10-Q 1 ttd-10q_20180930.htm 10-Q ttd-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-37879

 

THE TRADE DESK, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

 

 

27-1887399

(State or other jurisdiction of

incorporation or organization)

 

 

 

(I.R.S. Employer

Identification No.)

42 N. Chestnut Street

Ventura, California 93001

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code:

(805) 585-3434

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of October 31, 2018, the registrant had 36,251,162 shares of Class A common stock and 6,990,958 shares of Class B common stock outstanding.

 

 


THE TRADE DESK, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

 

 

  

 

Page

 

Part I.

  

FINANCIAL INFORMATION

 

3

 

Item 1.

  

Condensed Consolidated Financial Statements (Unaudited)

 

3

 

 

  

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

 

3

 

 

  

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017

 

4

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

 

5

 

 

  

Notes to Condensed Consolidated Financial Statements

 

6

 

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

12

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

 

19

 

Item 4.

  

Controls and Procedures

 

19

 

Part II.

  

OTHER INFORMATION

 

21

 

Item 1.

  

Legal Proceedings

 

21

 

Item 1A.

  

Risk Factors

 

21

 

Item 6.

  

Exhibits

 

41

 

Signatures

 

42

 

 

 


PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

THE TRADE DESK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par values)

(Unaudited)

 

 

 

As of

 

 

As of

 

 

 

September 30,

2018

 

 

December 31,

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

166,349

 

 

$

155,950

 

Accounts receivable, net

 

 

640,098

 

 

 

599,565

 

Prepaid expenses and other current assets

 

 

18,614

 

 

 

10,298

 

TOTAL CURRENT ASSETS

 

 

825,061

 

 

 

765,813

 

Property and equipment, net

 

 

29,402

 

 

 

17,405

 

Deferred income taxes

 

 

3,359

 

 

 

3,359

 

Other assets, non-current

 

 

15,891

 

 

 

10,587

 

TOTAL ASSETS

 

$

873,713

 

 

$

797,164

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

493,284

 

 

$

490,377

 

Accrued expenses and other current liabilities

 

 

35,927

 

 

 

28,155

 

TOTAL CURRENT LIABILITIES

 

 

529,211

 

 

 

518,532

 

Debt, net

 

 

 

 

 

27,000

 

Other liabilities, non-current

 

 

7,488

 

 

 

6,049

 

TOTAL LIABILITIES

 

 

536,699

 

 

 

551,581

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Preferred stock, par value $0.000001; 100,000 shares authorized, zero shares issued and

   outstanding as of September 30, 2018 and December 31, 2017

 

 

 

 

 

 

Common stock, par value $0.000001; 1,000,000 Class A shares authorized as of

   September 30, 2018 and December 31, 2017; 35,734 and 32,486 shares issued and outstanding as of

   September 30, 2018 and December 31, 2017, respectively; 95,000 Class B shares authorized as of

   September 30, 2018 and December 31, 2017; 7,451 and 9,155 shares issued and outstanding as of

   September 30, 2018 and December 31, 2017, respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

252,329

 

 

 

209,603

 

Retained earnings

 

 

84,685

 

 

 

35,980

 

TOTAL STOCKHOLDERS’ EQUITY

 

 

337,014

 

 

 

245,583

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

873,713

 

 

$

797,164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

3


THE TRADE DESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share amounts)

(Unaudited)

 

  

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

118,825

 

 

$

79,413

 

 

$

316,826

 

 

$

205,569

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Platform operations

 

 

29,344

 

 

 

17,397

 

 

 

78,842

 

 

 

45,097

 

Sales and marketing

 

 

23,287

 

 

 

16,200

 

 

 

60,007

 

 

 

42,842

 

Technology and development

 

 

22,621

 

 

 

13,181

 

 

 

59,806

 

 

 

35,777

 

General and administrative

 

 

21,310

 

 

 

14,227

 

 

 

59,816

 

 

 

41,815

 

Total operating expenses

 

 

96,562

 

 

 

61,005

 

 

 

258,471

 

 

 

165,531

 

Income from operations

 

 

22,263

 

 

 

18,408

 

 

 

58,355

 

 

 

40,038

 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense (income), net

 

 

(237

)

 

 

513

 

 

 

(113

)

 

 

1,290

 

Foreign currency exchange loss, net

 

 

395

 

 

 

1,841

 

 

 

2,035

 

 

 

3,159

 

Total other expense, net

 

 

158

 

 

 

2,354

 

 

 

1,922

 

 

 

4,449

 

Income before income taxes

 

 

22,105

 

 

 

16,054

 

 

 

56,433

 

 

 

35,589

 

Provision for income taxes

 

 

1,813

 

 

 

5,825

 

 

 

7,728

 

 

 

1,602

 

Net income

 

$

20,292

 

 

$

10,229

 

 

$

48,705

 

 

$

33,987

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.47

 

 

$

0.25

 

 

$

1.15

 

 

$

0.85

 

Diluted

 

$

0.44

 

 

$

0.23

 

 

$

1.07

 

 

$

0.77

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

42,721

 

 

 

40,700

 

 

 

42,178

 

 

 

39,977

 

Diluted

 

 

46,576

 

 

 

44,245

 

 

 

45,460

 

 

 

43,919

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

4


THE TRADE DESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

48,705

 

 

$

33,987

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8,107

 

 

 

5,157

 

Stock-based compensation

 

 

27,958

 

 

 

12,406

 

Bad debt expense

 

 

1,727

 

 

 

3,943

 

Other

 

 

2,396

 

 

 

(1,312

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(44,736

)

 

 

(95,215

)

Prepaid expenses and other assets

 

 

(10,597

)

 

 

(7,296

)

Accounts payable

 

 

(2,804

)

 

 

51,855

 

Accrued expenses and other liabilities

 

 

7,789

 

 

 

3,506

 

Net cash provided by operating activities

 

 

38,545

 

 

 

7,031

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(10,383

)

 

 

(8,357

)

Capitalized software development costs

 

 

(4,340

)

 

 

(2,479

)

Net cash used in investing activities

 

 

(14,723

)

 

 

(10,836

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Repayment on line of credit

 

 

(27,000

)

 

 

 

Payment of debt financing costs

 

 

 

 

 

(153

)

Payment of financing obligations

 

 

 

 

 

(677

)

Proceeds from exercise of stock options

 

 

7,165

 

 

 

1,768

 

Proceeds from employee stock purchase plan

 

 

7,014

 

 

 

2,294

 

Taxes paid related to net settlement of restricted stock awards

 

 

(602

)

 

 

(29

)

Net cash provided by (used in) financing activities

 

 

(13,423

)

 

 

3,203

 

Increase (decrease) in cash and cash equivalents

 

 

10,399

 

 

 

(602

)

Cash and cash equivalents—Beginning of period

 

 

155,950

 

 

 

133,400

 

Cash and cash equivalents—End of period

 

$

166,349

 

 

$

132,798

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Capitalized assets financed by accounts payable

 

$

6,624

 

 

$

945

 

Tenant improvements paid by lessor

 

$

1,017

 

 

$

640

 

Asset retirement obligation

 

$

386

 

 

$

 

Debt financing costs included in debt, net

 

$

 

 

$

1,153

 

Stock-based compensation included in capitalized software development costs

 

$

1,192

 

 

$

453

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

5


THE TRADE DESK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Nature of Operations

The Trade Desk, Inc. (the “Company”) was formed in November 2009 as a Delaware corporation. The Company is headquartered in Ventura, California and has offices in various cities in North America, Europe, Asia and Australia. The Company is a global technology company that empowers ad buyers by providing a self-service omnichannel platform that enables its clients to purchase and manage data-driven digital advertising campaigns across various advertising channels and formats.

Risks

The Company is subject to certain business risks, including dependence on key employees, competition, market acceptance of the Company’s platform, ability to source demand from buyers of advertising inventory, availability of equity or debt financings and dependence on growth to achieve its business plan.

Note 2—Basis of Presentation and Summary of Significant Accounting Policies

The accompanying condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and are unaudited. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 2017 was derived from audited financial statements, but does not include all disclosures required by GAAP. Accordingly, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2017.

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method. The adoption of ASU 2014-09 did not result in a change in the timing or amount of revenue recognized. Accordingly, there was no cumulative effect adjustment recorded in the condensed consolidated financial statements upon adoption.

On July 1, 2018, the Company early adopted ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, using the prospective method. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Previously, all implementation costs for a hosting arrangement that was a service contract were expensed when incurred. The Company’s adoption of ASU 2018-15 did not have a material impact on its consolidated financial statements.

Except for the adoption of ASU 2014-09 and ASU 2018-15, there have been no other changes to the Company’s accounting policies and these unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with that used to prepare the Company’s audited annual consolidated financial statements for the year ended December 31, 2017, and include, in the opinion of management, all adjustments, consisting of normal recurring items, necessary for the fair statement of the condensed consolidated financial statements.

The operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results expected for the full year ending December 31, 2018.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from these estimates under different assumptions or circumstances.

Revenue Recognition

The Company determines revenue recognition through the following steps:

 

Identification of a contract with a customer

 

Identification of the performance obligations in the contract

6


 

Determination of the transaction price

 

Allocation of the transaction price to the performance obligations in the contract

 

Recognition of revenue when or as the performance obligations are satisfied

The Company maintains agreements with each client and supplier in the form of master service agreements, which set out the terms of the relationship and access to the Company’s platform. The Company’s performance obligation is to provide the use of its platform to clients to develop ad campaigns and select the advertising inventory, data and other add-on features. The Company charges clients a platform fee, based on a percentage of a client’s purchases through the platform, and the transaction price is determined based on the consideration to which it expects to be entitled in exchange for the completion of a transaction, that is, when a bid is won. The platform fee percentage is based on the level of purchases by the client through the platform during the month. The Company recognizes revenue for its platform fee at a point in time when a purchase by the client occurs through its platform, which is when a bid is won. Subsequent to a bid being won through the Company’s platform, the associated fees are generally not subject to refund or adjustment. Historically, any refunds and adjustments have not been material.

The Company reports revenue net of amounts it pays suppliers for the cost of advertising inventory, third-party data and other add-on features (collectively, “Supplier Features”). The determination of whether the Company is the principal or agent, and hence whether to report revenue on a gross basis for the amount of the Supplier Features the clients purchase using the platform plus the Company’s platform fees or on a net basis for the amount of platform fees charged to the client, requires judgment. The Company determined that it is not primarily responsible for the purchase of Supplier Features, but rather, it is primarily responsible to provide a platform that enables clients to bid on advertising inventory, and use data and other add-on features in designing and executing their campaigns. The Company does not control the Supplier Features prior to the purchase by the client, and it does not have pricing latitude with respect to the cost of such features. The platform fee the Company charges clients is a percentage of their purchases through its platform, similar to a commission, and the platform fee is not contingent on the results of an advertising campaign. Based on these and other factors, the Company determined that it is not the principal in the purchase and sale of Supplier Features in all of its arrangements, and therefore, it reports revenue on a net basis for the platform fees charged to clients.

The Company generally bills clients for the gross amount of Supplier Features they purchase through its platform and the platform fees, net of allowances (“Gross Billings”). Some of the Company’s clients have payment relationships directly with advertising inventory suppliers in which case the Company only bills these clients for third-party data, other add-on features and its platform fees. The Company invoices its clients on a monthly basis for the purchases occurring during the month. Invoice payment terms, negotiated on a client-by-client basis, are typically between 30 to 90 days. However, for certain agency clients with sequential liability terms, payments are not due to the Company until such agency client has received payment from its customers who are advertisers. The Company’s accounts receivable are recorded at the amount of Gross Billings for the amounts it is responsible to collect, and accounts payable are recorded at the net amount payable to suppliers. Accordingly, both accounts receivable and accounts payable appear large in relation to revenue reported on a net basis.

Gross Billings, based on the billing address of the clients or client affiliates, were as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

US

 

$

479,489

 

 

$

337,134

 

 

$

1,282,178

 

 

$

843,557

 

International

 

 

89,255

 

 

 

59,370

 

 

 

242,519

 

 

 

146,286

 

Total

 

$

568,744

 

 

$

396,504

 

 

$

1,524,697

 

 

$

989,843

 

Allowance for Doubtful Accounts

The allowance for doubtful accounts was $2.8 million and $2.3 million as of September 30, 2018 and December 31, 2017, respectively.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases, which requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. The guidance offers specific accounting guidance for a lessee, lessor, and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of comprehensive income. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. The original guidance required application on a modified retrospective basis to the earliest period presented. In August 2018,

7


the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which includes an option to not restate comparative periods in transition but rather to elect to use the effective date of ASU 2016-02, as the date of initial application of transition. Although the Company is in the process of evaluating the impact of this guidance on its consolidated financial statements, the Company currently believes the most significant change will be that most of its operating lease commitments will be recognized as right-of-use assets and liabilities upon adoption of the new guidance, which will be material to the Company’s consolidated balance sheet. ASU 2016-02 will also require the Company to make additional disclosures regarding its leases. The Company plans to elect the option provided by ASU 2018-11 and not restate comparative periods.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is intended to provide more decision-useful information about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but not limited to, available for sale debt securities and accounts receivable. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-based Payments, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. The Company does not expect that the adoption of this guidance will have a material impact on its consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement-Disclosure Framework (Topic 820). The updated guidance modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.

Note 3—Earnings Per Share

The Company has two classes of common stock, Class A and Class B. Basic and diluted earnings per share (“EPS”) attributable to common stockholders for Class A and Class B common stock were the same because they were entitled to the same liquidation and dividend rights.

The computation of basic and diluted EPS is as follows (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

20,292

 

 

$

10,229

 

 

$

48,705

 

 

$

33,987

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding—basic

 

 

42,721

 

 

 

40,700

 

 

 

42,178

 

 

 

39,977

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options to purchase common stock

 

 

3,239

 

 

 

3,078

 

 

 

2,780

 

 

 

3,593

 

Employee stock purchase plan shares

 

 

270

 

 

 

322

 

 

 

273

 

 

 

250

 

Restricted stock

 

 

346

 

 

 

145

 

 

 

229

 

 

 

99

 

Weighted-average shares outstanding—diluted

 

 

46,576

 

 

 

44,245

 

 

 

45,460

 

 

 

43,919

 

Basic EPS

 

$

0.47

 

 

$

0.25

 

 

$

1.15

 

 

$

0.85

 

Diluted EPS

 

$

0.44

 

 

$

0.23

 

 

$

1.07

 

 

$

0.77

 

Anti-dilutive equity awards under stock-based award plans

   excluded from the determination of diluted EPS

 

 

167

 

 

 

899

 

 

 

167

 

 

 

899

 

 

Note 4—Fair Value Measurements

Cash equivalents, consisting of money market funds, of $12.6 million and $5.0 million at September 30, 2018 and December 31, 2017, respectively, were classified as Level 1 of the fair value hierarchy and valued using quoted market prices in active markets. The Company had no other material financial instruments that were measured at fair value as of September 30, 2018 and December 31, 2017.

8


 

Note 5—Accounts Payable

Accounts payable included the following (in thousands):

 

 

 

As of

 

 

As of

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Accounts payable—media and data

 

$

471,758

 

 

$

477,716

 

Accounts payable—other

 

 

21,526

 

 

 

12,661

 

Total

 

$

493,284

 

 

$

490,377

 

 

Note 6—Debt

Revolving Credit Facility

On May 9, 2017, the Company, a syndicate of banks, led by Citibank, N.A., and Citibank, N.A., as agent, entered into an amended and restated loan and security agreement (the “Revolving Credit Facility”). Availability under the Revolving Credit Facility was $196.6 million at September 30, 2018, based on a percentage of eligible accounts receivable and reduced by certain reserves. As of September 30, 2018, the Company was in compliance with all covenants.

On October 26, 2018, the Company and a syndicate of banks, led by Citibank, N.A. as agent, entered into a second amended and restated loan and security agreement (the “Second A&R Credit Agreement”). Refer to Note 10—Subsequent Event for additional information.

Note 7—Stock-Based Compensation

Stock-Based Compensation Expense

Stock-based compensation expense recorded in the condensed consolidated statements of operations was as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Platform operations

 

$

1,234

 

 

$

818

 

 

$

3,137

 

 

$

1,543

 

Sales and marketing

 

 

3,033

 

 

 

1,500

 

 

 

7,757

 

 

 

3,277

 

Technology and development

 

 

4,013

 

 

 

1,990

 

 

 

8,905

 

 

 

3,981

 

General and administrative

 

 

3,137

 

 

 

1,585

 

 

 

8,159

 

 

 

3,605

 

Total

 

$

11,417

 

 

$

5,893

 

 

$

27,958

 

 

$

12,406

 

 

Stock Options

The following summarizes stock option activity:

 

 

 

Shares

Under Option

(in thousands)

 

 

Weighted-

Average

Exercise Price

 

Outstanding as of December 31, 2017

 

 

4,745

 

 

$

17.96

 

Granted

 

 

1,253

 

 

 

59.61

 

Exercised

 

 

(1,110

)

 

 

6.46

 

Cancelled

 

 

(59

)

 

 

44.31

 

Outstanding as of September 30, 2018

 

 

4,829

 

 

$

31.09

 

Exercisable as of September 30, 2018

 

 

2,016

 

 

$

12.36

 

 

On January 1, 2018, the number of shares authorized for grant under the Company’s 2016 Incentive Award Plan was increased by 1.7 million shares in accordance with plan provisions.

9


Restricted Stock and Restricted Stock Units (“Restricted Stock”)

The following summarizes Restricted Stock activity:

 

 

 

Shares

(in thousands)

 

 

Weighted-

Average

Grant Date

Fair Value

 

Unvested as of December 31, 2017

 

 

418

 

 

$

39.95

 

Granted

 

 

126

 

 

 

57.04

 

Vested

 

 

(43

)

 

 

40.92

 

Forfeited

 

 

 

 

 

 

Unvested as of September 30, 2018

 

 

501

 

 

$

44.17

 

 

Employee Stock Purchase Plan (“ESPP”)

Stock-based compensation expense related to the ESPP totaled $4.4 million and $3.2 million for the three months ended September 30, 2018 and 2017, respectively. Stock-based compensation expense related to the ESPP totaled $11.0 million and $6.1 million for the nine months ended September 30, 2018 and 2017, respectively.

On January 1, 2018, the number of shares available for issuance under the Company’s Employee Stock Purchase Plan was increased by 0.4 million shares in accordance with plan provisions.

Note 8—Income Taxes

In determining the interim provision for income taxes, the Company uses the annual estimated effective tax rate applied to the actual year-to-date income and adds the tax effects of any discrete items in the reporting period in which they occur.

For the nine months ended September 30, 2018, the Company’s effective tax rate differed from the United States (“U.S.”) federal statutory tax rate of 21% primarily due to state and foreign taxes, nondeductible stock-based compensation and the impact of tax benefits associated with stock-based awards. For the nine months ended September 30, 2017, the Company’s effective tax rate differed from the U.S. federal statutory tax rate of 35% primarily due to the impact of tax benefits associated with stock-based awards, nondeductible stock-based compensation and state and foreign taxes.

For the three months ended September 30, 2018 and 2017, the provision for income taxes included $7.7 million and $3.2 million, respectively, of benefits associated with stock-based awards. For the nine months ended September 30, 2018 and 2017, the provision for income taxes included $14.2 million and $17.1 million, respectively, of benefits associated with stock-based awards.

There were no material changes to the Company’s unrecognized tax benefits during the nine months ended September 30, 2018, and the Company does not expect to have any significant changes to unrecognized tax benefits within the next 12 months.

Note 9— Commitments and Contingencies

As of September 30, 2018, the Company’s non-cancelable minimum lease commitments were as follows (in thousands):

 

Year

 

Amount

 

Remainder of 2018

 

$

2,540

 

2019

 

 

11,762

 

2020

 

 

13,471

 

2021

 

 

15,659

 

2022

 

 

10,511

 

Thereafter

 

 

35,103

 

 

 

$

89,046

 

Guarantees and Indemnification

In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to clients, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with directors and certain officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon the Company to provide indemnification under such agreements, and thus there are no claims that the Company is aware of that could have a material effect on the Company’s balance sheet, statement of operations or statement of cash flows. Accordingly, no amounts for any obligation have been recorded at September 30, 2018.

10


Litigation

From time to time, the Company is subject to various legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. Although the outcome of the various legal proceedings and claims cannot be predicted with certainty, management does not believe that any of these proceedings or other claims will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

Employment Contracts

The Company has entered into agreements with severance terms with certain employees and officers, all of whom are employed at-will. The Company may be required to accelerate the vesting of certain stock options in the event of changes in control, as defined, and involuntary terminations.

Note 10— Subsequent Event

On October 26, 2018, the Company and a syndicate of banks, led by Citibank, N.A., as agent, entered into the Second A&R Credit Agreement. The Second A&R Credit Agreement amends and restates the Company’s existing credit facility previously entered into on May 9, 2017, and consists of a $150.0 million revolving loan facility, with a $20.0 million sublimit for swingline borrowings and a $15.0 million sublimit for the issuance of letters of credit (the “Second A&R Credit Facility”). Under certain circumstances, the Company has the right to increase the Second A&R Credit Facility by an amount not to exceed $100.0 million. The Second A&R Credit Agreement is collateralized by substantially all of the Company’s assets, including a pledge of certain of its accounts receivable, deposit accounts, intellectual property, investment property, and equipment.

Loans under the Second A&R Credit Facility bear interest through maturity at a variable rate based upon, at the Company’s option, an annual rate of either a Base Rate or a LIBOR rate, plus an applicable margin (“Base Rate Borrowings” and “LIBOR Rate Borrowings”). The Base Rate is defined as a fluctuating interest rate equal to the greatest of (1) the federal funds rate plus 0.50%, (2) Citibank, N.A.’s prime rate, and (3) one month LIBOR rate plus 2.00%. The applicable margin is between 0.25% to 1.25% for Base Rate Borrowings and between 1.25% and 2.25% for LIBOR Rate Borrowings based on the Company maintaining certain leverage ratios. The fee for undrawn amounts under the Second A&R Credit Facility ranges, based on the applicable leverage, from 0.225% to 0.400%. The Company will also be required to pay customary letter of credit fees, as necessary.

The Second A&R Credit Facility matures and all outstanding amounts become due and payable on May 9, 2022.

The Second A&R Credit Agreement contains customary conditions to borrowings, events of default and covenants, including covenants that restrict our ability to sell assets, make changes to the nature of our business, engage in mergers or acquisitions, incur, assume or permit to exist additional indebtedness and guarantees, create or permit to exist liens, pay dividends, issue equity instruments, make distributions or redeem or repurchase capital stock or make other investments, engage in transactions with affiliates and make payments in respect of subordinated debt. The Second A&R Credit Agreement also requires the Company to maintain compliance with (a) a maximum ratio of consolidated funded debt to consolidated EBITDA of 3.50 to 1.00 and (b) a minimum ratio of consolidated EBITDA to interest expense of at least 3.00 to 1.00.

The Company entered into the Second A&R Credit Agreement primarily to lower its borrowing costs and to change from an asset-based structure to a cash-flow based structure.

11


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, operating results, 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 the Securities and Exchange Commission, or SEC. 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 the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2017, 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 global technology company that empowers ad buyers by providing a self-service omnichannel platform that enables our clients to purchase and manage data-driven digital advertising campaigns. Our platform allows clients to manage integrated advertising campaigns across various advertising channels and formats, including connected TV (CTV), mobile, video, audio, display, social and native, on a multitude of devices, including smart TVs, computers, and various mobile devices including phones and tablets.

We commercially launched our platform in 2011 targeting display advertising. We have since extended our platform to address additional advertising formats, and in 2017, approximately 62% of gross spend on our platform was for mobile, video, audio, social, and native.

Our clients are the advertising agencies and other service providers for advertisers, with whom we enter into ongoing master services agreements, or MSAs. We generate revenue by charging our clients a platform fee based on a percentage of a client’s total spend on advertising, data and other features through our platform.

Executive Summary

Highlights

For the three months ended September 30, 2018 and 2017:

 

revenue was $118.8 million and $79.4 million, respectively, representing an increase of 50%; and

 

net income was $20.3 million and $10.2 million, respectively.

For the nine months ended September 30, 2018 and 2017:

 

revenue was $316.8 million and $205.6 million, respectively, representing an increase of 54%; and

 

net income was $48.7 million and $34.0 million, respectively.

12


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, mobile, native, audio and video 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 operations.

In addition, we believe the markets outside of the 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, including China, 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.

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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Revenue

 

$

118,825

 

 

$

79,413

 

 

$

316,826

 

 

$

205,569

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Platform operations

 

 

29,344

 

 

 

17,397

 

 

 

78,842

 

 

 

45,097

 

Sales and marketing

 

 

23,287

 

 

 

16,200

 

 

 

60,007

 

 

 

42,842

 

Technology and development

 

 

22,621

 

 

 

13,181

 

 

 

59,806

 

 

 

35,777

 

General and administrative

 

 

21,310

 

 

 

14,227

 

 

 

59,816

 

 

 

41,815

 

Total operating expenses

 

 

96,562

 

 

 

61,005

 

 

 

258,471

 

 

 

165,531

 

Income from operations

 

 

22,263

 

 

 

18,408

 

 

 

58,355

 

 

 

40,038

 

Total other expense, net

 

 

158

 

 

 

2,354

 

 

 

1,922

 

 

 

4,449

 

Income before income taxes

 

 

22,105

 

 

 

16,054

 

 

 

56,433

 

 

 

35,589

 

Provision for income taxes

 

 

1,813

 

 

 

5,825

 

 

 

7,728

 

 

 

1,602

 

Net income

 

$

20,292

 

 

$

10,229

 

 

$

48,705

 

 

$

33,987

 

 

13


 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

(as a percentage of revenue*)

 

Revenue

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Platform operations

 

 

25

 

 

 

22

 

 

 

25

 

 

 

22

 

Sales and marketing

 

 

20

 

 

 

20

 

 

 

19

 

 

 

21

 

Technology and development

 

 

19

 

 

 

17

 

 

 

19

 

 

 

17

 

General and administrative

 

 

18

 

 

 

18

 

 

 

19

 

 

 

20

 

Total operating expenses

 

 

81

 

 

 

77

 

 

 

82

 

 

 

81

 

Income from operations

 

 

19

 

 

 

23

 

 

 

18

 

 

 

19

 

Total other expense, net

 

 

 

 

 

3

 

 

 

1

 

 

 

2

 

Income before income taxes

 

 

19

 

 

 

20

 

 

 

18

 

 

 

17

 

Provision for income taxes

 

 

2

 

 

 

7

 

 

 

2

 

 

 

1

 

Net income

 

 

17

%

 

 

13

%

 

 

15

%

 

 

17

%

_______________

 

*

Percentages may not sum due to rounding.

Revenue

 

 

 

 

 

 

 

 

 

 

 

Change

 

 

 

2018

 

 

2017

 

 

$

 

 

%

 

 

 

($ in thousands)

 

Three months ended September 30,

 

$

118,825

 

 

$

79,413

 

 

$

39,412

 

 

 

50

%

Nine months ended September 30,

 

$

316,826

 

 

$

205,569

 

 

$

111,257

 

 

 

54

%

 

The increases in revenue for the three and nine months ended September 30, 2018, compared to the same prior year periods, were 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.

Platform Operations

 

 

 

 

 

 

 

 

 

 

 

Change

 

 

 

2018

 

 

2017

 

 

$

 

 

%

 

 

 

($ in thousands)

 

Three months ended September 30,

 

$

29,344

 

 

$

17,397

 

 

$

11,947

 

 

 

69

%

Percent of revenue

 

 

25

%

 

 

22

%

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

$

78,842

 

 

$

45,097

 

 

$

33,745

 

 

 

75

%

Percent of revenue

 

 

25

%

 

 

22

%

 

 

 

 

 

 

 

 

 

The increase in platform operations expense for the three months ended September 30, 2018, compared to the same prior year period, was primarily due to increases of $9.1 million in hosting costs and $1.4 million in personnel costs, including $0.4 million of stock-based compensation. The increase in hosting costs was due to the increased use of our platform by our clients. The increase in personnel costs was primarily due to an increase in headcount for our client support team.

 

The increase in platform operations expense for the nine months ended September 30, 2018, compared to the same prior year period, was primarily due to increases of $25.0 million in hosting costs and $5.8 million in personnel costs, including $1.6 million of stock-based compensation. These increases were primarily attributable to the factors described above.

We expect platform operations expenses to increase in absolute dollars in future periods as we continue to experience increased volumes of transactions through our platform and hire additional personnel to support our clients.

14


Sales and Marketing

 

 

 

 

 

 

 

 

 

 

 

Change

 

 

 

2018

 

 

2017

 

 

$

 

 

%

 

 

 

($ in thousands)

 

Three months ended September 30,

 

$

23,287

 

 

$

16,200

 

 

$

7,087

 

 

 

44

%

Percent of revenue

 

 

20

%

 

 

20

%

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

$

60,007

 

 

$

42,842