The Trade Desk, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The Trade Desk operates a self-service, cloud-based platform for buying and optimizing digital advertising; it generally earns platform fees based on client advertising spend, plus fees for data and other services. Revenue is reported net of supplier costs, so accounts receivable and accounts payable reflect gross billings and can be large relative to reported revenue.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $164.2 million | $118.8 million | $445.1 million | $316.8 million |
| Income from operations | $21.9 million | $22.3 million | $59.5 million | $58.4 million |
| Net income | $19.4 million | $20.3 million | $57.4 million | $48.7 million |
| Diluted EPS | $0.40 | $0.44 | $1.20 | $1.07 |
| Operating margin (calculated) | 13.4% | 18.7% | 13.4% | 18.4% |
| Net margin (calculated) | 11.8% | 17.1% | 12.9% | 15.4% |
- Growth and profitability: Revenue increased 38% in Q3 and 40% for the first nine months. Net income declined about 4% in Q3 but rose about 18% year to date. Operating expenses grew faster than revenue year to date, and reported operating and net margins contracted.
- Cash flow: Nine-month operating cash flow was $88.3 million, versus $38.5 million in 2018. Investing activities used $147.9 million, mainly for short-term investments; financing activities provided $25.8 million, largely from employee stock-option exercises and the stock purchase plan. Cash and cash equivalents declined by $33.8 million to $173.4 million.
- Liquidity and debt: At September 30, cash and cash equivalents were $173.4 million, short-term investments were $123.1 million, and working capital was $455.1 million. The company had no borrowings under its credit facility, with $143.3 million available under a $150 million commitment; it reported compliance with covenants. Management said available liquidity, operating cash flows and undrawn credit were expected to meet requirements for at least 12 months.
- Balance sheet and commitments: Total assets were $1.415 billion and total liabilities were $879.6 million. Operating lease liabilities totaled $183.6 million, including $15.9 million current; additional non-cancelable hosting, marketing and software-service commitments totaled $203.2 million.
Material changes versus the prior comparable period
- Management attributed revenue growth primarily to increased gross spend by existing clients, driven by more advertising campaigns per client. Q3 gross billings were $751.0 million, up from $568.7 million; nine-month gross billings were $2.057 billion, versus $1.525 billion.
- Q3 operating expenses increased 47% to $142.3 million. General and administrative expense rose 74% to $37.0 million, sales and marketing rose 55% to $36.1 million, technology and development rose 29% to $29.2 million, and platform operations rose 36% to $39.9 million. Increases were primarily linked to headcount, stock-based compensation, facilities and, for platform operations, hosting costs.
- Stock-based compensation was $56.4 million for the first nine months, versus $28.0 million in 2018. The nine-month income tax provision fell to $5.2 million from $7.7 million, primarily reflecting larger tax benefits associated with stock-based awards.
- Cash flow from operations improved year over year, while investing outflows increased substantially because the company built a short-term investment portfolio and increased property and equipment spending.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no numerical revenue or earnings guidance. Management expects operating expenses to continue rising in absolute dollars, with investments in platform operations, technology, sales and marketing, international expansion (including China), and corporate infrastructure. It cautioned that these investments may weigh on near-term profitability.
- Key risks: Risks discussed include client and advertising-agency retention and spend volatility; competition and the pace of programmatic advertising adoption; access to quality inventory, including connected TV; collection delays and bad debt exposure; advertising seasonality; privacy and data-protection regulation and restrictions on cookies/device identifiers; cybersecurity and platform outages; international expansion and foreign-exchange exposure; and the ability to scale while controlling costs.
- Foreign exchange: The company estimated that an immediate 10% adverse exchange-rate change on foreign-currency-denominated accounts at September 30 could result in a loss of approximately $14.2 million. It uses forward contracts or other derivatives to hedge, but stated hedging may not be effective.
- Accounting and controls: The company adopted lease accounting standard ASC 842 on January 1, 2019, recognizing approximately $41 million of right-of-use assets and $47 million of lease liabilities at adoption. It also disclosed a $23 million bank-overdraft classification error at June 30, 2019 that understated cash, accounts payable and related totals; management deemed it immaterial and said it would revise the amounts in a later filing. Management reported disclosure controls effective at September 30. Implementation of a new financial reporting system was completed during the quarter, with internal-control testing still ongoing through year-end.
- Contingencies: The company reported no current legal proceedings it believed would have a material adverse effect and no material indemnification obligations recorded. Ordinary-course litigation and contractual indemnities remain possible.
Important facts for investors to verify
- Whether revenue growth and client spend remain strong as operating expenses rise and margins contract.
- How much of expense growth reflects ongoing hiring and stock-based compensation, and the resulting dilution.
- Cash conversion and working-capital needs, given the timing gap between supplier payments and client collections.
- Use and availability of the credit facility, and the scale and timing of lease and other contractual commitments.
- Effects of privacy, cookie and device-identifier changes on advertising targeting, inventory and demand, alongside the company’s cybersecurity and internal-control testing progress.
- The disclosed $23 million bank-overdraft classification error and the planned correction in a subsequent filing.