Business context and reporting period
The Trade Desk, Inc. operates a self-service, cloud-based platform for programmatic digital advertising across channels including display, video, connected TV (CTV), audio, native and social. It earns revenue primarily through platform fees based on client advertising spend, plus data and other platform services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Revenue is reported net of supplier costs, while accounts receivable and payable reflect gross billings and related supplier obligations.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $394.8 million | $301.1 million | $1,087.1 million | $800.9 million |
| Operating income | $28.8 million | $80.4 million | $13.5 million | $150.2 million |
| Operating margin | 7% | 27% | 1% | 19% |
| Net income (loss) | $15.9 million | $59.4 million | ($17.8 million) | $129.7 million |
| Net margin | 4% | 19% | (2)% | 16% |
| EPS, diluted | $0.03 | $0.12 | ($0.04) | $0.26 |
For the first nine months, operating cash flow was $375.3 million, versus $215.1 million in 2021. Investing activities used $165.8 million and financing activities provided $31.0 million. Cash and cash equivalents were $994.7 million at September 30, with $326.7 million of short-term investments, for combined cash and investments of $1.32 billion. Working capital was $1.63 billion.
Total liabilities were $2.01 billion, including $1.65 billion in accounts payable and $266.8 million in operating lease liabilities. The company had no borrowings under its $450 million revolving credit facility; $445 million was available after letters of credit. It reported compliance with facility covenants.
Material changes versus the prior comparable period
- Revenue grew 31% in Q3 and 36% for the nine-month period, primarily from higher platform spend, reflecting more advertisers and increased spend per campaign among existing clients.
- Profitability declined sharply: Q3 net income fell 73%, while the nine-month period shifted to a net loss from net income in 2021. Operating expenses rose 66% in Q3 and 65% year to date.
- General and administrative expense rose 151% in both comparison periods, primarily because of stock-based compensation on the CEO Performance Option: $66 million in Q3 and $197 million year to date. Total stock-based compensation was $121.0 million in Q3 and $371.1 million for nine months, versus $34.5 million and $132.0 million, respectively, in 2021.
- Nine-month income tax expense was $33.1 million despite a pretax profit of $15.3 million. The filing attributes tax-rate differences principally to nondeductible stock compensation and stock-award tax benefits.
Outlook, management commentary, risks and unusual items
The filing provides no specific numerical revenue or earnings guidance. Management expects operating expenses to rise in absolute dollars as it invests in platform operations, technology and development, sales and marketing, international expansion, CTV and infrastructure; it cautions that these investments may weigh on near-term profitability. Management believes cash, operating cash flow and undrawn credit availability will fund working capital needs for at least the next 12 months.
Management cited uncertainty from COVID-19, inflation, rising interest rates, foreign-exchange movements, geopolitical developments and possible economic slowdown, which could pressure advertiser budgets and complicate forecasting. Other material risks include client and agency concentration and churn, competition, inventory access, credit and collection timing, platform or cybersecurity outages, and evolving privacy and data-protection rules. The filing notes that supplier payments may be due before client collections.
The CEO Performance Option is a significant unusual compensation item: $465 million of related unrecognized compensation remained at September 30, 2022, expected to be recognized over a weighted-average 2.4 years assuming no acceleration. Unrecognized compensation also included approximately $461 million for restricted stock and $98 million for stock options, excluding the CEO award. Two consolidated derivative lawsuits allege fiduciary-duty breaches in connection with approval of the CEO Performance Option and seek rescission and monetary damages; defendants intend to move to dismiss. A separate earlier class action was dismissed with prejudice in July 2022. The company said it did not believe ordinary-course litigation would materially affect its financial statements.
The company reported effective disclosure controls as of September 30, 2022 and no significant quarterly changes in internal control over financial reporting. It said the Inflation Reduction Act was not expected to have a material financial impact, subject to ongoing evaluation.
Important facts for investors to verify
- Whether platform spend and revenue growth continue, particularly in CTV and other developing channels, amid economic uncertainty and changing advertiser budgets.
- How much the CEO Performance Option and other equity awards affect future operating expenses, earnings, tax expense and dilution; review the award’s vesting and valuation assumptions.
- Whether operating cash flow remains strong as supplier payments, client collections, credit losses and seasonal working-capital needs fluctuate.
- Developments in the derivative litigation challenging the CEO Performance Option, including any consolidated complaint or court rulings.
- Changes in privacy regulation, identifier availability, inventory access and cybersecurity or platform reliability that could affect the value and use of the platform.