PubMatic (NASDAQ:PUBM) Misses Q3 Sales Targets, Stock Drops

Full Report / November 08, 2022
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Programmatic Advertising platform Pubmatic (NASDAQ: PUBM) missed analyst expectations in Q3 FY2022 quarter, with revenue up 11% year on year to $64.5 million. Guidance for the next quarter also missed analyst expectations with revenues guided to $76.5 million at the midpoint, or 18.7% below analyst estimates. PubMatic made a GAAP profit of $3.32 million, down on its profit of $13.5 million, in the same quarter last year.

PubMatic (PUBM) Q3 FY2022 Highlights:

  • Revenue: $64.5 million vs analyst estimates of $67.0 million (3.71% miss)
  • EPS (non-GAAP): $0.22 vs analyst estimates of $0.20 (9.2% beat)
  • Revenue guidance for Q4 2022 is $76.5 million at the midpoint, below analyst estimates of $94.1 million
  • Free cash flow of $10.6 million, up 29.6% from previous quarter
  • Net Revenue Retention Rate: 120%, down from 130% previous quarter
  • Gross Margin (GAAP): 66.5%, down from 72.4% 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 impressive over the last two years, growing from quarterly revenue of $37.7 million in Q3 FY2020, to $64.5 million.

PubMatic Total Revenue

Even though PubMatic fell short of revenue estimates, its quarterly revenue growth was still up 11% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $1.46 million in Q3, compared to $8.48 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates PubMatic is expecting revenue to grow 1.24% year on year to $76.5 million, slowing down from the 34.3% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 21.2% over the next twelve months.

Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

PubMatic Net Revenue Retention Rate

PubMatic's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 120% in Q3. That means even if they didn't win any new customers, PubMatic would have grown its revenue 20% year on year. Despite it going down over the last year this is still a good retention rate and a proof that PubMatic's customers are satisfied with their software and are getting more value from it over time. That is good to see.


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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 66.5% in Q3.

PubMatic Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.66 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has been going down over the last year, which is probably the opposite direction shareholders would like to see it go.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. PubMatic's free cash flow came in at $10.6 million in Q3, down 30.6% year on year.

PubMatic Free Cash Flow

PubMatic has generated $54.7 million in free cash flow over the last twelve months, an impressive 21.2% of revenues. This extremely high FCF margin is a result of PubMatic asset lite business model and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from PubMatic's Q3 Results

With a market capitalization of $843.8 million PubMatic is among smaller companies, but its more than $166 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

PubMatic produced positive cash flow this quarter, that is good to see in the environment. On the other hand, it was unfortunate to see that its revenue guidance missed analysts' expectations. Overall, this quarter's results were not the best we've seen from PubMatic. The company is down 6.17% on the results and currently trades at $15.2 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. We think PubMatic is a good business. We would expect growth rates to moderate from here, but its revenue growth has been impressive, over the last two years. And while its gross margins aren't as good as other tech businesses we look at, the good news is its very efficient customer acquisition hints at the potential for strong profitability, and its bountiful generation of free cash flow empowers it to invest in growth initiatives.

PubMatic's price to sales ratio based on the next twelve months is 2.9x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. There is definitely a lot of things to like about PubMatic and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $28 per share right before these results, implying that they saw upside in buying PubMatic even in the short term.

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