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

Hi, everyone. I'm Shweta Khajuria, Internet analyst at RBC. And we are thrilled to have Michael Barrett, CEO of Magnite; and Nick Kormeluk, SVP of Investor Relations, with us today. Michael and Nick, thank you so much for joining us.

Thanks very much, Shweta.

Yes. Well, we're calling this the vaccine conference because so much has already happened over the past, call it, a couple of weeks and it is on almost everyone's mind. So I'm going to -- before I get to COVID, for those who are on the call, for the benefit of those who are on the call, maybe Michael, could you just talk about what it is that Magnite does? What is the problem that it's trying to solve? And what is the value proposition?

Certainly. So Magnite runs a digital ad exchange. And in industry kind of parlance, folks simultaneously refer to that as a supply-side platform. So we work with publishers, digital publishers; folks that do websites, mobile apps, connected television platforms. We work with them to take their digital inventory. We place it on our platform, our exchange. And we then connect buyers through DSPs, demand-side platforms, like The Trade Desk. And behind Trade Desk sits agencies and marketers and they bid live on the inventory. And if they win the auction, we serve the ad for them. We take the money. We take our cut from it. And we deliver the revenue, the vast majority of the revenue to the publisher. And so that's how we sit in the food chain. And the value that we bring is in order for this all to work, a marketer if they're chasing a data-driven audience, they're going to need to sift through trillions of impressions over tens of thousands of publishers to find the audience they're looking for. And without a supply-side platform, that wouldn't be possible. It's impossible for a DSP like The Trade Desk to plug directly into all those publishers. It's an entirely different business. And that's what we do and that's the value we provide to the marketplace.

Great. Well, thanks for that. So just to summarize or characterize it, you fall in between the content publishers and DSPs and the agencies and advertisers. So really the dollars go from agencies and advertisers, to the DSPs who then work with the SSP, which is you, Magnite. And you represent the content publishers like Disney or Hulu. And you help -- you represent Disneys and Hulus and the content publishers and Trade Desk will represent the advertisers. And you take a cut of it when the advertising dollars flow through these platforms and reach the common publisher. Is that...

It sounds so much better. You should work here.

That's nice of you. But just to follow up on that question, maybe talk about how you monetize that inventory. You mentioned you take a cut of it. That's the take rate. So where is your take rate compared to industry? Who are the other SSPs or the supply-side platforms? And this is all programmatic, correct, and what that means in terms of open Internet.

Yes. So that's exactly right. Our revenue model is a percentage of the total media spend. So we refer to that as a take rate. That take rate has been steady over the years, to give you some perspective. And we don't talk about our take rate publicly any longer, but we also educate our investors that it's not something to be concerned about in the business. They're not falling. The trend is steady to slightly up. Someone like a Google, for instance, runs at a 20% take rate. And they're one of the competitors in the SSP world. Our last time we talked about take rates publicly was at -- before the merger. And our take rate at Rubicon was in the high 13%, low 14%. And as I said before, it's quite stable. From a competitive landscape, certainly Google is the largest. Interestingly enough, you have to differentiate between media type. So in that world of display and online video, so non-CTV, Google is a very dominant player. They have an ad server and attached to that ad server is their SSP or exchange. And they're a formidable competitor in kind of the general exchange business. CTV is interesting. Google doesn't have nearly the toehold that they do in the general world of the non-CTV world. And that's a world that has far fewer players. I would say, we're 1 of 4 players on that side that are the main players. And the other being Comcast's FreeWheel, which is the ad server; and SpotX, which is owned by Bertelsmann currently. And of course, Google plays in the space.

Yes. That makes sense. Okay. Before we get to CTV segment, there is a lot to talk about but I want to get to COVID. So advertising in general has been impacted through COVID. Now what happens to Magnite's business and demand trends when the economy opens up?

Yes. So obviously the recovery, I think, has taken most folks by surprise. We are one of the few people to give advanced guidance in March when the pandemic hit. As you know, most folks pulled their guidance just out of pure inability to forecast. So I think across the board, the recovery has been stronger but it's still recovering, right? There are sectors that still haven't opened back up: travel, entertainment. So these ad verticals are still far, far beyond. It's hard for us to gauge what Q4 is going to be like. Is it going to be a normal Q4? Is it going to behave like Black Friday on with big, big holiday spending to be seen? But I think recovery looks really promising for us because the merger has gone extraordinarily well even though it's all been done by Zoom. And we're in market with a unified go-to-market approach and we're seeing green shoots from that already. And I think that we have strengthened our publisher relationships. In fact, I know we'll talk about CTV later. But we've seen so much cord cutting during the pandemic, an acceleration of a trend that was already in existence; and adoption of streaming services. And within that, a prevalence for ad-supported streaming services given the economics of the consumer to lower out-of-pocket spend. And those audiences have grown exponentially. And we feel that, that audience will stay with those streaming services. So as we come out of the full recovery to the new normal, I think we're extraordinarily well positioned to take advantage of that.

That makes sense. What have you seen so far in October and through November in terms of ad dollars coming back, in terms of just the recovery? I mean based on your third quarter numbers, you almost -- you already have a V-shaped recovery if we compare the third quarter revenue growth pro forma to the fourth quarter revenue growth. It's -- there was a dip, and then it's now back to those levels. And so maybe if you could talk about what you've seen in the fourth quarter so far?

Yes. So if you look at the guidance and the reports from the analysts, I think they're all pretty spot on. I think we kind of forecast a continued recovery, not a complete recovery. And political certainly was a good guy, a benefit for Q3, but it doesn't present this insurmountable comp for next year across the board. Political was in the low single digits for the year. And so really, the key question is as you get past into the Thanksgiving and beyond, how does that behave? Is that going to look like a normal Q4? And to be seen, but so far, promising results.

Okay. Okay. All right. Now let's talk about your segments, and that includes CTV. So earlier this year, it was Telaria and Rubicon that merged together. And as a result, you now are Magnite. In terms of your revenue segments, now you have CTV, mobile and desktop. CTV being one of your key growth drivers, it has been and will be going forward. You talked about third quarter revenue growth of about 51%. We are projecting growth for the year to be in the mid-40% range. CTV has seen benefits like you talked about with the shift to OTT in the COVID environment. So maybe can you talk about how you're positioned for growth? What is this good, sustainable growth for CTV segment? How are you positioned to benefit? And one of the most commonly asked questions is, well, Trade Desk at CTV is growing 100%. And how should we think about this 50% growth at Magnite? And you actually had a release that talked -- just a day or 2 ago that talked about Magnite's share with 8 of the top 10 DSPs. Your share has actually grown more than 100%. So maybe the question, all this boils down to, what is a sustainable growth rate for TV for Magnite? And second is how should we think about the correlation with what Trade Desk CTV growth is and where Magnite is? Those 2 questions, please.

Sure. So sustainable growth rate for CTV, I think if you look at the industry experts, e-marketer, your report, folks are pegging it in the 30% range. Some have upped it from mid-20s to mid-30s now, but suffice to say, very fast. And we see that for the foreseeable future, it's just getting started. I mean if this was a baseball game, you're not even out of the dugout yet. Most of the inventory that's sold in the connected television world is sold direct by publisher to agency. A sliver is programmatic. That was very, very similar to the early days of programmatic in display. Publishers sold 90% of revenue. Display -- programmatic handled 10%. And in a very fast period of time, it became 90/10 the other way. And we feel that that's going to continue in connected television. And so oddly enough, the supply challenge in the beginning is getting access to publishers that doesn't want to sell it direct. And then it completely flips. And so we feel as though our 50% growth is taking share. Why isn't it 100% like Trade Desk? I think the simple answer is Trade Desk is dealing in a less competitive world on the demand side. And that's by their own doing, and hats off to them. But they've kind of reached its escape velocity where $1 goes -- a new dollar goes into CTV. They're grabbing a big portion of it before it trickles down to the smaller DSPs whereas our space isn't as consolidated. Yes, there's only 4 players but they're good, healthy players. And I think that over time, there's nothing systematic about the supply side where that wouldn't be the same idea. And that is a global independent omnichannel player that has CTV can take share aggressively in the not-too-distant future, kind of match that Trade Desk trajectory from a growth standpoint.

Now that makes sense. You talked about in your press release that of the DSPs that you work with, 8 of your top 10, you have more than doubled the share gains over there. So how should we be -- what is the implication? Is it that Magnite is gaining share in CTV? Is it that you're becoming a larger player or a larger portion for Trade Desk in terms of CTV growth? And then I have a follow-up on your comment on being independent.

Sure. So the -- yes, I think the big concern, the initial concern with the question about growth rates and trying to compare the 2 was, well, it's obvious that Trade Desk isn't spending all with you because if you're only growing at 50%, they're growing 100%, are they disintermediating you? Are they going around you to get to the publisher? Are they spending that extra growth on another platform? And I think this is our way of saying, "No. As a matter of fact, we're getting more share from Trade Desk." So they're growing greater than 100% on our platform. So I think that, that bodes well. And I think that that's a testament to the quality of CTV we have. You mentioned the Hulu relationship. And I think that we talk to our publishers. That's how we gauge how we're doing. And in almost every case with every publisher, we've moved up the ranking in terms of monetization partner. So we feel good about that. And why is independent -- what does independent mean in the space? And what does it matter? Well, to us, independent means that I don't compete with my partners. I don't compete with my publishers. I don't own inventory, and I don't compete with the DSPs. I don't have another DSP that competes with that. You look at Google. They compete with everybody. And in -- particularly in this space, they own a lot of inventory so they compete directly with publishers. So if you're a publisher and you're placing your inventory on their exchange, in the back of your mind, you're like, "Boy, they're learning a lot about pricing and they're learning -- and they're probably filling the higher orders with their inventory before mine." So that's not fair. That's not independent. And if you're the DSP, Trade Desk, you're competing head to head with the largest DSP, which is Google's DV360. So we feel independent matters. And if you look at Trade Desk's ascendance on the DSP side, independence is a big role of that. "I don't want to give all my dollars to Google's DV360. Please, someone out there, build me something that looks like Google but isn't Google." And they've been asking that at the sell side for years. And so what we did with the merger with Telaria was do just that. Have these similar capabilities in inventory breadth that Google has but you're independent and you're not competitive. And it matters. People say, "Well, they haven't really voted with their dollars." Well, they haven't really had the opportunity to vote with their dollars. We're only 2 quarters in on this. So we feel very good about where we're positioned in our uniqueness.

That's great. And let me have -- I have a follow-up. And then I'm going to read a few of these client questions that came in. But I guess the question is being independent is a huge value proposition. Being omnichannel is also being -- a huge value proposition. And having scale, meaning that you are the largest, so the largest independent and omnichannel, is a great value proposition. Now the question is okay, well, that's Google. That's not independent. Is it -- another question is the value add for supply-side platform and, a, why can't the content publisher do the same thing that you are doing and work directly with a DSP? What will be your answer?

Well, so technically, they can. And there was a world previous -- if you go 3 or 4 years back, there was a world where advertisers did a waterfall, where they slotted in demand. And they just kind of prioritized it based upon their feel or expertise. And what they found was that, that was terribly inefficient and it wasn't creating a yield, the overall yield that they wanted. And so what the SSP does is it levels the playing field and unifies all the demand in one place and it competes in real time for every impression. And so for the Trade Desk pulling in directly to a publisher, it bypasses that whole checks and balances issue. And you might get $1 million to the Trade Desk, but you have no idea if that inventory you gave The Trade Desk could have yielded you $1.5 million in the exchange. So the exchange is like equalizer where all demand can come in and compete on the same level footing. And we do that across thousands of publishers. So -- and really for -- the work for The Trade Desk have to do with thousands of publishers, not just one. And I think Jeff has been very clear, that's just not their business. They don't want to do that. And I don't think an existential risk for SSPs or Magnite is being circumvented by DSPs.

Makes sense. Okay. All right. I want to touch on the cookieless environment and IDFA. So let me just lay the groundwork here. So we are expecting both these changes, not to have elimination of cookies in the future as well as Apple's IDFA. So let's start with cookieless. If there are no cookies tomorrow, how will Magnite's business be impacted? And second is you just announced that you are -- not partnering but you are supportive of Unified ID 2.0 with Trade Desk. And at the same time, you also spoke about audience segmentation during your third quarter earnings call. So how is that -- is that a full replacement of a cookieless environment, meaning that CPMs will be comparable? Is it a fair apples to apples? How will that work? And most importantly, what did you mean by saying that now the leverage is going to go from -- potentially from buyers to the sellers' side?

Got you. Whew. Okay. So first question, we do not believe that the deprecation of cookies will have an impact on our business. We have gone through this before with the deprecation of cookies in the Safari browser. And what happened then was CPMs went down. So Safari users couldn't be identified any longer, so the CPMs plummeted. But we were able to sell 4 impressions for every 1 impression because the prices were less. Ad budgets were never cut. That's the concept that's important here. And the belief is that people still want to buy programmatically. They may have to buy different. They may have to spray and pray a little bit more. But they'll -- advertisers found that there are campaigns where everybody is effective without cookies when they were -- because the prices were lower. So we feel that as cookies go away, IDFA goes away, these identifiers go away, that for our business, we'll be able to make it back up in volume because we don't believe that budgets will be cut. The attempts to replicate the third-party cookie world post deprecation are all the initiatives that you see. So Trade Desk is working closely with the industry, with us, with LiveRamp, Criteo, et cetera, to get users to log in. Everyone believes that the solution going forward in a cookieless IDFA world is that the publisher works closely with the buyer to get their user, their consumer to grant consent because it's just what this is all about. It's about consumer privacy. It's about the informed consumer saying, "I get it. It's a fair exchange. I get free content. And in return, you use data to target ads to me. Understood. Some of it might be creepy but got it." Trade Desk believes that they can get the vast majority of those users to log in. Once you log in, let's just say you give your e-mail address. That is the key to unlocking the third-party cookie world all over again. So you can populate that first-party ID from that logged-in user with all of that rich data that LiveRamp has and Trade Desk has right now. And it's a good thing because that means we continue without a hiccup. Cookies go away. You have the logged-in user. Everything is great. We support that 100%. We also believe that we don't think, nor do our publishers, that the vast majority of the audience will be willing to log in. So what are you going to do about the nonlogged-in consenting user? And how are you going to monetize that? And that is our initiative, to create audience segments with our publishers, with their data and keep it at the publisher side and let the buyers buy that data. So that's the kind of shift in balance where all the audience segments are done by the buyer in the previous cookie world. In a noncookie world, we believe that the publishers will have a very big say in audience segment creation and value creation.