Trade Desk Inc (TTD) 2020 Q2 法說會逐字稿

Good day, everyone, and welcome to today's The Trade Desk Second Quarter 2020 Earnings Conference Call.

(Operator Instructions) It is now my pleasure to turn the conference over to Vice President of Investor Relations, Chris Toth.

Thank you, operator.

Hello and good afternoon, everyone.

Welcome to the Trade Desk Second Quarter 2020 Earnings Conference Call.

On the call today are our Founder and CEO, Jeff Green; and Chief Financial Officer, Blake Grayson.

A copy of our earnings press release can be found on our website at thetradedesk.com in the Investor Relations section.

Before we begin, I would like to remind you that except for historical information, some of the discussion and our responses in Q&A may contain forward-looking statements, which are dependent upon certain risks and uncertainties.

In particular, our expectations around the impact of the COVID-19 pandemic on our business and results of operations are subject to change.

Should any of these risks materialize or should our assumptions prove to be incorrect, actual financial results could differ materially from our projections or those implied by these forward-looking statements.

I encourage you to refer to the risk factors referenced in our press release and included in our most recent SEC filings.

In addition to reporting our GAAP financial results, we present supplemental non-GAAP financial data.

A reconciliation of the GAAP to non-GAAP measures can be found in our earnings press release.

We believe that providing non-GAAP measures combined with our GAAP results provides a more meaningful representation of the company's operational performance.

I will now turn the call over to Founder and CEO, Jeff Green.

Jeff?

Hello, everyone, and thank you for joining us.

It's no secret that the last several months have been among the most trying times for all of us.

The global pandemic has changed the way every business in the world operates.

For us, The Trade Desk team continues to be resilient, supporting our families and friends and customers and partners.

The fact that we've always been so mission-driven with a clear conviction that our greatest asset is our people, has served as a solid foundation that has allowed us to continue to expand our business during these times.

While our revenue growth rate continued to be impacted by the disruptions from the COVID pandemic in the second quarter, we're starting to get a clearer picture of the role that advertising is playing as markets reopen.

We talked last time about how data-driven advertising would be on the front foot as that happens.

As much as the global financial crisis of 2008 and '09 caused many advertisers to consider data-driven strategies for the first time, I believe this crisis will cause advertisers to leverage more data more aggressively than ever as they look to make every dollar work as hard as possible.

And we started to see this play out through our second quarter and into the start of the third.

Since ad spend troughed in mid-April, advertisers have been returning and reactivating campaigns, but most of them with new approaches and new creatives, given the environment we're in.

They realize that as markets reopen, they have a unique opportunity to gain share.

Many paused in mid- to late March and even early April, but some advertisers in all categories have seen this as an opportunity to gain share.

To do that, they've had to be more flexible and agile than ever.

As markets open in different ways at different rates even within the same country, they are under pressure from their CFOs to prove the value of every advertising dollar, forcing them to prioritize advertising that is measurable and comparable.

And they are dealing with a consumer base that is rapidly shifting away from traditional linear television.

All of this puts data-driven advertising in the front seat, and we saw this reflected in our performance throughout the second quarter.

While we ended Q2 with a negative 12.9% year-over-year revenue decline, since April we saw spend on our platform increase every month and nearly every consecutive week.

As advertisers have been more deliberate, ad spend turned positive on a year-over-year basis in mid-June, and that trend has continued through the month of July.

On a personal note, I was surprised at how unified the ad industry was in pausing activity starting in mid-March.

We took a healthy economy, a healthy industry and collectively hit the pause button.

I'm not sure if that sort of synchronized response has ever happened before.

At the same time, I was equally surprised how unified the early phases of recovery have been so far.

Not just that advertisers have returned in a consistent way with a renewed focus on programmatic, in fact, nearly all of the large brands have increased their spend on our platform.

This includes spend from industries such as CPGs, food and beverage, technology, health care and even automotive.

Even travel, while still negative year-over-year, has improved significantly off its mid-April lows.

But it's more than that.

It's about the unified view I've heard from the market regarding the direction of the advertising industry.

Over the last 4 months, I've met with more executives at brands and agencies than ever before in such a short period of time.

So today I want to share some of that feedback with you, and in particular the convergence of 3 forces that are shaping the world of digital advertising.

I think this feedback will shed some light on our strategy and our performance and why we are well positioned for the future.

The first is how the industry is coming to terms with user-generated content.

The second is an important inflection point in connected TV, which is not unrelated to the advertisers coming to terms with that user-generated content.

And lastly, I want to touch on the future of identity, because creating a solution that works for consumers, advertisers and publishers is the only way we'll be able to create a better internet.

So perhaps the most important area where I have seen a unified front from advertisers in the last few months is in their approach to user-generated content or UGC.

I use the term UGC deliberately rather than social media platforms or video platforms like YouTube.

Because in my discussion with advertisers, it's the nature of the content rather than the platform that's the problem.

To quote Unilever, "There is much more to be done, especially in the areas of divisiveness and hate speech during this polarized election period in the United States." Or Diageo, "We strive to promote inclusion and diversity, including through our marketing programs.

We will continue to discuss with media partners how they will deal with unacceptable content." Or Starbucks, "We will continue discussions with our media partners and with civil rights organizations in the effort to stop the spread of hate speech." Pretty much every major brand has made public statements to the same effect.

The statements were all made as they pulled or suspended advertising from the major platforms that are built around user-generated content.

The issue is not necessarily the platforms themselves.

In fact, I think many advertisers believe those platforms are in a very tough spot, and I agree.

The content on these platforms reflect the divisiveness in public discourse today.

And that divisiveness of this has only exaggerated as people work through the implications of COVID-19 as social justice issues take center stage and as we gear up for a major election.

Asking social via platforms to be the arbiter of truth on a range of divisive issues is a really tough ask.

In some cases such as with hate content, it might appear straightforward, but broadly speaking, it requires applying judgments.

And when you're making judgment, you're always at risk of alienating someone.

It is an impossible task for UGC platforms to be asked to judge what is truth or what is hate, especially the largest companies, given the amount of content that is posted to their platforms every day.

There's simply no way to keep up.

But for advertisers, increasingly, it's a risk they don't want to take.

Brand safety is a critical issue.

They don't want the divisive argument of the day played out on social media, sponsored by their brand.

I don't think this, in and of itself, is the wake-up call that advertisers were waiting for.

I think it's the straw that breaks the camel's back.

Advertisers have long had their doubts about advertising on UGC, but to date, it's been an easy way to reach audience at scale.

But what these issues have highlighted is that advertisers have very little transparency and control when spending dollars on user-generated content.

They don't know exactly what the content their ads will show up against, and they don't know which consumers have interacted with their brand.

By contrast, advertisers increasingly understand that The Trade Desk provides the tools they need to buy only the premium inventory they want to support and reach only the audiences they value.

These conversations have accelerated considerably in the last few months, and we are winning spend from traditional video and social media platforms as a result.

One second quarter example of this was a multinational food and drink company that, through their global agency, began to think differently about how to allocate their digital ad spend and move it away from user-generated content.

In this case, they chose The Trade Desk for 2 main reasons: one was the ability to apply measurement and offline attribution tools to understand exactly who they were reaching; the second was the tools and breadth of premium inventory on the platform for buying CTV instead of UGC.

Of course, the rapid emergence of CTV as a viable option is key here.

For advertisers access to a growing base of brand-safe premium content could not contrast more with what is available today in user-generated content, which brings me to my second point: the surge in connected TV.

In Q2 despite the impact from COVID, CTV grew about 40% year-over-year.

In Q3, we anticipate that the CTV spend growth rate will more than double Q2.

We believe the COVID pandemic has permanently accelerated the growth of connected television, changing the TV landscape forever.

And no company is better positioned to grab share in CTV than The Trade Desk.

As one leading CMO said to me recently and I quote, "I want to move as much budget from social to CTV as possible, as soon as possible." And that's not an isolated comment.

Advertisers are unified about this.

They understand that data-driven advertising is a better place to measure performance and target key audiences.

And now they can bring that approach to their massive TV ad campaigns.

And it's not just our concerns about user-generated content that are forcing this.

There are 2 other major forces at work.

One is the rapidly increasing inventory of premium CTV content.

The other is the consumer shift towards CTV, accelerated by the COVID pandemic.

Let me quickly remind you what we discussed last time on our earnings call.

Our research suggested that 11% of U.S. households would cut the cable TV cord by the end of the year.

That's about triple the rate of cord cutting that we've come to expect the last few years.

That cord-cutting rate rises to 18% for the very coveted 18- to 34-year-old demo.

And the #1 reason households would keep cable TV?

Live sports.

60% of them cited live sports as the primary reason they hang on to cable.

And you don't have to take my word for it.

Fast forward 3 months, Roku recently issued its annual survey into TV viewing trends.

And according to their research, 32% of U.S. households have now cut the cord or never had it, and a further 25% are shaving their cable TV costs.

45% of those cord shavers said they expect to fully cut the cord by year-end.

The #1 reason?

Cost savings.

In the current environment, many households are looking at their home entertainment costs and their cable TV bill as often the most expensive part of their TV content lineup.

But related to that, the #2 reason: access to free streaming TV services.

As more broadcasters make their content available through AVOD services, the cost equation for many households is something of a no-brainer.

And according to the same survey, even if live sports make a comeback, less than 1 in 5 cord-cutters said they'd rethink their decision because those same sports events are now available over streaming services.

So whatever assumptions you have about the shift towards CTV and how many years it would take, you can throw those out because COVID has changed everything.

Advertisers can't ignore these shifts in consumer behavior, and they don't want to.

As I said, their growing concern about user-generated content, which is only exacerbated by recent events, represent the straw breaking the camel's back.

They want to shift to the premium content that CTV now enables.

Their consumers are there.

And in addition, not only has NBC launched its new streaming service, Peacock, on July 15, but Pluto reported 3x the viewing hours in April that it had at the beginning of the year.

Tubi reported that their viewing hours were up 100%.

In April, Vudu reported an increase of 55% in the stay-at-home environment.

Such is the growth of AVOD that these platforms have recently been acquired by Viacom, Fox and NBCU, respectively.

In addition to moving to where viewers are, advertisers also benefit from applying data to their TV campaigns for the very first time.

For example, after the COVID lockdown started, a large U.S. insurance company wanted to be more data-driven in their TV spend.

Their goal was to extend reach while managing frequency.

Using a third-party measurement firm through our platform, the results were transformative.

Even though CTV CPMs are roughly 3x those of linear CPMs, using CTV lowered cost per unique household by over 2.5x.

Even more eye-opening for the brand using CTV on our platform, they were able to reduce ad frequency to the consumer by over 80% compared with their previous linear campaigns.

In this case, site visits were 2x more efficient when using data-driven CTV versus publisher data.

Overall, this resulted in a significant reduction in cost per acquisition.

As I see advertisers question the value of user-generated content and as they make CTV a more important element of their media mix, I also pick up a more unified sense from advertisers that they want to put more pressure on the industry to uphold certain standards.

One of the attractions of connected TV is that it's a more competitive market than user-generated content, with the standards that typically come with competition, no studio, no channel, no cable company, no MVPD, no one company has the leverage or the resources to achieve the market dominance enjoyed by Google in search and by Facebook in social.

And because we continue to predict video in all of its forms will account for about half of the trillion-dollar advertising market, we believe that CTV may well be the catalyst that eventually forces all walled gardens to change course.

It's important to remember that in the great scheme of things, the digital advertising industry is relatively young.

As with any market that emerges, there comes a time when key participants demand certain market rules, things like transparency and objectivity.

And that's what I see happening now.

CTV may be the most vivid example, but you can also look at how advertisers are now having to do more with less, how they are demanding better measurement transparency and more market objectivity.

You can even look at various regulatory initiatives within our industry, whether it's here in the U.S. or in Australia or Europe.

There's pressure on all fronts within the system to have the advertising market conform to the norms of other mature markets.

And as I speak with advertisers, they put the debate regarding the future of identity in that exact same context, which is the third point I want to touch on today.

We can discuss the specifics of any one identity offering, and we are examining all of them.

But at the core of it, there are 2 critical questions that advertisers and publishers think about: how do we explain the value exchange of the Internet and the role of relevant advertising to consumers?

And how do we ensure power doesn't become too concentrated in one place?

The moves that Apple announced recently with IDFA represent a step forward.

When a consumer logs into an iOS app, they will be asked to opt in to tracking in return for personalized ads.

That's a partial step towards explaining the value exchange of the Internet.

The understanding that we get to enjoy premium content and experiences in return for relevant advertising.

Google is going through the same process.

But the issue is complicated for them by the dominant position they enjoy in digital advertising.

If they remove cookies from the open Internet in Chrome and rely on proprietary logins for the advertising business, which makes up almost their entire revenue stream, even if using privacy as a shield, it may be seen as an overreach by regulators.

In dollars and cents, I don't think the risk is worth it to them, and I expect that they will find a way to preserve relevant advertising for all of the reputable advertisers and advertising platforms in Chrome.

But regardless, we have to prepare for a world without third-party cookies.

Fortunately, we've successfully launched and built the ubiquitous ID before, our Unified Open ID.

When we developed the first iteration of our Unified ID solution, the core idea was to make sure certain players, particularly Google, didn't have an unfair cookie coverage advantage over the rest of the Internet and particularly the open Internet.

This was a huge success as every major SSP and exchange has adopted this ID, which is more important than ever.

As more advertisers embrace data-driven advertising, especially with the CTV surge, they want to ensure that the market is competitive and that they can compare one media property to another.

That kind of measurement and comparability is key, and it's not possible within walled gardens.

Following the guidelines outlined by the IAB's Project Rearc, we've been focused on ensuring the next phase of unified ID will help empower the open Internet beyond just cookies.

Development is underway with a focus on a few core characteristics.

First and most importantly, we need an open ID, which is a major upgrade over the current cookie technology.

This will include a hashed and encrypted ID with improved accountability measures.

Unlike a cookie, this ID does not live in the browser.

This ID can be used in a browser or on any type of device including a phone or connected TV, and this ID will be free and open source.

Second, granular and understandable consumer controls with the option to opt out.

Third, a simplified content framework for publishers, which explains the value exchange of content in exchange for relevant advertising for consumers.

And fourth, the single-sign-on capabilities across the open Internet, so consumers don't have to consent over and over again.

We won't go this alone, of course.

As with our initial unified ID solution, we will work with the industry to drive consensus and standards and to ensure we build a solution that will drive the required critical mass of adoption.

We are in development, and we expect to have beta versions of this solution in market very soon.

This work is important because third-party cookies are an archaic technology that need to be upgraded.

That said, I'm still not convinced that Google, in the end, will get rid of third-party cookies.

And even if they do, cookies will be replaced with something else that enables targeted advertising.

I do not believe that Google will have the ability to turn off targeted advertising for everyone but them.

As I said, advertisers and publishers are starting to demand the kinds of market rules for digital advertising that we've come to expect with other mature markets such as the financial markets.

Independence, objectivity and auditable measurement are more important to advertisers than ever before.

We're driven to maintain and build a free and open Internet that honors the quid pro quo of the Internet.

We want an internet that is better for consumers as well as advertisers and publishers.

As advertisers commit more of their budgets to digital, especially as they shift more of their TV dollars to CTV, they want to know that they can reach the right audiences, that they can measure and compare performance and that they can support the right content for them.

The move towards a more contemporary approach to identity will be key in building that trust for advertisers.

So let me close by just reiterating the consistency of these themes among advertisers.

If, like me, during COVID, you've been sucked into the world of online webinars and events, you've all heard many of the same themes, but I'm excited by it.

Advertisers are more tuned into the power of data-driven advertising than ever before.

They understand the role it can play in helping them be agile in the midst of today's uncertainty.

And they understand it can help them gain market share.

And as they embrace it across their advertising channels, they're demanding more of our industry.

This has been an important moment for The Trade Desk.

2020 is a moment where the culture we built for the last decade is paying dividends, perhaps more than ever.

Also, we've always been a company with a vision and a mission, and that's been more valuable in 2020 than perhaps any moment in our past.

That's always been our approach.

We've spent 10 years getting ready for this moment.

While we still have a great deal of uncertainty in front of us, we're very excited about the future.

Now let me turn the call over to Blake to discuss our financial performance.

Thank you, and good afternoon, everyone.

I hope you're all doing as well as possible in this challenging environment.

Before turning to results, I wanted to comment briefly on the status of our company's operations.

Today, we are currently operating with the majority of our full-time employees working from home.

Safety is the #1 priority for our team.

We fully support our employees as they either continue to work from home or return to the office based on their preference and where allowed by local regulations.

And in Q2, we were pleased to continue to onboard positive net new employees every month, investing in talent that we believe will deliver future value to our clients.

Given the circumstances, I really can't say enough about the dedication, focus and professionalism with which The Trade Desk team is tackling the challenges presented during this period.

Now moving on to our results.

In Q2, revenue was $139.4 million, representing a decline of 12.9% year-over-year.

That said, however, the story that developed over the quarter was a positive one.

Coming off the lows we experienced in mid-April, spending trends improved throughout the period, and by mid-June turned positive on a year-over-year basis, and that has continued into July.

As we began to see those improvements, we started to increase the pace of our investments to further capitalize on the opportunity that is presenting itself in our business, particularly in CTV.

For Q2, despite the year-over-year revenue decline, we generated $14.6 million in adjusted EBITDA or about 10.5% of revenue.

With the investments we are making in our people and our solid working capital situation, we believe we are well positioned for future growth acceleration as conditions continue to improve.

From a channel perspective, Q2 included strong year-over-year spend growth, relatively speaking, in branded channels where advertisers can really connect with customers.

Highlights included connected TV, which was up roughly 40%; and audio, which was up 23% year-over-year in Q2.

During the month of July, we continued to see improvements across all of these channels.

Geographically in Q2, similar to last quarter, North America represented 88% of spend, and international represented 12% of spend.

Some of the spending trends that I mentioned earlier applied to our regions as North America, APAC and Europe each improved every month during the quarter on a year-over-year basis.

In terms of our verticals that represent at least 1% of our spend, nearly every category improved between April and June with many exhibiting strong resilience.

In particular, health and fitness, our largest vertical in 2019, as well as technology and computing, home and garden and education continued to perform well.

While still improving materially from their April lows, travel and automotive lagged behind, although in the last few weeks, we have seen automotive turn positive year-over-year and are encouraged about that.

We are actively working with large automotive companies and their agencies to activate more campaigns on the platform.

Our early May CTV launch provided an opportunity to showcase our ability to deliver incremental reach, with frequency controls and measurement of real business outcomes.

As a result, CTV represented a significant amount of these brands' ad spend on our platform in Q2.

We believe this represents a growing opportunity in the back half of 2020 and into next year.

Operating expenses were $155 million in Q2, up 21% year-over-year.

This increase reflects continued investment across areas such as our technical talent and business development teams, but also being mindful of our cost structure in this environment and decelerated from 30% year-over-year growth in Q1.

This approach to our operating expenses continues to reflect how we actively allocate capital within the company toward areas that can drive future growth.

As spends started to recover, we began allocating resources to incremental investments.

Our goal is to invest heavily in the areas that can drive growth so we can grab share during the recovery.

Adjusted EBITDA was $14.6 million in Q2, representing a 10.5% margin.

Income tax was a benefit of $41 million in the quarter, mainly due to tax benefits associated with employee stock-based awards, the timing of which can be variable.

Adjusted net income for the quarter was $44.8 million or $0.92 per fully diluted share.

Net cash provided by operating activities was $96.3 million for Q2, and free cash flow was $75.5 million.

The primary driver for the increase was a change in working capital that can vary from quarter to quarter depending on the timing of payments and receivables.

DSOs exiting the quarter were 96 days, down 6 days from a year ago.

DPOs were 74 days, down 7 days from a year ago.

We exited Q2 with a strong cash and liquidity position.

Our balance sheet had $555 million in cash, cash equivalents and short-term investments at the end of the quarter.

I'd like to remind you that depending on the shape of the recovery curve, our liquidity position will fluctuate as we fund our growth.

I'm going to use the remainder of the time today to discuss Q3 and how we are managing the company through the current environment.

Like last quarter, we do not intend to provide financial guidance for the full year.

However, we do want to provide direction for Q3.

Please be aware, our business has been impacted by the COVID-19 pandemic that has significantly impacted advertiser demand.

Like many companies that are ad-funded, we are facing a period of higher uncertainty in our business outlook.

We expect our business performance could be impacted by issues beyond our control, such as shelter-in-place orders that may or may not occur.

Assuming that the economy continues to open up, and we do not have any major COVID-related setbacks that may cause economic conditions to deteriorate, we estimate revenue growth in Q3 to increase 8% to 10% on a year-over-year basis.

Under this assumption, we estimate adjusted EBITDA to be at least $30 million in Q3.

We also continue to be mindful of cash management, maintaining liquidity and investing in working capital spend continues to increase.

From an expense management perspective, while we are increasing our investments today, in light of the current environment, I want to remind you that we do have flexibility should things deteriorate.

I'm proud of the agility we exhibited in Q2, and we have those levers and additional ones depending on the environment as needed.

However, we are certainly encouraged and remain motivated by the stabilization trend in spend we have seen since the middle of April.

We believe we have the structure in place to accelerate growth and gain share as economic conditions improve and are cautiously optimistic about continued measured improvement through the remainder of the year.

That concludes our prepared remarks.

Operator, let's open it up for questions.

(Operator Instructions) We'll move first to Brian Schwartz with Oppenheimer & Co.

I have a question, Jeff, on the long-term impact from COVID-19 on the connected TV market.

There is some investor concern here that COVID might be pulling in accelerating spend for connected TV.

Given your guidance here for connected TV to more than double in 3Q, it's a big step-up from 2Q.

But I wanted to ask you if you really agree with that?

Or do you think what had happened so far is a structural change in the market?

So essentially, Jeff, what is the shape of this post-pandemic demand picture in the connected TV market look like for The Trade Desk?

Congratulations.

Thanks, Brian.

I appreciate the question and the kind words.

So yes, so let me start with the punch line.

So I think connected TV and television in general has changed forever because of connected -- or because of COVID-19.

And nothing is going to undo the change that has been instigated.

Is there some amount of viewership that is currently on AVOD that will go back to sports or something like that?

There is some amount of that, but I'm really drawn to a couple of the big vector numbers.

So first of all, we highlighted in the prepared remarks that cord cutting that's typically been around 3% a year is, according to our research, expected to be around 11%.

That's largely because the #1 reason that people hang on to cable is sports at 60% of people saying that's their #1 reason for hanging on to it.

Even as sports come back, those sports aren't nearly as watched or as desirable as they were.

But incidentally, it's really important to note that as they are coming back, we're getting access to all of them.

So even in their limited form, we're -- a lot of people are seeing them on demand and we're showing ads for the NBA, the major league baseball, major league soccer, tennis, even UFC.

So we're showing ads across all the sports that are coming back.

Of course, we've also seen a large surge in unemployment, and that, of course, makes everybody and those that have been affected negatively economically, which is almost everyone, to look at their TV lineup and say, "What's the most expensive part and where do I need to cut?" And that almost always leads to cable television.

It's really important, and I didn't emphasize this enough in the prepared remarks, that cable television and connected TV are both, I think, at a really important point, which is that the number of households that we can reach just passed in this quarter 80 million households.

And according to the projections that we have for this year, cable households or subscribers will drop below 80 million for the first time in many years.

So there's a bit of a changing of the guard that's happening right now, and I don't expect that to ever, ever change again.

So I guess the punchline to your question is that CTV has changed the landscape forever.

The effects of C-19 (sic) [COVID-19] have changed them forever.

There might be some noise as things get back to normal, but as they get back to normal, people are moving where they want to go, which is on demand.

We'll move next to Shyam Patil with Susquehanna.

Congrats on the impressive execution.

I had a couple of questions.

First one, Jeff, can you talk a little bit more about the upcoming IDFA changes, what they mean for The Trade Desk?

And also, how do you think Android will react to this?

Great.

So first, whenever we start to talk about IDs, it's really easy for me to lose people in the technical details.

And so I always like to start with headline and then just reinforce the headlines as we finish, which is I'm extremely confident that The Trade Desk is going to be fine no matter what.

I'm extremely confident that the quid pro quo of the Internet cannot be disrupted by a single company, whether they're dependent directly on advertising or indirectly on advertising.

With that as preface, Apple is indirectly dependent on advertising for what I believe to be the most valuable asset that Apple has, which is their app marketplace.

So people often make the point that Apple is not in the advertising business, and that's true.

They're not directly in the advertising business.

But they are indirectly in the advertising business, which is most of their apps in their ecosystem, again, which I believe to be their most valuable asset, are dependent on ads in some form.

All of that said, it's only about 10% of our spend uses IDFA in any way.

And one thing that I just -- that I think is really important to remind everybody of is that we look at millions and millions of ad opportunities every single second, ballpark, call it 11 million.

And with that 11 million, if you were to take away 1 million and say, "Now you have to fulfill all of your budgets with only 10 million ads available every single second," we would be just fine.

We would just buy a different 10 million.

So if IDFA were to go completely away or everybody were to opt out, we would just buy different ads.

So it wouldn't have much impact.

That said, because Apple is dependent on it, I don't expect that, and there might be some short-term surge in opt-outs.

But because Apple has made clear that they will do a better job of explaining the quid pro quo Internet, which, by the way, is amazing progress.

That's good news for everybody.

I do think long term, when people go to apps and find that they don't work as well because in fact you do need to share your location with Yelp in order for it to work at all.

The -- long term, everybody is going to become more familiar with the quid pro quo of the Internet, and we'll have access to nearly the same amount of inventory that we have today.

So I don't expect there to be any major disruption in the short term or the long term.

I'm even more confident that there won't be any meaningful disruption in the long term, which comes to the second part of your question, which is Google.

If I'm Google, especially when I've already made the announcement about the future of cookies inside of Chrome, and they've been -- Sundar was asked about it directly multiple times in the recent hearings.

I'm not going to start this -- I'm not going to start a fight on another front.

And especially because here at Google, and I'm speaking as if I'm them, we are dependent on ads.

So unlike Apple, which is indirectly dependent on ads, we are 95-plus percent of our revenue I think comes from ads.

So we're going to wait and learn from what happens with Apple and then make changes.

But if Apple overreaches, we will benefit because app providers will then start building to our platform first instead of to Apple's, and then we will gain more market share.

So if I'm working at Google, I'm secretly hoping that Apple messes up so that we can win share.

But given the number of places that sort of Google is under attack, I would be waiting and watching before acting.

So I think both of the strategic positions that they're in means that the quid pro quo of the Internet is just fine, and that brings me back to our headline, which is The Trade Desk is just fine.

That's very helpful.

If I could just sneak in one more for you, Blake.

Thank you for the color on the 3Q EBITDA and investment levels.

I was just wondering, I know you don't want to guide beyond 3Q, but just in terms of kind of how you're thinking about OpEx or investment for the fourth quarter, is there any kind of framework you could provide us?

Sure.

Thanks for the question, Shyam.

I appreciate it.

Yes.

Just to back up quickly, I was really pleased with how we managed the second quarter from an expense standpoint despite the COVID headwinds.

We still generated nearly $15 million in positive EBITDA for the quarter.

Our expense growth decel-ed.

We were up around 30% in Q1, and we decel-ed to up 21% in Q2.

So that said, even with the decel from Q1, we're still investing materially in the business, and we continue to do so.

Like we discussed in the prepared remarks, we did release more investment as we saw trends improve during the quarter.

Additional color I can try to help you with is on the Q1 call, you might recall we were targeting our full year 2020 hiring at more than 50% under our original plan.

Today, that figure has been reduced.

It's probably closer to 30% to 40% as of today.

So because of that, the expense growth in the second half, it's likely -- if I had to say, it's likely closer to what we saw in Q1 from a year-over-year growth perspective than what we saw in Q2.

But I also would want to add, remember, we really don't manage to an EBITDA target.

We invest where the opportunity is.

We invest where we believe the long-term value is.

We'll always try and flex around that.

And then also we have levers available to us if there was a macro deterioration of any kind.

So we showed that agility in Q2, and I'm really proud of that.

And so we have not only those levers that we were able to use in Q2, but we also have others available if needed.

So we like our positioning where we can invest in growth, but also show the flexibility as needed based on overall macro trends to make the right choices for the company in the long term.

And we'll move next to Michael Levine with Pivotal Research Group.

So a question for you, Jeff.

I wanted to talk a little bit more about connected TV.

I mean obviously great numbers for the quarter and where you're looking at in the outlook.

But to really unlock this opportunity to a much greater degree, what are the structural changes you feel like need to happen within the industry?

If you think through, let's say, the advertising agencies', the media companies' behavior that you're seeing at clients.

So I'd love to hear your two cents there.

Yes.

So first of all, thanks for the question.

So one of them, I think, is happening right now, and it's sort of indirectly related to connected TV.

And that is for the first time, a massive amount of really premium content has come into data-driven, Internet-fueled media.

And that's AVOD and all the content that's come in to connected TV over the last few years.

And so that just changes a number of choices that advertisers have.

And so what's really important that they do, and this has really been instigated and accelerated this year, is evaluate what is the value of premium content on a relative basis to everything else, especially user-generated content.

And so I'm really impressed by number one, how much content has come online and how much viewership has come online.

I know that the Wall Street Journal made the comment that Disney+ has picked up as many subscribers in the last roughly year as Netflix did in its first 8 years.

Peacock just launched in July and is off to a good start.

We quoted numbers from Pluto and Tubi and others when we're talking 3x growth in April and 100% growth in April.

So all of that coming online at the same time that people are having the discussion about the relative value of premium to UGC is a really important thing to keep unlocking dollars.

Also just in general, measurement is probably the long pole in connected TV.

So this relative value is an important discussion.

And it also just impacts the measurement discussion, which is the way that GRPs and reach are measured in linear television.

It doesn't really penalize advertisers or media companies who show you the same ad over and over and over again.

And sometimes that even creates negative brand affinity where if you show me the same ad 100 times, I start liking your brand less.

But the way traditional television measurement works, it doesn't penalize that behavior.

Rectifying just price and measuring reach and frequency and the fact that you have way more control in connected TV than what you can get with cheap GRPs in traditional television, rectifying the way we measure between old TV and new TV is a really important thing that just has to continue to get better.

And you'll see us continue to invest in product.

We've made some big hires to help us with this, in fact, in this quarter.

So it's something very top of mind because that is definitely one of the things that will unlock more spend.

But as you can see by the prediction that we'll do more than double our growth rate of Q2 at 40%, we're extremely confident that in the short term, we'll continue to improve.

We'll move next to Vasily Karasyov with Cannonball Research.

Jeff, you were talking about webinars you were doing all quarter.

And I listened to a couple of those, and you spoke about your unified ID.

And I know you touched on it in the prepared remarks, but I think it's such an important topic, given how much identity resolution and privacy is how central it is to everyone's thoughts about this space.

I was wondering if you can talk a little more about it in a little more detail and maybe explain to us in a simpler terms, what do you think potential implications could be and why you're paying so much attention, why you are leading the charge on that in the industry now?

Yes.

Thanks.

So I've been talking publicly for a few years now about how dissatisfied I am with the way companies like Apple and sometimes even Google have talked about privacy.

And especially in the way that they've explained the quid pro quo of the Internet.

And so we don't always know why we're typing in our Apple ID for the 9,000th time in a month, but it often is because you're giving consent for something that they're not explaining, not explaining well.

And so we look at the current state of discussion on cookies.

And especially -- really, this started with GPDR where regulators rightfully said, Internet players need to better explain the quid pro quo Internet.

And you need to just give notice in the case where you're providing targeted advertising to pay for your content.

And the response to GDPR in part because people quite -- didn't quite know what to do, it was often to just say things like, "There are cookies.

There are cookies on my site," instead of explaining what those cookies do and explaining how the quid pro quo of the Internet works.

So what we want to do, and what we've announced and we've developed, is a framework for making that quid pro quo of the Internet better.

So we spent a lot of time thinking about how cookies can be improved upon, how we could create an alternative to cookies and make that available to everyone else.

So unlike many of the big players in tech who come up with a solution like this and then say, "Great, now I can have proprietary advantage over everyone else," all we want is an ecosystem that is better.

And we're fine if it benefits everyone, including Google and Facebook and others.

And as our product, we expect it to be successful.

And part of the reason we expect it to be successful is because it is better for all the major players, and therefore, it's easier for us to invite them to participate.

And so as we mentioned, one part of this is that there will be an ID.

Historically, all that's in a third-party cookie is an ID, a random number.

And this ID would actually be encrypted, it would also come with terms of service that are regulated by the ID, which is better than cookies on both fronts.

Also comes with better opt-outs, so the publishers can actually better explain the quid pro quo of the Internet.

And we're going to be more prescriptive with publishers as to what we expect them to say so that they better explain that.

And we're going to spend more money with the publishers to do a better job of explaining that quid pro quo.

We're also going to give a framework to companies like Apple.

So when they update IOS, like they are about to, and they give consumers control, we'll give them a place to send us that information so that we can honor it.

And then we'll also create the most lightweight simple SSO available so that especially long tail publishers will continue to be competitive.

If in fact Google were to get rid of third-party cookies and say, "Well, we have login, so we'll use those to our benefit," the long tail publishers in particular would be the ones to get hurt.

And so by offering them something that is very lightweight and as well as not trying to take anything from them, we think it makes it possible to create a much better internet for everybody.

So just like unified ID, and I want to be very clear on this.

We do not need to go get billions of consumers to sign up for something in order for us to succeed on this.

All we need to do is get a few of the most forward-thinking publishers and SSPs and exchanges to understand and adopt, and then it will be successful.

Because we've already shared this with one of the biggest advertisers in the world who responded by saying, "What can we do to help?

We'll do everything, including getting on stage and talk about how important this is," which I -- that day will come.

And secondly, we've already presented this at several of the most sophisticated SSPs and exchanges.

And they've said, one of their CEOs said, "This is going to work.

It couldn't be pulled off by anybody but you guys because of the position you play in the ecosystem.

And it's going to work.

What do we have to do to help?

Tell us what we can do to be a good partner."

And that's the general sentiment across the space.

So it -- all it requires in order to be successful is adoption from the most sophisticated players in our space.

And we're extremely confident that just like with Unified ID 1.0, we can do that again.

So it's a very bold initiative, which will really benefit the entire Internet, and we're optimistic that we can do it again.

We will take our next questioner momentarily.

One second, please.

(technical difficulty)

My apologies.

Laura Martin, your line is open.

Okay.

Great.

Great.

Okay.

We're back on air.

Okay, so one on CTV, one on China.

CTV.

So we had 40% growth in the quarter just reported where total ad revenue was down -- total ad revenue is down 13%.

And now we're going to double that 40% growth to 80% next quarter.

I assume it will be more robust in the fourth quarter.

Jeff, can you size for us how big you think, as a percent of total revenue, CTV is by the end of 2020 for The Trade Desk?

And how much is benefiting from the upfront?

$7 billion less being spent in upfront, so that's a scatter where you can compete for it.

And how much is aiding you from live sports coming back?

Because it sounds like you're getting access to that inventory, I think, for the first time.

So that's the CTV question.

And then China, geopolitical risks, tensions, we're throwing out TikTok, and we've got revenue under pressure in your core business.

How do you think about the investment levels and the geopolitical risks of investing in China going forward from here?

Thank you.

Thanks for the question.

So in CTV, it is definitely the case that we have benefited from upfronts being weak.

And as we talk about a perfect storm in traditional television, that could never be more apparent than what happened at this year's upfronts, especially because the sharp downturn that the economy, and especially the advertising experience between the middle of March and middle of April, is also the exact time of when the upfronts is, which is, again, end of March and April.

So we definitely benefited from that being taken out.

And we definitely benefited from live sports being taken out of traditional television.

As sports comes back, I think more and more people are going to be watching it, streaming, and we'll benefit from that.

As it relates to the mix and total percentage of revenue, we just don't comment on that yet.

And the reason why we don't is just as it's growing at such an amazing rate, we don't want to have to constantly be explaining any change in the shape of the curve that are just blips.

But the general direction is all up into the right.

We expect that to continue.

And, of course, when we're growing it, as you point out, 40% this quarter and over 80% next quarter, we're -- of course connected TV is leading the way.

So that -- if there's any other color I can give on that that's more qualitative, it's simply that our sales team is leading every conversation with connected TV, and connected TV is leading the recovery inside of programmatic.

On the second question as it relates to China and just international expansion, there are definitely markets that have been more negatively impacted from COVID than others.

And so I think this is going to have a disproportionate effect, for good and bad, on every market.

So every market will be different than they were before.

Important to note that of the 25 offices that we have around the world, we only have a handful of them that are open today.

And the very first one that opened was China.

They've been back to work very first.

The numbers that they're putting up specifically are very impressive as a growth rate, but it's also compared against relatively low numbers, as we would say, easy comps.

So I'm really encouraged by what's happening in China.

As it relates to geopolitical and just whatever increased tension has come through the back and forth of leaders and tension between the 2 countries, I think I've noted before, I think there's an economic dependence between each other, meaning between the U.S. and China that no one can really disrupt.

It's not dissimilar from when I talk about the quid pro quo of the Internet, it cannot be disrupted.

The way that products are manufactured and where the biggest consumers in the world are and the biggest manufacturers in the world are, that creates a dependence or a codependence that is so great, that I don't think that that can be meaningfully disrupted, even though speed bumps can be created.

But I just keep looking at it as it's the second largest media market in the world.

We've definitely saved that one for later in our growth cycle, but we have amazing relationships with Baidu, Alibaba, Tencent.

Our TikTok relationship that started in Asia started very strong.

And we continue to have great expectations for that around the world.

And just continue to make investments, and we continue to see things move up into the right.

We'll take our next question from Youssef Squali with Truist.

I have 2 quick questions.

One, Jeff, data revenues has been -- have been very, very important piece of The Trade Desk story and margins.

Maybe can you just actually kind of highlight or break down how much of the revenue last quarter did come from data?

How should we be thinking about it going forward, in particular in light of all the changes that you spoke to earlier, IDF (sic) [IDFA], Chrome, et cetera?

And then just a quick one on political spending and maybe the likely impact you're expecting potentially in the second half?

Great.

So first, as it relates to a percentage of our revenue, we've never broken that out.

And we don't break it out for a number of reasons, not least of which is that I look at data as something that at times, I'm willing to give away in an effort to just help people buy more media more intelligently.

And if that makes our clients more sticky and more invested and especially see more ROI, I can make up the money that I could have made in charging for that by getting another dollar, if you will.

So I mean getting another dollar of media spend.

So we're always making that trade-off.

But I'd like to address the sort of bigger picture question that you framed because I think that's really important.

And if I even rephrase your question, which is to say, hey, there's a lot of discussion happening with IDFA with the third-party cookies going away inside of Chrome.

There's a lot of things that are saying the way that the quid pro quo of the Internet works may change.

And if that changed, not that the quid pro quo will change, but the mechanics of that quid pro quo may change.

That if they change, will that be good or bad for data companies?

And the short answer is I think it's good for data companies.

So right now, cookies in particular create a really difficult way for data to be onboarded.

It's actually created more of a barrier than anything else.

Data gets applied more easily to things like direct mail and almost every other form of advertising than it does to browsing Internet.

And as the Internet grows and as devices get more fragmented, having something that's more common as well as just better consent will actually create more opportunities for data companies that do the right thing.

So data companies that have been aggressive or deceitful, they're going away.

Data companies that do the right thing and operate without being too aggressive on collection or on deployment are going to do really well.

And I think if you look forward 20 years, there's more of them than there are now.

But there is way less deceit on the internet 20 years from now than there is now, just like there is less now than there was 10 years ago.

Political.

The political side, sorry.

So a lot of questions about how is political going to be different given the environment.

There's lots of discussions about even how people are going to vote in this upcoming election.

But I don't think there's that much debate though about the fact that more people are going to be home.

More of the debate and discussion is going to be hosted over the Internet, largely because people having this discussion and debate in their own homes just because of the nature of C-19.

I think also the amount of uncertainty has put a little bit more budget closer to the actual election time.

There will be -- it's possible that there's fewer debates and -- meaning actual debates where the candidates sit next to each other.

And if that's the case, then I think every candidate and every party is dependent more on the discussion that happens in digital ecosystems, and that includes programmatic advertising.

So I think all of that means that this one is going to be more of a digital election, if you will, than any ever before.

And we'll move next to Tim Nollen with Macquarie.

Jeff, as always, a lot of great color around the CTV universe.

And I wanted to follow up with another question on CTV.

And that's we're hearing a lot from media companies on them establishing linear/CTV ad sales platforms.

You've got another announcement today from ViacomCBS.

My understanding is these media companies are not really putting a whole lot of inventory into real-time bidding, but it's more private market transactions and things.

And I just wonder if you could maybe address this topic.

And what I'm wondering is sort of how much real-time bidding actually goes on in CTV ads with the media companies.

I'm assuming it's still very low, but I'm also assuming they will be putting more into exchanges and doing more real-time bid impressions.

And that, I would guess, is very good for the growth of CTV in general.

So I wonder if you could just address this topic, please.

Yes, you bet.

I appreciate you asking.

There's a lot of nuance in this topic, so let me take a step back and try to describe what's happening in CTV as it relates to the mechanics of data-driven advertising.

So when you're starting a new market, there is this chicken-and-egg problem.

Until you have something to sell, nobody wants to come to your store.

If somebody comes to your store and you don't have enough products to sell, they don't want to come back.

But if you put way too many products in your store and you have people showing up, then you're not going to want to sell the product that way anymore.

So there is this chicken-and-egg problem.

And one of the ways that that's getting solved in CTV, and has been getting solved over the last few years, is to just agree on what the price is going to be or agree on who's going to buy it.

And so where -- the ideal marketplace is to let the market in real time decide what to pay and decide what inventory to buy.

You might not rightsize the inventory and you might not rightsize the demand.

And also because of scarcity because as CTV has been taking off, right up until this year there wasn't enough inventory there for people to feel comfortable that they were going to spend the right amounts.

So they like to be something a little bit more like a reserve or to have a little bit more of a reassurance that they're actually going to spend.

So one of the ways they've done that is to create these private marketplaces where you basically create a deal and you agree on some of the vectors that would otherwise be variables in the future that includes things like price.

So real-time bidding is just another way of saying to leverage more data in real time so that you have more of a chance to inspect.

What the most sophisticated buyers in the world have made very clear, and that includes people or brands like Procter & Gamble, they've said very loudly they want the power of choice.

And they would rather pay a premium and choose what they get and what they pay than to just lock something in and then hand over decisioning to the sell-side.

That will be more the norm going forward.

As more and more inventory has come online, more brands are going to say, "I'm willing to pay a premium for choice." And given that there's more supply coming on, that's actually an important thing for the supply side to do in order to get that premium.

So that is very good for us, that's very good for the industry.

In fact, it's really essential for connected TV that things start to move in that direction so that prices continue to be able to fund the amazing content that all of us get to experience as consumers right now.

So a really important question, and the trend is heading in the right direction.

We move next to Brian Fitzgerald with Wells Fargo.

Jeff, in your prepared remarks, you mentioned the CMO telling you they want to move spend from social to CTV as rapidly as possible.

Beyond some of the near-term pressures that you're seeing with boycotts and social unrest and the elections, do you get a sense that some brand advertisers are kind of beginning to lose faith in feed-based advertising?

Because they're increasingly -- they're not just getting in front of their consumers within the feed, but they're being put in a position where they're kind of responsible for the organic content in the feed too.

Do you see that trend resonating with advertisers?

Yes.

So it's an interesting way to put it, which is feed-based advertising versus user-generated content.

I do think the bigger issue is user-generated content, even though you could also make the argument about the feed-based simply because it's harder to determine context.

But I think when you're very high level about this, advertisers have more choices than they've ever had.

And they have more data and more insight and they're smarter than they've ever been.

And so I think we're having a very important discussion on the Internet right now about what is the value and the risk of user-generated content.

And I've just been surprised, and I mentioned this in the prepared remarks, about how coordinated it seems the Internet has been, especially the advertisers, the funders of the Internet, how coordinated they've been in saying, hey, especially as we move into a pretty heated and competitive election and more people are saying in user-generated spaces, "Your politics suck.

You're an idiot," you just don't want that to be a brand that says this conversation is brought to you by brand X. And so as a result, they're just looking at that saying, "Where are safer places?"

And if there were anything else to contribute to the perfect storm of traditional television that's contributing to connected TV, it's that.

Because they are then saying, "Wow, there is this alternative, which is all this premium content that I can advertise on.

And it's premium videos.

It's a big video on a big screen that I know will run and I know what I get, and I know what I'm running next to." It's a very compelling alternative as people are struggling with what UGC, or as you put it, feed-based ads represent.

So they're definitely rethinking it.

It does appear there are no further questions at this time.

I would now like to turn it back to Chris Toth for any closing remarks.

Great.

I thank you all for joining us today.

We really appreciate your time and look forward to speaking to you again in about 3 months.

Have a good evening, everyone.

This does conclude today's program.

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