Criteo S.A. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; compared with Q1 2016 unless otherwise noted. Criteo provides performance-based digital advertising using predictive software and consumer-intent data. Financial statements are unaudited and prepared under U.S. GAAP.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $516.7 million | $401.3 million | +29% reported; +30% constant currency |
| Revenue ex-TAC (non-GAAP) | $210.0 million | $162.5 million | +29%; +30% constant currency |
| Gross profit / gross margin | $182.8 million / 35% | $144.2 million / 36% | Margin down about 1 percentage point |
| Operating income / margin | $21.1 million / 4% | $27.8 million / 7% | Down 24% |
| Net income | $14.5 million | $18.5 million | Down 22% |
| Diluted EPS | $0.18 | $0.26 | Down 31% |
| Adjusted EBITDA (non-GAAP) | $56.5 million | $48.8 million | +16%; +18% constant currency |
| Adjusted net income (non-GAAP) | $30.8 million | $28.1 million | +10% |
Revenue growth reflected increased impression volumes, client additions, broader publisher inventory access, technology improvements, and newer products, including Criteo Sponsored Products and Predictive Search. New clients contributed 66.2% of year-over-year revenue growth; existing clients contributed 33.8%. The client count rose to 15,423 from 10,962. Regional revenue increased 41% in the Americas, 19% in EMEA, and 26% in Asia-Pacific.
Traffic acquisition costs rose 28% to $306.7 million, while other cost of revenue rose 48% to $27.2 million. TAC represented about 59% of revenue in both periods; gross margin declined as other costs and operating expenses grew. Operating expenses increased 39% to $161.8 million, including higher headcount, share-based compensation, depreciation and amortization, and bad-debt provisions. Q1 2017 share-based compensation was $14.9 million versus $8.4 million.
Cash from operating activities was $44.2 million, versus $18.9 million in Q1 2016. Investing activities used $28.6 million, including $28.2 million of capital expenditures; financing activities provided $11.0 million. Cash and cash equivalents were $303.8 million at March 31, up from $270.3 million at year-end 2016. Total assets were $1.237 billion and total liabilities $565.8 million. Financial liabilities were $87.0 million, including $82.0 million of borrowings and $4.2 million of derivative liabilities. The company reported compliance with the leverage covenant on its €350 million revolving facility.
Changes, outlook, and risks
- Despite substantial revenue and adjusted EBITDA growth, GAAP operating income and net income declined, reflecting faster expense growth, including increased personnel, depreciation and amortization, and other operating costs.
- The March 2017 amendment increased the main revolving credit facility from €250 million to €350 million and extended its term to 2022. The company repaid the outstanding $75 million balance on April 29, 2017, after quarter-end.
- Management said existing cash was expected to cover anticipated cash requirements for at least the next 12 months. It did not provide specific revenue or earnings guidance in the supplied filing text. The company said it does not anticipate cash dividends in the foreseeable future.
- Management highlighted risks involving foreign exchange, access to advertising inventory and user data, changes in technology platforms, privacy regulation, competition, growth execution, and system reliability. Foreign-exchange movements negatively affected reported Q1 revenue by $3.7 million versus constant currency.
- Tax expense and effective tax rate can be volatile due to estimates across jurisdictions and discrete items. The Q1 2017 effective tax rate was 22%, compared with 30% in Q1 2016, primarily due to discrete tax effects including U.S. share-based compensation.
- HookLogic purchase-price allocation remained preliminary; related technology and customer-relationship intangible values and goodwill could change. Management reported no impairment triggering events. Provisions were $1.0 million, mainly for employee litigation and business and operating risks; no material adverse legal proceedings were reported.
Important facts for investors to verify
- Whether revenue ex-TAC and adjusted EBITDA growth translates into sustained GAAP earnings and margins; these are non-GAAP measures and should be assessed alongside GAAP results.
- The impact of continued growth in TAC, operating expenses, capital spending, and receivables quality on cash generation and profitability.
- The status and terms of revolving-credit borrowings after the April 29 repayment, including ongoing covenant compliance and acquisition-related financing needs.
- How HookLogic purchase-accounting adjustments, amortization, and acquisition integration affect subsequent results.
- Exposure to foreign-exchange, privacy, platform, inventory-supply, and competition risks; the filing reported no material change in risk factors from the 2016 Form 10-K.