Magnite, Inc. (MGNI) Earnings Call Transcript & Summary

Good afternoon. Thank you for joining us today for Rubicon's presentation. Let's get started. [Operator Instructions] Let me start by introducing our Rubicon participants today. Michael Barrett is Rubicon's CEO; Michael Zagorski (sic) [ Mark Zagorski ] is the President and Chief Operating Officer; David Day is Rubicon's Chief Financial Officer; and Nick Kormeluk is the SVP of Investor Relations and Rubicon's Head of Global Real Estate. I will hand it over to you guys.

Thanks, Laura. I appreciate it. I hope this video is finding everyone safe and well. We're delighted to share with you the story of Rubicon Project and our merger with Telaria. So Nick, I think if you can just advance the slide, I'm going to read it all back to you, not. But -- so the value proposition. So many of you know, and those who don't, we merged with Telaria, a merger of equals, that consummated at the start of Q2. And the driving idea behind that merger was Rubicon was very good at monetizing programmatically for our publishing partners a bunch of inventory, but we didn't have any CTV capabilities. And obviously, connected television is one of the brightest spots in programmatic to ever come along, access to the linear TV dollars that have eluded programmatic to date. And Telaria had done a wonderful job focusing on CTV, almost to the exception of every other media format. So we saw a real opportunity to get the 2 companies together to break through a very crowded field to look different and become this largest independent sell-side platform, as a CTV leader. And independence, incredibly important, it can't be overstated. What do we mean by independence? Independence is someone who doesn't own or operate media properties. So we're not in competition with our publishing partners, and somebody who doesn't compete with agencies and marketers and try to dislodge them from the equation. So independence is something that's prized in this industry, that is wanted in the industry. And so we feel as a scaled omnichannel independent player with a big focus on CTV, it puts us in a very bright position going forward. David -- sorry, Nick, if you can advance. Great. We see omnichannel, another probably confusing ad tech word, but what it simply means is that if it can be bought or sold programmatically, you're going to find it on our platform. So in addition to CTV, we talked about all sorts of video, whether it's outstream or display video. We do audios. Spotify is one of our prized partners, anywhere from desktop video to mobile video. You can read the slide. And not only do we monetize that inventory, we add capabilities through our software that allies for real time reporting, live analytics, buyer tools, TV-like ad podcast -- podding, et cetera. So we feel as the combination of the 2 brings this offering that's very unique, differentiated and separates us from the pack. So we reported just recently, I believe it was May 6, our Q1 results, so I'll give you some of the key highlights. Rubicon Project grew 12% year-over-year to $36.3 million in first quarter 2020. We'll talk a little bit about the challenges we faced, as all have, in this COVID environment, but we are well on path to meet guidance. And we saw in the middle of the month a severe decline in ad spend. Adjusted EBITDA came in at $2.8 million in Q1. We closed Telaria in April 1, so Telaria didn't really report any Q1, but the highlights were total revenue grew 11% and CTV revenue grew a whopping 74%, but that too was impacted by COVID. So we also were one of the few companies, perhaps wise or unwise, to provide Q2 guidance. So we expect revenue between $36 million and $39 million. And in addition, we highlighted the fact that although the middle -- although early May and later part of April we saw a revenue stabilization. So a steep decline in the end of March and then a rebalancing and stabilization as April and May played out. We talked, going into the merger, about achieving $15 million to $20 million in cost synergies. And given the COVID environment, we sharpened the pencil and exceeded the $20 million per year run rate. Keep in mind, please, that is a run rate. So we'll realize the full amount of that savings as the year plays itself out into Q1 of next year. We also initiated a series of fiscally prudent short-term measures, including Board and CEO salary cut, in addition to things like you would normally associate with shelter-in-place: T&E expenses, marketing expenses, et cetera. So I talked a bit about on the now, which is the backdrop we find ourselves in. Obviously, ad spend and revenue have been pressured. Our model is we get paid when our partners get paid, our publisher. So we take a percent of ad revenue. With their ad revenue down, so is our revenue. We had signaled that it was down in the 30% range in the month of April. Impressions are way up. As a consumer, most of you are probably sheltered in place. You are consuming more media than you normally would. So we're seeing record number of impressions. That's usually a good thing. The bad thing is the corollary is there's not a lot of advertising to fill those impressions. So you're seeing low fill rates and declining CPMs. And the idea is that with the cuts that we talked about and the fiscal prudence, that we're balancing the long-term opportunity with just being smart, given the lack of visibility that we have when we may come out of what we're experiencing today. But as I said before, we are seeing stabilization. CTV, we pointed out, although the company was down 30%, in April, CTV was up 10%. So CTV continues to be an accelerant. And we really think that one of the biggest beneficiaries of consumer behavior change has been ad-supported CTV. So the AVOD services have all grown substantially, and we would like to think that a bulk of that audience will stay with those platforms as we come out of this, and you might have a large audience that we can monetize for our partners. Spend and revenue growth, market share gains, strong incremental margins, those are all elements of the business that through good and through bad we think are drivers. It's the reason why we got together as 2 companies. We do think that with our strengthened balance sheet, we'll be able to better weather this storm, and we will be in a position coming out of it and during it to make certain that we're playing offense and we continue to create this supply path optimization pressure on our competitors. And lastly, we'll talk about it a little bit later in the presentation, but exciting new product, Demand Manager, that we launched last year. It was in beta for most of the year, so pre revenue. And we've seen great growth there and some real promising upsides given the types of -- these type of economic situation our publishers find themselves in. So there are 3 big drivers in the business, CTV, and we can't talk more -- enough about that, supply path optimization and Demand Manager. So I'll talk about supply -- CTV first and the trends and the big opportunity. You've seen the articles. Cord cutting is not just continuing, but it's accelerating, given the economic backdrop. So more and more households are living without having to pay for the complete cable package. And that's definitely benefiting connected television. And an increasing amount of that connected television is ad-supported. You're seeing the major media companies all launch ad-supported services in connected television. And we're seeing the viewership of those ad-supported services increasing as well. And programmatic is definitely driving the future of CTV. It's kind of made for -- programmatic is much more of a real-time spot market tool. And when you see things like the upfronts canceled, and you start to see that direct sales is being severely impacted with the COVID pandemic, the idea that programmatic can fill that gap and still create meaningful revenue for our CTV partners is another -- the thing that we're seeing coming out of this trend. Just some more statistics on the growth in the attractive TAM of this marketplace. In 2019 going to 2020, you're seeing growth of total households with connected TVs growing to 80% of total households. And the number that's just astounding is the number of cord-free homes, so you're going from 40 million to 48 million cord-free homes. So it's a fast-growing, large addressable market. And another very powerful statement, you're seeing that the number of households with pay TV packages versus the number with connected TV, that 2 points crossed going into 2019, and you're just seeing further acceleration. So there is a definite consumer shift in behavior, consumer shift in economics given the present backdrop that's accelerating it. And the idea that all connected TV packages are going to be subscription may have been the driving thesis just a year ago with the success of a Netflix, but now you're seeing the hybrids like Hulu and Peacock coming out and things like Pluto connected with Viacom and Tubi with FOX, and you're starting to see more and more of an ad-supported flavor in the marketplace today. And this is just kind of a placemat of our premier partners, and it's really the who's who of media companies in this space. I might point out Seven West Media were particularly strong in the Australian marketplace. And then you see acquisitions like I just talked about, Pluto going to Viacom and Tubi going to Fox, and that actually increases our opportunities, not decrease, because we're already working with those companies. And now you're seeing the high-quality programming from Fox being pushed onto Tubi and vice versa from Viacom being pushed onto Pluto, which will only increase -- which only increase the adoption of these platforms. Now to our second driver that I talked about, SPO opportunity. SPO is just an acronym for supply path optimization. Generally speaking, supply path optimization has been used to the buyer's [ lenge ]. So an ad agency wants to work with fewer platforms like ourselves, why do they want to do that? Well, they can better control inventory quality, they can definitely better control pricing and they'll have a closer relationship with the publisher. So we are definitely seeing that occur. Why is that important? That's important because there are still too many mouths to feed on our side of the fence. So supply path optimization to us, we feel, is a tailwind. It will cut out the weaker players and players that aren't as financially stable. We're definitely seeing a flight to quality right now. Folks with the strongest balance sheet, folks that have one-stop offerings so that there's not multiple vendors that have to fill one need for a customer. All of these things are kind of pushing in our favor. And we're definitely seeing on the buyer -- on the publisher side, too. Just a quick history lesson. Header bidding came to the market a couple of years ago, and it really took off in full bone use. Almost every publisher universally used it. The idea behind header bidding was pretty simple. If you ran a unified auction with all the demand competing against each other for that single inventory, you're going to raise pricing. It really did raise pricing, but it had a tough impact on the supply side, the SSPs, where we were kind of commoditized. Little by little, you're seeing publishers winnow down the number of players they're working with, and they're finding that they're making as much, if not more, money working with fewer players. And we think that, that really will result in this SPO of hundreds of millions of dollars in spend coming to our platform from other smaller, weaker platforms. And lastly, the third pillar of growth for us is Demand Manager. So what is Demand Manager? To understand Demand Manager, you need a quick history lesson in what Prebid is. So I talked about header bidding. And header bidding was this panacea for a lot of publishers. It made them a lot more money. It did free them up from using Google as their exclusive player. But what it was -- what header bidding was in inning 1 was a proprietary black box nontransparent solutions that publishers were frustrated with. So Rubicon decided to cofound an organization called Prebid.org, which was true open-source software, community-built, that could solve the need for a publisher to run a header bidding wrapper, but make it sure that it's open source and transparent. Not surprisingly, that caught on. It's now, by far and away, the most dominant utilized header bidding solution for publishers. However, because it's open source, it has some drawbacks to it. It's not easily used. It doesn't come with a sophisticated interface. It doesn't come with sophisticated tools. It often requires a publisher to hire resources, engineering resources to make changes, however simple, to the page. And therefore, we saw a real market opportunity to come to market with a managed service product called Demand Manager, where we give the software, we charge for it, but we provide support for our clients. And we went beta with that product last year. And to date, we have 156 customers under contract. We're very excited with the momentum we're seeing because, keep in mind with the economic backdrop our publishers are suffering through, any cost savings that they can apply is being very much sought after. And so Demand Manager is -- can answer that challenge that they have. So our pipeline is very strong. The revenue will definitely be impacted this year from our expectations because as we get paid as a percentage of ad spend, and ad spend for our publishers will be down because of the recession, but we feel that we're in very good position with Demand Manager going forward. So in conclusion, we talked about our strategy. We talked about on our execution part. I'd like to just quickly spend a second on the team. I talked a bit about header bidding and the impact it had in the industry. This was several years ago. I've been at the helm for a little over 3 years, so has David, so has Nick. Mark has recently joined us from Telaria, where he was at the helm for 3 years. And so it's a long way of saying the team is seasoned. We've gone through headwinds before in the industry. We've shown financial prudence, cutting expenses at Rubicon, returning the company to profitability. So the game plan that we have in place now is quite similar to the things we've gone through before as a team. So I think that we have great confidence in our ability as fiduciaries to manage through this and still come out being able to play offense in the end, because we think that there is going to be huge opportunities when we return to a semblance of normalcy. And lastly, we touched upon a bunch of this, but we feel as though the biggest part of what we have done from this merger is to create this highly differentiated player. If you look at the DSP space 3 years ago, Trade Desk was an important player, but they were one of many. And Trade Desk, through execution, product development, go-to-market strategy, were able to show that you can break out of a clustered pack and become neither -- almost 1 or 2, depending on what spend you look at against Google. And Google is the dominant player on our side of the fence, not as much in CTV. But we think the combination of the 2 companies, plus our road map, plus our product strategy, will allow us to break through the pack much like Trade Desk did, and put us in a position to be the dominant independent scaled player on the SSP side. So I appreciate your time. And with that, we'll open for questions. Is that correct?

Okay. Is that my cue? Do I come back? Maybe I've got a couple. Why don't I ask a couple? Thank you for that presentation. What are you seeing in -- on May 4, you guided to 2Q '20 combined revenues of $36 million to $39 million, down 27% to 30%, compared to $51 million of combined revenue in the first quarter. Is that still okay? Do you have an update for us as of May 19? Maybe we could start there.

This is where you get to meet David Day, the CFO.

Fabulous. Love CFOs.

Thanks, Michael. Yes. No, listen, and the context for that guidance at that point in time, we saw, as with everyone else, huge decreases in March in spend. We saw some further degradation on the margin in the first half of April. Then we really saw a stabilization latter half of April and going into our earnings call. And that's what our guidance was based on. We're not going to handicap with weekly updates at this point, but we're certainly hopeful as we all see some of these signs of returning to some semblance of activity in the broader economy and then in our daily lives that, that will bring some -- at least continue to support stabilization and bring further strengthening.

Do you feel that April is the bottom?

We certainly observed a bottom up through May 6. And so we saw again the stabilization latter half of April and early May. So your crystal ball is probably as good as mine as to how this whole thing is going to play out, but that's what we've observed so far.

So one of the things we're seeing with COVID is it's like accelerating trends that were in place before. And I'm wondering whether you think that COVID will be a catalyst for sort of shaking out the sell-side platforms and you'll be one of the last ones left standing. It feels like it's winners are going to be stronger, to your point, and maybe it will create an environment where maybe it's better for you competitively? Is that your point of view?

Yes. Laura, it certainly is. I mean we've been talking about this shaking out for years now and just been mystified as to how in a marketplace that's supposed be insanely efficient, there are 3 or 4 players that look identical and provide almost the same amount of service and take anywhere from 15% to 30% tax in the system. And it just never seemed to be a discipline or outside catalyst to spur it to its final conclusion. And we really do think that we're looking at the final conclusion that there -- it's not rational. This marketplace should behave more rationally, and buyers are talking with that language; sellers are talking with that language. So it's inconceivable that there isn't a shakeout as we come out of this.

And then, Mike...

And being a public company, there are many challenges with the financial transparency that come along with that. But certainly, in this COVID situation, having that financial transparency for our publisher partners has been a great benefit. So we've had -- I've had numerous discussions with CFOs and our publisher partners who look to our financial stability and are trying to increase the business that they do with us.

Okay. And then you talked a lot about your connected TV business. But what I'm interested in knowing is that are you feeling that as advertisers in the -- I know you're trying to take share from the linear TV ecosystem. Is it your feeling that this connected TV world benefits from -- it's getting killed by COVID now, I get that, on the monetization side. But is it your position that COVID actually accelerates connected TV ad spend shifts from linear to digital structurally?

Yes, Laura, why don't I have Mark grab that? As you've introduced Mark, he was a former CEO of Telaria, and he's now our President and COO. So he's the expert.

Yes, I think it's a great question. Thanks, Michael, and thanks, Laura, for the question. I mean look, we've got 2 major trends that I think were occurring prior to COVID and now are being accelerated on the consumer front and on the advertiser front. Consumer front, you've had cord cutting, which is now accelerating, we've seen that and Michael noted that, which is driving more folks towards viewing content over the top. And then more of that content is being ad-supported just due to the fact that people's budgets are being squeezed. So you have a consumer behavior, I think, shift that's occurring that has just been accelerated by the fact that people have less money and more time on their hands. And we're seeing viewership levels for ad-supported platforms like Pluto TV and Tubi and others set records right now. On the advertiser side, you have similar forces which have accelerated, which are: a, the collapse in the upfronts, meaning that more dollars are being held for scatter or spot buying later in the year. And the CTV world went to sell very well to that, particularly programmatic CTV where ROIs can be determined pretty quickly. So I think these things are not new. There are forces that were driving dollars going to CTV as well as consumer eyeballs. But with the added pressure of smaller marketing budgets and smaller consumer budgets, you have ad-supported CTV growing, both in usage and potentially setting itself up for a pretty significant rebounds when those ad dollars flow back into the video ecosystem.

And then, Nick, do you want to ask all the questions in your queue? Because you got a bunch of questions in your queue. So I'll sign off, and I'll let you go back to the other questions. Thanks, guys.

Sure thing. There's quite a few. First one, probably targeted, Michael, towards you. Will Google's market position be further weakened over time from regulatory scrutiny in the current environment relative to how they've been able to compete as a competitor in the past?

Well, that's a tough one to answer. I mean I think the way we look at it is that we don't anticipate that regulators will be our friends as it relates to the day-to-day competition. But I think over time, I think that there's enough energy and momentum around the idea of looking at what pieces of the puzzle should be there, what shouldn't be there, that it doesn't help a company being under that scrutiny. So I don't see them overnight becoming Gandhi, so to speak. But at the same time, I think that we work with them closely. We compete with them closely, and we haven't seen working with them much of a change in terms of their go-to-market approach or their rhetoric that we see coming from [ the shaft ].

Excellent. Next question. David, this is probably geared towards you. Can you discuss how you're managing and what you're seeing in terms of lower CPMs? And there was a prior focus about really getting efficient and turning away some lower-priced CPM business to focus on margin and profitability. More importantly, how does that impact the EBITDA margin profile over, say, the next 1 to 2 years?

Yes. Good question. So we've actually continued that trend of focusing on our unit economics, and so there's been a great surge of volume with folks staying at home during this COVID time period. And we've continued to implement strategies to reduce high-volume, low-revenue sources of inventory during this time. Over the longer term, we've -- we're undertaking a couple of initiatives. And first, let me highlight, we've done a pretty amazing job as our ad request volumes have more than doubled over the last 18 months, and we've essentially kept our adjusted EBITDA expenses relatively flat. Going forward, we are looking to expand our leverage from cloud usage. And so in our last earnings call, we talked a little bit about some additional expenditures over the course of this year as we move into a phase where we'll be able to leverage the cloud in a greater degree in certain international geographies, for example, in Asia, and we'll also be able to use the cloud in scenarios which we describe as [ ur-stability ] scenarios. So normally, we have significant CapEx that we build up towards the end of the year. In the fourth quarter, we utilize that capacity and then it sits empty for 9 months. And so we're making some investment this year to be able to utilize the cloud and not have that empty capacity for 3 quarters of the year. That will initially take some incremental investment, but we think should maintain the track that we've been on in the past as we head into 2021 and 2022.

Next question, probably geared towards Mark a bit. Mark, premerger Telaria had a unique relationship with Hulu. Are there opportunities to create partnerships similar to that with other publishers and creating more of a software management SaaS-like platform versus simply an SSP or running auctions for some of those partners?

That's a great question. I mean I think one of the major premises of putting the merger together was to provide a broader tool set for publishers, because when we start looking at the CTV players out there, they were increasingly multifaceted, right? So Hulu is part of the Walt Disney organization now fully, which has not just connected TV assets, but display and mobile and audio and all types of assets as well. So I think you've seen this also happen with folks like Tubi, which is now part of Fox, which also has assets across the board. And Pluto, which is part of Viacom, same story. So I think obviously, our charter now as a company, as an omnichannel platform is to not just build relationships with folks on one aspect of their media, but to do so across every different type of media vertical they support. And I think there's a great opportunity for us to do that based on the relationships that we've had on the CTV front with the CTV leaders and the CTV assets within those orgs. So that's a long answer to, yes, I think there's a great opportunity for us to continue to expand our footprint in the larger kind of umbrella organizations of the CTV partners that we've worked with since day 1.

Great. Thanks, Mark. Michael, how is your customer base and publishers relationships holding up, getting better, strained through this environment? And how do you believe the competition is doing relative to your -- some of your private competitors that you run up against as well as on the CTV front?

We were just talking about that the other day. The leadership team was together. And I do think one of the things that the shelter-in-place -- so I'm amazed at how well we've been doing as an organization, but I'm also very cognizant now that we're entering in week 10 that there's only -- there's a limited amount of true offense that you can be playing. And also the marketplace feedback is something that you miss, the conferences you go to, the bigger meetings you have with your clients. That's where you get a lot of the market intel about what our competitors are up to. From what I can tell, no one is advantaged from the situation of where we find ourselves in our workplaces. But the folks that had a leadership edge going in, I think, are not only continuing it, but leading it because I think there's this kind of flight to safety, flight to quality where the bigger players like us are taking on more business and more opportunities as opposed to folks where you may not have been as well positioned going into this. I think there's a reluctance on our publishers' part to experiment too wildly because they are so concerned about the revenue shortfalls that they've seen that anything more to exacerbate that just to experiment is something we're not seeing. And so I think that, that perversely puts us in a better position compared to our competitors, but it's certainly -- we're looking forward to the day where whatever it's a new normal or the new un-normal, whatever it is, to be able to go back out there and work in that capacity.

That's great. Next question, probably a little jointly to Michael and David. As Demand Manager picks up traction, do you see this -- do you see the revenue and the opportunity to grow revenues in Demand Manager act more recurring in nature? Or that revenue had different characteristics than your normal business? And is this an opportunity for as you continue to grow and develop products or in different areas of the business, for revenues to perform differently as you grow the business or look to the future?

I guess I'll take the first swing at it, and David can jump in. I think the biggest difference in the revenue, the type of revenue from Demand Manager, is the idea that we get paid on all programmatic dollars, not just the auction that we have to win. So keep in mind, the way it works today is we compete with other auctions in a unified auction in an open market to try to win that impression that everyone else is seeing and bidding on. And sometimes we do, sometimes we don't. More often than not, we don't win. And that's our only revenue opportunity. We go through the cost of processing everything. And if we don't win, we just incur the cost. Demand Manager, on the other hand, you get paid on every winning auction throughout the product. So I think that, that is the biggest difference in the revenue. To date, it's been very much still a share of media product, but we are starting to get folks looking at more of an enterprise SaaS modeling for it. We're completely open to it. It's just that the publisher base that we work with are very accustomed to share of media. And I think that will be a longer evolution for that revenue to behave completely differently and be more of an enterprise SaaS-type of revenue stream.

I think you covered it.

Great. And last question, is there, from an integration standpoint with Telaria and Rubicon from a unified user interface, from a video -- traditional web video platform and then also between a software platform, Demand Manager and Telaria's VMP, can you talk about the integration opportunities between the 2 companies that exist post-merger and kind of what to look for or time frame around some of those?

Yes. And I'll let Mark chime in. So the idea -- the real appeal of Telaria's platform is it's really, really good and efficient at what it does. And our platform is really, really good and efficient at what it does. And merging the 2 makes no sense whatsoever. But does that mean that our consumer, our publishing client, our buying client will know how many different engines are behind that unified interface? So there will be one interface. There will be one log in. There will be one set of reporting. There will be one tool. Whether it's video management platform or whether it's header bidding through Demand Manager, all of these will be part of an integrated offering to our clients. And it will probably take the shape of this going online first, that going online first. And little by little, you'll get to a point where it's a seamless experience.

I think that's -- that nails it.

That's great. Any closing remarks? That's all we've got for Q&A at the time, and we're just up about at time. So any closing remarks?

No, I just appreciate everyone listening in, and I hope everyone stays safe and well, and I can't wait to see you at an investor conference where we can be closer than 6 feet.