Criteo S.A. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports unaudited fourth-quarter results. Filed March 1, 2019. Figures are U.S. dollars unless stated otherwise. Criteo is a global digital advertising technology company, reporting as one segment.
Financial performance
| Metric | Q4 2018 | Q4 2017 | FY 2018 | FY 2017 |
|---|---|---|---|---|
| Revenue | $670.1m | $674.0m | $2,300.3m | $2,296.7m |
| Revenue ex-TAC (non-GAAP) | $271.9m | $276.9m | $966.0m | $941.1m |
| Gross profit / margin | $233.1m / 34.8% | $245.2m / 36.4% | $834.2m / 36.3% | $819.5m / 35.7% |
| Operating income | $62.2m | $70.5m | $147.1m | $137.8m |
| Net income | $42.1m | $52.4m | $95.9m | $96.7m |
| Adjusted EBITDA (non-GAAP) | $104.8m | $119.9m | $321.1m | $309.6m |
Q4 year-over-year changes: revenue −0.6%, Revenue ex-TAC −1.8%, gross profit −5.0%, operating income −11.8%, net income −19.5% and Adjusted EBITDA −12.6%. FY revenue was nearly flat as reported (+0.2%) and down 1% at constant currency; Revenue ex-TAC grew 3% reported (2% constant currency). FY net income was down 1%, while Adjusted EBITDA increased 4%. Revenue ex-TAC and Adjusted EBITDA are non-GAAP measures and should be considered alongside GAAP results.
- FY traffic acquisition costs were $1,334.3m, down 2%; other cost of revenue increased 8% to $131.7m. Full-year gross margin was approximately 36%, broadly unchanged from 2017 as presented by the company.
- FY basic and diluted EPS were $1.33 and $1.31, respectively, versus $1.40 and $1.34 in 2017. The effective tax rate rose to 32.5% from 24.7%.
- Operating cash flow was $260.7m, compared with $245.5m in 2017. Investing activities used $226.7m, including $125.5m of capital expenditures and $101.2m related to acquisitions and business disposal; financing activities used $62.7m.
- Cash and cash equivalents were $364.4m at year-end, down from $414.1m. Current assets were $933.9m and current liabilities $605.3m. Trade receivables, net, were $473.9m; the allowance for doubtful accounts rose to $25.9m from $20.8m.
- Financial liabilities totaled $3.5m. The €350m revolving credit facility was undrawn at year-end; the company reported compliance with its leverage covenant. Operating-lease commitments totaled $218.5m.
Material changes and business developments
- Regional FY revenue was $954.1m in the Americas (down 4% reported; down 3% constant currency), $839.8m in EMEA (up 4%; up 1% constant currency) and $506.4m in Asia-Pacific (up 2%; up 1% constant currency). Currency movements added $19.1m to reported revenue overall.
- Management attributed the softer underlying revenue trend to a slight decline in average cost-per-click that was not fully offset by click-volume growth. It cited user-coverage limitations, product discontinuations, delayed sales hiring and midmarket execution challenges. GDPR-related effects and rollout of a new go-to-market model also weighed temporarily on EMEA growth.
- Revenue retention declined to 101% in 2018 from 115% in 2017; client retention remained approximately 90%. The client base grew 7% to 19,419.
- Criteo acquired Storetail in August and Manage in October 2018 for approximately $47.8m and $60.0m, respectively, using available cash. Purchase-price allocations remained preliminary at year-end. Goodwill increased to $312.9m from $236.8m.
- The company completed an $80m share repurchase program in Q4, buying approximately 3.5m ADSs at an average $22.85 per share. It held 3.46m treasury shares at year-end.
Outlook, risks and unusual items
- No numerical revenue guidance is provided in the supplied filing text. Management expected 2019 capital expenditures to remain approximately 5% of revenue and anticipated a temporary decline in Adjusted EBITDA margin due to continued investment in R&D, sales resources, infrastructure and automation.
- Management aims to maximize Revenue ex-TAC in absolute dollars, even where this may pressure near-term gross margin. It expects traffic acquisition costs to rise in absolute terms and potentially as a percentage of revenue.
- Key risks include dependence on access to consumer and commerce data, browser and platform changes (including Apple’s Intelligent Tracking Prevention), privacy regulation, competition from large platforms, advertising-inventory costs and availability, midmarket execution, and the ability to expand newer solutions. GDPR took effect in 2018; the filing also discusses the California Consumer Privacy Act, scheduled to take effect in 2020.
- A CNIL privacy inquiry remained pending, and Privacy International had filed a GDPR complaint against Criteo and other ad-tech companies. The filing states that no formal authority investigation in response to that complaint was known at the time.
- Criteo was contesting an IRS proposed adjustment relating to 2014 that could result in up to $15m of additional federal tax, excluding fees, interest and penalties. Management disagreed with the IRS position; the outcome was uncertain.
- Adoption of the new lease standard on January 1, 2019 was expected to add approximately $220m–$240m of lease assets and liabilities to the balance sheet, with no material income-statement or cash-flow effect expected.
- The company reported no legal proceedings expected to have a material adverse effect and no goodwill impairment in 2018. Its financial statements and internal control over financial reporting received unqualified audit opinions.
Important facts for investors to verify
- Whether revenue and Revenue ex-TAC stabilize or improve after the 2018 constant-currency decline, and whether average CPC and click volumes recover.
- Whether the 2019 sales-model transition, midmarket self-service rollout and acquisitions produce durable growth without further weakening retention or margins.
- How browser changes, GDPR enforcement and other privacy rules affect user coverage, campaign performance and revenue.
- The resolution and potential total cost of the IRS matter, including interest and penalties, and the status of the CNIL inquiry and privacy complaint.
- Actual 2019 capital spending and Adjusted EBITDA margin versus management’s qualitative outlook; assess non-GAAP measures against GAAP results.
- The balance-sheet effect of lease-standard adoption and the company’s use of cash for acquisitions, buybacks and operations.