Good day everyone and welcome to today's The Trade Desk Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] It is now my pleasure to turn the conference over to Vice President of Investor Relations, Chris Toth. Please go ahead.

Thank you, operator. Hello and good afternoon to everyone. Welcome to The Trade Desk third quarter 2020 earnings conference call. On the call today are our Founder and CEO, Jeff Green; and Chief Financial Officer, Blake Grayson. A copy of our earnings press release can be found on our website at thetradedesk.com in the Investor Relations section. Before we begin, I would like to remind you that, except for historical information, some of the discussion and our responses in Q&A may contain forward-looking statements, which are dependent upon certain risks and uncertainties. In particular, our expectations around the impact of the COVID-19 pandemic on our business, the Q4 holiday season, and results of operations are subject to change. Should any of these risks materialize, or should our 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 referenced in our press release and included in our most recent SEC filings. 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. I will now turn the call over to Founder and CEO, Jeff Green. Jeff?

Hello everyone and thank you for joining us. We are excited to announce the results of our third quarter. Despite the headwinds of a global pandemic, we had healthy growth in the third quarter, up 32% year-over-year, far surpassing our own expectations. As we discussed, 2020 is a year where agility matters more than ever. In this environment, marketers have come to more fully appreciate the power of data-driven advertising. And as that happens, we are becoming indispensable. We have developed closer relationships with the biggest brands and agencies in the world, and we are winning more business, with both new and existing customers. In addition, we continue to see rapid growth in key channels, such as connected TV, which grew more than 100% year-over-year. This was a very encouraging quarter, not only in terms of our revenue and market share growth, but also what it signals about our growth opportunity moving forward. While our growth is very encouraging, we are still operating at a time of great uncertainty for many industries, but even in the midst of that uncertainty, we are clear that our role is to help our customers drive economic recovery. Advertising is an engine of economic growth, and our customers know that their campaigns can fuel growth and drive market share gains for their brands. And because of that, during times of uncertainty, they become much more deliberate. That's not to say this is a straight line recovery for our customers. It's not. Often our customers are still being hurt by the global pandemic and the economic consequences of most people staying home. But while we are a long way from being completely out of the woods, I do believe that in 2020, so far, we have gained more market share or said another way grabbed…

Thank you and good afternoon, everyone. We continue to operate in an uncertain and challenging environment. However, as Jeff mentioned, we are seeing advertisers accelerate their shift to data-driven advertising in 2020. I'm really encouraged not only by this shift, but also by our company's execution during this period of uncertainty by working closely with our customers and our results demonstrate our solid operational performance. For Q3, revenue was $216 million, representing an increase of 32% year-over-year. This represented a 45 percentage point acceleration from Q2. We benefited from several trends that helped us significantly exceed our expectations. One, existing advertisers shifted more spend to our platform during the quarter. This included CTV, which offers the ability for advertisers to apply data to their TV ad campaigns in ways that are simply not possible with linear. Two, we want a significant amount of new business from our competition, enabling us to gain share. And three, political spends steadily ramped up throughout the quarter and was particularly strong in the month of September. With the strong top line performance in Q3, we've generated $77 million in adjusted EBITDA, or about 36% of revenue. As you have seen historically, when we outperform on the top line, we often see that outperformance dropped down to EBITDA, which it did in Q3. EBITDA also benefited temporarily lower than expected operating expense growth. From the channel perspective, in Q3, we continue to see improvements across all of our channels. For the quarter, spend in our mobile video, which includes connected TV, display, and audio channels all grew on a year-over-year basis. Connected TV spend was the strongest, run over 100% in Q3 on a year-over-year basis. Geographically in Q3, similar to last quarter, North America represented 88% of spend and international represented 12% of spend.…

Thank you. [Operator Instructions] And we will take our first question from Michael Levine with Pivotal Trade Group. Please go ahead.

Thanks for the question guys, and terrific results. So, just to dig in a little bit deeper, Jeff, on your comments around CTV, which were super helpful. Two parts. I mean, one, I'm curious if the weakness in linear sports TV ratings actually led to some acceleration. And I guess to secondarily, as your thinking about 2021, anything you guys could basically do to frame how investors should basically think about CTV growth?

Yeah. Great. First of all, thanks for the question. Of course, there's no place in our business that we're more excited about than in CTV. And I think, it's difficult to argue that we didn't benefit from the struggle that live sports has had in 2020. In 2019, we just had this amazing sort of arm and arm tour with ESPN and just talking about the benefits of live sports. But while time consumption has gone up across the board on connected TV, consumption on both linear, as well as live sports has gone down dramatically, live sports suffering the most. When we asked in a survey, what was the number one reason that people hung on to cable? 60% of consumers said the reason for hanging onto it was live sports. And we think that that's the reason why when we asked them about cord cutting that they're doing that between two and a half and four times the rate that they've been doing that in the past. And that's in part because of just live sports being less compelling when there's not a crowd and it's not the same in this environment. So, we've definitely benefited from that. Will you remind me of the second part of your question?

Just some initial thoughts -- just how investors could think about the opportunity for CTV in 2021.

Yeah. Absolutely. So, the first is just to touch on a little bit the upfront. So, this year, the upfront, which is a way that a lot of advertising spend in TV gets allocated was, especially weak, because just a lot of the decisions and meetings take place last week in March and first week in April, that was the moment that perhaps with the most amount of uncertainty in the global economy and certainly in the media landscape. I think most people -- part of the reason why I quoted Marc Pritchard on that really bold statement that he made that they plan to skip out on upfronts going forward, is in part because of the amount of uncertainty that the media landscape faces continuing going into 2021. What I think all of that means is the way to make television work and scale is going to be to move more to connected TV. I think it means that there's going to be more sold in what is effectively a spot market instead of on upfronts and all of that bodes well for us. That said, I think it's also important to note that we're investing in product to help digital participate in a new version of a forward market. And we're working with multiple players in the premium content space to define that. So, incredibly optimistic about our prospects in 2021 because of the secular tailwinds we have in TV for a variety of reasons, including the macro environment.

Terrific. Thanks again, Jeff.

Thank you.

Our next question from Shyam Patil from Susquehanna. Please go ahead.

Hey, guys. Congrats on the impressive results. I have a couple of questions. First one, Jeff, you talk a little bit more about how you're thinking about Apple's upcoming IDFA change and how you guys plan to manage that change? And then Blake, I know you're not providing 2021 outlook yet. But are you able to talk a little bit about how you're thinking about areas of investment as well as how margins could trend next year? Thank you.

Awesome. I'll take the first one and then Blake, if you want to take the lead on the second one, that'd be great. So, first, I'd like to answer the Apple IDFA question in two ways. First, let me just talk about from our company perspective, and then I just want to talk about it on behalf of the Open Internet and bigger perspective. So, about 10% of our spend uses IDFA, and because we've had limited targeting on that 10% for quite a long time continuing to limit it or limited in a new way, doesn't have a material impact to our business. Because we're looking at roughly 12 million ads every single second, when you take a million-ish of those and say, we're going to allow less data to be used on those. We just look more carefully for gems and the other 11 million. So, I don't expect it to have a material impact on our business the way that it will others. So, when you hear Facebook talk about having a big impact, just remember they're 70%-ish mobile, not 10% IDFA so, very different impact to us. That said, I do believe this is Apple trying to mess with Facebook's business and Google's business. They're much more committed, I think, to payment than they are to the advertising ecosystem. But one thing I just think has not been talked about enough is that when you limit the ability to use IDFA by all apps, not just for advertising, but for personalization, like in Netflix or Dropbox or so many others, what that is going to lead to is a massively deprecated consumer experience where consumers are then going to be asked the question, if you would like to upgrade your experience, you have to go to settings and change the following. I believe that that is inevitable, that because there's so much advantage to that personalization and there's so many companies that are committed to doing that in a fair, equitable, responsible way, including us. I believe we've already been through this with location on Apple, and it ended up people giving consent in the places that mattered so that they could have a better experience. I think long-term, we end up with people opting into IDFA and this not being a big setback for the industry of personalization. I don't expect that to happen. But I'll just go back to -- as it relates to us, it's a small portion of our business, given our focus on connected TV and being a gateway to all channels, not just one. Blake?

Sure. Thanks, Jeff. And I'll try to address this. And then Jeff, if you want to add anything, feel free at the end. With respect to the second question on thoughts around investment and margins, maybe some contexts that I can provide them may help. Just in general, we're very excited about the investment opportunities we have in front of us, whether that's in connected TV, international identity solutions or product development, such as Solomar that Jeff referenced, our focus is to drive investment in areas that drive platform spend growth. As we as we move into 2021, there's still lots of uncertainty around COVID and the macro economy. You saw the bit in Q3 areas like support costs, travel, events, and hiring, they're generally below pre-COVID levels. We're competent that when we do return to normal, whenever that is sometime in 2021, late 2021, 2022, your guess is as good as mine on that. Our margin structure should be as good as it was pre-COVID. And over the long run, as we continue to add scale potentially slightly better. But where I'd end that statement with is that please remember that we do not manage to an EBITDA target. We have areas that we are really excited about investing in and driving growth and we're always looking for those opportunities. So, if we can invest more that will drive future growth with the right long-term ROI, I will really advocate for it. And so just -- we always have to have that balanced perspective.

I'll just add for 30 seconds. I was on the phone with some of our team in China this morning, just talking about how they are leading the world in global growth for us, they're back to the offices and sort of business as usual and having a phenomenal year for us. I definitely want to make investment there. I want to make investments in the forward market and CTV that we talked about. We talked about the momentum behind Unified ID, definitely a place that we can do more. We're planning the biggest release in our company's history next year in Solomar. There's just a lot of places for us to continue to grow. And we're still just in the very early innings of what is shaping out to be a huge game. So, just really excited, looking for places to make more investments.

Next question, Chloe.

We will take our next question from Vasily Karasyov from Cannonball. Please go ahead.

Thank you. Good afternoon. Jeff, wanted to ask you to talk about the decision to deemphasize Amazon publishing services and favor working directly with the apps. I think you announced that several weeks ago. What was the aeration now to do this a little over a year after the PMP was set up? And does that change your approach to other streaming platforms such as Roku? So would appreciate your thoughts on this.

You bet. So, first, the 2020 is the year where media does three years of worth of change in one year. So, while I had initially thought that this would last longer, I was extremely confident in it being important to our success in the short and medium term, but had less certainty about the long-term. Because of that, the partnership was an amazing success. We proved monetization on Amazon. We continue to monetize on Amazon. It's just not through Amazon published -- publishing services which it's my read that that's not the highest priority inside of Amazon. But instead getting access to the content that runs over Fire and Roku and every other device by creating closer relationships directly with the content owners. There is the same in TV, that content is king, and we continue to get closer to that content where they're more and more committed to doing yield management, either through a very close partner, like a FreeWheel or a Magnite, or doing it in some cases on their own. And we're okay, no matter what. We're sort of agnostic to how they want to do yield management as long as we plug in with them. But APS itself was less than 1.5% of all CTV ad impressions. So, meaning not necessarily Amazon, but those that came through Amazon publishing services. And so getting that more directly, it's actually better for us, better for our advertisers and deepens the relationship with the content owners. So by that measure, this was a smashing success.

Next question, Chloe.

We'll take our next question from Justin Patterson with KeyBanc. Please go ahead.

Great. Thank you. Hi, Jeff and Blake. Hope you're well. Congratulations on all the progress with the Unified ID 2.0 and getting closer to critical mass. My question is this, even with that degree of adoption there's some checks out there suggesting it's still going to be a lag time before ROI matches what previously existed under the third-party cookies. I'd love to hear your thoughts on whether an air pocket might exist? And how long you think it could take for us to start seeing the benefits of Unified ID play out both for your business and the Open Internet?

You bet. So, first of all, thanks for the question. It's a somewhat complicated question in large part, because third-party cookies still exist, right? And they will for the next 18 months or so. So, everything that we do in the time between now and the time when they go away inside of Chrome, the Unified ID -- the Unified ID 2.0 is a supplement to the rest of it. Now that said, I believe we'll replace it before they go away. So, I believe that it will be the primary way that people are targeting on the Open Internet before third-party cookies go away. But as people are thinking about, what's the adoption looked like. Just think about the fact that, that LiveRamp and Criteo, and Nielsen have a pretty amazing footprint. And when they talk about interoperability and adoption, it's effectively pooling the footprint that we have of LiveRamp, Criteo, Nielsen and The Trade Desk to start, that's just the start. If I were to give you the list of all the people in media that are engaged with us and with all of us that are working on it, are all the people on the supply side that are working on this, it's actually overwhelming to just keep up with the amount of success. I have never seen anything like this in the history of the internet in terms of adoption. And I think it's just because we got the product right as an industry where we said, okay, we want an upgrade to cookies where it's encrypted. It has a terms of service so that it actually operates better. We get rid of the cookie mapping issues. It's a simple framework for publishers that can better explain the quid pro quo the internet. We're giving consumers better controls. There's this SSO that comes with it, so that people can consent one time per app and website validate their email address one time and then have effectively a pass to go all over the internet, so, with open path. So, I highlight those four components to this to just say, it's an upgrade across the board on all of those things. And especially when you take the momentum that's already there, there's not a good reason for any company not to sign up as that it benefits from this common currency, which has every advertiser, every publisher, even the consumer benefits from that. So, I think we figured out the way to make it a win-win across the board. And that's why the momentum is overwhelming.

Thank you.

We'll take our next question from Tim Nolan with Macquarie. Please go ahead.

Great. Thanks very much. Jeff, I have a question also about Unified ID. I hope it's a simple one. Could you help us understand a bit more what your partners are doing in this effort? You've mentioned now, and we've seen the releases in the last couple of weeks with LiveRamp and Criteo and Nielsen. Maybe, is it about them helping create and build the ID itself, or is it them agreeing to make their systems work with it? Just to understand a bit more what they are actually doing with you on that. And relatedly, I think, especially when it comes to Nielsen, you're talking about measurement a bit more I think on this call than you have in previous calls, what role does Unified ID 2.0, play in actually measuring media, especially CTV? Thanks.

Yeah. So, it's -- this is a complicated question. So in the third-party cookie universe, there is all this sinking that has to happen. So, if one company -- let's just say, Google has a cookie that says, and they identify a user as user ABC, and then Facebook has a cookie and they identify that user as one, two, three, in order for them to have a common understanding of the user, they have to pin each other. And so, when you see on the bottom of your browser, all the pixels loading constantly, it's all these companies thinking with each other so that they have a common understanding of the user and create a currency around the internet. What Unified ID 2.0 does, is it replaces that where there's constantly pings happening and sinking, so that there's a common understanding of the user and replaces it with a standard that we all have. And this effectively creates a currency for the internet. It doesn't mean that we aggregate all the data. In fact, it's liberally designed to avoid that. There is this ID where there's no data per se, attached to it. And then the individual companies themselves that have in proper ways gained insight or data, then can use that in their own four walls without having to send the data to all different places. Because everybody has an interest in creating this understanding so we can stop sinking and have a better system. We basically took a recipe from the IAB -- for the IAB has said, this is what the best solution should look like. And we just went one click down on fleshing that out. And then we sent it out to partners like Criteo and like -- which incidentally is a competitor in…

Next question, Chloe.

We will take our next question from Youssef Squali from Truist Securities. Please go ahead.

Great. Thank you very much and congrats on that really impressive quarter. Jeff, I was just wondering -- so two questions for you. One, how are the potential changes in the political environment could impact -- how are they potentially impacting your ecosystem, especially around what's happening with the walled gardens, with the change in the guards, have a material impact one way or another. And then on a topic that you mentioned briefly earlier, which is China. This was a topic that you stack a lot, a lot more about. It seems like China is now on the other side of this COVID, they've opened up. Their growth has been very, very impressive. How are you looking at that business from a contribution standpoint? I think 2021 was going to be a year where China was going to be starting to basically move the needle. I'm sorry, 2020 was a year where China was going to start moving the needle for you. Well, 2021 will now be that year? Thank you.

Great. So, first as it relates to the political environment, and correct me if I'm wrong, but I assume you just mean that amount of scrutiny that -- as I call it big tack is under right now, as that continues.

Right. Right. Potentially worsens, how does that play in your favor potentially or not?

So, I don't think that it will affect us all of that much. But it -- whatever effect that has is likely to be positive. And here's why -- as I mentioned in the prepared remarks, I think adding pressure to Google and especially having lived through sort of the other side of antitrust with -- when I was at Microsoft, more than 10 years ago, the level of scrutiny that I think big tech is under is likely to make the Googles of the world slowdown, be a little more careful dot the I's and cross T's to make certain that they're not violating antitrust. It could likely mean that they make changes to pricing tactics and it could mean that they are less aggressive in going after targeting, even if it is in the name of privacy. So that only they would be the ones to target on the other side of that, if the collective Open Internet didn't work together. So, because of that pressure, I anticipate that we'll see some small benefit. But here's I think the most important thing that I can say on this topic. We were fine with the landscape the way it was. We built a business from the very beginning, that was built on objectivity and we wanted to focus on the demand side so that people knew what we were. And we were to some extent 10 years ago or rebuttal to Google's business model to be involved in every part of the ad tech stack. And instead, we just said, we were going to focus on the buy side, because with that came a level of transparency and objectivity that we knew someone in Google's position could never provide. So, if they have to slowdown, great. If they don't, that's fine. We're going to keep talking about the exact same principles that got us here, and we believe we're more likely to win now than we were 11 years ago and happy to keep going.

Thank you, Jeff. Next question, Chloe.

We will take our next question from Mark with Rosenblatt Securities. Please go ahead.

Thank you. Hi, Jeff. I appreciate all the color on UID. A lot of excitement and anxiousness, I would say in the industry, as we talked to lots of the companies involved. I'm just curious, if we think about perhaps milestones over the next 12 months, that will indicate that we are trending in the right direction here to fully replace the scale that Chrome cookies offers. Can you maybe talk about a few milestones that we should look for? And then what do you anticipate to be the primary asks of all the parties that are involved here and whether or not the bigger asks will come from the bigger publishers, if I'm thinking about that correctly? Thanks.

Yeah. So, the milestones are mostly measured in interoperability. So, as a publisher or an advertiser says, we want to leverage this to create interoperability between our ID and somebody else's ID. And there are lots of ID initiatives out there. Nearly every agency has one that they're pursuing. Many of them have been pursuing them for multiple years. Those are all different. Most of those are similar to LiveRamp where they're about data onboarding and making it possible for people to use the data that otherwise has not been. That's different than creating a currency, which is all about interoperability. So, every time you see a press release or you see somebody publicly saying we are making our ID interoperable, you're just sort of joining the circles of what otherwise would have been a Venn diagram in the cookie world to just make a bigger circle. And so the thing to be looking for is interoperability. Did I answer the second part of his question?

Yeah. Did we catch that Mark? Okay. We will answer. You said that he had a second part of his question regarding China. And so, Jeff will take that question right now.

Great. So, you're absolutely right that we've had high hopes in China for a very long time. We've also been making investments for a few years now. Rather than just quantify when it's going to move the needle, especially as that becomes a bigger target as we continue to grow our business around the world, I'll just reiterate China is leading the world right now for us in terms of growth rate. The green shoots are really remarkable in 2020. I don't know that I would've pointed to the green shoots in years before this year. But they're really remarkable. We continue to just build out the team and build out the products that we need. Our vision is to do for the Chinese speaking world, what we've done for the English speaking world. If you look at like the places where we've had the most amount of growth the countries that we've talked most about in connected TV, it's been in the English speaking world, whether that's in Australia or in London, or in -- of course, the United States. It doesn't mean that we haven't had great success in places like Germany and other places as well, but it's been predominantly English. We think there's something very similar to be done in the Chinese speaking world, which goes beyond just greater China. And we're seeing those green shoots in 2020. So, it's one of the places that I'm interested in making investments in and spending more time in and really eager for the world to get back to some sort of normal. So, I can go back and spend more time in a place I fell in love with it.

And Chloe will take -- we have time for one more question, and then we'll close it out.

We will take our next question from John Egbert with Stifel. Please go ahead.

Great. Thanks for taking my question. Jeff, it seems like in addition to being a far more efficient channel for large brands than linear TV advertising, CTV seems really tailor made for premium video ads from SMBs and mid-market retailers that never really bought TV ads at a national level, would be the factors like budget limitations, or narrower geographic focus. And these companies are arguably among the largest drivers of digital ad demand today and driving most of the growth for the walled gardens right now. So, I guess, two questions. First, are you working with many companies in these categories through our agency relationships today? And I guess, looking maybe a few years out is your penetration within large advertiser and agency budgets continues to grow, would you consider developing products that better cater to the segment? And I guess, if so, what are some of the challenges to consider there?

Yeah. So, I could not agree more with the premise of the question, which is that SMBs and mid-market advertisers have been driver of digital, especially for companies like Google and Facebook. We, of course, have done much better among the premium brands and deliberately started there and that continues to be the core of the market that we service. But we fully acknowledge. When we talk about a trillion dollar TAM and we talk about being focused on the demand side so that we can appeal to everybody, that objectivity and that TAM has to include advertisers of smaller sizes. The way that we service those today is largely through agencies and other tech providers that are very focused on servicing those advertisers today. There might be a time down the road that we do some of that ourselves without trying to disintermediate any of them would be the hope. But there's a lot to consider there. You asked what are the considerations? You have to have a relationship that is almost like a B2C relationship in order to service those which, I think it's just really important for us to think about as we continue to expand. So, those things are not lost on us. We're spending a lot of time trying to learn more about that market, but we continue to be focused on that trillion dollar TAM and no, we can't ignore it.

All right. Last question, Chloe.

We will take our next question from Brian Schwartz with Oppenheimer. Please go ahead.

Yeah. Thanks for taking my question this afternoon. I've got a question for Blake on the EBITDA margin trajectory. If I look at the second half of this year, you're going to put up about 400 bips of improvement year-over-year and that probably is somewhat on sustainable. I wanted to ask you whether your comments about the lower OpEx growth that you expected in the current quarter and the uptick in investments was intended to perhaps suggest some restraint when we're thinking about that EBITDA margin trajectory. Again, I'm not asking firm margin guidance for next year. I know that will probably come later. But just directionally, how has the experience with COVID and the cost structure? How has that changed if at all your view of the EBITDA margin for trajectory coming out of the pandemic? Thanks.

Sure. Thanks. And I'll try to provide a little more perspective. I think, obviously, in Q3, we've seen the impact. What I refer to as the virtual environment, lower support costs in travel, corporate events, things like that. I mean, it's not just lower than quarter-over-quarter, but it's down significantly year-on-year. I think that -- and then you can obviously look at our EBITDA guidance for the fourth quarter and infer in there some sense of continuation of that in those numbers themselves. I think the thing, as far as like thinking about it into the future it goes, one of the reasons why we're able to run with a lower cost base today is that we're in this virtual environment -- our customers are in this virtual environment along with us. We are here to serve our customers and meet with them and help them in any way we can. And so if and when behavior changes on a macro basis, we'll adapt accordingly. But I don't expect that personally. Now the question is the timing of when is everybody's got their own guests and none of us are going to be right about that, the timing of it. But I think it's one of those things. I think where we begin to see benefits on margins and I talked about this a little bit earlier in my answer, I think before is just with scale. As we just got larger and larger, we can gain scale. We should be able to gain efficiencies. But as far as like near term components, that's about the way that I'm thinking. I hope that helps.

It does appear we have no further questions at this time. I would now like to turn it back to Chris Toth for any closing remarks.

Thank you, Chloe. Thank you everyone for joining. I know we ran a few minutes out over the top of the hour, but really good questions, and thanks everyone for joining. We look forward to speaking to you over the remainder of the quarter. Good night, everyone.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.