Trade Desk, Inc. Q3 FY2020 Earnings Call

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

Thank you, operator. Hello and good afternoon to everyone. Welcome to The Trade Desk third quarter 2020 earnings conference call. On the call today are our Founder and CEO, Jeff Green; and Chief Financial Officer, Blake Grayson. A copy of our earnings press release can be found on our website at thetradedesk.com in the Investor Relations section. Before we begin, I would like to remind you that, except for historical information, some of the discussion and our responses in Q&A may contain forward-looking statements, which are dependent upon certain risks and uncertainties. In particular, our expectations around the impact of the COVID-19 pandemic on our business, the Q4 holiday season, and results of operations are subject to change. Should any of these risks materialize, or should our assumptions prove to be incorrect, actual financial results could differ materially from our projections or those implied by these forward-looking statements. I encourage you to refer to the risk factors referenced in our press release and included in our most recent SEC filings. In addition to reporting our GAAP financial results, we present supplemental non-GAAP financial data. A reconciliation of the GAAP to non-GAAP measures can be found in our earnings press release. We believe that providing non-GAAP measures combined with our GAAP results provides a more meaningful representation of the company’s operational performance. I will now turn the call over to Founder and CEO, Jeff Green. Jeff?

Hello everyone and thank you for joining us. We are excited to announce the results of our third quarter. Despite the headwinds of a global pandemic, we had healthy growth in the third quarter, up 32% year-over-year, far surpassing our own expectations. As we discussed, 2020 is a year where agility matters more than ever. In this environment, marketers have come to more fully appreciate the power of data-driven advertising. And as that happens, we are becoming indispensable. We have developed closer relationships with the biggest brands and agencies in the world, and we are winning more business, with both new and existing customers. In addition, we continue to see rapid growth in key channels, such as connected TV, which grew more than 100% year-over-year. This was a very encouraging quarter, not only in terms of our revenue and market share growth, but also what it signals about our growth opportunity moving forward. While our growth is very encouraging, we are still operating at a time of great uncertainty for many industries, but even in the midst of that uncertainty, we are clear that our role is to help our customers drive economic recovery. Advertising is an engine of economic growth, and our customers know that their campaigns can fuel growth and drive market share gains for their brands. And because of that, during times of uncertainty, they become much more deliberate. That's not to say this is a straight line recovery for our customers. It's not. Often our customers are still being hurt by the global pandemic and the economic consequences of most people staying home. But while we are a long way from being completely out of the woods, I do believe that in 2020, so far, we have gained more market share or, said another way, grabbed more land than at any point in our company's history. We've accomplished this because advertisers have become more deliberate, and we are a part of the solution that helps them manage uncertainty and chart a path to grow. Our rate of grabbing land in Q3 might be the biggest bullish indicator we produced as a publicly traded company. Market share gains in 2020 is a testament to the strength of our value proposition and our customer relationship. That's what makes me more proud of our performance in the third quarter than any other quarter in The Trade Desk's history. Our team navigated uncertainty and helped the most sophisticated advertisers fuel their recovery, with new approaches to channels such as CTV. I'll come back to CTV in a few minutes. Before I do that, I want to give color about the third quarter, because I think it will give insight as to why I'm so bullish on our future. Since April, we've been focused on understanding where we are on the economic recovery curve. Some industries, such as CPG, pharma and healthcare were on the leading edge of that curve, as we would expect. In fact, some companies in those industries never fully shut down their digital advertising campaigns. Others are a little farther back, restaurants and retailers, for example. They needed to advertise that they were open and message what their new normal looked like in terms of pickup and delivery services. However, their businesses have not yet completely returned to normal. And then further down the curve, of course, you have other industries like, auto and airlines and hospitality that remain in various early stages of recovery. My bullishness isn't because I think the macro environment is back to normal. We all know that's not true. Our positivity about our future is driven by the share gains that are happening during this time of uncertainty and the numbers show it. We've spoken in the past about our 95%-plus retention rate, and we're seeing no deviation from that. In fact, I would assert that customers are relying on us more and more. I see that not only in our growth numbers and the trends underneath those numbers, but also in the conversations that I'm having with advertisers every day. So, today, I'd like to break this discussion down in three ways. First, how we have seen advertisers become more deliberate in 2020 and what that's meant for us. Second, how the tipping point in TV has proven a major factor to our growth in 2020. And third, how all of this adds up to a few things that I'm most excited about for our future, especially starting in 2021. Let's start with the first item. Advertisers have become more deliberate. Brands and agencies that advertise more effectively, who leveraged data to be more nimble and agile are gaining share. In 2020, almost every marketer and every large brand is being asked to do more with less. Every advertising dollar has to be accounted for. CFOs are more involved in marketing and advertising decisions than they've been in years. They become a lot more focused on what business value is created by advertising. And that means that advertisers have to focus on ad opportunities that are measurable and comparable, where the business ROI can be understood and proven. As companies reactivated their ad campaigns, they had an opportunity to let the world know that they are still there and open for business and in what capacity. But because the world changed so fast in March and April, advertisers quickly realized that effective advertising requires new levels of agility. Now national brand campaigns had to be complemented by highly local campaigns specific to the circumstances in a particular region or state. But there was a much greater focus on reaching specific audiences with specific messages. The need for agility impacted more than campaign planning and management teams. Creative teams had to suddenly develop content in days versus months to take account for the constantly changing environment. Combine those two factors, the need for new kinds of agility and the need to prove ROI, and you can recognize how marketers today need to not only be much more deliberate but also much more data-driven. To some extent, this is history repeating itself. There are parallels to the 2008 and 2009 recession when programmatic advertising first came on the radar for most marketers. Back then display and mobile advertising were the big winners. They won despite being weaker at winning hearts and minds than video, TV or audio. They won share because they were measurable and comparable, and marketers could prove effectiveness with credibility. Fast forward 12 years to the present and digital is leading the way recovery, instead of just supplementing it. While marketers were compelled to dip their toes in the waters of data and data-driven advertising 12 years ago, today they are all in across all advertising channels. And for the first time, advertisers are aggressively committing to the Open Internet because of the scale and results of connected TV and premium video. I maintain my prediction that eventually all premium video will make up about half of the global advertising pie. Now that advertisers can apply data to their premium video campaigns where hearts and minds are truly won, the long-term opportunity for The Trade Desk could not be more promising. Let me put some additional data behind these assertions. We recently surveyed more than 200 top advertisers, around 85% of them said they are under new pressure from CFOs to justify marketing spend and to measure against business goals. 50% are now having their typical measurement techniques questioned. As a result, almost all of them intend to adopt data-driven measurement strategies. This shift to being more deliberate has been a major driver of our growth this year. But we also see it play out in terms of business performance for those companies that prioritize data-driven advertising. And we see that industry-by-industry in consumer packaged goods, for example, those companies that maintained spend on our platform through the uncertainty performed better from a revenue growth perspective than those that slowed or suspended spending. Over the past three months, one CPG company lifted their same-store sales for one of their brands by over 40% utilizing a combination of CTV, mobile, and PC advertising. We've seen similar patterns show up across industries, whether it's pharma or fast food or retail or technology. So, those companies that are advertising effectively are gaining share. And as I said, if you want one particularly potent microcosm of this and our industry, you have only to look at what's happening within TV. Which brings me to my second point, how 2020 will go down in media history as a tipping point in TV. Our CTV spend grew more than 100% year-over-year in the third quarter, as advertisers follow consumers to streaming platforms. That consumer shift has created a tipping point. The number of U.S. households with traditional cable TV subscription is dropping to below 80 million this year. According to eMarketer, 77.6 million U.S. households will have cable TV packages this year, down about 7.5% year-over-year. That is a rapid acceleration from the 3% decline that they had been predicting at the beginning of the year. In addition, CNBC recently reported that at least three large U.S. media companies expect the number of U.S. households that subscribed to linear TV bundles will fall to about 50 million in the next five years. That is about a 40% drop from here. At the same time, advertisers will be able to reach more than 80 million U.S. households via CTV on our platform this year. The crossover at household reach on our platform versus linear TV bundles is only going to widen, and that's because on-demand streaming content is more convenient to viewers and because many U.S. households remain under considerable economic pressure and are abandoning their expensive cable TV packages. That live sports remain in a state of flux only adds to the acceleration in cord-cutting. All of this, of course, has massive implications for broadcasters and advertisers. Marc Pritchard, Chief Brand Officer at P&G, the world's largest advertiser, dropped a bombshell at the ANA conference a few weeks ago. He said that P&G would be moving away from the upfront model of TV ad buying. With TV advertising going digital, it makes no sense to make massive uninformed bets just because that's the way it's been done for decades. Now they can apply data to those decisions and be more deliberate. Relatedly, he also said that programmatic is their fastest-growing advertising channel, which speaks to how P&G and other advertisers want to apply data and optimize campaigns across all channels. P&G is not alone, of course. Advertisers such as Unilever and MasterCard are calling for similar rethinks of archaic TV advertising processes. We are also seeing other brands move away from the upfront and look for more agile data-driven options. That's why we're working with our customers to create digital alternatives to processes such as the upfront, which can provide them with a more efficient data-driven and transparent forward market for TV inventory. While these shifts in the TV landscape may have taken a few years, in a normal business climate 2020 accelerated this disruption and innovation into a few months. This transformation of TV isn't the only reason I'm so confident about our growth opportunities in 2021 and beyond, which brings us to the third main topic I want to cover today. Why I am so bullish about our future? It is impossible to talk about the future of The Trade Desk or the future of the Open Internet without talking about connected TV. That's because the shift to CTV is helping reinforce advertiser conviction that there is a compelling alternative to walled gardens. Like last quarter, I have spent a disproportionate amount of my time over the past few months meeting with agencies and brands. The first question invariably concerns helping them shift from user-generated content intent to premium TV content, that's because they are increasingly wary of the divisive nature of user-generated content. In fact, in that same survey of 200 advertisers, which I referenced earlier, 90% said they plan to shift ad dollars away from user-generated content. Indeed, we have won tens of millions of dollars of spend from UGC platforms in the last quarter alone, and we expect these trends to continue. We're also winning business from linear TV and expect to continue to grab share from that $250 billion worldwide TV market. In the third quarter, one e-commerce giant saw an 11 times return on ad spend for CTV on our platform. As a result of that performance, they shifted 10% of their linear budget to CTV. We're seeing similar shifts across our customer base. But the other side of the CTV coin is the massive surge on the supply side. Broadcasters are all pivoting to CTV. If you listened to Lindy Yaccarino, Chairman of Advertising & Partnerships at NBCUniversal at our recent Groundswell festival, you would have heard her talking about how the TV model has changed permanently. She is working with advertisers in new ways to bridge the world of linear to the incremental reach of CTV, recognizing that they are no longer thinking about advertising in terms of particular content, but in terms of reaching a particular audience. By the way, we've heard the same refrain from all broadcasters, whether it's Disney or Hulu or Channel 4 in the U.K. or ProSieben in Germany and so on. As you know, over the last few years, we have invested heavily to be ready for this opportunity. Indeed, you've heard me say before that the last 10 years has been a dress rehearsal for this moment. Through our comprehensive CTV partnerships, we have access to pretty much all CTV inventory. And increasingly, these are partnerships that offer direct access to that inventory. This includes both broadcasters themselves, or partners such as Magnite or FreeWheel. Our customers are prioritizing these partnerships because they maximize yield management and provide transparent access to a wide range of broadcast inventory. By contrast, broadcast TV is a ticking time bomb, where the economics are unsustainable. The ad to content ratio creates a terrible viewer experience. The cost of cable for the consumer is high. So, not surprisingly the move to CTV is accelerating on the supplier side as well as on the consumer side. Another reason I'm so bullish for our future is product. In 2021, we will launch one of the biggest upgrades to our system in company history. The release is called Solomar. As some of you saw in 2018, we delivered a massive upgrade to our platform, which accelerated our market share gains. That one was called Next Wave. We are still relentlessly committed to innovating and staying on the leading edge of our industry. We never take leadership for granted and we are always looking to improve our platform and deepen our relationships with our customers. Solomar will include a better user interface, one that brings all of our customers' buying and planning tools together for greater ease-of-use. We're also making it easier than ever to onboard and deploy their first-party data. We're improving data management, will continue to expand our identity products around the world, will make planning on our platform even better with a focus on ingesting and achieving customer specific goals and will release a meaningful integrated upgrade to Koa, the machine learning and AI engine that is always powering campaigns, even if users are away from their keyboards. Finally, this launch will include a new measurement marketplace that provides advertisers with more transparent reporting. This represents an even more compelling measurement alternative to the walled gardens who continue to grade their own homework. Everything about this release points to the primacy of first-party data and the ability to unlock the value of that data in an ad campaign, especially in connected TV. The third reason I'm so optimistic about our future is that we have deepened our relationships with brands. This is in addition to our core agency relationships. Brands understand they need to maximize the value of their first-party data and scale its deployment across their marketing function. And increasingly, brands understand the power of data-driven advertising to drive growth. Programmatic is no longer simply a line item on the media plan. It's a central part of the planning process. In most cases, brands will continue to work hand in hand with their agencies, but the amount of brand resources applied to this is growing every quarter. Fourth, I'm very confident about our international growth. Early on in the pandemic, many of our international markets slowed down first. But since we started seeing the green shoots of recovery, many of them have returned to very healthy year-on-year growth, including Tokyo and Paris, which have grown spend over a 100% year-over-year. The same dynamics that are happening here in the U.S. are happening around the world. Innovation and disruption have been accelerated. And in many cases with their advertising ecosystems much more concentrated than in the United States, these markets have the opportunity to leap ahead quickly in areas such as CTV. Lastly, I'm extremely confident in CTV's future because of the industry-wide movement that is galvanizing around the Open Internet. Even that phrase, the Open Internet, was something that only a few of us were using with any confidence a few years ago, but it's now a movement that has gained considerable momentum. The most important manifestation of this is the collaboration that is now happening outside of the walled gardens. The likes of which we have never seen before. Brands are looking for alternatives to walled gardens and alternatives to user-generated content and alternatives to broadcast TV and alternatives that are all data-driven. And, of course, alternatives that can be measured objectively. All of which point to the value of the Open Internet and all of which also mean that once again, the secular tailwinds are getting stronger for The Trade Desk. So, let me try to wrap this up by discussing some of the pressing items facing The Trade Desk and the Open Internet right now. I want to touch on the recent antitrust actions against Google. As many of you have asked about this, particularly in terms of what it might mean for us and the future of cookies. It is very difficult to predict what ultimately will transpire or what remedies might be, if any. All we do know is that it will likely take years. And that it will almost certainly create some level of distraction and change for Google. Ultimately, it doesn't change anything about our strategy. We are focused on offering a compelling alternative to walled gardens. One that enables a free and better Open Internet for all participants, for advertisers, data providers, content providers, and consumers. We're trying to distribute power among the competitive media market, not control the market. And as we have seen this year, there is growing demand for such an alternative to walled gardens that can execute at scale across every channel worldwide. The market will not allow Google to be the only company to offer effective ad targeting. There is too much collaboration and understanding of what's at stake for that to happen. As a key element in creating that compelling alternative, we have architected a new identity framework for the entire Open Internet, called Unified ID 2.0. It raises the bar, simply put, and creates a better and open competitive internet, one that also improves privacy controls for consumers. We have done this with the help and collaboration of players across the Open Internet, including governing and regulating bodies, such as the IAB. Large publishers are implementing this solution now. Some of the biggest names on the internet are asking to be involved. The leaders of ad tech companies are working together to make this a success. This is much bigger than The Trade Desk. This is an industry-wide collaboration on a level that we have never seen before in our industry. Because of that, regardless of what Google ends up doing with cookies, we believe that the industry will have a better upgraded alternative for identity that more effectively explains the value exchange of the internet and provides users with greater control and privacy. I firmly believe that Unified ID 2.0 will reach critical mass and adoption next year. And in doing so as an industry, we will have created a viable scale alternative to third-party cookies, one that is also browser and device agnostic. It's an upgrade across the board. The footprint of IDs that we're already working with is massive. In the last few days, you've heard that LiveRamp and Criteo will make their identity solutions interoperable with this. You've heard that Nielsen will be working with us to deploy Unified ID 2.0 for cross-channel measurement. And in the coming weeks, you'll start to hear from more advertisers and more publishers who are now part of this industry collaboration. If I could have fictionalized how this would go and the response from the market, I couldn't have written a more compelling story than what's actually happening. On a related note, I know some of you will have questions about Apple's recent moves regarding IDFA. We anticipate most users will ultimately opt in to IDFA in order to continue to enjoy personalization of apps across their devices. That includes things like Spotify, Dropbox, LinkedIn, Netflix, Facebook, or thousands of other apps. The last topic I would like to touch on is our most recent proxy filings. Our Board has proposed several amendments, which if approved would ultimately mean that our dual-class stock structure will sunset in five years. I don't want to go over the proposal specifically here today. There'll be time to do that in another forum, but I would like to provide a little context as to why the Board has made this recommendation. Many of you have been with us for our entire four years as a public company. And in that time, we've significantly increased our market valuation by thousands of percentage points. In light of that growth, sometimes it's hard to remember, but if you catch your mind back four years, you'll recall that there was a lot of skepticism around our industry and around our prospects, ad tech as an industry was looked down upon on Wall Street. Over the last four years, we've delivered significant shareholder return, but we've brought a new level of appreciation and respect for our industry and our role in pioneering the future of media as well. It didn't happen overnight. We climbed out of that ad tech penalty box by making promises and setting expectations, and then meeting them consistently quarter after quarter, because we knew we needed to build your trust. And that trust helped us provide you with a consistent view of our long-term strategy. The trust between The Trade Desk and its shareholders is extremely important because when you think about areas such as connected TV identity, upgrading our platform, international growth, these are not short-term or ad hoc decisions. These are decisions born of a long-term strategic plan. The next five years will be critical in our history as advertisers increasingly consider the value of the Open Internet and embrace an alternative to the walled gardens. The next five years will go a long way in determining the winners and losers. Our Board has determined that these changes will enable the company to continue to have that long-term strategic focus. Maintaining that focus maximizes our chances of continuing to deliver exceptional shareholder value. I just wanted to provide that brief context. As I know that many of you would appreciate that perspective, having been with us for the long haul. Now let me wrap up by coming back to where I started. We are highly encouraged by our strong performance in the third quarter. I have never been more proud of our team's performance than in this quarter. The team has done so much to set up our future and the future of the Open Internet. Because of that performance year-to-date, we're even more bullish about our ability to gain market share moving forward. Advertisers are becoming more deliberate with every ad dollar they spend and shifts in key channels, such as TV are only accelerating that trend. This makes our platform indispensable for our customers and partners. As Lindy Yaccarino said at our recent Groundswell festival when asked about why she spent so much time with The Trade Desk, she said, and I quote, it's because they are leading me to the future. With that, let me hand it over to Blake to cover the financials.

Thank you and good afternoon, everyone. We continue to operate in an uncertain and challenging environment. However, as Jeff mentioned, we are seeing advertisers accelerate their shift to data-driven advertising in 2020. I'm really encouraged not only by this shift, but also by our company's execution during this period of uncertainty by working closely with our customers and our results demonstrate our solid operational performance. For Q3, revenue was $216 million, representing an increase of 32% year-over-year. This represented a 45 percentage point acceleration from Q2. We benefited from several trends that helped us significantly exceed our expectations. One, existing advertisers shifted more spend to our platform during the quarter. This included CTV, which offers the ability for advertisers to apply data to their TV ad campaigns in ways that are simply not possible with linear. Two, we won a significant amount of new business from our competition, enabling us to gain share. And three, political spends steadily ramped up throughout the quarter and was particularly strong in the month of September. With the strong top line performance in Q3, we've generated $77 million in adjusted EBITDA, or about 36% of revenue. As you have seen historically, when we outperform on the top line, we often see that outperformance drop down to EBITDA, which it did in Q3. EBITDA also benefited temporarily lower than expected operating expense growth. From the channel perspective, in Q3, we continue to see improvements across all of our channels. For the quarter, spend in our mobile video, which includes connected TV, display, and audio channels all grew on a year-over-year basis. Connected TV spend was the strongest, running over 100% in Q3 on a year-over-year basis. Geographically in Q3, similar to last quarter, North America represented 88% of spend and international represented 12% of spend. All of our major regions, North America, APAC, and Europe grew spend well into the double-digits year-over-year in Q3. In terms of our verticals that represented at least 1% of our spend, nearly every category improved during the quarter, with many exhibiting strong resilience in the face of the economic uncertainty that Jeff discussed. In particular, health and fitness, our largest vertical in 2019, as well as technology and computing, food and drink, and home and garden, all performed well. Automotive showed consistent improvement as well during the quarter, ending with double-digit growth in Q3. Travel still remained negative on a year-over-year basis, but even that category showed relative improvement during the quarter and has improved on a year-over-year basis versus Q2 performance. Shopping also showed a noticeable turnaround in Q3, ending with growth well into the double-digits. And finally, as you can imagine, we have seen strong political spending in the month of September and also into October. However, it is fair to assume that we will still end 2020 as we had previously indicated, with political spend representing a mid-single-digit share as a percent of our spend. Operating expenses were $173 million in Q3, up 22% year-over-year. Although faster than we invested in Q2, our operating expense growth was a bit lower than expected due to a number of factors. First, our employee support costs, including travel and corporate events, ran lower and were down materially from the prior year due to the virtual environment. Second, our bad debt expense for the quarter was lower than we had originally assumed, partially due to strong receivables health. The aging of our receivables actually improved slightly year-over-year despite the volatile economic environment, which we're obviously pleased with. Third, while we continue to produce positive net hiring every month and grew headcount in double-digits year-over-year in Q3, we did not ramp our hiring as quickly as we had hoped, also partially due to the virtual environment. Income tax expense was $1.3 million in the quarter, mainly due to the increase in profitability in the quarter, which was partially offset by employee stock-based awards, the timing of which can be variable. Adjusted net income for the quarter was $62.7 million or $1.27 per fully diluted share. Net cash provided by operating activities was $88.5 million for Q3 and free cash flow was $66.5 million. The primary driver was the increase in net income and the change in working capital that can vary from quarter-to-quarter, depending on the timing of payments and receivables. DSOs exiting in the quarter were 101 days, up five days from a year ago. DPOs were 82 days, also up five days from a year ago. We exited Q3 with a strong cash and liquidity position. Our balance sheet had $557 million in cash, cash equivalents, and short-term investments at the end of the quarter. In Q3, we paid down $70 million debt or about half of our revolving line of credit that we drew down against in the very early days of COVID-19 out of an abundance of caution. Since the end of Q3, we have paid down the remaining $72 million of our outstanding line. And as of today, we have no revolver debt on the balance sheet. I'm going to use the remainder of the time today to discuss Q4. Please be aware that our business continues to be impacted by the COVID-19 pandemic that has significantly impacted advertiser demand. Q4 has historically been our strongest quarter, driven by holiday ad spend. However, we continue to face a period of higher uncertainty in our business outlook. Assuming that the economy continues to improve, and we do not have any major COVID-related setbacks that impact historically strong holiday ad spend, we estimate Q4 revenue to be between $287 million and $291 million, which would represent growth of between 33% to 35% on a year-over-year basis, a modest acceleration from our Q3 results. Under this assumption, we estimate adjusted EBITDA to be at least $115 million in Q4. I would remind you that the relative strength of our EBITDA forecast is in part due to the virtual environment our teams are working in. While there is continued uncertainty about the economic environment, we are pleased with our momentum, and we remain highly optimistic about the long-term growth prospects for our business. We believe we have the structure in place to accelerate growth and scale our business efficiently, as economic conditions improve and are cautiously optimistic about continued measured improvement through Q4 and into 2021. That concludes our prepared remarks.

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

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

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

Here are some initial thoughts on how investors could consider the opportunity for CTV in 2021.

Certainly. The upfront advertising market this year was particularly weak because many decisions were made during late March and early April, a time filled with uncertainty in the global economy and media sector. Many people are expressing skepticism about the traditional upfront process, with some companies indicating plans to skip it altogether due to ongoing uncertainties as we move into 2021. This suggests that television advertising may increasingly shift towards connected TV and operate more like a spot market rather than relying on upfronts, which could be advantageous for us. Additionally, we are investing in products to enable digital platforms to engage in a new version of a forward market, collaborating with various players in the premium content arena to shape this. I am very optimistic about our opportunities in 2021 due to favorable trends in television driven by the broader economic landscape.

Terrific. Thanks again, Jeff.

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

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

I'll address the first question, and then Blake can take the second. To answer the Apple IDFA question, I'll provide two perspectives. First, from our company's viewpoint, about 10% of our spending uses IDFA, and since we've had limited targeting on that portion for quite some time, any new limitations won't significantly impact our business. We analyze around 12 million ads every second, and if we restrict data usage on a million of those ads, we simply focus more on finding valuable opportunities among the remaining 11 million. Therefore, I don't anticipate any substantial effect on our business in the way it might affect others. For context, while Facebook may express concerns about a major impact, their reliance on mobile is around 70%, which is quite different from our 10% IDFA. Additionally, I believe Apple is attempting to undermine Facebook and Google's business models, showing a stronger commitment to payment over the advertising ecosystem. What hasn't been sufficiently addressed is that limiting IDFA usage across all apps—not just for advertising but also for personalization features in applications like Netflix or Dropbox—will lead to a significantly compromised consumer experience. Consumers may find themselves needing to adjust settings to enhance their experience. I think this scenario is likely, particularly since many companies, including us, are dedicated to providing fair and responsible personalization. We've seen a similar situation with location services on Apple, where users eventually gave consent when it mattered for a better experience. Long-term, I foresee users opting into IDFA, which won't hinder the personalization industry significantly. However, given our concentration on connected TV and serving as a gateway across all channels, this small part of our business isn't a major concern for us.

Sure. Thanks, Jeff. I'll address this question, and feel free to add anything at the end, Jeff. Regarding the second question about investment and margins, I can provide some context. We're very excited about the investment opportunities ahead of us, whether in connected TV, international identity solutions, or product development like Solomar that Jeff mentioned. Our aim is to drive investment in areas that promote platform spend growth. As we move into 2021, there remains significant uncertainty surrounding COVID and the broader economy. In Q3, we've seen support costs, travel, events, and hiring generally stay below pre-COVID levels. We are confident that once we return to normal, which could be anytime in late 2021 or 2022, our margin structure should match what it was before COVID, and potentially improve as we scale. However, it's important to note that we do not target a specific EBITDA. We are excited about the areas we want to invest in to drive growth and are always on the lookout for those opportunities. If we can invest more with a positive long-term return on investment, I will support it. It's essential to maintain a balanced perspective.

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

Next question, Chloe.

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

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

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

Next question, Chloe.

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

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

Thank you for your question. It's a bit complex because third-party cookies are still around for the next 18 months. During this time, Unified ID 2.0 will serve as a supplement. However, I believe it will become the primary method for targeting on the Open Internet before third-party cookies disappear. When considering adoption, keep in mind that companies like LiveRamp, Criteo, and Nielsen have a significant presence. Their focus on interoperability and adoption is essentially about combining our reach with theirs to start. If I were to share the list of all the media players involved with us and working on this initiative, it would be quite impressive. I've never witnessed such adoption in the history of the internet. This success is likely due to how we've developed the product to improve upon cookies with encryption and better terms of service, eliminating cookie mapping issues. It's a simplified system for publishers that clarifies the exchange value of the internet. We're also enhancing consumer controls with a system that allows for one-time consent across applications and websites, making it easier for users to navigate the internet. These elements represent a significant upgrade overall. Given the existing momentum, there’s little reason for any company not to participate, as it benefits everyone involved—advertisers, publishers, and consumers alike. We've successfully created a solution that works for all, which is why we’re seeing such strong momentum.

Thank you.

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

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

This is a complex issue. In the world of third-party cookies, a lot of syncing is required. For instance, if Google identifies a user as ABC and Facebook identifies that same user as 123, they need to communicate to align their understanding of that user. When you see different pixels loading in your browser, it's these companies communicating to establish a common understanding and create a unified internet currency. Unified ID 2.0 aims to replace the constant syncing with a standard that everyone can use. This approach does not aggregate data; it is designed to avoid that. The ID itself does not have data linked to it, allowing the individual companies that have acquired insights or data to utilize that within their own systems without sharing it widely. Everyone has an interest in developing this understanding to improve the current system. We based our approach on the IAB's recommendations for the ideal solution and worked with partners like Criteo and LiveRamp to ensure interoperability, even though they are competitors. We presented a nearly finalized version to them and asked for their input on modifications needed for adoption with their systems. Regarding measurement, you are right that companies like Facebook and Google excel at showcasing their impact in advertising due to their reach in generating conversions. The Open Internet needs to enhance its visibility in this regard, especially in areas like CTV and audio. We aim to integrate with top-tier measurement solutions and will be sharing more about our measurement initiatives and partnerships in the coming year, starting with collaborations with Nielsen, which has been a leading standard in TV measurement for years.

Next question, Chloe.

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

Thank you very much and congratulations on a really impressive quarter. Jeff, I have two questions for you. First, how could potential changes in the political environment impact your ecosystem, particularly regarding the walled gardens and the leadership changes? Could this have a significant effect? Second, regarding a topic you mentioned earlier, which is China. It seems that China has now moved past COVID and opened up, showing impressive growth. How do you view that business in terms of its contribution? Was 2021 going to be the year where China started making a significant impact for you, or is 2021 now going to be that year? Thank you.

Great. First, regarding the political environment, I assume you are referring to the increased scrutiny that big tech is currently facing, and that situation continues.

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

I don't believe it will have much impact on us. However, any effect is likely to be positive. As I mentioned earlier, the pressure on Google and my experiences with antitrust issues at Microsoft over a decade ago suggest that big tech is under significant scrutiny. This scrutiny is likely to cause companies like Google to slow down and be more cautious, ensuring they do not violate antitrust laws. It may lead them to adjust their pricing strategies and become less aggressive in their targeting efforts, even if it's framed as a privacy concern. If the Open Internet does not collaborate effectively, they might be the only ones left targeting on the other side. Therefore, I expect to see some small benefits, but the most important point to emphasize is that we were comfortable with the industry landscape as it was. Our business has always been built on objectivity, focusing on the demand side so people recognize who we are. A decade ago, we positioned ourselves as a counter to Google's all-encompassing approach in the ad tech stack, choosing instead to concentrate on the buy side, which afforded us a level of transparency and objectivity unattainable for someone in Google's position. If they need to slow down, that's great. If they don't, that's fine too. We're committed to the same principles that have brought us success, and we believe we are better positioned to succeed now than we were eleven years ago and we look forward to continuing this journey.

Thank you, Jeff. Next question, Chloe.

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

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

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

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

We have had high hopes for China for a very long time and have been making investments there for a few years. While it's difficult to predict exactly when we will see significant results, China is currently leading us in growth rate. The progress we've observed this year is truly remarkable; I wouldn't have noted such positive signs in previous years. We are focused on expanding our team and enhancing our product offerings. Our goal is to replicate our success in the Chinese-speaking world as we have in the English-speaking world. The majority of our growth has come from English-speaking countries like Australia, the UK, and the United States, although we have seen success in places like Germany as well. We believe there is potential for similar growth in the Chinese-speaking world, which extends beyond just greater China, and we are noticing these positive signs this year. I am keen to invest more time there and look forward to returning to a place that I cherish once things return to normal.

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

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

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

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

All right. Last question, Chloe.

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

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

Sure. Thanks. I'll provide some additional perspective. In Q3, we've observed the effects of the virtual environment, which has led to lower support costs related to travel and corporate events. This decline is significant not only compared to the previous quarter but also year-on-year. You can also check our EBITDA guidance for the fourth quarter, which indicates some continuation of these trends. Looking ahead, one reason we're able to maintain a lower cost base is that both we and our customers are operating in this virtual setup. We are committed to serving and assisting our customers in every way possible. If there are any changes in behavior on a broader scale, we will adapt, although I personally do not expect that. The timing of any such changes varies by individual perspectives, and no one can accurately predict it. As we grow larger, we should experience benefits in our margins through increased scale and efficiencies. In terms of immediate factors, that sums up my thoughts. I hope that helps.

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

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

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