Introduction
Magnite reported its second quarter 2024 earnings on Wednesday, August 7th. While the company showed steady growth, a closer examination of the numbers and market dynamics reveals that significant challenges lie ahead.
Revenue Numbers
For Q2 2024, Magnite reported revenue of $146.8 million net of traffic acquisition costs, marking a 9% increase compared to the same quarter last year. This growth represents a slight recovery from 2023’s slower pace, aligning with a broader industry trend where many companies have bounced back from a weak prior year. Management anticipates a 10% revenue expansion for the full year 2024, suggesting this growth rate may be sustainable through the end of the year.
The period of 2023 and 2024 has seen a normalization of the sky-high growth rates that Magnite and peers like PubMatic enjoyed when programmatic advertising spending surged in 2021 and exploded in 2022 during the COVID-19 pandemic. Before Covid, in 2019 and 2020, both Magnite and PubMatic closely tracked the speed of expansion for programmatic advertising at large. But when the heady Covid-years 2021 and 2022 hit, Magnite pulled ahead of PubMatic, likely because of its strong CTV offer. As a result, while in the pre-Covid 2019, Magnite’s net revenue was a little more than a third bigger than PubMatic’s, in 2023, it had become twice the size of its competitor.
Moreover, while Magnite managed to maintain a growth rate above that of the broader programmatic market, PubMatic’s growth lagged in 2023. (See below chart.)
Operational Income
Operational income has been a persistent challenge for Magnite. Ever since 2019, the company has never shown an income on an annual basis. It did manage to eke out a positive quarter a few times for Christmases. But that was as far as the thrill went, and the company failed to show a positive fourth quarter even in the exuberant 2022.
This low profitability underscores the difficulties management faces in balancing investment with profitability—a challenge not unique to Magnite. Companies must invest in product development, sales and marketing, and international expansion while striving to at least break even.
One of the inherent challenges for supply-side platforms (SSPs) like Magnite is the limited scope for product differentiation compared to demand-side platforms (DSPs). SSPs primarily aggregate and sell inventory, which limits their ability to add value. In contrast, DSPs have numerous opportunities to innovate across campaign planning, data management, and more. For SSPs, the risk then is to invest in product development without realizing significant sales increases.
While SSPs can consider going end-to-end by adding DSP services, it is generally easier for DSPs to incorporate SSP functionality than the reverse.
The good news is that Magnite has, for the first time, shown a profit in a second quarter, with $10 million in operational income. This could indicate a shift in management’s approach, potentially prioritizing profitability after seventeen years of losses for it and its predecessor, The Rubicon Project.
Performance vs. Guidance
Magnite’s net revenue of $146.8 million slightly exceeded its guidance, which forecast net revenue between $142 and $146 million. While the company’s ability to surpass its own projections is a positive sign for investors, the profit figures, though better than expected, still reflect the ongoing struggle to achieve consistent profitability.
Stock Price Impact
Following the earnings report, Magnite’s stock saw a modest 1% increase the next day, only to lose 3% in the following days compared to its pre-earnings close. This reflects the market’s mixed reaction to the earnings, where initial optimism was tempered by concerns about the company’s ability to sustain its momentum.
Revenue by Product Segment
Magnite tracks revenue across three product segments: CTV, Mobile, and Desktop. In sales and marketing, Mobile and Desktop are combined into a single product called Display & Video+ (DV+), providing insight into how these two segments contribute to DV+.
CTV has been Magnite’s primary growth engine in 2020 and 2021, driven by the surge in streaming video consumption during the pandemic. The timing was fortuitous, as Magnite had just introduced its CTV product in 2020, positioning it perfectly for the boom that followed. Consequently, CTV’s share of Magnite’s product portfolio soared from 0% in early 2020 to around 40% by the end of 2021.
This growth came to some extent at the expense of Mobile product share but more so, at that of Desktop, whose share declined from nearly 50% in early 2019 to just 20% by late 2023. While the decline in Desktop is not surprising, given its status as a legacy business in decline across the industry, the slowdown in CTV growth that we have seen in the past couple of years is more concerning. Despite a significant increase in U.S. CTV ad spend, Magnite’s CTV sales growth slowed dramatically in 2022 and slumped to just 2% growth in the challenging 2023.
However, there is some good news. In the first two quarters of 2024, CTV growth rebounded to 15%, a welcome turnaround, though still below the 20% growth I have forecast for 2024. The partnership with Netflix, announced in May, is a major milestone that could change the trajectory. As one of Netflix’s partners for programmatically selling CTV inventory, Magnite stands to benefit significantly, with potential contributions of $30 million to its top line by the end of 2025, equivalent to a 5% revenue bump, according to BofA Securities analyst Omar Dessouky. A similar deal with Roku, agreed upon in June, should also support CTV growth, though not to the same extent as the Netflix partnership.
In contrast, the Mobile segment has consistently outpaced U.S. mobile ad spend. Growth in the first half of 2024 was 11%, following 21% in 2023. While this may seem underwhelming, it still outperforms the broader mobile market, which is expected to grow more slowly than Magnite’s 11% this year.
Overall, Magnite has managed to grow nicely, even with a declining Desktop business and a CTV segment that could—and should—be performing better. However, growth needs to accelerate to support efforts to achieve consistent profitability and fund expansion in both product development (such as retail media) and international markets.
Retail Media Opportunity
Given the need for faster growth, it’s puzzling that retail media hasn’t received more attention from Magnite. The 2022 partnership with Kroger Precision Marketing (KPM) focuses on data sharing rather than aggregating inventory or offering a retail media platform. A recent partnership with Shopsense AI, while innovative, isn’t likely to drive significant retail media-related sales.
Retail media could be Magnite’s next big growth driver. Competitors like PubMatic and Index Exchange are already making strides in this area with dedicated products. Why isn’t Magnite doing the same?
Revenue by Geography
Another area of potential growth for Magnite is international markets, especially as programmatic CTV adoption expands globally. Currently, the company’s revenue remains heavily skewed towards the U.S., which accounted for 76% of total revenue in Q2 2024, with international markets contributing 24%. This regional distribution has remained relatively stable over the past few years, despite faster growth abroad lately compared to the U.S. However, the international business hasn’t grown quickly enough to increase its share of total revenue.
In contrast, PubMatic, a close competitor, has done a better job of diversifying its revenue, with 40% coming from non-U.S. markets.
Stock Price Review
Historically, Magnite’s stock price has underperformed compared to PubMatic’s, despite Magnite’s faster growth. This may be due to PubMatic’s better profitability, more diverse product offering, and greater geographic diversification.
Looking Ahead
The digital advertising landscape is becoming increasingly competitive, with new entrants and existing players like PubMatic encroaching on Magnite’s territory. Demand-side platforms (DSPs) like The Trade Desk are also bypassing SSPs like Magnite to work directly with publishers, cutting out the middleman. New entrants, in particular, pose a significant threat to traditional SSPs, as companies like Unity (including Ironsource), Applovin, and Criteo have seen record growth in the SSP segment, with some eclipsing incumbents.
While Magnite’s growth is solid, it’s not where it could be. The Mobile segment is healthy, and CTV growth should pick up with the Netflix and Roku partnerships. However, the company remains heavily reliant on the U.S. market, and its DV+ segment is hindered by the decline in Desktop advertising. Opportunities for Magnite include expanding its international footprint and making a strong push into retail media.
Cash Reserves
As of the end of Q2 2024, Magnite reported cash and cash equivalents of $326.5 million. This strong cash position provides a solid foundation for continued investment in technology development, potential strategic acquisitions, and other growth initiatives.
Conclusion
As we look ahead, Magnite is at a pivotal moment filled with opportunity. With a 9% net revenue increase in Q2 2024 and a promising partnership with Netflix to enhance its CTV offerings, the company is well-equipped to invest in innovative technologies, supported by a solid cash reserve of $326.5 million. While the digital advertising landscape is competitive, Magnite’s strategic focus on retail media and mobile growth positions it for sustained success. With optimism and resilience, Magnite is poised to thrive in the dynamic world of programmatic advertising.
About Magnite
Magnite is a leading supply-side platform (SSP). Magnite’s platform connects publishers and media owners with advertisers, facilitating the efficient and effective monetization of digital content across various channels, including Connected TV (CTV), mobile, and desktop. The company has been a significant player in the growth of CTV advertising, particularly during the COVID-19 pandemic, and continues to expand its offerings through strategic partnerships, such as those with Netflix and Roku. Magnite also focuses on enhancing its international presence and exploring opportunities in retail media to drive future growth.
For more information about Magnite, visit their website.
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