Criteo S.A. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited results for the fourth quarter ended December 31, 2017. Amounts are U.S. dollars unless stated otherwise.
Business context
Criteo provides performance-based commerce marketing and advertising technology, using commerce data and machine learning to deliver ads. It generally earns revenue when users click on ads and pays publishers for advertising inventory. The company operates as one reportable segment and generated 93.5% of FY 2017 revenue outside France.
Financial and operating performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $2,296.7 million | $1,799.1 million | +28% reported; +27% constant currency |
| Revenue ex-TAC (non-GAAP) | $941.1 million | $730.2 million | +29% |
| Gross profit / gross margin | $819.5 million / 35.7% | $645.0 million / 35.9% | Margin down about 0.2 percentage points |
| Operating income / margin | $137.8 million / 6.0% | $121.0 million / 6.7% | Income +14%; margin lower |
| Net income | $96.7 million | $87.3 million | +11% |
| Adjusted EBITDA (non-GAAP) | $309.6 million | $224.6 million | +38% |
| Cash from operating activities | $245.5 million | $153.5 million | Up $92.0 million |
Traffic acquisition costs were $1,355.6 million, or about 59% of revenue. They rose 27%, broadly in line with revenue; purchased impressions increased 29.1%, while average CPM declined 1.8%. Adjusted EBITDA and Revenue ex-TAC are management-defined non-GAAP measures and should be read alongside GAAP results.
Q4 2017: Revenue was $674.0 million, up about 19% year over year; Revenue ex-TAC was $276.9 million, up about 23%; operating income was $70.5 million versus $52.5 million; net income was $52.4 million versus $40.7 million; and Adjusted EBITDA was $119.9 million versus $83.0 million. Q4 gross margin was 36.4%. Quarterly figures are unaudited.
Liquidity and debt: Year-end cash and cash equivalents were $414.1 million, versus $270.3 million a year earlier; working capital was $370.8 million. Investing cash outflow was $106.3 million and financing cash outflow was $29.5 million. Capital expenditures were $108.5 million. Financial liabilities totaled $3.7 million, including $2.8 million of borrowings; the $75 million drawn under the general revolving facility for the HookLogic acquisition was repaid in Q2. The amended facility provides up to €350 million and was undrawn at year-end. Criteo reported compliance with its leverage covenant.
Material changes and unusual items
- Revenue growth was broad-based; management attributed it to existing-client expansion, new clients, technology improvements and broader publisher inventory access. Americas revenue grew 36%, while EMEA and Asia-Pacific each grew 22% as reported.
- Revenue retention was 115%, down from 120% in 2016; average quarterly client retention was approximately 90%. Client count rose 25% to 18,118.
- Apple’s Safari Intelligent Tracking Prevention had a net negative impact on Revenue ex-TAC of less than $1 million in Q3 and about $25 million in Q4 2017.
- FY 2017 included $7.4 million of restructuring charges: $3.3 million tied to refocusing China operations on export business and $4.1 million related to discontinuing Criteo Predictive Search. Predictive Search was discontinued in Q3.
- HookLogic, acquired in 2016 and offered as Criteo Sponsored Products, had its purchase-price allocation finalized in 2017; the acquisition added $188.6 million of goodwill.
- Financial expense increased to $9.5 million, principally due to debt interest, foreign-exchange hedging costs and revolving-facility fees. Income tax expense was $31.7 million and the effective tax rate was 24.7%.
Outlook, risks and contingencies
- Management expects a moderate, temporary decrease in Adjusted EBITDA in 2018 as it continues selective investment, particularly in R&D. It expects capital expenditures to remain around 5% of revenue. No quantified revenue-growth guidance is provided in the filing.
- Management expects Safari ITP to continue to weigh on Revenue ex-TAC in 2018; the impact was included in the company’s projections, but no specific amount is stated.
- The company prioritizes absolute Revenue ex-TAC growth over near-term gross margin and expects traffic acquisition costs to rise in absolute terms; they may also rise as a percentage of revenue.
- Key risks include privacy and data regulation (including GDPR effective May 2018), browser and platform restrictions on tracking, competition for publisher inventory, client and publisher retention, advertising-market seasonality, foreign-exchange exposure, and technology, security or system failures.
- The IRS issued a definitive proposed adjustment concerning Criteo Corp.’s 2014 tax year. If the IRS prevails, estimated additional federal tax could reach approximately $15 million, excluding fees, interest and penalties. Criteo disputes the position and intends to contest it.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. The filing identifies no legal proceeding expected to have a material adverse effect.
Most important facts for investors to verify
- Whether Safari ITP and subsequent privacy, consent or browser changes further affect addressable users, campaign performance and Revenue ex-TAC.
- Whether the reported growth in Revenue ex-TAC and Adjusted EBITDA translates into sustained GAAP earnings and cash generation, considering rising stock-based compensation and investment needs.
- The outcome, timing and potential total exposure of the IRS tax dispute, including interest and penalties.
- Whether client retention and revenue retention stabilize, and whether expansion in midmarket and Sponsored Products supports profitable growth.
- Whether publisher access and inventory costs preserve margins, and whether seasonality, foreign exchange and planned capital spending affect liquidity and cash flow.