Good morning, everyone, and welcome to the Criteo Q1 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note that today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Edouard Lassalle, VP of Investor Relations. Sir, please go ahead.

Thank you. Good morning, everyone, and welcome to Criteo's Q1 2017 earnings call. With us today are Eric Eichmann, CEO; and Benoit Fouilland, CFO. 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 today. Definitions of these metrics and the reconciliation 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, let me now turn the call over to Eric Eichmann, Criteo's Chief Executive Officer.

Thank you, Edouard, and good morning, everyone. I am pleased to report another strong quarter of profitable growth, the result of continued successful execution. Before we go through the quarterly performance, let me talk about how we help marketers win in a fast evolving and increasingly complex environment. Marketers need relevant marketing that drive sales in a measurable way and provides seamless experiences to consumers. Three trends are driving their demand. First, the fast growth of data rich ad buying is providing more opportunities to drive accountable personalized advertising at scale. Second, the increasing disjointed shopping experiences across devices and environment, both online and offline creates strong demand for seamless and integrated marketing. And third, the continued digitization of offline activities, largely driven by mobile devices opens new opportunities for performance marketing. In order to take advantage of these trends, marketers need a trusted partner with state of the art technology able to harness data at scale to enable them to drive more sales and profits. Criteo's performance marketing platform powered by proven machine learning, a massive pool of granular shopper data and a network of tens of thousands of retailers, brands, and publishers helps our clients maximize sales and profits across the shopping journey. The Criteo performance marketing platform brings significant value to our partner ecosystem. With Criteo dynamic retargeting, marketers profitably target convert shoppers at scale across online channels. With Criteo Sponsored Products, retailers gain additional revenue by monetizing their site inventory, while brand grow sales with comprehensive attribution measurement across retail partners. With Criteo Predictive Search today and other products in our pipeline, we help retailers drive higher sales and maximize ROI. And all of these products are fueled by the most powerful user graph focused on shoppers. Turning now to the Q1 results, for 14 consecutive…

Thank you, Eric, and good morning, everyone. I am also pleased with our success in Q1. We delivered rapid profitable growth on healthy free cash flow, while investing across the business, a combination that makes our model attractive and differentiated. I will walk you through the quarterly performance and share our guidance for Q2 and 2017. Q1 revenue was $570 million, up 30% at constant currency. Revenue ex-TAC is a key metric we use to monitor our business performance grew 30% at constant currency to $210 million. This was driven by the continued growth in same client revenue ex-TAC on the addition of new clients across regions, categories, and products. Revenue ex-TAC margin was 41% in line with our expectations. Compared with guidance assumptions, changes in ForEx had a $1.5 million positive impact on revenue ex-TAC mostly driven by the Japanese yen. However, compared with prior year period changes in ForEx represented a headwind of 90 basis points to revenue ex-TAC growth. Shifting to expenses, other cost of revenue comprise of hosting and data costs grew 48% to $27 million mainly driven by increased hosting capacity across data centers on to lesser extend third-party data to complement our user graph. Operating expenses increased 39% to $162 million, including $18 million related to the full quarter impact of Criteo Sponsored Products. Headcount-related expenses represented 75% of GAAP OpEx. We added over 80 net new employees in Q1 and closed the quarter with more than 2,500 employees, a 31% increase compared with Q1 2016. Non-GAAP operating expenses, which excludes depreciation and amortization, equity awards, compensation expense, pension service costs, acquisition related cost and deferred price consideration, grew 33% to $137 million. Excluding exceptional expenses of approximately $2 million, primarily related to corporate development projects, non-GAAP OpEx grew less than 31%. On a…

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Mark Kelley from Citigroup. Please go ahead with your question.

Hi, good morning. Thanks for taking my questions. The first one, for CSP can you just remind us how TAC margin should progress throughout the year? We know how revenue kind of plays out, but the margin side will be helpful. And then on the video product, can you give us any details on what kind of conversion or click-throughs you're seeing any initial test? I know it's early days, but any color there will be helpful. Thank you.

Thank you, Mark. Let me take the video one and I'll pass on the TAC margin to Benoit. On the video, it's early for us. Obviously, video as you all know is a big format online. And for us one of the key challenges was to create a video that was personalized and we've been able to do that. And so we're in the early stages. We look at this from a Rev ex-TAC perspective. And where we are today is that we're seeing good results on limited volume. And that is good, but is not necessarily an indication of something that will turn out to be the same when we increase the volumes. And so that's the next stage for us. And we again - we're seeing good enough - on limited volume good enough Rev ex-TAC, which means the combination of click through and conversation is competitive. So that's for video. And then…

For TAC margin, the margin that was generated in Q1 was 27%. And what we expect for the year is in the mid-20s as we indicated in the earlier - in the last earning calls.

That's helpful. Thanks. And one quick housekeeping one if I could. The Criteo Summit, how much was that or will that be a drag on EBITDA for this quarter? Thank you.

So as you know, I mean, the Summit is an event, which is an important event every year where we gather all the employees. It is the only occasion during the year where we have a large meeting of employees. And we are going to have a cost, which is exactly equivalent to the cost per head that we had last year. So if you account for the growth, it's a cost which would be around $7 million to $8 million, including all travel.

That's great. Thanks very much.

Our next question comes from Lloyd Walmsley from Deutsche Bank. Please go ahead with your question.

Thanks. Two if I can. First, just on Predictive Search, can you give us an update on where you are in terms of developing a standard testing protocol with Google? And what you think that can do in terms of helping win new business when you get that in place? And then, you guys - I'm wondering if you can give us just some color on video from both a product perspective and a go-to-market perspective. Is it something that you think is a relatively easy, like bolt-on on top of the user graph in terms of just driving performance there that you can scale? And then, from a sales perspective, are you primarily serving the same kind of e-commerce customer base or are you trying to tackle new customer types with your video product as well?

Great. Thank you, Lloyd, great question. So on Criteo Predictive Search, let me maybe just give you a little background on the A/B testing protocol. To date, what we've done is a deal split on top of Google to try and see what the lift is. And one of the challenges with that is that it could create biases over time. And so, we just launched a deal split that sort of changes deals every day. And so, that we think that will provide us a good baseline. Ideally, what we would like of course is that Google provides protocols that are more solid, that are based on technology that is put in place by Google. We're continuing to have conversations with them. The conversations are very positive. I think Google is willing to move forward. It's always a question of prioritization on their end. So we don't have a sort of an answer on when this will be developed. But we do have an indication that this is something that they're sort of willing to move forward with. So that's on the Search side, on video, maybe let me just explain a little bit what the video product is. So the video product is for our core retargeting business. And what we do is we do build videos on the fly that are specific to a particular user based on their history. And then we run those videos in a sort of - in video inventory. And the same metrics apply for our advertisers, which is the people click on the video and then they convert and bought the product. So it is a pure bolt-on. The two parts that we need to do once we have a product that performs is, one, secure the inventory from a volume perspective. That's different than our current sort of if you will sort of supply and that is just normal work that we would do when it comes to inventory supply. And the second thing is obviously we need the advertisers that we work with to say that they're okay using video inventory. We found that that's not a big issue. Obviously, advertisers want to see how the videos look like, but in general, they're going to judge these on performance. So it is a bolt-on, it's for the same clients that we operate with today. And the big question as I said earlier is more about can we scale, because you have different effects when you have volume increase, but the early test look quite promising so…

That's very helpful. Thank you.

Our next question comes from Charles Bedouelle from Exane. Please go ahead with your question.

Hi, good morning, everyone. So I actually had a kind of follow-up question on video. You said, you can now create the video on the fly. I mean, can you explain us how that work and what has changed maybe versus the past, and maybe also what are the limitations? And the other question I will have is on the Search product. I mean, you gave us an idea of the ramp up through 2017. It would be useful if you could give us maybe a ramp up as the quarters progress this year, and also what impact is on margin, so we can also assess the kind of core underlying trends for the business. Thanks.

All right, thank you, Charles, great question. So on video maybe let me just - I cannot go a bit deeper on the product, because unless you see it it's probably not as easy to understand. But basically, we're recommending products for users and we're building, say, if you have five products that I would recommend to you, Charles, based on your history, we're going to build a video that will sort of feature those five products. We'll have a music that's actually built through technology and we'll hopefully sort of get enough of your interest that you'll click and then buy. And so that's the challenge with sort of build the video in a certain period of time. That would do that and have it perform, of course. So that's the video product. On Search, like we've said, I think this year for us is a year where we're assessing the market. We don't expect a significant impact on the Rev ex-TAC. And I think we - the sense is that if we have a good A/B testing protocol and we continue to have the uplift that we're seeing originally then we should have a product that grows over time. But this year I would say in part is a year where we're testing a number of things. We're charging as you know a share of revenue when we meet with clients. And that share of revenue, generally, we're trying to get to a 10% to 20% of cost being spent by those customers. And that, of course, is a very disruptive way of coming into the market and that's why we sort of - we're sort of testing the market and seeing what the reception of that is. In general, what we see now with 70 clients that we work with today is the reception is good. There is strong interest. The retention is high and the satisfaction is quite good with those clients.

Yes, thanks.

Our next question comes from Brian Fitzgerald from Jefferies. Please go ahead with your question.

Thanks, guys. A couple of question, looking at the business outlook, 2Q EBITDA looks like it was a bit lower than the Street expected, but you maintain the full year EBITDA outlook. And you obviously just posted EBITDA well ahead of outlook. A question on how we should interpret that. Is normal seasonality starting to come to roost a little bit more as the business model matures, while you continue to invest for growth? Are you finding that as you invest in new products like Predictive Search and Sponsored Products and video? Are those requiring more early upfront investments than maybe previous investments?

Yes, yes, so thanks for the question. So in fact, we are in line with our plan on the Q2 EBITDA. I think the key piece that needs to be factored in the seasonality, which is new this year, is obviously the Criteo Sponsored Products impact. It's a business which is highly seasonal as we discussed during the last earning release. On the Q2, just to give you a sense, Q2 was representing around 20% just above 20% of the Revenue ex-TAC for the full year for last year for Criteo Sponsored Products. So that gives you a sense of the seasonality while Q4 was representing close to 45%. So there is an impact of seasonality that needs to be factored. Secondly, as I say, we have a sequential increase in expenses, associated with the Global Employee Summit that we have every year, but associated as well with growth - continued growth of headcount that we are foreseeing for Q2. So in fact we are in line with our plan, but the seasonality is slightly skewed compared to what it was in prior years.

Got it. Thanks, Benoit.

Our next question comes from Heath Terry from Goldman Sachs. Please go ahead with your question.

Great. Thank you. I just wondered, if you could give us a bit of an update, and you've talked about 6% in the past, but where was Facebook in terms of its importance to your business, to your - either from a revenue or inventory perspective. And then just if you could give us a sense of sort of how some of the new more targeted products like DPAs that you are participating, and are helping drive some of the growth that you are seeing in the business. What the profile of customer that's using you do help them with DPAs on Facebook looks like?

Okay. Thank you, Heath. That's a great question. So as we mentioned last quarter Facebook was about 6% or Rev ex-TAC, the last quarter in Q1, so that was Q4 and Q1 it was 7%, so it's increased a bit. We continue to work with Facebook, Facebook is a key partner for us. And we very much appreciate sort of being able to reach and by their inventory. I think, we participate very actively with DPA and many of our clients more than half of them sort of buy on Facebook through us. The areas were not sort of participating as much as dynamic us for travel, which are areas that - which are ads that Facebook is intending to go direct to people like Booking and Expedia and those types of clients, but otherwise we are quite excited and we continue to see Facebook as a key part of our ecosystem.

Great. Thank you.

Our next question comes from Sarah Simon from Berenberg. Please go ahead with your question.

Yes. Hi, two questions, please. The first one is just on China, you said on the last call that you would - you had a sort of key set of criteria that you're measuring yourself in terms of progress. I just wanted, if you can give us any update on that? And then, the second was just sort of broader question. Did you see any impact from - it's obviously video related more than your business, which is not primarily video at the moment. Whether there was any change in terms of marketers' activity with you following the YouTube, ads appearing in the wrong place and the Facebook measurements issues? Thanks.

Great. Thank you, Sarah. That's a great question. So on China, first maybe to give you a quick recap of what we've done in China. So for us, it was important to look at the Chinese market, we need to put a certain things in place to be able to test that market. And the things that we need to put in place where one set of having a data center in China, which we've had now for about three quarters. We also needed to connect to the supply in China those are different partnerships that versus the one that we have in other parts of the world and required custom integration. And China being a very sort of in-app centric market, we also needed to sort of connect to in-app inventory, and that was not an ecosystem nor a marketplace that was developed. So I think, we've made good progress in that, where we are having I think a bit more difficulty in China. And this might prove to be structural is that we are having a hard time integrating our solution fully with advertisers. In that, advertisers are most skeptical about having us see the sales that are generated from our campaigns. And so that for us is difficult in the sense that if we don't know whether we are driving our sale or not it makes it hard for our technology to perform. So we are still in the process of seeing if that is a structural issue, if it is something that can be resolved. And so I think that's for the domestic business in China, which is sort of working with domestic advertisers to drive domestic sales. We do have and we continue to be very excited about the export business in China, where we are working with large e-commerce companies in China to expand our business overseas, and that continues to grow and uses of course our full global network. So that's on China, on the issue of the video impact obviously with the YouTube and brands being more sensitive about where their ads are placed and what content is placed - we had requesting questions from advertisers. But it really didn't affect us, we already have quite strict guidelines around where we have our content, we don't place ads on YouTube, there are no third-parties that can place ads on YouTube. So YouTube was not part of our inventory mix, and from that perspective it didn't affect us. Bu the overall halo that that created by brands being more sensitive, was one issue that came to us. But we feel that we are in a good position to address those issues, and have a good process in place to do it. So in short, it really didn't affect us, except for obviously having to talk to the advertiser making sure that they understood what we did.

Great. Thanks.

Our next question comes from Doug Anmuth from JPMorgan. Please go ahead with your question.

Thanks for taking my question. I just wanted to follow-up on products, I think you've mentioned that Sponsored Products is generally on track. So is that mean where - that you're still expecting mid-single-digit percentage of revenues impact this year. And then also can you talk about any progress that you are seeing just in your conversations with your retailer ad inventory partners in terms of moving them over to become advertisers and I have a follow-up as well.

Yes. So you mean - Thank you, Doug. On the second question was sort of people that are retail partners for inventory becoming advertisers for core retargeting business?

Correct.

So what's interesting, and we are at the beginning of us, sort of understanding the full benefits of having a solution that cost across and brings many benefits to retailers. And we are having a couple of conversations that were helped by the CSP business, the Sponsored Products business to drive people to become retargeting business - businesses for us or clients. And in that perspective, we are seeing some progress, nothing to sort of talk about right now, but I think in terms of the Sponsored - we are seeing good progress on the retail side. We continue to sign clients, we mentioned a couple of clients in our earnings call that were clients that we signed like Walgreens and often in the U.S. So with these sorts of very large retail clients, so we are excited about that.

And with respect to perspective for the full-year, we are still in line with what we had indicated before, which was a mid-single-digit uplift to Revenue ex-TAC for the year. So we are in line with what we said before.

Okay. And if I can just follow-up on header bidding, I know in the past, I think you said at your Analyst Day, I believe a low-single-digit impact. I'm just wondering, that you're working with 100 plus publishers and rolling it out more themes like you are having some early success. Do you feel like you can get back some of that revenue and turn it more into a positive for you?

Yes. So thank you, Doug, for that question. As we said last year at the Investor meeting, we saw then in the short-term and that was in Q2 last year, we have seen some headwinds but that in the long-term it would turn to be a positive. And we are seeing that with our new header bidding technology as I mentioned, we are accessing 15% additional users, and we are seeing we tested with publishers, we are seeing an uplift with those publishers of up to 40%. And then so we are quite bullish about our ability to have header bidding be a technology that helps and drives our business, so that becomes a tailwind. And potentially a significant one for us, and so I think the work now that we tested the technology, we've had 100 publishers in alpha test, and we've seen some of the promising results is to deploy these technology more broadly into different markets. And that's where we sort of are starting to do now in Q2. But I would, yes, we are starting to shift very much to being a tailwind versus headwind.

Great. Thank you.

Our next question comes from Matthew Thornton from SunTrust. Please go ahead with your question.

Yes. Hey, good morning. Thanks for taking my questions. I guess, maybe two if I could. Starting with just kind of general timeline here, I was little surprised here. You call out video this early. I thought that was much more of a kind of 2018, your products. But when we think about video app installs prospecting all pretty good incremental TAMs. I think these are all in alpha testing if I'm correct there, and are probably again more 2018 kind of driver, that's why I want to make sure that our heads on straight at there. And then secondly, I guess, just bigger picture on competition, I'm wondering if you can give us an update there, and maybe do any between the advertiser side versus the inventory side, I guess, again what you're seeing in terms of changing competition for advertisers as well as just the fight for inventory any update there? And then just one housekeeping if I could, I think you reaffirmed the HookLogic outlook for the full-year. I think on Search, you previously talked about less than 2% of full-year revenue and high-single-digit $1 million drag on EBITDA. Just want to confirm if those are still consistent. Thanks.

Thank you, Matthew. That's a great question. I'll let Benoit take the questions on Search and HookLogic in a second. But let me talk first about the new products. You are right, the lot of the new products we are talking about there. They're in development and testing this year. And if successful, they would have been impact starting in 2018. Video is something that we've tested, I think I would just want to make sure that people understand that at this point, we tested on low volumes and it's performing. But going from low volumes to high volumes sometimes sort of leads to performances that are not as exciting. And so it's still, we are going to that stage now. We are going to test higher volumes, I could have an impact in the second half of 2017, if it works, but that's still an if. But obviously video is a significant format, so if it does work, it could be good for us, but it's still a question mark for us. In terms of competition, I think, a couple of things on the advertiser end, what we are seeing is that there is not much change except for - I would say a bit of a positive change in Twitter sort of announcing their earnings call that they were sort of taking down or sort of winding down TellApart, which was a strong competitive for us here in the U.S., and so that's good news for us. And obviously open the possibility for us to work with those advertisers that we are working with them. And other than that I would say that it hasn't changed dramatically, we continue to compete with the same folks, and based on the retention rates that we have and the progress that…

So HookLogic, I just confirm the uplift of [indiscernible] looking at an uplift of mid-single-digit of Rev ex-TAC for the full-year. As previously indicated with respect to Search, we have indicated that this would be a very small contribution to Rev ex-TAC, so 1% to 2% contribution to Rev ex-TAC, to go with Rev ex-TAC for the year. And with respect to the impact to EBITDA, the impact to EBITDA unchanged compared to what we had indicated before.

Our next question comes from Rocco Strauss from Arete Research. Please go ahead with your question.

Hey, good morning. With Google getting more active in it's on remarketing efforts, and your take rates are extremely stable levels. Do you anticipate more competitive pressure over the course of the year? And maybe a follow-up to that, could you give us some sense on how to look at your take rates going forward with HookLogic having it seasonal weakest quarter and first quarter and first quarter Search that's slowly ramping. How should we anticipate take rates to develop throughout the year? And another one quickly on ARPU, which seems to be down 10%. Could you give us a sense here on how much of that is driven by mid-market, international clients, outside the U.S. and EMEA, maybe lower margin products such as HookLogic. And, yes, how that we should anticipate to develop that's going for EMEA? Thanks.

Sorry, can you repeat the last question, Rocco? We didn't get it. Sorry.

The last question, ARPU is down kind of 10% year-over-year, so spend some time and I would - yeah.

Got it. Okay. Great, Rocco. We had heard Apple, sorry, we were wondering what Apple has to do with us. We like the comparison but. So on the Google remarketing, I would say that Google is a partner, but they're also a competitor and they have had high intensity throughout the years. I would say, it started even five years ago and they continued to improve their product. We do quite well in the environment. We have high retention rates and I think the area where we have probably more pressure with Google is in travel where there are very large clients. And so, we compete in that area. But I would say the intensity hasn't changed one way or the other. It continues to be the same. And it's obviously a competitor that we look at quite closely. And so, I would say, no change on that one. On take rates and ARPU, I'll let Benoit answer again.

So on the take rate, we would expect the take rate to stay of the Revenue ex-TAC margin to be more exact, say, within 40% to 41% range. Maybe given the high seasonality of HookLogic or Criteo Sponsored Products in Q4 you can assume that will be rather at the low-end of that trend in Q4 as a result of the seasonality. With respect to the Revenue ex-TAC per client, so if you look at the statistic of the Revenue ex-TAC per client, they are live client. It's down by single digits, mid-single-digits. In total, on that is expected. We've talked about it for quite a long time. This is the impact of the mix of the growing share of midmarket. Now, if you look at the dynamics in each one of the two different segments of clients, we still have pretty healthy dynamics in those two segments taken separately. So you should expect to see this mix effect continue over time.

Thank you.

Next question?

Our next question comes from Tom Champion from Cowen. Please go ahead with your question.

Good morning. Thank you. You call that $18 million in expenses related to Sponsored Products in the release. Is that the right run rate to think of through the year? Are there some efficiencies that you can create there as you go forward? And, I guess, I'm just curious, given the different take-rates in the business, if you could disclose the contribution this quarter from Sponsored Products and Search. I mean, I think you've commented for the full year. But just curious what the contribution is for the quarter. And final question is, if I may, just curious if you could comment on what you're seeing from Amazon broadly and what the cooperation potential there, especially through sponsor products. Thank you.

Okay. So that's a lot of questions there. So on the $18 million, let me clarify the $18 million expenses that we talked about where in the context of the explanation of the net income, so this is the GAAP expenses. And there is a significant portion of those expenses that are non-cash and that are related to the amortization of intangible on one hand as a result of the purchase accounting of the HookLogic acquisition on the stock based compensation, because we made as part of acquisition a rather large grant of equity awards to the founder and employees of HookLogic. So you should not assume that this would be a run rate for the year. I think looking at the contribution of Sponsored Products as well Search for the year, what we indicated before is we are not intending to break down that contribution on a quarterly basis. We gave you indication for the full year that as I just said before are still valid. But we are not intending to give a quarterly breakdown of these expenses. With respect to Sponsored Products, I invite you again to be careful about the seasonality profile, because while the activity of Sponsored Products for the year as we indicated is going to be just slightly negative from an EBITDA contribution for the year as indicated before, you should expect the significant negative impact over the first quarter of the year on the significant and positive impact as we had last year as well for Q4 with respect to Sponsored Products.

And then on Amazon, Tom, obviously, Amazon is a very interesting company. We don't work directly with us on our core business. We would be very happy to do so. And we think we could add significant value to Amazon. But that's not the case today. I would say Amazon, obviously, and you've seen in the press recently that there is quite a bit of discussion about Amazon media services and their advertising services. Some of the services within media services are competitive with Criteo Sponsored Products. And to us it's a validation of our model. Obviously, we - our value proposition is to come forward and offer a network of retailers outside of Amazon or sort of, if you will, the network that is non-Amazon. And so, that flies very well and works very well with brands. And so from that perspective, I think it's an interesting development. I think as you look at Amazon and the growth they've had and the growth of e-commerce, which of course is significant compared to the rest of the industry. What that has created also for retailers is the need to think about how they reach scale and how can they bring technology to basically compete on better terms. And that if you think about the proposition and the products that we're pulling forward and pushing forward for these brands, it's a terrific set of offerings that retailers are willing to take, in particular because of the pressure that Amazon has. So Amazon is obviously a strong force and it's helping us drive our business and get more retailers to work with us.

Thank you.

Thank you, Tom. This concludes our call for today. Thank you very much. Have a good day, everyone. And if you have any further questions, please feel free to contact the IR team. Thank you everyone.

Thank you.

Thank you.

Ladies and gentlemen, this does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.