CRTO Q1 Earnings

On the SA CRTO board, TimWEdits posted his review which I reference. It is here for those with a subscription.…

Here’s my post:

Tim posted the quarter’s numbers and some comments from the conference call that I won’t rehash - Thanks Tim!

Criteo delivered another very solid quarter excluding the impact of the HookLogic (HL) acquisition. Everything grew in lock step at just about 30%. Rev-Ex TAC grew 30%. Without HL costs, Adjusted EBITDA grew at 31% and EPS grew at around 30%. One thing to note, I don’t believe we were ever told what the revenue impact HL had in the quarter. To be conservative, one could subtract that out from the revenue and get slightly lower earnings growth. However, Q1 is the lowest sales quarter for HL. It likely didn’t have a large impact.

The company reiterated guidance, now 28% to 31% Rev-Ex TAC growth, increasing the low end by 1 point. This gives a range of $934M to $956M for 2017. Adjusted EBITDA is expected to grow from $225M to $292M this year. They guided for the next quarter as well; however, the full year is far more important since so much is weighted to Q4 for the holidays. I’m not as fixated on the next quarter as I am on the full year and am also becoming quite impressed with management’s ability to forecast (on a constant currency basis as ForEx will be playing a negative role this year).

So, the above analysis excluded the impact of HL. This seems reasonable to me especially since management has been very accurate in their analysis to date. You’d notice 7% EPS and 18% Adjusted EBITDA growth from the full company including HookLogic. By the way, HookLogic is now called Criteo Sponsored Products or CSP in the company lingo. And another aside, I struggle with Adjusted EBITDA as a metric. It requires a lot of thinking on my part. I have another company in my portfolio (HDP) that does the same. In the case of Criteo, I’m understanding why they use the measure. First, ForEx has unknown impacts at the behest of the global market. Second, their tax rates have been all over the place in the recent past making it difficult to predict real earnings.

Before continuing on with positives from the company, let’s look at what is probably the largest underlying risk…Google, Facebook and Amazon. The first two of which Criteo works with. Their Predictive Search offering is geared toward clients who use Google Shopping - an offering geared toward businesses that want to post their wares for sale as I see it. The core of what Criteo does is based upon its vast warehouse of data and all of the different ways it is using that data to drive sales growth of customers. Their revenue driven from Facebook grew from 6% to 7% of sales. The company does admit these companies are competitors along with AMZN who is getting into the arena. However, their current presence doesn’t appear to be affecting sales. I will leave it for the reader to determine the risk factors. To me, they are diminishing as Criteo scales.

And Criteo is scaling and innovating on many fronts. Predictive Search was mentioned earlier. This was just rolled out and will be a minor growth driver in 2017 with high expectations in 2018. Criteo’s relationships with the supply side are expected to pay dividends as they roll out their new Header Bidding platform this quarter. They are innovating in video ads, using customer’s CRM databases for online campaigns, offering options on a cost per sale basis as opposed to cost per click, developing a user graph that is increasing sales for companies on boarding and the list continues.

This was the company’s 14th quarter in a row beating their metrics. 75% of their Rev-Ex TAC comes from customers who are on an un-capped budget and client retention remains at 90%. They are becoming a force within the programmatic advertising world. CRTO, the stock, has essentially languished for about a year and a half while the valuation contracts.

It would be great to hear from others and thanks for reading.

Take care,