Magnite, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited, compared with Q1 2022. Magnite operates a digital advertising marketplace and technology platform, with activity across connected TV (CTV), mobile and desktop.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $130.2 million | $118.1 million | +10% |
| Revenue ex-TAC (non-GAAP) | $116.0 million | $107.1 million | +8% |
| Gross profit | $5.3 million | $58.7 million | -91% |
| Operating loss | $100.5 million | $39.8 million | Loss widened |
| Net loss | $98.7 million | $44.6 million | Loss widened |
| Adjusted EBITDA (non-GAAP) | $23.3 million | $28.8 million | -19% |
| Operating cash flow | $(30.9) million | $21.6 million | Declined |
- Net loss per diluted share was $0.73, versus $0.34. The Q1 2023 loss included $86.4 million of acquired-intangible amortization; the company said accelerated amortization increased loss per share by $0.38, net of tax.
- Reported gross margin was approximately 4% of revenue, versus approximately 50% a year earlier. Management cautions that gross-basis revenue includes related traffic acquisition costs; shifts in gross-versus-net revenue presentation can affect the reported margin percentage.
- Revenue by channel: CTV $59.1 million (+15%); mobile $48.2 million (+23%); desktop $22.9 million (-17%). Revenue ex-TAC grew 10% in CTV and 22% in mobile, while desktop declined 14%.
Balance sheet, debt and liquidity
- At March 31, 2023, cash and cash equivalents were $236.6 million, down from $326.3 million at year-end 2022. Total assets were $2.43 billion; stockholders’ equity was $705.2 million.
- Gross debt principal was $703.5 million: $349.8 million of convertible senior notes and $353.7 million under the Term Loan B Facility. Balance-sheet debt, net of issuance costs and including current debt, was approximately $677.6 million.
- The Term Loan B contractual rate was 9.91%; the revolver had no borrowings, with $59.7 million available after letters of credit. The company reported compliance with debt covenants.
- Management believes cash, expected operating cash flow and revolver availability will meet working-capital needs for at least 12 months. Operating cash use included $41.3 million of cash used by working-capital changes, primarily timing of buyer collections and seller payments.
Material changes and unusual items
- Cost of revenue rose 110% to $124.8 million, primarily because of increased depreciation and amortization. Management attributed about $53.2 million of incremental amortization to shortened estimated useful lives for acquired intangibles and capitalized software following CTV-platform integration.
- In March, Magnite repurchased $50.3 million principal amount of convertible notes for $40.8 million cash and recorded an $8.5 million gain on extinguishment. The new $75 million repurchase authorization runs through February 16, 2025; approximately $34.2 million remained available at quarter-end.
- Restructuring costs were $7.5 million, including severance, facility-related loss contracts and exit costs. The company also announced a global workforce reduction of approximately 6%, primarily tied to eliminating duplicative roles during CTV-platform integration.
- Cash used in investing activities was $7.5 million, compared with $31.3 million in Q1 2022, which included the Carbon acquisition. Cash used in financing was $51.8 million, chiefly due to the convertible-note repurchase and taxes related to net share settlement.
Outlook, management commentary and risks
- No quantified revenue, earnings or cash-flow guidance is provided in the supplied filing text. Management expects cost of revenue to remain higher year over year through Q3 2023 because of accelerated amortization, with about $61.1 million of net incremental non-cash expense expected through Q3; it expects cost of revenue to decline year over year in Q4 as the accelerated amortization effect ends.
- Magnite expected migration to its unified Magnite Streaming platform to continue mainly through the first half of 2023 and be completed early in Q3, with some temporary duplicated platform costs during the transition. Management identified CTV as a key anticipated growth driver and described ClearLine, launched in April 2023, as a solution supporting buyers’ direct access to premium inventory.
- Management said macroeconomic pressure had weighed on advertising budgets and could further affect revenue. Other cited risks include CTV adoption and inventory access, competition and lower take rates, privacy and identity changes, platform integration and execution, customer credit/collections, cybersecurity, foreign exchange, and floating-rate debt costs.
- The filing reports estimated minimum cloud-managed-services commitments of approximately $42 million in each of the July 2023–June 2024 and July 2024–June 2025 periods in Note 12, but the MD&A estimates $55–$60 million for each period. The filing states the commitment varies with actual spend. The difference is unclear and merits confirmation.
- Legal and regulatory matters are described as routine; management did not expect their resolution to have a material adverse effect. Disclosure controls were assessed as effective at the reasonable-assurance level, and no material changes in internal control were reported.
Important facts for investors to verify
- Reconcile the cloud-services minimum commitment estimates ($42 million versus $55–$60 million per year) and the spend assumptions underlying them.
- Track actual operating cash flow and working-capital movements, particularly buyer collections and payments to sellers, against management’s liquidity assessment.
- Assess the extent to which revenue ex-TAC growth and margins improve as CTV-platform migration concludes and accelerated amortization declines.
- Monitor the Term Loan B’s floating interest cost, debt maturities and repayment obligations, remaining revolver availability, and any further note or stock repurchases.
- Evaluate whether CTV and mobile growth can offset desktop declines and macroeconomic pressure, and whether privacy, identity and customer-credit risks affect transaction volumes or collections.