CRTO Earnings Forecast

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1

In their most recent earnings release, CRTO gave guidance for adjusted EBITDA for calendar year 2015. They guided for EBITDA of 125MM Euros. I’m interested in figuring out what level of earnings and EPS this translates into. If they meet their guidance, adjusted EBITDA will rise from 79MM Euros in 2014 to 125MM Euros in 2015. That’s an increase of 46MM Euros.

So, the question then is how much of the increase in adjusted EBITDA will fall through to adjusted earnings and to GAAP earnings? That’s a hard question since the difference between these things depends on things like how much stock based compensation management decides to rain down on itself, how much it spends on R&D, and so on.

To get an idea about how much of the difference falls through, I will look at past increases in adjusted EBITDA and see how they fell through to adjusted earnings and GAAP earnings. All figures in millions of Euros.


Comparison     Chg adj EBITDA   Chg adj Earn   Chg GAAP Earn
------------------------------------------------------------
Q1 2015 vs
Q1 2014            13.5            10.7             8.1
2014 vs 2013       48.1            42.5            33.3
2013 vs 2012       13.9             6.5             0.1

Now, dividing by the change in adjusted EBITDA to get percent pass-through:


             Percent Pass-Through To:

Comparison     Adj Earn   GAAP Earn
------------------------------------------------------------
Q1 2015 vs
Q1 2014          79%         60%
2014 vs 2013     88%         69%
2013 vs 2012     47%          1%

We should probably weight more recent data more highly. So, as a baseline, let’s say that 80% of the increase in adjusted EBITDA is going to fall through to adjusted earnings and 60% of the increase in adjusted EBITDA is going to fall through to GAAP Earnings.

Adjusted earnings in 2014 were 53.4MM Euros. Adjusted EBITDA is forecast to rise by 46MM Euros. Eighty percent of this is 36.8MM Euros. So, adjusted earnings are forecast to be 90MM Euros. To get EPS, we have to divide by outstanding shares. Currently, these are at 65MM, but CRTO has been diluting like mad, so let’s say 70MM by year end. That gives an adjusted EPS of 1.29. If price does not rise, the PE at the end of 2015 will be 32. Adjusted EPS growth rate will be 54% (1.29/0.84).

GAAP earnings in 2014 were 34.4MM Euros. Adjusted EBITDA is forecast to rise by 46MM Euros. Sixty percent of this is 27.6MM Euros. So, GAAP earnings are forecast to be 62MM Euros. Dividing by 70MM shares gives us 0.89 EPS. This gives a growth rate in GAAP EPS of 65% (0.89/0.54). It gives a PE of 46.

I’ve looked on a few sites, and the earnings projections for 2015 are all over the place, so it’s hard to evaluate how different this is from consensus.

Anyway, it’s easy to quibble with this or that, and it’s easy to get the 2015 EPS higher by reducing share count or assuming that CRTO is going to significantly beat its guidance. If you increase EPS by, say, 15% to account for a much more optimistic scenario, you’re looking at a PE of 28 and an EPS growth rate of 77%.

So, it seems like you have to believe that CRTO is going to beat its guidance pretty substantially this year for it to still be a good investment.

Q1 2015 was actually a somewhat disturbing quarter for CRTO, given its high PE. Its revenue growth decelerated a lot. Its earnings, both adjusted and GAAP, were sequentially down. It forecast flat revenue and earnings for Q2.

Comments or corrections welcome.

– Bill

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2

Bill, are you looking at CRTO? You have adjusted EBITDA 2013/2014 up 48%. Actually it was up 154% (from 31 million to 79 million). And adjusted earnings were up over 300% (from 20 cents to 85 cents, all in euros).

In the first quarter, EBITDA was up a little under 100% (from 14.5 to 28) and earnings were up 133% (from 12 cents to 28 cents).

For the year, then, if EBITDA rises from 79 to 125, that is a rise of 58%. From past experience, we can expect a percentage increase over 58% in adjusted earnings (say, 68%), which would give them earnings of 1.43. And that’s assuming they don’t beat their outlook! Which in this day and time would be a silly assumption. So lets say they beat by a little over 10% and make 1.60 (euros, which comes to about $1.80 at todays exchange rate). That gives them a PE of 24.7 at yesterday’s close of $44.50, which sounds very respectable to me.

Saul

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Hi Saul,

Yes, in the first table the figures are in millions of Euros, not in percents. So, the 2014 vs 2013 change in adjusted EBITDA is 48 MM euros (79-31), not 48%. In the same row of that table, adjusted earnings went up from 10.9MM euros to 53.42MM euros, or 42.5MM euros.

Your analysis assumes that earnings per share will rise by 10 percentage points more than EBITDA (not per share). That’s a problem because if it kept happening, it would eventually result in earnings being higher than EBITDA, which it can’t be.

To get adjusted earnings per share to go up by 68%, adjusted earnings would have to go up by 78% to take account of dilution (actually they have been diluting faster than 10%/yr). That would mean adjusted earnings would have to go up to 95MM (=1.78*53.4) euros. That would mean that, of the 48MM in extra EBITDA, 42MM would have to pass through to adjusted earnings. It’s possible, but it would mean that depreciation and amortization expense and taxes would have to moderate their increase a lot.

My analysis assumes that roughly the same percentage of EBITDA will be lost to taxes, depreciation, etc in future quarters/years as in recent past quarters/years. I assume about 20% of the rise in EBITDA will be lost before adjusted earnings and about 40% of the rise in EBITDA will be lost before GAAP earnings.

– Bill

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Bill, coming off a small base, net income and earnings always go up more percentage wise than EBITDA. Why? Think of it like this:

EBITDA is 100.
Interest, Depreciation and Amortization come to 90.
Net Income is 10

Next quarter EBITDA is 120 (up 20%)
Interest, Depreciation and Amortization come to 90. (They haven’t changed)
Net Income is 30 (up 200%!!!)

Let’s look out another quarter (or year)
EBITDA now is 140 (up 17% sequentially)
Net income is now 50 (up 67% from up 30 the reporting period before).

After a long time the percentage increases will get closer together, but CRTO has a while before that happens.

Saul

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5

That’s not really what has happened, though. Here are taxes and D&A (the two items which mainly differentiate adj earnings and adj EBITDA). I have them in millions of euros and as a % of adj EBITDA.


Item         Q1 2015  Q1 2014
-----------------------------
adj EBITDA      28.1     14.5
Taxes (MM)       6.3      3.2
Taxes (%)        22%      22% 
D & A (MM)       7.5      4.5
D & A (%)        27%      31%

Taxes are going up in step with EBITDA as one might expect. D&A is also going up, though a bit slower. Neither one is staying the same, though. It’s not clear to me why D&A went up so much. Maybe we should assume it is going to stop going up?

There was a big increase in financial income between Q1 2014 and Q1 2015, from 0.8MM to 3.5MM euros. I don’t know what that’s about. Should I assume it’s going to keep going up?

Thanks for the feedback, by the way.

– Bill

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Q1 2015 was actually a somewhat disturbing quarter for CRTO, given its high PE. Its revenue growth decelerated a lot. Its earnings, both adjusted and GAAP, were sequentially down. It forecast flat revenue and earnings for Q2.

Bill you are saying revenue is decelerating. Are you talking sequentially? Because YOY I have it at 71.49%. That is at the high end.

Andy

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I’m calculating sequential growth of 12.4%, which is actually a little higher than 1q14 sequential growth of 12.2%.

Growth seems fine to me.

Jason
Long CRTO

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8

Sorry, I was looking at revenue.

9

@jasonb75:

Just to clarify what I was looking at:


         Rev     QoQ
         ex-TAC  Seq
--------------------
Q2 2015  106      1%
Q1 2015  105      9%
Q4 2014   96     23%
Q3 2014   78     16%
Q2 2014   67      6%
Q1 2014   63

For Q2 2015, I am using their guidance. So, that looks like a deceleration to me. I read the Q2 guidance several times because I found it kind of shocking.

If it’s any reassurance, I’m long CRTO. It’s at 3.5% of my individual stock portfolio. I usually resist investing in anything with a PE over 30, so I’m a bit paranoid about the growth slowing down in this stock. That’s not to say that its stock price won’t appreciate. The market could get all enthusiastic about it.

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Hi Wilbear, Most people look at year over year results. Using your figure of 106 for Q2 2015, and comparing it with Q2 2014, you have ex-TAC Revenue up 58% year over year.

Most people Would consider that a pretty incredible year-over-year rise in Revenue. And undoubtedly they gave a number that they felt they were sure of beating.

Saul

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11

Wilibear,

I’ve got to agree with Saul for this one. YoY trend analysis is a better indicator than sequential trend analysis when we’re talking about growth. This is because YoY ‘understands and captures’ business cycle whereas sequential does not. When looking at FY14 sequential trend, especially from Q4 FY13 to Q1 FY14, you’ll know what I’m talking about. (I’m talking about adjusted EPS and revenue here. TTM earnings somewhat decelerated compared to Q4FY13-Q1FY14 trend)

Plus CRTO’s been talking about they’re increasing R&D in FY15 from few quarters ago, thus growth will be decelerating. I’m pretty sure this information is already factored in the current price.

Hex

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