Trade Desk, Inc. Q1 FY2022 Earnings Call

Good day, ladies and gentlemen, and welcome to The Trade Desk First Quarter 2022 Earnings Conference Call. It is now my pleasure to turn the floor over to your host, Chris Toth, Vice President of Investor Relations. Sir, the floor is yours.

Thank you, operator. Hello, and good afternoon to everyone. Welcome to The Trade Desk First Quarter 2022 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 recent pandemic on our business and results of operations in addition to potential supply chain disruptions or other macro events 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 our projections or those implied by these forward-looking statements. I encourage you to refer to our risk factors referenced in our press release and 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 results 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, everyone, for joining us today. As you've seen from the press release, we are off to a great start once again this year. For the first quarter, revenue grew 43% compared with last year, our fastest first quarter growth rate in the last four years. Our strong growth is a testament to a variety of factors that I want to touch on today and which give us significant optimism for the future. Our performance is especially encouraging because annual advertising budgets are often being reset and reconsidered in Q1, making them historically harder to predict. And this year, the macro environment was challenging with the ongoing global pandemic, war in Ukraine, and higher rates of inflation around the world. Despite those challenges, we again exceeded our own expectations. I believe we are now firmly established as the default Demand-Side Platform (DSP) for the open internet and that we are very well positioned to grow and grab market share regardless of the macro environment. We now have over 1,000 customers, representing tens of thousands of advertisers spending on our platform across the open internet. We continue to see a steady stream of new agencies and brands starting to work with us for the first time as well as existing customers increasing their spend with us. We are seeing strong momentum around key initiatives such as Connected TV, Shopper Data, UID2, OpenPath, and our game-changing new data marketplace. In each case, we are working with our advertising clients to drive maximum value from their campaign dollars. And this, in turn, helps us grow our trusted relationships with the world's leading brands and agencies, many of whom are signing long-term strategic partnerships with us. As a CEO, it's always important for me to look at how we are performing relative to the industry. For example, the IAB and PwC predict digital advertising will increase approximately 8% in 2022. Publicis Group's Zenith estimates the increase at about 14%. But either way, we continue to grow at a pace well ahead of industry estimates, which means we are gaining share and adding significant value. I continue to be extremely optimistic in part because of the combination of our exceptional 95% plus retention rate and our significant growth rate. There are macroeconomic forces, which have changed the media and technology landscape dramatically in the last few months, especially in CTV, which also gives me optimism. As many of you know, I have spent many of the last 10 years publicly predicting that Netflix and nearly everyone else would eventually show ads. Netflix recently announced that they are likely to make ads a part of their future. This and so many other great things are happening in CTV. In fact, I can't think of a time that the TV landscape has had more positive changes in a short period of time than what has happened in Q1 of this year. I want to spend most of our time on that. But in order to discuss the significance of what's happening in CTV, we first need to discuss two foundational initiatives: first, our work on a new identity framework for the Internet; and second, our work to make the supply chain more efficient. So first, identity. The Internet has been operating on a quid pro quo since it became commercial. But the Internet has also been a suboptimal experience. And by that, I mean we've used cookies as a make-shift technology to enable relevant advertising. But due to a series of events and choices, cookies are going away. Currently, Google has the majority of the browser market share around the entire Internet outside of China. So they decided when this transition is going to take place, and they currently targeted the end of Q1 2023. This has created a very unique opportunity to upgrade the Internet. Indeed, without those many circumstances, this opportunity wouldn't exist. We are upgrading from an opt-out Internet to an opt-in Internet. The open Internet is scrambling to coordinate and collectively upgrade. Many different opt-in IDs are being created. Some of them will scale and survive, some won't. However, those that scale will be distributed, encrypted, and interoperable. We don't believe IDs can or will scale if they don't upgrade the experience for consumers. With this in mind, we developed and launched UID2. This is the second version of UID, with version 2 being email and phone number-based instead of cookie-based. This allows consumers to take their privacy settings and controls with them all over the Internet without loss of control or a false sense of security. Some of the privacy protection that has been promised to consumers by large technology companies has misled some consumers to believe that they control privacy, opt-in, and the quid pro quo of the Internet across CTVs, mobile environments, and computer browsers. UID actually does enable consumers to set preferences and restrictions for each Web publisher, mobile app, and CTV app. They choose who they trust and can change their mind. Their preferences are tied to an encrypted, hashed, salted ID based on email address or phone number that a consumer can take with them. Because this move to an upgraded opt-in Internet is scheduled to happen in about 10 months based on the date Google deprecates third-party cookies in Chrome, the entire open Internet ecosystem is thinking about identity, and we continue to make significant progress with UID2. In terms of the number of unique IDs, we are now measuring UIDs on billions of devices. With every passing month, we are posting new all-time highs. That comes as more advertisers activate on UID2 and more publishers adopt it. Let me give you one quick example, which is particularly illustrative of the business value of UID2. MediaVine is a company that manages advertising for more than 8,500 independent publishers. Those include some large publishers like the Hollywood Gossip and some very niche publishers like Steamy Kitchen. They are a comScore top 5 lifestyle media platform with more than 130 million monthly viewers and 17 billion monthly ad impressions. MediaVine has now adopted and deployed UID2. Their publishers have seen CPMs increase by more than 100%. With UID2, they can create privacy-safe identifiers for their readers, pass those on safely to advertisers who can then serve relevant advertising without ever knowing anything directly identifiable about the reader. Better opt-ins and more sign-ins, including new lightweight Single Sign-Ons, are what a post-cookie Internet is going to look like. And pioneering advertisers, publishers, and CTV providers are building that Internet now. The momentum is amazing, but we're still in the early stages, simply because the Internet is so big. This work is both inevitable and essential. Without relevant advertising, CPMs will plummet. That's the fundamental value exchange of the Internet: relevant advertising in exchange for free content. That's why so many publishers are implementing UID2, and many have already reported strong CPM growth. The ecosystem of UID partners also continues to expand. InfoSum, a leading data collaboration platform, recently signed up as another closed operator of UID2. Many leading advertisers and their agencies, including Omnicom, already use InfoSum to activate their first-party data and are excited about this partnership as they look to unlock the value of that data while maintaining control over it using UID2. AppLovin also recently joined the UID ecosystem. AppLovin is one of the world's leading mobile in-app ad exchanges, and our advertisers now have access to ad opportunities across more than 140,000 apps and 1.8 billion devices with the precision and relevance that UID2 creates. The solutions such as UID2 allow us to manage that value exchange in a way that improves the experience for all parties. I believe this new approach will ultimately result in an upgrade to the Internet. We also recently announced that we are launching a version of UID2 that will be tailored for the European market called EUID. To understand the connection between UID2 and EUID, consider an analogy to Chrome and Chromium. Chromium is a free open-source development platform for Web browsers. Many browsers use core elements of Chromium, including Google Chrome, which uses Chromium as a foundation but is enhanced and adapted by Google. Essentially, Chrome is one iteration built on top of Chromium. In the same way, UID2 is an open-source project, and EUID is a version of it developed for Europe that meets the specific needs of that market, especially the legislative requirements. Building this specific version allows us to build in features that give our partners reassurance that data will not leave Europe, even for international companies that do business and have data in Europe. With this approach, we believe that EUID is the most GDPR-compliant identity solution in the market today. In order for the open Internet to thrive, it will require more authentication or logging in. High CPMs and relevance will gravitate to publishers and content owners who have logged-in users. CTV and new sites and apps especially have a unique opportunity at this moment as the identity foundation of the Internet being rebuilt. The CTV leaders understand this. Nearly every CTV ad is shown on the authenticated side of a log-in, almost always via an email or phone number, which means CTV already operates in an opt-in environment, unlike much of the rest of the Internet, which is still an opt-out, although it's transitioning. Within that environment, broadcasters can work with advertisers to build the new identity fabric of the Internet that provides addressability while significantly upgrading consumer privacy. And new identity solutions, including UID2, are key here. With UID2, advertisers can safely onboard first-party data. With interoperability with CTV apps, they can find valuable audiences, both current and prospective, exactly when they are viewing their favorite premium content. Ultimately, this is a much better advertising experience than one based on cookies. Cookies were never really intended to do this work. They were just co-opted. But in new technology environments like CTV, we can build a new identity framework that allows advertisers to create relevance, enables publishers to maximize yield, and gives consumers much more control over their privacy. So in many ways, the CTV ecosystem will pioneer the future of identity. To be clear, it's not about any one identity solution. It's about interoperability. This new fabric will include new currencies such as UID2, but also other identifiers, whether it's those developed by CTV providers themselves, measurement partners like Nielsen, or companies such as LiveRamp. And we are working with all of them to ensure this new fabric pays off those promises I just outlined for all participants. There is so much to discuss today that I'm going to bookmark a related issue that I'd like to address in a future call, which is our data marketplace. The data marketplace is as healthy as ever, largely because UID2 and a better opt-in environment create a better foundation for our data marketplace, which has the potential to become the largest in the world. I don't think any walled garden can ever create a data marketplace to rival it. Already, we have enacted massive marketplace design upgrades. As a result, we are already seeing higher data usage, better CPAs, and ROI for advertisers, better margins, and a faster spinning flywheel for us. We have once again stair-stepped increased the consumer surplus of our offering to our clients. There is so much more to report on this and more change and benefit to come, so I'm excited to talk about that in the future. Related to all the progress we're making with UID is the recent launch of OpenPath. We announced it in our last earnings report, and I'd like to give an update today. First, a reminder of what it is. OpenPath is a way for our advertisers to plug directly into publisher inventory via our platform. By plugging in directly, publishers have the opportunity to capture the value of an opt-in Internet and implement changes that benefit all participants, including advertisers and agencies. I do want to reiterate that this does not mean that The Trade Desk is getting into the Supply-Side Business or supply side business. OpenPath is simply a direct path to inventory with publishers that already have their own yield management solutions. OpenPath helps eliminate steps in the process where there may be fees or charges with no value in return. For example, since we announced OpenPath, we have shut down Google's open bidding on our platform. When we announced OpenPath a few months ago, we also had commitments from news organizations that represent a majority of news consumers in the United States, organizations such as Reuters, the Washington Post, Gannett, Conde Nast, which owns Vanity Fair, Vogue, The New Yorker, and many others, McClatchy, which owns more than 30 leading daily newspapers, including The Kansas City Star and the Fort Worth Star-Telegram, Hearst Magazines and Newspapers, which operate major titles such as Cosmopolitan and the San Francisco Chronicle, the Tribune Group, and several others. In the days following the announcement, we had more than 100 inbound inquiries from major publishers looking to join the initiative. We're prioritizing journalism as we launch OpenPath because nowhere is the danger of the absence of identity more apparent. Recently, we announced more journalistic publishers committing to OpenPath, including the L.A. Times, BuzzFeed, Forbes, MediaVine, and Red Ventures, which includes publications such as CNET and Lonely Planet. As more publishers adopt OpenPath, they will make UID2 deployment or interoperability a key element of their plan. In doing so, they can activate their own first-party subscriber data in a way that protects that data but also provides enough relevance to advertisers that we can enhance the value of those ad impressions and yield for publishers. For those that don't show most of their ads after a user has logged in, OpenPath will include a simple UID2-based single sign-on that will help them make this essential transition to a post-cookie environment. Let me bring this back to CTV because CTV is really the epicenter of open Internet identity. We've seen massive moves in the CTV landscape recently. In 2021, we added exponentially more inventory, thanks to new partnerships with a wide range of partners, including Peacock, Paramount Plus, Discovery Plus, and Sky. Early this year, we entered a scaled relationship with HBO Max, one of the most recent and fastest-growing content companies to adopt ad-funded subscriptions for consumers aggressively. On a more macro level, Amazon bought MGM and streams ads through IMDb TV. Just this year so far, Disney+ announced that ads would be added as a choice to their app. Microsoft acquired Xandr. Time Warner left the AT&T family and is now owned by Discovery and is mostly led by Discovery Plus leadership, which has one of the most savvy programmatic teams in TV. And of course, Netflix recently announced that it will likely make ads available on their platform. These major changes in the landscape have huge implications for the future of CTV and programmatic. A tailored TV ad is probably the most effective scaled advertising available today, online or offline. As a result, for most of our clients, TV is the largest segment of their campaign spend. That unique combination of video and audio delivered at a time when the audience is engaged remains the most effective way to touch the hearts and minds of consumers. As those consumers have shifted in mass to streaming platforms, advertisers are following them. For consumers, on-demand content is simply better. As content owners and streaming apps compete for more subscribers, it has become very clear that providing consumers with choice is the only way to win. This is a great setup for Netflix. By not having ads to date, Netflix has protected an amazing user experience, but it required Netflix to keep raising prices so that they could keep making and buying content. At some point, price becomes an issue for nearly all consumers. Consider what we can learn from TV of the past. Even in the days of cable bundles, very few consumers pay for every premium channel, Showtime, HBO, Cinemax, NBA League Pass, etc. In the past, nearly all channels have had ads. Now once again, consumers will have something better: choice. Netflix will very likely set up a clean option for consumers to see ads and pay meaningfully less or pay slightly more and avoid ads altogether. Consumers will continue to be given more choices. I predict that with this move, Netflix will continue to be something of a pace car in TV innovation. They were the first to really nail the subscription model for CTV. They were the first to 100 million global subscribers and the first to 200 million, and they continue to lead that race today. And now they are embracing consumer choice as a way to expand their market share even further. It's important to note that at least half of Netflix subscribers are outside the United States. So the implications of this move have global ramifications for the world of CTV. But there will be even more to this part of the story. As Netflix explores advertising options, they will be unburdened by legacy processes that some of their competitors are working through. For example, they will be able to structure their advertising operations so they don't have sales channel conflicts. They can be data-driven from the start in everything that they do, using data to ensure that they maximize yield on every ad impression. In all of these dimensions, and likely many others, I believe Netflix will continue to innovate and set the pace. And as with any market, others will have to adapt accordingly. Many of them already are. We are working on these opportunities with leading CTV providers every single day. HBO Max, Disney+, and Netflix are all public about their intentions to implement ad experiences. This adds pressure to all content owners to accelerate the move to data-driven buying and selling and finding ways to create the most competitive consumer experience, which means limited relevant ads with high CPMs. For CTV to continue to produce the amazing and expensive content that is driving this new golden age of television, relevant ads are the only way to fund and preserve it. This requires CTV to participate in the open Internet because in walled gardens, one cannot control universal reach and frequency. Additionally, I believe this means every CTV company around the world is racing to create this optimal viewing experience. CTV has historically competed regionally due to licensing and broadcast regulations. Netflix and YouTube have made this a global race. We're seeing content owners all over the world quickly adapting to these recent moves. Recently, I've personally spoken about this directly with some of our content partners in the United States and in Europe. They are already feeling the pressure to move fast and improve their ad experiences. This messaging from Netflix, Disney+, and HBO Max is requiring everyone to embrace biddable environments and move away from legacy models like upfronts and even programmatic guarantees, where advertiser choice is limited. These changes in the TV landscape have also adjusted marketers' mindsets. As advertisers are seeing reach and impact erode from traditional cable television, they are focused on moving to premium streaming content. Increasingly, this is the most important buy on the media plan. Marketers want to advertise against premium content as much as possible. It's content they can trust. It's content that reflects their brand. It's content they can activate on and measure against with precision. As advertisers prioritize ads on premium content on our platform, they are beginning to start their campaign planning there, too. As a result, user-generated content is increasingly getting the leftovers. With the explosive growth of premium CTV over the last few years, especially the last year, the trend is clear. We see it clearly reflected in some of the user-generated content data that's been reported in the last few weeks, and it's also why CTV remains by far our fastest-growing channel and why premium video in all its forms has become the largest segment of our business. This trend will be equally apparent internationally, where there is also a flight to premium content. We work with many Fortune 500 companies, almost all of whom direct their advertising campaigns at multiple international markets. As more premium supply comes online, particularly premium video, we have more than enough demand to satisfy it. And we could not be more excited about what this shift from Netflix, Disney+, and HBO Max means in terms of opening the door for AVOD supply. Not only in major markets that have already embraced CTV advertising, such as Western Europe and Australia, but also in many other markets where AVOD will be a vital driver of subscription growth because of tighter economic pressures on consumer wallets. Premium video, where everything is authenticated, is one of those key areas where the future of Internet identity is being forged, not just for CTV, but across the open internet, including inside the browser. That may not seem obvious as cookies are not present in CTV. And so you'd think they'd be less affected by the potential phase-out of cookies next year. But CTV needs persistent identity to have effective and high CPM ads, and they need high CPM ads to fund that content. It's economics that's driving that process. As more CTV leaders embrace advertising, they want to ensure that they create as much addressability as possible because that's the only way that they can maintain high CPMs. An advertiser will pay, say, a $12 CPM if they know the viewers are watching the latest hot reality show, but they will pay three times that if there's a reasonable chance those viewers are interested in their product. And that's why they will be among the pioneers of the new identity framework or the open Internet. I'd like to wrap this up by bringing us back to the market opportunity in front of us. The global advertising industry is moving rapidly towards a $1 trillion total addressable market (TAM). As the market grows, the majority of that spend will be digital, and all of it will ultimately be traded programmatically. At the same time, the industry is making important progress in several dimensions in building the Internet advertising ecosystem of the future, one that no longer relies on cookies. The Internet is getting an upgrade. We're moving from an opt-out Internet to an opt-in Internet. Everything is founded on a better identity framework. On that foundation come better controls for consumers, more choices for consumers on how to pay for CTV subscriptions, whether that's with money or with ad time, and better measurement and data. As the ecosystem continues to evolve and move away from walled gardens led by CTV, we will unleash the power of programmatic for our advertisers and our publisher partners. It will be an improved experience for everyone, consumers included. The innovations we are driving to help accomplish this are already delivering performance improvements for us today. They are a key factor in why we are off to such a strong start in 2022 and why we are so optimistic about our growth opportunities looking ahead. As I said earlier, advertisers are increasingly gravitating to our platform as the de facto DSP of the open Internet led by CTV. And we will continue to innovate to reinforce that leadership position and deliver more value to our advertisers. Our profitable business model allows us complete flexibility to make these investments and continue to drive growth. In doing so, we will help build a better Internet for all stakeholders, and all of that is what makes me so excited about our growth prospects. With that, I will hand the call over to Blake, who will take you through more of the financial details.

Thank you, Jeff, and good afternoon, everyone. As you have seen in our results, 2022 started out strong with solid Q1 financial performance and execution despite the current macro environment. Q1 revenue was $315 million, a 43% increase and an acceleration in growth from a year ago. In Q1, we benefited from a digital advertising environment that is leaning increasingly towards data-driven advertising and measurable results. This was evidenced by the continued strength in CTV, which again led our growth from a scale channel perspective. Solimar adoption is over 80%, and we continue to see promising results as customers are utilizing Solimar to leverage more data elements than they did previously. More data-driven precision improves ROI for customers, and we believe this helps spin the flywheel of our business faster. We are also starting to see green shoots in our retail media business, with Q1 representing our first full quarter of operations in this space. We have brought on additional retail media partners into the platform and are cautiously optimistic as spend continues to ramp up. With the durable top line performance in Q1, we generated $121 million in adjusted EBITDA or about 38% of revenue. The $121 million in adjusted EBITDA represents a 72% increase from a year ago. In Q1, we continued to benefit from temporarily lower-than-expected operating expenses, partly driven by the virtual environment. Even recognizing that, I'm proud of our continued ability to consistently grow our top line revenue while generating meaningfully positive adjusted EBITDA and cash flow that has enabled our cash and short-term investments balance to end the quarter over the $1 billion mark for the first time. In the current environment, our demonstrated ability to invest for growth and self-fund our high-growth rates through profitable long-term cash flow generation sets us up well for the future. From a scaled channel perspective, CTV led our growth again during the quarter. For Q1, video, including CTV, represented our largest percent of share on the platform, followed by mobile. Video and mobile each represented about 40% of spend. Display continued to grow well in Q1 and represented about 15% of spend, and audio represented about 5% of spend. Geographically, North America represented 88% of spend and international represented 12% of spend. International's overall share, while relatively small for our overall business, dropped slightly from Q4 and the prior year. Historically, our growth has been driven by the strong position we have in CTV, particularly in North America. That said, our CTV business internationally continues to grab share, with European CTV spend more than doubling over the prior year in Q1. We did see a larger gap between our North American growth rate and international growth rate, particularly in the second half of Q1, mainly due to spend in Europe. However, through April, Europe has recovered to levels we saw early in Q1, although there is still some room to improve. I'm excited about our opportunities to grab share as we have proven that as our customers become more deliberate and data-driven with their ad spending, much like they did in late 2020, The Trade Desk is in a great position to help those customers and also spin our flywheel. It is still early days for us internationally, but we are optimistic about our market position and the long-term growth opportunity that we have. In terms of the verticals that represent at least 1% of our spend, nearly all of them grew in the double digits during the quarter. Both travel and pets more than doubled compared with a year ago. Shopping and food and drink were also very strong. We believe there is still potential for share gain and improvement in most of our verticals. Turning now to expenses. Excluding stock-based compensation, operating expenses were $207 million in Q1, up 30% year-over-year. We continued to see significant operating leverage as we scale the business and improve our efficiency. Our income tax benefit of $2.7 million in the quarter was mainly due to the tax benefits associated with employee stock-based awards, the timing of which can be variable. Adjusted net income for the quarter was $105 million or $0.21 per fully diluted share. Net cash provided by operating activities was $146 million for Q1, and free cash flow was $136 million. DSOs exiting the quarter were 88 days, down 5 days from a year ago. DPOs were 72 days, down 3 days from a year ago. We exited Q1 with a strong cash and liquidity position. Cash, cash equivalents, and short-term investments ended the quarter at $1.1 billion. We have no debt on the balance sheet. Turning to our outlook for the second quarter. We estimate Q2 revenue to be at least $364 million, which would represent growth of 30% on a year-over-year basis. We estimate adjusted EBITDA to be approximately $121 million in Q2. With a large available market in front of us, we see significant opportunities ahead and continue to be motivated to invest thoughtfully in the business, placing a high importance on hiring to support future growth. This enables us to continue distancing ourselves from the competition in areas such as technology, identity, supply chain optimization, and customer service. I am pleased that over the past couple of years, the operating expense structure of the company has improved and is significantly better than it was prior to the pandemic. Doing so allows us to invest meaningfully in opportunities for growth while still generating strong adjusted EBITDA and free cash flow. In closing, we are excited about the momentum of our business with significant long-term growth drivers, including CTV, our international business, our retail media opportunity, which is only just beginning, our recent platform upgrade in Solimar, and the upcoming U.S. midterm election cycle. We remain highly optimistic about the long-term prospects for our business in 2022 and beyond. We continue to generate strong free cash flow, and the strength of our business model and balance sheet have positioned us well in the current environment. I believe we have the structure in place to continue driving long-term growth while scaling our business efficiently. That concludes our prepared remarks. And with that, operator, let's open up the call for questions.

And the first question is coming from Shyam Patil from SIG.

Congrats on the results. I had a couple of questions. First one, Jeff, when we look at your results and your outlook, they look a lot better than what we’ve seen from a lot of other ad-funded companies during earnings. Can you just talk about what you think is driving your outperformance? And then second question, can you talk a little bit about how you see the rest of the year shaping up?

You bet. Thanks, Shyam. I appreciate it. So as I look at the outperformance for this quarter, I just look at all the things that were right in this quarter, and it’s hard not to start with connected television. I mentioned in the prepared remarks that CTV had more positive changes than ever. I don’t know that I could have scripted it better in terms of just seeing companies like HBO move from sort of a testing phase to scale. And then Netflix and Disney+ talking about ads created an environment that is really optimal for ads. And of course, we already had great relationships with Paramount, Peacock, Sky, and many of those that you think of as the AVOD leaders, but now have really everybody entering into this world of choice driven by ads. It’s just a very exciting phenomenon. I’m also just very encouraged by the fact that, of course, there’s macro pressures and noise and uncertainty that everybody has seen due to war and inflation. And of course, the stock market bouncing around a lot. But in that environment, what we’ve historically seen is that the moment when CMOs and marketers get very deliberate about where they’re going to spend money, and they become very data-driven in the choices that they’re making. In our case, that means they’re spending more with us. So I’m incredibly encouraged by all the things that we've seen this quarter and how it sets up for the rest of the year, which gets to the second half of your question. So with all these moves in advertising, especially from the global players of CTV, I think it really sets up the second half of the year for the entire world to see a movement toward ad-funded CTV in a way that we started seeing early on in the pandemic. But I think we’re seeing even more of it now. We didn’t spend a lot of time in the prepared remarks talking about shopper data. In the first quarter of this year, we also just had our first full quarter with Walmart and their DSP, which is doing really well. We have talked about new partnerships with Walgreens and Drizly. There have been others that have spoken about our partnership with Target’s media company, Roundel. So having Walgreens, Walmart, and Target on the platform as partners in relation to data and measurement is just unbelievable. We’re also nearing a perfect setup as it relates to shopper partnerships. And of course, in the second half of the year, we’re also going to have a midterm election. Given recent events, that seems to be one that’s going to be exciting as well. I suspect just because of the momentum and attention that it will have, there will be more investment than most, and we think we’re very well positioned to have our biggest political year ever. Solimar is now over 80% adoption, and we’re confident we’ll finish the year very strong. To go from launch to 100% adoption the following year is something that we were aiming for, but now we’re extremely confident that we’ll hit. And then we spent a lot of time in the prepared remarks talking about UID and OpenPath. I mean, we mentioned a longer list of names on OpenPath, but we didn’t mention those that we mentioned in the press release just a couple of days ago. BuzzFeed, L.A. Times, Forbes, MediaVine, Red Ventures, which includes CNET and a whole bunch of others, have also come on board just since last quarter that we announced publicly. So all of those amount to some amazing contributors to the second half of the year.

And the next question is coming from Youssef Squali from Truist Securities.

Two, if I can. Jeff, 3 to 4 years ago, you were already on the strong opinion or the strong belief that Netflix has to offer an ad-supported model. That was just a matter of time. How do you feel about your chances of potentially partnering with Netflix around that opportunity and/or the potential risk of Netflix potentially building its own DSP? And Blake, Q2 EBITDA implies a pretty big sequential and year-on-year drop, I think, to that 33%. Can you maybe just flesh out the biggest areas of investments and whether there is a typical kind of conservative built into that? And just how should we think about that for the remainder of the year?

Yes. Great. You’re right. I’ve been saying for more than half a decade that I believe that Netflix will eventually have to show ads. That belief is based on the notion that consumers want choice. While Netflix has done a phenomenal job preserving an amazing experience for consumers, at some point, that becomes cost prohibitive because you have to keep raising prices, which is exactly what has happened over the years. They have now reached a place where I believe they will benefit from offering that choice. I think they have more pressure on them to create an amazing ad experience than anybody in the streaming competition, if you will. It’s partly because of that history that, as you may know, David Wells, who was the previous CFO of Netflix, joined our Board almost five years ago. So we’ve had a great relationship with Netflix because of him, and I’m extremely optimistic about our partnership potential with Netflix. One thing you should also know – and Youssef, you articulated something I’ve heard from a few others as well: Why wouldn’t Netflix build this themselves? Most advertisers are trying to manage what we call reach and frequency: how often do I show the same ad to the same consumer across apps and channels? So if I just control how many times I show an ad on one platform and then separately on another, those two pieces won’t communicate with each other, and you can waste money and show the same ad repetitively. This is why traditional television has so much repetition. If Netflix were to provide an ad experience that has lots of repetition, they would have to show many ads to make the necessary revenue, resulting in a low CPM. The best way out of that is for them to partner with an objective independent DSP that manages reach, frequency, and budgeting across all the fragmented pieces of streaming to provide the very best ad experience for everyone. I’m very optimistic that we’ll be able to create partnerships with every major streaming company, including Netflix. We have a fantastic relationship with Discovery, and therefore with Time Warner and HBO, as well as Disney, with whom we have partnered for years.

And Youssef, to follow up on your question on the EBITDA for Q2. Just to frame it up, I’m really happy with our situation and where we are. Like we mentioned on last quarter’s call, we expect in 2022 to increase the pace of our investment as we focus on the long-term growth of our business. And that’s got to support a very strong business model that produces strong free cash flow and has a solid balance sheet. Our Q2 forecast reflects that. It includes accelerating hiring across the business, particularly in engineering, business development, and account management roles that play a huge factor in driving our long-term growth. We also expect our in-office expenses to start ramping this year to prepandemic levels. We also anticipate hosting more employee events to get the team together. But in terms of this year, Q1 EBITDA was very strong. I’m comfortable with our EBITDA trajectory and where things stand for the remainder of the year. And like we said last quarter, we expect the operating expense structure of the company to be better than it was prior to the pandemic. As I’ve always said, this business is built for growth, and I’m optimistic about driving meaningful EBITDA and free cash flow as we scale. There are lots of great opportunities in front of us, and I feel pretty good about it.

The next question is coming from Matt Swanson from RBC Capital.

I’ll add my congratulations on the quarter. Jeff, maybe staying on the theme of CTV and Netflix. You mentioned still having an abundance or maybe an overabundance of demand for CTV. With the upfronts coming up, could you maybe give us an updated view on the supply-demand curve, especially for premium CTV content? And how you think about the addition of Netflix and Disney+ with all that content coming online and whether or not we’ll see lower CPMs? And then as a follow-up, Jeff, you mentioned that you have seen Netflix coming for a long time. When we think about the maturity curve for any subscription model reaching that threshold of payers, do you think this will change how new products launch from here on out when they see companies like Disney and Netflix and HBO Max all leading ads? Are we going to see any subscription-only products still being launched?

First of all, I appreciate the congratulations. We’re extremely excited about the results and all the developments going in our direction, particularly on CTV. I’ll first address the concern you raised regarding whether CPMs will be lower as a result of the additional inventory. The demand is really off the charts. This is in large part because people are moving away from traditional cable television, where there have historically been tons of ads, and you’re paying more to get less than ever. So as a result, when you’re adding new inventory, the demand is already lined up. What’s great about players like Disney, as I anticipate Netflix will do, and HBO Max, is they need to maintain subscriber satisfaction to keep attracting new users, which means they must provide relevance and limit ads. Therefore, I believe we’ll see scarcity of high-quality inventory for a while, which is excellent for maintaining CPMs. I think this economic reality is becoming clear to all companies that operate in this space. Hence, it would not be strategically smart for anyone entering the market today to do so with an SVOD-only model. It’s akin to launching an innovative smartphone without the features that reflect current market standards; competing becomes untenable. Consumers will insist on having choices, which becomes increasingly pivotal for any company entering the streaming wars in hopes of competing with the market leaders.

And the next question is coming from Vasily Karasyov from Cannonball Research.

I have a couple if I may. One on Europe. You said in the prepared remarks that spend did slow down around the start of the war in Ukraine but then recovered in April. Can you tell us your thought, maybe in more detail, about what the advertising environment is in Europe right now and where it’s going in your view? The second question is about politics. You did make some comments on it, but I wanted to see if you could give us more detail. Broadcasting companies have been reporting that they see a record political cycle spending so far. Can you tell us, please, how you feel you are positioned? And do you think this could be some incremental revenue growth this year from political?

Yes. Sounds great. I’m going to ask Blake to take a stance on both questions, and then I’ll add my thoughts after.

Sure. Thanks, Vasily, for the question. So with regards to Europe, just first to put into context, historically, our growth has been driven by a very strong position in the U.S. Europe represents a single-digit share of our spend. CTV has been the primary driver behind our growth in the U.S., but European CTV is also gaining share. I think in the prepared remarks, we talked about it more than doubling, growing in the triple digits in Q1. We did see a larger gap between our North American growth rate and international growth rate, particularly in the second half of Q1, which was mainly due to spend in Europe. However, through April, Europe has recovered to levels we saw early in Q1, although there is still some room for improvement. I think that when customers become more deliberate with spend and focus on the most efficient investment opportunities, that’s when The Trade Desk tends to shine because we’ve performed well under those conditions, as proved during the latter half of 2020, leading to significant growth. So I’m super optimistic about that.

Yes. So first, I completely agree with everything Blake just said. And he covered most of it, but I’ll add a bit more context. I’ve made two trips to Europe in the last four months, largely prompted by the opportunity emerging in connected television. In various markets, we're witnessing significant movement from companies that previously hadn’t embraced ads, particularly programmatic, and open internet ads, who are now doing just that. With pressure coming from big global players, we’ve observed companies shifting relatively quickly, which is why we saw CTV over 2x in Q1 in EMEA. I’m encouraged by the momentum; even during rare cases of pauses or challenges linked to the ongoing situation in Ukraine, the prevailing sentiment remains positive regarding their spending intentions for the rest of the year. My recent conversations with content partners in both the US and Europe reveal that they feel pressure to adapt quickly and enhance their ad experiences. Regarding political spending, I’ll reiterate what Blake mentioned—seasonality differs for midterm elections compared to presidential elections. We anticipate spending to ramp up in the second half of the year, with indicators suggesting this cycle could set records relative to previous cycles. I’m proud of our performance in past election cycles, demonstrating that we can fairly represent both parties and promote a more effective data-driven advertising approach than other mediums, including social media. We’re excited about what lies ahead for the second half of this year.

And the next question is coming from Jason Helfstein from Oppenheimer.

I’ll just ask one. Just want to focus back on CTV. So for a very long time, Google wanted to get into this, and the media companies don’t want them basically doing programmatic CTV. While they let them do YouTube TV, right, that YouTube isn’t doing the ads. And we’ve seen media companies try to own technology assets—ad tech assets—and have not been good at it. And I guess, Jeff, your perspective, I mean, given what we’ve now almost seen as kind of like the undoing of some of the media mergers, where there’s like a clear idea that content owners need to be content owners and maybe just be the best at that because it’s so competitive, just how do you see how that impacts your space on the board, and ultimately, to potentially become the default partner to help media companies with this transition?

Yes. So I think your assessment in your question is spot on. I just believe the tolerance for conflict of interest among media and technology companies is lower than in almost any other field. It’s fascinating that Google chose to participate in this year’s upfronts, scheduling their events right where Disney’s are taking place, which strikes me as bad form and certainly not a way to win friends in the industry. This sets an amazing backdrop for us in the CTV space, as the biggest provider of ad demand for some of the largest media companies globally. They are leaning into our partnerships now as they have never before, which is incredible. They know who we are and understand the value we provide. We are not trying to compete with them; we don’t own any content. We continually reassure them that we will not own content, allowing us to forge an effective supply chain and collaborate on the best ways to compete. Companies that were originally hybrids—part content, part technology—have now predominantly shifted to content creation. This clears a path for us to partner with them, enhancing clarity on our roles and respective value propositions, distinguishing us from technology behemoths aiming to dominate every area.

And the next question is coming from Brent Thill from Jefferies.

Maybe if you can give us a quick update on Walmart and any critical milestones that you’ve had and how you look at that through the second half of ‘22.

You bet. Yes. If there’s any topic that didn’t get its due, it’s a rivalry between our data marketplace and our shopper marketing efforts. I mentioned we just completed our first full quarter with Walmart. We saw over 200 advertisers—large brands—provide test budgets during that time. We expect even more large brands and expansion as we continue moving forward. We believe this will be an amazing growth driver over the next five years. We witnessed early tests and excellent results from consumer packaged goods, as you'd expect. However, we’ve barely scratched the surface of what’s being reshaped for companies like Walgreens, Target, and Drizly, as this Target division, Roundel, is really altering the measurement landscape in consumer packaged goods and anything else purchased offline. What’s essential is our method of measuring—from displaying the ad to tracking the purchase, leveraging retail data instead of walled garden methodologies, thereby creating an ecosystem that promotes rapid growth for our partners. We’re excited about the initial green shoots we’ve seen and the potential moving forward.

And the next question is coming from Mark Zgutowicz from The Benchmark Company.

Jeff, I was just hoping you could define what you consider the large publisher market in terms of having, I guess, the majority of loyal signed-in users and how many you think you need to sign on to UID2 for your platform to come close to replacing cookie scale when and if Google shuts down cookies? And then just in terms of UID2, what’s the status on finding an administrator for UID2, and particularly the importance of that in Europe?

You bet. In terms of loyal signed-on users, it’s a somewhat complex issue because it’s not just a matter of how many users are signed on but also how connected they are across different sites. In simpler terms, there needs to be a certain percentage of the Internet logged in to enable effective data modeling and predictions across the rest. Research has suggested that only about 10% need to be logged in for effective modeling, though I actually believe the actual figures will be much higher if we continue on our predicted trends. As for your second question regarding UID2, our aim is to keep it an open-source project accessible to everyone, which we’ve achieved through collaboration with the IAB here in the U.S. However, the administration and operational control are delicate issues that we are cautious about managing. While handing over responsibility can mitigate risk, it can also jeopardize the project’s future; thus, we are in no rush to do that. In Europe, potential controllers face regulatory risks under GDPR. We are committed to ensuring that as we expand UID2, we partner with responsible entities that adhere to best practices regarding data security and user privacy. The EUID solution, which we believe is the most GDPR-compliant, is designed to offer flexibility for companies while promoting a better and secure Internet experience.

The final question will be from Michael Morris from Guggenheim.

I’ll try to squeeze in two final questions. The first one is on the pretty consistent comment that you made, Jeff, about The Trade Desk being the default DSP for the open Internet. Obviously, this implies potential for a pretty universal adoption across buyers. So I’m curious if you can elaborate on where you are now in terms of partner penetration. You referenced over 1,000 customers, but any frame of reference on what that means for full penetration and how that’s been trending would be helpful. The second question is a little bit of elaboration on the impacts of Netflix and other peers introducing these global ad-supported businesses, which are pretty new to market, of course. Does this drive an acceleration in your investment internationally? Any other fundamental changes that this makes to the industry?

You bet. Regarding partner penetration, it's tough to find the best way to quantify it. In general, I believe we have only scratched the surface. Last year, we had over $6 billion flow through the platform but are targeting nearly a $1 trillion TAM in terms of total global advertising spend. Thus, we’re still in the early stages of tapping this potential. While we have seen growth among Fortune 500 companies, we aim to enhance our service to midsized businesses and agencies. We saw an increase in the number of advertisers both directly and via agencies during Q1, paving the way for potential growth in wallet share. Regarding the expansion we're witnessing from these global CTV players, I do anticipate an eventual uptick in our investments around the globe. This might not happen immediately, but the economic case is compelling; many international markets have lower median household incomes than the U.S., suggesting that consumers there may prefer to “pay” for their entertainment with viewing ads instead of high subscription fees. Thus, simply as a practical move, it aligns well with the interests of these streaming companies as they strive to expand their subscriber base, which exposes them to larger advertising opportunities. Advertisers will also benefit from access to untapped markets where expanding middle-class populations represent new potential for consumer spending.

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