The Trade Desk, Inc. — Q3 2020 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2020; comparative periods are Q3 and the first nine months of 2019. The Trade Desk operates a self-service, cloud-based platform for programmatic digital advertising. It earns platform fees based primarily on client advertising spend, plus revenue from data and other services. Revenue is reported net of advertising inventory and other supplier costs, so gross billings, accounts receivable and accounts payable are substantially larger than reported revenue.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $216.1m | $164.2m | $516.1m | $445.1m |
| Operating income | $42.8m | $21.9m | $37.8m | $59.5m |
| Net income | $41.2m | $19.4m | $90.4m | $57.4m |
| Diluted EPS | $0.84 | $0.40 | $1.86 | $1.20 |
| Operating margin | 19.8% | 13.4% | 7.3% | 13.4% |
| Net margin | 19.1% | 11.8% | 17.5% | 12.9% |
- Revenue increased 32% in Q3 and 16% year to date. Management attributed growth primarily to higher platform spend by existing clients and more campaigns per client.
- Q3 operating expenses were $173.3m, up 22%; technology and development increased 41%, sales and marketing 24%, general and administrative 16%, and platform operations 12% year over year. Nine-month operating expenses rose 24% to $478.4m.
- Nine-month net income included a $53.5m income tax benefit, versus $5.2m of tax expense in 2019. The benefit reflected tax benefits on employee equity awards and an expected CARES Act NOL carryback. Nine-month operating income fell despite revenue growth as expenses rose faster.
- Operating cash flow was $237.5m for the first nine months, versus $88.3m in 2019. Investing used $60.8m, including $57.7m for property and equipment; financing provided $126.8m, including net credit-facility proceeds and employee equity-plan proceeds. Cash and cash equivalents increased by $303.5m.
- At September 30, cash and cash equivalents were $434.4m, short-term investments $122.9m, and working capital $743.8m. Current assets were $1.756bn and current liabilities $1.012bn.
- Debt under the credit facility was $72.0m at quarter-end, at a 1.64% weighted-average rate; $70.8m remained available and the company reported covenant compliance. The remaining balance was repaid in October 2020. Operating lease liabilities totaled $240.1m.
Material changes versus prior period
- Q3 revenue and net income grew materially year over year; Q3 operating margin expanded to 19.8% from 13.4%.
- For the first nine months, revenue rose 16% but operating income declined 37%, reflecting faster expense growth. The reported net-income increase was substantially affected by the tax benefit.
- Cash and cash equivalents rose from $130.9m at December 31, 2019, while short-term investments were approximately unchanged. The company drew $143m on its credit facility in March as a precaution during COVID-19 uncertainty, repaid $71m by quarter-end, and repaid the balance in October.
- Accounts receivable allowance for credit losses was $7.2m at quarter-end, compared with $3.9m at year-end 2019. The company adopted the expected-credit-loss standard in 2020; the opening retained-earnings adjustment was not material.
Outlook, commentary, risks and contingencies
- No numerical revenue or earnings guidance is provided. Management said COVID-19 had slowed revenue growth and that the scale and duration of its effects could not be predicted reliably.
- Management expects operating expenses to continue increasing in absolute dollars, with investment in platform operations, technology, sales and marketing, international expansion, and infrastructure. These investments may weigh on near-term profitability.
- Key uncertainties include advertiser spending and client payment delays or defaults, particularly because the company may owe suppliers even when clients have not paid; competition and access to quality ad inventory; growth in connected TV and other newer channels; privacy regulation and restrictions on identifiers, cookies, and cross-border data transfers; and platform security, outages, and foreign-exchange exposure.
- The filing identifies non-cancelable commitments of $150.1m for hosting, marketing and software services, in addition to lease commitments. Management reported no legal proceedings expected to have a material adverse effect and recorded no material indemnification liability.
- Management stated disclosure controls were effective as of September 30, 2020, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of future growth is driven by existing-client spend versus new clients, and how advertising demand evolves after COVID-related disruption.
- Whether expense growth—especially technology, sales and marketing, and stock-based compensation—supports durable operating-margin improvement.
- The sustainability and cash-tax effects of the 2020 tax benefits, including the CARES Act carryback and employee equity-award benefits.
- Client receivable collectability, sequential-liability exposure, and the timing mismatch between client collections and supplier payments.
- Progress in CTV and international expansion, and the operational or revenue impact of privacy changes, browser identifier restrictions, and data-transfer rules.
- Post-quarter credit-facility repayment and subsequent liquidity, capital spending, and lease commitments.