Good day, everyone, and welcome to The Trade Desk's third quarter earnings call. [Operator Instructions] It is now my pleasure to turn the conference over to Mr. Chris Toth, Vice President, Investor Relations. Please go ahead, sir.

Thank you, David. Hello, and good afternoon. Welcome to The Trade Desk Third Quarter 2016 Earnings Conference Call. On the call today are founder and CEO, Jeff Green; Chief Financial Officer, Paul Ross; and Chief Operating Officer Rob Perdue. A copy of our earnings press release can be found on our website and at the thetradedesk.com in the Investor Relations section. Before we begin, I would like to remind you that except for historical information, the matters that we will be describing will be forward-looking statements that are dependent upon certain risks and uncertainties. I encourage you to refer to the risk factors included 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 non-GAAP to GAAP measures can be found on our earnings press release. We believe providing non-GAAP measures combined with our GAAP results provides a more meaningful representation regarding the company's operational performance. Lastly, I would like to highlight our participation in the following investor relations events: On Tuesday, December 6, at the Raymond James Conference in New York; on Wednesday, January 4, at the Citi Internet, Media and Telecom Conference at CES in Las Vegas; and on January 11, at the 2017 Needham Growth Conference in New York. I will turn the call over to founder and CEO, Jeff Green. Jeff?

Thanks, Chris. Good afternoon to everyone joining us today on The Trade Desk's first earnings call as a publicly traded company. Today is a very exciting day and I want to start out by expressing our deep appreciation to our investors, to our customers, to our partners and employees who have worked with us and put their passion and trust in us over the past 7 years. We were pleased by the way the IPO process went and The Street's reaction to our offering. We are excited to share today that we exceeded our own expectations for the third quarter of 2016 and we broke many of our previous records. We continue to significantly outperform our industry and massively outpace global economic growth. During the IPO process, we had to make tough choices knowing it was perhaps it's our last time to choose our investors. We that know that going forward investors are effectively choosing us, and we are committed to work hard and help investors understand our business and our esoteric industry. So today, we will use some of our time to share our story and explain why we believe our best days are ahead of us. The recent IPO was a major milestone but in reality, it's just an early step in the evolution of The Trade Desk. I would like to reiterate what I have shared with our employees and our investors. First, we say over and over again that we're only 2% done. Meaning total programmatic ad spend today of roughly $10 billion is only capturing about 2% of the $640 billion advertising industry. By contrast, many high-growth companies are focused on certain niches, whether it's something like the action sports market or a corner of the wearables market. Instead, we are trying to change all…

Thanks, Jeff. Good afternoon, everyone. Overall, we continue to experience growth meaningfully above the industry averages, which means that we are continuing to win market share. Specifically, year-over-year revenue growth in the third quarter was 84% and year-over-year adjusted EBITDA growth was 78% as well as another quarter of positive GAAP net income. Because our business follows the seasonal trends of the entire advertising industry, we provide a year-over-year comparison unless otherwise stated. We report revenue on a net basis, which represents our growth bill-ins, less the amount we paid to suppliers for the cost of advertising inventory, data and add-on features. We derive nearly all of our revenue from ongoing MSAs that give users constant access to our self-serve platform as opposed to insertion orders or other one-off deals to run single campaigns. Revenue for the third quarter was $53 million as previously mentioned, up 84% year-over-year. This growth reflects both expansion of our share of spend by our existing clients as well as the addition of new customers. Approximately 87% of our third quarter gross spend came from existing customers who we define as those that have been spending with us for over 1 year. On a year-to-date basis, revenue for the first 9 months of 2016 was $131 million, up 83% year-over-year, with 90% of our year-to-date gross spend coming from existing customers. Our operating expenses increased in parallel with the growth of our business to $38 million in Q3 of 2016 from $20 million during the same period in 2015. The increase in operating expenses was primarily due to overall increases in personnel, delivery and marketing expenses, which included the expansion of our product, sales, service and management teams. Total other expense net was $6.1 million and included a noncash charge of $4.7 million associated with…

Great. Thanks, Paul, and good afternoon, everyone. Let me just take a moment to echo Jeff's sentiment from the top of the call on how excited we are to be here today. Without the grit and commitment of our employees or the trust that our customers and partners have placed in us, we wouldn't be here today. And from an operational perspective, we remain focused and continue to execute on our business plan. The upside in performance versus our internal expectations for the quarter came in part from stronger-than-expected political spend and incremental advertising around the Olympics. When we look at the 18 most competitive congressional district elections, the average increase in spend across these races was 900% when you look at September versus August. So political spend gave us a nice bump in Q3 and a smaller bump that we've built into the Q4 numbers that Paul just shared a minute ago. In addition, mobile video was very strong during the quarter as advertisers continue to move programmatic dollars to this channel. Mobile video is one of the areas we're investing in heavily, both in terms of the technology and tools on the platform as well as more access to inventory. And what we referred to collectively as our newer channels, which include mobile video, native, audio, connected TV and cross-device products, those collectively grew 59% in just 90 days from the end of Q2 to the end of Q3. In terms of pure percentage growth, audio was our fastest growing channel, as Jeff mentioned earlier, massively exceeding the growth of our other channels. Now we're only in the very early stages of audio but adoption is growing more rapidly at this point than most channels we've introduced in the past. Fewer than 90 days into our generally available…

Great. Thank you very much, Rob and Paul. Before moving to the Q&A session, I would like to highlight growth drivers we see long term. We are excited about the long-term opportunities that are just getting started now. We continue to see advertisers and agencies realizing the return on investment in programmatic ad spending and increasing spend across all of our channels. I am very pleased with our progress on video and TV. And as the industry shifts, The Trade Desk is investing heavily into our engineering team and people to capture the video and TV market as it moves toward programmatic. Nearly all of our customers have expanded spend into mobile advertising as well. We have hundreds of customers now using in-app advertising. In-app alone has grown about 160% since the first quarter of this year. And mobile advertising is a big opportunity globally, and we expect it to continue to grow around the world but especially in Asia. We will continue to invest in markets around the world, and we are expecting to open offices in Indonesia, China, Spain and France in the first half of 2017. One last area I'd like to touch on is digital audio. This is one of the biggest things happening in media right now, and we are starting to see the industry move towards programmatic. We recently launched our partnership with the Spotify and they continue to gain more consumers' time as people listen to connected radio more. The digital audio industry needs programmatic advertising as it benefits content providers with a lower cost of sales while delivering more relevant ads, which leads to a better consumer experience. Given our third quarter results and accomplishments we have achieved, we are confident in the direction of our business and we are delivering on the commitments that we've made, the commitments that we made to our customers, to our investors, our partners and to our employees. We are focused on the long term, and this is how we will continue to operate our business and perform. So with that, we look forward to your questions. Operator, let's begin with the Q&A.

[Operator Instructions] And we'll take our first question from Mark Kelley with Citigroup.

You highlighted mobile growth in the quarter. Some competitors have talked about mobile video usually not having third-party measurement in place and advertisers kind of holding back there. That doesn't seem to be impacting you so would love to hear your thoughts there. And second, international growth exceeding the growth domestically, what are the main geographies today? And can you expand just a little bit on the plans in Hong Kong?

Sorry, can you say the last part of your question one more time, the part about Hong Kong?

Yes, just expand a little bit, to the opening an office this quarter. Just a little bit more on the plans there would be helpful.

Fantastic. Thank you. I'll take a stab at the first parts of the question. So as it relates to mobile video and measurement, I should first say that we think about things a little bit differently than some of our competitors. You mentioned that that's sort of the impetus for the question. We think about video and television as sort of 1 category. Even though you have to adapt for each of the different categories, we think of them together. We do actually measure mobile video separately from mobile and from video when we're talking about how we measure it internally just so that we cannot double count in both mobile and in video. But that said, the measurement issue is I think a little bit different just because we come at it from a digital-first perspective, and because we measure it much the same way that we do the rest of video and television, that hasn't been an obstacle for us. It doesn't mean that there aren't obstacles facing all of television measurement. There are -- or video measurement. There are. There absolutely are and there are things that need to improve. But because of our digital-first approach, it doesn't affect it as much. As it relates to the international growth, I couldn't be more pleased with the number that we highlighted, which is 4x international growth compared to the United States. That's actually pretty evenly applied around the world. But Asia, because in many of the markets that we're in like Hong Kong, we haven't been in as long as we have for instance in the U.K. or Germany, so the growth rates are even faster. The growth in Hong Kong is unbelievable. Rob, I'm not sure what you would add or any color you'd add on Hong Kong.

Sure. The only thing I'd add is I think you said where are we strong -- we're very strong in Southeast Asia. We've been there for nearly 4 years now, as well as Australia. And so we're seeing remarkable growth in both of those regions. In Southeast Asia, there's a phenomenon where the spend was in Singapore and it's starting to move out to other large countries, including Indonesia, which Jeff highlighted on the call. In terms of Hong Kong, we landed on the ground there just about a year ago. We've got a really significant growth in Hong Kong and we're adding to our team and investing in inventory partnerships. And when we talk about investing in Q4 and Q1, what we're really talking about is Mainland China. And so we're doing the things around inventory and data and data centers and people to get ready. But more to come on that.

Yes. The one thing I'll add before we go to the next question is to be big picture and think about the long term, part of the reason why we're over-investing so much, and it's hard to say we're over-investing given that we're already seeing the returns on the business, but we are putting so many more of our employees on a sort of per-revenue-dollar basis into particularly Asia. Just remember that of that global advertising pie, the $640 billion, which we're constantly referencing thinking about, talking about internally, we can't get our eye off of the ball, which is the U.S. or North America really represents about 1/3 of the global advertising pie and the other 2/3, of which the fastest growth is coming from the rest of the world and particularly in Asia. So we need to continue to make those investments in order to get the best out of it. So we're super excited of the growth we're experiencing in Asia.

Looks like our first question will come from Mark Mahaney with RBC.

Sorry about the background noise. Jeff, Rob and Paul, congrats on the first quarter out. Jeff, your updated thoughts across the industry on header bidding, what trends you're seeing there and the impact it's had specifically on The Trade Desk.

You bet. Thank you. So header bidding certainly continues to be one of the most discussed topics in all of digital advertising and certainly inside of programmatic. So many things to remember about header bidding. For those of you that are unfamiliar with it, I'll just give a 1-minute sort of overview of what it is and the impact that it has on our business. And then I'll talk specifically about the trends that have happened in the last 90 days. So header bidding essentially makes it so that instead of there being what has historically been a waterfall, where the top portion of the inventory at the website -- by top I don't mean at the top of the page, I just mean the most valuable stuff -- will go to one company. And then whatever they don't monetize will go to the next company, and whatever they don't monetize will go to the next company. And that means that you have 4, 5 or 6 or more companies that all get different bites at the apple. And what historically would happen is you would manage all of this through Google's ad server, DoubleClick, and they will help you control the waterfall. What header bidding has done is it's basically enabled via technology to pass into that decisioning tool, DoubleClick, what an option would produce in terms of yield so that instead of running the waterfall, all of the competition can be unified. So it creates what we call in the industry a unified option instead of this waterfall. So instead of yield being fragmented, so you effectively have 4, 5, 6 or more sort of pools of liquidity or different markets. They're all together. And that fuels competition. So the byproduct of header bidding is that particularly on…

And we'll take our next question from Brian Fitzgerald with Jefferies.

A couple questions. In general, how do you feel the market is evolving around digital TV and audio? I guess the point is, is programmatic adoption accelerating in those channels? Is the spend accelerating? And then as you look at international dynamics, do you expect it to be any different there for any systematic reason? And then one more I wanted to ask was around the product releases. 12 product releases, how should we think about that going forward? Is that the usual rate? Or is there a quicker tempo as you address emerging video, audio and international opportunities?

Fantastic. So I'll take a stab at the third part of your question. I'll ask Rob to take the first crack at the first 2 portions of the question. So as it relates to the product releases, we more or less ship product every single week. And so with 12, 13 weeks in a quarter, we're shipping every single week. So when we talk about the 12 that's what we're doing, sometimes we'll do that more or less depending on holidays and things like that. But it's our goal to ship product at least weekly. As it relates to like how you should think about that going forward, one of the things that I think we've done really, really well in the year -- so far this year and certainly influences the way that we make investments in 2017 is we have figured out how to not let the increasing side of our engineering team decrease the productivity per engineer. And so we are super excited to release a number of products and features. We're going to keep trying to get better about how we can give you more color on what that means because obviously they're different size and scope. But we wanted to start by just giving you at least a small amount of visibility into how much we are producing because we are producing more products than we ever had in our company's history in the third quarter. And we expect that to accelerate as we're making investments. And so as we -- and particularly in next quarter's annual summary when we're summarizing all of 2016 and giving guidance for 2017, you'll get more of a sense of the investments that we're making in technology. So knowing that productivity is doing so well is -- hopefully creates as much optimism in you as it does in me. But with that, Rob, do you want to take the first 2 parts of the question?

Sure thing. I'll start with the international growth and sort of rate of growth and how bullish we are. So really bullish. As we said, it's grown faster in every quarter in 2016 relative to U.S. spend. We expect that to continue. We see the rate of growth continuing to grow faster, frankly accelerating. But it's really hard to put a number on what the percentage growth is relative to the U.S. when we look forward other than to say it's going to grow faster and it's going to accelerate. And when you think about places like Japan where we've been on the ground for nearly 2 years now, the third largest media market in the world and yet only about 5% programmatic penetrated. So there's just a massive amount of room for growth. You think about Indonesia, the fifth-largest country in the world by population, the fastest-growing middle class, very concentrated set of publishers. It's ripe for programmatic entry, and we're doing really, really well there and expect to grow significantly. So those are just 2 examples of many international markets of size and scale that we think have massive potential going forward and will continue to drive our international growth being faster than our domestic even at the same time that we see U.S. growth continuing to grow much faster than the overall digital advertising growth. And then for the first question, I -- could you just reiterate the -- I'm trying to remember the question.

No, I think you got them. I think you hit both of those, Rob, so I appreciate it.

No problem. The last thing I'll just add on the international, just to echo sort of Rob's sentiments, is that one of the great things about our international growth, and particularly when we talk about areas like Indonesia and China, those require meaningful investments. And Indonesia has almost as many people as the United States, has one of the fastest-growing middle class in the world. I am so excited about that market. But one of the reasons why I'm so excited about that market is because we're going in there seemingly by ourself, and it's because our competitors, in large, can't afford to go into that market. So in the response to the last question, I just mentioned that because of header bidding, it's harder to compete. It is the bar or the -- yes, the bar to get over to be profitable is higher than it was 3 months ago or 9 months ago by a lot simply because there's more bid requests that you have to look at in order to be competitive. That makes it harder to go make investments in nascent markets like Indonesia. So we think because our competitors are going to struggle to have the resources to invest in those markets, we're going to be in markets that are more likely to go programmatic faster for the same reason because publishers can't afford to have sales people there and that's just creating an amazing environment for us to go own a programmatic market. So one of the most exciting parts about our international growth -- and I actually think it's a really important commentary on why the growth rate is so much higher than it is in the United States. There's less competition. We can afford to be there, and programmatic is a better way for content owners to distribute there even than in the United States.

We'll take our next question from Aaron Kessler with Raymond James.

On the EBITDA guidance for Q4 of roughly 30%, can you just walk us through that? It implies kind of slightly down sequentially. Normally, Q4 will be up on the EBITDA margin side. It looks like sales and marketing might have been lighter than expected in the quarter. Would you expect that to ramp in Q4 as well?

Great. I'll ask Paul to give the -- just financial nuts and bolts. And then I'll add just some color.

Okay, sure. Aaron, the EBITDA guidance for Q4, there's really nothing unusual in there other than just the timing of the investments that we're planning to make. You probably recall from the roadshow we talked a lot about the investments we're going to make in people and technology around television in particular, and of course, the international growth and opening up all of the international offices. So the difference there in EBITDA is just the impact of those investments.

Yes. I'll just add a few words and color. So I've been looking at this year very closely in terms of the things we were touching on a few minutes ago, which are what is the productivity per engineer and how are we affected by the network effect. That is a question that I have been closely watching all year long. And I -- this is one of the things that I am just so optimistic about, is that because I believe we're so productive and there are so many opportunities in television, in mobile. And those growth rates that we highlighted throughout the call just make it so easy to make the best, to make the investments. And so that's what we're investing in. So we are doubling down. We are investing. We gave guidance during the roadshow process. We're giving guidance now that we do expect EBITDA to dip down because we are making those investments. Those investments are starting now -- or have already started, I should say. But let's not lose sight of the fact that we're still in line with mature SaaS companies in terms of the EBITDA margins that we're producing. So when we say we're going to make investments and we're sort of trying to temper expectations or give expectations there, we're not talking about going to 0 or even anywhere close to it. We're simply talking about lowering them a bit on where we've been. But we certainly don't want people to misinterpret that as where they are at steady state. That's simply a byproduct of us making investments with the green shoots we're already showing are no-brainers.

Great. And just a quick follow-up, can you give us any data on kind of maybe client count, how that's progressing either qualitatively or quantitatively and then also maybe just penetration with existing clients as well?

Yes, so we haven't -- we've decided today to not provide the client count on a quarter-by-quarter basis. Frankly, we're still even contemplating providing it on an annual basis. But at this point, I can say we expect to. In other words, that's -- and the reason why, Aaron, is for the thing that Rob mentioned in the call, which is we do all of our modeling off of cohort analysis and particularly the potential of each individual cohort so that we're looking at them together because we encourage our account managers and salespeople and traders to look at their sort of book of business as AUM. They're placing bets together. And we don't want them to be overly focused on client count and getting the certain amount out of every client. We don't think about it that way. And so we just don't want to lead anybody down the wrong path, particularly as it relates to them creating models. So -- but we do want to show you that we're growing but it's sort of a double-edged sword. So that's the thing that we're struggling with.

And our next question comes from Kerry Rice with Needham.

Congratulations on a successful first quarter as a public company. Two questions if I may. First one is can you talk a little bit more about your relationship or partnership with Spotify for digital audio? Because you generally represent agencies, is there something different about that relationship that gives you a competitive advantage in digital audio? And then the second question is you mentioned consolidation earlier. You expected that to occur. We obviously had an acquisition announced this morning. Do you look at that particular acquisition as an opportunity to fill a gap? Or do you look at that as any opportunity at all or negative for the industry? Any just context, maybe your feelings about DSPs on the video side getting taken out?

Awesome. I appreciate you asking both of those questions. I was hoping that we got a chance to talk about both of them, so thank you. I'm not sure if this one is allocable to Rob, but I'll give it -- I'll take the first stab at Spotify and then I'll come back to TubeMogul. So first, as it relates to Spotify, it -- essentially, they have a challenge which is they want to make certain that they protect their customer experience. And every publisher, every content owner has that challenge. But frankly, I think in the digital audio space and particularly because they have done such an amazing job of growing that they want to protect that experience. So the way that the process was run -- and they said, "Okay, we want to get in the programmatic space because we've recognized the benefit of distribution in that way." So they went to the agencies and they asked them, "Hey, if we were to use -- if we were to partner with a couple of DSPs, which do we use?" And what they heard over and over and over again was, "Please talk to The Trade Desk." And so we have been very working very closely with them to make certain that they share the right amount of data and insight that the way that the auction is run and the information that they pass over to the auction gives us enough insight so that we can give them an ad tailored for that person so that they have a better experience. So often, that work is just done by us connecting to an SSP, and there's no dialogue with the content owner. But in this case, we've been working so closely with Spotify to just make certain that…

We have time for a few more questions.

A few more? Okay, great.

All right. And we'll take our next question from Shyam Patil with SIG.

Just a couple. The first one, Jeff, you highlighted higher growth is more than 4x-ing the market, and you talked about how some of the newer growth drivers like audio, TV and international are starting to see strong uptake. Is there any reason why this pace of growth shouldn't continue, especially given the low penetration in the near to immediate term? And then second question. In terms of audio, can you help us understand kind of how big that is today in terms of the mix and where you see that going over the next 2 to 3 years?

You bet. Thanks. So in terms of providing any guidance as to why that growth rate wouldn't continue or will continue, it's really too early for us to guide or change any guidance that we've given on 2017. We're working right now with our clients to plan 2017. We're doing that around the world. But from everything we hear, we think the ad industry as a whole will continue to see dollars shift to programmatic. But we'll, after next quarter's results, give more guidance on 2017 and growth rates. In terms of the size of opportunity in audio, we started with Spotify and we feel like that's such a luxury. That is a byproduct of our success and our size at this point to be able to partner with one of the best and frankly one of the most game-changing companies in the music industry in my lifetime. So we see that as such an honor. But while we've partnered with one of the biggest and most game-changing companies, there are many more to continue to partner with and expand that offering on. What is currently happening in programmatic is effectively we enable price discovery, right? We make it possible for people to know what they're buying and selling and figure out the right price. Because programmatic can encourage competition and it can make it so that you can get access to demand that you never would have been able to by pounding the phone or pounding the pavement. As the market matures, that can actually help prices go up and that's good for publishers. And because the efficacy is so much higher, it's still beneficial to advertisers. But when we're competing with a legacy radio distribution model, which is effectively salespeople pounding the pavement, it's so much easier to be more effective. So I think that in terms of the delta between the prices that ads clear at and the value that they create for advertisers, some of the most delta -- or some of the biggest delta or the biggest value that we can help customers find is in audio. So it's really exciting for us to be showing ads in the political or the election races, audio ads playing on phones while people are standing in line to vote. That sort of application and customization and targeting and user experience is just so much beyond what old-school radio could provide. And because it's early and there isn't competition other than sort of the legacy distribution model, it means there's real value there for our customers. So I expect that to continue and for us to continue to see more and more of our customers embrace digital audio.

Our last question today comes from Youssef Squali with Cantor Fitzgerald.

Congrats on a successful IPO and a successful quarter out of the gate. Let me actually take the last question and maybe flip it on its head. Jeff, just trying to figure out, what are the gating factors to you sustaining the growth ex the tough comps? So clearly, nobody can keep growing at 100% year in and year out. But if you strip those out and you look at other potential headwinds to your top line growth, can you just help us understand what those would be? And then maybe a quick question for Paul, and this is more of a long-term, kind of 3- to 5-year type of question, not 2 or 3 quarters out. As you work towards the 40%-plus goal for EBITDA margin that I think you guys talked about during the IPO, can you just talk to us about where you see the most margin leverage sooner rather than later as the model kind of evolves?

You bet. So I'll talk about potential headwinds. And then, Paul, you can take the second half of the question. So I'll just highlight 2 of the headwinds that I think about most. And I shouldn't call them absolute headwinds. They're not. It really is a question of where are the risks, right, the risks of potential headwind. The first is in execution risk, right? So I think this is a case where programmatic is so much more effective than the legacy ways of transacting in advertising. And because of the increasing price of content creation and the increasing cost of ads, the need to use data and move to programmatic is inevitable. Like the industry is going to do it. Whether The Trade Desk does it or somebody else does it, it's going to happen. So then it just comes down to execution risk. Are -- can we manage our business in a way that we just don't get in our own way? That's the thing that I spend the most amount of time making certain that we don't screw it up. But the second sort of risk, if you will, I would just say, is adoption in bigger companies. So what -- programmatic, just like so many the things where there's tons of innovation, really started with small companies, like ours was, 7 years ago. And a whole bunch of smaller companies proved it and then big companies get in the space. And because this is the future of companies like AT&T or Time Warner or AOL, much, much bigger companies than frankly started the programmatic race, the question is, can they execute? Can they move things over quickly enough? Are television advertisers and content owners going to embrace it or resist it because it does represent change. Like the timing question of how quickly they'll embrace it can represent headwinds. But long term, there is no question that, in my mind at least, that they'll have to embrace programmatic. To the second part of the question, Paul, I'll turn it to you.

Yes, sure. So I think your question was about the 40% EBITDA margins looking out 3 to 5 years. And really the -- I've got a few comments to shed some light on that. I guess the first thing to keep in mind is because we're an MSA-based model and our existing customers are spending more and more every year, we are out there hitting the pavement to get I/Os signed up. And we don't need to add to our infrastructure at the same rate as revenue. So the gap revenue and operating cost, that gap increases over time, and our team ends up managing more on a revenue per head basis. So the operating leverage really comes naturally, and there really isn't anything specific that we need to do in order to get to that 40% EBITDA margin. On top of that, there are some incremental benefits of scale as our tech costs go down, as our win rate goes up. So when you put those 2 things together, the path to 40% is pretty clear. The only question is because we're only 2% done, how many years are we going to be invested at these rates before we end up north of 40%. Okay?

Thank you, gentlemen. As there are no further questions at this time, this does conclude today's call. We thank you all for your participation, and you may now disconnect.