Magnite, Inc. (NASDAQ:MGNI) Q4 2023 Earnings Call Transcript February 28, 2024
Magnite, Inc. beats earnings expectations. Reported EPS is $0.16, expectations were $0.03. Magnite, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon and welcome to the Magnite Q4 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nick Kormeluk of Investor Relations. Please go ahead.
Nick Kormeluk: Thank you, operator and good afternoon everyone. Welcome to Magnite's fourth quarter 2023 earnings conference call. As a reminder, this conference 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 2023 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 contribution 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 additional metrics to provide greater insights into the dynamics of our business. Please be advised that this additional detail may be one-time 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 and 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. I'm pleased to report results for Q4 that once again exceeded our top line guidance for contribution ex-TAC across all business lines while delivering very strong profitability and free cash flow. Our DV+ business performed particularly well delivering contribution ex-TAC growth of 11% and CTV rebounded nicely from Q3, exceeding the high end of our guidance. To start 2024, our momentum has been especially strong with our CTV business. We are encouraged to see these positive trends and are optimistic they will continue. We are pleased to report that we finished 2023 with total ad spend over $5 billion, representing growth approaching 20%, with CTV ad spend growing above 20% for the full year. For 2024, we expect ad spend growth to accelerate on a full year basis over 2023. We believe this represents continued market share gains for Magnite.
Warner Bros Discovery: Streamers just entering ad supported programmatics such as Prime Video and the new sports partnership between ESPN, Fox and Warner Bros Discovery, all of which are important Magnite partners, are also going to drive industry growth and provide additional opportunities. As the market matures and the landscape of TV ad buying continues to evolve, we are very confident our role and the services we provide will expand.
SpringServe:
ClearLine: Today. I want to spend a little more time on CTV and sports as this is a highly technical and complex part of the CTV ecosystem, where we have a strong offering and leadership position. Historically, almost all sports advertising has been done by sellers directly, but we believe this is a tremendous opportunity for us in the future as more of this inventory goes programmatic, this remains a key investment area for us. In sports, you have an extremely valuable and engaged audience that can spike exponentially at any moment, making it ideal for programmatic, delivering real-time demand that matches the viewing audience and meets all the complex TV rules, takes massive scale and technical execution that greatly exceeds typical programmatic CTV needs.
Our technology is unrivaled with features such as LSA or Live Sports Acceleration, a technology that helps better monetize live inventory by increasing ad pod fill rates without impacting the user experience. We support all of the largest sporting events, including all of the major North American professional leagues, NFL, NBA, MLB and NHL, college football and basketball, international events such as the Olympics, Cricket World Cup and World Cup Soccer, and other sports such as tennis and golf. Beyond our prowess in sports, our publisher partners are increasingly reaping the benefits of our holistic solution, which leverages our ad server and SSP to enhance monetization and efficiency. Much of our CTV business is enabled through advanced integrations with our ad server.
As a reminder, ad serving puts us one step closer to the publisher and creates a stickier relationship. With SpringServe, our platform is deeply embedded within the client workflow and becomes a central technology in their overall monetization strategy. Now, more than three quarters of our streaming partners use both our SpringServe technology and SSP services. That compares to less than 50% at the time of the SpringServe acquisition. The wins at SpringServe also keep coming, especially on an international basis. The most recent additions or expansions include iHeart, Virgin Media, Whirl and Crackle, to name a few. In CTV, we saw Amazon make a big move by opting all Prime Video viewers into an ad supported tier in late January. This is part of a continuing trend, premium streaming platforms adopting ad supported tiers.
We believe Prime Video launching an ad supported tier will be a lift for the whole streaming ecosystem, including Magnite. Let me explain. Prime Video has a reported 200 million subscribers. That is a massive scale. Linear only advertisers can't ignore that reach. Therefore, more linear dollars will shift to streaming. Of course, the top TV advertisers will be a part of this shift, but more importantly, Prime Video will drag over thousands of Amazon merchants into CTV, and these merchants are used to purchasing ad inventory programmatically with advanced targeting. This cohort will help realize streaming's capabilities, advanced performing targeting and scale. Over time, these advertisers will sample other platforms to drive performance results.
This will help the entire ecosystem. But Magnite does not have to wait for this transition to occur to benefit from Prime Video's ad tier. Amazon syndicates more broadcaster and cable content than any other streaming service. By some accounts, 50% of all Prime Video content consumed is broadcast in cable shows. Our broadcast and cable partners rely on us to monetize their share of this inventory. So as their ad supply grows on Prime Video, so too do our revenue opportunities. We have already seen a surge in partner inventory. We expect Prime's success will be greatly driven by the syndicated content, and Magnite is perfectly positioned to participate in these economics. Now, moving over to DV+. We finished the year with growth of 10%, capped by 11% contribution ex-TAC growth in Q4.
A marketing manager examining a publisher's digital inventory on a laptop.
I am incredibly proud of our team's efforts and extreme focus on buyers needs to drive these results. We are also improving monetization for sellers by investing in formats such as native, audio, podcasts and digital out of home. Our roadmap of new product innovation in DV+ has never been stronger in the seven years I've been at the helm at Magnite. Our growth in DV+ has also been supported by our adoption of AI. Our technology uses AI to filter the best impressions out of the more than 1 trillion ad requests per day in order to deliver the highest ROI to the right client over and over and over. We also continue to invest in other AI tools that we have built into our client solutions, such as Demand Manager, which uses machine learning for dynamic auction optimization and management of price floors to lift revenue.
An industry development, which has received a lot of attention is Google's plan to deprecate third party cookies this year. We have been preparing and are ready for the next chapter in the cookie list world. We intend to fully support Privacy Sandbox as well as all the other leading alternative identity solutions. In addition, we are continuing to invest in our own audience capabilities to help publishers better monetize their first party data. Ultimately, we believe the elimination of third-party cookies will strengthen our market position as competitors will struggle to support new third-party solutions and do not possess the scale necessary to support first party segment creation. In closing, we feel very good about our business, particularly driving a return to growth in CTV.
Now that our platform consolidation is in the rearview mirror, we are in a position to focus our engineering and product efforts exclusively on delivering cutting edge tech that will further cement our leadership position in the industry. With that, I'll turn the call over to David for more detail on the financials. David?
David Day: Thanks Michael. We are pleased to close another strong quarter and year for Magnite. As Michael mentioned, fourth quarter results for both CTV and DV+ contribution ex-TAC exceeded the high end of our guide. We also reported an adjusted EBITDA margin of 43% for the quarter, which is above the high end of our guidance range. For the full year 2023, we generated contribution ex-TAC of $549 million, ad spend surpassing $5 billion, adjusted EBITDA of $171 million and over $100 million of free cash flow. Total revenue for Q4 was $187 million, up 7% from Q4 2022. Contribution ex-TAC was $165 million, up 6%. CTV contribution ex-TAC was $64 million, beating our guidance and was down 2% from last year. CTV contribution ex-TAC was pressured in the quarter as we had expected by mix shift and managed service softness trends, which we've discussed in the last several quarters, but showed marked improvement over the third quarter.
DV+ contribution ex-TAC was $102 million, an increase from $92 million or up 11% compared to last year and continues to be an area of strength as Michael mentioned. Our contribution ex-TAC mix for Q4 was 38% CTV, 44% mobile and 18% desktop. Geographically, our international investments are paying off and results continue to outpace our U.S. results led by our DV+ business with new publisher wins and overall volume growth. From a vertical perspective, automotive, health and fitness, travel and retail were our strongest performing categories. Categories that did not perform as well were business services, home and garden, and financial services, and political was also down significantly as we cycled the election spend from 2022. Total operating expenses, which includes cost of revenue for the fourth quarter, were $152 million, a decrease from $204 million in the same period last year.
A primary driver of the decrease from last year was the accelerated amortization resulting from the consolidation of our legacy platforms into Magnite Streaming, which was completed in July. Adjusted EBITDA operating expense for the fourth quarter was $95 million at the midpoint of our guidance range, up 3% from last year. Net income was $31 million for the quarter compared to net loss for the fourth quarter of 2022 of $36 million. Adjusted EBITDA was $70 million and adjusted EBITDA margin was 43% for the quarter, which compares to $64 million and a margin of 41% last year. As a reminder, we calculate adjusted EBITDA margin as a percentage of contribution ex-TAC. GAAP earnings per diluted share was $0.16 for the fourth quarter of 2023 compared to a loss of $0.27 for the fourth quarter of 2022.
Non-GAAP earnings per share in the fourth quarter of 2023 was $0.29, compared to $0.24 reported last year. The reconciliations to non-GAAP income and non-GAAP earnings per share are included with our Q4 results press release. Our cash balance at the end of Q4 was $326 million, an increase from $311 million at the end of last quarter. Capital expenditures, including both purchases of property and equipment and capitalized internally used software development costs, were $12 million for the quarter. Operating cash flow, which we define as adjusted EBITDA less CapEx, was $59 million for the quarter. Our net interest expense for the quarter was $8 million. As we announced earlier this month, we successfully refinanced our credit facilities that we had entered into in connection with our SpotX acquisition in April 2021.
Our prior structure consisted of a revolver with a capacity of $65 million and a term loan B with a balance of $351 million outstanding. We replaced this facility with a new $365 million term loan B and an upsized $175 million revolver. We believe that these new facilities provide significant benefits and flexibility to Magnite. First and foremost, the new debt structure removed the springing maturity covenant tied to our convertible notes due in March of 2026, which would have accelerated the maturity date of all term loans and made them current in December of 2025 absent a refinancing of the converts. Under our new credit facility, we now have maximum flexibility with our converts and can either repay them at maturity or repurchase them earlier, depending on our view of the trading discount.
Second, we were able to upsize our revolver from $65 million to $175 million with a lower interest rate, which increases our liquidity profile and gives us greater cash and financial flexibility. The revolver matures in February 2029. Third, we were able to refinance our term loans with a lower cash interest cost and extend their maturity to February of 2031. And finally, our new facilities carry the same rating, are leverage neutral, and continue to be covenant light with equal or better terms than the original debt. In less than three years since the acquisition of SpotX, we have been able to reduce our convert balance from $400 million to $205 million and reduce our net leverage ratio from 6.2x to 1.2x at the end of 2023. This is a huge accomplishment driven by the strong cash flow generation of our business.
In conjunction with the closing of our new credit facilities, our Board also approved a new program that allows for the repurchase of up to 125 million of common stock or convertible notes through February 1 of 2026. This program replaces the existing authorization and allows us to be opportunistic in our capital deployment. From a capital structure standpoint, we're now targeting a net leverage ratio of 1x or less longer term. Given the normal seasonality of our cash flow, we will likely see a cash decrease and a corresponding increase in our net leverage ratio at the end of Q1 similar to last year, but expect increases and improvement in subsequent quarters. I will now share our expectations for the first quarter and full year. For the first quarter, we expect contribution ex-TAC to be in the range of $122 million to $126 million.
Contribution ex-TAC attributable to CTV to be in the range of $49 million to $51 million, contribution ex-TAC attributable to DV+ to be in the range of $73 million to $75 million and adjusted EBITDA operating expenses to be between $106 million and $108 million, which implies adjusted EBITDA margin of approximately 14% for Q1 at the midpoints. The increase in adjusted EBITDA operating expense for Q1 is primarily driven by an inaugural all company gathering in January, the impact of annual merit increases as of January 1, and the 2024 payroll tax reset. To provide additional context beyond our Q1 expenses, we expect adjusted EBITDA operating expenses to come down in Q2 and to be between $101 million and $103 million. For the full year we expect strong continued ad spend growth, particularly in CTV, and we are raising total contribution ex-TAC to grow approximately 10%, up from high single digits previously, with CTV to grow faster than DV+.
We're also raising adjusted EBITDA margin expansion to 100 basis points, up from 50 basis points to 100 basis points previously at this level of top line growth. We also expect double digit percentage growth of adjusted EBITDA, with an even higher growth in free cash flow and total CapEx to be in the mid $40 million range, including PP&E and capitalized software. I am very happy with our strong finish to 2023, and I'm encouraged by the progress in our CTV revenue growth recovery. I'm also particularly pleased with our completed refinancing, which provides a stable capital structure for the foreseeable future. And with that, let's open the line for Q&A.
