PUBMATIC, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" included elsewhere in this Annual Report on Form 10-K. Overview We are an independent technology company seeking to maximize customer value by delivering digital advertising's supply chain of the future. Our sell-side platform empowers the world's leading digital content creators across the open internet to control access to their inventory and increase monetization by enabling marketers to drive ROI and reach addressable audiences across ad formats and devices. Since 2006, our infrastructure-driven approach has allowed for the efficient processing and utilization of data in real time. By delivering scalable and flexible programmatic innovation, we improve outcomes for our customers while championing a vibrant and transparent digital advertising supply chain. Our specialized cloud infrastructure platform provides superior monetization for publishers by increasing the value of an impression and providing incremental demand through our deep and growing relationships with buyers. We are aligned with our publisher and app developer partners by being independent. We do not own media and therefore do not have a vested interest in driving ad revenue to specific media properties. Our global platform is omnichannel, supporting a wide array of ad formats and digital device types, including mobile app, mobile web, desktop, display, video, OTT, CTV, and rich media. InDecember 2021 , our platform efficiently processed approximately 344 billion ad impressions daily, each in a fraction of a second, and 4.2 petabytes of data every day. During the fiscal year endedDecember 31, 2021 , we added approximately 250 new publishing partners. As ofDecember 31, 2021 , we served approximately 1,450 publishers and app developers representing over 97,000 individual domains and apps worldwide on our platform across a diverse group of content verticals such as news, e-commerce, gaming, media, weather, fashion, technology, and more, including many of the leading digital companies such as Yahoo, formerlyVerizon Media Group , and News Corp. We have demonstrated that we can retain and grow revenues from our publisher customers, as evidenced by our net dollar-based retention rate of 149% for the year endedDecember 31, 2021 and 122% for the year endedDecember 31, 2020 . We generate revenue from publishers primarily through revenue share agreements, generally one-year contracts that renew automatically for successive one-year periods, unless terminated prior to renewal. We primarily work with publishers and app developers who allow us direct access to their ad inventory, as well as select channel partners that meet our quality and scale thresholds. We refer to our publishers, app developers, and channel partners collectively as our publishers. We enter into written service agreements with our DSP buyers that allow them to use our platform to buy ad inventory, but we earn revenue from our publishers. Our platform service agreements with DSPs generally have one-year terms that renew automatically for successive one-year periods, unless terminated prior to renewal. We also negotiate SPO agreements with agencies and advertisers that encourage these buyers to spend a higher share of their advertising budgets on our platform. SPO agreements typically have a one-year term and renewal terms are generally discussed one quarter prior to a new term. The effect of these SPO agreements is to increase the volume of ad spend on our platform without corresponding increases in technology costs.
In the fourth quarter of 2021, mobile (including mobile video) and video (including OTT/CTV) combined comprised approximately 67% of our revenue. We anticipate mobile to continue increasing as a percentage of our
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--------------------------------------------------------------------------------total impressions and revenue in the future. We further expect video to constitute an increasingly important component of our business.
COVID-19
The COVID-19 pandemic and its variants has resulted in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, including those provided by certain of the advertisers on our platform. This situation could also potentially limit our ad buyers' budgets or disrupt sales channels and advertising and marketing activities generally. The duration of these disruptive effects will continue for an unknown period of time until the virus is contained or economic activity normalizes. With the decline in economic activity, our revenue growth slowed and turned negative in the second quarter of 2020. Although our revenue has subsequently returned to growth, the impact of the pandemic on our future growth and our results of operations is unknown and we are unable to accurately predict the future impact. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on a variety of factors, including the duration and spread of the virus, including new variants, and its impact on our publishers, ad buyers, industry, and employees, all of which are uncertain at this time and cannot be accurately predicted. See "Risk Factors" for further discussion of the adverse impacts of the COVID-19 pandemic on our business.
The table below summarizes the financial highlights of our business:
Year Ended December 31,
2021 2020 2019
(in thousands)
Revenue $ 226,908 $ 148,748 $ 113,871
Operating income 58,789 31,755 8,509
Net income 56,604 26,613 6,643
Adjusted EBITDA(1) 96,250 50,349 23,307Net cash provided by operating activities 88,681 24,330
35,125 _______________
(1)For a definition of Adjusted EBITDA, an explanation of our management's use of this measure, and a reconciliation of Adjusted EBITDA to net income, see "Non-GAAP Financial Measures" below.
Key Factors Affecting Our Performance
We believe our growth and financial performance are dependent on many factors, including those described below.
Growing access to valuable ad impressions
Our recent growth has been driven by a variety of factors including increased access to mobile web (display and video) and mobile app (display and video) impressions and desktop video impressions. Our performance is affected by our ability to maintain and grow our access to valuable ad impressions from current publishers as well as through new relationships with publishers. The number of ad impressions processed on our platform was approximately 9.0 trillion, 10.3 trillion, 11.8 trillion, 15.8 trillion, 18.5 trillion, 20.2 trillion, 23.9 trillion and 29.6 trillion, for each of the three months endedMarch 31, 2020 ,June 30, 2020 ,September 30, 2020 andDecember 31, 2020 ,March 31, 2021 ,June 30, 2021 ,September 30, 2021 ,December 31, 2021 , respectively.
Monetizing ad impressions for publishers and buyers
We focus on monetizing digital impressions by coordinating daily over a hundred billion real-time auctions and nearly a trillion bids globally, using our specialized cloud software, machine learning algorithms, and scaled
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transaction infrastructure. Valuable ad impressions are transparent and data
rich, viewable by humans, and verifiable. Each ad impression we auction consists
of 444 independent data parameters, which can yield valuable insights if
recorded and analyzed properly. This processing of voluminous data for each ad
impression must occur in less than half a second as consumers expect a seamless
digital ad experience. By deploying our specialized software and hardware and
continuously optimizing our machine learning algorithms, we are able to derive
superior outcomes by increasing advertiser ROI and publisher revenue, while
increasing the cost efficiency of our platform and our customers' businesses. We
continually assess impressions from new and existing publishers through a
rigorous validation process. We add or remove impressions from our platform
based on an assessment of the projected value of the impressions, which is
influenced by the type of publisher and its related consumers, as well as the
potential volume of monetizable impressions and ad format types, such as digital
video. We continuously create and iterate algorithms that leverage vast datasets
flowing through our infrastructure to improve the liquidity in our marketplace.
Our ability to drive successful outcomes in the real-time auction process on
behalf of our publishers and buyers will affect our operating results.
Identifying valuable ad impressions that we can profitably monetize at scale
We continuously review our available inventory from existing publishers across every format (mobile, desktop, digital video, OTT, CTV, and rich media). The factors we consider to determine which impressions we process include transparency, viewability, and whether or not the impression is human sourced. By consistently applying these criteria, we believe that the ad impressions we process will be valuable and marketable to advertisers. In addition, using a combination of proprietary analysis driven by machine learning algorithms that are continuously updated along with specialized third-party tools, we aim to exclude low value impressions from our platform and, in some cases, may suspend certain publishers, or particular publisher sites and apps, from using our platform if they do not meet our standards. Our confidence in our ability to achieve our quality goals is backed by a fraud-free guarantee to all of our buyers which we introduced in 2017. We believe that this rigorous commitment to quality helps us maintain our reputation as a leader in the programmatic advertising ecosystem. Our financial performance depends in part on how efficiently and effectively we can conduct these activities at scale.
Increasing revenue from publishers and advertising spend from buyers
We leverage our extensive platform capabilities and the subject matter expertise
of our team members to grow revenue from our publishers and increase advertising
spending from our buyers. Our sales and marketing team includes customer success
pods to enhance customer knowledge and implementation of best practices. Once we
onboard a new customer, we seek to expand our relationship with existing
publishers by establishing multiple header bidding integrations by leveraging
our omnichannel capabilities to maximize our access to publishers' ad formats
and devices, and expanding into the various properties that a publisher may own
around the world. We may also up-sell additional products to publisher customers
including our header bidding management, identity, and audience solutions. We
automate workflow processes whenever feasible to drive predictable and
value-added outcomes for our customers and increase productivity of our
organization.
Net dollar-based retention rate is an important indicator of publisher
satisfaction and usage of our platform, as well as potential revenue for future
periods. We calculate our net dollar-based retention rate at the end of each
year. We calculate our net dollar-based retention rate by starting with the
revenue from publishers in the last prior year ("Prior Period Revenue"). We then
calculate the revenue from these same publishers in the current year ("Current
Period Revenue"). Current Period Revenue includes any upsells and is net of
contraction or attrition, but excludes revenue from new publishers. Our net
dollar-based retention rate equals the Current Period Revenue divided by Prior
Period Revenue. Our net dollar-based retention rate was 149% for the year ended
December 31, 2021 , and 122% for the year ended December 31, 2020 . Our growth in
the period ended December 31, 2021 and 2020 was primarily attributable to an
increase in the number of ad impressions processed from our publishers,
upselling additional products, penetration of header bidding for mobile app and
digital video, and increased demand from the growth of our buyer relationships
primarily through SPO agreements.
We work with DSPs to help them reduce their costs and improve advertiser ROI,
which in turn makes us the specialized cloud infrastructure platform of choice
for many of our buying partners. As buyers increasingly
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consolidate their spending with fewer larger technology platforms, we seek to
bring an increased proportion of their digital ad spending to our platform
through direct deals. We have entered into SPO agreements directly with buyers,
advertisers and agencies through various arrangements ranging from custom data
and workflow integrations, product features, and volume-based business terms.
The effect of these SPO agreements is to increase the volume of ad spend on our
platform without corresponding increases in technology costs.
Managing industry dynamics
We operate in the rapidly evolving digital advertising industry. Due to the scale and complexity of the digital advertising ecosystem, direct sales via manual, person-to-person processes are insufficient for delivering a real-time, personalized ad experience, creating the need for programmatic advertising. In turn, advances in programmatic technologies have enabled publishers to auction their ad inventory to more buyers, simultaneously, and in real time through a process referred to as header bidding. Header bidding has also provided advertisers with transparent access to ad impressions. As advertisers keep pace with ongoing changes in the way that consumers view and interact with digital media there will be further innovation and we anticipate that header bidding will be extended into new areas such as OTT/CTV. We believe our focus on publishers and buyers has allowed us to understand their needs and our ongoing innovation has enabled us to quickly adapt to changes in the industry, develop new solutions and do so cost effectively. Our performance depends on our ability to keep pace with industry changes such as header bidding and the evolving needs of our publishers and buyers while continuing our cost efficiency.
Expanding and managing investments
We make software and hardware infrastructure investment decisions to meet expected increases in ad impressions on both a global and regional data center level throughout the calendar year based on the projected quantity, ad format type, and associated data requirements. In parallel, we seek to continuously improve our infrastructure utilization. Our ability to identify and monetize high value impressions allows us to operate more efficiently because the cost of processing low-value impressions and high-value impressions are approximately the same. We believe that increasing utilization of our platform leads to improved outcomes for our customers and more efficient and effective operations for us. To achieve improved utilization, we leverage the data on our platform through extensive application of artificial intelligence technologies, including machine learning and natural language processing. The magnitude and timing of our investments in our software and hardware may lead to fluctuations in our operating results. Expanding internationally We plan to continue expanding our international presence and making additional investments in sales and marketing and infrastructure to support our long-term growth and to position ourselves for expected increases in the penetration of programmatic advertising globally. We expect programmatic advertising to grow at different rates in different geographic markets. Our publishers outside ofthe United States typically have smaller amounts of programmatic inventory, and as a result, our sales and marketing expenses associated with non-U.S. publishers are generally proportionally higher. We are constantly evaluating new markets with a strategy to use our existing infrastructure and adjacent sales offices, or by expanding our infrastructure footprint and placing personnel directly in those markets. Our ability to efficiently expand into new markets will affect our operating results.
Managing Seasonality
The global advertising industry experiences seasonal trends that affect the vast
majority of participants in the digital advertising ecosystem. Most notably,
advertisers have historically spent relatively more in the fourth quarter of the
calendar year to coincide with the holiday shopping season, and relatively less
in the first quarter. We expect seasonality trends to continue, and our ability
to manage our resources in anticipation of these trends will affect our
operating results.
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--------------------------------------------------------------------------------Key Components of Our Results of Operations
Revenue
We generate revenue from publishers who use our platform. Our platform allows publishers to sell, in real time, customized ad inventory to buyers and provides automated inventory management and monetization tools to publishers across various device types and digital ad formats. We generate revenue primarily through fees charged to our publishers, which are generally a percentage of the value of the advertising impressions that publishers monetize on the platform. We report revenue on a net basis. This represents gross billings to buyers, net of amounts we pay publishers. We record our accounts receivable at the amount of gross billings to buyers, net of allowances, for the amounts we are responsible to collect, and we record our accounts payable at the net amount payable to publishers. Accordingly, both accounts receivable and accounts payable appear large in relation to revenue, which is reported on a net basis.
Our revenue recognition policies are discussed in more detail under "-Critical Accounting Policies and Estimates."
Cost of Revenue
Cost of revenue consists of data center co-location costs, depreciation expense related to hardware supporting our platform, amortization expense related to capitalized internal use software development costs, personnel costs, and allocated facilities costs. Personnel costs include salaries, bonuses, stock-based compensation, and employee benefit costs, and are primarily attributable to our cloud operations group, which maintains our servers, and our client operations group, which is responsible for the integration of new publishers and buyers and providing customer support for existing customers. We expect cost of revenue to generally increase in absolute dollars in future periods.
Operating Expenses
Technology and Development. Technology and development expenses consist of
personnel costs, including salaries, bonuses, stock-based compensation, and
employee benefits costs, allocated facilities costs, and professional services.
These expenses include costs incurred in the development, implementation and
maintenance of internal use software, including platform and related
infrastructure. We expend technology and development costs as incurred, except
to the extent that such costs are associated with internal use software
development that qualifies for capitalization. We expect technology and
development expenses to generally increase in absolute dollars in future
periods.
Sales and Marketing. Sales and marketing expenses consist of personnel costs,
including salaries, bonuses, stock-based compensation, and employee benefits
costs, for our employees engaged in sales, sales support, marketing, business
development, and customer relationship functions. Sales and marketing expenses
also include expenses related to promotional, advertising and marketing
activities, allocated facilities costs, travel, and entertainment primarily
related to sales activity and professional services. We expect sales and
marketing expenses to increase in absolute dollars in future periods.
General and Administrative. General and administrative expenses consist of
personnel costs, including salaries, bonuses, stock-based compensation, and
employee benefits costs for our executive, finance, legal, human resources,
information technology, and other administrative employees. General and
administrative expenses also include outside consulting, legal and accounting
services, allocated facilities costs, and travel and entertainment primarily
related to intra-office travel and conferences.
We expect to invest in corporate infrastructure and incur additional expenses
associated with the transition to and operation as a public company, including
increased legal and accounting costs, increased investor relations costs, higher
insurance premiums, and compliance costs associated with developing the
requisite infrastructure
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--------------------------------------------------------------------------------required for internal controls. As a result, we expect general and administrative expenses to increase in absolute dollars in future periods.
Total Other Income (expense), Net
Total other income (expense), net consists of interest income, unrealized gain on equity investment and other income (expense), net. Interest income is generated by investing excess cash into money market accounts and marketable securities. Unrealized gain on equity investment consists of gains and losses on our investment in equity securities, including unrealized gains and losses from market price changes on securities we continue to hold. Other income (expense), net consists primarily of gains and losses from foreign currency exchange transactions and the change in fair value of our convertible preferred stock warrant liability, which we previously marked-to-market until the warrant's exercise in the third quarter of 2019. We believe that investment gains and losses, whether realized from dispositions or unrealized from changes in market prices of equity securities, are generally meaningless in understanding our reported results or evaluating the economic performance of our businesses. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.
Provision for Income Taxes
The provision for income taxes consists primarily of federal, state, and foreign income taxes. Our income tax provision may be significantly affected by changes to our estimates for tax in jurisdictions in which we operate and other estimates utilized in determining the global effective tax rate. Actual results may also differ from our estimates based on changes in economic conditions. Such changes could have a substantial impact on the income tax provision. We reevaluate the judgments surrounding our estimates and make adjustments, as appropriate, each reporting period. Our effective tax rate differs from theU.S. federal statutory income tax rate due to state taxes, foreign tax rate differences, technology and development tax credits, Section 162(m) limitation, and stock-based compensation. Realization of our deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance, we consider our historical, as well as future projected, taxable income along with other objectively verifiable evidence. Objectively verifiable evidence includes our realization of tax attributes, assessment of tax credits, and utilization of net operating loss carryforwards during the year.
Non-GAAP Financial Measures
In addition to our results determined in accordance withU.S. generally accepted accounting principles ("GAAP"), including, in particular operating income, net cash provided by operating activities, and net income, we believe that Adjusted EBITDA, a non-GAAP measure, is useful in evaluating our operating performance. We define 53
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Adjusted EBITDA as net income adjusted for stock-based compensation expense, depreciation and amortization, impairments of long-lived assets, interest income, and provision for income taxes.
The following table presents a reconciliation of Adjusted EBITDA to net income for each of the periods indicated:
Year Ended December 31,
2021 2020 2019
(in thousands)
Net income $ 56,604 $ 26,613 $ 6,643
Add back (deduct):
Stock-based compensation 14,107 3,563 2,002
Depreciation and amortization 23,073 15,743 12,671
Unrealized gain on equity investment (5,433) - -
Impairment of internal use software - - 702
Interest income (300) (537) (1,290)
Provision for income taxes 8,199 4,967 2,579
Adjusted EBITDA $ 96,250 $ 50,349 $ 23,307 In addition to operating income and net income, we use Adjusted EBITDA as a measure of operational efficiency. We believe that this non-GAAP financial measure is useful to investors for period to period comparisons of our business and in understanding and evaluating our operating results for the following reasons:
•Adjusted EBITDA is widely used by investors and securities analysts to measure a company's operating performance without regard to items such as stock-based compensation expense, depreciation and amortization, interest expense, provision for income taxes, and certain one-time items such as impairments of long-lived assets, that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired; •Our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, including the preparation of our annual operating budget, as a measure of operating performance and the effectiveness of our business strategies and in communications with our board of directors concerning our financial performance; and •Adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.
Our use of this non-GAAP financial measure has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are as follows:
•Adjusted EBITDA does not reflect: (a) changes in, or cash requirements for, our working capital needs; (b) the potentially dilutive impact of stock-based compensation; or (c) tax payments that may represent a reduction in cash available to us;
•Although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
Because of these and other limitations, you should consider Adjusted EBITDA along with other GAAP-based financial performance measures, including net income and our GAAP financial results.
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--------------------------------------------------------------------------------Results of Operations
The following tables set forth our consolidated results of operations data (in
thousands) and such data as a percentage of revenue for the periods presented.
The period-to-period comparison of results is not necessarily indicative of
results for future periods.
Year Ended December 31,
2021 2020 2019
Consolidated Statements of Operations:
Revenue $ 226,908 $ 148,748 $ 113,871
Cost of revenue(1) 58,313 41,186 36,104
Gross profit 168,595 107,562 77,767
Operating expenses(1):
Technology and development 15,885 12,250 12,453
Sales and marketing 58,160 43,297 36,498
General and administrative 35,761 20,260 20,307
Total operating expenses 109,806 75,807 69,258
Operating income 58,789 31,755 8,509
Total other income (expense), net 6,014 (175) 713
Income before provision for income taxes 64,803 31,580
9,222 Provision for income taxes 8,199 4,967 2,579 Net income$ 56,604 $ 26,613 $ 6,643 55
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(1)Amounts include stock-based compensation before tax benefit as follows:
Year Ended December 31,
2021 2020 2019
(in thousands)
Cost of revenue $ 825 $ 86 $ 26
Technology and development 2,232 599 402
Sales and marketing 5,176 1,101 684
General and administrative 5,874 1,777 890
Total stock-based compensation expense $ 14,107 $ 3,563 $ 2,002
Year Ended December 31,
2021 2020 2019
(as percentage of revenue)
Revenue 100 % 100 % 100 %
Cost of revenue 26 28 32
Gross profit 74 72 68
Operating expenses:
Technology and development 7 8 11
Sales and marketing 26 29 32
General and administrative 16 14 18
Total operating expenses 48 51 61
Operating income 26 21 7
Total other income (expense), net 3 - 1
Income before provision for income taxes 29 21
8
Provision for income taxes 4 3 2 Net income 25 % 18 % 6 %
Comparison of the Years Ended
Revenue, Cost of Revenue and Gross Profit
Year Ended December 31,
2021 2020 $ Change % Change
(dollars in thousands)
Revenue $ 226,908 $ 148,748 $ 78,160 53 %
Cost of revenue 58,313 41,186 17,127 42 %
Gross profit 168,595 107,562 61,033 57 %
Gross profit margin 74 % 72 %
Revenue increased $78.2 million , or 53%, in 2021 driven by growth in impressions
processed on our platform from both existing and new publishers. For the year
ended 2021, we served approximately 1,450 publishers worldwide on our platform,
compared to approximately 1,200 publishers worldwide for the year ended 2020,
including approximately 250 net new publishers in 2021, which represented over
62,000 domains and 35,000 apps in total, compared to approximately 360 new
publishers in 2020, which represented approximately 60,000 domains and 20,000
apps in total. For purposes of our publisher count, we aggregate multiple
business accounts from separate divisions, segments or subsidiaries into a
single "master" publisher based on our assessment of the related
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--------------------------------------------------------------------------------nature of the group. In addition, in 2021 we completed a number of SPO initiatives which increased buyer spend on our platform.
We expect revenue to continue to grow in 2022, with mobile and omnichannel video, which is the combination of short form video and OTT/CTV, as our primary growth drivers.
Cost of revenue increased$17.1 million , primarily due to a$7.3 million increase in depreciation of data center equipment and amortization of internal use software, a$3.9 million increase in data centers expansion and upgrades, a$3.1 million increase in personnel costs as headcount increased by 26% in order to support our growing business, a$1.5 million in IT support expenses, and a$0.9 million in software expenses. Overall, our cost of revenue per impression processed in 2021 declined by 28% compared to 2020.
Our gross margin of 74% in 2021 increased compared to 2020 of 72% due to greater utilization of our platform offset by investments for capacity expansion.
We expect the cost of revenue to be higher in 2022 compared to 2021 in absolute
dollars primarily due to costs associated with the continued expansion of our
capacity to process impressions to support revenue growth.
Technology and Development
Year Ended December 31,
2021 2020 $ Change % Change
(dollars in thousands)
Technology and development $ 15,885 $ 12,250 $ 3,635 30 %
Percent of revenue 7 % 8 %
The increase in technology and development costs was primarily due to an
increase of
We expect technology and development expenses to increase in 2022 compared to
2021 in absolute dollars, primarily due to the additional headcount investment
in our key growth opportunities.
Sales and Marketing
Year Ended December 31,
2021 2020 $ Change % Change
(dollars in thousands)
Sales and marketing $ 58,160 $ 43,297 $ 14,863 34 %
Percent of revenue 26 % 29 %
Sales and marketing costs increased primarily due to a
We expect sales and marketing expenses to increase in 2022 compared to 2021 in
absolute dollars primarily due to additional headcount investment and marketing
programs.
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General and Administrative
Year Ended December 31,
2021 2020 $ Change % Change
(dollars in thousands)
General and administrative $ 35,761 $ 20,260 $ 15,501 77 %
Percent of revenue 16 % 14 %
General and administrative expense increased primarily due to a
We expect general and administrative expenses to increase in 2022 compared to 2021 in absolute dollars primarily due to the additional headcount and increased costs associated with being a public company.
Total Other Income (Expense), net
Year Ended December 31,
2021 2020 $ Change % Change
(dollars in thousands)
Total other income (expense), net $ 6,014 $ (175) Total other income (expense), net increased for the year endedDecember 31, 2021 , compared to the prior year period, primarily driven by unrealized gains related to our equity investment and as a result of currency fluctuations, partially offset by lower interest rates and as a result of holding a larger portion of our excess cash in lower yielding money market investments. Provision for Income Taxes Year Ended December 31, 2021 2020 $ Change % Change (dollars in thousands) Provision for income taxes$ 8,199 $ 4,967 $ 3,232 65 % The difference between the effective tax rate in 2021 of 13% and the federal statutory income tax rate of 21% was primarily due to deductible stock-based compensation, federal research and development credit, and a decrease in transfer pricing reserve due to expiration of statute of limitation, partially offset by Section 162(m) limitation and state taxes. The difference between the effective tax rate in 2020 of 16% and the federal statutory income tax rate of 21% was primarily due to deductible stock-based compensation, the foreign tax rate differential and federal research and development credits, partially offset by a valuation allowance on state research and development credits. For discussion on comparison of the fiscal years endedDecember 31, 2020 andDecember 31, 2019 , please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . 58 --------------------------------------------------------------------------------
Quarterly Results of Operations
The following table sets forth our unaudited quarterly consolidated statements of operations data for each of the eight quarters in the period endedDecember 31, 2021 . The information for each of these quarters has been prepared on a basis consistent with our audited annual consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K and, in our opinion includes all adjustments, consisting only of normal recurring adjustments necessary for the fair statement of the financial information contained in those statements. The following unaudited consolidated quarterly financial data should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. These quarterly results are not necessarily indicative of our operating results for a full year or any future period.
Three Months Ended
March June Sep Dec March June Sep Dec
2020 2020 2020 2020 2021 2021 2021 2021
(unaudited)
(in thousands, except share and per share data)
Revenue $ 28,348 $ 26,361 $ 37,797 $ 56,242 $ 43,608 $ 49,658 $ 58,086 $ 75,556
Cost of revenue 10,056 9,189 10,491 11,450 12,300 13,088 16,020 16,905
Gross profit 18,292 17,172 27,306 44,792 31,308 36,570 42,066 58,651
Operating expenses:
Technology and
development 2,919 2,971 3,390 2,970 3,738 3,860 4,139 4,147
Sales and marketing 9,995 9,236 10,911 13,155 12,789 13,997 15,004 16,369 General and administrative 4,349 4,236 5,214 6,461 8,139 8,580 8,875 10,168 Total operating expenses 17,263 16,443 19,515 22,586 24,666 26,437 28,018 30,684 Operating income 1,029 729 7,791 22,206 6,642 10,133 14,048 27,967 Total other income (expense), net 274 8 61 (518) 199 (239) 277 5,776 Income before provision for income taxes 1,303 737 7,852 21,688 6,841 9,894 14,325
33,743
Provision for (benefit from) income taxes 399 84 1,621 2,863 1,923 (27) 799 5,504 Net income$ 904 $ 653 $ 6,231 $ 18,825 $ 4,918 $ 9,921 $ 13,526 $ 28,239 Net income attributable to common stockholders Basic $ - $ -$ 1,195 $ 7,724 $ 4,918 $ 9,921 $ 13,526 $ 28,239 Diluted $ - $ -$ 1,574 $ 9,348 $ 4,918 $ 9,921 $ 13,526 $ 28,239 Net income per share attributable to common stockholders: Basic $ - $ -$ 0.12 $ 0.39 $ 0.10 $ 0.20 $ 0.27 $ 0.55 Diluted $ - $ -$ 0.10 $ 0.34 $ 0.09 $ 0.18 $ 0.24 $ 0.50 59
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Three Months Ended
March June Sep Dec March June Sep Dec
2020 2020 2020 2020 2021 2021 2021 2021
(unaudited)
(as percentage of revenue)
Revenue 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
Cost of revenue 35 % 35 % 28 % 20 % 28 % 26 % 28 % 22 %
Gross profit 65 % 65 % 72 % 80 % 72 % 74 % 72 % 78 %
Operating expenses:
Technology and
development 10 % 11 % 9 % 5 % 9 % 8 % 7 % 5 %
Sales and marketing 35 % 35 % 29 % 23 % 29 % 28 % 26 % 22 %
General and
administrative 15 % 16 % 14 % 11 % 19 % 17 % 15 % 14 %
Total operating
expenses 60 % 62 % 52 % 39 % 57 % 53 % 48 % 41 %
Operating income 5 % 3 % 20 % 41 % 15 % 21 % 24 % 37 %
Total other income
(expense), net 1 % - % - % (1) % - % (1) % - % 7 %
Income before
provision for income
taxes 6 % 3 % 20 % 40 % 15 % 20 % 24 % 44 %
Provision for
(benefit from) income
taxes 1 % - % 4 % 5 % 4 % - % 1 % 7 %
Net income 5 % 3 % 16 % 35 % 11 % 20 % 23 % 37 %
Set forth below is a reconciliation of Adjusted EBITDA to net income for the
periods presented:
Three Months Ended
March June Sep Dec March June Sep Dec
2020 2020 2020 2020 2021 2021 2021 2021
(unaudited)
(dollars in thousands)
Net income $ 904 $ 653 $ 6,231 $ 18,825 $ 4,918 $ 9,921 $ 13,526 $ 28,239
Add back (deduct):
Stock-based compensation(1) 495 500 1,444 1,124 3,165 3,629 3,714 3,599
Depreciation and
amortization 3,586 3,810 4,178 4,169 4,550 5,138 6,304 7,081
Unrealized gain on equity
investment - - - - - - - (5,433)
Interest income (260) (132) (83) (62) (62) (67) (79) (92)
Provision for (benefit
from) income taxes 399 84 1,621
2,863 1,923 (27) 799 5,504
Adjusted EBITDA $ 5,124 $ 4,915 $ 13,391 $ 26,919 $ 14,494 $ 18,594 $ 24,264 $ 38,898
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(1)Amounts include stock-based compensation before tax benefit as follows:
Three Months Ended
March June Sep Dec March June Sep Dec
2020 2020 2020 2020 2021 2021 2021 2021
(unaudited)
(dollars in thousands)
Cost of revenue $ 10 $ 11 $ 10 $ 56 $ 168 $ 204 $ 233 $ 220
Technology and
development 74 80 222 222 481 579 586 586
Sales and marketing 180 183 358 380 1,161 1,290 1,388 1,337
General and
administrative 231 226 854 466 1,355 1,556 1,507 1,456
Total stock-based
compensation expense $ 495 $ 500 $ 1,444 $ 1,124 $ 3,165 $ 3,629 $ 3,714 $ 3,599 Liquidity and Capital Resources
We have financed our operations and capital expenditures primarily through utilization of cash generated from operations, as well as a public offering of our common stock. As ofDecember 31, 2021 , we had cash, cash equivalents, and marketable securities of$159.6 million and net working capital, consisting of current assets less current liabilities, of$193.8 million . As ofDecember 31, 2021 , we had retained earnings of$99.3 million . We believe our existing cash, cash equivalents, marketable securities and anticipated net cash provided by operating activities, together with available borrowings under our credit facility, will be sufficient to meet our working capital requirements for at least the next 12 months. However, if our operating performance during the next 12 months is below our expectations, our liquidity and ability to operate our business could be adversely affected. In light of the potential impact worldwide of COVID-19 pandemic, we are closely monitoring the effect that current economic conditions may have on our working capital requirements. To date, the pandemic has not had a material negative impact on our cash flow or liquidity. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under "Risk Factors." In the future, we may attempt to raise additional capital through the sale of equity securities or through equity-linked or debt financing arrangements. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of additional indebtedness, we may be subject to increased fixed payment obligations and could also be subject to additional restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. Any future indebtedness we incur may result in terms that could be unfavorable to equity investors. We cannot guarantee that we will be able to raise additional capital in the future on favorable terms, or at all. Any inability to raise capital could adversely affect our ability to achieve our business objectives. Revolving Line of Credit
In
As ofDecember 31, 2021 , the amount we can borrow under the Loan Agreement was the lesser of$25.0 million or 80% of eligible accounts receivable less certain reserves, minus the aggregate principal amount of all outstanding advances. Interest accrues on advances under the Loan Agreement at a variable rate equal to the prime rate. For any quarter where the average closing outstanding balance under the Loan Agreement is less than$5 61 -------------------------------------------------------------------------------- million, a fee for such unused capacity in the amount of 0.40% per annum of the average unused portion is charged and is payable in arrears. As ofDecember 31, 2021 , the applicable interest rate under the Loan Agreement was 3.25%. In June, 2021, we amended the Loan Agreement to extend its maturity date toJune 6, 2024 . As ofDecember 31, 2021 , there were no outstanding borrowings under the Loan Agreement. Our obligations under the Loan Agreement are secured by substantially all of our assets excluding our intellectual property. The Loan Agreement contains affirmative covenants including financial covenants that, among other things, require us to maintain an adjusted quick ratio of no less than 1.0 to 1.0. The adjusted quick ratio is defined as the ratio of unrestricted cash and cash equivalents at SVB, plus billed accounts receivable to total accounts payable plus all SVB loans outstanding and outstanding letters of credit. The Loan Agreement also restricts us from paying dividends to stockholders without prior consent from SVB. We were in compliance with the covenants as ofDecember 31, 2021 . Cash Flows
The following table summarizes our cash flows for the periods presented:
Year Ended December 31,
2021 2020 2019
(in thousands)
Net cash provided by operating activities $ 88,681 $ 24,330 $ 35,125
Net cash used in investing activities (96,723) (29,877) (22,089) Net cash provided by (used in) financing activities 9,359 52,485
(1)
Net increase (decrease) in cash and cash equivalents
Operating Activities Our cash flows from operating activities are primarily influenced by growth in our operations, increases or decreases in collections from our buyers and related payments to our publishers, as well as our investment in personnel to support the anticipated growth of our business. Cash flows from operating activities have been affected by changes in our working capital, particularly changes in accounts receivable and accounts payable. The timing of cash receipts from buyers and payments to publishers can significantly impact our cash flows from operating activities. In addition, we expect seasonality to impact quarterly cash flows from operating activities. For the year endedDecember 31, 2021 , net cash provided by operating activities of$88.7 million resulted primarily from net income of$56.6 million , adjustments for non-cash expenses of$38.5 million , including$23.1 million for depreciation and amortization,$14.1 million for stock-based compensation, and$4.8 million for deferred income taxes, and an increase in accounts receivable of$67.4 million , partially offset by an increase in accounts payable of$68.3 million . For the year endedDecember 31, 2020 , net cash provided by operating activities of$24.3 million resulted primarily from net income of$26.6 million , adjustments for non-cash expenses of$22.6 million , including$15.7 million for depreciation and amortization,$2.9 million for deferred income taxes and$3.6 million for stock-based compensation, and an increase in accounts receivable of$102.2 million , partially offset by an increase in accounts payable of$77.4 million . 62
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Investing Activities
Our investing activities primarily included investments in marketable securities, purchases of equipment as we expanded the infrastructure in our third-party data centers, and capitalized internal-use software costs in support of enhancing our platform. Purchases of property and equipment may vary from period-to-period due to the timing of the expansion of our data centers, the addition of headcount, and the development cycles of our software development. As our business grows, we expect our capital expenditures and our investment activity to continue to increase. For the year endedDecember 31, 2021 , we used$96.7 million of cash in investing activities, consisting of a net increase in investments of marketable securities of$57.4 million ,$30.4 million in purchases of property and equipment (primarily data center infrastructure), and$8.9 million of investments in capitalized internal use software. For the year endedDecember 31, 2020 , we used$29.9 million of cash in investing activities, consisting of$24.2 million in purchases of property and equipment (primarily data center infrastructure),$7.2 million of investments in capitalized internal use software offset by a net decrease in investments of marketable securities of$1.5 million .
Financing Activities
For the year endedDecember 31, 2021 , net cash provided by financing activities of$9.4 million was primarily due to$5.4 million proceeds from stock option exercises and$4.8 million proceeds from the employee stock purchase plan, partially offset by$0.8 million due to payments of issuance costs of Class A common stock in connection with the IPO. For the year endedDecember 31, 2020 , net cash provided by financing activities of$52.5 million was primarily due to proceeds from the issuance of Class A common stock in connection with the IPO, net of underwriting discounts and commissions and other offering costs of$45.8 million , proceeds from repayment of stockholders' notes receivables of$4.3 million and proceeds from exercise of stock options of$2.4 million . For discussion on operating, investing, and financing activities of the fiscal year endedDecember 31, 2019 , see the Liquidity and Capital Resources section disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K, which was filed with theSEC onMarch 26, 2021 and hereby incorporated by reference herein and considered part of this Annual Report on Form 10-K only to the extent referenced.
Contractual Obligations and Future Cash Requirements
Our principal contractual obligations consist of non-cancelable leases for our various facilities. In certain cases, the terms of the lease agreements provide for rental payments that increase over time. The following table summarizes our contractual obligations, atDecember 31, 2021 (in thousands): Payments due by period Less than 1 More than 5 Total year 1 - 3 years 3 - 5 years years Other contractual obligations(1) 31,781 10,506 21,138 137 - Operating lease liabilities 23,210 4,298 6,929 7,233 4,750 Finance lease liabilities 922 136 285 302 199 Total$ 55,913 $ 14,940 $ 28,352 $ 7,672 $ 4,950 ______________ 63
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(1)Other contractual obligations consist primarily of contractual obligations to third-party data center providers.
As ofDecember 31, 2021 , we had$2.4 million of long-term income tax liabilities, including interest, related to uncertain tax positions. Because of the high degree of uncertainty regarding the settlement of these liabilities, we are unable to estimate the years in which future cash outflows may occur. As a result, this amount is not included in the contractual obligations table above.
Off-Balance Sheet Arrangements
ThroughDecember 31, 2021 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with GAAP. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenue and expenses. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, and adjust those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from these estimates and assumptions. We believe estimates and assumptions associated with the evaluation of revenue recognition criteria, including the determination of revenue reporting as net versus gross in our revenue arrangements, as well as internal use software development costs, stock-based compensation expense, and income taxes have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
Revenue Recognition
We refer to our publishers, app developers, and channel partners collectively as our publishers. We generate revenue through the monetization of publisher ad impressions processed on our platform. Our platform allows publishers to sell, in real time, ad impressions to buyers and provides automated inventory management and monetization tools to publishers across various device types and digital ad formats. We charge publishers a fee, which is typically a percentage of the value of the impressions monetized through our platform. The determination as to whether revenue should be reported gross of amounts billed to buyers (gross basis) or net of payments to publishers (net basis) requires significant judgment, and is based on our assessment of whether we are acting as the principal or an agent in the transaction. We have determined that we do not act as the principal in the purchase and sale of digital advertising inventory because we do not control the advertising inventory and do not set the price which is the result of an auction within the marketplace. Based on these and other factors, we report revenue on a net basis. See "Part II - Item 8. Financial Statements and Supplementary Data - Note 2" for more information on revenue recognition.
Internal Use Software Development Costs
We capitalize certain internal use software development costs associated with
creating and enhancing internal use software related to our platform and
technology infrastructure. These costs include personnel and related employee
benefits expenses for employees who are directly associated with and who devote
time to software projects, and external direct costs of materials and services
consumed in developing or obtaining the software. We expense software
development costs that do not meet the criteria for capitalization as incurred
and record them in technology and development expenses in the consolidated
statements of operations.
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Software development activities generally consist of three stages: (i) the
planning stage; (ii) the application and infrastructure development stage; and
(iii) the post implementation stage. Costs incurred in the planning and post
implementation stages of software development, including costs associated with
the post configuration training and repairs and maintenance of the developed
technologies, are expensed as incurred. We capitalize costs associated with
software developed for internal use when both the preliminary project stage is
completed and management has authorized further funding for the completion of
the project. We capitalize costs incurred in the application and infrastructure
development stages, including significant enhancements and upgrades.
Capitalization ends once a project is substantially complete and the software
and technologies are ready for their intended purpose. We amortize internal use
software development costs using a straight-line method over the estimated
useful life of two to five years, commencing when the software is ready for its
intended use.
Stock-Based Compensation
Stock-based compensation expense related to stock options, restricted stock
units, and awards granted under our employee stock purchase plan ("ESPP") is
measured and recognized in our consolidated financial statements based on the
fair value of the awards granted. The fair values of our ESPP and stock option
awards are estimated on the grant date using the Black-Scholes option-pricing
model. The fair value of restricted stock is calculated using the closing market
price of our common stock on the date of grant.
Stock-based compensation expense related to stock options and restricted stock
is recognized on a straight-line basis over the requisite service periods of the
awards, which is generally four years. Stock-based compensation expense for ESPP
awards is recognized on a graded-vesting attribution basis over the requisite
service period of each award.
For additional information regarding stock-based compensation and the assumptions used for determining the fair value of stock options and ESPP awards, refer to Note 2-Basis of Presentation and Summary of Significant Accounting Policies and Note 10-Stockholders' Equity and Stock Option Plans.
Income Taxes
Our income tax provision may be significantly affected by changes to our estimates for tax in jurisdictions in which we operate and other estimates utilized in determining the global effective tax rate. Actual results may also differ from our estimate based on changes in economic conditions. Such changes could have a substantial impact on the income tax provision. We evaluate the judgments surrounding our estimates and make adjustments, as appropriate, each reporting period. Deferred income tax assets and liabilities are determined based upon the net effects of the differences between the consolidated financial statements carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed. A valuation allowance is used to reduce some or all of the deferred tax assets if, based upon the weight of available evidence, it is more likely than not that those deferred tax assets will not be realized. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized. We recognize interest and penalties accrued related to our uncertain tax positions in our income tax provision in the accompanying consolidated statement of operations.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements included in Part II, Item 8
of this Form 10-K, for recently adopted accounting pronouncements and recently
issued accounting pronouncements not yet adopted.
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