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”.

The following generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussion of historical items and year-to-year comparisons between 2018 and 2017 that are not included in this discussion can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with SEC on February 22, 2019. 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 clients to develop on top of the platform.

We commercially launched our platform in 2011, targeting display advertising. We have since extended our platform to address additional advertising formats, and in 2019, approximately 79% of gross spend on our platform was for mobile, video, audio, native and social.

Our clients are primarily the advertising agencies and other service providers for advertisers, with whom we enter into ongoing 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, 2019 and 2018:

	•	our revenue was $661.1 million and $477.3 million, respectively, representing an increase of 39%; and

	•	our net income was $108.3 million and $88.1 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, such as display, mobile, video, audio, social and native. 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. 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 12—Segment and Geographic Information.

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 clients 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 more CTV 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 (Income), 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, cash equivalents and short-term investments, which carry variable interest rates.

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, Singapore Dollar 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, foreign tax rate differences, research and development tax credits, and state taxes.

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,
		2019				2018
		(in thousands)
Revenue		$	661,058			$	477,294
Operating expenses:
Platform operations			156,180				114,098
Sales and marketing			132,882				87,071
Technology and development			116,752				83,892
General and administrative			143,048				84,910
Total operating expenses			548,862				369,971
Income from operations			112,196				107,323
Total other expense (income), net			(4,024	)			1,586
Income before income taxes			116,220				105,737
Provision for income taxes			7,902				17,597
Net income		$	108,318			$	88,140

		For the Year Ended December 31,
		2019				2018
	(as a percentage of revenue*)
Revenue			100	%			100	%
Operating expenses:
Platform operations			24				24
Sales and marketing			20				18
Technology and development			18				18
General and administrative			22				18
Total operating expenses			83				78
Income from operations			17				22
Total other expense (income), net			(1	)			—
Income before income taxes			18				22
Provision for income taxes			1				4
Net income			16	%			18	%

*	Percentages may not sum due to rounding.

Comparison of the Years Ended December 31, 2019 and 2018

Revenue

		Year Ended December 31,								2019 vs 2018 Change
		2019				2018				$				%
		(in thousands, except percentages)
Revenue		$	661,058			$	477,294			$	183,764				39	%

The increase in revenue was primarily due to an increase in gross spend on our platform. Gross spend on our platform by existing clients added prior to 2019 increased by 24% in the aggregate in 2019, and these existing clients represented approximately 92% of the total gross spend in 2019. In 2019, 58% of existing clients added prior to 2019 increased their gross spend on our platform and their average increase in gross spend was approximately $2.6 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,								2019 vs 2018 Change
		2019				2018				$				%
		(in thousands, except percentages)
Platform operations		$	156,180			$	114,098			$	42,082				37	%
Percent of revenue			24	%			24	%

The increase in platform operations expense was primarily due to increases of $19.3 million in hosting costs and $13.8 million in personnel costs, including $0.9 million of stock-based compensation and $6.0 million in allocated facilities. 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 new office leases to support our growth.

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

Sales and Marketing

		Year Ended December 31,								2019 vs 2018 Change
		2019				2018				$				%
		(in thousands, except percentages)
Sales and marketing		$	132,882			$	87,071			$	45,811				53	%
Percent of revenue			20	%			18	%

The increase in sales and marketing expense was primarily due to increases of $32.6 million in personnel costs, including $9.5 million of stock-based compensation, $5.1 million in marketing expenses and $8.1 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 new office leases to support our growth.

We expect sales and marketing expenses to increase in absolute dollars in future periods, as we focus on increasing the adoption of our platform with existing and new clients and expanding our international business.

Technology and Development

		Year Ended December 31,								2019 vs 2018 Change
		2019				2018				$				%
		(in thousands, except percentages)
Technology and development		$	116,752			$	83,892			$	32,860				39	%
Percent of revenue			18	%			18	%

The increase in technology and development expense was primarily due to increases of $25.6 million in personnel costs, including $12.7 million of stock-based compensation, and $7.8 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 new office 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,								2019 vs 2018 Change
		2019				2018				$				%
		(in thousands, except percentages)
General and administrative		$	143,048			$	84,910			$	58,138				68	%
Percent of revenue			22	%			18	%

The increase in general and administrative expense was primarily due to increases of $44.8 million in personnel costs, including $15.5 million of stock-based compensation, and $7.5 million in allocated facilities costs. The increase in personnel costs, including stock-based compensation, was primarily due to increased headcount to support our growth and an increase in our stock price. The increase in allocated facilities costs was primarily driven by new office 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 (Income), Net

		Year Ended December 31,								2019 vs 2018 Change
		2019				2018				$
		(in thousands)
Total other expense (income), net		$	(4,024	)		$	1,586			$	(5,610	)

The decrease in total other expense (income), net was primarily due to an increase in interest income of $3.6 million, and decreases in interest expense of $0.7 million and foreign currency exchange loss, net of $1.2 million. The increase in interest income was primarily attributable to an increase in short-term investments during 2019.

Provision for Income Taxes

		Year Ended December 31,
		2019				2018
		(in thousands, except percentages)
Provision for income taxes		$	7,902			$	17,597
Effective tax rate			7	%			17	%

The difference between the effective tax rate in 2019 of 7% 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 taxes in foreign jurisdictions. For 2019, the provision for income taxes included $43.1 million of benefits associated with stock-based awards.

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.

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, 2019. 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,
		2019				2019				2019				2019				2018				2018				2018				2018
Revenue		$	215,944			$	164,203			$	159,924			$	120,987			$	160,468			$	118,825			$	112,333			$	85,668
Operating expenses:
Platform operations			47,267				39,932				35,330				33,651				35,256				29,344				26,601				22,897
Sales and marketing			42,931				36,142				31,072				22,737				27,064				23,287				20,690				16,030
Technology and development			32,803				29,185				29,452				25,312				24,086				22,621				19,484				17,701
General and administrative			40,293				37,017				32,121				33,617				25,094				21,310				19,396				19,110
Total operating expenses			163,294				142,276				127,975				115,317				111,500				96,562				86,171				75,738
Income from operations			52,650				21,927				31,949				5,670				48,968				22,263				26,162				9,930
Total other expense (income), net			(1,045	)			(1,892	)			(1,420	)			333				(336	)			158				1,064				700
Income before income taxes			53,695				23,819				33,369				5,337				49,304				22,105				25,098				9,230
Provision for (benefit from) income taxes			2,750				4,397				5,569				(4,814	)			9,869				1,813				5,755				160
Net income		$	50,945			$	19,422			$	27,800			$	10,151			$	39,435			$	20,292			$	19,343			$	9,070
Earnings per share:
Basic		$	1.13			$	0.43			$	0.63			$	0.23			$	0.91			$	0.47			$	0.46			$	0.22
Diluted		$	1.06			$	0.40			$	0.58			$	0.21			$	0.84			$	0.44			$	0.43			$	0.20

		Three Months Ended
		Dec 31,				Sept 30,				Jun 30,				Mar 31,				Dec 31,				Sept 30,				Jun 30,				Mar 31,
		2019				2019				2019				2019				2018				2018				2018				2018
		(as a percentage of revenue*)
Revenue			100	%			100	%			100	%			100	%			100	%			100	%			100	%			100	%
Operating expenses:
Platform operations			22				24				22				28				22				25				24				27
Sales and marketing			20				22				19				19				17				20				18				19
Technology and development			15				18				18				21				15				19				17				21
General and administrative			19				23				20				28				16				18				17				22
Total operating expenses			76				87				80				95				69				81				77				88
Income from operations			24				13				20				5				31				19				23				12
Total other expense (income), net			—				(1	)			(1	)			—				—				—				1				1
Income before income taxes			25				14				21				4				31				19				22				11
Provision for (benefit from) income taxes			1				3				3				(4	)			6				2				5				—
Net income			24	%			11	%			18	%			8	%			25	%			17	%			17	%			11	%

*	Percentages may not sum due to rounding.

Liquidity and Capital Resources

As of December 31, 2019, we had cash and cash equivalents of $130.9 million, including cash of $29.8 million held by our international subsidiaries, short-term investments in marketable securities of $124.1 million and working capital of $518.8 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, 2019, 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, 2019.

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,
		2019				2018
		(in thousands)
Cash flows provided by operating activities		$	60,205			$	86,603
Cash flows used in investing activities		$	(163,841	)		$	(25,191	)
Cash flows provided by (used in) financing activities		$	27,280			$	(10,130	)

Operating Activities

Our cash flows from operating activities are primarily influenced by growth in our operations, increases or decreases in collections from our clients and related payments to our suppliers for advertising inventory and data. We typically pay suppliers in advance of collections from our clients. Our collection and payment cycles can vary from period to period. In addition, we expect seasonality to impact cash flows from operating activities on a sequential quarterly basis during the year.

In 2019, cash provided by operating activities of $60.2 million resulted primarily from net income adjusted for non-cash items of $222.9 million, partially offset by a net decrease in our working capital of $162.7 million. The net decrease in working capital was primarily related to an increase in accounts receivable of $331.4 million, partially offset by an increase in accounts payable of $191.8 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 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.

Investing Activities

Our primary investing activities consist of investing in short-term investments in marketable securities, 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. As our business grows, we expect our capital expenditures and our investment activity to continue to increase.

In 2019, we used $163.8 million of cash in investing activities, consisting of $212.8 million to purchase short-term investments, $35.7 million to purchase property and equipment and $4.9 million of investments in capitalized software, partially offset by maturities of short-term investments of $89.5 million. Purchases of property and equipment, leasehold improvements and investments in capitalized software support our growth and further development of our platform.

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.

Financing Activities

Our financing activities consisted primarily of proceeds from our equity compensation plans, taxes paid related to net settlement of restricted stock awards and borrowings and repayments of our debt.

In 2019, cash provided by financing activities of $27.3 million was primarily due to the $29.9 million proceeds from stock option exercises and $16.7 million proceeds from the employee stock purchase plan, partially offset by $19.3 million of taxes paid for restricted stock award settlements.

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.

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, 2019 other than operating leases and the indemnification agreements described in Note 13—Commitments and Contingencies.

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, 2019:

		Payments Due by Period
						Less than				1-3				3-5				More than
		Total				1 Year				Years				Years				5 Years
		(in thousands)
Operating lease obligations		$	325,329			$	14,770			$	87,578			$	70,620			$	152,361
Other contractual commitments			186,949				55,112				63,837				68,000				—
Total minimum payments		$	512,278			$	69,882			$	151,415			$	138,620			$	152,361

As of December 31, 2019, our total amount of gross unrecognized tax benefits was $53.2 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 accounting principles generally accepted in the United States of America (“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, operating lease assets and liabilities, including our incremental borrowing rate and terms and provisions of each lease, stock-based compensation expense and income taxes have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. Except for the changes described in Note 2—Basis of Presentation and Summary of Significant Accounting Policies, there were no other changes to 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 our 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 10—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.

In April 2019, we completed a series of transactions resulting in changes to its international legal structure, including a transfer of certain intellectual property rights among wholly owned subsidiaries, primarily to align its structure to its evolving operations. We recorded a $262.4 million deferred tax asset associated with this restructuring offset by a reserve for uncertain tax position of $51.0 million. Based on available objective evidence, management believes it is not more-likely-than-not that these additional foreign deferred tax assets will be realizable as of December 31, 2019 and, therefore, are offset by a full valuation allowance to the extent not offset by reserves from uncertain tax positions. Management applied significant judgment in estimating the fair value of intangible assets, which involved the use of significant assumptions, including revenue growth rates, margins and discount rates.

Leases

We have operating leases for our offices. We recognize most of our operating lease rights and commitments as operating lease right-of-use assets (“operating lease assets”), operating lease liabilities and operating lease liabilities, non-current, respectively, on our consolidated balance sheets.

We determine if an arrangement is, or contains, a lease at inception. Operating lease assets and liabilities are initially recorded based on the present value of lease payments over the lease term, which includes the minimum unconditional term of the lease, and may include options to extend or terminate the lease when it is reasonably certain at the commencement date that such options will be exercised. The decision to include these options involves consideration of our overall growth plans, as well as other strategic and economic factors. Since determination of the lease term requires an application of judgment, lease terms that differ from our determination could potentially have a material impact on our consolidated balance sheet. As the rate implicit for each of our leases is not readily determinable, we use our incremental borrowing rate, based on the information available at the lease commencement date in determining the present value of our expected lease payments. The rate is determined by analyzing and combining an applicable risk-free rate, a financial spread adjustment and any lease specific adjustment, which requires judgment.

Recently Issued Accounting Pronouncements

For information regarding recent accounting pronouncements, refer to Note 2—Basis of Presentation and Summary of Significant Accounting Policies.