The Trade Desk, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The Trade Desk operates a self-service digital advertising platform and earns revenue primarily from fees tied to client advertising spend. Revenue is reported net of supplier costs; consequently, accounts receivable and accounts payable are large relative to reported revenue.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $301.1 million | $216.1 million | $800.9 million | $516.1 million |
| Operating income | $80.4 million | $42.8 million | $150.2 million | $37.8 million |
| Operating margin | 26.7% | 19.8% | 18.8% | 7.3% |
| Net income | $59.4 million | $41.2 million | $129.7 million | $90.4 million |
| Diluted EPS | $0.12 | $0.08 | $0.26 | $0.19 |
- Q3 revenue grew 39% year over year; nine-month revenue grew 55%. Management attributed the increase primarily to higher platform spend by existing clients, driven by more campaigns per client.
- Operating expenses rose 27% in Q3 and 36% for the nine-month period. Expense growth reflected hiring, stock-based compensation, hosting, facilities, product development, and sales and marketing investment. Stock-based compensation was $132.0 million for the first nine months, versus $73.8 million a year earlier.
- Q3 net margin was approximately 19.7%, compared with 19.1%; nine-month net margin was 16.2%, compared with 17.5%. The nine-month comparison reflects, among other factors, a substantial income-tax benefit in 2020.
Cash, liquidity and debt
- At September 30, 2021, cash and cash equivalents were $576.9 million and short-term investments were $221.7 million, totaling $798.6 million. Working capital was $1.088 billion.
- Operating cash flow for the first nine months was $215.1 million, down from $237.5 million. Cash use in investing activities was $97.7 million; financing activities provided $22.1 million. Cash and cash equivalents increased $139.6 million from year-end 2020.
- The company had no borrowings under its $450 million revolving credit facility; $443.9 million was available after letters of credit. The facility matures in June 2026, and the company reported compliance with its covenants.
- Lease commitments totaled $330.7 million; other contractual commitments totaled $79.5 million. Management said existing cash and operating cash flow should cover working capital needs for at least 12 months.
Changes, outlook and notable items
- Revenue growth and operating margin improved versus the comparable periods, while operating cash flow declined. Accounts receivable growth and supplier-payment timing were principal working-capital uses.
- No numerical revenue or earnings guidance is provided in the filing. Management expects operating expenses to continue rising as it invests in platform operations, technology, sales and marketing, international expansion, and infrastructure; it cautioned that these investments may weigh on near-term profitability.
- Management highlighted growth opportunities in programmatic advertising, connected TV, video, audio, native formats, international markets, and expansion within existing clients. It also said COVID-19-related effects on clients, advertising demand, collections, and forecasting remained uncertain.
- In July 2021, the company acquired a technology business for a GAAP purchase price of $17.8 million, subject to adjustments.
- After quarter-end, the CEO received a performance-based option covering up to 16 million shares, with a grant-date fair value of approximately $819 million. Expense is expected to begin in Q4 2021 and, absent accelerated vesting, be recognized over a weighted-average 2.9 years.
- A Delaware class action alleges fiduciary-duty breaches related to 2020 certificate-of-incorporation amendments and seeks rescission and damages. Defendants moved to dismiss; the plaintiff opposed the motion on October 8, 2021. The company disputes the claims and intends to defend them.
- Key risks include client and agency retention, competition and advertising-spend volatility, privacy regulation and reduced access to tracking identifiers, platform or cybersecurity disruptions, supplier and collection timing exposure, foreign-exchange movements, and the continuing uncertainty of COVID-19 impacts.
Investor verification priorities
- Check subsequent results against the 39% quarterly revenue growth and confirm how much growth came from existing-client spend and campaign volume.
- Track operating expenses and stock-based compensation, particularly the recognition and potential acceleration of the CEO performance award.
- Review cash conversion, receivable collections, supplier-payment timing, and the effect of seasonal advertising spend on working capital.
- Assess the ongoing tax-rate effects of stock awards and the unusually large 2020 CARES Act carryback benefit when comparing earnings.
- Monitor developments in the Delaware lawsuit, privacy and identifier changes, and the company’s ability to maintain advertising inventory and client spend.