The Trade Desk, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report; quarterly figures below identify the fourth quarter where relevant. The Trade Desk operates a self-service, buy-side programmatic advertising platform and reports one operating segment. Revenue is reported net of media, data, and add-on costs paid to suppliers.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $202.9 million | $113.8 million |
| Gross spend on platform | $1.028 billion | $552.3 million |
| Operating income | $57.5 million; 28% of revenue | $38.0 million; 33% of revenue |
| Net income | $20.5 million; 10% of revenue | $15.9 million; 14% of revenue |
| Adjusted EBITDA (non-GAAP) | $65.2 million | $39.2 million |
| Cash from operating activities | $75.0 million | $(36.6) million |
| Cash at year-end | $133.4 million | $4.0 million |
| Working capital | $172.3 million | Not stated here |
| Debt outstanding | $25.8 million | $45.9 million, net |
Revenue grew 78% year over year; gross spend grew 86%. Operating expenses rose 92% to $145.4 million, including increases in platform operations, sales and marketing, technology and development, and general and administrative expense. Operating margin declined to 28% from 33%, while net margin declined to 10% from 14%. The 2016 effective tax rate was 53.3%, versus 46.6% in 2015.
Fourth-quarter 2016 revenue was $72.4 million, operating income was $24.0 million, and net income was $10.3 million. The quarter was the strongest revenue quarter of 2016, consistent with the company’s stated seasonal pattern.
Investing cash outflow was $9.2 million and financing cash inflow was $63.5 million in 2016. Operating cash flow benefited substantially from a $209.5 million increase in accounts payable, which exceeded the $187.7 million increase in accounts receivable. Days sales outstanding rose to 105 days from 93; days payable outstanding rose to 84 from 62.
The company had a $125 million asset-based revolving credit facility, with availability subject to eligible receivables and reserves; $25.8 million was outstanding at year-end, at a weighted-average interest rate of 2.19%. The facility matures in March 2018, is secured by substantially all assets, and includes financial and operating covenants. The company reported covenant compliance at year-end.
Material changes and unusual items
- In September 2016, the company completed its IPO, receiving approximately $78.1 million in net proceeds before offering costs. Preferred shares converted into Class B common stock; Class A shares have one vote and Class B shares have ten votes per share.
- Although GAAP net income was $20.5 million, net loss attributable to common stockholders was $26.7 million, or $(1.46) per share. This reflected a $47.2 million premium paid above carrying value in the repurchase of preferred stock, which reduced income attributable to common stockholders.
- Adjusted EBITDA is non-GAAP and excludes, among other items, taxes, interest, stock-based compensation, depreciation and amortization, and warrant fair-value changes. It should not be treated as a substitute for GAAP earnings or cash flow.
- General and administrative expense increased 142%, partly due to IPO preparation and public-company costs, higher personnel and professional-services costs, and a $1.3 million increase in bad-debt expense. The allowance for doubtful accounts ended 2016 at $2.6 million.
- Client concentration is material: three clients each accounted for 11%–15% of 2016 gross billings. Three clients represented 27%, 13%, and 12% of year-end receivables.
Outlook, management commentary, and risks
Management provided no specific numerical revenue or earnings guidance in the supplied filing text. It expects operating expenses to increase in the foreseeable future as it invests in technology, platform operations, sales and marketing, international expansion, and programmatic television. Management cautioned that these investments may weigh on near-term profitability and that revenue as a percentage of gross spend may fluctuate or decline, including with client mix, discounts, and growth in television spend.
- Growth priorities include increasing spend from existing clients, adding clients, expanding omnichannel inventory (particularly television and digital radio), investing in data and technology, and growing internationally, including planned investment in China.
- Revenue is seasonal: historically, the fourth quarter is strongest and the first quarter weakest. Political advertising and major events may also affect quarterly results.
- Working-capital risk is significant. Client payment terms can depend on advertisers paying agencies, while the company generally must pay suppliers regardless of collection; management notes reliance on the credit facility to help fund working capital.
- Other key risks include client and agency concentration and churn, intense competition, inventory access and quality, privacy and data-protection regulation, cookie restrictions, cybersecurity and platform outages, foreign exchange exposure, and execution risks from international expansion.
- The company disclosed material weaknesses in internal control over financial reporting identified in 2015, including insufficient accounting resources, incomplete formal controls, and IT general-control and segregation-of-duties deficiencies. These weaknesses contributed to a restatement of 2014 financial statements and material 2015 adjustments. Management concluded disclosure controls were not effective as of December 31, 2016; remediation was ongoing.
- No material pending legal proceedings were reported. The filing says the company was not party to legal proceedings expected to have a material adverse effect.
Most important facts for investors to verify
- Whether revenue growth converts into sustainable operating and net margins as expenses and television and international investments rise.
- Whether operating cash flow remains positive after accounting for working-capital timing, especially the large rise in accounts payable and the 105-day DSO.
- How client and receivables concentration, sequential-liability contracts, and bad-debt exposure evolve.
- Whether the $25.8 million debt balance, receivables-based borrowing availability, covenant compliance, and March 2018 maturity remain manageable.
- Progress in remediating the disclosed material weaknesses and establishing effective financial-reporting controls.
- The effect of privacy, cookie, and data regulations on targeting capabilities and the company’s ability to scale programmatic advertising across channels and geographies.
- The distinction between positive GAAP net income and the 2016 loss attributable to common stockholders, including the preferred-stock repurchase adjustment, and the limitations of Adjusted EBITDA.