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