Magnite, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. Magnite completed its stock-for-stock merger with Telaria on April 1, 2020, so reported results include Telaria only from that date and are not directly comparable with 2019. The company changed its name from The Rubicon Project to Magnite and began trading as MGNI on Nasdaq during the quarter.
Business context and financial performance
Magnite operates a sell-side digital advertising platform spanning desktop, mobile, and connected TV (CTV). Revenue is generally the fee retained from advertising spend transacted on its platform. Q2 revenue included $13.1 million from Telaria after the merger.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $42.3 million | $37.9 million | $78.6 million | $70.3 million |
| Cost of revenue | $21.5 million | $15.1 million | $35.5 million | $30.2 million |
| Gross profit / margin | $20.8 million / 49% | $22.8 million / 60% | $43.1 million / 55% | $40.1 million / 57% |
| Operating loss | $40.6 million | $8.6 million | $51.3 million | $21.9 million |
| Net loss | $39.1 million | $8.3 million | $48.8 million | $20.8 million |
| Diluted loss per share | $0.36 | $0.16 | $0.60 | $0.40 |
| Cash from operating activities | Not separately reported for the quarter | $(21.5) million | $5.5 million |
Q2 revenue rose 12% year over year as reported, but declined 23% excluding Telaria; six-month revenue increased 12% as reported and declined 7% excluding the merger. The company attributed the underlying declines primarily to reduced advertiser demand related to COVID-19. CTV contributed $7.9 million, or 19%, of Q2 revenue; desktop contributed 36% and mobile 45%.
Liquidity, debt, and balance sheet
- At June 30, cash and cash equivalents were $107.5 million; cash, cash equivalents, and restricted cash totaled $108.7 million. Current assets were $410.2 million and current liabilities were $362.3 million.
- Operating cash flow was a use of $21.5 million for the first six months, versus $5.5 million provided in 2019. Investing activities provided $46.5 million, including $54.6 million of cash and restricted cash acquired in the merger. Capital expenditures were $3.4 million and capitalized software development costs were $4.7 million.
- No amounts were outstanding under the $40 million secured revolving credit facility; the full amount was available at June 30, subject to borrowing-base and covenant requirements. The facility was scheduled to mature September 26, 2020. Magnite reported compliance with its financial covenants.
- Accounts receivable was $292.4 million, net of a $4.7 million doubtful-account allowance. Two buyers represented 37% and 10% of receivables, respectively. Accounts payable and accrued expenses included $329.8 million payable to sellers.
- Lease liabilities totaled $46.6 million. After quarter-end, Magnite entered a five-year cloud-managed-services agreement with a $20 million minimum commitment; it also disclosed a three-year data-center commitment of $1.9 million beginning July 1, 2020.
Material changes and unusual items
- The Telaria merger was accounted for as an acquisition, with $287.4 million of purchase consideration, including approximately 52.0 million common shares. Former Telaria holders owned approximately 48% of the combined company on a fully diluted basis at closing.
- Merger-related goodwill was $150.4 million at acquisition; total goodwill was $157.8 million at June 30. Acquired intangible assets were $102.7 million at acquisition, driving increased amortization expense.
- Merger and restructuring costs were $12.5 million in Q2 and $14.4 million for the first half, mainly professional fees, termination costs, and stock compensation. Q2 stock-based compensation was $9.9 million, compared with $4.8 million a year earlier.
- Common shares outstanding increased to 109.9 million at June 30 from 53.9 million at December 31, 2019, largely reflecting merger consideration. The filing reported 110.3 million shares outstanding as of August 6, 2020.
Outlook, management commentary, and risks
- Magnite reported some revenue recovery in the latter half of Q2 and said it had accelerated in Q3 as of the filing. Management cautioned that recovery might not continue and that COVID-19’s duration and effects remained uncertain. The filing provides no clear numerical quarterly or annual earnings guidance.
- Management expected 2020 revenue to benefit from the Telaria combination, particularly CTV, while pandemic-related demand weakness could offset some gains. It expected annual run-rate merger synergies to exceed $20 million; most savings were expected late in 2020 and fully realized in early 2021. The company reduced combined headcount by approximately 8% in Q2 and also cited compensation reductions, a hiring freeze, and deferred capital expenditures.
- Key risks include prolonged COVID-19-related advertising weakness; slower collections, buyer defaults, and working-capital pressure; dependence on concentrated buyers and CTV publishers; slower CTV or programmatic adoption; merger integration and synergy execution; and evolving privacy rules and identity technology changes.
- The company said it believed existing cash and investment balances would meet working-capital needs for at least twelve months, while noting uncertainty around collections, the pandemic, and renewal or replacement of its September 2020 credit facility. It identified no goodwill or long-lived-asset impairment indicators as of June 30.
- All nine Telaria-stockholder lawsuits relating to the merger had been voluntarily dismissed by June 30. Magnite stated routine legal matters were not expected to have a material adverse effect, while noting outcomes were uncertain.
Important facts for investors to verify
- Underlying revenue trends excluding Telaria, and whether the reported Q3 recovery persisted.
- Buyer receivable concentration, collection timing, and any subsequent allowance increases or buyer defaults.
- Renewal or replacement of the $40 million credit facility and compliance with its covenants.
- Progress toward the expected $20 million-plus annual run-rate synergies and the costs and timing of integration.
- CTV growth, publisher access, and the effects of privacy and identity changes on platform demand.
- Final Telaria purchase-price allocation, acquired-asset amortization, and any future impairment indicators.