Criteo S.A. — Q2 2019 Form 10-Q
Business context and reporting period. Criteo operates a global digital advertising platform, including Criteo Marketing Solutions and Retail Media. This filing reports the unaudited quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Financial figures below are in U.S. dollars.
Key financial results
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Revenue | $528.1m | $537.2m | $1,086.3m | $1,101.3m |
| Revenue growth, reported / constant currency | (2)% / 1% | — | (1)% / 2% | — |
| Revenue ex-TAC (non-GAAP) | $223.9m | $230.2m | $459.6m | $470.6m |
| Revenue ex-TAC growth, reported / constant currency | (3)% / 0.3% | — | (2)% / 1% | — |
| Gross profit / gross margin | $194.9m / 37% | $200.3m / 37% | $404.5m / 37% | $410.6m / 37% |
| Operating income | $19.6m | $24.4m | $53.0m | $59.2m |
| Net income | $12.5m | $14.7m | $33.9m | $35.8m |
| Diluted EPS | $0.16 | $0.20 | $0.45 | $0.50 |
| Adjusted EBITDA (non-GAAP) | $56.4m | $68.8m | $125.3m | $146.7m |
| Operating cash flow | $53.0m | $40.3m | $120.2m | $124.9m |
Q2 net margin was approximately 2.4%, versus 2.7% a year earlier; operating margin was approximately 3.7%, versus 4.5%. H1 net margin was approximately 3.1%, compared with 3.3%. Non-GAAP measures are management-defined and should be considered alongside GAAP results.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $422.1m at June 30, up $57.6m from year-end 2018. H1 investing cash use was $62.3m, including $56.5m of capital expenditures; financing cash use was $0.7m.
- Recorded financial liabilities were $4.1m, including $2.0m current and $2.1m non-current. Criteo had not drawn its €350m revolving credit facility or its short-term credit lines and overdrafts.
- Total liabilities were $724.6m and total equity $1,025.0m. Adoption of lease accounting added operating right-of-use assets and liabilities; operating lease liabilities totaled $196.1m at June 30. These lease obligations are distinct from reported financial debt.
- Management said existing cash should cover anticipated requirements for at least 12 months. Capital expenditures were expected to remain at or slightly below 5% of 2019 revenue.
Material changes and management commentary
- Reported revenue declined, while constant-currency revenue grew modestly. Management attributed the currency-adjusted Q2 increase to new-client business and greater clicks and ad impressions, partly offset by lower average cost per click and a slight decline from existing clients.
- Management cited continued softness in the web environment as users spend more time in apps, where Criteo’s solutions were not yet contributing significantly to revenue growth. Midmarket growth and U.S. Retail Media traction were positive; large-client activity was softer in parts of the Americas and Asia-Pacific.
- Foreign exchange reduced reported revenue by approximately $15.7m in Q2 and $39.7m in H1. Revenue ex-TAC margin was 42% in both 2019 periods, versus 43% in the comparable periods.
- Q2 Adjusted EBITDA fell 18% reported (16% at constant currency); H1 fell 15% reported (11% at constant currency). Management described a strategic focus on growing absolute Revenue ex-TAC, including investment in publisher relationships and inventory access.
- Cash from operations was lower in H1 year over year, despite a favorable working-capital contribution. Capital spending increased to $56.5m from $50.4m in H1 2018.
Outlook, unusual items and risks
- A change in estimated useful lives for data-center servers and equipment, from three to five years, increased Q2 operating income by $10.2m and net income by $8.7m ($0.14 per share); the H1 increases were $21.0m and $17.9m ($0.28 per share). This estimate change materially supported reported earnings.
- The company recorded $2.6m of net restructuring costs in H1, associated with a new organization structure and multi-product strategy. Sales and operations expense also included an exceptional $5.0m charge related to an invoicing dispute.
- Criteo provided for an expected French digital tax: $0.8m in Q2 and $1.6m in H1, included in other cost of revenue. The company’s IRS dispute over 2014 tax treatment could result in up to approximately $15m of additional federal tax, excluding fees, interest and penalties; Criteo contests the position.
- A new share repurchase authorization of up to $80m was announced July 31, 2019. Purchases are discretionary and may be used for employee equity-plan obligations or potentially M&A. The company does not anticipate cash dividends in the foreseeable future.
- The filing highlights risks including privacy regulation and data use, platform and technology changes, competition, publisher inventory access, foreign exchange, customer credit, and dependence on adapting to changing user behavior. Management reported no material changes to the risk factors in its 2018 Form 10-K.
- The COO left the company July 5, 2019; the CTO was scheduled to separate from employment effective September 30, 2019. Management reported disclosure controls were effective as of June 30.
Important facts for investors to verify
- Assess underlying demand and retention: reported revenue and Revenue ex-TAC declined, while constant-currency growth remained modest and existing-client performance was soft.
- Separate operating performance from the server-life estimate benefit when evaluating Q2 and H1 earnings and future depreciation.
- Track Adjusted EBITDA and Revenue ex-TAC trends alongside GAAP profit, margins, and operating cash flow; these non-GAAP measures have company-specific definitions.
- Monitor the French digital-tax provision, the IRS dispute, and the invoicing-related charge for further developments or cash impacts.
- Review lease obligations, planned data-center investment, and execution of the announced buyback against liquidity and business needs.