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The offer:

Criteo S.A. (CRTO) is offering 7,200,000 ADSs in the price range of $23.00 and $26.00 per share. The expected listing date is October 31, 2013, on Nasdaq. (Source: IPO prospectus)

Business overview:

The company is a French company that operates in the online advertisement industry. It enables e-commerce companies to deliver ad impressions that expects to bring maximum user response and business. Its solution includes the Criteo Engine (includes proprietary predictive software algorithms), its data assets, access to display advertising inventory, and its advertiser and publisher platforms including Publisher Marketplace, or PuMP. It prices its advertising campaigns on a cost per click, or CPC, basis. 99.0% of its revenue in each of 2010, 2011 and 2012 was derived from the advertising campaigns sold on a CPC basis.

Data assets:

Its data assets include the data that it collects from any individual website regarding consumer behavior on that website. It uses its proprietary predictive software algorithms to process this website specific data in real time and deliver the ad impression that expects to bring maximum user response and business.

Criteo Engine:

The company's prime asset is its Criteo Engine, which is capable of processing data on a real time basis and also on a very large scale. This engine can process data and deliver the desire output in a very quick time normally in 150 milliseconds and can deliver up to 25,000 advertisements per second.

Financials:

Consolidated Statement of Income ($ in thousands)

FY 2012 (12 months)

H1 FY 2013 (6 months)

Revenue

353,683

252,732

Traffic acquisition costs

-205,177

-152,116

Other cost of revenue

-16,473

-14,155

Gross profit

132,033

86,462

Operating expenses:

Research and development

-18,585

-17,165

Sales and operations

-75,519

-52,148

General and administrative

-26,291

-19,769

Total operating expenses

-120,395

-89,082

Income (loss) from operations

11,639

-2,620

Financial income (expense)

-2,028

-3,311

Income (loss) before taxes

9,610

-5,931

Provision for income taxes

-8,529

-461

Net income (loss)

1,081

-6,392

Net income (loss) available to shareholders.

1,276

-6,243

ADSs to be outstanding after this offering

54,415,638

Balance sheet ($ in thousands) as on June 30, 2013 (Pro forma)

Cash and cash equivalents

222,061

Total assets

377,521

Trade receivables, net of allowances

85,992

Total financial liabilities

17,698

Total liabilities

140,811

Total equity

236,710

Industry size and growth: (source: IPO prospectus)

"According to ZenithOptimedia, the global display advertising market totaled approximately $33.2 billion in 2012 and is projected to grow at 19.8% per year from 2012 to 2015." (source: IPO prospectus)

Key point:

Key positives:

  1. Proprietary technology.
  2. Rapid revenue growth.
  3. Customer quality and growth in customer base.
  4. Industry growth.
  5. Client retention and revenue retention rate.
  6. Entry in mobile segment.
  7. Infrastructure.
  8. Geographically diverse operations and global reach.

1. Proprietary technology:

The company uses its proprietary technology to collect and process data and also to deliver ad impressions. The effectiveness of the technology is evident from its rapid revenue growth, its client's quality, growth in its client base and high customer retention rate. Its technology yields excellent results for its clients as seen in the following statement:

"Criteo delivered over 2 billion advertisements in June 2013 on Yahoo Japan, up from 500 million at launch in September 2012. Criteo's display ads have performed significantly better than standard display ads shown on the Yahoo Japan sites, with a click-through-rate that is thirty times higher than the average for other banners shown on Yahoo Japan's sites." (Source: IPO prospectus)

2. Rapid revenue growth:

The company is showing rapid revenue growth since last few years. Its revenues increased from €65.6 million ($65.6 million US) in 2010 to €143.6 million ($143.6 million) in 2011 and €271.9 million ($271.9 million) in 2012.

For the six months ended June 30, 2013 its revenues increased to €194.3 million ($194.3 million) from €113.1 million ($113.1 million) for the six months ended June 30, 2012.

3. Customer quality and growth in customer base:

The company serves some of the biggest and most demanding clients like Yahoo JAPAN, Expedia Staples, Macy's, etc. The company showed a rapid growth in the number of customers it serves, from 832 in FY 2010 to 4199 during H1 FY 2013 (see the chart below).

4. Industry growth rate (explained above).

5. Client Retention and revenue retention rate:

It holds relationships with the leading RTB internet display exchanges, and more than 6,000 publisher partners, including exclusive access to the premium inventory of Yahoo JAPAN. Moreover, it holds a direct relationship with over 76.2% of its advertiser clients.

Client retention rate and revenue retention rate both are the measure of client satisfaction and effectiveness of the company's solution.

Its client retention rate, in each of 2010, 2011 and 2012, was approximately 90%.

For the years ended December 31, 2011, and 2012 and the twelve months ended June 30, 2013, its revenue retention rate was 159%, 155% and 145%, respectively.

"We define our revenue retention rate with respect to a given twelve-month period as (1) revenue recognized during such period from clients that contributed to revenue recognized in the prior twelve-month period divided by (2) total revenue recognized in such prior twelve-month period." (Source: IPO prospectus)

6. Infrastructure:

Its global infrastructure includes over 3,000 servers and 160-node Hadoop clusters, providing a storage capacity exceeding six petabytes.

7. Entry in mobile segment:

In the first quarter of 2013, it launched a solution for mobile advertising and further enhances it with its recent acquisition of Ad-X, a technology company that allows businesses to track and optimize mobile display advertising campaigns delivered to smartphones and tablets.

8. Geographically diverse operations and global reach:

The company generates its revenues from geographically diverse locations (see the chart below). The company has a significant global presence as it operates globally in 37 countries. This geographic spread, to some extent, shall save it from any region specific slowdown.

Negatives:

  1. Highly competitive industry.
  2. Loss making entity.
  3. Normal business risks.
  4. Change in the online customer privacy regulations.

1. Highly competitive industry:

The market for online display advertisement is highly competitive. Its prominent competitors include Amazon (AMZN), eBay (EBAY) and Google (GOOG).

2. Declining growth rate (see the table below):

The company's revenue growth rate is coming down, though some slowdown in the revenue growth rate is acceptable due to the higher base effect. Its gross margins are also coming down due to high traffic acquisition costs which may be a cause of concern.

(click to enlarge)

3. Normal business risks:

Normal business risks like emergence of new competitors with better product/service offerings, any adverse change in Govt. regulations, any economic slowdown, etc.

4. Change in the online customer privacy regulations:

Any change in regulations regarding online privacy of customers can limit its ability to collect data and can reduce the effectiveness of its technology significantly.

Valuations:

At $24.5 (mid range of offer price) the company's valuations stand at $1.3 billion.

At $24.5, the company is available at P/S of about 2.9 ("TTM"), without traffic acquisition costs, the company is available at P/S of about 7.21 ("TTM").

Conclusion:

The company operates in the rapidly evolving, fragmented and competitive industry where it competes with some of the world's biggest companies, like: Google, Yahoo (YHOO), Amazon and eBay. These companies are much bigger than the company, but the success in the industry is technology driven, not size driven, so even a small company with a better technology can easily compete with much bigger companies. Its past growth and clientele tells a lot about the quality of its solution but on the negative side it has a limited operational history

The company is in its growth phase so the operating expenses are on the higher side and is expected to increase in the near future, at least in absolute terms. Its recent entry in the mobile space will do well for its future and will accelerate its growth rate. Another thing that will add more sheen to the company is its financial position, its balance-sheet is healthy and its income statement shows profit for the last few years (though the company reported a loss for the latest six months).

The company deals in the online advertisement industry and can process big data on a real-time basis. The online advertisement industry and big data processing capabilities both are expected to create lots of enthusiasm among investors due to its future growth potential.

Data source: IPO prospectus.

Disclaimer: Investments in stock markets carry significant risk, stock prices can rise or fall without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.

This article reflects the personal views of the author about the company and one must read offer prospectus and consult a financial adviser before making any decision.

Source: Criteo: Brings Maximum User Response And Business