FUEL Rocket Fuel Inc.

Rocket Fuel Inc. (NASDAQ: FUEL), a predictive marketing platform provider, today announced financial results for the second quarter ended June 30, 2017.

Financial Highlights for the Second Quarter of 2017

GAAP Revenue: $90.7 million, 22% below last year's second quarter total of $117.0 million.

Revenue derived from North America was $69.9 million, down 25% from last year's second quarter. Revenue from outside North America was $20.8 million, down 14% from last year.

Platform Solutions revenue grew significantly year-on-year, representing 38% of total revenue in the second quarter versus 18% in last year’s second quarter. Media Services revenue represented 62% and 82% of total revenue in the second quarter 2017 and the second quarter 2016, respectively.

Non-GAAP Spend: $95.8 million, down 19% compared to $118.4 million non-GAAP spend in the second quarter of 2016.

Non-GAAP spend derived from North America was $73.6 million, down 21% from last year's second quarter. Non-GAAP spend from outside North America was $22.2 million, down 13% from last year.

Platform Solutions spend grew 77% year-on-year, representing 41% of non-GAAP spend in the second quarter versus 19% in last year’s second quarter. Media Services declined 41% year-on-year, and spend was 59% and 81% of non-GAAP spend in the second quarter 2017 and the second quarter 2016, respectively.

Non-GAAP Net Revenue: $42.5 million, down 36% compared to $66.0 million non-GAAP Net Revenue in the second quarter of 2016.

GAAP Net Loss: $(18.2) million, or $(0.39) per diluted share compared to a net loss of $(16.7) million, or $(0.38) per diluted share, in the second quarter of 2016.

Non-GAAP Adjusted EBITDA: $(2.5) million, compared to $4.2 million in the second quarter of 2016.

Non-GAAP Adjusted Net Loss: $(9.9) million, or $(0.21) per diluted share, compared to an adjusted net loss of $(6.7) million, or $(0.15) per diluted share, for the second quarter of 2016.

GAAP Net Cash Provided by Operating Activities: $6.0 million, compared to $5.2 million in the second quarter of 2016.

Non-GAAP Free Cash Flow: $3.4 million, compared to $0.9 million in the second quarter of 2016.

Cash and Cash Equivalents: $62.4 million as of June 30, 2017, compared to $84.0 million as of December 31, 2016.

Debt and Capital Lease Obligation: Total outstanding obligations of $83.5 million, including a $69.5 million revolving line of credit and $14.0 million of capital leases. The Company was not in compliance with the bank-defined adjusted EBITDA covenant related to the credit facility as of June 30, 2017, however, a waiver has been obtained. Additionally, the Company has entered into an amendment to its credit facility with terms and covenants intended to align with completing the acquisition by Sizmek Inc. that was announced on July 18, 2017, or to pay down the remaining balance by October 31, 2017.

Employee Headcount: 726 as of June 30, 2017, down from 899 in the second quarter of 2016.

Financial Outlook for the Third Quarter of 2017

For the third quarter of 2017, the Company expects:

- Non-GAAP net revenue between $35.0 million and $40.0 million.

- Non-GAAP Adjusted EBITDA between negative $10.0 million and negative $5.0 million.

The Company does not reconcile its forward-looking non-GAAP financial measures, net revenue and adjusted EBITDA, to the corresponding GAAP measures due to the high variability and difficulty in making accurate forecasts and projections in respect to the interplay between revenue and the corresponding margins. Our Media Services and Platform Solutions have different media margins and the pace of the transition of some of our business from Media Services to Platform Solutions, the pace of adoption, or activation of existing Platform Solutions customers, and the corresponding future margins cannot be reasonably predicted. The GAAP measure net income includes stock-based compensation expense that is impacted by future hiring and retention needs, and the future share price of Rocket Fuel’s stock. Similarly, restructuring charges, which we exclude from our non-GAAP measure adjusted EBITDA, are impacted by future decisions and by actions involving our facilities that are difficult to predict. The actual amounts of these excluded items will have a significant impact on the Company’s GAAP net income. Accordingly, reconciliations of these two forward-looking non-GAAP financial measures to the corresponding GAAP measures are not available without unreasonable effort.

Conference Call, Webcast and Related Information

As a result of the announcement on July 18, 2017, regarding Rocket Fuel’s entry into a definitive agreement to be acquired by Sizmek Inc., Rocket Fuel will not be hosting a conference call to discuss its second quarter 2017 financial results.

Use of Non-GAAP Measures

We provide information relating to non-GAAP spend, non-GAAP net revenue, non-GAAP adjusted EBITDA, non-GAAP adjusted net income (loss), non-GAAP operating expenses and non-GAAP free cash flow, 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 non-GAAP spend as GAAP revenue plus platform media costs for a portion of our sales arrangements (customers with revenue recognized on a net basis per GAAP). Media costs consist of costs for advertising impressions we purchase from advertising exchanges or other third parties. A limitation of non-GAAP spend is that it is a measure designed for internal purposes to assess market share and scale, and to plan for optimal levels of support for our clients that may be unique to Rocket Fuel. This 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, media costs and other costs of revenue.

We define non-GAAP net revenue as GAAP revenue less media costs. A limitation of non-GAAP net revenue 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, media costs and other costs of revenue.

We define non-GAAP adjusted EBITDA as GAAP net income (loss) before interest expense, other income (expense), net, income tax provision (benefit), depreciation and amortization expense (including amortization of capitalized software development expenses), stock-based compensation expense and related payroll taxes, acquisition and restructuring related expenses, and impairment charges. Non-GAAP adjusted EBITDA has a number of limitations, including the following: although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and non-GAAP adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; non-GAAP adjusted EBITDA is often considered an approximation of operating cash flow, but in our case excludes software development costs capitalized in a current period and excludes those costs as they are amortized over future periods; non-GAAP adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; non-GAAP adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation; non-GAAP adjusted EBITDA does not reflect acquisition and restructuring related expenses, the expenses capitalized for internal-use software, tax and interest expenses that may represent payments reducing the cash available to us; and other companies, including those in our industry, may calculate non-GAAP adjusted EBITDA differently, which reduces its usefulness as a comparative measure. Because of these limitations, our management considers non-GAAP adjusted EBITDA alongside other financial performance measures, including cash flow metrics, net income (loss) and our other GAAP results.

We define non-GAAP adjusted net income (loss) as GAAP net income (loss) excluding stock-based compensation expense, amortization of intangible assets, impairment charges, acquisition and restructuring related expenses and the estimated tax impact of the foregoing items. A limitation of non-GAAP adjusted net income (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 income (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 income (loss).

We define non-GAAP operating expenses as GAAP total costs and expenses less media costs, depreciation and amortization expense (including amortization of capitalized software development costs), impairment charges, stock-based compensation expense and related payroll taxes, and acquisition and restructuring related expense. Non-GAAP operating expenses has a number of limitations, including the following: although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and this measure does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; non-GAAP operating expenses is often considered an approximation of operating cash flow, but in our case excludes software development costs capitalized in a current period and excludes those costs as they are amortized over future periods; non-GAAP operating expenses does not reflect changes in, or cash requirements for, our working capital needs; non-GAAP operating expenses does not consider the potentially dilutive impact of equity-based compensation; non-GAAP operating expenses does not reflect acquisition and restructuring related expenses, the expenses capitalized for internal-use software, tax and interest expenses that may represent payments reducing the cash available to us; and other companies, including those in our industry, may calculate non-GAAP operating expenses differently, which reduces its usefulness as a comparative measure. Because of these limitations, our management considers non-GAAP operating expenses alongside other financial performance measures, including total expenses, cash from operating activities and our other GAAP results.

In addition, we provide information about our non-GAAP free cash flow. We define non-GAAP free cash flow as the net cash provided by (or used in) operating activities less the cash used for purchases of property, equipment and software and for capitalized internal-use software development costs. A limitation of free cash flow is that it 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 free cash flow differently from us. This measure also does not represent the residual cash flow available to us for discretionary expenditures or investments because we have mandatory capital leases and debt service requirements that may have a material impact on Rocket Fuel’s liquidity. Our management compensates for these limitations by also considering the comparable GAAP financial measure of net cash provided by (or used in) operating activities.

For a reconciliation of non-GAAP financial measures to the nearest comparable GAAP financial measures, see “Reconciliation from GAAP Revenue to Non-GAAP Spend,” “Reconciliation from GAAP Revenue to Non-GAAP Net Revenue,” “Reconciliation from GAAP Net Income (Loss) to Non-GAAP Adjusted EBITDA,” “Reconciliation from GAAP Net Income (Loss) to Non-GAAP Adjusted Net Income (Loss)”, “Reconciliation from GAAP Total Cost and Expenses to Non-GAAP Operating Expenses" and “Reconciliation from GAAP Net Cash Provided by (Used in) Operating Activities to Non-GAAP Free Cash Flow" 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.

Cautions Regarding Forward-Looking Statements

This press release contains forward-looking statements regarding future events and our future financial performance, including but not limited to expectations regarding total spend as a new metric; expected progress against achieving our strategic priorities; expectations regarding our platform solutions business and our media services business; our sales and marketing execution; industry trends; trends and growth in our business; technology; our customer, supplier and channel partner relationships; our operating expenses and cost structure; guidance for third quarter non-GAAP net revenue and non-GAAP adjusted EBITDA, our expectations regarding our credit facility and amendments thereto, and financial goals for fiscal year 2017. Words such as "expect," "believe," "intend," "plan," "goal," "focus," "anticipate," and other similar words are also intended to identify forward-looking statements.

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; fluctuations in our operating results, including but not limited to fluctuations due to seasonality; changes in customers; our history of losses; our access to capital on acceptable terms; our ability to achieve the expected benefits of our restructuring and operating efficiency plans; risks due to employee attrition and integration of new leadership and employees; risks associated with margin shifts in our business; our ability to adequately address competition; our ability to serve the needs of agencies and agency holding companies; and risks to our ability to make the right investment decisions with regard to new products, technology, infrastructure, sales strategies and strategic imperatives in our key markets, including international.

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 March 16, 2017 and in subsequent SEC filings. These forward-looking statements are made as of the date of this press release and the related webcast, and the Company expressly disclaims any obligation or undertaking to update the forward-looking statements contained herein or therein to reflect events that occur or circumstances that exist after the date on which the statements were made.

About Rocket Fuel

Rocket Fuel is a predictive marketing software company that uses artificial intelligence to empower agencies and marketers to anticipate people's need for products and services.

Headquartered in Redwood City, Calif., Rocket Fuel has more than 20 offices worldwide and trades on the NASDAQ Global Select Market under the ticker symbol "FUEL." Rocket Fuel, the Rocket Fuel logo, Moment Scoring, Advertising That Learns and Marketing That Learns are trademarks or registered trademarks of Rocket Fuel Inc. in the United States and other countries.

  Rocket Fuel Inc. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)    

    June 30,    

December 31, 2017 2016 Assets Current Assets: Cash and cash equivalents $ 62,356 $ 84,024 Accounts receivable, net 107,267 125,755 Prepaid expenses 2,831 2,598 Other current assets 6,046   3,049   Total current assets 178,500   215,426   Property, equipment and software, net 42,429 49,561 Restricted cash 1,784 1,749 Intangible assets, net 27,346 34,874 Deferred tax assets, net 793 574 Other assets 673   517   Total Assets $ 251,525   $ 302,701     Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 72,268 $ 83,001 Accrued and other current liabilities 28,406 33,486 Deferred revenue 4,195 2,856 Current portion of capital leases 9,256 8,325 Current portion of debt 68,998   71,190   Total current liabilities 183,123   198,858   Capital leases - Less current portion 4,722 6,721 Deferred rent - Less current portion 8,840 9,121 Other liabilities 1,491   850   Total liabilities 198,176   215,550     Stockholders' Equity: Common stock 47 46 Additional paid-in capital 479,699 473,056 Accumulated other comprehensive loss (705 ) (925 ) Accumulated deficit (425,692 ) (385,026 ) Total stockholders' equity 53,349   87,151   Total Liabilities and Stockholders' Equity $ 251,525   $ 302,701       Rocket Fuel Inc. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except loss per share data)         Three Months EndedJune 30, Six Months EndedJune 30, 2017 2016 2017 2016 Revenue $ 90,747 $ 116,968 $ 185,919 $ 221,713 Costs and expenses: Media costs 48,239 50,922 95,995 93,481 Other cost of revenue (1) 20,053 20,397 41,558 40,482 Research and development (1) 6,863 9,438 14,133 20,077 Sales and marketing (1) 23,212 36,190 49,110 73,030 General and administrative (1) 9,280 12,765 19,981 27,086 Restructuring 986   1,766   4,754   1,567   Total costs and expenses 108,633   131,478   225,531   255,723   Operating loss (17,886 ) (14,510 ) (39,612 ) (34,010 ) Interest expense 1,231 1,032 2,368 2,269 Other (income) expense, net (1,136 ) 866   (1,688 ) 672   Loss before income taxes $ (17,981 ) $ (16,408 ) $ (40,292 ) $ (36,951 ) Income tax provision 216   285   374   515   Net loss $ (18,197 ) $ (16,693 ) $ (40,666 ) $ (37,466 )   Basic and diluted net loss per share attributable to common stockholders $ (0.39 ) $ (0.38 ) $ (0.88 ) $ (0.85 ) Basic and diluted weighted-average shares used to compute net loss per share attributable to common stockholders 46,638   44,056   46,451   43,828    

(1) Includes unaudited stock-based compensation expense as follows (in thousands):

  Three Months EndedJune 30, Six Months EndedJune 30, 2017 2016 2017 2016 Other cost of revenue $ 334 $ 493 $ 729 $ 1,023 Research and development 690 981 1,232 2,346 Sales and marketing 697 1,357 1,486 2,846 General and administrative 867   1,251   1,989   2,677   $ 2,588   $ 4,082   $ 5,436   $ 8,892       Rocket Fuel Inc. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)   Three Months EndedJune 30,   Six Months EndedJune 30, 2017   2016 2017   2016 Operating Activities: Net loss $ (18,197 ) $ (16,693 ) $ (40,666 ) $ (37,466 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 10,840 12,881 23,384 25,145 Impairment of long-lived assets 164 1,225 2,445 1,225 Accelerated amortization of leasehold improvements — 3,526 — 7,059 Stock-based compensation expense 2,588 4,082 5,436 8,892 Deferred taxes (66 ) 197 (192 ) 193 Other non-cash adjustments, net 872 253 1,121 1,607 Changes in operating assets and liabilities: Accounts receivable 6,035 (4,001 ) 17,451 10,102 Prepaid expenses and other assets 855 (413 ) (3,325 ) (2,209 ) Accounts payable, accrued and other liabilities 2,766 6,781 (15,398 ) (5,916 ) Deferred rent (540 ) (3,029 ) (414 ) (6,103 ) Deferred revenue 657   346   1,339   (128 ) Net cash provided by (used in) operating activities 5,974   5,155   (8,819 ) 2,401     Investing Activities: Purchases of property, equipment and software (240 ) (1,268 ) (1,504 ) (3,055 ) Capitalized internal-use software development costs (2,293 ) (3,000 ) (4,798 ) (5,924 ) Other investing activities 8   —   124   332   Net cash used in investing activities (2,525 ) (4,268 ) (6,178 ) (8,647 )   Financing Activities: Proceeds from employee stock plans, net 797 1,052 904 1,080 Tax withholdings related to net share settlements of restricted stock units (260 ) (368 ) (415 ) (609 ) Repayment of capital lease obligations (2,534 ) (2,126 ) (4,974 ) (4,218 ) Proceeds from debt facilities, net of issuance costs — — (356 ) 22,350 Repayment of debt facilities (2,000 ) —   (2,000 ) (24,000 ) Net cash used in financing activities (3,997 ) (1,442 ) (6,841 ) (5,397 )   Effect of Exchange Rate Changes on Cash and Cash Equivalents 148 (173 ) 170 (253 ) Change in Cash and Cash Equivalents (400 ) (728 ) (21,668 ) (11,896 ) Cash and Cash Equivalents—Beginning of period 62,756   67,392   84,024   78,560   Cash and Cash Equivalents—End of period $ 62,356   $ 66,664   $ 62,356   $ 66,664       Rocket Fuel Inc. UNAUDITED NON-GAAP MEASURES (In thousands, except per share data)         Three Months EndedJune 30, Six Months EndedJune 30, 2017 2016 2017 2016 Non-GAAP spend $ 95,772 $ 118,401 $ 194,839 $ 224,669 Non-GAAP net revenue $ 42,508 $ 66,046 $ 89,924 $ 128,232 Non-GAAP adjusted EBITDA $ (2,488 ) $ 4,219 $ (5,054 ) $ 1,594 Non-GAAP adjusted net income (loss) $ (9,875 ) $ (6,718 ) $ (21,963 ) $ (18,753 ) Non-GAAP adjusted net income (loss) per diluted share $ (0.21 ) $ (0.15 ) $ (0.47 ) $ (0.43 ) Non-GAAP operating expenses $ 44,996 $ 61,827 $ 94,978 $ 126,638 Non-GAAP free cash flow $ 3,441 $ 887 $ (15,121 ) $ (6,578 )     Rocket Fuel Inc. UNAUDITED RECONCILIATION FROM GAAP REVENUE TO NON-GAAP SPEND (In thousands)         Three Months EndedJune 30, Six Months EndedJune 30, 2017 2016 2017 2016 Revenue $ 90,747 $ 116,968 $ 185,919 $ 221,713 Add: Media costs reduced by net basis accounting 5,025   1,433   8,920   2,956 Non-GAAP spend $ 95,772   $ 118,401   $ 194,839   $ 224,669     Rocket Fuel Inc. UNAUDITED RECONCILIATION FROM GAAP REVENUE TO NON-GAAP NET REVENUE (In thousands)         Three Months EndedJune 30, Six Months EndedJune 30, 2017 2016 2017 2016 Revenue $ 90,747 $ 116,968 $ 185,919 $ 221,713 Less: Media costs 48,239   50,922   95,995   93,481 Non-GAAP net revenue $ 42,508   $ 66,046   $ 89,924   $ 128,232     Rocket Fuel Inc. UNAUDITED RECONCILIATION FROM GAAP NET LOSS TO NON-GAAP ADJUSTED EBITDA (In thousands)         Three Months EndedJune 30, Six Months EndedJune 30, 2017 2016 2017 2016 Net loss $ (18,197 ) $ (16,693 ) $ (40,666 ) $ (37,466 ) Adjustments: Interest expense 1,231 1,032 2,368 2,269 Income tax provision (benefit) 216 285 374 515 Amortization of intangibles 3,764 4,127 7,529 8,254 Amortization of capitalized software 3,023 2,743 6,028 5,033 Depreciation 4,053 6,011 9,827 11,858 Stock-based compensation expense 2,588 4,082 5,436 8,892 Other (income) expense, net (1,136 ) 866 (1,688 ) 672 Restructuring expense 986 1,766 4,754 1,567 Acquisition expense 984   —   984   —   Total adjustments 15,709   20,912   35,612   39,060   Non-GAAP adjusted EBITDA $ (2,488 ) $ 4,219   $ (5,054 ) $ 1,594       Rocket Fuel Inc. UNAUDITED RECONCILIATION FROM GAAP NET LOSS TO NON-GAAP ADJUSTED NET INCOME (LOSS) (In thousands, except per share data)         Three Months EndedJune 30, Six Months EndedJune 30, 2017 2016 2017 2016 Net loss $ (18,197 ) $ (16,693 ) $ (40,666 ) $ (37,466 ) Stock-based compensation expense 2,588 4,082 5,436 8,892 Amortization of intangible assets 3,764 4,127 7,529 8,254 Restructuring expense 986 1,766 4,754 1,567 Acquisition expense 984   —   984   —   Non-GAAP adjusted net income (loss) $ (9,875 ) $ (6,718 ) $ (21,963 ) $ (18,753 )   Basic and diluted net loss per share attributable to common stockholders $ (0.39 ) $ (0.38 ) $ (0.88 ) $ (0.85 )   Non-GAAP adjusted net income (loss) per diluted share $ (0.21 ) $ (0.15 ) $ (0.47 ) $ (0.43 )   Weighted average shares used in computing non-GAAP adjusted net income (loss) per diluted share 46,638 44,056 46,451 43,828     Rocket Fuel Inc. UNAUDITED RECONCILIATION FROM GAAP TOTAL COSTS AND EXPENSES TO NON-GAAP OPERATING EXPENSES (In thousands)         Three Months EndedJune 30, Six Months EndedJune 30, 2017 2016 2017 2016 Total costs and expenses $ 108,633 $ 131,478 $ 225,531 $ 255,723 Less media costs 48,239 50,922 95,995 93,481 Adjustments: Amortization of intangibles 3,764 4,127 7,529 8,254 Amortization of capitalized software 3,023 2,743 6,028 5,033 Depreciation 4,053 6,011 9,827 11,858 Stock-based compensation expense 2,588 4,082 5,436 8,892 Restructuring expense 986 1,766 4,754 1,567 Acquisition expense 984   —   984   — Total adjustments 15,398   18,729   34,558   35,604 Non-GAAP operating expenses $ 44,996   $ 61,827   $ 94,978   $ 126,638     Rocket Fuel Inc. UNAUDITED RECONCILIATION FROM CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES TO NON-GAAP FREE CASH FLOW (In thousands)         Three Months EndedJune 30, Six Months EndedJune 30, 2017 2016 2017 2016 Net cash provided by (used in) operating activities 5,974 5,155 (8,819 ) 2,401 Less: Purchases of property, equipment and software (240 ) (1,268 ) (1,504 ) (3,055 ) Less: Capitalized internal-use software development costs (2,293 ) (3,000 ) (4,798 ) (5,924 ) Non-GAAP free cash flow $ 3,441   $ 887   $ (15,121 ) $ (6,578 ) Net cash used in investing activities (2,525 ) (4,268 ) $ (6,178 ) $ (8,647 ) Net cash used in financing activities (3,997 ) (1,442 ) $ (6,841 ) $ (5,397 )

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Investor Relations:The Blueshirt GroupWhitney Kukulka, 650-481-6082ir@rocketfuel.com