Below are my notes on CRTO’s Q2 2015 earnings.
Prepared remarks: http://files.shareholder.com/downloads/AMDA-2220FT/141323757…
- Let’s start by looking at Ex-TAC revenue:
------------------------------- Quarter Ex-TAC YoY Growth ------------------------------- 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 -------------------------------
Ex-TAC revenue increased 65% QoQ, partly aided by favourable currency movements. The strength of the US dollar helps them because Americas is their fastest growing geography. The growth was about 52% in constant currency, again nothing to sneeze upon.
The Americas growth rate was 114% and contributed about €40M to the total Ex-TAC revenue. EMEA grew 38% to €49M, while Asia-Pacific grew 66% to €22M. Asia-Pacific is still a small pie of the overall business, but I like the growth there. I like how the Americas market is growing. This market is highly competitive but also highly lucrative.
Adjusted EBITDA grew 64%, or 60% at constant currency, to 22M€. This is pretty good as well.
Let’s next look at the client adds. 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 Q2 15.
------------------------------ Quarter total adds ------------------------------ Q1 14 5,567 --- Q2 14 6,131 --- Q3 14 6,581 ~450 Q4 14 7,190 ~600 Q1 15 7,832 ~640 Q2 15 8,500 ~730 ------------------------------
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. This was another quarter of record client adds. Solid retention rates coupled with record client adds seem to suggest that these guys are delivering value to their clients.
I like to track the average revenue ex-TAC (per client) to get a sense of the leverage obtained by adding more clients. I ‘m trying to see if the average ex-TAC/client is showing signs of flatlining, which would suggest that more clients are added but they might not be ‘high’ value clients. E.g., what is the impact of adding large versus mid-market clients? Let’s look at the numbers:
--------------- Q2 15 12.9 Q1 15 13.4 Q4 14 13.4 Q3 14 11.8 Q2 14 10.9 Q1 14 11.3 Q4 13 10.8 Q3 13 10.1 Q2 13 9.4 Q1 13 9.7 ---------------
The above don’t really point to anything that I would say is worrisome. The Ex-TAC/client slowed down in Q2 versus Q1, which is sort of similar to what happened in 2014. I would watch what happens here in the next two quarters. At some point, there wouldn’t be much more leverage to obtain from adding more clients (i.e., the average would flatline, but it’s not clear if we are already there.). Usually Q4 is a big quarter for advertising, so we will have to wait to get a sense of the ongoings.
I also look at the growth in Publisher count. Recall that ‘publishers’ are those with the ad spots or inventory. It seems their publisher market place is growing nicely. Their direct relationships went up to 11,000 publishers. They had reported more than 10,000 publishers at Q1 2015. There’s a bit of network effect going on here. Clients are receiving high value from advertising with Criteo, which possibly helps them bring more ad inventory to them, and high-quality ad inventory in turn attracts more clients. I like what’s going on here.
Ad Blocking in iOS8 has been a cause of concern. However, ad blocks have been around for ages, and it is my opinion that they are difficult to use. One key issue with any form of ad blocking tech is the ability to distinguish between functional components of a web page/app versus the non-critical components of the web page/app. This might appear to be a simple thing but is not so easy a problem to solve. Many don’t use ad blockers because solutions don’t address this problem. Additionally, we should note that this is an Apple specific concern. The question to ask here is — what percentage of Criteo’s target base are Apple iOS users? And what percentage of these users are going to use any form of ad block?
Q3 2015 Guidance
Ex-TAC Revenue = €117M (at mid-point)
Adjusted EBITDA = €22M (at mid-point)
FY 2015 guidance
Ex-TAC Revenue = €472.5M (at mid-point)
Adjusted EBITDA = €123.5M
The above implies Q4 2015 guidance of:
Ex-TAC = €139.9M
Adjusted EBITDA = €51.4M
Some of the questions in the conference call focussed on margin compression, i.e., if we look at the EBITDA as a percentage of Ex-TAC revenue, it looks like there is a trend of declining margins. My calculations have the numbers at Q1 Q2 15 - 19.7%
Q1 15 - 26.7%
Q4 14 - 33.1%
Q3 14 - 25.6%
Q2 14 - 19.8%
Q1 14 - 23.1%
The guidance implies Q3 15 margin at 18.8% and then a jump in Q4 15 to 41.6%. This trend seems consistent with what we had seen in 2014, but the expected margin expansion for Q4 15 does seem large. This could be just the way they are investing in the business. The call pointed to ongoing investments in data centres (Paris, Shanghai) and new offices (Middle East, Canada, Eastern Europe etc).
The growth in both clients and publishers is demonstrating that Criteo is gaining momentum. It looks like investments into the business is clouding the profitability. There are also some question marks from Apple’s move to allow developers to build content blocking extensions. I don’t think the content blocking issue is a big deal. Ad block tech has been around for ages, and we need to realise that much of the free Web/app experience is setup on giving something (personal data for harvesting, ads etc) and this model is unlikely to change in a hurry. I think legislative risk is the one we should be looking out for. So far, it looks like 2015 is going to be a year of investments. This was flagged in Q4 2014 and Q 1 2015, so its not something we weren’t told, but shareholders would like to see profits increase without investments I suspect the wild swings of this stock will continue for a while. I still like their long-term prospects.