Trade Desk's (TTD) CEO Jeff Green on Q4 2016 Results - Earnings Call Transcript

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The Trade Desk, Inc. (NASDAQ:TTD) Q4 2016 Earnings Conference Call February 16, 2017 5:00 PM ET


Chris Toth - IR

Jeff Green - CEO

Paul Ross - CFO

Rob Perdue - COO


Youssef Squali - Cantor Fitzgerald

Kerry Rice - Needham & Company

Aaron Kessler - Raymond James


It's my pleasure to turn the floor over to your host, Chris Toth of Investor Relations. Sir the floor is yours.

Chris Toth

Hello and good afternoon. Welcome to The Trade Desk Fourth Quarter and Full Year 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 at 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 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.

I will now turn the call over to founder and CEO, Jeff Green, Jeff?

Jeff Green

Thanks, Chris, and good afternoon and thanks to everyone joining us today on. 2016 was a massive year for The Trade Desk. We surpassed $1 billion in total spend resulting in record revenue of $203 million, an increase of 78% compared with a year ago. In 2016, according to PwC, digital advertising grew by about 14%, while programmatic according to IAB grew 19%. We grew about 4 times that, while producing over 30% adjusted EBITDA margins. 2016 was also the year that our omni-channel offering became more mobile and more video focused than display and we have significant momentum heading into 2017.

I recently spent time with a CEO of an important agency to us. It was amazing to hear them say point blank right in front of one of their largest clients, one of the biggest consumer brands in the world, that The Trade Desk is the best demand side platform in the market today and is easier to work with than any partner they’ve ever had in digital. That was quite an amazing and humbling endorsement and it really illustrates what we are trying to achieve as a Company.

I was just as excited when a much smaller and more nascent technology company came to our corporate headquarters in Ventura California just a few weeks ago. The CEO explained that he is trying make programmatic easier for the little guy. His mission is to make it so SMB advertisers can buy the rest of the internet the same way they buy Facebook. He was so excited to explain that his company is growing 60% every month. He’s adding hundreds of advertisers every month, but he made it clear his business couldn’t exist without The Trade Desk platform and especially the expressive APIs that power his entire business

With those two business and hundreds of others our mission is to change the way all of

advertising is bought, an industry which has now reached $650 billion dollars according to the latest research from IDC. Unlike most technology companies, we are not trying to disrupt an industry. We are trying to enable. In 2016, we powered more DSPs, more data companies, more agencies, more technology companies, and enabled more local aggregators than we have ever before. And while we’re known for powering CPG companies and Auto Makers, and in especially close partnerships with the big agencies, we are also powering more and more well-rounded and diverse group of enablers than we ever have before.

Many of the biggest players in digital advertising and some of the biggest internet destinations claim that their success is the result of them both owning and selling media. We think one of our strongest strategic assets is the objectivity that comes with not owning media. We objectively help buyers look for value and are holistic about their media buying. Today, we are the only purely independent, scaled, omnichannel DSP in the world. Our independence and allegiance to buyers makes it possible to objectively buy media from great companies like CBS, Google, The New York Times and thousands of others.

I am going to use this time that we have today the same that I plan to on most of our future earnings calls, to expand upon our strategy. First, I want to talk about our goals and priorities, in particular gaining share over maximizing profit in the near term. Second, I'll highlight some of the growth opportunities in our mobile and video channel as well as our global expansion. And then third, I'll focus on having the best technology platform for media buyers. And finally, I'll talk about how we maintain a strong business model that can build The Trade Desk into one of the most valuable companies in advertising and ad-tech industry.

First, let’s talk about our goals and priorities. We are in this for the long haul. We started 7 years ago, and we think there are adequate levels of price discovery on about 2% of that $650 billion a subset of digital transactions. It's our view that the other 98% will eventually be transacted digitally with higher levels of price discovery than they are today. Our highest priority is to grab land from the remaining 98%. Winning more than our share of the new dollars coming into programmatic is paramount to our strategy. This is why we will regularly highlight that we’re growing so much faster than the industry. We do not aim to maximize profitability today at the expense of gaining share, but we also realize we are in a very unique and fortunate position where we can rapidly grow while still remaining very profitable.

We are not tempering our growth to keep our EBITDA high. Our growth is not restrained by capital requirements. We control our growth due to our desire to preserve our culture and maintain our customer retention rate. We’re focused on the long-term, which is why we are making significant investments in 2017. This year we expect to keep our EBITDA margin percentages in line with some of the most scaled and most successful SaaS companies in the world while growing faster than most, if not even all of it.

So, let’s discuss our biggest growth opportunities; mobile, video and global. Our clients coordinate programmatic dollars across multiple-channels and thousands of sites, channels, stations for maximum efficiency. And they do so holistically, which is the only way marketers can stay competitive. We think the two most important channels of the future are in mobile and video.

For mobile, there are currently about 3 billion smartphone users worldwide and as a result, nearly all of our customers have moved to some amount of mobile advertising, most were spending nothing with us 3 years ago in mobile. In Q4, all mobile, including in-app mobile video, represented about a third of our business and grew 135% in 2016, while mobile advertising only grew by an estimated 46%, according to Zenith Optimedia. At 3x the growth of the industry, we are gaining share and our customers can reach billions more people than on desktops alone and we expect this trend to continue to grow around the world.

Another encouraging fact, according to Zenith, is that mobile users spend more than 300% more time on their mobile devices than they do on desktops. And in the coming years this gap is expected to increase. This is great news for our growth opportunity in mobile. Our platform is allowing ad buyers the opportunity to significantly increase their mobile engagement. Through our omnichannel offering, we can help brands and agencies measure the efficacy of their media decisions including the cases where TV ads create awareness and the mobile ads facilitates the transaction. Nowhere is the 1-2 punch of video and mobile more pronounced than on Singles’ Day in China.

On November 11, $17.8 billion dollars were transacted in this 24-hour period, 82% of which was on a mobile device. Preceding the day, there is a nationally televised Gala that is something like the Super Bowl and Oscars rolled into one event. Advertisers push offers, coupons, lock-in pricing ahead of the big event to drive awareness and sales, but the bulk of the transactions occur the next day on mobile devices. While display is still an important opportunity and channel for us, mobile is clearly more important to our future.

As connectivity and time on mobile increases, we believe mobile ads will also become higher quality and better integrated into the user experience than they are today. We also think mobile video is one of the most untapped opportunities in all of digital. With all these forces coming together in mobile, we enable unbiased, data-driven decisioning to more users and return a better ROI for our customers not just on one site or one app, but across the entire internet, and perhaps the only thing I’m more bullish about than mobile, is the future of television.

So, let’s talk about TV and video. We think about a few distinct categories in TV and video. There are web videos, which include premium content like Full Episode Players from the major networks. Then there are connected TVs, which include the Roku’s, Hulu’s, Apple TV and Sony Crackles of the world. And there are the efforts to improve the transactions of linear TV, a third category. However, the future of TV is fully addressable over the internet and that is where we are placing our biggest bets, in those first two categories. And here is why.

The traditional TV model built on bundles, networks, set-top boxes, coaxial cables, and audience panels is under a lot of pressure. Netflix, Amazon, YouTube, and DVRs have changed the game and accelerated a market transformation. As consumers cut the cord and move their TV habits to the internet, every major player in television has been formulating and adapting their own strategies to the new reality.

In 2015 we saw major broadcast and media companies start to test new distribution platforms and those tests left everyone underwhelmed. In 2016, they decided they needed to monetize their own assets and we saw large broadcast and media companies either buy sell-side platforms or take action to control their own distribution as exemplified by AT&T Time Warner deal. And now in 2017 we are starting to see this put into practice and this is why the independence of The Trade Desk is so valuable. As broadcast and media companies go to the agencies, which is where nearly all of TV advertising is bought today, and they asked a question, where should I plug into the programmatic dollars?

The Trade Desk will benefit as we already work directly with most agencies, buying TV media and we are the one self-serve platform that can holistically buy TV programmatically without any competing assets. While consumers love things like Netflix, the ad funded channels on connected TV are growing exponentially faster than the no-ad offerings. The future of TV is over the internet, and it is ad funded. As an industry, we have to show fewer ads and we have to make them more relevant. That is why we are so well positioned and optimistic about our future of TV.

We are frequently asked about how quickly traditional linear TV is going to transform into internet driven, fully addressable TV. We think the AT&T acquisition of Time Warner is a bellwether as to how this transition is pacing. When the deal was announced at the end of last year, the CEO of AT&T, Randall Stevenson announced that their aim is to provide a bundle to consumer's favorite channels at significantly less than what is on the market today. Initially they talked about a $35 price tag. He acknowledged the critical ingredient to this working over the next several years is to utilize 5G technologies and use the internet to deliver all of the content. Everything would be on-demand with menus that look more like Netflix than current cable grids. But in order to offer this 100 channels at a lower rate, his plan is to make it up in fully addressable advertising.

He stated that his aim is to have this up and running in 2018. A big $85 billion bet and a fast approaching date make that an important indication of how quickly the media world is moving to addressable digital advertising, which provides a significantly better experience than what today’s coaxial cable providers can offer.

Already, leading connected TV companies like Roku and Hulu are embracing data-driven programmatic advertising with significantly higher CPMs and we believe these are the early adopters. Approximately two-thirds of our customers spent on video in 2016 and our video spend increased by 140 percent year-over year and connected TV grew by 40x between January 2016 and December of 2016. Because of the sheer size of the market, this has the opportunity to move the needle unlike any of our other channels. We are the only scaled independent buyer of media in the video market without the conflicts of interest like competitors with large TV and video assets. The activity and enthusiasm, plus the ever-increasing flow of spend we are seeing make me very excited about the future of TV and video. Our objectivity and independence matter in every channel, but it is more strategically valuable to working in TVs than any other channel.

Next is global. When we talked about global we are talking about getting Europe to adopt programmatic, convert their existing advertising to more effective ways of transacting. However, the biggest opportunities in the world are in Asia. The same transitions are happening in Asia as are in Europe, but we predict adoption will be faster since GDP growth is faster there than anywhere else in the world. Today, Asia is nearly one-third of the total global ad spend and the region is expected to see the fastest programmatic growth in the coming years. eMarketer estimated that China grew programmatic 70% in 2016 compared to 19% in the United States. In our southeast Asia business, according to Magna Global, countries such as Indonesia and Vietnam are expected to grow programmatic ad spend 6x and 8x where it is today.

We have had our offices in Japan, Korea and Hong Kong, and Singapore for years. Last year we announced that in the first half of this year we would open offices in other spots in the world. We are pleased to announce that In Q4 we opened our Jakarta, Indonesia office and so far in Q1 we have already opened our Paris office in France and our Madrid office in Spain. In 2016, our international markets represented about 10% of total spend, but collectively grew about two times faster than the US. Mobile, mobile video, audio and native are significant drivers of revenue growth outside the US. We are extremely bullish on growth in Asia and we believe we are the first in the region with product specifically for each market, and deep relationships with many of the large global agencies with a presence in Asia.

Our independence is proving to be just as valuable in international markets. We are pleased to share with you today that we have recently entered two large and meaningful inventory partnerships with two international companies, Ambient in Indonesia and Baidu in China. We are excited to be one of the few advertising technology companies in the world to partner with both Baidu and Google. We expect to announce other big partnerships like this one throughout the year.

While the move to programmatic in the U.S. has been quick, the industry still struggles with channel conflict. We don’t see this happening in the international markets. Because there aren’t large established sales teams and channels for advertising like in the U.S., we are seeing customers like American Express go all in for programmatic in places like Asia. I believe International markets will play a much bigger role in our business in 2017 than they ever have before. We are seeing this with rapidly growing content providers like Spotify, which has figured out that price plus ad funded revenue stream is the way to go. This represents a tremendous opportunity for us in our Asia growth curve and we are very excited to work with these early adopters.

Now I’d like to speak a little bit about our platform. We are at the beginning of a massive change for our business and the state of the industry. In December, 2014 we crossed the threshold of evaluating up to 1 million ad impressions per second, or QPS aka queries per second. Last quarter, we saw a peak of 5.7 million QPS. Programmatic did not grow over 500% in two years. That increase in auctions is caused because of the advent of header bidding. Header bidding is a term used to describe a technical implementation which simply creates competition and enables publishers to run multiple auctions for the same impression. Essentially publishers figured out that header bidding or this running multiple auctions for the same impressions was good for them. They can make more money.

Advertisers now have to be more careful than ever about which ads they buy, even which auction they buy them in. The value equation has changed. We evaluate and analyze over 400 billion plus ad opportunities every day in real-time and we help our customers carefully decide which ads are best for them. The barrier to entry for the competition goes up when more ad opportunities come into the digital transaction world because costs are incurred whenever you look at an ad opportunity and will make money only when you win. In 2017 we project QPS could increase to upwards of 600 billion ad opportunities every day. This makes the race to profitability even farther away for anyone that’s not growing faster than the industry.

In Q4 we grew revenue 70% off of a much higher revenue base while the industry only grew at roughly 19 percent and our GAAP profitability grew 81% year-over-year. The way the industry is shaping out, this provides us with a massive opportunity, but to continue to capture the opportunity we need to build the best user experiences, we need to improve our platform, and continually develop and release innovate product to keep The Trade Desk far ahead of our competition.

In 2016 our engineering team nearly doubled in size and in 2017 we plan to continue this growth and hire more engineers than any previous year while ensuring we operate with maximum efficiency. Internally, we’re calling 2017 the year of development. This year, we will lead with product and product marketing, and we plan to roll out a brand-new user experience for our customers with a focus on work flow efficiency during the year. Our goal is to give people time back so they can optimize and better leverage our platform.

Finally, I want to switch gears and talk a bit about how we built a strong business model. As I have stated before, we don’t believe that growth has to come at the expense of profitability. We expect to do both and have since 2012 and we just reported record profitability for the most recent quarter and year. In 2016, our financial performance was more than we hoped for. Even with our pedal-to-metal aggressive investments in mobile, video and global growth as well as the investments to go public, we kept adjusted EBITDA margin at 32% and increased adjusted EBITDA dollars to 65 million, an increase of 66% over the prior year.

In addition, free cash flow for the year was also positive which marks a first for The Trade Desk. This is a testament to the value we provide to our customers and the leverage in our model. We continue to set a high bar. The industry is continuing to see ad dollars shift to programmatic and our customers are expecting to spend significantly more with us than they did in 2016. For 2017, we expect gross spend on our platform to be over $1.45 billion and revenue to be about $270 million.

In the year ahead, we view the aggressive investments we are making in high growth areas such as mobile, video and globally as critical to grabbing share and deepening our engagement and strategic importance with our customers. This will cause our expenses to grow at a faster rate in 2017 and as a result we see our adjusted EBITDA margin at about 26%. We are not aiming to maximize profit this year, but we believe we are doing the best thing for the growth of our business and ultimately profitability over the long term.

Now I am going to turn the call over to Rob to discuss our quarter in more detail.

Rob Perdue

Thanks, Jeff. And good afternoon everyone. Our business continued its strong trajectory in the fourth quarter and we ended 2016 with strong momentum. Total fourth quarter revenue increased 70% year-over-year, led by our mobile in-app channel which grew by over 400% on a year-over-year basis. Our focus in Q4 was to continue to improve our scale and deliver results for advertisers in our seasonally strongest quarter. We delivered on those goals and one of the best indicators of this came during the holiday season where we generated significantly more business from everyone from large consumer product brands to small businesses, all of our customer groups used The Trade Desk platform as a core part of their holiday advertising through their agencies. One of the biggest highlights of the quarter was the increasing importance in mobile and video as Jeff referred to earlier.

One example of this shift is, one of our customers which is a connected TV application customer that through their agency spent $5 million on our platform in Q4, 96% of which was either mobile or video. We also had an API customer spend over $1.5 million in the fourth quarter by aggregating spend over 400 SMB advertisers and 56% of that spend was on mobile. More and more advertisers of all sizes and across industries are shifting significant spend into video and mobile

Now, as I described last quarter, from an operational perspective we really have three core priorities. Number one and that is to be our customer's independent trusted advisor, number two focused on growing our Omni channel presence and number three continuing to grow our international foot print. Starting with the first item, our goal is to be our customer's trusted advisor. I want to emphasize that The Trade Desk is the only scaled, self-service and dedicated buy-side platform in our industry without any conflicts of interest.

In 2016, we focused our hiring efforts in the first half of the year, so that each employee was fully trained and ready to advise and contribute to our customer's success during the higher-volume second half of the year. Our efforts paid off, as we exited the year with 566 active customers, a continued customer retention rate of over 95% and an overall cohort growth of 71%. To help achieve these goals, we ended the year with 467 employees worldwide with the vast majority of them customer facing.

Our dedicated sales, account management and trading teams worked side-by-side with our customers to maximize the value they derive from our platform as they log in every day. As a result, our annualized revenue per employee totaled $435,000 for the full year 2016, which continues to stand out amongst other SaaS and ad-tech industry peers. Annualized revenue per employee is a key metric that shows how our business model was designed to scale efficiently and that we continue to execute strongly.

Next, I want to focus on our commitment to growing our omni-channel presence, which greatly helps media buyers become more holistic in how they buy advertising. In 2015, display was nearly 60% of the total spend on our platform, but as we have developed more robust offerings across mobile, video, native and audio channels display is now less than 50% of our total spend. The strong growth we have seen in areas such as mobile and video have enabled 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 and it's making a real difference for advertisers and agencies. Cross-device targeting is growing rapidly and has seen an almost 200% increase in the second half of the year when we compare that to the first half of 2016.

As an example, last year a large technology company through their agency used cross device targeting as a way to increase retargeting scale and find the same users across multiple browsers and devices. As a result of using cross-device targeting on this campaign, the company saw a 63% increase in subscription conversions, which greatly increased their ad spend ROI.

Our video growth which includes full episode players, connected TVs, set top boxes and web video in total grew by 140 percent over the prior year. Connected TV while still in its infancy, grew well over 100% in Q4 versus Q3, as advertisers realize the opportunity to utilize data-driven decisioning to target cord-cutters on early programmatic video adopters like Roku, Apple TV and Playstation. Given that TV budgets are about half of the global advertising pie, and this is only getting started, we continue to view this as one of the most promising areas of growth for our business.

Also in the fourth quarter, we launched several more native inventory suppliers on our platform. Our team spent significant time training media buyers at agencies earlier in the year on how to incorporate native ad units into their ad campaign strategies and as a result we saw over 700% growth in native spend in Q4 as compared to Q3.

Digital audio, that also remained one of our fast-growing channels. It's still the early stages of audio, but adoption is growing more rapidly at this stage than most of the channels we’ve introduced in the past. We are currently playing audio ads in more than 100 countries around the world, in large part due to Spotify at this stage, but we are also adding new audio partners such as Triton and AdsWizz in the coming year. One of the more interesting stories of the November election in the U.S., is that while one cannot bring signs and solicit voters near the polls, we were serving ads to Spotify users while they were in line to vote, illustrating the power of programmatic and cross-device targeting.

The third priority we are focused on is widening our geographic footprint to make sure we serve our customers locally in the markets that are important to them. In every quarter of 2016, our International spend growth percentage has outpaced that of the U.S., and exiting the year our International business amounted to about 12% of our total billings. When you think about places like Japan, which is the third-largest media market in the world, and where we’ve been on the ground for over two years now, that’s a market that has only about 5% programmatic adoption to date. There is just really a massive amount of opportunity for growth in Japan.

And then there’s Indonesia, where we just opened an office in Jakarta in Q4. Indonesia which is the fifth-largest country in the world by population, has the fastest growing middle class, a very concentrated set of publishers all of these characteristics make it very ripe for programmatic adoption to happen quickly. Those are just two examples of many international markets of size and scale and that we think have large potential going forward and will continue to drive our international growth in 2017.

Overall, we continue to make real progress advancing our strategy and achieving our operational goals. Our revenue and key metrics are growing nicely, and as we look ahead to 2017, we’re very confident in the direction of our business.

Now I am going to turn the call over to Paul to discuss our financials.

Paul Ross

Thanks, Rob, and good afternoon everyone. We are all really pleased with our Q4 performance against our key financial metrics, growing revenue 70% year over year, adjusted EBITDA 53% year over year and GAAP Net Income 81% year over year all while investing aggressively in areas critical to our future growth, and positioning the Company to maximize long-term financial returns.

We ended the year with over $1 billion in spend on our platform from approximately $550 million a year ago. The increase in spend was driven by video and mobile video which each grew 111% and 300% respectively. Even display, which is now less than 50% of our total business grew 57% for the year, three times the estimated rate of industry growth.

Revenue for the fourth quarter was $72 million, as previously mentioned, up 70% year-over-year. This growth reflects both expansion of our share of spend by our existing customers and the addition of new customers. Approximately 87% of our fourth quarter gross spend came from existing customers and we define existing customers as those that have been with us for more than one year

On a yearly basis, revenue for the 2016 fiscal year was $203 million, up 78% year-over-year, with 91% of our year-to-date gross spend coming from existing customers. Our operating expenses increased in parallel with the growth of our business to $48 million in Q4 of 2016 from $25 million during the same period in 2015. The increase in operating expenses was primarily due to our increased investments in personnel and stock based compensation and our newer offices.

Lastly, we recorded $12.7 million of income tax expense associated with our taxable income. Our effective tax rate in 2016 was 53%, primarily due to the non-deductibility of warrant expense and the non-deductibility of stock compensation expense, both of which are non-cash.

Absent any meaningful tax reform in Washington, we now expect that our tax rate will remain elevated throughout 2017. This is due to two factors, the first is the non-deductibility of stock compensation expense which is increasing due to the IPO and of course our higher share price. The second is due to our international structure, where our international entities may still be operating in a loss position, but we don’t get the deductibility of those losses in the U.S. which of course has the impact of making our effective tax rate appear high on the face of our income statement. Should the new administration and Congress pass any corporate tax reform, the Trade Desk would be a huge beneficiary as we generate most of our profitability in the U.S. and have no NOLs, and therefore pay corporate income taxes at the full statutory rates.

One item I’m often asked about is stock compensation expense. During Q4, Stock based compensation was $4 million, an increase from prior quarters primarily as a result of the Company’s new employee stock purchase plan. We’re expecting to keep stock compensation expense to mid-single digits as a percentage of revenue and have budgeted about $13 million for 2017.

GAAP Net Income was $10.3 million for the fourth quarter of 2016, or $0.24 per fully-diluted share. For the year, GAAP net income was $20.5 million an increase of 29% compared to 2015. Our adjusted earnings per share was $0.33 for the fourth quarter compared with $0.28 in the prior year. For the year, our adjusted earnings per share was $0.89, up 46% compared with the prior year.

We use adjusted EBITDA as a core metric for our business. We calculate our Adjusted EBITDA by excluding stock compensation expense and in the case of 2016 also the non-cash warrant expense. Adjusted EBITDA was $28.6 million with a corresponding margin of 39% of revenue during Q4, as compared to adjusted EBITDA of $18.7 million or 44% of revenue during the same time last year. The increase reflects growth of our top line and of course our operating leverage, offset by our increasing investments in product, people, and global expansion.

For the year, our adjusted EBITDA was $65 million or 32% of revenue in 2016. Adjusted EBITDA increased 67% from $39 million a year ago, reflecting the leverage in our model and of course offset by the investments we are making in our people and technology in the second half of the year.

Net cash provided by operating activities was $75 million for 2016, compared to net cash used in operating activities of $37 million for 2015. This represents a $112 million positive swing in our working capital situation as we have scaled significantly. During the quarter we paid down $25 million in debt and closed the year with $133 million in cash. We also have an additional $95 million available on our revolver. Our operating cash flow in Q4 exceeded our internal projections and was the result of initiatives to better align our DSOs and DPOs, as well as the favorable timing of collections which were much greater in December than we anticipated.

Our DSOs for FY'16 were 105 days, an increase of 12 days from the same period a year ago. Our DPOs for FY'16 however increased by 22 days to 84 days from the prior year, thereby narrowing the gap between DSOs and DPOs. While cash flow from operations can fluctuate meaningfully from quarter-to-quarter due to seasonality and timing, our net cash position of 108 million and revolver are more than sufficient to manage the ups and downs.

Looking ahead to 2017, we expect full year revenue to be $270 million on total gross spend of at least $1.45 billion, and Adjusted EBITDA to be $72 million or a little bit above 26%. For Q1, of 2017 which of course is seasonally the slowest in our industry, we are expecting revenue of $43 million, and an Adjusted EBITDA of breakeven plus or minus $2 million, depending on the timing of investments in our personnel, technology and new offices, such as in Shanghai, Paris and Madrid.

With that, I will hand it back to Jeff for any final comments and of course Q&A.

Jeff Green

Thanks Paul. Before we take your questions, I want to provide a few highlights on the news we issued concurrent with our earnings release today. Today we filed a registration statement for a follow-on offering. I want to stress that this offering is 100% secondary with zero primary shares being offered and therefore zero dilution to shareholders. The offering allows us to provide more liquidity for early investors and employees an opportunity to diversify a small amount of their investment in the Company. We also expected to increase our float and therefore reduce the volatility in the stock.

In 2016, connected TV ads grew by 40x for us this past year. Mobile and video are now the majority of our revenue and growing faster than the rest of our business. Our international growth outplaced the U.S. by more than 2x in 2016. And finally, one of our strongest strategic assets is the independence and objectivity that comes with not owning media and it significantly differentiates us from the competition. This is opening doors for us around the world and notably helped us partner with Baidu which has being implemented and rolled out shortly.

We enter 2017 with the wind at our backs and with fewer competitors. We continue to surpass our own expectations and are extremely pleased with our results during the quarter and for all of 2016. We have executed well and we're hitting on all cylinders as we enter 2017.

So with that, we look forward to your questions. Operator, shall we begin?

Question-and-Answer Session


Thank you. The floor is now open for questions. [Operator Instructions].

Chris Toth

Let's take the first question Mike.


Okay our first question comes from Sean Patel [ph]. Please speak your question.

Unidentified Analyst

Could you talk a little bit about how you arrived at the gross spending revenue guidance for the year? It looks like you're implying growth around or even less than 2x the market after going, much faster in the past few years. It certainly below of our numbers, but aside from that can you just talk about, kind of the soft process you use to get to the guide and I have one more follow up.

Jeff Green

We’ve guided little bit conservatively, historically simple because so many things have done right for us, 2016 was an amazing year in part because, we had the Olympics in 2016, we had an election in 2016 and then election sort of pushed some of the retail dollars into this -- to the later part of the year, which is what made our Q4 really strong. But we're also were able to make a bunch of investment for the long term, so we know that right down 2017, we're making investment, some of which will pay until 2018, and beyond. And so with all of those things together and trying to [technical difficulty] Wall Street, we know what we need to guide concretively.

I know we threw out a lot of numbers throughout the reports that we just gave, but couple that I'll just highlight. We grew Connected TV by 40x, of all the numbers we talked about in last 30 minutes that’s the one that I'm most excited about, between January 2016 and December 2016 for the X growth, in what I think is the most promising channel in media today. We also are able to make investments in Q1 that we've previously guided that we would open offices in the first half of the year and the fact that we were able to Jakarta in at the end of last year, meaning open the office to a significant revenue there, as well as Madrid and Spain, so far this year we're super excited about the impact of that have in the long-term, so you put all that together and we are extremely bullish on and kind of bold in predicting that we'll continue to grow at least double the industry.

Unidentified Analyst

Great, and then just a follow-up on the spending. When you look at the implied spending off backs for this year how much of that do you consider to be investment and can you just talk about little more about just what specific areas you consider investment this year?

Jeff Green

First, it's kind of hard to distinguish because growth is business as usual for our business. And if you are not capturing share and particularly in the new channels you're going to be shrinking not growing. So it’s hard to actually think of it as like what is your base and what is to grow, it's all the same thing to us. And because we've never known a time where we didn’t have 95% plus client retention it's always investments in retaining and growing the clients that we are already have. That's sort of first and foremost.

But we -- by hiring more engineer in 2017 than we ever have before, those are certainly investing for the future. The international I think it's fair to say that we invest double what they contribute in all of our international markets we're using round numbers. So all of that is investments for the future. Inside of televisions we're certainly putting more engineering muscle behind creating a foundation, but if you were to measure it on its own, it's probably not profitable in 2017. But the land grab that that represents is obviously massive.

Chris Toth

Thanks Sean. Next question operator?


The next question comes from Brian Fitzgerald. Please state your question.

Unidentified Analyst

This is John on for Brian, first off congrats on the quarter. Just a follow-up to that the previous question just once you've made these investments in international and headcounts and on the R&D side also, can you talk to the kind of leveraging the model of how that kind flows thorough maybe 2018 and beyond and then I have a quick follow-up. Thanks.

Jeff Green

So every market is different, so some markets like Singapore have been pretty linear where from employee number six on we're profitable. And then our other markets like Germany and Japan where we invest for two to three years before we get that return, and part of that depends on how aggressively we are willing to spend on any individual market and how much confidence we have of the ultimate pay off.

In markets like Canada which we expect to be a good investments area for us in 2017, we'll go all-in and I expect the case of that part to look more like Germany and Japan. And so those will pay beyond 2017, in order to pay for themselves, but the way that we think about it is how certain are we that it's going to return, and then how those opportunity is there if we invest now. And because for instance in China, but we think it’s of the [indiscernible] kind where people are hungry for a global omni-channel non-conflicted solution and so and that is something of a no brainer for us to just make a big investment.

Unidentified Analyst

Great. Thanks guys. And then just quickly on take rate. It looks like in your guidance that it is kind of stepping down a little bit. I know in the past, you have talked about as you expand into digital video and audio that’s kind of expected to happen. So just curious your thoughts on, is that trend kind of playing along the lines with the initial thoughts and any updates there? Thank you.

Jeff Green

You bet. I was hoping somebody would ask this question. For a couple of reason, number one, I just want to reiterate, we don’t use take rate as a core metric of our business. And my hope is that overtime we'll develop a trust with Wall Street that we move to what I think our [technical difficulty] core metrics of our business, particularly the growth of EBITDA and revenue which in our case is net revenue. So the fact that we operated at 32% EBITDA margin for 2016, I think should give people the confident, that the take rate has been a prop before in other cases, meaning for other businesses that have never been profitable take rate becomes a really core metric for their business, because of the profitability.

Now that said, as it relates to take rate. There are a number of things that can create slight adjustments for take rates, one is volume discount, another is, there is differences in channel mix and customer mix. And there are -- I expect in 2017 to be slightly more volume discounts and that's just the by-product of having 95% plus client retention and cohorts that are super strong. So we’re going to give discount to those who spend more and we’ve always done that to incentivize them and on the system.

So I do think that that will have very slight impact on take rate. However, I just want to point to what again are the core message, which are during that time EBITDA and revenue will be growing in a very healthy phase and that’s the thing that we're optimizing for not that proxy percentage.

Unidentified Analyst

Great. Thanks John.

Chris Toth

Operator next question.


Our next question comes from Mike [indiscernible]. Please state your question.

Unidentified Analyst

Okay. I think that’s me, it’s Mark [indiscernible]. Let me just ask two factual questions please. I think you said it, but the percentage of your revenue or gross and gross spend in 2016 that was international. And then commentary over what’s implied in your guidance for this next year, the percentage that comes from international bulk of spend and with revenue? Thank you very much.

Jeff Green

So the first one, I will give rough number. The spent for 2017 in terms of the percentage coming from international market is roughly 10%, comes from international market, which again is meaningfully over investing. So for instance, roughly 20% of our employees are in international markets. But just a commentary on how we’re investing. And because it's serving at roughly down the pace or more than double the pace of the U.S. market we expect that to be something more like 15% in 2017.


Our next question comes from Youssef Squali. Please state your question.

Youssef Squali

Two questions, on the margin longer term how should we think about your ability to hit that 40% plus that you guys talked about at the IPO. Has the increased level of investments that you're talking about for 2017 either making that potentially harder to get to it or does it just push it out, but in the meantime we're getting hopefully higher top line growth? And then can you maybe just parse out the growth in the fourth quarter that 70% is still very impressive between maybe pricing and volume? Thanks.

Jeff Green

So, I'll ask the people in the room to just make sure I answer all those questions. So, what was the 40%? [Multiple Speakers]. Yes, 40% plus, no change in terms of -- 40% into margins. Just again to sort of a check where we're in our journey, we say all the time we're 2% done. So at the state we're at and particularly because of the cost of pitching that header bidding is creating, now it's definitely the period of time where we want to be land grabbing. So, growth in 2017 in some ways is more of a priority than in been in recent years for us.

So, now is the time for us to invest and go get further ahead and that's why we're focusing on engineering, that’s why we're opening so many international offices and lastly we opened one international office this year [indiscernible]. So with that sort of investment we're going to grab land, but it's sort of steady state, we still think we're approaching that 40% EBITDA.

Paul Ross

There is just so much to go, the 2% like we're still in heavy growth mode and over than next several years we'll be continuing to earn towards 40%, and by the way this is -- we view the investments we're making now as somewhat of an insurance policy to make us more like we get to that 40% in the out years.

Jeff Green

What was the other component of the question?

Rob Perdue

Q4 growth pricing versus volume.

Jeff Green

Well yes, the Q4 growth more the result of uptick in volume versus giving prices discounts -- am I getting your -- help me understand your question again?

Youssef Squali

No that's it, that's exactly it. Just trying to understand the dynamics going on in the marketplace, competitively and how are volume and pricing driving the top line relative to prior quarters, if there has been any change, maybe there hasn't been?

Jeff Green

I would say in 2016 we started using a mantra frankly with our clients and with our own team that we haven't in near years past and that, is it is not our goal to be the cheapest platform in the world, it's our goal to be the best. And so, while many years ago we might have tried to underprice others in business, as we tried to ascend the business that we've already won, the way that we do that is in efficacy and in the value that we add, not trying to be the cheapest product. So we spent a lot of time with our customers, pointing to the value that we have, not the price that we offered it at. And because we think we add so much more value, it's really all a byproduct of volume and growth.

So it wasn’t just lowering the price, but if we can do it faster than everybody else, there is no way in could have put up the profitability numbers that we did last year, if we had taken that approach. So I think we were able to thread the needle, which is through an optimal growth, which is our first priority and while remaining as profitable as any independent asset company as of now.


Thank you. Our next question comes from Kerry Rice. Pease take your question.

Kerry Rice

I noticed in the K that you did provide some may be qualitative data on cohorts. Can you talk a little bit, may be more about that, if you can give us any growth rate or any of your key cohorts? And then the second question is, maybe relates to the previous question about volume versus pricing. With the header bidding a being a key trend in the market place, did header bidding raise CPM prices, was that beneficial to you, can you talk a little bit about the impact of header bidding may be in the Q4 and think about it in 2017? Thanks.

Jeff Green

Great, so let me start on the cohort and then if I'm missing anything, Rob will just add to it. I'm really glad somebody ask about the cohort, in part because I think it’s the way a lot of people are thinking about the modeling exercise that our company is, giving the color around to help sort of predict what's going to happen. So just a reminder the 2012 and 2013 cohorts represent the smaller customer. So when we first had started, we met with smaller agencies and smaller shops, that we could sort of tact with and not to make mistake, and prove ourselves and create [indiscernible]. So that we could then go to the buyers in the world. And where we really started to see success on that was in 2014, and then in 2015 became I think much easier for us to win the biggest buyers and particularly the biggest agencies in the world.

Because we think that those businesses are going to continue to do well, I think there is space to be made, that our 2014 and 2015 cohorts will be some of the strongest cohorts for our future going forward. I think it's fair to assume that and model our revenue. In 2016 and this was helped by the IPO. If that's the first time that we started winning on stages and in the spot light instead of just in conference room. So I think it's fair to say that all of our wins up until the IPO came in conference rooms and we have a little bit of wind at out back since then in term of creating more awareness and winning more customers in sort of the middle size and as a result, those have grown a little bit faster than our biggest, but still I don’t know that we'll ever have a cohort as competitive as our 2014 and 2015 cohorts. Did I leave anything out?

Rob Perdue

No, the only other prospective I would call out is, what we talk about during the road show is, remember it's still early right. Still the majority of brand are now spending programmatic in any serious way. So we see a lot of growth from brands shifting more dollars from digital in the programmatic and frankly from non-digital directly in the programmatic. So it's still early days both in terms of the number of clients, if you were to look at all the brands out there who are spending programmatically and then secondly the share of their total advertising spend that's in programmatic. So we think the cohorts have a long way to go, the ones we have today and frankly the cohorts that we signed on in 2016 is the strongest one we've ever signed and we expect a lot of growth to come from them in the future too.

Jeff Green

As it relates to the second half of your question, which is a really complex management question to answer, which is, the effect of header bidding. Because it creates more competition as well as we because we are able to see more of the premium inventories, results of header bidding, it naturally does move prices upward. And so, do we benefit from that versus any of the cost of the additional volume going, so in other words, because we have to look at more add opportunity, because in some cases the same impression is represented in multipole options, and that's often the case now, that does increase our cost to examine each individual impression and then figure out the right answer. Then because the prices also have gone up that one because we've typically operate on a percentage of spend we benefit from the raising prices, but as the process of the volume has gone up and when you put those two things together they roughly offset each other.

So it's hard to say what the net effect was because it's almost zero, but the most important piece is that the value-adds that we provide to our customers has gone up meaningfully, because the water could become a little bit more choppy if you will and so the need for you to examine everything and use data to make sure that you are making the best choices has gone up, and the odds of being successful without being data-driven have gone down, And so all of that looks like good news for us and if you also think that that puts pressure on our competitor, most of which are not profitable because of that dynamic and particularly if you are not growing stocks, as we are, I think there is a strong case to be made that none of them are. Than we separate it from the pack while having very little impacts upon our profitability and expenses.

So overall under our competitive basis that header bidding dynamic benefits us probably as much or more than every other company in advertising in the world.

Kerry Rice

Thank you.


[Operator Instructions] Our next question comes from Aaron Kessler. Please state your question.

Aaron Kessler

First just on the Q1 guide, I believe that implies roughly 40% sequential decline, should we think and I realize there is obviously seasonality in the business, but is there a little more kind of conservatism built in there. And just maybe an update on thus far, what you are seeing through mid-February.

And I think previously you've talked about -- you've touched about 10% of the brands, just where does that statistic stand now? And finally, I think you've mentioned international is up 10% today. What's your thoughts on what the outlook is like in maybe two to three years? Thank you.

Jeff Green

I'll take the first part of the question and I'll ask Rob to speak on the 10% of brand question. So as it relates to the sort of guidance in Q1 -- for Q1. It is definitely fair to say that Q1 is the hardest quarter for us, forecasting guidance. And it’s because they is seasonal nature to advertising, people tend to start the year reconsidering how they allocate budgets. And while we're sort of an install inside of the agencies and technologies providers that we power, that it doesn’t mean that they're not susceptible to that seasonality.

And then when you are coming off of the election year and a little bit from all those things, that maybe 2016 needs forecasting for the year, it’s harder. And particularly when you have such an amazing year like we did. We want to make certain that we provide guidance, that we know that we can hit. So while those people are excited to report that we are growing at at least double the industry, we also recognize that we have a lot of trust that we have to gain on behalf of sort of ad-tech community and we know that has to be reflected in the guidance that we provide.

Rob Perdue

Great. And I'll jump in. In terms of brand adoption of programmatic we touched on briefly earlier, just to reiterate and be more clear on that one. So yes, most of the big agencies that have rosters of advertisers in the hundreds, they’re still sort of double-digits 10%, 20%, 30% of the brands inside many of the agencies, that have adopted programmatic in a serious way. There is another incremental percentage that’s experimenting with small -- very small parts of their advertising budget. So when we look at the penetration within the agencies and then their brands that they aggregate and service, we just see a long runway to go, it’s way less than the majority of brand that are spending in programmatic in any serious way.

So we think in our cohort, as Jeff talk about in ’14, ’15 and ’16 as we signed most of the large global agencies. There is just a ton to runway to go in terms of brand adopting programmatic and then working on creating a platform. And I think the last question you asked is around international growth. And I think Jeff mentioned it perhaps early in call, roughly about 10% by the end of last year and we are over investing, particularly in the key international markets like China and Indonesia. We’ve got really strong positions throughout Southeast Asia with our presence in Singapore. We’ve got in Korea and Japan for three years, we’ve been in Europe for four years. We expect to all of those to continue to grow much faster than the U.S. and therefore take relative share as a percent of our total business. So I think we talked about heading towards a 15%-ish percent by the end of this year.

Aaron Kessler

Got it. I just have one quick follow-up. Election sounded like it was decent -- decent traction with election in Q4. Can you give us a rough sense maybe how much gross spend was in election that you benefited from?

Jeff Green

So directly, it was in the low-single digits. So it wasn’t like some massive amount of our spent. So as we think about the future is not like you should massively downgrade what would happen in 2017 because there aren’t any U.S. elections, there is nothing like that at play. That said, when you combined the average of header bidding, with the increase competition that comes from having the election and most notably, as a consumer certainly, I'm sure everybody in this call, if you were looking closely, notice that there was way less retail advertising prior to the election in November and then there was a little bit of percent making up for the lost time, particularly in inside of TV. So that had an interesting dynamic on prices, that had a bigger impact on our business than just low-single digit percentage of that due to election.

Kerry Rice

Got it. Great. Thank you.

Chris Toth



Thank you. There appear to be no further questions at this time. And this will conclude today’s conference. We thank you for your participation and you may disconnect your lines at this time and have a great day.

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