Understanding Criteo Part III - Q3 2014 Update

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.