PubMatic (NASDAQ:PUBM) Surprises With Q2 Sales But Quarterly Guidance Underwhelms

Full Report / August 08, 2023

Programmatic advertising platform Pubmatic (NASDAQ: PUBM) reported Q2 FY2023 results beating Wall Street analysts' expectations, with revenue flat year on year at $63.3 million. However, next quarter's revenue guidance of $59.5 million was less impressive, coming in 10.3% below analysts' estimates. PubMatic made a GAAP loss of $5.72 million, down from its profit of $7.82 million in the same quarter last year.

PubMatic (PUBM) Q2 FY2023 Highlights:

  • Revenue: $63.3 million vs analyst estimates of $59.8 million (5.92% beat)
  • EPS (non-GAAP): $0.02 vs analyst estimates of -$0.01 ($0.03 beat)
  • Revenue Guidance for Q3 2023 is $59.5 million at the midpoint, below analyst estimates of $66.3 million
  • Free Cash Flow of $10.8 million, up 102% from the previous quarter
  • Net Revenue Retention Rate: 100%, down from 105% in the previous quarter
  • Gross Margin (GAAP): 60.4%, down from 69.9% in the same quarter last year

Founded in 2006, as an online ad platform focused on ad sellers, Pubmatic (NASDAQ: PUBM) is a fully integrated cloud-based programmatic advertising platform.

The advertising industry continues to shift from traditional mediums to an expanding array of digital channels and platforms, which has created a convoluted ecosystem of ad buyers and sellers that includes header bidding, which involves putting software code on a website which allows different advertisers to bid in real time for each ad impression. Ever increasing ad impressions from ever rising digital adoption by consumers has resulted in an explosion of data around online advertising (e.g. who bid what when and who won each bid) that requires data mining to allow advertisers to more efficiently place bids.

Pubmatic’s platform plays the role of an intermediary between ad sellers and ad buyers. Publishers and app developers are the “ad-slot sellers'' that plug into Pubmatic’s platform, which in turn interfaces with “ad-slots buyers” and ad-slots buying platforms such as Google and The Trade Desk, along with individual advertisers and ad agencies. As an independent intermediary, Pubmatic’s platform provides transparency for advertisers to know who they are buying and selling from, along with data analytics to help improve buyers and sellers’ purchasing decisions.

The digital advertising market is large, growing and becoming more diverse, both in terms of audiences and media. This as a result drives a growing need for a software that enables advertisers to use data to automate and optimize ad placements.

Pubmatic’s competitors include the big three ad platforms: Google (NASDAQ:GOOG), Facebook (NASDAQ: FB) and Amazon (NASDAQ: AMZN) along with specialized programmatic players like The Trade Desk (NASDAQ: TTD) and Integral Ad Science (NASDAQ: IAS).

Sales Growth

As you can see below, PubMatic's revenue growth has been mediocre over the last two years, growing from $49.7 million in Q2 FY2021 to $63.3 million this quarter.

PubMatic Total Revenue

PubMatic's quarterly revenue was only up 0.47% year on year, which might disappoint some shareholders. However, its revenue increased $7.92 million quarter on quarter, a strong improvement from the $18.9 million decrease in Q1 2023. This is a sign of acceleration of growth and very nice to see indeed.

Next quarter, PubMatic is guiding for a 7.75% year-on-year revenue decline to $59.5 million, a further deceleration from the 11% year-on-year decrease it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 9.85% over the next 12 months.

Product Success

One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such high valuation multiples) is that customers typically spend more on a company's products and services over time.

PubMatic Net Revenue Retention Rate

PubMatic's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 100% in Q2. This means that even if PubMatic didn't win any new customers over the last 12 months, it would've grown its revenue by 0%.

Despite falling over the last year, PubMatic still has an adequate net retention rate, showing us that it generally keeps customers but lags behind the best SaaS businesses, which routinely post net retention rates of 120%+.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. PubMatic's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 60.4% in Q2.

PubMatic Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.60 left to spend on developing new products, sales and marketing, and general administrative overhead. While its gross margin has improved significantly since the previous quarter, PubMatic's gross margin is still poor for a SaaS business. It's vital that the company continues to improve this key metric.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. PubMatic's free cash flow came in at $10.8 million in Q2, up 31.1% year on year.

PubMatic Free Cash Flow

PubMatic has generated $40.1 million in free cash flow over the last 12 months, a solid 15.4% of revenue. This strong FCF margin stems from its asset-lite business model, giving it optionality and plenty of cash to reinvest in its business.

Key Takeaways from PubMatic's Q2 Results

Sporting a market capitalization of $997.7 million, PubMatic is among smaller companies, but its more than $170.9 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

We were impressed by PubMatic's strong gross margin improvement and revenue beat this quarter, but its net revenue retention rate continues to move lower. Furthermore, next quarter's revenue and adjusted EBITDA guidance came in below Wall Street's expectations. Overall, this was a mediocre quarter for PubMatic. The company is down 1.29% on the results and currently trades at $18.3 per share.

Is Now The Time?

PubMatic may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity. Although PubMatic isn't a bad business, it probably wouldn't be one of our picks. Its revenue growth has been mediocre, and analysts believe that growth rate will remain steady. And while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately gross margins show its business model is much less lucrative than the best software businesses.

PubMatic's price to sales ratio based on the next 12 months is 3.4x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. In the end, beauty is in the eye of the beholder. While PubMatic wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.

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