Good morning and welcome to the Criteo Third Quarter 2017 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] And please note this event is being recorded. I would now like to turn the conference over to Edouard Lassalle, Head of IR. Please go ahead.

Thank you, Nicole. Good morning everyone, and welcome to Criteo’s Q3 2017 earnings call. With us today are Eric Eichmann, CEO, and Benoit Fouilland, Chief Financial Officer. During the course of this call, management will make forward-looking statements. These may include projected financial results or operating metrics, business strategies, anticipated future products and services, anticipated investment and expansion plans, anticipated market demand or opportunities, and other forward-looking statements. 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 these metrics and the reconciliations to the most directly comparable GAAP financial measures were provided in our earnings release published earlier today. Lastly, 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 Eric Eichmann, Criteo’s Chief Executive Officer.

Thank you, Edouard, and good morning everyone. I am pleased to report another strong quarter for Criteo. We continue to deliver high growth while increasing profits and cash flow. Before we walk through the quarterly results, let me say a few words about the large emerging opportunity our Commerce Marketing Ecosystem opens up for us to serve retailers and brands in a fast evolving market. The battleground has shifted for commerce players, and today success increasingly depends on the ability to know your customers and serve them intelligently. This comes with multiple challenges for marketers. One, the seamless understanding of the shopper journey requires gathering granular shopper data in real time, both online and offline, and on a mass scale. And two, even more important, the activation of this dataset for commerce requires predictive technology, consumer reach at scale, and real-time advertising optimization to drive sales. Commerce marketing is quickly emerging as the next big marketing category after search and social. It focuses on inspiring people to buy things and is measured by performance, directly driving sales and profits for marketers. And unlike search and social, it is not limited to digital, as close to 90% of commerce still happens offline. To help marketers take advantage of these trends, we are building the highest performing and open commerce marketing ecosystem that delivers performance at scale to retailers and brands. The Criteo Commerce Marketing Ecosystem is powered by over $550 billion of online sales and associated intent data, state of the art machine learning, and unrivaled consumer reach across thousands of publishers. The Criteo Shopper Graph, built through data sharing among ecosystem participants, is made of three trusted data collectives. One, the Identity Graph, allowing us to match users’ identities across devices and environments; two, the Interest Map, collecting and organizing…

Thank you, Eric, and good morning everyone. I am also pleased with our Q3 performance. We continue to deliver high growth coupled with increased profit and free cash flow while investing in the business. This attractive combination remains the key differentiator of our strong model. I will walk you through the quarterly performance and share our guidance for Q4 and full year 2017. Q3 revenue was $564 million, up 32% at constant currency. Revenue ex-TAC, the key metric we use to monitor business performance, grew 32% at constant currency to $234 million, driven by a 14% growth in same client revenue ex-TAC and the addition of 930 net new clients across regions, sizes, and products. Revenue ex-TAC margin was 42%, in line with expectations and the prior year level. In the core business, both tier 1 and midmarket clients continued to show healthy growth in revenue ex-TAC per client at constant currency. Compared with our guidance assumptions, changes in ForEx had an approximately $3.5 million positive impact on the revenue ex-TAC, driven by the stronger euro and Japanese yen. In addition, compared with the prior year, changes in ForEx represented a tailwind of approximately 70 basis points to revenue ex-TAC growth. Moving to expenses, other cost of revenue, comprised of hosting and data costs, grew 34% to $30 million, driven by increased hosting capacity across data centers as well as additional third party data to complement our Identity Graph. Operating expenses increased 31% to $171 million. Headcount related expenses represented 75% of GAAP OpEx. Global headcount grew 23%, closing the quarter with over 2,700 employees. Non-GAAP operating expenses grew 26% to $140 million. On a non-GAAP basis by function, R&D expenses grew 42% to $35 million, in line with our investment plans and largely driven by a 37% increase in…

Thank you. [Operator Instructions] Our first question comes from Dan Salmon of BMO Capital Markets. Please go ahead.

Good morning everyone. Eric, could you perhaps expand a little bit on the decision to retire Predictive Search? I think in your prepared remarks you mentioned a little bit around that variability of traction and performance. I’d just love to hear a little bit more about that. And then second, you spent a good amount of time on retail data co-op. Could you just expand a little bit on how you’re working with retailer partners to get offline sales data in particular? Thanks.

Okay, great. Thank you, Dan. So let me first talk about Criteo Predictive Search; a couple of things to mention on it. First is, as you know, this for 2017 really doesn’t have a significant impact on our top line. We have provided sort of guidance for 1% to 2%, so it’s minimal from that perspective. We had been in the market now for about eight, nine months. And in that period of time, we have about 200 clients live with Criteo Predictive Search. And when I mentioned we have some traction in the market, so we’ve been very sort of proud of the effort that the team has put in place to get clients signed up. One of the challenges that we had since the beginning, and we probably sort of got a better appreciation as we were in-market, is the ability to measure the performance of the solution over other solutions. And that has proven to be a very difficult thing to do for a couple reasons. One, there’s no established head to head protocols out there like you have in display. And so we had to work to establish one of our own, which we think is stable enough, but it’s not standard in the industry and it’s hard to sort of implement with partners. And the second this is that, unlike sort of the elasticity that exists in display, you don’t have one metric of sort of uplift in sales. You often have two metrics that come into play. One is the cost that you’re able to sort of achieve for the partner and the sales that you’re able to achieve. And so, those two metrics don’t always calculating to an easy sort of one metric comparison. And so though in the clients, we obviously have…

Great. Thanks, Eric.

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

Yes, can you hear me?

Yes, yes.

I’ve got couple of questions. First one, just staying on the e-commerce marketing thing, obviously the fact you’re retiring search is something that some people will say is disappointing. But can you give us a feel for how reception of e-commerce is – the e-commerce marketing proposition has been relative to the sort same point in development of search, and also whether there are any issues we’re going to encounter in terms of measurability here that could also sort of impact the take up of e-commerce? And also, I know you have quantified customer acquisition previously in terms of the market opportunity. But do you have a sense for the overall market opportunity here versus what you were talking about with search? And the second one was on the margin. Your Q4 margins increased – or let’s say the margins implied by your Q4 guidance increase quite a lot year-on-year, and that’s despite the impact of ITP. And sorry, can you just go through in terms of your Q3 – or, sorry, the Q4 guidance, what the components were in terms of sort of like-for-like HookLogic drag, FX, and whatever’s going on in terms of ITP? Thanks.

Great. And thank you, Sarah. So let me just maybe take the first couple questions, and then I’ll pass it on to Benoit. So one, I would say the commerce marketing narrative has been very well received. And we’re helped by the fact, obviously, that large e-commerce platforms are creating a lot of pressure on existing businesses. So the urgency around sort of doing something and the understanding that data and technology are driving a lot of the value today, sort of what we call understanding your customer and serving them appropriately, has helped. I think, look, if you look at the products that we have, one of the tenets of search is that we would use our technology in optimization, which I think we’ve done well, and to a certain extent what we’re calling the data collective, the Interest Map or sort of the ability to see what shoppers have done on sites. And what we’ve found also in looking at that is the technology we’re able sort of to – as I said, the clients are with us and we’re able to add value. But the value coming from the Interest Map, on top of what is already an environment where you have a stated intent with the search keywords that happen, was not as significant. In terms of the Commerce Marketing Ecosystem and the products we’re talking about, a lot of them rely on an open environment that is not sort of driven by one or two suppliers, and so the ability to measure success is very much similar to what we do in dynamic retargeting. And so we don’t see a problem there because there’s a very well established way of looking at comparables. I think search, since the beginning, was a particular market where doing…

Yes. So the margin – thanks for the question. On the margin for Q4, it’s a combination of the fact that we have been delivering – we are ahead of our plan for the nine months, and we’ve been delivering better margin in Q3 and expect to deliver also a better outlook for Q4. It’s a mix of several factors. First, we had a very disciplined and focused hiring on critical functions. If you look at where we have been hiring, we’ve been prioritizing MMS on one hand, on R&D on the other hand, with a modest increase in terms of resources in other functions. So we had a paced and focused hiring. We have also – with respect to Q4, we have pretty effective variable pay policy internally which allows us to compensate for some of the impact of ITP from a cost standpoint on the variable pay through the company. And the third point I would highlight is the fact that our model continues to deliver operating leverage as a result of the pull- through levers that have been pushing our margin for now multiple quarters. So if we look at the guidance for Q4, I’d like to just remind that we have never provided guidance specifically for Q4. We had communicated some caution – at the time of the Q2 earnings release some caution around Q4, as we were – it was still early at that point to estimate the impact of ITP. So if you look at compared to the prior outlook that we had given for the year, the variance is approximately around – just above $20 million down compared to the prior outlook for the year, and that is essentially the impact of ITP. There is also a small impact from search, because we are going to see obviously less revenue ex- TAC from search in Q4. But essentially it is the impact from ITP that explains this $20 million decrease in outlook for the full year. With respect to margin for next year, what I had indicated is, given the focus that we have in allocating our resource, we believe that the ITP impact that we have highlighted for next year should not drive a significant impact on our adjusted EBITDA margin next year when it’s compared to the one that we believe we could achieve this year.

Okay, thanks.

Our next question comes from Mark Kelley of Citigroup. Please go ahead.

Hi, good morning. Thanks for taken my questions. first one is just back on ITP. You talked a little bit about improving and deploying some solutions to offset some of the impact. Can you go into a little bit more detail there? Are these technology changes you still need to make and then implement, or are you talking more about procedural changes that you’ve already developed, you just need the clients and publishers to adopt them? And then second, I know it’s just been over a month since ITP was released. But are there any differences or nuances that you’ve seen in the public version versus the beta version that you now have to react to? Thanks.

Okay, great. Thank you, Mark. So on ITP, just a couple of things. What we’ve developed is a privacy friendly solution. We already have a privacy friendly solution for Safari users. And we continue to do that, and so we feel quite good about that. The solution relies on sort of the ability to have an identifier that is not a cookie but is allowed within sort of the transfer information between websites and our servers. I think two things in terms of how we expect this to evolve. One, it’s a new technology for us, and so we sort of have to work out the kinks, if you will. And so those are sort of a box here and there that we have to make sure work. And then the other thing is it works best when we’re connected directly to publishers. So we’re rolling these out with publishers directly, and the more we have a presence on a direct bidder perspective the better it is for us. The other change is sort of working with the exchanges to make sure that that information can be transferred through the exchange. We haven’t done this across all exchanges, and some are more difficult than others in terms of the implementation. And so that’s part of sort of what sort of creates some of the, if you will, uncertainty around sort of how much of it we can mitigate. In terms of the difference between what was public or what is public now in terms of the technology and what we expect, there were a couple of changes back in the days before they – it wasn’t clear that it was going on by default. It wasn’t clear it was going to be on mobile or not. But by and large, sort of the way it’s working is what we expected it to be. And that’s why, at the moment that sort of iOS11 was released, we had a solution that we were putting in place very quickly. So hopefully that answers the question.

That does. Thanks Eric.

Our next question comes from Douglas Anmuth of JP Morgan. Please go ahead.

Thanks for taking the question. I guess maybe first, just to follow up a little bit on ITP, just wondering, Eric, if you can help us understand in a little bit more detail how the solutions are working on both publisher inventory and then also exchange inventory and what some of the key differences might be there? And then second, can you just give us some of your early thoughts here on how you’re thinking about GDPR in 2018? And then if we think about Benoit’s comments about 9% to 13% the lower revenue from ITP in 2018, is there any impact from GDPR in there or is that just solely ITP-based? Thanks.

All right, great. Thank you, Doug; great question. So on ITP, just to be a bit more precise, the solution, which we call HSPF on our end, uses the HTTP strict transport security protocol. And that’s just another field in the information that goes back and forth, and so it allows you to sort of store an ID within that field without having to use the cookies. Again, like I’ve said since the beginning, this is a privacy friendly solution where we sort of seek consent from users, just like we had done before. And so the question, when it comes to exchanges, is are they sort of using this or sort of are they okay using this mechanism. And for most of them, the conversations are good. Some of them are already implemented. For some others, sort of we need to work harder with them to get that. It just – yes, it’s one mechanism where you can exchange the data and see the data. There are other sort of mechanisms that you could use over time. And this is why we could find ourselves in ways where we need to continuously adapt our solutions, and that’s one of the things that we think about constantly. So hopefully that gives you a better sense for it. GDPR; as we’ve said in the past, we feel quite good about GDPR, though there’s quite a bit of uncertainty still about what it means exactly. What we believe is it does a couple of things that we’re excited about. One, it sort of takes regulation that is sort of country specific and makes it sort of region wide. And from that perspective, it’s going to be easier for us to track that. Two, I think one of the things that GDPR is looking for and is not – hasn’t been as specific on yet is to make sure that there is clear consent, something we do today. And I think one of the concerns of the commission as we understand it is that it’s a bit clunky to have each website sort of ask for it, so they’re looking for ways to do this. And then there’s a third element about sort of a legitimate reason to be sort of having the information, which we again feel quite good about. So I – and then I pass on the question to Benoit about the guidance.

So with respect to the guidance, the impact we indicated next year for – the expected impact at this stage for ITP, we don’t expect any additional impact on the top for GDPR. We don’t see a negative impact coming from GDPR on the top of what has been indicated already for ITP.

Great. Thank you, both.

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

Good morning everyone. So, two questions really. The first one is on the – really your new initiatives around getting the CMOs to work with you in a more – a deeper way and a more diverse way. Can you give us any sense of how do you think this can impact next year and maybe the next two years, both in terms of investments but also revenues? And also, just to come back and just to make sure I understand well on the ITP impact, if we take the Q4 impact you mention and the next year’s impact you mention, how much do you think it will really take off in total of your revenues maybe in U.S. dollars or as a percentage of revenues? Because it seems to be a little bit higher than maybe what was indicated before? Thanks.

Great. Thank you, Charles. So on the new initiatives and the CMOs, we mentioned that a Forbes Insights survey showed that 71% of CMOs are willing to share data as part of a pool. And we have seen this actually in practice when we ran the customer acquisition beta in the UK. Out of 10 customers, eight were okay sharing the data in a pool. So in terms of investments, I think this is very much in line with what we’re planning to do with the data collective. Remember for the Interest Map we already have all the data. What we need to get is permissions from the companies to be able to do it. And then the second thing we need to do is really invest in making sure that the data is consistent across retailers so that we can find a red hat at one retailer and sort of also see that that red hat exists at another retailer so we can link sort of the information across retailers. We haven’t provided any guidance about next year in terms of revenues for these products. We see the potential of not just this product, but the portfolio of products that we’re going to bring as part of the Commerce Marketing Ecosystem being a significant opportunity for us. Again, we haven’t provided sort of any guidance on this. But certainly in talking to CMOs and in talking to the companies we work with, the excitement is real. And it also allows us to have a conversation at a higher level at the client, because obviously now we’re talking about activating their data offline, about filling sort of needs across the funnel in a way that sort of makes them more defensible or puts them on an equal footing against a large e-commerce platform. In an ITP I’ll let Benoit…

So before I add on ITP, I wanted to mention with respect to new products for the investment next year, we compare what we’ve seen this year where we had significant investment with respect to – especially on the R&D integration of Sponsored Products into our core technology where we are now 12 months into an 18 months roadmap. So we should see this effort going down next year as we complete the full integration. And with respect to the secondary investment that we had around Sponsored Products, we have now integrated the sales force and we are coming to market with an integrated sales force for next year, which should also lower the requirement in terms of specific sales force specialists with respect to Sponsored Products, just to put this in perspective for next year. With respect to ITP, we indicated that dollar amount for Q4, so it’s around $20 million of an impact from ITP negative on the revenue ex-TAC. Obviously, for next year, as you know, we will guide only next year when we will release our results in February. So what we’ve chosen is to give you a range with respect to the negative impact in percentage, so the 9% to 13%. And what are the factors behind it? First is that we anticipate that the rollout of iOS11 is going to continue to increase to reach around 90% by the mid of the year, which would be we believe, the plateau based on experience. And what we are anticipating as well is that our current ability to offset, which we are close to 50% or about at 50% with also increase over time. So these are the two components. So the revenue at risk; if you look at the revenue at risk today, we are – around 17% of the revenue ex-TAC is, I would say, at risk in Q4, of which we offset approximately 50%. And if we look at next year – and we are at 17%, not 70%, 17%. And with respect to next year, we believe that this revenue at risk is going to be increase slightly above 20% to reach around 23%; 22%, 23%, and as a result of the increased penetration of iOS. But we believe as well that we are going to increase our ability to offset. So these are the parameters that we can share with you today.

Yes. But Benoit, if I just may on this one, since you’ve had a few weeks of ITP and actually a full quarter in Q4, shouldn’t the impact that you mentioned be on three quarters of the year rather than the full year? Because next year when you lap into Q4, you should probably be on a more comparable basis. And Q4 is actually quite big last – next year.

No, approximately – yes, absolutely; absolutely. While we will be in Q4 next year, I would say the initial impact will be behind us. And then we will carry then a pace of growth that should not be impacted any more by ITP at this point.

Right. Another way of saying that is that obviously ITP to a certain extent sort of resets a base from which, once we’re in it, sort of we go back to what – our core growth of the business. And obviously, there’s also a possibility we mitigate a larger part of ITP, right? So that’s what we’re working on.

Okay. That’s very clear. Thank you very much.

Thank you.

And our next question comes from Richard Kramer of Arete Research. Please go ahead.

Hi, couple of questions. And just to follow-on the last one, if people in the market are having difficulties buying Safari inventory and that should lead to lower CPMs there, can you see higher take rates on other inventory sources and increase bids and sort of mitigate the impact with other inventory sources? We’re kind of talking about one inventory source in isolation, so that’s one question. Second, maybe Benoit, you can just help us understand exactly the implied loss in CSP, I think it was suggested it was about $5 million, and what the revenue ex-TAC was in 3Q. And won’t that move into a situation next year where that should be a meaningful contributor to profits? And the third one, I know it’s one we’ve talked about in the past, but the cash is now back at the level that it was before you bought HookLogic, or almost back to the same level. Given how you’ve had a slide in the equity, why wouldn’t you look at putting some of that cash back into work in a buyback or at least to mitigate dilution or use that cash somehow? Because you keep generating more cash but it’s not reflected in the share price. Thanks.

Great. So thank you, Richard. Let me just take the ITP one and I’ll pass it on to Benoit for the other two. So ITP, if users are sort of accessing most of their activity to Apple devices, it is hard to find those users in other places. We can find them in the app environment where Apple sort of has no restrictions about IDs. But in general, it’s not as easy. If they go to work and they’re using a PC or they’re using Google Chrome, we can certainly find them, but there’s part of their history that we lose. Now the positive side of ITP is that through our solution we’re obviously accessing inventory that many people cannot access. So the competition of that inventory is much lower. So not unlike sort of some of the effects on the inventories, we might find ourselves being some of the only ones with the profile that we have accessing and buying that inventory. And so we can get better prices and higher take rates on that inventory. The net effect of that is still to be seen. We frankly don’t have a good idea of what that is. But again, it’s not just an inventory source sometimes. If users are sort of exclusively using Safari browsers, it’s hard to sort of find them in other places. So with that, let me just pass it on to Benoit about the two other questions.

Yes. So with respect to the loss resulting from Sponsored Products, you are right. It’s approximately $5 million loss on EBITDA for the quarter. So we’re still looking for the year at a slightly dilutive impact in terms of absolute impact on adjusted EBITDA. So I would say middle digits in terms loss. So for next year, we expect to see growth in – significant growth there in Sponsored Products. And as a result of lowering the effort on the integration – R&D integration, as we will complete the R&D integration by that time and also the integration of the sales force, we should see Sponsored Products turning to a contributor to the EBITDA, not yet to the margin but to the EBITDA next year. With respect to the cash, you’re absolutely right. We are not yet at the point where we have restored the cash balance, the pre…

Almost.

But almost. And with the comments made on cash flow for Q4, you could expect that we would get there pretty soon. So we will look at the best alternative for the use of cash, which is always a tradeoff between investment needs that the business might have in terms of selective acquisition versus potentially looking at buying back shares.

And I would say obviously in that equation we’re embarking on a significant endeavor to bring a Commerce Marketing Ecosystem for retailers, a brand that has been well received, and there’s a number of products that we’re going to build there. And as we see companies or propositions outside of what we can do organically, we’ll certainly look at acquisitions continuously. And we see a big opportunity there.

Okay. Thanks.

Thank you, Eric. This concludes our Q&A session. We thank everyone for attending the Criteo call today. The team will be fully available if you have any follow-up questions. Goodbye and have a great rest of the day. Thank you.

Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.