Business context and reporting period
Magnite, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The company operates a sell-side platform for digital advertising across connected TV (CTV), desktop and mobile. Results include SpotX only from its April 30, 2021 acquisition; the prior-year comparison is also affected by the April 2020 Telaria merger and the pandemic-driven advertising downturn.
Financial results and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $114.5 | $42.3 | $175.3 | $78.6 |
| Gross profit | $64.0 | $20.8 | $104.0 | $43.1 |
| Operating loss | $(47.0) | $(40.6) | $(60.8) | $(51.3) |
| Net income (loss) | $36.8 | $(39.1) | $23.9 | $(48.8) |
| Adjusted EBITDA (non-GAAP) | $31.8 | $(3.5) | $41.2 | $(0.7) |
Q2 revenue grew 170% year over year; management reported 86% growth on a pro forma basis including SpotX in the comparison period. Six-month revenue increased 123%, or 59% pro forma. Revenue ex-TAC, a company-defined non-GAAP measure, rose 139% in Q2 to $100.4 million and 105% for the first half to $160.3 million. CTV revenue ex-TAC grew 333% in Q2 and 484% for the first half year over year.
Reported gross margin was approximately 56% in Q2 versus 49% a year earlier. Management cautions that SpotX increased revenue reported gross, which increases reported revenue and lowers gross-margin percentage without changing gross profit or Revenue ex-TAC in the same way. Operating losses widened despite revenue growth, reflecting higher operating costs and acquisition-related charges.
Net income includes an $87.7 million Q2 income tax benefit ($87.5 million for the first half), principally from a partial release of the domestic deferred-tax valuation allowance following SpotX-related deferred tax liabilities, and recognition of a benefit on part of projected losses. The company continues to maintain a partial valuation allowance. Q2 diluted EPS was $0.26; first-half diluted EPS was $0.18.
At June 30, cash and cash equivalents were $193.0 million. Six-month operating cash flow was $27.4 million, compared with cash use of $21.5 million in 2020; investing cash use was $640.1 million, primarily for SpotX, and financing cash inflow was $688.3 million. Accounts receivable was $780.5 million and accounts payable and accrued expenses were $844.0 million, largely reflecting the platform’s buyer collection and seller-payment flows.
Debt, net of discounts and issuance costs, totaled approximately $722.2 million: $389.2 million of convertible notes and $333.0 million under the Term Loan B Facility. The notes have $400 million principal, a 0.25% coupon and March 2026 maturity. The $360 million secured term loan bears floating-rate interest; its stated effective rate was 6.98% for the period. The $65 million revolving facility had $60.1 million available at quarter-end, net of letters of credit. Management stated that cash, operating cash generation and available revolver capacity should cover working-capital needs for at least 12 months.
Material changes, outlook and risks
- SpotX: Acquired April 30 for estimated total consideration of $1.2 billion, comprising $640 million cash, 12.4 million shares valued at $495.6 million, and estimated working-capital adjustments. SpotX contributed $39.3 million of post-acquisition revenue for May and June. The preliminary allocation included $787.6 million goodwill and $431.1 million acquired intangible assets; valuation remains subject to finalization.
- SpringServe: Acquired July 1, 2021, after quarter-end, for approximately $31 million cash, net of a prior investment and subject to adjustments. Purchase-price allocation was not yet available.
- Costs and synergies: Q2 merger, acquisition and restructuring costs were $32.6 million, including $25.0 million related to SpotX. Management is targeting more than $35 million of annualized operating-cost synergies over two years and said more than half the target had been achieved on a run-rate basis by June 30.
- Management outlook: No specific numerical earnings or revenue guidance is provided in this filing. Management expects revenue and Revenue ex-TAC to increase during the remainder of 2021, with CTV a key growth driver, and expects Adjusted EBITDA to rise with growth and further synergies. It also expects higher expenses, including amortization, personnel, data and bandwidth, and integration costs. Management notes PMP mix may reduce average take rates, while CTV growth and transaction volume may support revenue.
- Key risks: Realizing acquisition benefits and integrating SpotX and SpringServe; debt service, floating-rate exposure and credit-agreement covenants; potential dilution upon conversion of the notes and resale of shares issued to SpotX’s former owner; advertising-market and COVID-19 uncertainty; competition, customer concentration and take-rate pressure; privacy regulation and changes to identifiers; and buyer nonpayment while seller payments may still be due. The filing says known litigation is not expected to have a material adverse effect, but outcomes are uncertain.
- Controls: Management concluded disclosure controls were effective at the reasonable-assurance level. SpotX was still being integrated into internal controls, and may be excluded from part of the year-end 2021 controls assessment if not yet integrated.
Most important facts for investors to verify
- Underlying organic growth versus acquired revenue and the unusually weak pandemic-affected 2020 comparison; assess both reported revenue and Revenue ex-TAC.
- Whether the stated synergy run rate converts into realized savings, and how much integration and restructuring spending remains.
- Final SpotX purchase-price allocation, acquired-asset amortization, goodwill impairment assumptions, and SpringServe’s contribution and integration costs.
- Ability to sustain operating cash flow as receivables, seller payables, capital spending and acquisition-related payments fluctuate.
- Debt terms, floating-rate interest, required amortization and prepayments, covenant headroom, and potential dilution from convertible notes and registered resale shares.
- How much reported net income depends on tax benefits and valuation-allowance judgments rather than operating profitability.