The Trade Desk's (NASDAQ:TTD) Q2 Sales Top Estimates But Stock Drops

Full Report / August 09, 2023

Advertising software maker The Trade Desk (NASDAQ:TTD) reported Q2 FY2023 results topping analysts' expectations, with revenue up 23.2% year on year to $464.3 million. The company also expects next quarter's revenue to be around $485 million, slightly above analysts' estimates. The Trade Desk made a GAAP profit of $32.9 million, improving from its loss of $19.1 million in the same quarter last year.

The Trade Desk (TTD) Q2 FY2023 Highlights:

  • Revenue: $464.3 million vs analyst estimates of $455.1 million (2.02% beat)
  • EPS (non-GAAP): $0.28 vs analyst estimates of $0.26 (8.51% beat)
  • Revenue Guidance for Q3 2023 is $485 million at the midpoint, above analyst estimates of $480.5 million
  • Free Cash Flow of $118.7 million, down 32.9% from the previous quarter
  • Gross Margin (GAAP): 81.3%, in line with the 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 strong over the last two years, growing from $280 million in Q2 FY2021 to $464.3 million this quarter.

The Trade Desk Total Revenue

This quarter, The Trade Desk's quarterly revenue was once again up a very solid 23.2% year on year. On top of that, its revenue increased $81.5 million quarter on quarter, a strong improvement from the $107.9 million decrease in Q1 2023. This is a sign of acceleration of growth and very nice to see indeed.

Next quarter's guidance suggests that The Trade Desk is expecting revenue to grow 22.9% year on year to $485 million, slowing down from the 31.1% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 23.4% over the next 12 months.


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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 81.3% in Q2.

The Trade Desk Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.81 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, The Trade Desk's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. The Trade Desk's free cash flow came in at $118.7 million in Q2, up 35.5% year on year.

The Trade Desk Free Cash Flow

The Trade Desk has generated $534.8 million in free cash flow over the last 12 months, an eye-popping 31.5% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from The Trade Desk's Q2 Results

With a market capitalization of $41.7 billion, a $1.43 billion cash balance, and positive free cash flow over the last 12 months, we're confident that The Trade Desk has the resources needed to pursue a high-growth business strategy.

We were impressed by The Trade Desk's strong gross margin improvement, revenue beat, and EBITDA beat this quarter. We were also glad it raised its revenue and EBITDA guidance for next quarter, topping Wall Street's estimates. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. Investors were likely expecting more, however, and the stock is down 6.03% after reporting, trading at $76 per share.

Is Now The Time?

When considering an investment in The Trade Desk, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. There are numerous reasons why we think The Trade Desk is one of the best software as service companies out there. While we'd 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 indicate 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 12 months of 18.9x 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.

Wall Street analysts covering the company had a one year price target of $80 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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