Summary
- Magnite reports Q4 earnings on February 22.
- We highlight the important themes surrounding Magnite.
- We also touch upon the financial outlook, valuations, and technicals.
The world's largest omnichannel SSP (Supply side advertising platform) operator- Magnite, Inc. (MGNI) will publish its Q4 results on the February 22, post-market hours. In this article, we'll focus on a few important themes that investors should be mindful of ahead of that event.
Earnings Event - What To Consider
- Over the last three years, Magnite's track record during earnings season has been fairly decent, with a few blemishes every now and then. Basically, over the last 12 quarters, it has beaten EPS street estimates 66% of the time, with an average beat of $0.03
- For Q4-22, the headline numbers that investors should be watching out for are a revenue figure of $153.5m (implying 8% annual growth), and an EPS figure of $0.32 (implying 24% annual growth)
- MGNI's Q4 revenue typically tends to benefit from higher ad budgets devoted to holiday purchasing. The company's topline will also likely get a 3% sequential uplift in Q4 on account of political related spending. Magnite is also very well positioned ahead of other SSP peers on account of its impetus in the CTV space which gives it something of a counter-cyclical edge. Contrary to popular belief, in the US , an ad-supported subscription package doesn't damage viewership levels, and it looks like an overwhelming majority of streamers will likely pursue economical ad-supported streaming packages in the face of a recession. With a number of partners on the cusp of launching CTV ad businesses, the growth runway for Magnite looks relatively promising even in the midst of challenging economic conditions.
- In Q3, Magnite's OPEX base ($83m) was relatively well controlled, growing only 2% sequentially. Whilst lower workforce and office-related costs are welcome, there were some marketing costs that were deferred, the impact of which will be felt in Q4. On the other hand, note that Magnite continues to trim its cost base well into Q1-23.
- Magnite's capital allocation priorities at this stage of the cycle are to focus more on debt pay downs. One of the admirable facets of the Magnite story is that its management has been very consistent in bringing down the net leverage ratio (short and long-term debt adjusted for cash, over TTM Adjusted EBITDA) for five straight quarters now. In Q2-21 it stood at 6.2x, and at the end of Q3-22 it stood at 2.6x. They certainly won't rest on their laurels and one would expect further net leverage progress in Q4 as the ratio is still above their target of less than or equal to 2x trailing EBITDA.
- The EBITDA picture for Magnite over the next 12 months is likely to be quite challenging (for more details refer to the next section of this article), so it is imperative that Magnite continues to demonstrate ample working capital efficiency to generate cash. Note that the company's working capital turnover has been above 4.1x for a while now, the best it's been in five years (for context note that Magnite typically only generates working capital turns of less than 3x ).
- As mentioned before with debt servicing taking precedent, investors shouldn't expect much support from buybacks, even though Magnite still has $28.3m worth of shares to be purchased by December 2023. It's worth noting that in Q3, Magnite didn't indulge in any buybacks, and this has seen its buyback yield halve in recent periods.
- During the Q4 call, Magnite's management will also likely talk up the potential of 'Magnite Streaming'- the company's CTV and OTT monetization platform which is well poised to exploit the secular tailwinds associated with the growth of streaming viewership. This SSP was launched only a couple of weeks ago.
What Do The Forward Valuations Look Like?
Magnite's financial outlook over the next 12 months doesn't look too compelling. Whilst the business is on course to deliver 20% growth levels at the revenue, EBITDA, and EPS levels for FY22, in FY23 it won't see any operating leverage with EBITDA growth (flat growth), and EPS growth (+3%), coming in lower than revenue growth, which will also only be in the single-digits (7.5%).
Investors should also note that MGNI's long-term EBITDA margin target is between 35-40% but the FY23 numbers will likely drop well outside that range, by 250bps (much of this will be H1 weighted, on account of higher tech stack costs linked to running two separate CTV platforms during client migrations)! Even if FY24 should see a bounce back to the target range, note that it will still be lower than what was seen in FY21.
For further details see:
Magnite: Key Discussion Points Ahead Of The Q4 Results