The Trade Desk, Inc. — Q2 2020 Form 10-Q
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2020, compared with the same periods in 2019. The Trade Desk operates a self-service, cloud-based platform for programmatic digital advertising and generally earns platform fees based on client advertising spend. Revenue is reported net of advertising inventory and other supplier costs.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $139.4m | $159.9m | $300.0m | $280.9m |
| Operating income (loss) | $(15.8)m | $31.9m | $(5.0)m | $37.6m |
| Net income | $25.1m | $27.8m | $49.2m | $38.0m |
| Diluted EPS | $0.52 | $0.58 | $1.01 | $0.80 |
| Operating cash flow | Six-month period: $149.0m | Prior-year six-month period: $43.8m |
Q2 operating margin was approximately (11)% versus 20% a year earlier; net margin was approximately 18% in both periods. Six-month operating margin was approximately (2)% versus 13% in 2019; net margin was approximately 16% versus 14%. These margins are calculated from reported revenue and income.
At June 30, 2020, cash and cash equivalents were $426.3m, short-term investments $129.0m, total current assets $1,491.8m, and current liabilities $730.7m. The company reported working capital of $761.1m. Debt was $142.0m, at a weighted-average annual rate of 1.68%; only $1.6m remained available under the $150m credit facility. Operating lease liabilities totaled $236.9m.
Changes versus prior comparable periods
- Q2 revenue fell 13%, principally because COVID-19 reduced advertising spend among existing clients. Six-month revenue increased 7%, primarily from higher platform spend by existing clients and more campaigns per client.
- Q2 operating expenses rose 21% to $155.1m while revenue declined. Technology and development increased 36%, platform operations and sales and marketing each increased 19%, and general and administrative increased 12%. The company recorded an operating loss, compared with operating income in Q2 2019.
- Six-month operating expenses rose to $305.0m from $243.3m, exceeding revenue growth. Operating performance weakened despite higher six-month net income.
- Six-month operating cash flow increased to $149.0m from $43.8m. The 2020 amount reflected working-capital movements, including a $293.6m decrease in receivables, partly offset by a $214.4m decrease in accounts payable.
- Cash increased from $130.9m at year-end 2019, including a $143.0m credit-facility draw in March 2020. The draw was precautionary amid pandemic uncertainty.
Outlook, commentary, risks and unusual items
- Management said the pandemic slowed revenue growth, which turned negative in Q2; the duration and scale of further effects could not be reliably predicted. The company said cash, cash flows from operations and existing liquidity should cover working-capital requirements for at least 12 months.
- No specific revenue or earnings guidance was provided. Management expects operating expenses to increase in absolute dollars, with continued investment in platform operations, technology, sales and marketing, international expansion, and infrastructure; these investments may pressure near-term profitability.
- Income included substantial tax benefits: $48.8m for Q2 and $73.1m for the first half associated with stock-based awards. The first-half tax benefit also reflected an expected CARES Act NOL carryback. The resulting tax benefit drove positive net income despite pretax losses; the company used the discrete effective tax rate method because COVID-19 made its annual tax rate difficult to estimate.
- Stock-based compensation was $23.9m in Q2 and $46.9m for the first half, up from $21.1m and $36.9m, respectively, in 2019.
- Credit risk is heightened by pandemic-related uncertainty and sequential-liability arrangements: the company may owe suppliers before clients pay, and it increased its receivables allowance under the new expected-credit-loss standard. Adoption of CECL in January 2020 had an immaterial opening retained-earnings impact.
- Other key risks include advertising-budget reductions, dependence on agency clients and third-party inventory, competition, platform and cybersecurity disruptions, privacy regulation and restrictions on identifiers/cookies. The filing notes the July 2020 invalidation of the EU-U.S. Privacy Shield and uncertainty over cross-border data transfers.
- The company reported no current legal proceeding expected to have a material adverse effect and no material change in internal control over financial reporting; disclosure controls were assessed as effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether advertising spend and revenue recover from the Q2 pandemic-driven decline, and how client spending and channel mix develop.
- How much reported earnings depend on stock-based compensation tax benefits and the expected CARES Act NOL carryback; assess operating results before these tax effects.
- Whether operating expenses continue to outpace revenue and whether the company returns to operating profitability.
- Cash conversion and working-capital sustainability, including collections, sequential-liability exposure, receivables allowances, and supplier payment timing.
- Debt terms, covenant compliance, variable-rate exposure, and the company’s limited remaining facility availability and May 2022 facility maturity.
- Potential business effects and compliance costs from privacy and data-transfer rules, including the Privacy Shield decision, CCPA/GDPR requirements, and changes to third-party cookies and mobile identifiers.