Late last week, programmatic advertiser Magnite announced it would acquire global video ad-serving platform SpotX in a deal valued at $1.17 billion. The company also revealed preliminary results for its fourth quarter that easily surpassed expectations. The one-two punch of good news sent the stock exploding higher, gaining more than 26% on the day following the announcement.
On this clip from Motley Fool Live recorded on Feb. 5, “The Wrap” host Jason Hall and Fool.com contributor Danny Vena dug into the details and what they mean for investors.
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Jason Hall: All right, guys. Danny, Magnite. Stock was up big today, announced almost $2 billion acquisition of a big competitor and a super high growth space, and gave us some preliminary earnings. What do we need to know?
Danny Vena: Well, first of all, I want to say that Magnite is a company that I have owned the stock for quite some time. It’s a company that I actually bought back when the company was still named Telaria, which then got acquired by the Rubicon Group, which then changed its name to Magnite. Now, while we’ve had several name changes, we’re only on the second acquisition, and Magnite is going to acquire SpotX.
SpotX is a supply side, global video ad-serving platform. Digital media owners use this programmatic software to access desktop, mobile, and connected devices. Now, just to be clear, this is a supply side platform. Supply side is used by digital media owners, AKA the publishers, to sell their available advertising space. If you’re watching the 7:00 news, and the 7:00 news has 10 different commercial slots available, supply side make sure that they get the advertising that goes in those slots. That is what Magnite does, and consequently, that is also what SpotX does.
Now, the purchase price is going to be about $1.7 billion which is going to consist of about $560 million in cash and about 14 million shares of Magnite stock. Sorry, $1.17 billion, not $1.7, $1.17 billion. With these two companies together, they are going to create the largest independent sell-side platform and they’re going to be focusing on connected TV and on video.
I looked at the customer list that they published in the press report, this looks like a who’s who that crosses, it crosses television, it crosses streaming, it crosses gaming, it crosses all of these different segments here. I’m just going to read a few of the names. The CW Network, Discovery, Disney (NYSE:DIS) and Hulu, Electronic Arts, Fox Corporation and its streaming service Tubi, fuboTV (NYSE:FUBO), Microsoft (NASDAQ:MSFT), Roku (NASDAQ:ROKU), ViacomCBS it’s streaming service Pluto, and AT&T‘s (NYSE:T) WarnerMedia.
These are a lot of customers, these are very high profile. The fact that these companies are already putting their trust into either Magnite or SpotX, I think is a pretty good indicator of the confidence that they have in this business.
Now, I do want to mention, I have a particular concern about Magnite, which I will share in a moment. I’m going to do that right after I list the preliminary results.
Magnite reported revenue of $82 million, up 69% year-over-year. On a pro forma basis, it’s up 20%. Remember those two numbers, I’ll get back to them in second. Net income of $5.8 million and adjusted EBITDA [earnings before interest, taxes, depreciation, and amortization] of $29.9 million. Now, the market was expecting revenue of $74 million, so $82 million is a pretty sizable beat.
Because of the way they do the shares, we won’t know exactly what the earnings per share is. Right now, the market is expecting earnings per share of $0.13 cents. They report adjusted earnings per share but, and I’ll get to what my concern is now.
If you go and read any of Magnite’s press releases when they report earnings, there’s a little note there that I think is it’s important for investors to know and understand.
That note says, “The year-over-year comparisons, as reported, reflect Rubicon Project only results from the prior year quarter. When these comparisons are referred to as pro forma, that Telaria results in the prior year period were added in order to provide additional detailed insights to the business performance.”
Now, think about that, what they said was their revenue was up 69% year-over-year, just Rubicon, up 20% pro forma, Rubicon plus Telaria’s results. The way that they’re doing that gives me a little bit of concern. Again, I’m a Magnite shareholder, but I think investors should be watching because they’re going to roll off of that Telaria acquisition here probably in another quarter.
Then we’re not going to get those two numbers anymore, we’re just going to get one number. That one number is not going to be the 69% number, it’s going to be the lower number. I think if investors don’t understand that that’s the case, there is the potential that we could see the stock fall. I wanted to throw that out there.
Jason Hall: Danny, thanks for that. It’s been a wild ride. [laughs] There’s no getting around that, it’s has been an absolutely wild ride. Like I said earlier, I think the long-term prospects remain really, really good, but there’s a lot of expectations to make and it’s going to be pretty bumpy in the next little bit of time.
