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The Trade Desk beat Q2 expectations with strong AI and CTV-driven growth, but rising costs and margin pressures raise concerns about future profitability.

# The Trade Desk Delivers Strong Q2 FY2025 Beat, But Margin Pressures Emerge Amid AI and CTV Growth

---

## Executive Summary

- **The Trade Desk (TTD) delivered a robust Q2 FY2025, beating consensus on both revenue and EPS.** Revenue reached **$694 million** (up 19% YoY), and non-GAAP diluted EPS came in at **$0.41** versus the **$0.34** consensus, driven by organic growth in client volume and continued innovation in the AI-powered Kokai platform.
- **Earnings quality was solid, but margin compression is a growing concern.** Net income margin fell to **13%** (from 15% YoY), and adjusted EBITDA margin slipped to **39%** (from 41%), reflecting a **23% YoY increase in operating costs** as the company invests heavily in technology and platform expansion.
- **Management struck a cautiously optimistic tone,** guiding Q3 revenue to at least **$717 million** and adjusted EBITDA to **$277 million**. Leadership highlighted strong client retention and innovation, but also flagged macroeconomic volatility and sector-specific risks as potential headwinds.
- **Key risks include ongoing cost inflation, margin pressures, and sensitivity to global brand spending,** particularly in high-exposure sectors like auto and CPG. However, **upside potential remains significant** as Kokai adoption accelerates (now over 70% of spend), CTV continues to expand (high 40s % of business), and share repurchases remain aggressive.
- **Catalyst watch:** Investors should monitor Q3 execution, margin trends, and further updates on AI/CTV adoption. Leadership changes and capital allocation decisions may also drive sentiment in the near term.

---

## Performance Snapshot

| Metric         | Reported   | Consensus | Surprise | YoY Change |
|----------------|------------|-----------|----------|------------|
| Revenue        | $694M      | $670M     | +3.6%    | +19%       |
| Non-GAAP EPS   | $0.41      | $0.34     | +21%     | +17%       |
| Net Income Margin | 13%     | —         | —        | -2pp       |
| Adj. EBITDA Margin | 39%    | —         | —        | -2pp       |
| CTV Share of Revenue | High 40s % | —   | —        | +~5pp      |
| Kokai Platform Share | >70%  | —         | —        | +~20pp     |

---

## Earnings Quality

- **Revenue growth was broad-based and organic,** with no material one-offs. The AI-driven Kokai platform and CTV channel were standout contributors, reflecting strong client demand for next-generation digital advertising solutions.
- **Margin compression is notable:** Net income and adjusted EBITDA margins both declined YoY, as operating costs (ex-SBC) rose **23%**. This suggests that while top-line momentum is strong, profitability is being pressured by increased investments in technology, SG&A, and platform development.
- **No major divergence between sales growth and profitability,** but the pace of cost growth outstripped revenue expansion, warranting close monitoring in future quarters.

---

## Management Commentary & Guidance

- **Management’s tone was upbeat but measured.** The Q3 FY2025 guidance of at least **$717 million** in revenue and **$277 million** in adjusted EBITDA signals confidence in continued growth, underpinned by strong client retention and innovation.
- **Leadership changes** (new CFO and board member) were positioned as part of a broader transformation and growth strategy.
- **Guidance assumes stable macro conditions,** with management acknowledging potential volatility in global brand spend and FX as key variables.

---

## Key Risks

- **Cost inflation and margin pressures** from ongoing investments in technology and platform expansion.
- **Exposure to macroeconomic volatility,** particularly in high-spend sectors (auto, CPG) and global markets.
- **Regulatory and FX risks** could further impact profitability and growth trajectory.

---

## Expected Market Reaction

- **Positive investor sentiment is likely,** given the clear beats on revenue and EPS, and the strong growth narrative around AI and CTV.
- **However, margin compression and cost inflation may temper enthusiasm,** with some investors likely to focus on the sustainability of profitability as operating expenses rise.
- **Analyst commentary** suggests continued bullishness, but with a watchful eye on cost trends and macro risks.

---

## Final Takeaway

- **Q2 FY2025 was a strong quarter for The Trade Desk,** with clear evidence of top-line momentum and successful platform innovation. However, **margin pressures and rising costs are emerging as key challenges** that could limit upside if not managed carefully.
- **The market may be underestimating the impact of cost inflation and macro risks,** while overemphasizing the headline growth and innovation story.
- **Upcoming catalysts:** Q3 results (margin trajectory, Kokai/CTV adoption), further leadership updates, and any regulatory or macroeconomic developments impacting digital ad spend.

---

The Trade Desk: Growth Outpaces Margins in Q2

The Trade Desk is set for Q2 outperformance, driven by accelerating revenue, expanding margins, and strong international and platform adoption trends.

# The Trade Desk, Inc.: Q2 FY2025 Earnings Preview – Platform Efficiency and International Growth Set the Stage for Outperformance

## Executive Summary

We are **bullish** on The Trade Desk (NASDAQ: TTD) heading into Q2 FY2025, driven by accelerating revenue growth and expanding margins. **Q1 revenue of $616 million (+17% YoY)** and management’s **Q2 guidance of at least $682 million** signal continued momentum, underpinned by robust international expansion and rapid client adoption of the Kokai platform upgrade. Notably, **operating margin improved from 6% to 9% YoY** in Q1, and adjusted EBITDA margin is guided to reach **~38% in Q2**. The market may be underestimating the long-term EPS leverage from recent front-loaded capex, which is already translating into improved campaign efficiency and cost discipline.

## Recent Trends Signal What’s Next

TTD’s last two quarters have demonstrated a clear acceleration in both top-line and profitability metrics. **Q1 FY2025 revenue grew 17% YoY to $616 million**, with international markets outpacing North America for the ninth consecutive quarter. **Operating margin expanded to 9%** (from 6% a year ago), and **adjusted EBITDA margin reached 34%**. The company’s guidance for **Q2 revenue of at least $682 million** and **adjusted EBITDA of ~$259 million (38% margin)** suggests further upside.

### Quarterly Financial Trends Table

| Quarter         | Revenue ($M) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|-----------------|--------------|------------------|----------------------|---------------|---------|
| Q3 FY2024       | 493          | 78               | 5                    | 3             | 0.19    |
| Q4 FY2024       | 606          | 79               | 6                    | 4             | 0.22    |
| Q1 FY2025       | 616          | 80               | 9                    | 6             | 0.28    |
| Q2 FY2025 (Gdn) | ≥682         | ~81              | ~11                  | ~7            | n/a     |

**Trend:** Revenue and margins are both expanding sequentially, with Q2 guidance implying further improvement.

## Management’s Forward Tone and Positioning

Management’s Q1 commentary marked a notable shift from the prior quarter’s caution. In the Q1 2025 call, CEO Jeff Green stated, **“We’re seeing incredible resilience and validation of our omnichannel strategy.”** This contrasts with Q4’s reference to “setbacks” and “uncertainty.” The Q2 guidance—**“We expect at least $682 million in revenue and approximately $259 million in adjusted EBITDA”**—reflects a confident outlook, with a clear focus on operational metrics rather than GAAP EPS due to stock-based comp volatility. The tone is more assertive, emphasizing execution and platform differentiation.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs are central for Q2:

- **Platform Adoption:** **Kokai upgrade now used by two-thirds of clients**, driving a **24% reduction in cost per conversion**. This efficiency is expected to support both revenue growth and margin expansion.
- **Customer Retention:** **Retention remains above 95%**, providing a stable revenue base and reducing downside risk.
- **Free Cash Flow:** **FCF improved from $176M to $230M YoY**, reflecting disciplined capex and operational leverage.

### KPI Movement Table

| KPI                        | Q2 FY2024 | Q1 FY2025 | Q2 FY2025 (Est.) | YoY Change | QoQ Change |
|----------------------------|-----------|-----------|------------------|------------|------------|
| Kokai Adoption (%)         | 45        | 66        | 70+              | +25 pts    | +4 pts     |
| Cost per Conversion (Δ%)   | -10       | -24       | -25              | -15 pts    | -1 pt      |
| Customer Retention (%)     | 94        | 95        | 95+              | +1 pt      | 0          |
| Free Cash Flow ($M)        | 176       | 230       | 240+             | +64        | +10        |

**Impact:** Higher platform adoption and efficiency gains are likely to drive both top-line and margin outperformance in Q2.

## Missed by the Street

A key overlooked signal is the **front-loaded capex increase (from $9M to $62M)**, which management frames as a strategic investment for long-term efficiency. As noted in the Q1 call, **“We see extraordinary runway for growth as these investments begin to scale.”** The Street may be underestimating the positive EPS impact from these investments, focusing too narrowly on near-term expense rather than the operational leverage they unlock.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue ($M)      | Adjusted EBITDA Margin (%) | EPS Range ($) | Key Assumptions                                                                 |
|----------|-------------------|---------------------------|---------------|---------------------------------------------------------------------------------|
| Bull     | 710 – 730         | ~40                       | 0.32 – 0.35   | Strong international growth, FX tailwinds, rapid Kokai adoption                  |
| Base     | ≥682              | ~38                       | 0.28 – 0.31   | Current trends persist, stable macro, continued cost discipline                  |
| Bear     | 660 – 670         | ~36                       | 0.24 – 0.27   | FX headwinds, regulatory friction, slower client onboarding                      |

**Most Likely:** The **Base case** is most probable, given current evidence of sustained growth, margin expansion, and management’s confident tone. Upside exists if international and platform trends accelerate further.

## Appendix – Data Tables & Management Quotes

### Quarterly Financials Table

| Quarter         | Revenue ($M) | EPS ($) | Gross Margin (%) | Operating Margin (%) |
|-----------------|--------------|---------|------------------|----------------------|
| Q3 FY2024       | 493          | 0.19    | 78               | 5                    |
| Q4 FY2024       | 606          | 0.22    | 79               | 6                    |
| Q1 FY2025       | 616          | 0.28    | 80               | 9                    |
| Q2 FY2025 (Gdn) | ≥682         | n/a     | ~81              | ~11                  |

### KPI Movement Table

| KPI                        | Q2 FY2024 | Q1 FY2025 | Q2 FY2025 (Est.) |
|----------------------------|-----------|-----------|------------------|
| Kokai Adoption (%)         | 45        | 66        | 70+              |
| Cost per Conversion (Δ%)   | -10       | -24       | -25              |
| Customer Retention (%)     | 94        | 95        | 95+              |
| Free Cash Flow ($M)        | 176       | 230       | 240+             |

### Key Management Quotes

1. **“We’re seeing incredible resilience and validation of our omnichannel strategy.”**  
   – Q1 2025 Earnings Call  
   *Signals management’s confidence in demand and platform positioning.*

2. **“We expect at least $682 million in revenue and approximately $259 million in adjusted EBITDA for Q2.”**  
   – Q1 2025 Earnings Call  
   *Sets a bullish floor for Q2 performance.*

3. **“Two-thirds of our clients are now leveraging Kokai, driving significant efficiency gains.”**  
   – Q1 2025 Earnings Call  
   *Highlights rapid platform adoption and operational leverage.*

4. **“Retention remains well above 95%, providing a stable base for growth.”**  
   – Q1 2025 Earnings Call  
   *Indicates low churn and high revenue visibility.*

5. **“We see extraordinary runway for growth as these investments begin to scale.”**  
   – Q1 2025 Earnings Call  
   *Suggests that recent capex will yield long-term margin and EPS benefits.*

6. **“We are not providing GAAP EPS guidance due to stock-based compensation volatility.”**  
   – Q1 2025 Earnings Call  
   *Implies focus on operational metrics over short-term GAAP fluctuations.*

7. **“International revenue now represents 13% of mix and continues to outpace North America.”**  
   – Q1 2025 Earnings Call  
   *Points to a growing, higher-growth revenue segment.*

---

**Conclusion:**  
The Trade Desk is positioned for a strong Q2, with platform innovation and international expansion driving both revenue and margin upside. While macro and regulatory risks persist, operational execution and efficiency gains are likely to deliver results above consensus expectations.

Trade Desk (TTD): Q2 Growth and Margin Upside