes accruing on vesting. In the past, volatility in the market price of a company's securities has often resulted in securities litigation being brought against that company. Declines in the price of our common stock, even following increases, may result in securities litigation against us, which would result in substantial costs and divert our management's attention and resources from our business.
Competition for investors could adversely affect the price of our stock.
There are many companies in the advertising technology or "ad tech" space, but we are one of a relatively small portion of those companies that is publicly traded. Some of the other publicly traded ad tech companies are substantially larger than we are and have more diversified offerings, or may be perceived by investors as having greater stability or growth potential. Others may be focused on parts of the business that investors may view as more appealing. Ad tech or related advertising companies that are not yet public may become public, and publicly traded companies may enter the ad tech business through acquisitions. Increase in the number of publicly traded companies available to investors wishing to invest in ad tech may result in a decrease in demand for our shares, either because overall demand for ad tech investment does not increase commensurately with the increase in public companies in the ad tech space, or because we are not perceived as competitively differentiated or offering superior value compared to other such companies. Decrease in demand for our shares would result in suppressed growth, or decrease, in the value of our stock.
If securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our market, if they publish negative evaluations of our stock, or if we fail to meet the expectations of analysts, the price of our stock and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. We do not have any control over these analysts, and their reports or analysts' consensus may not reflect our guidance, plans or expectations. If one or more of the analysts covering our business issues an adverse opinion of our company because we fail to meet their expectations or otherwise, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline.
Provisions of our charter documents and Delaware law may inhibit a potential acquisition of the company and limit the ability of stockholders to cause changes in company management.
Our amended and restated certificate of incorporation and amended and restated bylaws and the certificate of incorporation and bylaws that will govern the combined company if the merger with Telaria is completed, include or may include provisions, as described below, that could delay or prevent a change in control of the company, and make it difficult for stockholders to elect directors who are not nominated by the current members of our board of directors or take other actions to change company management.
•Our certificate of incorporation gives our board of directors the authority to issue shares of preferred stock in one or more series, and to establish the number of shares in each series and to fix the price, designations, powers, preferences and relative, participating, optional or other rights, if any, and the qualifications, limitations, or restrictions of each
series of the preferred stock without any further vote or action by stockholders. The issuance of shares of preferred stock may discourage, delay or prevent a merger or acquisition of the company by significantly diluting the ownership of a hostile acquirer, resulting in the loss of voting power and reduced ability to cause a takeover or effect other changes.
| |
• | Our certificate of incorporation provides that our board of directors is classified, with only one of its three classes elected each year, and directors may be removed only for cause and only with the vote of 66 2/3% of the voting power of stock outstanding and entitled to vote thereon. Further, the number of directors is determined solely by our board of directors, and because we do not allow for cumulative voting rights, holders of a majority of shares of common
|
•Our certificate of incorporation provides that our board of directors is classified, with only one of its three classes elected each year, and directors may be removed only for cause and only with the vote of 66 2/3% of the voting power of stock outstanding and entitled to vote thereon. Further, the number of directors is determined solely by our board of directors, and because we do not allow for cumulative voting rights, holders of a majority of shares of common stock entitled to vote may elect all of the directors standing for election. These provisions could delay the ability of stockholders to change the membership of a majority of our board of directors.
•Our bylaws provide that until April 1, 2022, our board of directors shall be composed of four legacy Rubicon Project directors, four Telaria directors, and the Chief Executive Officer of the Company.
•Under our bylaws, only the board of directors or a majority of remaining directors, even if less than a quorum, may fill vacancies resulting from an increase in the authorized number of directors or the resignation, death or removal of a director.
•Our certificate of incorporation prohibits stockholder action by written consent, so any action by stockholders may only be taken at an annual or special meeting.
•Our certificate of incorporation provides that a special meeting of stockholders may be called only by the board of directors. This could delay any effort by stockholders to force consideration of a proposal or to take action, including the removal of directors.
•Under our bylaws, advance notice must be given to nominate directors or submit proposals for consideration at stockholders' meetings. This gives our board of directors time to defend against takeover attempts and could discourage or deter a potential acquirer from soliciting proxies or making proposals related to an unsolicited takeover attempt.
| |
• | •The provisions of our certificate of incorporation noted above may be amended only with the affirmative vote of holders of at least 66 2/3% of the voting power of all of the then-outstanding shares of the company's voting stock, voting together as a single class. The same two-thirds vote is required to amend the provision of our certificate of incorporation imposing these supermajority voting requirements. Further, our bylaws may be amended only by our board of directors or by the same percentage vote of stockholders noted above as required to amend our certificate of incorporation. These supermajority voting requirements may inhibit the ability of a potential acquirer to effect such amendments to facilitate an unsolicited takeover attempt. • 2/3% of the voting power of all of the then-outstanding shares of the company's voting stock, voting together as a single class. The same two-thirds vote is required to amend the provision of our certificate of incorporation imposing these supermajority voting requirements. Further, our bylaws may be amended only by our board of directors or by the same percentage vote of stockholders noted above as required to amend our certificate of incorporation. These supermajority voting requirements may inhibit the ability of a potential acquirer to effect such amendments to facilitate an unsolicited takeover attempt. |
Our board of directors may amend our bylaws by majority vote. This could allow the board to use bylaw amendments to delay or prevent an unsolicited takeover, and limits the ability of an acquirer to amend the bylaws to facilitate an unsolicited takeover attempt.
We are also subject to Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in any business combination with an interested stockholder for a period of three years from the date the person became an interested stockholder, unless certain conditions are met. These provisions make it more difficult for stockholders or potential acquirers to acquire the company without negotiation and may apply even if some of our stockholders consider the proposed transaction beneficial to them. For example, these provisions might discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer were to be at a premium over the then-current market price for our common stock. These provisions could also limit the price that investors are willing to pay in the future for shares of our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters are located in Los Angeles, California, where we occupy office space totaling approximately 47,000 square feet under a lease that expires inon April 30, 2021. We use these facilities for our principal administration, sales and marketing, technology and development, and engineering activities.
On November 20, 2020, we signed a new lease for our corporate headquarters in Los Angeles, California, where we will occupy office space totaling 38,754 square feet. Our lease begins in May 2021 and expires in April 2031.
We also have a 15,000 square foot officetwo offices in New York under a leaseleases that expiresexpire in 2029 and 2030 that are approximately 26,664 square feet and 15,000 square feet, respectively, and lease additional offices and maintain data centers in other locations in North America,
South America, Europe, Australia, and Asia. We believe that our current facilities are adequate to meet our current needs, butand that, if our proposed merger with Telaria is consummated, our needswe require additional space, we will change and any newbe able to obtain additional facilities could have a material impact on our financial condition.commercially reasonable terms.
Item 3. Legal Proceedings
We and our subsidiaries may from time to time be parties to legal or regulatory proceedings, lawsuits and other claims incident to our business activities and to our status as a public company. Such routine matters may include, among other things, assertions of contract breach or intellectual property infringement, claims for indemnity arising in the course of our business, regulatory investigations or enforcement proceedings, and claims by persons whose employment has been terminated. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability, amounts which may be covered by insurance or recoverable from third parties, or the financial impact with respect to such matters as of December 31, 2019.2020. However, based on our knowledge as of December 31, 2019,2020, we believe that the
final resolution of such matters pending at the time of this report, individually and in the aggregate, will not have a material adverse effect upon our consolidated financial position, results of operations or cash flows.
Refer to Note 17—"Commitments and Contingencies" for additional information related to legal proceedings.
On February 13, 2020, a complaint (captioned Sebatini v. The Rubicon Project, Inc. et al.) was filed in the United States District Court for the District of Delaware by a putative stockholder of Telaria challenging the proposed merger. The complaint names as defendants Rubicon Project, Madison Merger Corp., Telaria, and each member of the Telaria board of directors. The complaint asserts violations of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder against all defendants other than Rubicon Project and Madison Merger Corp., and asserts violations of Section 20(a) of the Exchange Act against Rubicon Project and the individual defendants. The plaintiff contends that the Registration Statement on Form S-4 filed with the SEC by Rubicon Project on February 7, 2020, and serving as an amended preliminary joint proxy statement/prospectus for the Telaria merger, omitted or misrepresented material information regarding the merger. The complaint seeks injunctive relief, rescission, or rescissory damages, and an award of plaintiff’s costs, including attorneys’ fees and expenses. We believe the claims asserted in the complaint are without merit.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock has beenwas listed on the New York Stock Exchange, or the NYSE, sincefrom April 1, 2014 through June 8, 2020, under the symbol "RUBI." Prior
On June 8, 2020, the Company voluntarily delisted its common stock from the NYSE and commenced listing on The Nasdaq Global Select Market of The Nasdaq Stock Market LLC ("Nasdaq"). On June 30, 2020, the Company changed its name from "The Rubicon Project, Inc." to our initial public offering, or IPO, there was no public market for our common stock."Magnite, Inc." In connection with the name change, the Company changed its ticker symbol from "RUBI" to "MGNI."
Holders of Record
As of February 23, 2020,19, 2021, there were approximately 5462 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of holders also does not include stockholders whose shares may be held in trust by other entities.
Dividend Policy
We have never declared or paid any dividends and we do not anticipate paying any cash dividends in the foreseeable future. In addition, our credit facility contains restrictions on our ability to pay dividends.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We presently have no publicly announced repurchase plan or program.
Upon vesting of most restricted stock units or stock awards, we are required to deposit minimum statutory employee withholding taxes on behalf of the holders of the vested awards. As reimbursement for these tax deposits, we have the option to withhold from shares otherwise issuable upon vesting a portion of those shares with a fair market value equal to the amount of the deposits we paid. Withholding of shares in this manner is accounted for as a repurchase of common stock. There were no repurchases during the quarter ended December 31, 2019.2020.
Use of ProceedsStock Performance Graph
As of December 31, 2019, all of the proceeds from our initial public offering of common stock effected through a Registration Statement on Form S-1 (File No. 333-193739) have been applied as described in our final prospectus filedThis performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC pursuantfor purposes of Section 18 of the Exchange Act, or otherwise subject to Rule 424(b)the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of ours under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.
The following graph compares the cumulative total stockholder return on an initial investment of $100 in our common stock between December 31, 2015 and other period reports previously filedDecember 31, 2020, with the SEC.comparative cumulative total returns of the S&P 500 Index, Nasdaq,Internet Index, S&P Internet Select Industry Index and Russell 2000 Index over the same period. As previously discussed, we have not paid any cash dividends and, therefore, the cumulative total return calculation for us is based solely upon stock price appreciation (depreciation) and not reinvestment of cash dividends, whereas the data for the comparative indexes assumes reinvestments of dividends. The graph assumes our closing sales price on December 31, 2015 of $16.45 per share as the initial value of our common stock. The returns shown are based on historical results and are not necessarily indicative of, nor intended to forecast, future stock price performance.
COMPARISON OF CUMULATIVE TOTAL RETURN
Item 6. Selected Financial Data
This section is not requiredThe following selected consolidated financial data should be read in conjunction with Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing in Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
The following table sets forth our selected consolidated historical financial and operating data for smaller reporting companies.the periods indicated. The consolidated statements of operations data for the years ended December 31, 2020, 2019, and 2018 and the consolidated balance sheet data as of December 31, 2020 and 2019 have been derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | |
| | December 31, 2020 | | December 31, 2019 | | December 31, 2018 | | December 31, 2017 | | December 31, 2016 | | |
| | | | | | | | | | | | |
| | (in thousands, except per share data) | | |
Revenue | | $ | 221,628 | | | $ | 156,414 | | | $ | 124,685 | | | $ | 155,545 | | | $ | 278,221 | | | |
Expenses: | | | | | | | | | | | | |
Cost of revenue | | 77,747 | | | 57,391 | | | 60,003 | | | 56,836 | | | 73,247 | | | |
Sales and marketing | | 76,030 | | | 44,565 | | | 44,556 | | | 51,794 | | | 83,328 | | | |
Technology and development | | 51,546 | | | 40,250 | | | 37,863 | | | 47,500 | | | 51,184 | | | |
General and administrative | | 52,987 | | | 39,750 | | | 42,431 | | | 55,596 | | | 68,570 | | | |
Restructuring and other exit costs | | 17,552 | | | 2,041 | | | 3,440 | | | 5,959 | | | 3,316 | | | |
Impairment of intangible assets | | — | | | — | | | — | | | 4,585 | | | 23,473 | | | |
Impairment of goodwill | | — | | | — | | | — | | | 90,251 | | | — | | | |
Total expenses | | 275,862 | | | 183,997 | | | 188,293 | | | 312,521 | | | 303,118 | | | |
Loss from operations | | (54,234) | | | (27,583) | | | (63,608) | | | (156,976) | | | (24,897) | | | |
Other (income) expense: | | (1,495) | | | (593) | | | (2,143) | | | (431) | | | (1,984) | | | |
Loss before income taxes | | (52,739) | | | (26,990) | | | (61,465) | | | (156,545) | | | (22,913) | | | |
Provision (benefit) for income taxes | | 693 | | | (1,512) | | | 357 | | | (1,762) | | | (4,860) | | | |
Net income (loss) | | (53,432) | | | (25,478) | | | (61,822) | | | (154,783) | | | (18,053) | | | |
Net income (loss) per share attributable to common stockholders(1): | | | | | | | | | | | | |
Basic | | $ | (0.55) | | | $ | (0.48) | | | $ | (1.23) | | | $ | (3.17) | | | $ | (0.39) | | | |
Diluted | | $ | (0.55) | | | $ | (0.48) | | | $ | (1.23) | | | $ | (3.17) | | | $ | (0.39) | | | |
Weighted-average shares used to compute net income (loss) per share attributable to common stockholders(1): | | | | | | | | | | | | |
Basic | | 96,700 | | | 52,614 | | | 50,259 | | | 48,869 | | | 46,655 | | | |
Diluted | | 96,700 | | | 52,614 | | | 50,259 | | | 48,869 | | | 46,655 | | | |
(1)See Note 3 to our consolidated financial statements for a description of the method used to compute basic and diluted net income (loss) per share attributable to common stockholders.
Consolidated Balance Sheet Data
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31 |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | | | | | | | | | |
| | (in thousands) |
Cash and cash equivalents | | $ | 117,676 | | | $ | 88,888 | | | $ | 80,452 | | | $ | 76,642 | | | $ | 149,423 | |
Marketable securities, current and non-current | | $ | — | | | $ | — | | | $ | 7,524 | | | $ | 54,999 | | | $ | 40,550 | |
Accounts receivable, net | | $ | 471,666 | | | $ | 217,571 | | | $ | 205,683 | | | $ | 165,890 | | | $ | 192,064 | |
Property, equipment and internal use software development costs, net | | $ | 39,841 | | | $ | 39,720 | | | $ | 48,057 | | | $ | 60,127 | | | $ | 52,768 | |
Total assets | | $ | 938,960 | | | $ | 395,120 | | | $ | 360,012 | | | $ | 383,635 | | | $ | 519,775 | |
Total long-term liabilities | | $ | 35,149 | | | $ | 15,685 | | | $ | 1,017 | | | $ | 1,780 | | | $ | 1,825 | |
Total liabilities | | $ | 557,347 | | | $ | 283,184 | | | $ | 241,999 | | | $ | 219,024 | | | $ | 220,262 | |
Common stockholders' equity (deficit) | | $ | 381,613 | | | $ | 111,936 | | | $ | 118,013 | | | $ | 164,611 | | | $ | 299,513 | |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes to those statements included in Item 8 to this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs, and expectations and that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in "Item 1A. Risk Factors" and the "Special Note About Forward-Looking Statements."
Overview and Industry Trends
See “Item"Item 1. Business”Business" for an overview of our business, of the industry in which we operate, in, and of important industry and business trends.
Trends in Our Business
Ad Spend and Take Rate2020 Channel Trends
Overall,Sellers use our technology to monetize their content across all digital channels, including CTV, mobile and desktop, and each of these channels will continue to represent a meaningful portion of our revenue increased 25% from $124.7 million in 2018future periods. We track the breakdown of revenue across channels to $156.4 million inbetter understand how our clients are transacting on our platform, which informs decisions as to business strategy and the allocation of resources and capital. The following table presents revenue by channel and as a percentage of total revenue for the years ended December 31, 2020, 2019, which reflects both increased ad spend and higher overall take rates. Our ad spend increased to $1,117 million in 2019, up from $992 million in 2018, driven by2018.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | |
| Year Ended | |
| December 31, 2020 | | December 31, 2019 | | December 31, 2018 | |
| (in thousands, except percentages) | | | |
Channel: | | | | | | | | | | | | |
CTV | $ | 34,319 | | | 15 | % | | $ | — | | | — | % | | $ | — | | | — | % | |
Desktop | $ | 78,956 | | | 36 | | | $ | 68,302 | | | 44 | | | $ | 59,039 | | | 47 | | |
Mobile | $ | 108,353 | | | 49 | | | $ | 88,112 | | | 56 | | | $ | 65,646 | | | 53 | | |
Total | $ | 221,628 | | | 100 | % | | $ | 156,414 | | | 100 | % | | $ | 124,685 | | | 100 | % | |
Each of these digital channels has its own industry growth across both desktoprate, with CTV and mobile channels, with video and audio inventory types being key contributors. Our overall take rate in 2019 increased to 14.0%, compared to 12.6% in 2018. Our 2019 take rate is higher due primarily to seller pricing improvements negotiated during the first half of 2018. We believe this take rate puts us in a favorable competitive position in terms of pricing, but it is uncertain whether it represents a sustainable competitive advantage. We do not expect significant increases in take rate, and could experience decreases in take rate due to the mix of PMP ad spend which typically carries a lower take rate, and from discounted seller fees related to our SPO initiatives. Our results could be negatively impacted if take rate decreases from these factors are not offset by increased ad spend. For an explanation of how ad spend and take rate are calculated and why they are useful to investors and managers, see the discussion below under the heading "Non-GAAP Financial Measures."
Industry dynamics are challenging due to market and competitive pressures and make it difficult to predict the near-term effect of our growth initiatives. While we anticipate long-term benefits from these initiatives, unless we are ableprojected to continue to increase advertising spend on our platform, through higher transaction volumes or higher transaction values or both, our revenuegrow steadily, while desktop growth may be limited.
Supply Path Optimization
Supply Path Optimization ("SPO"), refers to efforts by buyers to consolidate the number of vendors they work with to find the most effective and cost-efficient paths to procure media. This practice emerged in 2018 and continues to gain momentum. SPO is important to buyers because it can increase the proportion of their advertising ultimately spent on working media, with the goal of increasing return on their advertising spending, and can help them gain efficiencies by reducing the number of vendors they work with in a complex ecosystem. Largely because of header bidding, buyers are able to choose the best partner (or a small number of partners) without limiting the available inventory to bid on. There are a number of criteria that buyers use to evaluate supply partners, including transparency, cost, quality of inventory, privacy standards, brand safety standards, including compliance with ads.txt and similar industry standards, and fraudulent traffic prevention policies. We believe we are well positioned to benefit from supply path optimization in the long run as a result of our broad inventory supply, buyer tools such as traffic shaping, our pricing tools, which reduce the overall cost of working with us, our transparency, and our brand safety measures. We believe that benefits from successful outcomes in the SPO process could drive meaningful increases of ad spend across our platform. In order to achieve increased ad spend, we may negotiate discounts to our seller fees with agencies and advertisers, and we have increasingly been receiving requests from buyers for discounts, rebates, or similar incentives in order to move more advertising spending to our platform. We believe that because our businessflattens. MAGNA's October 2020 Programmatic Market forecast has many fixed costs, increases in ad spend volume create opportunity to disproportionately improve net income, even with increased seller fee discounts. However, our results could be negatively impacted if our advertising spend increases and cost reductions are not adequate to compensate for the discounted fees.
Impact of Header Bidding
While the rise and rapid adoption of header bidding increased revenue for sellers, it also created new challenges. Managing multiple exchanges on the page is technically complex, and in the early days of header bidding this complexity was exacerbated by the lack of independent technology standards. In 2017, we began to address these issues through our support of Prebid, a free and open source suite of software products designed by advertising community developers to enable publishers to implement header bidding on their websites and from within their apps. Despite Prebid’s adoption by a number of the world’s largest sellers, deploying and customizing it still requires dedicated technical resources. In the second quarter of 2019, we announced the beta program for Demand Manager. Demand Manager helps sellers effectively monetize their advertising inventory through configuration tools and analytics to make it easier to deploy, configure, and optimize Prebid-based header bidding solutions. In October 2019, we acquired RTK.io, a provider of header bidding solutions that has much in common with our Demand Manager product, including a foundation in Prebid. RTK’s technology and team enables Rubicon Project to extend the strategy we introduced with the launch of Demand Manager. We plan to integrate the two solutions to extend our Demand Manager product portfolio and client base, and to add talented header bidding experts and Prebid developers to our team. We believe that adoption of these tools will further strengthen our relationship with sellers and contribute to our future revenue growth. We charge sellers a fee for Demand Manager that is based on all of the sellers’ advertising spending managed through Demand Manager, whether the actual inventory monetization runs through our exchange or otherwise.
Desktop, Mobile, Video and CTV Trends
MAGNA estimates thatestimated compound annual growth rates through 2023from 2020 to 2024 for desktop, mobile and video will bedesktop at 18% and down 1%, 22%,respectively, and 22%, respectively.over the same period, eMarketer projected CTV is a nascent but rapidly growing segment, with the U.S. market expected to grow at ana 23% compound annual compoundgrowth rate.
We believe that CTV will be our biggest growth driver in future periods, and following the SpotX Acquisition we expect CTV revenue to represent a significantly higher percentage of our overall revenue.
We expect our mobile business to grow at a higher rate than desktop, consistent with industry trends and our historical results. Our mobile business consists of 19% through 2023 accordingtwo components, mobile web and mobile applications. Initially our mobile business consisted primarily of mobile web, which is similar to eMarketer. our desktop business, but our mobile application business has been the growth driver behind our mobile business, and prior to the COVID-19 pandemic showed growth rates in excess of industry projections. We therefore expect our growth within mobile to come largely from our mobile applications business and, in particular, mobile video.
Lower industry growth rates in desktop will make growth ofgrowing desktop revenue more challenging unlesschallenging; however, in future periods we arebelieve we will be able to grow our desktop business in excess of industry projections by capturing market share through SPO or theand expansion of additional inventory. Our strategic focus is on growth areas—including mobile, video, PMPs, Demand Manager, and header bidding—that are expectedpublisher relationships. We expect our desktop business to represent a majoritydecline as an overall percentage of our revenue in future periods. However, despite our progress in these growth areas, our traditional desktop display business is expected towe expect that it will continue to represent a significant part of our revenue in the near term. Therefore, the mix of our desktop display business will continue to have a significantnegative effect on our overall growth rate until our advertising spend mix has shifted more fully to growth areas. Revenue from our mobile business was $88 million in 2019, representing 56% of our total business, and grew 34% in 2019 over 2018. Video revenue was $29 million in 2019, and grew 43% in 2019 over 2018.rate.
Because ofTelaria Merger
On April 1, 2020, we completed the long-term growth potential in CTV, we undertook a comprehensive review in 2019 to determine our CTV strategic approach through build, buy or partner opportunities. On December 19, 2019, we announced a stock-for-stock merger (“Merger”) with Telaria, Inc., (“Telaria”),a leading provider of CTV technology, which will createcreated a combined company offering a single partner for transacting CTV, desktop display, video, audio, and mobile inventory across all geographies and auction types. We believe theThe combination of Rubicon Project’sMagnite's programmatic scale and expertise with Telaria’s leadership in CTV technology and premium partnerships will createcreated what we believe to be the world’s largest independent sell-side advertising platform, with scale, capabilities, and solutions exceeding those offered by competitors. Together,As CTV viewership is growing rapidly and the combined company will enable thousandspace of publishersadoption is accelerating the shift of advertising budgets from linear television to connect with hundreds of buyers and brands, creating a global, independent alternative to closed players. The combination will provide additional engineering and sales resources as well as deeper financial assets to seize the opportunity of CTV, the fastest-growing digital medium. Telaria merger
strategically positioned us to take advantage of this growth trend, and we believe that CTV will be our biggest growth driver in future periods.
Telaria Merger Costs Synergies and Other Expense Reduction Initiatives
In connection with the Merger, we restructured certain areas of our operations during 2020. As part of those efforts, we achieved annual run rate cost synergies of over $20.0 million, mainly related to duplicative public company costs, vendor rationalization, overlapping general and administrative costs, and other operational streamlining. Employees of the merged company were functionally aligned under a unified leadership team and we reduced our headcount by approximately 8% of our combined workforce during 2020.
Given the significant impact resulting from the COVID-19pandemic, we instituted certain additional short-term actions during the second quarter, including compensation reductions, a hiring freeze, and deferment of certain capital expenditures. When we experienced a recovery in revenue in the third quarter, we reinstated compensation and removed certain of these temporary cost-cutting initiatives during the fourth quarter.
SpotX Acquisition
On February 4, 2021, we entered into a Stock Purchase Agreement (the "SpotX Purchase Agreement") with RTL to acquire 100% of the issued and outstanding shares of capital stock of SpotX, Inc., a Delaware corporation ("SpotX"), for a purchase price equal to $560 million in cash plus 14 million shares of the Company’s common stock (the "SpotX Acquisition"). SpotX is one of the leading platforms shaping CTV and video advertising globally.We believe the combined companyacquisition will be an essential omni-channel partnercreate the largest independent CTV advertising platform in the programmatic marketplace, making it easier for buyers to reach targetCTV audiences optimizingat scale from industry-leading streaming content providers, broadcasters, platforms and device manufacturers.Subject to receipt of regulatory approvals and satisfaction of customary closing conditions, the supply path with industry-leading transparency, robust support for identity solutionsSpotX Acquisition is expected to close in the second quarter of 2021. The SpotX Acquisition will result in a significant increase in our revenue, in particular in CTV and brand-safe premium inventory. In addition, Rubicon Projectother video. Following the transaction, we expect CTV to represent a higher percentage of our overall revenue, and Telaria have complimentary domestic and international footprints that will create a combined broader global reach.
Expense Reduction Initiatives
In additionbecause CTV is largely transacted through PMPs, we also expect to strategic decisions made to reduce costs paid by our clientssee an increase in the percentage of PMP transactions transacted on our platform while growingplatform. If the SpotX Acquisition successfully closes, the acquisition would result in a substantial increase in related operating expenses, primarily associated with costs for personnel, payments to sellers for revenue through transaction volume, we have also focusedreported on the cost structure of our business to enable us to compete more effectively. We must operate efficiently to remain competitive in the current environmenta gross basis, and to compensate for the ongoing investments in technology and data processing capabilities requiredother ancillary costs to support the increased volumebusiness. We expect some of transactions that our growth plans require. As partthose increases to be offset by cost saving activities we plan to undertake. We are targeting in excess of these efforts, during$35 million in run-rate operating cost synergies, with more than half of the synergies to be realized within the first quarteryear of 2018, we undertook measures to reduce headcount by approximately 100 people, or 19% of our workforce, and to reduce other operating costs. Our actions included reductions in administrative staff to bring our general and administrative operations into better alignment with the current size of the business, as well as in sales and technical personnel as a result of offshoring certain development functions, organizational delayering and restructuring, and reducing investment in unprofitable projects. We are continuously evaluating our costs and pursuing additional cost-control and efficiency opportunities, including increased automation, across all aspects of the company. However, we anticipate significant increases in ad request volume, and are developing internal tools to manage the volume increases and investing in software architectural improvements, filtering, and cloud services to accelerate innovation and further enable efficiencies.combined operations.
Uncertainty Resulting from Privacy Regulations
Our business is highly susceptible to emerging privacy regulations and oversight. In Europe, data protection authorities have started to clarify certain requirements under the GDPR, but uncertainty remains. Data protection authorities in a number of territories have expressed a desire to focus on the advertising technology ecosystem specifically.
In addition to the GDPR, a number of new privacy regulations will or have already come into effect in 2020. The California legislature passed the California Consumer Privacy Act ("CCPA") in 2018, which became effective January 1, 2020. This regulation imposes new obligations on businesses that handle the personal information of California residents. The obligations imposed will require the Company to devote significant resources towards compliance. Certain requirements remain unclear due to ambiguities in the drafting of or incomplete guidance. These ambiguities and resulting impact on our business will need to be resolved over time. In addition, other privacy bills have been introduced at both the state and federal level. Certain international territories are also imposing new or expanded privacy obligations. For example, Brazil's data protection regulation, the LGPD, will also come into effect in August 2020. In the coming years, we expect further consumer privacy regulation worldwide.
Until prevailing compliance practices standardize, the impact of worldwide privacy regulations on our business and, consequently, our revenue could be negatively impacted.
Components of Our Results of Operations
We report our financial results as one operating segment. Our consolidated operating results, together with non-GAAP financial measures, are regularly reviewed by our chief operating decision maker, principally to make decisions about how we allocate our resources and to measure our consolidated operating performance.
Revenue
We generate revenue from the purchase and sale of digital advertising inventory through our marketplace.platform. We also generate revenue from the fee we charge clients for use of our Demand Manager product, which generally is a percentage of the client's advertising spending on any advertising marketplace. We recognize revenue upon the fulfillment of our contractual obligations in connection with a completed transaction, subject to satisfying all other revenue recognition criteria. For substantially all transactions executed through our platform, we act as an agent on behalf of the publisher that is monetizing its inventory, and revenue is recognized net of any advertising inventory costs that we remit to sellers. With respect to certain revenue streams acquired in connection with the Merger with Telaria, we report revenue on a gross basis, based primarily on our determination that the Company acts as the primary obligor in the delivery of advertising campaigns for our buyer clients with respect to such transactions. The revenue that we recognized on a gross basis was less than 2% of total revenue in 2020. Our revenue recognition policies are discussed in more detail in Note 4 of the accompanying Notes to the Consolidated Financial Statements.
Expenses
We classify our expenses into the following categories:
Cost of Revenue. Our cost of revenue consists primarily of data center costs, bandwidth costs, ad protection costs, depreciation and maintenance expense of hardware supporting our revenue-producing platform, amortization of software costs for the development of our revenue-producing platform, amortization expense associated with acquired developed technologies, personnel costs, facilities-related costs, and cloud computing costs. Personnel costs included in cost of revenue include salaries, bonuses, and stock-based compensation, and are primarily attributable to personnel in our network operations group who support our platform. We capitalize costs associated with software that is developed or obtained for internal use and amortize the costs associated with our revenue-producing platform in cost of revenue over their estimated useful lives. We amortize acquired developed technologies over their estimated useful lives.
Sales and Marketing. Our sales and marketing expenses consist primarily of personnel costs, including salaries, bonuses, and stock-based compensation, as well as marketing expenses such as brand marketing, travel expenses, trade shows and marketing materials, professional services, and amortization expense associated with client relationships and backlog from our business acquisitions, and to a lesser extent, facilities-related costs and depreciation and amortization. Our sales organization focuses on increasing the adoption of our solution by existing and new buyers and sellers. We amortize acquired intangibles associated with client relationships and backlog from our business acquisitions over their estimated useful lives.
Technology and Development. Our technology and development expenses consist primarily of personnel costs, including salaries, bonuses, and stock-based compensation, as well as professional services associated with the ongoing development and maintenance of our solution, depreciation and amortization, and to a lesser extent, facilities-related costs and depreciation and amortization, including amortization expense associated with acquired intangible assets from our business acquisitions that are related to technology and development functions.costs. These expenses include costs incurred in the development, implementation, and maintenance of internal use software, including platform and related infrastructure. Technology and development costs are expensed as incurred, except to
the extent that such costs are associated with internal use software development that qualifies for capitalization, which are then recorded as internal use software development costs, net, on our consolidated balance sheets. We amortize internal use software development costs that relate to our revenue-producing activities on our platform to cost of revenue and amortize other internal use software development costs to technology and development costs or general and administrative expenses, depending on the nature of the related project. We amortize acquired intangibles associated with technology and development functions from our business acquisitions over their estimated useful lives.
General and Administrative. Our general and administrative expenses consist primarily of personnel costs, including salaries, bonuses, and stock-based compensation, associated with our executive, finance, legal, human resources, compliance, and other administrative personnel, as well as accounting and legal professional services fees, facilities-related costs and depreciation and amortization, and other corporate-related expenses. General and administrative expenses also include amortization of internal use software development costs and acquired intangible assets from our business acquisitions over their estimated useful lives that relate to general and administrative functions.
Restructuring Merger and Other ExitRestructuring Costs. Our restructuringmerger and other exitrestructuring costs consist primarily of professional service fees associated with the merger and acquisition activities, including cash-based employee termination costs, including stock-based compensation charges associated with the Merger, and other restructuring activities, including facility closure andclosures, relocation costs, and contract termination costs.
Other (Income) Expense
Interest (Income) Expense, Net. Interest income consists of interest earned on our cash equivalents and marketable securities. Interest expense is mainly related to our credit facility.
Other Income. Other income consists primarily of rental income from commercial office space we hold under lease and have sublet to other tenants.
Foreign Currency Exchange (Gain) Loss, Net. Foreign currency exchange (gain) loss, net consists primarily of gains and losses on foreign currency transactions. We have foreign currency exposure related to our accounts receivable and accounts payable that are denominated in currencies other than the U.S. Dollar, principally the British Pound, Australian Dollar, Canadian Dollar, and the Euro.
Provision (Benefit) for Income Taxes
We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations, administrative practices, principles, and interpretations in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. Our effective tax rates could be affected by numerous factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize related tax benefits, the applicability of special tax regimes, changes in foreign currency exchange rates, changes in our stock price, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions.
Results of Operations
The following table sets forth our consolidated results of operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year Ended | | Favorable/(Unfavorable) % |
| | | | | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 | | 2020 vs 2019 | | 2019 vs 2018 |
| | | | | (in thousands) | | | | | | |
Revenue | | | | | | | $ | 221,628 | | | $ | 156,414 | | | $ | 124,685 | | | 42 | % | | 25 | % |
Expenses (1)(2): | | | | | | | | | | | | | | | |
Cost of revenue | | | | | | | 77,747 | | | 57,391 | | | 60,003 | | | (35) | % | | 4 | % |
Sales and marketing | | | | | | | 76,030 | | | 44,565 | | | 44,556 | | | (71) | % | | — | % |
Technology and development | | | | | | | 51,546 | | | 40,250 | | | 37,863 | | | (28) | % | | (6) | % |
General and administrative | | | | | | | 52,987 | | | 39,750 | | | 42,431 | | | (33) | % | | 6 | % |
Merger and restructuring costs | | | | | | | 17,552 | | | 2,041 | | | 3,440 | | | (760) | % | | 41 | % |
Total expenses | | | | | | | 275,862 | | | 183,997 | | | 188,293 | | | (50) | % | | 2 | % |
Loss from operations | | | | | | | (54,234) | | | (27,583) | | | (63,608) | | | (97) | % | | 57 | % |
Other (income) expense, net | | | | | | | (1,495) | | | (593) | | | (2,143) | | | 152 | % | | (72) | % |
Loss before income taxes | | | | | | | (52,739) | | | (26,990) | | | (61,465) | | | (95) | % | | 56 | % |
Provision (benefit) for income taxes | | | | | | | 693 | | | (1,512) | | | 357 | | | (146) | % | | 524 | % |
Net loss | | | | | | | $ | (53,432) | | | $ | (25,478) | | | $ | (61,822) | | | (110) | % | | 59 | % |
| | | | | | | | | | | | | | | | | | | | | |
(1) Stock-based compensation expense included in our expenses was as follows: | | | | | | |
| | | Year Ended |
| | | | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| | | (in thousands) | | |
Cost of revenue | | | | | $ | 525 | | | $ | 421 | | | $ | 321 | |
Sales and marketing | | | | | 8,229 | | | 5,638 | | | 4,557 | |
Technology and development | | | | | 7,451 | | | 4,757 | | | 2,867 | |
General and administrative | | | | | 10,416 | | | 8,009 | | | 8,139 | |
Merger and restructuring costs | | | | | 1,870 | | | — | | | 398 | |
Total stock-based compensation expense | | | | | $ | 28,491 | | | $ | 18,825 | | | $ | 16,282 | |
| | | | | | | | | | | | | | | | | | | | | |
(2) Depreciation and amortization expense included in our expenses was as follows: |
| | | Year Ended |
| | | | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| | | (in thousands) | | |
Cost of revenue | | | | | $ | 34,879 | | | $ | 30,345 | | | $ | 33,306 | |
Sales and marketing | | | | | 13,313 | | | 537 | | | 586 | |
Technology and development | | | | | 454 | | | 573 | | | 882 | |
General and administrative | | | | | 602 | | | 671 | | | 564 | |
Total depreciation and amortization expense | | | | | $ | 49,248 | | | $ | 32,126 | | | $ | 35,338 | |
|
| | | | | | | | | | |
| Year Ended | | Favorable/(Unfavorable) % |
| December 31, 2019 | | December 31, 2018 | |
| (in thousands) | | |
Revenue | $ | 156,414 |
| | $ | 124,685 |
| | 25 | % |
Expenses (1)(2): | | | | | |
Cost of revenue | 57,391 |
| | 60,003 |
| | 4 | % |
Sales and marketing | 44,565 |
| | 44,556 |
| | — | % |
Technology and development | 40,269 |
| | 37,863 |
| | (6 | )% |
General and administrative | 41,772 |
| | 42,431 |
| | 2 | % |
Restructuring and other exit costs | — |
| | 3,440 |
| | 100 | % |
Total expenses | 183,997 |
| | 188,293 |
| | 2 | % |
Loss from operations | (27,583 | ) | | (63,608 | ) | | 57 | % |
Other (income) expense, net | (593 | ) | | (2,143 | ) | | (72 | )% |
Loss before income taxes | (26,990 | ) | | (61,465 | ) | | 56 | % |
Provision (benefit) for income taxes | (1,512 | ) | | 357 |
| | 524 | % |
Net loss | $ | (25,478 | ) | | $ | (61,822 | ) | | 59 | % |
|
| | | | | | | |
(1) Stock-based compensation expense included in our expenses was as follows: | | | |
| Year Ended |
| December 31, 2019 | | December 31, 2018 |
| (in thousands) |
Cost of revenue | $ | 421 |
| | $ | 321 |
|
Sales and marketing | 5,638 |
| | 4,557 |
|
Technology and development | 4,757 |
| | 2,867 |
|
General and administrative | 8,009 |
| | 8,139 |
|
Restructuring and other exit costs | — |
| | 398 |
|
Total stock-based compensation expense | $ | 18,825 |
| | $ | 16,282 |
|
|
| | | | | | | |
(2) Depreciation and amortization expense included in our expenses was as follows: | | | |
| Year Ended |
| December 31, 2019 | | December 31, 2018 |
| (in thousands) |
Cost of revenue | $ | 30,345 |
| | $ | 33,306 |
|
Sales and marketing | 537 |
| | 586 |
|
Technology and development | 573 |
| | 882 |
|
General and administrative | 671 |
| | 564 |
|
Total depreciation and amortization expense | $ | 32,126 |
| | $ | 35,338 |
|
The following table sets forth our consolidated results of operations for the specified periods as a percentage of our revenue for those periods presented:
| | | Year Ended | | | Year Ended |
| December 31, 2019 | | December 31, 2018 | | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
Revenue | 100 | % | | 100 | % | Revenue | | 100 | % | | 100 | % | | 100 | % |
Cost of revenue | 37 |
| | 48 |
| Cost of revenue | | 35 | | | 37 | | | 48 | |
Sales and marketing | 28 |
| | 36 |
| Sales and marketing | | 34 | | | 28 | | | 36 | |
Technology and development | 26 |
| | 30 |
| Technology and development | | 23 | | | 26 | | | 30 | |
General and administrative | 27 |
| | 34 |
| General and administrative | | 24 | | | 26 | | | 34 | |
Restructuring and other exit costs | — |
| | 3 |
| |
Merger and restructuring costs | | Merger and restructuring costs | | 8 | | | 1 | | | 3 | |
Total expenses | 118 |
| | 151 |
| Total expenses | | 124 | | | 118 | | | 151 | |
Loss from operations | (18 | ) | | (51 | ) | Loss from operations | | (24) | | | (18) | | | (51) | |
Other (income) expense, net | (1 | ) | | (1 | ) | Other (income) expense, net | | — | | | (1) | | | (1) | |
Loss before income taxes | (17 | ) | | (50 | ) | Loss before income taxes | | (24) | | | (17) | | | (50) | |
Provision (benefit) for income taxes | (1 | ) | | — |
| Provision (benefit) for income taxes | | — | | | (1) | | | — | |
Net loss | (16 | )% | | (50) | % | Net loss | | (24) | % | | (16) | % | | (50) | % |
Comparison of the Years Ended December 31, 2020, 2019, and 2018
Revenue
Revenue increased $65.2 million, or 42%, for the year ended December 31, 2020 compared to the prior year. Our revenue growth was driven primarily by the Merger, completed on April 1, 2020, which contributed $60.1 million in revenue during the year ended December 31, 2020. On a per channel basis, CTV revenue increased $34.3 million, compared to the prior year (all as a result of the Merger), while mobile revenue increased $20.2 million, or a 23%, compared to the prior year, and desktop revenue increased $10.7 million, or 16%, compared to the prior year. Excluding the impact of the Merger, our revenue increased 3% year-over-year. Despite some recovery in our revenue trends, beginning in the third quarter of 2020, our overall annual revenue growth was significantly negatively affected by the impact of the COVID-19 pandemic.
Revenue increased $31.7 million, or 25%, for the year ended December 31, 2019 compared to the prior year.year ended December 31, 2018. Our revenue growth was driven primarily by ongoing increases in advertising spend transacted on our platform, particularly video and mobile adadvertising spend.
We expect revenue to increase in 2021 compared to 2020, with CTV as our primary growth driver. Our revenue is largely a function of the number of advertising transactions and the price, or CPM, at which the inventory is sold, which results in total advertising spend on our platform, and to a lesser degree, by increases inthe take rate or the fee we earn on advertising spend.
Revenuecharge for our services. Because pricing and take rate vary across publisher, channel and transaction type, our revenue is impacted by shifts in the mix of advertising spend by transaction type and channel, changes in the fees we charge sellers foron our services, and other factors such as changes in the market, our execution of the business, and competition. In addition,platform. For instance, an increase in PMP transactions as a percentage of the transactions on our platform could also result in reduced revenue, if not offset by increased volume,advertising spend, because PMP transactions can carry lower feestake rates than OMP transactions. Industry dynamics are challengingWe believe that contributions to revenue from PMPs, in particular with respect to CTV which is largely transacted through PMPs, will continue to grow as a percentage of our total revenue. In general, we expect this shift will result in an overall increase in advertising spend through our platform due to marketboth an increase in volume and competitive pressuresaverage CPM which will be partially offset by a decrease in our average take rate.
Our revenue growth has been tempered, and makemay be negatively impacted in the future, by reductions in revenue resulting from the economic impact of the COVID-19 pandemic. Refer to Item 1A. "Risk Factors" for additional information related to this risk factor and the impact it difficult to predict the near-term effect of our growth initiatives. While we anticipate long-term benefits from these initiatives, unless we are able to continue to increase advertising spendmay have on our platform, through higher transaction volumes or higher transaction values or both, revenue growth may be limited.business.
Cost of Revenue
Cost of revenue increased by $20.4 million, or 35%, for the year ended December 31, 2020 compared to the prior year primarily due to the Merger. Cost of revenue includes an increase of $11.8 million in data and bandwidth expenses, $4.5 million in depreciation and amortization, and $2.0 in media costs.
Cost of revenue decreased $2.6 million, or 4%, for the year ended December 31, 2019 compared to the prior year ended December 31, 2018 mainly due to our continued focus on infrastructure serving efficiency, which resulted in a decrease of $3.0 million in depreciation and amortization and a decrease of $1.0 million in data and bandwidth expenses due to our leverage in contract pricing as a result of our increased scale.expenses. These decreases were partially offset by an increase of $1.1 million in ad protection costs.
We expect the cost of revenue to be higher in 2021 compared to 2020 in absolute dollars in 2020 compareddue primarily to 2019 as we continue to expand select data center operations tothe increased amortization of intangible assets resulting from the Merger and higher cloud service providers to accelerate innovation and gain efficiencies, andcosts to support the growth of our business.
Cost of revenue may fluctuate from quarter to quarter and period to period, on an absolute dollar basis and as a percentage of revenue, depending on revenue levels and the volume of transactions we process supporting those revenues, and the timing and amounts of depreciation and amortization of equipment and software.
Sales and Marketing
Sales and marketing expenses increased by $31.5 million, or 71%, for the year ended December 31, 2020 compared to the prior year primarily due to the Merger and associated increases in amortization related to acquired intangibles and other assets and increases in headcount. Sales and marketing expenses increased by $20.4 million related to personnel expenses and $12.8 million related to depreciation and amortization associated with the Merger. These increases were partially offset by a decrease in expenses of $2.4 million related to travel and industry events due to the impact of the COVID-19 pandemic.
Sales and marketing expenses stayed flat for the year ended December 31, 2019 compared to the prior year ended December 31, 2018 primarily due to the benefit of the prior year's cost control initiatives.
We expect sales and marketing expenses to increase in 20202021 compared to 20192020 in absolute dollars primarily due to a full year of additional headcount costs and amortization of acquired intangible assets as a result of the Merger and increased investment in headcount, particularly in international markets. Travel and Entertainment expenses post COVID-19.
Sales and marketing expenseexpenses may fluctuate quarter to quarter and period to period, on an absolute dollar basis and as a percentage of revenue, based on revenue levels, the timing of our investments and seasonality in our industry and business.
Technology and Development
Technology and development expenses increased by $11.3 million, or 28%, for the year ended December 31, 2020 compared to the prior year, primarily due to an increase of $11.6 million in personnel costs as a result of the increased headcount associated with the Merger.
Technology and development expenses increased by $2.4 million, or 6%, for the year ended December 31, 2019 compared to the prior year ended December 31, 2018, primarily due to an increase of $3.0 million in personnel costs as a result of strategic headcount additions to focus on the engineering aspect of our new developments, including Demand Manager and other initiatives.
We expect technology and development expenseexpenses to continue to increase in 20202021 compared to 2019 as we make a limited number of strategic and targeted2020 in absolute dollars, primarily due to the additional headcount additions to focus on the engineering aspect of buildinginvestment in our new products and expanding features and functionalities of our current products. key growth opportunities.
The timing and amount of our capitalized development and enhancement projects may affect the amount of development costs expensed in any given period. As a percentage of revenue, technology and development expense may fluctuate from quarter to quarter and period to period based on revenue levels, the timing and amounts of technology and development efforts, the timing and the rate of the amortization of capitalized projects and the timing and amounts of future capitalized internal use software development costs.
General and Administrative
General and administrative expenses increased by $13.2 million, or 33%, for the year ended December 31, 2020 compared to the prior year, primarily due to increases of $7.1 million in personnel expenses and $4.0 million in facilities related expenses, both primarily associated with the Merger. In addition, professional services increased by $3.0 million in professional services mainly attributed to the growth of the overall business as a result of the Merger. These increases were partially offset by a decrease in bad debt expense of $1.3 million.
General and administrative expenses decreased by $0.7 million, or 2%, for the year ended December 31, 2019 compared to the prior year ended December 31, 2018, primarily due to a decrease of $1.2 million in personnel related expenses due to the benefit of prior year's cost control initiatives.
We expect general and administrative expenses to increase slightly in 20202021 compared to 2019. 2020 in absolute dollars primarily due to the additional headcount and assuming a return to office work environment later in the year.
General and administrative expenses may fluctuate from quarter to quarter and period to period based on the timing and amounts of expenditures in our general and administrative functions as they vary in scope and scale over periods. Such fluctuations may not be directly proportional to changes in revenue.
Merger and Other ExitRestructuring Costs
As We incurred merger and restructuring costs of $17.6 million and $2.0 million during the year ended December 31, 2020 and 2019, respectively, primarily related with the Merger. In 2020, these costs included professional fees of $9.9 million related to investment banking advisory, legal, and other professional service fees, one-time cash-based employee termination benefit costs of $5.7 million, and non-cash stock-based compensation expense associated with double-trigger accelerations and severance benefits of $1.9 million. In 2019, these costs consisted of professional services associated with the Merger, which were all incurred during the fourth quarter.
Merger and restructuring costs increased by $15.5 million during the year ended December 31, 2020 compared to the prior year primarily due cash and non-cash acceleration and termination benefits, as referenced above, and increased professional services associated with the Merger and resulting restructuring activities.
During the year ended December 31, 2018, we incurred restructuring costs of $3.4 million for severance and other one-time employee termination benefits related to headcount reductions that were made in 2018. These costs included one-time cash-based employee termination benefit costs of $3.0 million and non-cash stock-based compensation expenses associated with severance benefits of $0.4 million. These headcount reductions were as part of our on-going evaluation of efficiency and implementation of cost-control measures. As part of these measures, during the first quarter of 2018, we undertook measures to reducereduced headcount by approximately 100 people, or 19% of our workforce, and to reducereduced other operating costs. Our actions included reductions in administrative staff to bring our general and administrative operations into better alignment with the current size of the business, as well as in sales and technical personnel as a result of offshoring certain development functions, organizational delayering and restructuring, and reducing investment in unprofitable projects.
ForWe expect merger and restructuring costs to increase in 2021 compared to 2020 in absolute dollars if the year ended December 31, 2018, we incurred restructuring and other exit costs ofSpotX Acquisition successfully closes.
Other (Income) Expense, Net
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| | | (in thousands) | | |
Interest (income) expense, net | | | | | $ | (50) | | | $ | (789) | | | $ | (988) | |
Other income | | | | | (3,665) | | | (285) | | | (766) | |
Foreign exchange (gain) loss, net | | | | | 2,220 | | | 481 | | | (389) | |
Total other (income) expense, net | | | | | $ | (1,495) | | | $ | (593) | | | $ | (2,143) | |
Other income increased by $3.4 million for severance and other one-time employee termination benefits related to headcount reductions that were made in the first quarter of 2018 (see Note 14 to the consolidated financial statements). There were no restructuring and other exit costs incurred during the year ended December 31, 2019. All accrued costs2020 compared to the prior year due to rental income for two real estate leases for which we sublease the property to a third parties. We expect rental income for real estate leases subleased to third parties to be approximately $3.8 million in 2021, $3.2 million in 2022 and 2023, $3.0 million in 2024, and $0.3 million in 2025, based on the subleases in place as of December 31, 2018 associated with these events were paid in the first quarter of 2019.2020.
Other (Income) Expense, Net |
| | | | | | | |
| Year Ended |
| December 31, 2019 | | December 31, 2018 |
| (in thousands) |
Interest income, net | $ | (789 | ) | | $ | (988 | ) |
Other income | (285 | ) | | (766 | ) |
Foreign exchange (gain) loss, net | 481 |
| | (389 | ) |
Total other (income) expense, net | $ | (593 | ) | | $ | (2,143 | ) |
Foreign exchange (gain) loss, net is impacted by movements in exchange rates and the amount of foreign currency-denominated receivables and payables, which are impacted by our billings to buyers and payments to sellers. The foreign currency loss, net during the year ended December 31, 2020 was primarily attributable to the currency movements between the British Pound, Australian Dollar, Canadian Dollar, and Euro relative to the U.S. Dollar. The foreign currency loss, net during the years ended December 31, 2019 and 2018 was primarily attributable to the currency movements between the British Pound and the Euro relative to the U.S. Dollar.
Provision (Benefit) for Income Taxes
We recorded an income tax benefitexpense of $1.5$0.7 million for the year ended December 31, 20192020 compared to an income benefit of $1.5 million and income tax expense of $0.4 million for the yearyears ended December 31, 2018.2019 and 2018, respectively. The tax expense for the years ended December 31, 2020 and December 31, 2018 was primarily the result of the domestic valuation allowance and the tax liability associated with the foreign subsidiaries. The net tax benefit for the year ended December 31, 2019 iswas the result of a deferred tax liability associated with the RTKio acquisition, the release of a foreign valuation allowance resulting from a change to a cost-plus arrangement for a foreign subsidiary, the domestic valuation allowance, and the tax liability associated with foreign subsidiaries.
Non-GAAP Financial Measures and Operational Measures
In addition to our GAAP results, we review certainAdjusted EBITDA, a non-GAAP financial measuresmeasure, to help us evaluate our business, measure our performance, identify trends affecting our business, establish budgets, measure the effectiveness of investments in our technology and development and sales and marketing, and assess our operational efficiencies. These non-GAAP measures include advertising spend and Adjusted EBITDA which areis discussed immediately following the table below, along with the operational performance measure take rate.below. Revenue and other GAAP measures areis discussed under the headings "Components of Our Results of Operations" and "Results of Operations."
|
| | | | | | | |
| Year Ended |
| December 31, 2019 | | December 31, 2018 |
| (in thousands) |
Financial Measures and non-GAAP Financial Measures: | | | |
Revenue | $ | 156,414 |
| | $ | 124,685 |
|
Advertising spend | $ | 1,117,317 |
| | $ | 992,087 |
|
Net loss | $ | (25,478 | ) | | $ | (61,822 | ) |
Adjusted EBITDA | $ | 25,694 |
| | $ | (11,222 | ) |
Operational Measure: | | | |
Take Rate % | 14.0 | % | | 12.6 | % |
Advertising Spend
We define advertising spend as the total volume of spending between buyers and sellers transacted on our platform. Advertising spend does not represent revenue reported on a GAAP basis. We also use advertising spend for internal management purposes to assess market share of total advertising spending.
Our advertising spend may be influenced by demand for our services, the volume and characteristics of paid impressions, average CPM, our ability to fill ad requests, the nature and amount of fees we charge, and other factors such as changes in the market, our execution of the business, and competition.
Advertising spend may fluctuate due to seasonality. In the past, we have experienced higher advertising spend during the fourth quarter of a given year because many buyers devote a disproportionate amount of their advertising budgets to this period of the year to coincide with increased holiday purchasing. Buyers' focus on the fourth quarter generates more bidding activity on our platform, which may drive higher volumes of paid impressions, average CPM, or both. Our advertising spend grew 13% for the year ended December 31, 2019 compared to 2018. The increase in advertising spend was driven by higher ad request volumes and corresponding paid impressions. CPMs generated from our auctions were flat driven by implementation of first price auctions and EMR for our header bidding inventory. CPMs can be influenced heavily by the value of the inventory that we made available to buyers, including PMP, mobile, and video inventory that typically carries higher pricing.
The following table presents the reconciliation of revenue to advertising spend: |
| | | | | | | |
| Year Ended |
| December 31, 2019 | | December 31, 2018 |
| (in thousands) |
Revenue | $ | 156,414 |
| | $ | 124,685 |
|
Plus amounts paid to sellers | 960,903 |
| | 867,402 |
|
Advertising spend | $ | 1,117,317 |
| | $ | 992,087 |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| | | (in thousands) |
Financial Measures and non-GAAP Financial Measures: | | | | | | | | | |
Revenue | | | | | $ | 221,628 | | | $ | 156,414 | | | $ | 124,685 | |
Net loss | | | | | $ | (53,432) | | | $ | (25,478) | | | $ | (61,822) | |
Adjusted EBITDA | | | | | $ | 43,065 | | | $ | 25,694 | | | $ | (11,222) | |
Our solution enables buyers and sellers to transact through desktop and mobile channels. The following tables present revenue by channel and as a percentage of total revenue for the years ended December 31, 2019 and 2018.
|
| | | | | | | | | | | | | |
| Revenue |
| Year Ended |
| December 31, 2019 | | December 31, 2018 |
| (in thousands, except percentages) |
Channel: | | | | | | | |
Desktop | $ | 68,302 |
| | 44 | % | | $ | 59,039 |
| | 47 | % |
Mobile | 88,112 |
| | 56 |
| | 65,646 |
| | 53 |
|
Total | $ | 156,414 |
| | 100 | % | | $ | 124,685 |
| | 100 | % |
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) adjusted to exclude stock-based compensation expense, depreciation and amortization, amortization of acquired intangible assets, impairment charges, interest income or expense, and other cash and non-cash based income or expenses that we do not consider indicative of our core operating performance, including, but not limited to foreign exchange gains and losses, acquisition and related items, and provision (benefit) for income taxes. We believe Adjusted EBITDA is useful to investors in evaluating our performance for the following reasons:
•Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s performance without regard to items such as those we exclude in calculating this measure, which can vary substantially from company to company depending upon their financing, capital structures, and the method by which assets were acquired.
•Our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, including the preparation of our annual operating budget, as a measure of performance and the effectiveness of our business strategies, and in communications with our board of directors concerning our performance. Adjusted EBITDA may also be used as a metric for determining payment of cash incentive compensation.
•Adjusted EBITDA provides a measure of consistency and comparability with our past performance that many investors find useful, facilitates period-to-period comparisons of operations, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.
Although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results of operations as reported under GAAP. These limitations include:
•Stock-based compensation is a non-cash charge and will remain an element of our long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period.
•Depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future, but Adjusted EBITDA does not reflect any cash requirements for these replacements.
•Impairment charges are non-cash charges related to goodwill, intangible assets and/or long-lived assets.
•Adjusted EBITDA does not reflect non-cash charges related to acquisition and related items, such as amortization of acquired intangible assets and changes in the fair value of contingent consideration.
•Adjusted EBITDA does not reflect cash and non-cash charges and changes in, or cash requirements for, acquisition and related items, such as certain transaction expenses and expenses associated with earn-out amounts.
•Adjusted EBITDA does not reflect changes in our working capital needs, capital expenditures, or contractual commitments.
•Adjusted EBITDA does not reflect cash requirements for income taxes and the cash impact of other income or expense.
•Other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Our Adjusted EBITDA is influenced by fluctuations in our revenue and the timing and amounts of our investments in our operations. Adjusted EBITDA should not be considered as an alternative to net income (loss), income (loss) from operations, or any other measure of financial performance calculated and presented in accordance with GAAP.
The following table presents a reconciliation of net loss, the most comparable GAAP measure, to Adjusted EBITDA for the years ended December 31, 20192020 and 2018.2019.
| | | Year Ended | | | Year Ended |
| December 31, 2019 | | December 31, 2018 | | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| (in thousands) | | | (in thousands) |
Net income (loss) | $ | (25,478 | ) | | $ | (61,822 | ) | Net income (loss) | | $ | (53,432) | | | $ | (25,478) | | | $ | (61,822) | |
Add back (deduct): | | | | Add back (deduct): | | |
Depreciation and amortization expense, excluding amortization of acquired intangible assets | 28,818 |
| | 32,153 |
| Depreciation and amortization expense, excluding amortization of acquired intangible assets | | 24,337 | | | 28,818 | | | 32,153 | |
Amortization of acquired intangibles | 3,308 |
| | 3,185 |
| Amortization of acquired intangibles | | 24,911 | | | 3,308 | | | 3,185 | |
Stock-based compensation expense | 18,825 |
| | 16,282 |
| Stock-based compensation expense | | 28,491 | | | 18,825 | | | 16,282 | |
Acquisition and related items | 2,041 |
| | — |
| |
Interest income, net | (789 | ) | | (988 | ) | |
| Merger and acquisition related items | | Merger and acquisition related items | | 15,682 | | | 2,041 | | | — | |
Non-operational real estate expense (income), net | | Non-operational real estate expense (income), net | | 198 | | | — | | | — | |
Interest (income) expense, net | | Interest (income) expense, net | | (50) | | | (789) | | | (988) | |
Foreign exchange (gain) loss, net | 481 |
| | (389 | ) | Foreign exchange (gain) loss, net | | 2,220 | | | 481 | | | (389) | |
Other non-operating (income) expense, net | | Other non-operating (income) expense, net | | 15 | | | — | | | — | |
Provision (benefit) for income taxes | (1,512 | ) | | 357 |
| Provision (benefit) for income taxes | | 693 | | | (1,512) | | | 357 | |
Adjusted EBITDA | $ | 25,694 |
| | $ | (11,222 | ) | Adjusted EBITDA | | $ | 43,065 | | | $ | 25,694 | | | $ | (11,222) | |
Our principal sources of liquidity are our cash and cash equivalents, marketable securities, cash generated from operations, and our credit facility with Silicon Valley Bank ("SVB"). At December 31, 2019,2020, we had cash and cash equivalents of $88.9$117.7 million, of which $13.0$23.5 million was held in foreign currency cash accounts. Our cash and marketable securities balances are affected by our results of operations, the timing of capital expenditures, which are typically greater in the second half of the year, and by changes in our working capital, particularly changes in accounts receivable and accounts payable. The timing of cash receipts from buyers and payments to sellers can significantly impact our cash flows from operating activities and our liquidity for, and within, any period presented. Our collection and payment cycle can vary from period to period depending upon various circumstances, including seasonality.seasonality, and may be negatively impacted as a result of COVID-19.
In the future, we may attempt to raise additional capital through the sale of equity securities or through equity-linked or debt financing arrangements. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by incurring indebtedness, we will be subject to increased fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. Any future indebtedness we incur may result in terms that could be unfavorable to equity investors. Due to the economic uncertainty caused by the COVID-19 pandemic, the debt and equity markets have become less predictable and obtaining financing on favorable terms and at favorable rates has become more difficult.
An inability to raise additional capital could adversely affect our ability to achieve our business objectives. In addition, if our operating performance during the next twelve months is below our expectations, our liquidity and ability to operate our business could be adversely affected.
Our cash flows from operating activities are primarily driven by revenues generated from advertising activity, offset by the cash costs of operations, and are significantly influenced by increases or decreasesthe timing of and fluctuations in receipts from buyers and related payments to sellers. Our future cash flows will be diminished if we cannot increase our revenue levels and manage costs appropriately. Cash flows from operating activities have been further affected by changes in our working capital, particularly changes in accounts receivable and accounts payable. The timing of cash receipts from buyers and payments to sellers can significantly impact our cash flows from operating activities for any period presented.
activities by $12.1 million. The net changes in working capital for bothall periods presented are primarily due to the timing of cash receipts from buyers and the timing of payments to sellers.
We believe that cash flows from operations will continue to be negatively impacted by our ongoing net losses and working capital needs.
Our financing activities consisted of transactions related to the issuance of our common stock under our equity plans.
We do not have any relationships with other entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We did not have any other off-balance sheet arrangements at December 31, 20192020 other than the short-term operating leases and the indemnification agreements described below.
Our principal commitments consist of leases for our various office facilities, including our corporate headquarters in Los Angeles, California and offices in New York, New York, and operating lease agreements, withincluding data centers and cloud managed services that expire at various times through 2030. At December 31, 2019, expected future commitments relating to operating leases were $25.8 million. See Note
In the ordinary course of business, we enter into agreements with sellers, buyers, and other third parties pursuant to which we agree to indemnify buyers, sellers, vendors, lessors, business partners, lenders, stockholders, and other parties with respect to certain matters, including, but not limited to, losses resulting from claims of intellectual property infringement, damages to property or persons, business losses, or other liabilities. Generally, these indemnity and defense obligations relate to our own business operations, obligations, and acts or omissions. However, under some circumstances, we agree to indemnify and defend contract counterparties against losses resulting from their own business operations, obligations, and acts or omissions, or the business operations, obligations, and acts or omissions of third parties. These indemnity provisions generally survive termination or expiration of the agreements in which they appear. In addition, we have entered into indemnification agreements with our directors, executive officers and certain other officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. No demands for indemnification have been made as of December 31, 2019.2020.
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
We believe that the following assumptions and estimates have the greatest potential impact on our consolidated financial statements: (i) the determination of revenue recognition as net versus gross in our revenue arrangements, (ii) the determination of the estimated useful lives of internal-use software development costs, (iii) the recoverability of intangible asset impairment analysis,and goodwill, (iv) assumptions used in the valuation models to determine the fair value of stock options and stock-based compensation expense, (v) the assumptions used in the valuation of acquired assets and liabilities in business combinations, and (vi) income taxes, including
the realization of tax assets and estimates of tax liabilities. There have been no significant changes in our accounting policies or estimates from those disclosed in our audited consolidated financial statements and notes thereto for the yearyears ended December 31, 2020 and 2019.
We believe that the accounting policies disclosed below include estimates and assumptions critical to our business and their application could have a material impact on our consolidated financial statements. In addition to these critical policies, our significant accounting policies are included within Note 2 of our "Notes to Consolidated Financial Statements" within this Annual Report on Form 10-K.
We generate revenue from transactions where we provide a platform for the purchase and sale of digital advertising inventory. We also generate revenue from the fee we charge clients for use of our Demand Manager product, which generally is a percentage of the client's advertising spending on any advertising marketplace. Our advertising automation solution is a marketplace that includesplatform dynamically connects sellers of inventory (providers of websites, mobile applications and other digital media properties, and their representatives) and buyers of advertising inventory (including advertisers, agencies, agency trading desks, and demand-side platforms). Thisin a digital marketplace. Our solution incorporates proprietary machine-learning algorithms, sophisticated data processing, high-volume storage, detailed analytics capabilities, and a distributed infrastructure. Together, these features form the basis for our automated advertising solution that brings buyers and sellers together and facilitates intelligent decision-making and automated transaction execution for the digital advertising inventory managed on our platform. Digital advertising inventory is created when consumers access sellers’ content. Sellers provide digital advertising inventory to our platform in the form of advertising requests, or ad requests. When we receive ad requests from sellers, we send bid requests to buyers, which enable buyers to bid on sellers’ digital advertising inventory. Winning bids can create advertising, or paid impressions, for the seller to present to the consumer.
The total volume of spending between buyers and sellers on our platform is referred to as advertising spend. We keep a percentage of that advertising spend as a fee, and remit the remainder to the seller. The fee that we retain from the gross advertising spend on our platform is recognized as revenue. The fee earned on each transaction is based on the pre-existing agreement we have
with the seller and the clearing price of the winning bid. We recognize revenue upon fulfillment of our performance obligation to a client, which occurs at the point in time an ad renders and is counted as a paid impression, subject to a contract existing with the client and a fixed or determinable transaction price. Performance obligations for all transactions are satisfied, and the corresponding revenue is recognized, at a distinct point in time; wetime. We have no arrangements with multiple performance obligations. We consider the following when determining if a contract exists (i) contract approval by all parties, (ii) identification of each party’s rights regarding the goods or services to be transferred, (iii) specified payment terms, (iv) commercial substance of the contract, and (v) collectability of substantially all of the consideration is probable.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Item 8. Financial Statements and Supplementary Data
Opinions on the Financial Statements and Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The Company provides a technology solution to automate the purchase and sale of digital advertising inventory for buyers and sellers. The Company's platform features applications and services for sellers of digital advertising sellers, includinginventory, or publishers, that own or operate websites, mobile applications, CTV channels, and other digital media properties, to manage and monetize their representatives, to sell their digital advertising inventory; applications and services for buyers, including advertisers, agencies, agency trading desks, and demand side platforms, ("DSPs") to buy digital advertising inventory; and a marketplace over which such transactions are executed.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and include the operations of the Company and its wholly owned subsidiaries. All significant inter-companyintercompany transactions and balances have been eliminated in consolidation.
Management has determined that the Company operates as 1 segment. The Company’s chief operating decision maker reviews financial information on an aggregated and consolidated basis, together with certain operating and performance measures principally to make decisions about how to allocate resources and to measure the Company’s performance.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported and disclosed financial statements and accompanying footnotes. Due to the economic
On an ongoing basis, management evaluates its estimates, primarily those related to: (i) revenue recognition criteria, including the determination of revenue reporting as net versus gross in the Company’s revenue arrangements, (ii) accounts receivable and allowances for doubtful accounts, (iii) the useful lives of intangible assets, internal use software development costs, and property and equipment, (iv) valuation of long-lived assets and their recoverability, including goodwill, (v) the realization of tax assets and estimates of tax liabilities, (vi) assumptions used in valuation models to determine the fair value of stock-based awards, (vii) fair value of financial instruments, (viii) the recognition and disclosure of contingent liabilities, and (ix) the assumptions used in valuing acquired assets and assumed liabilities in business combinations.
These estimates are based on historical data and experience, as well as various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Estimates relating to the estimated useful lives of internal-use software development costs, assumptions used in the valuation models to determine the fair value of stock options and stock-based compensation expense, business combinations, as well as the recoverabilityestimated useful lives of long-lived assets, recoverability of intangible assets and goodwill, the assumptions used in the valuation of acquired assets and liabilities in business combinations, and income taxes, including the realization of tax assets and estimates of tax liabilities. require the selection of appropriate valuation methodologies and models, and significant judgment in evaluating ranges of assumptions and financial inputs. Actual
results may differ materially from those estimates under different assumptions or circumstances.
The total volume of spending between buyers and sellers on the Company's platform is referred to as advertising spend. The Company keeps a percentage of that advertising spend as a fee, and remits the remainder to the seller. The fee that the Company retains from the gross advertising spend on its platform is recognized as revenue. The fee earned on each transaction is based on the pre-existing agreement withbetween the Company and the seller and the clearing price of the winning bid. The Company recognizes revenue upon fulfillment of its performance obligation to a client, which occurs at the point in time an ad renders and is counted as a paid impression, subject to a contract existing with the client and a fixed or determinable transaction price. Performance obligations for all transactions are satisfied, and the corresponding revenue is recognized, at a distinct point in time; theThe Company has nodoes not have arrangements with multiple performance obligations. The Company considers the following when determining if a contract exists (i) contract approval by all parties, (ii) identification of each party’s rights regarding the goods or services to be transferred, (iii) specified payment terms, (iv) commercial substance of the contract, and (v) collectability of substantially all of the consideration is probable.
with technology and development functions from its business acquisitions over their estimated useful lives.
The assumptions and estimates used in the Black-Scholes pricing model are as follows:
Due to the full valuation allowance provided on its net deferred tax assets, the Company has not recorded any tax benefit attributable to stock-based awards for the years ended December 31, 2020, 2019, and 2018.
Deferred income tax assets and liabilities are determined based upon the net tax effects of the differences between the Company’s consolidated financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed.
A valuation allowance is used to reduce some or all of the deferred tax assets if, based upon the weight of available evidence, it is more likely than not that those deferred tax assets will not be realized. The Company has established a full valuation allowance to offset its domestic net deferred tax assets due to the uncertainty of realizing future tax benefits from the net operating loss carryforwards and other deferred tax assets.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized. The Company recognizes interest and penalties accrued related to its uncertain tax positions in its income tax provision (benefit) in the consolidated statements of operations.
The Company has authorized capital stock of 500,000,000 shares of common stock and 10,000,000 shares of preferred stock. The Company has issued common stock, which is included in outstanding common stock on the Company's Consolidated Balance Sheets. The Company has not issued any shares of its preferred stock subsequent to the Company's IPO and does not have any preferred stock outstanding.
The Company is required to reserve and keep available out of its authorized but unissued shares of common stock such number of shares sufficient to effectaffect the conversion of all shares granted and available for grant under the Company’s stock award plans. The number of shares of the Company's stock reserved for these purposes at December 31, 20192020 was 18,014,777.27,882,222.
The board of directors is authorized to establish, from time to time, the number of shares to be included in each series of preferred stock, and to fix the designation, powers, privileges, preferences, and relative participating, optional or other rights, if any, of the shares of each series of preferred stock, and any of its qualifications, limitations or restrictions.
Basic net income (loss) per share of common stock is calculated by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding. Diluted income (loss) per share attributable to common stockholders adjusts the basic weighted-average number of shares of common stock outstanding for the effect of potentially dilutive securities during the period. Potentially dilutive securities consist of stock options, restricted stock awards, restricted stock units, potential shares issued under the Company's Employee Stock Purchase Plan ("ESPP"), shares held in escrow and potential shares issuable as part of contingent consideration as a result of business combinations. For purposes of this calculation, potentially dilutive securities are excluded from the calculation of diluted net income (loss) per share if their effect is anti-dilutive.
Comprehensive income (loss) encompasses all changes in equity other than those arising from transactions with stockholders, and consists of net income (loss), unrealized gains (losses) on investments and foreign currency translation adjustments.
The Company invests excess cash primarily in money market funds, corporate debt securities, and highly liquid debt instruments of the U.S. government and its agencies. The Company classifies investments held in money market funds as cash equivalents because the money market funds have weighted-average maturities at the date of purchase of less than 90 days. Investments held in U.S. government and agency bonds and corporate debt securities with stated maturities of less than one year are classified as short-term investments included in marketable securities and prepaid expenses and other current assets. Investments held in U.S. government and agency bonds and corporate debt securities with stated maturities of over a year are classified as long-term investments included in other assets, non-current on the Company’s consolidated balance sheets, as the Company does not expect to redeem or sell these securities within one year from the balance sheet date.
The Company determines the appropriate classification of investments in marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. The Company classifies and accounts for the Company’s marketable securities as available-for-sale, and as a result carries the securities at fair value and reports the unrealized gains and losses in the consolidated statements of comprehensive income (loss) and as a component of stockholders’ equity. The Company determines any realized gains or losses on the sale of marketable securities on a specific identification method, and the Company records such gains and losses as a component of other income, net on the Company’s consolidated statements of operations.
The Company classifies certain restricted cash balances within prepaid expenses and other current assets on the consolidated balance sheets based upon the term of the remaining restrictions. At December 31, 20192020, the Company had restricted cash of $0.1 million, and 2018at December 31, 2019, the Company had 0 restricted cash.
Accounts receivable are recorded at the invoiced amount, are unsecured, and do not bear interest. The allowance for doubtful accounts is based on the best estimate of the amount of probable credit losses in existing accounts receivable. The allowance for doubtful accounts is determined based on historical collection experience and the review in each period of the status of the then-outstanding accounts receivable, while taking into consideration current client information, subsequent collection history
and other relevant data. The Company reviews the allowance for doubtful accounts on a quarterly basis. Account balances are charged off against the allowance when the Company believes it is probable the receivable will not be recovered. The Company’s allowance for doubtful accounts was approximately $3.4 million and $1.3 million at December 31, 2019 and 2018, respectively. During the years ended December 31, 2019 and 2018, the Company wrote off $3.3 million and $0.6 million, respectively, of accounts receivable.
Property and equipment are recorded at historical cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets. The estimated useful lives of the Company’s property and equipment are as follows:
Repair and maintenance costs are charged to expense as incurred, while renewals and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the Company’s results of operations.
Software development activities generally consist of three stages, (i) the planning stage, (ii) the application and infrastructure development stage, and (iii) the post implementation stage. Costs incurred in the planning and post implementation stages of software development, including costs associated with the post-configuration training and repairs and maintenance of the developed technologies, are expensed as incurred. The Company capitalizes costs associated with software developed for internal use when the planning stage is completed, management has authorized further funding for the completion of the project, and it is probable that the project will be completed and perform as intended. Costs incurred in the application and infrastructure development stages, including significant enhancements and upgrades, are capitalized. Capitalization ends once a project is substantially complete and the software and technologies are ready for their intended purpose. Internal use software development costs are amortized using a straight-line method over the estimated useful life of three years, commencing when the software is ready for its intended use. The straight-line recognition method approximates the manner in which the expected benefit will be derived.
Intangible assets primarily consist of acquired developed technology, client relationships, and non-compete agreements resulting from business combinations, which are recorded at acquisition-date fair value, less accumulated amortization. The Company determines the appropriate useful life of its intangible assets by performing an analysis of expected cash flows of the acquired assets. Intangible assets are amortized over their estimated useful lives using a straight-line method, which approximates the pattern in which the economic benefits are consumed.
The Company’s intangible assets are being amortized over their estimated useful lives as follows: