Magnite, Inc.

Q3 2023 Earnings Conference Call

11/8/2023

spk05: Good afternoon and welcome to the Magnite third quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Nick Kormeluk of Investor Relations. Please go ahead.
spk09: Thank you, Operator, and good afternoon, everyone. Welcome to Magnite's third quarter 2023 earnings conference call. As a reminder, this call is being recorded. Joining me on the call today are Michael Barrett, CEO, David Day, our CFO. I would like to point out that we have posted financial highlight slides on our investor relations website to accompany today's presentation. Before we get started, I will remind you that our prepared remarks and answers to questions will include information that may be considered to be forward-looking statements, including but not limited to statements concerning our anticipated financial performance and strategic objectives, including the potential impacts of macroeconomic factors on our business. These statements are not guarantees of future performance, they reflect our current views with respect to future events and are based on assumptions and estimates and subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from expectations or results projected or implied by forward-looking statements. A discussion of these and other risks, uncertainties, and assumptions is set forth in the company's periodic reports filed with the SEC, including our third quarter 2023 report on Form 10Q, and our 2022 annual report on Form 10-K. We undertake no obligation to update forward-looking statements or relevant risks. Our commentary today will include non-GAAP financial measures, including contribution exact or less traffic acquisition costs, adjusted EBITDA, and non-GAAP income per share. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings press release and in the financial highlights deck that is posted on our investor relations website. At times, in response to your questions, we may offer additional metrics to provide greater insights into the dynamics of our business. Please be advised that this additional detail may be one time in nature and that we may or may not provide an update on the future of these metrics. I encourage you to visit our investor relations website to access our press release, financial highlights deck, periodic SEC reports, and the webcast replay of today's call to learn more about Magnite. I will now turn the call over to Michael. Please go ahead, Michael. Thank you, Nick.
spk07: I'm happy to report results for Q3 that exceeded our top-line guidance for total, CTV, and DVplus contribution ex-tac, while delivering strong profitability and free cash flow. Our DVplus business performed very well, delivering contribution ex-tac growth of 12%, despite a depressed CPM market. Moreover, in CTV, we continue to grow our market share with ad spend growing over 20% year-over-year, exceeding industry growth estimates. We were pleased with our execution in the quarter as we continued to solidify our position as the leading independent player in CTV. And as product mix shifts stabilize and macro ad spend returns to normal, we believe our CTV contribution XTAP growth will, over time, approach our ad spend growth. In this respect, it's important to remember that we are still in the early days of programmatic CTV. Marquee publishers are just now ramping AVOD and their inventory is limited and in high demand by advertisers. With this dynamic, pubs generally refer to sell programmatic deals through their direct sales teams. The good news is they are using our technology to execute those transactions. However, as we've explained previously, the programmatic direct business carries a lower take rate versus when we sell the inventory and layer on more services. We believe that as programmatic CTV scales, buyers will want to purchase the majority of their CTV programmatically using advanced data targeting within biddable environments, a process that can't be executed using a direct sales team. This evolution will attract a significantly broader advertiser base, increased ad spend, a more competitive CPM environment, and better ROI and COGS for both buyers and sellers. We had some noteworthy customer wins this quarter, announcing that we'd be powering the Disney Plus Bidable Marketplace via Magnite streaming, as well as an expansion in our partnership with Paramount Advertising. Buyers now have access to all of Paramount's combined streaming offerings, including their IQ program through Magnite. We're also encouraged by the fact that a lot of the growth in our CTV business is being enabled through advanced integrations with our ad server, SpringServe. As you know, ad serving puts us one step closer to the publisher and creates a stickier relationship. With SpringServe, our platform is more deeply embedded within the client workflow and becomes a central technology in their overall monetization strategy. The stickiness of the software and development we provide in CTV is far different than a typical SSP model. We are clearly growing share, as shown by our ad spend growth above 20%. And this is a result of working with nearly every scale media owner outside of the walled gardens. These clients have continually expanded their relationship with us, both vertically and horizontally. I'll offer two examples. One is a market-leading streamer and media company that started using us in a small part of their U.S. business for workflow and directly sold campaigns. Now, that partner has expanded our services to additional streaming platforms to other countries and now uses us to access biddable programmatic demand through the Magnite SSP. Another example is a market-leading TV OEM that started with us in ad serving. They now use us as their SSP and demand engine, as well as a source of incremental revenue through our new CTV Tiles product. This same partner also leverages our audience capabilities to sell and package its first party data on both its direct properties and through audience extension. These examples are common across our top partners, and we have continually shown that as our partners grow their CTV businesses, so do the ways in which they utilize our services. Despite a soft start to Q4 largely driven by macro conditions, We believe we are uniquely positioned to capitalize on the inevitable market turnaround. I'll briefly touch on just a few of the things that make me the most excited for 2024. Accelerated supply path optimization with our agency partners, particularly in our curated and often exclusive marketplaces. Consolidated spend on our platform leads to more publisher supply and enhance margins. Clearline, our recently launched buy-side tool, is off to a strong start, and with additional features and functionality planned for the coming quarters, we expect continued momentum and adoption. If you recall, Clearline is built to capture linear TV dollars that aren't currently in the CTV ecosystem, a TAM of enormous proportion. and planned innovation across our audience tools, SpringServe ad server, Magnite streaming, and DV Plus platforms. With our CTV platform integration behind us, we can now focus exclusively on new innovative products supporting our unrivaled omni-channel offering and new and existing customer expansion. Although Magnite works with every publisher across the DV Plus and CTV landscape, we have tremendous opportunities to grow our existing business and capture new entrants in fast-growing and dynamic markets like CTV. In summary, there is a lot to be excited about, our business, our people, our customers, and our partners. I've never felt better about our strategic position and ability to grow long-term. We have made the right investments, and it's time to put our heads down, work hard, and deliver. We're in a great position to capture an outsized portion of market growth when it inflects by executing and being the best at what we do. With that, I'll turn the call over to David for more details on the financials. David?
spk10: Thanks, Michael. Total revenue for Q3 was $150 million, up 3% from Q3 of 2022. Contribution X-TAC was $133 million, up 4%. CTV Contribution X-TAC was $52 million, down 6% from $56 million last year. DV Plus Contribution X-TAC was $81 million, an increase from $72 million, or 12% compared to last year. Both of these exceeded the high end of our guidance ranges. Our contribution XTAC mix for Q3 was 39% CTV, 41% mobile, and 20% desktop. Geographically, our international results outpaced our U.S. results, led by our DBplus business with new publisher wins and overall volume growth. From a vertical perspective, travel was our strongest performing category, while weaker performing categories included retail, financial services, and media and entertainment related to the actors and writer strikes. CTV contribution X-TAC was negatively impacted by expected softness in managed service and by the mixed shift. As a reminder, tough political comps from last year negatively impacted Q3 CTV contribution X-TAC results by roughly 3%. BV Plus continued to be an area of strength with 12% growth in the quarter. We continue to innovate in and are excited with the launch of native ad formats across DV+, allowing programmatic demand to target key publishers that offer native formats. We expect to continue to bring new products to DV+, that will enable our publishers to better monetize their supply. Total operating expenses, which includes cost of revenue for the third quarter, were $168 million, similar to the $167 million in the same period last year. Operating expenses for the third quarter of this year includes the final $8 million of non-cash accelerated amortization resulting from our platform consolidation. Adjusted EBITDA operating expense was $93 million at the midpoint of our guidance range. Adjusted EBITDA operating expense for the third quarter of last year was $83 million. The year-over-year increase resulted from higher data center and bandwidth costs, as well as higher payroll-related expenses. Net loss was $17 million for the quarter, compared to a net loss for the third quarter of 2022 of $24 million. Adjusted EBITDA was $40 million, and adjusted EBITDA margin was 30% for the quarter. Please note, we calculate adjusted EBITDA margin as a percentage of contribution ex-tax. GAAP loss for basic and diluted share was $0.13 for the third quarter of 2023 compared to a loss of $0.18 for the third quarter of 2022. Non-GAAP earnings per share in the third quarter of 2023 was $0.12 compared to $0.18 reported last year. The reconciliations to non-GAAP income and non-GAAP earnings per share are included with our Q3 results press release. There were 137 million weighted average basic and diluted shares outstanding for the third quarter of 2023. Fully diluted weighted average shares utilized for non-GAAP earnings per share were 146 million for the third quarter. Capital expenditures, including both purchases of property and equipment and capitalized internally used software development costs, were $8 million for the quarter. Operating cash flow, which we define as adjusted EBITDA less capex, was $32 million for the quarter. Our net interest expense for the quarter was $8 million. During the third quarter, we purchased and retired $34 million in face value of our convertible notes using $30 million in cash, resulting in a discount of 14%. Our total par value convertible notes repurchased through the third quarter was approximately $125 million reducing our total convertible note debt balance from $400 million to $275 million. We have $70 million remaining under our current program for either the repurchase of common shares or convertible debt. Our cash balance at the end of Q3 was $311 million, an increase from $266 million at the end of last quarter. We're very pleased that we reached our initial net leverage target of less than 2x with 1.8x at the end of Q3. We expect to generate significantly increased seasonal free cash flow in Q4. We will continue to evaluate the best use of our cash as it relates to debt reduction and share repurchases. I'll now share our expectations for the fourth quarter and some high-level thoughts for 2024. For the fourth quarter, we expect contribution XTAC to be in the range of $158 to $162 million. We expect contribution XTAC attributable to CTV to be in the range of $61 to $63 million. As a reminder, political comps create a roughly 6% headwind in Q4 of 2023. We expect contribution XTAC attributable to DVplus to be in the range of $97 to $99 million. We expect adjusted EBITDA operating expenses to be between $94 and $96 million, which implies adjusted EBITDA margin of approximately 41% for Q4 at the midpoints. Looking ahead to 2024, we expect strong continued ad spend growth, particularly in CTV, total contribution extract to grow in the high digits, High single digits with CTV to grow faster than DV+. Adjusted EBITDA margin expansion of 50 to 100 basis points at this level of revenue growth. Double digit percentage growth of adjusted EBITDA with even higher growth in free cash flow. And total CapEx to be in the mid 40 million range, including property plan equipment and capitalized software. It's worth noting that our guidance reflects some uncertainty in the macro environment, in particular the potential impact from the Mideast conflict. Overall, the company's performance for the third quarter was better than our expectations. I'm especially pleased that even with a soft macro and with the negative impact of the current CTV revenue mix shift that we've been experiencing, we've been able to continue to generate such strong cash flows. As a result of those cash flows this past year, we were able to retire over 30% of our outstanding converts well before their maturity and achieved our initial net leverage ratio target of less than 2x. I'm confident that our greater than market share ad spend growth in CTV will continue. I'm also confident that we'll continue to expand our CTV partner relationships, leading to CTV revenue growth and closing the gap with our ad spend growth. We continue to have significant opportunities ahead of us, and we are uniquely positioned to leverage our capabilities as a leading independent omnichannel SSP. With that, let's open the line for Q&A.
spk05: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Jason Cryer with Craig Hallam. Please go ahead. Oops.
spk11: Michael, can you just step back and maybe just talk about what you see as the evolution of the connected TV transaction model for the industry? I'm kind of curious on what you think, how that migrates from the programmatic execution that seems to be dominating more of that spend today and how that maybe evolves into a more biddable environment down the road.
spk07: Yeah, sure, Jason. Great question. Yeah, here's how we look at the market. We're very, very early stages. I mean, if you looked at our leading CTV revenue publishers on the Magnite platform two years ago, None of them would be the top guys that we're talking about today, the plus services, the broadcasters, et cetera. They were highly specialized CTV first players. And it's not surprising that the types of advertisers that the bigger services are talking to right now are their legacy linear advertisers. And it's not surprising that they've sold to them direct their whole existence and and that they'll want to continue that method in working with those advertisers. I think where we're starting to see, and you can see it with services that have been around for some time, you know, take a look at a Hulu, you're starting to see this openness to biddable just largely because the buyers are wanting that to occur, and they want to use more data-targeting. and they want to use more audience definition that may be coming from the buy side, not just the sell side. So I think that you have that occurring with that cohort of advertisers, a desire to do more automated, to do more data targeting, to do advanced biddable environments. But in addition, we really do believe that if all of this is just about converting a couple hundred broadcast advertisers over to CTV, we've really missed the big picture. And that big picture is 10,000 new advertisers coming in, right? Advertisers that right now predominantly advertise in social video environments. And they're going to, with the increasing targeting and the hyper-targeting and the advanced functionality and features that you're going to find with these shoppable ads that are coming out, that you're going to find that they're going to find this to be a very performant environment for and they're always going to want to be in a biddable environment. And these are the types of advertisers that a direct sales team from a large broadcaster, they're not going to hire people to go call on them. So that's where we feel as though programmatic comes into play beautifully. And lastly, all sports will be streamed. They're already most of the contracts are. And sports is ideal for a programmatic environment, timeouts, overtimes, et cetera. Programmatic is ideally suited to fill those kinds of ad gaps there. So we really think that you're going to see a maturation in the CTV environment in the not-too-distant future where it's much more of the programmatic that we're accustomed to on the DV Plus side of the business, with one exception. They're not going to be using 20 SSPs. it's going to be a winner-take-most, and we think we're perfectly positioned for that position.
spk11: Thanks, Michael. I wanted to just follow up on managed service, see if you can give any color on how that progressed through Q3, if there's any indications on how that's going in Q4, and then maybe along with that, I think some of that spend perhaps has been impacted by some of the strikes that are going on, and so I'm curious if that will continue to pressure spend and in that category or if there's any signs that that could be alleviated.
spk07: Yeah, I'll let David give some more color, but I would say Jason in general, no surprises there. It's behaving as we thought it would. You know, managed service isn't impervious to, you know, macro headwinds, and I would say that we're not the only company citing a Q4 that's a bit weaker than we had anticipated going into Q4 or perhaps hoped for. And so managed service is not an outlier there. I don't know, David, if you have any more details to share.
spk10: No, that's right. It's, you know, it's stabilized. And, you know, I think what's important is we've, you know, we've tried to take a very cautious approach in our guidance for Q4.
spk03: Thank you, gentlemen. Thanks, Jason.
spk05: The next question is from Sham Patil with Susquehanna. Please go ahead.
spk08: Hey, guys. I have a couple of questions. You guys talked about high single-digit growth next year with CTV going faster than TV+. You know, implying, I think, low double-digit growth for CTV. Can you maybe just talk a little bit about just, you know, what would be the upside factors for CTV in that scenario, and then how you see the Hollywood strikes potentially impacting CTV next year as well. And then just to follow up, Michael, in your prepared remarks, you talked about the new tech platform and that enabling new products, new offerings. Can you just talk a little bit about the specifics there and any kind of timing on when those might be launched and potentially start contributing to revenue?
spk07: Yeah, sure. I'll take the latter first and know what David talked about, the upside factors related to CTV. Yeah, no, I think we'll be able to throughout 2024 roll out some of the innovation that's occurring. I mean, I think a general theme is you're going to see a tighter stitching of of the SpringServe ad server with the programmatic platform that Magnate Streaming is. We have multiple clients that use both of them. And making it more of a harmonious experience for our client end user, I think, is a big goal. And that's just not aesthetic. That will lead to better monetization for publishers. But that's more of a 2024 goal. discussion and we'll certainly be keeping everyone abreast of developments on a quarterly basis. David, perhaps you want to talk about CTV for next year? Yeah, sure.
spk10: I think what would be helpful to talk about that would be to set a little background on our perspective for 2024 from a little higher level. We're giving this guidance for 2024. We certainly don't have the same degree of confidence or visibility in 2024 as we do in Q4, just because of the time lag. But we thought it would be super helpful to share some of our thinking around what our financial profile would look like, what our margin would look like, and so forth. And so with that in mind, our 2024 revenue guide certainly reflects caution around the macro, caution in our managed service business, modest expectations from the presidential year. And so if I think about upside from a CTV perspective, certainly I think if the macro turns around, that certainly pushes more dollars into some of our longer tail, higher take rate channels in CTV. There could be upside from the presidential election as well. So Overall, we've just tried to take a very cautious approach with a focus on giving some visibility around our cost structure.
spk03: Great. Thank you, guys.
spk05: The next question is from Dan Kumos with the Benchmark Company. Please go ahead.
spk02: Thanks. Good afternoon. Michael, I mean, you talked about kind of the tighter stitching of spring serve with the SSP, and you spent a bunch of time talking about your sort of winner take most. You know, I know that We saw that sort of strange press release with Yahoo, DSP full integration with the SSP and the ad server, in addition to Trade Desk through their OpenPath solution. And so I know Freewheel has been kind of pursuing that. It feels like a... I'm going to call it golden handcuffs in a way, but it feels like an opportunity to gain ad share through kind of direct integrations. Is that sort of what you're talking about? And can you kind of maybe give a little bit more color on the thought process or economics behind those deals?
spk07: Yeah, Dan. Yeah, we thought it was a great development. I mean, obviously, it's not a huge revelatory development. uh trend uh some of the top dsps wanting to go direct to publishers um in in dv plus uh with you know an open path product like uh the trade disc has there's a pre-bit adapter that makes it possible to be able to plug into multiple publishers in the ctv world there really isn't that equivalent um and so we saw an opportunity because of SpringServe and its connections with every major publisher out there in the CTV world, to enable those connections through SpringServe. So we retain kind of the economics of that connection while some of the largest DSPs are able to have a direct pipe and pitch their clients and the efficacy of that direct pipe. It should be noted that we have seen only increased spend with someone like the Trade Desk post-open path through their normal channel, through the pre-bid header bidder. So we think that this is all accretive for our publishers. Our publishers wanted access to these different dollars because it's been explained to us and to marketers that these are kind of different budgets, that if the publisher doesn't connect with uh, the DSP in this fashion, they're, they're going to be out that revenue. And so we're delighted to be able to help our publishers, uh, capture this revenue for them at the same time. We kind of retain our, um, uh, economics and, um, yeah, I think Dan is part of the winner take most, uh, you know, you're not going to see a header bidding world where they need 10 SSPs, uh, to be able to run a unified auction. even when things become biddable for the vast majority of the publishers is going to be an invite only auction run by one or one and a half SSPs. And we think we're in a terrific position to, to walk with our clients as that progresses.
spk02: Got it. That's helpful. And I know international is kind of, you know, tricky ground right now, given both the macro and the conflict out there. But I mean, there's some data out there that suggests you guys took some 10 points of share sequentially in EMEA. And, you know, I'm just kind of curious, you know, how you're thinking about kind of planting the seeds and continuing to grow kind of ex-US from here.
spk07: Yeah. Um, and I'll let David talk to some of the specifics, but, um, you know, I was just over there last week and, um, you know, the team was on fire in London. Um, you know, some of it, it was quite depressed, uh, uh, comps given, uh, you know, we're several years now into the, you know, the Ukraine war and some of that is, you know, worked its way through the system in terms of CPM pricing. Uh, But we definitely invested in that marketplace. And we, you know, when you look at a Talaria pre-acquisition, you know, merger with, you know, Rubicon, now Magnite, and SpotX, it was kind of a market that neither one were playing in. And so now you have this legacy Rubicon team being able to take these new shiny tools in their toolkit out to market. And I think that largely explains why you're seeing an acceleration of success there. David, I don't know if you have anything else to add.
spk10: I think you've covered it. A couple of specific initiatives we took over from a reseller in the Nordics. We've opened an office in Sweden recently. We're seeing some nice progress there. We've opened up an office in India. So we're also making some modest investments globally that we're excited about and should have greater payoffs in the future.
spk02: All right, great. Thanks very much, guys. Appreciate it. Thanks, Dan.
spk05: The next question comes from Laura Martin with Needham. Please go ahead.
spk04: Hi there. Good morning. So my favorite chart is this net leverage chart, where in two years you've gone from six times leverage to 1.8. So I know you hit your goal early of being at two times. My question is, do you want to stop here? Are you going to keep delevering? Are you going to zero leverage, or are you going to do sort of like stay here and then use your capital to buy in shares? Can you tell me how low that leverage, what you're aiming for for the net leverage now that you're under the 2X?
spk10: Yeah, Laura, I think, yeah, it is great. We're super excited to achieve that initial goal. I think in the current economic environment, 1X might be the new 2X. And so, you know, I think we do have, you know, aspirations. I think to lower that somewhat, we don't necessarily have a 0X. You know, there's some, you know, benefit, cost of capital gains. benefit to, you know, having some debt out there. So I think we'll continue to, you know, lower that to some degree, but it won't be, we won't have the same urgency around it that we've had in the past.
spk04: Okay, that's super helpful. And I have 10 more, but I'm going to sort of dig it into two. So up front, we're really weak for my traditional media companies. And so what I'm wondering is if a week up front where people didn't commit to as much, advertisers didn't commit to as much in the up front is good for you because that frees up more money and scatter that you guys have an option on. And I'm going to tie it into this Amazon ad tier question. So Amazon, as you know, on January 1st is going to start adding ads sort of against your will unless the consumer pays an extra $3 a month to not have ads. Is that good for you or is that bad for you since Amazon is sort of a walled garden? Does that take share away from you? So sort of those two things that aren't really related, but I didn't want to ask three questions.
spk07: Yeah, so on the first one, I think in a normal marketplace, the assumption that advertisers withholding from the upfronts committed dollars and having dollars that they have at their leisure, they can go into the spot market That probably would be a net benefit for streaming and for Magnite. I think that what you're seeing is the lousy upfront necessarily wasn't folks reserving dollars for spot. It was folks not having dollars to commit because of the macros. So I think it was a lousy upfront across the board. That said, programmatic played such a big role front and center with all the upfront presentations. that I think that distinction between upfront being bad for streaming and spot being good is starting to very blur. So let's just see how that plays out when the ad spend engine kicks back in from a macro standpoint. Amazon ad tier, I think that they're going to, in a market like this with the muted spend world, those dollars are going to be fiercely fought for. And it's possible that those dollars come at the expense of a Paramount or a Disney or an NBC Universal. But I do think that generally speaking, if you look at it in a slightly longer timeframe, having another AVOD mass global service out there is nothing but good for Magnite. The whole idea that you can't be successful in this environment is without having an ad tier at scale is just music to our ears. So we think in the longer term, it's going to be fine. And Amazon isn't exactly completely out of reach for us. We're able to work with them when partners like a Disney distribute programming on an Amazon. We're able to take their share that they get from an ad sales standpoint and help them monetize it. So on the margins, we can work with Amazon.
spk04: Thank you very much. Very helpful. Thank you.
spk07: Thank you.
spk05: The next question comes from Nick Vangler with Stevens. Please go ahead.
spk12: Yeah. Hey, guys. Good to see the upside for the quarter. Just curious on, you know, last quarter, as you pointed to 3Q, you called out managed service. You called out the mixed shift to premium services. and you called out soft M&E spend as, I guess, pressure points in CTV for 3Q, and I think it was in that order. Curious, on the guide for 4Q down 4%, are these the same pressure points, and is it, again, in that same order?
spk10: Yeah, I think it's – I mean, we're making – I think there's an interesting dynamic, Q3 to Q4 in CTV. First, to call out the midpoint of our guide, as you mentioned, 4% down in Q4 versus a 6% down actual in Q3. If you take out the political comps from 2022... we had a 3% impact in Q3 and actually a 6% impact in Q4. And so if you factor those out, the CTV growth goes from sort of an adjusted 3% down in Q3 to actually a 2% up in Q4 on kind of an apples to apples, you know, taking out that comp basis. And so the comps mask, I think, a little bit of the actual growth and acceleration that we're seeing in that CTV business. And as far as drivers, I think all of those drivers in about the same order are fairly accurate.
spk12: Got it. Helpful. And then, obviously, Hulu goes to Disney, and this was pretty much expected. Um, I'd imagine maybe just a relief in general, so that it doesn't go to Comcast, but, uh, any, any benefit that you could point to, um, that you might see as, as Hulu gets, uh, uh, fully brought in by Disney going forward. Thanks.
spk07: Yeah, Nick, I think it's, uh, you're right. We anticipated Hulu to stay in the Disney family. And I think that it's, uh, It's more business as usual than that presenting a huge opportunity. But again, you know, having a service that large and the idea that there possibly could extend the brand globally, and this is just my conjecture, I have no inside information as it relates to Disney, but there's upside to the extension of the Hulu footprint and the bundling of it with other properties that could lead to more ad opportunities for us. Great, thank you very much and good luck all forward.
spk05: The next question is from Shweta Kajuria with Evercore ISI. Please go ahead.
spk00: Okay, thank you. Let me try one for Michael, please. Michael, what do you think would drive the inflection? Is there an inflection point that you think could drive the gap between ad spend and revenue narrower, and what would that be? What should we be looking out for that gives you confidence that outside of macro, all else equal, this is what's going to help narrow that gap? Thank you.
spk07: Yeah, I think macro definitely plays a role in it, as we kind of had said, especially last quarter, that this kind of product mix shift is wouldn't be nearly as severe in a normal spend environment because media plans would be more diversified. There would be a lot more CTV native first publications, OEMs on the buy, and they use that different product than, say, a direct sold programmatic by one of the plus services. So I think that macro helps for sure. But I do think that it's a buyer intention. In an environment when spending is down, every dollar can bring with it so much more clout from an agency standpoint. And they're universally, spoke to us, spoke to our partners on the publisher side, about a desire to do much more biddable, much more data targeting, and much more programmatic. And so, you know, I think that it's just, you know, again, the buyers have a lot of clout in the market where dollars are, you know, in short supply to go around. And I think that that's probably the inflection point, Shweta, that's in the near and not too distant future.
spk00: So, sorry, let me follow up on that. If that's the case, why would you not be seeing that happening today?
spk07: Well, keep in mind, upfronts are just now being placed, right? And you have this paucity of content that's because of the strikes. So I think in terms of, again, it's another kind of macro challenge, but a lot of those dollars are on pause right now. So They've been talked about to be executed programmatically, but there's not really any home to put them in to execute programmatically. So I think that that's part of the lag, if that makes sense.
spk00: Okay. Thanks, Michael.
spk05: The next question is from Matt Swanson with RBC Capital Markets. Please go ahead.
spk01: Yeah. Thank you so much for taking my question. Yeah, it kind of touches on a point that we've heard quite a bit here. But I guess when you're thinking about the FY24 guidance framework around CTV growth, can you just kind of help us think about what your assumptions are for take rates in 24? Like, is it assume no change? Is it assume lower? Is it assume higher? As we're kind of trying to think of that two-variable model with that and the volume growth, which remains really strong.
spk10: You want to handle that, David? Yeah, sure. Yeah, no, I think it assumes, again, some of these, the mixed shifts that we're seeing, we continue to expect very robust growth in these premium channels. And so I think overall take rates as an average will decline somewhat soon. But the rate of ad spend growth is significant. We see great momentum there. And as we see... And so as we move through the year, and particularly as we get our presidential... The 2022 comps behind us and into 2024, you'll see... uh you know that that that will lead us to the kind of you know uh as was mentioned earlier um probably low to mid single uh low to mid uh double digit uh growth in ctv in other words of ctv growth as we guided to is uh higher than uh dv plus and our average is high single digits you'll see something you know with the double digit growth in ctv uh next year
spk01: Yeah, that's helpful. And then the context when you're giving on the adjusted EBITDA margins, I noticed that you pointed out to say specifically at those revenue numbers, you always seem to get a lot of leverage when you do deliver that upside to the top line. Can you help us think a little bit about that? Like, are there a bunch of other investment opportunities that you'd like to go after if revenue growth ends up being better than expected? Or do you think we should expect to kind of see that drop straight to leverage?
spk10: I think you'll see, if we have greater top line growth, I think you'll see more of that drop to the bottom line. There are a few investments on the margin that we would make, but we're making all the most important investments that we need, and that is embedded in this model. I think the other thing I'd like to call out is, and I think we briefly mentioned it last quarter, But we will have a one-time event in Q1. We're bringing the whole company together that has a cost of $4 million plus. And that actually is a super important event for us. We see a lot of value in it. That will lower margins in Q1. But it also represents, you know, almost 100 basis points of margin if you look at our profile next year. And so we do that one-time event. And so the core business, you know, we're still seeing, you know, nice flow through even at, you know, the lower top-line growth rates than, you know, what we think we'll have in the future.
spk03: Thank you.
spk05: The next question is from Dan Day with B. Reilly FBR. Please go ahead.
spk13: Yeah, guys. Appreciate you taking the questions. Michael, wanted to come back to the point you made earlier on live sports. I agree. It feels like we're at a tipping point there, especially 2024 and potential direct-to-consumer ESPN. You've got this live sports accelerator product out there. Just wondering how active the pipeline is for new business there. And, you know, whether that's a significant piece of the business at all today, a material, or how much of a revenue driver do you think that can be in 2024?
spk07: You know, in 2024, it's a tricky one, right? Because all of the services, you know, aren't made available just yet. We think it will be a contributor. There's no question. There's a little bit of a disconnect right now between piping the programmatic dollars in to that environment. If you think about a way the DSPs work, generally speaking, they pace campaigns over an X period of time and they try to balance it, right, so that you're not, you know, firing off, you know, if it's a million-dollar campaign, no one wants to spend a million dollars on day one. You want it spread over the period of time. Sports isn't completely different, right? It's a huge spike on a Saturday afternoon and it's gone. And if you miss that opportunity, so there's tweaking of the algorithms that have to work, but everyone's hard at work making it work better. I think from a consumer experience, if you watch sports streaming, you understand what I'm saying. You see one more, you know, just billboard that says we'll return to programming soon. You're going to pull your hair out. So, yeah, I think it's a huge opportunity. I think it's one of those areas where there's much more openness from a publisher standpoint, from a premium publisher standpoint, to engage with programmatic because it just makes so much sense.
spk13: Thanks. And then just another one on the DV plus, just the strength there, 12% growth. Is that all mostly volume driven? What's happening with CPMs on the DV plus side? Is it a plus or a minus right now? Yeah, it's a minus.
spk07: So yeah, go ahead, David.
spk10: You were going to say the same thing. Yeah. CPMs are still depressed. And so it's, you know, it's, it's on the, on the volume side.
spk13: Okay, so volume better than the growth offset by maintenance and CPM. That's what's going on.
spk07: Yeah. Okay. Selling more units at a lower volume, at a lower price, yeah. Okay. Thank you.
spk05: The next question is from Tim Nolan with Macquarie. Please go ahead.
spk14: Hi, thanks for taking the question and apologize in advance. I joined the call a little bit late, so I hope this question wasn't answered, but most of my others already have been. I was curious about this news about the Disney campaign manager using its own ad server for automated insertion orders. I'm just curious if you could remind us what role is your, you know, are you playing with Disney? So Disney-wide, you've got Disney+, you've got Hulu, of course, and, you know, ESPN+. Can you just remind us what you're doing in terms of being the SSP for Disney? If Disney uses its own ad server, if that somehow pushes you to the side, if that is negative for you in any way? And lastly, on that point, it seems like the campaign manager using its own ad server is targeting local audiences. So I'm wondering if maybe that's not kind of your game anyway. So I know it's kind of a lot of points in there. I hope you could just clarify for me. Thanks.
spk07: Yeah, Tim, good question. You know, I'll answer to the degree that I can in terms of, you know, working with Disney and, you know, some of the restrictions and talking about it. But the simple fact is, you know, the ad server, generally speaking, is out of touch for us even if it's spring serve, right? If a publisher sells a campaign directly and it's delivered by the ad server, you know, unless it's spring serve, we don't kind of participate in those economics. Now, if a publisher sells a deal directly, but it's a programmatic deal, that's when we interact. And so if anything's done programmatically within the Disney empire, Magnite has a role in that. But direct sold, and I think what you're referring to is, they were talking about a self-service tool that they have launched to try to get those local dollars. That's probably a step beyond our purview anyway. Our managed service business isn't necessarily a local, local business. It's oftentimes referred to as kind of a tier two where you're talking about not just the car dealer, but you're talking about the car dealer with multiple locations in a region. That's kind of more what we're focused upon. And so it's not necessarily cannibalistic of our advertising efforts in that area.
spk14: Okay. That's something I was hoping you were going to say, is that it's more of a local effort, so it's not really your thing. Okay. Could I ask one related question? This news – and I'm sorry, again, if this was already asked, but she discussed this already in the prepared remarks. But this news several weeks ago about free will and you integrating more with free will, I'm just curious if you could just – Give us a bit more color on any kind of advances you might be making with other publishers in terms of getting SpringServe a bit more integrated into their businesses. I know you're not going to overtake Freewheel, but kind of chipping away at the business in some way. If you could provide a bit more color on that, please.
spk07: Yeah. So, you know, Tim, as we talked about the ideas into Rip and Replace, it's the provide, uh, publishers with an alternative to state of the art, you know, with state of the art programmatic tools, uh, with, you know, using an ad server that was born for streaming and a platform that was born for streaming. Um, and you know, it's had quite a bit of success and uptake. So free will, uh, a connection to free will, uh, just helps that piece of it. Um, it used to be a little kludgy if, um, you were a publisher, you used Freewheel as your ad server, you wanted to use Magnite for your programmatic efforts, there was a bit of stitching together that fell on the publisher that created extra workload. Now what you're dealing with is kind of this seamless integration that allows for a publisher that uses Freewheel to choose to use Magnite as their programmatic partner with not having to lift a finger because it's already integrated. So we have high hopes for that. Certainly from a buyer's standpoint, buyers that are creating these marketplaces on Magnet Streaming are excited about that because it gives them access to all the publishers that may not be using a Spring Server ad server. So, yeah, we think it's a great deal for both companies. We've been talking with them for quite some time and happy we're able to get it through the hoop. Okay, great. Thanks a lot.
spk05: This concludes our question and answer session. I would like to turn the conference back over to Michael Barrett for any closing remarks.
spk07: Thank you, Debbie. I would like to thank the Magnate team for their diligent effort required to deliver another strong quarter. I really like the business that we built and how well we're positioned in both CTV and DV+. We remain hard at work delivering solid financial results, building more tech, growing share, and working vigorously with our partners to prepare for the growth that we all know lies ahead. We look forward to speaking with many of you at our upcoming investor events. Macquarie will host our post-Q3 meetings tomorrow. We have a busy conference scheduled in November. We will be attending the Stevens Conference in Nashville on November 14th and 15th, the RBC Conference in New York on the 15th of November, the Craig Hallam Conference in New York on November 16th, and the Macquarie International Conference in Sydney on November 29th and 30th. We will be hosting an Evercore bus tour meeting at our office in New York on November 29th. Nick will be participating in the Wolf Research Conference in New York on December 7th, and Marketing in San Francisco on December the 20th. And a little further out, we'll be participating in the Needham Conference in New York on January 18th. Thank you again for joining and have a great evening.
spk05: Thank you for attending today's presentation. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-