Magnite, Inc. Q2 FY2023 Earnings Call

Good day and welcome to the Magnite Second Quarter 2023 Earnings Call. All participants will be in listen-only mode. After today's presentation, there'll be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Nick Kormeluk of Investor Relations. Please go ahead.

Thank you, operator, and good afternoon everyone. Welcome to Magnite's second quarter 2023 earnings conference call. As a reminder, this conference call is being recorded. Joining me on the call 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 may 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 second quarter 2023 quarterly report on Form 10-Q and our 2022 annual report on Form 10-K. We undertake no obligation to provide forward-looking statements or relevant risks. Our commentary today will include non-GAAP financial measures including contribution ex-TAC or less traffic acquisition cost to more accurately reflect what we previously referred to as Revenue ex-TAC. 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 additional 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. Michael, please go ahead.

Thank you, Nick. Q2 was a solid quarter for Magnite. Total revenue grew 11%, contribution ex-TAC grew 9%, and adjusted EBITDA came in at $37 million with a margin of 28%. That said, EBITDA and margin were negatively impacted by the MediaMath bankruptcy, which David will discuss in more detail. Once again, our DV+ business was a bright spot as contribution ex-TAC grew 10% year-over-year despite an industry-wide weakness in CPMs showing clear market share gains. About a year ago, we refocused on our DV+ business, completed a number of technical improvements, and consolidated our online video activity. This freed us up to put greater focus on the needs of our partners, platform enhancements, and optimizations for ad spend performance. We're now seeing the results of those efforts. And we expect more strength in our DV+ business moving forward. On the CTV front, contribution ex-TAC grew a healthy 8%. We continued to execute well against our plan this quarter while managing through a challenging market that is far from normal. Starting in June, we began to see softness in our managed service business driven by macro challenges as several large managed service campaigns were paused based upon ad budget pressure, particularly in the auto and media and entertainment verticals. As we've discussed in previous earning calls, our managed service business operates at our highest take rate. So the flow-through to financials is significant. The industry also saw TV upfronts excluding sports and live events coming in weaker than anticipated, which is a good indicator of advertiser sentiment in the current challenge to ad spend environment. On a positive note, we would hope that while buyers were cautious in the upfronts, their budgets remain largely intact and that spend could be deployed in the scatter market, which will benefit streaming services and programmatic partners like Magnite. Several trends also accelerated this quarter into Q3. The most significant of those trends is that the largest and fastest-growing streaming players, the broadcasters, plus services and TV OEMs are all getting truly serious about programmatic and are taking share from smaller CTV publishers. We are seeing this shift manifest itself in our own partners, including Disney, Roku, Warner Brothers, Discovery, and Vizio who are moving more inventory toward programmatic transactions and away from traditional direct-sold executions. While we believe this trend is positive for the long-term health of the programmatic CTV market and our business, it is negatively impacting our near-term financials. The reason is simple. As all of those large sellers move direct-sold deals to publisher direct programmatic, they're becoming a bigger part of our ad spend mix but they are relying on services with lower take rates. What's not showing up in our financials is that we're growing market share at a far greater rate than our revenue would suggest. In Q2, our ad spend grew at a significantly higher rate than our revenue and industry forecast. With that being said, we see a huge long-term opportunity here; the shift to premium programmatic CTV is in full swing, and Netflix hasn't even started its programmatic efforts. Magnite is winning with top-tier clients and from experience, we know that the more we work with these types of companies, the closer we get to them, so more we can move to delivering higher value, higher take rate services over time. So what makes us confident that we can expand our value generation on this growing market share? It's a combination of continuing to execute on existing industry-leading products and introducing new innovative services. On the existing front, we're going to up-sell higher-value SSP services to those clients by running auctions and bringing proprietary demand, continue to win new ad-serving clients to SpringServe, expand our SpringServe tiles business and other proprietary formats and continue to create direct private marketplaces between agencies and premium publishers further accelerating our SPO efforts. On the new and future front, this quarter, we introduced two new innovative offerings and one new partnership. First, there's ClearLine, the self-service direct video buying solution for agencies. We believe strongly in this product's ability to unlock linear budgets and efficiently bring them to programmatic, which as I mentioned is a strategic interest to agencies. In fact, we recently announced that the list of agencies using ClearLine has expanded beyond our launch partners, Camelot, GroupM, and MiQ to include GSD&M, Horizon Media, Omnicom Media Group, Germany, and Stagwell Brand X Performance Network. ClearLine has also seen robust momentum on the sell side where we've added A&E Networks, AMC Networks, DirecTV Advertising, DISH Media, Disney Advertising, Fox Digital, Nine, and Warner Brothers Discovery to our launch partners LG and Vizio. Second, in June, we introduced Magnite Access, a suite of omnichannel audience data and identity products that make it easier for media owners and their advertising partners to maximize the value of their data assets, including a DMP, a data storefront, and a secure solution enabling sellers and buyers to match datasets. Parts of Access are available to clients today, and others are in testing and are on track to reach wider availability this year. Finally, earlier this month, we and FreeWheel announced an integration enabling clients of their ad server, including many of the world's largest programmers and broadcasters to work seamlessly with Magnite for their programmatic needs. Not only does this integration allow our mutual clients to better maximize yield across sales channels, but it also unifies their view of ad creatives, frequency capping, and other data across systems which ultimately improves the advertiser and consumer experience. We expect it will take a few quarters for this integration to ramp up, but we're bullish on the value for the industry and the opportunities it opens for us to further grow our footprint. We believe these efforts will both positively influence our revenue and increase our role as a strategic partner to our clients. Now that we have completed the CTV platform integration that began with our acquisition of SpotX two years ago, we will apply even more focus towards innovation that advances our technology and leadership position. In summary, we are very pleased with how our business is performing and our share gains in both DV+ and CTV. The rapid shift to premium programmatic CTV has come with some near-term revenue pressure. The ad spend growth represents a significant opportunity for us to expand our relationship with the industry's top players. I'm confident that we have the resources and the strategy to execute on this opportunity. With that, I'll turn the call over to David for more detail on the financials. David?

Thanks, Michael. Q2 was a solid quarter for Magnite. We reported total and CTV contribution ex-TAC results within our guidance range, and our DV+ business performed very well. Total revenue for Q2 was $153 million, up 11%, Contribution ex-TAC was $135 million, up 9% from Q2 2022 and at the midpoint of our guidance. CTV contribution ex-TAC was $56 million, up from $52 million or 8% from last year. DV+ contribution ex-TAC was $79 million, an increase of 10% compared to Q2 last year. Our contribution ex-TAC mix for Q2 was 42% CTV, 39% mobile, and 19% desktop. From a geographic perspective, International continues to lead our growth increasing at a rate well over double that of the US. From a vertical perspective, travel showed relative strength overall while technology and media and entertainment were relatively weaker, particularly in CTV. I'd like to highlight a few trends we're seeing, which are impacting our Q3 CTV guidance. In general, April and May continued to grow and June was softer than expected. In particular, our managed service business was notably weaker evidenced by slower order flow and paused campaigns, as Michael alluded to. The premium broadcasters, plus services, and OEMs are taking share from smaller CTV publishers, which while creating significant long-term opportunity is negatively impacting revenue in the short term. Also related to second half trends, keep in mind that political spend represented roughly 3% of CTV contribution ex-TAC in Q3 2022 and 6% in Q4 2022 creating some additional comp challenges. DV+ continued to be an area of strength with 10% growth in the quarter. We continued to innovate in DV+ and are excited with the launch of native ad formats across DV+ allowing programmatic demand to target key publishers that offer native formats. We will continue to bring new products to DV+ that will enable our publishers to better monetize their supply. Total operating expenses, which includes cost of revenue for the second quarter, increased to $224 million compared to $161 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 expense was $97 million higher than our expectations due to $4.5 million in bad debt expense that was recognized as a result of the MediaMath bankruptcy. Excluding the MediaMath impact, expenses would have been at the low end of our guidance range. Last year, adjusted EBITDA operating expense for the second quarter was $82 million. The year-over-year increase was driven by higher platform expenses, payroll expenses, the aforementioned MediaMath expense, return to office, and travel and event-related costs. Net loss was $74 million for the quarter compared to the net loss for the second quarter of 2022 of $25 million. Our results for the second quarter this year include the previously mentioned $53 million of accelerated amortization expense. Adjusted EBITDA was $37 million and adjusted EBITDA margin was 28% for the quarter, both of which reflect the negative impact from the $4.5 million in bad debt expense. Note that we calculate our adjusted EBITDA margin as a percentage of contribution ex-TAC. GAAP loss per basic and diluted share was $0.54 for the second quarter of 2023 compared to a loss of $0.19 for the second quarter of 2022. Non-GAAP earnings per share in the second quarter of 2023 was $0.09 compared to $0.14 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 Q2. The reconciliations to non-GAAP income and non-GAAP earnings per share are included with our Q2 results press release. We will recognize the final amount of accelerated amortization expense of $8 million in Q3 this year prior to the completion of our CTV platform consolidation. There were $136 million weighted average basic and diluted shares outstanding for the second quarter of 2023. Fully diluted weighted average shares utilized for non-GAAP earnings per share were $146 million for the second quarter. Apple expenditures, including both purchases of property and equipment and capitalized internal-use software development costs, were $9 million for the quarter. As a reminder, our CapEx for this year is expected to be about $5 million lower than 2022, aided by the repurposing of the SpotX CTV platform servers to our on-prem DV+ pipelines. Operating cash flow, which we define as adjusted EBITDA less CapEx, was $28 million for the quarter. Our net interest expense for the quarter was $9 million. During the second quarter, we purchased and retired $40 million in face value of our convertible notes using $34 million in cash resulting in a discount of 15%. Our total par value convertible note repurchases through the second quarter was $90 million reducing our total convertible note balance from $400 million to $310 million. With these purchases, we've completed our previous plan. And our board has approved a new repurchase program authorizing the use of up to $100 million to repurchase common shares or convertible debt through August of 2025. Our cash balance at the end of Q2 was $266 million, an increase from $237 million at the end of last quarter. Our net leverage ratio was 2.2 times at the end of Q2, down sequentially from 2.5 times at the end of Q1. We expect the ratio to be meaningfully below two times at year-end. Our business model generates strong cash flow providing the flexibility to self-fund investments in our business, reduce debt and maintain a healthy cash position. We continued 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 third quarter and thoughts for the full year. For the third quarter, we expect contribution ex-TAC to be in the range of $128 million to $132 million. We expect contribution ex-TAC attributable to CTV to be in the range of $50 million to $52 million. We expect the contribution ex-TAC attributable to DV+ to be in the range of $78 million to $80 million. We expect adjusted EBITDA operating expenses to be between $92 million and $94 million, which implies an adjusted EBITDA margin of approximately 28% for Q3 at the midpoint. For the full year 2023, we expect our contribution ex-TAC growth rate to be in the mid to high-single digits. For Q4, we expect the CTV growth to improve from Q3 guidance and to be much closer to flat year-over-year. We anticipate adjusted EBITDA would be comparable with 2022 excluding the impact of MediaMath bad debt expense. For Q4, we expect adjusted EBITDA operating expenses to be between $94 million and $96 million. Our CapEx expectation is unchanged and we expect it to be less than $40 million. Lastly, we continued to expect free cash flow to exceed $100 million. Overall, the company's performance for the second quarter was solid. We are well positioned financially with strong cash flow generation that has allowed us to retire 23% of our converts well before their maturity. We have significant opportunities ahead of us, and we are uniquely positioned to leverage our capabilities, as the leading independent omnichannel SSP. We are excited about our position and feel confident in our ability to continue delivering positive results. With that, let's open the line for Q&A.

We will now begin the question-and-answer session. Our first question comes from Jason Kreyer from Craig-Hallum. Please go ahead.

Great. Thank you, guys. Michael, can you spend a little bit more time talking about just the trade-off, and what's happening in connected TV? Like, are you seeing some of the bigger participants move volumes from like a biddable or a private auction to something that's purely direct or I'm just having trouble reconciling going from an inventory that's a higher take rate to an inventory that's a lower take rate?

Sure, Jason, I'm happy to respond to that. The forward guidance we're providing for connected TV is influenced by a couple of factors. First, the managed service business, which has the highest take rate. When deals are canceled or pushed out of the quarter, it has a significant impact on net revenue, roughly 50%. The other half is due to an increase in publisher-sold programmatic deals, particularly in premium inventory that wasn't available last year, along with services provided by broadcasters. Companies like Roku and other TV OEMs have strong data and prefer to sell directly. This has intensified the shift among larger connected TV players with their direct sales teams. There’s a noticeable transition happening from an open market that these players previously avoided. They generally preferred selling directly rather than auctioning. Over time, we believe they will become more comfortable with auctions, but for now, they prefer direct sales, pulling a lot of business out of a slower spending environment. Any new investments that came in were primarily directed toward this group. It was a quick shift within about a quarter and a half. As spending normalizes, we anticipate that revenues will enter open auctions and other publishers. Currently, in a limited spending environment, buyers are leaning towards quality and security, sticking with familiar partners. I hope this gives you a clearer picture of what’s been happening, Jason.

That clarification is helpful. This raises another question though. Clearly, you have some confidence in your ongoing role, especially since you're observing some premium inventory being sold directly. Where does that confidence stem from regarding the return of that inventory to Magnite over time? Do you see this as a transition lasting a quarter or two, or do you think it will take a year or two?

Okay. To clarify, there are direct deals sold by publishers that are processed through the ad server. Traditionally, I would receive the creative and an insertion order via email, which constitutes a direct sale by the publisher. Unless SpringServe is involved, Magnite has no role in that process. What I'm referring to on the Magnite platform is publisher sold programmatic. The agency wants to buy from the publisher programmatically, mainly for the convenience of workflow. They can simply click a button, and the campaign goes live. This has always been how Disney engages in the programmatic space. Our confidence stems from the fact that, as they increasingly operate programmatically and make more inventory available, buyers will eventually transition them to an auction model where we will manage the auction. Publishers are looking for more demand as their inventory grows, and that is where our demand facilitation team comes in. We are very confident based on our experience with DV+ and certain publishers on our platform. All the factors we've mentioned, such as upselling and transitioning to SpringServe and ClearLine, reinforce our strong position to enhance the value we deliver, which in turn will increase our take rate.

Thanks for the detail, Michael. I will hop back in the queue.

The next question comes from Shyam Patil from Susquehanna. Please go ahead.

Hi, everyone. I wanted to ask about the CTV and managed services, particularly the transition to programmatic direct in your CTV business. How significant is that shift for your overall CTV operations? And what potential do you see for growth in that area, especially if more large customers adopt this approach? Additionally, you've provided insights for the second half of the year, which are helpful, but as you plan for next year and beyond, how should we anticipate CTV growth? Are we looking at a growth rate of 5%, 10%, or even 20%? Lastly, regarding the upfront market, you mentioned some weaknesses but also noted that the scatter market might strengthen later this year. When do you expect to have clarity on that, particularly in relation to programmatic CTV? Thank you.

You bet. So I think I got them all. So the first question is how big is that business today and how big could it be. I want to emphasize again how these players sell their inventory hasn't changed. The amount of dollars going to these players has changed. So close to 80% of our business in the CTV world, on the streaming platform, is direct deals. In some cases, we'll bring the direct deal. We'll find the buyer and bring it. In other cases, the publisher sales team will do it. It is not an open market industry right now. Very few players, a handful do, but very few players do open auctions. So it's not like a DV+ world. So I'm not saying that that's changed. What's changed is just the concentration of spend on those particular publishers. And what gives us hope again is all the products and services that we have, both for the buy side and for the sell side to enhance the take rate over time, and so I think we're incredibly well positioned there. As far as 2024 CTV growth rate, this hasn't changed that at all. If the market returns to a normal pace of growth, what you define normal or Magnite can define normal, we fully intend to grow faster than that. So we think we're incredibly well positioned to outpace the market growth in CTV. It's just really a question of when it returns and what does that return to. And lastly, from an upfront standpoint, I think a lot of people are hoping that when the upfronts really kick in, traditionally, it's the end of Q3, Q4, that the spend that's been paused will find its way through scatter. And streaming has always been a beneficiary of scatter. I will caveat that by saying there's externalities like the writer and actor strike that will pause the creation of new programming, which will definitely have an impact on broadcast. There's a little less on the kind of plus services because of their library. But that could very well create some friction in that spend resuming because of the lack of programming choices. But we do feel confident that a weak upfront or a muted upfront is not the enemy of streaming; it actually might help downstream.

Great. Thank you for all the color.

The next question comes from Laura Martin from Needham. Please go ahead.

Hey, there.

Hey, Laura.

Hi there. So I think we need to let you address the big question, which is your primary competitor was down 33% today. And from this morning's open, you guys are down, round numbers, 24%. So whereas, Trade Desk is down 5%. So I think the question I'd like to hear you address is essentially Wall Street is saying that SSPs are doomed, but somehow they are in a worse strategic position than DSPs. Please respond as to why that's wrong, why Wall Street is wrong.

We certainly don't see it that way, Laura. I think it has a lot to do with how each company is performing rather than the overall category. Our performance is quite different from the competitor you mentioned. We actually experienced growth in the DV+ business during a time of reduced CPMs. As we pointed out, our advertising spend has increased significantly, particularly in CTV ads on the platform. I believe we are in a strong position for future developments. Regarding Trade Desk, they have successfully consolidated spending on their platform, leading to a scenario where the DSP market is nearly a duopoly. We are confident that, over time, similar trends will emerge on the SSP side, and we expect to benefit from that transition.

My second question is about the upfront market. Today, Netflix, ABC, and CW have all wrapped up their upfronts, which I believe is nearly the conclusion, though there might be one more. We’ve heard that this year’s contracts offer significantly more flexibility to escape commitments, which poses a competitive edge in scatter and the digital ad space. As the upfront market hasn’t had as much leverage to impose stringent terms from traditional linear networks, does this suggest that the competitive advantages in the scatter market within the digital ecosystem where you operate are diminishing? What are your thoughts on this?

That's a great question. I would say maybe a year, 1.5 years ago, that might have been a cogent observation because essentially programmatic was kind of thrown to the kiddie table and then all they got with scatter. But if you look at the upfronts this year, I believe I read this morning that Disney, in their upfront that they just recently closed, claiming that their percentage of programmatic is above 40%. So programmatic is now part of the upfront and to the tune of maybe $1 out of every $2. And so therefore, I think that distinction about scatter, upfront winter, streaming losers, streaming winners, is a lot less defined now that programmatic is part and parcel of the upfront.

The next question comes from Nick Zangler from Stephens. Please go ahead.

I was wondering if you could talk about any contribution in the quarter from the new ClearLine product aimed at directing spend right from the agencies. How has reception been there? And how might ClearLine contribution be impacting your guidance for the rest of the year within CTV?

Yes, Nick, I'll address that and David can add his thoughts if needed. The contribution from ClearLine is minimal and is already included in the guidance David provided. The response to it has been extremely positive, as evidenced by the number of clients who have adopted ClearLine. It appears to be the right solution at the right moment for our target customers. There is significant enthusiasm surrounding it, and we believe that over the medium to long term, it will become a substantial contributor to our revenue.

Within like the next year or two, though, do you think that this inflects CTV growth rates? Or is it still just too small?

No. I think look, if you look at some of the folks that have been using the product for the longest period of time because it had been in beta before, we saw definitely a crawl-walk kind of run. And I wouldn't say it's too different from deals that we announced like the GroupM marketplace, where it takes a while for the client to onboard their clients and get them acclimated to the idea and the concept. So I think it plays itself out over the coming quarters. But I think there'd be some sense of disappointment on our end if 2024 ended and we weren't able to cite a ClearLine contribution to the growth rates of CTV.

Got it. And then last one, I just wanted to see if you could flesh out the recent partnership with FreeWheel. Obviously, they're an SSP competitor of yours. It sounds like, in a way, you're combining SSP capabilities. But just looking for just more detail on what exactly you guys are doing together and what the economics are for Magnite? Thank you.

Yes. Sure, Nick. So in some ways, it's unchanged, right? The broadcasters that are all FreeWheel clients have always liked working with us in our programmatic capabilities, whether that's our serving functionality, our targeting functionality, our demand facilitation functionality. And to be honest, it wasn't always the easiest lift for these broadcasters to do it because they have a separate ad server over here. They're using programmatic over here, which is Magnite. The two systems are talking to each other. It makes extra work for the ops people at these broadcasters. So a combination of us talking to FreeWheel, the broadcasters talking to FreeWheel. This announcement was a technical integration that makes it quite seamless to use Magnite for programmatic capabilities and use the FreeWheel server for ad-serving capabilities, having them talk to each other in real time so that you're making the most efficient use of your programmatic and direct-sold inventory. So we think this is a breakthrough partnership, and we really respect the FreeWheel folks, and I think this meets the needs of our programmatic partners in the broadcast space.

Great. Much appreciate it. Thank you.

The next question comes from Dan Kurnos from the Benchmark Company. Please go ahead.

Thank you. Good afternoon. Michael, I’d like to rephrase our discussion today, but I’m a bit concerned about how investors might react. You've consistently emphasized the importance of a variable take rate. It appears that you have strategies in place to enhance value, especially with the broadcasters mentioned earlier, while you work on new initiatives. However, please correct me if I'm mistaken. To put it simply, even if you provide a basic service for them at a low single-digit take rate instead of managed services, the ad server could still lead to significantly high-margin growth if scaled up. Am I understanding this correctly, or is there another perspective I should consider?

No, Dan, you made an excellent point. It's true that this isn't our highest margin product within our CTV offerings. However, if the scenario unfolded where $60 billion of linear ad dollars transitioned to CTV, the majority would flow to Magnite, primarily through programmatic sales by the broadcasters. That would be beneficial for us. Currently, we believe the imbalance we are experiencing stems from broadcasters and certain services changing their strategies regarding programmatic sales. Previously, they were not very engaged with it, but as the market softens, buyers are increasingly preferring programmatic over direct purchases. This shift brings a surge of new inventory, particularly high-value Disney inventory, which translates to increase in ad spending. Although we're navigating this imbalance, I believe you are correct that even if we don't achieve upsells and the market stabilizes at a 25% growth rate, we would still be in a good position. We think we are at the lowest point of transaction rates due to recent developments, and we anticipate that expansion will occur over time.

Got it. That's helpful. To follow up on that question, now that the integration on the video side is complete, you've mentioned some new products you're planning to launch. Can you help us understand if you believe this is a good time to invest and redeploy the assets you have? We would like to know your willingness to share potential margins or invest a bit more aggressively, so that when the market improves, you are ready to take advantage of the opportunities.

Yes. Dan, I think you killed it there. I think that you're exactly right. This is very similar to DV+. In the DV+ business, we had OLV inventory running on the legacy SpotX platform, the legacy Telaria platform, and the legacy Rubicon platform. We brought it all together that freed up bandwidth from people having operated three platforms to one. It freed up creativity. It freed up innovation. We think we're going through that phase right now that we've sunset one of our platforms, and it's all in streaming and CTV. So I don't even think the use case is, oh, now it's time to double down and bring on 100 people because we just read up 100 people. These poor people were working night and day consolidating platforms, and now their 100% bandwidth is focused on innovating on streaming. I think we're just incredibly well positioned. If the use case presented itself, where we could collapse time by bringing on more resources and investing more for the long-term revenue growth of CTV, obviously, we look at that every day. But I really think the story here is with our existing assets, we just gained like 50 FTEs because these poor people were doing two jobs.

Got it. Thanks for all the color, Michael. Really appreciate it.

Thanks, Dan. The next question comes from Matthew Thornton from Truist Securities. Please go ahead.

Okay. Good afternoon, guys. Two, if I could, can you walk us through what you're assuming for the back half of the year in terms of services across F&E as well as on verticals? Just more color on what you're thinking and assuming the guidance for 3Q and 4Q in CTV. You talk about a bit from maybe RTB to program in the short term orders in the short term. Are you also seeing a shift from maybe smaller tail players to blue-chip, a handful of blue-chip publishers as well? So I wonder if that exacerbates it as well. Any thoughts or color there would be helpful. Thank you.

Yes, sure, Matt. You were a little garbled, but I think I got it. So back half of the year, I think that some of the disruption in managed service truly are kind of pausing campaigns that should reignite in Q4, particularly in verticals of autos. What we're hearing from regional auto dealers is they're still troubled by lack of supply. It's not as bad as it was at the height of the pandemic, but they're still not where they need to be. And whether that's battery shortages or chip shortages, I think that on the lot, they don't have what they want to sell, but they feel more emboldened by model launches coming later. Media and entertainment might be a little bit slower to rebound. A lot of it has to do with new production. I think you're seeing tune in for libraries. I see it myself. People are now advertising existing shows that are deep in the library to get people to watch them. But I don't think we see that whoosh of new media and entertainment spend if there's not new production, and so that's kind of a question mark. As to any other verticals, David, do you have any opinion or insight into anything that we might see in the second half of the year from a trend line?

No, I think you covered the big ones.

Okay. Yes, definitely, Matt. We mentioned it earlier. It's important to note that our spending on the CTV platform cannot grow significantly without some level of cannibalization. If spending is increasing at a rate that outpaces net revenue, it cannot all be from new investments. Some of that spending must have previously gone to publishers with higher take rates and those who relied more on open auction, but have since transitioned to premium publisher-sold programmatic deals. That's the shift we've observed. Additionally, new investments are increasingly favoring this group of publishers. We believe that if spending increases to around 20% to 25% as some analysts predict in a normal market, everything will benefit, and we will have successfully advanced our efforts to provide higher value services to the primary service broadcaster TV OEMs.

The next question comes from Dan Day from B. Riley Securities. Please go ahead.

Hey, guys. Thanks for taking the question. Just any potential friction in the third quarter guide from MediaMath going down and that spend getting reallocated between DSPs. I asked because like my understanding is there's not much of a player in buying CTV. So I assume if anything, it would be more on the DSP side. But is that a challenge for you in the third quarter right now?

No, Dan, most of that spend was DV+, as you point out. And from our tracking of it, it's found a home with some rare exceptions because private deals take a while to be activated. But by and large, that spend works its way back into the ecosystem, but all on the DV+ platform.

Great. Other than a cash hit, it was kind of sadly a nothing burger.

Can you elaborate on what gives you the confidence to provide a conservative forecast for fourth quarter CTV revenue? We haven't seen others willing to make predictions beyond the current quarter. You mentioned it being nearly flat year-over-year for the fourth quarter for CTV. Are you having discussions with advertisers and publishers that provide any visibility? What is driving your commentary for the fourth quarter?

Yes. I would say, first of all, a very cautious approach, but we have spent a lot of time with our sales team getting feedback for the managed service team. Michael mentioned that some of those campaigns appeared to be paused rather than completely taken off the table. We think that it's sort of, as our sales team described earlier, an air pocket for a few months here. And so we are comfortable with some recovery on the managed service front. The rest of the business, as Michael mentioned, from an ad spend share perspective, is actually very healthy, and so we do have continued growth on that front. And so even at these reduced take rates, it's still, as we move forward, we believe, provide some momentum and lift for us to at least return to those levels.

Okay. Thanks, guys.

Thanks.

The next question comes from Tim Nollen from Macquarie. Please go ahead.

All right. Thanks very much. Obviously, CTV is the topic of the day. So I've got another related question to this, which is there's been more discussion recently over issues of transparency and measurement and things in CTV. And I wonder if that may be factoring in, in any way to the network groups maybe opting to go into direct sold means instead of using more programmatic tools. I just wonder if there's any correlation of that at all. And if so, what you can do to help improve that? And then one point of clarification. I think we're talking mostly or exclusively US CTV. You did mention international is growing double the rate. So I just wonder if there's any of this sort of dynamic that's going on now in the US if that's also happening outside the US.

Yes, those are excellent questions. I believe that when budgets are tight, marketers often prefer to rely on familiar options and safe choices, leading to less experimentation. This tendency is less about fraud or lack of transparency and more about seeking a secure option in a tumultuous environment. Our platform avoids these issues because we work directly with publishers and don't engage with aggregators in the CTV space. This allows us to have direct relationships with each publisher, ensuring that visibility and fraud concerns are nonexistent at our level. Therefore, I don’t think these factors have affected us on a micro level, although they may have more influence on a macro scale. Internationally, our presence is primarily on DV+, and it makes sense that our growth in those regions leads to better performance compared to peers. We have a significant presence in the Australian CTV market, primarily through broadcasters. The trends we see here are similar in that market; top-tier broadcasters prefer to sell directly, so this isn’t an issue unique to North America.

Okay. Great. Thanks very much.

The next question comes from Shweta Khajuria from Evercore. ISI. Please go ahead. Looks like his line is not coming through. This concludes our question-and-answer session. I would like to turn the conference back over to Michael Barrett, CEO, for any closing remarks.

Thank you, Jason. Yes, I'd like to thank the Magnite team for the diligent effort required to report another strong quarter. We are thrilled to complete our CTV platform integration. I would particularly like to thank the many internal teams responsible for completing the migration to the new CTV platform, which required significant additional work and attention to deliver a smooth transition for our partners. So thank you so much. We look forward to speaking with many of you at our upcoming investor events. RBC will host our post Q2 virtual meetings tomorrow. Nick will be participating in a virtual IRO conference with Canabo on August 14th and in Mid-Atlantic marketing with Craig-Hallum on August 22nd. We will be marketing in New York on September 6th and attending the Benchmark Conference in New York on the 7th. We will participate in the Truist Virtual Summit on September 12th. Nick will be marketing in San Francisco with Truist on September 21st. We'll also be in London for marketing on September 26th. Thank you for joining and have a great evening.

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