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.
They also posted a presentation deck summarizing Q2 Highlights:
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.
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.
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