The Trade Desk, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The Trade Desk operates a self-service, cloud-based platform for buying and optimizing digital advertising. It earns platform fees based primarily on client advertising spend, plus fees for data and other services. Revenue is reported net of advertising inventory and other supplier costs.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $159.9 million | $112.3 million | $280.9 million | $198.0 million |
| Operating income | $31.9 million | $26.2 million | $37.6 million | $36.1 million |
| Net income | $27.8 million | $19.3 million | $38.0 million | $28.4 million |
| Diluted EPS | $0.58 | $0.43 | $0.80 | $0.63 |
| Operating margin | 20% | 23% | 13% | 18% |
| Net margin | 17% | 17% | 14% | 14% |
Revenue grew 42% year over year in both periods, which management attributed primarily to increased platform spend by existing clients, driven by more campaigns per client. Q2 operating expenses rose 49% to $128.0 million; general and administrative costs increased 66%, sales and marketing 50%, and technology and development 51%. Management cited hiring, stock-based compensation, hosting, and new office costs. Gross margin is not separately presented in the filing.
For the six months, operating cash flow was $20.8 million, versus $12.4 million a year earlier. Investing activities used $119.4 million, primarily for purchases of short-term investments ($122.4 million) and property and equipment ($17.0 million), partly offset by investment maturities. Financing activities provided $22.0 million. Cash and cash equivalents were $130.6 million at quarter-end, down from $207.2 million at year-end; short-term investments were $100.5 million, for combined cash and investments of $231.1 million. Working capital was $413.5 million.
There was no debt outstanding under the credit facility at June 30; $143.3 million remained available under commitments of up to $150 million. The company reported compliance with facility covenants. Accounts receivable were $830.6 million and accounts payable $616.2 million; the filing explains these balances are large relative to net revenue because receivables reflect gross client billings while revenue is reported net of supplier costs.
Changes, outlook, and notable items
- Although revenue and net income increased year over year, operating margin fell from 23% to 20% in Q2 and from 18% to 13% for the first half as expenses grew faster than revenue. Six-month operating income was nearly flat year over year.
- Stock-based compensation was $21.1 million in Q2 and $36.9 million for the first half, compared with $9.3 million and $16.5 million, respectively, in 2018. This is a substantial noncash expense and contributes to potential share dilution.
- The six-month income-tax provision was $0.8 million, compared with $5.9 million in 2018; the reported effective rate was 2%, reflecting, in part, $20.3 million of tax benefits associated with stock-based awards. Q2’s effective rate was 17%.
- Adoption of the new lease standard in January 2019 brought operating lease assets and liabilities onto the balance sheet. At June 30, operating lease liabilities totaled $88.5 million; reported adoption effects on income and cash flows were not material. Lease and other contractual commitments totaled $461.0 million, including $214.7 million of other commitments to hosting, marketing, and software-service providers.
- No numerical revenue or earnings guidance is provided. Management expects operating expenses to increase in absolute dollars as it invests in platform operations, technology and development, sales and marketing, infrastructure, and international expansion, including China. It expects these investments to support long-term growth but may weigh on near-term profitability. Management believes available liquidity and operating cash flows, together with undrawn credit, will meet working-capital needs for at least 12 months.
- Key risks include client spending volatility and concentration through agencies, competition, access to quality advertising inventory, payment timing and credit risk, platform outages and cybersecurity, and evolving privacy and data-protection rules. The filing also identifies foreign-exchange exposure; a hypothetical immediate 10% adverse currency move would produce an estimated $15.4 million loss on foreign-currency-denominated balances.
- Management reported no material adverse litigation matters and effective disclosure controls as of June 30. A new accounting and financial reporting system went live in July, with implementation expected to be completed in the quarter ending September 30, 2019.
Important facts for investors to verify
- Whether the 42% revenue growth rate is sustained, and how much reflects higher client spend versus broader client adoption or pricing and mix.
- Whether expense growth—particularly general and administrative costs and stock-based compensation—moderates enough to stabilize or improve operating margins.
- Cash conversion and working-capital trends, including timing of client collections and supplier payments, and whether reported operating cash flow remains sufficient as the business grows.
- Investment and contractual commitments, including the company’s lease obligations and planned spending on infrastructure and international expansion.
- Potential effects of privacy regulation, cookie and device-identifier changes, cybersecurity incidents, and foreign-currency movements on the platform and results.