Trade Desk, Inc. quarterly report, Q2 FY2020

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

MetricQ2 2020Q2 2019Six months 2020Six 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 flowSix-month period: $149.0mPrior-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.