Trade Desk, Inc. — Q2 2017 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2017; unaudited results are compared with the same 2016 periods. Trade Desk provides a self-service platform for agencies and other buyers to manage data-driven digital advertising campaigns. Revenue is generally a platform fee based on client advertising, data and feature spend.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $72.8m | $47.2m | $126.2m | $77.6m |
| Operating income | $19.7m | $15.0m | $21.6m | $18.4m |
| Net income | $18.8m | $7.6m | $23.8m | $6.6m |
| Adjusted EBITDA (non-GAAP) | $25.3m | $15.7m | $31.5m | $20.1m |
- Revenue increased 54% in Q2 and 63% in the first half, primarily from higher platform spend by existing clients and more campaigns per client.
- Operating margin was approximately 27% in Q2 versus 32% a year earlier; first-half operating margin was approximately 17% versus 24%. Net margin was approximately 26% versus 16% in Q2, and 19% versus 8% for the first half.
- Operating expenses rose 65% in Q2 and 77% in the first half. Technology and development expense more than doubled in both comparisons; platform operations and general and administrative costs also increased substantially.
- First-half operating cash flow was negative $12.0m, versus positive $22.6m in 2016. The company attributed the outflow chiefly to working-capital use, including lower accounts payable and higher prepaid assets. Investing cash outflow was $8.5m; financing provided $2.9m.
- At June 30, cash was $115.9m, working capital was $203.8m, and total assets were $541.3m. Debt, net, was $27.0m, at a weighted average rate of 3.2%. The amended asset-based revolver provides commitments up to $200m, subject to borrowing-base conditions, and matures May 2022. The company reported covenant compliance.
- DSO was 95 days, up from 88; DPO was 73 days, up from 64. The company typically pays media and data suppliers before collecting from clients.
Material changes and unusual items
- Operating income grew more slowly than revenue, and operating margins contracted as expenses rose faster than sales.
- First-half 2017 income tax included $13.9m of discrete tax benefits from disqualifying dispositions of incentive stock options ($8.6m in Q2); reported tax benefits produced negative effective tax rates. These benefits materially supported net income.
- Stock-based compensation increased to $4.2m in Q2 and $6.5m in the first half, versus $0.2m and $0.4m, respectively, in 2016.
- Two secondary offerings by existing stockholders were completed in March and June. The company received no proceeds and recorded $1.5m of related costs in first-half general and administrative expense.
- Class A shares increased substantially following the IPO-related capital structure transition; weighted-average basic shares were 40.0m in Q2 2017 versus 10.9m in Q2 2016. Review per-share comparisons in light of this change and the prior-year preferred-stock effects.
Outlook, risks and controls
- Management expected operating expenses to continue increasing in absolute dollars, investing in platform operations, technology, sales and marketing, international expansion—including China—and public-company infrastructure. It cautioned that investments may weigh on near-term profitability. No specific revenue or earnings guidance was provided.
- Management said cash, operating cash flows and undrawn credit availability should meet working-capital needs for at least 12 months, while noting that weaker-than-expected performance or limited financing could impair liquidity. Borrowing availability depends on eligible receivables and reserves.
- Key risks include client and agency concentration, clients’ ability to shift spend or terminate with limited notice, credit and collection exposure, supplier access, competition, seasonal advertising budgets, scaling costs, foreign exchange, privacy and data regulation, cookies and platform security or outages.
- Disclosure controls and procedures were concluded to be ineffective at the reasonable-assurance level because previously identified material weaknesses in internal control over financial reporting remained under remediation. Management stated the financial statements fairly present results, but remediation had not been completed or validated.
- Management reported no legal proceedings expected to have a material adverse effect. Purchase obligations, primarily for hosting, totaled $31.5m; the filing does not identify a material litigation contingency.
Investor verification points
- Assess recurring operating profitability excluding the discrete stock-option tax benefits, and review the company’s non-GAAP Adjusted EBITDA reconciliation.
- Track cash conversion, receivables and payables, DSO/DPO, bad-debt reserves and borrowing-base availability as platform spend grows.
- Evaluate whether expense growth and investments in technology, television inventory and international markets translate into durable revenue and margin performance.
- Monitor completion and testing of internal-control remediation, particularly ahead of the required annual Section 404 reporting.
- Review share dilution, stock-based compensation, dual-class voting control and any future insider sales; secondary offerings described here provided no cash to the company.