The Trade Desk, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; comparisons are to the same periods in 2016. Unaudited interim financial statements.
Business context
The Trade Desk provides a self-service platform for advertising agencies and other buyers to purchase and manage data-driven digital advertising across formats and devices. Revenue is primarily a platform fee tied to clients’ gross spend. Management attributed growth mainly to increased spend by existing clients, driven by more campaigns per client.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $79.4 million | $53.0 million | $205.6 million | $130.5 million |
| Revenue growth | 50% | — | 58% | — |
| Income from operations | $18.4 million | $15.1 million | $40.0 million | $33.5 million |
| Operating margin | 23% | 28% | 19% | 26% |
| Net income | $10.2 million | $3.6 million | $34.0 million | $10.2 million |
| Net margin | 13% | 7% | 17% | 8% |
| Diluted EPS | $0.23 | $0.06 | $0.77 | $(3.23) |
| Adjusted EBITDA (non-GAAP) | $24.4 million | $16.6 million | $56.0 million | $36.7 million |
As of September 30, 2017, cash and cash equivalents were $132.8 million, working capital was $220.0 million, and total debt, net, was $27.0 million. The revolving facility provides commitments of up to $200 million, subject to borrowing-base and other conditions; the company reported covenant compliance. Accounts receivable were $470.5 million and accounts payable were $370.5 million. The company reported DSO of 102 days versus 86 a year earlier and DPO of 83 days versus 63.
For the first nine months, operating cash flow was $7.0 million, compared with $39.0 million in 2016; investing cash outflow was $10.8 million and financing cash inflow was $3.2 million. The operating cash flow decline reflected a $95.2 million increase in receivables, partly offset by a $51.9 million increase in accounts payable and noncash adjustments. Cash decreased by $0.6 million over the period. No separate gross-margin figure is presented.
Material changes and unusual items
- Operating expenses increased faster than revenue in Q3: total operating expenses rose 61% to $61.0 million, and operating margin narrowed to 23% from 28%. Technology and development expense rose 81% in Q3 and 102% for the nine-month period.
- Stock-based compensation increased to $5.9 million in Q3 and $12.4 million year to date, from $0.7 million and $1.0 million, respectively, in 2016.
- Other expense declined year over year largely because 2016 included preferred-stock warrant remeasurement expense and an IPO-related debt liquidation fee. These items did not recur in 2017; higher foreign-exchange losses partly offset the decline.
- The nine-month 2017 income-tax provision was $1.6 million, including $17.1 million of discrete tax benefits associated with disqualifying dispositions of incentive stock options. Q3 included $3.2 million of such benefits.
- March and June 2017 secondary offerings were sales by existing stockholders; the company received no proceeds and recorded $1.5 million of related costs in general and administrative expense.
- In October 2017, the company paid approximately $3.0 million for certain Adbrain technology assets.
Outlook, commentary and risks
No quantified revenue or earnings guidance is provided. Management expects operating expenses to continue increasing in absolute dollars as it invests in platform operations, technology, sales and marketing, infrastructure, international expansion—including China—and television and other omnichannel capabilities. Management expects existing cash, operating cash flows and undrawn credit availability to meet working-capital needs for at least 12 months, while noting that future needs depend on operating performance and other factors.
Management cautioned that revenue as a percentage of gross spend may fluctuate or decline because of customer mix, volume discounts, feature adoption and expansion into channels such as television. Risks highlighted include client and agency concentration and retention, competition, access to advertising inventory, programmatic-market adoption, payment timing and credit losses, seasonality, foreign-exchange exposure, privacy and data regulation, cybersecurity and platform outages, and execution of international growth.
Controls: Management concluded disclosure controls and procedures were not effective at the reasonable-assurance level as of September 30, 2017 because previously identified material weaknesses in internal control over financial reporting remained under remediation. Remediation efforts were ongoing and had not yet been validated through sustained testing. Management stated the interim financial statements fairly present the company’s results in all material respects.
Contingencies and financing: The company reported no legal proceedings or indemnification claims expected to have a material adverse effect. Purchase obligations, primarily for hosting services, totaled $37.4 million, including $20.5 million due in the remaining months of 2017. The $27.0 million revolving balance bore a 3.2% weighted-average rate; the facility is secured by substantially all company assets and includes covenants and a conditional fixed-charge coverage test.
Important facts for investors to verify
- Whether receivables growth, longer DSO and low operating cash generation persist, and how cash conversion compares with reported earnings.
- Whether operating-expense growth moderates and operating margins stabilize as the company continues investing.
- The sustainability of reported earnings given the substantial discrete stock-option tax benefits and rising stock-based compensation.
- Progress in remediating the material weaknesses and the results of required internal-control reporting and auditor assessment.
- Actual borrowing availability under the receivables-based facility, covenant headroom, and sensitivity to interest rates and foreign exchange.
- Whether client spend, take rate and adoption of video, television and international offerings support growth without materially pressuring margins.