The Trade Desk, Inc. — Q1 2017 Form 10-Q
Period: Three months ended March 31, 2017; unaudited. Unless stated otherwise, amounts are in U.S. dollars. The company provides a self-service platform for agencies and other buyers to manage data-driven digital advertising campaigns, charging platform fees based on client spending.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $53.4 million | $30.4 million |
| Operating income | $1.9 million | $3.4 million |
| Operating margin | 3.6% | 11.2% |
| Net income (loss) | $4.9 million | $(1.0) million |
| Diluted EPS | $0.11 | $(4.45) |
| Adjusted EBITDA (non-GAAP) | $6.3 million | $4.3 million |
| Operating cash flow | $(22.7) million | $16.9 million |
- Revenue increased 76%, primarily from higher gross spend by existing clients, driven by more campaigns per client. Operating expenses rose 91% to $51.4 million; technology and development and general and administrative costs grew especially quickly.
- Q1 2017 net income included a $3.8 million income tax benefit, including approximately $5.3 million of discrete benefits from disqualifying incentive stock option dispositions. Adjusted EBITDA is non-GAAP and excludes, among other items, taxes, stock-based compensation and secondary-offering costs.
- Cash was $106.6 million at quarter-end, down from $133.4 million at December 31, 2016. Net working capital was $179.8 million. Current assets were $432.7 million and current liabilities $252.9 million.
- Operating cash use reflected seasonal declines in accounts payable ($87.9 million) and accounts receivable ($59.2 million). DSO was 82 days versus 76 a year earlier; DPO was 60 versus 51.
- Debt was $25.8 million, bearing a 2.44% weighted-average rate at March 31; the company reported covenant compliance. On May 9, the company amended its secured revolving facility, increasing commitments by $75 million to up to $200 million, subject to conditions. The facility matures in 2022 and is secured by substantially all company assets.
- Investing cash outflow was $4.2 million, including $3.6 million for property and equipment. The company reported $33.5 million in purchase commitments, primarily for hosting services.
Changes, outlook and notable items
- Compared with Q1 2016, the company moved from a net loss to net income, while operating income and operating margin declined despite strong revenue growth. The prior-year common-stockholder loss and EPS were significantly affected by a $47.2 million premium on preferred-stock repurchases; EPS comparisons are therefore not directly indicative of operating improvement.
- Management expects operating expenses to increase in absolute dollars as it invests in platform operations, technology, sales and marketing, international expansion, infrastructure and public-company requirements. Such investment may weigh on near-term profitability. No numerical revenue or earnings guidance is provided.
- The company says take rate may fluctuate or decline with customer, channel and product mix, volume discounts and adoption of new features. Growth opportunities include video, television, digital radio, data and international markets, including China.
- In March, selling stockholders sold 7.28 million Class A shares at $35.50 per share, including the fully exercised underwriters’ option. The company received no proceeds and incurred about $0.9 million of offering costs.
- Bad-debt expense was $3.3 million, primarily from reserves for two clients; the allowance for doubtful accounts increased to $5.7 million from $2.6 million at year-end. The company’s agency-heavy model can expose it to collection risk while supplier payments remain due.
- Management concluded disclosure controls were not effective at the reasonable-assurance level because previously identified material weaknesses in financial reporting controls remained under remediation. Management stated the financial statements fairly present the periods shown.
- Risk disclosures emphasize competition, client and inventory-supplier dependence, advertising seasonality, working-capital timing, privacy and data regulation, cybersecurity and platform reliability, foreign exchange, and the execution risks of growth and international expansion. The filing also identifies a New York sales-tax dispute: the state asserts the services may be taxable, which the company contests.
- The filing reports no legal proceedings management believed would have a material adverse effect. It also describes indemnification commitments, but no material claims or amounts were recorded.
Important facts for investors to verify
- Whether revenue growth and increased client campaign activity continue, and how gross spend growth translates into revenue as take rate and channel mix change.
- Whether operating expense growth, especially technology and development and corporate costs, supports durable operating margins.
- Whether receivables, bad debt, DSO and seasonal supplier-payment patterns affect working-capital needs and cash generation.
- Availability and terms of the amended asset-based facility, including borrowing-base limits, covenants, collateral and any fixed-charge coverage requirements.
- Progress in remediating material weaknesses and the effect of the discrete tax benefit on the sustainability of reported net income.
- Potential outcomes of the New York sales-tax position and evolving privacy, data-protection and advertising regulations.