Good day, everyone and welcome to The Rubicon Project Third Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that today's is being recorded. I would now like to turn the conference over to Nick Kormeluk. Please go ahead.

Thank you, operator and good afternoon, everyone. Welcome to Rubicon Project's third quarter 2017 earnings conference call. As a reminder, this conference call is being recorded. Joining me on the call today are Michael Barrett, President and CEO; David Day, our CFO. I would like to point out that we've posted slides to accompany today's presentation on our website. Before we get started, I would like to remind you that our prepared remarks and answers to questions will include information that might be considered to be forward-looking statements, including but not limited to, statements related to our anticipated financial performance, including without limitation, revenue, advertising spend, profitability, net income or loss, adjusted EBITDA, earnings per share and cash flow, strategic objectives including focus on header bidding, mobile, video, order and private marketplace opportunities, investments in our business, development of our technology, introduction of new offerings, the impact of our acquisition of nToggle and its traffic shaping technology on our business, scope and duration of client relationships, our fees, business mix, sales growth, client utilization of our offerings, our competitive differentiation, our leadership position in the industry, our market share, market conditions, trends and opportunities, user reach, certain statements regarding future operational performance, measures including ad request, fill rate, advertising, spend, take rate, paid impressions and average CPM and factors that could affect these and other aspects of our business. These statements are not guarantees of future performance. They reflect our current views with respect to future events and are based on assumptions and estimates that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements. A discussion of these and other risks, uncertainties and assumptions is set forth in the company's periodic reports filed with the SEC including our 2016 annual report on Form 10K and quarterly reports on Form 10-Q for the three quarters of 2017 under the headings Risk Factors and Management's Discussion and Analysis of Financial Conditions and results of operations. We undertake no obligation to update forward-looking statements or relevant risks. Our commentary today will include non-GAAP financial measures, reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings press release and in the financial highlight deck, which we have posted to the investor relations website @Rubiconproject.com. At times in response to your questions we may offer incremental metrics to provide greater insights into the dynamics of our business. Please be advised that this additional detail may be one-time in nature and we may or may not provide an update on the future of these metrics. I encourage you visit our Investor Relations website to access our press release, financial highlights deck, periodic SEC reports and webcast replay of today's call to learn more about Rubicon project. I will now turn the call over to you, Michael. Please go ahead,

Thank you, Nick and good afternoon, everyone. Welcome to our Q3 '17 earnings call. When I arrived March, I focused a team on accelerating our efforts on header bidding at the time it was the greatest and most immediate opportunity that we had to win back market share. And today, I'm happy to say that the team has made significant progress against this objective in just six short months. The amount of inventory that we have access to has grown by 50% year-over-year. According to a recent report issued by Rockford, within Prebid open source client-side header bidding implementations, we are now one of the top two revenue sources for desktop inventory being sold through these implementations and a mobile ad spend, we were neck and neck with Facebook's audience network as the leader. And with the launch of our open-source server-side header bidding solution, we expect to further grow our market share and strategic position within header bidding as sellers move towards the use of open-source server-side solutions to meet their monetization needs in a rapidly evolving market. Now that we are no longer playing catch-up in header bidding, we are shifting our efforts to focus on differentiating our platform. In alignment with our strategy, which I outlined on the earnings call last quarter, I see four areas of differentiation. First, cost. We are committed to becoming the low-cost provider. Second, transparency and choice, clear, fair and transparent auction dynamics that support multiple versions of header bidding implementation. Third, the programmatic supermarket, if it can be bought or sold programmatically, you can find it on the Rubicon project exchange and fourth, inventory quality and brand safety, which have always been key differentiators for our exchange and an area that we plan to continue to leverage. Let's start with cost.…

Thanks Michael. As Michael highlighted, we continue to take very specific actions in the third quarter to execute against our strategy to make Rubicon project the most attractive platform for buyers and sellers to trade on for their programmatic advertising needs. A long-term positive outlook for programmatic digital advertising growth makes our space compelling and we are well positioned in the most attractive growth areas of programmatic. However, getting back to growth will require investment in operating losses. As evidenced by our third quarter losses, which we expect will further increase in the fourth quarter due to the elimination of all our buyer fees and much lower corresponding take rates. Turning to our results, for the third quarter of 2017, we generated $195 million in advertising spend, $35.2 million in net revenue, adjusted EBITDA loss of $2.3 million, a loss of $0.14 per share in non-GAAP EPS. Total advertising spend decreased 5% in Q3 versus Q2 of 2017 and declined by 20% year-over-year, driven primarily by desktop ad spend, which was lower than prior year by 60% and by lower fees across our platform. This is in line with our prior comments that ad spend has begun to stabilize at levels experienced in the first half of 2017. Total mobile ad spend increased nicely with a 7% improvement over Q2 2017 and a 10% increase year-over-year, driven by mobile app. Mobile app ad spend, which is an area of focus for us continue to grow very nicely and is now over half our total mobile business. Ad spend mix for the third quarter was 47% mobile and 53% desktop, representing a continuing trend towards mobile from Q2 of 2017 when mobile represented 42% of total ad spend. This is also represents a sizable increase over Q3 of 2016 when mobile…

Thanks David. As discussed, our total take rate for Q3 2017 was 18% and we exited the quarter slightly lower than 17%. The auction dynamics tests in combination with the elimination of our buyer fees across our platform will further reduce take rates in Q4 2017 and into 2018. In the past I've noted that we believe the industry take rates will settle between 15% and 20%. However, now we believe that in order to be successful, exchange take rates will be between 10% and 15%. I am very proud of our accomplishments over the course of the last few months, despite the fact that our near-term results are behind where we hope they will be. However, with the changes in our industry, we believe that our total addressable market has grown and will continue to grow with further consolidation in ecosystem. So, we've made a conscious decision to make bolder moves to capitalize on the opportunity. We recognize that we are sacrificing near-term growth and profitability, but it's so we can own a larger piece of the more than $500 billion being spent on ads. The journey to get back to growth will not be an easy one, but we remain confident we have the right strategy and team to deliver. With that, I thank you for participating and operator you can open the line for Q&A.

Thank you. And we'll now begin the question-and-answer session. [Operator instructions] And the first questioner today will be Kerry Rice with Needham. Please go ahead.

Thanks a lot. On the take rate, it seems to slide given your guidance, it's going to settle out 10% to 12% little bit low or in the towards the lowering of the range of what you said the industry is. What -- I guess what gives you confident that it settles out there is the first part of the question. And then the second part is nToggle, does that help at all of the take rate or now that you've eliminated the buyer side of that cost. Is nToggle just more of an engagement, certainly helps as a tool for the buy side, but is it more of just an engagement to keep them spending more on the platform versus helping any kind of take rate there. And then I have one quick follow-up question.

Thanks Kerry. So what gives us confidence why the take rate is going to settle where we think it will? I'll answer it and let David opine as well, but having been in the marketplace for 15 so many years, now that we have stripped the fee down to just publisher side fees because that's essentially what's left and how we make money, that business has not been nearly as dynamic as the buy side fee business and boy did we live a little dynamic rollercoaster this year with that. It's been very steady. There are longer term contracts. The pricing has been very explicit with our selling partners and if anything, we get the sense through market intelligence that we're actually below market in our seller fee contracts, giving us some hope that perhaps there is some ability to move in some of our customers moving it north. But you point out is a very dynamic market. Our certainty is very strong. From a guarantee standpoint it's always tough to do that, but I really think for the foreseeable future, which would mean 2017 and 2018 and beyond that we have settled where we're going to settle. Of course, to just one caveat that Kerry and that's a mix -- media mix, similar products like orders carry a lower take rate and so we'll keep a careful eye on that and give any kind of findings to that that may have any impact to the take rate. David, do you have anything to add to that? And then the second question nToggle, nToggle was always -- we perceive nToggle as something that can help with win rate a lot more than take rate and so nothing's changed there. DSPs are getting overburdened with traffic, traffic that they don't even value, but they still have the process and incur the cost. So, the big hope of nToggle still lives very, very strong and that is we can help our buying partners see more the traffic they want, have the process, lessen the traffic they don't and that will lead to higher win rates on our platform, which obviously will then lead to higher spend and net revenue for us.

Okay. Great. And then just the follow-up is we heard from one of the buy side firms that at least their guidance is being impacted by the rollout of IOS, Apple IOS 11, that seems like that would impact the publishers as well, their ability to sell impression. So, have you seen and certainly, but have you seen anything there that might impact impression volumes and your ability to sell those impression?

Yeah, a terrific question and obviously we saw the result as well. I think that certain buyers are going to be much more impacted upon it folks that re-target -- this is going to have I think a disproportionate impact to them and say a brand buyer that is looking to target a certain audience. We'll keep a close eye on it. I don't think we've seen anything globally on our platform where we were like, oh that that's why that's happening. So, to date we haven't seen the impact of it.

Okay. Thank you very much.

Thank you, Kerry.

And the next questioner today will be Jason Kreyer with Craig-Hallum. Please go ahead.

Okay. Thanks for taking my question. Michael, can you just provide a little bit more color on the decision to eliminate the buyer's fees? Obviously, I'm sure you did some testing and ran through some different scenarios and maybe give us some of the green shoots on your takeaways during that testing that made you more confident whether it was better win rates, better inventory, any numbers to support that would be great?

Sure, and keep in mind, we eliminated buy side fees yesterday. So, the body of evidence is yet to come, but you correctly eluded to some testing that we did starting in September. That testing was generally around auction dynamics as we pointed to first modified -- first price modified, second price, which then had -- the byproduct of that was in instances sample size did include buyer side fees. And when we saw a modified first coupled with no buy side fee, we saw increase in revenue for publishers. We saw increase in win rate and downstream auctions and it really embolden us to say what if we expanded the sample set and that was the primary driver that we saw, a real opportunity here to grow market share and grow revenue. The secondary driver is there is no question that buy side fees in general wouldn't exist in an not-too-distant future and so we figured let's get out ahead of it. Let's use it to our advantage when others platforms are going to struggle as to how to work their pricing around it, gain market share when others are slow to adopt no buy side fees and in general lean into it because we think it's transparent and we think it's the right thing to do for the ecosystem.

And then moving on -- the conversation that you're having with your customers regarding server header bidding, how have those progressed over the last several months and what's your perception of market adoption or any thoughts on timing there?

Yeah great question. So, I think we've been pretty clear to say that Q4 was going to be -- it's traditionally a lockdown timeframe for publishers. So, any major tech decision, any implementation is shelved until Q1 Q2 timeframe because of the importance of the volume and revenue of Q4. But from what we've heard it it's kind of a two-step process rate Jason. It's open source like so we pitched the concept of why open source is correct, transparency fair etcetera and then our version of open source and then lastly, implementing on the server and we have some real live results that I'm sure we'll be able to talk about on our next call about some great engaging conversations with sellers and I think it's going to move pretty fast. As we get out of the Q4 timeframe there is a lot of folks that are deciding now and then we'll want to start implementation as soon as possible. So, we'll keep you posted, but so far so good. It seems like the bets we made in this area are going to pay off.

A couple times that you referenced our model, I think you're referring to the pre-debt model and I just want to make sure, are you still working with some other third parties on server-to-server?

Sure, so part of our choice differentiation for our publishing partners is that if they come to us and say, hey, all things being equal we're decided to go with Amazon Solution. We support that and we're closer to Amazon. We support and we're closer to Google. We'll support and work close with anyone that's part of the Prebid organization as long they code their solution to the standards of the organization. We'll support that as well. Obviously, our preference is our clients that adopt our flavor, but we're going to be very facile as it relates to working with others because we think that's what our clients want and will ultimately lead to an increase in added pressure on the platform, which will downstream result in revenue.

Okay. Just trying to sneak one last one in, just trying to understand the optics of the write-down on nToggle help me understand why you'd take the goodwill write-down on that one?

Sure, so it's not really write-down on nToggle. So not to get too deep into the accounting use but for any acquisition that we have, goodwill is pulled into a amorphous group of our pool of goodwill. And so, we assess that goodwill then where a single reporting unit or a single entity and we assess that goodwill just against market capitalization and valuation that we went through with an outside valuation firm on a macro basis. So, from an nToggle perspective, the minute we purchased nToggle that goodwill was really -- is separated from the results of nToggle. So, our outlook for deployment of the nToggle technology we're still extremely excited about it. We plan to get that rolled out by the end of this quarter here in the U.S. We don't see any change in the prospects of the potential left in revenue that will provide us. So, it's really separate from prospects of nToggle directly.

Thanks guys.

And the next questioner will be Mark Kelley with Citi. Please go ahead.

Hi this is Nick Jones for Mark Kelley. Thanks for taking my question. Can you walk through the take rate pressure in Q3 since I thought the buyer fees since you cut November, can you also talk a little bit about how we should think about spend growth and the DBA partnership become a bigger part of the revenue? And then lastly, are you guys seeing anything from Apple's ITP and Safari, thanks?

Sure, I'll take the first one or two. Yeah so in the third quarter as we talked about last quarter, our exit rate previously was 18.9% and we expected Q3 to come in something below that and that held true for the first two months of the quarter. We talked about some very significant and broad-based testing that we undertook in September and that testing was broad-based enough that that drove us somewhat lower take rate in September than the prior two months and so that's why you have this exit rate of 16.9% and of course a average rate for the quarter of 18.1%. And so, there was a little bit of drop in that last month, primarily driven by that testing. So that drove Q3 take rate activity and of course that testing is what led to this decision to eliminate our buyer fees. Sorry and the second question…

I was just wondering about the spend growth the DBA partnership becoming a bigger part of revenue?

I am sorry Nick, are you referring to press release that we issued about DBA and the private marketplace connection?

Yes.

Yeah, we think that it'll be part of the order story and what we're seeing is a trend is the biggest advertisers that are buying programmatically are as concerned about environment as they are price and that's definitely pushing more and more dollars to the order of business and this is just an easier way for them to access our private marketplaces. So, it definitely will play a role in the shift that we've seen underway for the last several quarters.

Okay. And then lastly any other thing on Safari's ITP?

Yeah, so we had originally addressed it a couple of calls back, we have not seen any direct impact in Q4. Obviously, we deal with thousands of buyers and so I guess it's a fair statement to say that collectively there hasn’t been an impact across the program market space. We know that certain buyers that have specialties like re-targeters are probably going to be the first hit from it, but we're keeping a watchful eye on it, but right now nothing to report.

Great. Thank you.

Thank you.

[Operator instructions] And the next questioner today will be Sameet Sinha with B. Riley FBR. Please go ahead.

This is actually [Lee] on for Sameet. Thanks for taking my questions. First off, I was wondering if you guys can may be talk about as a percentage of revenue what buyer’s fees are?

Well, if you look at our exit rate of Q3 of 16.9% and we're attributing 400 to 500 basis points decrease in this quarter and another 100 to 150 in the next quarter, those decreases are primarily resulting from our elimination of buyer fees. So that gives you an order of magnitude on the scale.

Okay. And then with take rate going down to the 10% to 15% range and eminent to that last point, you guys are taking out fees so that it's a very core offering. Are there any other sorts of friction points if you will that could potentially be eliminated that would further pressure that take rate?

No, we're very, very explicit, if you even to our website post this earnings, we've posted links to exactly how we make our money, exactly where it comes from and you'll see that there is no other primary source of revenue other than our seller fees. And as I said before, those are generally speaking contractual relationships that are longer in term and very explicit in terms of rate and they have held steady for a long period of time here Rubicon.

Yes, and as Michael for, those rate sell side rates were heavily discounted because we did have buyer fees and so there is some opportunity there in the future we're not going to focus on that from an external results perspective too much right now, but there's some potential upside from that. And then on the downside there are -- there is a mix as Michael mentioned earlier that orders in particular has a slightly lower take rate and so as mix changes, that rate could go down a little bit, but order of magnitude, nothing at all compared to the recent changes that we've seen.

Okay. And then I know you guys announced Google in the last couple weeks, Amazon is also onboarded, can you just talk about the partnership landscape and where there are other opportunities to integrate?

Sure, I think you hit the two largest by far, the other folks that we would work with would be other folks in the open source, the open source consortium, the Prebid.org so anyone that adopts that technology, we've as a member of the organization and acting lead role in it for this year, we've committed to work with partners that have created open source or backing away on its proprietary client-side implementations. We don't feel as though it provides the best monetization experience for our publishing partners and our buyers and it certainly is a great consumer experience in terms of the impact of what occurs with all that stuff on the page. So, if a server-side, it's open source, if it's server side, the PDA server-side and it's Amazon we'll lean into it, would imagine anyone else as the offering will take a look, I think we want to just be really flexible here and we think it's the right thing to do and it runs transparency. And we have a fair fighting shot in partnering with someone will do it if our client wants to do.

Okay. Thanks guys.

Thank you.

And there are no further questions. So, this will conclude the question-and-answer session. I would now like to turn the conference back over to Nick Kormeluk for any closing remarks.

Great. Thank you all for joining today. We look forward to speaking with you again on our fourth quarter earnings call as well as seeing you at a couple of upcoming financial conferences in January, which is the City Conference at CES as well as Needham in the second week of January. Thanks again.

And the conference has now concluded. Thank you all for attending today's presentation. You may now disconnect.