Hello and welcome to the Magnite First Quarter 2023 Earnings Conference Call. I would now like to turn the conference over to your host today, Nick Kormeluk, from Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Magnite's first quarter 2023 earnings conference call. As a reminder, this 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 impacts 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 first quarter 2023 quarterly report on Form 10-Q and our 2022 annual report on Form 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 onetime 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.

Thank you, Nick. Q1 was a standout quarter for Magnite. Revenue ex-TAC grew 8%, CTV revenue ex-TAC grew 10%, adjusted EBITDA came in at $23 million, and we posted an adjusted EBITDA margin of 20%, all exceeding our guidance for the quarter. We continue to demonstrate the value of a differentiated strategic sell-side partner in the ad tech ecosystem. Our growth and outperformance relative to walled gardens and numerous peers in Q1 is further evidence that our strategy is working and there is a big opportunity for a leading sell-side platform to serve the open Internet. It is most evident in CTV. We're having ad servers becoming critical to long-term success given that so much inventory is still transacted directly. CTV publishers require a fully integrated offering that maximizes yield across their portfolio of programmatic and direct inventory, providing tremendous performance advantages. At an increasing pace, we are seeing undifferentiated SSP struggle, as they are unable to serve customers in new formats, or geographies, with the depth of tools and solutions that customers demand. This has resulted in market share gains for Magnite, and we believe there are significant opportunities for market share gain in the future. As we look forward, our growth expectations for 2023 haven't improved from our last update, and we expect this strength to continue throughout the year. David will provide greater detail on our financial results and future outlook in his prepared remarks. Our CTV results were propelled by strong performance in our SpringServe ad server business and by our managed service business where we saw good traction with new and existing partners. We've had success this quarter with our lead partners in CTV that include LG, VIZIO, GroupM, Disney, Fox and Roku, who recently announced changes to their go-to-market strategy. Our momentum with these partners is very visible with our active participation in the upfront to new friends that have recently kicked off, where programmatic continues to play a bigger role, especially as it relates to direct deals. On the new CTV partner front, Rakuten TV, one of the leading video on demand platforms in Europe recently adapted the SpringServe Tile solution. As a reminder, this proprietary ad unit provides publishers with the flexibility to showcase custom ad creative within the streaming interface in any size in a wide variety of formats. Rakuten joins VIZIO and others who are now leveraging tiles to create incremental revenue opportunities and enhance the advertising experience and effectiveness within their platforms. Moving on to DV+. We continue to build momentum with our initiatives in this business. DV+ revenue ex-TAC grew 7% year-over-year, showing further improvement in share gains. We have seen broad-based improvement this quarter across many of the leading DSP partners we work with. As I've mentioned in the past, DV+ growth is a result of many incremental wins and improving the fill rates between our publishers and DSPs, and we look forward to continued strength as we drive further improvements in the quarters to come. We had a very busy quarter from a platform perspective. In February, we officially launched Magnite Streaming. Magnite Streaming is our next generation CTV and OTT platform that merges the best features, functionality and technology for Magnite and SpotX. Customer feedback so far has been very positive, migrations to date have gone very well, and we expect to have all migrations completed shortly after the end of Q2 as planned. On the product front, we also announced the launch of ClearLine in early April. ClearLine is a self-service solution that provides agencies direct access to buy premium video inventory across all Magnite publishers and is ad server agnostic. ClearLine significantly increases the spend going towards working media, makes it easier for sellers and agencies to securely share data, and helps Magnite publishers generate more revenue and develop new sources of unique demand. This product captures CTV ad dollars that have traditionally been transacted outside the programmatic channel through direct deals, and therefore represents an incremental opportunity to bring additional ad spend into the ecosystem. In addition to our agency launch partners, we've received positive feedback from publishers as well, who see this as a potential alternative to drive additional revenue. ClearLine has been portrayed by some of the press as an alternative to DSPs. This couldn't be further from the truth. ESPs will remain the primary method for agencies to access premium video inventory on our platforms. ClearLine represents a programmatic market expansion for publishers, agencies, and DSPs. We are excited to share more details on ClearLine's traction in the coming quarters. Also on the technology front, we announced that SpringServe will be joining the Amazon publisher services or APS. Ad server certification program for streaming TV. Working with APS through the certification program is a significant opportunity for our SpringServe publishers, as it will add Amazon DSP demand to their existing monetization solutions. We've been doing a lot of work behind the scenes in CTV audience creation and targeting helping media owners extract greater value from their first party publisher data, while carefully protecting the confidentiality of their user IDs. This is a big shift from the browser world and display an online video where the buy side would typically perform this work through third-party cookies. More to come on this in the quarters ahead. Before I turn it over to David to cover the financials, I'd like to mention the promotion of David Buonasera to the role of Magnite's new CTO. He's been pretty busy as you can see from the platform and partner developments I just covered. David joined the company in 2021 when we acquired SpringServe, which he helped co-found and scale to a leader in video ad serving with an impressive global client list. Prior to his appointment as our CTO, David was serving as a member of our office of the CTO, as well as leading our SpringServe and CTV platform engineering efforts. He is a phenomenal leader and technologist and we're thrilled to have someone with David's unique experience and capabilities lead our global technology organization. Welcome David. With that, I'll turn the call over to David Day, for more details on the financials, David.

Thanks, Michael. Q1 finished with strong momentum. As Michael mentioned, revenue ex-TAC adjusted EBITDA, and adjusted EBITDA margin all exceeded our guidance for the quarter. Total revenue for Q1 was $130 million. Revenue ex-TAC was $116 million, up 8% from Q1 of 2022. CTV revenue ex-TAC was $46 million, up from $42 million, or 10% from last year. DV+ revenue ex-TAC was $70 million, an increase of 7% compared to Q1 last year. Automotive, travel and food and beverage were our top growth verticals for the quarter. Consumer categories such as technology, retail and health and fitness made more modest improvements. Our revenue ex-TAC mix for Q1 was 40% CTV, 40% mobile and 20% desktop. From a geographic perspective, we saw good international growth that was roughly double the growth rate of the U.S. Total operating expenses, which includes cost of revenue for the first quarter increased to $231 million, compared to $158 million in the same period a year ago. With the increase primarily driven by $53 million of non-cash accelerated amortization, resulting from our platform consolidation. Adjusted EBITDA operating expenses were $93 million and within our guidance range. This was an increase of less than 1% sequentially from Q4. We would typically see a bigger increase seasonally, but the impact was offset by our RIF actions. The increase from $78 million in Q1 of last year resulted from increased platform and personnel expenses along with return to office travel and event-related costs. Net loss was $99 million for the quarter compared to net loss for the first quarter of 2022 of $45 million, which includes the previously mentioned $53 million of accelerated amortization expense. Adjusted EBITDA was $23 million versus $29 million for the same period last year, and adjusted EBITDA margin was 20%. Now we calculate our adjusted EBITDA margin as a percentage of revenue ex-TAC. GAAP loss for basic and diluted share was $0.73 for the first quarter of 2023 compared to a loss of $0.34 for the first quarter in 2022. Non-GAAP earnings per share in the first quarter of 2023 was $0.04, compared to $0.08 reported last year. The $53 million of accelerated amortization expense had a negative impact on GAAP loss per share of $0.39, and a negative impact on non-GAAP earnings per share of $0.09 in Q1. The reconciliations to non-GAAP income and non-GAAP earnings per share are included with our Q1 results press release. We expect to recognize additional accelerated amortization expense of $53 million in Q2, and $8 million in Q3 this year. There were 135 million weighted average basic and diluted shares outstanding for the first quarter of 2023. Fully diluted weighted average shares utilized for non-GAAP earnings per share were 144 million for the first quarter. Capital expenditures, including both purchases of property and equipment and capitalized internal use software development costs were $10 million for the quarter. Operating cash flow, which we define as adjusted EBITDA less CapEx was $40 million for the quarter. Our net interest expense for the quarter was $8 million. During the first quarter, we purchased and retired approximately $50 million in face value of our convertible notes using approximately $41 million in cash, resulting in a discount of approximately 19%. We have $34 million remaining under our current program for the repurchase of common shares and our convertible debt. Cash balance at the end of Q1 was $237 million. The reduction from year-end is based on the use of cash for the repurchase of our convertible notes, typical seasonality and timing of receivable payments around quarter end. Our net leverage ratio was approximately 2.5x at the end of Q1, down from 3.1x year-over-year. We expect the ratio to be meaningfully below 2x at year-end. We are excited about our business and ability to generate strong cash flow, while providing the flexibility to reduce debt and maintain a healthy cash position. We continue to expect to generate significant free cash in 2023, especially in our seasonally strong second half. And we will continue to evaluate the best use of our cash as it relates to debt reduction and share repurchases. I will now share our expectations for the second quarter and thoughts for the year. Our guidance is based on recent growth trends. Although we have been somewhat measured due to the continued uncertainty in the macro environment. For the second quarter, we expect revenue ex-TAC to be in the range of $132 million to $136 million. We expect revenue ex-TAC attributable to CTV to be in the range of $56 million to $58 million. We expect adjusted EBITDA operating expenses to increase slightly from Q1 to between $94 million and $96 million, which implies adjusted EBITDA margin of approximately 29% for Q2 at the midpoint. For 2023, we expect our revenue ex-TAC growth rate for the full year to be in the high single digits assuming current course and speed. We expect that adjusted EBITDA OpEx will be lower in the second half of the year compared to the first half as we complete our CTV platform migration, and remain focused on managing costs across the business. We anticipate full year adjusted EBITDA will be comparable or better than 2022 and that adjusted EBITDA margins will show meaningful improvement in the second half of 2023. Our full CapEx expectation is unchanged and we expect $40 million or less in 2023. And lastly, we continue to expect full-year free cash flow to exceed $100 million. Q1 performance gives us a great start to 2023. And our differentiated market position as the leading independent sell-side advertising company puts us in a great place to accelerate growth and expand margins as the market improves. With that, let's open up the line for Q&A.

And the first question comes from Laura Martin with Needham.

Hi there. Great job on the impressive quarter. Congratulations. Since Upfront week is next week, I’d like to focus on ClearLine. I know that Group M was your launch partner. Do you anticipate announcing other partners for ClearLine soon, and what is your business model? How do you generate revenue from the ClearLine product? That's my first question.

Yes. Hey, Laura, it's Michael. Yes, great question. So yes, we're looking for the upfront, as we said in the script, programmatic is playing a bigger and bigger role. And therefore, Magnite is as well. You're right about Group M. I do anticipate further announcements regarding client adoption of ClearLine timing to be determined. But yes, the marketplace has reacted really positively. And again, to be clear, this is great for the industry because we're talking about freeing up those linear dollars that have been clogged, largely because of the inability to transfer on the fee structure that is currently in place in programmatic. So we think it's super exciting. As relates to the fee structure for ClearLine, we're quite flexible about it. We would charge advertisers a percentage of media, a CPM base fee, a staff kind of base fee. So those conversations are ongoing. And we're quite flexible as it relates to what the model looks like.

Perfect. And then on my second question is about the two services. I thought your point about ad servers was really interesting. You said that you'd have, it sounds like a majority adoption of the combined new platform by the end of the second quarter. Is it your feeling that as we're modeling the back half, therefore we get to close down one of the two platforms, and therefore there's cost savings in the back half of the year?

Yes, this is David, Laura. That's correct. We will see reduced costs from completely shutting down the legacy on-prem platform. However, these savings will be slightly offset by increased cloud expenses associated with the new Magnite Streaming platform. Overall, we expect to see a decrease in costs in the third and fourth quarters.

Great, thanks very much, guys. Appreciate it.

Thank you, Laura. See you next week.

Thank you. And the next question comes from Shyam Patil with Susquehanna.

Hey guys. Great job on the results. I had a couple of questions. Michael, I know you’ve talked about this in the script, but can you just talk a little bit more about how you're feeling about the CTV business right now, obviously, you had a great quarter. But how you just thinking about the CTV business for the balance of this year and kind of growth and how new initiatives like ClearLine may factor into that? And then second question, we're hearing a lot about walled gardens potentially opening up. How big of a tailwind do you think that'll be for you guys? And is it something that you think would impact the business in the near-term? Or is it more kind of intermediate to long-term kind of business impact from wall gardens opening up? Thank you.

Yes, those are excellent questions. I believe that the growth in CTV is somewhat affected by the current macroeconomic environment. If you examine the linear companies that reported this week, they all faced a challenging quarter. You can discern some of YouTube's numbers from their overall platform performance, which indicates considerable headwinds. While we achieved low double-digit growth, we expect the business to continue increasing, possibly at a similar rate, maybe slightly more or less, but these are not typical conditions. We're still confronting macro challenges, and it will be intriguing to observe the dynamics between buyers and sellers, including how much commitment there is and how that might benefit CTV from a spot perspective. However, CTV could also be increasingly integrated into broader upfront models. We maintain a long-term optimistic outlook on CTV, but we have to navigate through the upcoming quarters amidst the macro situation. Regarding walled gardens, we are experiencing some immediate benefits as certain platforms that were previously inaccessible are now opening up, allowing us to inject demand into them. These are positive developments. Overall, while there may be obstacles, the gradual decline of walled gardens will unfold over time, signaling a potentially positive long-term trend for us. However, it is clear that this situation is creating significant challenges, and trying to connect premium video platforms is more complex than operating a search walled garden, like the dominance of Google in search. To fully capitalize and maximize monetization, it will be essential to open up and involve the entire ecosystem.

Great, thank you guys.

Thank you. And the next question comes from Jason Kreyer with Craig-Hallum.

Great. Thank you, guys. Nice quarter. Michael, you've talked a few different times about programmatic taking a more prominent role in the upfront. It's wondering if you can talk more about that. Why the role is expanding this year and where you see the benefits to Magnite?

I believe it's a combination of several factors, Jason. Publishers and buyers are becoming more comfortable with programmatic advertising, especially in valuable inventory like connected TV. Buyers are eager to utilize data-driven targeting, and publishers are more receptive due to the current environment and the significant influence of agency spending. The effectiveness of these strategies is evident, as seen with companies like Disney, which aims for over 50% of their inventory to be sold programmatically by 2025, following the success of Hulu. This demonstrates a viable approach to integrate traditional direct sales with programmatic methods.

And then just between ClearLine and open path, and I think we've seen other solutions hit the market in this kind of end-to-end type of offering. Maybe what's the view of all these different solutions over the next several years? Like over the long-term, how do you expect all this stuff to play out?

I think that it's easier to comment upon our product than it is others. It won't stop me from doing it. But it's easier for me to do it than ours. With ClearLine news, its stated goal in mind, and that was our top publishers came to us and our top agency partners came to us and said, hey, if we're really ever going to unlock those dollars that are being sold directly in this dollar set, or in the linear world that wants to move into programmatic, but can't stomach the take rates that are normally associated with a programmatic buy. Can we just move them forward at a lower cost of service? And as you know, ClearLine has been a product that we've been kind of dogfooding ourselves over the past year with our managed service team. They've been using that as their kind of buying tool to process our direct sold business. So we have a lot of experience with it. It's been really successful. We have an agency that's up and going on it, that had great success, and it's been singing its praises. So I think it will accomplish that goal. When I talked about market expansion, I meant it and that is, I don't believe that is the best use of programmatic longer term, just translating a direct sold deal to work closer to the pipes. I think we all believe in a world where there's data overlaid on it. We believe in a world in a biddable world, whether it's invited only auction or open auction. And I think those dollars will once they get acclimated into the programmatic ecosystem will expand into that. And that presents a bigger opportunity for monetization to publishers, and DSP participation because there's, as we said, till we're blue in the face, we build an NPSP here. What we're doing is building an on-ramp to allow those dollars that are direct sold to be able to get into the ecosystem. And then once in there, we see them flourishing in going in a more programmatic kind of auction-oriented world.

All right. Always appreciate the thoughts. Thank you, Michael.

Thanks.

Thank you. The next question comes from Nich Zangler with Stephens.

Yes. Hey, guys. Just on ClearLine, just delving deeper here, how would you describe the difference between an agency buying CTV ad inventory directly, as they do now from publishers versus buying on ClearLine? Obviously, I see the benefit of wanting to buy on ClearLine versus a DSP because you could avoid some of the higher take rates, but just trying to better understand why they need to make that shift from buying directly from publishers. And instead utilize ClearLine, obviously, low take rates in I think both cases. But what's the real benefit of driving that ad spend from direct into the ClearLine channel?

Yes, Nick, that's an excellent question. The essence of it lies in the ability to integrate data. When you purchase directly from a publisher, you're accessing audience segments defined by them, following a traditional methodology. However, when you use ClearLine, you gain access to programmatic data targeting and audience segmentation that combines both advertiser and publisher data to form unique purchasing segments. This provides a level of data integration and targeting that isn't available with a standard ad server ad insertion.

Okay. So that makes sense. But I understand those benefits. My next question is how would you compare the ClearLine offering with potential targets focusing on specific audiences and providing measurable feedback versus what the DSPs offer? If you're considering switching to ClearLine, they have a lower take rate, but how would you assess the targeting and measurable feedback opportunities provided by a DSP compared to those offered by ClearLine?

Yes, another great question. And again, each DSP is slightly different. But listen, I would say that there's comparable value proposition when you're talking about just translating what is kind of a story made up, kind of audience by that you would normally do direct; two, what ClearLine could do versus what a DSP could do at that level. But we're DSPs shine in Excel is when it starts to come to finding audiences across a wider array of inventory and in a biddable format, right. And so we're just really talking about training wheels probably isn't the right way. But it's the lowest form of programmatic, right? It's mostly workflow with some data, versus what a DSP would provide, which is, you know, a robust full-fledged offering across the spectrum of ways that you can buy, purchase programmatically.

Got it? And then for publishers, obviously, the draw is for ClearLine is just hey, why not open myself up to yet another source of demand? And I'd assume there's limited hurdles in getting a publisher set up with ClearLine.

That's exactly right. Yes.

Thanks.

Thank you. And the next question comes from Matt Swanson with RBC Capital Markets.

Yes, thanks for taking my questions. Congratulations on the quarter, I guess to be the first thing. If we look back kind of to mid-February to the strong results now, it might be hard to parse it out. But I mean, how much of it was the macro performing better than expected versus your company-specific execution? Obviously, it can take a bit of both to deliver results like this.

I believe that if you look at all the companies that have reported this week and last week, you can see that Magnite is gaining market share. We definitely benefited from an improved advertising spending environment, similar to others in the industry. At the end of Q4 last year, particularly in December and early January, the outlook for 2023 looked quite poor. However, things started to improve in February and March, and that trend has continued. While we definitely took advantage of these factors, I also think we outperformed expectations. Looking at the performance of others in the industry, ours stood out, so I want to give credit to the team for achieving what many others could not and capturing additional market share.

And then, both for the quarter, but then also for the Q2 guide, adjusted EBITDA was really strong relative to some of the headwinds we have talked about what the platform's coming together. Is that just kind of a product of the top-line outperformance and then obviously, it's the structure you have to be able to drop that down to the bottom line? Or was there anything else like maybe more efficiencies than you expected from combining the platforms?

Yes, Matt, it's David. I'll take that. Yes, that's exactly right. It's top line over performance dropping through to the bottom line.

Hi, appreciate it.

Thank you. And the next question comes from Dan Day with B. Riley FBR.

Yes, good afternoon, everyone. Thank you for the question. At first glance, you've launched ClearLine of activate earlier this week. It appears that you are targeting similar markets. Could you perhaps compare and contrast your approach, as you mentioned earlier in the Q&A? I'll ask it more directly.

I'm sorry again. So the question was the difference between two things? Yes, it's interesting. It's difficult to compare with a product that isn't available yet. Ours has been operational for over a year. However, from what I gathered, they are quite enthusiastic about the opportunities in connected TV, just like we are. That said, I want to emphasize that regardless of how impressive your buyer interface or tools may be, access to the connected TV supply is essential. If you're looking to shift linear advertising dollars used for traditional broadcasts to programmatic buying, it's crucial to source the same high-quality inventory. Therefore, having access to that supply is vital. We feel very confident in our unique position because we have that access, which is integrated into our platform. People recognize us as the player that provides that supply, so our conversations with buyers will be notably different from others in the industry.

Thanks, Michael. Just one follow-up. You spent a lot on the convert buybacks this quarter. Just maybe think about that versus the common, do you have a specific goal of getting the convertible debt down to a certain level? What is it that might make you more inclined to turn that repurchases back to the common?

Yes, we think that given our overall debt quantum, it's just prudent to continue to reduce that overall level of debt. We have a target to get our net leverage ratio well below 2x. And we don't see significant debt, as you know, a future long-term component of our capital structure. And so the converts, in particular, have a due date, it's still a way off in early 2006. But we think it's prudent to reduce that tranche of our debt that has the earliest due date. And so our focus is there. It's also a significant discount to face value. So, we're able to purchase that at a 19% discount. And so, it's guaranteed accretion there and so we took the sure bet on that.

All right. Thanks. I'll turn it over.

Thanks, Dan.

Thank you. The next question comes from Shweta Khajuria with Evercore ISI. Ms. Khajuria, your line is open.

Now could you hear me? Sorry.

Yes, we can.

I'm asking a question for Shweta. What's the difference between ClearLine and activate?

Yes. Hi. We hit that a couple of questions ago. And it's quite difficult to answer that question, given the fact that they just announced it yesterday. And it's kind of not even in market yet where ours has been up and gone for over a year. So, ultimately, we feel like in order to move those dollars over that are being transacted directly, particularly in CTV, the difference maker will be access to supply. And we feel very good about our position there in terms of access to the premium CTV inventory that these buyers will want to purchase.

Thank you. Is there anything you can share on the demand trend quarter to date?

Nothing that we haven't talked about in the script.

Okay, thanks.

You're welcome. Thank you. That concludes the question-and-answer session. I would like to turn the floor to Michael Barrett for any closing comments. Thanks so much, Keith. Bear with me. Yes. So I'd like to thank our great Magnite team for putting up another strong quarter and working hard behind the scenes to deliver. We have a great opportunity ahead of us to continue to gain share, advance the ad-supported CTV market and its transition from linear and accelerate our growth when the market begins to recover. We look to reward shareholders that support us along this journey. We look forward to speaking with many of you at our upcoming investor events. SIG will host our post Q1 virtual investor meetings tomorrow. We'll be attending the Needham conference in New York on May 17. The B. Riley conference in Beverly Hills on May 25. To Craig Hallum conference in Minneapolis on May 31, and the Evercore conference in New York also on May 31. We will also be participating in meetings with SIG in Boston on June 5, and in Chicago with Stephens on June 6. Have a great evening. Thank you.

Thank you. The conference has now concluded. Thank you for attending the presentation. You may disconnect.