Criteo S.A. — Q1 2019 Form 10-Q
Business and period: Global advertising technology company providing personalized digital advertising and retail media solutions. This unaudited filing covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $558.1 million | $564.2 million | Down 1% reported; up 3% at constant currency. Currency translation reduced reported revenue by $24.0 million. |
| Revenue ex-TAC | $235.7 million | $240.4 million | Down 2% reported; up 2% at constant currency. Non-GAAP measure. |
| Gross profit / margin | $209.6 million / 38% | $210.4 million / 37% | Margin improved approximately 1 percentage point. |
| Operating income | $33.4 million | $34.8 million | Down 4%; includes benefit from longer estimated server lives. |
| Net income | $21.4 million | $21.1 million | Up 1%. Net income attributable to Criteo S.A. shareholders was $19.1 million versus $19.8 million. |
| Diluted EPS | $0.29 | $0.29 | Unchanged. |
| Adjusted EBITDA | $68.9 million | $77.9 million | Down 12% reported; down 6% at constant currency. Non-GAAP measure. |
| Operating cash flow | $67.2 million | $84.5 million | Down $17.3 million year over year. |
Balance sheet and liquidity
- Cash and cash equivalents were $395.8 million at March 31, up $31.3 million from year-end 2018.
- Current assets were $872.3 million and current liabilities $564.9 million. Total assets were $1.746 billion; total equity was $991.8 million.
- Financial liabilities totaled $3.9 million. Criteo had not drawn on its €350 million revolving credit facility or its short-term credit and overdraft facilities, which provide up to €21.5 million in aggregate.
- Operating lease liabilities were $216.4 million, including $49.5 million current and $166.9 million non-current. The company adopted the new lease accounting standard in January 2019; prior periods were not restated.
- Investing cash outflow was $29.0 million, including $23.7 million of capital expenditures and $5.4 million related to a business acquisition. Financing cash outflow was $0.2 million.
Changes and management commentary
- Revenue growth at constant currency was reported across all regions: Americas +4%, EMEA +3%, and Asia-Pacific +4%. EMEA revenue fell 6% on a reported basis, with management citing currency effects and a continuing short-term GDPR-related headwind.
- Management said existing-client revenue grew over 2% at constant currency, supported by adoption of newer marketing solutions and Retail Media. It added 845 net new clients; the company cited a slower pace of smaller midmarket onboarding while it develops a self-service module.
- Traffic acquisition costs were $322.4 million, down 0.4% reported; other cost of revenue declined 13%. Management cited lower average costs per thousand impressions and lower allocated depreciation and amortization, partly offset by higher impression volumes and hosting costs.
- On January 1, Criteo changed the estimated useful life of data-center servers and equipment from three to five years. The change increased Q1 operating income by $10.8 million, net income by $9.2 million, and EPS by $0.14 versus the former estimate. This is a material non-cash estimate change affecting comparability.
- Other notable items included a $1.9 million impairment charge related to plans to reduce London office space and $1.4 million of costs including expected digital taxes in France and Italy.
- The company repurchased shares under an $80 million authorization begun in 2018. It retired 1.6 million treasury shares in February; 1.7 million treasury shares remained at quarter-end.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided in the filing. Management expected 2019 capital expenditures to remain approximately 5% of revenue and said existing cash was expected to cover anticipated needs for at least 12 months.
- Key stated risks include foreign-exchange movements, privacy and regulatory developments, platform and technology changes, competition, advertising inventory access, client and publisher relationships, and the ability to sustain growth and profitability. Management identified foreign currency as its principal market-risk exposure; it reported hedging foreign-currency exposures.
- The IRS tax dispute concerning Criteo Corp.’s 2014 tax year remains contested. An unfavorable outcome could result in up to approximately $15 million of additional federal tax liability, excluding fees, interest, and penalties.
- Management reported no material changes to the risk factors in its 2018 Form 10-K and no material legal proceedings. It stated disclosure controls were effective as of March 31, 2019.
Important facts for investors to verify
- Assess underlying growth using constant-currency revenue and Revenue ex-TAC, while noting both are non-GAAP measures and reported revenue declined.
- Quantify the effect of the five-year equipment-life estimate on earnings and assess whether actual equipment use supports the revised estimate.
- Monitor regional growth, especially the EMEA GDPR headwind, and progress in midmarket onboarding and Retail Media.
- Track operating cash flow, capital spending, working-capital movements, and the size and commitments of lease liabilities.
- Follow the IRS dispute and potential digital-tax costs, as well as the effect of foreign exchange and hedging on results.