Trade Desk Inc (TTD) 2016 Q3 法說會逐字稿

Good day, everyone. And welcome to The Trade Desk's third quarter earnings call. At this time all participants are in a listen-only mode. Later you'll have the opportunity to ask a question during the question-and-answer session. (Operator Instructions). It is now my pleasure to turn the call over to Mr. Chris Toth, Vice President Investor Relations. Please, go ahead.

Thank you, David. Hello and good afternoon. Welcome to The Trade Desk third quarter 2016 earnings conference call. On the call today are Founder and CEO Jeff Green, Chief Financial Officer, Paul Ross and Chief Operating Officer, Rob Perdue. A copy of our earnings press release can be found on our web site and 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 will be describing will be forward-looking statements, that are dependent upon certain risks and uncertainties.

I encourage to you refer to the risk factors, included in our press release, and in our most recent SEC filings. In addition to reporting our GAAP financial results, we present supplemental non-GAAP financial data. A reconciliation of the non-GAAP to GAAP measures can be found in our earnings press release. We believe providing non-GAAP measures, combined with our GAAP results, provides a more meaningful representation regarding the Company's operational performance.

Lastly, I would like to highlight our participation in the following Investor Relations events. On Tuesday, December 6th, at the Raymond James conference in New York, on Wednesday, January 4th at the Citi Internet Meeting and Telecom conference at CES in Las Vegas, and on January 11th at the 2017 Needham Growth conference in New York. I will now turn the call over to founder and CEO, Jeff Green. Jeff?

Thanks, Chris. Good afternoon to everyone joining us today on The Trade Desk's first earnings call as a publicly traded Company. Today is a very exciting day and I want to start out by expressing our deep appreciation to our investors, to our customers, to our partners and employees who have worked with us and put their passion and trust in us over the past seven years. We were pleased by the way the IPO process went and the street's reaction to our offering.

We are excited to share today we exceeded our own expectations for the third quarter of 2016. And we broke many of our previous records. We continue to significantly outperform our industry and massively outpace global economic growth. During the IPO process, we had to make tough choices, knowing it was perhaps our last time to choose our investors. We know that going forward investors are effectively choosing us, and we are committed to work hard and help investors understand our business and our esoteric industry. So today we will use some of our time to share our story and explain why we believe our best days are ahead of us.

The recent IPO was a major milestone, but in reality it's just an early step in the evolution of The Trade Desk. I would like to reiterate what I have shared with our employees and our investors. First, we say over and over again we're only 2% done. Meaning total programmatic ad spend today of roughly $10 billion is only capturing about 2% of the $640 billion advertising industry.

By contrast, many high-growth companies are focused on certain niches, whether it's something like the action sports market or a corner of the wearables market, instead we are trying to change all of advertising, all $640 billion. And advertising needs changing. Many brands are unknowingly spending billions to make consumers (inaudible). They're spending in hopes of selling more product and services, but instead they're annoying consumers. This is because while consumers' immediate consumption is up, thanks to great partners of ours like Spotify, or Google, or CBS or AOL.

The number of devices that media outlets are fragmenting rapidly. So with advertisers are going one-to-one to each site, station or channel to advertise, it doesn't account for how the message is shared on the other outlets. So we provide a cloud based software platform that coordinates across every media channel, starting with digital, what message is shared to each consumer.

And each device. We aim to (inaudible) the advertising media that goes into every device in the consumers' home, whether the ads are on a smart TV, a computer, a smart phone, an XBOX, a (inaudible), an Apple TV, a tablet, or any other device on the Internet of Things. We think we are uniquely qualified to objectively buy ad media, because of our market leading technology and because we don't own or arbitrage the media.

The second value that we've shared with our employees and early investors is the philosophy that we hope to maintain. For our specific business and business model, we don't believe growth has to come at the expense of profitability. We can do both and we have since 2012. We've been profitable since then and have grown faster than any scaled player in our space during that time. And, third, while our team has done an outstanding job of getting us to the current level of revenue and profitability, we are focusing on the long-term and to win the lion's share of the other 98% over the long-term, we know we have to consistently execute. That's a given.

But this race to transform a growing $640 billion industry is a marathon, not a sprint. Sometimes there are approaches, especially since we're a platform with so much operating leverage, that can make a quarter, but not maximize the long-term opportunities. We have committed to our employees to focus on the long-term. We have asked them to make the same commitment to us. So while our focus is on the long-term, I want to say that I am super pleased with our performance over the past quarter.

We surpassed our own expectations and delivered record revenue and strong adjusted EBITDA in the September quarter and we look forward to delivering an even stronger fourth quarter. We will talk about the sales of the numbers in a few minutes. For those of you that are not familiar with us, The Trade Desk is a self-service software platform for buyers of advertising. As a world of advertising becomes more digital, both in transactions as well as in delivery, we're helping the industry transition by making data-driven decisions.

Our software platform allows our customers direct access to desktop, mobile, social network, audio, native, TV and video ads. They can purchase us via our web-based UI, or via our API, our Applications Program Interface. More specifically, we target ad agencies large and small whose job it is to deliberately select from the 200 billion plus digital ad opportunities available every day. So they can choose what they want to buy for the clients. We are not trying to disrupt advertising or bypass ad agencies. We are focused exclusively on the buy side of advertising by providing the technology layer that enables ad agencies and service companies to be more efficient and provide more value to their clients every day. And we do this in a number of ways.

First, we're an omnichannels provider. This means that when media buyers at large advertising agency's like a WPP wants to reach a consumer, they prefer to log into a few platforms at most, not 25. Where they can coordinate branding and messaging across multiple advertising channels. All in one place. Individuals no longer rely on a single device. Nearly all of us as consumers use multiple screens each and every day. The Trade Desk takes those devices into account and enables a higher level of coordination, and strategic targeting advanced by proprietary data and technology, including both first and third-party data across all of these channels.

To power the biggest agencies and brands in the world, we all thought to be global. The large brands in the world, like Coca Cola, American Express, IBM, or HP advertise in 150 plus countries. So we have to provide one platform that buys advertising programatically in all of them. That does not mean we need to have offices in all of those countries, but we are in nearly all of the major media hubs in the world where buying decisions are made.

We are currently in 16 offices around the world, and as we say to our employees, we are not an American Company. We are a global Company that's headquartered in the United States. Next, we are an agnostic platform, where an advertising buyer can purchase inventory across the entire Internet. We don't own media by design. We align our interests with the buyers of apps, and we built our technology specifically for them.

So we have a level of alignment and objectivity that most competitors don't. And we can buy media without complex or bias from companies like Google and Facebook and CBS and Spotify, and hundreds of other aggregator's and literally millions of websites and channels and outlets, including many properties that have stated that they want to monetize their own media.

So now in order to buy the entire Internet effectively, we put our customers' first party data to work. Large consumer brands that are moving towards programmatic like BMW, Kimberly Clark and Pepsi, each spent billions of dollars a year in advertising through their agencies and they need a partner they can trust with their data. A partner who's aligned with them, who can effectively manage and protect that extremely valuable and proprietary data.

This is first and foremost what we do at The Trade Desk and this is where our technology comes in. We started the Trade Desk back in 2009, when we built our DMP, or Data Management Platform. We created the platform so we could activate a customers' first-party data for them. We then combined their data with third-party data from some of the largest data companies in the world, such as Axiom, Experion, Oracle and others. So media buyer could make better decisions. Only after we had significant data assets, did we start buying media. Today data usage is growing.

In Q3, existing customers bought twice as much data on our platform then they did the prior year. To provide some sense of scale in 2015, when Facebook announced it reached 1 billion monthly users, we already had rich user profiles on multiple billions of devices and had evaluated that opportunity from nearly all global citizens that had a consistent Internet connection.

On top of the DMP, we built our decisioning technology, which is based on the principle of expressiveness. That expressiveness is a term we use a lot with our customers and internally and it defines how they want to target and whom to target with their advertising, so they have better efficacy with their ad dollars.

From the beginning, our goal is to build the most expressive or precise platform in the world. Unlike other platforms, our technology does not use line items where every permutation requires a user-defined data or budget. Instead, we developed our technology so users can create billions of permutations, with just a few clicks of the mouse. We also built our technology around the philosophy of a clear box, as opposed to a black box. With a clear box we can provide full transparency to our customers. We help them make decisions but they can see all of the mechanics, the data and the insides for themselves and they can change anything they want to.

This means that every single ad strategy is supported for every single advertiser, with billions of permutations and targeting capabilities. In other words, we made a system for buyers to objectively buy across all forms of digital media. We structured the technology so that media buyers can be super precise. And that precision doesn't just help in targeting, but it also helps in reporting. On the reporting side, we have created what we believe to be the most complete, most detailed and most transparent reporting in advertising.

This helps our customers evaluate their programs and make better decisions, as so much of ad buying today is still made in the absence of quality data. All of this is possible because of our transparent and objective approach to making advertising work better. In a fragmented media world, advertisers and agencies are afraid that the efficacy of ads is not keeping up.

After all the TV world is adding more ads into every commercial break, radio, both terrestrial and digital is struggling to have enough ad variety and targeting to make the ads effective. But because in digital, we can measure so much, for the first time our customers are able to measure efficacy. Even though media companies have become more valuable, they have fewer watchers, fewer readers and fewer listeners then they had in the past. Media companies are all experiencing the pressure of rising content costs.

And, therefore, they are rising the prices, -- raising the prices on the ads, despite having fewer users. Therefore, our role is to use technology and data to help our advertisers achieve high returns in their advertising investments. Finally, I'm watching the power of our technology can only be done with great people showing our customers how to effectively use it.

We provide a dedicated account management and training team that ensures our customers knows how to maximize the value they derive from our platform when they log in every day. I'm proud to say that our customer service strategy and customer feedback has been highlighted in the Forester Research Wave Reports as one of the best options for ad buyers. We hear from our customers again and again that our people are transforming their businesses. So now that I have described the technology platform we provide to customers, I would like to spend a minute on how we contract and retain our customers.

We have a business model that we believe is better than fast for our industry and our agency partners. We have recurring revenue, but we also have a pricing model that deviates from tradition facts. Our platform licensing fee is effectively a percentage of growth spend through our platform which aligns our interest with our partners. Over 95% of our business comes through master service agreements or MSAs.

And we have a 95% plus customer retention rate. This provides with us a subscription-like predictability in our business. This is significantly different from legacy, technology models that use insertion orders, where they have to win business over and over again from the same customer. Now at a high level, I'd like to share some thoughts on our financial performance for the third quarter of 2016. Comparing our Q3 2016 to Q3 2015, we grew our revenue by 84%. Considering digital advertising grew by just 19% over the same period, according to the Internet Advertising Bureau, our 84% growth is out pacing nearly everyone in our industry, and nearly all companies of our size.

Despite our aggressive investments in operations for TV, radio, native and international growth, we generated $16.6 million in adjusted EBITDA, which is a 31% adjusted EBITDA margin. Let's talk about three of the biggest channel growth areas for our Company and our industry. Video, mobile and digital audio. We ended the third quarter with over a quarter of a billion dollar run rate in video.

Our video growth, which includes full episode players and connected TVs and set-top boxes and web video, grew by 185% in the first nine months of the year. Given that TV budgets are about half of the global advertising pie, we view this as one of our most promising metrics, that we can share with you about our business. Especially if you couple that with our 95% plus retention rate in the third quarter.

Meaning that the customer as we had a year ago, 95% plus of them are still using our platform today, but not only are they spending, they're spending more. Rob will discuss that a little bit more when he discusses our cohort. For Q3 2016, over Q3 2015, mobile was up by even more.

It was up 205%, now representing over 30% of our growth spend. During that same time, mobile video was up 350% for the quarter year-over-year. So if you believe, as I do, that the future of our business is dependent on our growth in video, which includes television, and mobile, this quarter represents a very promising time for our company.

And, finally, digital audio. Digital audio is off to an amazing start. We launched in Beta in Q2, but we moved to General Availability, or GA in Q3. And in large part due to our partnership with Spotify, that channel grew by (inaudible) in the third quarter, albeit from a small base. We are extremely pleased with our quarter and so excited that we are already profitable in the areas that we see growing fastest. We are just as excited that these same areas are where we have the most amount of unrealized potential.

Now I'm going to turn the time over to Paul to discuss our financials in a bit more detail.

Thanks, Jeff. Good afternoon, everyone. Overall we continue to experience growth, (inaudible) above industry averages, which means that we are continuing to win market share. Specifically, year-over-year revenue growth in the third quarter was 84%, and year-over-year adjusted EBITDA growth was 78%, as well as another quarter of positive GAAP net income. Because our business follows the seasonal trends of the entire advertising industry, we provide year-over-year comparisons unless otherwise stated.

We report revenue on a net basis, which represents our gross (inaudible) less the amount we pay to suppliers, for the cost of advertising inventory, data, and ad-on features. We derive nearly all of our revenue from ongoing MSAs that give users constant access to our self care platform, as opposed to insertion orders or other one-off yields to run single campaigns. Revenue for the third quarter was $53 million as previously mentioned, up 84% year-over-year.

This growth reflects both expansion of our share of spend by our existing clients, as well as the addition of new customers. Approximately 87% of our third quarter gross spend came from existing customers, who we define as those who have been spending with us for over one year. On a year-to-date basis, revenue for the first nine months of 2016 was $131 million, up 83% year-over-year, with 90% of our year-to-date gross spend coming from existing customers. Our operating expenses increased in parallel with the growth of our business to $38 million in Q3 of 2016, from $20 million during the same period in 2015.

The increase in operating expenses was primarily due to overall increases in personnel, delivery, and marketing expenses, which included the expansion of our product, sales, service and management teams. Total other expense net was $6.1 million and included a non-cash charge of $4.7 million, associated with accounting for the preferred warrants, and a $750,000 success bank fee from a prior debt facility. Both of these expenses were the result of the IPO and will not recur.

Lastly, we reported $5.3 million in income tax expense, associated with our third quarter taxable income. Our effective tax rate was 59% in Q3, due to the non-deductibility of stock compensation expense and the expense associated with the change in the fair value of the preferred warrants, both of which are non-cash.

Because income taxes are calculated on a year to date basis and adjusted each quarter, our Q4 effective tax rate will look similar to Q3's. We expect our tax rate will dip back down to the low 40s as a percentage in 2017, once the warrant expense is behind us. I should also remind everyone that since we have no NOLs, we do pay corporate income taxes at the full statutory rate. Over the long-term, however, we expect our tax rate to decline as we ramp up our international business, and start achieving the savings of a lower tax rate on international profits.

GAAP net income was $3.6 million for the third quarter of 2016, or $0.06 per fully diluted share and on a year-to-date basis, our GAAP net income was $10.2 million. We used adjusted EBITDA as the core metric for our business, and we calculate our adjusted EBITDA by excluding stock compensation and the non-cash warrant expenses. Adjusted EBITDA was nearly $17 million with a corresponding margin of 31% for Q3, as compared with an EBITDA margin of 32% during the same time last year.

The increased reflects growth of our top line and, of course, our operating leverage, slightly offset by our ongoing investments in products, people, and global expansion. In addition to adjusted EBITDA, we also look at adjusted earnings per share as a financial metric, which is GAAP earnings per share, less the impact of stock compensation expense, the non-cash warrant expense and any additional unusual items that we do not expect to recur. Our adjusted earnings per share was $0.24 for the third quarter.

Net cash provided by operating activities was $39 million for the year-to-date period 2016, compared to net cash used in operating activities of $26 million for the same prior-year period. This represents a $65 million turn around in our working capital situation, even as we have scaled significantly. We closed the period with $124 million in cash, which includes approximately $74 million in net proceeds from the IPO, after underwriting discounts and operating costs. And we also have an additional $74 million available on our revolver.

Our DSOs for the 12 month period ended September 30, 2016, was 86 days. An increase of eight days from the prior year period. However, DPOs for the same rolling 12-month period were 63 days, an increase of 14 days from the prior period, which reflects the fragmentation of supply and better payment terms with new suppliers. While the longer DSOs are expected given the growth of our large (inaudible) agency business, we believe our efforts around managing DPOs, plus our current revolver ability are more than sufficient to manage our working capital for the foreseeable future.

Looking ahead to the fourth quarter, we expect revenue to be $62 million, we expect to have continued positive net income, and an adjusted EBITDA margin of 30%, which includes increased investments in growth activities. For the full-year 2016, we expect revenue to be $193 million on total gross spend of around $1 billion.

So with that I'd like to turn the call over to Rob Perdue, our Chief Operating Officer, for additional insight on our business operations. Rob?

Great. Thanks, Paul. And good afternoon, everyone. Let me just take a moment to echo Jeff's sentiment from the top of the call and how excited we are to be here today. Without the grit and commitment of our employees or the trust that our customers and partners have placed on us, we wouldn't be here today.

And from an operational perspective, we remain focused and continue to execute on our business plan. The upside in performance versus our internal expectations for the quarter came in part from stronger than expected political spend, and incremental advertising around the Olympics. When we look at the 18 most competitive congressional district elections, the average increase in spend across these races was 900%, when you look at September versus August. So political spend gave us a nice bump in Q3, and a smaller bump that we built into the Q4 numbers, that Paul just shared a minute ago.

In addition, mobile video was very strong during the quarter, as advertisers continue to move programmatic dollars to this channel. Mobile video is one of the areas we're investing in heavily. Both in terms of the technology and tools on the platform, as well as more access to inventory. And what we refer to collectively as our newer channels, which include mobile video, native, audio, connected TV, and cross-device products, those collectively grew 59%, in just 90 days from the end of Q2 to the end of Q3. In terms of fewer percentage growth, audio was our fastest growing channel, as Jeff mentioned earlier, massively exceeding the growth of our other channels. Now we're only in the very early stages of audio.

But adoption is growing more rapidly at this point then most channels we've introduced in the past. Fewer than 90 days into our generally available release of audio, we're already playing audio ads in more than 120 countries. From an operational perspective, we focus on the long-term. And in particular our three main drivers to capitalize on the opportunity that we see in front of us.

The first driver is to be our customers' trusted adviser. During a time of massive shift of advertising dollars from traditional and digital advertising into programmatic, we strive to be the programmatic experts, along side our customers. So thousands of media buyers from the largest global agencies to smaller local and regional agencies, they come into their office every single morning, they turn the computers on, and one of the first things they do is to log into The Trade Desk platform and begin their work day.

They spend all day there, loading ad campaigns, optimizing the campaigns they have live, adding value to their clients. And we are there for them in that process. As one example in the third quarter, we launched several native inventory suppliers on our platform. And our team spent significant time training media buyers at agencies how to incorporate native ad units into their omnichannel advertising campaign strategies and, as a result, we saw 10X growth in native spend in Q3 compared to Q2.

The second driver is our focus on growing our omnichannel presence. When we started, we were primarily a display-based platform, because that's where the programmatic dollars were first spent. But over the last five years, we've seen a dramatic shift. In Q3 of this year, display advertising was less than half of the spend coming through our platform. As customers typically prefer to coordinate programmatic dollars across multiple channels, for maximum efficiency and efficacy.

The third driver is widening our geographic footprint, to make sure we serve our customers locally in the markets that are important to them. In short, we go where our customers need us. The Trade Desk is a global company, with 16 offices located throughout the world. We've set up offices in media hubs around the world, including London, and Hamburg, and EMEA, and across Asia in places like Singapore, Sydney, Tokyo, and Seoul, amongst others. Now on a percentage basis, international growth has out paced the US every single quarter in 2016 for The Trade Desk. Last quarter our international markets collectively grew four times faster than the US, on a quarter over quarter basis.

We expect our international growth to outpace our domestic growth in the coming years and, as a result, we are investing in infrastructure and strategic locations, including China. This includes partnerships with large suppliers of inventory and we look forward to reporting on our progress in the coming months. Now combined these drivers, along with our unique technology platform, are the reasons why customers continue to choose The Trade Desk as their demand-side platform of choice.

Our customer retention rate consistently remains greater than 95%. Through the first three quarters of 2016, our cohort growth, or existing customers of The Trade Desk, spent 81% more than those same customers spent in the first three quarters of 2015. One of the most compelling things we can share about our Company is a detailed cohort analysis. And we'd encourage you to look at the cohort information we provided in the S1 that we filed earlier this year.

So today we're excited to report that our 2015 cohort has grown by 247% through the first three quarters of 2016. To provide some guidance for modeling, I'll share the way we think about modeling our business. We always think of our cohorts and our cohort potentials is the main drivers of our business and not really overall increases in customer counts, it's really the cohort's. From a product perspective, we did 12 product releases in the quarter, including 186 new product features and enhancements.

These releases included a major new update to our UI which is receiving positive customer feedback. A new cutting edge version of our viewability product, tighter local mobile targeting and reporting improvements to our Enterprise APIs. All of these releases are helping our customers become more expressive. At the end of the September quarter, we had 437 employees worldwide. And at $396,000 on a trailing 12-month basis, our revenue per employee continues to stand out amongst other SAAS, and ad-tech industry peers as our business model was designed to scale efficiently.

Due to the seasonality of our industry, we focused on our hiring efforts on the first half of the year, so that each employee is fully trained and ready to contribute during the higher volume second half of the year. We maintained a very strong culture here at The Trade Desk and we believe that serves as a long-term advantage in running our business. Characteristics like grit, humility and collaboration, those are the things that drive the culture of our Company.

We are regularly named as one of the best places to work in the United States, most recently by Crain's in New York. And we are very proud of that and seek to maintain that strength to lead our future growth. Along with Jeff and Paul, I'm extremely pleased with our progress over the past quarter, and with the guidance we've put forth in the fourth quarter. With the election now behind us, and ad budgets and clearing prices becoming more predictable, I'm really optimistic about our performance heading into the end of the year.

Advertisers continue to migrate their dollars toward programmatic and we expect to see solid year-over-year growth across all of our channels, and geographies. I couldn't be more proud of where The Trade Desk is today, or more confident in our strategy as we proceed into the future. I'd like to again thank our customers, employees, and partners for their commitment to fundamentally change into what advertising is bought and sold and for joining us on this journey.

And with that, let me turn it back over to Jeff.

Great. Thank you very much, Rob and Paul. Before moving to the Q&A session, I would like to highlight the growth drivers we see long-term. We are excited about the long-term opportunities that are just getting started now. We continue to see advertisers and agencies realizing the return on investment and programmatic ad spending and increasing spend across all of our channels. I am very pleased with our progress on video and TV, and as the industry shifts, The Trade Desk is investing heavily into our engineering teams and people to capture the video and TV markets, as it moved toward programmatic.

Nearly all of our customers have expanded spend into mobile advertising as well. We have hundreds of customers now using in app advertising. In app alone has grown about 160% since the first quarter of this year and mobile advertising is a big opportunity globally, and we expect it to continue to grow around the world, but especially in Asia. We will continue to invest in markets around the world, and we are expecting to open offices in Indonesia, China, Spain, and France in the first half of 2017. One last area I'd like to touch on is digital audio.

This is one of the biggest things happening in media right now and we are starting to see the industry move towards programmatic, we recently launched our partnership with Spotify and they continue to gain more consumers' time as people listen to connected radio more. The digital audio industry needs programmatic advertising, as it benefits content providers with a lower cost of sales, while delivering more relevant ads, which leads to a better consumer experience.

Given our third quarter results and accomplishments we have achieved, we are confident in the direction of our business and we are delivering on the commitments that we've made. The commitments that we made to our customers, to our investors, our partners, and to our employees. We are focused on the long-term. And this is how we will continue to operate our business and perform. So with that, we look forward to your questions. Operator, let's begin with the Q&A.

(Operator Instructions). We'll take our first question from Mark Kelley with Citigroup.

Hi, guys. Thanks a lot for taking the question. You highlighted mobile growth in the quarter, some competitors have talked about mobile video viewability not having third-party measurement in place and advertisers kind of holding back there. That doesn't seem to be impacting you. Would love to get your thoughts there. Second, international growth exceeding the growth domestically, you know, what are the main geographies today and can you expand on the plans in Hong Kong? Thanks.

I'm sorry. Can you say the last part of the question, one more time? The part about Hong Kong?

Yes. Just expand a little bit. You noted the opening in office this quarter, just a little bit more on the plans there would be helpful. Thank you.

Fantastic. Thank you. I'll take a stab at the first parts of the question. So as it relates to mobile video and measurements, I should first say we think about things a little bit differently than some of our competitors, you mentioned that's sort of the impetuous for the question. We think about video and television as sort of one category, even though you have to adapt for each of the different categories, we think of them together.

We do actually measure mobile videos separately from mobile and from video and we're talking about how we measure it internally, just so that we can not double count in both mobile and in video. But that said, the measurement issue is I think a little bit different, just because we come at it from a digital first perspective. And because we measure it much the same way that we do the rest of video and television, that hasn't been an obstacle for us. It doesn't mean that there aren't obstacles facing all of television measurements. There are, or video measurement.

There are. There absolutely are. And there are things that need to improve. But because of our digital first approach, it doesn't affect it as much. As it relates to the international growth, I couldn't be more pleased with the number that we highlighted, which is 4X international growth, compared to the United States. That's actually pretty evenly applied around the world. But Asia, because in many of the markets that we're in, like Hong Kong, we haven't been in as long as we have, for instance, in the UK or Germany, so the growth rates are even faster. The growth in Hong Kong is unbelievable. Rob, I'm not sure what you would add or any color you'd add on Hong Kong?

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

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

That's great.

I apologize. Looks like our next question will come from Mark Mahanney, with RBC.

Okay. Great. Thank you. Sorry about the background noise. Jeff, Rob and Paul, congratulations on the first quarter out. Jeff, you're updated thoughts across the industry on header bidding. What trends your seeing there, and impact (inaudible) specifically on The Trade Desk. Thank you.

You bet. Thank you. So header bidding is certainly continues to be one of the most discussed topics in all of digital advertising and certainly inside of programmatic. So many things to remember about header bidding for those of you unfamiliar with it, I'll give sort of a one-minute overview of what it is and the impact that it has on our business. And then I'll talk specifically about the trends that have happened in the last 90 days. Header bidding essentially makes it so that instead of there being what has historically been a waterfall, where the top portion of inventory on a web site and by top, I don't mean the top of the page, I just mean the most valuable stuff, will go to one company and then whatever they don't want to type, will go to the next company and whatever they don't want to type, it will go to the next company.

That means you have four or five or six or more companies that all get different bites of the apple. And what historically would happen is you would manage all of this through Google's ad server, Double Click and they would help you control the waterfall. What header bidding has done is it's basically enabled via technology to pass into that decisioning tool, Double Click, what an option would produce in terms of yield, so that instead of running the waterfall, all of the competition can be unified. So it creates what we call an industry, a unified option instead of this waterfall.

So instead of yield being from fragmented you effectively have four, five, six or more pools of liquidity, or different markets, they're all together and that fuels competition. So the by-product of header bidding is that particularly on the sell side, the sell side providers are competing with each other. And the impact that that has on us, is that it's forcing them to compete with each other, often making it so that the amount that they can take in order to be competitive, has to go down. Meaning that more dollars are going to the actual media. But there's also another effect, and this relates to the recent trends, which is as publishers have recognized more yield as a result of header bidding, they started to include more [SSPs] and exchanges in the header.

So that means that I can often get called three, four, five times on a particular impression request and then I have my choice to choose between do I buy this particular impression through SSP number one, ad exchange number two, SSP number three or SSP, number four. That encourages once again competition, but it can also increase the costs of demand-side platforms, listening to all of these different requests. Because even though the number of impressions didn't go up, the number of calls to us did. Given the fact that we're so scaled and profitable, I think this represents a bigger barrier to entry for our competitors and makes it harder for them to be competitive.

And I do think it will in the medium term represent consolidation on both the supply side and the demand side. So the number of conversations we're having about powering, other demand-side platforms is at an all-time high. And I think it's a by-product of this header business. A lot of esoteric nuance in that answer, but that's sort of a state of the union.

Thank you, Jeff.

You bet.

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

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

Fantastic. So I'll talk a stab at the third part of your question, I'll ask Rob to take the first crack at the first two portions of the question. So as it relates to the product releases, we more or less ship product every single week. And so with 12, 13 weeks in a quarter, we're shipping every single week. So when we talk about the 12, that's would we're doing, sometimes we'll do that more or less depending on holidays or things like that. But it's our goal to ship product at least weekly.

As it relates to like how you should think about that going forward, one of the things that I think we've done really, really well in the year so far this year, and certainly influences the way that we make investments in 2017, is we have figured out how to not let the increasing size of our engineering team decrease the productivity per engineer. And so we're super excited to release the number of product and features, we're going to keep trying to get better about how we can get you more color on what that means. Because obviously there are different size and scope.

But we wanted to start by just giving you at least a small amount of visibility into how much we're producing. Because we are producing more product then we ever had in our Company's history in the third quarter. And we expect that to accelerate as we're making investments. And so as we -- particularly in next quarter's annual summary, when we're summarizing all of 2016 and giving guidance for 2017. You'll get more of a sense of the investments that we're making in technology. So knowing that that productivity is doing so well, it's hopefully creating as much optimism in you as it does in me. With that Rob, do you want to take the first two parts of the question?

I'll start with the international growth and sort of rate of growth and how bullish we are. So, really bullish. As we said, it's grown faster in every quarter in 2016, relative to US spend. We expect that to continue. We see the rate of growth continuing to grow faster, frankly accelerating. But it's really hard to put a number on what the percentage of growth is, relative to the US when we look forward. Other than to say it's going to grow faster and it's going to accelerate.

And when you think about places like Japan, where we've been on the ground for nearly two years now, the third largest media market in the world. And yet only about 5% programmatic penetrated. So there's just a massive amount of room for growth. You think about Indonesia, the fifth largest country in the world by population, the fastest growing middle class.

Very concentrated set of publishers, it's ripe for programmatic entry. And we're doing really, really well there. And expect to grow significantly. So those are just two examples of many international markets of size and scale that we think have massive potential going forward and will continue to drive our international growth, being faster than our domestic. Even at the same time that we see US growth continuing to grow, much faster than the digital advertising growth. And then, for the first question, could you reiterate that?

No. I think you got them. I think you hit both of those, Rob. Appreciate it. Thanks, Jeff and Rob.

No problem. The last thing I'll just add on the international, just to echo sort of Rob's sentiments, is that one of the great things about our international growth, and particularly when we talk about areas like Indonesia and China, those require meaningful investments. And Indonesia has almost as many people as the United States, it has one of the fastest growing middle classes in the world. But I am so excited about that market.

But one of the reasons why I'm so excited about that market, is because we're going in there seemingly by ourselves. And it's because our competitors in large part can't afford to go into that market. So in the response to the last question, I just mentioned that because of header bidding, it's harder to compete. And it's the bar or the -- yes, the bar to get over to be profitable is higher than it was three months ago or nine months ago by a lot.

Simply there's been more bid requests you have to look at in order to be competitive. That makes it harder to go make investments in (inaudible) markets like Indonesia. So we think because our competitors are going to struggle to have the resources to invest in those markets, we're going to be in markets that are more likely to go programmatic faster for the same reason because publishers can't afford to have sales people there and that just creates an amazing environment for us to go own the programmatic market.

So one of the most exciting parts about our international growth, and I actually think it's a really important commentary on why the growth rate is so much higher than it is in the United States. There's less competition, we can afford to be there. And programmatic is a better way for content owners to distribute there, even than in the United States.

Got it. Thanks, guys.

We'll take our next question from Aaron Kessler, with Raymond James. Please, go ahead.

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

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

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

Yes. I'll just add a few words of color. So I've been looking at this year very closely in terms of the things we we were touching on a few minutes ago, which are what is the productivity per engineer and how are we affected by the network effect. That is a question that I have been closely watching all year long.

And this is one of the things that I am just so optimistic about, is that because I believe we are so productive and there are so many opportunities in television and mobile and those growth rates that we highlighted throughout the call, just make it so easy to make the best, to make the investments. And so that's what we're investing in. So we are doubling down, we are investing. We gave guidance during the road show process, we're giving guidance now. That we do expect EBITDA to dip down, because we are making those investments, those investments are starting now, or have already started I should say.

But let's not lose sight of the fact that we're still in line with mature SAAS companies in terms of the EBITDA margins that we're producing. So when we say we're going to make investments and we're sort of trying to tamper expectations or, you know, give expectations there, we're not talking about going to zero or even anywhere close to it. We're simply talking about lowering them a bit on where we've been. But we certainly don't want people to misinterpret that as where they are, at steady state. That's simply a by-product of us making investments that with the green shoots we're already showing are no-brainers.

All right. A quick follow-up, can you give us any data, client count, how that's progressing, either qualitatively or (inaudible)? And also maybe just penetration with existing clients as well? Thanks.

Yes. So we haven't -- we've decide to date to not provide the client counts on a quarter-by-quarter basis. Frankly, we're still contemplating on an annual basis. But, at this point I can say we expect to.

So in other words -- The reason why, Aaron, is for the thing that Rob mentioned in the call, which is, we do all of our modeling off of cohort analysis. And particularly the potential of each individual cohort, so that we're looking at them together, because we encourage our account managers and salespeople and traders to look at their, sort of, book of business as AUM, they're placing bets together. And we don't want them to be overly focused on client accounts and getting a certain amount of every client. We don't think about it that way. And so we just don't want to lead anybody down the wrong path, particularly as it relates to them creating models. So but we do want to show you that we're growing that. But it's sort of a double edged sword. So that's the thing that we're struggling with.

Got it. Thanks a lot.

You bet.

Our next question comes from Kerry Rice, with Needham & Co. Your line is open.

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

Awesome. I appreciate you asking both of those questions. I was hoping that we got a chance to talk about both of them. Thank you. I'm not sure if this one is applicable to Rob, but I'll take the first stab at Spotify. And then I'll come back to mobile. So, first, as it relates to Spotify. Essentially, they have a challenge which is they want to make certain that they protect their customer experience. And every publisher, every content owner has that challenge. But, for instance, in the digital audio space and particularly because they have done such an amazing job of growing, that they want to protect that experience. So the way that the process was run, they said, okay, we want to get into programmatic space, because we recognize the benefits of distribution in that way.

So they went to the agencies and they asked them, hey, if we were to use -- if we were to partner with a couple DSPs, which we use, and what they heard over and over again was please talk to The Trade Desk. And so we have been working very closely with them to make certain that they share the right amount of data and the insight in the way that the auction is run and the information that they pass over to the auction, gives us enough insight, so that we can give them an ad tailored for that person, so that they have a better experience. So often that work is just done by us connecting to an SSP. And there's no dialogue with the content owner.

But in this case, we've been working so closely with Spotify, to just make certain that it's successful, that do I think that's a commentary on why it's been so successful and why we're so excited by that 9,090%. I'm not sure in subsequent calls I'll get to use the number 9,090%. I'm so excited by that. And then, I'll touch on T-Mobile and then, Rob, if there's anything you want to add. So, of course the two mobile acquisitions was announced just today. So it's early for me to provide any real commentary. And things could change based on what I'm going to say. But I'm happy to give my sort of visceral responses. So as you know, we're an omnichannel platform and we believe that the winners in the DSP race have to be omnichannel, (inaudible) just focus on TV and video. So it makes sense that they would join Adobe, who is more likely to be omnichannel.

One thing that I think is really unique, though, is that Adobe, at least the way I understand it, has predominantly been a managed service offering, and not a sell-service platform. And that has meant that they go direct to advertisers, more than they go to agencies. Two mobile has had a blended business and had some sort of I would say channel conflict, but it will be interesting to see how that resolves once it gets integrated. What that does mean is that Adobe effectively has two bidders. They have the DSP that they've been working on their own, and now they have two. They'll have to pick one, and either way they'll have to integrate.

And as somebody who spent time looking into that a lot, the integration work is not simple. So it really comes down a question of how much will that impact their agility, is the fact that they're coming together and perhaps becoming more than omnichannel offerings, does that benefit outweigh whatever is lost in agility? For now, I would just say that I think the fact that this makes them less likely to service the agencies and digital solutions companies that we tend to focus on, and the fact that they're perhaps less agile than they've been in the past, this represents I think an opening, or an opportunity for us.

Thank you for the insight, Jeff.

You bet.

Fantastic. I know we're at about time.

We have time for a few more questions.

Few more? Okay, great.

All right. Then we'll take our next question from Sean Patel with SIG. Your line is open.

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

You bet. Thanks. So in terms of providing any guidance as to why that growth rate wouldn't condition or will continue, it's really too early for us to guide or change any guidance that we've given on 2017. We're working right now with our clients to plan 2017. We're doing that around the world. But from everything we hear, we think the ad industry as a whole will continue to see dollars shift to programmatic. But after next quarter's results, we'll give more guidance on 2017 and growth rates.

In terms of the size of opportunities in audio, you know, we started with Spotify and we feel like that's just such a luxury as a by-product of our success and our size at this point to be able to partner with one of the best and frankly one of the most game-changing companies in the music industry. And in my lifetime. So we see that as such an honor, but while we've partnered with one of the biggest and most game-changing companies, there are many more to continue to partner with and expand that offering on.

What is currently happening in programmatic is effectively we enable price discovery, right? We make it possible for people to know what they're buying and selling and figure out the right price. Because programmatic can encourage competition and it can make it so that you can get access to demand that you never would have been able to by pounding the phone or pounding the pavement. As a market matures, that can actually help prices go up. And that's good for publishers and because the efficacy is so much higher, it's still beneficial to advertisers.

But when we're competing with a legacy radio distribution model, which is effectively salespeople pounding the pavement, it's so much easier to be more effective. So I think that in terms of the delta between the prices that ads clear at and the value that they create for advertisers, some of the most delta or some of the biggest delta, or the biggest value that we can help customers find is in audio. So it was really exciting for us to be showing ads in the political -- the election races, audio ads playing on phones while people are standing in line to vote.

That's sort of an application and customization and targeting and user experience. Is just so much beyond what old school radio can provide. And because it's early and there isn't competition, other than sort of the legacy distribution models, it means there's real value there for our customers. So I expect that to continue and for us to continue to see more and more of our customers embrace digital audio.

Thank you. Our last question today comes from Youssef Squali, with Cantor Fitzgerald. Please, go ahead.

Thank you very much, guys. Congratulations on a successful IPO and successful quarter out of the gate. Let me actually take the last question and maybe flip it on its head. Jeff, as just trying to figure out, what are the gaining factors to use? The growth, X, the tough comp. So clearly, nobody can keep growing at 100% year in and year out. But if you strip those out, and you look at other potential, you know, head winds to your top-line growth, can you just help us understand what those would be? And then maybe quick question for Paul. And this is more of a long-term kind of three to five-year type of question, not a two-three quarters out, as you work towards the 40% plus goal for EBITDA margin that I think you guys talked about during the IPO, can you just talk to us about where you see the most margin leverage sooner rather than later, as the model kind of evolves? Thanks.

You bet. So I'll talk about potential head winds and then Paul, you can take the second half of the question. So I'll just highlight two of the head winds that I think about most. And I shouldn't call them absolute head winds. They're not. It really is a question of where are the risks. The risks of potential head winds. The first is in execution risk. So I think this is a case where programmatic is so much more effective then the legacy ways of transacting in advertising, and because of the increasing price of content creation and the increasing cost of ads, the need to use data and move to programmatic is inevitable. The industry is going to do it.

Whether The Trade Desk does it or somebody else does it, it's going to happen. Then it just comes down to execution risks. Can we manage our business in a way that we just don't get in our own way. That's the thing that I spend the most amount of time making sure that we, you know, don't screw it up. But the second sort of risk, if you will, I would just say is adoption in bigger companies. So what -- you know, programmatic just like so many things, where there's tons of innovation, really started with small companies, like ours was seven years ago.

And a whole bunch of smaller companies proved it and then big companies get in the space. And because this is the future, companies like AT&T or Time Warner or AOL much, much bigger companies than frankly started the programmatic race. The question is can they execute? Can they move things over quickly enough? Are television advertisers and content owners going to embrace it or resist it, because it does represent change. Like the timing question of how quickly they'll embrace it can represent head winds. But long-term there is no question, in my mind at least, that they'll have to embrace programmatic. To the second part of the question, Paul, I'll turn it to you.

Yes, sure. So I think your question is about the 40% EBITDA margins, looking out three to five years. And really I've got a few comments to shed some light on that. I guess the first thing to keep in mind is because we're an MSA based model and our existing customers are spending more and more every year, we aren't out there hitting the pavement to get (inaudible) signed up. And we don't need to add to our infrastructure at the same rate as revenues. So the gap between revenue and operating governments, that gap increases over time. And our team ends up managing more on a revenue per head basis.

So the operating leverage really comes naturally and there really isn't anything specific that we need to do in order to get to that 40% EBITDA margin. On top of that, there are some incremental benefits of scale as our tech costs go down, as our win rate goes up. So when you put those two things together, the path to 40% is pretty clear. The only question is because we're only 2% down how many years are we going to be invested at these rates before we end up north of 40%. Okay?

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

Thank you, everyone. See you next quarter.