PubMatic (NASDAQ:PUBM) Q2: Beats On Revenue, Stock Soars

Full Report / August 08, 2022
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Programmatic Advertising platform Pubmatic (NASDAQ: PUBM) reported Q2 FY2022 results topping analyst expectations, with revenue up 26.9% year on year to $63 million. Guidance for the full year also exceeded estimates, however the guidance for the next quarter was less impressive, coming in at $67 million, 1.98% below analyst estimates. PubMatic made a GAAP profit of $7.81 million, down on its profit of $9.92 million, in the same quarter last year.

PubMatic (PUBM) Q2 FY2022 Highlights:

  • Revenue: $63 million vs analyst estimates of $60.6 million (3.94% beat)
  • EPS (non-GAAP): $0.23 vs analyst estimates of $0.15 ($0.08 beat)
  • Revenue guidance for Q3 2022 is $67 million at the midpoint, below analyst estimates of $68.3 million
  • The company dropped revenue guidance for the full year, from $284 million to $279 million at the midpoint, a 1.76% decrease
  • Free cash flow of $5.69 million, down 61.8% from previous quarter
  • Net Revenue Retention Rate: 130%, down from 140% previous quarter
  • Gross Margin (GAAP): 69.8%, down from 73.6% 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 very strong over the last year, growing from quarterly revenue of $49.6 million, to $63 million.

PubMatic Total Revenue

This quarter, PubMatic's quarterly revenue was once again up a very solid 26.9% year on year. On top of that, revenue increased $8.48 million quarter on quarter, a strong improvement on the $21 million decrease in Q1 2022, and a sign of acceleration of growth, which is very nice to see indeed.

Guidance for the next quarter indicates PubMatic is expecting revenue to grow 15.3% year on year to $67 million, slowing down from the 53.6% 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 17.8% 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 130% in Q2. That means even if they didn't win any new customers, PubMatic would have grown its revenue 30% year on year. Despite it going down over the last year this is still a great retention rate and a clear proof of a great product. We can see that PubMatic's customers are very satisfied with their software and are using it more and more over time.


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 69.8% in Q2.

PubMatic Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.69 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

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 $5.69 million in Q2, down 40.2% year on year.

PubMatic Free Cash Flow

PubMatic has generated $54.7 million in free cash flow over the last twelve months, an impressive 21.7% 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 Q2 Results

With a market capitalization of $907.2 million PubMatic is among smaller companies, but its more than $182.9 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

It was good to see PubMatic outperform Wall St’s revenue expectations this quarter. And we were also glad to see good revenue growth. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results could have been better. The company is up 6.92% on the results and currently trades at $19 per share.

Is Now The Time?

When considering PubMatic, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think PubMatic is a solid business. We would expect growth rates to moderate from here, but its revenue growth has been strong, 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 3.4x, suggesting that the market is expecting more steady growth, relative to the hottest tech stocks. There are definitely 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 $28.5 per share right before these results, implying that they saw upside in buying PubMatic even in the short term.

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