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

To the continuation of day 2 here at the TIMT Conference. My name is Matt Swanson, I'm a tech analyst here at RBC. And we are delighted to have Trade Desk and CFO Laura Schenkein. Thank you so much for joining us.

Thanks for having me.

So I think any ad tech conversation kind of starts and finishes I feel like with macros. And we're coming off another challenging year, which feels very repetitive for the last 3 years. Given your current guide and the comments you made on brand advertising, what do you think of the current environment? And then the way we always love to look at it is relative to TAM growth. So how would you explain your relative durability? We've seen the results compared to peers.

Yes. That's a good question. I mean I look at us coming into this year growing in the low 20s. And every single quarter of this year through Q3 having a degree of acceleration, where we landed at 25% in Q3. Going into Q4, we saw that same strength. And then in the second week-ish of October, we saw some drop-off in some of our verticals. And of course, thought about that, thought about the stabilization going into the first week of November and built that into our go-forward guide that we put out when we said we'd deliver at least $580 million in revenue. So I look at that and I say -- I look at it in two different ways. I say, when the economy is booming and when ad spend is growing and when our part of the TAM is growing, we regain big dollars. And those big dollars show up in our revenue growth. When things are contracting, our clients get more data-driven. They want to see the outcome of every dollar that they spend. And even though the dollars that they're spending are smaller, we're gaining share in that environment. And that's happened coming out of the pandemic. That happened -- I mean this business was launched coming out of the global financial crisis. And when I see that arc, it gives me confidence obviously, in the numbers that we put forward for Q4, but also gives me more confidence going into 2024 that regardless of what the macro environment is, we're going to be gaining share. And when there's that upswing when things pick back up, we're just positioning ourselves to gain more of the bigger dollars as they come.

And building off that question. I feel like something we've heard Jeff say in a lot of these conference calls is in the last 2 years, he feels like you've gained more market share than maybe any time in the company's history. So doing those prolonged macro headwinds, it can kind of mask those market share gains, those strategic gains, I call it, larger slice of a shrinking pie? What are some of the advancements maybe you've made in the last 2 years, you're most proud of? And how might that show up more evidently, let's say, in 2024, if the macro improves?

Yes. So there are a couple of things. I mean, first, I know we didn't launch our CTV product in the last 2 years. We launched it towards the end of 2016. But if you think about the arc and think about, from my perspective, the fact that we become the place to go for every incremental dollar that is flowing into fully decisioned programmatic CTV, I'm extremely proud of that. I think that, that's become more apparent over the last 2 years. And it's -- as we've connected to every major content provider out there as they've all adopted UID2. And that we are the place to go, the place on the opening Internet and the party that is driving the ability to have identity in that portion of the market that never had cookies to begin with, I say, that's a huge win. UID2 in itself, just being able to create identity for the open Internet, should Google takeaway cookies starting in Q1 of next year, making sure that the ecosystem has an alternative and putting that out there where it's free for everyone to use, and it's just in the interest of the open Internet and our advertising clients to me is a huge win, just seeing the adoption that we've got, not only from the CTV content creators, but from the infrastructure of the Internet, the Snowflakes, the Salesforces, et cetera. And then also from 80% of the data partners out there and everything, a huge win. And then finally, if you remember, we only launched our partnership with Walmart in the retail media space in like Q4 of 2021. So we are exactly now at the 2-year mark for retail media. And I think that has opened more budgets to us in a way that was never possible before. And we say it's likely exiting the year going to be our fastest-growing segment. And even with that it's so small, and we're just at the initial phases. But the fact that we've got measurement in retail and a lot of fires burning in that area is -- it's looks like those three things that I think I'd point to.

Yes. And I'm sure for everyone here in the audience through two questions, you can already tell that for a CFO, and especially for a newly minted CFO, Laura, you have a lot of operational expertise when it comes to Trade Desk. So maybe going into that unique perspective, you joined Trade Desk when it was over 60 people a decade ago. With that backdrop, could you just kind of give us some context of how you've seen the advertising industry and the company evolved in the last decade? And maybe specifically, when you're thinking about the competitive environment, in the sense of like where net new dollars are coming into Trade Desk from, whether it be displacing competitors, or formats, or just kind of how you think about that?

Yes, that's a really good question. And I don't know, maybe too much info, but like I'm going to start with the company part first. And when I first started talking to The Trade Desk almost 10 years ago to the day, I was at another small tech company, and I was saying, "I don't think this is the right place for me to be. What am I looking for next?" And what I was looking for was a huge TAM. I was looking for an amazing team of people that I really wanted to work with, whether we failed or succeeded. And I was looking for a company that led with its technology, not with a sales team because I really think a sales team can sell anything if it's the best technology that's out there. So when I think about the company today, I think all of those things are still true. We've got the huge TAM. We are addressing a large part of it. I think we have the most amazing team in technology, not alone in ad tech. And with all of the innovations that we've made in our platform over time, including Kokai, which is the biggest that we've ever done in my 10 years here, it's -- what I was looking for and what I joined, there's a reason I'm still around a decade later, right? So I think the difference is when I did first joined I was like, "I don't know if we're going to exist 6 months from now." Because the Lumascape had all of these little icons on it, and we were one of the last DSPs to actually go to market. So when you're joining a company you're like, I don't know, there's MediaMath, there's XY -- there's TubeMogul, there's Dataxu, there's this, there's that. That then we were taking share as we grew from a lot of those companies. Now to the second part of your question, we're not taking share because most of them don't -- none of them exist anymore or they exist in very like shadows of their full results, right? So now where we're getting dollars from are the incremental dollar that's going from linear into digital, into programmatic. Of course, just as the market is growing, we're capturing dollars from there, too, but it's really more about the shift of that large $800 billion growing to $1 trillion TAM that is fueling our growth.

And speaking of kind of those like additional growth drivers, I think at one point, you mentioned to me that you had visibility into every dollar in and out of Trade Desk. Kind of it's probably easier when it was 60 people than it is now to keep track of all of them.

It is depressed. But, yes.

But one thing when I talk to new investors to the story, they were kind of surprised by the lack of international revenue, just given the scale of the company. Could you talk about the investments you're making internationally? And how we should kind of think about this in terms of dollars flowing out in investments and the dollars outflow back in revenue when we kind of look at your outlook here?

Yes, it's a good question. So when I look at international, year-to-date, I believe our international business is about 13% of our total gross billings, right? Last year, it was around 10%. So I'm like, "Okay, we're making gains." At the end of the day, 70% of the advertising pie is outside of North America. So there is a ton of growth to be had outside of North America. I wouldn't -- I don't look at the 13% as a failure. What I look at is CTV and retail media being our largest growth drivers and being North America centric. So I look at the growth rates in North America, and I say, "It makes it harder to balance it out sooner than it would later." We do have, to your point about like, what do you invest internationally versus what do you invest domestically, we have -- we look at productivity for all of our business teams, every inventory and data partnerships person that we layer on board, and it's going that there's like the shape of the curve that we expect each market to follow, not even each region, but each country. And we look at that and we say, "We expect to gain operating leverage out of those countries as they move up the curve. We're very prescriptive about how we look at that." And to me, it's just a matter of the rapidity of growth of that 13% relative to the tidal wave of CTV. Is it more concentrated in North America than elsewhere? And does it make it harder to balance that out in the medium term?

Yes. And I mean that's a perfect kind of segue into the next section year, which is that flood of CTV. And maybe thinking about in terms of expenses you have to put in now to be prepared to fully realize the opportunity that's coming. Could you just talk to us a little bit about this dynamic? And how you think about the timing of the CTV opportunity? And I guess, is it right to think of it as a near term, almost like a headwind on the expense side that doesn't have like the full offset of revenue?

Yes. Luckily, no. So we built fully into our expense base. Our -- all the engineers that are working on Kokai. We've got engineers working on our forward market products. AI is foundational to how our company was built, and that is fully built into our data and delivery and engineering costs and everything like that. So when I think about our operating expenses and our ability to capture the CTV opportunity ahead, to me, it's more about how much do we fund head count, which is the largest portion of our growth relative to revenue growth and how and where are we going to gain leverage there. It's not about any step-up in operating expenses or costs or investment because we've been doing it for years and plan to stay the course.

If I could just ask one follow-up on the flood, what do you guys think are like the earliest signs that the dam is cracking?

I think we need to see the tens of millions of dollars that are done in the traditional school upfront come through our forward market product, where instead of committing the $100 million, I see, I don't know, $30 million, $40 million. They're like, "No, we're not going to do that direct. We see in your platform, we're forecasting where that will be spent. We're forecasting against an audience. We've got conviction and we've got the confidence of the Disneys and CBSs and Warners and everyone out there that we're going to spend that." And I think when I start to see that come through, I think that's the beginning of the flood.

And that's a good call out for your product event that will come early on next year to talk about the upfront product, right?

It will. That's a multiyear build. That's the only caution I give. So like I don't expect that to come Q1. If that would increase, that what I mean, I'll take it, but that's optimistic. Yes.

One area that always comes up in conversations with investors and also your peers, is your take rates?

Got you.

And it's brought up -- we'll call it, there's some envy, there I think, at times, but I get questions about the durability of a 20% take rate. And can you kind of take us through the variables that go into the take rate fluctuations? And you always talk about kind of that 100 bps on either side. And how do you think of balancing like pricing and volume?

Yes. That's so many, Matt. 7 years into being a public company, I thought I'd get to stop answering this question since we've shown such a durability, but -- I just look at it like big picture. We've been public for 7 years, even for the years before that when I was working here, right? Half the years, it's been up. Half the years, it's been down, usually within tens of basis points, right? And we've always communicated that 19% to 20% is what we think is a fair cut for buy side for the value that we're delivering. And I have, at this point, absolutely no reason to believe that for the foreseeable future that is going to change. When I look at that, I say, why? Like if you're a big customer and you're growing really quickly, yes, you're going to ask for volume discounts. You would be foolish if you not to. And for every single deal that we do, that's material, we're talking to our customers and we're trying to understand the trade-offs between accelerated growth and use of value-added services and other things. But what we're also doing is we had Next Wave, we had Solimar, we have Kokai, and we're building more and more and more and adding more value. And we always go to market. And we're like, we're not the cheapest out there. It's not a race to the bottom. We're going to be paid for the value that we're adding. And that when you combine all of that together with the historical track record, it gives me the confidence to say like we're managing to be in the 19% to 20% and our clients are accepting of that.

And if I can just ask a follow-up just because of your unique kind of historical look at it. When you think about the value you're delivering for 20% today versus for 20%, 7 years ago, that probably gives you a lot of the confidence too?

Yes, we had no CTV. We had no audio. As the data products we have, we didn't even know would exist, right? Like -- and you add in retail media, we're giving away measurement for free. We're allowing people to tie the entire funnel to that attribution at the end. And we're not charging more for that. We're keeping it the same. So...

Maybe that should be the argument, that you've actually held prices the same. And that's the surprising part.

We do have that. Well, that's the harder sell than you would think with some big customers, but yes.

So speaking of some of those data products, let's talk about the launch of Kokai. And really, how important do you think this platform is? For two secular growth areas we'd love to talk about, CTV and then retail media. And maybe kind of how those two things maybe could be a little bit interconnected in terms of the value proposition?

Yes, definitely. So I think Kokai just fundamentally is important to both of those vectors and to the company at large. What it's doing in broad buckets is making it so data and specifically first-party data is able to be used front and center as a starting point for every campaign. So make everything data-centric. We are also making it so that in the view and in the back up build to Kokai, we have distributed AI across the entire platform. So you make a change to one part of the campaign, one part of the ad group, it doesn't roll through to all the others, but it's infinitely more powerful than it was in our current way of buying. We're making sure that measurement, whether it's the retail sales index or other tools that we're rolling out also is front and center. And then it's a change the UI and UX where it is just fundamentally different from the current way of doing business, and it is making the workflow so much easier for our trading clients and it's making it so much easier for them to do the right thing. Doing the right thing in our case is bidding on open market fully decision spend. It's having an audience-centric first place to buy. It's getting that seed audiences -- first-party seed audiences that will launch off take to the campaign, and all of that is changing. When it comes to CTV or when it comes to retail media, because the algorithms are more powerful, because the way of buying is more intuitive, you're going to have CTV buyers who are leveraging retail data or retail -- I don't even know what you're calling -- people whose stock SKUs and retailers who are -- for the first time ever, using that retail data to find their audience on CTV and to drive them back to an Albertsons, drive them back to Kroger or drive them back to a Walmart. So it used to be that the shopper marketing teams, shopper marketing budgets would be siloed. You'd have your person at a candy bar shop who is affiliated with Walmart or affiliated with Kroger, and they use that data and try to optimize and try to target people to get them in the store. Now they're going across the entire open Internet inclusive of CTV, and figuring out what works in order to drive actual sales and also figuring out how they can tie that top-of-the-funnel brand advertising down to that last click attribution. So all of that gets infinitely stronger with Kokai.

Yes. And I mean to your point, it's always been that CTV is a premium product, a premium price point, but the challenge is it's tough. And so bringing that attribution to allow for ROAS and for people to be able to assign real value to it is going to be really a key to the long-term CPM stability.

Yes. I think also just key to CPM stability in connected television specifically, it's not only stability, but the content creators need higher CPMs in order to fund their businesses. And we've seen historically that fully decision biddable, programmatic, it's a win-win for both our clients and for the CTV content creators because our clients are willing to pay more when they can address a household or a device within a household than they are if something is blasted just to a demo area. So they pay more, content creators create more, get more. And at the same time, our advertisers are getting a much higher return on their ad spend.

And then maybe just one more follow-up on Kokai, how do you think about the transition to Kokai? Especially in regards to like Solimar is a very well-received product.

Yes. Jeff and I joked, it's not like a Microsoft thing where you send out a -- nobody sending out floppy disks anymore, but like where you send something out and you have to yank out the old version, you put in the new version, you better hope you like it and that it works because you have no recourse, if you don't. This is -- we're rolling out in exactly the same way that we did Next Wave, then the way that we did Solimar, where you can switch to the new one, we encourage you to. And you're going to want to because there's a lot of bells and whistles on it that we're not including and we're not upgrading in the old platform. But with a toggle, you can go back to the old platform if you want to. And it's just an education program where, with the other two, it took, what, 6 to 12 months to get them all transitioned over. You have some early adopters. You go to the middle curve, and then there's some laggards that you have the client service team work on a whole lot. I expect it's going to be the same thing with this group. There's not only going to be a learning curve. The UI/UX is a periodic table. Some people like chemistry, some don't. And we've seen even when they're saying, "I don't like chemistry. Why would you have this organizing principle?" We take them through and they were like, "Oh, this is going to be way better," right? But there's a learning curve, and we'll expect that over the course of 2024, we get to full adoption, much like anything else. But without the disruption that comes from yanking something out of the box and maybe having something totally hate it and just be angry.

Double-clicking back on to retail media. It's a term that comes up in like every transcript across the space. And I feel like it's used a lot of different ways. Can you just talk about maybe Trade Desk's strategic road map around retail media? And what the long-term plans are for the market?

Yes. So oddly enough, when I think of the road map for retail media, it's not fundamentally different from what we've done over the last 2 years. So we got Walmart up and running. We've then gone and stock the shelves with Albertsons, Krogers, et cetera, et cetera, Dollar General, Schwarz Group over in Europe. And our philosophy is to continue stocking the shelves with more retail data, go into more verticals, whether it's retail, we were talking about the gap earlier today, or H&M, or going into pet care and whatever else we don't currently have stock on the shelves. But ultimately, it's the same exact playbook where we want to get more advertisers using retail data, applying it to more impressions and then measuring across the entire funnel. So we'll work to get more advertisers data included in the retail sales index and things like that, but there's nothing that fundamentally needs to change. We just need to keep selling it to our brand advertisers. And increasingly because we've gained access and conversations to whether it's e-commerce marketers, shopper marketers, trade promotion marketers at all of the big brands, just explaining to them that this exists and that they can tie the full bundle together. It's just continuing to go down that path.

And then one tech team that we kind of have to buy default, bring up in every meeting at this conference, is generative AI. And whether it be -- Trade Desk and maybe it's more AI with Kokai, but also how you see it? We're starting to hear more and more about need for advertising content and some of the challenges that brings in. So either how it impacts Trade Desk or how you see it impacting the ecosystem?

Yes. So what I think about it is you hear a ton of buzz out there about gen AI, and it's mostly focused on language models or it's focused on images. I think what's lost in the conversation is that you point AI at a data set and have the data set iterate and fix itself and make better recommendations, and it's almost easier and more powerful. That's what we're doing, right? We've got our bid stream, we've got a ton of data, and that's what our AI is focused on. So for us, that's a huge win, and that's what Kokai is like ramping up. When it comes to gen AI, of course, there are interesting ideas out there in terms of creatives, And I think, ultimately, when that technology evolves, that could be something that helps us as we move down to the medium-sized and small-sized advertisers in the SMB. Right now for our large clients for the P&Gs and big ones out there, they're like, "No, we're good on our creative," right? But there are exciting things that are happening out there. It's just for us, at this moment, it's pointed on the data and make recommendations, better make campaign outcomes better and spin that flywheel faster.

Yes. And kind of building on that from some things that I've heard at this conference and before, both Adobe and Shutterstock have talked about this idea of one-to-one marketing, and the ability to create enough creatives that you can efficiently have an image that's separate for you and separate for me. But the only way that works is that they can tell the difference between me and you. And that seems something that Trade Desk could be well suited to assist in.

Yes. Definitely.

I guess on a more ad tech focused macro theme, putting aside whether or not Google actually will deprecate cookies. Can you just kind of walk us through what you think the scenario would be if they did? And kind of how Trade Desk would be impacting? And also just kind of how you think the ecosystem would be impacted?

Yes. I mean I don't think it will be great for the ecosystem. If Google takes away cookies, yes, I think it would really hurt the long tail of publishers and their ability to continue, whether it's to create news or support their sites and things like that. When I look at it from the Trade Desk perspective, I'm like, "We come out stronger." I think about that because I think Jeff mentioned in the last -- the call last week that 50% of our CTV impressions have UID2 on them. We've got adoption from the infrastructure of the Internet. We've got 80% of our data providers. We are effectively creating an alternative identity currency. And as long as you have data, as long as you are applying that first-party data to the entire open Internet, and as long as QPS is up at 12 million, 13 million, and we're only buying a tiny fraction of it, there's going to be identity across not only CTV, but across display and audio and other parts of the authenticated open Internet. So for us, we look at it and we say, we think it's terrible for that long tail. I think what will happen is if they were taken on bulk all the way, there's going to be a long tail that's scrambling to figure out their identity strategy and we have a solution for that. But it's something where I look and I say, parts of the ecosystem, including audio and CTV, don't use cookies anyway. On the parts that do, we've got such widespread UID2 adoption and are continuing to push it that we're fine. It's more like there's a lot of pressure on Google and a lot of eyeballs and that's a big thing to do to the open Internet to take away that identifier.

That's really helpful context. I guess zooming back on Trade Desk specifically, I mean you've shown a great ability to show durable growth, right, Rule of 40 -- I mean Rule of 60 company and higher in previous years. When we think about achieving that balance and maybe like how it's affected by the current environment, like how do you think about balancing growth and profitability?

It's something -- it's like the baton, I don't want to say the bane of my existence, is what I focus on almost every second of every day when I'm not up on stages like this. So I'm working with the entire team to think about resourcing relative to growth. And for us, head count is the majority of our costs. So when we're talking about where we're going to invest and where we're not, it's not like we've got funds of expenses outside. We've got some data -- we got to have to run our bidders and stuff, so we got data and delivery. We've got a marketing budget. We pay rent, right? There are very few things outside of our investments in our employees where they're focused, where they are geographically, et cetera, that are the needle movers in terms of our investments. So when I look out at the future, I say, we had a huge hiring year in 2022. It was a catch-up because we were very low in the previous years, and we grew over 40%. This year, we're growing 15%, 16%, right? And when I look out at 2024 and beyond, I'm looking at every part of the business and working on productivity metrics with every leader in our business to say, not only like what would the incremental person inflect, but let's look at the existing team and let's understand exactly what they're doing and where the incremental need is coming from. And as I look out in the future, I see the opportunity to grow revenue faster than headcount growth. And that's what we're working through right now, obviously, for 2024, but I am equally uncomfortable that we're over versus underinvesting. Like I just keep staring at it and saying, I don't want to give up $1 of the top line by being too singing on the bottom line and finding that right balance is where I'm focused, Jeff is focused, Tim, everyone. Yes.

We've got about 3 minutes left. Are there any questions from the audience?

[ Am I bad though? ]

Well that comprehensive. All right, Perfect. So I guess one question. I've been kind of combining two.

Okay.

So when you think out to the next let's call it 3, 5 years at Trade Desk, what's the opportunity you're the most excited about? And then as the CFO, what's the biggest strategic decision you feel like you have to make to be able to achieve the things you're most excited about?

Yes. It's a good question. To me, it's just like we're TAMs $800 billion, growing to $1 trillion. We are taking a tiny fraction of that. And the operating assumptions of this company from the day I joined through today is that we don't need to win the whole TAM, but we're going to gain more of it as more and more of it transitions over into our way of buying. So when I look at the next 3 to 5 years, I just say, the opportunity is ours to take. We need to continue working on the CTV side. With all the content creators, we need to make sure UID is wildly successful and EUID too. But when I look out over the next 3 to 5 years, I just say when you're operating in a $1 trillion TAM and you're adding to it retail media, you're adding to a trade promotion dollars, to me, it's all about execution. So what I focus on is the culture of the team. Because also, like when I said, I joined this company and I wanted to join people I actually wanted to work with, like that's huge. And it's something that Jeff and Dave and all of us were focused on is just saying, I don't think you win if you have a team who's not having fun doing it. It's way easier and it's way more fun if people are really invested in that growth. So we're focused on the team. We're back to we're a technology-led company, not a sales-led company. So as long as we continue to innovate on the product, I don't think Kokai is the end of the world or end of the road for our product, right? It's going to be 2, 3 years from now, we're going to have the next big iteration of this platform and making sure that we say far ahead of the competition in terms of what we're offering and its effectiveness, I think, is of utmost importance. And then it's just continuing like retail media, CTV, they're scratching -- a tip of the iceberg of those and just making sure that we stay on top of leadership and taking the incremental dollar or at least a portion of it that's flowing from linear and from the old ways of buying into programmatic.

Yes, I've got a question. What do you think the walled gardens from last...

Which one? I'm just -- I mean we've got some knocking on the door who would like us to buy on them. We're just -- we're at a point where we're very thoughtful about our positioning in terms of being the buyer of premium inventory versus being the buyer of cat videos and scary stuff. So we -- for the smaller ones, there will be opportunities, and we'll have to be very choiceful about whether we take them for the big ones, whether it's a Meta or a Google. If somebody opens up and says, "Hey, you can buy on YouTube tomorrow." And that's a conciliatory chip that's thrown on the table in order to say, "Oh, now we compete fairly, I'd say, I don't know if I want the cat videos." So we have to also be prescriptive about that, but I have no idea when.

Well, we are out of time. That was a fantastic half hour. Thank you so much for joining us.

Thanks for having me.