CRTO Earnings & Thoughts

Greetings All,

CRTO had another excellent quarter. I want to share the quick numbers and guidance, but then talk about new developments at CRTO and in the industry. I’ve held some beliefs about CRTO since I took a position in them and will review those. Finally, I’ll look at some the risks as an investment.

If you are new to CRTO and/or the ad tech space, I recommend reading Anirban’s Two part posts (Post #61 on this board). They are a very informative review of the overall market and the position CRTO has in it.

Two Key Metrics:

Rev-Ex TAC - $177M up 30%
Adjusted EBITDA - $54M up 51%

Q4 Guidance:

Rev-Ex TAC - $208.5M up 29%
Adjusted EBITDA - $73.5M (don’t know how this compares to LY)

Just a few statements about the numbers. Really, there was very little to find that didn’t look great. Costs are in control with leverage starting to show in the bottom line. Margins are in great shape. The only negative on the call was due to some poor execution in the US (sounds like someone got fired and it isn’t a long term concern). Overall a very good quarter.

Moving on to new developments, there are three worth mentioning: Predictive Search, the HookLogic acquisition and the entrée of Header Bidding into the ad tech arena.

CRTO launched Predictive Search for marketers in Google Shopping. This appears to be a new revenue stream for CRTO likely to begin kicking in next year. A beta version has been launched and CRTO claims clients who have used it have demonstrated up to a 49% increased return in ad spending. It seems that many companies are offering help optimizing returns in Google Shopping, yet it has been a laborious process. CRTO claims to have automated this. Here’s a snippet from the presser at the launch:

“Google Shopping is a huge opportunity for retail marketers, with Shopping quickly becoming the biggest ecommerce performance driver for retailers,” said Jason Lehmbeck, General Manager, Search, Criteo. “Yet, the tools available today are overly complex and time-consuming, and do not sufficiently help marketers connect with consumers who are actively shopping for their products. Our goal with Predictive Search is to eliminate the guesswork of managing Shopping Campaigns while delivering unbeatable performance for retailers.”

As with everything else CRTO offers, this will be a pay for performance service. Clients will be paying CRTO a portion of the benefit they glean from Predictive Search. CRTO feels this gives retailers a chance to compete with large e-commerce sites. Here’s a quote from a satisfied beta version customer:

“Criteo’s management of our Google Shopping program has generated incredible results,” said David Gottesman, director of digital marketing, Teleflora. “Criteo Predictive Search has really helped fine-tune our bidding strategy and increase our impression share. Our year-over-year performance has grown by triple digits in just six months.”

The acquisition of HookLogic is expected to close this month. CRTO feels there are vast synergies. HookLogic is a leader with Brand Manufacturers who sell through retailers. Some of these Brands have enormous ad budgets. This is an area where CRTO did not play previously. Additionally, both companies feel there are strong synergies in tech advancements to come (mainly from the CRTO side).

Header bidding seems to be a relatively new in the ad tech space. It is apparently designed to allow Publishers to sell ad spots for higher prices by creating a bidding environment between ad exchanges. Header bidding apparently removes the “Waterfall” effect for publishers who used to offer ad spots at high prices to Tier 1 customers. As inventory remained open, publishers would move down the list and reduce pricing. This was apparently quite the hassle of which Header Bidding is supposed to remove.

I believe some ad tech companies have been left “flat footed” when it comes to preparing for Header Bidding. CRTO seems to be reacting well to the changes. Here is a snippet:

Three, we continue to invest in our publisher-facing products, taking advantage of recent shifts in the markets such as header bidding. As we described at our Investor Day in September, we are making modifications to our bidding strategy to maximize yield for advertisers, such as using our machine-learning technology to predict the prices of opponent bids.

And we launched a direct header-bidder technology that allows us to be in the auction without going through the traditional RTB platforms, reducing cost and capturing more data on the auction bids. While this is still in progress, our smart approach allows us to embrace the changes in the publisher landscape and take advantage of the opportunities that header bidding opens up for sophisticated technology players like Criteo.

CRTO has been a tough business for me to understand (thanks Anirban!). To make matters more complicated, the ad tech space continues to change quickly (see Header Bidding) with the ubiquitous fear of ad blocking lurking in the background. There are a few things that have given me confidence to invest that are worth reiterating.

I like that CRTO is looking to disrupt the industry by allowing advertisers the ability to track their ROI. I’ve always heard this has been a big issue. So, I’ve always wondered whether this is true. I can only assume it is, based on the ever increasing client base both on the advertiser and publisher side. This is the 12th consecutive quarter they’ve beaten guidance on the two key metrics and the 21st consecutive quarter of 90%+ client retention, if further evidence of the benefits of their product is needed.

CRTO reports their client additions every quarter. Looking back at Anirban’s post in November 2014, they had 6,600 clients and 8,000 publisher relationships. Today they have 13,000 clients and 17,500 pub partners. That’s 40% and 47% annual growth in customers. They must be doing something right!

So while this has been a tough business to get to know and a difficult industry to follow, I remain confident based on their recent success.

Finally, let’s look at some risks:

Ad blockers - When Apple announced this, CRTO stock took a pretty big hit. It doesn’t appear to have affected their business. The internet would have a very big problem if advertising dollars suddenly went away. I’m comfortable thus far in CRTO ability to manage around this, but am certainly interested in those that may feel differently.

Google changes the rules - It has been said that Google dominates this space. When Google makes changes, it has impacted some ad tech companies. RetailMeNot comes to mind. A key differentiator for CRTO is the massive amount of data fed to their Machine Learning Engine. If changes are made, it feels like CRTO will be one of the first to respond.

Header Bidding causes a disruption that CRTO can’t handle. See what I wrote above.

Predictive Search Fails - This would not be damaging other than sunken costs as it appears to be an incremental revenue stream.

HookLogic Acquisition doesn’t produce results - Time will only tell here, but thus far I’m confident with management’s message on synergies.

Someone develops a better mousetrap - Of course this could happen in the tech world.

Thanks for listening all. This has been a long review and if there are questions or comments, I’m certainly interested in hearing them.

Excerpts from above were taken from Seeking Alpha which can be found in the entirety at:…

and from CRTO website at:…

Best regards,