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, 2020 , 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 and
channels, 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 inventory, publisher, and data partners
provides ad buyers reach and decisioning capabilities, and our enterprise
application programming interfaces ("APIs") enable our clients to develop on top
of the platform.
We commercially launched our platform in 2011, targeting the display advertising channel. Since launching, we have added additional advertising channels. In 2020, the gross spend on our platform came from multiple channels including mobile, video (which includes CTV), display, audio, native and social channels.
Our clients are primarily the advertising agencies and other service providers
for advertisers, with whom we enter into ongoing master services 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 37%; and
• net income was $22.6 million and $24.1 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. We believe the markets outside ofthe United States , and in particularChina , offer an opportunity for growth, although such markets also may pose challenges related to compliance with local laws and regulations, restrictions on foreign ownership or investment, uncertainty related to trade relations, and a variety of additional risks. 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 the COVID-19 pandemic 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 COVID-19
pandemic is contained, or economic activity normalizes. With the current decline
in economic activity, 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 COVID-19 pandemic 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
March 31,
2021 2020
(in thousands)
Revenue $ 219,811 $ 160,660
Operating expenses:
Platform operations 50,500 40,208
Sales and marketing 55,764 34,294
Technology and development 53,918 36,794
General and administrative 51,845 38,598
Total operating expenses 212,027 149,894
Income from operations 7,784 10,766
Total other expense (income), net (308 ) 417
Income before income taxes 8,092 10,349
Benefit from income taxes (14,550 ) (13,708 )
Net income $ 22,642 $ 24,057
Three Months Ended
March 31,
2021 2020
(as a percentage of revenue*)
Revenue 100 % 100 %
Operating expenses:
Platform operations 23 25
Sales and marketing 25 21
Technology and development 25 23
General and administrative 24 24
Total operating expenses 96 93
Income from operations 4 7
Total other expense (income), net - -
Income before income taxes 3 6
Benefit from income taxes (7 ) (9 )
Net income 10 % 15 %
* Percentages may not sum due to rounding.
Revenue
Change
2021 2020 $ %
($ in thousands)
Three months ended March 31, $ 219,811 $ 160,660 $ 59,151 37 %
The increase in revenue for the three months ended March 31, 2021 , 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, and reduction in advertising spend in
the latter part of the three months ended March 31, 2020 due to the impact of
the COVID-19 pandemic.
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Platform Operations
Change
2021 2020 $ %
($ in thousands)
Three months ended March 31, $ 50,500 $ 40,208 $ 10,292 26 %
Percent of revenue 23 % 25 %
The increase in platform operations expense for the three months ended March 31,
2021 , compared to the same prior year period, was primarily due to increases of
$4.7 million in personnel costs, $3.1 million in hosting costs and $2.7 million
in facilities costs and allocated overhead. The increase in personnel costs was
primarily driven by stock-based compensation costs of $3.6 million due to our
hiring, growth and an increase in ESPP stock-based compensation expense and
increases in payroll related costs of $1.1 million . The increase in hosting
costs was primarily attributable to supporting the increased use of our platform
by our clients. The increase in facilities costs was primarily driven by new
data center locations and leases for additional office space to support our
future 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
2021 2020 $ %
($ in thousands)
Three months ended
25 % 21 %
The increase in sales and marketing expense for the three months ended March 31,
2021 , compared to the same prior year period, was primarily due to increases of
$18.9 million in personnel costs, including $8.4 million of stock-based
compensation, and $2.3 million in allocated facilities costs. The increase in
personnel costs was primarily due to an increase in headcount in order to
support our sales efforts and continue to develop and maintain relationships
with our clients. The increase in stock-based compensation was primarily due to
an increase in ESPP stock-based compensation expense. The increase in allocated
facilities costs was primarily driven by new leases for additional office space
to support our future growth.
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
2021 2020 $ %
($ in thousands)
Three months ended
25 % 23 %
The increase in technology and development expense for the three months ended
March 31, 2021 , compared to the same prior year period, was primarily due to
increases of $14.7 million in personnel costs, including $7.5 million of
stock-based compensation and $2.5 million in allocated facilities costs. The
increase in personnel costs was primarily attributable to increased headcount to
maintain and support further development of our platform. The increase in
stock-based compensation was primarily due to an increase in ESPP stock-based
compensation expense. The increase in allocated facilities costs was primarily
driven by new leases for additional office space to support our growth.
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 support the increase in volume of advertising spending by our
customers on our platform. We also intend to invest in technology to further
automate our business processes.
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General and Administrative
Change
2021 2020 $ %
($ in thousands)
Three months ended March 31, $ 51,845 $ 38,598 $ 13,247 34 %
Percent of revenue 24 % 24 %
The increase in general and administrative expense for the three months ended
March 31, 2021 , compared to the same prior year period, was primarily due to
increases of $10.9 million in personnel costs, $3.1 million in professional
service fees and $1.6 million in allocated facilities costs. These increases
were partially offset by a $2.4 million decrease in credit loss expense due to
recoveries and less specific bad debt identified in the current quarter. The
increase in personnel costs was primarily driven by increases in stock-based
compensation costs of $10.0 million due to our hiring and growth and an increase
in ESPP stock-based compensation expense and payroll related costs of $4.0
million , partially offset by a decrease of $3.0 million in reduced
employee-related corporate events and travel due to the COVID-19 pandemic. The
increase in allocated facilities costs was primarily driven by new leases for
additional office space to support our future growth.
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
2021 2020 $ Change
(in thousands)
Three months ended
The decrease in total other expense (income), net for the three months endedMarch 31, 2021 , compared to the same prior year period, was primarily due to the decrease in foreign exchange loss of$1.6 million , the decrease in net interest income of$1.1 million and a decrease in investment credit loss of$0.3 million . Compared to the same prior year period, the decrease in net interest income was attributable to lower interest rates on our short-term investments and the zero outstanding debt balance on our credit facility. The decrease in foreign exchange loss was due to realized gains during the current period. The decrease in investment credit loss was due to recovered unrealized credit loss. Benefit from Income Taxes 2021 2020 ($ in thousands)
Three months ended
(180 )% (132 )%
The
The increase in the income tax benefit for the three months endedMarch 31, 2021 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. For the three months endedMarch 31, 2021 and 2020, the tax benefits associated with employee exercises of stock options and vesting of restricted stock units were$25.9 million and$24.3 million , respectively.
Liquidity and Capital Resources
As of
We believe our existing cash and cash equivalents and cash flow from operations will be sufficient to meet our working capital requirements for at least the next 12 months. Further, inNovember 2020 , 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. 17
-------------------------------------------------------------------------------- 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. The inability to raise capital would 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 the Second Amended and Restated Loan and Security Agreement ("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 our 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 the COVID-19 pandemic. InOctober 2020 , we repaid the balance on our credit facility from available working capital. As ofMarch 31, 2021 , availability under our credit facility was$143.6 million . Our credit facility matures onMay 9, 2022 . Cash Flows
The following table summarizes our cash flows for the periods presented:
Three Months Ended March 31,
2021 2020
(in thousands)
Net cash provided by operating activities $ 75,070 $ 52,776
Net cash used in investing activities $ (36,327 ) $ (16,026 )
Net cash provided by (used in) financing activities $ (4,459 ) $ 157,585
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 three months ended March 31, 2021 , cash provided by operating activities
of $75.1 million resulted primarily from net income adjusted for non-cash items
of $99.6 million and a net decrease in our operating assets and liabilities of
$24.5 million . The net decrease in working capital was primarily due to a $208.8
million decrease in accounts receivables, partially offset by a $200.6 million
decrease in accounts payable and a $16.2 million increase in prepaid expenses
and other assets. The decrease in accounts receivable resulted from the decrease
in spend through our platform due to seasonality and the timing of cash receipts
from clients. The decrease in accounts payable was due to the decrease in spend
through our platform due to seasonality and 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 three months ended March 31, 2020 , cash provided by operating activities
of $52.8 million resulted primarily from net income adjusted for non-cash items
of $65.7 million , partially offset by a net decrease in our operating assets and
liabilities of $12.9 million . The net decrease in working capital was primarily
due to a decrease of $206.0 million in accounts payable and a $15.8 million
increase in prepaid expenses and other assets, partially offset by $210.6
million decrease in accounts receivables. The decrease in accounts payable was
due to the decrease in spend through our platform, seasonality and the timing of
payments to suppliers for the cost of advertising inventory, data, and add-on
features. The decrease in accounts receivable resulted from the decrease in
spend through our platform, seasonality and the timing of cash receipts from
clients. 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.
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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 three months ended
For the three months endedMarch 31, 2020 , we used$16.0 million of cash in investing activities, consisting of$35.9 million to purchase short-term investments,$18.3 million to purchase property and equipment, and$1.0 million of investments in capitalized software, partially offset by maturities of short-term investments of$39.2 million . Purchases of property and equipment and investments in capitalized software support our growth and further development of our platform. Financing Activities For the three months endedMarch 31, 2021 , cash used by financing activities of$4.5 million was primarily due to$17.1 million of taxes paid for restricted stock award settlements, partially offset by$12.6 million proceeds from stock option exercises.
For the three months ended
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 atMarch 31, 2021 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 atMarch 31, 2021 : Payments Due by Period More than Less than 1 Year 1-3 Years 3-5 Years 5 Years (Remaining 2021) (2022 and 2023) (2024 and 2025) (Thereafter) Total Operating lease commitments $ 32,767 $
99,255 $ 79,691
50,074 67,211 16,785 - 134,070
Total $ 82,841 $ 166,466 $ 96,476 $ 131,372 $ 477,155
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-------------------------------------------------------------------------------- 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 atMarch 31, 2021 .
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, 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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