Good day, and welcome to the Rubicon Third Quarter Earnings Conference Call and Webcast. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Nick Kormeluk. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Rubicon Project's Third Quarter 2019 Earnings Conference Call. As a reminder, this conference call is being recorded. Joining me on the call today are: Michael Barrett, President and CEO; and David Day, our CFO. I would like to point out that we have posted financial highlight slides to our Investor Relations website to accompany today's presentation. Before we get started, I'd 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 concerning our anticipated financial performance and strategic objectives. 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 and 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 risks and other -- of these and other risks, uncertainties and assumptions is set forth in the company's periodic reports filed with the SEC, including our 2018 Annual Report on Form 10-K and subsequent filings. 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 highlights deck that is posted on our Investor Relations website. We define cash flow as adjusted EBITDA less capital expenditures, which excludes changes in working capital. 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 onetime in nature, and we may or may not provide an update on the future of these metrics. I encourage you to 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 Michael. Please go ahead.

Thank you, Nick. We are pleased to post another solid quarter with revenue of $37.6 million, reflecting year-over-year revenue growth of 27%. Importantly, our bottom line came in very strong, showing the leverage we have in our business model. We delivered $6.1 million of adjusted EBITDA carrying a 16% margin. We continue to perform very well during the time of industry consolidation and feel very good about our position with buyers and sellers, especially as we've realized the first, albeit small, revenue from Demand Manager in the fourth quarter. Stepping back from Q3 specific performance, I wanted to give some context and perspective and industry trends that have influenced several of our strategic moves. Our first strategic objective when I started at Rubicon was to build our position in header bidding and regain our independent market-leading position. Header bidding caused an explosion in ad requests over the past few years and we're focused on ingesting as many impressions as possible to really understand the new market dynamics of header. This large volume of ad requests required a significant amount of CapEx in cloud investment for both us and our DSP partners. Our first move to optimize this inventory of scale was buying nToggle for their traffic shaping technologies and industry leadership on the demand side. We have now reached the stage that allows us to refine unit economics and to focus to a greater degree on profitability, along with our focus on revenue growth. This takes the form of filtering, prioritizing, removing and eliminating various impressions and creating further efficiencies in the large volumes of internal data flows. The results of our efforts in this phase have more significantly manifested themselves in our financial performance this quarter. This also completely aligns with buyers and sellers priorities of getting the most…

Thanks, Michael. We are happy with our solid results for Q3. We generated $37.6 million in revenue, a 27% increase year-over-year, meaningfully controlled operating expenses, and as a result, generated adjusted EBITDA of $6.1 million. The year-over-year increase in revenue was once again driven by solid growth in both take rate and ad spend. Revenue came in slightly lower than our guidance due to the factors as noted by Michael. Our mobile revenue grew 26%, our desktop revenue grew 28% and video and audio revenue continued to be growth drivers in the quarter. Operating expenses, which in our case, includes cost of revenue for the third quarter of 2019 were $44 million, flat as compared to the same period a year ago. On an adjusted EBITDA basis, operating expenses including cost of revenue for the third quarter were down to $31.5 million from $33.5 million in Q2 2019, and roughly flat versus $31.2 million in Q3 2018. This is 10% lower than the total adjusted EBITDA operating expenses of $35 million we expected as noted on our last call. This improvement was primarily driven by lower-than-expected network cost related to the traffic shaping and filtering efficiency gains, which Michael mentioned. The efficiency gains outpaced even our estimates as we realized network capacity savings in cloud and connectivity cost. As a result, our gross margin for the third quarter was 63%, up from 51% in the same period a year ago. Net loss was $6.2 million in the third quarter of 2019 as compared to a net loss of $13.8 million in the third quarter of 2018. As I mentioned earlier, adjusted EBITDA was $6.1 million, which represents a 16% margin compared to an adjusted EBITDA loss of $1.4 million reported in the same period one year ago. The improvements in…

[Operator Instructions]. Your first question comes from Jason Kreyer with Craig-Hallum.

Just wanted to touch on, Michael, your commentary on just the app-ads.txt and sellers.json. If you can provide a little bit more explanation on how those had kind of a little bit of a hiccup towards the end of the quarter there. And then I'm not sure I'm connecting the right dots, but we saw mobile growth slowdown a little bit in the quarter. Was that related to the, kind of the app-ads.txt implementation or is there something else and better than that?

Yes. Jason, I'll jump on some of this and let David chime in. Yes. So the -- we've often talked about new developments that occur in our marketplace, the exchange that sometimes favor one side versus the other, imbalances of CPMs, bid jamming by publishers in the beginning of header, and we all kind of feel as though, despite the fact that we had to do this on a 90-day sprints, it tends to reach an equilibrium at a certain point. I think our feeling is that although, we implemented app-ads.txt and sellers.json per the rules of the industry that some of it was unfairly -- unfairly hurt our publishers and I think they feel the same way that there are some legitimate resellers out there, some legitimate avenues to acquire their inventory that was profitable for them. They felt very strongly that it provided value-added, but buyers kind of approached it with just one-size-fits-all and if it's not from the direct source, we're going to pause it and review it as it comes across on a case-by-case basis. So I don't think we've seen the full extent of either initiative, but I also feel as though we've seen the bulk of it, and that over time, I think we're going to see a balance return to more equilibrium that would help the publisher. And I would say to answer your question about mobile and video so app-ads.txt disproportionately affected video on mobile in international markets. So you saw a kind of a triple -- trifecta there from the application of app-ads.txt and again, I -- our gut tells us it swung a little bit out of balance and it will come back, but that's it. Listen, it's really good for the industry and if we got dinged by it slightly, I can't imagine what other exchanges earns, well curated, well lit, well policies are, so I think it's good. Anytime you can create greater efficiencies for buyers to reach resellers with less fees along the way, that's good. It puts more dollars to working media, so we are totally leaning into it. We just think that like any initiatives be it GDPR, be it Google's move to first prize, there's always going to be this period of uncertainty, may be overreaction on one side versus the other, but over time, I think it's good for the industry. We aggressively enforced it, and I think it will shake out as the quarters go on.

Got it. And maybe David, kind of related, is there any way we can qualify these 2 developments and look at what kind of a headwind that created? Or is it kind of complicated the tide to several categories?

I think, like Michael said, there is some impact, I think, we talked about a couple of factors that impacted our revenue for the quarter and have impact going forward, and we think are actually unrelated clean up, not clean up, but our focus on unit economics probably was a little bit greater of a driver in that impact. So I guess it had some impact, but it's not a huge impact.

Okay. Switching gears a little bit. There's been a lot more talk that I've heard from people just on accessing log level data, and I think that you've been participating in that with brands and agencies and whatnot. And just wondering if you can give some perspective on how broad based that is and if that creates an opportunity for you to get a little bit closer to the sources with brands and agencies?

Yes. Another good question, Jason. We've been very favorably disposed to helping buyers understand exactly how much dollars are going to working media, and a lot of that disclosure at the bid level is helpful to them in that respect, and we think it's helpful to us because we made decisions to lower our take rates to below industry average. And so we feel is that we'll be the net beneficiary of it. As far as the momentum of it, it certainly started at the marketer level, not necessarily the agency level. And I haven't seen it spread like wildfire, but then there's this other concept of direct connect, and now all of a sudden, you're kind of merging 2 concepts into one, so I think the broader bucket would be direct connect, which would give you not just the direct connection as the name implies, but it would also give you log level data in many cases. And so that, I think, you've seen initiatives that we've done it and you've seen press releases and you've seen people talking about in the industry, and although some folks have said, while they're going to the depth of the exchange, we kind of feel opposite. We think that's the evolution of the exchange and where it should go. So we're really leaning into that too and think we're kind of leading the industry as it relates to initiatives there. And that, I think, has a lot more momentum than one-off. I want to make sure that buy I did for $600,000, I want to see every bid, what price it cleared at et cetera.

Last one, and I'll see the floor. I think we talked before that Prebid was going to be adding support for video. I think that was expected to occur at some point in Q3. I was never able to track down whether or not that happened. So just wanted to see if you could confirm if that's there yet and if you think that that could be a driver for a little bit of a rebound in video growth?

Yes. So I'm not trying to be vague, I just don't have the information on my fingertips as to what developed in Q3 on the Prebid roadmap. There's no question that video is going to be a big role, probably more impactful as it moves to the server, but be that as it may, yes, so as we've talked about Prebid and its aspirations as a .org, there is no question that it wants to be kind of a complete operating system for publishers, a monetization. And videos are very important piece of it. So there are assets, video assets that we're developing, we're putting to Prebid. I've heard that AppNexus is putting tools into Prebid. So yes, there's no -- Prebid is not just for desktop, it's for mobiles, it's for videos, it's for everything and that's the natural evolution of the vision we have for it.

Your next question comes from Lee Krowl with B. Riley FBR.

Real quick, just on audio. Kind of wanted to maybe connect the dots, spotify on their call, highlighted that a migration within Google impacted the quarterly results on the ad-supported site. Did you guys feel that impact as well just given your relationship there?

No. We really didn't. So we have such a distributed inventory base and their overall growth was still very healthy, so their issues didn't really impact us.

Got it. And then these developments with filtering and driving some margin through efficiencies in the quarter. You know it seems like you guys had a fairly notable jump across the board realizing these efficiencies. Do you guys kind of anticipate that now that everything's fully implemented that you've kind of level set or is there incremental improvement in Q4 expected as well in terms of the filtering and efficiency initiative?

Well from a cost basis with our guide of the $33 million and adjusted EBITDA OpEx, which includes cost of revenues. There's a slight uptick in those cost of revenue costs. But if you think about it, we're absorbing with the fourth quarter heavy season, a much greater increase in ad request, and so we're still -- we see significant efficiency gains continuing forward. We haven't given 2020 guidance, but we can see some additional leverage of the cloud, which could result in some incremental OpEx costs there and cost of revenue, but we think we'll continue on this path of more efficiency gains.

Got it. And then just last one on Demand Manager and the integration of RTK. Does the timeline in terms of revenue growth kind of get a little bit delayed as you integrate the two product portfolios or products suites into one? Or do you anticipate that prior expectations in terms of initial rev rec, but a more notable kind of uptick in 2020 time line is still on track?

Yes. We don't feel -- I mean, not that we've shared in any great detail the time line, but it hasn't altered our internal time line at all. In fact it's accelerated it. We'll operated as two separate platforms, but as we mentioned before, they're both on Prebid. So we're not talking about like a 2-year integration process between 2 software companies. So I think they have some unbelievable tools that we're envious of that adding to our dashboard once we get -- we'll get to a unified dashboard in a relatively quick period of time, which won't have any impact or drag on revenue from the either product.

And to clarify, we'll operate as two separate platforms in this fourth quarter busy season, and then have, we think a fairly rapid integration in 2020.

Your next question comes from Matthew Thornton with SunTrust.

This is Anthony on for Matt. Just a couple, I mean most of mine were taken already, but without quantifying precisely, are there-- are we still within the take rate range that you talked about at the start of the year? And then if you already addressed this, apologies again, but could you qualify the RTK impact for 4Q in terms of revenue expenses. What the actual impact would be?

Yes. Sure. I mean we're not updating our take rate guidance, but at the beginning of the year, we talked about take rate being in the mid-13s and so we'll stick with that. And the -- we're not breaking out the RTK expenses separately, we acquired them on the 21st October so you've got a partial quarter in Q4 with those expenses, and with 20 give or take employees and contractors being kind of work out a run rate and that's included in our $33 million guide on adjusted EBITDA operating expenses for Q4.

Your next question comes from Kyle Evans from Stephens.

You guys talked about the focus on unit economics and maybe taking some of the lower effective CPM units out of the equation. Can you talk about where you are in that process and maybe how that process affected different ad units across the ecosystem like video, desktop et cetera?

Yes. I think we have more to come there, not that it will have huge impacts on revenue, but it's a continual process of optimization as we figure out how to squeeze the most out of the inventory that we have. I think there was probably some disproportionate impact similar to some of the transparency initiatives on video, on mobile and in the international realm.

Got you. Can you kind of step back and look at the competitive landscape? Was there anything meaningful that changed in the third quarter or is there anything that we should be thinking about going into 2020 on that front?

You know we obviously said that Google's auction changes, which they're kind of a onetime only thing, so anything that arose from those changes, we'll be living with and as we kind of said, it's neutral. There was a period of volatility that led to more of the kind of steady-state. We've seen areas of our business that we do with Google slightly down, areas that we do without Google slightly up, so maybe that fell into that bucket. So -- but I don't see that occurring and noted that everyone's had first prize. I don't see another shoe falling with any of our competitors on the exchange front. I would say, I guess, you can always have to call out privacy initiatives and the idea that recently, I think, it was floated as early as yesterday the idea of federal privacy initiative, which frankly we welcome, although we haven't seen any details, I should be careful, but it sure beats having to do 50 different ones or in the States. And so those will always be a real macro reality for us. And then lastly, we talk often about a supply path optimization or SPO. And although we haven't seen any dramatic changes in SPO and we've talked about it until we're blue in the face for the last 2 years because people keep alluding to it on the buy side, I've got to imagine that 2020 will come to an end with the same number of players or the same -- should I say the size of the players. We've been clear about supply path optimization is kind of looked like 100 exchanges is going to 60, going to 20 and although that's probably provided us with some tailwind, the big changes for us will be when you go 20 to 10, 10 to 5, we think we're very well positioned to benefit from those reductions in supply partners, however, it really had manifested itself yet, and so we just continue to do what we think we need to do to convince buyers and sellers that were vital partner in their monetization scheme and hope for the best in terms of SPO.

What inning do you think we're in, Michael, for SPO?

You know, I think if you talk to someone that was exchange number 100, the game's over, right? So far us, again for those meaningful things to occur, I think you're into the -- you're batting in the bottom of the fourth. Yes. So I think we still -- but then it can accelerate fast. We always -- we often talk about how tens of thousands of buyers buy from us every day and you might be like, well, boy, how's that ever going to get rationalized? But behind those buyers are 5 to 6 global agencies and that can pretty much take care of a big chunk of the spend that they decide to work with just a handful of partners. So that's what we spend a lot of our time and energy and effort around and that's what we talked about when buying nToggle, obviously, we get the technology benefits, but when we talked about the leadership of nToggle in the demand space, essentially our team's leadership on the buy side is from the nToggle, coupled with some of the very talented people we had on Board prior to their arrival. And we feel really, really good about the talent we have on that side in the kind of conversations we're having.

Great. I can kind of hear the excitement in your voice when you talk about Demand Manager. I know it's still very early days there. Could you frame up the competitive set there, talk about what you think the more mature revenue model there looks like and then may be of if you want to put brackets around the long-term opportunity go for it, but if you don't, I understand?

Yes. No. It's hard to tamp down the excitement with Demand Manager. We really fundamentally think it will change our business. Of course, like any software initiative, it will take time and will probably be able to lay out a little bit more of a roadmap at Q4 earnings, but yes, I mean the simplicity of it is great. Instead of winning a small portion of a publisher's inventory in our auction, we're able to monetize 100% of their inventory, albeit at much lower take rate. So we're very excited about it, the traction has been terrific. Who's their biggest competitor in market, Prebid itself. By far and away, there are big enterprise publishers that are like, hey, guys, I've already switched to Prebid. I've hired folks that can help me with Prebid. Yes, your tools are really cool, but I'm not so sure. Right now, I want to flip out what I have got going, I think I got this home built thing on Prebid that's working just fine. And I think our feeling is if you -- especially, if you look at the economics of the digital publishing business, the idea of being able to save hard cost, even if you have to pay to use a product. I think it's going to be, in the end, too enticing to pass up, in addition, we have seen from our publishers that adopted, they make more money. So you get a double whammy there. So yes, so Prebid would be the biggest competitor we're faced with. The other folks that were header bidding pioneers, credit to them for changing the industry in terms of the way publishers monetize and way buyers buy, but the day of this proprietary kind of black box solution is dwindling fast. So we don't really go up against proprietary solutions, it's just -- it's Prebid in us essentially.

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Michael Barrett for any closing remarks.

We're very happy to deliver strong financial results again this quarter. We're well positioned for the future growth of SPO, video and Demand Manager. We look forward to seeing many of you in the next couple of weeks at the Craig-Hallum, Stephens and IDEAS conferences. I want to thank you for joining us for our Q3 results call and have a good evening.

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