Understanding Criteo Part III - Q3 2014 Update

Hi all,

This is the last and final piece of my Criteo study. I looked over the recent earnings releases. Below are the notes from the most recent earnings call (Q3 2014).

Bottomline

This company is growing nicely. TTM revenue is up some 65% with respect to the same period last year. The company is profitable now; the company reported net income for 9-months ended Sept 30, 2014 of €17.7M versus a loss of €1.9M in the same period last year. I figured that Yahoo and Google finance are reporting TTM PE on an unadjusted basis. On an adjusted basis, the PE is about 60% of what it is on an unadjusted basis. The notes are below. As always, apply your eagle eyes and due diligence before taking any action based on these notes.

Anirban

Criteo Part III - Q3 2014 Conference Call Notes

Press release: http://ir.criteo.com/releasedetail.cfm?ReleaseID=880366

Conference call: http://ir.criteo.com/eventdetail.cfm?eventid=151753

Transcript: http://seekingalpha.com/article/2662505-criteo-crto-ceo-jb-r…

Financial Highlights

o 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.
o Revenue on TTM basis as of Sept 30, 2014 was €648.2M, which is up YoY 64%. That’s pretty solid growth in revenues.
o Revenue excluding Traffic Acquisition Costs, or Revenue ex-TAC, in the third quarter 2014 grew 65.8% (or 66.5% at constant currency) to €77.6 million, compared with €46.8 million in the third quarter 2013.
o Net income in the third quarter 2014 increased by €8.4 million to €11.5 million, compared with €3.0 million in the third quarter 2013. Note that this is a substantial jump albeit from a small base.
o Adjusted EBITDA for the third quarter 2014 was €19.8 million, an increase of 71.4% (or 73.1% at constant currency), compared with €11.6 million in the third quarter 2013.
o TTM net income as of Sept 30, 2014 was €20.8M; based on the diluted share count of around 68M we get TTM EPS (unadjusted) of €0.31. Note that Yahoo and other finance sites are using this unadjusted EPS when reporting PE. At share price around USD 40, TTM PE works out to be around 104.
o TTM adjusted net income is €36M, which works out to adjusted EPS of €0.53, or an adjusted PE of around 61 for share price around USD 40. Considering that revenue is growing YoY at around 65% rate, this may not be as pricey as some may think it is.

Here’s another way to look at this. The company reported net income for 9-months ended Sept 30, 2014 of €17.7M versus a loss of €1.9M in the same period last year. The adjusted net income for 9-months ended Sept 30, 2014 was €30M versus €3.9M in the same period last year, or a 7.7x increase in adjusted net income. Agreed this is coming off a small base and the 8x increase would be unsustainable but it IMO demonstrate the company’s earnings growth.

Operational Highlights

o Total clients grew by 450 to close to 6,600 clients. Recall that ‘client’ refers to those interested in placing adverts.
o Total publishers in the fold is now close to 8,000. Recall that ‘publishers’ are those with the ad spots or inventory.
o Launched mobile and multi-screen solutions, which will certainly lead the way in the years ahead. In Q3, 73% of their clients were using their multi-screen solutions.
o They are on-track to launch a new email marketing product.

o Their clients seem to be very happy with the service being provided by Criteo. How do we know?

  • Business from existing clients is contributing more and more to growth. e.g., from the transcript:
    "To put this in perspective, a year ago, existing clients were contributing only 15% of our growth. In other way to look at this is to look at the cohort of our clients that were already live in Q3 last year.

In Q3 this year, this cohort generated 31% more revenues ex-TAC. This increase in spending from existing clients was generated in all regions. In the Americas in particular, this increase was close to 50%."
o They have very high retention rate for clients, in the high 90%’s.
o Because of their performance-driven cost structure, they are able to move clients to uncapped budgets, which is another piece of the growth jigsaw.

o 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. At the end of this quarter, they had direct relationships with 8,000 publishers. The following was noted in the conference call:
“Our third driver this quarter is our continued success in growing our publisher base. We made remarkable progress in this area. We signed new RTB deals in various regions including a number of mobile only partnerships.”

o They are on track to be among the top 3 in online advertising. Latest ComScore data also revealed that Criteo personalized ads reached almost 1 billion users worldwide in September 2014.

o They are also working with Facebook on the mobile side but this relationship and what it is doing wasn’t very clear to me. I need to do some more research to figure this out.

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. Management indicated that they now have much higher liquidity in their platform for the US market (for buying and selling ads) and they believe a critical mass has been achieved to kick in the network effect of more clients and more publishers coming to their fold.

o Management also elaborated on expanding the verticals in the US market. They noted the same pattern that as Europe, where from a base of highly concentrated customer base in retail, they expanded into travel, real-estate, automotive, job boards, and telecom.

7 Likes

Thanks Anirban for the very very thorough research on CRTO. I had to fight off my impulse to buy !

My only unknown is competition with GOOGL. At this point they seem ahead in display based personalized Ad. They have some momentum going for them, technologically their secret sauce is machine learning neural network they have built over the years.

In terms of their sheer database of user data, GOOGL will always be ahead. And Algorithms or pure computer science is really the core competency of GOOGL more than anything else and they are big on AI. So the question really is how long before GOOGL catches up technologically in their display based offerings and complement it with their other offerings. May be they may not catch up, but thats a gap in my understanding today.

CRTO will win some battles in the near term, longer term I am not so sure. However even if they have to play second or third fiddle, they can sill turn out to be a profitable investment. Just that you have to live with the uncertainty.

They remind me of QLIK, which I had spent some time researching …http://discussion.fool.com/1069/understanding-qliks-competitive-… eventually (and wisely) did not invest. They had solved a few key problems, but it was only a matter of time before entrenched players catch up. The company will almost certainly still do fine, but given premium pricing the risk for late investors is higher.

2 Likes

Hi Swapsan, I also really appreciated Anirban’s incredible write-up on CRTO, did my due diligence, but I didn’t fight off the urge to buy. I actually took a small to medium sized position. You compared CRTO to Qlik, but Qlik never did get their act together and was in a different field. On the other hand, CRTO, in the last 6 quarters has more than doubled their ex-TAC revenue, and quadrupled their adjusted EBITDA (admittedly off a small base). We’ll see where they go from here.

Saul

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Hi Saul,

Yes QLIK is in a different field, but it was more of a analogous philosophical comparison of new technology entrants. A new player challenges incumbents with some competitive edge it has mustered by a technological leap in certain areas (in QLIKs’s case massive in memory databases). Entrenched players are behind, but still far bigger and have the ability to respond back or just do enough to dampen adoption or keep their bases over time. It just remains to be seen how the story unfolds.

P.S. I have not yet completely fought off my urge, I will just sleep over it a week before taking a plunge :slight_smile: Even if they end up playing second fiddle to likes of google, the market opportunity is likely be big enough for all of them. Even in search based ads googl is only 65% of the market, so there is room for others even there. For display the room for others may be more so. Someone may always be interested in their technology. (For example likes of FB or yahoo…FB for all their incredible moat due to network effect, technologically I do not see it in the same league as Google and may be interested in buying them out)

If nothing it will be my hedge to my google position, and I can play with options to minimize downside risk.

2 Likes

Hi Swapsan,

I agree with your assesment that Google is a big competititor. No doubt. But that by itself doesn’t deter smaller companies to challenge Google and other entrenched players. I think the numbers here suggest that CRTO is gaining marketshare: the number of client adds (and they have some big names here), the number of publishers, and Ex-TAC revenue are all marching upwards. This to me indicates they have a differentiated offering for both publishers and clients. As the network of publishers & clients becomes bigger they become more and more entrenched and even better at leveraging their data. Given how competitive the area is I suspect a competitor might consider just buying them instead of re-inventing the wheel.

That said, this position requires a little more attention than something like Google or Apple where a quick review of high-level earning release is often sufficient. But I also expect much higher annualized return from CRTO than I expect from Apple. So watching it and holding it while the growth story is intact.

Anirban.

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And Swapsan,

I think the following bit from the summary I posted is really key to seeing their success:
o TTM adjusted net income is €36M, which works out to adjusted EPS of €0.53, or an adjusted PE of around 61 for share price around USD 40. Considering that revenue is growing YoY at around 65% rate, this may not be as pricey as some may think it is.

Here’s another way to look at this. The company reported net income for 9-months ended Sept 30, 2014 of €17.7M versus a loss of €1.9M in the same period last year. The adjusted net income for 9-months ended Sept 30, 2014 was €30M versus €3.9M in the same period last year, or a 7.7x increase in adjusted net income. Agreed this is coming off a small base and the 8x increase would be unsustainable but it IMO demonstrate the company’s earnings growth.

The PEG ratio isn’t outrageous for the earnings growth they are showing. Anyways, I invested after doing a lot of DD and anyone investing should also do their own DD and make their own call.

Anirban.

1 Like