Magnite, Inc. (MGNI) Earnings Call Transcript

Hi, everyone. Good to see everyone themselves on the Zoom. Thanks for joining. Just wanted to welcome everyone. I'm Jill Hall, Head of Small and Mid-cap Strategy within BofA Global Research. So we're very fortunate to have a great 2 days of executive insights fireside chats with almost 20 small and mid-cap corporates -- it's a great annual event we have every year. And our analysts have really great breadth of coverage in the small and mid-cap space. They cover about 1,000 small and mid-cap U.S. companies. So excited to continue to hear from them. Feel free to reach out to me or to corporate access if you need the schedule, if you still want to join any of the sessions that you're not already signed up for. I've had some people reach out to me today, so not to wait or if we can help you getting in touch with any of the analysts for any follow-up or if you would like to sign up for any of the research on the companies today as well as our small and mid-cap research or we also put out a daily compilation on some of the small and mid-cap research from our analysts. So with that, thank you for joining. I hope you're able to join some other sessions as well, and I will pass it over to Arthur to do some introductions.

Thank you, Jill. So good afternoon, everyone. My name is Arthur Chu, and I'm on the U.S. Internet team here at BofA. I work with Omar Suki, who leads the video game and advertising technology coverage. The ad tech stocks we cover are Magnite, AppLovin and Unity. So we're going to have some time for a live Q&A later. But if you have any questions in the meantime, you'd like to ask, feel free to e-mail me at arthur.chu., that's arthur.chu@df.com. So it's a great pleasure today to have Nick Car Head of Investor Relations at Magnite with us. Magnite is a leader in programmatic advertising on the supply side, particularly on CTV. And we're buy rated on the stock. We think it is well positioned to be one of the biggest beneficiaries from the CTV industry's transition to programmatic advertising. So welcome, Nick. Thank you, Arthur, and thank you, Jill, for having me today. Yes. So Nick, we have some generalist investors on the audience -- in the audience today. Maybe just for people less familiar with Magnite or supply set of platforms in general, can you introduce Magnite to the audience?

Sure. So Magnite is what's traditionally labeled as a supply platform, right? So effectively, where we initially kind of enter into the industry is really working for publishers and working for publishers that have inventory across the open Internet, connected TV. Think of any digital ads that are serviced. Those are ads that we are in market trying to bring demand to, right? So we operate a marketplace. We bring in demand to match up to be able to get inventory sold for publishers. But our strategic value is really making sure that we can bring it to as many buyers as possible, make a very active bidding on that inventory. A lot of that's tied to bringing and importing data in to allow data to find users that buyers and brands are specifically looking for. So in doing so, that's the value that we inject into the market and the value that we drive for publishers. So whether it's in connected TV, streaming, broadcast, TV OEMs or whether it's mobile app or mobile web or even web browser or digital out-of-home, we service all markets as an omnichannel player. I think the area that's most exciting that has a much different market setup than historically the web has is connected TV, where the amount of inventory is really concentrated in the hands of 30 large global partners that represent about 80% of the world's inventory. And it seems like every week that goes by, there's less of those people because they're consolidating like a Roku Fox, for example. But we have relationships with all of them with the exception of YouTube. So we've become the de facto place that anybody that wants to buy connected TV comes to, to access the CTV market, which is a far cry where we were a couple of years ago.

Got it. So you guys definitely have a very diversified sort of business. I think if you look at the ad tech industry probably like 3 to 5 years ago, I would say the industry has obviously changed a lot since then, so has Magnite. And I think you guys have transformed yourself from a traditional sort of open web SSD to now I think you're more of a programmatic CTV ad leader. Maybe just tell us a little bit more about that evolution.

Yes. I think the beginnings of CTV, and we made a few acquisitions to get into CTV. But I think it's the nature of relationship of many partners that view themselves as walled gardens have brought us in as a trusted technology partner. right? So I think that's much different than simply looking at a supply side platform and saying, "Hey, we'll invite you guys in, throw a bid in. If you guys win, you'll get paid for it. If you guys don't win, then go away and try again next time, right? So I think the strategic nature of the relationship that's evolved is -- comes from initially working with a Disney or a Roku or others in our early days, call it, 3, 5 years ago and showing that we've been brought inside. They want to operate and sell their inventory, but they don't want to simply allow everybody to bid on their inventory. They want their data protected. They don't want anybody to see their user IDs leak out to buyers, but they want to monetize better than they can on their own, either through a direct sales force and insertion orders or doing something self-service on their website. They want to capture programmatic demand from all sources. And their aspirations to grow revenue more has had them lean on us to be the one party that's invited in to be their tech partner, which is why we define the market as almost a winner take most. you may have a couple of partners that you use. But for the vast majority, whether it's ad serving, whether it's mediation, whether it's demand generation, whether it's yield management, whether it's identity strategies or audience creation, you don't choose 2 partners for that. So that's where we've won. And I think what's happening is our evolution over time that people believe or investors may have believed that there was risk to and this industry grew up, right? Connected TV grew up. There was always the risk or the fear that people would either, a, do this themselves or b, go to a much, much larger player. Now there is not a larger player in the space. Our market share has expanded dramatically. Our position in programmatic is large, and we've expanded our Disney relationship. We've expanded a Fox relationship. We've dramatically expanded Roku. We've won Netflix during that particular time. So we've shown that we are that partner that can execute and bring people to the programmatic market. And the very interesting component to that kind of rewinding to the past was it's also had a halo effect on the DV+ market. And the reason that I say that is you now have people on the DV+ market that looked at how we've partnered on the connected TV side that look at DV+ and have never relied on programmatic demand. And they have said, "Hey, can we have that type of relationship with you? In the past, in open web and in, what we call DV+, which is everything excluding CTV, we would be one of a bidder and then you -- it wouldn't be exclusive and you'd have 5 or 6 other guys also trying to sell and rep that inventory. What's happened by that halo effect that I'm describing is people have said, we want the same kind of relationship with you that Netflix has. We want you to protect our data, you be the one that connects us to demand. We don't want to have 5 SSPs. We want to hire you exclusively because we trust you, and we think you are best positioned to monetize and bring in all the demand, and we don't need 2 people to do the same thing. That inserts risk, that inserts confusion. So we want you to be the partner. So our list of Commerce Media partners has exploded from a United Airlines to a Pinterest to a Best Buy to a Redfin, to a RE/MAX to an Expedia to a PayPal. All of those things have exploded recently to now 21 partners that are now relying on us exclusively to be their programmatic partner bringing in new demand once they've decided that, that is a path or a source of revenue that they'd like to be able to tap into.

Got it. So it sounds like in the CTV world, the supply side is much more consolidated. because a lot of inventory are either with these premium streaming partners or companies like Netflix. So you mentioned some of the key partnerships like Disney, I think you mentioned Roku, Netflix. I think the latest -- for the latest, you guys also added Samsung ads as a key partner. Samsung is adopting SpringServe, which is your ad server for placing programmatic ads on home screen. And I think you talked about retail media and I think Walmart recently also like pick you guys as the sell-side partner. So it really seems like Magnite has become like the go-to for these big brands when they're looking for CTV opportunities. Maybe tell us a little bit more about these recent announcements. Like what are you hearing from partners that they're looking for that perhaps they can't get elsewhere? Like what makes Magnite offering unique?

Sure. No, absolutely. So let me do it maybe in reverse order since we were talking a little bit about Commerce Media. Let me tackle Walmart VIZIO first. So they've been a long-standing partner with VIZIO, and we've helped -- we've been their ad server. We've been their primary SSP selling inventory for them, and that's been a phenomenal relationship, and they've been one of our strong customers. What's changed recently is they, in the past, used a white label DSP that they use from Trade Desk, right? And they kind of parked all their data in that DSP so that you had to buy through that path essentially to be able to access Walmart shopper data on all their VIZIO inventory. They kind of broke that data lock a while ago back in April and said, "Hey, now you can get that same Walmart data on VIZIO inventory from a handful of different parties, basically meaning it's not just going to be centered in one DSP. Then it turns around towards Can, which just happened in June, they announced that they're buying Vie. So clearly, they bought a DSP. They're focused on having and owning their own DSP versus using a white label DSP. And they tapped into us to say, we are going to use Magnite to be able to take our user data and be able to take that not only on their own inventory and bring in new DSPs like Yahoo! -- that was announced at the time, but also be able to use their data across being a DSP they could buy on other sources of inventory, open web inventory, non-owned and operated inventory from VIZIO. So that's a very, very big expansion of kind of what they would like to do in the market, none of which is running through our numbers as of Q2. So again, that's a future opportunity that we think has a lot of promise. And clearly, I think they've got aspirations to want to do something similar to what Amazon has done and to stand up and buy a DSP, one that's very tightly integrated with what we're doing with them is a very, very good guide to our long-term prospects of continuing to grow with Walmart Connect. Samsung is another one that you referenced. I think because Samsung was a prior customer, I think to a large degree, the Street really is like, oh, that's great. You got some home screen inventory from Samsung from an ad server perspective. Just to clarify, historically, we've done no ad serving with Samsung. There's -- they use Publica, which is private equity owned part of IAS and it's kind of the only account that Publica has served recently. but they went to market to bring in somebody to do ad serving for their home screen. Their home screen historically was sold through a direct sales source through insertion orders, and it was ads that they actually ran without having to tap into an ad server to do so. So they went to market, ran an RFP. We won that business for their home screen. You say, "Hey, great, that's fantastic. You get a little bit of fees for doing that. Samsung has the largest amount of television, smart TVs installed globally at hundreds of millions of televisions. Some numbers say 100, some say 300, it's their number to post and publish, so you can publish the number that you find from whatever source that you have. But they are the largest installed base of televisions globally, smart TVs globally. For other TV OEMs, what we have seen is the home screen can represent up to 30% of their ad revenue. So there is a very established channel of buyers who are buying home screen inventory and a track record of that inventory performing from Samsung being the publisher of that inventory. The fact that we are now the ad server and we are able to sell that inventory as their primary SSP to do so opens up a tremendous amount of additional growth within Samsung as an account for us that, again, had no revenue contributing from ad serving and SSP in their home screen in Q2. So that's another future growth opportunity that's pretty sizable that I think is probably bigger than what the Street has recognized or realized when the announcement hit because folks recognize that we have a relationship with them already.

Got it. That's super helpful. And I think, Nick, you mentioned something that's really interesting, which is like platforms like Magnite, they allow they allow like the data on users to be activated across a variety of different platforms for the buy side. I think you're talking about like audience creation curation. Historically, I think audience curation is a value sort of accretive component that used to happen like primarily on the buy side, right? It contributes significantly to DSP take rate, I think north of 10%. But increasingly, we're seeing the audience activation taking place on the supply side. Maybe can you talk a little bit about some of the drivers behind that shift? Why is sort of audience creation moving from the demand side to the supply side? And secondarily, how accretive do you think this could be for SSP take rate?

Yes. No, it's a great observation, and you're 100% correct. A lot of it has to do with what we talked about earlier is market structure. right? So in open Internet, when you have millions of websites and you have millions of apps, it's really, really hard to scale. If you're a large marketer like a P&G, it's really, really hard to find scale within one publisher, right, because the market is so broad and so diverse. So you really looked at -- you looked to DSPs to be able to find signal across thousands of different publishers and find the users that you wanted to be able to effectively run your campaigns. So you kind of leaned in there. publishers were more open to sharing their user IDs on the other side and embracing different identifiers so that they could get access to that demand. And if they had their preference, they would never share their IDs because they believe that, that data leakage and loss leads to somebody else being able to buy their user without them having to come back to the same website over and over, whether it's an ESPN or it's a Disney website or a New York Times or Wall Street Journal, you name it. If you learn that ID, you can find Arthur in 5 other places, maybe cheaper than the Wall Street Journal, and they have the ability to now target you outside of just their website. So in CTV, because the market is so concentrated, that fear that they have in open Internet, now they can mandate that, that ID does not pass to a user. They have the control and they're controlling how data is used and they will import identifiers into their walled gardens, but the match is happening inside and then they report out that, yes, the users were found. So because of where the ID sit and where the matches take place in CTV, DSPs do not have the same ability to charge for data sets and build data sets to identify users. They still have their IDs of who their buyers are looking for that they can pass, but they're not being sought after for those data sets. The other element that exists there is you have buyers that have decided they want control of what inventory they are buying. In DSPs, when you would plug in what you're looking for, you might not always know on the other end of that black box where your inventory or what the preferred inventory sources were. Buyers have wanted more control. So agencies have played a role in becoming data providers and even bought data assets like a LiveRamp and market out there. You've seen them partner with other data vendors and providers. So as agencies have tried to play a bigger role in data, that's also moved it in that direction. And I think they've started to curate and sought to connect with us to be able to then say, "Hey, we want to -- on the other end of that, we want to make sure we have which data sources, which publishers we are seeking. We want to make sure that those paths are visible, seen and we can buy across what we would like and more importantly, what they would not like, right? So in that seek for control, that's also moved DV+ to have more creation by the agencies playing an increased role and brands playing an increased role in doing so. So for us, there's 2 parts of our data business that I would reference. If we're using somebody's first-party data, which we think is the most valuable data, meaning a publisher knows most about their users, they have credit card info, they have addresses, they have e-mails, they know shopping behaviors, they know intent, they know viewing patterns. They know a lot about them. So that first-party data is extremely valuable. We do not charge that first-party data. We don't charge a fee for that first-party data. There is a benefit. The better we are at clearing that signal and making it and matching it up with buyer demand, you get a higher CPM for the publisher. So our incentive is to drive higher CPMs to have better targetable inventory to be able to bounce up against. Our take rate then, for example, if you had a Pinterest ad at $4, -- on top of that, if we could refine and have a very clear signal of who that viewer is and who that Pinterest user is, and we could sell that impression for now $6 because a buyer really -- restoration hardware really wants it. For that increase, and I'm just making it up, if our take rate was 10%, now we would capture $0.60 as our revenue per impression as opposed to $0.40 if it was without their data signal coming through. So we get a nice lift from selling the inventory for a higher price and the publisher gains most of those economics by carrying, again, the higher CPM lift that they're getting for us doing so. What we're also doing is allowing data vendors, whether it's a United Airlines or whether it's a Best Buy or RE/MAX or Expedia, we're also helping them monetize their data off O&O, off their owned and operated inventory. And in doing so, LG is a perfect example. So LG has ACR, automatic content recognition data from all the information and all the video that's seen through that glass, they capture that data. We help them sell that data to non-LG inventory. What that does is you might find a category that you're looking for or a viewer that you're looking for, for something that you'd like to market in open Internet, on another streaming channel, on another TV device. So we will sell their data. And in that case, we will actually get a rev share for them for reselling their data and driving and contributing new revenue to them that they ordinarily wouldn't realize. And because we're as broad as we are, as omnichannel as we are, we're the best positioned to be a reseller or a data broker for that data elsewhere and sharing those economics with them.

Got it. Understood. And Nick, if we think about like the traditional sort of DSP pricing model out of, let's say, like take rate of 20%, maybe like 10% of that is like data bundling and all these like audience activation. Are we talking about like a pricing lift or take rate lift in sort of the same -- similar magnitude? Or how should we think about that?

Yes. We haven't quantified it, particularly like -- so it's really hard to understand and try to tease out what CPM lift is with that higher take rate, right? So in that case, it wouldn't be any higher take rate for us. It's just CPM lift, right? So that CPM lift comes through and 0 difference to the take rate. where we're selling that inventory off property, right? So in that, you could have very favorable rich economics, a 50-50 split for reselling their data in other locations and other places. That's something that's becoming a very nice contribution to overall revenue. It's not massive. So by no means is it anywhere close to half of our overall take rate and revenue. But it's definitely been a very nice addition, and it's something that has other partners seeking us to be a data broker and vendor on their behalf because it is revenue that comes to them as a new source from nothing.

Sure. Got it. Understood. Maybe just switch gear a little bit to AI, which is obviously a very highly thought topic. I recall back at the BofA Tech Conference in June, we talked about this new aggenic ad buying app that you guys were just rolling out. I think you guys branded as Nnetchestration. So maybe just to start for investors who aren't as familiar with the agenic development in ad tech, what specific problem does it aim to solve? And why is Magnite uniquely positioned to solve this problem?

Yes. Embedded in that kind of series of lots of questions, we probably have a 2-hour webcast that we could go into and stay at a level, make the key points that I need to, but not get too far into the weeds. So we play agentically, and we made some announcements back in April with real partners that when they signal that they're a partner of yours, like they get a lot of customers hitting them consistently and investors asking, where are you in your journey because you're willing to put your name in a press release. So we announced capabilities across mediation, agentic capabilities across seller agents and across buyer agents. And then we follow that up in, call it, the June time frame right around your conference with an orchestration layer on top of that. So broadly speaking, even if it's not -- and again, we think we're positioned really well to have our buyer agent, seller agents and mediation agents used. But even if we're not used in those cases and it's a transaction where somebody's buyer agent is talking to a seller agent, we are the ones that are sought out after in order to be the infrastructure layer on which to monetize. You still need things like privacy protection. You can't just share an ID and publishers can violate privacy risk, and they're the ones that have to pay fines across the globe for doing so. We don't -- those agents don't know how the money is going to transact and who's going to pay what funds through what workflow and then who's going to end up with the money as a publisher at the end of the day. So there's a lot of infrastructure even if you make the assumption that we are not involved in a buyer or a seller agent. That being said, we think we have a lot of traction, and we've announced a lot of partners from an agentic capability. The mediation part of it, right, the ad serving component from an agentic workflow makes a lot of sense, right? That's just optimizing inventory and ad units to perform the best that they possibly can with demand, different criteria, different workflows, speed to setting those campaigns up, et cetera, et cetera. That's something that makes a lot of sense for what we do daily because that's in our purview and that's our general workflow. The other side is the seller agent, the buyer agent. Because we are the end-to-end broker to get somebody desiring to buy to somebody desiring to sell, we sit across that. So if you're a buyer only, all you see is your component of the workflow. If you're a seller only, you only see your component. The fact that we sit across the entire transaction from intent to offering inventory and the match between them, we are able to solve the workflows across start to finish. Now that being said, we do not have religion of whether it is our buyer agent, our seller agent. We do have them out in market. And you can use Azure, you can use ours, you can white label ours. We can give you some of the features that we offer. What our benefit is, is removing friction and then taking share in the aggentic world. So we will optimize anybody's buyer agent that connects to ours or another seller agent. Our orchestration product make sure that they all work seamlessly and very, very well together. And you're thinking about this and you're like, well, Agentic is really a workflow solution. And you're right, and our workflows generally are people setting up and removing friction from APIs. So really, what Agentic is replacing is APIs that require a lot of manual configuration, monitoring and compliance and change. We are ideally set it to be the aggentic replacing APIs and workflows of all end-to-end solutions. So what I would tell you is that if we're successful in doing that, as Agentic share increases over time, whether it takes it from programmatic, which doesn't bring us any net new spend and gives us the same take rate, there may be a cost advantage. But if we're able to take disproportionate share in Agentic versus where we sit in programmatic, that's a good guy from a market share perspective to us. If we fail, then there's some risk in market share and that others could start to peel that away. So I think we're advantaged from the amount of inventory we represent. There's a lot of unique exclusive inventory that we only have access to, especially in CTV. So there, I would bet -- I would say that the probability based on the supply that you have and where you can optimize is probably in a much, much better market position. There's some risk in the non-CTV side because others have access to a lot of similar inventory that we do. So I would say that market share gains are probably the opportunity from the easiest perspective, broadly speaking. The one opportunity that we're really targeting that we talked about at the conference is in agency spend today, there is a significant amount of money that is still tied into manual buys that are coming in through insertion orders. That's tens of billions of dollars that still live and sit within agencies. So let's take a step back and peel back what that means. So today, there are brands that walk into their agency partner and have a campaign goal that they'd like to achieve. They hand that over. It's normally a 2- or 3-page brief that they hand over to the agency. The agency spends 2 weeks running around and finding and creating a media plan based on all their extensive history and all the brands that they've worked with and all the campaigns that they run and new inventory that's out there and all the upfront presentations they've listened to, they come up with a media plan. That's the secret sauce is, hey, this is where we think you should run your ads to give you the highest ROI of your ad spend. They do that, they come back. The brand then says, yes, looks good, we approve. Let's run a test. They run a test where they then knock on our door and say, "Hey, we'd like to do a test campaign. It's only a few thousand dollars or $10,000 or $20,000 or $100,000 and let's run it. Then we want to do a very, very deep dive on how this is performing, how is the creative performing? Are we hitting the right audience? Are there refinements that we can make? Are there certain inventory that's not performing? Are there others that are performing at a really high level? Let's run a test and then analyze those results, refine that campaign and then rerun a test based on joint adjustments to that campaign that we've now agreed to. They do that 3 times, each of which is another 2-week process. So now you're looking at 8 weeks from the time that you walked in the door with your campaign goal to the time that you're actually comfortable that you're deploying and running your full ad spend that you'd like to, and it's not this quarter anymore, it's next quarter. What we do is that entire process in 10 minutes. But because we're connected to inventory, any LLM and an agency can do this on their own, you can convert a proposal or program goals into a media plan quickly. But without being tied to inventory to real live inventory, you can't test, run, rerun and then modify your creative because we give you your creative tool as well, the version of anywhere it needs to go or create different versions of your creative, A/B test those in real time. So the fact that we're doing all of those things, and you can run 3 tests in 10 minutes and redo all of your creative and have it ready to go, that's what we're solving for. And that is new spend that already exists within the insertion order market at an agency and allows them to be better, faster, cheaper and bring it into the ecosystem quicker, and it's all net new revenue or net new ad spend to us that runs through agentic workflows. That's really the initial area that we think has dramatic inefficiency and what agencies have told us they want help and assistance in unlocking.

Got it. Understood. And I think your ClearLine product also sort of aims to target at the agency spend that's currently tied in us orders, right? Like is this agent buying path sort of considered as an upgrade to the existing ClearLine product suite? Is that how we should understand it?

Yes. So ClearLine for us now is an entire product line. There's ClearLine curation. There's ClearLine audience activation. effective you can effectively run an entire deal where if the deal is negotiated in an agency marketplace, they negotiate the price, the volume and what inventory will be purchased. We execute all that programmatically, make sure we find your targets, make sure you find the users that you're looking for -- what ClearLine allows you to do is, at the end of the day, be a payment method for that agency, right? So the brand then says, okay, I've done my transaction and either ClearLine or the DSP basically becomes a payment method at the end of the day. That's really kind of what that final role is. So yes, you can do that without having to pay a DSP take rate or do it at the DSP that you'd like to, to either, a, get credit for that ad spend as part of a commitment or be able to run it most efficiently for purposes of reducing your ad tax.