Edouard Lassalle - Vice President of Investor Relations JB Rudelle - Chairman and Chief Executive Officer Benoit Fouilland - Chief Financial Officer.

Andy Hargreaves - KeyBanc Capital Markets Aaron Kessler - Raymond James Doug Anmuth - J.P. Morgan Securities Inc. Charles Bedouelle - Exane BNP Paribas Sarah Simon - Berenberg Bank Tim Nollen - Macquarie Capital Inc..

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..

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?.

first, as we evolve into a platform company, we need to adopt our go-to-market strategy. Our multiproduct solutions require a more granular segmentation of our clients, which itself requires to reshuffle our resource allocation to better serve each segment of clients.

This transformation also involves a different hiring plan that will include bringing on new people with complementary skill sets that the one we currently have. So far, our new headcount has been behind planned. And we intend to accelerate hiring in the second half of the year.

Though, we do not expect to fully catch up on our hiring delay by end - by year-end. The adjustments we have made to assess team, coupled with our delayed hiring, represents a large driver of our reduced growth in the second half of the year.

For large clients, not having enough of the right sales people, capable of selling our strategic platform, is restraining our growth. For mid-markets, making sure we have enough incisive people in seats is also critical to achieving our goals.

As a matter of fact, we have made recently a leadership change on our staffing group, that we expect will accelerate our ability to efficiently onboard sales people, so again, achieve those goals. Additionally, we expect that the sales team realignments we have made will begin to bear fruits earlier next year.

The second element of our transformation involves our product roadmap. To accelerate on this front, I step into the role of Chief Product Officer, in addition to my CEO role. With this, I should be hopefully able to head the organization, integrate much faster to seek new market opportunities in front of us.

For instance, although Criteo has historically sold its product exclusively on a cost-per-click basis, we have begun to receive clients requests to price some of our new products on a cost-per-impression or other types of variable fees.

And there is no sacred cow at Criteo, nothing is forcing us to have all of our products sold exclusively on a cost-per-click basis. So we have included this feedback into our roadmap, and we should be able to offer much more flexible pricing options for our new products to our clients by the beginning of next year.

This delay in our adjusting to how our clients want to consume our solution, is a second driver behind the lowering of our near-term outlook. Our company-wide transformation will not be completed overnight. And we anticipate it will last approximately 6 to 12 months. I will, of course, share more details with you as we progress in the coming quarters.

And I'm confident, it will set up us well to achieve our strategy goals over time. Speaking of which, I would like now to say a few words on the future of Criteo. Our vision is to be the advertising platform of choice for the open Internet. Through this vision, we'll create value for advertisers, consumers and publishers or like.

For advertisers, that means driving enhanced advertising performance across their full funnel, combined with transparency, monetization and self-service capabilities as a platform. For consumers, that means relevant product recommendations with engaging creatives, while benefiting from user-friendly concept management capabilities.

And for publishers, this means reaping the benefits of direct access to advertiser demand at scale, to effectively control the monetization of the inventory, while not getting trapped into walled gardens. We'll execute our platform vision with the combination of organic investments and targeted acquisitions.

On the organic front, as you may have heard, we recently announced a EUR 20 million investment in the Criteo Artificial Intelligence Lab in Paris, to define the advertising technologies of the future.

This ambitious, multiyear plan in next-GEN deep learning will not yield immediate results, however, we expect it will become a core component of our future performance in the coming years. On the acquisition front, today, we just signed a small-sized acquisition called Storetail to further accelerate the rollout of our new monetization platform.

This 60-people company based in France, it will enable retailers to tap into very significant trade marketing budgets from brands by monetizing native media placements on their e-commerce websites on a cost-per-impression basis, and expand this all across the Internet.

While having no material revenue contribution at closing, the addition of Storetail solution would expand very significantly our opportunity for data monetization.

As a matter of fact, based on feedbacks from large retailers we discussed with, we are hearing that the market for audience selling to brands on the cost-per-impression basis is several times bigger than the market for our existing cost-per-click sponsored product.

Storetail also bring us a very meaningful footprint of large food retailers in France, the sector complementary to existing verticals. We expect the deal to close in the third quarter of this year.

Looking forward, overall, with our multiproduct platform, we believe, we can grow our non-retargeting business from the current 6% of revenue ex-TAC to 30% over 3 years.

Before I let Benoit go into details of our Q2 results and discuss the guidance in more details, I want to reiterate that my top priorities as a CEO, is to ensure that the steps we are taking now and the adjustments we are making are paving the way to reaccelerate revenues in the coming years. With that, I will now happily turn the call to Benoit..

first, the sale of HookLogic Travel, combined with the restructuring of Criteo Predictive Search last year, accounting for a reduction of about 50 employees. The transformation of our go-to-market model, coming with a reshuffling of resources on the need for adding different profiles.

And third, continued hiring delays, in particular in the mid-market. We are working on accelerating the hiring process across the organization, in particular in our Boston and Barcelona mid-market hubs, and believe hiring will pick up in the second half. On a non-GAAP basis, operating expenses decreased 1% to $147 million.

In 2018, we did not hold our Global Employee Summit and on an apple-to-apple basis, non-GAAP OpEx grew 4%. On a non-GAAP basis by function now. R&D expenses grew 7%, in line with investment plan and largely driven by the 6% increase in headcount to over 680 employees. We expect to grow R&D expenses in H2 2018.

Sales and operation OpEx decreased 8%, slightly below our plan. This was driven by a 4% decrease in employee headcount to over 1,500, including 700 quota-carrying employees. After the sale of HookLogic business and the Search restructuring. We expect our sales and operation headcount to increase in the second half.

And G&A expenses grew 8%, driven by a 4% increase in headcount to 470 employees. Excluding a one-time expense relating to the change of our prior CEO, G&A expenses grew 4%. While the trend in expense growth shows effective expense management, we did incur about $5 million of temporary savings compared to our expectations.

The majority of these savings relates to delayed hirings, which we expect to partially reverse in the second half. However, we do not expect to have fully caught up with our hiring delay by the end of the year. Moving to profitability. We grew adjusted EBITDA 20% at constant currency to $69 million.

Adjusted EBITDA margin improved 530 basis points to 30% of revenue ex-TAC. As in Q1, the reported effective tax rate was 37%, based on the conservative 37% projected income tax rate of fiscal year 2018. However, pending clarification of interpretation of the U.S.

tax reform as well as the impact of our ongoing tax structuring plan, we believe the projected tax rate for the year could go down by 3 to 5 percentage points. Net income increased 96% to $15 million and adjusted net income per diluted share increased 36% to $0.53.

Cash flow from operations decreased 33%, due to one-time negative changes in working capital, after a favorable timing of accounts payable in Q1 for approximately $23 million. This momentarily drove transformation of adjusted EBITDA into cash flow from operations to 59%, compared to a normalized 80%.

CapEx decreased 34%, driven by delayed cash out of investments committed in Q2. Going forward, we continue to expect CapEx to represent slightly less than 5% of revenue in 2018. Free cash flow decreased 33% to $22 million.

For the first 6 months, free cash flow increased 51% to $74 million, representing 51% of adjusted EBITDA or above 10 points above the historical average. Finally, cash and cash equivalents increased $66 million from the end of 2017 to $480 million - $66 million, yes, despite a $14 million negative ForEx impact on our cash position.

I will now provide our guidance for the third quarter on fiscal year 2018. The following forward-looking statements reflect our expectation as of today, August 1, 2018. In Q3 2018, we expect revenue ex-TAC to be between $218 million and $223 million.

This implies constant currency growth of minus 5% to minus 3%, and assumes that year-over-year ForEx changes will positively impact reported growth by about 160 basis points. And we expect Q3 2018 adjusted EBITDA to be between $61 million and $66 million.

In light of the lower revenue outlook for 2018, we have adjusted our variable people expenses assumption for the year. This translates into $4 million lower expenses in Q3 compared to Q2. For 2018, we are adjusting our revenue ex-TAC growth outlook to be between minus 1% and plus 1% at constant currency.

We expect ForEx changes to impact positively the 2018 reported growth by about 160 basis points. In parallel, we are increasing our guidance for the adjusted EBITDA margin in 2018 to between 30% and 32% of revenue ex-TAC.

This translates into an increase in implied adjusted EBITDA of about $4 million, as compared to the prior guidance, despite a reduction in revenue ex-TAC of about $50 million, suggesting disciplined expense management despite a continued hiring delay.

Our guidance for both the third quarter on fiscal 2018 does not include any contribution from the acquisition of Storetail. The ForEx rates assumed in our guidance for the third quarter and for fiscal 2018 are included in the earnings release that we published earlier today. With that, we will now take your questions..

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

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?.

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..

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?.

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..

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..

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

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..

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..

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..

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?.

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..

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

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?.

Shall we start with ITP?.

Yes..

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..

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..

Our next question will come from Charles Bedouelle of Exane..

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?.

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..

the first one is obviously, we are assuming a slower growth in APAC, which is mostly related to Japan. As we have said on the call, we have a leadership change in the Asia-PAC. And we are also - we have also mid-market business that is performing below our expectation in Japan, primarily due to attrition.

So we are working on correcting this, but I have been taking a freedom stance. Hiring delay, which has been a big topic, discussed, has an impact on the new business in H2.

We have a change in HR leadership going on, as we speak within the company, to address that particular hiring delay, but we do not plan to catch up fully before the end of the year. And our new go-to-market strategy is also driving some short-term disruption in the resource reshuffling.

So finally, I would say that CSP, as we are going to reposition the offering on CSP also is, we are slightly below our expectation on CSP and more prudent on the second part of the year. So all in all, these are the reasons, why we have been revising the guidance.

What I want to insist on is that we are confident that past the end of the year, we should see a rebound and with an acceleration to double-digit growth in the second part of next year..

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

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?.

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..

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

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?.

one is automation and two is self-service capabilities for our mid-market clients to be fully autonomous in the way they interact with our platform. And this is one of those projects that I love, because it's kind of a no-brainer and a sure win. When you increase automation and you increase productivity, and this flows directly to the bottom line.

So this is a project that is a high-priority for us, because the gains we have are obvious and sure. We have other bets, which are more speculative. When we try to enter the new area, there is always a risk that we are not going to find the magic formula. But these are - this is the type of bets that are our assurance.

So you are absolutely right, this is something, which we are pursuing. And by the end of this year and exiting 2018 and getting in 2019, you should start to see some very meaningful benefits, both in terms of reacceleration, hopefully of net new addition of clients, and also the overall dynamics of - and the economics of our mid-market business.

Acquisition, as I explained, we are morphing into this platform solution and being much more strategic to our clients. We are identifying gaps into our product portfolio. One of those gaps was the ability to monetize native placements on the website of our clients for brand advertisers. And this Storetail acquisition is fitting exactly well this piece.

And this - you should see more coming in this period. So Storetail today is purely a French business. But the first thing we are doing now is bringing them to the U.S., as we are having strategic conversation with the top 10 U.S. retailers. They are all asking for this specific functionality.

And our sales teams were banging their heads saying we want this product. And we knew if we take some time to build it internally, so we thought, let's accelerate and acquire this capability.

So we can grab land very quickly, especially now that those clients, they are with the right spirits, they want to make a decision in the coming months of other strategic partners, so we need to be here to offer the full solution. So you should see more acquisition, it's relatively modest one, yes.

We would not necessarily want to do only huge ones, but one which fits very nicely as a complement of our product portfolio. Third question regarding ePrivacy. So ePrivary is the next-generation after GDPR.

So as you know, it's still in discussion and it's going to be a long way before this gets into reimplementation, at the best, end of next year and could probably be even later. Right now, it's going into the right direction.

And we have seen from the last iteration, we are getting increasingly positive that ePrivacy is taking the best of GDPR in a very pragmatic approach. And I think the whole spirit there is that you want to do right thing with a user that without creating a hellish nightmare in terms of concept management..

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

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..

Thank you JB..

Thanks..

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..

Thank you..

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