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Why Connected TV Was a Brief Headwind for The Trade Desk

By Nicholas Rossolillo - May 16, 2020 at 7:44AM

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The small ad platform was able to overcome the coronavirus crisis and is already making strides toward recovery.

In times of economic crisis, advertising tends to take a hit. Consumer spending falls, which lowers the potential return on advertising activity, and businesses tighten up their budgets as a result. Thus, for companies like The Trade Desk (TTD 4.05%) that derive their revenue from ads, the lockdown that has ensued to halt the spread of the coronavirus was looking like a bad omen.

In reporting its numbers for the first quarter of 2020, The Trade Desk did in fact reveal that its cloud-based ad platform took a hit in March. But business is already rebounding, especially in connected TV, as new internet-based streaming platforms come online. Digital ad flexibility is a double-edged sword in times of crisis, but it's an enduring long-term advantage.

A surprisingly good scorecard

First, the start of 2020 must be acknowledged. In spite of mounting fears, The Trade Desk's revenue growth exceeded guidance provided at the onset of the year (which called for at least 30.5% growth). Adjusted profit margin measured by EBITDA (earnings before interest, tax, depreciation, and amortization) was 24% -- lower than the 30% margin predicted for full-year 2020, but still strong year-over-year expansion.


Q1 2020

Q1 2019



$161 million

$121 million


Total operating expenses

$150 million

$115 million


Earnings per share




Adjusted EBITDA

$39.0 million

$24.7 million


Adjusted EBITDA profit margin



3.8 pp

EBITDA = earnings before interest, tax, depreciation, and amortization. Pp = percentage point. Data source: The Trade Desk.

Those gains came in January and February, though, as ad budgets started to take a hit in mid-March through mid-April because of the economic lockdown. CEO Jeffrey Green said the reduction in activity was indiscriminate, although declines stabilized in April and are starting to improve as organizations adjust their messaging. Digital commercials based on data (programmatic ads) are increasingly being favored, in part for the ability to target specific audiences as well as the flexibility to turn them off and on. That flexibility proved to be the primary reason for the rapid declines during the crisis, since The Trade Desk's customers exercised their ability to quickly shut down campaigns.

Someone in a suit holding a tablet. A brain made of electrical connections is illustrated hovering over the screen.

Image source: Getty Images.

Why connected TV is still an exciting market

However, that flexibility is also one of the reasons this cloud-based ad platform will rebound quickly. And as organizations gradually turn their commercial activity back on, an increasing number are choosing the digital route. Internet-based TV is especially powerful, because consumers are cutting ties with cable and are spending more time streaming programming. Green said on the Q1 earnings call:

I think there is a shift in media that started about nine weeks ago that is accelerating the move to data-driven advertising. Nowhere is this more apparent than in connected TV. And even though it is too early to predict exactly when the economy will start firing on all cylinders again, we do have a sense of the role advertising will play in that. And I'm confident that The Trade Desk will be on the front lines of recovery. It will present a major land grab opportunity and our ability to be successful in that environment rests solely in our own hands. As it relates to what global recovery looks like, keep in mind that in order to grow and reopen for business, companies need to get the word out.

While an economic recession is now a foregone conclusion, Green continued that the recovery post-Great Recession of 2008-9 can be used as a template. As organizations ramp up activity again, they choose to spend where they get the most bang for their buck. Post-2009, that was internet ads. That is playing out again, especially in programmatic ads via streaming TV and audio. And a migration to internet-based entertainment that was expected to take years has accelerated as consumers also look to tighten up their budgets. Cable is out; streaming is in.

Green had plenty of data to back up his point, but one item stuck in my mind as the most significant: In April, connected TV ad spending surged 40% higher from a year ago. Put simply, while advertising budgets overall remain down, connected TV is picking up the lion's share of campaigns as budgets get reallocated.

Of course, there are other places to play the migration to programmatic commercials. There's the far smaller Rubicon Project (MGNI 2.76%), which is also seeing booming activity in connected TV spending. But I like The Trade Desk. During economic contraction, liquidity is key. It means survival. But more importantly, it enables a company to continue spending for growth and to opportunistically acquire high-growth peers that are in a cash crunch.

And in these departments, The Trade Desk shines. The company is profitable and generates free cash flow (what's left after operating and capital expenses are paid: $50.8 million over the last 12 months). And because of its disciplined investing over the last few years, the company has a sizable war chest. Cash and short-term investments totaled $446 million at the end of March, and debt only $143 million. That combination of high profit margins and liquidity can't be topped by any of The Trade Desk's closest peers.

While ad spending took a brief hiatus -- even on connected TV -- in March and early April 2020, the continued migration to digital is a long-term tailwind. This movement plays right into the hands of The Trade Desk.

Nicholas Rossolillo and his clients own shares of The Trade Desk. The Motley Fool owns shares of and recommends The Rubicon Project and The Trade Desk. The Motley Fool has a disclosure policy.

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