As a so-called demand-side platform, or DSP, The Trade Desk is a company that makes money off of advertisers’ desire to connect with the most desirable inventory.

 

That process of looking for the best place to put an add amidst the plethora of ever-expanding content offerings is like a diamond hunter reaching for jewels, as Blake Grayson, chief financial officer of The Trade Desk (NASDAQ:TTD), explained in a recent interview with Capital Market Labs following the company’s third-quarter report.

 

“Essentially, the way it works for us is, we look at 12 to 13 million impressions a second,” said Grayson. “We are generally agnostic to where the impression is, it’s the quality of the impression that we want for our specific customer at that specific time, and who they are specifically looking to try to advertise to.”

 

The company, says Grayson, is “not beholden” to any one channel. The company indirectly buys time on Roku, it buys time on some of the “walled gardens” such as Amazon, and a lot of other places. But he is less concerned about those individual channels.

 

“What we do is, we really just look at the gems of impressions out there.”

That means the total shift of video watching to what is called “connected television,” or CTV, is the fundamental phenomenon that is important. Cable TV subscriptions for so-called “linear” viewing, on a plain-old TV set, is falling below 74 million this year, while the homes passed, effectively, by CTV that are addressable by The Trade Desk, reached almost 90 million earlier this year.

 

In total, says Grayson, “Video, which includes CTV, represented around 40% of our spend mix, and it’s growing.” CTV growth “is a tailwind for us — we're still in the very early days of that.”

 

With the debut earlier this year of the company’s new suite of tools for advertisers, called Solimar, Grayson believes the big payoff will be to help push that move even more from linear TV to CTV, right along with the rest of the advertising shift.

 

He likes to recall the philosophy at his former employer, Amazon.

 

“We used to always have this kind of idea that margin percent is interesting, but the margin dollars are what matter,” says Grayson of Amazon. “Because if you can drive much more margin dollars through the pipe, your business does better.”

 

Every medium, including CTV but also mobile and other print forms, are, for Trade Desk, a larger and larger pipe toward which it can funnel the demand of its advertising clients, and their clients, to move more dollars to digital.

 

CML:
As we usually do, I would throw it open to you. First of all, what things are most important to take away from the results and outlook in your view?

 

Blake Grayson (CFO TTD):
Well, let’s see. I think that Q3 for us was really strong. We’ve generated 301 million of revenue, that was up 39% from last year.

And if you exclude the political impact from the US election last year, which was pretty material to our results in Q3 and Q4 last year, I think we were up 47% year-on-year.

So just that really strong top line growth.

And then combined with that, I think the profitable of growth that we had in that we generated, I think 123 million of adjusted EBIDA, which is about 41% of revenue. So I think those results are, obviously, I think what we were most excited about.

I think that just as far as like going forward part, I think that just seeing the breadth of growth that we’ve seen across channels and verticals, like CTV continues to lead the way.

Video, when we break it up for investors, video, which includes CTV, represented around 40% of our spend mix. And its growing.

CTV grew faster in Europe than anywhere in the world in the third quarter. Which is encouraging for us because if you look at the total opportunity that we have in front of us, the total advertising market, around two thirds of that is outside of North America.

Yet, our spend today is only 12ish percent outside North America for Q3. And so we have this huge opportunity.

We think CTV is kind of like going to lead the way. It Is leading the way for us to be able to grow there.

I think that it’s just, again, I think that besides the results too, I think the message, I hope that it’s partly also the reception we got was strong because the message that we’re communicating is resonating a bit more with folks, or with people.

And I think that message is obviously CTV growth is a tail wind for us. We’re still in the very early days of that.

Solimar is our new kind of platform for advertisers in order to empower them to make better decisions. It’s still very early days.

We only launched it in July. We’ve had a great reception to date.

I think that improving the ability for customers to onboard their first party data to make better decisions, and be able to better align their kind of campaign goals with measurement, is something that we’re really excited.

But it’s also that I think just the value proposition that we give to customers I think, is super compelling. And I think does uniquely differentiate us in that The Trade Desk owns no inventory.

We act solely on behalf of our customers. We have no bias to push a customer into a certain channel that we might benefit from, or anything like that.

And, we don’t compete with our customers. We don’t sell competing products, or competing content, or anything like that.

And I think the proof of that is that we often find, or we’re finding more and more, that our customers tend to be our advocates for us.

When we talk to inventory partners or retail partners, we talk to companies like Walmart and we’re doing a data deal with them, that it’s very early days, we just launched.

But it’s that partnership we have with our customers, I think is a compelling value proposition that differentiates us.

We’re also not dependent on any single channel for our business. Like essentially, the way it works for us is we look at 12 to 13 million impressions a second.

We are generally agnostic to where the impression is.

It’s the quality of the impression that we want for our specific customer at that specific time, and who they are specifically looking to try that advertise to.

And so, I think that there was a positive reaction because the issues like the iOS platform changes for us had no real material impact on our performance. And I think it’s that breadth of the issue is that we’re not beholding or we’re not dedicated to any single channel. And so what we do is we really just look at the gems of impressions out there.

And if some impressions maybe aren’t as high quality as they may have been previously, we’re looking at the next best item.

And so it’s one of those things where I might just think proving that through the results I think helped us. And, at the end of the day, we’re really just focused on supporting our customers the best way we can.

We’re the largest independent kind DSP focused on the open internet. And, I think just continuing to generate profitable growth, for me is what was so exciting about our results in the three quarter.

 

CML:
Very good. Nicely done.

Since Solimar came out, I’m curious, you’d made mentioned on the call, Jeff [Green, CEO] mentioned, for example, some customers can see lower CPMs because the bidding is more effective, it’s more efficient. It makes efficient markets basically.

Then I’m wondering, is there a quantifiable impact financially for Trade Desk from Solimar, will there be one at some point in time?

Whether you disclose it to the street or not, do you know internally, “Yeah. We see this quantifiably has this impact on our business?”

 

BG:
I think absolutely we hope that improvements in our products will spin the flywheel of our customers.

And then it will in turn, spin our own flywheel as well.

I think that the thing about Solimar for us is sometimes people may think, “Oh, it’s a way to get more margin,” or something like that. That’s not the goal for Solimar.

For Solimar the goal is to provide a better return for our customers. So they get better return on their ad spend, so that they want to come back and do another campaign with us, and a larger campaign with us.

And to shift more of their spend, not just to The Trade Desk, but to digital to The Trade Desk too.

Because there’s this whole shift that’s going on.

I think that the point that Jeff is making is that if we believe that the use of more data, and more data well spent, let’s call it, helps a customer get a better return we want to be able to surface that to them to use.

And so we believe pretty strongly that, again, this alignment with our customer’s interests, if they do well, we do well. That’s kind of the thing.

So, for me, I really want to make sure that we focus on spinning that fly wheel. And that’s one of the reasons we provide marketplace tools. Like we don’t just provide things that The Trade Desk owns.

These are third parties who we put in the marketplace, whether that’s data or measurement. And I think we’re one of the very few platforms that allow third parties that come in and say, “Hey, let’s evaluate performance for this customer on their behalf. That customer believes that they need that service.”

And so it’s really just empowering our customers more via that marketplace model.

And we think that if we can do that, one, we earn trust with our customers and then if they do well, they’re going to want to come back and do more with us, and we’re going to get more new customers excited about the opportunity to join as well.

I look at margin percents and things like that, because it’s important to pay attention to. But the most important thing for me is spinning the flywheel for the long term so that we can gain our fair share of the marketplace that’s open internet.

 

CML:
It sounds like people draw this conjecture about margin because they’re saying, “Well, there must be some different spread if there’s an effect to CPMs.” I’m assuming there’s a grain of truth in that in some way.

 

BG:
There’s a number of things that we’ve done besides like easier way for them to onboard first priority data, easier way for them to match campaign goals, easier for them to use the measurement marketplace, the data marketplace.

We have features like predictive clearing that uses AI to say, “Hey, we think we can bid lower for this CPM than we may have in the past. Because now we have more information.”

And across all those elements, if we believe we’re passing value to the customer, then we believe we should be able to get our fair share, [inaudible] compensation for that.

And I think, you hear Jeff talk about supply path optimization. And essentially at the end of the day, what that means to me is be ready and able to justify the value that you take out of that supply chain.

And I think we believe strongly that The Trade Desk can do that and we have those conversations with folks, but it has to continue throughout the supply chain as well.

And so, again, that’s working on behalf of our customers because our customers benefit from the improvement in the supply chain.

And so, I can see why people believe that and it could be an outcome from it.

But again, I think over the long term, for me, … this tends to be a little bit of my background that I came from previously when I worked at Amazon.

Which is we used to always have this kind of idea that margin percent is interesting, but the margin dollars are what matter.

Because if you can drive much more margin dollars through the pipe, your business does better. But still want to be mindful of the margin percent, things like that.

 

CML:
I like that alternative way of viewing things.

Connected TV is a new and it is a disruptive advertising market, and it lives outside of the walled gardens, it seems safe to say, of many parties.

And so for Trade Desk, as this non walled garden market gets bigger, what Jeff refers to as the transparent open internet, one would assume that the achievable market, maybe the TAM for you gets larger in concomitantly, sort of in correspondence with that.

Is that a fair way to look at Connected TV?

 

BG:
Yeah. I mean, I think maybe one other way to think about it is the linear television, the cable kind of historical model, is that advertising markets 200, 250 billion dollars.

I think if you look at that business or that industry, you look over the span of time, will most of it, or all of it, shift to CTV? We believe so.

I think the argument isn’t a question of if, it’s a question of when, and that shift is already occurring.

And so if you think about the spend that we do today across our entire business, not just CTV, it’s a fraction of that number.

And then I think what you’re also finding is one of the things that is, I think in our… It’s a tailwind for us, like you said, there isn’t a dominant player so much in that area and that’s good.

Because what it does is there are going to be subscription methods out there where people don’t do advertising, but that’s going to, I think, end up being the exception rather than the rule.

And you’re seeing this growth in what we call AVOD, the advertising video on demand versus SVOD.

 

CML:
Right.

 

BG:
And AVOD’s growing very fast. And we think that over the span of time, there will be places that can deliver.

It’s expensive to deliver content and only get subscription of it. You can see it with Netflix and these companies. And there will be ones that do well.

But just, you can play the reality out and say, “How many subscription services will one consumer want/afford/feel differentiated on content?”

And we like the positioning that we’re in over the span of time, focus on that AVOD area.

And, I think you’re seeing it in that every company out there, I think, now is creating some type of a streaming environment.

And so what we’re trying to do is just to stay as close with them as possible to be able provide them our demand.

Because that’s the thing, like we bring the buy side demand to the table, and then they bring the content that our advertisers seek to advertise on.

 

CML:
Yeah. You’ve also sort of pointed out in there, underlying what you’re saying, Blake, is that some people look at this as the new market, the organic connected TV market.

Meaning they think there’s subscriptions and there’s people who never had a TV, and never had cable. They’re not their grandparents.

But then there is also this entrenched market installed base of huge advertising supply that’s in cable that’s coming over.

And so, another way of asking the question is, which do investors care about more?

Do they care about this market of expanding SVOD plus AVOD, and new users, and people who never had cable? Or do they care about the vast 250 billion that’s moving over?

 

BG:
I don’t know if they care about one more or the other, I think they care about the total market, right?

Like I think they sit there and say, “I think today we have more reach at CTV households than we do in linear at The Trade Desk.” Mason can confirm that.

But I think that it’s, as people are cutting the cord, and you can’t go a week today without seeing another article or information about people, especially through COVID, right?

Like in the core desiring premium content that they get and then saying to themselves, “Gosh, how do I rationalize this linear bill that I get?” And then getting into a point it’s like, “Okay, well now how many subscriptions?”

 

CML:
Right.

 

BG:
And, it’s somewhat akin, I think, to it is challenging.

I think if you’re running an SVOD business today, subscription revenue is your only revenue source. Right?

And so, when you get large and big enough, what happens? You keep raising the price, because content is more expensive.

But, if it’s a very competitive marketplace, which I think it is becoming more and more that way, that’s going to be, I think, probably harder for companies, so they’ll have to invest more in content. Right?

So, there’s that kind of natural thing. And so I definitely don’t want to make it sound like, I don’t think that SVOD’s going to survive.

Because I think there’s always going to be subscription video services.

But, I think it ends up being the exception more than the rule and that AVOD is really kind of like the vehicle for growth for that industry over like the next decade, let’s call it, in my opinion.

 

CML:
You know what the other vehicle for growth is. Jeff mentioned sport on the call.

 

BG:
Right.

 

CML:
So, I’m not sure like which is happening faster, people staying at home, watching sports on connected TV, or people going to just surging explosion in the build out of sports bars.

Because I’ve noticed that in Manhattan, because I’m a guy who goes out to places, you know?

 

BG:
Yeah.

 

CML:
Just like every place, places I used to go to that have been transformed into sports bar, new sports bars are opening.

So, I’m not sure which is happening more is like people on connected TV, watching sports they would’ve paid for in a package, or people going to sit in front of a television set in a sports bar.

 

BG:
I think… I don’t know about the sports bar traffic.

 

CML:
Believe me.

 

BG:
Yeah, no, I bet it’s high, but obviously physical space has got a limit.

 

CML:
New construction of sports bars is a metric you need to follow.

 

BG:
I think that, to your bigger point, I think one of the things when I first joined the company that people talked about is that linear’s major competitive advantage at the time people said was live sports.

That’s why linear is not going to change, all this kind of stuff.

But, that dynamic is already changing, right?

Like we just announced kind of a deal to buy inventory on Peacock. And I think with Peacock comes access to things like NFL, Premier League, the Olympics, things like that.

I know we added the NBA League Pass for Turner Sports. I think we’ve disclosed like the number of impressions we see on the NFL is up like sixfold this year.

The walls of live sports are falling faster, I think, than I personally would’ve probably would’ve expected.

 

CML:
You would’ve thought. Yeah.

 

BG:
And so, I think that we had a report from eMarketer that said, I think there’s like 60 million live sports viewers in the US today.

 

CML:
Yeah. I saw that.

 

BG
They think it’s going to grow 50%, up to 90 million in the next three years.

And that’s digital sports viewers.

And I think that that, it’s hard to argue against like how does CTV not continue to have this tailwind effect for us? And I also think that there’s a benefit to consumers too, right?

Because if we can target… And we’re still very early days in this. But if advertisers can better target people for advertising, like there’s no reason why the three of us on this call should get the same advertisement during an NFL game. And, it just doesn’t make sense.

And I think that getting something more relevant to our interests, and potentially, if we’re able to bid higher on a CPM basis for that, because it’s more relevant to advertisers, so they’re willing to pay more, could we enter an environment where you get fewer ads during a show, or a event, that kind of thing?

 

CML:
Just the one that matters.

 

BG:
Right. Exactly. That’s going to evolve over time.

It’s going to take time for the industry and everybody to get there.

But it’s just exciting, I think, because we get excited when advertisers go in, and we think customers win too through CTV. And user customers, not just for advertisers.

 

CML:
But the creatives are heartbroken because their NFL ads are the greatest advertising creatives of the year.

 

BG:
Right. And I think maybe like the super bowl kind of stuff sticks around because those are brand campaigns.

And so maybe like brand, more kind of overarching, kind of like winning hearts and minds messages, maybe those are more applicable. But, maybe their job gets a little bit harder.

Maybe their job says, “Okay, now what are we going to do about this and do we have an option to tweak it?”

But I can imagine there’s discussions going on about all that.

 

CML:
The changes with iOS, IDFA, et cetera. You’ve made the point several times, this is not denting our business.

I think the question becomes the reverse. Is this a big tailwind for you that people come to first party data?

 

BG:
I think the shift to first party data can help us quite a bit.

I wouldn’t really say like the iOS changes help us. I think it’s more of an idea that because of the breadth of the business model that we have.

And that we’re not dependent on any single channel or inventory source, I think that’s why we’re in maybe better position than some other companies who’ve been more impacted perhaps.

For us, the whole idea of the first party data is amplified by our, like the deal we did with Walmart.

Essentially, the largest retailers in the world have been sitting there, I think, saying, “How do I use my data better for the people who sell in my stores and allow them the ability to sell more?”

Spin my flywheel, spin their flywheel. And to date, I don’t know that they’ve had an option to do that.

Whereas something like Amazon has been doing it for years. Right? And it’s a huge advantage for Amazon because the margins on advertising for them are so much higher than when they sell like a product item on their site.

And so the thing we’re excited about is we refer to that as shopper marketing kind of budgets like a TAM that we really have never had, I’ll say, kind of access to, in a way.

And the thing we’re so encouraged by is the first retailer we signed up is the largest retailer in the world.

And so I think that it’s very early days. Companies are doing test budgets on this kind of thing.

But if you spin it out over the span of time, you would sit there and say, “Why wouldn’t a large retailer want to monetize their data to help their customers, and who can they trust with their data?”

I think that’s the other thing too.

Which is, I think because we’ve built this partnership with our customers, as you can imagine, some of these large retailers are very kind of cognizant about, who’s got my data?

And we don’t compete with them.

And so, it’s, again, we can look them in the eye and say, “Listen, I don’t own any inventory. I got no incentive to push you one place or the other. I don’t compete with you. I don’t sell products just like you. I’m not going to replicate your product and do something with it.”

And I think that that trust building, I think, gains us Walmart’s trust. And then obviously there’s lots of discussions ongoing with other retailers talking about what are those options for us as well.

But it’s going to take some time, but I think that for long term, we’re really excited about that.

 

CML:
It’s a good place to start.

We’ve heard from some industry experts, including former employees of Roku, that Roku views the market as a coopetition situation.

Meaning, everyone who’s not the walled gardens, or the other walled gardens, should be interested in somehow finding common cause.

And, so one example that has been offered by these folks is that OneView, which is the demand-side, internal platform to Roku, I think it was DataXu was the acquisition, is something that can be benefit from working with you.

Do you have any relationship with OneView at this point? And is it useful to you? Is it of interest to you?

 

BG:
Well, I would say, we don’t sell that much through Roku. Mostly what we sell through Roku is through the actual third parties.

That have apps.

 

CML:
Right. It’s indirect. Yeah.

 

BG:
Exactly. So we do buy direct from them. It’s pretty small, I would say.

And so, most of it is like, I’ll choose an example.

Like if Discovery has the app on Roku’s Channel, Roku sells some of their inventory, because that’s the tax that they charge them to be on a Roku device.

And then the remainder, they sell.

And we go through that kind of thing.

Just overall, I think, on Roku is that we’re a very different model than what Roku is.

Roku now is owning their own media, besides the device businesses.

They’re owning their own media, which we’ve chosen not to do because we think that it preserves our partnership with our customers.

We look at impressions across the internet. We don’t just look on CTV.

So, like I said, like video, which includes CTV’s, only 40% of our mix.

There’s 60% out there that’s in mobile and audio, and other channels out there that’s a little bit different.

So, we’re giving advertisers kind of access to demand across the internet, you would call it. We give them more control.

We give advertisers more control because we allow third parties to come in and help measure data for them in the marketplace.

But also, one of the big advantages is the ability that we have to manage, call it like frequency capping.

Like when you advertise with us, we can see like this person or this ID, it’s like should we throw an ad at them in mobile and audio, and CTV, within a five minute span?

You probably wouldn’t be super happy about that.

 

CML:
Poor quality.

 

BG:
Right? And these advertisers, obviously, because you can get a negative reaction.

It’s like you’ve actually burned a bridge of the customer.

And so, I think it’s that brand relationship risk that I think also provides value. So, we’re a different model than Roku.

I think that the thing that I really appreciate about The Trade Desk and the model is the alignment we have with our customers.

It’s just truly, I think, just a simpler relationship that we have in that we have no conflict because we don’t own inventory or products that compete with them.

 

CML:
I like it. Do you guys sell into Amazon and Google Connected TV as well? Or are those often to you?

 

BG:
I think the answer’s yes. I think that, again, Fire TV is somewhat the same type of relationship with Roku, that we go through, predominantly, through these content providers.

Because, I mean, essentially these walled gardens, they have walls for a reason.

And so for us, it’s… Now, the thing that we like about it is that these content providers taking a percentage of their inventory and putting in the pockets of these device owners, that’s the only way they make money on their content.

So I’m guessing, I mean, you probably have these conversations with folks about all the kind of conflicts that these content folks are having with the Roku’s and the Amazon’s, and device owners of the world.

And that’s part of the struggle that these walled gardens have to do is, they have to balance, they have to balance those, and we don’t. And so, we think our advertisers, that’s the relationship we have with our advertiser, which is generally pretty positive.

 

CML:
Do you have time for one more?

 

BG:
Sure.

 

CML:
Mobile gaming is a very lucrative market. Some of it’s in game purchases, but there is a top of the funnel aspect too, as well. Is it interesting? Is it useful for Trade Desk?

 

BG:
It is. When we do sell ads on various kind of mobile inventory, mobile gaming inventory spots, it’s growing obviously, pretty quickly. Not a huge part of our business today, but I think it’s exciting for us.

I think that you have to figure out, again, there’s this walled garden kind of component to it as well.

And how does that all shake out over time? And who’s willing to pay for those services? And so, it’s another opportunity area for us that we’re interested about.

 

CML:
Awesome. Thank you, as always, for taking the time. It’s a pleasure.

 

BG:
Thank you so much. I appreciate it.