NEW YORK, Jan. 7, 2021 /PRNewswire/ -- Spruce Point
Capital Management, LLC ("Spruce Point" or "we" or "us"), a
New York-based investment
management firm that focuses on forensic research and
short-selling, today issued a detailed and expansive report
entitled "A Repellent Investment" that outlines why shares of
Magnite, Inc. (NASDAQ: MGNI) ("Magnite" or the "Company") face up
to 50% downside risk to under $14 per
share. The full report can be downloaded and viewed at
www.sprucepointcap.com. Follow us on
Twitter @sprucepointcap for additional information and
exclusive updates.
Magnite was formed in early 2020 following the merger of two
advertising technology companies: Telaria Inc. ("Telaria", formerly
Tremor Video) and The Rubicon Project, Inc. ("Rubicon"). The merger
was predicated upon cost savings – instead of revenue synergies –
and to the anticipated scaling of a Connected TV ("CTV") product,
which Rubicon could not build alone. CTV advertising has become
increasingly popular with the rise of streaming and web-based
content distributors such as Hulu, Disney (NYSE: DIS), Netflix
(NASDAQ: NFLX) and Roku (NASDAQ: ROKU). However, our research
indicates that Magnite currently lacks the depth of quality CTV
inventory to adequately scale.
Spruce Point believes Magnite's ~400% share price appreciation
since the onset of the COVID-19 pandemic is completely unjustified.
It appears that the market has largely overlooked the Company's
clear growth headwinds and highly-questionable management team,
which we believe has been masking business challenges with
inaccurate financial reporting. We believe our research shows that
management is running two separate businesses, but structuring
Magnite's financial reporting as if the Company has a lone
operating segment. We believe that this dubious reporting style may
be allowing Magnite to conceal challenges that have seen Magnite
suffer pro forma revenue decline by 1% year-to-date, while public
industry peers The Trade Desk (NASDAQ: TTD) and PubMatic (NASDAQ:
PUBM) grow 16%.
A high-level overview of some of the detailed findings in Spruce
Point's downloadable report includes:
- Prior to the merger, publicly-available material indicates
that both Telaria and Rubicon were hampered with business and
accounting struggles. Telaria issued warnings about potential
material weaknesses, including in its last 10-K filing, and its
reported capital expenditures were negative prior to the merger.
Most concerning, however, is our discovery that Telaria made nearly
$10 million of assets and liabilities
inexplicably disappear from its preliminary closing valuation.
Evidence also shows that Rubicon was under severe pressure
pre-merger, failing to deliver on expectations with its apparently
exaggerated growth opportunities. We believe this explains why
Rubicon sought to merge with Telaria, which had at least one
revenue driver (CTV). Rubicon stopped regular reporting of key
metrics such as Ad Spend and Take Rate and changed its Free Cash
Flow to a non-standard calculation in our view. Spruce Point always
warns investors to be cautious when key disclosures disappear or
when key metrics change.
- Post-merger, evidence suggests Magnite is struggling and
running two separate businesses while only reporting one operating
segment. We question what management is hiding with two
separate businesses and only one set of financials, especially
given that at the very onset of the merger, management made clear
that both businesses were "quite different" and would function as
two separate business units on two separate platforms. Instead,
Magnite's website provides unique login portals for Telaria
and Rubicon, respectively. We also discovered that Telaria still
has its own employees – including in financial and accounting roles
no less – demonstrating that Magnite appears to be misrepresenting
and misreporting its business by running two separate businesses
behind the scenes. We also find that pro forma revenue results do
not add up when combining Telaria and Rubicon reported revenue. As
another sign that something is dramatically wrong, Magnite's pro
forma organic sales are down 1% year-to-date 2020 with peers up
16%. We estimate Magnite's pro forma operating cash flow is down
143% year-to-date 2020.
- Evidence suggests Magnite likely faces significant business
headwinds, which are not properly reflected in its currently
inflated share price. Despite management's historical and
future growth story claims, we believe that the 2020 election cycle
had an outsized impact on recent Q3 2020 results, adding an
estimated $5 million revenue benefit
to its highly promoted CTV business. Absent this one-off
contribution, we estimate CTV revenue would have declined 16% on a
year-over-year basis. We believe Magnite faces business headwinds
due to increased customer concentration with XUMO, Pluto and Hulu
all coming under control recently by larger corporations. In our
experience, rarely is it good news for small vendors when large
corporate behemoths acquire smaller, more entrepreneurial
companies. Finally, creditors changed Magnite's financial covenant
from "Adjusted EBITDA" to "Maximum Cash Burn" suggesting that
further pressures could lie ahead.
- We believe Magnite is led by a highly-questionable,
unimpressive leadership team.
-
- An Ineffective CEO: Before joining Rubicon as its Chief
Executive Officer, we believe Michael
Barrett destroyed value and failed to promptly disclose a
Securities Exchange Commission ("SEC") inquiry regarding goodwill
impairment accounting in his prior role as Chief Executive Officer
at Millennial Media (NYSE: MM). This discovery – paired with
Rubicon management's exaggerated growth opportunities pre-merger –
leads us to believe that Mr. Barrett is unfit to serve as Magnite's
leader.
A CFO with a Questionable Past: Magnite's Chief Financial
Officer, David Day, has an
unimpressive and suspect track record. While holding the Chief
Financial Officer role of Spot Runner, the advertising and tech
company faced a lawsuit from WPP plc (OTCMKTS: WPPGF), which
alleged Spot Runner of orchestrating a "pump and dump"
scheme.1
- An Inexperienced and Ill-Suited Chief Accounting
Officer: With Magnite having recently attained a multi-billion
dollar market capitalization, we find it alarming that recently
appointed Chief Accounting Officer Shawna
Hughes has not held an accounting role since 2013.
Shockingly, she recently held human resources leadership roles.
- We believe analysts have wildly marked up Magnite's sales
expectations largely on the back of a single quarter and promotion
from an analyst with a checkered past. Magnite's shares
are heavily promoted by Needham & Company ("Needham"), which
blessed the merger with a fairness opinion. We believe that Needham
analyst Laura Martin incorrectly
models revenue growth as increasing 36% on a year-over-year basis
due to an understated pro forma revenue base, when our calculations
estimate that Magnite's true 2020 expected organic growth is a
meager 1.7%. In addition, we believe Ms. Martin incorrectly
compares Magnite to an early The Trade Desk (NASDAQ: TTD) in terms
of market share and growth. Our research suggests this is a long
shot. Investors should be aware that legal documents show that Ms.
Martin played a role in promoting the 2000 AOL/Time Warner merger,
which later settled SEC accounting fraud charges. Legal documents
alleged that Ms. Martin was willing to write glowing commentary on
AOL so as not to offend management though she was aware AOL was
engaging in accounting gimmickry. We believe investors should be
incredibly wary of Needham's steep price targets on Magnite and
conduct their own independent due diligence.
It is also notable that insiders have also been sellers of
Magnite shares, which should give investors serious pause. If these
insiders were so bullish on the Telaria-Rubicon merger, we believe
they would have been buying stock cheap ahead of the recent price
increase, not selling.
Please note that the items summarized in this press release are
expanded upon and supported with data, public filings and records,
and images in Spruce Point's full report. As a reminder, our full
report, along with its investment disclaimers, can be downloaded
and viewed at www.sprucepointcap.com.
Spruce Point has a short position in Magnite, Inc. (NASDAQ:
MGNI) and owns derivative securities that stand to benefit if its
share price falls. Spruce Point also has long positions in PubMatic
(NASDAQ: PUBM), The Trade Desk (NASDAQ: TTD) and Roku (NASDAQ:
ROKU) which stand to benefit if their share prices increase.
About Spruce Point
Spruce Point Capital Management, LLC is a forensic
fundamentally-oriented investment manager that focuses on
short-selling, value and special situation investment
opportunities. Spruce Point Capital Management, LLC is a member of
the Financial Industry Regulatory Authority, CRD number 288248.
Contact
Daniel Oliver
Spruce Point Capital Management
doliver@sprucepointcap.com
212-519-9813
1 Spot Runner Is Accused of Fraud, The Wall
Street Journal (April 2009). Note:
Mr. Day was not specifically named in the lawsuit.
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SOURCE Spruce Point Capital Management, LLC