Magnite, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Magnite operates a sell-side digital advertising platform spanning CTV, desktop and mobile. Results reflect the April 2021 SpotX acquisition and July 2021 SpringServe acquisition, as well as the prior-year Telaria merger.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $131.9m | $61.0m | $307.1m | $139.6m |
| Revenue ex-TAC (non-GAAP) | $114.1m | $60.3m | $274.4m | $138.6m |
| Operating loss | $(23.9)m | $(10.9)m | $(84.7)m | $(62.2)m |
| Net loss | $(24.3)m | $(10.5)m | $(0.4)m | $(59.3)m |
| Adjusted EBITDA (non-GAAP) | $40.0m | $13.7m | $81.1m | $13.1m |
| Operating cash flow | Not provided for quarter | $58.0m | $(24.0)m |
- Q3 revenue rose 116% year over year; management said revenue grew 27% on a pro forma basis including SpotX and SpringServe in the prior-year comparison. Nine-month revenue increased 120%, or 47% pro forma.
- Q3 Revenue ex-TAC grew 89%; CTV Revenue ex-TAC rose 290% to $43.1m. CTV represented 44% of reported revenue, versus 18% a year earlier. Nine-month CTV Revenue ex-TAC increased 371% to $89.4m.
- Q3 gross profit was $68.3m, equal to approximately 52% of revenue, compared with $40.0m, or approximately 66%, a year earlier. The company attributed higher reported revenue and lower gross-margin percentage in part to SpotX-related gross-basis revenue and associated traffic acquisition costs; management said this mix change does not itself affect gross profit or Revenue ex-TAC.
- Q3 operating expenses were $155.8m, including $42.2m of acquired-intangible amortization. Nine-month merger, acquisition and restructuring costs were $37.8m.
- Nine-month net loss was nearly break-even mainly because of a $92.2m income-tax benefit, including a $56.2m partial release of the domestic deferred-tax valuation allowance tied to acquisition-related deferred tax liabilities. The company continues to maintain a partial valuation allowance.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $188.2m; accounts receivable was $765.1m and accounts payable and accrued expenses were $828.5m, largely reflecting amounts due to advertising sellers.
- Gross principal debt was $759.1m: $400m of 0.25% convertible notes due 2026 and $359.1m under a senior secured Term Loan B facility. Balance-sheet debt, net of unamortized issuance costs and discounts, was $722.9m, including $3.6m current debt.
- The Term Loan B carries a floating rate; its reported effective interest rate was 7.00% for the period. The convertible notes have an initial conversion price of approximately $63.88 per share. Capped calls cost $39.0m and cover potential dilution between the conversion price and $91.26, subject to terms.
- The $65m revolving facility had no borrowings; approximately $59.9m was available after $5.1m of letters of credit. Management said available cash, operating cash flows and revolver capacity should meet working-capital needs for at least the next 12 months, while noting that cash collection and seller-payment timing can fluctuate.
- Nine-month investing cash outflow was $675.6m, including $653.1m net cash used for acquisitions. Financing cash inflow was $688.9m, principally from the notes and term loan. Cash, cash equivalents and restricted cash increased $70.7m to $188.4m.
Changes, outlook and risks
- SpotX and SpringServe materially expanded CTV and video capabilities and increased reported revenue, acquired intangibles, goodwill and debt. SpotX’s purchase consideration was approximately $1.20bn; SpringServe’s preliminary consideration was $42.1m. SpotX’s post-acquisition standalone results were impracticable to determine.
- Management expected revenue and Revenue ex-TAC to increase through the remainder of 2021, with CTV expected to be the largest growth driver. It anticipated continued expense increases from acquisitions, amortization and operating scale, partly offset by synergies. The company targeted more than $35m in run-rate operating-cost synergies over two years and reported achieving more than half of that target by September 30. No specific quantified earnings guidance was provided in this filing.
- Management expected Adjusted EBITDA to increase with revenue growth and further synergies. It also expected CTV and reserve-auction mix to rise; reserve auctions may carry lower take rates, while a higher proportion of gross-basis revenue can reduce reported gross margin.
- COVID-19 effects remained uncertain. Travel and auto advertising were still below pre-pandemic levels; supply-chain disruptions and stay-at-home measures affected spending, and management expected challenges to persist through the remainder of 2021.
- Key risks include acquisition integration and synergy execution, debt service and restrictive covenants, floating-rate and LIBOR-transition exposure, dilution or share-sale pressure related to convertible notes and the former SpotX owner’s shares, advertiser and buyer credit/collection risk, CTV growth and competition, privacy regulation and identity changes, and cybersecurity or ad-fraud events. The company reported no known litigation expected to have a material adverse effect. Disclosure controls were considered effective; SpotX was still being integrated into internal controls.
Important facts for investors to verify
- How much reported growth reflects acquired revenue versus comparable organic growth, and whether CTV and mobile growth continues.
- Progress toward the $35m-plus synergy target, and the cash and restructuring costs required to achieve it.
- Gross-basis revenue, traffic acquisition costs, take rates and Revenue ex-TAC, which can make headline revenue and gross margin less comparable.
- Debt repayment capacity, floating-rate exposure, covenant headroom and the impact of any future conversion or refinancing.
- The sustainability of operating cash flow given large receivables, seller payables and collection timing, and the impact of acquisition-related amortization and tax benefits on GAAP results.
- Final purchase-price allocations and integration controls for SpotX and SpringServe, along with advertiser demand, privacy and identity developments, and COVID-related market effects.