13 May 2014

Summary company financials ($m)

Year end December FY2012 FY2013 FY2014E
Next 4 quarters
estimated
Price $21.14 Revenue 106.6 240.6 427.4 485.2
Market cap ($m) 742.0 138.7% 125.7% 77.6% 75.3%
Enterprise value ($m) 624.1 EBITDA -6.5 -10.2 4.5 12.6
-6.1% -4.3% 1.1% 2.6%
Free float 34% Net income -10.3 -20.9 0.3 6.4
Net debt (cash) -7.9 -86.4 -117.9 -118.3
Shares outstanding 32.8 35.1 35.1
EV/Sales 2.59 1.46 1.29
EV/EBITDA -- 138.7 49.5
PE -- -- --
ACX Research
Rocket Fuel Inc.
Revenue growth
EBITDA margin
Rocket Fuel Inc is a leading provider of "big data" programmatic solutions to help companies make the best advertising purchases on the internet,
essentially giving advertisers the best bang for their buck. At December 31 2013, Rocket Fuel's customer base included over 70 of the Advertising
Age 100 Leading National Advertisers and and over 50 of the Fortune 100 companies. Rocket Fuel's algorithms include artifical intelligence analytics,
and Rocket Fuel's claim that they are achieving higher KPIs than their competitor set is supported by our research.

Following its Q1 trading update, Rocket Fuel shares trade in the market at 1.46x Enterprise value to FY Sales and 1.29x Enterprise Value to Next 12
month Sales. The valuation is at a discount to both private market transactions of programmatic advertising peers and listed company valuations in
the sector.

The size of the market opportunity for programmatic advertising may be significant. Total global advertising spend is expected to reach $628bn in
2014 (c. 6% year on year growth), of which internet advertising is expected to encompass $58bn (c. 14% year on year growth). Within internet
advertising, $5.2bn (19% of spend) is currently placed through programmatic platforms such as Rocket Fuel, however the programmatic market is
growing at 55% per annum. Rocket Fuel is one of the largest companies offering programmatic solutions and currently has industry-leading revenue
growth estimated at 78% for full year 2014. Despite this, Rocket Fuel's FY2014E revenue at $0.43bn remains less than 1% of the $58bn internet
advertising market.

Rocket Fuel's results-driven approach has, as noted, achieved sector-leading levels of organic revenue growth. Looking at the four years from 2011-
2014E, Rocket Fuel will have grown revenue by 857%, increasing its share from 3.5% of the programmatic advertising market to 8.3%. The best
performing peer group companies are DataXu, Criteo and Turn and have achieved total revenue increases of 700%, 385% and 367% over the same
period. Rocket Fuel's model, which solely uses algorithms including artificial intellgience analytics to purchase advertising, relative to competitors
which typically use humans combined with algorthmic support, has also allowed Rocket Fuel to achieve an increasing gross margin, now at around
double the level of its competitors. Additionally, Rocket Fuel's 857% four year organic revenue growth from a $45m base in 2011 puts it in a select
club of of companies to achieve such growth measured from a comparable $50m base. Other club members include Facebook 2011-2014 1,394%
revenue growth, Pandora 2010-2013 1,086%, LinkedIn 2008-2011 563%, Salesforce.com 2003-2006 508%, Yelp 2011-2014 388%, and Workday
2010-2013 302% revenue growth.

In the past, the market for buying and selling digital advertising was relatively simple, with advertisers and publishers transacting directly with one
another. However, as internet usage increased, the number of publishers with significant advertising inventory increased. There are now tens of
billions of daily trades across all internet advertising exchanges, thousands of times more than the number of daily trades executed by NASDAQ and
the NYSE combined. This increasingly makes it unrealistic to manage an efficient advertising campaign without big data programmatic assistance.
The programmatic channel offers advertisers other benefits including measurable results, efficient access to the fragmented media landscape,
leverage of complex data, and an advertising strategy that can adapt in real time.

As well as Rocket Fuel's use of artificial intelligence analytics, an additional difference between Rocket Fuel and most other leading programmatic
buying platforms is Rocket Fuel's revenue model. Whilst most platforms charge a fixed percentage of advertising spend for a platform license or
campaign management, Rocket Fuel charges clients a specified rate for media and then captures the arbitrage spread between what clients pay and
the actual media cost. This model has generated increasing gross margins at Rocket Fuel and its margins today stand at up to double the level of its
competitor set. Rocket Fuel's revenue retention rates were also the highest amongst its competitor set at 168%, 175% and 134% in 2013, 2012 and
2011 respectively. In other words, had Rocket Fuel made no new sales in these years, its revenue growth rate would still have been 68%, 75% and
34% respectively. Rocket Fuel's advertising customers have increased spend with Rocket Fuel because they can see its results are superior,
according to the company. Rocket Fuel's customers typically contract with the company on a per-advertising campaign basis. However, Rocket Fuel
has also trialled a SaaS-like programmatic platform with Densu of Japan, and may roll out such a platform to additional clients in due course.

Rocket Fuel argue they will be able to maintain their competitive advantage as they filled a vacant niche in using advanced technology to address
companies' programmatic advertising needs. Rocket Fuel continue to invest in their technology and in FY2013 spent a higher proportion of their
revenue - 7.4% - on research and development than their competitor set. Rocket Fuel's higher gross margins theoretically allow it to also maintain
this higher R&D spend than its competitor set going forward. Rocket Fuel also benefits from a scale advantage, in that a programmatic advertising
company only gets to see the data for, say, a BMW campaign if they are working with BMW on the campaign. So the bigger Rocket Fuel's market
share, the more data advantage they have, and they become difficult to catch because a competitor cannot get that data nor build Rocket Fuel's
technology from anything else other than having the pre-existing client relationships.

Rocket Fuel equity has 34% free float. Employees own 26% of the company (the CEO and President own 8.6% and 7.2% respectively) and venture
fund investors retain a combined 35% stake. As a group, both employees and the venture fund investors have made limited share sales so far.
Employees sold a total of 14% of their holdings at the 2013 September IPO and January 2014 secondary placing, and venture fund investors sold a
total of 16% of their holdings. The majority of the free float - 68% - has come from new share issuance.

Rocket Fuel is guiding for a positive 1.1% EBITDA margin FY2014, and Q1 2014 saw reduced EBITDA losses in line with achieving this full year target.
However, 2014 is also a capex-heavy year which when combined with working capital growth will see a reduction in Rocket Fuel's net cash position
from $189m at Q1 2014 to $117m for the year end. Margin improvement in FY2015, combined with the company moving closer towards its
receivables days-sales-outstanding target of 95 days, may see the year as Rocket Fuel's first cashflow breakeven year. However, given the company
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from $189m at Q1 2014 to $117m for the year end. Margin improvement in FY2015, combined with the company moving closer towards its
receivables days-sales-outstanding target of 95 days, may see the year as Rocket Fuel's first cashflow breakeven year. However, given the company
has stated it would want to operate with a minimum cash balance of $80m, the risk of additional equity dilution cannot yet be ruled out. The
company's shareholder structure - employees own 26% and venture funds 35% - nevertheless incentivises equity holder interests and we would
expect the company to factor its $150m YE2014E receivables before coming to the market for further diltuive funding, particularly at current equity
pricing levels.

A regulatory risk exists for Rocket Fuel if internet "cookies" undergo additional regulation. For example, the EU has directed member states to
ensure the accessing cookies on a user's computer is allowed only if the users has given consent. We would note, however, that a large part of the
web economy runs on advertising, and even under a scenario of increased consumer protection, the need will remain for a web infrastructure to
allow efficient advertising to take place.

As is often the case in high growth companies, Rocket Fuel has been run with EBITDA negative to break even as the company has maximised sales
force hires and focused on achieving revenue growth. Whilst this strategy has been conducted, however, gross margins have improved, from 39% in
FY2011 to 48% in FY2013, and 50% in Q1 2014. This has allowed mild EBITDA margin improvement, from -7.5% in 2011 to -4.3% in 2013. Rocket Fuel
has guided positive EBITDA for FY2014.

In attempting to "normalise" Rocket Fuel's cost base we've looked at the R&D, sales & marketing and general and administrative spend levels of
Rocket Fuel's listed peers Criteo and Millennial Media. On average, despite business models which directly compete with Rocket Fuel, these two
peers have a sales and marketing spend lower than Rocket Fuel of 18% of revenue. We don't see why Rocket Fuel's valuation should be penalised
due to a discretionary (and theoretically temporary) decision by its management hold sales and marketing spend at 35% of revenue, versus its
competitor set spending an average 17% of revenue, in order that Rocket Fuel can establish market leadership. Creating a synthetic Rocket Fuel for
FY2014 with the lower overall spend base of its peer group (we make adjustments for other items also) would offer a 15.5% EBITDA margin and
therefore value the company at 8.3x Next 12 month EV/EBITDA and 13.9x P/E. Rocket Fuel has guided a long term EBITDA margin target of 20%.