Adjusted EBITDA is a company's net income with interest, taxes, depreciation and amortisation added back, and then a further set of items stripped out that management considers unrepresentative of the core business. The most common of those further items are stock-based compensation, restructuring charges, acquisition costs and litigation expenses. It exists because executives, lenders and buyout investors want one profit figure that approximates operating cash generation before financing, tax, past investment and one-off events. Each company decides which items to remove, so there is no single formula.

Adjusted EBITDA is not recognised under US generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS). The Securities and Exchange Commission (SEC) treats it as a non-GAAP financial measure, which means a company that publishes it must also show the closest GAAP figure, usually net income, and reconcile the two line by line.

How the calculation works

The arithmetic runs in two stages. The first produces plain EBITDA: earnings before interest, taxes, depreciation and amortisation. Depreciation spreads the cost of physical assets such as servers over their useful life; amortisation does the same for intangibles such as acquired technology. Neither is a cash payment in the period. The second stage adds the company's own adjustments.

The Trade Desk's results for the quarter to September 30, 2026, published on November 9, show both stages. The company defines adjusted EBITDA as net income before depreciation and amortisation, stock-based compensation, restructuring charges, net interest income and the provision for income taxes. In thousands of dollars, the reconciliation reads:

  • Net income: 38,050
  • Plus depreciation and amortisation: 32,940
  • Plus stock-based compensation: 95,093
  • Plus restructuring charges: 44,258
  • Less interest income, net: (12,904)
  • Plus provision for income taxes: 68,400
  • Adjusted EBITDA: 265,837

Net income of $38 million becomes adjusted EBITDA of $266 million, a ratio of almost seven to one. The largest single bridge item is stock-based compensation, at $95.1 million.

The result is usually expressed as a margin, and the denominator is where comparisons break down. The Trade Desk divides by revenue, giving 36% for the quarter. Ad tech intermediaries that pass much of their gross billings to publishers often divide by a narrower base. Magnite reported fourth-quarter 2025 adjusted EBITDA of $83.8 million at a 42.9% margin against contribution ex-TAC, while PubMatic's $27.8 million represented a 35% margin against total revenue.

Beyond the core four, typical adjustments cover stock-based compensation, restructuring, acquisition and integration costs, impairments, foreign exchange movements and litigation expenses, which PubMatic and Magnite both excluded in 2026.

Origin and evolution

The underlying EBITDA concept is generally credited to John Malone, who used it in the 1970s while building the cable operator Tele-Communications Inc. (TCI). Cable systems carried heavy depreciation and debt, so Malone presented cash-like operating earnings to lenders as evidence the business could service more borrowing. Leveraged buyout investors later adopted the same lens, since a buyout's debt is sized as a multiple of EBITDA and repaid from it.

Regulation followed the accounting scandals of 2001 and 2002. Under Section 401(b) of the Sarbanes-Oxley Act, the SEC adopted Regulation G and amended Item 10(e) of Regulation S-K in Release No. 33-8176 on January 22, 2003, effective March 28, 2003. Any company using a non-GAAP measure must present the comparable GAAP figure and a reconciliation.

The SEC staff's Compliance and Disclosure Interpretations (C&DIs) then fixed the labels. Question 103.01, dated January 11, 2010, states that "earnings" in EBIT and EBITDA means GAAP net income. Measures calculated differently "should not be characterized as 'EBIT' or 'EBITDA'" and should carry a different title, "such as 'Adjusted EBITDA.'" The word "adjusted" is therefore a disclosure requirement, not a marketing choice. Question 103.02, updated on May 17, 2016, adds that the reconciliation should start from net income, not operating income.

The European Securities and Markets Authority (ESMA) published guidelines on alternative performance measures (APMs) on October 5, 2015, applying from July 3, 2016. They name EBITDA as an example APM, require labels that reflect the basis of calculation, and bar giving APMs more prominence than statutory figures.

In December 2022 the SEC staff tightened the C&DIs again. Question 100.01 now states that excluding "normal, recurring, cash operating expenses necessary to operate a registrant's business" could make a measure misleading.

Why lenders and buyers lean on it

Outside earnings releases, adjusted EBITDA is the base number of leveraged finance. Credit agreements define their own version, often called covenant EBITDA, and test leverage and interest coverage against it. A borrower whose debt exceeds, say, five times covenant EBITDA may trip a default. SEC C&DI 102.09 allows companies to disclose a covenant measure in their filings where the covenant is material to liquidity.

These contractual definitions often include add-backs for cost savings and synergies that have not yet happened. S&P Global Ratings, as reported by ABL Advisor on November 25, 2020, found that for merger and buyout deals originated between 2015 and 2019, add-backs inflated "marketing EBITDA" by an average of over 28% and accounted for 54% of last-twelve-months EBITDA at deal inception. Actual reported EBITDA came in 27% below the marketed figure in 2018, and actual net leverage ran 2.8 turns higher than forecast in 2018 and 3.3 turns higher in 2019.

Takeover valuations work the same way. After a private equity approach in July 2026, PPC Land calculated that Criteo's enterprise value of $566.85 million on October 6, 2026 equalled about 1.4 times its 2025 adjusted EBITDA of $406.7 million, or about 1.8 times the roughly $314 million implied by its August guidance.

Why it matters for marketers

Adjusted EBITDA is the profit line most ad tech companies put first, so it shapes how the market judges the vendors that buy and sell media on advertisers' behalf.

The Trade Desk is the clearest 2026 case. Its second-quarter adjusted EBITDA fell 11% to $241.3 million, a 34% margin against 39%, and it guided third-quarter adjusted EBITDA to about $160 million while declining to give a GAAP net income outlook, citing unpredictable stock-based compensation. The actual figure, $265.8 million, beat that guidance by about 66%.

Criteo's quarterly adjusted EBITDA ranged between $89.4 million and $120.1 million in 2025 before falling to $64.9 million and $73.3 million in the first half of 2026.

AppLovin reported second-quarter 2026 adjusted EBITDA of $1.61 billion at an 84% margin. Free cash flow, however, equalled about 54% of adjusted EBITDA, down from about 75% a year earlier.

Limitations and disputes

The sharpest dispute concerns stock-based compensation. Companies argue it is non-cash and tied to unpredictable share prices. Critics counter that dilution is a real cost to shareholders, and that excluding it treats recurring payroll as optional. AppLovin's stock-based compensation rose 148% to $85.8 million in the second quarter of 2026. At Viant, PPC Land found that roughly 85% of the gap between a $1.8 million net loss and $9.9 million of non-GAAP net income was stock compensation.

The second criticism is older. EBITDA ignores capital expenditure, which for infrastructure-heavy businesses is a recurring cost. Warren Buffett's 2000 letter to Berkshire Hathaway shareholders asked whether management thinks "the tooth fairy pays for capital expenditures."

Third, the boundary of "non-recurring" is contested. ESMA's guidelines say issuers should not mislabel items as non-recurring, and that items affecting past and future periods, including restructuring costs, will rarely qualify. The Trade Desk excluded $44.3 million of restructuring as infrequent, noting no comparable plan existed in prior periods shown. Conversely, Criteo said its third-quarter 2026 beat came primarily from lower hiring and a partial reversal of an accrued employee bonus, items that flatter adjusted EBITDA without being excluded.

The extreme cases attract enforcement. On December 26, 2018 the SEC settled with ADT over earnings releases that gave undue emphasis to adjusted EBITDA relative to GAAP figures. WeWork's "community-adjusted EBITDA" of $233 million, reported by the Wall Street Journal and cited by Going Concern on April 26, 2018, went further, excluding marketing and general and administrative costs.

Not the same as

EBITDA. The unadjusted measure, built from GAAP net income with only interest, taxes, depreciation and amortisation added back. Under C&DI 103.01, anything further must change the label.

Contribution ex-TAC. Revenue less traffic acquisition costs paid to publishers, closer to gross profit than to operating profit. Ex-TAC gross profit sits above adjusted EBITDA, which comes after operating expenses; ad tech firms often use the former as the denominator for the latter.

Free cash flow. Operating cash flow minus capital expenditure. It captures working capital, cash taxes and investment, which adjusted EBITDA ignores. AppLovin's 54% conversion ratio shows the gap.

Recent developments

Third-quarter 2026 results reset several guidance paths. Criteo reported adjusted EBITDA of $64.5 million on November 4, 39% lower, at a 27% margin against 36%, and set full-year guidance of $308 million to $314 million. On November 9 The Trade Desk reported adjusted EBITDA of $265.8 million, down 16.3%, at a 36% margin against 43%, and guided fourth-quarter adjusted EBITDA to at least $280 million, about 30% below the $400 million of a year earlier.

The next structural change comes from IFRS 18, which takes effect for annual periods beginning on or after January 1, 2027. Paragraph 118 exempts a plain EBITDA-style subtotal, operating profit before depreciation, amortisation and impairments, from its new rules. Adjusted EBITDA used in public communications becomes a management-defined performance measure (MPM). Each MPM must be explained and reconciled in a single note to the audited financial statements, with the tax and non-controlling interest effect of every adjustment, according to RSM.

Timeline

  • 1970s: John Malone uses EBITDA at TCI to present cable earnings to lenders
  • January 22, 2003: SEC adopts Regulation G and Item 10(e) amendments in Release No. 33-8176
  • March 28, 2003: The non-GAAP rules take effect
  • January 11, 2010: SEC C&DI 103.01 requires measures beyond EBITDA to carry labels such as "Adjusted EBITDA"
  • October 5, 2015: ESMA publishes guidelines on alternative performance measures
  • May 17, 2016: SEC staff update C&DI 103.02 on reconciling EBITDA to net income
  • July 3, 2016: ESMA guidelines apply
  • April 26, 2018: WeWork's community-adjusted EBITDA of $233 million draws public criticism
  • December 26, 2018: SEC settles with ADT over undue prominence of adjusted EBITDA
  • November 25, 2020: S&P finds add-backs made up 54% of EBITDA at inception for 2015-2019 deals
  • December 13, 2022: SEC staff revise C&DI 100.01 on excluding normal, recurring cash operating expenses
  • August 5, 2026: AppLovin reports adjusted EBITDA of $1.61 billion at an 84% margin
  • August 6, 2026: The Trade Desk guides third-quarter adjusted EBITDA to about $160 million
  • November 4, 2026: Criteo reports third-quarter adjusted EBITDA of $64.5 million, down 39%
  • November 9, 2026: The Trade Desk reports third-quarter adjusted EBITDA of $265.8 million
  • January 1, 2027: IFRS 18 takes effect

Summary

Who: Public and private companies that report it, including The Trade Desk, Criteo, Magnite, PubMatic and AppLovin, along with the lenders, private equity buyers and rating agencies that rely on it, and the SEC, ESMA and IASB, which set disclosure limits.

What: A non-GAAP profit measure: net income before interest, taxes, depreciation and amortisation, with further items such as stock-based compensation, restructuring and litigation removed. Each company defines its own version.

When: EBITDA emerged at TCI in the 1970s. SEC non-GAAP rules took effect in March 2003, the "Adjusted EBITDA" labelling requirement dates from January 2010, ESMA's guidelines from July 2016, and IFRS 18 applies from January 1, 2027.

Where: Earnings releases, investor presentations, credit agreements, merger documents and, under IFRS 18, the notes to audited financial statements.

Why: It gives a single figure for operating earnings before financing, tax, past investment and items management treats as unusual. That makes it useful for debt sizing and valuation, and contested because companies choose what to leave out.