The Trade Desk, Inc.

Greetings. Welcome to the Trade Desk Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Chris Toth. You may begin.

Thank you, Operator. Hello and good day to everyone. Welcome to the Trade Desk fourth quarter 2022 earnings conference call. On the call today are both 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. These forward-looking statements represent our belief and assumptions only as of the date such statements are made. Actual results could vary significantly, and we expressly assume no obligations to update any of our forward-looking statements. Should any of our beliefs or assumptions prove to be incorrect, actual financial results could differ materially from our projections or those implied by these forward-looking statements. I encourage you to refer to the risk factors referenced in our press release and included in our most recent SEC filings. In addition to reporting our GAAP financial results, we present supplemental non-GAAP financial data. A reconciliation of the GAAP to non-GAAP measures can be found on our earnings press release. We believe that providing non-GAAP measures combined with our GAAP results provides a more meaningful representation of the company's operational performance. With that, I'll now turn the call over to founder and CEO, Jeff Green. Jeff?

Thanks, Chris, and thanks, everyone, for joining us today. Let me start by highlighting the numbers. The spend on our platform in 2022 was nearly $7.8 billion, a record for us. Fourth quarter revenue alone was $491 million, also a record. CTV continued to be our strongest growth driver as more content owners from around the world are moving beyond ad-free subscription models and offering ad-supported options for viewers. And once again, despite all the uncertainty of the year, we delivered strong profitability, highlighting the operating leverage we have in our business. Our results are often benchmarked against the rule of 40 and compared to other high growth companies. In that benchmark, The health of a technology company is expressed as the sum of a company's growth rate and EBITDA margin. In 2022, we finished well over that benchmark again. For the sixth year in a row, we were over 50%, all while we continue to invest to drive future value and growth. In times of market uncertainty, perhaps it's most useful to look at how we are performing compared to the broader industry. According to estimates by Dentsu, Total global ad spend increased 8% last year. Spend on our platform grew more than three times that. With uncertain macro conditions where most marketers are under pressure to do more with less, we continue to outperform and gain share. I'd like to focus on why we're winning market share during this time of uncertainty as I think it gives a sense of the dynamics in our industry right now, which I expect to be in place for the foreseeable future. Specifically in the last six months of 2022, the trade desk started to separate from much of the digital advertising market in terms of relative outperformance. In the third quarter, we reported 31% growth while our competitors were either in retreat or posting single-digit growth. That same trend continued into the fourth quarter as we grew 24%. And most of our large competitors were posting between negative nine and negative 2% growth. I don't think we've ever had the level of industry outperformance in our six years or so as a public company, as we did in 2022. And it means that we can be very confident that we're gaining share and that our platform continues to gain traction with advertisers. I remain convinced that in times of uncertainty, as marketers look to do more with less, they are continuing to prioritize decision media on the open Internet. With the Trade Desk and the open Internet, marketers can measure ROI and value with more objectivity. And that means they'll prioritize us over the limitations of Walt Gardens. With that in mind, Insider Intelligence reported a couple weeks ago that 2022 represented the first year in a decade that Meta and Google did not account for more than half of the digital advertising market between them. That shift comes as the digital advertising market continues to expand. Before the pandemic, digital advertising accounted for around half of total market spend. Last year, it represented more than two-thirds of the market, according to GroupM. What's driving these two trends? Well, as I've said many times before, CTV is changing everything in advertising. Not only is the shift from linear to CTV driving significant growth in digital spend as advertisers shift dollars from linear TV to connected TV, but more spend is happening outside the wall of gardens as advertisers shift spend from user-generated content to premium streaming content. I'd like to expand on this in a couple dimensions because I think it will give you a sense of why I'm so optimistic about our potential to grow this year and beyond. First, I'd like to touch on UID2 because so much has happened around identity in recent months that points to how the industry is evolving. Second, I believe we are starting to see advertisers challenge the wild garden business model more systematically than ever. And it's because they have premium alternatives at scale in fast-growing markets such as CTV and retail media. And last, I'd like to touch on what all of this means for us in 2023. So let's start with UID2. First, as a reminder of what UID2 is, a few years ago, we created, in collaboration with other open internet companies, an identity currency for the open internet based on either an email address or a phone number. UID2 is anchored on those two consumer data points so that consumers can own and manage their identity around the Internet, rather than managing privacy settings for each device or ecosystem like Apple or Google's. Our goal was to create a personalization technology that was more privacy safe than cookies and better at empowering consumers than any alternative in the market. Once UID2 was built, the technology was open sourced, and we welcomed the partnership of Internet governing bodies, as well as the broader digital advertising ecosystem, including agencies, brands, content providers, ad tech companies, and data partners. We have always believed a critical mass of adoption would lay the foundation of a massively upgraded Internet, one that incents more competition and improves privacy standards. And that's exactly what we are starting to see. If you had told me at this time last year how much progress the industry would have made on UID2 in 2022, I don't think I would have believed you. At the beginning of our fourth quarter last year, around 15% of the third-party data ecosystem was activating on UID2. This is essentially a very large sample of the entire data ecosystem of the entire internet. By the first half of this year, we expect we will be in the 75% range. Levels of activation that high mean we will have effectively solved the identity matching challenge of the entire open internet on a scale well beyond anything cookies have ever accomplished. And all while providing consumers with much greater control over their privacy. To be clear, I'm talking about companies adopting UID2, such as AWS, Snowflake, Salesforce, and Adobe. We always said this change to the Internet required adoption of the infrastructure players of the Internet, not knocking on 2 million publisher or content owners' doors. By upgrading the data infrastructure of the Internet, there is now a significant mathematical incentive for every reputable player involved in digital advertising to lean in to UID2. This is already happening with thousands of publishers in all channels of the open internet. UID2 adoption by publishers is creating the richest, most privacy-centric identity environment we've ever seen for advertisers. And it also means an advertiser's first-party data becomes exponentially more valuable. In fact, I would say again that it becomes about 10 times more valuable than with cookies, simply because UID2 solves the needle in the haystack problem that came with cookies. because advertisers can now match their customer data with accuracy across the open internet more effectively than ever before. They can make much better decisions in every aspect of campaign optimization, including attribution and measurement. And they can do so without ever compromising the consumer trust they have spent years, sometimes decades, establishing. To help advertisers take advantage of this new value at CES, we announced Galileo, a new service that helps advertisers easily onboard and activate their first-party data. Galileo is only possible because of all those integrations we worked on last year across the data ecosystem. Galileo starts with advertisers activating their first-party data. UID2 can then be applied to ensure that data can be used in a privacy-safe way. Of course, it's not just on the data side that we're seeing critical mass of UID2 adoption. UID2 is starting to change the value of the inventory on the internet. Because CTV is almost 100% authenticated, CTV is being upgraded while non-personalized ads on the web, mobile, and UGC sites are being downgraded. As a result, increasingly the world's leading publishers are embracing UID2. With CTV, we've talked previously about how Disney is applying UID2 across its media portfolio. Just a few weeks ago, Paramount announced their integration with UID2 across their IQ inventory, which includes Paramount+, Pluto TV, BET, CBS News, CBS Sports Network, Comedy Central, MTV, Paramount Network, VH1, and many others. I shared the stage at CES with Paramount advertising president John Haley. He talked about the importance of unified identity in helping agencies and brands tie together campaigns in a fragmented, omnichannel environment. And I couldn't agree more with his sentiment. UID2 will continue to grow as cookies become less important. And CTV will continue to lead the charge here. Because right now, there is economic pressure on everyone in the advertising ecosystem. There is pressure on consumers who increasingly want ad supported lower cost options because of the strain on their wallets. There is pressure on content providers who need high CPMs to fund their premium content in the arms race for new subscribers. And there's pressure on advertisers, many of whom need to do more with less. All of that creates opportunity for CTVs. At a moment when advertisers need to prove value and ROI, there is more opportunity than ever to advertise via CTV in a more data-driven way. Pioneer advertisers are already taking action. For example, leading advertisers running campaigns on Disney, leveraging UID2, have been 12 times more effective in reaching their target audience than without UID2. That's astonishing progress. and it's just the beginning. Much more will be said this year about the impact UID2 is having on the biggest brands and media companies in the world. CTV is the kingpin for the open Internet, and I believe its size, its efficacy, and its value will be transformational in showcasing the power of the open Internet to advertisers. Eventually, it will force many walled gardens to lower their barriers. This will happen in part because CTV is perfectly fragmented, but collectively huge. It's not so fragmented that you need millions of parties to coordinate, but it's fragmented enough that no one has enough power to be draconian and go it alone. As a result, everyone is rational enough to make the right decisions for the ecosystem that optimize the experience for viewers, advertisers, and of course, media companies. Because of these dynamics, I also believe that 2023 will be the year that everything in TV changes. We now have premium CTV inventory at scale, almost all of which is authenticated. And we'll see more of a premium attached to inventory that incorporates new identifiers such as UID2. But in order to get the best out of data-driven TV advertising, you cannot use a forward market that was invented in 1962. By the way, that's the same year the cassette tape was introduced. The cassette tape has evolved. In fact, the way we consume music has evolved many, many times over the last 60 years. But the upfronts have not. The market needs an upfront that is always on, but also leverages data so that content owners sell fewer, more relevant ads at higher CPMs and advertisers get more efficacy. To adjust for high CPMs in CTV today, advertisers are asking us for a new forward market where they can leverage data on an everyday, always-on basis. Advertisers have to make their ads more effective to justify higher ad prices. It takes a long time to unwind the culture of multibillion-dollar commitments signed during a few days each spring and bring the process into today's digital environment. But this is already starting to happen as media companies can no longer justify the CPMs required to power today's content arms race without a contemporary forward market where advertisers leverage data. We will talk more about our CTV forward market strategy at an event that we will host in early March in advance of the upfront season. This is the first time we're hosting this kind of event where our streaming inventory partners will be able to showcase their value and innovation to our top clients. And what's interesting about this event is that I don't think there's any company in the industry that can convene this level of media and advertising leadership to have this discussion. I believe this event marks an inflection point for the Trade Desk. But I think it will also underscore the pivotal role that CTV is playing in the broad transformation of digital advertising. It will showcase the emergence of premium CTV inventory at enough scale to provide a compelling alternative to the limitations of walled gardens and user generated content. And it's not just here in the United States. CTV and premium video is the fastest growing digital advertising channel worldwide. In Indonesia, we recently ran a premium video campaign for Mondelez, the global food giant. Using our platform, Mondelez was able to target specific audiences on premium video content from media companies such as Video, WeTV, and iFlix. For this campaign, Mondelez shifted spend from popular user-generated content platforms, and the results were very positive. Ad completion rates were eight times higher than what they've been achieving against user generated content, and the click-through rate was 15 times higher. In addition to CTV, one of the rapidly emerging areas of digital advertising is shopper marketing. Shopper marketing, of course, has several components to it. Probably the most interesting part is the retail media segment. Interestingly, the dynamics of the market are not dissimilar to CTV. Retailers realize that they cannot maximize the value of their shopper data by building walls around it. They stand to drive much greater growth by opening their data up to advertisers in a privacy safe way. Advertisers can then understand much more clearly how their campaigns are driving actual online and in-store sales, meaning that they can optimize and measure in ways that simply weren't possible a few years ago. The Current recently published a story about how Coca-Cola, one of the world's largest advertisers, is thinking about shopper marketing. They are activating campaigns across more than 25 retail media networks, including Kroger, Target, Walmart, Amazon, DoorDash, and Instacart. Since Coke started building out its retail media strategy a few years ago, It has seen a major uptick in return on ad spend and incremental reach, as well as its ability to determine overlapping audiences across more than 130 million households in the United States. This approach has helped the company better pinpoint audiences in targeted channels like programmatic display, connected TV, and social media. I'd like to quote Katie Neal, the connected commerce lead for Coke in North America. Retail media networks know so intimately the behaviors of these consumers that their predictive models, their data, really help us identify what are those right touch points when we are able to say, this is a great time to remind you that there's a Coca-Cola product for you. Retail media networks are another proof point that advertisers win when they can apply data to their campaigns. And because of this, like CTV, retail will also prove to everyone in the advertising ecosystem that building walls around data and inventory is ultimately a flawed strategy. As I said last quarter, We now provide access on our platform to about 80% of the leading retailers in the United States, and we're growing our international footprint every month. For example, we recently announced partnerships with Tesco, one of the largest grocery groups in Europe, and Fairprice, the largest grocery chain in Singapore. As a result of these integrations, measurement from impressions all the way to the point of sale can be connected to drive better reporting, analytics, and attribution across the open internet. This provides our advertising clients with new measurement capabilities that don't exist pretty much anywhere else on the digital ad landscape, including inside of walled gardens. Once again, we are pioneering better data-driven strategies. Now the tens of thousands of brands that sell in retail environments have better, more objective, data-driven alternatives to walled gardens and unfair, opaque marketplaces. So what does all this mean for us in 2023? From an industry perspective, we have a lot of tailwinds. The shift from linear TV to CTV continues to accelerate. And I predict that at some point in the near future, we will reach a precipitous tipping point. It won't be a long, gradual shift to CTV. It will be an acceleration and then a full-on shift. One of the things I am preparing for as a CEO is making sure that we have the resources and scale in place to help our clients through that shift. Retail media networks will continue to grow in influence, in part because they offer something revolutionary in terms of measurement that advertisers have been craving for years. that direct relationship between spend and action. But partly as a result of those trends, I also believe we will see a couple of additional important shifts in our industry in 2023, particularly when it comes to how marketers think about programmatic. First, as advertisers have more opportunity to deploy data more fully in their omnichannel campaigns, their focus will continue to shift from price to value. They will always want to make sure that they are buying impressions at the right price, but that won't be the leading indicator anymore. It never should have been. They will continue to put much more priority on whether those ad impressions delivered the right outcome for that price. In other words, value. Second, in the pursuit of value, advertisers' decisioning will shift from inventory to audience. Instead of focusing on buying a certain show or a certain piece of inventory, advertisers will put much more priority on audience precision, regardless of channel, because data enables them to do that. This is especially important as the industry moves from a once a year upfront to an always on forward market. As we make progress on these initiatives and as advertisers embrace the value of the open internet, I also predict that more walled gardens will begin to take down some of their barriers. They will see that incremental demand and higher CPMs that companies like the Trade Desk can generate with a focus on advertiser goals, data, and the open internet. I'll close by highlighting that while we have those industry tailwinds, we are not immune to the general economic headwinds. I've met with dozens of CMOs through the first few weeks of 2023, and there is some level of uncertainty. They all are under pressure to do more with less. And precisely because of those pressures, CMOs are gravitating to places where they can be more deliberate and where they can apply data and decisioning. And in fast-growing channels like CTV, they're finding data-driven advertising opportunities at massive scale. CMOs also understand that while the current macro environment may be uncertain, we will emerge from it. and they are all preparing to be in a position of strength as that happens. Most of them are getting ready. Some are grabbing land now. But nearly all of them are getting a better grasp on their first-party data. They are working with new identity solutions. They are leveraging more direct paths to premium inventory, such as OpenPath. And the world's leading media companies are integrating with us so they are best positioned to access demand from advertisers. They are integrating UID2 as well as new innovations such as OpenPass, which creates simple authentication for their consumers as the Internet shifts away from cookies to a more logged-in consent-based model. Everyone is taking this moment to prepare for a more data-driven, decision-advertising environment. This also means that the walled garden strategy is breaking down. Everyone needs more demand. Advertisers want more objectivity and value. It's becoming increasingly difficult for other players to be draconian, especially now that advertisers have premium options at scale on the open internet. Right now, the biggest threat to the walled gardens is an open internet centered around CTV and retail media. The disparity in what advertisers get from the open Internet in terms of measurement and performance compared to Walt's Gardens is growing every day. You see it especially in TV, and increasingly you see it in retail. Of course, I would be remiss to not mention the recent Department of Justice lawsuit against Google. It's a comprehensive look at how Google operates, including many of the draconian measures they have implemented to tilt the market in their favor. The Trade Desk has not been as impacted as much as others in the ecosystem. And I believe that's because our mission has always been to provide an open, objective, and transparent alternative to the walled gardens. We focus on objectively serving the buy side. And with that objectivity, we will win no matter what. To be clear, this is not us versus Google. It's the value and opportunity of the open internet versus the limitations of walled gardens. We have been winning for years in an unfair market with some systemic obstructions working against us. Imagine what we can do as the market becomes more fair, which we predict it will one way or another. I could not be more excited about the direction we are heading in and the value that our advertising clients are realizing on the open Internet because of all the progress we've talked about today. Our focus on profitability ensures that we will remain at the cutting edge of our industry. Compared to many others in our industry over the last three years, we did not overextend ourselves in terms of hiring. We have been deliberate and prudent, keeping a laser focus on the long-term opportunities in front of us. As a result, we are one of a few high-growth technology companies that consistently generates strong adjusted EBITDA and free cash flows. As you may have seen in our press release, our strong profitability and cash flow enables us to return capital to shareholders with a $700 million share repurchase program. While I generally don't like to comment on competitors' performance, it is worth noting, again, that in an environment where many of our competitors contracted, our revenue grew 24% in the fourth quarter. I believe that level of relative outperformance which was evident throughout 2022, is indicative of the value we are delivering to our clients, even in a challenging environment. We continue to sign JVPs with brands and their agencies at a very strong pace, with billions of dollars transacted through these agreements last year. I believe 2023 will be a tipping point year in many ways, and I expect that advertisers will emerge more empowered than ever to drive data-driven precision. As a result, we will continue to gain share. Let me wrap this up by borrowing a phrase from one of our closest and largest agency partners. I have a strong sense of hesitant optimism about what 2023 holds for our industry. And with that, I'll hand it over to Blake to cover the financials.