Trade Desk looks to trade publicly

Contact: Scott Denne

The Trade Desk unveiled its prospectus Monday, showing that its agency-focused strategy may have enabled it to meet the challenge of scaling an ad-tech business. Most of Trade Desk’s peers have a complicated relationship with ad agencies and the holding companies that own them. Agencies control an outsized amount of ad spending, yet they treat most media buying platforms as a media rather than software purchase, and play ad-tech competitors off each other to see who will take the lowest margin for a campaign. This has led many media buying platform purveyors to seek to sell their wares to marketers directly, bypassing the agencies and hoping to exchange unpredictable, low-margin orders from agencies for long-term, software-like contracts.

Rather than fight ad agencies, Trade Desk embraced them by selling its software strictly to them and not to the agencies’ marketer customers. That bet has paid off. The company’s revenue increased to $114m in 2015 from $45m a year earlier. Its topline rose 83% year over year through the first six months of 2016. That growth hasn’t come at the expense of profits. The Ventura, California-based vendor eked out a tiny profit in 2014 and grew that to $15m last year. This year it’s on pace to bump that up a bit.

Selling to ad agencies is expensive. Profits remain elusive for many ad-tech firms because the sales process is never-ending, as many agencies choose to purchase media buying platforms as a one-off media expense, rather than an ongoing license or subscription. Trade Desk appears to have gained more traction in selling software contracts to agencies (389 of its agency customers have contracts in place with minimum spending levels), which has kept its marketing and sales costs down as the use among existing customers has risen.

Trade Desk allocated just 24% of its 2015 revenue toward selling its products. Other publicly traded ad-tech providers spend far greater portions of their net revenue on this activity. TubeMogul spent 41% of its revenue on sales and marketing last quarter. Rocket Fuel shelled out 55%, though far lower than the 88% it was spending at its IPO. Ad network specialists Tremor Video and YuMe were even higher at 65%.

Its ability to sell ad-tech as software, its high growth and its profitability should enable Trade Desk to fetch a superior multiple than its peers when it does begin to trade. And it will need to trade well up from those companies to get a valuation above the $600m it garnered in a private financing earlier this year. TubeMogul is the best available comp for Trade Desk. Both vendors offer a media buying platform, and both position themselves as software firms rather than services or media companies. At 57% last year, TubeMogul’s growth is less than half that of Trade Desk and the vendor has yet to turn a profit. Despite garnering one of the best multiples in ad-tech, TubeMogul trades at roughly 2x net revenue. To hit $600m, Trade Desk would need to get 4x trailing revenue.

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