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Max Grigoryev

Criteo: perfect track record / will the company keep its high growth rates?

Criteo engages in the digital performance marketing. Criteo has contracts with lots of publishers in USA and Europe and helps e-commerce companies to make an effective advertising campaign. The company's stock lost almost 30% since mid of July, however the whole advertising technologies market is growing rapidly and Criteo is one of the market leaders. 


The business model of Criteo is rather simple: the company buys traffic based on CPM rate from publishers and sells traffic by CPC rate to e-commerce companies. I usually call top-line revenue as a turnover, because it is actually the total sum of marketing budgets that goes through the system. So the actual revenue of the company is the difference between the marketing budgets and traffic acquisition cost. 

Let's check the operating and financial metrics of the company, there are some interesting points to pay attention to. 

  • Number of clients and number of publishers

Clients are the e-commerce companies, publishers are the websites / blogs for advertising placement. So the number of clients grew up from 3,297 in 2012 to 7,190 in 2014 (3-y CAGR is around 30%), number of publishers grew up from 6,600 in 2013 to 9,303 in 2014. Publishers are actually the inventory, if the company stops adding new publishers it will for sure reduce the ARPA and gross margins. At the moment there is no evidence that Criteo will significantly reduce the growth rate. However, such growth rate is rather high and potentially we can see small decrease. 

  • Average revenue per account (average turnover per account)

Average turnover per account is the average marketing campaign size. The company increase the average marketing campaign size from $82K in 2012 to $104K in 2014. Average revenue per account shows the marginality of the platform (difference between marketing campaign and traffic acquisition) is also growing, but the marginality slightly decreased from 42% in 2012 to 40.75% in 2014. Even 40% is a high marginality for such kind of business, so I think that over the next several years Criteo will come to the average 30-35%. 

  • Customer acquisition cost (publisher acquisition cost)

Current customer acquisition cost is around $63K, it grew up from $47K in 2013. Publisher acquisition cost is also growing as well. We cannot divide the marketing costs between the customers and publishers, therefore we can talk about the same size of sales and marketing expenses related to both customers and publishers. However, the company was able to reduce the sales and marketing costs as % of revenue: it was around 21.35% in 2012 and came to 17.9% in 2014. I assume that the company will be around this percentage over the next several years. 

Summary

Operating and financial metrics are growing rapidly. However, significant decrease in revenue growth rate will more likely happen than significant decrease in costs. Assuming that, we will see the marginality reduction in 2015-2016 fiscal years. It's too early to tell that the company has a stable business now, however I consider them as a good, but risky investment. 

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