Online-Ad Retargeter Criteo Files for $190 Million IPO

Company Recorded $353.7 Million in Revenue Last Year

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Despite mixed results so far this year, the ad-tech IPO calendar continues to fill up.

Criteo, a French web advertising company that specializes in retargeting people with ads based on the sites they visit, has filed papers with the Securities and Exchange Commission for a $190 million initial public offering.

The company's IPO will be another test for what has been a lukewarm market for ad-technology after the largely disappointing IPOs of Tremor Video and YuMe earlier this year. Online ad buyer Rocket Fuel will be another indicator when it makes its Wall Street debut this Friday.

Criteo president Greg Coleman
Criteo president Greg Coleman

Of the aforementioned ad tech companies, Criteo is the largest by revenue. The company raked in $353.7 million in revenue last year, an 89% year-over-year increase, and $252.7 million through the first six months of this year. Criteo's growth strategy has centered on the U.S. The region has climbed from accounting for 15% of Criteo's revenue in 2011 to 28% through the first six months of 2013.

Criteo's business hinges on serving ads to people who recently visited an e-commerce site with ads on other sites that aim to drive those people back to the e-commerce site and make a purchase. In its regulatory filing, the company said that more than 4,000 advertisers and agencies have used it to run these retargeted ads in the last year and that those ads have led to more than $6.5 billion in sales, or nearly 4% of the total sales Criteo has observed on those clients websites.

Unlike a number of ad-tech companies that went public this year, Criteo did experience profitability for a number of years, but a recent downward trend in that area may be worrisome for investors. The company had been profitable in 2010, 2011 and 2012, but its 2012 mark was short of both previous years' numbers. And through the first six months of 2013, Criteo recorded a $6.4 million loss. The downward trend may be symptomatic of Criteo investing in its business and underlying technology to better compete, or a result of higher costs of doing business.

Increasing costs
Weighing on Criteo's income are its costs to buy publisher inventory, which continue to increase in close proportion to revenue. Traffic-acquisition costs grew by 99% from 2011 to 2012 while revenue increased by 89%. In the regulatory filing, Criteo said that it plans to increase its revenue excluding those costs, but those costs may continue to increase as publishers look to reap more money for each ad they serve. The Guardian sales exec Tim Gentry said last year that the British newspaper had struggled to provide as many ad slots as Criteo wanted it to because it made more money per ad slot through direct sales compared to Criteo's prices.

Criteo will need to improve its direct relationships with publishers in order to reduce its reliance on other ad-tech companies that may view Criteo as a competitor for advertisers' budgets and its vulnerability to the potential demise of third-party cookies.

Criteo cited a 155% increase in the number of individual ad slots it purchased as the primary factor in its rising traffic-acquisition costs. That inventory increase largely comes from exchanges operated by other companies instead of inventory purchased directly from publishers. That means as Criteo has looked to boost its revenues and reach, it has needed to cut in companies that work with Criteo's competitors. More than 30% of Criteo's spending on acquiring publisher inventory went to Google and ad exchange AppNexus, Criteo said in the filing. Interestingly Criteo did not include Facebook in that stat even though it has access to the social network's display retargeting program, Facebook Exchange.

Criteo is also vulnerable to the ongoing push away from third-party cookies, as the company acknowledges in its regulatory filing. If "Do Not Track" becomes default on major browsers, Criteo would need to strike deals for the individual publishers to relay their proprietary cookie data to the retargeting firm, which would then need to stitch those data points together. The speed of Criteo's retargeting could suffer from the added steps. Then there's the matter of Google reportedly exploring a move away from cookies entirely, which could catalyze the industry's broader shift.

Amazon -- and to a lesser extent eBay -- pose big risks to Criteo's business, which is oriented around running ads aimed at people who had visited e-commerce sites. Both e-commerce giants have been developing display advertising programs that retarget users based on the products they have bought or browsed on Amazon's and eBay's sites.

Criteo, originally founded as recommendation engine, has the technology to at least compete with these giants. When a user visits to a certain product page, for instance, Criteo will serve them a succession of ads, each with a different product based on what its engine predicts that user is likely to purchase. Buyers purchase Criteo inventory on a cost-per-click basis, enabling them to buy display advertising in a method similar to search.

Criteo's pre-IPO filing had been confidentially on file until today. The company has raised $63 million to date, its latest round last September reportedly putting it at an $800 million dollar valuation.

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