CRTO Q1 2015 Analysis

Hi all,

Below are my notes from Q1 2015.


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Disclaimer: Note that the following notes are my notes so you should be very skeptical about them! Apply your judgement before taking any action based on these notes.

Press release:

Prepared remarks:…



Just like my Q4 2014 analysis, I am going to put my concluding remarks upfront. The summary from the earnings release and the conference call come after the bottomline.

This company is executing well, and it is grabbing market share. We see that in its growth of the client and the publisher base. Client retention rates are in 90%+ zone and clients are moving to uncapped budgets. The ex-TAC revenue growth is strong and adjusted net income growth is even stronger. The company is generating tons of cash, its making smart acquisitions, it’s one of the few investing in multi-screen solutions (i.e., looking at how views in one screen can translate into sales in another screen, think about moving b/w your iPhone, iPad, and Mac), working with Facebook to deliver ads (another big opportunity), and is rapidly expanding its footprint in the US market.

The company has flagged 2015 as a year of investments as it looks to increase its lead over competitors. This would dampen the earnings growth somewhat but its probably the right thing to do in the face of competition and the opportunity in front of it.

What about valuation? The company reports in Euros which probably causes confusion. Looking at adjusted net income and using current diluted share count I get a TTM non-GAAP eps of $1.03 (converted using current Euro to USD rates). This puts the company on a trailing PE of around 44. That’s not expensive IMO for a company growing as fast as this one, and one that’s gaining market share. IMO, the biggest risk here is privacy legislations which might make tracking very difficult, so this is something to watch out for.

I have been slowly building up this position. I now have an above-average sized position. I have also been writing puts with strike prices that give me a buy point at PE below 40. So far, both strategies have been working well.

Financial Highlights

o Revenue in the first quarter 2015 increased 71% (or 59% at constant currency1) to €262 million, compared with €153 million in the first quarter 2014. Q4 2014 had come in at €233 million, compared with €136 million in the fourth quarter 2013. As I noted last quarter, I like how they are maintaining the revenue growth run-rate around 70%. I also like how they are seeing nice sequential growth.

o Revenue excluding Traffic Acquisition Costs, or Revenue ex-TAC, in the first quarter 2015 grew 68% (or 55% at constant currency) to €105 million, compared with €63 million in the first quarter 2014. Revenue ex-TAC was €96 million in Q4 2014. Nice YoY and sequential increases.

o Net income in the first quarter 2015 increased to €12 million, compared with €4 million in the first quarter 2014. Net income in Q4 2014 was €18 million, so we had a sequential decline. However, the Q4 conference call had flagged 2015 as a year of investments in the business, so we should be expecting some let down in the net income growth.

o Adjusted Net Income for Q1 2015 was €18, or about a €11 increase over Q1 2014. Similar to net income, the adjusted net income declined sequentially from €23 to €18.

o Free cash flow, defined as cash flow from operating activities less acquisition of intangible assets, property, plant and equipment, net of proceeds from disposal, was€25M in Q1 2015. FCF was €30 million in Q4 2014.

o The company is nicely cashed up. Total cash, cash equivalents and short-term investments were at €294 million as of March 31, 2015.

o Let’s look at the valuation before delving into the operational highlights. The fully diluted share count was around 69.3M and adjusted net income of Euro 63.6M. Based on this, we get:

  • Non-GAAP EPS (TTM) of $1.03
  • PE (Non-GAAP) = 44 (as of close of 7 May 2015)
    For a company growing revenues YoY at 70% rate, and income at an even greater pace, I would think the above PE numbers are quite reasonable. It’s not as pricey as it may appear to be, at least not as long as the growth continues.

Operational Highlights

o Another quarter and another record in terms of adding new clients. This quarter they added 640 clients. They had added more than 600 clients in Q4 2014 as well. Total client base grew to 7832 from 7190 in Q4 2014. Recall that ‘client’ refers to those interested in placing adverts. Also note that there’s some client churn as well, so the numbers can’t be figured out by simply subtracting client count in Q1 15 with those in Q4 14. The total client count in the past 4 quarters:
Q1 14: 5,567
Q2 14: 6,131
Q3 14: 6,581
Q4 14: 7,190
Q1 15: 7,832
Their client retention rates are around 90%. That’s pretty solid, and Criteo is seemingly taking big strides in adding both large and mid-market clients. The following bit from the prepared remarks released by the company is worth noting:
"While we continue to add large clients in all regions, our specific investments in the midmarket segment are paying off. We maintain our strong midmarket momentum in all regions, which continues to outpace the growth of the rest of the group. As we have only penetrated a small fraction of the overall addressable midmarket, we plan to further invest in this area in the coming quarters.”

o In Q4 they added more than 900 publishers. Recall that ‘publishers’ are those with the ad spots or inventory. It seems their publisher market place is growing nicely. They now have more than 10,000 publishers.

One important relationship here is with Facebook. They noted the following in the conference call:
We continue our partnership with Facebook, especially on integrating the dynamic product and to reach users on mobile. In the first quarter, we brought more clients into a solution, which we Facebook Dynamic Product Ad on mobile in-app inventory.

As I noted in my earlier notes, growing the publisher base is important to create a dominant foothold in this industry. After all, having access to high-quality publishers will help bring clients and having access to a large client pool will help bring more publishers to the fold. This can be a nice self-reinforcing cycle and can help Criteo become a dominant force in online advertising.

o Their mobile and multi-screen solution rollout is nearing completion. In Q3 2014, 73% of their clients were using their multi-screen solutions. Q4 2014 saw that number rise to 80%. That’s now 84% in Q1 2015.

o The growth of the US market will be something to watch out. Right now, it is showing rapid growth but it is coming off a small base compared to EMEA. The US market is also more competitive according to management but they are happy with the progress they are making. YoY growth this quarter was 101%.

o Here’s another way to look at their ability to generate more from existing clients, again right out of the prepared remarks:
Overall, our improved technology and ability to convert consumers seamlessly across devices helped generate more sales for our clients. During this quarter, our clients continued to increase their spend with us. In particular, clients that were live with us in both in Q1 last year and in Q1 this year generated 25% more revenue ex-TAC at constant currency this year compared with the previous year. Our ability to maintain over 75% of our business from uncapped budgets continues also to be a key success factor of this growth.
This more revenue from existing client cohort is showing us how relevant the technology is for the people using it. I like how they are able to get uncapped budgets from their customers.

o CRTO’s ads are estimated to reach 1.1 billion unique users, just on desktops in March 2015. They claim this to be the second largest reach worldwide.

o For 2015 they are focusing on several interesting initiatives. Here are some that I found interesting:

** Multi-channel performance marketing solutions focusing on display, native, in-app, and email + cross-device solutions.
They want multi-channel across devices. The idea here is to match views in one device with sales in another device. Think here about someone switching from an iPhone to a iPad to a Mac. How does one figure out how the marketing dollars allocated for mobiles result in sales say on desktops? Criteo apparently is one of the few companies offering solutions that can figure this out. Further, combined with the fact that Criteo reaches 1 billion users worldwide on a monthly basis, this cross device opportunity can be very significant. Great solution for marketeers.

** Expand global footprint.
They will look to further expand their US presence and also penetrate other emerging markets such as LATAM, Russia, China, and SE Asia. These emerging markets are early stage markets so potentially have lots of room to grow.

Guidance for Q2 2015

o Expect to continue investing in R&D and sales & marketing.

o Q2 15 ex-TAC is expected to be between €105M and €107M. Note that Q2 14 ex-TAC was €67. At mid-point ex-TAC is flat with respect to Q1 2015.

o Q2 Adjusted EBITDA between €18M and €21M. Q2 was noted to be their lowest quarter from a EBITDA standpoint and they also pointed to additional costs in hiring and hosting.

o FY ex-TAC was raised to the range €454M and €460M; roughly 50% growth with respect to 2014 at the mid-point.



As my young employees say, “You are the man!” Thanks for both beating the drum on CRTO and providing useful information.