The Trade Desk (TTD) earnings

[rdutt]

TTD announced what I thought was an excellent earnings report. But it fell hard today, as investors fretted about 1) lower sequential revenue growth from last 4Q to Q1 this year and 2) the company’s reluctance to provide guidance for GAAP Net Income for next Q. I’ll explain why I’m not fretting about either of these things, and consider this to be a buying opportunity.

First, let’s get look at the numbers vs expectations.

• Revenue for 1Q was $220M which beat the consensus estimate of $217M (granted, it wasn’t a large beat), and represents YoY sales growth of 37%

• Adjusted EPS was $1.41 vs. expected EPS of only $0.64. This beat by $0.77 which is huge. We have here a company that is #1 in its industry (connected TV ads), growing revenues at 37% annually and is generating much larger than expected profits at the same time.

• Next Quarter Guidance is for revenue of $260M which beats the consensus $253M, and adjusted EPS of $1.68, which beats the consensus of $1.13.

So far, this is great. Now, let’s look at the historical YoY growth and sequential QoQ sales growth to see what people are fretting about.

TTD Historical Quarterly Revenues

	             Revenue	YoY%	QoQ %
2Q 2021 (Guided)     260	87%	18%
1Q 2021	             220	37%	-31%
4Q 2020	             320	48%	48%
3Q 2020	             216	32%	55%
2Q 2020	             139	-13%	-14%
1Q 2020	             161	33%	-25%
4Q 2019	             216	35%	32%
3Q 2019	             164	38%	2%
2Q 2019	             160	42%	32%
1Q 2019	             121	41%	-25%
4Q 2018	             161	56%

So, yes, the $220M last Q was a decline of 31% compared to the $320M sales of 4Q 2020. But the first quarter of the year has always been weaker than 4Q of the previous year, because advertising spend always peaks in the Nov/Dec months of Thanksgiving and Christmas. As you can see, sales declined 25% compared to the previous quarter in both 2020 and 2019, long before the pandemic.

So I don’t see this quarterly sequential decline as anything to worry about, it’s the seasonal nature of advertising. Next quarter laps the first full pandemic quarter (2Q 2020), and the company is conservatively guiding to 87% revenue growth. If 2020 sales was $836M, then TTD needs to hit about $1.1B of revenue this year to maintain a 35% revenue growth rate. I think that’s achievable. More importantly, they’re on track to earn $3 per share during the first half of this year, which means $6/sh is achievable for 2021.

And it’s still early days for connected TV ad expenditure. According to the analysis linked below, TTD could get to $3.6B of annual revenue by 2024. Of course, the stock is going to continue to be volatile, but I think it’s going to reward long-term investors who have a 3 to 5-year time horizon.

https://greytabinvest.blogspot.com/2019/09/trade-desk-ttd-ca…

Would like to hear opinions from others on this.

-Ron

[MFChips]

Any informed investor knew that a drop was coming for Q1 because, the guidance told them so.

I think what the investors wanted to hear is that there was acceleration and that the Google Cookies absolutely do not matter to the revenue picture. There is still uncertainty it seems, at least in investors minds. I’ve not listened to the conference call, so was the elephant in the room addressed?

[MFChips]

Edit:
I’ve now gone thru the conference call, and I believe the investing community may have uncertainty on the Unified ID deal still and the street doesn’t like uncertainty.

[mekong22]

Ron

Great summary, thanks.

TTD is about a 10% holding for me and, I admit, I was a little disappointed with the results this quarter myself as I was expecting at least a little bit bigger beat than what we got. Especially after the strength from Roku’s earnings. I was estimating at least +100% growth next quarter in Q2 too, given the weakness in the prior year Q2’20, so the guide in the high +80%'s, which I’m sure they will beat and at least be in the +90%'s next quarter was also a bit disappointing to me.

But you’re correct that some people may be incorrectly comparing to Q4 sequentially, which we shouldn’t do due to a) the seasonality as Q4 with holiday shopping advertising will always be stronger than Q1 and b) they got a bump from political spend (although management told us it was only about single digit percent impact from the elections) in Q4.

I didn’t get to take detailed notes when listening to the earnings call, but one quote I did write down is when Jeff said that Q1’s CTV revenue more than doubled (again) and then he said something along the lines of they are “barely breaking ground on the process” (Not an exact quote, but very upbeat about the future trajectory for CTV).

Overall, I’d say it was a good, but not great, quarter. Do I think the stock should be down -25% as a result of this report, no. But given how growth and tech stocks are reacting lately, especially with uncertainly about exactly how the privacy/tracking evolves, I’m not totally surprised. I still love the long term story with TTD and don’t see any reason to decrease my position, although I don’t know that I’ll be adding any more right now either.

Magnite

And I’ll add a quick comment here on MGNI and not a separate thread since it isn’t widely followed here.

MGNI was down today probably due to TTD’s results this morning, and then didn’t really recover in the aftermarket after Magnite’s earnings came out.

Magnite’s results have been, and will continue to be, muddy due to the Telaria acquisition which finally gets lapped now effective April 1st (going forward will be in both the 2020 and 2021 periods), and then Spot X will start showing up in results May 1st (so next quarter will have two months of spotx in 2021, but none in 2020).

Their earnings I liked a little better than TTD’s, although I was hoping for better (MGNI as many know, is an oversized position for me, albeit most of my shares were purchased six months ago for about a third of the current price).

I think the market is likely to overly focus on the only +18% pro forma growth number this quarter (it’s +67% when looking at the Telaria acquisition as incremental, but 18% apples to apples) and while yes, I get why that is going to steer some people away, I would suggest focusing on a pro forma of Magnite including Telaria + SpotX since that is what the company is going to be comprised of going forward, in order to get a better sense of how all pieces are growing right now, apples to apples, compared to the same period of the prior year.

Doing some back of the envelope math:

Pro forma Magnite including Telaria increased 18% from about $51m in Q1’20 to $61m in Q1’21

SpotX grew +66%, from $29m to $48m

So combined, all entities that make up the company going forward grew from $80m to $109m, about +36%, and management said on the call that this growth rate is increasing so far in Q2. Of course, similar to TTD, MGNI (and probably spotX) had a weak comparison period in Q2’20 due to the pandemic impact on advertising.

If I understood the call correctly, they said that all products for all companies (including spotx) would appear to customers in a single interface in July, which seemed really quick. They commented that the platforms that feed in would still of course be largely separate, but the customer/users wouldn’t see it that way, and would view things consistently. I’m sure it will be far from perfect and will take some time as the companies integrate and their IT/Dev roadmap moves forward, but this all came across pretty positively. they noted that they tripled their CTV developer workforce with the spotX acquisition (the first third, I believe came mostly from Telaria).

While I was hoping for something better from both companies, I still feel that, long term, they will both be leaders in their industry and investment winners, tho days like today can be quite painful, that’s why we invest for the long term. Part of me feels like, if they are going to have weaker results, it might be better for them to come now, when the whole sector is in the dumps and hopefully stronger performance will come when growth/tech is rotating back, but that’s probably just me trying to put a silver lining on things.

But earnings season is just getting started! Excited to see what the rest of our companies have in store…

-mekong

[rdutt]

Thanks, mekong, great summary. Here are my key extracts from the conference call regarding the ad-driven CTV TAM, and the momentum behind UID 2.0 which TTD created as an open identity standard, replacing cookies.

Jeff Green
"It is my prediction that AVOD [Advertising-driven Video on Demand] will outpace the growth of SVOD [Subscription-based VOD] over the coming years. …

Now just to put the CTV market scale in perspective, according to Omdia’s latest research, there are now more than 200 million active AVOD users in the U.S. alone. By 2024, Omdia predicts that annual CTV advertising revenue will top $120 billion, outperforming subscription revenue by more than 20%. Omdia also predicts that markets such as the U.K. and Germany will be the fastest-growing CTV markets outside of the United States, driven by very similar consumer shifts.

…

Let me start the discussion of identity by clarifying what we’re talking about. This discussion on identity is bigger than cookies. It’s bigger than any company or any channel. Cookies are not present in CTV. However, a privacy safe identifier for CTV will be a major factor in driving relevant ads and managing reach and frequency across apps, channels and devices. CTV needs this kind of approach in order to maintain or increase CPMs in a way that help fund the amazing content that has kept most consumers sane during this pandemic. The current TV content arms race cannot be financially sustained for providers or consumers without relevant ads.

So you can see how the identity discussion is bigger than cookies or even CTV or Google’s decision to deprecate cookies for the browsing Internet. This is a discussion about how the Internet pays for itself. It’s also a discussion about control. Is the Internet going to be controlled by a few large tech companies? Or will power be distributed and will choice sit with consumers and their relationship with each content owner.

We launched the UID project with the goal to improve the Internet. This is not merely a marketing campaign about how deeply we care about consumers, the quality of the Internet or consumer privacy. Of course, we deeply value all of those things, which is why this is not about marketing, but about action. It is a movement.

We are working with the leaders in the open Internet to build a better Internet. We want consumers to have control in a privacy-forward manner that transcends a single company’s ecosystem, and that’s why identity continues to be the hottest topic of conversation in our industry. It feels like every media outlet from The Wall Street Journal to the advertising trades is covering identity these days.

Personally, I was inspired this last quarter when working directly with Artur, the CEO of Publicis, to make sure that their ID and UID 2.0 were interoperable. Like Artur, there are so many people and leaders across the open Internet that are engaging with us and recognizing the significance of this moment. The momentum behind UID 2.0 is beyond anything I could have scripted. And for me, it’s probably the most inspiring movement that I’ve experienced in this industry.

I don’t think I’ve explained well for Wall Street how UID 2.0 has gotten so much scale so quickly and why I’m so positive about this movement. Let me try to add more clarity. Remember how UID works. A consumer signs in once with their e-mail address and then opts in site by site, just once per site or channel. This is a significant improvement to the consumer Internet experience today, where intrusive toast or cookie pop-ups, appear on almost every premium content site and seemingly every time you go there.

The Wall Street Journal reported 50 million UID authenticated users in the U.S. a couple of months ago, and we have seen more partners adopt since then, multiplying that user number."

-Ron

[monkeydluffy]

The earning report numbers were not too bad by themselves. But if you take the current strong tailwind in ad industry, the numbers of TTD were actually very bad.

I’d take a look at how much acceleration happened to the other ad companies: Facebook, Google, Pinterest, Snapchat, Roku etc. All of them achieved considerable acceleration of revenue growth rate in Q1 comparing to Q4 2020. How about TTD then? Its revenue growth rate dropped from 48% in Q4 to only 37%!!! This was definitely a really bad signal to me.

In addition, TTD was valued at a too high multiple before this earning report, higher than. That was too expensive for a company who had been consistently delivering ~40% revenue growth in the recent years. The market must had been expecting a much higher growth rate with the hypothesis of the CTV tailwinds. Given the small revenue base of TTD and the huge TAM of ad industry, I do not think TTD is winning the competition against the walled gardens. I suspect the idea of open internet ads is just a good story at the moment.

Luffy

[anthonyms]

Ok - I thought this opening point was material. Effectively Q4 was strongly inflated with political spend and Q1 2020, accounting for both then the Q4’20 to Q1’21 drop off as well as the YoY growth for Q1 2021 looks much better…

Thank you, Jeff, and good afternoon, everyone. As you have seen in our results, 2021 has started out strong, despite the lingering challenges faced around the world. Q1 revenue was $220 million, a 37% increase from a year ago. Excluding political spend related to the U.S. elections last year, which represented a mid-single-digit percent share of our business in Q1 of 2020, revenue increased around 42% year-over-year in Q1 of this year. This represents a material acceleration on a sequential basis from Q4 of 2020 after excluding election spend.

As Ron points out, Jeff is totally on top of the movement to address Google and Apple privacy moves and the broader ownership of the internet at large (i.e yours and my relationship with content providers online vs a few large internet corporations controlling the internet). I wouldn’t want to leave that to anyone else.

So clearly the business is running along at a 40%+ rate on the top line but as we have seen in the last few quarters, the results of leverage and impact profitability levels have been immense.

With ~40% growth on the top line, after stripping out ESOPs etc, the cost base is growing at a much lower rate despite internationalisation investments…

Operating expenses were $212 million in Q1, up 41% year-over-year. The growth in operating expenses in Q1 was primarily driven by stock-based compensation. Operating expenses, excluding stock-based compensation, grew 26% year-over-year. A majority of the growth in stock-based compensation expense in Q1 was related to the Company’s employee stock purchasing plan. We currently estimate that stock-based compensation growth should moderate from current levels in the second half of the year.

As a result non-GAAP Net Inc and EPS expansion was extreme, again…
Quarter EPS
Q1’19 0.49
Q2’19 0.95
Q3’19 0.75
Q4’19 1.49
Q1’20 0.90
Q2’20 0.92
Q3’20 1.27
Q4’20 3.71
Q1’21 1.62

I can see TTD delivering massive outsized bottom line growth in profitability for years to come even with 30-50% top line growth rates. The kind of thing we watch and scratch our heads at when PayCom does this or SFDC keeps doing year after year.

I’m actually tempted to top up on TTD.

Ant

[LifeOfDreamer]

Its revenue growth rate dropped from 48% in Q4 to only 37%!!! This was definitely a really bad signal to me.

---

Q4 was impacted positively by the most advertised election ever, in 2020…thus the outsized q4 growth number.

Q3 growth was fine.

Stock was just overvalued.
People trying to explain some fundamental or metric-based reasoning for the price collapse are ignoring valuation, imo.

How about:

1. There have been multiple growth stock drawdowns since March. Yet TTD was still at a 40+ P/S until today. Adtech surged hard late in 2020, so maybe just took longer for that to pullback.
2. TTD only grew 26% in 2020. Yet their stock tripled. Or quadrupled depending if you bought at the bottom in March.

If you believe, as I do, that stock price growth should align roughly with and mirror company growth, then TTD stock would have looked something like this.

$265 end of 2019
$350 end of 2020
$465 end of 2021
$600 or so end of 2022

Instead it looka like this:
$265 end of 2019
$900+ end of 2020
$490 currently midway thru 2021.

Looks like it has more to fall, imo.

Doom

[jdc115]

If you believe, as I do, that stock price growth should align roughly with and mirror company growth, then TTD stock would have looked something like this.

$265 end of 2019
$350 end of 2020
$465 end of 2021
$600 or so end of 2022

Instead it looka like this:
$265 end of 2019
$900+ end of 2020
$490 currently midway thru 2021.

Looks like it has more to fall, imo.

That assumes $265 was the correct starting numbers at the end of 2019. Maybe it was too Low or too high, leaving the concluding difficult.

[anthonyms]

Agree with Jon’s post about the suitability of the starting point for calibrating the valuation journey…

However back to the point that I was trying to make previously in relation to your observation Doom,
(great handle by the way)…

1. There have been multiple growth stock drawdowns since March. Yet TTD was still at a 40+ P/S until today. Adtech surged hard late in 2020, so maybe just took longer for that to pullback.

You might be unhappy about the valuation of TTD with a P/S of 40 (prior to yesterday) but have you considered that:-

1. They finished last year with a NET income margin of 40% (2020 Revenues = $836m and Non GAAP Net Inc = $335.6m)

2. Their Q2’20-Q1’21 TTM EPS of 7.31 gives them a P/E ratio of 67 (whilst growing the top line at ~40% and the bottom line by 79% over the year ago TTM EPS of 4.09)

Having a profitable business amongst our Saul like stocks can be uncommon but having a company with a net margin of 40% which it is growing at 79% is incredible - and valued at a P/E of 67!

I’d say TTD has one of the best risk reward investment opportunities out there.

Ant

[rdgyy]

I am not sure if people post here without actually reading the full earning call transcript. But this is a quote form their CFO in the Q&A section of the call

“The thing to keep in mind, like you said, with all the quarterly comparisons, against last year when we benefited from that U.S. political spend. Q1 accelerated not only year-over-year, but on a sequential basis from Q4, once you exclude political. In the prepared remarks, I think I mentioned that you would take the Q1 growth rate of 37% in revenue, that’s more like 42% when you exclude political, and then that’s comparing really to like a mid-30s growth rate in Q4 of 2020. So that’s super optimistic that we can see that acceleration once you exclude that kind of noise we had a bit from the political side”

[LearningInvest0r]

This is to add a comment on MGNI report which was commented by Mekong above.

Bottom line - I did not like it. Overall organic growth deceleration to high 10s, hyped CTV growth deceleration to low 30s.

Bright spots - guide for next Q CTV growth which will include SpotX is 90%+. This looks like acceleration. They also upped their long-term revenue growth target from 20% to 25%.

I don’t have any position in MGNI at the moment because I did not like the Q4 2020 report and exited in February after that report. I would not be initiating a position in MGNI as it clearly does not reach the criteria of hypergrowth which we invest as a rule into.

There might be other reasons to invest into Magnite business - like reasonable growth expectations, reasonable valuation, expectedly long runaway for growth etc. I respect those reasons and can understand why some of board members remain long the shares.

Good luck to all of us in these turbulent times when next waves of “rotation to value” and “inflation concerns” are hitting hard our stocks.

Best,
V

[mekong22]

Yet TTD was still at a 40+ P/S until today

Two things here

1. assuming you’re using their reported revenue to calculate P/S, I’m coming up with a much lower P/S than 40+. By my math, their past 12 months of revenue is $895 million. And their market cap is $23 billion, so that makes the P/S (again using their reported GAAP revenue) as more like 26x right now.

and that still includes the massively pandemic impacted Q2 2020, which they’ve guided to be about +90% higher next quarter. Using their guidance for Q2, the trailing 12 month revenue will be more like $1.02 billion at 6/30/21, making their P/S more like 22x-23x at the end of June.

2. I’ll also add here that you have to remember that TTD, under U.S. GAAP accounting rules, is required to recognize their revenues on a “net” basis. So most of what we would ordinarily think of as cost of sales (the majority of what they collect from customers and then pay to the owners of the ad inventory) gets netted out of their gross revenue. E.g. most of what they collect in cash from customers is not included in the revenue number you see on their earnings release and 10-Q.

Different people may choose to view that differently, but at least for me, since TTD’s “take rate” (the commission/fee they keep on ad sales) is probably in the teens %, that means the gross amount they bill their customers and collect is more than five times the revenue they report, so if I want to compare their revenue, and P/S, to another company that records revenue “gross” (and then backs out COS on a separate line on the income statement to get to net income), I would approximately multiply TTD’s reported revenue by five.

So you could look at their P/S is more like 26x divided by 5, or only 5x when looking at it on an apples to apples basis compared to companies that show their revenue gross. Of course then you would have to factor in the fact that while TTD’s “gross” revenue is several times higher than what they report, their true margin % is only in the teens, unlike most SaaS companies with very high margins, so one way or another you have to adjust your thinking a bit

But no matter how you look at it, their P/S is nowhere near 40x+ today.

Magnite is the same situation, they are also required to report/recognize most of their revenue net.

Tom G and I had a good discussion back in November on this topic citing the relevant disclosures from both companies financials on the Magnite premium board here (tho note if you don’t have a premium membership to TMF, you probably won’t be able to access/view):

https://discussion.fool.com/4056/magnite-earnings-34662992.aspx?..

-mekong

[GolfCaddy4PLynch]

Great discussion here. I am going to reallocate $MGNI to $ROKU as I think that’s the better buy. $TTD I sold out of a few months ago.

They keep trying to hype up their business but they admit it doesn’t compare to any of the walled gardens like $ROKU.

Magnite earnings call excerpt.

Laura Martin – Needham & Company – Analyst
Hi there. Thanks very much for taking the question. Michael, I would be interested in your thoughts about why the CTV growth is different on a pro forma basis? Like SpotX up at 70%, you guys down at the 32% level on a pro forma basis. And if you care to comment, why Roku’s at 100% year-over-year growth was so much higher? Thank you.

Michael Barrett – Chief Executive Officer

Yes. Hi, Laura. Thanks for the question. Yes.

So I think March was a bit of a disappointment for us at Magnite. I think if you look at the combined company going forward, you’re just going to have a greater line of CTV products that each kind of address a different sliver of the marketplace. We talked a bit about the SpotX managed service business, which was able to extract linear dollars into CTV, a capability that we did not build out at Magnite, but saw it as something incredibly attractive at SpotX, along with a few other products. But as we said, so we have acceleration in Q2 for Magnite’s business.

And if you look at the two combined, you’re 90%-plus growth range for Q2. So all is well there. And as far as Roku is concerned, I think those owned and operated platforms, they have kind of a different business model, different business metrics. So it’s tough to compare us directly to Roku.

Obviously, same category, but I think that we feel really good about our long-term position as this leading platform, independent for the open web. And I think the numbers that David shared reflect that and the margins of the business reflect that as well.

[Texmex]

I think part of the issue is that TTD’s growth (37%) is much lower than Roku (100%) and PINS (78%) which are cheaper on a valuation basis. Yes, TTD is profitable now but Roku and Pins can become profitable if they chose to slow down their growth - that is the thesis anyway. The other issue I have heard is that IDFA may be unfriendly to folks with third-party relations like TTD while Pins and Roku will be less impacted.

[monkeydluffy]

Multiple posts pointed out that the slowdown of revenue growth in Q1 was due to political impacts in Q4. However, I don’t think this proves that TTD is doing great in Q1. FB, PINS, ROKU… I believe all the companies in ad industry benefited from election in Q4. However, most of the other ad companies reported even stronger Q1 result than Q4, which I believe was partially because of the relatively weak results in 2020 Q1 and was partially due to the tailwinds from economy reopening.

From TTD’s 2021 Q1 results, it does not look that TTD is enjoying the tailwinds as much as the other ad companies.

Luffy

[MFChips]

Stock prices typically don’t track revenue growth in a linear fashion. As TTD’s revenue grew, their leverage grew. That leverage translates to increasing profitability (or decreasing losses). Stocks don’t follow the model you propose.

[MFChips]

Sorry - that was meant as a reply to @ jdc115’s post

[jdc115]

Sorry - that was meant as a reply to @ jdc115’s post

I didn’t propose a model but was offering a reason why Doctor Doom’s model was flawed when trying to estimate a reasonable price for TDD today. But I think your response is valid for his post.

Thx

[MAS4R]

“Stocks don’t follow the model you propose.” And you know that from…? See below.

“Stock prices typically don’t track revenue growth in a linear fashion.” Is that what DOOM said though?

The point is that of all the futurology about reasonable expected returns, Tom Gardner tells us what DOOM referred to, to be the most reasonable metric: over the long run, you can expect the share price return to be capped by the revenue growth.

Unless you have done equivalent research on equivalent or better data set than TMF, or have access to one the results of which you can share, we have to go with Tom. Obviously, DCF does not count.

DOOM is also right on the extreme TTD valuation at the end of 2020.

I had run TTD’s growth-adjusted valuation for 10Q prior to COVID and then averaged to find a pre-Covid “normal” growth adjusted multiple. By year end 2020 TTD had become absurdly expensive for a company with comparatively lackluster growth. I lost that file with a bunch of others, and I am not going to re-do the work (I think I posted it somewhere but who knows where!), but DOOM is right and TTD was way ahead of its pre-Covid self.

Even just eyeballing it, the stock had tripled in 2020, roughly, while revenue was up in the 20s or so. As I like to say, obvious things are obvious. TTD had run far too much, far too quickly. Not the company’s fault. The rest we can debate endlessly.