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

Welcome to the third day of Needham's Growth Conference, now in its 24th year. My name is Laura Martin, and I'm a senior media and Internet analyst here at Needham & Company. If you -- the format today is a fireside chat. [Operator Instructions] Okay, why don't I start with a couple of introductions? I'm happy to welcome to the stage the CEO of Magnite, Michael Barrett; and the CFO of Magnite, David Day. Michael Barrett has been the CEO of Magnite, formerly the Rubicon Project, since March of 2017. Prior to that, Michael was the CEO and President of Millennial Media, a leading independent mobile ad technology company which was acquired by AOL Verizon in October of 2015. Before that, Michael served as the Founder and President of Ichabod Farm Ventures, a private investment firm he established after working as EVP and Chief Revenue Officer at Yahoo!. Before Yahoo!, Michael worked at Google, where he led integration efforts following the acquisition of AdMeld Inc., where he had been the CEO. He began his career as EVP and Chief Revenue Officer at Fox Interactive Media, Vice President of Sales and Partnerships at AOL and held senior sales and management -- senior sales positions at Geocities and Disney Online. David Day, Magnite's Chief Financial Officer, joined the Rubicon Project in 2013 as its Chief Accounting Officer and was promoted to CFO in 2016. Prior to joining Rubicon Project, David held various financial executive roles in high-growth technology-based advertising companies, including Chief Accounting Officer, ReachLocal, the Vice President of Finance at Spot Runner and the Senior Vice President of Finance and Corporate Controller of Overture Services, the originator of the paid search company. David began his professional career at Arthur Andersen and PricewaterhouseCoopers, suggesting he is a CPA. Okay. So there's Michael. Fantastic. Right on cue. Perfect timing.

Thank you.

I know we're keeping you guys busy today. So thank you, everybody, for joining us.

Yes. Thank you. Thank you for having us. Appreciate it.

My pleasure. Okay, for folks less familiar with the Magnite story, can you give us a quick overview of Magnite, how it fits into the ad tech ecosystem and maybe some financial metrics that you have off the top of your head?

Yes, certainly. So we are a supply-side platform, SSP. So that means we work with publishers, and we help them bring their digital ad inventory to market through our exchange, where buyers like the Trade Desk, a DSP, look at the inventory, make a bid on a piece of inventory. And if they're successful, we collect the dollar from the buyer, stripped out our take rate, our commission, and return the rest of the money to the publisher. We work with publishers like The New York Times, like Hulu, like Spotify. So any large global media company that has digital assets, whether it's a website, whether it's a mobile website, whether it's a mobile app or whether it's connected television or, in the case of Spotify, audio services. We work with them and we help them make the most amount of money they can from their digital inventory. And from a financial profile standpoint, we have given guidance in terms of our long-range aspirations to be a company that grows at 25%-plus annual growth and a margin business of 35%-plus.

And is that organic, Michael? Or does that include M&A, the 25% revenue growth?

We have gone through, as you well know, a series of M&A, and that's created that company that puts that up. But that isn't also -- that's the company today, Magnite. We're not -- that isn't predicated -- those numbers aren't predicated on continued M&A. We've been pretty clear that we've swung for the fences on 2 occasions, got the crown jewels of CTV companies, put them together under one roof. And any further acquisitions, it'll just be more product acquihire-driven than the previous ones that we've had.

Okay. So the 25% long-term growth trajectory is an organic growth idea?

Very much so.

Fantastic. Great. So one of the sort of controversies going on in the ad tech ecosystem right now, not so much Wall Street, but ad tech, is we are hearing from companies that specialize like The Trade Desk, which is a demand-side platform, a DSP, and Magnite, which is an SSP or supply-side platform, that being single purpose is actually better than being end to end. But we've had about 7 CEOs on this stage over the last couple of days that are end to end, saying, "No, no. That's much better for a bunch of reasons." Could you actually defend the position that being a pure-play SSP or DSP is actually better than being an end-to-end provider in ad tech?

Yes. Where I approach it, like I think most folks do and what the marketplace is asking for, what are our publishers asking for us and what are the buyers that buy from us, the agencies and the marketers behind those agencies, what are they asking for? And not one of them are asking for a complete end-to-end solution where they're beholden upon a supply-side partner and a demand-side partner that's connected. As a matter of fact, it's one of the biggest criticisms of Google. That if you give your money to their DSP, you know that $0.70 on the dollar are going to wind up on to Google's Ad Exchange. And that's by design, not by accident. And so marketers want choice. They want to be able to know that the inventory that they're buying is the best possible price in the best possible environment. And I don't think that they feel that they can get that in an end-to-end solution where they're beholden upon one supply source and same with publishers. So until the marketplace changes and tells us we're not behaving the way they want us to, I think we feel very comfortable with our strategy of drilling down a mile deep on our expertise, which is working with publishers.

So what you're saying is the client base wants different things. And our -- and the largest clients want special-purpose SSPs and DSPs, which is also what we're hearing from The Trade Desk. Okay. And maybe smaller publishers want a lower take rate or something.

Yes. I couldn't agree more, yes.

Okay. Sounds perfect. Let's talk about 2022. So let's start with 3 biggest growth drivers for Magnite in 2022, your point of view.

Well, first and foremost, CTV, right? We've become this omnichannel independent scale company, put that CTV first, and it's our largest bucket of revenue, representing close to 40% of our revenue. And so that market is growing anywhere from high 20% to 40%, if you believe the industry analysts. And we've pledged to outgrow the marketplace growth. So that's, by far and away, the biggest bucket of growth for us. And I think the most strategic, as most people will acknowledge. The second is our core business, the DV+ business, the non-CTV digital video business. That's still -- most people say, well, it's a market that you know that's flattish, and it's anything but. That's a market that we feel very confident should be growing with the two handle as well. And so we view that as an opportunity. I think we've been very clear that, throughout this CTV journey, we've had to allocate finite resources and most of it went to CTV, probably to the deterrence of our DV+ business. And so reinvesting in that area, we feel really good about the trajectory where we are on. It's a multi-quarter journey, but we think that there's a growth opportunity and margin expansion there. And then lastly, I think that it's not going to show up in the revenue numbers. But strategically, one of the best areas of growth for us, as I think is our identity and audience strategy business, as third party cookies get deprecated, people have agreed that first-party data is the way to go. Publishers own that data, and they want a trusted technology partner to help them bring that audience segment to market, keep it safe and secure and monetize it. And that's the perfect role for an SSP, and we think we'll exit 2022 in a great position there.

I had a CEO earlier today say that he thought the most important things about cookies deprecation is that it moved the balance of power from DSPs, which use cookies, to the publishers, which have first-party identity. So you're saying you think you can productize that for publishers to get higher CPMs for those publishers for their first-party cookies data in a post-cookies world?

Sure. A lot of it is bringing it to market in a safe and secure way. So how do you create those audience segments? How do you make those audience segments accessible in a store front? How do you -- you think about it through the lens of DSP and how they've done it, it's really going to -- that CEO is very prescient. It really is going to look like that from an SSP world. It's going to be, I'm going to go to the audience store, and I'm going to pick moms with kids that are aged 2 to 4 that are in diapers. I'll buy that audience segment, and I'll put that -- append that to my campaign and look for that inventory. But where that audience segment used to come from, which was a third party cookie world, it's going to come from the first-party cookie world, and that's the publisher world. And so it's very much going to look like what the DSPs do today, SSPs will be doing in the future.

So that would be a new -- and if you did this, if you became the technology partner that aggregated all this first-party data from the largest publishers sort of in the internet, how do you get paid on that? What's the business model on that? I assume it's not a percent of media spend, which is how you get paid today.

Well, it could be. And obviously, it's -- we're talking somewhat futuristic. So I think we're going to be facile with our business models. It could be as simple as the CPM of those audience segments are twice of what they would be without that audience. And if our take rate stayed stable, obviously, that's good for us because the inventory is more valuable. The way it's worked in the third-party cookie world is people are compensated for creating those audience segments. And I think there are publishers out there that want direct compensation for their audience. Now in order for that to occur, they're going to have to be willing to live with that audience resting on other people's inventory, not just their owned and operated inventory. That may be too long a putt for a lot of publishers. So you might just see our compensation result from increased CPMs, but there will be instances where that audience data is federated over thousands of publishers and there's a direct fee associated with that, that we partake in the economics.

I get that we're talking sort of about a 3- to 5-year frame here. Do you think this kind of solution -- let's call it a solution or a product. Let me call it a product, from a Magnite point of view, really gets traction after cookies actually deprecates, after Google actually deprecates cookies? That's when it gains urgency as a product?

Yes. That and the pressure that you're seeing from folks like the EU, where they're getting much more involved in terms of how you can track. And so yes, Google is the last -- Google Chrome is the last bastion of third-party cookies. And when that goes away, it goes away. But I think that you're seeing on the margins acceleration of publishers' efforts because they see it coming, even if Google delays deprecation for another year. But we're kind of -- publishers are very human as well. And until they're faced with a deadline, they're more inclined to keep with what the process is today.

Yes. No, I agree. And I think there's a real debate about whether Google does deprecate cookies in 2023 or whether they push it off. So I think some people are just hoping that it gets pushed into the future sort of forever. Market has become nervous for all of ad tech and really the streamers, too, about ad spend, all because of Omicron and supply chain shortages and chip shortages, too. What's your view on how 2022 plays out?

I think that we're -- our crystal ball is as good as anybody's in terms of trying to predict when the next variant may occur, when supply chains get settled. There are some macro things that are positive about 2022. I think you're going to see midterm elections, and that's always helped companies like ours that have exposure to that spend. You have a series of live sport events, which have become very appropriate for the programmatic CTV streamed world in terms of inventory, is very unpredictable in a live environment. You have an injury, you have a time out. You have an overtime. That's perfect where programmatic comes in and can fill that void. So I think there's a lot of bright spots about 2022 that we see, but there are the macro challenges that we still haven't seen, travel rebound from where it was pre-COVID, entertainment spend and, of course, auto spend being impacted by supply chain. All those things still exist. There's no question about it. We don't see a decel or it being particularly exacerbated, but it remains a bit of a headwind as you go into 2022, no question.

But in theory, those eventually hopefully come back to pre-COVID levels? Do you think that might happen in 2022? Because together, those are about 30% of total digital advertising, those 3 categories.

Do you? I just -- you know what I mean? I just -- what we hear is that from our biggest spenders that there's a cautiously optimistic approach to it. But until the world opens up and until folks can travel without some of the friction that is involved in traveling today, I think you're still going to see some headwinds against some of those sectors.

Yes. Yes. Now, you might be right. Every time I think COVID, the pandemic is going to be over, there's some new variants that all of my family has around me. I think -- I have 2 kids that have had 2 shots, a booster and both forms of COVID, like we are the -- like a 100%, they're battling 1,000, these silly kids of mine. Okay. Let's talk about connected TV, which is -- you just said is your core growth driver in 2022. So one of the things that Jeff Green is saying is that everything we've done to date is a dress rehearsal for CTV. And what he's talking about there, I think, is that ad tech, the open Internet was $30 billion last year in the U.S. alone and linear alone moving to CTV is about a $60 billion TAM. So we're going to double or triple our TAM over the next 5 years as linear television moves to connected television. So let's talk about CTV a little bit. Can you talk about what you're seeing in the CTV market today and where you think it's going? And then what are you -- what is the mix of direct PMP and open marketplaces? And how does that shift over time? And does that benefit Magnite or not?

Well, I think we've built a company that can participate in the economics of just about any CTV ad that's delivered and/or sold, starting first with our ad-serving product, SpringServe. Everyone needs an ad server. If you're in the CTV business, and SpringServe really hits a really nice niche in terms of device manufacturers that don't have this linear legacy business, where they're just getting into advertising for streaming for CTV. And so even if we don't participate as a traditional SSP, we have a toehold into the business as an ad serving. And then as you go through the content -- the continuum, we have a product offering for every piece of the cycle up into the traditional SSP, open auction, service the demand, clear the trade, et cetera. So we feel really good about our position in CTV. We feel positive about 2022. I think Jeff is right. It's a multiyear shift, but we've never seen anything like it in the digital world, and I think that's why there's so much excitement surrounding CTV. And I think that we've just seen the beginning. And to your question about what's the predominant way that CTV is being sold today, I would say, predominantly, it's being sold direct by the premium publisher to their traditional buyer. And then they're asking Magnite to help them facilitate that sale through our pipes. And so that's a pretty low take rate for us because we didn't find the buyer, we didn't organize the deal, we didn't create the audience package. And that's the majority of what you're seeing today in CTV. I think, as you go forward, you're going to see more and more of the SSP playing that traditional role of sourcing demand and filling inventory that's unsold by the publisher. And we saw that occur in the open web in the early days of the open web. The New York Times is steadfast in selling their own inventory, and then they realized that this is a different way, a different model to be able to monetize their inventory. And then they leaned into working with an SSP like us. And so I think you're going to see 2022 become much more of a made-for-the-programmatic CTV market than trying to mirror what linear sales has been in the past.

Well, let's double-click on that a little bit because I did have a guy yesterday, a CEO say that basically, CTV, we've seen this movie before in display. It all started direct. And eventually, we're programmatic, in mobile. It all started direct and it moved programmatic. And now in CTV, it's just starting, accelerated by COVID. It's direct, but it's all going to transition to programmatic. And my pushback, and so I'm interested in your thinking as well, is that both display and mobile, which were the predecessors that, that analog is based on, had excess supply. There was a lot of remnant inventory. And that has not drove CTV. We had VIZIO on stage yesterday. They are selling out 100%. So can direct move to programmatic so long as there is more demand than supply? Or does supply have to outstrip demand for that transition to begin, which could take 5 years in theory?

Yes. I think I side more with your point of view than the CEO that you alluded to. It is -- there's different dynamics. It is always going to be a supply-constrained world just simply because the consumer demands that. The consumer doesn't want the ad load that they had in linear, and they've chosen to consume it through streaming because it's a lighter ad load. And in programming, that's not live programming, that's always going to be a finite amount of supply. And so I do think that you're going to see a slower transition from direct sold to open auction. But the road between direct sold and open auction is all going to be a programmatic road, and they're going to need a partner like Magnite to work with them in every step of the continuum. So even if they sell it direct, it has to be served by someone, and we have ad-serving capabilities. Even if they sell it direct, it has to be served and then programmatically coupled to the DSP that they've done the deal with, and that has to go through our pipes. And so I don't see this as either/or. I just think more and more dollars are going to flow into programmatic, and they're going to need a technology partner to help facilitate that even if they sell it direct 100%. So we're not defeated if the publisher maintains control of their inventory with an iron fist. We have a solution for every step for their needs. And so I think that probably disappoints some SSPs that don't have CTV capabilities and they're hoping for it to go open auction and then they can just slide in, in their normal capacity. CTV is different for an SSP. You have to be built for the medium. You have to have the talent, the skills and the product. And that's why we've done all these acquisitions to put ourselves in this position.

And early on, these SSPs were going to -- these were exclusive, the CTVs [ arrange ] were exclusive. Do you see that continuing? Or do you think most of these premium publishers of CTV, connected TV, ad inventory are going to have 1 or like 2 or 3 different representatives on the supply side?

Yes, I think it's going to be a winner take most. You'll have exclusive deals, but our expectation is, and you're going to see a parade of press releases that say blank names Magnite the exclusive, right? We've had those. But mostly, what you're going to see is that -- they're going to pick their lead SSP, 80% of their business will go to them, and then they may have 1 or 2 others that divvies up the rest of the 20%. And that's what we aspire to be. That 80% player, winner take most.

Very interesting. Okay. I'm taking notes that's why I'm looking down. Okay. Very interesting. Okay. One of the things that you said is you talk about expanding CTV services beyond programmatic execution for some of your bigger partners. Can you give us some examples of what you've been doing -- what you've been successful at in doing this?

Sure. So as we talked about in terms of expanding footprint with existing clients, it's very exciting because we're just starting that journey because having the assets like SpringServe and legacy SpotX and Telaria together, it's been incredible. So sometimes you start with unmonetized inventory via PMPs and then you can move into doing PG transactions and then even work your way into addressable linear VOD inventory. And you look like something like an AMC, and that's a great example of how we started with the PMP business. And now we're working with them on their linear business that can overlap with the IP kind of driven ad serving. You're looking at a Samsung or a VIZIO where you get to build out their fast channel and help with monetizations there, then you get the leverage, the PMPs and the PG and the demand facilitation services. Then you get into the data bit of it, you integrate first-party data later to lock up -- to free up some more supply into increased CPMs. And then last, you work with privacy tools that we built, like Audience Lock that can protect against data leakage. There's just a couple of examples. I can go on and on, but the idea is that our product suite is so extensive right now that, like I said, there's not a piece of programmatic transaction that we can't play in. And more and more what you're seeing is that kind of expansion of our relationships with our premier clients using more and more of our tool set.

Well, I'm just building on that. One of the reasons or one of the unintended consequences of buying the most recent acquisition, I'm going to call it SpotX, is that you've got a bunch of engineers. Don't you have like more engineers working in CTV than any other companies sort of on planet Earth?

Yes. unverified, but we...

Not to be reported to the SEC.

We feel very comfortable with that. Yes, it's more than doubled our engineering resources. And it's super exciting in terms of being able to -- and then, of course, with SpringServe, it brought on a whole another level of engineering talent as it relates to the ad-serving piece of it. So we really do feel like if you look at our organic road map going forward, it's incredibly aggressive. But then you look at the types of folks we have that can build that, and it's just another competitive moat that we feel we have.