Rocket Fuel sale highlights complexities of ad tech business models
Editor’s note: After billions of dollars in venture capital investment and initial public offerings, a fragmented advertising technology (ad tech) sector is maturing and consolidating with new challengers rising to face Google, says Technology Business Research analyst Seth Ulinski. HAMPTON, N.H. – As ad tech consolidation continues, new challengers are lining up against Google. After billions of dollars in venture capital investment and initial public offerings (IPOs), a fragmented advertising technology (ad tech) sector is maturing and consolidating. On July 18 ad serving vendor Sizmek announced it would acquire programmatic ad‐buying specialist Rocket Fuel (Nasdaq: FUEL) for $145 million, including debt. In 3Q16 Sizmek was acquired by private equity firm Vector Capital for $122 million. By integrating Sizmek and Rocket Fuel assets, Vector Capital looks to assemble a formidable contender against Google, which has largely cornered the ad serving market via DoubleClick. Rocket Fuel’s journey In 2013 Rocket Fuel’s IPO raised $116 million, with a market cap that approached $2 billion during the first day of trading. Since then, the company has struggled to sustain a combination of revenue growth and profitability. Rocket Fuel achieved growth early on (e.g., 73.9% in 2014 and 18.0% in 2015); however, the company has been challenged to demonstrate a sustainable, profitable business long term, particularly as programmatic advertising has shifted from insertion orders and a managed service delivery model to a SaaS model based on volume. As a result, the company’s trailing 12‐month metrics for operating margin and net revenue were ‐14.2% and ‐23.8%, respectively. Client demand for self‐service platforms resulted in increased transparency and control, as well as improved intelligence and operational efficiency. This put Rocket Fuel at a disadvantage since its user interface was built for internal staff rather than for agencies, trading desks and in‐house marketing teams. Another factor the demand‐side platform vendor contended with in the fast‐moving ad tech market was lack of an integrated data management platform (DMP). Rocket Fuel addressed SaaS and DMP shortcomings through R&D and the acquisition of peer X+1 for $230 million in 3Q14; however, this only solved for the technology side of the equation. To build a profitable SaaS‐led enterprise, the company needed a road map for scaling the business, including go‐to‐market strategies for agencies,desks and inhouse marketing teams. The company identified trading desks of agency holding companies as a pillar to its corporate turnaround strategy, but cracking the agency code was a challenge until 3Q16, when Rocket Fuel signed an agreement with one of the top six holding companies. Scaling a profitable SaaS business through agency holding companies and usurping incumbents has been a tall order for Rocket Fuel In recent quarters Rocket Fuel CEO Randy Wootton stated that the company had signed agreements with agency holding companies, but that activation of campaigns was slow. This could be attributed to the strength of incumbents, such Google and The Trade Desk (Nasdaq: TTD), as well as Rocket Fuel’s previous efforts to work with brands directly, potentially disintermediating agency partners. Higher margin SaaS revenue streams required significant volume to offset the loss of lower‐margin managed ...
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