Magnite (MGNI) Q2 2021 Earnings

[mekong22]

Magnite reported earnings after market close yesterday and they more than met my expectations. At the open today, it looks like the stock is up about +15% so far. The moves they have made over the past two years to focus the business more on CTV appear to be progressing well and paying off.

https://investor.magnite.com/news-releases/news-release-deta…

They also posted a presentation deck summarizing Q2 Highlights:

https://investor.magnite.com/static-files/31cc97b8-3fea-409f…

Revenue Growth

Their growth numbers will still be muddy to navigate because they had 2 months of new acquisition SpotX in Q2 vs none in the prior year and Q2 2020 was the low point for business last year when their numbers were pretty depressed.

GAAP revenue was $114 million, +170% compared to $42m last year.

Revenue ex Traffic Acquisition Costs (“ex-TAC”)

The metric that management focuses on “revenue ex-TAC”, which makes their total revenue more consistent across the company since some revenue (due to GAAP accounting requirements) gets recorded gross (including what they pay to the owners of advertising space) and other revenues have to be recorded net (essentially just Magnite’s commission, net of cost of sales, so only their gross margin is included in total revenue). Those of you that follow Trade Desk TTD know that almost all of TTD’s revenue is recorded “net”, which is very different than pretty much every other company we follow here, making MGNI and TTD’s revenues look much lower than the amounts they bill customers and collect, due to the related US GAAP accounting rules

Revenue ex-TAC was $100m, +139% vs $42m last year. The prior year Rev and Rev ex-TAC numbers were more in line because most of the legacy Magnite & Telaria revenue was net, while more of Spot X’s revenue has to be recorded gross. That’s why the ex-TAC non GAAP measure became more important to evaluate their business only recently due to the combination with Spot X

Pro forma / organic growth

This is what I’m focusing on and what really matters to me. They are basically showing what the growth was if all companies, including Spot X, were combined both in the full prior year and full 2021 periods. This is how fast the total company that shareholders own today is growing.

When management said, on the Q1 earnings call last quarter, that the pro forma (organic) growth rate was accelerating (from about 36% in Q1) in the beginning of Q2, they weren’t kidding!

Pro forma Revenue ex-TAC grew +79% in Q2 2021 compared to Q2 2020

Pro forma CTV-only Revenue ex-TAC grew +108%!

They specified that both legacy Magnite (with Telaria) and SpotX’s CTV revenue grew more than +100% each this quarter on a pro forma basis. So it’s not like just SpotX’s CTV business is growing fast and making up for lagging growth on the legacy (mostly Telaria when it comes to CTV) business.

For all intensive purposes, their CTV businesses are combined and are being managed together already so management said not to expect this kind of metric (legacy vs SpotX’s individual CTV growth) going forward, although of course they will continue to show combined pro forma/organic growth results until we lap SpotX’s acquisition date next spring.

Pandemic PY impact

Now keep in mind, just because the pro forma organic number had such huge growth this quarter, we don’t expect it to continue near the +100% rate in the future. Q2 was the low point of the pandemic impact which drove down revenue temporarily. For example, I expect that TTD will also be close to, or over +100% growth this quarter when they report next week, and they didn’t have any significant acquisitions recently, so that is all organic.

I believe their long-term revenue ex-TAC goal of +25%/annually will ultimately be quite conservative. I think they can easily do significantly better than that for several years, given all of the macro tailwinds for digital programatic advertising, streaming and CTV and, if so, today’s MGNI stock price should look very cheap in retrospect.

Cash Flow

While the cash balance on the balance sheet and debt were impact by the SpotX acquisition (no surprises there), Magnite’s cash flow from operations appears very strong in Q2.

They generated +$27 million of net cash from operations, compared to -$21 million negative cash used in operations in Q2 last year.

Earnings call

I missed part of the earnings call, but I was surprised how many of the questions and discussion were related to a very small company that Magnite bought last month called SpringServe. The analysts asking seemed to believe this company will have a more significant positive impact on Magnite’s business that I had realized, and management felt this way as well. I need to go back and read up more on this, as I hadn’t paid too much attention to it when it the SpringServe purchase was first announced.

Overall, guidance looked fine and will hopefully be conservative. As the acquisitions get further integrated and they move their IT dev roadmap, and the overall trend toward CTV continues to evolve, I remain really optimistic for Magnite and have no concerns continuing to hold it as my largest investment. I expect I’ll continue to own them for a long time, and looking forward to what TTD and Jeff Green have in store for us on Monday

-mekong

[MilennialFool]

mekong,

Thank you for the summary of MGNI earnings. I want to hear your thoughts on guidance:

1. Revenue ex-TAC attributable to CTV for Q3 2021 to be between $41M-$45M representing growth of approximately 50% YoY on a pro forma basis. CTV grew 108% in Q2 but they guided for only 50% in Q3. Is this conservative or around 50% is what we should expect the CTV revenue growth rates to be at?

2. They guided for $114M ex-TAC revenue for Q3’2021.Difficult to get pro-forma growth without SpotX revenue for Q3’20.But looking sequentially, Q2’21 revenue including SpotX rev for April can be approximated as $116M (100.4+48/3). This indicates pretty much flat from Q2 to Q3. Does this concern you? And i noticed that to be the case in 2018 & 2019 as well, but not in 2020, where revenue stays flat from Q2 to Q3 .

[FinallyFoolin]

One more question on top of what MilennialFool has above.

Was there much talk about the customer concentration stuff? Disney was by far their top client. Hopefully they are diversifying more.

I sold out a couple months ago but still on my watch list here.

[mekong22]

MillenialFool

you’re looking at things exactly right

While I expect their guidance will be at least a little conservative, as I noted above, the 100% proforma/organic CTV growth this year was very much a function of the weak comparison to Q2 in the prior year. It probably won’t be near that high again in subsequent quarters. Also remember the elections were last year and the biggest periods of political ad spending was Q3 2020 and early Q4. Those sales won’t repeat this year (but will be at least somewhat back next year and then even more so in the presidential cycle two years later). That will make it a little more challenging to know the exact business growth period to period.

But regardless, by my math, they aren’t even being valued for 30% growth today, so even a few periods around 35-40% is all I’m looking for over the next couple of years. But the potential is there for those growth rates to accelerate at any time, and grow even faster, over the next 3-5 years, depending how and when the CTV advertising market evolves and matures. If (still an “if”) Magnite becomes the, or one of the, SSP leaders, they will find themselves in a position to grow bigger and faster over a pretty extended amount of time.

You’re also right with the sequential guidance, an extra month of SpotX has to be factored in.

Sequential growth probably won’t look too impressive (on a proforma basis) next quarter. But in Q4 it certainly will because, as with the election ad spending noted above, this is an advertising activity-driven company (similar to TTD) so it’s very seasonal (e.g. Q4 will always be a big sequential growth month for holiday ad spending, with Q1 a sequential decline, even in good times). Very different from many other companies we follow here that are not as seasonal and just have user licenses and other data usage revenue that renews and grows more smoothly from period to period.

So it won’t be as easy to evaluate Magnite from quarter to quarter based on quantitative metrics. In my mind, this is a longer term play where, as long as the big picture and trends hold, I focus less on the period to period gyrations.

-mekong

[mekong22]

Was there much talk about the customer concentration stuff? Disney was by far their top client. Hopefully they are diversifying more.

I don’t believe that is the case. Can you point me toward where you saw that?

Disney is definitely one of their biggest name, highest profile suppliers of ad inventory. Magnite powers Disney and Hulu’s merged XP ad platform. But Disney isn’t actually a customer of Magnite, they’re more of a vendor. They don’t pay to buy ads, Magnite pays them, less the commission/take rate, when they sell an ad on Disney/Hulu’s streaming platforms.

And according to Magnite’s latest 10-K:

No seller of advertising inventory accounted for 10% or more of revenue during the years ended December 31, 2020, 2019, and 2018.

So Disney is the supplier of than 10% of Magnite’s ad inventory.

But let me know if you’ve seen something that suggests otherwise

-mekong

[Citibeach44]

“depending how and when the CTV advertising market evolves and matures.”

Mekong, I’m right there with you on MGNI. Curious though on this point above. As CTV develops and benefits MGNIs growth going forward, does it not hurt TTDs forward growth? Isn’t MGNI much more of a CTV play then TTD, and isn’t that where much more of the ad dollars are going moving forward?

TMB

[mekong22]

As CTV develops and benefits MGNIs growth going forward, does it not hurt TTDs forward growth? Isn’t MGNI much more of a CTV play then TTD, and isn’t that where much more of the ad dollars are going moving forward?

TMB

It’s hard to tell based on the info that is publicly available, but I believe CTV is a pretty significant portion of TTD’s business and will likely be even a larger share in the future.

CTV is only about one-third of Magnite’s business today ($34m out of $100m total Rev ex-TAC last quarter) but certainly that is where they are investing and moving more heavily toward.

TTD on the other hand, considers their whole business as one operating segment and I don’t believe they break out CTV, or video.

But according to this article

https://www.adexchanger.com/platforms/trade-desk-handled-4-2…

“…in 2020, at least 1,000 brands spent at least $100,000 in CTV” (with TTD)

and they say the number of brands that spent more than $1 million in CTV with TTD “doubled” (tho we don’t know how many that is)

As a reminder, those ad spend dollars, while they all get collected by TTD, most of that (the portion they pay to the streaming platforms, essentially like cost of sales) doesn’t ever show up in TTD’s revenue, since they’re required to record revenue “net” under US GAAP, so only their “take rate”/commission flows through revenue (approx. 15%). Trade Desk and Magnite are actually both much bigger businesses than they appear if you just look at their reported revenue numbers.

So that was a long way of saying, I think CTV growth will be a big deal for both TTD and MGNI. Of course, they are on opposite sides of the process with Trade Desk as a DSP (demand side platform) and Magnite SSP (sell side), but both should ride the wave of CTV growth to becoming bigger and bigger companies in coming years.

-mekong

[FinallyFoolin]

I can’t find that reference material. I should have copied and pasted that URL into my notes. MGNI is the exclusive SSP for Disney.

My major concern with this is due to Disney’s potential of doing the SSP themselves when this 18 month contract is over.

https://www.marketingdive.com/news/disney-unveils-programmat…

As long as Disney isn’t a huge customer concentration risk, that makes me much more interested in it. That was one of my big concerns. Basically, I sold out for a few reasons, the Disney concentration (that’s perhaps a misunderstanding on my part) and the difficulty I have for understanding how they’re really doing. I kept my CTV allocation the same, just pumped those funds into Fubo.

[GolfCaddy4PLynch]

I sold for the same reason. Disney has been very public about its five-year plan to build an entire ad tech stack internally.

Here is one article regarding it.
https://www.adexchanger.com/strategy/inside-disneys-plan-to-…

Will this completely cut out Magnite? Perhaps not. Disney may still need to work with various vendors for additional scale. But I do think that means there is an existential thread to Maginite’s business over the long term. This is why I ultimately went with ROKU as a CTV play. They own the full stack like YouTube and do all the tech end-to-end.

[mekong22]

That’s interesting that two of you sold Magnite over worries of losing Disney. I’ve always thought of their Disney deal, not so much as a source of profit, or even revenue, but as a proof of concept.

If other companies that they want to sign on see that Magnite powers the Disney Hulu platform, they think “Well if it’s good enough for Disney and Hulu and their millions of subscribers, then Magnite surely can handle our needs”

It actually wouldn’t surprise me if they gave Disney a sweetheart deal and it’s almost like a loss leader. After 2-3 years, it might have served it purpose and Magnite may be no worse off if Disney leaves then.

I could be totally wrong, but that’s how I look at it.

Or Magnite may continue to power Disney/Hulu for the next decade and it contributes lots of profit, who knows? Either way, at least in my opinion, I don’t see Disney/Hulu as the difference maker between whether Magnite is a great investment or not over the next 5+ years.

Remember when Twilio lost major 12% customer Uber in 2017? Twilio was $25/share then. It’s $371 today. I’m not saying MGNI will have that same kind of gains over the next four years…it might take them 5 years. (Half) Kidding, but you get my point.

-mekong

[freshpaint]

I think I’ve worked out the spotx 2020 numbers but someone jump in if I’ve got this wrong. They broke out numbers for Q121, Q420 and full year 2020 in their past few earnings presentations. I used the growth rates they gave to figure out Q1-Q3 2020.

Q120 - 20.8
Q220 - 13.8
Q320 - 36
Q420 - 45.3
Full Year 2020 - 115.9

So they’re only guiding for 20% growth next quarter. Not great but they’ve been beating their guides so I would hope it’s much higher. Like Mekong said, their revenue is lumpy with Q4 being the big kahuna and the thesis for this one really isn’t about the next quarter. This is only a 5% position for me but the way I look at it is they’re in very early innings and off to a good start in a space that has quite a bit of upside potential. On the call, it sounded like they’re making good progress combining everything into a unified platform.

It’s probably my lowest conviction position but at this point, I’m still willing to wait to see how it plays out. If they start seeing some of the same traction TTD has, it should start showing up in the numbers and with the announcement of more big deals. It should also mean some decent expansion in multiples over the next few years.

[rdgyy]

This is a great thread, thank you all for sharing. I like others were also concerned about Disney but didn’t sell last quarter. I’m still unclear on the relationship and the way clients are being counted. I found the following article

https://www.adweek.com/media/magnites-tight-relationship-wit…

Is Hulu considered separate client from other Disney properties if Disney is not considered a client directly? If they are managing multiple properties that Disney owns that could be a greater risk - and that is what I remember reading from couple of months ago, but don’t remember the source or analysts laying that out (and if it was actually correctly reported).

[GolfCaddy4PLynch]

Let me see if I can clear a few things up here for people on this thread.

Advertising is a two-sided marketplace. Publishers need tools to sell advertising slots. Advertisers need tools to buy ads.

DSP: The Tradedesk’s clients are advertising agencies and their primary focus is making tools to make it easy to buy ads from as many publishers as possible. This is called a DSP (Demand Side Platform).

SSP: Maginte’s clients are big publishers like Disney and Hulu. The primary focus is tools to allow them to sell all of their advertising inventory. This is called the SSP (Supply Side Platform).

The needs of both sides of the market are surprisingly complex and that is why there are two different companies making tools to focus on each side.

With the Disney Maginite relationship, there is extreme customer concentration risk. Because there are very few publishers of that scale that need an SSP. Keep in mind that the biggest publishers are Google, Facebook, Pinterest, Snap, Roku, and YouTube who do not need an SSP. They make all their own tools and sell directly to advertisers. There is only a small cross-section of independent publishers that need an independent SSP. All of the new streaming apps like Peacock or a niche app like Tubi could work with Magninte.

[apackalyes]

Maybe this makes me a jerk, but you mentioned Magnite 3 times in your post and a) you spelled it differently each time, and b) you misspelled each time!

Sorry, but as a Magnite shareholder I felt compelled…

[n8larson]

Maybe this makes me a jerk, but you mentioned Magnite 3 times in your post and a) you spelled it differently each time, and b) you misspelled each time! Sorry, but as a Magnite shareholder I felt compelled…

It does, but I totally get it… I’m a slowly recovering “jerk” of the same kind. ‘Grammar Nazi’, typo pointer-outer, whatever, it’s not a productive enterprise in the end. One of the great things about this board is that folks tend to forgive such things. I have found my own reading experience in all things posted by regular people online (not just TMF posts) getting richer each time I let go of the urge to correct someone else’s basic writing/typing mistake. I admit, I have a long way to go, at least in my head.

One way this manifests itself is that, maybe unfortunately, I’m a little less careful when proofing my own posts here before hitting that ‘Submit’ button. Nearly every post I make that’s more than a few lines seems to contain a left-out word, a repeated one, a sentence fragment, a typo, or some grammatical error I used to be generally more quick to point out in others’ stuff, earlier in life.

I hope you’ll consider a ‘let it go’ approach as well and read for content even when the urge to correct feels overwhelming. And don’t take it personally if your post gets deleted… this one might as well. It’s good to appreciate and work within the climate of forgiveness that seems to prevail here when it comes to the superficial thing that is spelling, grammar, and typing. Mostly, we don’t want to dwell on the little things when there are so many big things going on that matter.

-n8 (I don’t remember this topic being in the knowledge base, which probably means I should schedule my next re-reading of it.)(Oh, and I’m also long MGNI.)

[rdgyy]

I went through the entire earning call and did not find any questions or information regarding Disney, or Hulu. The key I think for Magnite moving forward is to have an extremely competitive SSP that will be able to serve all of their publishers and clients. This is the part that got my attention - this is from the CEO regarding the acquisition of SpringServe

" This is a key technology piece that market leaders like FreeWheel and Google have bundled with their SSP to create an efficiency advantage and better compete in the market versus other SSPs or ad server only competitors. We’ve talked before about how important it is to be a full stack independent partner to serve the open web in third-party CTV publishers, in this critical piece of tech allows us to offer a viable independent end-to-end solution"

The CEO goes into more details on the subject, but I think this will help them keep Disney at bay, and even if Disney has their own solution, I think they will still maintain some sort of partnership with Magnite giving the completeness of their platform.

The strange part of the call to me was the responses from their CFO David Day - is he not interested in taking at all, or just does not care? He barely provided any feedback, and the answers to the questions were ridiculously uncharacteristic for a CFO.