Criteo SA (NASDAQ: CRTO): Is Criteo Malware? And Why Does Criteo Refuse to Reveal to its Clients Where Their Ads Are Placed? Part I

Gotham City Research is releasing Criteo SA (NASDAQ: CRTO): Is Criteo Malware? And Why Does Criteo Refuse to Reveal to its Clients Where Their Ads Are Placed? in two parts:

  • Part I features Method Media Intelligence’s Criteo Report (released today)
  • Part II features Gotham City Research’s Criteo Report (released next week)

Background: Criteo’s shares declined the last two days, after the company announced that its exposure to Apple’s Intelligent Tracking Prevention was 20% of revenue, not 8% as was widely believed before Wednesday. While Apple’s pro-privacy initiatives are a threat to Criteo’s business model, we have reason to believe that Criteo has even bigger problems than Apple for the following reasons:

Gotham City Research’s Opinions

  • Over 50% of Criteo’s revenues originate from suspect sources (e.g. clickbots, fake/low quality websites, etc).
  • Criteo takes credit for clients’ sales it did not contribute to, and in some cases, that never actually occurred.
  • Clients will leave or demand reimbursements from Criteo, out of brand safety & revenue misattribution concerns.
  • Criteo’s sales & profits will decline as a result of increased client scrutiny, leading to a 67%-77% decline in its share price.

 

Summary of Method Media Intelligence’s Criteo Report

  • Criteo operates with no transparency as to where the clicks they charge advertisers for are being generated.
  • Criteo charged a client at least 61% higher than what was truly reported.
  • Criteo reports 42% higher clicks than our own tracking code that is on the same page as theirs.
  • Criteo claims attribution credit to their ads for transactions that were falsely triggered by a bot.
  • Criteo displays ads on websites that do NOT fit a PG13 or “Disney Safe” standard as they claim.
  • Criteo’s timestamp of the transactions are dated after the timestamp in Shopify, which allows extra clicks to be billed to those User ID’s even after a purchase is made.
  • All advertisers should engage in audits and review of any campaigns operating on a cost-per-click model.

About Method Media Intelligence

Method Media Intelligence (“MMI”), headed by Shailin Dhar, is a San Francisco based concern that specialises in detecting ad fraud.

MMI concluded a multi-month investigation into Criteo.  The MMI report summarizes their findings, which they describe as “an analysis of fraudulent digital advertising practices at one of the largest ad-tech companies.”

website: http://www.methodmi.com/

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AAC Technologies LTD (Ticker = 2018): Why are AAC’s reported profit margins higher AND smoother than Apple’s? Part II Preview

GOTHAM CITY RESEARCH HAS REASON TO BELIEVE THAT:

  • AAC has used 20+ undisclosed related parties & dubious accounting to overstate & smoothen profits since 2014.
  • At least 20 undisclosed related party suppliers are owned or managed by AAC CEO’s family members or employees.
  • These undisclosed related party suppliers are not listed in Apple’s supplier list, despite some claiming otherwise.
  • Some of the undisclosed related entities supply the same products as AAC does, are based in the same locations as AAC is, & hire employees under AAC’s name.
  • AAC has used these hidden entities to evade Apple’s labor standards specified in the Apple Supplier Code of Conduct.
  • Apple (and other parties) will conduct independent investigations, & validate our findings. As a result, AAC’s profit margins will decline, converging to its peers’ levels.
  • AAC is in violation of Hong Kong listing rules, Apple’s supplier code of conduct, and its own representations.

OBSERVATIONS

  • AAC’s China-based subsidiaries’ 2015 operating margins are only around 9%, per local filings, compared against AAC’s total 2015 operating margins of 30%.
  • There are at least 30 companies listed under CEO father’s name, some of which do business with AAC.
  • Companies with more automation should have a higher – not lower – average compensation, revenue, & gross profit per employee versus peers, according to a Sunwah analyst.
  • AAC has no CFO, & has never addressed whether its reporting, financial statement accuracy, & quality of internal controls would be affected.
  • Conference call: “At this moment we don’t need a CFO.”
  • AAC CEO’s responsibilities include finance while AAC CEO’s wife sits on the audit committee.
  • AAC has not explained how its auditor is able to audit AAC’s financial statements with such low audit fees, given that AAC’s size would seem to require more billable hours.

Is there a smoking gun? See for yourself, by reading this report.

 

AAC Technologies LTD (Ticker = 2018): Why are AAC’s reported profit margins higher AND smoother than Apple’s? Part I (Full Report)

GOTHAM CITY RESEARCH’S OPINIONS

  • AAC has used 20+ undisclosed related parties & dubious accounting to overstate & smoothen profits since 2014. In this regard, AAC reminds us of Longtop Financial Technologies.
  • AAC has used these hidden entities to evade Apple’s labor standards specified in the Apple Supplier Code of Conduct.
  • AAC’s share price will initially decline to 40 HKD – 50 HKD per share, as the undisclosed related party supplier revelations are digested.
  • We see far greater downside potential to the share price if the company were to concurrently experience the same problems that other Apple suppliers have in the past, e.g. increased competition, pricing pressure from its customers, wage inflation, etc.

Example #2: ZhongBeiTong Magnetic Materials 中北通磁科技股有限公司

Gotham City Research has reason to believe that ZhongBeiTong Magnetic Materials is a significant undisclosed related party:

  • The company estimated it would enter into RMB 150 million transactions with AAC in 2016.
  • ZhongBeiTong Magnetic Materials declared itself (in its filings) as a related party supplier to AAC because Ingrid Wu, one of the unit’s main shareholders and board members, shares the same name as the woman who is the wife of AAC CEO Mr. Pan and an AAC board member.
  • In contrast, AAC has never disclosed ZhongBeiTong Magnetic Materials in its annual report.

AAC Technologies LTD (Ticker = 2018): Why are AAC’s reported profit margins higher AND smoother than Apple’s? Part I (Preview)

Why are AAC Technologies LTD’s – a supplier of Apple – reported profit margins higher AND smoother than Apple’s?

GOTHAM CITY RESEARCH HAS REASON TO BELIEVE THAT:

  • AAC has used 20+ undisclosed related parties & dubious accounting to overstate & smoothen profits since 2014.
  • At least 20 undisclosed related party suppliers are owned or managed by AAC CEO’s family members or employees.
  • These undisclosed related party suppliers are not listed in Apple’s supplier list, despite some claiming otherwise.
  • Some of the undisclosed related entities supply the same products as AAC does, are based in the same locations as AAC is, & hire employees under AAC’s name.
  • AAC has used these hidden entities to evade Apple’s labor standards specified in the Apple Supplier Code of Conduct.
  • Apple (and other parties) will conduct independent investigations, & validate our findings. As a result, AAC’s profit margins will decline, converging to its peers’ levels.
  • AAC is in violation of Hong Kong listing rules, Apple’s supplier code of conduct, and its own representations.
  • AAC’s share price will initially decline to 40 HKD – 50 HKD per share, as the undisclosed related party supplier revelations are digested.
  • We see far greater downside potential to the share price if the company were to concurrently experience the same problems that other Apple suppliers have in the past, e.g. increased competition, pricing pressure from its customers, wage inflation, etc.

Aurelius Equity Opportunities SE & Co KGaA: Do Aurelius’ Swedish subsidiaries exist?

  • How many shares does Aurelius’ management currently own? Why does Aurelius refuse to answer this simple question?
  • When asked about his current shareholdings last week, CEO Dirk Markus said: “I cannot say anything… we respect the law with regards to quiet periods” Is Dirk Markus telling the truth, implying that he is legally restricted?
  • Is Aurelius telling the truth when it claims,
    “Steffen Schiefer has been CFO of AURELIUS since 2012?

 

 

Aurelius Equity Opportunities SE & Co KGaA: The Next Arques AG or the next Philip Green?

GOTHAM CITY RESEARCH’S OPINIONS

  • Aurelius’ shares are worth no more than €8.56 per share, implying at least -88% downside to its current share price.
  • Aurelius may face similar scrutiny as Philip Green did in the UK, who was accused of systematically plundering BHS.

SUMMARY OF FINDINGS

  • We were unable to reconcile 43% – 100%+ of Aurelius’s reported earnings to the sum of its subsidiaries’ earnings.
  • 2015 contingent liabilities, as calculated by the sum of its parts, seem understated by 46% or more.
  • Aurelius’ income from negative goodwill accounts for over 120% of 2011-2015 earnings.
  • Similarly high levels of negative goodwill preceded a permanent -95%+ collapse in the share price of Arques AG, whose business model seems identical to Aurelius’.
  • Aurelius claims to be a “good home for companies” yet nearly 60% of portfolio companies entered insolvency after Aurelius sold them, per our review.
  • Our estimate of NAV is 80%-90% lower than Aurelius’ unaudited and DCF-based NAV.
  • Aurelius has never received an unqualified audit opinion on its audited financial statements.
  • CEO Dirk Markus, a former Finance executive of Arques is also the CFO of Aurelius, according to Hauck & Aufhauser.
  • Aurelius’ executives sold €169 million of shares in December 2016 (40% or more their stake) at €52.5 per share. The prevailing market price was €59 that day.
  • Aurelius has been accused of illegal conveyance (and found guilty in some cases) in its business dealings (Einhorn case, EDS case).
  • Aurelius “abstains” from providing negative goodwill-related disclosures “because it believes that they can lead to economic disadvantages.”