Criteo S.A. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Criteo operates a digital advertising platform offering marketing and retail media solutions. Financial statements are unaudited and prepared under U.S. GAAP; amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Revenue | $522.6m | $528.9m | $1,608.9m | $1,630.2m |
| Gross profit / margin | $189.6m / 36% | $190.6m / 36% | $594.1m / 37% | $601.2m / 37% |
| Operating income | $29.4m | $25.8m | $82.3m | $84.9m |
| Net income | $20.6m | $17.9m | $54.5m | $53.7m |
| Diluted EPS attributable to Criteo shareholders | $0.28 | $0.25 | $0.74 | $0.75 |
| Revenue ex-TAC (non-GAAP) | $220.7m | $223.5m | $680.3m | $694.1m |
| Adjusted EBITDA (non-GAAP) | $64.2m | $69.6m | $189.5m | $216.3m |
| Adjusted net income (non-GAAP) | $35.4m | $36.3m | $105.9m | $112.3m |
Q3 net margin was approximately 3.9%, versus 3.4% a year earlier. Reported revenue ex-TAC margin was approximately 42% in both Q3 periods.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $409.2m at September 30, 2019, up from $364.4m at December 31, 2018.
- For the first nine months, operating cash flow was $163.5m, compared with $175.1m in 2018; investing cash outflow was $86.4m versus $129.0m; financing cash outflow was $18.6m versus $16.7m inflow.
- Capital expenditures were $80.4m for the nine months. Management expected full-year 2019 capex to remain at or slightly below 5% of revenue.
- Financial liabilities totaled $3.8m, including current and non-current amounts. Criteo had not drawn on its €350m revolving credit facility or its short-term credit lines and overdrafts at quarter-end.
- Adoption of lease accounting added $169.9m of operating right-of-use assets and $185.2m of lease liabilities at September 30, 2019. Management said existing cash should cover anticipated needs for at least 12 months.
Changes and management commentary
- Q3 reported revenue declined 1% year over year; at constant currency it was approximately flat. Nine-month revenue fell 1% reported but grew 2% at constant currency. Currency translation reduced nine-month revenue by $45.8m.
- Management attributed softer results mainly to lower spending by large clients on retargeting and broader softness in web activity. New solutions, including Retail Media, and midmarket business provided offsets. Criteo added 758 net clients, fewer than in the prior-year period.
- Revenue ex-TAC declined 1% in Q3 and 2% for the nine months on a reported basis; constant-currency growth was approximately flat in Q3 and 1% for the nine months. Adjusted EBITDA declined 8% in Q3 and 12% year to date on a reported basis.
- A first-quarter estimate change extended the expected useful life of data-center servers and equipment from three to five years. This increased operating income by $10.3m and net income by $8.8m, or $0.13 per share, in Q3; for the nine months, the increases were $31.3m and $26.7m, or $0.41 per share.
- Q3 included $0.3m of net restructuring costs; nine-month costs were $2.9m, with $2.0m remaining as a restructuring liability. The company also cited a $5.0m exceptional charge related to an invoicing dispute in sales and operations expenses.
Outlook, risks and notable items
- No specific revenue or earnings guidance is provided in the filing. Management stated it expected 2019 capex at or slightly below 5% of revenue and believed available cash was sufficient for at least the next 12 months.
- Risks highlighted include large-client spending trends, migration of user activity from web to apps, competition, changes in advertising platforms and technology, privacy regulation and data use, access to advertising inventory, foreign-exchange exposure, and system or infrastructure failures. A typhoon-related Tokyo data-center outage caused an estimated $1m lost revenue opportunity in Q3.
- The IRS tax dispute concerning Criteo Corp.’s 2014 tax year remained unresolved; an unfavorable outcome could result in up to approximately $15m of additional federal tax, excluding fees, interest and penalties.
- France’s digital tax, adopted in July 2019, contributed to costs; the filing cites provisions of $0.7m in Q3 and $2.3m year to date. The estimated tax rate may also be affected by French tax reform.
- The board authorized a new share repurchase program of up to $80m in July 2019. Criteo repurchased about 915,000 shares for $17.6m through September 30; the program was scheduled to remain in effect through May 15, 2020.
- After quarter-end, Criteo announced the planned closure of its Palo Alto R&D operations and appointed Megan Clarken as CEO effective November 25, 2019; Jean-Baptiste Rudelle remained chairman.
Most important facts for investors to verify
- Underlying revenue and revenue ex-TAC trends, including the constant-currency comparison and performance of large clients, midmarket and Retail Media.
- How much reported earnings growth depended on the longer server useful-life estimate, and whether equipment replacement and infrastructure spending remain adequate.
- Adjusted EBITDA and adjusted net income reconciliations, and the impact of excluding share-based compensation and other adjustments.
- Cash conversion, ongoing capex, lease commitments and share repurchases; distinguish low financial debt from substantial operating lease liabilities.
- Resolution and potential cost of the IRS dispute, the French digital tax, and any further consequences of the invoicing dispute or restructuring.