Magnite, Inc. (NASDAQ:MGNI) Q3 2023 Earnings Call Transcript

Magnite, Inc. (NASDAQ:MGNI) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Good afternoon and welcome to the Magnite Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there’ll be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nick Kormeluk of Investor Relations. Please go ahead.

Nick Kormeluk: Thank you, operator and good afternoon everyone. Welcome to Magnite’s third quarter 2023 earnings conference call. As a reminder, this conference call is being recorded. Joining me on the call are Michael Barrett, CEO, and David Day, our CFO. I would like to point out that we have posted financial highlight slides on our Investor Relations website to accompany today’s presentation. Before we get started, I will remind you that our prepared remarks and answers to questions will include information that may be considered to be forward-looking statements, including but not limited to statements concerning our anticipated financial performance and strategic objectives including the potential impacts of macroeconomic factors on our business.

These statements are not guarantees of future performance. They reflect our current views with respect to future events and are based on assumptions and estimates, and subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from expectations or results projected or implied by forward-looking statements. A discussion of these and other risks, uncertainties, and assumptions is set forth in the company’s periodic reports filed with the SEC including our third quarter 2023 quarterly report on Form 10-Q and our 2022 annual report on Form 10-K. We undertake no obligation to provide forward-looking statements or relevant risks. Our commentary today will include non-GAAP financial measures including contribution ex-TAC or less traffic acquisition cost, adjusted EBITDA, and non-GAAP income per share.

Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings press release and in the financial highlights deck that is posted on our Investor Relations website. At times in response to your questions, we may offer additional metrics to provide greater insights into the dynamics of our business. Please be advised that this additional detail may be one-time in nature and we may or may not provide an update on the future of these metrics. I encourage you to visit our Investor Relations’ website to access our press release, financial highlights deck, periodic SEC reports, and the webcast replay of today’s call to learn more about Magnite. I will now turn the call over to Michael. Please go ahead, Michael.

Michael Barrett: Thank you, Nick. I’m happy to report results for Q3 that exceeded our topline guidance for total CTV and DV+ contribution ex-TAC, while delivering strong profitability and free cash flow. Our DV+ business performed very well, delivering contribution ex-TAC growth of 12% despite a depressed CPM market. Moreover, in CTV, we continue to grow our market share with ad spend growing over 20% year-over-year, exceeding industry growth estimates. We were pleased with our execution in the quarter as we continue to solidify our position as the leading independent player in CTV. And as product mix shifts stabilize and macro ad spend returns to normal, we believe our CTV contribution ex-TAC growth will, over time, approach our ad spend growth.

In this respect, it’s important to remember that we are still in the early days of programmatic CTV. Marquee publishers are just now ramping AVOD and their inventory is limited and in high demand by advertisers. With this dynamic, pubs generally refer to sell programmatic deals through their direct sales teams. The good news is they are using our technology to execute those transactions. However, as we’ve explained previously, the programmatic direct business carries a lower take rate versus when we sell the inventory and layer on more services. We believe that as programmatic CTV scales, buyers will want to purchase the majority of their CTV programmatically, using advanced data targeting with embeddable environments, a process that can’t be executed using a direct sales team.

This evolution will attract a significantly broader advertiser base, increased ad spend, a more competitive CPM environment, and better ROI and COGS for both buyers and sellers We had some noteworthy customer wins this quarter, announcing that we’d be powering the Disney+ biddable marketplace via Magnite streaming as well as an expansion in our partnership with Paramount advertising. Buyers now have access to all of Paramount’s combined streaming offerings, including their IQ program through Magnite. We’re also encouraged by the fact that a lot of the growth in our CTV business is being enabled to advance integrations with our ad server SpringServe. As you know, ad serving puts us one step closer to the publisher and creates a stickier relationship.

With SpringServe, our platform is more deeply embedded within the client workflow and becomes a central technology in their overall monetization strategy. The stickiness of the software and development we provide in CTV is far different than a typical SSP model. We are clearly growing share, as shown by our ad spend growth above 20%. And this is the result of working with nearly every scale media owner outside of the walled gardens. These clients have continually expanded their relationship with us, both vertically and horizontally. I’ll offer two examples. One is a market-leading streamer and media company that started using us in a small part of their US business for workflow and directly sold campaigns. Now, that partner has expanded our services to additional streaming platforms to other countries and now uses us to access biddable programmatic demand through the Magnite SSP.

Another example is a market-leading TV OEM that started with us in ad serving. They now use us as their SSP and demand engine as well as a source of incremental revenue to our new CTV Tiles product. This same partner also leverages our audience capabilities to sell and package its first-party data on both its direct properties and through audience extension. These examples are common across our top partners and we have continually shown that as our partners grow their CTV businesses, so do the ways in which they utilize our services. Despite a soft start to Q4, largely driven by macro conditions, we believe we are uniquely positioned to capitalize on the inevitable market turnaround. I’ll briefly touch on just a few other things that make me the most excited for 2024.

Accelerated supply path optimization with our agency partners, particularly in our curated and often exclusive marketplaces. Consolidated spend on our platform leads to more publisher supply and enhance margins. ClearLine, our recently launched buy-side tool is off to a strong start and with additional features and functionality planned for the coming quarters, we expect continued momentum and adoption. If you recall, ClearLine is built to capture linear TV dollars that aren’t currently in the CTV ecosystem, a TAM of enormous proportion. And planned innovation across our audience tools, SpringServe ad server, Magnite streaming, and DV+ platforms. With our CTV platform integration behind us, we can now focus exclusively on new innovative products, supporting our unrivaled omnichannel offering and new and existing customer expansion.

Although Magnite works with every publisher across the DV+ and CTV landscape, we have tremendous opportunities to grow our existing business and capture new entrants in fast-growing and dynamic markets like CTV. In summary, there’s a lot to be excited about our business, our people, our customers, and our partners. I never felt better about our strategic position and ability to grow long-term. We have made the right investments and it’s time to put our heads down, work hard, and deliver. We are in a great position to capture an outsized portion of market growth when it inflects by executing and being the best at what we do. With that, I’ll turn the call over to David for more details on financials. David?

David Day: Thanks Michael. Total revenue for Q3 was $150 million, up 3% from Q3 of 2022. Contribution ex-TAC was $133 million, up 4%. CTV contribution ex-TAC was $52 million, down 6% from $56 million last year. DV+ contribution ex-TAC was $81 million, an increase from $72 million or 12% compared to last year. Both of these exceeded the high end of our guidance ranges. Our contribution ex-TAC mix for Q3 was 39% CTV, 41% mobile, and 20% desktop. Geographically, our international results outpaced our US results led by our DV+ business with new publisher wins and overall volume growth. From a vertical perspective, travel was our strongest performing category, while weaker performing categories included retail, financial services, and media and entertainment related to the actors and writers’ strikes.

CTV contribution ex-TAC was negatively impacted by expected softness in managed service and by the mix shift. As a reminder, tough political comps from last year negatively impacted Q3 CTV contribution ex-TAC results by roughly 3%. DV+ continued to be an area of strength, with up 12% growth in the quarter. We continue to innovate in and are excited with the launch of native ad formats across DV+, allowing programmatic demand to target key publishers that offer native formats. We expect to continue to bring new products to DV+ that will enable our publishers to better monetize their supply. Total operating expenses, which includes cost of revenue for the third quarter were $168 million, similar to the $167 million in the same period last year.

Operating expenses for the third quarter this year includes the final $8 million of non-cash accelerated amortization resulting from our platform consolidation. Adjusted EBITDA operating expense was $93 million at the midpoint of our guidance range. Adjusted EBITDA operating expense for the third quarter of last year was $83 million. The year-over-year increase resulted from higher data center and bandwidth costs as well as higher payroll-related expenses. Net loss was $17 million for the quarter compared to a net loss for the third quarter of 2022 of $24 million. Adjusted EBITDA was $40 million and adjusted EBITDA margin was 30% for the quarter. Please note, we calculate adjusted EBITDA margin as a percentage of contribution ex-TAC. GAAP loss for basic and diluted share was $0.13 for the third quarter of 2023 compared to a loss of $0.18 for the third quarter of 2022.

Non-GAAP earnings per share in the third quarter of 2023 was $0.12 compared to $0.18 reported last year. The reconciliations to non-GAAP income and non-GAAP earnings per share are included with our Q3 results press release. There were 137 million weighted average basic and diluted shares outstanding for the third quarter of 2023. Fully diluted weighted average shares utilized for non-GAAP earnings per share were 146 million for the third quarter. Capital expenditures, including both purchases of property and equipment and capitalized internally used software development costs, were $8 million for the quarter. Operating cash flow, which we define as adjusted EBITDA less CapEx, was $32 million for the quarter. Our net interest expense for the quarter was $8 million.

During the third quarter, we purchased and retired 34 million in face value of our convertible notes using $30 million in cash, resulting in a discount of 14%. Our total par value convertible notes repurchased through the third quarter was approximately $125 million, reducing our total convertible note debt balance from $400 million to $275 million. We have $70 million remaining under our current program for either the repurchase of common shares or convertible debt. Our cash balance at the end of Q3 was $311 million, an increase from $266 million at the end of last quarter. We’re very pleased that we reached our initial net leverage target of less than 2x with 1.8x at the end of Q3. We expect to generate significantly increased seasonal free cash flow in Q4.

We will continue to evaluate the best use of our cash as it relates to debt reduction and share repurchases. I’ll now share our expectations for the fourth quarter and some high-level thoughts for 2024. For the fourth quarter, we expect contribution ex-TAC to be in the range of $158 million to $162 million. We expect contribution ex-TAC attributable to CTV to be in the range of $61 million to $63 million. As a reminder, political comps create a roughly 6% headwind in Q4 of 2023. We expect the contribution ex-TAC attributable to DV+ to be in the range of $97 million to $99 million. We expect adjusted EBITDA operating expenses to be between $94 million and $96 million, which implies adjusted EBITDA margin of approximately 41% for Q4 at the midpoint.

Looking ahead to 2024, we expect strong continued ad spend growth, particularly in CTV, total contribution ex-TAC to grow in the high digits — high single-digits with CTV to grow faster than DV+, adjusted EBITDA margin expansion of 50 to 100 basis points at this level of revenue growth. Double-digit percentage growth of adjusted EBITDA with even higher growth in free cash flow and total CapEx to be in the mid-$40 million range, including property, plant, and equipment and capitalized software. It’s worth noting that our guidance reflects some uncertainty in the macro environment, in particular, the potential impact from the Mideast conflict. Overall, the company’s performance for the third quarter was better than our expectations. I’m especially pleased that even with the soft macro and with the negative impact of the current CTV revenue mix shift that we’ve been experiencing, we’ve been able to continue to generate such strong cash flows As a result of those cash flows this past year, we were able to retire over 30% of our outstanding converts well before their maturity and achieved our initial net leverage ratio target of less than 2x.

I’m confident that our greater than market share ad spend growth in CTV will continue. I’m also confident that we’ll continue to expand our CTV partner relationships, leading to CTV revenue growth and closing the gap with our ad spend growth. We continue to have significant opportunities ahead of us and we are uniquely positioned to leverage our capabilities as the leading independent omnichannel SSP. With that, let’s open the line for Q&A.

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jason Kreyer with Craig-Hallum. Please go ahead.

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Q&A Session

Jason Kreyer: Michael can you just step back and maybe just talk about what you see as the evolution of the connected TV transaction model for the industry. And kind of curious on what you think how that migrates from the programmatic execution that seems to be dominating more of that spend today and how that maybe evolves into a more biddable environment down the road?

Michael Barrett: Yes. Sure Jason. Great question. Yes, here’s how we look at the market. We’re very, very early stages. I mean if you looked at our leading CTV revenue publishers on the Magnite platform two years ago, none of them would be the top guys that we’re talking about today, the plus services, the broadcasters, et cetera. They were highly specialized CTV first players. And it’s not surprising that the types of advertisers that the bigger services are talking to right now, are their legacy linear advertisers. And it’s not surprising that they’ve sold to them direct their whole existence and that they’ll want to continue that method in working with those advertisers. I think we’re starting to see and you can see it with services that have been around for some time, take a look at Hulu, you’re starting to see this openness to biddable just largely because the buyers are wanting that to occur and they want to use more data targeting and they want to use more audience definition that may be coming from the buy side, not just the sell side.

So, I think that you have that occurring with that cohort of advertisers, the desire to do more automated, to do more data targeting, to do advanced biddable environments. But in addition, we really do believe that if all of this is just about converting a couple of hundred broadcast advertisers over to CTV, we’ve really missed the big picture. And the big picture is 10,000 new advertisers coming in, right? Advertisers that right now, predominantly advertise on social video environments. And they’re going to — with the increasing targeting and the hyper-targeting and the advanced functionality and features that you’re going to find with the shoppable ads that are coming out, that you’re going to find — that they are going to find this to be a very performing environment, and they’re always going to want to be in a biddable environment.

And these are the types of advertisers that a direct sales team from a large broadcaster, they’re going to hire people to go call on them. So, that’s where we feel as though programmatic comes into play beautifully. And lastly, all sports will be streamed if they’re already most of the contracts are. And sports is ideal for a programmatic environment, timeouts, overtime, et cetera, programmatic is ideally-suited to fill those kinds of ad gaps there. So, we really think that you’re going to see a maturation in the CTV environment in the not-too-distant future where it’s much more of the programmatic that we’re accustomed to in the DV+ side of the business, with one exception, they’re not going to be using 20 SSPs. It’s going to be a winner take most, and we think we’re perfectly positioned for that position.

Jason Kreyer: Thanks Michael. I wanted to just follow-up on managed service, see if you can give any color on how that progressed through Q3? If there’s any indications on how that’s going in Q4? And then maybe along with that, just I think some of that spend perhaps has been impacted by some of the strikes that are going on. And so I’m curious if that will continue to pressure spend in that category or if there’s any signs that, that could be alleviated?

Michael Barrett: Yes. I’ll let David give some more color. But I would say, Jason, in general, no surprises there. It’s behaving as we thought it would. Managed service is impervious to macro headwinds and I would say that we’re not the only company citing a Q4 that’s a bit weaker than we had anticipated going into Q4 for absolute. And so managed service not an outlier there. I don’t know, David, if you have any more details to share.

David Day: No, that’s right. It’s stabilized. And I think what’s important is we’ve tried to take a very cautious approach in our guidance for Q4.

Jason Kreyer: Thank you, gentlemen.

Michael Barrett: Thanks Jason.