The Trade Desk (TTD) Earnings Review
Summarizing the results of this open internet advertising titan.
The Trade Desk is the de facto demand side platform for open internet programmatic advertising. It morphs ad campaigns from guesswork to precisely valuing impressions one by one, and in real time. If you’d like to learn more, my deep dive can be found here. The financial data is now dated (with quarterly earnings reviews and frequent news coverage since then for updates). The rest is not.
I’ll also reference “Kokai” throughout this article. That refers to The Trade Desk’s newly upgraded bidding platform. A detailed explanation of the launch and the various products within it can be found here.
1. Demand
Beat revenue estimates by 4.1% & beat guidance by about 4.4%.
Growth was 27% Y/Y ex-political spend.
Take rate remained stable in 2023 for the 7th straight year since going public.
The 23.7% 3-year revenue compounded annual growth rate (CAGR) compares to 31.7% as of last quarter and 49.3% 2 quarters ago.
2. Profitability
A few items to note on margins. First, a large Q4 2020 tax benefit propped up net income and free cash flow (FCF). This makes for a difficult 3-year margin comp this quarter. Furthermore, Jeff Green’s founder awards continue to vest, which is hurting its GAAP margins. This will be the case through Q3 2025. Money well spent on this superstar, in my shareholder opinion.
Beat EBITDA estimates by 3.6% & beat guidance by 5.2%.
Beat GAAP EBIT estimates by 20%.
Met $0.19 GAAP EPS estimates.
Missed $0.43 EPS estimates by $0.02.
The combination of adjusted EBITDA and GAAP EBIT beats paired with the adjusted EPS miss tells me the “miss” was related to sell-side mis-modeling effective tax rate. To offer support for this, its tax bill rose 55% Y/Y to greatly lead revenue and profit growth. It doesn’t guide to tax rate expectations.
3. Pretty Balance Sheet
$1.4 billion in cash & equivalents.
No debt.
Share count fell slightly Y/Y due to $220 million in buybacks. It added another $700 million in buyback capacity this quarter. It has $753 million in total capacity (just about 2% of the market cap).
4. Guidance & Valuation
The Trade Desk beat Q1 revenue estimates by at least 5.7%. The guidance implies 23.5%+ Y/Y revenue growth for a Q/Q acceleration. It also beat EBITDA estimates by 14.6%. It plans to grow headcount more slowly than revenue in 2024.
Based on this result, and before inevitable upward profit estimate revisions, TTD sells for 57x 2024 EPS and 54x FCF. EPS is (for now) expected to grow by 12% Y/Y, with FCF expected to grow by 8% Y/Y. This slower expected profit growth than we’re used to comes as it leans back into growth after pulling back through 2023. This name is expensive. It has been expensive since 2016.
5. Call & Release Highlights
Kokai:
TTD’s client reception of the new Kokai platform has been quite warm and fuzzy. Whether it’s the streamlined reporting, the new data indexes, or all of its work to infuse AI throughout the platform, this is killing it. Specifically from an AI perspective, Kokai facilitates precise impression value forecasting for a buyer. Green compared this to an equity trader buying a stock and being told what that stock will be worth in 10 minutes. It’s effectively time traveling with enough (not perfect) accuracy to bolster campaign decisioning and returns.
Kokai also removes human error from the campaign design process. Buyers under the old platform occasionally grew frustrated by not knowing how precise to make targeting requirements. They routinely spent less than desired or spent the entire budget too quickly. The Trade Desk, partially thanks to the forecasting tool, now effectively guides and shapes how strict and specific buyers should get — in a fully automated fashion. All of this is done in the neatly organized “periodic table” of campaign building to make the process as simple and powerful as ever.
AI is not new to this company. It has been leading the AI-powered programmatic advertising charge for 8 years. This is more of the same.
Macro:
The Trade Desk warned investors last quarter about spend appetite from its ad buyers slowing for the month of October. This led to its first guidance miss in almost a decade. That weakness proved to be very temporary as spending sharply bounced back and led to these stellar results and guidance. The Trade Desk took more market share in 2023 than in any previous year. It also signed more joint business partnerships (JBPs) with accelerating growth there too. How? Because when macro becomes uncertain, marketing and financial executives obsess even more closely over only allocating advertising dollars to the highest return areas. They always focus on juicing returns; that focus is heightened when times are tough and demand shocks unfold. They need to be in the zone.
The Trade Desk, through its 100%+ higher return on ad spend (ROAS) vs. competition and its transparent reporting, is where those dollars flock. TTD is how CFOs get into that aforementioned zone with ease. That reality is how TTD maintained 20%+ Y/Y growth throughout 2022 and 2023 while everyone else saw growth fall off a cliff. With advertising demand greenshoots now forming, The Trade Desk is confident that it’s poised to lead the industry’s re-acceleration once again.
Connected TV (CTV), Audio, Retail Media and Identification:
CTV, audio and retail continue to be the firm’s most promising growth areas. Importantly, all 3 are structured so that audiences are always authenticated and identifiable. Why does this matter? Because in a world where Google will deprecate 3rd party cookies this year, not relying on that tech giant for authentication and identification (auth/ID) is now vital. Just like Apple’s Identifier for Advertisers (IDFA) created massive signal loss for many, this will too. This time, the signal loss will be harshest for web-based publishers using 3rd party cookies for auth/ID.
Conversely, while TTD seamlessly overcame IDFA signal loss, it thinks 3rd party cookie elimination will actually boost its results. How? Because again, this will hurt web and display based publishers while helping those with alternative methods for auth/ID. CTV, audio and retail media don’t need 3rd party cookies for auth/ID; they will be relative beneficiaries vs. competing channels becoming less valuable.
And for channels without innate auth/ID means, TTD’s unified ID 2.0 (UID2) creates an alternative for 3rd party cookies. Importantly, this alternative is actually an upgrade as it doesn’t just work on the web, but across all channels. Hewlett-Packard is using this to precisely connect each ad dollar spent directly to attributable revenue. That enhanced idea of procuring cause means better ad returns. Unilever is using UID2 to enjoy a spike in click-through rates and ad completion rates as well. Overall, UID2-tagged display impressions are receiving a roughly 30% premium to non-tagged impressions and are delivering a 900% ROAS boost to ad buyers using it for streaming campaigns.
Scale will also matter dearly post 3rd party cookies. All in all, The Trade Desk sees 15 million impressions per second on behalf of its clients. About 50% are identifiable & authenticated for 7.5 million compelling impressions to choose from. Per CEO Jeff Green, cookies removal would move the number to 6.5 million and have 0 material impact on its ability to deliver successful ad returns. So? TTD will remain as capable as ever within targeting while the channel in which it thrives will comparatively benefit vs. others. Again… good news. For evidence, Firefox and Safari have already cut 3rd party cookies, which has had 0 impact on TTD.
Kokai pairs perfectly with UID2. Kokai allows ad buyers to design campaigns to target the most relevant consumers with perfect frequency and precision. UID2 and other identifiers ensure these designed campaigns actually know who those most relevant consumers are.
More on Connected TV, Audio & Retail Media:
Pretty much every streamer has now realized that ad-supported subscribers are more valuable than premium subscribers. Green has been saying this for years. This is reiterating the firm’s conviction that ads are the only way to fund expensive streaming content costs. As you’ve likely noticed, streamers are readily hiking prices for premium tiers while leaving ad-supported tier pricing flat. That’s not random. They’re pushing you and me to ads.
In retail media, Samsung is using TTD’s service in Canada to better understand the impact of its advertising spend. With UID2 and TTD, Samsung increased its ability to attribute ad dollars to revenue by a whopping 19x.
TTD sees audio joining CTV and retail as a 3rd compelling growth channel. “Leading audio streamers” are engaging with TTD more than ever before. Green thinks audio is in the “early innings” of realizing the value of biddable programmatic advertising. Like CTV and retail, this channel enjoys near 100% auth/ID rates and is un-impacted by cookies. All three channels also provide professional-grade content, while walled gardens lean more heavily on user-generated content (UGC). This makes all three more compelling for quality brands not wanting to associate with inappropriate posts.
Privacy Sandbox:
Google is trying to replace 3rd party cookies with a new product called privacy sandbox. Green is always critical of Google and its philosophy, and this quarter was no different. He basically said nobody likes using it. The product will force publishers to require emails when we enter a site, which builds new user friction. From a consumer perspective, it leads to far more frequent sign-in requirements. To help address this new headache, TTD is debuting its own take on a single-sign-on (SSO) product. It’s called “Open Pass” and is in private beta. Notably, this is different from its “Open Path” product allowing publishers to do their own yield management. Probably should’ve picked less similar product names.
Green compared Open Pass to Shopify’s Shop Pay checkout accelerator. With both, a buyer is required to input data manually only once. After that, they can speed through a merchant checkout or enter a site with no friction. This should make publishers on the web slightly better off as they struggle through the cookie evolution. As a reminder, TTD serves only ad buyers, not publishers. Still, it does want to see these publishers thrive, considering they’re reliant on large impression scale to offer unmatched open internet value. Like publishers and advertisers are flocking to UID2, they’re flocking to Open Pass as well.
Joint Business Partnerships (JBPs):
JBPs are multi-year, often multi-billion spend deals that TTD signs with large agencies. 33% of its revenue now comes from these types of contracts. Why does that matter? It makes TTD’s growth more and more visible in what is normally a quite cyclical sector. TTD will not suddenly become immune to the cyclicality, but is becoming more insulated from it. This is another reason why its growth held up so well in 2022 and 2023.
6. Take
Advertising is a very cyclical industry… you wouldn’t be able to tell by looking at this firm’s results over the last two years. Fantastic quarter following some analysts warning investors about today’s guidance being bad. Instead, it was excellent.
Continued rapid compounding, market share gains and the gaudy margin profile are the byproducts of this titan continuing to lead in sector innovation. While last quarter was weaker than any it has delivered in years, that now appears to be a one-off anomaly. Back to business as usual for this special company. At the firm’s current multiple, its performance will need to remain perfect. There’s little margin of safety. But? There are also few teams that I’m more confident in delivering perfection than this one.
Thank you so much for the time and effort you put into these writeups! It is greatly appreciated.
Great work 🙏🏼