Criteo S.A. (CRTO) Earnings Call Transcript & Summary

[Audio Gap] measurable ROI and performance at scale across a range of channels for more than 20,000 advertisers and thousands of publishers. Megan joined the company as CEO in November of last year. Prior to that, she spent 15 years at Nielsen in a number of senior roles, across both commercial and product leadership, most recently as Chief Commercial Officer of Nielsen Global Media. So thank you for being with us today, Megan.

Yes. Good to be here, Doug.

I should also mention just to the audience as well that we will be taking some questions through Zoom through the Q&A feature there. So if you'd like to put some in there, we'll get to those a bit later in the conversation. So Megan, let's go ahead. It's been about 6 months since you've joined the company. What have been your initial takeaways so far, in a very eventful 6 months?

Well, firstly, I'll say the job has changed somewhat inside in the 6 months. I came in to do a transformation of the company to take it into a growth position from where it was. And now it's about making sure the company stays healthy and in a good shape as it moves through the COVID period. What I noticed coming into the company is, it has become even stronger in my mind since then, which is the strength of the people, the enthusiasm and loyalty of the people. And I will say that the average age of a Criteo is 32. So we have a really young group of people, about 2,800 associates around the globe. So I'm -- it never ceases to amaze me how loyal and hardworking this group is. The assets are better than what I expected coming into the company. So there are stronger. The teams that work on them, know exactly what they're doing. I think it's best-of-breed in terms of AI technology and some of the things we do on the targeting side of the business, particularly our best-of-breed and then we have this untapped opportunity out there, given the assets that we have and the things that we just haven't touched to date. In terms of utilizing our global footprint, utilizing the relationships that we have between the buyers and the sellers, utilizing the data that we have sitting inside of our Shopper Graph. It's just this manner, pool of assets there that I just don't think we've touched. And it's true today, it was true yesterday when I started. And so I remain as excited about the future of the company as I did when I came in it. Nothing about that's changed. The COVID challenges that we face today are challenges that I just know through the things that I've just highlighted that we can remain strong coming out of that. And we can use the opportunity to just step back and start to work on the things that we haven't taken advantage up to date and service our clients in the way that they're wanting us to help them get through this period as well and come through the other side even stronger. So it's still extremely exciting to me and everybody else out there.

Okay. Great. So when you think over the next 2 to 3 years, how do you think about Criteo's place in the ad tech ecosystem and how that evolves?

Yes. It's a good question. Criteo has been a company that's been a one-product company, a retargeting company. Whenever I talked to the marketplace, they see us as retailers. The notion here for the company is to unbundle all of that and become much bigger than retargeting. And to sort of start from the foundation of being performance-based and then move up the funnel to offer awareness capabilities, consideration capabilities and those conversion capabilities to clients. And then to extend across platform on to other channels like CTV and AMP and then to extend ourselves beyond the client verticals that we focus on today and to client verticals that we haven't touched yet, but also use those assets to extend out beyond even a DSP offering or even outside of an ad tech offering into more of a martech offering and again, expand and utilize some of those capabilities that are sitting there servicing our retailing business. So again, there's massive opportunity to grow. We've set our sights on becoming a full stacked DSP out to 12 months, 24 months and beyond, and that's still the focus of the organization

So let's talk about that a little bit. If you could help the audience just understand kind of what a full stack DSP really means. And from a Criteo perspective, why that's important as you're shifting the business?

Yes. Yes, thanks for asking that. It's a -- full stack DSP for us is, as I said before, is moving from just the conversion performance piece at the bottom, but offering capabilities above that in terms of consideration or audience-based targeting, audience-based understanding, insights, for instance, and measurement, much more thorough measurement around performance. And right up to the top around how do we help in terms of the brand advertising, particularly as brand advertising also wants to get closer to a specific target audience. And making sure that when a marketer or an advertiser wants to actually place an ad dollar is that they've got line of sight into that full funnel, bottom to the top, so that they can make those decisions across platform. For us, I think what's really important is that we have a best-of-breed capability at the bottom of that phone in terms of performance, direct response, targeting, retargeting and that we can use that capability to start to offer as a mid-funnel and the top of the funnel as our clients actually want to move their dollars, move their ad spends between each set. Now that's one part of it. The other part of it, of course, is to get them self-service tools to pull these things apart so they have flexibility to be able to use one piece over another piece and change according to the objectives of their marketing campaigns. And we've heard clients for a while now, say, we want to be able to unbundle what we do. We want flexibility through your model, right down to pricing flexibility. And it's that, that, to us, is what makes up a full stack DSP, even to the point where it's a bunch of APIs across the top that just does allow as much control back to our clients as possible. And that's what it is that we're focused on.

So what are those key investments you need to make in that process to get there in your view?

Yes. So they're both sort of focusing in on the platform itself. And as I said, unbundling it, pulling it apart so that you don't have to -- one size doesn't fit all, but you can take one piece of the other. The other is bringing in some assets that we don't currently have, which is an important part of the strategy because we can't and we don't want to build everything organically. That's not -- that's -- that will take us a long time. We want to focus our internal efforts on building the things that we have to build because we know the tech or for instance, the APIs, because we know the tech -- the things that we have to build ourselves. But part of the DSP stack is things that we will partner to bring in. And so for instance, this quarter, we announced 3 partnerships with LeadsBridge, with Oracle Data Cloud and with Nielsen, all of those that bring on an onboarding capability, brand safety capability and the third-party independent measurement capability. Now we could build all that ourselves, but it's not -- they are not things that we need to or should be doing. So partnerships is a big part of this. And also, we don't want to ignore the idea of M&A as well. Even though right now, it's not an ideal time for us to focus on using M&A to fill in some of those gaps. We don't want to dismiss that if something comes on that makes ultimate sense. So this combination of pulling all of those things together, to get the best DSP that we can possibly get as quickly as we can possibly get there.

Got it. Okay. Let's just talk about kind of client mix a little bit. So about 70% of spend currently is in the retail vertical. So historically strong in travel, classifieds, auto, finance and gaming. I guess how do you -- how does this mix change when you look out 2 to 3 years in your view?

Okay. I think the notion of going full stack DSP brings in maybe not a different mix but more capability or more flexibility in that existing mix that you called out. So that's number one. And it's -- the strategy is to strengthen the client verticals that we have and bring in more clients across -- into those verticals. But also as we build out full stack DSP, the idea here, of course, is to build it out in such a way that it speaks to each of the verticals individually. And therefore, we can bring more into the mix that we haven't been able to focus on before. And the technology is one thing, but what's really important to me is that we also focus on our go-to-market capability and our client service capability and our new sales capabilities. So we have teams of people that speak the language of a particular vertical. And we have teams of people that speak the product and how to link those 2 things together to actually build the capability more and more out to more and more verticals. We don't clearly want to rely on one vertical in particular. But we do see strength in verticals like retail and particularly those who are changing through the current environment and spending more time on e-commerce. So just sort of making sure that we're at the right place at the right time, that we're building a solution that speaks to a client vertical. And as I said before, most importantly is that we have a go-to-market strategy that enables us to branch out into verticals that we hadn't -- haven't even thought about.

Got it. Okay. So let's talk about mid-market clients a little bit. It's obviously been an important part of the strategy in the past, and it was a particularly strong area in 1Q. How do your self-service capabilities contributed to the growth there? And then what are the other key things you need to do in terms of mid-markets approaching that opportunity?

Self-service has a long way to go, or I should say, a lot of opportunity. So it's not where it needs to be, but it certainly is heading in that direction. And it is really, I guess, accelerated by the fact that our mid-market has become very strong over the last quarter and certainly into this quarter, and what we see into the foreseeable future is that mid-market is going to be a really strong play for us. And I'll tell you what's happening in the mid-market that we might not have seen prior to the epidemic or pandemic is that particularly retail and mid-market -- and don't forget mid-market for us is just as much around TOSSOW as it is like Hugo Boss, for instance, would be a mid-market client for us as it is around the capability to get to long tail. And long-tail is really important to us and does require full-blown self-service in order to get scale. But they tend to be -- our mid-market clients do tend to be strong in terms of their e-commerce presence. They have been prepared and ready. As I said, they -- that extends right out to long tail. It enables us to put partner programs in place so that we have, if you like, a model and whereby partners can be resellers for us. And if you think of this environment where mid-market has really had a strong opportunity to service those -- all of us who are stuck at home and are really after products that we can get to as opposed to brands that we used to. In other words, products that we know are local or can be delivered or accessible. And so what we've seen is that the mid-market, and particularly around e-commerce, has really surged, and it will take a rocket scientist to know that that's a trend that's coming through, which serves itself extremely well to our mid-market positioning. And it's one of the reasons why we're leaning in heavily into mid-markets and starting by trying to get those services in place to make it easier for them and giving them a whole lot of insight into what's going on from a consumer perspective in mid-market, particularly around bottom of the funnel advertising and really make sure that their ads are at the right place at the right time, seen by the right people, and it gives them the ability to compete where perhaps they haven't had access before. So long story short, mid-market is -- it's a big opportunity for us. And it's a great opportunity for mid-market to stay ahead of what's going on by really expanding their strength in e-commerce.

Okay. Great. Let's shift gears a little bit. The -- so people were concerned about Google's announcement in January, that they'll be deprecating third-party cookies in Chrome within 2 years. You obviously have your identity graph. Hoping you could talk more about that help people understand exactly what that is and how effectively will that be able to mitigate the impact here as you go forward?

Yes. Well, let's start by just going through sort of the layers of identity that we have access to, just to sort of, I guess, trying to make it clear that we're not beholden to the Chrome issue that we're actually not reliant on third-party cookies. We use them today, but we're certainly not a company that relies on them. We have sort of a privileged position in terms of where we sit with our relationship between the buy side and the sell side. So as you said, coming into the conversation with the advertisers but with the publishers as well. They need us, that they need us to be able to trade or link between the two. And so in doing that as part of their workflow, they pass us their first-party data, and that comes through to us seamlessly. And so within this sort of 'let's go back to the future and call it an ad network' if you like. We have the sort of first-party data capability that flows backwards and forwards between our clients and links our clients. So that's one layer. The second layer here is that we have Shopper Graph. And the Shopper Graph is really a collection of our clients' data that comes into what we call a Criteo ID. So I can call it a spine, it's a backbone, if you like. It has 2 billion Criteo IDs in it, and what gets passed through to us is -- it has nothing to do with cookies. It's a hash e-mail ID or it's a logon ID or it's something that helps us identify consumer for one of our clients. The notion here, which is very, very powerful, which is the bigger picture that we're working towards is to use those common ID threads to call it a hash e-mail, to link a consumer to start to get this profile of this consumer as they move through our network. And our network is huge. As you said upfront, it's 20,400 advertisers and over 4,500 publishers. To link them with a common hook is the way in which to bridge the relationship between the consumer, the advertiser and the publisher. And we feel that, ultimately, that's the right way to deal with privacy because the consumer should have control over their information, not the browser. And so today, what we see is the browsers are controlling consumer ID and consumer experience. And ultimately, tomorrow, if we want to solve the privacy problems, and we want to allow the consumer to dictate their own experience, then we would use the notion of what I've just talked about. So that ultimately is the bigger picture for us. In the meantime, we sit at the tables now that we might not have yesterday in terms of lobbying and working with the industry and with Google to come up with a satisfactory response to the eradication of third-party cookies, so that the ecosystem can continue to function because third-party cookies are something that has been around for 25 years. They have now gone past their due date, but there hasn't been the right sort of replacement for them. And the ecosystem needs to stand up, which I believe and Criteo believes should involve the publishers, should involve the marketers to actually sit down and say, "We need to get the right message to the right person at the right time." And the Internet is all about a one-to-one relationship. The Google's response to their replacement of third-party cookies in terms of creating groups of people or cohorts coming out of the browser doesn't speak to the notion of one-to-one relationships. And so we have to find a better replacement. And Criteo was putting itself in the center of that discussion because we think it's critical to the success or ongoing success of media on the Internet. I mean, that's a huge deal. If they turn off third-party cookies tomorrow, it's not as suspected. It's across the entire ecosystem, including the consumers. So I can thought down entire time on this one, which I won't. But it's a passion for us beyond the notion of us being hamstrung by it. Wait, we're not hamstrung by it. We just want to make sure that the industry knows that there are alternatives out there, and we should be staring at them.

And how long do you think it takes for kind of that alternative to be developed and show itself? Like when do you kind of get more resolution around this process?

Well, so don't forget, I should have said in the background, there are, yes, I'm going to say 8 to 10 ways, just off the top of my head, that you can source identity. And Criteo is working on all of them. So we can work on all of them. If you ask me if we're ready today to just click a switch and go, we're not. We have 1.5 years to do this. And I would argue we had longer because I would imagine Chrome is looking at the situation in the economy right now and saying, this is not something we should be doing to the ecosystem, while they're trying to get through the current situation. So we have a while. So as we work through each of these different layers of identity, we get to the top layer. So first party, we're moving our solution across the first party as I speak. But the notion of getting the entire industry to what is the next-generation solution in terms of collecting information about consumers in a privacy-first manner where consumers are in control is not just us, it is the entire industry to make that decision to switch to. Our capability to do it is it's within this year to do that because we have access to the Shopper Graph. And for some of our retargeting business today, we actually use the Shopper Graph data. So to kind of extend to that is less of a heavy lift on us than the job to get the marketplace to make a decision around everybody using something other than third-party cookies.

Got it. Okay. So let's shift gears a little bit and let's talk about kind of the near term and current dynamics in the market. So you said at 1Q earnings that you didn't expect retail client spending in the U.S. to bottom until the end of June. Curious kind of what drove that forecast? Have you seen any material change in trend since then? And any kind of update that you might have or more color would be great?

Yes. Look, we used a number of different ways to try to create a forecast. And let me say, like everybody, we're shooting in the dark. We have no idea. But we -- to run our business, we have to have -- we have to create an idea based on a number of different scenarios. And we want to be transparent with our shareholders in terms of what we think could happen and how we're thinking about our business. So I'm not going to stand on anything that this is absolutely what's going to happen because we have no idea. But what we do do is, we look at -- firstly, we read a bunch of stuff where the different analyst groups around the world have put pictures together at what they think might happen. So we go through all of that material. And then we lay on top of that, the trends that we see happening already in terms of our client spend. And then we spend a bunch of time asking them, spending time with them about what they see is going to happen and what they come back to all of this is. And for the U.S., that was the conclusion we made sort of at the midpoint was that it still was going to be at its trough through June and July and then would make a really slow come back through the rest of the year and would certainly still be weak into quarter 4. Again, it's based on everything that we see in -- could that completely surprise us in a couple of months' time? Yes, that could do. But we have to plan our business around what we think might happen. And particularly, when you look at our key clients -- a lot of our key clients in the U.S. are very large brick-and-mortar retailers. And we've already seen a couple of them filed for Chapter 11. So we know that amongst the large brick-and-mortar, there's a skew towards them not coming through this at all. So there's a balancing act between -- particularly our clients who will do are doing very well under these conditions, and those that are really, really struggling, we have to make a call as to how that balance is going to play out over the rest of the year.

And you're a pretty global company. I mean, are there any trends or any kind of early signs or indications that you see from other markets, including Asia, in particular?

Asia has -- as you all know, we're strong through Korea and Japan, in particular, through Asia. And Asia seems to be following the same sort of trend in terms of out verticals: classifieds and travel as EMEA is, I should say, retail and classified, it's not travel, it's a very different story as Europe is. And so if you look at the trough and you look at the curve in terms of return, it looks very similar in terms of the shape, with APAC returning more quickly than certainly the U.S. and Europe. We actually saw a sign very early on in APAC even into the end of last year, where there was -- there were corona cases that were cropping up there and the APAC region started to see some sort of change in behavior in the quarter 4 of last year. So they went into a trough a little earlier. But at the same time, they're coming out of it a little earlier as well. So that's really promising. But again, we've seen -- we've also seen signs of China and South Korea finding themselves having to sort of pull back on their restrictions as of late, which may have a knock-on effect to business there.

Okay. All right. So if you're in the audience, you can certainly submit questions through Zoom, and I'm able to access those. I do want to ask you about your cost-cutting plans, Megan, and just talking about investments. So you've talked about having about $77 million less in non-GAAP expenses this year. Just curious how you think about the impact on product development, on just overall R&D? And I know it's hard to say, obviously, but how do you think about when hiring could resume?

Look, I think that we need to protect R&D as much as possible. So in the cost cutting actions, it's been some obvious places where we could take costs out. Certainly, as I looked at the business, there was some low-hanging fruit regardless of the fact that we could cut discretionary costs in terms of some real estate in different places, hiring freezes, travel, all of those sorts of things that are really important to take a look at and cut right back on. So we took those measures very, very early on. So yes, so $77 million is where we've got to so far, and we'll continue to make sure that we're focused on cutting costs as we see decline in business throughout the rest of the year. So that won't stop. But a couple of goals for us in doing that exercise is, firstly, to protect that investment in the product. We still want to come out the other side with our goal of -- from a product strategy perspective and full stack DSP and investing into the new solution areas that we have in retail, media and app. And also making sure that we can find -- use this as an opportunity to find productivity, do things better faster, better throughput, taking out some of the things that over a period of time for a company like Criteo has sort of -- yes, built up a way of doing things. And if you sort of clear the table, and I have the luxury of coming in and asking why for everything. And it means that if I am getting an answer, a good answer, for why. Then the question is whether or not you have to do it at all. So that's sort of a cleaning-up exercise that just has to take place. I want to protect the margin as well as much as possible. So clearly, we're not going to cut to a point where we cut into the bone far from that. We want to make sure that we keep the company healthy. And given the fact that we have a strong balance sheet so that we're in as good as shape as possible to see ourselves through this current climate and have a stronger product or the strongest product in the ecosystem to be ahead of the game when we come out the other side. So protection is against new solutions, product development, R&D, that's -- and our people. That is number one.

Got it. Okay. One last question kind of following up on that. Just curious if there's other kind of key roles you'd like to fill? We know that Benoit is leaving at the end of 2Q. So curious if there's any update there in terms of a new CFO? But anything else on any other key roles or additions to the business?

Yes. So there is -- to start with the hiring freeze, which I put across everything. Certainly, when I came in, I wanted to put a C-suite in place and a strong C-suite. What I've done is, I've sort of lifted the curtains on roles there, as I've seen the need increase to bring those people in. First one, of course, Benoit -- is to replace Benoit. He's been a great partner to me. And so one of the first things I look for is rapport and somebody that can continue to be a great partner and to keep the team strong. He has a very strong team that is pulling all of this stuff together for us. I'm ultimately looking for somebody who has been a CFO for a public-facing company. Somebody who understands France and French law and has the caliber to step in and gain the trust of our shareholders as quickly as possible. So that search has been underway for the time since he actually announced that he was leaving us. And I'll take the time to make sure that we get the right person and make sure that in the interim, if it's not immediately before he goes into corporate development, he managed to slip in before the hiring freeze happened. And I'm thrilled about that because he's double-heading right now, and he's acting as our Chief Commercial Officer. And boy, he's knocking it out of the ballpark. So it covers -- there's the ability for us to see some gallant acts and stars coming through as well, and he's certainly one of them. The one that I've lifted just recently, which will sound obvious, but we did hold back on this one, just because I wanted to make sure that if the company was going under a hiring freeze, so was I, but we lifted the curtain on our Chief Product Officer. We have so many double-heading there at the moment. But I think it's critical, given what we have in front of us to get that role filled as soon as possible. And we have some great candidates coming through the door to play that role. Again, because Criteo is an exciting proposition for a product firstly to come in. This is like a -- I don't want to use a sandbox term because I did already use this, but call it a plaything. It's a great area just to take these assets and just light them up into the different things that we're going to do here. So CPO is the one that I've lifted. And to your point, long story short, as the need for these roles come up, and I have the ability too, and it looks it's a fair move for the rest of the organization. Then I'll lift some of the holes, but we'll wait and see. We just want to make sure that we're being very careful and diligent.

Understood. Okay. Great. We are out of time. So we're going to leave it there. But thank you, Megan. Thank you, Criteo. I appreciate you being here with us today. And thanks, everybody, for listening.

It's a pleasure. Thank you.

Take care.