CRTO Q4 and FY 2014 Analysis

Press release:…



I am going to put my concluding remarks upfront. The summary from the earnings release and the conference call come after the bottomline.

Q4 2014 was yet another superb quarter for Criteo. Throughout 2014, the company’s execution was phenomenal. Revenues increased YoY 68%. Adjusted net income for 2014 was €53M versus €11M in 2013. 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.

What else is there to like? Let’s see:

  • Criteo’s client retention rates are around 90% and it’s also adding clients at a rapid clip. This past quarter they added some 600 clients!
  • Clients are increasingly moving towards uncapped budgets. This combined with 90% retention rates point to the increasing appeal of Criteo’s offering.
  • Criteo’s publisher network is also showing healthy increases. It’s now sitting at some 9,000 publishers. It can be argued that publishers should want to work with Criteo given their ability to satisfy clients.

In 2015, the company is looking to make more investments to increase it’s 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? I estimated the current GAAP PE on a trailing basis to be about 74 and non-GAAP PE on a trailing basis to be about 50. It’s expensive when looked in isolation but very reasonable when considered in conjunction with the growth rates delivered by the company. The company provides projections for ex-TAC revenue and EBITDA numbers, so it’s a bit hard for me to come up with forward estimates of earnings. Sorry, I ‘m lazy and not willing to do that more work than I have to, so I instead look at what the analysts are modelling. This company has been crushing estimates for a while, so I figure analysts estimates might be a reasonable starting point anyways. Looking at analyst estimates over at Yahoo and MarketWatch, it appears analysts are looking at EPS growth of about 40% for the year, putting the full year non-GAAP eps at around $1.05. This lines up with the company’s guidance of 40% EBITDA growth projections for 2015. So on a next twelve month basis, the adjusted forward PE (estimate) is 40. Again, not bad at all for a company demonstrating nice growth and technology advantage.

I have been slowly building up this position. I now have an above-average sized position. I had some cash available for deployment, this would be one I would certainly look to add some more.

Financial Highlights

o Revenue in the fourth quarter 2014 increased 71% (or 69% at constant currency1) to €233 million, compared with €136 million in the fourth quarter 2013. Revenue in the third quarter 2014 increased 70.9% (or 71.9% at constant currency1) to €194.4 million, compared with €113.8 million in the third quarter 2013. A few obvious points here. One, I like how they are maintaining the revenue growth run-rate around 70%. Two, I also like how they are seeing nice sequential growth.

o Revenue for fiscal year 2014 increased 68% (or 70% at constant currency) to €745 million, compared with €444 million in fiscal year 2013. That’s pretty solid growth in revenues.

o Revenue excluding Traffic Acquisition Costs, or Revenue ex-TAC, in the fourth quarter 2014 grew 76% (or 73% at constant currency) to €96 million, or 41.4% of revenue, compared with €55 million, or 40.4% of revenue, in the fourth quarter 2013. Revenue Ex-TAC was €77.6 million in Q3 2014.

o Net income in the fourth quarter 2014 increased by €14 million to €18 million, compared with €3 million in the fourth quarter 2013. Net income for fiscal year 2014 increased by €34 million to €35 million, compared with €1 million in fiscal year 2013. Again, we need to remember that net income is growing off a small base so the growth rates will come down over time. Here, I think sequential growth is interesting to look at. Net income in Q3 was €11.5 million, so we still got about 56% sequential growth.

o Adjusted Net Income for the fourth quarter 2014, or our net income adjusted to eliminate the impact of share-based compensation expense, amortization of acquisition-related intangible assets, acquisition-related deferred price consideration and the tax impact of these adjustments, was €23 million, representing a €16 million increase compared with €7 million in the fourth quarter 2013. Adjusted Net Income for fiscal year 2014 was €53 million, representing a €42 million increase compared with €11 million in fiscal year 2013.

o For fiscal year 2014, cash flow generated by operating activities increased 255% to €88 million, compared with €25 million in fiscal year 2013.

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 €30 million in the fourth quarter 2014, an increase of €25 million, compared with €5 million in the fourth quarter 2013. Free cash flow for fiscal year 2014 was €52 million, an increase of €49 million, compared with €3 million in fiscal year 2013.

o The company is nicely cashed up. Total cash, cash equivalents and short-term investments were at €290 million as of December 31, 2014. This represents an increase of €55 million compared with December 31, 2013, primarily the result of €52 million in free cash flow generation over the period and proceeds from capital increases of €24 million, including €16 million in net proceeds from our follow-on equity offering in March 2014. This was offset by the €19 million cash consideration for the acquisitions of Tedemis S.A. and AdQuantic SAS, in February 2014 and April 2014, respectively.

o Let’s look at the valuation before delving into the operational highlights. The fully diluted share count was around 68.5M. Based on this, we get:

  • GAAP EPS (TTM) of €0.52
  • Non-GAAP EPS (TTM) of €0.78.
    At the end of Q3, I had estimated the GAAP and non-GAAP TTM EPS to be €0.31 and €0.53, respectively.

As I write this (6 March 2015), CRTO’s stock was at $42 or about €38.7 based on today’s exchange rates. We can calculate P/E as:

  • PE (GAAP) = 74
  • PE (Non-GAAP) = 50
    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 They added more than 600 clients this quarter, their highest in their operational history! This compares with about 450 clients added in Q3. Total client base grew to 7190 from around 6600. 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 Q4 with those in Q3. The total client count in the past 4 quarters:
Q1: 5,567
Q2: 6,131
Q3: 6,581
Q4: 7,190
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.

o In 2014, they grew the post click sale of their clients by 77%. Outstanding! The more sales they can generate for their clients the more clients will stick around and new ones will come aboard.

o Total publishers in the fold is now over 9,000. They added more than 900 publishers in Q4. Recall that ‘publishers’ are those with the ad spots or 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.
They also have got deals with local real-time bidding platforms in China, Russia, and Korea.

o Their mobile and multi-screen solution rollout is nearly completion. In Q3, 73% of their clients were using their multi-screen solutions. Q4 saw that number rise to 80%.

o As noted in my Q3 review, 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 114%.

o Here’s another way to look at their ability to generate more from existing clients.
In Q4 our revenue ex-TAC per clients increased 24% mainly driven by significant growth from existing clients. Put differently, our Q4 2013 clients that were live with us in Q4 2014 generated 37% more revenue ex-TAC compared to the prior year. Our ability to convert a very large portion of our clients to uncapped budgets is also key driver of this growth in the revenue ex-TAC per clients.
This more revenue from existing client cohort is showing us how relevant the technology is for the people using it.

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

(1) Native mobile ads on OSN platforms. In Q4, they were working with Facebook to develop a solution for their in-app inventory. The first in-app advertisements were delivered in Q4 2014 and they are looking to scale this up in 2015. This can be very exciting, given Facebook has a huge user base.

(2) Cross device solution. 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.

(3) They continue to work on improving their prediction technology. Their next-gen solution is predicting the likelihood of sales and the value of the sales basket. This is another useful parameter for ad placements. Version 1 of this solution was release in Q4, with rollout to about 10% of their clients.

(4) Criteo offers its solution in 70 markets. In 2015, they will look to further expand their US presence and also penetrate other emerging markets such as LATAM, Russia, and China.

Guidance for 2015

o Expect to continue investing in R&D and sales & marketing. Another year of strong investment into the business. 2014 was a big year in terms of EBITDA margins, but the company says that we shouldn’t consider this margin improvement to be the new norm given they want to invest heavily into the various programs noted above.

o Q1 15 ex-TAC is expected to be between €96M and €99M. At mid-point, ex-TAC growth is about 55% versus Q1 14. However, at the mid-point this reflect zero growth with respect to Q4 2014 possibly because Q4 being the holiday quarter. I ‘m not sure about this and there were no question re. this in the conference call.

o FY ex-TAC is expected to be between €433M and €440M; roughly 44% growth with respect to 2014. The ex-TAC growth was about 68% between 2013 and 2014 but some slowdown should be expected as the company grows.

o Q1 Adjusted EBITDA between €19M and €21M. FY is expected to be between €108M and €115M. This was about €79M in 2014, reflecting about 40% growth at the mid-point. Again, some slowdown should be expected because the company was coming out of a small base in the first few years.