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

Okay. All right. This is Omar Dessouky. I'm a senior analyst at Bank of America covering U.S. Internet, focusing on advertising technology, video games and consumer subscriptions. Some of the stocks that I cover in the ad tech space are Magnite, whose CEO we have today, Michael Barrett. AppLovin, Unity, DoubleVerify and a couple of others.

So Magnite. We've been following Magnite for a long time. Well, actually, sorry, since 2024. We turned bullish, sort of late '24, and we've been bullish ever since. And it seems like much of the thesis that we had expected has just simply played out. So one thing, for example, is CTV. They have 2 businesses: the CTV business and the DV+ business, which is focused on the open web. We've always been looking at CTV as your business -- as a business that could outgrow the CTV market in general, which seems to be -- CTV advertising seems to be growing, I think, kind of like mid- to high-teens expected long term. Yet you grew 36% year-on-year in the third quarter (sic) [ second quarter ]. Your top 10 advertisers grew 40% year-on-year.

Yes.

Right? So that's even faster than the rest of your business, probably because of upsells. Your upsell process is working.

Yes, no question. I mean one of the benefits we do or most of our clients are global in nature. And so when they expand to different countries, we get to go along for the ride and help them monetize their inventory in those areas. So you find that it's kind of a land-and-expand with the big media owners.

Got it. And I think what I'm most interested in is you talked about the potential for kind of 25% annualized growth long-term. And I was hoping to double-click into that. So are you saying that it's going to be sort of like a 25% CAGR or a minimum 25% year-on-year growth, what you would look for even with years where there are tough comps?

Yes. No, I think it's very fair. Again, it's a longer-term goal, but I do think that most of the industry experts peg the growth rate of streaming, the ad-supported streamers, in that mid- to high teens. And we have every expectation, given the breadth of the relationships that we have in streaming, that we'd outpace the industry growth. And so I think if you look at a 25% growth rate compared to our 36% versus low- to mid-teens growth rate for the industry, we feel very comfortable pegging that as not just aspirational but something that we feel is very likely for -- to occur.

Okay. Got it. So this year, I think there's potentially like a big political cycle coming up.

Correct.

And to us, I think your guidance looks kind of a little bit conservative. But I still want to kind of get back to that question. So even in the context of like a big year, which, for example, could be this year, depending on how political does and other factors where you're doing well, is that sort of -- are we supposed to look at that 25% as sort of more of a floor or like a CAGR?

Yes, I think a CAGR. Yes, I mean you mentioned political. Political is very interesting for us. We're new at it. We're not Scripps, right? And so we have 2 cycles to go off of: a national election 4 years ago and a midterm most recently. And the challenge is that it was so new -- streaming was so new as a medium mix for political advertisers that it's a little unknown what to expect this year. To date, we've been pleasantly surprised with the amount of spend, but we know it's heavily backloaded, and it really does come down to: are the competitive races, are the races in the right market, et cetera. And so I do absolutely think we'll be talking in 2027 about ex-political from a comp standpoint, but I think we feel very good about where we've pegged it right now.

And how penetrated are your services in the CTV TAM at this point, do you think? The reason I ask that is because there's this push and this pull where your more seasoned advertisers -- or excuse me, your more seasoned publishers, you have upsold them, and that's one of the reasons why, for example, your top 10 accounts are growing faster than the rest. So you've talked about positive kind of pricing mix shifts very recently, and the 40% growth on your biggest publishers, that's higher than the overall 36% growth. So I assume you're still penetrating the market, right? And the newly onboarded publishers are going to start off with lower take-rate type services, which eventually will go up. So there's probably some latent pricing mix in your model, which I think analysts have to think about further off. Eventually the take rate will improve, right, while the top line may -- sorry, with total ad spend may moderate. But how do you...

Yes, it'll be closer. So today -- and again, our take rate is a contractual agreement with publishers, so it's not as if, if we talk about scenarios by which there's lower take rates or higher take rates, sometimes people immediately go to, "Oh, they're under pressure. The market is forcing a collapse in take rates." What it is, is it's a product mix. So generally speaking, when someone that has a legacy advertising business gets into streaming and hires Magnite, they're very much inclined to kind of go at it on a walking pace and say, "Hey, we've been selling advertising for 100 years. We're going to continue to sell the exact same way we sell linear. We're going to do the same with streaming, because we want complete control. We've always had complete control. And we just want you, Magnite, to operate as our plumber. So we'll go find the advertiser, we'll negotiate the price and then we'll just execute it automated, so programmatically." And so that carries with it a lower take rate. It's a product that we offer. It's publisher-sold programmatic. And not surprisingly, every large media company starts off that way because they're a little concerned: Is the programmatic ads going to ruin the consumer experience? I don't know that advertiser. Is it going to be cheaper CPMs? And so it's just this journey that most folks have to go along until they get comfort. And of course, at the same time, the buyer is coming at the media owner saying, "Go programmatic or you're going to lose dollars." And so that accelerates the uptake of a service by which we bring the demand, of which we get compensated higher.

So this is super interesting because I remember speaking with you about a year ago after the Cannes conference, and I asked you: is the mega bull case here just simply the entire industry moving to biddable programmatic? And I recall your response, which was that it's not necessarily the holy grail, right? Now recently, you did, kind of, cite that there was a shift towards biddable programmatic from, I think, programmatic guaranteed. So is that still how you think about it, or like, is adoption picking up, and can you kind of see a path to biddable programmatic, this very high value-added service, being the, I don't know, the majority or eventually the entire market? Has any of your thinking changed on that?

No, I think that if I were to -- I'm going to say definitely I think biddable programmatic is where the whole market's moving to. I think sometimes when we say biddable programmatic, we think of the open web, which is trillions of ad requests, billions of impressions going to auction and random advertisers winning and showing up, but no one really cares because it's ephemeral, it's a banner, what's the big deal? Where there's a big difference between that and a 30-second spot running in a million-dollar-produced streaming series. So I think what you're going to see as the majority for the top-tier streamers is invite-only auctions. So it'll still be biddable, it'll still be an auction, but they're going to want to know who those advertisers are. They still have 2 floors at Disney of people who review advertising creative. So it's not for the faint of heart to be able to get an ad on TV and have it approved. So we've done this automated through technology that allows them to feel comfortable about the ad and the quality and whether it meets standards to appear on their shows. So I think invite-only, and that's for what we think of as the centerpiece major streamers. As you go further afield and you talk about device manufacturers like Roku, LG, VIZIO, Samsung, they have tremendous amounts of inventory. Even the Disneys have inventory in FAST channels that they don't consider the same as something like The Handmaid's Tale or whatever the case might be. So when you deal with that type of inventory, that'll be much more democratic, much more open to biddable, and that's where you see the world of the small- to medium-sized advertiser that is the bedrock of Instagram, the bedrock of Alphabet, start to come onto the CTV environment.

Got it. And I should have been more clear. There's like, open auction biddable and then there's invite-only biddable -- just clarified. And when you mentioned to me last year that it's not the holy grail, you were talking about open auction programmatic.

Correct. Yes.

Okay. So that would be a very interesting world we would live in for Magnite if that were the case.

Yes.

And who knows, maybe it'll happen someday. So then let's maybe move on to your margin profile, which has just basically continued to get better. Part of it, I think we already alluded to, was kind of the mix shift to higher-value services, right? You had talked about potential for the -- you've always talked about 30%, 35% to 40%?

Correct. Potentially.

And the potential to exceed 40% at some point in the...

Yes, that's certainly not a cap, yes.

Right. So is that mainly a function of all the businesses you have in place today, that potential to exceed that 40%, or is it also -- or is it mainly a function of what's going on with DOJ and DV+?

Yes. No, all those statements about the aspirational margin profile of the company had been stated long before any DOJ Google investigation. So we feel -- listen, seasonally, almost every fourth quarter, we exceed 40% in adjusted EBITDA. So it's really a question of just revenue growth on top of a pretty consistent cost model. Where our biggest cost, like most technology companies, is people, and I think we've done very judicious growth in that area. We haven't outpaced what we needed. We'll always add on 50 or so bodies a year, but in order for us to drop another $1 billion onto the platform, that doesn't require another 1,000 people added to the company. So we've had a very stable profile of employees. And then the other cost is the serving costs, the cloud costs. Our volumes continue to surpass every expectation that we had going into budgeting, but our teams have been doing a great job of processing 3x the amount of impressions at the same cost that we did the previous year. So in order to do that, we pulled forward some CapEx into last year's fourth quarter to build out another data center, taking as much traffic as we can off the cloud onto our own boxes and modulating costs that way. So I think keeping our cost structure where it's at and just dropping more revenue on top of it naturally gets you a four-handle in terms of margin profile.

Did the potential to have market share gains in DV+ factor into your decision to take that -- to make that additional investment to move away from the cloud and build out more of your on-prem?

In the back of our minds. Mostly the investment that we're doing in taking cloud off is almost all streaming. So streaming was a 100% cloud business that we are now doing a hybrid model to. There are certain aspects from real-time reporting that cloud is absolutely essential, but there are other low-value things that we're doing in the cloud that can easily be done on boxes at much less expense. Now to answer your question about the DOJ and the recent release of the opinion, or the closed opinion, there's no question that those boxes will come in handy for that if there is any increased volume of bidding from Google that we weren't seeing previously. We're going to have to absorb that capacity, and those boxes will come in handy for that, for sure. And then that's the whole idea of being able to burst to the cloud. So if all of a sudden you have this profitable traffic coming in that's crimping your bandwidth on your own proprietary boxes, you can jump to the cloud and buy bandwidth there.

Got it. And right, so I think if we just move really quickly, I do want to talk about mobile on DV+, but let's since we started talking about the DOJ and the potential outcome there. So first of all, there is potentially a redacted version of the ruling coming out at some point?

Yes. So the ruling came out, the opinion came out this week. It was closed, sealed, only for DOJ and Google to look at. They have a 14-day window where they can redact any sensitive -- they obviously can't redact the remedies, but they can redact any sensitive information that was used in the findings. That probably then leads to another 14-day journey with the judge looking at it and saying, "You're a little heavy with the black pen there. Open that up, open that up." And then maybe in a 30-day window, it gets posted and everyone knows what the remedies are. We know that the remedies aren't structural. We've known that for some time, the judge signaled that that wasn't going to be on the table. And the behavioral remedies are real, and if she said that most of them are going to be adopted, and in that case, it'll make a more fair and efficient auction at AdX. It'll make a more fair and open ad server from Google, their DFP, and all that should benefit the ecosystem, including Magnite.

So I think this is really interesting because we -- like I said, we at BofA have been bullish on your CTV business for a while now, and that's playing out. The DV+ business has kind of been a laggard, more -- growing somewhat inconsistently and, I think, probably on average like mid-single digits or so. Open web advertising is not known as a growth business. So for us, we're interested in figuring out a couple of things. Obviously you're not going to tell us all the answers, but let's talk about it a little bit. So there's a margin impact, and there's also a potential for this entire industry to become a growth industry again, okay, because of additional competition, similar to, I think, what happened in mobile when a lot of these mobile ad tech players started innovating and improving their models to drive growth for mobile game developers. So I think, first of all, about -- maybe about a year ago, I remember putting out a piece where we sized the, sort of, the ad spend through the SSP market on open web around $25 billion. And this was all from research from 2025. And we, sort of, estimated that a 1% market share gain, which would be like $250 million, I guess, could result in a really significant increase in net revenue like, I think would increase EBITDA by 67%, right? So can you just walk us through your thinking on what that sensitivity in terms of market share gain is, if you have those numbers handy in your mind?

Sure. So it was through the discovery process. It was estimated that Magnite had the second-largest share of programmatic open web spend. The Google's share was close to 60%, and ours was 6%. And we were by far and away the largest of the second -- we're the second. Everyone else after that way long. We estimated that for every 1 market share gain, so we eat into Google's 60%, that could represent $50 million in margin to the company. And so I think that it's safe to say that we're not going to lose share post-remedy. I think it's safe to say that we'd win it based upon the share that we already enjoy in the market. So we'd be the outsized beneficiary of the ruling given our second-place status. We have deep relationships. One of the things we've always invested in, even in the early days when we were Rubicon and became Magnite, was our publisher sales team. It's incredibly well-respected, incredibly knowledgeable. And a lot of our peers have cut down their sales team in that area because in the open web, as you know, it's kind of commoditized. It's this header bidding, you're always going to get slotted in the head, so why do you have to have a deep relationship with the publisher anyway? But we've always maintained those deep relationships, largely because of our streaming business also. Long story short, I think one of the biggest unlocks is going to be if they are -- they will be allowed, I can't imagine the judge wouldn't rule in this capacity. Right now, your data is locked within the Google ad server, you can't bring it anywhere. And they desperately want to work with us to do their private marketplace deals. They don't want to have to put them in AdX, they don't want to have to keep them in GAM, but they can't. It's just such a heavy lift. They've even tried it, and they've tried to cut and paste, and it's just a mess. So we think that Magnite could really be an outsized beneficiary there because we have deep publisher relationships, they want to do more business with us, it's probably going to be better terms than they're doing currently, and we're sized to catch that business.

Yes. There are several levers, I think, that could potentially help your business. I mean, the one that I had pointed out a year ago was to simply improving your win rate, because your infrastructure is already in place, so I don't think there's much else to spend. But simply having a higher win rate because Google doesn't get first look or last look would flow directly through. Like, any kind of revenue there would flow directly to EBITDA, and you'd have 100%...

That'd be the fastest win. Yes, because we don't have to process one more impression. We take 2 trillion ad requests a day...

Simply a huge efficiency, like, increase.