Good morning, and welcome to the Criteo Second Quarter 2019 Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After the prepared remarks, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would like to now turn the conference over to Edouard Lassalle, Head of Investor Relations. Please go ahead, sir..

Thank you, Keith. Good morning, and welcome to Criteo's second quarter 2019 earnings call. With us today are Co-Founder and CEO, JB Rudelle; and CFO, Benoit Fouilland. During 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. As always, 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. Today, we'll also discuss non-GAAP measures of our performance.

Definitions of such metrics and the reconciliations to the most directly comparable GAAP financial measures were provided in the earnings release published earlier today, which is available on our website. 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..

one focuses on Web, another focuses on App and Store, and the third focuses on Retail Media. We believe this new customer-centric organization should allow faster and more effective iterations on our product roadmap and go-to-market.

Second, we took this opportunity to regroup our previously fragmented operations into one single global team to support our product units with a transversal Platform, Marketing & Operation team dedicated to best-in-class services for our clients.

Third, we are bringing the Large Customers and Midmarket organizations in each of our three regions under a single regional leadership to share best practices and maximize execution. And fourth, we simplified our management layers and increased span of control. The immediate benefits are faster communication and decision making.

Overall, we are confident this new organization will bring additional momentum for our ongoing transformation. Looking ahead, we reiterate our 2019 guidance for both the top-line growth and profitability margin.

We also remain focused on executing on our key priorities for the next 18 months which are, grow adoption of self-service at scale to add new clients. Grow full funnel solutions including app install and Web Awareness and Consideration. Continue to invest in Retail Media and accelerate our transition towards transactional-SaaS.

Reinforce our identity solutions, leveraging our key assets in data management. And effectively manage our expense base to pave the way for incremental gains in profitability margin in the future In closing, despite the challenges we discussed, we feel good about our strategic direction and our ability to deliver on our plans.

As a matter of fact, to underline our confidence in the future of Criteo, I am pleased to announce a new $80 million share buy-back program. With that, I’ll turn the call over to Benoit, who will walk you through our financials and provide more color on our outlook..

Thank you, JB, and good morning everyone from my side as well. As always, I will walk you through our quarterly performance and share our guidance for Q3 and fiscal year 2019. Revenue was up 1% at constant currency to $528 million. Revenue ex-TAC, our key metric to monitor the business, increased 0.3% at constant currency to $224 million.

New client business drove our growth this quarter, especially in the mid-market, offsetting a limited decline in our existing-client business, despite continued adoption of our new solutions across the client base.

Using currency assumptions supporting our guidance, revenue ex-TAC reached $225 million before a $1.5 million negative foreign exchange impact. Compared to Q2 2018, the foreign exchange negative impact was $7 million or 3 points of growth.

Revenue ex-TAC margin declined 50 basis points compared to last year to 42%, in line with our expectations for the margin to normalize from its peaks in the first half of 2018. We grew the number of clients by 4% year-over-year to close to 20,000 and maintained client retention at close to 90% for all solutions combined.

From an existing client standpoint, same-client revenue decreased slightly less than 2% at constant currency, despite higher adoption of our new products, driven by the slight decline in retargeting because of continued softness in the Web. Same-client Revenue ex-TAC decreased slightly less than 3% at constant currency.

Turning to the regional performance. In the Americas, revenue ex-TAC declined about 3% at constant currency, including minus 2% in the U.S.

On a revenue basis, Americas actually grew plus 1% at constant currency, driven by the continued progress of Retail Media and our growing mid-market revenue, offset by limited softness in our large client business. The EMEA revenue ex-TAC growth turned positive, improving by 6 points from Q1 and reaching 4% at constant currency.

This was driven by double-digit growth in mid-market and high double or triple-digit growth in new solutions, as well as the anniversary of GDPR.

And in APAC, revenue ex-TAC declined less than 2% at constant currency, as slower business with large clients in Japan and South-East Asia offset double-digit growth in mid-market and continued positive momentum in Korea. Shifting to expenses.

Other cost of revenue decreased 3%, driven by a change in our server amortization period, savings in power consumption in our data centers and lower expenses for third-party data. Offsetting this were increased hosting costs and the provision for the French digital tax on Revenue.

We now anticipate that the digital tax in Italy and Spain will not apply before 2020, representing a favorable variance of approximately $2 million on a full year basis compared to prior expectations. On a Non-GAAP basis, other cost of revenue increased 22%.

GAAP Operating expenses are flat year-over-year, with higher headcount costs fully offsetting a lower equity awards compensation expense due to the lower stock price over the period.

In connection with our company transformation, we incurred restructuring costs of $0.7 million, including $2 million related to cash payroll and facilities expenses that were added back to adjusted EBITDA and $1 million of facilities-related depreciation and amortization expense, partially offset by non-cash forfeitures of equity awards.

We anticipate this restructuring to generate savings of about $6 million on an annualized cash expense basis. Headcount-related expenses represented 72% of GAAP OpEx, down about 300 basis points compared to Q2 last year. We ended the quarter with close to 2,900 employees, an increase of 7% year-over-year.

Thanks to stronger hiring and continued decrease in employee attrition. On a Non-GAAP basis, OpEx grew 2% to $149 million. Looking at these by function, R&D decreased 6%, largely driven by an increase in our Research Tax Credit, despite a 6% growth in headcount to over 720 R&D and Product engineers.

Sales & Operations increased 7%, driven by a 7% increase in headcount to 1,640 and a $5 million exceptional charge related to an invoicing dispute. Excluding this exceptional charge, sales & operations were flat. Sales and account strategists our so called quota-carrying employees, grew 5% to over 740.

And G&A was flat, largely driven by severance charges that were incurred in Q2 last year, and despite a 10% increase in headcount to 515 employees, including headcount transfers from other functions.

As indicated last quarter, we are effectively managing the cost base and expect Non-GAAP expenses for the remainder of 2019 to grow slower than originally planned across all functions. On the profitability side, adjusted EBITDA was over $56 million, 7% above the high end of our guidance at comparable FX, and 16% below Q2, 2018 at constant currency.

This drove our adjusted EBITDA margin to 25% of Revenue ex-TAC, down 470 basis points. As you may recall, adjusted EBITDA was particularly high in Q2 last year as we were significantly behind our hiring plan at that time.

Excluding the $5 million exceptional charge mentioned earlier, adjusted EBITDA was $62 million, 17% above the high end of guidance and driving a margin of 28% of revenue ex-TAC, down only 230 basis points year-over-year.

Depreciation and amortization expenses decreased 10%, mainly driven by the change in the useful life of our servers from three to five years, representing approximately $10 million. Equity awards compensation expense decreased 29% due to the lower stock price and equity forfeitures over the period.

Financial expense increased 35%, due to the impact of ForEx changes on our hedging positions. And our effective tax rate was 31% in line with our projected tax rate of 30% for 2019. In Q2, 2018, the effective tax rate was 37%, translating into a 34% decrease in the provision for income tax year-on-year.

The difference between the annual estimated tax rate and the effective tax rate relates to the tax impact of discrete items such as share-based compensation in the United States. Discrete items were immaterial as of Q2, 2018, resulting in no difference between the annualized estimated tax rate and the effective tax rate.

Net income decreased 15% to $13 million, driven by a 20% decrease in income from Operations and higher financial expense, despite the lower tax expense. On a Non-GAAP basis, earnings per diluted share were $0.47. Cash flow from operations increased 31% to $53 million, largely driven by positive changes in working capital and lower taxes paid.

Our transformation of adjusted EBITDA into operating cash flow remained very strong at 94%. CapEx increased 84% to $33 million, representing 6% of revenue, but only grew 12% on a year-to-date basis, reflecting a catch-up from Q1 in Q2. As a result, free cash flow decreased 10% to $20 million, reaching 36% of adjusted EBITDA, up from 33% in Q2, 2018.

And cash and cash equivalents increased $58 million in the first half to $422 million. With respect to capital allocation, our last shareholder meeting provided us, as requested, with increased flexibility around share buybacks. I'm therefore pleased to confirm that our Board of Directors has authorized a new $80 million buyback program.

We intend to execute the program over the next several quarters. I will now provide our guidance for the first -- for the third quarter of fiscal year 2019. The following forward-looking statements reflect our expectation as of today July 31, 2019. For Q3, we expect revenue ex-TAC between $219 million and $223 million.

This implies constant currency growth of approximately minus 2% to 0%. We expect year-over-year ForEx changes to be neutral to the reported growth. For the full year 2019, we maintain our expectation to grow revenue ex-TAC between 0% and plus 2% at constant currency.

Using current ForEx assumption, this means revenue ex-TAC of about $947 million to $967 million. Compared to 2018, we expect ForEx changes to negatively impact reported numbers by about $19 million or 190 basis points of growth. We expect Q3, 2019, Adjusted EBITDA between $57 million and $61 million.

As for 2019, we maintain our expectation of an Adjusted EBITDA margin of approximately 30% of revenue ex-TAC, demonstrating our commitment to profitability. As indicated last quarter, we continue to focus on effectively managing the cost base to ensure we deliver on our profitability goals for 2019 and beyond.

As usual, the FX assumptions supporting our guidance for the quarter and the year are included 281 in our earnings release. In closing, we feel good about our strategic direction, remain focused on execution and are committed to delivering – to leveraging our effective financial model to deliver healthy profitability over time.

With that, we will now take your questions..

Yes. Thank you. [Operator Instructions] And today's first question comes from Nick Jones with Citi..

Hi. Thanks for taking my question. Do you have any insight or color to how these self-registration features being received in the U.S., U.K.

and Australia? And then maybe more broadly, just how self-serve is being received by its users?.

Hi. This is JB. Thank you for your -- for the question. So the self-registration feature is very new. So it's probably a little too early to draw any conclusion. We had our first clients going through the end-to-end process with zero touch from our systems.

So just by itself this one is a pretty exciting achievement to see our first clients validating the whole process on its own.

Obviously, to scale this and for this to become a material contribution, we're going to have -- not only to have, I would say, the technical implementation of this new fix module, but also the demand generation programs, so we can fill the pipeline with that. And as we discussed before, this will come -- this will ramp up in the coming two quarters.

So it can have a material impact in 2020. Regarding other features that in terms of self-service.

As we -- as I shared during the -- during my first introduction, we already have a number of features that with a very high level of adoption, which is validating our analysis, that there is a strong appetite from the market from clients to have their hands on the keyboards. The market now is more mature than it was a few years ago.

And something which was probably a bit intimidating for them, a few years ago now, they're much more engaged. And they want to turn dice themselves..

Got it, thank you..

Thank you. And the next question comes from Heath Terry with Goldman Sachs..

Great and thanks, I was just wondering if you could give us a sense of what the changes that have been made at Google within Chrome. To what degree you're seeing that or the numbers that we've seen this quarter sort of reflect that being fully implemented. I know the general sense to the outcome was better than expected.

Just curious if that was the case in terms of what you're actually seeing. And then, as we look at the profitability in the quarter.

And the profitability guidance for the rest of the year, if you can just give us a sense for sort of what you're seeing in terms of the cost of inventory or just sort of the underlying cost of being able to -- whether it's on a CPM basis or a cost per conversion basis, sort of what's happening at the publisher end of the equation. Thank you..

Sure. Thank you. So on Google Chrome, there is no material impact that Google has done in the previous weeks. So, there is no impact on our business. So to speak, this is something we discussed at length a quarter ago.

I know there was a lot of concern in the beginning of the year about Google meeting; this brings some change that could be negative for our business. And this had put our stock price under pressure in -- during the spring time. This did not happen and our Q2 numbers don't include any particular Chrome impact.

Regarding the cost of inventory, so that's always a hard question. Because not in all inventory has the same value. And what really matters for us is, not the cost of a particular impression, but the cost of the impression we'll achieve to its value.

And one of the strength of engine is this ability to predict the value of every impression and to pay the right cost. So to look at the inventory, what we focus on mostly, what we call the win rates, which is, as you know, we are doing bidding for each impression and we are bidding against other bidders for a particular impression.

And we monitor our win rates, to ensure that we keep bidding and winning a stable fraction of the impression which has been the case. In the last quarter, we didn't see any significant change in our win rates. So overall, I mean the cost of the inventory has been quite stable. But once more, there is no real average in this space.

Every impression has its own value. And the ability of each player to determine this value is absolutely, key in the performance..

Just maybe one thing is that I would add, as you know we report, even if the average is not really meaningful as just explained by JB. We report in our Q every quarter.

What's the trend and we will confirm in the Q that will be filed in the next coming days, that we have seen a slight decrease in average CPM over the period, which is consistent with what we've seen in prior periods, a slight decrease meaning, mid-single-digits..

Great, thank you, Bob..

Thank you. And the next question comes from Tom White with D.A. Davidson..

Great. Thank you for taking my question. On your mobile app business I think you said it grew 21%.

I was hoping you could just give a bit more detail about your key inventory sources for mobile app inventory, just I'm specifically interested, in which large app publishers or networks might be garnering the bulk of that spend or whether there might be specific large app publishers and works that you don't currently tap into? And then just a follow-up on retail media.

You mentioned that retail clients are asking for a turnkey platform that factors in or incorporate brand related spend too. Just at a high level curious to hear, how you think you guys are positioned for that brand -- more branding type campaigns both from a technology and maybe personnel wise? Thanks..

Sure. Thanks very much. So mobile approximately, I mean we are applying the same strategy at the high level that what we applied on the web. We are -- we want to help our clients to buy mobile inventory across the whole open tenets. So, we are completely agnostic and so applying our usual playbook.

We started with the exchanges and we are connected and buying at scale on all the major changes. On top of that, we are making very exciting progress on buying directly from the mobile app developers. As you know when you buy from an exchange, you get 15% fee from the exchange, the middle man, which doesn't necessarily add a lot of value.

And by buying direct with the -- to the publisher, it's win-win. It's better performance for the advertiser and more money in the pocket of the publisher. So this is why this is a very attractive value proposition.

And as a matter of fact, now we are working as we said with more than 200 app developers including more than 420 of the largest global apps that are not connected to a direct bidder. So it's great to see that our strategy to go direct is being off the same way in-app than in web.

We still -- a lot of value to capture, because we still have a very early in-app. While web, obviously, we've been pursuing this -- the web inventory direct for many years. So we had a much high level of penetration. But in-app, we still relatively are early and there is a lot of room to grow. Speaking of retail media.

So that's a very important trend that retailers they want to partner capable to offer the full suite of product and this is something we recognize more than a year ago. And it's true that historically Criteo was focused more on performance than on branding. That's the reason why we acquired this French company called, Storetail.

They were doing the equivalent of the Sponsored Product but on the branding side with branding formats. And we acquired this company last August, so exactly a year ago. And we've been very busy integrating the two offers under the same umbrella and into a single solution. And as a matter of fact, we see a lot of excitement from the market.

We've been already signing one first very big client in the U.S. on this new single platform and something we're going to accelerate in 2020. And we feel we have a product, which is really unique. We've been winning against very big players in this area and people recognize across the industry that our offer is way ahead of the rest of the market..

Thank you.

Thank you. And the next question comes from Tom Champion with Cowen..

Hi, good morning. JB, I'm wondering if you could talk about the pace of growth in new products. Clearly a strong result at 60%, but I think a little below last quarter's level.

And how do you think about continuing to ramp and accelerate that growth? And then second, maybe you could just talk a little bit about the hiring process in the sales organization now that you're taking a more consultative approach? Thank you..

Sure. So new product is we have several initiatives in this space, some are more mature than others. I would say, we -- to simplify with kind of three buckets.

We have Retail Media that we discussed quite a lot, and we're excited to see that -- particularly in this area, there is a reacceleration of our business and -- which is happening in a market which itself is changing a lot in a direction we like a lot, because favoring technical solution, which is our strength. So this is very exciting.

The two other key initiatives we have is upper funnel, this awareness and consideration product. So we're still quite early there. But potentially this is a huge market. As a matter of fact, it's a market which is growing faster than the lower funnel today and something where it's almost a greenfield opportunity for us.

So, if we execute well on that there is a huge potential. And I feel, we're already -- we're still very, very early there. The third one, as I discussed is, app install, where it's a lot about performance app install, but cost and install, something we're very good at performance. So we've been putting a lot of effort upgrading the product.

We acquired nine months ago from Manage, this app install company. And as we discussed, we are shipping a new version including enhanced bidding capability, which is really the strength of Criteo this machine learning, highly sophisticate engine.

And we believe combining the go-to-market expertise as managed with our machine learning expertise, we have the best of the two world and a really good job to make a dent into these very large app install market where today we are very, very small. But there is a lot there.

We have other opportunities, which are more, I would say, early like store, a physical store where we have an exciting early success with our clients, but this is still early and not very material yet. So, we spend less time on this, but it's something that can be promising midterm. So all in, it's a very robust portfolio of new products.

And this is why when all combined, it's enjoying a very healthy double-digit growth..

Hiring process for the go-to-market?.

Can you repeat the second question?.

Yeah. I was just curious if you could update us on your progress in transforming the sales organization, now that a process includes a more consultative approach. I think that was a barrier in the past..

Yeah. Absolutely. So, this is something we are working on. As we are selling -- we need two type of profiles. Some of them we can train from the inside and we have a lot of great talents that we are training from the inside, and we're also bringing talents from the outside. We need experts in specific areas.

I was discussing about app install, which requires a different pitch than a traditional web solution, and we are hiring very aggressively app specialists there.

We also need to hire people with more exactly what you said a consultant - strategy consulting mindset, because as we are now engaging in a much high level in the organization with the CMOs on the strategy of our clients, we need people capable to conduct this high-level discussion with a 360 view on the needs and the strategy of our clients.

So -- and we're executing this with a good mix of training our teams on the ground and bring new talents from the outside..

Okay. Got it. Thank you..

Thank you. And our next question comes from Lloyd Walmsley with Deutsche Bank..

Thanks. Just wondering if you can talk a little bit about the potential to shift more of your revenue potentially to a licensing model, where you maybe provide access to tools and things like underlying shopper graph and other data sets in a fee model. You've talked about getting some inbound request along these lines.

The CSP business has transitioned kind of towards this. How much of your business do you think you could move to a model like this? And how are you guys thinking about that given the market values those revenue streams much higher than kind of risk-taking revenue streams? Any thoughts there would be great..

Sure. Absolutely. So as we discussed specifically for Retail Media, we are shifting very rapidly. As a matter of fact much faster than what we expected six months ago to a transactional SaaS model, which is already representing 30% of our Retail Media business. And I wouldn't be surprised if very quickly it will be the majority of our business.

This is just the way the market is going and there is no point resisting this. As a matter of fact we're doing exactly the opposite. We are proactively pitching our clients and switching as quickly as possible from the old model to the new model with them having discussion one-by-one with every client of ours.

Regarding our marketing solution, we have interesting ideas there that are still early stage, but there is a very big appetite for what we would call data insights and more generally for our shopper graph. And it's still too early to discuss this in detail.

Right now we are experimenting a few things, but there are some very promising things happening there. The market also is getting more mature.

Other player has been educating the market in this area, which is also helpful for us, because rather than reinventing the wheel we can get inspired by the best performance model and apply the uniqueness of the Criteo data assets and Criteo user graph to combine the best together..

Thanks JB..

Thank you. And the next question comes from Doug Anmuth with JPMorgan..

Thanks for taking the questions. Just hoping you could elaborate a little bit more just on the drivers of the lighter 3Q outlook and then your confidence in recovering more in 4Q. And I know there's obviously some more favorable seasonality there too as well, but just given that you're maintaining the full year outlook.

And then on self-registration, can you just talk about some of the key benefits there? And then when you talk about increasing your client base and significantly more client adds in 2020 is self-registration the key driver? Thanks..

So regarding -- this is Benoit speaking.

Regarding Q3 we expect a quarter which would be very consistent with the performance that we've seen in Q2, where ultimately we expect to see our new solutions continuing to show good traction, but impacted by a slow decline in the retargeting business As commented on the call earlier, we see that decline primarily driven by the web usage.

And we see opportunities in -- through the take up of apps over time as well as the take up of our self-service channel, automated channel that would show your results that scale in 2020 as the two factors that could allow us to offset that decline and stabilize the decline on the retargeting side.

So we expect very, very similar type of dynamics in Q3 than what we've observed in Q2. And with respect to the strategic initiatives that we have discussed in more detail on the call, those strategic initiative are expected to producing more results in 2020..

So regarding self-registration the key benefits. There are several benefits. This is what makes me so excited about self-registration. The first one which is the most obvious is productivity of our onboarding.

When clients engage on their own with the platform and they are setting on their own and start the company on their own, you need less people to turn the dial behind the scene.

So it has an immediate improvement on productivity and allow our own team to engage more strategically with our clients, more into upselling them and rather than just turning the dice. So that's the first benefit of self-registration.

The second one which is more I would say, less known, but very important is that surprisingly some clients trust more machines than human beings in a way that they can find it intimidating to speak to a sales rep. While going on their own and doing their own thing in front of the screen, some of them are just more comfortable to do this.

They are used to do this on many other platform. And this is something -- some are very comfortable to do and we've seen this in many aspects.

The third one, which is equally important, is that as we are working more and more with agencies, agencies are really adding a lot of value for their own clients for the one that I don't have the expertise to turn the dice on their own. And they are getting trained on our tools and they can operate on behalf of the clients the Criteo platform.

And this is really a win-win value proposition that we're having with agencies and it's part of our agency strategy. So all in, this self-registration is really exciting, because not only it's targeting the lower torso and the tail of the market where you can see there are benefits that apply across all type of clients big and small.

And as we shared, we are confident that this should have a material impact next year on our net adds. For this fully leverage this momentum, we're going to at the same time have to ramp up our marketing and acquisition channels to make sure we have enough prospects engaging with our self-registration modules.

And this is something we are working very hard on..

Great. Thank you, JB and Benoit..

Thank you. And the next question comes from Dan Salmon with BMO Capital Markets..

Good morning everyone. Thanks for taking the question. JB, I want to ask a little bit of course, the manner in which major Internet technology platforms operate, is always an important issue for Criteo as your business lives on top of those platforms oftentimes.

And we talked a lot about Chrome and the changes going on at Google's ecosystem lately, but I want to ask a little bit about Apple. I don't really want to dwell on the initial impacts of ITP, which are now of course sort of ancient history.

But more look forward as sort of public comments on consumer marketing from Apple they continue to focus on differentiating through privacy [indiscernible].

Could you speak sort of just high-level about the company's relationship with Apple and more importantly sort of how you see that ecosystem evolving? And what that means for your business in the years ahead? Thanks..

Sure. So as you said, the ITP impact is fully in our numbers. It's been there for a while. Speaking moderately about privacy, it's a major trend in the market and a very good one.

And we are very supportive about having an open Internet which is privacy-friendly, because ultimately if you want to do targeted advertising you need to do it in a transparent way. Otherwise, the users there they loose trust. And just as a reminder, we pay for the inventory no matter what and we get paid only when the users engage with our ads.

So we have absolutely no incentive to show an ad to a user who's not fully comfortable to see this. So we've always been very proactive to ensure that every user had the right level of control and they can decide on their own when and how they want to see targeted ads.

That's probably the difference we have with Apple that is deciding on behalf of their own clients what is -- what they can see or not. We want the end-user to have the choice and to make the choice.

And we see in reality and we're not afraid of that, because we've seen in the reality that when you give the two choice to the user, the vast majority of them that rather see a relevant ads than to see random ads, because the user they perfectly understand that no matter what they're going to see ads.

That's just a way the Internet need to -- economy works that seeing ads you'd rather see ads that are of some interest rather than things that are just visual pollution. And I think this is our big vision something which I share with the vast majority of the market. There are some players that are -- want to decide on their own. It's their choice.

We believe in the open Internet and letting the end-user ultimately in control..

Great. Thank you..

Well thank you JB and Benoit. This concludes our call today. We thank everyone for attending. The IR team is available for any follow-up you may have. We wish you a very good day. Thank you and goodbye..

Thank you..

Thank you..

Thank you. The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect your lines..