Criteo S.A. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Amounts are in U.S. dollars. Criteo provides performance-marketing advertising technology, using shopping data and predictive technology to deliver digital ads.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $564.2 million | $516.7 million; +9% reported, +3% at constant currency |
| Revenue ex-TAC (non-GAAP) | $240.4 million; 43% of revenue | $210.0 million; +14% reported, +8% at constant currency |
| Gross profit / gross margin | $210.4 million / 37% | $182.8 million / 35% |
| Operating income | $34.8 million; 6.2% of revenue | $21.1 million; 4.1% of revenue |
| Net income | $21.1 million; $0.30 basic and $0.29 diluted EPS | $14.5 million; $0.19 basic and $0.18 diluted EPS |
| Adjusted EBITDA (non-GAAP) | $77.9 million | $56.5 million; +38% reported, +22% at constant currency |
| Adjusted net income (non-GAAP) | $40.5 million | $30.8 million |
| Operating cash flow | $84.5 million | $44.2 million |
| Cash and cash equivalents | $483.9 million at March 31 | $414.1 million at December 31, 2017 |
| Financial liabilities | $3.8 million total | $3.7 million at December 31, 2017 |
Investing activities used $43.5 million, including $32.6 million of capital expenditures and $10.8 million reported in connection with a disposal of an activity. Financing activities provided $16.8 million. Management said existing cash should cover anticipated requirements for at least 12 months. The company had no borrowings drawn on its €350 million ($431.2 million) revolving credit facility and was compliant with its leverage covenant.
Material changes and operating trends
- Reported revenue growth was supported by approximately $31.1 million of favorable foreign-exchange effects; constant-currency revenue growth was 3%.
- Revenue grew across regions: Americas +2%, EMEA +18% (+4% constant currency), and Asia-Pacific +8% (+3% constant currency). Revenue ex-TAC growth was strongest in EMEA (+26%) and Asia-Pacific (+15%).
- Management attributed growth to product innovation, broader product adoption, improved publisher-inventory access, more uncapped client budgets, and more than 3,100 net new clients. Client count rose to 18,528 from 15,423.
- Traffic acquisition costs increased 6%, while revenue increased 9%; traffic acquisition costs were 63% of revenue versus 65% a year earlier. The company said impressions purchased rose 10% and average CPM fell 4.1% (9.1% at constant currency), partly reflecting a greater mobile-app inventory mix.
- Operating expenses rose 9% overall, with higher headcount-related costs and share-based compensation. Share-based compensation was $19.3 million versus $14.9 million.
- The effective tax rate increased to 37% from 22%, and tax provision rose to $12.4 million from $4.2 million. The 2018 rate includes preliminary estimates for U.S. tax reform and is subject to change.
Outlook, risks, contingencies, and unusual items
- No specific quarterly or full-year revenue or earnings guidance is provided in the filing. Management’s liquidity assessment covers at least the next 12 months; it expects to retain funds for growth and does not anticipate cash dividends in the foreseeable future.
- GDPR was scheduled to take effect May 25, 2018. Criteo warned that publisher or advertising-exchange consent requirements, delays, or incompatible consent signals could restrict its ability to bid on ad inventory and materially affect revenue. The filing also highlights dependence on third-party data, publisher inventory, cookies and other tracking technology, and real-time bidding platforms.
- The IRS issued a proposed adjustment, finalized in February 2018, relating to Criteo Corp.’s 2014 tax year. If the IRS prevails, estimated additional federal tax could be up to approximately $15 million, excluding fees, interest, and penalties. Criteo disputes the position and intends to contest it.
- Trade receivables net of allowances were $395.7 million at March 31. The allowance was $24.0 million, and the company reported an increase in doubtful-account provisions associated mainly with greater business in higher-credit-risk client categories.
- Foreign-currency movements are a key market risk. The filing reports that a 10% movement in the euro against the U.S. dollar would have changed Q1 2018 net income by approximately $2.9 million in either direction.
- Criteo adopted ASC 606 on January 1, 2018; management reported no significant financial-statement impact beyond disclosures. It expected adoption of the new lease standard in 2019 to have a material balance-sheet and results impact, particularly for office and datacenter operating leases.
- Q1 included a $0.3 million restructuring gain related to the discontinued Predictive Search product. The China domestic-market restructuring liability was paid off during the quarter. Management reported no legal proceedings expected to have a material adverse effect and no significant subsequent events through issuance.
Key facts for investors to verify
- Whether constant-currency growth, particularly in the Americas, remains consistent with reported growth after the favorable Q1 currency contribution.
- How GDPR consent implementation by publishers and supply-side platforms affects Criteo’s addressable inventory, bidding activity, and revenue.
- Whether the receivables allowance and collection trends adequately reflect increased exposure to higher-credit-risk client categories.
- The outcome and potential financial exposure of the IRS audit dispute, including interest, fees, and penalties.
- How much of reported operating cash flow is sustainable after working-capital movements, capital spending, and cash tax payments; non-GAAP measures should be assessed alongside GAAP results.
- The eventual impact of lease accounting adoption and the assumptions underlying management’s liquidity outlook.