Advertising software maker The Trade Desk (NASDAQ:TTD) reported results in line with analyst expectations in Q4 FY2022 quarter, with revenue up 24% year on year to $490.7 million. The company expects that next quarter's revenue would be around $363 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. The Trade Desk made a GAAP profit of $71.2 million, improving on its profit of $8.04 million, in the same quarter last year.
The Trade Desk (TTD) Q4 FY2022 Highlights:
- Revenue: $490.7 million vs analyst estimates of $491.8 million (small miss)
- EPS (non-GAAP): $0.38 vs analyst estimates of $0.36 (5.95% beat)
- Revenue guidance for Q1 2023 is $363 million at the midpoint, roughly in line with what analysts were expecting
- Free cash flow of $122.8 million, roughly flat from previous quarter
- Gross Margin (GAAP): 83.8%, in line with same quarter last year
- Announces $700 Million Share Repurchase Program
“The Trade Desk outpaced nearly all areas of digital advertising in 2022, with 32% revenue growth year over year, and a record $491 million of revenue in the fourth quarter alone. This performance was underscored by significant profitability and cash flow. In an unpredictable macro environment, our growing relationships with agencies and brands is testament to the value of the open internet over the limitations of walled gardens,” said Jeff Green, founder and CEO of The Trade Desk.
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).
As you can see below, The Trade Desk's revenue growth has been very strong over the last two years, growing from quarterly revenue of $319.9 million in Q4 FY2020, to $490.7 million.
Even though The Trade Desk fell short of revenue estimates, its quarterly revenue growth was still up a very solid 24% year on year. On top of that, revenue increased $96 million quarter on quarter, a very strong improvement on the $17.8 million increase in Q3 2022, which shows acceleration of growth, and is great to see.
Guidance for the next quarter indicates The Trade Desk is expecting revenue to grow 15.1% year on year to $363 million, slowing down from the 43.5% year-over-year increase in revenue the company had recorded in the same quarter last year.
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 83.8% in Q4.
That means that for every $1 in revenue the company had $0.84 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 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 $122.8 million in Q4, down 19.5% year on year.
The Trade Desk has generated $460.1 million in free cash flow over the last twelve months, an impressive 29.2% 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 Q4 Results
With a market capitalization of $24.4 billion, more than $1.45 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 glad to see good revenue growth. On the other hand, it was unfortunate to see that The Trade Desk missed analysts' revenue expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The market reacted positively to the news of buyback and company is up 5.13% on the results and currently trades at $52.48 per share.
Is Now The Time?
When considering The 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 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 impressive gross margins are indicative of excellent business economics.
The Trade Desk's price to sales ratio based on the next twelve months of 13.3x indicates that the market is definitely optimistic about its growth prospects. But looking at the tech landscape today, The 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 $59.5 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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