Criteo S.A. — Q1 2020 Form 10-Q
Business context and reporting period. Criteo is a global digital advertising platform serving commerce companies, brands and retailers. This unaudited report covers the three months ended March 31, 2020; financial amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $503.4 million | $558.1 million; down 10% reported and 8% at constant currency |
| Revenue ex-TAC (non-GAAP) | $206.0 million | $235.7 million; down 13% reported and 11% at constant currency |
| Gross profit / margin | $172.2 million / 34% | $209.6 million / 38% |
| Operating income / margin | $23.8 million / 4.7% | $33.4 million / 6.0% |
| Net income | $16.4 million; $0.25 diluted EPS | $21.4 million; $0.29 diluted EPS |
| Adjusted EBITDA (non-GAAP) | $59.2 million | $68.9 million; down 14% reported and 12% at constant currency |
| Adjusted net income (non-GAAP) | $32.0 million | $39.7 million |
| Cash from operating activities | $56.7 million | $67.2 million |
| Cash and cash equivalents | $436.5 million at March 31 | $418.8 million at December 31, 2019 |
| Financial liabilities | $2.9 million | $4.4 million at December 31, 2019 |
Gross margin contracted as revenue fell and other cost of revenue rose 30% to $33.8 million, partly reflecting higher data-center costs and a $1.6 million digital-tax provision. Traffic acquisition costs declined 8%; their share of revenue fell from 58% to 59%? The filing reports costs at 62% of revenue in 2019 and 66% in 2020, reflecting weaker gross margin. The company reported current assets of $909.2 million and current liabilities of $517.1 million at March 31. Total liabilities were $649.3 million and total equity was $1.03 billion.
Cash increased by $17.7 million during the quarter, after $56.7 million of operating cash flow, $10.8 million used in investing, $18.8 million used in financing and a $9.4 million adverse foreign-exchange effect. Capital expenditure figures are not fully consistent within the filing: one MD&A passage reports $11.7 million for the quarter, while another describes $23.7 million of capital expenditures. Investors should verify the intended measure and reconciliation.
Material changes and drivers
- COVID-19 began affecting revenue in mid-February. Management estimated a $24 million Q1 revenue impact, representing more than four percentage points of year-over-year growth. Travel revenue was down as much as 95% versus pre-pandemic levels; Classifieds declined about 40%, while Retail reductions were about 10%.
- Revenue declined in all regions: Americas 12%, EMEA 9%, and Asia-Pacific 7% reported. Currency translation reduced revenue by $8.1 million. At constant currency, existing-client revenue decreased 9%; the company added 987 net new clients year over year.
- Lower average cost per click drove the constant-currency revenue decline. Lower advertising inventory prices reduced traffic acquisition costs, partly offset by an 8% increase in impressions purchased. Other cost of revenue increased, including higher depreciation, hosting costs and digital taxes.
- Operating expenses decreased: R&D 19%, sales and operations 11%, and G&A 23%, mainly due to lower headcount-related and share-based compensation costs and facilities savings. Net income fell 23%, with lower operating income partly offset by lower financial expense and tax provision.
- Trade receivables, net, declined to $364.4 million from $481.7 million at year-end; the allowance for credit losses was $23.1 million. The company attributed higher provisioning to the new expected-credit-loss accounting model and anticipated COVID-related collection risk.
Outlook, risks and unusual items
- No revenue or earnings forecast is provided. Management said the pandemic’s impact is uncertain and expected negative effects to continue until economic conditions improve and stabilize.
- Management expected 2020 capital expenditures to remain at or slightly above 3% of revenue, including investment in data-center capacity and infrastructure redundancy. It said cash balances should cover anticipated requirements for at least 12 months.
- At March 31, the company had not drawn on its €350 million revolving credit facility, which was available through March 2022. On April 29, it announced a preventive €140 million ($150 million) draw and a new share repurchase authorization of up to $30 million. The filing said cash plus facility availability at March 31 exceeded $820 million.
- The company completed its prior $80 million repurchase program in February; Q1 repurchases totaled 1.26 million shares for $18.2 million. It reported 4.53 million treasury shares at March 31.
- An interim COVID-related goodwill impairment test found fair value above carrying value; no impairment was recorded. The company cautioned that changing economic conditions could affect future estimates, including credit-loss reserves, goodwill and taxes.
- An ongoing U.S. IRS dispute concerning 2014 could result in an estimated additional federal tax liability of up to $15 million, excluding fees, interest and penalties. Management disputes the IRS position; resolution is uncertain.
- CFO Benoit Fouilland planned to depart at the end of Q2 2020. Management said he would assist with an orderly transition.
- The company adopted the expected-credit-loss standard in January 2020, recording a $3.5 million cumulative adjustment to retained earnings. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Key facts for investors to verify
- How COVID-19 affected subsequent-quarter revenue, advertiser spending, collections and customer credit risk, particularly in Travel and Classifieds.
- The capital-expenditure amount and cash-flow reconciliation, given the differing Q1 figures in MD&A.
- Whether the April 29 revolving-facility draw was outstanding at the later reporting date and how the new buyback authorization was used.
- Progress and potential exposure in the IRS dispute, including fees, interest and penalties beyond the stated $15 million estimate.
- Whether gross-margin and revenue ex-TAC trends stabilize, and how much reported profitability depends on non-GAAP adjustments.