The Trade Desk, Inc. (TTD) Q3 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Trade Desk's Third Quarter 2018 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your hosts Chris Toth, Head of Investor Relations for The Trade Desk. Chris, please go ahead.

Thank you, operator. Hello, and good afternoon. Welcome to The Trade Desk Third Quarter 2018 Earnings Conference Call. On the call today from our headquarters in Ventura our Founder and CEO, Jeff Green; Chief Operating Officer, Rob Perdue; and Chief Financial Officer, Paul Ross. 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, the matters that we'll be describing will be forward-looking statements, which are dependent upon certain risks and uncertainties. I encourage you to refer to the risk factors included in our press release and 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 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 the following events on Wednesday, November 14, we will be attending the RBC Technology Conference in New York City. We are also planning in an Analyst Day on Wednesday, March 6, 2019 in New York. We will provide more information on this event before the end of the year. I will now turn the call over to founder and CEO, Jeff Green. Jeff,

Thanks, Chris, and thank you all for joining us today. Before we get into our results, I want to set the context of where The Trade Desk fits into the overall programmatic advertising industry. Global advertising revenues are estimated by IDC to be $700 billion in 2018. Digital is nearly half of that. Inside of digital programmatic is one of the fastest growing segments. We think nearly all of advertising will eventually be digital and nearly all of that will be programmatic. In 2018, Magna Global estimates programmatic will grow 21%. The Trade Desk is growing over two times that. In Q3, our revenue grew 50% year-over-year. This means our growth rate for Q3, 2018 equals our growth rate for Q3 2017. Even though programmatic is one of the fastest growing corners of global advertising, we're growing more than two times as fast. There are several reasons for our growth. First, there is strong momentum by advertisers to diversify their ad spend on digital. Programmatic is benefiting from this diversification. Advertisers are taking a more data driven approach to the way they spend and the marketers are realizing the traditional advertising methods do not deliver the best ROI. Another reason for our growth in Q3 is that media is rapidly fragmenting, especially in TV. From an agency and advertiser perspective, The Trade Desk is the best way to target audiences effectively across fragmenting distribution channels. This fragmentation enhances our value proposition because we are independent and objective we nimbly move where the advertising ecosystem moves. This is driving the momentum for advertisers to spend their incremental marketing dollars beyond the traditional search and social websites. Finally, our independence, avoiding conflicts of interest by not owning any media and serving only the demand side is more valuable today than ever before. The market continues to validate our business model. This is now the second quarter in a row where our growth rate has equaled the prior year's growth rate. We are seeing measurable results in our numbers. For 3Q, I'm pleased to report that Trade Desk had another record quarter. Our revenue increase to $118.8 million, once again exceeding our own expectations. We have seen significant growth in our most strategic channels. 46% of Q3 spend in our platform was in mobile. This is the highest percentage of mobile spend we've ever had. Our Q3 mobile video growth was up nearly a 100% year-over-year. Mobile in app growth was also nearly 100%. A very positive sign is the rise of the use of data, data spend on our platform grew by over 70% since Q3 of last year. We are extremely excited that our first acquisition made almost a year ago, has already paid for itself. Cross-Device spend was up 3x compared to last year, but perhaps most exciting is what we're reporting in Connected TV. Connected TV once again, grew more than 10x from a year ago. CTV growth and our CTV market share continue to exceed our own expectations. Our expansion and international markets also continues at a strong pace once again Q3 international spend grew more than the domestic spend. This puts international spend on track to exit the year at a much faster pace than the U.S. We continue to expect rapid growth outside the U.S. for the foreseeable future. We're also excited to report that we signed up three more of Ad Age's, top 200 global advertisers. This includes one of the biggest retailers in the U.S., a huge multinational consumer technology firm and one of the biggest global beverage companies in the world. We view most of their current spend in our platform as small tests relative to what we expect them to do in 2019. This continues the trend we saw last year, when we signed a number of large brands on our platform in the second half of 2017, they began with small campaigns, then as they saw measurable results increased their spend. The large advertisers we signed up in 2017 have driven in part our 50% year-over-year growth so far in 2018. Over the past 12 months compared to the same period last year, nearly half of the Ad Age’s top 200 brands increased spend with us by more than 50%. One of the most bullish themes I will share today of the top 200 brands that have signed with us since 2017 spend has increased by over 5x year-to-date compared with last year. This positions us very well for continued growth not only in Q4 but also in 2019, while too early to quantify we are more bullish on 2019 than we have ever been going into another year. We're more optimistic about our ability to gain market share than we've ever been on our business. Add to this the growing adoption of Connected TV by large advertisers. Advertisers have only just started to move budget over from linear TV, which is why Connected TV will possibly be the most important channel for our Company's growth in 2019 and beyond. The largest part of the $700 billion worldwide advertising market is TV estimated at $230 billion according to IDC. But when TV spend is reallocated to web, video, social video, mobile video, and CTV, video content will approach about half of the growing global advertising pot. While TV has moved to digital, is still in its very early days. We are witnessing a generational shift with a global convergence of the Internet and TV. Within the next 10 years linear TV as we know it today, will be dead. Technology such as 5G are expected to start rolling out in China, Japan and the U.S. very soon. Increased speeds and reduced latency are a big deal for advertising. 5G is expected to accelerate what consumers already want on-demand content. 5G will change the advertising and media landscape. Mobile video usage will increase cable companies that leverage 5G will have a huge advantage over those who don't. This monumental change is making new forms of distribution possible. This is one of the many reasons that TV content owners are showing more than ever to having a direct relationship with consumers. We recently met with the head of a major television network and their team. They were one of the earliest partners to make a significant of online inventory available programmatically. They know about CTV, OTT, and programmatic, but are not in the trenches every day. In our meeting, the TV network made their main point very clear. CPM is king and they will embrace anything that maximizes ROI on content and of course content continues to get more expensive and this is where we come in. Programmatic more effectively monetizes content. It was awesome to see one of the most senior executives at one of the largest content companies in the world embrace programmatic and The Trade Desk. Driving better CPMs is one of the reasons content owners are coming directly to us. By doing so, these content owners are eliminating many steps in the distribution channels and are monetizing their ad inventory more directly and efficiently. We expect to work with any TV cable or online channel who wants to have a direct relationship with consumers. We think that in a very short time that that type of relationship will be existentially required for any content creator that isn't included in the skinny bundles that many of the virtual MVPDs are packaging. Better monetization and the fact that no single company dominates the market share in TV leads us to believe that a walled garden approach will not succeed in TV. TV market dynamics are much different from those of other channels. The Google and Facebook playbooks for search and social do not apply to the TV industry. It is virtually impossible for any one content provider to own as much market share in TV as Google has in search or Facebook has in social. This is why our objectivity from not owning media ourselves makes The Trade Desk one of the most important partners to these TV content owners. For example, take the current NFL season. The Trade Desk is running ads on NFL inventory with many of the networks such as Fox, CBS, and ESPN, in addition to the virtual MVPDs, not just a single partner. We are nine weeks into the season, ratings are up. The NFL season is on pace for more overtime games than ever before, and this means that more hours are being watched as a result and more inventory is available. That is a huge opportunity for the network showing the games. We think that in the long-term we may be the one company who can partner with everyone in digital, from Amazon and Snap to traditional publishers with a growing online presence because of our scale and independence with no conflicts of interest. That's why we can work with many of the biggest digital publishers on the planet from Google in most of the world to Baidu in China. From Amazon, in the U.S., to Alibaba in China and globally on Spotify, and don't forget in TV, AT&T, ABC, Dish Network, Fox, Scripps and DirecTV. This is why we are so excited about our new global partnership with Tencent. You may recall that we have announced our partnerships with Baidu and Alibaba previously, so this is a big announcement, but before I talk about China and our international efforts let me finish a few things on TV and the CTV front. Recently AT&T launched its new ad tech division called Xandr. One of the exciting parts of this launch was the announcement that AT&T will not only sell its own household addressable cable advertising from subsidiaries like WarnerMedia and DirecTV, but we'll also sell other companies' inventory. This would effectively make AT&T the largest CTV focused open market exchange in the world and clearly differentiate it from the duopoly of Google and Facebook. This is a compelling commitment from a leading player on how to best monetize CTV. We expect to continue to be a demand partner for their marketplace and we expect Comcast and Disney and others to continue similar strategies. They try to own distribution to consumers. They wrap their own and other companies content and then they partner with us for ad demand. Our CTV spend was up strongly again this quarter at over 10x year-to-year. The number of advertisers running on CTV has increased about 100% over the past year. The early investments we made in this channel continue to yield increasing returns and we expect continued growth as the CTV ecosystem matures, but the success in CTV is not only happening in the U.S. We are also seeing great progress in Asia and Europe. Many of our Asian office delivered record results in Q3 of 2018 with Hong Kong and Australia both growing over a 100% year-over-year. We recently announced partnerships with Tencent Social Ads or TSA and ITE. Both of these are major players in the Chinese market. Integrations with these premium inventory sources have already begun connecting multinational brands with more than $772 million Internet connected consumers through premium inventory is a very compelling value proposition to them. We also recently signed an exclusive deal with ITE Taiwan, Taiwan has a massive user base that is highly engaged with its innovative video and gaming content and is one of the largest publishers in Taiwan because Taiwan is a market like others where Facebook and Google have a strong presence, but ITE Taiwan is a must have inventory source for digital marketers and that inventory is now available exclusively through The Trade Desk. In Hong Kong, we recently ran a large CTV branding campaign for a large multinational skincare company via TVBs, myTV SUPER. myTV SUPER is the regions largest OTT gateway and serves about a third of Hong Kong's households. The skincare advertiser's goal was a high completion rate and a lower cost per completed view than with our current video campaigns. The results were fantastic. The completion rate was nearly 100% and the cost per completed view was 62% lower than on the competing video platform. As advertisers see results like these, it's no wonder, they're moving incremental ad spend from other large search and social media companies over to The Trade Desks. We're also seeing growth in Europe in Q3 we had again record spend in the UK, Spain and Germany. Our Hamburg office to cite just one instance, increased its business over 200% from a year ago. Despite the concerns of some, we have not seen diminished spend in Europe as a result of GDPR. Instead, GDPR has enabled us to build trust with publishers and customers. We continue to win spend. For example, a global media company moved spend from a large competitor due to GDPR. The competitor was favoring its own inventory instead of supporting the inventory partners that the media company wanted to reach. We see this regularly and it is yet another example of why our objectivity is so valuable to advertisers. At The Trade Desk we can partner with all publishers that provide premium inventory. Now, moving to the data side of our business, we are enabling the activation of data to make smarter decisions much easier for advertisers. As a result, we've seen increased adoption of Cross-Device data. In Q3 our Cross-Device spend was up over 3x. Last year we bought a Cross-Device company. It was our first acquisition. Our intent behind the acquiring Adbrain was primarily as a service to our customers, not as a key revenue generator for us, but when the ability to buy inventory and track results across multiple channels in one place became available. Our customers embraced the opportunity and began building multi-channel media plans. By any measure the acquisition has more than paid for itself, but the strategic value of our enhanced ID offering is worth even more than the revenue. Over the last year we integrated multi-channel campaign capabilities in our platform in a practical, actionable way. Now, one third of our customers are buying inventory in five or more channels on our platform. And like in the past quarter, we see much of the incremental revenue from their increased spend going straight to the bottom line. Our multi-channel proficiency enhances our position and reputation as the independent alternative to the walled gardens. Facebook is where people go to buy Facebook and Google is where people go to buy Google. Amazon is where people, go to buy Amazon, but the Trade Desk is the place where people go to buy everything else worldwide. That's why a recent study by advertiser perceptions showed The Trade Desk ranked third right after Amazon and Google in overall demand side platform usage last year by surveyed marketers and advertising agencies. We were also a strong third and intended usage for the upcoming year and we are the number one DSP for self-service campaigns and the top multi-channel DSP according to these same advertisers and marketers, they also regard us as number one in thought leadership, the ability to articulate a compelling vision of programmatic. Our position as the leading independent objective, transparent demand side platform continues to grow and continues to consolidate. Recently, I met with the CMO of one of the world's largest consumer package goods companies. They own some of the most valuable brands and consumer data on the planet. And he told me, I have to advertise with Google and Facebook, I know that. It doesn't excite me though. When I hand over our data and get nothing in return. What I want is independent insights. I want a more symmetrical relationship. With The Trade Desk, I get the inventory and the sites that we need. We're hearing more and more marketers and advertisers from some of the largest brands in the world express the same sentiment. That The Trade Desk delivers ROI and insights that nobody else can. Our numbers reflect that. As the worldwide programmatic advertising market grows, we continue to outpace that growth. Our fundamental business model continues to be validated by our clients and the overall marketplace. As I've stated many times before, we believe our business model is exceptional. We also think that soon to be $1 trillion total advertising market presents an opportunity for us that most companies of any size never see. We benefit from faster revenue growth in the programmatic industry at large, strong profitability and strong operating leverage. We expect to continue to see this for the foreseeable future. In Q3, our financial performance, both in terms of revenue growth and our adjusted EBITDA was better than what we estimated. We often benchmark our results against the 40% role of other SaaS companies in which the health of a technology company is expressed as the sum of a company's growth rate and EBITDA margin. 40% is healthy and we're on pace to be about two times that this year and all this, while we are investing our future as fast as we can. Programmatic is only getting started, it is growing. We believe it will continue to grow and as our numbers quarter-after-quarter show, The Trade Desk is growing even faster. We anticipate these trends will continue for the rest of this year and into 2019. Now I'd like to turn things over to Rob to discuss our operating performance for the quarter. Rob?

Thanks Jeff and good afternoon everyone. We continue to execute well on all fronts and as a result, our business continues to deliver outstanding results. Our Q3 yielded record revenue of $118.8 million for the quarter. We continue to add new agency and we continue to see strong cohort growth. Perhaps most importantly like last year in Q3 and even into Q4. We have won significant amounts of new business, large global brands are moving additional spend onto our platform, including one of the largest retailers in the U.S. just in Q3. These wins continue to come from a diverse group of verticals including brands and sectors such as food and beverage, retail, fashion, fitness, consumer technology and business services. While we see some incremental spend in Q3 and Q4 from these new client wins. We expect all of these brands to be much bigger contributor starting in 2019, as they ramp up on our platform. Now outside the U.S. the trend is similar, as we saw last quarter, nearly every office outside the U.S. set records again in Q3 led by Spain, which grew 380% year-over-year. Our Hamburg, Germany at 206% and Hong Kong, which grew by 107% on a year-over-year basis, in Europe, there were two notable wins that represent much of the success we see worldwide. One was a high-end luxury automobile manufacturer that moves spend from a large competitor due to our ability to partner with many publishers in those specific regions that provide premium inventory. The other was a large global bank and financial services company that moves spend due to our ability to do custom attribution modeling using the advertiser's own first party data. This just cannot be done on other large competing platforms. Now in Asia, I want to highlight some of the successes we're seeing in the Australian and Indonesian markets. In Australia, after a long and thorough RFP process, we recently won one of the largest travel companies in the country. Our success was due to our omni-channel buying capabilities and a customer service and product support model is as our client put it literally second to none. Like what we see with large brands in the U.S. the agency is also working closely with the brand and providing strategy and executing buys on our platform. Turning to Indonesia, we've had some great client wins in this quarter, for example, two large independent agencies. We have cultivated over the past year, recently signed onto our platform and are starting to ramp up, spend with us. Those agencies saw the value in our business insights, the reporting data we provide and stellar customer support. We were also selected as the preferred DSP by a global agency on behalf of a multinational auto manufacturer for their Indonesian marketing efforts. Through an RFP process, we went head-to-head versus a large global competitor. During the process, our platform significantly outperformed the competitor on many key performance metrics and we won the business. From a channel perspective, our growth was again driven in part by our mobile video and in-app channel, which each grew nearly a 100% on a year-over-year basis and Connected TV, which again grew over 10x. Our audio spend was also very strong in Q3, growing nearly 200% on a year-over-year basis. As advertisers allocate dollars to a channel we regularly described as one of the most on sale portions of advertising in the market today. Total Mobile dollars reached 46% of total spend in the quarter for the first time while display is now less than 30% of spend. As media continues to fragment and our omni-channel strategy continues to drive spend growth. Now as I've described before, from an operating perspective, we have three core priorities that we focus on. One is remaining the objective and independent partner for our clients, two is growing our omni-channel presence and three, expanding our international footprint. One of the largest differentiators between The Trade Desk and other large advertising platforms is our objectivity and the independence that comes with not owning media. Those qualities serve as a foundation of trust that we then build on with our agency and brand partners. The proof is not just in our top line revenue results or the performance on our platform but by a 95% plus customer retention rate for the 19th straight quarter in a row. We are very proud of that. In a time where there's a lot of focus on privacy and brand safety concerns, advertisers seeing The Trade Desk provides the control they need to buy only the premium inventory they want to reach the audience they intend. And we're winning spend from traditional digital channels, as a result of this. A great example of this shift in spend is a large multinational life sciences company that is now on pace to spend over $5 million annually on our platform, which is up 20% from their original plan for the year. We want additional spend for two reasons. One, the marketer had brand safety concerns on other large competing platforms and two, our approach and commitment to blocking fraudulent impressions. Our partnership with White Ops, which is now about a year old, gives marketers assurance that we are building and maintaining a high quality marketplace for them to spend their marketing dollars on. Next, I want to focus on growing our omni-channel presence. The ability to target marketing messages throughout a complete customer journey is a key function for an omni-channel buying platform. And in Q3, we have seen more and more advertisers use multiple channels in the advertising mix. This includes mobile, video, Connected TV, audio, native and of course display. Those clients using six of these ad channels increased by 84% from a year ago, and advertisers using four, five or six channels now far outnumber those using one, two or three channels. From an omni-channel perspective, one of the most effective ways for an advertiser to maximize their ROI is by utilizing our new identity alliance product. Since launch, the success of this product has been phenomenal. Identity alliance accounted for 46% of all cross device usage in the quarter and was used on nearly 25% of all impressions by the end of Q3. This enables the ad buyer to leverage cross device data from major cross device vendors such as Tapad, LiveRamp, Drawbridge or Oracle that best considers the intended target audience for every single impression. It is delivering significant results for agencies and advertisers. The last area I want to touch on in our channel mix is Connected TV. Everyday, we see results from the field where our platform significantly outperforms the competition. As more brands are shifting their Connected TV spend from a testing phase to now incorporating Connected TV into their core media plans. They are seeing measurable improvements and results. Now one example of that is a global web services company that recently tested advertising on premium content on Connected TV versus video content from a leading user generated content or UGC platform. Previous campaigns on that UGC platform yielded a competitive cost per completed view metric but the company hope to reduce that metric below the UGC sites benchmark, while still maintaining a high video completion rate. Their agency tested out the two strategies by activating Connected TV with our platform on The Trade Desk. Within a few weeks, it was very clear that Connected TV on our platform was a more effective way to spend their ad dollars to achieve their marketing goals. The agency saw the value in The Trade Desk's audience targeting in the Connected TV channel and also the high quality inventory we had available. After proving that Connected TV content and advertising with The Trade Desk can perform better than its UGC benchmarks. The company quickly ramped up their ad spend budgets to include significantly more Connected TV spend on our platform. Running Connected TV campaigns on The Trade Desk resulted in a cost per completed view that was two times better than their previous UGC benchmark. Additionally, the company maintained significant audience scale as well as very high user engagement measured by a 95% video completion rate. These results were amazing and it provides a great example as to why more advertisers are turning to The Trade Desk for their Connected TV plans. The final priority we're focused on is extending our geographic footprint as we continue to see success outside the US. In Q3 international growth has put us on a pace to grow international spend at a much faster rate than the U.S. for the full year 2018. Again the teams in many of our offices outside the U.S. each reached their all-time record spend in Q3. The adoption of programmatic and the market growth we saw across both Asia and Europe was very strong. In Europe, three of our offices posted there all-time record spend in Q3. We continue to sign new MSAs and see spend moving over to our platform from large competitors and social media platforms. The new business wins included large global brands such as a major consumer technology company and another large global beverage company. We have seen this momentum continue into Q4 and our prospects in Europe are well positioned for rapid growth over the long-term. In Asia, all of our offices are posting good growth numbers and our client teams are regularly opening up new inventory and winning new business with large global brands. One recent example of expanding our inventory and running new Connected TV campaigns comes from Southeast Asia. One of the largest TV networks in Thailand operates an ad funded OTT service and we recently partnered with them. Last month two large global agencies began running new campaigns to open up the Connected TV market in Thailand. So this is a very exciting development for us and what we think is a harbinger of the future. Overall, we feel great about what we accomplished in the third quarter and the momentum we have entering Q4 and into 2019. We have secured big wins with new advertisers this year, many later in the year than we've seen historically. And we are consistently gaining incremental spend from existing clients and regularly winning incremental spend when we go up against other large competitors and social media platforms. We are very confident in the trajectory of our business. Now I'm going to turn the call over to Paul to discuss our financials.

Thanks Rob. Good afternoon everyone. Q3 was another record quarter for The Trade Desk and we were pleased with our Q3 financial performance and overall execution. Revenue increased 50% year-over-year similar to the growth rate we saw in Q3 of last year. Adjusted EBITDA increased 49% year-over-year and net income increased 98% from a year ago to a record $20.3 million all while we continue to invest aggressively for future growth. Revenue for the third quarter was a record $118.8 million, which was above our expectations and reflected increased spend by our existing customers and the addition of new customers and advertisers, as Rob elaborated a moment ago. For the quarter, approximately 91% of our third quarter growth spend came from existing customers who've been on our platform for longer than a year. With the growth of our business, our operating expenses grew to $97 million in Q3 of 2018 from $61 million during the same period in 2017. This increase was primarily due to increased investments in technology and development and our platform operations as we invested for future growth. GAAP net income was $20.3 million for Q3 or $0.44 per fully diluted share. Our adjusted net income was $30.2 million or $0.55 per fully diluted share, compared with adjusted net income of $15.3 million or $0.35 per share in the comparable period. Adjusted EBITDA was $36.6 million, with a corresponding margin of 31% of revenue during Q3 2018. The increase in adjusted EBITDA reflects the strong growth of our top line, offset by our increasing investments in product, people, global expansion and corporate expenses. Net cash provided by operating activities was about $26 million for Q3, and our trailing 12 months of operating cash flow and free cash flow were $63 million and $46 million respectively. We continue to have zero debt on our balance sheet, and our cash position continues to climb, exiting the quarter at $166 million. As you may have seen in our SEC filings, we’ve recently entered into an amended credit facility that enables us to borrow up to $150 million on our revolver, down from $200 million prior. The reason for the change was a combination of lowering our borrowing costs, while increasing our flexibility, as we move from an asset baseline to a cash flow baseline. While cash flow from operations will inevitably fluctuate from quarter-to-quarter due to seasonality and timing. We continue to expect our cash balances to continue their overall trend up into the right. Also, we believe that our strong cash position of $166 million combined with our revolver and our ability to generate free cash flow are more than sufficient to manage any working capital needs for the foreseeable future. For Q4 of 2018, we are expecting revenue of $147 million, which represents accelerating growth versus our growth rate in Q4 of last year and adjusted EBITDA at $53 million. And for the full year 2018 inclusive of our guidance for Q4, we now expect revenue for the year to be $464 million, which approximates to 50% growth year-over-year and corresponding to adjusted EBITDA to be $145 million or 31% of revenue. With that, I will hand it back to Jeff for any final comments and of course, Q&A. Jeff?

Let me close by giving some commentary on the remainder of 2018. For all of 2018, we are expecting revenue of $464 million and an adjusted EBITDA of $145 million. If we just meet our goals in Q4, we will have produced year-over-year growth acceleration, beating last year's Q4 growth rate of 42%. Brands are coming to us directly at a record pace. TV content creators are coming to us directly at a record pace. Our data business has grown 70% year-over-year. Cross device has grown 3x, mobile video was up almost 100% and mobile overall is almost half of our revenue. And we saw remarkable 10x increase in Connected TV yet again. With those trends, you can see why we're so bullish for Q4 and 2019. Our investments are paying off when we see surprises. They typically are to the upside. There is more opportunity in front of us. We believe The Trade Desk is well positioned to realize continued growth for Q4 next year and beyond. That concludes our prepared remarks. Operator, please open it up for questions.

Thank you. We'll be now conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Brian Schwartz from Oppenheimer. Your line is now live.

Yes, hi. Thanks for taking my question this afternoon. Congratulations Jeff, Rob and Paul on a terrific quarter here. Jeff, you mentioned a couple times here. You're more bullish about 2019 and that's quite a divergent from the other SaaS companies that I'm talking to who really aren't willing to talk about 2019 yet. You did a good job giving us some of the company specific trends that you have are looking positive. It looks like the share games are happening faster, the metrics are supporting that. The question I want to ask you, just based on the customer conversations that you have going on. When you think about 2019 and you think about that big digital advertising pie that's out there. Do you see tailwinds or headwinds out there for next year? Thanks.

Awesome. Thanks. Really appreciate the question. It's always a really important time of the year where we're prepping for 2019 or prepping for the next year. And let me give you some of the things that I think to answer your question very specifically, which are – and I'll just – I’ll skip to the end of the book, which is we had the winds at our back. We're in a better position than we've ever been at this point in the year with more confidence than we've ever had at this position in the year. So the first thing is, just looking at our own performance, it's pretty remarkable than in Q2, we equaled our growth rate of 2017 and in Q3, quarter-over-quarter meaning Q3 2018 over Q3 2017. We once again equaled our growth rate, which given that we're making much bigger numbers at this point, that we're very proud of that and that outperformance, even our own expectations. But it goes even further when we guide today that for Q4, we expect to accelerate and do grow faster this year than we did last year. And that is in part because of some of those numbers that we talked about that are the winds at our back. And maybe the two most exciting or just the channels where all the growth are coming from so first mobile, the fact that 46% of our revenue came from mobile and that mobile video, which is one of the most exciting channels will ever see, grew by 100%. And then connect the TV once again, growing at 10x a data growth where anytime people are making data driven decisions, we think that is good for us because it means that once they compare a data-driven choice to a non-data driven choice, which I think is most of advertising still, it just makes it to the house always wins like that's always in our favor. And the fact that our data spend grew so much and data usage as a whole went up by even more than that. Suggest that the winds are even more at our backs than we thought. So with all of those things happening, we're more confident for 2019 than we ever were. And I compare that to a year ago when we're looking at the next year. It's just night and day difference in terms of our competence.

Thank you. Our next question is coming from Vasily Karasyov from Cannonball Research. Your line is now live.

Thank you. Good afternoon. Chris, I'm sorry. Jeff, I would like to ask you to sort of simplify for us the Connected TV advertising process. Can you tell us what are the top three let's say, sources of inventory for you in the U.S. And then what percentage of those are transacted, what percentage is transacted programmatically? Because I think there is still some of the OTT inventory that sold manual or the traditional way. So, that would be great. Thank you.

You Bet. So first let me just give everybody a little bit of context for Connected TV. So you may recall that in Q1, I said the most bullish thing I'm reporting in this report is that inventory for Connected TV went up by a 1000%, went up by 10x. And then the next quarter, I said the most bullish thing that we've said year-to-date, even more bullish than the thing I said last quarter is that our Connected TV spend went up by 1000%. And when I said that, I never anticipated that when we are giving our Q3 results as we just said, that I would once again say that Connected TV spend went up by 10x quarter-over-quarter Q3 2018 over Q3 2017. I’d never expected that to happen. And that once again is wind at our backs. So to give you an example of where the inventory is coming from, more and more of the channels that are not included in the skinny bundles, they have their own channels popping up on the Roku and Amazon Fire and equivalents. And, of course, most of those are ad-funded. As media continues to fragment especially in TV and channels are going direct to consumers that represents new ad opportunities and we're working very closely with those companies. But maybe even more inventory is coming in through virtual MVPDs and those companies are essentially putting together their own bundles and that creates opportunity. And in order for them to stay reasonably priced and competitive, they need to rely on programmatic to be the primary source of demand. So in virtual MVPD it's often the primary source of demand, but in some of the bigger ones like for instance, Google or some of the other bigger channels where they have a big digital efforts and they've been doing digital for a long time, it's actually the programmatic is the minority and most of those are through direct sales forces. So in answer to the second part of your question. Most of digital is still sold from sales forces, which represent a tremendous opportunity for us because your cost of sales goes up when you do that as well as the ability to use data and get richer CPMs, as a result because targeted better and therefore generates a better CPMs for publishers or content owners. It makes us so that there is the possibility for us to inject data and lower the cost of sales and get them a higher net CPM as a result. And that's where we're seeing a tremendous amount of this growth. So, the fact that the majority of it is still sort of hand sold, if you will represent upside. And then of course there's a macro secular tailwinds that is moving everybody off of traditional cable, and what I think is becoming an even worse user experience for what is on demand and that of course as that continues to increase, given all the trends I just talked about fragmentation continues and then the need for holistic media buying especially to control reach and frequency comes in from a platform like ours. So, we've never seen it an opportunity like CTV before and I don't think we'll ever see one like it, again. It is the biggest opportunity we've ever seen probably ever will. Thanks.

Thank you. Our next question today is coming from Aaron Kessler from Raymond James. Your line is now live.

Hey, guys, congrats on the quarter. A couple of questions. First on, I think, last quarter you talked about Google limiting how DoubleClick ID can be used. Additionally, just your thoughts maybe Facebook also kind of limiting advertised data if that's starting to benefit you as well. And then third maybe just any commentary around election spend, if you guys benefited from that in the quarter? Thank you.

You bet. Just so that everybody understand exactly what was happening with DoubleClick ID, just because I know following all the ID stuff, it can sometimes be hard, quite used to happen. And actually I referenced this on the prepared remarks, when I was talking about the large CPG company talking about how they would rather give essentially their left over spent to Google and Facebook because of the change. So, let me explain why. So, what DoubleClick used to do is they use to share their ID with everybody. And that was great because it basically became a common currency and it was fine for the industry, it worked well. But they decided to limit the use of that mostly because of the liability of owning the search engine and the desire to protect the data that comes in through their search engine, so that it never has the opportunities to link. That's the same thing that I believe Facebook made the decision to not ever use their ID again. But in the case where it's anonymized and we, of course, not trading and personally identifiable information or directly identifiable information because, we don't transact in that using an ID to make it possible for an advertiser to track exactly what they bought is something that's much more feasible for us because, again, we don't have a search engine. So as a result, we will share our ID with the large CPG, for instance and Google will not and it makes a really hard for that CPG company to know what they bought on Google and especially, it makes it impossible for them to compare the performance on Google to something else. So, as a result, we're getting new inquiries from advertisers and agencies saying in cases where we used to spend with Google or Facebook, we'd like to spend with you. And in fact we prefer to spend with you and spend as much as we can with you first, and then we'll back-fill with them just because we don't get the insights back. So because it's complicated and nuanced, I think, we've only scratched the surface of what we will ultimately see as a result of this policy change, it is a huge, huge advantage that we have. And I understand why they made that choice because their DSP is not core to their strategy, well, of course, that's at the center of what we do. And then the second part of your question, political spend, sorry. I made a note here and I can't read my own handwriting. The political spend, we did have a little bit of political spend, it was very low single-digit, so it won't have, I imagine, the reason you're asking the question is, did we have some windfall that is going to go away. And that's not the case, we had a small amount and we actually made a deliberate decision this year, to make less efforts in political spending than we have in years past. So, it's relatively small.

Thank you. Our next question today is coming from Shyam Patil from SIG. Your line is now live.

Hey, guys. Congrats on the great quarter and outlook. I had couple of questions or two part question. First one, Jeff, you kind of talked about a little bit just now, but can you just talk a little bit about your new audience ID solution just what it is how it helps advertisers, how it fits into the advertising ID consortium. And then second part, you mentioned Amazon a couple of times in your prepared remarks. I was just wondering if you could just talk about that relationship a little bit more? Thank you.

You bet. So, let me first explain what we're after in our unified ID and some of you that were, at our Investor Day a year ago might remember that we talked about it as one of the five most important part of our strategy. And we said then even before Google made their policy change that we would have an ID available that would ultimately have a bigger footprint than any walled garden would create and sometimes that was a fairly bold assertion, but it's happening. And what our initiative is basically as I mentioned a second ago, Google used to be the currency or one of the currencies which all data can be transacted on, so it's a anonymous ID. Mobile advertising actually built sort of their entire infrastructure on a mobile ID that works the way that the rest of devices, we wished work like that. And instead things like desktop and even mobile web, transact using cookies, which makes really fragmented IDs. So, what we've done is we've said we're willing given how many times we touch consumers, given that we've essentially look at 9 million ad opportunities every single second, which represents another touch of a consumer, that we have the ability to be one of those currency that can be much bigger than any one inventory source could ever be even Google, Facebook or anybody. So, what we did, as we then created the standard and then immediately started sharing it, because our footprint or our currency was already bigger nearly everybody else we started sharing it with the independent ad tech community. As a sense then nearly every major SSP has committed many have implemented or in the process of implementing it, actually the largest independent SSP or Ad Exchange rolled it out GA less than a month ago and the results are unbelievable, that's index exchange and the matrix between us and at least the initial tests were above 99%. So, that effort is well under way and it will be paying dividends for years to come. And as we continue to grow and continue to get adoption that will only have more and more of a positive impact. And it's certainly, on an Investor Day, we'll talk more about it. To answer your second question, I think, that we going forward will have a more complex relationship with Amazon. So let me first explain why I think that relationship will be more complex. I believe that Amazon is going to be a significant player in the Connected TV sort of OS as a result of their efforts and fire and that creates an opportunity for them to have influence over advertising. And I believe that just like anybody in TV and this is true anybody in TV, nobody has enough of the inventory under their control, that they can build a walled garden. So, there is no walled garden playbook that will ever work in TV and because Amazon is smart they recognize that they will have to welcome demand from other players. And so I anticipate that we'll be one of those, which I welcome and hope to be a partner of Amazon's when that time in my view inevitably comes, which will make it more complex because on another front Amazon is somewhat of a competitor in the sense that they're trying to get advertising dollars, especially for their site. So Amazon.com has become an amazing place for brand to advertise their sort of the new end cap. If you think of them as a new retailer and in that regard we don't compete with them at all just because we're trying to get dollars that we can help allocate whether will ultimately have access to their inventory. I think we will at some point, but I think that's a long way down the road just because their business is still very young and they can manage a lot of it for a long time on their own. In terms of Amazon building a DSP or having efforts to go off site. I worry about them way less than I do Google or Facebook on that front. Simply, because I think they have more of an objectivity problem than any other company on the planet. If you think of it from a CPG’s perspective, I already have to sell my products through them. I'm more reliant on them than I ever was on Walmart or any other retailer for that matter. And now they're asking for my advertising spend, not just for Amazon.com, but for the entire digital media landscape. I need to reduce my dependence on them, not increase it, and then if they're already storing their data in age old AWS, the fear that is created in those companies because of the lack of objectivity is greater with Amazon than any company in the world. And as you already know, Facebook got out of the game in part because of that conflict. I think Amazon has a much tougher road than they did. So, I worry less about them than even Google or Facebook and hope that we have the complex partnership that I'm describing.

Thank you. Our next question tonight is coming from Mark Kelley from Nomura-Instinet. Your line is now live.

Hi. This is Andrew Marok on for Mark. Two questions, if I could first, can you talk a bit about what you're seeing broadly in the competitive environment for spend, especially with respect to DoubleClick Bid manager and Facebook. Second, you mentioned in your prepared remarks that you haven't seen diminished spend in Europe due to GDPR, but just wanted to get your thoughts on the potential spread of GDPR style regulation being considered or potentially past outside of the EU. Thanks.

You bet. So, first on the competitive stuff for DoubleClick, when they made that strategic choice to remove the DoubleClick ID, or Google's sort of common currency, which was the DoubleClick ID, from sharing with our clients. It created a huge opportunity for us and it also effectively said we're making the strategic priority that within Google we are de prioritizing DBM or that part that is formerly known as DBM. So that's been humongous for us and it means that in more and more head-to-head, we have advantage and as we continue to build out our offering, especially like the cross-device, our offering is getting more competitive more quickly, as we're more focused, because I would just summarize their value proposition is, hey, we have a unified stack and maybe end of buying tools, but we're not as competitive as The Trade Desk, but we have, we're more integrated to other parts of your advertising and marketing stack. As we do more integration and as we continue by continuing when we shift the biggest upgrade to our product ever, when we continue to do that, we continue to distance ourselves on the buying products, so those two things together make it, so we're winning at a faster pace than ever, and we think we're gaining ground. On the GDPR thing, there's probably not a place in the world where there was more discussion about GDPR than Germany and we just talked about how we had nearly 200% year-over-year growth rate inside of Germany. One of the fastest growing in the world and more scaled then more than half of the markets we're in. So, the growth in Europe has been fantastic, and we haven't seen any negative impacts from GDPR. I think your question though is more about, hey, what about GDPR like implementations like in individual states and things like that, and I'll just bring you back to the big picture, the Internet is based on a quid pro quo. You share data and see relevant ads in exchange for all the free content. I don't believe that quid pro quo can ever be changed because there's so much gravity around it. All the regulation and all the discussion is around GDPR and other efforts like it, I think, it's mostly reasonable, which is asking companies like ours to strike the balance between privacy and relevant, and there is no way that the Internet works if you don't have both you have to have both. And we've just made huge efforts to make certain that we respect consumer's privacy and avoid any of the gray area, and as a result, we think that we've won more spend and I think the proof of that is in the data, as a result of our stance on privacy and the way that we've handled GDPR. We've massively increased our legal resources, not as preventative or reactionary to it, but more or not reactionary to it, but more preventative which is to say that we want to make certain that we're doing the right thing and that we understand thoroughly the law everywhere in the world, so that we're constantly in compliance in doing the right thing, and I think we're doing as good a job as anybody in our space with that.

Thank you. Our next question is coming from Mark Mahaney from RBC. Your line is now live.

Okay, great. I know there were some details in the comments earlier about China and Tencent. Could you quantify that at all, do you think that there is the ability for China to be your largest international market and then potentially your largest market within a certain period of time, do you think you're up, I mean, you've got at least three really large partnerships in that market, they are the ones you need in order to gain critical mass, or do you think you already have it there? And then if I could just go back to the product itself, the Next Wave and unless I missed it, I don't think you've talked to a ton about it on this call. What impact you've seen that product have in terms of either client retention, client spend as far as we can tell, it looks like a mature, and you've certainly talked about how being the biggest product cycle upgrade, the improvement that you had, can you, can you talk about how that's actually impacted spend the client retention? Thanks a lot.

You bet. So first on the China piece, I absolutely believe that, at some point, China will be the largest market for us in the world. While today, it's the smallest market that we're in, we think that can change really rapidly as it will be the largest advertising market in the world. So, we think at end state, our pie, if you divide it up geographically, it's going to match the pie of global advertising spend and China will be the largest advertising market in the world. Because of that opportunity, and especially because so many of the advertisers that spend a lot of money in China are not based in China and that's what makes China a little bit different as the market in terms of the way you go in as well as something that makes it very different for us in a way that we go into that market versus like a B2C company, who is just trying to win over Chinese consumers to their brand. We are not doing that, we're taking brands that they already know and love into that market. And so that creates a level of trust with both the brand and the agency that is global and most often not based in China, just to bring to them, essentially trusted inventory, where Baidu, Alibaba and Tencent have more control as a percentage of the Chinese market and for instance Google, Amazon and Facebook have in the US market. So it means that developing relationships with Baidu, Alibaba and Tencent are really important. So, we alluded to an announcement that will make more public in the next couple of days around Tencent, which is that we have signed Tencent, we've been public before about our partnership with Baidu and Alibaba. Our partnership with Tencent, is as important, if not more important than Baidu and Alibaba in the sense that they are more invested in ads, especially video ads than arguably the other two. We're super excited about the partnership and believe that with those three, we have the foundation to be way more aggressive in the way that we go to market going forward. That said, we've done a little in terms of forecasting or planning only because we don't want to put some pressure on our own teams to go faster than we should. We definitely are in the business of winning trust and going slow and that means just being a little bit more cautious while investing aggressively in the inventory that we buy and doing a lot of due diligence. So, we're super excited at the opportunity and we will invest more in 2019 and expect to start seeing spend, real spend happen in 2019. As it relates to the Next Wave, yes, one data, I can share that, that we haven't shared yet, is that we just launched the product in June, and you're always trying to monitor how much of that adopts your new your new product. How many people upgrade from iPhone 9 to iPhone 10 ,and we offer both of them today and in our legacy products as well as all the products associated with Next Wave. I'm excited to report that already in that time, 42% of our clients have upgraded and all of them have seen increases in performance, in cost, we've quantified that we believe we've said at least tens of millions of dollars and increased efficiency by some measures over $100 million, and also, I think it's the best explanation as to why the data spend was up so much more, because we just made it easier for them to make data driven decisions and when they do that, it just increases efficacy that increases retention and the flywheel spins faster, and that is one of the top reasons why we're forecasting for the first time in the history of The Trade Desk acceleration.

Thank you. Our next question is coming from Tom White from DA Davidson. Your line is now live.

Great, thanks for taking my question. It's about your data offering and I'm just kind of curious if you could kind of characterize maybe the next areas where you guys can innovate or roll-out new offerings on the data front, just that kind of refining and improving the cross-device multi-channel or are there other things. And then I guess sort of related, I'm just curious, can the fact that a large percentage of your customers integrate with your APIs. Is that can be any sort of advantage or from the insight into what data offerings might be the most compelling or leads to the best outcomes for advertisers?

You bet. Let me start in reverse order because there are some insight I think to the first question that will come from the second. So I think you can make the argument that our most sticky customers are those that leverage our API. That means it taken the time to put dev work in connecting to us and they also are doing things in a more on automated or sophisticated way, it just represents a larger investment. I think we have massively under invested in selling and distributing our APIs even in developing our APIs, which you'll see more investment go into that in 2019 and that creates even stickier customers. So, there's definitely an opportunity for us to do more in APIs and they do represent some of the most a sticky customers as an aside, I'll say, you know in the independent ad tech world, AppNexus, is probably our biggest competitor on this. And I do believe them being acquired by AT&T massively changes their focus to just focus on building products for TV and especially for traditional television, although additionally Connected TV and that does create a big opportunity for us to own much more market share in the API world than we have in the past. So I think there's big opportunity there. As it relates to other new products in data we've done a decent job of investing in our DMP but there is so much more that we can do and especially to make it easy for brands to put their first-party data to work and to automate some of the look-alike modeling that they view today. There are so much opportunity for innovation and there are very few places that maybe the only one being Connected TV, where we will invest more than this. So in other words, this is our second biggest investment area coming into next year and there is just so much to do. We have only scratched the surface in terms of what we can do in data and data innovation and I just want to always caveat that we'll always do that in consumer safe way and be constantly thinking of how can we, how can we make certain that we strike the right balance between consumer privacy and relevance for consumers and there are so much more we can do.

Thank you. Our final question is coming from Brian Fitzgerald from Jefferies. Your line is now live.

Thanks guys. You're going to an acceleration on the top line growth in Q4 and you highlighted some strong client additions. How should we think about the scale of these new clients relative to what you've seen for past cohorts and maybe also the speed with which you're seeing these newer clients and cohorts ramp spend? Thanks.

You bet. So let me give you a couple of numbers from Q1, 2017 to Q1, 2018, the new advertisers that we've added, they added nearly $200 million in new spend to the platform and of the top 200 brands that we've added since 2017 spend has increased over 5x, so a 500% increase is a result of those that we added of course many of those came in early 2017, which is why they’ve had time to ramp up like that. So if you're thinking about the cohort, one other thing to think about and in order to give you this, insight, I have to give a little bit of a preface. Let me just reinforce, we've always been close partners with the agencies. I've always anticipate that will be the case and while we've talked about signing more MSAs with advertisers directly. That does not represent a change in strategy for us, which is, it doesn't mean that we're going around the agency to go sign with brand. Instead, what we're doing is we're signing with the brands, so that we can activate their first-party data in conjunction with all the things that I've talked about in the last question and then we're asking the agencies to do the work. But we want to give the brand reassurance, so last year we signed, I think, it was five brand directly, this year we're up to 15 and the incremental 10 are way bigger by some measures a 1000% bigger in aggregate over those original five. So there is so much opportunity that's come from those relationships and if you as you use history as any guide, there will be a meaningful growth in all of those added in next year, it's one of the many reasons to be bullish about next year.

Thank you. We reached the end of our question-and-answer session. That also does conclude our teleconference for this evening. We thank you for your participation today. Have a great night.