Business context and reporting period
The Trade Desk, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2023, compared with the three months ended March 31, 2022. It operates a self-service, cloud-based platform for buying and managing digital advertising and earns revenue primarily from platform fees based on client advertising spend, plus data and other services. Revenue is reported net of amounts paid to advertising inventory and other suppliers.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $382.8 million | $315.3 million | +21% |
| Operating expenses | $406.1 million | $332.4 million | +22% |
| Operating loss | $23.3 million | $17.1 million | Loss increased |
| Net income (loss) | $9.3 million | $(14.6) million | Improved by $23.9 million |
| Diluted EPS | $0.02 | $(0.03) | Improved |
| Operating cash flow | $187.6 million | $146.2 million | +$41.4 million |
- Operating margin was approximately -6% versus -5% a year earlier; net margin was approximately 2% versus -5% (calculated from reported figures).
- Net other income was $13.7 million, primarily reflecting higher interest income on short-term investments. The income tax benefit was $18.9 million, versus $2.7 million in Q1 2022; the tax benefit included $27 million associated with stock-based awards.
- Stock-based compensation expense was $113.5 million, down from $124.9 million. The CEO Performance Option accounted for $60 million of Q1 2023 expense.
Financial position and liquidity
- At March 31, 2023, cash and cash equivalents were $892.7 million and short-term investments were $437.7 million, totaling $1.330 billion. Cash was down from $1.031 billion at year-end 2022.
- Working capital was $1.646 billion. Current assets were $3.476 billion and current liabilities were $1.830 billion.
- Total liabilities were $2.059 billion; stockholders’ equity was $1.941 billion. Accounts receivable were $2.086 billion and accounts payable were $1.677 billion. The filing explains that these balances are large relative to reported net revenue because receivables reflect gross client billings and payables reflect supplier amounts.
- Operating cash flow was $187.6 million; investing cash flow was $(28.6) million and financing cash flow was $(296.8) million. Financing outflow principally reflected share repurchases and taxes paid on restricted stock settlements.
- No borrowings were outstanding under the $450 million revolving credit facility; $445 million was available after letters of credit. The facility matures June 15, 2026, and the company reported compliance with its covenants.
Material changes versus the prior comparable period
- Revenue growth was attributed primarily to higher gross spend on the platform, driven by more advertisers and more campaigns from existing clients.
- Platform operations, sales and marketing, and technology and development expenses rose 33%, 38%, and 30%, respectively, mainly due to personnel and hosting costs, headcount growth, and return-to-office, travel and in-person engagement. General and administrative expense increased 4%.
- Operating loss widened despite revenue growth, while the company returned to net income, aided by higher interest income and a larger income tax benefit.
- Operating cash flow increased year over year. Investing outflow declined, while financing cash flow shifted from a $11.0 million inflow to a $296.8 million outflow, principally because of the new repurchase program.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management expects operating expenses to increase in absolute dollars as it invests in platform operations, technology, sales and marketing, international expansion, and infrastructure; it cautions that these investments may weigh on near-term profitability.
- Management said existing cash, operating cash flow and undrawn credit availability should meet working capital needs for at least the next 12 months, and that cash and operating resources should fund the repurchase program.
- In February 2023, the board authorized repurchases of up to $700 million of Class A shares, with no expiration date. The company repurchased and retired approximately 5.1 million shares for an aggregate $293 million in Q1; approximately $407 million remained authorized.
- Macroeconomic uncertainty—including inflation, interest rates, currency movements and geopolitical developments—could affect advertising demand and make estimates more variable. The company also identifies seasonality, client and agency concentration, competition, access to advertising inventory, privacy and data regulation, cybersecurity, and platform reliability as material risks.
- A stockholder derivative case alleges breaches of fiduciary duty in connection with approval of the CEO Performance Option and seeks rescission and monetary damages. Defendants moved to dismiss; the filing says oral argument was scheduled for October 9, 2023, and the outcome is uncertain. Management did not believe ordinary-course litigation would have a material adverse effect.
- The filing reports foreign-exchange exposure: a hypothetical immediate 10% adverse currency move on foreign-denominated accounts would result in an estimated $32 million loss. A 1 percentage point interest-rate change would affect annual investment income by approximately $4 million.
Most important facts for investors to verify
- Whether revenue growth and platform spend remain broad-based across clients, channels and geographies, particularly CTV and other growth areas.
- Whether rising operating costs and substantial stock-based compensation can be managed while improving operating profitability.
- How much of reported net income depends on tax benefits and investment income rather than operating performance.
- Repurchase pace and remaining authorization, weighed against cash needs, employee equity dilution and alternative uses of capital.
- Developments in the CEO Performance Option litigation and any resulting financial or governance effects.
- Potential effects of privacy regulation, identifier changes, macroeconomic conditions, client payment timing and foreign-exchange movements on demand, cash flow and results.