Trade Desk, Inc. (TTD) Q3 2021 Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to The Trade Desk, Third Quarter 2021 earnings conference call. At this time, all participants have been placed on listen-only mode and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Chris Toth. Sir, the floor is yours.

Thank you, operator. Hello and good afternoon to everyone. Welcome to The Trade Desk, Third Quarter 2021 Earnings Conference Call. On the call today are 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, our business, and results of our operations, in addition to potential supply chain disruptions that could disrupt advertising spend are all subject to change. Should any of these risks materialize or should our assumptions prove to be incorrect, actual financial results could differ materially from the projections 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?

Thanks, Chris, and thank you all for joining us today. I'm here in Europe this week meeting with some of our colleagues, customers, and partners. And I'm thrilled to be joining you from our recently reopened London office. For Q3, I'm pleased to report that The Trade Desk had another very strong quarter. Revenue was $301 million, a 39% increase from a year ago, once again exceeding our own expectations. Excluding political spend related to the U.S. elections in Q3 of last year, our growth was about 47% from a year ago. This performance builds on our momentum year-to-date. I'd like to start by sharing five major highlights from this last quarter. First, video, which includes connected TV, accounted for nearly 40% of our business, our highest ratio ever, and our CTV growth has not just been here in the U.S. Like last quarter, CTV spend grew more rapidly in EMEA than any region in the world. The second, in Q3, our international growth once again outpaced domestic growth, a trend that we expect to continue over the long term. Inventory expansion also continued at a strong pace. Third, the Walmart DSP recently launched, which is of course built on top of The Trade Desk platform. It is early days, but we are starting to see test budgets from some of the largest brands in the world flow through the platform. And perhaps most exciting, these budgets are incremental. Fourth, Unified ID continued its strong industry-wide momentum and is reaching critical scale in the market. And fifth, our mobile business continues to be resilient. As we predicted, the most recent iOS changes have had no material impact on our business, and we expect that to remain the case. With that, I'd like to give you our perspective on the state of the market and then get into a few ways in which we are innovating to drive growth in this market. I get asked every day about where this market is heading because the pandemic has changed everything, because it has massively adjusted the media and tech landscape. It has accelerated the shift to CTV, it forced brand marketers to embrace data, and has driven a higher focus on real-time agility for everyone in our industry. I think this is an important backdrop to why we're doing so well and why our prospects are so bright for the future, and why I'm so optimistic about the future of the open Internet. Just as a reminder, according to IDC, the total advertising market today is estimated to be about $750 billion and is estimated to exceed $1 trillion in just a few years. Over time, I believe that nearly all advertising will be digital and nearly all of it will be executed programmatically. As that shift happens, accelerated by the pandemic, our commitment to the open Internet only intensifies. Everything we do in terms of our investments, engineering priorities, partnerships, and our go-to-market model are designed to create a better Internet. We want an Internet that is open, privacy-safe, and competitive, not one that's owned by just a few companies. As we work to advance the open Internet, we have a level of support from ad agencies, advertisers, industry bodies, TV content owners, and independent ad-tech that is unprecedented. We never thought our vision would be shared by so many companies outside of our own Company. More than ever, companies and marketers are concerned about the Internet being fair and competitive, and many of them are looking to us to help the Internet reach its potential. It's also in that context that many people in recent weeks have asked about our response to the unredacted version of the antitrust complaint against Google filed by a multi-state coalition led by the Texas Attorney General. Of course, the majority of the complaint alleges, among other things, that Google has engaged in unfair and anti-competitive conduct using market power built on top of DFP, which is Google's ad serving product for publishers. I expect that Google will take steps to make the market fair given the scrutiny they are under. That would be a positive development for the industry, as well as good for The Trade Desk. I want to remind everyone that we have been, we are, and we expect to continue to do very well regardless of Google's policy choices. A very small percentage of our business runs through Google's ad exchange and we're not dependent on Google for our business. The bottom line for us is that the market will always ultimately gravitate to transparency and competition over time. We will continue to innovate to drive the industry in that direction and to deliver more value to our advertising customers. If we get that right, and I believe we are, as you can see in our performance, we will grab more share of ad spend. To that end, I'm obsessed with the supply chain. The healthier the supply chains, the more competitive and transparent the open Internet will be, certainly in contrast to walled gardens. Of course, we only serve the buy-side and that will never change, but serving the buy-side demands that we do our part, working with the industry, to make sure the supply chain is as efficient as possible so that everyone in the ecosystem provides more value than they extract. We are innovating in the supply chain in ways that are not always obvious. In the last few months, for example, we've been working with the supply side to further reduce duplication of ad inventory. Because publishers use multiple supply-side platforms, or SSPs, we often have access to the same inventory from multiple sources. We've asked those SSPs to put in place a solution that identifies duplicate inventory so that we ensure bidding on the right impression at the right time, all the time. There has been overwhelming support and adoption for this approach as it increases overall supply chain efficiency. In the same vein, I also want to address the future of identity for the open Internet. UID2 is setting new benchmarks every week and every month. The growth is phenomenal. I've never seen the industry come together like this around a common agenda, collaborating on new technology that benefits all participants. The daily avails on our platform with UID2 reached an all-time high just last week, having broken records dozens of times through August, September, and October. The scale we have been able to build in a relatively short amount of time has been outstanding, and it's thanks to unprecedented industry-wide commitment and collaboration. Everyone in the open Internet is aware that Google has announced that they intend to get rid of third-party cookies in 2023. I maintain that this is a strategic mistake for Google to do, but their policy changes have created collaboration among the open Internet that probably wouldn't have happened otherwise. When fully implemented, we believe UID2 creates a better Internet for consumers with higher standards for consumer privacy than anything possible with cookies. The momentum and adoption of UID2 underscores that. Even some of the walled gardens are passing an encrypted version of UID2 in their marketplaces and ecosystems. One amazing new milestone is that many of the largest advertisers on our platform are now transacting on UID2 or are in the process of implementing it. As you'd imagine, some of these are among the biggest advertisers in the world, and nearly all of the major ad agencies and holding companies like Omnicom, Publicis, WPP, IPG, and even independent agencies like Horizon have also adopted UID2. The case studies are just starting to roll in because a common currency makes it easier for brands to use first-party data than cookies ever could. They are using that data more often and more safely. One early case study is with Made In, one of the fastest-growing cookware companies in the U.S. They are using UID2, the new industry identity currency, in their campaigns and seeing amazing results. They have seen a 20% improvement in cost per acquisition. Not just that, but they're seeing their time to convert per user improve by 33% compared to when they don't use UID2. That means they're driving campaign precision and putting their advertising dollar to work as hard as possible. As a reminder, UID2 started with us, but it belongs to the Internet today. It is open source and being used around the world and across many functions of the Internet, from payment companies to cloud companies to beverage companies, to agencies, to exchanges. New ideas are making the open Internet more effective. Meanwhile, CTV is expanding the open Internet in new ways. Since March of 2020, everything has changed about TV. The move to CTV over that time has been the fastest secular shift we've seen at The Trade Desk. Before the pandemic, CTV was getting premium CPMs because of scarcity of AVOD inventory. Now AVOD inventory is growing rapidly and premiums require improvements in efficacy. That means advertisers need an objective platform more than ever: a platform that does not own content or its own content channel, a platform that helps advertisers decide what to buy objectively while managing reach and frequency. That's a major reason so much CTV demand is gravitating to The Trade Desk. Lastly, concerning the state of the global advertising market today, roughly two-thirds of the total advertising market is outside of North America. That's why we invest so heavily in key growth markets globally. In recent months, we've established a presence in markets like India, Italy, the Nordics, and Taiwan. We're making very encouraging strides in every region where we are located. To wrap up our perspective on the state of the market, I'd like to circle back to where this all started. I believe digital advertising is still a relatively young industry. I got into this business initially because I thought there was a better way to price advertising that we could build something like the stock market or the markets for commodities, where there is transparency of information and mechanisms that drive efficiency. These are the kinds of characteristics that any mature market creates over time. This approach remains central to our mission at The Trade Desk. We believe that an open, competitive market for digital advertising is the only way to build long-term trust of marketers. It's how we unlock that $1 trillion industry TAM, the bulk of which will be digital. Given all the opportunities created for us in this fast-changing landscape, I'd like to talk about a few things that are driving us to win more share during this unique moment in time. Recently, we launched the biggest upgrade to our system ever. In terms of adoption, we're exactly where we expect to be. By the beginning of 2022, the majority of impressions on our platform will be bought via Solimar. Feedback from our customers has been very positive. They value the platform, the ability to be more granular in setting goals, and how Solimar activates on those goals. Everything from campaign optimization to more meaningful measurement, just as important, the use of both precise goal setting and activation for first-party data has increased the ability of our AI to better optimize every campaign with data. Our goal is for advertisers who activate Solimar to utilize more data and achieve measurable improvements in return on ad spend. In doing so, that helps the advertising flywheel spin much faster. We're also getting very positive feedback from industry analysts. Gartner just released their Ad Tech Magic Quadrant for 2021. The Trade Desk continues to be a market leader, scoring highest for completeness of vision. Perhaps more interesting though, Gartner measures all participants across four critical capabilities. The Trade Desk ranked number one for three of those: media planning, campaign piloting, and campaign results analysis. Each of these is a key element of Solimar. When you consider that we're going up against some of the tech industry's heaviest hitters, such as Google and Amazon, it's pretty remarkable to be leading the pack in these categories. That's credit to our amazing engineering and product teams and the work they put into Solimar. It also speaks to the focus we have on customer service. We're always looking to provide more value than we extract. Solimar is playing a role in driving innovation for our customers and for the industry. Solimar is allowing us to advance ideas and efficiencies that are benefiting the entire digital advertising ecosystem. One of those areas is our measurement marketplace. Instead of only using our metrics, we've created an entire marketplace to measure success. Having this marketplace makes end-to-end measurement possible at unprecedented scale. Nowhere is this more apparent than in retail. You all know about the partnership with Walmart, which is now available to many of the world's largest advertisers. Major brands such as PepsiCo are already actively testing campaigns in the Walmart DSP. Walmart is clearly a pioneer here. They are unleashing their shopper data so that advertisers can understand the relationship between their advertising tactic and actual in-store or e-commerce activity. We think about this as closing the loop. For many of our largest CPG advertisers, for example, the bulk of their products are still sold in physical stores. If they run an ad for toothpaste, they can now get a much better sense of how that actually drove sales, thanks to in-store shopper data. This means that advertisers can be much more precise and agile at every stage of the advertising funnel. Advertisers can understand the impact of their campaigns at a micro level in a particular region, a specific store, or at different times of day. They can also look at their impact across different channels and see which ones are working. It's not just Walmart. We are now working with many of the major retailers in the U.S. and many more around the world. They will each approach it in their own way, but major retailers everywhere are looking to make the most of their own shopper data so that they can provide the same kind of closed-loop measurement via our platform to the buy-side. They are joining forces with us because they trust us. They know we don't compete with them, and they know they will retain control of their data. Similar to when an operating system is upgraded, there were many upgrades to key features on Solimar. One of those features is called predictive clearing. What this means is that we use our data tools and our AI to predict the clearing price of first-price auctions. Advertisers can then bid as close to the winning price as possible without overpaying. With Solimar's upgraded predictive clearing, we've massively upgraded the product to use AI to help our customers save collectively tens of millions of dollars. This upgrade allows us to be much more aggressive in bidding and budget management, significantly lowering CPMs and increasing an advertiser's return on ad spend. We're seeing predictive clearing improvements resulting in the reduction of CPMs across the board for customers that have activated this feature thanks to the Solimar upgrade. These kinds of efficiencies are important to all of our customers but are particularly attractive to brand marketers who are increasingly paying attention to programmatic and efficacy. One long-term effect of the COVID pandemic is that there is more pressure than ever on brand marketers to show ROI for their marketing investments and to show how their campaigns are driving business growth. As a result, brand marketers are putting a premium on data and measurability. Solimar is proving to be tremendously beneficial here. One area where we're making a great deal of progress is new ways of thinking about the marketplace for data and how Solimar ensures we surface the right data at the right price. Of course, our customers have always used data to drive their campaigns, but the market for that data has not always been efficient. Advertisers would have a sense of what kind of data they wanted to apply, say ad group or geo-location, and they would go find the data for the campaigns in a fairly analog way. With Solimar, the process of finding the right data for each impression is far more automated. Because of more first-party data usage and more precise modeling in Solimar, our AI tools automatically find the right data for each impression that our platform is bidding on. What that also means is that Solimar may surface many more points of data that are relevant and valuable to a campaign and its goals. If an advertiser had been using two or three data points up until yesterday on Solimar, they will be using more. As a result, the ad impression is much more enriched, is more valuable and precise, and drives better return on ad spend. Lastly, I would like to touch on our continued growth in CTV. I spoke at an event a few weeks ago called Media Montage. Because of COVID, it was actually held in Midtown Manhattan. A few of you may have actually been there. The event brought together many of the leaders of the media industry, and there were some fascinating discussions around the future of TV. I noted that when I commented, as I have before, that linear or cable TV is a ticking time bomb and soon everyone will consume content via CTV. There was much more agreement than in years past. The notion that TV is moving to the Internet is not nearly as controversial as it was two years ago. COVID has accelerated the consumer shift to digital streaming platforms. Perhaps less appreciated are the scale, the speed, and the permanence of that shift. It's happening fast. In terms of scale, we've already reached a turning point: today we reach more U.S. households via CTV than via traditional linear TV. The point about speed was driven home at the Adweek conference a couple of weeks ago. Our Chief Revenue Officer, Tim Sims, was onstage with brand leaders at Anheuser-Busch, Volkswagen, and Colgate-Palmolive. Unprompted, those advertisers said they believe that the majority of TV advertising will be executed programmatically on CTV within three years. It was a fascinating insight into the future of TV that's worth a lot of replay if you want to understand where this industry is headed. Pre-pandemic, we had a much longer sense of the time horizon for that kind of transformation. Changing consumer habits have accelerated everything so that we have access to the best and broadest portfolio of premium CTV inventory, both here and around the world. Nowhere is that more apparent than in live sports. For a long time, many TV industry insiders felt that live sports would be the tentpole that would prop up linear TV. But once again, consumers have voted, and they are switching to digital platforms to watch their favorite teams. We added the NBA League Pass package from Turner Sports to our CTV inventory last season. Viewership on this platform increased around 50% last season, and their head of digital strategy, Seth Leshitz, believes that digital viewers are much more 'leaned in,' to quote him directly: the digital audience we see tends to be stickier because they are really seeking out the content specifically; there are deeper engagements versus someone sitting back on the couch and watching it. eMarketer estimates that there are almost 60 million digital sports viewers in the U.S. right now, rising to more than 90 million over the next three years. The notion that live sports will save linear TV is fanciful, which is why so many broadcasters are pivoting rapidly. The number of impressions we see for the NFL, for example, is up almost six-fold this year. We're also very excited that we've recently added Peacock, which in addition to amazing original content also has premium live sports franchises such as the NFL, the English Premier League, and, of course, the Olympics. As you can see in our results, demand for CTV continues to outpace all other channels both inside and outside North America. I don't see that trend changing for the foreseeable future. Video is the most effective way to reach consumers heart to mind, and advertisers are following the TV audience to new digital platforms. At the same time, content providers are working with us directly so that we have access to premium CTV inventory at scale. I'd like to wrap this up by bringing this back to the market opportunity. The total advertising industry is moving rapidly toward that $1 trillion mark. The bulk of that will be digital, and marketers are embracing data-driven decisioning more aggressively than ever; our long-term investments have positioned the Company to capture this opportunity in the years ahead. Solimar is an innovation platform that is creating new value for advertisers because it unleashes data and drives greater return on ad spend. UID2 is becoming a more widely used identity currency across the entire global open Internet and we continue to invest so that we can lead in CTV, the fastest-growing channel in digital advertising. Consumers are driving advertisers and TV content providers to rethink the future of TV, and that's going to be data-driven. These are our priorities because this is how we see the industry evolving. I hear the same things in every customer conversation I have, regardless of industry or geography. That's why more of the world's leading advertisers are standardizing on our platform and why our retention rate remains over 95%. It's why the major holding companies are embracing UID2. It's why Walmart is partnering with us as they unleash their retail data. It's why SSPs are working with us to optimize the supply chain. I could not be more excited about our growth prospects as we close out this year and head into 2022 and beyond. Now, I would like to turn the call over to Blake before moving to Q&A. Blake?

Thank you, Jeff, and good morning everyone. As our financial performance in Q3 indicates, we continue to execute well in the current environment. Connected TV continued to be our fastest-growing channel at scale around the world. Solimar is ramping on plan. The Walmart DSP is now available, and as we have consistently stated, we have seen no material impact on our business from the recent iOS platform changes. The value of our business model, being the largest independent DSP focused on the open Internet, continues to resonate strongly with our customers and has allowed us to build trust over the long term. Our appeal is the simplicity of our partnership. We focus exclusively on the buy-side, hunting for the impression opportunities that are the most valuable for our customers without the conflicts of owning inventory. When we deliver value for customers on a campaign, they almost always return for future ones, which has led to a retention rate of over 95% across the previous seven years. Q3 was an incredibly strong quarter and a testament to our belief that advertisers are accelerating their shift to data-driven advertising in 2021. Revenue of $301 million was up 39% from a year ago. Excluding political spend related to the U.S. elections last year, which represented a mid-single-digit percentage share of our business in Q3 of 2020, revenue increased approximately 47% year-over-year. During the quarter, we benefited from continued growth in the digital advertising environment from both agencies and brands. Our performance in Q3 was broad-based across all channels, regions, and nearly all verticals. We continue to grow our top line quickly while scaling our cost structure efficiently, helping drive meaningfully positive EBITDA. In Q3, we generated $123 million in adjusted EBITDA, or about 41% of revenue. During the quarter, our EBITDA continued to benefit from temporarily lower-than-expected operating expenses, partly driven by the virtual environment. This includes items such as travel and live Company events that are very gradually starting to return to our core structure. From a channel perspective, CTV by a wide margin led our growth again during the quarter. In Q3 video, which includes CTV, and separately mobile, each represented roughly 40% of our business as a percentage share. Video as a percent of our mix specifically continued to grow rapidly, and similar to last quarter, the increase in video was driven by CTV. Display and audio represented about 15% and 5% of our business respectively. Geographically, North America represented 88% and international represented 12% of our business for the quarter. APAC led our growth across all regions this quarter; Shanghai and Hong Kong drove spend growth in Northern APAC and Australia and Indonesia led our growth in Southern APAC. In terms of EMEA, London led the way, nearly doubling year-over-year in Q3. As Jeff highlighted, CTV across EMEA was again very strong, growing faster than any other region in Q3. CTV continues to rapidly increase its relative share of spend in Europe, while still small compared to the share of CTV spend produced in North America. We are optimistic about the trends we're seeing that set us up well for next year. In terms of the verticals that represent at least 1% of our spend, nearly all of them grew nicely during the quarter. Travel, shopping, and home and garden were the strongest performers in Q3. We believe there's still the potential for share gain and improvement in most of our verticals. Operating expenses were $221 million in Q3, up 27% year-over-year. The growth in operating expenses during the quarter was primarily driven by investments in our team, particularly in areas like technology and development, and sales and marketing. These are the areas that drive our business as we continue to scale for longer-term growth. During the quarter, we saw encouraging leverage from both our platform operations and G&A expenses as we scale the business. Stock-based compensation expense increased 28% year-over-year. As expected, this marked a sharp deceleration from the first half of the year as expenses related to the Company's employee stock purchase plan moderated significantly. Income tax was approximately $20 million for the quarter, representing a tax rate of about 25%. Adjusted net income for the quarter was $89 million, or $0.18 per fully diluted share. Net cash provided by operating activities was $130 million, and free cash flow was $103 million in Q3. Strong cash generation during the quarter was driven predominantly by our operating results. I would like to remind you that the timing of cash collections and payments can significantly impact cash from operating activities and free cash flow results on a quarterly basis. DSOs exiting Q3 were 87 days, down 14 days from a year ago. DPOs were 73 days, down nine days from a year ago. We exited Q3 with a strong cash and liquidity position. Our balance sheet had $799 million in cash, cash equivalents and short-term investments at the end of the quarter. We have no debt on the balance sheet. Turning to our outlook for the fourth quarter, we estimate Q4 revenue to be at least $388 million, which represents growth of 21% on a year-over-year basis, excluding U.S. political election spend, which represented a high single-digit percent of spend that we benefited from in Q4 of 2020. Our estimated growth rate in Q4 this year will be about 33% on a year-over-year basis. We estimate adjusted EBITDA to be approximately $175 million in Q4. And finally, we anticipate our stock-based compensation to rise in Q4 from our normal run rate. This is being driven by approximately $95 million of incremental stock-based compensation expense we expect to include in Q4 related to a long-term CEO performance award granted on October 6th. The performance option has a grant date fair value that results in $819 million in stock-based compensation expense, which is expected to be included in our G&A expense over approximately five years. The total amount expense is unrelated to whether any of the performance award thresholds are ever met; the only shares that have met the threshold criteria outlined in the performance plan are factored into our total shares outstanding. In closing, we are pleased with the momentum of our business with large growth drivers such as CTV, our international business, our shopper marketing opportunity, which just kicked off with the Walmart DSP a few weeks ago, and our recent platform upgrade in Solimar. We remain highly optimistic about the long-term prospects for our business in 2022 and beyond. I believe we have the structure in place to continue driving long-term growth while scaling our business efficiently. I am cautiously optimistic about continued improvement in the future. That concludes our prepared remarks. With that, operator, let's open up the call for questions.

Thank you. Ladies and gentlemen, the floor is now open for questions. We do ask that if you are listening on speaker phone, to please pick up your handset for optimum sound quality. Please hold for just a moment while we poll for questions. And our first question today is coming from Shyam Patel at SIG. Your line is live. You may begin.

Hey guys. Congrats on the results. I had a couple of questions. First, for Jeff, you guys reported great Q3 and Q4 outlook when a lot of your peers are struggling and calling out macro issues. I wanted to ask a question about next year, just at a high level. Can you talk about how you view the setup and the key drivers as you head into next year? I know you touched on a lot of them in your prepared remarks, but I'm asking in the context of next year. You guys have CTV, shopper marketing, international, Solimar, political. And then second one for Blake. I know you guys haven't given specific guidance for next year yet, but could you just talk a little about how you're thinking about revenue seasonality next year given that the past couple years have been a little bit abnormal? Just how you think about revenue seasonality next year. Specifically, Q1 revenue tends to be down about 25% to 26% sequentially. Is that a reasonable assumption at this point? Thanks, guys.

First of all, Shyam, thank you for the congratulations and the question. I'm really excited about 2022. I don't know that I've gone into a year more excited than I am going into 2022. A part of that is the regulatory environment is actually net positive. If Google and Facebook are a little more controlled or maybe forced to make more deliberate decisions—or even more likely, if they go a little slower—that's a net positive for us given how much they've gained share over the years. Of course, there are things outside of our control too: changes in iOS and a lot of discussion this earnings season about supply chain challenges. We don't see any material impact from iOS, and we don't see any material impact from supply chain. Given that, it makes me even more excited about the things that are going really well. First, we're consistently grabbing share, constantly getting more than the space is growing. Second, we've never seen what's happening in CTV happen in any channel ever before. Cord cutting is accelerating. I mentioned that cable subscriptions are a bit of a ticking time bomb. Subscription fatigue around live sports and the upfront last year being a struggle anticipate creating more opportunity for CTV and programmatic, which is always programmatic. Here in London and across EMEA, CTV has incredibly developed. International CTV is growing faster than in the U.S. Shopper marketing is going incredibly well. We just went live with one of the largest retailers in the world, which is creating closed-loop measurement, and I predict many more similar opportunities to come. In 2022, we have a midterm election, and some forecasts show that spend in digital will be similar to presidential election years. We also shipped a new product, Solimar, which is going incredibly well. And UID2 is growing rapidly. So everything is going great. On seasonality, before I hand it to Blake: in general, the market was heading toward digital being always-on, and there's less of a ramp difference between Q1 and Q4 where there was a ramp caused by seasonality. There's an always-on mindset in digital. Before 2020, we were heading toward what we predicted to be roughly 45% of spend in the first half and 55% in the back half of the year. It's important to note that 2020, because of the global pandemic, changed all of that and is an anomaly. 2021 is a bit more normal, but still affected. We expect 2022 to be more normal, but Blake can provide more detail.

Sure. Thanks, Jeff. Yes. Just to reiterate what Jeff said, the sequential growth seasonality has changed a bit over the last 18 months while dealing with the impacts of COVID. I do believe we seem to be moving closer back to that normal historic seasonality trend, but it's still a little early and difficult to say exactly where the new normal seasonality ends up. It does feel like we're getting back to a more normal historical trend.

Got it. Thank you guys.

Thanks, Shyam.

Thank you. Our next question is coming from Vasily Karasyov at Cannonball Research. Your line is live, you may begin.

Hello, sorry. Can you hear me? Jeff, I wanted to ask you to go into more detail about what you're seeing after the Walmart DSP went live. What kind of additional color and takeaways do you have now and how does that inform your view of the size of the opportunity for the Company? Are you having discussions with other retailers? Could you give us an update on that? Also your view on how material the opportunity is to have closed-loop measurement for The Trade Desk—will that be an important business line or is it just nice incremental revenue?

Thanks for the question, Vasily. As it relates to the Walmart DSP, it's always better to start with the biggest in the world. It's phenomenal that we were able to create this partnership and close the loop with the biggest retailer in the world. We're only a couple of weeks in, so of course we're looking for green shoots and the potential ahead of us. That potential is obviously massive with shopper marketing being a roughly $200 billion industry. When you look at what we're doing in spend and revenue, that's still a tiny percentage. Our entire Company is a tiny percentage of the shopper marketing TAM. We think we're as eligible as anybody for that. That's the real hope of shopper marketing and what we are demonstrating here with Walmart. Especially in the U.S., most purchases are still made offline while most advertising spend is online; there is a deep need to bridge that gap and connect the dots between the two. Over the years, retailers like Walmart have tried to monetize their data by creating ad networks—silos where they would sell their data on their own. The most exciting thing is that retailers are recognizing that in order to compete with Amazon, they have to put their data to work in a much bigger way and close the loop so advertisers can optimize the billions they spend to sell product inside brick-and-mortar stores or in e-commerce. For the first time, I believe retailers and product owners are aligned in wanting something much bigger. Because Walmart, the biggest, has gone first, it's not a surprise that other retailers around the world are saying they need to execute the same playbook and do more. We're talking to dozens of retailers, the major names you would expect. When you look at that in totality, it is definitely one of the most bullish things we're working on right now. I'm encouraged, excited, and proud to be Walmart's partner, and equally excited about the partnerships ahead for us.

Thank you. Our next question today is coming from Tim Nollen at Macquarie. Your line is live. You may begin.

Thanks a lot. Jeff, wanted to ask how the Solimar rollout is going and maybe how that progresses. Is it a matter of converting existing users to this new platform or just how you progress with that? And relatedly, as part of Solimar you've talked about the data and the measurement marketplaces. I think I understand in principle how a data marketplace might work, but how does the measurement marketplace actually work? What does that mean? I guess you use UID2 as a means of identifying users, but what sorts of measurement are you including in that, and how does the marketplace work? Thanks.

We launched Solimar recently and we're about four months into it. The reception, especially given that it was our biggest release in Company history, has been unbelievably strong. Re-learning a new platform takes work, especially in a busy year with talent shortages inside agencies and brands, which makes training on something new require effort. It's a commentary on the strength of the product that we are on track to have the majority of our impressions bought on the new product by the beginning of next year. Typically, that transition might take one to one and a half years to go from 0 to 100%. It starts with enticing customers to move over; there are always stragglers you have to flip. We're getting much closer to full adoption based on how strong reception has been from the majority of our clients. As it relates to the data marketplace and the measurement marketplace: there have been many inefficiencies in the way the industry prices and selects data. The way third-party data has been priced and found has been poor in many cases because there wasn't a good discovery mechanism. Unified ID, combined with the tools we've built in Solimar to onboard first-party data, makes it easier to discover which data to buy. It's a little like Netflix: if you've never watched anything, there are no recommendations. The industry used to be like that for data. Now, because more data is available and the system has learned from usage, our recommendations for what customers should buy are far better than before. That creates the most robust third-party data ecosystem. The measurement marketplace is highly related to what we're doing with Walmart: instead of grading our own homework like some walled gardens, we make it possible for other parties—measurement partners selected by the brand or agency—to determine what success looks like. The brand can choose how to grade success: for example, using Walmart's in-store sales as the metric. Using those signals as proxies for how advertising spend drove real business outcomes improves choices around reach and frequency and many other decisions. We didn't determine success ourselves; we provide the marketplace so brands can select unbiased measurement partners. Putting all that together makes the open Internet far more sophisticated and reliable than before.

Thank you. Our next question today is coming from Youssef Squali at Truist Securities. Your line is live. You may begin.

Great. Thank you very much. Congrats on a really strong performance. Two questions. Jeff, can you speak to the level of adoption of UID2, particularly by brands? You've done a great job bringing on a lot of ad-tech partners, but what are the gating factors to bringing on a lot more brands over time? That's clearly the Holy Grail. And on 2022, at a high level, what's the setup for Connected TV beyond some of the color you've given? Particularly, accelerating adoption in Europe and Asia. Can you quantify current penetration of connected TV in the U.S. versus Europe versus the rest of the world? Thanks.

Regarding UID2 adoption: we've produced hundreds of millions of unique users inside of UID2. Growth rates are breaking records almost every week. We mentioned in prepared remarks that we broke record thresholds many times during the quarter. The month-over-month gains are high. The collaboration around this initiative is unprecedented, including competitors working together. Even some walled gardens are supporting passing an encrypted UID2 value in their systems so customers can use it if they want to. Infrastructure providers like Snowflake adopting it is important because it makes their ability to activate data better. Advertisers and publishers, agencies, and many other partners adopting UID2 has created tremendous momentum. Your point about onboarding brands is well taken: case studies like Made In prove the lift. Advertisers see better results when they onboard first-party data with UID2, and that prompts others to adopt. There's also a 'stick' element: third-party cookies are expected to be deprecated in 2023, so brands need alternatives to put data to work. There are secular tailwinds and product benefits pushing adoption, and this initiative is no longer just a Trade Desk project—it's open-sourced and used widely. It's bigger than us, and it's creating a better Internet for consumers because it allows more centralized, consistent privacy controls instead of forcing consumers to manage settings across many places. On expanding CTV internationally: we've started partnerships all over the world and continue to expand content-owner relationships. For example, our expanded relationship with Peacock gives us rights to sports and premium content. Doing more partnerships with content owners globally is our priority; in most major markets we already have a solid starting point similar to how we started with the largest retailers, and we will continue to build out from there.

Thank you. Our next question today is coming from Justin Patterson at KeyBanc. Your line is live. You may begin.

Great. Thank you. Jeff, you're crossing the $1 billion revenue level this year and there’s clearly strong retention with this model. What does the Company need to do to get to $2 billion or even $5 billion of revenue over the next few years? And as a follow-up, could you expand on the supply chain efficiency initiatives you're working on and how that can create opportunities going forward? Thank you.

Thanks for that question—it's one of the most important for us. I'm reminded of the movie Hoosiers, where the smaller team focuses on playing their game well rather than getting distracted. For us, it's similar: if we stick to what we do really well—win in CTV, service our customers, focus on the buy-side, make the supply chain more efficient, and add more value than we extract—we will go from $1 billion toward $5 billion faster than anyone else trying to play the same game. It's about fundamentals: protecting our culture, continuing to build technology the right way, and recruiting top talent. Winning in CTV is vital: the CTV market is fragmented but not so fragmented that aggregation is impossible; new platforms gravitate to our market approach and we can integrate to create a more efficient supply chain. International is another important driver; we've been investing ahead of revenue internationally and building teams. Many competitors cannot afford to make these investments as aggressively as we have, which is why we continue to win share. Regarding the supply chain: I would note that, as mentioned in prepared remarks, there's been discussion about the antitrust complaint led by the Texas Attorney General. Our strategy has always been to compete and prepare for the market to become fair and competitive. We expect that end state. The market is currently inefficient and not fully competitive, but it is trending to more efficiency. Google's ad exchange used to be the biggest; it's not the only dominant player for the industry anymore. We've plugged into many exchanges around the world. I believe Google needs partners like us more than ever. We will succeed regardless of their policy decisions.

Thank you. Our next question today is coming from Laura Martin at Needham. Your line is live. You may begin.

Great results. Two questions: Jeff, on shopper marketing and the Walmart DSP—you said Walmart has started and you're negotiating with a lot of other people to join. Closing the loop feels like best practice. Do you feel this shopper marketing closed-loop opportunity could be bigger than your core business today at maturity? And Blake, you were very careful to say 'nearly all verticals had grown in the quarter.' I'm intrigued by what didn't grow in the quarter and what percent of digital ad revenue would that represent as it starts to return, inevitably, in 2022? Thanks guys.

I look at the $1 trillion TAM and how to slice it. Two-thirds is outside the U.S., which is why we've been obsessive about growing internationally. Shopper marketing is incremental: that $200 billion TAM is incremental to the $1 trillion, but collectively it's substantial. I believe our share in shopper marketing at maturity would be similar to our percentage of the larger digital pie. I don't expect shopper marketing to surpass our core business, though we might win more than our share in that TAM, especially because closing the loop is the Holy Grail and we are well positioned to partner across retail. Our core business, what we've worked on for the last decade, will remain the lion's share of our revenue. We have only scratched the surface in both categories and it's still very early.

I'll follow up on the verticals question. The obvious vertical that showed pressure year-over-year this quarter was political. It was super high last year because of elections, so you see pressure there compared to a year ago, which is expected. The only other vertical to call out—though not a significant share of our mix—is family and parenting, where we did see some volatility and it was a little lower than normal for Q3, but nothing of major concern. Those are the ones that moved around; otherwise, most verticals grew.

Thank you. Our next question today is coming from Mark Zgutowicz at Rosenblatt Securities. Your line is live. You may begin.

Thank you. Just a couple on UID. Jeff, you mentioned UID2 daily avails are now in the billions. I was wondering if you could share what percentage of the media that you've sold year-to-date was resolvable to those avails. What do you expect that media mix to trend to in the first half of next year? And a quick follow-up: regarding implementation across large publishers, how many have committed to UID2 to date, and what might be holding others back? Thanks.

As it relates to the entire media chain, there's still work to be done for UID2 to be present from publisher to every link in the chain for advertisers. The bigger thing right now is where it's available in the graph where we view all the measurements, and that's been the most promising development: if you combine device IDs plus UID2, that sum is greater than device IDs plus cookies. So it's already creating more traction in the graph than we had before UID2 existed. There's still work to do, and it largely relates to needing more advertisers and publishers to connect UID2 throughout the entire chain. We expect advertisers to start because they bring incremental dollars, and that will incentivize more publishers to connect. The fact we've reached billions of identifiers creates incentive for both sides to implement; it's a matter of implementation effort and time. Regarding publishers, many of the top publishers have publicly supported UID2, including several high-profile news publishers and local outlets, and others are implementing behind the scenes. NBC has been public about interoperability as well. It doesn't matter whether publishers or advertisers go first: either path creates incentive for the other side. If publishers go first, advertisers will onboard first-party data to use that publisher inventory; if advertisers go first, publishers will implement to capture higher CPMs. We're already starting from the middle with infrastructure and scale, and that has created strong incentives for both sides to act now.

Is there an inflection point—some milestone—where implementation is no longer a hurdle and we see a flurry of large publishers sign up in the first half of next year?

I believe we've already reached an inflection point where anyone not implementing UID2 is at a disadvantage compared to those who have. The remaining work is organizational implementation across multiple parts of companies, which takes time, but the incentive and momentum are already in place.

Thanks Mark. Getting there, we have time for one more question.

Thank you. Our final question today is coming from Brian Fitzgerald at Wells Fargo. Your line is live. You may begin.

Thanks. Two things from Adweek: One was the benefits of using a new ID across the web and CTV for universal frequency capping. Can you talk about how much of a pain point that is for advertisers and unpack that a bit? Second, AMC Networks talked about partnering with you to enable programmatic, addressable ads in linear TV—wrapping a digital wrapper around linear impressions. How quickly are you seeing evolution from that standpoint? Thanks.

Thanks, Brian. I'll take the first part and our Chief Revenue Officer, Tim Sims, will take the second. For universal frequency capping: nearly everything in CTV is consumed behind a login—you're logged in with an email or account to the app or platform. Because of that login environment, there's a real benefit to using a common currency across apps and platforms. Consumers now watch content on many apps; five years ago it was mostly Netflix and Amazon, now it's many more and AVOD is growing fast. Advertisers want to control reach and frequency across all these apps, not app-by-app. If they do it app-by-app, they waste money, and that waste is unacceptable in connected TV because costs are higher and efficacy must be justified. You need universal reach and frequency to control waste and maximize effectiveness. Unified ID is strategically important for enabling universal frequency capping across the fragmented CTV ecosystem. Content owners also want better ad effectiveness because you can't win by increasing ad loads as in linear TV. Whether you're a content owner, advertiser, or a DSP, we all want universal reach and frequency, and the only way to achieve that at scale is with a common currency like UID2. Tim, on the AMC question?

Thanks, Jeff. Brian, on AMC and addressable linear: one of the things we're constantly doing on the CTV partnerships front is expanding and growing the amount of available television inventory. The AMC release is an example of that—it's a new, albeit initially small, area where we can create inventory with addressable linear television. From our perspective, this looks similar to how we operate in CTV: an open RTP request to The Trade Desk where we make a decision on an impression-by-impression basis and deliver an ad back to AMC. It's unique in that it's the linear feed, but functionally it operates like connected TV in that we get a request and can bid back in real time on linear television. It's early days but an exciting new corner of television that can be addressable and available on platforms like The Trade Desk. One reason we're able to partner with networks like AMC and experiment with these types of innovations is our objective position in the market. Networks come to us because we are an objective partner to test and expand new types of inventory. It's early, but it's a meaningful development as we expand addressability across TV.

Thank you, Brian. And thank you so much for everyone being on the call today. We ran a few minutes over what we normally do, but appreciate everyone's attendance. Thank you.

Thanks, everyone.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. Goodbye and thank you for your participation.