What happened

Shares of advertising-technology company Magnite (MGNI -2.00%) were spiking higher on Tuesday, albeit with some volatile swings, after the company reported results for the second quarter of 2020. Its reported revenue exceeded guidance by 8%. As of 12:40 p.m EDT, the stock was trading 10% higher.

Despite revenue beating guidance, it's unlikely Magnite investors were too excited about the Q2 results. Rather, third-quarter trends in connected TV are likely driving the stock higher today.

A couple sits on a couch watching connected TV.

Image source: Getty Images.

So what

Earlier this year, Telaria and The Rubicon Project merged and named the new company Magnite. Q2 was the first reported quarter as a combined company. Management highlighted that it generated revenue of $42.3 million, good for year-over-year revenue growth of 12%. But this was on an as-reported basis. The results merely compared with The Rubicon Project's revenue for the second quarter of 2019, excluding Telaria's results from last year.

On a pro forma basis, which includes results from Telaria, revenue actually fell 18% quarter over quarter and 24% year over year. Revenue dropped because Magnite, as a sell-side platform, relies on advertising spending. And ad spending has been down for much of 2020 due to the coronavirus.

Last quarter, management noted spending was down 30%. During May and June, however, spending began improving. Overall revenue is now back to even for Q3 to date. And revenue from connected TV is up a whopping 50% year over year on a pro forma basis since the beginning of July. This is a very promising trend, and it's what has investors so excited today.

A businessman rides a rocket ship expelling cash exhaust over a multicolored bar chart.

Image source: Getty Images.

Now what

This was an important quarter for the technology company. Telaria brought the connected-TV business to The Rubicon Project when the two merged. But Telaria had been a long-term market underperformer as a stand-alone business. The two companies merged to achieve better scale for capturing the upside in sell-side advertising. If Telaria was going to shake off its track record of losing to the market, it needed to start proving it in the first quarter as a combined company.

The stakes were also high. Other ad-tech companies saw a spike in advertising demand in the second quarter and positive third-quarter trends. Had Magnite demonstrated lackluster revenue growth during a time with increased connected-TV demand, investors would have been right to question the long-term growth story. But with 50% growth in connected TV, Magnite may be in the early innings of delivering on long-term potential.