Skip to main content

The Rubicon Project

Rubicon Project (RUBI) is a software company that automates the sale and purchase of online advertising space. They enable buyers to bid for the advertising space in real time or to acquire advertising space for later use through static bidding. The company, which operates in an extremely competitive space dominated by similar technology from Google, is struggling to turn a profit. While their net income per share in their most recent quarter may show that they are finally in the black, the reality of their financial situation is not so clear.

In their most recent quarterly report, Rubicon reported a net income of $3,530,000 or $.07 per share. Using these reported GAAP figures for the trailing twelve months, the stock is trading at only 14.8 times earnings. For a software company in a high growth industry it appears to be good value, however when actual net income before taxes is used on the same trailing twelve-month basis a different story is told.

In their most recently quarterly report, net income before taxes was a loss of $2,027,000 or a loss of $.04 per share. The result is that tax benefits increased earnings by 274%, which is a tax benefit of $5,557,000.  Their P/E based on pre-tax income for the trailing twelve months cannot be measured because the total income is a loss of $6,936,000.  Total tax benefit for the trailing twelve-month period has been $7,064,000.

Adding the small interest expenses and benefits back into the before tax figure arrives at a trailing twelve-month EBIT loss of  $7,070,000.  This number would not instill much optimism for an investor however another key metric shows a completely different side of the company.

Depreciation and amortization makes up nearly half of their operating expenses. Being a non-cash charge, the company may not be in as dire of financial circumstance as it may seem. The trailing twelve-month EBITDA for the company is $71,796,000, compared to the EBIT loss of nearly $7 million over the same period. This means that the company on a basic level appears to be cash flow positive.


This analysis goes to show that the numbers can be twisted to fit any narrative depending on which way an analyst is leaning. I believe the most import metric for a software company struggling to gain a competitive advantage is EBITDA because it more accurately tells the story of what is happening with the company’s cash. The most important issue for small cap Rubicon ($433M) is to ensure that it will be able to survive. While the business model itself and growth prospects may need further examination, their financial situation is not as dire as it initially seemed.

Comments

Post a Comment

Popular posts from this blog

The Base Case Is Bullish For HealthSouth

HealthSouth Corporation (Ticker: HLS) operates post-acute rehabilitation centers across the country, with locations more focused in the southern U.S. Their business model is quite simple, they provide physical rehabilitation services based either in their facilities or at an individual’s home. As of December 31, 2014 they acquired Encompass, which broadens their care base to both home health and hospice. Home health provides assistance for individuals at home who require aid in their daily lives, while hospice care is for individuals with terminal diagnoses. HealthSouth’s business model is extremely dependent on their employees, and as a result they have limited economies of scale. Margins are also pretty standard, as Medicare only gives a ‘market basket’ price increase and HealthSouth itself gives their employees an equivalent increase in salary. The business model is extremely dependent on the quality of people they have interacting with and treating patients. HealthSouth unde...
9 comments
Read more

Digi International Makes A Convincing Argument For Growth

  Digi International is a small player in in the internet-of-things and connectivity space. With a market cap of just over $300 million they struggle to compete and innovate with the larger, more well funded companies such as HP. While their core business has been stagnant, they have positioned themselves to launch into an underserved and growing market through 3 small acquisitions. Over the past two years and as recently as January 2017, Digi has acquired Bluenica, Freshtemps and Smart Temps. Combined with Digi’s hardware manufacturing and cloud based platforms, their ‘Digi Cold’ suite of products allows restaurants, pharmacies, grocery stores and food services to remotely and automatically monitor the temperature of their cold storage. The current food safety procedure requires the aforementioned industries to physically check the temperature of their fridge or food, record it by hand on a piece of paper and then upload it to a spreadsheet or similar form of data stor...
2 comments
Read more

Setup For A Correction?

Today we are seeing volatility return to the market. As I write, the S&P 500 and Dow are down 2.08% and 2.39% respectively. Over the past week the VIX has risen over 40%, coming off of a period of historically low closes. While today is exciting, the real story will be told when the markets re-open on Monday. The setup today feels like a familiar story in this historic bull-run. An unforeseen political action, in this case the release of the GOP Surveillance memo, followed by a subsequent decline in the markets. Historically, shares have shown to be resilient; recovery from the surprise Brexit vote took less than 2 weeks for the S&P 500.   The term ‘buy the dip’ has come to characterize our current market. Moving towards the close today and during the open on Monday we will see if the sentiment for buying these pullbacks has shifted. Over the past week I have read second hand reports of brokers having difficulty selling volume in the market. In other wo...
1 comment
Read more