Advertising software maker The Trade Desk (NASDAQ:TTD) reported Q3 FY2021 results beating Wall St's expectations, with revenue up 39.3% year on year to $301 million. On the other hand, guidance for the next quarter missed analyst expectations with revenues guided to $388 million, or 0.54% below analyst estimates. Trade Desk made a GAAP profit of $59.3 million, improving on its profit of $41.2 million, in the same quarter last year.
Trade Desk (TTD) Q3 FY2021 Highlights:
- Revenue: $301 million vs analyst estimates of $283.9 million (6.04% beat)
- EPS (non-GAAP): $0.18 vs analyst estimates of $0.15 (19.9% beat)
- Revenue guidance for Q4 2021 is $388 million at the midpoint, below analyst estimates of $390.1 million
- Free cash flow of $103.2 million, up from $3.37 million in previous quarter
- Gross Margin (GAAP): 82.2%, up from 79.2% same quarter last year
Founded by former Microsoft engineers Jeff Green and Dave Pickles, The Trade Desk (NASDAQ:TTD) offers cloud-based software that uses data to help advertisers better plan, place and target their online ads.
Digital advertising is a massive industry and while large platforms like Google and Facebook provide tools for buyers of ads, it is still in their interest to sell as many ads for as much money as possible. The Trade Desk is providing online marketing agencies with an independent platform that helps them optimize ad-campaigns to be more cost-efficient.
The platform integrates the data advertisers have about their potential customers with all the other data Trade Desk has available, and automatically makes suggestions about who is the highest-value audience, when to reach them and how. Once the campaign is running, Trade Desk scans millions of available ad slots in real-time and automatically makes bids for placements when they are likely to yield the results the advertiser is looking for. Interestingly, to keep its incentives aligned with its customers, Trade Desk is selling the ad slots at cost and not making any money from them. Instead it charges its customers subscription fee for using its product that is based on a percentage of the overall ad spend.
The digital advertising market is large, growing and becoming more diverse, both in terms of audiences and media. This as a result drives a growing need to automate and optimize ad placements, which Trade Desk is well positioned to benefit from.
The Trade Desk is mainly competing with tools for ad buyers provided by ad sellers like Google (NASDAQ:GOOGL) or Facebook (NASDAQ:FB) and divisions of companies like AT&T (NYSE:T) and Adobe (NASDAQ:ADBE).
As you can see below, Trade Desk's revenue growth has been exceptional over the last year, growing from quarterly revenue of $216.1 million, to $301 million.
And unsurprisingly, this was another great quarter for Trade Desk with revenue up an absolutely stunning 39.3% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $21.1 million in Q3, compared to $60.1 million in Q2 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Analysts covering the company are expecting the revenues to grow 24.9% over the next twelve months, although estimates are likely to change post earnings.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Trade Desk's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 82.2% in Q3.
That means that for every $1 in revenue the company had $0.82 left to spend on developing new products, marketing & sales and the general administrative overhead. Trending up over the last year this is a great gross margin, that allows companies like Trade Desk to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.
Key Takeaways from Trade Desk's Q3 Results
Sporting a market capitalization of $32.8 billion, more than $798.6 million in cash and with positive free cash flow over the last twelve months, we're confident that Trade Desk has the resources it needs to pursue a high growth business strategy.
We enjoyed seeing Trade Desk’s impressive revenue growth this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 10.8% on the results and currently trades at $75.98 per share.
Is Now The Time?
When considering Trade Desk, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are a number of reasons why we think Trade Desk is a great business. While we would expect growth rates to moderate from here, its revenue growth has been strong, over the last two years. On top of that, its very efficient customer acquisition hints at the potential for strong profitability, and its impressive gross margins are indicative of excellent business economics.
The market is certainly expecting long term growth from Trade Desk given its price to sales ratio based on the next twelve months is 24.5x. But looking at the tech landscape today, Trade Desk's qualities stand out and we still like it at this price.The Wall St analysts covering the company had a one year price target of $89.3 per share right before these results, implying that they saw upside in buying Trade Desk even in the short term.
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