Programmatic advertising platform Pubmatic (NASDAQ: PUBM) reported Q1 CY2024 results topping analysts' expectations, with revenue up 20.4% year on year to $66.7 million. Guidance for next quarter's revenue was also better than expected at $70 million at the midpoint, 1.8% above analysts' estimates. It made a non-GAAP profit of $0.09 per share, improving from its loss of $0.11 per share in the same quarter last year.
PubMatic (PUBM) Q1 CY2024 Highlights:
- Revenue: $66.7 million vs analyst estimates of $62.18 million (7.3% beat)
- EPS (non-GAAP): $0.09 vs analyst estimates of $0.03 ($0.06 beat)
- Revenue Guidance for Q2 CY2024 is $70 million at the midpoint, above analyst estimates of $68.78 million
- Gross Margin (GAAP): 61.9%, up from 56.9% in the same quarter last year
- Free Cash Flow of $16.26 million, down 16.8% from the previous quarter
- Net Revenue Retention Rate: 106%, up from 101% in the previous quarter
- Market Capitalization: $1.18 billion
Founded in 2006 as an online ad platform helping 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.
Advertising Software
The digital advertising market is large, growing, and becoming more diverse, both in terms of audiences and media. As a result, there is a growing need for 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 solid over the last three years, growing from $43.61 million in Q1 2021 to $66.7 million this quarter.
This quarter, PubMatic's quarterly revenue was once again up a very solid 20.4% year on year. However, the company's revenue actually decreased by $17.9 million in Q1 compared to the $20.92 million increase in Q4 CY2023. Regardless, we aren't too concerned because PubMatic's sales seem to follow a seasonal pattern and management is guiding for revenue to rebound in the coming quarter.
Next quarter's guidance suggests that PubMatic is expecting revenue to grow 10.5% year on year to $70 million, improving on the 0.5% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 8% over the next 12 months before the earnings results announcement.
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's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 106% in Q1. This means that even if PubMatic didn't win any new customers over the last 12 months, it would've grown its revenue by 6%.
Significantly up from the last quarter, PubMatic has a decent net retention rate, showing us that its customers not only tend to stick around but also get increasing value from its software over time.
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 61.9% in Q1.
That means that for every $1 in revenue the company had $0.62 left to spend on developing new products, sales and marketing, and general administrative overhead. PubMatic's gross margin is poor for a SaaS business and it's dropped significantly since the previous quarter. This is probably the exact opposite of what shareholders would like to see.
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 $16.26 million in Q1, up 205% year on year.
PubMatic has generated $63.76 million in free cash flow over the last 12 months, an impressive 22.9% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.
Key Takeaways from PubMatic's Q1 Results
We were impressed by PubMatic's superb growth in net revenue retention this quarter. We were also excited its revenue and EPS outperformed Wall Street's estimates. Its revenue guidance for next quarter came in above analysts' expectations at $70 million. Overall, we think this was a really good quarter that should please shareholders. The stock is up 8.9% after reporting and currently trades at $26.19 per share.
Is Now The Time?
When considering an investment in PubMatic, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We cheer for everyone who's making the lives of others easier through technology, but in case of PubMatic, we'll be cheering from the sidelines. Its revenue growth has been mediocre over the last three years, and analysts expect growth to deteriorate from here. And while its bountiful generation of free cash flow empowers it to invest in growth initiatives, 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 12 months is 4.0x, suggesting the market has lower expectations for the business relative to the hottest tech stocks. While there are some things to like about PubMatic and its valuation is reasonable, we think there are better opportunities elsewhere in the market right now.
Wall Street analysts covering the company had a one-year price target of $25.13 right before these results (compared to the current share price of $26.19).
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