Criteo S.A. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results are presented under U.S. GAAP. Criteo provides digital performance-marketing technology; the 2017 results include HookLogic, acquired in November 2016.
Financial performance
Amounts are in U.S. dollars; figures below are in millions except per-share amounts. Comparisons are with the corresponding 2016 period.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $564.0 (+33.1%) | $423.9 | $1,622.7 (+31.7%) | $1,232.3 |
| Revenue ex-TAC (non-GAAP) | $234.4 (+33%) | $176.6 | $664.2 (+31%) | $505.3 |
| Gross profit / gross margin | $204.4 / 36.3% | $154.2 / 36.4% | $574.3 / 35.4% | $444.3 / 36.1% |
| Operating income | $33.0 | $22.9 | $67.3 | $68.5 |
| Net income | $22.3 | $14.7 | $44.3 | $46.6 |
| Diluted EPS | $0.29 | $0.21 | $0.56 | $0.66 |
| Adjusted EBITDA (non-GAAP) | $79.1 (+48%) | $53.5 | $189.7 (+34%) | $141.6 |
| Adjusted net income (non-GAAP) | $44.4 (+42%) | $31.3 | $101.5 (+25%) | $81.3 |
Q3 revenue growth was 32.5% at constant currency; nine-month growth was 32.5%. Revenue ex-TAC was approximately 42% of revenue in Q3 and 41% for the nine-month period. Q3 net income rose 51%, while nine-month net income fell 4.9%; nine-month operating income declined modestly despite strong revenue growth. Non-GAAP measures are management-defined and should be considered alongside GAAP results.
Cash, debt and liquidity
- Cash and cash equivalents were $358.0 million at September 30, 2017, up from $270.3 million at December 31, 2016. Operating cash flow for the first nine months was $166.5 million, versus $81.8 million in 2016.
- Investing cash outflow was $80.8 million, including approximately $83.0 million in capital expenditures; financing cash outflow was $35.3 million, principally reflecting repayment of the $75.0 million revolving-facility borrowing, partly offset by share-option proceeds.
- Total financial liabilities were $10.5 million, down from $85.6 million at year-end 2016. The $350 million syndicated revolving facility was undrawn at quarter-end; $4.5 million was drawn under the Chinese facility. Criteo reported compliance with its required leverage ratio.
- Management said existing cash should meet anticipated requirements for at least 12 months. The company has no stated plan to pay cash dividends in the foreseeable future.
Changes, outlook and notable items
- Growth was broad-based. Q3 revenue increased 42% in the Americas, 31% in EMEA and 22% in Asia-Pacific, as reported. Management cited product and technology improvements, greater publisher-inventory access, client additions and increased spending by existing clients. More than 4,400 net new clients were added year over year; new clients contributed 67.1% of Q3 revenue growth.
- Traffic acquisition costs rose 33% in Q3, broadly in line with revenue, while nine-month other cost of revenue rose 47.5%. Gross margin declined year over year for the nine-month period. Management prioritizes absolute Revenue ex-TAC growth over maximizing near-term gross margin.
- Apple Intelligent Tracking Prevention (ITP): Criteo reported a Q3 net negative impact below $1 million. It projected an 8%–10% net negative impact on Q4 2017 revenue and TAC relative to its base case, and a potential 9%–13% impact in 2018 relative to its base case. Management said its mitigation efforts could offset approximately half of the potential impact, but cautioned that mitigation may not succeed.
- China restructuring: Criteo stopped serving China’s domestic market and refocused on export business. It recorded $3.3 million of restructuring charges in the first nine months, with $1.9 million of restructuring liability remaining at September 30.
- Subsequent event: On October 31, Criteo announced discontinuation of Criteo Predictive Search, expecting approximately $4.5 million of restructuring costs across Q4 2017 and Q1 2018, including a $2.0 million write-off of acquisition-related intangible assets.
- Tax contingency: Criteo received a draft IRS proposed adjustment relating to its 2014 U.S. tax audit. The potential assessment could be material but was not quantifiable from the draft; Criteo disputes the position and intends to contest it.
- Other relevant exposures include currency fluctuations, user-data access and privacy regulation, ad-blocking, competition, publisher-inventory access, and the ability to sustain growth while investing in personnel and infrastructure. The filing reported no legal proceeding expected to have a material adverse effect, and no material change in previously disclosed risk factors other than the ITP discussion.
Important facts for investors to verify
- Track actual ITP effects against the company’s Q4 2017 and 2018 estimates, including whether mitigation performs as expected.
- Monitor the IRS audit outcome and any quantified tax assessment, as well as the timing and total cost of the Predictive Search discontinuation.
- Assess whether growth in Revenue ex-TAC converts into sustained GAAP operating income and net income, given rising operating expenses, share-based compensation and lower nine-month margins.
- Review capital spending, cash conversion, receivables and credit-loss allowances; the allowance for doubtful accounts increased and management cited greater business with higher-credit-risk client categories.
- Consider the acquisition contribution from HookLogic and the limitations of management’s non-GAAP measures when evaluating underlying growth and profitability.