Trade Desk Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 12 speakers on the call.

Operator

Greetings. Welcome to The Trade Desk Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note, this conference is being recorded.

Operator

I will now turn the conference over to your host, Chris Toth. You may begin.

Speaker 1

Thank you, operator. Hello, and good afternoon to everyone. Welcome to The Trade Desk Third Quarter 2023 Earnings Conference Call. On the call today are Founder and CEO, Jeff Green and Chief Financial Officer, Laura Schenkind. A copy of our earnings press release can be found on our website at thetradedesk .com in the Investor Relations section.

Speaker 1

Before we begin, I would like to remind you that except for historical information, some of the discussion and our responses in Q and A may contain forward statements, which are dependent upon certain risks and uncertainties. These forward looking statements represent our beliefs and assumptions only as of the date such statements are made. Actual results may vary significantly, and we expressly assume no obligations to update any of our forward looking statements. Should any of our beliefs or assumptions prove to be incorrect, Actual financial results could differ materially from our projections or those implied by these forward looking statements. I encourage you to refer to the risk factors Reference in our press release and included in our most recent SEC filings.

Speaker 1

In addition to reporting our GAAP financial results, we present supplemental non GAAP financial data. A reconciliation of the GAAP to non GAAP measures can be found in our earnings press release. We believe that providing non GAAP measures combined with our GAAP results provides a more meaningful representation of the company's operational performance. With that, I will now turn the call over to Founder and CEO, Jeff Green. John?

Speaker 2

Thanks, Chris, and thank you all for joining us today. As you've seen from our press release, we posted very strong growth in the 3rd quarter. We reported revenue of $493,000,000 growing 25% compared with last year. Our Q3 again accelerated over the Q2 as we continue to significantly outperform the digital advertising industry. We're growing our revenues and maintaining profitability and a strong balance sheet and making large investments.

Speaker 2

And most importantly, we're gaining market share as we're outperforming our advertising peers, both big and small. From a global view, our industry is nearing the $1,000,000,000,000 TAM we predicted when we launched as a public company 7 years ago. Inflation, a global pandemic, the streaming wars and retail media have all accelerated the expansion of that global TAM, but it's especially accelerated the speed of the pacesetter, the U. S. Market.

Speaker 2

Magna Global estimates That the overall U. S. Advertising industry is growing at 5% this year and digital spend or the digital ad market pie is expected to grow by 10%. Clearly, we are significantly outperforming the rest of the advertising market. This builds on our market share gains from last year when we grew 20% plus each quarter and our competitors were posting negative to low Single digit growth.

Speaker 2

So even with a bit more uncertainty than a usual Q4, we continue to gain significant share and we are set up exceptionally well for times of relative stability. As I often share with the teams at TTV, We got here by aligning our interests with agencies and brands, the buy side. We align our interests with them and then we obsessively innovate for them. We create more value than we extract and we operate our business with a philosophy that is people first. Our bias is to find win In all of our partnerships and our strong alignment with our customers is the foundation of our success and that foundation Has created the opportunity for us to be a leader and innovator for the open Internet.

Speaker 2

2023 has Already been the biggest year of innovation in the history of The Trade Desk and I'd like to share 6 or 7 major categories of innovation The first innovation I want to highlight today is a relatively new format for partnership. Our unmatched growth rate is fueled by signing joint business plans with major brands and agencies. JVPs represent joint innovation partnerships With our clients, agencies and brands work closely with us to pioneer new ways of thinking about data driven advertising and they are locking in that commitment as part of these JVPs. Our largest JVP signed this year represent future annual spend of over $1,000,000,000 per partnership. Yes, multiple partnerships have multi year partnership agreements With omni channel plans to spend $1,000,000,000 plus in each of them.

Speaker 2

Our strong relationships and share gains coupled with Durable EBITDA and cash generation means we can invest in innovation in service of our clients while also maintaining strong profitability. Our innovations in 2018 2019 2020 helped us gain share during 2020 2021. And that's why I expect we will continue to gain share in Q4 of this year and 2024 and beyond. As a global company, in tough economic environments, we grab market share and in vibrant economic environments, we aim to lead in absolute growth. The second area of innovation I want to highlight is in AI.

Speaker 2

We've approached AI the same way we approach Building the initial buying platform 14 years ago. While everyone else was on stage talking about building, we were back at the office actually building. AI has immense promise. It will change the world again. But not everyone talking about AI is delivering something real or impactful.

Speaker 2

We have been going through every part of our platform and making investments and or plans to inject AI in the places where data sets are rich, big and high quality. Large language models, the basis of ChatGPT aren't the highest priority places for us to make investments in AI right now. Deep learning models pointed at bidding, pricing, value and ad relevance are perfect places for us to concentrate our investment in AI. All four categories have private betas and some of the best engineers on the world We've expanded Koa, our brand for AI products that we launched in 2018 and I believe this will unlock performance budgets on our platform in the years to come. We will begin to see the impact of these 2023 AI investments In the size of that wave was the rapidly emerging world of CTV.

Speaker 2

As we all know, the pandemic accelerated the shift to CTV from a viewer perspective. And now we're at a point where more viewers are watching streaming services than traditional linear television. The global changes of 2020 2021 ushered in a period of innovation in CTV. As an industry and as a company, We crammed more advances into 2 years than might otherwise have been played out over a much longer period of time. Where once the industry was taking a wait and see approach to the emergence of streaming, suddenly everyone was innovating fast.

Speaker 2

Fortunately, we had a history of innovating ahead. With that same foresight, I believe the walled garden strategy will not work for most companies, if any, at EndState. Competition, innovation and the benefits of globally integrated markets outweigh the benefits At Draconian walled gardens, the surest way to prove the value of the open Internet is to continue to innovate in the 3rd and 4th And 5th innovations that I want to talk about today, CTV, identity and retail media. Our innovations in CTV have fueled our outsized growth and made us a better partner for all of the content companies. The last few years, consumers and media companies have been in the new golden age of TV.

Speaker 2

Content companies have been competing for streaming subscriber growth, which seemingly has provided the scoreboard determining winners and losers in the new digital era. That competition to win Subscribers has ratcheted up content costs. Higher content costs mean raising prices or finding some way Every premium video content company from Disney to Paramount to NBCU and Sky to Netflix Have changed pricing and embraced advertising. Not all of them have yet embraced or centered around programmatic advertising, but we predict they will. In order to get incremental subscribers, they can't simply keep raising prices.

Speaker 2

Some consumers would rather spend a few extra minutes Considering ads they watch, then pay more for subscriptions. High priced subscriptions alone will not provide the incremental As recently reported by Hollywood Reporter and I quote, Executives at every major streaming giant with both an ad supported and an ad free tier, including Disney, Netflix, Paramount, Warner Bros. Discovery and NBCU say that the total revenue per user is higher on the ad supported plan than it is on the ad free plan. Not only do media companies generate more revenue per user within an ad supported option, but the potential for growth is much greater. Ultimately, there's a limit to how much viewers will spend on subscriptions.

Speaker 2

Economic pressures on the consumer right now Are increasing the appeal of a free or low cost option that is supported by ads. However, this model is only sustainable If the ad load is significantly lower than traditional linear television and the only way we get there As if the ads are relevant to the viewer, so that the advertisers are willing to pay more for each of them. It's why we work closely with the world's largest streaming services to fully realize the value of that exchange. This includes freeing up competitive biddable inventory, Advancing new approaches to identity, unleashing the power of first and third party data, and of course, the technology infrastructure to In CTV, we have innovated by constructing a more efficient supply chain by creating a new product, OpenPath. It celebrated its 1st birthday this year and has already become a gold standard of transparency and auction integrity.

Speaker 2

We've also advanced TV measurement with the launch of TVQI, the TV Quality Index to showcase the value of premium TV content Over UGC platforms like YouTube that advertise on more questionable content for brands. We believe the ads we show in CTV in 2023 Are more relevant in CTV than they've ever been before in TV or premium video. As the value of these innovations is Proven out in the CTV advertising market day after day, we continue to see more premium inventory flow into our platform. Disney, for example, just opened Disney Plus inventory for us across Europe. More and more live sports inventory, Perhaps the crown jewel for most streaming providers is opening up for programmatic buying on our platform with billions of avails every single week.

Speaker 2

For the 1st few weeks of the football season, for example, we are averaging more than 300 advertisers activating on the NBC Sunday Night Football live stream. A great example of an advertiser pioneering new approaches to TV advertising with a focus on live sports Is Old Navy. They have been a long time participant in the upfront process. With their agency, PhD, Old Navy wanted to embrace CTV As more of their target audience has shifted to streaming, at first they moved part of their spend from insertion order to programmatic guaranteed and consolidated spend on our platform. In doing so, they were able to mitigate audience overlap across TV providers and hold each provider more accountable for performance.

Speaker 2

But as Old Navy quickly found out, programmatic guaranteed has limitations. Programmatic guaranteed or PG does not allow Old Navy to get the full value of programmatic such as frequency management, audience targeting and the ability to layer on their first party data. So they took the next step in the form of decision biddable buying within the private marketplace and focused on live sports inventory. CTV Live Sports advertising was appealing because it offered An opportunity to expose their brand against very high premium content that might be more restricted and expensive in a traditional linear environment. They were able to use Koa, The Trade Desk's AI, to optimize pacing and frequency management across the highest performing inventory.

Speaker 2

As a result, they saw a 70% reduction in the cost to reach each unique household versus their programmatic guaranteed performance. And we're just scratching the surface. As recently reported in the current, NBCUniversal has teamed up with the Walmart DSP, which partners with The Trade Desk, so brands can now deliver targeted ads on Peacock Live Sports inventory using Walmart Shopper data. Brands can then measure and provide attribution on the results of those ads in terms of impact and in store and online sales. Danone, North America, which includes brands such as Danone, Silk and Activa reported a 30 plus percent increase And new to brand buyers from their CTV campaign earlier this year.

Speaker 2

The next phase of innovation in CTV is the development of a forward market Product on our platform. We are investing significant resources to build this product, which is akin to a futures market, but for premium CTV inventory. Here, we bring the best of the traditional upfront guarantee and combine it with the power of data driven decisioning or programmatic advertising. Advertisers commit to certain levels of spend on specific audiences in a decision programmatic forward market. We are already active in live beta with a number of CTV providers and advertisers and expect the testing to steadily increase throughout 2024.

Speaker 2

We're excited to provide more details on our forward market innovations at our Forward 24 event in the first half of next year. The advances in CTV in 2023 for The Trade Desk have been accelerated by the 4th category of innovation I want to discuss today, Identity. With Google's latest disclosure that they plan to deprecate cookies in 2024, the industry has been more focused than ever on coalescing around a better alternative. Nearly all of the major streaming companies in the U. S.

Speaker 2

Have embraced UID2. They understand that if advertisers only advertise on users likely to be interested in their products, then advertisers will pay meaningfully more for those impressions. With UID2, content owners don't have to share data. Instead, advertisers can use their own data and to do so, they're willing to pay more. One leading streaming platform recently implemented UID2 and the results have been remarkable.

Speaker 2

Their average daily revenue from The Trade Desk has increased 150%. Their average daily revenue when those impressions are open and biddable has increased 2 22% And all because they are able to offer advertisers a much clearer sense of relevance and addressability. Again, because of rising cost of content And less appetite from consumers to pay for more subscriptions, every global content company in the world is now rolling out a programmatic advertising strategy and plan. As a result, more and more publishers and advertisers are now deploying UID2. Over the last couple of years, A who's who of major publishers, advertisers and data partners have announced their commitment to UID2 and now we're seeing the positive impact of adoption on our platform.

Speaker 2

Luxury Escapes is a high end travel agency with more than 7,000,000 customers worldwide. They activated their first party data on our platform and then used UID2 to help find potential new customers We shared characteristics with the most loyal customers they already had. In this way, their first party data acted as a seed to grow their potential customer base And the results were very impressive. In the U. S.

Speaker 2

Alone, their conversion rate with UID2 was more than 400% higher than with cookies. Their return on ad spend was 900% higher and their cost per acquisition was 83% lower. For the first time ever, in 2024, we expect the majority of CTV and premium video impressions To be bought on our platform using either EUID or UID2. The 5th innovation I wanted to highlight today is the rapid innovating We're doing in retail media and retail data partnerships. The fusion of retail and programmatic advertising has accelerated in the wake of the pandemic.

Speaker 2

Our partnerships with Walmart, Target, Albertsons, Instacart and many, many more have fueled the expansions of our TAM in the United States. Schwartz and Ocado have been notable catalysts in the EU. Incidentally, the EU programmatic advertising ecosystem It's showing signs of improvement in part brought on by the appeal of retail partnership. And lastly, Big Basket and TacoPedia Our examples of growing synergies between programmatic advertising and retail media in some of the largest APAC markets. Just as stay at home directives encouraged many of us to shift our viewing habits to binge streaming, they also forced many of us to shift our shopping habits To e Commerce, according to the U.

Speaker 2

S. Census Bureau, e Commerce sales boomed 43% in 2020 alone and it has continued to grow every year since. As a result, advertising on e commerce destinations has become more attractive and the value of data collected about purchase behaviors has become much more valuable. All major retailers are working on activating that data for advertisers So brands can understand how their advertising dollars impact actual sales, whether online or in store, and most of them are partnering with us. The significance of this shift should not go unstated.

Speaker 2

All advertisers are focused at their core on driving sales growth. But until very recently, especially in the consumer space, advertisers have been missing the link between their advertising dollars and the real world sales growth. Instead, they have had to use proxy metrics to showcase the ROI of their campaigns. How many click throughs did their ads drive for example? But now we can measure with much more precision whether the ad dollars actually led to a consumer purchase.

Speaker 2

We can attribute value to all parts of the funnel, not just the last touch. We can understand the relevance of every ad impression more clearly and we can better prioritize the right channel at the right time for the right audience. The open Internet It's proving to be increasingly preferred by big brands as retail media makes the efficacy of the open Internet continue to improve and scale. Rossman, a major European drugstore chain came to us when they wanted to drive first sales for their organic food brand. They knew that if consumers tried their product, there's a 95% chance of them becoming repeat customers.

Speaker 2

The challenge was getting them to make that first purchase. Working with us, they were able to deploy their 1st party data and then find where their target audience groups Might be across the open Internet. With data driven precision, they were able to determine that 99% of their ad spend was hitting their specific And more major retail organizations continue to partner with us as the most effective way to enable advertisers to benefit From their data, just last month Instacart, one of the world's largest retail technology companies representing more than 1400 retail labels Announce that it will make its retail media data available to advertisers on The Trade Desk. At the same time, we continue to innovate in the retail space. As a part of Kokai, we have launched the Retail Sales Index, which allows advertisers to understand the performance of the retail campaigns across the open Internet.

Speaker 2

It radically simplifies the measurement and attribution process in a rapidly evolving market and we are just scratching the surface. As one of the few independent players At scale in our industry, we are in the pole position to continue partnering with leading retailers, standardize their data on our platform and drive value for our clients. Let me conclude by making a few comments about the current environment and then connect the dots of innovation and our optimism for the future. We represent the vast majority of the Ad Age top 200 advertisers, the largest advertisers in the world. Starting in the 2nd week of October, we have seen some transitory cautiousness across some of those advertisers.

Speaker 2

These include, for example, industries that have been impacted by recent Strikes such as the U. S. Auto industry. Through the 1st week of November, we have seen spend stabilize and we are optimistic for the remainder of the year and for 2024. Both CTV and Retail Media continue to drive our business and we continue to win share.

Speaker 2

In terms of innovation, I am so excited to showcase the strength of this company over the next few years as we've innovated and built more this year than in any year in our history, while at the same time preserving and leaving room to expand our operating leverage. The many innovations I've discussed today are embedded in our newest version of the platform, Kokai. We've been launching Kokai innovations throughout the year, but many of the biggest innovations, including our new UX are in alphas or private betas today and will roll out to all of our customers in the first half of next year. As we exit 2023 and look forward to 2024, I want to highlight several specific areas that make me extremely positive about our future prospects. So let me sum up.

Speaker 2

1st, agencies and brands are more deliberate with advertising budgets. They are shifting ad budgets to where they can be more flexible, agile and data driven in everything they do, especially in times of uncertainty and this is driving them to sign JVPs with us at a record pace. 2nd is the innovation coming from AI and the many, many opportunities we have ahead of us to find places to inject AI into what may be the most rich and underappreciated data asset on the Internet, which we have here at The Trade Desk. 3rd, connected TV continues to be the fastest growing channel of our business And a key driver of overall omni channel growth. And it's not just here in the U.

Speaker 2

S. CTV continues to grow rapidly both in EMEA and across Asia. The industry is evolving fast as providers shift inventory into biddable marketplaces to maximize ad revenue and as advertisers look to bring more precision and addressability to their TV campaigns. 4th, retail media has become one of the growing areas of our business and we expect this to continue in 2024. Retail media is revolutionizing the way many advertisers In the CPG space, think about measurement and attribution and our innovation is at the center of this.

Speaker 2

5th, Global expansion. We have made significant investments outside the U. S. Over the last several years in our go to market strategy, In CTV and in Retail Media, we believe we are in a position to continue to accelerate our international growth in many of the markets we serve. 6th is the rapid adoption of UID2 and EUID as the currency for relevant ads and personalized content that has been adopted by the infrastructure of the Internet and nearly all of the biggest content companies in the world.

Speaker 2

7th Is the upcoming U. S. Political election. Since 2016, The Trade Desk has been a vital platform for leading political advertisers. In 2024, we expect to gain more share in this segment and we believe that spend will increase as the year progresses.

Speaker 2

And finally, we continue to be one of the few high growth technology companies that consistently generate strong adjusted EBITDA and free cash flow that has steadily increased over the years. As a result, we have been able to invest in innovation and I believe The Trade Desk has been successful because we have always focused on delivering premium value To advertisers and agencies, everything we do, including our latest Kokai innovations are pointed at helping brands And advertisers get the maximum bang for every advertising dollar. I could not be more confident or excited about how we are positioned for 2024 and beyond because of the many growth drivers that we've discussed today. We will continue to innovate to lead the market and I'm confident that the world's leading advertisers will continue to default to our platform as they seek to drive their own business growth via advertising. And with that, I'll hand the call over to Laura, who will give you more color on the quarter.

Speaker 3

Thank you, Jeff, and good afternoon. As you have seen in our Q3 results, we have continued to execute extremely well. During the quarter, we continued to grab share and outpace our peers. We delivered accelerating year over year revenue growth, managed our expenses efficiently and delivered strong adjusted EBITDA and cash flow. Our results are a reflection of the premium advertisers are placing on precision, Agility and transparency as they continue to shift away from Linear Media and Wall Gardens.

Speaker 3

Revenue in Q3 was $493,000,000 representing growth of 25% year over year, an acceleration from the prior quarter. Excluding U. S. Political election spend, which represented a low single digit percent of spend in Q3 2022. Our revenue growth rate in Q3 of this year was about 27% on a year over year basis.

Speaker 3

We continue to win spend as marketers increasingly focus their investment on platforms that deliver value, particularly in premium video like CTV. This is a dynamic we've seen many times over the years. When the macro environment presents challenges, brands shift to

Speaker 2

platforms and channels that offer flexibility and

Speaker 3

measurable results. Forms and channels that offer flexibility and measurable results. During the Q3, CTV led our growth from a scaled channel perspective once again. We saw strong momentum in Retail Media as we won incremental shopper marketing budgets and brought the retail sales index to market. International spend growth accelerated off a strong Q2 with notably strong performance in CTV.

Speaker 3

With the strong top line performance in Q3, we generated approximately $200,000,000 in adjusted EBITDA or about 40% of revenue. This led to free cash flow of $184,000,000 in Q3, marking over $600,000,000 of free cash flow on a trailing 12 month basis. I'm proud of our ability to generate strong profitability while continuing to invest in our business as that will help fund our future growth. Because of our fortunate position within an incredibly large addressable market, one of our greatest responsibilities is ensuring that we are growing sustainably, while also generating Profitability and cash flow. Our team has done a remarkable job achieving this as we balance short term opportunities with our long term financial vision.

Speaker 3

From a scale channel perspective, CTV by a wide margin led our growth again during the quarter. In Q3, video, which includes CTV, represented a mid-40s percentage share of our business and continues to grow as a percentage of our mix. Mobile represented a mid-30s percentage share of spend during the quarter. Display continued to represent a low double digit percent share of our business and audio represented around 5%. Geographically, North America represents about 87% of our business in Q3 And international represented about 13%.

Speaker 3

We are very pleased that international growth slightly outpaced North America for its Q3 in a row. CTV across EMEA and North Asia was very strong during the quarter, growing over 100% year over year in each region. In terms of the verticals that represent at least 1% of our spend, we continue to see strong performance in food and drink, travel and automotive. Health and fitness and business were below the average. Turning now to expenses.

Speaker 3

Excluding stock based compensation, Operating expenses in Q3 were $316,000,000 up 29% year over year. During the Q3, we continued to invest in Our platform and our infrastructure to support sustained growth. Income tax expense was $18,000,000 for the 3rd quarter, driven primarily by our pre tax profitability and non deductible stock based compensation. Adjusted net Income was $167,000,000 or $0.33 per fully diluted share. Net cash provided by operating activities was $192,000,000 for Q3 and free cash flow was $184,000,000 DSOs exiting the quarter were 91 days, down about one day from a year ago.

Speaker 3

DPOs were 75 days, up about one day from a year ago. In Q3, via our share repurchase program, we repurchased and retired 1,200,000 shares For an aggregate repurchase amount of $90,000,000 We exited the 3rd quarter with a strong cash and liquidity position. Cash, cash equivalents and short term investments ended the quarter at $1,500,000,000 We have no debt on the balance sheet. Turning to our outlook for the Q4. First, we continue to see strong spend in our key areas such as CTV and Retail Media.

Speaker 3

That said, we have seen more macroeconomic uncertainty at the start of Q4. We estimate Q4 revenue to be at least $580,000,000 which would represent growth of 18% on a year over year basis. Excluding U. S. Political election spend, which represented a mid single percent of spend in Q4 2022, our estimated revenue growth rate in Q4 of this year would be about 22% on a year over year basis.

Speaker 3

We estimate adjusted EBITDA to be approximately $270,000,000 in Q4. In closing, we are extremely pleased with our strong performance in 3rd quarter and we are cautiously optimistic for Q4. We continue to demonstrate our ability to drive momentum across our company priorities, achieve profitable growth Regardless of what the macro brings, we believe we have never been a better position than we are in today. With large growth drivers, including the ongoing secular shift to CTV, upgrading measurement with retail data, our biggest product release ever with Kokai, Growth in international markets, an identity framework that has never been stronger, the U. S.

Speaker 3

Presidential election cycle amongst others, We remain optimistic for the remainder of Q4 and into 2024. That concludes our prepared remarks. And with that, operator, let's open up the call for questions.

Operator

Absolutely. Thank you. At this time, we will be conducting a question and answer The The first question comes from Shyam Patel with Susquehanna. Please proceed, Shyam.

Speaker 4

Hey, guys. Congrats on the strong 3Q across the board. I think the big thing on everyone's mind right now is The 4Q outlook, which I think caught a lot of people by surprise, maybe we can start there. Jeff, I know you talked a little bit about this In your prepared remarks, but can you talk a little bit more about what you're seeing in 4Q? And just what gives

Speaker 2

you confidence that it is all macro and

Speaker 5

not competitive or anything else? Thank you.

Speaker 2

So I have a lot to say on it. So I appreciate the kind words and the question. So First, just looking back, we had a very strong Q3 growing 25% once again beating the market. And please don't forget, and this is really important, that we are coming off of a 30% plus growth year from last year, Where many of our competitors were shrinking or barely growing. This year and last year Major brand advertisers and agencies than ever before with bigger amounts and longer time horizons than we've ever had before too.

Speaker 2

So once again, this year, CTV and Retail Media have been leading the way. And in general, we have amazing momentum going into Q4. Another reminder, we represent the Ad Age top 200 advertisers and of course the majority of the S and P 500 something that I pointed out many times before. These are of course the largest advertisers in the world. And of course, that means that we represent nearly every major sector of the economy as well.

Speaker 2

So that said, starting about the 2nd week of October, we began to see some transitory cautiousness around certain advertisers. For example, we saw some reduction In brand spend in verticals such as automotive and consumer electronics, for instance, specifically around cell phones and media and entertainment. Some of these industries have been recently impacted by strikes, such as the U. S. Auto industry.

Speaker 2

So the 1st week in November, we have seen spend stabilize, and we're very confident that we will continue to outpace our industry and gain market share. Excluding election spend in Q4 of 2022, we're guiding to about 22% year over year growth, which is significantly faster than the industry and illustrates the long term strength of our business model, especially when you consider those comps. I'm very proud of our team and what they've done in the 1st 3 quarters and the market wins that they're putting on the board right now. The team really is firing on all cylinders. Our company is extremely healthy with great operating leverage and a strong balance sheet.

Speaker 2

All of those things are the strongest they've ever been. Given our strength in the fastest growing channels of digital advertising, Growing long term relationships in the world's largest brands and agencies, the technology innovations that we outlined in our prepared remarks, Including Kokai and the AI investments that we're making, we are very confident that we will continue to outpace the industry and gain share, And I'm very optimistic heading into 2024. Thanks, Shyam, for the question.

Speaker 4

Thanks, Jeff.

Operator

The next question comes from Vasily Karasyov with Cannon Globe Research. Please proceed.

Speaker 5

Good afternoon. Obviously, following up on the point of interest here. Jeff, wanted to ask you to talk in a little more detail about What you saw this quarter, specifically the linearity that we've seen in the 1st 5 weeks So far and probably wanted to ask you about if you could provide more color on where you have seen cautiousness On the part of advertisers, so any additional color you can give us on what's going on this quarter would be appreciated. Thank you so much.

Speaker 2

Okay. Laura, I know you have some comments on this. Why don't you go first and I'll go second.

Speaker 6

I'll add to it.

Speaker 3

Absolutely. Thanks, Vasily, for the question. So the way I view this is that coming off a strong Q3, we continue to see that strength going into the 1st week of Q4. Starting in the 2nd week is when we saw some advertisers become more cautious in their spend. And we saw this cautiousness across a few verticals that Jeff mentioned, such as automotive, And of course, some of the caution is transitory due to what we mentioned, the strikes in auto and in media and entertainment.

Speaker 3

We continue at the same time to see strong spend in our largest drivers such as CTV and Retail Media. And through today, which is a week and change into November, We've seen spend stabilize, so we're cautiously optimistic for the remainder of Q4. Jeff, is there anything you'd add to that?

Speaker 2

Yes. So first, a couple of things So just keep in mind, we have very strong and healthy growth. Every quarter for the last couple of years, we have significantly outpaced the industry and gained share. During that same time, some of our largest competitors are coming off low or negative growth from a year ago, where we're coming off of over 20% growth Then an over 20% growth again. Our unparalleled growth is because we've never been closer to many of the largest brands and agencies in the world that all use our platform.

Speaker 2

We're striking more and more long term commitments in JVPs and we're innovating to bring new value across all their Omnichannel advertising campaigns that includes in the biggest release that we've ever made in Kokai, which of course includes AI and performance enhancements Our business is largely based on the world's largest brands. So if there is a little caution due The macro uncertainty facing everyone, we, of course, won't be immune from that in the short term, but we are convinced The macro pressures today represent land grab opportunities now that will show fruit or pay off over and over again In the years to come, the fundamentals of our long term business are as solid as they've ever been, and we are poised to continue to outpace the industry and gain share in

Operator

The next question comes from Justin Patterson with KeyBanc. Justin, please proceed.

Speaker 7

Great. Thank you and good afternoon. Jeff, I just wanted to build off of your last statement there. Given the caution that you're seeing from advertisers right now, what gives you that confidence heading into next year And then just a quick follow-up to that point. Last year at the Analyst Day, you were talking about just Investing to make sure you're not missing this CTV and retail media wave.

Speaker 7

So I know you don't guide to expenses or EBITDA for the year ahead, But could you give some commentary on just how you're thinking about the right level of investment in an environment like this one? Thank you.

Speaker 2

You bet. I'll take the first part of the question and Laura, if you'll just speak to the investment side of that question. So let me just say a few words on 2024. First, obviously, the macro environment plays a role in our business and things like higher cost of capital and increased money supply have downstream effects on most businesses. Some of those effects are opportunities, which we're seeing mostly across our client base, but we're seeing some of those effects as pressures on their businesses.

Speaker 2

But regardless of the macro environment's effects on individual companies, we continue to see the tidal wave of opportunity Over the next 2 years, and I've never been more bullish, and that is because of the just the slew of things in front of us That are what we see as some of the biggest opportunities we've ever seen and probably ever will. CTV is moving to streaming more and more And they're also moving to biddable, both as a total and as a percentage at a faster rate than it ever has before. Content has more competition than ever, and it needs ads as a part of their strategies more than it ever has as we mentioned in the prepared remarks. We're convinced That their incremental subscribers and the incremental revenue are largely going to come from ads. Retail media, something we didn't spend as much time as I would have liked in The prepared remarks is one of the fastest growing areas of our business and is providing advertisers with completely new ways of Thinking about measurement and attribution, it closes the loop and helps them see the impact of their advertising in a way that has never been possible before.

Speaker 2

But in addition, they're also finding customers that benefit both advertisers and retailers because they're selling more of their products in the retailers that they're partnering with to get the data. In 2024, I also believe audio will follow suit. They're going to take out the CTV playbook and they're going to see some of the benefits that I think are really important for that category to grow. So I think there's Another secular tailwind available in 2024. Decision Programmatic is poised to have its best year ever in 2024.

Speaker 2

And I believe this is partly due to the macro pressures. We're investing heavily in our platform So that we make the value as obvious and as powerful as possible, I think the open Internet will start to get the 1st dollar even more in 2024 Than it has in the past and the places where we're injecting AI into the platform have seen amazing results so far. So of course, I'm optimistic about what that will relate to in 2024, especially because everything that we've done so far in AI has been small and yet also really impactful. So if we just continue down that track, I think we're going to see some amazing fruit come from that. Incidentally, I'm here in Chicago today.

Speaker 2

Yesterday, I met with 100 of our clients, 100 of traders, hands on Keyboard people, the day before that, I met with a group about the same size in New York. We have never been more aligned with traders than we are today. I think they're excited about the control and upgrades that Kokai represent for them, which I believe they'll all hit the ground running in Q1 With those enhancements, we've put better decisioning right next to data. We've put those 2 right next to each other in a much better and usable way than we ever have before. We've made first party data activation better than it's ever been before, and that's strategically more important at this moment than it's Ever, Ben.

Speaker 2

The obvious benefits of UID2 and EUID are becoming more and more apparent To everybody in the advertising community, traders know that their jobs are not going to be taken away by AI, but instead they have to compete with each other. So their job could be taken away from a trader who knows how to use AI really well. And so all of them are looking at ways to use the tools that are fueled by AI that we're providing, where AI is essentially doing 1 of 2 things. It's either doing the math For them, if you will, of course, with very advanced learning models or in other cases, it's actually their co pilot. So we could not be more excited and more bullish on even things like EUID and Europe.

Speaker 2

I think many markets outside the U. S. Recovered more slowly post pandemic, but we're seeing advertisers now in the EU start to Really lean into the innovations that we're bringing to the market in all dimensions such as EU ID. In times of macro uncertainty Or for verticals that are dealing with uncertainty, we will gain share aggressively and we're seeing exactly that. In times of more stability, we accelerate our spend.

Speaker 2

But I couldn't be more confident in that model and the growth potential that, that means for both the near term and the long term. Laura, for the part on expenses.

Speaker 3

Yes. So I'm going to repeat something I've said before, which is that we have a great luxury. We're high growth, we're profitable, we've got cash flow. And in 2023, we're growing well into the double digits above 20%. So all of that allows us to save the course to continue investing in areas So As we and you start to think about 2024 for the Trade Desk, there are a few things I'd keep in mind.

Speaker 3

First, we've been deliberate in our investments in hiring. So we're going to grow headcount this year, but only at about 15% to 17%. And importantly, we expect a similar trajectory next year, which I'd also add that our investments include Kochai, AI, the forward market, and we don't see any material increases as others have with investments in areas like that. We're also focusing heavily on productivity with our engineering teams, our go to market teams, everyone in sales, account management and trading. And I'd close, Lync, I've been here about 10 years now and I couldn't be more confident in our model, our growth, our ability to drive profitability and cash flow in both the near and the long term.

Speaker 3

Thank you for the question. Thanks, Paul. Okay. The

Operator

The next question comes from Shweta Kajuria with Evercore ISI. Please proceed.

Speaker 8

Thanks a lot for taking my questions. I have 2, please. So first is on retail media. Jeff, when we think about the opportunity, The Trade Desk has in retail media, if we think about, call it, 2 to 3 years from today, What would you be satisfied with in terms of how big retail media revenue is as a percentage of overall business, call it 10%, twenty Percent plus, how should we think about that? And then second is on Connected TV, clearly a growth driver as well.

Speaker 8

Where do you think industry growth is expected for next year and more specifically for Trade Desk to grow faster than overall industry? How should we think about what is really driving that inflection of shifting inventory to biddable marketplaces? Do we expect that next year? And is that the key driver that will allow you to gain share? Thank you.

Speaker 2

You bet. So rather than giving specifics On growth rates that I expect 2 to 3 years from now, we don't guide in that way. I'll talk about the macro vectors that are influencing that. So what I'll be happy to see over the next 2 or 3 years is to see us, 1st of all, continue to grow in the way that we have With companies like Walmart and Albertsons and Walgreens and Dollar General, we've had just an amazing year in all of those partnerships and so many others. I don't mean to leave off the dozens of others that have been amazing partners to us this year.

Speaker 2

And once again, this is a case where economic pressures Have helped them to be bold and daring and do things that they haven't done before that have really paid off for them and us and our clients. And I really love it when we see win win win situations like that. All of those are benefiting all three groups, the retailer, the advertiser And us, the platform. So what I look for in the next 2 to 3 years is to see that continue and to see the trends Retailers saying, I want to help close the loop. I want to use my data to help The biggest brands in the world sell products in my store.

Speaker 2

I want to spin my flywheel faster and we want to see more and more retailers think about their business The way that Amazon thinks about their business, which is about spinning the flywheel and using data to make better decisions, If they simultaneously make that data available for measurement and attribution, it will be better for everyone, including and arguably especially them. So we want to see them do that over the next 2 to 3 years. As it relates to CTV growth, the macro trend that I just want to point out is that, Of course, as there's been macro pressure put on the consumer, at the same time, we've overwhelmed the consumer with choice In the CTV world. So if you think about you as a consumer, how many more choices do you have, especially in the U. S.

Speaker 2

In streaming as compared to what you had 5 years ago. There's just way more choices. It's hard to keep track of which app the shows are even on. There's just way more choices in terms of apps and outlets. Even though there's been a little bit of lull in the content production as a result of the strikes In terms of the apps themselves and the need for sort of this content machine To continue to grow and grow subscribers, it's gone up for all of them, whether you're talking about smaller players like Paramount or the big guys Like Disney, who reported yesterday, all of them, in my view, need programmatic advertising to help them get the next stage of growth.

Speaker 2

And that's largely because they can't just keep raising prices and consumers are saying, I want to watch it, but is there any other way than having a total bill for television that is bigger than what I had Back when I was paying for cable, how can I get access to all the great content and not pay quite as much? And what that's brought all of them to is ad funded options. And I think companies like Disney and Netflix have proven this, Where their ad funded subscribers are worth in most cases about double to them, What those that are not receiving ads are worth to them. The only way that, that keeps up and that they keep producing more revenue per user Is it the ads get more effective and more relevant? I don't think it's super easy for them to just create lots more ads.

Speaker 2

I think that'll be too disruptive. I know there's a lot of fear of that in all the content companies. So their way out is to make CPMs go up. The only way to do that It's for them to make the ads more relevant. That means they'll embrace UID2.

Speaker 2

So I that's already happened. All of them have offered public support. All of them are in the process of implementing, but the faster they implement UID2, the faster that will accelerate for them. And as we see more authentication and more options in terms of the way consumers can pay, it's either through Sharing a little bit more of their time to see ads or paying a bit more money, we'll see more and more of them choose the ads as Has historically always been the case. And as a result, that means better and bigger partnerships for us.

Speaker 2

So I really just think we have to continue to be a great partner to the content owners and keep showing up the way that we have. But otherwise, those macro vectors are the themes that are really going to drive this. Really appreciate the question.

Speaker 6

Thanks, Shweta. Next question?

Operator

The next question comes from Jason Helfstein from Oppenheimer. Jason, please proceed.

Speaker 9

Thanks. Two questions. One, Jeff, that ties back to what you just talked about, which is as linear shifts to CTV And to kind of upfront the programmatic solutions, right, it results in less waste, but presumably so some will yield higher CPMs, right? But some of that spend will leave video and be allocated to some areas. Some you participate in and like this quarter, your display accelerated, I think, a lot sequentially versus others you don't like Search and Social.

Speaker 9

So just maybe talk about broadly where you're helping you have the opportunity to help Advertisers reallocate money other places where you do participate. And then Laura, just can you talk about the swing factors that Kind of go to that comment of at least for the guidance. Are you assuming that trends That has stabilized in November continue? Or does the guide kind of more assume an average, right, of like what you've seen quarter to date? Thank you.

Speaker 2

You bet. I appreciate the question, Jason. Of course, I'll take the first part and then Laura, if you'll take the second part. So you're right that as money shifts From linear traditional television into CTV, it of course has an opportunity to be reallocated. And Whenever a CMO or a media buyer has the option to reconsider, Of course, the first place where they're usually looking is to do something very similar.

Speaker 2

And let's not forget that television has always Focused on being the top of the funnel activity where you're creating awareness, I would argue that's where the heavy lifting of advertising is done, Which is the process of winning hearts and minds. Hearts and minds are not historically 1 in 2 40 blue and black characters. They are 1 With moving picture and audio and emotion, and that work continues to be done at the top of the funnel In CTV, so I would argue that CTV right now is the most effective television advertising that television has ever seen. And arguably, it's the most effective advertising at scale ever. So I don't anticipate that most of those dollars are moving The formats that are way different and way different location in the funnel like search or social, those budgets are not going there.

Speaker 2

It does have As you point out, it does have the opportunity to leave video, but why would it when CTV is way more effective? And I would argue that the effectiveness has gone up more than the cost and that as we see supply and demand continue, We might see more opportunities to find value as well as the target. And then of course, as UID adoption continues to go up, The efficacy will as well. So even though I think we're doing the most effective advertising that we've ever done in television, I think there's still lots of room For exponential growth in efficacy, so when you look at all of those sort of macro Trends and honestly the facts, I think it's inevitable that CTV gets the vast majority of that Transitioning from linear and traditional and even potentially additional spend. So, Laura, your portion of that Question?

Speaker 3

Yes, fantastic. So in talking about the guide, what I would say is that we guide to what we see. We always have since I've been here. That includes what's been observed quarter to date through 9th November. It also includes what our team and what our So I'm optimistic for the remainder of Q4 and we believe in this environment, it's good to listen to our customers, listen to our team And it's better to be cautious.

Speaker 3

Thanks, Jason.

Operator

The next question comes from Youssef Squali with Truist. Please proceed.

Speaker 6

Okay, great. Thank you very much. Just one question on CTV. Jeff, can you maybe Expand a little bit more on your comments around the different ways of buying CTV, programmatic versus insertion orders versus Programmatic guarantees, maybe where are we today in terms of percentage of CTV that's bought programmatically? And what is the biggest kind of hurdle To kind of get in it to become kind of the standard, the majority of the way people buy and interact with it.

Speaker 6

Thank you.

Speaker 2

You bet. So I would say today, and these are very broad buckets, This isn't a reflection of our spend. This is me giving a commentary on the macro space. As the dollar moves over from traditional television into CTV, it's mostly gone into 3 different buckets relatively evenly. The first is to work directly with the content owner and create essentially an insertion order again.

Speaker 2

The second is to work with us through programmatic guaranteed. And then the third It's a work through biddable, fully decisioned programmatic. Those have roughly been equal. You're seeing the 1st and second converge and then the 3rd category is of course the fastest growing. So when I talk about the need for television to embrace programmatic, I'm really talking about the need for it to embrace Fully decision programmatic because that's where content owners get higher CPMs.

Speaker 2

That's also where advertisers get the highest effectiveness And that's the only place where they're willing to pay a premium. The first and second have been increasingly converging over the last couple of years, while those were Even a few years ago, more and more they're moving towards the 2nd and third category with the final destination really being that 3rd category. That's how we see all of CTV moving because that's where efficacy and price and the healthiness of the ecosystem stabilizing.

Speaker 6

That's helpful. Thanks, John. Thank you, John.

Operator

Okay. The next question comes from Tim Nollen with Macquarie. Tim, please proceed.

Speaker 6

Hi, great. Jeff, I've got a CTV question as well, please. If I heard you right, in your prepared remarks, you spoke about some OpenPath efforts already taking shape in CTV. OpenPath, you started, what, a year and a half ago, if I remember right, on Could you just elaborate on what you were doing with OpenPath with direct relationships into CTV, please?

Speaker 2

You bet. I appreciate the question. So let me just remind everybody what OpenPath is. And Tim, again, really appreciate the question because I think this is something we haven't talked enough about. And you are right.

Speaker 2

OpenPath celebrated its first birthday at the beginning of this year. And it's Ben, the fastest growing path, if you will, or route Supply chain to inventory on our platform. And what it is, is the ability for publishers who want to do their own yield management to plug into us directly, where historically they would use an SSP, This time, they can plug into us directly. Part of the reason for that is because more and more Companies are wanting to do their own yield management. We initially really highlighted the need for journalists or journalistic outlets to embrace this because their need for authentication as well as CPMs to go up Was greater than any other part of the ecosystem.

Speaker 2

So it was really launched with journalism because that's where they needed the help the most. Where it moves the needle perhaps the most is in connected television. And the reason why it moves the needle so much in connected television It's because the content ownership, unlike on the browsing web, where you have millions of websites, You only have dozens of companies in the U. S. And as I've said before, I believe television is perfectly fragmented for a business like ours.

Speaker 2

But that makes it so that they're all big enough for them to have their own yield management functions. It makes it so that we can plug in directly with them And then make certain that the auction has a higher degree of integrity than if it were routed through Google or somewhere else for that matter. So we've launched OpenPath as a means of making certain that the pipes are clean And that has made certain that Connected Television has an ecosystem or a supply chain that is cleaner than others, which is really great for CTV and its future. Thanks for the question.

Speaker 6

Thanks, Tim.

Operator

The next question comes from Matt Swanson with RBC Capital Markets. Please proceed.

Speaker 10

Yes. Thank you so much for taking my question. Jeff, you've talked a few times on this call about taking market share in bad macros and then being able to invest more aggressively in a positive. We've obviously seen in the numbers that you've taken market share over the past couple

Speaker 6

of years. Can you just talk

Speaker 10

to us when that macro does flip, hopefully sooner than later? 1, how do you protect those market share gains? And 2, like what are those first steps when you return to investment, whether it is to protect that market share or go after

Speaker 2

You bet. Yes. Implicit in the question is that, hey, when as the macro continues to improve, where will you make additional investments? We're investing as aggressively as we can right now. So I know we're sort of showing our operating leverage, but that's not because We're saying let's flex our operating leverage.

Speaker 2

We're instead trying to grow as aggressively as we can. But as Laura highlighted and the change in head both this year and next year as it relates to our overall growth. That's in part because we surged our hiring during the pandemic and over the last few years, So that we could capture opportunities like this one, including that we're shipping the biggest release in the history of the company this year. We started that in June. We've been releasing throughout the year, so we'll continue to make investments in that same way.

Speaker 2

But I believe those are the investments that are making it so that it's really hard for anybody to take that away from us. We spend most of our time thinking about how we compete With the biggest technology companies in the world and the way that we compete is not to play the game the way they do. Most of them have conflict of interest all over the place And most brands are terrified to hand over their data and honestly to hand over their future to those businesses So they're dependent on growth to come from just handing over their budgets and hoping that they get good stuff. Instead with us, they have somebody who doesn't own any media and that is a feature, not a bug, in that we help Them objectively decide what media they should buy, because we don't have a dog in that hunt. And by not having a conflict of interest, We help them to buy objectively across the entire media landscape, especially the most perfectly fragmented portion of that, which is in CTV.

Speaker 2

The best way for us to stay ahead, and I say this to our team all the time, is to do the very same things that got us here. We align our interest with our clients, We maintain our objectivity and we innovate like hell. And that's what we've been doing all this year. That's what we expect to continue to do. That becomes even easier to do from an IR standpoint as times get better and better.

Speaker 2

But we've been doing it now. We'll keep doing it in the future. That's what got us here. That's what's going to get us to the future That we know we can obtain if we just keep executing.

Speaker 6

Next question.

Operator

Next question comes from Chris Kotarich with UBS. Chris, please proceed.

Speaker 11

Great. Thanks for taking my question. Maybe one here for Laura, just going back to the guide. Can you give us a sense for how fast Or if we were growing in October and just kind of how we should be thinking about kind of what's implied potentially for an exit rate in December in that 18% growth where with October potentially kind of if it was growing, say, 10% in October and we're talking about a stabilization Kensley around where the full year guide, could we be exiting in kind of that low 20s growth that we talked about, where the guide implies where you would be Full quarter ex political. Thanks.

Speaker 3

Hey, Chris. I appreciate the question. We actually aren't going to provide further guidance on exact Year over year growth figures both with and without election spend in the base for October, the 1st week of November or exiting the year. But you know correctly that we did see that drop off in the 2nd week of October and stabilization going into November. So all of that

Speaker 11

Okay. So was any color was October actually growing That you could share.

Speaker 3

Of course. It was growing. I'm smiling as I say that.

Speaker 2

All right. Thanks, Chris. Next question?

Operator

The next question comes from Laura Martin with Needham. Laura, please proceed.

Speaker 3

Hi. I'll just ask one on CTV. When I talked to Disney and Paramount and Fox, And they are always saying they have direct sales forces. They think they get a higher price point selling content, which is not substitutable. And they're definitely afraid of this 3rd bucket that you talk about, which is, what you think is the final destination, which is fiddable programmatic because they've Seeing what's happened in mobile and desktop is sort of a race to the bottom because of unlimited supply.

Speaker 3

So can you speak to the fact Why by the way, Michael Barrett yesterday on the magnet call said he completely disagrees with you that it's all going to stay in those first two buckets. So Can you explain why you think the final destination is all going to be biddable when that is not what I'm hearing from my premium content owners?

Speaker 2

Yes. So, I suppose it depends on who you ask inside of those premium content owners. But To me, the math is fairly obvious and even conceptually, it's fairly obvious. And I know that Michael Barrett's business can't really participate on the buy side decisioning that is that 3rd bucket. So it's natural for him to focus on the first two and talk about the things That are great about those 2 buckets.

Speaker 2

But if you step back, the 3rd bucket, which is fully decision programmatic, It's the one where the advertiser gets to bring their own data to the equation. It's the one where they say, these are the users that I want. It's the one where it realizes the potential of CTV advertising because the ads are relevant. Every single person here Hearing this, has seen television ads that are not relevant to them. And that's driven by a system that has historically always been focused on content, where I want to match this advertiser with this content And just a sort of spray and pray, that isn't what will happen in the future.

Speaker 2

That isn't what's happening in that 3rd bucket today, which is that you can bring your own data and show ads that are highly relevant, so that you don't just use the show as proxy for audience. The show was always used as proxy for audience. And sometimes it lines up really nicely, which is most people who watch football Are more likely to drink beer. And so as a result, those 2 have been married really well. And that's part of the reason Why?

Speaker 2

ESPN content is some of the most expensive. But if you can take And ID and make certain that the ad is relevant and customize that and make it so that you're only showing ads Only then can you make it so that this 4 minutes per 60 that are being used for ads, which is what, a quarter of what It happens in traditional television, only then can you make the CPMs go up high enough to justify the additional cost. So long term, we're all heading to that last bucket. It's the only place where the math makes sense. It's the only place where you really get the benefits of digital.

Speaker 2

And inside of all of those big content companies, there are groups of people But understand that that's where we're all heading, even though not necessarily everybody gets that the traditional models of selling are not the best ways to monetize television going forward. Thanks, Laura. Operator, you can close out the call.

Operator

Thank you. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

Speaker 6

Thank you.

Remove Ads
Powered by Quartr
Earnings Conference Call
Trade Desk Q3 2023
00:00 / 00:00
Remove Ads