TTD: One-on-One with CFO – The Trade Desk fights the Walled Garden of advertising – CML

We had our one-on-one post earnings conversation with the CFO of SpotlightThe Trade Desk (TTD).

Our most recent quarterly review off of reported earnings on 5-10-2021 is available here:
The Trade Desk Returns to Robust Growth

Two quarters ago, while The Trade Desk (TTD) posted impressive numbers, we removed it from our number five Spotlight Top Pick to a non-numbered Spotlight based on future projections for growth.

We still feel bullish about the company and its future, but its valuation in the interim had moved high enough that we replaced the number five spot with PagerDuty (PD).

This placed The Trade Desk in the second circle of this logic diagram:

Our most recent conversation with the CFO, shared below, has reinvigorated our bullish stance on The Trade Desk (TTD) — semi-arbitrary differences between numbered Spotlight and ‘regular’ Spotlight aside.

As of three quarters ago, TTD may have created the definitive unified system of collecting data for advertisers on the web, just as we opined.

The company reported earnings on 5-10-2021 before the market opened.

We noted then and re-emphasize our view that reporting earnings before the open on a Monday signals to us that the company is quite comfortable getting headlines that are undistracted by other companies.

We feel that this is a very good sign of governance and we have come to expect no less from CEO Jeff Green.

Earnings results aside, this was a statement by the company about its governance that very few will even consider. We will consider it and we applaud the company.

The stock collapsed off of the earnings report even though the company beat revenue and EPS estimates and beat revenue and EPS guidance estimates.

The fly in the ointment in what read like a very strong quarter was the growth in sequential revenue for Q1 2021 compared to Q2 2021 (guided) versus prior years.

We can look at sequential revenue growth from Q1 to Q2 the last couple of years:

We have to discard 2020 due to COVID, and we see a pretty consistent 31%-32% Q2 to Q1 growth sequentially for 2018 and 2019.

For 2021 we see just 19%.

The CFO noted meaningful political ad spend in Q1 2020 as unique and could impact comps, but we’re not sure that actually addresses the issue and it might actually make it more pronounced.

But meaningful color came from this statement:

… if you take Q1 of 2020, plus Q1 of 2021, and you compare that to Q2 of 2020, plus Q2 of 2021, it actually is a bit of an acceleration.It goes from mid-60s to 70 [percent growth] or so.

What we also learned was this:

… the momentum in this business, and the outlook, is as strong or stronger than it ever has been before.As I think about the quarter [Q1 2021], we surpassed our expectations again. Q1 revenue was $220 million, up 37% from a year ago.

What a lot of investors remember is that we had a pretty strong tailwind in certain quarters from political spend.

So that 37% is really around 42%, year on year, when you exclude that political spend.

That is an acceleration from Q4, when you exclude Q4, actually a pretty sizable acceleration.

It’s this type of clarification that is very helpful to us and available to us with a one-on-one conversation. This information is public — of course it is, but hearing how the CFO measures his company is valuable to us.

Please enjoy Tiernan’s write up and the transcription to follow.

Tiernan’s Take and Conversation
In the vast landscape of media ad sales, some companies get to “grade their own homework.”

That’s how the folks at The Trade Desk sum up how a lot of other companies operate.

The Trade Desk is a demand-side platform, meaning, it represents advertisers, helping them to find and buy the best placement for their spots. The company prides itself on providing transparency about the return on investment of such ad buys.

Increasingly, it is in an evangelical battle with those closed media networks, what the company calls the Walled Gardens.

“They get to say, the customer bought this product because of this ad that you put there, and you need to trust us that we see that,” says the Trade Desk’s CFO Blake Grayson.

Grayson spoke with Capital Market Labs following a blow-out quarterly report by The Trade Desk earlier this month.

The Trade Desk, as Grayson emphasized, has positioned itself as the friend of advertisers in contrast to the Walled Gardens.

“I think The Trade Desk provides more information and clarity for advertisers to be able to determine” the effect of ads, he said.

The Trade Desk’s word of mouth among customers, said Grayson, is perhaps not the classic “network effects,” but something powerful.

“It’s that unbiased perspective that we have,” he said. “We represent customers that compete vigorously with each other, right? But they both buy on our platform.”

The evangelical mission will be helped by the company’s forthcoming platform update, “Solimar,” the biggest change to ad-buying system in twelve years. That update is about providing still more metrics to help advertisers know that what they’re buying is going to have an impact, said Grayson.

“We hope that with better information and better ROI information, we will get more spend on the platform.”

One-on-One with the CFO:

Capital Market Labs: What do you think are the things that are most important for investors to take away from the results and outlook?

Blake Grayson (CFO The Trade Desk): I think, in totality, the momentum in this business, and the outlook, is as strong or stronger than it ever has been before.

As I think about the quarter, we surpassed our expectations again. Q1 revenue was $220 million, up 37% from a year ago.

What a lot of investors remember is that we had a pretty strong tailwind in certain quarters from political spend. So that 37% is really around 42%, year on year, when you exclude that political spend.

That is an acceleration from Q4, when you exclude Q4, actually a pretty sizable acceleration.

It’s just that whole momentum in our business. And I would say two things about.

One is that it’s worldwide. All our major regions, North America, APAC, Europe, grew spend well into the double digits.

And then CTV, connected television, is our fastest-growing channel. That more than doubled again in the quarter, year on year.

It’s one of these things where we have all this momentum coming in our business, but also have a lot to do as far as continued growth.

And so, I would say, how I think about the business is, really strong execution and results for us in Q1, but then a lot of momentum, a lot of projects going on that we think will help us, into 2022 and beyond.

CML: The growth outlook is again an acceleration, in the year over year sense, for, I think, $260.5 million at the mid-point for this Q1.

It’s a deceleration relative to past years, sequentially, Q1 to Q2. The numbers had been in the area of 30%-plus, Q1 to Q2, the past couple years, 2020 and 2019.

Is 19% growth, Q1 to Q2, this year, a slowdown from sequential growth?

BG: From Q1 to Q2, our actual top line is an acceleration from 86% to 87%, in revenue.

CML: Talking about the growth in top line from Q1 to Q2, it looks like 20% growth, and that look slower than 2019.

So, leaving out COVID year. It had been 32% increase in revenue that year, quarter to quarter, in 2019. And 2018 it was 31%, quarter to quarter. So, now it looks like the delta is smaller…

BG: Right, right. I think the way I would look at it is, if you look at our growth on a two-year stack basis, if you take Q1 of 2020, plus Q1 of 2021, and you compare that to Q2 of 2020, plus Q2 of 2021, it actually is a bit of an acceleration.

It goes from mid-60s to 70 or so.

These comps on a sequential basis are really tricky because of the challenges that we have.

We have two different facets with The Trade Desk.

One is COVID, and that’s, obviously, when you look at our Q2, year over year, we are comping an easier quarter in the second quarter.

But also have the political comps.

If you recall, U.S. political represented a mid-single-digit share of our business in 2020. It was particularly high in Q4, but also Q1 also had the impact of the democratic national primaries.

And so, because we are an agnostic platform, in that we serve both presidential campaigns, both sides of the aisle, this is challenging, I’m sure, for all the companies your readers deal with, stripping out that political element is going to be important when you do those year-over-year comps.

But we are pretty excited about the second quarter. I think our guidance was above consensus. So, we feel really positive about that.

CML: Moving to connected TV, what do you see as the biggest barrier to CTV selling the ad inventory that it has?

The publishers, what is their biggest barrier to finding demand, since you represent the demand?

BG: Biggest challenge… Gosh, I think it’s just this evolution of advertisers recognizing that value.

Obviously, they already do recognize it, it’s our fastest-growing channel.

But the penetration still is so early in the life cycle of that channel. That’s particularly even outside the U.S.

The U.S. is more penetrated than in Europe and APAC. Now, it’s beginning to pick up. Especially in Europe.

Europe was our fastest-growing region last quarter, and that’s partly driven by CTV.

Yet, Europe is still quite a bit under-penetrated. I think it’s really just recognizing the catalyst that happened in the middle of COVID.

What COVID did, which was a beneficiary to The Trade Desk, was it accelerated this shift to streaming. As customers move to that medium, we are a beneficiary of it.

Through all of last year, and we continue to have more and more conversations with advertisers about the programmatic benefits of CTV.

And you know, we are platform-agnostic. We pick where the best impression should live for the ad, for our advertisers.

They can be more deliberate about the data-driven decision that comes with it.

I would say that’s really the momentum that we are seeing. It’s just this continued evolution that we’re seeing.

CML: So, it’s taking time, that’s where the barrier is at this point?

BG: Yeah, and, to call it a barrier may misrepresent an issue.

Linear television for decades has had the obvious totality of advertising.

If you think about linear advertising, it’ hundreds of billions of dollars of ad spend.

If you believe that over time the vast majority of that will move to connected TV, the opportunity is really big.

The Trade Desk today does single billions of dollars of ad spend in a year. And CTV is only a portion of that.

And so, if you think about it, and you say, okay, where is that opportunity.

The other benefit, obviously, about connected TV is, there isn’t really one dominant player.

Fragmentation in the CTV market helps companies such as ours.

Because even the largest streamers you and I subscribe to, they are low teens in share. This is not like Google Search where it’s 85% of search goes through one company. Or 85% of CTV goes through one company. That’s also a factor.

CML: So, lack of concentration?

BG: Yeah, I think fragmentation, it’s good, one for customers, because they get choice of content.

But then it also helps the open Internet thrive.

One of the things you hear [Trade Desk CEO] Jeff Green talk about on earnings calls is, I think we would be unhappy as a society if we play out five to ten years from now and there are only just one to three places where you can get content. And especially from a journalism standpoint.

How do we make sure that people with certain ideas can survive? And so now, granted, we benefit from that, but I just think, as Jeff poses it, what kind of place do we want to live in.

CML: I remember a time when there were three channels on TV…

BG: Right.

CML: And then cable at some point. But there was a time with only three national channels and a local affiliate, and that was it.

BG: And that’s just television. Think about non-television content, and how are you going to be able to access it.

And one of the investment theses for Trade Desk is, is everyone going to live behind a paywall, or is everybody going to thrive in this quid-pro-quo of the open internet, where, Hey, we want to give you free content, and we would like to provide relevant advertising for you.

CML: That is how it is paid for …

BG: Right, right, exactly. As an industry, we are still trying to get that message across to folks. Which is, the quid pro quo of the Internet is a good thing.

If we can provide more relevant advertising, you will see hopefully fewer ads, but they will be more relevant, and the advertiser will be willing to pay more money for them.

So, the content provider can make the same or maybe more money, but as a customer, you will not be inundated. You and I should not be getting the same ads that we are on linear television.

We haven’t done a good enough job, maybe, explaining that. And we try to.

I think that is one of Jeff’s big focus areas, which is, how can we continue to communicate the value of the open Internet to folks, so they can get the content they want, and give them good, strong, relevant advertising.

I think for us, that is the Holy Grail, which is, we can provide customer fewer adds, higher CPMs for the publishers, advertisers are happy because they target the audiences they want to, and everybody can make out really well.

CML: What is the disparity in supply and demand in CTV? We have seen figures of, say, supply is 50% more than existing demand for CTV, as a whole?

BG: I don’t have data at the top of my fingertips for it.

The way that The Trade Desk model works is that the advertiser comes with a budget they want to invest, and then what we try to do is to find the best home possible that we can do. And our demand is obviously really high.

I think the last number that we quoted was 12 million queries per second that we’re doing.

So, it’s one of these things where, we have a lot of impressions we can go out and look at. And it’s a matter of, the expression we sometimes use is, spend finds the best home possible.

And one of the things, I think, that provides The Trade Desk credibility is that we do not have our own inventory that we provide.

There are other companies out there that are trying to sell not only their own inventory but outside inventory.

And how do you know they are doing what is right, let’s say, for the customer?

Whereas, we have no incentive.

And I think that’s a value proposition that our advertisers really appreciate, that we are inextricably linked in with them.

That if they get a good return on their investment, we believe pretty strongly they will want to return to The Trade Desk, and maybe even spend more money with us.

And we don’t make anything on the back-end side like other companies that own their own inventory.

CML: Related to this, Netflix’s proportion of total watch time has gone down. Has share shift in these properties within connected TV — is that beneficial to what you’re doing overall?

BG: I think that the more and more players that are out there, one, I think it’s better for customers, and then I think that the other reality is, there are players that deal with SVOD, subscriber video on demand, and AVOD, advertising-based video on demand.

We obviously play in AVOD side of that. I think there’s just a relationship where the AVOD side — you look at research by Omdia or Midea that says that CTV, AVOD is going to outstrip subscriber in future.

Which just makes sense because, I don’t know how many subscriptions you have, but I probably have too many, and at some point, I’m always debating in my head, which one you want to get rid of.

That’s not to say SVOD won’t survive, there will always be a place for it. But the opportunity is on the AVOD side.

And more choice for consumers is almost always a good thing. That doesn’t mean it won’t be super competitive for those folks to do that, but AVOD can provide them an opportunity to get a revenue stream, to be able to tap more and more customers.

With a lot of these companies that are really, really large, one of the curiosities I have is, how do they continue their growth on the top line.

Because you wonder, at some point, is there a penetration rate that’s hard to grow beyond.

And for those companies that only rely on subscriptions, they are either growing the number of subscribers they have, or they are increasing the fees that they charge.

And I don’t know how long that goes for.

I used to work at Amazon for a long time, and it’s somewhat akin to Prime member subscriptions.

You get to a point in U.S. where it’s hard to get more Prime members. Because you get to a certain penetration rate.

So, Amazon has a choice, which is, they can raise the price of Prime, which they do, not very often, but they do.

The difference for an Amazon is, they can also sell you more stuff. They can sell you clothes, or furniture or food, beyond your televisions and electronics, or books, which it was originally known for.

It’s a little different from that in the CTV subscriber space. And so, it’ll be interesting to see how that evolves over the next few years.

CML: Right, Amazon layered on Prime, but after a ton of volume of transactional business…

BG: And it’s spinning more transactions, right?

Because if you and I spend, maybe, $500 on Amazon, maybe with Prime we end up spending $1,500.

But with a subscription video service, if you watch one movie versus four, there’s not upside with the way that model works.

So, it will be interesting to see how companies deal with that subscriber growth versus subscriber fee model.

And that’s why we feel really optimistic that AVOD, the advertising-driven model has a lot of room to grow.

CML: Jeff said on the call, I think, that AVOD is the fastest growing portion of CTV?

BG: Yes, he did.

CML: The Trade Desk has the strongest relationship of pretty much any demand-side platform. Is there any network effect, where one buyer comes onto the platform and other buyers feel they have to be also participating in Trade Desk?

BG: I think, this is anecdotal, but you just get credibility from the customers that you work with.

Also, it’s not just that if one customer signs up, others will, but it’s also that unbiased perspective that we have.

We represent customers that compete vigorously with each other, right? But they both buy on our platform.

That’s that kind of customer-agnostic view for us, that we want to treat customers well, and get them the best purchases that they can.

I think there’s a network effect of — this anecdotal, but we announced a very early deal with Wal-Mart a few months ago.

I think that’s indicative of a very large retailer saying to themselves, we have all this first-party data that we think we can monetize for our customers, and provide them value, and so who can we partner with.

And so, we were really proud they thought enough of us in The Trade Desk to create that partnership.

That’s a whole other level of marketing opportunity for us that a lot of people never thought could be captured, necessarily, by a company like ours.

Which is, there’s this bucket of money that people call shopper marketing. It’s something that Amazon really is the only online retailer today able to capture it.

It’s, essentially, when you’re walking out of a store, and somebody pays to put a shelf right next to you at the checkout, we know the potential to access some of those dollars.

And, depending on what you read, that’s a couple hundred-billion-dollar opportunity, of which CPG [Consumer Packaged Goods] is half of it.

And we represent the biggest brands out there in that space.

And so, it’s very early days but it just gives us optimism about, Wow, maybe areas people didn’t think could be shifting to programmatic in the open Internet can.

So that gives more optimism for the future.

CML: That’s a good segue to this platform announcement, the biggest shift for Trade Desk in twelve years, called Solimar. Where does that name come from?

BG: It comes from sun plus sea.

CML: And what is the significance of that?

BG: Solimar for us is a platform upgrade for all of our customers. And It’s something that has been worked on for a number of years.

And it’s an example of us just continuing to invest to produce the best ROI we can for our customers.

It has a lot to do with improving measurement.

So, how can advertisers better measure the ability to tie an actual business outcome to an advertising investment.

It’s about activating first-party data for advertisers in a secure way that respects customers’ privacy. And it’s a new way also to how people approach TV advertising.

It will help advertisers set more rigorous goals around their investment, and then tie them to those campaigns. We are really excited about it. It will launch this summer.

For me, the thing I get excited about, it’s just continuing to invest in the customer experience.

It’ll be a whole new UI for them to be able to see their information more clearly, and dive more deeply into it to be able to see that measurement.

I think proving the ROI of every advertising dollar is going to be more and more important.

And, again, unlike some of these companies that we call walled gardens, that don’t really give advertisers a lot of access to the data — they provide them reports and say, Here is what you get to see — we try to provide much more information to them, so that they can make their own determination.

I think Jeff uses the phrase sometimes that there are other companies out there that get to grade their own homework.

They get to say, the customer bought this product because of this ad that you put there, and you need to trust us that we see that.

I think The Trade Desk provides more information and clarity for advertisers to be able to determine that.

You can imagine that the walled gardens of the world protect their information, they do so to their advantage.

We think that providing clarity around that is to our advantage.

CML: More disclosure, more transparency?

BG: Yeah, it’s just more information for them that they would not be able to access in walled gardens. The benefit of a walled garden is you won’t get to go inside unless you agree to their terms.

Some of them have such a dominance that it’s frustrating to advertisers.

There’s always going to be a place for that spend.

I think the difference is we have advertisers acting as our advocates when we talk to other companies. And I don’t know that any other place has that relationship.

It’s why you hear Jeff refer to relationships with brands and advertisers in the first person.

You know, I talked to this person at Publicis, or other companies. It’s because we have those relationships, and they want us to succeed just like we want them to succeed.

I don’t know that there’s that balance in every relationship that we have.

CML: Is there anything from Solimar that is going to be a direct impact on the financials for Trade Desk?

BG: From our perspective, there’s a lot of ways that over time, in the long term, can help.

One is, we hope that with better information and better ROI information, we will get more spend on the platform, right? New and existing customers willing to spend more.

We also think it will be, call it, easier, simpler or more clarity around the impact of data.

Those are longer-term flywheels that we think can spin. And it’s one of these things that, we really try to align ourselves with our customers.

If they are doing well, they will want to spend more with us, on media or data, and we do better because of that, and that spins both of our flywheels.

And so, we are both happy about that, and so that is an aligned strategy.

CML: Thanks for the time. Hopefully we can do this again in future.

BG: Yeah, this was great.

We maintain our status on The Trade Desk as a Spotlight Top Pick and note that growth rates matter in guidance, but that getting into the mind of the CFO helps us tremendously in evaluating longer-term growth rates while accounting for short-term gyrations.

Ophir is long shares of TTD and PD as of this writing.

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