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

Good afternoon, everyone. We'll have people rolling in, but thanks for joining. Wrapping up the day here with Michael Barrett from Magnite, and looking forward to the conversation. Thanks for joining us.

Thanks so much for having us.

All right. Let's start with Magnite typically thought of as a traditional SSP platform. The business has evolved and it's a lot more than that, I think, over the last few years. So just to start off with how it's evolved, where you're focused right now, the kind of the key business drivers and where you see the business going from here?

Yes. So I think when people think of your traditional SSP kind of born in the desktop era, thread together tens of thousands of websites and plug-in DSP demand and one looks like the other, pretty hard to differentiate in that world. And so what we saw was the streaming opportunity in CTV. And we were that DSP that -- the SSP that I just described at Rubicon Project. And so we decided went through the traditional build-buy-partner scenario to try to get into the streaming business, and we decided the best path was buy. And so we acquired Telaria, then we acquired SpotX and then we acquired SpringServe, the ad server. So if you start to look at the assets that we have and the products that we have, it's quite different than the SSP of old. And what we are finding is the top streaming clients are looking for anything but the old SSP. They're looking for a new version of that. Some of them need ad serving. Great. We've got it. Some of them need elements of ad serving and an SSP platform. We got that. And so we're finding it's a very modular, customized, taking everything off the shelf that we have, but people want to utilize it slightly different. And so the ability for us to be able to do that has, in large part, won us a lot of these deals that we've announced, Netflix being a tentpole deal, and it was because of our capability and our ability to be facile in terms of how they think of us, how they can use us as opposed to just being this dumb pipe that pipes in DSP demand.

Got it. If I just think about your business between the 2 segments, in CTV and DV+, which we'll dig into each, just what's the breakup in terms of, like, clients? Are a lot of advertisers using both? Are they kind of CTV only or DV+ only? And I don't know, how should investors think about, like, the growth rates, opportunities, the take rates and just some of the financials around that. And we'll dig into some of the details.

Yes. No, a really good question. So there's definitely overlap between the 2 platforms a publisher perspective. So if I'm Disney, I have a bunch of websites, I have online video and I have all these streaming, they'll use us for all that. And so will the Paramounts, the Warner Bros, the Discoverys, et cetera. But then there'll be exclusive DV clients that have no streaming business and then streaming folks that have no legacy website business. So I would say that the thesis of being able to be one platform that can house anything, that can be bought or sold programmatic has played out. But particularly on the buy side, which, again, we don't get paid by buyers, but we have to run this robust marketplace, and it's a two-sided marketplace. And so agencies come to us and say, "Wow, I can get everything here. I can get some of the exclusives you have, and I can get all the CTV I want, and I can get the DV+ I want. This is perfect. Like, there's not many platforms that look like you. I will concentrate my spend on you." So it's really played out. This whole thesis of having a robust business across the board has really paid out on the buy side.

Got it. Okay. That makes sense. And so let's start with CTV or dig into it a little bit more. And maybe just broadly what the biggest growth drivers have been, that business has grown really nicely. What are the most important things to know? And then I want to dig into some of the partnerships and differentiation there.

Well, certainly, account wins leads to the growth. We are the preferred programmatic or exclusive programmatic partner of all the top streamers. And we also think of the CTV world as just that direct-to-consumer brands, the Disneys, Netflixes, et cetera. But there's a thriving, vibrant streaming business on the OEMs, so Roku, LG, VIZIO, Samsung, and we work very closely with them as well. And so we put ourselves in a position to prosper from kind of the tailwinds because we're in early days of programmatic, early days of streaming, early days of streaming advertising, early days of streaming advertising programmatic. And so just the growth of programmatic, the adoption of programmatic by existing customers, is going to be an immense tailwind for us in the out-quarters. And then talk about the explosion of different advertiser profiles, like small- to medium-sized businesses coming on, that will be a huge growth driver because it will pour in more demand, more demand will be biddable. It will be a higher take rate for us because it's biddable. So yes, we really think we're positioned incredibly well. You're not going to win a Netflix every year because there's not Netflixes every year to win. And then I should mention also the global expansion of all of our partners. So it's all started in North America. It all started as U.S. only. And now you have Paramount going international, Warner's going international, Disney going international, Netflix is going international. And that we just go along for the ride. We already have a place there. We've been thriving in those markets in DV+. We have boots on the ground. We know the local DSPs. So we can just flip the switch and we're live.

What's your international mix?

75-25, but international growing faster than U.S. right now.

Okay. Are there any roadblocks internationally? Like, when you talk about biddable and more moving programmatic SMBs, whatever it is, like all these growth drivers in the U.S., are they similar internationally? Are they a few years behind?

Well, in some markets, more advanced. So if you look at Australia and New Zealand, where we have been -- we're the programmatic ad server of choice in those markets. They've been early adopters of broadcasters, were early adopters of streaming. And you look at other markets, they're laggards. And there were some times we would look at a market and say, "Boy, I don't think we'll ever crack that." If it's 3 broadcasters, they really enjoy 1/3, 1/3, 1/3 market share. There's no incentive for them to bring in outside tech. They're very comfortable in the way they're doing business. And then all of a sudden, the party ends because Netflix crashes, Disney comes in, Paramount, Warner. And so all of a sudden, they start to scramble and they're like, "Oh God, we actually have to have a streaming strategy." And I think you see it playing out in a market like France where we had signed TF1 and now TF1 has been distributed by Netflix. And so there's going to be strange bedfellows in these emerging areas, but I think we're really well poised to take advantage of it.

Okay. Let's pull on this thread a little bit. I guess there's been a thesis that SSPs would be disintermediated, particularly with some of the larger streamers that have their own tech stacks. And you've made a number of partnerships with big tech players in the streaming side. What is it about what you're bringing to them to help kind of investors understand that Magnite plays that role with these larger players who have their own tech stack to? What do you bring to the table that's allowed you to build those relationships?

Yes. And I think you have to look at it pragmatically. We're not a huge company, but we're 1,000 people; regularly spend $60 million to $80 million in R&D, whether it's CapEx, software, capitalized software development, cloud costs, whatever the case might be; and have been at this for 15 years. And so it'd be kind of silly to think that you could hire 10 crack engineers and flip to switch and do what we do. And so I think that, generally speaking, what folks have centered on is let's do what we do really well. And what is that? It's the consumer experience. It's the experience on the screen. If I want to do really cool special ads, I don't want my vendor telling me, "Oh, my ad server doesn't do that." So maybe I want to build my own ad server, and I want to protect my data. The last thing I want to do is have any data leakage. So I want to keep that really close. But if I'm going to go programmatic and I want to introduce global DSPs, and I want to have 60 DSPs eventually when I'm up and going, and build that layer of safety and build the brand safety and build all the tools, the collections, all that yield optimization, running huge auctions, I think generally speaking, they say that's where I feel as I can have a valued partner. So we haven't seen anyone go that next step and very few can build an ad server. So the vast majority -- I think Disney is an outlier because of largely the acquisition of Hulu and that came with technology. So Hulu as a stand-alone had to have technology. And Netflix is obviously a huge technology shop themselves. But I don't know if you could look at a Fox or a Warners and say, "Oh, yes, they're going to spend $100 million in building an ad server," and justify that. So I think that we feel very comfortable in the value that we provide and the fees that we charge to provide that.

Got it. But even with Netflix, which is a technology shop, you have a relationship there. Tell us about that and kind of -- I think it's still early days in how they're opening up their ad ecosystem. How is that going, the role you're playing? And how is that relationship building out?

Yes. So it's going swimmingly. I mean we're very cautious when we talk about partnerships, specifically on Netflix. We always say it's kind of their story to tell. So us paring what's already public, I think, is fair game. But we've walked people through the RFP process before. And when they reached out to the industry, when they chose to switch from Microsoft to a new partner, they were very clear about what they were going to do and what they were good at. And it's all the things I described before: consumer experience, ad experience, they needed to build the ad server to ensure that they were always going to be able to do what they want to do for the consumer. So you come in and sell them an ad server. I need a programmatic partner that does the following. And definitionally, I would say 2/3 of the questions in the RFP related to ad serving. So if we didn't have ad serving capability, it's going back to the modularity of our offering, we wouldn't have been able to win the RFP. So we didn't sell them an ad server, we sold them a platform, but it's a platform that had programmatic ad serving capabilities. And so we have been at it for a couple of years. They hired tremendous talent. They build fast. We work very closely with them. We've gone into all the international markets with them. And from a size perspective, we've said on many occasions that there's a very good chance, likelihood, that Netflix exits the year as our largest client, if not one of our largest clients on a run rate basis.

Got it. Okay. And still early days with Netflix.

Yes, very much so.

Another large recent partner is Amazon. Can you tell us a little bit more about that relationship? And does that have the opportunity to be similar scale size as Netflix?

Yes. I mean so already, it is -- like, you have to look at Amazon not necessarily just as the publisher but as the DSP. So Amazon as the DSP historically had spent the majority of the dollars on Amazon owned and operated platforms. Then in the display area, they said, "Oh, why don't we follow these Amazon users when they go off Amazon, try to get them back," classic retargeting. And they were very high bidders. They knew the person, they knew when they abandoned the shopping cart, they would be the highest bidder. So they came to us and said, "Hey, can we work with you on your supply footprint so that we can buy Amazon users across the open web?" So they became quickly -- and they only authorized a handful, 3 to be exact, platforms to do that with. So of all the platforms, they chose us as 1 of the 3. So we get an outsized share of their spend. And then CTV rolls along and they say the exact same thing, all the big CPG advertisers are advertising through the Amazon DSP that are buying Amazon owned and operated Prime, et cetera, they also want to buy a bigger footprint, "Hey, we'll come to you and we'll buy your CTV inventory because you're already an approved partner, and we know you and can trust you guys." So on the buy side, they're one of our fastest-growing, largest DSPs. On the publisher side, Amazon as a publisher, they've come to us and said, "You know what, we probably could monetize our inventory by bringing in greater demand than just the Amazon DSP," because traditionally, it's just Amazon DSP where you can get their inventory. So why don't we start not with the top-tier stuff, but we'll start with the Amazon Fire inventory, and we'll start with the inventory piece of that, that your partners, Magnite, the Peacocks of the world, the Maxes, they have inventory share. They have it over there. Why don't we work with you for you to grab it and help them monetize that. And so we're the only person that's allowed to do that for them. And so yes, it's a multifaceted partnership and growing very fast. Probably a bit of a stretch to say that we'd become their in-house SSP and be their only SSP, but yes, we enjoy the partnership we have.

All of that is done programmatically. And when you talk about that the shift to programmatic, so the Amazon Fire inventory that's opening.

Yes, they're very much a programmatic-first shop. And so they probably have the highest percentage of programmatic activity than anyone in that space does.

Got it. Okay. Let's shift slightly and talk about agency partnerships. I mean agency is obviously a big part of this ecosystem as well. And you've got some relationships there. I think you white label some data products for them. Can you talk about the kind of agency workflow and partnerships and what that opportunity is for you guys?

Yes. So I mean, I think agencies have been on record of saying that they were a little casual in the early days of programmatic. That kind of eroded a lot of their value proposition. So they used to be the guys that would help you plan your media and they would bundle together your spend. And you had $10 million to spend, I had $20 million to spend, like, I had $100 million, I'll bring it to market as one and get the best deals. So I'll not only plan your media, I will also get the best priced media. That all blew up in the programmatic world because they kind of ceded it all to the DSP. They're like, "Oh, DSPs are great. They can buy across 200 sites." But meanwhile, they were diluting the spend of each campaign and the DSP was making all the decisions. They were deciding what inventory to buy. They're deciding what price because it was open biddable. So it really hurt their media planning businesses. So they sat down and they said, "What's a way to rectify this?" And so they came to us and they said, "You know what, why don't I get in the exchange business? I'll create the GroupM exchange, WPP Media now, and I'll curate it. I'll get the best deals with those publishers because I know them all. And I'll run the tech as if I'm running it, but you white label it to me so that I can then justify to my clients well-lit, curated, the household names that you know at the best rates. And I will charge you a slight technology fee just like you pay an SSP. So think of me as your SSP exchange." These are kind of crawl-walk-run because there's a whole level of trying to convince the client that it's in their best interest, but they've really taken off. And that model, the general model that I pictured or painted, is being applied across all the holding companies now.

So does that mean the holding companies are effectively building their own DSPs and then leveraging you guys for that?

No, they'll still use the DSP. They're building their own exchanges. And so they'll still use whatever DSP they've licensed. And the real value they're bringing is well-lit, curated, safe environment with really good media rates.

Okay. Shifting to DV+, I mean that business is growing as well in a slower growth area of digital. Tell us about that business and what's driving the strength there.

I think a couple of things. I mean, account wins. And so you would think it's super saturated. But every once in a while, you get a new type of client, like maybe it's an audio client like a Spotify or a social client like a Pinterest, where all of a sudden, you used to think, well, that's not really open web, that's not DV, but it is. And so you get that kind of momentum from client wins. But you also get the impact of what we were talking about before in the supply path optimization. So those agency marketplaces are the definition of supply path optimization. They're telling their clients that they're going to consolidate their spend on one platform. Now it's labeled their platform, but it's our platform that's powering it. And so when hundreds of millions of dollars get concentrated on one platform, all of a sudden, there's a virtuous cycle where publishers are then, "Well, I have to be on that platform if all that spend is on that platform." And if all that spend is on that platform, it transacts. And so I think what you see is us gaining share because of those dynamics where we're winning new accounts, but we also are consolidating the spend across the industry level. So we have much more ad spend going through than our nearest competitor, and that just kind of starts the cycle of growth.

Okay. Understood. Shifting a little bit more, talk about Google. Kind of a lot to say there. Maybe just to start with the news from the other day, if any thoughts on that, if that impacts you guys at all. I know the ad tech trial is the one that has more of an impact. What are your thoughts there, expectations? Are you kind of beginning to leverage that at all? Are you waiting to see what happens? What's that opportunity? I know you've put some numbers around it.

Yes. We think it's real and it's a substantial kind of generational opportunity. If you kind of look at it from a market share standpoint, the court documents gave us the greatest insight you're ever going to get into the size of the business, and it's slightly dated because a lot of it's 2022, et cetera. But their market share in the DV+ world, open Internet, if you will, is 60% and ours is 6%. And we're by far the largest second player and their biggest competitor. So quite a disparity. So anything falls off the track, life is better than it is today. The search ruling is really quite distinct from the ad tech and our outside counsel has cautioned us to draw any lines like, "Oh, they're being lenient. They're not going to do structural behavioral remedies in the ad tech." They're quite different. In both cases, they were determined to be running a monopoly. In one case, it was a legal monopoly but had to be addressed. In the other case, an illegal monopoly. So that's the ad tech. So quite different. So the remedy hearing starts in a couple of weeks and should last a couple of weeks, with a ruling to be quickly handed down. It's called the rocket docket for a reason. It moves fast and the judge there is phenomenal. So there's good likelihood that by the end of the year, you kind of understand. If it's structural, there's no question there'll be an appeals process. So if the court dictates as remedy that you have to sell the ad server in the exchange and you got to get out of the business, they'll definitely appeal. But in the interim, we've been informed that, in all likelihood, behavioral remedies are put in place during the appeals process. So the behavioral remedies would level the playing field. And if you look at our business, we see all the impressions that they see. We take those impressions to auctions just like they take them. We just win a lot less when they're running the auction. And so if these behavioral remedies are put in place, while they're appealing structural, it should have the impact that we're looking for, for our business. And as we said, every 1% shift in share is $50 million in contribution to the business at almost 100% margin flow-through because we're already doing the work. You have to hire separate salespeople and have to build more boxes, it's already there to be had in a higher win rate.

Are advertisers preparing for this in any way like that you're speaking to? And does any of this have an impact for YouTube as well? Do you think YouTube can open up or it's more just for the traditional?

Yes. Again, YouTube wouldn't be a part of the argument about the tech monopoly. Would they be more persuaded to be more open? Perhaps. From an advertiser standpoint, I think that generally speaking, the advertisers that use DV360 are often concerned why $0.85 of their dollar is going to AdX and not to all the other exchanges. So I think they'd probably applaud it. And publishers have intimated that -- we always think of our DV+ business in the open web is all auction-based, right, this crazy auction where we're processing trillions of ad requests. And it's true, that's the business. But if you're talking about a premium publisher like a New York Times or CNBC or Reuters, whomever, they have a really big chunk of their revenue in what they call deals business. So kind of almost programmatic guaranteed where it's not biddable. They create a deal ID and it's always on. And buyers buy it that way, agencies buy it that way. That business is largely out of our control because it's so much easier to do when the ad server is connected to the exchange. If that connection was decoupled or we were able to, from a behavioral remedy, be able to access the deals and make it easy for publishers, I would venture that the vast majority would switch because they've been trying to for years. It's just too much friction in the process. So there's a fair amount of excitement around that as well.

That's the share gain opportunity you talk about?

Yes. That in a fair auction really results in what should be not a 60% market share versus a 6%.

Okay. I think it was at earnings, you mentioned a potentially civil lawsuit as well. What's that about? And anything you can share on that? I know some of that's a sensitive topic.

Yes. No update there other than to say that we have seen others in the space file lawsuits, and we believe there's merit in those lawsuits.

Okay. Let's shift to gen AI for a little bit. Let's start on the -- again, I guess, sticking to Google and just the impact from search and gen AI search overviews, sending less traffic out to the open web, and it's a very regular question these days from investors on what that impact means for publishers and what it means for ad tech, what it means for you guys.

Yes, it's going to be very real. Prior to these chat agents, the ChatGPTs of the world, Anthropic, Perplexity, Google used to spider your website. Every 2 times they spider it, they would send you one search referral. So that's not too onerous, right? They would crawl your website, refresh their search results and every second time, they would send you a search referral traffic. Right now, with Gemini baked into Google Search, they spider your site 19 times and send you one search referral. And it gets even worse. ChatGPT is like 60:1 and Anthropic and those guys are 600 and 900:1. So they'll spider your site 600 times and send you search referral. So it's real, and they're already feeling it. Where are the pockets that are going to feel worse, kind of the longer tail discovery places that aren't bookmarked. The bigger brands, the ones we tend to work with have an audience, built an audience, people go to them with a regular habit. Sometimes they're logged in. Sometimes there's user names, passwords. And so they kind of will fare better. They won't be immune from it. They could also have another leg in the revenue stool, the search engines, the answer engines, now the agentic search is now talking about compensating them on a license basis or a per query basis. They're actually even talking about creating an auction where they'd bid against each other for a certain query and the highest payer who win would get the spider, the New York Post that day. But at any rate, it's kind of encouraging that there could be another revenue stream because relying upon 100% in advertising hasn't been great for them anyway. But we feel as though from our business, I can't talk about ad tech in general, but we process so much inventory that if our inventory on the open web halves tomorrow and budgets remain the same, our win rate would just go up because we'd be bringing fewer impressions and it wouldn't impact our business. And to frame it, our desktop web exposure is 17% of the business. So we're not talking about half of our business here. Our DV+ portfolio includes audio. So that's not search referral-based; mobile app, not search referral-based. A lot of mobile web isn't search referral-based. So I think that we feel quite comfortable that we'll fare well. That's not to diminish the impact it could have on individual publishers, but I think because we have a broader portfolio and global kind of reach in nature, we're kind of insulated a bit from that downdraft.

Okay. Understood. Let's shift to internal gen AI development products, maybe some of the key things you guys are working on, how it's impacted, a, on the product and revenue generation side. And then the other side that's been talked about a lot is on driving efficiencies and cost savings and what you're implementing and seeing there.

Yes. So from the client-facing AI tools, we have several out today, more to come. Most of them kind of fall in the category of search and discovery. So being able to identify audiences faster, assemble audience segments quicker, being able to more efficiently find things that normally would take much longer to do. And so those are kind of the heart of our kind of curation products where folks are able to come in, assemble custom audiences quickly on the fly and buyers are able to buy it quickly. And so we're really excited about those tools and excited about the list that we have that will be coming out. I think that there's also going to be wonderful opportunities from kind of small acqui-hire M&A because this will lead into what we're doing as an organization. I don't know about you guys at Citi or anyone else, but what we have kind of found through our journey of trying to make the workforce more efficient and more productive is that the early-stage start-up guys that we found early on that had a particular service or product that the bigger guys didn't have, 6 months later, the bigger guys had it. And so we do a lot of business with Amazon, a lot of business with Oracle, a lot of business with Salesforce, a lot of business with Microsoft and Amazon. And we're kind of finding that these guys, if they don't have it today, they're going to have it tomorrow. So it's kind of making our job a little bit easier in terms of testing -- and one of our biggest concerns is data and data leakage and the sanctity of our customers' data. If these big guys have already gone through that process and we can trust them explicitly, then we are finding it a lot easier to adopt those big products as opposed to these bespoke boutique start-ups, which I don't think is unimaginative. I think we're just finding great value from those other products. And I think it also creates -- again, going back to acqui-hires, a lot of these folks will need to find a home. There's great talent in those shops. And I think we're going to take full advantage of the balance sheet and the momentum of the company to be able to grow our kind of AI presence that way, too.

Okay. So maybe just a follow-up on M&A. I was going to go there. So it sounds like a real focus on AI. Any other areas where you're focused on in M&A? I mean, we kind of kicked off this conversation just talking about Magnite being a roll-up of rates of M&A products.

Yes. I think we've been pretty clear to investors for the last couple of years that the days for swinging for the fence are over. We have what we need. We can do it organically. It's been a journey to put it all together. We never intended to buy it and let it all run separately. And so that journey is at its completion. Now it's innovation time, it's playing offense. That said, anything that can advance our product road map, if we have something on there that our customers desire is going to take 3 quarters to build, but the guy is sitting right over there, we can buy the company and accelerate that, those will be the kinds of initiatives, I think you should look from us going forward, which won't require increasing debt. It will all come out of cash flow. It won't require equity. So I think that our M&A story is going to be a measured one going forward.

Okay. Any questions from the audience? Okay. So let me just follow up on that. And just if you can just talk a little bit about kind of margin profile expectations, margin expansion, anything like that, how you get there and kind of free cash flow generation, how should investors view that?

Yes. I think they should think of it as a highly leveraged business, and that is once we invest in the core infrastructure, the people, give everyone their raises every year, the simple fact is, is that it's a business that if you drop $2 more billion in ad spend on top of it, and we've talked about all the drivers where that could come from, that it doesn't require $0.01 more of investment, that we have the boxes, we have the capacity, we have the individuals, we have the relationships with the customers, it's just processing more. And if you look at -- ours is a pretty seasonal business because it's advertising. If you look at Q4, you start to see what that could look like, right? Margins always go over 40% and adjusted EBITDA. And the costs don't go up. It's just more revenue dropping on top of it. So I think we feel as though we've got what we need. It's not going to require in lockstep $100 million investment to get to the next $1 billion in spend, it's just going to -- and we're right at that cusp, right? We're running ahead from analyst consensus on margins this year. And I think the work that we do on taming cloud costs and bringing more on-prem, coupled with just the momentum we have in the business that will bring more spend to the platform, it becomes a really attractive story from a margin standpoint.

Fantastic. That's our time, and that's the day. Thanks, Michael. Thanks for the conversation. Really helpful.

Appreciate it.

Thank you.