Magnite beat on revenue in the current quarter and raised top line guidance for Q1. The expectation was that Magnite would report GAAP profitability this quarter. However, the company reported GAAP EPS of ($0.27) compared to GAAP EPS estimates of $0.02. The adjusted EPS also missed at $0.24 versus $0.32 expected.
The bottom-line miss is due to the CTV ad platform that launched in February, which created “a $35 million accelerated amortization related to the CTV ad platform consolidation.”
In the prepared comments, management also stated: “Total operating expenses, which includes cost of revenue for the fourth quarter, increased 29% to $204 million compared to $158 million in the same period a year ago. Adjusted EBITDA operating expense was $92 million, up 11% sequentially from Q3 and up from $75 million from the fourth quarter last year and slightly above our guidance range. The increases were driven by higher cloud and personnel expenses, T&E and higher engineering team expenses, partially due to lower internally developed capitalized software due to the completion of our new CTV platform.”
Financials:
Note: numbers below are reported as ex-TAC unless otherwise stated. This stands for “excluding traffic acquisition costs” for a better representation of actual revenue minus any payments to online partners or affiliates.
Magnite reported revenue of $156.6 million, for growth of 10%. This beat estimates of $153.7 million. This led to a beat on FY2022 revenue of $514.6M compared to $511.7M expected.
For Q1, Magnite is guiding for $109 million to $113 million, which implies a raise at the midpoint compared to consensus of $109.7 million for Q1.
For Full Year 2023, Magnite provided a vague guide to “expect FY2023 revenue to grow from 2022.” Analysts have 7.5% growth for consensus of $550.3 million in revenue.
GAAP EPS of ($0.27) missed estimates of $0.02 for the reasons stated above. Adjusted EPS of $0.24 missed estimates of $0.32.
Q4 CTV Ad Revenue grew 19.6% for revenue of $64.6 million. The Q1 guide for CTV revenue is $42.5 million to $44.5 million, compared to $42.3 million in the year ago quarter. One of the bigger issues in this report is that CTV ad revenue is expected to be flat YoY to up to 3% growth for Q1. (See below for the earnings call discussion.)
Mobile revenue of $61 million, was up 18% YoY. Desktop also grew 18% YoY for revenue of $30.8 million.
The United States and International mix remained the same at 78% of revenue and 22% of revenue, respectively.
Margins:
The adjusted EBITDA in Q4 was 41% which was lower than the Q4 EBITDA margin from a year ago at 48%. Management stated adjusted EBITDA would remain the same in 2023 as 2022, which was $178.8 million. Given the guide nodded toward nominal growth in 2023, this makes sense that EBITDA would be similar.
· Gross Margin of 37% is lower than usual with a FY2022 gross margin of 47%
· Operating Profit Margin of (16%) compares to +2% OPM in the year ago quarter
· Net Margin of (21%) compares to a flat net margin in the year ago quarter
· Adjusted net income was slightly down at $34.7 million compared to $37.5 million in the year ago quarter.
Cash:
Cash flow was the strongest line item in Magnite’s report.
The company reported operating cash flow margin of 32% compared to 37% last year for operating cash of $56.9 million.
Free cash flow of 28% compared to 34% in the year ago quarter. This remained Magnite’s strongest quarter in 2022. Total free cash flow was $48.91 million. All things considered; this is a good report on cash.
The free cash flow guide for next year is $100 million, which means Magnite intends to not lose ground here as FY2022 cash flow was $106 million.
The company lowered its net leverage to 2.2X down from 3.3X in the year ago quarter. The company has $326.3 million in cash on the balance sheet with $726.4 million in debt for net debt of $400.1 million.
Earnings Call:
On the earnings call, the main discussion points were ad budgets and how macro affecting is affecting ad budgets this year. Magnite management sees the industry at a potential bottom but admits they don’t have a crystal ball. Also, within this topic, analysts wondered why Magnite’s CTV ad revenue would be flat to 3%, per guidance.
On the positive side, Magnite pointed toward the upfront season as a potential turning point for the CTV ad tech segment. We’ve covered as a potential catalyst for our Netflix position, since this will be Netflix’s upfront season. By the time the next earnings season starts to roll-in, we will likely hear quite a bit about the upfront, committed ad spend each publisher or ad network is able to secure. Additionally, the Disney partnership is extended another year for Magnite’s ad server.
Macro/Ad Budgets
Below are two discussions that directly relate to what Magnite saw in Q4, which was a deceleration that seemed to be unexpected. I believe our analysis here on Ad Budgets Set to Slow Even More is in sync with this discussion. The deceleration we are seeing in ad-tech revenue growth across the board from Q1 2022 to Q1 2023E reflects this flat to minimal YoY annual budget growth.
Shyam Patil
Nice job on the execution. I had a couple of questions. First question, for 1Q, as you guys talked about it, it seems like things have started off a bit slow for the industry in terms of ad spend growth. I was just wondering if you've seen any improvement or changes in the growth rates as we've kind of gone from early January to late February?
Michael Barrett
Yes, sure. I'll start off and allow David to chime in or Nick. As far as improvements are concerned, I think what has us cautiously optimistic is there hasn't been further decline. So I think what we — and especially talking with our big buyers, agencies, marketers, the consensus seems to be that we've seen the worst, and that it should get better from here and out. That's not to say we're starting to see it, it get better overnight, but it is to say that I think that the notion that late Q4 into Q1 probably is we're bouncing along the bottom and hoping that things have freshen as we get into the Q2 and the upfront period of time.
Jason Kreyer
Michael, I just wanted to ask about visibility. I mean it sounds like things kind of decelerated pretty quickly in Q4, have stabilized since. But just wanted some color on if the visibility has changed? Or how much visibility you have now into marketers may be pulling back on budget or reaccelerating budget or just things like that?
Michael Barrett
Yes. And you're right, Jason. I mean no sooner do we finish our call, [indiscernible] around for the Q3 earnings. And it's universal across talking to every publisher sometime right around mid-December, Q4 stopped behaving like Q4, right? And it kind of limped across the finish line in December, and that kind of headwinds followed into Q1.
Our visibility, generally speaking, comes more from the insight of our buyers from agencies. We do, as you know, have the demand facilitation team, and that's a little bit of a features market. Insertion orders tend to be more of a I'm willing to spend x amount over the next couple of months. And those bookings are quite strong.
And so it leads us to believe, and I think this is kind of the industry rhetoric, that we're bouncing along the bottom with the hope that the recovery begins sooner than what some folks are hoping, which is second half of the year. But again, our crystal ball is no greater than anyone else's in that respect.
CTV Ad Budgets Weak in Q1
Outside of the bottom line miss, what was most surprising is the deceleration in growth on CTV ads. Magnite has consistently been growing this segment around 40% YoY and is now guiding for 0% to 3% growth YoY next quarter.
In the opening comments, management stated “this slowing of growth is attributable to an industry-wide slow start to Q1.”
When an analyst questioned the team about it, the following was stated:
“CTV is 100% macro, and there's no question that CTV will be the fastest-growing segment as we exit 2023. It's just budgets that were more branding-oriented, that were TV-oriented are always the first to get paused as opposed to more performance-related advertising, which is typically the domain of the DV+ world.”
Upfront Season
That brings us to the potential time frame when CTV ad revenue could turn back up, and start growing again. Per our previous Netflix coverage:
“I foresee Netflix doing quite well during next year’s upfront season, which is when prepaid inventory is contracted between high-paying brand advertisers and media companies. Assuming there are no changes, we fully expect to hold our position well into this time frame (Q2 2023). This is primarily because Netflix has very high-quality content and because Pay TV advertisers are in some pain right now with the need to find strong content to place ads.”
Magnite is asserting they will also do well in the upfront season, which takes place in May. Notably, we wrote about Netflix and the upfront seasons prior to getting information on the flat 2023 budgets. Netflix being a new entry could take market share, however, as has been pointed out on the forum, this is speculative as the ad tier will not have had much time to accumulate many users. Ultimately, weaker 2023 budgets complicates things and Magnite’s report reminded us of this, in no uncertain terms. Technically, every ad-tech investor is speculating as the data (today) doesn’t support a strong 2023. This can change if budgets get revised.
What management is saying below is that Buyers are in control for the 2023 Upfront season and auctions will be more n demand this year than presold inventory at a set price. He is hopeful that Buyers will be encouraged by the favorable conditions for a successful Upfront season.
Michael Barrett
Yes, great question. These trends are hard to like kind of draw generalizations just given the needed nature of the marketplace. But I think that you're going to find going into the upfront a kind of record, which is a little embellished to talk about a record when there's been very little biddable inventory in the premium CTV categories of the plus services, the broadcasters, et cetera.
But I think you're going to find a record amount as dictated by the buyers. The buyers — every dollar is going to go a lot further in this marketplace, and they have demanded, for quite some time now, the opportunity to be able to bring data to the foray and bid openly on it. And so I think this concept of the invite-only auction that who has done so incredibly well with, just no question that you're going to see the spread of that, just given the cloud that the buyer has coming into it.
We're also seeing quite a bit of biddable inventory at CPMs that are quite different than perhaps CPMs were in Q3 in the fast service market and in the OEM market. So yes, a biddable is coming. It's probably coming faster because of this tough ad economy. And it does bode well for take rates for sure because of the amount of value that we contribute to conducting an auction versus just being the technology partner to process presold deals by the publisher.
Disney Partnership
In the opening remarks, Magnite stated the partnership had been renewed:
“First, I'd like to highlight the news in late January that we expanded and renewed our agreement as Disney's global programmatic SSP partner. As you may recall, our relationship with them started with Hulu. We have since grown the relationship to include the full portfolio of Disney properties […] We are thrilled to be a partner with Disney in support of their audience and targeting capabilities, which leverage the Disney Select first-party data platform with more than 100 million U.S. household level ideas.”
Here is a question from an analyst on the call. The answer pertains to the value Magnite adds, and why Disney prefers to outsource this, and Magnite’s expectation that others will follow suit in using them for biddable/auction side.
“Michael Barrett
Sure, Ian. So as it relates to Disney, I think we've been pretty clear that — we are working with them primarily as a technology partner that helps facilitate programmatic buys that are sold by Disney. The belief is that it moves to a more biddable environment. With us running the auction piece of it, the economics increased in terms of take rates. And so I think that, that plays itself out over time.
And there's no question that I think Hulu has shown the efficacy of having biddable inventory going up against what traditionally is upfront inventory guaranteed pricing. And I think that, that's the model that Disney is going to emulate. And I don't think they're an outlier by any stretch. They're just more advanced. They have more inventory, right? They're global, and they have Hulu. And they also had the learnings of Hulu being at this for 8, 9, 10 years doing programmatic.”
Conclusion:
Given Magnite remained strong on cash and has a fairly direct reason for missing on the bottom line, some of the price weakness is likely due to valuation and investors taking gains. We discussed the valuation concerns leading into earnings on the forum.
This is one of the strongest stocks off the bottom in October in the tech universe and certainly in the ad-tech universe.
· For example, Magnite has been much stronger than TTD since October, at +80% versus +6.3%.
· It’s also been stronger than TTD since Jan 1st, 2022 at (22%) versus (38%).
· If you go back to Nov 1st, 2021 blowoff top, then TTD has been stronger at (51%) MGNI versus (26%) TTD.
The point is that even a perfect earnings report (if we agree TTD had a perfect earnings report) may have been sold off due to the strong price action Magnite has seen recently as Magnite has been beating the ad-tech favorite (TTD) for going on 14 months in price action. Eventually, the market is going to take a breather. The strong price action is based on the stock often hovering in a 1 to 2 forward price-to-sales with a strong bottom line, unlike most small caps right now. Magnite didn’t lose any major ground on its bottom line.
Most importantly, weak ad budgets in 2023 are a gale rather than simply a headwind. This is a powerful force that we are seeing across every single ad-tech name right now in terms of YoY deceleration (Q4 is always strongest quarter for ad-tech so the YoY is the important comp).
Magnite is correct in that the bottom for budgets is likely to be hit when you least expect it, hence the comment we could be at the bottom right now. Most investors may not care to time a bottom with their ad-tech stocks. We are going to attempt to time the bottom, and so it’s likely you see us exit Magnite, and then rely on technicals for when to re-enter.