The Trade Desk, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. The Trade Desk operates a self-service, omnichannel platform for purchasing and managing data-driven digital advertising. This unaudited report covers the three and nine months ended September 30, 2018; comparisons are with the same 2017 periods. Revenue is reported net of advertising inventory, data, and other supplier costs, and primarily reflects platform fees.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $118.8 million | $79.4 million | $316.8 million | $205.6 million |
| Operating income | $22.3 million | $18.4 million | $58.4 million | $40.0 million |
| Net income | $20.3 million | $10.2 million | $48.7 million | $34.0 million |
| Diluted EPS | $0.44 | $0.23 | $1.07 | $0.77 |
| Operating margin | 19% | 23% | 18% | 19% |
| Net margin | 17% | 13% | 15% | 17% |
- Q3 revenue rose 50%; nine-month revenue rose 54%. Management attributed growth primarily to increased platform spend by existing clients, driven by more campaigns per client.
- Operating expenses increased 58% in Q3 and 56% for the nine months, faster than revenue in Q3. Platform operations costs rose notably with hosting costs and client-support staffing; technology and development and personnel costs also increased.
- For the nine months, cash from operations was $38.5 million, versus $7.0 million in 2017. Investing used $14.7 million, including $10.4 million for property and equipment and $4.3 million for capitalized software. Financing used $13.4 million, principally reflecting repayment of $27.0 million of credit-facility borrowings.
- Cash and cash equivalents were $166.3 million at September 30, 2018, including $31.7 million held internationally; working capital was $295.9 million. Current assets were $825.1 million and current liabilities $529.2 million.
- No debt was outstanding at quarter-end; availability under the then-existing facility was $196.6 million. The company reported compliance with facility covenants. Stock-based compensation was $28.0 million for the first nine months, compared with $12.4 million a year earlier.
Material changes, outlook, and risks
- Revenue growth was strong, but operating margin declined in both the quarter and nine-month comparison as expenses grew. The nine-month effective tax rate was 13.7%, versus 4.5% in 2017; stock-award tax benefits and other factors affected the provision.
- Management expects operating expenses to continue increasing in absolute dollars, citing investment in platform operations, technology, sales and marketing, international expansion, and infrastructure. It stated that cash, operating cash flows, and undrawn credit capacity should meet working-capital needs for at least 12 months. No specific revenue or earnings guidance is provided in the filing.
- On October 26, 2018, after quarter-end, the company entered a new $150 million revolving facility, with potential increases of up to $100 million in specified circumstances, maturing May 9, 2022. It was intended to reduce borrowing costs and shift from an asset-based to a cash-flow-based structure. It is secured by substantially all assets and includes financial covenants.
- Operating cash generation remains sensitive to collection and supplier-payment timing: the company typically pays suppliers before collecting from clients, and some agency arrangements make payment dependent on the agency first receiving payment from advertisers. Accounts receivable was $640.1 million and accounts payable $493.3 million at quarter-end.
- The company disclosed a continuing material weakness in IT general controls over certain financially significant platform applications. Management concluded disclosure controls and procedures were not effective as of September 30, 2018; remediation and sustained testing remained in progress. Management stated the financial statements fairly present the reported results.
- Other disclosed risks include competition and client budget shifts, dependence on advertising agencies and inventory suppliers, privacy and data regulation (including GDPR and the future California Consumer Privacy Act), platform outages and security, foreign-exchange exposure, and seasonality. A 10% adverse foreign-exchange movement would have produced an estimated $12.2 million loss on foreign-denominated accounts.
- Non-cancelable lease commitments totaled $89.0 million. Management did not believe ordinary-course legal proceedings would have a material adverse effect; no material indemnification claims were reported.
Important facts for investors to verify
- Whether revenue growth and client spending remain broad-based, and how much depends on existing agency relationships and campaign volume.
- Whether expense growth, particularly hosting, staffing, and stock-based compensation, stabilizes enough to support margins.
- Cash conversion, receivables aging, sequential-liability exposure, and the timing gap between client collections and supplier payments.
- Availability, borrowing costs, collateral terms, and covenant headroom under the October 2018 credit facility.
- Progress in remediating and testing the IT-controls material weakness, and any effect on future reporting reliability.
- Exposure to foreign exchange, privacy regulation, advertising-inventory access, and the company’s substantial lease commitments.