One thing that’s great about when companies go public is the issuing of an S-1 prospectus. These often reveal interesting material — such as how dependent on Google, Omnicom and WPP a company like The Trade Desk is.
The Trade Desk (Nasdaq: TTD), a buy or demand-side platform that provides access to all RTB inventory, went public last month. So far, the market seems to like the stock. It was trading at $26 last we looked, and now has a market cap of just over $1 billion, almost twice the original projected range. Will this trigger a bunch more ad tech IPOs?
The Trade Desk’s IPO provides a unique opportunity to see both how viable ad tech companies are in the public markets as well as to evaluate The Trade Desk in particular. We find ad tech companies secretive, especially when talking about clients. And so far, the marketplace record is mixed. Since its 2013 IPO, ad tech company Rocket Fuel has lost ground and was trading at $2.51, near its 52-week low, at last glance. Rocket Fuel is due to reveal third quarter results next Tuesday.
According to its S-1, The Trade Desk believes that buyers have the advantage in the programmatic market.
“We had approximately 389 clients, consisting primarily of advertising agencies, as of December 31, 2015,” it reports. “Many of these agencies are owned by holding companies, where decision-making is decentralized such that purchasing decisions are made, and relationships with advertisers are located, at the agency, local branch or division level. If all of our individual client contractual relationships were aggregated at the holding company level, Omnicom Group Inc. and WPP plc would each represent more than 10% of our gross billings for 2015.”
Programmatic TV Advertising
The document expresses some uncertainty as to the projected growth of programmatic television advertising, and the amount of money required to exploit it.
“As new types of inventory, such as digital advertising for television, become available, we will need to expend significant resources to ensure we have access to such new inventory,” the Trade Desk warns. “Although television advertising is a large market, only a very small percentage of it is currently purchased through digital advertising exchanges. We are investing heavily in our programmatic television offering, including by increasing our workforce and by adding new features, functions and integrations to our platform. If the digital television advertising market does not grow as we anticipate or we fail to successfully serve such market, our growth prospects could be harmed.”
Moreover, the S-1 warns, ad agencies are slow payers. “We typically experience slow payment by advertising agencies as is common in our industry. In this regard, we had average days sales outstanding, or DSO, of 88 days, and average days payable outstanding, or DPO, of 64 days at June 30, 2016. … If our DSOs increase significantly, and we are unable to borrow against these receivables on commercially acceptable terms, our working capital availability could be reduced, and as a consequence our results of operations and financial condition would be adversely impacted.”
In other words, if ad agencies become deadbeats, we will suffer. None of this is particularly worrisome. Financial documents like this require that companies list all possible adverse conditions that could materially affect their business, and mentioning a worst-case scenario doesn’t mean it will happen.
The Trade Desk has good numbers, reaching profitability in 2013, and with growth year-to-year reaching 100% — way better than the industry average. As long as Omnicom and WPP still needs its services, it will prosper. But this particular IPO is being closely watched because tech company IPOs have been scarce lately, especially given the volatility and uncertainty in the marketplace.
The Trade Desk also has some interesting comments on Google as both a competitor and client.
“A few inventory suppliers hold a significant portion of the programmatic inventory either generally or concentrated in a particular channel. For example, one supplier represented more than 10% of our accounts payable at June 30, 2016. In addition, we compete with companies with which we have business relationships. For example, Google is one of our largest advertising inventory suppliers in addition to being one of our competitors. If Google or a similarly situated company limits our access to advertising inventory, our business could be adversely affected.”
The S-1 continues, on page 19 if you care to read it, with additional caveats and “if-this-happens” scenarios regarding inventory. When all is said and noted, though, The Trade Desk expects programmatic advertising to about triple through the end of the decade, citing Magna Global projections that the marketplace will grow from $14.2 billion in 2015 to $36.8 billion by 2019.
Given the extreme volatility of tech stocks, and the various bubbles we’ve all encountered, The Trade Desk’s trading history inspires much-needed confidence.