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Rocket Fuel's martech transition continues to extract a heavy toll as it posts another loss

Publicly-listed adtech outfit Rocket Fuel announced revenues of $124.8m for the closing quarter of 2016, down from $125.4m 12 months earlier, as many advertisers moved from a “transitional-to-fixed revenue” model. But the company’s chief executive, Randy Wootton, remains upbeat about its transition plan to become a "platform solutions business".

Rocket Fuel's reported that the downturn in its media services business was in-part prompted by a switch in charging model

In a release published earlier today (February 21) the company’s leadership described 2016 as a “transformational year”, with Wootton adding that the numbers came in the high end of guidance, although they equated to a $17.5m loss for the quarter.

Throughout the company’s subsequent earnings call, Rocket Fuel’s leadership emphasized that its core focus was its transition to become a SaaS company, away from its managed service media buys, to a “platforms solutions business” which comes with a recurring, monthly revenue fee. The latter mode of revenue generation continued to grow throughout 2016 – 97% year-over-year – and now accounts for 20 to 30% of its total takings.

Also on the call was Rocket Fuel’s chief revenue officer Rex Jackson, who pointed out some additional rationale for the switch in business model, noting that its media services business declined by $14m year-over-year, with clients shifting from a variable- to fixed-services business throughout the year. Under questioning from analysts, Wootton further forecast a 1-2% decrease in media services revenue over the quarter.

“The transition towards a platform solutions model remains critical to our company, due to its stickier revenue model, as well as lower operating costs,” Wootton told investors, adding that Rocket Fuel now has over 100 such platform customers.

Wootton also noted several tie-ups it forged throughout 2016, citing recent partnerships it stuck with Nielsen to incorporate TV audience data into its platform decisioning, as well as a viewability tie-up with Integral Ad Science as further indicators of its move away from the old media buying model.

Another hallmark of the turnaround in strategy is that Rocket Fuel is now focusing on a smaller, more valuable group of customers with revenue generated by its top 50 customers comprising of 59% of its total haul for the period, compared to 46% in the fourth quarter of fiscal year 2015.

He also highlighted some progress it was starting to see by doubling down on its core group of advertisers – both brand-direct, and with agencies – pointing out the green shoots it was starting to see as a result, adding that its “North America holding group revenue" was up 25%.

"The engine of our growth is our largest customers,” added Jackson, who also noted that on the media services front (still the vast bulk of Rocket Fuel’s revenues) the company was anticipating that audio ads (it is also in the process of enabling media buying on Spotify) would be a growth-driver going forward.

Issuing guidance for the subsequent quarter, Rocket Fuel’s leadership noted “the typical seasonality” (i.e., the dip in media spend in the immediate aftermath of the holiday season) would take effect, with revenue forecast to be in the range of $47m-to-$52m.

However, the transition from media business to SaaS is not coming without its trials, with the company reporting that its revenue for the 12 months to December 31, 2016 was $456.3m, compared to $461.6m 12 months earlier.

It was dwindling revenue numbers such as these, as well as the shift in focus towards automated platforms and away from managed service buys, that prompted recent cutbacks within Rocket Fuel's ranks, with the company last month announcing that it would let 11% of its total headcount go.

Rocket Fuel was one of the first adtech, or programmatic, outfits to list publicly in 2013, and since then, its stock price has experienced a downward trajectory as Wall Street has struggled to understand the business models, as well as the value proposition of adtech – a fate shared by many of its contemporaries that similarly launched IPOs during that era.

Each has responded in their own unique way, but a prevailing method of maintaining their stock prices has been to cut back on costs, and reposition (or articulate themselves as) martech, or SaaS outfits.

In the final minutes of trading on Tuesday, the company's shares hit $2.55. A year ago, they were trading at $2.78, according to data from Zack's Investment Research.

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