Business context and reporting period
The Trade Desk, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. The filing also reports unaudited results for the fourth quarter of 2018. The company operates a self-service, cloud-based platform for buying data-driven digital advertising across display, video, mobile, connected TV (CTV), audio, native and social channels. It generally earns platform fees based on client advertising spend and reports revenue net of supplier costs.
In 2018, approximately 72% of platform gross spend was in mobile, video, audio, native and social. The business is seasonal, with advertising activity typically highest in the fourth quarter and lowest in the first quarter.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages. Annual figures are for the fiscal year; Q4 figures are for the three months ended December 31.
| Metric | FY 2018 | FY 2017 | Q4 2018 | Q4 2017 |
|---|---|---|---|---|
| Revenue | $477.3 | $308.2 | $160.5 | $102.6 |
| Income from operations | $107.3 | $69.4 | $49.0 | $29.3 |
| Operating margin | 22.5% | 22.5% | 30.5% | 28.6% |
| Net income | $88.1 | $50.8 | $39.4 | $16.8 |
| Net margin | 18.5% | 16.5% | 24.6% | 16.4% |
| Diluted EPS | $1.92 | $1.15 | $0.84 | $0.38 |
- For FY 2018, revenue grew 55% and platform gross spend rose 51% to $2.35 billion. Gross billings were $2.29 billion. Existing clients added before 2018 generated approximately 94% of 2018 gross spend; their aggregate spend increased 44%.
- Annual operating expenses rose 55% to $370.0 million. Platform operations expense increased 72%, technology and development 59%, general and administrative 45%, and sales and marketing 42%. Operating margin was broadly unchanged year over year; net margin improved.
- Cash provided by operating activities was $86.6 million, versus $31.2 million in 2017. Investing activities used $25.2 million and financing activities used $10.1 million. Operating cash flow benefited from earnings but was affected by working-capital movements, including a $239.9 million increase in receivables partially offset by a $177.7 million increase in payables.
- At year-end, cash and cash equivalents were $207.2 million, accounts receivable $834.8 million, accounts payable $669.1 million, and working capital $342.5 million. Total liabilities were $723.3 million and stockholders’ equity was $394.6 million.
- The company had no debt outstanding at year-end and reported $143.3 million available under its $150 million revolving credit facility, which matures in May 2022. It was in compliance with facility covenants.
Material changes versus the prior comparable period
- FY 2018 revenue increased $169.1 million, primarily reflecting higher platform spend; net income rose $37.3 million. Q4 revenue increased approximately 56% and Q4 net income approximately 135% versus Q4 2017.
- Operating expenses grew substantially alongside the business. Platform hosting costs and staffing increased to support greater platform use, while technology, sales and administrative teams expanded.
- Operating cash flow increased year over year, but receivables remained large relative to net revenue because the company bills and collects substantial advertising spend while reporting revenue net of supplier costs.
- Debt was reduced from $27.0 million at the end of 2017 to zero at the end of 2018; the company entered a new, larger revolving facility in October 2018.
Outlook, commentary, risks and unusual items
- The filing provides no specific numeric revenue or earnings guidance. Management expects operating expenses to continue increasing significantly as it invests in platform operations, CTV and other product capabilities, sales and marketing, international expansion, and infrastructure. It cautions that these investments may weigh on near-term profitability.
- Management identifies growth opportunities in CTV, digital audio and other omnichannel formats, increased client spend, and international markets, including China. It expects international growth to outpace domestic growth, while noting that success depends on adoption by existing and new clients.
- Revenue and cash flow are exposed to advertising seasonality, economic conditions, competition, shifts in channel mix, and the pace of programmatic advertising adoption. Client MSAs generally do not commit clients to a minimum level of spend and may be terminated on 60 days’ notice.
- Client and receivables concentration is significant. Publicis Media accounted for 20% and Omnicom for 10% of 2018 gross billings; two clients represented 24% and 14% of year-end accounts receivable. Sequential-liability arrangements and the timing gap between supplier payments and client collections can pressure working capital.
- Privacy and data regulation is a material risk. The filing highlights the GDPR, the California Consumer Privacy Act scheduled to take effect in 2020, potential ePrivacy rules, and uncertainty over cross-border data transfers and Brexit. Other key risks include cybersecurity or platform outages, access to quality ad inventory, cookie and device-identifier restrictions, foreign-exchange movements, and dependence on major suppliers and agencies.
- The company disclosed no legal proceedings expected to have a material adverse effect. A previously reported material weakness in information-technology general controls was remediated during 2018; management and the auditor concluded internal control over financial reporting was effective as of year-end.
- Subsequent to year-end, the company invested $50.9 million of existing cash in marketable securities and entered a hosting-services arrangement with a $200 million commitment through April 2024. It also reported $225.0 million of operating lease commitments, including $183.5 million for leases signed in 2018 that it planned to occupy in 2019.
Important facts for investors to verify
- Whether continuing growth in gross spend converts into revenue and profit at sustainable rates, given variable platform fees, discounts and client or channel mix.
- How concentrated billings and receivables are across agency groups and advertisers, and whether collection timing or bad debts worsen as the business scales.
- The cash-flow and margin impact of planned technology, CTV, international and hosting investments, including the new hosting commitment and lease obligations.
- Whether the company can maintain access to quality inventory and adapt its data practices and platform to evolving privacy rules, cookie restrictions and cross-border transfer requirements.
- Whether remediated financial controls remain effective as the platform, organization and reporting systems grow.