The Trade Desk & Revolve Earnings Reviews

Digesting the results of two core holdings.

1. The Trade Desk (TTD) -- Q2 2023 Earnings Review

a. Demand

Beat revenue estimate by 2% & beat guide by 2.7%.

Demand Context:

• Ex-political spend, Y/Y revenue grew by 24.5%.

• Video is stable at 45% of revenue, Mobile is stable at around 35% of revenue, Display is stable in the low double digit range, and Audio is stable at 5% of total revenue.

b. Profitability

• Beat EBITDA estimates by 10.6% & beat guidance by 12.5%.

• Beat GAAP EBIT estimates by 40%.

• Beat $0.25 EPS estimates by $0.03 & beat $0.05 GAAP EPS estimates by $0.02.

• Beat free cash flow (FCF) estimates by 20%.

FCF = Free Cash Flow

Margins:

• Founder awards are hitting GAAP margins hard and will materially through next quarter. Things will normalize in Q4 2023.

• Without the founder package, operating expenses rose 22% Y/Y. The company sees easy operating leverage in its model but is prioritizing growth and share taking today. It thinks it can grow margin whenever it wants to. Based on its track record, that’s accurate.

c. Balance Sheet

• $1.4B in cash & equivalents.

• No debt.

• Share count up 2.2% Y/Y.

• Bought back $44M with $364M left on its buyback program.

d. Next Quarter Guidance

• Beat Q3 revenue estimates by AT LEAST 1.1%. This represents another quarter of acceleration to 23% Y/Y (25% ex-political spend).

• Beat Q3 EBITDA estimates by 0.5%.

• Will continue to hire at half the pace of 2022.

“2024 is looking like a massive wave of opportunity and a chance to grab more land.” -- Co-Founder/CEO Jeff Green

“We are well positioned for the second half of the year and highly optimistic about 2024.” -- New CFO Laura Schenkein

e. Call & Release Highlights

Unified ID 2.0 -- a brief reminder:

As a refresher to preface the rest of this section, UID2 stands for Unified ID 2.0. It’s The Trade Desk’s replacement (and upgrade) of 3rd party cookies. It doesn’t own this directly, but built it and opened it up to the entire internet.

UID2 frees organized email tracking to ensure buyers know exactly who they’re marketing to and sellers know exactly what impressions are worth. This means more valuable ad slots for publishers & higher returns for buyers thanks to the immensely better targeting. TTD threads the needle of making BOTH stakeholders more successful. Unlike cookies, this does not just work in a web browser setting… but across all channels.

All of the top streamers have integrated with UID2 “or are planning to.” Warner Brothers & Discovery (including Max) were the latest to integrate this quarter along with Peacock adding it across all content channels. As a speculative aside, the “or are planning to” tells me Netflix (the remaining holdout) will soon integrate. We’ll see.

As 3rd party cookies are deprecated by Google in 2024, the value of UID2 will merely build. Why? In the eyes of Jeff Green, all advertisers need an “identity strategy.” Cookies is obviously not a sustainable choice there. If Cookies are actually phased out next year (big if), that will pressure buyers to form that identity strategy. UID2 is the way to do it without material signal loss. Just like with Apple’s IDFA and Safari’s cookies deprecation before that, this will have 0 negative impact (maybe even slightly positive) on TTD.

How does this possibly not impact TTD negatively? Good question. Scale & efficacy leads in the open internet is the answer. TTD shops through 12 million impressions per second. If a chunk of these lose their Cookies tag, it will choose away from them with (in its view) 0 impact on ad spend return for clients. Furthermore, video is completely un-impacted by cookies deprecation and retail media is too. This really only impacts web-based publishers. The sad reality is that it will sharply hurt the journalism industry, but will make all open internet players MORE reliant on TTD’s returns. Google is pushing advertisers closer to The Trade Desk. Thank you Sundar.

Competition & Macro:

The company continues to vastly outperform its peers and take market share. Specifically, it has taken more share this year than at any point in its history. Scale helps, but still notable. While macro remains somewhat uncertain and ad buyers remain timid, they are flocking to the highest certainty, highest return and most open reporting means of advertising. So? They’re flocking to The Trade Desk. It continues to win contracts from bellwether advertisers and agencies representing billions in future platform spend. Retention is stable, the pipeline is strong and the team is even more excited about 2024 than this year. They’re killing it… and have been for nearly 9 years as a public company.

The firm sees ad sentiment and demand visibility now improving. This led to yet another forward guide calling for accelerating growth.

Connected TV (CTV)(Streaming):

The always signed-on (so always authenticated) user reality of streaming continues to be very attractive to the ad industry. If I always know who you are (in a responsible manner), then I can more granularly market. It’s as simple as that. The result is dollars continuing to briskly migrate to this demand channel. The Trade Desk’s platform and commanding marketshare put it in an ideal spot to capitalize as streamers embrace ad-supported plans.

When pairing UID2 with CTV, The Trade Desk has changed the way video ad buying works (and really all channels of buying). Now, buyers starts with condensed “data seeds” or extensive profiles anonymously covering all relevant previous consumer touch points to build a sense of demand. Companies used to need to “hunt for opportunities to infuse their data.” Now their data (and enriching 3rd party sources) is infused across all parts of the value chain in an intuitive manner.

All of this leads to the reality that CTV targeting is quite precise. That means buyers that TTD represents will pay a premium for impressions because of the immense value these impressions fetch. They still get a best in class returns while those premiums are vital for funding publisher content spend on the supply side. The Trade Desk’s targeting algorithms, therefore, are truly the only way streaming will sustainably and profitably work.

Retail Media:

Aside from CTV, retail media is TTD’s most promising growth channel. It calls massive retailers like Home Depot, Macy’s, Meijer and countless others its clients. Its lack of competition with these supply side vendors builds trust while superior efficacy builds demand for its platform. When pairing that with an ability to connect a buyer’s dollar spent on ads to the actual dollars created in revenue… it’s no wonder why this channel is rocking.

Walmart is another key retail client. This quarter, with TTD, Walmart began testing a UID2 integration within its own demand side platform (which TTD built). For a brand like Fruit of the Loom, this led to a 1000%+ return on ad spend (ROAS) with new and existing customers vs. expectations of 200%.

“Working with The Trade Desk is like putting on a fresh pair of underwear. (what a quote)” -- Fruit of the Loom Campaign Head

• Coke is using FairPrice (another TTD retail media client) for targeting recent buyers. This program led to a 189% spike in Singapore revenue for the consumer packaged goods giant.

Going Global:

• International growth outpaced North American growth for the second straight quarter.

• A new Radio Television Luxembourg (RTL) partnership gives TTD advertisers and agencies exclusive access to inventory across Germany, Spain, France and soon all of Europe.

Kokai:

Jeff Green reviewed some of the notes from the company’s Kokai platform launch event earlier in the year. We covered that event when it happened and full highlights can be found here.

Kokai rolled out amid peak ad buying season this year. For that reason, the financial benefits will become a lot more noticeable in 2024 -- per the team.

MediaMath Bankruptcy:

Because MediaMath was such a small demand side platform vs. TTD, its bankruptcy won’t be all that needle moving to new business. It’s leading to a few TTD wins, but nothing all that material. What has been material is the firm’s ability to hire several key employees from MediaMath to join its deep bench of talent.

f. Takeaway

I see what the stock did after-hours. That does not change that fact that this quarter was simply flawless. For those of you who follow the newsletter & portfolio closely, you know I’d been trimming over the last 2 months. Why? Because this name got wildly expensive. It deserves a premium, but the premium had gotten a bit egregious. This breather is healthy and was more than due. If a dip here gets aggressive enough, I will add back all of those trims.

More share gains, more compounding, more gigantic partners and more hefty cash flows to feed the pristine balance sheet. This team just executes quarter after quarter. It has gracefully overcome one of the toughest sector ad demand backdrops with macro headwinds now shifting to tailwinds. It’s ready to pounce. Great quarter.

2. Revolve Group (RVLV) — Q2 2023 Earnings Review

a. Demand

Revolve missed revenue estimates by 0.4%.

AOV = Average Order Value

Demand Context:

• International net sales up 4% Y/Y thanks to Mexico as a highlight. The revenue disappointment was driven by the U.S.

b. Margins

Revolve beat $0.07 GAAP EPS estimates by $0.03. It also beat EBITDA estimates by 16.9% and beat GAAP EBIT estimates by 19.4%. Finally, its 54% GAAP gross margin compares to guidance calling for 53.3%.

Margin Context:

• Gross margin fell Y/Y due to lower mix of sales at full prices. This is normalizing back to pre-pandemic levels.

• Operating expense pressure from things like higher return rates paired with soft demand is leading to the sharp margin contraction.

• Revolve gross margin was 56% vs. 58% Y/Y; FWRD gross margin was 43% vs. 47% Y/Y.

c. Guidance

• Lowered 2023 gross margin guide from 52.5% to 52.25%.

• Raised fulfillment cost intensity as well as selling & distribution cost intensity slightly.

Since the end of Q2, Revolve revenues have shrunk by a mid single digit percentage Y/Y. This commentary led to a 5% reduction in consensus sell side revenue estimates for next quarter. Disappointing, but as expected. The team is fully confident in multi-year 20% revenue compounding at strong margins when its consumer isn’t so challenged.

Revolve caters to young, aspirational consumers deciding to splurge on expensive goods. That splurging is just not happening right now as younger consumers remain timid and a shift from goods to services spend continues. The resumption of student loan repayments, it thinks, is also weighing on its customer’s spending appetite. It’s still outperforming direct peers, but told us that the delta between its results and others is not where it wants it to be. The accountability here was appreciated.

d. Balance Sheet

• $270 million in cash & equivalents.

• $0 debt.

• Inventory fell 2% Y/Y but rose 8% Q/Q.

• Announced a new $100 million buyback worth about 8% of its existing float. The company pays virtually nothing in stock comp, so this will directly shrink the share count.

e. Call & Release Highlights

Cost Efficiency Initiatives:

• Launched a new process this month to consolidate all returns from Canada to the USA.

• Began holding returns in the UK for local re-fulfillment vs. shipping it back and forth across the Atlantic. It has a lot of programs like this to debut to become more efficient after a few years of rapid international expansion.

• “Aggressively pursuing a long list of initiatives to gain further efficiencies in the coming quarters.”

• Testing virtual trying on of clothing as well as more detailed size descriptions, comparisons and reviews. All of this is to reduce return rate without making service quality any worse.

AI:

Revolve launched a new AI-powered shopping flow. It recognizes apparel selected to recommend visually similar goods. This has shown to materially boost conversion rates following extensive split testing.

Going Global:

• Named its first Head of Greater China and is building out a team there. Revolve was the 6th ranked fashion brand on T-Mall in June.

• Now actively hiring international talent and just opened its first international office.

• Hosted its first event in Mexico City with Mexico now a top 5 international market for Revolve.

FWRD:

Revolve’s FWRD brand hosted its first ever physical event. The team was intrigued by observed efficiency associated with selecting items in store to have them shipped to your door. This raised conversion and lowered returns and it’s now toying with the idea of establishing a larger physical retail presence. What a concept.

FWRD’s reselling program will expand to Revolve this quarter following great traction.

Inventory:

Revolve did not re-balance inventory by the end of Q2 like it told us to expect. FWRD inventory is taking them longer to normalize. This was my least favorite part of the call.

f. Takeaway

Bad quarter as expected. The Q3 revenue commentary is a lot worse than I was hoping for and the inventory balance delay is not acceptable. In June, I talked about plans for the position. Those plans included holding off on adding until this quarter was announced (because it was always going to be ugly). The forward commentary inspires no confidence that this company is enjoying easing macro pressures. So? I’m holding off on adding for another quarter. I’m disappointed. The backdrop is very tough for the firm… but results were still very underwhelming. If the rest of the year does not show significant brightening, I may exit.