filings.toolsTrade Desk 10-Q 2022-03-31
Filed 2022-05-10. 7 sections, 209K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|
For the quarterly period ended March 31, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|
For the transition period from to
Commission File Number: 001-37879
THE TRADE DESK, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 27-1887399 | |||
|---|---|---|---|---|
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
42 N. Chestnut Street
Ventura, California 93001
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (805) 585-3434
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
|---|---|---|---|---|
| Class A Common Stock, par value $0.000001 per share | TTD | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
|---|---|---|---|---|---|---|
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2022, the registrant had 442,090,841 shares of Class A common stock and 44,234,950 shares of Class B common stock outstanding.
THE TRADE DESK, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE TRADE DESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par values)
(Unaudited)
| As of | As of | |||||||
|---|---|---|---|---|---|---|---|---|
| March 31, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 844,223 | $ | 754,154 | ||||
| Short-term investments, net | 260,347 | 204,625 | ||||||
| Accounts receivable, net of allowance for credit losses of $8,040 and $7,374 as of March 31, 2022 and December 31, 2021, respectively | 1,760,985 | 2,020,720 | ||||||
| Prepaid expenses and other current assets | 89,784 | 112,150 | ||||||
| TOTAL CURRENT ASSETS | 2,955,339 | 3,091,649 | ||||||
| Property and equipment, net | 130,640 | 135,856 | ||||||
| Operating lease assets | 228,991 | 234,091 | ||||||
| Deferred income taxes | 73,548 | 68,244 | ||||||
| Other assets, non-current | 44,203 | 47,500 | ||||||
| TOTAL ASSETS | $ | 3,432,721 | $ | 3,577,340 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,405,673 | $ | 1,655,684 | ||||
| Accrued expenses and other current liabilities | 92,903 | 101,472 | ||||||
| Operating lease liabilities | 47,226 | 46,149 | ||||||
| TOTAL CURRENT LIABILITIES | 1,545,802 | 1,803,305 | ||||||
| Operating lease liabilities, non-current | 229,489 | 238,449 | ||||||
| Other liabilities, non-current | 8,327 | 8,280 | ||||||
| TOTAL LIABILITIES | 1,783,618 | 2,050,034 | ||||||
| Commitments and contingencies (Note 10) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, par value $0.000001; 100,000 shares authorized, zero shares issued and outstanding as of March 31, 2022 and December 31, 2021 | — | — | ||||||
| Common stock, par value $0.000001 Class A, 1,000,000 shares authorized; 441,791 and 439,206 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively Class B, 95,000 shares authorized; 44,235 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | — | — | ||||||
| Additional paid-in capital | 1,051,572 | 915,177 | ||||||
| Retained earnings | 597,531 | 612,129 | ||||||
| TOTAL STOCKHOLDERS’ EQUITY | 1,649,103 | 1,527,306 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 3,432,721 | $ | 3,577,340 | ||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
THE TRADE DESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | 315,323 | $ | 219,811 | ||||
| Operating expenses: | ||||||||
| Platform operations | 63,890 | 50,500 | ||||||
| Sales and marketing | 70,688 | 55,764 | ||||||
| Technology and development | 71,999 | 53,918 | ||||||
| General and administrative | 125,799 | 51,845 | ||||||
| Total operating expenses | 332,376 | 212,027 | ||||||
| Income (loss) from operations | (17,053 | ) | 7,784 | |||||
| Other expense (income): | ||||||||
| Interest expense, net | 1,076 | 45 | ||||||
| Foreign currency exchange loss (gain), net | (795 | ) | (353 | ) | ||||
| Total other expense (income), net | 281 | (308 | ) | |||||
| Income (loss) before income taxes | (17,334 | ) | 8,092 | |||||
| Benefit from income taxes | (2,736 | ) | (14,550 | ) | ||||
| Net income (loss) | $ | (14,598 | ) | $ | 22,642 | |||
| Earnings (loss) per share: | ||||||||
| Basic | $ | (0.03 | ) | $ | 0.05 | |||
| Diluted | $ | (0.03 | ) | $ | 0.05 | |||
| Weighted-average shares outstanding: | ||||||||
| Basic | 484,190 | 472,816 | ||||||
| Diluted | 484,190 | 497,916 | ||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
THE TRADE DESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
| Class A and B | Additional | Total | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Common Stock | Paid-In | Retained | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||
| Balance as of December 31, 2020 | 473,401 | $ | — | $ | 538,778 | $ | 474,367 | $ | 1,013,145 | |||||||||||
| Exercise of common stock options | 1,794 | — | 12,621 | — | 12,621 | |||||||||||||||
| Issuance of restricted stock, net of forfeitures and shares withheld for taxes | 110 | — | (17,080 | ) | — | (17,080 | ) | |||||||||||||
| Stock-based compensation | — | — | 52,985 | — | 52,985 | |||||||||||||||
| Net income | — | — | — | 22,642 | 22,642 | |||||||||||||||
| Balance as of March 31, 2021 | 475,305 | $ | — | $ | 587,304 | $ | 497,009 | $ | 1,084,313 | |||||||||||
| Balance as of December 31, 2021 | 483,441 | $ | — | $ | 915,177 | $ | 612,129 | $ | 1,527,306 | |||||||||||
| Exercise of common stock options | 2,395 | — | 24,408 | — | 24,408 | |||||||||||||||
| Issuance of restricted stock, net of forfeitures and shares withheld for taxes | 190 | — | (13,428 | ) | — | (13,428 | ) | |||||||||||||
| Stock-based compensation | — | — | 125,415 | — | 125,415 | |||||||||||||||
| Net loss | — | — | — | (14,598 | ) | (14,598 | ) | |||||||||||||
| Balance as of March 31, 2022 | 486,026 | $ | — | $ | 1,051,572 | $ | 597,531 | $ | 1,649,103 | |||||||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
THE TRADE DESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | (14,598 | ) | $ | 22,642 | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 12,350 | 10,011 | ||||||
| Stock-based compensation | 124,895 | 52,354 | ||||||
| Allowance for credit losses on accounts receivable | 725 | 203 | ||||||
| Noncash lease expense | 10,515 | 9,451 | ||||||
| Deferred income taxes | (5,304 | ) | — | |||||
| Other | 998 | 4,905 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 259,483 | 208,847 | ||||||
| Prepaid expenses and other assets | 23,743 | (16,180 | ) | |||||
| Accounts payable | (245,937 | ) | (200,578 | ) | ||||
| Accrued expenses and other liabilities | (8,688 | ) | (5,691 | ) | ||||
| Operating lease liabilities | (11,990 | ) | (10,894 | ) | ||||
| Net cash provided by operating activities | 146,192 | 75,070 | ||||||
| INVESTING ACTIVITIES: | ||||||||
| Purchases of investments | (121,221 | ) | (89,354 | ) | ||||
| Sales of investments | — | 4,539 | ||||||
| Maturities of investments | 64,133 | 62,670 | ||||||
| Purchases of property and equipment | (8,401 | ) | (13,120 | ) | ||||
| Capitalized software development costs | (1,614 | ) | (1,062 | ) | ||||
| Net cash used in investing activities | (67,103 | ) | (36,327 | ) | ||||
| FINANCING ACTIVITIES: | ||||||||
| Proceeds from exercise of stock options | 24,408 | 12,621 | ||||||
| Taxes paid related to net settlement of restricted stock awards | (13,428 | ) | (17,080 | ) | ||||
| Net cash provided by (used in) financing activities | 10,980 | (4,459 | ) | |||||
| Increase in cash and cash equivalents | 90,069 | 34,284 | ||||||
| Cash and cash equivalents—Beginning of period | 754,154 | 437,353 | ||||||
| Cash and cash equivalents—End of period | $ | 844,223 | $ | 471,637 | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| Cash paid for operating lease liabilities | $ | 14,030 | $ | 15,107 | ||||
| Asset retirement obligation | $ | — | $ | 625 | ||||
| Operating lease assets obtained in exchange for operating lease liabilities | $ | 4,732 | $ | (937 | ) | |||
| Capitalized assets financed by accounts payable | $ | 1,837 | $ | 2,421 | ||||
| Stock-based compensation included in capitalized software development costs | $ | 520 | $ | 631 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
THE TRADE DESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Nature of Operations
The Trade Desk, Inc. (the “Company”) is a global technology company that empowers buyers of advertising. Through the Company’s 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”). The Company’s platform integrations with major inventory, publisher and data partners provides ad buyers reach and decisioning capabilities, and the Company’s enterprise application programming interfaces (“APIs”) enable its clients to develop on top of the platform.
The Company is a Delaware corporation formed in November 2009 and headquartered in Ventura, California with offices in various cities in North America, Europe, Asia and Australia.
Note 2—Basis of Presentation and Summary of Significant Accounting Policies
The accompanying condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and are unaudited. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 2021 was derived from audited financial statements but does not include all disclosures required by GAAP. Accordingly, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2021.
There have been no material changes to the Company’s accounting policies from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021, and these unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with that used to prepare the Company’s audited annual consolidated financial statements for the year ended December 31, 2021, and include, in the opinion of management, all adjustments, consisting of normal recurring items, necessary for the fair statement of the condensed consolidated financial statements.
The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results expected for the full year ending December 31, 2022.
On June 16, 2021, the Company effected a ten-for-one stock split (the “Stock Split”) of the Company’s common stock in the form of a stock dividend. Each stockholder of record on June 9, 2021 received nine additional shares of common stock for each then-held share. Trading began on a stock split-adjusted basis on June 17, 2021. The number of shares subject to outstanding equity awards and the exercise prices of the outstanding stock option awards were also adjusted to reflect the effect of the Stock Split. All share and per share amounts presented herein have been retroactively adjusted to reflect the impact of the Stock Split.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from these estimates.
Management regularly evaluates its estimates, primarily those related to: (1) revenue recognition criteria, including the determination of revenue reporting as net versus gross in the Company’s revenue arrangements, (2) allowances for credit losses accounts, (3) operating lease assets and liabilities, including our incremental borrowing rate and terms and provisions of each lease (4) the useful lives of property and equipment and capitalized software development costs, (5) income taxes, (6) assumptions used in the option pricing models to determine the fair value of stock-based compensation and (7) the recognition and disclosure of contingent liabilities. These estimates are based on historical data and experience, as well as various other factors that management believes to be reasonable under the circumstances; the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
As of March 31, 2022, the impact of the Coronavirus (“COVID-19”) pandemic on the Company’s business continues to evolve. As a result, many of the Company’s estimates and assumptions, including the allowance for credit losses, consider macro-economic factors in the market, which require increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, the Company’s estimates may change materially in future periods.
Note 3—Earnings Per Share
The Company has two classes of common stock, Class A and Class B. Basic and diluted earnings (loss) per share attributable to common stockholders for Class A and Class B common stock were the same because they were entitled to the same liquidation and dividend rights.
The computation of basic and diluted earnings (loss) per share is as follows (in thousands, except per share amounts):
| Three Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Numerator: | ||||||||
| Net income (loss) | $ | (14,598 | ) | $ | 22,642 | |||
| Denominator: | ||||||||
| Weighted-average shares outstanding—basic | 484,190 | 472,816 | ||||||
| Effect of dilutive securities | — | 25,100 | ||||||
| Weighted-average shares outstanding—diluted | 484,190 | 497,916 | ||||||
| Basic earnings (loss) per share | $ | (0.03 | ) | $ | 0.05 | |||
| Diluted earnings (loss) per share | $ | (0.03 | ) | $ | 0.05 | |||
| Anti-dilutive equity awards under stock-based award plans excluded from the determination of diluted earnings (loss) per share | 25,609 | 263 |
Note 4—Cash, Cash Equivalents and Short-Term Investments, Net
Cash, cash equivalents and short-term investments in marketable securities were as follows (in thousands):
| As of March 31, 2022 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash and | ||||||||||||
| Cash | Short-Term | |||||||||||
| Equivalents | Investments | Total | ||||||||||
| Cash | $ | 268,511 | $ | — | $ | 268,511 | ||||||
| Level 1: | ||||||||||||
| Money market funds | 539,351 | — | 539,351 | |||||||||
| Level 2: | ||||||||||||
| Commercial paper | 36,361 | 103,176 | 139,537 | |||||||||
| Corporate debt securities | — | 86,455 | 86,455 | |||||||||
| U.S. government and agency securities | — | 70,716 | 70,716 | |||||||||
| Total | $ | 844,223 | $ | 260,347 | $ | 1,104,570 |
| As of December 31, 2021 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash and | ||||||||||||
| Cash | Short-Term | |||||||||||
| Equivalents | Investments | Total | ||||||||||
| Cash | $ | 272,058 | $ | — | $ | 272,058 | ||||||
| Level 1: | ||||||||||||
| Money market funds | 431,299 | — | 431,299 | |||||||||
| Level 2: | ||||||||||||
| Commercial paper | 47,544 | 70,804 | 118,348 | |||||||||
| Corporate debt securities | 3,253 | 85,425 | 88,678 | |||||||||
| U.S. government and agency securities | — | 48,396 | 48,396 | |||||||||
| Total | $ | 754,154 | $ | 204,625 | $ | 958,779 |
The Company’s gross unrealized gains or losses from its short-term investments, recorded at fair value, for the three months ended March 31, 2022 and 2021, were immaterial.
The contractual maturities of the Company’s short-term investments are as follows (in thousands):
| March 31, 2022 | ||||
|---|---|---|---|---|
| Due in one year | $ | 227,934 | ||
| Due in one to two years | 32,413 | |||
| Total | $ | 260,347 |
Note 5—Leases
The components of lease expense recorded in the condensed consolidated statements of operations were as follows (in thousands):
| Three Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Operating lease cost | $ | 12,484 | $ | 13,095 | ||||
| Short-term lease cost | 472 | 171 | ||||||
| Variable lease cost | 1,943 | 1,923 | ||||||
| Sublease income | (626 | ) | (650 | ) | ||||
| Total lease cost | $ | 14,273 | $ | 14,539 |
Note 6—Debt
Credit Facility
On June 15, 2021, the Company and a syndicate of banks, led by JPMorgan Chase Bank, N.A., as agent, entered into a Loan and Security Agreement (the “Credit Facility”). The Credit Facility replaced the Company’s prior credit facility, which was scheduled to terminate in May 2022. The Credit Facility consists of a $450 million revolving loan facility, with a $20 million sublimit for swingline borrowings and a $15 million sublimit for the issuance of letters of credit. Under certain circumstances, the Company has the right to increase the Credit Facility by an amount not to exceed $300 million. The Credit Facility is collateralized by substantially all of the Company’s assets, including a pledge of certain of its accounts receivable, deposit accounts, intellectual property, investment property and equipment.
Loans under the Credit Facility bear interest through maturity at a variable rate based upon, at the Company’s option, an annual rate of either a Base Rate or an adjusted LIBOR rate, plus an applicable margin (“Base Rate Borrowings” and “LIBOR Rate Borrowings”). The Base Rate is defined as a rate per annum for any day equal to the greatest of (1) the rate of interest last quoted by The Wall Street Journal as the “Prime Rate” in the United States, (2) the NYFRB Rate in effect on such day plus half of 1%, and (3) the adjusted LIBOR rate for a one-month interest period on such day plus 1%. The applicable margin is between 0.25% to 1.25% for Base Rate Borrowings and between 1.25% and 2.25% for LIBOR Rate Borrowings based on the Company maintaining certain leverage ratios. The fee for undrawn amounts under the Credit Facility ranges, based on the applicable leverage, from 0.200% to 0.350%. The Company is also required to pay customary letter of credit fees, as necessary.
On December 17, 2021, the Company amended the Credit Facility to expand the process for issuing letters of credit and the related invoicing, particularly with respect to letters of credit not denominated in U.S. Dollars.
As of March 31, 2022, the Company did not have an outstanding debt balance under the Credit Facility. Availability under the Credit Facility was $444 million as of March 31, 2022, which is net of outstanding letters of credit of $6 million. The Credit Facility matures, and all outstanding amounts become due and payable, on June 15, 2026.
The Credit Facility contains customary conditions to borrowings, events of default and covenants, including covenants that restrict the Company’s ability to sell assets, make changes to the nature of the Company’s business, engage in mergers or acquisitions, incur, assume or permit to exist additional indebtedness and guarantees, create or permit to exist liens, pay dividends, issue equity instruments, make distributions or redeem or repurchase capital stock or make other investments, engage in transactions with affiliates and make payments in respect of subordinated debt. The Credit Facility also requires the Company to maintain compliance with a maximum ratio of consolidated funded debt to consolidated EBITDA of 3.50 to 1.00. As of March 31, 2022, the Company was in compliance with all covenants.
Note 7—Stock-Based Compensation
Stock-Based Compensation Expense
Stock-based compensation expense recorded in the condensed consolidated statements of operations was as follows (in thousands):
| Three Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Platform operations | $ | 5,950 | $ | 5,015 | ||||
| Sales and marketing | 16,525 | 13,684 | ||||||
| Technology and development | 22,393 | 16,094 | ||||||
| General and administrative | 80,027 | 17,561 | ||||||
| Total | $ | 124,895 | $ | 52,354 | ||||
Stock Options
The following summarizes stock option activity:
| Shares Under Option (in thousands) | Weighted- Average Exercise Price | |||||||
|---|---|---|---|---|---|---|---|---|
| Outstanding as of December 31, 2021 | 18,984 | $ | 15.14 | |||||
| Granted | 122 | 81.37 | ||||||
| Exercised | (2,395 | ) | 10.19 | |||||
| Expired/forfeited | (247 | ) | 39.93 | |||||
| Outstanding as of March 31, 2022 | 16,464 | $ | 15.98 | |||||
| Exercisable as of March 31, 2022 | 11,803 | $ | 9.29 | |||||
At March 31, 2022, the Company had unrecognized stock-based compensation relating to stock options of approximately $83 million, which is expected to be recognized over a weighted-average period of 1.7 years.
CEO Performance Option
In October 2021, the Company granted a market-based performance award to the Company’s Chief Executive Officer (the “CEO Performance Option”) under the Company’s 2016 Incentive Award Plan. The CEO Performance Option has an exercise price of $68.29 per share. At March 31, 2022, the CEO Performance Option had 2.4 million exercisable options and 19.2 million options outstanding. No options were granted, exercised, forfeited or expired during the three months ended March 31, 2022. No acceleration of unachieved award traches occurred during the three months ended March 31, 2022. Stock-based compensation of $66 million for the CEO Performance Option was recorded as a component of general and administrative expense during the three months ended March 31, 2022. At March 31, 2022, the Company had unrecognized stock-based compensation relating to the CEO Performance Option of $596 million which, assuming no acceleration of vesting, is expected to be recognized over a weighted-average period of 2.8 years.
Restricted Stock
The following summarizes restricted stock activity:
| RSU (in thousands) | Weighted- Average Grant Date Fair Value | |||||||
|---|---|---|---|---|---|---|---|---|
| Unvested as of December 31, 2021 | 5,597 | $ | 51.54 | |||||
| Granted | 884 | 77.10 | ||||||
| Vested | (518 | ) | 40.20 | |||||
| Forfeited | (266 | ) | 57.35 | |||||
| Unvested as of March 31, 2022 | 5,697 | $ | 56.27 |
At March 31, 2022, the Company had unrecognized stock-based compensation relating to restricted stock of approximately $296 million, which is expected to be recognized over a weighted-average period of 2.8 years.
Employee Stock Purchase Plan (“ESPP”)
Stock-based compensation expense related to the ESPP totaled $26 million for the three months ended March 31, 2022 and 2021. At March 31, 2022, the Company had unrecognized stock-based compensation relating to ESPP awards of approximately $17 million, which is expected to be recognized over a weighted-average period of 0.3 years.
Note 8—Income Taxes
In determining the interim provision for income taxes, the Company utilized the discrete effective tax rate method, as allowed by Accounting Standards Codification (“ASC”) 740-270-30-18, “Income Taxes – Interim Reporting.” The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The discrete method treats the year-to-date period as if it were the annual period and determines the income tax expense or benefit on that basis. Due to our forecasted level of profitability and significant permanent differences, primarily related to the CEO Performance Option, the Company is unable to utilize the annual effective tax rate method.
For the three months ended March 31, 2022 and 2021, the income tax benefit included benefits associated with stock-based awards of $26 million.
For the three months ended March 31, 2022 and 2021, the Company’s effective tax rate differed from the United States federal statutory tax rate of 21% primarily due to the impact of tax benefits associated with stock-based awards, nondeductible stock-based compensation, state and foreign taxes and research and development tax credits.
There were no material changes to the Company’s unrecognized tax benefits during the three months ended March 31, 2022, and the Company does not expect to have any significant changes to unrecognized tax benefits through the end of the fiscal year.
Note 9— Segment and Geographic Information
The Company has one primary business activity and operates in one reportable and operating segment.
The Company reports revenue net of amounts it pays suppliers for the cost of advertising inventory, third-party data and other add-on features (collectively, “Supplier Features”). The Company generally bills clients based on Gross Billings, which is the gross amount of Supplier Features they purchase through its platform and the platform fees, net of allowances. The Company’s accounts receivable are recorded at the amount of Gross Billings for the amounts it is responsible to collect, and accounts payable are recorded at the net amount payable to suppliers. Accordingly, both accounts receivable and accounts payable appear large in relation to revenue reported on a net basis.
Gross Billings, based on the billing address of the clients or client affiliates, set forth as a percentage of total Gross Billings, were as follows:
| Three Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| U.S. | 88 | % | 86 | % | ||||
| International | 12 | % | 14 | % | ||||
| Total | 100 | % | 100 | % | ||||
Note 10— Commitments and Contingencies
Guarantees and Indemnification
In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to clients, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with directors and certain officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon the Company to provide indemnification under such agreements, and thus, there are no claims that the Company is aware of that could have a material effect on the Company’s balance sheet, statement of operations or statement of cash flows. Accordingly, no amounts for any obligation have been recorded at March 31, 2022.
Litigation
From time to time, the Company is subject to various legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. Although the outcome of the various legal proceedings and claims cannot be predicted with certainty, management does not believe that any of these proceedings or other claims will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
On June 28, 2021, a class action lawsuit was filed against the Company, the members of the Company’s board of directors, and one of the Company’s executive officers (collectively, the “Defendants”) in the Court of Chancery of the State of Delaware. The complaint alleges generally that the Defendants breached their fiduciary duties to the Company’s stockholders in connection with the negotiation and approval of the amendments to the Company’s certificate of incorporation and related matters voted on at the Special Meeting of Stockholders held on December 22, 2020 (the “Amendments”). The plaintiff is seeking a court order rescinding the Amendments, as well as monetary damages. On November 29, 2021, the plaintiff filed a supplement to the complaint, adding factual allegations related to the CEO Performance Option. On February 1, 2022, the Defendants moved to dismiss the complaint. A hearing on Defendants’ motions was held on April 11, 2022. The Company believes that all of the claims asserted in the complaint are without merit and intends to defend against them vigorously. However, litigation is inherently uncertain and there can be no assurance regarding the likelihood that the Defendants’ defense of the action will be successful.
Employment Contracts
The Company has entered into agreements with severance terms with certain employees and officers, all of whom are employed on an at-will basis, subject to certain severance obligations in the event of certain involuntary terminations. The Company may be required to accelerate the vesting of certain stock options in the event of changes in control, as defined, and involuntary terminations.
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 the COVID-19 pandemic 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, 2021, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
References to “Notes” are notes included in our unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Overview
We are a global technology company that empowers 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 connected TV (“CTV”). Our platform’s integrations with major data, inventory and publisher partners provide ad buyers reach and decisioning capabilities, and our enterprise application programming interfaces enable our clients to develop on top of the platform.
We commercially launched our platform in 2011, targeting the display advertising channel and have continued to add additional advertising channels. The gross spend on our platform comes from multiple channels including mobile, video (which includes CTV), display, audio, native, digital-out-of-home 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. 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
| Three Months Ended March 31, | Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | |||||||||||||
| (in millions, except percentages) | ||||||||||||||||
| Revenue | $ | 315 | $ | 220 | $ | 95 | 43 | % | ||||||||
| Net Income (Loss) | $ | (15 | ) | $ | 23 | $ | (38 | ) | (165 | )% |
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 the data, usage, measurement and targeting capabilities provided by our platform.
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 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 across Europe, China and India for example, offer opportunities 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 international markets 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 COVID-19, including the emergence of variants, 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 COVID-19 and its variants, and its impact on our clients, partners, industry and employees, all of which are uncertain at this time and cannot be accurately predicted. See “Item 1A. Risk Factors” in Part II. Other Information for further discussion of the adverse impacts of the COVID-19 pandemic on our business.
Results of Operations for the Three Months Ended March 31, 202****2 C****ompared with the Three Months Ended March 31, 202****1
The following tables set forth our consolidated results of operations for the periods presented.
| Three Months Ended March 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||||||||||
| (in thousands) | (% of Revenue) | (in thousands) | (% of Revenue) | |||||||||||||
| Revenue | $ | 315,323 | 100 | % | $ | 219,811 | 100 | % | ||||||||
| Operating expenses: | ||||||||||||||||
| Platform operations | 63,890 | 20 | 50,500 | 23 | ||||||||||||
| Sales and marketing | 70,688 | 22 | 55,764 | 25 | ||||||||||||
| Technology and development | 71,999 | 23 | 53,918 | 25 | ||||||||||||
| General and administrative | 125,799 | 40 | 51,845 | 24 | ||||||||||||
| Total operating expenses | 332,376 | 105 | 212,027 | 96 | ||||||||||||
| Income (loss) from operations | (17,053 | ) | (5 | ) | 7,784 | 4 | ||||||||||
| Total other expense (income), net | 281 | — | (308 | ) | — | |||||||||||
| Income (loss) before income taxes | (17,334 | ) | (5 | ) | 8,092 | 3 | ||||||||||
| Benefit from income taxes | (2,736 | ) | (1 | ) | (14,550 | ) | (7 | ) | ||||||||
| Net income (loss) | $ | (14,598 | ) | (5 | )% | $ | 22,642 | 10 | % | |||||||
Note: Percentages may not sum due to rounding.
Revenue
Revenue increased by $96 million, or 43%, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase was primarily due to increases in gross spend in the current year on our platform, which was primarily driven by increases in the number of advertising campaigns executed per client.
Platform Operations
Platform operations expense increased by $13 million, or 27% for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase was primarily due to increases of $5 million in personnel costs, which includes $1 million in stock-based compensation; $4 million in data related costs; $3 million in facilities costs and allocated overhead; and $1 million in hosting costs. The increase in personnel costs was due to an increase in headcount. The increase in data costs was primarily attributable to investment in new data providers. 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 hosting costs was primarily attributable to support related to the increased use of our platform by our clients.
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
Sales and marketing expense increased by $15 million, or 27%, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase was primarily due to increases of $11 million in personnel costs, which includes $3 million of stock-based compensation; $3 million in advertising and marketing costs; and $1 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.
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
Technology and development expense increased by $18 million, or 34%, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase was primarily due to increases of $18 million in personnel costs, which includes $6 million of stock-based compensation. The increase in personnel costs was primarily attributable to increased headcount to maintain and support further development of our platform.
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
General and administrative expense increased by $74 million, or 143%, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, primarily due to an increase in personnel costs. This increase was primarily driven by a $66 million increase in stock-based compensation related to the CEO Performance Option granted in the fourth quarter of prior year, and a $7 million increase in payroll costs related to hiring to support our growth.
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.
Total Other Expense, Net
Total other expense, net increased by $1 million, or 191%, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase was primarily due to credit loss expense on available-for-sale securities, partially offset by a net increase in foreign exchange gains.
Benefit from Income Taxes
The U.S. federal statutory tax rate was 21% for the three months ended March 31, 2022 and 2021, respectively.
The benefit from income taxes decreased by $12 million, or 81%, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The decrease was primarily attributable to higher nondeductible stock-based compensation, which is primarily related to the CEO Performance Option.
Liquidity and Capital Resources
As of March 31, 2022, we had cash and cash equivalents of $844 million, including cash of $85 million held by our international subsidiaries, short-term investments in marketable securities of $260 million, working capital of $1,410 million and $444 million of availability under our Credit Facility (refer to the “Credit Facility” section below). For the three months ended March 31, 2022, we generated $146 million cash flows from operating activities.
We believe our existing cash and cash equivalents, cash flow from operations, and our undrawn available balance under our Credit Facility 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 in “Item 1A. 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 worldwide 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 Credit Facility replaced our prior credit facility, which was scheduled to terminate in May 2022. The Credit Facility consists of a $450 million revolving loan facility, with a $20 million sublimit for swingline borrowings and a $15 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 million.
On December 17, 2021, we amended the Credit Facility to expand the process for issuing letters of credit and the related invoicing, particularly with respect to letters of credit not denominated in U.S. Dollars.
As of March 31, 2022, we did not have an outstanding debt balance under the Credit Facility. Availability under the Credit Facility was $444 million as of March 31, 2022, which is net of outstanding letters of credit of $6 million. The Credit Facility matures, and all outstanding amounts become due and payable, on June 15, 2026. As of March 31, 2022, 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:
| Three Months Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||
| (in thousands) | ||||||||
| Net cash provided by operating activities | $ | 146,192 | $ | 75,070 | ||||
| Net cash used in investing activities | $ | (67,103 | ) | $ | (36,327 | ) | ||
| Net cash provided by (used in) financing activities | $ | 10,980 | $ | (4,459 | ) |
Operating Activities
Our cash flows from operating activities are primarily influenced by growth in our operations, increases or decreases in collections from our clients, and related payments to our suppliers for advertising inventory and data. We typically pay suppliers in advance of collections from our clients. Our collection and payment cycles can vary from period to period. In addition, we expect seasonality to impact cash flows from operating activities on a sequential quarterly basis during the year.
For the three months ended March 31, 2022, cash provided by operating activities of $146 million resulted primarily from net income adjusted for non-cash items of $129 million, and a net increase in our operating assets and liabilities of $17 million. The net increase was primarily due to a $259 million decrease in accounts receivable, a $24 million decrease in prepaid expenses and other assets, partially offset by a $246 million decrease in accounts payable and a $12 million decrease in operating lease liabilities. The decrease in accounts receivable was due to seasonality and the timing of cash receipts from clients. The decrease in prepaid expenses and other assets was primarily due to the receipt of an income tax refund. The decrease in accounts payable was due to seasonality and 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 three months ended March 31, 2021, cash provided by operating activities of $75 million resulted primarily from net income adjusted for non-cash items of $100 million and a net decrease in our operating assets and liabilities of $25 million. The net decrease was primarily due to a $209 million decrease in accounts receivable, partially offset by a $201 million decrease in accounts payable and a $16 million increase in prepaid expenses and other assets. The decrease in accounts receivable was due to seasonality and the timing of cash receipts from clients. The decrease in accounts payable was due to seasonality and the timing of payments to suppliers for the cost of advertising inventory, data and add-on features. The increase in prepaid expenses and other assets was attributable to an increase in the income tax receivable primarily related to the tax benefits associated with employee exercises of stock options and vesting of restricted stock units.
Investing Activities
Our primary investing activities consist of investing in short-term marketable securities, purchases of property and equipment for the expansion of our new facilities in support of our expanding headcount as a result of our growth, and capital expenditures to develop our software in support of enhancing our technology platform. As our business grows, we expect our capital expenditures and our investment activity to continue to increase.
For the three months ended March 31, 2022, we used $67 million of cash in investing activities, consisting of $57 million of net purchases of short-term investments, $8 million to purchase property and equipment and $2 million of investments in capitalized software.
For the three months ended March 31, 2021, we used $36 million of cash in investing activities, consisting of $22 million of net purchases of short-term investments, $13 million to purchase property and equipment and $1 million of investments in capitalized software.
Financing Activities
For the three months ended March 31, 2022, cash provided by financing activities of $11 million was primarily due to $24 million proceeds from stock option exercises, partially offset by $13 million of taxes paid for restricted stock award settlements.
For the three months ended March 31, 2021, cash used by financing activities of $4 million was primarily due to $17 million of taxes paid for restricted stock award settlements, partially offset by $13 million proceeds from stock option 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 at March 31, 2022 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 March 31, 2022 (in thousands):
| Payments Due by Period | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Less than One Year | One Year or More | Total | ||||||||||
| Operating lease commitments | $ | 43,867 | $ | 282,178 | $ | 326,045 | ||||||
| Other contractual commitments | 164,773 | 470,017 | 634,790 | |||||||||
| Total | $ | 208,640 | $ | 752,195 | $ | 960,835 | ||||||
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 operations or statement of cash flows. Accordingly, no amounts for any obligation have been recorded at March 31, 2022.
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.
Recently Issued Accounting Pronouncements
Refer to Note 2**—** Basis of Presentation and Summary of Significant Accounting Policies of our condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks include primarily interest rate and foreign currency exchange risks.
Interest Rate Risk
We are exposed to market risk from changes in interest rates on our Credit Facility, which accrues interest at a variable rate. No amount was owed under our Credit Facility as of March 31, 2022. We have not used any derivative financial instruments to manage our interest rate risk exposure. Based upon the short-term investments amount as of March 31, 2022, a hypothetical one percentage point increase or decrease in the interest rate would result in a corresponding increase or decrease in investment income of approximately $3 million annually.
Foreign Currency Exchange Risk
We have foreign currency exchange risk related to transactions denominated in currencies other than the U.S. Dollar, principally the Euro, Australian Dollar, British Pound, Canadian Dollar, Japanese Yen and Indonesian Rupiah. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. As of March 31, 2022, an immediate 10% adverse change in foreign exchange rates on foreign-denominated accounts would result in a foreign currency loss of approximately $21 million. In the event our non-U.S. Dollar denominated sales and expenses increase, our operating results may be more greatly affected by exchange rate fluctuations.
We enter into forward contracts or other derivative transactions in an attempt to hedge our foreign currency risk. There can be no assurance that such transactions will be effective in hedging some or all of our foreign currency exposures and under some circumstances could generate losses for us.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of March 31, 2022. Our disclosure controls and procedures are designed to provide reasonable assurance that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures, and is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2022.
Changes in Internal Control over Financial Reporting
There have been no significant changes in our internal control over financial reporting during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently a party to any legal proceedings, litigation or claims, which, if determined adversely to us, would have a material adverse effect on our business, financial condition, results of operations or cash flows. We may from time to time, be party to litigation and subject to claims incident to the ordinary course of business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
On June 28, 2021, a class action lawsuit was filed against us, the members of our board of directors and one of our executive officers (collectively, the “Defendants”), in the Court of Chancery of the State of Delaware. The complaint alleges generally that the Defendants breached their fiduciary duties to our stockholders in connection with the negotiation and approval of the amendments to our certificate of incorporation and related matters voted on at the Special Meeting of Stockholders held on December 22, 2020. The plaintiff seeks a court order rescinding the amendments approved at the Special Meeting of Stockholders held on December 22, 2020, as well as monetary damages. On November 29, 2021, the plaintiff filed a supplement to the complaint, adding factual allegations related to the CEO Performance Option. On February 1, 2022, the Defendants moved to dismiss the complaint. A hearing on Defendants’ motions was held on April 11, 2022. We believe that all of the claims asserted in the complaint are without merit and intend to defend against them vigorously. However, litigation is inherently uncertain and there can be no assurance regarding the likelihood that the Defendants’ defense of the action will be successful.
Item 1A. Risk Factors
Investing in our Class A common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information contained in this Quarterly Report on Form 10-Q, including the condensed consolidated financial statements and the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations, before making investment decisions related to our Class A common stock. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the market price of our Class A common stock could decline and you could lose part or all of your investment.
Risks Related to Our Business and Industry
If we fail to maintain and grow our client base and spend through our platform, our revenue and business may be negatively impacted.
To sustain or increase our revenue, we must regularly add new clients and encourage existing clients to maintain or increase the amount of advertising inventory purchased through our platform and adopt new features and functionalities that we make available. If competitors introduce lower cost or differentiated offerings that compete with or are perceived to compete with our offerings, our ability to sell our services to new or existing clients could be impaired. We have spent significant effort in cultivating our relationships with advertising agencies, which has resulted in an increase in the budgets allocated to, and the amount of advertising purchased on, our platform. However, it is possible that we may reach a point of saturation at which we cannot continue to grow our revenue from such agencies because of internal limits that advertisers may place on the allocation of their advertising budgets to digital media to a particular provider or otherwise. While we generally have master services agreements (“MSAs”) in place with our clients, such agreements allow our clients to change the amount they spend through our platform or terminate our services with limited notice. We do not typically have exclusive relationships with our clients and there is limited cost to moving their media spend to our competitors. As a result, we have limited visibility to our future advertising revenue streams. We cannot assure you that our clients will continue to use our platform or that we will be able to replace, in a timely or effective manner, departing clients with new clients that generate comparable revenue. If a major client representing a significant portion of our business decides to materially reduce its use of our platform or to cease using our platform altogether, it is possible that our revenue or revenue growth rate could be significantly reduced, and our business negatively impacted.
The loss of advertising agencies as clients could significantly harm our business, financial condition and results of operations.
Our client base consists primarily of advertising agencies. We do not have exclusive relationships with advertising agencies, and we depend on agencies to work with us to build and maintain advertiser relationships and execute advertising campaigns.
The loss of agencies as clients could significantly harm our business, financial condition and results of operations. If we fail to maintain satisfactory relationships with an advertising agency, we risk losing business from the advertisers represented by that agency.
Advertisers may change advertising agencies. If an advertiser switches from an agency that utilizes our platform to one that does not, we will lose revenue from that advertiser. In addition, some advertising agencies have their own relationships with suppliers of advertising inventory and can directly connect advertisers with such suppliers. Our business may suffer to the extent that advertising agencies and inventory suppliers purchase and sell advertising inventory directly from one another or through intermediaries other than us.
We had approximately 980 clients, consisting primarily of advertising agencies, as of December 31, 2021. Many of these agencies are owned by holding companies, where decision making is decentralized such that purchasing decisions are made, and relationships with advertisers are located, at the agency, local branch or division level. If all of our individual client contractual relationships were aggregated at the holding company level, Publicis Groupe and WPP plc would have each represented more than 10% of our gross billings for 2021.
In most cases, we enter into separate contracts and billing relationships with the individual agencies and account for them as separate clients. However, some holding companies for these agencies may choose to exert control over the individual agencies in the future. If so, any loss of relationships with such holding companies and consequently, of their agencies, local branches or divisions, as clients could significantly harm our business, financial condition and results of operations.
If we fail to innovate or make the right investment decisions in our offerings and platform, we may not attract and retain advertisers and advertising agencies and our revenue and results of operations may decline.
Our industry is subject to rapid and frequent changes in technology, evolving client needs and the frequent introduction by our competitors of new and enhanced offerings. We must constantly make investment decisions regarding offerings and technology to meet client demand and evolving industry standards. We may make bad decisions regarding these investments. If new or existing competitors have more attractive offerings, we may lose clients or clients may decrease their use of our platform. New client demands, superior competitive offerings or new industry standards could require us to make unanticipated and costly changes to our platform or business model. In addition, as we develop and introduce new products and services, including those incorporating or utilizing artificial intelligence and machine learning and new processing of personal information, they may raise new, or heighten existing, technological, legal and other challenges, and may cause unintended consequences, may not function properly or may be misused by our clients. If we fail to adapt to our rapidly changing industry or to evolving client needs, or we provide new products and services that exacerbate technological, legal or other challenges, demand for our platform could decrease and our business, financial condition and results of operations may be adversely affected.
The market for programmatic buying for advertising campaigns is relatively new and evolving. If this market develops slower or differently than we expect, our business, growth prospects and financial condition would be adversely affected.
The substantial majority of our revenue has been derived from clients that programmatically purchase advertising inventory through our platform. We expect that spending on programmatic ad buying will continue to be our primary source of revenue for the foreseeable future and that our revenue growth will largely depend on increasing spend through our platform. The market for programmatic ad buying is an emerging market, and our current and potential clients may not shift to programmatic ad buying from other buying methods as quickly as we expect, which would reduce our growth potential. If the market for programmatic ad buying deteriorates or develops more slowly than we expect, it could reduce demand for our platform, and our business, growth prospects and financial condition would be adversely affected.
In addition, our revenue may not necessarily grow at the same rate as spend on our platform. As the market for programmatic buying for advertising matures, growth in spend may outpace growth in our revenue due to a number of factors, including pricing competition, quantity discount
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Item 6. Exhibits
| Exhibit Number | Exhibit Description | Incorporated by Reference | Filed Herewith | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Form | Filing Date | Number | |||||||||
| 3.1 | Amended and Restated Certificate of Incorporation. | 10-K | 2/19/2021 | 3.1 | |||||||
| 3.2 | Amended and Restated Bylaws. | 10-K | 2/19/2021 | 3.2 | |||||||
| 4.1 | Reference is made to Exhibits 3.1 and 3.2. | ||||||||||
| 4.2 | Form of Class A Common Stock Certificate. | S-1/A | 9/6/2016 | 4.2 | |||||||
| 4.3 | Form of Class B Common Stock Certificate. | S-8 | 9/22/2016 | 4.4 | |||||||
| 31.1 | Certification of Principal Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | |||||||||
| 31.2 | Certification of Principal Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | |||||||||
| 32.1(1) | Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | |||||||||
| 101.ins | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | X | |||||||||
| 101.sch | Inline XBRL Taxonomy Schema Document. | X | |||||||||
| 101.cal | Inline XBRL Taxonomy Calculation Linkbase Document. | X | |||||||||
| 101.def | Inline XBRL Taxonomy Definition Linkbase Document. | X | |||||||||
| 101.lab | Inline XBRL Taxonomy Label Linkbase Document. | X | |||||||||
| 101.pre | Inline XBRL Taxonomy Presentation Linkbase Document. | X | |||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | X |
| + | Indicates a management contract or compensatory plan or arrangement. |
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| (1) | The information in this exhibit is furnished and deemed not filed with the SEC for purposes of section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is not to be incorporated by reference into any filing of The Trade Desk, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| THE TRADE DESK, INC. (Registrant) | ||||
|---|---|---|---|---|
| Dated: May 10, 2022 | /s/ Blake J. Grayson | |||
| Blake J. Grayson | ||||
| Chief Financial Officer (Principal Financial and Accounting Officer) |