Rocket Fuel Inc.
Aug 5, 2014

Rocket Fuel Reports Second Quarter 2014 Financial Results and Intent to Acquire [x+1]

Revenue Grew 70% and Gross Profit Grew 80% Year-Over-Year

Combination of Rocket Fuel and [x+1] Will Offer a Wide Array of SaaS-Based Advertising and Marketing Solutions Across All Digital Channels

Updated Full Year Standalone Guidance Reflects Tempered Revenue Expectations

REDWOOD CITY, Calif., Aug. 5, 2014 (GLOBE NEWSWIRE) -- Rocket Fuel Inc. (Nasdaq:FUEL), a leading provider of artificial intelligence and big data solutions for digital advertising, today reported record financial results for the second quarter ended June 30, 2014. In a separate press release, Rocket Fuel also announced a definitive agreement under which it will acquire [x+1], Inc., a leading provider of programmatic marketing and data management solutions. That release, along with slides that describe the transaction, may be accessed at http://investor.rocketfuel.com/.

"Rocket Fuel's 70% revenue growth and 80% gross profit growth over the second quarter of last year demonstrate our ability to deliver the solutions that advertisers need to drive ROI and increase brand impact across channels. We continued to grow rapidly in our mobile business, with 31% of total revenue being from the mobile channel in the second quarter, up sequentially from 26% in the prior quarter," said George John, Chairman and CEO of Rocket Fuel. "We are launching new and expanded solutions at a rapid pace, including Mission Control™, our AI-driven digital marketing hub with expanded self-service tools for digital campaign management; Audience Guarantee, giving brand advertisers the targeted audience impact they need to improve their reach across video and display; and Rocket Fuel Dynamic Personalized Ads, enabling advertisers to programmatically create a nearly unlimited number of ad variations."

Financial and Business Highlights for the Second Quarter of 2014

Revenue of $92.6 million increased 70% compared to $54.4 million for the second quarter of 2013.

Revenue less media costs1 of $54.7 million increased 84% compared to $29.7 million for the second quarter of 2013, and grew to 59% of revenue for the second quarter of 2014.

Gross Profit of $45.7 million increased 80% compared to $25.4 million for the second quarter of 2013, which represented a gross margin improvement to 49.4% from 46.7%, a 265 basis point expansion.

Net Loss was $(9.8) million, or $(0.28) per diluted share, compared to a net loss of $(3.8) million, or $(0.46) per diluted share for the second quarter of 2013. Adjusted net loss1 for the quarter was $(3.8) million, or $(0.11) per diluted share, compared to adjusted net loss of $(0.5) million, or $(0.07) per diluted share, for the second quarter of 2013.

Adjusted EBITDA1 was $(0.4) million compared to $0.3 million in the second quarter of 2013.

Other channels revenue of $40.8 million, which includes revenue from delivery of digital advertising to mobile, social, and video channels, increased by 317% compared to $9.8 million for the second quarter of 2013 and more than doubled from 18% to 44% as a percentage of revenue from the second quarter of 2013. Mobile was the largest component of other channels revenue, at 31% of revenue in the second quarter of 2014.

Active customer count expanded to 1,444, up from 784 in the second quarter of 2013.

Employee headcount increased to a total of 826 as of June 30, 2014, a 77% increase from June 30, 2013.

Cash and cash equivalents were $203.5 million as of June 30, 2014.

Total debt was $26.9 million as of June 30, 2014.

1 Revenue less media costs, adjusted net loss, and adjusted EBITDA are non-GAAP financial measures. Please see the discussion below under the heading "Use of Non-GAAP Measures" and the reconciliations at the end of this release.

[x+1] Acquisition Will Create Additional Growth Opportunities

Rocket Fuel has signed a definitive agreement to acquire [x+1], Inc. in a cash and stock transaction. Rocket Fuel and [x+1] believe that the transaction will:

Under the terms of the agreement, Rocket Fuel will pay $100.0 million in cash and approximately 5.4 million shares of Rocket Fuel common stock as consideration which, based on the average of the observed closing prices of Rocket Fuel common stock for the 20 trading days preceding 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.

"This combination brings together the leading Data Management Platform and the leading Artificial Intelligence-based Digital Advertising solution. We are strengthening our competitive position while significantly increasing our total addressable market and ability to deliver SaaS-based multi-channel solutions to advertising agencies and enterprise customers," added Mr. John.

Business Outlook

Rocket Fuel continues to achieve revenue growth that is significantly outpacing the digital advertising industry. Despite the Company's strong revenue growth in the first half of 2014, advertiser commitments in the latter part of the second quarter for future advertising campaigns were lower than previous internal forecasts. Rocket Fuel attributes this result to a number of expanding trends, including tighter control of client spend by the agencies' internal trading desks and a shift toward direct licensing by advertisers, as well as recent customer concerns about inventory quality on exchanges that impact the entire industry. Rocket Fuel expects these trends to continue to influence its growth rate and as a result is lowering its full year guidance (excluding the impact of the [x+1] transaction). The Company expects to achieve the following results:

Third Quarter 2014

Given the anticipated closing date of the transaction, [x+1] is not expected to have an impact on Rocket Fuel's third quarter financial results.

As a result of the intended acquisition of [x+1], Rocket Fuel will be changing its definition of Adjusted EBITDA2 beginning in the third quarter of 2014. These changes are reflected in the third quarter and fiscal 2014 expectations reflected herein.

2 Beginning in Q3 Rocket Fuel will 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.

Fiscal Year 2014

Rocket Fuel will integrate [x+1] over the course of 2014, and will not provide separate guidance for the two entities beginning in 2015. Assuming that the transaction closes in the fourth quarter, Rocket Fuel will report its fourth quarter results on a consolidated basis.

Key components of Rocket Fuel's operating strategy for the second half of the year include:

Conference Call and Webcast Information

The Rocket Fuel second quarter 2014 teleconference and webcast is scheduled to begin at 2:00 PM Pacific time on Tuesday, August 5, 2014. To participate on the live call, analysts and investors should dial 1-877-681-3375 at least ten minutes prior to the call. Rocket Fuel will also offer a live and archived webcast of the conference call, accessible from the "Investors" section of its website at www.rocketfuel.com.

Use of Non-GAAP Measures

This press release includes information relating to revenue less media costs, adjusted net loss, and adjusted EBITDA, which are financial measures that have not been prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). These non-GAAP financial measures have been included in this press release because they are measures 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, and to develop short- and long-term operational plans.

We define revenue less media costs as GAAP revenue less media costs. Media costs consist of costs for advertising impressions we purchase from real-time advertising exchanges or other third parties. A limitation of revenue less media costs is that it is a measure designed for internal purposes that may be unique to Rocket Fuel and may not enhance the comparability of Rocket Fuel's results to other companies in the same industry that have similar business arrangements but present the impact of media costs differently. Our management compensates for this limitation by also considering the comparable GAAP financial measures of revenue, cost of revenue, and total operating expenses.

We define adjusted net loss as GAAP net loss excluding stock-based compensation expense and change in fair value of convertible preferred stock warrant liability, net of estimated tax. A limitation of adjusted net loss is that it is a measure that may be unique to Rocket Fuel and may not enhance the comparability of Rocket Fuel's 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 Rocket Fuel's reported financial results. Our management compensates for these limitations by also considering the comparable GAAP financial measure of net loss.

We define adjusted EBITDA as net loss before income tax (expense) benefit, interest expense, net, depreciation and amortization expense (excluding amortization of internal use software), stock-based compensation expense and change in fair value of convertible preferred stock warrant liability.   Adjusted EBITDA has a number of limitations as an analytical tool including the following:

Because of these limitations, our management considers adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.

For a reconciliation of non-GAAP financial measures to the nearest comparable GAAP financial measures, see "Reconciliation of Revenue Less Media Costs to Revenue," "Reconciliation of Adjusted Net Loss to Net Loss" and "Reconciliation of Adjusted EBITDA to Net Loss" included in this press release.

These non-GAAP financial measures are not intended to be considered in isolation from, as substitutes for, or as superior to, the corresponding financial measures prepared in accordance with GAAP.

Forward-Looking Statements

This press release contains "forward-looking statements," including, without limitation, statements regarding the Company's ability to achieve long-term sustainable growth, including growth in other channels; the anticipated benefits of recently announced product offerings; the anticipated completion of the [x+1] acquisition, including the expectation that such acquisition will close in the fourth quarter of 2014; the expected impact of the [x+1] transaction on the Company's business, prospects and addressable market opportunity; and the Company's forecasted financial performance, including its financial results for the third quarter of 2014 and the full fiscal year 2014. These forward-looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from the results anticipated by such statements, including, without limitation, our limited operating history, particularly as a relatively new public company; risks associated with our growth, particularly outside of the U.S.; our inability to complete the acquisition of [x+1] due to our failure to obtain required regulatory approvals or satisfy the other conditions to closing of the acquisition; failure to achieve expected synergies and efficiencies of operations between Rocket Fuel and [x+1]; the ability of Rocket Fuel and [x+1] to successfully integrate their respective market opportunities, technologies, products, personnel and operations; the failure of Rocket Fuel to timely develop and achieve market acceptance of combined products and services; the loss of any key [x+1] customers; the ability to coordinate strategy and resources between Rocket Fuel and [x+1] following the acquisition; our potential failure to make the right investment decisions in our offerings and technology platform; our inability to access inventory on private exchanges; fluctuations in our operating results; the failure to release new services that improve the quality of available advertising inventory; and general market, political, economic and business conditions.

Additional factors that could cause actual results to differ materially from those anticipated by our forward-looking statements are under the caption "Risk Factors" in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on February 28, 2014 and in subsequent SEC filings. These forward-looking statements are made as of the date of this press release, and Rocket Fuel expressly disclaims any obligation or undertaking to update the forward-looking statements contained herein to reflect events that occur or circumstances that exist after the date on which the statements were made.

About Rocket Fuel

Rocket Fuel delivers a leading programmatic media-buying platform at Big Data scale that harnesses the power of artificial intelligence (AI) to improve marketing ROI in digital media across web, mobile, video, and social channels. Rocket Fuel powers digital advertising and marketing programs globally for customers in North America, Europe, and Japan. Customers trust Rocket Fuel's Advertising That Learns® platform to achieve brand and direct-response objectives in diverse industries from luxury cars to groceries to retail. Rocket Fuel currently operates in more than 20 offices worldwide and trades on the NASDAQ Global Select Market under the ticker symbol "FUEL." For more information, please visit http://www.rocketfuel.com or call 1-888-717-8873.

Rocket Fuel and Advertising That Learns are trademarks or registered trademarks of Rocket Fuel Inc. in the United States and other countries.

Rocket Fuel Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
     
     
 June 30,
2014
December 31,
2013
 (unaudited)  
Assets  
Current Assets:    
Cash and cash equivalents  $ 203,540  $ 113,873
Accounts receivable, net  93,941  90,502
Deferred tax assets  207  207
Prepaid expenses  2,526  2,164
Other current assets  17,797  3,962
Total current assets  318,011  210,708
Property, equipment and software, net  56,234  25,794
Restricted cash  2,227  -- 
Other assets  1,315  1,006
Total assets  $ 377,787  $ 237,508
     
Liabilities and Stockholder's Equity    
Current Liabilities:    
Accounts payable  $ 42,976  $ 39,910
Accrued and other current liabilities  22,891  21,584
Deferred revenue  1,375  918
Current portion of capital leases  2,566  203
Current portion of debt  9,743  7,243
Total current liabilities  79,551  69,858
Long-term debt - Less current portion  17,168  19,568
Capital leases - Less current portion  4,744  412
Deferred rent - Less current portion  19,629  3,909
Deferred tax liabilities  207  207
Other liabilities  499  387
Total liabilities  121,798  94,341
     
Stockholders' Equity:    
Common stock  36  33
Additional paid-in capital  321,403  187,624
Accumulated other comprehensive loss  10  (15)
Accumulated deficit  (65,460)  (44,475)
Total stockholders' equity  255,989  143,167
Total Liabilities and Stockholders' Equity  $ 377,787  $ 237,508
 
Rocket Fuel Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except loss per share data)
         
 Three Months EndedSix Months Ended
 June 30,June 30,
 2014201320142013
 (unaudited)      
Revenue  $ 92,642  $ 54,369  $ 167,039  $ 92,581
Cost of revenue (1)  46,923  28,981  84,458  49,652
Gross profit  45,719  25,388  82,581  42,929
         
Operating expenses:        
Research and development (1)  8,434  3,711  15,675  6,123
Sales and marketing (1)  33,789  18,419  63,548  34,649
General and administrative (1)  12,135  5,775  22,475  10,952
Total operating expenses  54,358  27,905  101,698  51,724
Loss from operations  (8,639)  (2,517)  (19,117)  (8,795)
Other expense, net:        
Interest expense  (514)  (229)  (928)  (353)
Other income (expense)—net  (425)  151  (444)  (368)
Change in fair value of convertible preferred stock warrant liability  --   (1,258)  --   (2,355)
Other expense, net  (939)  (1,336)  (1,372)  (3,076)
Loss before income taxes  (9,578)  (3,853)  (20,489)  (11,871)
Provision for income taxes  (181)  14  (496)  (40)
Net loss  $ (9,759)  $ (3,839)  $ (20,985)  $ (11,911)
         
Basic and diluted net loss per share attributable to common stockholders  $ (0.28)  $ (0.46)  $ (0.61)  $ (1.43)
Basic and diluted weighted-average shares used to compute net loss per share attributable to common stockholders  35,172  8,396  34,606  8,347
(1) Includes stock-based compensation expense as follows (in thousands):
         
     
 Three Months Ended
June 30,
Six Months Ended
June 30,
 2014201320142013
 (unaudited)      
Cost of revenue  $ 276  $ 91  $ 528  $ 118
Research and development  1,311  368  2,298  759
Sales and marketing  2,748  808  4,915  1,320
General and administrative  1,664  768  3,215  1,403
   $ 5,999  $ 2,035  $ 10,956  $ 3,600
 
Rocket Fuel Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
   
 Six Months Ended
June 30,
 20142013
  (unaudited) 
OPERATING ACTIVITIES:    
Net loss  $ (20,985)  $ (11,911)
Adjustments to reconcile net loss to net cash used in operating activities:    
Depreciation and amortization  6,940  2,882
Provision for doubtful accounts  (260)  16
Stock-based compensation  11,241  3,600
Amortization of debt discount  101  1
Excess tax benefit from stock-based activity  (163)  -- 
Loss (gain) on disposal of property, equipment and software  228  (5)
Change in fair value of preferred stock warrant liability  --   2,355
Changes in operating assets and liabilities:    
Accounts receivable  (3,179)  (12,464)
Prepaid expenses  (362)  123
Other current assets  (13,835)  30
Other assets  (417)  (137)
Accounts payable  (248)  8,181
Accrued and other liabilities  (1,301)  4,094
Deferred rent  15,749  10
Deferred revenue  457  603
Other liabilities  112  -- 
Net cash used in operating activities  (5,922)  (2,622)
INVESTING ACTIVITIES:    
Purchases of property, equipment and software  (19,141)  (2,603)
Capitalized internal use software development costs  (3,555)  (3,020)
Restricted cash  (2,203)  -- 
Net cash used in investing activities  (24,899)  (5,623)
FINANCING ACTIVITIES:    
Proceeds from the issuance of common stock in follow-on public offering, net of underwriting discounts and commission  116,510  -- 
Issuance costs related to initial and follow-on public offering  (1,380)  (298)
Proceeds from exercise of vested common stock options  1,875  51
Proceeds from early exercise of unvested common stock options  17  770
Repurchases of common stock options early exercised  (13)  (1)
Excess tax benefit from stock-based activity  163  -- 
Proceeds from issuance of common stock from employee stock purchase plan  3,792  -- 
Tax withholdings related to net share settlements of restricted stock units  (53)  -- 
Repayment of capital lease obligations  (430)  -- 
Borrowings from line of credit  --   5,000
Proceeds from issuance of long-term debt  --   10,000
Repayment of long-term debt  --   (113)
Net cash provided by financing activities  120,481  15,409
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND    
EQUIVALENTS  7  (75)
CHANGE IN CASH AND CASH EQUIVALENTS  89,667  7,089
CASH AND CASH EQUIVALENTS—Beginning of period  113,873  14,896
CASH AND CASH EQUIVALENTS—End of period  $ 203,540  $ 21,985
 
Rocket Fuel Inc.
KEY METRICS
(In thousands, except number of active customers)
         
     
 Three Months Ended
June 30,
Six Months Ended
June 30,
 2014201320142013
 (unaudited)      
Revenue  $ 92,642  $ 54,369  $ 167,039  $ 92,581
Revenue less media cost (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
 
Rocket Fuel Inc.
RECONCILIATION OF ADJUSTED EBITDA TO NET LOSS
(In thousands)
         
     
 Three Months Ended
June 30,
Six Months Ended
June 30,
 2014201320142013
 (unaudited)
Net loss  $ (9,759)  $ (3,839)  $ (20,985)  $ (11,911)
Adjustments:        
Interest expense, net  514  229  928  353
Provision for income taxes  181  (14)  496  40
Depreciation and amortization expense (excludes 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)
         
         
Rocket Fuel Inc.
RECONCILIATION OF REVENUE LESS MEDIA COSTS TO REVENUE
(In thousands)
         
     
 Three Months Ended
June 30,
Six Months Ended
June 30,
 2014201320142013
 (unaudited)      
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
         
         
Rocket Fuel Inc.
RECONCILIATION OF ADJUSTED NET LOSS TO NET LOSS
(In thousands, except per share data)
         
     
 Three Months Ended
June 30,
Six Months Ended
June 30,
 2014201320142013
 (unaudited)
Net loss  $ (9,759)  $ (3,839)  $ (20,985)  $ (11,911)
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
CONTACT: Investor Relations:

         Alex Wellins

         The Blueshirt Group

         (415) 217-5861

         ir@rocketfuel.com