The Trade Desk, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. The Trade Desk operates a self-service digital advertising platform and earns revenue primarily through platform fees based on client advertising spend, plus data and other services.
Financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $160.7 million | $121.0 million | +33% |
| Operating expenses | $149.9 million | $115.3 million | +30% |
| Operating income | $10.8 million | $5.7 million | +90% |
| Operating margin | 6.7% | 4.7% | +2.0 percentage points |
| Net income | $24.1 million | $10.2 million | +137% |
| Diluted EPS | $0.50 | $0.21 | — |
| Operating cash flow | $52.7 million | $9.7 million | +$43.0 million |
Net income included income tax benefits of $13.7 million, principally reflecting employee stock-option exercises and restricted-stock vesting; related tax benefits were $24.3 million, versus $11.0 million in Q1 2019. This benefit materially boosted reported net income, so earnings growth exceeded operating-income growth. Stock-based compensation was $23.0 million, compared with $15.9 million.
Revenue is reported net of supplier costs. Gross billings were $751.8 million, up from $556.4 million in Q1 2019; accounts receivable and accounts payable therefore appear large relative to reported revenue.
Liquidity, debt, and cash flow
- At March 31, cash and cash equivalents were $325.2 million and short-term investments were $120.6 million, totaling $445.8 million. Working capital was $707.4 million.
- The company drew $143.0 million on its revolving credit facility in March as a precautionary COVID-19 liquidity measure. The balance bore a 2.20% weighted-average annual rate; the facility matures in May 2022. The company reported covenant compliance. A one-percentage-point rate change would affect annual interest expense by approximately $1.4 million.
- Operating cash flow was $52.7 million, reflecting net income and noncash adjustments, partly offset by working-capital movements. Receivables declined $210.6 million, while payables declined $206.0 million, primarily due to collections, supplier-payment timing, seasonality, and lower platform spend.
- Investing activities used $15.8 million, including $18.3 million for property and equipment, partly offset by investment maturities. Financing activities provided $157.4 million, mainly from the credit-facility draw and stock-option exercises.
- Recorded operating lease liabilities totaled $227.2 million. Other contractual commitments for hosting, marketing, and software services totaled $180.6 million. Management said existing cash and operating cash flows should cover working-capital needs for at least 12 months.
Changes, outlook, and risks
- Management attributed year-over-year revenue growth primarily to higher spend by existing clients and more campaigns per client. Advertising spend declined in the latter part of the quarter as COVID-19 affected business activity; management said revenue growth had slowed and the pandemic’s magnitude and duration were not reliably predictable.
- Operating expenses rose across all categories. Sales and marketing increased 51%, technology and development 45%, platform operations 19%, and general and administrative 15%. Management expects expenses to continue rising in absolute dollars as it invests in platform operations, technology, sales, international expansion, and infrastructure; such investment may weigh on near-term profitability.
- No numerical full-year revenue or earnings guidance is provided. The company cautioned that Q1 results are not necessarily indicative of full-year results and said COVID-19 creates greater uncertainty in estimates, forecasting, client demand, collections, and credit losses.
- Key risks include reduced or delayed advertising budgets and client payments, while supplier payments may remain due regardless; client concentration and limited contract commitments; competition and access to advertising inventory; privacy and data-protection regulation, including the CCPA and GDPR; platform availability and cybersecurity; and foreign-exchange and variable-rate debt exposure.
- The company recorded a $1.3 million allowance for credit losses on receivables in Q1 and a $0.3 million credit loss on available-for-sale securities. It adopted the expected-credit-loss standard on January 1, 2020; the opening retained-earnings adjustment was not material.
- Management said ordinary-course legal matters were not expected to have a material adverse effect and no material indemnification liability was recorded. Disclosure controls were effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How advertising demand, revenue growth, and client spending developed after Q1 as COVID-19 effects continued.
- Whether client collections, sequential-liability arrangements, and supplier-payment timing create further credit losses or working-capital pressure.
- How much reported earnings growth depends on stock-based compensation tax benefits, and whether those benefits recur.
- Credit-facility terms, covenants, variable interest exposure, repayment capacity, and the purpose and duration of the $143.0 million draw.
- Progress and returns on spending in CTV, international markets, and technology, alongside rising operating expenses and contractual commitments.