#76: Post-4Q23 and FY23 Earnings + Portfolio Update
Winners/Losers; The Rule of 20; Media Money Flows
Reading Time: 9 informative minutes
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Where do they stand?
4Q23 and FY23 earnings for AdTech Land are in the rearview mirror. TTD still leads the way by country mile turning in another good quarter and full-year results. Looking back at Q4 guidance from last November, investors got a bit spooked but it was full steam ahead as things turned out.
Had you bet $100 in January 2018 when our AdTech18 portfolio started, you’d be up $416 today after accounting for your $100 initial investment. The AdTech18 was up ↑48% in the first half of 2023 but down ↓13% in the second half. So far this year we are up ↑13% while the NASDAQ is down ↓8%.
Winners: The same six players from our previous quarter review remain the top performers but only two of them from our Core10 group are trading above IPO prices (TTD and ZETA). Two things that caught our eye the most since Q4 earnings:
The Trade Desks launched Sellers and Publishers 500+ (aka SP500+) allowing buyers to target premium publishers including The New York Times, Disney+, Hulu, ABC, and The Wall Street Journal. Quo Vadis has been recommending buyers walk away from false cheap reach strategies (which turn out to be very expensive) and instead take a flight to quality (more on this subject below). This is the right train for advertisers looking to get the most impact from their ad dollars.
In other Trade Desk news, they secured a gem partnership with NBCU to run biddable inventory during the Paris Summer Olympics. One thing is getting a short-term revenue bump, but the important win is showing investors how the company playing for keeps in the CTV space.
While doing the research for our article on the Gravity Theory of Walled Garden Trades, we came across Mimbi’s AirtTable dataset which shows Criteo dominating retail media on-site technology and TTD as the most prominent player handling off-site advertising (see discussion below on “media dollar flows”).
Losers: The other twelve players are all losing money for investors. Media money is like water — it always finds its own way. The way media money flows is toward wherever audience targeting can get done best in a trade-off between reach and data accuracy (see discussion below on “media dollar flows”).
Identity Webinar Series: Check out Quo Vadis Use Case Webinar series on the present and future state of identity. We’ve held two amazing sessions on this important subject — one with Travis Clinger from Liveramp on February 14 and one with Mathieu Roche from ID5 on March 6.
Use Case Webinar, April 2 at 11AM ET — We are switching gears from identity to attention metrics with Marc Guldimann (CEO/founder of Adelaide Metrics) on how to eliminate MFA inventory by using bid prices adjusted to attention data. It’s such an eloquent solution. Register here.
QV AdTechCore10, AdTech18 and MarTech18
Quo Vadis studies three equal-dollar portfolios: AdTech18, AdTechCore10 (subset of AdTech18), and MarTech18. Our Core10 group leads the way with respect to total portfolio returns (520%). That’s 6x better than NASDAQ returns and 3x better than our MarTech18 tracker since January 2018 (portfolio starting date).
From a Fibonacci Retracement perspective, the AdTechCore10 is trading at support levels between a recent high of $726 (July 2023) and a recent low of $500 (October 2023). Given the state of third-party cookie deprecation, ambiguity around identity replacement alternatives, and the future flow of media dollars (see below), along with the potential for margin expansion resulting from AI-led labor productivity gains over the next few years, we would expect to see the Core10 to continue trading within these support levels for the rest of 2024.
AdTechCore10 Revenue Growth Trend
Turning to YoY revenue growth across the AdTechCore10, FY24 came in at 12.7% down from 16.0% growth in FY23. Looking at the blue-hashed line, we make a best-guess adjustment to visualize what revenue would have been (or should have been) had the pandemic never occurred. As you can see, 12.7% growth for FY23 would be more or less on-trend and heading to ~10% in FY24.
Rule of 20
Venture capital investors often use “The Rule of 40” to assess companies, which is revenue growth (pure YoY growth or MRR) plus EBITDA margin. They tend to prefer companies that beat 40%.
Our adtech portfolio consists of mature businesses in a maturing market, so we tweak this venture capital concept into “The rule of 20,” which is YoY revenue growth plus operating profit margin (EBIT). We use EBIT because it includes stock-based compensation (SBC) as a true expense. The resulting perception chart is telling and in some cases surprising.
TTD and DV: One thing that might come as a surprise to our readers is not seeing The Trade Desk in the #1 spot. DoubleVerify occupies pole position with 27% YOY revenue growth and the highest EBIT margins at 15%.
The Trade Desk is in the #2 position with revenue growth above 20% and EBIT margins growing to 10% in FY23. Importantly, DoubleVerify’s SBC expense as a percentage of revenue is 10% (about average for the sector) while TTD’s was 25% in FY23. If we used adjusted EBITDA margins (less SBC), TTD would score 58% on the Rule of 20 and DV would come in at 52%.
Integral Ad Science just squeaks past our rule of thumb score coming at 20% which is half of DV’s result. Revenue growth is 16% (relatively good) beating the overall digital ad market (~10% according to eMarketer), but EBIT margins need some work. The interesting thing about the future of DV and IAS’s growth story is how they will leverage large install basis to sell new services.
Example: Let’s look at DV’s acquisition of Scibids. If DV’s revenue CAGR over the next five years is 15% (e.g. a doubling of FY23 revenue and amazing result if it happens) and Scibids manages to take 7.5% of media spend when clients run its AI custom algos, that would represent about half of DV’s revenue growth —roughly $300 million coming from Scibids. That would ~10x growth for Scibids based on our revenue estimate at the time of the acquisition in July 2023.
Magnite and PubMatic: Turning to our two public SSPs we see a large gap in financial performance on a relative basis. PUBM’s YoY revenue growth was 4% and EBIT margins were 1% in FY23 sliding downward from 21%, 26%, and 16% in 2020, 2021, and 2022, respectively. The stock is 46% YTD so investors like the guidance and see PUBM on the winning side of the creative destruction taking place across adtech.
We expect both PUBM (and all other players) to find margin expansion via AI-led fixed cost reduction and continued M&A into new growth areas further up the supply chain toward advertiser budgets. Every day is a dog fight in AdTech Land.
MGNI has different issues to deal with. Revenue growth is okay at 7%, but EBIT margins take last place across our AdTechCore10 players at –27% resulting in an overall score of –20%.
We know from public disclosure that MGNI’s take rates on gross ad spend are around 12%. PubMatic, on the other hand, does not disclose take rates (nor should they in our view) but talk on the street estimates PUBM take rates at 20%+. If MGNI had 20% take rates, its EBIT margins would be –16% instead of –27% which is more easily fixable. All that said, Magnite’s crown jewel is its CTV ad server (SpringServe) making it a viable contender to FreeWheel’s dominant position, particularly in non-US markets. The $31 million price tag back in July 2021 looks like a bargain in 2024 (see discussion below on “media dollar flows”).
Bottom Line: Urban consulting legend says that McKinsey’s answer to most problems is “raising your prices fixes 80% of your problems.” It’s easier said than done but probably good advice. If you don’t disclose take rates in the first place it’s a lot easier to raise prices here and there when needed.
RAMP: We like where Liveramp is heading. Revenue growth was 8% in FY23 which is impressive given the creative destruction caused by cookie deprecation. But RAMP’s bigger win is getting EBIT margins to trend toward breakeven. The trend line is clear and investors are noticing.
-46% (2019)
-27% (2020)
-12% (2021)
-14% (2022)
-8.0% (2023).
As far as our Rule of 20 goes, RAMP moved into positive territory in FY23 and we expect to see mid to high single-digit results for FY24.
Viant (DSP) delivered above-market revenue growth in FY23 at 15%, but -13% EBIT margins drag its overall score down to 2%. Viant’s stock price is up 41% in the second half of last year and up 56% YTD so something is going right as far as investors are concerned.
Taboola and Outbrain: Both companies used to deliver nice revenue growth, but these two players turned in negative growth last year and both generated negative EBIT margins. OB has had two years in a row of negative revenue growth, -14% in FY22 and – 3.0% in FY22. Not great, but improving nonetheless.
One has to wonder about TBLA and OB leaning into M&A to find new growth areas (e.g. bolt-ons) to leverage their large advertiser and publisher bases. TBLA has $181 million in cash and OB has $165 million so finding dislocated assets that fit their worldview seems like a logical path to follow.
Lastly, finding ways to cut fixed costs via AI-led productivity growth is an important theme for both of these companies and the adtech sector at large. It’s just a matter of time.
Case and Point: TTD’s revenue productivity is $624K/employee. Imagine AI productivity gains result in revenue productivity doubling to $1.25M/employee in five years. If you play out revenue growth on TTD’s current trend line, they would have roughly 4,800 employees in 2028 instead of nearly 10,000 which is huge for EBIT margin expansion (currently at 10%).
Media Money Flows
With 3rd party cookies phasing out (already ~70% deprecated), the lifeblood and “free” economic good (raw material) that adtech was built off of over the past 15 or so years is causing a new cycle of creative destruction (credit to Brian Wieser
). Sure, things might be a bit wonky and uncertain at the moment, but one thing that is not changing is advertiser demand for audience-targeted media. May the best alternative or combination of alternatives rise to the top.This fundamental shift is equivalent to rerouting a flowing river. Here’s how we map out media money flows to get an idea of where demand is flowing today and rerouted in the future.
The big headline might come as a shock to all those “sky is falling” trade press reports about cookie deprecation, but the fact is that advertisers have no exposure to cookie deprecation. Adtech companies, on the other hand, are very exposed. As Warren Buffett famously said:
“Only when the tide goes out do you learn who (in AdTech) is swimming naked.”
What industry folks commonly refer to as “AdTech,” usually means ad-supported publisher inventory (aka “programmatic”). By our calculations, that’s just 5.6% of total global media spend. The lion’s share of every other place to spend media dollars has little or zero exposure to third-party cookie signal loss.
When advertisers want to target audiences, there are plenty of green pastures to feed their appetite and it’s growing by the day. For open web adtech companies and the entire supply chain in play, there are two growth pools to swim in: CTV and Commerce Media.
Investing and winning in CTV is critical for adtech because audiences are increasingly addressable with first-party signals. Sure, we might be playing captain obvious here, but the point is that if your deal teams can’t make deals in the green boxes then future growth is likely off the table.
Retail/Commerce Media is the other big growth area for open adtech to find growth. This is where audiences are addressable and measurable so that’s where the media money will flow. Again, making deals in this space is paramount.
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Disclaimer: This post, and any other post from Quo Vadis, should not be considered investment advice. This content is for informational purposes only. You should not construe this information, or any other material from Quo Vadis, as investment, financial, or any other form of advice.