Thoughts and Questions on Trade Desk

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Thoughts and Questions on TTD

The discussion on the board has made me sit down and look at The Trade Desk to decide whether I should have more than my current 4% position. I reread the last earnings report, and read the transcript of the conference call, and looked at the investor presentation.

I have to admit that Jeff Green, the CEO, is a great salesman for his stock, and makes it sound like there’s no way the company can go wrong, and indeed, with an election year coming and lots more political ads, I can see where he could be right.

However, what the f… happened this quarter???
How can a company growing CTV spend at 145%, and audio spend at “a stunning” 162%, and with mobile spend up 58%, and data spend up 63%, and cross-device spend up 132%, have revenue up just 38%??? It just doesn’t make sense! What isn’t he telling us? What is shrinking?

The Sept quarter sequential revenue rose just $4 million, from $160 to $164 million!!! That’s about 2.5%. That’s the smallest sequential growth from June to Sept, by far, in the last four years. Last year the percentage was double that, the year before it was more than triple that, the year before that it was 5 times this year’s sequential growth.

And don’t give me any nonsense about the law of big numbers. It was by far the smallest sequential gain in dollars too, by far. Even in 2016 when they were only coming off a base of $47 million in June, they managed to grow by $6 million sequentially to $53 million, and this year, coming off a base of $160 million, they only grew $4 million? With all those bragging segments with over 100% growth?

How can 2.5% sequential growth happen in a company growing all these segments by 162%, 145%, 132%, 63%, and 58%? I don’t get it!

And why did EPS grow only 10 cents yoy, when a year ago it grew 30 cents yoy??? Does that make any sense? And, oh yes, this June quarter it grew 35 cents, and in the Mar quarter (usually smallest) it grew 15 cents, and last December it grew 55 cents. And only 10 cents this quarter???

And he gave no explanation for what went wrong. Just everything is beyond wonderful!

I may build my position up to 4.5% or so, but with a lot of misgivings.

Can any of you explain it to me??? Please?

Saul

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Can any of you explain it to me??? Please?

As to what is dropping, the likely culprit is traditional display advertising. It could also be stated their traditional programmatic display is growing closer to the market rate of around 20% from memory. They currently outpace the overall programmatic growth rate by 2x. Also from memory, display is roughly 50% of the business but someone (me later) should check me on that.

Jeff Green has not given investors enough information to ascertain what the growth rates in various segments mean as a portion of total sales. Yes, he is a very good salesman, but he also has lead the company incredibly well to date by investing early in the right spaces.

A.J.

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Saul,

I can only say that I share your misgivings. Q3 was indeed a very bad quarter from a numerics standpoint. Trade Desk does seem to have some seasonality in Q2 to Q3 being the weakest growth quarter of the year (aside from Q4 to Q1 which is somewhat typical amongst companies). Q4 by contrast is the strongest quarter of the year.

By the numbers, sequentially, revenue grew to 164.2M from 159.9M, or 4.3M. Gross profit actually fell to 124.3M from 124.6M, a decline of 0.3M. Net income fell further to 19.4M versus 27.9M, a decline of 8.5M. The only good thing I can say about the numbers is that share count only barely increased sequentially.

I have almost never sold a company based upon a single quarterly result. However, TTD needs to have a very strong Q4 to remain amongst my largest positions. They are guiding to 213M, which would be 30% sequential growth and 33% y/o/y growth. I’d like to see them maintain the 38% y/o/y growth rate (“a round up to 40%”) as they did in Q3 and do 221. Also on my wish list is that their GAAP net margin recovers to Q2 levels.

As long as they are in the range of 215+, and no material change to the story, I will continue to hold and hope for accelerating growth next year.

I can’t explain the strong stock price performance in Q4. I can only say what makes me attracted to The Trade Desk. I like the fact that they are GAAP EPS positive, have modest dilution, and they have strong story for future growth. Very few of our companies are significantly GAAP EPS positive, indeed even mighty Alteryx has turned EPS negative for the last two reported quarters. I think that is appealing to investors relative to other opportunities.

Thanks,
Rob

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Can any of you explain it to me??? Please?

My take is that platform expansion is expensive & international expansion is also expensive. I base this on the company’s Q3 filing specifically page 4 and comments from the Q3 earnings call. (Links provided at the end of this post.)

Notice that in the third quarter of 2018 the company had revenue of $118.825 million and after operating expenses were deducted the company had $22.263 million remaining.

In comparison during Q3 of this year the company produced $164.203 million in revenue or 38% more revenue than the same quarter in 2018. Yet, even with 38% more revenue in the quarter, the company had less in income from operations. ($21.9M vs. $22.3M)

The reason for this is because TTD spent a lot more for sales and marketing ($36M vs. $23M) as well as general administrative expenses ($37M vs $21M).

I could be mistaken but I think this is related to the building out of the company’s platform. From the Q3 conference call CEO Jeff Green:

…We’re building on our Adbrain acquisition, and investing heavily in identity graph solutions that enable our customers to drive data-driven precision in their campaigns, whether they are operating in the cookie-based or a cookie-less environment.

Our investment also includes areas such as measurement. As advertisers look for the most precise information on campaign performance, our measurement tools allow an agency or advertiser to use third parties for verification. This helps the ecosystem become more transparent and avoid the grading your own homework syndrome that advertisers experience with walled gardens, and which often obfuscates ROI and data.

We also continue to invest in our infrastructure to support business and data processing growth worldwide, you already see some of these infrastructure investments flow through to our gross margin or platform development expense line. It is these types of investments that help drive leverage in our model. We do not have to choose between growth and profitability. We do both. This is highly appealing to our customers, and a major factor in our 95%-plus retention rates. They know we will continue to invest for their success.

and additional comments from the CFO:

With the growth of our business, our operating expenses grew $242 million in Q3. This increase was primarily due to sales and marketing and engineering as we continue to scale for growth.

You can see all the numbers on page 4 from the company’s Q3 filing with the SEC.

http://investors.thetradedesk.com/static-files/fc4f780f-72dc…

Here is a link to the Q3 conference call transcript:

https://www.fool.com/earnings/call-transcripts/2019/11/07/th…

Frank - long TTD, see profile for all holdings

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Another question from the Conference Call

For the quarter, 89% of our gross spend came from existing customers who have been on our platform for longer than a year.

On the one hand you can say, That’s great! Their old customers increased their spend by 23% this year (1.38 revenue x 0.89 = 1.23). That’s like a 123% net retention rate.

But on the other hand, they seem to be acquiring few big spending new customers. 11% is pretty piddling when you think of companies like Crowd with over 100% customer growth year to year.

Also, as far as the initial questions I asked in starting this thread, someone attempted an excuse for the weak earnings growth (they are spending more), but no one has attempted to explain why sequential gross revenue essentially didn’t grow for the first time… and how a company with all these sectors growing at 130%, 140%, 150%, could grow total revenue at just 38% … and why Jeff Green didn’t make any attempt to explain it.

Saul

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I think it might make sense that 89% is coming from existing customers as the main customers of The Trade Desk are large ad agencies buying ad inventory for their clients. I would suspect that most (large) agencies already use TTD for several years and hence future growth will mainly come from gaining market share vs competitors and the fast growth of the programmatic advertising market.

It’s a good point but I don’t think the customer base of TTD can be compared to let’s say Crowd.

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I think it might make sense that 89% is coming from existing customers as the main customers of The Trade Desk are large ad agencies buying ad inventory for their clients. I would suspect that most (large) agencies already use TTD for several years and hence future growth will mainly come from gaining market share vs competitors and the fast growth of the programmatic advertising market.

Thanks Rubenslash, that makes more sense to me.

Saul

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I really should make clear that I think The Trade Desk will do just fine this year, and I even increased my position by a quarter of a point today, but what I’m complaining about is Jeff Green’s cheerleading and lack of any transparency about what the numbers that he’s presenting actually mean.

If a sector rises from $0.6 million in spend to $1.3 million in spend, and he crows that it’s up 117%, we’ll never know that he’s only talking about 0.8% of their total revenue and it is totally irrelevant to the big picture. ($1.3 million divided by $164.3 million = .0079 which is just eight-tenths of 1% of total revenue). That’s what ticks me off. Giving percents without giving numbers of dollars is a sham in my opinion.

Saul

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I’d also like to add that Green made it clear that while connected tv and streaming radio is growing insanely fast.

Monetizing these green fields are still in the early innings. I know he has said that they have deals with companies in China but have yet to monetize them. Think Facebook before they figured away to monetize mobile as or more effectively as they did desktop. When they did, the stock took off.

Institutions seemed to have took the leap of faith because last quarter revenue wasn’t that hot but that could change drastically in the near future.

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TTD lists “Concentration of Risk” in their 10-K every year.

In 2018, one customer was 20% of Gross Billings and another was 10%.
Their make up of Accounts Receivables were 24% and 14%.

See Page 64 and 65 of this link:
http://investors.thetradedesk.com/static-files/cb23ef1a-29de…

Every other year previously listed another customer of around 10%. That customer must have fallen to less than 10% in 2018.

A.J.

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Jeff Green’s unwillingness to provide real numbers has been a bone of contention of mine for some time now so I share your sentiment.

We do get the mobile spend data in most quarterly calls.
In Q2, Mobile spend was 47% of the total. With that said, I truly don’t know what categories make up the rest of the spend. I assume they are display, audio and CTV, but that is really just a guess.

They also have broken down mobile spend into separate categories of mobile in app and mobile video, but I’m assuming those are all part of mobile so they aren’t relevant to trying to ascertain the different sectors and their make up of the total spend.

They have listed other spend numbers that I have no idea what category they would fit into. Things like “Data” spend and “Cross Device” spend such as this from Q2.

Data spend again was up 80%, and cross-device spend was up over 250% for the third quarter in a row.

If I’m missing something from above or have made any errors, I’d like to know.

With all of this, why am I invested in The Trade Desk? First, it is evident they are the clear leader in their space for the open internet. Green has done a fantastic job of seeing the opportunity in this market and where it is headed long term. Second, in the time I have owned them, they have been growing as much as 3x the programmatic market growth rate and now sit around 2x. Third, the CTV tailwind. Fourth, more green field international opportunity where walled gardens aren’t as entrenched. Fifth, the China potential and the relationships they have now built there. Sixth, they are profitable and have been for a long time.

Honestly, I was surprised at the market’s reaction to both the Q2 and Q3 numbers. I sold half of what I owned in the after market following the Q2 call and then bought half of that back the next day (at a higher price). Current position is about 11%.

It seems the investment community is buying into TTD’s tailwinds. I forgot to mention the election year tailwind.

One final note regarding Q3 sequential growth. The previous two Q3 (2018 and 2017) saw 5.8% and 9.1% sequential growth while they were growing in the 50% to 60% range. Q3 doesn’t seem to be a seasonally strong quarter. Q4 is obviously a very strong quarter for them and I would expect TTD to handily beat their rather paltry forecast, but it remains to be seen.

I could always be incorrect and there could be something wrong going on under the hood.

A.J.

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That’s what ticks me off. Giving percents without giving numbers of dollars is a sham in my opinion.

Yet you upped your position in a “sham”?

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So I too reduced my holdings by 2/3. I too could not figure out what all the numbers added up to. I am wondering whether I should not get rid of the rest of my trade desk holdings. It seems to me that I can still put this money in other companies which are more transparent with their numbers. TTD might be a great company and grow like wild, but so many other companies will also. It is impossible for me to own every one.

Gordon

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Over the last few days I have thought quite a bit about TTD’s recent out performance. After last quarters slowing growth I was surprised their stock price held up as well as it did. I even trimmed a little post report. Currently TTD is a 14% position and ROKU is an 8% position.

My bull thesis for TTD’s out performance is I’ve heard the phrase software is eating the world. Well I think streaming is eating the video world. I think within my life time practically all video will be consumed via streaming. I was an early investor in NFLX because I thought if they could execute they would change the way video content was consumed. I feel pretty much the same way about TTD, if they can execute they will change the way video advertising is sold. I think its about total addressable market opportunity, in conjunction with being first mover in the space. Also think the same applies to Shopify and maybe Tesla. I don’t believe you will find the answer to TTD’s recent out performance in the numbers. Maybe sometimes the market sees beyond this quarters numbers.

I always loved a good story stock. I wish I could remember who wrote (paraphrased when talking about story stocks) “I always see the lip stick on the pig. Saul sees the pig.” My hope for TTD is they are no pig and will be a long term winner. Time will tell, for now I’m holding.

Kindest Regards,
Steve

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Here’s what I wrote yesterday:

In Q2, Mobile spend was 47% of the total. With that said, I truly don’t know what categories make up the rest of the spend. I assume they are display, audio and CTV, but that is really just a guess.

Here’s what I asked TTD IR yesterday:

What buckets comprise the total ad spend on the platform. In the Q2 conference call it was mentioned that mobile ad spend is 47% of the total. What are the other buckets outside of mobile ad that comprise the remaining 53%. Thank you!

IR replied in a couple of hours at 7:22 PM CST. Good to see they aren’t working “banker’s hours.”

The other buckets outside of mobile include:
Video which is a little over 25%
Display (desktop) which is a little over 20%
Audio which is ~5%
And the of course Mobile which is 47%

Ask and ye shall receive, eh?

I previously assumed video would be allocated to the device (Mobile, desktop, CTV), but it is its own category. Therefore, mobile and desktop must be static (non-video) ads.

I know a bit more now, but I don’t believe this helps us glean anything from Green’s comments with the exception of audio. We see that audio is roughly 5% of spend. Assuming a 20% take rate on the spend, we can get somewhere close to a number there. CTV remains “hidden” in overall video.

Take care,
A.J.

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Jeff Green yesterday: “The ads are moving over very quickly, and I beleive 2020 is the year of the hockey stick for AVOD, advertised video on demand.”

https://www.youtube.com/watch?v=GMyhBS5LaTk

Jim

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I’ve read and reread the posts on TTD and I’m still not sure how the word “spend” is being used in this context. I’m sure its transparent to everyone else, but not to me.

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Streaming fatigue

https://www.valdostadailytimes.com/news/business/new-survey-…

The majority of Americans (59 percent) are not willing to pay more than $20 a month for streaming TV services, according to a recent survey of more than 2,600 U.S. consumers by The Trade Desk. Furthermore, 75 percent of consumers will not pay more than $30 a month. This research suggests, however, that there are hard limits to consumer appetite for subscription-based services. As a result, streaming companies must decide whether and how to incorporate advertising-supported tiers to their platform.
The survey indicates a willingness from consumers for streaming services supported by ads, particularly if the format and pacing of commercial breaks differ from traditional TV content.

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Saul,
You are spot on. Green is the best cheerleader CEO of all our companies. Last Q numbers do not warrant this market reaction. However, I think it is about expectations in 2020. 1. Many articles I have read suggest due to competition NFLX will start having advt. option. Think what that could do TTD stock. 2. Green in the CC mentioned that numbers were improving in the later half of last Q and seemed to prime the pump for this Q. So, there is an expectation of a significant beat this Q. Lastly because of its profitability even if the company grows around 40% this Q I do not expect this company to be punished severely. But I dont expect a 2019 type stock performance either. Just my 2c.

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I’ve read and reread the posts on TTD and I’m still not sure how the word “spend” is being used in this context. I’m sure its transparent to everyone else, but not to me.

Hi draj,

In my naive take I understand it like this: It is the amount of money that the advertisers are spending to buy ads through the platform. It doesn’t relate at all “one to one” to the money that TTD gets (its “revenue”), as TTD may get different (small) percentages of the spend, depending on whether the ad placement is data driven, on computers, on TV, on mobile, etc.

I may be wrong about this interpretation, of course.

Saul

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