filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
64K characters. Original on sec.gov · Markdown
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and the related notes to those statements included in Item 8 to this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs, and expectations, and involve risks and uncertainties. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the section titled “Item 1A. Risk Factors” and the “Special Note About Forward-Looking Statements”.
References to “Notes” are notes included in our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
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 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 customers 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 2018, approximately 72% 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 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 years ended December 31, 2018 and 2017:
| • | our revenue was $477.3 million and $308.2 million, respectively, representing an increase of 55%; and |
|---|
| • | our net income was $88.1 million and $50.8 million, respectively. |
|---|
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 of the 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.
Factors Affecting Our Performance
Growth in and Retention of Client Spend
Our recent growth has been driven by expanding our share of spend by our existing clients and adding new clients. Our clients include some of the largest advertising agencies in the world, and we believe there is significant room for us to expand further within these clients. As a result, future revenue growth depends upon our ability to retain our existing clients and to gain a larger amount of their advertising spend through our platform.
In order to analyze the contribution to the growth of our business driven by the increase in gross spend from existing clients, we measure annual gross spend for the set of clients, or cohort, that commenced spending on our platform in a specific year relative to subsequent periods. The gross spend from each of our cohorts has increased over subsequent periods. However, over time we will likely lose clients from each cohort, clients may spend less on our platform and the growth rate of gross spend may change. Any such change could have a significant negative impact on gross spend and operating results.
Ability to Expand our Omnichannel Reach, Including CTV and Digital Radio
We enable the purchase of advertising inventory in a wide variety of formats. Non-display advertising such as mobile, video, audio, social and native are significant and increasing components of our gross spend. Our future growth will depend on our ability to maintain and grow the inventory of, and spend on, other channels in addition to display advertising. We believe that our ability to integrate and offer CTV and digital radio advertising inventory for purchase through our platform, and in particular our ability to manage the increased costs that will accompany these purchases, will impact the future growth of our business.
Growth of the Programmatic Advertising Market
Our operating results and prospects will be impacted by the overall adoption of programmatic advertising by inventory owners and content providers, as well as advertisers and the agencies and service providers that represent them. Programmatic advertising has grown rapidly in recent years, and any acceleration, or slowing, of this growth would affect our operating and financial performance. In addition, even if the programmatic advertising market continues to grow at its current rate, our ability to position ourselves within the market will impact the future growth of our business.
Development of International Markets
We have been increasing our focus on markets outside the U.S. to serve the global needs of our clients. We believe that the global opportunity for programmatic advertising is significant due to the growing middle class abroad, and should continue to expand as publishers and advertisers outside the U.S. seek to adopt the benefits that programmatic advertising provides. To capitalize on this opportunity, we intend to continue investing in our presence internationally, and we expect our growth internationally to continue outpacing our domestic growth. Our growth and the success of our initiatives in newer markets will depend on the continued adoption of our platform by our existing clients, as well as new clients, in these markets. Information about geographic gross billings is set forth in Note 11 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Seasonality
In the advertising industry, companies commonly experience seasonal fluctuations in revenue. For example, many advertisers allocate the largest portion of their budgets to the fourth quarter of the calendar year in order to coincide with increased holiday purchasing. Historically, the fourth quarter of the year reflects our highest level of advertising activity and the first quarter reflects the lowest level of such activity. We expect our revenue to continue to fluctuate based on seasonal factors that affect the advertising industry as a whole.
Components of Our Results of Operations
We have one primary business activity and operate in one reportable and operating segment.
Revenue
We generate revenue from clients who enter into agreements with us to use our platform to purchase advertising inventory, data and other add-on features.
We report revenue on a net basis which represents gross billings net of amounts we pay suppliers for the cost of advertising inventory, data and add-on features. Our accounts receivable are recorded at the amount of gross billings to clients, net of allowances, for the amounts we are responsible to collect, and our accounts payable are recorded at the amount payable to suppliers. Accordingly, both accounts receivable and accounts payable appear large in relation to revenue reported on a net basis.
Revenue as a percentage of gross spend may fluctuate from period to period due to a number of factors, such as changes in the proportion of spend represented by our larger customers with the lowest platform fees, our clients’ use of platform features and volume discounts. We expect that our revenue as a percentage of gross spend will fluctuate in the future, especially as we introduce and as our clients select new platform features, expand our omnichannel capabilities, extend our reach to TV inventory and add additional clients whose businesses may have different underlying business models.
Refer to “Critical Accounting Policies and Estimates—Revenue Recognition” below for a description of our revenue recognition policies.
Operating Expenses
We classify our operating expenses into the following four categories:
Platform Operations. Platform operations expense consists of expenses related to hosting our platform, which includes “internet traffic” associated with the viewing of available impressions or queries per second (QPS) and providing support to our clients. Platform operations expense includes hosting costs, personnel costs, and amortization of acquired technology and capitalized software costs for the development of our platform, including allocated overhead. Personnel costs included in platform operations include salaries, bonuses, stock-based compensation, and employee benefit costs, and are primarily attributable to personnel who provide our clients with support using our platform and the personnel who support our platform. We capitalize certain costs associated with the development of our platform and amortize these costs in platform operations over their estimated useful lives. We allocate overhead such as information technology infrastructure, rent and occupancy charges based on headcount.
We expect platform operations expenses to increase in absolute dollars in future periods as we continue to experience increased volumes of QPS through our platform and hire additional personnel to support our clients.
Sales and Marketing. Sales and marketing expense consists primarily of personnel costs, including salaries, bonuses, stock-based compensation, employee benefits costs and commission costs, for our sales and marketing personnel. Sales and marketing expense also includes costs for market development programs, advertising, promotional and other marketing activities, and allocated overhead. We allocate overhead such as information technology infrastructure, rent and occupancy charges based on headcount. Commissions costs are expensed as incurred.
Our sales organization focuses on marketing our platform to increase its adoption by existing and new clients. We are also focused on expanding our international business by growing our sales teams in countries in which we currently operate, as well as establishing a presence in additional countries. As a result, we expect sales and marketing expenses to increase in absolute dollars in future periods. Sales and marketing expense as a percentage of revenue may fluctuate from period to period based on revenue levels and the timing of our investments in our sales and marketing functions as these investments may vary in scope and scale over periods and are impacted by the revenue seasonality in our industry and business.
Technology and Development. Our technology and development expense consists primarily of personnel costs, including salaries, bonuses, stock-based compensation and employee benefits costs, third-party consultant costs associated with the ongoing development and maintenance of our platform and integrations with our advertising and data inventory suppliers, amortization of capitalized third-party software used in the development of our platform and allocated overhead. We allocate overhead such as information technology infrastructure, rent and occupancy charges based on headcount. Technology and development costs are expensed as incurred, except to the extent that such costs are associated with software development that qualifies for capitalization, which are then recorded as capitalized software development costs included in other assets, non-current on our consolidated balance sheet. We amortize capitalized software development costs relating to our platform to platform operations expense.
We believe that continued investment in our platform is critical to attaining our strategic objectives and long-term growth. We therefore expect technology and development expense to increase 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 spend on our platform. Our development efforts also include additional platform functionality to support our international expansion. We also intend to invest in technology to further automate our business processes.
General and Administrative. Our general and administrative expense consists primarily of personnel costs, including salaries, bonuses, stock-based compensation, and employee benefits costs associated with our executive, finance, legal, human resources, compliance, and other administrative personnel, as well as accounting and legal professional services fees, bad debt expense and allocated overhead. We allocate overhead such as information technology infrastructure, rent and occupancy charges based on headcount.
We expect to continue to invest in corporate infrastructure to support growth. We expect general and administrative expenses to increase in absolute dollars in future periods.
Other Expense, Net
Interest Expense. Interest expense is mainly related to our debt, which carries a variable interest rate.
Interest Income. Interest income is mainly related to our cash and cash equivalents, which carry variable interest rates.
Change in Fair Value of Preferred Stock Warrant Liabilities. Prior to our IPO in September 2016, we had two outstanding warrants to purchase shares of our convertible preferred stock. These convertible preferred stock warrants were subject to remeasurement at each balance sheet date, and any change in fair value was recognized as a component of other expense, net. In connection with the closing of our IPO, the warrants converted into warrants to purchase shares of common stock and were net exercised by the holders. As a result, we no longer remeasure the value of warrants after our IPO.
Foreign Currency Exchange Loss, Net. Foreign currency exchange loss, net consists primarily of gains and losses on foreign currency transactions. We have foreign currency exposure related to our accounts receivable and, to a much lesser extent, accounts payable that are denominated in currencies other than the U.S. Dollar, principally the Euro, British Pound, Australian Dollar, Canadian Dollar, Indonesian Rupiah, Japanese Yen and Thai Baht.
Provision for Income Taxes
The provision for income taxes consists primarily of U.S. federal, state, and foreign income taxes. Our income tax provision may be significantly affected by changes to our estimates for tax in jurisdictions in which we operate and other estimates utilized in determining the global effective tax rate. Actual results may also differ from our estimates based on changes in economic conditions. Such changes could have a substantial impact on the income tax provision. We evaluate the judgments surrounding our estimates and make adjustments, as appropriate, each reporting period.
Our effective tax rate differs from the U.S. federal statutory income tax rate due to stock-based compensation, research and development tax credits, federal and foreign tax rate differences, state taxes, fair value adjustments associated with our warrant liabilities, and adjustments to our valuation allowance.
Realization of our deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance, we consider our historical, as well as future, projected taxable income along with other objectively verifiable evidence. Objectively verifiable evidence includes our realization of tax attributes, assessment of tax credits and utilization of net operating loss carryforwards during the year.
Results of Operations
The following tables set forth our consolidated results of operations and our consolidated results of operations as a percentage of revenue for the periods presented:
| For the year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||
| (in thousands) | ||||||||||||
| Revenue | $ | 477,294 | $ | 308,217 | $ | 202,926 | ||||||
| Operating expenses: | ||||||||||||
| Platform operations | 114,098 | 66,230 | 39,876 | |||||||||
| Sales and marketing | 87,071 | 61,379 | 46,056 | |||||||||
| Technology and development | 83,892 | 52,806 | 27,313 | |||||||||
| General and administrative | 84,910 | 58,446 | 32,163 | |||||||||
| Total operating expenses | 369,971 | 238,861 | 145,408 | |||||||||
| Income from operations | 107,323 | 69,356 | 57,518 | |||||||||
| Total other expense, net | 1,586 | 5,731 | 13,684 | |||||||||
| Income before income taxes | 105,737 | 63,625 | 43,834 | |||||||||
| Provision for income taxes | 17,597 | 12,827 | 23,352 | |||||||||
| Net income | $ | 88,140 | $ | 50,798 | $ | 20,482 |
| For the Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||
| (as a percentage of revenue*) | ||||||||||||
| Revenue | 100 | % | 100 | % | 100 | % | ||||||
| Operating expenses: | ||||||||||||
| Platform operations | 24 | 21 | 20 | |||||||||
| Sales and marketing | 18 | 20 | 23 | |||||||||
| Technology and development | 18 | 17 | 13 | |||||||||
| General and administrative | 18 | 19 | 16 | |||||||||
| Total operating expenses | 78 | 77 | 72 | |||||||||
| Income from operations | 22 | 23 | 28 | |||||||||
| Total other expense, net | — | 2 | 7 | |||||||||
| Income before income taxes | 22 | 21 | 22 | |||||||||
| Provision for income taxes | 4 | 4 | 12 | |||||||||
| Net income | 18 | % | 16 | % | 10 | % |
| * | Percentages may not sum due to rounding. |
|---|
Comparison of the Years Ended December 31, 2018, 2017 and 2016
Revenue
| Year Ended December 31, | 2018 vs 2017 Change | 2017 vs 2016 Change | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | $ | % | $ | % | ||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||||
| Revenue | $ | 477,294 | $ | 308,217 | $ | 202,926 | $ | 169,077 | 55 | % | $ | 105,291 | 52 | % |
2018 Compared to 2017
The increase in revenue was primarily due to a 51% increase in gross spend on our platform. Gross spend on our platform by existing clients added prior to 2018 increased by 44% in the aggregate in 2018, and these existing clients represented approximately 94% of the total gross spend in 2018. In 2018, 61% of existing clients added prior to 2018 increased their gross spend on our platform and their average increase in gross spend was approximately $2.5 million.
2017 Compared to 2016
The increase in revenue was primarily due to a 51% increase in gross spend on our platform. Gross spend on our platform by existing clients added prior to 2017 increased by 40% in the aggregate in 2017, and these existing clients represented approximately 91% of the total gross spend in 2017. In 2017, 59% of existing clients added prior to 2017 increased their gross spend on our platform and their average increase in gross spend was approximately $2.0 million.
Revenue as a percentage of gross spend in the aggregate may fluctuate from period to period based on our client mix and the extent to which clients utilize our platform’s features.
Platform Operations
| Year Ended December 31, | 2018 vs 2017 Change | 2017 vs 2016 Change | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | $ | % | $ | % | ||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||||
| Platform operations | $ | 114,098 | $ | 66,230 | $ | 39,876 | $ | 47,868 | 72 | % | $ | 26,354 | 66 | % | ||||||||||||||
| Percent of revenue | 24 | % | 21 | % | 20 | % |
2018 Compared to 2017
The increase in platform operations expense was primarily due to increases of $34.8 million in hosting costs and $8.6 million in personnel costs, including $1.8 million of stock-based compensation. The increase in hosting costs was primarily attributable to supporting 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.
2017 Compared to 2016
The increase in platform operations expense was primarily due to increases of $17.6 million in hosting costs, $6.6 million in personnel costs, including $1.9 million of stock-based compensation, and $1.3 million in allocated facilities costs. The increase in hosting costs was primarily attributable to supporting 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 allocated facilities costs was primarily driven by an increase in rent expense associated with new operating 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 transactions through our platform and hire additional personnel to support our clients.
Sales and Marketing
| Year Ended December 31, | 2018 vs 2017 Change | 2017 vs 2016 Change | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | $ | % | $ | % | ||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||||
| Sales and marketing | $ | 87,071 | $ | 61,379 | $ | 46,056 | $ | 25,692 | 42 | % | $ | 15,323 | 33 | % | ||||||||||||||
| Percent of revenue | 18 | % | 20 | % | 23 | % |
2018 Compared to 2017
The increase in sales and marketing expense was primarily due to increases of $21.0 million in personnel costs, including $5.0 million of stock-based compensation, $2.5 million in marketing expenses and $2.2 million in allocated facilities costs. The increase in personnel costs was primarily due to an increase in sales and marketing headcount in order to support our sales efforts and to continue to develop and maintain relationships with our clients. The increase in overall marketing expenses was mainly related to our participation in industry events, tradeshows and related public relations activities. The increase in allocated facilities costs was primarily driven by an increase in rent expense associated with new operating leases to support our growth.
2017 Compared to 2016
The increase in sales and marketing expense was primarily due to increases of $15.6 million in personnel costs, including $4.6 million of stock-based compensation, and $2.4 million in allocated facilities costs, partially offset by a decrease of $2.8 million in marketing expenses. The increase in personnel costs was primarily due to an increase in sales and marketing headcount in order to support our sales efforts and to continue to develop and maintain relationships with our clients. The increase in allocated facilities costs was primarily driven by an increase in rent expense associated with new operating leases to support our growth. The decrease in marketing costs was mainly related to a shift in our participation in industry events, tradeshows and related public relations activities.
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
| Year Ended December 31, | 2018 vs 2017 Change | 2017 vs 2016 Change | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | $ | % | $ | % | ||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||||
| Technology and development | $ | 83,892 | $ | 52,806 | $ | 27,313 | $ | 31,086 | 59 | % | $ | 25,493 | 93 | % | ||||||||||||||
| Percent of revenue | 18 | % | 17 | % | 13 | % |
2018 Compared to 2017
The increase in technology and development expense was primarily due to increases of $27.0 million in personnel costs, including $7.2 million of stock-based compensation, and $4.1 million in allocated facilities costs. The increase in personnel costs was primarily attributable to increased headcount to maintain and support our technology and development efforts. The increase in allocated facilities costs was primarily driven by an increase in rent expense associated with new operating leases to support our growth.
2017 Compared to 2016
The increase in technology and development expense was primarily due to increases of $21.0 million in personnel costs, including $5.1 million of stock-based compensation, $3.5 million in allocated facilities costs and $1.0 million in contractor and temporary staff costs. The increases in personnel costs and contractor and temporary staff costs were primarily attributable to increased headcount and use of contractor and temporary staff to maintain and support our technology and development efforts. The increase in allocated facilities costs was primarily driven by an increase in rent expense associated with operating leases 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 ramp up the volume of advertising spend on our platform. We also intend to invest in technology to further automate our business processes.
General and Administrative
| Year Ended December 31, | 2018 vs 2017 Change | 2017 vs 2016 Change | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | $ | % | $ | % | ||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||||
| General and administrative | $ | 84,910 | $ | 58,446 | $ | 32,163 | $ | 26,464 | 45 | % | $ | 26,283 | 82 | % | ||||||||||||||
| Percent of revenue | 18 | % | 19 | % | 16 | % |
2018 Compared to 2017
The increase in general and administrative expense was primarily due to increases of $25.2 million in personnel costs, including $6.9 million of stock-based compensation, and $2.7 million in allocated facilities costs, partially offset by a $2.2 million decrease in bad debt expense. The increase in personnel costs was primarily related to finance, human resources and legal headcount to support our growth. The increase in allocated facilities costs was primarily driven by an increase in rent expense associated with operating leases to support our growth. The decrease in bad debt expense was primarily attributable to specific client reserves.
2017 Compared to 2016
The increase in general and administrative expense was primarily due to increases of $18.1 million in personnel costs, including $4.6 million of stock-based compensation, $3.9 million in professional services fees, $2.4 million in bad debt expense and $1.9 million in allocated facilities costs. The increase in personnel costs was primarily related to finance, human resources and legal headcount to support our growth. The increase in professional services fees was primarily related to finance and legal services to support our growth, including $1.5 million in legal, accounting, printing and other costs related to the secondary offerings completed in March and June 2017. The increase in bad debt expense was primarily attributable to specific client reserves. The increase in allocated facilities costs was primarily driven by an increase in rent expense associated with operating leases to support our growth.
We expect general and administrative expenses to increase in absolute dollars in future periods, as we continue to invest in corporate infrastructure to support our growth.
Other Expense, Net
| Year Ended December 31, | 2018 vs 2017 Change | 2017 vs 2016 Change | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | $ | $ | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Total other expense, net | $ | 1,586 | $ | 5,731 | $ | 13,684 | $ | (4,145 | ) | $ | (7,953 | ) |
2018 Compared to 2017
The decrease in other expense, net was primarily related to a decrease of $2.1 million in foreign currency exchange loss, net, a $1.8 million increase in interest income, and a $0.2 million decrease in interest expense. The increase in interest income was primarily attributable to an increase in cash and cash equivalents during 2018, including an increase in higher interest-bearing money market funds.
2017 Compared to 2016
The decrease in other expense, net was primarily due to decreases of $9.5 million in expense related to the fair value of our convertible preferred stock warrant liabilities, which were exercised as part of our IPO in September 2016, and $1.3 million in interest expense attributable to a reduction in our debt borrowings and a liquidation fee paid in 2016 at the closing of our IPO related to a prior debt facility. These decreases were partially offset by an increase in foreign currency exchange loss, net, of $2.8 million resulting from higher foreign denominated accounts receivable and accounts payable balances in 2017 compared to 2016.
Provision for Income Taxes
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||
| (in thousands, except percentages) | ||||||||||||
| Provision for income taxes | $ | 17,597 | $ | 12,827 | $ | 23,352 | ||||||
| Effective tax rate | 17 | % | 20 | % | 53 | % |
The difference between the effective tax rate in 2018 of 17% and the U.S. federal statutory income tax rate of 21% was primarily due to the impact of tax benefits associated with stock-based awards partially offset by the impact of state taxes. For 2018, the provision for income taxes included $15.1 million of benefits associated with stock-based awards.
The difference between the effective tax rate in 2017 of 20% and the U.S. federal statutory income tax rate of 35% was primarily due to the impact of tax benefits associated with stock-based awards, partially offset by the impact of higher pre-tax income in U.S. jurisdictions. For 2017, the provision for income taxes included $19.9 million of benefits associated with stock-based awards.
The difference between the effective tax rate in 2016 of 53% and the U.S. federal statutory income tax rate of 35% was primarily due to higher non-deductible preferred stock warrant expense and stock-based compensation expense.
Quarterly Results of Operations
The following tables set forth our quarterly unaudited consolidated statements of operations data in dollars and as a percentage of total revenue for each of the eight quarters in the period ended December 31, 2018. We have prepared the quarterly unaudited consolidated statements of operations data on a basis consistent with the audited consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. In the opinion of management, the financial information in these tables reflects all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair statement of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. The results of historical periods are not necessarily indicative of the results for any future period.
| Three Months Ended | ||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec 31, | Sept 30, | Jun 30, | Mar 31, | Dec 31, | Sept 30, | Jun 30, | Mar 31, | |||||||||||||||||||||||||
| 2018 | 2018 | 2018 | 2018 | 2017 | 2017 | 2017 | 2017 | |||||||||||||||||||||||||
| Revenue | $ | 160,468 | $ | 118,825 | $ | 112,333 | $ | 85,668 | $ | 102,648 | $ | 79,413 | $ | 72,804 | $ | 53,352 | ||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Platform operations | 35,256 | 29,344 | 26,601 | 22,897 | 21,133 | 17,397 | 15,151 | 12,549 | ||||||||||||||||||||||||
| Sales and marketing | 27,064 | 23,287 | 20,690 | 16,030 | 18,537 | 16,200 | 14,166 | 12,476 | ||||||||||||||||||||||||
| Technology and development | 24,086 | 22,621 | 19,484 | 17,701 | 17,029 | 13,181 | 12,135 | 10,461 | ||||||||||||||||||||||||
| General and administrative | 25,094 | 21,310 | 19,396 | 19,110 | 16,631 | 14,227 | 11,658 | 15,930 | ||||||||||||||||||||||||
| Total operating expenses | 111,500 | 96,562 | 86,171 | 75,738 | 73,330 | 61,005 | 53,110 | 51,416 | ||||||||||||||||||||||||
| Income from operations | 48,968 | 22,263 | 26,162 | 9,930 | 29,318 | 18,408 | 19,694 | 1,936 | ||||||||||||||||||||||||
| Total other expense (income), net | (336 | ) | 158 | 1,064 | 700 | 1,282 | 2,354 | 1,303 | 792 | |||||||||||||||||||||||
| Income before income taxes | 49,304 | 22,105 | 25,098 | 9,230 | 28,036 | 16,054 | 18,391 | 1,144 | ||||||||||||||||||||||||
| Provision for (benefit from) income taxes | 9,869 | 1,813 | 5,755 | 160 | 11,225 | 5,825 | (458 | ) | (3,765 | ) | ||||||||||||||||||||||
| Net income | $ | 39,435 | $ | 20,292 | $ | 19,343 | $ | 9,070 | $ | 16,811 | $ | 10,229 | $ | 18,849 | $ | 4,909 | ||||||||||||||||
| Net income per share attributable to common stockholders: | ||||||||||||||||||||||||||||||||
| Basic | $ | 0.91 | $ | 0.47 | $ | 0.46 | $ | 0.22 | $ | 0.41 | $ | 0.25 | $ | 0.47 | $ | 0.13 | ||||||||||||||||
| Diluted | $ | 0.84 | $ | 0.44 | $ | 0.43 | $ | 0.20 | $ | 0.38 | $ | 0.23 | $ | 0.43 | $ | 0.11 |
| Three Months Ended | ||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dec 31, | Sept 30, | Jun 30, | Mar 31, | Dec 31, | Sept 30, | Jun 30, | Mar 31, | |||||||||||||||||||||||||
| 2018 | 2018 | 2018 | 2018 | 2017 | 2017 | 2017 | 2017 | |||||||||||||||||||||||||
| (as a percentage of revenue*) | ||||||||||||||||||||||||||||||||
| Revenue | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Platform operations | 22 | 25 | 24 | 27 | 21 | 22 | 21 | 24 | ||||||||||||||||||||||||
| Sales and marketing | 17 | 20 | 18 | 19 | 18 | 20 | 19 | 23 | ||||||||||||||||||||||||
| Technology and development | 15 | 19 | 17 | 21 | 17 | 17 | 17 | 20 | ||||||||||||||||||||||||
| General and administrative | 16 | 18 | 17 | 22 | 16 | 18 | 16 | 30 | ||||||||||||||||||||||||
| Total operating expenses | 69 | 81 | 77 | 88 | 71 | 77 | 73 | 96 | ||||||||||||||||||||||||
| Income from operations | 31 | 19 | 23 | 12 | 29 | 23 | 27 | 4 | ||||||||||||||||||||||||
| Total other expense, net | — | — | 1 | 1 | 1 | 3 | 2 | 1 | ||||||||||||||||||||||||
| Income before income taxes | 31 | 19 | 22 | 11 | 27 | 20 | 25 | 2 | ||||||||||||||||||||||||
| Provision for (benefit from) income taxes | 6 | 2 | 5 | — | 11 | 7 | (1 | ) | (7 | ) | ||||||||||||||||||||||
| Net income | 25 | % | 17 | % | 17 | % | 11 | % | 16 | % | 13 | % | 26 | % | 9 | % |
| * | Percentages may not sum due to rounding. |
|---|
Liquidity and Capital Resources
As of December 31, 2018, we had cash and cash equivalents of $207.2 million, including cash of $34.5 million held by our international subsidiaries, and working capital of $342.5 million.
We believe our existing cash and cash equivalents, cash flow from operations, and our undrawn available balance under our amended credit facility (refer to the section captioned “Credit Facility” below) will be sufficient to meet our working capital requirements for at least the next 12 months. Our current credit facility matures in May 2022. Further, in November 2017, we filed a shelf registration statement on Form S-3 with the SEC, 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 Annual Report on Form 10-K.
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.
Credit Facility
On October 26, 2018, we and a syndicate of banks, led by Citibank, N.A., as agent, entered into the Second Amended and Restated Loan and Security Agreement (the “Second A&R Credit Agreement”, which we also refer to as “our credit facility”). Available funding commitments to us under the Second A&R Credit Agreement, 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 the Second A&R Credit Facility by an amount not to exceed $100.0 million. As of December 31, 2018, we did not have an outstanding debt balance under the Second A&R Credit Facility, and availability was $143.3 million. We were in compliance with all covenants as of December 31, 2018.
For additional information regarding the Second A&R Credit Agreement, refer to Note 7—Debt.
Cash Flows
The following table summarizes our cash flows for the periods presented:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||
| (in thousands) | ||||||||||||
| Cash flows provided by operating activities | $ | 86,603 | $ | 31,224 | $ | 75,031 | ||||||
| Cash flows used in investing activities | $ | (25,191 | ) | $ | (16,064 | ) | $ | (9,221 | ) | |||
| Cash flows provided by (used in) financing activities | $ | (10,130 | ) | $ | 7,390 | $ | 63,543 |
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 of advertising inventory and data. The timing of cash receipts from clients and payments to suppliers can significantly impact our cash flows from operating activities. 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 quarter basis.
In 2018, cash provided by operating activities of $86.6 million resulted primarily from net income adjusted for non-cash items of $142.1 million, partially offset by a net decrease in our working capital of $55.5 million. The net decrease in working capital was primarily related to an increase in accounts receivable of $239.9 million, partially offset by an increase in accounts payable of $177.7 million. The increase in accounts receivable was primarily due to the increase in spend through our platform and the timing of cash receipts from clients and the increase in accounts payable was primarily due to the timing of payments to suppliers.
In 2017, cash provided by operating activities of $31.2 million resulted from net income adjusted for non-cash items of $80.7 million, partially offset by a net decrease in our working capital of $49.5 million. The net decrease in working capital was primarily related to an increase in accounts receivable of $224.6 million, partially offset by an increase in accounts payable of $171.8 million. The increase in accounts receivable was primarily due to the increase in spend through our platform and the timing of cash receipts from clients and the increase in accounts payable was primarily due to the timing of payments to suppliers.
In 2016, cash provided by operating activities of $75.0 million resulted from net income adjusted for non-cash items of $41.2 million and a net increase in our working capital of $33.8 million. The net increase in working capital was primarily related to an increase in accounts payable of $209.5 million, partially offset by an increase in accounts receivable of $187.7 million. The increase in accounts payable was primarily due to the increased volume of transactions with suppliers and an improvement in matching the timing of our supplier payments to contractual terms. The increase in accounts receivable was primarily due to the increase in spend through our platform and the timing of cash receipts from clients.
Investing Activities
Our primary investing activities have consisted of purchases of property and equipment 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. Purchases of property and equipment may vary from period-to-period due to the timing of the expansion of our operations, the addition of headcount and new facilities. Expenditures related to our capitalized software development costs also may vary from period-to-period based on development cycles. As our business grows, we expect our capital expenditures and our investment activity to continue to increase. Subsequent to December 31, 2018, we used existing cash and cash equivalents to purchase $50.9 million in marketable securities.
In 2018, we used $25.2 million of cash in investing activities, consisting of $19.8 million to purchase property and equipment and $5.4 million of investments in capitalized software.
In 2017, we used $16.1 million of cash in investing activities, consisting of $10.1 million to purchase property and equipment and $3.0 million of investments in capitalized software, and $3.0 million for certain assets accounted for as a business acquisition.
In 2016, we used $9.2 million of cash in investing activities, consisting of $6.9 million to purchase property and equipment and $2.3 million of investments in capitalized software.
Financing Activities
Our financing activities consisted primarily of borrowings and repayments of our debt, proceeds from our equity compensation plans, taxes paid related to net settlement of restricted stock awards, proceeds from the issuance of convertible preferred stock, and proceeds from the issuance of Class A common stock as part of our IPO in September 2016.
In 2018, cash used in financing activities of $10.1 million was primarily due to the $27.0 million repayment of our line of credit and taxes paid related to net settlement of restricted stock of $6.7 million, partially offset by proceeds of $13.8 million from our employee stock purchase plan and $10.0 million from stock options exercises.
In 2017, cash provided by financing activities of $7.4 million was primarily due to proceeds of $7.0 million from our employee stock purchase plan and $2.6 million from stock option exercises, partially offset by repayments under financing obligations of $1.0 million and taxes paid related to net settlement of restricted stock of $1.0 million.
In 2016, cash provided by financing activities of $63.5 million was primarily driven by net proceeds from our IPO of $73.8 million, proceeds from our line of credit of $75.8 million and proceeds from the issuance of Series C convertible preferred stock of $60.0 million. Cash provided by these financing activities was partially offset by repayments on our line of credit and debt of $95.0 million and the repurchase of preferred and common stock of $54.0 million.
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 as of December 31, 2018 other than operating leases and the indemnification agreements described in Note 12 of “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
Contractual Obligations and Known Future Cash Requirements
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 contractual obligations, including interest, at December 31, 2018:
| Payments Due by Period | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Less than | 1-3 | 3-5 | More than | |||||||||||||||||
| Total | 1 Year | Years | Years | 5 Years | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Operating lease obligations | $ | 225,016 | $ | 13,419 | $ | 47,800 | $ | 44,688 | $ | 119,109 | ||||||||||
| Other contractual commitments | 34,328 | 33,352 | 746 | 230 | — | |||||||||||||||
| Total minimum payments | $ | 259,344 | $ | 46,771 | $ | 48,546 | $ | 44,918 | $ | 119,109 |
In January 2019, we entered into a hosting services arrangement that includes a $200.0 million commitment through April 2024.
As of December 31, 2018, our total amount of gross unrecognized tax benefits was $4.3 million before netting with deferred tax assets for tax credit carryforwards and is considered a long-term obligation. Due to their nature, there is a high degree of uncertainty regarding the time of future cash outflows and other events that extinguish these liabilities.
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. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated financial statements.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these 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.
Revenue Recognition
We generate revenue from clients who enter into agreements with us to use our platform to purchase advertising inventory, data and other add-on features. We charge our clients a platform fee, which is a percentage of a client’s purchases through the platform. In addition, we invoice our clients for the cost of advertising inventory purchased, plus data and any add-on features purchased through the platform.
We determine revenue recognition through the following steps:
| • | Identification of a contract with a customer; |
|---|
| • | Identification of the performance obligations in the contract; |
|---|
| • | Determination of the transaction price; |
|---|
| • | Allocation of the transaction price to the performance obligations in the contract; and |
|---|
| • | Recognition of revenue when or as the performance obligations are satisfied. |
|---|
We maintain agreements with each client and supplier in the form of MSAs, which set out the terms of the relationship and access to our platform. Our performance obligation is to provide the use of our platform to clients to develop ad campaigns and select the advertising inventory, data and other add-on features. We charge 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 we expect 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. We recognize revenue for our platform fee at a point in time when a purchase by the client occurs through our platform, which is when a bid is won. Subsequent to a bid being won through our platform, the associated fees are generally not subject to adjustment or refund. Historically, any refunds and adjustments have not been material.
We report revenue net of amounts we pay suppliers for the cost of advertising inventory, third-party data and other add-on features (collectively, “Supplier Features”). The determination of whether we are 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 our platform fees or on a net basis for the amount of platform fees charged to the client, requires judgment. We determined that we are not primarily responsible for the purchase of Supplier Features, but rather, we are 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. We do not control the Supplier Features prior to the purchase by the client, and we do not have pricing latitude with respect to the cost of such features. The platform fee we charge clients is a percentage of their purchases through our 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, we determined that we are not the principal in the purchase and sale of Supplier Features in all of its arrangements, and therefore, we report revenue on a net basis for the platform fees charged to clients.
Stock-Based Compensation
Compensation expense related to stock options, restricted stock awards and units, which we refer to, collectively, as restricted stock, and awards granted under our employee stock purchase plan, or ESPP, is measured and recognized in our consolidated financial statements based on the fair value of the awards granted. The increase in our stock price since our IPO in September 2016 and our growth in headcount have resulted in increased stock-based compensation for each sequential fiscal year since our IPO. The fair value of each option award is estimated on the grant date using the Black-Scholes option-pricing model. The fair value of restricted stock is calculated using the closing market price of our common stock on the date of grant, and for performance-based restricted stock, we also assess the probability of targets being achieved in determining the amount of expense to recognize. Stock-based compensation expense related to stock options and restricted stock is recognized on a straight-line basis over the requisite service periods of the awards, which is generally four years. For performance-based restricted stock, expense is recognized on a graded-vesting attribution basis over the requisite service period of the award and is adjusted in subsequent reporting periods if the assessed probability or estimated level of achievement of the performance goals changes. Stock-based compensation expense for ESPP awards is recognized on a graded-vesting attribution basis over the requisite service period of each award.
For additional information regarding stock-based compensation and the assumptions used for determining the fair value of stock options and ESPP awards, refer to Note 2—Basis of Presentation and Summary of Significant Accounting Policies and Note 9—Stock-Based Compensation.
Income Taxes
Our income tax provision may be significantly affected by changes to our estimates for tax in jurisdictions in which we operate and other estimates utilized in determining the global effective tax rate. Actual results may also differ from our estimate based on changes in economic conditions. Such changes could have a substantial impact on the income tax provision. We evaluate the judgments surrounding our estimates and make adjustments, as appropriate, each reporting period.
Deferred income tax assets and liabilities are determined based upon the net effects of the differences between the consolidated financial statements carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed. A valuation allowance is used to reduce some or all of the deferred tax assets if, based upon the weight of available evidence, it is more likely than not that those deferred tax assets will not be realized.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized. We recognize interest and penalties accrued related to our uncertain tax positions in our income tax provision in the accompanying consolidated statement of operations.
Recently Issued Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 2 of “Item 8. Financial Statements and Supplementary Data” included in this Annual Report on Form 10-K.
Previous: Item 6. Selected Financial Data · Next: Item 7A. Quantitative and Qualitative Disclosure about Market Risk