What stood out to me from both The Trade Desk and Magnite’s calls was the emphasis placed on Netflix entering the market.

“If I could actually pick up at the end of where Laura's question was on CTV, and you kind of touched on this, the idea that between Netflix, Disney, HBO, Warner coming together, we're going to see a lot of ad-supported content coming into inventory and this next year here.”

“Yes, hey Matt. Great question. And to be played out, but our sense in talking to the big buyers is when there were rumors of the Netflix perhaps coming online this year they purposefully left money out of the up fronts into the spot market to have optionality.” – CEO Of Magnite“Yes, hey Matt. Great question. And to be played out, but our sense in talking to the big buyers is when there were rumors of the Netflix perhaps coming online this year they purposefully left money out of the up fronts into the spot market to have optionality.” – CEO Of Magnite

To me, this means buyers are excited and already planning to allocate to Netflix and didn’t want to tie up their budgets in the upfront season for this reason.

“I also want to talk about Netflix recent moves. I believe they are in a very strong position to be a leader in AVOD and hybrid pricing models, similar to how they led the way for more than a decade in SVOD.” – CEO of The Trade Desk

The Trade Desk’s CEO, Jeff Green, spent a good deal of time talking about Netflix.

There’s risk that Netflix will have a subscriber miss in the near term –Q3 specifically since more time will be spent indoors in Q4 so less risk here. Yet, there is considerably less risk than usual that Netflix will be able to accelerate revenue next year in 2023.

Surprisingly enough, both stocks are down 50% (more or less) YTD and so there is no penalty by moving this position to Netflix. It’s rare to get a juggernaut on sale, and even rarer to have a juggernaut outline a clear path to accelerate revenue over the next 12 months.

We are strong believers in the connected TV trend — and the trend is painfully early right now. Eventually, all traditional broadcast and cable will be phased out and about 1-3 years after this we will have a mature market. Magnite is not a CTV pureplay right now and we prefer to allocate to those that are.

Magnite’s CTV ad revenue growth is not an issue yet other segments weigh on this company, such as DV+ (desktop video) and mobile. The company will see some tailwinds from political ad spend in Q3, but overall, the revenue mix is weighed by underperforming segments.

We prefer to move this over to Netflix soon given the company’s discount in price.

Closing Magnite:

All numbers are stated in ex-TAC, which means revenue minus acquisition costs.

The chances are high that Magnite provided a conservate guide and will have a sizable beat next quarter. Political campaign spend is expected to exceed 2020’s ad spend levels and Magnite will see tailwinds here.

In the current quarter, Magnite reported 23% YoY growth for revenue of $123.3 million, or up 7% on a proforma basis. Out of an abundance of caution, Magnite guided for flat sequential growth from $123 million ex-TAC in the current quarter to $124 million, at the midpoint, for next quarter.

CTV revenue continues to be strong as a result of the SpotX acquisition. The segment was up 52% year-over-year, or 19% on a proforma basis, for revenue of $52.1 million. In the year ago quarter, the company reported revenue of $34 million. Last year’s comp includes two months of the SpotX acquisition.

The company is guiding for similar revenue next quarter of $53 million at the midpoint. This will be up from $43 million in the year ago quarter. You can see the conservatism here as some political spend will show up in September as the guide implies growth of 23%.

Magnite’s bottom line fluctuates on a GAAP basis due to the amortization of intangible assets from acquisitions. This expense totals $72 million this year and will total $104 million next year. Stock based compensation increased from $16 million to $38 million.

GAAP EPS was ($0.19) and adjusted EPS was $0.14. The company has an adjusted EBITDA margin of 34%. The company has operating cash flow of $30 million and the company has stated their free cash flow for 2022 will be $100 million. The company’s net leverage has improved from 6X to 2.9X with cash of $230 million on the balance sheet and debt of $723 million.

Mobile reported modest growth of 13% with revenue of $44 million compared to $38.8 million in the year ago quarter.

The CTV segment is not an issue but the desktop segment continues to weigh on the company. It was flat year-over-year with $27.2 million this quarter compared to $27.4 million in the previous quarter. You could argue they are seeing the same headwinds as many media properties right now. However, the desktop ad ecosystem also has to overcome Google’s plans to remove cookies on the Chrome browser and the risk here is not present in CTV pure plays.

Perhaps anti-trust measures will prevent Google from moving forward, but Apple certainly was allowed to move forward as the real estate owner, and hoping for a favorable anti-trust outcome is not a risk we care to take on. The reason the deprecation of cookies has been pushed out is not for altruistic reasons by any means, it’s so that Google’s Privacy Sandbox can be tested and roll-out as a stronger product.

It’s true this is delayed until 2024 now but given this segment already weighs on Magnite and we have other CTV pure plays down a similar amount this year (50%-ish), we think it’s prudent to take advantage of the discounts now rather than time this later.

We started our position in Google around the market lows in May and we are now starting a position in Netflix so that we can build with defensible land owners. As stated, it’s rare to get juggernauts on sale. Perhaps they don’t provide the AH pops that high growth does, but the downside is limited and we have clear catalysts (potentially massive catalysts) on the horizon.

Netflix’s announcement to partner with Microsoft confirms our understanding of the value of first-party data as Netflix chose its partner based on Microsoft’s ability to protect its data. As AI/ML builds out, data will move from being the oil of the world to being scarce as diamonds. I believe all of the moves you’re seeing from Apple, Google and Netflix’s choice with Microsoft is to prepare for consumer-driven AI dominance and to protect their large and valuable data sets.

Netflix resources:

October 15th Update: Netflix
Netflix Stock Stronger Than It Seems Following Q2 Earnings
Netflix Stock Could Rally With Ad-Supported Content
The Crucial Difference Between Roku and Netflix
Netflix: Coronavirus Cements The Company as Untouchable
Netflix Stock: Unshakeable Long Term
Why no streaming company will be able to dethrone Netflix

Magnite resources:

Roku, Magnite and Vuzix: Earnings Reviews
LTBH Webinar: Magnite, Roku and IDFA
Earnings Update: TWLO, DDOG, MGNI and ROKU
Video Interviews and Update on Q4 Stocks: MGNI, FUBO, LAZR, QCOM, DT, BABA
Magnite: CTV Ads and Publisher First-Party Data

Magnite Intro:

Magnite offers an opportunity to have exposure to a higher mix of CTV ads from an independent SSP than what is currently on the market. What is most interesting about Magnite as of late is the company’s programmatic strategy for Live TV and also programmatic SSP products for bids on CTV ad inventory. We discuss this more below.

Similar to Roku, The Trade Desk, PubMatic and other ad-tech companies, Magnite faces the double whammy of enduring eight quarters of high Covid comps at a time when macro headwinds are affecting the ad industry. Magnite has even more whammies, which is being a small cap during a historic small cap selloff, and having financials that are tough to analyze due to a string of acquisitions/mergers.

Bradley wrote about the financials in the Q2 earnings write-up: “While the SpotX acquisition positions the company to succeed in the CTV ad market, it also unfortunately complicates MGNI’s accounting. For example, SpotX recognizes sales on a gross basis, while MGNI had previously recognized most of its sales on a net basis (net of TAC). As a result, the company has reported an adjusted pro-forma growth rate to help investors better gauge MGNI true topline growth rate.

Moreover, since SpotX recognizes sales on a gross basis, this can artificially dampen MGNI’s reported gross margins, as the topline is inflated while gross profit remains static. As well, accounts receivables are accrued on a gross basis, which makes MGNI receivables balance appear severely outsized relative to sales. A ballooning receivables balance can signal that a company is pulling forward sales, which is a negative trend and something investors tend to avoid. We suspect that MGNI’s complex accounting is having a temporary negative impact on MGNI share price, due to a subdued gross margin and an inflated receivables balance. However, these concerns will likely dissipate as MGNI’s results start to annualize and the Street gains a better understanding of MGNI’s future growth prospects. At the moment, the Street is dependent on management’s adjusted, pro-forma metrics.”

To illustrate that SpotX was a merger and not really an acquisition, consider that Magnite paid $1.2 billion for the company meanwhile Magnite reported $221 million in revenue in 2020, around the time the acquisition was announced. This acquisition combined two CTV players to create scale and efficiencies. Magnite has stated the company expects to realize $35 million in annualized cost savings from its mergers and acquisitions: "We expect some of those increases to be offset by cost saving activities that began in the second quarter of 2021 and continue to be in process. We are targeting in excess of $35 million in run-rate operating cost synergies over a two year period. As of December 31, 2021, we have achieved more than half of our cost synergy target on a run-rate basis.” However, Magnite also reported $20 million in interest and so the high debt levels are technically a risk.

We see softer growth in Q4 compared to Q3 but it would be tough to say this is reflective of the company. The next few guides on Q2 and Q3 are more important for Magnite than what we’ve seen during the winter months. This is because ad spend is expected to rebound in H2 and by Q3 the company will be fully past the one-year mark for the SpotX acquisition (which was almost more of a merger), which will help normalize the year-over-year comparisons.

On the earnings call, management discussed a product that can help differentiate Magnite, which is Live Stream Acceleration (LSA). The product was announced in February and has been tested with Sling by serving programmatic ads for five weeks to help increase fill rates. Live sports are expected to account for 22% of ad spend and this product helps publishers deal with large spikes in traffic, sporadic time-outs or play reviews by referees by lowering the throttle and increasing fill. LSA helped Sling see a 47% lift in ad conversions during the trial period by filling ad slots that would have normally timed out.

The company also launched BidLink to help publishers improve ad rates and yield by creating a real-time auction. The programmatic features of link to 22 SSPs to increase bids regardless of what ad server publishers use. This is key because Magnite is going to full leverage the Telaria and SpotX acquisitions to potentially help drive publishers to its platform. By using CTV as the anchor, Magnite can expand its footprint and leverage its positioning as the largest independent SSP by being full-featured and competitive in its product R&D. We’ve seen a slew of announcements on Magnite being chosen as a preferred SSP and/or omnichannel partnerships, including from Fubo/Molotov, Samsung Ads, Plex, CH Media and GroupM.

That is a lot of product and partnership movement for a small cap with a seasoned management team although currently the forward revenue guide isn’t reflecting this with “more than 20% revenue growth this year” (see below). I think it’s clear to see Magnite is not a momentum play for us in terms of top line growth, rather it’s a strong choice for those who think CTV ads are going to rip over the next few years (I am in this group).

We also covered private marketplaces in the past and why CTV inventory is unique in terms of how many SSPs a publisher will work with. These newer products help differentiate the private marketplace deals and also any upfront contracts that Magnite might see with more tools for Live TV publishers. Essentially, private marketplace inventory is more premium and this helps edge a (marginal) defense for Magnite against other independent ad-tech companies. Magnite must still compete against heavyweights like FreeWheel and Roku, especially for upfront contracts, yet medium-sized publishers who see working with these two as cannibalistic will likely prefer Magnite.

On the call, the company discussed The Trade Desk’s OpenPath product which is attempting to pull more direct publishers to the DSP. The announcement came with a list of media companies that plan to utilize OpenPath, such as The New York Times, Conde Nast, etcetera. This does not prevent those media companies from also working with a SSP to procure higher bids and so TTD will need to be competitive with SSPs in order for this to succeed. Magnite argues in the earnings call it may not drive higher ad rates for publishers who will prefer to stay with a SSP because the tools are more optimized for publishers.

“In the end, most publishers find it insufficient to rely solely on a direct connection versus the breadth and depth of what a full-featured SSP like Magnite offers. I'm not just talking about capabilities like yield management, inventory curation, ad quality tools, billing and reconciliation or access to seasoned monetization experts, though, all of that is critical. Magnite also facilitates demand for publishers across all formats, in many cases, directly from brands and agencies.”

The company is stating it may be more advantageous in the long run if advertisers to go direct to SSPs: “For select publishers that want a direct connection to buyers, the approach can be additive to the unified auction, potentially lifting of publishers revenue. Demand Manager, our header bidding software based on prebid, makes it easy for publishers to activate direct connections to buyers such as the Trade Desk.”

The management also stated The Trade Desk moving away from Google’s Open Bid was a slight tailwind for them: “But I'm also going to move outside that action with a direct connection and compete against those auctions, sometimes compete against ourselves. And a publisher's way of thinking is that could just be increased bid density and it could lift yield. And so therefore, the only reason why I wouldn't want to do it is if Trade Desk came in and said, "I don't want to participate in a unified auction. I want to be put as a tag in the server, and I want to be first look on everything and then everyone else gets to look at everything." That's the world of nonheader-bidding that used to exist in the SSP world.

And so publishers have spoken. They want it as part of a unified process. Interestingly enough, a lot of publishers, as you know, through our Demand Manager product don't have the wherewithal to even manage a unified auction in prebid. And so in — weird way economically Trade Desk moving outside of moving as another source of demand in the head helps us economically from Demand Manager, because, as you know, we get paid on every successful auction, whether it's a Magnite auction or not. And so if it's more demand inside the header and it's going through Demand Manager, it actually — it works out well for us.And so in — weird way economically Trade Desk moving outside of moving as another source of demand in the head helps us economically from Demand Manager, because, as you know, we get paid on every successful auction, whether it's a Magnite auction or not. And so if it's more demand inside the header and it's going through Demand Manager, it actually — it works out well for us.

Typically, if publishers go direct to the demand side successfully, it’s because the DSP has some kind of rich first-party data that the publishers can gain from (Facebook/Audience Network, Google/AdMob). I’m not sure The Trade Desk has enough leverage in terms of data for this strategy to successfully recruit publishers in terms of offering an advantage on higher ad rates for publishers, but let’s see/monitor this. Instead, it could be a defensive move from The Trade Desk in terms of third-party data becoming weaker. I suspect Google is not going to work with Universal Ad ID 2.0 as there is little incentive to invite a new ID after getting rid of cookies. My educated guess is Google will want to protect their properties. I’ll try to write more about Google’s changes on Android as it unfolds in a separate analysis.

You’ve probably heard the term walled garden. Well, we are now going to have fortified stone walled gardens in terms of Google protecting their properties and data and not allowing cookies/IDs. Apple is doing the same. This is under the guise of privacy but given that Google sells fire alarms that spy on people in their personal residence, I doubt ethics or privacy is driving the decision.

Regardless of what Big Tech’s motivation is, I believe there is alpha in some of our ad-tech stocks because this shift is so little understood. The reason Snap and Facebook’s earnings were important for us is that it provided a nod that we are on the right track – as the publisher (Snap) is guiding strong while the third-party data exchange (Facebook) is expecting top line erosion in ads. Given the opaque backdrop on macro/supply chain, this at least provided a glimpse of the longer-term picture, which should become clearer when macro/supply chain clears up. I think I’ve been pretty clear that my money is on first-party data and on the publisher/supply side. I do want to emphasize that I don’t expect the first-party data thesis to materialize overnight, the shift will be gradual. However, despite the shift being gradual, I believe it will be permanent and that’s most important to us investors in terms of a material change to the advertising industry.

Review of Q4 Earnings Report

By Bradley Cipriano

Magnite reported revenue of $142.1 million for proforma growth of 10% and revenue ex-TAC growth of 76%. CTV revenue growth continues to be a strength, up 23% proforma and up 252% on an ex-Tac basis to $54 million.

The adjusted EBITDA was $68 million during the quarter, or 48% of ex-TAC revenues, which was an improvement from the 37% EBITDA margin in the year-ago quarter, driven by the SpotX acquisition and organic growth. This led to EPS of $0.26 in Q4 and operating cash flow of $60 million.

In 2021, Magnite reported total revenue of $416 million. CTV revenue grew 52% on a proforma basis and accounted for roughly 40% of revenue. Magnite stated they reach 80 million households every month (similar to Roku) and they estimate this to be 20% market share. The company’s mobile revenue was low at 6% growth and desktop was very thin at 1% growth.

The company is guiding for ex-TAC revenue of “well above $500 million” for 2022, or at least 20% growth. The first quarter ex-TAC revenue is expected to be $107.5 million, at the midpoint. The company expects CTV revenue growth to be similar to Q4 although a lower amount at $41 million due to the seasonality of Q1. Management stated that Q1 adjusted EBITDA margin will be in the low 20s on a percentage basis primarily due to the timing of annual raises, which were pulled forward from April to January, general increase in wages to improve retention and increased costs related to returning to the office. As a result, the path to 35% to 40% adjusted EBITDA margins has been extended, but management nonetheless reiterated the guide. CFO David Day stated during the Q4 call that “we don't see any changes in the long-term trajectory to our 35% to 40% [adjusted EBITDA] margin targets”.

The company’s current mix is 38% CTV / 36% mobile / 26% desktop. This is up from a mix of 19% CTV exposure in Q4 2020, highlighting the rapid repositioning Magnite has made in one year.

Adjusted EBITDA margin for the year was 35.7% with adjusted EPS of $0.55. The company has $230 million in cash and $720 million in long-term debt, or about $500 million in net debt. With $148 million in annual adjusted EBITDA, Magnite’s net leverage ratio is 3.3x as of Q4, down from 4.1x as of Q2 2021 and management explained on the Q4 call that they aim to reduce their leverage to 2x over time. The company’s strong cash flows will help reduce debt, and Magnite guided that its free cash flow (defined by the company as Adj. EBITDA less capex less intertest expense) will be over $100 million during the year, and will grow faster than adjusted EBITDA over time. The company is currently in compliance with its debt covenants as well.

Additional Reading:

Magnite: CTV Ads and First-Party Publisher Data
LTBH Webinar: Magnite and Roku
Q3 2021 Earnings: Roku and Magnite
Roku, Magnite and Vuzix: Earnings Reviews

Magnite Intro:

Magnite offers an opportunity to have exposure to a higher mix of CTV ads from an independent SSP than what is currently on the market. What is most interesting about Magnite as of late is the company’s programmatic strategy for Live TV and also programmatic SSP products for bids on CTV ad inventory. We discuss this more below.

Similar to Roku, The Trade Desk, PubMatic and other ad-tech companies, Magnite faces the double whammy of enduring eight quarters of high Covid comps at a time when macro headwinds are affecting the ad industry. Magnite has even more whammies, which is being a small cap during a historic small cap selloff, and having financials that are tough to analyze due to a string of acquisitions/mergers.

Bradley wrote about the financials in the Q2 earnings write-up: “While the SpotX acquisition positions the company to succeed in the CTV ad market, it also unfortunately complicates MGNI’s accounting. For example, SpotX recognizes sales on a gross basis, while MGNI had previously recognized most of its sales on a net basis (net of TAC). As a result, the company has reported an adjusted pro-forma growth rate to help investors better gauge MGNI true topline growth rate.

Moreover, since SpotX recognizes sales on a gross basis, this can artificially dampen MGNI’s reported gross margins, as the topline is inflated while gross profit remains static. As well, accounts receivables are accrued on a gross basis, which makes MGNI receivables balance appear severely outsized relative to sales. A ballooning receivables balance can signal that a company is pulling forward sales, which is a negative trend and something investors tend to avoid. We suspect that MGNI’s complex accounting is having a temporary negative impact on MGNI share price, due to a subdued gross margin and an inflated receivables balance. However, these concerns will likely dissipate as MGNI’s results start to annualize and the Street gains a better understanding of MGNI’s future growth prospects. At the moment, the Street is dependent on management’s adjusted, pro-forma metrics.”

To illustrate that SpotX was a merger and not really an acquisition, consider that Magnite paid $1.2 billion for the company meanwhile Magnite reported $221 million in revenue in 2020, around the time the acquisition was announced. This acquisition combined two CTV players to create scale and efficiencies. Magnite has stated the company expects to realize $35 million in annualized cost savings from its mergers and acquisitions: "We expect some of those increases to be offset by cost saving activities that began in the second quarter of 2021 and continue to be in process. We are targeting in excess of $35 million in run-rate operating cost synergies over a two year period. As of December 31, 2021, we have achieved more than half of our cost synergy target on a run-rate basis.” However, Magnite also reported $20 million in interest and so the high debt levels are technically a risk.

We see softer growth in Q4 compared to Q3 but it would be tough to say this is reflective of the company. The next few guides on Q2 and Q3 are more important for Magnite than what we’ve seen during the winter months. This is because ad spend is expected to rebound in H2 and by Q3 the company will be fully past the one-year mark for the SpotX acquisition (which was almost more of a merger), which will help normalize the year-over-year comparisons.

On the earnings call, management discussed a product that can help differentiate Magnite, which is Live Stream Acceleration (LSA). The product was announced in February and has been tested with Sling by serving programmatic ads for five weeks to help increase fill rates. Live sports are expected to account for 22% of ad spend and this product helps publishers deal with large spikes in traffic, sporadic time-outs or play reviews by referees by lowering the throttle and increasing fill. LSA helped Sling see a 47% lift in ad conversions during the trial period by filling ad slots that would have normally timed out.

The company also launched BidLink to help publishers improve ad rates and yield by creating a real-time auction. The programmatic features of link to 22 SSPs to increase bids regardless of what ad server publishers use. This is key because Magnite is going to full leverage the Telaria and SpotX acquisitions to potentially help drive publishers to its platform. By using CTV as the anchor, Magnite can expand its footprint and leverage its positioning as the largest independent SSP by being full-featured and competitive in its product R&D. We’ve seen a slew of announcements on Magnite being chosen as a preferred SSP and/or omnichannel partnerships, including from Fubo/Molotov, Samsung Ads, Plex, CH Media and GroupM.

That is a lot of product and partnership movement for a small cap with a seasoned management team although currently the forward revenue guide isn’t reflecting this with “more than 20% revenue growth this year” (see below). I think it’s clear to see Magnite is not a momentum play for us in terms of top line growth, rather it’s a strong choice for those who think CTV ads are going to rip over the next few years (I am in this group).

We also covered private marketplaces in the past and why CTV inventory is unique in terms of how many SSPs a publisher will work with. These newer products help differentiate the private marketplace deals and also any upfront contracts that Magnite might see with more tools for Live TV publishers. Essentially, private marketplace inventory is more premium and this helps edge a (marginal) defense for Magnite against other independent ad-tech companies. Magnite must still compete against heavyweights like FreeWheel and Roku, especially for upfront contracts, yet medium-sized publishers who see working with these two as cannibalistic will likely prefer Magnite.

On the call, the company discussed The Trade Desk’s OpenPath product which is attempting to pull more direct publishers to the DSP. The announcement came with a list of media companies that plan to utilize OpenPath, such as The New York Times, Conde Nast, etcetera. This does not prevent those media companies from also working with a SSP to procure higher bids and so TTD will need to be competitive with SSPs in order for this to succeed. Magnite argues in the earnings call it may not drive higher ad rates for publishers who will prefer to stay with a SSP because the tools are more optimized for publishers.

“In the end, most publishers find it insufficient to rely solely on a direct connection versus the breadth and depth of what a full-featured SSP like Magnite offers. I'm not just talking about capabilities like yield management, inventory curation, ad quality tools, billing and reconciliation or access to seasoned monetization experts, though, all of that is critical. Magnite also facilitates demand for publishers across all formats, in many cases, directly from brands and agencies.”

The company is stating it may be more advantageous in the long run if advertisers to go direct to SSPs: “For select publishers that want a direct connection to buyers, the approach can be additive to the unified auction, potentially lifting of publishers revenue. Demand Manager, our header bidding software based on prebid, makes it easy for publishers to activate direct connections to buyers such as the Trade Desk.”

The management also stated The Trade Desk moving away from Google’s Open Bid was a slight tailwind for them: “But I'm also going to move outside that action with a direct connection and compete against those auctions, sometimes compete against ourselves. And a publisher's way of thinking is that could just be increased bid density and it could lift yield. And so therefore, the only reason why I wouldn't want to do it is if Trade Desk came in and said, "I don't want to participate in a unified auction. I want to be put as a tag in the server, and I want to be first look on everything and then everyone else gets to look at everything." That's the world of nonheader-bidding that used to exist in the SSP world.

And so publishers have spoken. They want it as part of a unified process. Interestingly enough, a lot of publishers, as you know, through our Demand Manager product don't have the wherewithal to even manage a unified auction in prebid. And so in — weird way economically Trade Desk moving outside of moving as another source of demand in the head helps us economically from Demand Manager, because, as you know, we get paid on every successful auction, whether it's a Magnite auction or not. And so if it's more demand inside the header and it's going through Demand Manager, it actually — it works out well for us.And so in — weird way economically Trade Desk moving outside of moving as another source of demand in the head helps us economically from Demand Manager, because, as you know, we get paid on every successful auction, whether it's a Magnite auction or not. And so if it's more demand inside the header and it's going through Demand Manager, it actually — it works out well for us.

Typically, if publishers go direct to the demand side successfully, it’s because the DSP has some kind of rich first-party data that the publishers can gain from (Facebook/Audience Network, Google/AdMob). I’m not sure The Trade Desk has enough leverage in terms of data for this strategy to successfully recruit publishers in terms of offering an advantage on higher ad rates for publishers, but let’s see/monitor this. Instead, it could be a defensive move from The Trade Desk in terms of third-party data becoming weaker. I suspect Google is not going to work with Universal Ad ID 2.0 as there is little incentive to invite a new ID after getting rid of cookies. My educated guess is Google will want to protect their properties. I’ll try to write more about Google’s changes on Android as it unfolds in a separate analysis.

You’ve probably heard the term walled garden. Well, we are now going to have fortified stone walled gardens in terms of Google protecting their properties and data and not allowing cookies/IDs. Apple is doing the same. This is under the guise of privacy but given that Google sells fire alarms that spy on people in their personal residence, I doubt ethics or privacy is driving the decision.

Regardless of what Big Tech’s motivation is, I believe there is alpha in some of our ad-tech stocks because this shift is so little understood. The reason Snap and Facebook’s earnings were important for us is that it provided a nod that we are on the right track – as the publisher (Snap) is guiding strong while the third-party data exchange (Facebook) is expecting top line erosion in ads. Given the opaque backdrop on macro/supply chain, this at least provided a glimpse of the longer-term picture, which should become clearer when macro/supply chain clears up. I think I’ve been pretty clear that my money is on first-party data and on the publisher/supply side. I do want to emphasize that I don’t expect the first-party data thesis to materialize overnight, the shift will be gradual. However, despite the shift being gradual, I believe it will be permanent and that’s most important to us investors in terms of a material change to the advertising industry.

Review of Q4 Earnings Report

By Bradley Cipriano

Magnite reported revenue of $142.1 million for proforma growth of 10% and revenue ex-TAC growth of 76%. CTV revenue growth continues to be a strength, up 23% proforma and up 252% on an ex-Tac basis to $54 million.

The adjusted EBITDA was $68 million during the quarter, or 48% of ex-TAC revenues, which was an improvement from the 37% EBITDA margin in the year-ago quarter, driven by the SpotX acquisition and organic growth. This led to EPS of $0.26 in Q4 and operating cash flow of $60 million.

In 2021, Magnite reported total revenue of $416 million. CTV revenue grew 52% on a proforma basis and accounted for roughly 40% of revenue. Magnite stated they reach 80 million households every month (similar to Roku) and they estimate this to be 20% market share. The company’s mobile revenue was low at 6% growth and desktop was very thin at 1% growth.

The company is guiding for ex-TAC revenue of “well above $500 million” for 2022, or at least 20% growth. The first quarter ex-TAC revenue is expected to be $107.5 million, at the midpoint. The company expects CTV revenue growth to be similar to Q4 although a lower amount at $41 million due to the seasonality of Q1. Management stated that Q1 adjusted EBITDA margin will be in the low 20s on a percentage basis primarily due to the timing of annual raises, which were pulled forward from April to January, general increase in wages to improve retention and increased costs related to returning to the office. As a result, the path to 35% to 40% adjusted EBITDA margins has been extended, but management nonetheless reiterated the guide. CFO David Day stated during the Q4 call that “we don't see any changes in the long-term trajectory to our 35% to 40% [adjusted EBITDA] margin targets”.

The company’s current mix is 38% CTV / 36% mobile / 26% desktop. This is up from a mix of 19% CTV exposure in Q4 2020, highlighting the rapid repositioning Magnite has made in one year.

Adjusted EBITDA margin for the year was 35.7% with adjusted EPS of $0.55. The company has $230 million in cash and $720 million in long-term debt, or about $500 million in net debt. With $148 million in annual adjusted EBITDA, Magnite’s net leverage ratio is 3.3x as of Q4, down from 4.1x as of Q2 2021 and management explained on the Q4 call that they aim to reduce their leverage to 2x over time. The company’s strong cash flows will help reduce debt, and Magnite guided that its free cash flow (defined by the company as Adj. EBITDA less capex less intertest expense) will be over $100 million during the year, and will grow faster than adjusted EBITDA over time. The company is currently in compliance with its debt covenants as well.

Additional Reading:

Magnite: CTV Ads and First-Party Publisher Data
LTBH Webinar: Magnite and Roku
Q3 2021 Earnings: Roku and Magnite
Roku, Magnite and Vuzix: Earnings Reviews