Good morning, and welcome to Criteo Second Quarter 2016 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 note today's event is being recorded. I would now like to turn the conference over to Edouard Lassalle, Head of IR. Please go ahead, sir.

Thank you, Roco. Good morning, everyone, and welcome to Criteo’s second quarter 2016 earnings call. With me today are our CEO, Eric Eichmann; 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. 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. Definition of these metrics and the reconciliations to the most directly comparable GAAP financial measures are provided in the earnings press 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 this, I will now turn the call over to our Chief Executive Officer, Eric Eichmann.

Thank you, Edouard; and good morning, everyone. I'm pleased to report another strong quarter of profitable growth. We continue to execute consistently on our plans for growth and operating leverage. Before diving into the quarterly earnings, let me take a few moments to explain Criteo's vision in a fast-changing advertising landscape. We believe that data-driven people-centric marketing that is held accountable to performance metrics is the way all advertising will be done in the future. The era of not knowing which half of a marketer’s advertising spend is working will be a thing of the past. Three big trends are accelerating this transition. Number one, mobile is driving the digitization of offline activities, making offline intend data available and offline sales trackable. Two, one-to-one marketing at scale based on accountable metrics is growing fast. And three, increasingly marketers are demanding optimization and coordination of their marketing activities across channels and devices. We are well-positioned to help marketers make this transition and finally make all advertising work. Through our solution, consumers experience more relevant ads across channels and devices and clients get superior performance. And our continued innovation in core technology, mobile and cross-device are driving higher value for clients. Now let's turn to Q2. We exceeded revenue ex-TAC and adjusted EBITDA guidance for the 11th consecutive quarter. At constant currency, we grew revenue ex-TAC 35% to $166 million and adjusted EBITDA 61% to $39 million. We continue to make progress towards our long-term operating model, demonstrating the scalability and leverage of our business. We performed well across all areas. We delivered on our innovation roadmap, we continued to expand our publisher relationships and we added a record number of new clients across all regions. Technology innovation drives more client sales every quarter. Q2 2015 client generated 14% more revenue ex-TAC…

Thank you Eric and good morning everyone. I'm also pleased with our strong performance in Q2. Fast growth and expanding profitability remains key attributes of our business model. I will walk you through our quarterly financial performance and our guidance for Q3 and full year 2016. Revenue was $407 million, up 36% or 35% at constant currency. Revenue ex-TAC, the key metric we use to monitor our business performance, grew 36% or 35% at constant currency to $166 million. This was driven by the impact of the largest quarterly addition of new clients as well as sustained growth of existing clients spend, in line with our expectations. Revenue ex-TAC margin was 40.8%, consistent with prior quarters. We grew mid-market very fast and the share of mid-market clients continue to increase. At constant currency, average revenue ex-TAC to our live clients increased over 10% and 13% for large clients on mid-markets respectively. Compared with guidance assumptions, change in ForEx had a positive impact of $0.7 million on reported revenue ex-TAC, mostly driven by a stronger Japanese yen. Compared with the prior year period, ForEx represented a tailwind of 140 basis points to reported growth in revenue ex-TAC, also largely driven by the stronger yen. Turning to expenses, other cost of revenue comprised of hosting and data cost was $20 million. Non-GAAP other cost of revenue grew 49% to $11 million, mainly driven by increased hosting capacity across datacenters. Operating expenses were $128 million. Non-GAAP operating expenses grew 27% to $116 million. Headcount related expenses represented over 75% of non-GAAP OpEx. We added 110 net new employees on close of the quarter with over 2018 employees, a 27% increase compared to June last year. On a non-GAAP basis by function, R&D expenses grew 60% to $27 million, largely driven by the 46%…

Thank you. [Operator Instructions] Today's first question comes from Doug Anmuth of JPMorgan. Please go ahead.

Great. Thanks for taking the question. Just wanted to ask few things guys. First on Facebook, can you just talk about how you are managing the transition there from desktop to mobile and then in particular a little bit more color around the recent Instagram DPA ramp and then also the new travel ad there as well. And then secondly, Benoit, just on sales and the ops, it looks like you got a decent amount of leverage there. I think you said sales and marketing hiring is up 21% in terms of headcount. Are you able to hire the way that you would like there or would you like to be able to push on that even faster to drive the top line? Thanks.

Great. Thank you, Doug for those questions. This is Eric. On Facebook, obviously Facebook has announced that FBX will be a no more starting in October. So as we have done to-date, we are managing the transition for our clients into DPA, and DPA now for those clients is not only a mobile solution, it's also a depth of solution. So when you think about transition from mobile and desktop, it really is just putting all the clients on DPA and as long as the clients are on DPA I think we are covering both areas. As you heard from the call, we are at 6,000 clients. For Facebook, we have another 500 ready to be deployed. We continue to transition clients into our DPA solution. We are very excited about the progress we are making there and we are also excited about continuing to work with Facebook on improvements to the solution. The solution is good, solution is delivering sales as we would expect, we believe there are still areas of improvements there. Dynamic travel ads, it's too early for us to talk about that. But that scenario, we will be working with Facebook on.

So Doug, with respect to sales and operation, yes, you are right. I mean, we got some good leverage this quarter. But that is something - this is a continuous leverage that we've been gaining now for multiple quarters. It is true that the situation with respect to hiring, particularly in mid-market and more specifically in the U.S. has become more competitive and we are making renewed effort there to make sure that we have the right sales capacity in place. But this is clearly an area which has become a slightly more competitive than what we've seen in the past.

I forgot to mention, Doug, you also asked about Instagram. Instagram obviously now is part of DPA for Facebook. And it's an area where we've transitioned quite a bit of clients that are on Facebook on to Instagram. And so we're excited about that. Just keep in mind, and you can probably see this from further public information from Facebook, that Instagram is a property that's about a tenth of the size of Facebook, so you should expect that type of impact for us as we transition clients into Instagram.

Great. Thank you.

And our next question today comes from Mark Kelley of Citigroup. Please go ahead.

Hi, thanks for taking the question. I think you know that your clients see about 40% of transactions on mobile. Just curious, if you can bridge that roughly 10% gap between your mobile revenue and what your clients see? Is that purely the CPC difference between mobile and desktop? And then second, just curious to get your thoughts on header bidding, we heard from a peer last night that, you know, who noted an underestimated header bidding. Considering you guys continue to add publishing partners, you know access to inventory is simply an issue, but anything you could offer there will be helpful. Thanks.

Great. Thank you, Mark for those questions. Yes, as you mentioned, there is a bit of a difference between what our partners are seeing on mobile and the revenue that we’re generating on mobile, hard to identify exactly why that is. So a strong hypothesis would be the fact that we believe we have a strong position in mobile. We will want to develop early on a position in mobile and a solution that sort of cut across all markets. And so that probably gives us an advantageous position in mobile, and we're probably taking a bigger share from that. So on header bidding, I think in general, we are a technology agnostic as long as we can drive value and get access to all impressions. And so a lot - and a lot of the demand that we drive comes from direct unique relationships that we have with partners. What is true is what we are seeing now is that, and this is early impressions, but what used to be in some cases second price auction dynamics with header bidding are becoming first price auction dynamics. And so that might have an impact in the ecosystem, in particular for sort of high-value users. Now we believe and we've seen changes in the publisher ecosystem over the years and we obviously have a technology and a product team that is dedicated to thinking to these things that we adjust to changes quite rapidly and quite well. We're a sophisticated buyer. And so though it might, and we haven't really seen it that much, but it might have an impact in the short-term. We believe in the medium and long-term, it will be a positive for us. Having said that, we really are not sort of looking at that as a big factor today.

That’s helpful. Thanks a lot.

And our next question comes from Heath Terry of Goldman Sachs. Please go ahead.

Great, thanks. I was just wondering if you could give us a sense of how your vertical exposure performed this quarter. Obviously, it seems like kind of a strong quarter for e-commerce, sort of across the board, wondering, if that was reflected in your numbers as well. And then if you could just give us an update also on sort of publisher exposure, and where - what percentage of either impressions or revenue of Facebook and Google currently account for?

Yes. So for your first question on verticals, we really globally have not seen a change in terms of the distribution of revenues across verticals. It continues to be about 60% retail, about 20%. So 65% - to give you the precise number, 65% retail, 16% travel, 10% classified and 9% other.

Very stable.

Yes. It's quite stable. What we have seen and this is I think more seasonal than not. In Europe, travel performed quite well for us. And so that's probably a distinguishing thing that we would note. But other than that, it's quite stable for us. In terms of publisher exposure, it hasn't changed dramatically.

So Facebook is still a single-digit, mid-single-digit figures in term of share of our revenue ex-TAC. With respect to Google, we generally not disclose Google, but it's been very stable as well and that remains a very large publisher, the largest publisher for us.

And I would say, so just in terms of revenue ex-TAC by publisher and we've given you these numbers in the past, about 62% are RTBs and direct publishers are about 33% or 35%, so that gives you a sense for the general distribution of publisher revenue ex-TAC.

Got it. And any thoughts on how you see yourselves working with Snapchat as that grows as an advertising platform?

Yeah I think so. Obviously anytime there is a new advertising platform that's capturing users' attention, we're always interested in serving our ads on those platforms. We generally see that publishers go through a number of phases before they fully make their platform open to all kinds of advertising. And so our expectation is we're hoping to work with Snapchat, but there is nothing at this time that we would be ready to announce.

Great, thank you.

And our next question comes from Brian Nowak of Morgan Stanley. Please go ahead.

Thanks for taking my questions. I've two. The first one is going back to header bidding, you mentioned what used to be second price auction dynamics is now first price. I guess, maybe a simple question, what does that mean and what could that do to the overall model and how should we think about the ramification of that near term, long-term? And then secondly, just if we talk about kind of access to impressions, I think you guys disclosed the impressions delivered approaches on an annual basis. Can you just help us how fast have your impressions purchased grown year-to-date and how do you think about that in the guidance for full year this year? Thanks.

So on - thank you, Brian. On header bidding, let me tell you a little bit more. So, with header bidding we believe that some high-value users may become more pricy as a result of the change in the auction pricing. So there is going to be more people instead of at first if you will, in first look environments willing or able to bid for those users. However, overtime the scale that we have, the technology and data advantages allows us to have a better view on what those users are worth. And so our expectation is that even though there is a - there could be a little bit of a blip in the short term in terms of the value of those users going up or the price of those users going up, that overtime that that would sort of be something that would be to our advantage. We, as I said in the prior question, we haven't seen significant impact for this, but this is something - from this, but this is something that we're tracking closely and obviously our buyer and technology teams on the publisher side are looking at this, and are looking at strategies to take advantage of the new environment.

So just to - Brian, to answer your question with the respect to the growth in impression, I mean, the growth in impression that we've seen during the quarter has been very consistent with prior quarter. We were around 20% growth in our number of impressions that we have booked during the quarter at $220 million of impression during the quarter. We see that trend continuing on a pretty much consistent pattern over the course of the next quarters, which implies obviously an increase of CPM which is around low double-digit increase in CPM.

Great, thanks.

And our next question today comes from Ross Sandler of Deutsche Bank. Please go ahead.

Thanks guys, two questions. First, can you talk about how the Criteo universal match IDs compared to the identity data that's been used by Facebook or Google for mobile targeting? And are you guys allowed to use the first party data that many of your advertisers give you when constructing these match IDs? And then second question, Benoit, just any color on the growth rate for the Americas, the quarter-on-quarter growth is a little bit lower than previous year. Is that the Brazil commentary or any other color there will be helpful. Thank you.

Great Ross, thank you for the question. So universal match ID, just to give you a quick sense for that, over two-thirds of our clients are participating in it. They provide anonymized CRM IDs. Those CRM IDs in any cases are e-mail addresses that are anonymized and when you think about that information, that information is a pooled information because in many cases those IDs are the same for several advertisers. So if there is a login on one device with one advertiser and on another device with another advertiser, as long as that CRM ID is the same we make a match. And so, we've been able to grow this. We started initially with a very deterministic approach, meaning that we would use exclusively sort of CRM IDs or matches that were actual matches from login. We've expanded that view because we believe that with a very strong deterministic base, you can run machine learning models to use probabilistic matches that can be refined to be of similar quality of what you can get from deterministic. And so we started doing that and so we feel quite good about our ability to grow that. Now, how does that compare to Facebook and Google you ask, I think obviously Facebook has a very, very large deterministic base. We participate in the matches that Facebook makes and the matches that Google makes in the sense that when we buy on Facebook environment there is matching that is provided by Facebook that allows us to beat on users with a history that comes from match ID. So we cannot take that match outside of the Facebook environment. That's why we complement that match with or universal match product. Same thing for Google. Google provides matches within the same device and so if you are in an app and then you move to a mobile browser, Google within their environment allows us to see that match. But again, we cannot take that match outside of that environment. So we rely on or cross-device graph. And so if you think about that basically taking advantage of great infrastructure and device graphs that exist within Facebook and Google and then building on for everything outside.

Okay. So with respect to the Americas, so growth was 38%. The U.S. was growing faster. I mean, the U.S. growth was above 40%. I think though what's worth noting in term of quarter in the Americas is that Brazil has been challenging, especially in the larger count in Brazil, which is a factor of the - I would say, quite unstable macroenvironment there in Brazil. With respect to the U.S., we've seen good fraction in Tier 1, continued traction in Tier 1. In the mid-market, mid-market, it remain very solid. The growth was at 70% in the region in mid-market. But what we've seen is from a sales capacity standpoint, as I have highlighted earlier, the hiring environment has been a bit more competitive for mid-market and we have been slightly behind our plan to build the sales capacity, and we see that situation continuing in Q3, but we are taking all of the right measure to address it.

And our next question today comes from Brian Pitz of Jefferies. Please go ahead.

Thanks for the questions. Eric, you mentioned strong growth in native, I was hoping for a little color here as there are specific publisher that’s driving a lot of this growth or is it all driven by Taboola? And then looking at third quarter outlook, I'm curious if there is anything worth calling out relative to higher expenses in 3Q that might be impacting the EBITDA outlook? Thanks.

Thank you, Brian. On native, I would say, it's a number of things. Taboola is just an example, but I won't say the growth is driven by Taboola. We have a number of initiatives there. I mentioned Yahoo!, Gemini and we are also sort of integrating with other players. It's quite a bit of initiatives that with publishers to get native units, why, because they work and they very much look like content even tough it's clearly advertising. So they perform quite well and what performs well generally carries higher CPM. So that's a good thing for publishers. In addition to that, we are launching also our own native initiative that allows us to integrate units with publishers, and so we started deploying that more aggressively with all the publishers in our network, which would allow us to buy native inventory from those publishers which unit that we help them set up, and so that's an exciting initiative with them. I would also say that in general, we are also starting to get access to users that are users that might be blocked by ad blockers, and so that's also an initiative that's still early, is something that provides additional inventory for us. So with that, let me turn it to Benoit to talk about our expenses, yes.

Yes with respect to expenses in Q3, I wouldn’t not call anything really material in terms of unusual items that will build into Q3 expenses. Of course, we would incur a slightly higher legal fees, but not something very material to the overall expense line.

Thanks.

And our next question today comes from Ralph Schackart of William Blair. Please go ahead.

Good morning. Just looking at the full year guidance relative to sort of the recent bids in Q1 and Q2, I think you grew about 38% constant currency for the six months of the year and the guide for the year, the midpoint is around 32%. Anything outside of your general level of conservatism that you would call off for the second half that perhaps you didn’t see at the beginning of the year? Thanks.

No, I mean clearly as we explained when we started the year, we have changed slightly our guidance approach for the year. Now we guide with no stable indicators on over the midterm with a constant currency growth and also guiding on the EBITDA margin - at least EBITDA margin improvement, which is very much more in line with our midterm operating model. So we are consistent. Our intend clearly when we articulated that thing for market at the beginning of the year said it would be more stable so you should not expect necessarily that we will make changes during the course of the year and we are operating according to this new model.

Okay, thanks so much.

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

Hi, thanks very much, a couple of questions. Eric, you mentioned the number of new sources of mobile inventory and also native and social, can you be more specific about how you are going to secure further sources of mobile ad inventory and more importantly, authenticated mobile users? And maybe a second question, given the rise and discussion around video advertising as a critical new medium, can you talk a little bit about how you would map Criteo's skill set onto video as that becomes more prominent? And a quick one for Benoit, it’s now been a year since the Paris analyst event when you laid out how many companies you were reviewing and since then you purchased almost nothing other than maybe some higher CapEx. So have you given any more thought to either a partial buyback to offset modest dilution or something else to use the $377 million you’re just holding on the balance sheet? Thanks.

Great. Thank you, Richard, great questions. So new sources of mobile inventory, you know, one of the areas that’s growing quite fast and that’s already a big part of the ecosystem is app inventory in APAC, in particular markets like China that are seeing more than 50% and this is just from quarter going certainly growing more than 50% of the e-commerce in those markets come from mobile devices. And a lot of that also comes from app environments. You might have seen also an article (inaudible) journal that talked about how app innovation and app consumer use in APAC in particular in China is driving, it’s really leading the way worldwide. And so in those markets, what’s happening is obviously that’s an important part of the ecosystem. It’s becoming the most important part of the ecosystem and what have not developed as quickly was the ecosystem around the supplier base and the ability to reach inventory on a programmatic basis that’s happening. And so when we talk about sort of the eight RTBs that have been integrated, a lot of them actually come from those geographies and all of them are actually part of the mobile app world. You mentioned also authenticated users and mobile users, so there’s a couple of areas. Obviously, within the same environment, we can identify the users, it’s not a problem and that’s part of our solutions. So if you have a mobile browser user that appears several times, we have the ID for the user, we have a cookie and we can identify easily that user when they come back to that environment. Same thing for app, if they’re on apps, we have an ID for them and when they come back to an app, we can actually use the history of that…

So just to Richard, to cover your question with respect to capital structure, we are very active and we continue to be active at screening the market for acquisition opportunities. In fact, we even slightly increased strength in our corporate development team and product dedicated team to acquisitions. That being said, we are very disciplined in our approach and very demanding based on the focus model that we have with respect to assessment of acquisition. So the capital structure, we discussed on the balance sheet is a great flexibility for the company to see the opportunities of acquisition. There is no direct plan to use this - the cash on the balance sheet for purchasing back shares. This flexibility is there to help us grow the company strategically with discipline. Now I would like to note, even if it was a small acquisition, we did a small acquisition, Monsieur Drive, during the quarter, which was pretty small in terms of amount, but a very interesting acquisition to build up our strategy with respect to CPG.

And I would say - I would add to that, Richard that obviously, we're still in an environment that's rapidly changing. So we believe that in a rapidly changing environment, opportunities can arise at any moment for us to take action and drive shareholder value. And so, from that perspective, we don't believe at this point that it would be wise to do share buybacks.

Okay. Thanks, guys.

And our next question today comes from Murali Sankar of Boenning. Please go ahead.

Yes. Hi, thank you for taking my question. I was curious, if you could go a little deeper into any changes in the competitive environment that you're seeing especially in the context of kind of two things. First, the commentary that one of your peers made on their intent to marketing business, and how it's essentially struggling. And the other is also with respect to legal action that has been going back and forth between yourselves and a competitor. Wondering whether there - that’s an indication of whether the competitive environment is becoming more intense than it was before or anything else? Thank you.

Yes. Thank you, Murali, great question. So I would say on the competitive environment, things have not really shifted dramatically. I would think that where we're seeing more changes is as we've been discussing on this call, there are changes on the supply environment with header bidding and that’s something that we're looking at closely to adapt for it. On the competitive environment, we haven't seen pure plays, we haven't seen new pure plays. And the pure plays that are out there remains similar to what they were before, they are not a big concern for us. Our focus is really to and we believe as long as we do this will be in a strong position competitively is to continue to add value to our clients by focusing on innovation and driving additional sales for our clients. We do believe and this is to your second question that it is important for us to keep an environment where the metrics that are being used and the way that clients are reading the metrics is a fair environment. And so, as you know we launched a legal action against SteelHouse just recently. And in our public filings, we alleged that SteelHouse perpetuated a counter feed click fraud scheme designed to take credit for online sales attributable to Criteo and other companies and also for traffic that comes into the site. And so, I think it's for us it's always been very important that there is transparency around how attribution is done. Obviously, it's a client sort of ultimately responsibility, but very important that the rules of the game are fair. And so, in this particular case, we felt that it was important to make sure that that will continue. Obviously it's ongoing investigation, so we can't comment further on that. But we believe it's very important to have an environment that's fair and transparent in particular for clients that are trying to figure out where the sales come from, what's the right attribution. So there we go.

Thank you.

And our next question today comes from Tom Champion of Cowen. Please go ahead.

Hi good morning, thank you. Perhaps I missed it, but any change in the customer retention rate? Also, existing customer spend declining to 14% year-over-year. Why was that expected? And I think there was maybe some additional commentary in your prepared remarks, maybe if you could just elaborate on that? And then last if there is time, you've been in China for a while now, that would have the new datacenter up and running for about six months. I think you signed a couple of RTBs last quarter. Just curious any commentary on how the business is evolving there? Thank you.

Great. So on customer retention, not really a change, 20 quarters of 90% of retention rates, so that's very stable. Then…

Absolutely, absolutely 90%, that is very stable. With respect to I think to your question on existing client growth, so we - our existing client growth have been at 14% at constant currency in Q2. And what you've noted is that is we've for the first time disclosed two metrics about that particular aspect. Ours is a metric that we've been disclosing consistently quarter-after-quarter was a metric which is strictly based on the definition of our clients, and clients is defined as an advertiser at the current level that has been live any day over the last 12 months. So in other word, that metrics includes a broader view of the population and the population that were just live during the given quarter. So the reason why we felt it was appropriate to provide the second metric, which gives us probably a better view from the pure same client growth standpoint or equivalent to same-store sales, which is basically the growth based on live clients in a given quarter. And that indicator was at 20%. Now it's a decrease if you take both metrics. There are in decrease compared to the prior quarter, this was expected. You know, this growth of existing clients is driven to a large extent by innovation in our whole platform and that innovation is not linear. So we were expecting to see a decrease this quarter. But we've got as we've discussed on this call a portfolio of multiple initiatives to invest in our core platform that are going to drive growth in existing clients in future quarters.

Very good, and then regarding your question Thomas, on China, we're seeing good progress. I think first off, we consider the opportunity in China to be - continues to be very large. And we don't see any structural issues today in China that will not allow us to make progress in China. We are making good progress, now China is our third largest country in APAC. So that's a positive for us. We have a team of about 30 people on the ground. We are connected to the 10 largest RTBs, which include Baidu, Tencent and Alibaba and our Shanghai datacenter is up and running and fully operational. So we have the elements in the market. However, it's a new market. There is quite a bit of education that needs to be done in that market about our offering. It is a complex market and it - China is never simple. However, we always thought that the price, if you will, or the potential of the market sort of justified a long-term investment for us and for the time being we're quite happy with the progress we're making there.

Thanks very much.

Thank you very much. I think we will close the call. Thank you very much for attending today's earnings call. We'll be happy to follow up with any question. We remind you that we are hosting an Analyst Day and Investor day in September 15 in San Francisco. So we'll be happy to send you any invitation. Thank you everyone, have a great day.

Thank you very much.

Thank you.

Thank you, gentlemen. The conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.