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RBC Capital Markets, LLC
Mark S.F. Mahaney (Analyst) (415) 633-8608
Benjamin Wheeler (Associate)

Sector: Internet

Rating: Sector Perform
Price Target: USD 715.00 (prev: 510.00)

Our view:

TTD reported Solid Beat & Raise Q3 results, coming in 20% better than the Street on Revenue and well above on EBITDA with Q4 guidance 15% above the Street on Revenue at the high end, which calls for 35% Y/Y growth – a full V-Shaped recovery. Maintain Sector Perform.

Key points:

Q3 Roundup: Revenue of $216MM grew 32% Y/Y (vs. down 13% Y/Y in Q2) citing boosts from CTV, Political spend (~5% of Revenue in each qrtr in FY20) and shift away from UGC platforms (i.e., “boycotts”) that amounted to $10s of MMs in Ad Spend. EBITDA of $77MM was well above RBC/Street @ $36/33MM. Q4 Guide calls for 35% Revenue growth at the high end with 40%+ EBITDA margins. All in, fundamentals improved dramatically in Q3, with Revenue growth accel’ing 44pts and EBITDA margins up 660bps Y/Y.

A Few Key Details: 1) Connected TV – Connected TV (approx. 25% of rev) grew over 100% Y/Y (vs. 40% Y/Y in Q2 and 100% in Q1) and in line with guidance. 2) Unified ID 2.0: TTD now believes their cookie-less identity solution will reach “critical mass adoption” in 2021 and that it will take over the third-party cookie as the main identifier on the Open Internet. Recently announced partnerships with Criteo, LiveRamp and Nielsen suggest this collaborate effort to solve for identify on the Open Web has significant momentum. We believe the impact will be higher CPMs for impressions bought with Unified ID. 3) Solimar: In 2021, TTD plans to launch a platform upgrade similar to the “Next Wave” in 2018. Solimar will include a better user interface for ad buying, make it easier to onboard 1P data, include the latest identity products and an integrated upgrade to Koa – the AI engine for optimizing campaigns.

Raising Estimates, PT to $715: ‘21 Revenue up 3%, EBITDA up 31%. PT based on average of 65x ’22 EV/EBITDA and 25x ’22 EV/Sales. These are SaaS premium multiples, but TTD is a powerful SaaSecular model – 31% 3-year Revenue CAGR with 30%+ EBITDA Margins.

Maintain Sector Perform: TTD’s most important growth engine (CTV) has seen accelerated adoption this year as tougher economic conditions and a lack of live sports are accelerating the inevitable decline of Linear TV. While not a “Checkmark” recovery in revenue growth like some of the smaller Walled Gardens (SNAP, PINS), TTD’s revenue is snapping back faster than we anticipated. We are encouraged by the announcement of Solimar given what we saw with Next Wave (unlocked higher data spend, accelerated market share gains). And we are especially intrigued by the idea of an interoperable cookie-less identity solution that could lead to higher CPMs on the Open Internet. We remain on the sidelines based on rich valuation (32x EV/Sales on ’21), though we acknowledge that TTD’s unusual combo of premium growth and high margins (35% …