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