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Ali Mogharabi
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Morningstar | Criteo 1Q Results Beat Expectations, but Guidance Disappoints; Maintaining $25 FVE

Criteo’s first-quarter results exceeded expectations, but the firm provided a disappointing revenue outlook for the second quarter and full-year 2019. Criteo experienced a sequential decline in clients and lower monetization of those clients during the quarter, which we think may continue through the year. The firm posted revenue weakness in Europe, which indicates the ongoing impact of Apple’s ITP, further implementation of EU privacy legislation GDPR, and further data access limitation to be possibly brought on by Google. In our view, the last one has likely lowered the willingness of some of Criteo’s clients to work with the ad-tech firm (as we initially mentioned in our March 26 note).

Plus, during Alphabet’s earnings call on April 29, Google’s management said it remains focused on improving data privacy on the Chrome browser. Nonetheless, Criteo is still a player in the growing online advertising space, and its client retention rate remains in excess of 90%. We lowered our gross and net revenue projections a bit, which did not affect our $25 per share fair value estimate for Criteo. While the stock is down 12% in reaction to the firm’s lower guidance and shares appear modestly undervalued, Criteo remains a no-moat firm with a negative moat trend and very high uncertainty.

First-quarter gross revenue came in at $558 million, down 1% from last year. Slightly lower take rate of 42% (due to an increase in traffic acquisition costs) brought net revenue down 2% year over year to $236 million. While the firm added 5% more clients from last year, the client count declined sequentially, by 46, for the first time since second-quarter 2018. Gross revenue generated per client dipped 6.5% year over year, which we think was due to the ongoing GDPR implementation and clients’ uncertainty regarding what data privacy steps Google’s Chrome browser may take. More than half of Criteo’s gross revenue depends on the Chrome browser.

Year over year, lower net revenue was mainly due to a 10% decline in Europe, the Middle East, and Africa market. Americas, which is the highest ad-spending market in the world, grew 6%. Net revenue coming in from the Asia-Pacific market increased 1% from last year. Weakness in EMEA supports our assumption that clients (for the time being) may reduce ad spending through Criteo, or may do more direct buying from Google, Facebook, or other ad suppliers. In addition, clients in the North American market may begin to behave similarly later this year, which is why we have assumed full-year net revenue at the low end of Criteo’s guidance, or around $950 million. EMEA and Americas represent around 40% of Criteo’s total gross revenue each. While growth in Criteo’s other offerings, such as customer acquisition, audience match and retail media, were impressive, revenue from these products remains less than 10% of the firm’s total revenue, which is still composed mainly of retargeted ad buying.

Operating margin declined around 20 basis points from last year to 6%, due to lower net revenue. There was less than 1% growth in operating expenses, as the firm is controlling costs, such as selling, general, and administrative, while facing top-line growth headwinds. Management expects this to continue as its adjusted EBITDA margin guidance of 30% remained unchanged. We are more cautious, as we think the firm must increase research and development, mainly through headcount; and given how the Criteo stock has performed the last 24 months, higher stock-based compensation may not lure in talent, which will affect adjusted EBITDA.
Underlying
CRITEO S.A

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Ali Mogharabi

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