Earnings Call Transcript - MGNI Q2 2020

Operator, Operator

Good afternoon, and welcome to the Magnite Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will 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, Head of Investor Relations. Please go ahead.

Nick Kormeluk, Head of Investor Relations

Thank you, operator, and good afternoon, everyone. Welcome to Magnite's second quarter 2020 earnings conference call following the merger of Rubicon Project and Telaria. As you may recall, the merger closed on April 1, 2020, and this quarter’s 10-Q will be the first quarter that includes the combined company results. The comparisons you will see in the 10-Q are listed as reported, as they include the combined financial results in the second quarter of 2020, but for 2019, the results do not include Telaria. During the course of this call, when we refer to results and associated year-over-year comparisons with the phrase 'as reported,' we are referring to the basis as reported in our 10-Q. When we make comments referring to pro forma comparisons, we are using combined company metrics for the prior year period in 2019, as the basis for comparison in order to provide additional detailed insights to business performance that management also uses to evaluate our business performance. As a reminder, this conference call is being recorded. Joining me on the call today are Michael Barrett, CEO; David Day, CFO; and Tom Kershaw, our CTO, for the Q&A session. I would like to point out that we have posted financial highlights slides to our Investor Relations website to accompany today’s presentation. Before we get started, I’ll 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 COVID-19 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, including with respect to the severity and duration of the COVID-19 pandemic. A discussion of these and other risks, uncertainties and assumptions is set forth in the company’s period reports filed with the SEC, including our 2019 Annual Report on Form 10-K and subsequent filings, and including our 10-Q for the second quarter of 2020. We undertake no obligation to update forward-looking statements or relevant risks. Our comments here today will include non-GAAP financial measures. 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. We define cash flow as adjusted EBITDA less capital expenditures, which excludes changes in working capital. 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.

Michael Barrett, CEO

Thank you, Nick. Before we get started, I want to take a moment to recognize that this is our first earnings call as Magnite, the leading CTV and full-service omni-channel SSP. When we intended to merge in December, we knew that our combined company deserved a new name, one that would capture the culture and drive of both companies, project our strength as a global leader, position us as the alternative to the walled gardens, and highlight our ambition to unite the industry through innovation and transparency. The Magnite brand embodies all of that. Since we launched it in June, the excitement from our clients and partners has been phenomenal. I’d like to review the highlights of our first full quarter since completing the merger. We’ve seen a strong improvement in our business trends since our last call and are seeing very positive momentum since the start of Q3. But before we get to the current trends, which you’ll be most interested in, I’ll give a brief overview of the second quarter 2020 results. Q2 revenue was $4.3 million, reflecting year-over-year revenue growth of 12% versus as reported Rubicon Project-only revenue of $37.9 million in Q2 2019. CTV revenue was $7.9 million in Q2, which represented an increase of 12% year-over-year. And Q2 adjusted EBITDA loss was $3.5 million, much better than we originally expected. Since our last earnings call, we have observed a steadily improving revenue recovery. We noted in our last earnings call that we had observed revenue stabilizing in April and early May at a level of roughly down 30% year-over-year on a pro forma basis. Revenue in May and June continued to recover with June down only 17% year-over-year on a pro forma basis, resulting in a 24% year-over-year decline for the full quarter. Since the start of this quarter, we have observed even greater recovery with Q3 revenue quarter-to-date, nearly breakeven year-over-year on a pro forma basis. Since the start of Q3, we have observed even more rapid acceleration in CTV revenue growth currently running at roughly 50% up year-over-year. I’d like to provide some color on where we are seeing signs of recovery. The top three performing ad sectors in Q3 to date are technology, home and garden, and health and fitness. The lowest performing sectors are travel, retail, and automotive. From a global regional perspective, we’ve continued to see significant APAC outperformance relative to Americas and EMEA. Q3 quarter-to-date, APAC is growing in the high teens on a pro forma year-over-year basis, while both the Americas and EMEA are close to returning to flat pro forma year-over-year growth. We’ve conducted some additional work looking at ad spend trends in regions of the U.S. impacted by coronavirus resurgence. Initially, we saw ad spend slow in regions where hotspots were concentrated in April and May. However, when new hotspots emerged in July, there has not been a corresponding slowdown in spend in these areas. We’ve, in fact, seen continued sequential growth in ad spend in all geographic areas, led by the strongest sectors we mentioned earlier. Overall, as we step back and look at the main drivers of ad spend improvement, several trends emerge: increased marketer confidence in the second half of 2020, supply path optimization, the return of live sports, an uptick in political ad spend, and lastly, ad spend shift from marketers participating in ad boycotts of social sites. On the supply path optimization front, we have seen a flight to quality benefiting Magnite. DSPs, agencies, and publishers are narrowing their programmatic partners to a handful of full-service omni-channel players with sufficient resources to weather the COVID-impacted economy. We expect this trend to accelerate in the coming quarters and are also seeing a pickup in ad spend as a result of larger DSPs consolidating spend with us away from smaller industry players. Regarding sports, we’ve seen the return of basketball, baseball, soccer, hockey, and golf among others, with strong ad spend deployment against programming. We participate directly in the live sports market with CTV spend with Hulu, Sling, Pluto, Fox, and Fubo, not to mention ESPN across all of their formats. Political spend is starting to grow with less than four months until the November election, leading to an earlier spending surge, primarily impacting our CTV business as there will be more mailing compared to live voting this year. Lastly, we’ve been tracking spending of many large brands that made public statements about their social media boycotts. Since the boycott began, we’ve seen a pickup in their specific spending that has continued into early August. I’ll now shift gears to CTV. The CTV business is an important focus for us, as we provide an industry-leading CTV monetization platform to many of the largest players in the market. In Q2 2020, CTV represented 19% of our total revenue. The CTV market continues to accelerate, and the largest industry participants, including Hulu, Disney, Roku, Peacock, Sling, and Pluto, have seen strong subscriber growth, increased consumer viewing time, and solid ad spend growth. We are seeing the same positive trends in our CTV business, which we define as digital content viewed on traditional TV screens. Specifically, we have seen a significant increase in CTV ad inventory, driven by consumers watching more CTV content during the pandemic and by larger secular trends. These trends include consumers cord-cutting or canceling satellite subscriptions to save money, consumer preference for lower-cost ad-supported CTV content, and marketers shifting dollars to CTV because of the audience and its premium content. Together, these trends are driving continued solid performance of our CTV business, which is now growing approximately 50% year-over-year since the start of Q3. We gathered some additional insights on CTV industry trends and predictions that demonstrate the strength of this growing market. Cord-cutting is accelerating. By 2024, traditional linear pay TV subscribers are expected to decline by 27 million, or 24%, to less than half of all occupied U.S. households, according to research from Moffett Nathanson. The combination of high prices as well as loss of live sports contributed to an overall drop of 1.8 million pay TV subscribers in Q1, translating to an annual rate of decline of 7.6%, the fastest shrinkage of the sector on record, which we expect to further accelerate due to the pandemic in Q2. AVOD platforms are growing; downloads of the Pluto app more than tripled to 3 million in April from 900,000 in January, according to Sensor Tower, a market researcher. Similarly, Sennheiser jumped 30% to 4 million over the same period, while VooDoo was up 55% to 673,000. Finally, on the demand side, agencies plan to increase their OTT CTV spending by 46% compared to 2019, while brands expect to boost budgets by 32%, according to IAB in their June 2020 report. As these and other trends continue to unfold, we have seen business with our largest partners grow across the board, including players like Hulu, Sling, Pluto, DISH, Tubi, as well as major content providers like Discovery, Fox, and NBC. We believe the future is bright for connected TV; Magnite and our clients will continue to benefit from our industry-leading technology and service as the CTV market evolves. I’d like to change topics and talk a little bit about privacy. There continues to be a lot of attention in our industry on privacy initiatives from both regulators and industry participants concerning the collection and use of individual user data. For instance, Google’s recent decision to eliminate the use of third-party cookies and Apple’s recent announcement requiring user opt-in for IDFA tracking. First, we fully support consumer privacy initiatives and believe a privacy-first model is good for the health of our industry and our business. The new privacy paradigm is shifting responsibility for identification more squarely to publishers that have first-party relationships with their consumers and are better positioned to gain consent, rather than a third-party that is operating in the background. This transforms the value a publisher has with their users, and as the largest independent SSP, we are well positioned to help them capitalize on this industry shift. Second, while we expect there to be some short-term disruption in the ecosystem as participants adjust to the absence of certain identifiers, we do not expect these changes to cause meaningful reductions in overall ad spend or revenue. We do not believe budgets will generally be reduced, and we believe that spending will continue to flow to high-value users across a mix of mobile, desktop, and CTV. It may mean more volume trading at lower CPMs in some cases, but ad budgets themselves should continue to be deployed, and there is no lack of inventory. Furthermore, CTV ad spend has never been dependent on third-party cookies or mobile identifiers like IDFA, so there should be little to no impact on CTV growth as the industry works towards the new targeting paradigm. In fact, more spending will likely shift to CTV as our addressability efforts continue to roll out and allow buyers to find their audiences on these platforms. Third, we are actively participating in this industry shift to ensure that we enable our publishers to realize value for their first-party data without sacrificing the security and control over that data. Some of the initiatives we are undertaking include helping publishers pass through first-party attributes, such as demographics, interests, and subscriber types in the bid request, which allows buyers to incorporate this publisher information into their buys; packaging publisher segments into deal IDs, which allows buyers to purchase segments rather than identifiers; augmenting buyer segments with lookalike segments created from first-party publisher data; supporting the SK ad network standard, which was released by Apple and augmented by IAB specifications to allow for attribution on Apple devices; and lastly, beta testing our new vendor marketplace, which allows sellers to package their data and extend that to additional publisher inventory. This is live with some accounts today. Beyond publisher first-party data, we are also leading efforts with prebid.org, which has broad industry support and is an open community-driven first-party identity model. We are also heavily participating in the Google Chrome privacy project, also referred to as Google Privacy Sandbox. Let's provide an update on demand manager, where we continue to see strong adoption by leading publishers. At the end of Q2, we had 172 live contracts compared to 156 at the end of Q1 and 86 at year-end. Revenue continues to grow, and we continue to meet or exceed our contract signing targets for the year, which bodes well for the future as publishers look to decrease costs and optimize revenue. The key growth drivers for our business remain the same. We are focused on continuing to invest in CTV as our fastest growth area, driving revenue in the combined non-CTV video businesses to deliver growth, accelerating supply path optimization as a transparent independent omni-channel partner, growing our publisher-focused prebid offering with demand manager, and lastly, playing a key supporting role in the changing landscape and identity solutions. I am proud of the efforts our team has undertaken to be productive and make significant strides to recover and further position us for success going forward. The merger of our two companies is a major strategic milestone to position us for the future, and I’m even more optimistic now than ever. With that, I will hand it over to David, who will provide greater detail regarding our Q2 financial performance, cost reductions, and expectations. David?

David Day, CFO

Great. Thanks, Michael. As Michael noted, we’re very pleased with the significantly improving revenue trends since our Q1 call on June 18. As Michael pointed out, Q3 revenue levels on a pro forma basis are nearing breakeven year-over-year quarter-to-date, which is up approximately 40% on an as-reported basis. Most importantly, CTV has resumed a very strong growth trajectory, currently growing at roughly 50% year-over-year, quarter-to-date. The Q2 2020 year-over-year increase in as reported revenue was 12%, attributable to the Telaria merger and offset, of course, by the negative impact of COVID-19. As reported, Q2 2020 revenue declined 10% in mobile and 8% in desktop. CTV was entirely additive due to revenue from the Telaria merger. On a pro forma basis, Q2 2020 revenue for mobile declined 32%, desktop declined 26%, and CTV grew 12%. Revenue mix for Q2 2020 was 19% CTV, 45% mobile, and 36% desktop. Operating expenses, which in our case includes cost of revenue, for the second quarter of 2020 were $82.9 million versus $46.5 million in the same period a year ago. Increases were driven by the inclusion of Telaria expenses, $12.5 million of non-recurring merger and merger-related restructuring expenses, and the purchase accounting impact of approximately $7 million in non-cash intangible asset amortization. On an adjusted EBITDA basis, operating expenses, including cost of revenue for the second quarter were $45.8 million as compared to $33.5 million in Q2 2019. This was below the $48 million to $49 million in total adjusted EBITDA operating expenses we originally expected, driven primarily by additional savings and temporary cost reduction efforts, including the deferral of some non-time sensitive projects. Our GAAP-based gross margin for the second quarter was 49%. Gross margin is lower due to the impact of COVID-19 on our revenue and increased non-cash intangible amortization resulting from Telaria purchase accounting. One-time deal and merger-related expenses in Q2 were approximately $12.5 million and are excluded from adjusted EBITDA. Deal and merger-related expenses in the quarter were comprised of $6.8 million in banking, legal, and professional service fees and $5.7 million in personnel-related expenses, primarily severance. The net loss was $39.1 million in the second quarter of 2020, compared to a net loss of $8.3 million in the second quarter of 2019. As I mentioned earlier, the adjusted EBITDA loss was $3.5 million, which is better than originally estimated due to improving business conditions and adjusted EBITDA operating expenses coming in lower than our initial expectations. GAAP loss per share was $0.36 for the second quarter of 2020, compared to a GAAP loss per share of $0.16 in the same period in 2019. Non-GAAP loss per share in the second quarter of 2020 was $0.10 compared to a non-GAAP loss per share of $0.06 for the same period in 2019. There were 108.5 million weighted average, basic and diluted shares outstanding for the second quarter of 2020. There would have been an additional 5.8 million shares included in the diluted share count had the company posted net income versus a net loss, consistent with anti-dilutive accounting rules. For purposes of estimating the full year EPS calculations, also keep in mind the impact of the April 1, 2020 closing date and the lower share count to be used for Q1. Capital expenditures, including purchases of property and equipment, as well as capitalized internal-use software development costs, were $3.3 million for the second quarter of 2020, in line with our guidance. We closed the second quarter with $107 million in cash, an increase of $36 million from the $71 million balance at the end of Q1. The cash increase was driven primarily by the addition of Telaria’s cash to our balance sheet, offset by deal-related cash usage of approximately $17 million and operating cash burn of approximately $7 million, which includes adjusted EBITDA loss and CapEx for the quarter, offset by favorable working capital impacts. As a reminder, our cash balances can swing disproportionately both up and down compared to the run rate of our business since we collect and pay the gross amount of flow through to our sellers, while we record revenue on a net basis. Note that, as part of the purchase accounting related to the merger, we recorded intangible assets with a basis of roughly $103 million and goodwill of $150 million. The intangible assets consisted primarily of acquired technology of $58 million, which will be amortized over five years in cost of revenue, and $36 million for customer relationships, which will be amortized over 2.5 years in sales and marketing. We continue to expect total annual run rate cost reductions from our cost synergies to exceed $20 million. At this time, and based on current economic and business recovery trends, we’re not planning any headcount-related cost actions. I will now share some indications for our third quarter. We expect revenue for the third quarter to be in the range of $51 million to $55 million. These revenue expectations are based on the level of year-over-year revenue growth that we are currently experiencing, which is nearly flat year-over-year on a pro forma basis. It is, of course, challenging to estimate how revenue will respond in these still uncertain times, although we are cautiously optimistic that current trends will continue. We expect that adjusted EBITDA operating expenses in Q3, including cost of revenue, will be approximately $49 million to $50 million. As a result, we expect to be adjusted EBITDA positive in Q3. We continue to expect that CapEx for the full year 2020 will be roughly $22 million. We expect cash balances to be lower at the end of Q3 than the potential Q3 decrease from adjusted EBITDA less CapEx would normally indicate as a result of the benefit from working capital in Q2 that will likely normalize in Q3. We are very pleased to report on results and trends that are much improved compared to our Q1 call. The efforts we’ve undertaken position us very well to benefit from the continued improvement of economic conditions and to weather any additional pressures should they arise. We will continue to be extremely prudent with respect to costs while making critically important investments in the future growth of CTV, demand manager, and in our tech stack efficiency. With that, let’s open the line for Q&A.

Operator, Operator

The first question is from Lee Krowl with B. Riley FBR. Please go ahead.

Lee Krowl, Analyst

Great. Thanks for taking my questions and nice work on the quarter and quarter-to-date trends. I wanted to start off just kind of on the quarter-to-date trends; you highlighted a few sectors that were performing well, as well as a few sector that were performing poorly due to the macro backdrop. Just curious what kind of the working assumption is for the impacted sectors to the downside and Q3? And then also, I know you kind of defended the IDFA impact on the business. Is there any impact from revenue standpoint, or do you believe that you can steer clear of any impact in the second half?

Michael Barrett, CEO

Yes. Great questions. David, do you want to take the trends to date with the categories question?

David Day, CFO

Yes. I’m sorry, I don’t fully follow that. So I apologize. So Lee, can you just expand on that question?

Lee Krowl, Analyst

Yes. I guess, is there an assumption that those negative sectors improve in Q3 or do they kind of trend similar to Q2?

David Day, CFO

Yes. We’re basing our guidance on what we’re observing today. So we’re not assuming significant upsides in those lower performers at this point in time. I’m not saying that’s what will happen, but that’s what we’re basing our guidance on.

Michael Barrett, CEO

Yes. And I can—Lee, I can hit the IDFA and then also would love to throw that to Tom Kershaw as well, our CTO is on the call, who’s far more expert at the impacts of IDFA perhaps not monetarily, but from a technical standpoint. But yes, we feel comfortable Lee, in that we aren’t terribly exposed or have outsized exposure to any deprecation of IDFA. And of course, it’s all a guessing game as to how money is spent, and whether or not top apps can get consumer permission. And so that all has to play itself out. But generally speaking, we think that the inventory is broad and diverse enough, and the spend is broad and diverse enough that what we’ve seen on platforms—whether it’s GDPR or any of the other Apple initiatives, like Intelligent Tracking Prevention, the deprecation of cookies in the Safari browser that if there’s a momentary imbalance, it’s usually in CPMs, not ad budgets. And there tend to be enough inventory where if you sold one unit at a dollar, selling two units at $0.50, I’m not trying to minimize the impact that may have on specific publishers, but for our platform, generally speaking, we deliver the budgets, and we haven’t seen the budgets cut. I don’t know, Tom, if you have anything further to add to that.

Tom Kershaw, CTO

Yes, I totally agree with that. I think the thing to note is this is going to be a phased rollout; iOS 14 rolls out in the middle of September. And it’s not going to be adopted on day one. It will be adopted gradually by customers over time. The same way, the opt-in process for apps is the opt-in to IDFA tracking is per app. And that will be rolled out again over a period of time. So you won’t see a one-time impact; we’ll see a gradual rollout of this. Given the introduction of the SK ad network standard for attribution, we feel that spend will still flow to iOS devices. Mobile buyers have been in close contact with us on what’s necessary to maintain spend. So I think there will be some impacts here, but given the phased rollout, our experience means it makes us comfortable that we’ll be able to manage this transition.

Lee Krowl, Analyst

Got it. That was very helpful. I think most investors just breathed a sigh of relief there. Thanks, Tom. The second question I had just wanted to focus on the SPO share gains. I know we’ve talked about it several times in the past. It’s always kind of been on the horizon, but it seems like the tone in this call has changed. It really seems like perhaps it is starting to materialize. I guess, what is the catalyst for the change in tone? What is the sort of trajectory for SPO from here going forward?

Michael Barrett, CEO

Yes, I’ll jump on that. And maybe David wants to chime in. Lee, but yes, there’s no question we’re seeing an average rebounding this quarter and the projections at the guide that we gave for Q3. If you look across the industry and look at the CPMs that we have trending on our platform, in the volume, it all seems to be beating on the industry average with this COVID tamped down. So through the multiple initiatives that we’ve done over the last two years to the strengthening of the company’s profile with the merger with Telaria, the strength of the balance sheet to assure buyers and sellers that we’re not going anywhere with our cash balance. There’s definitely been an uptick; we think, in this slate to quality. And I also believe that many of the initiatives—they’re not bold. You’d like SPO to be one day you wake up and four platforms go out of business and it’s tangible. And everyone recognizes that SPO is upon us. This is— it’s a gradual game. And we’ve been seeing a gradual shifting, a gradual strengthening of the Magnite platform. There’s no question; there are countless examples of agencies or agency partners or DSP partners that we can point to where we’re getting shifted spend towards the platform.

Lee Krowl, Analyst

Got it. Thank you for taking my questions, guys.

Michael Barrett, CEO

Thanks, Lee.

Operator, Operator

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

Jason Kreyer, Analyst

Hey, guys. Good afternoon. Good to hear the improvement of trends. Just wondering to start on connected TV. Michael, can you give any details on the cadence that you saw over the course of the quarter and, in particular, any changes in the volume of CTV being purchased programmatically versus direct?

Michael Barrett, CEO

Yes. So we see what we can see, right, Jason, so it’s not completely a macro insight, but what we have seen is what intuitively folks predicted and others have commented upon. And that is CTV was not immune from the pause in March. It was a drastic decline in growth rates, but it was still growing. Then we saw it as one of the fastest media types to recover; it outpaced the gains we saw in the rest of the platform. Those trends have even accelerated, as we pointed out with the guidance for Q3. We know that it’s an increase in inventory that we are seeing, not partially because of consumer behavior but also because of how difficult it is in a world without upfront, in a world that’s been disrupted from direct selling. The idea that you can monetize these added impressions in the surge in viewership without having commercial teams directly selling during this backdrop, we really definitely benefited from that trend. I think some of that’s here to stay. The concern that programmatic would drag down CPMs, the concern that programmatic would take away the control of inventory from leading players— you can just sense it abating, and there’s this new norm that it’s going to be front and center with their distribution strategies and their sales strategies, and it’s now going to play a very, very important role, pulled forward by I would guess about eight or so quarters in terms of what it would normally be the development cycle.

Jason Kreyer, Analyst

Perfect. Thank you. You made a couple of comments that stood out to me earlier in regards to the privacy initiatives—two in particular; I wanted to see if you could just give a little bit more color on. But one was just the establishment of publisher segments, it seems like almost kind of creating better capabilities to target individual groups. Then the second on launching a vendor marketplace. So any more color on those two would be great.

Michael Barrett, CEO

Sure. Tom, you want to jump on this?

Tom Kershaw, CTO

Sure. So publisher segments—publishers leveraging first-party data for the creation of segments is something that the industry has been doing for a while. We’ve been using publisher data in the form of key value pairs to buyers for a long time. But they weren’t really using that data actively, and what’s shifted now with this change in identity is that we’re using deals and deal IDs to package up segments for buyers, so they can buy their audiences without having to process the IDs themselves. I think what this is going to represent is a shift of control and responsibility to the sell side, to the publisher community. Those publishers are going to need to federate, because a lot of them are too small to scale on their own. So these groups of publishers, using tools like Prebid, will be able to create standardized audiences for the buy side—it’s a clear trend we’re seeing, and we’re super excited about it. The vendor marketplace is a new innovation that allows us to plug third-party data into our platform. So say a third-party provider has a bunch of information for segment creation or targeting. Taking that to our platform will collect the money from the buyer on their behalf or from the seller and pass that on to them seamlessly, so they don’t need to have contracts with thousands of publishers. What this helps publishers do is extend their first-party data to other publishers. We think there’s going to be a data marketplace, as well as a format marketplace, that will be enabled as we move towards this first-party environment.

Jason Kreyer, Analyst

Okay. Since Tom’s already got the floor, I’m going to throw one more question out to you. Over the course of the quarter, I guess early in the quarter, we saw one of the larger DSPs starting to put some regulations out there to limit supply paths, and as we’ve gone through checks, we’ve heard that that’s been a big tailwind for Prebid, and they’ve seen better adoption. Just wondering if you can connect some dots for us. Do you see that as a benefit to Magnite with Prebid gaining market share, or what’s kind of the read-through?

Tom Kershaw, CTO

Well, yes, I have to see it pretty positively for Magnite that Prebid is gaining market share. It’s a phenomenal testament to Prebid's success. When publishers were asked a couple of months ago to pick between Google, A9, and Prebid, they overwhelmingly picked Prebid as their preferred methodology for connecting to the rest of the world. That’s a testament to the open-source nature and the control the publishers have. We definitely did see that trend. We see continued movement of inventory into Prebid. The next phase of this is for that to extend to mobile and to CTV. Certainly, one of the big trends in the first half of the year was the continued acceleration of Prebid as the preferred method for most publishers to connect to demand sources.

Jason Kreyer, Analyst

All right. Well, thanks a lot for all the color, guys. Tom, appreciate you joining the call. Thank you.

Tom Kershaw, CTO

Thanks, Jason.

Operator, Operator

The next question is from Matt Thornton with Truist Securities. Please go ahead.

Matt Thornton, Analyst

Hey, guys. Michael, David, Nick, Tom, thanks for the question. Maybe first, just coming back to supply path optimization. I guess, maybe this one’s from Michael. Did you see without getting into specifics, but are you starting to see in the second quarter, did you see developments that just gave you proof points that this is starting to play out in a way that favors Magnite? Meaning, obviously, you guys just closed this merger. Did you see a buyer or buyers come to the table and prune their supplier cohorts in favor of Magnite because of the steps you guys have taken? I’m just curious, without specifics, if you’ve seen some of the evidence start to come to fruition there. And then just secondly, on maybe on the revenue side, we’ve talked a little bit about some of the cost synergies that you guys reiterated during the deal, but I’m just curious if you’ve started to see again evidence of some of the revenue synergies we’ve talked about in the past, starting to come through as you start to cross-sell the two different customer bases and the different geographic footprints. Any color there would be helpful. Thanks, guys.

Michael Barrett, CEO

Yes, Matt. I’ll jump on that. So yes, the big vision is the promise of Magnite bringing together the great CTV capabilities of Telaria and the omni-channel capability of Rubicon. We see validation of that play on a daily basis, but to be honest, that’s a longer-term delivery in terms of working with publishers on demand manager products or video management platform products and more of a software. We’ve always seen this— the great opportunity that Mark and I saw when we got together wasn’t just that we’d be able to provide demand to publishers for all media types—that’s obviously important—but the idea was to take this to the next level, and being able to combine some of the initiatives they’ve done with Hulu with our demand manager project, our product, bring them all together and have this one platform, one software-first approach. That obviously takes time. I’ll be honest; it isn’t helped to be in the office with your colleagues and doing all the normal stuff you would do under business. But we are terribly encouraged. The feedback has been fabulous from clients, and it directly correlates to the fruition of the deal promise. We definitely saw the initial pause and spend that occurred in the concern from publishers about the viability of certain sources and platforms. Given the combined strength of the two companies and the combined balance sheet, there was no question that played a significant role in this shift in spend in the calling of partners among leading publishers. As it relates to revenue synergies, I think it dovetails into the first part of the answer to the first question. Those are definitely longer-term plays. We’ll be shouting them from the mountain top as they start to come to fruition. But right now, given what we’re doing, we’re just trying to excel in the CTV game, excel in the omni-channel game, and work behind the scenes to make it one cohesive pitch that we’ll be able to deliver on the ultimate proud. I don’t know if you have anything to add, David.

David Day, CFO

I think you got it.

Matt Thornton, Analyst

Maybe just one quick follow-up, and then I’ll jump back in the queue. I guess when you think about the landscape over time, obviously you’ve come together with Telaria, which was a very pragmatic move. I’m curious as we continue to see kind of fallout here, if you think there will be more opportunity for you guys to be a consolidator of the supply side. I know the choice being or given, then maybe it’s a consolidation of the supply side didn’t make sense, but obviously the world is changing. I’m curious about your views on that looking forward.

Michael Barrett, CEO

Yes, Matt, I don’t think they’ve changed. I think we’re bullish on the consolidation. We look at deals constantly, and it took us so long to deal it to our idea. The market timing was right for both companies, and we were both winning. We don’t want to do a merger or a rollout or an acquisition just for the sake of it for financial engineering. Any company we look at has to be playing often in a strategic and valuable piece of the ecosystem and has a plethora of options themselves because they’re doing well, but buy into the overall vision of this combined entity and running the TV omni-channel SSP with a focus on CTV. We’re very open to a lot of things but highly selective and still don’t buy the thesis of trying to revolve a bunch of general exchanges that were born in the desktop banner era and trying to see if that adds up to more than the sum of the parts.

Matt Thornton, Analyst

Great. Thanks, guys. Appreciate it.

Operator, Operator

The next question is from Kyle Evans with Stephens. Please go ahead.

Unidentified Analyst, Analyst

Great. Thanks for taking my question. This is actually Michael on for Kyle. I know you talked about the number of live contracts increasing now to 172 for demand manager. Do you feel like you’re scaling to a user base and have a healthy environment to get to the original pre-COVID goal of $5 million in revenue? And just to tack onto that, are there any new competitive threats to demand manager outside of in-house development of pre-bid solutions that you’re seeing?

Michael Barrett, CEO

I’ll jump to the latter and let David handle the revenue projection piece of it, but no, I don’t think the landscape has changed much, Michael, and that was a—and thank you for the question. That was kind of the belief we had that our primary competitor in the demand manager space is going to be the free pre-bid product, and that has certainly played itself out. Why you see the acceleration is that pre-bid is growing in complexity, moving server to server. Publishers are starting to look hard at internal costs, realizing that by taking a company like ours with a managed service offering, it’s a very attractive economic proposition compared to trying to run it yourself. So I think that’s really what we’re seeing in terms of the uptick. As it relates to revenue and reaching the original $5 million goal, David, do we have a…

David Day, CFO

Yes, I’ll take that. Yes. I think there was well, first as he noted on the signups. What’s interesting is we’re also getting more interest from some of the larger players that we thought would have taken more time to gain this level of interest. Because of COVID and the impacts on their revenue and because they’re looking at their cost structure, we’ve definitely had positive progress on the signup side. From a revenue side, I think we’re not formally at the in our guidance, but there’s a big enough hole here that we don’t expect to hit those levels this year. Of course, we’ve still got a runway here the rest of the year, so things could take off even more of it. At this point, I don’t think we’re going to hit those levels, but I think we’re going to be better positioned for 2021.

Unidentified Analyst, Analyst

Got it. Thank you. And just one follow-up on the one-time deal and merger related payment that you guys were expecting to be $16 million. I know it came in a little bit below. Just wondering what the variance was here and if you expect any kind of more incremental expenses in Q3, or if that’s going to be a little bit cleaner going forward. Thanks.

David Day, CFO

Yes, and there was—the part of the—we were talking about cash outlays when we talked about that $16 million, and the cash outlay related to those deal expenses will actually be $17 million, just a tick up. It’s just a cork of some of the investment banking costs on the Telaria side that actually aren’t on the cost ledger, but they are on the cash flow ledger. We’re proceeding as expected with both the costs and cash outlays related to the deal costs. But yes, and then going forward, there’s a lot of noise in this quarter, and it should certainly normalize significantly next quarter.

Unidentified Analyst, Analyst

Got it. Thanks so much.

Operator, Operator

The next question is from Chris Sakai with Singular Research. Please go ahead.

Chris Sakai, Analyst

Hi everyone, can you—I know there was some weakness in the desktop and mobile channels. Can you just provide some color as to what were the main points of weakness there? And in the near future, how do you see these channels developing?

Michael Barrett, CEO

Why don’t you grab that, David?

David Day, CFO

Yes, I think the premise—I mean, obviously COVID has impacted across the business. The results on mobile and desktop, I think, are better than we anticipated. Certainly, even at the end of May for the quarter, we certainly did not anticipate the momentum that we have coming into July. I wouldn’t necessarily describe even though they’re down, that’s purely we see as COVID driven, and we think we’re well on our way to recovery as overall ad spend levels lift across the industry. As we get continued momentum on some of the things Michael talked about with continued SPO, and then in particular, as some of the sectors, some of the low-performing sectors do start to recover, for example, travel and retail—certainly not necessarily in the super near-term, but we believe they will come back, and those will help lift our desktop business as well.

Chris Sakai, Analyst

Okay, great. And then as far as the proportion of revenue from CTV by the end of the year, can you provide a reasonable estimate of how that revenue will compare to desktop and mobile?

David Day, CFO

Yes. We’re not providing any specific CTV revenue guidance going forward, but obviously with a 50% growth rate and a quicker trajectory, that 19% that we experienced in Q2 is mathematically going to grow. So we’re very bullish on that CTV business. The benefits we’re seeing are not just COVID-related, but sustainable for the longer term.

Chris Sakai, Analyst

Okay. Great, thanks.

Michael Barrett, CEO

Thank you, Chris.

David Day, CFO

Thanks.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Michael Barrett for any closing remarks.

Michael Barrett, CEO

Thank you, operator. As David mentioned in his closing remarks, we’re very pleased to deliver solid Q2 results and a view into the strengths we’ve seen so far in Q3. We are optimistic that these trends will continue and remain very excited about the long-term growth prospects of our business, especially CTV. None of this would be possible without the tireless efforts of every team member at Magnite. We closed our merger at the start of this quarter and have never had the opportunity to meet each other in person; we’ve had thousands of hours of Zoom meetings. The teams have bonded and not missed a beat. Don’t get me wrong. We all hope one day to return safely to our offices and resume a more regular business cadence. But if our team can put up these types of results under extraordinarily trying circumstances, I feel very bullish about the future of Magnite. Thank you all for joining us for our Q2 results call. We look forward to talking to many of you through virtual investor meetings in the coming weeks. Everyone, have a good evening.

Operator, Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.