Rubicon Project recently laid off roughly 20% of its workforce. This comes on the heels of AppNexus laying off 13% and Pubmatic a similar amount. Each of these companies makes most of their money on the supply side. What's the take home here?
First, each company has a public-facing rationale. These are enhanced with PR spin, but they're interesting to explore nonetheless.
- Rubicon stated that it missed the header bidding wave, and that header bidding in turn will cause certain headwinds for the organization. Further, the buyer and seller clouds will be unified. Also, noteworthy, it is expecting a negative year-over-year growth for Q4.
- Pubmatic saw a small number of clients driving most of their revenue, allowing them to lay off the people that serviced the less profitable client - and thus be more profitable by focusing on their areas of profitability
- AppNexus cited the company merging its buy- and sell-side businesses into a single organization.
Themes include re-consolidating a supply / demand dichotomy that had previously existed in the organization, increasing profitability, and - implicitly - increasing profits per employee. Of the three, Rubicon is the only public company. Its revenue and profitability have been relatively stagnant and its share price has gone from 19 at its IPO, to under 6.5. AppNexus is likely planning to IPO next year, and Pubmatic's future is unknown.
The public markets have not been terribly kind to ad tech companies, but The Trade Desk and Criteo have been notable exceptions. Criteo has a unique value proposition and should be considered separately. The Trade Desk has incredibly high profits per employee, a pattern of regular growth, and consistent profitability. It appears that each of the above three moves - at least to some degree - is focused on increasing the profitability of the company in question.
Public market companies trade based on a number of factors, but one of the most important is the P/E ratio. This is price / earnings. The higher the P/E, loosely speaking, the more investors believe in the future growth of the company. Different industry sectors, to some degree, will have different ranges of eligible P/E ratios applied to them based on investor sentiments about that industry. Companies within that industry will be found variously across that range based on their profitability and the characteristics of that company. For example, mining companies may be between 3 and 5 P/E, with those having the best management, the best mines, etc, trading closer to 5.
Real-time bidding was brand new a decade ago and represented the future of the digital ad ecosystem. Indeed, that's where spend went. Companies grew aggressively and spent heavily on marketing and personnel - largely to grab marketshare. But the second derivative of the growth in RTB generally is negative. This means companies are starting to pull back from the drive for market share at all costs - to a drive for for profitability. Each of the moves above, their publicly stated reasons notwithstanding, are a direct move to enhance their profitability and thus improve their market cap.
This can also be seen as an admission that we are at a new point in the lifecycle of RTB. It is no longer brand new. Simply being a standard-bearer for RTB alone does not bring sufficient growth to be considered "high growth" and thus justify irresponsible spending. Companies must either be breaking new ground and actually growing very quickly (e.g. native!) or focusing on steady, predictable growth with respectable profit margins.