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The Trade Desk (NASDAQ:TTD) Q3 Sales Beat Estimates But Quarterly Guidance Underwhelms


Full Report / November 09, 2022
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Advertising software maker The Trade Desk (NASDAQ:TTD) reported Q3 FY2022 results beating Wall St's expectations, with revenue up 31.1% year on year to $394.7 million. However, guidance for the next quarter was less impressive, coming in at $490 million at the midpoint, being 3.75% below analyst estimates. The Trade Desk made a GAAP profit of $15.8 million, down on its profit of $59.3 million, in the same quarter last year.

The Trade Desk (TTD) Q3 FY2022 Highlights:

  • Revenue: $394.7 million vs analyst estimates of $386.5 million (2.13% beat)
  • EPS (non-GAAP): $0.26 vs analyst estimates of $0.23 (15.2% beat)
  • Revenue guidance for Q4 2022 is $490 million at the midpoint, below analyst estimates of $509.1 million
  • Free cash flow of $108.6 million, up 23.9% from previous quarter
  • Gross Margin (GAAP): 82.2%, in line with 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 for a software that enables advertisers to use data to automate and optimize ad placements.

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).

Sales Growth

As you can see below, The Trade Desk's revenue growth has been impressive over the last two years, growing from quarterly revenue of $216.1 million in Q3 FY2020, to $394.7 million.

The Trade Desk Total Revenue

And unsurprisingly, this was another great quarter for The Trade Desk with revenue up 31.1% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $17.8 million in Q3, compared to $61.6 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates The Trade Desk is expecting revenue to grow 23.8% year on year to $490 million, in line with the 23.6% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 24.9% over the next twelve months.

Profitability

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. The 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.

The Trade Desk Gross Margin (GAAP)

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. This is a great gross margin, that allows companies like The Trade Desk to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that The Trade Desk is doing a good job controlling costs and is not under pressure from competition to lower prices.

Cash Is King

If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. The Trade Desk's free cash flow came in at $108.6 million in Q3, roughly the same as last year.

The Trade Desk Free Cash Flow

The Trade Desk has generated $484.9 million in free cash flow over the last twelve months, an impressive 32.7% of revenues. This robust FCF margin is a result of The Trade Desk asset lite business model, scale advantages, and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from The Trade Desk's Q3 Results

With a market capitalization of $21.1 billion, more than $1.32 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

It was good to see The Trade Desk deliver strong revenue growth this quarter, on top of solid free cash flow. And we were also excited to see that it outperformed analysts' 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 were mixed. The company is down 2.6% on the results and currently trades at $42.25 per share.

Is Now The Time?

The Trade Desk may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. There are numerous reasons why we think The Trade Desk is one of the best software as service companies out there. While we would expect growth rates to moderate from here, its revenue growth has been impressive, 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.

There's no doubt that the market is optimistic about The Trade Desk's growth prospects, as its price to sales ratio based on the next twelve months of 11.7x would suggest. But looking at the tech landscape today, The Trade Desk's qualities as one of the best businesses really stand out and we still like it at this price, despite the higher multiple.

The Wall St analysts covering the company had a one year price target of $78.2 per share right before these results, implying that they saw upside in buying The Trade Desk even in the short term.

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