U.S. Markets open in 2 hrs 15 mins

Edited Transcript of CRTO earnings conference call or presentation 22-Feb-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Criteo SA Earnings Call

Paris Feb 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Criteo SA earnings conference call or presentation Wednesday, February 22, 2017 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Edouard Lassalle

Criteo S.A. - Head of IR

* Eric Eichmann

Criteo S.A. - CEO

* Benoit Fouilland

Criteo S.A. - CFO

================================================================================

Conference Call Participants

================================================================================

* Douglas Anmuth

JPMorgan - Analyst

* Mark Kelley

Citigroup - Analyst

* Richard Kramer

Arete Research - Analyst

* Lloyd Walmsley

Deutsche Bank - Analyst

* Brian Nowak

Morgan Stanley - Analyst

* Heath Terry

Goldman Sachs - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and welcome to the Criteo Q4 and FY16 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Edouard Lassalle. Please go ahead.

--------------------------------------------------------------------------------

Edouard Lassalle, Criteo S.A. - Head of IR [2]

--------------------------------------------------------------------------------

Thank you, Keith. Good morning, everyone, and welcome to Criteo's Q4 and FY16 earnings call. Eric Eichmann, CEO, and Benoit Fouilland, CFO, are here with us today.

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. These 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. Definitions of such metrics and the reconciliations to the most directly comparable GAAP financial measures were provided in our earnings release issued earlier today.

Last, 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 will now turn the call over to our Chief Executive Officer, Eric Eichmann.

--------------------------------------------------------------------------------

Eric Eichmann, Criteo S.A. - CEO [3]

--------------------------------------------------------------------------------

Thank you, Edouard, and good morning, everyone. I am pleased with the successful execution against our plans in 2016 and the significant progress we made towards our vision. We continued to innovate and expand our core business. We made significant advances to becoming a multi-product company and we opened exciting new avenues for growth.

Before diving into 2016, let me talk about the trends that are shaping performance marketing. Increasingly, marketers demand relevant advertising that is held accountable to performance metrics and provide seamless experiences to consumers.

Three trends are driving this demand. First, the rapid growth in data-rich ad buying, providing more opportunities to drive performance. Second, the disjointed online shopping consumer experiences across devices, creating strong demand for seamless and integrated marketing.

And third, the continued digitization of offline activities, thanks to the ubiquity of mobile devices, opening new opportunities for performance advertising. In 2016, we bolstered our position in performance marketing for commerce and brands, while keeping a strong focus on relevance, accountability and seamless experiences.

We used our scale to grow a large user graph, helping e-commerce companies optimize the consumer journey across devices. We launched Criteo Predictive Search, a disruptive product bringing precise, predictive optimization to drive sales on Google Shopping, a critical and growing commerce marketing channel.

And we expanded our business with Criteo Sponsored Products, formerly HookLogic, to bring performance marketing to brands on e-commerce sites. These three products further differentiates Criteo in the marketplace and with our core offering, provide a broad portfolio of performance solutions.

Our scale and state-of-the-art technology bring retailers capabilities that allow them to compete on equal terms with the largest e-commerce players. These new and future performance products for brands and retailers address a growing set of marketing needs and strengthen our overall ecosystem.

2016 was another phenomenal year for Criteo. The unique strengths of our model allowed us to further solidify our market position. We grew our top line 36% to $1.8 billion and our adjusted EBITDA 57% to $225 million. We added over 4,000 net clients. We maintained client retention at 90% while increasing our client base 42%.

We added two new products, Criteo Predictive Search and Criteo Sponsored Products, and continued to innovate the core platform with our Kinetic Design creative capabilities with new features in the Engine and with a stronger Universal Match solution. We crossed the 50% share of our business on mobile and closed the year at over 60% and we grew the number of Criteo employees to 2,500 while growing R&D capacity over 50% to more than 600 engineers in France, California and Michigan.

Let me now turn to the Q4 results. For 13 quarters in a row, we have exceeded quarterly revenue ex-TAC and adjusted EBITDA guidance. At constant currency and including Criteo Sponsored Products, we grew revenue ex-TAC 41% to $225 million and adjusted EBITDA 55% to $83 million.

We performed well across the entire business. We continued to innovate on our core product. We broadened our publisher relationships and we added a new record number of clients.

Starting with innovation, our technology drives more client sales every quarter. In Q4, the growth of same-client revenue ex-TAC accelerated sequentially to 20% at constant currency, having close to 80% of our business, fueled by uncapped budgets, continues to drive this growth.

Let me highlight three areas of innovations: Engine, cross-device and mobile. Within the Engine, we rolled out Kinetic Design, which optimizes creative elements of any kind, shape and size, resulting in 17 trillion combinations, while maintaining brand consistency to generate the one ad that drives the highest engagement for an individual shopper.

This is a key innovation and drives improved performance across clients. We also started to roll out the value optimization feature of our Engine, which optimizes on the gross margin target that advertisers set by product.

On the cross-device front, our investments continue to pay off. With now 73% of our clients embracing Universal Match, we saw users matched through this technology generate 60% of revenue ex-TAC in Q4. In addition, all advertisers can now measure the impact on their online sales by tracking their cross-device sales through the Criteo dashboard.

Overall, our cross-device initiatives drove a 6% uplift to revenue ex-TAC in Q4. We expect this to improve as the user graph continues -- drives more demand from the web into mobile app inventory. In other words, our user graph bridges the gap between mobile web and mobile apps, two separate and disjointed environments.

Mobile commerce continues to enjoy rapid momentum across our client base. Over 63% of revenue ex-TAC is now generated on mobile devices, a significant increase over the prior year.

Within mobile, demand from in-app advertisers continues to be very strong, growing revenue ex-TAC by 460% year over year. Overall, we now generate close to 25% of total revenue ex-TAC on app inventory, representing over 2.5 times what app inventory generated in Q4 2015. This is a great achievement and demonstrates how our scale provides us with additional competitive advantages.

Moving to publisher relationships and the supply side of our business. Native continues to be a significant driver. Close to 500 publishers are live with our direct native offering launched in Q2, an increase of more than 20% quarter over quarter.

Revenue ex-TAC generated on native inventory, excluding Facebook, grew close to 60% quarter over quarter. And our total share of business from native included Criteo Sponsored Products grew to 30% of total revenue ex-TAC at the end of Q4. Our flexible integration and dynamic creative capabilities continue to be core competencies in native.

We continued to test an early version of our own header bidder that connects directly to publishers' ad servers. We are currently connected to 10 large publishers with our beta product. We expect a broader deployment in Q2. Our partnership with Facebook continues to be fruitful, driving over 16% more sales for Criteo clients on average.

Our ad blocking solution has been adopted by approximately 400 publishers, driving revenue ex-TAC growth of 70% compared to Q3. And with Criteo Sponsored Products, we signed several new large retail publishers, including Zulily, Toys R Us UK, Lazada, Morrison Supermarkets, and Melissa & Doug.

Let's now take a closer look at the demand side of our business. We set another record in Q4 by adding close to 1,600 net new clients, including 1,050 client additions without Criteo Sponsored Products. In the quarter, we also added many brand advertisers using Criteo Sponsored Products, including Garmin; Netgear; drone company, Parrot; and smart toy manufacturer, Ozobot.

Altogether, we ended 2016 with over 14,400 commerce and brand clients, a growth of 42% compared to 2015. Clients of all sizes across all regions decided to work with Criteo. We maintain strong momentum in mid-market which grew 75% worldwide and represented over 30% of revenue ex-TAC.

In Q4, we launched the creative module of our self-service platform for mid-market. The complete range of these tools, from registration and tagging, to product feed, creative and payment will be available by the end of Q1.

Turning to regional performance. Our business saw healthy growth in all three regions. The Americas revenue ex-TAC year-over-year growth accelerated sequentially to 35% at constant currency, excluding Criteo Sponsored Products. We had another very successful holiday season.

We shortened the time it takes to sign new clients and launched several key accounts. In-app advertising increased significantly and the US is now our largest app market globally. It is notable that one app-only client entered our top 10 client list in North America.

We saw strong interest for Criteo Predictive Search in the US and started signing new clients. Client satisfaction and retention remain high. Criteo Sponsored Products, formerly HookLogic, is seeing significant growth momentum. We now spend 2 to 5 times more on app placements on several key US retail publishers compared with Q4 last year.

In EMEA, growth in revenue ex-TAC, excluding Criteo Sponsored Products, accelerated both sequentially and year over year to 33% at constant currency. All established markets, such as Germany, France and the UK, grew between 20% and over 30%, with strong performance across large and mid-market clients.

We signed many new clients, including Thomas Cook, Turkcell, and a large Chinese e-commerce pure player operating in Europe. In parallel, we grew our business with existing clients, especially those expanding campaigns outside of their home markets.

Lastly, APAC revenue ex-TAC grew 29% at constant currency despite a challenging comparable last year. We continued to deliver solid growth from both existing and new clients in Japan and Korea. In-app advertising is on a roll across the entire region, especially in Japan and Korea. We increased the cadence of new client wins in Southeast Asia, including Central and Adayroi. And we signed new key clients in India such as Shopclues and Flipkart.

Looking ahead, in 2017, we remain focused on a clear set of operating priorities. First, continue to innovate on our core product and drive worldwide expansion of our core business. Second, scale Criteo Sponsored Products across existing and new geographies and integrate it with the Criteo Engine technology.

Third, launch Criteo Predictive Search in key markets. Fourth, build and leverage our powerful pooled assets across our product portfolio and partner ecosystem, in particular, our large user graph, our Universal Catalog, and the ability to attribute sales for brands across all retailers.

And last but not least, develop great new products along the customer lifecycle, such as customer prospecting; new capabilities, such as CRM onboarding; and additional marketing channels, such as video.

In closing, I'm very pleased with our success in 2016. We continued to innovate and grow our core business. We became a multi-product company, addressing broader marketer needs, and we opened significant new avenues for growth.

Overall, we continued to strengthen our leading position in performance marketing for commerce and brands. I look forward to updating you on our growth plans as we progress into the year. With that, I will now have Benoit, our Chief Financial Officer, walk you through our financial results in detail.

--------------------------------------------------------------------------------

Benoit Fouilland, Criteo S.A. - CFO [4]

--------------------------------------------------------------------------------

Thank you, Eric, and good morning, everyone. Just like Eric, I'm very pleased with our success. In 2016, we continued to deliver rapid growth, expanding profitability and increasing free cash flow, while investing in innovation. We believe this attractive combination remains unique in our space.

I will walk you through the quarter and fiscal-year performance and share our guidance for Q1 and full-year 2017. Q4 revenue was $567 million, up 43% at constant currency. For FY16, revenue grew 36% at constant currency to $1.8 billion. Revenue ex-TAC, the key metric we use to monitor our business performance, grew 41% at constant currency in Q4 to $225 million.

Excluding Criteo Sponsored Products, revenue ex-TAC grew 33% at constant currency to $213 million. This sequential acceleration was driven by our largest quarterly addition of clients to date as well as the continued growth of existing live clients. Revenue ex-TAC, our equivalent to same-store sales. Revenue ex-TAC margin in the quarter was 40%, or 41% excluding Criteo Sponsored Products, in line with expectations.

For FY16, revenue ex-TAC grew 37% at constant currency to $730 million, and 34% at constant currency excluding Criteo Sponsored Products to $718 million. Revenue ex-TAC margin for FY16 was 41%, both including and excluding Criteo Sponsored Products.

Compared with guidance assumptions, changes in ForEx had a negative impact of approximately $3 million on reported revenue ex-TAC, excluding Criteo Sponsored Products in Q4, mostly driven by the stronger Japanese yen. However, compared with prior-year periods and excluding Criteo Sponsored Products, changes in ForEx had virtually no impact on revenue ex-TAC growth in both Q4 and the fiscal year.

Shifting to expenses, other cost of revenue, comprised of hosting and data costs, grew 37% to $24 million in Q4, mainly driven by increasing hosting capacity across data centers. For FY16, other cost of revenue also increased 37% to $85 million.

Q4 operating expenses were $148 million, or $139 million excluding Criteo Sponsored Products. Non-GAAP operating expenses grew 32% to $128 million, or 25% to $122 million excluding Criteo Sponsored Products. Headcount-related expenses continued to represent approximately 75% of OpEx, both including and excluding Criteo Sponsored Products.

We added over 290 net new employees in Q4, including 190 from Criteo Sponsored Products and closed the year with over 2,500 employees, a 36% increase compared with December 31, 2015. On a non-GAAP basis by function, which excludes depreciation and amortization, equity awards compensation expense, pension service costs, and acquisition-related costs, and deferred price consideration.

R&D expenses grew 44% in Q4 to $31 million and 45% in FY16 to $104 million, largely driven by the 51% headcount growth to over 600 employees, including 90 from Criteo Sponsored Products. Excluding Criteo Sponsored Products, R&D OpEx grew 30% in Q4 to $28 million and 41% in FY16 to $101 million, in line with our plans.

Sales and operation expenses grew 33% in Q4 to $73 million, and 21% in FY16 to $258 million, also largely driven by [32%] increase in headcount to 1,490 employees, including 86 from Criteo Sponsored Products. Excluding Criteo Sponsored Products, S&O OpEx grew 27% in Q4 to $70 million, and 20% in FY16 to $255 million.

Quota-carrying headcount, excluding Criteo Sponsored Products, grew 25% to 660, with over 80% of the growth coming from mid-market. On the full-year view and excluding Criteo Sponsored Products, sales and operation OpEx decreased by 150 basis points of revenue and 430 basis points of revenue ex-TAC, well in line with our operating plans.

Finally, G&A expenses increased 18% in Q4 to $25 million, and 31% in FY16 to $97 million, while headcount grew 29% to 410 employees, including 14 from Criteo Sponsored Products. Excluding Criteo Sponsored Products, G&A OpEx grew 16% in Q4 to $24 million and 30% in FY16 to $96 million. When excluding exceptional items of $1.3 million in Q4 and $2.7 million in FY16, which related to legal and tax fees, G&A expenses excluding Criteo Sponsored Products only grew 10% in Q4 and 27% in FY16.

Moving now to profitability. Q4 adjusted EBITDA grew 55% at constant currency to $83 million, or 45% at constant currency, excluding Criteo Sponsored Products to $78 million. This increase was primarily the result of our strong revenue ex-TAC performance across all regions in the quarter. Excluding Criteo Sponsored Products, Q4 adjusted EBITDA margin was 15% of revenue, or 37% of revenue ex-TAC.

Adjusted EBITDA for FY16 grew 55% at constant currency to $225 million, or 52% at constant currency excluding Criteo Sponsored Products to $219 million. Adjusted EBITDA margin excluding Criteo Sponsored Products increased by 170 basis points of revenue to 12.5%, or 370 basis points of revenue ex-TAC to 30.6%.

Our expanding profitability remains well on track with our long-term operating plans and demonstrates the scalability of our model. Financial income improved by approximately $1 million in Q4 and $4 million in FY16. This increase was primarily driven by the much lower foreign exchange loss compared with last year, mainly as a result of converting our Brazil intercompany position from debt to equity in Q2 2016.

This was partly offset by interest expense on debt from drawing on our revolving credit facility in Q4 to finance 30% of the HookLogic acquisition. Net income increased 5% in Q4 to $41 million, or 40% in FY16 to $87 million. In the quarter, the growth in income from operations and financial income was largely offset by higher income taxes.

In Q4 2015, income taxes represented a positive income, as a result of recognizing deferred tax assets in the US. Net income in Q4 2015 was also inflated by a nonrecurring reversal of $2 million acquisition-related deferred price consideration. The effective tax rate was 24% in Q4 and 28% for FY16, in line with our expectations.

Adjusted EPS on a diluted basis increased 16% in Q4 to $0.84, or 51% in FY16 to $2.08. Cash flow from operations grew 7% in Q4 to $72 million and 12% in FY16 to $153 million. Excluding Criteo Sponsored Products, cash flow from operations improved 15% in Q4 to $77 million, as a result of increasing profitability and a positive change in working capital, in line with expectations.

For FY16, cash flow from operations, excluding Criteo Sponsored Products, grew 16% to $159 million. This represents a 72% conversion of adjusted EBITDA into cash flow from operations for the year. CapEx increased 20% in Q4 to $23 million, driven by a sequential catch up in our hosting program, and only grew 4% in FY16 to $77 million, representing slightly over 4% of revenue, a decrease of 130 basis points of revenue compared to 2015.

Free cash flow increased 2% in Q4 to $49 million and 21% in FY16 to $76 million. Excluding Criteo Sponsored Products, free cash flow increased 15% in Q4 to $55 million and 31% in FY16 to $82 million. This translates into a 70% conversion of adjusted EBITDA into free cash flow in Q4 and a 37% conversion rate for FY16, consistent with the prior year. Finally, total cash and cash equivalents were $270 million at the end of December, after paying $175 million in cash for the HookLogic acquisition in Q4.

I will now provide you with guidance for Q1 and FY17. The following forward-looking statements reflect our expectations as of today, February 22, 2017. Please note that the contribution of Criteo Sponsored Products as well as Criteo Predictive Search are included in our guidance for Q1 and 2017.

We expect Q1 2017 revenue ex-TAC to be between $200 million and $205 million. At the ForEx rates provided at the time of our Q4 2016 guidance, this would equate to between $208 million and $213 million. On a year-over-year basis, this would imply constant currency growth of 25% to 28%.

We assume year-over-year changes in ForEx to have a negative impact of approximately 180 basis points on our Q1 reported growth. And we expect Q1 2017 adjusted EBITDA to be between $47 million and $52 million. At the ForEx rates provided at the time of our Q4 2016 guidance, this would equate to between $51 million and $56 million.

For FY17, we expect revenue ex-TAC to grow between 27% and 31% at constant currency. We assume changes in ForEx to have a negative impact of 320 basis points on our reported growth for the full year. And we expect FY17 adjusted EBITDA margin as a percentage of revenue ex-TAC to improve by 0 to 50 basis points compared with 30.8% in FY16.

Finally, with respect to investments, we expect our CapEx program for FY17 to increase to between 5% and 5.5% of revenue. As usual, the ForEx assumptions underlying our guidance for both periods are included in the earnings release that we published earlier today.

In closing, I'm pleased with our strong performance in Q4 and 2016, combining rapid growth, expanding profitability and increasing cash flow generation. We continue to execute on our plans and see exciting new avenues of growth ahead of us for 2017 and beyond With that, let me turn the call back over to the operator to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

Douglas Anmuth, JPMorgan.

--------------------------------------------------------------------------------

Douglas Anmuth, JPMorgan - Analyst [2]

--------------------------------------------------------------------------------

I had a couple. First, I wanted to ask about the Predictive Search rollout, if you guys could talk in a little bit more detail about how it's going so far? What are some of your early learnings? And also, how are you thinking about the margin profile going forward there?

And then secondly, just on the 2017 guidance, can you help us understand a little bit how Search is being built in there, as well as Sponsored Products? Thanks.

--------------------------------------------------------------------------------

Eric Eichmann, Criteo S.A. - CEO [3]

--------------------------------------------------------------------------------

Great, thank you, Doug. This is Eric; I will take the first one and give the second one to Benoit. On Predictive Search, as context, we've launched a product late last year and we're really starting to put it into the market.

There's a couple of things around Search that are important to understand. One is, it is an established market; we are coming in with a disruptive product. Our expectation and the tests we have run have us running performance uplift of up to 49%. So the value is there.

What I think is a bit harder in Search is to prove the value because there are no clear AB or head-to-head testing mechanisms. So that's taking a little bit more time. And because it is an established market, I think we're going after people using a solution already.

Having said that, we are very bullish on our ability to introduce these products, though the expectation is that the rollout will not be as fast because the head-to-head protocols are not yet in place. We are working to put some of those. We believe that Google will ultimately also provide some mechanism to do that.

The margin in Search, as you know, we have been sort of indicating we're going to have a 10% to 20% margin when you take costs into account in Search. The way we price Search is really as a percent of revenue, so it varies depending on the advertiser. That is also disruptive because the market has half or a third of the margins; however, none of the market players offer anything in terms of the performance that we drive.

Our expectation is that we are trying to price this from a value perspective, and we deliver significant value to clients and we take some portion of that as value for ourselves to continue to invest in the product. We continue to be bullish, but for 2017 I think the expectation is that it's not significant or a material element of our guidance. With that, I don't know if you want to comment, Benoit?

--------------------------------------------------------------------------------

Benoit Fouilland, Criteo S.A. - CFO [4]

--------------------------------------------------------------------------------

So just quickly on the driver for the 2017 guidance, from a [rev ex-TAC] perspective, we expect to add a significant number of new clients, in particular in the mid-market and in the underpenetrated Tier 1 markets, including in the US. We also expect to -- that the continued innovation in the core platform on access to broader inventory is going to yield results and continue to drive growth of the same client revenue ex-TAC.

With respect to Criteo Sponsored Products, it will contribute to the growth, in line with the perspective that we had shared with the market at the time of the acquisition, meaning a middle single-digit uplift to our core business. So that is what we expect for the year.

With respect to Criteo Predictive Search, as Eric just said, we expect that the contribution will be quite minimal for the year. It will be around, just less than 2% of the overall rev ex-TAC for the year, with a ramp-up during the course of year.

--------------------------------------------------------------------------------

Eric Eichmann, Criteo S.A. - CEO [5]

--------------------------------------------------------------------------------

We expect -- what's most important to us is that we see real momentum as we go into the year, as opposed to generating significant revenues this year. So --

--------------------------------------------------------------------------------

Douglas Anmuth, JPMorgan - Analyst [6]

--------------------------------------------------------------------------------

Got it. Okay. That's helpful. Thank you, guys.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Mark Kelley, Citigroup.

--------------------------------------------------------------------------------

Mark Kelley, Citigroup - Analyst [8]

--------------------------------------------------------------------------------

I just want to follow up on the last one on the Search margins. I know it's 10%, 20% margin is how you bill your clients, but doesn't it flow through the P&L as only net revenue and no gross revenue? That is the first one.

The second one is on the adjusted EBITDA guide for Q1, it is a bit of a step down, and you're guiding the rest of year as either flat to up a little bit, so just curious if there's anything maybe one-time in nature that impacts Q1? And then we should see that reverse as we go throughout the year? Thanks.

--------------------------------------------------------------------------------

Benoit Fouilland, Criteo S.A. - CFO [9]

--------------------------------------------------------------------------------

So with respect to the Search, you are right, we are accounting for the net revenue, so in terms of the margin that is presented in our financial statement is going to have a slightly positive impact on the margin. But because the contribution is not going to be very material in the year in 2017, we don't expect to have a material impact on margin as a result of the Search ramp-up in 2017.

With respect to the Q1 guidance, there are a few items to keep in mind when you look at the adjusted EBITDA for Q1. The first aspect is, obviously, the FX headwind. There is a very significant FX headwind, and we take the full impact of that FX headwind in Q1 because you have the full [differential of rate] that you are taking in Q1, and that is approximately a $4 million negative impact compared to the Q4 guidance rates. So that's what I expect.

The second aspect is the full-quarter impact of the Criteo Sponsored Product expense base, so it is approximately 200 employees, and we are going to continue hiring in the core business, in particular in mid-market, but also to support new Product in Search in Criteo Sponsored Products. With respect to exceptional items, yes, there are a few exceptional items in Q1, around $2 million of exceptional items that relate primarily to legal fees.

--------------------------------------------------------------------------------

Mark Kelley, Citigroup - Analyst [10]

--------------------------------------------------------------------------------

That's really helpful. Thanks a lot.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Richard Kramer, Arete Research.

--------------------------------------------------------------------------------

Richard Kramer, Arete Research - Analyst [12]

--------------------------------------------------------------------------------

A couple of questions, please. First of all, Eric, could you give us a bit more insight into both growth acceleration in the Americas that we saw in Q4? How much of that was product mix shift to Sponsored Products and a few other things, or currencies or mid-market segment?

And then I think a second really big question, especially with respect to guidance for top line going into the first quarter, is that we saw average revenue per client actually turn positive in fourth quarter despite this growth in mid-markets and adding that in more clients. Can you give us a bit more sense on how penetrated this mid-market segment is? We really can't get to your guidance without seeing a very large decline in average revenue per client and maybe talk us through the dynamics of that? And one other maybe further follow-up, if I may, afterwards,

--------------------------------------------------------------------------------

Eric Eichmann, Criteo S.A. - CEO [13]

--------------------------------------------------------------------------------

Sure. Thank you, Richard. Let me take your first question regarding Q4 for the Americas. A couple of aspects that were important there. One is the fact that we have very strong holiday season. As you know, that is quite seasonal, so that was a big driver for us.

I think the second thing is, obviously, we caught the CSP business, or the Criteo Sponsored Products, formerly HookLogic business, started integrating that around November 10, and so we caught the best part of the year from that business. They have a strong seasonality of about 40% to 50% of their business happening in Q4, and so you are seeing that reflection, and because most of their business or almost all of their business is in the Americas, that was all represented in the Americas.

And then I would say the last thing that I would add is we also are getting the benefits of -- I don't know if you remember, but a couple of quarters ago we talked about some of the sort of concerns that we had around the management team in the Americas. And we sort of turned that situation around, and we're seeing the benefits of having a stronger team and tightening stronger or bigger clients in the Americas. So all of those things are sort of combining to see a very good Q4 in the Americas. So that was great.

In terms of the guidance in Q1, I think there is a number of things that are different this year than what we had last year, and they are worth noting because I think it will help understand the dynamics in Q1. We are feeling quite good about Q1. I think there's no worries anywhere in terms of Q1, but there's a number of things that are different, as I said. The first one is that Q1 is a bit more difficult as a comparable versus last year for a couple of reasons. One is, we had one less day in Q1, so that shaves, if you will, 1 percentage point of growth.

And the second thing is, last year we had a particularly strong travel quarter where we had sort of the ski and the Easter holidays happening within Q1, which is not going to happen this year. So we would expect that would be this year more distributed between Q1 and Q2. So those are two things that are very particular to this year versus last year.

And then in addition to that, and I mentioned this in the acceleration for the Americas, 40% to 50% of the business of Criteo Sponsored Products, formerly HookLogic, is in Q4. So we didn't have that dynamic in the past. Yes, we did have and we do have seasonality on our core business, but not to that extent. And so, as we move forward, I think we will see more of a decrease from Q4 to Q1 just based on the fact that Q1 is a much bigger quarter for us, and will become a bigger and bigger quarter as we go forward.

And then the last thing is, we do have significant foreign exchange headwinds compared to Q4 and FY16, and the estimate from our end is about an $8 million negative impact on the Q1 guidance. So when you combine all of those things together, Q1 is actually a strong quarter for us and we feel quite good about it. Do you want to add something, Benoit?

--------------------------------------------------------------------------------

Benoit Fouilland, Criteo S.A. - CFO [14]

--------------------------------------------------------------------------------

Yes, what I wanted to build on is, with respect to your question, Richard, specifically on the revenue ex-TAC per client, you are absolutely right, we saw very positive momentum in Q4, which was very much driven by the underlying existing client growth. As you noted, it accelerated to 20%, and there are several factors that have ultimately produced that result in Q4, especially the impact of the cross-device graph, the impact of the in-app activity, growing in-app activity have contributed to this.

With respect to the year, our assumption for the year is a slight decline of rev ex-TAC per client, and the result primarily of the mix, of the growing mix of mid-market. So mid-market is still very much underpenetrated. If you look at the global opportunity, it's a good area of growth for us in which we continue to invest. So we built in our plan a slight decline with respect to the combined average revenue per client, while seeing still good dynamics in each of two categories of clients.

--------------------------------------------------------------------------------

Eric Eichmann, Criteo S.A. - CEO [15]

--------------------------------------------------------------------------------

I would add one last thing on this. If you look at the guidance for Q1 and then compare that or put it in sort of context of the guidance for the year, the guidance for the year from a growth perspective has us at a higher sort of top range of the guidance because we expect some of these new businesses, in particular Criteo Sponsored Products, to grow faster and to continue. And you'll have some of those dynamics as we introduce new products that will represent a small part of revenues, but as they get deployed, represent a bigger and bigger part of revenues.

--------------------------------------------------------------------------------

Richard Kramer, Arete Research - Analyst [16]

--------------------------------------------------------------------------------

Okay. And one more quick one, if I may. There's a lot of discussion about measurement and attribution. Can you give us any thoughts about the incrementality of the sales that you're generating via retargeting versus purchases that might have happened anyway? Are you getting closer to being able to measure that for clients? And is that something you'll be able to share with us during the course of 2017?

--------------------------------------------------------------------------------

Eric Eichmann, Criteo S.A. - CEO [17]

--------------------------------------------------------------------------------

Yes, attribution is an exciting and rich area of discussion, and has been for the last 10 years and will continue to be. As I've stated in prior calls, the best attribution mechanism is to really do a head to head of having users exposed and users not exposed to your campaign.

One of the complications lately, and that's why incrementality testing are not as reliable as you would expect in the past, is that you have people across devices. And so if you can't identify that the person is the same person in two devices, and they might have been influenced on one device by an ad and they purchased on the other, it creates a lot of noise with those incrementality tests.

So we have done incrementality tests. Some of the clients asked for it, and it has been an area where we feel quite good. You remember that our Engine looks at post-click 30 days, and generating a click is actually quite hard so it's a very clear signal of engagement, which we still believe is good.

But I think one of the biggest problems with incrementality today, which is a great measurement, is the ability to see users across devices. And as long as that problem is not fixed, I think it's not as reliable in areas, in particular since more than 40% of eCommerce sales are happening across devices.

If I can add one thing on attribution, one of the very exciting things that we are working on and that is part of the offering that we bring with Criteo Sponsored Products, formerly HookLogic, is the ability for brands to place ads and see sales on third-party retail sites on a real-time basis. And that ability doesn't exist offline.

It's an ability that brands would love, in particular, since they spend about half of their money today on promotional activities to drive their sales without really a good feedback mechanism. That's one of the things that HookLogic brings, or Criteo Sponsored Products brings for us, and as we expand [that network] of retailers, this ability to be able to place ads and see whether sales are resulting from those ad is unmatched and unparalleled, and we believe that will drive a lot of brand dollars online, promotional dollars online.

So that's -- if you think about attribution, there's bigger problems. Like, for example, for the brands just being able to see the sales, not even considering how you attribute sales; just seeing the sales is a huge step forward. So lots to be discussed. Attribution, I think, will continue to evolve over time, but very exciting area for us.

--------------------------------------------------------------------------------

Richard Kramer, Arete Research - Analyst [18]

--------------------------------------------------------------------------------

Okay. Thanks.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Lloyd Walmsley, Deutsche Bank.

--------------------------------------------------------------------------------

Lloyd Walmsley, Deutsche Bank - Analyst [20]

--------------------------------------------------------------------------------

Just wondering if you could just give us an update on how conversations around Criteo Sponsored Products has gone with your existing partners? And give us an update on how you feel about this relative to when you announced the transaction?

And a second one, if I can, more broadly, you do have a large set of new products this year, both in the core business and outright new products. Can you maybe just give us a sense for where you see the greatest scope for potential upside from these new products? It sounds like CSP is the biggest one, but looking across the other ones, where do you see the most scope for upside? Thanks.

--------------------------------------------------------------------------------

Eric Eichmann, Criteo S.A. - CEO [21]

--------------------------------------------------------------------------------

Sure, Lloyd, that's a great question. We are very bullish about Criteo Sponsored Products. I think what we've -- the pennant or some of the drivers for us doing the acquisition are still true, and I think we are even more excited about the potential to combine the technologies of Criteo Sponsored Products with core Criteo technology.

So as we do that, we will be able to do two particular things this year -- or let's say three particular things. One is the ability to create scale and internationalize their platform. That's going to be important as we expand into Europe. We obviously have a global organization that's helping due to deployment and that's going to be very helpful for us to lock in markets for Criteo Sponsored Products outside of the US. So that's one area. The second area is using the optimization technology that we have at Criteo to drive more performance of the ads that are placed on retailers' sites by brands, and so that's also part of what we are trying to do this year.

And the third area is just using some of the common infrastructure that we've developed over the years, and in particular things like our Universal Graph can make a big difference. You just heard how much it helps sort of drive in-app purchases in Q4 and also uplift. As you apply this to the Criteo Sponsored Products business, it would also help drive uplift and be more efficient in the spending that we do. We do have other assets we are developing that will help, like Universal Catalog, that will allow us to identify products across retailers, and that will help with attribution across all retailers in the Criteo network, but also with recommendation. So I would say, all in all, we are very bullish on Criteo Sponsored Products, and feel quite good about the progress.

In terms of the new products, of course, you've seen and I think you are hearing this correctly from us, is we have a number of innovations that relate to new products now and this is part of the evolution that we intended to have. I think, for 2017, the biggest upside in terms of an individual separate product is obviously Criteo Sponsored Products. It's an established business; it's been running.

On the core business, there is a number of things that we are excited about. We mentioned some of this in the call. Video is one area we've been starting to test. It is an inventory that is quite -- that we don't use today, and that is very large online, and I think that could be one of the ones that could drive significant value.

We are also working, obviously, on a prospecting product, and there's lots of demand for that product, so it would be an easy sell. The key question there obviously is a technology question and from a performance perspective what we can drive. And any of those products could sort of drive significant value on the core business.

But overall, if you -- the expectation now, we are creating a number of products to help retailers compete against [RH] eCommerce platforms, and so you will see a lot of these products. And interestingly enough, they are all part of an ecosystem and they all sort of reinforce and strengthen each other.

--------------------------------------------------------------------------------

Lloyd Walmsley, Deutsche Bank - Analyst [22]

--------------------------------------------------------------------------------

Thanks, guys.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Brian Nowak, Morgan Stanley.

--------------------------------------------------------------------------------

Brian Nowak, Morgan Stanley - Analyst [24]

--------------------------------------------------------------------------------

I have two. The first one, the margin guidance for the first quarter, really for the full year, the incremental margins were a little bit lower than expected. Can you just talk through the two or three biggest sources of incremental OpEx spend this year, and how you think about evaluating payback or ROI in the areas of investment for the Company?

And then secondly, I guess going a little bit back to Lloyd and even Doug's question, can you just help us better understand, in the guidance, how do you think about core America's growth ex-Search, ex-Sponsored Products for revenue ex-TAC this year? Just so we can get an idea for how fast you expect the core business to grow throughout the year? Thanks.

--------------------------------------------------------------------------------

Benoit Fouilland, Criteo S.A. - CFO [25]

--------------------------------------------------------------------------------

Okay. So with respect to the margin guidance for the year, in fact, our margin guidance for the year is pretty much in line with what we had shared with the market previously with respect to the impact of our investment in HookLogic, as well as the impact of the launch of Search Obviously, these are two large areas of investment for the year, and that's the reason why you'd see a margin, an EBITDA margin for the year in terms of progression which is much more modest than what we experienced in 2016.

Obviously, we had expressed at the time of the HookLogic acquisition that we were expecting HookLogic to be slightly negative to the EBITDA in the first year, so this is what's reflected in our guidance for the year. And we would expect in the following year to see [Incrodixo], now Criteo Sponsored Products, to contribute to adjusted EBITDA, not yet to contribute positive to the margin in the following year, but to start then contributing to the EBITDA in the following year. So this is pretty much in line with what we told you in the context of HookLogic.

With respect to Search, there is a significant investment that we are planning with respect to Search in our guidance for the year. As we want to ensure we have the right capacity, Search capacity in the various region to support the growth of Search. So that is with respect to the full year. Now, with respect to Q1, there are specific items in Q1, as we discussed previously with respect, in particular to the full-quarter impact of the 200 employees of Criteo Sponsored Products, as well as the FX headwind in Q1.

Now, more broadly, how do we think about the Americas growth? I mean, the driver for growth in the Americas with respect to our core business would remain, number one, mid-market. We have a large mid-market opportunity in the Americas, and we are committed to continue to address that opportunity in 2017, so that's going to be one of the critical growth drivers.

The second growth driver would be, of course, to continue to penetrate also [the larger comp] on leveraging on now our combined capabilities with Criteo Sponsored Products, on the strengthening of our [facet] in the US in particular is going to contribute also to the success in the [larger count]. And certainly, I would mention the existing live client growth, which obviously given all of the innovation, the portfolio that we have for the year, we expect also to be a strong driver of growth in the Americas for our core business.

--------------------------------------------------------------------------------

Brian Nowak, Morgan Stanley - Analyst [26]

--------------------------------------------------------------------------------

Thanks. Just to follow up, you mentioned increased sales capacity for Search in the spending. How much of an investment [do you see you need] to make in either headcount or dollars, however you want to talk to it, just a Search sales force this year?

--------------------------------------------------------------------------------

Benoit Fouilland, Criteo S.A. - CFO [27]

--------------------------------------------------------------------------------

I mean, the way to think about it in terms of the impact is high single-digit immediate impact on adjusted EBITDA for the year, as the Search investment that we are making in primarily inside capacity.

--------------------------------------------------------------------------------

Brian Nowak, Morgan Stanley - Analyst [28]

--------------------------------------------------------------------------------

Great. Thank you so much.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Heath Terry, Goldman Sachs.

--------------------------------------------------------------------------------

Heath Terry, Goldman Sachs - Analyst [30]

--------------------------------------------------------------------------------

We saw the average revenue per user increase for the first time in a while. I'm wondering how much of that was driven by the addition of HookLogic versus the core product, and whether you would have us expect that average revenue per customer continues to improve for you here, particularly given the fact that you also added more customers than you had ever added in a quarter before this quarter?

--------------------------------------------------------------------------------

Eric Eichmann, Criteo S.A. - CEO [31]

--------------------------------------------------------------------------------

Maybe let me make one quick comment on Q4. We saw re-acceleration of revenue per client, which was great. And we've said for a while now that, for existing clients, and we've said now for a while that a lot of this comes from innovation and supply, and that's not a linear path. It happens at different points, and one of the proof points of that statement is, for example, the User Graph, which took a while to build, and got to a point now where it's really delivering results and so we saw a 6% uplift.

Coming from that, we also had the Kinetic Design platform that went out there and started operating and started optimizing. So all of those things drove better revenue per client.

Going forward, and I think Benoit mentioned this, is we -- this is always the hardest thing for us to look at in our Business. There's a number of initiatives around improving the core business that we're excited about. At the beginning of every year, we always have a good portfolio of initiatives, and we feel strongly the specifics of what those initiatives are going to result in are hard to forecast, but I would say we feel quite positive.

The one thing that's hurting us this year is the mix effect of smaller clients coming in, and [NMS] becoming a bigger part of it. So, but overall, we feel quite good about the innovation pipeline that we have.

--------------------------------------------------------------------------------

Benoit Fouilland, Criteo S.A. - CFO [32]

--------------------------------------------------------------------------------

So just to reiterate what's, I believe I covered just earlier on the call as well, is that for the year, we have assumed a slight decline of revenue per client as a result primarily of the mix of increasing share of mid-market clients in our overall portfolio. So that's what's assumed in our guidance for the year. Now, as you see, we also assume very strong dynamics in each of the two categories of clients, but as a combined average, we assume that it will decrease during the year.

--------------------------------------------------------------------------------

Heath Terry, Goldman Sachs - Analyst [33]

--------------------------------------------------------------------------------

Great, thank you.

--------------------------------------------------------------------------------

Edouard Lassalle, Criteo S.A. - Head of IR [34]

--------------------------------------------------------------------------------

Thank you very much. This concludes the call for today. If you have any further questions, the IR team will be very happy to address them. We wish you a very nice day. Thank you, everyone.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.