The Trade Desk, Inc. — Q2 2021 Form 10-Q
Business context and reporting period
Quarter and six months ended June 30, 2021. The Trade Desk operates a self-service, cloud-based platform for buying and optimizing digital advertising. Revenue is reported net of advertising inventory, third-party data, and other supplier costs; gross billings and related receivables and payables are therefore much larger than reported revenue. The filing gives unaudited interim results. A ten-for-one stock split took effect June 16, 2021; share and per-share amounts were adjusted retroactively.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $280.0M | $139.4M | $499.8M | $300.0M |
| Operating income (loss) | $61.9M | $(15.8)M | $69.7M | $(5.0)M |
| Net income | $47.7M | $25.1M | $70.3M | $49.2M |
| Diluted EPS | $0.10 | $0.05 | $0.14 | $0.10 |
| Operating margin | 22% | (11)% | 14% | (2)% |
| Net margin | 17% | 18% | 14% | 15% |
| Cash from operations | — | $85.4M | $149.1M |
Q2 revenue increased 101% year over year; first-half revenue increased 67%. Management attributed growth primarily to higher platform spend by existing clients, including more campaigns per client, and comparison with advertising-spend reductions during the early COVID-19 period in 2020. Q2 operating results turned profitable. Net income grew more slowly than revenue, and the prior-year tax benefit makes year-over-year net margin comparisons less straightforward.
Operating expenses were $218.0M in Q2, up from $155.1M, and $430.0M for the first half, up from $305.0M. First-half stock-based compensation was $97.6M versus $46.9M a year earlier. No separate gross profit or gross margin is presented in the filing.
At June 30, cash and cash equivalents were $476.9M, short-term investments $228.2M, and working capital $1,018.7M. Cash and short-term investments totaled $705.1M. Management said existing cash and operating cash flows should meet working-capital needs for at least 12 months.
First-half operating cash flow declined to $85.4M from $149.1M. The company cited working-capital movements, notably a $133.5M decrease in accounts payable, partly offset by a $49.8M decrease in receivables, with payment timing to suppliers and seasonal client receipts affecting cash flows. Accounts payable was $1,222.2M and accounts receivable $1,527.7M at quarter end.
The company had no borrowings on its new $450M revolving credit facility; $443.0M was available after letters of credit. The facility matures June 15, 2026, is secured by substantially all company assets, and includes covenants, including a maximum funded-debt-to-EBITDA ratio of 3.50:1. The company reported compliance with all covenants. Lease liabilities totaled about $292.6M, current and non-current combined.
Material changes versus comparable periods
- Revenue more than doubled in Q2 and rose 67% for the first half, while operating income moved from losses to profits in both comparisons.
- Operating expenses increased substantially in dollars as the company added personnel and invested in facilities, hosting, product development, sales, and corporate infrastructure. As a share of revenue, operating expenses fell to 78% in Q2 from 111%, and to 86% for the first half from 102%.
- First-half operating cash flow was lower despite higher net income, primarily reflecting working-capital changes and supplier payment timing.
- First-half 2020 income taxes included substantial stock-award tax benefits and a CARES Act NOL carryback benefit. For the first half of 2021, the company recorded a $0.7M income tax benefit; Q2 2021 had a $13.9M tax provision.
- A new credit facility replaced the prior facility in June 2021. No debt was outstanding at quarter end.
Outlook, commentary, risks, and unusual items
- No quantified revenue or earnings guidance is provided. Management expects operating expenses to increase in absolute dollars as it invests in platform operations, technology and development, sales and marketing, international expansion, and infrastructure. It expects these investments to support long-term growth but may weigh on near-term profitability.
- Management identified programmatic advertising adoption, expansion within existing clients, international growth, and development of CTV, video, audio, native, and data capabilities as opportunities. It cautioned that COVID-19’s effects on advertising demand, client payments, and forecasting remained uncertain.
- Key risks include client spending reductions or loss of agency relationships; competition and uncertain programmatic-market growth; the timing mismatch between client collections and supplier payments; seasonality; privacy and data-protection regulation; reduced access to identifiers such as cookies and mobile ad IDs; platform reliability and cybersecurity; and international regulatory and currency exposure.
- On June 28, 2021, a Delaware class-action suit was filed alleging fiduciary-duty breaches relating to amendments approved at the December 2020 special stockholder meeting. The plaintiff seeks rescission and monetary damages. The company says the claims are without merit and intends to defend them; litigation outcomes are uncertain.
- In July 2021, the company acquired a technology company for a preliminary GAAP purchase price of $18.5M, subject to final adjustments; acquired assets primarily included technology and goodwill.
- The UK enacted a corporate tax-rate increase from 19% to 25%; the resulting $76.4M increase in UK deferred tax assets was fully offset by a valuation allowance. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether elevated revenue growth continues after the COVID-affected 2020 comparison period, and how client spend and campaign activity evolve.
- Whether operating leverage persists as expenses, particularly stock-based compensation and personnel costs, rise.
- Cash conversion and working-capital trends, including the timing of supplier payments versus client collections and the credit quality of receivables.
- Progress in CTV and other channel expansion, international markets, and adaptation to privacy rules and changes in identifiers and tracking technology.
- Availability and covenant terms of the secured credit facility, the outcome of the Delaware litigation, and final accounting for the July acquisition.