Criteo S.A. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also presents unaudited fourth-quarter results. Criteo is a France-based digital performance marketing company; its U.S. GAAP financial statements are reported in U.S. dollars, while the parent company’s functional currency remains the euro.
Business context
Criteo uses machine-learning technology and shopping-intent data to deliver performance-based advertising across display, search and sponsored products. Revenue is generally earned when users click on ads; Predictive Search revenue is based on sales generated. The company acquired Monsieur Drive in May and HookLogic in November 2016, adding consumer-brand and sponsored-product advertising capabilities.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $1,799.1 million | $1,323.2 million | +36% |
| Revenue ex-TAC, non-GAAP | $730.2 million | $534.0 million | +37% |
| Gross profit | $645.0 million | $471.8 million | +37% |
| Income from operations | $121.0 million | $76.3 million | +59% |
| Net income | $87.3 million | $62.3 million | +40% |
| Adjusted EBITDA, non-GAAP | $224.6 million | $143.4 million | +57% |
| Cash from operating activities | $153.5 million | $137.2 million | +12% |
Gross margin remained about 36% for the year. Net income margin was about 4.9%, versus 4.7% in 2015. Traffic acquisition costs rose 35% to $1,068.9 million and remained about 64% of revenue. These are annual results; Revenue ex-TAC and Adjusted EBITDA are non-GAAP measures and should be considered alongside GAAP results.
Fourth-quarter results
| Metric | Q4 2016 | Q4 2015 | Change |
|---|---|---|---|
| Revenue | $566.8 million | $397.0 million | +43% |
| Revenue ex-TAC, non-GAAP | $224.9 million | $160.0 million | +41% |
| Gross profit | $200.6 million | $142.2 million | +41% |
| Income from operations | $52.5 million | $33.8 million | +55% |
| Net income | $40.7 million | $38.9 million | +5% |
| Adjusted EBITDA, non-GAAP | $83.0 million | $53.5 million | +55% |
Q4 gross margin was 35.4%, compared with 35.8% a year earlier; net income margin was 7.2%, compared with 9.8%. Q4 2016 included HookLogic from its November 9 acquisition date.
Liquidity, debt and cash flow
- Cash and cash equivalents were $270.3 million at year-end, down from $353.5 million. Working capital was $222.8 million, down from $305.6 million.
- Operating cash flow was $153.5 million. Investing activities used $312.8 million, including $235.5 million for acquired businesses and $77.4 million of capital expenditures. Financing activities provided $90.6 million.
- Borrowings were approximately $82.9 million; total financial liabilities were $85.6 million. The company had drawn $75 million on its general revolving credit facility to help fund HookLogic and RMB 30 million (about $4.3 million) on its China facility. It reported compliance with the general facility’s leverage covenant.
- Trade receivables, net, increased to $397.2 million from $261.6 million. The allowance for doubtful accounts was $11.6 million at year-end.
Material changes, outlook and risks
- Growth was broad-based: reported revenue increased 45% in the Americas, 22% in EMEA and 48% in Asia-Pacific. Management attributed growth to technology improvements, greater access to inventory and increased spending by existing and new clients. Revenue retention was 120% for 2016, down from 138% in 2015; quarterly client retention averaged about 90%.
- HookLogic contributed $45.2 million of revenue and $12.3 million of Revenue ex-TAC from acquisition through year-end. Its purchase-price allocation and the goodwill estimate were provisional; $165.3 million of goodwill was recorded. Monsieur Drive’s purchase accounting was also preliminary.
- Management expected 2017 capital expenditures to remain around 5% of revenue. It anticipated moderate near-term Adjusted EBITDA growth while investing in Predictive Search and integrating Sponsored Products, and expected operating leverage over time. The filing gives no specific numeric revenue or earnings guidance.
- Management prioritizes absolute Revenue ex-TAC growth over near-term gross margin; traffic acquisition costs may increase as a share of revenue. Advertising spend is seasonal, typically strongest in Q4. The filing identifies risks from privacy regulation and data restrictions, ad blocking and platform changes, competition for publisher inventory, foreign-exchange movements, execution of acquisitions and the company’s ability to sustain growth and profitability.
- The EU GDPR was scheduled to be enforced after a transition period ending in spring 2018, with potential penalties of up to €20 million or 4% of worldwide turnover. A French CNIL inquiry begun in 2016 remained pending. The SteelHouse litigation was settled in October 2016 without a material adverse effect.
- The effective tax rate increased to 27.5% from 13.3% in 2015. The company also reported $43.3 million of share-based compensation expense. It transitioned to U.S. GAAP reporting as a domestic registrant for 2016; management reported effective disclosure controls and internal control over financial reporting, and the auditor gave unqualified opinions.
Important facts for investors to verify
- Reconcile reported revenue growth with Revenue ex-TAC growth and the rising traffic acquisition costs; review the definitions and limitations of the non-GAAP measures.
- Track HookLogic integration, subsequent final purchase-price allocation, acquisition-related amortization and the contribution of Sponsored Products beyond the brief 2016 ownership period.
- Monitor receivables growth, collections and allowance adequacy, given the significant increase in year-end receivables and working-capital use.
- Assess remaining liquidity, debt maturities and covenants, planned capital expenditures, and cash needs for growth or further acquisitions.
- Follow privacy-law developments and the pending CNIL inquiry, as well as changes to cookies, mobile identifiers, ad blocking and publisher inventory access.
- Compare future margins and results with management’s stated near-term investment plans, seasonality and the absence of numeric revenue guidance.