Trade Desk Inc (TTD) 2020 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Trade Desk First Quarter 2020 Earnings Call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to your host, Chris Toth, Vice President, Investor Relations. Sir, the floor is yours.

Thank you, operator. Hello, and good afternoon to everyone. Welcome to The Trade Desk First Quarter 2020 Earnings Conference Call. On the call today are our Founder and CEO, Jeff Green; and Chief Financial Officer, Blake Grayson. Jeff and I are in the office in Ventura, and Blake has dialed in remotely. 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 certainties. 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, and thank you for joining us. It's been an extremely challenging and unusual last few months for the world. But while there will continue to be uncertainties in our near term, I am very optimistic about the future. Our #1 priority right now is the health and safety of our employees, our families and the communities we live in. As we take every precaution to self-isolate and ensure that we will emerge from this in a safe and healthy way, we are starting to see our customers plan for that future.

With that in mind, I want to cover 3 main things with you today. First, I want to reiterate our solid financial foundation and how we are operating in this environment. Second, I'll provide some perspective on the most recent market trends and what we are seeing in our industry. And third, where I would like to spend most of my time, I'd like to talk about the opportunity in front of The Trade Desk.

While these are very challenging times for everyone, I think there is a shift in media that started about 9 weeks ago that is accelerating the move to data-driven advertising. Nowhere is this more apparent than in connected TV. And even though it is too early to predict exactly when the economy will start firing on all cylinders again, we do have a sense of the role advertising will play in that. And I'm confident that The Trade Desk will be on the front lines of recovery. It will present a major land grab opportunity and our ability to be successful in that environment rests solely in our own hands.

As it relates to what global recovery looks like, keep in mind that in order to grow and reopen for business, companies need to get the word out. We believe that data-driven advertising is on the front lines of recovery where advertising fuels and even ignites growth and where growth fuels more advertising. As The Trade Desk is one of the leaders in data-driven advertising, we strongly believe that we will play a critical role in the global economic recovery.

So first, our financial foundation and how we are operating in this environment. As we've said many times on this call, from the beginning, we have always prioritized profitability and building a strong balance sheet. We could have raised more venture capital in the beginning. All of our competitors did. In the last few years, we could have spent more of our earnings like many of our SaaS peers did, given our unique combination of high growth and profitability. We didn't because we wanted to grow responsibly. We wanted to instill good discipline that would serve us well in moments like these. In short, from the beginning, we wanted our business to be sustainable. That discipline and commitment to sustainability is what enables us to focus on what's valuable to our customers. It allows us to prioritize, innovate and invest wisely. It also has put us in the enviable position of being able to invest in our technology to ensure we stay years ahead of our competition. It's why we have historically grown so rapidly and we will never be a commoditized player. It also ensures that we can manage our way through this global crisis. We can weather near-term impacts and continue to invest in our business. Our goal is to emerge from this environment a much stronger company.

Beyond the balance sheet, we started asking our employees in Asia to work from home starting at the end of January. By the middle of March, we've closed all of our offices, and the vast majority of them remain closed, with Shanghai and Hong Kong among the few where most of our employees are already working from the office again. Nevertheless, globally, almost everyone is still working remotely. Our teams around the world have responded, and we are operating almost as seamlessly as if we were all in the office.

As a technology company, we're pretty damn good at utilizing the most effective collaboration technology. Whether it's for customer meetings, internal collaboration, marketing development or agile engineering programs, we operate virtually shoulder to shoulder as much as we possibly can without being in the same physical proximity.

Since I founded the company in 2009, our leadership has had regular communication with all employees on a weekly basis, a weekly all-hands. And that has served us well in this environment, ensuring we are all well connected and informed. There have been some really critical all-hands meetings over the years, meetings where we announced fundraising, meetings where we explained we were going public, but I'm not sure any was more important than our all-hands on Monday, March 16, when all employees were working from home and we tried to offer our teams reassurance and guidance. We reminded them that panicking is not a strategy, and we have a critical role to play in the economic recovery, that this is a moment for our team to make a difference. Every week since then, we've had over 1,000 people live on every week's all-hands.

Our team is incredibly resilient. I've always been impressed by the powerful combination of talent and dedication in our people. They believe in our mission to make data-driven advertising as ubiquitous as electronic trading and equities. And they believe in our vision of a healthy, thriving, ad-funded, open Internet. I'm incredibly proud of them in every corner of the world.

That said, let me move on to my second point and provide some color on what's happening in digital advertising and our business, beginning with the sense of how the last couple of months have progressed. We had an amazing start to 2020. $161 million in revenue, up 33% year-over-year. We were tracking ahead of our original projections in January and February. Connected TV was on pace to more than double through the first 2 months of the year. That strength was partially offset by rapid declines in the second half of March as most advertisers started indiscriminately pausing budgets and indiscriminately reducing budgets. For a brief period of time, programmatic was hurt by one of its greatest features: its agility. You can easily start and stop programmatic campaigns in ways that are not possible in most other mediums like linear television that don't move so fast.

The strong growth rates we saw the first 2 months of the quarter served as a reminder of how strong the secular tailwinds are for data-driven advertising and The Trade Desk. In early April, we saw more advertisers slow spend or hit the pause button across every channel. Some verticals cut most of their budgets, such as the travel vertical. Of course, some did remain active particularly in health and fitness and technology and computing and home and garden. In late March and early April, some budgets were canceled to stop expenses at businesses that knew their businesses were taking a hit from the shelter-in-place movements around the world.

However, many businesses were simply pausing campaigns, not canceling them to refresh the messaging. The way a CPG or a pharma company planned to message in January had to be redone. Messaging had to be reworked.

Overall, by mid-April, the year-over-year spend decline stabilized. And as April progressed, we started to see stabilization and even some improvement. I believe that's because there was growing realization among advertisers that panic is not a strategy. Advertisers started to adapt to the current environment. For example, restaurants shifted their messaging to "we are open" or "we deliver." Consumer products companies turned their focus to pantry loading products. And some travel companies started to message that they would waive all change or cancellation fees for bookings. And beyond the present, many advertisers started to strategize about how they emerge on the other side of this pandemic.

Let me give you an analogy I've shared with our team. Like many of you, I'm sure, I found myself watching a little more TV in the evenings while we've been working from home. One movie I enjoyed a lot was Ford Versus Ferrari. There's a scene in the movie where there's a crash, and there's a cloud of smoke over the track. As racing cars come into the cloud, they can't see for the next 15 or 50 meters. Everything in that moment is uncertain, but they know exactly how the track is laid out once they emerge from the smoke cloud. So all they can really do with any certainty is start to plan for that. That's where we are with the advertising industry right now. We are still in that smoke cloud. We don't know exactly when it will lift, and we don't know exactly what the next few meters look like, but we do have confidence of what will happen once we emerge from this, and we know what the track looks like. We've lived it so many times, but now the opportunity is even greater. This is where I ask our teams to focus most of their efforts, preparing for the opportunity on the other side of this cloud, the other side of this uncertainty.

Which brings us to my third main point: the opportunity for advertisers and The Trade Desk on the other side of this. While advertisers are indiscriminate in what they pause or cancel on the way down, they are very deliberate on the way up. While we can be sure that ad spending will return, we expect it to look a little different than it did immediately before the global health emergency, especially at first. We expect there will be a staggered return. Some industries will lead while others such as travel and entertainment may lag a little. Some countries will reopen earlier than others. Here in the United States, we're already seeing different time lines from different states and localities. This makes flexibility and agility super important for advertisers. But overall, there will be a massive land grab opportunity and I expect that marketing will be a critical success factor in that land grab.

Think about it. If you're Uber or Lyft, for example, your business is largely on pause and you're not advertising much right now. But as we start to emerge from this, companies will start marketing more heavily because that's the moment a company can gain awareness, loyalty and share. Whichever those 2 companies market more effectively will gain share, and that same scenario will play out across every industry, whether it's Marriott versus Hilton or Domino's versus Pizza Hut or Toyota versus Ford. All of these companies and every other company out there is figuring out right now how they use advertising to connect with consumers and gain share once the gears of the economy start cranking again. What will they advertise using what kind of creative to what kinds of audiences in precise location using what kind of channel. It's all being strategized right now. And as they increase their spend again, not only will they do so aggressively, but they will do so much more deliberately than ever before. With this kind of market disruption, companies are under maximum pressure to be as effective as possible with every dollar of expenditure including, maybe even especially, in advertising. In that way, this is not dissimilar to the 2008 recession. Remember, programmatic advertising came of age during that recession. And that's because ad spend migrated to where advertising dollars were measurable and comparable. The GFC and downturn of 2008 and '09 was an important learning experience to prepare for this. Back then, display and mobile advertising were the big winners. Day 1, despite being weaker at winning hearts and minds than video, TV or audio, they won share because measurable and comparable are what it takes to win outside budgets during the recovery. CMOs more than ever have to defend their spending to CFOS. That's of course best done in data-driven advertising.

The same dynamic will happen here. Spend will migrate to what works best. Today, it's connected TV and digital audio. Advertisers will apply data-driven advertising more aggressively than they did before this. They will place more value on those ad impressions that are measurable and comparable. Nowhere will this be more apparent than in TV advertising.

We've talked about the CTV opportunity many times before. We've talked about the consumer shift to streaming services. We've talked about how broadcasters are moving to streaming platforms. We've talked about how advertisers are eager to apply data to their massive TV ad campaigns for the first time. We thought this CTV revolution would play out across the next 2 years, but the last 8 to 10 weeks have changed all of that. I believe that the media landscape has changed forever, starting in the middle of March. Every channel and every participant is in a different position today versus a few months ago because of one dramatic shift: linear TV's shelf life has shortened and as viewers have moved en masse to CTV. The biggest loser in all this is traditional linear television, and CTV is without a doubt, biggest winner.

Let's outline why linear is losing. First, consumers under pressure. Cable is the most expensive item on the TV menu and there are more choices on the menu than ever with all of the new OTT options coming from the likes of Disney and NBC. eMarketer predicted in the summer of 2019 that the U.S. would have what's become a standard, a 4% annual decline from 86.5 million households having cable to 82.9 million. We did a survey a few weeks ago with thousands of consumers. Across all households, 11% of those who still have cable plan to cut the cord by the end of the year. That number goes up to 18% for the 18- to 34-year-old age group. Compared with eMarketer's estimates, that would be a massive and unprecedented acceleration to cord cutting.

Second, according to the same survey of those that still have cable, the #1 reason they were hanging on to it was for sports. In fact according to our research, 60% of those with cable keep it primarily for live sports. The longer live sports remain suspended, the more these audiences move away from those expensive TV packages. Sports being canceled is a big hit to the traditional linear TV business model.

Third, not only is the TV audience shifting, but perhaps just as important, the linear TV revenue model is jeopardized. Often, the majority of TV ads are sold in the upfront process. The upfronts are usually done in late April and early May, and those events are largely suspended this year. According to the new IAB survey of 390 media buyers, planners and brands, linear TV ad spend will fall an estimated 41% in March and April. And buyers expect to spend 20% less in the upcoming upfront marketplace than they had initially planned. That's because those big in-person fall preview events in New York City and LA are not happening. And for the most part, they don't even have any new fall content to preview because production is shut down. There's only so much advertiser interest in Jimmy Kimmel and Ellen Degeneres broadcasting from home, much as we love those entertainers.

For advertisers, this can be liberating. I hear it from brands and agencies every day. For them, the upfronts are a bit of a burden. They're asked to commit billions of dollars to content they don't know that much about and chasing audiences that they can't measure quite as well as anywhere else. Now they have the freedom to be more deliberate, agile and data-driven in their TV ad investments.

Now before I transition to discuss why CTV is the biggest winner in the shifted landscape, let me make one thing clear. This isn't the case of new media companies versus old media companies. It isn't Disney and NBCU versus Amazon and Netflix. All 4 companies and hundreds of others can and do create amazing content. The linear pipes will eventually go away because consumers prefer to watch on-demand content.

But traditional media companies are adopting even faster to the on-demand nature of CTV, and here is why CTV is winning. First, with the vast majority consumers largely confined to home, the consumption of on-demand TV content has skyrocketed. You only have to look at the incredible numbers posted by both the subscription platforms and the ad-supported services.

Second, this proved to be a really great moment for new AVOD launches like NBC Peacock. At a moment it's hard to make content and harder to charge for it, on-demand AVOD is skyrocketing. Ad inventory on these platforms has skyrocketed too. Ad impressions are up as much as 30% over the last several weeks as content providers chase these eyeballs and make more content available on more platforms. 30% in 3 weeks? That's something no one could have predicted.

This has led to outperformance in connected TV. Through the first 20 days in April, we estimated connected TV spend on our platform increased by about 20% year-over-year. Over the last 10 days in April, connected TV spend accelerated even more. During that period, we estimated that connected TV spend increased about 40%.

Third, I mentioned before that programmatic's agility hurt it when advertisers were mostly cutting and pausing campaigns. However, the agility and data-driven nature of our platform is hugely helpful in winning budgets. As I said, according to eMarketer, our total U.S. households with cable would fall below 82.9 million this year. Our research suggests it could be below 80 million. This year, we expect to reach well over 80 million households via CTV in the United States.

This is an important point. The Trade Desk is the largest aggregator of CTV ad impressions across every major content provider, and that massive scale is a great leading indicator of future spend on our platform. All of this means that in 2020, The Trade Desk will likely surpass traditional TV in reach capabilities for the first time in our history. We're already seeing this shift as brands strategize on our platform. For example, a large U.S.-based restaurant chain was wary of committing millions to the upfronts while their business remains severely impacted. They wanted flexibility in their ad spend. And on our platform, they can time their campaign launches when they have more certainty on consumer attitudes and intentions. They also can target by location where their stores are open. With large upfront commitments and national TV ads, this is simply not possible.

We are seeing this demand for flexibility and precision across all verticals.

Another recent example was a large technology company that was looking to run a major CTV campaign in a short time frame. They needed the flexibility to act quickly and to activate against their target audience at scale, something that could never be accomplished within the confines of an upfront arrangement. On our platform, they were able to successfully meet their reach and frequency goals for their campaign. To quote them directly, "CTV scale on The Trade Desk is a given, but it's the ultimate flexibility on your platform that makes you the DSP of choice."

Fourth, CTV is getting what linear is losing from the expectedly weak upfronts. It's one main reason why CTV spend has been steadily increasing. We are winning the incremental spend that would have historically been committed in the upfronts. I do not mean to imply that traditional TV broadcasters are not adapting quickly. They are. Every one of them has either launched or is about to launch a major AVOD platform. Disney has Hulu, Fox has Tubi. Viacom and CBS has Pluto. Comcast has Peacock and XUMO and recently acquired Vudu from Walmart. And we are partnering with all of them directly. We recently announced that we are integrating with Comcast FreeWheel unified yield products, which allows advertisers to work across direct buy and programmatic buying seamlessly.

For premium content providers, our value is only increasing. Relevant ads, higher CPMs and lower ad loads are the only way content owners can compete with subscription services. To capture this opportunity, our engineers have shipped one of the most important product releases in our history. One of the most interesting features of this launch is the ability for advertisers to manage frequency in TV advertising across all channels and devices. This is a breakthrough for CTV advertisers. Not only is ad frequency the #1 consumer frustration about TV advertising, it's an issue that has been a problem for advertisers as they shift more spend to CTV. They want the ability to manage frequency as the consumer moves between streaming platforms and their multiple devices. And now for the first time, they can do that.

We also continue to strike partnerships that bring the best premium video content and workflows to our clients, whether it's a partnership with TikTok in APAC, which we've recently announced, or deals with Samba TV, DISH TV, RTL, Channel 4 or FreeWheel, we continue to outwork our competitors in building an ecosystem that allows them to apply data to the widest variety of premium inventory. You might think I'm a bit of a broken record on CTV, but let me reiterate why I spend so much time on it. Advertisers view CTV as a way to break their dependence on walled gardens. There is no one dominant player in TV as there is in search and social. TV is a much more fragmented market, and the cost of content development means that a single dominant player is very unlikely to emerge. No studio, no channel, no cable company, no MVPD, no one has the leverage to pull that off in TV. And because we think video in all of its forms will be about half of the trillion-dollar advertising pie, we continue to predict that CTV will be the Trojan horse that eventually forces all walled gardens to change course. And no company is better positioned than The Trade Desk to grab share from the $200 billion linear TV worldwide market as it moves to digital.

So to summarize the hardships for linear TV, number one, the consumer is under an economic pressure that they weren't a few months ago; number two, live sports are completely canceled; number three, the upfronts are mostly canceled; number four, on demand is a way better way to watch everything that isn't live, and consumers are binging now; and number five, one to four all add up to what looks to be an unprecedented year in cord cutting.

Let me summarize why CTV is winning. One, everyone is consuming more right now. Two, on demand is better for everything, especially when live sports are paused. Three, CTV is data-driven. It's measurable and comparable in a way that linear isn't. Number four, the agility of programmatic is picking up dollars that would have otherwise gone to the upfronts. And number five, AVOD CTV now has close to the same reach in households that linear does. And 2020 may represent the changing of the guard for all television content as a result of the changes in the media landscape.

Let me wrap this up by reiterating that we are operating in unprecedented times. As I said earlier, we don't know exactly when the smoke cloud will lift, but we do have some certainty on what it will look like once we're through it, and we are already starting to see some bright spots emerge such as in connected TV. The secular transition to data-driven advertising was incredibly robust in January and February. But then advertisers just hit the pause button, and they did so somewhat indiscriminately. We were impacted because programmatic advertising is easy to just switch off when you have to very rapidly take stock of a changing environment. But what we've seen since then is a much more deliberate approach. Advertisers are being much more strategic and data-driven in their decisions as they adjust for the present and plan for the future. And we will benefit more than most in this recovery as a result. We are already seeing some very positive signs. The frontline industry is in a recovery, things like technology, home and garden, consumer packaged goods, they represent some of our largest sectors. We will be on the front lines with them, helping them make every advertising dollar count. Data-driven precision will be more important than ever. Think about it, even today in the United States, cities are opening at different speeds in different ways. If you're an advertiser, you need to be able to tailor your message to specific regions at specific times. That can only be accomplished on a platform like ours.

And advertisers are eager to jump back in. Some are already doing it because they understand the recovery will present an opportunity to grow share in that crucial land grab time. They understand the role advertising plays in driving their growth, and that growth will drive more advertising. Indeed, in the last 10 days of April, we saw a gradual improvement in spend on our platform to a negative high teens year-over-year decline, which is an encouraging early signal. A major contributor to this is the relative performance of CTV, which had increased about 40% in those same 10 days. While programmatic may have been dialed back indiscriminately at the beginning of this crisis, it will be turned back on more aggressively as we recover from it because advertisers understand the role it plays in driving their own growth. And no company is better positioned to be on the front lines with them than The Trade Desk. And this gives me confidence in our future. As I said at the outset, we're financially healthy enough to be able to ride out uncertainty. And because of our continued investments in our platform, in our inventory partnerships and in our amazing team, I'm confident that we will gain share and outperform our competitors as this starts to happen.

I'd just like to close with something that has been a bit of an upside surprise. As they work through planning with us, many advertisers and agency partners are using this time to upgrade their skills. We recently relaunched our training platform, The Trade Desk Edge Academy. And we've made it available to anyone free of charge for the first time through the end of the year. We've already had more than 12,000 advertisers and agency staff and brand marketers sign up for the new courseware this single month since we launched. Just for a little perspective, through the first 6 years of the original Trade Desk Academy, we handed out 11,000 professional certifications. That one data point alone should provide some indication of the skyrocketing demand for data-driven education during this uncertain time. Personally, that, too, gives me confidence about the future.

Let me turn the time to Blake to discuss the financial performance.

Thank you, and good afternoon, everyone. I hope you and your families are all doing well and staying as safe as you can in this unique situation.

As Jeff mentioned, Q1 was on pace to be a strong quarter. Revenue for the quarter was $160.7 million, representing 33% year-over-year growth, and adjusted EBITDA was $39 million.

That said, like other ad-funded companies, we saw a sharp deceleration in the second half of March. The Trade Desk was on track for revenue growth acceleration to start this year, and we believe we are well positioned for future growth acceleration when macro conditions improve.

From a channel perspective, Q1 includes strong year-over-year spend growth in connected TV, mobile video, mobile in-app and audio channels. Geographically, in Q1, North America represented 88% of spend, and international represented 12% of spend.

As Jeff had highlighted in terms of our verticals, during the last 2 weeks of March and into April, auto, shopping, style and fashion and travel were our weakest verticals for those that represent at least 1% of our spend. We saw resilience in health and fitness, our largest vertical in 2019, technology and computing, home and garden and education.

Operating expenses were $150 million in Q1, up 30% year-over-year. While sales and marketing and technology and development costs both grew more rapidly than our revenue, platform operations and G&A costs, both grew at a much slower pace than revenue. G&A's deceleration was driven partly by delayed corporate events due to COVID-19. This approach to our operating expenses continues to reflect how we actively allocate capital within the company toward areas that can drive growth and efficiency in the future and that we discussed in our Q4 2019 earnings call.

Adjusted EBITDA was $39 million in Q1, up 58% year-over-year and representing a 24% margin.

Income tax was a benefit of $13.7 million in the quarter, mainly due to the tax benefits associated with employee stock-based awards, the timing of which can be variable. Adjusted net income for the quarter was $43.4 million or $0.90 per fully diluted share. Net cash provided by operating activities was $53 million for Q1, and free cash flow was $33.4 million.

I'm going to use the remainder of the time today to walk you through what I believe are the key considerations in how we manage the company through the current environment. Everything in the near-term is about being mindful of cash management and maintaining a fair level of liquidity. This is about weathering the storm, retaining our operational flexibility with a strong cash position, and managing expenses deliberately to make sure we continue to focus on the areas we believe will drive our future growth, like CTV.

We exited Q1 with a very strong cash and liquidity position. Our balance sheet had $446 million in cash, cash equivalents and short-term investments at the end of the quarter. In the third week of March, out of an abundance of caution, we pulled down a revolving line of credit. While we do not see a need to use additional capital in the foreseeable future, we felt it was prudent to take the funds to the balance sheet to provide ample liquidity. We believe the capital on hand provides flexibility for a number of different scenarios, whether it's a slower-than-expected recovery or providing ready working capital to fund growth in a rapid recovery, or opportunistic M&A similar to our approach with Adbrain, the company we acquired in 2017.

Our DSOs at the end of Q1 were 92 days, a decrease or improvement of 3 days from the same period a year ago. DPOs for Q1 were 69 days, a decrease of 7 days from the same period a year ago.

Given the uncertainty in this environment at this point, we are not providing specific gross spend, revenue or adjusted EBITDA guidance for the second quarter or full year 2020. Because of this and to be as transparent as possible, I will provide an overview of current trends on our platform that Jeff also alluded to earlier.

Like other ad-funded companies, we saw a sharp deceleration in spend during the second half of March. Spend for the last week in March ended in a negative mid-teens year-over-year decline. In early April, the year-over-year decline in spend continued to increase. By mid-April, the year-over-year decline in spend stabilized. During the last 10 days in April, we started to see more stabilization and then some improvements, primarily driven by CTV as Jeff had described. Over that 10-day period, total spend improved to a negative high teens year-over-year decline.

There is still a significant amount of uncertainty in this macro environment. So I caution you extrapolating this most recent data. However, we are encouraged and cautiously optimistic by the stabilization trend and improvements in late April. From an expense management perspective, we've already taken a number of actions in light of the current environment and still have additional levers available to us should things deteriorate from today. Although as Jeff said earlier, we're seeing very recent signals of improvement. Some of the actions we've taken so far included reducing our 2020 hiring expectations by over 50%, pulling back on Q2 marketing cost by over 50%, pausing discretionary expenses like company events along with the natural pausing of T&E due to the current situation, and rightsizing future facilities' capital investments where we can based on updated hiring plans.

We entered this crisis period in a position of strength as our profitable business model with healthy EBITDA margins allows us the flexibility to handle reductions in top line relatively well. Adding that to our additional liquidity, we believe, sets us up to weather the storm better than most companies in our space.

While lower spend in the short-term hurts and our EBITDA will be impacted, we are well positioned as we emerge from this to gain trust from our customers and suppliers, differentiate ourselves from peers and gain market share. If conditions were to get worse, we have levers available to us to manage costs even further. But at the same time, we believe we have the structure in place to accelerate growth and gain share when things get better as we believe they will. By balancing those decisions, we believe that once we get through to the other side of this crisis, we will be more ready to add value to our customers by helping them reach more of their customers than we ever have before.

That concludes our prepared remarks. Operator, let's open it up for questions.

We'll take our first question from Michael Levine with Pivotal Research Group.

2 questions, one for Jeff, one for Blake. Jeff, I'd love to dig in a little bit more around CTV and your optimism. I mean, I guess, based on what I feel like -- been hearing out in the marketplace, it seems like a greater probability that the upfront conceivably breaks and there certainly should be a lot more scatter inventory as part of the mix looking into 2021, I think, for some of the reasons you outlined. So I'd love to get your two cents on how you think the company is able to adapt to that and become a better partner to the media companies? And then for Blake, I'd love to hear more about your expense management philosophy, just in terms of areas that you're going to lean in more aggressively versus not -- beyond the comments you called out in the prepared remarks.

First of all, thanks for the question, Michael. Yes, I'm excited to start by talking about connected TV because it's a part of our business that I'm absolutely most bullish about. Of course, we started the year on pace to more than double in connected TV. And that's a large part because there were lots of AVOD options being presented to consumers even before the pandemic. It's really just been a perfect storm for linear television. I was talking to a woman this morning who has been an exec in television for the last 30 years and just talking about how we've never seen anything like this. And it's really an unfortunate timing for television in the sense that typically upfront and guarantees are made at the end of April and early May. That's a moment where people have some visibility into the lineup for linear television for the year. And this year, there's just no visibility. That will push things to the scatter market but will also push things to the spot market, which is what programmatic is. What all of them are doing is scrambling to make more of their programs available in connected TV options because they know that people are watching on demand, as we highlighted in the survey that we did, which I find that to be one of the most insightful pieces of research that we've ever done, we highlighted that the primary reason that people are hanging on to linear television subscriptions or to their cable bill, 60% of the time is because they want live sports. And of course this is an environment where you don't have that. So I think the upfronts coupled with just the current environment are making it so there's lots of moves to connected TV. And that is another way of saying the spot market, the data-driven spot market. Blake, do you want to take the expense question?

Sure. Thanks for the question, Michael. I guess what I would have to say about our expense philosophy is that our guiding principle is to continue generating quality positive EBITDA over the long term. The focus right now that we want to take is to balance our expense base to stay flexible. So that's staying flexible in order to be ready to grab share in recovery or -- and also be disciplined in case the recovery takes longer than we expect, and we have additional levers still available to us.

One data point that might be helpful is that excluding stock-based comp, the actions that we've taken to date that I referred to in the prepared remarks, they reduced our cost base by over 10% from our original plan. Actions that I referred to include reducing hiring expectations by more than 50%; reducing Q2 marketing costs by more than 50%; pausing various discretionary spend like events, some T&E in other areas. And it's important to remember, we have other levers still available to us, and we'll just adapt based on how the macro environment unfolds.

We'll take our next question from Shyam Patil.

Thanks for all the color on the current trends. Jeff, as you mentioned on the call, this is a time of significant uncertainty. But over time, as things return to normal, do you see yourself getting back to the growth rates that you were at previously, the 30% to 40% or higher growth rates? I was wondering if you could just talk about that and just kind of how you see that in terms of the key drivers.

You bet, and thanks for the question, Shyam. So this is a moment where there's just not a lot of visibility, so I'm not eager to sign up for specific numbers over the long term. But I will say that the opportunity that's in front of us now is bigger than it's ever been. I'm more bullish on the long term. And because of the fact that we started January and February accelerating our growth again, it's certainly not out of the question that we could see that acceleration resume. You have to make a lot of assumptions about what happens in the macro in order to get there. But what has really just happened is that in my view, linear television was decaying at a 3% or 4% rate pretty steadily for the last 5 years. And that has just accelerated because of all the things that we talked about in the prepared remarks. So because of that acceleration, our opportunity has gotten bigger. And it just happens to be that this is the year that we also project that the reach of connected TV will rival and even surpass the reach of linear TV, and so -- which I would argue is the greatest feature of linear TV. So I'm more bullish than I was 3 months ago on the future of connected TV and our role in it. But there's a lot of uncertainty on specific numbers and whatnot. So just not able to sign up for that at this moment, but my bullishness is higher than ever.

Our next question comes from Tim Nollen with Macquarie.

Great. I've got another question about CTV and the upfronts. Jeff, appreciate your comments, agree with basically everything you're saying in general. The upfronts typically run on Nielsen ratings, so I'd add to your comments about how difficult the upfronts will be to get done this year that it will be very difficult to do guarantees. So wondering what things are buyers and sellers looking at now? What are you talking with them about as we go into the upfront?

And the difference of reach is even (inaudible). Reach used to be meeting -- reaching a large number of consumers that want ads. Now it's about reaching consumers in different households that you couldn't reach on TV anymore. So I'm just wondering sort of what things are you talking with advertisers about as you go into this, upfront or not upfront?

Yes. So I love the question because one of the gating issues for growth in connected TV from an advertiser perspective has been the ability to measure. And it's not because measurement isn't better in connected TV. It is. It is far better in connected TV and in all things digital than it is in linear television but it's new, and one of the things that CTV has going for it is that Nielsen is sort of a gold standard. It's the only way, really, to measure. And so the way that we have competed with that and the way we've made the transition relatively easy is that we've leaned on Nielsen in the same way of measuring linear television to give that as a baseline in digital and then, add to that in every report on every impression run, additional metadata on where you're reaching people, how frequently you're reaching them. One of the biggest issues that linear television has is that you can't really manage reach and frequency. So if you go do a deal with one media company or on one station or even on one show, and then do it on another one, you don't necessarily know how many times you're reaching the same user. And there's no way at a fine-grain to know how much waste there is. You're just measuring if you reach them, not how often you touch them. And that's something that digital has improved on dramatically, and that's one of the ways that connected TV and digital is able to afford to reduce the ad load and increase the relevance while making all the content fundable. And so all of that is working in our favor, but it's coming from -- we start with the baseline of the same sort of measurements that we have in linear TV and then improve upon it. So we're already giving customers both of those things today.

Next question, please?

Our next question comes from Vasily Karasyov with Cannonball Research.

So we hear a lot these days when people talk about ad-funded companies, it's all about direct response, how resilient it is in this environment and so on. So Jeff, I wonder if you could spend a few minutes talking about brand versus direct response, how it evolves on the other side of this environment. Hopefully, we'll come out of it soon. And what is the mix of your business between brand and DR?

I'm so glad that you've asked this question. It's not one that we've ever fielded before. And the reason why is because I, like many of you, listen to lots of other companies, and I've been surprised at how often we've heard the term direct response. I struggle to define which ads you put in the direct response bucket and which ones you don't. Because if you're just talking about it from an advertiser perspective, is GEICO or Progressive, a direct response company or a brand company. They both have amazing brands, but they put a 1800 number and a URL at the end of every single commercial. They are trying to get you to respond directly as quickly as possible. What has become more synonymous with direct response or performance advertising is actually the way things are transacted. And this is actually really important for us to take a minute and just deconstruct and that's that impressions are often sold on a CPM. That's the way that we transact. That is the finest grain metric to transact in because you're selling every single impression individually.

You can of course sell on a CPC, which is the way most search is sold on a click basis or on an action. So what sometimes you see happen with companies who kind of control the ecosystem end to end, whether that's a Snap or a Facebook or a Google or a number of other companies, Twitter, is when you have an end-to-end solution, you can take ads on a CPC or a CPA basis and then effectively arbitrage into a CPM. So you can say to an advertiser, "Okay, I know your ad budgets have been cut. I'll show the ads that only -- you only pay when we sell something." And then what you can do is you can increase the number of ads that you show per content. So you can have 7 ads per page instead of 4 the way you did before. And it gives you the ability to maintain some amount of advertiser budget.

It's a good way to monetize during a downturn if you control things end to end as many of the walled gardens have done. But because we're not a walled garden, we don't operate in any form of arbitrage. We're trying to be transparent and open. And we've traded that ability to arbitrage for transparency and trust, so that we are transacting on a CPM basis in the finest grain possible, so that we enable the most amount of price discovery and transparency available in advertising. What happens is markets get healthy as they move back towards CPM and they move back towards just price discovery and just healthy transaction methodologies. Doesn't mean that search is ever changing from CPC or anything like that, but on the rest of the business where things are most transparently transacted on a CPM basis, you'll see movement back to that and less sort of arbitrage.

So I don't really count much of our business in direct response because I don't think it's about the way that the ad is actually encouraging action, it's more about the way things are transacted and we'll continue to stick with the CPM metric because of all the benefits that I just said, most notably is it does not compromise our objectivity.

Our next question comes from Brian Fitzgerald with Wells Fargo.

I had a couple of quick questions. One was on frequency capping and connected TV. And it seems to be a bit of a problem, it's getting better. But we were listening to Disney recently, and they said, "Look, we're moving across our disparate brands to ESPN, moving to connected TV. And we're going to lean in on programmatic partners to help us solve this frequency capping problem because they get a better purview across the whole universe. And so they can -- with their help, we can help them manage their frequency capping."

So first question is what are you seeing with respect to that dynamic, frequency capping in connected TV? Is it getting better, is it getting worse, especially as inventory and advertisers move into and lean into connected TV?

And then second question was just in -- with respect to partnership with FreeWheel for video tender bidding, do you see that panning out similar to what happened with header bidding on the displacement? And that was, look, it added transparency to a market. And so that was good. There's dislocations in terms of pricing, and so you got some better yields on CPMs and you guys actually crafted a tool out of that dislocation and that chaos, predictive clearing built in the [Koa]. And so is that tucked into your predictive clearing product? Or are there opportunities there to help solve that dislocation with video header bidding?

Thanks, Brian. I love the nuanced questions, and it gives us a chance to dive into the details. Thank you.

On the frequency for CTV, yes, it brings me a lot of joy to hear Disney talking in that way. Because one, we're also really excited about the partnership with them as we are with so many of the greatest media companies in the world. It is true that because television content, especially in digital, is so fragmented, it is really hard to manage frequency. I was just talking a second ago about how it's really hard to do that in linear -- it's hard to do in linear, and you're isolated to the number of television sets or set-top boxes that you have potentially in order to manage frequency. But now in a world where you have phones and you have computers and just so many ways to consume connected TV content, it makes it so managing frequency can be even harder because there's just more devices involved, let alone managing people across all those devices. So connected TV does a better job of this than linear ever can, just because of the nature of the technology or the pipes. We've been doing a good job of it.

As you point out, the industry can improve dramatically. That's one of the reasons why I spent a little bit of time talking about the release that we just did about 1.5 weeks ago, which we were already planning to do it. We put all hands on deck to make this one of the most important releases in the history of the company. One of the biggest features, maybe the biggest, that we shipped in this is just enhancements to frequency capping, to do exactly what Disney is asking us to do, which is just make it better for the consumer, make it better for the advertiser to eliminate waste. I think as of this moment, we're doing a better job of it than has ever been done before. And we'll continue to expand on it because of partners like Disney leaning in.

As it relates to the partnership with FreeWheel, I -- yes, we call it header bidding for TV, only because header bidding is the closest technological comparison to what's been shipped by FreeWheel. It's not necessarily in the header of course because it's not a web page, but the concept is exactly the same. The only thing is it's unifying sort of these silos of demand that are a little bit different between what was happening on browser-based traffic versus CTV traffic. And let me explain the difference. In an ad server like DoubleClick, in the browser you have these priorities that effectively silo the demand. And it just made sense for somebody to write some code so that I could look as a publisher. I could look and see, of all the demand I have, which one is going to make the most amount of money on this particular impression at this moment. And it just enables better price discovery. So header bidding was very successful in just sort of working around the ad servers, so that publishers have better visibility, and that just created a more robust market for everyone.

This is happening a little bit less about the ad server priority, although that might be a little bit of it, it's more about the direct sales force in television where your direct sales force is out selling something, usually without very much targeting at all. And that is in comparison to this data-driven or targeted advertising where the CPMs are higher and their data paths to it. And figuring out which bucket should I put this particular impression and how does it create yield. FreeWheel has done an amazing job of unifying all that yield, so that content owners can maximize the revenue from the content. And they've taken a page out of the browser yield management playbook and that is definitely serving them well. It's definitely serving us well as we continue to increase spend with them. I think it's also very good for their counterpart in NBC. So I'm really excited at the technology that they're shipping. In my view, they're doing absolutely the right thing in combining visibility, so that demand is no longer siloed. And you're creating the optimal level of monetization for a publisher, so that they can continue to afford to produce amazing content, which we all just need to be focused on perpetuating because it's the best time in arguably the history of television for great content.

Our next question comes from Brent Thill with Jefferies.

Jeff, many are curious about your vision of the shape of the ad spend return. You have mentioned a negative high teens year-over-year decline in the last 10 days. And when you listen to some of the commentaries from a lot of the companies that are reporting, they're saying U.S. feels like it's bottomed. You're seeing improvement week over week. And it seems like obviously you're seeing a lag here. Can you just talk to how you think this rebuilds and the shape of this and what it looks like throughout the year?

Yes. So there's a lot of macro that has to be taken into account to make any really good predictions. I mean I can talk a little bit about where -- what we've seen in our business, and just to reiterate, some of the things that Blake said and maybe give a little bit more detail. So -- and by the way, when I'm finished, Blake, if there's anything you want to either clarify or add to it, feel free, of course.

So there was a slowdown that started in the second half of March. There was some amount of acceleration into April. In the middle of April, we saw some stabilization. And then we've seen improvement since then. I think it's really important to talk about where we're seeing those green shoots in the time since mid-April when we saw that near bottom to today.

First, companies are not all going to recover at the same pace. And if you think about this from a consumer standpoint, you're probably more likely to go back to work and be comfortable being in your office than you are on an airplane tomorrow. So there's just going to be some differences as to when you're willing to go do certain activities. Even though the recovery, lots of people are optimistic that things happen very quickly, I'm not certain that things will be back to normal right away.

Certainly, in the verticals that we're seeing spend, there's some indication -- that's the way the rest of the world looks at it, too, it's not just from a consumer standpoint. But that's the way that companies are sort of putting their money where their mouth is. So not surprisingly, you're seeing things like health and fitness, which includes pharma. You're seeing technology and computing. And you're seeing home and garden and some education categories all doing very well at the front end of the recovery. Not surprising, those are the companies that are more likely to be spending right now. If you're a travel company or you're in automotive, you're more likely to be on the back part of the recovery, which there's just fewer green shoots to point to at this moment.

But overall, I'm encouraged by the trend I see. I definitely see green shoots in those categories. But where I get of course most optimistic is in connected TV and in audio, where we're just seeing some pretty strong numbers. We're leading sort of out of that bottom with what I think are the most effective channels. Which to me is the reason to be bullish about those, is if advertising is really about winning hearts and minds, then I'm not certain that there's anything more effective than video advertising and audio advertising, and the fact that those are leading the recovery in those specific verticals. To me, it's a very positive sign. Blake, anything I got wrong or you want to add to that?

No. I think you covered it well.

Our next question comes from Mark Mahaney with RBC Capital Markets.

Okay. This is Ben on for Mark. Two if I could. One, just in terms of -- we've obviously all seen now the numbers reported and the rate of deceleration from the walled garden companies. Looking just based on what you disclosed in March and mid-April, Jeff, why do you think the rates of deceleration on Trade Desk ex-CTV are kind of more pronounced than the walled gardens? And how do you think the recovery shapes versus them?

And then in terms of just kind of clients coming to you directly versus spending through agencies, how has that been trending? I think you've been getting more spend coming to you directly. Has this crisis kind of accelerated that? And then what do you think are the kind of the P&L implications of that long term?

You bet. So the -- as it relates to the rates of deceleration, why are there more with us than there was with the walled gardens, the walled gardens often don't break things out much. And because of the performance advertising or having control over the inventory itself, it -- when you put all those numbers together, it's not surprising that for instance if you're in YouTube and you have an increase of impressions, that's double digits increase because everybody's shelter-in-place. And then you also take on advertisers on a performance basis to supplement your demand that you could offset some of the loss that comes from that.

So the thing about what the situation that we're in is that, let's say that yesterday I got to look at 100 impressions, and I bought 50 of them. Today, I get to look at 150 of them, and I buy, let's say, 40 of them just because of pauses or decreases in budgets. And then as well, the reason it went from 100 to 150 is because just more impressions available because people are consuming more.

In a walled garden scenario, that's going to go into their pockets. In our scenario, that's going to go into consumer surplus or to our clients' advantage, where we are now doing a better job of selecting which impressions work for them. So it all gets translated into the efficacy of the ads, which is part of the reason why I'm so bullish about our ability to win share during this downturn because just the mathematics of programmatic are, I get to look at more impressions during an environment like this, and I have to buy fewer of them, so I get to be more selective. That difference, plus the way things are transacted, amounts to a difference in our numbers in the short term. But in my view, in the long term, that will work to our advantage.

And then the second part of your question, sorry, is about the direct versus agency. And so while -- it is absolutely true that we're having more conversations with brands directly than we ever have before, largely at their request, often at the agency's request where they're asking us to go arm in arm with them to talk to brands so that we can service them better. We definitely have brands signing directly with us more than ever, so that they can control the activation of their data. And then they are leaning on their agencies for guidance and for strategy and for execution. We see more and more of that, but we're really optimistic about the continued relationship between both brands as well as the agencies. I think there's a little bit more pressure on the agencies in this environment than there was before, which might create a little bit more in-housing.

It definitely -- this environment definitely makes it so that brands are being more scrutinizing of where every single cent is being spent. But I think in almost all cases, that's very good for programmatic. And it makes it so that brands are going to be more deliberate about spending where things are measurable and comparable. And there's no place where I think that's better than in programmatic, so it's an opportunity for the agencies to add more value in this moment. But without a doubt, the brands are going to be more involved going forward because they want to make deliberate choices.

Our next question comes from Brian Schwartz with Oppenheimer.

Jeff, I wanted to ask you a question about your investment strategy here during the downturn, clearly articulating throughout the entire call on how excited you are about the share shift that you expect to happen in programmatic and connected TV here and how the opportunity just got bigger. So I kind of wanted to ask you a different question here. I realize there is a cost here to the margin, but the balance sheet is strong. So doesn't it make sense for you to potentially not slow down hiring here to get the best talent, maybe even invest more to scale the international business faster or (technical difficulty) for inorganic R&D?

Yes. I love this question, and I'll take the first one. And Blake, I'd love for you to add any color. Blake and I spend a lot of time reviewing and making these decisions together.

So when we started to see the downturn in March and in early April, as I compared it to a cloud of smoke on the prepared remarks, you don't necessarily know where that's going to go. So we're really encouraged by what we've seen since the middle of April. And so we definitely have the ability to hit the gas again. I'm really happy that we have such a strong balance sheet that unlike so many other companies who -- their car was going 100 miles an hour and they had to come to a screeching halt, we took ours from 100 miles an hour to 80 miles an hour. And now we're in a position where we can accelerate if we decide to. So we are in the position where we could do that and we'll gain market share during that time.

I don't mind sharing with everybody that during that time, we scrutinized every single piece of incremental headcount, every single role. I personally looked at all of them. Blake and I and team reviewed them all, just trying to go as aggressively as we possibly can while also just accommodating to the uncertainty of the moment. But we absolutely have the ability to hit the gas again, and it's not that hard to go from 80 to 100 or 110. It's not nearly as hard as it is to go from 0 to 110.

Yes, the only thing I'll add to what Jeff said is that we did -- we were super diligent about where we choose to hire for the near term. So just to give you some idea, we said we reduced hiring from our full year plan by 50%. Of the remaining hires that we have open right now, 75% of those are in sales and marketing and technology and development. And those are the areas that will give us the ability to be a catalyst to continue our growth.

So we're not slowing the business down. That's really important. We're -- really, what we're trying to do is be as flexible as possible in order to gain share in a recovery, but also be adaptable depending on where this all goes. And so that's the kind of the balanced mechanism that we're trying to use.

And that does conclude our time for questions today. We'll turn the floor back over to our host, Chris Toth.

Great. Thanks, Erin. Hey, thanks, everyone, for joining today. We really appreciate your time this afternoon. Stay safe, everybody, and we look forward to speaking to you again. Thank you.

Thank you, ladies and gentlemen. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day. Goodbye.