Notes on Trade Desk's 4Q19 Call

Trade Desk ("TTD") had its earnings call last week. Here are a few things that stood out to me.

On Connected TV ("CTV") trends:

1. CTV adopts header bidding style mechanism. See below:

2. Since walled gardens don’t exist in traditional TV, marketers see CTV as a chance to shift power away from the walled gardens.

3. Even live sports are adopting CTV.

Financial/Modeling Related

1. Take rates likely to come down over next few years. TTD talked about willing to give up some take rate for market share. This is likely to trigger competitive response.

2. Deleveraging on the sales/marketing costs over the next  few years as TTD add more employees to capture growth market. 

• "you should expect sales and marketing to generally grow a little faster than revenue growth over the next few years"

3. Free cash flow suffered from massive working capital drain this quarter because the gap between DSO and DPO widened. It's not clear if that’s just temporary but management says they do want to bring it down.

• I can see this cash drain being a problem as their agency clients might turn into bad credits. 
• This also implies that some of that cash on balance sheet might not be excess as it is needed for working capital buffer.

4. 2020 revenue guidance implies deceleration through the year and exiting 4Q20 at mid/high 20's revenue growth. But management insinuated some sandbagging there

• "we're more comfortable moving expectations up as we go"

Overall I think the results are solid, despite some of my cautions on financials above.

Since my September post the stock went up from ~$185 to now ~$280. It may looks expensive but that's because the company has years of profitable growth ahead - it is winning in a large TAM that's yet to be realized. 

How many companies are growing revenue 30%+ while having TTD's SaaS like margins and positive free cash flow? Not only that, the Trade Desk achieves this 30%+ revenue growth while spending a mere 20% of revenue on sales and marketing. This is a rare asset indeed.

  

I continue to hold TTD as a way to capture upside on the Connected TV theme.