The Trade Desk Reports Second Quarter 2023

Investment Analysis Clubs Saul’s Investing Discussions
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*TTD reports Q2 Non-GAAP EPS of $0.28 beats by $0.02.

-*Revenue of $464M (+23.1% Y/Y) beats by $9.03M.

  • Customer retention remained over 95% during the second quarter, as it has for the past nine consecutive years

CEO, Jeff Green: “With the launch of Kokai, we are surfacing that value more intuitively and putting data next to every decision. We are helping our clients put their first-party data to work, we’re making it easier for partners to integrate with us, and we’re helping clients get the full value of AI as a co-pilot across many aspects of the campaign process. As a result of these innovations, I’m confident we will continue to gain share, especially in key growth markets such as CTV.”

  • Third Quarter 2023 outlook summary:

    • Revenue at least $485 million vs $479.61M consensus, this would make it 22.9% YoY growth
    • Adjusted EBITDA of approximately $185 million

  • Share Repurchases: Repurchased $44 million of our Class A common stock in the second quarter of 2023. As of June 30, 2023 $364 million available and authorized for repurchases.

-At first take, this was a solid beat and raise in my opinion. The guide is showing slight YoY acceleration, assuming a solid beat next quarter. Q3 is seasonally slow so low single digit growth was expected.

-EBITA margin looks to be above 38% next quarter, which is solid as well.

-Stock has run up a lot so the market might have been expecting higher guidance based on the strong reports from Google and Meta. Stock down 5% After hours.

Full Press Release: The Trade Desk Reports Second Quarter 2023 Financial Results | Seeking Alpha

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Here are my notes from the earnings call that concluded a moment ago.

The Trade Desk (TTD) Q2 FY23 Analyst Q/A
08/02/2023 4PM Central

Jeff Green, CEO
Laura Schenkein, CFO

Opening remarks from Jeff Green:

Certainty and reliability TTD’s competitive advantage.
Retail media: One of the fastest areas of growth at TTD.
What is the future of the linear TV model? CTV has been one of the fastest growing segments at TTD in the past couple of years.
Every streaming viewer is logged in with an email address. This is causing advertisers to shift to TTD.
Start with data and then use it to determine which groups to target.
For the streaming business to thrive, they need to maximize advertising revenue. To thrive financially, content providers need to release their subscriber data. We’ve seen that a subscription fee is not enough for them to succeed financially.
Expanding in Europe and into their CTV market.
Kokai has a series of new indexes that help advertisers understand the impact of their spend, which simplifies how best to understand where they are having the greatest impact. Measurement and optimization are big benefits of Kokai.
Walgreens, Dollar General and Albertson’s are bringing retail advertising to bear as pioneers.
For every 10 point improvement in quality, there is a 15% improvement in conversion rates. Up to a 19% became a 50% improvement in conversion rates.
Open path provides insights to inventory, which enhances eyeballs and conversion rates.
Recent outperformance is not a blip, rather Jeff Green believes it is the beginning of a growth opportunity that will be good for advertisers and for TTD.
International growth was significant this quarter.
The ability of TTD to grow cash flow and EBITDA will continue to enable TTD to invest in the elements that will allow TTD to grow revenue and profitability.
International revenue outpaces US revenue for the 2nd quarter in a row.
Expenses were up 22%/year, and it’s been necessary to grow the business.
FCF was $119M this quarter.
No debt on the balance sheet.
Q3 revenue will be at least $485M, which is an increase of at least 23.5%.
Growth Drivers include: CTV, retail media, election cycle, strong international growth (and a couple others).

Analyst Q/A:

Q Thoughts on macro and on 2024? How you’re thinking about expenses next year?
A Extremely excited about the sentiment they’re seeing among CMOs and their advertising spend. Seeing lots of shifts
Linnear television is not going to be all of a sudden. CTV, streaming and studios are where it’s at in the future, rather than linear TV.
Investments upcoming in 2023 and 24. Rest of 2023- Being very deliberate with spending. 20% increase in headcount foreseen. Investing more in CTV and retail media. For 23, they expect CAPEX to be $60M rather than $80M previously. They’re not increasing AI spend, since they’ve always spent significantly on AI.

Q Cookie deprivation: Your thoughts on magnitude on TTD and why you think it won’t be meaningful.
A We’ve been down this path before when Safari removed cookies and 2 other occasions. Jeff Green sees this as exactly the same and the reason for that is they look at 12 million ads every second, and they buy 2-3 million. They’re still going to buy the same number with or without Google’s cookies deprivation. This directly impacts the browsing world and everything that runs on chrome.
So much or their revenue at TTD comes from UIV and CTV. Jeff Green believes it’s not in their best interest to make cookies go away. This will be bad for print journalists and it won’t have a great impact on the open internet. UID2 will be accelerated into the browsing world.

Q Retail media and success you’re having w/ Walmart. Q1-How’s that coming along? Q2 -Would you update your TAM that you presented at investor day?
A Many retail advertisers are bringing their data to bear. In the new world where things are leveraging UID from the beginning, you start with the data and just look at the opportunities that match and make the most sense. Walgreens, Dollar General and ____ have made their data available for free to the market. This represents a massive change in the way companies advertise are effective and make money.

Q CTV market and what you’ve learned re the up front. How are you feeling about the future?
A Jeff has never been more bullish on CTV than he has been now. Seeing everyone in CTV look to add or enhance their ad functions. Everyone is looking to add ads and make them more effective. Writers and actors strike makes it much harder/difficult to maximize this. TTD’s product makes it easier up front to have a much more sophisticated buy. Don’t expect to see all the fruit harvested in 2024, yet he sees this as a significant contributor to how they make money going forward in the future.

Q Behaviors you’re observing re: recent launches. Trends?
A Kokai is a Japanese word that means open for business. Makes it possible for more and more businesses to work with TTD. Kokai is really built in 5 major categories: Improvement of data (massive), Use of AI across TTD’s platform (launched AI in 2018), Improved measurement of improvement, New user experience in Q4 of 2023 that will create better behavior/improvements in the US, Integrations for better CTV measurements and performance across the board. Koklai is their biggest release, and Jeff expects it will become their best. Most of the benefits will take place in 2024 and into 2025. This will change how advertising is bought.
TTD remains well-positioned for balance of 2023 and throughout 2024.

Q What are customers looking for?
A As people are moving budgets over from traditional linear television, they want predictability first, and they all say decisioning/performance of decisioning is 5X better. It’s an 83% save in CTA cost. 20% take rate is more than justified by the increase in decisioning and that’s what they SSP’s doing into the future.

Q Update on industry body to act as an administrator of UID? Identity is founded on emails. UID impact on this? Apple not thrilled about using emails.
A Users input their email address over and over and over. It is exactly that that provides proof of privacy for TTD’s UID2. Apple is not allergic to email since their ecosystem is built on emails. Want to be sure the public administrator would look out for the best inersts of thei internet.

Q UID2 benefits TTD in a cookie-less world. How is this? RE: Open Path -is there reluctance in providers pushing back on this?
A Reasons for why TTD befits from cookies going away is that there are other ways to loging. Very few companies are leveraging their logins. If cookies go away, the need for that goes away dramatically. People say they’ll wait to sign up. Think of how many print journalists who have gone out of business with cookies going away. Jeff thinks you’ll see a lot more authentication. Jeff is not seeing obstacles from this. To grow and grow profitability: Open Path enhances supply chains.

Q Impact from media mass bankruptcy?
A Definitely seen impact. Media mass is significantly smaller than TTD. What most advertisers do is to run a process, crawl/walk/run plan and TTD is benefitting from this. As a result of this, TTD will see benefits and they expect to win more business as a result of this.

sjo

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If anyone wants to see the ER presentation or replay/listen to the conference call, they are up on The Trade Desk website.

Overall I thought this was a solid and re-assuring release and I’m happy for at least one of my holdings not to be down 20%. Growth looks set to re-accelerate going into Q3 & Q4 and the earnings line looks a lot healthier than last year by comparison. Clearly Jeff and TTD are trying to continually shape and manage expectations around both cookie removals and walled gardens in CTV.

Investor resource area:

Presentation:

Conf Call:
https://investors.thetradedesk.com/news-events/events/event-details/2023/Q2-2023-The-Trade-Desk-Earnings-Conference-Call/default.aspx

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I saw lots to like about Trade Desk’s earnings release and analyst call

As already mentioned above, revenue growth is trending upwards, from 21% in Q1 to 23% in Q2, and with just a small beat in Q3, that growth rate is likely to move up even higher (even despite some midterm election spend in Q3 last year).

Q4 may have a tough comp given that the majority of the midterm election spend probably hit Q4 last year, but that’s normal and comes with the territory of being in the ad business.

Even more importantly, their profitability still looks good and I expect profit and cash flow growth are going to outpace revenue growth in the future, given the nature of their business and how the revenue can grow as buyers and sellers transact directly on TTD’s platform with essentially “no touch” from Trade Desk.

On the call, the CFO confirmed that they expect to need less capex spend next year, than what was spent this year. I think the new platform Kokai was launched this year, so that’s consistent with my expectation that they won’t need to invest as much next year as they did in 2023.

I like that they did $44 million of buybacks, it seems like they are repurchasing in a disciplined way without going overboard. As the following year should generate even more cash flows without a huge amount of new spending, it will free up more cash for buybacks if the price is right, or to use for other business needs, or just to further fill up the coffers.

At one point during the call Jeff said something about a “twenty-ish percent take rate” which caught my attention because TTD hasn’t historically disclosed their take rate (the commission they take on sales…which is all that gets shown in revenue on their income statement, just the commissions they keep). I always assumed it was lower than that, in the mid to high teens. However, I wasn’t paying full attention the call at the time and he had just been speaking about some of the SSP’s (like Magnite and Pubmatic) and he may have been referring to their take rates and not TTD’s. I’ll have to check back on the transcript.

For me, the most intriguing news of the past couple of days was not anything that Trade Desk revealed yesterday, but some of the chatter about Disney’s plans for Disney+. Apparently they have added 3.3 million subscribers to the ad-supported plan since it launched recently, and that 40% of new subscribers are going with the ad-supported plan.

Disney announced that they are going to be increasing the monthly subscription cost for their ad-free plan, but leaving cost of ad-supported plans the same, seemingly to encourage more people to sign up for ad-supported plans. This trend is good overall for the CTV programatic ad market.

Here’s one article that speak to Disney’s news a bit:

Disney+’s ad-free plan will increase from $10.99 to $13.99, Hulu’s ad-free plan will increase from $14.99 to $17.99, and ESPN+ with ads will increase from $9.99 to $10.99.

However, the company is keeping the cost of Disney+ and Hulu standalone ad-supported tiers at $7.99/month each, with the bundle still $9.99/month. Subscribers in the U.S. will also be able to access an ad-free bundled subscription plan featuring Disney+ Premium and Hulu ad-free for $19.99/month on Sept. 6.

Disney+ also announced an ad-supported offering that will be available in select markets across Europe and Canada on Nov. 1. The new ad-supported plans start at £4.99/€5.99 month in EMEA and $7.99/month in Canada.

“We believe in the future of advertising on our streaming platforms, both Disney+ and Hulu, and we’re obviously trying with our pricing strategy to migrate more subs to the advertiser-supported tier,” Iger said during the earnings call, adding, “A substantial amount of new subscribers to Disney+ are signing up for the ad-supported tier, which suggests that pricing is working for us in that regard.”

Like Netflix, Disney is also starting to focus on “account sharing”, which may push some users that were previously sharing someone else’s account for free to sign up and likely go with the least expensive option available (ad-supported) which will be another plus for CTV advertising.

Overall, while it wasn’t a blowout quarter or shocking guidance, things are moving in the right direction. TTD is growing at a MUCH higher rate than the overall advertising industry and continuing to take market share and I expect further good things in the future.

Trade Desk is my largest holding and I don’t see myself selling a very significant chunk of my shares at least until we get into next fall and the presential election cycle advertising starts to heat up. Although I expect TTD will continue to have growing success well beyond next year too.

-mekong

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Great recaps. I’d also add:

  1. TTD continues to add market share by growing much faster than the ad industry as a whole right now.

  2. Even a moderate Q3 beat would be slightly faster sequential growth than many past Q3’s. Yes, there’s some lumpiness there but TTD just pulled off the same trick this quarter a well.

Both those trends are tougher to do at scale, and TTD seems to be doing it. That’s a testament to how well it has positioned itself to capture the move to targeted ads. I thought this quarter was about as business-as-usual as it gets.

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Hey mekong, while I don’t think The Trade Desk officially discloses their take rate, it can be calculated by dividing their revenue by the gross spend which they release at the end of each year. Here is a breakdown of their past performance:

Gross Spend Total Growth Revenue Growth Take Rate
2014 $211 $44.5 21.1%
2015 $552 161% $113.8 156% 20.6%
2016 $1,027 86% $202.9 78% 19.8%
2017 $1,556 51% $308.2 52% 19.8%
2018 $2,351 51% $477.3 55% 20.3%
2019 $3,130 33% $661.1 38% 21.1%
2020 $4,198 34% $836.1 26% 19.9%
2021 $6,172 47% $1,196.5 43% 19.4%
2022 $7,741 25% $1,577.8 32% 20.4%

I actually emailed their IR to ask about take rates last June and this is what they said at the time:

“As for take rate, we’ve kept this consistently around 19-20% for all five years that we’ve been a public company other than in 2019. While our take rate can fluctuate by a few basis points quarter-to-quarter, we expect it to stay near this range for the foreseeable future. Lastly, the same take rate is applied across channels (ie. there isn’t a specific take rate on CTV spend).”

At the time, I was hoping CTV might be more accreditive towards the take rate but that is not the case.

Agreed this was a strong quarter. Business as usual for TTD which is a welcome sight in this market.

You mentioned the stock buybacks, but I have started to wonder if the introduction of a dividend could be in the cards within the next year or two. I am not sure if this is something I would want to see given the big opportunity they are chasing down but given their consistent cash flow and fortress of a balance sheet ($1B+ of cash and no debt), I would not be shocked to see something similar to how Paycom just introduced a dividend. Just a theory - we’ll see!

Rex

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Rex

that table is great. Thanks so much for posting it!

You mentioned the stock buybacks, but I have started to wonder if the introduction of a dividend could be in the cards within the next year or two.

Yeah, I could see them eventually paying a dividend if things keep progressing and revenue and cash flows exceeds their cash requirements more and more. I’d also be suprised if they do any major acquisitions, but who knows.

I don’t expect a dividend in the next year, maybe not even in the next two years, but at some point down the line, depending how attractive the valuation of stock buybacks looks, I hope that they grow into the type of large powerful company that can handle a decent dividend over time.

Another thought is that Jeff Green’s equity awards are tied to the per share stock price. Buybacks makes that go up, but dividends could make it go down, so that’s another reason why a dividend might be a longer shot, especially until much of Jeff’s awards hit the stock price milestone targets to vest them. There could be something in the agreements that adjusts the target prices for dividends (or it could be added/adjusted) but I’m not sure off the top of my head.

-mekong

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For what it’s worth, as collected by my broker:

 * Trade Desk Inc        : Citigroup raises price target to $96 from $86
 * Trade Desk Inc        : D.A. Davidson raises target price to $92 from $77
 * Trade Desk Inc        : Evercore ISI raises target price to $100 from $75 
 * Trade Desk Inc        : Guggenheim raises target price to $90 from $75
 * Trade Desk Inc        : Jefferies raises target price to $80 from $75
 * Trade Desk Inc        : Oppenheimer raises target price to $95 from $80 
 * Trade Desk Inc        : Susquehanna raises target price to $105 from $90
 * Trade Desk Inc        : Truist Securities raises target price to $90 from $78

Somewhat a disconnect with the stock price reaction.

Saul

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From what I’ve read TTD is seen by many as being at a very high valuation. I don’t know what to think. I’ve got about 5% position and wondering if the money might be better applied elsewhere.

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This seems like a decent report to me as they’ve said they are gaining market share versus the industry.

I’m on the fence with TTD because a lot of the thesis banks on the industry itself recovering. 23% revenue growth is not that impressive although the bottom line is growing too.

I’d much rather be in Celsius right now where the industry is growing and the company is gaining market versus its peers, and revenue is up ~100% year over year. Understandably Celsius is not SaaS so it’s not guaranteed income like TTD would be.

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I think that part is worth rethinking, as we have seen.

Is ODD, INMD, or CELH revenue necessarily any less recurrent than SaaS or TTD revenue? Of course, an individual company would have to be monitored for edge, competition, execution, etc. But I see no reason to give SaaS a free pass, especially after the self-propelled revenue growth bubble of SaaS selling too much to other high tech companies in easy money context–instead of revolutionizing the “old world” (which is why I like IOT so much–it does precisely the latter).

For as long as there are humans, beauty, youth, and coolness will be among the last things people cut and the first they get into when they have any disposable income whatsoever. That includes software folks and their teenagers :slight_smile:

By contrast, we have seen businesses eager to reduce spend and optimize consumption without any economic trouble even occurring, as they run on numbers, rather than intangibles. Households optimize for far more than numbers.

For me, the winter of 2022-3 was the nail in the coffin of presumed SaaS out-worldliness as performance plummeted without even a recession in sight.

Overall, I am still heavily invested in SaaS via my ETF-only 401k, but my Saul-style experiments no longer privilege SaaS.

Just my 2c.

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TTD isn’t guaranteed any income. Companies have ad budgets and they have to decide how it gets allocated. Jeff has been touting that they’ve been able to show companies how well their ad monies are working for them and that’s why they have been able to grow. The minute they stop doing this or it stops working well, I imagine the income will start to flow elsewhere as well.

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While possible, there is zero evidence this will happen. I see TTD having quite a large moat in an enormous space. Companies are not going to stop advertising their wares and TTD has time and again shown how effective their platform is at improving ROI.

Green is a visionary in the ad tech space investing far ahead of the curve all the while operating a profitable company.

AJ

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I agree with AJ.

In addition to improving metrics, TTD just posted its ninth consecutive quarter of at least 95% customer retention. While the company is not without risk, I’m more concerned about another macro dip and/or ad budgets not rebounding as quickly as anticipated as opposed to worrying about TTD losing any current operational leverage or competitive advantage.

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Agree - the volatility of this stock seems to be macro-driven for the most part.

Vince

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Well, I don’t agree with AJ. I can’t see any reason that TTD would stop doing what it is doing at present. If there’s a threat to TTD, it will be that some other company does it better and starts eroding TTD share. I don’t see that as a big threat, but disruption is something that should always be considered.

Like Stocknovice, I am much, much more concerned about the macro environment. And to add fuel to that fire, I just read today that Dr. Michael Burry has shorted the market with more than 95% of his huge fund. If you don’t know the name, think The Big Short, he’s that guy.

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Interesting Brittlerock - with TTD specifically, actually I am more concerned the other way around.

The advertising industry has survived and thrived since the industrial revolution and gone from strength to strength and withstood every recession to date. Today’s leading Ad agencies have been around since the 50’s. Leaving aside what the temporary business cycle might do to advertising prices, revenue growth rates and profit margins, I would consider disruption as a far more existential threat. Just within the digital era we have seen Alta Vista, AOL and Yahoo all but come and go as well as DoubleClick and other similar digital advertising disrupters rise and fall. TTD hasn’t even got its hands on 10% of the total ad market TAM yet so its position is still relatively precarious even if they are the leader.

Jeff Green spends a huge amount of time talking about DSPs vs SSPs, walled gardens, cookies and UID2.0 rather than the background health of the ad market for a reason. These represent huge points of uncertainty that hold the potential for a landscape reset and disruption to take place.

From a macro perspective, we have already been served notice that the ad market is picking up this year and we have political spend starting to come through. Next year we have the perfect storm of a presidential election year and the summer olympics in a viewer friendly timezone location, (Paris) as well as hopefully the unwinding of interest rates rises.

Ant

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One quick clarification - it is actually nine consecutive years with over 95% customer retention. Like stocknovice, I am not questioning TTD’s competitive advantage. They have more than proved that this year, imo.

While no one can predict the macro environment, I feel pretty confident this company is on to something special, hence why it is my largest holding by a wide margin.

Rex

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@anthonyms,
Thanks for the reply, you have raised some good points. Maybe both threats, disruption and macro should be taken as holding the potential to erode TTD’s position. I consider macro as more immediate but transitory, disruption would be more ruinous to the business in the long run.

Aside from that, I wholeheartedly agree that "Jeff Green spends a huge amount of time talking . . . " I don’t think I’ve read any quarterly conference call transcript in which the CEO talks as much as Jeff. I find it somewhat annoying as opposed to informative. But maybe that’s just me. I would prefer less verbiage and more financial information. It’s not until you get to the last page of the presentation that a bit more financial information is provided. And even that is still pretty slim reporting.

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