The Trade Desk, Inc. — Q1 2019 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. The Trade Desk operates a self-service, cloud-based platform for programmatic digital advertising and earns revenue primarily from platform fees tied to client advertising spend. Revenue is reported net of supplier costs, so it is not directly comparable to gross billings.
Financial performance and liquidity
- Revenue: $121.0 million, up 41% from $85.7 million. Management attributed growth mainly to greater platform spend by existing clients, driven by more campaigns per client. Gross billings were $556.4 million versus $406.0 million.
- Profitability: Operating income was $5.7 million, down from $9.9 million; operating margin fell to about 5% from 12%. Net income was $10.2 million versus $9.1 million; diluted EPS was $0.21 versus $0.20.
- Expenses: Operating expenses rose 52% to $115.3 million. General and administrative expense increased 76% to $33.6 million; stock-based compensation expense increased to $15.9 million from $7.3 million.
- Taxes: The company recorded an income tax benefit of $4.8 million, compared with a $0.2 million provision in Q1 2018. The 2019 benefit included $11.0 million related to stock-based awards, versus $3.4 million a year earlier.
- Cash flow: Operating cash flow was $9.7 million, compared with $11.8 million. Investing activities used $81.5 million, including $74.0 million for short-term investments. Financing activities provided $8.4 million, primarily from stock option exercises. Cash and cash equivalents declined to $143.8 million from $207.2 million; short-term investments were $74.1 million.
- Liquidity and debt: Working capital was $361.3 million. No debt was outstanding under the credit facility; $143.3 million was available, subject to conditions. The facility provides up to $150 million and matures in May 2022; the company reported covenant compliance.
- Balance sheet and commitments: Total assets were $1.08 billion and total liabilities $653.0 million. Operating lease liabilities were $79.6 million. Reported contractual commitments totaled $472.9 million, including lease commitments and other contracts.
Material changes versus Q1 2018
- Revenue grew substantially, but expenses grew faster, reducing operating income and operating margin despite higher net income.
- Accounts receivable and accounts payable were both large because the company records client receivables based on gross billings while reporting revenue net of supplier costs. Their movements materially affected quarterly operating cash flow.
- The company adopted ASC 842 leases on January 1, 2019, recognizing approximately $41 million of right-of-use assets and $47 million of lease liabilities at adoption. Comparative periods were not restated.
- Cash and cash equivalents decreased, while the company placed $74.0 million into short-term investments.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management expects operating expenses to continue increasing, including investment in platform operations, technology, sales and marketing, international expansion, and infrastructure. These investments may weigh on near-term profitability.
- Management said existing cash, operating cash flows, and undrawn credit availability should meet working-capital needs for at least 12 months, while noting liquidity could be affected if operating performance falls below expectations.
- Key risks include dependence on advertising-agency clients and their spend, variable client payment cycles and potential bad debt, competition, access to quality ad inventory, platform outages or security incidents, and privacy regulation, including GDPR and the forthcoming California Consumer Privacy Act.
- Foreign currency exposure is material: the filing estimates an approximately $11.9 million loss from an immediate 10% adverse move in foreign exchange rates on foreign-denominated accounts. The company uses forward contracts or other derivatives but cautions hedging may not be effective.
- Management reported no litigation or indemnification claims expected to have a material adverse effect. The company stated disclosure controls were effective as of March 31, 2019.
Important facts for investors to verify
- Whether revenue growth continues and translates into improved operating margins as expenses rise.
- How much reported net income reflects recurring operations versus the significant stock-award-related tax benefit.
- Cash conversion and working-capital trends, particularly the timing gap between client collections and supplier payments.
- Use of cash and short-term investments, credit-facility availability, and upcoming contractual and lease obligations.
- Progress on international, CTV and other product investments, and exposure to privacy, data-security, currency and advertising-market risks.