Good afternoon, and welcome to the Magnite Q3 Conference Call. I would now like to turn the conference over to Nick Kormeluk, Head of Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Magnite's Third Quarter 2022 Earnings Conference Call. As a reminder, this conference call is being recorded. Joining me on the call today are Michael Barrett, CEO; and David Day, our CFO. I would like to point out that we have posted financial highlight slides on our Investor Relations website to accompany today's presentation. Before we get started, I will remind you that our prepared remarks and answers to questions will include information that might be considered to be forward-looking statements including, but not limited to, statements concerning our anticipated financial performance and strategic objectives, including the potential impact of macroeconomic factors on our business. These statements are not guarantees of future performance. They reflect our current views with respect to future events and are based on assumptions and estimates and subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements. A discussion of these and other risks, uncertainties and assumptions is set forth in the company's periodic reports filed with the SEC, including our third quarter 2022 quarterly report on Form 10-Q and our 10-K. We undertake no obligation to update forward-looking statements or relevant risks. Our commentary today will include non-GAAP financial measures, including revenue ex-TAC or less traffic acquisition costs, adjusted EBITDA and non-GAAP income per share. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings press release and in the financial highlights deck that is posted on our Investor Relations website. At times, in response to your questions, we may offer incremental metrics to provide greater insights into the dynamics of our business. Please be advised that this additional detail may be one-time in nature, and we may or may not provide an update on the future of these metrics. I encourage you to visit our Investor Relations website to access our press release, financial highlights deck, periodic SEC reports and the webcast replay of today's call to learn more about Magnite. I will now turn the call over to Michael. Please go ahead, Michael.

Thank you, Nick. We are very pleased with our Q3 performance that surpassed our guidance, as well as our continued ability to grow even with a tougher macro and more challenging ad spend environment. Our growth in revenue ex-TAC exceeded our expectations across the entire business and in CTV specifically, and adjusted EBITDA margin also came in strong at 35%. These results were encouraging, and David will provide greater detail on Q3 results and Q4 outlook. Our CTV business continued to be a growth driver in the quarter, as revenue ex-TAC grew 29% year-over-year, a trend improvement from the first half of the year, driven by new and ramping Magnite partnerships. We grew and deepened our relationships with industry leaders in streaming. We want to highlight 3 key client wins in the quarter with Fox, VIZIO and Kroger, and give ongoing commentary to 3 partnerships that continue to grow with time and engagement, LG, Disney and GroupM. All of these partnerships serve as future drivers of our CTV business, and I want to touch on each individually. First, we recently announced a partnership with Fox where we will serve as the SSP launch partner to power programmatic campaigns for OneFOX video inventory across the company's leading entertainment, sports, streaming and news portfolio. Together, Fox and Magnite will build custom technology solutions that further streamline the buying process and enable advertisers to create one simple and unified plan to deliver their private marketplace and programmatic guaranteed campaigns across the entire Fox portfolio of video inventory. SpringServe, our CTV ad server, is becoming an increasingly important component of many of our wins and represents a true differentiator for Magnite. As we have highlighted on previous calls, the integration between our ad server and SSP is incredibly powerful. It reduces complexity, improves inventory management between multiple parties, enhances functionality, and most importantly, drives yield for customers that have both a direct sales force and programmatic sales channel. In fact, our win with VIZIO was driven by the unique relationship between our CTV ad server and SSP. VIZIO used SpringServe to manage their entire video ad serving business while also relying on our SSP to power their programmatic channel. In the quarter, we announced that VIZIO would also be using our newly released CTV Tiles product across its entire footprint. Tiles are our proprietary native ad unit that are presented on the home screen of connected TVs and represents an exciting area of growth for us as a new ad format. OEMs can use Tiles to highlight content recommendations, deliver personalized experiences and simplify the search and discovery process for millions of users. As the retail media network space has gained momentum recently, we are very pleased to have been selected as one of the inaugural CTV platforms to support Kroger's retail media advertising business, Kroger Precision Marketing. This partnership will allow advertisers, regardless of what DSP they work with, to package Kroger's proprietary first-party data with Magnite's premium omnichannel inventory with an emphasis on CTV but spanning all formats, including display and online video. Last quarter, we announced a multiyear partnership with LG Ads Solutions, which in addition to serving as the preferred SSP in ad server, provides us access to their automatic content recognition or ACR data for planning, activation, measurement and advanced analytics. This data can be leveraged across our entire streaming publisher footprint to deliver more personalized ad campaigns at scale. We are very encouraged by the early progress with this initiative with a number of brands and agencies already utilizing this data to help optimize spend. Our preferred partnership with GroupM is continuing to scale, gaining momentum as we move into 2023 and the new season of upfronts. We are starting to see new advertiser demand across OTT as a result of the partnership and expect it to be one step in our supply path optimization, or SPO strategy, as we work with agencies and brands to consolidate spend on Magnite. And lastly, a quick update on Disney. We continue to be a strategic programmatic technology partner with Disney, positioned at the forefront of their advertising stack. We are excited to partner with Disney and their industry-leading efforts to shift more streaming inventory into a biddable programmatic environment. Our relationship is continually growing in scope as we work across ad formats on their properties globally. Our CTV platform integration is also moving forward very nicely, and we are on track to have our next-generation platform substantially complete by year-end and ready for client transition starting in Q1. We are excited about the industry-leading features and functionality, and intend to share more details after the launch. On the DV+ side, we have begun implementing some key initiatives that have returned the business to growth this quarter, with growth acceleration expected in ensuing quarters. This quarter, DV+ grew 1% year-over-year, although we estimate this would have been closer to 5% when considering the effect of the strengthening dollar in the quarter. Stepping back, our broader perspective remains very positive heading into 2023 despite macro concerns. In challenging ad environments, publishers tend to have greater difficulty selling ads directly to agencies and marketers, and therefore, rely more heavily upon partners like Magnite to monetize this inventory through programmatic channels. We have already seen a record number of ad impressions this quarter and expect this trend to continue into 2023. And specifically in CTV, we are seeing the launch of more AVOD services and consumers shifting from higher-priced subscriptions to ad-supported tiers, which will result in additional ad inventory. As we look to 2023, we expect to grow our top line and generate very healthy free cash flow as we judiciously manage expenses and balance investments in the business.

Thanks, Michael. Our team at Magnite performed well during the third quarter, and we are very pleased with results that surpassed our guidance. Total revenue for Q3 was $146 million. Revenue ex-TAC was $128 million, up 12% from Q3 2021. Revenue ex-TAC attributable to CTV was $56 million, up from $43 million or 29% from last year. DV+ revenue ex-TAC was $72 million, an increase of 1% compared to Q3 last year. On a sequential basis, Q3 total revenue ex-TAC grew 4% over Q2, CTV grew 7%, and DV+ grew 1%. Political spend represented less than 2% of our revenue ex-TAC for the quarter. Our revenue ex-TAC mix for Q3 was 44% CTV, 35% mobile and 21% desktop. Total operating expenses, which includes cost of revenue for the third quarter increased 7% to $167 million compared to $156 million in the same period a year ago. Adjusted EBITDA operating expenses were $83 million, up 2% sequentially from Q2 and up from $74 million from the third quarter last year. Costs for the third quarter were lower than expected, primarily due to a reduction in the pace of hiring, lower office and facilities costs, lower technology and cloud costs and deferral of marketing costs into Q4. Net loss was $24 million for the quarter, the same as the net loss for the third quarter of 2021. Adjusted EBITDA was $44 million, an increase of 11% versus $40 million for the same period last year. Adjusted EBITDA margin was 35%, consistent with the 35% reported for the third quarter of 2021. Note that we calculate our adjusted EBITDA margin as a percentage of revenue ex-TAC. GAAP loss per basic and diluted share was $0.18 for the third quarter of 2022, consistent with a loss of $0.18 per share in 2021. Non-GAAP earnings per share in the third quarter of 2022 was $0.18, which was up compared to $0.14 per share in 2021. There were 133 million weighted average basic and diluted shares outstanding for the third quarter of 2022. Fully diluted weighted average shares utilized for non-GAAP earnings per share were 142 million for the third quarter. Capital expenditures, including both purchases of property and equipment and capitalized internal use software development costs, were $16 million for the quarter, in line with our expectations. Operating cash flow, which we define as adjusted EBITDA less CapEx, was $29 million. Our net interest expense for the quarter was $7 million. At the end of Q3, we had $254 million in cash on the balance sheet. Regarding debt, we continue to reduce our net leverage ratio, which was approximately 2.6x at the end of Q3 as compared to 2.8x at the end of Q2. This demonstrates further progress towards our ultimate target of 2x or less. We did not repurchase any shares under our share buyback program during Q3, and $28 million remain in the program, which was extended through December 2023. During the quarter, we continued to utilize the withhold-to-cover method to cover employee taxes for our regular RFP vesting. We withheld 257,000 shares for approximately $2 million. We started the year with a balanced goal between share buybacks and reducing debt leverage. As previously discussed, our current plan is cash accumulation to maximize flexibility, with the goal of continuing to reduce our net leverage ratio. That being said, we will continue to evaluate share repurchases as part of our capital allocation strategy, as we believe repurchases at our current share price would represent a very attractive use of capital to buy our shares at a discount to intrinsic value. Moving on to guidance. I will now share our expectations for the fourth quarter and a very high-level view into 2023. Our approach to guidance continues to be conservative and assumes a continued challenged economic environment. For the fourth quarter, we expect revenue ex-TAC to be in the range of $151 million to $157 million. We expect revenue ex-TAC attributable to CTV to be in the range of $63 million to $65 million. Now that election day is over, we can provide an update on our political spend. Based on what we've seen, we expect political dollars to roughly double from Q3 to Q4, or 3% of revenue ex-TAC. We expect adjusted EBITDA operating expenses to be $88 million to $90 million, implying an adjusted EBITDA margin of approximately 42% at the midpoint. We anticipate CapEx to be approximately $9 million for the quarter, consistent with our 2022 expectations. For the full year, we expect revenue ex-TAC to be over $510 million, and that we will generate over $105 million in free cash flow. As for 2023, we expect to grow revenue even with more challenging market conditions and recession risks. It should come as no surprise that we are increasing our focus on managing costs. We do expect some slight margin compression with the higher tech stack costs in the first half of the year as we complete our CTV platform client migration. However, we believe that the impact will subside over the second half as the migration is completed. And longer term, we expect to achieve adjusted EBITDA margins in the 35% to 40% range. We also expect that our CapEx will be similar or potentially lower than in 2022. We are encouraged by the progress made during the quarter. We're also optimistic regarding our strong position, both from a financial and operational perspective, as we close out 2022 and move into 2023.

Good job on the quarter. I had a couple of questions. Michael, just curious. With Netflix AVOD, I'm just wondering what kind of impact you've seen in the industry in terms of inventory and CPM? I know it's early, and do you expect Disney+, the AVOD option launch there to be a catalyst? And then I had a follow-up. David, in terms of your commentary for next year, I know you didn't comment on the top line per se. But should we be looking at the fourth quarter kind of year-over-year growth rate guide as kind of a starting point as we look at next year? And then on the margin point you made about a little bit of pressure in the first half subsiding in the second half, will that lead to overall pressure for the year, or are you suggesting that the second half would offset the pressure in the first half?

Great. Yes, I'll address Netflix and Disney+. As you mentioned, it's still early. Most of the campaigns on Netflix were directly sold to a select group of advertisers, so we're not observing significant changes in the market. It hasn't negatively impacted other AVOD services at stream. The revenue likely came from linear ad dollars rather than budgets set for TV, which I see as a positive sign for the entire industry. We believe this will raise all boats and shift more dollars toward streaming AVOD, which is beneficial. From a CPM perspective, there are premium CPMs available, with Disney and HBO Max being prime examples. The CPMs they achieved are generally in line with what other premium services are seeing today. Regarding Disney+ as a contributor to our business, it is part of the Disney portfolio, and we're pleased to continue collaborating with them strategically. As they add more ad-supported tiers in the long run, it will be significant for our business.

All right. From the perspective of 2022 revenue, I have a few general thoughts. I'll discuss our DV+ and CTV business. In DV+, as we enter 2023, we are not yet where we want to be, but we are experiencing some growing momentum and believe we can continue to gain market share. We anticipate positive developments in the DV+ area as we head into next year. In CTV, we also see increasing momentum. Even in the event of a recession, we expect some countercyclical support that could be advantageous, particularly with potential acceleration in cord-cutting and growth of AVOD, as households may shift to lower tiers of streaming subscriptions. Overall, we are confident that even in a recessionary environment, we expect to see growth. Regarding margins, we have two dynamics at play. In the first half of the year, we will operate two separate CTV platforms as we transition our clients to our new streaming platform. By mid-year, you will notice a reduction in those costs. The new platform will also leverage the cloud, and we will optimize our cloud usage throughout the year. These factors should help reduce costs over the course of the year. We could come close to maintaining our current margins by year-end, although that will depend on top-line performance and any recession impacts. However, at the very least, we will exit the year in a position to achieve our margin targets of 35% to 40% going forward.

The next question is from Jason Kreyer of Craig-Hallum.

It was a really nice quarter and kind of different than where we've seen elsewhere. And I'm just wondering if you can maybe talk a little bit about where you've seen a little bit more resilience in your business, or where you think maybe you're outperforming?

We're hoping you could do that for us, Jason. Yes, I think it's really difficult to get read-throughs in this market with everyone reporting, some facing macro challenges and others dealing with inherent business issues. What we've observed is that we are certainly gaining market share. The narrative of Magnite as the largest independent omnichannel, CTV-first focused player with ad serving capabilities is starting to show positive results. As you saw in the examples we shared during the call, we still don't have DV+ where we want it to be in terms of growth. However, getting it back on a growth trajectory has been our focus, and we will have more updates on that. In a stronger environment, our performance would have been even more remarkable. I believe our exposure to CTV distinguishes us in the market. Our significant revenue from CTV sets us apart from our peers in the SSP sector, and this growth rate in the total addressable market is what motivated us to create Magnite and will fuel our progress moving forward.

That's helpful. You highlighted a number of wins like Fox, VIZIO, things like that in the quarter. Just as the economic climate has changed, are you seeing any slowdown in those conversations like top-of-funnel interactions with customers, either there are initial engagements or moving them through the cycle? Or have those continued to persist at the same pace?

Yes, I believe that pace will remain the same or could even pick up slightly. As mentioned earlier, we've been in this space for quite a while, and during tougher times in the advertising environment, publishers tend to rely heavily on their programmatic partners. In our case with Magnite, we are experiencing record impressions and inventory levels. Even in a challenging buyer market, we are not sold out, and there are always buyers available, though at lower prices. We can sell 10 units at reduced prices, while some publishers unfortunately have run out of inventory. This situation has really prompted increased discussions, especially with publishers or platforms that typically relied on direct sales, who are now interested in how programmatic can positively impact their bottom lines during this difficult economic cycle.

The next question is from Laura Martin of Needham.

Yes, it is. So Michael, I was at a Disney event where they mentioned that they only had two supply-side platforms. I believe you're one of them, and Google's supply-side platform is the other. My question is, as they introduce this ad-driven tier, should we expect it to help boost your revenue next year?

Yes, Laura. Most definitely, but let's put this in perspective, I think we've been pretty clear in the past about our concentration or lack thereof of accounts. And so in other words, I don't think a read-through should be Disney represents 20% of our CTV business, and it will go from there. We don't really have a material CTV client by financial definition. And as we've talked about, Laura, in the past, there are several buckets and take rates differ associated with which bucket. And so if you're dealing with the publisher and they're doing all the heavy lifting of selling and they're creating the packages and they're just using you as the plumber, that's dramatically different take rate, much more along the lines of ad serving than it would be if we pipe in the demand. So as we've talked about, I think there's this evolution that's occurring where as a company and an industry, we're at the lower end of our take rates just given the prevalence of the bigger platforms to want to sell direct and be in control. And we believe over time that they'll rely upon Magnite more for demand stimulation which will carry the higher take rate, which would have a bigger bump to the revenue line.

Very helpful. And then my follow-on is leverage. These leverage numbers are excellent. And do you have a leverage target you're moving towards? Or 2.6x, how much lower do you want to go before you're ready to start making acquisitions again or doing something like buying in shares with the cash instead of repaying debt?

Yes. Our current target, we want to get that leverage ratio below 2x. So that's our #1 priority right now, and we're making good progress. So when we get there, then yes, we'll be rethinking other priorities.

The next question is from Matt Thornton of Truist.

Congrats on the quarter, and I think you know I rarely say that. I'd say that the read-throughs from peers are somewhat useless. Michael, obviously, you put up a good quarter, you're guiding conservatively for 4Q despite a tough macro, and you're guiding for growth next year despite a tough macro. And so you've touched on a little bit of this already, but my question is what has you most confident about that path? There's a lot of initiatives here that we've talked about, I guess, what has you most confident and kind of underpins that outlook? And then conversely, where do you think maybe you're most conservative and could get some upside surprise? That's my first question. And then one for David. David, if we fast forward to second half of next year and into '24. On a like-for-like basis, as you roll out CTV platform 2.0, would there be a step change in margin there, again, like-for-like revenue, like-for-like macro? Would there be a step change in margin there?

Yes, Matt, I'll hit the first step and then David will jump in. Yes. So listen, confidence probably with a small see, not a capital see. But listen, we're pretty deep into the quarter, and so we had some sight lines into Q4. And we're always in the marketplace and talking to our clients, and of course, there is concern about a worsening economy and a tightening ad market. But there's some bright spots, some bright verticals that had been dormant for a while throughout the pandemic that are kind of kicking back in. So again, I think largely, we have seen historically, and we are seeing today, that folks really start to lean in on their programmatic sales channel. And if your choice is serving a page or not serving an ad during a streaming show or serving one that's slightly less at a CPM and served by us, most publishers are going to take the latter. And so we think that with the record inventory that we're processing, that will just give us more at bats and again, enable us to generate more revenue and yield for our clients. And in the CTV in particular, there's quite a few ad-supported tiers that are coming to line next year. So we think there's just going to be more inventory opportunity for programmatic capabilities, and so that kind of gives us confidence. And I guess I would assume that the upside surprise for us would be similar to everyone, and that is it isn't as tough a macro climate. It isn't going to be a deep long-lasting recession, and you see a quicker rebound in terms of consumer spend and advertising spend commensurate with it.

Yes. On the margin front, with the combination of our platforms, launch of our new platform, I don't think there'll be a step function change in our margin profile. I think what you'll see is the initially higher costs will be substantially compensated for by the end of the year, right? What I think it does is it sets us up to grow at an even more effective unit cost basis going forward. And so I think it sets up nicely for continued growth and momentum in our margins in 2024.

The next question is from Matt Swanson of RBC Capital Markets.

Yes. I'll add my congratulations on the quarter. Something we've touched on, a bunch of the answers to this question kind of had me thinking. But we're talking about maybe going into a year that has a suppressed demand environment. We talked a lot about the influx of premium supply coming in through AVOD. If we got to an environment, right, where that equilibrium of supply demand start to shift and people wanted to move faster to biddable or a programmatic bidding environment, can you just kind of talk us through how fast a publisher can turn that on? Like if Disney or Netflix decided to go 100% biddable tomorrow, is that even feasible? Or is this month that takes weeks, just kind of through that logic?

Yes. I can't speak for Netflix, but regarding our clients, our demand systems are already in place and integrated. In situations where open auctions are available, they rarely utilize that capability for the types of clients mentioned. Therefore, if the inventory were made available on the platform, it could be activated immediately since the demand exists. However, each publisher operates differently, and there are factors like creative reviews that could cause delays. This isn't a technical issue but more about business practices. So, open auctions could be activated rapidly. Invite-only auctions would take longer due to the nature of needing to invite participants. Additionally, for PMP or PG arrangements, some of them are always active but require some negotiation between the buyer and seller. However, for open auctions, they could be set up very quickly.

And I'll keep my streak alive by asking a DV+ question. I mean, can you just talk a little bit about where you guys have been seeing the most improvement? Obviously, the macros are still impacting the growth rates. And then, I guess, from an investment standpoint, is it just waiting for those investments to play out? Or are there incremental areas through year-end into next year that you're looking to be investing in?

Yes, Matt, we are continually adjusting and investing within our budget. This isn't about adding another $20 million from an R&D perspective. We have a dedicated team working on it. The challenge lies in the size of the business, which handles hundreds of billions of ad requests daily, making it a lengthy process to fine-tune and optimize our systems. In previous quarters, we expressed optimism about our internal progress, even as our external metrics were less favorable, and you're now beginning to see the reasons for our optimism. Those early signs of improvement are becoming evident. We have about 30 projects in the pipeline, and as we tackle them one by one, some will have a greater impact than others. Additionally, in today's environment, there's an increased focus on optimizing the supply path. From an efficiency perspective, we aim to maximize our media spending, and it’s also distracting to collaborate with partners who don’t add value. We're witnessing a trend where even larger platforms are being favored, as publishers express a preference for purchasing their inventory through Magnite because they are familiar with us. This trend is gaining momentum.

The next question is from Shweta Khajuria from Evercore.

This is Jocelyn calling for Shweta. I have a high-level question regarding current ad spending. Several companies, such as Trade Desk, have reported cautious advertising expenditures recently. Given that you have likely spoken with many agencies and advertisers, I would like to know what you are hearing about when the sentiment might start to change.

So I lost you a little bit on that, but you're asking kind of market checks from buyers about their sentiment going forward. Is that what the question was?

Yes.

Yes. Although we receive payment from the publisher to operate a marketplace, it is essential to generate demand, and we maintain close relationships with buyers. Currently, there is noticeable caution among advertisers, who prefer not to commit to long-term agreements. A significant amount of spot dollars in the CTV sector remains available, as they were not utilized during the upfront period. The key question many are trying to answer is whether this situation represents a pause in spending or a reduction in spending. While I cannot provide a definitive answer, we believe it leans more towards a pause rather than a cut. We are confident that spending will return and likely do so quicker than some of the more pessimistic outlooks suggest.

Yes, that makes sense.

There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Michael Barrett for closing remarks.

Thank you, Kate. We are pleased to report a strong third quarter with improved growth rates. We continue to strengthen our market-leading position and carefully invest in promising areas for growth in CTV, DV+, and audience and identity. We feel optimistic about our growth potential next year and the improving outlook for the broader CTV ad-supported market, particularly as many of the largest players are launching their CTV ad businesses, which will drive growth for years to come, especially for programmatic partners. I appreciate the Magnite team for their performance this quarter, and thank our analyst investors for joining us for our Q3 results call. We look forward to speaking with many of you at our upcoming investor events. SIG will host our post-Q3 virtual investor meetings tomorrow. We will also be attending the Stephens Conference in Nashville on November 15, the RBC Conference in New York on the 16th, the Craig-Hallum Conference in New York on the 17th, a virtual Macquarie Conference on December 8 in New York, and Needham in New York on January 10. Additionally, we have a busy roadshow schedule with Truist in Boston on November 30 and Evercore in San Francisco on December 14. Have a great evening, and thank you for joining us today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.