Good morning, and welcome to the Criteo First Quarter 2018 Conference Call. All participants will be in listen only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask question. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Edouard Lassalle, Vice President and Head of Investor Relations. Please go ahead.

Thank you, Nicole. Good morning, everyone, and welcome to Criteo's first quarter 2018 earnings call. With us today are Co-Founder, Chairman and CEO JB Rudelle: and CFO, Benoit Fouilland. During the course of this call, management will make forward-looking statements. These may include projected financial results or operating metrics, business strategies, anticipated future products and services, anticipated investment and expansion plans, anticipated market demand or opportunities and other forward-looking statements. Such statements are subject to various risks, uncertainties and assumptions. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements. We do not undertake any obligation to update any forward-looking statements contained herein, except as required by law. In addition, reported results should not be considered as an indication of future performance. Also, we will discuss non-GAAP measures of our performance. Definitions of such metrics and the reconciliations to the most directly comparable GAAP financial measures were provided in the earnings release published earlier today. Finally, unless otherwise stated, all growth comparisons made in the course of this call are against the same period in the prior year. With that, I will now turn the call over to JB Rudelle, CEO of Criteo. JB?

Thank you, Ed, and good morning, everyone. I am glad to be here after having been away from the day-to-day operations of the business for more than two years. As you know, the Board of Directors have asked me to lead again the company, I love, as CEO. I'd like to take this opportunity to thank Eric Eichmann for his great commitment and contribution in growing our business over the last years. Eric will assist me in this transition as my special advisor. Given the many changes that are happening in the industry, there is a lot that needs to be done to prepare Criteo for its next chapter of growth. I must say, I am super excited with this challenge. This said, I also recognize that we have not always done a good job in the past explaining why we strongly believe Criteo has so much potential to create value for shareholders. And with Benoit, Edouard, and the rest of the team, our task would be to regain the trust of our investors and convince them of our ability to reaccelerate our growth in the coming years. This said, I'd like to stress the fact that Criteo is today in a healthy state. Despite the significant headwinds we are facing with respect to user coverage, I am happy to report a pretty solid first quarter, delivering positive growth, while significantly expanding our profitability and cash flow. At constant currency, we grew our revenue ex TAC 8% and adjusted EBITDA 22%. I believe those better-than-expected results somehow illustrate the resilience of our business when dealing with external shocks. Looking at our results by region. In the Americas, we grew revenue ex TAC 3% at constant currency, with the U.S. market growing at 7%, driven by our dynamic business with large…

Thank you, JB, and good morning, everyone. I am pleased to see that we are off to a good start in 2018. We delivered another quarter of growth, increased profitability and strong cash flow, while investing for the future. I will walk you through our Q1 performance and share our guidance for Q2 and 2018. Revenue was $564 million. Revenue ex TAC, our key metric to monitor performance, grew 8% at constant currency, driven by new clients across region and sizes as well as expanding business with existing clients across our various solutions. Revenue ex TAC margin improved 200 basis points to 42.6%, largely driven by changes introduced by key supply partners in mobile apps that positively impact how we get charged for inventory. We are working to have our engine adapt to these changes, and as a result, anticipate that our revenue ex-TAC margin will normalize to prior levels over time. Compared with Q1 2017, changes in ForEx driven by the rising euro represented a tailwind of about 680 basis points to revenue ex-TAC growth, a slightly higher impact than anticipated. Switching to expenses. The increase in other cost of revenue was mostly driven by a higher number of servers to increase our hosting on computing capacity worldwide. Operating expenses grew 9%, largely driven by a 4% increase in headcount. We ended the quarter with close to 2,700 employees, and three drivers explain the slower headcount growth. First, the sale of the travel activity of HookLogic in January 2018 combined with the restructuring of Criteo Predictive Search accounted for a reduction of about 50 employees. Second, the transformation of our go-to-market model comes with a reshuffling of resources. Third, we had some hiring delays, in particular, in the mid-market. Headcount-related expenses represented 77% of GAAP OpEx. Our non-GAAP operating…

[Operator Instructions] Our first question comes from Matthew Thornton of SunTrust. Please go ahead.

JB, welcome back. Your opening comments there were helpful. Maybe one question for JB, and one for Benoit. JB, I mean, obviously, the board is actually kind of come back in here. Can you bring it full-circle and maybe give two or three bullets on what you're charged with accomplishing and how the strategy might change under your direction kind of moving forward, including your view of GDPR versus your predecessor? So maybe just a couple of bullets to kind of bring that all full-circle would be helpful. And then Benoit, just couple of housekeeping items. Take rate was up a little bit, it seems to have a modest upward trajectory. I guess, is that sustainable and kind of what's driving that? And then also the same client sales. I apologize, if I missed this, but last quarter you talked about same client sales ex ITP. Just wondering if you had an update on that number for the quarter?

Thank you very much. So just to give you a bit more color on my -- kind of -- my return. I guess you are an entrepreneur and my mindset is to try to look at challenges into opportunities. And that's probably what the board was seeking from me, to try to look at things from different angle and to seize more of the opportunities. Whenever it's implied to GDPR or other things, people can see this, as you know, challenge, concern, depressing things, or it could be seen as -- you know Europe is at the forefront of a new way to interact with consumers, and we need to embrace this and educate the market. So when it comes to strategy, my plan is not to change the strategy for the sake of changing it. I want to do what's best for the company. But more specifically, I want to make sure that when we see an opportunity, we move quickly on it. And sometime in the past, we have been probably a bit too slow in term of assessing and going after new opportunities, and it's going to be one of my focus in the future to put the organization into the right mindset to move faster on new opportunities.

So with respect to your question. First on the take rate, so you're right, I mean, rev ex-TAC margin was higher in the quarter. It likely improved 200 basis point year-over-year and 150 basis point compared to prior quarter. So this is largely driven by changes that were introduced by key supply partners in mobile apps that ultimately positively impact how we get charged more for inventory. So we are working on to have our engine to adapt to these changes. So you should not assume that we will stay at those levels, and I think over time, we should see the margin normalizing to, I would say, historical level around closer to 41% that we've seen in recent quarters. With respect to the same client revenue ex-TAC growth, we had -- in fact, we maintained the same client rev ex-TAC, despite the users coverage limitation. Now this is in line pretty much with our expectations. So now, the impact of user coverage is embedded into our figures and it would be increasingly meaningless to try to recompute these numbers without this.

Our next question comes from Andy Hargreaves of KeyBanc.

I just wanted to ask a couple around sort of the client acquisition strategy that you guys are implementing. I wonder if you could just say a little bit more specifically about what is causing the slowdown in retailer growth during that transition, and what sparked the change in approach? And then secondly, on ePrivacy, I wonder if you could just give us any update on where that drafting process stands, and what your guys expectations are there?

So maybe just quickly to remind what is our go-to-market strategy and transformation there. So it's a key priority for 2018 for us, and we have already three subjects -- three objectives around this transformation. We want to maximize our commercial opportunity globally, we want to become more strategic to large clients, and to be more efficient and profitable in the mid-market. So these are the objectives behind this strategy. And the strategy is implemented -- is going to be implemented across the entire year. During the period of the transition, in the mid-market, in particular, and that we have already highlighted during the last quarter, we are focusing on larger mid-market clients until we will have developed a fully scalable self-service platform. And that's the reason why during this transition phase you would see a lower number of net add of -- in the mid-market until the point we are able to have a fully scalable self-service solution, which should come by the end of the year, and we should then see a rebound in our number of net add driven by the high volume of the mid-market.

So when it comes to ePrivacy regulation, as you know, this is still in discussion. So there are lot of moving pieces in this. So we are promoting our view point about how to translate this into something, which is as user-friendly as possible, because at the end of the day, I think everyone wants the same thing, the consent management to be transparent and easy to understand for the end user, and not something bothering where you have a hard interruption all the time. So there is a particular point that we're trying to promote is the ability to do what we call universal portable consent, so we are trying to make sure this view is taking into consideration in the drafting of the agenda. The idea is to be able to -- once the consent is -- for a specific usage is given on a website to be able to use this consent on another website. And I think, this will make a very fair playing field for all players in the industry, big and small. And it's important and I think it's the mindset of the European Commission to make sure that this new regulation doesn't favor too much the biggest players, that give equal chance of opportunity for players of all size. That's the right spirit. And we are confident that our view is going to be taken into consideration into this drafting.

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

Welcome back JB. I wanted to ask you about Amazon, so they already have a large advertising business. I want to get your take on Amazon as a disruptive force among brands and retail advertisers, and how Criteo is pushing back here with Sponsored Products in the commerce marketing ecosystem? And then secondly, I think your cash balance now is approaching just under $500 million, close to 30% of the market cap. Just wanted to get a sense of how you're thinking about M&A versus potentially buying back stock? And why not put an authorization in place particularly just as the company has been susceptible to some of these exogenous factors in the past?

So Amazon first, and then I will address M&A. So as you know Amazon has been growing a very big business by offering brands the ability to target individual consumers, all the way down to their shopping basket, which has been the dream of brands for years. This is why this offer is so successful because brands rather than doing random air coverage, the way they have been doing for 50 years, now have the ability to precisely dialogue with consumers on a very granular level. So as a matter of fact, this exactly are plans for our Sponsor Product. So we are glad in a way that Amazon is educating the brands on those new capabilities. So basically, we are doing pretty much the same thing, but for the rest of the world, Amazon is one touch point for the brands, but thank god, it's not the monopoly. And the ecommerce world has many diversified players. And we have thousands and thousands of retailers, with very high-quality shopping engagement from consumer. And each of them independently, it would be very hard to develop an offer Amazon style, but Criteo is exactly in the right position to -- with the core program to -- all combined to have something which is extremely attractive. So this is why we are investing and putting a lot of focus on this Sponsored Product offer and it's one of our key priorities for this year. And the success of Amazon is validating -- I see this -- that there is a lot of potential in this space. So regarding M&A and you know what the two things that are connected is, HookLogic, was, as you know, our biggest acquisition. And today, it's a growing part of our business. And we've been learning a lot in terms of our ability to acquire and integrate in an efficient way other businesses into ours. And as you know, we have plans to expand Criteo into new markets. So clearly, our cash in the company is a great tool for this strategy. And we definitely pursue a strategy to complement our organic growth with further acquisition, always in a disciplined way, quality assets, but it's something the success of this HookLogic integration is encouraging us to pursue.

Our next question comes from Sarah Simon of Berenberg.

I just had two questions. I guess, one probably is on from what you were just saying, your comments earlier about maybe not being fast enough to react. Is that to do with developing new products organically, or to do with M&A opportunities you missed out on? And the second question is, whether you could give us any indication of how fast Criteo Sponsored Products grew during the quarter?

So it's not one or the other either new product or M&A. I think it's three things. It's our existing business to make it much more solid and resilient, and this is all based on the -- on our Shopper Graph, and we are doing a big push there into strengthening our user coverage to make it less dependent on specific technologies, like cookies, in particular. So I think this is a very important for the long-term sustainability of our business and there is a very big effort there to make it much more resilient and sustainable. We are as developing new products and that's probably the biggest change for Criteo in the last years, is we've been moving from being a single-product company to multi-product company and it's also the reason why we've been changing our go-to-market and our sales organization. And this put us in a much better position to be more aggressive on the M&A side, because when you're a single-product company, it's much harder to do M&A, you have to buy things that are fit completely directly into your one-product approach. Once you had the right go-to-market and organization to scale a multi-product approach, then it opens a lot of new opportunities in term of M&A.

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

First question, I think, if you could just go through a little bit more on your comments. There was a bit of slowdown in the Americas business. And I don't know how much that's more directly linked to the ITP issues and user coverage issues, you mentioned, but -- and you made some comments on Brazil. So maybe if you could go into a bit more detail on that? And then maybe the wider question, JB, if you could talk a little bit more about measurement? And there's a lot of discussion in the industry about proving incrementality of spend on retargeting or remarketing. Can you talk through where you are in your efforts to improve measurement and prove that incrementality for clients since it still seems to be a very contentious issue?

So maybe let's start with the Americas. So the Americas region grew 3% rev ex-TAC, but there are contrasted dynamics by market. In fact, the U.S. grew 7%, and Latin America, especially in Brazil, has been decreasing, where we've been facing some pretty difficult market condition. So in the U.S., maybe a bit more color in the U.S. We've seen continuous good traction with existing clients, while on the mid-market size the impact of the transformation or the transition into -- in the mid-market of the go-to-market transformation had an impact, which is a temporary impact on the mid-market performance.

So speaking about measurement and specific incrementality, that's a very good question. But it's something, which is nothing new in a way that since the very beginning of Criteo, that's probably the first question I got when I was pitching clients back to in 2008 and 2009. When you explain them that there is a lot of value to reengage with their audience, the first question they ask is, is that incremental? Because it in a way goes against intuition. Intuition, you would think people will be engaging with the brands and, of course, they are going to come back, what's the matter? Why should I pay for this? So we've been running hundreds, if not thousands, of incrementality tests because this question, which is a very legitimate question, which is something at the very heart of the questions that our clients ask. As a matter of fact, we have a specific group dedicated in R&D to design the right protocols to prove incrementality. And the devil is in the details, you need to do those A/B test in a very controlled manner to be sure that you measure the right thing. So it's an area where we put a lot of expertise, and I am really glad that more and more people are aware of this. And it's a very basic of sustainable advertising, it's proving to your clients that what you do to is incremental, otherwise why would they renew the budget rate.

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

Two questions, if I may. The first one is, can you characterize maybe a little bit more the friction you were mentioning around Q2 supposed to be probably due to GDPR, but can you explain a little what it is going to look like and how long it could last? If you have any views on that? The second question is, you've explained very clearly what you think is the reasonable outcome of ePrivacy in terms of consent portability. Can you maybe explain us what are the other options discussed at the moment, so we can have, maybe, I would say, a broader range of potential outcome? And the third question is, maybe here for Benoit, clearly, the second part of year's performance, if we deduct the full year, the Q2 seems very cautious or very conservative. So is that because the friction, you mentioned, could last a bit longer? Or is it just because you are always on the conservative side of guiding?

So specifically, on GDPR, to go a bit more specific is, there is a law coming about. And as you know, the spirit of the law, the law is about getting more control and transparency and ease of use for the consumer. What the law is not about is bothering users by making their browsing experience very poor. This said, there might be some publishers that decide that they want to implement a very interruptive, hard obtained thing, where you cannot do anything before obtaining to their consent. We believe that such approach is not user-friendly and not in the spirit of the law. And as a result, we think it's very unlikely that there's going to be -- this rigid approach will become the industry standout because this is not the intention of the legislature, and the CNIL, the French CNIL, where we've been discussing this at length plan is completely aligned with this interpretation. Now this said, we don't control how many of those publishers might decide to implement this kind of interruptive, hard opt-in. And those that would decide to do this could create some friction, friction for the end-user because it's going to damage their browsing experience, and friction for the ecosystem because it would create more difficulties in terms of connectivity across the players. So we need some more clarity on how those players are going to implement this. We are doing a big effort to promote what we think is the right way to implement the law, and in a way we think our expertise in consent management may offer us some opportunity to even reengage with some publishers we're not working with today directly. And said, that's the opportunity for us, hopefully, to implement our direct-bidder solution with those guys. And so this…

So with respect to your questions on the full year, I mean, we have not changed the way we guide the market. We feel that with all of the information that we have in hand today, and as you can see around the discussion on the potential implementation of the GDPR and the transition effect of that implementation on the supply side, in this context, we think that our guidance for the full year seems to be realistic and balanced at this point. So I would not necessarily characterize it, as you say, as conservative. There is still a lot of questions as to how some of the players are going to react in the current environment.

Our next question comes from Tim Nollen of Macquarie. Please go ahead.

I'd like to come on to the question of guidance, again, as well, please. Your Q2 guidance seems quite strong versus what we had modeled coming in, yet your full year guidance is unchanged. GDPR comes into effect on May 25. All the comments we're hearing about friction and so forth, but can you say if there has been any advertiser reaction to GDPRs? And any concerns about spending, which it doesn't seem like you're saying, given the Q2 guidance and yet you remain cautious on the full year? So just want to understand from the advertiser's perspective what you're seeing? And then similarly relatedly, GDPR seems to us to bring some power to the walled garden, in particular, perhaps Google, which is making some pretty bold moves ahead of GDPR as well as perhaps to Amazon and yet Facebook, I think, maybe, obviously, what they've been going through, and given your comments on your access to Facebook data and your supplying of advertising to Facebook might be a different situation for you. I just wonder if you could talk a little bit more about those three big walled gardens, please?

Do you want to speak about the guidance?

Yes, I can speak briefly about the guidance. I think what you are referring to when you say our guidance comes strong is probably around the EBITDA, where, as we've described, in Q1 we have some temporary savings and hiring delay, and we are not going to catch up on those hiring delays fully in Q2. So that is reflected in our guidance. With the respect to the top line in the guidance, reminding you that we are looking at minus one to plus one in terms of growth on the top line at constant currency. And that reflects as always with the same philosophy the best view we have, with the knowledge that we have at this point of demand from advertisers, and that reflects current the state of affairs. With respect to advertisers, I think many advertisers are still busy adapting to GDPR. We've not seen a strong reaction of this point. That being said, we want to be relatively cautious on the supply side, where there are still a certain number of question marks as to how large players are going to implement the consent management.

So the second part of your question is very interesting regarding walled gardens. And yes, of course, the big players have -- are seen as so called walled gardens, which creates advantage for them because they can control in a very tight way at least all the data. But it creates also some limitation and in a way opportunities for us, in a way that some of our clients, they are a bit frustrated that there's data behind walled gardens and they don't fully understand what's going on with their own consumers. We have a different approach where we make this data very open and actionable for our clients. We have this, as you know, this coop view, where based on, obviously, on their -- on our clients consent, we pool data together and allow them to benefit from the network effect of all our partners. And I think this open approach, which is very different in terms of philosophy than the walled garden, resonates very well with our clients. And specifically when it's going to come to consent management, where nobody has 100% footprint on this, and ability to manage this consent across our different partners is something which has a lot of value for our partners. So in a way, we have a different philosophy than those walled gardens. There are some pros and some cons, and where we see a lot of opportunities to strengthen and deepen our relationship with our clients, given our open philosophy on this aspect.

Thank you, JB. This would now conclude our earnings call. I'd like to thank everyone for attending. The IR team is available for any follow-up question that you may have. We wish you a very good end of day.

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