THE TRADE DESK, INC. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally relate to future events or our future financial or operating performance and may include statements concerning, among other things, our business strategy (including anticipated trends and developments in, and management plans for, our business and the markets in which we operate), financial results, the impact of COVID-19 on our business, operations, and the markets and communities in which we, our clients, and partners operate, results of operations, revenues, operating expenses, and capital expenditures, sales and marketing initiatives and competition. In some cases, you can identify forward-looking statements because they contain words such as "may," "might," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "suggests," "potential" or "continue" or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. These statements are not guarantees of future performance; they reflect our current views with respect to future events and are based on assumptions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements. We discuss many of these risks in Part II of this Quarterly Report on Form 10-Q in greater detail under the heading "Risk Factors" and in other filings we make from time to time with theSecurities and Exchange Commission , orSEC . Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q, which are inherently subject to change and involve risks and uncertainties. Unless required by federal securities laws, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made. Given these uncertainties, investors should not place undue reliance on these forward-looking statements. Investors should read this Quarterly Report on Form 10-Q and the documents that we reference in this report and have filed with theSEC , including our Annual Report on Form 10-K for the year endedDecember 31, 2019 , completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
References to "Notes" are notes included in our unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Overview
We are a technology company that empowers buyers of advertising. Through our
self-service, cloud-based platform, ad buyers can create, manage, and optimize
more expressive data-driven digital advertising campaigns across ad formats,
including display, video, audio, native and social, on a multitude of devices,
such as computers, mobile devices, and connected TV ("CTV"). Our platform's
integrations with major data, inventory, and publisher partners provides ad
buyers reach and decisioning capabilities, and our enterprise APIs enable our
clients to develop on top of the platform.
We commercially launched our platform in 2011, targeting display advertising. We
have since extended our platform to address additional advertising formats, and
in 2019, approximately 79% of gross spend on our platform was for mobile, video,
audio, native and social.
Our clients are primarily the advertising agencies and other service providers
for advertisers, with whom we enter into ongoing master service agreements
("MSAs"). We generate revenue by charging our clients a platform fee based on a
percentage of a client's total spend on advertising. We also generate revenue
from providing data and other value-added services and platform features.
Executive Summary
Highlights
For the three months ended
• revenue was
an increase of 32%; and
• net income was $41.2 million and $19.4 million , respectively.
For the nine months ended
• revenue was
an increase of 16%; and
• net income was $90.4 million and $57.4 million , respectively.
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Trends, Opportunities and Challenges
The growing digitization of media and fragmentation of audiences has increased the complexity of advertising, and thereby increased the need for automation in ad buying, which we provide on our platform. In order to grow, we will need to continue to develop our platform's programmatic capabilities and advertising inventory. We believe that key opportunities include our ongoing global expansion, continuing development of our CTV, video, audio, and native ad inventory, and continuing development of data usage and advertising targeting capabilities. We believe that growth of the programmatic advertising market is important for our ability to grow our business. Adoption of programmatic advertising by advertisers allows us to acquire new clients and grow revenue from existing clients. Although our clients include some of the largest advertising agencies in the world, we believe there is significant room for us to expand further within these clients and gain a larger amount of their advertising spend through our platform. We also believe that the industry trends noted above will lead to advertisers adopting programmatic advertising through platforms such as ours.
Similarly, the adoption of programmatic advertising by inventory owners and content providers allows us to expand the volume and type of advertising inventory that we present to our clients. For example, we have expanded our CTV, native and audio advertising offerings through our recent integrations with supply-side partners.
We invest for long-term growth. We anticipate that our operating expenses will continue to increase significantly in the foreseeable future as we invest in platform operations and technology and development to enhance our product features, including programmatic buying of CTV ad inventory, and in sales and marketing to acquire new clients and reinforce our relationships with existing clients. In addition, we expect to continue making investments in our infrastructure, including our information technology, financial and administrative systems and controls, to support our growing operations. In addition, we believe the markets outside ofthe United States ("U.S.") offer an opportunity for growth, and we intend to make additional investments in sales and marketing and product development to expand in these markets, includingChina , where we are making significant investments in our platform and growing our team.
We believe that these investments will contribute to our long-term growth, although they may negatively impact profitability in the near term.
Our business model has allowed us to grow significantly, and we believe that our operating leverage enables us to support future growth profitably.
COVID-19
The worldwide spread of COVID-19 has resulted, and is expected to continue to
result, in a global slowdown of economic activity which is likely to decrease
demand for a broad variety of goods and services, including those provided by
our clients, while also disrupting sales channels and advertising and marketing
activities for an unknown period of time until the virus is contained or
economic activity normalizes. With the current decline in economic activity, our
revenue growth has slowed, and the impact on our revenue and our results of
operations is likely to continue, the size and duration of which we are
currently unable to accurately predict. The extent of the impact of the COVID-19
pandemic on our operational and financial performance will depend on a variety
of factors, including the duration and spread of the virus and its impact on our
clients, partners, industry, and employees, all of which are uncertain at this
time and cannot be accurately predicted. See "Risk Factors" for further
discussion of the adverse impacts of the COVID-19 pandemic on our business.
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Results of Operations
The following tables set forth our condensed consolidated statements of comprehensive income data for each of the periods presented and as a percentage of our revenue for those periods:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands)
Revenue $ 216,113 $ 164,203 $ 516,128 $ 445,114
Operating expenses:
Platform operations 44,826 39,932 127,167 108,913
Sales and marketing 44,637 36,142 116,002 89,951
Technology and development 41,079 29,185 117,931 83,949
General and administrative 42,789 37,017 117,252 102,755
Total operating expenses 173,331 142,276 478,352 385,568
Income from operations 42,782 21,927 37,776 59,546
Total other expense (income), net 223 (1,892 ) 834 (2,979 )
Income before income taxes 42,559 23,819 36,942 62,525
Provision for (benefit from) income taxes 1,312 4,397 (53,473 ) 5,152
Net income $ 41,247 $ 19,422 $ 90,415 $ 57,373
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(as a percentage of revenue*)
Revenue 100 % 100 % 100 % 100 %
Operating expenses:
Platform operations 21 24 25 24
Sales and marketing 21 22 22 20
Technology and development 19 18 23 19
General and administrative 20 23 23 23
Total operating expenses 80 87 93 87
Income from operations 20 13 7 13
Total other expense (income), net - (1 ) - (1 )
Income before income taxes 20 14 7 14
Provision for (benefit from) income taxes 1 3 (11 ) 1
Net income 19 % 11 % 18 % 13 %
* Percentages may not sum due to rounding.
Revenue
Change
2020 2019 $ %
($ in thousands)
Three months ended
32 % Nine months ended September 30,$ 516,128 $ 445,114 $ 71,014 16 % The increase in revenue for the three and nine months endedSeptember 30, 2020 , compared to the same prior year period, was primarily due to increases in gross spend on our platform by existing clients, which was driven by increases in the number of advertising campaigns executed per client, partially offset by a reduction in advertising spend due to the impact of COVID-19 in the latter part of the first quarter and during the second quarter. 17
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Platform Operations
Change
2020 2019 $ %
($ in thousands)
Three months ended
12 % Percent of revenue 21 % 24 %
Nine months ended
17 % Percent of revenue 25 % 24 % The increase in platform operations expense for the three months endedSeptember 30, 2020 , compared to the same prior year period, was primarily due to increases of$4.6 million in hosting costs. The increase in hosting costs was due to the continued increase in media impressions presented to our clients. The increase in platform operations expense for the nine months endedSeptember 30, 2020 , compared to the same prior year period, was primarily due to increases of$12.0 million in hosting costs and$3.3 million in facilities costs. The increase in hosting costs was primarily attributable to the factor described above. The increase in facilities costs was primarily driven by new office leases to support our growth.
We expect platform operations expenses to increase in absolute dollars in future periods as we continue to experience increased volumes of media impressions through our platform and hire additional personnel to support our clients.
Sales and Marketing
Change
2020 2019 $ %
($ in thousands)
Three months ended
24 % Percent of revenue 21 % 22 %
Nine months ended
29 % Percent of revenue 22 % 20 % The increase in sales and marketing expense for the three months endedSeptember 30, 2020 , compared to the same prior year period, was primarily due to increases of$9.9 million in personnel costs, including$1.9 million of stock-based compensation, and$0.8 million in facilities costs. The increase was partially offset by a decrease in marketing costs related to decreased company branding expenses compared to the same prior year period and postponement of corporate events as a result of COVID-19. The increase in personnel costs was primarily due to an increase in headcount to support our sales efforts and continue to develop and maintain relationships with our clients. The increase in facilities costs was primarily driven by new office leases to support our growth. The increase in sales and marketing expense for the nine months endedSeptember 30, 2020 , compared to the same prior year period, was primarily due to increases of$24.5 million in personnel costs, including$5.5 million of stock-based compensation and$4.6 million in facilities costs. These increases were primarily attributable to the factors described above. We expect sales and marketing expenses to increase in absolute dollars in future periods, as we focus on increasing the adoption of our platform with existing and new clients and expanding our international business. Technology and Development Change 2020 2019 $ % ($ in thousands)
Three months ended
41 % Percent of revenue 19 % 18 %
Nine months ended
40 %
Percent of revenue 23 % 19 %
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-------------------------------------------------------------------------------- The increase in technology and development expense for the three months endedSeptember 30, 2020 , compared to the same prior year period, was primarily due to increases of$11.4 million in personnel costs, including$0.8 million of stock-based compensation, and$1.4 million in facilities costs. The increase in personnel costs was primarily due to an increase in headcount to maintain and support our technology and development efforts. The increase in facilities costs was primarily driven by new office leases to support our growth. The increase in technology and development expense for the nine months endedSeptember 30, 2020 , compared to the same prior year period, was primarily due to increases of$29.2 million in personnel costs, including$5.8 million of stock-based compensation, and$6.6 million in facilities costs. These increases were primarily attributable to the factors described above. We expect technology and development expense to increase in absolute dollars as we continue to invest in the development of our platform to support additional features and functions, increase the number of advertising and data inventory suppliers and ramp up the volume of advertising spending on our platform. We also intend to invest in technology to further automate our business processes. General and Administrative Change 2020 2019 $ % ($ in thousands)
Three months ended
16 % Percent of revenue 20 % 23 %
Nine months ended
14 % Percent of revenue 23 % 23 % The increase in general and administrative expense for the three months endedSeptember 30, 2020 , compared to the same prior year period, was primarily due to increases of$4.7 million of stock-based compensation and$2.5 million in professional service fees. The increases were partially offset by cost savings from the postponement of certain corporate events due to COVID-19. The increase in professional services fees was primarily related to our current proxy solicitation. The increase in general and administrative expense for the nine months endedSeptember 30, 2020 , compared to the same prior year period, was primarily due to increases of$5.7 million in facilities costs,$4.6 million of stock-based compensation and$1.5 million in the allowance for credit losses on accounts receivable. The increase in facilities costs was primarily driven by new office leases to support our growth. The increases were partially offset by the postponement of employee-related corporate events due to COVID-19. The increase in the allowance for credit losses on accounts receivable was primarily due to the adoption of CECL beginningJanuary 1, 2020 as well as the effects of COVID-19 on macro-economic factors used in the valuation of trade receivables and the related allowance for credit losses (refer to Note 2 - Basis of Presentation and Summary of Significant Accounting Policies of our condensed consolidated financial statements). We expect general and administrative expenses to increase in absolute dollars in future periods. We expect to continue to invest in corporate infrastructure to support growth.
Total Other Expense (Income), Net
2020 2019 $ Change
(in thousands)
Three months ended
The increase in total other expense (income), net for the three months endedSeptember 30, 2020 , compared to the same prior year period, was primarily due to net increases in interest expense of$1.7 million and net foreign currency exchange loss of$0.4 million . The increase in total other expense (income), net for the nine months endedSeptember 30, 2020 , compared to the same prior year period, was primarily due to net increases in interest expense of$3.0 million and foreign currency exchange loss, net of$0.8 million . 19
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Provision for (benefit from) Income Taxes
2020 2019
($ in thousands)
Three months ended
3 % 18 %
Nine months ended
(145 )% 8 %
The
The decrease in income tax expense for the three months endedSeptember 30, 2020 compared to the prior year period, was primarily due to an increase in the tax benefits associated with employee exercises of stock options and vesting of restricted stock units, partially offset by higher pre-tax profitability. In addition, income taxes for the three months endedSeptember 30, 2020 includes an income tax benefit attributable to the expected NOL carryback provided for under the CARES Act. The expected NOL carryback applies to our 2015-2017 income tax years, in which we paid federal income tax at a 35% tax rate. For the three months endedSeptember 30, 2020 and 2019, the tax benefits associated with employee exercises of stock options and vesting of restricted stock units were$25.6 million and$7.7 million , respectively. The decrease in income tax expense for the nine months endedSeptember 30, 2020 , compared to the prior year period was primarily due to an increase in the tax benefits associated with employee exercises of stock options and vesting of restricted stock units and the tax benefit related to the expected NOL carryback noted above. For the nine months endedSeptember 30, 2020 and 2019, the tax benefits associated with employee exercises of stock options and vesting of restricted stock units were$98.7 million and$28.0 million , respectively.
Liquidity and Capital Resources
As ofSeptember 30, 2020 , we had cash and cash equivalents of$434.4 million , including cash of$41.5 million held by our international subsidiaries, short-term investments in marketable securities of$122.9 million and working capital of$743.8 million . We believe our existing cash and cash equivalents, and cash flows from operations, will be sufficient to meet our working capital requirements for at least the next 12 months. Further, inNovember 2017 , we filed a shelf registration statement on Form S-3 with theSEC , or the Shelf Registration, which permits us to issue equity securities and equity-linked securities from time to time, subject to certain limitations. The Shelf Registration is intended to provide us with additional flexibility to access capital markets for general corporate purposes, subject to market conditions and our capital needs. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under "Risk Factors" within this Quarterly Report on Form 10-Q. In the future, we may attempt to raise additional capital through the sale of equity securities or through equity-linked or debt financing arrangements. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of additional indebtedness, we may be subject to increased fixed payment obligations and could also be subject to additional restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. Any future indebtedness we incur may result in terms that could be unfavorable to equity investors. There can be no assurances that we will be able to raise additional capital. An inability to raise capital could adversely affect our ability to achieve our business objectives. In addition, if our operating performance during the next 12 months is below our expectations, our liquidity and ability to operate our business could be adversely affected. In light of the recent worldwide COVID-19 pandemic, we are closely monitoring the effect that current economic conditions may have on our working capital requirements.
Credit Facility
OnOctober 26, 2018 , we and a syndicate of banks, led byCitibank, N.A ., as agent, entered into our credit facility. Available funding commitments to us under our credit facility, subject to certain conditions, total up to$150.0 million , with a$20.0 million sublimit for swingline borrowings and a$15.0 million sublimit for the issuance of letters of credit. Under certain circumstances, we have the right to increase our credit facility by an amount not to exceed$100.0 million . InMarch 2020 , we drew down$143.0 million under the credit facility as a precautionary measure to provide increased liquidity and preserve financial flexibility in light of the worldwide decline in business activity resulting from COVID-19. Subsequent toMarch 2020 , we repaid$71.0 million from available working capital. Availability under the credit facility was$70.8 million as ofSeptember 30, 2020 . InOctober 2020 , we repaid the remaining balance on our credit facility. 20
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Cash Flows
The following table summarizes our cash flows for the periods presented:
Nine Months Ended September 30,
2020 2019
(in thousands)
Cash flows provided by operating activities
88,273
Cash flows used in investing activities
(147,868 ) Cash flows provided by financing activities$ 126,793 $ 25,809 Operating Activities Our cash flows from operating activities are primarily influenced by growth in our operations, increases or decreases in collections from our clients, and related payments to our suppliers for advertising inventory and data. We typically pay suppliers in advance of collections from our clients. Our collection and payment cycles can vary from period to period. In addition, we expect seasonality to impact cash flows from operating activities on a sequential quarterly basis during the year. For the nine months endedSeptember 30, 2020 , cash provided by operating activities of$237.5 million resulted primarily from net income adjusted for non-cash items of$192.0 million and a net increase in our working capital of$45.5 million . The net increase in working capital was primarily due to$21.1 million decrease in accounts receivables and$47.7 million increase in accounts payable, partially offset by$23.9 million increase in prepaid expenses and other assets. The decrease in accounts receivable resulted from seasonality, and the timing of cash receipts from clients. The increase in accounts payable was due to the timing of payments to suppliers for the cost of advertising inventory, data, and add-on features. The increase in prepaid expenses and other assets was attributable to an increase in the income tax receivable primarily related to the tax benefits associated with employee exercises of stock options and vesting of restricted stock units. For the nine months endedSeptember 30, 2019 , cash provided by operating activities of$88.3 million resulted primarily from net income adjusted for non-cash items of$143.1 million , partially offset by a net decrease in our working capital of$54.8 million . The net decrease in working capital was primarily due to a decrease of$21.4 million in accounts payable and a$19.0 million increase in prepaid expenses and other assets. The decrease in accounts payable was due to the timing of payments to suppliers for the cost of advertising inventory, data, and add-on features. The increase in prepaid expenses and other assets was attributable to our growth.
Investing Activities
Our primary investing activities consist of investing in short-term investments in marketable securities, purchases of property and equipment for the expansion of our new facilities in support of our expanding headcount as a result of our growth, and capital expenditures to develop our software in support of enhancing our technology platform. As our business grows, we expect our capital expenditures and our investment activity to continue to increase. For the nine months endedSeptember 30, 2020 , we used$60.8 million of cash in investing activities, consisting of$127.1 million to purchase short-term investments,$57.7 million to purchase property and equipment, and$4.2 million of investments in capitalized software, partially offset by maturities of short term investments of$128.3 million . Purchases of property and equipment and investments in capitalized software support our growth and further development of our platform. For the nine months endedSeptember 30, 2019 , we used$147.9 million of cash in investing activities, consisting of$178.2 million to purchase short-term investments,$21.7 million to purchase property and equipment, and$3.8 million of investments in capitalized software, partially offset by maturities of short term investments of$55.8 million . Purchases of property and equipment and investments in capitalized software support our growth and further development of our platform. Financing Activities For the nine months endedSeptember 30, 2020 , cash provided by financing activities of$126.8 million was primarily due to net proceeds of$72.0 million from our credit facility,$53.9 million proceeds from stock option exercises and$15.0 million proceeds from our employee stock purchase plan, partially offset by$14.2 million of taxes paid for restricted stock award settlements. For the nine months endedSeptember 30, 2019 , cash provided by financing activities of$25.8 million was primarily due to the$21.9 million proceeds from stock option exercises and$8.6 million proceeds from the employee stock purchase plan, partially offset by$4.7 million of taxes paid for restricted stock award settlements. 21
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Off-Balance Sheet Arrangements
We do not have any relationships with other entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We did not have any other off-balance sheet arrangements atSeptember 30, 2020 other than the indemnification agreements described below.
Contractual Obligations
Our principal commitments consist of our non-cancelable operating leases for our various office facilities and other contractual commitments consisting of obligations to our hosting services providers, marketing contracts and providers of software as a service. In certain cases, the terms of the lease agreements provide for rental payments on a graduated basis. The following table summarizes our non-cancelable contractual obligations atSeptember 30, 2020 : Payments Due by Period More than Less than 1 Year 1-3 Years 3-5 Years 5 Years (Remaining 2020) (2021 and
2022) (2023 and 2024) (Thereafter) Total Debt obligations (1)
$ 287 $ 73,378 $ - $ - $ 73,665
Operating lease commitments 5,248 102,122 82,638 167,800 357,808
Other contractual commitments 16,016 71,408 62,642 - 150,066
Total $ 21,551 $ 246,908 $ 145,280 $ 167,800 $ 581,539 (1) Includes
facility as of
Interest on the principal balance was estimated from
maturity date using a weighted average annual interest rate of 1.42%.
In the ordinary course of business, we enter into agreements in which we may agree to indemnify clients, suppliers, vendors, lessors, business partners, lenders, stockholders, and other parties with respect to certain matters, including losses resulting from claims of intellectual property infringement, damages to property or persons, business losses, or other liabilities. Generally, these indemnity and defense obligations relate to our own business operations, obligations, and acts or omissions. However, under some circumstances, we agree to indemnify and defend contract counterparties against losses resulting from their own business operations, obligations, and acts or omissions, or the business operations, obligations, and acts or omissions of third parties. These indemnity provisions generally survive termination or expiration of the agreements in which they appear. In addition, we have entered into indemnification agreements with our directors, executive officers and other officers that will require us to indemnify them against liabilities that may arise by reason of their status or service as directors, officers or employees. In the ordinary course of business, demands have been made upon us to provide indemnification under such agreements, but we are not aware of any claims that could have a material effect on our balance sheet, statement of income or statement of cash flows. Accordingly, no amounts for any obligation have been recorded atSeptember 30, 2020 .
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. We believe that the assumptions and estimates associated with the evaluation of revenue recognition criteria, including the determination of revenue recognition as net versus gross in our revenue arrangements, operating lease assets and liabilities, including our incremental borrowing rate and terms and provisions of each lease, stock-based compensation expense and income taxes have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ materially from these estimates.
Recently Issued Accounting Pronouncements
Refer to Note 2- Basis of Presentation and Summary of Significant Accounting Policies of our condensed consolidated financial statements.
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