Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2014 Earnings Conference Call for The Rubicon Project. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Derek Brown of Investor Relations, you may begin your conference.

Good afternoon, everyone, and welcome to Rubicon Project's 2014 third quarter earnings conference call. As a reminder, this conference call is being recorded. Joining me today are Frank Addante, CEO, Founder and Chief Product Architect; Greg Raifman, President; and Todd Tappin, Chief Operating Officer and Chief Financial Officer. Before we get started, I'd like to remind our listeners that our prepared remarks and answers to question will include predictions, estimates and other information that might be considered to be forward-looking statements, including but not limited to, the guidance we're providing and other non-historical statements related to our anticipated financial performance, operating and strategic plans and the markets and our competitive position. Forward-looking statements involve risks, uncertainties and assumptions and actual results may differ significantly from the results suggested by forward-looking statements for various reasons, including without limitation, if such risks or uncertainties materialize or assumptions prove to be inaccurate. Reported results should not be considered an indication of future performance. A discussion of some of the risks, uncertainties and assumptions is set forth in more detail in the company's registration statement on Form S-1 and quarterly reports on Form 10-Q including under the headings Risk Factors and Management's Discussion and Analysis of financial condition 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, which we have posted to our website. At times in response to your questions, we may offer incremental metrics to provide greater insights into the dynamics of our business or quarterly results. Please be advised this additional detail may be one-time in nature and we may or may not provide an update in the future on these metrics. I encourage you to visit our Investor Relations website at investor.rubiconproject.com to access our third quarter press release, periodic SEC reports, a webcast replay of today's call or to learn more about The Rubicon Project. With that, let turn the call over to Frank.

Thank you, Derek, and good afternoon, everyone. I'm proud to announce another record revenue quarter for Rubicon Project. We exceeded our revenue and adjusted EBITDA forecast for Q3 2014, delivering a 60% growth in revenue from the prior year. I'm proud of our team's continued commitment to being aggressive with innovation and growth, while remaining fiscally prudent in building a profitable business. For technology companies like Rubicon Project that are positioned to lead the automation of all advertising regardless of device, format or location, this is an exciting time. Since founding Rubicon Project, our mission has been to automate the buying and selling of advertising. Over the last seven years, we have focused on digital advertising, as that market has the greatest potential for growth and innovation. However, in building infrastructure and technology needed to automate digital advertising, we've also laid the foundation required to automate all advertising, both online and offline. And that is where we are headed. However, that's not to say that there isn't room for growth within digital advertising. Forrester's 2014 forecast of online display advertising for North America confirms that advertising budgets will continue to shift away from traditional media channels with TV and print to online display, video and mobile and that this trend will accelerate over the next four years. According to the report, online display advertising is expected to grow at an annual rate of 13% between now and 2019. We are already seeing this trend impact the market in a major way as advertisers including Mastercard, Mondelēz International and Verizon Wireless have begun reallocating money previously spent on TV to digital outlets. Advertising dollars will continue to follow the consumer as they evolve away from offline media into digital ones. While we agree that the shift to digital is here to…

Thank you, Frank, and thank you for joining us on the call this afternoon. Throughout the third quarter, we continued to make real tangible progress toward our mission to lead the automation of advertising for buyers and sellers. Rubicon Project was highly visible in the third quarter from a large scale presence at Advertising Week in New York to thought leadership participation at key industry events around the globe. It has been incredibly exciting and rewarding to see our team step out in a big way and lead the conversation on the future of advertising. In addition to these great marketing and thought leadership efforts, we are continuing to drive robust growth in our existing business. We delivered new products, progressed in new regions and welcomed new customers, helping to extend our leadership position. Our robust financial and operational performance should make it clear that our solutions resonate with our customers and the market at large. As you've heard me say previously, there are four core pillars of our business that we focus on day in and day out: first, our Buyer Cloud efforts bringing buyers closer to sellers; second, our Seller Cloud focus on providing innovative and scalable solutions for premium sellers to sell their advertising inventory; third, bringing to market innovative cross-platform solutions for all buyers and sellers; and fourth, continuing to invest and support our international growth. Now let me touch on each of these briefly, starting with our focus on buyers. We're seeing a pronounced acceleration in our direct orders business and buyers seek safer and more transparent buying environment. Reflecting this, I'm pleased to report that our direct orders business saw extremely strong growth in Q3, highlighted by Amnet Group, a division of Dentsu Aegis Media, which increased its order spending on our platform in…

Thank you, Greg. Overall, we've continued to experience tremendous growth, once again led by our RTB solutions, while continuing to invest in the business to drive future growth. Due to the seasonality of our business, we will compare the third quarter 2014 to the third quarter 2013. Managed revenue, which is the media spend transacted to our platform in a given period, is an important operating metric for both internal and external evaluation purposes. Because many companies in our industry record revenue on a growth basis, managed revenue provides a comparison to others in our industry. Managed revenue for the third quarter of 2014 was $158.2 million compared to $117.6 million in the third quarter of 2013, an increase of 43% year-over-year. The increase in managed revenue was primarily driven by an increase in both pricing and bidding activity, led by RTB, which represents the largest portion of our business. According to IDC, RTB spending globally is expected to grow approximately 50% year-over-year from 2013 to 2014. Rubicon Project's RTB managed revenue grew 75% for the nine months ended September 30, 2014, versus 2013, thereby significantly outpacing expected industry growth rates. The increase in managed revenue resulting from a significant increase in average CPM with more targeted buying was partially offset by a decrease in the volume of paid impressions year-over-year, which was mainly a result of the quality control initiatives we instituted during the end of 2013, as well as an ongoing shift from static bidding to RTB. Accordingly, RTB paid impressions grew year-on-year. As a result of the end of the year 2013 anniversary of the traffic quality control initiative, we expect to experience the same comparison throughout the remainder of 2014 versus 2013. We report revenue on a net basis and generate fees from buyers and sellers…

(Operator Instructions) And your first question comes from the line of Deb Schwartz of Goldman Sachs.

I have two questions. First, you've seen revenue growth accelerate for the last two quarters and your guidance seems to imply deceleration, given the fact that it's arguably the seasonally strongest quarter. Just curious to better understand what's behind your guidance for Q4. And then second, I was wondering if you could just talk a little bit more about video. So you mentioned that you're sourcing inventory control issues in video. But can you talk a little bit more broadly about how the product roll-out is going on, whether or not you're seeing publisher uptake and kind of what you've learned from the beta launch so far?

We are in market now with our video product, as we expected to be. We are talking with our publishers about our video product. We're excited about the opportunities for video going forward and we're excited about it from a variety of perspectives. We're cautiously excited, I think, is the way to put it, because we're hesitant to go into market and bring in inventory quality that we don't feel is consistent with the other levels of quality we have in the marketplace. And I think we've all read about what's involved in video as an industry in general. At the same time, what I'd like to point out is that we're building and investing in products in video and our other core products that are going to be particularly productive for video in the long term. Our direct orders product and in both non-guaranteed and guaranteed will be particularly helpful for video as premium sellers and buyers move more and more to take advantage of automation and move into video. So we see that as a very big opportunity. But we see that happening over the longer term, like not necessarily quarter-by-quarter, but over the next several years. And this is pretty consistent with what we've seen with other investments that we've made in mobile and in direct orders. It takes time for these markets to really develop in a way that everybody wants them to. And so from that perspective, we're expecting to see growth over the long term. We're just not seeing the kind of quality that we would hope to see as quickly as possible. But that's frankly not a terrible surprise to us.

We saw sequential growth from Q2 to Q3 around 14% and that is accelerating into the fourth quarter into about 21% sequentially. If you look at the fourth quarter composition with regard to the rest of the year, it matches pretty exactly with prior history when it comes to the seasonal allocation quarter-by-quarter. Just to expand a little bit on what Greg was saying on video, there is certainly quality video in the market. A lot of that you'll see from the premium publishers are selling directly. What we see with respect to that, which is available to exchanges, is that there are levels that don't meet our particular standards. Certainly there is some quality out there as well, but as you know, we've taken some very stringent measures with regard to traffic quality control initiatives and with video we do the same thing.

Your next question comes from the line of Kerry Rice of Needham.

First question on the take rates. So it moved up and you talked about it on the call. Can you talk a little bit more on maybe what's driving that? Is it more service providers? If there's one stronger maybe trend than the other, because obviously both would impact that. And why would you kind of expect that to come back down? And then on mobile, mobile is obviously growing really faster. You guys provide mobile inventory. Can you talk a little bit about the trends there maybe both from mobile web and in-app inventory that's available and maybe the competitive landscape around mobile?

We see the RTB mix as still being the primary driver year-on-year as to the increase in take rate, and that should continue into the fourth quarter with a seasonal high period. With the advent of orders in some of the other products and 2015 initiatives, as we've mentioned in the past, while those products carry a very high CPM, it also carries lower take rates. And so the overall mix will provide us increased managed revenue and increased revenue and higher revenue per transaction. It would also then have a reverse effect that we're seeing with RTB now, in which the product mix now would show a lower take rate. But again, it's a favorable development, because it is accruing more absolute dollars of managed revenue and revenue. But that's really driving that. You heard us mention the increase this past quarter. What we do see is probably some modest increase next quarter. But as we go into '15, we really have some strong aspirations with regard to some of our other products namely orders in which this would bring it to levels probably more consistent with the first half of '14 versus the second half of '14, but all favorable reasons. Kerry, with regard to your mobile question, we are in market now with mobile web and in-app and product does serve us with the auction as well as the direct orders capabilities there. So we've been in market with that now for a couple of quarters and the business is ramping up well. Our focus again is on the top 500 publishers or application developers in any given market in the countries that we operate in. And if you look at their mobile strategies, a lot of their mobile strategies started 12 to 18 months ago where they were developing applications that were specifically servicing mobile consumers. So it first takes a little while for the consumers to move in that direction, which it has. And then once those premium brands are in market, making their inventory available, that's what then goes and attracts the advertisers. And the advertisers' budgeting cycles are sometimes 12 months in advance, sometimes quarters in advance. So it was really last year that a lot of the inventory in consumers were available on the top 500 publishers and applications in the regions that we serve. And this year is when the budgeting cycle started planning. So I'd say we'll continue to see growth in mobile in Q4 and through 2015.

Let me add also, Frank, to a quick update on mobile partnership with InMobi. We talked last quarter about how we're moving into phase one of development work and integration with InMobi and that's going very nicely. We're now well into phase two. And we started initially by launching our server API with them and now we've taken that to the next level. So you'll be hearing more about that in the next quarter or two to come. And with that comes the ability to open a lot more inventory from InMobi than before. So as we talked about it in Q2 that we were going to get this right and take a more disciplined approach to adding on to their video inventory, that's been going very smoothly. And then two trends that I might highlight that Frank kind of intimated was we're going to be focusing quite a bit on the mobile native aspect or the native aspect of mobile as we go forward into 2015. And the other area that we're excited about too in working with InMobi on is video on mobile. So that is one of the areas of video we see as a big growth driver for the future.

Your next question comes from the line of Jason Helfstein of Oppenheimer.

Any commentary as far as outlook for international over the next 12 months and how we should be thinking about that? And then secondly, the market doesn't seem to be kind of delineating from a stock perspective or kind of an understanding of supply side versus demand side and seems to be more focused on licensing model. Can you talk about perhaps what the clients go through to integrate with you basically to join your platform, how long it takes, what they spend to show that basically they do have skin in the game? And has there been any discussions around making it contractual if there are certain investments that some of your partners want you to make that that would incentivize you to make if there was a guaranteed link to the relationship?

Let me start by talking about international. We're very heartened by what we're seeing internationally. We've got a tremendous there led by our Head of International Jay Stevens. He has been with us for quite a few years. We're seeing growth in not only the large markets that you know about, EMEA, et cetera, we're also moving rapidly into Japan, LatAm. We're also seeing some additional trends that are interesting. And that is that we're seeing the rise of cooperatives in the secondary and tertiary markets. As you know, we work with La Place Media. They kind of pioneered this type of platform and we celebrated our second year anniversary with La Place this September, and that's kind of the mold for other co-ops, and we're beginning to expand into other areas partly because of co-ops and partly because of our continued move into those markets. So as I mentioned in the earlier part of the call, we are beginning to see traction in LatAm. We're now seeing traction in areas beyond just Brazil into Argentina. We're lining up publishers in Japan. That's going very smoothly. So all in all, the future is very bright for Rubicon Project with respect to our international effort, and we're looking forward to continuing our efforts in abroad.

Jason, I'll answer your question about the supply side versus the demand side. I think it's a really insightful question. There're hundreds of companies that are ad tech companies, most of who are customers of our exchange. So there're hundreds of different companies that are integrated into our platform and they also exist in the market that are servicing advertisers and they're buying platforms. However, there's just a couple of large exchanges, us and Google. I think if you look at the business characteristics of being on the exchange side of that, it creates a lot of stickiness. We have network effects in our business, so as more buyers attract more sellers and more sellers attract more buyers, et cetera. A way to think about that stickiness is it's like in stock trading where if a lister of stock chooses NASDAQ over New York Stock Exchange, they typically don't switch unless something goes wrong. And we have a lot of these similar qualities in our business and that's where a variety of factors, one is driven by those network effects and other is driven by the data that exists in that platform, which I'll explain in a second. And then the third is the integration customization ramp time that comes associated with integrating a platform like ours. So the integration you asked, when a seller comes to integrate into our platform, they have to take the different sections of their inventory, the different audiences that they have, make that inventory and all that information available into our platform. Think of the experience as being similar to using a Salesforce.com type of system. You have to go in, set up the system, set up all sorts of rules, customize the system for your needs. Every company is different. The integration is…

One other thing to mention is that the international community is clamoring for automation, and it's ripe for automation in a sense that it may even be more fertile than the rest of the world at this point, because of the fact the campaign sizes tend to be smaller internationally. So what we're seeing is as we move from the bigger markets into the outer markets, they're actually automating at a faster rate and adopting our direct orders protocol and our RTB protocol faster than we did with the initial more experienced marketplaces.

Would you guys consider giving out perhaps the number of sellers on your platform and kind of churn, just something to help people understand that the client retentions there, et cetera, however the cut-off may be of a certain spend, but I mean perhaps just some additional metrics that could be put out to get people more comfortable?

In fact, we do have that in the S1 and we can update that at the end of the year. I can't tell you that from a churn standpoint consistent with the past. We continue to see it below 2% in any given quarter, less than 15% on an annual basis and those customers that do tend to be the smaller publishers or applications as opposed to the larger.

Your next question comes from the line of Rohit Kulkarni of RBC Capital Markets.

A quick question on housekeeping. Are you trying to give any breakout in managed revenues coming from international or domestic or RTB versus direct or desktop versus mobile to get more color on what exactly is leading growth?

I think last quarter, we said that international managed revenue from a seller perspective was about 35% to 40% of our overall business, and that remains. We tend to see it actually skew a little bit lower in Q4, given the seasonal composition of the US. But with the drivers that we have in initiatives that Greg outlined with respect to our current initiatives as well as successes internationally, we think that that will grow in 2015. With respect to product type of composition, we've said that RTB is approximately now 80% of our overall mix. We haven't broken out the other components whether they be static orders or mobile, but certainly would look to do that in the future.

You talked about radio inventory quality. Are there any other kind of ecosystem level hurdles or other developments that are on the top of your mind, be it, I don't know, evolution of how Deal ID is being used or the way you set priorities inside ad servers and how that helps speed and targeting our efficiencies or multi-channel programmatic campaigns across mobile radio displayers, from things that probably are a little bit out of your control, but you think or hope that there is a lot of growth or opportunity outside what your current set of offerings is?

When you ask about things like Deal ID, are you talking specifically in video or are you talking about the market as a whole across the model?

About the market as a whole.

In terms of video quality, and Greg talked a little bit about this before, our focus again has been on the top 500 publishers and applications in any given market. Actually if you break it into two parts, there's the premium video and then there is torso/tail video. And our customers are the premium companies like News Corp, Viacom, et cetera. And in the premium part of the market, they sell a lot of their video direct. So it's a supply constrained portion of the market. And we think that our direct orders product serves that market incredibly well, but that's a relatively newer product for us, as we've just recently announced it. So we're incredibly bullish about that product in that part of the market. When it comes to the torso/tail part of the market, that's where there is some quality issues and also a mismatch of what the quality advertisers are looking to purchase. So as the security technologies become more and more mature, as we continue to invest in those areas, I think we can create a safer environment for video, but we also need to help the advertisers understand that part of the market as well to understand that they can and in fact buy safe video. But it's a different type of advertiser or it's changing the behaviors of the quality advertisers than those advertisers are used to in the past. So I think they're solvable problems and we're actively working toward solving those and growing that market just as we did with ad network spend initially, just as we did with real-time bidding spend when that came into the market. We are applying that same experience and that same approach to video. When it comes to Deal ID, that's a very interesting topic. As…

And your next question comes from the line of Sameet Sinha from B. Riley.

You spoke about take rate dynamics going into the next year. Can you also talk about in the context of mobile? Is it any different from a similar inventory or ad unit that you would serve on the desktop or would your take rate be different there? My second question was in terms of composition of the type of ad units that go through your platform. Do you benefit from native ad formats? And if yes, can you give us a percentage of what percentage the ad units are native versus standard IAB formats. Last question would be, with this transaction between AppNexus and Xaxis, do you see any sort of change in competitive dynamics?

With regard to take rate, mobile and desktop actually is pretty darn close. We see two of them moving pretty much in parallel and they're pretty similar. The types of advertising units, our platform is agnostic. We just process auctions and orders between buyers and sellers. It doesn't matter what the format is. It doesn't matter what the size of the ad is. So we've supported IAB standards. A growing portion of our platform is native and we continue to see that be the case continuing in the future. In fact, Greg mentioned the InMobi customer relationship there, that exchanges entirely native. So we continue to support what the ad formats are that the buyers and sellers want. AppNexus, I believe, didn't buy Xaxis from WPP. They bought they ad serving assets of the WPP owned.

My mistake. The sales side portion of Xaxis, yes.

The ad server that sellers use, but not to be confused with the sell side automation or an SSP capability. They're very, very different things. AppNexus, they're an important company in the space. They're an important customer to us. They're also an important partner of ours. AppNexus is enabling a lot of the buyers and a lot of the ad networks as well as companies like Xaxis to be able to purchase inventory across our exchange to reach the sellers that exist on our exchange. Their move to purchase the ad serving components of WPP, I think, is a good one and a positive one. I'm not sure what their plans are, but I think there is a lot of opportunity to create and present ad serving solutions to advertisers and I think there's also an opportunity to present ad serving solutions to the sellers. We think that's all good for business. With our Ad Engine API and our exchange API, we're able to add the automation capabilities and the automated orders and automated auctions capabilities to ad servers. So we think that is a great potential partnership and opportunity for us.

There are no further questions at this time. I turn the call back over to the presenters. Thank you all for joining us this quarter and we look forward to staying in touch as the days and months progress.

Thank you very much for participating and we look forward to keeping you abreast of things in quarters to come.

This concludes today's conference call. You may now disconnect.