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FUEL > SEC Filings for FUEL > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for ROCKET FUEL INC.

Form 10-Q for ROCKET FUEL INC.


14-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, (the "Exchange Act"). The words "believe," "may," "will," "potentially," "estimate," "continue," "anticipate," "intend," "could," "would," "project," "plan," "expect" and similar expressions that convey uncertain expectations of future events or outcomes are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the following:
our future financial and operating results;

         the anticipated closing of the acquisition of [x+1] (including the
          expectation that the acquisition will close by early in the fourth
          quarter of 2014) and the expected impact of the acquisition on our
          financial condition and results of operations;

our ability to maintain an adequate rate of revenue growth;

our capital investment plans and our ability to effectively manage those investments;

our growth strategy;

         our future operating expenses, including changes in research and
          development, sales and marketing and general and administrative
          expenses;

our ability to timely and effectively adapt our existing technology;

         our ability to introduce new offerings that gain market acceptance,
          including the recently announced expansion of our self-service
          platform;

our ability to continue to expand internationally;

our ability to fulfill covenants and obligations under our existing business agreements;

our ability to manage our cash to meet our liquidity needs;

the effects of increased competition in our market and our ability to compete effectively;

our plans to use the proceeds from our initial and follow-on public offerings;

future acquisitions of or investments in complementary companies or technologies;

our expectations concerning relationships with third parties; and

the effects of seasonal trends on our results of operations.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in our forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee that the future results and circumstances described in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations, except as required by law.


The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. Overview
Rocket Fuel is a technology company that has developed an Artificial Intelligence and Big Data-driven predictive modeling and automated decision-making platform. Our Artificial Intelligence, or AI, system autonomously purchases ad spots, or impressions, one at a time, on advertising exchanges to create portfolios of impressions designed to optimize the goals of our advertisers, such as increased sales, heightened brand awareness and decreased cost per customer acquisition. As our revenue retention rate was 149% and 168% for the twelve months ended June 30, 2014 and December 31, 2013, respectively. We define our "revenue retention rate" with respect to a given twelve-month period as (i) revenue recognized during such period from customers that contributed to revenue recognized in the prior twelve-month period divided by (ii) total revenue recognized in the prior twelve-month period. For the past twelve trailing months, as of June 30, 2014, our active customer base included 84 of the Advertising Age 100 Leading National Advertisers and 60 of the Fortune 100 companies. Additionally, as of June 30, 2014, we had 100 customers with more than $1 million in lifetime spend with us, with 51 of these 100 trusting us with over $2 million in lifetime spend and 14 of these 100 trusting us with over $5 million in lifetime spend.
Our solution is designed to optimize both direct-response campaigns focused on generating specific consumer purchases or responses, generally defined as cost per action goals, as well as brand campaigns geared towards lifting brand metrics, generally defined as cost-per-click and brand survey goals. For the three and six months ended June 30, 2014 and 2013, direct response campaigns contributed approximately two-thirds of our revenue, with the remaining one-third of our revenue generated through brand campaigns. We have successfully run advertising campaigns for products and brands ranging from consumer products to luxury automobiles to travel and had served well over 280 billion impressions as of June 30, 2014. As of June 30, 2014, our computational infrastructure supported over 34,000 CPU cores in eight data centers and housed 17 petabytes of compressed data.

We generate revenue by delivering digital advertisements to consumers through our platform across display, mobile, social and video channels. Historically, our revenue has predominantly come from display advertising because display advertising inventory was the first to be made available for programmatic buying through real-time advertising exchanges. The digital advertising industry is rapidly adopting programmatic buying for mobile, social and video advertising, accelerating the amount of digital advertising inventory available through real-time advertising exchanges. We offer a single solution for advertisers across all of these channels to compete for a larger share of advertisers' budgets. While a majority of our revenue currently comes from display advertising, we are focused on offering advertisers a comprehensive solution that addresses the display, mobile, social and video channels.

Our contracts typically have a term of less than one year, and we recognize revenue as we deliver advertising impressions, subject to satisfying all other revenue recognition criteria. Our revenue recognition policies are discussed in more detail under "Note 1-Nature of Business and Summary of Significant Accounting Policies" in the notes to our condensed consolidated financial statements included in Part I, Item 1.

In August 2014, we signed a definitive agreement to acquire [x+1], Inc., a provider of programmatic marketing and data management solutions. Under the terms of the agreement, we expect to pay $100 million in cash and approximately 5.4 million shares of our common stock as consideration, which, based on the average of the observed closing prices of our common stock for the 20 trading days prior to the signing of the definitive agreement, represents an enterprise value of $230 million. The transaction is subject to regulatory approvals and satisfaction of customary closing conditions, including Hart-Scott-Rodino clearance in the U.S., and is expected to close by early in the fourth quarter of 2014. See "Note 15 - Subsequent Events" in the notes to our condensed consolidated financial statements included in Part I, Item 1 for additional information regarding our proposed acquisition of [x+1].

We plan to invest for long-term growth. We anticipate that our operating expenses will increase significantly in the foreseeable future as we invest in research and development to enhance our solution, in sales and marketing to acquire new customers and reinforce our relationships with existing customers and in our infrastructure, including our IT, financial and administrative systems and controls. On August 5, 2014, we entered into an agreement to acquire
[x+1]. See "Note 15 - Subsequent Events" in the notes to our condensed consolidated financial statements included in Part I, Item 1. If the transaction closes as anticipated by early in the fourth quarter of 2014, it will result in an increase in our operating expenses on the date we close the transaction. We believe that these investments will contribute to our long-term growth, although they will reduce our profitability in the near term.


Key Metrics
We monitor the key metrics set forth below to help us evaluate growth, establish
budgets, measure the effectiveness of our research and development and sales and
marketing and other investments, and assess our operational efficiencies.
Revenue is discussed under the headings "-Components of Our Results of
Operations" and "-Results of Operations." Revenue less media costs (to be
renamed revenue ex-TAC beginning in the third quarter of 2014) and adjusted
EBITDA are discussed under the heading "-Non-GAAP Financial Performance
Metrics." Number of active customers is discussed below (in thousands, except
number of active customers):
                                       Three Months Ended          Six Months Ended
                                            June 30,                   June 30,
                                        2014         2013         2014          2013
Revenue                             $   92,642     $ 54,369    $ 167,039     $ 92,581
Revenue less media costs (non-GAAP)     54,712       29,726       99,402       51,292
Adjusted EBITDA (non-GAAP)                (398 )        343       (4,134 )     (4,284 )
Number of active customers               1,444          784        1,444          784

Number of Active Customers
We define an active customer as a customer from whom we recognized revenue in the last three months. A customer can be either an advertiser who purchases our solution from us directly or an advertiser who purchases our solution through an advertising agency or other third party. We count all advertisers within a single corporate structure as one customer even in cases where multiple brands, branches or divisions of an organization enter into separate contracts with us. We believe that our ability to increase the number of active customers using our solution is an important indicator of our ability to grow our business, although we expect this number to fluctuate based on the seasonality in our business. For example, the number of active customers, excluding active customers originating through our licensing agreement with a Japanese advertising agency, was flat from December 31, 2013, to March 31, 2014, but increased by 18% from March 31, 2014 to June 30, 2014.
Non-GAAP Financial Performance Metrics
To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles, or GAAP, we provide investors with the following financial measures that are not prepared in accordance with GAAP. Revenue Less Media Costs (to be renamed Revenue ex-TAC) Revenue less media costs (to be renamed revenue ex-TAC, but with no changes to the definition, beginning in the third quarter of 2014) is a non-GAAP financial measure defined by us as GAAP revenue less media costs. Media costs consist of costs for advertising impressions we purchase from real-time advertising exchanges or through other third parties. We believe that revenue less media costs is a meaningful measure of operating performance because it is frequently used for internal management purposes, indicates the performance of our solution in balancing the goals of delivering exceptional results to advertisers while meeting our margin objectives and facilitates a more complete period-to-period understanding of factors and trends affecting our underlying revenue performance.
A limitation of revenue less media costs is that it is a measure that we have defined for internal purposes that may be unique to us, and therefore it may not enhance the comparability of our results to other companies in our industry that have similar business arrangements but present the impact of media costs differently. Management compensates for these limitations by also relying on the comparable GAAP financial measures of revenue, cost of revenue and total operating expenses. The following table presents a reconciliation of revenue less media costs to revenue for each of the periods indicated (in thousands):


                            Three Months Ended         Six Months Ended
                                 June 30,                  June 30,
                             2014         2013         2014        2013
Revenue                  $    92,642    $ 54,369    $ 167,039    $ 92,581
Less: Media costs             37,930      24,643       67,637      41,289
Revenue less media costs $    54,712    $ 29,726    $  99,402    $ 51,292

Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure defined by us as net loss before income tax (expense) benefit, interest expense, net, depreciation and amortization (excluding amortization of internal-use software), stock-based compensation expense and change in fair value of convertible preferred stock warrant liability. We have presented adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, to develop short and long-term operating plans and to determine bonus payouts. In particular, we believe that the exclusion of the expenses eliminated in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the determination of compensation for our executive officers. Accordingly, we believe that adjusted EBITDA provides useful information in understanding and evaluating our operating results.
Our use of adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are as follows:
although depreciation and amortization of property and equipment (excluding amortization of internal use software) 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;

adjusted EBITDA does not reflect: (1) changes in, or cash requirements for, our working capital needs; (2) the potentially dilutive impact of equity-based compensation; or (3) tax payments that may represent a reduction in cash available to us; and

other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.

Because of these and other limitations, adjusted EBITDA should be considered along with other GAAP-based financial performance measures, including various cash flow metrics, net income or loss, and our other GAAP financial results. The following table presents a reconciliation of adjusted EBITDA to net loss for each of the periods indicated (in thousands):

                                                    Three Months Ended          Six Months Ended
                                                         June 30,                   June 30,
                                                    2014          2013         2014          2013
Net loss                                         $  (9,759 )   $ (3,839 )   $ (20,985 )   $ (11,911 )
Adjustments:
Interest expense, net                                  514          229           928           353
Income tax expense                                     181          (14 )         496            40
Depreciation and amortization expense (excluding
amortization of internal-use software)               2,667          673         4,471         1,279
Stock-based compensation expense                     5,999        2,035        10,956         3,600
Change in fair value of convertible preferred
stock warrant liability                                  -        1,258             -         2,355
Total adjustments                                    9,361        4,181        16,851         7,627
Adjusted EBITDA                                  $    (398 )   $    343     $  (4,134 )   $  (4,284 )


Beginning in the third quarter of 2014, we will be define its Adjusted EBITDA as net loss before income tax (expense) benefit, interest and other expenses, depreciation and amortization expense (excluding amortization of internal use software), stock-based compensation expense, acquisition related and other expenses; payroll tax expense related to stock-based compensation expense and changes in the fair value of convertible preferred stock warrant liability. Acquisition related and other expenses: We will be excluding the effect of acquisition related and other expenses and the effect of restructuring expenses from our non-GAAP operating expenses and net income/ (loss) measures. We will incur significant expenses in connection with our pending acquisition and also incurred certain other operating expenses or income, which we generally would not have otherwise incurred as a part of our continuing operations. Acquisition related and other expenses consist of personnel related costs for transitional employees, other acquired employee related costs, stock-based compensation expenses (in addition to the stock-based compensation expenses described above), integration related professional services, certain business combination adjustments including adjustments after the measurement period has ended and certain other operating items, net. Substantially all of the stock-based compensation expenses included in acquisition related and other expenses resulted from unvested options assumed in acquisitions whose vesting was fully accelerated upon termination of the employees pursuant to the original terms of those options. We believe it is useful for investors to understand the effects of these items on our total operating expenses. Acquisition related expenses generally diminish over time with respect to acquisitions, we generally will incur these expenses in connection with any future acquisitions.
Payroll tax expense related to stock-based compensation. We will exclude payroll tax expense related to stock-based compensation expense because, without excluding these tax expenses, investors would not see the full effect that excluding share-based compensation expense had on our operating results. These expenses are tied to the exercise or vesting of underlying equity awards and the price of our common stock at the time of vesting or exercise, which factors may vary from period to period independent of the operating performance of our business. Similar to share-based compensation expense, we believe that excluding this payroll tax expense provides investors and management with greater visibility to the underlying performance of our business operations and facilitates comparison with other periods as well as the results of other companies.

The following tables present a reconciliation of adjusted EBITDA to net loss for each of the periods indicated (in thousands) using the current definition and the definition which will be used beginning in the third quarter of 2014:
Adjusted EBITDA as previously disclosed

                                                       Three Months Ended
                          Mar 31,       Jun 30,      Sep 30,       Dec 31,       Mar 31,       Jun 30,
                           2013          2013          2013         2013          2014          2014
Net income (loss)       $  (8,072 )   $  (3,839 )   $ (6,860 )   $  (2,161 )   $ (11,225 )   $  (9,759 )
Adjustments:
Interest expense              124           229          251           313           414           514
Income tax expense             54           (14 )        133           112           314           181
Depreciation and
amortization (excluding
amortization of
internal use software)        607           673          781         2,407         1,804         2,667
Stock-based
compensation                1,565         2,035        2,653         4,589         4,957         5,999
Change in fair value of
preferred stock
warrants                    1,097         1,258        2,385             -             -             -
Total adjustments           3,447         4,181        6,203         7,421         7,489         9,361
Adjusted EBITDA         $  (4,625 )   $     343     $   (657 )   $   5,260     $  (3,736 )   $    (398 )


Adjusted EBITDA with revised definition

                                                       Three Months Ended
                          Mar 31,       Jun 30,      Sep 30,       Dec 31,       Mar 31,       Jun 30,
                           2013          2013          2013         2013          2014          2014
Net income (loss)       $  (8,072 )   $  (3,839 )   $ (6,860 )   $  (2,161 )   $ (11,225 )   $  (9,759 )
Adjustments:
Interest expense              124           229          251           313           414           514
Income tax expense             54           (14 )        133           112           314           181
Depreciation and
amortization (excluding
amortization of
internal use software)        607           673          781         2,407         1,804         2,667
Stock-based
compensation                1,565         2,035        2,653         4,589         4,957         5,999
Change in fair value of
preferred stock
warrants                    1,097         1,258        2,385             -             -             -
Other income (expense)
- net                         519          (151 )       (155 )          95            19           425
Acquisition related and
other expenses                  -             -            -             -             -           100
Payroll tax expense
related to stock-based
compensation                   10             3          136            14           210           185
Total adjustments           3,976         4,033        6,184         7,530         7,718        10,071
Adjusted EBITDA         $  (4,096 )   $     194     $   (676 )   $   5,369     $  (3,507 )   $     312

Adjusted Net Loss
Adjusted net loss and adjusted diluted net loss per share are non-GAAP financial measures that are useful to us and investors because they present an additional measurement of our financial performance, taking into account depreciation, which we believe is an ongoing cost of doing business, but excluding the impact of certain non-cash expenses (e.g. stock-based compensation). We believe that analysts and investors use adjusted net income and adjusted diluted net income per share as supplemental measures to evaluate the overall operating performance of companies in our industry.
A limitation of adjusted net loss is that it is a measure that may be unique to us and may not enhance the comparability of our results to other companies in the same industry that define adjusted net loss differently. This measure may also exclude expenses that may have a material impact on our reported financial results. Our management compensates for these limitations by also considering the comparable GAAP financial measure of net loss.
The following table presents a reconciliation of adjusted net loss to net loss for each of the periods indicated (in thousands):

                                                    Three Months Ended          Six Months Ended
                                                         June 30,                   June 30,
                                                    2014          2013         2014          2013
Net loss                                         $  (9,759 )   $ (3,839 )   $ (20,985 )   $ (11,911 )
Adjustments:
Stock-based compensation expense                     5,999        2,035        10,956         3,600
Change in fair value of convertible preferred
stock warrant liability                                  -        1,258             -         2,355
Tax impact of the above items                            -            -             -             -
Adjusted net loss                                $  (3,760 )   $   (546 )   $ (10,029 )   $  (5,956 )
Adjusted diluted net loss per share              $   (0.11 )   $  (0.07 )   $   (0.29 )   $   (0.71 )
Weighted average shares used in computing
adjusted diluted net loss per share                 35,172        8,396        34,606         8,347


Factors Affecting Our Performance
We believe that the growth of our business and our future success depend on various opportunities, challenges and other factors, including the following:
Investment in Growth
We plan to invest for long-term growth. We have invested and will continue to invest in research and development to enhance our solution and create additional offerings, in sales and marketing to acquire new customers and reinforce our relationships with existing customers and in our infrastructure, including our IT, financial and administrative systems and controls, data centers and leasehold improvements. We expect our capital expenditures to increase significantly in 2014 compared to 2013. We are also investing to further automate our business processes with the goals of scaling our business while maintaining customer satisfaction and enhancing our profitability. We believe that these investments will contribute to our long-term growth, although they will reduce our profitability in the near term. In the second quarter of 2014, we saw operating expenses increase as a percent of revenue, and we anticipate this trend to continue at least through the second half of 2014. If we complete our proposed acquisition of [x+1], it will represent a . . .

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