Magnite, Inc. (NASDAQ:MGNI) Q1 2023 Earnings Call Transcript May 10, 2023

Magnite, Inc. beats earnings expectations. Reported EPS is $0.04, expectations were $-0.04.

Operator: Hello and welcome to the Magnite First Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host today, Nick Kormeluk, Investor Relations. Please go ahead, sir.

Nick Kormeluk: Thank you, operator, and good afternoon, everyone. Welcome to Magnite’s first quarter 2023 earnings conference call. As a reminder, this call is being recorded. Joining me on the call today 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 might 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 first quarter 2023 quarterly report on Form 10-Q and our 2022 annual report on Form 10-K. We undertake no obligation to update forward-looking statements or relevant risks. Our commentary today will include non-GAAP financial measures, including revenue ex-TAC, or less traffic acquisition costs, 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 incremental metrics to provide greater insights into the dynamics of our business. Please be advised that this additional detail may be onetime 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 Barrett: Thank you, Nick. Q1 was a standout quarter for Magnite. Revenue ex-TAC grew 8%, CTV revenue ex-TAC grew 10%, adjusted EBITDA came in at $23 million, and we posted an adjusted EBITDA margin of 20%, all exceeding our guidance for the quarter. We continue to demonstrate the value of a differentiated strategic sell-side partner in the ad tech ecosystem. Our growth and outperformance relative to walled gardens and numerous peers in Q1 is further evidence that our strategy is working and there is a big opportunity for a leading sell-side platform to serve the open Internet. It is most evident in CTV. We’re having an ad servers becoming critical to long-term success given that so much inventory is still transacted directly.

CTV publishers require a fully integrated offering that maxes — maximizes yield across their portfolio of programmatic and direct inventory, providing tremendous performance advantages. At an increasing pace, we are seeing undifferentiated SSP struggle, as they are unable to serve customers in new formats, or geographies, with the depth of tools and solutions that customers demand. This has resulted in market share gains for Magnite, and we believe there are significant opportunities for market share gain in the future. As we look forward, our growth expectations for 2023 haven’t improved from our last update, and we expect this strength to continue throughout the year. David will provide greater detail on our financial results and future outlook in his prepared remarks.

Our CTV results were propelled by strong performance in our SpringServe ad server business and by our managed service business where we saw good traction with new and existing partners. We’ve had success this quarter with our lead partners in CTV that include LG, VIZIO, GroupM, Disney, Fox and Roku, who recently announced changes to their go-to-market strategy. Our momentum with these partners is very visible with our active participation in the up friend to new friends that have recently kicked off, where programmatic continues to play a bigger role, especially as it relates to direct deals. On the new CTV partner front, Rakuten TV, one of the leading video on demand platforms in Europe recently adapted the SpringServe Tile solution. As a reminder, this proprietary ad unit provides publishers with the flexibility to showcase custom ad creative within the streaming interface in any size in a wide variety of formats.

Rakuten joins VIZIO and others who are now leveraging tiles to create incremental revenue opportunities and enhance the advertising experience and effectiveness within their platforms. Moving on to DV+. We continue to build momentum with our initiatives in this business. DV+ revenue ex-TAC grew 7% year-over-year, showing further improvement in share gains. We have seen broad based improvement this quarter across many of the leading DSP partners we work with. As I’ve mentioned in the past, DV+ growth is a result of many incremental wins and improving the fill rates between our publishers and DSPs, and we look forward to continued strength as we drive further improvements in the quarters to come. We had a very busy quarter from a platform perspective.

In February, we officially launched Magnite Streaming. Magnite Streaming is our next generation CTV and OTT platform that merges the best features functionality and technology for Magnite and SpotX. Customer feedback so far has been very positive, migrations to date have gone very well, and we expect to have all migrations completed shortly after the end of Q2 as planned. On the product front, we also announced the launch of ClearLine in early April. ClearLine is a self-service solution that provides agencies direct access to buy premium video inventory across all Magnite publishers and is ad server agnostic. ClearLine significantly increase the spend going towards working media, makes it easier for sellers and agencies to securely share data, and helps Magnite publishers generate more revenue and develop new sources of unique demand.

This product captures CTV ad dollars that have traditionally been transacted outside the programmatic channel through direct deals, and therefore represents an incremental opportunity to bring additional ad spend into the ecosystem. In addition to our agency launch partners, we’ve received positive feedback from publishers as well, who see this as a potential alternative to drive additional revenue. ClearLine has been portrayed by some of the press as an alternative to DSPs. This couldn’t be further from the truth, ESPs will remain the primary method for agencies to access premium video inventory on our platforms. ClearLine represents a programmatic market expansion for publishers, agencies, and DSPs. We are excited to share more details on ClearLine’s traction in the coming quarters.

Also on the technology front, we announced that SpringServe will be joining the Amazon publisher services or APS. Ad server certification program for streaming TV. Working with APS through the certification program is a significant opportunity for our SpringServe publishers, as it will add Amazon DSP demand to their existing monetization solutions. We’ve been doing a lot of work behind the scenes and CTV audience creation and targeting helping media owners extract greater value from their first party publisher data, while carefully protecting the confidentiality of their user IDs. This is a big shift from the browser world and display an online video where the buy side would typically perform this work through third party cookies. More to come on this in the quarters ahead.

Before I turn it over to David to cover the financials, I’d like to mention the promotion of David Buonasera to the role of Magnite’s new CTO. He’s been pretty busy as you can see from the platform and partner developments I just covered. David joined the company in 2021 when we acquired SpringServe, which he helped co-found and scale to a leader in video ads serving with an impressive global client list. Prior to his appointment as our CTO, David was serving as a member of our office of the CTO, as well as leading our SpringServe and CTV platform engineering efforts. He is a phenomenal leader and technologist and we’re thrilled to have someone with David’s unique experience and capabilities lead our global technology organization. Welcome David.

With that, I’ll turn the call over to David Day, for more details on the financials, David.

David Day: Thanks, Michael. Q1 finished with strong momentum. As Michael mentioned, revenue ex-TAC adjusted EBITDA, and adjusted EBITDA margin all exceeded our guidance for the quarter. Total revenue for Q1 was $130 million. Revenue ex-TAC was $116 million, up 8% from Q1 of 2022. CTV revenue ex-TAC was $46 million, up from $42 million, or 10% from last year. DV+ revenue ex-TAC was $70 billion, an increase of 7% compared to Q1 last year. Automotive, travel and food and beverage were our top growth verticals for the quarter. Consumer categories such as technology, retail and health and fitness made more modest improvements. Our revenue ex-TAC mix for Q1 was 40% CTV, 40% mobile and 20% desktop. From a geographic perspective, we saw good international growth that was roughly double the growth rate of the U.S. Total operating expenses, which includes cost of revenue for the first quarter increased to $231 million, compared to $158 million in the same period a year ago.

With the increase primarily driven by $53 million of non-cash accelerated amortization, resulting from our platform consolidation. Adjusted EBITDA operating expense was $93 million and within our guidance range. This was an increase of less than 1% sequentially from Q4. We would typically see a bigger increase seasonally, but the impact was offset by our RIF actions The increase from $78 million in Q1 of last year resulted from increased platform and personnel expenses along with return to office travel and event related costs. Net loss was $99 million for the quarter compared to net loss for the first quarter of 2022 of $45 million, which includes the previously mentioned $53 million of accelerated amortization expense. Adjusted EBITDA was $23 million versus $29 million for the same period last year, and adjusted EBITDA margin was 20%.

Now that we calculate our adjusted EBITDA margin as a percentage of revenue ex-TAC. GAAP loss for basic and diluted share was $0.73 for the first quarter of 2023 compared to a loss of $0.34 for the first quarter in 2022. Non-GAAP earnings per share in the first quarter of 2023 was $0.04, compared to $0.08 reported last year. The $53 million of accelerated amortization expense had a negative impact on GAAP loss per share of $0.39, and a negative impact on non-GAAP earnings per share of $0.09 in Q1. The reconciliations to non-GAAP income and non-GAAP earnings per share are included with our Q1 results press release. We expect to recognize additional accelerated amortization expense of $53 million in Q2, and $8 million in Q3 this year. There were 135 million weighted average basic and diluted shares outstanding for the first quarter of 2023.

Fully diluted weighted average shares utilized for non-GAAP earnings per share were $144 million for the first quarter. Capital expenditures including both purchases of property and equipment and capitalized internal use software development costs were $10 million for the quarter. Operating cash flow which we define as adjusted EBITDA less CapEx was $40 million for the quarter. Our net interest expense for the quarter was $8 million. During the first quarter, we purchased and retired approximately $50 million in face value of our convertible notes using approximately $41 million in cash, resulting in a discount of approximately 19%. We have $34 million remaining under our current program for the repurchase of common shares and our convertible debt.

Cash balance at the end of Q1 was $237 million. The reduction from year-end is based on use of cash for the repurchase of our convertible notes, typical seasonality and timing of receivable payments around quarter end. Our net leverage ratio was approximately 2.5x at the end of Q1, down from 3.1x year-over-year. We expect the ratio to be meaningfully below 2x at year-end. We are excited about our business and ability to generate strong cash flow, while providing the flexibility to reduce debt and maintain a healthy cash position. We continue to expect to generate significant free cash in 2023, especially in our seasonally strong second half. And we will continue to evaluate the best use of our cash as it relates to debt reduction and share repurchases.

I will now share our expectations for the second quarter and thoughts for the year. Our guidance is based on recent growth trends. Although we have been somewhat measured, due to the continued uncertainty in the macro environment. For the second quarter, we expect revenue ex-TAC to be in the range of $132 million to $136 million. We expect revenue ex-TAC attributable to CTV to be in the range of $56 million to $58 million. We expect adjusted EBITDA operating expenses to increase slightly from Q1 to between $94 million and $96 million, which implies adjusted EBITDA margin of approximately 29% for Q2 at the midpoint. For 2023, we expect our revenue ex-TAC growth rate for the full year to be in the high single digits assuming current course and speed.

We expect that adjusted EBITDA OpEx will be lower in the second half of the year compared to the first half as we complete our CTV platform migration, and remain focused on managing costs across the business. We anticipate full year adjusted EBITDA will be comparable or better than 2022 and that adjusted EBITDA margins will show meaningful improvement in the second half of 2023. Our full CapEx expectation is unchanged and we expect $40 million or less in 2023. And lastly, we continue to expect full year free cash flow to exceed $100 million. Q1 performance gives us a great start to 2023. And our differentiated market position as the leading independent sell-side advertising company puts us in a great place to accelerate growth and expand margins as the market improves.

With that, let’s open up the line for Q&A.

Q&A Session

Operator: [Operator Instructions] And the first question comes from Laura Martin with Needham.

Operator: Thank you. And the next question comes from Shyam Patil with Susquehanna.

Operator: Thank you. And the next question comes from Jason Kreyer with Craig-Hallum.

Operator: Thank you. The next question comes from Nich Zangler with Stephens.

Operator: Thank you. And the next question comes from Matt Swanson with RBC Capital Markets.

Operator: Thank you. And the next question comes from Dan Day with B. Riley FBR.

Operator: Thank you. The next question comes from Shweta Khajuria with Evercore ISI. Ms. Khajuria, your line is open.

Michael Barrett: Thanks so much, Keith. Bear with me. Yes. So I’d like to thank our great Magnite team for putting up another strong quarter and working hard behind the scenes to deliver. We have a great opportunity ahead of us to continue to gain share, advance the ad supported CTV market and its transition from linear and accelerate our growth when the market begins to recover. We look to reward shareholders that support us along this journey. We look forward to speaking with many of you at our upcoming investor events. SIG will host our post Q1 virtual investor meetings tomorrow. We’ll be attending the Needham conference in New York on May 17. The B. Riley conference in Beverly Hills on May 25. To Craig Hallum conference in Minneapolis on May 31, and the Evercore conference in New York also on May 31. We will also be participating in meetings with SIG in Boston on June 5, and in Chicago with Stephens on June 6. Have a great evening. Thank you.

Operator: Thank you. The conference has now concluded. Thank you for attending the presentation. You may disconnect.