Magnite, Inc.

Derek Brown - Investor Relations, ICR Frank Addante - Chief Executive Officer and Chief Product Architect Greg Raifman - President Todd Tappin - Chief Operating Officer and Chief Financial Officer

Deb Schwartz - Goldman Sachs Kerry Rice - Needham Jason Helfstein - Oppenheimer Rohit Kulkarni - RBC Capital Markets Sameet Sinha - B. Riley

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 stay, it is important to note that those who see this exciting trend and forecast the death of TV advertising are actually missing a real and evolving opportunity. The industry is moving towards automation and TV will be a part of that.

We are studying various opportunities to automate advertising within video, TV, out-of-home and even print. The launch of Rubicon Project's direct order technology is a great example of delivering on our objective to power the future of advertising through automation, and this technology will become even more critical as we expand our offering to include some of the more traditional media formats.

Earlier this week, Rubicon Project along with Digiday released the first substantive industry report on the value of direct order automation. The survey found that buyers today use up to half a dozen different systems to plan and execute to buy, often requiring manual reconciliation causing significant inefficiencies in costs.

And nearly half of those surveyed spent at least 20% of their time on these manual processes when buying and selling digital advertising. Ultimately, the survey confirmed our belief that there is an increasing demand for automation as 90% of those surveyed want a direct order automation solution that eliminates inefficiencies, reduces costs and increases overall return on investment where: one, sellers attract higher CPMs for their inventory by using data to more appropriately segment and price to audiences; and two, buyers can better access the audiences, further increasing the reach and effectiveness of their campaigns.

Before I hand things over to Greg and Todd to discuss our operations and financial performance in more detail, I'd like to take a moment to acknowledge and address the ongoing noise factor in our industry. I remain confident about the future of Rubicon Project, and here's why.

The market opportunity for Rubicon Project is enormous. We are different from ad tech companies.

We believe that we can continue to have strong growth rates, and we believe that the penetration pricing strategy of our take rates and our current business is effective. The market opportunity is not only enormous, but growing.

We see a $200 billion and growing advertising industry ripe for innovation and expect that 50% of that spend will become automated in the coming years. That includes the continued automation of online and digital channels as well as offline channels like TV, out-of-home and print.

It's an opportunity that we believe provides plenty of room for growth for us. In regards to how Rubicon Project is different from ad tech companies, I'd like to start by noting that we've established a very unique position in that many companies rely on our platform for their revenue.

This also puts us in a strategic and sustainable position in the market. We think of Rubicon Project as the operating system and technology infrastructure powering the advertising industry for today and tomorrow.

As the operator of one of the largest exchanges for advertising, we provide SaaS applications to the world's top publishers and application developers to package, sell and optimize their inventory across any device, format or location. Because our exchange technology is integrated directly with the premium publishers and applications, any buyer who wants to access the inventory from those sellers in our exchange must buy directly from the Rubicon Project exchange.

We also provide applications and APIs to buyers to connect to our exchange, helping them identify, bid and serve their ads and properties of the most premium publishers and applications in the world. These buyers are often misunderstood to be competitors, but are in fact customers of our exchange.

Simply put, Rubicon Project offers a unique combination of global consumer reach, sticky seller and buyer integrations, deep technological differentiation of both advanced software and hardware engineering, unique big data intelligence and a safe and secure advertising marketplace for buyers and sellers. Our industry is growing fast and we are growing even faster.

We're really proud to record 60% year-over-year growth in revenue in the most recent quarter, which was a further acceleration from last quarter's growth rate. And we continue to see plenty of room for expansion because of this confidence in our ability to become a much bigger business.

For instance, many of our current customers still sell substantial portions of their inventory manually through direct sales, a practice that we're already addressing with our direct orders technology. We also have a number of large prospective customers, here and abroad, that appreciate the fact that our technology, data elements, hardware, software and security were all developed specifically for their advertising businesses.

And then there's the growing opportunity to continue to move into adjacent markets like automating video, TV, out-of-home and print. Lastly, I'd like to offer some insight on our take rate.

It's important to realize that our market position and business model allow for positive long-term financial dynamics. To start, we are a technology company, charging fees for the usage of our platform, similar to Salesforce.com and Oracle.

We do not trade or arbitrage media like ad tech companies. This is a key differentiator and a contributing factor to why Rubicon Project has continued to grow steadily over the last seven years regardless of changing CPMs where the multitude of new entrants have joined our industry.

This illustrates the stable and predictable nature of our business. As CPMs and new buying strategies such as static bidding, RTB and direct orders evolve, so does our take rate.

And we believe that our revenue per transaction will continue to increase. Continuing with my Salesforce.com and Oracle analogy, we are also deeply integrated into the properties and business processes of our buyers and sellers, which not only makes us sticky, but also unlocks the true value of our technology, decreased cost for our customers.

The key for using Rubicon Project's advertising automation cloud is less than the cost of our customers' direct sales efforts, resulting in a higher return on investment for them. Once again, this speaks to the stable and predictable nature of our business.

And finally, let me explain why our take rate differs from that of a traditional exchange. While we use financial exchanges such as NASDAQ as an analogy to describe our functionality and where we fit into the advertising ecosystem, our business and revenue model is analogous to our marketplace business like eBay or Amazon.

We provide SaaS applications and APIs to allow buyers and sellers of advertising to connect into our proprietary marketplace. As such, our take rate is more analogous to other marketplace businesses, which traditionally have significantly higher take rates than that of the financial exchange.

With that, I'll close by saying that I'm really proud of our team for delivering another strong quarter financially, strategically and operationally. Our commitment to culture is in full effect.

I'm excited about where we're headed both near term and long term. Now, I will let Greg and Todd walk through a more detailed analysis of our business.

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 Q3 by more than 300% year-over-year and more than 50% quarter-over-quarter. DigitasLBi, a top global agency and a division of Publicis Groupe, announced earlier this month that it is using our orders and agency marketplace solutions to provide full and direct access to our automation technology to power buying for all of DigitasLBi's clients.

The DigitasLBi deal is the first time when agency has directly contracted the marketplace to ensure access to well-lit supply sources through our technology to create premium inventory packages for DigitasLBi's clients with a transparent fee structure. This was a significant milestone for Rubicon Project in the overall industry according to the considerable media attention it received.

We look forward to striking similar deals in the weeks and months ahead. Deepening our relationships with global buyers such as these is a key component of our overall strategy to provide buyers with greater and closer access to sellers' inventory.

Turning now to our Seller Cloud business, I'm pleased to share that we have continued to experience significant growth in a number of high-quality seller customers that deploy our marketplace technology. In Q3, we added more than 70 new sellers and enhanced our overall product offering to better address all of our sellers' needs.

We are excited to have debuted our latest Seller Cloud feature called Ad Engine during Advertising Week at the beginning of the month. Ad Engine firmly addresses the emerging needs of premium sellers to execute performance campaigns and have those campaigns optimized against their indirect or automated campaigns.

Ad Engine also provides sellers with capabilities to monetize the valuable first-party data when targeting their audiences safely in different environment. Adding strong and innovative feature capabilities like Ad Engine to our Seller Cloud product helps strengthen our relationships with premium sellers and provide greater value to their businesses.

We are very excited to inform you that News Corp and La Place Media, two giant sellers of performance inventory, have signed on as initial launch customers of Ad Engine. During Q3, we also added significant high-quality inventory from new sellers, including the The Economist Group, US News, New York Daily News, ThinkProgress and (inaudible).

More specifically, BOXmedia, recognized as one of the most innovative and fastest growing media companies in the market today, reaching an audience of 150 million each month, selected Rubicon Project to help support the monetization of BOXmedia's rapidly expanding inventory. Future Publishing, a leading group in the United Kingdom, representing titles such as Total Film and PC Gamer, also selected Rubicon Project to power its global exchange, helping buyers reach Future's 50 million monthly international consumers.

And finally, Business Insider is another leading publisher that has selected Rubicon Project as a technology provider for its global private exchange solution. Our multiyear agreement with Business Insider enables us to connect their buyers with BI's 24 million unique visitors.

Given their digital footprint, these new sellers are already having a positive impact on Rubicon Project's managed revenue. Shifting now to our cross-platform efforts, I'd like to share some details about this critical component of our business that advanced nicely in the third quarter.

The successful implementation of our partnership with InMobi was a major focus of our efforts in Q3 and I'm happy to report that we are seeing strong progress there. As I mentioned during our last earnings call, creating a mobile-first marketplace, in fact the world's largest mobile-native marketplace requires a great deal of coordination within and between our seller and buyer cloud teams.

We've been working closely on these efforts and are seeing the fruits of those labors and have already enabled more than 60 DSPs with access to InMobi inventory. In addition to our progress with InMobi, our mobile expansion is also coming from more traditional media sources.

Some of our highest quality mobile sellers expanded their relationships with us to include mobile, and we brought on multi-screen sellers such as BOXmedia mentioned above. Lastly, as you have heard me say before, our vision is to automate advertising not just here in North America or in other mature international markets, but around the globe on any device, format or location.

Our international footprint continues to be a strength for the company and we've been building on that strength in Western European, LatAm and APAC markets. In Japan, we're seeing significant interest in the marketplace and we've added nearly a dozen new premium sellers in recent weeks including Nikkei BP, one of the largest publishing companies in the country, whose diverse array of digital properties generate 125 million page views and more than 11 million unique visitors per month.

LatAm is also seeing strong interest where a number of major sellers have signed with Rubicon Project in the last quarter. Furthermore, we are making strong inroads in other markets outside of our initial foothold in Brazil with e-planning, [ph] Clarin and Telefe all coming onboard in Argentina.

In Western Europe, our business and operations continue to grow. In Belgium, we have added Skynet, the largest Belgium publisher.

We've now been working with La Place Media in France for two years, a relationship that has helped propel further deals in Denmark and in Czech Republic. We're also seeing the execution of high-impact formats through our automated technology in international markets, countries like France and Italy, which have rapidly gained an appetite for using RTB in innovative ways.

In addition to the strong growth we're seeing from both buyers and sellers internationally. We have also made smart investments in our infrastructure in Europe by adding a new data center in Germany, which came online in Q3.

This is our second data center in Europe and provides 100% redundancy for our marketplace. Before I hand it over to Todd, I want to take a final minute to discuss our commitment to inventory quality, which remains a critical important point for our industry and the buyers and sellers with whom we work.

First, we view ourselves as leaders in this regard. We know that our focus on maintaining a clean, well-lit transaction environment means that for some we may take unpopular steps during the short term, but longer-term we truly believe that our decisions are best for our customers and our marketplace.

In this regard, we regularly review and remove inventory that doesn't meet the standards that we have set and that we feel buyers demand and deserve. We believe that this is the right thing to do for our marketplace and our business and that this process will continue to serve as a differentiator as well as a revenue driver for Rubicon Project.

Second, we believe that although video presents a significant opportunity for automated advertising, our research indicates that a large amount of today's exchange rate of video inventory is sub-standard and therefore not acceptable to the very high standards that our customers have come to expect from Rubicon Project. Therefore, while we stand ready and willing to move into and innovate new segments of our industry, be they digital video, television, print or radio, we will expect more measured growth until we see the video inventory quality that our customers have come to depend on us.

Clearly, as we look back across our business in the third quarter from our seller and buyer clouds to a multiple cost platform and international growth initiatives, we have much to be proud of. And finally, as we head into the busy holiday advertising season, we do so with great optimism knowing that we have the right people, the right innovative and differentiated products and the right leading customers from around the world necessary to continue to drive future growth.

In summary, it was another terrific quarter for Rubicon Project, continued momentum in our core business and exciting innovation in new areas. I want to send a personal congratulation to all Rubiconers around the world who make it happen each and every day.

And with that, I would like to turn it over to Todd.

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 transacting on our platform based on a percentage of managed revenue. Our take rate represents the total of the buyer and seller fees that we charge and is influenced by a number of factors.

Revenue in the third quarter of 2014 was $32.2 million compared to $22.1 million in the same period in 2013, representing a year-on-year increase of 60% and well above the midpoint of our guidance of $29 million. The increase in revenue was primarily due to the increase in managed revenue and related metric fluctuations, as previously mentioned, and an increase in take rate.

The take rate increased to 19.1% in the third quarter of 2014 as compared to 17.1% in the same period in 2013. The increase in take rate year-over-year was primarily due to a higher mix of auction RTB managed revenue, which carries a higher take rate compared to overall managed revenue.

Take rate may increase slightly with seasonal patterns in Q4. As other areas of our business grow such as orders and other products, we expect our managed revenue and revenue to increase, but our take rate to decrease.

I'm looking toward 2015 with expected increases in orders and other products. We expect the mix shift to result in take rate lows more in line with the first half of 2014 rather than the second half of 2014.

We plan to provide 2015 guidance during our Q4 2014 earnings call. Operating expenses including cost of revenue increased to $37.6 million in the third quarter of 2014 from $23 million during the same quarter in 2013.

The increases in operating expenses were primarily due to the expansion of our sales efforts and general and administrative expenses associated with becoming a public company. The total year-over-year increase of $14.6 million included an increase of $5.6 million of non-cash stock-based compensation.

Net loss was $4.6 million in the third quarter of 2014 compared to $4.9 million in the third quarter of 2013. The decrease in net loss was primarily due to the strong revenue growth, partially offset by increases in costs associated with planned headcount additions as well as an increase in non-cash stock-based compensation cost of $5.6 million, which was $7.2 million in total this quarter.

Net loss improved sequentially from $9.4 million in Q2 of this year to $4.6 million this quarter primarily due to revenue growth, partially offset by costs associated with planned headcount additions. Adjusted EBITDA was $4.8 million in the third quarter of 2014 compared to $0.6 million in the third quarter of 2013.

The year-over-year improvement was primarily due to the increase in revenue, partially offset by the increase in operating expenses from both hiring and infrastructure investments incurred toward the end of 2013 associated with an increase in engineering and product related development, enhancements in our sales efforts as well as costs associated to becoming a public company. Adjusted EBITDA improved sequentially during the first three quarters of 2014 from a negative $1.6 million in Q1 of this year to a positive $2.7 million in Q2 and a positive $4.8 million this quarter primarily due to an increase in revenue and additional capitalized cost, partially offset by planned increases in expenses.

As mentioned in our last earnings call, we continue to expect 2014 cost to significant increase over 2013 and 2014 will reflect the full year effect of these 2013 investments as well as planned product and international expansion efforts in 2014. Q3 2014 adjusted EBITDA of $4.8 million was favorable to the midpoint of our guidance, a loss of $3 million.

The favorable variance to guidance was primarily due to the strong revenue performance and secondarily due to slower than expected hiring. We plan to accelerate our hiring during the remainder of 2014 in accordance with our initial plan.

In the third quarter of 2014, our GAAP loss per share was $0.14 based on the weighted average basic and diluted shares of 33.7 million. This compares to a loss of $0.52 per share during the same period in 2013, which was based on a weighted average basic and diluted shares of 11.5 million.

Non-GAAP earnings per share in the third quarter of 2014 was $0.05 based on non-GAAP weighted average basic and diluted shares of 33.7 million, well above the midpoint of our guidance loss per share of $0.19. This compares to a non-GAAP net loss per share of $0.05 in the same period of 2013, which was based on non-GAAP weighted average basic and diluted shares of 26.2 million.

Capital expenditures, including property and equipment as well as internally used software, excluding capitalized stock compensation, were $6.3 million in the third quarter of 2014 and were primarily composed of investments in Buyer Cloud features and functionalities, capacity expansion, orders, mobile and video. Capitalized internally developed software was $2.1 million in the third quarter of 2014.

We expect capital expenditures to increase throughout the rest of 2014 and expect it to range between $20 million to $25 million this year. We closed Q3 2014 with $104.1 million in cash, which includes $86 million in the proceeds from our IPO in April net of expenses.

Debt including capital lease obligations was $0.2 million at the end of Q3 2014. Consistent with historical and seasonal trends, we expect revenue in Q4 to be higher than each of the first three quarters of this year.

And as a result of our strong third quarter results, we are raising our guidance for the remainder of the year. For the full year 2014, we expect revenue for the full year to be between $122 million and $123 million, adjusted EBITDA to be between $9 million and $10 million and non-GAAP loss per share to be between $0.06 and $0.03 based on approximately 32.1 million weighted average shares.

We'd further like to comment on some of the trends we see occurring in the business. We continue to hold our leadership position in reach and have experienced strong growth in RTB, fueled by increased bidding activity and pricing.

We operate in a large market and plan to invest in our business opportunity as more buyers and sellers increase their RTB activity across multiple platforms. We believe we will benefit from positive trends in the industry.

And as viewed on a trailing 12-months basis quarter-over-quarter, the average revenue per seller and average spend per buyer on our platform continued to increase. We expect to see continued near-term growth from international seller expansion efforts, primarily from existing territories with contributions from new territories.

Buyer technologies, orders and other product expansion efforts, mobile in which managed revenue grew 3x from the third quarter 2013 to the third quarter of 2014 and grew 50% from the second quarter 2014 to the third quarter of 2014, and continued expansion of RTB and related pricing and bidding activity. In summary, advertising is a large market and we are leading the fastest growing portion, automation.

Our strong financial results and RTB growth rates are evidence of this leadership. We continue to invest in growth and innovation with fiscal prudence.

We'd now like to open the line for any questions.

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.

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.

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 standardized, but the customization of the platform is different and dependent on that seller's needs. On the buyer side, the integrations there are also very sticky and could be quite complex.

If you look at the DSPs, they have to write actual code to be able to integrate into our exchange to be able to access their sellers. And that initial integration for sellers could be as short as weeks to integrate, but the full ramp of that customer takes a good six to 12 months.

And I'll explain the data portion of that in a second. And for buyers, that integration is actually a lot longer.

So for the DSPs to be able to integrate into our platform, that could be a good three-month cycle of development and then another three to six months for them to be able to synchronize the cookies and the data ideas for them to be able to access the users on their sellers, because we are the primary identifier for them to be able to access those users. As I mentioned before with the data, there's historical data.

When a seller integrates our platform, the platform is collecting and analyzing data for them, analytics on their sales. The algorithms they're using historical data to predict future trends.

So if they were to remove our platform and install another platform, they lose all those learnings. So we head into Q4 as an example, those sellers want to be able to take advantage of the learnings from last Q4 for this Q4 to be able to effectively price their inventory and algorithms need to do that.

So switching platforms, you sort of lose that historical data information that's part of the reason that our platform is so sticky. As we continue to move more and more into the orders business in addition to the auction product that we have, that orders business is directly connecting buyers and sellers.

So as they continue to process orders through the system, if they were to leave our platform, they would lose access to those buyers and the orders that come associated with it. So it's not necessarily an easy thing to just switch off and go switch on to another platform.

I think that's a unique characteristic of our business and being the exchange and not one of the demand side platforms. And then lastly to address the question about the contractual fees, we've toyed with this through the years.

In fact, initially, we were binding customers to long-term contracts, long-term agreed to rates, exclusivity functions and things like that. And what we've found is that that actually slowed down the sales cycle and that slowing down didn't necessarily create a great benefit, because we have such stickiness with our customers that we've consciously made the choice to shorten the sales cycle by shortening the legal process to get a customer up and running, because once we typically get a customer up and running, they typically stay with our platform.

So we've sacrificed the long-term contractual process to be able to accelerate the sales cycle to increase our growth and market share.

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.

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 being a platform company, as being the infrastructure that supports advertising, we continue to encourage transparency in the market and we continue to try to push buyers and sellers together, so they can do things like direct orders and fulfill them using automation across our platform.

Deal ID is something that we've pushed to be able to connect the buyers and sellers. And what that does is it forces transparency, and we think transparency is great for the market and we think the transparency will help continue to grow the market.

The challenge with Deal ID is that a lot of the buyers are buying platforms that exist on their platform are not transparent. With things like Deal ID, it forces that transparency and it also forces the buyer and seller together and some of these companies are reluctant to see that happen, either because it exposes their business model, which isn't necessarily bad, or it's putting their customer in direct contact with the seller, the supplier of that inventory, which they necessarily don't want to see happen as well.

So yeah, we continue to push this. Our direct orders product makes a big movement in this direction, but I'd say that's one of the other challenges that we're trying to convince a lot of these companies that transparency is good and is not a threat to the industry.

It's a quality characteristic of the market.

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.

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