MAGNITE, INC. This Quarterly Report on Form 10-Q and related statements by the Company contain forward-looking statements, including statements based upon or relating to our expectations, assumptions, estimates, and projections. In some cases, you can identify forward-looking statements by terms such as "may," "might," "will," "objective," "intend," "should," "could," "can," "would," "expect," "believe," "design," "anticipate," "estimate," "predict," "potential," "plan" or the negative of these terms, and similar expressions. Forward-looking statements may include, but are not limited to, statements concerning the acquisition ofSpotX, Inc. ("SpotX," and such acquisition the "SpotX Acquisition") orSpringServe, LLC ("SpringServe," and such acquisition the "SpringServe Acquisition") or the anticipated benefits thereof; statements concerning potential synergies from the SpotX Acquisition or SpringServe Acquisition; statements concerning the potential impacts of the COVID-19 pandemic on our business operations, financial condition, and results of operations and on the world economy; our anticipated financial performance; anticipated benefits or effects related to our completed merger withTelaria, Inc. inApril 2020 ("Telaria" and such merger the "Telaria Merger"); key strategic objectives; industry growth rates for ad-supported CTV and the shift in video consumption from linear TV to CTV; introduction of new offerings; the impact of transparency initiatives we may undertake; the impact of our traffic shaping technology on our business; the effects of our cost reduction initiatives; scope and duration of client relationships; the fees we may charge in the future; business mix; sales growth; client utilization of our offerings; our competitive differentiation; our market share and leadership position in the industry; market conditions, trends, and opportunities; certain statements regarding future operational performance measures; benefits from supply path optimization; and other statements that are not historical facts. 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. Risks that our business faces include, but are not limited to, the following: •our ability to realize the anticipated benefits of the Telaria Merger, SpotX Acquisition, and SpringServe Acquisition; •our ability to comply with the terms of our financing arrangements; •restrictions in our Credit Agreement may limit our ability to make strategic investments, respond to changing market conditions, or otherwise operate our business, which may place us at a disadvantage compared to competitors; •increases in our debt leverage may put us at greater risk of defaulting on our debt obligations, subject us to additional operating restrictions and make it more difficult to obtain future financing on favorable terms; •sales of our common stock by the former owner of SpotX may have an adverse effect on the price of our common stock; •conversion of our Convertible Senior Notes would dilute the ownership interest of existing stockholders; •the severity, magnitude, and duration of the COVID-19 pandemic, including impacts of the pandemic and of responses to the pandemic by governments, business and individuals on our operations, personnel, buyers, sellers, and on the global economy and the advertising marketplace; •our CTV spend may grow more slowly than we expect if industry growth rates for ad supported CTV are not accurate, if CTV sellers fail to adopt programmatic advertising solutions or if we are unable to maintain or increase access to CTV advertising inventory; •we may be unsuccessful in our supply path optimization efforts; •our ability to introduce new offerings and bring them to market in a timely manner, and otherwise adapt in response to client demands and industry trends; •uncertainty of our estimates and expectations associated with new offerings, including the CTV ad server product that we recently acquired in the SpringServe Acquisition; •lack of adoption and market acceptance of our Demand Manager solution; •we must increase the scale and efficiency of our technology infrastructure to support our growth; •the emergence of header bidding has increased competition from other demand sources and may cause infrastructure strain and added costs; •our access to mobile inventory may be limited by third-party technology or lack of direct relationships with mobile sellers; 31 -------------------------------------------------------------------------------- Table of Contents •we may experience lower take rates, which may not be offset by increase in the volume of ad requests, improvements in fill-rate, and/or increases in the value of transactions through our platform; •the impact of requests for discounts, fee concessions, rebates, refunds or favorable payment terms; •our history of losses, and the fact that in the past our operating results have and may in the future fluctuate significantly, be difficult to predict, and fall below analysts' and investors' expectations; •the effect on the advertising market and our business from difficult economic conditions or uncertainty; •the effects of seasonal trends on our results of operations; •we operate in an intensely competitive market that includes companies that have greater financial, technical and marketing resources than we do; •the effects of consolidation in the ad tech industry; •the growing percentage of digital advertising spend captured by closed "walled gardens" (such as Google, Facebook, Comcast, and Amazon); •our ability to differentiate our offerings and compete effectively to combat commodification and disintermediation; •potential limitations on our ability to collect or use data as a result of consumer tools, regulatory restrictions and technological limitations; •the development and use of new identity solutions as a replacement for third-party cookies and other identifiers may disrupt the programmatic ecosystem and cause the performance of our platform to decline; •the industry may not adopt or may be slow to adopt the use of first-party publisher segments as an alternative to third-party cookies; •our ability to comply with, and the effect on our business of, evolving legal standards and regulations, particularly concerning data protection and privacy; •failure by us or our clients to meet advertising and inventory content standards could harm our brand and reputation and those of our partners; •the freedom of buyers and sellers to direct their spending and inventory to competing sources of inventory and demand; •the ability of buyers and sellers to establish direct relationships and integrations without the use of our platform; •our reliance on large aggregators of advertising inventory, and the concentration of CTV among a small number of large sellers that enjoy significant negotiating leverage; •our ability to provide value to both buyers and sellers of advertising without being perceived as favoring one over the other or being perceived as competing with them through our service offerings; •our reliance on large sources of advertising demand, including demand side platforms ("DSPs") that may have or develop high-risk credit profiles or fail to pay invoices when due; •we may be exposed to claims from clients for breach of contracts; •errors or failures in the operation of our solution, interruptions in our access to network infrastructure or data, and breaches of our computer systems; •our ability to ensure a high level of brand safety for our clients and to detect "bot" traffic and other fraudulent or malicious activity; •the use of our net operating losses and tax credit carryforwards may be subject to certain limitations; •the possibility of adjustments to the purchase price allocation and valuation relating to the SpotX Acquisition and the SpringServe Acquisition; •our ability to raise additional capital if needed; •volatility in the price of our common stock; 32 -------------------------------------------------------------------------------- Table of Contents •the impact of negative analyst or investor research reports; •our ability to attract and retain qualified employees and key personnel; •costs associated with enforcing our intellectual property rights or defending intellectual property infringement; •the Capped Call Transactions may affect the value of the Convertible Senior Notes and our common stock; •we are subject to counterparty risk with respect to the Capped Call Transactions; •the conditional conversion feature of the Convertible Senior Notes, if triggered, may adversely affect our financial condition and operating result; •failure to successfully execute our international growth plans; and •our ability to identify future acquisitions of or investments in complementary companies or technologies and our ability to consummate the acquisitions and integrate such companies or technologies. We discuss many of these risks and additional factors that could cause actual results to differ materially from those anticipated by our forward-looking statements under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this report and in other filings we have made and will make from time to time with theSecurities and Exchange Commission , orSEC , including our Annual Report on Form 10-K for the year endedDecember 31, 2020 and subsequent filings. These forward-looking statements represent our estimates and assumptions only as of the date of the report in which they are included. Unless required by federal securities laws, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made. Without limiting the foregoing, any guidance we may provide will generally be given only in connection with quarterly and annual earnings announcements, without interim updates, and we may appear at industry conferences or make other public statements without disclosing material nonpublic information in our possession. Given these uncertainties, investors should not place undue reliance on these forward-looking statements. Investors should read this Quarterly Report on Form 10-Q and the documents that we reference in this report and have filed or will file with theSEC completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. 33 -------------------------------------------------------------------------------- Table of Contents OverviewMagnite, Inc. , formerly known asThe Rubicon Project, Inc. ("we," or "us"), provides technology solutions to automate the purchase and sale of digital advertising inventory. OnApril 1, 2020 , we completed a stock-for-stock merger withTelaria, Inc. ("Telaria" and such merger the "Telaria Merger"), a leading provider of connected television ("CTV") technology, and onApril 30, 2021 , we completed the acquisition ofSpotX, Inc. ("SpotX" and such acquisition the "SpotX Acquisition"), a leading platform shaping CTV and video advertising globally. Following the Telaria Merger and SpotX Acquisition, we believe that we are the world's largest independent omni-channel sell-side advertising platform, offering a single partner for transacting globally across all channels, formats and auction types, and the largest independent programmatic CTV marketplace, making it easier for buyers to reach CTV audiences at scale from industry-leading streaming content providers, broadcasters, platforms and device manufacturers. Our platform features applications and services for sellers of digital advertising inventory, or publishers, that own and operate CTV channels, applications, websites and other digital media properties, to manage and monetize their inventory; applications and services for buyers, including advertisers, agencies, agency trading desks, and demand side platforms, ("DSPs"), to buy digital advertising inventory; and a transparent, independent marketplace that brings buyers and sellers together and facilitates intelligent decision making and automated transaction execution at scale. Our clients include many of the world's leading buyers and sellers of digital advertising inventory. Our platform processes trillions of ad requests per month allowing buyers access to a global, scaled, independent alternative to "walled gardens," who both own and sell inventory and maintain control on the demand side. We provide a full suite of tools for sellers to control their advertising business and protect the consumer viewing experience. These tools are particularly important to CTV sellers who need to ensure a TV-like viewing and advertising experience for consumers. For instance, our "ad-pod" feature provides publishers with a tool analogous to commercial breaks in traditional linear television so that they can request and manage several ads at once from different demand sources. Using this tool, publishers can establish business rules such as competitive separation of advertisers to ensure that competing brand ads do not appear during the same commercial break. In addition, we offer audio normalization tools to control for the volume of an ad relative to content, frequency capping to avoid exposing viewers to repetitive ad placements, and creative review so that a publisher can review and approve the ad units being served to its properties. OnJuly 1, 2021 , we acquiredSpringServe, LLC ("SpringServe"), a leading ad serving platform for CTV. SpringServe's ad serving technology manages multiple aspects of video advertising, including for CTV publishers, across both their programmatic and direct-sold inventory, including forecasting, routing, customized ad experiences, and advanced podding logic. The integration of SpringServe's ad serving technology with our existing programmatic SSP capabilities provides CTV publishers a holistic yield management solution that dynamically allocates between direct-sold and programmatic inventory to drive value. Buyers leverage our platform to manage their advertising spend and reach their target audiences on brand-safe premium inventory, simplify order management and campaign tracking, obtain actionable insights into audiences for their advertising, and access impression-level purchasing from thousands of sellers. We believe that our scale, platform features, and omni-channel offering makes us an essential partner for buyers. We operate our business on a worldwide basis, with an established operating presence inNorth America ,Australia andEurope , and a developing presence inAsia andSouth America . Our non-U.S. subsidiaries and operations perform primarily sales, marketing, and service functions. Our global workforce has maintained a work from-home policy since March, 2020. We continue to monitor best practices and guidance for a potential return to office and currently plan to return to our offices in most locations during the first quarter of 2022. We will approach our return with caution to prioritize the safety and health of our employees. We believe that our employees have been able to work productively during the time period in which our global offices have been shut down. However, to the extent we have extended work from home requirements, or that work patterns are permanently altered, it is unclear how productivity may be impacted in the long-term. How We Generate Revenue We generate revenue from the use of our platform for the purchase and sale of digital advertising inventory. We also generate revenue from the fee we charge clients for use of our Demand Manager header-bidding product and SpringServe ad server product, which we acquired onJuly 1, 2021 . Generally, our revenue is based on a percentage of the ad spend that runs through our platform, although for certain clients or transaction types we may receive a fixed CPM for each impression sold. Digital advertising inventory is created when consumers access sellers' content. Sellers provide digital advertising inventory to our SSP platform in the form of advertising requests, or ad requests. When we receive ad requests from sellers, we send bid requests to buyers, which enable buyers to bid on sellers' digital advertising inventory. Winning bids can create advertising, or 34 -------------------------------------------------------------------------------- Table of Contents paid impressions, for the seller to present to the consumer. The price that buyers pay for each thousand paid impressions purchased is measured in units referred to as CPM, or cost per thousand, and the total volume of spending between buyers and sellers on our platform is referred to as advertising spend. Industry TrendsContinued Shift Toward Digital Advertising Consumers are rapidly shifting their viewing habits towards digital mediums and expect to be able to consume content seamlessly across multiple devices, including computers, tablets, smartphones, and CTVs whenever and wherever they want. As digital content consumption continues to proliferate, we believe the percentage of advertising dollars spent through digital channels will continue to grow. Automation of Buying and Selling Due to the size and complexity of the advertising ecosystem and purchasing process, manual processes cannot effectively manage digital advertising inventory at scale. In addition, both buyers and sellers are demanding more transparency, better controls and more relevant insights from their advertising inventory purchases and sales. This has created a need for software solutions, known as programmatic advertising, that automate the process for planning, buying, selling and measuring digital advertising across screens. Programmatic buying enables the use of real-time bidding technology that allows for the dynamic purchase and sale of advertising inventory on an impression-by-impression basis. Programmatic transactions include open auctions, where multiple buyers bid against each other in a real-time auction for the right to purchase a publisher's inventory, as well as reserve auctions, where publishers establish direct deals or private marketplaces with select buyers. Programmatic has become the dominant method of transacting for desktop and mobile inventory and we expect it to continue to grow as a percentage of CTV advertising. Convergence of TV and Digital CTV viewership is growing rapidly and the pace of adoption is accelerating the transition of linear television to CTV programming. As the number of CTV channels continues to proliferate, we believe that ad-supported models or hybrid models that rely on a combination of subscription fees and advertising revenue will continue to gain traction. In turn, we believe brand advertisers looking to engage with streaming viewers will continue to shift their budgets from linear to CTV. Furthermore, as the CTV market continues to mature, we believe that a greater percentage of CTV advertising inventory will be sold programmatically, similar to trends that occurred in desktop and mobile. As such, we expect CTV to be a significant driver of our revenue growth for the foreseeable future. We expect the recently completed acquisitions of SpotX and SpringServe to further fuel this growth. Identity Solutions A number of participants in the advertising technology ecosystem have taken or are expected to take action to eliminate or restrict the use of third-party cookies and other primary identifiers that have historically been used to deliver targeted advertisements. We believe that the elimination of third-party cookies has the potential to shift the programmatic ecosystem from an identity model powered by buyers that are able to aggregate and target audiences through cookies to one enabled by sellers that have direct relationships with consumers and are therefore better positioned to obtain user data and consent for implementing first party identifiers. We believe that our platform and scale position us well to provide the infrastructure and tools needed for a publisher-centric identity model to succeed, and we are already enabling sellers to create audience segments with their first-party data. Supply Path Optimization Supply Path Optimization ("SPO") refers to efforts by buyers to consolidate the number of vendors with which they work to find the most effective and cost-efficient paths to procure media. SPO is important to buyers because it can increase the proportion of their advertising ultimately spent on working media, with the goal of increasing return on their advertising spend, and can help them gain efficiencies by reducing the number of vendors with which they work in a complex ecosystem. We believe we are well positioned to benefit from SPO in the long run as a result of our transparency, our broad and unique inventory supply across all channels and formats, including CTV, buyer tools, such as traffic shaping that reduce the cost of working with us, and our brand safety measures. Header Bidding and Data Processing Header bidding is a programmatic technique by which sellers offer inventory to multiple ad exchanges and supply side platforms, such as our platform, simultaneously. Header bidding has been rapidly adopted in recent years in the desktop and mobile channels, and while the rise and rapid adoption of header bidding increased revenue for sellers, it has also created new challenges and technical complexities. Header bidding has led to a significant increase in the number of ad impressions to be processed and analyzed through our platform as well as by DSPs, which can lead to increased costs if not properly addressed. We have invested in technology solutions, such as Demand Manager, to help publishers manage their header-bidding inventory. 35 -------------------------------------------------------------------------------- Table of Contents Privacy Regulation Our business is highly susceptible to emerging privacy regulations and oversight concerning the collection, use and sharing of data. Data protection authorities in a number of territories have expressed a desire to focus on the advertising technology ecosystem. In particular, this scrutiny has focused on the use of technology (including cookies) to collect or aggregate information about Internet users' online browsing activity. Because we, and our clients, rely upon large volumes of such data, it is essential that we monitor developments in this area domestically and globally, and engage in responsible privacy practices. The use of and transfer of personal data in EEA member states and theUK is currently governed by the General Data Protection Regulation (the "GDPR"). The GDPR sets out higher potential liabilities for certain data protection violations and establishes significant new regulatory requirements resulting in a greater compliance burden for us in the course of delivering our solution in the EEA andUK . While data protection authorities have started to clarify certain requirements under GDPR, significant uncertainty remains as to how the regulation will be applied and enforced. In addition to the GDPR, a number of new privacy regulations will or have already come into effect. TheCalifornia legislature passed theCalifornia Consumer Privacy Act ("CCPA") in 2018, which became effectiveJanuary 1, 2020 . This law imposes new obligations on businesses that handle the personal information ofCalifornia residents. The obligations imposed require us to maintain ongoing significant resources for compliance purposes. Certain requirements remain unclear due to ambiguities in the drafting of or incomplete guidance. Adding to the uncertainty facing the ad tech industry, a new law, titled the California Privacy Rights Act ("CPRA") passed as a ballot initiative inCalifornia and will impose additional notice and opt out obligations on the digital advertising space. This law, which will take effect inJanuary 2023 , is expected to cause us to incur additional compliance costs and impose additional restrictions on us and on our industry partners. These ambiguities and resulting impact on our business will need to be resolved over time. In addition, other privacy bills have been introduced at both the state and federal level. Certain international territories are also imposing new or expanded privacy obligations. In the coming years, we expect further consumer privacy regulation worldwide. We support privacy initiatives and believe they will be beneficial to consumers' confidence in advertising technology, which will ultimately be positive for the advertising ecosystem in the long term. In the short term, however, until prevailing compliance practices standardize, the impact of worldwide privacy regulations on our business and, consequently, our revenue could be negatively impacted. 36
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Trends in Our BusinessTelaria Merger , SpotX and SpringServe Acquisitions OnApril 1, 2020 , we completed the Telaria Merger, onApril 30, 2021 , we completed the SpotX Acquisition and onJuly 1, 2021 , we completed the SpringServe Acquisition. These transactions were transformative and have resulted in what we believe to be the world's largest independent sell-side advertising platform, with scale, capabilities, and solutions exceeding those offered by competitors. We offer a single partner for transacting CTV, desktop display, video, audio and mobile inventory across all geographies and auction types. As CTV viewership is growing rapidly and the pace of adoption is accelerating the shift of advertising budgets from linear television to CTV, these transactions have strategically positioned us to take advantage of this growth trend, and we believe that CTV will be our biggest growth driver in future periods. The SpotX Acquisition resulted in a significant increase in our revenue and Revenue ex-TAC (as defined in section "Key Operating and Financial Performance Metrics") in particular in CTV and online video. As a result of the transaction, we expect CTV to represent a higher percentage of our overall revenue, and because CTV is largely transacted through reserve auctions, we also expect to see an increase in the percentage of reserve auction transactions transacted on our platform. The acquisition will result in an increase in related operating expenses, primarily associated with costs for personnel, payments to sellers for revenue reported on a gross basis, and other ancillary costs to support the business. We expect some of those increases to be offset by cost saving activities that began in the second quarter of 2021 and continue to be in process. We are targeting in excess of$35 million in run-rate operating cost synergies, over a two year period. As ofSeptember 30, 2021 , we have achieved more than half of our cost synergy target on a run-rate basis. The SpringServe Acquisition expanded our video and CTV offering to include ad server functionality in addition to our programmatic SSP capabilities. The SpringServe ad server manages multiple aspects of video advertising for both programmatic transactions and inventory sold directly by the publisher, including forecasting, routing, customized ad experiences, and advanced podding logic. Combined with our SSP, the SpringServe ad server provides publishers a holistic yield management solution that works across their entire video advertising business to drive value. This is of particular importance for CTV publishers, who still sell a large percentage of their inventory through their direct sales team. We believe the acquisition of SpringServe is highly strategic as it allows us to offer publishers an independent full-stack solution to the walled gardens, which can be leveraged across their entire video advertising business. Impact of COVID-19 Pandemic and Other Recent Developments The COVID-19 pandemic and resulting global disruptions have negatively affected our revenue, results of operations, cash flows, and financial condition. Our business depends on the overall demand for advertising and on the economic health of our current and prospective sellers and buyers. In response to the pandemic and associated economic challenges, a significant number of advertisers, in particular with respect to certain categories of advertising that were particularly impacted by the pandemic and resulting stay-at-home orders, reduced their advertising budgets, resulting in an overall decrease in advertising spend through our platform compared to our pre-COVID expectations. This decrease was particularly pronounced through the first half of 2020, where we experienced a significant decline in our revenues compared to our expectations. Our revenue trends improved significantly during the third and fourth quarters of 2020 as our revenue returned to positive growth. During the first half of 2021, revenue from a number of advertising categories returned to pre-COVID spending levels, while certain categories including travel, auto, and entertainment remain below pre-COVID spending levels. In the third quarter, we continued to see lower levels of spending in travel and auto, in part due to global supply chain disruptions, and also faced challenges due to government stay-at-home orders in certain markets such asAustralia . We expect such challenges to persist throughout the remainder of 2021 and it is possible that they will increase in scope. Due to the substantial uncertainties associated with the COVID-19 pandemic, the extent to which the pandemic (and actions taken in response to it by governments, businesses, and individuals) and other direct and indirect impacts of the pandemic will ultimately impact our business and is currently unknown, and depends on various factors, many of which are outside of our control. Refer to Item 1A. "Risk Factors" for additional information related to this risk. 37 -------------------------------------------------------------------------------- Table of Contents Components of Our Results of Operations We report our financial results as one operating segment. Our consolidated operating results are regularly reviewed by our chief operating decision maker, principally to make decisions about how we allocate our resources and to measure our consolidated operating performance. Revenue We generate revenue from the purchase and sale of digital advertising inventory through our platform. We also generate revenue from the fee we charge clients for use of our Demand Manager product and SpringServe ad server product, which we acquired onJuly 1, 2021 . Generally, our revenue is based on a percentage of the ad spend that runs through our platform, although for certain clients or transaction types we may receive a fixed CPM for each impression sold. We recognize revenue upon the fulfillment of our contractual obligations in connection with a completed transaction, subject to satisfying all other revenue recognition criteria. For the majority of transactions executed through our platform, we act as an agent on behalf of the publisher that is monetizing its inventory, and revenue is recognized net of any advertising inventory costs that we remit to sellers. With respect to certain revenue streams for managed advertising campaigns that are transacted through insertion orders, we report revenue on a gross basis, based primarily on our determination that the Company acts as the primary obligor in the delivery of advertising campaigns for our buyer clients with respect to such transactions. Following the SpotX Acquisition, the percentage of our revenue reported on a gross basis has increased significantly. During the first quarter of 2021 (prior to the SpotX Acquisition), our revenue reported on a gross basis was less than 3% of total revenue. For the three months endedSeptember 30, 2021 , our revenue reported on a gross basis increased to 20% of total revenue. As revenue streams acquired in the SpotX Acquisition continue to increase, the percentage of revenue reported on a gross basis may continue to increase in future periods. Any mix shift that causes an increase in the relative percentage of our revenue accounted for on a gross basis would result in a higher revenue contribution and an associated decrease in our gross margin percentage (with no underlying impact on gross profit or Revenue excluding traffic and acquisition cost ("TAC"), as defined in section "Key Operating and Financial Performance Metrics"). Our revenue recognition policies are discussed in more detail in our audited consolidated financial statements and notes thereto for the year endedDecember 31, 2020 included in our Annual Report on Form 10-K and in Note 3 of the accompanying Notes to the Condensed Consolidated Financial Statements. Expenses We classify our expenses into the following categories: Cost of Revenue. Our cost of revenue consists primarily of data center costs, bandwidth costs, ad protection costs, depreciation and maintenance expense of hardware supporting our revenue-producing platform, amortization of software costs for the development of our revenue-producing platform, amortization expense associated with acquired developed technologies, personnel costs, facilities-related costs, and cloud computing costs. In addition, for revenue booked on a gross basis, cost of revenue includes TAC. Personnel costs included in cost of revenue include salaries, bonuses, and stock-based compensation, and are primarily attributable to personnel in our network operations group who support our platform. We capitalize costs associated with software that is developed or obtained for internal use and amortize the costs associated with our revenue-producing platform in cost of revenue over their estimated useful lives. We amortize acquired developed technologies over their estimated useful lives. Sales and Marketing. Our sales and marketing expenses consist primarily of personnel costs, including salaries, bonuses, and stock-based compensation, as well as marketing expenses such as brand marketing, travel expenses, trade shows and marketing materials, professional services, and amortization expense associated with client relationships, backlog, and non-compete agreements from our business acquisitions, and to a lesser extent, facilities-related costs and depreciation and amortization. Our sales organization focuses on increasing the adoption of our solution by existing and new buyers and sellers. We amortize acquired intangibles associated with client relationships and backlog from our business acquisitions over their estimated useful lives. Technology and Development. Our technology and development expenses consist primarily of personnel costs, including salaries, bonuses, and stock-based compensation, as well as professional services associated with the ongoing development and maintenance of our solution, depreciation and amortization, and to a lesser extent, facilities-related costs. These expenses include costs incurred in the development, implementation, and maintenance of internal use software, including platform and related infrastructure. Technology and development costs are expensed as incurred, except to the extent that such costs are associated with internal use software development that qualifies for capitalization, which are then recorded as internal use software development costs, net, on our consolidated balance sheets. We amortize internal use software development costs that relate to our revenue-producing activities on our platform to cost of revenue and amortize other internal use software development costs to technology and development costs or general and administrative expenses, depending on the nature of the related project. We amortize acquired intangibles associated with technology and development functions from our business acquisitions over their estimated useful lives. General and Administrative. Our general and administrative expenses consist primarily of personnel costs, including salaries, bonuses, and stock-based compensation, associated with our executive, finance, legal, human resources, compliance, and other administrative personnel, as well as accounting and legal professional services fees, facilities-related costs and depreciation and amortization, and other corporate-related expenses. General and administrative expenses also include amortization of internal 38 -------------------------------------------------------------------------------- Table of Contents use software development costs and acquired intangible assets from our business acquisitions over their estimated useful lives that relate to general and administrative functions. Merger, Acquisition, and Restructuring Costs. Our merger, acquisition, and restructuring costs consist primarily of professional service fees associated with the merger and acquisition activities, including cash-based employee termination costs, stock-based compensation charges, and other restructuring activities, including facility closures, relocation costs, and contract termination costs. Other (Income) Expense Interest (Income) Expense, Net. Interest expense consists of interest expense associated with our Convertible Senior Notes and credit facility ("Term Loan B Facility"), and their related amortization of debt issuance costs and debt discount. Interest income consists of interest earned on our cash equivalents. Other Income. Other income consists primarily of rental income from commercial office space we hold under lease and have sublet to other tenants. Foreign Currency Exchange (Gain) Loss, Net. Foreign currency exchange (gain) loss, net consists primarily of gains and losses on foreign currency transactions and remeasurement of monetary assets and liabilities on our balance sheet denominated in foreign currencies. Foreign currency monetary assets and liabilities consist primarily of cash and cash equivalents, accounts receivable, accounts payable, and various intercompany balances held between our subsidiaries. Our primary foreign currency exposures are currencies other than theU.S. Dollar, principally the Australian Dollar, British Pound, Canadian Dollar, Euro, and Japanese Yen. Provision (Benefit) for Income Taxes We are subject to income taxes in theU.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations, administrative practices, principles, and interpretations in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. Our effective tax rates could be affected by numerous factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize related tax benefits, the applicability of special tax regimes, changes in foreign currency exchange rates, changes in our stock price, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions. 39 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth our condensed consolidated results of operations: Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2021 2020 Change % 2021 2020 Change % (in thousands) (in thousands) Revenue$ 131,871 $ 60,982 116 %$ 307,127 $ 139,625 120 % Expenses (1)(2): Cost of revenue 63,541 21,031 202 % 134,823 56,579 138 % Sales and marketing 52,260 21,761 140 % 118,122 53,059 123 % Technology and development 21,059 13,562 55 % 53,436 37,318 43 % General and administrative 16,535 13,314 24 % 47,673 38,221 25 % Merger, acquisition, and restructuring costs 2,424 2,254 8 % 37,778 16,677 127 % Total expenses 155,819 71,922 117 % 391,832 201,854 94 % Loss from operations (23,948) (10,940) (119) % (84,705) (62,229) (36) % Other (income) expense, net 5,079 (871) (683) % 7,920 (3,444) (330) % Loss before income taxes (29,027) (10,069) (188) % (92,625) (58,785) (58) % Provision (benefit) for income taxes (4,708) 446 1,156 % (92,237) 533 17,405 % Net loss$ (24,319) $ (10,515) (131) %$ (388) $ (59,318) 99 % (1) Stock-based compensation expense included in our expenses was as follows: Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2021 2020 2021 2020 (in thousands) (in thousands)
Cost of revenue$ 278 $ 122 $ 530 $ 412 Sales and marketing 4,583 2,309 10,426 5,928 Technology and development 3,828 2,061 8,195 5,469 General and administrative 3,087 2,504 8,299 7,935 Merger, acquisition, and restructuring costs 48 354 1,071 1,554
Total stock-based compensation expense
(2) Depreciation and amortization expense included in our expenses was as follows:
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2021 2020 2021 2020
(in thousands) (in thousands)
Cost of revenue $ 24,764 $ 9,579 $ 52,108 $ 26,407
Sales and marketing 23,569 4,317 44,037 8,962
Technology and development 190 143 468 340
General and administrative 179 37 471 448
Total depreciation and amortization expense
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The following table sets forth our condensed consolidated results of
operations for the specified periods as a percentage of our revenue for those
periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 September 30, 2020 2021 September 30, 2020
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 48 34 44 41
Sales and marketing 39 36 39 38
Technology and development 16 22 17 27
General and administrative 13 22 16 27
Merger, acquisition, and restructuring
costs 2 4 12 12
Total expenses 118 118 128 145
Loss from operations (18) (18) (28) (45)
Other (income) expense, net 4 (2) 2 (3)
Loss before income taxes (22) (16) (30) (42)
Provision (benefit) for income taxes (4) 1 (30) -
Net loss (18) % (17) % - % (42) %
Comparison of the Three and Nine Months Ended
Revenue
Revenue increased$70.9 million , or 116%, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . Our revenue growth was driven primarily by increases in our core business as well as incremental revenue from the SpotX Acquisition, which was completed onApril 30, 2021 . On a pro forma basis, including SpotX and SpringServe revenue for the three months endedSeptember 30, 2020 , revenue increased 27% for the three months endedSeptember 30, 2021 compared to the prior period, primarily due to the growth in all channels, mainly driven by CTV and mobile, and a rebound from impacts of the COVID-19 pandemic. Revenue increased$167.5 million , or 120%, for the nine months endedSeptember 30, 2021 compared to the prior year period, for the same reasons above plus incremental contributions from the Telaria Merger, which was completed onApril 1, 2020 . On a pro forma basis, including revenue for SpringServe, SpotX, and Telaria during the relevant pre-acquisition period, revenue increased 47%, for the nine months endedSeptember 30, 2021 compared to the prior year period. We expect our revenue will substantially increase through the remainder of 2021 as a result of our recent Acquisitions and from continued growth in other areas of our business, in particular CTV. Our revenue is largely a function of the number of advertising transactions and the price, or CPM, at which the inventory is sold, which results in total advertising spend on our platform; and, with respect to our revenue reported on a net basis, the take rate we charge for our services. Because pricing and take rate vary across publisher, channel and transaction type, our revenue is impacted by shifts in the mix of advertising spend on our platform. For instance, an increase in reserve auction transactions as a percentage of the transactions on our platform could also result in reduced revenue, if not offset by increased advertising spend, because reserve auction transactions can carry lower take rates than open auction transactions. We believe that contributions to revenue from reserve auction, in particular with respect to CTV which is largely transacted on a reserved basis, will continue to grow as a percentage of our total revenue. In general, we expect this shift will result in an overall increase in advertising spend through our platform and in revenue due to both an increase in volume and average CPM which will be partially offset by a decrease in our average take rate. Cost of Revenue Cost of revenue increased$42.5 million , or 202%, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 , primarily due to costs associated with our revenue growth, and an increase in traffic acquisition cost driven by the increase in revenue reported on a gross basis as a result of the SpotX Acquisition. Cost of revenue increased by$17.0 million in traffic acquisition costs associated with revenue recognized on a gross basis,$15.2 million in depreciation and amortization, and$6.6 million in data and bandwidth expenses during the three months endedSeptember 30, 2021 compared to the same period in the prior year. For the nine months endedSeptember 30, 2021 , cost of revenue increased$78.2 million , or 138%, compared to the prior year period primarily due to the same reasons above, as well as increased costs from the Telaria Merger, which was completed onApril 1, 2020 . Cost of revenue increased by$31.6 million in traffic acquisition costs associated with revenue recognized on a gross 41 -------------------------------------------------------------------------------- Table of Contents basis,$25.7 million in depreciation and amortization, and$15.1 million in data and bandwidth expenses during the nine months endedSeptember 30, 2021 compared to the same period in the prior year. Our cost of revenue will continue to increase in future periods as a result of our recent acquisitions. In addition, excluding the impact of recent acquisitions, we expect our cost of revenue to increase on a year-over-year basis through the remainder of 2021 due primarily to the increase in expenses due to a full year of amortization of intangible assets resulting from the Telaria Merger and higher cloud service costs to support the growth of our business. Cost of revenue may fluctuate from quarter to quarter and period to period, on an absolute dollar basis and as a percentage of revenue, depending on revenue levels and the volume of transactions we process supporting those revenues, and the timing and amounts of depreciation and amortization of equipment and software. Sales and Marketing Sales and marketing expenses increased$30.5 million , or 140%, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 , primarily due to the SpotX Acquisition and associated increases in headcount and the amortization of acquired intangibles and other assets. Sales and marketing expenses increased by$19.3 million related to depreciation and amortization and by$10.5 million related to personnel expenses, both increases associated with the SpotX Acquisition. For the nine months endedSeptember 30, 2021 , sales and marketing expenses increased$65.1 million , or 123%, compared to the prior year period for the same reasons above. Sales and marketing expenses increased by$35.1 million related to depreciation and amortization and by$27.9 million related to personnel expenses, both increases associated with the SpotX Acquisition and the Telaria Merger. We expect sales and marketing expenses will continue to increase on a year-over-year basis through the remainder of 2021 due to increase in our headcount associated with our recent acquisitions, increases in travel and entertainment related expenses, as well as a full year of amortization of intangible assets resulting from the Telaria Merger, and amortization of acquired intangible assets as a result of the SpotX Acquisition, partially offset by reductions associated with cost synergies. Sales and marketing expenses may fluctuate quarter to quarter and period to period, on an absolute dollar basis and as a percentage of revenue, based on revenue levels, the timing of our investments and seasonality in our industry and business. Technology and Development Technology and development expenses increased$7.5 million , or 55%, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 , due primarily to an increase of$7.1 million in personnel costs as a result of the increased headcount associated with the SpotX Acquisition. For the nine months endedSeptember 30, 2021 , technology and development expenses increased$16.1 million , or 43%, compared to the prior year period, due to an increase of$15.5 million in personnel costs primarily for the same reasons above as well as the Telaria Merger. We expect technology and development expenses to continue to increase on a year-over-year basis through the remainder of 2021 due to increase in our headcount associated with our recent acquisitions, partially offset by reductions associated with cost synergies. The timing and amount of our capitalized development and enhancement projects may affect the amount of development costs expensed in any given period. As a percentage of revenue, technology and development expense may fluctuate from quarter to quarter and period to period based on revenue levels, the timing and amounts of technology and development efforts, the timing and the rate of the amortization of capitalized projects and the timing and amounts of future capitalized internal use software development costs. General and Administrative General and administrative expenses increased by$3.2 million , or 24%, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 , primarily due to increases of$1.6 million in personnel expenses primarily associated with the SpotX Acquisition. For the nine months endedSeptember 30, 2021 , general and administrative expenses increased$9.5 million , or 25%, compared to the prior year period, primarily due to increases of$4.6 million in personnel expenses,$2.0 million in professional services, and$0.9 million in software licenses, for the same reasons above. We expect general and administrative expenses will continue to increase on a year-over-year basis through the remainder of 2021 due our recent acquisitions, partially offset by reductions associated with cost synergies. 42 -------------------------------------------------------------------------------- Table of Contents General and administrative expenses may fluctuate from quarter to quarter and period to period based on the timing and amounts of expenditures in our general and administrative functions as they vary in scope and scale over periods. Such fluctuations may not be directly proportional to changes in revenue. Merger, Acquisition, and Restructuring Costs Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2021 2020 2021 2020 (in thousands) Professional Services (investment banking advisory, legal and other professional services)$ 1,064 $ 952 $ 28,032 $ 9,533 Personnel related (severance and one-time termination benefit costs) 1,312 948 6,176 5,590 Non-cash stock-based compensation (double-trigger acceleration and severance) 48 354 1,070 1,554 Loss contracts (lease related) - - 2,500 - Total merger, acquisition, and restructuring costs$ 2,424 $
2,254
Merger, acquisition, and restructuring costs increased by$0.2 million , or 8%, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . Costs incurred during the three months endedSeptember 30, 2021 of$2.4 million were primarily due to the SpotX and SpringServe Acquisitions, which were completed onApril 30, 2021 andJuly 1, 2021 , respectively, which costs included investment banking advisory, legal, and other professional services fees, one-time cash-based employee termination benefit costs, and non-cash stock-based compensation expense associated with equity accelerations due to severance benefits. Costs incurred during the three months endedSeptember 30, 2020 of$2.3 million were primarily due to the Telaria Merger, which was completed onApril 1, 2020 , which costs included investment banking advisory, legal, and other professional services fees, one-time cash-based employee termination benefit costs, and non-cash stock-based compensation expense associated with double-trigger accelerations. Merger, acquisition, and restructuring costs increased by$21.1 million , or 127%, for the nine months endedSeptember 30, 2021 compared to the prior year period for the same reasons above as well as facility closure costs associated with office space restructuring activities. We expect to continue to incur merger, acquisition, and restructuring costs to continue to increase on a year-over-year basis through the remainder of 2021 as a result of the SpotX and SpringServe Acquisitions and related restructuring activities. Other (Income) Expense, Net Three Months Ended Nine Months Ended September 30, September 30, September 30, 2021 September 30, 2020 2021 2020 (in thousands) (in thousands) Interest (income) expense, net$ 7,280 $
30
(955) (1,194) (3,317) (2,487)
Foreign exchange (gain) loss, net (1,246) 293 (1,358) (845)
Total other (income) expense, net $ 5,079 $
(871)
Interest (income) expense, net increased by$7.3 million and$12.7 million during the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year, mainly due to interest expense associated with the Convertible Senior Notes (defined below), which the Company entered into duringMarch 2021 , and interest expense associated with the Term Loan B Facility (defined below), which the Company entered into duringApril 2021 . We expect interest expense to increase in 2021 compared to 2020 significantly as a result of increase in interest expense associated with our Convertible Senior Notes and Term Loan B Facility. Foreign exchange (gain) loss, net is impacted by movements in exchange rates and the amount of foreign currency-denominated cash, receivables, payables, and intercompany balances, which are impacted by our billings to buyers and payments to sellers. During the three and nine months endedSeptember 30, 2021 , the net foreign exchange gain was primarily attributable to the currency movements between the British Pound, Australian Dollar, Canadian Dollar, and the Euro relative to theU.S. Dollar. 43 -------------------------------------------------------------------------------- Table of Contents Provision (Benefit) for Income Taxes We recorded an income tax benefit of$4.7 million and expense of$0.4 million for the three months endedSeptember 30, 2021 and 2020, respectively and an income tax benefit of$92.2 million and expense of$0.5 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The tax benefit for the three and nine months endedSeptember 30, 2021 is primarily the result of the partial release of the domestic valuation allowance of$56.2 million related to the SpotX Acquisition, as well as the income tax benefit of a portion of our current year projected loss. The net deferred tax liabilities recorded in connection with the SpotX and SpringServe Acquisitions provided an additional source of taxable income to support the realizability of pre-existing deferred tax assets, and, as a result, we released a portion of our domestic valuation allowance and recognized current benefit for a portion of our projected losses. We continue to maintain a partial valuation allowance for our domestic deferred tax assets. Key Operating and Financial Performance Metrics In addition to our GAAP results, we review non-GAAP financial measures, including Revenue ex-TAC and Adjusted EBITDA, to help us evaluate our business on a consistent basis, measure our performance, identify trends affecting our business, establish budgets, measure the effectiveness of investments in our technology and development and sales and marketing, and assess our operational efficiencies. Our non-GAAP financial measures are discussed below. Revenue and net income (loss) are discussed above under the headings "Components of Our Results of Operations" and "Results of Operations." Three Months Ended Nine Months Ended September 30, September 30, Change September 30, September 30, Change 2021 2020 Favorable/ (Unfavorable) 2021 2020 Favorable/ (Unfavorable) Revenue$ 131,871 $ 60,982 116%$ 307,127 $ 139,625 120% Revenue ex-TAC 114,064 60,302 89% 274,356 138,647 98% Net loss (24,319) (10,515) (131)% (388) (59,318) 99% Adjusted EBITDA 39,966 13,749 191% 81,121 13,054 521% Revenue ex-TAC: Revenue ex-TAC is revenue excluding traffic acquisition cost ("TAC"). Traffic acquisition cost, a component of Cost of revenue, represents what we must pay sellers for the sale of advertising inventory through our platform for revenue reported on a gross basis. In calculating Revenue ex-TAC, we add back the cost of revenue, excluding TAC, to gross profit, the most comparable GAAP measurement. Revenue ex-TAC is a non-GAAP financial measure. We believe Revenue ex-TAC is a useful measure in assessing the performance ofMagnite as a combined company following the SpotX Acquisition and facilitates a consistent comparison against our core business without considering the impact of traffic acquisition costs related to revenue reported on a gross basis. Our use of Revenue ex-TAC has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. A potential limitation of this non-GAAP financial measure is that other companies, including companies in our industry which have similar business arrangements, may define Revenue ex-TAC differently, which may make comparisons difficult. Because of these and other limitations, you should consider our non-GAAP measures only as supplemental to GAAP-based financial performance measures, including revenue, net income (loss) and cash flows. The following table presents the calculation of gross profit and reconciliation of gross profit to Revenue ex-TAC for the three and nine months endedSeptember 30, 2021 and 2020, respectively: Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2021 2020 Change % 2021 2020 Change % Revenue$ 131,871 $ 60,982 116 %$ 307,127 $ 139,625 120 % Less: Cost of revenue 63,541 21,031 202 % 134,823 56,579 138 % Gross Profit 68,330 39,951 71 % 172,304 83,046 107 % Add back: Cost of revenue, excluding TAC 45,734 20,351 125 % 102,052 55,601 84 % Revenue ex-TAC$ 114,064 $ 60,302 89 %$ 274,356 $ 138,647 98 % 44
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Sellers use our technology to monetize their content across all digital
channels, including CTV, mobile and desktop, and each of these channels will
continue to represent a meaningful portion of our revenue in future periods. We
track the breakdown of Revenue ex-TAC across channels to better understand how
our clients are transacting on our platform, which informs decisions as to
business strategy and the allocation of resources and capital. The following
table presents Revenue ex-TAC by channel.
Revenue ex-TAC
Three Months Ended Nine Months Ended
September 30, September 30,
September 30, 2021 2020 Change % September 30, 2021 2020 Change %
Channel:
CTV $ 43,142 $ 11,059 290 % $ 89,382 $ 18,978 371 %
Desktop 29,192 20,222 44 % 76,566 50,490 52 %
Mobile 41,730 29,021 44 % 108,408 69,179 57 %
Total $ 114,064 $ 60,302 89 % $ 274,356 $ 138,647 98 %
Revenue ex-TAC increased $53.8 million , or 89%, for the three months ended
September 30, 2021 compared to the three months ended September 30, 2020 . The
increase in Revenue ex-TAC is due to increases across all channels, a rebound
from COVID-19 advertising lows, and includes increases associated with the SpotX
Acquisition, which was completed on April 30 2021.
Revenue ex-TAC increased $135.7 million , or 98%, for the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020 . The
increase in Revenue ex-TAC is attributable to the same reasons above.
We expect Revenue ex-TAC to increase through the remainder of 2021 as compared
to the same period in the prior year. We believe that CTV will be our biggest
growth driver in future periods and with the recently completed SpotX
Acquisition, we expect CTV Revenue ex-TAC to represent a significantly higher
percentage of our overall Revenue ex-TAC.
We expect our mobile business to grow at a higher rate than desktop, consistent
with industry trends and our historical results. Our mobile business consists of
two components, mobile web and mobile applications. Initially our mobile
business consisted primarily of mobile web, which is similar to our desktop
business, but our mobile application business has been the growth driver behind
our mobile business. We therefore expect our growth within mobile to come
largely from our mobile applications business and, in particular, mobile video.
Lower industry growth rates in desktop will make growing desktop Revenue ex-TAC
more challenging; however, in future periods we believe we will be able to grow
our desktop business in excess of industry projections by capturing market share
through SPO and expansion of publisher relationships. We expect our desktop
business to decline as an overall percentage of our revenue in future periods.
However, we expect that it will continue to represent a significant part of our
Revenue ex-TAC in the near term. Therefore, the mix of our desktop business will
continue to dampen our overall growth rate.
Adjusted EBITDA:
We define Adjusted EBITDA as net income (loss) adjusted to exclude stock-based
compensation expense, depreciation and amortization, amortization of acquired
intangible assets, impairment charges, interest income or expense, and other
cash and non-cash based income or expenses that we do not consider indicative of
our core operating performance, including, but not limited to foreign exchange
gains and losses, acquisition and related items, non-operational real estate
expense (income), net, and provision (benefit) for income taxes. We believe
Adjusted EBITDA is useful to investors in evaluating our performance for the
following reasons:
•Adjusted EBITDA is widely used by investors and securities analysts to measure
a company's performance without regard to items such as those we exclude in
calculating this measure, which can vary substantially from company to company
depending upon their financing, capital structures, and the method by which
assets were acquired.
•Our management uses Adjusted EBITDA in conjunction with GAAP financial measures
for planning purposes, including the preparation of our annual operating budget,
as a measure of performance and the effectiveness of our business strategies,
and in communications with our board of directors concerning our performance.
Adjusted EBITDA may also be used as a metric for determining payment of cash
incentive compensation.
•Adjusted EBITDA provides a measure of consistency and comparability with our
past performance that many investors find useful, facilitates period-to-period
comparisons of operations, and also facilitates comparisons with other peer
companies, many of which use similar non-GAAP financial measures to supplement
their GAAP results.
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Although Adjusted EBITDA is frequently used by investors and securities analysts
in their evaluations of companies, Adjusted EBITDA has limitations as an
analytical tool, and should not be considered in isolation or as a substitute
for analysis of our results of operations as reported under GAAP. These
limitations include:
•Stock-based compensation is a non-cash charge and will remain an element of our
long-term incentive compensation package, although we exclude it as an expense
when evaluating our ongoing operating performance for a particular period.
•Depreciation and amortization are non-cash charges, and the assets being
depreciated or amortized will often have to be replaced in the future, but
Adjusted EBITDA does not reflect any cash requirements for these replacements.
•Impairment charges are non-cash charges related to goodwill, intangible assets
and/or long-lived assets.
•Adjusted EBITDA does not reflect non-cash charges related to acquisition and
related items, such as amortization of acquired intangible assets, merger
related severance costs, and changes in the fair value of contingent
consideration.
•Adjusted EBITDA does not reflect cash and non-cash charges and changes in, or
cash requirements for, acquisition and related items, such as certain
transaction expenses and expenses associated with earn-out amounts.
•Adjusted EBITDA does not reflect changes in our working capital needs, capital
expenditures, non-operational real estate expenses or income, or contractual
commitments.
•Adjusted EBITDA does not reflect cash requirements for income taxes and the
cash impact of other income or expense.
•Other companies may calculate Adjusted EBITDA differently than we do, limiting
its usefulness as a comparative measure.
Our Adjusted EBITDA is influenced by fluctuations in our revenue, cost of
revenue, and the timing and amounts of the cost of our operations. Adjusted
EBITDA should not be considered as an alternative to net income (loss), income
(loss) from operations, or any other measure of financial performance calculated
and presented in accordance with GAAP.
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2021 2020 2021 2020
Net (income) loss $ (24,319) $ (10,515) $ (388) $ (59,318)
Add back (deduct):
Depreciation and amortization expense, excluding
amortization of acquired intangible assets 6,518 6,254 17,771 19,253
Amortization of acquired intangibles 42,184 7,822 79,313 16,904
Stock-based compensation expense 11,824 7,350 28,521 21,298
Merger, acquisition, and restructuring costs,
excluding stock-based compensation expense 2,376 1,900 36,707 15,123
Non-operational real estate expense (income), net 57 163 197 203
Interest expense (income), net 7,280 30 12,595 (112)
Foreign exchange (gain) loss, net (1,246) 293 (1,358) (845)
Other non-operating (income) expense, net - 6 - 15
Provision (benefit) for income taxes (4,708) 446 (92,237) 533
Adjusted EBITDA $ 39,966 $
13,749
Adjusted EBITDA increased by$26.2 million during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 , primarily due to increase in revenue from both organic growth and the SpotX and SpringServe Acquisitions, which are discussed in section "Comparison of the "Three and Nine Months EndedSeptember 30, 2021 and 2020," and improved operating leverage from our increased scale and related cost synergies. Adjusted EBITDA increased by$68.1 million during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , for the same reasons above. We expect Adjusted EBITDA to continue to increase as a result of continued growth in revenue and the realization of additional cost synergies. 46 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Liquidity As ofSeptember 30, 2021 , we had an aggregate gross principal amount of$759.1 million of indebtedness outstanding that will mature in 2021 through 2028, and approximately$59.9 million of availability to borrow under our Revolving Credit Facility. See Note 14 "Convertible Senior Notes and Capped Call Transactions" and Note 15 "Credit Facility" in the notes to unaudited condensed consolidated financial statements included in this Quarterly Report for further information about our outstanding debt. Our ability to meet expenses, remain in compliance with the covenants under our debt instruments, pay interest, repay principal for our level of indebtedness depends on, among other things, our operating performance, competitive developments, and financial market conditions, all of which are significantly affected by business, financial, economic, political, global health-related and other factors, many of which we may not be able to control or influence. Additionally, our cash flows may not be sufficient to allow us to pay interest or repay principal on our outstanding indebtedness. We have historically relied upon cash and cash equivalents, cash generated from operations, borrowings under credit facilities and issuance of debt for our liquidity needs. As ofSeptember 30, 2021 , we had cash and cash equivalents of$188.2 million , of which$34.2 million was held in foreign currency denominated cash accounts. Our cash and cash equivalents are managed with the objective of preserving principal and maintaining liquidity while minimizing risk. We also have an undrawn Revolving Credit Facility of$65.0 million , of which approximately$5.1 million is assigned to outstanding but undrawn letters of credit. Our principal cash requirements are to fund business operations and working capital needs, taxes, interest and principal payments, and capital expenditures. Our working capital needs and cash conversion cycle, which is influenced by seasonality and may be negatively impacted as a result of COVID-19, can have large fluctuations due to the timing of receipts from buyers and timing of disbursements to sellers. Additionally, we must continue to reinvest in our business by making capital expenditure investments which tend to be higher in the second half of the year. These impacts from working capital, cash conversion cycle and capital expenditures can significantly impact our cash flows from operating and investing activities and therefore, our liquidity during any period presented. We believe our existing cash and cash equivalents, investment balances, cash generated from operating activities, and available borrowings under our Revolving Credit Facility will be sufficient to meet our working capital requirements for at least the next twelve months from the issuance of our financial statements. However, there are multiple factors that could impact our cash balances in the future. For example, we typically collect from buyers in advance of payments to sellers, and our collection and payment cycle can vary from period to period depending upon various circumstances, including seasonality. In addition, in the event a buyer defaults on payment, we may still be required to pay sellers for the inventory purchased even if we are unable to collect from buyers. To date, these actions have not had a material negative impact on our cash flow or liquidity. The future capital requirements and the adequacy of available funds will depend on many factors, including the duration and severity of the COVID-19 pandemic and its impact on buyers and sellers and the factors and those set forth in Part II, Item 1A: "Risk Factors" of our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Capital Resources OnApril 30, 2021 , we completed the SpotX Acquisition, which included cash consideration of$640.0 million , and onJuly 1, 2021 , we completed the SpringServe Acquisition, which included cash consideration of$31.1 million , excluding indemnification holdback. InMarch 2021 , we sold convertible senior notes ("Convertible Senior Notes") for gross proceeds of$400 million . The Convertible Senior Notes are senior, unsecured obligations with interest payable semi-annually in cash at a rate of 0.25% per annum in arrears onMarch 15 andSeptember 15 . The Convertible Senior Notes will mature onMarch 15, 2026 , unless earlier converted, redeemed, or repurchased. The initial conversion rate is 15.6539 shares per$1,000 principal amount of notes, which represents an initial conversion price of approximately$63.88 per share of the Company's common stock and is subject to adjustment as described in the Offering Memorandum. AtSeptember 30, 2021 , the balance of the Convertible Debt was$389.8 million , net of unamortized debt issuance costs of$10.2 million . Accrued interest atSeptember 30, 2021 was$0.5 million . In conjunction with the issuance of the Convertible Senior Notes, we entered into capped call transactions to reduce the Company's exposure to additional cash payments above principal balances in the event of a cash conversion of the Convertible Senior Notes. The Company may owe additional cash or shares to the holders of the Convertible Senior Notes upon early conversion if our stock price exceeds$91.260 per share, which is subject to certain adjustments. Although the Company's incremental exposure to the additional cash payment above the principal amount of the Convertible Senior Notes is reduced by the capped calls, conversion of the Convertible Senior Notes by the holders may cause dilution to the ownership interests of existing stockholders. See Note 14 "Convertible Senior Notes and Capped Call Transactions" in the notes to unaudited condensed consolidated financial statements included in this Quarterly Report for more information regarding terms and conditions of the Convertible Senior Notes and the capped call transactions. OnApril 30, 2021 , and in conjunction with the SpotX Acquisition, we entered into a credit agreement (the "Credit Agreement") withGoldman Sachs Bank USA as administrative and collateral agent, and other lending parties thereto for a$360.0 47
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million seven-year senior secured term loan facility ("Term Loan B Facility")
and a $52.5 million senior secured revolving credit facility (the "Revolving
Credit Facility"). As part of the Term Loan B Facility, the Company received
$325 million in proceeds, net of discounts and fees, which were used to finance
the SpotX Acquisition and related transactions and for general corporate
purposes.
On June 28, 2021 , we entered into an Incremental Assumption Agreement (the
"Incremental Agreement") to the Credit Agreement. Pursuant to the terms of the
Incremental Agreement, the Company's existing revolving credit facility under
the Credit Agreement was increased by $12.5 million (the "Incremental Revolver")
to $65.0 million total, and the letter of credit sublimit under the Credit
Agreement was increased by $5.0 million . At September 30, 2021 , amounts
available under the Revolving Credit Facility were $59.9 million , net of letters
of credit outstanding in the amount of $5.1 million .
In the future, we may attempt to raise additional capital through the sale of
equity securities or through equity-linked or debt financing arrangements. If we
raise additional funds by issuing equity or equity-linked securities, the
ownership of our existing stockholders will be diluted. If we raise additional
financing by incurring indebtedness, we will be subject to increased fixed
payment obligations and could also be subject to restrictive covenants, such as
limitations on our ability to incur additional debt, and other operating
restrictions that could adversely impact our ability to conduct our business.
Any future indebtedness we incur may result in terms that could be unfavorable
to equity investors.
An inability to raise additional capital could adversely affect our ability to
achieve our business objectives. In addition, if our operating performance
during the next twelve months is below our expectations, our liquidity and
ability to operate our business could be adversely affected.
Our cash and marketable securities balances are affected by our results of
operations, the timing of capital expenditures which are typically greater in
the second half of the year, and by changes in our working capital, particularly
changes in accounts receivable and accounts payable. The timing of cash receipts
from buyers and payments to sellers can significantly impact our cash flows from
operating activities and our liquidity for, and within, any period presented.
Our collection and payment cycle can vary from period to period depending upon
various circumstances, including seasonality, and may be negatively impacted as
a result of COVID-19.
Cash Flows
The following table summarizes our cash flows for the periods presented:
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