The Trade Desk, Inc. — 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; quarterly figures below compare Q4 2017 with Q4 2016. The Trade Desk operates a self-service, buy-side-focused platform for programmatic digital advertising. It earns platform fees and reports revenue net of advertising inventory, data, and other supplier costs. Approximately 62% of 2017 platform gross spend was for mobile, video, audio, social, and native advertising.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $308.2 million | $202.9 million |
| Gross spend | $1.556 billion | $1.028 billion |
| Gross billings | $1.492 billion | $990.6 million |
| Operating income / margin | $69.4 million / 22.5% | $57.5 million / 28.3% |
| Net income / margin | $50.8 million / 16.5% | $20.5 million / 10.1% |
| Diluted EPS | $1.15 | $(1.46) |
| Cash from operating activities | $31.2 million | $75.0 million |
Revenue grew 52% year over year, primarily alongside a 51% increase in gross spend. Existing clients added before 2017 accounted for about 91% of 2017 gross spend; their aggregate spend rose 40%. Reported revenue is not directly comparable to gross spend or gross billings, which are non-GAAP operating measures.
In Q4 2017, revenue was $102.6 million versus $72.4 million in Q4 2016; net income was $16.8 million versus $10.3 million. Diluted EPS was $0.38 versus $0.24. The fourth quarter is typically the company’s strongest advertising period, with the first quarter typically weakest.
- Operating expenses rose to $238.9 million from $145.4 million. Technology and development increased 93% to $52.8 million, and general and administrative expense increased 82% to $58.4 million. Operating margin contracted despite higher operating income.
- Cash and cash equivalents were $156.0 million at year-end, and working capital was $247.3 million. Accounts receivable rose to $599.6 million from $377.2 million; accounts payable rose to $490.4 million from $321.2 million.
- Operating cash flow fell year over year, mainly due to working-capital needs: the increase in receivables exceeded the increase in payables. Investing activities used $16.1 million, including $10.1 million for property and equipment, $3.0 million for capitalized software, and $3.0 million for acquired assets.
- Debt outstanding was $27.0 million at year-end under a secured revolving facility with commitments up to $200 million; the company repaid principal and accrued interest of $27.1 million in January 2018. Availability at year-end was $168.1 million, subject to borrowing-base conditions.
Changes, outlook, risks, and unusual items
- Management expects operating expenses to increase as it invests in platform operations, technology, sales and marketing, international growth, and connected TV (CTV). It highlighted CTV, digital radio, other omnichannel offerings, and international markets—including China—as growth priorities. The filing gives no numerical revenue or earnings guidance.
- The 2017 effective tax rate was 20.2%, compared with 53.3% in 2016. Management attributed the lower rate mainly to $19.9 million of discrete tax benefits related to disqualifying dispositions of incentive stock options. The Tax Cuts and Jobs Act also resulted in a $0.6 million deferred-tax revaluation.
- Customer concentration is significant: three clients represented 22%, 11%, and 10% of 2017 gross billings. Three clients accounted for 58% of year-end receivables. Client MSAs generally have no minimum spend commitments and may be terminated on 60 days’ notice.
- Cash flow and liquidity are exposed to payment-timing and credit risk: the company may have to pay suppliers before collecting from clients, and some agency agreements use sequential liability. Bad-debt expense was $4.3 million in 2017, and net write-offs were $4.6 million.
- Privacy and data regulation are material risks. The EU General Data Protection Regulation was scheduled to take effect May 25, 2018; the filing warns of potentially significant compliance costs and penalties. Cookie restrictions, changes to device identifiers, and challenges to cross-border data-transfer mechanisms could also affect the business.
- Management and the auditor concluded that internal control over financial reporting was ineffective at December 31, 2017 because of a material weakness involving IT general controls for certain financially significant platform applications. A related immaterial adjustment was identified and corrected in the period. The financial statements received an unqualified audit opinion, but the auditor also reported the control weakness.
- The company reported no legal proceedings believed likely to have a material adverse effect. It had $31.8 million of operating lease commitments and $37.0 million of other contractual commitments at year-end. No dividends were declared or paid.
Most important facts for investors to verify
- Whether the remaining platform-application IT control weakness was remediated and tested effectively after year-end.
- Whether operating cash flow can recover as revenue grows, given receivables, supplier-payment timing, and client credit concentration.
- Whether large agency clients maintain or expand platform spend, and whether concentration in gross billings and receivables changes.
- Whether investment in CTV and international expansion produces growth that offsets rising operating costs and pressure on operating margin.
- How GDPR and other privacy, cookie, and data-transfer requirements affect compliance costs, data availability, and client demand.