Ad Tech Layoffs

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?

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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.

AppNexus and The Trade Desk S-1s

Recently, there were reports that AppNexus and The Trade Desk were on the verge of filing their S1s (https://adexchanger.com/ad-exchange-news/s1s-expected-soon-appnexus-trade-desk/). What is the significance of this news? What does it mean for us and the industry?

We've previously discussed what it means to IPO (What Does It Mean to IPO). This included conversations around public v private company regulations, as well as the process. That discussion was largely phrased from TripleLift's perspective. Filing an S1 is the initial securities registration with the SEC (the securities regulation agency in the US). When you file your S1, you submit for comment from the SEC information about your business, disclosures, risk factors - all the things a reasonable public investor might want to know, all of which is then publicly available. Here's a copy of Google's: http://bit.ly/29cdeaq, Rocketfuel: http://bit.ly/29nSpJF, Tremor Video: http://bit.ly/29fCrCb. They're pretty interesting and revealing.

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The efficient market hypothesis states that public securities are priced to perfectly incorporate all publicly available information, and effectively that pricing is devoid of emotion. This is, entertainingly, both a presumption in the federal courts (https://en.wikipedia.org/wiki/Basic_Inc._v._Levinson) and largely incorrect - even the weakest form (http://www.investopedia.com/terms/w/weakform.asp). This derives from two different perspectives: 1) the US courts want to ensure that all material information can reach the public markets so that investors could use that information to make a decision, which is a noble goal, and 2) the markets are gonna do what the markets are gonna do, which often means not being "efficient," but instead of having moods.

In the current environment, IPOs for tech companies have not been received well. There was no "efficient" answer for this, it was just a cyclical thing that the investors were spooked by a few ideas, including a lot of unicorn bubble talk, fears about China's declining economic growth, oil prices, etc. Because every company IPOs precisely once (unless blah blah blah), no one would want to do it in a market that wasn't receptive. Recently, however, a brave soul (Twilio Inc.) decided to go public. Twilio is a telephony-based tech company, and its IPO was a smash success. People look at the first day's results, its first several months, and how it performs relative to projected earnings for the first few quarters. For Twilio - so far so good (initially priced at $15, currently at $34).

Ad tech is also in a bit of a slump. A lot of the companies that have IPO'd did not do well in the public markets, including RocketFuel, Tremor, Yume, Millenal (now AOL/Verizon) and several more. A couple others did well enough, including Criteo and Rubicon (to a much lesser degree) - but there was more bad than good for ad tech. These mediocre IPOs were often after raising a ton of VC money, in many cases less than the market value. This trickled down into the VC world, meaning VCs thought the IPO market wouldn't necessarily welcome ad tech, which meant it would be hard for them to turn a profit, which meant they would be less likely to invest.

All this gets to the point that AppNexus and The Trade Desk just filed their S1s. These are two good companies. The Trade Desk is probably the largest independent (meaning not Google) buy-side platform, and AppNexus may have the most money flowing through its platform of any independent (also meaning not Google) ad tech company. The fact that both of these companies are on the verge of filing their S1s means that they are seriously considering going public. It is quite expensive to prepare, revise, and repeat to the level that the SEC needs, and almost always means the company will - when they're ready and have the prospectus and buyers lined up - actually go public. So one can imagine that two strong ad tech companies will IPO at some point in the next several months (timeframe TBD). 

This will have a positive cascading effect through the industry. It will show that the public markets are ready for tech IPOs again. It will show (hopefully) that ad tech companies can be legitimate, successful, public companies. It will show to other ad tech companies that the market is increasingly receptive, which may lead to more solid ad tech companies filing IPOs. And it will show to VCs that ad tech should be considered ripe for investment.