The Trade Desk, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; financial statements are unaudited. The Trade Desk operates a self-service digital advertising platform and generally recognizes revenue as net platform fees, while billing clients for substantial pass-through media and data costs.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Revenue | $85.7 million | $53.4 million | Up 61%; growth primarily reflected higher platform spend by existing clients and more campaigns per client. |
| Gross billings | $406.0 million | $245.0 million | Reported separately from net revenue; includes gross client billings. |
| Operating expenses | $75.7 million | $51.4 million | Up 47%; platform operations and technology and development grew substantially. |
| Operating income / margin | $9.9 million / 12% | $1.9 million / 4% | Improved as revenue grew faster than total operating expenses. |
| Net income | $9.1 million | $4.9 million | Net margin was 11% versus 9%. |
| Diluted EPS | $0.20 | $0.11 | Weighted-average diluted shares were 44.5 million versus 43.6 million. |
| Cash flow from operations | $11.8 million provided | $22.7 million used | Q1 2018 cash flow reflected seasonal reductions in receivables and payables. |
| Investing cash flow | $2.7 million used | $4.2 million used | Primarily equipment purchases and capitalized software development. |
| Financing cash flow | $26.1 million used | $0.2 million provided | Included repayment of $27.0 million under the revolving credit facility. |
Financial position and liquidity
- Cash and cash equivalents were $139.0 million at March 31, 2018, down from $156.0 million at year-end 2017; $32.2 million was held by international subsidiaries.
- Working capital was $236.8 million. Current assets were $706.5 million and current liabilities were $469.7 million.
- No revolving credit facility balance remained outstanding. Availability was $194.6 million, subject to borrowing-base conditions; the company reported covenant compliance. The facility matures in May 2022.
- Accounts receivable were $556.7 million and accounts payable were $440.7 million. These balances are large relative to reported net revenue because the company records gross client receivables and supplier payables while reporting platform fees net.
- Non-cancelable operating lease commitments totaled $41.1 million.
Material changes and notable items
- Revenue rose 61% year over year. Platform operations expense increased 82%, technology and development 69%, sales and marketing 28%, and general and administrative 20%.
- Stock-based compensation increased to $7.3 million from $2.3 million, including $3.0 million related to the employee stock purchase plan versus $1.0 million in Q1 2017.
- The income tax provision was $0.2 million, compared with a $3.8 million tax benefit a year earlier. Both periods included discrete tax benefits tied primarily to stock-based awards: $3.2 million in 2018 and $5.3 million in 2017.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method; it reported no change to the timing or amount of revenue recognized.
Outlook, management commentary, and risks
- Management expects operating expenses to continue increasing in absolute dollars, citing investment in platform operations, technology, sales and marketing, infrastructure, international expansion, and new advertising channels including connected TV. These investments may weigh on near-term profitability; management believes operating leverage can support profitable growth over time.
- The filing provides no specific quantified revenue, earnings, or full-year guidance. Management stated that cash, operating cash flow, and undrawn credit availability should meet working-capital needs for at least the next 12 months.
- Key business risks include dependence on agency clients and their advertising budgets, client concentration through agency holding companies, competition, supplier and inventory access, collection and payment timing, and seasonal advertising spend. Management notes that fourth-quarter spend is typically higher and that supplier payments may precede client collections.
- Privacy and data regulation are significant uncertainties. The filing discusses the EU General Data Protection Regulation, scheduled to take effect May 25, 2018, and potential effects on data use, inventory, compliance costs, and international operations.
- A previously identified material weakness in IT general controls over certain platform system applications remained unremediated. Management concluded disclosure controls and procedures were not effective as of March 31, 2018; remediation and sustained testing were ongoing. Management nevertheless stated that the presented financial statements fairly present the company’s financial position and results in conformity with U.S. GAAP.
- The company reported no legal proceedings expected to have a material adverse effect and no material indemnification claims. A hypothetical 10% adverse foreign-exchange move would have resulted in an estimated $9.4 million loss on foreign-denominated accounts at quarter-end.
Important facts for investors to verify
- Whether the company remediates and tests the IT-controls material weakness, and whether disclosure controls are subsequently judged effective.
- Whether revenue growth continues to come from higher client spend and campaign activity, and how net revenue tracks gross platform spend and gross billings.
- Whether rising hosting, personnel, and technology costs—and stock-based compensation—affect operating margins and cash generation.
- Whether seasonal collections and supplier-payment timing, agency sequential-liability terms, and receivable quality create working-capital or credit-facility demands.
- How GDPR and other privacy or tracking changes affect the company’s platform, access to data and inventory, compliance costs, and international growth.