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

Let's get started here. I'm Jamesmichael Sherman-Lewis, and I'm on the Internet team here at Citi. Joining us today are Sean Buckley, President of Revenue and Market Strategy; and Nick Kormeluk, SVP of Investor Relations. Thank you both for being here.

Let's start with CTV. Growth accelerated sequentially at 36% in Q2, fairly broad-based strength across the segments. Against that backdrop, -- has anything changed in budget conversations in the last few years, that could suggest programmatic is increasingly becoming the default method for transacting in CTV. .

Good to be here. I would say programmatic is just up into the right in terms of becoming the default mechanism for transactions in CTV. With that being said, I think there are some pockets where the market has leaned on more of the traditional direct sold model. For example, historically speaking, business tied to the upfronts with the largest players would fall into that bucket. Increasingly, though, the negotiations between the big buyers and the big media owners through the upfronts are moving money toward programmatic transactions as well, and that's a relatively new trend. And so that's a historically untapped pocket that's moving toward programmatic and then live events would be another example. That's probably even earlier on, but historically speaking, either linear pass-through as in the same ad experience you'd get if you were watching on linear even though you're watching via streaming or traditional IO-based transactions dominated that space -- and now you're seeing more and more business there move toward programmatic as well. So we have some of these untapped pockets that are moving toward programmatic in addition to the historical video on demand.

Yes, that's helpful. We've talked about this dynamic of demand fragmenting and broadening out across new buyers, but also on the publisher side, roughly 30 global publishers controlled 80% of CTV inventory. How do you see the CTV market kind of growing and evolving from here? And how is Magnite specifically sustaining this CAGR of above-market growth?

Yes. So just start on the buy side, for sure, the national television business was dominated by a relatively small number of large advertisers. We're now seeing more of these small businesses looking for niche audiences, direct-to-consumer businesses, opening up the funnel and moving into streaming television the addressability and targetability just -- and also the measurability provides that in terms of what those advertisers are looking for. We've seen a bunch of dedicated companies pop up on the buy side and some of which you're probably familiar with, so the likes of a mountain or a Tatar or a TV scientific. And we've worked very closely with all those companies. And I would say we're one of, if not the largest supply sources for those businesses. And they've worked hard to help onboard those small and midsized businesses, which is a very broad category into the space. I would say a more recent development that we find very interesting is some of the M&A that's happened there. So Walmart with Vibe, Pinterest with DB Scientific. I think one of the big challenges has been, how do you go out and attract that mid- and long-tail advertiser at scale and also retain those advertisers and doing that as a start-up sustainably over the long term. I think we've had some questions about. But certainly, you see Walmart getting involved, Pinterests getting involved. They have those connection points with those types of advertisers, and we think that can really turbocharge the broadening on the buy side of advertisers in streaming space.

Yes, that makes a lot of sense. I mean Magnite has this streamer.ai that lets partners help smaller advertisers create buy and measure campaigns without a direct sales force. So how do you view Magnite fitting into this SMB landscape?

Yes. So you bring up an interesting point. So we acquired a company called Streamer and the core business model there was bringing down the creative barrier. So how do we help small and midsized businesses get through that process, which was historically a big blocker. The time and the cost around building a TV creative was an issue now using AI. We have tools that bring down the time and cost dramatically. We made the strategic decision not to go directly to those small and midsized businesses, but to license that technology to companies who in turn do. And so it's a little bit of a different approach from our side, but that technology has been hugely popular as part of our portfolio, and we're working with tons of companies out there to help do that. In addition, I think at the end of the day, all of those advertisers need to purchase supply through a scaled and effective player, and I think we're very well suited to be that home regardless of the type of advertiser.

You think Creative is still kind of the gating bottleneck to broader SMB TV adoption? Or given the advancements in generative AI? Or are there other pieces in the landscape that are preventing smaller advertisers today?

I certainly think it was, but I think the capabilities are coming along very well there, and I think that's starting to become more appreciated by the market. Also, those advertisers are often coming at it with a little bit of a different angle than a big television advertiser. And so -- they have more of a performance focus. And so making the process of buying streaming look more like what they're accustomed to in other channels like social is also a big part of it.

Makes sense. I want to hit more on TV and the growth drivers. But before we do that, let's talk Google very quickly. Last week, the court ruled in favor of behavioral remedies instead of structural remedies in Google's ad tech trial, which I think is consistent with your view that behavioral remedies would be the more meaningful lever going forward. Now that we have a ruling in hand, which behavioral changes have you may be focused on? And what do you think about the path from here?

Yes. Great question. And yes, we've all been waiting Wall Street ourselves very impatiently for a long period of time for this to come through. Now what we do have at the moment is a 1.5 page order, which is, again, still cryptic and still not the full set of behavioral remedies that we -- that has been shared with both parties. So what's been shared with both parties is sealed, it's sealed for 14 days. At that point, what we know is Google and the DOJ will have a chance to redact anything that they would not like seeing. The judge will rule on that. And sometime between day 14 and 30, we'll get a full viewing of what the remedies are and what the behavioral remedies will be. . So I think at the moment, we know no structural as you pointed out. We know there are behavioral remedies. And everybody is overanalyzing and rightfully so, overanalyzing that most of the behavioral remedies proposed by the parties will be ordered, right? So we are guessing at what that might mean. The Street is trying to guess at what that might mean. The industry is guessing what that might mean. So today, we know nothing more than that. But it's encouraging, right? To hear most, right, is an encouraging word. What we also know is some of the remedies proposed by parties are in conflict with one another. And I won't go through those, but we don't know how those tie breakers work as well. But the word most give us encouragement that is it just the ad server that will be changed and how it works with the exchange? Is it something on the demand side that will be changed. We honestly do not know. We would like to think the word most suggest that, but we'll find out more as there's more information shared -- and there -- as a reminder, there's not a whole lot that changes from how we run our business to what this means. So the reason I'm answering this question as opposed to Sean is there's nothing here today that Sean can say, "Hey, I'm going to take action against this and do a lot of things with my partners, customers and buyers to be able to influence what this outcome is until we know what that is. Even then, a lot of what changes on the auction side is a more fair auction that can transact. That means our win rate in those auctions can increase. We already see and have at bats there. So we already play in that ecosystem. This simply means our win rate goes somewhere higher than very, very, very low single digits. Where in the trials, Google's win rate was much higher than double digits. So again, understanding what exactly that means, what countermeasures might be taken, we don't understand if this affects the demand side, that would be a very good guy for our industry and our business. But we don't know if that will be inclusive or not. So we sit here kind of waiting to be able to react. What we have shared in the past is that for every market share point that we would win as part of this, we believe it's $50 million in contribution ex TAC. Today, as a reminder, we sit at 6% to 7% of overall market share. Outside of Google share, we sit at 16%, 17% of rest of market, excluding Google. So we think that there's an opportunity here, obviously, for that to move in that $50 million in contribution to TAC, which is really net revenue. In that case, that flows through at very high incremental margins, 90%, 95% incremental margin. So this is meaningful. We don't know the answer yet. So hopefully, as the next couple of weeks, past 3, 4 weeks past, we'll have more information on it, but that's the best that we can share and again, overanalyze that 1 set of words that I think everybody is laser-focused on.

Makes sense. So consistent execution from here regardless of what happens.

None of this is baked into what Street numbers have, what our expectations around the DBs business would be. So again, none of that has been kind of priced in, if you will, for expectations, yes.

Understood. Let's move on to SpringServe. It's evolved into this kind of OS or CTV monetization, extending into mediation, demand facilitation and yield management. What SpringServe capabilities do you think are delivering the greatest value today? And how are they translating into deeper relationships with Magnite?

Yes. I mean SpringServe has been a transformational acquisition for our CTV business, in particular. I think first and foremost, at a foundational level, when we integrate with media partners in the streaming space, so publishers -- there's really 2 main models. We either integrate as the ad server, which is relatively straightforward. And SpringServe in particular, has done very well there with regards to new media -- if you look at, for example, some of the OEMs like VIZIO or an LG we use SpringServe as the ad server and run their ads business kind of wire to wire on our technology. The other model is what we call a mediation platform. And so this is different than what you've historically looked at an exchange or an SSP, right? This is more of a control center where they operate most or all of their programmatic business. And so we integrate with an existing ad server, it could be home built or could be another player in the space. but then they house their programmatic business more holistically in our platform. That would include other exchanges and SSPs, some of these DSP direct integrations that are talked about in the market and they also use us for other capabilities like creative review and things like that. And so at a foundational level, I think we have a very differentiated integration point with virtually all of the partners we work with in streaming. And we work with virtually all of the ad-supported streaming services certainly here in the U.S. And so that foundation gives us massive differentiation between what most others are doing in the space. you can then obviously layer on unique capabilities. For example, more recently, we've come to market with a bunch of agentic capabilities, which we'll talk about but that foundation is what gives us the ability -- we're so deeply embedded in their workflows, and we're such a big part of how their business operates, it gives us a unique launch pad for all the other things that we do. There have also been some applications on the buy side. For example, our ClearLine technology, the direct buying UI that we offer for specific purposes was built foundationally on the spring serve technology. And we've developed marketplaces for some of the big buyers, for example, some of the holding companies which we have announced, which is also foundationally built on the spring serve technology when it comes to CTV. And so yes, that acquisition, albeit small in the onset has unlocked a lot of potential for the company.

Makes sense. Let's move if we can to live sports banner year this year, World Cup, et cetera. It represents about 40% of TV ad spend, but relatively low programmatic penetration. -- even as I think you've noted, 56% growth year-over-year in live sports ad spend from January to July, which was fast. What are the primary areas here keeping programmatic from becoming a more meaningful part of live sports monetization? And how is Magnite positioning with some of your newer tools like live scheduler.

Yes. So there's kind of an additional step that I'd like to clarify with folks as the sports monetization moves from traditional television into streaming. So you'll hear stats that a huge part of the audience watched it -- watched x event on streaming. But the reality is there's an additional step, which is you have to move from linear pass-through, which I touched on earlier, to dynamic advertising. And the media owners, even though the audience has moved and is viewing through some streaming service, they have to flip another switch, which is, okay, we're going to enable dynamic advertising in this event, not just pass through the linear ad load. And once the switch is flipped for dynamic advertising, that is what then enables programmatic to move in and capture that opportunity as well. And so obviously, we're working closely with the major media owners to help them understand. It's a sizable transition. There's a business decision. There's a high level of technical sophistication. And so there's folks both looking at the user experience and also crunching the numbers to say like, does it make sense that flip the switch on this event, and it can literally be done event by event. So we're working closely with media owners to help give them confidence that, yes, this will be a net positive for you financially and we're ready to support very high concurrency, high-profile live events with our technology, and you're able to do it dynamically. You mentioned one example of a recent product release, which is a scheduling capability to have people go in and sort of manually one by one, set up all these live events, which are often happening when nobody is in the chair from a trading perspective, right? It's happening at night, it's happening on weekends, so creating a more robust scheduling capability for media owners to go in and do a lot of that work in advance and bring some automation to that was a huge deal. Before that, we had released a product called Livestream Acceleration, which -- if we were to just take the traffic on a live event and send it out to DSPs as is, it creates a lot of issues around pacing or there's -- essentially, you can bet that if we were to do that, it would not function properly. And so we have a suite of tools that spreads that traffic, makes it more digestible for the buy-side technologies and therefore, helps live events monetize much more smoothly and effectively. And so those are 2 examples of technology we've built to help bridge this gap and bring live into the programmatic ecosystem.

Yes. I think the topic of sports and flipping the switches brings us to a very parallel subject, which is data. ad tech data historically being concentrated on the buy side for targeting, but also first-party data CTV now increasing its worth publishers. How is the balance of power really shifted between the buy side and the supply side and advertising? And what role does Magnite play in the data landscape?

Yes. This is an important trend that I think the market is really starting to pay attention to -- so if you go back in CTV, we've been doing this for a long time. The cohort I mentioned earlier, the OEMs, smart TV manufacturers, they have historically done it this way for a long time as in taking their valuable first-party data, their ACR, automatic content recognition data and enabling that through the supply side technology Magnite and saying, okay, a buyer can come and say, "I want to target this segment." But when we activate that segment, we're going to do it on the supply side preemptively and then send that traffic out through a deal and that traffic is already refined against what the buyer was looking for versus take that data and hand it over to buy-side technology and then start to lose control of how that data is used. Except for very, very few exceptions, the OEMs have remained very firmly on the supply side track in terms of how they activate that valuable first-party data. What we've seen happen over the last 18 months 2 years is other folks are seeing the value proposition of activating on the supply side, commerce players, for sure. And even the major buyers, like we've done a bunch of work integrating the data assets that have either been built or have been acquired at the major holding companies, and they're seeing the value in integrating and activating audiences on the supply side. I think the Walmart announcement that we did with Walmart a few months ago was a big signpost for the industry that was like, wow, with Walmart's moving in that direction, this is probably a trend we need to pay close attention to. So that's accelerated this conversation meaningfully. But we see it basically from happening from all constituents now evaluating, okay, if I can activate decisioning and audiences on the supply side, I'm starting to really see the benefits of doing that.

Yes, makes a lot of sense. As we think about that kind of future of buying you have buyer and seller agents that are being tested with a handful of partners. A handful of million also of transactions to date. And today, you just launched your first agentic campaign in EMEA, I think, with Amnet France. How do you view the broader like adoption curve for genetic advertising capabilities and moving advertisers from really kind of experimentation to a true scalable channel?

Yes. The first set of announcements that we had, we brought our own buyer agent our own seller agent to the market, so enabling partners to use our tools to tap into the efficiency and natural language capabilities of the LLM and start transacting that way. So very different workflow, like you're prompting and the buyer is, for example, prompting and pushing -- or pushing or uploading a campaign brief and saying, "Hey, here's what I want to execute on." More recently, we announced our orchestration layer, which this is, I think, a unique set up in the market because it builds on the foundation that I discussed earlier. I really think you have to have the right depth in terms of your partnerships with the major media owners, and you really have to work with everyone that the buyers want to reach and we're uniquely positioned in that way. And so what we're doing there is we're enabling the media owners to upload their full inventory footprint, all the packages, the different offerings, and they can even customize it buyer. And so we have this amazing repository of all of the inventory intelligence from the major media owners now around the world. And that gives buyer agents, whether it be our own or we're interoperable on this front, so we're allowing buyers to bring their own tools, agenetic tools and integrate and we put it in a machine-readable format. So essentially, those agents can now evaluate the broader inventory landscape and execute on campaigns. Most of the transactions have been on 1 in nature to this point. So it's been 1 major buyer interacting with a major media owner. We certainly see a world where it moves, for example, to 1 to many, where it's a buyer who wants to interact across with many media owners, and I think that enforces our position and makes it even important.