I’ve now had a chance to read the earnings call transcript. Here are some additional points that I saw as important.
- On the iOS concerns, the CEO provided his take. Here’s the what he said in his scripted remarks:
“While talking about inventory I’d like to say a few words about ad blocking, the subject that receive questions about recently. Overall we do not view this as a huge threat to the industry. Generally speaking users are happy to access free concern in exchange for advertising. However users also have clearly expressed this, their pleasure within - non-relevant app to pop-ups and non-skipable pre-roll videos. And indeed industry studies and consumer feedbacks confirm again and again then poor user experience is by far of the main virtualization for ad blocking.”
In the Q&A part, he added:
“Yes. So ad blockers just to give you a bit more color on this specifically on your question. So first thing concern is that the majority of our mobile business is derived from Android devices. That really is meaningful but it’s really under eighty. And Apple mobile device is probably in the low-teens in terms of contribution to our business. This said ad blocker has been supported by on this total Safari for years and so far we haven’t seen any impact. So we have to take this into - and second data point important is that this ad blocking feature is not default thing about iOS of Safari, it would need but not to be download which would require Apple approval on this. So I think people have to be careful although in cap rating in some announcement that you can have read in the press.”
Bottom line: Apple devices make up maybe 1/6th of CRTO’s business. Advertising is an important part of the internet and people buy a lot of stuff that way so ads seem to add value to even consumers leading me to conclude that most people would not take the active decision to block ads.
In a previous post, I pointed out the Q2 decline in average ex-TAC revenue per client. I suggested possible seasonality and the we should look for (hope for) a rebound of this metric in Q3 and again Q4. After reading the earnings call transcript, I now question whether this metric will be valuable as CRTO’s business develops. Let me explain. Their business to date has been very heavily weighted toward Tier 1 clients. Tier 1 clients are very large companies that will spend a lot on advertising. CRTO is now making a very active push to gain clients in the mid-sized market (i.e. smaller companies which will likely spend a lot less on advertising than Tier 1 clients). If CRTO is successful (and they say they are making great progress in the market so far), we will see the addition of a lot more smaller companies that will spend less than Tier 1 companies. This will drive down the average ex-TAC revenue per client. Thus, it will become less and less relevant to compare average ex-TAC revenue per client going forward. Instead, we should focus more on overall ex-TAC revenue growth and customer retention. However, customer retention of mid market clients could be different that for Tier 1 clients.
The increased spending in FY2015 was discussed. As they target the mid-market, they are spending a lot to put in place the capabilities to address this market. They are adding a lot of new offices: China, SE Asia, Europe, Middle East were all mentioned. I was under the impression that FY15 would be a big spending (~6% of revenue) year followed by a more “normal” (~4% of revenue) spend after FY15. Management was asked about this and I heard that they weren’t prepared to commit to a lower spend in FY16. They are investing in growth, but they did say that their plans to improved operational leverage as they grow were still intact. I’m giving them the benefit of the doubt for now, but we want to watch this and make sure it doesn’t turn into a AIOCF (Fernandes) situation.