The Trade Desk (TTD) Q1 '23 Earnings Recap
The Trade Desk (TTD) Q1 '23 Earnings Recap
The $177M dollar-printing machine
The Trade Desk (TTD) delivered excellent Q1 earnings for their fiscal year 2023:
$177M Record-free cash flow
46% FCF margin (!)
$1.3B cash
$0 debt
What more could you ask for in this environment?
Ah yes, GAAP-profitability, of course:
They hit that mark with a positive $9M GAAP net income!
Circling back to the non-GAAP front, they significantly beat their adjusted EBITDA guide of $78M and delivered $109M (29% of revenues).
The EBITDA margin of 29% is their lowest since Q2 2020, but this is primarily due to higher interest income and tax benefits. These are subtracted from EBITDA (earnings before interest, tax, depreciation, and amortization) and do not necessarily represent a negative trend. On the contrary.
Ignoring that, the EBITDA would be around $137M with an EBITDA margin of 37% and is "on track”.
Net income was $114M (30% of revenues), up from $104.66M a year ago. Earnings per share also increased from $0.21 to $0.23. Operating cash flow was $179M (47% of revenues). These margins are incredibly strong and are one of the reasons why I'm holding this stock.
Non-GAAP operating expenses for R&D (19% of revenues) and S&M (21.7% of revenues) rose by 300 and 450 bps respectively year-over-year. This is likely due to in-person events and travel that did not take place in Q1 of the prior year as they had not yet fully resumed back-to-office work or in-person events, but nothing to worry about.
Revenue and guidance - another highlight
Revenue for the quarter was $383M, which exceeded my expected $366M. This represents a 21.5% increase year-over-year and a -22% decrease quarter-over-quarter. Note: The negative QoQ decline is not worrisome, as Q1 is seasonally the weakest quarter for the company and the advertising industry in general.
The company beat its revenue guidance by 5%, which is a positive surprise since it breaks the negative trend of the previous 4 quarters:
4.1%, 3.6%, 2.6%, 0.2% -> now at 5%!
The Q2 revenue guide was $452M, which exceeded my expected $437M, and was another positive surprise. Excluding U.S. political election spend, which represented a low single-digit percentage of spend in Q2 2022, the estimated revenue growth rate in Q2 of this year would be about 21% on a year-over-year basis, instead of an estimated 18%. This is without a beat. Assuming they beat their guide by just 2% (I expect a 4% beat), revenue is likely to accelerate again.
International spending, with a particularly strong performance in EMEA, accounted for 12% and outpaced North American spending, which accounted for 88%. Additionally, CTV business in Europe grew well into the triple digits YoY in Q1.
In terms of verticals, the travel sector nearly tripled its spending in Q1 compared to a year ago as it continues to recover from the pandemic, while spending on shopping and business was below average.
Customers
On the customer front, there is the usual 95% customer retention for the 9th consecutive year.
I also appreciated the comment about customers being able to work in month-to-month increments rather than committing to a yearlong or 6-month plan, which helps customers in uncertain environments like this.
Tailwinds: Connected TV (CTV)
Looking at the comments regarding the main investment thesis, Connected-TV (CTV), provides further confidence:
Jeff Green said that CTV currently accounts for 45% of spending and is the fastest-growing channel. The shift from linear to connected TV is accelerating, and this trend is the biggest secular tailwind the company may ever see in its history.
Netflix highlighted on their earnings call a few weeks ago that the ad-funded subscriber is more valuable to them than the ad-free subscriber. This bold statement supports The Trade Desk.
And streaming wars intensify each year, which makes integration with The Trade Desk somewhat inevitable for all major streaming platforms as they scale, because they need as much demand as possible on their platforms.
Touching AI
Jeff Green (CEO, The Trade Desk) reiterated a recent statement of Coca-Cola’s CEO:
“AI is going to make a huge impact in marketing" — James Quince, CEO, Coca-Cola
Which I agree with, being a marketing guy for 20+ years. This will be a significant development for marketing, and the same can be said for The Trade Desk.
He also highlighted their advantage in AI, as they analyze over 10 million ad requests per second. These requests represent a unique dataset that can be used to train generative AI with confidence for years to come. On June 6th, The Trade Desk will hold its "Net Platform Launch" event, which is "the largest in our history". During this event, additional insights about AI will be announced.
On UID2
I was happy to see that The Trade Desk has achieved its target of having 75% of the third-party data ecosystem activate on UID2. This means that most major third-party data providers are now using UID2.
Unilever has reported that ad impressions, including UID2, on Disney were 12X more effective in reaching their target audience than those with traditional identifiers. This is a significant value add and a compelling reason to work with The Trade Desk.
In Summary
I was impressed by the quarter, as were several analysts during the call. The Trade Desk continues to outperform its industry by 4X and is on track to achieve re-accelerated revenue growth.
Someone on Twitter asked me why the stock was down 6% in the following days. While I wouldn't describe it that way, my explanation would be the relatively high valuation. Stocks like these can be extremely volatile, but as of writing, it's still up 48% year-to-date. As long as the company continues to deliver, I expect the stock to keep rising. Long-term.
Despite growing slower compared to all my other holdings, I have a lot of confidence in The Trade Desk. Not only am I expecting revenue growth to accelerate next year due to at least two significant tailwinds: 1. Political spending from elections and 2. accelerating CTV tailwinds, but I also believe that TTD 0.00%↑ is a rare, enduring grower for years to come.
That's why I plan to opportunistically add to my position over time, and it might even deserve to be among the larger holdings (>10%) in my portfolio.
Thanks for reading, and happy investing!
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