The Trade Desk, Inc. (NASDAQ:TTD) Q1 2024 Earnings Call Transcript May 8, 2024
The Trade Desk, Inc. beats earnings expectations. Reported EPS is $0.26, expectations were $0.2175. The Trade Desk, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the Trade Desk First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Chris Toth. You may begin.
Chris Toth: Thank you, operator. Hello and good afternoon to, everyone. Welcome to the Trade Desk first quarter 2024 earnings conference call. On the call today are Founder and CEO, Jeff Green, and Chief Financial Officer, Laura Schenkein. 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. These forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. Actual results may vary significantly, and we expressly assume no obligations to update any of our forward-looking statements.
Should any of our beliefs or 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. With that, I will now turn the call over to Founder and CEO, Jeff Green. Jeff?
Jeff Green: Thanks, Chris, and thank you all for joining us today. As you’ve seen from the press release, we are off to a very promising start once again this year. For the first quarter, revenue grew 28% compared with last year, marking strong revenue growth acceleration on both a sequential and a year-over-year basis. Outpacing the industry for a quarter or two is a great accomplishment. But I’m so proud of our team for now having outpaced the digital advertising industry for a couple of years straight. I believe our revenue growth acceleration in the first quarter speaks to the innovation and value that we’re delivering to our clients with Kokai. It also reflects growing awareness among the world’s leading advertisers of the value and power of the best of the open Internet.
To put a finer point on this, more than 90% of the Ad Age Top 200, the largest 200 advertisers in the world, have run advertising campaigns on our platform over the last 12 months. Even with its considerable size, CTV continues to be our fastest-growing channel. Over the past few months, industry giants like Disney, NBCU, Walmart, Amazon, and now Roku, and LG Electronics have all made deeper pivots into CTV, many of them in partnership with us, bringing more opportunity for advertisers. UID2 has become ubiquitous across the premium parts of the open Internet, and along with greater first-party data deployment and advances in emerging data markets, especially retail data, we are building the new identity and authentication fabric of the Internet.
In doing so, the open Internet is getting replumbed and revalued, especially in contrast to the value offered by walled gardens. And the innovations in our Kokai platform will help our clients take advantage of this revaluation and fully leverage data-driven buying to fuel their own business growth. As a result, I’ve never been more optimistic about the future of the open Internet, and our ability to gain more than our fair share of the nearly $1 trillion advertising TAM. Let me dig into this a little deeper. I’d like to frame my remarks with just a little context on how our industry has advanced over the years, at least in part because of some of the significant and disruptive events today. I think this framing is important because I believe we may be in the midst of another period of major disruption right now.
And perhaps most important, I believe our ability to anticipate and innovate in these moments positions us very well moving forward. I’ve often said that the programmatic industry, as we know it today, came to life as a result of the global financial crisis just over 15 years ago. At that time, there was tremendous pressure on all businesses to do more with less and to find new ways to differentiate, automate, and grow more efficiently. With those pressures, the precision and value of programmatic became more immediately apparent to major brand advertisers, and this proved to be a fertile environment for our business and so many others. Similarly, the rapid rise of CTV as the driving force of programmatic would not have happened so quickly were it not for the COVID pandemic.
With stay-at-home directives around the world, consumers shifted in mass to the convenience of streaming, and the media world hasn’t been the same since. TV has always been the central element of major brand advertising campaigns, so the shift from linear to CTV was always going to be disruptive. What’s perhaps more important is how quickly the TV industry has evolved as a result. CTV is now a driving force in how we think about things like authentication, identity, the use of retail data, relevance, and attribution in advertising. And while it may not be as apparent as a global financial crisis or a global pandemic, I believe we’re now in the middle of another great disruption in our industry. This disruption is very different because it is driven from major tectonic shifts within our own industry instead of from macroeconomic and pandemic forces.
Today’s shift is largely driven from the conflict Apple and Google are having with governments and domino effects that are coming from new draconian policies and tactics coming from wounded big tech. For the last couple of years now, we’ve delivered consistent, durable revenue growth over 20%, significantly outpacing the broader market, including the major walled gardens, and it’s because the contrast between the best of the open Internet, what you might call the premium Internet. And the content and characteristics of walled gardens has never been more apparent. The details of the Texas Attorney General’s suit against Google and the approaching trial of the Department of Justice versus Google have shined a light on a few themes inside of Google, but has created a lot of clarity on things outside of Google as well.
There is a wider understanding of a few immediate themes facing advertising. First, there is a broader understanding of the role that walled gardens are playing as major purveyors of low-grade made-for-advertising inventory. Second, there is a much wider understanding of how bad ad-to-content ratios within walled gardens and the brand suitability risk of user-generated content or UGC. This is in part due to the stark contrast that premium content has right now to UGC. The industry has growing awareness that consumers spend most of their quality time with premium content on the open Internet versus the walled gardens. Advertisers are making better use of their first-party data and retail data as they explore contemporary cross-channel alternatives to cookies.
And lastly, in advertising and marketing, like in many other sectors, there is a broad industry frenzy around AI and what it means for our industry. Taken together, I don’t know that I’ve ever seen the industry in such a state of transition. In some corners of our industry, I also sense some panic and confusion about what to do next. But for us, this gives context to our recent outperformance, as well as our conviction for why I’m so confident about the opportunity in front of us in 2024 and the years ahead. One insight that reinforces this shift that is happening is found in where I’m spending my time. Over the last six months or so, I have been spending more and more of my time with CEOs, CMOs, and heads of media companies, helping them make sense of the issues that I just outlined.
And the bottom line across all of these discussions, there is consensus that the value is shifting to the open Internet. But perhaps I should be more specific. It’s shifting to the best of the open Internet, what we might call the premium Internet. It won’t all happen overnight, but it is starting. In 2022, that marked the first year in a decade that the majority of digital ad spending took place outside of Meta and Google. With the proliferation of CTV and retail media, that trend accelerated last year, and I believe the trend will only continue moving forward. The role of CTV and digital audio in all of this should not be understated. For many people, movies, TV, and audio consumption is a very important part of their daily lives. It’s premium quality content that captivates consumers who spend significant amounts of time engaging with it.
No one watches Mandalorian or Curb Your Enthusiasm or March Madness casually. No one listens to their favorite podcast passively. I found in every aspect of my life, I can’t talk to anyone about premium CTV content or the best of music without people sharing a passion for some form of those mediums. We are all highly invested in it. That’s very different than how consumers engage or talk about social media content, which is often short-form UGC video such as cat videos or 14 year-olds filming themselves falling off of bicycles. However, people spend much more time with premium content such as streaming TV and digital audio than they do with UGC. Our research shows consumers spend about 60% of their online time on the open Internet. The ad-to-content ratios are much better and therefore the experience is much better.
But walled gardens still command the bulk of digital advertising spend because those tech giants have made it super easy to reach consumers at mass scale, and the performance results are equally simplified. Hey, look, your ads did great. We told you so, so it must be true. But that’s changing. Advertisers now have scaled alternatives on the open Internet. One of the major innovations in Kokai is the Sellers and Publishers 500 Plus. This is a curated marketplace that represents the best of the open Internet, the premium Internet, where consumers spend the majority of their time online. It’s live sports events such as March Madness, where we saw a 200% increase in spend compared to a year ago. It’s the latest movies and hot TV shows. It’s music and podcasts on platforms like Spotify.
It’s trusted journalism. Now, our advertisers can access that premium marketplace at scale easily and with confidence. In doing so, they don’t have to cede control of their valuable first-party data, they get to measure effectively, and they can be sure that their ads are showing up against high-quality content that’s consistent with their brand. Advertisers now have a scaled way to control their own future. Of course, our ability to buy the best of the open Internet is based on close working relationships with the world’s leading publishers. Across the board, publishers are working with us to make advertiser access to their inventory as attractive as possible, which means making it as transparent and objective as possible. You only have to look at the list of expanded partnerships that we’ve signed over the last few weeks.
We are integrating directly with the Disney real-time ad exchange, which includes Hulu and Disney+ via our OpenPath technology. For the first time ever, NBCU will make the Olympics available programmatically to advertisers and is doing so with The Trade Desk. LG Electronics has adopted UID2. Vizio and Cox Media Group are connecting with us via Openpath. TF1 and M6, two of the largest broadcasters in France, have integrated EUID as they make their content available programmatically. And just a week ago, Roku announced that it is expanding its demand strategy to include The Trade Desk or its premium content. Just to go one click deeper on Roku, I think it makes a ton of sense for Roku to embrace the open Internet with their premium content. Early on, when CTV inventory was scarce, it made sense for many of the premium CTV streamers to sell most of the inventory themselves.
With the proliferation of CTV content over the last couple of years, those same companies now need to find ways to maximize advertiser demand, and that means opening up to a broader range of demand sources such as The Trade Desk and embracing solutions such as UID2, which help advertisers find their target audience as accurately as possible. We are excited to be Roku’s partner in this, and we believe this move is a win-win-win for Roku, for advertisers, and for The Trade Desk. As a reminder, last year on 06/06, we started shipping Kokai. This platform launch is different for us because 06/06 last year marked just the beginning, and we’ve been shipping new features ever since. We are quickly approaching some of the biggest UX and product rollouts of Kokai that nearly all of our customers will begin to use and cede benefits from over the next few quarters, including a game-changing AI-fueled forecasting tool.
Another major innovation that we’re bringing to market with Kokai is a completely new approach to audience-based buying. We’re able to do this because of the broad availability of new identifiers such as UID2, along with easier on-ramps for first-party data. This means advertisers can now take what they know about their most loyal customers and find new customers who look just like the loyal ones, and find them anywhere across the open Internet. Advertisers no longer have to use content as a proxy for audience. Instead of simply advertising against the NBA playoffs to reach pizza lovers, advertisers can find pizza lovers wherever they are across all digital channels. In Asia, Unilever and their agency, PHD, leveraged our retail partnership in Kokai with foodpanda to increase sales of their Knorr food sauces.
Unilever was able to onboard its own first-party data on our platform, then do look-alike modeling for foodpanda’s retail conversion and loyalty data to target new customers more precisely on the open Internet. This new audience-based approach resulted in a 229% improvement in customers adding Knorr products to their shopping basket, and an 81% improvement in customer conversion. Just like Unilever, more and more advertisers are prioritizing ad opportunities where they can be sure they are reaching their target audience. And increasingly, that means activating their first-party data effectively, and leveraging ad impressions where UID2 is present. This is the new identity fabric of the Internet taking shape, and it’s revaluing the Internet in the process.
Recently, Target Australia and their agency OMD worked with us to upload their first-party customer data into our platform, then, targeted new customers using UID2. Their conversion rate improved 66% versus using traditional identifiers, and their cost per action decreased 36%. And there are huge benefits to publishers who offer transparency and authenticated audience data to advertisers. Unwind Media is one of the world’s leading gaming platforms. They recently reported that they saw a 47% improvement in the value of ad impressions when deterministic identifiers such as UID2 are present, and 107% improvement when users are authenticated with SSOs such as OpenPass. Let me also spend a moment on AI, not because we’re trying to get on the bandwagon.
We’ve been deploying AI in our platform since we launched Koa in 2016. Given the frenzy around AI, I think it’s important to talk about how it is actually helping advance the work of programmatic advertising. Too much discussion on AI today is about AI in the abstract instead of practical details about implementation. We are starting to get better at explaining how our AI investments will actually help people do their jobs better. To that end, we’ve known, since before our company existed, that the complexity of assessing millions of ad opportunities every second, along with hundreds of variables for each impression, is beyond the scope of any individual human. We have always thought about AI as a co-pilot for our hands-on keyboard traders.
And with Kokai, we are bringing the power of AI to a broader range of key decision points than ever, whether it’s in relevance scoring, forecasting, budget optimization, frequency management, or upgraded measurement. AI is also incorporated into a series of new indices that score relevance, which advertisers can use to better understand the relevance of different ad impressions in reaching their target audience. For example, UScellular worked with their agency, Harmelin Media, to leverage our TV Quality Index to better reach new customers. Their conversion rates improved 71%. They reached 66% more households by optimizing frequency management and their cost per acquisition decreased 24%. I think it’s important to understand how we’re putting AI to work in Kokai because this kind of tech dislocation will bring new innovators.
We see that now where major tech players are inviting scrutiny because they’re behind the innovation curve on AI, and more agile players, and I would include the Trade Desk in that bucket, are figuring out how to apply it to help humans make better, more data-driven decisions. We are also developing AI branded with Koa to make data-driven refinements on its own, within the confines of human-defined guardrails. Let me close by trying to bring all of this together and help you understand why I believe this positions The Trade Desk so well going forward. I can’t explain it any better than Jamie Power, the SVP of Addressable Sales at Disney, who spoke at our recent Forward ’24 event in New York City. Disney is one of the pioneers of CTV technology and Jamie talked about how UID2 is helping Disney offer advertiser match rates that are 3 times to 4 times higher than when UID2 is not present, and higher CPMs are clearly following higher match rates.
That’s a pretty astonishing statement about where the Internet is heading. Disney deals with an authenticated audience, and they’re leveraging UID2, so advertisers can find the right customers with much more precision in TV than ever before, against what many would consider some of the most premium content on the open Internet. With the growing ubiquity of UID2, with new approaches to authentication, with better deployment of first-party data, with easier access to the premium Internet, and with major advances in AI, the ability for advertisers to reach the right audience, at the right time, in the right place, and convert those customers has never been greater, and all of that’s happening in our platform. And all of that happens with the advertiser in control of their data, understanding more precisely where their dollars are going, how they should optimize, and how those ads are performing in service of their KPIs. None of what I just ran through is really possible in a walled garden.
I might not go as far as to say we’re seeing the early days of the fall of Rome, but the current macro and tech forces are creating an important moment of the reckoning for everyone in our industry, and advertisers are shifting more dollars to us as a result. Advertisers want a competitive market with price discovery because they want to own their own future. It is easier than ever for advertisers to understand who is delivering value at all points of the digital advertising supply chain, and they will increasingly gravitate to those who are helping them make the most of every advertising dollar with transparency and objectivity. Of course, this is all made possible by our profitable business model, which generates significant cash flow, which in turn allows us to invest in the major platform upgrades that characterize Kokai.
So while I believe 2024 will be remembered as a year of great tech-driven disruption in our industry, I also believe it is a year that The Trade Desk will continue to differentiate itself from its competitors, and continue to outpace the market. As the industry races towards $1 trillion TAM, we are incredibly well-positioned to take more than our fair share. With that, I will hand it over to Laura, who will take you through more of the financial details.
Laura Schenkein: Thank you, Jeff, and good afternoon, everyone. The Trade Desk delivered another strong quarter as revenue was $491 million, a 28% increase year-over-year. Our growth is further evidence of the durable value that The Trade Desk brings our clients, and we continue to outperform the industry as a result. All of our progress in areas such as CTV, retail media, Kokai, and UID2 helped deliver another quarter of consistently strong growth and profitability to start 2024. In addition to strong top-line performance, I am proud of the $162 million of adjusted EBITDA we generated during the quarter, representing a margin of 33%. Our strong growth in Q1 was broad-based in terms of geography and channel diversity. Strength in CTV continued as the channel led our growth from a scale channel perspective once again.
We also continue to see strong momentum in retail media as we continue to win shopper marketing budgets and as more of our existing clients utilize third-party retail data for targeting and measurement. UID2 is being deployed by major advertisers and publishers at a larger scale than ever, and we continue to see the benefits from strengthening our relationships with major brands and their agencies. From a scaled channel perspective in Q1, video, which includes CTV, represented a mid-40s percent share of our business and continued to grow as a percent of our mix. Mobile represented a mid-30s percent share of spend during the quarter. Display represented a low double-digit percent share of our business and audio represented around 5%. Geographically, North America represented about 88% of the spend and international represented about 12% of spend for the first quarter.
We saw strong consistent year-over-year growth across all of our regions in Q1, with international growth outpacing North America for the fifth quarter in a row. We continue to execute our growth playbook internationally, led by CTV and retail media. We remain optimistic that our business outside North America continues to be a strong contributor to our overall growth this year, and for years to come. In terms of verticals, every category greater than 1% of spend grew double-digits in Q1. It’s exciting to deliver such consistent growth across the business, and we’re proud to see the value of the open Internet or premium Internet resonating with clients for many industries. Turning now to expenses. Q1 operating expenses, excluding stock-based compensation, were $352 million, up 20% year-over-year.
We continue to make investments in our team and platform, particularly in areas like sales and marketing and platform operations as we position the organization for long-term growth. Income tax expense was $14 million in the first quarter, driven primarily by our profitability and non-deductible stock-based compensation. Adjusted net income for the quarter was $131 million or $0.26 per fully diluted share. Net cash provided by operating activities was $185 million and free cash flow was $176 million in Q1. DSOs exiting Q1 were 86 days, down two days from a year ago. DPOs were 70 days, down two days from a year ago. We exited Q1 with a strong cash and liquidity position. Cash, cash equivalents, and short-term investments ended the quarter at $1.4 billion.
We have no debt on the balance sheet. Finally, in Q1, we repurchased 1.5 million shares of Class A common stock for an aggregate amount of $125 million. The company will continue to approach the repurchase program opportunistically, depending on market conditions and capital priorities. Now, turning to our outlook for the second quarter. We continue to see strong spend in our key areas such as CTV and retail media. We estimate Q2 revenue to be at least $575 million, which would represent growth of approximately 24% on a year-over-year basis. We estimate adjusted EBITDA to be approximately $223 million in Q2. In closing, we are encouraged about the momentum of our business. We’re executing on large long-term growth drivers including CTV, international expansion, retail media, our recent platform upgrade in Kokai, UID2, as well as the upcoming US election cycle.
We continue to generate strong free cash flow, grow our headcount efficiently, and maintain a balance sheet that positions us to continue investing in achieving durable growth. We remain optimistic about the prospects for our business in the remainder of 2024 and beyond. That concludes our prepared remarks. And with that, operator, let’s open up the call for questions.
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