The Trade Desk, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited results; dollar amounts below are in millions unless stated otherwise. The Trade Desk operates a self-service omnichannel platform for programmatic digital advertising and generally records revenue net as platform fees.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $112.3 | $72.8 | $198.0 | $126.2 |
| Operating income | $26.2 | $19.7 | $36.1 | $21.6 |
| Net income | $19.3 | $18.8 | $28.4 | $23.8 |
| Diluted EPS | $0.43 | $0.43 | $0.63 | $0.54 |
| Operating margin | 23% | 27% | 18% | 17% |
- Revenue increased 54% in Q2 and 57% in the first half, primarily from greater platform spend by existing clients, driven by more campaigns per client. Gross billings were $550.0 million in Q2, up from $348.3 million, and $956.0 million in the first half, up from $593.3 million.
- Q2 operating income rose about 33%, while net income increased about 3%. The reported net-income comparison was affected by a $5.8 million tax provision in Q2 2018 versus a $0.5 million tax benefit in Q2 2017. Tax benefits associated with disqualifying dispositions of equity awards were $2.8 million and $8.6 million, respectively.
- Operating expenses increased across all categories. Q2 platform operations rose 76%, sales and marketing 46%, technology and development 61%, and general and administrative 66%. Platform operations rose to 24% of revenue from 21%; total operating expenses rose to 77% from 73%.
- First-half operating cash flow was $12.4 million, compared with cash used of $12.0 million in 2017. Net income and noncash adjustments were partly offset by a $50.3 million increase in receivables and working-capital use. Investing activities used $9.4 million; financing activities used $17.3 million, including repayment of $27.0 million of credit-facility borrowings. Cash declined $14.3 million to $141.7 million.
- At June 30, cash was $141.7 million, working capital was $268.8 million, and revolving-credit availability was $196.6 million; no facility borrowings were outstanding, and the company reported compliance with covenants. Current assets were $800.4 million and current liabilities $531.6 million. Accounts receivable were $645.6 million and accounts payable $503.2 million; these balances are large relative to reported net revenue because they reflect gross media billings and supplier obligations.
Changes, outlook, and notable items
- Management attributed growth mainly to higher spend from existing clients. It identified opportunities in international markets and connected TV, mobile, native, audio, video, and data/targeting capabilities, while noting that continued programmatic-market adoption is important to growth.
- No quantified revenue or earnings guidance is provided in the supplied filing text. Management expects operating expenses to increase in absolute dollars, including investment in platform operations, product development, sales and marketing, international expansion, and corporate infrastructure. It cautions that these investments may weigh on near-term profitability.
- Management stated that cash, operating cash flow, and undrawn facility capacity should cover working-capital needs for at least the next 12 months. The facility matures in May 2022. The company typically pays suppliers before collecting from clients; sequential-liability arrangements can make collections dependent on advertisers paying agencies.
- Non-cancelable lease commitments totaled $87.4 million, materially higher than at year-end, principally reflecting new office leases. The company expected most operating lease commitments to be recognized as right-of-use assets and liabilities when it adopts the new lease standard.
- Stock-based compensation was $9.3 million in Q2 and $16.5 million in the first half, versus $4.2 million and $6.5 million in the comparable 2017 periods. Foreign-currency exchange losses were $1.1 million in Q2 and $1.6 million in the first half. The filing estimates that an immediate 10% adverse currency movement on foreign-denominated balances at June 30 would produce a loss of about $10.2 million.
- Control weakness: A previously identified material weakness in IT general controls over certain platform applications remained unremediated. Management concluded disclosure controls were not effective as of June 30; remediation and testing were ongoing. Management nevertheless stated the interim financial statements fairly presented the company’s financial position and results in all material respects.
- Key risks include client and agency concentration and retention, advertising-budget and seasonal volatility, supplier access and credit/collection exposure, competition, platform outages or security incidents, privacy and data regulation (including GDPR and the future CCPA), foreign exchange, and the ability to scale internationally. The filing reports no litigation expected to have a material adverse effect and no material indemnification claims known to management.
Investor verification priorities
- Confirm that revenue growth is translating into sustainable operating and net-income growth, given Q2 margin compression and materially higher expenses.
- Track receivables, collections, bad-debt reserves, supplier payables, and operating cash conversion as platform spend grows.
- Verify remediation and sustained effectiveness testing of the disclosed IT-control material weakness.
- Assess the return on investments in CTV, international expansion, product development, and new hiring, alongside the $87.4 million lease commitments.
- Monitor privacy-law compliance, access to advertising inventory, currency exposure, and client/agency concentration and retention.