Magnite(MGNI) - 2022 Q4 - Annual Report

Special Note About Forward-Looking Statements; Summary of Risk Factors This section outlines the report's forward-looking statements, which are subject to various risks and uncertainties, and summarizes key risk factors - Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially from projections[10] - Key risks include the ability to realize anticipated benefits from acquisitions (e.g., SpotX, SpringServe), the impact of macroeconomic challenges (inflation, recession, global conflict), slower-than-expected CTV advertising growth or programmatic adoption, and intense market competition[11][111][113] - The company assumes no obligation to update forward-looking statements unless required by federal securities laws[13] Part I Item 1. Business Magnite provides technology for digital advertising sales and has become the largest independent omni-channel sell-side platform through key acquisitions Overview Magnite offers automated digital advertising solutions and is the largest independent omni-channel SSP following strategic acquisitions of Telaria, SpotX, and SpringServe - Magnite, Inc. provides technology solutions to automate the purchase and sale of digital advertising inventory[19] - Key acquisitions include Telaria (April 2020), SpotX (April 2021), and SpringServe (July 2021), positioning Magnite as the largest independent omni-channel SSP and programmatic CTV marketplace[20][21] - The platform offers applications and services for both sellers (publishers) to monetize inventory and buyers (advertisers, agencies, DSPs) to purchase digital advertising, processing trillions of ad requests monthly[22] - Magnite introduced its unified CTV platform, Magnite Streaming, on February 7, 2023, merging legacy Magnite CTV and SpotX CTV technologies to maximize yield across live and VOD inventory[23] Industry Trends The digital advertising industry is shifting towards programmatic automation, rapid CTV growth, new identity solutions, and supply path optimization - Consumers are rapidly shifting to digital mediums, driving continued growth in digital advertising spend[27][28] - Programmatic advertising is the dominant method for transacting desktop, CTV, and mobile inventory due to its automation, transparency, and data-driven targeting capabilities[29] - CTV viewership is accelerating the transition from linear TV, with ad-supported models gaining traction and programmatic CTV expected to be a significant revenue driver[30] - The industry is moving away from third-party cookies, shifting towards a seller-enabled first-party identity model, which Magnite is investing in through acquisitions like Nth Party and Carbon[31][32] - Supply Path Optimization (SPO) by buyers aims to consolidate vendors for efficiency and cost-effectiveness, a trend Magnite believes it is well-positioned to benefit from[34] - Header bidding has increased competition and ad request volumes, necessitating sophisticated tools like Demand Manager to manage increased costs and complexities[35][36] How We Generate Revenue Magnite generates revenue primarily from a percentage of ad spend transacted on its platform, with variations for fixed CPMs and other service fees - Revenue is generated from the use of Magnite's platform for digital advertising transactions[38] - Generally, revenue is based on a percentage of ad spend, but can also be fixed CPM for impressions, full ad spend for insertion orders, or fees based on impressions/percentage of ad spend for ad server and Demand Manager products[38] Magnite: Competitive Strengths of Our Platform Magnite's competitive strengths include its leadership in CTV, scaled omni-channel platform, advanced data analytics, and independence from media ownership - Leadership in CTV: Magnite Streaming platform meets unique CTV seller requirements, offering features like ad-podding, dynamic ad insertion, and frequency capping[39] - Scaled Omni-Channel Platform: Provides a single partner for buyers and sellers across CTV, mobile, desktop, and digital out-of-home, fostering a self-reinforcing network effect[41] - Big Data Analytics and Machine-Learning Algorithms: Utilizes massive data repositories and bid filtering technology to improve matching, ROI for buyers, and revenue for sellers[43][44] - Integrated Video Ad Server and SSP: SpringServe acquisition provides a holistic yield management solution for CTV publishers across programmatic and direct-sold inventory[46] - Independence: Operates without owning media properties or a demand-side platform, ensuring alignment with publisher clients' interests and avoiding conflicts of interest[52] Magnite: Growth Strategies Magnite's growth strategy focuses on CTV leadership, capitalizing on Supply Path Optimization, investing in identity solutions, and expanding internationally - Focus on CTV: Expects CTV to be the biggest growth driver, investing significant resources in technology, sales, and support, including the new Magnite Streaming platform[53] - Supply Path Optimization (SPO): Aims to benefit from SPO by pursuing more direct relationships with advertisers and agencies, leveraging transparency and broad inventory supply[54] - Identity Solutions: Investing in first-party identity and audience solutions (e.g., Nth Party, Carbon) to lead the shift from third-party cookies to a publisher-centric identity model[55] - Increasing Seller Inventory: Continuously adding new high-quality sellers and expanding existing relationships, particularly in CTV and OTT, through custom integrations and omni-channel capabilities[57][58] - Expand International Footprint: Plans to expand international presence with investments in sales, marketing, and infrastructure to support global programmatic advertising growth[59] Technology and Development Magnite operates a globally distributed infrastructure using both hosted data centers and cloud support, with continuous investment in platform innovation - Operates a globally distributed infrastructure with hosted data centers for non-CTV and hybrid infrastructure for CTV transactions[61] - Utilizes bid efficiency algorithms for bid prediction and throttling, real-time data pipelines, and a 24-hour Network Operations Center for system stability[62][63] - Employs an agile development process and continuously invests in platform technologies and functionalities[63][64] Sales and Marketing The company's sales and marketing efforts are driven by global teams focused on client education, integration support, and brand awareness - Global sales teams market solutions to buyers and sellers, leveraging market knowledge and expertise[65] - Professional services teams support seller integration, and buyer teams collaborate with DSPs, agencies, and brands to maximize spend[65] - Marketing initiatives focus on brand management, market awareness, and driving ad spend through industry events, PR, and various media[65] Competition Magnite operates in a highly competitive and rapidly evolving digital advertising market, facing large incumbents and numerous transaction service providers - The digital advertising industry is highly competitive, with spending concentrated among large companies like Google, Facebook, and Amazon[66] - Magnite competes with various supply-side platforms, video ad servers, and advertising exchanges in a fragmented market[67] - Industry trends include rapid evolution, consolidation, and increasing demands for transparency and lower transaction costs, putting pressure on Magnite to differentiate its solutions[67] Human Capital: Our Team and Culture Magnite fosters a high-performing, collaborative culture with a global team of experts, emphasizing diversity, equity, and inclusion - Magnite's team includes experts in data science, machine learning, and ad tech, with a global presence to service clients worldwide[68] - The company cultivates a high-performing, results-oriented culture emphasizing transparency, collaboration, and innovation[69] - Diversity, Equity, and Inclusion (DEI) are promoted through the Magnify Council, focusing on employee experience, talent development, and external partnerships[69] - Talent retention strategies include rewarding excellence, bi-annual engagement surveys, continuous performance feedback, investment in learning and leadership development, and equity grants[70][72] - As of December 31, 2022, Magnite had 947 full-time employees[75] Our Intellectual Property Magnite protects its proprietary technologies through a combination of trade secrets, trademarks, copyrights, and patents - Magnite relies on trade secret, trademark, copyright, and patent laws in the U.S. and abroad to protect its proprietary technologies[76] - The company has issued patents and pending applications, but no individual patent is considered material to the business[77] - Trade secrets and know-how are significant intellectual property assets, protected by confidentiality agreements with employees, contractors, and business partners[78] Client Dynamics The company focuses on deep strategic partnerships with a concentrated base of sellers and buyers, particularly in CTV and with major DSPs - Sellers, especially in CTV, are a concentrated group, leading Magnite to focus on deep, long-term strategic partnerships and custom features[81] - On the buy-side, Magnite maintains close relationships with major DSPs, brand advertisers, and agencies, as ad spend is highly concentrated among these entities[85] - The company offers direct platform access and managed services for brands and agencies, supporting SPO efforts to increase spend on its platform[88][89] Geographic Scope of Our Operations Magnite operates globally with established presences in North America, Australia, and Europe, while navigating the challenges of international expansion - Magnite operates worldwide, with established presences in North America, Australia, and Europe, and developing presence in Asia and South America[90] - International operations face challenges including staffing, adapting to local requirements (e.g., privacy), managing foreign exchange rates, and adverse tax consequences[90] Regulation Magnite's business is highly susceptible to evolving global privacy regulations, requiring significant compliance efforts across various jurisdictions - Magnite's business is highly susceptible to existing and emerging privacy regulations globally, focusing on pseudonymous data (IP addresses, geo-location, persistent identifiers) rather than directly identifiable information[91][92] - Complies with COPPA for child-directed sites, GDPR and UK GDPR in Europe, and U.S. state laws like CCPA, Colorado, Connecticut, Utah, and Virginia privacy laws, which impose significant compliance obligations and data transfer restrictions[94][95][96][97] - Adheres to self-regulatory bodies like IAB, Digital Advertising Alliance, and Network Advertising Initiative, providing consumer notice and opt-out mechanisms[99] - Regulatory uncertainty and evolving standards could negatively impact business and revenue, despite supporting privacy initiatives for long-term consumer confidence[100][101] Seasonality The company's financial performance is subject to seasonal fluctuations, with the fourth quarter typically being the strongest due to holiday advertising - Advertising spend, revenue, cash flow, and operating results are subject to seasonal variations[101] - The fourth quarter typically sees higher activity due to increased holiday purchasing, leading to higher revenue and cash flow compared to other quarters[101] Available Information Magnite's SEC filings, including annual and quarterly reports, are available free of charge on its investor relations website - Magnite files Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and proxy statements with the SEC[102] - All SEC filings are available free of charge on the company's investor relations website: investor.magnite.com[102] Item 1A. Risk Factors This section details significant risks affecting Magnite's business, including those related to acquisitions, economic conditions, competition, and regulations Risks Related to Recent Mergers and Acquisitions Magnite faces risks in integrating acquisitions like SpotX and SpringServe and realizing their anticipated benefits and synergies - Failure to realize anticipated benefits from acquisitions (SpotX, SpringServe) could negatively affect business and results[104][106] - Integration of the unified Magnite Streaming CTV platform carries risks of bugs, client dissatisfaction, and disruption to active reserve auctions and private marketplaces[104] - Consolidation of platforms may reduce overall ad requests to DSPs, potentially leading to a temporary decrease in won ad impressions and negatively impacting revenue[105] - Future acquisitions may disrupt business, dilute stockholders, and expose the company to unforeseen costs and liabilities, including integration difficulties, loss of clients/personnel, and regulatory compliance issues[107][109] Risks Related to Economic Conditions and COVID-19 The company's revenue is highly dependent on advertising demand, which is vulnerable to macroeconomic challenges like inflation and recession - Revenue and operating results are highly dependent on overall advertising demand and economic health[111] - Macroeconomic challenges (inflation, global hostilities, recession) have negatively impacted ad budgets and could continue to do so, potentially increasing the company's cost base[112] Risks Related to Our Business, Growth Prospects and Operating Results Magnite's growth is vulnerable to slower CTV adoption, unsuccessful SPO efforts, technology development challenges, and competitive fee pressures - Slower growth in CTV advertising spend or programmatic adoption could harm operating results and growth prospects[113][115] - Maintaining or increasing access to CTV advertising inventory on acceptable terms is critical, especially given the concentration of CTV inventory among a few large sellers[116][117] - Unsuccessful Supply Path Optimization (SPO) efforts or increased fee concessions could negatively impact revenue[118][119] - Inefficient or ineffective technology development, challenges with header bidding, and limitations in mobile inventory access pose risks to attracting buyers and sellers[120][122][127] - Take rates may decrease due to shifts in transaction types (e.g., lower rates for reserve auctions/CTV) or competitive pressures, potentially reducing revenue despite increased ad spend[129][130][131] - The company has a history of losses and its operating results are difficult to predict, subject to factors like seasonality, pricing changes, economic conditions, and technology innovation[132][135] Risks Related to Our Relationships with Buyers and Sellers and Other Strategic Relationships The business relies on maintaining relationships with a concentrated client base whose contracts are often short-term and non-exclusive - Acts or omissions of buyers/sellers, or Magnite's failure to meet advertising/inventory content standards, could harm brand and reputation[137][139] - Contracts are generally non-exclusive and terminable on short notice, making the business vulnerable to clients reducing use of its solutions or migrating to competitors[140] - A small number of large buyers and sellers account for a disproportionate share of business, creating concentration risk[142] - Reliance on DSPs for purchasing advertising exposes Magnite to credit risk and potential working capital demands if payments are slow or default[145] - Sales efforts are time-consuming and expensive, with no guarantee of success, and competitive conditions may force unfavorable contract terms[146] - Use of third-party open source software components carries risks of license non-compliance and potential compromise of proprietary software[148][149] Risks Related to the Advertising Technology Industry, Market, and Competition Magnite operates in an intensely competitive and consolidating market, facing pricing pressure and the need for continuous differentiation - Slow or unexpected development of the digital advertising market could adversely affect business and growth prospects[150] - Operates in an intensely competitive market against companies with greater financial, technical, and marketing resources, including those that are also buyers/sellers on its platform[151] - Rapid evolution and consolidation in the ad tech industry increase competitive pressure and may lead to erosion of Magnite's buyer and seller base[153] - Must continuously differentiate its offerings to compete effectively and avoid commodification[152] Risks Related to Our Collection, Use and Disclosure of Data The business is vulnerable to limitations on data collection from consumer tools, regulatory restrictions, and the phasing out of third-party cookies - Limitations on data collection, use, or disclosure due to consumer tools (ad-blocking, cookie blocking, device settings like Apple's IDFA opt-in) or regulatory restrictions could diminish the value of Magnite's solution[156][158][159] - The phasing out of third-party cookies by 2024 (e.g., Google Chrome) poses a risk of declining performance and revenue, requiring substantial development for new identification solutions[162] - Magnite's strategy of shifting to a first-party publisher data model may not be widely adopted or could disproportionately benefit larger 'walled gardens' with extensive first-party data[163] Risks Related to Regulation Evolving global privacy laws like GDPR and CCPA impose significant compliance costs and restrictions on data processing and transfer - Evolving global privacy laws (GDPR, UK GDPR, U.S. state laws) impose significant compliance costs, restrictions on data collection/processing, and potential enforcement actions[164][165][168] - Strict requirements for international data transfers (e.g., from EEA/UK to U.S. post-Schrems II) create uncertainty and may necessitate changes to data practices, potentially affecting demand for solutions[171][172] - Uncertainty regarding end-user consent standards (e.g., IAB Europe's TCF) and inconsistent regulatory guidance across countries could impair targeted advertising capabilities[174][178][179] - Industry unpreparedness for new privacy laws could lead to substantial disruption, reduced inventory value, and benefit large, integrated competitors[181] - Lack of clarity and uniformity in political advertising regulations may impact ad spend and increase compliance costs[182] - Failure to comply with industry self-regulation could harm brand, reputation, and business[183] Risks Related to Our Operations Operational risks include software failures, network interruptions, cyber-attacks, and the ability to attract and retain qualified personnel - Errors or failures in software operation, faulty algorithms, or technical problems could damage reputation, lead to revenue loss, and incur claims[184] - Interruptions to network infrastructure or data, including cyber-attacks, natural disasters, and third-party system failures, could disrupt operations and expose the company to liabilities[185] - Breaches of computer systems or confidential data could lead to significant expenses, legal claims, regulatory fines, and reputational harm[186] - Failure to detect or prevent fraud, malware intrusion, or other activities impacting solution integrity could cause clients to lose confidence and expose the company to legal claims[187] - Inability to attract, motivate, train, and retain highly qualified engineering, marketing, sales, and management personnel could impair business strategy execution, especially in competitive talent markets and post-acquisition[190][191][192][193] - Proprietary rights may be difficult to enforce, enabling others to copy technology and erode competitive advantages[194] - Subject to intellectual property rights claims by third parties, which are costly to defend and could limit technology use[195] Risks Related to Financing Arrangements Significant debt leverage from the SpotX acquisition imposes restrictive covenants, heightens default risk, and could dilute stockholders upon conversion - Financing the SpotX Acquisition with a $360.0 million Term Loan B Facility and $400.0 million Convertible Senior Notes significantly increased debt leverage[196] - Increased leverage may heighten default risk, limit operating flexibility, and reduce cash available for operations and investments[197][205] - The Credit Agreement includes restrictive covenants and a financial covenant (first lien net leverage ratio not greater than 3.25 to 1.00 if Revolving Credit Facility utilization exceeds 35%), which could lead to default if not met[199] - Conversion of Convertible Senior Notes could dilute existing stockholders and depress common stock price[202] - Capped Call Transactions, while designed to reduce dilution, expose the company to counterparty risk if financial institutions default[203][207] - The conditional conversion feature of Convertible Senior Notes, if triggered, may require cash settlement, affecting liquidity[208] - Provisions in the Convertible Senior Notes indenture may deter or prevent business combinations favorable to stockholders[209][210] Risks Related to Our International Business Strategy International operations expose the company to risks including managing a distributed workforce, adapting to local regulations, and foreign exchange fluctuations - International operations require increased expenditures and management attention, with significant investment in technology infrastructure and sales/support capabilities[212] - Risks include managing a distributed workforce, adapting to diverse local requirements (privacy, labor laws), laws favoring local competitors, foreign exchange rate fluctuations, and adverse tax consequences[213][214] - Compliance with complex foreign and U.S. laws (e.g., FCPA, U.K. Bribery Act) increases costs and exposes the company to potential fines or sanctions[216][217] Risks Related to Our Internal Controls and Finances Magnite faces risks in maintaining effective internal controls, utilizing tax assets, securing future capital, and managing interest rate changes - Failure to maintain an effective system of internal control over financial reporting could lead to inaccurate financial reporting, loss of investor confidence, and regulatory investigations[218][221] - Ability to use net operating losses (NOLs) and tax credit carryforwards may be limited by ownership changes (e.g., Section 382 of the Internal Revenue Code), potentially resulting in higher tax liabilities[222][223][224] - May require additional capital for business support or debt refinancing, which might not be available on favorable terms, potentially impairing business growth[226][227][228] - The elimination of LIBOR after June 2023 could result in higher interest costs on LIBOR-based borrowings, impacting financial results[229] Risks Related to the Securities Markets and Ownership of our Common Stock The company's stock price is volatile, and provisions in its charter documents may inhibit potential acquisitions or changes in management - The trading price of common stock has been and may continue to be volatile due to various factors, including company performance, market conditions, and analyst expectations[230][231] - The 2023 Repurchase Plan (up to $75.0 million of common stock or Convertible Senior Notes) may not enhance shareholder value and could affect stock price and cash reserves[234] - Increased competition for investors in the ad tech space or negative analyst reports could lead to a decline in stock price and trading volume[235][236] - Provisions in charter documents and Delaware law (e.g., classified board, restrictions on stockholder action) may inhibit potential acquisitions and limit stockholders' ability to change management[237][238] Item 1B. Unresolved Staff Comments There are no unresolved staff comments from the SEC Item 2. Properties Magnite leases its corporate headquarters in New York and maintains additional offices and data centers globally - Corporate headquarters are in New York, New York (41,946 sq ft, lease expires 2030)[240] - Maintains an office in Los Angeles (38,754 sq ft, lease expires 2031) and other offices/data centers globally (North America, South America, Europe, Australia, Asia)[241] - Believes current facilities are adequate and additional space can be obtained on commercially reasonable terms[241] Item 3. Legal Proceedings The company is subject to routine legal proceedings, which management does not expect to have a material adverse effect on its financials - Magnite is subject to legal or regulatory proceedings, lawsuits, and claims incident to its business activities[242] - As of December 31, 2022, management believes the final resolution of pending matters will not have a material adverse effect on financial position, results of operations, or cash flows[242] Item 4. Mine Safety Disclosures This item is not applicable to Magnite, Inc Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section details Magnite's common stock market, dividend policy, and recent share repurchase activities Market Information Magnite's common stock is listed on The Nasdaq Global Select Market under the ticker symbol MGNI - Common stock delisted from NYSE on June 8, 2020, and commenced listing on Nasdaq Global Select Market[246] - Company name changed to Magnite, Inc. and ticker symbol to MGNI on June 30, 2020[246] Holders of Record As of February 16, 2023, the company had approximately 54 holders of record for its common stock - As of February 16, 2023, there were approximately 54 holders of record of common stock[247] - The actual number of stockholders is greater due to shares held in street name by brokers and nominees[247] Dividend Policy Magnite has never paid cash dividends and does not anticipate doing so in the foreseeable future - Magnite has never declared or paid any dividends and does not anticipate paying cash dividends in the foreseeable future[248] - The company's credit facility contains restrictions on its ability to pay dividends[248] Recent Sales of Unregistered Securities Magnite had no recent sales of unregistered securities Purchases of Equity Securities by the Issuer and Affiliated Purchasers Magnite repurchased shares for equity withholding in Q4 2022 and replaced its 2021 Repurchase Plan with a new $75.0 million plan in February 2023 Common Stock Repurchases (Q4 2022) | Period | Total Number of Shares Purchased (in thousands) | Average Price per Share ($) | Maximum Approximate Dollar Value that May Yet be Purchased Under the Program ($ in thousands) | | :--- | :--- | :--- | :--- | | October 1 - October 31, 2022 | 11 (Equity withholding) | 6.63 | 28,330 | | November 1 - November 30, 2022 | 215 (Equity withholding) | 11.45 | 28,330 | | December 1 - December 31, 2022 | 10 (Equity withholding) | 10.66 | 28,330 | | Total | 236 | | | - The 2021 Repurchase Plan (initially $50.0 million) was extended through December 15, 2023, with approximately $28.3 million remaining as of December 31, 2022[250] - The 2021 Repurchase Plan was replaced by the 2023 Repurchase Plan on February 16, 2023, authorizing up to $75.0 million for common stock or Convertible Senior Notes repurchases through February 16, 2025[250] Stock Performance Graph This section presents a graph comparing Magnite's cumulative total stockholder return against various market indices - The stock performance graph compares Magnite's cumulative total stockholder return against major indices from December 31, 2017, to December 31, 2022[253] - Magnite's return calculation is based solely on stock price appreciation, as no cash dividends have been paid[253] Item 6. Reserved This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed analysis of Magnite's financial condition, results of operations, liquidity, and critical accounting policies Overview and Trends This section refers to 'Item 1. Business' for an overview of Magnite's business, industry, and important trends - Refers to 'Item 1. Business' for an overview of the company's business, industry, and trends[256] Recent Developments Recent developments include strategic acquisitions positioning Magnite as a CTV leader, platform integration efforts, and workforce reduction amid macroeconomic challenges - Completed acquisitions of Telaria (April 2020), SpotX (April 2021), and SpringServe (July 2021), establishing Magnite as the largest independent omni-channel SSP and programmatic CTV marketplace[257][258] - CTV is expected to be the biggest growth driver, benefiting from these acquisitions[259] - SpotX acquisition led to significant increases in revenue and operating expenses, with integration efforts including the unified Magnite Streaming CTV platform (client migration expected through Q3 2023)[260] - SpringServe acquisition expanded video and CTV offerings to include ad server functionality, providing a holistic yield management solution[261] - Reduced global workforce by approximately 6% due to elimination of duplicative technology roles from CTV platform integration, realizing cost synergies[262] - Macroeconomic challenges (inflation, global hostilities, recession) have negatively impacted ad budgets, though the direct revenue impact from COVID-19 has largely subsided[264][265] Components of Our Results of Operations This section details the components of Magnite's financial results, including revenue recognition and expense categories - Operates as one operating segment, with financial results reviewed on a consolidated basis[266] - Revenue is primarily a percentage of ad spend, recognized upon fulfillment of contractual obligations (ad rendering)[267] - Revenue is reported on a net basis for most transactions (acting as agent) but on a gross basis for certain managed advertising campaigns (acting as primary obligor)[267][268] - Cost of revenue includes data center, bandwidth, ad protection, depreciation/amortization, personnel, and traffic acquisition costs (for gross revenue)[269] - Sales and marketing expenses cover personnel, brand marketing, travel, trade shows, and amortization of acquired client relationships[270] - Technology and development expenses include personnel, outsourced resources, and software development/maintenance costs (capitalized if qualified)[272] - General and administrative expenses comprise executive, finance, legal, HR personnel costs, professional services, and corporate expenses[273] - Merger, acquisition, and restructuring costs include professional fees, employee termination costs, and impairment of abandoned technology[274] - Other (Income) Expense includes interest (income)/expense, other income (rental), and foreign currency exchange (gain)/loss[275][276] - Provision (Benefit) for Income Taxes is affected by U.S. and foreign tax laws, business operations, acquisitions, and changes in deferred tax assets/liabilities[277] Results of Operations Revenue grew 23% in 2022, driven by acquisitions and CTV growth, but the company reported a net loss of $130.3 million due to increased operating expenses Consolidated Results of Operations (in thousands) | | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | | :--- | :--- | :--- | :--- | | Revenue | $577,069 | $468,413 | $221,628 | | Cost of revenue | $307,165 | $201,662 | $77,747 | | Sales and marketing | $200,081 | $170,406 | $76,030 | | Technology and development | $93,757 | $74,449 | $51,546 | | General and administrative | $81,382 | $64,789 | $52,987 | | Merger, acquisition, and restructuring costs | $7,468 | $38,177 | $17,552 | | Total expenses | $689,853 | $549,483 | $275,862 | | Loss from operations | $(112,784) | $(81,070) | $(54,234) | | Other (income) expense, net | $22,813 | $13,918 | $(1,495) | | Loss before income taxes | $(135,597) | $(94,988) | $(52,739) | | Provision (benefit) for income taxes | $(5,274) | $(95,053) | $693 | | Net income (loss) | $(130,323) | $65 | $(53,432) | - Revenue increased by 23% in 2022 (to $577.1M) and 111% in 2021 (to $468.4M), driven by CTV and mobile growth and acquisitions (SpotX, SpringServe)[281][282] - Net loss was $130.3 million in 2022, compared to net income of $0.1 million in 2021 and net loss of $53.4 million in 2020[278] - Cost of revenue increased by 52% in 2022, primarily due to $64.5 million in depreciation and amortization (including $35.4 million from accelerated amortization of acquired intangibles and capitalized software due to CTV platform integration)[285][286] - Sales and marketing expenses increased by 17% in 2022, mainly due to increased headcount from the SpotX acquisition and amortization of acquired intangibles[290] - Technology and development expenses increased by 26% in 2022, primarily due to higher personnel costs from the SpotX acquisition[294] - Merger, acquisition, and restructuring costs decreased significantly to $7.5 million in 2022 from $38.2 million in 2021, primarily due to lower professional fees[303] - Interest expense, net increased by $9.4 million in 2022, mainly due to a full year of interest on the Term Loan B Facility and rising variable interest rates[306] Key Operating and Financial Performance Metrics Non-GAAP metrics like Revenue ex-TAC and Adjusted EBITDA show underlying growth, driven primarily by the CTV and mobile channels Key Operating and Financial Performance Metrics (in thousands) | Financial Measures and non-GAAP Financial Measures: | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | | :--- | :--- | :--- | :--- | | Revenue | $577,069 | $468,413 | $221,628 | | Revenue ex-TAC | $514,615 | $416,455 | $219,602 | | Gross profit | $269,904 | $266,751 | $143,881 | | Net income (loss) | $(130,323) | $65 | $(53,432) | | Adjusted EBITDA | $178,790 | $148,659 | $43,065 | - Revenue ex-TAC increased by $98.2 million (24%) in 2022 and $196.9 million (90%) in 2021, primarily due to acquisitions (SpotX, SpringServe) and organic growth in CTV and mobile[317][318] Revenue ex-TAC by Channel (in thousands) | Channel: | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | | :--- | :--- | :--- | :--- | | CTV | $214,803 | $143,407 | $34,319 | | Mobile | $188,116 | $160,067 | $108,353 | | Desktop | $111,696 | $112,981 | $76,930 | | Total | $514,615 | $416,455 | $219,602 | - CTV is expected to be the biggest growth driver, with mobile as the second, while desktop growth is projected to flatten[319][320] Adjusted EBITDA Reconciliation (in thousands) | | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | | :--- | :--- | :--- | :--- | | Net income (loss) | $(130,323) | $65 | $(53,432) | | Add back (deduct): | | | | | Depreciation and amortization expense, excluding amortization of acquired intangible assets | $31,658 | $25,017 | $24,337 | | Amortization of acquired intangibles | $184,394 | $121,869 | $24,911 | | Stock-based compensation expense | $64,118 | $40,735 | $28,491 | | Merger, acquisition, and restructuring costs, excluding stock based compensation expense | $5,464 | $37,106 | $15,682 | | Non-operational real estate and other expense, net | $622 | $552 | $213 | | Interest (income) expense, net | $29,260 | $19,848 | $(50) | | Foreign exchange (gain) loss, net | $(1,129) | $(1,480) | $2,220 | | Provision (benefit) for income taxes | $(5,274) | $(95,053) | $693 | | Adjusted EBITDA | $178,790 | $148,659 | $43,065 | - Adjusted EBITDA increased by $30.1 million in 2022 and $105.6 million in 2021, driven by revenue growth and improved operating leverage[324][325] Liquidity and Capital Resources Magnite maintains sufficient liquidity through cash reserves, operating cash flow, and credit facilities to meet its obligations and fund operations Cash and Debt Overview (as of December 31, 2022) | Metric | Amount (in millions) | | :--- | :--- | | Cash and cash equivalents | $326.3 | | Indebtedness outstanding | $754.6 | | Revolving Credit Facility available | $59.7 | | Net cash provided by operating activities (2022) | $192.6 | | Net cash used in investing activities (2022) | $(65.2) | | Net cash used in financing activities (2022) | $(30.2) | - Principal cash requirements include personnel, contractual obligations (leases, data centers), capital expenditures, debt payments, and working capital[327] - Believes existing cash, operating cash flow, and Revolving Credit Facility will be sufficient for the next twelve months, but subject to macroeconomic and working capital risks[330][331] - Convertible Senior Notes (0.25% interest, due March 2026) and Term Loan B Facility (variable rate, $354.6 million outstanding) are key debt instruments[332][334] - A new $75.0 million repurchase plan (2023 Repurchase Plan) for common stock or Convertible Senior Notes was approved in February 2023[335] - Cash flows from operating activities increased to $192.6 million in 2022 (from $126.6 million in 2021), driven by revenue and non-cash adjustments[342] - Investing activities used $65.2 million in 2022, primarily for property and equipment, internal use software, and the Carbon acquisition[345] - Financing activities used $30.2 million in 2022, mainly for share repurchases and taxes related to stock-based awards, partially offset by employee stock plan proceeds[347] Off-Balance Sheet Arrangements The company's off-balance sheet arrangements are limited to short-term operating leases and standard indemnification agreements - Magnite does not have relationships with structured finance or special purpose entities for off-balance sheet arrangements[348] - As of December 31, 2022, off-balance sheet arrangements were limited to short-term operating leases and indemnification agreements[348] Contractual Obligations and Known Future Cash Requirements Magnite's principal commitments include debt obligations and operating leases, totaling approximately $1.04 billion as of December 31, 2022 - Principal commitments include Convertible Senior Notes, Term Loan B Facility, Revolving Credit Facility, and operating leases for offices and data centers[349] Contractual Obligations and Future Payments (as of December 31, 2022, in thousands) | | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Lease liabilities associated with leases included Right of Use Assets | $25,711 | $22,224 | $14,466 | $12,007 | $7,425 | $21,011 | $102,844 | | Obligations for leases not included in Lease liabilities | $226 | $226 | $226 | $226 | $226 | $1,095 | $2,225 | | Convertible Senior Notes | — | — | — | $400,000 | — | — | $400,000 | | Interest, Convertible Senior Notes | $1,000 | $1,000 | $1,000 | $500 | — | — | $3,500 | | Term Loan B | $3,600 | $3,600 | $3,600 | $3,600 | $3,600 | $336,600 | $354,600 | | Interest, Term Loan B | $34,221 | $33,155 | $32,724 | $32,383 | $32,043 | $10,545 | $175,071 | | Operating sublease income | $(4,925) | $(4,767) | $(1,751) | $(260) | — | — | $(11,703) | | Other non-cancelable obligations | $9,453 | $6,859 | $2,070 | — | — | — | $18,382 | | Total | $69,286 | $62,297 | $52,335 | $448,456 | $43,294 | $369,251 | $1,044,919 | - Estimated non-cancelable minimum annual obligation for third-party cloud-managed services is approximately $50 million to $55 million for each twelve-month period from July 2023 to June 2025[353] - Enters into indemnification agreements with various parties, including clients and officers, for claims like intellectual property infringement, but no material demands have been made[354] Critical Accounting Policies and Estimates The company's financial statements rely on significant estimates, particularly for revenue recognition, software capitalization, and asset valuation - Preparation of financial statements requires significant estimates and assumptions, evaluated on an ongoing basis[355] - Critical estimates include revenue recognition (net vs. gross), internal-use software capitalization, goodwill and intangible asset valuation/impairment, stock-based compensation, business combinations, and income taxes[356] - No significant changes in accounting policies or estimates from prior years[357] Revenue Recognition (Critical Accounting Policy) The critical judgment in revenue recognition is determining whether to report revenue on a gross or net basis - Revenue is generated from platform use for digital advertising, typically a percentage of ad spend, or fixed CPM, or full ad spend for insertion orders[359] - Revenue is recognized at the point an ad renders and is counted as a paid impression, fulfilling performance obligations[360] - Critical judgment involves determining if revenue is reported on a gross or net basis, based on whether Magnite acts as a principal (controls inventory, sets prices) or an agent (does not control inventory, does not set prices)[361][362] Internal Use Software Development Costs (Critical Accounting Policy) Magnite capitalizes certain internal use software development costs, which are then amortized over an estimated three-year useful life - Capitalizes internal use software development costs (personnel, external direct costs) during the application and infrastructure development stage[363][364] - Costs are amortized using a straight-line method over an estimated three-year useful life once the software is ready for its intended use[366] - Reassessment of useful lives in Q4 2022 due to CTV platform integration resulted in $0.7 million of incremental amortization expense for the year[367] - Internal use software is evaluated for abandonment and impairment on a quarterly basis[368] Valuation of Goodwill and Intangibles (Critical Accounting Policy) Goodwill is tested for impairment annually, while intangible assets are amortized over their useful lives and reviewed for impairment when indicators arise - Goodwill is not amortized but is tested for impairment annually or more frequently if circumstances indicate impairment, using qualitative or quantitative assessments[372] - Intangible assets are amortized over their estimated useful lives and reviewed for impairment when events or changes in circumstances indicate non-recoverability[371] - In Q4 2022, accelerated amortization of certain acquired intangible assets due to CTV platform integration resulted in approximately $34.7 million of incremental amortization expense[370] Stock-Based Compensation (Critical Accounting Policy) Stock-based compensation expense is recognized based on the fair value of awards, estimated using models that require subjective assumptions - Compensation expense for stock-based awards is measured and recognized based on their fair value at the grant date[373] - Fair value of options with service/performance conditions is estimated using the Black-Scholes model; awards with market conditions use a Monte-Carlo lattice model[373] - Subjective assumptions (expected term, volatility, risk-free rates, dividend yield) are used in valuation models, and changes could materially affect future compensation expense[374][375] - Expense is recognized over the requisite service period (generally four years) using straight-line or graded vesting models[373] Business Combinations (Critical Accounting Policy) The company allocates the purchase price of acquired businesses to identifiable assets and liabilities at fair value, with any excess recorded as goodwill - Acquired businesses' results are included from the acquisition date, with purchase price allocated to identifiable assets and liabilities at fair value[376] - Excess purchase price over net identifiable assets is recorded as goodwill[376] - Fair value determination requires significant judgment in selecting valuation methodologies, estimating future cash flows, and discount rates[376][378] - Stock-based or cash awards to acquired company stockholders are evaluated as contingent consideration or compensation for post-business combination services[377] - Acquisition-related transaction costs are expensed as incurred[378] Income Taxes (Critical Accounting Policy) Significant judgment is required to evaluate uncertain tax positions and determine the provision for income taxes, including the realization of deferred tax assets - Significant judgment is required in evaluating uncertain tax positions and determining the provision for income taxes[379] - Deferred tax assets and liabilities are determined by temporary differences and measured using enacted tax rates[379] - A valuation allowance is applied to deferred tax assets if realization of future tax benefits is not more likely than not[379] - Tax benefits from uncertain positions are recognized only if they are more likely than not to be sustained by taxing authorities[380] Recently Issued Accounting Pronouncements Magnite adopted a new lease accounting standard in 2022 with no material impact and will adopt a new business combinations standard in 2023 - Adopted ASU 2021-05 (Leases) on January 1, 2022, with no material impact[382] - Will adopt ASU 2021-08 (Business Combinations – Accounting for Contract Assets and Liabilities) prospectively in Q1 2023 for future acquisitions[382] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Magnite is exposed to market risks including interest rate fluctuations on its variable-rate debt, foreign currency exchange volatility, and inflation Interest Rate Fluctuation Risk The company is exposed to interest rate risk primarily through its floating-rate Term Loan B Facility - Cash and cash equivalents are relatively insensitive to interest rate changes due to short maturities, but interest income will vary[384] - Convertible Senior Notes have a fixed interest rate, so they are not exposed to interest rate expense fluctuations[385] - Term Loan B Facility bears a floating interest rate, exposing the company to changes in the underlying base rate[386] - An estimated 100 basis points increase above the LIBOR floor on the Term Loan B Facility would result in an approximate $3.5 million annualized impact to interest expense[387] - The company is exposed to refinancing risk for its outstanding debt[387] Foreign Currency Exchange Risk Magnite faces foreign currency risks from revenue and expenses denominated in currencies other than the U.S. Dollar - Exposed to foreign currency risks from revenue and expenses denominated in non-U.S. Dollar currencies (British Pound, Australian Dollar, Canadian Dollar, Euro)[388] - A 10% adverse change in foreign exchange rates would result in an approximate $10.5 million foreign currency loss as of December 31, 2022[388] - Does not currently use derivatives to hedge foreign currency exchange risk but may do so in the future[388] Inflation Risk While direct cost inflation has not materially affected the business, broader economic inflation could indirectly harm the company by reducing ad spend - Direct cost inflation has not had a material effect on the business[389] - Significant inflationary pressures could prevent offsetting higher costs through price increases[389] - Broader economic inflation could indirectly harm the business by reducing ad spend[389] Item 8. Financial Statements and Supplementary Data This section presents Magnite's audited consolidated financial statements for the fiscal year ended December 31, 2022, and related notes Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on Magnite's financial statements and internal controls, identifying revenue as a critical audit matter - Deloitte & Touche LLP issued an unqualified opinion on Magnite's consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2022[396] - Revenue was identified as a critical audit matter due to the highly automated, IT-dependent nature of processing and recording a significant volume of low-dollar transactions[403][404] Consolidated Balance Sheets Total assets were $2.712 billion as of December 31, 2022, while total liabilities were $1.921 billion, resulting in stockholders' equity of $791.3 million Consolidated Balance Sheet Highlights (in thousands) | ASSETS | December 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $326,254 | $230,401 | | Accounts receivable, net | $976,506 | $927,781 | | Total current assets | $1,326,261 | $1,178,116 | | Property and equipment, net | $44,969 | $34,067 | | Intangible assets, net | $253,501 | $426,615 | | Goodwill | $978,217 | $969,873 | | TOTAL ASSETS | $2,712,213 | $2,712,612 | | LIABILITIES | | | | Accounts payable and accrued expenses | $1,094,321 | $1,000,956 | | Total current liabilities | $1,125,032 | $1,029,395 | | Debt, non-current, net | $722,757 | $720,023 | | TOTAL LIABILITIES | $1,920,915 | $1,831,855 | | STOCKHOLDERS' EQUITY | | | | TOTAL STOCKHOLDERS' EQUITY | $791,298 | $880,757 | - Total assets remained stable at approximately $2.71 billion from 2021 to 2022[407] - Total liabilities increased by $89.1 million (4.9%) from $1.83 billion in 2021 to $1.92 billion in 2022[407] - Total stockholders' equity decreased by $89.5 million (10.2%) from $880.8 million in 2021 to $791.3 million in 2022[407] Consolidated Statements of Operations The company reported revenue of $577.1 million and a net loss of $130.3 million for the year ended December 31, 2022 Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | | :--- | :--- | :--- | :--- | | Revenue | $577,069 | $468,413 | $221,628 | | Total expenses | $689,853 | $549,483 | $275,862 | | Loss from operations | $(112,784) | $(81,070) | $(54,234) | | Total other (income) expense, net | $22,813 | $13,918 | $(1,495) | | Loss before income taxes | $(135,597) | $(94,988) | $(52,739) | | Provision (benefit) for income taxes | $(5,274) | $(95,053) | $693 | | Net income (loss) | $(130,323) | $65 | $(53,432) | | Basic net income (loss) per share | $(0.98) | $0.00 | $(0.55) | | Diluted net income (loss) per share | $(0.98) | $0.00 | $(0.55) | - Revenue increased by 23% from $468.4 million in 2021 to $577.1 million in 2022[409] - Net loss was $130.3 million in 2022, compared to a net income of $0.1 million in 2021 and a net loss of $53.4 million in 2020[409] - Loss from operations increased to $112.8 million in 2022 from $81.1 million in 2021[409] Consolidated Statements of Comprehensive Loss The comprehensive loss was $132.1 million in 2022, driven by the net loss and foreign currency translation adjustments Consolidated Statements of Comprehensive Loss (in thousands) | | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | | :--- | :--- | :--- | :--- | | Net income (loss) | $(130,323) | $65 | $(53,432) | | Foreign currency translation adjustments | $(1,775) | $(419) | $(912) | | Comprehensive loss | $(132,098) | $(354) | $(54,344) | - Comprehensive loss was $132.1 million in 2022, primarily due to net loss and foreign currency translation adjustments[412] Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased to $791.3 million in 2022, mainly due to the net loss for the year Consolidated Statements of Stockholders' Equity Highlights (in thousands) | | Balance at December 31, 2021 | Net loss (2022) | Stock-based compensation (2022) | Other comprehensive loss (2022) | Balance at December 31, 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | | Common Stock | $2 | $0 | $0 | $0 | $2 | | Additional Paid-In Capital | $1,282,589 | $(21,670) (retirement of common stock) | $66,822 | $0 | $1,319,221 | | Accumulated Other Comprehensive Loss | $(1,376) | $0 | $0 | $(1,775) | $(3,151) | | Treasury Stock | $(6,007) | $(15,663) (purchase) | $0 | $0 | $0 (retired) | | Accumulated Deficit | $(394,451) | $(130,323) | $0 | $0 | $(524,774) | | TOTAL STOCKHOLDERS' EQUITY | $880,757 | $(130,323) | $66,822 | $(1,775) | $791,298 | - Total stockholders' equity decreased by $89.5 million from $880.8 million in 2021 to $791.3 million in 2022[415] - Key drivers in 2022 included a net loss of $130.3 million, stock-based compensation of $66.8 million, and share repurchases/retirement[415] - In 2021, equity increased signif