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The Trade Desk (NASDAQ:TTD) Q2 Sales Beat Estimates, Stock Jumps 13.8%


Full Report / September 29, 2022
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Advertising software maker The Trade Desk (NASDAQ:TTD) reported results ahead of analyst expectations in the Q2 FY2022 quarter, with revenue up 34.6% year on year to $376.9 million. The company expects that next quarter's revenue would be around $385 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. The Trade Desk made a GAAP loss of $19 million, down on its profit of $47.6 million, in the same quarter last year.

The Trade Desk (TTD) Q2 FY2022 Highlights:

  • Revenue: $376.9 million vs analyst estimates of $365.1 million (3.22% beat)
  • EPS (non-GAAP): $0.20 vs analyst estimates of $0.20 (small beat)
  • Revenue guidance for Q3 2022 is $385 million at the midpoint, above analyst estimates of $382.3 million
  • Free cash flow of $89.2 million, down 34.4% from previous quarter
  • Gross Margin (GAAP): 82%, 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 very strong over the last year, growing from quarterly revenue of $279.9 million, to $376.9 million.

The Trade Desk Total Revenue

And unsurprisingly, this was another great quarter for The Trade Desk with revenue up 34.6% year on year. On top of that, revenue increased $61.6 million quarter on quarter, a strong improvement on the $80.2 million decrease in Q1 2022, and a sign of acceleration of growth, which is very nice to see indeed.

Guidance for the next quarter indicates The Trade Desk is expecting revenue to grow 27.8% year on year to $385 million, slowing down from the 39.3% 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 23.9% 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% in Q2.

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. Significantly up from the last quarter, 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.

Cash Is King

If you follow 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 $89.2 million in Q2, up year on year.

The Trade Desk Free Cash Flow

The Trade Desk has generated $480.6 million in free cash flow over the last twelve months, an impressive 34.6% 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 Q2 Results

With a market capitalization of $26.7 billion, more than $1.21 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 improve their gross margin this quarter. And we were also excited to see the really strong revenue growth. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company currently trades at $61.3 per share.

Is Now The Time?

The Trade Desk may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. There are a number of reasons why we think The 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 bountiful generation of free cash flow empowers it to invest in growth initiatives.

The market is certainly expecting long term growth from The Trade Desk given its price to sales ratio based on the next twelve months is 15.4x. 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 $70.8 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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