Programmatic advertising platform Pubmatic (NASDAQ: PUBM) announced better-than-expected results in the Q1 FY2023 quarter, with revenue up 1.57% year on year to $55.4 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $59.5 million at the midpoint, 4.66% above what analysts were expecting. PubMatic made a GAAP loss of $5.87 million, down on its profit of $4.78 million, in the same quarter last year.
PubMatic (PUBM) Q1 FY2023 Highlights:
- Revenue: $55.4 million vs analyst estimates of $51 million (8.57% beat)
- EPS (non-GAAP): $0.02 vs analyst estimates of -$0.13 ($0.15 beat)
- Revenue guidance for Q2 2023 is $59.5 million at the midpoint, above analyst estimates of $56.9 million
- Free cash flow of $5.34 million, down 48.9% from previous quarter
- Net Revenue Retention Rate: 105%, down from 108% previous quarter
- Gross Margin (GAAP): 56.9%, down from 67% 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 strong over the last two years, growing from quarterly revenue of $43.6 million in Q1 FY2021, to $55.4 million.
PubMatic's quarterly revenue was only up 1.57% year on year, which might disappoint some shareholders. But the revenue actually decreased by $18.9 million in Q1, compared to $9.8 million increase in Q4 2022. However, PubMatic's sales do seem to have a seasonal pattern to them, and considering management is guiding for revenue to rebound in the coming quarter we wouldn't be too concerned.
PubMatic is guiding for revenue to decline next quarter 5.6% year on year to $59.5 million, a further deceleration on the 26.9% year-over-year decrease 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 5.13% 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'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 105% in Q1. That means even if they didn't win any new customers, PubMatic would have grown its revenue 5% year on year. Despite it going down over the last year this is still a fair retention rate and it shows us that customers stick around. But PubMatic is lagging a little behind the best SaaS businesses that achieve net dollar retention rates of over 120%.
Profitability
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 56.9% in Q1.
That means that for every $1 in revenue the company had $0.57 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 have followed 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 $5.34 million in Q1, down 64.3% year on year.
PubMatic has generated $37.5 million in free cash flow over the last twelve months, a solid 14.6% of revenues. This strong FCF margin is a result of PubMatic asset lite business model and provides it plenty of cash to invest in the business.
Key Takeaways from PubMatic's Q1 Results
With a market capitalization of $658.4 million PubMatic is among smaller companies, but its more than $173.2 million in cash and positive free cash flow over the last twelve months give us confidence that PubMatic has the resources it needs to pursue a high growth business strategy.
We were impressed by how strongly PubMatic outperformed analysts’ revenue expectations this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was less good to see the pretty significant deterioration in gross margin and the revenue retention rate deteriorated. Overall, we think this was an ok quarter. But the market was likely expecting more and the company is down 2.54% on the results and currently trades at $12.3 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 cheer for everyone who is making the lives of others easier through technology, but in case of PubMatic we will be cheering from the sidelines. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately its 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 twelve months is 2.5x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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