The Trade Desk, Inc. (TTD) Earnings Call Transcript & Summary

[Technical Difficulty]

[Technical Difficulty] So we've been advocates for helping the agencies change. But that doesn't mean we're not going to have conversation with brands. And especially when brands are more concerned about both protecting and deputizing their first-party data, we have to have a contractual relationship with them in order to reassure them of the way that data will be used. So we will get closer to brands, but that's not with us looking to displace the agencies. Brands are going to get more data driven. They are also going to be more prescriptive than what they want from their agencies. Brands are going to do a better job of defining what success looks like and specifying their goals. And I think agencies are going to continue to be consultants and advisers and execute a lot on those plans. So I don't see our relationship with the agencies weakening. I see us sort of helping them and we go shoulder to shoulder into these brand meetings to just help them spend more on programmatic. It used to be that a brand would outsource programmatic because it was so small on a media plan. Now especially because of Connected TV, it should be the place where everyone starts and so it's -- we just have to expect that brands are going to care a lot more and be more involved.

Does it allow you to increase your take rate if your relationships are directly with the payor, in this case, the brand?

It can. Again, for me, though, the highest order bit is grabbing land and winning market share. And so if I can give up some -- what otherwise would be margin to create more consumer surplus and more loyalty from our customers at times, I will, but I care most about growth and grabbing land and then below that is take rate. And in fact, above that is making money and optimizing for the highest profit possible. So that doesn't necessarily equate to take rate.

And in land grab, do you mean new clients or more spending from old clients? How do you think about -- when you say land grab, what are you thinking about?

Yes. So I am constantly -- my North Star is in that 7-ish year time frame, advertising will be $1 trillion industry globally. So I look across that $1 trillion and say, "How can I get as much as possible? How can I make as much data-driven as possible?" And how can I be the place where people say, "Help me decide what to buy in audio, what to buy in digital out-of-home, what to buy in display, what to buy in native, and of course, most importantly, what to buy in Connected TV."

Okay. So it's about the percent of spend that is going over your platform, not so much about particular brands or ad clients? Or that's how you think about it as you think about the $1 billion? Okay.

Yes, the $1 trillion. Exactly.

Okay. And so in a time like this, where the ad spend is falling, I mean it's possible that overall ad spend will be less, right? Because pricing is really under a lot of pressure right now, and some businesses are going out of business. So in that land grab idea, the $1 billion maybe isn't as big as $1 billion as we thought before?

Well, yes. So again, it's the overall market being $1 trillion in that 7 years. I do think that in the equation of success for businesses, the coefficient, if you will, on marketing is going up, not down. And so the difference between Dropbox being the winner from the 100 other file sharing sites that there were a decade ago was really dependent on how well Dropbox went to market, how well they marketed and advertised. And that's true more and more of companies as supply chains are getting shorter, like the global economy is becoming more integrated. The difference between success and failure is largely hinging on your ability to market in a data-driven way. So I think overall, that just accelerates growth, and I do think that the marketing pie is going to continue to grow.

Jeff, let me introduce -- so I'm -- Tommy or Miles, I can't remember who's on. I'm getting clients saying that they are not started, that this hasn't started. Are we in the stream talking to Jeff?

Yes, we are in the stream talking. I have a backup crew who is in right now. It should be streaming.

Okay, because Wellington is saying they don't have a -- and Needham Funds, which is who pays my bills, they're saying they haven't -- they can't hear us. So I just want to make sure that since we have a back-office guy and Jeff's giving us some brilliant insights that the clients can hear us.

Let me make a call real quick and just get to this other guy who's doing the streaming, and I'll take care of that. Let me just make sure that we're getting it over there.

Okay. Should I keep talking? Who knows? I guess, Jeff, you and I will go, just in case, it's streaming now. I can see you. Hello. Has this started? It's now working. Okay.

Okay. Great.

Great. Oh my goodness. Okay. So we're --

[indiscernible]

It's 16 minutes into our little chat and -- no, apparently, it was just for us. So thank you, Jeff, for giving me 16 minutes of time. Okay. So guys, let's see. Let's go back. To recap what Jeff and I have covered so far, what he said was he's a COVID beneficiary, and it's going to be -- short-term, he's a beneficiary in terms of the fact it expands is TAM. And it takes up -- it takes TAM, let me just go slower. The Connected TV TAM was always $500 billion. It brings it closer. So his TAM near-term is larger, total addressable market, and competitors are going out of business, so he's going to be more competitive or have fewer competitors, which I think lowers his customer acquisition costs. He sort of doesn't like that point, but it's okay. He's a revenue guy. So it expands his TAM. And then competitive positions, he does think he'll have fewer competitors. We then talked about his historical relationship with ad agencies. And now that brands are doing more deals with him direct. He said you have to do that because you've got to protect their data, and you must have a contract on how you're protecting their first-party data, but he has no interest in disintermediating the ad agencies. He continues to think holistically about the ecosystem of brand, ad agency, Trade Desk. But he understands that time, like COVID, is really understands -- underscore time sensitivity. So these brands need to be talking directly and ad agencies can slow the process. What did I miss, Jeff, that we --

That was an amazing recap. That was impressive.

Anything I missed?

I think you covered it.

. Okay. Great. That's what you guys missed while we were having a lovely talk. Well, I have 100 questions, let's do Connected TV. And then I will go to the 100 questions that people were probably queuing up to ask. And thank you guys for telling us the stream wasn't working because otherwise, it wouldn't be here either, and Jeff would rather continue. So let's move to Connected TV, Jeff. Has COVID just accelerated the shift to streaming OTT from what you call the ticking time bomb of linear TV? Or is there something new post-COVID that investors should be thinking about? And then we're going to talk about upfronts, but let's do that one first.

Yes. So we'll ballpark upfronts, but of course, those happened at the end of April, early May, and they've been almost nonexistent. And if that weren't enough, you've also got people at home watching more on demand than ever. We sponsored some research where we talk to consumers, thousands of consumers. And a couple of the things that really stood out to us that are really helping CTV grow and putting pressure on linear is that even though typically, the decline over the last 5 years per year has been 4% cut their cable bill at the most expensive part of the TV menu, if you will. And our research showed that of the thousands we interviewed, that 11% plan to cut before the end of the year. You can point to the economic pressure that's on them as well as them seeing more and more on demand. And as you sign up for Disney+ and you sign up for Hulu and you put all these things together, if you subscribe to all of them, your cable bill is as expensive as ever at a time when unemployment claims are $20 million plus. But if that weren't enough, the #1 reason why they held on to cable was because according to 60% of the thousands we surveyed was because of live sports. So with live sports being sort of put on pause, it just makes that decision much, much easier for them. So you then transition to CTV, and there were a bunch of AVOD themes coming online anyway. But to see that adoption we saw in March and April, 30% surges in month-over-month inventory. And then if you take things like FreeWheel's unified yield, where you now can compare what you're getting from your sales force, if you're a content owner, to what you could get in programmatic and open it up, so this -- the demand is brought together, we're seeing just really strong surges in premium content that just helps the equation for advertisers in a really significant way. So the punchline, though, is that the CTV is leading the recovery. And for me, that's exciting because of the fact that I think Connected TV is the most effective advertising on the planet today.

Well, let's stay with that theme because we're not going to have upfronts this year, at least not formal ones. It's typically a $20 billion business. I think it was the first May 14 in 20 years I hadn't been in New York sitting through presentations. So it was amazing. But anyway, it's $20 billion, and they're saying $7 billion. The survey out of eMarketer this last week, I guess, was that $7 billion would be -- that upfronts would be lower by $7 billion as advertisers wanted more flexibility. Do you think all of that becomes a larger -- I'm not going to call it total addressable market. But all of that becomes fodder for you guys well in advance of when it would have been without COVID? Without the upfronts that occurred?

Yes. So I think you could take that $20 billion. And you should also know that what will often happen is people will go to the upfronts, and that's where they make their sort of plans and everything else trickles down from that. So I do think it can also put pressure on the scatter market and if you look at it as an, a, I want to lock things in so that I have the assurance that I can spend. And then you look at CTV and how much is available in the spot market, it makes a ton of sense for people to be moving more to the spot market where you can be more agile, where you know what you're going to get. So one way to think of the upfront market is like a forward market for commodities where there's not very good prediction and not very good price discovery. You make that worse this year. It's just going to put pressure on the rest of it. So I do think that $20 billion is decreased a little bit in the sense that everybody's created some amount of cutbacks, but it didn't decrease so much that it doesn't have to be redeployed when you go from $20 billion to $7 billion. So most of that is going to be redeployed, and it's going to end up in the scatter and spot markets, which is really good for a business like ours.

Okay. I have 100 questions, I'm going to go to them. My last question, which I think is the hardest question I'm going to ask you is you love Connected TV. You spend a lot of your bandwidth and have spent a lot of your communication strategy on CTV. We estimate that 25% of your revenue is CTV. Roku is 100% CTV. So why are investors on this call buying Trade Desk and not Roku if Connected TV is going to be as fabulous as you tell us?

Yes. So this is the hardest question. And in large part, because I have a ton of respect for what Roku has done. I've mentioned to many of the people on this call before that I have a house full of Rokus. I'm a big fan of the product. And I spent a good amount of time with the executive team over the years. So they're an important partner to us, and we expect that to continue to happen. In fact, I met with some of their executive team just last week. But let me just make the case for why us and maybe a little less of why not them. One of the things that is very unique about our proposition in the marketplace is that we are objective. So we sell all the time that we don't own any media. And that's really important in everything television. And it's even more important in television than it is anywhere else. And the reason for that is because if you're Facebook or you're Google, those markets are built for monopolies, if you will, where Google has 75% plus market share. In television, no one has that sort of monopoly, and no one will. The nature of the content makes it fragmented and it will forever be that way. So being Switzerland, where you don't own any media, and I'm just trying to help an advertiser figure out should they buy Spotify or should they buy The New York Times or should they buy CBS or should they buy NBC, and doing that with objectivity as well as having access to everything is really important. We may be the only company in the world who has partnered with Baidu, Alibaba, Tencent, Amazon, Facebook, Google and Roku at the same time. And that's in part because of our Switzerland position. If you look at how many devices Amazon has, and the fact that we have a really strong partnership with them as well. I think it underscores the importance of being Switzerland in this environment.

It should make your TAM a lot bigger if you can work with everybody all the time. It should make you more hedged, too. If something goes down, that's okay, you got somebody else going up.

Exactly.

That's an excellent answer. Okay. Let's go to some of these hundreds of questions that I've got here. So let me take a look, Jeff, of what we've got here. So let's see, let's see. Oh, no, I guess, I don't. Okay. So I have a lot of commentary, but it's all around why hasn't it started. So I guess, if anyone has a question, you can send it to me, Jeff's willing to be asked whatever you guys interested in. I want to talk about AVOD versus SVOD. So one of the things we're seeing is the data coming out of COVID is that SVOD subscriptions are going through the roof because we're all sitting home, and so we're sort of subscribing to everything. And yet, we've seen a bunch of introductions of really big, powerful, deep library AVOD services. So I'm interested in, a, like post-COVID, when you have more choices to leave the home, do we think there is going to be SVOD subscriber fatigue and more will go to AVOD? Or do you -- tell me what you think the industry structure looks like AVOD versus SVOD sort of normalized after COVID's behind us.

Yes. So I sometimes -- I think in the past, I've answered this question wrong, in the sense that I could have been just more accessible than sort of falling into the false paradigm of AVOD versus SVOD. Because I've been saying for years, Netflix eventually has to show ads. I still think that's true.

I still think that's true.

Yes. It's -- I think it's just a fact, and it boils down to the math, and I've spent time with executives at Netflix walking through the math, and I'm convinced they eventually get there. But it's not -- I think the paradigm of AVOD versus SVOD is the wrong one, which is there are some pieces of content like the really premium and amazing content machine that Netflix has built that is going to start with SVOD, and they've done very well. They are the sort of platonic ideal of what SVOD looks like. But in an ABC or a CBS or an NBC, they're, of course, going to be AVOD to start, but I think they all end up at the same place where you give consumers the choice. Do you want to see ads as your form of paying for the content? Or would you rather pay more to get rid of them? And because I suspect Netflix will always offer both choices, we'll both get to forever saying we're right. But that's -- I will -- I think, mostly be proven right in the sense that when we look at Hulu, when we look at Spotify, when we look at the early companies who were providing consumers with the choice between AVOD and SVOD, roughly 80% of consumers -- and keep in mind, this was in a very strong bull market, 80% of consumers preferred the ad-funded option as a way to pay for their content. So as the content market gets more competitive, I think that sort of pressure and mathematical fact becomes more and more apparent that it's easier to get subscribers if they're seeing ads than paying more. And when people see the correlation between how big and robust the library is, so to speak, versus the ads and what they have to pay, I think most content will be ad funded, the same way that it was in linear TV, where there's 500 stations and 490 of them have ads on it, even though you pay $150 every month to get access to all of them.

Okay. So I have an ID question over here. Hi, Laura and Jeff. What impact will ID solution service providers be impacted by Google's efforts on moving to the cookie-less world? This is a good question. I get this a lot. Specifically, how do you supplement for your clients the third-party data they would need to bring into your platform if they do not have access to that? It would seem like you could capture more value with better ID data for your customers using your platform. Let's talk about that.

Yes. So first, let me just give a little bit of commentary on what Google has been doing over the last year, right? So I think it's important to note that just the government is taking a closer look, whether it's DOJ or FTC, into both Facebook and Google. That's been in lots of headlines. But I think that has changed some behavior inside of Google. And especially in Chrome, there's been a lot of discussion. They announced they were going to make a policy change roughly 10 months ago that I loved. I thought they threaded the needle between privacy and relevance with that solution. It was simply a blog post where they put that out, and yet I applauded it and lots was written about it, including on the front page of The Wall Street Journal. A few months later, a different engineer writes a different solution, where they say, "Hey, let's move to a cookie-less environment where Google can control more of the targeting." I think with it comes some risk to Google as it relates to antitrust and it comes with some risk as it relates to privacy because what will happen if that happens is content owners will not just say, "Okay. Well, Google will just pay my bills for now on." Then I'll immediately adapt and take control of their content. It will mean that there will be more log-ins the same way that you have to log in at times to get access to like The New York Times or whatever. Most websites will move to that sort of model. And when that happens, we actually will get more robust data in that environment. I've spent a bunch of time, including some of -- many of our team with people at Google and in the industry, trying to help talk through 5 steps ahead and not just responding to the pressures of today. I think it's a bad bet to predict that Google will be irrational in the long term on this. So I don't think that any of the more draconian moves that people hypothesized they will make are likely just because they're under more scrutiny at this moment. But I think no matter what, The Trade Desk is going to be better off in the future as it relates to being able to use data around each of these. And that's because strategically, we've always said, let's just do the right thing. Not let's start with what's legal and go up to those limits. Let's start with what is a fair quid pro quo with the consumer, what would we want done for us as consumers and let's start there. And then let's also, of course, make certain that we're compliant with laws and regulations in both the letter and the spirit of the law. But by always starting with do the right thing, we think we've done what benefits publishers where they get more of the money, it benefits advertisers because they're only focused on what's relevant and effective and consumers see fewer ads, and they're much more relevant while respecting their privacy. That end state, I think, is inevitable and anybody who tries to stop it is going to get hurt, whether they're as big as Google or not.

Okay. So I got a couple on China here, Jeff. There's a lot of interest in China. Could you bring -- provide an update with bringing Western companies advertising to partners in China? And China has always been an area of potential growth for many platforms like The Trade Desk, but many have experienced challenges breaking into the market. Could you comment about your position in China's market? And how do you plan to continue to address that market? And I would add one because of COVID, it feels like our relationship with China is degrading weekly. So let's like do theirs first, but I'm really interested in whether you think if there continues to be difficulties between a U.S.-Chinese relationship from a foreign policy point of view, whether that negatively affects you. But you can do that one first.

Yes. So I was -- I've never been more bullish on...

On China?

On China than I was in January, where we've established some really important partnerships. We've hired a number of people. So for -- even though we talked about it a lot, we had single-digit number of employees, I don't know, 18 months ago. So now to be exponentially bigger than that and I was in China in January, just really optimistic about what we're seeing in the marketplace. Of course, COVID hit there first. They were our first -- Shanghai was our first office to work from home. Hong Kong was our second. And those cities and the way housing is set up in both of those, it's hard to work from home. So it definitely hurt and set us back. But they're on the uptick, I'm really encouraged by what's happening, but it's going to be a slow road. And there is a lot that has to be done in order to win in China. It is a very difficult market. And the way we approach it is to be deliberate and spend a lot of time trying to explain our value proposition and that we're not trying to take something from China. It takes a lot longer to win trust as a company that's headquartered in America, which is maybe a segue to your question on the more macro. I agree with you, I do think that on the macro, especially in an election year, or where maybe it's politically rallies a particular base to just talk about China in a negative light. That's not good for our international relationship with China. That said, it is huge. Our dependence on China globally is massive. Their dependence on us as the greatest consumers in the history of capitalism is also massive, and so those -- that codependence can't be stopped with political rhetoric. And perhaps, the sentiment can get hurt a lot more than actual policies. It doesn't mean that, of course, you can't tax trade, which has obviously happened, but it will ultimately hurt the global economy if that's done in any extreme way. And I just don't think anybody is going to win from that. So I just don't think it can be stopped. So for me, it's business as usual, but it requires a lot more sensitivity than it would, if things were a little bit different between our two countries.

Okay. Let's do another one. Is there a point over the next intermediate period of time when you'll have a good idea of what the underlying growth rate is for The Trade Desk in the new normal? That's a good question.

Yes. So what I encourage our team, including on our all hands just a few hours ago, to look at is what I call the recovery curve. So whether it's V-shaped or W-shaped or U-shaped or whatever other letter you want to throw at it, there is this part where we climb out of a trough. And on that climbing out there, every brand, every advertiser is at a different part of that line. If you're in live sports or events where you have to put 100,000 people in the same place, you're probably at the end. If you are in travel and you have to put a lot of people in a tight space like an airplane, you're probably near the end. Now automotive, probably a little sooner than that. And CPG and some of the brands that actually help, they're already spending aggressively. So I encourage them to think about where everybody is on that continuum. At the risk of speaking about things that I know less about, which is like what is the nature of the virus going to look like, I do think that we get back to normal at some point. I don't know when that is. But whether -- that's really just determining the slope of this line. But we are social creatures who want to go to events and have common experiences and those sorts of things will happen again 1 day. It's just a question of when we stop this virus and how we stop it.

I know you're CEO, so this might be too narrow for you. But do you have a sense of what verticals are coming back now? Like I know, obviously, CPG has sort of held up well. Are there anything that actually plummeted and now is coming back? It feels like fast food has redone their promotional materials for COVID sensitivity. Do you have a sense for verticals that are coming back?

Yes. So that is -- those are places where we've seen really strong recovery. I mean, of course, health and fitness has done really well and whether that is on the pharma side, which has done very well during all this or that's on the fitness side, which is also not early on, but by April, definitely contributing to recovery. There's -- I'm trying to think of what else. I think auto is around the corner. There's a lot of prep work happening in that space. Some might look at it with saying they're being optimistic, but the prep work is real. Yes, some fast food in terms of restaurants, they're on the earliest part of it, I think. And I know I'm leaving some off that I don't think about -- technology has done great. Tech has done really great during all this and accelerated spend from lows.

Okay. Just talk about -- could you talk about the key structural risks for your business, in particular around intermediary fee pressure and competitive dynamics?

Yes. So because most companies in ad tech were not -- or are not profitable, a downturn like this can accelerate pushing players out of the space. So every day, I get asked to do a convert. And every day, I get asked to buy a company. So those pressures have definitely been put on companies in ad tech. That to me, just thins the competitive landscape and makes it easier for us to win. I think pricing is more a function of how do we justify our relative value and are we providing more value than we charge, especially because our approach is one from objectivity. So as long as we continue to make things measurable and comparable, we'll have good sight into what we can afford to charge. And for now, I don't see anything that forces that to change in any dramatic way.

Okay. All right. So the risks are the same or maybe less because some of your competitors are going to get shaken out because you've always made money, which is -- and your balance sheet is fantastic. There's one here about major seats. What are your major CTV inventory sources? And is that changing? I assume it probably is owing to COVID. Does it resemble closely the overall market or under and over index? Yes. Why don't you answer? I have -- yes, local versus national? And how is that changing, in your opinion, owing to COVID?

Yes. So to me, it seems that the content that is coming online first is national and it is sort of the bigger content or those that you would see in what we talked about a few years ago in the skinny bundles. Those are the places where the biggest media companies have tried to find an outlet. That's what's in Disney+. That's what's in Peacock. That's what's in CBS All Access. And that's very good for us. We are seeing a pretty substantial acceleration in the access that we have to that. Now I'll point again to the unified yield product at FreeWheel. So what was happening before is like if the ads were showing on 2B, for instance, I would get access to 2 minutes of that roughly 8 that happens in an hour or 10 minutes. I get access to 2And now over the last few months, in some cases, we're getting access to all 10 minutes, and...

That's a big deal. That's a big TAM expansion.

It's amazing. And it's not that we have access to new shows necessarily. It's just that we're getting access to all the ads in an ad break. And so massive expansion there, plus more coming online. The stuff that we see less of that's in linear television is like, to my knowledge, the game show network doesn't have an OTT offering. A lot of those that are in more of the long tail are going to struggle. They don't have original content for the most part. I think those business models are under more pressure in linear. But surge in inventory from really everywhere where there's premium AVOD.

Okay. We're going to go to our last question. I'm going to let you have the last word. 3 key reasons you think investors should be buying Trade Desk today?

Very good. I don't usually end on this. And I think this is great. So first of all, we are in this for the long haul. So we have a massive TAM at what will soon be a $1 trillion industry. And in the same way that we don't talk about stocks as being programmatically bought or real-time stock buying, we just say we're going to buy stocks. And of course, we use electronic pipes, and of course, there's good price discovery, and of course, it's near real-time as it relates to execution. That exact same thing will be done in advertising. We think -- and maybe this is number two, the companies that are going to do the best in that environment are those that have a pitch of objectivity and no walled garden can have that pitch. And when you have that level -- that pitch or that level of objectivity, there's no place where you benefit more than in number 3, which is Connected TV. So we're just an amazing play on Connected TV because of the fact that we can objectively help somebody choose between CBS or NBC as it relates to finding their target audience. And if we did nothing else than control reach and frequency, we would earn our keep in the CTV world, and we do far more than that.

That's excellent. Well, I really appreciate you being with us today, Jeff. Thanks for your time so much and really appreciate your answers.

Thank you, Laura. Really appreciate this.