What happened

Shares of The Rubicon Project (NASDAQ:MGNI) were down sharply on Thursday, after the company reported earnings for the first quarter of 2020. The stock was volatile throughout much of the session, before ultimately finishing 11% lower for the day.

The Rubicon Project's Q1 reflected a challenging business environment due to the COVID-19 pandemic. But Wall Street may be overlooking some long-term tailwinds for the online advertising technology company.

A frustrated man lays his head on the table with a down stock chart in the background.

Image source: Getty Images.

So what

Q1 results were just for The Rubicon Project, since its merger with Telaria wasn't complete until April 1. Quarterly revenue was up 12% year over year to $36.3 million, while its net loss improved from $12.5 million last year to $9.7 million this year. This was a little behind expectations.

Early in the quarter, the company was on pace to hit guidance. But mid-March, it saw a drop-off in advertising spending. And it's ongoing; April revenue was down a crushing 30% from last year. Management believes the situation has stabilized and hopes that ad spending will return later in the year.

Guidance for the upcoming second quarter should have logically been strong, given that it's for the newly combined company. But The Rubicon Project is only guiding for $36 million to $39 million in revenue. Combined, these companies generated $51.4 million in Q1 revenue. This represents a steep 27% sequential drop in revenue at the midpoint of the guidance, which is why the stock was punished today.

Now what

While Q1 was bad, and Q2 has started on the wrong foot, there may be a couple of net positives from this quarter. First, the merger between Rubicon and Telaria is now complete. Originally, management hoped to save between $15 million and $20 million annually as a combined company, but pressure from the coronavirus has given it a new goal. It's now identifying savings of over $20 million and is scrambling to implement them. These cuts could create a lean, disciplined, and profitable company in the not-so-distant future.

Second, investors need to understand the difference between ad slots and ad spending. "Ad slots" refers to the opportunity for an ad to be shown, and The Rubicon Project's available slots grew 50% in April alone. So it appears the coronavirus accelerated consumer consumption of digital content. While advertisers spent less for those slots, it creates a powerful tailwind for this technology stock once advertising budgets return to normal.