The Trade Desk, Inc.

Greetings. Welcome to the Trade Desk fourth quarter 2023 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 afternoon to everyone. Welcome to the Trade Desk fourth quarter 2023 earnings conference call. On the call today are founder and CEO Jeff Green and Chief Financial Officer Laura Shenkine. 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 and Q&A may contain forward-looking statements which are dependent upon certain risks and uncertainties. These forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. Actual results may vary significantly, and we expressly assume no obligations to update any of our forward-looking statements. Should any of our beliefs or assumptions prove to be incorrect, actual financial results could differ materially from our projections or those implied by these forward-looking statements. I encourage you to refer to the risk factors referenced in our press release and included in our most recent SEC filings. In addition to reporting our GAAP financial results, We present supplemental non-GAAP financial data. A reconciliation of the GAAP to non-GAAP measures can be found in our earnings press release. We believe that providing non-GAAP measures, combined with our GAAP results, provides a more meaningful representation of the company's operational performance. With that, I'll now turn the call over to founder and CEO, Jeff Green. Jeff?

Hello, and thank you, everyone, for joining us. Today, I'm really excited to discuss our strong finish to the year in Q4, reflect on the progress we made in 2023, and explain why I'm so confident about our growth prospects in 2024 and beyond. Total spend on our platform in 2023 was almost $10 billion, a record for us. Revenue in the fourth quarter topped $600 million, the first time we have ever crossed that mark in a single quarter. This record spend helped drive revenue growth of 23% for the year. Once again, significantly outpacing the broader digital advertising market. And of course, we had solid growth in an uncertain market of 2022 when many of our competitors were exiting the year comparatively flat. In fact, in Q4 of 2022, we grew by 24% year over year. So 23% growth in 2023 on top of very strong growth in 2022 is once again leading the market. We generated adjusted EBITDA of over $770 million in 2023. We also generated $543 million of free cash flow. This relentless focus on profitability and growth allows us to keep investing in innovation, ensuring we are always bringing the best possible value to our clients. whether it's our game-changing CoCHI launch or new approaches to identity and authentication for the open internet. While there is much to celebrate about 2023, I'm even more excited about 2024 and beyond. I've never felt more confident heading into a new year. I believe we are uniquely positioned to grow and gain market share, not only in 2024, but well into the future. regardless of some of the pressures that our industry is facing, whether it's cookie deprecation, growing regulatory focus on walled gardens, or the rapidly changing TV landscape. These industry shifts represent tremendous growth opportunities for us. Shifts in our nearly $1 trillion global advertising market are not dissimilar from shifts in all large markets, including the equities markets. When macro changes come to the equities markets caused by economic velocity changes, Fed moves or governmental changes, these sorts of macro shifts force the smart money to rotate. Or said another way, macro changes almost always force a revaluing of the market. Every investment is scrutinized and adjusted. Similarly, the internet is being revalued once again. We've seen this many times before. During the pandemic, people streamed more. We got more inventory, and the value of choice in CTV helped create better performance, so the value of CTV went up. Things shifted. We saw it again in 2021 when Apple made changes to limit relevant advertising in its operating system, which impacted their browser and their mobile environments. We simply adjusted, and we bought two segments of the ecosystem with better price discovery and performance. which were still at times inside the Apple ecosystem, but often were not. Often people looking at our massive global industry continually overlook significantly different strengths, weaknesses, and opportunities for different types of companies. Some wrongly think only big companies win and smaller companies like us don't. That paradigm is completely wrong. In general, the current shifts will help companies with authenticated users and traffic which also sit next to large amount of advertiser demand. These macro changes hurt those, especially content owners and publishers, who don't have authentication. So this year, CTV and audio have big opportunities ahead, and the rest has pockets of winners and losers. But nearly everyone will be either better off or worse off. And I believe 2024 is a year of volatility for the global advertising market. And for those who are prepared, like the Trade Desk, it is an opportunity to win share. Our platform is set up to make the most of any signal that can help advertisers drive relevance and value. Our platform now sees about 15 million advertising impression opportunities per second. And we effectively stack rank all of those impressions better than anyone else in the world based on probability of performance to any given advertiser. without the bias or conflict of interest that plague most walled gardens. With UID2, COCAI, and advances in AI in our platform, we now do this more effectively than ever before. And our work in areas such as CTV, retail data, and identity are helping build a new identity and authentication fabric for the open internet. So regardless of how the environment evolves around us, we will always be able to help advertisers find the right impressions for them. A great example of this is the work that we're doing with HP. They initially started to think about new approaches to identity because of the imminent cookie deprecation in Chrome. But while the conversation started there, it quickly turned to how new identifiers such as UID2 could help manage campaigns across all channels, especially channels with high levels of user authentication. HP started using UID2 for CTV campaigns on Disney and Hulu, Disney being a notable and early adopter of UID2. HP started with their first-party data that consumers had consented to provide after making a purchase. That data was then matched with UID2s on our platform. As a result, HP segmented its audience into specific groups, allowing better targeting and measurement of specific product campaigns with more accuracy. HP was then able to link ad exposure data from UID-2 identifiers with the device registration data in its CDP to connect consumers with actual online conversions and sales. That measurement proved to be more effective than the multi-touch attribution model that HP had been using, according to Caitlin Nardi, their head of programmatic for North America. This is a great example of how we're improving advertising outcomes for a major global brand by integrating new approaches to identity, authenticated audiences in high-growth channels such as CTV, and retail sales conversion data. It all started with a conversation about cookie deprecation, but the answer was something much more advanced, which speaks to the way that most major advertisers are innovating with us, and it's why we're embedding these innovations into Cochai. As I've said before, walled gardens are not an optimal competitive environment for the open internet. And the open internet will continue to challenge the walled gardens as the place where the very first advertising dollar is spent. Because for the most part, premium content is outside of the walled gardens and all the questionable user-generated content is inside of the walled gardens, from cat videos to political rants to hate speech to cyberbullying. Walled gardens simply use self-reported numbers in an increasingly opaque black box. Meanwhile, retail data and premium content are making the open Internet more compelling than ever. I predict this trend will accelerate during this year, which, of course, is an election year. I think it's worth spending the bulk of my time unpacking the transitions we are seeing in the industry as it will highlight why we continue to outperform and why I'm so confident about our growth potential moving forward. To do that, I'd like to cover three main areas. First, how advertising channels such as CTV, retail media, and even digital audio are helping re-plumb the internet from an advertising perspective. Second, what the future of relevance in advertising looks like as the identity landscape evolves. And third, why Cochai helps us advance our growth opportunity in the context of all of this. In order to understand some of the more interesting drivers of our business, I think it's important to note the macro environment we're dealing with. For nearly all of 2023, there was uncertainty, particularly around economic growth rates and recessionary fears. In that environment, CMOs become much more reliant on their CFOs, and CFOs needed to make sure that every dollar spent was in service of growth, which means CMOs had to focus more than ever on where they could achieve efficacy and deliver strong and provable return on ad spend. That pressure came at the same time that many CTV content owners around the world were seeing how much more valuable ad viewing subscriptions were to them than the higher priced ad-free subscribers. It is not a coincidence that our growth in 2023 was driven by ongoing strength in CTV and continued leadership through strong and expanding partnerships in retail and retail media. In each of these markets, advertisers can really put data to work and drive precision because they have a greater sense of confidence in who they are actually reaching. In CTV and other emerging channels such as digital audio, there's a logged in authenticated user base. In retail media, our platform works with actual authenticated sales data. CTV continues to be the fastest growing channel at scale for the trade desk. There's a ton of speculation right now about the future of the TV industry, but every major TV trend is good for us. Linear is shrinking and users are streaming instead. We have built our business around streaming premium content. Subscriptions are moving to ad-funded models, and both consumers and content owners want that. As the industry oscillates back and forth from fragmentation to consolidation in all scenarios, we're partnering to provide demand from the biggest advertisers in the world. But one thing is clear through all of this. Ad-supported streaming is going to be an essential strategy for any successful TV provider moving forward. Nearly every major streamer has stated that they make more money from their ad-supported tiers than from their subscription only, and was reported pretty extensively in recent weeks with the price of subscription models continuing to rise, consumer fatigue is settling in. There's only so much disposable entertainment money to go around. According to the Wall Street Journal, 25% of US streaming subscribers have canceled at least three subscriptions over the last two years, up from 15% for their prior two-year period. In fact, by hiking the cost of the no-ad subscription services, streamers are pushing viewers to the cheaper ad-supported options because they are more lucrative. There is only one way for the CTV ecosystem to mature. Content owners in CTV and audio get good at presenting three clear choices to consumers. Pay for access to content by seeing a few relevant ads or pay more money to avoid them or some kind of hybrid of those two. Consumers will have choice and CTV and audio will find their coveted incremental users. Some want to pay with time and some want to pay with money. There's enough pressure to fund the CTV content machines that all of them have to get focused on a light ad load with high CPMs to create the best experiences for their users. While there is more than enough pressure on TV content owners to expand relevant ad programs, there is probably even more pressure on big players of audio. 2024 will be a big year for audio, depending on the strategic choices that those players make. Just like CTV, digital audio benefits from a highly authenticated logged-in audience. Also like CTV, digital audio listeners are highly leaned in. Advertisers have a captive audience that are engaged with quality professional content. Whether it's a podcast or your favorite music, engagement is high, and we're spending more and more time with audio streaming leaders in part because I believe they are in the very early innings of seeing the value of data-driven advertising and about to set out on the journey that CTV companies began years ago. Another area of strong growth for us in the fourth quarter was retail media. Again, a major reason for this is that advertisers got to work with their first-party data, in this case, real-world sales data. In the fourth quarter, we saw major new shopper marketing budgets shift to the trade desk as more advertisers started to move from a non-decision insertion order strategy, which has long been typical in the retail space, to one that's highly decisioned and leveraging retail media a great example of an advertiser leaning into retail media is samsung in canada a large percentage of samsung's device and appliance sales take place through carriers and retailers in order to understand how advertising is influencing consumer purchases in those channels they needed a way to unlock their first party data and combine it with retail data Working with their agency, Starcom, we helped Samsung develop what they call the Samsung Sales Measurement Tool on our platform. When buyers make a purchase, they are prompted to open an account with Samsung and opt in to marketing engagement. With the right permission, Samsung can then look back through their marketing activations across masses of consumers and start to attribute campaign activities to different stages of the purchase funnel. This helps Samsung be much more precise with their campaign activities looking forward. Working with us, they can attribute the effectiveness of marketing directly on sales 19x more effectively than they were previously. I spend time on these growth drivers not only to give you a sense of why I'm so confident in our prospects this year, but also to underscore how major advertisers are thinking about identity and authentication. Which brings me to my second point or second topic. the evolving world of identity. I don't think it's an understatement to say that there's considerable thrash in the industry driven by Google's recent decision to accelerate the deprecation of third-party cookies. It had previously been scheduled to begin deprecation at the end of March of this year, but moved up to the beginning of the year in January. I just want to be clear on one point. For all of the industry debate that's been caused by these changes, The Trade Desk stands to benefit. As I said a few minutes ago, we see approximately 15 million ad impression opportunities every second on our platform. And the vast majority of the ad impressions that we value don't have anything to do with third party cookies. When you consider the fastest growing channels of digital advertising, such as CTV or digital audio, they've never relied on cookies. Retail data doesn't rely on cookies. What our clients care about is being able to reach their audiences with precision and relevance. And we help them do that using whatever signal is available to us. And increasingly, as I've just discussed, the post-cookie world is one that will combine authentication, new approaches to identity, first-party data activation, and advanced AI-driven relevance tools, all to create a new identity fabric for the Internet that is so much more effective than cookies ever were. The Internet is being replumbed. and our product offerings create the best outcome for all of the open internet. The offerings of the walled gardens often are good for them and no one else. Let's also remember that we've seen this movie before. Today, cookies have already been deprecated for around a third of all display impressions. Browsers such as Firefox and Safari made the transition several years ago. Neither of those shifts meaningfully affected our business. In fact, quite the opposite. We continue to innovate a full range of ways for our clients to understand the relevance value of every advertising impression and price them accordingly. In fact, the value we add to advertisers and agencies has gone up with all these changes. Those shifts make it important to consider buying different impressions, and so we do. We're constantly objectively helping buyers to know where to find value and performance. As the relative value of ad shifts to somewhere else, we shift to. One example of this is the work we're doing with Unilever in Thailand. They were looking to raise awareness for their new detergent product, as well as test new identifiers that could advance addressability in a post-cookie environment. Using their own first-party data as a seed, they leveraged UID2 to target relevant audiences and measured against Unilever's traditional audience targeting methods. The results showed a marked improvement over these traditional methods, which include cookies across key areas of measurement, such as click-through rate, brand awareness, and cost per completed view. Interestingly, this work relied on UID2s created from encrypted phone numbers, which is a big part of the identity fabric in Asia. This UID2 work with Unilever is now expanding into additional markets in Southeast Asia. I know you're going to ask me specifically about Privacy Sandbox because nearly everyone else does, so I'll touch on it here. I've written fairly extensively on it on our news platform, The Current, so you can see my thoughts there in more detail. But the CliffsNotes version is that I believe Google has missed an opportunity to build something better. Increased complexity with decreased functionality is hardly a compelling offering. To publishers, they are effectively saying, do more work. and make less money. I believe Privacy Sandbox is an incredibly complex product, understood fully by very few people, which will likely degrade the Chrome user experience for publishers and brands, but especially for users. Users' personalization will break more often. Users will begin to be required to log in seemingly everywhere. Browser-based publishers, including mobile, will likely have to do what so many e-commerce sites already do, Ask for an email address when you arrive. The consumers will get a weaker experience for a while, and publishers will make less money until they change. However, this has less impact on advertisers, especially those with quality first-party data, and it is more likely to help the trade desk than it is to hurt us. For many reasons, we will be better off, but a few of those to include. First, we're on the buy side. We also represent the majority of Fortune 500 brands. We also invested in UID2 many years ago. We invested in AI many years ago. And our business is increasingly built around CTV audio and environments that are almost always authenticated. Fewer cookies doesn't really matter a ton for us. It doesn't stop our work because we've been busy with other open Internet pioneers building something much better. Where there is real risk is on the publisher side of the ad ecosystem, especially browser-based publishers. Others have reported that declines in publisher CPMs in Chrome, where cookies have been deprecated, are around 30%. That's potentially devastating for publishers, of course. Not so much for advertisers, who continue to have millions of choices a second on where to spend their ad dollars. But this threat to publishers comes as there are daily reports of journalism outlets laying off major swaths of their newsrooms amid a really tight business climate. While there may be many reasons for the struggles that journalism outlets are having, one of the dirty secrets of the industry is that authentication rates there are surprisingly low. That means that they don't have any sense of who is visiting their destinations, and they've been reliant on cookies until now, to create relevance for advertisers. Without either cookies or publisher authentication, advertisers won't value those ad impressions nearly as much. This is a wake-up call for publishers. And the math is obvious. A dollar CPM turns into 70 cents with cookie deprecation. We're often seeing a dollar CPM turn into a dollar 30 when UID2 is layered on it. So when publishers get to consider the contrast of $1.30 versus 70 cents, the math is more obvious than ever. In some cases, they only recently started looking at the math when the dollar suddenly turned into 70 cents. So 2024 has started off as a year of action for our industry. On the positive side, we're seeing more publishers lean in to single sign-on authentication tools that they control. For example, We've seen a major uptick in publishers deploying Open Pass. These include Snopes, OK Magazine, Radar Online, and many others. We expect many more to deploy this in the months ahead. Open Pass lets publishers authenticate their regular visitors so they can help advertisers score the relevance of their ad impressions. All of this taken together brings me to my third point, our new Cochai platform. Much of what I've been talking about today is embedded into Kokai. In particular, Kokai represents a completely new way to understand and score the relevance of every ad impression across all channels. It allows advertisers to use an audience-first approach to their campaigns, targeting their audiences wherever they are on the open internet. Our AI optimizations which are now distributed across the platform, help optimize every element of the ad purchase process. Kokai is now live, and similar to Next Wave and Solomar, it will scale over the next year. It's our largest platform overhaul in our company's history, and I could not be more proud of the incredible work of our product and engineering teams. In Q4, me and our product team personally visited four continents and met with hundreds of clients in each location. Europe, North America, with large showings in New York City and Chicago, as well as in Asia and Australia. After spending half a day in each location with almost 1,000 clients in total, almost every single one of our clients believe that Cochai is a major upgrade to our platform and to the ecosystem. We have never launched a product with this much change, and we've never launched a product with this much confidence that what we have represents a major advance in advertiser performance and that it is going to be enthusiastically adopted. So let me wrap up. I've covered a lot of ground, but there's a lot going on in our industry. And I thought it was important to reiterate why I feel so confident about our position and our prospects. In closing, I'd like to just summarize a few key points. First, agencies and brands are becoming more deliberate with their campaign budgets. They are shifting ad dollars to where They can be more data-driven and precise in everything they do, and this is driving them to sign JBPs with us at a record pace. Exiting last year, over a third of our business fell under a JBP. Second, we are reinforcing our position as the ad tech AI leader. We've been embedding AI into our platform since 2016, so it's nothing new to us. But now it's being distributed across our platform so our clients can make even better choices among the 15 million ad impression opportunities a second. And understand which of those ads are most relevant to their audience segments at any given time. Third, connected TV continues to be the fastest growing channel of our business at scale and the key driver of overall omnichannel growth. And it's not just here in the U.S. We're seeing strong CTV growth across EMEA and Asia as more CTV inventory comes online. CTV companies are driving a ton of innovation in our industry, particularly around identity. And it's no coincidence that they have been among the earliest and most enthusiastic adopters of UID2. Fourth, retail media has become one of the fastest growing areas of our business, and we expect this to continue in 2024. Retail partnerships and retail media is revolutionizing the way many advertisers think about connecting advertising to actual consumer actions. And more and more of the world's leading retailers are now active on our platform. Fifth, global expansion. We have made significant investments outside the U.S. over the last few years in CTV and in retail media, but also in our overall go-to-market strategy. Our business outside the U.S. grew at a much faster pace than here in the U.S. last year. We believe we are in a position to accelerate our international growth in many of the markets we serve. Sixth, we've seen a rapid uptick in adoption of UID2 and EUID as a new identity currency for the open Internet from advertisers, publishers, and everyone who serves them. But perhaps even more encouraging, We're seeing significant performance improvements for advertisers who are using UID2 and this is accelerating adoption. Seventh, of course, 2024 stands to be a major year for political spending here in the United States. Since 2016, the Trade Desk has been a vital platform for leading political advertisers. This year, we expect to gain more share in this segment and we believe that political spend will increase as the year progresses. The Trade Desk is very well positioned as the advertising industry evolves. We built our business model on the belief that objectivity and aligning our interests with buyers would matter more and more over time. Objectivity matters more now than it ever has before. And that trend will continue as walled gardens continue to grow their conflict of interest faster than ever. We are executing well. We are poised for growth. 2023 was an excellent year. We expect 2024 to be even stronger. Now I'm going to turn the call over to Laura to discuss our financials.