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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements generally relate to future events or our future financial or operating performance and may include statements concerning, among other things, our business strategy (including anticipated trends and developments in, and management plans for, our business and the markets in which we operate), financial results, the impact of COVID-19 on our business, operations, and the markets and communities in which we, our clients, and partners operate, results of operations, revenues, operating expenses, and capital expenditures, sales and marketing initiatives and competition. In some cases, you can identify forward-looking statements because they contain words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “suggests,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. These statements are not guarantees of future performance; they reflect our current views with respect to future events and are based on assumptions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements.

We discuss many of these risks in Part II of this Quarterly Report on Form 10-Q in greater detail under the heading “Risk Factors” and in other filings we make from time to time with the Securities and Exchange Commission (the “SEC”). Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q, which are inherently subject to change and involve risks and uncertainties. Unless required by federal securities laws, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made. Given these uncertainties, investors should not place undue reliance on these forward-looking statements.

Investors should read this Quarterly Report on Form 10-Q and the documents that we reference in this report and have filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2020, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

References to “Notes” are notes included in our unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

Overview

We are a technology company that empowers buyers of advertising. Through our self-service, cloud-based platform, ad buyers can create, manage, and optimize more expressive data-driven digital advertising campaigns across ad formats and channels, including display, video, audio, native and social, on a multitude of devices, such as computers, mobile devices, and connected TV (“CTV”). Our platform’s integrations with major inventory, publisher, and data partners provides ad buyers reach and decisioning capabilities, and our enterprise application programming interfaces (“APIs”) enable our clients to develop on top of the platform.

We commercially launched our platform in 2011, targeting the display advertising channel. Since launching, we have added additional advertising channels. The gross spend on our platform comes from multiple channels, including mobile, video (which includes CTV), display, audio, native and social channels.

Our clients are primarily the advertising agencies and other service providers for advertisers, with whom we enter into ongoing master services agreements (“MSAs”). We generate revenue by charging our clients a platform fee based on a percentage of a client’s total spend on advertising. We also generate revenue from providing data and other value-added services and platform features.

Executive Summary

Highlights

For the three months ended September 30, 2021 and 2020:

	•	revenue was $301.1 million and $216.1 million, respectively, representing an increase of 39%; and

	•	net income was $59.4 million and $41.2 million, respectively.

For the nine months ended September 30, 2021 and 2020:

	•	revenue was $800.9 million and $516.1 million, respectively, representing an increase of 55%; and

	•	net income was $129.7 million and $90.4 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.

We believe the markets outside of the United States, and in particular China, offer an opportunity for growth, although such markets may also pose challenges related to compliance with local laws and regulations, restrictions on foreign ownership or investment, uncertainty related to trade relations, and a variety of additional risks. We intend to make additional investments in sales and marketing and product development to expand in these markets, 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.

COVID-19

The worldwide spread of the COVID-19 pandemic has resulted, and may continue to result, in a global slowdown of economic activity, which may decrease demand for a broad variety of goods and services, including those provided by our clients, while also disrupting supply channels, sales channels and advertising and marketing activities for an unknown period of time until the COVID-19 pandemic is contained, or economic activity normalizes. With the current uncertainty in economic activity, the impact on our revenue and our results of operations is likely to continue, the size and duration of which we are currently unable to accurately predict. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on a variety of factors, including the duration and spread of the COVID-19 pandemic and its impact on our clients, partners, industry, and employees, all of which are uncertain at this time and cannot be accurately predicted. See “Risk Factors” for further discussion of the adverse impacts of the COVID-19 pandemic on our business.

Results of Operations

The following tables set forth our condensed consolidated statements of income data for each of the periods presented and as a percentage of our revenue for those periods:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2021				2020				2021				2020
		(in thousands)
Revenue		$	301,091			$	216,113			$	800,869			$	516,128
Operating expenses:
Platform operations			53,400				44,826				154,709				127,167
Sales and marketing			59,278				44,637				176,797				116,002
Technology and development			55,847				41,079				163,301				117,931
General and administrative			52,120				42,789				155,884				117,252
Total operating expenses			220,645				173,331				650,691				478,352
Income from operations			80,446				42,782				150,178				37,776
Total other expense, net			1,470				223				1,560				834
Income before income taxes			78,976				42,559				148,618				36,942
Provision for (benefit from) income taxes			19,592				1,312				18,895				(53,473	)
Net income		$	59,384			$	41,247			$	129,723			$	90,415

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2021				2020				2021				2020
	(as a percentage of revenue*)
Revenue			100	%			100	%			100	%			100	%
Operating expenses:
Platform operations			18				21				19				25
Sales and marketing			20				21				22				22
Technology and development			19				19				20				23
General and administrative			17				20				19				23
Total operating expenses			73				80				81				93
Income from operations			27				20				19				7
Total other expense, net			—				—				—				—
Income before income taxes			26				20				19				7
Provision for (benefit from) income taxes			7				1				2				(11	)
Net income			19	%			19	%			16	%			18	%

	*	Percentages may not sum due to rounding.

Revenue

										Change
		2021				2020				$				%
		($ in thousands)
Three months ended September 30,		$	301,091			$	216,113			$	84,978				39	%
Nine months ended September 30,		$	800,869			$	516,128			$	284,741				55	%

The increase in revenue for the three and nine months ended September 30, 2021, compared to the same prior year period, was primarily due to increases in gross spend in the current year on our platform by existing clients, which was driven by increases in the number of advertising campaigns executed per client.

Platform Operations

										Change
		2021				2020				$				%
		($ in thousands)
Three months ended September 30,		$	53,400			$	44,826			$	8,574				19	%
Percent of revenue			18	%			21	%
Nine months ended September 30,		$	154,709			$	127,167			$	27,542				22	%
Percent of revenue			19	%			25	%

The increase in platform operations expense for the three months ended September 30, 2021, compared to the same prior year period, was primarily due to increases of $3.6 million in personnel costs, including $0.9 million in stock-based compensation, $3.0 million in hosting costs and $1.8 million in facilities costs and allocated overhead. The increase in personnel costs was due to an increase in headcount. The increase in hosting costs was primarily attributable to increased support for the increased use of our platform by our clients. The increase in facilities costs was primarily driven by new data center locations and leases for additional office space to support our future growth.

The increase in platform operations expense for the nine months ended September 30, 2021, compared to the same prior year period, was primarily due to increases of $13.1 million in personnel costs, including $6.2 million of stock-based compensation, $7.8 million in hosting costs and $7.4 million in facilities costs and allocated overhead. These increases were primarily attributable to the factors described above.

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

Sales and Marketing

										Change
		2021				2020				$				%
		($ in thousands)
Three months ended September 30,		$	59,278			$	44,637			$	14,641				33	%
Percent of revenue			20	%			21	%
Nine months ended September 30,		$	176,797			$	116,002			$	60,795				52	%
Percent of revenue			22	%			22	%

The increase in sales and marketing expense for the three months ended September 30, 2021, compared to the same prior year period, was primarily due to increases of $10.3 million in personnel costs, including $2.2 million of stock-based compensation, $2.8 million in advertising and marketing costs and $1.5 million in allocated facilities costs. The increase in personnel costs was primarily due to an increase in headcount in order to support our sales efforts and continue to develop and maintain relationships with our clients, as well as an increase in incentive compensation. The increase in advertising and marketing costs was primarily due to an increase in marketing campaigns and sponsorships. The increase in allocated facilities costs was primarily driven by new leases for additional office space to support our future growth.

The increase in sales and marketing expense for the nine months ended September 30, 2021, compared to the same prior year period, was primarily due to increases of $50.0 million in personnel costs, including $18.8 million of stock-based compensation, $5.7 million in allocated facilities costs and $5.0 million in advertising and marketing costs. These increases were primarily attributable to the factors described above.

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

Technology and Development

										Change
		2021				2020				$				%
		($ in thousands)
Three months ended September 30,		$	55,847			$	41,079			$	14,768				36	%
Percent of revenue			19	%			19	%
Nine months ended September 30,		$	163,301			$	117,931			$	45,370				38	%
Percent of revenue			20	%			23	%

The increase in technology and development expense for the three months ended September 30, 2021, compared to the same prior year period, was primarily due to increases of $13.4 million in personnel costs, including $3.4 million of stock-based compensation and $1.2 million in allocated facilities costs. The increase in personnel costs was primarily attributable to increased headcount to maintain and support further development of our platform. The increase in allocated facilities costs was primarily driven by new leases for additional office space to support our growth.

The increase in technology and development expense for the nine months ended September 30, 2021, compared to the same prior year period, was primarily due to increases of $39.9 million in personnel costs, including $17.0 million of stock-based compensation, and $5.5 million in allocated facilities costs. These increases were primarily attributable to the factors described above.

We expect technology and development expense to increase in absolute dollars as we continue to invest in the development of our platform to support additional features and functions, increase the number of advertising and data inventory suppliers and support the increase in volume of advertising spending by our customers on our platform. We also intend to invest in technology to further automate our business processes.

General and Administrative

										Change
		2021				2020				$				%
		($ in thousands)
Three months ended September 30,		$	52,120			$	42,789			$	9,331				22	%
Percent of revenue			17	%			20	%
Nine months ended September 30,		$	155,884			$	117,252			$	38,632				33	%
Percent of revenue			19	%			23	%

The increase in general and administrative expense for the three months ended September 30, 2021, compared to the same prior year period, was primarily due to increases of $6.7 million in personnel costs, including $1.2 million in stock-based compensation, and $1.5 million in allocated facilities costs. The increase in personnel costs was primarily due to our hiring and growth. The increase in allocated facilities costs was primarily driven by new leases for additional office space to support our future growth.

The increase in general and administrative expense for the nine months ended September 30, 2021, compared to the same prior year period, was primarily due to increases of $33.5 million in personnel costs, including $16.3 million of stock-based compensation, and $5.0 million in allocated facilities costs. These increases in personnel costs and allocated facilities costs were primarily attributable to the factors described above.

We expect general and administrative expenses to increase primarily due to an increase in stock-based compensation expense associated with the Performance Option and continued investment in corporate infrastructure to support growth. For additional information regarding the Performance Option, refer to Note11— Subsequent Event.

Total Other Expense, Net

		2021				2020				$ Change
		(in thousands)
Three months ended September 30,		$	1,470			$	223			$	1,247
Nine months ended September 30,		$	1,560			$	834			$	726

The increase in total other expense, net for the three months ended September 30, 2021, compared to the same prior year period, was primarily due to a net increase in foreign exchange losses.

The increase in total other expense, net for the nine months ended September 30, 2021, compared to the same prior year period, was primarily due to lower interest income on our short-term investments.

Provision for (benefit from) Income Taxes

		2021				2020
		($ in thousands)
Three months ended September 30,		$	19,592			$	1,312
Effective tax rate			25	%			3	%
Nine months ended September 30,		$	18,895			$	(53,473	)
Effective tax rate			13	%			(145	)%

The U.S. federal statutory tax rate was 21% for the 2021 and 2020 periods, respectively.

The increase in the income tax provision for the three months ended September 30, 2021, compared to the same prior year period, was primarily due to higher pre-tax profitability coupled with the tax impacts associated with nondeductible stock-based compensation. Additionally, the 2020 period included an income tax benefit attributable to a net operating loss (“NOL”) carryback provided for under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) not applicable to the 2021 period. For the three months ended September 30, 2021, and 2020, the tax benefits associated with employee exercises of stock options and vesting of restricted stock units were $21.9 million and $25.6 million, respectively.

The increase in the income tax provision for the nine months ended September 30, 2021, compared to the same prior year period, was primarily due to higher pre-tax profitability coupled with the tax impacts associated with nondeductible stock-based compensation. Additionally, the 2020 period included an income tax benefit attributable to an NOL carryback provided for under the CARES Act not applicable to the 2021 period. For the nine months ended September 30, 2021 and 2020, the tax benefits associated with employee exercises of stock options and vesting of restricted stock units were $58.2 million and $98.7 million, respectively.

Liquidity and Capital Resources

As of September 30, 2021, we had cash and cash equivalents of $576.9 million, including cash of $41.0 million held by our international subsidiaries, short-term investments in marketable securities of $221.7 million, and working capital of $1,088.0 million.

We believe our existing cash and cash equivalents and cash flow from operations will be sufficient to meet our working capital requirements for at least the next 12 months. Further, in November 2020, we filed a shelf registration statement on Form S-3 with the SEC, (the “Shelf Registration”), which permits us to issue equity securities and equity-linked securities from time to time, subject to certain limitations. The Shelf Registration is intended to provide us with additional flexibility to access capital markets for general corporate purposes, subject to market conditions and our capital needs. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under “Risk Factors” within this Quarterly Report on Form 10-Q.

In the future, we may attempt to raise additional capital through the sale of equity securities or through equity-linked or debt financing arrangements. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of additional indebtedness, we may be subject to increased fixed payment obligations and could also be subject to additional restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. Any future indebtedness we incur may result in terms that could be unfavorable to equity investors.

There can be no assurances that we will be able to raise additional capital. The inability to raise capital would adversely affect our ability to achieve our business objectives. In addition, if our operating performance during the next 12 months is below our expectations, our liquidity and ability to operate our business could be adversely affected. In light of the COVID-19 pandemic, we are closely monitoring the effect that current economic conditions may have on our working capital requirements.

Credit Facility

On June 15, 2021, we and a syndicate of banks, led by JPMorgan Chase Bank, N.A., as agent, entered into a Loan and Security Agreement (the “credit facility”). This agreement replaced our prior credit facility, which was scheduled to terminate in May 2022. The credit facility consists of a $450.0 million revolving loan facility, with a $20.0 million sublimit for swingline borrowings and a $15.0 million sublimit for the issuance of letters of credit. Under certain circumstances, we have the right to increase the credit facility by an amount not to exceed $300.0 million.

As of September 30, 2021, we did not have an outstanding debt balance under the credit facility. Availability under the credit facility was $443.9 million as of September 30, 2021, which is net of outstanding letters of credit of $6.1 million. The credit facility matures, and all outstanding amounts become due and payable, on June 15, 2026. As of September 30, 2021, we were in compliance with all covenants.

For additional information regarding the credit facility, refer to Note 6—Debt.

Cash Flows

The following table summarizes our cash flows for the periods presented:

		Nine Months Ended September 30,
		2021				2020
		(in thousands)
Net cash provided by operating activities		$	215,119			$	237,512
Net cash used in investing activities		$	(97,676	)		$	(60,906	)
Net cash provided by financing activities		$	22,120			$	126,889

Operating Activities

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

For the nine months ended September 30, 2021, cash provided by operating activities of $215.1 million resulted primarily from net income adjusted for non-cash items of $333.9 million, partially offset by a net decrease in our operating assets and liabilities of $118.8 million. The net decrease was primarily due to a $48.6 million increase in accounts receivables, a $44.1 million decrease in accounts payable and a $31.9 decrease in operating lease liabilities. The increase in accounts receivable resulted from seasonality and the timing of cash receipts from clients. The decrease in accounts payable was due to the timing of payments to suppliers for the cost of advertising inventory, data and add-on features. The decrease in operating lease liabilities was due primarily to rent payments.

For the nine months ended September 30, 2020, cash provided by operating activities of $237.5 million resulted primarily from net income adjusted for non-cash items of $192.0 million and a net increase in our operating assets and liabilities of $45.5 million. The net increase was primarily due to a $21.1 million decrease in accounts receivables and a $47.7 million increase in accounts payable, partially offset by a $23.9 million increase in prepaid expenses and other assets. The decrease in accounts receivable resulted from seasonality, and the timing of cash receipts from clients. The increase in accounts payable was primarily due to the timing of payments to suppliers for the cost of advertising inventory, data, and add-on features. The increase in prepaid expenses and other assets was attributable to an increase in the income tax receivable primarily related to the tax benefits associated with employee exercises of stock options and vesting of restricted stock units.

Investing Activities

Our primary investing activities consist of investing in short-term investments in marketable securities, purchases of property and equipment for the expansion of our new facilities in support of our expanding headcount as a result of our growth, and capital expenditures to develop our software in support of enhancing our technology platform. As our business grows, we expect our capital expenditures and our investment activity to continue to increase.

For the nine months ended September 30, 2021, we used $97.7 million of cash in investing activities, consisting of $233.4 million to purchase short-term investments, $43.9 million to purchase property and equipment, $3.7 million of investments in capitalized software and $13.3 million for certain assets accounted for as a business acquisition, partially offset by maturities of short-term investments of $192.1 million and sales of investments of $4.5 million. Purchases of property and equipment and investments in capitalized software support our growth and further development of our platform.

For the nine months ended September 30, 2020, we used $60.9 million of cash in investing activities, consisting of $127.3 million to purchase short-term investments, $57.7 million to purchase property and equipment, and $4.2 million of investments in capitalized software, partially offset by maturities of short-term investments of $128.3 million. Purchases of property and equipment and investments in capitalized software support our growth and further development of our platform.

Financing Activities

For the nine months ended September 30, 2021, cash provided by financing activities of $22.1 million was primarily due to $39.6 million proceeds from stock option exercises and $22.8 million proceeds from our employee stock purchase plan, partially offset by $38.3 million of taxes paid for restricted stock award settlements and $1.9 million for debt financing costs.

For the nine months ended September 30, 2020, cash provided by financing activities of $126.9 million was primarily due to net proceeds of $72.0 million from our credit facility, $54.0 million proceeds from stock option exercises and $15.0 million proceeds from our employee stock purchase plan, partially offset by $14.2 million of taxes paid for restricted stock award settlements.

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 at September 30, 2021 other than the indemnification agreements described below.

Contractual Obligations

Our principal commitments consist of our non-cancelable operating leases for our various office facilities and other contractual commitments consisting of obligations to our hosting services providers, marketing contracts and providers of software as a service. In certain cases, the terms of the lease agreements provide for rental payments on a graduated basis.

The following table summarizes our non-cancelable contractual obligations at September 30, 2021:

		Payments Due by Period
		Less than 1 Year (Remaining 2021)				1-3 Years (2022 and 2023)				3-5 Years (2024 and 2025)				More than 5 Years (Thereafter)				Total
Operating lease commitments		$	13,476			$	103,260			$	82,506			$	131,430			$	330,672
Other contractual commitments			11,134				68,127				210				52				79,523
Total		$	24,610			$	171,387			$	82,716			$	131,482			$	410,195

In the ordinary course of business, we enter into agreements in which we may agree to indemnify clients, suppliers, vendors, lessors, business partners, lenders, stockholders, and other parties with respect to certain matters, including losses resulting from claims of intellectual property infringement, damages to property or persons, business losses, or other liabilities. Generally, these indemnity and defense obligations relate to our own business operations, obligations, and acts or omissions. However, under some circumstances, we agree to indemnify and defend contract counterparties against losses resulting from their own business operations, obligations, and acts or omissions, or the business operations, obligations, and acts or omissions of third parties. These indemnity provisions generally survive termination or expiration of the agreements in which they appear. In addition, we have entered into indemnification agreements with our directors, executive officers and other officers that will require us to indemnify them against liabilities that may arise by reason of their status or service as directors, officers or employees. In the ordinary course of business, demands have been made upon us to provide indemnification under such agreements, but we are not aware of any claims that could have a material effect on our balance sheet, statement of income or statement of cash flows. Accordingly, no amounts for any obligation have been recorded at September 30, 2021.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the assumptions and estimates associated with the evaluation of revenue recognition criteria, including the determination of revenue recognition as net versus gross in our revenue arrangements, stock-based compensation expense and income taxes have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ materially from these estimates.

Recently Issued Accounting Pronouncements

Refer to Note 2**—** Basis of Presentation and Summary of Significant Accounting Policies of our condensed consolidated financial statements.