No. of Recommendations: 10
As always, there’s a ton to talk about with this company, and I feel like I’m only scratching the surface with this writeup. But it’s already grown long enough ;-)

The Business

TubeMogul (TUBE) offers an advertising platform for advertisers interested in brand advertising — and especially online video advertising — that allows them to plan, buy, measure, and optimize that advertising. Brand advertising is the key word here, as TubeMogul isn’t trying to go after the traditional online ads intended to drive direct sales like one might find on Google (so-called “performance” marketing). We’re instead talking about the kind of advertisers that traditionally operate large television ad budgets with the intent of influencing consumer perception of their brand. As online video ads have gained popularity — both embedded in videos (YouTube, online television like Hulu and Sling TV, streaming videos offered direct from content producers and media companies, etc) — and as standalone ads on social media like Facebook, etc., these large television-oriented advertisers have become interested in taking advantage of online branding campaigns to reach their consumers.

There are large potential advantages for advertisers utilizing online video ads versus traditional TV, such as fine-grained targeting to exact demographic audiences, increased measurability, and lower cost. But there are also headaches and significant barriers, made worse by a fragmented playing field of discrete technology solutions. Here are a handful of challenges brand advertisers face when they begin to move online:

* Ensuring ads appear alongside high quality content that is compatible with, and not damaging to, the brand.

* Performing an apples-to-apples comparison of effectiveness and return-on-investment with traditional TV campaigns given the different metrics used for online ads.

* Figuring out which ad slots on which websites will best reach their intended audience at any given time.

* Purchasing those ad slots for a reasonable price.

* Achieving the necessary reach across many, many publishers to get the ads in front of a large enough audience.

* Detecting and tracking fraudulent views.

* Achieving global reach online.

One traditional approach these advertisers have taken is to make use of Advertising Service Providers. These providers buy up a ton of ad slots across thousands of websites, and then market and resell them to large advertisers. This makes it possible for a large advertiser to achieve the necessary reach they need, but they suffer from inherent conflicts of interest with the Provider that is trying to unload a bunch of ad slots it has purchased. Advertisers are captive and often have no real visibility into which sites their ads are actually running on, what content they’re appearing next to, or how many of the impressions or clicks are driven by fraudulent traffic. Further, the measurements and analytics they receive are couched in traditional web advertising terms, which are different than traditional tv advertising metrics, making comparisons of effectiveness and return on investment difficult.

The alternative, however, has been to deal individually with the sales organizations of each individual site publisher and go through a cumbersome, time-consuming, and very manual “request for proposal” (or RFP) process for every site for every campaign. That might be fine for a few premium publishers, but dealing with hundreds — let alone thousands — of sites and publishers this way simply isn’t feasible.

TubeMogul aims to solve all of the above problems (and many more) by providing advertisers with a single, unified platform that leverages a ton of automated technology and artificial intelligence allowing advertisers to automatically reach exactly the audiences they need globally and across devices at the lowest possible cost, including real-time automated ad-slot evaluation and bidding, plus integration with Nielson reporting, consumer brand surveys, and familiar metrics like brand lift and engagement that are traditionally used for TV advertising. TubeMogul also takes care of automatically ensuring that ads run alongside safe, high-quality, brand-compatible content, and detects and discards any fraudulent activity. And the company also integrates with many 3rd-party tools that tend to be popular with potential customers, allowing those customers to continue using them within the TubeMogul platform in an integrated experience.

Together, this allows advertisers to allocate a portion of their TV budget to online video, trust that their ads will be run on high quality sites in slots targeted at their demographic, and then verify and measure with the same metrics they’re used to in their traditional TV campaigns. Advertisers pay TubeMogul as they go, with TubeMogul charging a commission on ads run through their platform (which varies by ad type, but averaged 21.8% in the latest quarter).

It’s worth highlighting that TubeMogul automatically evaluates up to 500,000 ad slots each second and purchases the best available and cost-efficient ones in real time: unlike Advertising Service Providers, they don’t buy up a bunch of ad inventory ahead of time that they then have to resell. TubeMogul is independent and represents only buyers of ads, and thereby avoids many of the conflicts of interest that otherwise plague the industry.

Advertisers have been happy with the platform and continue to spend more and more through it: in fact, 82% of ad spend in 2015 came from existing customers that had been on the platform for at least a year. To make it more appealing as a one-stop-shop for managing video ad campaigns, TubeMogul has been begun integrating with both traditional TV ad placement with over 50 TV networks and media companies so far (including A&E Networks, Discovery Communications and Univision) and social media ad placement (Facebook, Instagram, Twitter, and soon Snapchat). They also have rolled out tools to help manage and automate the Request for Proposal (RFP) process for those situations where advertisers do want to deal directly with specific publishers, taking some of the pain out of that process, and allowing them to then manage that private ad inventory within the platform. They’ve even added some traditional display ad (not video) functionality to allow advertisers to plan, manage, and effectively run a holistic campaign from within TubeMogul. These efforts not only continue to increase the value to advertisers and therefore stickiness of the service, but also continue to expand the total addressable market for TubeMogul.

Before going any further, it’s important to note that TubeMogul is currently losing money on a GAAP basis, though they are slightly profitable on an adjusted basis (with stock-based compensation expense the biggest reason for the difference with GAAP). But I think that has to be put into context a bit, given the business model. TubeMogul is primarily dealing with large businesses (companies that are used to significant spending on television ads, after all), and the sales cycles are long — 9 months or even longer in some cases. Once companies do start using the service, they pay as they go based on the amount of advertising spend, and they usually start slow while they get a feel for things and test out some campaigns. That means that TubeMogul is investing a lot of capital up-front to bring in new customers and train them on the service, and it can take a while before those customers really ramp up and begin serious spending. But ramp up they do: TubeMogul’s top 25 clients increased their spend 50% YoY in the latest quarter, with 26 clients now spending over $1 million in the quarter compared to 16 last year. Total ad spend increased 33% YoY in the latest quarter, and mobile spend increased 146% and now represents nearly 30% of total ad spend.

So TubeMogul’s expenses are largely front-loaded, with significant capital required to bring on new clients, but then the company benefits from recurring (and increasing) revenues for the lifetime of that client. Ongoing expenses to service those clients, once they’re ramped up, are relatively low.

It’s also important, though, to understand some of the key risks of TubeMogul’s business model:

* First, their independence swings both ways: it frees them from the traditional conflicts of interest so inherent in the industry, and allows them to be incredibly transparent, which is very attractive to advertisers; but it also leaves them completely dependent on forming relationships with premier sites and publishers so that they can gain access to their ad inventory. So far, TubeMogul has done an excellent job at that, forming key relationships. But, for example, they’re completely locked out of YouTube as Google forces advertisers to go through their own platform. The risk increases if, over time, the best ad inventory becomes concentrated on just a few premier sites.

* A related risk is that inventory concentration can lead to higher costs for advertisers, reducing the ROI of ads for TubeMogul clients, and leading to a reduction in ad spend. Since TubeMogul’s revenue model is commission-based, that can impact its revenue. We saw a bit of this occurring in the latest quarter on desktop ads as viewers have increasingly switched to using mobile devices for video consumption, leading to tighter premier inventory on the desktop. TubeMogul does a great job of supporting mobile, and many of its clients simply moved a larger portion of their budgets over to mobile as a result, but some did not as the ability to measure performance of mobile ads is not yet as well developed (though that should be remedied over the next few quarters as new industry standards come into effect).

* There can often be a lag between when TubeMogul pays for the ads it is purchasing in real-time on behalf of its customers (Days Payable Outstanding or DPO), and when those customers pay TubeMogul (Days Sales Outstanding or DSO). This is exacerbated when the customer is actually an ad agency that, itself, is looking to collect from its brand customer before it pays TubeMogul. In 2015, the difference between DPO and DSO averaged about 17 days, with TubeMogul having to cover the gap with its own working capital. The upshot is that as total ad spend increases, so potentially does the company’s need for working capital to cover any gap between DPO and DSO (TubeMogul currently has a line of credit to assist with this). And, of course, if a client does not pay at all, then TubeMogul is left holding the bag as the company is still responsible for paying for the ads it purchased on behalf of its clients.

* In 2015 there was significant reliance on a few large companies. To be clear, most large companies are broken into separate divisions and geographical segments that are responsible for their own advertising budgets and decisions, and these look and act like separate customers to TubeMogul (and TubeMogul treats them as such). Under that definition, no single customer is responsible for more than 10% of revenue. But if one were to roll up all of those smaller “customers” within a single organization and treat them as one large customer, then 43% of 2015 revenue came from just 3 companies.


An investment in TubeMogul is about looking past the up-front capital expenditures needed to bring on new clients, and instead focusing on the potential lifetime value of those customers in combination with the explosive growth in online video. TubeMogul has created a unified platform that delivers real value to its customers, and the company continues to make the service more sticky as it rolls out new features and offerings that allow its customers to increasingly treat TubeMogul as a one-stop-shop for all of their brand campaign needs. I expect TubeMogul will continue to reinvest heavily in its product offerings and its on-boarding of new customers, potentially keeping its headline EPS and EBITDA figures on the low end, but my personal opinion is that the company has demonstrated that those investments are worthwhile over the long term.

My hypothetical real-money portfolio rating: 4 stars (out of 5 possible).

My CAPS call: thumbs up (outperform the market over the next 2-4 years)

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Good to see you :)

(Or read a post from you to be more exact).

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Thanks, Matt! I've definitely been focusing on other things besides the market these past months (all of my TMF subs even expired, and I had to sign back up for RB & SA last week), but your PayPal post inspired me to do another writeup -- albeit with a bit of a delay!

So thanks for keeping the board alive ;-)

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Hi Neil,

Thanks for posting. Really enjoyed your perspective (as always). And love your writing style! Hope your already busy life gives you some windows to post again in the future. Here are some questions about your write-up -- purely from curiosity, not at all meant as criticism:

How/why did you pick TubeMogul?

What did you learn from this experience -- not about TUBE, but about doing an analysis?

How did you come up with your portfolio and CAPS ratings? I can see that you developed a qualitative feel for the business to come up with those ratings, but curious if you did any quantitative work, and if so, what that involved.

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Great post. Very interesting company. I just wonder: who's their competition. I know some other stocks in the advertising space have been under a lot of pressure lately (RUBI, PERI, which I own, to name two). Then there is Saul's recent purchase HUBS, which I haven't looked into but sounds like it might be similar.

I guess my more general question is, I'd like to understand the advertising space and all the different types of players...I'm guessing there would be at least, but not limited to:

1. Companies who want to advertise (anybody)
2. Companies who help them create their ads (I don't know any big companies in this space)
3. Companies who help them place their ads (TUBE?)
4. Companies who help publishers sell ads (HUBS?)
5. Companies who run ads alongside their content (Google, FB, and anybody else with web real estate. Other more tradtional publishers like print and TV.)

6. Companies who try to create a marketplace between 3 and 4? (RUBI?)

Anyway as you can see I am not very informed about advertising. Please correct me where I am wrong and let me know what else I'm missing.

To close, I'll say that I feel like possibly the best position to be in is 4, if and only if you can get GOOG and FB as customers. They are so massive in this space, that a small company could really make a great living adding value to their businesses. I am sure there are ways to win on all sides, though, and I would love to be convinced that TUBE is one. Just need to understand where they fit in a little better.

Thanks. Also, you might want to cross post on saul's board.

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No. of Recommendations: 7
Hi Ears, great questions! TubeMogul has been a TMF rec for a while now -- at least a year -- and then I saw another recent report (not TMF) that sounded intriguing. So I decided to look into the company.

As far as ratings go, I use the "star" rating as a way to better convey my feelings about the company as an investment. I really, really dislike the binary CAPS thumbs up or thumbs down approach. It's extremely rare that I feel so strongly about an investment that it's a clear thumbs up or thumbs down. Worse, thumbs down in CAPS translates to shorting the stock, which I never do. So the star rating is another way of summarizing my feelings that give me a little clearer picture of how I felt about a potential opportunity. But they aren't grounded in any kind of formula or anything.

The only quantitative analysis I did on TubeMogul was some high-level sanity checks. We're basically talking about a small company ($330 million market cap) that is building a moat offering pick-and-shovel services in a massive and rapidly growing industry. One report I read believes it could grow to be a $200 billion industry, of which TUBE is expected to capture only about $560 million in ad spend this year. Facebook makes nearly all of its money from ads, and it has a market cap of nearly $360 billion -- 1000 times that of TubeMogul. But as a pick-and-shovel play, TUBE can benefit not only from ads sold on Facebook, but also on other sites like Twitter, Snapchat, etc -- and that's just social media, not to mention the rest of the web. TubeMogul is also is moving into traditional television advertising, a whole additional industry. Of course, it makes less on each ad (charging a commission) than the publishers do, but the opportunity still appears to be immense.

As far as stock price goes, TUBE is selling for about 1.5 times expected 2016 revenue and about 2.2 times expected 2016 gross profit, so not a whole lot of that future potential seems baked in. And that's mostly what I was thinking about from a quantitative perspective. When evaluating TUBE as an investment, I think at this stage it's not primarily about the current numbers, but really about potential future opportunity and a hypothetical ability to execute on that opportunity profitably. So my quantitative look was from a very high level.

What did I learn doing the analysis? I think we learn something with every analysis we do -- regardless of what we end up thinking about the company as an investment -- which is why I started this project in the first place. We learn about industries, we begin to spot patterns, we come to better understand how different businesses impact and affect each other, we become exposed to new risks and possible situations (good or bad) that may also be relevant to other companies we own or are interested in, we encounter various management styles and approaches, and we also get a sense for how the market treats companies as they go through various episodes in their businesses. Successful investing is obviously about a lot more than just the business (investor temperament, portfolio management, etc.), but I firmly believe that every analysis I do makes me a little bit better investor. And writing down my conclusions makes it possible to go back later and continue learning from those analyses -- where my weak spots are, where my assumptions and beliefs led me astray, which aspects of the business I clearly should have put in more effort into, etc.

Thanks for the questions!

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Hi Neil,

Great to see a post from you again! And of course, so totally know what you mean about being busy off boards. Sigh. But inspired to see new posts from both you and Matt.

Meanwhile, a couple questions.

You wrote:

<It’s worth highlighting that TubeMogul automatically evaluates up to 500,000 ad slots each second>

Wow! They evaluate 500,000 ad slots per second. Any understanding of how that is done? Obviously, must be some kind of software program. (I don't imagine a group of millennial math wiz genius ad analysts sitting around viewing slots and doing advanced computations and considerations in fractional nanoseconds. But if a computer program, what exactly would it look for (eye on site, hits from ads on site, demographics?).

You mention that Google requires all advertisers to go through their channel to advertise on Youtube. Would those customers who do so then naturally use google channel to locate ad space outside of YouTube or is their any likelihood that TUBE might share some of same customers who do advertise on YouTube in other areas of the web?

Who are some of TUBE's biggest clients currently?

You mentioned in answer to Ears question that you discovered TUBE as a TMF rec. But I don't recall you're ever revealing where the original tickers offered for group to analyze in the "early" days of club. Each week (to start!) (crazy, in retrospect) "the computer" would toss out another random company for analysis, very interesting assortment (ATRO, LAD, DY, DPLO, and more), the source of pull, you promised (I think) to reveal at a later date. Would that time be now?

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Ok, thanks. After reading up on HUBS at those links makes me think it's not a direct competitor to TUBE. But what about RUBI? Or others? Who do you see as TUBE's competition, and why is TUBE better?

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Hi okapimoon,

Wow! They evaluate 500,000 ad slots per second. Any understanding of how that is done?

Lots and lots of gerbils ;-)

Here is what the 10K says about campaign execution. This starts on page 13.

Our powerful, real-time optimization and decisioning engine helps enhance brand advertising performance while at the same time focusing on brand safety.

Media Buying
Our platform automates impression buying and ad serving for campaigns. Based on budget and targeting parameters set in the planning module, our platform continually evaluates impressions across sources of inventory and dynamically bids for each impression. When an auction is won, the platform serves the ad to the publisher site to be displayed to the user. The entire process typically takes less than 0.25 seconds.

Decisioning and Optimizing
Our platform enables customers to purchase the “best” impression each time according to the audience targeting criteria established in the campaign planning phase. Each second, our platform evaluates as many as 500,000 ad impressions, determines which impressions would be desirable for our customers, based on their targeting criteria, and bids accordingly.

In addition to the decisions made on each bid for an ad impression, our platform continually evaluates which of the criteria are delivering the best performance and then automatically makes adjustments to the bidding strategy to help maximize overall campaign performance.

Fraudulent Placements and Brand Safety
Using site, page and player safety technology, our platform is designed to screen and block sites with objectionable content, in- banner auto-play ad placements and fraudulent bot-driven traffic, with the goal of ensuring that ad placements are consistent with campaign objectives. Our multi-layered approach for protecting brand equity includes manual site screening and categorizing of websites according to content quality, combined with technology that assesses page and placement level content.

As for large clients, they just announced Walmart signed on, and in the 10K they say "during 2015, advertising for 94 advertisers listed
on the 2014 AdAge Top 100 U.S. Brands was placed through our platform." In the latest call they also said:

We also had several exciting client wins in the quarter. We not always able to announce these publicly, but our new client wins included signing a top five global beverage brands, a top 10 global financial services company, and a top 10 technology company, who all chose TubeMogul as their preferred media buying software.

As far as the Google question goes, my knowledge is limited, but my sense is that TUBE is going after a different customer base. Google has traditionally focused on performance-based marketing: showing ads from companies looking to get clicks that turn into sales conversions. That's not at all what TubeMogul is doing: they've crafting their platform around brand advertisers, who are approaching their campaigns from a very different perspective and measure effectiveness using very different metrics.

TubeMogul is also independent and represents only buyers of ads. There is a huge problem right now in the industry with massive, rampant fraud. In fact, Facebook's acquisition LiveRail (a marketplace for video ads) has, for all intents and purposes, shut down because it was discovered that the fraud was completely out of control. Here's one article about it:

Two years ago, topics such as viewability (measuring whether an ad was actually seen by a real person and for how long) and ad fraud (the practice of deliberately serving ads that have no potential to ever be seen by a human user) were niche issues. Now they're major topics of conversation at the advertising industry's biggest events and among the CEOs and chief marketers at the top agencies, platforms, ad-tech vendors, and brands.

Ad fraud is predicted to cost brands $7.2 billion in wasted spend this year, according to the Association of National Advertisers.

"As we started to integrate our data, Facebook targeting, and reporting, we were able to do a lot of really interesting things on the viewability and fraud front to understand what the supply was like in the market," Boland said.

"That was when we learned that a lot of the video supply out there — in fact the vast majority of the video supply that was running through LiveRail — was not creating value, whether it was from a viewability [standpoint] or fraud, or other reasons. It was not quality supply, and that was part of our evolution to move away from that."

(If this sounds like a familiar story, it's because Facebook also confirmed this month that it was pulling the planned demand-side platform within Atlas because of the number of bots and bad-quality ads on the open Web.)

TubeMogul represents only buyers, so it avoids a lot of conflict of interests that exist in these ad networks. In Q1 they even rolled out a new program where their customers are not charged for any fraudulent traffic, and that's been very attractive to advertisers. From the last call:

we’ve been investing in protecting advertisers from multiple types of ad fraud, including safe traffic generated by computers or botnets for a long time. But as a matter of policy in Q1 for a Platform Direct clients, we said any fraudulent botnet traffic will be refunded and the refunds that that we made in the quarter were negligible.

Another potential differentiator with TubeMogul is that they're purpose-built for global campaigns, which is a lot more important to these large brand advertisers. Most of TUBE's revenue still comes english-speaking countries, but campaigns could be run from within the platform in 70 different countries as of the end of 2015.

At the end of the day, I think TubeMogul is aiming to build a sticky platform that serves as a one-stop-shop for all of these advertisers' needs: planning, executing, and measuring their campaigns across multiple media types (web, traditional tv, social media, etc.) in a simple, consistent, and efficient fashion that delivers measurable results.

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Hi Bear,

why is TUBE better?

We've all been away from the board for a while, so I just want to gently remind everyone that the point of the board is to publish analyses that we write up so that we can get practice and improve over time. It has never been aimed at finding good investments. It's all about practice, practice, practice and exercising those analysis muscles ;-)

So I'm not making any claim that TUBE is better than RUBI, or even that it's a good investment. I personally liked what I saw, and gave it a hypothetical rating to match, but that's all part of documenting something that I can go back and measure later.

If TUBE does sound intriguing to you, it'd be awesome if you wrote up some thoughts on it after you get a chance to dig in! That's really what this board is about :-)

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So I'm not making any claim that TUBE is better than RUBI, or even that it's a good investment. I personally liked what I saw, and gave it a hypothetical rating to match, but that's all part of documenting something that I can go back and measure later.

I'm not sure why you say in one breath that you aren't positing that TUBE is a good investment, and in the next that you liked what you saw and rated it highly. It seems to me that if your rating is to mean anything, giving it a 4/5 would suggest that you do think (at this point in your research) that it is at least potentially a good investment.

My suggestion was simply that you take the competition into account. Any analysis that ignores the competition and addressable market doesn't seem complete to me.

Then again, this is your board.

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Let me state that a little more clearly. I *think* what you're saying is that you're not trying to value the stock, but rather to evaluate the company. That's great, and that's why I'm interested. But the sector it's in and the competition it faces are paramount considerations when considering the prospects for the business.

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Hi Bear,

Sorry for the late response. I've been out of town.

But the sector it's in and the competition it faces are paramount considerations when considering the prospects for the business.

This is a great question. I'm not entirely sure I agree. Competition is certainly important, but we've all seen a lot of rule-breaking, upstart companies succeed in the face of massive, and sometimes deeply entrenched, competition by taking a fresh and disruptive approach. They don't always succeed, of course, so there is a question of what traits tend to make the difference. That would be a fascinating discussion.

From a practical perspective, though, I only had time to analyze one company. Again, the purpose isn't to invest, but to get practice with analysis. I certainly agree with you that analyzing other companies in the sector would be a great idea for someone looking to invest in the sector.

I'm not sure why you say in one breath that you aren't positing that TUBE is a good investment, and in the next that you liked what you saw and rated it highly.

The hypothetical score simply allows me to go back later and easily evaluate my conclusions so that I can look for weaknesses in my process where things have gone wrong. It provides measurability at a glance. Maybe one of those weaknesses will be a lack of focus on the competitive landscape ;-)

As you've pointed out, I haven't done nearly enough work to evaluate it as an actual investment.

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From a practical perspective, though, I only had time to analyze one company. Again, the purpose isn't to invest, but to get practice with analysis

Time limitations are understandable, and in the interest of not seeing you waste your time I would simply suggest you consider whether such an analysis is useful. "SWOT" analysis might be a wheel that doesn't need to be reinvented. I would caution against considering the "Strengths" and "Opportunities" of a company and not its "Weaknesses" or "Threats."

You say you can go back later and evaluate my conclusions so that I can look for weaknesses in my process where things have gone wrong, but it seems questionable whether your "company in a vacuum" analysis would allow you to actually do this, even in retrospect. For instance, perhaps you correctly saw that MySpace had a huge user base, first mover advantage, etc etc, but failed to consider the threat of a better social network completely displacing them. Regardless of your accuracy evaluating the company's strengths, opportunities, financials, etc, I'm not sure what you'd be able to glean in hindsight about your appraisal of the company.

That said, I'm making suggestions because I'm interested in your project. If you evaluate a company I am interested in, I will chime in with my thoughts.

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