Ricky Mulvey (3:26)

And Nike is also in a tough environment to turn around, announcing that it's going to hike prices on June 1st. The company did not mention tariffs, but CNN reports that they just said we are regularly evaluating our business and making pricing adjustments as a part of our seasonal planning. End quote. Jim, I think we're going to see a lot more of that, especially from retailers. Just we're not going to put blame on anyone, but we are going to raise prices coming into the summer.

Jim Gillies (3:52)

Well, that was the lesson of, that's the lesson of Walmart and President Trump jawboning them down last weekend. Right. You know, I mean, the second they say, well, we can have to, you know, our costs are higher so we're going to have to pass along the costs caused by tariffs and they got spanked. And the signal that sent was, okay, everyone else who is also going to raise prices, everyone's going to do it, come up with literally any other explanation. Don't blame, you know, it's going to happen and people are going to have to pay for this. Just don't point blame in the general DC area is all. So I look, I mean they've also, of course, you know, if they're gonna do price hikes, I mean, part of that's, you know, you gotta pay the Amazon vig now too. Right. So I mean, that's part of it. But no, I think it's going to be interesting times for, for, for Nike in this, in this new higher cost environment. I'll leave it at that.

Ricky Mulvey (4:50)

And it's also incredibly difficult for a brand to come back from being A discount brand back to we're going to sell you things at full price again because you've trained your customer base to wait for the discounts to come and then good luck to you if you can stop that game. It's incredibly difficult. I don't want to discount Nike's ability but there's also a pricing game that's going to be tough for them.

Jim Gillies (5:10)

100%.

Ricky Mulvey (5:12)

Let's talk about the turnaround story itself. It is difficult for companies to turn around. Nike has the Win now plan which, which is focusing on retail partners. As we, as we mentioned there's some focus on brand. There's a shakeup in the technology division. You've seen a lot of turnaround plans and it's easy for investors to get excited about them to want to hop on board and see an undervalued stock and, and, and get on that train. So what do you specifically think of Nike's Win now plan?

Jim Gillies (5:40)

I don't know what to think about the, the Win now plan. I will say I've seen various other Win Now I guess no one could see the air quote so it was a wasted motion. I've seen other turnaround plans and, and we remember the ones that work and the ones that don't work tend to disappear into the ether along with the executives that trundled them out. I have very fond memories this is a technology space as a few years ago someone had come from a very high profile technology company. We'll just put it that. And I saw a presentation from them which was their version. Again, the technology space, it's not important who it was but the plan. They stood up and spoke very confidently about their version of the Win now program. How they're going to win back customers for the technology products that they were offering. I remember watching this and really noting the enthusiasm of the executive who had come over from a much larger company and how much deference he was being given in the room because this guy was very, very important executive from a much larger company than us now. And I think, I think the plan and the person lasted less than 18 months. You know, no, I'm not talking about Pat Gelsinger and Intel. We have seen this story before and, and, and the principles that I have when looking at turnarounds, any turnaround, first of all turnarounds are difficult and a lot of time turnaround doesn't happen. And it's not that the company turns around, it's the company turns around on the person who's trying to drive the turnaround we go get the latest, you know, savior. But the second thing is it's probably going to take you a long time and longer than you expect. So you have time to go into a turnaround story. You have time to kind of, you know, maybe gauge a few quarters, don't even throw any money at it or throw, you know, 0.1% tiny starter position just to make sure you, you keep paying attention. In my, in my career, when I've looked at, like I give you a couple other turnaround scenarios right now, there's a lot of people getting very excited about United Health Group, you know, which has fallen like 50% in a month or whatever it is. And there's a bunch of executives who have committed capital in the open market and everyone's yay, you know what, let's just see how this plays out. I'm going to point you in the direction of Boeing as well, which. The two airliner crashes of the 737 Max, which kicked off a lot of the problems with Boeing. Those were in late 2018, early 2019, and people were rushing in in 2019, 2020. It's like, oh, this is one of the great American success story companies. It's a intrinsically required company in the defensive and the defense industry as well as in the, the airline. It's part of an airline duopoly. If you rushed in in the first year of that, boy, you've been waiting a long time for your money, you know, and, and even like I mentioned earlier with Nike, Nike's, Nike's probably three years into their turnaround. I'm not sure they, they're going to turn yet. Certainly, if you look at expectations, you know, this is a company that as recently as 2021 was, was had revenue growth over 20%. It's going to decline this year and if you believe consensus estimates, going to decline next year and going to decline the year after. One of the bigger turnarounds, I think, or one of the, one of the turnarounds that actually turned that I can appreciate is, is Chipotle. You know, Chipotle and in 2015 had a very, what's the, what's the phrase? Very bad, terrible, awful, you know, year.

Ricky Mulvey (9:08)

They kept giving people food poisoning.

Jim Gillies (9:10)

Well, in various locales and different types of food poisoning too. It's nice that they went for diversification. You don't like E. Coli? No problem. We've got norovirus. By the time you come along in 2016, the stock had already been knocked down by about 40 or 50%. You come along in mid, mid 2016, it's like, okay, like, you know, valuation's much better. It's, they're still got good growth plans. They've at least paid lip service to improving the quality. We understand why they had a lot of the foodborne illness issues that they had. Ironically, a lot of it was tied to their whole food with integrity thing where it's, you know, you can't get one type of potato to make your potato chips or your make your French fries like McDonald's does, where they have a very specific French fry, you know, specification, and they go everywhere. Like, a lot of it was because local, local farms has had tainted lettuce and they tried to do local. So. But, you know, you come in about, you know, mid-2016, you know, you're, you've well cleared the, the 50% drop and, you know, the, they've paid lip service, they've closed the stores to do a proper clean at everyone. They introduce more, more, you know, training, and they come out and say all the right things was still dead money for another two and a half, almost three years, you know, and it was only after founder Steve Ells is gone and they bring in Brian Nichol from, from Taco Bell, which is still hilarious to me. You know, only then did Chipotle have its renaissance and it's done very, very well. But, you know, the people who ran in in the first couple months, you know, probably paid more than they needed to, and they were very early. So I look at a Nike and go, okay, we're about three years into this. Is any of the moves they're doing gaining traction? I don't know, but I'm still like, you know what? I'm still taking my time because I'm not sure there's a lot going on.

Ricky Mulvey (10:54)

Elliot Hill came in as CEO in 2024, was John Donahoe, who is there from 2020 to 2024. So he is not, you know, the new leadership has not had three years to really implement a new plan. It's, it's, it's been less than that. Jim, it doesn't sound like you're interested in Nike. I'm not getting you to bite on Nike. It's, it's at a historic multiple. It's like 20 times earnings for an iconic brand. I think that, you know, I, I would Bet that in 10 years from now, 20 years from now, people are still buying Nike shoes. Now, sure. Degree that is, I have no prediction. But you're not biting on Nike. These things are difficult. Are there any Current turnaround stories that are, you're more interested in. I know you like looking in the dark corners of the market where not a lot of other people like paying attention. But when you grab your flashlight and search around the attic, are there any better, better situations for retail investors than Nike right now?

Jim Gillies (11:45)

Oh, I'm going to give you one that's going to get me some grief but that's okay because I, you know, I, I, I live on grief and tears. So that's good. In the spirit of trying of Charlie Munger try to destroy a cherished belief at least once a year. A company that I very publicly mocked on Fool 24 Fool Live at the time called out their now former CFO as being, I'll say suboptimal. I said nastier things but that's okay. If you had told me that I would be an owner of Peloton today, I'm not sure I would have believed you. But the whole concept of Peloton is fine post Covid because you know, Peloton spent the COVID bubble completely overbuilding and pushing as far away as possible. Any suggestion that they were nothing more than a Covid growth story, you know, no, no, no, we're fine. And of course they overbuilt all their, they overbuilt all of their fitness gear which is very low margin as opposed to their subscription business which is very high margin. They plowed all their capital into their treadmill and bike business and then had to sell it at just brutal discounts. You know, the CFO again had no idea what the F in her name meant. She very publicly said we have no need to raise capital. Twelve days before the company raised a billion dollars in capital when the CFO doesn't know what coming, you know, you don't exactly engender optimism in that they know what the hell is going on. But flash forward to today. The froth has been largely cut. The people who were intent on empire building are gone. They have hired a guy who on paper looks great. It comes from Apple Connected Fitness and is one of the pioneers there. That's the new CEO, has been a Peloton member since 2016 himself some subscribers who uses the product and they're basically, it's basically boils down to the new management finding and nurturing the real business hidden underneath this Covid era empire excess. And you know for though and of course peloton was down 99% at one point. You know, like this has been bombed out. Why would anyone go here? Right. Well if you look at the last three quarters they have beaten and raised their guidance. Each time you look at the full year quarter they came into 20, they have a June fiscal year, so they're three quarters into fiscal 2025. They came into fiscal 2025 with a prognostication of various things. The main things I'll say is adjusted EBITDA of 200 to 250 million and free cash flow, which is not something this company was familiar with for the last couple years generating at least 75 million in free cash flow after one quarter. So that was, that's what they came into. After 1/4 they bumped their guidance up and you know, the free cash flow guidance became at least 125 million after two quarters, again bumped guidance up and cash flow became at least 200 million for the year after the third quarter. And by the way, after three quarters they've actually done 211 million in free cash flow, which is again kind of not what people were expecting from the corpse of, of peloton. This most recent thing is they're going to do free cash flow in the vicinity of $250 million. So and they've already got, you know, 211. Like I said, they are now trading for about 13 times least. As of a couple days ago. I've looked at them today trading at about 13 times free cash flow. They have 1.5 billion in debt and some of it's very expensive debt but you know, I think they're going to pay it off fairly quickly. They got $1.5 billion in debt with about 900, $910 million cash against it. Going to take out about $200 million in convertible debt, which it matures next year. That'll be gone. Probably going to take out a couple hundred million dollars on the credit line which is a very high interest rate. When they do that, it'll automatically drop their interest rate down. So now you've got another engine contributing to the cash generation story. They're really focused on keeping the subscriptions that they have now. They've de. Emphasized the hardware model and I just look at this and go, I think peloton not only can be a multi bagger from here or here being $6 when I was looking at it fairly recently, I think you could have, I think you could see a world in less than five years where Peloton goes from six to, you know, 25 to 30 and it's bought out during that interim. And so I'm, I'm more interested in that kind of a turnaround. Where like the bombing happened and it's just rubble everywhere rather than the fits and starts at like at a Boeing, at a Nike, at an Intel. I mentioned Pat Gelsinger earlier. You know, I'm, I'm more interested in, you know, I want to see like, you know, blood in the streets or my turnaround target and then I get interested. I don't see that with Nike.

Ricky Mulvey (16:41)

And importantly, free cash flow. You used a free cash flow metric for peloton. That means that company is generating a profit for, for listeners making sense of that word salad. That's a great place to end it. How about that? Jim Gillies, thank you for your time and your insight. Appreciate you joining us on Mountain Money.

Jim Gillies (16:55)

Thank you.

Ricky Mulvey (17:02)

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Rajiv Goel (18:42)

Rajiv One thing we love to dig in through is really the competitive advantages of the companies we invest in and we follow. And Pubmatic is a recommendation across many of our services. So I want to talk a little bit about Activate, convert and connect, just some of the new initiatives you've brought to the platform, especially tied to AI. But really as you're looking to serve different parts of this market that is just kind of all blending together with all the different players that are connected into serving advertisers to consumers. As the advertising Market is not just growing, but as you mentioned and really evolving towards more programmatic spend. Yeah. So I think the great thing about our platform is how we connect all of these different segments of the market together so we can enable their businesses and enable them to transact. So Convert is our commerce media platform. I gave a couple of examples earlier of Instacart Data, for instance, is available on our platform. So if a marketer wants to target people that are shopping for specific products, or maybe it's a conquest where you say, okay, if you they bought Campbell's soup, then we want to show them an ad for the alternative. But Instacart doesn't have a huge amount of digital ad inventory in that people go on Instacart and they purchase their basket of groceries, but then that data can actually be applied outside of Instacart itself. We can extend the value of that data. Now streaming inventory is a great place to extend the value of that data so we can play on Instacart data onto, let's say Roku Invent. That's a huge win for everybody involved in that process, including the consumer, by the way, who's going to get a much more relevant ad as they're watching content on Roku. The beauty of our platform, Convert for commerce media, Activate for buyers. We have our core SSP for publishers. And then we have a product called Connect, which I'm sure we'll get into. Andy. Which has to do with curation and sell side targeting. More and more of this targeting is moving to the sell side of the ecosystem rather than the buy side. So we can bring all of these pieces together to enable a customer to very efficiently and with a high degree of performance drive the transactions and the outcomes that they want to drive.

Andy Cross (20:55)

Rajiv, I wanted to ask you a question about where advertising is going in the current sort of macro environment, maybe some longer term trends. And I think you've peripherally touched on this as you've been talking. In your last earnings call you mentioned a shift in marketing funnels from sort of top of the funnel activities to lower level activities. So I was curious. So if you advertising advertisers are shifting from sort of brand building activities to more performance marketing, how does this benefit Pubmatic and how are you all positioned to help advertisers go a little bit lower down the funnel?

Rajiv Goel (21:31)

There's no doubt, right, that there's a degree of uncertainty out there, right? U.S. trade policy, tariffs, all that kind of stuff that is causing some, some unease. The good news from my perspective Is, you know, having been doing this as long as I have, we've managed through multiple economic cycles, right? And so we've kind of seen this playbook of, okay, when the CYC shift happens, like how does that play out into advertising? So the good news is that advertising always comes back bigger and better. And in particular, digital advertising. Advertising has been around for hundreds of years and it's not going away. And so what typically happens is the underlying shifts that were happening maybe slowly in the ecosystem, those get accelerated. And so a couple of things that I'm anticipating. So number one is I think we're going to see a more pronounced shift of dollars from linear TV into streaming. So no secret that obviously the eyeballs have shifted into streaming, right? And the COVID pandemic was a big accelerant for that. But, you know, new households that form, right? If you're in your 20s or your 30s, nobody's subscribing to Comcast or something like that, right? They're all going for streaming. And so the eyeballs have shifted, but the dollars have lagged, right? And so right in the middle of the upfronts, right, this is when the big TV companies, the broadcasters and the streamers, they go, and what's their content slate? And try to get advertisers to commit big budgets. And I would think, and when I talk to advertisers and agencies, I'm hearing who's willing to step up their commitment given the uncertainty. Particularly because if you don't buy in the upfront, there's what's called the spot market, right? That's the real time market where you can buy without having made a commitment. And so the spot market is available to you. So I think we're going to see a lot of dollars move into the spot market and in particular around streaming. And spot tends to be much more heavily programmatic dominated. And so we think that's a big upside potential for us. The second ossip is what you mentioned around performance. So the other thing that happens is usually a CFO is now getting into the CMOs here and saying, hey, we got to make sure every dollar of ad spend is super accountable, right? We need to know granularly what's the roi. Otherwise it's potentially on the block for being cut. And so that means that I would expect to see a shift of ad dollars from brand orientation towards performance. And so what does that mean in terms of performance channels? CTV is a performance channel, Commerce Media is a performance channel. You have closed loop reporting, the ability to measure what kind of sales happened? We have a lot of advanced data and targeting. I'm sure we'll talk about cookies, but there's been a big transition and we've been a leader in that transition away from cookies. So a lot more advanced data like people logged in. And so I think we're going to in a good position to be able to manage through that shift for our publishers to drive more performance ad spend. And then I think the third thing we're going to see, actually I'll give you two more things. The third is more supply path optimization. Right. So if your CFO comes to you and says, hey, we're going to have to ratchet back the ad spend by 5, 7, 10%, then the first place you're going to lean to is to say, well, how can I protect ad actually the media spend, but how can I get more efficient, but how can I take cost out of my supply chain, out of my buying process and supply path optimization? And our Activate solution with its AI capabilities is a great way to do that. And then lastly, I think we're right at the cusp of this AI revolution. And so usually what happens in a macro cycle is people are much more willing to try new solutions. When you're making 100, 110% of your plan, your motivation to try something new is very low. Like hey, why rock, rock the boat. But if you're coming in at 80 or 90% to plan, if you're a publisher or an advertiser, you know, trying to kind of trying to drive your sales, then all of a sudden you're willing to try new things. And I think there's a lot of AI solutions out there in general. But you know, we've got, we've been doing a lot in AI, our new buyer platform that we announced last week with AI driven workflows. So I think we're going to see an acceleration of interest in trial, you know, of a lot of these new AI solutions.

Andy Cross (25:51)

Rajiv, we've talked about a lot of technological advancements and potential tailwinds up until now. We're about halfway through. So before we jump into questions about AI, I want to draw everything together. Can you give us from a financial perspective, sort of a sense of the revenue cagr we should be expecting, shareholders should expect, let's say over the next three and then maybe five years.

Jim Gillies (26:14)

Sure.

Rajiv Goel (26:15)

So I'm happy to share what I can in terms of forward looking projections. Let me give a little bit of context on the business just from the last couple of quarters. So in May of 2024. So almost exactly a year ago, one of our large DSP buyers, they made a technical change to how they, you know, how they bid. So they, I won't go into too many details on it, but they went from first and second price auctions to really managing first price only. And so that was a significant headwind for us. At the same time we saw a nice tailwind in political ad spend, right. So obviously last year, presidential cycle, big cycle, so there was a lot of political ad spe, particularly in the second half of the year. So there's a lot of noise in the numbers right now. And so what we started to do middle of last year is just to break out. If you look at our business excluding that DSP and excluding political, so the put in the take what is the growth in the business look like so that investors could get kind of a clear picture of what is the underlying business, how is it performing. And that underlying business, by the way is about 70% of our revenue. So obviously a very significant chunk of it. So in the second half of last year, that underlying business grew 17% on a year over year basis. Pretty good. That growth accelerated in Q1 to 21%. So we're seeing really nice trajectory in the business. Our reported revenues, the entire business, they've been uneven. Uneven because we took that hit in Q2 of last year and that persisted into Q3 and then we had uptick from political. So Q3 looked pretty good and Q4 came back down. So when you look at the total kind of reported numbers, there's some unevenness. You know, we are really targeting to grow at over 15% per year on a sustained basis. And we think, you know, when we look at our, our underlying business again and the trends there with that 21% growth in Q1 and we think about even in the near term, you know, with the macro uncertainty, we think we can continue to grow at that rate. At that 15% plus rate. I think there will be quarters where we're, you know, where we're above that. But I think that, you know, 15ish percent is a good, is a good number. Also the market is also, you know, our market is growing in the 8 to 10% range. You know, digital advertising, programmatic digital advertising. So that 15% also implies, you know, sustained market share growth.

Ricky Mulvey (28:44)

I'll put a link to the whole interview in today's show. Notes which members of any Motley fool service can access. As always, people on the program may have interests in the stocks. They talk about in. The Motley fool may have formal recommendations for or against don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and are not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our Show Notes. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.