Criteo S.A.
Q2 2018 Earnings Call Transcript

Published: 1 Aug 2018

[Operator:]

Good morning, and welcome to the Criteo Q2 2018 Financial Results Conference Call. [Operator Instructions] And please note, this event is being recorded. I would now like to turn the conference over to Edouard Lassalle. Please go ahead.

[Edouard Lassalle:]

Good morning, and welcome to Criteo Second Quarter 2018 Earnings Call. With us today are co-founder and CEO JB Rudelle; and CFO Benoit Fouilland. During the course of this call, management will make forward-looking statements. These may include projected financial results or operating metrics, business strategies, anticipated future products and services, anticipated investment and expansion plans, anticipated market demand or opportunities and other forward-looking statements. Such statements are subject to various risks, uncertainties and assumptions. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements. We do not undertake any obligation to update any forward-looking statements contained herein, except as required by law. In addition, reported results should not be considered as an indication of future performance. Also, we will discuss non-GAAP measures of our performance, the definition of which, and the reconciliations to the most directly comparable GAAP financial measures were provided in the earnings release published earlier today. Finally, unless otherwise stated, all growth comparisons made in the course of this call are against the same period in the prior year. With that, I now turn the call over to JB Rudelle, CEO of Criteo. JB?

[JB Rudelle:]

Thank you, Edward, and good morning, everyone. As you have seen, we have closed Q2 with a combination of modest growth, increasing profitability and cash generation. Despite the headwinds we have been facing, we think these solid results highlight the strengths and resilience of our model. So during this call, I would like to cover 4 important topics

[Benoit Fouilland:]

Thank you, JB, and good morning, everyone. I will walk you through our Q2 performance and share our guidance for Q3 of 2018. Revenue was $537 million. Revenue ex-TAC, our key metric to monitor performance, grew 2% at constant currency to $230 million. This growth was primarily driven by new clients, both large and mid-market, and was achieved despite a significant headwind the user reach limitations in Safari had on our business with existing clients, in line with our expectations. Using the ForEx assumption imply, in our Q2 outlook, revenue ex-TAC was $234 million or $4 million above the higher end of our guidance. Compared with Q2 2017, changes in ForEx represented a tailwind of over 200 basis points to revenue ex-TAC growth, about half of what was assumed in our guidance. Looking at our operating highlights. We added over 400 net new clients in line with our plan, bringing total client count to 19,000, while maintaining retention at close to 90% for all products. Before the impact of discontinuing prior products, this represented 500 new clients net of churn, an acceleration compared to Q1. We are making progress building our self-service platform for mid-market, which we expect to be live in the first half of 2019. By then, we expect to return to higher growth in client additions. Same-client revenue ex-TAC decreased 3%, compared to flat growth in Q1, entirely driven by the user reach limitation in Safari. Excluding the impact of these limitations, we estimate the same-client revenue ex-TAC increased approximately by 11%. Revenue ex-TAC from all non-retargeting products altogether, including Criteo Customer Acquisition, Criteo Audience Match and Criteo Sponsored Products increased 72% year-over-year. We accelerated our business in apps, a strategic area for us where we do not rely on cookies to access user data. We significantly reduced the time to integrate at retargeting and are now on par with the best players in the industry. This led to accelerate the deployment of app retargeting with our in-app business growing 38% on a revenue ex-TAC basis. Last, we continue to increase our direct access to publishers. As the number of partner deploying - partners deploying Criteo Direct Bidder increased to over 2,300 publishers, up from 2,000 last quarter. Turning now to regional performance. In the Americas, we grew revenue ex-TAC 4% at constant currency, including 8% in the U.S., driven by the strengths with both large and in-market clients and the continued ramp up of our U.S. products in the region. EMEA revenue ex-TAC decreased 1% at constant currency, in line with expectations, driven by external headwinds in our business with existing clients, and short-term disturbance related to the implementation of our new go-to-market model across the region. In APAC, we grew revenue ex-TAC 6% at constant currency. The strong business in Korea and India, particularly in-apps offsets weaker-than-expected performance in Japan. For the second half of the year, we are taking a more prudent stance on our APAC growth. 2 factors explained the slowdown. We are having a change of senior leadership in the region and the Japanese mid-market business is performing below our expectation, in part due to higher attrition in the sales team. Revenue ex-TAC margin improved 230 basis points to 42.9%. Similar to Q1, the margin improvement was largely driven by the increased share of mobile app supply, a large portion of which we purchased at the lower cost than expected. We view this margin level as high and expect it to normalize over time. Moving to expenses. Other cost of revenue decreased 9%, excluding the one-time charge in Q2 2017, related to the restructuring of our domestic business in China, other cost of revenue decreased 1%. Operating expenses grew 1%, reflecting a stable headcount over the period. In line with prior quarters, headcount-related expenses represented 76% of GAAP OpEx. We ended the quarter with close to 2,700 employees, somewhat lower than expected. The slower headcount growth can be attributed to three factors

[Operator:]

[Operator Instructions] Our first question today will come from Andy Hargreaves of KeyBanc. Please go ahead.

[Andy Hargreaves:]

I just wanted to sort of clarify a little bit, because I'm a little bit confused given the uncapped nature of lot of your clients' budget, how the change in hiring impacts the revenue so materially? And maybe just as part of that, is there an incremental impact in the guidance from the changes to ITP Apple made and - or that they announced?

[Benoit Fouilland:]

So there is no incremental impact that is assumed from ITP or GDPR in the guidance. The guidance - the revision in guidance is primarily driven by the transformation that the JB has described during his prepared remarks. And the hiring delay has an impact obviously that has the ripple effect in the second part of the year on the new business and the fact that we have been 200 people on average below our hiring approximately in H1, is going to impact our ability to maximize the opportunity for new business in the second half.

[Andy Hargreaves:]

Okay. And then in 3-year target for non-retargeting revenue to grow to 30% of rev ex-TAC, does retargeting stay flat or it will - or grow?

[JB Rudelle:]

We are not giving the breakdown right now exactly of how this is going to be translating into actual numbers. The idea is that we want to have a more balanced business with much broader portfolio of products. And as I explained, as we move from being a point solution to being a broad strategic platform to our clients, very naturally, we should see many other products that we are targeting to become a key part of the portfolio. And - but we need to answer your question, we feel very good about retargeting itself. So it doesn't mean - it's not because we are expanding new products that we are targeting, it's not - we are not investing or retargeting. This is a big money machine and it's going to keep going.

[JB Rudelle:]

And what I would add is, we are looking at the reacceleration, especially in the second half, as we have indicated in the prepared remarks, including obviously, for the core retargeting business.

[Operator:]

Our next question will come from Aaron Kessler of Raymond James. Please go ahead.

[Aaron Kessler:]

Couple of questions. First on Europe that seemed to be a little lower than we expected. How much - can you help me quantify GDPR? And was there anything else that was weighing on Europe? We saw a couple of other companies thus far report weaker Europe results also, quarter. And then if you guys clarify the increasing revenue ex-TAC margins in the Americas business? Didn't catch that completely on the call.

[JB Rudelle:]

So for Europe, as we mentioned, the GDPR impact has been very modest and within our expectation. And as you can expect, it's highly concentrated in Europe, by definition. GDPR is something in your brand, so any impact from GDPR that is going to translate into the numbers, will be, to a very large extent, concentrated in Europe, for sure.

[Benoit Fouilland:]

And what I would add also on Europe and in GDPR was, in line with our expectations, slightly - in fact slightly better than our expectations, what has also had an impact on the EMEA is the short-term disturbance related to the implementation of the new go-to-market model, especially in EMEA, as we have multiple markets that we operate. With respect to the second question, on the rev ex-TAC margin. As I explained, we are - we have been running at the rev ex-TAC margin, overall, on the global basis, but it's also valid in the Americas, and that has been higher than the traditional level, it's partly due to the increased mix of apps supply that we buy at a lower CPM than anticipated. We would expect this normalize over time, not necessarily in the very short time, but over multiple quarters.

[Aaron Kessler:]

And then finally any thoughts on 2019? I think you indicated before kind of double-digit growth 2019, and that change is now given your updated '18 guidance?

[JB Rudelle:]

What we have indicated on the call today is that we were working towards a return to double-digit growth in the second half of 2019.

[Operator:]

Our next question will come from Doug Anmuth of JP Morgan. Please go ahead.

[Doug Anmuth:]

I have a couple. First just on ITP, obviously, you have helped us walk through the past year, but just trying to understand where we are now in terms of financial impacts? And it feels like we are about to lap since here - are we still seeing deterioration? Or are we at a baseline kind of level at this point? And then second, I'm trying to understand why some clients want to move from a CPC to a CPM basis? Is that existing clients or is it more a newer set of clients to potentially reach out to? And then when you think about how the business is changing, anything about what the economics will look like a year out in the new configuration, as you are competing with Amazon more, becoming more of this open platform for advertising and at different pricing structures?

[Benoit Fouilland:]

Shall we start with ITP?

[JB Rudelle:]

Yes.

[Benoit Fouilland:]

So I can cover ITP quickly and then JB will cover the rest. On ITP, I mean, we have seen the impact in Q2 was pretty much as expected, 14 percentage point of growth was the impact in Q2. I mean, we are at a point where, in term of rollout of the solution, we are close to the peak of the rollout, we have not yet reached the peak of the rollout. It should be some times in Q3. So we should see the impact plateauing. And obviously, as we go out of Q4, all of that would we included in our base.

[JB Rudelle:]

So regarding the change in pricing. So this is not for retargeting. Retargeting - I think we defined market practice, which is not - now widespread on the CPC and the clients are very comfortable with that. This is mostly for our new and promising acquisition product that we call CCA, Criteo Customer Acquisition, where we realized that where our clients are measuring things, is - it's different from retargeting. They want to see the value of the click, but also the value of the view. So by charging cost-per-impression, we suggest them that then they have a better way to measure this by including both the click and the view, which is opening the door for new type of inventory, like video. As you know, so far, video is representing very, very, very small amount of our inventory. And it's obviously something we intend to change in the future, particularly as we go up and final - and scale this acquisition product. And we have very strong appetite for clients, for the - they all want new clients. So this is something we are putting a lot of effort in. So regarding the impact of Amazon, that's interesting. It's something very favorable for us, because if you use a goal that we are trying to educate the market about the value of monetizing the data, they would say okay, and some of them would do things with that, but it was all actually low on their priority list. Today, it becomes much more strategic and very hard topic, not only because it's opportunistically a very interesting new line of revenue for them, with actually no cost, but also because they realize that Amazon is running their core retail business with very little, like no margin, and making margin on new type of businesses, like advertising. And as they want to compete with Amazon, that - they realize that it's very important to - own their own, to have additional margins on this advertising business. So overall, it makes our conversation with our clients much more strategic and creates a lot of momentum. And some very big names in the U.S. that's - were very hard to get the attention, now we are getting meetings and really up into their organization, because it becomes very strategic for them.

[Operator:]

Our next question will come from Charles Bedouelle of Exane.

[Charles Bedouelle:]

Just to clarify on the change in the guidance around the revenues in the hiring delay. So first, we have seen, let's say, 11% like-for-like growth in the existing clients ex ITP, which is probably slower than what you had. What do you imply roughly in your H2? So that we can see what's the split between less new clients and lower activity of existing clients? And the second element I just wanted to clarify is, with your hiring delays, how much is due to the fact that you are struggling to hire? How much is due to the fact that the management has been busy, may be reorganizing and thinking about a new option? And how much is it may be due to the fact that you are seeing some lower, maybe revenues and so you are may be being slower in hiring? Or is it really a hiring delay, or is it a voluntary hiring delay?

[JB Rudelle:]

So I will take the second half and I will let Benoit jump for the first half of the question, on the hiring delay. To be fully transparent, end of last year, in Q4, when we got hit really hard by ITP, we kind of, I wouldn't say, freeze, but slowed down and reduced the size of our hiring machine. And one of my first priorities, when I came back, was to reinitiate this hiring process, but it takes time. There is a lag, because first, you have to hire staffers. You have to hire the hirer before they can hire all passionate people. So that you - and we had also a change into our HR leadership. And I had to adjust and have a new Head of Staffing stepping in. So all those changes are taking a little more time than what we expected. I was hoping our hiring machine will restart faster. But next time, you have to - as I said, you have to get the staffers in and then they need to find the people, we need to recruit them and then you need to get them onboard and then you need to train them before they are fully operational. So there is always a couple of quarters to get at full speed once you press the button.

[Benoit Fouilland:]

So regarding the guidance, why doesn't - dissecting all of the assumption behind it, I think, maybe it's worth mentioning what are the primary reasons why we revised the guidance. I mean, there are basically 4 main reasons

[Operator:]

Our next question will come from Sarah Simon of Berenberg. Please go ahead.

[Sarah Simon:]

I have got a couple of questions. First of all, in terms of GDPR, I'm just interested as to whether you are saying - you mentioned, a stricter approach with some of the publishers, who obviously have influence on other publishers, I'm just wondering, if you are saying anybody changing their position? That's the first question. And the second one is on the margin in - your revenue ex-TAC margin in Europe, have you seen any benefit from people kind of self-selecting out by saying no to cookies? And then the second one was just - you just referenced repositioning of Criteo Sponsored Products, and I’m sorry, I missed what are you doing there?

[JB Rudelle:]

Okay. So on the GDPR, as I said, there is a small fraction of publishers that probably under the influence of their legal team have taken an approach, which is, we believe, very rigid and not the spirit of the law. Very practically meaning what does it mean, when you go on their website in Europe, usually you just see a new [indiscernible] but you can browse, it's okay. In some rare cases, the whole site is frozen, and the only way you can browse on the website is you have to go through a very intrusive opt-in process on your data, which is way, way beyond any recommendation of the data privacy agencies. And I would say most of those outliers are subsidiaries of American publishers, where probably the European operation is very small compared to what they are doing in U.S. and they take a [indiscernible] stand, because it's - yes, probably in the U.S. they'll see this from a - from the long distance and it's harder for them to adjust. We believe that either most of them they are going to adjust or their visitors will go to other websites, as plenty of that - and we have seen this happening that some U.S. players completely shut down their European website due to GDPR, which we think it's kind of extremist and reduced, but it's benefiting to local publishers. So overall, it's going to be a redistribution i think of the traffic among publishers. And the ones taking a pragmatic approach will be the winners. Regarding the margin, I will - I like your idea that selecting people creates a better engagement. This is something we are trying to implement into smarter concept management. But I would say, this [indiscernible] impact you are seeing as - on our revenue has been - like I explained, is mostly coming from the - from this in-app inventory, where we get better economics than other type of inventory, which happened to be where we are going the fastest. You asked a legit question on CSP also. So CSP, that's interesting. This is a Criteo Sponsored Product. When we came into the market two years ago, once more, it was not a very strategic topic for our retail partners. So let's say, okay, we are happy to test this, but why don't you go to the brands and try to monetize them and yourself. And where to put together so-called a grand team to go after the grand budgets and try to convince them to spend their money on the website of our retailer partners. Now today, increasingly in the past six to 12 months, that - wait a minute, this is like super-strategic for us, we should have our own sales team going and you guys should be the technology platform for us. And we are like, wow, we are more than happy to do this. And so we are translating, but it's a different business model where rather than offering this full solution including the sales team, we become what we really are, a technology partner, a technology providers, offering the platform and letting them doing their own monetization, at least the biggest ones. And this change in pricing, it's something new for Criteo. We are a company that used to sell clicks and now we are selling a platform solution, as a technology provider, a bit like a SaaS thing. And adjusting into this new pricing, it takes a lot of time. And this is why in the short term, as we are shifting to this new market dynamics, which is very exciting, it's creating some short-term delay into the growth of CSP.

[Operator:]

The next question will come from Tim Nollen of Macquarie. Please go ahead.

[Tim Nollen:]

Couple of things please. There is been quite a bit of discussion on hiring delays and so forth in this call. You haven't talked so much about your efforts that you have spoken of before on building out kind of a platform for mid-market kind of self-served clients, I wanted if you can talk a little bit about that, please? And then, could you discuss a little bit about your acquisition today? I think a lot of us have been waiting on hearing what you might do with your cash? And this looks like a small deal? Is this one of perhaps more to come? And then could I slip in a last question, please. A lot of discussion on GDPR, pleased to see that that's not been such a problem for you. I wanted if you could say something more about any updates to the ePrivacy legislation or the California regulation, which has just been announced?

[JB Rudelle:]

So, yes, it's true that we didn't talk about [indiscernible] the - we are making big efforts in the mid-market to include 2 things

[Benoit Fouilland:]

So I think there was also a question on the California. Please go ahead.

[JB Rudelle:]

Yes, I like this, because California is kind of following the path of GDPR. So all the experience we are learning with GDPR, we are going to be at the forefront for the U.S. And as we see increasing opportunity to be the expert in concept management for our clients, the experience we are building in Europe, we are going to be able to do this for the U.S. and we are excited to see the U.S. following the same path.

[Edouard Lassalle:]

Thank you JB.

[JB Rudelle:]

Thanks.

[Edouard Lassalle:]

That concludes the earnings call. We would like to thank you, everyone, for attending today. And the IR team is available for any follow-up you guys may have. Thank you all and have a great end of day.

[Benoit Fouilland:]

Thank you.

[Operator:]

Ladies and gentlemen, this conference is now concluded. And we thank you for attending today's presentation. You may now disconnect your lines.