Criteo S.A. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; unaudited U.S. GAAP results. Criteo provides performance-marketing technology and digital advertising services. Dollar amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $528.9M | $564.0M | $1,630.2M | $1,622.7M |
| Revenue ex-TAC (non-GAAP) | $223.5M | $234.4M | $694.1M | $664.2M |
| Gross profit / margin | $190.6M / 36% | $204.4M / 36% | $601.2M / 37% | $574.3M / 35% |
| Operating income | $25.8M | $33.0M | $84.9M | $67.3M |
| Net income | $17.9M | $22.3M | $53.7M | $44.3M |
| Net income attributable to Criteo shareholders | $17.1M | $19.8M | $50.7M | $38.2M |
| Diluted EPS | $0.25 | $0.29 | $0.75 | $0.56 |
| Adjusted EBITDA (non-GAAP) | $69.6M | $79.1M | $216.3M | $189.7M |
| Adjusted net income (non-GAAP) | $36.3M | $44.4M | $112.3M | $101.5M |
Q3 revenue declined 6% year over year, or 4% at constant currency; revenue ex-TAC fell 5% reported, or 2% at constant currency. For the nine months, revenue increased 0.5% reported but declined 1% at constant currency; revenue ex-TAC rose 5% reported, or 2% at constant currency. Management identifies lower average cost per click, not fully offset by slightly higher click volume, as a driver of constant-currency revenue weakness. Non-GAAP measures are company-defined and should be considered alongside GAAP results.
Cash, debt and liquidity
- Cash and cash equivalents were $458.7M at September 30, 2018, up $44.6M from year-end 2017. Current assets were $911.4M and current liabilities $498.2M.
- Nine-month operating cash flow was $175.1M, compared with $166.5M in 2017. Investing activities used $129.0M, including capital expenditures, the Storetail acquisition and disposal-related outflows. Financing activities provided $16.7M.
- Total financial liabilities were $5.3M. The company had no borrowings under its €350M (about $405.2M) revolving credit facility and reported compliance with its leverage covenant.
- Management said existing cash was expected to cover anticipated requirements for at least 12 months. Criteo does not anticipate paying cash dividends in the foreseeable future.
Material changes, outlook and risks
- Demand and platform factors: Management attributed Q3 revenue declines primarily to user-coverage limitations, including Apple’s Intelligent Tracking Prevention, and discontinued products. Existing large clients were generally resilient, while the midmarket was weaker. GDPR and go-to-market changes affected EMEA; Japan demand was soft.
- Client acquisition and products: Criteo added 1,914 net clients, but their revenue contribution was softer than expected amid sales hiring delays, employee attrition and longer sales cycles. Management cited increased adoption of Customer Acquisition and Audience Match, mobile-app growth and more direct publisher connections as offsets.
- Acquisition: Criteo acquired Storetail on August 3 for €41.3M (about $47.9M), including cash consideration and shares to be delivered two years after closing. The purchase-price allocation was preliminary and included $33.0M of goodwill. Manage.com was acquired on October 29, after quarter-end.
- Capital allocation: On October 31, the board authorized a share repurchase program of up to $80M, intended primarily for M&A-related share needs and potentially employee equity-plan vesting.
- Tax and contingencies: The nine-month effective tax rate was 34%, versus 26% in 2017; the company’s estimated annual rate rose to 32%, partly reflecting preliminary estimates of the U.S. Tax Act and BEAT. An IRS dispute concerning 2014 could result in estimated additional federal tax of up to about $15M, excluding fees, interest and penalties; Criteo disputes the position. Management reported no legal proceedings expected to have a material adverse effect.
- Other risks: Foreign-exchange exposure remains material. New office and data-center leases added $26.0M of commitments over five to six years. The company expected lease-accounting adoption in 2019 to materially affect its financial position and results. Management also cites privacy regulation, platform and technology changes, data access, advertising inventory, competition and execution as risks. The filing gives no specific financial guidance for upcoming periods.
Important facts for investors to verify
- Whether user-coverage restrictions and lower cost per click continue to weigh on revenue, and whether new products and client wins offset the pressure.
- Whether midmarket sales capacity recovers after hiring delays and attrition, and whether new-client revenue contribution improves.
- Storetail’s final purchase-price allocation, integration progress and contribution to results; also the impact of the subsequent Manage.com acquisition.
- Resolution and potential exposure from the IRS tax dispute, and changes in tax estimates as U.S. Tax Act guidance develops.
- Cash conversion, capital spending, credit quality and bad-debt allowances; trade receivables were $356.8M net, with a $24.3M allowance at quarter-end.
- Execution of the $80M repurchase authorization and the effects of lease-accounting adoption in 2019.