Magnite, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Magnite operates a digital advertising marketplace connecting publishers and buyers across CTV, desktop, and mobile. On April 1, 2020, it completed an all-stock merger with Telaria, adding CTV technology; the company changed its name and ticker to Magnite (MGNI) in June.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $61.0m | $37.6m | $139.6m | $107.9m |
| Operating loss | $(10.9)m | $(6.7)m | $(62.2)m | $(28.6)m |
| Net loss | $(10.5)m | $(6.2)m | $(59.3)m | $(27.0)m |
| Net loss per share, diluted | $(0.10) | $(0.12) | $(0.65) | $(0.52) |
- Q3 revenue rose 62% as reported, principally due to Telaria; excluding the merger contribution, revenue grew 10%. On a pro forma basis, Q3 revenue increased 12% year over year. For the nine-month period, reported revenue grew 29%, while revenue excluding the merger declined 1%.
- Q3 revenue mix: mobile $29.0m (48%), desktop $20.9m (34%), and CTV $11.1m (18%). Telaria contributed $19.7m of Q3 revenue after closing.
- Q3 gross margin was approximately 65.5%, versus 63.2% a year earlier; operating margin was approximately (17.9)%, versus (17.7)%. For the nine-month period, gross margin was approximately 59.5%, versus 59.2%; operating margin was approximately (44.6)%, versus (26.5%).
- Nine-month operating cash flow was $(24.0)m, compared with $9.8m provided in 2019. The company attributed the cash use to losses and working-capital movements, including the timing of buyer receipts and seller payments. Investing activities provided $43.5m, including $54.6m of cash and restricted cash acquired in the merger; financing used $3.3m.
- At September 30, cash and cash equivalents were $103.8m; cash, cash equivalents, and restricted cash totaled $105.1m. Current assets were $529.6m and current liabilities $473.6m. Receivables were $412.4m, while accounts payable and accrued expenses were $457.4m, including $434.3m payable to sellers. Two buyers represented 37% and 9% of receivables.
- No borrowings were outstanding under the SVB revolving facility. The facility provides up to $60m, subject to an eligible-receivables borrowing base; $55.7m was available at quarter-end, net of letters of credit. Magnite reported compliance with financial covenants.
Changes, outlook, and risks
- Merger-related goodwill rose to $157.8m from $7.4m at year-end 2019, and net intangible assets to $97.1m from $11.4m. The preliminary purchase-price allocation included $150.4m of goodwill; the company said it was subject to final valuation adjustments.
- Merger and restructuring costs were $2.3m in Q3 and $16.7m for the nine months. Accrued merger and restructuring costs were $5.1m at quarter-end. Management said annual run-rate synergies were expected to exceed $20m; cost-cutting efforts were largely completed by Q3-end. Some temporary COVID-related measures were removed in Q4, including compensation reductions.
- Management said revenue recovery accelerated in Q3 after pandemic-related demand declines, returning to positive year-over-year pro forma growth. It expected CTV and mobile to be growth drivers and desktop to become a smaller share of revenue. The filing provides no specific financial guidance and cautions that recovery may not continue.
- Management believed existing cash and available borrowing capacity would meet working-capital needs for at least 12 months from issuance of the statements. Risks include COVID-related ad-demand uncertainty, buyer payment delays or defaults, working-capital needs, and dependence on concentrated CTV publishers and programmatic adoption.
- Other notable exposures include evolving privacy rules and data-transfer restrictions (including the EU-U.S. Privacy Shield ruling), competition and fee pressure, and integration and purchase-accounting uncertainty. A five-year cloud-managed-services agreement carries a $20m minimum commitment. Lease liabilities were $45.4m; undiscounted lease payments were $53.1m.
- The company reported no impairment indicators for goodwill or long-lived assets as of September 30. It also reported routine legal matters that management did not expect, individually or in aggregate, to have a material adverse effect.
Important facts for investors to verify
- Whether the Q3 pro forma growth trend continues, and how much growth comes from CTV versus mobile and desktop.
- Buyer collections, receivables concentration, bad-debt exposure, and the effect of payment-term changes on cash flow and seller payments.
- Progress toward the stated merger synergies, remaining integration costs, and the final Telaria purchase-price allocation.
- Liquidity-facility borrowing-base availability and ongoing compliance with minimum-liquidity and cash-burn covenants.
- Whether privacy and data-transfer requirements affect platform activity, customer relationships, or compliance costs.