Criteo S.A. — Q2 2018 Form 10-Q
Business context and reporting period
Criteo provides performance-based digital advertising services using commerce data and predictive technology. This unaudited report covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Amounts are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $537.2 million | $542.0 million | $1,101.3 million | $1,058.7 million |
| Revenue ex-TAC (non-GAAP) | $230.2 million | $219.8 million | $470.6 million | $429.8 million |
| Gross profit | $200.3 million | $187.0 million | $410.6 million | $369.8 million |
| Operating income | $24.4 million | $13.3 million | $59.2 million | $34.3 million |
| Net income | $14.7 million | $7.5 million | $35.8 million | $22.0 million |
| Adjusted EBITDA (non-GAAP) | $68.8 million | $54.1 million | $146.7 million | $110.5 million |
| Operating cash flow | Not separately stated | Not separately stated | $124.9 million | $104.7 million |
Q2 gross margin was approximately 37.3%, up from 34.5%; operating margin was approximately 4.5%, versus 2.4%, and net margin was approximately 2.7%, versus 1.4%. For the first half, gross margin was approximately 37.3% versus 34.9%, operating margin 5.4% versus 3.2%, and net margin 3.3% versus 2.1%. Q2 diluted EPS was $0.20 versus $0.09; first-half diluted EPS was $0.50 versus $0.27.
At June 30, cash and cash equivalents were $480.3 million, total financial liabilities $2.8 million, and total equity $964.9 million. Current assets were $933.3 million and current liabilities $477.1 million. The company had no borrowings under its €350 million (approximately $408 million) revolving credit facility and reported compliance with its leverage covenant. First-half investing cash use was $61.2 million, including $50.4 million of capital expenditures. Cash increased $66.2 million from year-end 2017.
Material changes versus prior period
- Q2 reported revenue declined 1% year over year; at constant currency it declined 3%. First-half reported revenue increased 4%, but was flat at constant currency. Currency added $11.4 million to Q2 revenue and $42.5 million to first-half revenue.
- Q2 revenue ex-TAC rose 5% reported and 2% at constant currency; first-half revenue ex-TAC rose 10% reported and 5% at constant currency.
- Management attributed Q2 weakness to user-coverage limitations, particularly Apple’s Intelligent Tracking Prevention (ITP), which more than offset gains from new clients and product adoption. The average cost-per-click also declined. First-half growth was attributed mainly to new clients; Criteo added 2,566 net clients.
- Regional Q2 revenue was down 7% in the Americas, up 5% in EMEA (down 1% at constant currency), and up 2% in Asia-Pacific. First-half constant-currency growth was 2% in EMEA and Asia-Pacific, while the Americas declined 2%.
- Traffic acquisition costs were 57.1% of revenue in Q2, down from 59.4%; gross margin improved. Q2 operating expenses rose modestly overall, with higher R&D and G&A partly offset by lower sales and operations expense.
- First-half income taxes were $21.0 million versus $7.9 million, and the effective tax rate rose to 37% from 26%, primarily reflecting preliminary estimates of the U.S. Tax Act’s impact.
Outlook, commentary, risks and unusual items
- The filing does not provide numerical forward guidance. Management said existing cash should cover anticipated requirements for at least the next 12 months and described its focus as growing revenue ex-TAC rather than maximizing near-term gross margin.
- Key business risks discussed include platform and technology changes, user-data access and privacy regulation, competition, advertising-inventory supply, customer credit, foreign-exchange exposure, and the ability to sustain growth and profitability. Management reported no material change to previously disclosed risk factors.
- The IRS tax examination of Criteo Corp. for 2014 could result in an estimated maximum additional federal tax liability of approximately $15 million, excluding fees, interest and penalties. Criteo disputes the IRS position and intends to contest it.
- Management reported no legal proceeding expected, individually or collectively, to have a material adverse effect. Provisions were $1.8 million at June 30, mainly for employee litigation and other operating matters.
- Criteo agreed to acquire Storetail, a retail-media technology platform, with closing expected in Q3 2018 subject to conditions. The filing does not state the purchase price.
- Jean-Baptiste Rudelle became Chairman and CEO on April 25, 2018; former CEO Eric Eichmann transitioned to an advisory role through August 31, 2018.
- First-half share-based compensation expense was $39.1 million. The company adopted ASC 606 in January 2018 with no significant financial-statement impact. It expected adoption of the new lease standard in 2019 to materially affect its financial position and results, particularly for office and data-center operating leases.
Investor verification priorities
- Track the impact of ITP and other platform changes on user coverage, client retention, cost-per-click, and constant-currency revenue.
- Review the quality and sustainability of revenue ex-TAC and Adjusted EBITDA growth, including their non-GAAP reconciliations and the effect of substantial share-based compensation.
- Monitor aged receivables and credit-loss allowances: net receivables were $372.9 million, and the allowance was $23.4 million at June 30.
- Check developments in the IRS dispute, U.S. Tax Act estimates, and the Storetail acquisition, including any disclosed final terms or integration effects.
- Reconcile cash-flow disclosures, capital spending, and working-capital movements; assess the expected balance-sheet impact of lease accounting adoption.