A different view on CRTO

Investment Analysis Clubs Saul’s Investing Discussions
1

Hi Anirban, Let me give a more concerned view of CRTO, and why I sold over half of my position (but certainly not ALL), to reinvest elsewhere.

Free Cash Flow in the past three quarters (Dec, Mar Jun) has gone from 30 to 17 to 11. Lest you think that’s seasonal, the year before the same three quarters went from 5 to 8 to 11. (This quarter FCF was flat with the year before at 11).

Adjusted earnings compared to the year before:
Dec - up 185%
Mar - up 133%
Jun - up 67%

Since those are percentage increases you can’t blame that on seasonality.

And speaking of seasonality, sequentially from Dec to June, adjusted earnings have fallen from 37 to 28 to 15. That’s down almost 60%. The year before the “seasonal” fall from Dec to June was just about 30%.

Adjusted EBITDA compared to the year before:
Dec - up 121%
Mar - up 93%
Jun - up 67%

Since those are percentage increases you can’t blame that on seasonality.

And speaking of seasonality, sequentially from Dec to June, adjusted EBITDA has fallen from 32 to 28 to 22. That’s down 31%. The year before the “seasonal” fall from Dec to June was only 9%.

Revenue ex-TAC compared to the year before:
Dec - up 74.5%
Mar - up 66.7%
Jun - up 64.2%

Just slowing down all over.

And speaking of seasonality, sequentially from Dec to June, Revenue ex-TAC has gained 14.6%. The year before the gain from Dec to June was 21.8%.

Now the big deal, EBITDA margins! What’s going on here with Revenue rising sequentially and adjusted Earnings and adjusted EBITDA falling sequentially?
EBITDA margin
Dec - 33.3%
Mar - 26.6%
Jun - 20.0%

That’s a major drop in the face of increasing income.

And EPS margins? We have 14.6% MORE revenue in June than December, but 60% less adjusted EPS???

This isn’t disaster by any means. They are still growing quite nicely. But those aren’t happy numbers. Just another point a view.

Saul

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2

Hi Saul,

Just to clarify a few points, from my spreadsheet:


-------------------------------
Quarter  Ex-TAC          YoY
-------------------------------
Q2 15	€110,455	64.80%
Q1 15	€105,160	67.63%
Q4 14	€96,303	        75.56%
Q3 14	€77,596	        65.75%
Q2 14	€67,022	        67.42%
Q1 14	€62,733	        69.38%
Q4 13	€54,855	
Q3 13	€46,815	
Q2 13	€40,032	
Q1 13	€37,036	
-------------------------------

The YoY ex-TAC revenue growth does fluctuate. The trend this year seems to follow what we saw in 2013. It doesn’t look alarming to me.

Same story with the EBITDA/Ex-TAC Rev. The margin seems to fluctuate with Q2 < Q1, and typically Q4 being the big one. Below are the numbers from my spreadsheet:


Q2 15 19.71%
Q1 15 26.71%
Q4 14 33.08%
Q3 14 25.55%
Q2 14 19.76%
Q1 14 23.12%
Q4 13 26.44%

Some of this looks like seasonality to me. They talked a bit about spending big time on data centres, clusters, and offices in new geographies. That’s going to affect earnings for sure. But then, 2015 was a year of investments and this was flagged as early as Q4 2014.

What I like here is the solid uptake from clients and publishers. Both numbers are up nicely. It creates a nice little self fulfilling circle.

I don’t know, so far it looks good to me. I 'm not discounting the risk here … ad tech is highly competitive and constant changes with big exchanges and publishers happen. I think the upside with CRTO is still intact but I agree this is certainly a risky play compared to some of the bigger tech giants.

Anirban

16 Likes
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Item	                2015/6	2015/3	2014/12	2014/9	2014/6	2014/3	2013/12	2013/9	2013/6	2013/3	2012/12	2012/9
TAC QoQ Growth	        64.8%	67.6%	75.6%	65.8%	67.4%	68.2%	55.3%	59.7%
---------------------------------------------------------------------------------------------------------------------				
TAC YoY Growth	        68.3%	69.3%	69.6%	64.4%	63.0%
---------------------------------------------------------------------------------------------------------------------							
TAC % of Rev	        40.8%	40.2%	41.4%	39.9%	40.5%	41.1%	40.4%	41.1%	40.3%	39.3%	40.8%	40.6%
---------------------------------------------------------------------------------------------------------------------
Other Cost % Ex-TAC	**11.7%**	11.0%	11.5%	12.0%	__*12.4%*__	11.9%	11.5%	10.1%	14.3%	13.9%	13.7%	10.7%
R&D % Rev Ex-TAC	**16.2%**	15.3%	**12.7%**	15.8%	__*16.2%*__	16.0%	18.2%	19.2%	17.3%	16.8%	12.0%	12.4%
Sales&Op % Rev Ex-TAC	**48.7%**	44.8%	**41.2%**	44.7%	__*47.4%*__	43.4%	40.7%	43.6%	56.9%	46.4%	49.7%	49.3%
G&A % Rev Ex-TAC	**16.7%**	14.9%	**14.2%**	15.7%	__*16.5%*__18.8%	16.9%	14.8%	19.1%	20.2%	20.6%	20.1%
=====================================================================================================================
Costs % Rev Ex-TAC 	**93.3%**	86.0%	**79.5%**	88.3%	__*92.5%*__	90.1%	87.3%	87.8%	107.7%	97.2%	96.0%	92.6%

This past quarter has shown a significant increase in the costs as a percentage of Revenues Ex-TAC (highlighted in the table). At some point, it would be good to see this number come down, especially for a company growing as fast as Criteo.

Also, the total cost percentage associated to last December’s quarter is significantly lower than any other quarter, making some of the comp numbers look so good.

It would be nice to see it get back to December, 2014 levels, instead of staying at the latest quarter’s figures. In which direction is norm? If, as management says, this is an investment year, perhaps we’ll get closer to December, 2014 numbers as the norm.

DJ

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I have made a similar move (to Saul’s) on CRTO, though for additional reasons. I have personally found advertising on the mobile platforms problematic and intrusive over the last few months. For smaller screens and “more focused” attention I usually give the phone and tablet screens (as opposed to general purpose desktop computer screens), the distractions of advertisements is more pronounced, especially since the ad industry started experimenting with video+audio ads.

Here are a couple of other interesting sample points for statistics and individuals’ thought on the general topic of digital advertising, which does get specific on occasion:

NY Times BLOG
http://bits.blogs.nytimes.com/2015/08/10/study-of-ad-blockin…

Slashdot (Geek website which references the above blog article, plus user comments)
http://tech.slashdot.org/story/15/08/10/136226/study-ad-bloc…

-vanGobi