Preface

The Trade Desk (NASDAQ:TTD) is having an amazing 2022, just as it has had an amazing thirteen years in business. Not only has it continued to beat expectations every quarter, as it has for many years, but it has done so while some peers in the media world such as Roku have struggled to deliver the goods.

The most recent quarter, reported August 10th, saw revenue rise 35% even though the company was up against a very strong quarter from June of last year when sales more than doubled.

In an interview with Capital Market Labs, CFO Blake Grayson said the business is not slowing down even if growth in viewership of connected television may have cooled with the easing of COVID lockdowns.

“Competition in CTV [connected TV] is really strong,” says Grayson. “So, you might see subscribers, maybe, moving around but if they’re advertising open internet, we’re buying on all of them, so I think we’re maybe a little less impacted by that.”

The big picture, says Grayson, is that the company is still a tiny portion of TV spending, leaving tons of room to grow.

“If you take a look at linear television advertising, it’s around, probably, worldwide, about $200 billion dollars — you can go to eMarketer and that kind of thing,” says Grayson. “Our total company spend worldwide in 2021 was just over $6 billion, so, if you believe we do that over time, that linear spend is going to move. It’s going to shift over…”

And Grayson does believe it’s going to shift. Not just linear TV, but a lot of areas of content, in all media, that have been walled gardens, as they say, beholden to the rigid control of gatekeepers. Those walls are going to come down sooner or later, leaving new opportunities for The Trade Desk.

“The way it probably evolves is, smaller walled gardens do it first, right? Because they are dependent on demand,” opines Grayson. “I think that for those companies that need demand, I think they’re going to ask themselves more and more, Gosh, should we open this up?”

The big picture as far as The Trade Desk? “We’re really happy with our growth,” says Grayson. “We’re nowhere near where we think we’ll be in a few years from now.”

 

One-on-One with the CFO of The Trade Desk (TTD)

Capital Market Labs: As we usually do, I’ll throw it open to you first of all. Free association time, what things are most important to take away from the results and outlook in your opinion?

 

Blake Grayson: Yeah, so we were really happy with the Q2 results that we talked about on our call recently, it was a really strong quarter at, just off the top of my head, $377 million of revenue. We were up 35% year on year.

That’s comparing against Q2 of ‘21, where we were up over a hundred percent.

So, hard comp, and we still grew really well. Then adjusted EBITDA of $139 million, which is about 37% of revenue EBITDA margin.

So, we outperformed both on the top line and on the profitability side. Nearly every vertical that we were in grew in the double digits.

We had some that grew more than double. CTV, connected television for us, again, led the way, it’s our largest channel and it’s grown the fastest.

The macro environment has created some uncertainty. We talked about that a little bit on the call, especially maybe more focused on smaller businesses that we have internationally, but we’ve got some really strong tailwinds in CTV and just that whole shift from linear to CTV.

So that’s really helping us. Other highlights from Q2 would be, we finished the migration from our, kind-of, legacy platform to the one we now have, which is called Solimar. We did that.

It took us about a year to do that, which is — it took us over 18 months, I think, on the last one — which we’re really excited about.

It just, it’s helping customers essentially activate their first-party data better, measure against their goals better, use more data elements that we’re seeing.

We talked about that on the call. So, from a CFO perspective, it’s like, high top line growth, strong adjusted EBITDA growth and margins. We generate pretty consistent annual free cash flow.

So, in this environment that we’re in right now, from my perspective, I got to stay humble with it, but I’m really happy, it’s a really nice place to be in.

 

CML: Yeah, I was going to say, most people would say, there’s been a flip of some kind, although everyone characterizes it differently.

Companies that don’t make money like you do, say, well, you have to be wise in your investments, we are prudent. And other companies that do make money the way that you do, say, well, nobody’s going to buy a stock of a company that doesn’t make money.

So, I guess the truth is somewhere in the middle, as far as what your investors want these days…

 

BG: I think it’s always just having that long-term, kind-of, balanced focus.

It was one of the things that really attracted me to The Trade Desk and to [CEO] Jeff Green, in that top-line growth is super important, and it’s going to be the engine for the company’s valuation, I think, over time, but to do so with profitable growth really makes it sustainable and durable for the long run.

So, we’ve really had that focus. Now, that doesn’t mean that we won’t invest in areas that we feel like are important, but we always are going to have a mindset and a perspective about things like productivity and where we think those things pay off, and we’ll make bets and things like that.

But growth for growth sake, you have to have an economic end point that you’re shooting for that you believe it can turn into profits at some point.

Now, some companies say they have that.

I think sometimes maybe they struggle to reach those lofty ambitions. So, I’m happy. I really like this business model where we stand with that.

I think it’s an enviable position to be in, because what it does is, it builds up a balance sheet for us that we have over a billion dollars in cash and securities. We have no debt.

So, we can, especially in a situation where the people that we’re generally competing against are much, much larger than us, it provides us some independence that, unfortunately, I think there’s a lot of companies out there that don’t have that luxury in this space.

 

CML: It’s better to have gotten to where you are before this time arrived.

 

BG: Well, yeah, you just want to have that line of sight.

I mean, I think when I joined the company, we were in the low hundreds of millions of dollars and we took some, made some efforts — COVID, actually, I would say was a driving force in a lot of ways for companies to really take a look internally and say, Are we being as efficient as we should be in this environment?

When we talk about the macro for us as, well, it’s like, we’re not unaffected by it. I mean, you just go back to 2020 and look at what happened to us in COVID and we were negative 12% or 13% year over year in revenue growth in Q2 of 2020.

So, we didn’t panic, didn’t change our business model overnight. We investigated and et cetera, we right-sized for the opportunity.

Do we think we’ll come back? Do we have the balance sheet to be able to maintain that?

So, we were fortunate, but I also like to think that hopefully we made some good decisions along the way too.

 

CML: I know you addressed it just at the top of this conversation, but the macro that everyone’s asking about, I didn’t see in the call transcript, Blake, and it didn’t sound like you were saying now, that there’s been push-outs or, kind-of, weakening in the advertiser market as far as your clients?

 

BG: So this one, it’s a little tricky, and I’ll try to explain why. We’re not immune to the uncertainty that’s out there.

The one thing I always hesitate about is that I think we start to get questions sometimes as if we’re a bellwether for the advertising industry.

I don’t know that we are because there’s so much available opportunities still out there for us, and we’re growing so quickly and we’re taking share.

So, just like I would say there’re companies out there that may act like they’re a bellwether of the advertising industry, and some of their comments on macro on the downside, I hesitate to say, Oh, the macro is fine for us because there’s obviously areas of pressure and uncertainty.

It’s like, you can’t argue against that.

So, it’s really, for me as I think about the macro — and we talked about this, I think, on the call — is, the reason why I think we’re this last quarter, let’s just say, I think we stood out a bit more than we have previously against other ad-funded companies.

So, I get the question a lot, what is it for you guys that is different from these other companies? It’s like, well, some of it’s business model.

The advertising industry, I think, is just increasingly recognizing the value programmatic decision spend.

And this isn’t, not trying to toot our own horn. It’s more just, I think that is a trend in the advertising industry that advertisers are recognizing.

And we’re a beneficiary of that, obviously, because that’s the area that we participate in. Obviously, the CTV secular tailwind is huge, right? I think The Wall Street Journal put out an article, like, a week or two ago that said in July, there were more streaming hours than linear cable hours watched in that month.

So, CTV continues to be our fastest growing channel.

If you look at advertising dollars though, linear advertising spend is multiples higher than it is in CTV, right?

So, this kind of shift is happening where budgets are moving from linear to CTV and from other areas into CTV because TV essentially is the largest area of spend by major brands.

So, I think that’s a secular tailwind that we definitely benefit from.

I think that we also benefit from there’s just this continued, I’ll say, diversification by large brands away from walled gardens, that they look for companies that don’t own an inventory.

We don’t compete with our customers. We let them use third party measurement.

You’ll hear us talk about this idea, concept of, we don’t grade our own homework. You can grade the homework yourself and make those decisions for you.

So, it’s, we feel like the combination of those things, I think, is what is really helped us in this quarter.

I think it is going to help us into the long-term future.

I don’t think they’re temporal or anything like that, but I think that’s not to say, though, that advertisers aren’t, essentially, I’ll call it being more deliberate with their spend.

It’s like when we saw that in COVID, if you look at our 2020 results, they’re actually really interesting.

Even if you strip out the political advertising that we had in 2020, which was a good buy, because of the presidential election we had, even when you strip all that out, we had a big decline in Q2, but then we snap back pretty well in Q3 and Q4.

Our belief is that’s when advertisers essentially were shrinking the amount of budgets in the era of uncertainty yet they were saying, okay, the value programmatic spend dictates that I should still prioritize this or even more so than I did before.

So, we’ll see how this continues to evolve, but I think that’s also, just, that recognition by the industry of programmatic decision spend, I think, is evident in our results.

 

CML: You answered one of my thematic questions, which is why some competitors have 3% growth and you had 10 times or plus this quarter.

Is it that the demand-side platform, as you’re saying, allows your clients to go to other places of focus in a time when they’re saying we have 50 cents instead of a dollar to spend, is that…?

 

BG: Yeah, I think that the uniqueness of our model is that we look to purchase in CTV inventory, across all platforms.

Essentially, almost all global CTV platforms that have an advertisement-supported model, we’re buying on, almost.

If we don’t, a lot of them are on their way essentially to recognizing the value of an advertising-driven model and tier and part of that.

So, the advantage for us is that we don’t have a bias or incentive to put people into one content provider.

We want our customers to get the best return and investment possible. A lot of times that means really high CPMs for publishers, because we’re willing to bid on behalf of our customers for the right impression at the right time.

So, the fragmentation in the CTV landscape is actually a bit of a benefit for us because it creates an opportunity where really, really strong premium content is created by these companies.

It’s a competitive marketplace.

So, they’re all competing for subscribers, and, well, that kind of — all that growth, we really, I would say, benefit from just the overall CTV market rather than an individual platform situation.

So, I think that just that continued fragmentation and growth in that industry is a benefit for us and for our customers.

I do think that — because we talked about this, I think, the last time we spoke, which was, we look at it more of from a budget and then we go looking for the inventory gems out there that we can go after.

 

CML: Right, the gem hunters!

 

BG: Yeah, exactly. So, we don’t spend a lot of time saying, like, Oh, did we buy enough inventory on XYZ platform? Like, that doesn’t come up conversationally for me.

It’s, do the customers get the returns that they hope they would against their campaign goals? Okay, great.

We do that for CTV, but it’s also that we do it across all channels, whether that’s display or audio or mobile, and all that kind of stuff and regions as well.

It’s super basic in my head, but we’re just trying to represent the customer’s best interest, and get them the best returns as possible because we think, we do that, they’ll come back and do another campaign with us the next month and they tend to do that.

 

CML: Yeah, that makes sense. To that point, the walled gardens, as we’ve talked about many times, seem to be something that is under scrutiny generally.

So, one wonders, for example, in the other parts, the 60% that’s not CTV or roughly, right?

For you guys as far as channels? Is anything happening in that 60% that is reflecting a de-emphasizing of walled gardens or maybe a challenge to walled gardens in the way that it’s happening in CTV?

 

BG: I would say our non-CTV business is growing. It’s not growing as fast as CTV obviously, but it’s still growing.

I think the situation with walled gardens — and when we talked about this on the call, Jeff did, as far as the situation with Google and such — I think it’s one of these things that we’re going to do just fine.

We’re doing just fine regardless.

It’s really, I think with the walled gardens issues, couple things. One is we just want to compete on a level playing field. That’s it. To be able to compete for business without let’s call it using other assets to our advantage in order to create incentives for customers and things like that.

But it’s brands, I think, are just increasingly looking for the opportunity to have objective, data-driven measurement opportunities.

They’re just not getting that from walled gardens. The walled garden is only a single source, generally, of inventory other than maybe a Google DSP or something like that, that buy us outside, because we buy across all those different channels, all those different inventory sources, and where we don’t own.

I think the fact that, I think it’s telling that the fact that we don’t own an inventory is such a, I’ll call it, a differentiator for us.

I wish it wasn’t in a way, but it is frankly, because of the way that this industry is situated.

So, it puts us, I think in a really good position because advertisers just want to get the maximum return for their ad dollars.

 

CML: It sounds like then the mechanics of those other fields outside of CTV they don’t operate necessarily by the same rules where they suddenly open up because Google’s under scrutiny and we’ve decided walled gardens are bad or something like that?

 

BG: Well, I think that, first off, they don’t have the fragmentation, maybe, that let’s say the CTV business does, I think, the theme where advertisers are asking, I want to work with a partner that has my best interest in mind and doesn’t have an inherent buy.

And I’m not saying they’re all doing the wrong thing or anything like that, but they have the opportunity to essentially favor themselves over their customers and the level of transparency they provide, I think, sometimes makes it challenging for advertisers to understand if that’s happening or not.

I think more and more, I think one of the proofs of that is we find that our customers tend to be our advocates with us in a lot of places.

That came out, we talked about the theme of Shopper Marketing a bit on our call and such.

That’s an area where our advertisers, essentially on our behalf and their behalf, go talk to retailers and say, I need to be able to access this data so that I can sell more through your stores.

So, it’s one of these things where I don’t think customers do that for some of these other companies because of that inherent potential for conflict.

 

CML: Does that mean from the standpoint of some of these walled gardens, do they have to, at some point say, I mean, we’ve seen Netflix shifting its tone, do these walled gardens say we could work with Trade Desk and be making a lot more off of this if we would open it up?

 

BG: I think over the span of time, that’s what we’re going to see.

Now, I think the way it probably evolves is smaller walled gardens do it first, right? Because they are dependent on demand.

I mean, if you really think about it from just basic economics, if you have somebody on the outside of your walls, that has a lot of demand that is willing to bid for essentially, wants to participate in the option and is willing to bid more than you can get on your own, the reason why you’re not accepting that is for strange reasons, let’s say.

And so, I think we are the largest in CTV where I think we’re the largest purchaser of decision CTV spend in the world or programmatic decision spend.

I think that for those companies that need demand, I think they’re going to ask themselves more and more, gosh, should we open this up?

Now. That’s a big change for a lot of these companies. So, I can’t tell you, oh, overnight I think every walled garden’s going to open the side door and let us bid on these things.

But I do think that over the span of time it’s going to happen because, you hear about — you brought up Netflix: these providers want really premium CPMs, really high that they’re looking for.

How do you get that?

If you do it in — I would argue it’s going to be nearly impossible to get the CPMs that I think people are talking about out there if they don’t open up demand for everybody to bid.

Because other than that, how are you going to drive the prices up so much? And in order to bid that much, you have to have the ubiquity of the data opportunity to be able to say, hey, you know what, I’m willing to pay a $50 more CPM because I think that this person watching this television at this time is worth my ad.

Well, how am I going to know that?

So, it’s one of those self-fulfilling prophecies that it’s, like, you don’t want to open it up?

I just am pretty skeptical they’ll get that premium opportunity for themselves. I just think that’s that continued evolution that we’ll see.

 

CML: That makes sense to me. Can you talk a little bit about shopper marketing and what is the opportunity there?

 

BG: So, for us, I think it’s a big opportunity.

It’s still super early days for us. Just, we really only launched with Walmart, would be less than a year ago.

So, everything I’m going to talk about this is in the span of time, it’s not something short term, but it’s essentially an opportunity where large retailers to date other than Amazon have not really been able to essentially leverage their data in a way to drive more sales.

I don’t mean just selling their data, it’s to use their data in order to spin the flywheels of their companies.

So, we’ve been able to, we launched with the Walmart DSP, but then we have added companies like Walgreens, and we’ve added Albertsons and Target, some really, really large retailers who recognize that they have an opportunity to help their customers, their brands, essentially, that sell in their stores online to drive more sales.

That’s not just retail sales conversion. It’s — shopper marketing, really, is about the life cycle of a customer.

It’s introducing you to a product it’s helping you figure out what products you want to buy, purchase, repurchase them and have a recurring relationship over the span of many, many, many years.

It’s something where, again, I think our positioning, in that we don’t compete with our customers, puts us in a situation where these retailers are very comfortable working with us without saying it too bluntly.

You can’t imagine that Walmart’s going to go put their data on other retailers’ site or something like that, or a company that maybe competes with them a little bit in shopping like a Google or something like that, that has the potential to compete with them even greater down the road.

The Trade Desk just does not create that kind of a threat or concern for them.

I think that’s a, I’ll call it, an arrow in the quiver for us that it’s something that I don’t think other companies of real size and scale can match.

I think, initially, if you had asked us maybe a year ago, and we talked to retailers about it at the time, they may have thought that, oh, the benefit is that I can monetize my data.

I can make some money by selling data to customers.

The real advantage for them, which we’re trying to explain, I think now they’re getting it. Which is it’s really about spinning their own flywheel of spend.

Their actual sales will go up because that’s what really what Amazon does. It’s essentially using advertising information and data in order to spin the flywheel and drive more sales in their network.

That’s the opportunity as well.

So, when you have really large customers like Proctor & Gamble and all this kind of stuff that essentially says, hey, I want to be able to sell more through Target, you got to let me access that data so that I can do it, so that I can help Target with relevant advertising to the right people, I’ll drive more sales in your stores, and that’s good for everybody it’s good for the brand, it’s good for the retailer, and it’s good for us.

Those incentives all align.

I think it’s more and more advertisers are starting to recognize it. So, we’re seeing the spend ramp pretty well.

We talked about this on the call. I think it’ll be on the transcript.

Still early days, but we’re really excited that more and more advertisers are starting to test spend, see what they think about the products.

Then as we add more selection from other retailers, we think it just adds more kind of momentum to our flywheel over time.

 

CML: Is there, on that theme with first-party data, Blake, is there any debate over whether it’s safe to put that first-party data out there?

Because it seems like we moved beyond third-party data.

There’s UID 2, there’s a need for other identifiers. Yet this first party data feels so precious to some companies you’d think, whoa.

 

BG: Yeah, and so we don’t hold first party data, the retailers do that. So, they need to safeguard that.

You can imagine they do because it’s super important to them.

Then, with your comment on the UID 2, the thing that’s really important about UID 2 is that companies that use it are not passing personally identifiable information.

They’re not passing an email address back and forth.

What’s happened, they’re saying, is, a publisher is taking that email address and creating an ID with it.

So, a number like an encrypted code that encrypted code then gets passed around.

So, it’s the privacy element we think is actually a lot better because then what you’re doing is you’re passing an encrypted code around, you’re not passing blakegrayson@gmail.com, whatever that is.

So, that’s the kind of efficacy of passing these encrypted tokens in the bid-stream, which helps.

That’s why you see all these companies that are embracing it.

I think that we talked about this on the call, but it’s like, there are some pretty major companies that are now embracing it.

I think on infrastructure side, we’ve talked about AWS and Snowflake and Adobe and then on the publisher side, Disney came out and supported it.

Then this morning we actually just announced that Procter & Gamble is embracing UID.

So that’s essentially, Disney’s one of the largest publishers, maybe the largest in the world, Proctor & Gamble’s the largest advertiser, I think in the world, the ad agencies like Publicis and Verizon and IMG and OMG, those guys are all, and it’s pretty cool because for me the thing that — this is just me personally — I got so excited about was the infrastructure announcements.

So, Snowflake and AWS, because I think it’s going to be a lot easier for these customers to activate UID because they’re already using those tools.

It’s going to lessen the burden for them to do it.

I would say Amazon is one of these companies where they obviously have their own DSP, we compete with them and things like that.

But AWS is a division of Amazon that recognizes if their customers desire and need something, they tend to provide it because they want to be able to stand out.

So, I didn’t — very little to do with that, my old relationships at Amazon and such, but I was really proud because it’s AWS recognizing that, Hey, this is important to our customer base. We’re going to do that for them because it’s the right thing to do and embrace it.

So, anyways, I think that’s the biggest thing. And the other thing too is when you mentioned first-party data, a lot of people have, I think made the misconception that UID 2 is created as a replacement for cookies.

I think the narrative was created because of the timing for everything.

But cookies, in our business, display is where cookies generally live. That’s like 15% of what we do.

Cookies don’t live in CTV world for us.

But UID is really important for CTV because you want to be able to have this identity signal so that we know an advertiser knows. It’s like, okay, did I show Tiernan an ad or who I think Tiernan is, this ID number, this ad.

And did I show it on their mobile device? And did I show it on this display?

And then it’s like, okay, then Tiernan’s like, okay, forget this, you’ve overloaded me, now I actually have a negative connotation about your brand.

And so having that identity signal to provide relevant advertisement. So, it’s super important to CTV, but it’s important for the customer too.

We think that customers will appreciate having this ability to be able to have, oh, if advertising’s more relevant, we think they’re more apt to be accepting of it. Then publishers can actually get paid for the content, because it’s not free.

I mean, this is the thing: You go ask 10 people, it’s like, do you like ads? A lot of them would say, No. Right?

But then if you said, oh, would you like to pay for all the content you ingest, every news article that you read, every website that you go to, and people would say, no way.

So, it’s like, okay, well, where’s the balance there to give these content providers the monetization so they can survive and thrive with a great customer experience.

That’s why we think better decision, kind-of, target-relevant advertising is better for publishers, consumers, advertisers. It’s better for everybody.

 

CML: Makes sense. I’m almost out of time. Like exit question for you.

Some people think CTV’s going to slow in the next three to five years because it had this big COVID-induced swelling. What do you think? Where does it stand?

 

BG: Here’s what I would say about CTV.

For us, what matters is CTV advertising, right? So, it’s one of these things.

So, the viewership moved way faster. I think COVID pushed the viewership kind of shift far, far through.

If you take a look at linear television advertising, it’s around, probably, worldwide, about $200 billion dollars, as you can go to eMarketer and that kind of thing.

Our total company spend worldwide in 2021 was just over $6 billion. CTV is a fraction of that.

So, if you believe we do that over time, that linear spend is going to move. It’s going to shift over time…

I did this: we had an employee event, and, you know, we’re all very excited because we’re really proud of our results.

But the point I was trying to make to everybody was we’re just getting started.

The share that we have relative to total TV advertisement spend is, I mean, you can barely see it on the pie chart, our CTV spend relative to total linear.

 

CML: It’s like the Homo sapiens emerge, after the dinosaurs.

 

BG: Yeah, right. It’s just this thing where it’s like, hey, we’ve grown super-fast and we’re really excited and we’re really happy with our growth.

We’re nowhere near where we think we’ll be in a few years from now.

So, I would say that the volatility of, kind-of, subscriber growth, I think, is probably what you’re referring to when companies talk about CTV growth moving around.

It’s already so high that advertising spend’s going to continue to shift, and, we think, going to accelerate the shift, too.

So, the runway created for us, it’s moving, it’s less dependent on the subscriber kind of growth.

But if you look at cable households, the number of bundled cable households, it’s shrinking every year.

I don’t know why, it’s just maybe the industry, those dollars, advertisers are going to move their dollars where their customers are, they should.

So, we feel pretty confident about… I think it’s one of these things that the competition in CTV is really strong, so you might see subscribers, maybe, moving around but if they’re advertising open internet, we’re buying on all of them.

So, I think we’re maybe a little less impacted by that.

 

CML: Excellent. Thanks as always for your time, Blake.

 

BG: Yeah. Thanks so much. I really appreciate it too.

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