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Magnite (NASDAQ: MGNI)
Q3 2024 Earnings Call
Nov 07, 2024, 4:30 p.m. ET

Magnite Reports Strong Growth in CTV for Q3 2024

Overview of Today’s Earnings Call

• Prepared Remarks
• Questions and Answers
• Call Participants

Key Insights and Forward-Looking Statements

Operator

Good day, and welcome to Magnite’s third quarter 2024 earnings call. All participants will be in a listen-only mode. [Operator instructions] This event is being recorded. Now, I’d like to turn the conference over to Nick Kormeluk from investor relations.

Nick Kormeluk — Investor Relations

Thank you, operator, and good afternoon, everyone. It’s great to have you here for Magnite’s Q3 2024 earnings conference call. Please note that today’s conversation will include forward-looking statements about our financial performance and strategic objectives, reflecting our current views based on various risks and uncertainties.

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A detailed discussion of these risks and assumptions can be found in our SEC filings, including the third quarter 2024 Form 10-Q and our 2023 Form 10-K. We are not obligated to update forward-looking statements, and during this call, we may discuss non-GAAP financial measures. For reconciliations of GAAP and non-GAAP metrics, please refer to our earnings press release and financial highlights on our Investor Relations website. I’ll now hand the call over to our CEO, Michael Barrett.

Please go ahead, Michael.

Q3 Performance Highlights from the CEO

Michael Barrett — Chief Executive Officer

Thank you, Nick. I’m pleased to share that we achieved another impressive quarter of growth in Connected TV (CTV) and exceeded our expectations for adjusted EBITDA. During the quarter, our CTV contribution ex-TAC grew by 23% year-over-year, up from a 12% increase in Q2. This positive trend was driven by increased ad spending, wider programmatic adoption, and a boost from political advertising.

Our growth rates in CTV contributions indicate a stabilization in our operations and a balanced take rate. Partners such as Roku, Netflix, Paramount, Warner Discovery, and Disney are embracing programmatic advertising, which broadens our Total Addressable Market (TAM).

Highlighting our partnerships, we see significant progress with Netflix’s implementation of Magnite-powered solutions, expected to increase revenue contributions through 2025. Recently, we extended and expanded our collaboration with Disney to include live sports, particularly college football, and regional opportunities in Latin America, further solidifying our strategic relationship.

Live sports advertising, especially in college football and the NFL, is gaining traction. As this market develops its programmatic capabilities, our technology and ability to monetize real-time inventory position us strongly for growth in this sector.

Additionally, I’m confident about the potential of commerce media as a key long-term growth driver for Magnite. Our recent partnership with United Airlines has been productive, enabling ad serving on personal devices on many flights, with plans to expand further into seatback screens by 2025.

Moreover, our self-service buying platform, ClearLine, is witnessing notable growth, with over 20 agencies and brands actively engaging.

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Magnite’s Financial Performance: Positive Trends and Future Outlook

Magnite has successfully reduced share dilution for its shareholders by 1.1 million shares, with an investment of $14 million. Year-to-date, through November 6, the company’s repurchase program and withhold-to-cover activities have effectively cut dilution by 2.9 million shares at a cost of $32 million. Looking ahead, the anticipated net share dilution for 2024 is approximately 2%, not accounting for any further actions related to share repurchases. Currently, the firm has substantial capacity left, as $110 million remains in its authorized repurchase program.

Fourth Quarter Expectations and Annual Guidance

As we prepare for the fourth quarter, Magnite forecasts contribution ex-TAC between $182 million and $186 million. Of this, the contribution from connected TV (CTV) is expected to be between $75 million and $77 million, indicating a year-on-year growth of about 20% at the midpoint. Meanwhile, contributions from DV+ are projected to fall between $107 million and $109 million. Adjusted EBITDA operating expenses are expected to be between $102 million and $104 million, suggesting an adjusted EBITDA margin of around 44% for the fourth quarter at the midpoint.

For the full year, Magnite is upgrading its guidance for contribution ex-TAC, forecasting growth of 11% to 12%. The adjusted EBITDA margin is expected to expand by 150 to 200 basis points compared to 2023. Additionally, the company now anticipates adjusted EBITDA growth of over 15% year-over-year and an approximate 20% increase in free cash flow. Total capital expenditures are now expected to exceed $50 million.

Overall, we anticipate being net income and EPS positive for the full year on a GAAP basis. Third quarter results have been strong for Magnite, and there is optimism about the company’s momentum and future opportunities, particularly as we look towards a robust finish in 2024. Now, let’s proceed to the Q&A session.

Questions & Answers

Operator

Thank you. We will now begin the question-and-answer session. Please ask one question followed by a follow-up. We’ll pause briefly to assemble the roster.

Laura Martin – Analyst

Thank you. Strong numbers, everyone. My first question is about net leverage, currently at 0.9 times. How close are we to zero, considering your solid free cash flow? My second question revolves around generative AI. Companies utilizing generative AI tend to have slower growth in costs compared to their revenue growth. How is Magnite implementing generative AI, and what is the strategy moving forward to improve operational efficiency?

David Day – Chief Financial Officer

Thanks for the questions, Laura. Yes, we are pleased with our balance sheet. Our goal was to reach a net leverage ratio of 1x or below, and we’re happy with our current position. While we expect our net leverage ratio to decrease over time, we will also maintain a focus on managing share dilution.

Michael Barrett – Chief Executive Officer

Hi Laura. Regarding generative AI, we have initiated a task force comprising various teams, including engineering and product development, to explore available tools and work on our proprietary developments. While much of our existing machine learning work isn’t strictly generative AI, it has already resulted in about a 30% decrease in processing costs, attributed to better efficiency. Additionally, our Demand Manager AI tool is well-received, leading to revenue boosts for clients. We view this as an evolving process and look forward to sharing more in future quarters.

Operator

Our next question is from Shyam Patil with Susquehanna. Please proceed.

Shyam Patil – Analyst

Hi, great job on the quarter! I have a couple of questions. Michael, can you elaborate on the relationship with Netflix and how you expect it to scale in Q4 and beyond? Also, can you discuss the recent expansion with Disney and what drove them to choose Magnite for additional services? Is there potential for more revenue growth from this partnership?

Michael Barrett – Chief Executive Officer

Thank you for your questions. Regarding Netflix, we need to be cautious in our messaging. We are their sole programmatic partner on the sell-side, and we anticipate being involved as they enter new markets. Their current programmatic selling is in the early stages, but we believe that by 2025, Netflix could become one of Magnite’s largest clients.

As for Disney, the extension of our relationship underscores our longstanding collaboration and the software we have developed for them. They appreciate our reliability as a partner and the technology that supports their endeavors. This relationship is a strong indicator of our trustworthiness and positions us favorably for future growth.

Shyam Patil – Analyst

Thank you, everyone.

Operator

Next, we have Jason Kreyer from Craig-Hallum Capital Group. Please proceed.

Jason Kreyer – Analyst

Thank you. Michael, there’s been significant emphasis on direct connections in recent quarters. Can you share your thoughts on the evolution of direct connections in the long term?

Michael Barrett – Chief Executive Officer

Absolutely, Jason. The landscape for direct connections is indeed different across our various platforms. For DV+, we’ve established a solid foundation, making it relatively easier to implement these connections smoothly.

Magnite’s Economic Landscape: Analyzing CTV Trends and Publisher Strategies

Pre-bid software is widely used by DV+ publishers, yet Trade Desk’s two-pipe approach remains largely unchanged. This model consists of one pipe for direct connections and another for competing in the pre-bid unified auction. Consequently, Trade Desk continues to invest significantly in the pre-bid unified auction space.

Understanding CTV Connections

In the realm of Connected TV (CTV), the situation differs, as there is no conventional pre-bid auction. Instead, a unique connection is formed to each player’s ad server. Often, Magnite acts as either the primary ad server or as the programmatic layer connecting the Demand-Side Platform (DSP) to the ad server. Thus, Magnite does not experience significant economic losses from direct connections in CTV when collaborating with Trade Desk, especially with non-proprietary ad-serving platforms.

UID Misunderstandings

It’s essential to clarify some misconceptions about Unique Identifiers (UID) in CTV. Many mistakenly equate UID usage in CTV with direct connections. For instance, Roku has openly discussed how UID enhances revenue through its partnership with Trade Desk. However, it’s important to note that UID is serviced through Magnite, meaning that during these transactions, Magnite remains an integral player rather than being excluded.

The Rise of Curated Audiences

Jason Kreyer — Analyst

Can you discuss the early successes with curated audience solutions within DV+ CTV?

Michael Barrett — Chief Executive Officer

The move towards audience targeting on the sell side is gaining traction. Although the transition has been slow, sparked partly by the impending phase-out of third-party cookies, we are witnessing a notable surge in adoption among publishers. While this is still in the early stages, the growth from theory to practical application is promising.

As an example, if Magnite can aggregate 1,000 publishers, we can create targeted segments like left-handed jugglers. This capability allows buyers to capitalize on specific, curated audiences. In the CTV space, where first-party data plays a vital role, almost all audience targeting is curated. We believe that as third-party cookies become obsolete, this shift will enhance opportunities for both publishers and partners like Magnite.

Shifts in Bidded Programmatic Advertising

Tim Nollen — Analyst

Can you elaborate on the shift toward bidded programmatic advertising amid fluctuations in direct sales?

Michael Barrett — Chief Executive Officer

Good observation, Tim. Many buyers have long sought to activate programmatic buys in a biddable manner, which they find beneficial for advertisers. Historically, top-tier publishers preferred direct selling methods. Currently, with an abundance of CTV inventory in the market, there’s a clear shift in behavior toward meeting buyer demands.

While premium publishers are still cautious, it’s evident that many are exploring biddable programmatic options. This shift is particularly prevalent among original equipment manufacturers (OEMs) and streaming-first providers. However, the transition is ongoing, suggesting there are significant growth opportunities for Magnite.

Future Implications for Take Rates

Tim Nollen — Analyst

With the evolution of CTV, will this shift positively impact your take rate compared to the past?

Michael Barrett — Chief Executive Officer

You are correct; the transition to more biddable offerings should ultimately benefit our take rate as the market evolves. While historically, we have faced downward pressure from low take rates, especially due to publisher-sold programmatic goods, we anticipate that with increased biddable transactions, the take rate will rise from current lows.

Insights on Disney’s Economic Model

Omar Dessouky — Analyst

Could you provide insights into the economic aspects of your extended relationship with Disney?

David Day — Chief Financial Officer

While I am unable to share specifics, I can confirm that our engagement with Disney involves various products that carry distinct economic benefits.

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Magnite’s Positive Outlook: Disney Partnership and Regulatory Landscape

Financial insights reveal that Disney primarily generates demand through its sales force, either programmatically or via direct sales.

This approach results in a lower take rate range for Magnite. However, as we explore expansion opportunities, they may include Magnite facilitating demand. These scenarios are likely to yield more favorable take rates, akin to what other publishers experience. The potential for expansion is promising.

Such developments reaffirm the strength of our partnership with Disney. Most importantly, once we capitalize on these opportunities, we anticipate more lucrative financial outcomes. Consequently, we see Disney as a significant contributor to revenue growth for Magnite in the future.

Omar Dessouky — Analyst

That’s reassuring news. If I may ask, do you have any updates regarding the recent regulatory changes and court rulings concerning Google and Supply-Side Platforms (SSPs)? I hope this question hasn’t been covered earlier.

Michael Barrett — Chief Executive Officer

Omar, this hasn’t been discussed. There’s no substantial update at the moment. The ad tech trial’s remedies will soon be debated, after a slight delay.

It’s important to remember that it will take years before the full implications are understood. We believe that once the dust settles, Magnite’s competitive landscape will improve, particularly against Google’s dominance in the Digital Video Plus (DV+) space. We’ve had success competing in Connected TV (CTV), and we foresee significant growth opportunities in DV+ as the marketplace’s inefficiencies are resolved, although it’s uncertain when this will occur.

Overall, we maintain an optimistic outlook on the future direction.

Omar Dessouky — Analyst

That’s encouraging to hear. Thank you for your insights.

Michael Barrett — Chief Executive Officer

Thank you, Omar.

Operator

Next, we have Dan Kurnos from The Benchmark Company. Please go ahead.

Dan Kurnos — Analyst

Thank you. Michael touched on some confusion in the market that seems quite widespread. Can you update us on the division of volume between first-party (1P) and third-party (3P) ad tech stacks? There’s been a lot of talk about the effectiveness of both, and it appears you often outperform in A/B tests. What are your thoughts on this? Additionally, we’re hearing from other e-commerce companies like Uber and Lyft that they are exploring more programmatic options.

It seems that United is at the beginning of what could be a broader use of programmatic advertising. I’d like to know your thoughts on additional use cases as the ecosystem shifts more toward programmatic advertising. Thank you.

Michael Barrett — Chief Executive Officer

Thanks, Dan. Regarding first-party versus third-party data, think of it in two segments. Third-party data will play a significant role in DV+. Although traditional DV+ publishers have relationships with their users, many do not have registered or logged-in connections, which can weaken signal fidelity. In CTV, however, we expect first-party data to dominate.

For third-party inputs, we expect this to come from advertisers. An example is the activity surrounding clean rooms, where advertisers match their customers with specific audiences. This approach is becoming essential for creating tailored audience segments.

Moving on to Commerce Media, you mentioned Uber, and similar patterns can be observed in travel. Companies that utilize their own screens show increased interest in entering the commerce media space. Our recent success in winning a competitive RFP with United illustrates our capabilities in this area. We’re experienced in video ad serving and monetization, and we’re ready to bring demand to our partners.

This approach stands in contrast to early attempts in retail media networks. We believe the emerging commerce and travel network will focus on sell-side operations, an opportunity for which we are well-prepared.

Dan Kurnos — Analyst

That’s very informative. Thank you, Michael.

Michael Barrett — Chief Executive Officer

Thanks.

Operator

Our next question comes from Shweta Khajuria with Wolfe Research. Please proceed.

Brian Kraska — Analyst

Hello, this is Brian Kraska on behalf of Shweta. Congratulations on the latest quarter. Can you share any updates regarding Trade Desk and OpenPath? Is there any impact you’ve observed? You previously mentioned gaining market share in DV+ and accelerated growth. We’d appreciate any updates on that. Additionally, could you provide insight into vertical performance trends so far this quarter? Thank you.

Michael Barrett — Chief Executive Officer

Sure, Brian. For OpenPath, there’s no significant change. It remains a constant in our strategy. We participate in the economics of OpenPath in the CTV sector, and our spending share with Trade Desk continues to increase in the DV+ domain. This positions us strongly as a leading omnichannel SSP.

David, would you like to share details on verticals?

David Day — Chief Financial Officer

Absolutely. When analyzing our verticals, it’s noteworthy that we do not rely heavily on any particular category. Our extensive footprint means our ad spending generally reflects overall advertising trends. Thus, while certain sectors may show strength or weakness, their impact on our revenue is often marginal. Political advertising accounted for 3.5% of our total revenue last quarter, which was significant.

The news and retail sectors also emerged as our strongest verticals. For example, increased news coverage during hurricanes drove additional engagement.

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Update on Mediaocean Partnership and DV+ Growth: Insights from Digital Advertising Leaders

Operator

The next question comes from Zach Cummins with B. Riley. Please go ahead.

Zach Cummins — Analyst

Hi, good afternoon. I appreciate you taking my questions. Can you give any updates on the Mediaocean partnership? It was announced earlier this year, and any additional details would be helpful.

Michael Barrett — Chief Executive Officer

Thanks, Zach. As we mentioned earlier, we see great potential in this partnership. However, we want to emphasize that, due to the sales cycle and activation times, it will take a while to realize its full benefits. Currently, some users are testing the tool and spending is being routed through it, but we do not expect significant expenditures until Q1 or Q2 of next year.

Zach Cummins — Analyst

Understood. That clarification is helpful. Given the near-term challenges faced by DV+, what should we consider as a sustainable growth rate for this business moving forward? I’m curious how you plan to invest in opportunities in that area.

Michael Barrett — Chief Executive Officer

David, do you want to address that?

David Day — Chief Financial Officer

Sure. We are optimistic about DV+. There’s no reason we can’t continue increasing our market share. Depending on macroeconomic conditions and overall spending trends, we believe DV+ growth rates may surpass current levels. We’re investing in new formats and curation strategies, which we think will drive further growth and enable us to capture more market share.

Zach Cummins — Analyst

Thanks for that insight, and best wishes for the remainder of the quarter.

Michael Barrett — Chief Executive Officer

Thanks, Zach.

Operator

The next question is from Matt Swanson with RBC Capital Markets. Please proceed.

Simran Biswal — Analyst

Hello, this is Simran standing in for Matt Swanson. Congratulations on the results. My first question is about your numerous partnerships in CTV. What’s your strategy for growing these partnerships from here?

Michael Barrett — Chief Executive Officer

That’s an excellent observation. We have established partnerships with almost all key players in the space. Our strategy involves leveraging the growth of programmatic advertising alongside these partners. For our top premium partners, programmatic ad sales are often exclusively handled by publishers. As the market evolves and advertisers begin to see CTV as a viable performance advertising tool, we aim to drive more demand into these partnerships, enhancing overall profitability.

Simran Biswal — Analyst

That’s insightful. One more question: Are you seeing any pressure on non-political spending, particularly as we approached the end of October? How do you see this affecting your guidance going forward? Overall, how has the first month of Q4 looked in terms of momentum compared to Q3?

Michael Barrett — Chief Executive Officer

Political spending always disrupts the market due to limited ad space in CTV. Political ads often take precedence, especially during contentious elections, leading to reduced general brand spending. However, we expect this spending to rebound, particularly as we enter the holiday season, which typically sees strong performance in Q4. David, can you provide more details on that?

David Day — Chief Financial Officer

Sure. Political advertising accounted for about 3.5% of our total revenue in Q3. With the elections now behind us, we can discuss political impacts more freely. In the lead-up to the elections, we saw a significant increase in spending. We expected political contributions to reach around $20 million this year, and we hit those targets.

Simran Biswal — Analyst

Thank you, and congratulations again.

Michael Barrett — Chief Executive Officer

Thank you.

Operator

Our next question is from Robert Coolbrith with Evercore ISI. Please proceed.

Robert Coolbrith — Analyst

Hi, good afternoon. Thank you for taking my questions. I’d like a quick update on the managed service business for the quarter. Also, regarding curation from an advertiser’s viewpoint, are you noticing any advertisers preparing for changes due to policy limitations on the use of third-party data segments? What share gain opportunities do you see in lighting up these audience segments?

Michael Barrett — Chief Executive Officer

I’ll address the curation point first, then hand it over to David for managed services. Curation is gaining traction. Many buyers, especially large agencies, are expressing a preference for managing these relationships through their existing exchanges.

Magnite Reports on Third Quarter Financials with Focus on Continuous Improvement

Key Takeaways from Recent Analyst Call

During a recent earnings call, executives from Magnite discussed various aspects of their operations, including strategies for ad requests and managed services. Insights were provided by several key figures within the company.

Managed Services Decline: A Shift in Strategy

David Day — Chief Financial Officer

In the third quarter, managed services accounted for about 4% of our total contribution, excluding TAC, marking a 20% decline year-over-year. Looking ahead to the fourth quarter, we expect managed services to remain at similar or potentially lower levels. Managed services have traditionally involved mid-market sales teams assisting agencies lacking in-house resources for programmatic buying. However, many of these agencies are improving their programmatic capabilities, leading to a shift of spending towards programmatic solutions.

While this adjustment presents short-term challenges for both our take rate and overall contributions, we believe it strengthens relationships with these buyers, who are likely to continue growing their programmatic investments over time. This trend will cause managed services to represent a decreasing portion of our contributions as we progress.

Focus on Cost Efficiency in Ad Requests

Alec Brondolo — Analyst

Alec inquired about the notable 30% decrease in cost per ad request compared to the previous year. This improvement reflects our focused efforts on filtering and traffic shaping, which have been crucial for enhancing our ad request efficiency.

Michael Barrett — Chief Executive Officer

To elaborate, costs for ad requests arise based on the structure in place when those requests are processed. Effective filtering ensures that only the most lucrative ad requests reach auctions, thus avoiding unnecessary expenses. This process involves continuously analyzing past sales performance to allocate requests efficiently among DSPs. Each adjustment occurs in real-time, allowing us to maximize our win rates and improve overall cost efficiency.

Understanding Spending Trends

David Day — Chief Financial Officer

When discussing ad spend, we can separate it into two categories: DV+ and CTV. For DV+, ad spend typically grows in line with our revenue growth, as seen in contribution ex-TAC. In CTV, ad spending continues to grow at a rate surpassing our contribution ex-TAC growth. Although there remains a gap between these growth rates, we are observing signs of stabilization.

Changes in Partnerships: Insights on Disney

Max Michaelis — Analyst

Max asked for clarity on the renewal of the Disney partnership and the sourcing of demand, specifically regarding whether this approach was new. Michael Barrett clarified that the strategy reflects a broader change in how premium publishers like Disney engage with programmatic buying.

Initially, these publishers primarily defined their audience segments and set prices, leading to a more limited value proposition. However, the growing acceptance of programmatic biddable opportunities means higher-value engagements are emerging, where multiple advertisers can compete for the same audience segment. The evolving relationship with Disney is emblematic of this trend, especially in newly developing markets such as audio and international territories.

Closing Thoughts from Analysts

Tim Nollen — Analyst

The discussion highlighted that ongoing changes, including the push toward CTV, represent a significant growth driver for Magnite’s future.

Magnite CEO Applauds Team Success in Strong Earnings Call

CEO Michael Barrett Credits Teamwork and Upcoming Investor Events

Operator

Tim, are you on the line?

Michael Barrett — Chief Executive Officer

We already had Tim’s question before.

Nick Kormeluk — Investor Relations

Operator, we can go ahead and move on to the next one. If there are no others, we can wrap up.

Operator

Yes. This will conclude the question-and-answer session. I would like to turn the conference back to Michael Barrett for any closing remarks.

Michael Barrett — Chief Executive Officer

Thank you, Sherry. Before we close, I want to express my gratitude to the Magnite team worldwide for their dedication and hard work in delivering another impressive quarter that exceeded expectations. Our team’s success is underscored by earning the highest score in the current offering category among the 10 vendors evaluated in the Forrester Wave Sell-Side Platforms Q4 2024 report. Congratulations to all Magniters.

Looking ahead, we are excited about our upcoming investor engagements. We will participate in several virtual and in-person conferences, including the Wells Fargo Virtual Meetings tomorrow, the Truist Virtual Conference on November 12, SIG Meetings in Boston on November 13, Seaport Virtual Conference on November 18, Craig-Hallum Conference in New York on November 19, RBC Conference in New York on November 20, Macquarie Conference in Sydney on November 20, Wells Fargo Conference in Rancho Palos Verdes on December 3, Wolfe Conference in New York on December 4, Evercore meetings in San Francisco on December 9, and the Scotiabank Conference in San Francisco on December 10. Thank you all for joining, and have a great evening.

Operator

[Operator signoff]

Duration: 0 minutes

Participants on the Call:

Nick Kormeluk — Investor Relations

Michael Barrett — Chief Executive Officer

Laura Martin — Analyst

David Day — Chief Financial Officer

Shyam Patil — Analyst

Jason Kreyer — Analyst

Tim Nollen — Analyst

Omar Dessouky — Analyst

Dan Kurnos — Analyst

Brian Kraska — Analyst

Zach Cummins — Analyst

Simran Biswal — Analyst

Robert Coolbrith — Analyst

Alec Brondolo — Analyst

Max Michaelis — Analyst

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