Criteo S.A. — Form 10-Q Summary
Business context and reporting period
Global digital performance-marketing technology company using predictive software and consumer-intent data to deliver personalized advertising. This unaudited filing covers the quarter and six months ended June 30, 2017; year-over-year comparisons are to 2016. 2017 results include HookLogic, acquired in November 2016.
Financial and operating performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $542.0m | $407.2m | $1,058.7m | $808.5m |
| Revenue ex-TAC | $219.8m | $166.2m | $429.8m | $328.7m |
| Gross profit | $187.0m | $146.0m | $369.8m | $290.1m |
| Income from operations | $13.3m | $17.9m | $34.3m | $45.7m |
| Net income | $7.5m | $13.3m | $22.0m | $31.9m |
| Net income attributable to Criteo shareholders | $6.0m | $12.2m | $18.4m | $29.3m |
| Adjusted EBITDA (non-GAAP) | $54.1m | $39.2m | $110.5m | $88.0m |
| Adjusted net income (non-GAAP) | $26.2m | $21.9m | $57.1m | $50.0m |
Q2 revenue grew 33.1% reported and 35.3% at constant currency; six-month growth was 31.0% and 32.5%, respectively. Revenue ex-TAC rose 32% in Q2 and 31% for the half. Q2 gross margin was 34.5%, down from 35.8%; operating margin was 2.4%, down from 4.4%, and net margin was 1.4%, down from 3.3%. Traffic acquisition costs rose 33.7% in Q2, while other cost of revenue rose 61.8%. Management said it prioritizes absolute Revenue ex-TAC growth over near-term gross margin.
Q2 diluted EPS was $0.09 versus $0.19; six-month diluted EPS was $0.27 versus $0.45. Adjusted EBITDA grew 38% in Q2 and 26% for the half. These are non-GAAP measures and should be considered alongside GAAP results.
- Cash from operations was $104.7m for the first half, versus $38.2m a year earlier. Investing used $52.9m, primarily reflecting $55.3m of capital expenditures; financing used $53.0m, mainly repayment of borrowings.
- Cash and cash equivalents were $308.2m at June 30, 2017, versus $270.3m at December 31, 2016. The increase included a $39.1m favorable foreign-exchange effect.
- Total financial liabilities fell to $8.5m from $85.6m, following repayment of the $75m drawn on the revolving facility for HookLogic. Total liabilities were $555.5m; equity was $742.7m.
- Current assets were $759.9m and current liabilities $518.5m. Trade receivables, net, were $370.1m, with a $14.7m allowance. The filing notes increased business with higher-credit-risk client categories.
Material changes versus prior comparable periods
- Revenue growth spanned all regions. Q2 reported revenue increased 46.6% in the Americas, 24.6% in EMEA and 25.0% in Asia-Pacific. For the first half, growth was 44.0%, 21.5% and 25.6%, respectively.
- Management attributed growth to product and technology improvements, broader publisher-inventory access, nearly 4,500 net new clients, and increased revenue from existing clients. New clients contributed 55.8% of Q2 and 50.4% of first-half year-over-year revenue growth.
- Profitability declined despite higher revenue: operating income fell 25.8% in Q2 and 24.8% for the half. Operating expenses increased, including R&D and sales and operations costs, principally from headcount growth. Higher amortization, hosting costs and share-based compensation also contributed to cost growth.
- Financial expense increased to $2.1m in Q2 and $4.4m for the half, reflecting foreign-exchange hedging, debt interest and revolving-credit-facility fees. Favorable foreign-currency translation lifted comprehensive income but also increased the reported cash balance.
Outlook, commentary, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management said existing cash should cover anticipated requirements for at least the next 12 months; future funding needs depend on growth, hiring, capital investment, new products and potential acquisitions. The company does not anticipate cash dividends in the foreseeable future.
- Apple’s announced Safari Intelligent Tracking Prevention feature, expected in September 2017, could make user data harder to access and adversely affect revenue. Other disclosed risks include privacy regulation and concerns, platform and technology changes, competition, inventory access, international operations, and system or infrastructure failures.
- In May 2017, Criteo decided to stop serving China’s domestic market and refocus Chinese operations on export business. It recorded $3.3m of restructuring charges, including $2.5m in other cost of revenue; $2.9m remained payable at June 30.
- The €350m revolving facility was undrawn at June 30; the separate Chinese facility had RMB30m ($4.4m) drawn. Criteo reported compliance with the euro facility’s leverage covenant. It states the facility includes leverage and additional-debt restrictions.
- Adoption of share-based-compensation accounting guidance resulted in a $10.0m cumulative retained-earnings adjustment and $1.4m current-year tax expense. No material impairment indicators for goodwill or intangible assets were reported; HookLogic purchase-price allocations remained preliminary.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material adverse legal proceeding or significant subsequent event was disclosed.
Important facts for investors to verify
- Whether growth and client additions persist, particularly after accounting for HookLogic and foreign-currency movements.
- Whether higher traffic acquisition, hosting, personnel and amortization costs continue to pressure GAAP margins and earnings.
- The actual effect of Safari tracking restrictions and other privacy or platform changes on user-data access and revenue.
- Receivables collectability and credit-loss allowance adequacy, given higher exposure to client categories described as higher risk.
- Cash conversion and capital requirements, including the sustainability of operating cash flow after capital expenditures and share-based compensation.
- Final acquisition purchase accounting, restructuring cash costs, and ongoing obligations or covenant headroom under credit facilities.