Business context and reporting period
The Trade Desk, Inc. filed this unaudited Form 10-Q for the quarter ended June 30, 2022. The company operates a self-service, cloud-based platform for programmatic digital advertising and earns revenue primarily from platform fees and value-added services. Reported revenue is net of amounts paid to suppliers for advertising inventory, data and other features; accounts receivable and accounts payable therefore appear large relative to revenue.
Financial performance
Amounts are in millions of U.S. dollars except per-share data and percentages. Q2 and first-half comparisons are with the corresponding 2021 periods.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $377.0 | $280.0 | $692.3 | $499.8 |
| Operating income (loss) | $1.7 | $61.9 | ($15.3) | $69.7 |
| Net income (loss) | ($19.1) | $47.7 | ($33.7) | $70.3 |
| Diluted EPS | ($0.04) | $0.10 | ($0.07) | $0.14 |
| Operating margin | 0.5% | 22.1% | (2.2%) | 14.0% |
| Net margin | (5.1%) | 17.0% | (4.9%) | 14.1% |
Revenue increased 35% in Q2 and 39% in the first half, primarily as gross spend on the platform rose, driven mainly by more advertising campaigns per client. The filing does not provide a clear gross-margin value.
Cash flow, liquidity and debt
- First-half operating cash flow was $238.0 million, versus $85.4 million a year earlier. Investing activities used $93.6 million and financing activities provided $34.1 million. Cash and cash equivalents increased $178.5 million to $932.7 million.
- At June 30, cash and cash equivalents were $932.7 million and short-term investments were $280.5 million, totaling $1.213 billion. Working capital was $1.531 billion.
- The company had no borrowings under its $450 million revolving credit facility; $444 million was available after $6 million of letters of credit. The facility matures June 15, 2026, and the company reported compliance with its covenants.
- Accounts receivable were $1.903 billion and accounts payable were $1.537 billion. The company notes that it generally must pay suppliers within negotiated periods even when clients pay late or not at all.
Material changes versus the prior comparable period
- Profitability weakened sharply despite strong revenue growth: Q2 operating income fell to $1.7 million from $61.9 million, and net income shifted to a $19.1 million loss from $47.7 million of income. First-half net income shifted from $70.3 million of income to a $33.7 million loss.
- General and administrative expense rose 160% in Q2 and 151% in the first half. Management attributed much of the increase to CEO Performance Option compensation: $66 million in Q2 and $131 million in the first half. Total stock-based compensation was $125.2 million in Q2 and $250.1 million in the first half, versus $45.2 million and $97.6 million, respectively, in 2021.
- Other operating expenses also increased with investment in personnel, platform development, sales and marketing, data, hosting and facilities. Revenue growth exceeded the growth of each of these expense categories except general and administrative.
- Cash from operations improved year over year, helped by noncash adjustments and working-capital timing, including collections from clients and payments to suppliers.
Outlook, risks and unusual items
- The filing gives no specific numeric revenue or earnings guidance. Management expects operating expenses to increase in absolute dollars as it invests in platform operations, technology and development, sales and marketing, international expansion and corporate infrastructure; it cautions that these investments may weigh on near-term profitability.
- Management stated that cash, operating cash flow and undrawn credit availability should be sufficient for working-capital needs for at least the next 12 months, while noting uncertainty around macroeconomic conditions and the company’s operating performance.
- Management cited COVID-19, geopolitical and broader economic developments as sources of uncertainty for advertising demand, collections and estimates. It said the effects and duration could not be predicted clearly.
- Key business risks include client and agency retention, advertising-budget reductions, supplier access and payment timing, competition, platform reliability and cybersecurity, and privacy rules and changes to identifiers such as cookies and mobile ad IDs. The filing highlights upcoming privacy requirements, including California and Virginia laws taking effect in January 2023.
- The CEO Performance Option is a significant noncash compensation item and also contributes to nondeductible stock-based compensation and tax expense. Despite the first-half pretax loss, the company recorded an $18.4 million income-tax provision for the period.
- A shareholder class action concerning 2020 charter amendments was dismissed with prejudice on July 29, 2022, after quarter-end; the plaintiff may appeal. Two derivative suits filed in May and June 2022 challenge the CEO Performance Option and seek rescission and monetary damages. The company intends to seek dismissal.
Important facts for investors to verify
- How much of future reported earnings and cash generation is affected by CEO Performance Option and other stock-based compensation, including the remaining unrecognized awards.
- Whether revenue growth continues and how advertising spend, campaign activity, channel mix and client concentration evolve.
- Whether expense growth moderates enough to restore operating profitability, given management’s plans for continued investment.
- Whether client collections, supplier payment timing and credit losses affect working capital and operating cash flow.
- Developments in the derivative litigation, privacy regulation and changes to advertising identifiers, and their potential effects on operations and financial results.