Criteo S.A. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also presents unaudited fourth-quarter results. Amounts are in U.S. dollars; financial statements are prepared under U.S. GAAP. Filed March 2, 2020.
Business context
Criteo operates a global digital advertising platform that uses commerce data and AI to deliver performance-based advertising. Its offerings include Criteo Marketing Solutions and Criteo Retail Media. The company reported more than 20,000 clients and approximately 90% quarterly client retention. It operates in 103 countries and reports one operating segment.
Key financial results
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $2,261.5 million | $2,300.3 million | Down 2% reported; up 1% at constant currency |
| Revenue ex-TAC | $946.6 million | $966.0 million | Down 2% reported; up 0.3% at constant currency |
| Gross profit / margin | $829.0 million / 37% | $834.2 million / 36% | Margin improved |
| Operating income / margin | $141.2 million / 6.2% | $147.1 million / 6.4% | Income down 4% |
| Net income | $96.0 million | $95.9 million | Essentially flat |
| Adjusted EBITDA | $299.0 million | $321.1 million | Down 7% |
| Operating cash flow | $222.8 million | $260.7 million | Down 15% |
Revenue ex-TAC and Adjusted EBITDA are non-GAAP measures; they should be considered alongside reported GAAP results. FY2019 diluted EPS was $1.38, versus $1.31 in FY2018.
Fourth-quarter 2019
Revenue was $652.6 million, down about 3% from $670.1 million in Q4 2018. Revenue ex-TAC was $266.3 million versus $271.9 million. Net income was $41.5 million versus $42.1 million; operating income was $58.9 million versus $62.2 million. Adjusted EBITDA increased to $109.5 million from $104.8 million, and its margin on revenue ex-TAC rose to 16.8% from 15.6%.
Liquidity, debt and cash flow
At year-end, cash and cash equivalents were $418.8 million, versus $364.4 million a year earlier. Working capital was $390.1 million. Financial liabilities totaled $4.4 million, including approximately $2.1 million of borrowings; the €350 million revolving credit facility was undrawn. Separately, adoption of the lease accounting standard resulted in $163.8 million of operating lease liabilities at year-end. Capital expenditures were $97.9 million, and cash used in financing activities included $58.6 million of share repurchases.
Changes, outlook and material items
- Management attributed constant-currency revenue growth to new clients, offset by lower spending from existing clients, particularly large customers’ retargeting budgets and softness in the web environment. Revenue retention declined to 94% in 2019 from 101% in 2018; client retention remained about 90%.
- New solutions outside legacy retargeting grew 54% on a revenue ex-TAC basis and represented 12% of the business for FY2019, including 16% in Q4. Management said this share could reach approximately 30% over the medium term. Omnichannel revenue ex-TAC grew close to 300% from a small base.
- Management expected a slight decline in Adjusted EBITDA margin as a percentage of revenue ex-TAC in 2020, with longer-term improvement anticipated from expense discipline and operating leverage. 2020 capital expenditures were expected to remain at or slightly below 3% of revenue. The filing does not provide a clear numerical revenue forecast.
- A change in estimated server and data-center equipment useful life from three to five years increased FY2019 operating income by $42.0 million and net income by $35.8 million ($0.56 per share). This was an accounting estimate change, not a cash-flow benefit.
- FY2019 included $13.6 million of restructuring costs. The company also recorded a $4.6 million impairment of Manage customer relationships and accelerated amortization of Manage technology following a revised useful-life estimate.
- Key risks include browser restrictions and Google’s planned phaseout of third-party cookies, privacy regulation, competition, access to advertising inventory, foreign-exchange exposure and seasonal advertising demand. Criteo disclosed a November 2019 systems compromise; the investigation was ongoing, and the company said it had not identified a material adverse effect or material customer-data loss as of the filing date.
- CNIL opened a formal investigation in January 2020 following a privacy complaint. The company was also contesting an IRS proposed adjustment that could result in up to approximately $15 million of additional federal tax, excluding fees, interest and penalties. Management cited COVID-19 as a potential business and economic risk, with impact not yet reasonably estimable.
Most important facts for investors to verify
- Whether revenue and revenue ex-TAC stabilize, especially in large-customer retargeting, and whether new solutions offset that weakness.
- The portion of revenue still dependent on third-party cookies and progress toward cookie-independent identity and advertising capabilities.
- Underlying earnings and margins after considering the $35.8 million net-income benefit from the longer server-life estimate and other restructuring and impairment items.
- Actual 2020 performance against management’s margin and capital-spending outlook, including any effects from COVID-19.
- Outcomes and potential financial consequences of the CNIL investigation, the IRS dispute and the ongoing cybersecurity review.