The Trade Desk S-1

As many of you know, The Trade Desk (TTD) filed its S1 with the SEC this week. This was alluded to in an earlier Lift Letter (AppNexus and The Trade Desk S-1s) that delves a little deeper into what an S1 is, going public, and the like. You can read the TTD S1 here: https://www.sec.gov/Archives/edgar/data/1671933/000104746916015074/a2229525zs-1.htm. When you read the S1, you'll note that there are a number of blanks around the price per share and amount raised. This is because the offering is not yet priced - the banks are going around drumming up interest. The round will eventually be price when it goes public and the number of shares * the offering price is the amount they raise. Below we discuss some note worthy points from the S1. Another interesting note is that they're offering 2 classes of shares - class A is the issuance, and class B is held by employees, current investors and executives (until they're sold, then they become class A). Class B shares get 10 votes per share while class A has 1, meaning the class A shares - because of the current makeup in ownership - cannot make any decisions.

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TTD only makes its money as a percent of media spend through its platform - there is no media arbitrage, only long term master service agreements with fixed media fees. In 2015, there was $550M spent on their platform, from which its revenue was $113.8 - meaning their fee is about 20% (higher than I thought it was). In 2014, its revenue was $44.5M. The company was profitable by $0.005M in 2014, and by $15.9M in 2015. On June 30, 2016 they had 387 employees, which is half the size of MediaMath, and a quarter (or less) the size of AppNexus. But TTD is likely worth a similar amount, if not more, meaning it is very effective at generating revenue on a per-employee basis (something they make quite clear in the S1), and that it is easier for them to be profitable. Also, both TripleLift and TTD are quickly growing companies whose revenue is impacted by media spend. We projected our Q4 to be 40% of annual media spend, and they saw 42% in 2014 and 37% in 2015.

The key trends they highlighted as the basis for their business are the shift to digital, consumption fragmentation across many websites / apps, shift to programmatic, automated ad buying, and more data in ad buying. This largely agrees with our views, though it is - in my view - is more retrospective than prospective. Perhaps more prospective on their part, native advertising was mentioned 6 times in the S1. They also view programmatic TV as key to their future. TTD expects their margin to decrease as they move into TV.

TTD highlights a few key risks. They don't have exclusive relationships with agencies and it is very easy for agencies to move budgets from one DSP to another. Omnicom and WPP are each more than 10% of their revenue. They are concerned that SSPs may cut them off from high quality inventory at any time. And - a specially called out item for them - training for their platform is so important that they mentioned that if they fail to do it at a high level it could be an existential risk for their platform.

The ad tech industry has not done terribly well in the public markets over the past couple years, so TTD does go to some lengths to differentiate themselves. The discuss their view of the industry, and their position as a non-arbitrage, pure-technology, pure buy-side business with transparent optimization - implicitly contrasting against other public companies. They speak frequently about their customer retention (95%) and their rate of growth (>100% annually).

AppNexus and The Trade Desk S-1s

Recently, there were reports that AppNexus and The Trade Desk were on the verge of filing their S1s (https://adexchanger.com/ad-exchange-news/s1s-expected-soon-appnexus-trade-desk/). What is the significance of this news? What does it mean for us and the industry?

We've previously discussed what it means to IPO (What Does It Mean to IPO). This included conversations around public v private company regulations, as well as the process. That discussion was largely phrased from TripleLift's perspective. Filing an S1 is the initial securities registration with the SEC (the securities regulation agency in the US). When you file your S1, you submit for comment from the SEC information about your business, disclosures, risk factors - all the things a reasonable public investor might want to know, all of which is then publicly available. Here's a copy of Google's: http://bit.ly/29cdeaq, Rocketfuel: http://bit.ly/29nSpJF, Tremor Video: http://bit.ly/29fCrCb. They're pretty interesting and revealing.

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The efficient market hypothesis states that public securities are priced to perfectly incorporate all publicly available information, and effectively that pricing is devoid of emotion. This is, entertainingly, both a presumption in the federal courts (https://en.wikipedia.org/wiki/Basic_Inc._v._Levinson) and largely incorrect - even the weakest form (http://www.investopedia.com/terms/w/weakform.asp). This derives from two different perspectives: 1) the US courts want to ensure that all material information can reach the public markets so that investors could use that information to make a decision, which is a noble goal, and 2) the markets are gonna do what the markets are gonna do, which often means not being "efficient," but instead of having moods.

In the current environment, IPOs for tech companies have not been received well. There was no "efficient" answer for this, it was just a cyclical thing that the investors were spooked by a few ideas, including a lot of unicorn bubble talk, fears about China's declining economic growth, oil prices, etc. Because every company IPOs precisely once (unless blah blah blah), no one would want to do it in a market that wasn't receptive. Recently, however, a brave soul (Twilio Inc.) decided to go public. Twilio is a telephony-based tech company, and its IPO was a smash success. People look at the first day's results, its first several months, and how it performs relative to projected earnings for the first few quarters. For Twilio - so far so good (initially priced at $15, currently at $34).

Ad tech is also in a bit of a slump. A lot of the companies that have IPO'd did not do well in the public markets, including RocketFuel, Tremor, Yume, Millenal (now AOL/Verizon) and several more. A couple others did well enough, including Criteo and Rubicon (to a much lesser degree) - but there was more bad than good for ad tech. These mediocre IPOs were often after raising a ton of VC money, in many cases less than the market value. This trickled down into the VC world, meaning VCs thought the IPO market wouldn't necessarily welcome ad tech, which meant it would be hard for them to turn a profit, which meant they would be less likely to invest.

All this gets to the point that AppNexus and The Trade Desk just filed their S1s. These are two good companies. The Trade Desk is probably the largest independent (meaning not Google) buy-side platform, and AppNexus may have the most money flowing through its platform of any independent (also meaning not Google) ad tech company. The fact that both of these companies are on the verge of filing their S1s means that they are seriously considering going public. It is quite expensive to prepare, revise, and repeat to the level that the SEC needs, and almost always means the company will - when they're ready and have the prospectus and buyers lined up - actually go public. So one can imagine that two strong ad tech companies will IPO at some point in the next several months (timeframe TBD). 

This will have a positive cascading effect through the industry. It will show that the public markets are ready for tech IPOs again. It will show (hopefully) that ad tech companies can be legitimate, successful, public companies. It will show to other ad tech companies that the market is increasingly receptive, which may lead to more solid ad tech companies filing IPOs. And it will show to VCs that ad tech should be considered ripe for investment.