Good morning, and welcome to the Criteo First Quarter 2019 Conference Call. [Operator Instructions]. Please note this event is being recorded. I would like to now turn the conference over to Edouard Lassalle, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Criteo's First Quarter 2019 Earnings Call. With us today are Co-Founder and CEO, JB Rudelle; and CFO, Benoit Fouilland. 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. As always, 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. Today, we'll also discuss non-GAAP measures of our performance. Definition 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'll now turn the call over to JB.

Thank you, Ed, and good morning, everyone. Looking at where we're after Q1, we see a mixed picture. On one hand, we are making good progress on several key priorities. Our new solutions are growing fast. We are shipping important product features, and we are getting positive feedback from clients testing our new solutions. In Q1, our top line grew above the high end of our guidance, and we significantly exceeded expectations for profitability. Overall, I feel good about our strategic direction and our financial model. On the other hand, I acknowledge that our top line growth is still way too modest relative to our potential. I also realize that some of the new capabilities we are building to achieve our transformation are going to take more time before yielding the acceleration we are working very hard for. In particular, despite encouraging client performance from our new solutions, we are not ready yet to sell them in a truly scalable way. To complete our transformation, we have a few execution issues to fix, more on that in a minute, and we believe it's going to take a bit longer than expected to get the full benefit of it. While we are paving the way for acceleration in 2020, the issues we have identified lead us to take a more modest approach to our 2019 growth outlook. As a result, we now expect revenue ex TAC growth to be in the range of flat to 2% in 2019. Despite this slow growth, we are maintaining our profitability margin outlook for the year. So with this in mind, I'd like to address 3 big questions today: First, why are we more cautious in our outlook and what does it mean for 2019? Second, what are we doing about it? And third, how…

Thank you, JB, and good morning to everyone from my side. As usual, I will walk you through our performance for the quarter and share our guidance for Q2 and fiscal year 2019. Revenue grew 3% at constant currency to $558 million. Revenue ex TAC, our key metric to monitor the business, increased 2% at constant currency to $236 million. Existing clients adopting our new solutions as well as new client business drove our growth in the quarter despite some continued short-term headwinds. Changes in currency negatively impacted revenue ex TAC by $11 million or 4.4 points of growth compared to Q1 2018. Compared to our guidance assumptions, FX changes were immaterial. Revenue ex TAC margin declined 40 basis points to 42%, in line with our expectation that margin would normalize at a lower level compared to the peaks we saw in the first half 2018. Looking at our main growth drivers for the quarter. We grew the number of clients by 5% to over 19,000, while maintaining retention at close to 90% for all solutions combined. As we increased our focus on higher-value mid-market clients until we launch our self-registration onboarding module, this resulted in a lower client addition in the quarter. Same client revenue ex TAC was down less than 1%. However, on a revenue basis, which truly reflects our clients' spend with us, same-client revenue increased 2%, demonstrating the growing adoption of our new solution by existing clients. Turning to regional performance. In the Americas, revenue ex TAC grew 8% at constant currency, including 8% in the U.S. This was driven by the growing number of existing clients adopting new solutions, accelerated growth in the mid-market, good performance of retail media in the U.S. as well as improving performance of our Brazilian business. EMEA revenue ex TAC…

[Operator Instructions]. The first question today comes from Tim Nollen with Macquarie.

JB, I'd like to pick up on your comments on any potential Google Chrome changes. I know that you're going to be limited in what you can say. But could you help us understand how much of your retargeting business is reliant on using those cookies versus any changes they might make that you could adapt to, whether that would be easy to do or difficult? Any comment on that would be great. And then, another follow-up, please. Relatedly, Facebook, rather surprisingly, called out GDPR as creating a cumulative risk for them into the second half of this year. I haven't heard anybody else say that. I just wonder if you have any comments on any impacts from GDPR at this point on your business?

Thank you very much, Tim. Okay, let me come back to that. Thank you for asking about Chrome because I know a lot of our investors want to know more about this. I don't know if you've heard, you had -- there was earning of Google yesterday. And I think the CEO made a very interesting comment, he was -- which is confirming what we heard from our side. So this is very consistent that, one, they're going to make some changes in the future about how Chrome manage identity; and two, that -- those changes will be done in a way to minimize any impact on the ecosystem. And he was very clear on that and insisted that for them it's extremely important to maintain a healthy advertising ecosystem that this is the key revenue source for most publishers. Obviously, it's a very important part of Google business, including the exchange where we are one of the biggest buyers on the exchange. So this is very consistent what we heard ourselves. That yes, there will be some changes, but those changes will be not adverse to the ecosystem. And this is the basic assumption we are working with. And we are working hand-in-hand with Google to implement this -- those changes. As a matter of fact, and it's kind of a good segue to your second question, I think a good way is to look how Google handled GDPR because there was also a lot of concern a year ago about how Google will handle GDPR, will it destroy the ecosystem. I think Google has been handling this in a very calm and very thought way, where they implemented GDPR in the spirit of the law, but also in the spirit of making sure it would have minimum impact on the ecosystem, and which is exactly what happened. When it comes to Facebook, I think they are facing very specific issues on GDPR, which is very different from us. As you know, Facebook core value is the fact that they have personal information on users, which is a complete different class of data than what we are manipulating. We are -- from the start, Criteo is only managing nonpersonal information. Everything is hashed and anonymized, which is why from the starts, from the get-go, we were completely compatible with all the GDPR. As a matter of fact, we were GDPR compliant way before the law was implemented. Well, when you have personal information like Facebook, it's a whole different story. Obviously, the sensitivity of the public is much higher with personal information. And this is why they face specific scrutiny on the way they handle their data.

Okay. Any color around your use of the cookies versus any other methodology of tracking users?

Yes. Absolutely. As you know, we were impacted by cookie restriction in the Safari browser 18 months ago. And in a way we learned our lesson. We've been putting a lot of technology resources to implement new ways to get the -- to the Criteo graph. And we are very pleased today that we have now a full-fledged Criteo graph with 1.5 billion user -- unique user in this. And a very large part of this graph is not cookie dependent. So in short, we are reducing very significantly compared to 2 years ago our dependency on cookies. This is something which is a long-term investment for Criteo. And we believe that as some browsers, especially Safari, are implementing restriction on cookies, this investment we've done in our user graph is creating a very unique competitive advantage compared to other independent players who haven't done this effort. So it's probably because we've been impacted probably much more than others on ITP that we also invested much more. And today, we see ourselves in a good position compared to others in this space.

The next question comes from Mark Kelley with Nomura.

First question is just on the sales headcount you're planning, the sales specialists you're talking about. What's the skill set you're looking for? And is that headcount focused in a particular geography or is it global? And the second thing is, can you talk about the shift to selling through third-parties? It would be helpful for you to maybe offer an example there and how does that flow through the P&L?

Sure. So the skill set, if I take, for instance, apps versus web, it's very different in terms of how app-first clients look at the world and I would say more traditional web-centric clients look at the world. The metrics are different. This whole concept of app install has no equivalence in the web world. So you have this idea of cost per install. The way you measure also the performance of the company is different. The way you do the technical integration is different. The whole, I would say, customer pipeline is different. So this requires a significantly different pitch. The question also asked by clients are different. The ecosystem, although, is different. So it requires some very specific skills. So some of our salespeople have been trained to sell both, but it's really hard, and today, we rely on a mix of sales specialists that are really specialized in app-first clients versus generalists that are capable to address clients that are both on the web and on app. We have kind of 2 types of clients. We have clients that are purely app-first that are selling all of their products primarily through an app; and clients that were purely web and that have expanded into apps. And this is really very different. So this is why we have this mix of the 2. And you're absolutely right that not all regions are equal. APAC and the U.S. are the most advanced in terms of apps, and this is where we're investing today the bulk of our resources. EMEA is a bit behind in terms of app penetration. It will catch up eventually. But the pace at which app is developing is not the same in all market. I mean some market is pretty extreme like India, where 70%…

The next question comes from Sarah Simon with Berenberg.

I have got three questions. First one, you talked about app-related revenue growth being lower than you had expected, but you came in above. So I'm just interested what it was that should have more than offset that. Which areas grew faster than expected? Secondly, you talked about attrition improving. Can you just give us a few words on where you are in terms of accelerating the pace of hiring? And then the third question was for Benoit, the increased flexibility for the buyback. Can you talk around what you think is the right kind of cash balance, capital structure and so on for the company given where you are today in terms of the return to growth?

I can say a few words on the app revenue. We had a pretty aggressive goal for Q1. We were hoping to do 63% year-on-year growth. So we had put the bar really high. And we ended up with quite a big gap with 32%. It's still a very solid double-digit growth, but it's clearly short of our expectations. Regarding attrition, so yes, we were again...

JB, what was it that grew faster than because if you fell short on app revenue, you still came in better than guidance, so what was the offsetting factor that did better?

It was the web, if you look at the two components of our business, web -- app and web. And broadly speaking, so if app is short and we still make our numbers, it means that web was better than expected.

Maybe, Sarah, just to be slightly more specific, within the web where did we see greater strength than what we had anticipated in our guidance, we saw good performance in mid-market from an existing client standpoint, not so much on the new business, but the existing clients in mid-market where we've seen a rebound in growth there. And we've seen a good performance even if it's -- these are small numbers into our new product that we are seeing consideration outside of app.

Excellent. Thank you. So regarding your second question, regarding attrition, so yes, we made some significant progress and we pretty much hit our hiring goals for Q1. We want to make sure it's quality as much as quantity. So we are focusing more and more on quality. As I mentioned, we want to make sure we acquire the right expertise, especially in areas where we have gaps. So this is where the hiring team is focusing right now.

So with respect to capital allocation on buyback, we had indicated in the last earning calls that we would seek more flexibility, so that's part of our proxy, and you've seen that we've asked for an authorization, which allows us to blend 2 objectives within the same authorization, the objective to buy back shares for the sake of satisfying the obligation towards equity plan for employees as well as buying shares for potential use of consolidation purposes. So clearly, we've initiated a buyback program last year. You've seen that we executed first on this one. I think we will monitor very closely on the opportunity to do further buyback after having obviously obtained authorization from the shareholders. With close to $400 million of cash on the balance sheet, I think we've got significant flexibility to both fund for the continued growth of this business and provide return to shareholders through buyback.

The next question comes from Doug Anmuth with JPMorgan.

I wanted to ask, just going back on the outlook, just trying to understand, are you saying that the revised outlook is all based on kind of internal execution related issues or is it considering some factors externally related that you may not be able to control as well? And then second on the retail media business, I know it's off a small base in an emerging business area. But can you just talk about retailers willingness to partner rather than trying to do this more directly themselves?

I mean, we're aware of -- obviously of the external factors in our industry. Broadly speaking, they were already taken into account into our previous forecast. So the revised forecast is mostly done on internal factors. And this is really why we had to revisit this. As discussed before during the call, there was a number of area where we didn't have the full picture in terms of confirmation that we had to do. Benoit, do you want to add something on this?

I think it's clearly driven by the internal execution delays. The only factor that was not fully baked in our interim forecast was the digital tax that has been newly introduced in Europe. Unfortunately, we are also being targeted even in France. On that -- at the time we put together our first guidance, we were hopeful that we will not be impacted by the digital tax in France, and it looks like now that it passed the first step in Parliament that we are going to be impacted to the extent of total for the France and Italy of around $7 million that are accounted for in our cost of sales.

So regarding retail media, if I understand well your question, are we working with partners? Is this the question, just for me want to understand, Doug?

Meaning just retailers acting as publishers and their willingness to partner with you as opposed to kind of going directly, trying to use more...

Sure. What we see is more and more the users as a pure technology provider that they want to take the monetization of their audience in their own hands with their own selling team, which is totally fine with us. This is why this kind of transactional SaaS model that we introduced a year ago is really enjoying very high momentum. It's the second quarter in a row we are having a triple-digit growth, so we're starting from a very small base. But still, it shows a very consistent trend that specially for the big retailers, they are taking things into their own hands. And we've been developing an agnostic ad server and exchange for their own inventory, where we can plug any type of demand, either coming from their own sales team, also coming from third parties. And so more and more we are selling this as a technology solution, and this is really exciting the way it's going.

The next question comes from Tom Champion with Cowen.

I'm wondering if you could just expand a little bit more on the health of the core business. We're quite a ways off from the implementation of ITP and some of the issues from last year. And I'm just looking at same client spend. It looks like it was flat and customer growth, it looks to me like it was down quarter-over-quarter for the first time. Just the question is, how do you get both of these moving in the right direction? And then secondly, can you just help us understand the philosophy behind full year guide? What's your level of confidence in the achievability of full year target?

So I'll take perhaps the first part of the question and let Benoit come back on the guidance. So as we discussed previously, I mean, our so-called historical business or core business grew as expected in Q1, even slightly better. As you know, there is an industry shift of user attention from the browser to the app. This is why we -- people are spending more time in apps and less time in browser, especially on desktop. And we want to make sure we are helping our clients in these conditions. Some of our clients are moving faster than others in this transition from desktop to apps. This is something we don't fully control, how quickly they make the move and how quickly they can transition their own business from the browser to the app. This is why we're putting very aggressive, ambitious targets on our ad growth because we know this is where the future in term of incremental value is and we want to set the bar really high. And even with 32% year-on-year growth in this area for Q1, we are not happy about this momentum. We want more. And with right level, I think not only we can mitigate this change of user habits from the web to the app, but grow the whole pie together. So this is really the strategy. And so in the short term, you have sometimes some frictions, as we've seen in our Q1. But with the plan we're putting together, we want to make sure we have full efficiency in all channels regarding our core business.

So with respect to your question on the philosophy around the full year guide, I think the philosophy, are the change -- I mean, are we consider our full year guidance as realistic, balanced and achievable? Now of course, what we've reflected in that guidance, we've reflected the execution issue that are well identified with respect to our ability to sell effectively at scale our broader offering as well as for the second part of the year, the delays in our ability to generate demand for our new self-serve channel for bid market. So those are reflected, and these are really the explanation for the change, which just to remind you, the change on a full year view is $34 million in the mid -- if you look at the mid of the guidance, and that's explained by those two factors. Assuming that the effect of our action plan on which we are working out to resolve these two issues, we start yielding tangible result only from early 2020.

Our next question comes from Dan Salmon with BMO Capital Markets.

JB, I'll follow-up on that question, the Google CEO about Chrome yesterday and the one here earlier on the call to just ask, specifically, if you could size out what percentage of your revenue ex TAC was generated from the Chrome browser? You've sized out for Safari and Firefox in the past. I'm wondering if you can do that for Chrome as well. And then maybe just a follow-up on the retail media business. Just maybe take it up even a higher level than the prior question, is just, could you see as your competition in -- for that business, is it for publishers or is the businesses like Quotient, like Triad Retail Media, is it general market sell-side platforms when you're trying to sort of build awareness for with the publisher community? And then for the advertisers, is it sort of Google as it so often is or really is it the large owned and operated retailers themselves there, like Amazon and Walmart and eBay that are doing more of it themselves? Just sometimes it's a little bit difficult for us to piece together how different players interact with each other in a growing ecosystem, and I would love to hear your high-level views on how you view that landscape.

Sure. So on Chrome, this is very simple. We have roughly 50% of our business related to the Chrome browser. And as I said, we believe that -- the change that Google will implement on Chrome will make identity on Chrome more robust for the advertising industry in a way I think very similar to what we have now in apps, that today the cookie has number of limitations that the whole industry is very aware of. And we are looking forward to this new Chrome identity that hopefully will be more robust and will let us do even more things than what we can do today with the cookie on. Especially identity is cross domain, which is one of the major limitation with cookies that it's, as you know, limited to specific domains, which creates a lot of friction. And if like in the mobile app world we could have a cross-domain ID, I think it would be much better for the whole industry. And I believe that this is what Google is working on. It's something which is going to be more robust and more in favor of what we have in the mobile app ecosystem. It seems to be something where all parties are happy with, including Apple, who's very happy with IDFA in the iOS ecosystem on apps. So retail media, if I understand well, the question is what are the other retailers doing compared to Amazon? Today, Amazon is, I would say, absorbing large part of the brand dollars going into this retail media market, probably a share bigger than their own share of e-commerce, which is something which is a bit frustrating for the other retailers. They say we want to have our fair share of the brand dollars. We understand very well that it is strategic and it has the strategic impact on our bottom line. Now those retailers, they obviously don't have the same R&D capabilities of Amazon. So they cannot build in-house the whole stack, wouldn't make sense in terms of ROI for them to do so. So they look for a tech vendor that can provide them with best-in-class stack so they can compete on par with Amazon. Because if you want to have your fair share in terms of brand dollars, you need something that performs as well or even better than Amazon. And basically, there is one company in the world capable of doing this, it's Criteo. We are way more advanced than any other players in this emerging markets. This is why it's very exciting. And this is why we are investing heavily. This is why we have just hired a very senior General Manager for this business because we are a big believer in this space. And we believe we're in a unique position to win. Like always, it comes down to execution, and this is why that we are working on really, really hard to make it work.

Okay. Great, JB. If can follow-up -- can I just clarify that with 50% of your business on the Chrome browser, 5-0 or 15%, 1-5? Just want to...

5-0.

5-0.

5-0. I mean, as you know, Chrome is 65% of the browser market, and it's 5-0, 50% of our own business.

Okay. And that's total revenue or the core retargeting business if I can just clarify?

Total business.

Pretty much. Yes, pretty much total revenue then.

Well, thank you, everyone. This concludes today's call, and we'd like to thank everyone for attending. The IR team is available for any follow-up questions you may have. Goodbye, everyone, and enjoy the rest of your day.

Thank you.

Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.