The Trade Desk, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. The company provides a self-service platform for buying and managing data-driven digital advertising. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $53.0 | $28.8 | $130.5 | $71.2 |
| Operating income | $15.1 | $9.2 | $33.5 | $20.0 |
| Operating margin | 28% | 32% | 26% | 28% |
| Net income | $3.6 | $4.6 | $10.2 | $10.3 |
| Net margin | 7% | 16% | 8% | 14% |
| Adjusted EBITDA (non-GAAP) | $16.6 | $9.3 | $36.7 | $20.4 |
- Revenue increased 84% in Q3 and 83% year to date. Management attributed growth primarily to higher platform spend from existing clients, which rose 70% in Q3 and 81% year to date.
- Operating expenses rose 94% in Q3 and 90% year to date, faster than revenue. Technology and development and general and administrative expenses increased substantially; management cited hiring, infrastructure, and IPO preparation costs.
- Other expense increased to $6.1 million in Q3 and $12.6 million year to date, including fair-value changes in preferred-stock warrants and interest expense. A $0.8 million fee related to the prior debt facility was recorded at the IPO.
- For the nine months, net income attributable to common stockholders was a loss of $37.0 million and basic and diluted loss per share was $3.23, despite $10.2 million of GAAP net income. The calculation included a $47.2 million preferred-stock repurchase premium. Q3 basic and diluted EPS were $0.08 and $0.06, respectively.
- The filing does not present a separate gross-profit or gross-margin measure.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $39.0 million, versus cash used of $25.5 million in 2015. The 2016 inflow was materially supported by higher accounts payable and payment timing; accounts receivable growth was a significant offset.
- Investing cash outflow was $5.3 million and financing cash inflow was $86.2 million. Cash increased by $119.9 million to $124.0 million at September 30, 2016. Net working capital was $182.6 million.
- Accounts receivable was $274.0 million and accounts payable was $206.2 million. DSO was 86 days versus 78 a year earlier; DPO was 63 days versus 49.
- Debt, net, was $50.8 million. The asset-based revolving facility provides commitments of up to $125 million, subject to borrowing conditions and receivables-based availability; it matures in March 2018. Outstanding borrowings bore a weighted-average rate of 2.27%, and the company reported compliance with covenants.
- Management believed cash, operating cash flow, and undrawn facility availability would cover working capital needs for at least 12 months.
Material changes, outlook, and risks
- The company completed its IPO on September 26, 2016, issuing 4.67 million Class A shares at $18 per share. It received approximately $78.1 million after underwriting discounts and commissions, before offering costs. Preferred shares converted to Class B common stock.
- The company also issued $60 million of Series C preferred stock earlier in 2016 and used $54 million to repurchase preferred and common shares. The repurchase premium materially affected year-to-date EPS.
- Management expects operating expenses to increase in absolute dollars as it invests in platform operations, technology, sales and marketing, international expansion, and public-company infrastructure. It cautioned that these investments may pressure near-term profitability. No specific revenue or earnings guidance was provided.
- Key business risks include reliance on advertising-agency clients and continued platform spend, customer payment and working-capital timing, competitive and changing digital-advertising markets, access to inventory, privacy and data regulation, cookies and platform security or availability, international expansion and foreign exchange.
- Disclosure controls were deemed ineffective as of September 30, 2016 because previously identified material weaknesses in financial reporting controls remained unremediated. The company described remediation efforts as ongoing. Management nevertheless stated that the interim financial statements fairly presented the company’s results and position.
- The filing reported no legal proceedings or claims expected by management to have a material adverse effect. It disclosed operating lease commitments of $34.5 million and purchase obligations of $4.4 million.
Most important facts for investors to verify
- Whether revenue growth and existing-client spend growth continue, and how revenue yield or take rate changes as media and customer mix shifts.
- Whether cash generation remains healthy after separating operating performance from supplier-payment timing; monitor receivables, DSO, payables, DPO, and credit-facility availability.
- Whether expense growth moderates enough to stabilize operating and net margins, including the effects of IPO-related costs, stock compensation, taxes, and warrant-related items.
- Progress in remediating material weaknesses and establishing effective disclosure and financial-reporting controls.
- Developments in privacy regulation, inventory access, platform reliability, customer concentration, and the company’s dual-class voting structure.