The Trade Desk, Inc. (NASDAQ: TTD) Q2 2020 Earnings Call Highlights
Jeff Green, CEO
“The global pandemic has changed the way every business in the world operates. For us, The Trade Desk team continues to be resilient, supporting our families, friends, customers and partners. The fact that we have always been so mission driven, with a clear conviction that our greatest asset is our people, has served as a solid foundation that has allowed us to continue to expand our business during these times.
While our revenue growth rate continued to be impacted by the disruptions from the COVID pandemic in the second quarter, we’re starting to get a clearer picture of the role that advertising is playing as markets reopen. We talked last time about how data driven advertising would be on the front foot as that happens. And much as the global financial crisis of 2008 and 2009 caused many advertisers to consider data-driven strategies for the first time, I believe this crisis will cause advertisers to leverage data more aggressively than ever, as they look to make every ad dollar work as hard as possible.
And we started to see this play out through our second quarter and into the start of the third. Since ad spend troughed in mid-April, advertisers have been returning and reactivating campaigns, but most of them with new approaches and new creatives given the environment we’re in.
They realize that as markets reopen, they have a unique opportunity to gain market share. Many paused in mid-to-late March and even early April, but some advertisers in all categories have seen this as an opportunity to gain share. To do that, they’ve had to be more flexible and agile than ever, as markets open in different ways, at different rates, even within the same country. They are under pressure from their CFOs to prove the value of every advertising dollar, forcing them to prioritize advertising that is measurable and comparable. And they are dealing with a consumer base that is rapidly shifting away from traditional, linear TV.
All of this puts data-driven advertising in the front seat. And we saw this reflected in our performance throughout the second quarter. While we ended Q2 with a negative 12.9% year-over-year revenue decline, since April, we saw spend on our platform increase every month and nearly every consecutive week. As advertisers have been more deliberate, ad spend turned positive on a year-over year basis in mid-June. And that trend has continued through the month of July.
On a personal note, I was surprised at how unified the ad industry was in pausing activity starting in mid-March. We took a healthy economy, a healthy industry, and collectively hit the pause button. I’m not sure that sort of synchronized response has ever happened before.
At the same time, I was equally surprised at how unified the early phases of recovery have been so far. Not just that advertisers have returned in a consistent way, with a renewed focus on programmatic. In fact, nearly all of the largest brands have increased their spend on our platform. This includes spend from industries such as CPGs, food and beverage, technology, healthcare, and automotive. Even travel, while still negative year-over-year, has improved significantly off its mid-April lows.
But it’s more than that. It’s about the unified view I’ve heard from the market regarding the direction of the advertising industry. Over the last 4 months I have met with more executives at brands and agencies than ever before in such a short period of time. So today I want to share some of that feedback with you, and in particular, the convergence of three forces that are shaping the world of digital advertising. I think this feedback will shed some light on our strategy and our performance and why we are well positioned for the future.
The first is how the industry is coming to terms with user-generated content. The second is an important inflection point in CTV which is not unrelated to advertisers coming to terms with user-generated content. And lastly, I want to touch on the future of identity, because creating a solution that works for consumers, advertisers and publishers is the only way we’ll be able to create a better Internet.
So perhaps the most important area where I have seen a unified front from advertisers in the last few months is in their approach to user-generated content or UGC. I use the term UGC deliberately, rather than social media platforms or video platforms like YouTube, because in my discussion with advertisers, it’s the nature of the content rather than the platform that’s the problem.
To quote Unilever, “there is much more to be done, especially in the areas of divisiveness and hate speech during this polarized election period in the U.S.” Or Diageo, “We strive to promote inclusion and diversity, including through our marketing programs. We will continue to discuss with media partners how they will deal with unacceptable content.”
Or Starbucks, “we will continue discussions with our media partners and with civil-rights organizations in the effort to stop the spread of hate speech.” Pretty much every major brand has made public statements to the same effect. The statements were all made as they pulled or suspended advertising from the major platforms that are built around UGC.
The issue is not necessarily the platforms themselves. In fact, I think many advertisers believe those platforms are in a very tough spot, and I agree. The content on these platforms reflect the divisiveness in public discourse today, and that divisiveness is only exaggerated as people work through the implications of COVID-19, as social justice issues take center stage, and as we gear up for a major election.
Asking social media platforms to be the arbiter of truth on a range of divisive issues is a really tough ask. In some cases, such as with hate content, it might appear straightforward. But broadly speaking, it requires applying judgements, and when you’re making judgements, you’re always at risk of alienating someone.
It’s an impossible task for UGC platforms to be asked to judge what is truth or what is hate, especially the largest companies, given the amount of content that is posted to their platforms every day. There is simply no way to keep up. But for advertisers, increasingly, it’s a risk they don’t want to take. Brand safety is a critical issue. They don’t want the divisive argument of the day, played out on social media, sponsored by their brand.
And I don’t think this, in and of itself, is the wake-up call that advertisers were waiting for. I think it’s the straw that breaks the camel’s back. Advertisers have long had their doubts about advertising on UGC. But to date, it’s been an easy way to reach an audience at scale. But what these issues have highlighted is that advertisers have very little transparency and control when spending dollars on user generated content. They don’t know exactly what content their ads will show up against, and they don’t know which consumers have interacted with their brand.
By contrast, advertisers increasingly understand that The Trade Desk provides the tools they need to buy only the premium inventory they want to support, and reach only the audiences they value. These conversations have accelerated considerably in the last few months, and we are winning spend from traditional video and social media platforms as a result.
One second quarter example of this was a multi-national food and drink company that, through their global agency, began to think differently about how to allocate their digital ad spend and move it away from user-generated content. In this case, they chose The Trade Desk for two main reasons. One was the ability to apply measurement and offline attribution tools to understand exactly who they were reaching. The second was the tools and breadth of premium inventory on the platform for buying CTV instead of UGC.
Of course, the rapid emergence of CTV as a viable option is key here. For advertisers, access to a growing base of brand-safe, premium content could not contrast more with what is available today in user generated content. Which brings me to my second point. The surge in CTV.
In Q2, despite the impact from COVID, CTV spend grew about 40% year over year. In Q3, we anticipate that the CTV spend growth rate will more than double Q2. We believe the COVID pandemic has permanently accelerated the growth of connected television, changing the TV landscape forever. And no company is better positioned to grab share in CTV than The Trade Desk.
As one leading CMO said to me a recently, and I quote, “I want to move as much budget from social to CTV as possible, as soon as possible.” And that’s not an isolated comment. Advertisers are unified about this. They understand that data-driven advertising is a better place to measure performance and target key audiences.
And now they can bring that approach to their massive TV ad campaigns. And it’s not just their concerns about user generated content that are forcing this. There are two other major forces at work. One is the rapidly increasing inventory of premium CTV content. The other is the consumer shift toward CTV, accelerated by the COVID pandemic.
Let me quickly remind you what we discussed last time on our earnings call. Our research suggested that 11% of U.S. households would cut the cable TV cord by the end of the year. That’s about triple the rate of cord cutting that we’ve come to expect the last few years. That cord cutting rate rises to 18% for the coveted 18-34 year-old demo.
And the number one reason households would keep cable TV? Live sports. 60% of them cited live sports as the primary reason they hang on to cable. And you don’t have to take my word for it. Fast-forward three months. ROKU recently issued its annual survey into TV viewing trends. According to their research, 32% of U.S. households have now cut the cord or never had it, and a further 25% are “shaving” their cable TV costs. 45% of those cord shavers said they expect to fully cut the cord by year end. The number one reason? Cost savings.
In the current environment, many households are looking at their home entertainment costs and their cable TV bill is often the most expensive part of their TV content line-up. But related to that, the number two reason? Access to free streaming TV services. As more broadcasters make their content available through AVOD services, the cost equation for many households is something of a no brainer.
And according to the same survey, even if live sports make a comeback, less than one in five cord cutters said they’d rethink their decision. Because those same sports events are now available over streaming services.
So whatever assumptions you had about the shift toward CTV and how many years it would take you can throw those out. COVID has changed everything. Advertisers can’t ignore these shifts in consumer behavior. And they do not want to.
As I said, their growing concerns about user generated content, which are only exacerbated by recent events, represent the straw breaking the camel’s back. They want to shift to the premium content that CTV now enables. Their consumers are there. In addition, not only has NBC launched its new streaming service Peacock on July 15, but Pluto reported three times the viewing hours in April that it had at the beginning of the year. Tubi reported that their viewing hours were up 100% in April. Vudu reported an increase of 55% in this stay at home environment. Such is the growth in AVOD, that these platforms have recently been acquired by Viacom, Fox and NBCU respectively.
In addition to moving to where viewers are, advertisers also benefit from applying data to their TV campaigns for the first time. For example, after the COVID lockdown started, a large U.S. insurance company wanted to be more data-driven in their TV spend. Their goal was to extend reach while managing frequency. Using a third-party measurement firm through our platform, the results were transformative.
Even though CTV CPMs are roughly 3 times those of linear CPMs, using CTV lowered the cost-per-unique household by over 2.5X. Even more eye opening for the brand, using CTV on our platform, they were able to reduce ad frequency to the consumer by over 80% compared with their previous linear campaigns. In this case, site visits were 2X more efficient when using data-driven CTV versus publisher data. Overall, this resulted in a significant reduction in cost per acquisition.
As I see advertisers question the value of user generated content, and as they make CTV a more important element of their media mix, I also pick up a more unified sense from advertisers that they want to put more pressure on the industry to uphold certain standards. One of the attractions of CTV is that it’s a more competitive market than UGC, with the standards that typically come with competition.
No studio, no channel, no cable company, no MVPD, no one company has the leverage or resources to achieve the market dominance enjoyed by Google in search and Facebook in social. And because we continue to predict video in all its forms will account for about half the trillion-dollar advertising market, we believe that CTV may well be the catalyst that eventually forces all walled gardens to change course. It’s important to remember that in the great scheme of things, the digital advertising industry is relatively young. As with any market that emerges, there comes a time when key participants demand certain market rules. Things like transparency and objectivity.
And that’s what I see happening now. CTV may be the most vivid example, but you can also look at how advertisers are now having to do more with less, how they are demanding better measurement transparency, and more market objectivity. You can even look at various regulatory initiatives within our industry, whether it’s here in the U.S., or in Australia, or Europe. There’s pressure on all fronts within the system to have the advertising market conform to the norms of other mature markets.
And as I speak with advertisers, they put the debate regarding the future of identity in that exact same context. Which is the third point I want to touch on today. We can discuss the specifics of any one identity offering, and we are examining all of them, but at the core of it are two critical questions that advertisers and publishers think about:
How do we explain the value exchange of the Internet and the role of relevant advertising to consumers? And how do we ensure power doesn’t become too concentrated in one place? The moves that Apple announced recently with IDFA represent a step forward. When a consumer logs in to an iOS app, they will be asked to opt-in to tracking in return for personalized ads. That’s a partial step toward explaining the value exchange of the Internet – the understanding that we get to enjoy premium content and experiences in return for relevant advertising.
Google is going through the same process. But the issue is complicated for them by the dominant position they enjoy in digital advertising. If they remove cookies from the Open Internet in Chrome and rely on proprietary logins for the advertising business which makes up almost their entire revenue stream, even if using privacy as a shield – it may be seen as an overreach by regulators.”