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PubMatic (NASDAQ:PUBM) Reports Q1 In Line With Expectations But Full Year Guidance Underwhelms


Full Report / May 09, 2022
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Programmatic Advertising platform Pubmatic (NASDAQ: PUBM) reported results in line with analyst expectations in Q1 FY2022 quarter, with revenue up 25% year on year to $54.5 million. However, guidance for the next quarter was less impressive, coming in at $61 million at the midpoint, being 0.98% below analyst estimates. PubMatic made a GAAP profit of $4.77 million, down on its profit of $4.91 million, in the same quarter last year.

PubMatic (PUBM) Q1 FY2022 Highlights:

  • Revenue: $54.5 million vs analyst estimates of $54.4 million (small beat)
  • EPS (non-GAAP): $0.14 vs analyst estimates of $0.10 (37.7% beat)
  • Revenue guidance for Q2 2022 is $61 million at the midpoint, below analyst estimates of $61.6 million
  • The company provided revenue guidance for the full year, at $284 million at the midpoint, missing analyst estimates by 0.98%
  • Free cash flow of $14.9 million, down 20.2% from previous quarter
  • Net Revenue Retention Rate: 140%, down from 149% previous quarter
  • Gross Margin (GAAP): 67%, down from 71.7% 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 exceptional over the last year, growing from quarterly revenue of $43.6 million, to $54.5 million.

PubMatic Total Revenue

This quarter, PubMatic's quarterly revenue was once again up a very solid 25% year on year. But the revenue actually decreased by $21 million in Q1, compared to $17.4 million increase in Q4 2021. However, PubMatic's sales do seem to have a seasonal pattern to them, and since management is guiding for revenue to rebound in the coming quarter we wouldn't be too concerned.

Guidance for the next quarter indicates PubMatic is expecting revenue to grow 22.8% year on year to $61 million, slowing down from the 88.3% 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 25% 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 140% in Q1. That means even if they didn't win any new customers, PubMatic would have grown its revenue 40% year on year. Despite the recent drop that is still an absolutely exceptional retention rate, meaning PubMatic's software is extremely successful with their customers who are rapidly expanding the use of it across their organizations.

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 67% in Q1.

PubMatic Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.67 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 dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.

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 $14.9 million in Q1, up 58.7% year on year.

PubMatic Free Cash Flow

PubMatic has generated $58.5 million in free cash flow over the last twelve months, an impressive 24.6% 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 Q1 Results

With a market capitalization of $1.12 billion PubMatic is among smaller companies, but its more than $174.7 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 delivered solid revenue growth this quarter. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that the revenue guidance for the full year missed expectations. Overall, this quarter's results were not the best we've seen from PubMatic. The company is flat on the results and currently trades at $18.94 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 exceptional, over the last two years. On top of that, 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 3.6x, 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 $43.6 per share right before these results, implying that they saw upside in buying PubMatic even in the short term.

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